Allied Esports Entertainment, Inc.

Greetings and welcome to Allied Esports Entertainment third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Lassa Glasson, Investor Relations. Thank you. You may begin.

Thank you, operator. Good afternoon, and welcome to the Allied Esports Entertainment 2020 Third 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 World Poker Tour CEO, Adam Pliska, and Jed Hannigan, who is leading the Allied Esports operations, are also available for the question and answer sessions. 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 assurance that its expectations will be attained. The company undertakes no obligation to update any forward-looking statement 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 reconciliation 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, Lhasa, and thank you, everyone, for joining us this afternoon. I'm extremely pleased with the resiliency of our business and the solid performance we delivered in the third quarter despite the significant challenges we faced in the first half of 2020 arising from the COVID-19 pandemic that persisted throughout the quarter. While strong results in the in-person pillar of our business was our primary growth driver for the company prior to the onset of the pandemic, operational restrictions, including extremely limited social gatherings mandated globally, impacted this part of our business model for both Ally Esports and the WPT during the third quarter. In light of this, I continue to be very pleased with our team's ability to adapt to the challenges by successfully pivoting our operational focus to our multi-platform content and interactive services pillars. Solid third quarter revenue growth in multi-platform content and interactive services pillars significantly mitigated the impact of the pandemic on our businesses as we continued to serve the esports and poker communities. In addition, as Tony will discuss further, we make aggressive strides to pay down our convertible debt principal to $3.1 million. As we look ahead, we believe that the strategic pivot we made as a result of the pandemic has accelerated our ability to monetize all three pillars of our strategy. Importantly, we believe this has put us in a great position to better serve our customers in the future and take full advantage of the significant growth opportunities as the economy continues to recover and the environment normalizes. Despite the near-term impact the pandemic has had on our financials, we do see a longer-term silver lining for RIE Sports and WPT. As gamers abide by stay-at-home restrictions and with fewer entertainment options during the pandemic, gaming is filling The void and its popularity is clearly on the rise. On the esports side, more time is spent on gaming. The proportions of gamers who spend five plus hours per week gaming jumped from 63% to 82% during the pandemic. Similarly, more money is being spent on gaming. The gaming industry has experienced a 39% increase in gaming spend where compared to to pre-pandemic levels and expected to increase an additional 21% post-pandemic relative to spending before COVID-19. And finally, gamers are watching more esports content. Audiences watched 7.5 billion hours of content across all live streaming platforms in the third quarter. Year over year, the live streaming industry is up 92% compared to Q3, With that, let's shift gears and review our third quarter results. Total revenues for the quarter of $5.9 million declined just 2.5% from $6 million in the third quarter last year. Considering the significant restrictions we had in our ability to operate our in-person events for both RIE Sports and WPT, we are pleased with the results. During the quarter, we generated a strong year-over-year growth in interactive services revenue, as well as a solid increase in revenue from multi-platform content. However, this was offset by sharply lower revenue from in-person experiences as a result of COVID-19 that persisted throughout the third quarter. As announced earlier in the year, we took significant actions to reduce our expenses and minimize the negative impact on our financial position results from the pandemic. These actions, which included salary reductions and other cost savings measures, reduced our GNA and selling and marketing expenses by $1.7 million this quarter versus the same period last year. At the bottom line, our adjusted EBITDA loss of $1.1 million improved significantly from an adjusted EBITDA loss of $2.1 million a year ago, marking the third quarter as the best quarterly adjusted EBITDA results since we entered the public markets one year ago. Overall, we remain confident in our ability to capitalize on the valuable positions we created today. in the voyaging esports marketplace, while WPT continues to steadily build its business and we believe has a promising outlook. As we have stated previously, our goal is to maximize the potential of these complementary businesses through a model built around three strategic pillars, in-person experiences, multi-platform content, and interactive services. With that, let's turn to our third quarter operational highlights as well as an update on the previously announced strategic partnerships. Beginning with in-person experiences, similar to most businesses in the live entertainment and event industry, in-person experiences for both Ally Esports and WPT continued to face significant operational headwinds during the third quarter. Looking first at all our esports after being forced to completely shut down due to the pandemic on March 17th, our flagship HyperX Esports Arena Las Vegas at the Luxor Hotel and Casino successfully reopened on June 25th with certain restrictions and a modified schedule for daily play and weekly tournaments. To ensure the health and safety of guests and team members, HyperX Esports Arena has implemented extensive sanitization protocols throughout the venue and has deployed reduced operating hours. Furthermore, enforced physical distancing remained in effect throughout the quarter, lowering customer capacity by approximately 35% of pre-pandemic levels with food and beverage service also limited. we believe we have earned the trust of our customers to provide a safe place to play with our enhanced safety and sanitization protocols. That said, since the reopening, the demand we have seen for our weekly tournaments is very encouraging. Third quarter highlights included a weekly event at HyperX Esports Arena Friday Fracks featuring Fortnite and Saturday Night Speedway featuring Mario Kart. though have shown considerable growth across all viewing matrix in the third quarter by comparison to the first quarter pre-pandemic levels. Most notably, unique viewers increased 1,144% with Friday Fract and 136% with Saturday Night Speedway as compared to the pre-pandemic levels in the first quarter of 2020. While in-person events continued to be limited by the pandemic, during the third quarter, we are pleased to execute two events with the HyperX eSports truck, including an outdoor event with local Saturday night Speedway sponsor, Finlay Volkswagen. After a five-month hiatus, the WPT also resumed the in-person PILA office business during the third quarter. In August, the WPT returned to live poker with the record-setting WPT Japan event in Tokyo. The event drew 726 players in WPT's first live event since March 2020 and marks the first time WPT secured a mainstream sponsor for WPT Japan with Sega Sammy Corporation. In September, the WPT hosted a second event with PartyProper U.S. Network that featured another record-breaking price pool in the New Jersey market of more than $432,000 for the WPD Online Bogota Series main event. With the ongoing restrictions of in-person events during the quarter, we remained focused on interactive services and multi-platform content. Not only did this help recruit nearly all of the in-person revenues lost as a result of the pandemic, we are confident our efforts here will also help strengthen the pipeline of new fans as potential attendees at our live events when the pandemic subsides. Similar to last quarter, the shift to holding events online continued to strengthen our interactive service pillar. In the third quarter, we saw strong growth in our proprietary offerings. We extended the Legend Series brand and tournament format to Valorant, completing five online Valorant Legend Series tournaments sponsored by a Switzerland-based home of esports. Our community-building efforts in Valorant led us to a partnership with Riot Games on a Valorant Ignition Series tournament where we launched Ally Esports Odyssey, a six-day event featuring the top teams in Europe. The event set a company viewership record with 1.6 million live views and 1.1 million hours watched on Twitch. The success of our event in the third quarter grew our Twitch followers by 358%. We also became a member of the Esports Integrity Commission and forged strong partnerships with esports entertainment group and grid esports that have begun to generate monetization opportunities through esports betting via the licensing of video and data rights. The Viya.gg CSGO Legend Series ran for two weeks in September and delivered 1.7 million unique viewers across multi-platforms while driving a 400% increase in new users and a 300% increase in deposits on Esports Entertainment Group's Via.gg platform. The event was historic for Ally Esports, its partners, and the state of New Jersey, as the New Jersey Division of Gaming Enforcement and the New Jersey Economic Development Authority announced its regulatory approval, allowing our event to be the first to offer legal esports wagering in the state. In addition to Via.gg, The event was carried on several other sportsbook platforms, including Drop Kings, PointsBet, Bet365, Pinnacle, YouWin, Yabal, OneWorks, and FunBet. We also lay out our vision for continued growth of our online tournament offerings in North America, where we will be hosting combinations of month-long series and single-day pop-up events to drive participations and viewership. The Valorant Strife Series and Rocket League Combustion Series both ran throughout the quarter with more than 1,700 players participating online. The interactive services pillar for the online esports business continues to mature. Importantly, the platform we built to host online esports tournaments represents an important foundational building block In the future, we expect to further develop the platform as an always-on subscription-based online service where an esports player and fans can watch, play, and win with other members of the esports community, along with esports personalities and influencers. This online platform will be closely integrated with our offline experiences to create a comprehensive and authentic esports tournament experience for fans. Turning next to WPT. We demonstrate further online success during the third quarter. From July through September, WPD hosted the first ever WPD World Online Championships on party poker. The series was phenomenally successful with $100 million in guarantees in the festival and five WPD champions crowned and their names added to the Mike Saxton WPD Champions Cup. The 10,000 buy-in, 10 million guaranteed WPD Ming event drew more than 1,000 players and became the largest WPD prize pool of season 18. In addition to being one of the most successful events in WPD history, this festival underscores the growing brand value of WPD online globally. In addition to the online events, The successful World Poker Tour Interactive Services strategy includes Club WPT, our online membership platform that offers a subscription-based poker club with no purchase necessary. Early in the year, Club WPT launched its $100,000 Club WPT Diamond Championship promotion, which has proven very popular with members. Qualifiers rank from June through October, accumulating in a $100,000 prize pool event in November. This became the largest single-day tournament prize pool in Club WPP's history, with first place taking home $25,000. We also continue to be pleased with the new premium level of Club WPP membership, Club WPP Diamond, which successfully launched in June. Diamond subscribers have exceeded our expectations and comprises a meaningful portion of the overall Club WPD revenue. Thanks in part to these activities, Club WPD can point to some impressive growth statistics through the end of Q3, including new registrations increased 29% year-over-year, total subscription revenue increased 105% year-over-year, daily active users average increased 41% year-over-year, and Virtual currency sales on Club WPD are up 171% compared to the prior year. Rounding out our business model was in multi-platform content, where we generated content that is live-streamed, post-produced, or packaged for consumption on the 24-by-7 basis and retained optionality in monetization of content via direct distribution and sponsorship, use of third-party distributors, or other various hybrid solutions. World Poker Tour has executed this successfully for many years. Overall, we continue to experience strong demand for our poker television product. During the third quarter, WPT online sponsorship revenue from EdSales grew 23% over the prior year period. which is a promising sign as more content opportunity moves online to a global audience. Moreover, WPD Studios began the process of securing syndications for seasons 13 and 14 of the WPD television series in 2021, with a forecasted 80% clearance. This puts WPD in the position of selling national advertising buys in 2021 and pushing for upfront revenue. I think it is also important to note that linear household viewership in the third quarter was up 77% year over year, while OCP household viewership grew 368% over the prior year period. In fact, OCP third quarter viewership of 22 million households surpassed linear television viewership of 17 million households for the first time. Before turning it over to Tony to discuss our third quarter financial in more detail, I would like to provide an update on our strategic relationship with Simon Property Group and Brookfield Property Partners, who we are working with to deliver esports experiences at select Simon and Brookfield properties. Earlier in the year, Simon's Mall of Georgia, located in the Atlanta metro area, was selected as the location for an ally esports venue. While the Simon project is currently suspended due to the pandemic, esports remains a key strategic initiative for Simon, and to allow for this, we are talking about further extending the milestone date under our partnership agreement until the COVID-19 crisis has ended. With respect to our similar strategic relationship with Brookfield, we are following a similar path to open an on-mall venue concept at Brookfield retail locations once the COVID-19 crisis has passed. Although the pandemic delays our timeline with expansion to malls, we remain confident in the prospect of this business initiative and will continue to update you on our progress in future calls. With that, I would like to turn the call over to Tony Hong, our CFO, for a more detailed update on our third quarter financial results. Hey, Tony.