Hall of Fame Resort & Entertainment Company (NASDAQ:HOFV) Q1 2023 Earnings Call Transcript

Hall of Fame Resort & Entertainment Company (NASDAQ:HOFV) Q1 2023 Earnings Call Transcript May 16, 2023

Operator: Good morning and welcome to the Hall of Fame Resort and Entertainment Company’s First Quarter 2023 Earnings Conference Call. This conference call is being recorded and all participants are in a listen-only mode. We will open the conference up for questions and answers following the prepared remarks. I’ll now turn on the conference over to Anne Graffice, Executive Vice President, Global Marketing and Public Affairs.

Anne Graffice: Good morning from Canton, and thank you all for joining us for our first quarter 2023 earnings conference call. Our latest press release, supplemental slides, and Form 10-K were posted yesterday evening after market hours. These documents can be found in the Investor Relations section of our website at hofreco.com. After this brief introduction, our President and CEO Michael Crawford will give an update on the company’s outlook, Benjamin Lee; Chief Financial Officer will then provide analysis of the quarter’s financial results, and an update on the company’s fiscal year 2023 financial guidance. During today’s call, we will make forward-looking statements that reflect the company’s current expectations about future plans and performance.

These statements rely on assumptions and estimates, and actual results may differ materially due to risks and uncertainties. I encourage you all to read the full disclosure concerning forward-looking statements in the earnings press release. Additionally, please note that the company uses non-GAAP results to evaluate performance internally, as detailed in our press release. We have posted a supplementary slide deck summarizing the quarterly results as well. These slides can be accessed on our website and will be archived there along with a replay of this call later this morning. It’s now my pleasure to turn the call over to Michael Crawford. Michael?

Michael Crawford: Thank you Anne. Good morning everybody. It’s a really incredible day here in Canton, Ohio and we have a fantastic week ahead of us and I’ll talk about that in just a few moments. If you looked at our first quarter earnings obviously you would have seen revenue growth year-over-year of 48%. And I give that – just the results have been fantastic and I give the team credit for those. But you would have also seen as expected our operating expenses have increased to support the launch of things like new content in our media division creating our village destination and really building our gaming business in general. While the expenses were expected, we do remain focussed on cost control and balancing the cost appropriately against our revenue growth, that’s always going to be a goal of ours.

I thought it would be important to take a step back and really put in context the Q1 2023 earnings and provide a little perspective. Some of you may remember this, some of you may not but we launched publicly as a [Indiscernible] merger in July of 2020. Later in the middle of one of the worst health pandemic the world has ever experienced. The country and the world basically shut down for almost two years. It impacted supply chain, it’s created inflationary conditions and frankly political turmoil have all continued and we’re experiencing these types of issues still today. So for a smaller start-up company like the Hall of Fame Resort & Entertainment Company we have continued to make difficult decisions to not only survive but to grow. By the way add-in there that our largest name sponsor in Johnson Controls decided that at the point in time where construction had to slow down due to these significant milestones that they were going to put us in default and we were going to have to react to that creating an issue for us from a revenue point of view and from a brand point of view.

So why is that all relevant to Q1 earnings? I think, I could not be more proud of the team, because it’s demonstrating the ability to drive results in the face of adversity. And I think I said this over and over again. We have been able to not only make tough decisions but continue to grow our business. This shows the commitment of all of our stakeholders in our community from our larger shareholders and all of the support that they’re giving us through these difficult times and you can full well imagine as we come out of these times and we will come out of these times, that support will only propel us to even bigger results in greater growth. Lastly, in the quarter, approximately one full year of operation as a company, we have grown revenue; we’ve shown strong attendance growth and attendance growth during non-peak periods at the village, especially in Q1.

We’ve increased events in programming and we’ve really started to show the strategy can work by driving synergies between our business verticals. I thought it would be relevant to share some key highlights from quarter one and starting with the village. I think the Center for Performance was probably one of the most important assets that we could have added to flatten seasonality and to really drive revenue and attendance growth into Q1 and it did exactly that. Our traffic at the village was the highest it ever was in Q1. We hosted very unique indoor sporting and entertainment events from boxing matches to large-scale dinners to other significant private events and we also continued our use sports programming with league play and tournaments, this just after officially opening in November of 2020.

So the team was well ahead of programming already a few months after we opened this facility. At Tom Benson, Hall of Fame Stadium, we also saw some significant announcements in Q1. We became one of the official sites for the USFL to host two regular season game teams here playing regular season games along with the playoffs and the championships and it expanded our partnership with Fox. I remember Eric Shanks saying to me during our press conference, you guys made it very difficult for us not to come back and by the way not to just come back but to expand our presence in Canton, Ohio. So that was a big tribute to our team and the way in which we execute and I could not have been more pleased to have the USFL folk here and I think they’re showing how having that type of event programming drive synergies through every facet of our business.

Food and beverage, hotel stays private events. They were out renting our fields for training, fuel rental for the stadium concessions and then obviously media with Fox being our key partner with significant numbers of nationally televised events this year and already doing extremely well in terms of viewership. Play Action Plaza, we completed our Red Zone giant wheel attraction, which is now operational and adding to our overall guest experience and extending length of stay. We increased event revenue from Q1 of 2022 to Q1 of 2023 by almost 1400% staggering results, largely attributable to having indoor capacity but also public and private event growth as well. USFL playing or training here in Q1 hosting meetings, gearing up for the season as an example along with things like significant other private events in more climate controlled space in a very unique setting I think has really enabled our sales team to get after it in a very big way.

We have continued to grow in every facet of our business with respect to the village and we brought in new partners, we’ve created new events and just this morning you would have seen I hope the announcement of a brand new ride attraction called “Spike It” where we can give guests the sensation of being in the end zone having discord and doing the dance with the player spiking the ball. It’s a ritual that we see almost every time that a FLE [Ph] in professional football gets into the end zone. And so this will be our third ride attraction. I think we’re adding the right amount of capacity to really create play action plaza as a wow and a destination for people in and of itself. Our media group in one short year was able to produce one of the most significant products for us yet in the perfect 10 documentary.

It was sponsored by Prudential. It was launched and aired on Fox Prime Time Saturday night prior to the Super Bowl and it had an amazing viewership. It was the largest viewership. The most popular sports documentary on Fox in three years since the Brady Heist. And most importantly it allowed us to showcase our media team and their capabilities around the quality of content that we can develop. From that we have had numerous more opportunities to sign new partnership deals with high profile retired athletes that have production companies that are really interested in doing new and innovative content with us and we’ll talk more about those in the future. We continue to launch and build our become a villager NFT digital collectible program and we sold out of our highest level of those passes.

And if you’ve watched over the course of this last quarter we are adding really unique experiences, memorabilia, chances to have VIP access to events. And so the opportunity here to be a heavy digital collectible but to also be a part of the company’s ecosystem I think is going to be very highly demanded and it’s showed already with our highest level of entitlement being sold out almost immediately. We announced a new distribution partnership with Brink’s television for the goat code, leveraging access to exclusive IP and access to the greatest ever-play professional football. We’re developing a new type of short form content that really shows the scientific tangible and intangibles on how these greatest athletes achieved the milestones that they have both on and off the field.

And I think this short form content is going to be really well received. We’re talking about three minute increments here that give guests the opportunity and viewers the opportunity to learn what it was like and what these athletes did to perform at the highest level. And then lastly we wrapped up our first season of our newly developed vodcast Football Heaven, 6.5 million impressions. Athletes like Warren Moon, Steve Young, big contributor sports analyst like Chris Berman appeared on the show and again the team did extremely well in partnership with the Pro Football Hall of Fame, our analysts and our guests were all incredibly pleased with the outcome. Our gaming division launched our online sports betting partnership with Betr. I think we’re revolutionizing the new micro betting experiences in Ohio.

The results are actually in line and in some cases exceeding our expectations as a company. And if you recall we did take an ownership stake in Betr. And so as they progress with their business growth in states like Massachusetts or other states, obtaining sports betting licenses, we as a company will benefit from that long-term growth as well. We launched e-gaming tournaments here on campus. E-gaming tournaments bringing concessions revenue, ticket revenue, some cases hotel revenue across pollination. But most importantly proving out the fact that we could satisfy a very sophisticated e-gaming clientele and offer a unique product and experience and venue for them to come and enjoy it. And we also received a significant commitment in Q1 from a very large scale fantasy league to host their league drafts here on campus at the village.

And what that speaks to is when you create an environment of excellence and an environment where you have multi-faceted experiences, these types of leagues, these types of partners will seek you out. And that’s exactly what happened here. So I’m proud of what the gaming division is doing and Rob Boram after a few short months of being in his role is already starting to achieve. Now let me turn to a couple of topics that I know are probably very relevant. And while all of these updates are a tribute to the team’s hard work and I do mean the team works incredibly hard every single day of the week. And again, I want to thank the team for all of the great results in Q1. We are committed to executing our game plan still at a very high level and we’re focused on the challenges that we’re facing.

As I think about it, we have five key priorities that we have to deal with. And we deal with on a daily basis and have to continue to grow our capabilities around the first is, balancing expenses with revenue growth. We’ve learned a lot about our business. I can tell you after operating and developing assets like this all over the world, it takes three to five years to really stabilize a business so that you can get through multiple cycles of events, multiple cycles of seasons to understand how to operate efficiently and we’re already doing that. And the landscape is changing for our company fairly rapidly. But we have to continue to focus on expense, containment, and profitability. Like any new operational company would, we made a difficult decision just over the last couple of weeks to reallocate resources.

We reduced staffing in other areas. And why we increased staffing in other areas. And why we did that was, we saw opportunity for revenue growth. And so we are being strategic and dynamic around how we’re placing human capital, the right human capital in places to realize those cost deficiencies, but also to realize the progress that we’ve talked about and the progress that we need. The second big focus is restructuring our balance sheet and specifically some of our debt instruments. While a large portion of our debt is of the right profile, meaning longer-term appropriate interest rate type of debt. And recall we have both public and private debt. And so we’ve taken advantage of many different programs here in the state, tiff financing, pace financing, TDD bonding, things that are unique to our destination.

We have had the ability to balance the type of debt. We’re taking but the reality is we also have some very costly debt. And so we’re working right now. We’re in discussions with lenders and our largest shareholder IRG Industrial Reality Group to see if we can come up with options to re-balance some of that more costly debt. And to ensure we continue to optimize our debt inequity needs. And so as we have updates on those efforts, we will provide appropriate transparency on an on-going basis but a very important point for us to sustain ourselves in the long-term. The third point is identifying significant deals and partners in all of our business verticals that align with our vision and further our strategy of growth and execution and creating unique experiences.

Most importantly, partners that we can bring in to our center for excellence. And we have signed some new agreements there, our fan engagement zone. I’ve talked about new tenants. We’re getting ready to open Brew Kettle and Topgolf in the next week. You’ll start to see announcements around being able to book for top golf reservations and Brew Kettle is a fantastic new food and beverage experience that I’m excited for our guests to enjoy. And we’ve also talked about new distribution and production partnerships in media, new gaming partnerships in Esports and fantasy sports for our gaming division. The point here is we want the right partners. We’re not looking to sign quick partnership deals that may not in the best for us or for them. And we’re also not interested in signing partnership deals that don’t further and enhance our capabilities as a company.

Now I know some of you have talked about and wondered about our retail sports partner Rush Street Interactive. The update I have for you is after several months of working together Rush and we decided not to pursue the partnership together. We had different versions and different vision of what a retail sports book experience could be at a destination based asset like the Hall of Fame Village. And so while Richard Swartz and his team were doing a fantastic job at what they do and I’m very proud of our team. Again, I would say not the right partnership at our time for either of us. And so we now continue to look for and are already in discussions with potential partners to backfill in our retail sports book. By the way, one other thing to note, we’re also in discussions with food and beverage partners as a part of that overall experience.

And so we will continue to champion that effort. But again, we want the right partner to help us further our mission and to expand the destination and the experiences that we’re going to have here. Fourth point is continuing to develop base two assets of the village to be on time and on budget. It is we are laser focused on this. You’ve seen the progress we’re making on the water park weather is helping us believe it or not. I’m encouraged by the progress that Realty and the team is making and our team is making and the construction oversight and project management. We look forward to breaking ground on the hotel in the very near term. And also, we championed and undertaken work around our phase 3 master plan. Now, one of the things I want to make clear, Phase 2, it was critical for us to develop a set of assets all at the same time that would create a destination.

And I think we’re doing that very successfully. Phase 1 of development was some big assets that were great at hosting events. Phase 2, you could play, you could stay, you could dine and you could be entertained. And so this is really something that we felt strongly we needed to do, excuse me all at one time. Phase 3 is about enhancing and furthering and being responsive to the evolution of our destination. We will not build Phase 3 all at one time, and in fact will be very strategic around the timing as our company grows, as our revenue grows, and our capabilities grow, we will add assets that will enhance the guest experience, increase length to stay, and also increase profitability. So our goal is not to continue to take on extreme amounts of debt or have to go out and do large equity raises to build all of Phase 3 at the same time.

It’s to be strategic around how we grow the destination after we have the destination place. And then lastly and probably most importantly, we have to continue to create unique experiences for our guests to enjoy. This also allows us to drive synergy opportunities from one business unit to the other too. When you create great product that is highly demanded, business results will come, and I believe we’re doing just that. So now let me turn it over to Ben Lee. I want to have been give you a chance as our CFO to provide a more detailed financial overview, and then I’ll come back and talk about some of the things that were focused on in the upcoming months and in the rest of this year.

Benjamin Lee: Thanks Mike, and good morning everyone. Moving on to financial results, and as Anne mentioned earlier, we filed our first quarter of fiscal 2023 Form 10-Q post market yesterday. That document is available on the SEC website as well as our investor relation site. First quarter total revenue was $3.1 million, which represents an increase of 48% from the same period in the prior year. For first quarter revenue growth was primarily driven by higher event and rental revenue at the Hall of Fame Village, increased operating revenue or a Doubletree Hotel, and contribution from our media vertical. First quarter adjusted EBITDA was minus $12 million compared to minus $6.7 million in the same period last year. While our expense space is increased as we brought new destination assets online over the year, the majority of the increase in Q1 operating expenses was the result of several non-recuring items, including start-up costs for our new restaurant, Don Shula’s American Kitchen, film costs associated with our media production, THE PERFECT 10, and recognition timing of certain compensation related expenses.

As Mike mentioned during his remarks, the company made organizational changes during the second quarter to improve operating efficiency and to enhanced future profitability. Company posted a net loss of $19.6 million during the quarter, which included an increase in the fair value of our warrant liabilities of $238,000. Under U.S. GAAP, the fair value of these liabilities will increase and income will decline when the company stock price increases. Moving to the balance sheet, we finished the quarter with cash and liquid investment balance of approximately $47 million compared to $50 million at the end of the year. Both values are inclusive of our restricted cash balances and investments held to maturity. With a larger cash balance, we’ve been investing excess funds and short-term treasuries due to attractive yields and to better match timing of cash outflows.

Company’s usage of cash was attributed to operating activities already highlighted and construction expenditures, which totaled approximately $9.7 million during the first quarter. This cash usage was offset by proceeds obtained from various financing instruments during the quarter. Our net debt balance increased to $192 million compared to $171 million at the end of the year. The increase in notes payable during the quarter was primarily due to increase principal amounts related to a tax increment financing transaction that was completed in February. We have also received proceeds related to our Series A Preferred, our EB-5 Program that was reinstated in late 2022, and will continue throughout the remainder of this year. There are several additional financing transactions currently in process related to the water park and on-campus hotel, as well as those necessary to refinance and optimize the capital stack for the Doubletree hotel.

Recent macro trends and credit conditions have resulted in significant tightening in the lending markets. However, the support from our largest shareholder, IRG, and our ability to source capital with a support of local municipal and state funding programs has allowed us to continue towards closing later this year. It’s important to highlight two key points. First, the company’s ability to execute and raise capital and an ever-changing and difficult macro environment, and two, our intense focus on taking on the right kind of debt and optimizing the capital stack for each asset. We will continue to restructure and optimize our overall capital structure in a way that positions the company for future growth. Moving to guidance. At this time, we are reiterating our forecast of 2023 revenue growth in excess of 75% when compared to 2022.

We are revising our adjusted EBIT estimate, as we now expect a loss in the mid to high teams in millions of dollars. In closing, the company is mindful of the current economic environment and will remain intensely focused on driving profitability through synergistic and diversified revenue streams and discipline cost management while making strategic investments to support our continued growth. We will continue to analyze and optimize our capital structure to deliver long-term value to all shareholders. And finally, as you’ve come to expect, we will continue to provide transparent and timely updates to our shareholders as we move ahead. Operator, we would now like to open the line for any questions.

Q&A Session

Operator: [Operator Instructions] Our first question comes from David Martian with Singular Research. Please go ahead.

Operator: Our next question comes from Michael Diana with Maxim Group. Please go ahead.

Operator: Thank you. There are no further questions at this time. I’d like to turn to floor back over to Michael Crawford for closing remarks.

Michael Crawford: Thank you. So, I’d just like to leave with a couple of key takeaways. We’ve had to make a lot of difficult decisions over the past couple of years. We’ve really been an operational company in all of our divisions for over a year given the shutdown of the world. And we survived and we continued to grow our capabilities. We’ve continued to grow our revenue. We’ve had to make decisions that were popular. We conducted a reverse stock split. Our stock was under an extreme pressure. The value of having our shareholders have access to trade in the markets was important to us. I realized some folks think that that was a bad decision. We still believe it was the absolute right decision to say to send the message that we are going to protect your rights to trade your stock freely.

We did not do a big equity offering right after we did this reverse stock split. We’ve had an at the market offering out there for multiple years and we’ve barely used it. In fact, in the last year, I think we’ve done a couple of thousand dollars worth of testing in the market to see if we wanted to use it. We haven’t. And so our commitment is to make the right decisions at the right time for our shareholders. These are not always going to be popular. But I’ll say this. When you look at our company and you look at our board and you look at our largest shareholders and you look at the executive management team, not one single share of our company stock has been traded or sold by that group other than to cover tax obligations. And that’s an important distinction, okay.

We believe so deeply in our growth in our trajectory that this team, this board, our largest shareholders have said, we are standing behind you. The same with our community. Our community has been providing loan instruments, regulatory changes, allowing us to become a designated outdoor recreation area, TDD tourism development district, offering Tif [Ph] support offering pay support, bonding support. All of these things are not just done lightly, they’re done in support of our company because the business plan we’ve articulated is compelling and we’re proving it out on a daily basis. We are on track for record attendance at the village this year. That is a very significant step forward. We are launching a lot of new media content driving revenue from our media division this year.

We’re signing multiple new partners distribution, production, tenants, operational partners. And by the way, we’re continuing to look at those types of partners as enhancing our capabilities of executing our game plan, driving revenue growth and creating those exceptional experiences. We have our own team, but we have an extended team that we rely upon as well. And our gaming division just continues to add new partnerships, new opportunities for engagement and building our brand as well in that division. We fully intend to address our balance sheet and improving our balance sheet. We made the decisions we needed to make and gained access to lending through largest shareholders and through other entities, private and public during a very difficult time.

Look, we are a start-up company. We have very little credit history and yet we were able to achieve the financing that has been needed to build the assets to create the experiences and to drive the revenue growth. I think it’s also important to note, we are a young company and so we have to create brand awareness. And I’ve asked Anne Graffice who heads up our public affairs and marketing team to really focus on branding, really focus on marketing. You can have great product if you can’t market and sell it. It’s not going to benefit you as a company and as a shareholder. We have to resolve the dispute with Johnson Controls. It’s going to be an Ohio, three-hour tour panel, October time frame at this point and we feel like we will get resolution around that.

And we have to drive revenue through our synergy model and we have to focus on aligning cost, the cost base with the opportunities for growth. And we want to have the right expectations so that we’re not cutting too deeply and deteriorating the guest experience. It’s hard to manage costs and expand at the same time. And so we’re taking costs that aren’t productive and we’re reallocating those two locations that are more productive in allowing that growth in those experiences and in our operational capabilities, allowing us to operate at a very high level. That is an important primary key takeaway. When you create exceptional product and experience that are unique, business results will come. I know everyone wants the stock price to shoot to the moon.

I know people have that on their minds, but I want to remind folks, shareholders need to understand that this is a difficult environment and yet this team is executing and we are showing transparency. We are being very honest, where we’re at, the challenges we’re facing and the goals that we have. I see growth. I’ve done this multiple times. The potential for this company to not only grow but to exceed our expectations is very, very big. The team has executed in very difficult times. I think the Q1 results reflect that. I’m very optimistic that we have the right plan. But we are dynamic and we are fluid and we have the ability to pivot, calling audible as they say in the game. As we see the opportunity to grow the company this year and beyond.

I really just want to finish by thanking everybody. I know it’s been difficult times not only for our company but for many companies when you look across the landscape. Companies, our size are struggling everywhere. Big companies are trading at lower than 52-week lows and having difficult time accessing credit markets. Credit is tightening. We’re moving from probably an inflationary environment into a recessionary environment. We are doing the right things and focusing on the things that will allow us to grow long-term. Thank you to our guests. Thank you to our board. Thank you to the team. Thank you to our shareholders. We have exciting work to do here in Canton and beyond. And this week it sort of personifies that. We have Kevin Hart coming Thursday night.

He’s going to put on a phenomenal show for those of you coming. Schulis [Ph] has been sold out for weeks. We’re preparing for the launch of two new experiences next week. We’re packaging and bundling things together. We have that large scale across tournament that we’re excited about. And many, many more big private events. And I’m looking forward to our team being able to talk about new partnerships, new events and the growth of all of our business verticals not only in the next quarter, but over the next year and the next several years. Hope everyone has a great rest of the day. Thank you for tuning in. And certainly appreciate your support. Thank you.

Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.