Motorsport Games Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 21, 2023

There are 8 speakers on the call.

Operator

You for standing by, and welcome to Motorsport Games Inc. 2nd Quarter 2023 Earnings Call. As a reminder, this conference is being recorded. At this time, all participants are in a listen only mode and a question and answer session will follow the formal presentation. I would now like to turn the conference over to Ben Rustner Turner from Motorsport Games.

Operator

Please go ahead.

Speaker 1

Thank you, and welcome to Motorsport Games' 2nd 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 Q2 2023 earnings press release filed today after market close. This is available on the Investor Relations section of Motorsport Games' website at www.motorsportgames.com. During the course of this call, management may make forward looking statements within the meaning of the U.

Speaker 1

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 statement 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.

Speaker 1

In today's conference call, we will refer to certain non GAAP financial measures such as adjusted EBITDA. As we discuss the Q2 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 over the call to Steven Hood, Chief Executive Officer of Motorsport Games.

Speaker 2

Steven? 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.

Speaker 2

During the initial phase, We implemented strategic measures aimed at streamlining our satellite studios, accelerating the simplification of our organizational structure per 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 update 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 product, NASCAR Rivals, which introduced local multiplayer functionality.

Speaker 2

This enhancement is expected to foster greater social interaction and renewed 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 resources and operational capacity in the present context. A pragmatic reevaluation of the business was sorely needed and critical to our future. Consequently, we have The cultivation of commercial consideration across all sectors and functions.

Speaker 2

Our decision making process now rigorously assesses projects and investments Based on realistic return potential, even when the returns are non direct, we contribute to revenue generation indirectly. Activities deemed unlikely to sustain themselves or propel our business forward are subject to detailed scrutiny and possible termination. Our immediate 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 are retaining 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.

Speaker 2

Recent collaborations including the F1 arcade project with Kindred and our planned proprietary LeMond 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 toward mainstream gamers, particularly those playing in their living room on 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 mass appeal 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 provide a superior experience for our consumer. Through Race Control, previously known under its Codename competition system, This platform is designed to empower us to cater to a broader spectrum of players, making accessible, professional and sociable racing experiences, a segment we believe to be underserved.

Speaker 2

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 Multiple Games to delve into the financial results for the Q2 of 2023.

Speaker 3

Thank you, Stephen, and good evening, everyone. As of previous earnings 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 Q2 of 2023. Revenues were $1,700,000 down $300,000 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 earned through the development of simulation platforms for 3rd party Lower revenues earned through Esports Sponsorships were the primary drivers for the reduction in revenues, which were partially offset by lower sales allowances and reserves when compared to Q2 2022.

Speaker 3

Net loss for the quarter was $8,200,000 an increase of $700,000 when compared to the same period in the prior year. The change in net loss was primarily driven by non cash asset impairment loss of 4,000,000 recognized in the Q2 of 2023, which was partially offset by a $2,200,000 reduction in margin development, General and administrative expenses as well as $400,000 in fair value gains and changes in the carrying value of certain liability classified warrants as well as favorable foreign currency gain. Consequently, EPS for 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 taken under the company's 2022 restructuring program, which has helped us lower overhead costs by approximately $4,900,000 on an annualized basis As of June 30, 2023, exceeding our target of $4,000,000 in annualized savings by the end of December 31, 2023. These savings were achieved through changes in global headcount, reducing certain overhead expenses and improvements in our internal processes.

Speaker 3

We are reporting an adjusted EBITDA loss of $2,700,000 for the Q2 of 2023 compared to an adjusted EBITDA loss of $6,000,000 for the same period in the prior year. The improvements in adjusted EBITDA loss are the same as those discussed in respect The change in net loss for the period and comparative quarter. On a year to date basis, revenues were $3,500,000 down $1,900,000 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 $13,500,000 for the year to date period compared to $23,500,000 for the same period in the prior year. Year to date adjusted EBITDA was $6,900,000 down from $11,500,000 for the same period last year.

Speaker 3

Non cash asset impairment losses of $4,000,000 $9,400,000 for the 6 months ended June 30, 2023 and 2022 respectively

Speaker 4

Account for a

Speaker 3

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 Cash equipment was $2,000,000 down from $5,800,000 as of March 31, 2023.

Speaker 3

Net cash used in operations for the 6 months ended June 30, 2023 was approximately $8,900,000 representing an average monthly net cash burn of $1,500,000 down $100,000 when compared to the average monthly cash $1,600,000 for the year ended December 31, 2022. As of July 31, 2023, Our cash and cash equipment position was reduced by $600,000 to $1,400,000 which we believe is insufficient to fund our operations the remainder of 2023, and then additional funding will be required in order to continue operation. In order to address this liquidity shortfall, we are actively exploring several options, including but not limited to Additional funding in the form of potential equity and with debt financing arrangements or similar transactions. Strategic alternatives for our business, including but not limited to the sale or licensing of our assets and 3, asset cost reduction and restructuring initiatives. Thank you all for your time.

Speaker 3

And now I will turn the call back to Stephen for closing remarks.

Speaker 2

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

Thank And our first question comes from the line of Jason Tilton with Canaccord Genuity. Please proceed.

Speaker 4

Great. Good afternoon and thanks for taking the question.

Speaker 5

I was hoping maybe you could spend

Speaker 4

a minute just talking about As you're building out the racing franchise and in particular, the Lamons game that's coming out this December, what are some of the characteristics that you think Jade, either from a feature perspective, from a visual perspective, these titles from some of the other racing games that are out there by maybe by other publishers? Thanks.

Speaker 5

Hi, Jason, it's Steven 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 the 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 do you positively differentiate in that market?

Speaker 5

So one of the weaknesses of racing 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 at 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 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 of Endurance Racing and Le Mans in particular, it's about a team fighting against others Using a single vehicle, so there's more than 1 driver in a car and it entails driver swaps. We think that's a very, very interesting mechanic This 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.

Speaker 5

It's dog eat dog. Only one person can win. In our world, in Le Mans and 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 sells well with endurance racing. It's really about the team ethic.

Speaker 5

If you think about a lot of positively received games today, like, shooter titles, all sorts of things, You play in a squad, you play in a team. That does not exist in typical racing games. Le Mans will change that. And it also involves an async mode that enables people to take turns 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.

Speaker 5

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 it should position us accordingly.

Speaker 4

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 $1,500,000 And then just doing the math here, the monthly burn in July was about $600,000 Can Just talk about if there were any decisions that have been made given the given where the cash position is and is that why the burn was slower in July? What should we Sort of the next few months relative to the timing of a potential decision on what path to go down in terms of resolving liquidity situation?

Speaker 6

Hi, Jason. This is Jason. Thanks for the question. So you're right that The cash burn or net cash burn from operations is a little bit lower in July when compared to the other 2 months in the quarter. And we did see on average just for the 3 months net cash burn from operations dropped to about $1,100,000 a quarter versus the $1,500,000 for the year to date.

Speaker 6

As you are probably aware, there is always some lumpiness to our cash flows in terms of timings and Minimum multi guarantee payments and the like. And so what you see in Q2 is some of those payments It's all due earlier in the quarter, which drove up a slightly higher cash burn within that particular month and then some upside from that In July as things started to smooth out. Also, I think you're seeing the benefit from or starting to see some of the benefit from the 2022 restructuring The program where we've realized about $4,900,000 in annualized savings and so that's starting to filter through into our cash flow position. And so, yes, we're starting to see a little

Speaker 3

bit of upside from that.

Speaker 4

Great. Thank you very much.

Operator

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

Speaker 7

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.

Speaker 7

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?

Speaker 5

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 are still playing NASCAR Heat 5.

Speaker 5

It was near complete and we took the decision to continue development of that content update, which didn't tax It's a great deal, just required some additional coordination across the business and 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 off, but it made sense to complete it and put it into the hands of gamers. And that was Very well received. As you heard me make comment to the huge uptake.

Speaker 5

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 games, 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 2 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.

Speaker 7

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?

Speaker 5

Hi, Michael. Yes. That's something that we're undergoing at the moment, doing a kind of broad review across the business, having a look at which titles are in production, how 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 undertaking for a while now. And I think we're very close to understanding what our potential opportunities are.

Speaker 5

That needs to be discussed further internally with our Board and for the benefit of the business, we'll 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 and 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 any games and experiences that we launch. 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 this 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 tread lightly, but I think in this next quarter, we We'll have resolved all of those outstanding conversations and we'll very firmly know where we're headed and what the upside is.

Speaker 7

Going back to my previous question, are there things in the vault, so to speak, that you can launch, that you're Plating or moving forward with that maybe that we outside of the Lamons 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?

Speaker 5

I think there are a number of opportunities. I mean, quite clearly nothing comes for free. And we have to be very considerate about where we invest our resources going forward, the products We do allow to continue. We're going to undergo 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.

Speaker 5

And my view is There are many opportunities. I made reference to going 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 preserve of a 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 rating, we will stand a chance of reaching additional consumers and driving additional revenues.

Speaker 5

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 Near term projects, I don't wish to invest significantly in things that are going to take years to come to fruition. I think there are some exciting opportunities there that we need to validate.

Speaker 7

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.

Speaker 5

Thank you very much for everybody's time today. Much appreciate the questions. And I thank you very much for your participation in this call. Thank you.

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Earnings Conference Call
Motorsport Games Q2 2023
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