CA - FansUnite Entertainment Inc. (FUNFF) Q1 2023 Earnings Call Transcript

2023-05-16 16:55:04 ET

FansUnite Entertainment Inc. (FUNFF)

Q1 2023 Earnings Conference Call

May 16, 2023, 10:00 AM ET

Company Participants

Prit Singh - Investor Relations

Scott Burton - Chief Executive Officer

Graeme Moore - Chief Financial Officer

Conference Call Participants

Presentation

Prit Singh

Okay, let's begin. Hi everyone, welcome to the FansUnite. Q1, Fiscal 2023, Earnings Call. For those who are unfamiliar with FansUnite, FansUnite is a global sports entertainment and gaming company focused on the regulated and lawful sports betting affiliate market, which includes customer acquisition, retention, support and reactivation. FansUnite trade on the TSX, under the ticker fans, FANS and on the OTCQB, under the ticker funff, FUNFF.

My name is Prit Singh and I'll be the moderator for today's call. Before we begin, I would like to go over to legal disclaimers. I will pause here for a minute, so our viewers can read it.

On today’s call, we will be covering FansUnite’s Q1 fiscal 2023 financial and operational highlights as well as its growth outlook for the remainder of 2023. After the presentation component of the webinar, we will be hosting a Q&A session at the end of the webinar. If you have any questions during the webinar, feel free to send them in using the zoom Q&A function at the bottom of your screen. If you are calling in to listen to the webinar today, you can e-mail your questions directly to ir@fansunite.com, again, that’s ir@fansunite.com. We will address these questions during the Q&A session.

Our presenters today will be the CEO of FansUnite, Scott Burton and CFO of FansUnite Graeme Moore. I will now turn the conference over to Graeme Moore, CFO of FansUnite to discuss the Company’s full year and Q1 2023 financial results.

Graeme Moore

Thank you, Prit. Just everyone knows how this will be structured similar to prior quarters. I'm first going to speak to the statement of profit and loss of the three months ended March 31, 2023, or as often refer to it Q1, 2023. I will then move on to the balance sheet. This quarter for us is pretty unique in that subsequent to quarter end. We announced the sale of the source code of Chameleon, as well as the sale of McBookie, our whole own Scottish sports book subsidiary.

As a result, some of the numbers are going to look a little different in our Q2 reporting when we get there. But nonetheless, I want to give a full breakdown of Q1 here, and we will address the future in depth in our Q&A section. During Q1, 2023 revenue decreased to $8.7 million when compared to $9.7 million over the same period in the prior year. This changes primarily as a result of an usually high activity in the prior year as New York legalized sports betting in January 2022.

A large influx of sports books using affiliates in an attempt to capture early market share lead, led to increased revenue from our affiliate revenue segment. Affiliate revenue is $7.3 million for this quarter compared to $8.5 million in Q1 2022. This decrease was offset by IGaming revenue, which increased to $1.4 million for the quarter up from $1.2 million in 2022. IGaming activity increased as McBookie continued to see strong revenue and there were full quarters of operations for white label partners Better and Dragon Bet.

During Q1, FansUnite had cost of revenue of $3.3 million compared to $3.8 million over the same period in the prior year. Our gross margin was 62% as compared to 61% in Q1 2022. The improved overall gross margin percentage primarily relates the increase in efficiency related to American affiliate, specifically our betting hero brand. This was driven by the sale of certain lower margin assets in 2022 and early 2023 compounded by the continued diversification of betting hero business line.

Overall, margins are expected to trend upwards as affiliate revenues become the dominant segment for FansUnite. Our affiliate margin was 64% for Q1 2023 as compared to 63% in Q1 2022. Net loss for Q1 2023 was $6.2 million as compared to $9.2 million for Q1 2022, due primarily to the non-cash expenses. Non-cash expenses totaled $6.4 million as compared to $10.3 million over the same period in the prior year. During the period, non-cash expenses related to the accretion of our contingent consideration decreased to 569,000 as compared to $3.2 million for the same period in the prior year. This was due to the restructure of the contingent consideration that occurred in September 2022. There was also a decrease of share-based payments to 685,000 as compared to $1.9 million in the prior year.

Our main operational expense was salaries in wages, which increased to $3.7 million. Although the company reduced average headcount to 101 for Q1 2023, salaries in wages increased as a result of annual performance raises, inflation, and the hiring as technical subject matter in industry experts to support the growth of the business. We do expect this number to decrease slightly in Q2 with the aforementioned McBookie and Community and Transactions and then see a significant decrease in Q3.

Total assets decreased to $75.1 million as of March 31, 2023 as compared to $77.5 million as of December 31, 2022, our year-end. During current quarter, there was amortization of intangible assets of $5.1 million, which was offset by a $2.3 million increase in cash primarily driven by the March non-broken private placement. This decrease was also mitigated by a $544,000 increase in total receivables. Mostly, from the activity during the NCAA March Madness Basketball tournament, as well as the sale of BetPrep.

Our total liabilities remained relatively consistent at $34.8 million as of March 31, 2023 as compared to $34.5 million as of year-end. As of March 31, the company's cash position increased to $5.2 million from $2.9 million at year-end. The increasing cash for the quarter is largely due to the receipt of a non-broken private placement for gross proceeds of $3 million. Offset by $226,000 of interest paid in relation to the bank indebtedness and $300,000 paid for earned out consideration. As we'll get into later, we've decreased our outstanding debt significantly with these two transactions and expected decrease in interest expense going forward.

That's all for the financial update on FansUnite, and I'll turn the call over to Scott Burton, our CEO.

Scott Burton

Thanks, Graham. Yeah, over the operational highlights for the first quarter, and then in Q&A, we'll cover more of the future looking stuff for FansUnite. So we'll start with the sale of BetPrep. As we continue to work on our plan to make sure we're a capital positive and focus on the key business units, we agreed to sell the BetPrep site to the Australian Entertainment to operate the site best odds. The BetPrep product was an early stage further away from profitability than we needed it to be. When we talked to best odds, they had a real good vision for what they could do with BetPrep, and with their product they had a good outlet for it, they'll see it commercialized Better in the near term.

So that's sale allowed us to remove the cash and burn of BetPrep on the Fansitite business, but we still retain the upside potential with what we think that best odds group can do with that site. In our agreement, best odds will pay as a 30% revenue share for 36 months, subject to a minimum monthly guarantee, so we have the minimum monthly payments coming, and we've agreed for those to begin in September, which allows them to do the integration and get ramped up.

We talked about the Super Bowl, so in February, we've given update from that weekend, and the performance of our customer acquisition brand and betting hero. So over the three days prior to Super Bowl and through the end of the game, they deployed over 350 ambassadors at 250 locations across the U.S to activate Better for our partners. During the week, betting hero registered more than 6,700 new first-time depositing customers for its partners. They continue to break their records every year, and we've seen recently all the awards that they've been getting, so things would be very strong in performing business unit.

On March 16th, we closed a non-broken private placement for proceeds of just over $3 million each unit there consisted of a common share and a common share purchase warrant. That financing was led by a strategic value ad gaming investor, Tekkcorp. That's run by a number of ex-gambling executives and it come on board as a strategic advisor to the group. In addition to Tekkcorp, who did just over $1 million at the financing, we had good support from insider's management.

So through the first quarter, we continued to focus on gaining our operational and financial efficiencies and that culminated in the sale of McBookie and the community platform code subsequent to quarter end. So the sale of both of those assets allows us to focus on growing the business, the cash flow sides of the business and help drive shareholder value going forward.

I'm a little betting here, they continue to expand its U.S footprint by launching in Ohio and Massachusetts. They're currently operating over 15 states in the U.S, and as mentioned, they generated strong results this year and came one through the Super Bowl and March Madness tournaments. The overall affiliate revenue to the business in the first quarter was $7.3 million, and it March 31, 2023. So it's a part of our strategy to continue diversifying revenue streams and help smooth out the seasonality of the U.S sports calendar.

We're focusing on growing other units within Betting Heroes to complement the successful live activation business that they built. The two new units are you can see Hero Research and Hero Hotline. So it's the sports betting you know gaming becomes legalized in more North American states. We'll continue our aggressive expansion into those markets and partnerships with our existing estimates and bringing on new affiliate customers in the U.S.

In addition to the state expansion that we expect to see and also be launched by a gaming in a number of states. We're going to grow those other two lines of business, the Research and Hotline. So here Research is a comprehensive product testing competitive analysis and the sport consulting service we can offer to new and existing partners. The Hotline is a customer acquisition retention and development resource designed to help Better anywhere on it be at any time. The great thing about both of these units is they leverage the existing hero team and the existing client base, which will help make them high margin business. And grow from the existing relationships with the betting hero team is built over the years.

With global reaching profitability will continue where we left off in 2022 by assessing and streamlining the various business units to make sure maximizing efficiency and approval. We're on revenue growth and margins. Consistent with the past profitability we've conducted strategic reviews on a number of segments to identify as operational -- Opportunities for operational financial efficiency. This led to the sales that we talked about of the vetting analytics brand BetPrep, McBookie and most recently our community and source code sale.

The sales McBookie sold for more than $5 million in cash, which was over seven times. The record 2022 EBITDA and 2022 was an exceptional year in part because there was a World Cup, which always helps especially U.K bookmakers. So we saw significant profit on the sale as we acquired McBookie in March of 2020 for CAD $2.2 million. That included $1 million in cash and $1.2 million in shares. And then a May 8 we closed the sale of the community and source code to Better for CAD $10 million dollars in total consideration. That included up front $3 million in cash and $2 million in preferred shares of Better. And then an additional set of milestone payments of up to $5 million.

People over the next 12 months following the close of the transaction and that's upon achievement of certain integration and time-based milestones. The additional CAD $5 million is payable the same as the up front, which is $3 million in cash. And another $2 million by way of ordinance to purchase preferred shares and Better at a price of U.S 1 cent per preferred share. After the transaction we retain the use of the community code to further develop and maintain the platform. We're currently supporting our first B2B client of Dragon Bet on the platform now. And we also retain the right to sell that platform again if we if we choose to.

So if we look as we talk about the focus on the cash flowing businesses, the high margin and the growth potential. We're looking at the affiliate part right now and that's where we're focused right currently. So we look to grow these off the strong results of betting here. We've completed a number of initiatives with the props brand which has resulted in an 8x increase in year or year. We're having you for the last 12 months. We built that upon our own digital affiliate platform. So now that we're seeing results that platform is ready to scale with other digital affiliate brands that we own. And these businesses will continue to generate higher revenues and improve profitability for fans unite, which is the focus for the rest of this year. So that's the portion that covers the first quarter of 2023.

I'll turn it over to Prit for the Q&A and then we'll talk a bit more about the rest of the year.

Prit Singh

Perfect. thanks Graeme thanks Scott.

Question-and-Answer Session

A - Prit Singh

[Operator Instructions] First question is for Graeme.What are FansUnite plans to scale revenue growth and improve overall growth margins?

Graeme Moore

Yeah, first the first thing is kind of what we've been saying is focused on the largest most profitable revenue segment, which is our U.S. affiliate business specifically Betting Hero. The affiliate segment generated '23 of our $27.3 million in revenue in 2022. So while the divestments that we've had of McBookie and the source code are critical for us as a business and do really help strengthen our balance sheet. This is all about what we do best, what for us is most profitable and how we can focus on that and then continue to do it Better.

As I mentioned in one of my sections, the affiliate is the highest margin business, it's the highest cash shattering business. So I expect we'll see margin improvements to come as we continue to scale and complete strategic initiatives and removing cash burning segments of the business.

Prit Singh

Just to follow up to that, when does FansUnite expect to become profitable?

Graeme Moore

Yeah, I mean, if you look at our statement of cash flows, our operating statement of cash flow is positive and Q1 not massively positive, but it is positive. If you look at the affiliate business, it thrives during football season, you know, it is U.S. driven and the U.S. sports revolve around football, March ban. This is also a huge rest. So football doesn't really kick back into gear until Labor Day, which is in September. So we did this past quarter, we did a small financing, it ensures we could complete the transactions that we completed nearly May. It ensures we can get through this two slower quarters ahead of us before football season kicks off and then we look to be cash flow positive from Q4 of 2023 and beyond.

Prit Singh

Okay, great. This question on Betting Hero, besides entering new states, what are Betting Heroes plans to scale its operations?

Graeme Moore

Sorry, as muted, I'll take that one. There's a few for Betting Heroes, so we talk about the new states, which we know will happen, and we still have some very big states to come. So we always talk about sort of the big three path for New Florida and Texas. There's also opportunities within existing states that they mature. So they're very solid in the states we're in, but typically in the past we've been just looking at major one or two major city centers within a state. So as those states mature we can we can widen our spread within the state to other areas. The role of IGaming, so that's something that I don't think people have recognized the potential for.

So we looked at the size of the hero business today, which is largely off the back of sports betting, IGaming is what most people would think of when they talk about online casino. So as online casino and IGaming get regulated in the same state if they haven't yet. One that's a whole new set of customers for us, but that business is bigger than the sports betting business. That means that one we lose the seasonality, so unlike casinos run in 24x7. We leverage all of our existing customers because every sports book wants to turn on casinos click as possible and CPAs are higher.

So we talk about CPA being the main sorts of revenue for like betting hero or props, which is cost per acquisition. So that's every time we supply it first time to pause it or so as we start doing that with casino players we get paid higher CPAs. So we have some massive upside potential on revenue, just as existing stage start to roll out the IGaming and again it's just leveraging our existing people and our existing clients. So very much that's a huge, huge opportunity.

And then we talk a lot about the other two lines of business, which are really just getting going, but start to see traction. And those are the hero Research on hero Hotline, you know, I touched on them briefly. But hero Research, again, is leveraging all of the people and information and knowledge that we've been gathering as betting hero over the years. So there's no company in the U.S. that has had more face to face interactions with interested sports Betters than the betting hero group. So what we've leveraged that into is a Research division. So there's a few ways that we generate revenue there. But what they do is they can do product testing where you consume or in competitive analysis and then also bespoke consulting. So the few components is there's a recurring subscription model. There's always Better coming. So that's recurring. There's always new Better.

But with a subscription model and research, but we get paid monthly by our clients to provide them with research reports on the states and you'll find things in those reports like trends. You'll see marketing reports on what people are doing, other marketing campaigns, our rankings to see how all the operators stack up against each other, customer sentiment, customer awareness, and then on the bespoke research studies, we can get paid for contracts by existing clients who maybe want to go into a market that they're not in and we can do market entry research. We do respond in service. So we have access to hundreds and thousands of people that we can ask questions of.

We do end up interviews and then a really powerful one is our product testing capability and so as we mentioned, we've up to 400 heroes out there. We've got a very good group of testers that know every product in every state. So we can get new features or branding products into the hands of many users who know exactly what they're trying to do and how they stack up. So that's the research arm.

And then there's the hotline side, which is more about customer attention and customer development to help the Better. We would say anywhere on any habit any time, again, because different than an operator, we know every product in the market. We know all the friction points. So we know if they have some KYC challenges. We know if they have payment issues. We can help users very quickly get through that through a hotline.

And if we do that, we can deliver a huge value to our partners, the biggest drop-off is typically on that sign up. And if you miss them there, you may not get them back because often people are trying to get the app because they want to bat on an event they're watching in a casino or something and it's one of the biggest complaints that we've heard from users is if they do have an issue trying to get in touch with a large operator.

They may take a dare to through support. But we can now offer that service to our operators and again, leveraging the groups we have. So these two businesses have huge potential. And I think if you look at the, Jane Jeremy found into hero business. I think they look at these is having the potential to reach the same scale as the activation very quickly.

So that's what we're very excited about these pieces of business. They leverage what we've got. We're at scale already in the activation side. And it uses our existing customers and it turns into pretty high margin business.

Prit Singh

Okay, thank you. Next question. No, you touched on this a little bit. But can you explain the rationale behind selling McBookie?

Scott Burton

I think there is, I guess, different times. We talked a lot about last year of simplifying the business and we heard that. And from a lot of sort of different angles, analysts, banks and institutions, that we had a few too many business lines. And the B2C, the directive consumers, one that we identified that we were going to pull back on.

We weren't necessarily actively looking to sell McBookie at the time, but we weren't going to be doing any more B2C outside of McBookie. We were no rush to do anything with McBookie as we've said, it was a profitable business. We've seen smarter growth year on year, which was great, but we hadn't approached to acquire McBookie at a very good valuation.

And as we looked ahead at really the UK market, I don't know if people follow much, but there's been a lot of talk about the UK GC, which is the UK gambling commission's white paper. There are some pretty strict rules coming into place in the UK around advertising, around player protection limits, which is going to make the industry over there a bit more challenging.

No doubt that Paul and Damien can continue to be successful there, but there will, I think, be increased spending on marketing or trying to find ways to market and I think margins are going to tighten that. So last year was a record year for McBookie and again, we mentioned the World Cup. So that helps. Anytime it's a World Cup year, it helps McBookie revenue. So off the back of a record year, we had an offer for over seven times EBITDA all hash, which was, we could not turn that down. So it allowed us to see effectively, 70 years of revenue now, all cash.

And again, the numbers there, we sold that for over CAD5 million off of a purchase we did in March of 2020 for CAD1 million cash and 1.2 million stocks. So it was a very good transaction for us. And Paul Damien and McBookie are going with a group that are going to really be focused on the B2C segment.

The second part of that is was on the community and in that one, we sold that to Better. And we had decided that the deal Better last year launched the first site with them in January. It was a three-year agreement. But we knew early on that their plan was to eventually own their technology, bring their payment house. And they're going to do that one of two ways.

They were starting to build out a team that could potentially build that over the course of the contract. Or they're going to buy and this was the largest cash consuming piece of the business as well on a development site. We'd largely done a lot of the development. So, we were going to be looking at ways to reduce the headcount there to bring down the cost of supporting that technology going forward.

So the sale allowed us to really bring all the potential revenue and profit from the Better deal that we had over three years. We brought it forward to today. We still have the upside potential of having some equity in Better and it's significantly reduced our cost.

So as Graham mentioned, we'll see some of that impact in Q2 but we'll really start to see the impact of that cost reduction Q3 and beyond. So we still retain the right to use the code. So we are still, as I said, supporting Dragon Bet on platform. We can continue to develop on top of it. But one of the really good parts of the deal is we have the ability to to resell again the code if we choose to. So, we retain that right as well. So we can still see plenty of future value out of that.

Prit Singh

Perfect. Thank you. Do you have any plans to initiate stock buyback.

Scott Burton

We, still have our NCIV in place, which allows us to do that and we've done some in the past. We've been, I would say, very focused and heads down on the strategic initiatives with divestitures and then planning to get to cash flow positive this year. So we've been a lot more on the preserving cash at this time.

As Graham said, we did the small financing. We want to ensure that we get through the real big cost reductions get through the two slower quarters. Then at that point, when we move to a go-forward cash will positive basis and Q4, we can take a look at the using the NCIV at that point.

Prit Singh

Okay. Thanks. I'm just going back to Camillion, if you can clarify a little bit of unsourced code is Better able to resell this platform, now that you've sold it to them.

Scott Burton

As a ability, they, they can develop on it as a B2C and then if they were to sell as a company, it would go with it. But it's not as a B2B product.

Prit Singh

Okay. Thank you. Are there any deals happening in Ontario?

Scott Burton

One deals, I'm trying to kind of deals there. If we're talking, affiliates, right now, the affiliate space there is still, I would say, influx and we're part of that discussion. One is, my involvement with the Canadian Gaming Association, but then there's a round take on it affiliate, which is trying to steer on the AGCO. So the challenge in Ontario is it's a big ray in terms of affiliates.

Getting here as gone in and done some of the research work and testing and they have it ready to go. But the rules are a bit unclear for the operators. So the concern right now, the operators is if affiliates get outside, then the operators are the ones who get punished. And they're not totally clear on the rules of what can be done as an affiliate.

So once that gets cleared up, which, I'm sure it will, we're ready to go and we will be in there. And yeah, expect it to be a very good market once some of those things get worked out.

Prit Singh

Great. Just, last question, this all comes up. What is the catalyst that that's just going to expect in the next six to 12 months?

Scott Burton

Yeah, for us, we're always going to see as state token that will be a big one for the business and the US and as I mentioned it's Ontario. So Graham talked about that spike we saw in Q1 of last year, which was off the back of New York. So again, the underlying affiliate business is very strong and we've got plenty of growth potential and we can improve margins, which is hugely important.

But as we see states, we're going to see spikes as those states open. So big states legalizing will be a very big catalyst for the business. Cash flow positive again, we talked about that a lot and I think once people see when we get into Q4, which is where, the work we've done in the cost cutting will really be in full effect in the revenues we ramped. Being cash flow positive company on a go forward basis, I think that's the main catalyst we've been focused on and that's how we think we are going to drive shareholder value and get the share price moving.

And then you'll see more outreach from us now that we've done this work. So, these deals get announced and they seem probably quite sudden, but there is months of where it goes into it and that's what the team we've been doing for many months now to get to this point.

Now that we've done the broken sort of the back of all the large work, you'll see us out there a lot more telling the story and then making sure that we get caught Better, I think, in the market, closer to what it really comes, we're undervalued if you look at us on a multiple basis with the other constant that space and that's really what we've been focused on doing is getting the story simplified and now we'll be back out there pushing that.

So I do expect some animals coverage we've had, in bound now, since we announced the two acquisitions now that people are getting a clear picture of what the revenue and the profitability looks like expect that will help the catalyst as well when we get coverage.

Prit Singh

Great. So with that out of the way, so thank you Scott and Graham. That's all for the Q&A session today. Just a reminder to those unfamiliar with FansUnite, the company trades in the TSX, some of the ticker FUNFF and on the OTCKB under the ticker FUNFF.

Just with that out of the way Scott and Graham, any last voting reports.

Scott Burton

Yeah, I think our message or quite some time starting mid to late 2022 has been pretty consistent, it's become cash flow positive. I think our recent moves have really positioned us to achieve that. And we are going to continue to push for operational efficiency. We're going to continue delivering maximum value for our shareholder and really what we've done here is just position ourselves for significant organic growth and I think that's a really strong place for us to be as a company.

Graeme Moore

For me, I would say, moving forward, we now have a path that we can be a dominant player in an industry in the North American market. And we're going to keep pushing on that and building off of the high performing businesses we have and we do have a couple as we, I think we've shown a completed lottery structure to get us this point.

And if we isolated the results from the live activation business of 2022, that produced an EBITDA of about $5.6 million. So that's a cornerstone that we have that's continued to grow. And that's what we're going to be able to build off of and get to say a very good cash flow position.

We've also done a lot of work on the balance sheet, which we'll see by reduced debt and increased cash position and then you'll expect to see is out there a lot more telling the story. I think it's mentioned that, but we are now in a position where the work's done and we can get back out and get some new people interested and get some I think some analysts coverage and institutional involvement.

Prit Singh

Perfect. So Scott and Graham, thank you for your time today. Our audience, we will record this call. So we will be sending out a record of call to all of you. If you have any questions, please do not hesitate to email us at ir@fansunite.com. Again, that's ir@fansunite.com.

Thank you for your time today.

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