GameSquare Holdings, Inc.

Good afternoon and thank you for joining us to discuss GameSquare Esports Incorporated's first quarter of fiscal 2021 financial results conference call. On the call today, we have GameSquare's CEO Justin Kenna and GameSquare's President Kevin Wright. During the call, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Before management discusses the results, I'd like to remind everyone that certain statements in this call may be forward looking in nature. These include statements involving known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in our forward looking statements. For caveats about forward-looking statements and risk factors, please see our MD&A for the year-ended November 30, 2020, which can be found on our company profile at cdar.com. I will now turn the conference call over to GameSquare's President, Kevin Wright. Please go ahead.

Thank you, Charisse. And good afternoon to everyone who's taking the time to join us today. As Charisse said, I'm Kevin Wright. I'm the president at GameSquare Esports. And I'd like to welcome all of you to today's conference call to discuss GameSquare Esports inaugural conference call to discuss the Q1 2021 financial results, which were filed on CDAR earlier today, along with the MD&A conference. I'll jump into the disclaimer side. Before we begin, I would like to remind you that during today's call, we will be making comments containing forward-looking information. I'd invite you to read our financial disclosure for some of the risks and uncertainty that may affect GameSquare's performance in the future. And as such, actual results may differ materially from the views expressed today. For further information, please visit CDAR, where you'll find our financial statements and NDNA. As this is our first conference call, I would like to take a moment to introduce GameSquare's CEO, Justin Kenna. Justin joined GameSquare in January of 2021, coming to us from his previous role as CFO of FaZe Clan, which is the world's largest gaming lifestyle brand. During his time there, Justin raised over $60 million from investors and saw revenues increase 10 times over the four years of his tenure. Forbes valued Faze Planet more than $300 million US and recognized the company as one of the most valuable esports organizations globally. Needless to say, I think that GameSquare is in great hands as we continue to build a world-class esports organization under his leadership. I'll now turn the call over to Justin and let him talk about his vision for the company and the industry, as well as details of our financial results for the first quarter of fiscal 2021. Over to you, Justin.

Thanks, Kev. Hi, everyone, and welcome to GameSquare's conference call for our first quarter of BISCOOL 2021. As Kevin said, I'm Justin Kenner, GameSquare's CEO. Before jumping into the financial results, I want to spend some time introducing esports to those who may not be familiar with the industry. And then I'd like to share what I consider our differentiated approach to our business, which is bridging brands to the esports industry. First, esports is competitive video games played by professional and casual gamers. It attracts massive audiences from around the world, especially to popular games, and audience sizes soared during the COVID pandemic. Without a doubt, COVID has been a global tragedy. It's changed how people live, how people do business, and how people stay healthy and connected. However, at the pandemic's onset in 2020, as traditional sports matches were suspended, many live esports competitions transitioned online. As a result, more people gravitated towards esports and gaming in general as a form of entertainment. In fact, gaming was and is a tremendous way for people to stay connected with players and enthusiasts around the world. Weekly esports hours streamed grew 81% year over year in 2020 and esports audience growth has continued in 2021. In fact, esports has been one of the fastest growing industries as more people are playing games and, in turn, the size of audiences watching gamers, streamers and influencers has grown dramatically. Twitch, Amazon's gaming channel, reported that 1.7 billion hours of content were watched in this past December alone. What makes esports and its rapid growth unique from a marketing perspective is its unprecedented engagement across a very attractive demographic, people under the age of 35. These esports fans are a generation that grew up playing and watching video games, consuming content through an internet browser rather than television or radio. However, marketing to them is quite different than marketing to older generations. Esports fans demand transparency, accountability, community and trust before they engage brands. Building trust with this demographic is not easy. But once achieved, esports fans are loyal and supportive unless brands break that trust. As I mentioned, brands recognize the massive opportunities that these esports audiences represent. What this means for businesses is that major brands are committing more marketing dollars to the space in order to reach this unreachable demographic that is consuming media in very different ways than generations before them. GameSquare's business model is to operate and acquire digital media agencies that bridge the gap between global brands and the large gaming and esports communities. We are building a highly scalable, profitable esports company with global reach, which sets us apart from every other esports company that we know of. Our agencies are growing quickly, rely on relationships built over decades of professional careers, and importantly, are profitable with healthy EBITDA margins. One of GameSquare's key differentiators is that we understand esports, esports audiences, the importance of building community and attracting influencers. These are things that many of the large incumbent agencies really struggle with. Post-quarter end, Gamescore acquired Reciprocity, a privately held gaming and esports company that has a well-established Los Angeles-based digital media group, the Gaming Community Network, or GCN, that designs and constructs bespoke campaigns and activations and then distributes and promotes them through their network of over 100 million unique viewers. GCN's network includes esports and gaming-focused websites, influencers, streaming networks, over-the-top and social platforms, pro teams, and tournament and event producers. The acquisition also came with the ownership of two popular esports teams, one in China and the other in South America, bringing with them an extensive fan base and influencers. Reciprocity is an excellent addition to Code Red, our influencer talent agency in the UK. Our ability to engage the esports and gaming community is reflected in our financials and in the commercial opportunities that we are seeing in the US and in the UK. With this introduction to the industry and our business as a backdrop, I'll move to Games Square's financial performance during our first quarter of fiscal 2021. During the first quarter of fiscal 2021, Games Square generated revenue of nearly $1.1 million an increase of over 97% over Code Red's Q1 2020. Our influencer segment generated 456,000, which represents 44% growth year-over-year, and our consulting segment reported $413,000 of revenue. As I mentioned previously, COVID caused the postponement or cancellation of many live esports events, leading to flat year-over-year performance in the broadcast segment. As of February 28, 2021, Games Square had $1.1 million of cash on hand and about $357,000 of working capital. Subsequent to the quarter, we closed an oversubscribed $7 million bought deal, putting us in a strong position for organic growth and M&A. We continue to highlight that our strategy is to fund profitable, organic growth and to accelerate our financial profile through the acquisition of EBITDA-positive digital media businesses. Our business consists of three segments, influencer, consulting, and talent management. We are pleased with the progress made in the influencer segment by Code Red in Q1. This reflects the attention the company has been devoting towards the segment, and we are seeing the benefits continuing to improve with new headcount added in the UK to support the influencer segment. We believe that this segment can continue to make progress as brands are recognising influencers as a viable marketing and engagement channel. Our consulting business also had a great quarter, partly on the back of our relationship with Bud Light Europe, which has resulted in some really interesting work. As mentioned previously, we closed on the acquisition of Reciprocity in mid-March and are very impressed with what we've accomplished there in a short period of time. Prior to the acquisition, we were hard at work integrating the business's and the priority has been optimizing GCN's operations. We pre-funded the company to enable some key hires, and that has led to some great early contract wins, including the Van Wagner deal, which will see GCN producing and promoting the largest national collegiate esports tournament across 10 NCAA conferences and multiple gaming titles. In my view, this is a tremendous example of the quality of projects and clients that GCN brings into the GameSquare family of companies. Moving on to Outlook. GameSquare is a young but growing company that has already demonstrated the ability to bridge well-known major brands to the esports industry. Post our $7 million board deal financing, we will have a strong balance sheet to execute on our business strategy. Code Red is performing very well and has some great potential deals in the pipeline. To support our expansion and pipeline opportunities, we added Jan Neumeister as our head of Europe. Jan is doing a terrific job coordinating between Europe, North America, and Asia, along with Sabrina Howe, our head of Asia. Jan has incredible connections with brands. His reputation and network are unparalleled in the industry, and he has brought in some really interesting partnership and M&A opportunities. In short, we expect growth in Europe this year, but it's too early to talk about the quantum of that growth. Preliminary results in North America, mainly from GCN business, have been very promising. GCN's management is confident in their ability to meet and potentially exceed the US $7 million revenue figure to receive their earn out. So while we are not providing formal guidance yet, we are trending well and we are focused on profitable growth within esports, sports and entertainment. We continue to grow Gamesco organically, but an important pillar of our growth strategy is M&A. Our focus is on digital agencies and complementary businesses that are EBITDA positive or have a clear path to achieving it in the near term. We have experience integrating and optimising these types of accretive acquisitions and will continue to do so going forward. We have not yet announced any potential transactions, so I won't get into specifics on our M&A targets, but what I can say is that we have a healthy pipeline of potential US and European acquisitions that are in various stages of discussions. Based on current discussions, we feel very confident that we should be able to close additional acquisitions within the next 12 months. For context, the potential targets that we have engaged with would each add $5 million to $25 million in revenue in the next 12 months with EBITDA margins typically in the 20% to 40% range. Beyond our current market, apologies, beyond our current pipeline of acquisition targets, I would say that we are operating in a highly fragmented market right to consolidation. We are confident that we can continue to find great companies serving the esports market and more broadly sports and entertainment and close acquisitions and multiples that unlock tremendous value for our shareholders. In the short time that we've been public, we have already accomplished a lot. However, we are just getting started. We've closed one full quarter of operations and generated good results financially and operationally. We are looking forward to our Q2 results when we can give our first indication of performance at GCN. We demonstrated the ability to contract with great reference customers like Van Wagner, Bud Light, and we believe that we will sign many more. My confidence in growing the business is rooted in the great bench strength that we have and that we've been recently able to add like Chris, Drew, Sabrina, and Jan, plus advisors that include Jordan Balfour, the Wolf of Wall Street. Investors believe in our story and the outlook of our businesses, as indicated by the $11 million we've been able to raise as a public company. And we have also proven that we can find, close, integrate, and optimize accretive acquisitions. We closed our first major acquisition in March, and we expect to have more great news on the acquisition front. Furthermore, we have new partnerships that we are working on that could be transformational in the way that we are viewed by the industry. With that, I'd like to thank all of our investors for your support, and I'll now turn it over to the operator to take questions. I might also add that I've been on phone calls since 6 a.m. this morning, so if my voice completely gives away, then Kevin might be fielding the questions. But thanks, guys, and I appreciate the support.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your headset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. The first question comes from Robert Young with Canaccord Genuity. Please go ahead.

Hi, good evening, guys. You gave a bunch of information on the call already about the M&A pipeline, but I think if I assemble all the little bits that you'd given, I think you have a healthy pipeline, any context around that would be helpful. You know, what sort of companies are you targeting? I think you mentioned digital media companies, pretty broad there, but maybe if you can expand on that, if I heard that right. And then, you know, the targets would be something like $5 to $25 million in revenue and 20 to 40% in EBITDA, which is very specific, but, you know, quite large. And so, you know, maybe if you expand on that summary, is that about right?

Hey, Rob, thanks for your question.

Great to have you on the call. I'll jump in and save Justin's voice and then let him add some more color. In terms of the type of digital media groups, when we look at that, I think the agency space is very interesting to us. And so whether that's sort of traditional type agencies that focus on esports or digital media groups like GCN that do production and promotion. Those are the kind of businesses that we're looking at. And importantly, within all of those, it goes back to the relationships that the folks that we're buying have and the experience that they have in delivering top quality service for the customers. And specifically right now within esports, but over time, that'll expand out to sports and entertainment. So does that answer your question in terms of the kind of things that we're looking at?

Yeah, and maybe just talk about the preference for, say, digital media companies over, you know, expanding esports teams or esports specific, you know, properties. Maybe that might help.

Yeah, I think the way that we look at that is, you know, we do own teams. And so we like teams and our teams are special in that they're not burning cash. They're profitable. And, you know, that's a bit of a rarity within the esports space. So we wouldn't rule out looking at more teams as a way to bolster our financial profile. But one of the nice things about agencies and the service businesses is they're really sport agnostic. So you're not making a bet on whether sport X, Y, or Z is going to remain popular two years from now after you've acquired them or paid a lot of money for a slot. outside of kind of the big three or four games that we notionally believe will always be around. So, yeah, the teams are interesting to us, but not as interesting as the agencies and the complementary businesses that support agencies. And if you were able to look under the hood and see the kind of companies that we're speaking with, it would be very, very skewed towards those agencies and complementary technologies that support them.

Okay, great. And then maybe outside of M&A, maybe talk about your organic growth. Any kind of brackets you can put around that? Any context around how much organic growth you think you can target? And yeah, that's enough.

Yeah, and I think the way that we think about that is there'll be a little lumpiness in the quarters, but but I think we're on a good trajectory with Code Red in terms of what they put up this quarter. Is it going to be the same quarter over quarter? There'll be some movement, but I think we can sort of straight line out what they'll do over the year. And we're hoping that by next quarter, we'll be able to give a little bit more clarity to the market and really put some brackets around it. And then if you look at the reciprocity acquisition, Their earnouts kick in at the top end of 7 million U.S. dollars, so notionally about 9 million Canadian with a 20% minimum EBITDA margin. And they've expressed a lot of confidence in being able to deliver against those earnouts. So that should give you some loose boundaries on the low end of what we could do. And then we've got some good contracts that could hit that if they do hit, will go past sort of the back of the envelope that I've tried to spell out here. And all of that is absent any M&A that we would deliver against.

Right, right. And then, I mean, on the cost side, maybe a little bit of context there, you know, with the money you've just raised, is there anything you're going to invest back in the business outside of M&A? Like, is there any headcount addition or any, you know, growth in your OPEX that you expend? expect rather.

Justin, do you want to talk about some of the hires that we've done at GCN and highlight some of them? Yeah, totally. So Rob, yes, the answer is absolutely.

I mean, we're growing quickly and as mentioned previously, we pre-funded GCN to be able to get them up and ready to go. I mean, their pipeline currently is incredibly impressive and we're very excited to to get a couple of those deals closed and announced over the over the coming month or two um but you know i think gcn has has taken on uh you know six or so hires in the past two months so um we're definitely ramping up and that that growth will continue so yeah there will be a a reasonable allocation of capital towards uh towards ramping up not only at gcn we have a couple of key hires at co-red as we continue to grow there. And, you know, as we obviously scale out the business, we'll look at a couple of key hires into the corporate team as well.

All right. I think that's all the questions for me today. Thanks a lot.

Thanks, Rob.

Once again, if you have a question, please press star, then one. The next question comes from Mike Stevens with Echelon Capital Markets. Please go ahead.

Yeah. Hi, guys. Congrats on your first conference call, first of all. I'm just kind of curious, being a little bit new to the space and your story, I don't know if you can quantify how much of the revenue you see being relatively recurring in nature and how do you see that trending? I know you obviously have some pretty big deals that you just, you know, the bandwagon and whatnot and the Bud Light. So how can we look at, you know, how much of the revenue base is recurring? And as a second question, if you don't mind, I'm curious your thoughts on post-COVID and when, you know, social events kind of come back online, you know, how do you see the demand and the industry, you know, going? And, yeah, just your thoughts on that.

Yeah, no, I can kick off here, Kev, and then you can add to it.

In terms of recurring revenue, it's an interesting one. I mean, being a relatively new business, that's definitely an area for us to work on. It's also an interesting one. I think I've used this example a few times from my time at FaZe Clan, but given the overall growth of the industry, and if you look at some of the brands entering the space, but also you know, the value dollar of deals increasing year on year. It's also, you know, we're not necessarily looking to come in and sign a brand and look to sign a two-, three-, four-year deal either. You know, quite often it's getting a brand in the door and proving our value. And I can say, you know, definitely my time at FaZe Clan and my time so far at Gamesquare, when a brand has come in and engaged, they're then, you know, a customer for life because they start to see, you know... the real eyeballs and the impact and how big this industry really truly is. When I started at Faze, we had an energy drink client who at the time was a really meaningful chunk of revenue sort of three or four years ago and they looked to sign us up on a three-year deal at the time and we actually did a 12-month deal and we've been able to renew that deal year on year and that's at about 15x currently from what the deal looks like a couple of years ago. And those examples are coming into the space often. So not only are the volume of deals in the space increasing, but the dollar value is as well. So, I mean, we do have ongoing relationships with Bud Light. You mentioned Van Wagner and the deal we have there for the collegiate esports tournament. So there is a reasonable amount of recurring revenue, but I wouldn't say currently that it's the substantial makeup of our revenue. but I think you'll see that begin to change as the market matures and as our business continues to grow. So I hope that answers that part of it. Kev, do you want to talk to the COVID question?

Yeah, I think the forecasting out and predicting what's going to happen post-COVID is tough. But I think anecdotally what we look at is COVID has accelerated the eyeballs on esports. And I think the engagement's so strong and it's something that was there before and it's something that remains. I think what's been interesting about the change in the mix of what's going on is that companies that would have typically been B2B by nature, in a lot of cases, have had to shift their focus towards being more B2C focused. And I think that that's where engagement within esports has really driven. And what they're seeing is that it's working. And so our view is that as we come out of COVID and the world starts to return to some semblance of normal, that we'll continue to see that brands that have historically been on the B2B, their ROI on the investments they're making in marketing towards this demographic has been really strong. And so I think that those dollars will remain. And then the other piece of it is that there's so many brands that haven't dipped their toe in the waters of esports that there's a lot of opportunity to introduce new brands and new marketing dollars into the space. So I think coming out of COVID, we're going to be in a very healthy place. And, you know, we're in the very early innings of esports and people are realizing that this is a dynamic form of entertainment. that's really important to a very attractive demographic in these 18 to 35-year-olds that have a lot of disposable income.

Awesome. Thank you very much, Greg.

The only thing that I'd add to that that Kevin said is, you know, if anything, we think the post-COVID world is a positive one because, you know, further to my point before, you know, through COVID with COVID, a lot of traditional sports not being played and with gaming and esports being one of the only live sports and really being highlighted across a lot of traditional forms of media and entertainment, it's really been highlighted the eyeballs and I think there's not going to be a change there. I think if anything, live events will come back and I know many people will remember the Fortnite World Cup only a couple of years ago was her $30 million of prize money, bigger than any golf or tennis tournament. We have a 16-year-old kid at Flushing Meadows in New York in front of a packed house winning $3 million of prize money in a Fortnite competition. So I think it's a real upside for us and I think we plug in really well into brands and into live tournaments and events, which is highlighted by the fact that GCN were able to a partner with Dan Wagner on the collegiate tournament coming up. So, yeah, I mean, we're extremely bullish about, you know, obviously not only where this industry is going, but how well we're positioned to really capitalize on that.

Great. Thanks a lot.

Thanks, Mike.

There are currently no more questioners in the question queue. This now concludes the question and answer session and today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.