Allied Gaming & Entertainment Inc. (AGAE) Q1 2020 Earnings Report, Transcript and Summary

Good day and welcome to the Allied Esports Entertainment First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to Lasse Glassen of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and welcome to Allied Esports Entertainment’s 2020 first 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?

Thank you, Lasse and thank you everyone for joining us this afternoon. With the COVID-19 pandemic significantly impacting people’s lives across the country, the environment we face today is very different from when I last spoke to you early in March. Given the unprecedented circumstances we are encountering, my prepared remarks today will focus on the key actions the company is taking to mitigate the adverse effect of this crisis on our employees, customers and partners, while maintaining business continuity and continuing to build Allied Esports Entertainment for the future. After my remarks, Tony Hung, our Chief Financial Officer will follow with details on our first quarter financial results.As the COVID-19 crisis escalated, we took a number of measures to protect our employees from the effect of the pandemic. We quickly implemented our business continuity plan designed to allow the company to continue operating as normally as possible on the extraordinary circumstances. As the impact of the pandemic spread globally, we suspended all business-related employee travel and established work-from-home policies in all of our offices. Through the successful execution of our business continuity plan, we have not experienced any significant interruption of our internal corporate functions.By mid-March, it became clear to us that shelter-in-place orders would be issue in most cities in the United States and in other markets in which we operate around the globe, resulting in the temporary shutdown of all but the virtual component of our in-person pillar of our business strategy. We quickly shift our strategic focus to multiple platform content and interactive surfaces in order to continue to serve our loyal communities and our industries at a time when they need us most. With our teams’ operations agility, we rapidly pivoted in the face of this adversity.Looking at the strategic shift for Allied Esports. The shift to online event in response to the current crisis proved to be a silver lining for Esports during this new at-home dynamic that the world is currently enduring. As cameras abide by stay at home restrictions, online video gameplay continues to see a rise. Beginning March 14, we moved all of our U.S. tournament operations and production services online. With the broadcast of our tournament being a key feature that attracts and entertains our players and audience, maintaining our ability to produce and live stream events was a key challenge with all employees working from home.We are incredibly fortunate to have highly passionate and dedicated team. In addition to everyone in their separate homes four individuals elected to quarantine together in one of their houses where we built a production control center with equipment from our arena and truck, which has given us the ability to continue to engage and grow our customer base as well as add new production service clients during the crisis.Some of the highlights are as follows; from March 14 through May 7 we hosted a total of 57 online esports tournament. With the addition of this new online tournament offering, tournament entries were up 35% in the first quarter compared to the first quarter of last year. Participation in online tournaments also expanded our customer base beyond Las Vegas with many tournaments seeing over 50% participation from new customers outside of Nevada. In addition, HyperX joined the new online tournament as a presenting partner expanding the company’s multi-continent relationship.Our partner services also expanded to include online tournament production highlighted by a series of FIFA matches and broadcast for the Los Angeles Football Club to help the teams’ foundation raise funds for COVID-19 causes. The first two streams generated 650,000 total live views with a high of 18,143 concurrent viewers on April 5. We also pivoted our World Poker Tour even online, as we have mentioned in previous calls prior to the cancellations of in-person WPT events around the globe due to the COVID-19 pandemic, we initiated further development of our interactive division including the subscription-based online platform, ClubWPT. We believe that decision along with the expansion of partnership with over the top and lenient television providers, positions WPT as a market leader for online poker entertainment during the COVID-19 crisis and expand the WPT user base for future interactions between online and offline events when normal operations return.Recent business highlights from the online shift include a significant wave of new registrations on our online platform ClubWPT, which I will discuss shortly. WPT also announced the debut of WPT online series that is taking place on party poker from May 3 through May 20, including $30 million in guarantees and $9 million guaranteed among WPT branded events, because of the popularity of events, the party poker has already increased the amount of guarantees by $2 million from the time of the announcement. The event is WPT first on a real money gaming platform and will highlight virtual versions of many WPT tournament features, including commentary, streaming and online pre-event.Based on the success of the online production services and tournament, we will continue with both products after HyperX Esports Arena reopened and work with local and state officials as well as partners on the reopening plans for our flagship arena and mobile esports truck going forward. Due to the reduced level of business activity, as a result of the shuttering of the in-person experiences, we took significant actions to reduce our expenses and try to minimize any negative impact on our financial position. These actions include cuts in headcount, salary reductions across the board and other cost saving measures. And I will be taking an 80% salary reduction for six months.Now let’s shift gears and discuss our first quarter results. First quarter total revenues of $6 million declined 3% compared to the prior year period. While we generated solid growth in revenues from multi-platform content and interactive services, this was more than offset by reduced level of revenue from in-person experiences related to COVID-19 crisis for the majority of the month of March. While COVID-19 certainly impacted our financial results for the first quarter, we remain confident in our ability to capitalize on the valuable positions we created in the voyaging esports industry. At the same time, the WPT continues to steadily grow its business and have a very promising outlook.To maximize the potential of these complimentary businesses, our strategy has been built around three strategic pillars, which are; first, in-person experiences. This includes hosting live events at our fixed and mobile facilities around the world where they can be viewed live by thousands of fans and streamed online, significantly increasing the viewership potential. This also includes events at casinos in six continents and now virtual online platforms such as party poker.Second, we then produce content of off select live experiences that is delivered over multiple distribution platforms with a focus on social channels. This content provides opportunities to increase the overall viewership to tens of millions. We also maintain our own distribution company assuring year-around distribution to networks worldwide of our own and third-party content. And third, we intend to leverage our content by way of embedded messages in order to convert a percentage of that viewership to participate in our interactive services, including our to be built online platform similar to what we have done successfully at WPT.Importantly, each of the three pillars of our strategy built on one and other to work together, which is a strategy with a proven track record of success. In-person experiences, multi-platform content and interactive services has been the go-to-market strategy that the WPT has effectively deployed in the poker industry for nearly two decades. As we continue to execute this successful strategy for WPT, we are also applying it to the much larger and more rapidly growing esports industry.With that, let’s turn to the highlights of our first quarter results as well as an update on the previously announced strategic partnership. The first of the three pillars in-person experiences performed well during much of the first quarter, but as noted earlier, was significantly impacted by the COVID-19 pandemic. This segment of our business is currently the most developed and recognizable due to our flagship HyperX Esports Arena at the Luxor Hotel & Casino, on mobile esports trucks and World Poker Tour event around the globe. And while the pivots moving, the in-person experience to online was remarkable, we were not able to overcome the subsequent reduction in revenue.Until this temporary closure on March 17, we held 67 events at the HyperX Esports Arena. This is down 13% from 77 events in the first quarter last year. Highlighted events included multiple brands activations during the Consumer Electronics Show as well as LVL UP EXPO and Bethesda’s The Elder Scrolls Online update, ESO’s Future. The total number of proprietary events in the first quarter across the Allied Esports ecosystem and participants increased by 11% from the first quarter in 2019. In addition, the HyperX Esports truck teams executed two events in the first quarter at Dreamhack Anaheim and Messe Husum to organize eFootball Championship FIFA 20 with several events canceled due to reasons related to COVID-19.During the quarter, the number of WPT events was impacted by COVID-19. However, in February, the WPT returned to Paris, France, for the first-ever WPTDeepStacks Paris festival. The festival set the record for most entries 6,347 people in a WPTDeepStacks festival in Europe. Revenue for the festival totaled €293,200 across 31 events. In addition, the first WPT Philippines festival at Okada Manila in February doubled the WPT Main Event guarantee and received strong support from the global poker community in spite of the COVID-19 pandemic.The Allied Esports Property Network was introduced in late 2018 as the world's first affiliate program for global partners interested in developing esports venues and participating in Allied Esports events, programming and content production. With this program, we also work with a number of venue operators to increase their esports events, programming and related offering or create new dedicated esports facilities all together.During the first quarter, Fortress Esports, the first affiliate program partner of the Allied Esports Property Network covering Australia and New Zealand opened its first venue on March 13 at Australia's largest shopping mall, Emporium, in Melbourne, Australia. This new facility is the largest video gaming and esports entertainment venue in the Southern Hemisphere. Unfortunately, the new venue was temporarily closed just days after its grand opening due to the COVID-19 crisis. In addition, another affiliate partner Esports Arena LLC, an operator of esports and 25% owned by Allied Esports, it's nearly tripling their in-store presence in Walmart stores to 18 with 15 opened by the end of first quarter of 2020.Now I would like to provide an update on our strategic relationship with Simon Property Group and Brookfield Property Partners, which is part of our important pillar. Here we are working with these important partners to deliver esports experiences through integrated gaming revenues and production facilities and select Simon and Brookfield destination. During the first quarter, we announced that the Mall of Georgia located in the Greater Atlanta, Metro area will be the location for the first Allied Esports venue at a Simon destination. After COVID-19 crisis escalated late in the first quarter, Simon announced that Mall of Georgia project what's being halted pending further discussions after the crisis subsides. Together with Simon, we have extended the due date under our partnership agreement to develop and budget for the annual esports program and esports venues in future years once the COVID-19 crisis has ended.We also announced a similar strategic relationship with Brookfield during the fourth quarter. As part of their strategic investments, we plan to expand the Allied Esports on mall venue concept to existing Brookfield retail locations. Between Simon and Brookfield, we now have access to over 400 premium locations around the globe. While the COVID-19 responds is delaying our timeline with expansion to mall, we will continue to update you on the – our progress with Simon and Brookfield in future call.The second pillar of our business model is multiplatform content, where we're generate content for consumption on a 24/7 basis. This could be from content that is live-streamed, host produced or packaged, where we retain optionality in monetization of content via direct distribution and sponsorship, use of third-party distributors or other various hybrid solutions.World Poker Tour has been effectively doing this for many years and Season XVIII of WPT TV season is off to a great start. In addition, WPT studios continues to deliver WPT Season XVII episodes premiering on FOX Regional Sports Network and we just have – we have just secured a new deal with FOX Sports 1 and FOX Sports 2 to air WPTs content library nationally to more than 84 million households. Syndication of WPT programming to households has grown by 25% with deals put into place during the first quarter of 2020.New syndication deals include AT&T, Sinclair Networks, Cox Sports, Right Now TV, Action Channel and Altitude Sports. Renewed linear TV deals in U.S. include NBC Chicago and NESN. Renewed linear TV deals to international markets include Rogers and Game TV in Canada, Ananey network in Israel and AMC Networks in Eastern Europe. The mound for alternative sports during the crisis continues to increase interest for our poker television product.On the Esports side of the business, the pivots from the In-person pillar I discussed earlier in my remarks continues to generate significant content that we are streaming. Importantly, the focus on content and online tournament participation dramatically increased social media interactions across all Allied Esports Twitter, Instagram and Facebook accounts versus the same time period immediately before the closure of the HyperX Esports Arena.Finally, the interactive services still is model after the successful World Poker Tour interactive services strategy. That includes a subscription-based membership platform, ClubWPT. During the first quarter, we launched the ClubWPT 1 million bonus promotion, where any ClubWPT member who wins a seat package to a main event tour on ClubWPT and then goes on to win that event, win an extra 1 million bonus. This ClubWPT 1 million promotion along with other promotions has helped attracted thousands of new registrations.During the first quarter, ClubWPT registrants increased 40% from the prior year period. More recently, the increase accelerated 147% from March 1 to April 30. As a result, ClubWPT revenue increased 33% over the same period. The interactive pillar for esports business remains an absents, but the platform we have already built to host online esports tournament represents an important foundational building block. Longer term, we envisioned this becoming a subscription-based online platform where esports players and fans can watch, play and win with other members of the esports community and top esports personality and influencers. This online platform will be closely integrated with our offline experiences to create a comprehensive esports tournament experience for fans.In addition to the three pillar strategy, we are also excited about growth catalyst for WPT. In particular, real money gaming, for which we have generated significant inbound interest and engage in active conversations with outside partners. These opportunities range from partnering with major real money gaming sites to affiliate marketing programs that allow us to monetize our customers and content library to generate additional leads for real money gaming. Importantly, these opportunities would require a low or no capital investment, while potentially generating significant returns. As these growth opportunities may evolve beyond conservations, we will continue to provide updates.In summary, I am thankful for the tremendous popularity of esports in poker, including WPTs meaningful grove in March as the nation and world shelters in place. I firmly believe that our unique position will not only carry us through these unprecedented times, but will also further funnel new fans to our live events once the pandemic ends and it is safe to bring everyone back together.With that, I would like to turn the call over to Tony Hung, our CFO provide more detailed update on our first quarter financial results. Tony?

Thank you, Frank. Good afternoon, everyone and thank you for joining us today. As Frank talked about, our quarter started out well before the COVID-19 pandemic really took root in mid-March. While our in-person pillar was negatively affected by the stay-at-home orders, we pivoted quickly and accelerated the development of our interactive pillar. As we are really leaning into that area of the business, we have been working hard to reconcile our expense base with current economic conditions and strengthen our liquidity and capital structure, which I will go into more detail in a few minutes.Looking at the quarterly results, total revenues were $6 million down 3% year-over-year, primarily due to lower in-person revenues, partially offset by higher revenues from the multiplatform content and interactive pillars. Specifically, we saw a 10.5% increase in revenue for multiplatform content and a 5.8% increase in interactive compared to the prior year period.The increases were partly driven by the quarters’ trend over the latter half of March as the COVID-19 crisis manifested and we transitioned to more online events. Looking at these results in greater detail, in-person revenues for the first quarter totaled $2.3 million compared to $2.7 million in the prior year period, a decrease of 16.1% year-over-year.Multiplatform content revenues totaled $1.2 million compared to $1.1 million in the prior year period. And interactive revenues totaled $2.5 million compared to $2.4 million in the prior year period. Overall, total revenues in the first quarter derive from Allied Esports declined to $1.1 million from $1.4 million in the first quarter of 2019. This was partially offset by revenue growth from WPT, which increased to $5 million from $4.8 million in the prior year period.While our in-person pillar is historically the main driver of revenue for Esports business, the gradual declines in attendance as reports of COVID-19 spread culminating in mandatory stay-at-home orders across the globe had an outside impact on revenues for that business, despite our pivot to online tournaments at the end of the quarter.World Poker Tour on the other hand has historically had a much more mature multiplatform and interactive services platform. And so it was already well positioned to realize revenue from the transition to online events.Total costs and expenses for the first quarter were $14.1 million, up from $10.1 million in the prior year period. The majority of the increase was related to stock-based compensation of which there was none in the first quarter last year. General and administrative expenses increased by $593,000 as a result of becoming a public company and online operating expenses increased by $136,000, which was partially offset by decreases in expenses related to our in-person experiences and multiplatform content of $184,000 and $119,000 respectively.We also realized the comparable expense benefit due to an impairment of investment in Esports Arena LLC last year, which did not have a corresponding expense this year. In light of the current economic environment and uncertainties around the length of the COVID-19 crisis, we are taking swift and aggressive actions to rationalize expenses as we further build out multiplatform content and interactive revenue stream.As mentioned earlier by Frank, we have reduced payroll expense or negotiating with vendors for more favorable terms and really sharpening the pencil on all other expenses in general. Our plan is to reduce payroll by nearly $1 million over the next six months and total expenses by approximately $1.8 million over the same period.Net loss attributed to Allied Esports Entertainment for the first quarter was $8.8 million, down from a net loss of $3.9 million in the first quarter last year. The decline was primarily driven by the operational results I just described, in addition to an interest expense of $683,000.Now switching to our balance sheet, at March 31, 2020, our cash position totaled $9.4 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 cash position was negatively affected this quarter due to Simon Properties requesting a return of $3.7 million of restricted cash at the end of March, which was being held in an escrow account.The gross principal amount of total convertible debt was $14 million at the end of the first quarter. At the end of February, we announced that Lyle Berman, Chairman of the Board of Directors committed to purchase 2 million of newly issued shares of Allied Esports common stock through our exercising an option on March 9. We agreed to extend the deadline to May 15 as the effects of COVID-19 have rippled through the markets. The proceeds from the stock sale will be used for working capital and general corporate purposes.Subsequent to quarter end, on April 29, we also entered into an agreement with Knighted Pastures LLC to hold the $5 million convertible promissory note issued by the company. Knighted agreed to convert $2 million of the principle amount of their notes into shares of the company's common stock at $1.60 per share. The remaining $3 million of principal will continue to be convertible at $8.50 per share. This agreement helps to decrease the amount of cash needed to repay our existing debt upon maturity in August.In summary, we are pleased with the performance of both Allied Esports and WPT during a very tough quarter. Our three pillar business model is showing resiliency, especially as we pivot to offering more multiplatform content and interactive services using the successful WPT model to guide the expansion of the Allied Esports business. It's happening a bit faster than we had originally planned. We are hopeful this will enable us to come out the other end with a much more developed and mature business, where our in-person experiences and multiplatform content will drive interactive services to new and higher levels of performance.We still see a lot of runway for growth, so things may look a little bit different in the near term than we had originally anticipated for 2020. As we continue growing and expanding areas of the business that can realize benefits from the new at-home dynamics. We are also working hard to optimize our operations and continue to strengthen our balance sheet.We will now open the line for Q&A. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Jacob Silverman of Alliance Global Partners. Please go ahead.

Hi everyone, this is Jacob on for Brian. We have a few questions. With malls expected to experience financial constraint as anchor department stores have or may file for bankruptcy. Can you talk about how your criteria for mall selection has or will change?

Jud, Can you say something about this?

I'd be happy to. Thanks Jacob. So going into this, in a pre COVID environment, we had very detailed selection criteria and looked at not only the markets that we're in, but also analyze demographic information like Google Analytics as well as data game download data from Steam, which is publicly available. So we felt like we were really drilled down, especially with regards to Simon's and Brookfield’s properties as to where we felt that we could be successful. And so going forward now in this current time period, as malls are beginning to open, we're really at a point where we're just measuring data and trying to best understand how quickly could traffic comes back in these places and really seeing – but it's very early to tell as to the markets that are beginning to open how quickly they come back. So we're really closely monitoring those situations and applying it to our previous data that we've been analyzing for some time.

Great. Thanks. And can you talk a little bit about the numbers for online Esports tournament? Did you say 57 before or was that in-person?

Jud?

Sure. Yes, we've done between until we began doing this in March to May 7, we've done 57 online tournaments, proprietary tournaments since that time. So we've been adjusting our schedule and playing with a few different options with the schedule. But it's been 57 since we began.

Okay. And what is participation looks like? I think you gave some statistics before.

So participation has been quite strong, right? And again, that part of that adjustment in how we're looking at schedule and monitoring our offering is understanding what games are resonating with not only our community, but really the new folks that have been coming into our world. I think one of the best things that we've seen has been an influx people that were not our existing customer before this now all of the sudden participating. So we're growing our customer base in this effort, which is quite a positive move in all of this. And I think one of the things we've talked about earlier was in some of the cases, some of our tournaments have been over 50% filled with people that are outside our existing customer base. So that bodes well for our existing – continued growth during this time.

Okay. And then in terms of the economics for the tournaments, they're the same, but you're not going to have food and beverage and merchandise revenue. Is that correct?

That is correct. Sorry, go ahead, Tony.

Sorry about that Jud. Yes, that is correct, Jacob. So as far as the online events themselves are concerned, it's very similar to how the economics would work for any event held within our Las Vegas Arena. We just don't get the benefit as you mentioned, of being able to sell food and beverage and merchandising.

Okay, perfect. And one last question. What's your stock comp this quarter and what should we expect it to be for the remainder of the year?

Yes. So stock-based comp for this quarter was just over $4 million, but it was abnormally high because it reflected the return of the Simon restricted cash with $3.65 million. So I think in terms of traditional stock-based comp, you'd be looking at the difference of about $350,000 and that should be pretty consistent going forward through the rest of the year.

All right. Perfect. Thanks everyone.

Our next question will come from Jeff Cohen of Stephens, Inc. Please go ahead.

Hey guys, thanks for taking the question. Hope you’re all doing well. I think you’ve touched on this a bit in your prepared remarks. But can you talk about the subscription trends in the World Poker Tour business. Did you see an uptake in subscribers due to the closure of brick-and-mortar casinos? And then I think you guys did a price increase recently. So can you maybe talk about how churn is trended?

Sure. Adam, can you share some?

Yes. Sure. So we actually started the year with a number of promotions and some changes to our ClubWPT product. And so we had begun those promotions. Frank mentioned one of them, which was $1 million bonus. But we started to put other advertising we had, we started to do some brief rashes on the actual site itself. And even before COVID-19, we started to see some uptick. When – the WPT was a bit of a beneficiary of early warning from what was likely to happen because of our Philippines event. So we began the process of converting much of the focus of the company on to online.And so, what I mean by that is, the talent that would normally be at the event – the staff that would be on the event really started to concentrate on promotions for the product. So you saw a wealth of new commercials literally every week, even though we were doing them from our home. We saw new promotions coming out. And since that time we’ve had a considerable uptick. And it’s – I think Frank mentioned that there was – the quarter recorded a 40% increase. But if you look at the end of the quarter, it is really been and this last two months numbers that quite frankly, we have just not seen since the beginning.And so, we see that continuing and what – to the second part of your question, the other thing is that we are seeing much better retention in part because there’s a lot more on the site now. There’s a lot more activities. It isn’t uncommon to have 3,000 people at applying on one event on ClubWPT. But we do a number of other things. For example, at the end of the week, each one of our talent is playing and you can go on to Twitch stream and you can see them play and you can interact with them. And this is helping us a lot in returning those numbers. So, we see that continuing. And I think, quite frankly, we’ve learned some very good practices that are going to continue far beyond this crisis.

Great. Thanks.

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I’d like to turn the conference back over to Frank Ng for any closing remarks.

Great. Thank you operator, and thank you everyone for your support and your participation on today’s call. We would like to remind everyone that next week on Tuesday, May the 19th, we will be presenting at the 15th Annual Needham Virtual Technology and Media Conference. We hope to speak with many of you at this event. Thanks again and please stay safe and healthy.

The conference has now concluded. We thank you for attending today’s presentation. You may now disconnect your lines.