Motorsport Games Q3 2023 Earnings Call Transcript

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November 7, 2023

There are 6 speakers on the call.

Operator

Good day, and welcome to the Motorsport Games in Third Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ben Rossiter Turner, Vice President.

Operator

Please go ahead.

Speaker 1

Thank you, and welcome to the Multiple Games Third Quarter 2023 Earnings Conference Call and Webcast. On today's call is Multiple Games' Chief Executive Officer, Stephen Hood and Chief Financial Officer, Jason Potter. By now, everyone should have access to the company's Q3 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 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 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 September 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 Q3 2020 3 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 Stephen Hood, Chief Executive Officer of Municipal Games.

Speaker 2

Stephen? Thank you to all participants joining this conference call today. This past quarter has been a continuation of the incredible efforts to steer our business to future success. This work undertaken by the Board and senior leadership team has started to deliver recognizable tangible results, And I'm very happy to walk you through the positive achievements we have accomplished thus far. I would first like to announce Stanley Beckley as our Interim Chief Financial Officer effective November 8, 2023.

Speaker 2

Stanley will pick up the reins from Jason Potter, continuing the exemplary work to drive positive Change to our business. Stanley is an incredibly detail orientated individual with unflinching financial discipline That aligns perfectly with our need to leave no stone unturned in building this business into something we know it can become. Stanley is a fantastic addition to our team and his energy and enthusiasm will maintain our momentum. My sincere thanks to Jason, who is alongside me today on this call, for his expertise, guidance And support through the restructuring period of the last several months. Jason has committed to assisting the leadership team as and when needed, Accelerating the onboarding of STANLEY and providing valuable knowledge over the next few weeks months.

Speaker 2

I'm very excited about this next phase And we are Jason for the effort in providing this launchpad. Now please allow me to bring you up to speed on the results of a prior announced comprehensive assessment of the company's position and projects. The sale of the NASCAR license in early October generated Net cash proceeds of $3,700,000 to the company at closing, plus an additional $1,000,000 in deferred consideration that will fall payable over the next 15 months subject to the satisfaction of certain conditions. This sale significantly reduces our financial obligations associated with the NASCAR license and allows us to focus both financial and development resources on near term projects that are anticipated to come to market. Additionally, the company executed a limited license, which affords the company the ability to continue selling our NASSCO Game back catalog through to the end of 2024.

Speaker 2

This means we have another 5 quarters of revenue from the SMAC catalog. We believe this will provide some stability to our operational cash cycles over the next 15 months, Although we anticipate the amount of revenue to be generated by our existing NASCAR products to decline over time. A key principle of our assessment was the need to streamline our operations, reducing satellite studios while simplifying our structure. What was built during the COVID period is less efficient today. This streamlining initially began under the previously announced 2022 restructuring program.

Speaker 2

The 2022 restructuring program was originally estimated to deliver approximately 4,000,000 Total annualized cost reductions by the end of 2023, but through further action, this is now estimated to be Significantly higher at approximately $6,700,000 as of September 30, 2023. In the last week, we have taken further cost reduction and restructuring initiatives, closing our Australian studio, Which was slated to produce our planned IndyCar title. We retained all technology and assets for future utilization And we are currently identifying opportunities to resume development of the title elsewhere within the business with growth to oversight and TASI control. Additionally, our media website traction.gg has been similarly closed due to underperforming revenues versus cost. We retain the site, audience and highly respected brand and have a plan of action for its use alongside elements of the business already indicating growth prospects.

Speaker 2

Additionally, we recently announced that the licensor of our BTCC license has terminated our BTCC license effective as of November 3, 2023. As such, we will continue to evaluate our corporate structure for the ongoing And changing landscape as our business is in the process of being pivoted. In October, we released the 1st version of race control into a publicly available opt in beta. This technology previously referred to under the code name competition system This powering an improved multiplayer service today for our recent game, R Factor 2, and tomorrow in our planned Le Mans Ultimate game. We had considered saving this service to launch alongside our Le Mans alternate title, but opted to soft launch now for rFactor 2 and benefit from the learnings Ahead of a major push with the arrival of Lamont.

Speaker 2

Feedback has been overwhelmingly positive, beating all expectations And is expected to continue going from strength to strength as the beta program becomes available to all players later this week. Within a short period of a limited release, Race Control quickly broke our early registration projections reaching 10,000 registered users in the same month. Today, we have almost 15,000 users and expect closer to 25,000 by the end of 2023. We know this number compares favorably to somewhat similar services, beating them outright in growth. Account registrations mean little less we can derive value.

Speaker 2

I'm happy to say that we are already witnessing additional content sales for our Factor 2 reaching over 50% compared to the month prior. Although still early, we are optimistic in believing that our approach to providing accessible, high quality, interconnected Services and entertainment within this segment will pay dividends. We are building for the players first, not the cameras. We are making something that can sustain itself and grow. On the subject of Lomon Ultimate, our next planned product release, I'm pleased today that we can confirm the updated release date of this highly anticipated racer from Studio 397, our veteran racing team.

Speaker 2

We anticipate releasing the game on February 20, 2024 with further details available in due course. We are pleased to see the positive attention at AppTight for a 24 hour Le Mans and World Endurance Championship game, utilizing the state of the art Highly regarded physics engine behind the Rfactor 2 simulation with some of the most recognizable vehicles in sports car memory. With a plethora of fidelity upgrades, racing gamers are in for a real treat. The passion going into the project is second to none, We look forward to releasing the product in an ideal window in the run up to the new season. With the World Endurance Championship heading into a wonderful period, which She's many greats of the automotive world returning to compete from Ferrari to Porsche and Lamborghini, Cadillac and BMW.

Speaker 2

We're on the wave of an exciting season and believe this will serve our move into this segment particularly well. We're also making headway in our planning for how we take Collaborative team based concept not usually found in racing games to a much wider mainstream audience. Players will be able to enjoy the story of Endurance Racing as and when convenient to them. Additionally, I am pleased to say our continued partnership with Kindred Concepts and their F1 arcade project that utilizes the rFactor 2 technology It's continuing to grow. They will shortly open a second venue in the United Kingdom with Boston in the United States expected to come online in 2024.

Speaker 2

Being the chosen platform to demonstrate the high-tech entertainment to be found within Formula 1 is a testament to our ongoing investment in Studio 397, The home of rFactor 2 and the planned Ramon Ultimate title. This period of reorganization since my return earlier in the year is starting to demonstrate positive results. Our focus is to deliver a sustainable, profitable, high growth business. As underperforming business units and projects have been closed, A new sense of optimism continues to emerge as we continue to foster a heightened sense of purpose throughout the organization. Since joining the company as CEO, we've been able to significantly reduce costs, executed the sale of the NASCAR license, Offloading a significant portion of our NASSCAR financial obligations, the retaining of our NASSCAR back catalog through 2024, More than doubling our projections for users of our new online service, Race Control, and today announcing an updated release date for our planned Lumon Ultimate product.

Speaker 2

We are pleased with the progress and continue to work diligently to drive the business forward. Now, I invite Jason Potter, Chief Financial Officer of Muscular Games to speak on the financial results for the Q3 of 2023.

Speaker 3

Thank you, Stephen, and good evening, everyone. As with 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 Q3 2023. Revenues were $1,700,000 up by $500,000 or 38.5 percent when compared to the same period in the prior year. Hiya, digital game and DLC sales are the primary drivers for the increase, driven in part by the release of NASCAR Heat 5 Next Gen Kart Update PLC in June 2023, which were partially offset by a reduction in esports revenue due to the timing of the commencement of The 20 3, 2024 LaMonde Virtual Series Season compared to the 20 2, 20 23 season, which commenced in September 2022.

Speaker 3

Net loss for the quarter was $3,500,000 a decrease of $5,000,000 when compared to the same period in the prior year. The change in net loss was primarily driven by $4,600,000 reduction in marketing, development and general and administrative expenses, as well as the $500,000 increase in revenue previously discussed. Consequently, EPS for the quarter was negative 1.28 compared with negative $7.29 in the same period in the prior year. The reduction in overhead spend was in part driven by actions taken under the 2020 2 restructuring program, which has helped us lower our overhead costs by approximately $6,700,000 on an annualized basis as of September 30, 2023 exceeding our target of $4,000,000 in annualized savings by the end of 2023. You see savings were achieved through changes in global headcount, reducing certain overhead expenditures and improvements in our internal processes.

Speaker 3

We are reporting an adjusted EBITDA loss of $2,400,000 in the Q3 of 2023 compared to an adjusted EBITDA loss $6,500,000 for the same period in the prior year. The improvements in adjusted EBITDA loss are the same as those discussed in respect of the changes in net loss for the period in comparative quarter. On a year to date basis, revenues were $5,200,000 down $1,400,000 when compared to the same period in the prior year, primarily due to lower digital, mobile and retail game sales driven by lower volumes of sales and less favorable pricing. Net loss was $17,000,000 for the same period compared to $32,000,000 for the same period in the prior year. Year to date adjusted EBITDA loss was $9,400,000 down from $18,000,000 for the same period last year.

Speaker 3

Non cash asset impairment losses of $4,000,000 $9,400,000 for the 9 months ended September 30, 2023, 2022, respectively, Account for a significant portion of the difference between net loss and adjusted EBITDA loss in the respective periods. EPS loss for the year to date period was 6 point $60 compared to $26.61 in 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 September 30, 2023, we had cash and cash equivalents of $1,200,000 down from $2,000,000 as of June 30, 2023. Net cash used in operations for the 9 months ended September 30, 2023 was approximately $10,100,000 representing an average monthly net Cash balance from operations of $1,100,000 down $500,000 when compared to the average monthly cash balance of $1,600,000 for the year ended December 31, 2022.

Speaker 3

As of October 31, 2023, our cash and cash equivalents Increasing $2,000,000 to $3,200,000 following the sale of the NASCAR license, which we believe is insufficient to fund operations through the end of Q1 2024 and that additional funding will be required in order to continue operations. In order to address this liquidity shortfall, we are actively exploring several options, including but not limited: Q1, additional funding in the form of potential equity and or debt financing arrangements or similar transactions strategic alternatives for our business, including but not limited to the sale or licensing of assets In addition to the recent sale of the Nezcal license and 3, further cost reduction and restructuring initiative. Thank you all for your time. And now I'll turn the call back to Stephen for closing remarks.

Speaker 2

In closing, I thank our shareholders for their time and support. Thank you for joining us today. And now let's go to questions. Operator?

Operator

Thank you. We will now begin the question and answer session. Our first question comes from Michael Kupinski with NOBLE Capital Markets. Please go ahead.

Speaker 4

Thank you and thanks for taking the question. A quick one. I was wondering if you can just kind of tell us, is the company Current on all of its obligations on its existing licensees, licenses and so forth. And I was just wondering if you can add a little color on and I'm sorry for joining a little late at this, if you've already discussed this on your British touring car license and what maybe the What were the reasons behind that? Can you just give us an update on that?

Speaker 3

Hi, Michael. Good to hear from you. So I'll answer the first part and

Speaker 5

then maybe An update on VTC in

Speaker 3

the whole. In respect to obligations and being current as disclosed in the Form 10 Q, which Assuming you've not yet had a chance

Speaker 5

to go through, but we have decided that we are behind on some of the payments in respect to the BTCC license. So there are some, you know, some remaining payments that need to be made under that license agreement. That was one of the drivers

Speaker 4

And then go ahead. I'm sorry, Jason, did you have a conversation with him? And so I was just wondering in terms of the additional the cash that you have currently, does that You have enough cash to kind of make those payments whole in terms of the other licenses or is that a part of the funding that you'll be needing?

Speaker 3

I mean, it's so I mean, you might have said we're under the BTCC specifically, it's €400,000 subject to The termination is

Speaker 5

not limited to be addressed as a result of the termination this week, and that's disclosed in Form 10 Q.

Speaker 3

But We're obviously looking to engage

Speaker 5

in conversations with BTCC on that point specifically and get some clarity as to where they're standing.

Speaker 3

I think from a financing perspective as a whole, we

Speaker 5

look at what our cash line has been and it's come down tremendously when we compare to the prior year And even prior quarters in the year to date, so that we're happy with where the cash balance heading directionally. You should see us about $4,000,000 average monthly Q3, which we've just never been close to before. And so we're obviously back to

Speaker 3

all that in when we're looking

Speaker 5

at our future burn and what We think we may be in what additional funding we'll need and it covers operating costs and then any residual payments that are required and then about purchase commitments.

Speaker 4

Got you. And I'm sorry if this is covered in the 10 Q, but which other licenses are you behind on? And are there is there a risk At this point, are you in can you give us a gauge of what how those maybe negotiations are going with those licensees?

Speaker 5

That's okay. So I mean,

Speaker 3

so the remaining kind

Speaker 5

of 2 primary licenses, the Limon license and the Indicar license, I'm not presently behind on payments on either of those arrangements, but obviously they've come with minimal guarantees and there are payment schedules Associated with those that we'll have to look to adhere to in the future in coming months.

Speaker 4

Got And I know that you went through a tremendous reorganization and consolidation. Are there further expenses that you can cut at this point? Are you now at the base level where you feel you need to be?

Speaker 5

Yes. I mean, I think This week hasn't been easy for us. There's some tough decisions around, but we have to obviously have to make some changes from a restructuring side We try and reduce some of the overhead to a more sustainable level. We've tried to do that as much as we can, but of course, we'll continue to review Our cost base and will always look for opportunities to reduce reduce overhead that matches

Speaker 3

where the organization is

Speaker 2

So this

Speaker 5

is something we'll continuously review and I'd always like to improve upon and make sure it's efficient as possible.

Speaker 4

All right. That's all I have. Good luck to you guys.

Operator

All right. And this concludes our conference. And thank you for attending today's presentation. You may all now disconnect.

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Earnings Conference Call
Motorsport Games Q3 2023
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