Toadman has been working on Osiris for about two years. In September 2017, an agreement with Leyou was signed with a worth of USD 5m. At that time, Toadman hade a 10% royalty agreement. In December 2018, Toadman and Leyou signed an extended agreement worth another USD 8m. And in February 2019, the company increased its royalty share to 20% for USD 1.5m, which was deducted from the milestone payments (USD 8m) to Toadman. In total, about USD 13m has been invested in the Osiris project.
Now Toadman is buying the full rights and ownership of the game project from Leyou for a total of USD 2.6m. The purchase is divided into two installments; an initial payment of USD 1.3m, which gives Toadman a 100% ownership of the revenue from Osiris, the second payment of USD 1.3m is due within two years, which gives Toadman the full IP rights.
Toadman's investment in the game title and IP will have amounted to USD 4.1m, far below the actual development costs of USD 13m. But why would Leyou sell Osris for roughly 30% of what they have put into the development of the game? Well, Leyou is a quite large company and the Osiris project was a small one for them. Warframe, Leyou's main IP, generates annual revenue in excess of USD 180m and iDreamSky is in the talk about acquiring (which likely also effected Leyou's decision in selling Osiris) the company for USD 1.4bn. For a company of that size, a game needs to be quite large to have an impact on the P&L. However, something that is to small for Leyou can be a large project for a company like Toadman Interactive.
Toadman has previously stated that they see a high revenue (+USD 20m) potential in Osiris. As the information has been minimal about the game, we have kept our estimates very conservative. In our projections, we assume that the game would generate a mere SEK 21m (USD 2.3m) in royalty to Toadman. Our underlying assumption was that the game could make about SEK 70m in revenue during the first three years, but we discounted that by 30% as we did not know if the game actually would be published.
The new deal changes the board game;
In summary, we find the deal as value-enhancing. The alternative would have been that the game would not have been published at all. We have adjusted our assumed time revenue for project Osiris to SEK 125m over three years with a release in late 2020. Our assumptions imply roughly a 3x sales return on investment for Toadman but are conservative compared to the actual budget of the game. When we have more information and seen gameplay, trailers, etc. we might adjust our assumptions further. Our Base-case valuation is increased to 28 (26) SEK per share due to our forecast adjustments. The company still has much to prove. However, we find that the market is yet to fully grasp the transformation Toadman has undergone, which, in our view, leads to an attractive valuation.
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