SharpLink Gaming Ltd (NASDAQ:SBET) Q4 2021 Earnings Conference Call May 17, 2022 11:30 AM ET
Company Participants
Dodi Handy – Director of Communications
Rob Phythian – Co-Founder & Chief Executive Officer
Brian Bennett – Chief Financial Officer
Conference Call Participants
Operator
Good morning, everyone, and thank you for participating on today’s conference call and webcast.
Joining us today from SharpLink Gaming is Co-Founder and Chief Executive Officer, Rob Phythian; CFO, Brian Bennett; and Dodi Handy, Director of Communications.
Before I turn the floor over to them, I remind you that during today’s call, statements that are not historical facts, including any projections, statements regarding future events or future financial performance or statements of intent or belief are forward-looking statements and are covered by the Safe Harbor disclaimers contained in the company’s public filings with the SEC. Actual outcomes and results may differ materially from what is expressed in or implied by these forward-looking statements.
With that said, I’ll now turn the call over to Dodi. The floor is yours.
Dodi Handy
And thank you, Karen, and good morning to everyone who’s taken your valuable time to listen in today. Before we launch into our discussion, I’d first like to formally welcome both Rob and Brian to our call. So good morning, Rob.
Rob Phythian
Hi, Dodi, and hello to everyone joining by way of the webcast. We’re happy you’re here and really appreciate your interest in and support of SharpLink Gaming.
Dodi Handy
Great. And also with us is Mr. Brian Bennett. Hello, Brian?
Brian Bennett
Good morning, Dodi. I do want to thank everybody for participating in today’s call, and I look forward to sharing some key insights into several important aspects of our business and financial operations.
Dodi Handy
Okay. Thank you, gentlemen. So let’s get this started. Yesterday, after the market closed, SharpLink filed its results for the 12 months ended December 31, 2021, with the Securities and Exchange Commission on Form 20-F, which shows akin to a 10-K filed by a US-based reporting company.
As of today, despite being a US-based company, SharpLink remains classified as a foreign private issuer. Brian, first question is going to come to you. Why is that? And where do we stand on re-domiciling the company from being a foreign private issuer to being classified as a US-based reporting…?
Brian Bennett
Our business plan. As everyone is likely aware, in July of last year, SharpLink went public by way of a merger with NASDAQ-listed Martel Management Solutions, a company headquartered in Israel and one that has traded as a foreign private issuer on the NASDAQ since the 1990s. In order to reclassify SharpLink as a domestic issuer under the 34 Act reporting requirements, one of our top strategic priorities, we are required to implement a re-domiciling process that is highly complex, named SharpLink Gaming Inc., which upon our re-domiciling efforts being finalized as approved by the SEC and our shareholders, SharpLink Gaming, Inc. will become the surviving 34 Act reporting company.
In February, we filed a Form S-4 with the SEC, providing all details of our plan for re-domiciling. Following its review of our S-4 submission, the SEC determined that it was first necessary for SharpLink to amend our S-4 to provide for the inclusion of our audited year-end results for the year ended December 31, 2021, before they will permit us to seek shareholder approval of the re-domiciling.
With the filing of our audited year-end results yesterday, technically, we could amend our S-4 to reflect those results and we submit immediately. However, we believe the SEC will then request that we also provide more current interim financial information, our reporting requirement that foreign private issuers are typically not required to comply with until the end of the calendar year.
Nonetheless, we will – we are moving forward on finalizing our current 2022 results, so we can amend the S-4 as quickly as possible, and include both our year-end and our first half 2022 results in the resubmission.
Once the S-4 has been properly amended to reflect the year end and the first half results and subsequently filed with the SEC and assuming they have no further comments, we will move forward with finalizing and mailing the proxy statement to our shareholders so that they may then vote on the redomiciling the company and all that entails at the meeting of the shareholders.
Upon receiving shareholder approval of the redomiciling, Sharplink will be reclassified from a foreign private issuer to a 34 Act reporting company and will commence filing quarterly and annual results in keeping with the filing deadlines established for fully reporting domestic issuers.
Dodi Handy
Okay. Thank you very much for that update, Brian. And so is it safe to assume that the entire redomiciling process, that being giving consideration to SEC commenting period allowances, shareholder mailing, collection of proxies, et cetera. Will that be completed during calendar year 2022?
Brian Bennett
Yes. That is our objective and what we intend to achieve.
Dodi Handy
Okay. So let’s move on to discussing the actual year end results just reported for the 12 months ended December 31, 2021. Brian, can you share some highlights on that?
Brian Bennett
Absolutely, Dodi. Looking first at our results of operations for the year ended December 31, 2021, total revenues climbed to $4.15 million, up 82% from $2.28 million for the 12-month period in 2020. Breaking this down by defined business segments, our affiliated marketing services, U.S. business, which is charged with commercializing our C4 betting conversion technology contributed approximately 210,000 to overall revenues.
Our affiliate marketing services international business was only just formed with the acquisition of FourCubed, which occurred in the last day of 2021. Therefore, our results do not reflect any revenue contribution reported from this business unit for the 12 months ended December 31. That will change with the reporting of the first half 2020 results and moving forward.
Our sports gaming client services business, which is focused on creating free-to-play and fantasy sports games for our blue-chip customer base comprised of who’s who in professional sports leagues, teams and media operators contributed $2.4 million to our total revenues last year.
And finally, revenues from our legacy Mer Telemanagement business segment, which we refer to as Enterprise 10 contributed $1.52 million to our consolidated revenue performance for 2021.
Moving down our income statement. Total operating expenses increased significantly to $55.93 million from $1.63 million when comparing the years ended December 31, 2021 and 2020, respectively.
After deducting non-cash charges in 2021 of $48.95 million associated with goodwill impairment expense, commitment fee expenses, stock-based compensation and other non-cash expenses largely associated with our merger with Mer Telemanagement, total operating expenses were approximately $7 million.
This compared to total operating expenses of roughly $1.43 million in 2020 after deducting non-cash charges of approximately $200,000. For the reasons I mentioned, our net loss totaled $55.66 million in 2021 compared to a net loss of $1.14 million in the prior year.
Now, turning our attention to our balance sheet, cash on hand as of December 31st, 2021, totaled $6.76 million and $1.03 million in restricted cash compared to $2.5 million in cash as of the end of 2020.
Total shareholders’ equity increased rising to $14.19 million from $1.36 million on a comparable year-over-year basis in 2021 and 2020, respectively.
During 2021, SharpLink raised a total of $15.69 million in cash from our financing activities and subsequent to the end of 2021, secured a $3.25 million five-year term loan, which bears interest at a rate of 4%.
That concludes my review of the results Dodi, unless you have specific questions relating to the numbers.
Question-and-Answer Session
A – Dodi Handy
No, that’s great, Brian. And great job for hitting all the key highlights. As a reminder, if anyone on this call would like to conduct a much more thorough review of the audited financial results, we’d like you to take a look at our Form 20-F filed yesterday with the SEC, and it’s also accessible on sec.gov or on SharpLink’s website found at sharplink.com under our Investors tab.
Now, what I’d like to do is move on to our discussion regarding where SharpLink is at today? Where we are going? And how we’re going to get there? So, Rob, next questions coming to you. Where do you believe our industry is in its evolutionary process? And where do you believe SharpLink fits in the new US sports betting and iGaming ecosystem?
Rob Phythian
Thanks Dodi for that question. And let’s just start with the industry. In a Forbes article published in January of last year, it was noted that the market for legalized sports betting in the US exploded in 2021, doubling in size as Americans wagered nearly $53 billion throughout the year. This increase was due in large measure to the launch of legalized wagering in 11 new states — and of course, the more than $1 billion invested in marketing and advertising by some of the nation’s largest sport books like BetMGM, FanDuel, and DraftKings.
With legalized sports betting now available in 30-plus states and Washington D.C. with more states expected to join this year, things are really starting to heat up. According to one research study by Morning Console of US adult stages 21 and older, 18% reported betting on sports at least once a month in a December 2021 survey.
When the same survey was conducted in January of 2020, only 10% of that age range reported placing of that at least once a month. That represents an 80% jump in betters over the course of just one year.
Bloomberg reports that sports gambling companies are in pace to take — to make about $4 billion in net gaming revenue this year. And if California legalizes sports betting, the market could grow exponentially.
Legal sports betting in the US, once confined to Nevada, has gone mainstream. Since the Supreme Court in 2018 ended federal ban on industry expansion, more money is now wagered on sports in New Jersey than in Nevada.
As betting expands, the boundaries that once separated gambling from sports media and professional sports leagues are disappearing. Digital apps are making sports betting possible on mobile devices, which is increasing its foothold across America. And of course, it’s still very early in the game.
Brian Bennett
You’re right, Rob. It is early. So let’s talk about the technology that is helping the industry to mature on an accelerated basis.
Rob Phythian
So anyone investing in betting related tech-driven companies need to understand the new Sports Betting affiliate marketing enterprise software needs to be built. The old tech designed to develop to support the conversion of sports fans in the sports bettors in the European market isn’t easily adaptable to the US market without significant investment in redesign and reengineering.
What we have created at SharpLink is the nation’s first new build advanced technology solutions, specifically designed and developed from the ground up for affiliate marketing conversion use by the US Sports Betting and iGaming markets. Moreover, the audience owners, those being professional sports media operators, teams and leagues are now being held accountable for delivering quantifiable conversions of Fans to Bettors by the sports books.
“The free money phase” that followed over $1 billion in sponsorship dollars flowing to these audience owners over the past year is ending in our opinion. We heard firsthand last week at the iGaming next Investor Conference held in New York City from numerous major teams and media operators have to speak at the event.
Given these market dynamics, we believe the fund is just now starting for SharpLink Gaming. And frankly, it’s the moment we’ve been working for towards, through all our discussions with major league and media owners over the past 1.5 years. And as we have focused on building out our C4 technology and demonstrating its powerful conversion capabilities with early adopters, including the PGA and NASCAR.
Dodi Handy
Okay. So let’s talk about NASCAR, Rob. In late March of this year, SharpLink announced that its integration of our C4 bought behind the bet technology with nascar.com delivered some positive results based on the metrics. When assessing the conversion of NASCAR fans to sports betting depositors with BetMGM, for the first five weeks of the 22 NASCAR racing season, what was learned? Can you elaborate on some of the key data points? And can you reveal whether these head-turning results are winning SharpLink any new customers.
Rob Phythian
The bottom line is that our C4 engine performed considerably better than the conversion rate of prevailing bettor ads typically being relied on by the industry to drive online bettors to the books. In the case of NASCAR, we featured a BetMGM bet slip module directly on nascar.com’s main landing page incorporating our C4 Bet recommendation algorithms into that bet slip in legal betting stakes.
Once the NASCAR fan clicks on the bet slip, BetMGM promotional offer is provided to the fan. When comparing C4 against standard fan engagement metrics, the percentage of NASCAR fans to engage with the promotional offer embedded from BetMGM was 9.2%. This is significantly better than the typical 1% to 2% that a standard banner or button is pulling. Once the fan landed at BetMGM, over 72% of the fans registered and the percentage of fans who deposited money with BetMGM was 152% higher than the year before. We are proving that by applying the strength and capabilities of our proprietary C4 conversion engine, we can enable lead clients and sportsbook partners to fully optimize the benefit from personalized and engaging betting content, resulting in an increase in conversion of traditional sports fans into online sports betters.
The industry reaction to our NASCAR results has been fantastic, which has led to numerous discussions that we’re aggressively advancing with a broad range of operators, teams, leagues and sportsbooks. In fact, in just the past two weeks, I personally met with two major sports leagues, two large sportsbooks, a globally leading technology company and several others, including members of the press, interested in learning more about our C4 engine and its high-performance capabilities.
I expect we will have the opportunity to share more meaningful details on new customer growth in the coming weeks and months. Simply put, our technology works and is being proven by the metrics. We have strong partnerships with early market movers, NASCAR and the PGA and they are now leaning on SharpLink for free-to-play games, sportsbook integration, more advanced and more advanced services that will ultimately allow us to benefit from net gaming revenue opportunities, which is our Holy Grail…
Dodi Handy
Why are net gaming revenue is the Holy Grail, Rob, what do you mean by that?
Rob Phythian
So in net gaming revenue arrangements, sportsbooks pay out approximately 30% of their net gaming revenues to companies like SharpLink, in exchange for converting fans into depositing better and net gaming revenue deals or NGR deals, pay us in for the lifetime value of that user. Meaning every time a sports better originating from a conversion occurring through our pipes, places the bet, SharpLink is entitled up to 30% of the net gaming revenue generated from that better.
Therefore, the lifetime value of fans converted by better betters, two betters like SharpLink could yield a revenue channel, whose growth exponentially accelerates and increases over time. Another key driver for growth of our C4 enabled sports betting affiliate marketing business is continued state rollouts. As of today, SharpLink is now cleared to operate in 17 states, 14 of which we are allowed to participate in NGR deals.
As we succeed in expanding the number of states in which we can operate, the greater the audience of sports fans, we can reach and offer personalized sports betting offers on behalf of our sportsbook partners. The more conversions and best we’re able to facilitate through our C4 engine, the faster our revenues will multiply.
Dodi Handy
Okay. So that’s great, Rob. Let’s change direction. So now let’s talk about 4Q. On December 31, 2021, SharpLink closed on its acquisition of 4Q, which is an accomplished affiliate marketer with deep experience in real-money poker and other casino games that comprise the global iGaming industry. Can you walk us through SharpLink’s logic of acquiring that company? What is it strategic value to us? And what impact do you believe it will have on the growth of our company in 2022 and beyond?
Rob Phythian
So Dodi, to appreciate the value of this acquisition to SharpLink, you must first understand the talent that was retained will propel FourCubed forward despite prevailing challenges associated with the geopolitical environment in Eastern Europe.
FourCubed is a leading Affiliate Marketing partner to En TEM [ph] in Europe. And now due to the efforts of the FourCubed team and announced yesterday morning, FourCubed has been named Master Affiliate to the World Poker Tour’s, WPT Global Online platform.
FourCubed’s team, led by Tori Roberts, now Vice President of Affiliate Marketing at SharpLink, has a long track record and extensive experience in successfully growing net gaming revenues from operators benefiting from FourCubed’s PAS affiliate network, made up of over 12,000 sub-affiliates worldwide.
In addition to contributing a new revenue stream and positive cash flow to SharpLink, this team is key to helping our company establish our own global sub-affiliate network in support of our customers operating within the US sports betting market. And then, of course, there’s the opportunity to cross-refer iGamers and sports betters, therefore, generating even more robust growth for our company in the future.
I believe it is also important to add that building an operations team comprised largely of professionals with hands-on experience earned working within the European online sports betting in iGaming Industries, a simply smart business. The acquisition of FourCubed brings SharpLink, a team of key employees with this type of proven experience and know-how.
Longer term, you can expect SharpLink to continue implementing a workforce strategy focused on constructing an organization led by US experts with influence and experience in business building, advanced technology development and professional sports marketing, while also actively recruiting operating personnel that has extensive hands-on experience in the much more mature online sports betting and iGaming markets that exist in global regions outside the US with particular emphasis in Europe.
This approach to team building will allow SharpLink to fully leverage the unique strengths and entrepreneurial scale sets of a proven US senior leadership team and aligning it with the reach and operational experience of professionals, who have built successful careers within the European sports betting and iGaming industries, knowing firsthand what works and what doesn’t and applying that knowledge to the benefit of SharpLink.
Dodi Handy
Okay. Thank you. Next question is, can you provide us with some idea on how the sports game development side of our business has been performing? And what do you think is ahead for that business segment?
Rob Phythian
Sure, Jodi. Our Sports Gaming Client Services group is killing it. As noted in yesterday’s press release put out by the PGA of America, it was SharpLink that created the PGA Championship first free-to-play game. And as recently disclosed in an article published by SportTechie, SharpLink was responsible for creating the fun, highly engaging Stanley couple similar game plan to the popular Wordle game and the related Bracket Challenge for the NHL. We also created the free-to-play fantasy game for the 2022 Masters Golf Tournament held at Augusta National.
Other high-profile media coverage has resulted from our creation of the NCAA’s March Madness Men’s Bracket Challenge, the official bracket game of the NCAA March Madness Tournament as well as the new March Madness men’s starting lineup and the Women’s March Madness Bracket Challenge. In the weeks and months ahead, you can expect to see press releases and media coverage on other free-to-play and fantasy games that SharpLink is pioneering on behalf of major sports leagues, teams and media operators. Currently representing a collective viewing audience of well over six million plus game players in 2022, the aggregation of these audience should prove to serve SharpLink’s wealth as we encourage our free-to-play customers to expand the relationship with our company, embrace our solutions for the integration of sports betting into their digital media strategies.
Dodi Handy
Okay. Thank you very much. Now let’s address the big elephant in the room, Rob. We get this question a lot. There’s been quite a bit of rough going on Wall Street as of late. And it’s been very unkind to publicly traded companies, generally speaking. But to sports betting stocks, in particular, what do you make of this? And do you expect to see a recovery anytime soon?
Rob Phythian
So I believe there’s a long list of reasons why the overall market has been declining, rising prices, higher interest rates, inflationary concerns, the war in Ukraine and lockdowns in China, which are hampering supply chains across virtually every industry sector are just some of the reasons affecting market volatility.
Within the sports betting sector specifically, those of us, which operate public companies and have seen massive sell-offs in our stocks, resulting in plunging stock prices and market cap depending on what business and financial publications you read, everyone seems to have an opinion on why stock betting companies have appeared to fallen out of favor.
As I mentioned, I attended an industry investor conference last week, at which the prevailing tenor of the guest speakers and event participants, although tempered by the reality of the stock market, remain hugely bullish on the growth outlook of the sports betting and iGaming industries. Everyone seems to agree the market will rebound, particularly for sports tech companies, helping to fill gaps. They had apparent by the need to shift from — shift to profit-oriented growth strategies. Strategies powered by more effective user engagement, conversion and retention capabilities.
Based on the fundamental reasons for the creation of SharpLink, we believe we are ideally positioned to meet the underserved needs of the sports betting market and expect our stock price will ultimately reflect the true underlying value proposition inherent in our company, our people, our technology and our market penetration strategies.
Trust me when I say that I, along with every member of our leadership team and Board of Directors share our fellow stockholders’ frustration with SharpLink’s stock performance over the past several months. Moreover, because SharpLink’s officers and directors are all privy to material, nonpublic information that could affect our stock price, we are not permitted to trade in that period at this time. Thus, we are restricted from being active buyers of the stock, a source of great frustration for us.
In the meantime, ardently maintained the belief that performance moves markets, not the other way around, so achieving fundamental performance in our business is where we will remain focused irrespective of what price or stock is currently trading at.
Dodi Handy
Okay. Thank you very much, Rob. And thank you, Brian. Both of you have covered quite a bit of ground today.
Dodi Handy
But Rob, before we close today’s discussion, do you have any final comments you’d like to add?
Rob Phythian
Yes, Dodi, I’d like to reiterate our vision for the future of SharpLink Gaming. While we’ve made substantial progress over the past year to be in a strong position we are today, I firmly believe we have only scratched the surface of the true potential of our company, our intense obsession on delivering the most innovative and effective sports betting conversion technology on the market, should help to drive and amplify awareness of SharpLink and our depth of capabilities.
Good fundamentals reflect a good business. In a good business, we’ll command a premium valuation in the market. It is my promise to you that we remain committed to seeing our organization deliver upon our strong growth potential and to generate quarter-over-quarter strong financial performance moving forward.
With that, I’d like to thank you all for joining our webcast today, and thank you again for your continued support. We sincerely appreciate you for sticking with us throughout this journey, and we look forward to future calls with you to detail many progressive milestones, we expect to achieve in the coming months. Dodi, back to you.
Dodi Handy
Thank you, Rob. I also like to thank all of the shareholders who kindly submitted questions to us in advance of today’s call. We really appreciate your active engagement in helping us to prepare. For those of you who would like to listen to today’s webcast again, a replay of this call will be available later today on our website found at sharplink.com. So with that said, I’d like to wish everyone a good afternoon. Karen, the floor is back to you.
Operator
Thank you. Ladies and gentlemen, this does conclude today’s webcast. We thank you for your participation. You may disconnect your lines at this time, and have a great day.
