GameSquare Holdings, Inc. (GAME) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us for GameSquare Holdings' live stream to review its $250 million on-chain treasury strategy. With us today, we have Justin Kenna, GameSquare's CEO; Ryan Zurrer of Dialectic; Robert Leshner of Superstate; and Rhydon Lee of Goff Capital. [Operator Instructions] Viewers are encouraged to advance the slides at their own pace and a copy of the slide presentation is also available on the company's IR website. I'd like to remind everyone that certain statements made during the live stream 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 refer to the company's Securities and Exchange Commission's filings. I will now turn the conference over to GameSquare's CEO, Justin Kenna. Justin, please go ahead.

Thank you, and good afternoon to everyone joining us on today's call. Some of you may be new to GameSquare, and we want to thank you for taking interest in our business. It's a very exciting time at GameSquare. The goal of today's call is to provide our investors with a front row seat to what we've been up in the past few weeks and also to give you an idea of what's next. In less than 2 weeks since our last chat, we've raised a total of $80.4 million in fresh capital, purchased the legendary Cowboy Ape CryptoPunk, one of the absolute crown jewels of NFTs and brought on Robert Leshner, the visionary Founder of Compound and CEO of Superstate as a key strategic investor. These aren't just wins, they are bold steps in our mission to bring digital-native fluency to public markets. And we're committed to doing that with a razor-sharp strategy rooted in culture and credibility. I'm excited to be joined today by 3 trailblazers in decentralized finance that also serve as strategic advisers and the investors in GameSquare. Before I turn the call over to Robert, Ryan and Rhydon to review our crypto treasury strategy, I think it's important to bring any newcomers up to speed on who we are and the powerhouse business that we've created. In first launching GameSquare in August of 2020, we followed a strategic plan focused on quickly building a next-generation media, entertainment and technology ecosystem designed to connect hard-to-reach digital-native audiences to brands, creators and publishers at scale. In just over 4 years, our operations have quickly grown to over $100 million in pro forma annual revenue. Our tech powers the biggest video game publishers in the world. Our creative and media services drive brand engagement with iconic brands like McDonald's, Nike, Porsche, General Mills, P&G and more. And let's not forget, we own FaZe Clan, the most recognizable esports brand in the world. One consistent approach that's been instrumental in our success has always been building with the best in the game, people who have earned trust in digital-native culture. That's how we've helped brands into gaming and it's how we're approaching crypto, which makes our differentiated treasury program a natural extension of our core business. It isn't just about yield. It's a way to lead the public markets into a deeper understanding of on-chain ecosystems through the lens of those shaping them. GameSquare isn't just another ETH treasury company. We have a very successful core business that was built by connecting mainstream players to digital-native audiences and educating the traditional marketplace on Internet culture. We operate as a market-leading digital company providing services across advanced technology and data solutions, Internet-first creative and production agencies, and we develop and execute the most authentic content and live experiences that uniquely serve Internet-native audiences. The reason we've expanded our financial strategy into crypto is because this is an expansion of our ecosystem that is truly authentic. At the heart of this expansion is our strategic partnership with Dialectic. Crypto investing legends, who have engineered Medici, a cutting-edge platform that claims our on-chain yields of 8% to 14%. That's miles ahead of the standard 3% to 4% from basic ETH staking. Using smart machine learning, automated optimization and multilayered risk controls, Medici delivers what we see as the gold standard in risk-adjusted returns in decentralized finance. Due to this, 8% to 14% yields on top of the Ethereum appreciation and staking rewards on an authorized strategy of $250 million. We are set up to deliver a meaningful amount of annual income for GameSquare and our shareholders. In addition to our higher than market yields, we will also be able to utilize significant carryforward tax losses from prior acquisitions that will ensure that we keep more of the upside in-house. We will be kicking off our yield strategy with Dialectic this Friday. And for reference around fees, please see Slide 19 in the Dialectic deck, of which GameSquare gets a further 25% discount. Right now, our ETH treasury holdings are valued at approximately $55 million, inclusive of $5 million in unrealized gains, and we have significant cash on our balance sheet to fund future purchases of on-chain assets and continue to grow our business operations. With 99 million common shares outstanding, our stock is currently trading at approximately 1.19x our ETH and cash asset value. This valuation doesn't take into consideration the value of our operations or expected future cash flows generated by our yielding strategies, let alone the potential appreciation of our ETH holdings. When looking at mNAV yield, our operating business and cash, we are trading well below our peers. A couple of weeks ago, we had a call first introducing our crypto treasury strategy. And since then, we have expanded that strategy to include an NFT yield program. As you may have seen in the headlines last week, we purchased the iconic Cowboy Ape CryptoPunk NFT, which is one of only 24 Ape CryptoPunks in existence and is widely regarded as one of the most desirable CryptoPunks of the 10,000 piece collection as well as NFTs in general. Acquiring CryptoPunk showcases our belief in the long-term value of digital identity, decentralized ownership and cultural capital on-chain. This was done through a strategic preferred stock swap transaction with no dividends, interest payments or further adjustments in the preferred to common exchange at $1.50 per share. Our NFT strategy diversifies our treasury program by targeting an expected annual return of 6% to 10%. This is another factor that sets GameSquare apart from other Ape treasury companies. Our strategic adviser, Ryan Zurrer, is a leading authority on digital art, and he is the only digital-focused member on the Board of Trustees at the Museum of Modern Art in New York. His firm, 1OF1 AG is managing GameSquare's NFT yield strategy and will custody the asset for yield generation purposes. As you can see, we are not just scaling, we are pioneering the most dynamic high-octane on-chain treasury in the public markets, designed to crush outdated approaches and deliver outsized wins. If you're sizing us up on an mNAV multiple, don't forget to layer on an expected 8% to 14% yield like a PE multiple. It paints a far brighter picture of our true potential. We're all about transparency and sharing the journey. So let's hear straight from the experts that are shaping it. I'll first kick it over to Robert, who can do a bit of an intro. I think this is the first time Robert's met our investor base, and then Robert will pass it over to Ryan and Rhydon to do a deeper dive on our treasury strategy. Thanks all.

Hi, this is Robert Leshner. I had the pleasure of being able to work with the GameSquare team to sell to the company a CryptoPunk, which I had been a collector of for many years. I originally purchased the work a few years ago with the knowledge that it was one of the most important pieces of art in the crypto ecosystem and always would be. And for years, I really waited for the opportunity for somebody or some company to put it to use as part of a collection and as part of the brand identity of something bigger. This wasn't a piece of art that I had the ability to scale. It really with GameSquare coming along with the vision to add this to a crypto treasury strategy and to make it the face of their social presence that really can help me to work with them to exchange this truly important piece of work for preferred stock in the company. And the compelling thing for me was that they have an NFT strategy that is about collecting important works of art, which we'll appreciate. And not just that, but to put them to work in the crypto ecosystem as well for yield. And for myself, knowing that I'd be exchanging art for shares, this was a compelling proposition. My background beyond being a collector is I was the founder of one of the first DeFi protocols Compound. And I'm an active investor in the space at Vine Ventures, where we've invested in hundreds of early and middle-stage crypto companies as one of the marquee investors. And so I bring as a shareholder, a perspective both of art, but as well of the opportunities on blockchains for yield and for a crypto treasury strategy to be put to work. So excited to be joined by everyone, and I'll pass you, Ryan.

Great. Thanks, Robert. My name is Ryan Zurrer, and I will walk through a little bit of how Dialectic generates a consistently differentiated yield that we're able to produce on ETH Bitcoin and U.S. dollar stables. But first quickly on the item of crypto culture and digital art. I am a collector that has a collection called 1OF1. And this collection 1OF1 is specifically designed to help digital artists take the rightful place in our canon. And I wanted to design sustainability into that collection by being able to use the tool that Dialectic has in our high-yield machine, Medici to be able to produce a cash flow on top of these important capital assets, these iconic cultural works in order to be able to fund the works that we do with museums, with artists and with the broader community. And there's a range of experiments that we've been able to execute. I think the one that most people are most familiar with us for is the Refik Anadol exhibition of the machine hallucinations at MoMa, which broke a number of records, more than 3 million visitors and helped bring MoMa back to pre-COVID levels of traffic earlier than most other major institutions. Anyways, core to 1OF1's activities is this our yielding, whereby we're able to take a conservative loan-to-value, loan on some of these iconic works like HumanOne or CryptoPunks and then put them to work in our yielding machine. Our yielding machine, as you've known from either from these slides or from the last call, last year, we produced 26.99 on U.S. dollar stables, 14.02 on ETH. And with that kind of high-yield opportunity, we get really significant spreads on -- against the [ art debt ], which is sort of in the mid-single-digit range just depending on the work of art. And that point therein lies the advantage of CryptoPunks. In working with art lenders, we have observed that because of the efficiency of crypto, CryptoPunks are able to get higher loan to value than even other iconic works of contemporary art like Picasso, Ralph Wizard or Warhols because of the efficiency of on-chain and the transparency there. And then with that higher loan-to-value and higher yields from DeFi, we're able to capture much better spreads on these capital assets and for the first time, allow these important iconic cultural assets to yield in a compelling fashion. If somebody had been doing art lending and then yielding with traditional contemporary art until 1OF1 came along, you were looking at usually like 1% to 2% on the net asset. And 1OF1 is able to significantly outperform that by a multiple of 3 to 6 on that range and consistently produce double-digit spreads on our art portfolio. So that's sort of the interesting thing about 1OF1 and how it sits as an application on top of the protocol that is Medici. That machine of being able to produce high yields allows us to do other things that are intellectually and financially compelling, such as produce interesting yields on top of cultural assets like contemporary digital art for the first time. So with that context in mind, and that's really why this CryptoPunk purchase actually dovetails very well with the ETH strategy. CryptoPunks are denominated in ETH, are highly correlated to ETH throughout the history of the project. And in fact, often quite a bit more elastic in ETH in bull markets, which very clearly we're in right now, where CryptoPunks have outperformed Ethereum in certain periods along their trajectory. So we do look at this as a very coherent addition to the Ethereum treasury that GameSquare is building and really in line with their ability to construct a differentiated position as a public treasury of crypto assets. So with the rest of the time that I have, I'll walk through just a little bit of how we generate the yield that is this underlying machine that drives all of this forward and a little bit about how much time and care we put into risk management. To our knowledge, Dialectic produces the best risk-adjusted yields in DeFi due to hyper diversification due to our insurance mechanisms, due to just the general professionalism and automation that we built. So as I said, we yield in 3 categories or 3 different assets, U.S. dollar with Chronograph, Eth with Moonphase and Bitcoin Calatrava. One of the key drivers is our automation allows for hyper diversification. So here on Slide 5, you can see this is just a snapshot of one of the funds in one moment where we're in 72 strategies. Any given moment, we're in somewhere between 150 and 250 strategies. In any given other moment, we could be in 150 to 250 other strategies. You must execute DeFi in an automated fashion with the necessary infrastructure and risk management. As a result, again, last year, 26.9 on U.S. dollar, 14.02 on ETH. How do we automate the process? There's various steps from scouting due diligence, risk scoring that the algorithm produces. But our due diligence is also complemented by engineers, who are directly looking at code basis. From there, that algorithm will create limits on sizing and then execute the on-chain transactions, converting back into base currency. We've got -- we use a lot of data and analytics in an early warning alerts mechanism that will give us signals of when something should be exited and often will preempt attacks in that regard. And we've really been using machine learning in a deep fashion since 2021, since the inception of the fund. So the way we're using this highly automated machine that can look across the entire ecosystem, track 30,000 pools all at once. We track hundreds of different smart money wallets. Robert, I hate to bring it to you, but we do track your wallets here as well. And it's one of the smartest money wallets out there, certainly. And then we break down the risk. Our advanced analytics with AI is able to pose risk across a number of different categories of governance and smart contract risk, economic risk and so on and so forth and then look at interdependencies of those risks. So on top of that, we overlay a full fund coverage insurance with Nexus Mutual. So this deep commitment to ensuring that you have no down-months that this is a compounding machine. Dialectic was founded and built on the idea that compound interest is the strongest force in the universe. If you just Compound on these compelling assets, the longest, you'll win. And that is the strategy that GameSquare is undertaking. Happy to walk through any questions or anything anybody else would like to add. And Rhydon, I don't know if you'd like to add anything further on that.

Yes. I just have a couple of comments. I think GAME is in a very unique position. Not only is it an Ethereum accumulator, but it's also an Ethereum integrator. GAME has become a unique way to integrate many crypto-native activities into a digitally-native company. There are many more things to do in Ethereum beyond just hold. There are ways to grow your quantity of crypto or ETH on a balance sheet, and it doesn't just have to be common equity issuances. Bitcoin treasury companies are doing this by accessing multiple parts of capital markets, GAME can too. It has with its equity and recent preferred issuance with Robert. Other ETH treasury companies grow their ETH quantity by staking and restaking to escape inflation. GAME is utilizing DeFi primitives and applications pioneered by innovative entrepreneurs like Robert and managed by the best asset managers like Ryan to generate rates of return targeting more than 3x staking. Investing in other segments of crypto and Ethereum specifically like high-end crypto art or NFTs allows for creating a productive yield-bearing asset just like GAME's regular ETH holdings. However, certain NFT collections historically exhibit a property of increasing in dollar terms and also Ether-denominated terms during bull markets, thereby increasing the effective as quantity owned by GAME. You can think of it as almost a multiple expansion in traditional financial markets like how a closed-end fund may see premium to NAV expansion in a bull market or PEs may expand for commodity companies and commodity bull markets. Historically, in previous cycles, you have seen that multiple expansion like property occur in NFTs and CryptoPunks specifically as they are the Apex asset in NFTs. The NFT collections and CryptoPunks specifically fit GAME strategy of yield-generating productive assets while organically growing each quantity held. There are many other segments and use cases in crypto and Ethereum beyond these mentioned today that will also allow for ETH accrual that our peers aren't focused on as holding companies. And I think you'll see synergies of GAME's operating business and how it integrates with traditional crypto businesses to become a service provider there, which will also benefit traditional growth metrics at the company as well as ETH growth metrics in its treasury. GAME is creating a very digitally native business with its operating businesses, its growth initiatives in the Ethereum ecosystem, exploration of stock tokenization with Superstate, as mentioned in the press release on the 24th and more to come that will continue to differentiate itself from other digital asset treasury companies. Justin?

Thanks, Robert. Thanks, Ryan, and thanks, Rhydon. That was awesome. Really appreciate it. Look, I think from our end, we're clearly very bullish. We do feel that we have a really differentiated strategy here that's going to drive real value for shareholders. And again, we would reiterate the fact that we're knocking on the door here of profitability in the operating business. We've been very clear that we expect in the back half of the year to represent profitability for our business. And certainly now with the yield that we believe that we can generate from our ETH holdings, it puts us in a really, really strong position to continue to acquire digital assets to continue to invest in the growth of our operating business. And we've already found -- and we've worked in the crypto space in a number of different ways. Our biggest sponsor role at [indiscernible], a number of different blockchain gaming developers to different platforms that we've helped with content and marketing services. But the inbound on that front has been through the roof since we've announced this strategy. So that's another key piece here. This not only makes sense for the evolution of our company, but from an operating standpoint, we're really benefiting in terms of looks from a revenue standpoint. I'm sure you'll see a lot of announcements on that front as we continue to grow the core of our business. So our strategy there hasn't changed. I think this is giving us the ability to grow and grow faster to hit profitability sooner and to really scale from there. So thanks so much to Robert and Ryan, Rhydon again for their time today to have them involved is just -- it's a huge stamp of confidence and obviously gives us huge credibility in the crypto space. So very, very grateful to them and grateful to everybody who made the time to join the call today. As I said, we're really bullish. We feel great about the trajectory that we're on, and we're going to continue aggressively growing. So again, I appreciate the support. I appreciate everyone jumping on. And we'll continue to give clear updates to the market. We've got an earnings call coming up in a couple of weeks here and excited to update everyone on the progress we're making. Thanks, everyone.

This concludes today's live stream. Thank you for joining.