GAME - NASDAQ

Good afternoon, and thank you for joining us for the GameSquare Holdings 2025 Second Quarter Conference Call. On the call today, we have Justin Kenna, GameSquare's CEO; Lou Schwartz, President; and Mike Munoz, CFO. [Operator Instructions] Before management discusses the results, I'd like to remind everyone that certain statements in this call may be forward-looking in nature. These include statements involving known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in our forward-looking statements. For information about forward-looking statements and risk factors, please see our 10-Q for the quarter ended June 30, 2025, which will be available on the company's website or with the Securities and Exchange Commission. I will now turn the call over to GameSquare's CEO, Justin Kenna. Justin, please go ahead.

Thank you, and good afternoon to everyone joining us on today's call. 2025 is on track to be a transformative year for GameSquare as we aggressively execute against a bold vision aimed at building a leading digital-first platform at the intersection of media, technology, gaming and onchain finance. While our roots are in media, technology and gaming and those businesses continue to deliver strong revenue and operational performance, we have also recently launched a differentiated crypto-native treasury management strategy. Since its official launch in July using the August 13, 2025, closing price, our treasury strategy has already generated over $19 million in unrealized gains, and we now hold 15,630 ETH with a current market value of $74.3 million. We believe GameSquare is one of only a few companies globally that combines a proven high-performing operating business with a large-scale actively managed Ethereum treasury. This unique model positions us to capture meaningful appreciation and yield from our crypto strategy while leveraging the financial and operating performance of our core businesses. Our operating businesses and onchain treasury management strategy are complementary. In fact, our growing onchain presence is beginning to fuel new opportunities in our operating business, creating the potential for a powerful growth flywheel. Our strategy is also designed to smooth the volatility of the crypto market by balancing it with consistent diversified revenue streams. Over time, the cash flow and value creation from our treasury activities are expected to fund additional ETH purchases, opportunistic share repurchases and reinvestment in our core businesses. With over $71.5 million in trailing 12-month revenue and a scalable onchain model built for both growth and resilience, this structure sets GameSquare apart and creates an extremely compelling value proposition for our shareholders. So with this, I'll jump into our operating performance before I share our early observations from the launch of our treasury management strategy in the third quarter. As we stated on our first quarter earnings call, our priorities this year are focused on achieving profitability, streamlining operations and driving higher-margin revenue opportunities across our core media, technology and gaming businesses. I'm pleased with our progress. On a consolidated basis, we've reduced SG&A expenses by 15% and expanded gross margin by 120 basis points, driving a 16% improvement in adjusted EBITDA year-over-year. Additional restructuring efforts are underway, and we've identified a further $5 million in annualized savings and are expected to begin contributing in the third quarter. We also anticipate stronger gross margin in the second half of the year, supported by higher seasonal revenue and a more profitable mix of business. During the second quarter, we completed the divestiture of Fa

Thanks, Justin. It's important to note that our second quarter financial results do not reflect the July launch of our treasury management strategy. The contribution of this strategy will begin to be reflected in our financial results starting in the third quarter. Comparing our 2025 2nd quarter reported results to the prior year, total revenue was $15.8 million (sic) [ $15.9 million ] compared to $17.8 million. The 11% year-over-year decline in revenue was primarily due to a reduction in programmatic advertising revenue partially offset by growth across our other business segments. Gross margin for the 2025 2nd quarter was $2.4 million or 15.3% of sales compared to $2.5 million or 14.1% of sales for the same period last year. We expect gross margin to improve going forward, supported by a more profitable revenue mix in 2025 and additional actions underway to improve gross margin. Adjusted EBITDA loss for the 2025 2nd quarter was $3.5 million compared to a loss of $4.2 million last year and a loss of $3.0 million for the first quarter of 2025. Before I turn the call back over to Justin, I want to quickly review some balance sheet items after the second quarter that take into account our recent equity offerings, onchain purchases and debt repayments. As of August 13, 2025, GameSquare had approximately 99 million common shares outstanding, cash and cash equivalents of $20 million, onchain treasury assets of $79.4 million, total debt of $1.25 million and a market cap to net asset value ratio of 0.92x. As you can see, GameSquare has a strong financial position with excellent liquidity to pursue strategic initiatives, invest in our operating platform and return capital to shareholders. So with this overview, I'll turn the call back over to Justin.

Thanks, Mike. As a result of the strong performance since the launch on July 1, 2025, of our Ethereum-based treasury strategy and continued restructuring initiatives aimed at streamlining operations and accelerating the path to profitability, we plan to reintroduce full year guidance in the third quarter of 2025. That said, I want to provide investors with the following assumptions that we believe will add some insight into why we expect the second half of 2025 to be meaningfully stronger. As we've discussed, we launched our Ethereum yield strategy on August 1, which is targeting annualized onchain yields of 8% to 14%. Approximately 60% of 2025 revenue is expected to be generated in the second half of the year, in line with typical seasonal trends. We expect revenue growth combined with a more profitable mix of revenue will further improve consolidated gross margin in the second half of the year. Opportunities that shifted out of the second quarter are now on track to close in the coming months. We expect meaningful sequential growth with third quarter revenue higher than the second quarter and fourth quarter building further on that growth, supported by both new wins and expansion with existing partners. We expect additional wins in the crypto space like the $2.5 million recently announced Azuki deal to continue that were not modeled into our original numbers. Ongoing restructuring initiatives are expected to lower operating expenses in the second half of 2025, with approximately $5 million of additional annualized savings expected by the end of the third quarter. Taken together, the strength of our operating platform, the seasonally stronger revenue mix, our ongoing expense discipline and the contribution from our onchain treasury strategy gives us confidence in a significantly improved performance in the back half of the year. GameSquare is building what we believe is a category-defining model that combines high-performance operating platform with one of the most sophisticated actively managed Ethereum treasuries in the public markets. Our dual strategy is designed to deliver growth, yield and appreciation while providing the resilience to outperform across market cycles. We are focused on expanding our reach profitably into traditional and onchain economies and translate this advantage into meaningful lasting shareholder value. We believe the second half of 2025 will show the full potential of what our platform can deliver. So with this overview, Lou, Mike and I are happy to take questions. Operator, please open the call to questions.

[Operator Instructions] The first question comes from Greg Gibas with Northland Securities.

Great. Justin, Lou and Mike. Congrats on the early progress and success with that Ethereum treasury strategy. I wanted to just kind of follow up on your, I guess, revenue performance in terms of a little lighter than you expected. Could you provide maybe a little bit more color on what maybe panned out differently than expected? And simply, was it kind of deal timing? Or were there other impacts? And appreciate the comments on kind of the expectations into the back half.

Yes, absolutely. Thank you, Greg. I think there's 3 main factors in Q2, which I think the most sort of pleasing factor of that is that they're sort of macro related and that these deals are very much on the table. So I would say number one was really the effect of the tariffs. I think that we had 2 sort of large deals with global gaming companies that are headquartered in China. These were multiyear 7-figure deals that they haven't gone away, but they certainly slowed down and one that we were expecting to paper in short order that was certainly slowed down by, I think, the confusion that some of the announcements around tariffs created. And I certainly think that from an advertising and sort of agency perspective, I do think that there was sort of some pain felt across those segments. So certainly, we weren't isolated there. I think the pleasing part of that is that these deals are very much on the table. We've got real inventory. I hate to sort of continue to use the word pipeline because these deals are translating into real revenue. And again, I'd touch on sort of the Azuki deal that we just announced. It's $2.5 million of really high margin revenue that wasn't even factored into the model at all. So feel really good about Q3 and Q4 revenue, Q2 a little softer for sure, so I think, one, certainly kind of the tariff announcements. I'd say number two was a sort of slowdown in our programmatic advertising revenue. This is a part of the business -- I think we've been pretty vocal about it. It's been really low-margin sort of revenue for us. And when we talk about being a next-generation media company, certainly, our focus is not on programmatic advertising. We're really focused on our map building business, connecting brands authentically with these audiences, large-scale campaigns, really high-margin areas of our business, and that really -- I think you'll see a continued focus there. So certainly kind of from a top line perspective but what I think you will see in the back half of the year is really material margin growth. So certainly, top line came off a little bit, but again, I think if you look year-on-year, there is adjusted EBITDA improvement. And to kind of touch on that, Greg, because I think that's really key, right, is if you think about that EBITDA piece, right, into Q3 and how you kind of get to profitability, right, if you're looking at a burn of just sort of over $1 million a month, I think if you look at -- and this isn't even sort of taking into account the increase in revenue and margin, which we expect but just from sort of that $5 million of annualized restructuring costs, if you take into account that and even just the sort of yield off our current Ethereum strategy, you're already sort of at breakeven, right, before you even look at kind of that revenue growth. So we feel really good about the operating business. I think third factor is really just a renewed sort of focus on this crypto space. I think that we kind of touched on the pipeline there, but there are 15-plus active conversations going on. And this is not a pivot in terms of our services, so I'd really note that. I think that we're just seeing a lot of inbound, right, from these blockchain gaming companies, exchanges, wallets, neobanks that are all wanting to reach youth audience at scale. They're all wanting to reach these traditional gaming audiences, and so we're seeing a huge amount of inbound there. So yes, just to sort of summarize that, say, some macro factors, the tariffs, certainly a bit of a slowdown in programmatic revenue but again, year-on-year EBITDA improvement. We know the job is not done by any extent, but I think there's a really clear path here to profitability. And that's not to sort of -- we're not just looking at our unrealized gains on Ethereum, right, which is, as we talked about, $19 million. We're trading currently below cash in Ethereum. So yes, we certainly think there's significant upside, but we certainly think just from an operating standpoint that we'll be getting to profitability in the near term.

Yes, great. Really appreciate the detailed color there. And it does make sense. You kind of beat me to a follow-up question as well. But I guess I'll just ask 2 on -- you mentioned the 15-plus active conversations in the crypto space. That's exciting. Wondering if you could maybe characterize the timing of those opportunities? Like could you say those are longer term? Or could those be contributors in the back half? And I guess just secondly or lastly, as it relates to your guidance, like do you have a sense of the timing on when you -- is it just getting a better sense of the treasury strategy and how that's trending? And -- sorry, and I guess if I could throw in another one, just in terms of the incremental restructuring, maybe where you expect to derive those savings from in the business.

Yes, absolutely. So a bit in there, I'd say we'll touch on sort of the restructuring first and we can go backwards from there. On the restructuring front, we've been talking about some time really consolidating our technology platforms, Stream Hatchet and Sideqik. We've made some really big strides there. We've continued to pull out efficiencies within the business. We've obviously integrated engine gaming and then phased plans over the past 2 years. And we've been continuing to look at efficiencies, so really just around streamlining our offering. And I think you'll see that sort of net effect of that in Q3 and Q4, and we're going to be operating sort of really efficiently. And so I think from that point, it's really about, one, hitting profitability and two is obviously scaling from there. I think that we can really hit operational efficiency from there and again, really see scale into 2026. In terms of the sort of crypto revenue category, it's been an interesting one. I think it's certainly been one -- we've been involved in this space for some time, and we've certainly been on the sideline sort of watching as these treasury strategies have appeared. And we certainly looked at it from a perspective of we're not in an arms race here with BitMine and others to own the most Ethereum. We, one, believe that our sort of strategy is really differentiated by the fact that we have an exclusive partnership with Dialectic. From a public company standpoint, that is an exclusive relationship. And we believe that we can generate the greatest yields on Ethereum. So we certainly believe, at the end of this month when we can report our first month and actual results on yield, that people will start to see that and hopefully, the market will see those actual results. But certainly, we think that we have a differentiated approach by the fact that our operating business really does work within this space, right? And that is through our core businesses in technology, agency, events, marketing, media, these gaming audiences living on the Internet and there's enormous crossover with these crypto communities, right? They're all digitally native. It's really sort of servicing everything Internet culture. And so we have done that. We've worked with a number of blockchain gaming developers in the past. Our largest sponsor on the Fa

This concludes the question-and-answer session. I would like to turn the conference back over to Justin Kenna for any closing remarks. Please go ahead.

Thank you. And yes, I just want to thank everyone for jumping on today's call. We've certainly received a lot of inbound around the treasury strategy and sort of understanding the different pieces there and why the company is trading below cash and Ethereum. And I think that as frustrated as we certainly are as management, we're going to continue to keep our heads down and drive the business forward and get to profitability to prove out the yield strategy to continue to really drive for long-term sustained shareholder success, and that's really what we're in this for. I think that we mentioned it in the script, but we really look at this strategy as a long-term strategy. This isn't about just writing the appreciation in price in Ethereum, which is certainly nice. That sort of $19 million unrealized gain is certainly nice. But it's -- this is about long-term sustained success. It's about generating real yield that we can invest into the operating business and that we can continue to execute. So as I mentioned, we're really uniquely positioned here as a service provider to the crypto space. We see this as a new vertical and new revenue stream for us. We're going to continue to be a leader in the gaming space, but we think that we're extremely well positioned for future growth. And so yes, I really appreciate the support of all the investors, and we're certainly here if anybody has questions about the strategy or wants to understand more. We're always available. Yes, again, we feel really bullish about where things sit today and where we're headed. We're really, really excited about Q3 and Q4. Nothing has changed in our ruthless pursuit of profitability, and we're really excited to sort of update shareholders with our Q3 results and deliver those results for shareholders. So again, thank you, everyone, for jumping on today. And the company really appreciates it. Thank you.