Shares of Esports Entertainment Group, Inc. (NASDAQ:GMBL), a tiny online gaming and sports betting company, jumped 11.82% today on volume that was more than 12 times the daily average on news the firm is shuttering two of its UK sites at the end of this month in a bid to conserve capital.
While news of the closures of RedZone and SportNation — brands Esports Entertainment purchased in 2020 — was clearly met with enthusiasm by investors, the stock lost nearly 98% of its value over the past year. Its 52-week high is $6.67, but it closed at 14 cents today. Adding to the stock’s woes, an analyst yanked coverage of the gaming equity.
Following GMBL’s recent exit from several eSports related business in order to preserve liquidity, we are dropping coverage,” wrote Roth Capital analyst Edward Engel in report to clients. “GMBL has been struggling to remain a going concern since 1Q22 Shares of GMBL were previously Neutral rated, with a $0.45 price target. Effective with this note, all prior estimates, rating and price target are no longer relevant and should not be relied upon.”
Esports Entertainment Group is one of several small gaming companies currently grappling with going concern questions.
Esports Entertainment May Be on the Brink
In its 10-Q filing with the Securities and Exchange Commission (SEC) dated Nov. 14, Esports Entertainment confirms its ability to continue as a going concern is up in the air. One reason for that is the gaming company’s inability to service debt.
Adding to investors’ concerns about the company’s financial state, Esports Entertainment is attempting to renegotiate the terms of a convertible debt offering. That offering gives bondholders rights to convert to stock at $17.50 a share — a price the stock hasn’t traded at in over a year. That convertible offering was worth $35 million and matures in June 2023.
“The company has not maintained compliance with certain debt covenants and is currently in default under the terms of the senior convertible note,” according to the regulatory filing.
Esports Entertainment added in the filing it has a deficit of $153.3 million as of the end of the third quarter and a history of recurring losses.
Esports Entertainment Needs More Cash
While closing the aforementioned UK businesses represents a cost-cutting measure, the stark reality is Esports Entertainment likely needs access to more capital. The issue is whether or not a creditor will be willing to step up to provide that cash.
“The Company believes that its current level of cash and cash equivalents are not sufficient to fund its operations and obligations without additional financing,” according to the 10-Q. “Although the Company has financing available, as further described below, 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 was determined to raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of at least one year from the date of issuance of these unaudited condensed consolidated financial statements.”
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