Trading Update and Investment Portfolio Review

RNS Number : 9157A

Blue Star Capital plc

28 September 2022

 

 28 September 2022

Blue Star Capital plc

("Blue Star" or the "Company")

Trading Update and Investment Portfolio Review

Change of Broker

Following the recent appointment of Tony Fabrizi as Executive Chairman, the board has undertaken a review of the Company's investments and operating structure and set out below their key findings and updated strategy moving forward.

Esports portfolio

The Company made initial investments in November 2019 of £900,00 in aggregate into a portfolio of six early-stage companies, investing approximately £150,000 into each business. At the time of making this investment the Board decided that, due to the early-stage nature of the investments and sector, a portfolio approach was most likely to prove successful. Since making this initial investment, the Company has made two smaller investments of approximately £115,000 in September 2020 into a new esports business called Formation Esports Investment and approximately £60,000 in September 2021 into Paidia Esports Inc. The Board is pleased to report that the overall performance of the esports portfolio has been strong.

Of the eight esports investments, the best performing is Dynasty Gaming & Media PTE. Ltd ("Dynasty"). The Board notes that the investment into Dynasty has been very successful and fully justifies the decision to pursue a portfolio approach. Unlike the Company's other esports investments, Dynasty is a pure B2B infrastructure business, having developed a powerful gaming and media platform ecosystem for mass market deployment. The Board believes that Dynasty's success to date in securing large contracts clearly demonstrates the inherent value in this business.

Dynasty's partners include:

· Saudi Telecom Corporation, the largest telecom carrier in the Middle East with which it signed a 2-year SaaS contract in October 2020.

· Maxis Bhd., Malaysia's leading telecoms operator. Initial traction has far exceeded expectations with increasing functionality being continually added. Maxis Bhd. has approximately 11 million customers.

· New Zealand's largest telecommunications and digital services company, which enjoys a dominant market position and premium brand presence. The platform is scheduled to launch in November 2022.

· Lets Play Live Ltd - Australia's largest tournament organiser and gaming content creators. Scheduled platform launch January 2023.

In addition, the Board understands that a number of other multi-year contracts, which are subject to confidentiality, have been signed.

In terms of new business, Dynasty has a large number of contract discussions ongoing with large global telecoms operators and tech businesses. The scale of these contracts is expected to be significantly larger than the company's existing partnership agreements and, if secured, will position Dynasty as the global leader in B2B white label gaming platforms.

As previously highlighted, Dynasty's business model has evolved and all new partnership agreements contain both fixed licence fees and managed services revenue share. While Dynasty's initial commercial model was based on collecting monthly licence fees over a minimum 24-month contract, moving forward, all agreements will see Dynasty supporting its partners with a managed service solution. Dynasty provides dedicated in-country resources, working exclusively with their partners in all areas of engagement and monetisation, to help maximise commercial outcomes. Under the new hybrid model, Dynasty enjoys a significant portion of all platform revenue generated, in addition to licence fees.

Since first investing in Dynasty, the Company has maintained its shareholding at approximately 13.7 per cent, investing in total £895,000. The last external valuation of Dynasty took place in April 2021 when it raised USD$5million on a post money valuation of USD$50million. Since then, Dynasty has announced a number of new contracts, developed a new, more attractive business model and confirmed significant interest from potential partners and strategic investors.

The Company is currently carrying the investment in Dynasty at the last external valuation of approximately £4.6million. For the reasons highlighted above, it is the Board's belief that Dynasty's valuation should have increased significantly since the company's last fundraise and should be worth considerably more than the current carrying value. Furthermore, the recent strengthening of the US dollar against sterling means the current carrying value of the Dynasty shareholding is over £6m based on current exchange rates.

The second significant esports investments is in Guild Esports plc ("Guild") in which the Company has invested a total amount of £705,000. Guild initially performed strongly and listed on the Standard Segment of the Main Market of the London Stock Exchange in October 2020 at 8p per share valuing the business at £41.2million. At that time the Guild investment was showing an unrealised gain to Blue Star of approximately £1.75million. Since its listing, Guild's share price performance has been disappointing and is currently standing at around 2.7p. In order to raise working capital, the Company has recently reduced its shareholding in Guild to approximately 22million shares, representing 4.3 per cent of Guild. At this time, based on the current share price and proceeds from disposals, the Company is around break-even on its Guild investment. However, the Board is pleased to note the positive announcements from Guild in the last few days and its share price strengthening and remain hopeful that Guild's recent stronger performance will continue.

The remaining esports investments are carried at cost and, in light of little news, for prudence, the Company will be looking into the potential write-off of most of the smaller esports investments within the next financial statements to 30 September 2022.

In summary, the existing esports portfolio has a combined cost to date of £2.375million and taking the proceeds raised from selling approximately 1.5 per cent of the Guild position and the current carrying values of the remaining Guild stake of approximately £600,000 and Dynasty (applying current exchange rates) and ignoring the remaining six other esports investments, has a combined value of approximately £6.70million which equates to an unrealised gain of around £4.35million.

Other Quoted investments

The Company's other quoted investments in NFT Investments and East Side Games are non-core and will be sold as and when an appropriate opportunity arises. They have a current carrying value of approximately £135,000.

Blockchain investment

The Company's second core investment is in SatoshiPay. This investment was made in increments between January 2017 and July 2017 with a total amount invested of €1.87million. Post these investments, the Company attempted to carry out a reverse takeover of SatoshiPay at the end of 2018. This proposed transaction was aborted due to difficult market conditions at the time. A small convertible loan of €200,000 to SatoshiPay was converted in February 2019 taking the Company's shareholding to 27.9 per cent of SatoshiPay's issued share capital.

In the last two years, SatoshiPay has made a number of fundamental changes to its business model, most notably:

· Changed the focus away from its micropayments business which was the company's initial market priority. Although the technology works well, the business was too early and the market opportunity still in its infancy.

· In early 2020, SatoshiPay announced it was refocussing on B2B cross-border money transfer through blockchain with the launch of DTransfer. This was identified as a major global market opportunity which had scope for disruption through blockchain. Since switching focus, SatoshiPay has made solid progress in building DTransfer by signing up customers and building partnerships.

· While building DTransfer, it became clear that the blockchain infrastructure required to launch Dtransfer as a complete solution still needed refining. This encouraged SatoshiPay's management to seek out ways of providing and supporting this infrastructure, which led to the inception of Pendulum.

· Pendulum's development started in the first half of 2021 as an open-source blockchain built on the stable and existing Substrate framework. Its objective is to establish the missing link between fiat and the DeFi ecosystems through a network of sophisticated smart contracts. Pendulum's Layer-1 infrastructure will connect DeFi to the foreign exchange market, building automated market makers (AMMs) to introduce scalable liquidity pools for fiat currencies, and create yield earning opportunities for fiat token holders.

· Having built the first prototype of Pendulum at the end of 2021, which featured a bridge to Stellar and an AMM smart contract, Pendulum has subsequently developed a fully functional testnet and prepared a launch as a Polkadot parachain.

· In more recent months, the Pendulum team has continued development and achieved all of its internal milestones. In addition, recent external achievements include securing a place on the Berkeley University blockchain Xcelerator program and receiving a grant from the Web3 Foundation to build a bridge (Spacewalk Bridge) between Stellar and Substrate-based parachains.

· Most notably, a second parachain project, Amplitude, was launched by the Pendulum team in June 2022 and was successful in winning a Kusama parachain auction on 4 July 2022, achieving $1.2million in contributions. Amplitude went live on 11 August 2022 and serves as a testing ground for the future Pendulum parachain, with new features first being rolled out on Amplitude.

· Pendulum has so far raised $5million for its further development by the private presale of future PEN tokens. The Board understands that Pendulum intends to carry out a further private presale before the listing of the token.

The Board notes that placing a value on SatoshiPay is highly subjective given the early stage nature of its business interests. In looking at SatoshiPay's valuation, the Board has taken the following key factors into account:

· The business is, through its relationship with Pendulum, fully funded for the next year so there is no need for any equity injection into SatoshiPay.

· SatoshiPay is now generating monthly revenues and was profitable in the year ended 31 December 2021 and is expected to be profitable in 2022.

· It has a close relationship with a number of large crypto organisations such as Web3 Foundation, Parity and Stellar Development Foundation and a growing reputation generally in the blockchain ecosystem.

· It has successfully executed the first private presale for Pendulum and secured approximately 5.5 per cent of the future PEN tokens for services rendered.

· If the Pendulum network can successfully connect De-Fi to the larger foreign exchange markets, building AMMs to introduce scalable liquidity pools for fiat currencies as well as creating yield earning opportunities for fiat token holders, then Pendulum should be well placed within the De-Fi space, a market which is currently estimated to be valued at $55billion in total value locked.

· SatoshiPay has successfully incubated the Amber AMM Project for which it has secured 5 per cent of its future tokens. Amber is a novel AMM design for low-risk, single-sided liquidity provision, significantly lower slippage and fees compared to other AMM designs.  

· It is well placed to earn fees and accumulate tokens in existing and new De-Fi projects.

· SatoshiPay owns 100 per cent of DTransfer which remains a highly attractive opportunity.

The current valuation of SatoshiPay is based on the last external fund raise which took place in February 2019. Since then, SatoshiPay's business has changed considerably and, in the Board's opinion, SatoshiPay's prospects, while still difficult to accurately value, are significantly improved. Given these factors the Board believes the current carrying valuation for SatoshiPay of approximately £4.8million could significantly understate its current market value.  Based on this latest valuation and the investment to date of £1.8million, the investment in SatoshiPay is showing an unrealised gain of approximately £3million.

Biometric business

Sthaler is a biometric identity and payments technology business which enables an individual to identify themselves and pay using the unique vein patterns within a finger. Its FinGo ID platform uses a biometric called VeinID which instantly recognises an individual through the unique pattern of veins inside each finger. The FinGo technology scans each person's unique vein pattern, an internal biometric that cannot be traced or copied, making FinGo the most secure and inclusive way to connect.

FinGo's technology is relevant across so many sectors and industries ranging from payments, age verification, identity and access. Sthaler are currently launching FinGo across a number of countries and sectors either directly or through partners.

Blue Star's percentage shareholding in Sthaler was approximately 0.8% at 30 September 2021 and is valued on the basis of Sthaler's last completed fundraise at approximately £387,000. The cost of the Sthaler investment is £50,000, representing an unrealised gain of £337,000. While the Board believes Sthaler is an excellent business with enormous potential, the small size of its shareholding means the Board are treating Sthaler as non-core.

Conclusions based on portfolio review

Based on the current carrying valuations of Dynasty, SatoshiPay, Sthaler and the market price of the quoted investments the portfolio has a current value of approximately £11.9million which is equivalent to an estimated NAV per share of approximately 0.24p.

For the reasons highlighted above, the Board believes there is significant scope for this figure to materially increase over the next twelve to eighteen months. Accordingly, the Board intends to focus its attention and resources on supporting its two core investee companies and does not anticipate making any new investments for the foreseeable future.

In addition, the Board intend to manage the Company with a focus on funding the business, insofar as possible, through the sale of its existing non-core investments.

The Board will cut all non-essential costs and is proposing to put in place a share option scheme on a time and performance basis. The terms of the option scheme will reflect the Directors belief in the inherent value of the two main investments. Details of the scheme will be announced later this year and will cover a maximum percentage of 5 per cent, maximum life of 3 years and proposed exercise prices of at least 0.35p per share.

Long term strategy

The Board believes the two major investments have the potential to provide significant value for shareholders and the focus will therefore be on managing the Company to maximise the prospects of achieving a successful exit of these investments within the next two years. Assuming this can be achieved the Board intends to consult with shareholders to decide on the most appropriate course of action to ensure shareholder interests are best served.

Change of Broker

The Company also announces that Cairn Financial Advisers has been appointed as the Company's sole broker with effect from 1 October 2022.

The information contained within this announcement is deemed by the Company to constitute inside information stipulated under the Market Abuse Regulation (EU) No. 596/2014, as retained as part of the law of England and Wales.

For further information please contact:

Blue Star Capital plc	0777 178 2434
Tony Fabrizi
Cairn Financial Advisers LLP	[phone]
(Nominated Adviser)
Jo Turner / Liam Murray / Ludov ico Lazzaretti
S tanford Capital Partners Limited	[phone]
(Broker)
Patrick Claridge / John Howes / Bob Pountney

About Blue Star

Blue Star is an investing company with a focus on new technologies. Blue Star's investments include SatoshiPay Limited, a payments business using blockchain technology; 8 early-stage to mid-level esports companies, including Guild eSports plc, a global esports business headquartered in London whose lead investor is David Beckham and Dynasty eSports Pte Ltd., an esports platform with a mission to become the global leader in B2B white label gaming platforms ; East Side Games Group Inc., a mobile leading free-to-play mobile games group; NFT Investments plc, a company that engages, partners, incubates and develops non-fungible tokens; and Sthaler Limited, an identity and payments technology business which enables a consumer to identify themselves and pay using just their finger.

Forward looking statement disclaimer

Certain statements made in this announcement are forward-looking statements. These forward-looking statements are not historical facts but rather are based on the Company's current expectations, estimates, and projections about its industry; its beliefs; and assumptions. Words such as 'anticipates,' 'expects,' 'intends,' 'plans,' 'believes,' 'seeks,' 'estimates,' and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject to known and unknown risks, uncertainties, and other factors, some of which are beyond the Company's control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. The Company cautions shareholders and prospective shareholder holders not to place undue reliance on these forward-looking statements, which reflect the view of the Company only as of the date of this announcement. The forward-looking statements made in this announcement relate only to events as of the date on which the statements are made. The Company will not undertake any obligation to release publicly any revisions or updates to these forward-looking statements to reflect events, circumstances, or unanticipated events occurring after the date of this announcement except as required by law or by any appropriate regulatory authority.

 

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