Esports Entertainment Group, Inc. (GMBL) CEO Grant Johnson on Q1 2021 Results - Earnings Call Transcript
Esports Entertainment Group, Inc. (NASDAQ:GMBL) Q1 2021 Earnings Conference Call November 16, 2020 4:30 PM ET
Company Participants
Jeff Cohen - Vice President of Strategy & Investor Relations
Grant Johnson - Chief Executive Officer & Chairman
Dan Marks - Chief Financial Officer
Michael Wilson - Chief Operating Officer, SportNation
Conference Call Participants
Michael Kupinski - NOBLE Capital Markets
Lisa Springer - Singular Research
Operator
Thank you for standing by. This is the conference operator. Welcome to the Esports Entertainment First Quarter 2021 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]
I would now like to turn the conference over to Jeff Cohen, Vice President, Strategy and Investor Relations. Please, go ahead, sir.
Jeff Cohen
Good afternoon, everyone. Thanks for joining us today for our first quarterly conference call as a NASDAQ-listed company. Before we begin, I'm just going to read some brief Safe Harbor language. Statements we make during this call that are not statements of historical fact constitute forward-looking statements that are subject to risks, uncertainties and other factors that could cause our actual results to differ materially from our historical results or from our forecast. We assume no responsibility for updating forward-looking statements. For more information, please refer to the risks, uncertainties and other factors discussed in our SEC filings.
Hosting the call today, we have Grant Johnson, Chief Executive Officer and Chairman of Esports Entertainment Group; and Dan Marks, Chief Financial Officer of Esports Entertainment Group, who will provide a review of our financials. Afterwards, we will then open up the line to questions.
I'll now turn the call over to EEG's CEO, Grant Johnson. Grant?
Grant Johnson
Thank you for joining us on our first fiscal Q1 earnings call. Given this is our first conference since our uplist in April, I'd like to take a few minutes and walk you through some of the significant milestones we've achieved since the uplisting, as well as take you through our company strategy. After which, our CFO, Dan will, of course, go over the results of the current quarter in detail.
Before we jump into strategy, I think it's important to take a minute or two to frame for you why there's such a tremendous opportunity in the Esports market. With over 500 million viewers globally, Esports has become the fastest-growing subsector of digital media. And with the COVID-19 pandemic, this has absolutely accelerated this rapid growth.
We've even seen Esports break into the mainstream, with advance broadcast on national TV on ESPN and FOX Sports. Those of us that have followed this sector for some time have always expected these things to happen over a period of time. However, the pandemic has accelerated this time line.
Esports fans are young, digitally native and affluent. Third-party research has also found that Esports fans are more likely to be influenced by their favorite team being sponsored by brand, than traditional sports fans are. One of the things we hear a lot from investors is there's very few Esports investment opportunities in the public markets. We believe Esports Entertainment Group with our three-pillar strategy -- three-pillar growth strategy, excuse me, can provide investors with a broad exposure to the large and rapidly growing Esports market.
We structured our business to be able to deliver diversified Esports and online gambling company, under our -- under these three pillars. The first pillar is Esports Entertainment and Infrastructure. On the closing of the pending acquisition of EGL, Helix and ggCircuit on the B2B side -- or B2C side, excuse me, we'll be able to offer our tournament platform and LAN centers. And on the B2B side, we'll have the Genji Analytics and the ggCircuit, which is the leading operating system software provider for LAN centers on a global basis.
The second pillar, of course, is our Esports wagering. Here the focus will be on both traditional wagering with VIE.gg-branded platform and skill-based player versus player wagering. On the buy side, we've announced that we're planning to be live on our proprietary wagering platform here in the United States in New Jersey as of Q1 next calendar year, via our partnership with the Twin Rivers Casino. And on the skilled player versus player side, we're working alongside New Jersey Gaming Commission to launch a pilot offering at around the same time in that state.
The final and third pillar is our traditional online sports booking casino, or igaming. This is our Argyll Entertainment asset and SportNation. These brands operate in the U.K., Ireland and have a Tier 1 gambling license issued by the U.K. Gambling Commission. This acquisition, as you know, closed August 4.
The sports book provides us with strategic licenses and access to a pool of players that we can cross-sell our Esports offering into. In addition, as we announced in May, we have received approval for the multi-gaming license. This is also a Tier one license. The multi-license is strategically important. It allows us to advertise and do additional 150 jurisdictions globally and across the EU. The U.K. and Malta globally are globally recognized as and powerfully -- powerful regulatory systems for igaming and provide our players and partners with the highest levels of trust and confidence in knowing they're dealing with an onshore jurisdiction because legislation is in line with the applicable EU legislation and international agreements. We believe this multi-tiered portfolio approach, provides investors, broad exposure to two major trends, the rise of competitive gaming and legalization of online gambling here in the United States.
Now, I'd like to turn some operational highlights since our uplisting back in April. In addition to the multigambling license, we announced in May, which I just referenced, in August we announced an expanded partnership with team Dignitas, which is an esports asset owned by the Harris Blitzer Sports and Entertainment Group. Under the terms of the agreement, VIE.gg secured naming rights of Dignitas with their famed Counter-Strike: GO team.
In addition to VIE's integration to CS:GO naming rights and New Jersey license, the partners have ruled that strategic digital physical activations in New Jersey in the judicial marketplace as is a core focus. We've also moved our U.S. headquarters into the Dignitas' offices which is next to the Prudential Center in Newark on Lafayette, the New Jersey -- in New Jersey, where our CFO on this call with us and other U.S. executives including Jeff will now be based.
In August, we acquired FLIP Sports. FLIP is a team of developers that have been tasked with building, our own back end for the VIE.gg platform, so we can vertically integrate our tech stack. We believe this investment allows for greater flexibility in terms of types of lines that we can offer and ultimately provide our customers a better experience. We expect this project to be completed by the end of this quarter and we will be submitting it for testing.
In August, we entered into a partnership with Twin Rivers to launch online esports wagering in the New Jersey market. This announcement -- with this announcement, we became the first esports-dedicated gambling company to acquire a U.S. license. We anticipate, we will have our documentation submitted in the New Jersey Gaming Enforcement in the next several weeks and intend to have our proprietary VIE.gg wager platform live in the state by the end of March. We expect -- we certainly intend to expand the VIE platform into additional U.S. states during fiscal '22.
Also in August, we announced the acquisition of Esports Gaming League, which is a skill-based esports tournament platform. In their 10-year history, EGL has partnered with brands such as Microsoft, Red Bull, Arsenal FC, Activision and more. Subsequent to our acquisition of EGL, we announced first-of-their-kind deals with the LA Kings, LA Galaxy and Philadelphia Union. We are to be their official esports tournament provider.
What we found is that, during the pandemic traditional sports teams are struggling to engage with their fans without being able to have them in stands because of the online nature. And because of the online nature of esports, as well as a crossover between traditional sports, fans and gamers, we believe we have the solution for them.
Since our announcement with AEG, we have about over 10 additional sporting organizations to reach out to us to explore similar partnerships. In September, we partnered with Allied Esports to host the VIE.gg CS:GO Legend Series tournament. The two-week competition drew over 1.7 million unique viewers and generated over one million hours watched, making the most watched Legend Series event since the tournament series was created back in 2017.
As the official gambling sponsored the event, our VIE.gg platform saw a significant increases in both new and -- new users and deposits. Because of the success of this partnership, we intend to work alongside Allied again in the future towards additional tournaments.
Finally, in October, we announced the potential acquisition of Helix eSports and ggCircuit for $43 million. Strategically, these acquisitions fit nicely within our three-pillar framework as described earlier adding state-of-the-art esports entertainment centers, esports focused to vertically enterprise software business and best-in-class esports analytics platform, along -- and along with this a player-versus-player skill-based wagering platform to our diversified asset base.
Since our acquisition announcement, we've been approached by several traditional sports teams who have expressed an interest in building out Esports centers on-premise at their arenas to attract and engage new fans. And this acquisition also opens up a new vertical for us in the casino space.
Many brick-and-mortar casinos are struggling to attract younger demographic and we believe Esports can be a solution to this problem. By bringing the capabilities of VIE, EGL, ggCircuit, Helix and Genji to bear we can now provide a turnkey solution for casinos who are looking to integrate Esports wager into their facilities.
I will now turn over the call to Dan Marks, our CFO, who will discuss our quarterly results and guidance. Thank you. Dan?
Dan Marks
Thank you, Grant. Good afternoon, everyone and thanks again for joining us today. Before we dig into the quarter just gone, I wanted to provide some additional detail around the guidance we've given the market for both this coming fiscal year ending June 30, and also next fiscal year.
From our core Argyll, VIE and EGL platform for fiscal 2021, we continue to expect revenue of $13 million. And for fiscal 2022, we expect revenue of $25 million. EBITDA for the same periods are expected to be minus $9 million and minus $1.4 million in fiscal 2022.
Pro forma for our acquisition of ggCircuit and Helix, we have revised our fiscal 2022 revenue guidance up to $42 million and EBITDA will improve to positive $2 million in fiscal 2022.
Turning now to the results of the quarter just gone. In the 12 months preceding the impact of COVID, the Argyll brands were realizing $1 million of revenues per month. However, the business encountered a challenging operating environment during this quarter. Post the Argyll deal closing on August 4, revenue in the subsequent two months was $222,000.
The main driver of this reduction was this simultaneous to the negative impact of COVID on the global sporting calendar. Argyll also underwent a routine compliance audit with the U.K. Gambling Commission in June. Such compliance assessments are conducted regularly as part of the U.K. GC's oversight of its licensed operators.
The audits review and verify compliance with the commission's code of conduct, in particular in relation to safer gambling player protection and anti-money laundering practices. Argyll did complete the audit successfully, which against the backdrop of many examples over the last two years as operators both large and small, who have failed compliance assessments and received large fine and/or had their licenses revoked, it was very positive news.
However, the impact of COVID increased the Commission's focus on ensuring all operators raise player protection standards across the industry. And we were given guidance to implement more robust, safer player protection tools on our sites. One such measure undertaken by Argyll was to exhibit with the commission's guidance to integrate an automated customer affordability tool. This evaluates the players spending ability on registration, indicating how much they are able to deposit and bet with us and over what time period.
Once integrated, it would ensure Argyll provides a safer and more secure gaming environment, in which our players can play responsibly and within their means. However, it took 2.5 months to source, evaluate and integrate the market-leading affordability tool provided in our case by true narratives. The integration of which was finally completed towards the end of September.
During that time though we proactively took the decision to enforce deposit limits and more stringent KYC disclosure requirements in an effort to safeguard our player base. But ultimately it impacted our top line business. Active customers reduced 67% versus the prior quarter. New FTDs reduced by 47% and average player values fell by over 50% as a result of these temporary manual but ultimately protective measures we put in place. They were the key drivers in the reduction of both turnover and income during the quarter.
Since the tool has been successfully implemented however, marketing spend has recommenced and I'm glad to say that October activity levels and levels of turnover, GGR and NGR have broadly returned to pre-COVID levels. Handover is back up to the 16 million range. Our active customer base was above 11,000 players for the month of October and revenues in the month were above $600,000.
And as mentioned previously, our guidance on revenue for the remainder of this fiscal year entailing the VIE, Argyll and EGL businesses remains unchanged at $13 million. Total operating expenses in the period totaled $3.7 million. These are principally driven by payroll, stock compensation, marketing and professional services fees, of which in total circa $1 million were non-repeatable or one-off costs.
One of the key strategic initiatives that we have pursued since our uplisting have been to consolidate our tech stack onto wholly owned platforms. The acquisition of Argyll and that of the FLIP Sports Assets together with the enhancement of our in-house tech team, increased the group's employee base with 13 employees in June 2020 to 56 by the end of the quarter. And this investment in our tech resources bodes well for delivering a fully functioning online wagering platform, during the first calendar quarter of 2021.
Total net loss for the period was $1.8 million, driven principally by reduced revenues related to the measures taken post the Gambling Commission Audit, partially offset by a change in fair market value or warrant liability of $2.1 million. Turning to the balance sheet, as of 30th of September we had $8.9 million in cash, approximately $2.3 million in working capital and total shareholders' equity of $16.8 million. This included $1 million in net proceeds from the sale of 275,000 shares issued for warrant exercise.
Our monthly current net cash burn rate on operational activity is in the $0.8 million to $0.9 million range. And we continue to be focused on finding efficiencies within our enlarged group's cost structure. We are confident our existing operational results and cost base can support a doubling in customer activity in the next six to 12 months, whilst some incremental investment will continue, in augmenting our technology function.
In summary therefore, despite the unprecedented environment and significant impacts we felt from the pandemic and from the Gambling Commission Audit, the recent uptick in performance in October, ensures we remain extremely optimistic looking out across the next 12 months and sets us up positively to accelerate our development into the coming industry's most diversified esports online gambling company.
I think we can now open the line for Q&A. Operator?
Question-and-Answer Session
Operator
Thank you. We will now being the question-and-answer session. [Operator Instructions] Our first question is from Michael Kupinski with NOBLE Capital Markets. Please go ahead sir.
Michael Kupinski
Thank you. And thanks for taking my questions. Just a couple here, macro and then a couple of micro questions, you mentioned -- talked about the pandemic and how that might be helping you. And it sounds like, there's some talk about shutting down economies, as COVID seems to be spiking again. Can you give us a sense of, how this is helping or hurting you in terms of implementing your development plans at this point?
Grant Johnson
Sure. It's Grant Johnson here. I'll take the first part of that. It's -- of course there's -- the list of positive things that have come out of COVID is a very short-list. I think we can all agree on that. However, what it has done is our online elements have definitely had an increase in activity.
So the best example I can give you is, as COVID continues to wreak havoc, the sports teams will continue to reach out to us. And this is expanding our opportunities with our tournament platform, most definitely. And these opportunities will be revenue drivers for us as we move into the next -- into fiscal 2022.
In addition to that, the VIE.gg platform is specifically an online platform. So the pandemic will have -- it has a positive effect in driving traffic online into that site as well. I think it's safe to say, it will have a negative impact on -- continuing negative impact on LAN-based operations.
So those are -- that will potentially have a negative effect on the sports weekend. Not at this point in time they seem to be operating at a bubble, which the games will be played without fans for the foreseeable future, lets see. But that will not have a negative impact on the sports book. So as awful as the pandemic is we are positioned well to be a benefactor of this activity. I don't know, if Dan would like to add to that or not.
Dan Marks
No. I think you're right, Grant. I mean during the first lockdown, at least within the U.K. particularly when sports were shut down we saw a movement from traditional sports onto either, esports or casino products. So our turnover didn't -- wasn't impacted. They're slightly -- at least a slightly lower-margin product in the sports book. But actually turnover itself wasn't hugely impacted.
I think with sports remaining open currently, I wouldn't expect to see the same change in product mix, assuming the sporting calendar continues to be open.
Michael Kupinski
Thank you for that color. And I was wondering, can you give us the parameters of the $43 million acquisition on the Helix and ggCircuit in terms of how you plan to finance that acquisition? And then are you still in acquisition mode? Are you planning to integrate what you currently have purchased at this point? If you can just give us a sense of the M&A environment right now.
Grant Johnson
Sure. Those -- we are working very closely with our banking partners on the finances of the ggCircuit and Helix transaction. That will -- the only color I can give you at this point in time is going to be the transaction side $43 million is going to be effectively a mix of 60-40 equity to cash and debt. That transaction will go to shareholder vote we expect in January, at which point in time we will finalize the last segment on how much is cash and debt.
With regards to other acquisitions we have been broadcasting for quite some time that we do have multiple conversations online with iGaming operators. These are accretive acquisitions. We have multiple conversations underway to occur, who is our advisory group out of the UK. And we've been keep -- working with our bankers to discuss putting debt vehicles in place for these acquisitions because of the high revenue nature of them.
We anticipate to be far enough along by the end of this calendar year to engage in a -- announce one of these transactions, but it -- all of them are a little premature as of this call. But we are definitely pursuing those as we've -- as same as we did with Argyll, there are others that will be coming down the pipe here in the near future. We are not entertaining any new discussions, simply because we have -- all we can possibly manage at this moment in time.
Michael Kupinski
And just a final question and I'll let others ask questions. I know that there were some initial disruptions in revenue at Argyll. And you mentioned revenues that in October of $600,000. Was that in line with expectations? And I know -- I just kind of want to get a sense, I know you're giving guidance in terms of revenues for the fiscal year. But so far, in November, are you still seeing some disruptions into November or revenues ramping? And then, if you could just give us a sense of what's driving the growth? Is it the number of players? But just in general what the color there is?
Grant Johnson
Sure. I'll take first pass, and I'm going to hand it over to Michael, the CEO of Argyll and SportNation. Clearly, when the acquisition was negotiated COVID was not upon us, of course, and nor could we have forecast what the impact of that was. So, I'd have to say that some of it was not anticipated nor could we have anticipated the audit taking place during COVID from the UK GC.
So, it was a bit of a one, two that we did not plan on. However, we are quite pleased with the numbers since. I'm going to turn it over to Michael, who's on the phone Michael Wilson, COO of SportNation to get into a little more specifics on that point. Michael, can you take the call -- question please?
Michael Wilson
Yes. No problem. Thanks Grant. Michael, here. So the October bounced back, and also the momentum also in November is largely driven through retention and increased retention and also the new players that we're acquiring. We're acquiring players through new channels along with our existing affiliate network. We're branching more out into social where we're seeing a whole new batch of players coming in.
And also, as I mentioned as well, the retention figures are creeping up and up and up. And in fact, October saw the largest retention figure as a month two from FTDs the month before that we've seen on record. That momentum of the new players and the players returning to the site, we're seeing continue through into this month as well. To tell you last week as an individual week, we saw the highest number of actives that we've had on record and also the highest number of FTDs as well. So I think it looks as though at this stage the momentum is all moving forward to hitting the $1 million revenue by December again.
And the final point I'd make as well, part of the acquisition in the – sorry, part of the retention of customers and also the revenue that we're seeing from them is tied into the rewards program that we have. We're seeing that loyalty that we're getting through customers showing through the decent numbers that the customers are doing on-site and also driving that retention and seeing those retention figures increasing as well.
Michael Kupinski
Thank you. I’ll let others ask questions. Thank you.
Operator
[Operator Instructions] Our next question is from Lisa Springer with Singular Research. Please go ahead.
Lisa Springer
Thank you. I'm wondering what kind of timetable you have for the pilot with the New Jersey Gaming Commission for the LANduel? And how -- if you could explain to us how adding the skill-based player-to-player wagering how that really is going to expand your opportunities?
Grant Johnson
Certainly. The product has through its evolution been tested with the commission's involvement. So they are mindful and this is the people from Genji, Helix and ggCircuit have been working with them. The product we expect to launch in a Helix center in their New Jersey center in Q1, that's our time line. How it will impact our revenues? We believe it will have substantial impact.
Esports fans are very engaged with each other and comparing their skills against each other's. Player-versus-player betting has always been talked about in esports and this will be the first time a product has come out that's actually been better and approved by a gaming commission in terms of skilled betting. So this would allow me to play you in any video game any esports, we can bet against each other. I will get the next kill I win the match $10. And the house -- the facility would take a commission a rate not unlike a poker room where they -- the house doesn't take a position of risk, but the house benefits from providing the environment where the action takes place. And so this will be unique. It does not exist anywhere else currently in esports.
Think of it if I could make a sporting comparison, think in terms of golf and all the foursomes in golf. It's very common to bet the long shot closest to hole. Hole-by-hole there's more betting that takes place on the links around the world than will take place betting on the masters. So think of it that way. We anticipate the environment to get to the point in time with this product where there'll be more activity taking place on the person versus person betting that will end up taking place on these major tournaments. So it will have -- we believe it will have a profound positive effect on both our growth and on our revenues.
Lisa Springer
Okay. Excellent. And you've got a lot of visibility out of the title sponsorship with the tournament. I wonder what can we look for in terms of more tournament sponsorship during this year. I mean do you have a schedule of how many you'd like to do? And what kind of shape that would take?
Grant Johnson
Actually we are in discussion with Allied on that exact topic frankly. So we are -- where we've gotten to is we both enjoyed the results. We both see the merits and benefit in working together in future tournaments. I would expect a minimum four working with Allied next calendar year possibly more including additional titles and being focused in different geographic regions of the world. So that's about as far as we are in the details. We expect to come out with a schedule early in the New Year.
Lisa Springer
Okay. Excellent. Looking forward to it. Thank you.
Grant Johnson
Thank you.
Operator
[Operator Instructions] There are no further questions registered at this time. I would like to turn the conference over to Grant Johnson for any closing remarks.
Grant Johnson
Thank you. Again, I'd like to thank everybody for joining us for our earnings call. Thank you for your questions. I believe that we do offer the most diversified offering in the esports sector and then that we will create tremendous value for our shareholders. Thank you for joining us here today and we look forward to delivering more and larger exciting results as we continue to execute our business model.
Operator
This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.
