Bragg Gaming Group Inc

TSX:BRAG

Earnings Call Transcript 2020-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Bragg Gaming Group Q2 2020 Earnings Call. [Operator Instructions] As a reminder, today's conference is being recorded. [Operator Instructions]I would now like to introduce your host for today's conference call, Yaniv Spielberg. You may begin.

[Yaniv Spielberg, Chief Strategy Officer & Company Secretary]

Good morning, everyone, and thank you for joining our second quarter 2020 earnings conference call. During today's call, we'll review Bragg's financial and operating results for the second quarter of 2020. Following our prepared remarks, we'll open the conference call to question-and-answer session. The call today will be led by myself and -- alongside Ronen Kannor, Bragg's Chief Financial Officer; and Adam Arviv, interim CEO.I'd like to start the call with some brief cautionary remarks regarding certain statements that may be made on this call. Certain statements made on this conference call in our responses to various questions may constitute forward-looking information or future-oriented financial information within the meaning of applicable securities law. Statements about expected growth, prospective results, strategic outlooks, and financial and operational expectations, opportunities and projections rely on a number of assumptions concerning future events, including market and economic conditions, business prospects or opportunities, future plans, strategies, technological development and anticipated events, trends and regulatory changes that affects the corporation, its subsidiaries and their respective customers and industries. While we believe these assumptions to be reasonable, they are subject to a number of risks, uncertainties and other factors, many of which are outside the corporation's control and which could cause the actual results, performance or achievement of the corporation to be materially different. There can be no assurance that these assumptions or estimates are accurate or that any of these expectations will prove accurate. For a complete discussion of these factors, please refer to our recently filed press release and our other publicly available disclosure documents are available on SEDAR.The conference call will be a little bit different this time around, and I'll lead the conference call. So good morning, everyone, and thank you for taking the time to join our earnings conference call. On today's call, I'll provide an update on our main asset Oryx as well as walk you through our recent operational developments. Following my comments, our CFO, Ronen Kannor, will run through our financial results for the second quarter.I'd like to address the corporate changes announced in our release on Thursday first. Our CEO, Dominic Mansour, has taken a paid leave for personal reasons. With that said, Mr. Adam Arviv, the founder of the Bragg business, has taken the role of interim CEO. He's on the call this morning, and he'll be happy to answer any questions. With that, I'll dive in some operational highlights.We've had a strong quarter and experiencing record growth, making continuous progress, diversifying our revenues, expanding into new geographies. As a reminder, our main asset ORYX Gaming, offers a full turnkey retail, online, mobile and iGaming platform as well as an advanced content aggregators for both lottery and marketing and operational services.We continue to grow rapidly, building on the growth trajectory established in 2019. Revenues for the second quarter grew exponentially to EUR 12.1 million. This represents a 107% increase from Q2 of 2019 and a 38% increase from Q1 of 2020. We also experienced EBITDA increase to EUR 1.8 million. In the first half of 2020, our revenues grew by 74%, with growth mainly seen within our games and content services offering, we attribute this growth to a number of initiatives we've undertaken, all falling under 3 key pillars of growth. The 3 key pillars of growth within Oryx that we've been focusing on are to enhance our technology and product offering; diversify our revenues; and expand into new geographies. And collaborating with key players in the space through strategic collaborations and content deals. I'll provide an update on our activities within each of these areas.So we'll start by talking about the enhancement of technology and product offering. Our casino product, Oryx, is a -- Oryx's primary growth comes from the casino product and aggregator platform. Over 8,000 casino games are now seamlessly integrated and can be accessed through a single player account. Dedicated resources to continuous improvement of our platform, especially now with the uptick in traffic due to the increase in virtual gaming and activities.New features that we've rolled out in the first half of 2020 includes real-time tournaments and leaderboard tools. These tools enable operators to set up slot tournaments across multiple game providers with real-time data feeds, which allows players to track and compare the results with others, taking player engagement to the next level and increasing retention for operators, which, of course, in turn, results in higher revenues for Oryx. The data analytics platform allows for real-time collection and analysis of data from internal as well as third-party systems. Enabling operators to gain a better understanding of their customers and more effectively target and engage them, then going down to retention of customers for our operators and resulting in better results for the Oryx business. All these new features are available through a simplistic single integration. We closed contracts to integrate at a significantly faster pace than the industry standard. We -- the average for us is about 2 to 4 weeks compared to the industry standard of about 3 to 6 months.The second pillar is diversifying our revenues and expanding to new geographies. Our global customer base and footprint is growing. There's new customers coming onboard each quarter. As you guys have seen from the release, we onboarded new clients in the second quarter, which continues to grow from the first quarter. We also continue to focus on customer diversification, both by geographic expansion and by decreasing our dependence on our top customers. We signed agreements with 11 industry-leading companies in the quarter, including MaxEnt and SuperBet. We're in discussion with additional 25 customers to be onboarded through the rest of the year. Some of them have already been signed or waiting to be integrated and some of them we have heads of terms agreed on and will be signed and integrated. In terms of the diversification, we're pleased to say that our customer concentration is improving, with only about 45% of our revenues coming from our top 5 customers. And that's down from 66% in Q2 of last year. In terms of geography, entering key geographies such as Croatia, Latin America and Romania, we continue to build out our presence in the U.K. and the U.S. for eventual rollout into the U.K. and the U.S. We decreased our dependence on the German-facing operators, with German-facing operators now represent roughly 28% of our revenues. That's down from 47% in Q2 of 2019. We focus on diversifying new geographies in order to reduce exposure to any single country. The third pillar is the collaboration with key players in the space through strategic collaborations and content deals. A new partnership deal with New York-based Seneca Gaming Corporation and Kambi Group that was signed in late 2019 represented our entry into the lucrative U.S. market. As you guys may recall, we're providing Seneca with casino services and player account management to the 3 New York casinos. We are advancing the technical integration and hoping to be live with the Seneca Gaming Corporation in their 3 casinos in Q1 of 2021. We continue to sign content deals with key providers in the space in order to enhance and supplement our unique content offering.I'll turn to looking ahead. We anticipate very strong growth throughout the rest of 2020. We've already experienced great trending momentum in Q3. While the global outbreak of the COVID-19 has had, and continues to have, a significant impact on the global economy, the online gambling industry has experienced a positive momentum like other online industries. And as a result, Bragg has benefited from this positive momentum. We've actually experienced a significant increase in traffic as people explore entertainment alternatives they can enjoy in their own homes, and we hope to build on this momentum throughout the rest of the year. Looking ahead, our strategy is focused on growing our B2B gaming solution through Oryx. We continue to invest in our platform and integration capabilities in order to provide the best products and services to our customers. We're focused on growing our international reach in regulated markets and strengthening our client base in addition to entering new geographies, including the lucrative North American ones. And we have financial plan, capital restructuring and strategic initiatives that we will discuss further in today's call or on today's call. We're confident that we're well positioned in the fast-growing markets and we have the tools that we need to continue on this amazing growth trajectory that we've experienced in the first half of 2020.With that said, I'd like to turn the call over to Ronen Kannor, our Chief Financial Officer, who will run you through the second quarter and the first half financials. So Ronen, on to you.

[Ronen Kannor, Chief Financial Officer]

Thanks, Yaniv and Adam. Good morning, all. I'll run through the highlights of the second quarter and the first half financials. Just to clarify, all figures are presented in euros. It's important how we're reporting our financials in our MD&A.With regard to the second quarter, the group revenue for the quarter, ended 30th June, increased for the same period in the previous year by 107% to EUR 12.1 million as opposed to previous year, which was EUR 5.9 million, and by 38% from the prior quarter, while maintaining its solid quarterly growth momentum since Q1 2019. The gross profit increased compared to the same period in the previous year by 100%, to EUR 5.1 million as opposed to EUR 2.6 million previous year, with subsequent margins decreasing by only 1% to 42%, mainly as a result of revenue classification and growth towards content and aggregator. The adjusted EBITDA increased from the same period in the previous year by EUR 2.1 million, reaching EUR 1.8 million in the end of this quarter as opposed to a loss of EUR 0.3 million last year, with subsequent adjusted margins -- EBITDA margins increasing by 19 basis point, reaching 14.4% in the end of this quarter. Just to remind you, it was negative 5% in previous year. And this is due to the result of reaching high scale and tight cost control. The total net loss for the period decreased by EUR 5.3 million from the same period in the previous year to EUR 0.4 million positive as opposed to net loss of EUR 5.7 million negative last quarter. This is due to the result of increased revenue and scale, share-based payment credits from the sale of the GiveMeSport unit. And also, we didn't have any losses of the remeasurement of the contingent consideration in this particular period.With regards to the first half highlights, the group revenue increased from the same period in the previous year by 74% to EUR 20.9 million as opposed to last year with EUR 12 million. The group revenue growth was mainly in gains in content services, as Yaniv mentioned, and demand for the unique games and content proposition material to grow. It's important to highlight the company's growth in the period has been underpinned by continued investment and innovation in technology and product offering, which includes the launch of Oryx Hub, the launch of new data analytics platform and customer engagement platforms, which is demonstrating again and again the potential of the group to further leverage its technology to accelerate growth.The adjusted EBITDA for H1 amounted to EUR 2.5 million as opposed to only EUR 100,000 the previous year, an increase of EUR 2.4 million for the period with margin increasing by 11 basis points to 12%. Cash flow from operating activities amounted to EUR 3.1 million during the H1 period as opposed to a negative EUR 2.3 million last year, mainly as a result of working capital movement. The cash flow used investment activities predominantly is attributable to software -- capital and software development costs. Cash and cash equivalents as of 30th June, 2020, amounted at EUR 2.5 million as compared to December 31, 2019, with only EUR 0.7 million.I will finish with the working capital position. The total current assets as of June 30, 2020, amounted to EUR 11.7 million as opposed to December 31, which was EUR 8.3 million. And current liabilities, including the deferred consideration, which is all now presented in a short-term liability, amounted to EUR 44 million as opposed to December, which was only EUR 20.8 million. Finally, as you know, you can find more detailed information on our financial performance in our June 30, 2020, financial statement and MD&A on the SEDAR or on our Investor Relations page on our website.With that, I will turn the call to the operator for any Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Greg Weaver with Invicta.

[Gregory Allen Weaver, Chief Executive Officer]

Could you give a little more detail on how you're handling the contingent consideration?

[Yaniv Spielberg, Chief Strategy Officer & Company Secretary]

Sorry. Thank you. Adam, do you want to answer the contingent consideration question?

[Adam Joseph Arviv, Interim CEO & Director]

I assume you were referring to the burn out assessment?

[Gregory Allen Weaver, Chief Executive Officer]

Correct.

[Adam Joseph Arviv, Interim CEO & Director]

So one of the reasons I got involved and I'm one of the largest shareholders of the company, and I'm bringing on my group to provide both debt and equity to offset any negative effects on the stock by doing a raise at this point. Based on what's going on in the U.S. and the valuations that are -- these companies are getting that are our competition, I feel that an uplisting is the most important thing for us. So I'm stepping in with my own checkbook and my partners' checkbooks, and we're going to make sure that we settle all of the requirements to the founder of Oryx.

[Gregory Allen Weaver, Chief Executive Officer]

So you're issuing new equity at the current price level?

[Adam Joseph Arviv, Interim CEO & Director]

We're finalizing now, but we're -- it's going to be most likely right around here, yes.

[Gregory Allen Weaver, Chief Executive Officer]

Right. So no outside investors have an opportunity to invest at this level?

[Adam Joseph Arviv, Interim CEO & Director]

There will be the opportunity for them, but it's going to be backstopped by us. So we won't be putting any pressure on the stock by going to the market. We're going to backstop it and then provide the outside market opportunity to participate. And if there's demand, then great, and if there isn't, then we'll just -- we'll fund it ourselves.

[Gregory Allen Weaver, Chief Executive Officer]

Okay. And the timing, it sounds like it's reasonably imminent. I believe the extension ran through September, was it?

[Adam Joseph Arviv, Interim CEO & Director]

Yes, it ends September 30, but we're in talks on that as well, which we can call you directly and update you. But we expect to, by the end of this month, have everything settled. And file an application for an uplisting with everything meeting all requirements.

[Gregory Allen Weaver, Chief Executive Officer]

Okay. All right. That sounds reasonable. And...

[Adam Joseph Arviv, Interim CEO & Director]

And our objective is to get on the NASDAQ. When you look at our comps out there, I mean I would say one of the easiest comps for us to look at would be GAM. And when you look at our revenues, EBITDA, we're bigger than them in revenue and EBITDA. The only difference between us and them is that they have revenue from the U.S., and we don't currently. But another reason why I stepped in is to focus on bringing my relationships in U.S. to the company and opportunities in the U.S. because obviously, that's where people are getting the values of -- this perceived value that everybody is looking to obtain in the North American market.

[Gregory Allen Weaver, Chief Executive Officer]

All right. And just a question on the business. The Germany concentration, which you noted was down substantially. Now did you back into that? Or the other stuff grew enough just to shrink it?

[Yaniv Spielberg, Chief Strategy Officer & Company Secretary]

So this is Yaniv Spielberg. I think the answer is both. Some of the German operators that we have shrunken slightly, and of course, other clients have grown in addition to onboarding new clients, which resulted in the actual concentration of the German-facing business to be reduced.

[Gregory Allen Weaver, Chief Executive Officer]

And that's still legally up in the air at this point in terms of online gaming?

[Yaniv Spielberg, Chief Strategy Officer & Company Secretary]

Yes. So I mean -- depending on how much you know about the German market. So there was supposed to be a transition period that was going to start around October of 2020, so next month. The 16 states and the federal government have had some issues on agreeing on the timing and the terms of that transition period. So we've spoken to our lawyers, both our gaming lawyers in England, WeGame, and our German lawyers in Germany, Hambach & Hambach. And their view is that there's still no clear answer on whether or not that transition period is actually going to take place. But companies that are going to be in compliance with -- in that transition period will be viewed favorably once that full-fledged regulation is approved in 2021. Oryx platform -- the Oryx platform as a B2B platform allows our customers to be compliant. So we're of the view that our clients -- most of them will be compliant because they're in the SH licensing regime. And in addition to that, we have indications from them that their plan is to be compliant. And finally, the licensing or at least the transitionary period in Germany, from what we understand is going to hurt mostly table games, slots, which is most of our clients in Germany are somewhat immune and are doing better than their competitors in the table games.

[Gregory Allen Weaver, Chief Executive Officer]

Okay. I appreciate the color. And just lastly, any time frame on Dominic coming back in your -- to take over?

[Yaniv Spielberg, Chief Strategy Officer & Company Secretary]

So I mean, Dominic is obviously stepping aside for personal reasons, and I can't really get into the details on this as it's a personal matter. But I'll assure you that Dominic and the Chairman of Bragg, Paul Pathak, continue to have ongoing discussions. And when there's something to update the markets, we'll absolutely do so.

[Operator]

[Operator Instructions] And I'm not showing any further questions at this time. I'd like to turn the call over -- to turn the call back over to our host.

[Yaniv Spielberg, Chief Strategy Officer & Company Secretary]

So thank you, everyone, for joining the second quarter of 2020, our results, and we look forward to continuing providing good results in the quarters to come. Thanks a lot, everyone, for joining.

[Ronen Kannor, Chief Financial Officer]

Thank you.

[Operator]

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.