Hello everyone,
I have been following this thread for a LONG time now, but am not a member, so I got myself a trial membership. I have analysed Starnet in detail and have enclosed my summary below. It's quite long, but bear with me. After all, I've read all yours. I think you will find it quite informative.
The Internet is globally used by approximately 150,000,000 people. The growth rate of the Internet is 100% per year and is expected to reach 200,000,000 users by the turn of the century. Internet users are wealthy, educated and mostly male - identical to the source of most gaming revenues.
PC Computing Magazine estimates the annual market size of online gaming to swell from $0.6 - $20 Billion US by the year 2000. Currently, only 150 organisations are actively involved with accepting online wagers over the Internet. Approximately fifteen of these corporations develop and license the gaming software necessary to operate Internet gambling Web sites. Starnet Communications has superior products, management and marketing strategies - and will emerge as the dominant innovator, the "Microsoft" in the online gaming industry.
Aside from operating "Worldgaming," a fully functional online gambling site, including 25 casino games, an international lottery ticket brokerage, sports book and broadcaster of pari-mutuel horse and greyhound dog races - Softec Caribbean (a wholly owned subsidiary of Starnet) licenses its proprietary software to eligible third parties who hold gaming licenses from offshore jurisdictions such as Antigua.
Softec charges an up front fee of $100,000 US to each licensee to set up the Internet gaming site. Softec also charges each licensee a royalty based on net monthly revenues. Royalties start at 40% and slide down to as little as 15% based on net monthly revenues.
Softec has licensed 6 parties since the last quarterly statement was filed with the SEC. This contributes a guaranteed minimum of $0.6 Million US to quarterly revenues. Softec expects to license another 6 parties by the end of 1998.
Starnet also operates several "adult" Internet sites. Last year, these pornographic sites generated a gross revenue of $2,242,246 US. Adjusted to quarterly earnings, without accounting for any growth, will generate a revenue of $560,056.
The last quarter ending January 31, 1998 saw a loss of $569,256 on net sales of $812,177. This loss can be attributed to research and development costs amounting to $615,942. In the nine months ending January 31, 1998, Starnet spent $1,138,079 in research to develop online gaming software. In those nine months Starnet posted a net loss of $897,434. Had Starnet not developed Internet gaming software and simply continued with the "adult" site business, it would have a net profit of $240,645 during those nine months. Starnet only had a debt of $389,669 as of January 31, 1998.
Starnet intends to dispose of the "adult" site for the price of $10,000,000 US. This will contribute approximately 50› to the current share price.
I estimate the revenue generated by the Worldgaming casino during the last quarter to approach $750,000 US. Starnet estimates the profit will increase to over $10,000 per day during the next quarter.
With these revenue sources combined - Starnet stands to gross a minimum of $2.5 million during the first fiscal quarter of 1998 which amounts to $10 million annually. This does not take into account any royalties that may have been earned through third party licensees. Starnet should gross close to $20 million during the current fiscal year.
E.F.S. Caribbean (a wholly owned subsidiary) acts as an international currency converter and will provide online merchants with the means to charge as little as 2› for Internet products and services. E.F.S. will charge the merchant a transaction fee. In my opinion, within 3-5 years NOTHING (worthwhile) will be free on the Internet. For example, to view an online magazine article, one will have to pay 10 or 25›. E.F.S. will provide online merchants the means to charge such small amounts. Financial analysts predict online commerce to explode from $5 to $500 Billion US annually over the next decade. E.F.S. currently has an agreement with the Bank of Montreal to accept and process credit card transactions. Currently, all six gaming licensees, along with the adult sites utilise E.F.S. transaction technology.
The following is a brief summary of current press releases:
September 18, 1997 - Starnet Communications goes public on NASDAQ.
October 22, 1997 - Worldgaming commences operations at www.worldgaming.net.
November 12, 1997 - Softec Caribbean is incorporated to license gaming software to eligible third parties.
December 9, 1997 - Seven private placements of 350,000 shares generating $2,450,000 US are issues.
January 13, 1998 - First licensee signs software agreement.
March 17, 1998 - Hialeah Park Race Course (horse race track in Vancouver) agrees to allow Starnet to broadcast and accept pari-mutuel wagers via the Internet.
March 24, 1998 - Two more licensees are signed.
April 7, 1998 - Ontario Jockey Club (Woodbine Race Track) agrees to allow Starnet to broadcast and accept pari-mutuel wagers via the Internet.
May 6, 1998 - Three more licensees signed.
May 27, 1998 - Jacksonville (Florida) Kennel Club agrees to allow Starnet to broadcast greyhound races and accept pari-mutuel wagers via the Internet. The club hosts 400 events per year on three tracks.
Starnet International trades on the over-the-counter Bulletin Board market on NASDAQ under the symbol SNMM. On Friday, July 8, Starnet closed at $0.93 US. Average volume is approximately 1000,000 shares per day. Starnet International will release annual and quarterly statements on or about July 30, covering the fiscal period ending April 30, 1998.
Currently, 22,450,000 Class A voting shares are outstanding. No class B or C shares have been issued. According to the corporate charter, authorised shares are limited to:
100,000,000 Class A voting
50,000,000 Class B non-voting
50,000,000 Class C non-voting Preferred
An Employee Stock Plan will potentially issue an additional 1,000,000 Class A shares. The Employee Stock Option Plan can issue a maximum of 3,000,000 Class A shares.
Private Placements: 2,450,000 shares were issued through private placements to undisclosed offshore interests. Each share comes with two warrants which are exercisable within one year of issue. The first warrant was issued at the placement date and has a strike price of $2.00. The second, or "piggy-back" warrant is issued upon the exercise of the first warrant. The strike price of the second warrant is $4.00. The warrants will further dilute the equity float by a total of 4,900,000 Class A shares.
Although the beneficiaries of the private placement are not known, SEC filings disclose some of the major stock holders:
Mitchell White 300,000
Richard Thiessen 300,000
Jason Bolduc 300,000
Paul Giles 300,000
Mark Dohlen 100,000
Jack Carley 25,000 Christopher Zacharias 10,000
The preceding shareholders are directors of Starnet International
Directors & Executive Officers as a Group 1,335,000
Furthermore, several of the preceding directors and family members own the offshore corporation Murray Partners which holds an additional 10,000,000 class A shares.
Other major shareholders include:
Gise Capital 200,000
Sharp, Flint & Blunt 200,000
Eastern Pacific 200,000
Richland Acceptance 100,000
Allfund Capital Corp. 100,000
David Parfitt 50,000
Randal Pow 100,000
Rush & Company 150,000 David Parfitt 50,000 Elissavet Doxa 100,000 First Marathon Securities 585,000
John Tsagarii 55,000
Accounting for the inevitable dilution as a result of the exercised warrants, Employee Stock Plan and Stock Option Plan, Starnet stands to have an equity float of 31,350,000 Class A shares within one year. When the share price reaches $2.00, first level warrants will be "in the money" and at $4.00, piggy-back warrants will be "in the money." At those two thresholds one can expect equity dilution.
Management owns well over 50% of the outstanding stock. This will create an environment where a relatively small portion of the float will be actively traded. Consequently, the supply of traded stock will most likely be restricted which will assist in the upward pressure of the share price.
Cryptologic trades on the Toronto over-the-counter market under the symbol CRYP. Cryptologic is a similar corporation that has developed online gaming software and sports book and subsequently licenses to approximately 10 third parties. Cryptologic has been in operation for about one year longer than Starnet. Last year, Cryptologic grossed $17 Million. Currently, Cryptologic trades at approximately $16 per share and has about 12 Million shares outstanding. Cryptologic traded as high as $39 this year.
After one full year of operations, Cryptologic earned $0.61 (CAN$) per share on a fully diluted basis. The equity currently trades at $16, but traded as high as $39. During the first quarter of 1998, fully diluted EPS was $0.37, or annualised to $1.48 per share. So based on earnings, Cryptologic now trades at a Price to Earnings ratio of:
$16/share 10.8 times
$39/share 26.4 times
If Starnet posts similar earnings during its first year of operations (i.e. 8 million$), it can be expected to trade between (adjusted to US$):
10.8 times $5.18
26.4 times $12.67
on a fully diluted basis.
In consideration that Starnet has a superior product, and the exponential growth the online gaming industry is experiencing - Starnet should match or beat Cryptologic first year revenues.
Starnet has a competitive advantage over Cryptologic. First, Starnet also offers live horse and greyhound pari-mutuel gambling. Starnet is also a brokerage of lottery tickets for over 25 countries, including Canada, Germany, Great Britain and France. Starnet also offers culture-specific games such as Japanese Pachinko, Mah Jong and Pai Gow Poker. The software product Starnet offers is simply more dynamic and superior. Furthermore, Cryptologic charges higher license fees and royalties are steady at 50% of net monthly revenue. Starnet also receives over 9,000,000 visitors per day on their "adult" sites. This traffic can be redirected to the online casino through banner advertising, which essentially links the porn sites to the casino. Starnet also developed an "adult" theme casino which features nude women in the casino product.
I suggest that Starnet will comparatively out-perform Cryptologic on a midterm horizon, in respect to earnings equity valuation.
I predict that the quarterly statements which will be made public on or about July 30, 1998 will show the first net profit, or bring Starnet close to the break even point, since research and development began. On speculation that Starnet will become a leading developer of online gaming software and earnings will continue to rise exponentially, I believe the stock will rise to the level of $2.00 - $3 dollars per share. As Starnet continues to license software to additional third parties the stock will continue to rise. The quarterly statements to be released on or about September 15, 1998 will be more impressive and further drive the equity value. Within one year, Starnet may be trading between $8 - $12 per share. As E.F.S. develops online E-commerce and online casinos continue to generate increasing revenues, Starnet stands to further rise during the next 1-3 years.
The ability the purchase this equity in the range of $1.00 presents an undervalued company that has the potential to provide an investor with a unique opportunity to earn a substantial return.
c 1998 |
