East Side Games Group Inc. (EAGR) Earnings Call Transcript

Good afternoon, ladies and gentlemen, and welcome to the East Side Games Group Second Quarter 2026 Earnings Conference Call. [Operator Instructions] This call is being recorded on Thursday, August 13, 2026. I would now like to turn the conference over to Jason Bailey, CEO of East Side Games Group. Please go ahead.

Welcome, everyone, to the East Side Games Group Q2 2026 Earnings Call. I'm Jason Bailey, Board Chair and CEO of East Side Games Group. Today, we will share highlights from the second quarter ended June 30, 2026. 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, and please refer to our first quarter -- sorry, 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 Investors section of our website at www.eastsidegamesgroup.com under the Financial Information section. Q2 2026 was focused on improving adjusted EBITDA and maintaining disciplined cash management across the business. Throughout the quarter, we ran a significantly reduced user acquisition budget as part of a broader strategy to prioritize efficiency and preserve cash. We targeted a 30-day return on ad spend, which allows us to focus on acquiring the most profitable player cohorts while improving overall capital efficiency. At the same time, we remain very focused on cash generation and debt repayment with the goal of eliminating our bank debt. Despite the effect on top line revenue, we believe these changes have best positioned the company well for a disciplined remainder of 2026. Beginning in mid-August, we are transitioning to a new banking relationship, which gives us better access to capital, additional borrowing options, and more appropriate covenants. In conjunction with this improved relationship, we will be increasing our user acquisition spend. This wider net will give us the expanded top line and better long-term profitability. Each dollar spent will be closely measured and returned within a short- to mid-payback window. The broader -- this broader investment approach is expected to support higher revenue, while maintaining a disciplined focus on long-term profitability. In Q2, we raised $2.95 million in outside capital in order to reduce debt and manage cash flow. In Q2, we settled our lawsuit with Truly Social Games. This settlement included a $3 million -- includes $3 million worth of payments. $1 million has already been paid. The remainder will be paid over 4 payments of $500,000 every 6 months. I'll pass it over to Mr. Chan for some financial highlights.

Thank you, Jason. As mentioned, last quarter, we continued our strategic pivot towards profitability, disciplined capital allocation, and the preservation of cash with the goal of repaying our debt obligations and creating future long-term value and growth. For the second quarter, we reported revenue of $10.3 million and achieved adjusted EBITDA of $1.36 million, which is an adjusted EBITDA margin of 13.2%. On the operational side, our daily active users were at 118,872 with an ARPDAU of $0.95. More importantly, we saw our stickiness rate, the DAU over MAU ratio, increased by 22% year-over-year, reaching 29.6%, showing the strong core of users that continues to play our games every day. Throughout the quarter, we operated on a significantly reduced user acquisition spend as part of our strategy to prioritize capital efficiency. Furthermore, we took several decisive steps to strengthen our balance sheet. We completed a $2.95 million capital raise to support working capital, and we reached a settlement in our litigation with Truly Social Games, which provides us with a clear visibility on our future obligations. As mentioned, looking ahead and pending final approval, we are transitioning into a new banking relationship with a major Canadian financial institution, which will provide us with improved access to capital, significant operational flexibility, and restore compliance with our financial covenants. This financial flexibility is key to our next phase. Beginning this month, we intend to materially expand our user acquisition strategy by targeting a 60-day payback window. We are targeting profitable cohorts in our highest-margin games, measuring every dollar for a clear short- to midterm return. The goal being to maximize cash flows across the board, the broad base of our portfolio while paying down our debt. We remain focused on disciplined execution, strengthening our balance sheet, and driving sustainable, profitable growth through the remainder of 2026. I will now pass on to Jim for an update on product.

Thank you, Jason. On the product side of the business, we focused on 3 main initiatives in Q2: increasing direct-to-consumer sales, reducing platform fees, and increasing revenue through new features and A/B testing. I'm happy to report that ESG's share of revenue coming from D2C increased from 11% in Q1 to 13% in Q2. This was a result of a number of successful A/B tests we ran that tested different incentive placements and UI designs. We plan to continue to improve this revenue share in Q3 by implementing web shops, daily bonuses, and expanding the presence of D2C to more territories. We're also working to improve net revenue by aiming to be one of the first developers to successfully enroll in Google Play's Level Up program. Being accepted into the Level Up program will grant us a discount on all our platform fees for the Google Play platform in exchange for being compliant with the most up-to-date quality standards for Google Play games. In this case, they will reduce our platform fees from 30% to as low as 20% for IAP purchases and 10% on the first 1 million of revenue per game per year. This is global and will have a significant impact on the net revenue coming from our existing players as well as improve our ability to acquire new players and scale our games. This program goes into effect on October 1, 2026, and we are on track to be enrolled at launch. In terms of top-of-funnel revenue generation, we had success with a number of initiatives in A/B tests this quarter. Two examples I'd like to highlight. First, we introduced a secondary season pass into Bud Farm: Idle Tycoon, which increased revenue by 8%, while having a positive effect on engagement, which is a difficult achievement. Secondly, we increased ARPDAU by 26% in the U.S. for Cheech & Chong Bud Farm through a season pass pricing A/B test. Even better about these successes is that we can take them now and port them across to other games in our portfolio to reap the benefit across all our games. I'll pass it over to Lisa Shek for further comments.

Thank you, Jim. From an operational perspective, we continue to take meaningful steps to optimize our cost structure and run the business as efficiently as possible. We remain focused on maintaining a lean organization, carefully managing operating expenses, and ensuring that our resources are aligned with the titles and activities that generate the greatest value. We continue to look for opportunities to leverage shared capabilities across the portfolio, improve how we operate, and use technology and AI to increase productivity without adding unnecessary cost. We are continuing to work closely with our external partners to improve the economics of our portfolio and ensure that each title has a clear path to profitability. We're taking a disciplined approach to partner spend and agreements, evaluating where costs can be reduced or structures can be improved, while maintaining the quality of our games and player experiences. Together, these efforts are helping us build a structurally leaner business with greater visibility into title-level profitability and a stronger foundation for sustainable cash generation. Back to you, Jason.