Allied Esports Entertainment Inc

NASDAQ:AESE

Earnings Call Transcript 2021-Q3

[Operator]

Greetings. Welcome to the Allied Esports Entertainment Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded.

I will now turn the conference over to your host, Lasse Glassen, Investor Relations. Thank you. You may begin.

[Lasse Glassen, Addo Investor Relations]

Thank you, operator. Good afternoon, and welcome to the Allied Esports Entertainment 2021 third quarter results conference call. Speaking on the call today is Allied Esports Entertainment's Chief Executive Officer, Libing Claire Wu; Chief Financial Officer, Roy Anderson; and Co-Chairman of the Board and President, Lyle Berman.

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 discussed in 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 assurances 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 definitions of such non-GAAP financial measures, 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, Claire Wu. Claire?

[Libing Wu, President and Chief Executive Officer]

Thank you, Lasse, and thank you, everyone for joining us this afternoon. My remarks today will begin with a discussion of recent changes in our leadership team at AESE as well as an overview of the important operating highlights from this past quarter. Roy Anderson, our Chief Financial Officer will follow with additional details on our third quarter financial performance and Lyle Berman, Co-Chairman of the Board and President will conclude with an update on the previously announced strategic process for our Esports business along with the company's progress on our ongoing activities to invest our cash from the sale of the World Poker Tour or WPT. After our prepared remarks, we will open the floor to questions.

Turning first to recent changes in our leadership team. As announced earlier this month, Lyle Berman, current Co-Chairman of the Board has assumed additional duties as President of the company and will head up our Investor Relations effort. Furthermore, Yinghua Chen, current Director has been named the Chief Investment Officer. Together, Lyle and Yinghua will focus on completing the sale of our Esports business and identify opportunities to invest our cash to maximize shareholder value.

And finally, I am very pleased to introduce Roy Anderson as our new Chief Financial Officer. Roy joined the company last month and has truly headed the ground running. As CFO, he will have responsibility for overseeing all aspects of our accounting, financial reporting and planning, treasury and tax activities. Before joining AESE, Roy was a partner with Mazars USA, an independent member firm of Mazars Group, where he advised and worked closely with the top executives and investors of companies in the Technology, Media and Telecommunications market ranging from start-ups to large multinational companies.

Roy brings strong leadership qualities, financial insight and the strategic M&A experience to our executive team. This combined with his broad-based industry expertise makes him ideally suited to lead our finance and accounting activities as we move forward.

With that, let's move on to an overview of our results for the third quarter of 2021. This quarter was a very productive period for AESE highlighted by a strong quarter of growth from our Esports business. During this quarter, total revenues more than doubled from the last quarter and increased over 182% compared to the third quarter last year. This growth was driven by a sharp recovery of the in-person pillar of our Esports business with the U.S. economy almost fully reopened, coupled with a steady climb in Las Vegas foot traffic and the return of live entertainment events.

That said, game publishers, who were our largest customers prior to the pandemic, have not yet resumed in-person events and could provide an additional boost to our in-person pillar when they resume normal activities. In addition, our Multiplatform Content pillar generated solid revenue contributions, and we continue to make strides towards monetizing our growth content library with key streaming partners as well as building out our production services capabilities through AE Studios.

Importantly, during the quarter, we significantly improved our liquidity position with the sale of WPT to Element Partners in an all-cash transaction for $105 million. Since the completion of the WPT transaction this summer, we have made good headway in evaluating opportunities to invest our cash. We also made good progress exploring strategic alternatives for our Esports business and recently signed a non-binding Letter of Intent to sell our Esports assets. Lyle will discuss this in more detail in his remarks.

With that, let's now turn to our third quarter operational highlights for our Esports business. Recovery from the pandemic continued in the third quarter with increased demand for tournament and production services. This lead to Allied Esports production of 110 events in this quarter, an increase of 31% versus the last quarter. This included 39 proprietary events and 71 third-party online and in-person productions. In total, over 8,000 players competed in Allied Esports productive events during the third quarter.

With the easing of pandemic-related restrictions, the company's proprietary events, such as Lockdown and Saturday Night Speedway saw a 24% increase in player interest compared with last quarter. Also, Findlay Mazda, a well-known auto dealership in the Metro Las Vegas area has become the new preventive sponsor of Saturday Night Speedway featuring Mario Kart at the HyperX Esports Arena Las Vegas.

Third-party events company-wide were up by 51% quarter-over-quarter. This was driven by an 89% increase in third-party events and productions booked at HyperX Esports Arena led by FACEIT production of the Rainbow Six North American League, Red Cross Rescue Royale featuring Fall Guys and the World Poker Tour final tables.

Additional contribution came from the company's organization and the production of Trovo Titans in North America, Europe and Latin America for Tencent-backed streaming platform Trovo. AE Studios, the company's new original content, storytelling and production services arm also produced a number of events including the CelebriTee Showdown for Twitch.

Although the company's more expansion plans with the Simon Properties, and the Brookfield Property Partners continue to remain on hold, the Allied Esports Truck in North America continued to bring gaming activations to fans around the country. During the quarter, the Allied Esports Truck began a seven-stop tour at NASCAR Cup Series event and offered gaming activations.

The truck was also utilized by Monster Energy in its activation at a three-day hard rock festival, Rocklahoma. Subsequent to quarter-end in October, the Allied Esports Truck in Europe returned to action with partner Trovo and Poznań Game Arena, which is the largest computer, console and the multimedia entertainment fair in Central and Eastern Europe.

Throughout the pandemic, we also made significant strides to advance Allied Esports Multiplatform Content pillar. To this end, the first major milestone was the launch of a 24-hour content strategy on Twitch, which saw 3.2 million live views in the third quarter of 2021 and increased the followers by 24%. So far the company has delivered 14.7 million live views on its TwitchSports channel since launching the 24-hour strategy in November, 2020. I am pleased to report that the company's content library currently holds over 1,000 hours of Esports programming with distribution on Tencent streaming platforms around the world.

Earlier this year, we successfully launched AE Studios. Through AE Studios, we leveraged our years of digital content creation and world-class production facilities to design and produce digital-first content for clients and the partners spanning a variety of industries, such as gaming, entertainment, pop culture, music and the spot. During the third quarter, AE Studios’ production of CelebriTee Showdown for Twitch on its TwitchSports channel aired 16 episodes and the showdown was extended from 24 to 30 episodes for 2021.

Subsequent to quarter end, Allied Esports was recognized at the Tempest Esports Business Awards in October as a finalist in the Innovative Use of Technology category. This award acknowledged the company for its production of the world's first esports tournament featuring live animated commentators in a partnership with motion capture technology leader, Xsens. This is a great honor and reflects the spirit of innovation that has made Allied Esports a leader in the competitive gaming industry.

Also subsequent to the end of this quarter, AE Studios produced the live-stream of the first-ever UNO Championship Series Invitational Tournament from the HyperX Esports Arena on November 11. The event was hosted by professional gamer and streamer, Tyler “Ninja” Blevins, and the viewers around the world will able to watch live on UNO's TikTok channel, and finalists competed for a winner-take-all $50,000 prize.

That concludes my prepared remarks. And at this time, I'd like to turn the call over to Roy Anderson, our CFO for an update on our third quarter financial results. Roy?

[Roy Anderson, Chief Financial Officer]

Thank you, Claire. Good afternoon, everyone, and thank you for joining us today. I am excited to join AESE during this transformational period, and I look forward to contributing my expertise and leading the accounting, finance and M&A activities of the company. As Claire mentioned, we continued to see the recovery from the COVID-19 pandemic positively impact our business with increased demand for our tournaments and production services, which led to strong growth in the third quarter. In addition, we continued to make progress on the development of our Multiplatform Content pillar led by contributions from the recent launch of AE Studios.

Now, let's turn to our third quarter results from continuing operations. Total revenues for the quarter increased to $1.7 million, up 182% compared to the third quarter of last year. Looking at these results in greater detail, in-person revenues for the third quarter increased 144% to $1.5 million compared to $600,000 in the prior year period. The strong growth was primarily driven by the increased number of events and loosened restrictions of operating hours and social distancing measures at our HyperX Esports Arena in Las Vegas. Multiplatform Content revenues for the third quarter totaled $200,000 driven by our new tournament organization partnership with Trovo, the Tencent-backed streaming platform.

Total costs and expenses for the third quarter were $5.6 million, up from $4.4 million compared to the prior year period. The year-over-year increase was due to several factors. First, in-person pillar costs and expenses increased by 95% and selling and marketing expenses increased by 66% compared to the prior year period due to the strong recovery of live in-person events.

Secondly, general and administrative expenses increased by 41% as compared to the third quarter of 2020. The year-over-year increase was primarily due to a $400,000 severance accrual for our former CEO along with additional compensation, including the normalization of salaries in 2021 as compared to the temporary salary reductions that were in place during the third quarter of 2020, in response to the COVID-19 pandemic. We continue to prioritize expense management and actively reduce all non-essential spending across all of our costs and expense items.

Adjusted EBITDA from continuing operations for the third quarter was a loss of $3 million compared to a loss of $2.4 million in the prior year period. Net income for the third quarter was $74.3 million compared to a net loss of $6.5 million in the third quarter of 2020. The year-over-year improvement was primarily driven by the gain on the sale of WPT.

While the gain on the sale of WPT for financial statement purpose was approximately $80 million, there are no current federal or state income taxes payable due to a combination of the following: First, the company's tax basis on the stock of WPT of $99.9 million on the date of sale. Second, the company's current year 2021 projected tax losses. And finally, as needed, the company has net operating losses generated by AESE and Allied Sports that would be available to offset any cash tax liability.

Now moving on to our balance sheet. At September 30, 2021, our cash position totaled $100.2 million, including $5 million of restricted cash. This compares to our total cash position of $5.4 million at December 31, 2020, which also included $5 million of restricted cash. The company's working capital surplus defined as current assets minus current liabilities was $98.1 million at September 30, 2021 compared to $26.3 million at December 31, 2020, which included $36.2 million of net assets from discontinued operations.

On July 12, 2021, the company sold the stock of WPT for $105 million, including a $10 million deposit received in March of 2021, of which $3.8 million was used to pay off company debt. In addition, $1.5 million was used to pay transaction bonuses, fees and expenses. On that date, $500,000 was used to pay Board of Director fees, including a WPT transaction bonus and a catch up for unpaid fees from January 1, 2021 and $4 million was used to normalize payables and to fund operations through September 30, 2021, leaving a cash balance of $95.2 million at September 30, 2021.

Importantly, the company has zero debt having paid off the remaining convertible debt and bridge notes concurrent with the closing of the WPT sale during the quarter. In summary, we continue to see operational improvements in our Esports business that are being driven by strong growth of our in-person pillar and it returned to a more normalized operational environment.

Our Multiplatform Content pillar is also gaining traction as we launched our 24-hour content strategy on Twitch in November, 2020 and AE Studios last quarter. We will continue to carefully manage our costs and expenses as we continue the process of emerging from the pandemic.

With that, I will turn it over to Lyle Berman for a discussion on corporate matters, including an update on the previously announced strategic process for our Esports business, along with the company's progress on ongoing activities to invest cash from the sale of WPT. Lyle?

[Lyle Berman, President and Co-Chairman of the Board]

Thank you, Roy, and thank you all for joining us today. I am looking forward to my expanded role as Co-Chairman and President during this very exciting time for Allied Esports Entertainment. First off, a quick housekeeping matter. Our Annual Shareholder Meeting will be reconvened for some time in December 2021. At which time, we fully expect to obtain a quorum of shareholders to conduct the meeting. We will be announcing the reconvened meeting in the near future.

Next, and as noted on our call last quarter, we have accelerated our plans to explore strategic options for the Esports business. We have made substantial progress in identifying a path forward for the Esports business that maximizes value for the AESE shareholders. To this end, we have entered into a non-binding Letter of Intent with a third-party to sell our Esports business. While we are not yet in a position to publicly announce further details at this time, we will provide updates as quickly as possible.

At the same time, we are continuing to identify opportunities to invest our cash on our balance sheet, along with any cash from anticipated sale of the Esports business to acquire or merge with an existing business. To date, we have reviewed a number of potential targets. Our due diligence and the continued sourcing of other opportunities is ongoing. In addition, we are also aggressively interviewing a number of investment banks to insist us in this process. We have asked for proposals from several of these investment banks, and we expect to complete the selection process and engage a firm within the next three weeks.

Let me be clear, that while we are working with a sense of urgency to acquire or merge with an existing business, we are laser-focused on finding the absolute best opportunity available to maximize value for our shareholders. These are very exciting times, and I look forward to providing you with an update on our progress at the appropriate time.

That concludes our prepared remarks, and we would now like to open the line for Q&A. Operator?

[Operator]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Derek Soderberg of Colliers Securities. Please proceed with your question.

[Derek Soderberg, Colliers Securities LLC]

Hey, everyone. Thanks for taking my questions. So it sounds like you guys did sign an LOI. Just curious what sort of drove you guys to sell that business. Any additional color there would be great. And then just given your exiting in Esports business, I think you've talked about potentially buying another business in that area. Why would you exit? And then are you still looking for an asset in that area? Or should we sort of read that as you're targeting a non-Esports business as an acquisition target? If there's any additional detail you can give me on some specific sub-sectors within entertainment you're targeting? Any additional color there would be great.

[Libing Wu, President and Chief Executive Officer]

Hi. Good afternoon, Derek. Thanks for the question. There are several reasons why we made this strategic decision, and I will quickly address why and pass it on to Lyle to add more color to that. One of the reasons for us to make the decision is because of the increased interest to the whole Esports industry and Esports business, especially after pandemic. We have been approached by potential buyers, including the [current one we signed the Letter of Intent]. And with that being said, I’m going to pass it to Lyle to further address this question. Lyle?

[Lyle Berman, President and Co-Chairman of the Board]

All right. Thank you, Claire. It wasn't an easy decision for us. However, although we have made great strides in the Esport business, it is still definitely cash burning and we have found it to be very competitive landscape. So we made a decision that we would like to exit the Esports business, if possible, and redeploy our cash into a new business. We definitely are not looking at Esport businesses. I think you asked the question, why would we exit one and look at another? We are not looking at an Esport – Bsports of any kind.

However, what we are saying is that we are open to any – we are looking at all industries, we're looking at opportunities that can redeploy our cash that the new company has a number of attributes, most likely they need to have a high growth potential, they have a documented use of our cash. Our cash would be used to further the business. We're not looking to buy out other shareholders. We want our cash to go forward. But we're wide open and looking at any industry that works, that makes sense. And most likely, we're looking for a merger where there's a very good management team. Our company would still be on the Board of Directors, but we're looking for a company – we're not looking for a company that we would run and manage, we're looking for one that comes with management.

[Derek Soderberg, Colliers Securities LLC]

Got it. You did talk about cash burn a little bit. I'm just curious what that would look like if you did divest the remaining Esports business. What would the corporate structure look like? And then just otherwise, what should we expect in terms of cash burn from here if you do not divest that remaining business?

[Roy Anderson, Chief Financial Officer]

Yes, I'll take that. This is Roy. So on a combined basis, if you add corporate and AEI operations on a quarterly basis, we're right around $2 million at the moment. Corporate by itself post-sale is probably about $1 million, which includes payroll and payroll-related costs, insurance along with audit tax, legal SEC filings and so on. So it's roughly a $2 million burn, of which, one is corporate and one is AEI pre-sale. But the AEI amount continues to decline as the revenues continue to grow and margins continue to increase. So that'll continue to decline.

[Derek Soderberg, Colliers Securities LLC]

Got it. Thanks guys.

[Operator]

We have reached the end of the question-and-answer session. I will now turn the call back over to management for closing remarks.

[Libing Wu, President and Chief Executive Officer]

Thank you for your support and for joining us on today's call. We look forward to speaking with you again, when we report our 2021 fourth quarter results in March. Thank you, again, for your time and attention this afternoon and your interest in Allied Esports Entertainment.

[Operator]

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