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.