Gamesquare Holdings, Inc. quarterly report, Q1 FY2024

GameSquare Holdings, Inc. — Q1 2024 Form 10-Q

Reporting period: Three months ended March 31, 2024. Unaudited results compare with Q1 2023. GameSquare is a digital media, entertainment and technology company serving gaming and youth-culture audiences. Results include Engine, acquired in April 2023, and FaZe, acquired March 7, 2024; therefore, year-over-year comparisons reflect significant changes in the consolidated business.

Key financial metrics

Metric	Q1 2024	Q1 2023
Revenue	$17.73 million	$2.79 million
Gross profit / margin	$3.39 million / 19.1%	$1.28 million / 45.8%
Loss from continuing operations	$6.81 million	$3.03 million
Net loss	$5.26 million	$4.35 million
Adjusted EBITDA (non-GAAP)	Loss of $4.13 million	Loss of $1.54 million
Net cash used in operating activities	$8.02 million	$0.66 million
Cash and restricted cash at period end	$7.82 million	$0.19 million

• Q1 2024 revenue was $12.22 million from SaaS + Advertising, $2.94 million from Agency, and $2.56 million from Teams. Management attributed the overall revenue increase primarily to the Engine and FaZe acquisitions.
• Gross profit increased in dollars, but gross margin declined to 19.1% from 45.8%. Operating expenses rose to $9.67 million from $4.29 million, and loss from continuing operations more than doubled.
• Q1 2024 net loss included $1.55 million of income from discontinued operations, principally reflecting the $3.0 million gain on the Complexity sale, partly offset by its operating loss. Q1 2023 included a $1.31 million discontinued-operations loss.
• Cash and restricted cash rose from $2.99 million at December 31, 2023. Operating cash use was partly offset by $9.48 million of financing cash flow, primarily the $10.0 million gross PIPE proceeds, and $2.73 million of investing cash flow, including cash acquired with FaZe and proceeds from Complexity.
• Working capital was negative $14.8 million. Current assets were $38.22 million and current liabilities were $53.04 million at March 31, 2024.
• Debt included a $4.23 million line-of-credit balance and convertible debt carried at fair value of $8.39 million; contractual principal on the convertibles totaled $6.95 million. The line of credit has a $10 million maximum availability and bears interest at the greater of prime plus 4% or 9.5%. Convertible notes carry rates of 7% and 12.75% and mature in 2025. Operating lease liabilities totaled $2.27 million.

Material changes and transactions

• On March 7, 2024, GameSquare completed the FaZe merger, issuing 10.13 million common shares as part of the acquisition consideration. FaZe contributed $2.6 million of revenue and a $0.21 million loss from acquisition through quarter-end. Purchase accounting remains preliminary, including $6.49 million of goodwill and $12.0 million of acquired intangible assets.
• On March 7, GameSquare also completed a PIPE financing for $10.0 million gross proceeds, issuing approximately 7.19 million shares and warrants to purchase up to 1.08 million shares at $1.55 per share. The quarter-end share count was 30.32 million, versus 12.99 million at year-end.
• On March 1, GameSquare sold Complexity for consideration with a closing-date fair value of $7.9 million, consisting of $0.8 million cash and a secured subordinated note receivable recorded at $7.13 million. The note has a $9.5 million principal amount, bears 3% interest, and is due February 28, 2027. The filing also describes a $9.6 million principal amount in the transaction discussion, so investors should confirm the final note terms and purchase-price adjustments.
• Interest expense increased to $0.44 million from $0.02 million, primarily due to convertible debt and the line of credit. Transaction costs were $1.09 million, compared with $0.48 million in the prior period.

Outlook, risks and unusual matters

• Going concern: Management disclosed a material uncertainty that casts significant doubt on the Company’s ability to continue as a going concern. The Company has accumulated losses, a $78.7 million accumulated deficit, negative working capital, and dependence on additional financing and achieving profitable operations. Management says it plans to raise additional funds but provides no assurance of success.
• Liquidity and execution: Management says the Company does not currently generate enough revenue to cover costs; liquidity depends on controlling operating cash outflows, collecting receivables, and securing financing. Q1 operating cash use increased substantially year over year.
• Concentration: One customer accounted for approximately 57% of Q1 2024 revenue, versus none in Q1 2023. No customer represented more than 10% of accounts receivable at quarter-end.
• Controls: Disclosure controls and procedures were deemed ineffective at March 31, 2024. Material weaknesses involved risk assessment, design and documentation of control activities, and monitoring. Management intends to complete remediation by December 31, 2025; it reported no material financial-statement adjustments for the quarter.
• Legal and contractual matters: The Company disclosed an Allinsports arbitration obligation to issue 241,666 shares, a separate claim seeking recovery of approximately $2.1 million plus interest, and other ordinary-course claims. Management believes resolution of other claims will not materially harm the Company, but outcomes are uncertain. Certain officer agreements could require approximately $0.6 million upon specified change-in-control and termination events, or approximately $1.1 million upon termination without cause; no triggering event had occurred.
• Subsequent event: On May 15, 2024, the Company announced a FaZe Media joint venture in which GameSquare will hold 51% and Gigamoon 49%, with Gigamoon contributing $11.0 million for its interest. GameSquare also agreed to provide services and license certain intellectual property for an annual fee equal to 2.5% of FaZe esports gross revenue, payable in shares.
• The Company gave no specific quantitative financial guidance. Management described pursuing organic growth and acquisitions, investing in sales, and seeking to combine SaaS businesses into a unified offering. These are plans, not assured outcomes. Principal disclosed risks include financing and liquidity, integration and acquisition execution, competition, talent and partner retention, cyber/privacy matters, Nasdaq listing, and market volatility.

Most important facts for investors to verify

1. Near-term cash needs, actual availability under the receivables-backed credit line, and the Company’s ability to obtain additional financing given its going-concern disclosure.
2. Whether acquired revenue can translate into stronger gross margins and lower cash burn; reported growth is not a like-for-like comparison because of acquisitions.
3. FaZe integration performance, final purchase-price allocation, and the economics and governance of the FaZe Media joint venture and related license.
4. Complexity sale proceeds, final note principal and adjustments, and the buyer’s capacity to repay the secured note.
5. Customer concentration, collection of receivables, debt maturities and interest costs, potential dilution from warrants and convertible debt, and progress in remediating internal-control weaknesses.