East Side Games Group Inc.

Ladies and gentlemen, thank you for standing by and welcome to the Eastside Games Group, formerly Leaf Mobile Inc. Fourth Quarter 2021 Results Conference Call. At this time, all participants are in 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 your speaker today, Darcy Taylor, CEO of Eastside Games Group. Thank you. Please go ahead.

Thanks and welcome everyone to the Eastside Games Group fourth 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 a performance from the fourth quarter and full year ended December 31st, 2021. In addition to giving you an update on our strategy and key events that have taken place since we last reported on November 15th, 2021. Jim will go into greater detail on our financial results commentary for the period before turning it back to myself for some final remarks, and then we will open up the call to endless questions. Now, before we get started, please note on December 6th, Leaf Mobile Inc. began operating under the trade name Eastside Games Group, and announced its intention to change its name and will seek shareholder approval at the upcoming general meeting. The company also announced the effect of December 8th. Its shares will start trading under the ticker EAGR on the Toronto Stock Exchange, and in effect of December 10th, its shares started trading on the OTC Market Group's OTCQB marketplace in the United States under the new symbol EAGR. Additionally, 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 fourth quarter press release and MD&A for cautionary statements relating to forward looking information and reconciliations of non-GAAP measures to GAAP results. References to all figures are on an IFRS as reported basis otherwise noted. Additional materials can be found in the investor section of our website at eastsidegamesgroup.com under the financial information area. And an audio replay of this call will also be available on our website in the coming days in the same section. If you have any questions, please email investorrelations at ir at eastsidegamesgroup.com. Let me begin our call by highlighting that Eastside Games Group are extremely proud to inform our shareholders that the execution of our growth strategy has us delivering our best ever annual top-line performance and the largest player audience in the company's history across our 12-game portfolio. We have multiple growth catalysts in place to drive continued top line expansion in 22 and beyond. In Q4, Eastside Games Group delivered our highest ever Q4 revenue, also resulting in record top line for full year 2021 on both an as reported and perform a basis and record player audience metrics. Strong organic growth towards the end of the year reversed our previously quarterly decline by increased traction in our marketing efforts, delivering improved performance across our core portfolio, and the introduction of RuPaul's Drag Race Superstar at the end of October fueled year-over-year growth momentum and strong fundamental game title metrics. The marketing landscape continued to improve in the fourth quarter, We've adapted well to Apple's IDFA changes and have been successful in our marketing campaigns with increased discipline investing towards the end of the year linked to new launches and positive return on advertising spend across our game portfolio with sustained returns. This increased investment in marketing also coincided with the launch of RuPaul's Drag Race Superstar. This resulted in an achievement of our highest ever adjunct quarterly revenue of $28.6 million for the fourth quarter, a $9.4 million year-over-year revenue gain, and an increase of 49% versus the prior year quarter of $19.2 million, as well as a 58% increase versus the previous quarter three. Full year revenue delivery also achieved record levels at $93.2 million, a 37% annual revenue growth relative to the full year as reported revenue of $68.1 million. On a pro forma basis, we also had recorded record revenue of $28.6 million and $95.5 million for the three months and year ended December 31st, 2021. Increases of 25% and 19% respectively compared to 23 million and 80.5 million in the comparable prior year periods. Key growth drivers were a combination of player retention from quarter two 2020 shelter in place install increases across our entire game portfolio. The full year revenue recognition of previous game launches in Q2 with Cheech and Chong's Bud Farm and in Q3 2020 with Archer Danger Phone. And the first two months launch results of RuPaul's Drag Race Superstar launched on October 25th, 2021. We'd also like to highlight adjusting for lower US dollar in 2021 compared to 2020. In constant dollar revenue, we would have been $103 million in revenue on a performa basis and $29.2 million this quarter on an annual basis. The 7% reduction in average exchange rate resulted in a 5% reduction to revenue. We continued to focus on maintaining profitability as we invested our growth capital into an expanding new game pipeline and scaling GameKit platform tech stack for future growth. This saw an adjusted EBITDA of $1.1 million for the quarter representing a 4% margin compared to $5.9 million for the prior year quarter. Adjusted EBITDA for the full year ended December 31st was $7.4 million compared to $12 million for the prior year. As of Q4, we've introduced non-GAAP operating metrics into our reporting that we believe best outline the collective metrics of our total gain portfolio, audience growth, retention, and monetization trends to help support investors and our shareholders of our underlying business health. The key metrics are daily active users as a measure of audience engagement, monthly active users, as a measure of total game audience size, Dow over Mal percentage as a stickiness rate to evaluate how often users interact with our products, and average revenue per daily active users to evaluate monetization across our player base for both in-app purchases and advertising. Full definition outlines can be found in our MD&A. Highlighting our game metrics on our total game portfolio of 12 titles, we finished the fourth quarter with a record average daily active user of 348,000, up 21% year over year, and an average monthly active user of 1.5 million, up 53% year over year. This growth was driven by increased UA investment or user acquisition investment results across our titles, including RuPaul's Drag Race Superstar that launched on October 25th. On a full year basis, we have captured the largest audience ever. We finished the year with record average daily active users of 279,000, up 8% year over year, and stable average monthly active users of 1.0 million year over year. This return on growth was also driven by user acquisition investment and the addition of RuPaul's Drag Race Superstar. We saw consistent Dow over Mao percentage rate above 20% across the total portfolio on a fourth quarter and full year basis. The fourth quarter decline in 2021 compared to 2020 was a result of the rapidly growing new installs of RuPaul's Drag Race Superstar that launched at the end of October. And we expect this to stabilize in Q1 2022. Fourth quarter average revenue per daily active users was just shy of a dollar at 90 cents and was consistent with prior year quarter. On a full year basis, our average revenue per daily active user was up 7% to 96 cents compared to the prior year. The lower Q4 2021 average revenue per daily active user as compared to the full year was due to the monetization ramping early in the game launch lifecycle of RuPaul's Drag Race, which launched during the Q4 2021. Leaving behind 2021, we continue to strengthen our business for the long term. We have grown our games portfolio organically increased our game kit partners and game pipeline, and have delivered solid performance and profitability. Moving into the business highlights within and subsequent to the quarter end, within our new games publishing and game kit business area, we have added our fastest growing franchise to date with the addition of RuPaul's Drag Race Superstar. In its first weeks of launch, it already surpassed 1 million downloads, And our ramping new game pipeline has never been stronger. NBC's The Office, Somehow We Manage, launched the end of January and is already off to a strong start. Additionally, we have now two other Super Marquee IP games with major studios. Doctor Who, our first game with BBC Studios, and Star Trek Lower Decks with CBS Viacom. Both of these franchises enter soft launch in mid-2022. Also, we have expanded and extended our IP partnership with the Trailer Park Boys to include more games in expanded genres. Additionally, we were very opportunistic in the acquisition of global IP game asset Funko Pop Blitz from Network to genre diversify our game portfolio as well as our tech. With our game kit platform, we are actively building a next generation game tech software and scaling partnerships such as Mighty Kingdom based in Australia and No Power Up of Vietnam for four additional free-to-play mobile games on this platform, which expands our total addressable market and further strengthens our competitive position in the mobile games sector. Entering 2022, we also see strong organic growth through an exciting pipeline of new games leveraging our game tech platform. We have more partners than ever before working on new games. Currently, we have 11 game kit partners, and we will publish nine new game titles in 2022, almost doubling our portfolio, including our three Super Marquee games, The Office Somehow We Manage, Doctor Who, our first game with BBC, and Star Trek's Lower Deck with CBS Viacom. As well as almost doubling our portfolio, we have multiple new game kit R&D going on that will address new genres that are already in various stages of development and beta test deployment. Our ambition is to develop our games to the point where they are ready for soft launch But as our performance requirements for a worldwide launch are high, not all game projects get a final go-ahead. Eastside Games Group Studios have a solid track record of launching games worldwide that can be successful for years, and we intend to keep that high-quality bar going forward. Our commitment to Eastside Games Group's three-pillar strategy of combining accretive acquisitions, organic game groups, and distributed growth through our proprietary game kit platform licensing and revenue share has delivered strong growth momentum across key growth drivers. We expect to build on our Q4 results through Q1 as we capture a full quarter of RuPaul's Drag Race superstar revenue and realize revenue from our newly launched title, The Office Somehow We Manage. Now I will turn over the call to Jim to further discuss our fourth quarter results.

Thank you, Darcy. This quarter is the third full quarter of consolidated operations of Eastside Games Group, 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 Q4 of $28.6 million with approximately 70% of our revenue generated in the United States. These results also set us up for record revenue of $93.2 million for the year, an increase of 37% versus last year on an as-reported basis, and a 19% increase on a pro forma basis. As of December 31st, we had 12 live mobile games published under the Eastside Games and Leader League banners. This includes RuPaul's Drag Race Superstar and Be Real Monster Buds, which both launched during the fourth quarter. In terms of financial highlights for Q4, our cost of sales include platform fees from Apple and Google, which are 30% of in-app purchases and intellectual property royalties. The increase over the prior year is due to the higher revenues and the acquisition of Eastside Games. User acquisition costs increased over the prior year, especially in the fourth quarter as we invested in the launch of RuPaul's Drag Race Superstar and the improved marketing landscape as we adapted to changes made by Apple to their identifier for advertisers. Development costs for the year increased over the prior year as we added developers and development costs to increase our total gain portfolio. General and administration expenses increased over the prior year due to stock-based compensation charges and public company costs. On an IFRS basis, for the three-month period, the company recorded a net loss of $0.8 million largely as a result of the amortization of intangibles and accretion expense. This compares to net income of 4.5 million in the prior year quarter. For the year, the company reported a net loss of 1.9 million versus net income of 15.1 million in 2020, largely due to non-cash charges recorded in 2021. On an adjusted EBITDA basis, For the year ended December 31, 2021, we recorded $7.4 million, a 34% decrease as compared to $11.2 million in 2020. The decrease is primarily driven by the increased investment in marketing spend linked to new game launches and public company operating costs not included in the prior year. Key profitability and efficiency metrics to highlight are gross profit percentage, which was 65% in the fourth quarter, consistent with the prior quarter, and adjusted EBITDA margin, which was 1.1 million during Q4 2021, representing a 4% adjusted EBITDA margin, consistent with Q3 adjusted EBITDA. From a balance sheet perspective at December 31, 2021, LEAF had $9 million in cash with no debt and access to $13 million in credit facilities. The $10 million cash payout to former Eastside Games shareholders will be made prior to March 31, 2022, using existing cash and credit facilities. During the year, we generated $1 million in cash from operations. Despite substantial investments in new intellectual property and game launches, and 4.2 million in cash taxes paid. During 2022, we will continue to invest in game technology, intellectual property, and new game launches. We finished 2021 with a strong fourth quarter, which sets us up well for continued growth in 2022. And now I will turn it back over to Darcy for some closing remarks before Q&A.

Thanks, Jim. In closing, The execution of our growth strategy has had us deliver Eastside Games Group best ever annual top line performance, our strongest quarter to date, and our largest player audience in the company's history. We expect to build on our strong Q4 results through Q1 2022 as we capture a full quarter of RuPaul's Drag Race superstar revenue and realize revenue from our newly launched title, NBC is the office somehow we manage. We anticipate continued organic growth momentum over the next year with the introduction of Doctor Who, as well as Star Trek Lower Decks, and corresponding with stable adjusted EBITDA margins as we gain scale. We have multiple growth catalysts in place to drive continued growth in 2022 and beyond. Thank you for joining us. And we'll now open the floor for questions.

As a reminder, again, as a reminder, to ask a question, you will need to press star 1 on your telephone. Again, that star is on the number 1 on your telephone keypad. To withdraw your question, you may press the pound key. Please stand by while we compile the Q&A roster. Your first question comes to the line of Neil Gilmer from Haywood Securities. Your line is now open.

Yeah, good afternoon. Congrats on the quarter, guys. Maybe let's start with obviously, you know, significant revenue growth in Q4 sounds like driven like by RuPaul. Wondering, you know, is there some way you can sort of give us some sort of comparison on how the office is tracking? Are we going to be sort of seeing a similar growth in revenue in Q1? Or you just think you got a little bit more traction on RuPaul and the office will sort of build throughout 2022?

Yeah, thanks, Neil. Yeah, we're really excited about how the quarter ended up. As far as the comparison between RuPaul and the Office, we're super encouraged with the early indications from the Office as far as how it's tracking against RuPaul, though the rollout is a little more phased in the approach versus RuPaul, so you'll see a slightly slower build in general. But our expectations and aspirations for the property is to see similar growth trajectory just over a longer period of time.

Okay, that's helpful, Darcy. Thank you. You mentioned nine titles to be released in 2022. Obviously, The Office is one of those in January. Are you able to give a ballpark as far as the cadence of those titles to try to figure out sort of the revenue growth across the quarters or whether there'd be like four in the first half and five in the second half or any sort of more specifics on the timing?

Yeah, so I'll just start with the super marquee IPs being The Office, Lower Decks and Doctor Who. If you look at the office we've already highlighted, it will start to slowly build coming out of Q1 throughout the entirety of the year. Lower DEX is currently in soft launch in Canada with an expectation to be in worldwide launch by the midway point of this year. So you'll see that sort of hit our revenue line in, I'll say, mid Q2 and build from there. And then as far as Doctor Who, it's slated for the second half of the year, looking at sort of mid to late Q3 launch and building from there. The rest of the games will intersect in between those mega IP games, sort of a mix of sort of three in the first half and three in the back half of 2022.

Okay. Thanks. Maybe one last small one for me. Obviously, part of 2021 was impacted by those IDFA changes and seemed to sort of hit in Q2, Q3 and doesn't seem to be a factor in Q4. Do you feel those changes and the impact on your business is mostly behind you now and shouldn't be any further potential disruptions from that going forward?

Yeah, I think we could say that it's definitely that marketing landscapes improved over the fourth quarter. And I would give great kudos to our team to adapting tremendously well to those adjustments. And we are seeing, obviously, increased returns on our investing and being very disciplined around it. The general market is still adapting. We believe we've found a way through it and that we will be able to grow our games in this sort of new landscape going forward without any impedance.

Great. Okay, thanks. Congrats again on the good quarter. Thanks, Neil.

Your next question comes to the line of Adir Amin. Chav from Aid Capital, your line is now open.

Thanks, guys, and congrats on the quarter here. I had a couple of questions just maybe on the back of the Funko Pop acquisition. You had mentioned in the past that you would like to broaden the genres that you have, and I think you achieved that with Funko Pop. Do you see an immediate opportunity to kind of port some of your IP into this genre of game, I guess the match genre? And do you think that this genre really lends itself to the current IP that you have? Or do you think it lends itself to maybe a broader or a different type of IP?

Yeah, thanks for the kudos on that, Adir. I mean, we instantly saw synergies with the Funko Pop Blitz game as that game already included IP from Doctor Who as well as NBC's The Office. So obviously there's some tremendous cross-promotion opportunity there going forward. We also see IP such as RuPaul and the Trailer Park Boys would translate very well into this genre and currently we're in various stages of discussion and new genre game kit development to see that realized. So we think that combination of IP synergies as well as stretching our current IP across multiple genres as a benefit for us in not only growing our audience base, but also allowing our fandoms to play multi-genre games across the same IP.

Okay, great. And then just secondly, I mean, obviously a very impressive IP wins lately with BBC Studios, obviously NBC Universal earlier, and then with CBS Viacom. Do you find that these conversations with these large IP owners are getting easier now that you approach them? And maybe talk to us about how those conversations are going.

Yeah, absolutely getting easier. We've built a tremendous reputation as being incredibly strong stewards for some of the crown jewel IP brands of major studios. I mean, NBC, The Office. BBC, Doctor Who, Viacom, CBS, Star Trek. I mean, these are iconic franchises. So this has obviously improved or increased our inbound inquiries to a new level of, I'll say, IP pedigree. And it has also allowed us to approach any IP we're interested in with a very strong background of working with IP over time. So those negotiations, I would say, have become broader. The negotiations have become more fruitful, and we see that as us building a very strong business moat in the IP genre world around mobile games.

Thank you. And then just maybe one last one for me, and I'll pass the line. Just on the GameKit partners, you said 11 GameKit partners currently. How is that... pipeline kind of building and do you find that you have more game kit partners in the pipeline moving forward?

Yeah, I mean, we've seen not only from the sort of the reception of our games across the board. I mean, obviously, we've had RuPaul be, you know, a game of the day feature on the App Store as well as the NBC's The Office. Both of these are built off our GameKit platform. This has obviously had more inbound requests from professional development studios wanting to leverage our game tech services and tools. We have been incredibly selective to date on ensuring we want to work with some of the best best-of-breed partners out there. I think an example of that is Mighty Kingdom out of Australia, who we not only are building one of our current IP games with, but also have now already extended our agreement to build an additional three games, as well as the game experts out of Vietnam with No Power Up, who brought some of the biggest idle and casual games to market. This has just allowed us to not only reach into more geographies with bigger partners, but also expand existing relationships to bring more games to market. So I think it's been a net positive across the board and allows us to obviously scale our business without incurring that increased overhead by sharing those development and costs across a distributed network.

All very helpful. Thank you very much, gentlemen. Congrats on the quarter. I'll pass the line. Thanks, Adir.

Your next question comes in the line of David McFadgen from Coromark Securities. Your line is now open.

Yeah, great. A couple of questions. So just wondering, can you give us an update on when you expect to pay the earn out and what do you expect the cash position to be once that earn out is paid? And then can you give us an update on how Truly Social is performing? Because I know with that company, there's a potential acquisition, a potential earn out with that one as well, obviously contingent upon performance. So I'm just wondering how that's doing. Thanks.

Yeah, thanks, David. I'll take the first question on the cash. So we're going to make the $10 million payout before March 31st, so over the next couple weeks. And, yeah, we'll dip into our line of credit, but we expect to have about $5 million of cash at the end of this quarter.

Okay, so you're expecting to go into the line of credit by 5? Yeah, that's correct. Okay. And how big is the line of credit again?

Currently $13.5 million.

Okay. I mean, as a tech company, wouldn't you want to, you know, sort of have a bigger buffer of cash around just, you know, rainy day, you know, opportunities come up, so on and so forth?

We can draw on the line very quickly if we need to. So we don't want to, we don't need to take on unnecessary debt if we don't need to. The line is available very quickly. Okay.

okay and can you give us an update then on truly social how that's performing yeah thanks david uh yeah truly social right now as far as uh performing against their targets uh they currently aren't in line uh with the earn out targets uh that have been set so we don't see that uh at this point of being um a drain on any of our uh growth capital going forward okay

Um, and then you talked about expanding the partnership on trailer park boys. Can you give us some color as to what that means?

Yeah, so we most recently in the fourth quarter announced one in extension on our casual idle game. So that game now will be going into its seventh year now, and we've extended it to run for another five years with options as one of our top performing games within our portfolio. But also within that, we signed the agreement to have the ability to enter other genres, whether that be Merge, Match, 3, or Blitz, such as our current game. So we believe this is a tremendous opportunity to take a proven IP as far as free-to-play mobile monetization and stretch that IP across multiple genres to basically widen our player audience and allow more trailer park boys fans to play more games more often in different genres across without impacting or actually with incremental upside growth on it.

Okay. And then just on the other potential earner coming due, obviously based on the results ending February 5th, 2023, In order to make the results or in order for the earner to be paid, do you expect that that would be conditional upon additional super marquee IP to be licensed and launch into the marketplace in new games? Or just with the existing game portfolio, you think that there's a good chance that the results would be such that the earner will be paid?

From what we've seen already with our games in market, that being The Office as well as RuPaul's Drag Race Superstar, it gives us a fair amount of confidence on having, I'll say, a strong glide path into that number. We also have early soft launch indications of a strong Star Trek Lower Decks as well. If you're looking at the guidance that – consensus guidance that many have provided for 2022, we feel that's in line with what we're seeing, and it doesn't include any potential upside of future games. So we have a confidence that that target should be met.

Okay. Okay. Okay, that's it for me. Thank you.

Thanks, David. Thank you, David.

Again, everyone, if you have questions, please press star 1 on your telephone keypad. Again, that's star, then the number 1 on your telephone. I am showing no further questions at this time. I would now like to turn the conference back to Darcy Taylor.

I'd just like to thank everyone that was on the line today as well as the very detailed and informative questions from all the analysts covering us right now. We are tremendously encouraged from what we've seen on the results of our new game launches and coming out of 2021 and entering into 2022. We think we have a very deep pipeline of marquee IP to come to market as well as scaling and expanding GameKit partnership portfolio. And we look forward to seeing the results of those games into the back half of the year and growing these games through 2022 and beyond. So with that, I would like to close the conversation and feel free at any time to reach out to us on our website or other channels as needed. Thank you very much.

This concludes today's conference call. Thank you all for your participation. You may now disconnect.