Good afternoon, and thank you for joining us to discuss GameSquare Esports third quarter of fiscal 2021 financial results conference call and webcast. On the call today, we have GameSquare CEO Justin Kenna, and GameSquare's President Kevin Wright. If you would like to join the conference by phone, please click on the link at the bottom of the webcast. During the call, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. Before management discusses the results, I'd like to remind everyone that certain statements in this call may be forward-looking in nature. Any such forward-looking statements are based on certain assumptions and are subject to risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements.
Forward-looking statements speak only as of the date of this call, and there can be no assurance that the forward-looking statements will prove to be accurate, and you should not place undue reliance on such statements. Please refer to the forward-looking disclaimer and risk factors in the company's MD&A for the period ended August 31, 2021, which can be found on the company profile at sedar.com and on the company's website. The company undertakes no obligation to update such forward-looking statements except as required by applicable law. I will now turn the call over to GameSquare's President, Kevin Wright. Kevin.
Thank you, Carl. Good afternoon to everyone on the line. I'm Kevin Wright, President at GameSquare Esports, and I'd like to welcome all of you to today's conference call to discuss GameSquare Esports Q3 2021 financial results for the quarter ending August 31st, 2021, which we filed on sedar.com earlier today, along with management's discussion and analysis. Before we begin, I'd like to remind you that during today's call, as noted by the operator, we will be making comments containing forward-looking information. I invite you to read our Q3 MD&A for some of the risks and uncertainties that may affect GameSquare's performance in the future. As such, actual results may differ materially from the views expressed today. In addition, during the course of this call, there may also be references to certain non-IFRS financial measures.
For further information on these risks and uncertainties and non-IFRS measures, please consult our most recent MD&A and filings on SEDAR. Unless otherwise indicated, please note all figures are in Canadian dollars. I'd also like to remind everyone that this call is being recorded. With these formalities out of the way, I'd like to now turn the call over to GameSquare's CEO, Justin Kenna.
Thanks, Kevin. Good afternoon, and welcome to the GameSquare Esports Q3 conference call. I'm Justin Kenna, GameSquare's CEO. I'll start by outlining what the GameSquare team is building and how we are striving to be the largest and most profitable esports company. There are three areas of focus. One, our competitive esports teams. Two, building a world-class streaming org. Three, leadership in digital media and agency businesses. You will hear this throughout today's call. Our focus is on revenue growth while managing costs and margin to realize profitability across the company. Competitive esports teams form the foundation of what we do. We train, we focus on maximizing our advantages, and we win. Importantly, we are growing our fan base by giving them access to great teams, including our recently announced all-women's Valorant team.
However, we know that finding the right level of investment for maximum return is a critical balance needed to keep our fans engaged and entertained while landing on the right level of spend as we think about profitability and ROI. The announcement of TimTheTatman established Complexity as a top-tier streaming org, which is critical for engaging fans and brands. We can't overstate what a transformational announcement this was. For context, in the month following Tim joining us, we sold more merchandise than the prior full calendar year, and the number of talented streamers reaching out to us about joining Complexity has been tremendous. A world-class streaming org brings in more fans, more engagement, and this opens the door for authentic monetization opportunities, and we're already seeing evidence that this strategy is paying off. Next, we are leaders in digital marketing, content creation, and agencies focused on esports, sports and entertainment.
Later in the call, I will discuss how well the integration of Code Red, GCN, and Cut+Sew are going and the strong start that we've had to Q4 as our subsidiaries have hit the ground running and have shown a tremendous ability to collaborate and share across the company. Our leadership in these three areas enables us to monetize the rapidly growing esports market by helping brands to authentically connect with a massive demographic that consumes media like no generation before them. Importantly, we focus on prudent capital allocation with a view to profitability and squeezing all that we can out of every dollar that we spend. We are investing in growth, and every decision that we make has revenue and profitability at its core. With that, I will go through our financial performance.
I'll provide an operational update, discuss opportunities to grow through M&A, and I'll provide some insight into Q4 performance to date, which in my view has been very strong. Close with a brief update on our OTCQB application, which is in process. Financial performance. For the third quarter of fiscal 2021 ending August 31, GameSquare reported CAD 2.5 million of revenue, a 123% increase from the second quarter's CAD 1.1 million. Code Red contributed CAD 1.3 million to the consolidated revenue, an 84% increase over the last quarter. Third quarter revenues also included CAD 607,000 from Complexity and CAD 226,000 from Cut+Sew. We reported gross margin of 28% during the third quarter versus 25% in Q2 of 2021.
Improved gross margin was largely due to a focus on higher margin businesses as well as the contribution of our recent acquisitions. I would like to take a moment to provide some insight on this quarter's comprehensive loss. We recorded a CAD 18.1 million loss. However, this included CAD 15.8 million of non-cash costs and one-time transaction costs related to the acquisition of Complexity and Cut+Sew. To be clear, this does not represent cash leaving the business. We ended the third quarter with CAD 13.1 million of cash, which is a strong cash position. Our working capital as of August 31 was CAD 12.4 million, leaving GameSquare well capitalized to execute on our plan to continue to grow revenue and realize profitability.
This is a unique quarter as it includes only partial performance of the assets we have acquired. I would like to take a moment to give you a sense of the quarterly performance to date, which I think gives an idea of the strength of our combined platform. To date in Q4, our operating businesses have already generated revenue and signed contracts in excess of CAD 3.5 million, which reflects the strength of the businesses that we have acquired as well as the concerted effort put into integrating the businesses under the GameSquare banner. In our view, the first two months of Q4 compare very favorably to the CAD 2.5 million in Q3. Operationally, during the third quarter, we executed upon our M&A strategy while driving growth at Code Red.
We focus our M&A efforts on digital agencies and complementary businesses that are EBITDA positive or have a clear path to achieving it in the near term. In the third quarter, we added Complexity, which brings a tremendous amount of digital content creation, and Cut+Sew, which enhances our capabilities on the agency side with their deep expertise in brand development and go-to-market strategy. Complexity is a top-tier gaming org that competes in some of the biggest esports on the planet, including Tier One CS:GO and Valorant, which is now ranked as one of the most popular games in North America. Complexity has assembled winning teams, world-class facilities and professional management. With GameSquare's content creation, sales, marketing, and branding expertise, Complexity is starting to monetize its unique content and brand, and we expect to accelerate growth by building its streaming capabilities.
Subsequent to the quarter, the commitment of the Jerry Jones family and Goff Capital, collectively our largest shareholders, was further cemented as Tom Walker, CFO of the Dallas Cowboys, and Travis Goff, President of Goff Capital, joined the GameSquare board of directors. In my view, this shows a tremendous level of support from our new partners. Post quarter end, Complexity announced the addition of TimTheTatman, one of gaming and esports most popular personalities. TimTheTatman brings with him over 18 million gaming and esports fans and has immediately multiplied our credibility with fans and brands alike. We recently held our first merchandise sale pop-up in Dallas drawing upon these new strengths. The event was received very well, generating a tremendous attendance by fans at the live event held in Frisco, and the Complexity Tim merch drop sold out in person and online.
Cut+Sew is a lifestyle marketing company operating at the intersection of gaming, sports, and new media. Their expertise is building brand awareness and developing go-to-market strategies. Cut+Sew has deep understanding of how to bring the cool factor to brands and client engagements. This acquisition brings additional marketing capabilities to GameSquare and increases our presence not only in esports but also traditional sports, emerging tech, new media, music, and fashion. Cut+Sew has integrated with other GameSquare businesses extremely well and is introducing great new sales opportunities to the broader group as well as executing on their business plan driven by sales growth and solid EBITDA margins. As mentioned, Code Red's Q3 revenue grew 84% versus Q2 and was the biggest contributor to GameSquare's consolidated revenues. Code Red's management continues to add outstanding talent to support the influencer segment and consulting functions.
Code Red is a company that was early to esports and influencer promotion and representation. They continue to grow their client roster, which includes a number of top-tier brands. Throughout the year, we've been working to improve margins and accelerate growth, and the financial results in the quarter are an early indicator that strategy is taking hold. GCN is making robust progress. During the quarter, GCN announced activations and partnerships with Spiketrap, a contextualization analytics platform delivering AI-powered insights that brings real value to our brand partners. We announced Roc Nation Sports in Q3, which early on has led to some great opportunities. Post-quarter, we announced that GCN is working with Uplive, a leading live social company with more than 410 million registered users, and with Bagel Bites, a Kraft company.
Uplive and Bagel Bites are significant wins for us and are contributing to Q4, which is showing meaningful sequential growth. The sales team at GCN are gaining access to large RFPs, and we've seen some early wins as a result of their partnership with Roc Nation Sports. We believe that there are big opportunities that are well-suited to GCN's media stack and its ability to deliver bespoke activations to brands seeking to bridge the gap to esports fans. Moving on to M&A. Last quarter, we indicated that we are taking the foot off the gas in regard to M&A. That said, we aren't stopping. We are slowing after a very active first 12- months.
While our focus has turned to integration of our acquired businesses and we are seeing really good progress across the board, we continue to look at great businesses run by great teams with a high interest in agencies that operate in the esports, sports, and entertainment verticals. As previously announced, we are considering companies that generate revenue roughly between CAD 5 million-CAD 25 million, with EBITDA margins in the 20%-40% range, depending on the size and maturity of the business. We prefer transactions that favor stock over cash, and we like structures that include achievable and reasonable earn-outs over as much as 24 months. We are unlikely to complete another transaction in 2021, but management believes that it can complete additional acquisitions in 2022 to seek to bolster revenue and EBITDA. I will turn now to our financial outlook.
We have a healthy balance sheet which positions us well to execute against our strategic priorities. While we do not provide formal forward guidance, I would like to reiterate that we expect our business units to meet performance thresholds related to their acquisition earn-outs, implying illustrative revenue for 2022 of CAD 28 million. We are building a highly scalable, profitable esports company with global reach, which we think sets us apart from every other esports company that we know of. Our agencies are growing quickly, relying on relationships built over decades of professional careers, and importantly, are profitable. We are excited by the secular trends within esports and encouraged by more esports companies that are seeking to access the public markets. We believe that we are extremely well-placed within the capital markets.
We have applied for an OTCQB listing and expect to be DTC eligible in the very near term, which we believe will be viewed as a positive catalyst as U.S. investors appear to have a desire to invest in esports names. We are executing on our business plan, and we are seeing great results within the agency and media businesses and seeing early returns as we grow Complexity into a leading streaming and esports org. As a FaZe Clan alum, having served as CFO there for three years of impressive growth, I am extremely encouraged by the progress that we have made and that we are making at GameSquare. I believe that we are extremely well-positioned, and we have assembled a team of outstanding people committed to the long-term success of the business and to building tremendous shareholder value.
On behalf of the company, I'd like to thank you all for joining the call and for your continued support. With that, I'll now turn the call over to the operator to take your questions. Thank you.
Thank you. We will now begin the question and answer session. To join the question queue over the phone, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Alternatively, you may type in your question in the box at the bottom of the webcast. We will pause for a moment as callers join the queue. The first question comes from Robert Young of Canaccord Genuity. Please go ahead.
Hi. Good evening. I was hoping maybe the first place to start might be just around whether there's any exposure. It seems like to me that it would be an adjacent thing, if anything, but would there be any exposure from some of the concern on, ad spend in, you know, an inventory-constrained environment? Some of the things that Snap and Microsoft others highlighted, and, I'm not too sure how much mobile, how important mobile is, but some of the Apple iOS changes that have been causing some problems in the ad industry. Is there anything there to think about related to your business?
Yeah, I'll jump in on that one, Rob. Thanks for your question. It looks like Justin's gonna have to rejoin our call here. Yeah, so in terms of, you know, changes within ad spend, keep in mind that, you know, we did CAD 2.5 million this quarter. We're trending, I mean, we've said that we did CAD 3.5 million in excess of that so far in Q4. So reasonably small numbers compared to the budgets that are out there. What we're seeing within the industry is that y ou know, companies like Bagel Bites are dipping their toes in and Uplive; they're looking for ways to reach those audiences, and we've got a great platform to do that.
We're really encouraged by the progress that we've seen with the clients that we have. We're not anticipating that that's gonna have a serious impact. Then in terms of changes that are coming, particularly around cookies, you know, our partnership with Spiketrap puts us in a really strong place there because we're actually listening to what's going on in the, you know, the metaverse in the universe of online. I think we're really well positioned to protect ourselves from any of the impacts. You know, when we get to doing a lot more revenue, that's gonna have an impact. Right now, we're growing really strongly.
Okay, great. That's fair comment. The beginning of the Q4, which I guess four months here, the CAD 3.5 million. Can you talk about the seasonality in Q4? Do you expect to see an abnormal amount of seasonality in a Q4 relative to the other quarters, even beyond the fact that you've got four months, I guess, at the longer quarter? How should I put-
Yeah.
that CAD 3.5 million into context?
So, you know, we pointed out that is two months of performance because we've changed our year-end from a November 30th to a December 31st. This is gonna be a longer quarter. Taking that out of the mix, you know, Q4 should be a little bit stronger in terms of seasonality because of the spend that brands have around Black Friday, Thanksgiving, Christmas. Those feed into it. You know, this is an audience that is 18 to 35, so they're ripe for holiday spending and people spending on them for those holidays. We should see strength in Q4 relative to others.
I'd say that, for us, you know, the strength that we're seeing initially in Q4 here is around the work that we've done on integration, the work that we're doing on sales. You know, there's a line in our press release around Sean Horvath joining as a Chief Revenue Officer at the GameSquare level. He's gonna do a lot of work around structuring the sales team and working with the really great salespeople that we have across the company and that we're attracting to the company so that we can grow. Don't think of that CAD 3.5 million as a result of seasonality. Think of it as a lot of concerted work in the company to integrate the businesses we've bought and to tap the networks of folks that we've worked with in the past.
Hi. Yeah. Hi, Rob.
Hey.
It's Justin back. Sorry, I was booted off the call very briefly, but I'm back. Just to add to Kevin's comments there, you know, I would totally agree. I mean, you know, this a CAD 3.5 million number, you know, beyond merchandise has little to do with seasonality and more to do with the hires and the pipeline that we've built up. I mean, if you look at, you know, GCN for example, you know, we got GCN capitalized throughout, you know, Q1 and Q2, and then built, you know, a really strong pipeline, you know, and now have, you know, dedicated sales teams that are, you know, working on really large RFPs. You know, it's a trend that we expect to continue, has less to do with seasonality.
I mean, a number of brands are very interested in looking at, you know, larger campaigns and programmatic, you know, but a lot have already spent budget for this year and, you know, we're starting to lock in, you know, big deals and programmatic opportunities for 2022. Less to do with seasonality and more to do with, you know, building a real pipeline, you know, investing in the right resources and integrating those assets.
Okay, great. Hoping to get maybe a little more context around the gross margins. I'm sorry if I missed it in the prepared comments, but the gross margins are stronger than I expected. Is there something driving behind that? You know, how do I think about that going forward?
Yeah. The way that I would think about that is, you know, traditionally, Code Red has been the lion's share of the revenue of the group as we've, you know, obviously made acquisitions and brought in GCN and then, you know, obviously Cut+Sew on complexity more recently. Code Red, while we've been focusing on improving margin there through the consulting side of the business. If you look at the influencer side of the business is traditionally a lower margin business. We've been able to bring in that nice mix so that 3.5 million of revenue in Q4, again, is going to be an increased margin, again. That's, you know, really comes down to the mix of revenue.
If you look at these larger RFPs that we've been working on and we've been able to land, they really live in that higher margin world because you are connecting your brands directly to audience. So, you know, you are finding these larger projects with, you know, larger margin areas. So that's, you know, really where we are trying to focus is those larger margin areas, while obviously, you know, being able to continue to grow that core business, i.e., you know, your sort of recurring influencer revenue through a business like Code Red. But playing definitely in a higher margin area, and we expect that trend to continue moving forward.
Okay, okay. Then, like, this Kraft, I was a little bit surprised to see the participation in that. I was wondering if you could talk about like, what was the hook that got Kraft in to work with you on this Bagel Bites campaign? I mean, how it seems as though you're operating as an agency, you know, above and beyond the esports team assets that you have. So maybe you could talk about, you know, what the hook was and what that means relative to the future of working across different, you know, esports teams.
Yeah, absolutely. It's a really interesting one, and it's an interesting question. This, you know, win for the team was through GCN, so it was actually completely separate of Complexity and the FaZe hook was actually after the RFP was won, so that wasn't, you know, used as a sort of tool to win that project. The team worked really well on pulling together a strategy for Bagel Bites, in terms of how they reach audience in this space, put together a really comprehensive response to RFP, which includes the use of their media network. I think we've talked to the media network before, but you know, the ability to reach a huge amount of audience in a targeted way is you know, really the secret sauce.
You know, to be frank, what we try to do is where it makes sense to use, you know, Complexity talent or Code Red helping, you know, link influencers and where we can keep it internal, we will. We're not going to do that at the cost of a project. For this specific RFP, it really made sense to use that specific talent. There's other talent that are used in this RFP as well as FaZe High Sky. You know, we do have the ability, because of our agency businesses, to work with other esports orgs. Obviously it is a priority of ours to always highlight Complexity and to keep, you know, revenue internal where possible. Again, you know, we do have the ability to work with other esports orgs in the space.
Look, quite frankly, we'll continue to do so. You know, we are putting in a lot of time and effort into building out our content business and our merchant product capability internal. Again, you know, first and foremost, we'll be servicing Complexity and our agency project businesses. However, you know, there is a gap in the market in terms of content, in terms of merch, and, you know, we think that we're incredibly well-placed to be able to fill that, you know, that space. You know, this was a GCN win, again, you know, being able to link in talent from, you know, whether it be different orgs or different agencies. I think that gives us a really good ability, you know, to be able to help brands connect to audience in the best possible way.
Okay. Then maybe last question, just on the Complexity acquisition, since you've, you know, had it inside the org, is there any low-hanging fruit, like that you've been able to take advantage of so far? I think you were talking about plugging some of the agency asset directly into them to help move along the monetization. Maybe, I know you touched on that a little bit in the prepared remarks, but maybe anything specific about, you know, quick benefits since you've owned them and I'll pass the line.
Yep, no, for sure. There's been a couple. Cut + Sew have actually been working directly with Complexity around, you know, we talked about the cool factor and where you wanna take the brand, what you stand for, what really is that North Star. They've done a fantastic job in working internally with Complexity on that. I mean, you know, since we've acquired Complexity across our major platforms, I think we've had growth of around 80,000 followers across Twitter, Instagram, and TikTok. You know, there's been really big growth from a brand marketing standpoint, having Cut+ Sew plugged in directly. I think another one to think about is production.
You know, Complexity, whether it's Race to World First or, you know, they are at the forefront of a number of large scale, world-class events and tournaments, et cetera. I think last year we spent roughly CAD 500,000 on sort of outside production. Again, that's, you know, that's production costs that can be kept in-house now with GCN. We've seen through, you know, GCN's ability to, you know, run the NCAA collegiate esports tournaments. You know, they produce world-class tournaments and events that gives us another ability, you know, to keep that revenue internal. There are a couple of examples off the top of my head, but I'd say not just with Complexity, even with the agency businesses.
You know, Cut+ Sew and GCN are very complementary in, you know, ways that Cut+ Sew are now looking to go and upsell, you know, their clients on the media network that GCN has access to, et cetera. It's been working incredibly well. Now, Kevin mentioned before, we've had our recent hire of Sean Horvath, who's come in as CRO, and he's really organizing these opportunities. You know, as a group, we have a really compelling offering. You know, that internal cross-selling has been working really well.
All right. Thanks for all the color. Thanks for taking the questions.
Thanks, Rob.
Thanks, Rob. We do have a couple questions that have come in through the online portal as well. The first one here is, with your growing U.S. exposure, can you highlight any plans or strategies towards growing U.S. investor awareness. I'll grab that one. The
Yep.
You know, we're waiting on the OTC listing. We do have some very thoughtful promotion lined up in terms of getting the word out. We think the OTC, when we get that with DTC eligibility is a great catalyst for the stock. We think there's a lot of pent-up demand. You know, our operations are. There's a lot of operations that are in the U.S., there's a lot of U.S. investors that are very interested in esports, and we've got a big investor network down there that are looking for ways to buy our stocks.
We do have some conferences lined up that we will be speaking at in the U.S. as well as some similar style promotions and marketing that we've done in the Canadian market to help us gain exposure. There's absolutely work going into that, but we won't spend any dollars on that until we're actually OTC listed. Anything you wanna add there, Justin?
No, I think you nailed it, Kev. It's perfect.
The second question here is, the FaZe Clan transaction has garnered a lot of attention. How do we think about that in the context of GameSquare, and are they potential competitors? Justin, you're a FaZe alumni, and we know about the go public transaction that was announced this week, so why don't you take that?
Yeah, absolutely. I mean, it's an interesting one. We've had a lot of questions about FaZe since, you know, the announcement last week. Look, this is nothing but positive news for not only GameSquare, but for others in the industry. You know, I'll steer clear of talking specifically to their numbers or their multiples or their valuation. That's not really our place. You know, I would say that, you know, the news that's come out is nothing but a positive for us in relation to where we sit currently in relation to, you know, our value prop and our multiples to valuation. We see it as a real positive. I mean, is FaZe Clan a competitor? I would say in some capacities, yes.
I mean, they are to Complexity, you know, in Counter Strike and Apex and other key games for sure, and there's crossover. We are, you know, a very different org overall to FaZe. I mean, they are agency businesses. Two of the agency businesses that sit within our group actually, you know, work with FaZe, and there's plenty of ways for us to work together and to be able to further monetize. I'd say overall, you know, it just goes to show the growth of this industry. It's a huge positive for us, and it's a huge positive for the industry overall.
We see it as really good news and, you know, we're really excited about, you know, continuing to grow what we're doing and continuing to look at ways to partner with and work with FaZe when and if it makes sense.
I think with that, operator, unless there's any other questions on the line, we're through everything on the portal.
Thank you. There are no other questions on the phone lines.
Okay. With that, I'd like to thank everybody for joining our call today, and we look forward to giving you updates through Q4 and then our full year reporting that'll happen in 2022.
This concludes GameSquare Esports Inc.'s third quarter of fiscal 2021 financial results conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.