This article was co-written with Kevin Hitt.
British esports agency Code Red Esports is in the process of going public on the Toronto Stock Exchange Venture Exchange (TSXV), a marketplace for emerging companies, through a reverse takeover (RTO), according to documents seen by The Esports Observer. The agency first entered into a letter of intent (LOI) with TSXV-listed Magnolia Colombia Ltd. and Toronto-based GameSquare Inc. outlining the business transaction in February 2020.
Since the LOI was first announced, multiple allegations involving directors and talent of Code Red Esports have been made public as part of a movement of sharing experiences of abuse and misconduct in the esports industry. While no filings have been made with the Canadian Securities Administration that would indicate the transaction has been changed by those allegations, Code Red Esports’ business was affected in several ways.
Two of the company’s directors, Paul Chaloner and Luke Cotton, were subject to those allegations. Chaloner, co-founder and CEO of Code Red, was accused of workplace violence as brought forth by former co-worker James Banks. This, coupled with the revelation of a 2015 court case in which Chaloner was found not guilty of domestic violence against his then-wife, saw Chaloner tweet that he “decided to walk away from esports” and resign as managing director of Code Red with immediate effect. However, no filings have been made with the UK House of Companies declaring the termination of Chaloner’s director appointment.
Cotton, the company’s COO, admitted to threatening Banks in a statement via his twitter account to deter Banks from publishing the allegations made against Chaloner. In Banks’ posting, he shows a text message he received from a source he has kept confidential alleging that Cotton engaged in inappropriate behavior directed towards a woman who was looking into hiring Code Red for an esports event.
Chaloner and Cotton are set to receive significant payments and shares in Code Red’s new parent company, GameSquare Esports, as part of the aforementioned transaction. In addition, Chaloner is set to serve as director of Magnolia Colombia, the company indirectly running Code Red Esports after the transaction is completed.
“Paul [Chaloner] no longer works for Code Red so you would need to reach out to him directly for comment from him,” Code Red COO Luke Cotton told The Esports Observer in response to this article. “As per Paul’s statement, he resigned as Managing Director of Code Red. Thus, he would not be a Director of Magnolia Colombia.”
Additionally, talent managed by Code Red Esports was accused of various misconduct, including Toby “TobiWan” Dawson who was accused of sexual assault—charges he denied. The agency subsequently dropped him from its portfolio. In correlation with those allegations, some of the agency’s talent, such as Austin “Cap” Walsh, cut ties with Code Red Esports.
The company in charge of the business transaction is Magnolia Colombia (formerly Stetson Oil and Gas), a Canadian independent oil exploration company. Before entering into its LOI with GameSquare, the company entered into two LOIs for an RTO in 2019, with PCT Ltd. and Lendified Holdings Ltd., but both were canceled. Once the business transaction with GameSquare and Code Red Esports is completed, Magnolia Colombia will be the second oil company venturing into esports after Black Ridge Oil & Gas, who sponsored Allied Esports Entertainment’s listing on the NASDAQ via an RTO.
The proposed business transaction takes place in three steps. First, Magnolia Colombia granted a $250K ($185K) loan at a 10% annual interest rate to GameSquare in May. A portion of the loan was used to finance the acquisition of Code Red Esports, while the rest is used as working capital to complete the amalgamation with 2631443 Ontario.
Second, GameSquare acquired all 100 shares of Code Red Esports from its previous shareholders on June 3. In detail, GameSquare acquired 56 shares from Paul Chaloner, 20 from Luke Dominic Cotton, 17 from Benjamin Woodward, and the remaining 7 shares from Toby Oddy, respectively.
Third, Magnolia Colombia acquires GameSquare and transfers control in a three-cornered amalgamation: Magnolia Colombia’s wholly-owned subsidiary 2631443 Ontario Inc. will amalgamate with GameSquare, which thereby becomes a wholly-owned subsidiary of Magnolia Colombia. 2631443 Ontario Inc. will be renamed to GameSquare Esports Inc. and operate Code Red Esports’ business. This step is necessary to comply with Canadian law, as the companies involved are incorporated under different business corporations statutes.
As part of the three-cornered amalgamation, GameSquare shareholders will receive one Magnolia share per GameSquare share owned. In preparation for that share transfer, Magnolia will commence a 5.8 to 1 consolidation of shares resulting in a total of just under 10M outstanding shares. Following the completion of the transaction, GameSquare will have 29.3M shares outstanding, of which 9.3M are issued to Code Red Esports shareholders.
The parties involved in the business transaction proposed a group of directors to operate Magnolia Colombia going forward, which is subject to TSXV approval. GameSquare CEO Kevin Wright, a former director with Canaccord Genuity (which recently loaned $22.7M to esports organization FaZe Clan), is suggested to serve as CEO and director. Code Red Esports co-founder and managing director Paul Chaloner is proposed as director. The two would be complemented by Paul Bozoki, Neil Said, Maurice Colson, and Craig Armitage.
Aside from shareholder and regulatory approvals, the completion of the business transaction will also be subject to other conditions, including the completion of a private placement financing by Magnolia Colombia of at least $3M ($2.2M).
Consequently, Magnolia intends to close a private placement of subscription receipts of GameSquare Esports targeting to raise up to $3M ($2.2M) in gross proceeds at $0.25 ($0.185) per share prior to or concurrently with the closing of the business transaction. As per the agreement between the parties involved the net proceeds of that private placement will be used for a payment of $2.33M ($1.74M) to the shareholders of Code Red Esports.
Code Red Esports, which was established in 2016, reportedly generated net revenues of $3M CAD ($2.2M USD) for the twelve months ended Nov. 31, 2019, which was up 50% year-over-year. For the period the company’s net income was $64.3K ($47.6K).
Alongside Magnolia Colombia, several esports companies are currently listed on the TSXV, including Enthusiast Gaming (the owner of esports teams Luminosity Gaming, Vancouver Titans, and Seattle Surge), Simplicity Esports and Gaming (owner of Flamengo Esports and Simplicity Esports), and sim racing and data company Torque Esports. Furthermore, esports organizations eUnited and Team Reciprocity, as well as esports betting platform Luckbox are pursuing a listing on the exchange through an RTO.
The Esports Observer has reached out to Code Red, Paul Chaloner, and Luke Cotton for comment and will update this story should more information become available.
Editor’s Note: An earlier iteration of this story noted incorrectly that stage host Frankie Ward “in correlation” with allegations against Code Red members. Ward left the organization on June 10. We have adjusted the story to reflect this.