Investors have dumped stock in Esports Entertainment Group after the operator was forced to reduce full-year revenue guidance by $30m due to a quarter plagued by headwinds.

Reporting its fiscal second quarter financial results, the operator cut 2022 revenue guidance to between $70m and $75m, down significantly from previous annual estimates of $100m.

Net revenue came in at $14.5m, down 11.4% quarter-on-quarter as gross profit slipped by 19.5% over the same period to $8m.

The operator said the downturn was due to pulling its acquired Bethard brand out of the Netherlands following the launch of the country’s regulated market, as well as a material decline in sportsbook revenue across Europe and the US due to “historically low” hold rates.

Ongoing issues related to the Covid-19 pandemic also played a part after the company was forced to cancel in-person esports events, postpone the opening of its Helix esports centre in California and delay the launch of its LANDuel peer-to-peer wagering product.

“Our fiscal second quarter results reflect a variety of challenges largely outside of our control, which together drove our first quarter-over-quarter revenue decline in more than a year,” said Grant Johnson, CEO of Esports Entertainment Group.

Of much greater concern is the fact the company had just $1m on its balance sheet at the end of the reporting period as of 31 December 2021, although this has since risen to $1.4m as of 18 February 2022.

With the company currently burning through more than $1m in cash per month, it looks in a vulnerable position. CFO Dan Marks said the second quarter performance had pushed the breakeven point back to the first calendar quarter of next year. “That is where we are in terms of timelines,” said Marks. “It really is a reset that’s pushed us out an extra quarter.”

Esports Entertainment Group’s liquidity position is so precarious that it cited its current cash balance as a going concern in its newly published financial report.

It said: “The company believes that its current level of cash and cash equivalents are not sufficient to fund its operations and obligations without additional financing.

“Although the company has financing available, the ability to raise financing using these sources is subject to several factors, including market and economic conditions, performance, and investor sentiment as it relates to the company and the esports and iGaming industry.

“The combination of these conditions were determined to raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of the unaudited condensed consolidated financial statements,” it concluded.

During the quarter, Esports Entertainment Group raised $1.6m in gross proceeds through an ATM equity offering programme to grant it flexibility and access to additional capital.

Since that time, it has been in dialogue with the noteholder over a longer-term solution on updated terms, resulting in a flat monthly repayment amount over the next five quarters.

The new solution agreement has no prepayment penalties and will be agreed and signed before the end of the current quarter, according to Marks.

The CFO said that while the agreement had a significant negative impact on its reported results, the outcome of the discussions should result in a long-term positive solution for the firm, allowing it to make fixed monthly payments while investing and growing the business.

Adjusted EBITDA dropped by $2.5m quarter-on-quarter as total net losses for the period reached $34.5m versus a net loss of just $7.3m in the same period of 2021, due primarily to a one-time non-cash charge related to its senior convertible notes totalling almost $30m.

During the webcast accompanying the financial results, one analyst asked whether the operator’s lack of cash would impede on its ability to acquire customers as there would not be money in the budget for marketing.

“The reason we’re public is because we depend on the public markets [for cash] and clearly, we are not in what we would call a bull market,” replied Esports Entertainment Group CEO Grant Johnson.

“It’s been a very difficult market, and the ongoing concerns of not just the pandemic, but more recently events in Ukraine, restricts our access to capital and it restricts some of the interest in the sector, which is down overall across all operators.

“Restricted access to capital does slow down our marketing efforts. However, thankfully, several of our assets are positive cash flow and are somewhat self-perpetuating,” he added.

New York-based investment bank HC Wainwright reduced its target price from $14 to $6 following the results announcement. Investors duly took note, and the stock is down 48% on Nasdaq at the time of writing.

Looking to the positives, Johnson said the full-scale launch of its VIE.gg esports betting platform in New Jersey would be a future growth driver, as would the rearranged unveiling of the LANDuel product during an event at the Hard Rock in Atlantic City on 18 March.

The company said it has also seen significant interest in its OMEGA esports gaming platform, a B2B solution that enables businesses such as movie theatres and shopping malls to offer esports gaming options using an arcade model.

OMEGA was created by in-house provider ggCircuit. It currently operates across nearly 1,000 venues globally and hosts nearly two million unique gamers every year.

According to the company, these OMEGA units will mine for cryptocurrency when not being used by gamers. This means they are never dormant, unlike legacy gaming machines.

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