Enthusiast Gaming (TSX: EGLX) is facing a potential internal power struggle at the upcoming annual general meeting of shareholders on June 29. Greywood Investments, which owns 9.3% equity and is the largest shareholder, has launched a campaign to upgrade the company–starting with its CEO and board.
The activist investor has reposited its call for leadership change in the website upgradeeglx.com, including the letter it sent to the board enumerating the reasons why it feels an “upgrade” is necessary.
“Our investment in Enthusiast reflects our belief in the Company’s enormous potential. Unfortunately, under current leadership, that potential is being squandered,” Greywood said in its letter to the board.
The investment firm also said that its primary and clear conclusion is that CEO Adrian Montgomery “is a detriment to the company’s management, operations, communications, and growth strategies.” The company also struggles to “realize its potential under his leadership and under the direction of the Board of Directors, as it is currently constructed.”
Among Greywood’s arguments include the belief that the company should have a market value of US$1-2 billion, “not the anemic US$250-300 million market value under the current leadership.” The investor also highlighted the company’s share price dropping from a high of US$8.64 per share on April 20, 2021 to US$2.10 as of the close of business yesterday, May 23, 2022–representing an almost 76% drop in over a year.
Greywood: Upgrade Enthusiast
In its “Upgrade Enthusiast” campaign, Greywood calls to replace a majority of the board directors, who it claims to have a “lack of economic interest” in the company evidenced by the fact that the entire board only owns 5.7% equity. Further, around 87% of this position represented shares mostly gifted to Montgomery and board director Francesco Aquilini.
The investor bloc also believes that the board only rubber-stamps Montgomery’s deals “without any rigorous assessment, appropriate diligence or contemplation or deliberation.” In addition, it claims that the CEO has a proclivity toward co-opting staff’s achievements and has lost the confidence of shareholders and the industry in general.
“To be successful, Enthusiast requires an environment that rewards all of those who are generating growing revenues and strong performance, as opposed to overcompensating the CEO. We think the Board is making a serious mistake in granting CEO equity incentive compensation that exceeds the equity incentive compensation of all the talented non-management personnel combined,” the investor said further.
Enthusiast: Greywood lacks transparency
In its response, Enthusiast Gaming belies the claims made by Greywood in its letter, calling the accusations “misleading and baseless.”
“We believe the Company is well-positioned to continue accelerating both revenue and gross profit, given the exceptionally strong trends we continue to see in our business,” said lead director John Albright. “Despite the unnecessary distraction caused by Greywood, the Company’s Board and management remain focused on executing on our strategy.”
The company further insinuated that Greywood “lacks transparency and seeks to take full control of Enthusiast Gaming’s Board without paying shareholders a control premium.” On Greywood’s Upgrade Enthusiast website, its ‘about us’ page only describes it as a “multi-strategy investment firm” and discloses its equity in the company.
“What is clear is that they have no plan for the Company other than to take full control of the Board, for their own undisclosed purposes, without offering shareholders a premium. This is evidenced by Greywood’s singular focus on Enthusiast Gaming’s CEO and a list of grievances that have nothing to do with long-term shareholder value,” the company further added.
The company then touted its “early successes” in 2022, including a $47.2 million quarterly revenue in Q1, a 136% year-on-year increase in direct sales, and an 83% year-on-year increase in recurring subscription revenue. It also highlighted that all seven equity analysts covering the company have a “buy” or “outperform” rating on its shares.
However, the firm also recorded an $11.0 million net loss and $0.08 loss per share in Q1 2022, leading to a cash burn of $8.5 million during the quarter. This drove down the company’s current assets to $45.7 million while its current liabilities ended at $60.6 million.
“Our team is well positioned to continue delivering rapid top line growth, while increasing gross profit at a significantly faster rate. With so much potential right in front of us, now is not the time to risk your investment to unproven activist nominees,” said Montgomery.
In its 2021 financials, the company posted an annual revenue of $167.4 million, up from 2020’s $73.0 million. But it also recorded an annual net loss of $52.0 million compared to net losses of $26.9 million last year.
Greywood’s nominees
In its campaign to change the structure of the board, Greywood released its list of nominees it plans to field in on the board election during the upcoming annual general shareholders meeting.
“The slate of the exceptionally qualified proposed director nominees will bring a diverse blend of financial, technology, gaming, entrepreneurial and leadership skills and experience to Enthusiast’s Board,” said the activist investor.
The list includes the Palladium Consulting’s Fractional Chief Product & Technology Officer Jon Dakks, wellness tech firm WellnessWrx COO Raphael Danon, healthcare firm Sesame Inc. CEO and former Game Show Network CEO David Goldhill, real estate investment firm Redbadge Managing Partner Janny Lee, esports equity firm RadarZero CEO Mark Klein, and former Goldman Sachs Partner Dan Petrozzo.
Enthusiast Gaming last traded at $2.52 on the TSX, up by as much as 8.33% when markets opened today.
Information for this briefing was found via Sedar and the companies mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
