The unprecedented COVID-19 pandemic has undoubtedly pummelled mixed martial arts (MMA) promoter ONE Championship, but a closer look suggests the company’s troubles predated the virus.
Even before the pandemic, ONE carried a persistently wide margin of loss and a significant portion of its trade receivables were overdue. Virus or no, the company was already burning through its cash pile at a brisk pace.
ONE this week announced that it was laying off 20 per cent of its staff amid what group president Teh Hua Fung described as “the worst economic crisis in 100 years.”
Social distancing restrictions this year have forced ONE to cancel key fights, which not only bring in revenue from ticket sales but also generate revenue from sponsorship deals and broadcast rights. That pressure clearly accelerated the company’s need to tighten its belt and seek additional capital in 2020, but it would not have been far from a reckoning even if the virus had not choked off live sporting events.
In 2018, ONE’s net loss widened to S$82.2 million ($59.0 million), more than double its year-ago loss of S$34.4 million, according to regulatory filings. Even as revenue more than doubled to S$37.3 million in 2018, net loss margin remained just above 200 per cent; in other words, ONE lost more than two dollars for every one dollar of sales recorded in 2018 and 2017. The company’s 2019 financial filings are not available.
A key reason for the unyielding loss margin is that a large portion of ONE’s revenue is actually non-cash in nature. In 2017, S$10.7 million, or almost two-thirds, of ONE’s revenue came from “barter transactions,” in which advertising and media rights were swapped for goods and services. These barter transactions were subsequently deducted as costs and expenses before the bottom line.
In 2018, ONE stopped reporting barter transactions separately. If the proportion of barter transactions stayed flat, however, about S$24.2 million of its 2018 revenue could have been non-cash in nature.
Even in the case of cash revenue, ONE has not always been able to collect its money. In 2018, S$3.1 million, or almost four-fifths, of the company’s S$3.8 million of trade receivables were past due but not impaired. About 22.5 per cent of 2018 trade receivables were past due by more than 90 days but not impaired. ONE impaired S$196,343 of trade receivables in 2018, and S$620,805 in 2017.
The losses and bad debt have taken a toll on the company’s cash situation.
ONE burned through S$78.5 million in cash from operations alone in 2018, roughly twice what it recorded as revenue for the year. 2018’s cash burn represented about 41.3 per cent of ONE’s cash and fixed deposits at the end of the year, and 41.9 per cent of its net current assets.
ONE disclosed only one fundraising event in 2019, a sale of S$10.4 million of convertible preference shares to TPG Capital founding partner David Bonderman in March 2019. On the assumption that ONE maintained the same burn rate in 2019, the company would have had only about 1.5 years of runway left at the end of 2019.
But that is a conservative estimate. In 2019, ONE pursued an aggressive expansion plan, with new businesses in e-sports, apparel and television and film production that would have required significant capital to set up and start. Even without the pandemic, ONE was likely looking at about a year’s worth of cash entering 2020. With the pandemic, that runway would have shortened significantly.
Still, ONE’s investors have been supportive so far.
The company this week announced that it had obtained $70 million of funding. While it did not provide a breakdown of investors and amounts, regulatory filings show that an investment vehicle of Singapore government-owned investment firm Temasek, an existing investor, had subscribed to about S$35.43 million of convertible notes due in 2025. The convertibles are understood to have an initial conversion price of S$49.552, a modest premium of about 5.9 per cent to the S$46.78 per share price paid by Bonderman a year earlier.
The new funding, however, is no silver bullet. Based on earlier financials, that $70 million might extend ONE’s runway by only a few months to a year.
The company will have to use that extra time to fix its business.
Teh spoke with DealStreetAsia about COVID-19’s impact on ONE before this week but did not mention the layoffs and new funding that were since announced. When asked for additional comments following the announcement, ONE said it could not set up an interview on time.
In his interview, Teh had shared that the development of a television and film studio is a key priority for ONE.
The studio’s main project right now is a localised version of The Apprentice, in which competitors will vie for a job that reports to ONE chief executive Chatri Sityodtong. While ONE has been positioning itself as a sports media company, what is notable about The Apprentice is that it is only marginally related to MMA and live sports events.
“This is our first foray into mainstream content,” Teh said. “It has nothing to do with live bouts.”
Mainstream, pre-recorded entertainment content is an understandably enticing business vertical. Television and films have a tried and true business model of content sales and sponsorship and open the possibility to reach a much wider audience for ONE.
But while ONE is the dominant Asian player in MMA, it is but one of many in the world of television and film production. It will not only have to contend with much more experienced incumbents but also its peers who have reached the same conclusion about how to boost their business.
Singapore-based Rebel Group, Inc, which has been focusing on the China market, is making a big push into mainstream television entertainment as well, CEO Justin Leong told DealStreetAsia.
Like ONE, Rebel has also been reporting consecutive years of losses, with a $10.8 million net loss on net revenue of $138,908 in 2019 and a loss of $13.7 million on $223,783 of revenue in 2018. Leong said Rebel has also had to cut salaries and let go of about 10-20 per cent of his staff.
“It’s never an easy decision to make, letting go of someone,” Leong said. “But due to the economic climate, the inability to organise any events, our event revenues are all stuck to zero, so decisions have to be made about key functions.”
Leong said that Rebel is now focused on creating a reality show surrounding MMA fighters, and has hired acclaimed director Xie Dikui to helm production. The aim is to wrap MMA in a package that is easily accessible to the mainstream, especially through digital distribution channels, even if it means forgoing live matches.
Asked about his path to profitability, Leong said: “We’re no different from a major YouTuber. Consistent viewership, engagement, likes, brand awareness. I think the formula doesn’t stray very much.”
A new path
Teh believes that a live sporting event will always remain a source of valuable content.
“The live event is still the crown jewel,” he said. “It creates moments that aren’t reproducible.”
For ONE, the question of survival could well hinge on figuring out how to sell those moments in a sustainable way.