OverActive Media Corp.

Good day, everyone, and welcome to Overactive Media's fourth quarter and year-end 2022 conference call. At this time, participants are in a listen-only mode. A question-and-answer session will follow management's remarks. This conference call is being recorded, and a replay of today's call will be available on the Investor Relations section of Overactive Media's website. It will remain posted there for the next 30 days. I will now hand the call over to Mr. Babak Pedram, Investor Relations for Overactive Media, for introductions and the reading of the Spave Carver Statements. Please go ahead, sir.

Thanks, Lara, and good morning, everyone. Welcome to Overactive Media's fourth quarter and year-end 2022 earnings conference call. A copy of the company's earnings press release is available on the Investor Relations section of our website at overactivemedia.com. With us on today's call are Adam Adamu, Overactive Interim Chief Executive Officer, Alison Walker, Chief Commercial Officer, and Rakesh Shah, Chief Financial Officer. Today, we'll review the highlights and financial results for the fourth quarter and year-end 2022, as well as recent developments. Please note that unless otherwise specified, all amounts mentioned on today's call are in Canadian dollars. Before we begin, I will read our cautionary notes regarding forward-looking information. Certain information to be discussed during this call contains forward-looking statements within the meaning of applicable security laws, including, among others, statements concerning the company's 2023 objectives, the company's strategy to achieve those objectives, as well as statements with respect to management's beliefs, plans, estimates, and intentions, and similar statements concerning anticipated future events, results, circumstances, performance, or expectations that are not historical facts. Such forward-looking statements reflect management's current beliefs and are based on information currently available to management and are subject to several significant risks and uncertainties that could cause actual results to differ materially from those anticipated. Also, our commentary today will include adjusted financial measures, which are non-GAAP measures. These should be considered as a supplement to and not as a substitute for GAAP financial measures. Reconciliations between the two can be found in our management discussion analysis, which is available on CDAR.com and our website. At this time, it is my pleasure to introduce Adam Adamu, interim CEO of Overactive Media. Adam, please go ahead.

Thanks, Babic, and good morning, everyone. I appreciate you joining us today as we share our fourth quarter and year-end 2022 earnings report. First, I would like to thank our outgoing CEO, Chris Overholt. Chris was the first ever Overactive Media employee and a key component of our growth and success as a company. Thank you, Chris. I took on the role of interim CEO during a difficult time in the economy for small and large companies alike. My first priority is to ensure the long-term sustainability of our business. On this front, In the first 30 days of the transition, we initiated an operations review and instituted significant cost reductions. We effected a restructuring to better align our costs with our resources in an environment where access to new capital is scarce. These moves and others to come will expand our runway and provide a path to sustainability with the current capital and resources that we have on hand. This is a key focus. and we will monitor it closely and provide updates to investors quarterly. When we founded Overactive, we set out on an esports journey driven by a few fundamental beliefs. That esports is at the crux of gaming, media, and entertainment for today's generation of fans. That owning franchise league assets in partnership with the world's best game developers will deliver a growing stream of recurring revenue to our business, and that brands would support our value proposition based on the attractive demographics of our fans. These beliefs have come, or are coming, to fruition. Our fans are passionate, engaged, and sizable. Our league partners are invested, and the franchise model delivers on the promise of multi-generational leagues driving dependable and recurring revenue streams to teams. Our business operations revenue continues to hit new highs, and the return to live events has fueled the interest and passion of our fan communities. Not everything has developed according to our thesis. Our belief that, as with traditional sports, media rights paid for by broadcasters would fuel the rapid monetization of the industry is not developing as we expected. The digital world has evolved during the pandemic, and the balance between the oversized market power of the incumbent platform providers relative to those distributing content on their platforms, is skewed strongly in favor of the former. Our leagues and league partners are left to choose between media monetization connected to a significantly smaller audience reach or greater reach without media rights monetization. Neither is optimal for the ecosystem, and this challenge has yet to be figured out. Because of this uncertainty, we have decided to reduce the carrying value of some of our franchise assets. While we believe the market value of our assets is substantial, the valuation models used under our accounting standards focus primarily on a discounted cash flow model that is negatively affected by higher interest rates, economic uncertainty, and the perceived risks related to these cash flows. Let me be clear. The core of our competitive advantage is the foundational role that our relationship with the world's leading publishers and game developers has on our ability to adapt. Because of these relationships, we are uniquely positioned to revisit these assumptions and to fix what's not working. We can work directly with our publisher partners to refine the monetization model to seek new sources of revenue from within the broader gaming ecosystem and to develop a revised model that is endemic to our industry and plays to our strengths as publishers, developers, teams, players, and fans. This is only possible because we are directly partnered with the owners and publishers of the intellectual property that backs our esports leagues. We have the means and drive to ensure their esports ecosystems succeed. As I speak to you this morning, I can confidently say that we are executing our plan, that our business is strong, that our teams are successful, and that the excitement is real. As of December 31, 2022, we had $13.6 million in networking capital. a decline of just over $6 million relative to last year at this time. As of April 19, 2023, our financial resources are roughly at the same level as at the end of December, almost four months ago. This results from positive momentum in our operations, management of our working capital, and the positive impact our cost reductions have on our cash burns. We feel fortunate to have a strong balance sheet with sufficient working capital to fund our operations, allowing our senior leadership team to focus on achieving key milestones and building long-term value for our shareholders. Our sponsorships business remains strong. Our leagues are underway, and our franchise teams are progressing very nicely. With regards to our teams business, we remain focused on talent identification, player development, and a coach-led system. As an organization, our goal is to build and deliver consistently top-performing teams that compete at the highest level. So far, in 2023, our Mad Lions team in League of Legends has qualified for the championship finals twice, winning the LEC Spring Championship just two days ago. Mad Lions logged in 7.8 million hours watched by our audience of fans in just two months. With yesterday's victory... I'm convinced they are the most watched esports team in the Western world to date in 2023. Our Call of Duty team, the Toronto Ultra, won the Major 3 championship in Arlington, Texas, and will be hosting the Major 5 championship in Toronto in May in front of a sold-out crowd. With a return to a multi-platform content distribution system, the Call of Duty League viewership has doubled this season. It is now positioned to become the most prominent esports league in North America by viewership. Our Overwatch League team, the Toronto Defiant, finished in fourth place at the Pro-Am tournament in March and will launch our fifth season this week. The Overwatch League will remain on an exclusive platform in 2023, where it found success in 2022 with the highest ever viewership for a grand final. We also launched our first all-female Valorant team under the Mad Lions brand in Spain and the North American Valorant League team under the same name. I will now turn it over to Alison Walker, our Chief Commercial Officer, who will speak about our commercial and business partnerships along with some of our plans for 2023 and beyond. Alison?

Thank you, Adam, and good morning. As Adam highlighted, our business successes were key growth indicators for Overactive Media in 2022. From signing and renewing foundational partnerships to year-over-year audience growth and buy-all accounts, some of the highest quality and attended live events in the Call of Duty and Overwatch leagues in 2022. In the first half of 2022, we signed three critical multi-year, multi-million dollar partnerships with our founding partner Bell, TD Bank Group, and Metaverse partner Zilliqa. In addition to our other partnerships in North America and Europe, these partnerships highlight our focus on creating long-term value for partners through our robust audience engagement strategies unique activations, and strong account management. As a result, we continue to maintain top-ranked positions in our franchise leagues with respect to partnership revenue, MTX revenue, and audience engagement. From an audience growth perspective, our focus on creating high-quality, channel-specific, always-on content and our growing roster of influencers and creators resulted in a 43% year-over-year increase from 2021 to 2022 driven in part by significant growth on TikTok and the promotion and execution of two major live events in Toronto in 2022. From a live event perspective, our Toronto Alter Call Duty Major hosted last year in June and our Toronto Defiant Summer Showdown hosted last year in September, both at Mattamy Athletic Centre, the apropos, the former home of Maple Leaf Gardens, drove sold-out weekend crowds, top performances by our home teams, significant merchandise sales, and massive engagement across social platforms. And we're evidence that our fans are loud, proud, and eager for more. Alongside our business growth, we focused on fiscal responsibility and expense management. With the knowledge that live event and team travel expenses would return post COVID in 2022, we were disciplined in our approach to spending across all functions. And as Adam shared, we've had a solid start to 2023 with strong performances by our Toronto Ultra and Mad Lions teams leading to further growth in followers and engagement and record ticket sales for our Call of Duty Major V coming at the end of May. We re-entered the fastest-growing game in esport, Valorant, in the North American Valorant Challengers League and the Valorant Game Changers ecosystem with an all-female Spanish roster, which we anticipate will create partnership opportunities and audience growth in the months and years to come. Finally, we look forward to sharing more partnership news soon as we continue to focus on developing long-term, premium, sustainable partnerships in our markets. I will now turn it over to Rakesh Shah, our Chief Financial Officer, who will share a high-level review of our 2022 financials.

Thank you, Adam and Alison, and good morning, everyone. Today, I'll review our 2022 financial results, as just mentioned, and please note that the financial information we discussed today is prepared in accordance with international financial reporting standards and is in Canadian dollars, unless otherwise indicated. For the full year 2022 endings, Results, we reported total revenue of $14.2 million in line with prior year's revenue. The total revenues reflect a 1.5 million or 23% year-over-year increase in business operations revenue, which is driven by higher partnerships and event sales. A $1.3 million decline in non-recurring team-related prize money partially offset that increase. Furthermore, for 2022, we reported an adjusted EBITDA loss of approximately $8.8 million. That's a 26% increase compared to an adjusted EBITDA loss of approximately $7 million during the comparative prior year period. The increase is attributable to our investment in our team rosters, people, and products. Our full year 2022 results were in line with our adjusted EBITDA expectations, and importantly, Our strong and current projected liquidity with cash and cash equivalents totaling $13.6 million at year-end gives us the flexibility to pursue our short and long-term goals. That concludes our prepared remarks, and I'd like to open up the call for questions. Operator, please go ahead.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number one on your touchstone phone. Again, that's star followed by the number one on your touchstone phone. If you would like to withdraw your request, please press star followed by the number two. One moment, please, for your first question. Your first question comes from the line of Tawaki Dochima from TD Securities. Please go ahead. Your line is now live.

Thanks for taking the question, guys. I have a question about the write-down. You spoke about the media rights and the difference in reach versus older ways of distribution and newer ways, but it also seemed like your write-downs were mainly in the OWL and CDL and not in the LEC. So, just wondering if there's any differences between the European and North American market that kind of drew those decisions.

Yeah, thanks, Tawaki. I think the way that we look at it is primarily driven by revenue share forecasts going forward. And the model that goes into it is a pretty long-term financial estimate that is frankly kind of built with a lot of uncertainty. And I would say you know, when you take a look at all the assumptions that go into it and you discount it at a rate that is pretty significantly high, um, you know, changes in those forecasts result in, in larger kind of present value situation. So I really don't want to get into the, the, the determination, you know, by franchise, by league, uh, and so forth. But, but, you know, there is a formula that is done. Uh, you know, we, we have expert valuation people that basically review it, um, And as I said, small changes in numbers over long periods of time, discounted at high rates, mean that there's a lot of volatility in those valuations.

Fair enough. And I also noticed that the franchise fee deferral, another deferral was put on after the year ended. It seems like these are becoming more commonplace. Is there a potential for these fees to not become deferrals, but maybe a restructuring over time, or is that? Is that something you would absolutely want to comment on?

Well, let me say that, you know, when I talked about our league partners being heavily invested in the esports ecosystem and the industry, you know, I really meant that. They, you know, they have a very strong vested interest in the success of their leagues. They've invested heavily into them. They see a very bright future for the industry going forward. And quite honestly, right now is a difficult time in the economy for many of the small types of businesses, frankly, that are team organizations. And so we work closely with the publishers, the leagues that they operate, and the people therein to figure out a system that basically makes the leagues viable and Right now, the most viable action they can take is to defer those payments to a later point. So I don't really want to speak to what kinds of restructurings could happen, but I will say that there has been several deferrals across all of our leagues over some periods of time right now. And I would say that is largely related to the leagues wanting to ensure that the sustainability of the ecosystem that they created alongside us.

And one last question for me, closer looking at near-term stuff. I recall that the TD Bell and I think WarnerMedia sponsorship contract renewals, they had a step up, but they were only going to be effective in 23. Are we going to see those increases hit in Q1 or do those renewals kind of play in later on in the year?

Let me pass that over to Alison and maybe Rick.

Yeah, all of those deals, I'll pass to Rick on these financials, but all of those deals, the three that I mentioned, TD, Bell, and Zilliqa, revenue from those deals is, sorry, I should say, Rick, you should probably answer this, but TD and Zilliqa affected 22, Bell, the new renewed deal started in 2013.

Yeah, so these are – good morning, Tawaki. They're longer-term deals. They, on a whole, are step-ups to our existing agreements, and you'll see them reflected over the course of the term of those agreements. And so, as you know, one of the reasons for our success and, so to speak, sustainability is the fact that we enter into – long-term relationships with our sponsors. So I don't want to speak specifically about the impact in this coming quarter, but rather speak to the benefit of those step-ups and the strength of the sponsorships over the course of the term of those agreements, which are long-term in nature.

But basically the step-ups should, maybe you might not hit all hit in Q1, but it should come through over the course of 23. Yes, yes. Perfect. Sounds good. Thank you very much, guys.

Thank you, sir. Just a reminder, should you have a question, please press star followed by the number one on your touchdown sign. Your next question comes from the line of David McSatchin from Cormark Securities. Please go ahead. Your line is now live, sir.

Thank you. Yeah, just a question just on the macro and economic environment here. I mean, since the last time we spoke on the last quarter, Has the situation gotten a little tougher with respect to advertising sponsorship revenue over the next six to 12 months, or is it kind of the same compared with the last quarter? Thanks.

Let me kind of start, and then maybe Allison can talk a little bit about it. I would say, you know, kind of fairly speaking on a macro level, I would say it's probably gotten tougher, certainly not only for esports, but for, you know, kind of all sponsorship-driven events uh, businesses, including, you know, media advertising, probably professional sports teams as well. Um, you know, when, when, you know, these large, large companies are announcing layoffs of their employees, uh, you know, before they do that, they probably kind of cut down on their spending everywhere else as well. So I would say that's just a cyclical component of, of, of the broader industry that we're involved in the, the kind of sponsorship industry, um, And, you know, that will ebb and flow. And right now, I would say it has ebbed. And from our perspective, our strategy and positioning of negotiating long-term deals has really kind of assisted in kind of maintaining the growth, even as the macro economy has declined. um there are there are a number of uh other organizations other other kind of players in the broader industry that you will see a lot more volatility with their numbers and declines as a result of that decline in spending uh but you know as you can see from our numbers we've we've actually increased uh pretty well um and we feel reasonably confident in in you know kind of our expectations for the current year um Allison, if you could add some color, you're dealing with a lot of these sponsors directly yourself.

Hi, David. Thanks for the question. I would say we continue to compete heavily for share of wallet in the sports and entertainment space from a sponsorship perspective and in the media space, particularly as it pertains to esports with Twitch, with brands doing media buys on Twitch. And so we have a very strong partnerships team. It requires that we are pitching and delivering assets and demonstrating their return on investment. So that requires a lot of reporting work and work with our research partners. So I would say I would agree with what Adam said. It remains challenging. It has always been challenging, particularly because esports was new. And so we were having to demonstrate, I would argue, even a greater return on investment than some of our traditional sports colleagues.

Okay, okay. That's it. Thanks.

Thank you, sir. I show no further questions in the queue. At this time, I'd like to turn the call over to Mr. Adam Adamu, Interim CEO, for closing remarks.

Thank you very much for the call. We will continue to work hard. I think we see a brighter path ahead of us. I would say that the team here is well-structured. We've got among the best leadership team in the industry. We've got a plan. We're executing against it, and we feel very confident about the future. And we will be back with an update shortly for first quarter, and we can track our status at that point. So thank you very much, everybody, and good day.

Thank you, sir. Thank you so much, presenters. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.