East Side Games Group Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the Eastside Games Group Second Quarter 2023 Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session for analysts only. I would now like to hand the conference over to the speaker today, Jason B., board chair, CEO, and founder of Eastside Games Group. Thank you. Please go ahead.

Thank you, operator, and welcome, everybody, to Eastside James Group's Q2 2023 results call. On the call with me today is Jason Chan, our interim chief financial officer. We're also joined by our chief operating officer, Lisa Sheff, and our chief product officer, Jim Wagner. I'm very excited to share highlights from the second quarter ending June 30, 2023. I will also be giving an update on our business strategy and key events that have taken place since we last reported it in May. Mr. Chan will go into greater detail on our financial results commentary for the period before turning it over to Lisa and Jim for some remarks before we open it up to analyst questions. I'd like to remind you that certain statements made on this call are forward-looking within the meaning of applicable securities laws. This call includes references to non-GAAP measures. Please refer to our second quarter press release and MD&A for cautionary 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. Additional materials can be found in the investor section of our website at www.eastsidegamesgroup.com under the financial information section, and an audio replay of this call will be available on our website. Q2 was a quarter that saw us achieve our core goals. Namely, we posted $2.5 million in adjusted EBITDA, bringing our year-to-date total to over $5 million. This was achieved primarily through cost reductions and smart fiscal management by our new C-suite. We have talked about this refocus extensively on the past two earnings calls, and Q2 shows the fruits of that labor. We have a strong business that is profitable, growing, and well-financed and lean. A business with a strong pipeline of new products to layer on top of our existing strong foundations. Revenue for Q2 was $21.3 million despite having no new game launches and reducing ad spend from $24 million in Q2 2022 to $11.6 million in Q2 2023. Naturally, this spend reduction saw revenue decline, but we feel we have reached a sustainable margin with our seven LiveOps titles. They are all running with lean and focused teams. Our new games pipeline is strong, and we continue to invest heavily in it. Lisa and Jim will speak to this more later in the call. We have a strong, growing, profitable business with an enviable IT portfolio and a broadly diversified base of games driving revenue. We have seven titles that make up almost 95% of our revenue and no single title accounting for more than 25% of revenue. I'll now pass to Mr. Chan, our interim chief financial officer, for some comments.

Thank you, Jason. As mentioned, although revenues this quarter have declined, I want to emphasize that our strategic decisions and operational efficiencies have driven higher margins and positioned us well for a sustained success. We ended Q2 with $21.3 million in revenue and adjusted EBITDA at $2.5 million, roughly an 11.7% margin. This is our highest so far this year and almost twice as much as Q2 of 6.4%. and our third trade quarter of over 9% margin and $2.5 million in adjusted EBITDA. Our focus on optimizing our cost structure and refining our UA strategy has yielded remarkable results in terms of profitability. As mentioned before, for UA spend specifically in Q2 2022 year to date, our expenditure was roughly $24 million. This year, it's down to $11.6 million, a 52% decrease. We will continue to improve and adapt this as the market landscape changes. Our average daily users for the quarter were 273,000, which is slightly down from the first quarter with the rate of our repeat daily users remaining strong at 28%. Our cash on hand at June 30 ended at $2.8 million. This drop is mostly related to the timing and Apple payment structures and minimum IT guarantee payments. This is offset with a rise in our age receivables, which has since been collected to bring us back to $5 million cash level. This included Apple, as well as $1.4 million in outstanding GST returns delayed by the CRA strike. Cash flow from our core operations before working capital changes is strong at $4.8 million, which is consistent with last year's Q2 results. In addition, we've also purchased 682,653 shares under our NCIB through June 30th. This is an average cost of $0.98 per share, and we'll continue to be as aggressive as we can on that front. As we navigate the road ahead, we remain steadfast in our long-term vision and will continue our focus on the path of sustainable growth and profitability. Thank you for your continued support, and with that, I will pass it off to our Chief Product Officer, Mr. Jim Wagner.

Thank you, Mr. Chan. Looking ahead to the remainder of the year, ESG will see major releases and continued development into new games for some of the biggest names in television, sports, music, and toys. We have a diverse set of projects we are developing to double down on our success with IP-driven idle games, as well as expanding into the idle RPG category, where we found success with RuPaul's Drag Race Superstar. The idle RPG category offers more depth and strategy for mid-core players, leading to increased stickiness, long-term engagement, and opening up more IPs in the future that match favorably to their sub-genre. With our existing portfolio of games, we'll be focusing heavily on profitability by sporting successful revenue-driving features, such as season passes, interstitial ad placements, and live event mechanics that have proven themselves on at least one other game in our portfolio and can be expanded to all of the games in our portfolio. This applies not just to engineering, but design and balance as well, where we can release a new event balance in one game, see the positive uplift in revenue, and turn that around in weeks to our other games. Producing and innovating on new balances is a huge focus for Q3 as we saw those initiatives as having the strongest lift in Q2. Supplementing our idle games, our Match 3 game, Bud Farm Lunch and Match, continues to grow month over month in its core KPIs as we innovate on the Match 3 genre with our best-in-class live-off strategies that we developed and owned on our idle simulation games. Continuing on this trajectory, we are excited about the indicators of future success in the MASH genre and the potential product and IP pairings that open up many opportunities for the studio in the future. Over to Ms. Lisa Schreck, our Chief Operating Officer, for additional comments.

Thanks, Jim. In Q2, we've been highlighting new and innovative ways to promote our games outside of traditional pages or acquisitions. We are seeing support from our celebrity influencer partners like RuPaul himself, who has a 4.4 million push and follow on our social media. We recently signed a partnership with Vox Media to promote our exclusive RuPaul's Drag Race Superstar mobile game across all live shows around the world, as well as engage influencers through podcasts and referral codes. Furthermore, you can now see our game trailers on the Jumbotron at Universal Park and at the Physical Office Experience in Washington and Toronto. The landscape has changed, and we are approaching our go-to-market strategies completely differently, embracing cross-channel marketing. Towards the end of August, we will be announcing our biggest new game for 2023, which will be the best example of this approach. We are working with an extremely supportive IT partner and planning a strategy that will span television advertisement, social media, influencers, communities, and massive physical event spaces. For our stock launch, we are expecting to reach an audience of over 300,000 people before we even touch traditional paid user acquisition. We see our celebrity partners expand their own presence outside social media, from launching pet food brands, physical products, and clothing lines, embracing shows, and so on. IT partners are more interested than ever to tie in and market all their initiatives across channels. With our announced Squishmallows launch in 2024, you will see a game QR code on every toy. With another partner, we will have trailers playing at every physical event. With a third unannounced celebrity partner, we will be on the packaging of their physical products. We're looking forward to continuing innovative approaches to grow the next wave of our IT games. Back to you, Jason.

Thanks, guys. In Q3 of 2022, we made a promise to investors to focus on EBITDA over top-line growth. We have very much delivered on that promise with three consecutive $2.5 million quarters. We have grown our margin to over 11% and plan to continue that focus and increase that margin further. Thank you for your time today, and we will now open it up to questions from the analysts.