Good day, ladies and gentlemen, and welcome to the Esports Entertainment Group Fiscal 2022 Q2 Earnings Conference Call. Today's conference is being recorded. Before we begin, I'm going to read some brief safe harbor statement language.

Statements made during this call that are not statements of historical fact constitute forward-looking statements that are subject to risks and uncertainties and other factors that could cause our actual results to differ materially from historical results from our forecast. We assume no responsibility for updating forward-looking statements.

For more information, please refer to the risk and uncertainties and other factors discussed in our SEC filings. Now at this time, I'd like to turn the conference over to Mr. Grant Johnson, CEO. Please go ahead..

Argyll Entertainment, which was our first sports betting and iGaming operator in Europe; Lucky Dino Gaming, an online casino brand in Europe with over 25,000 monthly users and a focus on markets in Scandinavia; Bethard, our other sportsbook focused brand based in Sweden and Spain.

And of course, VIE.gg, our wagering brand operator, solely focused on esports wagering and powering our recent esports wagering launch in New Jersey. We believe our collection of assets provides our company with exceedingly bright future.

The recent elevation of Stuart Tilly to the role of Chief Operations Officer will also allow us to take full advantage of our future growth opportunities and implement further operating discipline across the business as we look to drive efficiencies given the scope and scale of our brands.

Furthermore, our two targeted entertainment verticals, iGame and esports, remain extremely healthy. And we believe we are well positioned to realize tremendous growth potential of our business while achieving the operating leverage inherent in our portfolio of unique and powerful brands. With that, I'd like to turn you over to Dan.

Could you please take us through the numbers?.

Thanks, Grant, and good afternoon and good evening, everyone, and thanks again for joining us. We generated $14.5 million of net revenue for the quarter, up $12.2 million compared to the second quarter of fiscal 2021, but down $1.9 million or 11% versus the first quarter of fiscal 2022 revenue of $16.4 million.

Gross profit for the quarter was $8 million, up $7.2 million compared to the second quarter of fiscal 2021 and a 19.5% decline from the $10 million of gross profit earned in the first quarter of fiscal 2022.

Gross margin of 55.2% in the quarter declined from 60.7% in the first quarter of 2022, largely driven by the quarter-over-quarter decline in revenue, which meant the monthly minimums owed to certain suppliers accounted for a higher proportion of our cost of sales than historically is the case.

It is expected that gross margin will return to the high 50s in future periods. Sales and marketing expenses were $6.9 million, down from $7.4 million in the first fiscal quarter of 2022, whilst general and administrative costs were $13.2 million compared to $11.2 million in the first quarter of fiscal 2022.

This rise in G&A reflected an increase in headcount, together with an increase in share-based compensation charges during the period. Adjusted EBITDA for the quarter was negative $6.8 million compared to negative $4.3 million in the first quarter of fiscal 2022.

Total net loss for the period was $34.5 million versus a net loss of $7.3 million in the second quarter of fiscal 2021 and a net loss of $0.6 million in the first quarter of 2022. Included in this $34.5 million net loss figure though was a one-time non-cash charge related to our senior convertible notes totaling approximately $30 million.

And just to provide a bit more detail on the material charge, $7.5 million of this non-cash charge during the quarter related to the conversion of $7.5 million of principal under the senior convertible notes to common stock.

This included $6 million related to the conversion of principal with an additional $1.5 million recorded due to a favorable pricing on conversion by the holder compared to the market price on the conversion date.

We also agree with the holder of the senior convertible notes to restructure the terms of the debt, which had resulted in a non-cash charge related to the acceleration of our debt discount of $28.5 million.

This is presented as a loss on extinguishment on our income statement as we have agreed to enter into a new debt facility in the next quarter under more favorable terms. The two combined charges were offset by a benefit of $8.7 million related to the warrants establishing connection with the notes that have since declined in value.

Moving on to the balance sheet. We ended the quarter with $1 million of total cash and cash equivalents. During the quarter, we raised $1.6 million in gross proceeds through our ATM equity offering program, which has continued to give us flexibility and access to capital.

As it relates to our liquidity position, we ended the quarter in violation of the covenants under the terms of our senior convertible notes. Since that time, however, we have been in active dialogue with the noteholder, and have signed an exchange agreement and proposed term sheet which will lead to a modification of the notes in the near-term.

Importantly, pursuant to the updated terms with the noteholder, we are expecting to pay a flat monthly repayment amount over the next five quarters to fully satisfy the loan, with no prepayment penalties. Final terms will be agreed and signed before the end of this quarter as part of finalizing the definitive agreement.

While this accounting requirement had a significant impact to our GAAP reported results, we believe the outcome of our discussions with the noteholder is a long-term positive for our company as the fixed monthly payments for uncertainty with respect to the convertible notes and would allow us to require them those in the coming quarters while moving forward to invest in and grow our business.

Looking to our guidance for fiscal 2022. As Grant laid out in his prepared remarks, there are a number of factors which have served to significantly impact our performance in the quarter, and which have led us to reset our full-year revenue expectations to a range of $70 million to $75 million.

We did not take this decision lightly and believe this range gives us a foundation upon which to fill graph going forward. The company remains extremely bullish about its ability to reach annualized revenue of $100 million from our current portfolio of offerings.

The factors which drove the quarter-over-quarter revenue decline and the decision to reset fiscal 2022 guidance are transitory in nature and only serve us to delay our businesses growth by a couple of quarters.

While we are not establishing guidance currently beyond fiscal 2022, we expect that the $100 million revenue figure on an annualized basis is not far off given a few key factors. First, as Grant mentioned, in January, we received our transactional waiver in New Jersey, allowing us to launch VIE.gg on a soft play basis.

Very shortly, we will complete the soft play evaluation period and launch the full VIE.gg platform, making us the first and only company to accept real-money esports wagers in the U.S. Second, we have the upcoming debut of LANDuel at the Hard Rock Hotel in Atlantic City on March 18 to 20.

While the need to delay the event due to COVID was no doubt a disappointment, the excitement for LANDuel remains, and we believe it will open Esports Entertainment Group to a significant and untapped market across many U.S. jurisdictions.

Peer-to-peer wagering is and in our view, will always be welcomed in far more jurisdictions across the U.S., greatly outweighing the revenue opportunity made possible by the VIE.gg wagering platform. Third, we have seen considerable interest for our OMEGA esports gaming platform since it debuted in the second quarter of fiscal 2022.

The potential user base for this platform is extremely broad and exposes us to customers such as arcades, casinos, family entertainment centers and any other location looking to connect with highly sought after avid esports enthusiasts.

We are very confident that OMEGA will become an important contributor to our topline results and look forward to announcing deals with named operators in the coming months. Finally, as Grant mentioned, January was a record month for the EEG iGaming segment of the business.

Our iGaming segment continues to build momentum across its unique brands as it takes advantage of a very strong market for iGaming and sports wagering in Europe.

With the potential to expand our brands into new markets in Europe, LATAM and further afield, together with the recent launch of VIE.gg in New Jersey, we expect to see continued growth in this part of the business.

In summary, we remain excited by the significant opportunities for our business and are committed to taking full advantage of the promise they represent. We believe the future is bright and expect the full force of our unique product portfolio to deliver strong financial performance going forward.

We look forward to updating the market further throughout the year as we execute our plan. With that, I'll turn the call back to the operator for the Q&A session..

Thank you. We'll take our first question from Scott Buck with H.C. Wainwright. Please go ahead..

Hi. Good afternoon, guys..

Hi, Scott..

My first question is on the guidance. I understand the kind of headwinds you faced during the quarter. But if I look at where Street estimates are for the third and fourth fiscal quarter, it looks like there's still $20 million between the two quarters that needs to come out and that's clearly more than the Netherlands is.

So I was hoping that maybe you could kind of help step function us through that..

Sure. It wasn't just – as I tried to outline, it wasn't just the Netherlands. Yes, that was a seven-figure factor. The sports handle was another huge factor.

And we had, I guess, dealing with the same thing that everybody who has live events, our EGL brand in Europe, which is a live in-person event company with this obviously was unable to host those events, Helix centers were dramatically down. Events that would expand our footprint of ggCircuit additionally were down.

Now that we are coming out the other side, we are seeing a pickup not only across all those areas, as Dan just mentioned, and I think in mind January is our best iGaming month ever as a company, and we have a strong consecutive string of weeks together that are all seven figures in our iGaming business.

Along with the launch of LANDuel, we see a building of momentum as we head towards the end of the fiscal year. So resetting of the guidance, albeit, is obviously not a decision we took lightly internally.

We felt given strong headwinds we faced last quarter, better said its expectations at this point in time and as we build momentum through the quarter here, this second half of the year..

But Grant, have you guys adjusted your internal modeling around sportsbook hold for the remainder of the year? And on the events side, should we think of that as lost revenue or are there kind of make up dates set further throughout the remainder of the year?.

I'll let Dan comment on the sports hold. But on the events, it's really been across the globe that it's more in a holding pattern. We do expect those clients to come back. We expect them – we're starting to see the bookings coming back in.

So it's certainly, as Dan mentioned, it's a reset really where it's a six-month period in time that we're obviously not going to get back this year, but we see that this sport is there on the sports hold, Dan, did you want to offer any more insight on that?.

Yes. We're certainly not adjusting our models. We had – as many of our peers have also communicated the backend of last year, sports margins were down across the industry, and we felt the brunt of that. We've had a good January. Margins have recovered significantly, and we expect them to return to industry norms across the remainder of the year.

So it's certainly not an expectation that margins will be deflated going forward afterward..

Okay. That's helpful, Dan. And then I know it's only been a few weeks on VIE.gg in New Jersey. Just wondering what the initial feedback has been within the states and versus your expectations.

And maybe when we can think about seeing it add two additional states?.

Well, on the first part of the question, we do expect it's imminent that we’ll hear that we're able to exit soft play. As you can appreciate, we haven't been able to execute our marketing because we didn't want to drive too much traffic at a site that had limited hourly activity on a day-to-day basis and limited number of bodies that can sign up.

So we've taken advantage of this time to make sure we add additional events to the site, if you're in a jurisdiction or a region, you can see those. You can see it's substantially more events now than there was when we started into the soft play. So the exit from soft play is imminent.

To the second question, we are in discussion with at least two other jurisdictions in the North American market, retaking gambling to those jurisdictions. I would like to draw attention the LANDuel product is not a gambling part. It's a betting product.

We have currently received about 29 legal opinions that we will be able to take that product into various states. So I expect that we will – once launched in New Jersey, we will roll that product out more rapidly than we'll be able to roll out the VIE.gg to other jurisdictions..

Okay. Great, Grant. That's great color. And then last one for me.

Just an update on timeline for UCLA, Helix, and what you guys think about adding additional centers through the remainder of the year?.

Well, UCLA, we got to go back to opening the school up in March, which will then start as being able to move again and getting the central open as the school opens.

We have, as you're probably aware, it's been announced, we have a letter of intent in place for the Hall of Fame Villages in Canton, and we have multiple other universities like UCLA that have reached out to us. So we are in multiple discussions to expand that business.

I can't speak specifically to them, as you can appreciate right now, but at least UCLA and Hall of Fame Villages are the next two on our list..

Okay, great. Appreciate the time guys. Thank you very much..

We'll take our next question from Edward Engel with ROTH Capital. Please go ahead..

Hi, thank you for taking my question. Can we please just get a quick update on your monthly cash burn? I think you – on prior calls, you talked about $3 million, I guess, $1 million per month, $3 million per quarter.

Has that changed at all? And then I think before you're targeting EBITDA positive by the end of this calendar year, is that still possible with the new guidance?.

Yes. I think we're slightly above $1 million a month now. We're near the $1.3 million a month in cash burn. The performance in the second quarter has probably pushed us out to get to breakeven into the first calendar quarter of next year. So that's kind of where we are in terms of timelines. It really is a reset that's pushed us out an extra quarter..

Okay. Great. That's super helpful. And then, could we just get an update, I guess, on how much cash you currently have? I know it's in the quarterly Q. And I guess, just on that, I think, I mean, just across the industry, I think it's pretty evident about sometimes it does take a bit of an investment to drive new user growth, especially in the U.S.

So I was just wondering, I guess, does a tighter cash balance impact your ability to really fully ramp your customer acquisition efforts, not just in the U.S.

but in Europe as well?.

Well, I'll take the first part of that and then let Dan take the second part. It's clear when you're a growth company that you depend on – I mean, the reason we're public is we depend on the public markets. Clearly, we are not in what we would call a bull market.

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

So yes, the short answer I give you a bit of a narrative there is that restricted access to capital does slow down our marketing efforts. However, thankfully, several of our assets are positive cash flow producer are somewhat self-perpetuating.

Dan, did you want to add anything to that?.

No, I think you're right. I mean we have been accessing the ATM that's available to us to draw down money on a prudent basis as and when it's needed, which has provided us that flexibility. We are in several conversations about longer-term strategic financing at the same time. So there's plenty of options available to us.

And as Grant said, being public on the public markets gives us that access to funds from the public market. So that's what I add on that from what Grant mentioned..

Great. Thank you for the color. Much appreciated..

Thank you..

We'll take our next question from Michael Kupinski with NOBLE Capital Markets, Inc. Please go ahead..

Thank you. A couple of questions here.

Can you address whether or not there are other markets that you operate, whether they be unregulated markets like the Netherlands that you are at risk in terms of maybe the country is changing regulations, I mean, similar to the Netherlands?.

Well, the gaming market is constantly changing. I mean, you're experience firsthand in the United States, right? Before 2018, it was absolutely not allowed. And here we are a few short years later, and I believe there's 30 states that now are actively pursuing having a regulated market.

So yes, as more jurisdictions look to regulate and tax we will have to continue to adjust just like every operator in the online gambling business. We have addressed that partially through acquisition, which is why we have a fairly solid footprint in the European markets with Ireland, U.K., Sweden, Malta, Spain, et cetera.

And we're looking to expand that further. Obviously, the first move into the states was in the state of New Jersey, and we will continue to do so.

In jurisdictions, right now that we're operating in, there is nothing that's imminent that we can see that does not necessarily mean that over the next six, 12, two years that there won't be additional jurisdictions that will become regulated. But to answer your question, is there anything that we're aware of currently? No.

There's no other jurisdictions. Netherlands just happened to be a substantial one where the Bethard asset, which we acquired, had a substantial part of their operations there. That's why it impacted us..

Grant.

Any particular countries that you think that we should look for or watch in terms of regulations that might be impactful to you that maybe we should have on our radar so that we might watch this in the future to see if there is an impact on your numbers?.

In terms of negative impact on our numbers?.

Yes, in terms of negative impact..

Well, we're – as you can imagine, as you can appreciate, we have several experts in the gambling sector. And we have several attorneys that work with us and give us advice as to which jurisdictions I would say that we're probably going to see regulatory controls coming into the Canadian marketplace.

So we will probably not expand our footprint into the Canadian market without going through the application process. There's currently nothing that we see in the markets where we're seeing our greatest growth in the South American and Latin American markets, yes.

So to answer your question, no, we don't see one that we're concerned about where we're having substantial traction, and we are trying to stay out in front of these things. That said, it is a constantly changing environment. Sometimes the change is positive, sometimes like in the Netherlands, it is not..

And in terms of slowing your expansion in certain markets like Canada, how does that affect your outlook for the growth rate and generating revenue.

I mean, do we have an impact in terms of your decision not to go into certain markets or expand in for certain markets affect the revenue outlook?.

Well, the revenue looks that we're having now, no. Keep in mind that some of the products we have like LANDuel, which is a newly launched product and our OMEGA product, these – we haven't taken the potential revenue from these products into that guidance yet. Those products, we both – we expect them to just move quite rapidly.

The LANDuel product after its inaugural launch coming up next month. We have, I believe, 20 casino properties coming in flying in from Europe, the Caribbean coast to coast in North America flying in to see that event at the Hard Rock. And we do expect have a better feel for how fast that will roll out after that point in time.

It doesn't have to be in the casino. We have 29 jurisdictions in the states alone that we can move that product into. And as far as OMEGA, we expect to be announcing in the near future. So very substantial movement on that product.

So those two products don't require the regulatory environment and most of our North American strategy is not dependent upon the regulatory environment. Internationally, I believe we feel quite comfortable and confident with our marketing plan and the numbers that we have in our forecast..

I want to go back to the liquidity question. So you indicated your burn rate $1.3 million. And you also – and correct me if I'm wrong, highlighted the prospect that you are going to do some sort of refund refinancing.

Can you talk a little bit about your thought on preferred ways to refinance at this point? What are you – what are the options that you're looking at outside of ATM?.

Yes. Well, the ATM, obviously, is one of the tools that we have. We obviously have a shelf in place for private placements from investments, funds, et cetera. As it comes down to the note, the specific terms are still being finalized, but we're looking to, after the proxy vote, obviously, a lot of the conversion opportunities came off the table.

And so we're working amicably with the fund to the best of the fund as well as our shareholders. Those – it's been quite positive actually. They obviously did not call any issues of incidents in default and are working with us to come to a stable monthly payback plan with an open opportunity for bringing other investors.

We have been, have ongoing discussions. I mean, we're a public company. Of course, we're talking to potential sources of capital at all times. And as mentioned, the ATM and the shelf are just two of the tools in our toolbox..

Can you give me the number of shares outstanding at the end of the quarter? I know that you have the average shares outstanding, but what were the average – what was the shares outstanding at the end of the quarter?.

Dan, do you have that number, handy?.

I'm just looking in the queue now. Might just come back to you, Edward..

Okay. All right. That's all I have for now. Thank you..

Thank you, Edward..

We'll go next to Lisa Springer with Singular Research..

Good afternoon. I wanted to ask you a couple of questions about the OMEGA product.

I'm curious, if you could provide a little bit more color around the pipeline and where the product is being marketed and how it's being marketed, and whether you think it could make a meaningful contribution in 2022?.

I'll start with your last question first. The answer to that is absolutely. We believe quite strongly it will make a substantial meaningful impact to revenue in the fiscal. The product was rolled out of the IAAPA Event Conference in Orlando last November.

We have a full pipeline interested parties, brand name, big box stores, retailers, casino properties, bowling alleys, the list goes on and on. I can't get into specifics. I would say we have roughly a dozen substantial contracts under negotiation at various stages. So you'll start to see some of the activity, we placed several units in malls already.

The product is effectively self-contained. We can bring in one the arrays as a six station or 12-station pod pulls it to the floor. All the equipment is attached, chairs, headset, et cetera, credit card swipe. Somebody sits down swipes their credit card and effectively starts engaging in gaming tournaments, and it's all managed remotely.

So if it's a movie theater or a bowling alleys, don't have worry bringing on the staff, we install it, we manage it. And when the units – and this is important for this call, with the units are not being gained upon the units will be mining cryptocurrency, so they're never dormant. And we're very excited about that product..

Okay.

Is it primarily a rollout in the U.S.?.

No. In fact, we've been marketing it and had lots of interest out of the European markets, Canada and obviously, the U.S. is the biggest market that we're talking about, and that's home turf for the ggCircuit team, but the orders have been coming in from overseas as well as north of the border..

Okay.

And then I think you mentioned that you did not have that included in your guidance for 2022 right now?.

Right..

Okay, great. Thank you..

We have no further questions at this time. I would like to turn the conference back to your presenters for any additional or closing remarks..

Okay. Thank you. And thank you all for coming. Of course, we remain very excited about the progress we've made as a company. So it's going effective on the NASDAQ April 14, 2020, just a very short period of time ago. And since that time, we pulled together over seven brands over that 18 – almost two years.

We have an incredible portfolio of brands and a proven team committed to delivering continued growth and innovations that will result in increased shareholder value over the balance of the 2022 and years ahead, not the least of which is our cryptocurrency LANDuel and VIE, these are all new products, OMEGA.

This is the type of innovation we'll come up with. I'd like to thank everyone for joining us on our call today. We appreciate your interest and continued support, and look forward to updating you on our progress that is during our fiscal third quarter call.

In the interim, should you have any questions or wish to speak with us, please contact our Investor Relations firm at JCIR at 212-835-8500. Thank you..

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect..