GameSquare Holdings, Inc.

Good afternoon and thank you for joining us for the GameSquare Holdings 2024 First Quarter Conference Call. On the call today, we have Justin Kenna, GameSquare's CEO, Lou Schwartz, President, and Mike Munoz, CFO. During the call, all participants are in listen-only mode. And 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 on 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 information about forward-looking statements and risk factors, please see our 10Q for the quarter ended March 31st, 2024, which is available on the company's website or with the Securities and Exchange Commission. I would now like to turn the call over to GameSquare's CEO, Justin Kenna. Justin, please go ahead.

Thank you, and good afternoon to everyone joining us on today's call. I'm extremely excited to review the progress we're making at GameSquare. as we pursue strategic priorities aimed at creating a fast-growing, highly profitable next-generation media business. Activity across our business is extremely high, and we're making significant progress optimizing our business model, investing in long-term growth, and improving profitability. While we still have work to do, we believe our pro forma results demonstrate the meaningful accomplishments we are making to create lasting value for our shareholders. With all the action we've taken over the past year and a half, all the use time today to review our recent M&A activities, our vision for phase plan, the progress we are making reducing costs, and the go-forward strategies that we're pursuing to drive profitable growth. I'll then turn the call over to Mike, who will review our first quarter results in more detail. As a reminder, in December 2023, we completed The $3.4 million sale of Frankly's non-core radio business assets. In March 2024, we completed the $10.4 million sale of Complexity Gaming. And also in March of 2024, we completed the all-stock acquisition of Faze Clan. That was valued at approximately $14 million. In addition, we recently sold 49% of Faze Media for $11 million today. allowing us to retain voting control and continue consolidating Faze Media's results in our financial statements. The vast majority of Faze Plan's historic burn has been associated with the assets of Faze Media, so this new capital will support Faze Media and position the combined business for profitability in the coming quarters. To summarise these recent actions, we brought in $25 million of new capital and acquired the largest esports organization in the world for 14 million dollars in stock as a result we believe that we have significantly enhanced our business with best in class assets replacing complexity with base plan is an important component of our growth strategy under game square's ownership complexity increased sales by over 220 percent in 2021 to 2023, reflecting our success, rapidly growing sales of an esports organization. Since I joined Gamesquare as CEO at the start of 2021, our strategy has been focused on developing a broader platform to pursue large market opportunities that produce greater value for Gamesquare, as well as our brand partners. We believe Faithplant allows us to quickly benefit from a broader business model that Faithplant already has established esports and media assets. PhaseClan, across its owned and operated social accounts, adds over 35 million direct followers compared to approximately 1 million at complexity. With a significantly larger direct following, PhaseClan is better positioned to add new brands and partners to the GameSquare ecosystem, which supports our interconnected strategy and accelerates our path to reaching scale. The PhaseClan acquisition also adds one of the world's best and most recognized esports organizations, which includes the number one globally ranked Counter-Strike team. In addition, FaZe Clan was one of a select number of esports teams invited to participate in this summer's Esports World Cup. This is the premier esports tournament, featuring one of the largest prize pools in the history of professional esports. While FaZe Clan has a leading esports organization, As a standalone business, they lacked the experience monetizing the teams and did not have dedicated assets to optimize their revenue. GameSquare's platform, on the other hand, has experience developing revenue opportunities, just like our success at Complexity. As a result, over the coming quarters, we are going to leverage our experience and resources to accelerate the growth of Faze Esports. This includes a dedicated sales infrastructure to the esports industry that is focused on monetizing direct partnerships, sponsorships, developing events, and creating new merchandising opportunities. As you can see, we have significantly upgraded our platform with the addition of Phase Esports, and we expect to see accelerating revenue growth from this business segment in the coming quarters as we leverage our proven monetization strategies. The next topic I want to review today is last week's announcement of the formation of Faze Media and the strategic investment for Matt Kalish, the founder of Draftix. I'm extremely excited to welcome Matt to Game Square and Faze Media. As a strategic investor, Matt has a proven track record, incredible networks. He understands the creator economy and media businesses as well as anyone. His $11 million investment is for a 49% interest in Faze Media. With a controlling interest, GameSquare's 51% ownership means that Faze Media's financials will be consolidated in our financial results. In addition, GameSquare owns 100% of Faze Esports. Most importantly, Matt's investment in Faze Media reflects his confidence in the leadership and creative talent of Faze Bank, as well as that of the Faze founders and creative roster. It also reflects his confidence in GameSquare's leading capabilities and the platform that we are creating. Faze Media includes revenue from content creation, talent management, and brand licensing that in 2023 represented approximately $30 million of Faze Clan's overall revenue. While Faze Media has an established base of revenue, we believe the business was previously impacted by a broken cost structure, underinvestment, and ineffective strategies that didn't properly understand the appeal of the brand and how it fits into the evolving gaming community. As a result, the vast majority of FaZe Clan's historic burn was from FaZe Media. Over the near term, there are three important strategies we are pursuing that we believe will improve FaZe Media's performance and create the proper infrastructure to drive its long-term success. Our third strategy is to control and eliminate costs to quickly reduce FaZe Media's cash burn. Even before we completed the acquisition in March, FASE was reducing headcount and working on initiatives to control costs. Under Gamesco's ownership, we believe that there are $18 million from annual cost synergies as a result of the FASE acquisition and expect the majority of these savings to be realized during the 2024 second and third quarters. Over the near term, we expect to benefit from removing expenses associated with redundant corporate overhead, headcount reductions, and optimizing vendor agreements. With Matt's $11 million investment in Phaze Media, we have brought in a strategic investor to fully fund the business, invest in its growth, and get Phaze Media on a clear path to profitability. We are also leveraging GameSquare's experience to provide the proper structure and leadership to effectively manage Phaze's talent and ensure that every dollar we spend generates a return. Our second priority is focused on creating a proper platform to maximize Phaze Media's revenue opportunity. Critical component to our strategy was returning Faze's founders back to the brand that they created to not only re-engage with their existing fan base, but to re-establish the brand's authenticity and increase their community engagement. As a result, Faze Media has welcomed back Faze Banks as CEO, Faze Apex as COO, and Faze Semper as president. Matt and I will also serve on the board of Faze Media, providing another level of oversight and guidance for Faze Media. On April 27, 2024, Faze rebooted its brand. And I'm thrilled to report that the relaunch experienced unprecedented engagement across social media platforms and was the number one trending topic on X, formerly known as Twitter, in the U.S. And this also should be noted being at the NFL draft going on at the same time. In addition, Faze Clan's search interest was the strongest the brand has experienced on YouTube since May of 2020 and on Google since May of 2019. It was estimated to have over 350 million social media impressions. The internet and gaming community is excited by Faze Bank's return and the steps he has taken to relaunch the brand and refresh the talent roster. As you can see, the Faze brand continues to captivate audiences and drive engagement. In fact, FaZe Clan has over 230 million aggregate followers across FaZe and talent socials, which includes the 35 million directs that we mentioned before. The final priority we are pursuing at FaZe Media is leveraging FaZe Clan's industry-leading following to drive significant revenue opportunities. Core to this plan is a newly-minted content strategy to take advantage of FaZe's proven content approach that resonates with gaming and youth audiences. Initiatives include new Faze Houses in Miami and LA for creators to produce continual, consistent content. In addition, we'll be developing creator-led shows, podcasts, live streaming events, short and long-form content that will all be monetizable. We are following a defined content strategy that leverages the resources of GameSquare and our established Foreframe Studios production asset. It's important to note that the internet and gaming communities will not see any difference in the Faze brand from a fandom standpoint. The formation of Faze Media only adjusts the ownership structure, and with Game Square maintaining its controlling interest, Faze Media's financials will continue to be consolidated in Game Square's results. Looking at our improved cost structure and the platform we are creating in more detail, I'm extremely proud of the hard work and dedication of our global team members. After last year's successful integration of engine gaming, we are quickly replicating our efforts to successfully integrate FaveSafe. Over the past year, we have removed approximately $8 million of annualized costs associated with the engine gaming transaction. While Fave has already begun eliminating costs prior to the acquisition, we are quickly removing additional redundant corporate expenses, and we are focused on aligning FaveClan's cost structure with expected revenues. As a result, we anticipate removing about $18 million of annualised operating costs, with the majority of these costs coming out during the 2024 second and third quarters. As we focus on reaching profitability in the coming quarters, we continue to pursue opportunities to add additional capital to our balance sheet. During the first quarter, we successfully raised $10 million of new capital in a private placement. The recent asset sales are frankly in complexity, yet again square a total of $14 million, including a $9.5 million promissory note on our balance sheet. We believe Matt's $11 million investment in Faze Media will fully fund that business as we optimize its cost structure and begin to drive revenue growth. Finally, we are working on additional non-core asset sales and other opportunities to improve our capitalization and support our growth opportunities. Today, Game Stress Platform comprises owned and operated IP, including content creation, phased media, and our esports teams. We have full-service creative agencies that leverage our experience and connection to youth and gaming audiences that provide global brands with content, campaign management, media strategy, and placement services. And finally, we have best-in-class SaaS-based offerings, including live streaming data, influencer marketing, and managed services capabilities. On a pro forma basis, we generated $23.5 million in revenue in the first quarter, a slight decrease from pro forma revenue for the same quarter of last year. More importantly, I'm pleased to report that our adjusted EBITDA on a pro forma basis improved by $6.4 million, a loss of $14.3 million for 2023 First quarter total loss is 7.9 for 2024. This dramatic improvement in adjusted EBITDA during the first quarter reflects the efforts we have been pursuing to eliminate costs and drive profitability. As a result, we believe we have a clear path to profitability in the coming quarters and expect to see the majority of the expected 18 million of cost synergies being removed in the 2024 second and third quarters. As you can see, we've created a strong go-forward platform, and the final strategies I want to review today are the actions we are taking to drive revenue growth in 2024 and beyond across Gainscores' ecosystem. Starting with our owned and operated IP, key growth priorities include leveraging Faze Media's content through a successful reboot and new talent roster, driving growth within our emerging events business, and growing our reach and influence to launch new content initiatives lifestyle brands and more looking at growth opportunities in our media and agency businesses in 2024 we are focused on expanding publisher relationships with major players like epic games leveraging the success of our rapidly growing world building business increasing our relationships with retainer clients and growing our live stream as a service business finally on the sas and technology side of our business growth priorities include combining our data and insights capabilities with our creative management and activation platform to deliver a more comprehensive solution set for game publishers and brands looking to drive targeted audiences and improve revenue performance. Leveraging our platform for data-driven creative campaigns that yield high-performing ROI and performance-based returns and expanding our managed services offerings. We have developed a strong, innovative, and differentiated platform that supports significant growth opportunities within the game publishing category. Our unique advantage within this category is being recognized by some of the largest game publishers in the world. We're just getting started and I'm excited to report on our success on future calls. But with this overview, I'd like to turn the call over to Mike to review our first quarter of financials.

Thanks, Justin. Before we look at our 2024 first quarter financial results in more detail, it's important to note that our GAAP financial statements include 24 days of FaZe Clan's results. In addition, Complexity, which was sold in March 2024, has been treated as a discontinued operation, and Complexity's results have been reclassed into discontinued operations in our 2024 and 2023 first quarter financial statements. As a result, we believe it's best to look at our business on a non-GAAP pro forma basis, which removes complexity from our financial statements, includes a full quarter contribution of FaZe Clan in the 2024 period, and includes a full quarter contribution of Enjin and FaZe Clan in the 2023 period. Comparing our 2024 first quarter pro forma results to the prior year, total revenue was 23.5 million compared to 24.1 million. The slight year-over-year decline in revenue was primarily due to a $4.2 million reduction in FaZe Clan revenue, partially offset by a $3.6 million increase in Game Square and Engine Gaming revenue. Gross margin on a pro forma basis for the 2024 first quarter was $3.7 million, or 15.7% of sales, compared to $4.0 million, or 16.5% of sales, for the same period last year. The declining gross margin for the year reflects a less profitable mix of sales, which temporarily impacted gross margin in the first quarter. As Justin mentioned, we have made significant strides in improving our operating cash burn figures over the past 12 months. On a pro forma basis, adjusted EBITDA loss for the 2024 first quarter amounted to $7.9 million, compared to a loss of $14.3 million last year. As a percentage of revenue, our adjusted EBITDA improved from 59.2% for the 2023 first quarter to 33.7% for the 2024 first quarter. We believe the integration activities between GameSquare and FaZe Clan will yield annual cost savings of approximately 18 million in 2024 when comparing GameSquare and FaZe Clan pro forma combined results in Q4 2023 to combined results in Q4 2024. With this overview, I'll turn the call back over to Justin.

Thanks, Mike. Before we open the call to questions, I want to review our expectations for the remainder of the year. After a solid first quarter, we believe we are extremely well positioned to achieve well over $100 million in revenue annually with an annual gross margin to range between 22.5% to 27.5%. It should be noted that Q1 is our seasonally lowest quarter, and with $23.5 million pro forma, we're well and truly on track. We anticipate revenue growth to accelerate in the third and fourth quarters. In addition, we remain committed to pursuing strategies that expand gross margins, reduce SG&A expenses, and ultimately drive profitability. As we look to the seasonally strong second half of the year, we believe we are very well positioned to achieve our guidance and benefit from dramatic improvements in profitability. I believe our strong first quarter financial and operating performance supports our initial success in creating a fast-growing, highly profitable next-generation media business. I look forward to updating investors on our success and our second quarter call in August. So with this overview, Lou, Mike, and I have to take any questions for the operator.

Thank you. We will now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Our first question is from Sean McGowan with Roth Capital Partners. Please go ahead.

Thank you. Good afternoon, guys. I have a couple of questions, if I may. Can you be a little bit more specific about what is in Faze Media and what is not relative to everything that you acquired when you took on Faze? So what's in it and what's not in it?

Yeah, absolutely, Sean. phase media is really the talent and media business and phase esports is the esports business so one lives in phase media is the phase brand IP the active talent roster which we have obviously made some recent cuts and some recent additions and we've really tightened up that roster so it's around 15 of the active talent and you know, in some ways, Sean, the easiest way to think about it is probably in the opposite as into what lives in phase esports because everything else effectively moving forward will live in phase media. And we kind of touched on that being, you know, quite a bit of burn that obviously we're getting under control, but, you know, this transaction really does help fund that burn as we get to growth. So on the esports side, it is, the active team rosters that we have and the active professional talent, the brand and sponsorship deals directly associated to those teams and the competitive esports play, anything outside of that lives within Faith Media.

Okay. So in terms of that burn that you referred to and the income statement impact, so if I hear you correctly, you'd still expect phased media as a standalone entity to have a negative profit. So you'll be backing out losses in effect then, right? So you'll be showing the fully consolidated revenue and other expenses, but you'll be backing out the minority investors portion of the losses. Is that right?

Yeah, I can take that one. Yeah, that's right. Yeah. 49% of phased media will be owned by minority interest and it will be an adjustment on the P&L. If there are losses, it'll be a reduction to that loss from a game score shareholder perspective. Okay.

All right. Thank you. And, Sean, to add to that, just to be clear, I think it's been pretty sort of widely publicized, you know, the burn that existed at phase. I think that this transaction sort of, you know, really de-risks that from our perspective. I would say that, you know, very similarly phase meter in the way that we view phase as a whole, we are on a very aggressive path to get towards profitability, but there's no doubt that in the near term, you know, there is a loss position. You know, I think if you look at comparatively kind of year on year Q1, you know, we showed a roughly six and a half million dollar improvement on that adjusted EBITDA line. And that's really before taking out a lot of costs. So just to be clear that there is, current burn, but we have very aggressive plans to get paid media to profitability.

Right. Thank you. I did assume that. And then to drill down a little bit more, is the $18 million in cost reduction, and I probably have asked you this before, it's just like more of an update, the $18 million in cost reductions, is that net of any other growth spending that you might see in other parts of the business? other than where you're cutting here? Is that net of any additions you're making somewhere else?

Yeah, so I think the biggest upside of this transaction has been the fact that because there are so many heads on the GameSquare side that have experience, one in the endemic esports space, but two more specifically within the FaZe Clan ecosystem, that we've been able to plug in really seamlessly. So the need for, I guess, growth spending to this point has not been required. You know, we've been obviously more on the cost reduction path. Now, look, we're obviously going to have, you know, there'll be strategic opportunities in the future where we continue to invest in growth. But I think a really good example is our content studio with 4Frame. Femi Okasanya, who runs that, was the head of content at Faith Clan originally and really helped drive, you know, a lot of engagement and audience interface early days. So his team are working tirelessly around the new content strategy and getting a podcast network stood up and, you know, really consistent in a lot of content that's going to come out into market. So, you know, the $18 million of costs is really... I guess it is net, Sean, in what we expect to be able to pull out. And we very much believe that we have the current resources required to be able to get, you know, Faithland really in shape and to get to profitability.

Right. Okay, that's helpful. And then last question, kind of along these same lines. Do you think that cost reduction and, you know, revenue growth opportunities will be enough for the company. I mean, you didn't say this, and I don't want to read into it what I shouldn't be reading into it, but do you think this would be enough to get EBITDA positive by the fourth quarter of this year?

Yeah, we do. I think that, you know, we've been pretty transparent about, you know, some of the macro issues that we endured, obviously, in the back part of 22 and into 23, and we're starting to see... see that shift and we are starting to see the return of real spend in the space, which is really, really promising. We're very confident in our, in our revenue targets. And obviously we're being very aggressive on the cost front. So yeah, we do obviously, you know, we need to execute and hit our revenue numbers for that to take place. But we are obviously controlling the controllables right now and, reducing and pulling out costs and we'll continue to and get efficient. And all signs indicate that, yes, we will be able to get there. And, you know, it is somewhat revenue dependent, but again, you know, the costs are coming out. We feel really good about the pipeline. So we're definitely on track.

Very good. Thank you very much. Appreciate it.

This concludes the question and answer session and brings to a close GameSquare's 2024 First Quarter Financial Results Conference Call. You may disconnect your lines. Thank you for participating and have a pleasant day.