GameWorks Starts $15 Million IPO Effort (Pending:GMWX)

Quick Take

GameWorks (GMWX) has filed to raise $15 million in an IPO of its units consisting of common stock and warrants to purchase common stock, according to an S-1 registration statement.

The firm operates a network of locations providing visitors with esports and entertainment arcade and video games.

GMWX has suffered from venue closures due to the Covid-19 pandemic and seeks to pivot, in part, to online offerings.

I’ll provide a final opinion when we learn more about the IPO from management.

Company & Technology

San Francisco, California-based GameWorks was founded to provide video game and arcade entertainment options via its lounges which range in size from 20,000 to 35,000 square feet.

Management is headed by Chairman and CEO Mr. Philip Kaplan, who has been with the firm since May 2018 and has extensive senior management experience in the healthcare IT industry.

Below is a brief overview video of the firm’s Las Vegas location:

Source: LL Adventures

The company currently operates seven locations each of which includes an onsite full service restaurant and bar.

GameWorks has received at least $15.4 million from investors including eSports Holdings LLC

Customer/User Acquisition

The company markets its locations in local media, both online and offline and through walk-by traffic via locations in malls and other high traffic areas.

Management has optimized the content and configuration of the locations to appeal to its target demographic of ‘young millennials and older gen Z guests, generally in the age range of 15 to 28…[the venues] also offer corporate events, as esports is a growth area that makes for great team-building.’

Selling, G&A expenses as a percentage of total revenue have been rising as revenues have fluctuated, as the figures below indicate:

Selling, G&A

Expenses vs. Revenue

Period

Percentage

26 Weeks Ended June 28, 2020

88.0%

2019

53.7%

2018

52.3%

Source: Company registration statement

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, swung to negative (1.3x) in the most recent reporting period, as shown in the table below:

Selling, G&A

Efficiency Rate

Period

Multiple

26 Weeks Ended June 28, 2020

-1.3

2019

0.1

Source: Company registration statement

Market & Competition

According to a 2020 market research report by IBISWorld, the market for arcade and Food & Entertainment complexes is expected to drop materially in 2020 as consumers avoid congregating in public spaces to limit their potential harm from the Covid-19 virus.

From 2015 to 2020, the industry grew at an average annual rate of 0.1%.

The main drivers for this low expected growth are a shift away from location-based gaming to home-based gaming due to the improvement in offerings via game consoles and PCs.

However, the industry expects to weather the Covid-19 and slowly rebound as users feel more comfortable in public spaces and seek to have a social experience doing fun activities.

Major competitive or other industry participants include:

  • Dave & Busters

  • Chinatown Fair

Financial Performance

GameWorks’s recent financial results can be summarized as follows:

  • Contracting topline revenue

  • Reduced gross profit but increased gross margin

  • Sharply higher operating losses and negative operating margin

  • Stable cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Total Revenue

Period

Total Revenue

% Variance vs. Prior

26 Weeks Ended June 28, 2020

$ 7,243,020

-52.4%

2019

$ 29,268,857

8.1%

2018

$ 27,065,106

Gross Profit (Loss)

Period

Gross Profit (Loss)

% Variance vs. Prior

26 Weeks Ended June 28, 2020

$ 6,205,466

-51.8%

2019

$ 24,682,832

9.8%

2018

$ 22,489,532

Gross Margin

Period

Gross Margin

26 Weeks Ended June 28, 2020

85.68%

2019

84.33%

2018

83.09%

Operating Profit (Loss)

Period

Operating Profit (Loss)

Operating Margin

26 Weeks Ended June 28, 2020

$ (13,168,548)

-181.8%

2019

$ (9,458,873)

-32.3%

2018

$ (7,353,289)

-27.2%

Net Income (Loss)

Period

Net Income (Loss)

26 Weeks Ended June 28, 2020

$ (13,112,939)

2019

$ (10,634,980)

2018

$ (9,156,736)

Cash Flow From Operations

Period

Cash Flow From Operations

26 Weeks Ended June 28, 2020

$ (1,843,399)

2019

$ (3,514,513)

2018

$ (3,604,701)

(Glossary Of Terms)

Source: Company registration statement

As of June 28, 2020, GameWorks had $1.2 million in cash and $22.9 million in total liabilities.

Free cash flow during the twelve months ended June 28, 2020, was negative ($2.8 million).

IPO Details

GameWorks intends to raise $15 million in gross proceeds from an IPO of its units consisting of common stock and warrants to purchase common stock, although the final amount may differ.

Management says it will use the net proceeds from the IPO as follows:

Management’s presentation of the company roadshow is not available.

Listed bookrunners of the IPO are Maxim Group and Joseph Gunnar & Co.

Commentary

GameWorks is seeking public capital for its expansion plans and to fund operations during the protracted Covid-19 pandemic.

The company’s financials show the ill effects of venue closures as a result of the pandemic, with a sharp drop in total revenue and increasing operating and net losses.

Selling, G&A expenses as a percentage of revenue have risen markedly, likely due to the sharp drop in revenue as a result of venue closures from the Covid-19 pandemic; its Selling, G&A efficiency rate has swung to negative territory.

The market opportunity for Arcade and Food & Entertainment venues is expected to show flat growth for the near term as consumer substitute home-based forms of entertainment.

Additionally, the long-term effects of the Covid-19 pandemic are an unknown for the industry. At least in the short-term, the effects are likely to continue to produce downward revenue pressures on venue operators.

While GameWorks has developed an attractive destination concept, I’m not optimistic on the firm’s ability to pivot (in part) to online offerings that can meaningfully move the needle on revenue in the near term.

I’ll provide an update when we learn more IPO details from management.

Expected IPO Pricing Date: To be announced.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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