East Side Games Group Inc.

Good day and thank you for standing by and welcome to the Leaf Mobile Q3 Financial Results Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speaker's remarks, 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, Darcy Taylor, Chief Executive Officer of Leaf Mobile. Please go ahead.

Thanks and welcome, everyone, to Leaf's third quarter 2021 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 third quarter and nine months ended September 30th In addition to giving an update on our strategy and key events that have taken place since we last reported on August 15th, 2021. Then Jim will go into greater detail on the financial results commentary for the period before, turning it back to myself for some final remarks before opening it up to the analyst questions. Now, 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 third quarter press release and MD&A for the cautionary statements related to the forward-looking information and reconciliations of non-GAAP measures to GAAP results. References to all figures are on an IFRS as reported basis unless otherwise noted in the presentation. 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 as well as presentation materials will be also made available on our website in the coming days in this same section. If you have any questions, please email our investor relations lead at ir, as in Roger, at leafmobile.io. Let me begin our call by highlighting that LEAF continues to experience year-over-year growth, absent of any new game introductions year-to-date. was a transitory quarter as we ramp up into Q4. We saw steady results in our third quarter, which is historically our slowest quarter and the slowest for the mobile game industry as a whole. This quarter, we also continue to see the effects of the global reopening, amplifying traditional seasonality, and Apple's ATT introduction still working its way through the mobile marketing ecosystem. In the response to this transitory period, we maintained our reduced marketing investments in our games to measured levels until the final month of Q3, when we started to increase our user acquisition investment as we witnessed signs of the ecosystem adaption through the industry moving forward. We are very encouraged with our business performance and fundamental game title metrics year to date in the nine months ending September 30th, and are focusing resources on ramping our pipeline of Q4 game launches with the introduction of global marquee IP titles, RuPaul's Drag Race Superstar, as well as The Office, Somehow We Manage. We believe these will deliver or achieve a major step function of growth as we execute successfully against our three pillar growth strategy. With the absence of new title launches in the first three quarters of this year and a unique operating environment, we still saw positive year over year Q3 revenue results. Revenue came in at 19 million, a 3.7% increase versus Q3 2020 reported revenue of $18.4 million. These quarterly results also set us up for record revenue of $64.5 million for the first nine months, an increase of 32% versus the same period last year. We continue to invest our growth capital into our future game pipeline and game kit tech stack while maintaining profitability, allowing us to deliver $1.1 million in the third quarter of adjusted EBITDA, representing a 6% margin. Additionally, adjusted EBITDA for the nine months ended September 30th was up 16.5% to 6.3 million, compared to the 5.4 million for the period the prior year. This growth came against challenging comparatives to last year, that were bolstered by an extraordinary inflow of new users to our games, driven by shelter-in-place pandemic measures. Now, moving to business highlights within and subsequent to the quarter three end, Leaf Group Studios have been investing heavily in R&D to accelerate our future game pipeline, as well as our game kit tech platform. As of October 30th, 2021, The Leaf Group has three new game kits that will address new game genres in various stages of development and beta test deployment. Our core idle game kit platform continues to build momentum with an additional partners in our pipeline and 12 games in active development or soft launch. Of the multiple titles in our pipeline, seven are based on global IPs, and we'd like to highlight our recent announcement milestones related to them. In the third quarter, we announced the Office, Somehow We Manage mobile game, in collaboration with Universal Games and Digital Platforms. This is the first mobile game inspired by the U.S. version of the Emmy Award-winning NBC comedy, The Office. The Office was the number one streamed show on Netflix in 2020 with over 57 billion minutes streamed. We are extremely encouraged by the key metrics we are seeing in the soft launch as we prepare for worldwide launch in December this year. Additionally, NBC Universal serves as a reference client and highlights our abilities to secure marquee IP with global fandom. The potential for additional projects with major IP holders such as NBC Universal in the future speaks to the moat that LEAF is building with its relationship with top IP owners and is a major step function of growth from our current North American IP to global IP franchises. Subsequent to the third quarter, we also announced the launch of RuPaul's Drag Race Superstar on October 25th. We are incredibly proud of the reception that RuPaul's Drag Race Superstar has received so far in the LGBTQ plus community as well as the broader community as a whole. Early results have been very promising with a strong active user base, retention, and monetization. We have very high aspirations for this title. According to data retrieved from App Annie, as of November 11th, RuPaul's Drag Race Superstar has already reached the number one ranking for games in the iOS App Store in three countries, has reached top 10 role-playing games in a total of 67 countries, and on Google Play Store, the title has reached number one ranking in simulation games in two countries, and has achieved top 10 status in a total of 12 countries worldwide. These incredibly strong ranking results and the promotion by RuPaul across RuPaul's 5 million plus social media followers has already placed RuPaul's Drag Race Superstar as our top daily grossing game in its first month since launch, and it continues to build momentum. The next thing I'd like to highlight was our announcement on November 4th with the Trailer Park Boys. The Trailer Park Boys Greasy Money was one of the first hit games from Eastside Games, which launched back in April 2017. Since the launch, the title has grossed over $120 million, hosted over 500 in-game events, and was downloaded over 8 million times. We are very excited with the confidence that the team at the trailer park boys has in our capabilities and the signing of a multi-year extension of the existing idle genre title, as well as expanding that relationship to new yet to be announced titles in other genres. What started off as a one game licensing agreement, as many of our IP relationships have has growing into an expanded partnership. and illustrates the value that major IP holders feel we bring to their IP franchises in helping their successful franchises engage with their existing fans and create new fans. Our focus on quality is evidenced by the 4.8 out of five star review on iOS with over 120,000 reviews and the 4.5 out of 5 ranking on the Google Play Store with over 300,000 reviews on this game alone. We pride ourselves in long lifecycle games that fans can enjoy over many years. As we look forward into Q4, we believe player patterns will continue to improve through the first half of 2022 as the industry adapts to Apple's ATT implementation. Leaf is increasing investment in current games, as well as ramping our product pipeline, including the introduction of global Super Marquee IP titles, RuPaul's Drag Race Superstar, and The Office Somehow We Manage. Additionally, the further scaling of our game kit software partners and game introductions has more games in production and development than we've ever had to date. Our commitment to Leaf's three-pillar strategy of combining accretive acquisitions, organic game growth, and distributed growth through our proprietary GameKit platform has delivered strong year-over-year growth and has poised us for a strong Q4 and beyond. Now, I'd like to turn it over to Jim to further discuss our third quarter results.

Thank you, Darcy. This quarter is the second full quarter of consolidated operations of LEAF, including its two studios, Eastside Games and Leaderly. 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 revenue performance in Q3 of 19 million, with approximately 70% of our revenue generated in the U.S. The Canadian dollar appreciated 5% against the U.S. dollar in Q3 2021 as compared to Q3 2020, which resulted in a 3% decrease to our revenue. In constant dollars, revenue would have been 19.6 million this quarter. As of September 30, we had 10 live mobile games, six of them published by Eastside Games, and the remainder published by Leaderly, which is unchanged from the start of this year. As of today, we have two additional live games, RuPaul's Drag Race Superstar, which launched October 25th, and B-Reel's Monster Buds, which launched November 1st. We categorize our games into active and evergreen, as defined. Active games are game titles that have been launched worldwide with active investment in user acquisition, marketing, and active live operations. During the third quarter, we had six active titles across the company, and 18.5 million, or 97% of our revenue, was generated from these games. Evergreen games are game titles that are more 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 0.5 million consistent with Q2 2021. Moving to the Q3 financial highlights slide, our advertising revenue increased to 5.2 million, or 27% of total revenue, which was consistent with the second quarter of 2021. Our cost of sales include platform fees from Apple and Google, which are 30% of in-app purchases, and IP royalties. The increase over the prior year is due to the higher revenues and the acquisition of Eastside Games. User acquisition costs have decreased over the prior year as a result of changes made by Apple to their identifier for advertisers. As Darcy mentioned, we scaled back our UA spend to maintain target returns, resulting in fewer players installing our games during the third quarter. Development costs were consistent with the prior year quarter, but higher on a year-to-date basis due to increased headcount and higher third-party development costs during 2021 due to a number of games launching in the fourth quarter of this year. General and administration expenses increased over the prior year periods due to stock-based compensation charges and public company costs. For the three-month period, the company recorded a net loss of $1.4 million largely as a result of the amortization of intangibles and accretion expense. This compares to net income of $2.6 million in the prior year quarter. On an adjusted EBITDA basis, for the nine-month period ended September 30, 2021, we recorded $6.3 million, a 16% increase as compared to $5.4 million in the same period last year. The increase is primarily driven by the strong revenue growth during the year. Key profitability and efficiency metrics to highlight are gross profit percentage, which was 64% in Q3 2021, consistent with the prior quarter. Adjusted EBITDA margin was 1.1 million during Q3 2021, representing a 6% adjusted EBITDA margin, down from 2.6 million in Q2 due to lower revenue this quarter. From a balance sheet perspective, at September 30th, LEAF had $12 million in cash with no debt and access to $13 million in credit facilities. During the first nine months of 2021, we generated $2.1 million in cash from operations. We are excited about our new game launches supported by marquee intellectual property in the fourth quarter. 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 to create world-class entertainment experiences for our users. This year's ramping game launches in the fourth quarter of this year and the first half of 2022 will almost double our game portfolio and bring super marquee IP franchises like RuPaul's Drag Race Superstar and NBC's The Office into the mobile game space for the first time, and we believe this will place LEAF in a very strong position for our future growth ambitions. I'd like to thank you all for joining us, and now I'd like to open the floor for questions.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. Again, that is star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We have our first question coming from the line of Neil Gilmer with Haywood Securities. Your line is open.

Yeah, good afternoon. Thanks for taking my questions. I'm wondering, you know, you had the soft launch for RuPaul and obviously went to the worldwide launch, the office, I understand, and soft launch right now. The initial metrics you get back through that soft launch phase, are you able to get a gauge with what your expectations for the adoption of the office are from RuPaul, like obviously maybe targeting some different audiences, but obviously to sort of a marquee IP that you're coming to market with?

Yeah, thanks, Neil. Absolutely. In soft launch, we do get an early indication of line of sight of the core strength of the game, everything from the retention ability, the ability for us to scale the game, as well as monetization. So we use that as a basis of when we start to lean into our user acquisition investment within that launch phasing or if we need to adjust and tweak before we lean into that investment.

okay thanks for that and then maybe just if you sort of give us the sense of how to uh i guess sort of um bridge the you know from worldwide launch to you know sort of that revenue ramp recognition obviously you put out some good metrics on rupaul in today's press release you know but how should we be thinking about when this really starts to hit the income statement of you know i think that we'll see contribution in q4 but Do you sort of hit that peak in that sort of six-month time frame where the revenue sort of really sort of scaled up? Or how should we sort of see that sort of progress after the worldwide launch in October?

Yeah, you'll start to see it recognized, obviously, in Q4. We'll only capture two months of the launch to date. And then it will continue to progress and ramp through the first half of 2020. Obviously, as we move through that ramping, we're continuously looking at our dashboards and understanding whether the game can continue to further scale. But right now, as you've seen from the early results of our 1 million downloads since launch and the very strong daily active user numbers that we're seeing, we continue to have very high aspirations for the game. going into the second half as well as the first half of 2022. Thanks, Darcy. Thank you very much, operator. We'll end the call now with the technical difficulties.

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