East Side Games Group Inc.

ladies and gentlemen thank you for standing by and welcome to the east side gains group formerly leaf mobile inc first quarter 2022 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 your speaker today mr jason bailey board chair, CEO, and founder of Eastside Games Group. Please go ahead.

Thanks, operator, and welcome everyone to Eastside Games Group's first quarter 2022 results call. On the call today with me is Jim McCallum, our chief financial officer. I'll begin by sharing highlights from our first quarter ended March 31st, 2022. I will be also giving an update on our strategy and key events that have taken place since we last reported on March 10th, 2022. Before we get started, please note, on December 6th, Leap Mobile began operating under the trade name Eastside Games Group and announced its intention to change its name and will seek shareholder approval at the AGM next week. Effective December 8th, 2021, shares started trading under the ticker EAGR on the Toronto Stock Exchange. And effective December 10th, shares started trading on the OTCQB under the new symbol EAGRF. Additionally, certain statements made on this call are forward-looking with the meaning of applicable to securities laws. This call includes references to non-GAAP measures. Please refer to our first quarter press release and MD&A precautionary statements relating to the forward-looking information and reconciliations of non-GAAP measures to GAAP results. References to all figures are in Canadian dollars on an IFRS basis unless otherwise noted. ESAC Games Group are pleased to report yet another record quarter. We did $35.6 million in top-line revenue and the largest quarter player audience yet. We captured a full quarter of RuPaul's Drag Race superstar revenue, and we started to build an audience for our newly launched title, The Office Somehow We Manage. The Punkle Pop Blitz game acquisition also added to our roster of successful titles in Q1. The revenue result is a 55% increase year-over-year and a 24% increase quarter-over-quarter. Monthly active users was also at a record high, clocking in at an average of $1.8 million in quarter one. This was primarily driven by new game launches and the marketing investments in them. Adjusted EBITDA in quarter one was $3 million. Our mature titles, such as Trailer Park Boys Greasy Money, Bud Farm Idle Tycoon, and others continue to drive EBITDA, which allows us to grow aggressively while still being cash flow positive. Strong EBITDA was assisted by some one-time events from several deals such as Netflix and Applevin. We remain committed to our goal of maximizing growth while maintaining a strong balance sheet. Cash on hand at the end of the quarter was $6.1 million. We also have $15 million in available credits. In quarter one, we fully paid the continued compensation resulting from the achievement of hitting over $100 million in revenue in our first year as a TSX-listed company. Our current debt is $1.9 million. Given our strong balance sheet, we are fully funded to achieve significant organic growth with existing liquidity available to the company and without the access to equity capital markets. Last quarter, we introduced operating metrics that we believe best outline the collective health of our business. daily active users, monthly active users, and average revenue per daily active user. DAO, MAO, and ARPDO. Full definitions can be found in our MD&A. We finished the first quarter with a record DAO of 407K, up 47% year-over-year, and an average MAO of 1.75 million, up 74% year-over-year. First quarter ARPDO was 94 cents, an increase of four cents over last quarter. GameKit is our development framework which allows us and our third-party development partners to build games faster with less capital investment and with a higher probability of success. With GameKit, we enable creators to successfully deliver memorable mobile gaming experiences that engage players every day. RuPaul's Drag Race Superstar continued to scale effectively despite the introduction of a software bug in March which took several weeks to properly address and resolve. Significant stability improvements have been made as well as additional processes which will help our entire portfolio and future titles. The Office, somehow we manage, debuted worldwide at the end of January. The Office is following a similar trajectory as RuPaul's Drag Race Superstar on iOS and marketing spend on Android platform is ramping up for Q2. Our recently announced Super Marquee titles, Doctor Who, our first game with BBC, and Star Trek Lower Decks, in partnership with CBS Viacom, are scheduled to worldwide launch in second half of 2022. We acquired the Funko Pop Blitz game in January. The acquisition of Funko Pop Blitz is accretive in three ways. Additional revenue, access to a deep set of IP relationships, and an added genre to the game kit in Blitz-style games. We are actively scaling partnerships with developers all over the world. B-side Games Group now has signed agreements with developers in Brazil, Vietnam, Australia, Finland, and Argentina, as well as Canada and the U.S. Mighty Kingdom, No Power Up, and Zaibatsu are three samples of newly signed and expanded partnerships in Q1. Possibly the most exciting news of all is our Netflix announcement. Eastside Games' Dragon App mobile game will be available to play exclusively on Netflix in May. This is a testament to the strength of our game platform. We're being recognized by leaders in technology as an ideal solution for iterative game deployment. This game is published with no monetization hooks, no ads, and no in-app purchases. Our upfront compensation for this contributed to our strong EBITDA in Q1. We see Netflix revolutionizing the game distribution platform as it revolutionized the way we consume TVs and movies. We're excited to be part of the early entry into the $100 billion a year mobile games industry. Now I'll turn the call over to Jim to discuss our first quarter results.

Thank you, Jason. Q1 was a strong quarter on all fronts, revenue, profitability, and cash flow. As Jason highlighted, we delivered record revenue in Q1 of $35.6 million. This is a 55% increase on the prior year and a 41% increase on a pro forma basis. User acquisition costs were significantly higher than the prior year quarter as a result of the launches of RuPaul and the Office Games. However, user acquisition costs were consistent with Q4, but lower as a percentage of revenue. For Q1, the company recorded net income of $0.5 million due to strong operating performance partially offset by non-cash amortization, accretion, and stock-based compensation. This compares to net income of $1.3 million in the prior year quarter, which benefited from a $5 million gain due to the Eastside gains acquisition. De-profitability and efficiency metrics to highlight are gross profit percentage was 69% in Q1 2022, an increase over prior quarters, primarily due to the higher revenue and the license revenue that Jason highlighted. Adjusted EBITDA was $3 million during Q1 2022, representing an 8% adjusted EBITDA margin. From a balance sheet perspective, at March 31, 2022, Eastside Games Group had $6.2 million in cash. Including the $1.9 million drawn against the credit lines, net cash was $4.3 million, compared to $9.2 million at December 31, 2021. The decrease in cash of $4.9 million resulted from the $10 million earn out pay in full in March offset by cash generated from operations of $5 million during Q1 2022. This was our strongest cash flow from operations quarter as a TSX listed company. During Q1 2022, the company expanded its bank credit facility from $3.5 million to $7.1 million increasing its overall credit facilities to 17.1 million. At March 31st, 2022, the company had undrawn credit facilities of 15.2 million compared to 13.5 million at December 31st, 2021. The year is off to a strong start, and we look forward to the Star Trek and Doctor Who game launches later this year. And now I will turn the call back to Jason for some closing remarks before Q&A.

Thank you. Those are some incredible numbers. Our growth at Eastside Games has a long history of year-over-year increases and disciplined use of capital. Josh Galen and I started this company with just a few hundred thousand dollars in the bank. We grew year-over-year and hired only when we could afford to do so. We never got in front of our skis, we never raised additional capital, and we were profitable every single quarter as a private company. I am extremely confident in our ability to continue this growth by using existing liquidity available to the company and without having to access equity capital markets. This next slide clearly demonstrates game development economics. Blood Farm Model Tycoon is a wholly owned IP, built and published by Eastside Games Group, and these are the 2021 actuals. We spent approximately one year and $1.5 million developing this game. It launched worldwide in early 2020. In the first year of any game, It is generally run at a loss as we determine first, whether or not it's going to be a viable title, then heavily invest in marketing and growth and building up a solid user base, adding new content and events. And ultimately, if a game breaks even in the first year, we're very happy. The example illustrated here is a game in its second full year of success. So in 2021, platform idle tycoon generated over $30 million in top line revenue, the cost of goods sold, platform fees, servers, software, et cetera, was $6.6 million. We spent just over $9 million on user acquisition and marketing. The LiveOps and support team of approximately 15 people cost $1.4 million. Therefore, the 2021 profit for this game was $13 million. If we were to shut down everything we do except this game, we would have a 43% net profit margin. We also expect this gain to have a 10-year lifespan. Note that the IP during gains would need to pay a royalty from this amount, and to save a question that's going to be asked later in the Q&A, yes, we did cherry-pick the best number. A more typical number would be 30% margins. This is our best-case scenario. Our goal at Eastside Gains is to grow revenues to $1 billion a year. In 2022, we will take most of that EBITDA generated by our active titles and use the capital to fund growth, secure more IPs, and expand our development partner network. We ultimately want 30% of a billion dollars a year, not 30% of $93.7 million, which we put up last year. Okay, let's wrap it up. In the history of this company, I have never been more excited about its opportunities and prospects. I've taken the helm of this company and I will be hyper-focused on delivering value to shareholders, building an industry-defining product and game case, and building the Eastside Games Group into a multi-billion dollar company. Thank you for your time today and now let's open it up to questions.

Thank you. Your first question comes from the line of Neil Gilmer with Haywood Securities. Please go ahead.

Yeah, good afternoon and congrats on a good quarter. Maybe if you could just sort of give us a sense and, you know, to use your expression and your prepared remarks to make sure that we don't get out over our skis. Can you sort of talk us through maybe some of the seasonality, like with, you know, the summer months coming up, but you just launched office in January, you're investing heavily into that. just want to make sure that we sort of manage appropriately sort of the quarterly growth rate for revenue. I know that you're focused on year over year, but us as analysts tend to get a little bit more focused on the quarters. But how should we look at some of that seasonality that may play into the fact this summer?

Yeah, thanks, David. Sorry, Neil. You're absolutely right. I am focused on year over year and the long-term growth and health of this company and less focused on quarter to quarter. But that is your job to make that focus. And absolutely, there is seasonality. You can see some of that last year. And if you want to go back years and years behind, we like to say in the games industry, summer sucks because everybody goes outside. They're eating and drinking with their friends. They're going to the beach. We prefer the winter months when you're locked in the house, it's cold and rainy and you have nothing else to do and you have lots of spare cash in your pockets because you didn't spend it on beer or on a patio with your friends. So we do expect a small reduction in revenue over the next, well, Q2 tends to feel the worst of it. Q3 starts to pick up. With September, everybody goes back to school. So there is definitely a little bit of seasonality coming.

Thank you for helping us understand that, but we'll still focus on the year as best we can. With the Netflix partnership, obviously, the game's been launched in May here. Are you expecting to get any sort of metrics from Netflix, or you basically sort of close that chapter with them? Obviously, you're still in discussions, I assume, for potential other games, but how are you yourself going to try to evaluate the success of that, or Are you not as focused on that as far as just developing other games that Netflix would be interested in putting on their platform?

It's going to be really interesting to see that play out. Netflix is famously very black box to its partners. If you put a TV show or a film on Netflix, they don't tell you how many people watched it, how many minutes. They keep that information very close to their chest. Now, games are a little bit different in that they do hit our servers and hit our network, so we should be able to gather a fair bit of information. What we'll be able to share remains to be seen as we're under pretty tight NDAs with unconfidentiality around this stuff with Netflix, but I think we should be able to have a pretty clear picture of what kind of success it has, and our agreement with Netflix does include making additional content for this game and even more yet should it be successful. So our hope is that it does well and that we continue to expand on this game as well as obviously we're talking to them about multiple other titles.

Excellent. Thank you for answering the questions and congrats again. Thanks.

Your next question comes from the line of David McFadgen of Cormark Securities. Please go ahead.

Hi, thank you. Just a couple of questions. So, I mean, you give us now the user metrics, which are great. Um, so it's looking at the art and I was just wondering, does this really vary a lot by game or you kind of all target each game to kind of come in that 90 cents to a buck range, or can there be some big outliers on the positive side?

Yeah. Our, so right now a vast majority of our successful titles are in the idle genre. So they're all incredibly similar, ranging, they fluctuate day to day and week to week as different types of events and new content and et cetera. But on average, it's close to a dollar. It's a little bit under right now, partly because of a lot of new users coming in. So mature users tend to monetize around a dollar a day each, and the Some games perform better than others, of course, but they're all in kind of a plus or minus 20% range.

Okay, okay.

I mean, if they're under that, to be fair, we, you know, that's not a successful game. That's one of the many metrics that we look for to decide whether a game is successful and to continue to invest heavily in it.

Okay, okay. Yeah, I was just wondering if, like, maybe a home run you might be doing, like, 50 or something like that, but... I guess you just ramped the marketing spend up to drive even more revenue, but keep the ARPDAU the same. Is that the right way to think about it?

That is a way to think about it. But if you also look historically, especially around our ad revenue, you'll see that that's come up. And that is because of additional features and triggers that we put in place to improve that. We're always trying to get that ARPDAU to grow. So over time, we want that number to continue to come up. uh, additional genres are going to put up different art house. Uh, and, but the real win here is, is reaching player audience. If we can get a game with a million Dow, then theoretically it should make a million dollars a day. Okay.

Okay. And you know, when I look at the ad revenue in the quarter, obviously quite strong up, uh, 97% year over year. So it would seem like you're beyond the IDFA thing with alpha, right? Is that correct?

Well, ad revenue and IDFA are not related. IDFA is more in line with the money we spend to acquire users. Okay, okay.

And then just on RuPaul, I imagine this game is still ramping, right?

Yes.

Okay, okay. And is it still coming in line with your expectations or exceeding expectations?

RuPaul is an absolutely fantastic title. Like we mentioned in the call, there was a software bug introduced in March that took us some time to address and fix and put in things so March was soft. And as a result, we also reduced ad spend, so May is softer than expected. But now that the bug is fixed and we're back on the ramp, we're going to ramp it back up. But it has had a couple of soft months with that bug, unfortunately.

Okay. All right. Okay. That's it for me. Thank you.

Your next question comes from the line of Adir Katz of 8Capital. Please go ahead.

Good afternoon, guys. Thanks for taking my questions. You mentioned that The Office is doing really well on iOS, and you are going to start increasing spend on Android. Can you maybe give us a sense of when you expect the game to really hit its stride, similar to RuPaul?

So, every game is slightly different, audiences are different, etc. but it takes a year for a game to fully ramp up to expectations or that kind of solid audience. Part of it is teaching people how to play the game, getting in more and more paying users. You acquire users and let's say 40% of them come back the next day, so 60% of your new users on any given day are bouncing off, but over time, you're packing down that long-term retention. So we're continuing to build up that audience. It does take time. I would say usually around six to nine months is when we see its peak, which is about where RuPaul is right now with that bug not being a fun time. Believe me, there was a lot of gray hairs growing, but it's all behind us now. And so the office is the same. It's going to take a few more months to get it to uh, full capacity.

Great. Thanks. And then, sorry, just on game kit, you, you mentioned, you know, some pretty, uh, uh, expanded agreements with some of your partners, but, you know, looking forward, just given all of the momentum, you've seen the business, do you find that more developers are coming to you and what kind of conversations are you having conversations with bigger developers, different developers, maybe just give us a, a sense on the game kit pipeline there.

Sure. the we've talked to approximately 50 different developers about game kit so far we only do outbound sales we have no inbound sales you can't come to our website and sign up this is a if you know about it you know about it only product we have not begun to really market it as we solidify it and the reality is is we have more opportunity than we have bandwidth so you know, the partners are already working with. So we have a very strong vetting process. So we've talked to approximately 50 developers and we put all of those through the ringer and only, you know, 15 or so of them have been able to pass that vetting process. So we're only doing deals with the top 25% of the people that we talk to. As the product gets better and better and more and more built out, we'll be able to increase that range as we'll be able to take bigger chances, and we will have solved the problems that typical game developers run into, therefore allowing game studios with less senior teams and not as much experience to be able to have success on the platform as well.

Perfect.

Thanks for your time, guys. I'll pass the line.

No problem. Thanks, Adair.

There are no further questions at this time. I will turn the call back to Mr. Jason Bailey. Please go ahead.

Thanks everybody for coming to the call. My first call as a CEO. I'm really excited about this company. Couldn't be more so, you know, looking forward to hearing everybody's feedback and continuing to grow this company into the monster that we know it can be.

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