8-K: GameSquare Secures $6.5 Million Pre-Paid Advance, Plans to Repay King Street Debt

GameSquare Holdings, Inc. has entered into a $6.5 million pre-paid advance agreement with Yorkville Advisors Global L.P. and intends to repay its outstanding convertible debenture with King Street Partners LLC.

Summary

• GameSquare Holdings, Inc. has secured a $6.5 million pre-paid advance agreement with Yorkville Advisors Global L.P.
• The company plans to use part of these funds to repay a $5.7 million convertible debenture with King Street Partners LLC.
• The agreement allows GameSquare to sell up to $20 million of its common stock to Yorkville over 36 months, with sales at the company's discretion.
• Yorkville will purchase shares at 97% of the lowest daily VWAP during a three-day period, with the company able to set a minimum acceptable price.
• The pre-paid advance has a 0% interest rate, which increases to 18% upon default.
• Yorkville is also restricted from short selling GameSquare stock while the pre-paid advance is outstanding.
• The company paid a $25,000 diligence fee and will pay a $200,000 commitment fee to Yorkville, with half paid in shares and half in cash or an advance.
• The promissory note associated with the pre-paid advance can be converted into common stock at a fixed price of $1.375 or a variable price based on the VWAP, with a floor price of $0.25 or 20% of the average VWAP prior to the resale registration statement.
• GameSquare has the option to redeem the promissory note early with a 7% prepayment premium if the VWAP is below the fixed price.
• Yorkville can trigger an advance notice to purchase shares if there is a balance outstanding on the promissory note, up to certain limits.
• An amortization event is triggered if the VWAP is below the floor price for five days in a seven-day period or if the company has issued over 99% of the shares under the exchange cap, requiring monthly cash payments.
• The company expects to use the proceeds for working capital, general corporate purposes, and to pay off the King Street Note.

Sentiment

Score: 4

Explanation: While the company is securing funding and addressing debt, the terms of the agreement, particularly the potential for dilution and the high default interest rate, raise concerns. The reliance on a variable price for share sales and the potential for forced sales also contribute to a negative sentiment.

Positives

• The pre-paid advance provides immediate capital to strengthen the balance sheet.
• Repaying the King Street convertible debenture will reduce debt and associated interest expenses.
• The agreement provides flexibility for GameSquare to access capital over 36 months.
• The company has the option to control the timing and amount of share sales to Yorkville.
• The 0% interest rate on the pre-paid advance is favorable, until a default occurs.
• The company has the option to redeem the promissory note early if the VWAP is below the fixed price.

Negatives

• The agreement includes a potential for significant dilution of existing shareholders.
• The company is obligated to make monthly cash payments if an amortization event occurs.
• The interest rate on the pre-paid advance increases to 18% upon default.
• The company is subject to certain limitations on the number of shares it can issue to Yorkville.
• The company is subject to a potential for a forced sale of shares if Yorkville triggers an advance notice.

Risks

• The company's ability to control the timing and amount of share sales to Yorkville is limited by Yorkville's ability to trigger an advance notice.
• The company's share price could be negatively impacted by the potential for significant dilution.
• The company's financial condition could be materially adversely affected if it is unable to resolve the alleged defaults under the King Street Note.
• The company's ability to meet its obligations under the promissory note is dependent on its financial performance and market conditions.
• The company is subject to the risk of an amortization event being triggered, requiring monthly cash payments.
• The company is subject to the risk of an event of default, which would trigger an 18% interest rate on the pre-paid advance.

Future Outlook

The company expects that any proceeds received from such sales to Yorkville will be used for working capital and general corporate purposes and to pay off the outstanding principal and accrued interest under the King Street Note. The company also intends to use the funds to support growth strategies and take advantage of growing demand trends.

Management Comments

• Justin Kenna, CEO of GameSquare stated, 'Todays announcement is the culmination of our efforts over the past seven months to strengthen our balance sheet primary through non-dilutive sales of non-core assets.'
• Justin Kenna also stated, 'I am also pleased to announce that we intend to repay our outstanding convertible debenture balance with King Street. With a strengthened balance sheet and capital position, we have the financial resources in place to support the growth strategies we are pursuing and take advantage of growing demand trends currently underway across our global markets.'

Industry Context

This announcement reflects a trend of companies seeking alternative financing methods to strengthen their balance sheets and fund growth initiatives. The use of a standby equity purchase agreement and a pre-paid advance is a common strategy for companies looking to access capital without traditional debt financing. The repayment of the King Street debt also indicates a move towards reducing financial risk and improving the company's overall financial health.

Comparison to Industry Standards

• The use of a standby equity purchase agreement is a relatively common financing method for small to mid-cap companies, particularly in volatile sectors like gaming and esports.
• The terms of the agreement, such as the 97% of VWAP purchase price and the 0% interest rate (until default), are generally within the range of similar agreements.
• The 18% default interest rate is relatively high, which is not uncommon in these types of agreements, reflecting the risk associated with the investment.
• The inclusion of a floor price for the conversion of the promissory note is a common protection for the investor.
• The limitations on Yorkville's ownership and the exchange cap are standard provisions to protect existing shareholders from excessive dilution.
• The ability for the company to redeem the promissory note early with a premium is a common feature that provides flexibility for the company.
• The amortization event trigger is a mechanism to protect the investor in case of a significant decline in the company's share price.

Legal Proceedings

• The company received a notice of alleged event of default and a demand for payment from King Street Partners LLC.
• The company strongly disagrees with the assertion that events of default have occurred under the King Street Note and will pursue a defense to any enforcement action.

Stakeholder Impact

• Shareholders may experience dilution due to the potential issuance of new shares.
• Employees may benefit from the company's improved financial stability.
• Customers and suppliers may see a more stable and reliable business partner.
• Creditors may be impacted by the company's repayment of the King Street Note.

Next Steps

• The company will file a registration statement on Form S-1 with the SEC.
• The company will seek stockholder approval to issue shares in excess of the Exchange Cap.
• The company will use the proceeds from the pre-paid advance to repay the King Street Note and for working capital and general corporate purposes.
• The company will monitor the VWAP of its common stock to avoid triggering an amortization event.
• The company will manage the timing and amount of share sales to Yorkville to minimize dilution.

Key Dates

Keywords

pre-paid advance, standby equity purchase agreement, convertible promissory note, Yorkville Advisors Global, King Street Partners, common stock, dilution, VWAP, amortization, capital raise