SharpLink Gaming Ltd. (NASDAQ:SBET) Q4 2022 Earnings Call Transcript

SharpLink Gaming Ltd. (NASDAQ:SBET) Q4 2022 Earnings Call Transcript April 5, 2023

Operator: Good afternoon, everyone, and thank you for participating in SharpLink’s Webcast. Joining us today from SharpLink Gaming are Rob Phythian, Co-Founder and CEO; Bob DeLucia, the company’s Chief Financial Officer; 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 would now like to introduce Dodi Handy. Dodi, the floor is yours.

Dodi Handy: Thank you, Kat, and thanks to everyone who is listening in on the webcast. On behalf of everyone at SharpLink, we sincerely appreciate your interest in our company and hope we succeed today at providing you with a meaningful insight into our recently reported financial performance for the year ended December 31st, 2022, and hopefully to provide you with some perspective on what exciting things may be ahead for us is 2023 unfolds. So, let’s get this started. Hi, Rob, are you with us?

Rob Phythian: Hey, Dodi. Yeah. I’m here and good afternoon to all of you on the webcast. We’re delighted you can join us. Dodi, why don’t we begin by having Bob provide a summary of SharpLink 2022 financial results announced via press release this morning and provide everyone additional color on the numbers. Bob, take it away.

Robert DeLucia: Thanks Rob. I too would like to thank everyone for taking their valuable time to listen in. Looking at our income statements for the full year ended December 31st, 2022 and 2021, SharpLink revenue increased 177% to $7.29 million from $2.63 million, respectively. This growth was largely attributable to the new revenue contributions stemming from our successful M&A activities, which included the acquisition of FourCubed on December 31st, 2021, and the recently completed merger with SportsHub Games Network on December 22nd, 2022. Before I further drill down, is important to note that SharpLink receives the benefit of multiple revenue streams generated by four primary business units. The first is our Sports Gaming Client Services Group, which designs, develops, hosts and manages online free-to-play games and mobile apps for several of the biggest names in sports and sports betting.

These include the NBA, the NFL, NHL, Women’s Tennis Association, PGA Tour, NASCAR, BetMGM, Tipico, and Turner Sports, just to name a few. In fact, it is the business unit that has created the official NCAA March Madness Live Bracket Challenge for more than a decade, along with other fun popular freedom play games that you may be familiar with. Our Client Services Group also provides sports betting market integration services for major league sports and sports media clients. For the 12 months ended December 31st, 2022, this unit generated revenues of $2.49 million or 34% of the total sales in the past year. This compares to the revenues of $2.42 million or 92% of SharpLink total sales in 2021. Our second business unit is our new Fantasy Sports Group, which came into being with our merger with SportsHub at the end of 2022.

Through this business unit, SharpLink owns and operates a variety of real money fantasy sports and sports simulation games and mobile apps, and is licensed to operate in every state in the U.S. where fantasy sports is legal and in which we choose to operate based upon the financial viability of operating in that state. Despite only being able to recognize revenue as of the closing date of the SportsHub merger December 22nd through December 31st, our fantasy sports group contributed proxy $951,000 to an overall sales in those 10 days or 13% of the total 2022 sales. Our third business unit is our affiliate marketing international, or AMI, business unit, which came from our acquisition of FourCubed in December, 2021. This group is focused on delivering quality traffic and player acquisitions, retention and convergence to U.S. regulated and global eye gaming operator partners primarily across Europe through a proprietary affiliate marketing network known as PAS.net.

2022 revenues generated by our affiliate marketing services international group totaled $3.43 million compared to zero in the prior year. This was due to the timing of the acquisition, and it represented 47% of the overall sales in the past year. Our fourth and final business unit is our newly formed Affiliate Marketing Services-U.S. Group, which was launched in November of 2022. We created this unit to leverage our AMI International Group’s historical success in Europe and replicated in the emerging U.S. sports betting and iGaming markets. While this business unit is relatively new and subject to a phase rollout of product and services, it is a key driver behind SharpLink’s long-term growth strategy to deliver unique and expanding fan activation and conversion solutions to our U.S. sportsbook and casino partners yielding us a strong reoccurring revenue stream that is expected to exponentially scale over time.

In 2022, the AM-U.S. group generated revenues of $415,450 or 5.7% of the total revenues for the year. Moving down the income statement. Gross profit totaled $1.13 million for the year ended December 31st, 2022. This compared to a negative gross profit of $300,000 in the previous year, reflecting a 478% improvement. As a result, gross profit margin percentage also climbed rising to 16% from a negative 11% on a comparable year-over-year basis. The increase was primarily attributable to higher revenues in a mix of higher margin products and services sold in 2022 as a direct result of our acquisition of FourCubed and the merger with SportsHub. Now looking at expenses. For the 2022 year total operating expenses dropped 50% to $16.61 million from $33.20 million recorded in the prior year.

SG&A expenses accounted for $11.8 million of the total operating expenses in 2022 compared with $9.89 million in 2021 or a 21% increase year-over-year. Non-cash charges included in the total operating expenses were a $4.73 million goodwill and intangible asset impairment charge in 2022 and a $23.3 million commitment fee expense in the prior year. For the reasons I’ve covered after factoring total other income and expenses net of $185,000 and income tax expense of $11,000, the net loss from continuing operations for the year ended December 31st, 2022, totaled $15.23 million. This represented a 54% reduction from the net loss from continuing operations of $55.64 million from the prior year after other income expense of $29,000 and an income tax expense of approximately $4,200.

Net income from discontinued operations of SharpLink’s legacy MTS business totaled $70,000 for the year ended December 31st, 2022, which compared to a net loss from discontinued operations of $22.17 million in the prior year. Now moving on to the balance sheet. As of December 31st, 2022, we had total cash and restricted cash of $50.34 million, which compares to cash of $6.07 million as of December 31st, 2021. The increase in cash and restricted cash is primarily attributable to our merger with SportsHub. In January, 2022, we secured a $3.25 million loan note with our commercial lender Platinum Bank. It is important to note that we also assumed $5.39 million in debt obligations in December, 2022 from the merger with SportsHub, which stems from a $3 million term note and a $5 million reviving on credit that SportsHub had originally received from Platinum.

In February of this year, 2023, we closed an additional $7 million revolving line of credit with our bank and a $4.4 million convertible debenture with an existing institutional shareholder of the company. As a result, and notwithstanding an extraordinary development such as a large acquisition or other strategic opportunity, we believe we have sufficient cash available to us to fund our current business operations for the next year without having to raise additional debt or equity funds. With that, I’ve concluded my overview of the financial highlights and, I’ll invite Dodi to resume the floor. Dodi?

Dodi Handy: Great. Thanks Bob. Great job. I’d like to say that SharpLink operates in a very complex, highly regulated industry, and managing all the various financial aspects of this organization does require a level of skill, experience, and heart that is really tough to find. So Bob, I just want to say we’re really lucky to have you.

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Q&A Session

Rob Phythian: I couldn’t agree more. Dodi. Thanks Bob.

Robert DeLucia: Thank you.

Dodi Handy: Okay, Rob. So, now let’s turn our attention to the operational side of our very multifaceted business and talk about the vision for the future of SharpLink. So, we’ve made strategic acquisitions and we form new business units in 2022. Can you explain what the plan is for leveraging the respective strength assets and the talent that we got in those transactions to benefit SharpLink as a whole on a moving forward basis?

Rob Phythian: Sure, Dodi. And stop me if I get carried away. It’s something I’m pretty passionate about what we’re building here at SharpLink and I can talk about our business all day long if you let me. In the interest of time, I’ll try to keep it high level with some relevant drill downs. Start with the vision because that’s what’s guiding our decision-making processes every day. Every step we’ve taken since founding SharpLink has been purposeful and objective oriented. We have long understood that there’s a definite need and one that continues to be underserved for technology enabled solutions that are built specifically for the U.S. sports betting and iGaming markets. Yes, there are well established companies in Europe and other global regions, which have done a great job of creating fan conversion and performance marketing solutions.

But they’re built for those legal sports markets and have matured over years and years. But we also know, and others are finally starting to get it, is the solutions are not readily adaptable for the U.S. sports betting market, which by the way, is projected to be the largest sports betting market in the world. SharpLink’s vision is the power targeted and personalized fan experiences across the U.S. sports ecosystem through the delivery of homegrown tech innovations combined with impactful experience-based services that will give us the power to number one, collect and analyze deep behavioral data on fans. Number two, intelligently connect those fans with sports betting and iGaming content that will resonate with the fans. Number three, convert them into paying customers for our own proprietary properties and for our clients and trusted business partners who in turn then number four, capitalize on acquiring and scaling sports betting depositors resulting in higher and greatly enhanced user experiences because the SharpLink team has long worked in and around sports technology and media.

With the biggest names in sports for more than two decades, we understand far better than anyone, in my opinion, how to place the right content in the right place at the right time. Sports are about fan interaction, creating a conversation between fellow fans and opposing fans alike, and building that relationship between the fan, the team, and the sports that they love. By creating that dialogue, SharpLink can build further affinity for a sport and keep its fans engaged at a higher level, whether they’re in venue, watching from the comfort of their own home, or sitting at a bar with other fans. Through free-to-play games, fantasy sports, games and contents, compelling sports content and other engaging entertainment, we deliver sports betting offers directly to fans in a credible and trusted environment.

The result is operators benefit from lower acquisition cost per user, and considerable higher lifetime value from each fan. Therein lies the hockey stick growth opportunity for SharpLink. We deliver sports fans to our marketing partners through high quality, relevant tools, games and contents. We enable our customers and with the acquisition of SportsHub our own customers to build revenue driving and community building experiences across hundreds of businesses in the sports ecosystem. And we provide premium conversion and monetization solutions that improve the audience experience and brand results. Simply put, SharpLink is in the sports fan audience and conversion business. We intend to be among the biggest and the best in the business within the next 24 months.