Esports Entertainment plans asset sale after defaulting on debts

In its quarterly report, Esports Entertainment group again said there was “substantial doubt about its ability to continue as a going concern for a least one year”. The business added that it “has not maintained compliance with certain debt covenants and is currently in default”.

As a result, chief executive Grant Johnson said the business would take action to alter its repayment plans and drastically cut costs.

“To address our liquidity position and improve our ability to invest in the business and adequately support our growth initiatives, we are actively working with our lender on key modifications to the loan and hope to have more to share on this front in the near-term,” he said.

To address these challenges and allow it to pursue growth, as well as achieve operational and profitability goals, Johnson said EEG will implement a number of strategies.

First, EEG will “dramatically simplify” its offering in the esports space, with an increased focus on SAAS-based technology under the ggCircuit brand, in-person tournaments under the EGL brands, and its peer-to-peer wagering platform. This asset-light model, Johnson said, will allow the operator to more efficiently leverage its esports assets. 

EEG will also “aggressively” cut costs across its seven brands, including the removal of duplicative functions and de-emphasising non-core assets. Johnson said EEG expects to record material savings over the next 12 months through an amended marketing strategy and through the implementation strategies to drive operating efficiencies. 

“We have also identified further avenues to increase our cost savings and will pursue these in the coming months,” Johnson said. “We are encouraged by the early results of these efforts and expect them to have a significant positive impact on our future results, including our progress towards profitability, with a goal to achieve break-even on an annualised basis by early fiscal 2023.”

In line with these changes, as well as its focus on achieving break even as quickly as possible, EEG has altered its forecasts for the full year. Revenue is now expected to reach between $55.0m and $60.0m, down from the initial range of $70.0m to $75.0m.

“While we have come a long way in a short period of time, there is much work ahead of us as we become a leaner organisation that can operate more efficiently and create greater value for our partners and shareholders,” Johnson said. 

Revenue for the three months to 31 March 2022 amounted to $15.7m (£12.5m/€14.7m), up from $5.4m in the corresponding period in the previous year. The operator said this sharp increase was mainly due to the impact of M&A activity in recent years. 

This included its acquisitions of online betting and gaming operator Argyll Entertainment in July of 2020, online casino operator Lucky Dino in March 2021 and Gameday Group’s B2C business, operating as the Bethard sportsbook brand, in July 2021.

Online betting and casino revenue increased 180.8% from $5.2m to $14.6m, while esports and other revenue jumped 538.7% to $1.1m.

In terms of geographical performance, revenue from its global operations, excluding the US, reached $14.7m, up 177.4% year-on-year, while US revenue rocketed 743.7% to $1.0m.

However, costs also increased rapidly. Total operating expenses for the third quarter amounted to $66.3m, up 502.7% from $11.0m in the same period in 2021, with spending higher in all areas.

In particular, EEG noted an impairment charge of $38.6m, including $23.1m of goodwill and $15.5m of long-lived assets in the Esports Gaming League (ESL), Helix Holdings and ggCircuit business units. In contrast, there were no impairment charges in the previous year.

EEG said that it “does not see a path to attractive profitability” in the Helix business, given its significant overhead and ongoing capital expenditures, and is currently working to divest its two existing gaming centres. 

In terms of ggCircuit and EGL, the operator said it has not effectively been able to monetise these assets due to liquidity constraints. Work is ongoing internally to forecast long-term opportunities for the businesses.

Such was the impact of higher spending that operating loss widened from $5.6m in Q3 of 2021 to $50.6m in the most recent quarter. After including $12.9m in other expenses, this left a pre-tax loss of $63.6m, compared to $12.4m in 2021.

EEG paid minimal income tax in the quarter but did note $200,628 in dividend payments and a further $73,136 in additional accretion stock-related costs, which resulted in a total net loss of $63.8m, more than four times the $12.4m loss in Q3 of the previous year.

Adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) also hit a loss of $7.3m, wider than the negative $2.6m in 2021. 

Looking at year-to-date performance, revenue for the nine months through to 31 March 2022 was $46.6m, up 482.5% from $8.0m in 2021. Online betting and casino revenue jumped 441.6% to $41.7m, while esports and other revenue hiked 1,387.8% to $4.9m.

However, operating costs were 431.1% higher at $117.9m, meaning operating loss widened from $15.2m to $71.3m. Other costs reached $32.7m, leaving a pre-tax loss of $104.0m, far higher than $21.5m in the previous year.

EEG received $5.5m in tax benefits, but after accounting for $300,942 in dividend payments and $108,209 in accretion stock-related costs, resulting in a net loss of $98.9m, compared to $21.5m in 2021. Adjusted EBITDA loss also widened from $9.1m to $18.4m.

“Our fiscal third quarter 2022 results illustrate growing top-line momentum across both our igaming and esports verticals, which benefited from a more normalised operating environment in the quarter,” Johnson said.

“Despite this momentum, we are addressing several near-term challenges which are constraining our ability to grow the business and to drive that growth to the bottom line.