Yet Another Value Podcast - Jeremy Raper on Bragg Gaming (BRAG.V)

Episode Date: December 1, 2020

Jeremy Raper, founder of the excellent rapercapital.com and our inaugural guest, makes a repeat appearance on the podcast. We discuss his recent views on the market, a quick update on his StoneX (SNEX) thesis, and his recent thesis on Canadian microcap Bragg Gaming (BRAG). Note that BRAG is a Canadian Microcap; please do you own research and nothing in this podcast is investing advice.LinksJeremy's first YAVP appearance: https://youtu.be/X-nVRNiSeosJeremy's article on BRAG: https://seekingalpha.com/article/4391937-bragg-gaming-undiscovered-igaming-saas-gem-be-next-gan-plcChapters0:00 intro1:30 Catch up and the current environment5:55 How Jeremy is shorting in this environment15:15 Sectors Jeremy is seeing opportunity on the long side23:30 Update on StoneX (SNEX) thesis29:50 Brag Overview33:10 Similarities between Brag and GAN38:55 Red flag #1: Management turnover45:40 How a recent deal suggests equity upside49:40 Why Brag could be a better business than Gan56:20 Brag's 2021 outlook and German regulatory risk1:11:00 Management's recent commentary on relisting

Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have the founder of Raper Capital.com and my friend Jeremy Raper back on the show. Jeremy, how's it going? Hey, Andrew. Thanks for having me back. I'm well. How are you? Doing good. Well, let me start this pod the way I do every pod. And that's by pitching you my guest. And look, it's not going to be hard to pitch you because you were the first person on the show and I'm having you back on. So that should speak for itself. But, you know, anyone who's who's listened to me knows I love and respect your work. Your Rapercapital.com is one of the two or three people email me, hey, what subscription service should I sign up for? And every time, love the subscription service. There aren't many people who can get me to tape a podcast at 7 p.m. on a weeknight, and you're one of them. So, you know, I just love the work. I love everything right. I'm glad you came on. And, you know, that's my pitch. So that out the way. I appreciate your support. And listen, And another happy Custer makes me happy. So I'm really glad to have you.

And yeah, I do apologize for the time. It's just I recently made, maybe for everyone else, I can let them know. I recently moved to Tokyo. So lining up a Tokyo East Coast call is a little trickier than London East Coast, which is pretty, you know, it's a good five-hour difference. But thanks for taking time out of your evening to do this. I do appreciate it. Hey, not a problem.

And I'm happy to because we always talk about so much interesting stuff. For those who we talked for 20 minutes before this podcast started about a lot of stuff. So anyway, let's do some catching up. Last interview was early August. You were still living in London. Now it's late November. You're in Tokyo. But I think we're in a completely different environment.

And most years from August to November, you couldn't say that. But here, you know, we're seeing a huge second wave of COVID. Don't even know if it's a second wave. But a lot of places are about to go back into lockdown or have already locked down again. We've obviously got a dramatically different administration in the United States. How is your views just of the overall environment and where you're seeing an opportunity? how have they evolved over the past few months? Sure.

I mean, look, let me caveat what I'm about to say by saying, I'm not the best macro prognosticator and or market timer, so to speak. So take that with a grain of salt. What I kind of focus on is kind of like, you know, the peripheral things you notice from talking to other market participants and not even so much professionals such as yourself, but just like general people. And you kind of gauge how many people are, you know,

paying attention to the stock market, what they're trading, things like that. I'm sure lots of your friends are. reached out to recently and started asking about stocks and what they should be looking at or telling you what they're trading. I certainly know a lot of my friends have very long lists of the hot tech stocks du jour, guys who were otherwise pretty conservative and cautious with their money. Suddenly email me saying they own a bunch of Tesla and they're really happy and they're crushing my returns by the way. I think as someone said it best, I was listening to it. I was listening to another podcast and someone said the stupidest person you know is getting the richest this year.

And that's basically how I think about the market. Like most of the time in the stock market, the obvious thing to do is the wrong thing to do, right? First derivative thinking is punished, not rewarded, right? And yet for most of this year and in accelerating fashion since, well, since the election, let's say. But definitely recently, doing the first derivative thing has been the only thing to do. and trying to think at a second derivative level has been extremely painful. Like, you can pull up things like, look at the stock price of Palantir.

There was a great analysis, right? Someone on Wall Street bets on Reddit broke down why Palantir stock was going to the moon. And, you know, this is like a $60 billion company, right? And it went up 70% in three days or whatever. And I think in a nutshell, it's some combination of a huge amount of retail speculative money has entered the market, right? and the you know yeah there is it's looking for a home it's gravitating towards these situations which capture the popular narrative whether that be around EV whether that be around tech

whether that be around you know stay at home and it's being massaged and guided by a whole host of people online who have a lot of pelts on their belt at this stage right like the new high priests of the tech of the tech the four horsemen of the apocalypse type Guys like the Puru Saxoners of the world and the arc invests of the world, you know, they're looking at those performances and those returns are, you know, huge staggering returns over a very short period of time and it's hard not to get sucked into doing that. But look, it's always that way right before you hit a massive wall, right? Like this is always, it seems the easiest to make money right before it becomes extremely

difficult to make money and or just to protect your money. So, I mean, look, it's kind of a rambling intro, but I try to do what I've been doing, right? I mean, I try to stay true to my process and try to find things where I can justify the valuation on an absolute level, not just a relative level, where I know I'm paying a reasonable price on a, let's say, an above average, I don't want to say a hugely high quality business because I've been known to dumps that I've now and then, but where I'm paying a very attractive entry price, right? and that's part of my protection is the price I pay is hopefully low enough relative to what I'm getting, that maybe there is some mistakes along the way and I'll still do okay, combined with some kind of exogenous factor, some catalyst that's going to get the market to view that asset or that security differently. Yep. That hasn't changed. That hasn't changed. So all this mania and manic behavior is going on around me and around you as well. And I mean, frankly, to

the extent I'm participating. I'm participating by not shorting some of these things, whereas before I would have, and I'd been carried out and learned my lesson. That's actually what I was going to mention, because I know you run, I think in our last podcast, you mentioned you run pretty much beta neutral, I think. I know you run a much kind of heavier shortbook for me. One of the hardest things for me to do this year, last year has been, look, there are some things that I think are obvious frauds or obviously overvalued. Like, but it's really, difficult to short them, you know, I, there are some Chinese companies I've looked at that that are, it's completely obvious their financials are fraudulent, right? Like, I don't know

many people who don't think the financials are fraudulent, but the stocks are up 5x this year because their huge scam plays. And as you mentioned, like Wall Street Betts is buying calls and they're trading sardines, but they're trading sardines up 5x. And how are you going to short when you could be 100% right? The company basically admits they're a fraud, and the stock will go up 5x anyway. Because, so, so just referring back to our original conversation, or maybe something we've talked about offline, but there's, I guess,

two or three ways to catalyze a short, right? So either the capital markets realizes that they're running out of rope, right? Let's say they're a massive cash burning enterprise. The capital markets wakes up and says, we're no longer willing to fund this enterprise, right? And or there is some kind of exogenous enforcement of pure fraud, right?

So these are the two key levers. Now, if both of those levers don't apply, so for example, in an environment where there is, literally we're swimming in excess dollars or swimming in excess of cash. So the capital markets are open for everyone at all times. Well, let's just stick with the U.S. market for now, right? This is more of a U.S. phenomenon than a European or other market phenomenon.

I'll explain how that relates to what I'm doing. But if the markets are open at all times and there is no balance sheet pressure, there's no balance sheet kind of gravity being applied, you have those situations. And the most obvious example is one where I honestly have taken a huge bath this year. And that's Neo. So it's a Chinese EV company where... That's the one I was thinking of, but I didn't want to wrong. I mean, look, you can go through the analysis and I basically nailed the analysis,

not that it helped me. I mean, they sell a product at negative gross margins. Okay, the gross margin has climbed positive because they've managed to get some semblance of leverage after burning through huge amounts of cash and managing to raise volumes significantly, but they still, they sell a product at 10% gross margin with huge costs below the gross profit line to obviously develop their technology in a hyper-competitive space. It's just getting more competitive. They've burned a cumulative $2.5.3 billion in their life, they don't really have a sniff of making real operating earnings ever, and yet the market thinks it's worth $75 billion. So again, the point being, if the market is willing to fund the dream, there's no limit to how big the

dream can get before the market decides not to fund the dream. I mean, is it really that different between a Neo and a Netflix? It's kind of a philosophical point, right? But Netflix has never generated positive free cash flow on annual basis. Well, I would push back on you because Netflix, you can see like they've got huge competitive advantages where like you know anyone who turns the first thing I do when I turn on and want to watch something with my wife you know we flip to Netflix and we see what's out and like you look at something like the Queen's Gambit right or I've mentioned Cobra Kai before dot on YouTube comes over to Netflix it's the biggest hit in the United States for a month and they're going to have season three coming out like that distribution

they have is a competitive advantage whereas Neo it's just like it's a me too electric vehicle product. That's true now, but that's also an ex post factor judgment based on the availability of free capital. In other words, the ability to build that advantage is only because the market has been willing to fund these dreams for eight, nine, ten years, right? Is it self-function monetary policy, right? If the market applied a Disney cost of capital to Netflix over the last five, six years, they wouldn't have that advantage. And so for example, I mean, we don't have to talk too much about Netflix, even though it's very interesting, as more and more of the Netflix economics rules get applied to the Disney's and the like, you have to really reconsider, are those advantages

going to remain? Because all these other companies that can afford to acquire customers and who have that native content or can afford to create that content, they're just going to copy the playbook. I mean, it's exactly the same reason why Warren Buffett doesn't invest in these kind of high-growth companies, because you know, you would think that that kind of moat, as it is today, which is a valid point, gets competed away. But I guess going back to your real question, I mean, like, the one way I'm doing it is on my short book, I essentially have nothing in the United States. So, I mean, if the U.S. is the epicenter of the mania, why would I try and take shots there? Don't compete with the Robin Hooders. Go where Robin Hood can't trade.

Basically, basically. So, I mean, look, I have the odd position here and there. Let's not, let's not kid ourselves. You know, like, I actually am short a couple of stocks in the U.S. as it relates to this conversation, but I mean, on a very tight leash and around very, with very kind of tight kind of stops, let's say. I don't want to room what we're about talking, but I think one of the ways, and one of the ways I've done it too is, hey, I really like this insurance company, you know, I take a five percent of position in the insurance company, and then I see four insurance companies in the same field that I think are overvalued or maybe they're fairly valued and the other

one's very undervalued. But I take, you know, four, 25 basis point position shorts across those four. So you're just kind of hedging some of your beta risk out. But you're not exposed to, hey, you know, I thought, I think it's worth two times with value. It trades for five times. Tomorrow I wake up and it's at 20 times. And all of a sudden it's blown my entire book up. That's right. I mean, look, so position size per name goes down. Concentration goes down. Exposure to the U.S. goes down, frankly. Because, I mean, like the rules are almost complete. they are completely different. If you look at Europe, right? So, you know, we talk about this on the long side a lot. Like we talked about GAN last time as being along getting a two-time sales

multiple in the UK and then a 20 times at one point in the US. But I mean, you get the ball in the park with that one too. Think about on the short side, right, or at least on the negative side, right? Like the availability of capital to some of these really crappy names, if they were simply listed in the US, they'd be able to sustain these stories. Whereas like, I don't know, what's a good example, maybe something like a, like take American Airlines. Okay, so completely busted enterprise, a completely busted capital structure, right? There's literally no way under, by the way, I'm not sure at American Airlines, just as an observer, there is almost no way under any kind of normalized scenario. They can earn back to repay equity holders with any

kind of residual value in any reasonable time frame, given what's happened with COVID, the amount of cash they've burnt, the amount of debt they've had to relever, put back onto the balance sheet, et cetera, right? So compare how that stock is performed versus, say, British Airways, right, which was nowhere near his levitt coming in, was actually a much better business in terms of their monopoly routes, the Atlantic, et cetera. And the equity performs, I think, is a lot worse. And they were forced to do a massively dilutive rights issue near the bottom before the vaccine, even though they weren't, you know, they weren't carrying, you know, eight, nine times pro-formal leverage or whatever American had.

you know, there were maybe one and a half times levered, including some of the COVID leverage hit, right? But the market just has no tolerance. And they have the equity market culture is completely different. And so look, that's kind of a high profile example. But there's down the market cap curve in the UK, for example, the market's willingness to tolerate a product, to tolerate a profit miss, even if it's due to, you know, COVID or whatever on even modestly levered capital structures is so much less than therefore the barrier to kind of getting paid on the short side is so much lower. And that's more an attitude related or market participant related. I'm not sure. But so, so for example, one of the more successful shorts I had this year is a

company called Rank Group. And it's R&K, I think, in London. It's not a large company. They operate physical casinos. They have an online business as well, but like 70, 80% of their revenues pre-COVID came from physical casinos and bingo halls in the UK. So it's a nice pair for, say, some of my other gambling exposures, which are more online related. So, but yeah, I mean, look, it wasn't really. levered, I just kind of looked at it and thought, they're going to burn a shitload of cash. You know, COVID's obviously going to hurt them a lot, huge fixed cost, deluge. You know, the typical story you've heard, and the market's going to punish them for it. And yeah, sure enough, the stock went from trading at a relatively cheap multiple to just being

given away, basically. Something is very hard to kind of to receive in the US, I think. So in a short answer is, one, I'm doing less shorting, right, was it cost me. running slightly longer than I normally do. Two, I do try to look only outside the U.S. with a few exceptions. So basically, I'm in Europe, a lot of shorts in Europe and Japan. And then three is I also just have to dial back on the long side and lower the position size.

Yeah. No, that's great. No, all of that's super interesting. I mean, I think I've put it out there a couple times. But one of the things that most fascinates me about the stock market today is you look at the cruise lines or you look at a Dave and Busters and like, they're basically trading for the same enterprise values they did at the start of years. Or AMC Theaters, I think, trades for a significantly higher enterprise value than the start

of the years. And you're like, these guys have burned nine months of cash. They're going to burn another nine months of cash. They're raising debt at huge amounts. And the equity market is just like, yeah, whatever. Well, it's in 2024 normalized earnings and this thing's worth more. And it just makes no sense. Yeah, any particular sectors that you're seeing opportunities on on the long side,

I thought going into October, I thought you had a really interesting tweet where you said, hey, now it's not the time to go buy kind of the vaccine recovery place, which it was the time it turned out. But you were saying, look, the next 10 months. I told you I wasn't a good market time, right? I did say that. Hey, I think you're smart guy. I like to hear your thoughts. But you were saying, look, the next 10 months are going to be still really bad. Like now is actually the time to press work from home because they're going to be taking more share and more money for the next 10 months. Are you anything interesting? Yeah. Well, okay. So that is true. I did say that. but I think I tried to qualify by that saying you don't go out and yolo on Zoom calls, right? So obviously, valuation is paramount. What I mean by that is there are some kind of secular winners from work from home and or from COVID that are still being priced as if that was a one-time benefit or very temporary benefit, right? There's obviously a whole host of other names where they're being priced as if it's a secular shift that'll never change, like the Zooms of the world, right?

I'm not talking about those. I'm talking like names like some of these off-price retailers that have just started to learn how to do Omni Channel or have dip their toy in online or learn how to be an online retailer, but you used the pandemic to say massively cut costs, renegotiate rents, etc. So, I mean, I've talked about a couple of them on my blog. But, you know, there's also a whole host of names like, okay, I haven't talked about this on the blog. I think it's interesting.

So I'll bring it up just for fun. So there's a name in Japan called Koshidaka, which is a smallish cap company. they're a karaoke operator, right? So they basically just roll up some of the lower end karaoke operators in Japan. It's a very fragmented industry. It's a very stable business. Like the total revenue of karaoke,

the last bicycée is basically flat. It doesn't go up. It doesn't go down. But it's kind of like a national pastime, right? So it's a pretty stable, dependable type business. Now, the stock is essentially not just flat versus where it was pre-COVID, but down significantly because they had two businesses. They had a gym business and they had the karaoke business.

A few other odds and ends, but essentially they had those were the two main businesses. And they spun off the gym's business to shareholders in the first kind of spin-off in Japan that's ever happened. Really? The first spin-off of at least at a highish level, you know, like a Tokyo Stock Exchange main board listed company, right? So it was kind of a novel event. And the way they did it was almost all the tax basis in the stock stayed in Koshidaka. stayed in the parent company, which obviously did get hit pretty aggressively during COVID, right? So in absolute terms, the stock was way lower and it also had all the cost base. So anyone that wanted to harvest the loss or is wanting to harvest the loss this year is selling Koshedaka, not the spin off.

So it was 90 to 10, 90% in Koshidaka, 10% in the other, even though the spinoff were actually similar in size. So the market cap post spin was, the gym business was a big part of the business. So if you strip it all out, it's still way down. if you have any kind of view that like behavior returns to normal post vaccine these guys are just going to go back to making what they were making on that basis it trades like five times earning right so of course there is a big question how long does it take to go back to normal and there are some there is some you know decremental economics from lower utilization as you would expect right they don't own

their real estate they lease it right so there's some fixed costs there is some increased cleaning costs so i'm not saying it's just a linear ramp back up to what it was maybe it takes 18 months okay so maybe it's not next year maybe it's 2022 okay so five times earnings no debt or very little debt great capital allocator that that's interesting to me that that kind of thing right and there's some there are some other examples as well where um i guess i guess you were asking about the stay from home work from home winners and i gave you like a recovery place i didn't really answer a question but that's that's kind of what i'm looking at so so these kind of opportunities where they they you know for whatever reason they're they haven't been noticed they haven't been picked up yet

maybe they're slightly smaller maybe they're not listed in the u.s maybe for whatever reason they haven't been picked up by davy trader davy day trade actually i'll give you a perfect example right so there is a company that's listed in the u.s i actually think it could be a good short in the next six month it's called corsair gaming CRSR so they just make gaming headsets and gaming computers and keyboards, right? Like, yeah, they have a good brand within the industry, but it's not that much different to like a Turtle Beach, which you've probably heard of here, H-E-A-R, which is another headset maker. I know the name. I know Turtle Beach very well, yeah. So you know Total Beach. So video game accessories or headset is a notoriously cyclical business, right? And if anyone

sits down and seriously tells you that the last 12 months, let's say the last six months plus the next six months aren't going to be the best 12-month period in the history of all video game accessories, they're completely lying. I was going to say you have Xbox cycle, PlayStation cycle, and COVID cycle. Like this is the best it's ever going to get for these guys. Yeah, exactly. This is like a once-in-a-generation type bonanza. And of course, this was owned by private equity, got sold a month ago or two months ago.

They listed at 17 bucks. The stock's gone to 40. I think it went to 50. Now it's like high 30s, 40 bucks. Trades at a crazy multiple of peak-peak earnings. I mean, you know, it's seeing trades at 40, 40 times EBIT, something like that. And yeah, they're printing 60, 70, 80% growth. They just pre-announced a great quarter, of course, right?

But guess what? The lockup expires next March. Guess what? Then they have to anniversary, the first post, you know, COVID quarter. And, you know, the private equity guy still owns 75%. So if they were willing to sell it 70, 17, what do you think they're doing at 40, right? Yep. And so on the one hand, you have those names, right?

that for whatever reason, it's pretty obvious what's going on, and yet people believe the growth, right? And Wall Street enables that. And then you have the exact same kind of exposure elsewhere in the market. Like, Total Beach is also listed in the US. This is actually kind of an interesting example because it's also US listed. It has a pretty junky history, but it just wasn't an IPO. Like if Total Beach was an IPO today, I guarantee you it would be the same kind of fervorous reaction. You know, and it's not a large company. It's like 300 million or whatever, but it's high profile, it's got some analysts covered. And that thing trades like 10 times trailing earnings, right?

So it's like on the one hand, the market is rational, like, okay, we should put a low multiple on current earnings because we have no idea how sustainable it is. It's probably peak, peak earnings margins, peak margins. And we've seen through the history of this company, they have channel stuffing issues every three, four years, they have massive inventory write downs. Can they execute this time around? Is it different this time? You know, all valid questions.

On the other hand, you have a company that makes the exact same product slightly different. they make computers as well that the exact same in markets it trades at 45 times ebit it's like same do you think part of that is because the private equity company has a much tighter float than turtle beach so it's a little bit more prone to it's added to an index and you know wall street bets picks up and they can just brace that stuff does that make sense yes exactly i mean a lot of it is technical related to float dynamics whatever but then even if you believe that then you go to say europe and you look at some of these european names where they're similar tight float dynamics but There's no Wall Street bets.

There's no guy bigging up the stock or looking at it. And those things trade even cheaper still. So you have this French company that, you know, I did own early in the year. I don't currently own it. So no position. But, you know, this thing trades at like half time sales, right? And Turtle Beach trades at one time sales. Yep.

Because fair enough. Who knows? And then Corsair trades at like four times sales. I mean, literally they all make basically the same product. Okay, one is a joystick and one is a hit. But it's the same underlying trend, right? And like, what is going on? Like, so these are the kinds of things I look at.

So if you do think that people spend more time in the home and you do think that, you know, gaming is a sustainable trend longer than just, okay, post-vaccine people will still spend more time at home. That's, that seems reasonable, right? There are still opportunities in some of these off-the-run situations. That's what I would say, these off-the-run situations, not in the high-fire Wall Street Brett Betts type names, but in these off-the-run situations listed maybe outside the U.S. So for a global investor, there's still plenty to do.

Wonderful. No, that was great. Let's just spend two or three minutes real quick. Last podcast, we talked about Stone X. The ticker there is S-N-E-X. Shares there have done pretty nicely. It's up about 20% since the last time we talked, though, you know, a little bit behind the market, which is that up, you know, rustles up about 25%. It's only been four months. You never want to base something on that short time. But any updates to the Stone-X thesis since the last time we talked? Well, Andrew, 20% in four months. By my math, that's 60% annualized. So... Good job. That's nice. I'm just kidding. No, so honestly, it's been a fairly quiet four months. Honestly, I was hoping for a little bit more action there. So I think last time we spoke about what we spoke about the reasons for the cheapness, right? And the main reason was this is completely undiscovered. No one's paying attention. That obviously has a changed a huge lot. So Jeffries did finally initiate coverage. I think they came out with a $70 price target when the stock was like $60. As you know, we both talked about some of the assumptions in that note. I don't think it was the greatest research note in the world. They missed a few simple things, just to kind of highlight some of the basics. They basically assumed all the excess cash billed in the business would sit on balance sheet and not repay debt.

That was very high cost debt, right? So part of my thesis is they eventually repay and or refinance that 8.5% or whatever they priced bond deal that they didn't need to do at a much tighter level. Those bonds trade at like 4.5% yield, right? So there's a huge savings that drops to the net income line, which for our financial is the right way to look at it, that can come in the out years just from refinancing a lot of that unnecessary debt. That's point one. Point two is they assumed a huge normalization in G-cap earnings, in gain capital earnings, that is. And so, you know, if you run

through, they actually did break out their revenue assumptions. They basically went from assuming it does 100 million in revenues a quarter to somewhere between 50 and 70 million, maybe closer even to 50 to 60 million. So 40% normalization where if you look at the performance, of similar businesses like plus 500 or IG group, CMC, some of these other FX trading shops. Sure, the business is lower and volatility is not what it was in March, April, but versus say run rate 2018, 2019 numbers, it's still off the charts. So that's very penal. And then the third problem with the note was they didn't really make it clear where the synergies

would hit. Like if you were looking at the pre-provision income, it wasn't clear they were seeing a margin boost from the synergies, which as we discussed last time should be very low-hanging fruit. given it's basically all operational cost cuts like closing offices, closing duplicate functions, et cetera. So I think the real problem's not the right word. The real part that's still undiscovered with that story is simply the street getting the numbers right, which will happen. So you have an initiation at 70, it gives you room to be supposedly surprised, see the numbers come in, and hopefully they bump up that stock price.

I still think it's more of an $80 to $90 stock out 18 months with hopefully more of that return. in the next, say, six month, let's say. The company hasn't done us any favours, to be honest. They haven't really marketed themselves. They're also a little bit slow on the current report because it's actually their fiscal year end. So that's why they haven't reported yet for the current quarter because there is it typically for a normal company.

There's a longer lead time for the annual report, and this happens to be their fiscal year end. So I think they're reporting. They told me the first two weeks of December, so it should be soon. Again, I don't think there's going to be any rocket, not rocket shoot, There's not going to be any fireworks there.

The business is good. It's continuing to be good. It's more a question of what they do with the excess capital and what they guide to the synergy number for next year, I guess. I do think, like, you and I are the thesis was, hey, this is a business that's cheap, standalone. They got a great deal buying Gain Cap. And that deal is also going to be very synergistic when they merge.

And I do think part of it is, like, they closed the GainCap deal. And I think it was late June, early July. I can't remember exactly. But as you said, like, this business, it's fiscal year that ends in September. So they closed the gain cap deal. They report Q3 earnings in August, right? They've got basically no benefit from gain cap. It's been six months.

They haven't reported a clean quarter. They did this great deal that's going to have big synergies, but no one cares. No one cares. And it's going to take a while for it to flow into the numbers. But I think once it flows into numbers, like as you said, every business similar to this, they're not reporting March-type volatility record levels, but they're still reporting really good numbers. And I think maybe it's Q4 earnings or maybe it's once they report, you know, Q2 earnings next year or something.

But I think once people get a clean look at this business and they see all this excess capital coming out of it and they pay down some debt and probably start a share buyback, like I still think the thesis there is going to be really good. Totally. Totally. I think, look, nothing has changed in either a good or a bad way, but the underlying thesis is still very much valid. And going back to your previous point about where the opportunity set is, that's another example of how this is kind of like a work from home. home beneficiary. The work from home part of it, no, but a post-cove beneficiary is what? Higher equity vol, higher financial markets volatility. I think that's probably going, that's a reasonable assumption to make. And then we have the added kicker now of a Democratic administration and potentially a slightly more inflationary environment or a more fiscally irresponsible environment, which obviously should be hopefully good for interest rates, as in high

interest rates. And there's a huge added kicker we haven't even discussed where if rates move 25 basis points. They basically clear 15 million extra at the net income line, which is a decent amount of money for this business. So yeah, you're basically long that that interest rate optionality owning it and you're paying a very low multiple of the not even just the run rate earnings, but the kind of the normalized earnings are paying an extremely low multiple, even if you just believe their synergies at face value, which we both think a low. So the setup hasn't changed. It's great. But, you know, if I could sign up for 20% quiet returns every three months from every pick. Guess what? We'd be printing 60% a year and we'd both be sitting sipping

pina colladas in the Caribbean. I like it. No, look, I agree with you. I think it's a free call option on interest rates. It's a free call option on if things got really volatile again for some reason. And even without those free call options, the business is really darn cheap. And if you look at their history, I think they've done a nice job. Anyway, anything else on Stoenax? Or I kind of want to turn to the newest. Okay, so let's turn to the newest pick. This Jeremy posted an article on seeking Alpha today. I'll be sure to include in the show notes. The company is Bragg. The ticker is Bragg, but it trades in Canada. So I just want to disclose both Jeremy and I are along the stock. This is a Canadian microcap. So nothing on here is investing in advice. Everyone should

do their own diligence. Keep in mind Canadian microcap, not for the faint of heart. So that's disclosure out the way. Let me just turn it over to you. Who is Bragg? Why are we both so attracted to them? Sure. Yeah. Let me just double up on your disclosure there. Just, you know, I mean, look, everything, we're just explaining our views and our own opinions about securities and investments, but not only this is a microcap, it's a very small company. It's 100 million Canadian, under 100 million Canadian market cap. The enterprise value is even small, 60, 70 million with a limited operating history. So again, you know, this is kind of big boy pants rule. So for anyone who's just a casual listener, you know, this is, this is one of the high risk security.

So just please keep that in mind. With that out of the way, look, this is a very interesting situation, right? So at a very high level, Bragg is a provider of B2B software products for online casino operators. The easiest way to think about it is if you want to run an online casino, but you don't have the native software suite or the technical know-how, you will come to someone like Bragg and you'll say, okay, can you develop my backend systems? Can you build the player account management? Can you handle my risk management? Can you do the analytics on players? Can you provide me with content? Can you actually give me the casino games that I need?

Can you integrate it all into a turnkey solution where I'm abiding by all the regulatory rules that apply to my environment, right? So these guys have the relevant licenses in, mostly in Europe, let's be honest, right? So most of the licenses in Europe come out of Malta, actually. They're also licensed in Romania. They're also licensed in Germany under one of the states,

Schleswig Holstein, which is basically, we'll talk about Germany in a second, but that's where you get the licenses historically. And you'll go to an operator like Bragg and you'll say, okay, can you do this part of the business for me, that part of the business? And it really varies depending on the need and the want of the client, right? So it could be a whole, it could be an all-encompassing casino in a box type offering where that you want the whole kit and caboodle done outsourced to brag. Or it could be more, look, we just want your library of fourth-house. games piped to us and we'll pay you a very small kind of you'll most all the revenues of that will go to actually the content creators as it should and brag will get kind of like a packaging

pass-through fee administrative fee kind of or it could be something in between so for i guess the vast majority of our listeners or your your listeners are u.s based the best comp is gan g-a-n this is the most similar business um other than gan there are a number of other businesses where bits of brag or bits of these other listed businesses compete against Bragg. So, for example, bits of what scientific games does would compete against Bragg, bits of what IGT, international game technology, Playtech is not listed in the US, listening in the UK, but is also a pretty good comp. But the US listed comp that is, I think, a very similar business is GAN. And that's a business we've spoken about before and one I was quite familiar with from earlier in the year.

I'm just going to dumb it. So long-time listeners will know once every third podcast or so I'll say one of the business I missed was GAN this year. And GAN, Brad competitor, they were London listed. They did exactly what you said, right? In London, they traded for two times revenue. They relist the U.S. And three days later, they trade for eight times revenue, right? Same business, just switch their listing and they change for eight-time revenue.

This is, I think it is the best brag comp, basically the same business, best brag comp, And I actually, I personally think Bragg is probably a little bit of a better business, but I'll leave that to listener. Anyway, I was just jumping in with that background. I'll let you continue on. So we fed out of the way there's kind of, I guess, two or three legs to the thesis. So the first point is this is a rapidly growing business, right? So, you know, last quarter grew 75%. The quarter before that grew 100%.

I mean, it's basically been growing, you know, I don't even want to say high double digits because that probably undersells it. but the last eight or nine quarters, essentially Bragg is the Canadian listed entity. It bought this business. It's called Orix, O-R-Y-X, and almost all the operating, in fact, all the operating business today is this Orix business. Bragg is kind of the Canadian hold co that sits on top of the Orix business, which is this actually, this is the software business that I was just referencing when I said Bragg. So to be completely clear, it operates as Orix. And it's been growing rapidly for two reasons.

One, it's been rapidly winning clients. So, you know, this business was founded. in the early 2010s by a Slovenian entrepreneur whose name is Mathez Majdi, I think. I need to work on my Slovenian. Brush up on your Slovenian, yeah. Not my native tongue, let's put it that way. So anyway, it was founded in, I think, 2013 or something like, 2000. I can look up the exact date.

But it grew very rapidly from being a provider originally to just a couple of German facing online casinos. to as of the last report they have over 90 clients. And they've been adding, look, this year alone, they've added, I want to say, 20 to 30 clients with another 10 to 15 in the pipeline for the fourth quarter. And yeah, I mean, look, it's been a highly successful growth operation both organically.

And then obviously you've had the tail win from offline to online adoption, right? So basically the way these businesses operate is you develop the software suite and maybe people who are familiar with GAN know this, For anyone who's not, you get paid on the volume of business that's happening on your platform. So if you provide the platform to the casino and a ton of people come and bet on the casino, you get a piece of everything they gamble. And the percent you get depends on the extended services you provide, right? So if you do one piece of the tech stack, you get a tiny percent.

If you do the whole kit and caboodle, you get a much higher take rate, right? So you do get paid incrementally and or exponentially based on the activity on the platform. and the costs obviously are providing that platform are very similar, right? So obviously server costs go up if there's a lot more activity. But other than that, you've already built the software. It's not as if there's a huge amount of costs. So these businesses are very much like SaaS kind of businesses where as long as you're confident in the ongoing growth of the client and or industry, you know,

these things can start turning into very interesting cash businesses very quickly. So that's interesting. You have secular growth, you have organic growth, both in the industry and, they're winning a ton of business. Now, the second point is the one Andrew mentioned, you mentioned, and that is, that's all well and good, but this is still a Canadian microcap company listed on a crappy exchange. How am I actually getting paid, right? And that's really the key.

So they articulated very recently the desire, not just the desire, but the game plan to relist the shares, not just to the TSX main board. So going from the TSX venture exchanges is a very small exchange in Canada and hard to trade the shares, to the main board in Toronto. So essentially becoming a main listed Canadian company, which obviously opens up the share registered to a huge number of larger institutional investors, professional investors who can't trade venture shares. That's step one.

Step two, and obviously much more, from my perspective, much more important is relisting on the NASDAQ. And so once they're on a TSX main board, which, look, I think happens quite soon, maybe very early next year, knock on wood. then hopefully thereafter and soon thereafter they will look to to relist on the NASDA either via a dual listing where it's not that hard for a Canadian company to actually do a list on the NASDAQ or via full formal listing which might look again in terms of timeline there are there are some disclosure in the docs that suggests that has to happen in

first quarter next year yep I'm not sure honestly how binding that is it might actually take a little bit longer than that in any case let's say a 2021 event okay so it's not too far way. That's the game plan. And so it's really two-fold. It's one, you get access or exposure to an attractive end market growing at extremely high rates at a low valuation. In advance of, frankly, more eyeballs and more dollars being able to be deployed in it, either in greater Canada and or greater North America, which is basically the key, right? This thing is not going to trade any kind of multiple listed on a back or exchange, just like GAN. Once you put it on the same board next again, you know, I'm not saying it needs to trade at 10 times revenues, but it trades at 1.2, 1.3

times revenues today. So there's a lot of delta in between those two numbers. So that's kind of the story in the broad strokes, but you probably have some questions. Maybe you shoot the questions away, and then I'll discuss more some of the risks and opportunities that I see from here. Yeah, so let's start with the question. I think the biggest question for any microcap, right, is going to be the management team. And I do think there is a worry with GAN, correct me wrong, but they've had two CFOs turnover in the past two years. Their CEO just left over the summer. They've got an interim CEO out there.

So I do think there is a question like, you know, when you first put the ID out there, I saw two CFOs turnover in a Canadian microcap and I was like, oh my God, there's no chance I can get, give it part of this. There were some things I did that got me comfortable with it. But when I say two CFOs, CEO turnover, all that, how did you get comfortable with that? Why is that not a, it's a risk, but why is that not a huge concern to you? I look, Andrew, I have a personal philosophy only by companies that have at least three or four CFO turnovers in 12 months because I like fresh ideas, okay?

No, no, no. Look, in all seriousness, it's never great to see. What I would say is, like, someone was saying the other day, you never have complete information, right? You never completely know what's going on. But it also makes sense why you would expect to see greater turnover at the very, small end of the company's spectrum than the larger end, right? So obviously the risk degree is higher. The rewards of, the current rewards are much less relative to the optionality if the company really hits it big, right? But, you know, you often see higher executive turnover at small

companies. Like, so for example, like GAN, GAN went through two CFOs as well in the 18 months prize listing. It was very similar. I don't have all the details for why they left, but, you know, they basically said personal reasons. There are a few other kind of yellowish flags there. And yet, you know, as we discussed, the stock has gone up, 6x, 7x, whatever it was. So I'll just, I was emailing you. I was like, this red flag, this red flag, this red flag, this red flag. And you were like, dude, you're looking at the trees and missing the forest.

And I said, red flag, red flag, red flag, I was very wrong. Don't get me wrong. Sometimes it's important to look at the trees. We should try and look at the trees as well. So basically both of the CFOs who left in the Bragg case, They both left for personal reasons. The very first one who left was more affiliated with the former entity. So as I mentioned at the beginning, the Bragg Shell used to be a company called Breaking Data Corporation,

which was doing something completely different. And they had an ancillary kind of media sports business that was kind of subscale, didn't really go anywhere. So the former management team, including the CFO, was more related to that giving me sports business. So that was CFO number one, didn't really have a reason to be part of this new business. Because once it became Orix, essentially it's Matov's. baby, right? The only executives less now are the financial guys who put the deal together. And then people they've brought in subsequent to that, who actually do have pedigree that we'll

talk about. So that was the first CFO. Honestly, the second CFO, he wasn't there very long. I'm not entirely sure why he left. They mentioned only personal reasons. Having said that, they did replace him with a relatively well-seasoned, a pretty well-season executive, who I have spoken to, Ronan Kapoor, who actually is a bit of a dealmaker, very experienced in the online gaming industry who actually sold another company Stride Gaming to rank, that company I mentioned earlier, who does have a good pedigree. So that was a step up. And then the real issue was, or I guess the real positive change, was the hiring of the former CEO of SB Tech, a guy called Richard Carter, who also has a pretty good pedigree. Now, look, SB Tech has a bit of a mixed

reputation in the market, but they did sell themselves to draft Kings at a very high price. That was a great deal. This was the guy who put that deal together, and it hasn't been announced publicly because he's still in his non-compete, but I imagine he's going, he's the new chairman right now, but I imagine he's going to be the new CEO as soon as his non-compete expires, which is in a matter of months, right? So end of the first quarter next year, I believe, is he's basically going to be tapped to be CEO. And look, the interesting thing here is this guy made a bunch of money selling SB Tech. He's not coming to this Canadian microcap to make five minutes. million. Okay, $10 million. Like, there's got to be more in it for him. So he either thinks he can

really build this business into a very large business, another billion dollar business, which is what SBTEP became, and or when he was hired, he specifically mentioned MNA. And frankly, there's no company doing aggressive M&A using one-time sales currencies. So, you know, you can take it at what you will, in addition to knowing that the vast majority of Canada listing gaming software and or gaming companies end up getting acquired by larger players. You saw it with Stars Group. You saw it with NYX, and they even be missing one or two examples. But basically the two high-profile ones, as soon as they get big enough in Canada, they tend to get acquired. And there are a lot of potential acquires for this kind of business if the valuation doesn't approve. So, look,

I don't have all the answers with regard to the executive turnover. And it is one of the, it is one of the yellow flags. And again, I mentioned at the intro, you know, small company, higher risks. This is part of the parcel. But I would say I do think it's going in a better direction from an executive standpoint, they still are a bit, you know, not ready for game time, not ready for prime time. Let's be honest, they don't have a huge amount of public company experience some of the guys there, or at least that's my impression. But, you know, again, you're betting on, you're betting on the relisting catalyst. You're also betting on the secular tailwind, and then you're betting on the actual operating executive, which is the Slovenian guy.

And we didn't discuss it yet, but one of the key things that gave me comfort with the thesis was when Metev's sold his business to this shell, he took a huge amount of the purchase price in deferred compensation. And that recently got renegotiated into an equity conversion. So it was previously a lot of cash plus a bit of equity. And it got renegotiated into, again, some cash, but 75, 85, 80 percent of it in equity. And a strike price of that deal actually got set at 73 cents a share, even the stock at the time was in the 50s. And so he was willing to strike his equity exchange at a 40% premium to the then price to signal to the market.

One, I'm not going anywhere. Two, I believe in the long term prospects of the business. Three, I'm willing to take almost all my compensation for selling the business in stock. And I'm therefore going to become 35% owner of this business. Four, there's no way for me to exit without a sale, essentially, or some other kind of big liquidity event like going to the NASDAQ. So he was willing to signal all of that. And I tried to break that out in my note.

And look, the stock, the stock's gone up a little bit since then, but maybe the stock's at 80 cents today. But essentially, you're paying 10% more than the guy who knows this business inside it out and built it. And that gives me a huge amount of confidence, even with the CFO turnover at the Holtco level. Let me just jump in there, because you hit the two things that ended up giving me the most competence. A, the chairman is an industry, you know, he is somebody, he sold SB Tech to draft games. He knows this industry called the online gaming industry. And maybe there's a lot of hair on Bragg the Holdco, but he knows Oryx gaming, right? And he would not join, as you said, if he thought this thing was a strikeout or if he didn't see real opportunity.

So him being there gave me huge comfort. And the second, you know, Mike from Nongap, I said you're one of the two or three subscription services that I recommend to everyone. The other one, I say, Mike from Nongap, you need to buy him. It is, his stuff is incredible. And a big central thesis of his is, look, Board of Directors, when they've got a star, they often give them, you know, options at advantageous times or they roll their debt at advantageous times to give the inside management team a little bit of the pat on the back and to give them a lot of upside in the business. And when the founder of the company had stock truck at 73 cents, I said, oh my God, like the board and him negotiated. And the negotiation was they've said it 40% over the stock price. But I guarantee you, they set that. thinking that the intrinsic value of the business was a dollar or $1.25 with the potential to go to three, right? Like, they didn't set that 73 cents conversion price thinking that was the fair value. They were giving this guy a lot of value. And he obviously, he had a lot of leverage on the

company and he chose that price. So I just thought there was huge upside from that price. Absolutely. Exactly. That kind of got me comfortable there. Yeah. I mean, look, I, in full disclosure, I didn't even get involved in the company until I saw that renegotiated, right? Because it was a short-term liability and it was an overhang in the capital structure. It's a small company. This is like 30 million euro, a 30-million euro near-term liability that had to be crystallized one way or another. And, you know, it's all over the disclosure of the company. This is a near-term liability.

This causes significant doubt regoing concern. So it was a little bit additional hair too much, even for me. And so, and looking at both of us, we're both pretty hairy guys, right? I'm a very hairy guy. Just kidding. But yeah, so that was key. That was huge. I mean, look, he had them over a barrel, right?

Like this earn out, the way it was negotiated, they had to pay basically in cash, you know, two, three years into the future. And this was struck a couple of years ago. So he was coming up on his earn out. If they can't pay it, he could have taken the whole company. He could have said, I want my 30 million euro cash right now. In which case, they wouldn't have been able to pay him. As a Canadian microcap, the stock was, you know, 50 cents. They couldn't raise the equity.

They would have had to file. And then Matavs could have taken the whole thing. Instead of being a 35% owner, he could have been 100% owner. But of course, you run the risk to the business in that situation. Of course, that would damage his customer relationships. That would not be the same. Lawsuits left and right. You've got to go to play hardball, exactly.

But you don't want to go to your customers and say, hey, it's no big deal that we're in bankruptcy. Yeah, exactly. Trust all of your operations to my company. Like there are other things that. That's true. That's true. Maybe I'm being a little bit facetious. But the upshot is the negotiated solution is actually a great one, both for existing and for new

entrants such as ourselves, because look, we pay essentially the same price plus minus as the guy that knows the business inside out built it. And you're right, he's not taking stock at 73 cents if he thinks it's worth 80 cents, 85 cents, right? And similarly, SBTech Carter is not coming on board when the stock's 75 cents if he thinks it's worth 80 cents, right? He's coming on because he sees an opportunity to compound for many years and a multi-bagger. So that's kind of the very broad strokes. I mean, let's talk a little bit about some of the risks, I guess, just because, you know, normally you don't often see companies growing at, say, 70% and trading it, you know, eight times EBITDA or whatever. Yeah, please. Go for. Sorry, one thing. Sorry, one thing before we

talk about the risk, I should highlight that, you know, I spoke a little bit about GAN and why I think this is a very good comp. We should probably talk a little bit of why I think this may, as you said, this may actually be a better business than GAN in reality, irrespective of a perception. So GAN's whole pitch is, I guess, two things. One, where this great SaaS business, we plug us into casinos and online casinos and or sports betting, but mostly online gaming. As that goes through the roof, we have this take rate that all drops through the bottom line. We should be a 30% EBITDA margin business over time.

Well, that's a great thesis. And then you actually look at the financials. And even on a very heavily adjusted basis for the first nine months of this year, they're doing teens, EBITDA margins. And the last quarter, they did negative EBITDA margins. And the reason is not at the gross profit level. So they actually are seeing the gross profits come through in the 60, 65% range. There's this massive expense load below the line. Well, not below the EBITDA line, below the gross line, right? So in administrative expenses, whatever. And they explain that as the cost of hiring new engineers, growing to a new level of

scale. But conveniently, none of that was mentioned in the IPO roadshow, right? So what I'm really trying to say is they're growing revenues rapidly, but costs are also going up rapidly, which is not the whole market of a SaaS business. What it suggests to me is there was a very large initial opportunity that they somewhat exploited in the growing US market. But as the business has become more competitive, and as a lot of that initial land grab has happened and or is happening, they're needing to invest a lot more to try and grow the business into different verticals. And that thesis is somewhat confirmed by their announcement that they recently bought a completely different business, a B2C operator, so a front-end customer-facing business,

which is not even in the US at all, whereas before there are 85% in the US and essentially a pure play US business, they bought this other business called Coolbet, which is essentially just a sports book and casino in Europe. And yeah, it's growing really rapidly, but we don't know where the revenue is coming from. And they're not making any money. So they could easily just be giving huge discounts, huge bonuses, a lot of advertising to win customers, get, you know, low calorie revenues in the door. And then they sold the business. to GAN, who needs to keep growing revenues to prove out their valuation kind of thing. I agree.

So that's kind of my now bearish take on GAN. Full disclosure, I do have a small short position in GAN, mostly as a hedge of my long position, Bragg, right? But look, then I look at Bragg. Okay, Bragg is in nominal terms, not that much smaller than GAN, right? It's a little bit smaller. Now, even if we strip out all the content revenues at Bragg, so I mentioned before they have this mixed model where a lot of them.

revenues is content pass through and then some of the revenues are that much higher value piece that recurring revenue platform business even if we just look at platform business versus platform business gan versus brag um brag is really not that much smaller i mean maybe it's like 25 30 percent smaller but it's not that much smaller um it's growing basically the same speed or and you know it was until very recently um and it's actually making money like you know ebit margins stripping out the content pass through like 20 percent like at the company widely level, the EBIT margin is 15%, yep, EBITDA margin, sorry, but, you know, it's not that differentiated. So the EBITDA margin is already mid-teens, even if you look at their guidance for

next year, which we can talk about that in a moment. Yeah, we'll talk about their guidance. It's still in the teams. I mean, yeah, there's some expense bill. They've probably been running the business with a slightly oily rag the last year or two, given it's grown so fast. There needs to be a bit of investment, but it's definitely scaled much better. I mean, the numbers are actually there, versus the Gans of the world is still a bit of a wing in a prayer. And so really the main difference between GAN and Bragg today is that GAN has a much slicker, better management team in terms of marketing the story. They were very sensible in coming to the U.S. market, and they're more U.S. focused.

But in terms of the actual earnings power of the business and business proposition moat, usability of the product and or diversity of the product, maybe they're similar. Maybe they're not, but judging by clients, you know, Bragg has 90 clients, GAN has, I don't know, 20 to 30 clients. So, yeah, just as a pure competitive product, it's not that easy to pick between them, that's for sure. And so, yeah, the valuation disparity on that basis is very hard to understand, absent the technical factors that we discuss. And just one more thing on the clients, like, you know, the reason I like Bragg a little bit more is they have 90 clients and a lot of them are smaller. emerging market or, you know, they've got a lot of German, but they do have smaller like kind of Eastern European customers, a lot of those versus GAN. They've got some pretty chunky

U.S. customers, right? And some people would say, oh, emerging market customers, that's a risk. And yes, there is like some increased volatility. But to me, Bragg is a better business because they have less customer concentration. And the customers they do have, you know, I think with GAN, you saw with Fandul, hey, we want to bring this in house at some point, right? Whereas if you're a smaller emerging market. You can't make that investment's ran-in-house. So to me, Bragg is a much stickier and that diversity, yes, a little bit more volatility, but that diversity actually makes their business a lot stronger. Absolutely. That's a key point, right? So if you can have a view one way or another about the whole casino in a box industry, but at some point, your customers get

big enough that they can afford to do it themselves. And, you know, if you're paying five to 10% take rate out of GGR or out of gross gaming revenue to your software provider, at some point, the economics will make sense. You will try to develop or in-house that stack. And if it's cheap enough, like maybe you do buy a brag, which is essentially what Draft Kings did with SB Tech because they had cheap stock affected money, cheap spec stock-based coin to do that.

That aside, though, look, do you want to be in an industry where at some point you may or may not get in-house? Do you want 10 customers or do you want 90 customers? Your point is valid, right? Like the whole Fangio aspect of the GAN story was great because, you know, whether or not they lucked into that relationship, it's clear at this point that Fanduel is in-housing on the sportsbook side. I mean, that's a done deal. They have a bit more of a runway with the casino side,

just given the contracts they signed, but longer term, it's very difficult to see how that business doesn't get, you know, taken in-house or, again, gets disintermediated in some way. Whether it stays with them, that might actually happen too, but probably Fandil will use their leverage to negotiate a much lower take rate, something like that. Whereas, as you said, with Bragg, if you have 90 customers today, and yeah, you have the top 20 customers or half the business. So, you know, it's concentrated, but still much, much, much less concentrated. You'd rather bet with the wider field.

You'd rather bet the field than bet the one or two, two horses that you're forced to do with GAAP. Anything else you want to talk about here? I actually wanted to talk about the outlook real quick because I think a lot of the pushback is consisting on the... So if you're goodwill switch outlook or anything you want to switch on. Let's do outlook because it ties in with the main issue, which is Germany. So, you know, I think a lot of people, let's just talk 2021. So with the Q3 earnings for Bragg, they came out and they put out 2021 earnings outlook. And, you know, it, look, it's not bad, right? They're saying, hey, revenue is going to grow at the midpoint. I think it's about 15%.

EBIDA is going to grow, you know, midpoint probably about 20% if I'm just kind of eyeballing these numbers. So a lot of businesses, they would love that, right? But for a business that's growing as quickly as Bragg has, and I'm just going to eyeball it again. I mean, you know, 2019 to 2000. and 20, it looks like they're growing over 50%. Right. So for that, to go from 50 to kind of teens, that's pretty disappointing, especially with all the tailwinds and new customers. So why don't we talk about a little bit about that?

Sure. Okay. So look, it's very important. It's probably the most important thing. Other than the relisting and the technical elements of the thesis, this is the most important thing to understand. And honestly, this is where most of the risk lies. So if I was coming new to the story, this is the bit I would really try to

this element. So it's been growing very rapidly. Part of that is from new customer acquisition. Part of that is the tailwind from COVID. But honestly, it's much more from the new customer acquisition. Now, the key risk to the thesis is they have a very large German exposure. There's a function of the history of the company. A couple of their early clients who went with the full suite and then happened to grow very rapidly were German-facing businesses.

Now, Germany is going through a regulatory change where before it was kind of like a gray zone where you couldn't, online gambling is an interesting industry. you know, a lot of these markets are either unregulated or in a kind of gray zone where you have gray market operators who have like a Malta license, right, or an offshore license of, you know, a Caribbeanish, Aruba gaming license or whatever, and yet they'll, they'll then offer the gains within country. And if there's, like, if there's no, if there's no, if there's no Slovenia, I just pull it out of my head, but if there's no Slovenian policy against online gaming, then theoretically those sites can offer it, right? Right. So it's kind of unregulated.

So in Japan, this is an example. For example, there's a company I'm invested in that has a very large Japanese business that's growing very rapidly. It's not that it's illegal in Japan. There's literally no rules governing the provision of online games in Japan. So it's just unregulated. And this continues for a number of years. And invariably, these things grow because they're easy to access people like to gamble. And then all of a sudden the government says, no, no, no, this is not good.

You know, we need to regulate this industry. A lot of my listeners are U.S. So just to put it in U.S. terms, I mean, the way I've kind of thought about it is, hey, five years ago, daily fantasy sports, right? It was unregulated because nobody knew if was gambling or not. So they expanded a lot of places. And then, people decided that is gambling and laws were passed. They struck it down. But until then it was a gray market, right? Nobody had said definitively yes or no. So you kind of operated that gray market until somebody says either definitively yes or no. Exactly. It's a gray market. And so Germany operated in this region for most of the last five or six years. years where you could get one license to operate from that one state I mentioned, Schleswig Holstein at the state level, but there was no regulation at the national level. That all changed very recently with the imposition of new rules. The new rules go into effect in stages. The first stage went in in October.

The next kicks in mid-December. And it's what's known as a transition period. They're still consulting all the full rules will look like. And the new transition period, the transition period ends mid-year next year. So from July next year, you'll have the new regime. but chances are they're going to be relatively strict because the Chan decision rules are quite strict and so the transition rules basically they they do things to try and protect and guide against problem gambling which which are obviously important right and so they've done things like

institute deposit limits so if you're doing sports betting you can't deposit more than a thousand euro a month per player right which given this is kind of like a VIP business that's a huge imposition to sports betting they've done other things where they've limited I believe most table games are not allowed during the transition period until after the consultation. And then for slots, they've limited the amount you can wager on a slot spin to one euro per spin. And they've instituted you have to have a cooling off period, so like a five second cooling off period between spins. So think about it this way.

They want to basically reduce the velocity and speed of your gambling and the amount you're gambling, right? So there's various ways to interpret this. Most of them are bad, to be honest, for the overall market, at least 10. temporarily. And so I guess this is kind of the background, the necessary background to inform this guidance, right? So let's go back to Bragg. So of this year's revenues, you know, I think of their 40, they guided to 44 million euro in revenue this year, 43 million, 44 million. I think at least a third of that will be from Germany. At least the third, high,

low 30s, high, low 30s to mid 30s, maybe even slightly more depending on how you categorize it. and so if you listen to the most recent conference call they quantify that next year's numbers as you said they're still guiding to teens revenue growth close to 20% EBITDA growth they're embedding a 6 million euro hit from Germany year over year so if they're doing 44 million of revenues this year and at least a third of it is Germany maybe more what's that that's let's call it 1520 let's say 20 million let's say 20 million of Germany revenues so they're saying the business is going to fall by 35% Germany year of year. And because they get paid, they don't get paid out of earnings, right? They get paid out of

revenues, gross gaming revenues. So they're basically saying the market's going to contract 35% next year. Which, look, it depends on who you ask. I mean, it's still a bit early to see what the true impact will be, but it's plausible, right? I mean, you know, given the extent to which, given the extent to which the new rules are being put in, definitely you'll see contraction in the market next year. That's a given. Now, the interesting thing is if you look at some of the competing operators who also have German exposure. Bragg's clients tend to be more slots focused, right? They don't really have any sports betting in Germany. If they have it, it's extremely minor and not really a big part of the suite. It's much more slots. It's much more

slots and there is some table game exposure, but my conversations with management, they said overwhelmingly slots exposure. So their average revenue per slot spin was already under one euro per spin. But again, that's an average number, right? So you don't know how the higher end player, who's betting two, three euro per spin, you know, are they going to double their number of spins at one euro per spin? You know, we haven't seen that behavior evolve yet. So that's, that is definitely a risk. And so this is all kind of baked into that guidance number. So what I would say about that guidance number is management was extremely conservative this year as well. They ended up, they're going to beat that number by 20, 25% from 2020 guidance.

They had to give guidance for, they did a capital raising to pay part of the earn out. They were forced to give guidance as part of that capital raising process due to Canadian rules, which otherwise they probably would just say we're not exactly sure how the business goes, and then the street would have been probably more aggressive than the company, to be honest. And so I think they're being overwhelmingly conservative in assuming kind of like a 35 to 40 percent decline in GGR for the whole market next year. Like if you think about Sweden, right, Sweden went through a similar process a few years ago. GGR contracted, but it was nowhere near, there's nowhere near those kind of

numbers, right? It was kind of more like from memory, it was a teens contraction. And the rules weren't as strict. To be fair, the rules weren't as strict. So it's not apples, completely apples to apples, but it's, you know, northern Europe. And, you know, so I do think it's somewhat comparable as a situation. Go ahead. Let me ask you a question on Sweden. So one thing I've been wondering with the rules, you know, a lot of times you see something go from gray market to regulated. And yes, you do have that initial hit where you know nobody you can't gamble five euros per slot or whatever but a lot of times you also see eventual the market expands because you know if i'm mgm with a brand to protect and 20 casino 20 land-based casinos to worry about i can't go gamble and risk my license

in a gray market but once it's regulated i can roll out the mgm branded thing and i can start grabbing people from physical casinos right and maybe you know my mom she probably doesn't want to do something that's gray market regulated but once it's regulated, she can go into it. So is this a scenario where there's a short-term hit but longer-term that market can actually expand? Or am I just kind of painting too rosier picture there? No, no. I think you're right. I mean, look, the tension here is not between good and bad. The tension is between near-term and longer term. So you speak to the company or you do any kind of analysis. What you're saying makes exact sense and I think is right. And that is in the

medium term, this is a huge benefit to brag. I mean, to other operators as well, but brag because they're dominant in the German market, you're going to have more entrance into the market. As a regulated space, you're just going to have more operators come in. Guess what? A lot of those guys are not going to be familiar with the market. They're going to rely on one of the larger B2B SaaS operators to help them get up to speed. They're going to outsource more work. And indeed, if you speak to the companies, they'll say that. They're seeing much more, many more inquiries and all of those are some of the higher margin parts of their offering because people are preparing to enter the market. The only issue is you don't know when that's going to be, right? So you could

have this reset period, the first six months of next year, maybe even the first nine months of next year, where you just have a speed bump. And so you had, I mean, Germany grew very rapidly this year as well, more people at home, whatever, and, you know, the secular growth in online gaming versus offline. So Germany went from growing 30, 40 percent this year, which has been disclosed by management, to next year it's going to contract 30, 40 percent and essentially go back to what it was in 2019, I guess. And then it will rebase there. And then I imagine it will start to grow again and Bragg will still be a dominant operator and they will probably have even a more diversified business. To your point, you'll have a lot more new operators come in.

At this point, it's simply the lack of visibility that is causing the conservative guidance. So again, I don't want to get to a polyana-ish. It is a real risk. It is the main risk. We definitely need to see how it develops. But the point is if you're paying eight times earned, eight times EBITDA and a very low sales multiple of the already marked down numbers, which still imply 20% growth with these other catalysts to come. Yeah, I mean, you definitely have some risk if the German market just goes down 70% next year. I mean, that seems unlikely, but it's obviously possible, right, if they just decide to crush the market and all this gambling goes to illegal operators and, you know, Bragg doesn't service illegal operators, right? So it's a possibility,

but at the same time, then we'll set up, you know, six, we'll have another conversation like us in six to nine months and we'll be anniversary in 2020 we'll be looking at 2021 rather we'll be looking to 2022 and the business will still be print you know still be profitable still be generating money and we'll be looking to start regrowing again in germany and by that point i imagine they will be listed in better jurisdictions they will have an even more diversified business because they have started to in some u.s clients Canada is actually starting going to start to open up from the sound of recent regulatory activity we didn't even talk about that opportunity and so it's more of measuring the near-term pain for the long-term gain. And of course, if this stock was trading

at 10 times revenues, you know, I'd be extremely worried about this and we would not be having this discussion. But at, you know, at a single digit EBITDA multiple on already aggressively marked down assumptions, I think all they have to do is just hit those numbers and the stock can still easily re-rate a lot higher. Let me put another twist on it. If I told you that I thought the management was just being overly or hyper-conservative for a bunch of different reasons, They're going to get a new CEO at some point. They're looking to uplist. They just rolled their, you know, their key employee just rolled into 35%. If I told you, I thought they were being overly conservative because they do not want to miss 2021 numbers with all of that going on. Do you think I'm being too, again, too Pollyannish? Or do you think there's a chance they're just being way too conservative here? No, I think you're right. I think the incentives for them to, the cost of them as a small cap Canadian company that just did an equity deal. potentially want to do more equity deals and or obviously insiders may or may not try to get

out at some point in the future, right, once it's a more liquid stock. The costs of them, we think badly on guidance as their profile goes up, is so much higher than the cost of setting the bar really, really low and worst case, just meeting that bar, right? So the way I think about it is exactly that way. They understand their position as a kind of high cost, let's call it a high cost of capital company right now as a new entrant to the capital markets as a new story to tell and they really don't want to miss that guidance number and yeah if the cost of that is kind of this reset period where people kind of don't believe it for a while or it's a bit of a show me story and then as we go through 2021 they hit the number and or beat the number which I think

they can actually beat the number handily yeah I mean I think that would obviously that's not going to hurt the medium term that's that's the right way to play the game so I think you're you're right there. Again, just I don't want to sound too cautious or too, to kind of wary. I just, you know, there is still element of risk of how the German market develops. That's going to be key for the business, right? That's the key issue. The real reason I think they're too conservative is, you know, our listeners can go to the work here, but if you go look at their 2020 guidance and how it evolved from Q2 to Q3, I mean, the implied growth from the, it was insane. And they clearly knew they had the 2020 numbers in the bag.

just, they do not want to miss. So they guided way too conservative in Q2. And Q3, they up the guidance a little bit. I still actually think it's a little too conservative. But I think these guys are just, I think they're just overly conservative guiders. And at some point, maybe that changes, but it's not the worst thing in the world. And, you know, I think, sorry, what else should we be talking about with Brad? I think, I think that's about it. I mean, there's a few other, I mean, most of the stuff is covered in the note. And it's a bit in the weed. So I don't want to, you know, go into too many details that aren't accessible in that note. So people interested, people can

have a read. But yeah, I think we hit most of the key issues. I mean, the, yeah, I guess the one thing, the one thing to focus on is the narrative around the relisting. So, I mean, okay, yeah, this is actually a good thing to talk about very quickly. So you were mentioning before management quality and or my view there. So one thing that I didn't love about the most recent call is on the second quarter call, mentioned specifically pursuing this relisting, right? And both the uplisting to the TSX and then they had a throwaway comment about relisting in NASDAQ. And then that was outlined in the CDR filings, right? So the regulatory filings that was actually kind of outlined in black and white. So, you know, those are legal documents, right? So I'm pretty confident that's still the plan.

Then the third quarter rolled around. They basically had one question on the call from the one broker that covers them. They didn't even mention in the prepared remarks, the plan. And, you know, I spoke to them afterwards and, you know, I like them, but they said, you know, we're still talking to the TSX. It's, you know, just figure out what we need to do. I can't go on a call and say it's a done deal and it's, you know, it's not done. And I kind of impressed upon them, well, you don't have to say that. Just say it's still on track and you're still progressing towards a TSX main board listing. And thereafter, dual listing or a relisting on the NASDAQ when the time is right, as in when, you know, expediently is possible. You know, tons of companies say

this kind of stuff all the time. So I do think there's a learning curve for management, as I kind of alluded to. But again, that's part of the opportunity, right? If management was bashing us over the head with all these catalysts, whatever, the stock wouldn't be at 80, right? It would be much more closer to what I consider fair value, fairish value, which is probably somewhere between $1.50 and $2. And so that's just one thing to kind of keep an eye on, make sure that process remains on track, given some of the other, you know, the risks related to the story as regards to a small Canadian cap. You don't, you know, the way I think about it is this is a very attractive story in a very attractive niche, notwithstanding the fact that it's also a very

small company with a few of the geographic issues that we mentioned. And therefore, it's like, look, if we took GAN, right, if we took GAN, which in many ways is a similar, is a similar story, if there was no prospect of it ever getting off the AIM exchange in London, do you really want to have your capital tied up in it, even as attractive as the story is? Okay, maybe it can rewrite from two to three times sales. Maybe it can grow. Maybe you still are involved.

It's just the scale of the position and kind of the level of capital you throw at it is probably a lot less, right? So, yeah, the catalyst is really important in these kind of situations. So if I was to counsel what the kind of thing that I'm focusing most on is deliverability on that because frankly the business has performed great right guidance aside management kind of learning curve aside you know it's hard to fault their execution um it's really about some of the softer deliverables that that I really make a difference to guys like you and I you know I I 100% agree with everything you said I would just you know I do think I'm with you like if this never

uplisted I think it's a lot less interesting though you know it's cheap and it's growing quickly but I do think like whether it's early 2021 or late 2021 like at some point I think you and I both think this is a 20 to 30 percent top line grower that's going to be in a hot space that's run by the former the former CEO of SB Tech like at some point the TSX is going to be begging them to uplift to their exchange versus right now you and I are kind of like we really want to happen but at some point every exchange is going to be like this is the type of company we want you know this is a sexy growth company run by a record team exactly Exactly. A secular growth, 20 to 30 percent multi-year secular growth run by an owner operator, right? Essentially, the guy is going to be, Metev's as 35 percent owner run by a seasoned exec, whose only mandate is really to maximize value, whichever way that comes. I mean, it's very rare to find those at all, let alone at this kind of valuation. So they should be begging them for it, and I just hope they get it done, which I think. And if there aren't, there are a hundred stacks out there that would be willing to pay 10 times revenue for these guys.

Exactly, exactly. Cool. Well, anything else you want to talk about here or should we wrap it up here? I think that's it for today. That's been a good, a good dose of us. Hey, well, look, love having you on. Again, Rafer Capital, I don't say this lightly. I love the subscription. I'd encourage anyone to subscribe. I'll be sure to include the link to the Seeking Alpha Bragg article, which, you know, obviously the subscribers had an early look at this, but now it's public. So I think anyone can go check that out. And, Drew and Rick, thanks so much for coming on. And hopefully next time we'll have some S-N-E-X news. We'll have an uplist thing for a brag, and we'll just be talking about the next one. Awesome. Thanks, Andrew.

Always appreciate it. Great chatting and speak to you soon. Have a good one, man. Cheers, man.