UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______to _______
Commission
file number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding on August 12, 2024 | |
| Common Stock - $ par value |
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that involve substantial risks and uncertainties. These forward-looking statements depend upon events, risks and uncertainties that may be outside of our control. All statements other than statements of historical fact are forward-looking statements. The words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. Forward-looking statements include, without limitation, our expectations concerning the outlook for our business, productivity, plans and goals for future operational improvements and capital investments, operational performance, future market conditions or economic performance and developments in the capital and credit markets and expected future financial performance, as well as any information concerning possible or assumed future results of operations.
Forward-looking statements involve a number of risks, uncertainties and assumptions, and actual results or events may differ materially from those projected or implied in those statements. Important factors that could cause such differences include, but are not limited to:
| ● | the sufficiency of our cash and investments to meet our liquidity needs; | |
| ● | our limited operating history and uncertain future prospects and rate of growth due to our limited operating history, including our ability to implement business plans and other expectations; | |
| ● | our ability to grow market share in our existing markets or any new markets we may enter; | |
| ● | our ability to maintain and grow the strength of our brand reputation; | |
| ● | the Company’s ability to achieve its objectives; | |
| ● | our ability to manage our growth effectively; | |
| ● | our ability to retain existing and attract new Esports professionals, content creators and influencers; | |
| ● | our success in retaining or recruiting, or changes required in, our officers, directors and other key employees or independent contractors; | |
| ● | our ability to maintain and strengthen our community of brand partners, engaged consumers, content creators, influencers and Esports professionals, and the success of our strategic relationships with these and other third parties; | |
| ● | our ability to effectively compete within the industry; | |
| ● | our presence on the internet and various third-party mass media platforms; | |
| ● | risks related to data security and privacy, including the risk of cyber-attacks or other security incidents; | |
| ● | risks resulting from our global operations; | |
| ● | our ability to maintain the listing of our Common Stock on Nasdaq; | |
| ● | our securities’ potential liquidity and trading, including that the price of our securities may be volatile; | |
| ● | future issuances, sales or resales of our securities; | |
| ● | the grant and future exercise of registration rights; |
| ● | our ability to secure future financing, if needed, and our ability to repay any future indebtedness when due; | |
| ● | the ability of the Company to complete offerings on acceptable terms; | |
| ● | the impact of the regulatory environment in our industry and complexities with compliance related to such environment, including our ability to comply with complex regulatory requirements; | |
| ● | our ability to maintain an effective system of internal controls over financial reporting; | |
| ● | our ability to respond to general economic conditions, including market interest rates; | |
| ● | our ability to execute on future acquisitions, mergers or dispositions; and | |
| ● | changes to accounting principles and guidelines. |
We caution you not to rely on forward-looking statements, which reflect current beliefs and are based on information currently available as of the date a forward-looking statement is made. Forward-looking statements set forth herein speak only as of the date of this Quarterly Report on Form 10-Q. Forward-looking statements are not guarantees of performance. There can be no assurance that future developments affecting us will be those that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond our control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Other sections of this report describe additional factors that could adversely affect our business, financial condition or results of operations. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements.
We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. In the event that any forward-looking statement is updated, no inference should be made that we will make additional updates with respect to that statement, related matters, or any other forward-looking statements except to the extent required by law. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. Any corrections or revisions and other important assumptions and factors that could cause actual results to differ materially from forward-looking statements may appear in our public filings with the U.S. Securities and Exchange Commission (“SEC”), which are or will be (as appropriate) accessible at www.sec.gov, and which you are advised to consult.
GAMESQUARE HOLDINGS, INC.
INDEX
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GAMESQUARE HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
| June 30, 2024 | December 31, 2023 | |||||||
| Assets | ||||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Government remittances | ||||||||
| Contingent consideration, current | ||||||||
| Promissory note receivable, current | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Investment | ||||||||
| Contingent consideration, non-current | ||||||||
| Promissory note receivable | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Right-of-use assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Shareholders’ Equity | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Players liability account | ||||||||
| Deferred revenue | ||||||||
| Current portion of operating lease liability | ||||||||
| Line of credit | ||||||||
| Warrant liability | ||||||||
| Arbitration reserve | ||||||||
| Total current liabilities | ||||||||
| Convertible debt carried at fair value | ||||||||
| Operating lease liability | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| Preferred stock ( | ||||||||
| Common stock ( | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Non-controlling interest | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total shareholders’ equity | ||||||||
| Total liabilities and shareholders’ equity | $ | $ | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
| 1 |
GAMESQUARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(unaudited)
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Restructuring charges | ||||||||||||||||
| Other operating expenses | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net: | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of convertible debt carried at fair value | ||||||||||||||||
| Change in fair value of warrant liability | ||||||||||||||||
| Arbitration settlement reserve | ||||||||||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Loss from continuing operations before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax benefit | ||||||||||||||||
| Net loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) from discontinued operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to non-controlling interest | ||||||||||||||||
| Net loss attributable to attributable to GameSquare Holdings, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Comprehensive loss, net of tax: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Change in foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ||||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to non-controlling interest | ||||||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Income (loss) per common share attributable to GameSquare Holdings, Inc. - basic and assuming dilution: | ||||||||||||||||
| From continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| From discontinued operations | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss per common share attributable to GameSquare Holdings, Inc. - basic and assuming dilution | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted average common shares outstanding - basic and diluted | ||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
| 2 |
GAMESQUARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
| Common stock | Additional paid- | Acccumulated other comprehensive (loss) | Accumulated | Non-controlling | Shareholders’ | |||||||||||||||||||||||
| Shares | Par value |
in capital |
income |
deficit |
interest |
equity | ||||||||||||||||||||||
| Balance, January 1, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Acquisition of Faze Clan | ||||||||||||||||||||||||||||
| Private placements, net of issuance costs | ||||||||||||||||||||||||||||
| Restricted share units exercised | ||||||||||||||||||||||||||||
| Non-controlling interest in Faze Media, Inc. | - | |||||||||||||||||||||||||||
| Share-based compensation - options and RSUs | - | |||||||||||||||||||||||||||
| Other comprehensive income | - | |||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
| Balance, June 30, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Balance, January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Impact of rounding down after exchange for GSQ Esports | ( | ) | ||||||||||||||||||||||||||
| Issuance of common shares to settle contingent consideration | ||||||||||||||||||||||||||||
| Acquisition of Engine | ||||||||||||||||||||||||||||
| Reclassification of GSQ Esports Inc. warrants to warrant liability | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Common shares issued upon vesting of RSUs | ||||||||||||||||||||||||||||
| Shares issued to settle outstanding amounts payable | ||||||||||||||||||||||||||||
| Shares issued for legal settlements | ||||||||||||||||||||||||||||
| Share-based compensation - options and RSUs | - | |||||||||||||||||||||||||||
| Other comprehensive loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
See accompanying notes to Condensed Consolidated Financial Statements.
| 3 |
GAMESQUARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
| Six months ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization and depreciation | ||||||||
| Amortization of operating lease right-of-use assets | ||||||||
| Shares issued for legal settlements | ||||||||
| Gain on disposition of Complexity | ( | ) | ||||||
| Loss on disposition of assets | ||||||||
| Accretion of promissory note receivable | ( | ) | ||||||
| Change in fair value of contingent consideration | ( | ) | ||||||
| Change in fair value of warrant liability | ( | ) | ( | ) | ||||
| Change in fair value of arbitration reserve | ( | ) | ( | ) | ||||
| Change in fair value of convertible debt carried at fair value | ( | ) | ( | ) | ||||
| Income tax recovery | ( | ) | ||||||
| Change in deferred tax balances | ||||||||
| Share-based compensation | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | ( | ) | ||||||
| Government remittances | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable, accrued expenses and other current liabilities | ||||||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Cash acquired in Engine acquisition | ||||||||
| Cash acquired in Faze Clan acquisition | ||||||||
| Disposal of Frankly Media assets | ||||||||
| Disposal of Complexity, net of cash disposed | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financings activities: | ||||||||
| Proceeds from private placements | ||||||||
| Payment of equity issuance costs | ( | ) | ||||||
| Non-controlling interest in Faze Media, Inc. | ||||||||
| Proceeds (repayments) on promissory notes, net | ||||||||
| Repayment of borrowings on credit facility | ( | ) | ||||||
| Repayment of principal on convertible debt | ( | ) | ||||||
| Proceeds (repayments) on line of credit, net | ||||||||
| Net cash provided by financing activities | ( | ) | ||||||
| Effect of exchange rate changes on cash and restricted cash | ( | ) | ||||||
| Net increase (decrease) in cash and restricted cash | ||||||||
| Cash and restricted cash, beginning of period | ||||||||
| Cash and restricted cash, end of period | $ | $ | ||||||
See accompanying notes to Condensed Consolidated Financial Statements.
| 4 |
GAMESQUARE HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(unaudited)
| Six months ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Supplemental disclosure with respect to cash flows: | ||||||||
| Cash paid for interest expense | $ | $ | ||||||
| Cash paid for income taxes | ||||||||
| Operating lease payments in operating cash flows | ||||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Disposition of Complexity in exchange for promissory note receivable | $ | $ | ||||||
| Shares, options, and warrants issued for acquisition of FaZe | ||||||||
| Reclassification of GSQ Esports Inc. warrants to warrant liability | ||||||||
| Shares issued to settle legal and other amounts payable | ||||||||
Reconciliation of cash and restricted cash:
| June 30, 2024 | December 31, 2023 | |||||||
| Cash | $ | $ | ||||||
| Restricted cash | ||||||||
| Cash and restricted cash shown in the consolidated statements of cash flows | $ | $ |
| 5 |
GAMESQUARE HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Corporate information and going concern
(a) Corporate information
GameSquare Holdings, Inc. (“GameSquare” or the “Company”) is a corporation existing under the laws of the State of Delawre as of March 7, 2024 (and was a corporation existing under the Business Corporations Act (Province of British Columbia) prior to March 7, 2023). The registered head office of the Company is 6775 Cowboys Way, Ste. 1335, Frisco, Texas, USA, 75034.
GameSquare, completed its Plan of Merger (the “Merger”) with FaZe Holdings, Inc. (“FaZe”) on March 7, 2024, resulting in the Company acquiring all the issued and outstanding securities of FaZe (see Note 4).
GameSquare is a vertically integrated, digital media, entertainment and technology company that connects global brands with gaming and youth culture audiences. GameSquare’s end-to-end platform includes Gaming Community Network (“GCN”), a digital media company focused on gaming and esports audiences, Swingman LLC dba as Zoned, a gaming and lifestyle marketing agency, Code Red Esports Ltd. (“Code Red”), a UK based esports talent agency, FaZe Holdings Inc. (“FaZe”), a lifestyle and media platform rooted in gaming and youth culture whose premium brand, talent network, and large audience can be monetized across a variety of products and services, GSQ dba as Fourth Frame Studios, a creative production studio, Mission Supply, a merchandise and consumer products business, Frankly Media, programmatic advertising, Stream Hatchet, live streaming analytics, and Sideqik a social influencer marketing platform.
(b) Going concern
These accompanying financial statements have been prepared on a going concern basis, which contemplates that the Company will be able to realize its assets and discharge its liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be unable to continue as a going concern, and therefore be required to realize its assets and liquidate its liabilities and commitments in other than the normal course of business and at amounts different from those in the unaudited condensed consolidated financial statements. Such adjustments could be material. It is not possible to predict whether the Company will be able to raise adequate financing or ultimately attain profit levels of operations.
The
Company has not yet realized profitable operations and has incurred significant losses to date resulting in an accumulated deficit of
$
These conditions indicate the existence of a material uncertainty that cast significant doubt about the Company’s ability to continue as a going concern and, therefore, the Company may be unable to realize its assets and discharge its liabilities in the normal course of business.
| 6 |
2. Significant accounting policies
(a) Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared following generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting and the rules and regulations of the SEC for interim reporting. Accordingly, the unaudited condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for audited financial statements. The balance sheet as of December 31, 2023 was derived from the Company’s audited consolidated financial statements but does not include all disclosures required by GAAP for annual financial statements. In management’s opinion, the interim information contains all adjustments, which include normal recurring adjustments necessary for a fair statement of the results for the interim periods. The footnote disclosures related to the interim financial information contained herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto for the year ended December 31, 2023, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on April 16, 2024, and amended on April 30, 2024 (the “2023 Form 10-K”).
(b) Principles of consolidation
The unaudited condensed consolidated financial statements include the accounts of the Company, all wholly owned and majority-owned subsidiaries in which the Company has a controlling voting interest and, when applicable, variable interest entities in which the Company has a controlling financial interest or is the primary beneficiary. Investments in affiliates where the Company does not exert a controlling financial interest are not consolidated.
All significant intercompany transactions and balances have been eliminated upon consolidation.
The Company’s material subsidiaries as of June 30, 2024, are as follows:
| Name of Subsidiary | Country of Incorporation | Ownership Percentage | Functional Currency | |||||
| Frankly Media LLC | ||||||||
| Stream Hatchet S.L. | ||||||||
| Code Red Esports Ltd. | ||||||||
| GameSquare Esports (USA) Inc. (dba as Fourth Frame Studios) | ||||||||
| GCN Inc. | ||||||||
| Faze Clan Inc. | ||||||||
| Faze Media Inc. | ||||||||
| Swingman LLC (dba as Zoned) | ||||||||
| Mission Supply LLC | ||||||||
| SideQik, Inc. | ||||||||
(c) Use of estimates
The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. Management evaluates these estimates and judgments on an ongoing basis and bases its estimates on historical experience, current and expected future conditions, third-party evaluations and various other assumptions that management believes are reasonable under the circumstances. Significant estimates have been used by management in conjunction with the following: (i) valuation of warrant liabilities; (ii) valuation of convertible debt; (iii) contingent liabilities; (iv) share-based compensation; (v) assumptions used in business combinations; and (vi) testing for impairment of long-lived assets and goodwill. Actual results may differ from the estimates and assumptions used in the consolidated financial statements.
| 7 |
(d) Revenue recognition
Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when it transfers control of its services to a customer.
There were no significant changes in the satisfaction of performance obligations in contracts with customer and related revenue recognition policies for the six months ended June 30, 2024. The following describes the revenue recognition policies for the revenue streams the Company acquired as a result of the Merger (see Note 4):
Brand Sponsorships
The Company offers advertisers a full range of promotional vehicles, including but not limited to online advertising, livestream announcements, event content generation, social media posts, logo placement on the Company’s official merchandise, and special appearances of members of the Company’s talent roster. The Company’s brand sponsorship agreements may include multiple services that are capable of being individually distinct; however the intended benefit is an association with the Company’s brand, and the services are not distinct within the context of the contracts. Revenues from brand sponsorship agreements are recognized ratably over the contract term. Payment terms and conditions vary, but payments are generally due periodically throughout the term of the contract. In instances where the timing of revenue recognition differs from the timing of billing, management has determined the brand sponsorship agreements generally do not include a significant financing component.
Content
The Company and its talent roster generate and produce original content which the Company monetizes through Google’s AdSense service. Revenue is variable and is earned when the visitor views or “clicks through” on the advertisement. The amount of revenue earned is reported to the Company monthly and is recognized upon receipt of the report of viewership activity. Payment terms and conditions vary, but payments are generally due within 30 to 45 days after the end of each month.
The Company grants exclusive licenses to customers for certain content produced by the Company’s talent. The Company grants the customer a license to the intellectual property, which is the content and its use in generating advertising revenues, for a pre-determined period, for an amount paid by the customer, in most instances, upon execution of the contract. The Company’s only performance obligation is to license the content for use in generating advertising revenues, and the Company recognizes the full contract amount at the point at which the Company provides the customer access to the content, which is at the execution of the contract. The Company has no further performance obligations under these types of contracts and does not anticipate generating any additional revenue from these arrangements apart from the contract amount.
Consumer Products
The Company earns consumer products revenue from sales of the Company’s consumer products on the Company’s website or at live or virtual events. Revenues are recognized at a point in time, as control is transferred to the customer upon shipment. The Company offers customer returns and discounts through a third-party distributor and accounts for this as a reduction to revenue. The Company does not offer loyalty programs or other sales incentive programs that are material to revenue recognition. Payment is due at the time of sale. The Company has outsourced the design, manufacturing, fulfillment, distribution, and sale of the Company’s consumer products to a third party in exchange for royalties based on the amount of revenue generated. Management evaluated the terms of the agreement to determine whether the Company’s consumer products revenues should be reported gross or net of royalties paid. Key indicators that management evaluated in determining whether the Company is the principal in the sale (gross reporting) or an agent (net reporting) include, but are not limited to:
| ● | the Company is the party that is primarily responsible for fulfilling the promise to provide the specified good or service, | |
| ● | the Company has inventory risk before the good is transferred to the customer, and | |
| ● | the Company is the party that has discretion in establishing pricing for the specified good or service. |
| 8 |
Based on management’s evaluation of the above indicators, the Company reports consumer products revenues on a gross basis.
Esports
League Participation: Generally, The Company has one performance obligation—to participate in the overall Esport event—because the underlying activities do not have standalone value absent the Company’s participation in the tournament or event. Revenue from prize winnings and profit-share agreements is variable and is highly uncertain. The Company recognizes revenue at the point in time when the uncertainty is resolved.
Player Transfer Fees: Player transfer agreements include a fixed fee and may include a variable fee component. The Company recognizes the fixed portion of revenue from transfer fees upon satisfaction of the Company’s performance obligation, which coincides with the execution of the related agreement. The variable portion of revenue is considered highly uncertain and is recognized at the point in time when the uncertainty is resolved.
Licensing of Intellectual Property: The Company’s licenses of intellectual property generate royalties that are recognized in accordance with the royalty recognition constraint. That is, royalty revenue is recognized at the time when the sale occurs.
The Company assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. When the Company acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognized is the net amount of commission made by the Company.
Deferred revenue consists of customer advances for Company services to be rendered that will be recognized as income in future periods.
(e) Cash and restricted cash
The Company maintains cash deposits with major banks, financial institutions, and other custodians. Deposits at each financial institution are insured in limited amounts by the Federal Deposit Insurance Corporation (“FDIC”). At times cash balances held at financial institutions are more than FDIC insured limits. Bank overdrafts that are repayable on demand and form an integral part of the Company’s cash management are included as a component of cash for the purpose of the statement of cash flows. Restricted cash is related to the players liability account within current liabilities and is presented as a separate category on the consolidated balance sheets and cash restricted for purposes of securing a standby letter of credit covering lease deposits.
(f) Promissory note receivable and allowance for credit losses
The Company received a secured subordinated promissory note as part of the purchase consideration received for the sale of Complexity and sale of Frankly Media assets (see Note 4). The promissory note receivable is classified as not held-for-sale and measured at amortized cost, net of any allowance for credit losses, in accordance with ASC 310, Receivables. The Company maintains an allowance for expected credit losses to reflect the expected collectability of the promissory note receivable based on historical collection data and specific risks identified, as well as management’s expectation of future economic conditions. At each reporting date the Company assesses whether the credit risk on its promissory note receivable has increased significantly since initial recognition.
The promissory note receivable was initially recorded at its transaction closing date fair value on March 1, 2024 (Sale of Complexity) and on May 31, 2024 (Sale of Frankly Media assets) (see Note 4) and no allowance for credit losses had been recognized as of June 30, 2024.
(g) Concentration of credit risk
The Company places its cash, which may at times be in excess of United States’ Federal Deposit Insurance Corporation insurance limits, with high credit quality financial institutions and attempts to limit the amount of credit exposure with any one institution.
| 9 |
The
Company had one customer whose revenue accounted for approximately
No
customer individually accounted for more than
(h) Segment reporting
In accordance with the ASC 280, Segment Reporting, the Company’s Chief Operating Decision Maker (“CODM”) has been identified as the Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company.
The CODM uses gross profit, as reviewed at periodic business review meetings, as the key measure of the Company’s results as it reflects the Company’s underlying performance for the period under evaluation to determine resource allocation. As of June 30, 2024, the Company was organized into the three operating segments, which also represent its three reportable segments: Teams, Agency and Software-as-service (SaaS) + Advertising.
ASC 280 establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue.
3. Recent accounting pronouncements
(a) Pending adoption
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures (“ASU 2023-09”). ASU 2023-09 requires that public business entities must annually (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate). This ASU is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The ASU is to be applied prospectively. Retroactive application is permitted. The Company has not early adopted and continues to evaluate the impact of the provisions of ASU 2023-09 on its consolidated financial statements.
(b) Adopted
In November 2023, the FASB issued ASU No 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (“ASU 2023-07”). ASU 2023-07 is intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The provisions of ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The guidance will be applied retrospectively to all periods presented in the financial statements. ASU 2023-07 will be applicable for the Company’s financial statements for the year ended December 31, 2024. Management is currently evaluating and understanding the requirements under this new standard.
4. Acquisitions and divestitures
(a) FaZe Merger
On March 7, 2024, the Company completed its acquisition of FaZe (the Merger). Prior to the Merger, the Company created GameSquare Merger Sub I, Inc. (“Merger Sub”) to effect the Merger. As a result of the Merger, Merger Sub merged with FaZe, with FaZe continuing as the surviving corporation and as a wholly-owned subsidiary of the Company.
| 10 |
The Company acquired all issued and outstanding FaZe common shares in exchange for 0.13091 of a GameSquare common share for each FaZe common share (the “Exchange Ratio”). All outstanding FaZe equity awards and warrants to purchase shares of FaZe common stock were acquired and exchanged for GameSquare equity awards and warrants to purchase GameSquare common stock on substantially the same terms, with exercise prices, where applicable, and shares issuable adjusted for the Exchange Ratio.
The
Company incurred transaction costs of $
The Merger was accounted for using the acquisition method of accounting under ASC 805, Business Combinations, which requires that the Company recognize the identifiable assets acquired and the liabilities assumed at their fair values on the date of acquisition. The estimated fair values are preliminary and based on the information that was available as of that date.
The following preliminary table summarizes the consideration for the acquisition:
| Purchase consideration | Number of shares | Amount | ||||||
| Common shares | $ | |||||||
| Warrants - Equity | ||||||||
| Options - Vested | ||||||||
| RSUs / RSAs - Vested | ||||||||
| Total purchase price | $ | |||||||
The preliminary purchase price allocation is as follows:
| Purchase price allocation | Amount | |||
| Cash | $ | |||
| Restricted cash | ||||
| Accounts receivable, net | ||||
| Prepaid expenses and other current assets | ||||
| Property and equipment | ||||
| Goodwill | ||||
| Intangible assets | ||||
| Total assets acquired | ||||
| Accounts payable | ||||
| Accrued liabilities | ||||
| Deferred revenue | ||||
| Total liabilities assumed | ||||
| Net assets acquired | $ | |||
Measurement period adjustments
Where provisional values are used in accounting for a business combination, they may be adjusted in subsequent periods, not to exceed twelve months. The primary areas that are subject to change relate to the fair value of the purchase consideration transferred and purchase price allocations related to the fair values of certain tangible assets, the valuation of intangible assets acquired, and residual goodwill. The Company expects to continue to obtain information to assist in determining the fair value of the net assets acquired during the measurement periods.
Goodwill
The
difference between the estimated acquisition date fair value of the consideration transferred and the estimated values assigned to the
assets acquired and liabilities assumed represents goodwill of $
The goodwill recorded represents the following:
| ● | Cost savings and operating synergies expected to result from combining the operations of FaZe with those of the Company. | |
| ● | Intangible assets that do not qualify for separate recognition such as the assembled workforce. |
Goodwill arising from the Merger is expected to be deductible for tax purposes.
| 11 |
(b) Sale of Complexity
On March 1, 2024, the Company, through its wholly owned subsidiary GameSquare Esports (USA), Inc., entered into a Membership Interest Purchase Agreement (the “MIPA”) to sell all of the issued and outstanding equity interest of NextGen Tech, LLC (“Complexity”) to Global Esports Properties, LLC (the “Buyer”) (the “Transaction”).
Pursuant
to the MIPA, Buyer paid the Company aggregate purchase consideration with a Transaction closing date fair value of $
As
a result of the Transaction, during the six months ended June 30, 2024, Complexity met the requirements to be reported as
discontinued operations (see Note 17). The Company recognized a gain of $
The
Note has a principal amount of $
(c) Frankly Media asset disposal
On May 31, 2024, the Company, through its wholly owned subsidiary Frankly Media LLC (“Frankly”), entered into an Asset Purchase Agreement (the “UNIV APA”) to sell the producer content management software platform and associated software technology (“CMS Assets”) of Frankly to UNIV, Ltd (“UNIV”) (the “UNIV Asset Sale”).
Pursuant
to the UNIV APA, UNIV paid the Company aggregate purchase consideration with a transaction closing date fair value of $
Additionally on May 31, 2024, the Company, through its wholly owned subsidiary Frankly, entered into an Asset Purchase Agreement (the “XPR APA”) to sell the press release and content distribution service assets (the “PR Assets”) of Frankly to XPR Media LLC (“XPR”) (the “XPR Asset Sale” and, collectively with the UNIV Asset Sale, the “Frankly Asset Sales”).
Pursuant
to the XPR APA, XPR paid the Company aggregate purchase consideration with a transaction closing date fair value of $
As
a result of the Frankly Asset Sales during the three and six months ended June 30, 2024, the Company recognized a loss of $
The
UNIV Note has a principal amount of $
The
XPR Note has a principal amount of $
| 12 |
(d) Faze Media, Inc. asset contribution
On
May 2, 2024, the Company created FaZe Media, Inc. (“Faze Media”). On May 15, 2024, the Company entered into a business
venture with Gigamoon Media, LLC (“Gigamoon”). As part of this venture, the Company contributed certain media assets of
Faze Clan, Inc. to Faze Media and Gigamoon invested $
On
June 17, 2024, the Company entered into an agreement to sell of its shares of Series A-1 Preferred Stock of Faze
Media to M40A3 LLC (“M4”) in exchange for $
Contemporaneous with the execution of the Secondary SPA, the Company and M4 entered into a Limited Proxy and Power of Attorney with respect to all of the shares of Series A-1 Preferred Stock of Faze Media held by M4 (the “Faze Media Voting Proxy”).
Faze Media is not a variable interest entity. Due to the Faze Media Voting Proxy, the Company maintains a controlling financial interest in Faze Media and Faze Media is a consolidated subsidiary of the Company as of June 30, 2024. The Preferred Stock of Faze Media held by M4 and Gigamoon represent a non-controlling interest of the Company. Upon termination of the Faze Media Voting Proxy, the Company will reassess whether it continues to have a controlling financial interest in Faze Media.
As
a result of the above transactions, the Company recorded a non-controlling interest in Faze Media, Inc. of $
5. Goodwill and intangible assets
(a) Goodwill
The following table presents the changes in the carrying amount of goodwill:
| Balance, December 31, 2023 | $ | |||
| Acquisition of FaZe | ||||
| Disposal of Frankly Media assets | ( | ) | ||
| Balance, June 30, 2024 | $ |
Goodwill resulting from the acquisition of FaZe was allocated to the Teams operating and reportable segment.
There were
| 13 |
(b) Intangible assets
Intangible assets consist of the following:
| As of June 30, 2024 | ||||||||||||||||
| Original cost | Accumulated amortization | Accumulated impairment losses | Carrying value | |||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Talent network | $ | $ | ( | ) | ||||||||||||
| Brand name | ( | ) | ( | ) | ||||||||||||
| Software | ( | ) | ||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| As of December 31, 2023 | ||||||||||||||||
| Original cost | Accumulated amortization | Accumulated impairment losses | Carrying value | |||||||||||||
| Customer relationships | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
| Brand name | ( | ) | ( | ) | ||||||||||||
| Software | ( | ) | ||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
The
Company recognized amortization expense for intangible assets of $
Amortization expense for the intangible assets is expected to be as follows over the next five years, and thereafter:
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total estimated amortization expense | $ |
There
were
6. Leases
On June 30, 2021, the Company acquired Complexity. Complexity leased a building in Frisco, Texas. Upon the sale of Complexity (see Note 4), the lease was assigned to GameSquare Esports (USA), Inc. and the Company entered into an agreement to sublease the building to Complexity for a 12-month period. The lease has an original lease period expiring in April 2029. The lease agreement does not contain any material residual value guarantees or material restrictive covenants.
| 14 |
The components of operating lease expense are as follows:
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Operating lease expense | ||||||||||||||||
| Variable lease expense | ||||||||||||||||
| Total operating lease costs | ||||||||||||||||
As
of June 30, 2024, the remaining lease-term and discount rate on the Company’s lease was
Maturities of the lease liability are as follows:
| Remainder of 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total lease payments | ||||
| Less: Interest | ( | ) | ||
| Total lease liability | $ |
7. Line of credit
On
September 14, 2023, the Company entered into an accounts receivable financing and security agreement with a maximum availability of $
As
of June 30, 2024, the outstanding principal, and unpaid accrued interest, on the LOC was $
8. Convertible debt
As
of June 30, 2024, the Company has two convertible debt instruments: a $
Certain
registration rights were included in the King Street CD. If the Company does not have an effective registration statement on file with
the SEC within either 110 days (if registered on a Form S-3) or 150 days (if registered on a Form S-1) of the December 29, 2023, registering
the underlying shares issuable upon conversion of the King Street CD, or fails to maintain the effectiveness of such registration statement,
then liquidated damages would accrue equal to
| 15 |
The Company accounts for such damages in accordance with ASC subtopic 825-20, Registration Payment Arrangements (“ASC 825-20”). ASC 825-20 specifies that the contingent obligation to make future payments under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument, should be separately recognized and accounted for as a contingency in accordance with ASC 450-20, Loss Contingencies. The registration statement is expected to be declared effective during 2024 and no contingent liability has been recognized in relation to this registration payment arrangement.
The King Street CD was paid down subsequent to June 30, 2024 (see Note 18).
(a) King Street CD
Key
terms of the King Street CD include (a) a maturity date of
The fair value of the King Street CD was estimated using the binomial lattice model with the below assumptions:
| June 30, 2024 | December 31, 2023 | |||||||
| Share price | $ | $ | ||||||
| Conversion price | $ | $ | ||||||
| Term, in years | ||||||||
| Interest rate | % | % | ||||||
| Expected volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Expected dividend yield | % | % | ||||||
(b) Three Curve CD
Key
terms of the Three Curve CD include (a) a maturity date of
The fair value of the Three Curve CD was estimated using the binomial lattice model with the below assumptions:
June 30, 2024 | December 31, 2023 | |||||||
| Share price | $ | $ | ||||||
| Conversion price | $ | $ | ||||||
| Term, in years | ||||||||
| Interest rate | % | % | ||||||
| Expected volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Expected dividend yield | % | % | ||||||
| 16 |
The change in fair values of the Company’s convertible debentures subject to recurring remeasurement at fair value were as follows:
| Three Curve CD | King Street CD | Total | ||||||||||
| Balance, December 31, 2023 | $ | $ | $ | |||||||||
| Interest expense | ||||||||||||
| Interest payments | ( | ) | ( | ) | ||||||||
| Principal payments | ( | ) | ( | ) | ||||||||
| Change in fair value(1) | ( | ) | ( | ) | ( | ) | ||||||
| Balance, June 30, 2024 | $ | $ | $ | |||||||||
| Contractual principal balances outstanding: | ||||||||||||
| As of December 31, 2023 | $ | $ | $ | |||||||||
| As of June 30, 2024 | $ | $ | $ | |||||||||
| (1) |
9. Shareholders’ Equity
(a) Description of the Company’s securities
The Company is authorized to issue an unlimited number of common shares, with no par value. Holders of common shares are entitled to one vote in respect of each common share held at shareholder meetings of the Company.
(b) Activity for the periods presented
On March 7, 2024, common shares of the Company were issued for the completion of the Merger (see Note 4).
In
conjunction with the Merger, on March 7, 2024, the Company completed a private placement in public equity financing (the “PIPE
Financing”) with certain investors in which the Company offered units at a purchase price of $ per unit for aggregate
gross proceeds of $
During the six months ended June 30, 2024, the Company issued common shares from the exercise of Restricted Share Units (“RSUs”) under its equity incentive plan (see Note 11(b)).
On
March 24, 2023, common shares were issued in settlement of outstanding amounts payable of $
On March 10, 2023, common shares of the Company were issued to settle contingent consideration on a prior acquisition.
On April 11, 2023, common shares were issued in connection with the acquisition of Engine Gaming and Media, Inc. (“Engine”).
During the six months ended June 30, 2023, the Company issued common shares from the exercise of RSUs under its equity incentive plan (see Note 11(b)).
As the Company incurred a net loss for the three and six months ended June 30, 2024 and 2023, the inclusion of certain Options, unvested stock units, warrants, and contingent shares in the calculation of diluted earnings per share would be anti-dilutive and, accordingly, were excluded from the diluted loss per share calculation.
| 17 |
| Three and six months ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Options and RSUs outstanding | ||||||||
| Warrants outstanding | ||||||||
| Shares issuable upon conversion of convertible debt | ||||||||
| Total | ||||||||
The Company grants share purchase options (“Options”) for the purchase of common shares to its directors, officers, employees and consultants.
Options may be exercisable over periods of up to years as determined by the Board of Directors of the Company. The Option price for shares that are the subject of any Option shall be fixed by the Board when such Option is granted but shall not be less than the market value of such shares at the time of grant.
The Omnibus Plan allows the Company to award restricted share units to directors, officers, employees and consultants of the Company and its subsidiaries upon such conditions as the Board may establish, including the attainment of performance goals recommended by the Company’s compensation committee. The purchase price for common shares of the Company issuable under each RSU award, if any, shall be established by the Board at its discretion. Common shares issued pursuant to any RSU award may be made subject to vesting conditions based upon the satisfaction of service requirements, conditions, restrictions, time periods or performance goals established by the board.
The TSXV required, at the time of approval of the Omnibus Plan, the Company to fix the number of common shares to be issued in settlement of awards that are not options. The maximum number of Shares available for issuance pursuant to the settlement of RSU shall be an aggregate of Shares.
(a) Options
The following is a summary of Options outstanding as of June 30, 2024 and December 31, 2023, and changes during the six months then ended, by Option exercise currency:
| Number of shares | Weighted-average exercise price (CAD) | Weighted-average remaining contractual term | Aggregate intrinsic value | |||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Outstanding at June 30, 2024 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2024 | $ | $ | ||||||||||||||
| Number of shares | Weighted-average exercise price (USD) | Weighted-average remaining contractual term | Aggregate intrinsic value | |||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Acquisition of FaZe | ||||||||||||||||
| Outstanding at June 30, 2024 | $ | $ | ||||||||||||||
| Exercisable at June 30, 2024 | $ | $ | ||||||||||||||
| 18 |
See Note 4 for a summary of the significant valuation inputs used to value options issued in relation to the acquisition of FaZe.
Share-based compensation expense related to the vesting of Options was $ thousand and $ thousand for the six months ended June 30, 2024 and 2023, respectively, and is included in general and administrative expense on the consolidated statements of operations and comprehensive loss.
(b) RSUs
The following is a summary of RSUs outstanding on June 30, 2024, and December 31, 2023, and changes during the six months then ended:
| Number of shares | Weighted-average grant date fair value | |||||||
| Outstanding at December 31, 2023 | $ | |||||||
| Acquisition of FaZe | ||||||||
| Granted | ||||||||
| Exercised | ( | ) | ||||||
| Outstanding at June 30, 2024 | $ | | ||||||
The grant-date fair values of RSUs are based on the Company’s stock price as of the grant date (see Note 4).
Shared-based compensation expense related to the vesting of RSU’s was $ million and $ million for the six months ended June 30, 2024 and 2023, respectively, and is included in general and administrative expense on the consolidated statements of operations and comprehensive loss.
12. Warrants
(a) Liability-classified warrants having CAD exercise price
The functional currency of the Company is USD and certain of the Company’s warrants have an exercise price in CAD, resulting liability classification of the warrants.
The following is a summary of changes in the value of the warrant liability for the six months ended June 30, 2024:
| Amount | ||||
| Balance, December 31, 2023 | $ | |||
| Change in fair value | ( | ) | ||
| Foreign exchange | ( | ) | ||
| Balance, June 30, 2024 | $ | |||
The following assumptions were used to determine the fair value of the warrant liability using the Black-Scholes option pricing model:
| June 30, 2024 | December 31, 2023 | |||||||
| Share price | CAD$ | CAD$ | ||||||
| Term, in years | ||||||||
| Exercise price | CAD$ | CAD$ | ||||||
| Expected volatility | % | % | ||||||
| Risk-free interest rate | ||||||||
| Expected dividend yield | % | % | ||||||
| 19 |
Volatility was estimated by using the average historical volatility of the Company. The expected life in years represents the period of time that warrants issued are expected to be outstanding. The risk-free rate is based on government treasury bond rates issued with a remaining term approximately equal to the expected life of the warrants.
The following is a summary of liability-classified warrants outstanding as of June 30, 2024, and December 31, 2023, and changes during the six months then ended:
| Weighted-average | ||||||||
| Number of | exercise price | |||||||
| warrants | (CAD) | |||||||
| Outstanding, December 31, 2023 | $ | |||||||
| Warrants expired | ( | ) | ||||||
| Outstanding, June 30, 2024 | $ | |||||||
(b) Equity-classified warrants
As
discussed in Note 4 above in conjunction with the acquisition of FaZe, the Company issued
As
discussed in Note 9, in conjunction with the PIPE Financing on March 7, 2024,
The following is a summary of equity-classified warrants outstanding as of June 30, 2024, and December 31, 2023, and the changes during the six months then ended:
| Weighted-average | ||||||||
| Number of | exercise price | |||||||
| warrants | (USD) | |||||||
| Outstanding, December 31, 2023 | $ | |||||||
| Warrants expired | ( | ) | ||||||
| PIPE Financing | ||||||||
| Acquisition of FaZe | ||||||||
| Outstanding, June 30, 2024 | $ | |||||||
13. Related party transactions
(a) Convertible debenture with a director of the Company as counterparty
On
September 1, 2022, Engine extended convertible debentures that were due to expire in October and November 2022 with an aggregate principal
amount of $
14. Commitments and contingencies
In
April 2020, Engine announced its renegotiation of the acquisition of Allinsports. The revised purchase agreement provided for the acquisition
of
| 20 |
In
response, in November 2020, the shareholders of Allinsports commenced arbitration in Alberta, Canada seeking, among other things, to
compel Engine to complete the acquisition of Allinsports without the audited financial statements, and to issue common shares
of Engine to those shareholders. As alternative relief, the shareholders of Allinsports sought up to $
By
Order to Continue dated May 5, 2022, Engine was substituted in as the plaintiff in a matter pending in the Ontario Superior Court of
Justice, seeking recovery of $
The outcomes of pending litigations in which the Company is involved are necessarily uncertain as are the Company’s expenses in prosecuting and defending these actions. From time to time the Company may modify litigation strategy and/or the terms on which it retains counsel and other professionals in connection with such actions, which may affect the outcomes of and/or the expenses incurred in connection with such actions.
The Company is subject to various other claims, lawsuits and other complaints arising in the ordinary course of business. The Company records provisions for losses when claims become probable, and the amounts are estimable. Although the outcome of such matters cannot be determined, it is the opinion of management that the final resolution of these matters will not have a material adverse effect on the Company’s financial condition, operations, or liquidity.
15. Revenue and segmented information
The CODM uses gross profit, as reviewed at periodic business review meetings, as the key measure of the Company’s results as it reflects the Company’s underlying performance for the period under evaluation to determine resource allocation. As of June 30, 2024, the Company was organized into the three operating segments, which also represent its three reportable segments: Teams, Agency and Software-as-service (SaaS) + Advertising.
| 21 |
Revenue, cost of sales and gross profit for the Company’s operating and reportable segments, disaggregated into geographic locations, are as follows:
| Six months ended June 30, 2024 | ||||||||||||||||
| Segment | United Kingdom | USA | Spain | Total | ||||||||||||
| Revenue | ||||||||||||||||
| Teams | $ | $ | $ | $ | ||||||||||||
| Agency | ||||||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Revenue | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Teams | ||||||||||||||||
| Agency | ||||||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Teams | ||||||||||||||||
| Agency | ||||||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Gross profit | $ | $ | $ | $ | ||||||||||||
| Six months ended June 30, 2023 | ||||||||||||||||
| Segment | United Kingdom | USA | Spain | Total | ||||||||||||
| Revenue | ||||||||||||||||
| Agency | $ | $ | $ | $ | ||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Revenue | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Agency | ||||||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Agency | ||||||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Gross profit | $ | $ | $ | $ | ||||||||||||
| Three months ended June 30, 2024 | ||||||||||||||||
| Segment | United Kingdom | USA | Spain | Total | ||||||||||||
| Revenue | ||||||||||||||||
| Teams | $ | $ | $ | $ | ||||||||||||
| Agency | ||||||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Revenue | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Teams | ||||||||||||||||
| Agency | ||||||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Teams | ||||||||||||||||
| Agency | ||||||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Gross profit | $ | $ | $ | $ | ||||||||||||
| Three months ended June 30, 2023 | ||||||||||||||||
| Segment | United Kingdom | USA | Spain | Total | ||||||||||||
| Revenue | ||||||||||||||||
| Agency | $ | $ | $ | $ | ||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Revenue | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Agency | ||||||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Cost of sales | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Agency | ||||||||||||||||
| SaaS + Advertising | ||||||||||||||||
| Total Gross profit | $ | $ | $ | $ | ||||||||||||
Management does not evaluate operating segments using discrete asset information. The Company’s consolidated assets are generally shared across, and are not specifically ascribed to, operating and reportable segments.
| 22 |
Property and equipment, net, by geographic region, are summarized as follows:
| June 30, 2024 | December 31, 2023 | |||||||
| USA | $ | $ | ||||||
| United Kingdom | ||||||||
| Spain | ||||||||
| Total | $ | $ | ||||||
16. Fair value measurements
The carrying value of cash approximates fair value. The carrying amount of other current assets and liabilities, such as accounts and other receivables and accounts payable, approximates fair value due to the short-term maturity of the amounts, and such current assets and liabilities are considered Level 2 in the fair value hierarchy.
The following tables summarize financial assets and liabilities measured at fair value on a recurring basis:
| As of June 30, 2024 | ||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant liability | ||||||||||||||||
| Arbitration reserve | ||||||||||||||||
| Convertible debt | ||||||||||||||||
| As of December 31, 2023 | ||||||||||||||||
| Description | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | ||||||||||||||||
| Contingent consideration | $ | $ | $ | $ | ||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant liability | ||||||||||||||||
| Arbitration reserve | ||||||||||||||||
| Convertible debt | ||||||||||||||||
(a) Fair values measured on a non-recurring basis
The Company’s non-financial assets, such as property and equipment, goodwill and intangible assets, are recorded at fair value upon a business combination and are remeasured at fair value only if an impairment charge is recognized. The Company’s investment, accounted for under the measurement alternative of ASC 321, is remeasured at fair value only upon an observable price change or if an impairment charge is recognized. The Company uses unobservable inputs to the valuation methodologies that are significant to the fair value measurements, and the valuations require management’s judgment due to the absence of quoted market prices. The Company determines the fair value of its held and used assets, goodwill and intangible assets using an income, cost or market approach as determined reasonable.
17. Discontinued operations
As
discussed in Note 4, on March 1, 2024, the Company sold Complexity and recognized a gain on disposition of $
The
Company recognized a pretax net loss of $
| 23 |
Complexity
had amortization and depreciation of $
18. Subsequent events
Standby Equity Purchase Agreement
On
July 8, 2024, the Company entered into the Standby Equity Purchase Agreement (“SEPA”) with YA II PN, LTD, a Cayman Islands
exempt limited partnership (“Yorkville”), pursuant to which the Company has the right to sell to Yorkville up to $
Each
advance (each, an “Advance”) the Company requests in writing to Yorkville under the SEPA (notice of such request, an “Advance
Notice”) may be for a number of shares of Common Stock up to the greater of
The SEPA will automatically terminate on the earliest to occur of (i) the 36-month anniversary of the date of the SEPA or (ii) the date on which the Company shall have made full payment of Advances pursuant to the SEPA. We have the right to terminate the SEPA at no cost or penalty upon five trading days’ prior written notice to Yorkville, provided that there are no outstanding Advance Notices for which shares of common stock need to be issued and the Company has paid all amounts owed to Yorkville pursuant to the Promissory Note. The Company and Yorkville may also agree to terminate the SEPA by mutual written consent.
In
connection with the execution of the SEPA, the Company paid a diligence fee (in cash) to Yorkville in the amount of $
| 24 |
Additionally,
Yorkville agreed to advance to the Company, in exchange for a convertible promissory note (the “Promissory Note”), an aggregate
principal amount of up to $
At
any time during the Commitment Period that there is a balance outstanding under the Promissory Note, Yorkville may deliver notice (an
“Investor Notice”) to the Company to cause an Advance Notice to be deemed delivered to Yorkville and the issuance and sale
of shares of Common Stock to Yorkville pursuant to an Advance (an “Investor Advance”) in an amount not to exceed the balance
owed under the Promissory Note outstanding on the date of delivery of such Investor Notice, and shall not exceed during any calendar
month period, the greater of
An
“Amortization Event” will occur under the terms of the Promissory Note if (i) the daily VWAP is less than the Floor Price
for five trading days during a period of seven consecutive trading days, or (ii) the Company has issued in excess of
The Company will control the timing and amount of any sales of shares of Common Stock to Yorkville, except with respect to Investor Advances. Actual sales of shares of Common Stock to Yorkville as an Advance under the SEPA will depend on a variety of factors to be determined by the Company from time to time, which may include, among other things, market conditions, the trading price of the Company’s Common Stock and determinations by the Company as to the appropriate sources of funding for our business and operations.
The SEPA contains customary representations, warranties, conditions and indemnification obligations of the parties. The representations, warranties and covenants contained in such agreements were made only for purposes of such agreements and as of specific dates, were solely for the benefit of the parties to such agreements and may be subject to limitations agreed upon by the contracting parties.
King Street CD
On
June 21, 2024, the Company received a notice of alleged event of default and a demand for payment of the full principal amount, together
with premiums and interest thereon (the “Notice”), from King Street Partners LLC (“King Street”), the holder
of that certain
The
Notice alleges that due to the Company’s failure to maintain its
If
it is ultimately determined that events of default exist under the King Street Note and that the Notice was properly provided on behalf
of the Holder, the outstanding principal amount of the King Street Note, plus accrued but unpaid interest, liquidated damages and other
amounts owing in respect thereof will be due and payable. From and after an event of default, all such amounts due and owing to King
Street would bear interest at
The Company strongly disagrees with the assertion that events of default have occurred under the King Street CD based on, inter alia, a plain language reading of the Consent and interpretive caselaw regarding the plain language. The Company will pursue a defense to any enforcement action taken by King Street, but the Company cannot guarantee a resolution on a timely basis, on favorable terms, or at all. If the Company is unable to resolve the alleged defaults under the King Street Note, it would have a material adverse effect on the Company’s liquidity, financial condition and results of operations.
On
July 10, 2024, the Company paid down the outstanding principal and accrued interest on the King Street CD of $
| 25 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise requires, all references in this section to the “Company,” “GameSquare,” “we,” “us,” or “our” refer to GameSquare Holdings, Inc. and its subsidiaries and/or the management and employees of the Company.
The following discussion and analysis provide information which our management believes is relevant to an assessment and understanding of our results of operations and financial condition. This discussion and analysis should be read together with our audited consolidated financial statements and related notes included in Part I of this Form 10-Q. This discussion and analysis should also be read together with our financial information for the year ended and as of December 31, 2023. In addition to historical financial information, this discussion and analysis contains forward-looking statements that reflect our plans, estimates, and beliefs that involve risks, uncertainties and assumptions. As a result of many factors, such as those set forth under the “Cautionary Statement Regarding Forward-Looking Statements” elsewhere in this Form 10-Q, our actual results may differ materially from those anticipated in these forward-looking statements.
Overview
GameSquare is a vertically integrated, digital media, entertainment and technology company that connects global brands with gaming and youth culture audiences. GameSquare’s end-to-end platform includes Gaming Community Network (“GCN”), a digital media company focused on gaming and esports audiences, Zoned, a gaming and lifestyle marketing agency, Code Red, a UK based esports talent agency, FaZe, a lifestyle and media platform rooted in gaming and youth culture whose premium brand, talent network, and large audience can be monetized across a variety of products and services, Fourth Frame Studios, a creative production studio, Mission Supply, a merchandise and consumer products business, Frankly Media, programmatic advertising, Stream Hatchet, live streaming analytics, and Sideqik a social influencer marketing platform.
GameSquare Holdings, Inc. (formerly Engine Gaming and Media, Inc.), (NASDAQ: GAME; TSXV: GAME) completed its plan of arrangement (the “Arrangement”) with GameSquare Esports Inc. (“GSQ”) on April 11, 2023, resulting in the Company acquiring all the issued and outstanding securities of GSQ. At completion of the Arrangement Engine Gaming and Media, Inc. changed its name to GameSquare Holdings Inc.
Brands
FaZe
FaZe a digitally native lifestyle and media brand founded and rooted in gaming and youth culture. FaZe is at the forefront of the global creator economy, which is an industry centered around innovative digital content development fueled by social media influencers, creators and businesses who monetize their content online. With a leading digital content platform created for and by Generation Z and Millennials, FaZe has established a highly engaged and growing global fanbase. FaZe produces engaging content, merchandise, consumer products and experiences, and create advertising and sponsorship programs for leading national brands. FaZe has several revenue streams including brand sponsorships, content, consumer products, and Esports.
Zoned
Zoned Gaming is a marketing agency dedicated to bridging the gap between gaming and pop-culture. They work with endemic and non-endemic brands alike, helping them identify their lane and build equity in the constantly changing world of gaming and esports.
Code Red
Code Red is an authentic esports media agency that is passionate about esports and video games. Since 2003, Code Red has produced major esports events, sourced, and hired esports and gaming talent, developed esports related content (that has gone out to over 1 million viewers), managed major esports teams, conducted a wide range of ongoing and ad-hoc strategic consultancy projects, and managed countless marketing campaigns.
GCN
GCN is a media group dedicated to gaming and esports. GCN builds bespoke strategy solutions for reaching young gaming & esports audiences from content creation to full-scale tournaments for any endpoint be it social, broadcast TV or live stream.
| 26 |
Fourth Frame Studios
Rooted in gaming, youth, and popular culture, Fourth Frame Studios is a multidisciplinary creative and production studio that specializes in telling stories for a multi-dimensional audience. Fourth Frame Studios builds meaningful and diverse content systems fueled by best-in-class creatives and production resources, that truly get what gamers and youth audiences want.
Mission Supply
Mission Supply operates at the intersection of gaming, esports, and fashion design filling a need for fans seeking high quality merchandise that represents their favorite teams, organizations, and brands within the gaming ecosystem by providing merchandise and consumer product design, marketing, and sales consultation to brands and esports organizations seeking to reach large and growing gaming and youth demographics.
Frankly
Frankly Inc. (“Frankly”), through its wholly-owned subsidiary Frankly Media, LLC, provides a complete suite of solutions that give publishers a unified workflow for the creation, management, publishing and monetization of digital content to any device, while maximizing audience value and revenue.
Frankly’s products include a ground-breaking online video platform for Live, Video-on-Demand (“VOD”) and Live-to-VOD workflows, a full-featured content management system with rich storytelling capabilities, as well as native apps for iOS, Android, Apple TV, Fire TV and Roku.
Frankly also provides comprehensive advertising products and services, including direct sales and programmatic ad support. With the release of its server side ad insertion (SSAI) platform, Frankly has been positioned to help video producers take full advantage of the growing market in addressable advertising.
Sideqik
Sideqik, Inc. (“Sideqik”), is an influencer marketing platform that offers brands, direct marketers, and agencies tools to discover, connect and execute marketing campaigns with content creators. Sideqik’s end-to-end solutions offer marketers advanced capabilities to discover influencers with demographic and content filtering; connect and message influencers; share marketing collateral such as campaign briefs, photos, logos, videos; measure reach, sentiment, and engagement across all major social media platforms; and evaluate earned media value and return on investment across the entire campaign.
Stream Hatchet
Stream Hatchet is the leading provider of data analytics for the live streaming industry. With a suite of services, encompassing a user-friendly SaaS platform, custom reports, and strategic consulting, Stream Hatcher is a trusted guide for those navigating the dynamic landscape of live streaming. With up to seven years of historical data with minute-level granularity from 20 platforms, Stream Hatchet provides stakeholders in the live-streaming industry with powerful insights to drive innovation and growth. Stream Hatchet partners with a diverse clientele - from video game publishers and marketing agencies to esports organizers and teams - who rely on the company’s cutting-edge data analytics to optimize their marketing strategies, secure lucrative sponsorships, enhance esports performance, and build successful tournaments.
| 27 |
Recent Developments
Standby Equity Purchase Agreement
On July 8, 2024, the Company entered into the Standby Equity Purchase Agreement (“SEPA”) with YA II PN, LTD, a Cayman Islands exempt limited partnership (“Yorkville”), pursuant to which the Company has the right to sell to Yorkville up to $20.0 million of its shares of common stock, par value $0.0001 per share (“Common Stock”), subject to certain limitations and conditions set forth in the SEPA, from time to time during the term of the SEPA. Sales of the shares of Common Stock to Yorkville under the SEPA, and the timing of any such sales, are at the Company’s option, and the Company is under no obligation to sell any shares of Common Stock to Yorkville under the SEPA except in connection with notices that may be submitted by Yorkville, in certain circumstances as described below.
Each advance (each, an “Advance”) the Company requests in writing to Yorkville under the SEPA (notice of such request, an “Advance Notice”) may be for a number of shares of Common Stock up to the greater of (i) 500,000 shares or (ii) such amount as is equal to 100% of the average daily volume traded of the Common Stock during the five trading days immediately prior to the date the Company requests each Advance; The shares of Common Stock purchased pursuant to an Advance delivered by the Company will be purchased at a price equal to 97% of the lowest daily VWAP of the shares of Common Stock during the three consecutive trading days commencing on the date of the delivery of the Advance Notice, other than the daily VWAP on a day in which the daily VWAP is less than a minimum acceptable price as stated by the Company in the Advance Notice or there is no VWAP on the subject trading day. The Company may establish a minimum acceptable price in each Advance Notice below which the Company will not be obligated to make any sales to Yorkville. “VWAP” is defined as the daily volume weighted average price of the shares of Common Stock for such trading day on the Nasdaq Stock Market (“Nasdaq”) during regular trading hours as reported by Bloomberg L.P.
The SEPA will automatically terminate on the earliest to occur of (i) the 36-month anniversary of the date of the SEPA or (ii) the date on which the Company shall have made full payment of Advances pursuant to the SEPA. We have the right to terminate the SEPA at no cost or penalty upon five trading days’ prior written notice to Yorkville, provided that there are no outstanding Advance Notices for which shares of common stock need to be issued and the Company has paid all amounts owed to Yorkville pursuant to the Promissory Note. The Company and Yorkville may also agree to terminate the SEPA by mutual written consent.
Any purchase under an Advance would be subject to certain limitations, including that Yorkville shall not purchase or acquire any shares that would result in it and its affiliates beneficially owning more than 4.99% of the then outstanding voting power or number of shares of Common Stock or any shares that, aggregated with shares issued under all other earlier Advances, would exceed 19.99% of all shares of Common Stock outstanding on the date of the SEPA (the “Exchange Cap”), unless the Company obtains stockholder approval to issue shares of Common Stock in excess of the Exchange Cap in accordance with applicable Nasdaq rules.
In connection with the execution of the SEPA, the Company paid a diligence fee (in cash) to Yorkville in the amount of $25,000. Additionally, the Company agreed to pay a commitment fee of $200,000 to Yorkville, payable as follows: (i) $100,000 payable within three days of the date of the SEPA, in the form of the issuance of 80,000 shares of Common Stock, representing $100,000 divided by the closing price as of the trading day immediately prior to the date of the SEPA, and (ii) $100,000 payable on the three-month anniversary of the date of the SEPA, payable in either cash or in the form of an Advance.
Additionally, Yorkville agreed to advance to the Company, in exchange for a convertible promissory note (the “Promissory Note”), an aggregate principal amount of up to $6.5 million (the “Pre-Paid Advance”), which was funded on July 8, 2024. The purchase price for the Pre-Paid Advance is 93.0% of the principal amount of the Pre-Paid Advance. Interest shall accrue on the outstanding balance of the Pre-Paid Advance at an annual rate equal to 0%, subject to an increase to 18% upon an event of default as described in the Promissory Note. The maturity date of the Promissory Note issued in connection with the Pre-Paid Advance will be 12 months after the issuance date of such Promissory Note. Yorkville may convert the Promissory Note into shares of Common Stock at any time at a conversion price equal to the lower of (i) $1.375 (the “Fixed Price”) or (ii) a price per share equal to 93% of the lowest daily VWAP during the seven consecutive trading days immediately prior to the conversion date of the Promissory Note (the “Variable Price”), but which Variable Price shall not be lower than the Floor Price then in effect. The “Floor Price” will be the lower of (i) $0.25 per share or (ii) 20% of the average VWAP of the Common Stock for the five trading days immediately prior to the date of effectiveness of the Resale Registration Statement. Additionally, the Company, at its option, shall have the right, but not the obligation, to redeem early a portion or all amounts outstanding under the Promissory Notes at a redemption amount equal to the outstanding principal balance being repaid or redeemed, plus a 7% prepayment premium, plus all accrued and unpaid interest; provided that (i) the Company provides Yorkville with no less than ten trading days’ prior written notice thereof and (ii) on the date such notice is issued, the VWAP of the Common Stock is less than the Fixed Price.
At any time during the Commitment Period that there is a balance outstanding under the Promissory Note, Yorkville may deliver notice (an “Investor Notice”) to the Company to cause an Advance Notice to be deemed delivered to Yorkville and the issuance and sale of shares of Common Stock to Yorkville pursuant to an Advance (an “Investor Advance”) in an amount not to exceed the balance owed under the Promissory Note outstanding on the date of delivery of such Investor Notice, and shall not exceed during any calendar month period, the greater of (i) an amount equal to 15% of the product of (A) the average of the daily traded amount on each trading day during such period and (B) the VWAP for such trading day, and (ii) $750,000. The foregoing limitation on the amount of any such Investor Advances shall not apply at any time (x) upon the occurrence and during the continuance of an Event of Default and (y) where the purchase price is greater than or equal to the Fixed Price. As a result of an Investor Advance, the amounts payable under the Promissory Note will be offset by such amount subject to each Investor Advance.
An “Amortization Event” will occur under the terms of the Promissory Note if (i) the daily VWAP is less than the Floor Price for five trading days during a period of seven consecutive trading days, or (ii) the Company has issued in excess of 99% of the shares of Common Stock available under the Exchange Cap. Within seven trading days of an Amortization Event, the Company will be obligated to make monthly cash payments in an amount equal to the sum of (i) $1.0 million of principal of the Promissory Note (or the outstanding principal if less than such amount) (the “Amortization Principal Amount”), plus (ii) a payment premium of 7% in respect of such Amortization Principal Amount, plus (iii) accrued and unpaid interest thereunder. The obligation of the Company to make monthly prepayments shall cease (with respect to any payment that has not yet come due) if any time after an Amortization Event (a) the Company reduces the Floor Price to an amount no more than 50% of the closing price of the Common Stock on the trading day immediately prior to such reset notice (and no greater than the initial Floor Price), or (b) the daily VWAP is greater than the Floor Price for a period of ten consecutive trading days, unless a subsequent Amortization Event occurs.
| 28 |
The Company will control the timing and amount of any sales of shares of Common Stock to Yorkville, except with respect to Investor Advances. Actual sales of shares of Common Stock to Yorkville as an Advance under the SEPA will depend on a variety of factors to be determined by the Company from time to time, which may include, among other things, market conditions, the trading price of the Company’s Common Stock and determinations by the Company as to the appropriate sources of funding for our business and operations.
The SEPA contains customary representations, warranties, conditions and indemnification obligations of the parties. The representations, warranties and covenants contained in such agreements were made only for purposes of such agreements and as of specific dates, were solely for the benefit of the parties to such agreements and may be subject to limitations agreed upon by the contracting parties.
King Street CD
On June 21, 2024, the Company received a notice of alleged event of default and a demand for payment of the full principal amount, together with premiums and interest thereon (the “Notice”), from King Street Partners LLC (“King Street”), the holder of that certain 12.75% Convertible Senior Secured Note with a principal amount of $5,800,000 dated December 29, 2023.
The Notice alleges that due to the Company’s failure to maintain its 51% economic interest in FaZe Media, Inc. and other actions, one or more events of default under the King Street CD, including with respect to the terms of that side letter and consent agreement dated May 13, 2024 between the Company and King Street (the “Consent”), have occurred. Pursuant to the Notice, King Street demanded immediate repayment of the full principal amount, premiums, and accrued interest under the King Street CD.
If it is ultimately determined that events of default exist under the King Street Note and that the Notice was properly provided on behalf of the Holder, the outstanding principal amount of the King Street Note, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof will be due and payable. From and after an event of default, all such amounts due and owing to King Street would bear interest at 18% per annum, or such lower maximum amount of interest permitted to be charged under applicable law.
The Company strongly disagrees with the assertion that events of default have occurred under the King Street CD based on, inter alia, a plain language reading of the Consent and interpretive caselaw regarding the plain language. The Company will pursue a defense to any enforcement action taken by King Street, but the Company cannot guarantee a resolution on a timely basis, on favorable terms, or at all. If the Company is unable to resolve the alleged defaults under the King Street Note, it would have a material adverse effect on the Company’s liquidity, financial condition and results of operations.
On July 10, 2024, the Company paid down the outstanding principal and accrued interest on the King Street CD of $5.7 million.
Frankly Media asset disposal
On May 31, 2024, the Company, through its wholly owned subsidiary Frankly Media LLC (“Frankly”), entered into an Asset Purchase Agreement (the “UNIV APA”) to sell the producer content management software platform and associated software technology (“CMS Assets”) of Frankly to UNIV, Ltd (“UNIV”) (the “UNIV Asset Sale”).
Pursuant to the UNIV APA, UNIV paid the Company aggregate purchase consideration with a transaction closing date fair value of $1.2 million in exchange for the CMS Assets, including $25 thousand paid in cash upon closing of the transaction and issuance of a secured subordinated promissory note (the “UNIV Note”) with a transaction closing date fair value of $1.2 million. The UNIV Note was valued using a discount rate of 13.7% (Level 3).
Additionally on May 31, 2024, the Company, through its wholly owned subsidiary Frankly, entered into an Asset Purchase Agreement (the “XPR APA”) to sell the press release and content distribution service assets (the “PR Assets”) of Frankly to XPR Media LLC (“XPR”) (the “XPR Asset Sale” and, collectively with the UNIV Asset Sale, the “Frankly Asset Sales”).
Pursuant to the XPR APA, XPR paid the Company aggregate purchase consideration with a transaction closing date fair value of $0.6 million in exchange for the PR Assets, including $10.5 thousand paid in cash upon closing of the transaction and issuance of a secured subordinated promissory note (the “XPR Note”) with a transaction closing date fair value of $0.5 million. The XPR Note was valued using a discount rate of 13.7% (Level 3).
As a result of the Frankly Asset Sales during the three and six months ended June 30, 2024, the Company recognized a loss of $3.8 million in Other income (expense), net in the consolidated statements of operations and comprehensive loss after offsetting the consideration received with the carrying value of the disposed assets.
The UNIV Note has a principal amount of $1.5 million, inclusive of the $25 thousand paid in cash upon closing. The principal amount of the UNIV Note will be repaid in monthly installments, beginning August 2024. Monthly principal payments will be $25 thousand from August 2024 to June 2025, $45 thousand from July 2025 to June 2026, and $55 thousand from July 2026 to final maturity on June 30, 2027. The UNIV Note is secured by assets of the UNIV pursuant to a Security Agreement executed in conjunction with the UNIV APA between the Company and UNIV.
The XPR Note has a principal amount of $0.7 million, inclusive of the $10.5 thousand paid in cash upon closing. The principal amount of the XPR Note will be repaid in monthly installments, beginning August 2024. Monthly principal payments will be $12.5 thousand from August 2024 to June 2025, $20 thousand from July 2025 to June 2026, and $26 thousand from July 2026 to final maturity on June 30, 2027. The XPR Note is secured by all rights of XPR to customer agreements and publisher agreements pursuant to a Security Agreement executed in conjunction with the XPR APA between the Company and XPR.
Faze Media, Inc. asset contribution
On May 2, 2024, the Company created FaZe Media, Inc. (“Faze Media”). On May 15, 2024, the Company entered into a business venture with Gigamoon Media, LLC (“Gigamoon”). As part of this venture, the Company contributed certain media assets of Faze Clan, Inc. to Faze Media and Gigamoon invested $11.0 million in Faze Media in exchange for 11,000,000 shares of Series A-2 Preferred Stock of Faze Media, 49% of Faze Media’s voting equity interests, pursuant to a Securities Purchase Agreement (the “SPA”). The Company was issued 11,450,0000 shares of Series A-1 Preferred Stock of Faze Media, 51% of Faze Media’s voting equity interests.
| 29 |
On June 17, 2024, the Company entered into an agreement to sell 5,725,000 of its 11,450,000 shares of Series A-1 Preferred Stock of Faze Media to M40A3 LLC (“M4”) in exchange for $9.5 million (the “Secondary SPA”). The first 2,862,500 share tranche was issued on June 17, 2024 for consideration of $4.75 million and the remaining 2,862,500 will be issued on August 15, 2024.
Contemporaneous with the execution of the Secondary SPA, the Company and M4 entered into a Limited Proxy and Power of Attorney with respect to all of the shares of Series A-1 Preferred Stock of Faze Media held by M4 (the “Faze Media Voting Proxy”).
Faze Media is not a variable interest entity. Due to the Faze Media Voting Proxy, the Company maintains a controlling financial interest in Faze Media and Faze Media is a consolidated subsidiary of the Company as of June 30, 2024. The Preferred Stock of Faze Media held by M4 and Gigamoon represent a non-controlling interest of the Company. Upon termination of the Faze Media Voting Proxy, the Company will reassess whether it continues to have a controlling financial interest in Faze Media.
As a result of the above transactions, the Company recorded a non-controlling interest in Faze Media, Inc. of $15,750,000, the sum of cash consideration received, within the consolidated statements of stockholders’ equity.
Merger Agreement
On March 7, 2024 (the “Closing Date”), GameSquare Holdings, Inc., a Delaware corporation (and prior to the Domestication (as defined below), a British Columbia corporation) (the “Company” or “GameSquare”), consummated the previously announced merger (the “Closing”) of FaZe Holdings Inc., a Delaware corporation (“FaZe”), pursuant to that certain Agreement and Plan of Merger, dated October 19, 2023 (as amended, the “Merger Agreement”), by and among the Company, FaZe and GameSquare Merger Sub I, Inc., a Delaware corporation and wholly owned subsidiary of GameSquare (“Merger Sub”), as amended by that certain First Amendment to Agreement and Plan of Merger, dated December 19, 2023, by and among the Company, FaZe and Merger Sub (the “Amendment to Merger Agreement”). The consummation of the Merger involved (i) prior to the Closing, the continuance of GameSquare from the laws of the Province of British Columbia to the laws of the State of Delaware so as to become a Delaware corporation (the “Domestication”) and (ii) the merger of Merger Sub with and into FaZe, with FaZe continuing as the surviving corporation and wholly-owned subsidiary of GameSquare (the “Merger”), as well as the other transactions contemplated in the Merger Agreement.
Merger Consideration
At the effective time of the Merger (the “Effective Time”): (i) each outstanding share of FaZe common stock, par value $0.0001 per share (the “FaZe Common Stock”) issued and outstanding immediately prior to the Effective Time (other than shares held in treasury by FaZe or held directly by GameSquare or Merger Sub (which such shares were cancelled)) was converted into the right to receive 0.13091 (the “Exchange Ratio”) of a fully paid non-assessable share of common stock, par value $0.0001 per share, of GameSquare (the “GameSquare Common Stock”) and, if applicable, cash in lieu of fraction shares of FaZe Common Stock, subject to applicable withholding, (ii) each share of common stock, par value $0.001 per share, of Merger Sub that was issued and outstanding immediately prior to the Effective Time was converted into one validly issued, fully paid and non-assessable share of common stock, par value $0.001 per share, of FaZe Common Stock.
Treatment of Equity Awards
In addition, effective as of immediately prior to the Effective Time, all of the outstanding FaZe equity awards, including options to purchase shares of FaZe Common Stock, each share of FaZe Common Stock subject to vesting, repurchase or other lapse of restrictions, and each FaZe restricted stock unit convertible into shares of FaZe Common Stock, was assumed by GameSquare and converted into GameSquare equity awards on substantially the same terms, except that the assumed equity awards will cover a number of shares of GameSquare Common Stock and, if applicable, have an exercise price determined using the Exchange Ratio.
Also at the Effective Time, all outstanding warrants to purchase shares of FaZe Common Stock were assumed by GameSquare and converted into warrants to purchase shares of GameSquare Common Stock on substantially the same terms, except that the assumed warrants cover a number of shares of GameSquare Common Stock, and have an exercise price, determined using the Exchange Ratio.
Post-Closing Governance
In connection with the Merger and in accordance with the Merger Agreement, effective as of the Closing, the board of directors of the Company (the “Board”) increased the size of the Board from six to nine members and appointed Paul Hamilton and Nick Lewin (each, a “New Director” and collectively, the “New Directors”), who were previously members of FaZe’s board of directors, to serve on the Board, in each case, to hold office until their successors are duly elected and qualified or their earlier death, resignation or removal. Following the appointment of the New Directors, there remains one vacancy on the Board. Pursuant to the Merger Agreement, such vacancy is to be filled at such time that the Board duly elects an individual to serve in such capacity in accordance with the Bylaws and the terms of the Merger Agreement. It has not yet been determined on which committees of the Board Mr. Hamilton and Mr. Lewin will serve.
PIPE Financing
Substantially concurrently with the consummation of the Merger, the Company completed its previously announced private placement in public equity financing (the “PIPE Financing”). In connection with the PIPE Financing, the Company entered subscription agreements (the “Subscription Agreements”) with certain investors (the “PIPE Investors”), pursuant to which the Company issued to the PIPE Investors an aggregate of 7,194,244 units at a purchase price per unit of $1.39, for aggregate gross proceeds of $10.0 million. Each unit consists of one share of GameSquare Common Stock and a warrant to purchase 0.15 shares of GameSquare Common Stock. As a result, the Company issued an aggregate of 7,194,224 shares of GameSquare Common Stock (the “PIPE Shares”) and warrants to purchase up to 1,079,136 shares of GameSquare Common Stock (the “PIPE Warrants) pursuant to the PIPE Financing. Each whole PIPE Warrant is exercisable for one share of GameSquare Common Stock at an exercise price of $1.55 per share for a period of five years after the Closing Date.
| 30 |
The PIPE Shares and PIPE Warrants are subject to a four month hold period under Canadian securities laws expiring four months following the Closing Date. The PIPE Shares will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), or any U.S. state securities laws, and were issued pursuant to and in accordance with the exemption from registration under the Securities Act, under Section 4(a)(2) and/or Regulation D promulgated under the Securities Act. The securities may not be offered or sold in the United States absent registration or pursuant to an exemption from the registration requirements of the Securities Act and applicable U.S. state securities laws.
The Company also entered into Registration Rights Agreements with the PIPE Investors (the “Registration Rights Agreements”). The Registration Rights Agreements provide, among other things, that the Company will as promptly as reasonably practicable, and in any event no later than 150 days after the Closing Date (the “Filing Deadline”), file with the SEC (at the Company’s sole cost and expense) a registration statement registering the resale of the PIPE Shares and the shares of GameSquare Common Stock underlying the PIPE Warrants issued to the PIPE Investors, and will use its commercially reasonable efforts to have such registration statement declared effective as soon as practicable after the filing thereof, but no later than the earlier of (i) the 90th calendar day following the Filing Deadline if the SEC notifies the Company that it will “review” such registration statement and (ii) the fifth business day after the date the Company is notified (orally or in writing) by the SEC that such registration statement will not be “reviewed” or will not be subject to further review.
The Company had previously entered into a backstop agreement (the “Backstop Agreement”) with Goff Jones Strategic Partners, LLC (formerly known as Goff & Jones Lending Co, LLC) (“Goff Jones”), to purchase common stock to ensure the PIPE was fully subscribed. The Backstop Agreement was originally announced on October 20, 2023. A total of $6.0 million of securities were issued to Goff Jones in connection with the Backstop Agreement.
Complexity Membership Interest Purchase Agreement
On March 1, 2024, Global Esports Properties, LLC, a Delaware limited liability company (“Buyer”), GameSquare Esports (USA), Inc., a Nevada corporation (“Seller”) and sole member of NextGen Tech, LLC, a Texas limited liability company doing business as Complexity Gaming, and GameSquare Holdings, Inc., a corporation formed under the laws of the province of Ontario (“Beneficial Owner”) (together, the “Parties”) entered into a Membership Interest Purchase Agreement (the “MIPA”) for the purchase of all issued and outstanding interests (the “Interests”) of NextGen Tech, LLC, a Texas limited liability company doing business as Complexity Gaming (the “Transaction”).
The purchase price for the acquired Interests was $10.4 million, subject to final determination and adjustment pursuant to the purchase price adjustment mechanism set forth in the MIPA (the “Purchase Price”). $0.8 million of the Purchase Price was paid in cash at closing and the remainder was paid at closing by delivery of a secured subordinated promissory note (the “Note”) in favor of the Seller in the principal amount of $9.6 million (the “Principal Amount”). Under the Note, the Company is required pay the Principal Amount of the Note, together with all accrued interest (accrued at a rate equal to 3% per annum), fees, premium, charges, costs, and expenses no later than thirty-six (36) months from the date of the Note.
The Note is secured pursuant to a Security Agreement (the “Security Agreement”), which provides for a security interest in Buyer’s collateral (as defined in the Security Agreement) to secure any and all indebtedness, obligations, liabilities, and undertakings under or in respect of the Note.
The Parties’ obligation to complete the Transaction contemplated by the MIPA is subject to certain conditions, including approval by TSXV, which is still outstanding. Accordingly, the Transaction described herein is subject to risk of completion.
The MIPA contains customary representations, warranties, indemnification obligations and agreements of the Parties.
Current Market Conditions
GameSquare is pursuing organic growth opportunities, as well as M&A growth opportunities. From August 2020 to March 2024, the Company has completed five acquisitions and divested two non-core assets. GameSquare’s organic growth strategy focuses on growing audience and reach within its digital agencies, media network, and teams segments. GameSquare’s digital agencies, teams, and services segments serve the gaming and esports market, and more broadly sports and entertainment through content creation, audience development and growing brand relationships. The digital agency industry is highly fragmented, and these businesses are generally characterized by high revenue growth with healthy earnings before income, taxes, depreciation and amortization margins, which management believes positions the Company well for sustainable growth through organic efforts and presents significant opportunities to grow through accretive acquisitions.
The combination of Engine Gaming’s best-in-class technology assets with GameSquare’s award-winning agency and creative capabilities, allows the Company to offer unparalleled insight into consumer behaviors. It also allows GameSquare to develop data-driven creative strategies, and measure and optimize campaigns towards customer acquisition goals in real-time - creating impactful marketing solutions that drive ROI for its customers.
The Company has invested in its sales organization and continues to see significant growth in the number, and the size, of requests for proposals within its agency businesses. The Company’s financial profile compares very favorably against its esports peers, as well as other companies seeking to engage with youth audiences.
The Company believes enterprise growth may come as a result of synergistic approaches to combining the strengths of its multiple SaaS companies that it can present as a unified offering to the market.
| 31 |
The following is a summary of the Company’s financial performance highlights for the three and six months ended June 30, 2024 and 2023. This summary should be considered in the context of the additional disclosures in this MD&A which further highlight Company results by segment.
Results of Operations
The following table summarizes our results of operations for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023:
| Six months ended June 30, | ||||||||||||
| 2024 | 2023 | Variance | ||||||||||
| Revenue | $ | 46,315,189 | $ | 14,151,965 | $ | 32,163,224 | ||||||
| Cost of revenue | 38,687,829 | 10,085,002 | 28,602,827 | |||||||||
| Gross profit | 7,627,360 | 4,066,963 | 3,560,397 | |||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 12,053,248 | 6,870,346 | 5,182,902 | |||||||||
| Selling and marketing | 4,654,592 | 2,481,722 | 2,172,870 | |||||||||
| Research and development | 1,566,669 | 660,969 | 905,700 | |||||||||
| Depreciation and amortization | 1,710,195 | 723,697 | 986,498 | |||||||||
| Restructuring charges | 123,846 | 294,286 | (170,440 | ) | ||||||||
| Other operating expenses | 2,088,137 | 1,497,981 | 590,156 | |||||||||
| Total operating expenses | 22,196,687 | 12,529,001 | 9,667,686 | |||||||||
| Loss from continuing operations | (14,569,327 | ) | (8,462,038 | ) | (6,107,289 | ) | ||||||
| Other income (expense), net: | ||||||||||||
| Interest expense | (627,385 | ) | (145,324 | ) | (482,061 | ) | ||||||
| Change in fair value of convertible debt carried at fair value | 456,759 | 455,009 | 1,750 | |||||||||
| Change in fair value of warrant liability | 52,900 | 1,710,878 | (1,657,978 | ) | ||||||||
| Arbitration settlement reserve | 138,625 | 739,644 | (601,019 | ) | ||||||||
| Other income (expense), net | (4,065,544 | ) | 37,894 | (4,103,438 | ) | |||||||
| Total other income (expense), net | (4,044,645 | ) | 2,798,101 | (6,842,746 | ) | |||||||
| Loss from continuing operations before income taxes | (18,613,972 | ) | (5,663,937 | ) | (12,950,035 | ) | ||||||
| Income tax benefit | - | 5,027 | (5,027 | ) | ||||||||
| Net loss from continuing operations | (18,613,972 | ) | (5,658,910 | ) | (12,955,062 | ) | ||||||
| Net income (loss) from discontinued operations | 1,349,883 | (2,770,547 | ) | 4,120,430 | ||||||||
| Net loss | (17,264,089 | ) | (8,429,457 | ) | (8,834,632 | ) | ||||||
| Net income attributable to non-controlling interest | 389,590 | - | 389,590 | |||||||||
| Net loss attributable to attributable to GameSquare Holdings, Inc. | $ | (16,874,499 | ) | $ | (8,429,457 | ) | $ | (8,445,042 | ) | |||
| Three months ended June 30, | ||||||||||||
| 2024 | 2023 | Variance | ||||||||||
| Revenue | $ | 28,586,965 | $ | 11,361,904 | $ | 17,225,061 | ||||||
| Cost of revenue | 24,352,762 | 8,573,785 | 15,778,977 | |||||||||
| Gross profit | 4,234,203 | 2,788,119 | 1,446,084 | |||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 7,134,618 | 4,228,666 | 2,905,952 | |||||||||
| Selling and marketing | 2,432,939 | 1,740,694 | 692,245 | |||||||||
| Research and development | 881,516 | 660,969 | 220,547 | |||||||||
| Depreciation and amortization | 954,746 | 583,217 | 371,529 | |||||||||
| Restructuring charges | 123,846 | 10,388 | 113,458 | |||||||||
| Other operating expenses | 994,717 | 1,013,672 | (18,955 | ) | ||||||||
| Total operating expenses | 12,522,382 | 8,237,606 | 4,284,776 | |||||||||
| Loss from continuing operations | (8,288,179 | ) | (5,449,487 | ) | (2,838,692 | ) | ||||||
| Other income (expense), net: | ||||||||||||
| Interest expense | (192,257 | ) | (122,227 | ) | (70,030 | ) | ||||||
| Change in fair value of convertible debt carried at fair value | 563,360 | 455,009 | 108,351 | |||||||||
| Change in fair value of warrant liability | 15,643 | 1,710,878 | (1,695,235 | ) | ||||||||
| Arbitration settlement reserve | 43,500 | 739,644 | (696,144 | ) | ||||||||
| Other income (expense), net | (3,948,274 | ) | 38,826 | (3,987,100 | ) | |||||||
| Total other income (expense), net | (3,518,028 | ) | 2,822,130 | (6,340,158 | ) | |||||||
| Loss from continuing operations before income taxes | (11,806,207 | ) | (2,627,357 | ) | (9,178,850 | ) | ||||||
| Income tax benefit | - | - | - | |||||||||
| Net loss from continuing operations | (11,806,207 | ) | (2,627,357 | ) | (9,178,850 | ) | ||||||
| Net income (loss) from discontinued operations | (196,934 | ) | (1,456,666 | ) | 1,259,732 | |||||||
| Net loss | (12,003,141 | ) | (4,084,023 | ) | (7,919,118 | ) | ||||||
| Net income attributable to non-controlling interest | 389,590 | - | 389,590 | |||||||||
| Net loss attributable to attributable to GameSquare Holdings, Inc. | $ | (11,613,551 | ) | $ | (4,084,023 | ) | $ | (7,529,528 | ) | |||
| 32 |
Revenue
The following tables disaggregate revenue by revenue stream and geographic region for the three and six months ended June 30, 2024, and 2023.
| Six months ended June 30, 2024 | ||||||||||||||||
| Segment | United Kingdom | USA | Spain | Total | ||||||||||||
| Revenue | ||||||||||||||||
| Teams | $ | - | $ | 15,841,591 | $ | - | $ | 15,841,591 | ||||||||
| Agency | 729,584 | 4,250,742 | - | 4,980,326 | ||||||||||||
| SaaS + Advertising | - | 23,912,430 | 1,580,842 | 25,493,272 | ||||||||||||
| Total Revenue | 729,584 | 44,004,763 | 1,580,842 | 46,315,189 | ||||||||||||
| Cost of sales | ||||||||||||||||
| Teams | - | 12,532,513 | - | 12,532,513 | ||||||||||||
| Agency | 534,098 | 3,698,755 | - | 4,232,853 | ||||||||||||
| SaaS + Advertising | - | 21,754,515 | 167,948 | 21,922,463 | ||||||||||||
| Total Cost of sales | 534,098 | 37,985,783 | 167,948 | 38,687,829 | ||||||||||||
| Gross profit | ||||||||||||||||
| Teams | - | 3,309,078 | - | 3,309,078 | ||||||||||||
| Agency | 195,486 | 551,987 | - | 747,473 | ||||||||||||
| SaaS + Advertising | - | 2,157,915 | 1,412,894 | 3,570,809 | ||||||||||||
| Total Gross profit | $ | 195,486 | $ | 6,018,980 | $ | 1,412,894 | $ | 7,627,360 | ||||||||
| Six months ended June 30, 2023 | ||||||||||||||||
| Segment | United Kingdom | USA | Spain | Total | ||||||||||||
| Revenue | ||||||||||||||||
| Agency | $ | 1,408,548 | $ | 4,309,847 | $ | - | $ | 5,718,395 | ||||||||
| SaaS + Advertising | - | 7,771,391 | 662,179 | 8,433,570 | ||||||||||||
| Total Revenue | 1,408,548 | 12,081,238 | 662,179 | 14,151,965 | ||||||||||||
| Cost of sales | ||||||||||||||||
| Agency | 1,169,414 | 2,667,369 | - | 3,836,783 | ||||||||||||
| SaaS + Advertising | - | 6,177,747 | 70,472 | 6,248,219 | ||||||||||||
| Total Cost of sales | 1,169,414 | 8,845,116 | 70,472 | 10,085,002 | ||||||||||||
| Gross profit | ||||||||||||||||
| Agency | 239,134 | 1,642,478 | - | 1,881,612 | ||||||||||||
| SaaS + Advertising | - | 1,593,644 | 591,707 | 2,185,351 | ||||||||||||
| Total Gross profit | $ | 239,134 | $ | 3,236,122 | $ | 591,707 | $ | 4,066,963 | ||||||||
| Three months ended June 30, 2024 | ||||||||||||||||
| Segment | United Kingdom | USA | Spain | Total | ||||||||||||
| Revenue | ||||||||||||||||
| Teams | $ | - | $ | 13,278,638 | $ | - | $ | 13,278,638 | ||||||||
| Agency | 350,935 | 1,686,534 | - | 2,037,469 | ||||||||||||
| SaaS + Advertising | - | 12,469,920 | 800,938 | 13,270,858 | ||||||||||||
| Total Revenue | 350,935 | 27,435,092 | 800,938 | 28,586,965 | ||||||||||||
| Cost of sales | ||||||||||||||||
| Teams | - | 10,950,943 | - | 10,950,943 | ||||||||||||
| Agency | 283,466 | 1,538,081 | - | 1,821,547 | ||||||||||||
| SaaS + Advertising | - | 11,492,930 | 87,342 | 11,580,272 | ||||||||||||
| Total Cost of sales | 283,466 | 23,981,954 | 87,342 | 24,352,762 | ||||||||||||
| Gross profit | ||||||||||||||||
| Teams | - | 2,327,695 | - | 2,327,695 | ||||||||||||
| Agency | 67,469 | 148,453 | - | 215,922 | ||||||||||||
| SaaS + Advertising | - | 976,990 | 713,596 | 1,690,586 | ||||||||||||
| Total Gross profit | $ | 67,469 | $ | 3,453,138 | $ | 713,596 | $ | 4,234,203 | ||||||||
| Three months ended June 30, 2023 | ||||||||||||||||
| Segment | United Kingdom | USA | Spain | Total | ||||||||||||
| Revenue | ||||||||||||||||
| Agency | $ | 774,175 | $ | 2,154,159 | $ | - | $ | 2,928,334 | ||||||||
| SaaS + Advertising | - | 7,771,391 | 662,179 | 8,433,570 | ||||||||||||
| Total Revenue | 774,175 | 9,925,550 | 662,179 | 11,361,904 | ||||||||||||
| Cost of sales | ||||||||||||||||
| Agency | 637,568 | 1,687,998 | - | 2,325,566 | ||||||||||||
| SaaS + Advertising | - | 6,177,747 | 70,472 | 6,248,219 | ||||||||||||
| Total Cost of sales | 637,568 | 7,865,745 | 70,472 | 8,573,785 | ||||||||||||
| Gross profit | ||||||||||||||||
| Agency | 136,607 | 466,161 | - | 602,768 | ||||||||||||
| SaaS + Advertising | - | 1,593,644 | 591,707 | 2,185,351 | ||||||||||||
| Total Gross profit | $ | 136,607 | $ | 2,059,805 | $ | 591,707 | $ | 2,788,119 | ||||||||
| 33 |
Key Components and Comparison of Results of Operations
Six months ended June 30, 2024 and 2023
Revenue
Revenues for the six months ended June 30, 2024, were $46.3 million, in comparison to $14.2 million for the same period in 2023. The increase was primarily related to the acquisition of Engine on April 11, 2023 and the acquisition of FaZe on March 7, 2024.
Team Revenue
Teams revenue for the six months ended June 30, 2024, was $15.8 million, in comparison to $0 for the same period in 2023. The increase was related to our acquisition of FaZe on March 7, 2024. As such, there is no revenue is this operating segment in the prior year period.
Agency Revenue
Agency revenue for the six months ended June 30, 2024, was $5.0 million, in comparison to $5.7 million for the same period in 2023. The variance was not significant.
Software-as-a-service (“SaaS”) + Advertising revenue
SaaS + Advertising revenue for the six months ended June 30, 2024, was $25.5 million, in comparison to $8.4 million for the same period in 2023. The increase was related to our acquisition of Engine on April 11, 2023. As such, there is only one quarter of SaaS + Advertising revenue for this operating segment in the prior year period. The large increase in revenue is also due to significant growth derived primarily from programmatic advertising year over year.
Cost of Sales
Cost of sales for the six months ended June 30, 2024, was $38.7 million, in comparison to $10.1 million for the same period in 2023. The increase was primarily related to an increase in revenue associated with the acquisitions of FaZe and Engine discussed above, and varying margins of the Company product mix.
Operating expenses
General and administrative
General and administrative expenses for the six months ended June 30, 2024, was $12.1 million, in comparison to $6.9 million for the same period in 2023. The increase was primarily related to our acquisitions of Faze and Engine as discussed above. Faze was not part of the prior year comparable results and Engine was included from April 11, 2023 forward.
Selling and marketing
Selling and marketing expenses for the six months ended June 30, 2024, was $4.7 million, in comparison to $2.5 million for the same period in 2023. The increase was primarily related to our acquisitions of Faze and Engine as discussed above. Faze was not part of the prior year comparable results and Engine was included from April 11, 2023 forward.
Research and development
Research and development expenses for the six months ended June 30, 2024, was $1.6 million, in comparison to $0.7 million for the same period in 2023. The increase was the result of an increase in expenses from the operations of Engine that were included in the 2023 period from April 11, 2023 forward.
Depreciation and amortization
Depreciation and amortization for the six months ended June 30, 2024, was $1.7 million, in comparison to $0.7 million for the same period in 2023. The increase was primarily related to our acquisitions of Faze and Engine as discussed above and the related long-lived assets and intangible assets acquired in connection with these acquisitions.
Restructuring charges
Restructuring charges for the six months ended June 30, 2024, were $0.1 million, in comparison to $0.3 million for the same period in 2023. The decrease was primarily related to acquisition of Engine and associated restructuring activities at GameSquare in advance of closing of the acquisition. Various restructuring activities at FaZe occurred prior to the closing of the acquisition on March 7, 2024, and therefore, the associated expenses are not included in the Company’s financial results for the period.
Other operating expenses
Other operating expenses for the six months ended June 30, 2024, was $2.1 million, in comparison to $1.5 million for the same period in 2023. Other operating expenses between the quarters consisted solely of transaction related expenses. The increase was primarily related to additional transaction activities in the 2024 period. The 2024 period included transaction costs associated with the acquisition of FaZe, the disposal of Complexity, the Faze Media Inc. asset contribution and the Franky Media asset disposal, while the 2023 period only included transaction costs associated with the acquisition of Engine.
| 34 |
Other income and expenses
Interest expense
Interest expense for the six months ended June 30, 2024, was $0.6 million, in comparison to $0.1 million for the same period in 2023. The increase was primarily related interest expense on convertible debt acquired in connection with the acquisition of Engine and line of credit that was closed in September 2023. We did not have comparable debt instruments outstanding during the comparative period.
Change in fair value of convertible debt carried at fair value
Change in fair value of convertible debt gain (loss) for the six months ended June 30, 2024, was $0.5 million, in comparison to 0.5 million for the same period in 2023. Prior to the Engine acquisition, we did not have any convertible debt. The change represents adjusting the convertible debt to fair value at the end of the reporting period, primarily driven by changes in our share price.
Change in fair value of warrant liability
Change in fair value of warrant liability gain (loss) for the six months ended June 30, 2024, was $53 thousand, in comparison to $1.7 million for the same period in 2023. Prior to the Engine acquisition, we did not have any liability measured warrants. The gain represents adjusting the liability measured warrants to fair value at the end of the reporting period, primarily driven by changes in our share price. The large reduction in gain is primarily driven by the expiration of the majority of the liability measured warrants, and therefore the change in fair value from period to period is not significant in the current period.
Arbitration settlement reserve
Arbitration settlement reserve gain (loss) for the six months ended June 30, 2024, was $0.1 million, in comparison to $0.7 million for the same period in 2023. Prior to the Engine acquisition, we did not have an arbitration settlement reserve. The change represents adjusting the arbitration settlement reserve to fair value at the end of the reporting period, primarily driven by changes in our share price.
Other income (expense), net
Other income (expense) for the six months ended June 30, 2024, was $(4.1) million, in comparison to $38 thousand for the same period in 2023. Other expense in the current period is primarily related to loss incurred of $3.8 million on the disposal of Frankly Media remaining SaaS assets which closed on May 31, 2024. No such loss was incurred in the prior period.
Income tax benefit
There was no income tax benefit for the six months ended June 30, 2024, in comparison to $5 thousand for the same period in 2023. The change was trivial between the two periods and relates to change in deferred tax liabilities.
Net income (loss) from discontinued operations
Net income from discontinued operations for the six months ended June 30, 2024, was $1.3 million, in comparison to a net loss of $2.8 million for the same period in 2023. The increase was primarily related to gain on disposal of Complexity of $3.0 million in the 2024 period partially offset by net loss from operations of Complexity of $1.4 million as compared to a net loss from operations of Complexity of $2.6 million in the 2023 period.
Three months ended June 30, 2024 and 2023
Revenue
Revenues for the three months ended June 30, 2024, were $28.6 million, in comparison to $11.4 million for the same period in 2023. The increase was primarily related to the acquisition of FaZe on March 7, 2024 along with the large increase in programmatic advertising revenue at Frankly.
Team Revenue
Teams revenue for the three months ended June 30, 2024, was $13.3 million, in comparison to $0 for the same period in 2023. The increase was related to our acquisition of FaZe on March 7, 2024. As such, there is no revenue for this operating segment in the prior year period.
Agency Revenue
Agency revenue for the three months ended June 30, 2024, was $2.0 million, in comparison to $2.9 million for the same period in 2023.
Software-as-a-service (“SaaS”) + Advertising revenue
SaaS + Advertising revenue for the three months ended June 30, 2024, was $13.3 million, in comparison to $8.4 million for the same period in 2023. The increase was related to our acquisition of Engine on April 11, 2023. The large increase in revenue is due to significant growth derived primarily from programmatic advertising year over year.
| 35 |
Cost of Sales
Cost of sales for the three months ended June 30, 2024, was $24.4 million, in comparison to $8.6 million for the same period in 2023. The increase was primarily related to an increase in revenue associated with the acquisition of FaZe discussed above, and varying margins of the Company product mix.
Operating expenses
General and administrative
General and administrative expenses for the three months ended June 30, 2024, was $7.1 million, in comparison to $4.2 million for the same period in 2023. The increase was primarily related to our acquisition of Faze as discussed above. Faze was not part of the prior year comparable results.
Selling and marketing
Selling and marketing expenses for the three months ended June 30, 2024, was $2.4 million, in comparison to $1.7 million for the same period in 2023. The increase was primarily related to our acquisition of Faze as discussed above. Faze was not part of the prior year comparable results.
Research and development
Research and development expenses for the three months ended June 30, 2024, was $0.9 million, in comparison to $0.7 million for the same period in 2023. The variance between the periods was not significant.
Depreciation and amortization
Depreciation and amortization for the three months ended June 30, 2024, was $1.0 million, in comparison to $0.6 million for the same period in 2023. The increase was primarily related to our acquisition of Faze as discussed above and the related long-lived assets and intangible assets acquired in connection with the acquisition.
Other operating expenses
Other operating expenses for the three months ended June 30, 2024, was $1.0 million, in comparison to $1.0 million for the same period in 2023. Other operating expenses between the quarters consisted solely of transaction related expenses. The variance between the periods was not significant.
Other income and expenses
Interest expense
Interest expense for the three months ended June 30, 2024, was $0.2 million, in comparison to $0.1 million for the same period in 2023. The increase was primarily related to a line of credit that was closed in September 2023. We did not have comparable debt instruments outstanding during the comparative period.
Change in fair value of convertible debt carried at fair value
Change in fair value of convertible debt gain (loss) for the three months ended June 30, 2024, was $0.6 million, in comparison to 0.5 million for the same period in 2023. The variance between the periods was not significant.
Change in fair value of warrant liability
Change in fair value of warrant liability gain (loss) for the three months ended June 30, 2024, was $16 thousand, in comparison to $1.7 million for the same period in 2023. Prior to the Engine acquisition, we did not have any liability measured warrants. The gain represents adjusting the liability measured warrants to fair value at the end of the reporting period, primarily driven by changes in our share price. The large reduction in gain is primarily driven by the expiration of the majority of the liability measured warrants, and therefore the change in fair value from period to period is not significant in the current period.
Arbitration settlement reserve
Arbitration settlement reserve gain (loss) for the three months ended June 30, 2024, was $44 thousand, in comparison to $0.7 million for the same period in 2023. Prior to the Engine acquisition, we did not have an arbitration settlement reserve. The change represents adjusting the arbitration settlement reserve to fair value at the end of the reporting period, primarily driven by changes in our share price. The decrease in gain is due to the large gain in the prior year period. There was a larger reduction in our share price from the beginning to the end of the reporting period in the prior year.
Other income (expense), net
Other income (expense) for the three months ended June 30, 2024, was $(3.9) million, in comparison to $39 thousand for the same period in 2023. Other expense in the current period is primarily related to loss incurred of $3.8 million on the disposal of Frankly Media remaining SaaS assets which closed on May 31, 2024. No such loss was incurred in the prior period.
Net income (loss) from discontinued operations
Net loss from discontinued operations for the three months ended June 30, 2024, was $0.2 million, in comparison to a net loss of $1.5 million for the same period in 2023. The decrease in net loss was due to net loss from operations of Complexity of $0 in the current period (disposed of on March 1, 2024) as compared to a net loss from operations of Complexity of $1.3 million in the 2023 period.
| 36 |
Management’s use of Non-GAAP Measures
This MD&A contains certain financial performance measures, including “EBITDA” and “Adjusted EBITDA,” that are not recognized under accounting principles generally accepted in the United States of America (“GAAP”) and do not have a standardized meaning prescribed by GAAP. As a result, these measures may not be comparable to similar measures presented by other companies. For a reconciliation of these measures to the most directly comparable financial information presented in the Financial Statements in accordance with GAAP, see the section entitled “Reconciliation of Non-GAAP Measures” below.
We believe EBITDA is a useful measure to assess the performance of the Company as it provides more meaningful operating results by excluding the effects of expenses that are not reflective of our underlying business performance and other one-time or non-recurring expenses. We define “EBITDA” as net income (loss) before (i) depreciation and amortization; (ii) income taxes; and (iii) interest expense.
Adjusted EBITDA
We believe Adjusted EBITDA is a useful measure to assess the performance of the Company as it provides more meaningful operating results by excluding the effects of expenses that are not reflective of our underlying business performance and other one-time or non-recurring expenses. We define “Adjusted EBITDA” as EBITDA adjusted to exclude extraordinary items, non-recurring items and other non-cash items, including, but not limited to (i) share based compensation expense, (ii) transaction costs related to merger and acquisition activities, (iii) arbitration settlement reserves and other non-recurring legal settlement expenses, (iv) restructuring costs, primarily comprised of employee severance resulting from integration of acquired businesses, (v) impairment of goodwill and intangible assets, (vi) gains and losses on extinguishment of debt, (vii) change in fair value of assets and liabilities adjusted to fair value on a quarterly basis, (viii) gains and losses from discontinued operations, and (ix) Net income (loss) attributable to non-controlling interest.
Reconciliation of Non-GAAP Measures
A reconciliation of Adjusted EBITDA to the most directly comparable measure determined under US GAAP is set out below.
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net loss | $ | (12,003,141 | ) | $ | (4,084,023 | ) | $ | (17,264,089 | ) | $ | (8,429,457 | ) | ||||
| Interest expense | 192,257 | 122,227 | 627,385 | 145,324 | ||||||||||||
| Income tax benefit | - | - | - | (5,027 | ) | |||||||||||
| Amortization and depreciation | 954,746 | 583,217 | 1,710,195 | 723,697 | ||||||||||||
| Share-based payments | 602,139 | 317,005 | 1,021,367 | 882,385 | ||||||||||||
| Transaction costs | 1,037,044 | 1,013,672 | 2,130,464 | 1,497,981 | ||||||||||||
| Arbitration settlement reserve | (43,500 | ) | (739,644 | ) | (138,625 | ) | (739,644 | ) | ||||||||
| Restructuring costs | 123,846 | 10,388 | 123,846 | 294,286 | ||||||||||||
| Legal settlement | - | 183,724 | - | 183,724 | ||||||||||||
| Change in fair value of contingent consideration | (42,327 | ) | - | (42,327 | ) | - | ||||||||||
| Change in fair value of warrant liability | (15,643 | ) | (1,710,878 | ) | (52,900 | ) | (1,710,878 | ) | ||||||||
| Change in fair value of convertible debt carried at fair value | (563,360 | ) | (455,009 | ) | (456,759 | ) | (455,009 | ) | ||||||||
| Gain on disposition of subsidiary | - | - | (3,009,891 | ) | - | |||||||||||
| Loss on disposition of assets | 3,764,474 | - | 3,764,474 | - | ||||||||||||
| Loss from discontinued operations | 196,934 | 1,456,666 | 1,660,008 | 2,770,547 | ||||||||||||
| Net loss attributable to non-controlling interest | 389,590 | - | 389,590 | - | ||||||||||||
| Adjusted EBITDA | $ | (5,406,941 | ) | $ | (3,302,655 | ) | $ | (9,537,262 | ) | $ | (4,842,071 | ) | ||||
Liquidity and Capital Resources
Overview
The financial statements have been prepared on a going-concern basis, which assumes the realization of assets and liquidation of liabilities in the normal course of business. Continuing operations, as intended, are dependent on management’s ability to raise required funding through future equity issuances, its ability to acquire business interests and develop profitable operations or a combination thereof, which is not assured, given today’s volatile and uncertain financial markets. We may revise programs depending on our working capital position.
Our approach to managing liquidity risk is to ensure that we will have sufficient liquidity to meet liabilities when due. Our liquidity and operating results may be adversely affected if our access to the capital market is hindered, whether as a result of a downturn in stock market conditions generally or as a result of conditions specific to the Company.
We regularly evaluate our cash position to ensure preservation and security of capital as well as maintenance of liquidity. As we do not presently generate sufficient revenue to cover costs, managing liquidity risk is dependent upon the ability to reduce monthly operating cash outflow and secure additional financing. The recoverability of the carrying value of the assets and our continued existence is dependent upon our ability to raise financing in the near term, and ultimately the achievement of profitable operations.
As of June 30, 2024, cash and restricted cash totaled $14.5 million, compared to $3.0 million as of December 31, 2023.
While management has been historically successful in raising the necessary capital, it cannot provide assurance that it will be able to execute its business strategy or be successful in future financing activities.
Our ability to maintain sufficient liquidity could be affected by various risks and uncertainties including, but not limited to, our ability to raise additional funds through financing, those related to consumer demand and acceptance of our products and services, our ability to collect payments as they become due, achieving our internal forecasts and objectives, the economic conditions of the United States and abroad.
| 37 |
Sources and Uses of Cash
Since inception, we have financed our operations primarily by issuing equity and debt. As of June 30, 2024, our principal sources of liquidity were our cash in the amount of $13.9 million, available borrowings under our line of credit as well as new debt and/or equity issuances.
As discussed in recent developments above, we obtained gross proceeds of $10.0 million from the PIPE Financing on March 7, 2024.
Operating Activities
Net cash used in operating activities was $17.6 million during the six months ended June 30, 2024, compared with $6.9 million used in operating activities in the comparative period. The use of funds in operating activities is described in the Results of Operations section above.
Investing Activities
Net cash provided by investing activities was $2.8 million for the six months ended June 30, 2024.
Net cash provided by investing activities was $11.3 million for the six months ended June 30, 2023.
Financing Activities
Net cash provided by financing activities was $26.3 million for the six months ended June 30, 2024, which was primarily due to PIPE Financing on March 7, 2024 of $10 million and cash investments by non-controlling interests of Faze Media, Inc. of $15.75 million. Net cash used in financing activities was $0.8 million for the six months ended June 30, 2023.
Commitments and Contingencies
Management commitments
The Company is party to certain management contracts. These contracts require payments of approximately $0.6 million to be made upon the occurrence of a change in control and termination without cause to certain officers of the Company. The Company is also committed to payments upon termination without cause of approximately $1.1 million pursuant to the terms of these contracts. As a triggering event has not taken place, these amounts have not been recorded in these consolidated financial statements.
Former activities
The Company was previously involved in oil and gas exploration activities in Canada, the United States and Colombia. The Company ceased all direct oil and gas exploration activities in 2014. While management estimated that the exposure to additional liabilities from its former oil and gas activities over and above the reclamation deposits held in trust for the Alberta Energy Regulator of $0.3 million to be remote, the outcome of any such contingent matters is inherently uncertain.
Litigation and arbitration
We are subject to various claims, lawsuits and other complaints arising in the ordinary course of business. We record provisions for losses when claims become probable, and the amounts are estimable. Although the outcome of such matters cannot be determined, it is the opinion of management that the final resolution of these matters will not have a material adverse effect on our financial condition, operations, or liquidity.
| 38 |
Revenue recognition
Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when it transfers control of its services to a customer.
The following provides information about the nature and timing of the satisfaction of performance obligations in contracts with customers, including significant payment terms and related revenue recognition policies:
Talent representation service revenues
Talent representation service revenue is recorded on completion of the event in which the talent management service has been provided.
Influencer promotional fees
Influencer marketing and promotional fees are recognized over the period during which the services are performed. Revenue and income from custom service contracts are determined on the percentage of completion method, based on the ratio of contract timepassed in the reporting period over estimated total length of the contract.
Consulting fees and other revenues
Consulting fees and other revenues are recognized when the services have been performed.
Software-as-a-service
The Company enters into license agreements with customers for its content management system, video software, and mobile applications (Frankly), e-sports data platform (Stream Hatchet) and an influencer marketing platform (SideQik). These license agreements, generally non-cancellable, without paying a termination penalty, and multiyear, provide the customer with the right to use the Company’s application solely on a Company-hosted platform or, in certain instances, on purchased encoders. The license agreements also entitle the customer to technical support.
Revenue from these license agreements is recognized ratably over the license term. Early termination fees are recognized when a customer ceases use of agreed upon services prior to the expiration of their contract. These fees are recognized in full on the date the customer has completed their migration of the Company’s solutions and there is no continuing service obligation to the customer.
The Company charges its customers for the optional use of its content delivery network to stream and store videos. The revenue is recognized as earned based on the actual usage because it has stand-alone value and delivery is in control of the customer. The Company also charges its customers for the use of its ad serving platform to serve ads under local advertising campaigns. The Company reports revenue as earned based on the actual usage.
Advertising
Under national advertising agreements with advertisers, the Company sources, creates, and places advertising campaigns that run across the Company’s network of publisher sites. National advertising revenue, net of third-party costs, is shared with publishers based on their respective contractual agreements. The Company invoices national advertising amounts due from advertisers and remits payments to publishers for their share. Depending on the agreement with the publisher, the obligation to remit payment to the publisher is based on either billing to the advertiser or the collection of cash from the advertiser.
National advertising revenue is recognized in the period during which the ad impressions are delivered. The Company reports revenue earned through national advertising agreements either on a net or gross basis. The Company applies judgement in recognizing revenue earned through national advertising agreements on a net or gross basis based on the criteria as disclosed below.
Under national advertising agreements wherein the Company does not bear inventory risk and only has credit risk on its portion of the revenue, national advertising revenues are accounted for on a net basis and the publisher is identified as the customer. In select national advertising agreements with its publishers, the Company takes on inventory risk and additional credit risk. Under these agreements, the Company either a) provides the publisher with a guaranteed minimum gross selling price per advertising unit delivered, wherein the greater of the actual selling price or guaranteed minimum selling price is used in determining the publisher’s share or b) provides the publisher with a fixed rate per advertising unit delivered, wherein the publisher is paid the fixed rate per advertising unit delivered irrespective of the actual selling price. Under these national advertising agreements, national advertising revenues are accounted for on a gross basis with the advertiser identified as the customer and the publisher identified as a supplier, with amounts billed to the advertiser reported as revenue and amounts due to the publisher reported as a revenue sharing expense, within expenses.
| 39 |
Also included in advertising revenue is advertising revenue generated by the Company’s various owned and operated properties.
Brand Sponsorships
The Company offers advertisers a full range of promotional vehicles, including but not limited to online advertising, livestream announcements, event content generation, social media posts, logo placement on the Company’s official merchandise, and special appearances of members of the Company’s talent roster. The Company’s brand sponsorship agreements may include multiple services that are capable of being individually distinct; however the intended benefit is an association with the Company’s brand, and the services are not distinct within the context of the contracts. Revenues from brand sponsorship agreements are recognized ratably over the contract term. Payment terms and conditions vary, but payments are generally due periodically throughout the term of the contract. In instances where the timing of revenue recognition differs from the timing of billing, management has determined the brand sponsorship agreements generally do not include a significant financing component.
Content
The Company and its talent roster generate and produce original content which the Company monetizes through Google’s AdSense service. Revenue is variable and is earned when the visitor views or “clicks through” on the advertisement. The amount of revenue earned is reported to the Company monthly and is recognized upon receipt of the report of viewership activity. Payment terms and conditions vary, but payments are generally due within 30 to 45 days after the end of each month.
The Company grants exclusive licenses to customers for certain content produced by the Company’s talent. The Company grants the customer a license to the intellectual property, which is the content and its use in generating advertising revenues, for a pre-determined period, for an amount paid by the customer, in most instances, upon execution of the contract. The Company’s only performance obligation is to license the content for use in generating advertising revenues, and the Company recognizes the full contract amount at the point at which the Company provides the customer access to the content, which is at the execution of the contract. The Company has no further performance obligations under these types of contracts and does not anticipate generating any additional revenue from these arrangements apart from the contract amount.
Consumer Products
The Company earns consumer products revenue from sales of the Company’s consumer products on the Company’s website or at live or virtual events. Revenues are recognized at a point in time, as control is transferred to the customer upon shipment. The Company offers customer returns and discounts through a third-party distributor and accounts for this as a reduction to revenue. The Company does not offer loyalty programs or other sales incentive programs that are material to revenue recognition. Payment is due at the time of sale. The Company has outsourced the design, manufacturing, fulfillment, distribution, and sale of the Company’s consumer products to a third party in exchange for royalties based on the amount of revenue generated. Management evaluated the terms of the agreement to determine whether the Company’s consumer products revenues should be reported gross or net of royalties paid. Key indicators that management evaluated in determining whether the Company is the principal in the sale (gross reporting) or an agent (net reporting) include, but are not limited to:
| ● | the Company is the party that is primarily responsible for fulfilling the promise to provide the specified good or service, | |
| ● | the Company has inventory risk before the good is transferred to the customer, and | |
| ● | the Company is the party that has discretion in establishing pricing for the specified good or service. |
Based on management’s evaluation of the above indicators, the Company reports consumer products revenues on a gross basis.
Esports
League Participation: Generally, The Company has one performance obligation—to participate in the overall Esport event—because the underlying activities do not have standalone value absent the Company’s participation in the tournament or event. Revenue from prize winnings and profit-share agreements is variable and is highly uncertain. The Company recognizes revenue at the point in time when the uncertainty is resolved.
Player Transfer Fees: Player transfer agreements include a fixed fee and may include a variable fee component. The Company recognizes the fixed portion of revenue from transfer fees upon satisfaction of the Company’s performance obligation, which coincides with the execution of the related agreement. The variable portion of revenue is considered highly uncertain and is recognized at the point in time when the uncertainty is resolved.
Licensing of Intellectual Property: The Company’s licenses of intellectual property generate royalties that are recognized in accordance with the royalty recognition constraint. That is, royalty revenue is recognized at the time when the sale occurs.
The Company assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. When the Company acts in the capacity of an agent rather than as the principal in a transaction, the revenue recognized is the net amount of commission made by the Company.
Deferred revenue consists of customer advances for Company services to be rendered that will be recognized as income in future periods.
| 40 |
Income taxes
Income tax on the profit or loss for the periods presented comprises current and deferred tax. Income tax is recognized in profit or loss except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.
Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at year end, adjusted for amendments to tax payable with regards to previous years.
Deferred tax is provided using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognized for the following temporary differences: the initial recognition of goodwill; the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit; and differences relating to investments in subsidiaries, associates, and jointly controlled entities to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the financial position reporting date applicable to the period of expected realization or settlement.
A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Company intends to settle its current tax assets and liabilities on a net basis.
Investments
Investments in and advances to entities or joint ventures in which the Company has significant influence, but less than a controlling financial interest, are accounted for using the equity method. Significant influence is generally presumed to exist when the Company owns an interest between 20% and 50% and exercises significant influence.
In accordance with ASC 321 “Investments—Equity Securities” (“ASC 321”), equity securities which the Company has no significant influence (generally less than a 20% ownership interest) with readily determinable fair values are accounted for at fair value based on quoted market prices. Equity securities without readily determinable fair values are accounted for either at fair value or using the measurement alternative which is at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. All gains and losses on investments in equity securities are recognized in the consolidated statements of operations and comprehensive loss.
| 41 |
Equity securities accounted for under the measurement alternative, the Company assesses the securities for impairment indicators, at least annually, or more frequently if there are any indicators of impairment. If the assessment indicates that the fair value of the investment is less than its carrying value, the investment is impaired and an impairment charge equal to the excess of the carrying value over the related fair value of the investment will be recorded.
Business combinations
The results of businesses acquired in a business combination are included in the Company’s consolidated financial statements from the date of the acquisition. The Company uses the acquisition method of accounting and allocates the purchase price to the identifiable assets and liabilities of the relevant acquired business at their acquisition date fair values. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. The allocation of the purchase price in a business combination requires the Company to perform valuations with significant judgment and estimates, including the selection of valuation methodologies, estimates of future revenue, costs and cash flows, discount rates and selection of comparable companies. The Company engages the assistance of valuation specialists in concluding on fair value measurements in connection with determining fair values of assets acquired and liabilities assumed in a business combination. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company records adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to the consolidated statements of operations. Transaction costs associated with business combinations are expensed as incurred and are included in selling, general and administrative expense in the consolidated statements of operations.
Impairment of long-lived assets and goodwill
Long-lived assets consist of property and equipment, right-of-use assets and intangible assets. The Company assesses for impairment of asset groups, including intangible assets, at least annually, or more frequently if there are any indicators for impairment.
Goodwill and indefinite life intangible assets are tested for impairment annually or when there is an indication that the asset may be impaired.
When a triggering event that occurred during the reporting period is identified, or when the annual impairment test is required, the Company may first assess qualitative factors to determine whether it is more likely than not that goodwill is impaired. If the Company determines it is more likely than not that goodwill is not impaired, an impairment test is not necessary. If an impairment test is necessary, management estimates the fair value of the Company. If the carrying value of the Company exceeds its fair value, goodwill is determined to be impaired, and an impairment charge equal to the excess of the carrying value over the related fair value of the Company will be recorded. If the qualitative assessment indicates that it is more likely than not that goodwill is not impaired, further testing is unnecessary.
Fair value option for convertible debt
The Company elected the Fair Value Option (“FVO”) for recognition of its convertible debt as permitted under ASC 825, Financial Instruments. Under the FVO, the Company recognizes the convertible debt at fair value with changes in fair value recognized in earnings. The FVO may be applied instrument by instrument, but it is irrevocable. As a result of applying the FVO, any direct costs and fees related to the convertible debt is recognized in operating expense in the consolidated statements of operations and comprehensive loss as incurred and not deferred. Changes in fair value of the convertible debt is recognized as a separate line in the consolidated statements of operations and comprehensive loss.
| 42 |
Contingencies
The Company estimates loss contingencies in accordance with ASC 450-20, Loss Contingencies, which states that a loss contingency shall be accrued by a charge to income if both of the following conditions are met: (i) information available before the consolidated financial statements are issued or are available to be issued indicates that it is probable that a liability had been incurred at the date of the consolidated financial statements and (ii) the amount of loss can be reasonably estimated. Management regularly evaluates current information available to determine whether such accruals should be adjusted and whether new accruals are required.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the results of operations or financial condition of the Company including, without limitation, such considerations as liquidity and capital resources.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements and related disclosures requires us to make estimates, assumptions, and judgments as of the balance sheet date that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. Our actual results may differ from these estimates under different assumptions and conditions.
Recent Accounting Pronouncements
See Note 3 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted, the timing of their adoptions and our assessment, to the extent we have made one, of their potential impact on our financial condition and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this Item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our management carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures under the supervision of our Chief Executive Officer and our Chief Financial Officer and concluded that our disclosure controls and procedures were not effective as of June 30, 2024. Material weaknesses relating to the Design and Implementation of Control Activities and Monitoring Activities were identified. The Company did not have sufficient resources with the relevant expertise to perform an effective risk assessment process, design and implement controls supported by documentation and provide evidence that such controls designed was based on the COSO Framework.
The material weaknesses in risk assessment, control activities and monitoring activities contributed to the following material weaknesses: (i) the Company did not complete a documented risk assessment, and (ii) the Company did not identify all risks and design relevant controls related to system of internal controls. As a consequence of the aggregation of the foregoing deficiencies in the Company’s DC&P and ICFR design, the Company did not have effective control activities related to the design of process-level and management review control activities. Aside from these deficiencies, management believes that the Company’s consolidated financial statements for three and six months ended June 30, 2024, present fairly in all material respects, the Company’s financial position, results of operations, changes in shareholders’ equity and cash flows in accordance with U.S GAAP. The Company does not believe and is not aware of any circumstance in which the potential weaknesses have impacted the Company’s financial reporting and as a result, there were no material adjustments to the Company’s consolidated financial statements for the three and six months ended June 30, 2024. In addition, there were no changes to previously released financial results. However, if the collective deficiencies were deemed to create a material weakness, a material misstatement to our consolidated financial statements might not be prevented or detected on a timely basis.
Management’s Remediation Measures
To address the deficiencies identified, management, with oversight of the Audit Committee, has implemented, or will implement, remediation measures to further address the deficiencies in the design of its DC&P and ICFR. The Company intends to complete such remedial measures by December 31, 2025. Management has also performed an initial risk assessment using a top-down, risk-based approach with respect to the risks of material misstatement of the consolidated financial statements. In addition, compensating controls have been applied to a number of areas where the risks of material misstatement are considered moderate to high. The Company is engaging outside resources to strengthen the business process documentation and help with management’s self-assessment and testing of internal controls. Although the Company can give no assurance that these actions will remediate these deficiencies or that additional deficiencies or a material weaknesses will not be identified in the future, management believes the foregoing efforts will, when implemented, strengthen our DC&P and ICFR. Management will take additional remedial actions as necessary as they continue to evaluate and work to improve the Company’s control environment.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting that occurred during the six months ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 43 |
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject, from time to time, to various legal proceedings that are incidental to the conduct of its business.
In April 2020, Engine announced its renegotiation of the acquisition of Allinsports. The revised purchase agreement provided for the acquisition of 100% of Allinsports in exchange for the issuance of 241,666 common shares of the Engine and other considerations, including payments of $1,200,000 as a portion of the purchase consideration. In September 2020, Engine advised the shareholders of Allinsports that closing conditions of the transaction, including the requirement to provide audited financial statements, had not been satisfied.
In response, in November 2020, the shareholders of Allinsports commenced arbitration in Alberta, Canada seeking, among other things, to compel Engine to complete the acquisition of Allinsports without the audited financial statements, and to issue 241,666 common shares of Engine to those shareholders. As alternative relief, the shareholders of Allinsports sought up to $20.0 million in damages. A hearing in this matter was held in May of 2021, and by a decision dated September 30, 2021, the Arbitrator determined that the closing of the transaction had previously occurred and directed Engine to issue 241,666 common shares. In conjunction with completion of the Arrangement (see Note 4), the Company assumed this obligation to issue 241,666 common shares. The Company is pursuing regulatory approval to issue the shares and is also pursuing relief against Allinsports shareholders for various alleged breaches of the share purchase agreement. The Company recognized a liability for the arbitration ruling of $1.5 million, which represented the fair value of the common shares directed to be delivered as of April 11, 2023, the closing date of the Arrangement. The liability is recorded as arbitration reserve on the Company’s consolidated balance sheets. This liability will be adjusted to fair value at the end of each reporting period.
By Order to Continue dated May 5, 2022, Engine was substituted in as the plaintiff in a matter pending in the Ontario Superior Court of Justice, seeking recovery of $2.1 million (€1.9 million) of principal and additional amounts of accrued interest under promissory notes acquired by Engine. The matter is in the discovery stage.
The outcomes of pending litigations in which the Company is involved are necessarily uncertain as are the Company’s expenses in prosecuting and defending these actions. From time to time the Company may modify litigation strategy and/or the terms on which it retains counsel and other professionals in connection with such actions, which may affect the outcomes of and/or the expenses incurred in connection with such actions.
| 44 |
The Company is subject to various other claims, lawsuits and other complaints arising in the ordinary course of business. The Company records provisions for losses when claims become probable, and the amounts are estimable. Although the outcome of such matters cannot be determined, it is the opinion of management that the final resolution of these matters will not have a material adverse effect on the Company’s financial condition, operations, or liquidity.
ITEM 1A. RISK FACTORS
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this Item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Repurchases of Shares
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During
the six months ended June 30, 2024, no director or officer of the Company
| 45 |
ITEM 6. EXHIBITS
GAMESQUARE HOLDINGS, INC.
FORM 10-Q
EXHIBIT INDEX
The exhibits to this Form 10-Q are listed in the following Exhibit Index:
*Filed herewith.
** Furnished, not filed.
| 46 |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| GAMESQUARE HOLDINGS, INC. | |||
| (Registrant) | |||
| Dated: | August 15, 2024 | By: | /s/ JUSTIN KENNA |
| Justin Kenna | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| Dated: | August 15, 2024 | By: | /s/ MICHAEL MUNOZ |
| Michael Munoz | |||
| Chief Financial Officer | |||
| (Principal Financial Officer) | |||
| 47 |