East Side Games Group Inc.

Good day and thank you for standing by. Welcome to the LEAF Mobile first quarter 2021 earnings call. At this time, all participants are in the listen-only mode. After the speaker presentations, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Mr. Darcy Taylor. Thank you. Please go ahead.

Thank you, operator, and welcome everyone to LEAF's first quarter 2020 results call. On the call with me today is Jim McCallum, our Chief Financial Officer. On today's call, I will begin by sharing highlights on our performance from the first quarter 2020 In addition to giving an update on our strategy and key events that have taken place since we have reported on our Q4 full year 20 results on April 29th. Jim will go into greater detail on our financial results for the period before turning it back to myself for some final remarks before we open it up to endless questions only. Before we get started, Please note that certain statements made on this call are forward-looking within the meaning of applicable securities law. This call includes references to non-GAAP measures. Please refer to our first quarter press release and MD&A for cautionary statements related to forward-looking information and reconciliations of non-GAAP measures to GAAP results. Additionally, materials can be found in the investor section of our website under financial information and an audio replay of this call will also be available on the website in the coming days in the same section if you have any questions please email ir leafmobile.io let me begin our call by highlighting that we delivered record q1 results and an excellent start to the year building on the momentum from the previous year and last quarter of 2020. We completed our transformational acquisition of each side's games and made significant progress executing on our three-pillar growth strategy in the first quarter of this year. By the end of 2021, we expect our game portfolios to have doubled from both in-house and idle kit partner game launches, including the highly anticipated mobile title from the Emmy Award-winning competition series, RuPaul's Drag Race. We also remain laser-focused on our three-pillar growth strategy of organic growth from games development and publishing via both IP-driven franchises and our own in-house developed franchises, distributed growth through our licensing of our software technology platform and game development framework, IdleKit, and acquired growth via mergers and acquisitions as a disciplined buyer of accretive revenue and or EBITDA-driven companies to increase our competitive advantage, scale, and unit economics. As mentioned, we've built upon a strong growth in 2020, and our strategy has delivered continued momentum into the first quarter of the year across all our key financial measures as follows. On a performant basis, LEAF generated record Q1 2020 revenue of $25.3 million, a 95% increase over the $13 million in revenue of Q1 2020. On a sequential basis, Q1 2020 revenue increased by $2.3 million over Q4 2020 revenue of $23 million, according to a 10% increase versus the previous quarter. Our adjusted EBITDA with $3 million in Q1 2021 compared to a loss of $1.4 million in Q1 2020. In the first quarter, we have been incredibly active across all of our strategic growth pillars to fuel future returns. We have announced game development and publishing agreements for a multi-year partnership with Worldwide Productions for the exclusive mobile gaming rights to the Emmy Award-winning competition series, RuPaul's Drag Race, hosted by the global icon in the LGBTQ plus community, RuPaul. We've expanded our Idlekit technology platform partnerships to further build our distributed growth model with the announcement of two Idlekit partnerships with Kano Applications and Nightgarden Studios for a total of six new games of which we will publish the first of which will launch this year. We've also innovated within our Idle Kit platform with the introduction of NFT Kit to allow the ability to offer non-fungible tokens across our select games in our portfolio and to offer players true ownership over in-game rewards and increase engagement. Additionally, our acquired growth and M&A pillar saw us complete the $150 million acquisition of Canada's largest independent studio, Eastside Games, as I mentioned previously, as well as enter into a non-binding letter of intent to acquire Truly Social Games for up to $37 million linked to earn-out performance criteria. A privately held Vancouver-headquartered mobile game developer and IdolKit partner with studios in Portland, Oregon, and Minx, Belarus. further capitalizing on the opportunity to increase our competitive advantage, scale, and unit economics. We're also pleased to have graduated to the TSX from the TSX Venture Exchange in early February to improve investor accessibility. Subsequent to March 31st, we've also announced a number of new idle kit and publishing partnerships, including Mighty Kingdom Games of Australia, Bigfoot Gaming out of Argentina, Vancouver-based Tiny Rex, and U.S.-based Game Masons, and have also partnered with WAX, the Worldwide Asset Exchange, known as the king of NFTs, as the world's leading decentralized wallet on the blockchain to support our NFT game, Bud Farm Nifty Stash, which we launched on 4.20. Leaf has been executing against its strategy and is uniquely positioned for growth. And I'm looking forward to an incredible year for 2021. Now I'll turn over the call to LEAP Mobile CFO, Jim McCallum, to further discuss our first quarter results. Now over to Jim.

Thank you, Darcy. I would like to start by giving a brief overview of the acquisition of Eastside Gains and the resulting accounting treatment. Because Eastside Games shareholders own 58% of the combined company, Eastside Games is considered the continuing company with LEAF leaderly results included for the period from February 5th to March 31st. The comparative financials for 2020 are also Eastside Games, which included their ownership of leaderly from January 1st to April 17th of 2020. In our MD&A and our press release, we have provided detailed breakdowns of revenue, net income, and adjusted EBITDA for the company, as reported under IFRS, which we refer to as our Schedule 1s, and pro forma financial information, which includes financial results for the company, assuming that the acquisition occurred on January 1st, 2021, our Schedule 2s. The completion of the Eastside Games acquisition in February is a major milestone for the company. B-Site Games has been developing and monetizing mobile games for over 10 years and has established IdleKit, a software platform for game development. As Darcy highlighted, we delivered record revenue performance for Q1 on a pro forma basis. Nearly doubled to $25.3 million versus Q1 2020 of $13 million. and Q4 revenue of 25.3 million in Q1 2021 was 10% higher than the 23 million recorded in Q4 2020. Approximately 70% of our revenue is generated in the U.S. The Canadian dollar has increased 6% against the U.S. dollar in Q1 2021 as compared to Q1 2020, which resulted in a 4% decrease to our revenue. This Canadian dollar strength has continued into Q2. On a pro forma basis, we recorded significant increases in net income and adjusted EBITDA during Q1 2021 as compared to Q1 2020. The increase is primarily driven by the strong revenue growth during the year. Pro forma adjusted EBITDA for the combined company was 3 million for Q1 2021 as compared to negative 1.4 million in Q1 2020. Key profitability and efficiency metrics to highlight are gross profit percentage, which was 62% in Q1 2021, which was consistent with 2020, and adjusted EBITDA margin was 3 million during Q1 2021, representing a 12% adjusted EBITDA margin, down from the 14% average realized during 2020. On a sequential basis, our adjusted EBITDA was down from 5.2 million in Q4 2020. Approximately $1.8 million of this is due to the recognition of full year 2020 research and development tax credits being recorded in the fourth quarter of 2020. From a balance sheet perspective, at March 31st, 2021, LEAF had $10 million in cash with no debt and access to $13 million in credit facilities. The proceeds from the share issuance in February were used for the purchase of Eastside Games. And now I will turn it back over to Darcy for some closing remarks before Q&A.

Thanks, Jim. We believe that there is significant upside in Leap's future as we continue to create world-class entertainment experiences for our users. This year's launch slate, which is more heavily weighted towards the second half of the year, will double our game portfolio, and these new game launches developed in-house and by Idlekid partners will bring marquee franchises like RuPaul's Drag Race to the mobile space for the first time. Thank you for joining us. And we now open the floor for questions.

At this time, I would like to remind everyone, in order to ask a question, press star and the number one on your telephone keypad. And your first question comes from Neil Gilmer with Haywood Securities.

Yeah, good afternoon, guys, and congrats on the quarter. I'll start with a couple of questions. Darcy, just towards the tail end of your prepared remarks there, you talked about sort of the pipeline of games heavily weighted to the second half. Can you give us sort of any sort of insight on a couple highlights of, you know, what to expect in Q3, Q4, Q4 sort of thing to try to just help us sort of digest what we should expect for the revenue growth in the second half of the year?

Yeah, thanks, Neil. Yeah, obviously, as we've highlighted, our launch pipeline is heavily weighted in the second half of the year. We have several games in soft launch right now, which will move to worldwide launch as well. So we will start to see the pickup of revenue trends, again, being weighted to the second half of the year and building as we exit Q4.

Okay. We'll still see some of those come out in Q3 and in Q4 sort of thing. We'll sort of see that spread out across the two quarters?

Yes, correct.

Okay. And then back towards your three-pillar strategy referred to, on the M&A side of things, what's the landscape look like right now? And as far as valuations, obviously the tech sector had a strong impact you know, 2020 and into early part of this year, we've seen the NASDAQ cool off a little bit, but just sort of wondering what you're sort of seeing out there and sort of what sort of criteria you're using as you evaluate your potential M&A strategy.

Yeah, Neil, obviously, as you highlighted, we have seen some cooling of the tech sector. I don't think we've seen that translate at this point into expectations from acquisition targets at this moment, but that we feel will probably start to come in line with the general cooling. As far as acquisition targets, it's still a very rich landscape of areas that we're looking at. We've been predominantly focused with our idle kit partners. As we highlight in our strategy, it is a very strong, clear line of sight for us to understand the teams that we're working with. And those criteria, as outlined, we're looking for accretive companies that add to either our EBITDA or top line. And we also are looking for well-managed studios with long lifecycle games that we feel fit well within our portfolio or further diversify.

Okay, thanks. That's helpful. And maybe the last sort of part two to that question, and then I'll pass the line, is any update on the timing of the closing on the Truly Social Games acquisitions?

Yeah, no update other than that it's in line with what we expected, closing within the 90 days since signing. It's progressing as we felt, so I think we'll see that closing very near term. Okay. Thanks, guys. Appreciate your time. Thank you.

And as a reminder, to ask a question, PLEZSTAR is number one. And your next question comes from Sudhan Sukumar with Eat Capital.

Good afternoon, gents. Hey, Sudhan. Guys, the first question for me was on the game pipeline. Just kind of, I mean, you guys obviously have, you know, quite a heavy back-end loaded schedule this year. Any updates on the timing of some of these releases? Are these still on track? Is it potential for some of these to be moved up or potentially be bumped out slightly?

Yeah, thanks for that. As far as the timeline, all the games are online with our expectations. Obviously, we will not put a game out that we feel that is not ready for worldwide launch, and we continuously iterate throughout our soft launch process, but no updates on any delays and or adjustments to the original schedule.

Okay, great. Just on the pipeline, I mean, you guys, you know, as it is, it's a very deep pipeline of new content you have in the schedule. I imagine it's more than enough to keep you guys busy for the course of the year. But how should we think about potential new additions to this pipeline? And how much of a focus is that for you guys this year?

So, Suzanne, as far as the, I'll say, 2021 year, The pipeline is, I would say, very robust and obviously stacked quite heavily to the second year. Anything that we would be signing through our idle kit partnerships, we probably, due to the timing now, would not be seeing those hit until Q1. We still are actively out or I would say actively taking multiple inbounds for uh, for other partners that want to participate on our, uh, gaming platform. Uh, so those, uh, those new partners coming into the pipeline, uh, we wouldn't start to realize them into, uh, 2022.

Okay. Okay. Okay. Great. Um, the next thing I want to touch on is, uh, is an allocate, you know, it sounds that you guys are quite busy on this front. You know, it's been a recent flurry of new partnerships. Um, but can you, um, You know, you guys have talked about this being another area of investment going forward, and you've touched on the, uh, the NFT kit as an extension of that. Can you remind us about your, um, call it the mid to long-term roadmap for idle kid? And what are some of your priorities from a technology and capabilities perspective?

So let me break that down into sort of, uh, two parts. I'll address the second one on, as far as investment in the, um, in the idle kit platform. Obviously, we've been focused quite heavily on refining our tech stack and software with our current AutoKit partners that will continue on for the near future throughout 2021, especially as we start to scale up and bring more partners on board. As far as the Second part of the question, and Suzanne, if I just ask you to remind me what was the second part?

Yeah, I was just kind of wondering what, you know, when kind of looking at the technology roadmap for Idlekit in the mid to long term, what are some of the key priorities that you guys are looking to tackle from a technology and capabilities perspective?

Yeah, thank you. Sorry about that. For a technologies and capabilities perspective, Obviously, you've seen us introduce NFTKit, which added an additional feature set of functionality. That is still an area of interest to us. Obviously, it's new landscape, new grounds. Our belief is that you can't understand that landscape without participating in it, so we've jumped in and have been navigating that space with One of our head VPs in the Eastside Games Group, which is Max Oval, whose pedigree in the NFT space is well-renowned from his co-founding of Dapper Labs, as well as the co-creator of CryptoKitties. So we're being shepherded very well through that space. That will continue to be a focus. We like what we're seeing to date, but it's still early days. Additionally, The platform and the software obviously operates as an ongoing iterative-based software. So as we bring more partners onto the platform and build upon it, we continue to upgrade and then distribute that new technologies going forward. And that's across all features, whether it's game balance, back-end analytics monitoring, as well as feature sets and event loading through the platform. So very easily said, a very holistic view of improvements across the board, iterating on a consistent basis.

Okay, great. And then the last question for me is on M&A. In terms of the outlook this year, how active do you guys intend to be on M&A this year and how should we think about the size of potential transactions that you have in the pipeline? Would they be comparable to truly social or are you guys expecting to look at a more diverse set of targets this year?

We are constantly evaluating the landscape of targets out there. Obviously, we've digested two quite recently with a third in the pipeline to come within to the group. Obviously, the idle kit partnerships are our first sort of line of sight to look at potential future acquisitions. Those are, I would refer to as tuck-in acquisitions that bolster our scale ability. But we are never, I'll say, not looking at opportunities for, I'll say, transformational or larger scale acquisitions if they make sense and if they are strategic and fit with our model.

Okay, great. I think that's it for me, guys. I'll pass the line. Thank you for taking my questions.

Thank you, Sasan.

There are no further questions. I will now turn the conference back over to Darcy Taylor for closing remarks.

Thank you, operator, and thank you, everyone, for attending the first quarter 2020 results call. As highlighted, we are absolutely excited about the runway for 2021. The start of the year has been very active across all of our key growth pillars, and we think we're just getting started. So we look forward to speaking to you in Q2, and hope everyone has a great day.

This concludes today's conference call. You may now disconnect.