Allied Gaming & Entertainment Inc.
Q2 2020 Earnings Call Transcript

Published: 11 Aug 2020

[Operator:]

Greetings and welcome to the Allied Esports Entertainment Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lasse Glassen of Managing Director with Addo Investor Relations. Thank you. You may begin.

[Lasse Glassen:]

Thank you, operator. Good afternoon and welcome to Allied Esports Entertainment’s 2020 second quarter results conference call. Speaking on the call today is Allied Esports Entertainment’s Chief Executive Officer, Frank Ng; and Chief Financial Officer, Tony Hung; the Company’s President and longtime WPT-CEO, Adam Pliska; and Jud Hannigan, who is leading the Esports Operations, are also available for the question-and-answer session. Before I turn the call over to management, please remember that our prepared remarks and responses to questions may contain forward-looking statements. Words such as may, will, expect intend, plan, believe, seek, could, estimate, judgment, targeting, should, anticipate, goal and variations of these words and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those implied by such forward-looking statements, due to a variety of factors discussed in the Company’s public filings, including the risk factors and documents filed with the Securities and Exchange Commission. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained. The Company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. In addition, certain of the financial information presented in this call represents non-GAAP financial measures. The Company’s earnings release, which was issued this afternoon and is available on the Company’s website, presents reconciliations to the appropriate GAAP measure and an explanation of why the Company believes such non-GAAP financial measures are useful to investors. With that, it’s now my pleasure to turn the call over to Allied Esports Entertainment’s CEO, Frank Ng. Frank?

[Frank Ng:]

Thank you, Lasse, and thank you everyone for joining us this afternoon. During the second quarter, we continue to operate in an extremely challenging and uncertain operating environments arising from the ongoing COVID-19 pandemic. The shelter-in-place orders that began in mid-March across most of the United States as well as nearly all of our markets around the globe extended for essentially the entire second quarter. This resulted in the temporary shutdown of the in-person pillar of our business strategy, which negatively affected our second quarter financial performance. Given this reality, we quickly shifted our strategic focus to the multi-platform content and interactive pillars to mitigate the impact of the pandemic of our business and to continue to serve our loyal communities while strengthening Allied Esports for the future. Overall, I'm pleased with our employee's steadfast dedication and commitment, as well as the team's ability to rapidly pivot and manage through this pandemic. We believe the strategic shift was successful for both our esports and poker businesses. Looking first at Esports beginning March 14th, we moved all of our U.S. tournament operations and production services online. As one of the few forms of competitive sports entertainment that continues to operate and produce competitive content during the pandemic, we believe the Esports industry has filled the void left by the unprecedented suspension of traditional sports. This led to a tremendous surge in both active gameplay and viewership, with Nielsen recently, reporting that 82% of global consumers played video games and loss video game content during the heights of the pandemic lockdown. Most notably since the onset of the pandemic, traditional media broadcasters and sports betting platforms have turned to esports during this time to fill the channels and platforms with competitive content, which had accelerate this awareness and acceptance of esports amount of mainstream audiences and the interest level for traditional brands engaged in esports. As an example of this, Allied Esports Saturday night's peak weight Mario Kart tournament at hyperworks esports arena, recently had a clip that was picked up by and shared by ESPN esports on Twitter and garnered nearly 0.5 million views on the platform in one day. The clip is currently the fourth most watched Mario Kart clip of all time on Twitch and Riot Team. Over the longer term, we believe that's the pandemic we accelerate the growth trajectory of the esports industry and our business. With the cancellations of in-person, World Poker Tour events around the globe due to the pandemic. We also moved our WPT events online and continued to leverage interactive pillar, including the subscription based online platform ClubWPT. Recent business highlights from the online shift include a significant increase in new subscribers on our ClubWPT platform, which I will discuss later in my remarks. Based on the success of the online production services and tournaments for Esports and WPT, we expect to continue these activities going forward. With that as a backdrop, let's shift gears and review our second quarter results. Total revenues for the quarter are 4.6 million declined from 7.3 million in the prior year period. While we generated solid growth in revenues from interactive services, this was more than offset by reduce levels of revenue from imports and experiences a multi-platform content related to the pandemic that persists for the entire second quarter. Due to the reduced level of businesses activity that resulted from the shuttering up of the in-person experiences pillar, we took significant actions to reduce our expenses and minimize the negative impact on our financial position. These actions include salary reductions across the board as well as other cost saving measures. In total, we successfully reduced our general and administrative and selling and the marketing expenses by 1.3 million this quarter versus the same period last year. Importantly, we also successfully refinance the Company's outstanding short-term debt, which significantly improved the liquidity, position and financial instability going forward. Tony Hung, our CFO will discuss this in more detail in his remarks. While it is clear that the pandemic adversely impacted our second quarter financial results, we remain confident in our ability to capitalize on the valuable positions we created in esports, which has gained in popularity as a result of the shelter-in-place orders. Additionally, WPT continues to steadily build this business and has a very promising outlook. As we have explained previously, our goal is to maximize the potential of these complimentary businesses through a model built around three strategic pillars, namely in-person experiences, multi-platform content, and interactive services. With that, let's turn to the highlights of our second quarter results, as well as an update on the previously announced strategic partnerships. Like everyone in the live entertainment and event industry, as and as noted earlier, we temporarily suspended our in-person first bullet activities during the second quarter. As a result of the hard work and dedication of our team, we placed a heightened focus on interactive services and multi-platform content to help carry us through these unprecedented times and simultaneously to strengthen the pipeline of new fans to funnel to our live events as circumstances begin to normal life. In particular, the shift to holding events online led to a significant boost to all interactive services pillars. Looking for us at the interactive pillar, in total, Allied Esports produced 78 online events in the second quarter, with 16 proprietary online events and 18 third-party productions, across our North American and European business units. We believe our emphasis on this pillar helped grow our customer base at a time when the in-person pillar of our model was not available. We have also launched a new form of monetization for all events through sports betting, and recently announced the VIE.gg CS

[Tony Hung:]

Thank you, Frank. Good afternoon everyone and thank you for joining us today. As Frank mentioned, the second quarter market challenging operating environment, as most of our markets were shut down throughout the quarter due to the COVID-19 pandemic. While our in-person pillar was significantly impacted by the shelter-in-place orders, we quickly shifted our strategic focus to the development of our multi-platform content and interactive pillars. As we continue to lean into these two pillars, while diligently working on the recovery of live in-person events, and adhering to state and local restrictions, our priority remains to manage our expenses and to strengthen our liquidity and capital structure during these uncertain times. Now turning to our second quarter results, total revenues for the second quarter of 2020 were 4.6 million, down 37.6% year-over-year, primarily due to lower in-person and multi-platform content revenues, partially offset by higher revenues from the interactive pillar. Looking at these results in greater detail, in-person revenues for the second quarter total 0.7 million, compared to 3.2 million in the prior year period, a decrease of 78% year-over-year as a result of the closure of most markets throughout the quarter due to the spread of the pandemic. Multi-platform content revenues totaled 0.7 million, compared to 1.7 million in the prior year period, a decrease of 59%. While we have seen more demand for our content, we experienced a decrease in multi-platform content revenues primarily due to a true up on music royalties in previous quarters. In addition, we generated lower sponsorship revenue in the second quarter of 2020, resulting from the postponement of the WPT final tables due to the pandemic. Finally, interactive revenues totaled 3.2 million, compared to 2.4 million in the prior period, an increase of 34% primarily attributed to strong growth in ClubWPT registration and the successful launch by premium ClubWPT Diamonds service. Overall, total revenues in the second quarter of 2020 derived from Allied Esports decreased to 0.6 million from 20.3 million in the second quarter of 2019. Total revenues derived from WPT decreased to 4 million from 5.1 million in the prior year period. Although the mandatory shutdown and shelter-in-place orders across the globe significantly impacted Allied Esports business World Poker tours mature multi-platform in their active pillars allowed us to realize revenue from the transition to online services and events and generate year-over-year growth in the interactive pillar despite the pandemic. Total costs and expenses for the second quarter were $9.4 million, down from $10.1 million in the prior year period. We significantly reduced our expenses in the in-person pillar by 41% or $0.3 million. Multiplatform content pillar by 63% or $1 million and selling and marketing expenses by 72% or $0.7 million, compared to the prior year period, as well as general administrative expenses by 14%, or $0.6 million. The decreases reflect the swift and aggressive actions we took during the quarter to actively reduce all non-essential spending. The year-over-year decrease in total costs and expenses were partially offset by several factors. First, expenses in the interactive pillar increased 44% or $0.2 million compared to the second quarter of 2019. And online operating expenses increased 124% or $0.2 million, as we continue to rationalize expenses to build out online events and production services, as the recovery of live in-person events continues. In addition, we incurred approximately $0.3 million of stock based compensation expenses, and $1.1 million impairment charge against our investment in ESA, versus none in the prior year period. Total net loss for the second quarter was $10.9 million, up from a net loss of $2.8 million in the second quarter of 2019. The decline was primarily due to the operational results, in addition to a conversion inducement expense of $5.2 million from the refinancing agreement, which I will describe in more detail in a moment. Now, moving to our balance sheet. At June 30 2020 our cash position total $14.2 million, including $5 million of restricted cash, compared to $12.1 million at December 31, 2019, which included $3.7 million of restricted cash. The increase of cash is due in large part to $2 million of additional capital raised from our Chairman, Lyle Berman, through the sale of Allied Esports common stock, and from $1.6 million of PPP loans as long as proceeds from the sale of certain WPT employee shares for tax withholding purposes. During the second quarter, we executed a series of activities to refinance our convertible debt and better position our company going forward. As part of this, we entered into an agreement with Knighted Pastures LLC, who held the $5 million convertible promissory note issued by the Company. On April 29, Knighted agreed to convert $2 million of the principal amount of their note into shares of the Company's common stock at $1.60 per share. On May 2, 2020, they also agreed to convert the remaining $3 million of their bridge note into the Company's common stock at $1.40 per share. As part of this transaction, Knighted Pastures has also agreed to an 18 month extension on the $1.4 million of accrued interest originally due in August 2020. Two additional existing convertible bridge note holders, collectively holding $2 million of the Company's debt also agreed to an 18 month extension on the maturity of their respective holdings. And finally, a group of new institutional investors agreed to refinance net of fees and interest, the remaining $7 million and convertible note principal and the associated accrued interest held by the Company into senior secured notes maturing in 24 months. With the completion of these transactions, Allied Esports Entertainment has significantly improved its liquidity position and has now addressed the entire $14 million of outstanding debt and $3.7 million of accrued interest that was scheduled to mature on August 23, 2020. This refinancing will provide the Company with additional financial flexibility over the next 18 to 24 months, as we continue to look for opportunities to optimize our capital, in a manner that allows us to better navigate economic uncertainties during the COVID-19 pandemic, while creating value and growth for the future. Finally, as detailed in an 8-K filed on July 24th, we entered into an amendment to our existing term sheet and share purchase agreement with TV Azteca, which eliminated our future 2 million commitments for various strategic initiatives and our obligation to further invest in and develop an Esports platform for the Mexican market. In turn, allowing us to conserve more cash. In return, we are releasing TV Azteca from the 24 month lockup that cohabit TV Azteca from selling or transferring their shares of our common stock. And if they do not generate at least 1.6 million of gross proceeds from the sale of their stock, then on March 1, 2021, we will contribute additional capital to the party's strategic alliance in amount equal to such shortage. In summary, despite the unprecedented environment and significant impacts, we felt from the pandemic, we continue to right size our business and pivot to offering more multi-platform content and interactive services using the successful WPT models to guide the expansion of the Allied Esports business. We are thrilled with reception of our online events and production services that we are generating. We remain optimistic in our growth opportunities as we continue to accelerate the development of the areas of our business that can realize benefits in the current operating environment while optimizing our operations and strengthening our balance sheet. We will now open the line for Q&A. Operator?

[Operator:]

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brian Kinstlinger of Alliance Global Partners.

[Brian Kinstlinger:]

I am taking so many note that I didn't quite Tony pick up the discussion, the details are on your TV Azteca. Can you just reiterate what there's the details behind that and the capital what they need to sell and I just wasn't able to write it down fast enough?

[Tony Hung:]

Sure Brian. I'll be happy to do that and thanks for joining the call. As you may recall, our original agreement with TV Azteca, we had a commitment to invest 7 million into the strategic partnership that we have with them, 5 million of which has already been invested. So, we had 2 million remaining of ongoing commitment due over the next two years. As part of this recent amendment, we've now eliminated the 2 million of additional commitments. So, we've basically fulfilled our entire obligation. And then on the flip side, what we've also done is TV Azteca shares, which they have purchased as part of the original strategic partnership, were subject to lockup. Those are now being released as well. And then essentially, there's a make hold on that. So, to the extent that they sell those shares and don't receive 1.6 million of gross proceeds from those sales, then we will do a make hold on the on the difference between what they actually receive and 1.6 million.

[Brian Kinstlinger:]

How many shares do they have? Can you just remind me?

[Tony Hung:]

Sure, it's about, just around 750,000 shares.

[Brian Kinstlinger:]

And then just moving the business, can you talk about the trend in your in-person? You gave a lot of details around what's going on right now, 35% less capacity, much lower food and beverage. In light of the 75% to 80% decline in revenue in the first quarter, should that be something more like 50% to 60% decline with a late opening to the quarter, a little less capacity but much lower numbers? I mean, how should we think about that and is there any way to predict it always talks to these in-person increased even further?

[Tony Hung:]

Yes, it's typical obviously, as you know Brian was in-person, not knowing exactly how the COVID pandemic is going play out, but I definitely feel that we're kind of reached the bottom and are starting to trend back up again. So as you mentioned on in-person, we had already been seeing a stable base of revenues coming from the sponsorship revenues that we're receiving, tied to the Las Vegas arena, as well as some of the online events, revenues and so forth. I think as you mentioned, as we now have the Esports arena opened again for a full quarter, you'll start to see that trend up again. And then I think, the bigger, the other big factor will be once we start booking more and more of those third party events that we had been doing pre-COVID as well.

[Brian Kinstlinger:]

And have you done any of those yet? Have you at least, will come into the future or not yet?

[Tony Hung:]

Yes, Jud, can probably provide a little bit more color there, but we have started to do that we just did one the other day with our truck, and we're starting to do some as the arena as well.

[Jud Hannigan:]

Yes, we have a time. Thank you.

[Brian Kinstlinger:]

And then, you've highlighted the drop in multi-content revenue. You mentioned music true-up sounded like a little less sponsorship. I assume as demand and maybe some timing for events, could you maybe put the three buckets up? What the decline result? How much of the decline was from each one? And then specifically, talk about what a music true-up is?

[Jud Hannigan:]

Sure, yes. It's a little confusing because at a business level, we are seeing a continued increase demand for our content. But music royalties is a little complicated because, we typically will get those paid in about six months in a rare so there's a little bit of a lag period there. And so, the vast majority of the decrease in pillar too or multimedia content revenues this quarter came from a result of those true up from music royalties. The other piece that I mentioned earlier that also impacted but not as much was on the sponsorship side, because we have sponsorship deals in place, but some of them we don't recognize those revenues until the final tables are done. And because of the COVID-19 pandemic, those final tables got postponed. So when those come back, then we'll be able to recognize those revenues. But that also had an impact when compared to last year.

[Brian Kinstlinger:]

So what were the music royalties for the second quarter this year versus last year?

[Jud Hannigan:]

Yes, the music royalties, that you're talking about nearly 300,000 versus last year was about 700,000 for the quarter. And then so there was that and then also some of the true-up.

[Brian Kinstlinger:]

Right, and so the true-up how much?

[Jud Hannigan:]

So the true-up makes up the other difference is about 300,000, roughly, yes.

[Brian Kinstlinger:]

And then, I think this is more long term and high level strategic question, but maybe talk about your thoughts of your strategy at malls at a high level. It sounds like your plans for breaking construction as soon as you'd hope to open mid-2021, but given the reluctance for we think consumers are headed tomorrow. Is there any change in your thought process to how you go about this business in the near and medium term?

[Jud Hannigan:]

Yes. I think in general, we're still closing monitoring the situation of how the pandemic is moving along and we're in constant dialogue with all those partners. And in fact, we talked to one of them and they are thinking more like in the very near future whenever things are easing up a little bit more, and they do some top activities or some of their locations. Whereas others, we're still talking on the permanent locations. But in the meantime, we tried to figure out the better business arrangement that will cater for this kind of situations. So, we're in meantime also discussing those arrangements with these partners. But like what Tony has been saying, we just have to keep watching at the situations. When things are getting better, we were still around back and we still have strong believer that this will be a very good business area for us to focus on in the long run.

[Brian Kinstlinger:]

I assume one mid 2021, it sounded like in the northwest and you'd hoped maybe to have a second by the end of the year. So a good scenario for 2021 is having two locations. Would that be an accurate statement in your view?

[Tony Hung:]

That would be a good scenario. But again, we really have to see how the economy is being opened up and what's pacing on that.

[Brian Kinstlinger:]

Yes, last question I may. I might have missed it. There were so many details. On WPT online, did you talk about, how many subscribers you have at the end of the quarter? And how does that compare versus March in the year ago period? And then last question is. how many diamonds -- how many diamond subscribers?

[Tony Hung:]

Yes. Brian, this is Tony again. So, we haven't publicly disclosed the actual subscriber numbers, but I'll give you kind of a ballpark they're in the five figure range. And then Adam, I don't know if you want to share a little bit of color in terms of how well the online piece of the WPT business has been doing.

[Adam Pliska:]

Sure. So in terms of -- we started to actually see a tick up at the beginning of January because that's when we started our new initiatives. As the COVID crisis have increased and more people were at home, that just magnified and in addition to that we were, we had transferred our talents online so they became streamers which are good, best practices that will continue long after this is done. So what we really saw before diamond was a substantial uptick in the overall ClubWPT. When we started in May, what I can say is that, we had -- we were hoping to convert a certain amount, but our expectations were quickly realized within a week or so and what we thought that first month would be. I think this we are now confident that diamond will become a significant and definitely the fastest growing part of ClubWPT for the remainder of the year.

[Operator:]

Our next question comes from the line of Derek Soderberg with Colliers Securities. Please proceed with your question.

[Derek Soderberg:]

My first question relates to the online event compared to in-person. So now you guys have sort of had a full quarter of online events. I was wondering, if you guys strip out the food, beverage merchandise revenue from your typical in-person event. How has revenue per event from your online events performed relative to your traditional in-person events? And then maybe relative to what you guys expected to get from an online event back in May?

[Frank Ng:]

Sure. Then why don't I go ahead and start and then Jud can fill in a little bit as well. But the size of the third-party event, they can vary from anywhere from kind of five figures to the mid six figures, depending on the size of those events. But I think overall, we've been pretty pleased with how those have been playing out. And Jud, I don't know, if you want to add a little bit more color in terms of some of the specific events.

[Jud Hannigan:]

What I'd add to is, Derek is the frequency at which we can do events online. So if you're comparing one event to an event in arena, there are different economics there versus what a player might pay for a one entering one particular event online versus coming in for an intermediate experience. However, the frequency of which we can do things online is much greater in detail. So, I think that's kind of the main difference in just our operating practice there and online versus in arena.

[Frank Ng:]

I can also answer that is, this is a B2C part of it. Yes B2C part, of course for the beverage will have some impact and all the retail part has some impact. But as we're doing more and more of these online events, we're also drawing in new customers, new engagement on the B2B side. Like for example, we have announced VIE.gg, the sports betting series that we're doing for them. It's a true online event, which we never had those opportunities before. And we're running at the moment in the VALORANT Series for the official series for a Riot. It's pure online event again, and this is something that we've never had before. So, as we do more of these online events, we're also attracting a lot of those new B2B opportunities, which can be lucrative as well.

[Adam Pliska:]

Derek, this is Adam. I know your question was more focused on the Esports side of the business, but the WPT has also put these events online during this time. And this will be a substantial impact and it will be a substantial impact going forward. It basically switches the margin when you're not flying a whole group of people to Marrakech or Uruguay or wherever it is, and you're and the scale is even greater. So as indicated by Frank, we had a Main Tour Event, which was our largest Main Tour Event of all time. We have an event going on right now to partypoker. That event in May was so successful, the partypoker has jumped behind it put $100 million of guarantees into the events that are going on right now. So, we feel like that is a substantial opportunity to really flip the cost where we always looked at the first pillar for the WPT at least, as that's where you build your brand. And that's where you probably will see in the long term, the lowest margin. But in this case, things change and you're able to run events 24x7 and so we think that's going to be a great growth area going forward.

[Derek Soderberg:]

And then just kind of to piggyback on that some of these points with some of your team working in different locations, and maybe your servers being in different locations. Are you guys limited at all to the number of events you guys can hold online concurrently?

[Frank Ng:]

Actually, first of all the servers that we're using, they all the game servers provided by their publisher, so, wherever they have those servers, we can run events, we have a working team directly owned by us in Germany and one in United States and we've partners team in Mexico and other locations as well. So, with this big network, we can pretty much run around to clock the online tournament, 20 to 24 hours if we need to. So, I think we don't see any limitations, once we get online, in fact, it really frees me up, and our production capacity, we increase dramatically because we're actually engaging in online now.

[Derek Soderberg:]

And then just one final one, back to the real money gaming, I know you've mentioned it a little bit before, but I was wondering if you can maybe remind us how large of an opportunity that is for you guys, and then maybe when we might start to see those opportunities really start to materialize on the top line?

[Frank Ng:]

Okay, that's the major first step for us. We have never done any content and tournament in this area before. This is the first try, but I think that has a lot to do with our belief. We believe tournament Esports, they meant to accomplish some business objectives, and we have been designing a lot of our events to create entertainment, but meantime, we must satisfy our partner's business objectives. And this time is our partner VIE.gg, which they want to launch their new online betting solutions, first time VIE.GG. So, we take one of the most popular series which we have been doing for a long time in Europe. And we adjust the format a little bit so that it will enable a more engaging experience for equal spending purposes for our partner. So, again this is a first time and it's a license arrangement, we license our tournaments to them. And we redesigned some of the features of the stream and also the format of the tournament so that it will help their -- help them to achieve their goals better. And hopefully on a rupture deal, we should be able to get something much more meaningful in the long run.

[Operator:]

There are no further questions at this time. I'd like to turn the call back over to management for any closing remarks.

[Frank Ng:]

Okay, thank you. Thank you for the support everyone and joining us on today's call. We look forward to speaking with everybody again when we record our 2020 third quarter results in early November. Thank you again for your time and attention this morning, and please stay safe and healthy.

[Operator:]

This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.