East Side Games Group Inc.

Ladies and gentlemen, thank you for standing by and welcome to the LEAF Mobile Second Quarter 2021 Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a 30-minute question-and-answer session for analysts only. I would now like to hand the conference over to our speaker for today, Darcy Taylor, CEO of LEAF Mobile. Thank you. Please go ahead.

Thank you and welcome everyone to LEAF's second quarter 2021 results call. On the call with me today is Jim McCallum, our Chief Financial Officer. Today's call, I will begin by sharing highlights on our performance from the second quarter and six months ended June 30th, 2021. In addition to giving an update on our strategy and key events that have taken place since we last reported on May 17th, Jim will then go into greater detail on our financial results commentary for the period before turning it back to myself for some final remarks before we open it up to analyst questions. 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 second quarter press release and MD&A for cautionary statements related to forward-looking information and reconciliations of non-GAAP measures to GAAP results. Additional materials can be found in the investor section of our website at www.leafmobile.io under the financial information section. And an audio replay of this call will also be available on our website in the coming days in this same section. If you have any questions, please email irinvestorrelations at leafmobile.io. Let me begin our call by highlighting that we are extremely pleased with our business performance in the first half of 2021, as we continue to execute successfully against our three pillar growth strategy. We have worked hard over the second quarter on post-transaction integration of Eastside Games and would like to thank the founders, Jason Bailey, Josh Nilsen, and Galen Aiken, for their leadership and studio team engagement in the process. We have focused on streamlining non-core business processes, sharpening our game portfolio investment, improving operations through active involvement and data-driven decision-making, organic game title growth through cross-promotion, as well as securing new IP and idle kit platform partners. The second quarter of 2021 was also unique as the global reopening amplified traditional seasonality effects and changes in the mobile ad marketing landscape with the introduction of Apple's iOS privacy terms embedded into the market. We were well prepared for the introduction of Apple's privacy changes and have been involving our UA marketing approach to address this new environment. Although it did lead Leaf to temporarily reduce our UA spend across both iOS and Android during this transitionary period, as the industry adapts to this new marketing environment, which culminated in fewer players installing our games. With these unique operating environment factors, we still saw strong Q2 revenue results. Revenue came in at 22.5 million, a 28% increase versus Q2 2020, with reported revenue of 17.6 million, and grew 4% on a performer basis in what historically is a slower quarter across the mobile game industry. These quarterly results set us up for a record first half of 2021, with performer year-to-date revenue reaching $47.8 million, an increase of 38% versus the same period last year. Our investments in our games continue to pay off with profitable organic growth from our existing 10 game titles, delivering an adjusted EBITDA of $2.6 million for the quarter and representing an 11.3% margin. Adjusted EBITDA on a performer basis for the six months ended June 30th, 2021, was up 100% to $5.6 million, compared to $2.8 million for the prior year period, as we continue to outperform our first half last year. Even with the previous year's extraordinary inflow of new users to our games, driven by shelter in place measures, and challenging comparison numbers from the pandemic last year. Leaf remains laser focused on executing our three pillar strategy of combining accretive acquisitions, organic game growth, and distributed growth through our proprietary idle kit platform licensing and rev share, and is uniquely positioned for growth going forward. Our idle kit business continued the momentum we saw at the start of the year, attracting four new idle kit partners, including Mighty Kingdom Games, which recently listed on the Australian Stock Exchange. These four partners will add up to an additional nine games to our existing pipeline and geographically expands our development network outside of North America to include South America and Australia. We also announced on June 22nd Leaf's definitive agreement to acquire Truly Social Games to increase our business scale, competitive advantage, and unit economics. Additionally, we entered into the NFT space, non-fungible tokens, launching a collectible NFT card game, Bud Farm Nifty Stash, in partnership with Wax Blockchain, as an innovative new way to explore, connect, and interact with our beloved characters and create retention in our games. By the end of 2021, we expect the multiple new game launches to almost double our existing portfolio of 10 games, and these new titles will be developed both in-house and by our Idlekit partners. The launch slate includes super marquee IP titles like the highly anticipated RuPaul's Drag Race Superstar mobile game, from the Emmy Award-winning Drag Race competition series broadcast globally, and several additional marquee IP games in our pipeline. Other events within the second quarter included Leaf Group Studio Eastside Games being recognized as a finalist for awards in two categories at the BC Tech Association's 2021 Technology Impact Awards. They were finalists in both Company of the Year Scale and Game Changer Diversity and Inclusion, and also a finalist for Best Developer at Pocket Gamers 2021 Mobile Game Awards. We weren't able to take home the title this year, though we were very proud to be named as a finalist for the Global Award among some of the best world-class developers such as Nintandic, best known for Pokemon Go, MiHoYo, the China-based developer of Genshin Impact. We're incredibly proud of what our studios have achieved so far this year as they continue to operate at top level despite the changes that have impacted all of us since March of 2020. These awards and nominations we have received for both work environment and performance are further evidence that our studio group and our people are best in class. Subsequent events to second quarter 2021 have made notable progress on our corporate structure. Effective August 17th, 2021, LEAF will consolidate its issued and outstanding common shares on a basis of up to 10 old pre-consolidation shares for every one new post-consolidation shares. As approved by its shareholders, at least most recent AGM held on June 29th, 2021. The common shares will commence trading on the TSX on a post-consolidation basis at the open of markets on the 17th of August, 2021. The post-consolidation common shares will continue trading under TSX, under the symbol LEAF, L-E-A-F. Management, board, and shareholders feel that this consolidation may attract more institutional investors and open up further opportunities for more senior listings and better reflect the value of the company. Now I will turn over the call to LEAF Mobile CFO, Jim McCallum, to further discuss our first quarter results. Now over to you, Jim.

Thank you, Darcy. This quarter is our first full quarter of consolidated operations of LEAF, including its two studios, Eastside Games and LeaderLeaf. Our MD&A provides detailed breakdowns of revenue, net income, and adjusted EBITDA, as reported under IFRS, and pro forma financial information for the current and historical periods. As Darcy highlighted, we delivered strong revenue performance in Q2 of $22.5 million, with approximately 70% of our revenue generated in the US. The Canadian dollar increased 12% against the US dollar in Q2 2021, as compared to Q2 2020, which resulted in an 8% decrease to our revenue. In constant dollars, revenue would have been $24.3 million this quarter. We saw solid advertising revenue during the quarter, with advertising revenue representing 27% of our total revenue, consistent with the first quarter of this year. We currently publish 10 live mobile games, six of them from the Eastside Game Studio and the remainder with Leaderly. We report on two categories of games, active and evergreen. Active games are game titles that have been launched worldwide with investment in user acquisition marketing and live operations. Currently, we have six active titles across the company, and 21.9 million of our quarterly revenue was generated from these games. Evergreen games are game titles that are greater than 12 months since worldwide launch with limited to no investment in user acquisition marketing and passive live operations. Currently, we have four Evergreen titles across the company, and they generated approximately 0.6 million consistent with the first quarter of 2021. Our cost of sales include platform fees from Apple and Google, which are 30% of our in-app purchases and intellectual property royalties. The increase over the prior year is due to the higher revenues this quarter. Cost of sales as a percentage of revenues was consistent year over year for the three and six month periods. User acquisition costs have increased over the prior year as we invest in new game launches and grow our user base. However, user acquisition costs decreased as compared to Q1 2021 as a result of changes made by Apple to their identifier for advertisers. In response to this, we scaled back our user acquisition spending to maintain target returns, resulting in fewer players installing our games during the second quarter. Development costs increased over the prior year quarter due to increased headcount and higher third-party development costs in the current quarter as we near the launch of several new gains. General and administrative expenses increased over last year due to higher stock-based compensation charges during the quarter and public company costs. Transaction expenses in Q2 2021 primarily related to the acquisition of Truly Social and for the year-to-date period also included transaction costs related to the merger between Eastside Games and LEAF. Other income for the six months ended June 30, 2021 reflects the $5 million gain on distribution of LEAF shares to Eastside Games shareholders. Accretion expense resulted from the contingent consideration recorded in Q1, and the unrealized foreign exchange loss resulted from the weakening of the U.S. dollar this quarter. On a gap basis for the three-month period, the company recorded a net loss of $0.9 million, largely as a result of the amortization of intangibles, accretion expense, and foreign exchange loss. This compares to net income of $7.8 million in the prior year quarter, which reflected the gain on sale of leader lead, lower research and development expenses, and lower sales and marketing expenditures. For the six months ended June 30th, 2021, the company reported net income of $0.4 million compared to net income of $6.1 million in the prior year period. As Darcy noted, on an adjusted EBITDA basis for the six-month period ended June 30th, 2021, we recorded $5.6 million, a 100% increase as compared to $2.8 million in the same period last year. The increase was primarily driven by the strong revenue growth during the year. Key profitability and efficiency metrics to highlight are gross profit percentage was 62% in Q2 2021, consistent with the prior quarter. Adjusted EBITDA margin was $2.6 million during Q2 2021, representing an 11% adjusted EBITDA margin, consistent with Q1. On a sequential basis, our adjusted EBITDA was down from $3 million in Q1 2021 as a result of lower sales and a $0.8 million increase in development expenses incurred to support upcoming game launches. From a balance sheet perspective, at June 30, 2021, LEAF had $12 million in cash with no debt and access to $18 million in credit facilities. During the first half of 2021, we generated $3.7 million in cash from operations. We are excited about launching new games supported by marquee intellectual property in the second half of this year. With that, 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 have more games in development than ever before. This year's game launch slate in the second half of the year will almost double our game portfolio, and these new game launches developed in-house and by idle kit partners will bring marquee franchises like RuPaul's Drag Race Superstar to underserved player bases in the mobile space for the first time, placing us in a very strong position for future growth ambitions. Thank you for joining us. and we'll now open the floor for analyst questions.

As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pan key, and please stand by while we compile the Q&A roster. Your first question is from Neil Gilmer of Haywood Securities. Your line is open.

Yeah, good afternoon. Thanks for taking my question, guys. And maybe I wanted to start on, dig a little bit further on your sort of perspective on the changes with respect to IDFA. And as you continue to sort of progress through the second half of this year, how should we be thinking of your sort of philosophy or approach towards spending on user acquisitions? Obviously, you commented that you scaled it back a little bit in Q2. But just sort of how you sort of monitoring the situation as to when you might try to ramp that up in light of some of those changes in that sort of environment.

Yeah, thanks, Neil. Very good question. Obviously, we've been monitoring and have been sort of ahead of the game as far as getting prepared for IDFA. as it rolled out. We believe that this is a temporary adjustment in the, I'll say, the marketing landscape, which will take some time to sort of work its way through and evolve not only our view on our data-driven UA spend, but also the industry serving it. So, as stated, we did adjust downward and took some money off the table as the industry adjusted and have been seeing improved user acquisition numbers as we've been moving through the last couple of months. Our view is that we will start to increase that spend as we enter our new games into market in the fall. driven by the launch of RuPaul's Drag Race, and will continue to be very data-driven on the return on investment going forward, ensuring that we see that continuous return.

Great. Thank you for that. Then I guess maybe my second question, then I'll pass the line to others, would be, Just on our expectations for the timing of new titles coming out in the second half, you mentioned that you're going to be close to doubling the existing game portfolio between now and the end of the year. How should we think the cadence of that between Q3 and Q4? Should we see more of the impact as far as, I'm taking a look at obviously the revenue line in Q4 versus the current quarter?

Yeah, so if we're looking at the cadence of revenue, the revenue coming online, we see our bigger games launching late Q3, sort of rolling into Q4 and then ramping. Our other titles are sort of scattered in various stages of launches. Those are internal and external auto kit partners also in the back half. So if you're looking at that phasing, it will grow with UQ4 and continue to ramp through the first half of 2022.

Okay, great. Thanks very much. I'll pass the line. Thanks, Neil.

Your next question is from Adi Akadbe of Ape Capital. Your line is open.

Hey, guys. Good afternoon. Just a couple of quick questions, I should say. Just maybe on some of the titles that you are looking to launch or anything that's maybe potentially in soft launch right now, can you maybe talk about maybe some early results or anything you can talk about in terms of early performance of any of these games that you can potentially speak about?

Yeah, thanks for that question. I think the one we would really like to highlight is we have some early results from our RuPaul Drag Race Superstar game. It's in soft launch in some specific geographies. And this game has us very, very excited internally because the early indications are is that we're seeing KPI numbers and benchmarks that are above any of the results that we've seen from our other successful games to date. And that is before we've even started to enter into any of the sort of live ops or events-driven performance of the game. So we're seeing tremendously strong retention as well as monetization on the, I'll say, the early stage rollout of the game. Our expectations from this game are high, and so far the indications are that this game is in a good position to deliver.

Oh, that's good. That's good to hear. And then maybe just, you know, talking a little bit about Idlekit, and, you know, you just mentioned that you obviously had a really good, a couple of studios that were onboarded. Maybe, can we talk about maybe your pipeline of partners that you're looking to onboard? Are you seeing, you know, more internals or anything around that?

Yeah, absolutely. So, Right now, we have 10 total partners on our game kit at the moment. We added four in the second quarter. The highlight of that is that we expanded our geography of partners or basically our development network outside of North America, landing with Mighty Kingdom in Australia, who are number one independent, as well as Bigfoot out of South America. We are seeing a tremendous amount of increased inbound for developers that want to participate on that platform. We've been working, I would say, on a very selective invite only as we scale up our tech stack for servicing those partners. and are very enthused on what we're seeing as far as the results from our current partners, but also the evolution of the tech stack going forward as we'll be rolling out an idle kit, say 3.0 in the fall that will push out to our existing platform partners. So all together, very strong with the current partners wanting to continue on the platform and launch additional games, but also very robust pipeline of inbound that we're managing as we build our tech stack to scale.

Okay, great. And then just one last one for me, and then I'll probably pass the line. Just maybe in terms of M&A, do you plan to still kind of be active on that front?

Yeah, obviously one of our core pillars of our business is acquisitions through accretive growth. We have been looking at several potential targets over the last few months in various stages of discussions. Obviously, we just closed the definitive agreement with Truly Social, who was a previous Idlekit partner, so it's fitting into our model of our three-pillar platform working at in concert and allowing us to incubate potential partners as they move through our idle kit. So not only are we reaching out for potential acquisitions, we've had several inbound coming from Tier 1A banks that have been introducing us to potential targets throughout North America and also globally. So we... The long story short is we continue to be acquisitive. We're looking for the right acquisition. We are disciplined buyers, and we want to make sure that the fit not only from our cultural portfolio fits works well for us, but also from that view of having an accretive upside to our top line.

That's fantastic, guys. Thank you very much. I will pass the line. Thank you.

Your next question is from David McFadden of Karmark Securities. Your line is open.

Oh, great. Yeah, a couple of questions. So just on RuPaul, you talked about the game being in soft launch and a couple of geographies, and you said that the KPIs are trending above anything that you've seen before. I was wondering if you could... get specific and and give us you know some examples of those kpis and and you know just one just want to understand um where the excitement comes from in the game and secondly just on truly social i know you guys recently completed that acquisition but i was just wondering how it's going and when do you think you might step up and take another equity position to increase your stake thanks

Thanks, David. Let me address the RuPaul results and KPIs. Obviously, it's still early within the soft launch, so I'll give some general parameters. We usually look for, I'll say, success benchmarks on our retentions that are over and above the industry standard of sort of a D1 of 40, a D7 of 20 percent retention. and a D30 of 10, that sort of is the bare minimum. We are seeing our D1 retention numbers as well as D30 and D7 trend well above that norm, as well as being above any of the existing games that we've already had tremendous success with. So that gives us a good indication that the, I'll say the game balance, game mechanics, ascension of the game are connecting as well as the IP. And then last, the second piece that we truly look at is the average revenue per daily active user. We try to have sort of best in class benchmarks of those numbers upwards of 75% per daily active user. We're seeing these numbers trend over and above that area already, and that's without LiveOps starting to turn on, which is the event-driven elements or the high engagement elements within the game. So from a retention level as well as an average revenue per daily active user, ARPDAU, Both of those are above industry benchmarks and above our, I'll say, internal benchmarks that we've seen from our successful games. The second question... Truly Social, yeah.

In terms of Truly Social investments, we've just really finished integrating the first 20%. We'll continue to monitor the new games that Truly Social launches, and as they hit their targets, we'll make... or near their targets, we'll make additional investment decisions as we move forward.

Okay, I was just wondering on the timing, is it a 12-month thing, 24-month thing that you monitor before you decide to step up?

Yeah, it's over that time period, yeah.

Yes, we have two hurdles within that. One, for them to hit a certain milestone target in the first 12 months, Obviously, those targets are dictated by their game launch cadence. So I think if we were looking at the timing, it would be sort of at the later end of the 12-month window that we'll be making that decision. Okay. Okay, that's great.

Thanks, guys. Thanks, David. Thank you.

Once again, to ask a question, please press star 1 on your telephone.

I think that's all it would look like from our Q&A, Buena.

Any questions at this time, sir?

Please continue. I think there's no more questions at this time. I'd just like to thank everyone for attending the call. Again, we are tremendously excited about the back half of this year. Very simply, we have more games in development than we've ever had before. We have our super marquee IP games such as RuPaul showing tremendously strong early KPI indications that have us very confident in the delivery of those games in the second half of the year. We continue to see very strong revenue growth and profitability from our existing 10-game portfolio, and we're excited about our Idlekit partners and their game launch pipeline coming online in the back half of this year as well. So we feel that our continued execution on our three-pillar strategy portfolio is delivering And we will continue to focus on that throughout the back half of the year to ensure that our accretive acquisitions, organic grain growth, as well as distributed growth through our game kit and platform licensing positions as well to benefit from the strong tailwinds of the market industry and its growth. So with that, I'd like to thank everyone and have a great end of your day.

This concludes today's conference call. Thank you for participating. You may now disconnect.