Update

Equity Research 18 December 2019

Toadman Interactive

Sector: Gaming A fairy tale transformation FAIR VALUE RANGE

BEAR BASE BULL Redeye initiates coverage of Toadman Interactive, a one-stop-shop for the entire gaming value chain. Our positive stance reflects management’s untypical focus on cash flow 16.0 26.0 34.0

generation alongside game development, enabling it to fund a pipeline of new releases and TOAD.ST VERSUS OMXS30FAIR

increasing the likelihood of blockbuster commercial successes. VALUE RANGE TOAD.ST VERSUS OMXS30

Many shots at goal OMXS 30

Toadman Interactive Toadman differs from the usual volatile gaming model, which depends heavily on how 25

individual releases perform. It is able to put stable cash flow from work-for-hire/financed TOA20 D.ST VERSUS OMXS30 REDEYE RATING projects, as well as its marketing consultancy (Petrol) and publishing business (Sold Out), 15 to work in game development projects that could produce significant returns. This 10 structure increases its ‘shots at goal’ and lowers individual title risk usefully, and also 5 increases the likelihood of a commercial success. REDEYE RATING TOA0 D.ST VERSUS OMXS30 Active M&A agenda 04-feb 05-maj 03-aug 01-nov

The company has a bond framework of SEK 500m, of which SEK 220m has been utilized. It REDEYE RATING is clear that we will see more acquisitions, most likely to fill gaps in the value-chain where TOAD.ST VERSUS OMXS30FAIR REDEYE RATING Toadman is not present today or dig deeper in the “legs” they currently have operations in. VALUE RANGE

By expanding in the value-chain, we also find that the strength of Toadman will increase. 4 3 Entrepreneurial lead owner operator 2 TOA D.ST VERSUS OMXS30FAIR The company’s ownership structure is a clear positive for external shareholders. As VALUEPeople RANGE Business Financials management, the board and other key employees own about 58% of the capital, Toadman ’s leadership is highly incentivized to maximize returns. We genuinely prefer what REDEYE RATING we call “Owner Operators”, namely a management team that owns a substantial stake of REDEYE RATING

the company. “Skin in the game” is a key part of Toadman’s acquisition strategy. TOA D.ST VERSUS OMXS30

KEY STATS C ompany transformation justifies revaluation People Business Financials Ticker TOAD.ST We believe the market is yet to fully grasp the transformation Toadman has undergone, TOAMarketD.ST VERSUS OMXS30 which, in our view, leads to an attractive valuation of the company. Our Base-case, based REDEYE RATING Share Price (SEK ) 19.4 on a DCF, amounts to 26 SEK per share, about 35% above market levels. We find robust Market Cap (MSEK) 607 support for our Base-case from both fair valuation multiples and a SOTP (Sum-Of-The- REDEYE RATING People Business Financials Parts). Our valuation range amounts to 16-34 SEK per share, which implies that we see a REDEYENet Debt RATING 19E (MSEK ) 172

limited downside in the stock thanks to the stability of Toadman’s cash flow generating TOA FreeD.ST Float VERSUS OMXS30 42 % capabilities but still significant potential. Avg. daily volume (‘000) 1 00

TOAD.ST VERSUS OMXS30 KEY FINANCIALS (SEK) 2017 2018 2019E 2020E 2021E 2022E People Business Financials

Net sales 11 73 160 552 703 723 REDEYEANALYSTS RATING

EBITDA 1 6 31 79 129 127 Kristoffer Lindström REDEYE RATING EBITA 1 6 30 76 118 114 [email protected] RATING EPS (adj.) 2017 2018 2019E 2020E 2021E 2022E EPS (adj.) 0.0 0.3 -0.5 -1.0 0.3 0.4 Tomas Otterbeck A fairy tale transformation EV/Sales 0.0 2.1 5.4 1.6 1.2 1.2 People Business Financials [email protected] EV/EBITDARedeye initiate coverage0.0 of Toadman24.4 Interactive,27.3 a one-stop10.9 shop for6.7 the entire6 gaming.8 EV/EBITvalueA chain. Our positive0.0 stance reflects27.1 management29.0 ’s 11.3untypical focus7.3 on cash21.6 flow

P/Egenerati on alongside game0.0 development43.0 , enablingn.m. it to fundn.m. a pipeline76.2 of new release51.4 s and REDEYE RATING increasing the likelihood of blockbuster commercial successes. REDEYEPeople RATING Business Financials Many shots at goal REDEYE RATING ToadmanImportant differs information: from the Allusual information volatile regarding gaming limitation model, of liability which and potential depends conflicts heavily of interest on canhow be found at theTOA endD.ST of the VERSUS report OMXS30 individual releaseRedeye,s perform Mäster. SamuelsgatanIt is able to 42, put 10tr, stable Box 7141, cash 103 87 flow Stockholm. from Tel.work +46- 8for-545-hire/financed 013 30, E-post: info@redeye. se projects, as well as its marketing consultancy (Petrol) and publishing business (Sold Out), to work in game development projects that could produce significant returns. This People Business Financials

structure increases its ‘shots at goal’ and lowers individual title risk usefully, and also REDEYE RATING REDEYE Equity Research Toadman Interactive 18 December 2019

Investment Thesis

Toadman has transformed itself from a small gaming studio focused on work-for-hire to a presence across almost the whole gaming value chain. The company’s acquisitions have taken it from annual EBITA of SEK 7-10m to SEK 70m in 2020 (our forecast). In our view, management is building a highly attractive operation with a clear focus on cash flow generation in combination with game development’s significant return potential. We believe the market is yet to understand the “new” Toadman fully. The lack of understanding of the transformation Toadman has undergone is indicated by the attractive valuation of the company.

Stable cash flow gives many shots at goal

Gaming is a volatile business where success depends on how well games releases perform. Toadman differs from most listed gaming companies by its stable cash flow from work-for- hire/financed projects, marketing consultancy (Petrol) and publishing (Sold Out). This is then reinvested into game development projects that could produce significant returns. Assessing games’ potential success before launch is almost impossible, but Toadman’s strong financials enable it to manage title risk as its future does not depend on any single title. This structure gives it the ability to take many ‘shots at goal’ and increases the likelihood of a commercial success.

Marketing expertise in-house

Petrol’s services are highly sought after in gaming with over 50 clients including projects like ‘Call of Duty’, the highest grossing game series on console. This world-class marketing expertise gives Toadman a valuable asset and advantage over many peers that should boost its prospects of successful releases – as well as lowering its marketing costs. Petrol generates annual revenues of SEK 179m with an expected 3-year CAGR of 7% and EBITDA margin of 14-15%.

Partnership with leader

Toadman has stable cash flow and revenue thanks mainly to Petrol, but also its consultancy- focused game development revenue model. An example is the major ‘Osiris’ project with China’s Leyou, the owner of ‘’ - one of the most successful free-to-play shooters of recent years. Toadman has an 20% royalty of gross sales on top of work for hire revenues. If the game is released, Toadman should see significant revenues.

Skin in the game

58% of Toadman is owned by management, the board and other key employees, which shows that its leadership is highly incentivized to generate shareholder returns; we find this as undoubtedly positive. We genuinely prefer what we call “Owner Operators”, namely a management team that owns a substantial stake of the company. We regard Robin Flodin, founder and CEO, as crucial for Toadman’s future success. He is the largest shareholder with over 12% of the capital. , the renowned Swedish gaming studio, is both an owner and a close partner on work-for-hire deals. See Appendix 1 for Ownership and board.

M&A across the value chain

Toadman has an active M&A agenda with the aim of expanding across the gaming value chain. The company has used SEK 220m of its SEK 500m bond program. With an underlying pro forma EBITDA of some SEK 50m following the acquisition of Sold Out, there is still significant room to increase leverage. It is clear that we will see more acquisitions to strengthen Toadman, either by filling current gaps or reinforcing current business areas. So far Toadman has conducted five acquisitions, from a list of about 150 prospects. Targets can be divided into three buckets (though they often fit into more than one):

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• Strategic acquisitions – entering new parts of the value chain or strengthening existing areas • Fairly priced quality – companies that management admires seeking a move into the Toadman group • Cheap opportunities – Examples include acquiring Tangentix (GameSessions) for GBP 50k, when GBP 6m had been invested in the platform.

Toadman focuses on not overpaying for companies and has historically paid an EV/EBIT multiple of about 6x for their acquisitions. Compared to standard gaming valuations, this is low. Toadman has strengthened its M&A team significantly during 2019. We view the recruitment of COO Christopher Bergstresser as key in this.

Value drivers ahead We identify several potential medium-term catalysts for the share: • Increased investor awareness – We believe the market's understanding of the "new" Toadman is low. As time goes by and the company produces stable quarterly updates, we believe that the recognition and valuation of the company will increase. • Osiris announcement – The most imminent catalyst is more information about the Osiris project. Toadman has a 20% royalty of gross sales, but the project’s future is still unclear. If the game is released, it could generate significant revenues and a high return on investment. Due to the uncertainty, however, we apply a 70% discount to our forecast lifetime income. • New Fatshark deal – In July Toadman signed a short-term work-for-hire deal with Fatshark. Extending this deal or broadening it could boost the share. • Bond refinancing or new program – We view 12% interest on the bond as too high for a company with Toadman’s high and stable cash flows. Its bond was issued prior to the acquisition of Sold Out and Petrol, which changed the business entirely. A refinancing or a new program at a lower rate is likely and would be positive. • Further M&A – Even if the current bond rate is somewhat hampering, Toadman has an active M&A agenda. New deals should trigger the share positively. • Game reveals and trailers – Toadman’s most significant upside comes from releasing its own games, which will happen in 2021 and 2022. Reveals, announcements and new content should lift expectations ahead of the releases and act as potential value catalysts.

Counter-arguments

Investors should also consider the following counter-arguments to our case: • Title risk – Although Toadman has sought to build a broad portfolio of games, it nonetheless faces title risk (particularly on larger projects) like all of its gaming peers. Disappointing releases could dampen investors’ enthusiasm and hurt the company’s financials. Nonetheless, Toadman is protected by more stable cash flow than other small gaming companies thanks to its consulting, marketing agency and game publishing arms. • Somewhat unproven M&A strategy – Growing through acquisitions always involves the risk that targets fail to add shareholder value (particularly measured against the 12% interest rate of its bond program). As Toadman is a rather young company, it’s still too early to judge all of its acquisitions – especially the most recent. Investors should focus on tracking their performance during the coming years to judge management’s capacity to add value through M&A. • K3 and M&A is a bad match – Despite it not affecting cash flow, K3 accounting is a bad fit for a company conducting a lot of M&A. As reported profits will be artificially low compared to underlying earnings power, this can impact valuation and market perceptions of the company.

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Share performance Below is a summary of key events and Toadman’s share performance since its listing on NGM in December 2017 (note that the share has traded on Nasdaq First North since February 2019). The bumpy road is mainly due to investors’ unrealistic expectations, as well as the Immortal Unchained release. Today’s Toadman is much more mature and stable than when it listed. Even so, it still offers the high potential of a commercially successful game.

Toadman Interactive share price performance and key events

40.0 Aug-18 Aug-18 Project I.G.I Market expectations for collaboration Immortal Unchained reached 35.0 with Petrol unreasonable heights Nov-19 announced Acquisition of Sold Out 30.0 Jun-18 Sept-18 Acquisition of Immortal Unchained released Feb-19 Artplant on PC, PS4 and . 7th Announcement of three Sept'19 significant game deals; 25.0 Osiris, Block N Load, and Feb-18 Project I.G.I. 3 Immortal Unchained Dec-18 trailer released Signed agreement with Leyou 20.0 for project Osiris & term sheet for Lord Of The Rings

SEK pershare SEK valued at USD 2m

15.0

Jun-19 10.0 Acquisition of Petrol, Antimatter & bond Oct-18 issue May-18 Leter of intent with Leyou for Feb-19 5.0 Immortal Unchained project Osiris, value USD 8m Starts trading on launch date set to Nasdaq First North Sept'18

0.0 Dec-17 Mar-18 Jun-18 Sep-18 Dec-18 Mar-19 Jun-19 Sep-19

Toadman Interactive OMX Technology PI

Source: Bloomberg & Redeye Research

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Index

Company overview ...... 6 Business model ...... 7 Business segments ...... 8 Strategy ...... 10 Projects, and pipeline ...... 14 Financials ...... 18 Petrol ...... 18 Toadman Core ...... 20 Sold Out ...... 22 Group estimates ...... 23 Valuation ...... 24 A) Gaming benchmark & valuation multiples...... 25 B) DCF – Valuation range ...... 26 C) SOTP ...... 27 Appendix 1: Management, board and ownership ...... 28 Management ...... 28 Board of directors ...... 28 Ownership ...... 29 Appendix 2: The gaming market ...... 30 Appendix 3: Petrol synergies...... 35 Summary Redeye Rating ...... 36

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Company overview

Toadman Interactive is a Swedish company Game active within the gaming industry. It originated as 10% development a game development company within console 30% Work-for-hire gaming specialized in first-person action/RPG game. After two major acquisitions in 2019 Toadman has operations within marketing 40% Marketing (Petrol), game publishing (Sold Out) and game 20% development (Toadman Core). The company was Publishing founded in 2013 and has grown rapidly to now employ roughly 195 people spread out in Stockholm, Los Angeles, Oslo, Berlin, Penryn (England) and Tver (Russia). The history of the company is as follows:

2013 • Founded by Robin Flodin and Rasmus Davidsson. Initially, the company operated as consultants who primarily helped games that, in some capacity was going the wrong direction and needed outside help 2014 • Entered into a partnership with the prominent Swedish gaming developer Fatshark to develop Warhammer: Vermintide 2015 • The company started developing its first own game and stopped operating as only consultants helping other developers 2017 • A cooperation was initiated with the Chinese company Leyou, and USD 5 m was given to Toadman for development of the game Osiris. This led to the company also starting an office in Berlin due to the increased workload • Listed on NGM Nordic MTF 2018 • The company also deepened its collaboration with Leyou and was given another 8 MUSD for the development of Osiris. By this time, 50 of the 85 employees at Toadman were working on Osiris • Acquired the Norwegian gaming studios Artplant A/S for approximately NOK 1m + earn-out of 0.465 million Toadman shares • Initiated a rights issue of SEK 3m • Toadman launches the game Immortal: Unchained • Acquiring the small consulting company Diskett interactive AB for SEK 0.14m 2019 • The stock begins to trade on Nasdaq First North Growth Market • Signs deal for the development of the shooting franchise Block n Load • Starting development of Civilization for Leyou • Rights issue of SEK 21m • Todman acquired the marketing company Petrol for USD 18m + potential earn-out of USD 5m and thereby increased the size of the company rapidly to 180 people • Acquired British game studio Antimatter for GBP 0.13km • Acquisition of the digital platform GameSessions for GBP 50k • Acquisition of the gamer publisher Sold Out for GBP 16m, with an additional potential earn-out of GBP 5.2m

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Business model Toadman has (or will have) six types of income streams within their three business segments namely the core-business, marketing (Petrol), and game publishing (Sold Out), all with different types of profitability and volatility;

Toadman Core Petrol Sold Out

Sales

Sales Sales

Time Time Time

Toadman Interactive Group Sales

Time

• Petrol: Consulting income based on marketing projects. Low but stable profitability, low scalability – Petrol’s primary area of marketing business is within gaming, but they are also active in tech and sports. They have had very renowned clients such as , UFC, and Netflix. Petrol is actually by far the most significant source of revenue today for the company (71% of total revenue on a proforma basis) • Toadman Work-for-hire: Consulting income. Low but stable profitability, low scalability - In the consulting business, Toadman is hired to do specific tasks for another company. How much of the final game that Toadman has been involved in can vary substantially. In this category, Toadman has, for example, helped with the making of and Warhammer: Vermintide. • Toadman Projects; Milestone income combined with royalties - The revenue from financed projects most often come in milestones payments based on the development of the gaming projects of the contract. Toadman most usually has some royalty agreement on a revenue level when the games are launched. Project Osiris from Leyou is an excellent example of this. • Toadman Games; income from sold games - Toadman also finances and develop their own games from start to finish, as a traditional game developer. Currently, Toadman has many games in development, but none in the market. (Immortal Unchained was a project financed game title) • Sold Out; Digital Publishing - Classic digital publishing where Sold Out invests in both production and marketing of the title. The income split obviously varies, but most often Sold Out will have a 50% share of the income after marketing recoup. The profitability of this type of income stream is most often high. Currently, there are 7 digital game investments ongoing. • Sold Out; Digital/Physical & Physical only Publishing - Dual track publishing for both digital and physical, 30% income share to Sold Out is the most common. Currently only physical publishing is the main business of Sold Out (this will change in 2020)

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Business segments

Petrol

Petrol Advertising is today the largest revenue generator in the Group. Petrol is a marketing company consisting of a team of experts in "Creative Development", "Campaign" and "Go-To-Market Strategy" as well as "Media planning / Buying" services. The company focus on the sectors: games, technology, and sports. Petrol was founded in 2003 by Alan J. Hunter and Benjamin A. Granados (now a major shareholders in Toadman). Petrol was acquired on the 4th of June 2019. The purchase price amounted to USD 18m on cash and debt-free basis, plus an additional purchase price of up to USD 5m based on Petrol’s financial results in the twelve months following the companies' merger. The upfront purchase price amounts to 6.7x Petrol’s Adjusted EBIT during 2018.

Petrol has four integrated business segments: Creative, Digital, Media, and Strategy. It has a unique market network combined with a wide range of customers across all major verticals, enabling long partnerships with industry-leading customers. From a value chain perspective, Petrol acts as an advertising agency and consultant on projects for game developers, publishers, and distributors, with clients such as Activision, Bethesda and Bandai Namco and 50+ more. Synergies created from the Petrol acquisition see Appendix 3.

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Toadman Games

Toadman Games consists of Toadman Core, Antimatter Games, and Artplant. The studios in Toadman games has a consultancy-driven focus with expertise in action-based role- playing (RPG) and First-Person Shooters (FPS). The company is headquartered in Stockholm and has six additional offices in Berlin, Oslo, Falmouth, Tver, Burbank, and Visby, with a total of 100 employees. The company was founded in 2013 by Robin Flodin and Rasmus Davidsson as a "work-for-hire" game consulting company but has since then evolved into also developing their own games.

Toadman has, as we have explained earlier, a business model with three complimentary but not competing revenue streams: "Own game titles", "Project financed game titles" and "Work- for-hire". The diversification with three revenue streams enables Toadman to reduce its overall business risk, developing and releasing games are inherently a risky business, as you never know if the game will sell well. The stable cash flow from the consultancy business enables Toadman to have many "shots on goal", as the company's future is not at stake if a game release is unsuccessful. More value chain expansion is likely in the future as Toadman actively seek to conduct more acquisition of game developers with complementary IP-rights and publishing companies.

Sold Out

The latest addition to the Group is the publisher Sold Out, acquired on the 26th of November. The purchase price amounts to GBP 16.0m, plus an additional purchase price of GBP 5.2m, on cash and debt-free basis. The game publisher has a target of producing GBP 25m in revenue during 2020 with an Adjusted EBIT of GBP 3.5m. Assuming full earn-out the EV/EBIT 2020E multiple amounts to 6.1x. The purchase price is paid through and combination of cash and shares in Toadman, the earn-out will be paid in full if Sold Out reaches GBP 3.2m in Adjusted EBIT during 2020. Following the Transaction, Garry Williams and James Cato, as owners, founders and key individuals in Sold Outs management, will each hold approximately 4.4% of the outstanding shares in Toadman.

Sold Out is a London-based publisher and distributer specializing in digital and physical publishing for console and PC formats. The company was founded in 2014 by Garry Williams and James Cato. Currently the company has 18 FTE’s providing a full-service offering to game developers seeking to bring game titles to the market with services ranging from publishing and sales to distribution and lifecycle management. Sold Out’s business model comprises of three integrated processes for bringing a game title to the market; • Digital Publishing, • Digital/Physical Publishing • Physical Publishing

Digital Publishing Digital/Physical Publishing Physical Publishing

Pipeline: 6 games (2020-2021) Pipeline: 2 games (2020-2021) Pipeline: 9 games (2020-2021) Launched: 1 game Launched: 2 game Launched: 34 game Revenue: First revenue during Revenue: 3% of revenue during Revenue: 97% of revenue during 2019/2020 FY19 FY19

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Sold Out is very strong on their physical publishing, which today is the lion part of the revenue generated. But the company is undergoing a digital transformation. As of today, Sold Out has invested GBP 2.2m in 7 games which are planned to be released in the coming two years. We expect that roughly 75% of the game investments will start to generate revenue during Q2’20 and Q3’20. No Straight Roads, expected to be released early 2020, is an Store exclusive which means that the company likely have received favorable minimum guarantees. The risks are higher, as the company has invested in the titles, but the potential pay-off is also significantly larger. The margins on digital sales where the company has invested will be many times higher than on the regular physical distribution deal.

Strategy Toadman has an acquisition agenda. The acquisition of Petrol created a solid ground to build upon. The acquisition of “Sold Out” was an important piece of the puzzle to climb in the value chain for the Group. These two acquisitions made in the last six months is currently generating approximately 85% of total revenue in the company.

However, game development is still a core business in the Group where the acquisitions of Artplant and Antimatter has strengthened the team. In 2021 and beyond Toadman’s game studios is expected to generate a significant share of the company’s profits.

In October 2019, the company also acquired the assets of Tangentix for a mere GBP 50k. The purchase gives Toadman the ownership of all Tangentixs' patents, digital rights, development technology, and domain rights for their digital publishing platform Game Sessions, a platform that roughly GBP 6m has been invested into. The acquisition of the Game session platform will enhance Toadman's digital distribution power.

Toadman now own the entire value chain. The one part that currently feels “overpowered” is the expertise in marketing which Petrol enables. We believe the publishing platform from “Sold Out” is “good enough” to build the framework upon. Publishing is therefore according to us Toadman’s strongest business area at the moment.

Game development: Hire or acquire game studios and building a game portfolio will likely be a core focus in a mid-term perspective. During the next three years Toadman plans to release a minimum of five own game titles. This goal sounds conservative according to us if the company continues its relative high acquisition frequency. We believe Toadman will continue to focus on risk management building its game portfolio of niched but proven IP- rights.

Today developers at Toadman often get assignments in its consultancy business that requires time-managed problem solving. According to Robin Flodin, this efficient game developing culture only need relatively small teams to develop the games in the current

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pipeline. We therefore do not expect the company will hire a significant number of personnel in its current development teams.

Publishing: Many game developers nowadays have started a publishing business. Except a strengthened value chain position which is positive for the overall business this means a more diversified revenue mix which appeals to investors. A lower dependency in single game launches of course lower the overall financial risk in the company.

CEO Robin Flodin thinks it is of crucial importance that the publisher/investor and the developer have an interest that is aligned. If the two parts are working towards different goals, the game will be less successful. With a history as a developer, Toadman wants to become the publisher they would choose where the developer does not only work to achieve so-called milestones but also control the overall product and get rewarded depending on the product’s reception and game sales. For example, Toadman will not fight the developer to secure the ownership of the IP.

With the recent acquisition of “Sold Out” the company has an opportunity of offering small- and mid-sized game developers an interesting business case with powerful marketing tools were interest is aligned.

Distribution: Toadman want to earn a closer contact with the end-customers and most likely obtain a better profitability excluding platform-costs. Self-owned digital distribution sounds good in theory but we can find many examples where big companies, such as EA, CD Project Red and has not managed to monetize enough on its own platforms’ recent years. The world-leading digital platform Steam is still very strong amongst costumers.

Thus far, Toadman has conducted five acquisitions, from a prospect list of about 150 companies. We find that their acquisition target strategy can be divided into three buckets, a target can often fit into more than one bucket: • Strategic acquisitions – Enter new parts of the value-chain or strengthen a leg • Great companies at a fair price – Companies run by great people that want to move into the Toadman family • Opportunities – Cheap opportunities that arise, like acquiring Tangentix (GameSessions) for GBP 50k, when GBP 6m has been invested into the platform.

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Gaming is by its nature a volatile business where the success depends on how well games that are released performs. Toadman Interactive differs from most public gaming companies as they have a stable cash flow generated from their work-for-hire/financed projects, marketing consultancy (Petrol) and publishing business (Sold Out). These cash-flows is then reinvested into Toadman game development projects, which could produce significant returns. Toadman model can be summarized as the following:

7. Leads to further 1. Diversified growth of revenue the Group

6. Cash flow can be 2. Reduced business reinvested into high risk and higher potential game projects cahsflows

5. Leads to even 3. Stabillity in cash flows lead lower business to levreage capabilites and risks and more higher valuation cash flow 4. Capital injections can be used for more acquisitons

Acquisitions and prices paid

Toadman continues to stay disciplined in-terms of how much they are willing to pay for their acquisition targets. For the four purchase the EV/EBIT multiples have ranged from roughly 6x. The Anitmatter acquisition is a little special as it was acquired at a negative EV-value, meaning that the cash that Toadman received was larger than the purchase price they paid. A sound price policy is most often the cornerstone of any successful acquisition strategy, and it’s clear to us that Toadman will continue to keep acquisition multiples as low as possible. We have excluded the small Diskett acquisition from the list.

Toadman acquistions Purchase Earn-out EV EV (mn) + TTM NTM TTM NTM Target Date Currency price (mn) (mn) (mn) earn-out EV/S EV/EBIT EV/S EV/EBIT Sales EBIT Sales EBIT* Artplant 2018-06-28 NOK 1.0 7.8 1.0 8.8 0.1x 0.7x 11.1 1.4 Petrol 2019-06-04 USD 18.0 5.0 18.0 23.0 1.0x 6.7x 6.6x 18.5 2.7 3.5 Antimatter 2019-06-18 GBP 0.1 0.1 -0.2 1.2 0.3 Tangentix 2019-10-15 GBP 0.1 0.1 Sold Out 2019-11-26 GBP 16.0 5.2 16.0 21.2 0.5x 6.2x 0.8x 6.1x 33.2 2.6 25.0 3.5 Source: Redeye Research *USD 3.5m for Petrol is to recieive full earn-out, not guidance

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More M&As ahead

Toadman has an active M&A agenda with the aim of expanding in the value-chain of gaming.. It is clear that we will see more acquisitions to come. With the Sold Out acquistion Toadman has a presence in most part of the value chain, we believe the company will focus on digging deeper within existing legs rather then adding a new one.

Toadman New verticals?

Game Digital Mobile Work-for-hire Marketing Publishing ? development distrubution development Physical Game tech distribution

Toadman also has a goal to offer digital distribution, which the GameSessions acquisition shows. Powered by the expertise and data from Petrol and its potential publishing arm, this would earn a closer contact with end-customer and create cost- and revenue synergies. Almost every major game publisher today offers its own digital distribution with a mixed commercial result.

Refinancing of the bond or a new framework likely

Today Toadman has a bond framework of SEK 500m, of which SEK 220m has been utilized. The bond has a 12% annual interest rate, which is high in today's interest rate environment. The bond framework was issued in conjunction with the Petrol acquisition, before the purchase of the leading marketing agency the Toadman Group had roughly SEK 8m in annual EBITA. Now, after Sold Out is consolidated, the annual EBITA will be closer to SEK 70m. The interest of the bond is not aligned with the company that Toadman is today. We find it likely that there will be a refinancing of the bond at more favorable terms or that a new framework will be issued and be used instead of the old one. Before that occur, me might have to wait before we see another large acquisition, at least if it’s mainly financed by the bond framework.

Partnerships

Toadman has a close collaboration with Leyou Technologies, a listed gaming company with a market cap of around SEK 80bn. Leyou has mainly three assets: , Splash Damage, and (publisher). Digital Extremes is the maker of one of the major western free-to-play shooters called Warframe. Its closest peer in the so- called “looter-shooter” genre is the game Destiny, a game that has an estimated USD 300m in digital revenue for 2019.

Another strong partnership Toadman have is with the renowned Swedish gaming studio Fatshark, that is both an owner and a close partner to Toadman. In July 2019, Toadman started a project as consultants for Fatshark to develop a game rendering Toadman SEK 13m in revenue.

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Projects, and pipeline

The past - Immortal disappointment We find that the “market’s” equity story of Toadman has been, wrongfully, and continues to be centred much about the failure of the game “Immortal: Unchained”. The game surely sold in the lower interval for what was expected from the management, but it is also safe to say the anticipations from investors was sky-high. Our estimates suggest that the game has sold approximately 75 000 copies. The investment was around SEK 15m.

We have played the game and have a similar verdict as critics and other users/gamers. We think the game is built upon solid ground when it comes to gameplay and game mechanics, but it fails to be a fair challenging game (like the biggest inspiration, namely the “Dark Souls series). The production values are not bad considering a SEK 15m budget, but considering the competition from other similar available games, it is poor according to us. In relation to its small budget, the game had only a minor negative financial impact. According to us, the movement in the share price before the release was decoupled from reality. At most, the share price rallied 250% before the release of Immortal; after when official sales number was inadequate, the bubble burst. We believe the bad experience for many small private shareholders has damaged the perception of the stock.

The future

Toadman’s gaming portfolio has grown substantially lately and now consists of 5 wholly- owned games that are in production. The table below is based on estimates from Toadman. The company defines a low investment as up to USD 3m, a high above USD 5m, and mid as in between. For the potential category, low corresponds to up to USD 5m, high above USD 20m, and middle in between.

Development projects IP`s owned 100 % by Toadman Genre Investment Reward potential Release Time / contract Anubis RPG Low High H2 2020- H1 2021 Block `n`Load 2 Shooter Low Mid H1 2021 - H2 "021 IGI 3 FPS Mid High H2 2021 - H1 2022 83 MMO FPS High High H2 2021 - H1 2022 Hathor RPG Low Mid H2 2021 - H1 2022

Source Redeye research Project IGI 3 (Dev: Antimatter, Partner PETROL) The first game called “Project IGI: I´m Going In” was released in 2000. The game is a copy-cat of the genre-defining cult classic “Goldeneye 007” on Nintendo 64. Released in 1997, “Goldeneye 007” was the third best-selling game on the console, with about 8 million copies sold. The game was exclusive to the Nintendo 64, a console that sold around 33 million units, which means 24% of the entire user base bought the game. The spiritual sequel to Goldeneye had a different art style and was also a Nintendo 64 exclusive.

Apparently, the developer Innerloop saw the opportunity to release a game to fill the emptiness in many gamer’s hearts. In Project IGI, you play as a spy (like James Bond), and the art style is close to identical to “Goldeneye 007”.

The gameplay was also “above average” according to leading gamecritic Gamespot. The game sold more than 100 000 copies in the UK, which means it likely sold more than 1 million worldwide.

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The game got a sequel in 2003. Both instalments were only released on PC, most likely missing a lot of the potential from probably its main target audience, console gamers. During the three years between the releases, the genre of “first-person shooters” had evolved. Unfortunately, Project IGI 2 had not followed suit. The sequel was called “a mediocre generic shooter” according to the same source (Gamespot). We believe the sequel was not close to the commercial success of the first game.

On 3 January 2017, Artplant, a video game developing studio founded by former employees of Innerloop Studios, acquired the intellectual property rights to IGI, with the publishing rights to the first two video games remaining with Square Enix (that bought all of Eidos Interactive's properties in 2009). On 29 May 2017, Artplant announced that a new game in the series is already in development and will feature "the freedom the series has become known for." Today Artplant is owned by Toadman.

Project Hathor

The game is so far only in a design stage, and any specifics about the game is therefore unknown. Toadman will receive 100 % of the revenues from the title.

Skyfighters

A game taking place in outer space and the mission is to shoot down the other players' space crafts. Toadman thinks the game will be well suited for eSport. Toadman will receive 100 % of the revenues from the game.

Block ‘n Load

A first-person shooter game in which five persons will try to destroy the other team's base. Jagex released an older version of the game in 2015, and Toadman is working on a remake. 90 % of the revenue will go to Toadman and 10 % to Jagex.

The company also has some consulting projects in which Toadman will split the revenue with another part, as can be seen in the table on the next page.

83: Antimatter Games' most significant success so far is developing “Rising Storm 2: Vietnam”. The game has sold 0.7-0.9 million copies, according to Steamspy, since its release in 2017. The game is also of high quality with a combined Metascore and user score of 80. The title also has a relative loyal fanbase with 1500-2000 active daily users.

With the game called “83” based on the cold war, Antimatter Games is trying to follow up on the success of Rising Storm. Many hardcore fans of Rising Storm will likely be interested in buying the game. But we also see two potential commercial risks.

• IP-risk- Rising Storm 2 was the sequel to a commercial and critically acclaimed game. The game “83” however, is an unknown new IP. Many customers in the gaming community will likely not be aware of fact that Antimatter was the core developer of Rising Storm 2.

• Publishing-risk- Tripwire is the publisher and co-developer of the Rising Storm- series. We believe many customers relate to Tripwire rather than Antimatter when they think of Rising Storm. Tripwire also published a similar game series called “Red Orchestra” so the publisher likely has a known brand amongst its core audience. (In

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fact, the first “Rising Storm” game was an expansion to Red Orchestra 2). The publisher of “83” is still not decided. We believe it would be a lower commercial risk if Tripwire published the game or Rising Storm’s co-publisher Iceberg Interactive.

Development projects Co-financed games (20 % of revenues) Genre Investment Reward potential Release Time / contract Osiris Co-op shooter High High TBA in Q4 2019 Publishing /50 % of revenue) West Mark Manor West Mark Manor Low Low H1 2020 Consulting projects Fatshark N/A Low Low Q3 2020 Anonymous gaming group N/A Low Low Q4 2019 or Q3 2021

Source Redeye research Osiris The Osiris is a project financed by Chinese Leyou.Toadman has been received USD 13m in development installments to complete the game, and will also receive 20 % of the future revenue.

Leyou has two major franchises in its pipeline. First, its subsidiary Athlon Games announced in September 2018 a multi-year free to play game based on “The Lord of the Rings” universe. The game will be mainly developed by Studio. The other game in the publisher’s pipeline is “Transformers Online”.

We believe the game that is developed by Toadman is a third game based on a newly created IP. This estimate is based on the fact that the investment is minor in relation to the other two projects. Toadman also bought an increased royalty in February 2019 (from 10% to 20%) with USD 1.5m in excluded milestone-payments. We assume Leyou would not give up 10% of the royalty for a small payment like that if the game were a more or less certain blockbuster. What kind of game Osiris will be is yet unknown. However, In November 2018, Leyou disclosed that they would develop a game designed as a free-to-play first-person shooter game with the same budget as Osiris. Hence, we speculate that Osiris could be a free-to-play first-person shooter game.

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Work-for-hire

Fatshark In July 2019, Toadman started a project as consultants for the game developer Fatshark to develop a game rendering Toadman SEK 13m in revenue. The payment is spread out over a year, and it is Toadmans` German studio in Berlin that will conduct the work.

Undisclosed – Leyou? One of the more significant potential projects for Toadman is with an anonymous game developer. In a first payment, Toadman will receive USD 1m by the end of 2019, and if everything goes according to plan, the project will deepen and bring Toadman another USD 15-20m over a 2-year period. Both the game and the developer are unknown. However, we speculate that it could be another project with Leyou. The current project with Osiris will end approximately when this project begins, they already have a collaboration with Leyou, and the company has communicated that it is one of the world’s leading gaming groups that will produce this FPS-game.

To summarize, the pipeline is as seen below. The most significant games in revenue for Toadman is currently Osiris, and if all goes according to plan, the new undisclosed game will lead to USD 15-20m in future milestone/consulting fees.

Toadman key releases Q4 2019-2022 Q4 - 2019 2020 2021 2022 Osiris TBA Q4 - 2019 WMM WMM Development H1 2020 Anubis Anubis Development H2 2020 - H1 2021 Block `n`Load 2 Block `n`Load 2 Development H1 2021 - H2 2021 I.G.I 3 I.G.I 3 Development H2 2021 - H1 2022 83 83 Development H2 2021 - H1 2022 Hathor Hathor Development H2 2021 - H1 2022 Fatshark consulting Q3 2020 Und. Undisclosed client Client Q4 2019 or Q3 2021

Soure: Toadman interactive Light grey = development Dark grey = release window Darkest grey = potential project

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Financials

Toadman Interactive as the Group we see today was formed in conjunction with the acquisition of Artplant in June 2018; therefore, the historical figures before that event are of limited usability in-terms of basing forecast on. The Petrol and Sold Out acquisitions also create significant changes in the income and profit levels for the Group. We expect that the company will separate Petrol, Sold Out, and Toadman Core in the coming report on the sales and profit level; therefore, we model the Group as such. We expect that the company will report net sales and EBITDA levels for those three business segments.

In conjunction with the Sold Out acquisition, Toadman disclosed historical revenue, EBITDA, and EBIT for all their business segments. Proforma on a TTM (Trailing-twelve-month) basis, the Group produces revenue of SEK 521m and an adjusted EBIT of SEK 49m. Proforma. Toadman Core, Petrol & Sold Out

700 12.0% 11.2% 600 9.9% 10.0% 9.3% 9.4% 500 8.0% 400 6.0% 300

Sales(mSEK) 4.0% 200 marginEBIT Adj. %

100 2.0%

0 0.0% FY'16 FY'17 FY'18 TTM Q3'19

Petrol Sold Out Toadman Core Adj. EBIT margin

Source: Redeye Research

Petrol Income is generated from completed projects; this is very much comparable to how a consulting firm works. The profitability is dependent on the type of pricing on the projects, the cost of the employees, and the consultant occupancy rate. The profitability for consulting firms are most often quite hard to increase and are highly depended on operating excellence. However, the business model is exceptionally asset-light and creates very stable cash flows.

We have no quarterly financial information on Petrol, but we believe the seasonality effect is somewhat limited. Gaming has a high season in Q4, but the thing affecting Petrol the most is the larger projects they sign. The EBITDA margin has fluctuated between 13-16% during the past years, we expect that the margin level is sustainable, and we do not project any more significant profitability shifts.

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Petrol financials, history and projections

250 7% CAGR

200 8% CAGR 207 191 179 171 150 164

140 146 mSEK 100

50

0 2016 2017 2018 TTM Q3'19 2019E 2020E 2021E

Petrol EBITDA

Source: Redeye Research

The CAGR has amounted to 8% during the past years; we believe that Petrol will continue to grow in a similar fashion during our forecast period driven by underlying market growth and Petrol’s strong competitive position. We expect to see margins in the region of 14-15% on an annual basis. Our quarterly projections for Petrol can be seen below.

Petrol quarterly financials

60

50 54 50 45 40

36

30 mSEK

20

10

0 Q1'19** Q2'19** Q3'19 Q4'19E

Petrol EBITDA

Source: Redeye Research **Estimate of quarterley figures, not comapny data *EBITDA Redeye estimate, not company data

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Toadman Core As discussed, earlier Toadman Core, has three types of income streams, Games, Work-For- Hire, and Projects. Today the company has no Games in the market. Currently, most of the income is generated from projects where Toadman receives milestone payments, and the upside comes through the different types of royalty agreements after the game is published.

Toadman Core income streams

80

70

60 17

50 50

40 mSEK 30 2 20 20 10 4 0 6 2016 2017 2018

Projects Work-For-Hire

Source: Toadman Interactive

Project income has shown steady growth during the past three years as Toadman has singed larger and larger projects. Most of the project income has come from milestone payments and not revenue share. Typical investment and potential revenue range look as follows for the three different kinds of revenue streams:

Games Projectes Work-For-Hire

Type of contract Milestones Consulting Investment rane SEK 30-60m SEK 30-100m SEK 0m Contracted: SEK 30-100m Revenue range SEK 10-1000m+ SEK 3-10m Rev. share: SEK 5-50m

The Games revenue range will vary greatly and are dependent on how successful the games are that comes to market, so here lies the highest potential but also most of the risk. The great thing about Toadman is that they generate significant cash flow from Petrol, Work-For- Hire, and milestone payments, which create the possibility of many “shoots” on goal within the Games area.

Toadman Core financials per quarter Q1'19 Q2'19 Q3'19 Q4'19E Net sales 15 14 17 17 OPEX -12 -9 -12 -14 EBITDA 2 5 5 3

Grow th (Q/Q) -8% 24% 2% EBITDA margin 16% 35% 30% 20% Source: Redeye Research

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The primary income generated during H1’19 comes from the Leyou project Osiris. We believe that roughly 50% of the current (by end Q3’19) FTEs at Core are working on financed projects, and Work-For-Hire (WFH), and the others focus on Toadman own games. For Q4 we expect a stable revenue performance, the increase in Q3 came from the contract, continued development of Osiris, and the new undisclosed contract.

Games

Game projects and projections (mSEK) Redeye Toadman est. Range Year 17/18 19E 20E 21E 22E 23E 24E est. Investment Low High Immortal Unchained 7 West Mark Manor 5 2 0 7 0-30 10 50 Osiris 15 5 1 21 50> 200> Anubis 30 15 5 50 0-30 200> Block'n'Load 2 20 6 2 28 0-30 50 200 IGI 3 55 17 5 76 30-50 200> 83 65 20 6 90 50> 200> Hathor 10 3 1 14 0-30 50 200 New games 60 120 180 Sum. 7 0 20 111 114 94 127 473 Source: Redeye Research

As described earlier, Toadman currently has seven game projects in development, where five are internally financed. Projecting game sales for titles where we have limited insight into the gameplay, quality, genre, and the like are, of course, extremely hard, and there is a high degree of uncertainty. In our modeling, we assume that about 70% of the lifetime revenue is generated in the first year with a decline in year two and three. The management has provided the market with an estimated range of both investments into the games, and potential revenue. When it comes to gaming, there is often a high correlation between the investment amount and the potential of the title, as the amount of time devoted to the development most often creates a higher quality product.

When there is uncertainty, the best medicine is being conservative. We assume much lower revenue from the games than Toadman’s guidance; our assumptions will likely change when the games are closer to completion, and we have more knowledge of the titles. Furthermore, we have no insight into what will happen with the Osiris project, but we assume that the game is launched and that Toadman will start to receive royalties. Based on the investment amount, we find it possible that Osiris has a high potential, close to IGI 3 and 83. But due to the uncertainty, we have reduced our assumed lifetime income by 70%. We also expect that Toadman will continue to invest and that new titles yet announced or started will come to the market in 2023 and 2024.

Long-term projections for Core

Toadman Core annual financials Year 2019E 2020E 2021E 2022E 2023E 2024E Net sales 63 89 210 200 184 221 Milestone payments & WFH 63 69 79 86 90 94 Games & royalties 0 20 131 114 94 127 OPEX -47 -72 -152 -147 -137 -163 EBITDA 16 17 58 53 46 59

Grow th Y/Y 42% 137% -5% -8% 20% EBITDA margin 25% 20% 27% 26% 25% 26% Source: Redeye Research

Overall, we expect that the milestones payments from projects and Work-For-Hire (WFH) to show stable growth during the coming years.

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As there is a lot of uncertainty if the large project with the unnamed Chinese game developer is initiated or not, we assume a hefty discount to the communicated revenue levels. We believe that the core-business can reach EBITDA margins in the region of 20-30% when more income is generated from their own games and royalties from financed projects. We expect that 2021 will be the year when the revenue jumps to a new level due to the new game releases, and then we model a relatively flat development during 2022-2023.

Sold Out During the past twelve months, Sold Out produced SEK 270m in revenue with an EBITDA margin of 5%. The drop-in margin compared to the previous years is an effect of the release schedule, as there have not been any new game releases during Q3’19. Eight major releases are planned during the coming two quarters.

Sold Out financials, history and projections

450 Overperformingrelease of Jurassic World 14% and Overcooked 2 generated 400 SEK 168m in revenue 12% 390 350 10% 300 318 297 8% 250 270 233 mSEK 200 229 6% 201 150 4% EBITDA %margin 100 2% 50

0 0% FY16/17 FY17/18 FY18/19 TTM Q3'19 2019E 2021E 2022E

Game releases 17 11 5 7 7

Pipeline Revenue EBITDA margin

Source: Redeye Research

Toadman has communicated a goal for Sold Out of GBP 25m in net sales and an Adjusted EBIT of GBP 3.5m during 2020. We find the target as probable but chooses to be slightly more conservative. The current pipeline consists of 17 games, of which 6 are digital publishing deals were Sold Out has invested. We expect that roughly 75% of the game investments will start to generate revenue during Q2’20 and Q3’20. No Straight Roads, expected to be released early 2020, is an EPIC Games Store exclusive which means that the company likely have received favorable minimum guarantees. The rise in margins is an effect from an increased digital share of the revenue mix. In a long-term perspective, we expect to see increasing margins as the focus on digital publishing continues to grow. FY’18/19 was a type of outlier year as the massive uptake in revenue was fueled by very successful releases of Jurassic World and Overcooked 2.

Sold Out annual financials Year 2017 2018 2019E 2020E 2021E 2022E Net sales 233 390 229 297 318 337 OPEX -208 -360 -206 -264 -280 -296 EBITDA 25 30 23 33 38 40

Grow th Y/Y 67% -41% 30% 7% 6% EBITDA margin 11% 8% 10% 11% 12% 12% Source: Redeye Research

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Toadman Group annual financials Year 2018 2019-Q1 2019-Q2 2019-Q3 2019-Q4E 2019E 2020E 2021E 2022E 2023E 2024E Net sales 73 14.8 13.6 66.5 64.9 160 552 703 723 734 802 OPEX -67 -12.5 -8.8 -53.1 -53.9 -128 -473 -576 -597 -607 -658 EBITDA 6 2.4 4.8 13.3 11.0 31 79 127 126 127 144 Depreciation -1 -0.6 -0.4 -0.4 -0.5 -2 -3 -9 -13 -15 -17 EBITA 6 1.8 4.4 13.0 10.4 30 76 118 114 111 126 Amortization 0 0.0 0.0 -11.0 -17.3 -28 -80 -80 -80 -80 -80 EBIT 6 1.8 4.4 2.0 -6.8 1 -4 38 34 31 46

Grow th Y/Y 119% 246% 27% 3% 2% 9% EBITDA margin 9% 16% 35% 20% 17% 20% 14% 18% 17% 17% 18% EBITA margin 8% 12% 33% 19% 16% 19% 14% 17% 16% 15% 16% EBIT margin 8% 12% 33% 3% -11% 1% -1% 5% 5% 4% 6%

Source: Redeye Research

The CAGR between FY’16/17 and the TTM figures by Q3’19 amounts to roughly 10%, we find it plausible to sustain that type of growth in the coming years as well. We expect to see a substantial increase in revenue during 2020 fueled by the current pipeline, and the low game release activity within Sold Out during H2’19.

Group estimates The table above summarizes our projections for the Group as a whole. There will be a sharp increase in both revenues and earnings following Petrol, Antimatter, and Sold Out acquisitions. We expect that Sold Out will be consolidated from Q1’20, so it does not affect our projections for the next quarter. We want to highlight that because Toadman follows the K3 accounting standards, there will be a significant increase in amortization following the acquisitions. The intangibles, roughly SEK 400m, will be amortized linear during the coming five years, which means about SEK 80m per year. We, therefore, suggest investors to judge Toadman on EBITA instead of EBIT as it’s more comparable to IFRS accounting, which most gaming companies follow.

Toadman Interactive, Group estimates

900 20% 19% 800 18% 17% 16% 16% 700 16% 15% 14% 600 14% 12% 500 10% 400 802 8% 703 723 734 8%

Sales(mSEK) 300 552 6% marginEBITA % 200 4%

100 160 2% 73 0 0% 2018 2019E 2020E 2021E 2022E 2023E 2024E

Net sales EBITA margin

Source: Redeye Research

Long-term, we expect the Group to reach EBITA levels in the region of 15-18%. In a few years, the highly profitable gaming revenue will stand for a much larger part of the income mix, and therefore the margins will likely increase. Still, we keep our margin assumptions rather conservative.

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Valuation

Valuation conclusion

We believe the market is yet to understand the “new” Toadman fully. The company differs in risk characteristics from most gaming companies as two of its product segments are rather stable with high cash flows, and the third holds huge potential if a game reaches commercial success. The lack of understanding of the transformation Toadman has undergone shows in the current market valuation. Our Base-case valuation, based on a DCF, amounts to 26 SEK per share, about 35% above market levels. We find robust support for our Base-case from both fair valuation multiples and a SOTP (Sum-Of-The-Parts). Our valuation range amounts to 16-34 SEK per share, which implies that we see a limited downside in the stock thanks to the stability of Toadman’s cash flow generating capabilities.

Valuation, share pr ice (SEK)

Today’s share price 19

EV/Sales 20 25 31 Multiple A valuation EV/EBITDA 21 23 26

B DCF – Fair value range 16 26 34

C SOTP 25

Key catalysts and value-drivers ahead

• Increased investor awareness – We believe the market's understanding of the "new" Toadman is low. As time goes by and the company produces stable quarterly updates, we believe that the recognition and valuation of the company will increase. • Osiris announcement – The most imminent catalyst is more information about the Osiris project. Toadman has a 20% royalty of gross sales, but the project’s future is still unclear. If the game is released, it could generate significant revenues and a high return on investment. Due to the uncertainty, however, we apply a 70% discount to our forecast lifetime income. • New Fatshark deal – In July Toadman signed a short-term work-for-hire deal with Fatshark. Extending this deal or broadening it could boost the share. • Bond refinancing or new program – We view 12% interest rate on the bond as too high for a company with Toadman’s high and stable cash flows. Its bond was issued prior to the acquisition of Sold Out and Petrol, which changed the business entirely. A refinancing or a new program at a lower rate is likely and would be positive. • Further M&A – Even if the current bond rate is somewhat hampering, Toadman has an active M&A agenda. New deals should trigger the share positively. • Game reveals and trailers – Toadman’s most significant upside comes from releasing its own games, which will happen in 2021 and 2022. Reveals, announcements and new content should lift expectations ahead of the releases and act as potential value catalysts.

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A) Gaming benchmark & valuation multiples

Gaming company benchmark Comment – Sales CAGR Sales CAGR 19-21E 50% • Growth is a key driver of 40% value, agg. Is the

30% aggregated level of the 21E - 47% whole peer group 20% 30% • Toadman is expected to 10% CAGR 19CAGR 20% 16% 15% 13% show top percentile 10% 8% 8% 7% 0% 4% -2% -4% growth from proforma ALFOC FDEV TOAD* PDX SUMO Agg. KWS EMBRAC CDM TM REMEDY DIB -10% LTM’Q3 during the next years Comment – EBITDA CAGR EBITDA CAGR 19-21E • Our projections are 100% • Where Toadman conservative, and we find outshines most is the 80% it clearly possible to

expected EBITDA growth 60% outperform on our 21E during the coming years - expectations 40% 78% (from proforma LTM 56%

20% 40% CAGR 19CAGR levels) 26% 25% 17% 17% 16% 12% 9% 7% • We use EBITDA instead 0% -6% FUNCOM TOAD* FDEV PDX CDM KWS Agg. SUMO EMBRAC ALFOC TM DIB REMEDY-14% of EBIT due to Toadmans -20% K3 accounting, which Comment – EBITDA-m also makes ROIC EBITDA margin 2020E comparison hard. 60% • EBITDA margin for 50% • Strong EBITDA growth Toadman is lower than should warrant above 40% most peers, but also avg. multiples 30% 51% much more stable and 20% 35% 33% 32% less risky thanks to EBITDA EBITDA margin 27% 10% 24% 24% 23% 20% 16% 14% Petrol and Sold Out 12% 9% 0% PDX EMBRAC FUNCOM TM Agg. CDM FDEV SUMO REMEDY KWS TOAD* DIB ALFOC • There is excellent leverage in Toadman’s Comment – EV/Sales EV/Sales 2020E business as games 8.0x • As Toadman has EBITDA released during 2021 and 7.0x 2022 might create an margins in the lower 6.0x explosive rise in margins region of the peer Group 5.0x thus, the EV/Sales 4.0x 7.3x 6.6x valuation follows suite. EV/Sales 3.0x We see multiples on 2.0x 3.4x 2.9x 2.9x 2.9x 2.7x 2.4x 2.4x 2020E of 1.8x-2.2x as fair 1.0x 2.0x 1.6x 0.8x 0.7x 0.0x • The markets risk PDX EMBRAC FUNCOM TM Agg. CDM FDEV SUMO REMEDY KWS TOAD* DIB ALFOC assessment of Toadman Comment – EV/EBITDA will likely decrease as the EV/EBITDA 2020E 25.0x actual figures of the • Toadman is valued close “new” Group is reported 20.0x to aggregated levels of 11x during the coming 2020E EBITDA, despite 4x 15.0x quarters expected EBITDA growth

10.0x 20.4x compared to aggregated EV/EBITDA 14.4x 14.4x 14.3x 12.2x 12.1x levels 5.0x 11.1x 11.0x 10.9x 8.6x 8.3x 6.9x 5.9x • We believe that the coming 0.0x TM KWS SUMO PDX REMEDY FDEV CDM Agg. TOAD* ALFOC EMBRAC DIB FUNCOM EBITDA growth should be valued higher and that the

Source: Bloomberg, Redeye Research market should put more *Toadman Sales and EBITDA CAGR is calcualted from LTM'Q3 proforma levels. premium on Toadman’s Conclusion valuation multiples ability to conduct value- adding M&A. The EV/EBITDA approach uses a low multiple of 11.5x and a high multiple of • We believe that EBITDA 13.5x. The assumption generates an EV range of SEK 905-1062m, with a 2020E multiples in the mean value of SEK 984m, implying a share price of 24 SEK. region of 11.5-13x are fair

In the EV/Sales method we use a low multiple of 1.6x and a high multiple of 2.2x. The EV range amounts to SEK 883-1215m. The range is wider than the EV/EBITDA approach as the multiple expansion is more significant when the absolute level of the multiple is lower. The middle value implies a share price of 27 SEK.

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B) DCF – Valuation range Toadman Interactive: Base-case Assumptions 2020-28 DCF-value Base-case – 26 SEK CAGR Sales 8% WACC 12.0% EBITA margin (avg) 17% Net presenst value FCF 515 Key model assumptions: ROIC (avg) 10% Net present value of Terminal 547

• CAGR sales ’20-28: 31% Terminal EV 1 063 Terminal growth FCF 2.0% Net debt -144 • EBITA margin: 17% Terminal EBITA margin 20% Provisions -113 Exit EV/EBITA multiple 7x Value minorities 0 • Terminal FCF growth: 2% DCF-value 805 • Terminal EBITA margin: 20% Estimated Fair value 26 Todays share price 19 • WACC 12% Potential/Risk 34% Source: Redeye Research Our Base-case assumes an uptake within Games with good to decent returns on game investments, but no blockbuster success. Furthermore, we presume market growth within both Petrol and Sold Out, but that Sold Out shows increasing margins thanks to increased digital sales. Our forecast does not include any further M&A. We have included the provisions in our debt calculation recorded on the balance sheet as these are likely pay-outs of future earn-outs. Our Base-case amounts to 26 SEK per share, or about 34% above current price levels.

Bear-case – 16 SEK

Key model assumptions: • CAGR sales ’20-28: 5% • EBITA margin: 15% • Terminal FCF growth: 2% • Terminal EBITA margin: 20% • WACC 12%

In our Bear-case, we take a much more pessimistic approach and model less success for Toadman Core’s own games, which also affect the margin levels of the Group. Thanks to the stability of Petrol and Sold Out, we do not assume any more significant margins fluctuations. Our Bear-case amounts to 16 SEK per share, thus we see a somewhat limited down-side from today’s share price levels.

Bull-case – 34 SEK

Key model assumptions: • CAGR sales ’20-28: 11% • EBITA margin: 19% • Terminal FCF growth: 2% • Terminal EBITA margin: 21% • WACC 12%

Our Bull-case assumes much greater success within Games for Toadman Core and also for Sold Out’s digital publishing. The progress within the product segments leads to high growth during the forecast period with expanding margins. We value Toadman in our Bull-case to 34 SEK per share or potential of 77%.

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C) SOTP Toadman consists of three different “legs,” a SOTP (Sum-Of-The-Parts) is a handy way to value the business. The SOTP uses the approach of applying different valuation multiples to the EBITDA level of Toadman’s subsidiaries and then adding those together.

Peer table SALES EV/Sales EV/EBITDA EBITDA margin CAGR Company EV (MSEK) 2019E 2020E 2021E 2019E 2020E 2021E 18-21E 2019E 2020E 2021E Gaming Embracer Group 20 606 3.0x 2.9x 2.6x 9.6x 8.3x 7.7x 27% 31% 35% 34% Paradox Interactive 14 614 8.3x 7.3x 6.3x 19.1x 14.3x 12.1x 26% 44% 51% 52% Group 5 376 7.1x 6.6x 6.6x 21.6x 20.4x 18.8x 16% 33% 32% 35% Frontier Development 5 487 4.5x 2.9x 3.1x 16.2x 12.1x 8.2x 58% 28% 24% 38% Codemasters 4 818 2.9x 2.7x 2.6x 16.7x 11.1x 10.7x 25% 18% 24% 24% Digital Bros 2 052 1.0x 0.8x 1.1x 6.9x 6.9x 7.9x 28% 14% 12% 14% Focus Home Interactive 1 073 1.0x 0.7x 0.6x 7.2x 8.6x 6.0x 25% 14% 9% 10% Funcom 873 3.6x 2.0x 1.7x 9.3x 5.9x 2.9x 30% 39% 33% 57% Remedy 1 206 2.9x 2.4x 3.0x 8.1x 12.2x 10.9x 18% 35% 20% 27% Low (25th perc.) 1 140 1.9x 1.4x 1.4x 8x 8x 7x 22% 16% 16% 19% Median 4 818 3.0x 2.7x 2.6x 10x 11x 8x 26% 31% 24% 34% High (75th perc.) 10 051 5.8x 4.7x 4.7x 18x 13x 12x 29% 37% 34% 45% IT/Media/Gaming services Keywords Studios 9 733 2.6x 2.4x 2.6x 17.3x 14.4x 12.6x 13% 15% 16% 21% Next Fifteen Communications 6 054 1.8x 1.7x 1.6x 9.1x 8.2x 7.5x 19% 19% 21% 22% Know IT 3 708 1.0x 1.0x 0.9x 9.3x 8.5x 7.9x 10% 11% 12% 11% Sumo Digital 2 915 3.8x 3.4x 3.0x 16.8x 14.4x 12.6x 29% 23% 23% 24% HiQ International 2 764 1.4x 1.4x 1.3x 10.0x 10.0x 9.4x 6% 14% 14% 13% Mission Group 1 029 0.9x 0.9x 0.9x 6.7x 6.1x 5.7x -14% 14% 15% 16% B3 489 0.6x 0.6x 0.5x 8.9x 7.9x 6.8x 8% 7% 7% 8% Low (25th perc.) 1 029 0.9x 0.9x 0.9x 9x 8x 7x 6% 11% 12% 11% Median 2 915 1.4x 1.4x 1.3x 9x 8x 8x 10% 14% 15% 16% High (75th perc.) 6 054 2.6x 2.4x 2.6x 17x 14x 13x 19% 19% 21% 22% Toadman Interactive 860 5.4x 1.5x 1.2x 27x 9x 6x 114% 20% 17% 21%

Source: Bloomberg & Redeye Research

Our peer group consists of different gaming companies, which is comparable to Toadman Core and Sold Out but also gaming service and IT-service companies, which are more like Petrol. Things that effects the assume multiples a little negatively are; Toadman’s small size, short history, low share liquidity, and relatively low margins compared to most peers. For Core, we have used the year 2021E as a base for the valuation and 2020E for Petrol and Sold Out. • We value Petrol at 9x ‘20E EBITDA, SOTP valuation 2020 Multiple EV relatively in line with peers. We Sales EBITDA EV/EBITDA view Petrol as one of the top Petrol 191 29 9.0x 258 Core (2021) 210 58 8.0x 462 marketing agencies’ in the world, Sold Out 297 33 10.0x 327 and the company outperforms the Sum. 1047 EV 1047 peer’s based on sales growth and Debt -144 margins. Still, we rather use a Provisions -113 Market Cap 790 conservative assessment in the Per share 25

SOTP then a too aggressive one. Source: Redeye Research • We have applied an 8x EBITDA multiple on Core. As we base the valuation on 2021E, there is both a time effect and uncertainty that lowers the assumed multiple. Still, Core will show most of its growth in 2022 and beyond, so we do not want to apply a too low multiple. • For Sold Out, we apply a market level EBITDA multiple of 10x (11x is median). We view both growth prospects, and especially margin expansion for Sold Out as substantial.

Our SOTP valuation implies an EV of about SEK 1047m, translating to a share price of 25 SEK.

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Appendix 1: Management, board and ownership

Management CEO – Robin Flodin Robin is the founder and CEO of Toadman. He started the company together with Rasmus Davidsson after meeting at university studying gaming design. There he created his first game, which sold over 250 000 copies. Robin also sits on the board of directors for Toadman.

COO - Christopher Bergstresser Christopher Bergstresser has experience from executive positions at SEGA, Konami, Atari, and a handful of other companies. Most recently, as a partner at Modern Times Group’s gaming division. We find that Christopher ad valuable experience from gaming acquisition and significantly strengthens Toadman’s M&A agenda.

Head of design – Rasmus Davidsson Rasmus has, during the last seven years had jobs within different gaming studios in which he has primarily worked with gaming design. His expertise lies within the design of the games and the rules thereof.

CTO – Andreas Jonsson Andreas has worked since the beginning of the 2000s in the gaming industry as a programmer and subsequently started his own company Diskett interactive. Diskett interactive is today a part of Toadman, where Andreas has become CTO.

Studio manager - Ola Nilsson Ola studied together with Rasmus and Robin at the university 2007-2011. Worked in the beginning of his career as a technical artist and has thereafter worked primarily as studio manager.

CFO – Birgitta Lönnberg Birgitta has an education from Handelshögskolan in Stockholm. She has over 30 years of experience working, for example, as head of consolidated accounting at Duni.

Board of directors Alexander Albedj - Chairman Managing partner at the investment company AA Capital. Alexander has three exams from Handelshögskolan in Stockholm, Stockholm University, and KTH. He also has an MBA from Duke University and has worked within finance for several years.

Robin Flodin – Board member (CEO) See description above.

Sven Folkesson - Board member Sven has managed his own gaming studio and got recruited as COO by Fatshark 2015. Sven has also worked as a business lawyer in London and Singapore and has extensive experience of leading projects and developing strategies.

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Marie-Louise Gewfert - Board member Marie-Louise has worked within large global companies by, for example, being Business unit director at Ericsson and Vice president at Vattenfall Data. She also has a long experience from different boards in smaller and mid-sized companies, and she also currently works as project leader for an it-initiative within health. Gunnar Lind - Board member Gunnar is the most recent addition to the Board. Gunnar has extensive experience from operations in public companies and board positions. Most prominent is his previous roles as CEO, COO of Cherry AB (publ.), and member of the Board. When Gunnar joined Cherry AB, the company had a market cap of about SEK 100m. He was the acting CEO at the time Bridgestone bought out the company from the stock market at a SEK 11bn valuation.

Ownership Over 58% of the capital in Toadman is owned by group management, board, management at subsidiaries (Petrol and Sold Out), and other key employees. The ownership structure shows that the leaders of the Group are highly incentivized on generating shareholder returns; we find this as undoubtedly positive. We genuinely prefer what we call "Owner Operators", namely a management team that owns a substantial stake of the company. We regard Robin Flodin, founder, and CEO, as crucial for Toadman's future success. He is the largest shareholder of the Group, with +12% of the capital. The sellers of Petrol, Alan Hunter Ben Granados, are the CEO, and Vice president of Petrol owns 7.4% of the capital each. The previous owners of Sold Out, Garry Williams and James Cato, owns 4.4% each in the Group.

Toadman ownership structure Shareholder # of shares % of capital Description Robin Flodin 3.8 12.2% CEO, co-founder Rasmus Davidsson 3.8 12.2% Head of design, co-founder Alan Hunter 2.3 7.4% CEO Petrol Ben Granados 2.3 7.4% COO Petrol Johan Svensson 1.8 5.7% Investor Alexander Albedj 1.7 5.4% Chairman Garry Williams 1.4 4.4% CEO Sold Out James Cato 1.4 4.4% COO Sold Out Fatshark AB 1.0 3.2% Strategic partner Ted Löfgren 0.7 2.2% CTO, games division Ola Nilsson 0.7 2.2% COO, games division Institutions 6.4 20.3% Other shareholders 4.0 12.8% Total 31.2 100% Of w hich managemnet & subs. 18.1 58% Source: Redeye Research

In conjunction with the Sold Out acquisitions, the company also conducted a direct share issue to some institutions of SEK 113m. We do not know exactly which institutions that participated in the offering except for Consensus Småbolag, who seized SEK 35m in the issue. We find it as positive that the company now has reached a high enough maturity level to attract some of the best small-cap funds in the Nordic space; institutions own approximately 20% of the capital.

Ownership is a core part of the M&A strategy

Toadman's focus on using their own share as partial payment for acquisitions is, in our view, a great thing, as the new "members" of the Group have aligned interest with the rest. The "skin in the game" part is a core part of Toadman's M&A strategy. In a way, it's not unlike how Stillfront Group have succeeded in bringing in talented people to the Group through M&A, which creates value and broaden the expertise further of the whole. A 1+1=3 formula for value creation. The shares that the sellers of the targets receive have a two-year lock-up, so they have full focus on long-term value creation.

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Appendix 2: The gaming market

The gaming industry consists of several different game genres aimed at all kinds of players. The main genres are: shooter/first person shooter (FPS), action/adventure/role-playing games (RPG), massively multiplayer online role-playing games (MMORPG), strategy/multiplayer online battle arena (MOBA), simulation, and puzzle. In simplified terms, the value chain in the gaming industry consists of the following players: developers, publishers, distributors, retailers, and consumers.

• Developers – Developers can be split into three different categories. o A first-party developer is part of a platform owner, such as and Microsoft, and develops games exclusively for this platform. o Second-party developers are those connected to a platform owner by creating exclusive content. Unlike a first-party developer, they can be an independently owned studio. o Third-party developers are platform-independent and are either a games publisher as well or develop games for one or several games publishers. EA and Ubisoft are examples of third-party developers. • Distributors – Distributors are usually game vendors, supermarkets, and internet providers. Distribution via digital channels is becoming more common as gamers prefer digitally distributed games. All the console manufacturers have digital platforms. • Publishers – A games publisher publishes video games that they have either developed internally or by working with a . Usually, the publisher provides financing for the development of the game and is also responsible for the market research, pricing of the game, and all aspects of marketing and advertising. A value chain that is changing

There has been a dramatic change from physical distribution to digital distribution, with distributors as the winners and retailers as the losers. Revenues are higher for publishers and in some cases developers. Distributors such as Apple and Google are minimizing risk and maximizing profits thanks to digital distribution.

Revenue models

The following section describes the most common revenue models for the two respective segments: PC/console and mobile.

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• Full game – A traditional model where the customer pays for the whole game up- front. Most often about 70% of the lifetime value comes during the first months post-release. o Extra content – Often called “add-ons” and DLC (downloadable content). DLCs/expansion packs usually offer an extended storyline, new game areas, or objects that are distributed digitally by the game's official publisher.

• Freemium/F2P – F2P (free to play) has been dominating the mobile industry. In late 2016, Nintendo tried charging players when it launched Super Mario Run but its lack of success was a strong sign of how challenging the old revenue model is in mobile games nowadays. Freemium is starting to take its position in the console industry as well with strong titles such as League of Legends (LoL), PlayerUnknown’s Battlegrounds (PUBG), and Fortnite. • Subscription-based – This is the latest trend, with EA, Sony, and Microsoft having launched new subscription-based services. This could also be a more common revenue model for mobile games in the future, possibly for the whole industry, with dominating giants charging subscriptions for all their games cross-platform. In 2018, Microsoft’s two biggest exclusive titles were released on Xbox Game Pass on the very first day, which was a potential game-changer.

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Game genres The gaming industry consists of several different Game Genres for all kinds of players. We describe the different categories and provide game examples. In this section we also look closer at the Industry Value Chain that the ongoing digitalization is changing dramatically. Originally it has consisted of developers, publishers, distributors, retailers and consumers. Another important aspect is how the revenues are generated, where different Revenue Models are applied. Full game is the traditional form but lately subscription-based has become the new trend. Shooter/FPS

First Person Shooter Examples: Call of Duty, Battlefield, Doom. This is Toadma’s focus genre.

Action/Adventure

Played in third person. The games are storydriven with a focus on action and collecting inventories. Often problem solving and puzzle-elements. Examples: Zelda, GTA, Tomb Raider, Super Mario Bros

RPG

Role Playing Game. Character evolves as the game progresses. Customizable characters. Most games today are Action RPGs. Examples: Witcher, Final Fantasy, Skyrim, Mass Effect

MMORPG

Massive Multi-player On-line RPG. Thousands of individuals play on-line simultaneously. Game environment is constantly active. Paid accounts and in-game purchasing. Examples: World of Warcraft, EVE, The Elder Scrolls Online

Strategy/MOBA

Logical and tactical gameplay/multi-player Online Battle Arena. Real-time strategy. Examples: Clash of Clans, League of Legends, DOTA, Starcraft

Simulation

Designed to closely simulate real world activities. Usually no strictly defined goals in the game. Examples: Sim City, Sims, Farming Simulator

Puzzle

Objective to solve or survive the puzzle. Players intelligence is primary and controller skills is secondary. Tetris invented the sub-genre Match 3 Puzzle. Examples: Tetris, Candy Crush Saga, Unravel

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Market size and growth The gaming industry is the world’s largest entertainment business, trumping all others. According to Newzoo the global gaming market had a value of roughly USD 122bn during 2017 and is expected to grow annually by about 11% in the coming years. A key driver is mobile gaming, which is expected to rise by 19% on an annual basis.

Global Gaming Market in USD bn

180 $ 166bn $ 152bn 160 $ 138bn 140 $ 122bn $ 107bn 120 100 80 USDbn 60 40 20 0 2016 2017 2018E 2019E 2020E

Console Mobile PC

Global CAGR 11% 2017-2021, mobile CAGR of 19%

Source: New zoo There are about 2.6 billion gamers worldwide who play at least once a month. The average gamer is 35 years old, and the gender split is relatively even, with a slight predominance of males.

#Gamers Avg age Gender

2.6Bn 35 M 54%, F 46% Mobile More than 500 new mobile games are introduced into the App Store every day. The overall mobile games market was worth USD 60 billion in 2017, and the top 10 games still account for 20% of total mobile games market revenues.

Trends shaping the market

Cloud gaming

“Cloud gaming” has been a tech buzzword for years. The idea is that we’ll no longer need gaming PCs or consoles with powerful graphics hardware. All the heavy lifting will be done “in the cloud.”, the remote server does all the heavy work, while your computer (or other device) just receives streaming video (and audio) and sends input commands. Essentially, cloud gaming is like a streaming video service, but interactive. This year however most of the big tech names will join the battle in cloud gaming. Google made it public first with “Stadia”, but Microsoft and Amazon have similar solutions ready to launch soon

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Casual gamers and early adapters will likely be the only audience that embrace this new technology the first years. Most early adapters will buy a console or a new PC as well. Many equity analysts estimate PS5 will sell in line with PS4 the first year, which was one of the fastest selling consoles of all time.

The next generation of consoles will not exactly be a next generation. We will be going to see the boxes act a lot more like smartphones and PCs, with multiple iterations in play; all running slightly improved versions of the same thing. Sony will have a user base of more than 100 million soon, betting on an entirely new generation were games will not work on older consoles seems risky in a business perspective. We believe it there likely will be three phases in cloud gaming the next 3-5 years, driven in part by the development of the infrastructure with 5G and FTTH (Fiber-To-The-Home). In the first phase single player games and some less demanding multiplayer games like FIFA will find an audience. In the second phase, more input lag critical multiplayer games like Fortnite will gain a larger audience. In phase three high demanding multiplayer games like Call of Duty will find mass market appeal.

Physical game sales will continue to slowly lose market share in the next generation. But in the west physical games sales is still significant. For example, 51% of EA game sales (full game) on console still were physical (last quarter). Many gamers want to own their consoles and build their own game libraries digital or physical.

As always, the market will be more sluggish than many believes. The big difference a year from now is that customers/gamers will have more options than ever. The content and games will be primary and the hardware or platform you play the game on will be more secondary. But only in some cases. Like in previous generations the best exclusive content will sell consoles and especially Sony and Nintendo will make that happen even in the future. In our opinion Microsoft has the by far best starting position amongst the American “big three” tech giants and will be the long-term winner in cloud gaming. It will be a closer race between Amazon and Google, but Amazon probably has better conditions to make the business profitable.

Platform wars

Steam has for a long time been the unrivaled player when it comes to PC digital distribution, and they still hold most of the market. However, during the past years and especially 2018 contenders have emerged. Players like Epic Games Store (EGS), Discord and GOG, are eating away of Steams massive pie. EGS’s owner EPIC utilizes their extensive financial capabilities to sing exclusive content deals to the EGS. Some notable games that have singed/released are; The Division 2, Metro Exodus, Control, The Outer Worlds, Satisfactory and more.

We believe that putting pressure on Steam’s position and in the end, their pricing, as EGS has a 12% cut and not 30%, is good for the industry. We think that as more of the profits will stay at the publishers and developers, and those cash flows can be re-invested into more projects.

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Appendix 3: Petrol synergies

Synergies from the Petrol acquisitions

The Petrol acquisition is, in many ways, an excellent case-study on how Toadman aims to add value thought to expand in the value-chain through M&A. The main synergies from the Petrol addition to the Group are the following:

• Addition revenue streams o Petrol ads an extensive new and stable revenue stream, which reduces the overall business risk of the Group. The cash-flow from Petrol can be reinvested into gaming projects and new acquisitions.

• Strengthened networks o Petrol has possibly one of the most quality rosters of clients in the world; this can open up new opportunities and other possibilities for the Toadman Group. The increased network also enables the Group to take on larger and more complex projects.

• Increased marketing capabilities o Petrol’s services are highly sought after, Toadman will now have the possibility to use the service internally in a way they would not have been as an external client. Marketing of Toadman’s games will also be cheaper compared to before.

• Creative marketing inhouse o Petrol is among the best in the world in creative marketing. By utilizing the marketing expertise early on in the game development process, Toadman can likely have a higher chance of a successful release.

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REDEYE Equity Research Toadman Interactive 18 December 2019

Summary Redeye Rating

The rating consists of three valuation keys, each constituting an overall assessment of several factors that are rated on a scale of 0 to 1 points. The maximum score for a valuation key is 5 points.

Rating changes in the report

People: 4 Over 58% of the capital in Toadman is owned by the management, board and key employees, which shows that the leaders of the Group are highly incentivized on generating shareholder returns; we find this as undoubtedly positive. We genuinely prefer what we call "Owner Operators", namely a management team that owns a substantial stake of the company. We regard Robin Flodin, founder, and CEO, as crucial for Toadman's future success. Robin is the largest shareholder of the Group, with +12% of the capital. The sellers of Petrol, Alan Hunter Ben Granados, are the CEO, and Vice president of Petrol owns 7.4% each of the capital. The previous owners of Sold Out, Garry Williams and James Cato, owns 4.4% each in the Group. Toadman's focus on using their own share as partial payment for acquisitions is, in our view, a great thing, as the new "members" of the Group have aligned interest with the rest. We view the management team and key employees of Toadman as highly experienced, and the company has been able to attract some industry-leading talent to join the team.

Business: 3 Gaming is by its nature a volatile business where the success depends on how well games that are released performs. Toadman Interactive differs from most public gaming companies as they have a stable cash flow generated from their work-for-hire/financed projects, marketing consultancy (Petrol) and publishing business (Sold Out). These cash-flows are then reinvested into Toadman game development projects, which could produce significant returns.

Financials: 2 Toadman Interactive as the Group we see today was formed in conjunction with the acquisition of Artplant in June 2018; therefore, the historical figures before that are of limited usability. Our Financial Rating has a focus on historical figures, and as the history for Toadman is short they receive a relatively low rating. During 2019 the company also conducted a couple of major acquisitions which changed the margin levels, risks, cash flows and income mix complete. When looking at proforma figures we see a strong and solid company with healthy cash flow generating capabilities. The bond framework (SEK 220m of 500m utilized) has a 12% annual interest rate, which is high in today's interest rate environment and given the business characteristics of Toadman post the latest acquisitions. We find it likely that there will be a refinancing of the bond at more favorable terms.

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REDEYE Equity Research Toadman Interactive 18 December 2019

INCOMEPlease STATEMENT comment 2017 on the 2018changes 2019E in Rating2020E factors……2021E DCF VALUATION CASH FLOW, MSEK Net sales 11 73 160 552 703 WACC (%) 12.0 % NPV FCF (2019-2020) 112 Total operating costs -10 -67 -128 -469 -569 NPV FCF (2021-2027) 393 EBITDA 1 6 31 79 129 NPV FCF (2028-) 547 Depreciation 0 0 0 0 -2 Non-operating assets -113 Amortization 0 -1 -2 -88 -94 Interest-bearing debt -144 Impairment charges 0 0 0 0 0 Fair value estimate MSEK 806 EBIT 1 6 1 -4 38 Assumptions 2017-2023 (%) Share in profits 0 0 0 0 0 Average sales growth 32.8 % Fair value e. per share, SEK 26 Net financial items 0 1 -14 -26 -30 EBIT margin 5.5 % Share price, SEK 19.4 Exchange rate dif. 0 0 0 0 0 Pre-tax profit 1 6 -12 -30 8 PROFITABILITY 2017 2018 2019E 2020E 2021E Tax 0 -2 -3 0 0 ROE 0% 24% -11% -12% 3% Net earnings 0 4 -16 -30 8 ROCE 55% 34% 1% -1% 8% ROIC 0% 306% 8% -1% 10% BALANCE SHEET 2017 2018 2019E 2020E 2021E EBITDA margin 7% 9% 2% 15% 19% Assets EBIT margin 7% 8% 1% -1% 5% Current assets Net margin 4% 5% -10% -6% 1% Cash in banks 1 15 78 94 161 Receivables 5 24 96 166 211 DATA PER SHARE 2017 2018 2019E 2020E 2021E Inventories 0 0 0 0 0 EPS 0.26 -0.50 -0.98 0.26 Other current assets 0 0 0 0 0 EPS adj 0.26 -0.50 -0.98 0.26 Current assets 6 38 173 260 371 Dividend 0.00 0.00 0.00 0.00 Fixed assets Net debt -0.96 5.52 5.00 2.86 Tangible assets 0 0 1 2 1 Total shares 15.18 31.22 31.22 31.22 Associated comp. 0 0 0 0 0 Investments 0 0 0 0 0 VALUATION 2017 2018 2019E 2020E 2021E Goodwill 0 0 0 0 0 EV 155.4 892.3 876.0 809.3 Cap. exp. for dev. 0 0 500 415 330 P/E 43.0 -39.1 -19.9 76.2 O intangible rights 0 8 16 30 42 P/E diluted 43.0 -39.1 -19.9 76.2 O non-current assets 0 1 1 1 1 P/Sales 2.3 3.8 1.1 0.9 Total fixed assets 0 9 518 448 374 EV/Sales 2.1 5.6 1.6 1.2 Deferred tax assets 0 0 0 0 0 EV/EBITDA 24.4 27.. 11.3 7.3 Total (assets) 6 47 691 707 746 EV/EBIT Liabilities P/BV 5.5 2.3 2.6 2.5 Current liabilities SHARE PERFORMANCE GROWTH/YEAR 16/18E Short-term debt 0 0 0 0 0 1 month 10.3 % Net sales 281.6 % Accounts payable 3 9 64 110 141 3 month 15.2 % Operating profit adj 36.9 % O current liabilities 0 0 0 0 0 12 month - EPS, just 0.0 % Current liabilities 3 9 64 110 141 Since start of the year 99,999,999,900.- Equity 900.3 % Long-term debt 0 0 250 250 250 SHAREHOLDER STRUCTURE %99,999,9 99,900.0 % CAPITAL VOTES O long-term liabilities 0 0 0 0 0 Robin Flodin 0 % 12.2 % 12.2 % Convertibles 0 0 0 0 0 Rasmus Davidsson 12.2 % 12.2 % Total Liabilities 3 9 314 360 391 Alan Hunter 7.4 % 7.4 % Deferred tax liab 0 0 0 0 0 Ben Granados 7.4 % 7.4 % Provisions 1 8 113 113 113 Johan Svensson 5.7 % 5.7 % Shareholders' equity 3 31 264 234 242 Alexander Albedj 5.4 % 5.4 % Minority interest (BS) 0 0 0 0 0 Garry Williams 4.4 % 4.4 % Minority & equity 3 31 264 234 242 James Cato 4.4 % 4.4 % Total liab & SE 6 47 691 707 746 Fatshark AB 3.2 % 3.2 % Ted Löfgren 2.2 % 2.2 % FREE CASH FLOW 2017 2018 2019E 2020E 2021E SHARE INFORMATION Net sales 11 73 160 552 703 Total operating costs -10 -67 -157 -469 -569 code TOAD.ST Depreciations total 0 -1 -2 -88 -96 List EBIT 1 6 1 -4 38 Share price 19.4 Taxes on EBIT 0 0 0 0 0 Total shares, million 31.2 NOPLAT 1 6 1 -4 38 Market Cap, MSEK 606.9 Depreciation 0 1 2 88 96 Gross cash flow 1 6 3 83 134 MANAGEMENT & BOARD Change in WC -2 -12 -18 -23 -15 CEO Robin Flodin Gross CAPEX 0 -10 -510 -18 -22 CFO Andreas Jonsson Free cash flow -2 -15 -525 43 97 IR Chairman Alexander Albedj CAPITAL STRUCTURE 2017 2018 2019E 2020E 2021E Equity ratio 43% 65% 38% 33% 32% FINANCIAL INFORMATION

Debt/equity ratio 0% 0% 95% 107% 103%

Net debt -1 -15 172 156 89

Capital employed 2 16 437 390 331

Capital turnover rate 1.8 1.5 0.2 0.8 0.9

ANALYSTS GROWTH 2017 2018 2019E 2020E 2021E Redeye AB Kristoffer Lindström Mäster Samuelsgatan 42, 10tr Sales growth 274,26 566% 119% 246% 27% [email protected] 111 57 Stockholm EPS growth (adj) 0%2% 0% -291% 96% -126%

Tomas Otterbeck [email protected]

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REDEYE Equity Research Toadman Interactive 18 December 2019

Redeye Rating and Background Definitions

Company Quality

Company Quality is based on a set of quality checks across three categories; PEOPLE, BUSINESS, FINANCE. These are the building blocks that enable a company to deliver sustained operational outperformance and attractive long- term earnings growth.

Each category is grouped into multiple sub-categories assessed by five checks. These are based on widely accepted and tested investment criteria and used by demonstrably successful investors and investment firms. Each sub-category may also include a complementary check that provides additional information to assist with investment decision-making.

If a check is successful, it is assigned a score of one point; the total successful checks are added to give a score for each sub-category. The overall score for a category is the average of all sub-category scores, based on a scale that ranges from 0 to 5 rounded up to the nearest whole number. The overall score for each category is then used to generate the size of the bar in the Company Quality graphic.

People

At the end of the day, people drive profits. Not numbers. Understanding the motivations of people behind a business is a significant part of understanding the long-term drive of the company. It all comes down to doing business with people you trust, or at least avoiding dealing with people of questionable character. The People rating is based on quantitative scores in seven categories: • Passion, Execution, Capital Allocation, Communication, Compensation, Ownership, and Board.

Business

If you don’t understand the competitive environment and don’t have a clear sense of how the business will engage customers, create value and consistently deliver that value at a profit, you won’t succeed as an investor. Knowing the business model inside out will provide you some level of certainty and reduce the risk when you buy a stock. The Business rating is based on quantitative scores grouped into five sub-categories: • Business Scalability, Market Structure, Value Proposition, Economic Moat, and Operational Risks.

Financials

Investing is part art, part science. Financial ratios make up most of the science. Ratios are used to evaluate the financial soundness of a business. Also, these ratios are key factors that will impact a company’s financial performance and valuation. However, you only need a few to determine whether a company is financially strong or weak. The Financial rating is based on quantitative scores that are grouped into five separate categories: • Earnings Power, Profit Margin, Growth Rate, Financial Health, and Earnings Quality.

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REDEYE Equity Research Toadman Interactive 18 December 2019

Redeye Equity Research team

Management Editorial Björn Fahlén Eddie Palmgren [email protected] [email protected]

Håkan Östling Mark Siöstedt [email protected] [email protected]

John Hintze Technology Team [email protected] Jonas Amnesten [email protected] Johan Kårestedt (Trainee) [email protected] Henrik Alveskog [email protected] Life Science Team Gergana Almquist Havan Hanna [email protected] [email protected]

Kristoffer Lindström Oscar Bergman [email protected] [email protected]

Erika Madebrink Anders Hedlund [email protected] [email protected]

Fredrik Nilsson Arvid Necander [email protected] [email protected]

Tomas Otterbeck Erik Nordström [email protected] [email protected]

Eddie Palmgren Klas Palin [email protected] [email protected]

Magnus Skog Jakob Svensson [email protected] [email protected]

Oskar Vilhelmsson Ludvig Svensson [email protected] [email protected]

Viktor Westman [email protected]

Linus Sigurdsson (Trainee) [email protected]

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REDEYE Equity Research Toadman Interactive 18 December 2019

Disclaimer Important information Redeye AB ("Redeye" or "the Company") is a specialist financial advisory boutique that focuses on small and mid-cap growth companies in the Nordic region. We focus on the technology and life science sectors. We provide services within Corporate Broking, Corporate Finance, equity research and investor relations. Our strengths are our award-winning research department, experienced advisers, a unique investor network, and the powerful distribution channel redeye.se. Redeye was founded in 1999 and since 2007 has been subject to the supervision of the Swedish Financial Supervisory Authority. Redeye is licensed to; receive and transmit orders in financial instruments, provide investment advice to clients regarding financial instruments, prepare and disseminate financial analyses/recommendations for trading in financial instruments, execute orders in financial instruments on behalf of clients, place financial instruments without position taking, provide corporate advice and services within mergers and acquisition, provide services in conjunction with the provision of guarantees regarding financial instruments and to operate as a Certified Advisory business (ancillary authorization).

Limitation of liability This document was prepared for information purposes for general distribution and is not intended to be advisory. The information contained in this analysis is based on sources deemed reliable by Redeye. However, Redeye cannot guarantee the accuracy of the information. The forward-looking information in the analysis is based on subjective assessments about the future, which constitutes a factor of uncertainty. Redeye cannot guarantee that forecasts and forward-looking statements will materialize. Investors shall conduct all investment decisions independently. This analysis is intended to be one of a number of tools that can be used in making an investment decision. All investors are therefore encouraged to supplement this information with additional relevant data and to consult a financial advisor prior to an investment decision. Accordingly, Redeye accepts no liability for any loss or damage resulting from the use of this analysis.

Potential conflict of interest Redeye’s research department is regulated by operational and administrative rules established to avoid conflicts of interest and to ensure the objectivity and independence of its analysts. The following applies: • For companies that are the subject of Redeye’s research analysis, the applicable rules include those established by the Swedish Financial Supervisory Authority pertaining to investment recommendations and the handling of conflicts of interest. Furthermore, Redeye employees are not allowed to trade in financial instruments of the company in question, from the date Redeye publishes its analysis plus one trading day after this date. • An analyst may not engage in corporate finance transactions without the express approval of management and may not receive any remuneration directly linked to such transactions. • Redeye may carry out an analysis upon commission or in exchange for payment from the company that is the subject of the analysis, or from an underwriting institution in conjunction with a merger and acquisition (M&A) deal, new share issue or a public listing. Readers of these reports should assume that Redeye may have received or will receive remuneration from the company/companies cited in the report for the performance of financial advisory services. Such remuneration is of a predetermined amount and is not dependent on the content of the analysis.

Redeye’s research coverage Redeye’s research analyses consist of case-based analyses, which imply that the frequency of the analytical reports may vary over time. Unless otherwise expressly stated in the report, the analysis is updated when considered necessary by the research department, for example in the event of significant changes in market conditions or events related to the issuer/the financial instrument.

Recommendation structure Redeye does not issue any investment recommendations for fundamental analysis. However, Redeye has developed a proprietary analysis and rating model, Redeye Rating, in which each company is analyzed and evaluated. This analysis aims to provide an independent assessment of the company in question, its opportunities, risks, etc. The purpose is to provide an objective and professional set of data for owners and investors to use in their decision-making.

Redeye Rating (2019-12-18) Rating People Business Financials

5p 11 11 2

3p - 4p 88 67 28

0p - 2p 9 30 78

Company N 108 108 108

Duplication and distribution This document may not be duplicated, reproduced or copied for purposes other than personal use. The document may not be distributed to physical or legal entities that are citizens of or domiciled in any country in which such distribution is prohibited according to applicable laws or other regulations. Copyright Redeye AB.

CONFLICT OF INTERESTS

Kristoffer. Lindström. owns shares in the company Toadman Interactive: No Tomas. Otterbeck. owns shares in the company Toadman Interactive: No Redeye performs/have performed services for the Company and receives/have received compensation from the Company in connection with this.

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