Title

Presentation

Motorsport Games Inc. beats earnings expectations. Reported EPS is $3.02, expectations were $-1.86.

Operator: Thank you for standing by, and welcome to Motorsport Games Inc.’s Second Quarter 2023 Earnings Call. As a reminder, this conference is being recorded. [Operator Instructions] I’d now like to turn the conference over to Ben Rossiter-Turner from Motorsport Games. Please go ahead.

Ben Rossiter-Turner: Thank you, and welcome to Motorsport Games second quarter 2023 earnings conference call and webcast. On today’s call is Motorsport Games’ Chief Executive Officer, Stephen Hood; and Chief Financial Officer, Jason Potter. By now, everyone should have access to the company’s second quarter 2023 earnings press release filed today after market close. This is available on the Investor Relations section of Motorsport Games’s website at www.motorsportgames.com. During the course of this call, management may make forward-looking statements within the meaning of the U.S. federal securities laws. These statements are based on management’s current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements.

Except as required by law, the company undertakes no obligation to update any forward-looking statements made on this call or to update or alter its forward-looking statements, whether as a result of new information, future events or otherwise. Please refer to today’s press release and the company’s filings with the SEC including its most recent quarterly report on Form 10-Q for the quarter ended June 30, 2023 for a detailed discussion of certain risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. In today’s conference call, we will refer to certain non-GAAP financial measures such as adjusted EBITDA as we discuss the second quarter 2023 financial results. You will find a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures as well as other related disclosures in the press release issued earlier today.

And now, I’d like to turn the call over to Stephen Hood, Chief Executive Officer of Motorsport Games. Stephen?

Stephen Hood: I extend my gratitude to all participants for joining this conference call today. The preceding quarter has been marked by an intense period of activity conducted discreetly behind the scene. Our focus has encompassed a comprehensive evaluation of our projects, processes, corporate culture, and objectives. This endeavor aligns with the strategic direction I emphasized upon my return in April. During the initial phase, we implemented strategic measures aimed at streamlining our satellite studios, accelerating the simplification of our organizational structure for the 2022 Restructuring Plan and instilling a heightened sense of purpose throughout the organization. Consequently, I am pleased to report the successful completion, preparation and subsequent market launch of a highly anticipated update for our NASCAR Heat 5 product titled the Next Gen Car Update, accessible on Xbox, PlayStation, and PC platform.

This upgrade has significantly surpassed our expectations having sold over 34,000 units to date. This performance suggests the potential for it to become our top grossing DLC by year’s end, underscoring the enduring appeal of our NASCAR product offerings, despite the natural aging of the product line. Additionally, we released an update for our Nintendo Switch NASCAR Rivals, which introduced local multiplayer functionality. This enhancement is expected to foster greater social interaction, and renew the interest in the product. During this period, I have undertaken a comprehensive assessment of the company’s current standing, competitive positioning and areas for enhancement. Our forward looking opportunities are intrinsically influenced by our financial resource and operational capacity in the present context.

A pragmatic reevaluation of the business was sorely needed and critical to our future. Consequently, we have prioritized the cultivation of commercial consideration across all sectors and functions. Our decision making process now rigorously assesses projects and investments based on realistically term potential, even when the returns are non-direct and contribute to revenue generation indirectly. Activities seemed unlikely to sustain themselves all propel our business forward are subject to decount scrutiny and possible termination. Our media objective centers on resolving our cash flow needs, mitigating expenditure and rightsizing the organization for sustainable operations. We are actively exploring diverse avenues to chart our path forward and have retained positive outlook on implementing the necessary adjustment.

Notably, initiatives such as those centered around our rFactor 2 technology present a pathway to sustainability and expansion. Recent collaborations, including the F1 Arcade project with Kindred and our planned proprietary Le Mans game unveiled in conjunction with the ACO at the Centennial Le Mans event on June 5 showcase a multi-revenue opportunity that capitalizes on our strength without overextending our resources. Our ongoing investment in versatile multi-format technology geared towards mainstream games particularly those playing in their living room and game consoles remains part of our future roadmap, and we are investigating a variety of paths to accelerate our arrival into that market. We believe this will open the door to exciting master deal titles that diverge from traditional Motorsport licenses.

This approach will be complemented by our ownership of both the game and the ecosystem, a synergy that we anticipate can position us to provide a superior experience for our consumer. Through rate control, previously known under its code name competition system, this platform is designed to empower us to cater to a broader spectrum of players, taking accessible, professional and sociable racing experiences, a segment we believe to be underserved. This broadening of our reach is something I expect to forge ahead with over the coming months. Now I invite Jason Potter, Chief Financial Officer of Motorsport Games, to delve into the financial results for the second quarter of 2023.

Jason Potter: Thank you, Stephen, and good evening, everyone. As in previous earning calls, I won’t be offering any forward-looking guidance today. Instead, I will focus on providing an update on our financial results and highlights from the second quarter of 2023. Revenues were $1.7 million, down $0.3 million or 13% when compared to the same period in the prior year. Less favorable pricing and volume of digital and mobile game sales lower revenues on super development acceleration platform to third party and lower revenues through esports sponsorships. The primary drivers to the reduction in revenues which were partially offset by lower sales allowances and reserves when compared to Q2 2022. Net loss for the quarter was $8.2 million, an increase of $0.7 million when compared to the same period in the prior year.

The change in net loss was primarily driven by a noncash asset impairment loss of $4 million recognized in the second quarter of 2023, which was partially offset by a $2.2 million reduction in marketing, development, general and administrative expenses, as well as a $0.4 million in fair value gains and change in recurring value of certain liability classified warrants as well as favorable foreign currency gain. Consequently, EPS in the quarter was negative $3.02 compared to negative $6.34 for the same period in the prior year. Reduction in overhead spend was in part driven by actions taken under the company’s 2022 restructuring program, which has helped us lower overhead costs by approximately $4.5 million on an annualized basis as of June 30, 2023, exceeding our target of $4 million in annualized savings by the end of December 31, 2023.

These savings were achieved through changes in global headcount, reducing certain overhead expenditure and improvements in our internal processing. We are reporting an adjusted EBITDA loss of $2.7 million for the second quarter of ’23 compared to adjusted EBITDA loss of $6 million for the same period in the prior year. The improvements in adjusted EBITDA loss and the same as we’ve discussed in respect to the change in the loss to the period and comparative quarter. On a year-to-date basis, revenues were $3.5 million, down $1.9 million when compared to the same period in the prior year, primarily due to the same factors discussed in respect to the quarterly performance. Net loss was $13.5 million for the year-to-date period compared to $23.5 million in the same period in the prior year.

Year-to-date adjusted EBITDA was $6.9 million down from $11.5 million for the same period last year. Noncash asset impairment losses of $4 million and $9.4 million for the six months ended June 30, 2023 and ’22 respectively account for a significant portion of the difference between net loss and adjusted EBITDA for the respective periods. EPS loss for the year-to-date period was $5.42 compared to $19.32 for the same period in the prior year. Moving on to liquidity. This continues to be a key area of focus for the company. As of June 30, 2023 we had cash and cash equivalents of $2 million down from $5.8 million as of March 31, 2023. Net cash used in operations for the six months ended June 30, 2023 is approximately $8.9 million, representing an average monthly net cash burn of $1.5 million, down $0.1 million when compared to the average monthly cash burn of $1.6 million through the year ended December 31, 2022.

And in July 31, 2023 our cash and cash equivalents position reduced by $0.6 million to $1.4 million, which we believe is insufficient to fund our operations for the remainder of 2023, and that additional funding will be required in order to continue operations. In order to address this liquidity shortfall, we are effectively exploring several options, including, but not limited to, additional funding in the form of potential equity and/or debt financing arrangements or similar transaction, strategic alternatives for its business including, but not limited to, the sale or licensing of our assets; and three, asset cost reduction and restructuring initiatives. Thank you all for your time. And now I will turn the call back to Stephen for closing our moments.

Stephen Hood: In closing, I would like to thank our shareholders for their ongoing support. Thank you for joining us today. And now let’s go to questions. Operator?

Operator: [Operator Instructions] And our first question comes from the line of Jason Tilchen with Canaccord Genuity. Please proceed.

Jason Tilchen: Good afternoon. And thanks for taking the question. I was hoping maybe you could spend a minute just talking about as you’re building out the racing franchise, in particular, the Le Mans game that’s coming out this December, what are some of the characteristics that you think are going to differentiate either from a future perspective, from a visual perspective, these titles from some of the other racing games that are out there – made by other publishers? Thanks.

Stephen Hood: Hi Jason, it’s Stephen here. Very good question, one that I’m excited to answer. I think when you’re looking at the racing market, typically, developers look at the on-track action by which I mean driving a vehicle around a track or through an environment. And of course, that’s a key focus. But in order for us to, in my mind, positively differentiate, we’re looking at what are the motivations for people to play racing games? And how do you positively differentiate in that market? So one of the weaknesses of recent games today is the inability of developers to get a number of people on track at the same time to participate in a race. In the real world, your motivation is having a career working your way up the ladder.

In the living room or home, in a normal kind of course of life, there are many challenges that get in the way of gaming. And racing requires everybody to be very prepared and very ready at a very specific time when the race begins. That is a problem for mass market appeal. So Le Mans, in particular, tackled this by allowing people to participate in a team with friends at a time that is convenient to them. Because if you think about one of the key distinctions of Endurance racing at Le Mans in particular, it’s about 18 fighting against others using a single vehicle. So there’s more than one driver in the car it entails driver swaps. We think that’s a very, very interesting mechanic that enables groups of friends to play together in a racing game on the same team whereas most racing games demand that everybody competes against one another.

It’s doggy dog, only one person can win. In our world, in Le Mans in Endurance racing, a team of friends or acquaintances or partners or whatever it may be, whatever the combination ends up being can succeed together. That is a hugely positive distinction in the racing market and one that tells well with Endurance racing. It’s really about the team ethics. If you think about a lot of positively received gains today like true to titles, all sorts of things, you play in a squad, you play in a team. That does not exist in typical rating games. Le Mans will change that. And it also involves an async mode that enables people to take terms and pass the pattern between one another. So we think it’s a very distinct offering that our consumers have started to pick up on.

We haven’t really gone into any detail about this, so far, we started teasing it. But the reception is very positive, and we think it’s a major differentiator and actually position us accordingly.

Jason Tilchen: Great. That’s really helpful. And then just one going back to the cash position. The cash burn, I think in Q1, you mentioned was about $1.5 million. And then just doing the math here, the monthly burn in July was about $600,000. Can you just talk about if there were any decisions that have been made given where the cash position is? And is that why the burden was slower in July? Or what should we expect for sort of the next few months relative to the timing of a potential decision on what path to go down in terms of the solving liquidity situation? Thank you.

Jason Potter: Hi Jason, this is Jason. Thanks for the question. So you’re right, the cash burn on net cash flow from operations is a little bit lower in July when compared to the other two months in the quarter. And we did see, on average, just for the three months, net cash down from operations dropped about $1.1 million a quarter versus the $1.5 million for the year-to-date. As you are probably aware, there is always some lumpiness to our cash flows in terms of timing of minimum royalty guaranteed payments and the like. And so what you see in Q2 is some of those payments falling due earlier in the quarter, which drove up a slightly higher cash burn within a particular month and we’re now and then gain some upside from that in July as things started to smooth out.

Also I think you’re seeing the benefit from – we’re starting to see some of the benefit from the 2022 short fall program where we’ve realized about $4.9 million in annualized savings. And so that’s starting to filter through into our cash balance position. And so yes, we’re starting to see a little bit of upside for that.

Jason Tilchen: Great. Thank you very much.

Operator: Our next question comes from the line of Michael Kupinski with Noble Capital Markets. Please proceed.

Michael Kupinski: Thank you. I have a couple of questions here. In terms of Heat 5 and the launch of the DLC in the quarter, was that something that was planned because I didn’t seem to have that on my radar screen, and that was something that was a surprise to me. Can you talk a little bit about that decision and mainly because I thought that NASCAR Ignition was going to kind of replace Heat 5 and that you were no longer going to be investing in that particular game given the product cycle? Can you just kind of give us – give me your thoughts about that? And then also what the implications are for NASCAR Ignition given that you’ve launched the DLC for Heat 5?

Stephen Hood: Hi Michael, it’s Stephen. Good question. The NASCAR Heat 5 DLC, the Next Gen Car Update was actually partially completed back in the tail-end of last year. So on my return to the company in April, a few short months ago, I was looking through what we had in the product pipeline, and it struck me that a near complete content update for a well-regarded if legacy title of NASCAR Heat 5, lots of people still claim NASCAR Heat 5. It was near complete, and we took the decision to continue development of that content update, which didn’t tax us a great deal, just required some additional coordination across the business to push that live. And we also took that decision in consultation with NASCAR who were keen to kind of see the back catalog remain vibrant.

And it didn’t take a huge amount of effort or resource to finish up, but it made sense to complete it and put it into the hands of gains. And that was very well received, as you heard me make a comment to the huge uptake. So there’s a clear affinity and love in the NASCAR gaming community for the Heat franchise. It’s felt a decent reputation. And that piece of DLC was a good addition by multiple gains, I’m sure. But following that, NASCAR Ignition, yes, was designed to take over the mantle of the Heat franchise. And we don’t see the two kind of conflicting with one another right now. Players have remained very true to the Heat games. People still pick up those titles, and it made sense to serve a title that is very vibrant with a piece of DLC that was near ready.

Michael Kupinski: Seems like a brilliant move. Can you talk a little bit about going back to your cash burn? Is it possible that you can provide a roadmap for investors when you expect to swing towards cash flow positive? I mean, I know that there’s a number of titles that are coming out but kind of give us your thoughts of when that might be?

Stephen Hood: Yes. That’s something that we’re undergoing at the moment doing a kind of a broad review across the business, having got which titles are in production, how far they are into development. the cash needs of those products, the viability and the likely kind of return on revenues. That is something that we’ve been able to taking for a while now. And I think we’re very close to understanding what our potential opportunities are. That needs to be discussed further internally with our Board and for the benefit of the business will provide a number of options to the Board before we progress. But I think I’ve certainly returned with a great deal of optimism. And I think there are a number of assets and opportunities in licenses and products that are in development.

And when I mentioned products, it’s not just actually the core game products. We also have other services that have been in development as well. that we’re keen to see go live because they will be complementary to the – any games and experiences that we launched. When I talk about the ecosystem, it’s about not just delivering the game, but having an ecosystem that enables players to come together, gel enjoy the entertainment experience. with a view to the business, further monetizing that audience and promoting DLC and driving additional revenue from our gaming audience. All of that is coming to fruition. And we’re just going to be very careful and select about where we go next with the idea that the business becomes sustainable and viable for the future.

So we track lightly. But I think in this next quarter, we will have resolved all of those outstanding conversations, and we’ll very firmly know where we’re headed and what the upside is.

Michael Kupinski: Going back to my previous question, are there things in the vault, so to speak, that you can launch that you’re contemplating or moving forward with that maybe that – outside of the Le Mans and other titles that you’re planning on publishing that there are other things like Heat 5 with the DLC that you might be able to launch inexpensively and generate a favorable return on?

Stephen Hood: Well, I think there are a number of opportunities. I mean, quite clearly, nothing comes for free. And we have to be very considered about where we invest our resources going forward. The products that we do and allow it to continue. We’re going to go a comprehensive review on those products. And I think we’ve got a good idea of where we need to be in the near, medium and long term. And my view is there are many opportunities, I made reference to doing mass market arriving on consoles, being in the living room. We’re ultimately trying to provide an entertainment experience. I mean people believe that racing games are typically the preservable PC niche. And I think there’s a very vibrant market there. But we know that if we can open the doors and reach a mainstream gamer interested in vehicles, cars, driving let alone racing, we will stand a chance of reaching additional consumers and driving additional revenues.

So there are many opportunities there. We just need to settle on which of those we’re going to go after. But I am interested in near-term projects. I don’t wish to invest significantly in things that we’re going to take years to come to fruition. I think there are some exciting opportunities there that we need to validate.

Michael Kupinski: Thank you. That’s all I have.

Operator: Thank you. There are no further questions at this time. I’d like to turn the call back to management for closing comments.

Stephen Hood: Thank you very much for everybody’s time today. I much appreciate the questions. And I thank you very much for your participation in this call. Thank you.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.