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spk06: Thank you for standing by, and welcome to the fourth quarter and full year 2020 conference call and webcast for Motorsport Games, Incorporated. I would now like to turn the call over to Ms. Ashley DeSimone, Managing Director of ICR, to begin.
spk00: Thank you. Good afternoon, and welcome to Motorsport Games' fourth quarter and full year 2020 earnings conference call and webcast. On today's call are Dimitri Kosko, Executive Chairman and Chief Executive Officer, and Jonathan New, Chief Financial Officer, and Stephen Hood, President. By now, everyone should have access to the company's fourth quarter earnings press release, filed today after market close. This is also 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 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. Please refer to today's press release and the company's filings with the SEC, including the company's annual report on Form 10-K for the year ended December 30, 2020, for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. In today's call, we will refer to adjusted EBITDA, a non-GAAP financial measure, as we discuss the fourth quarter and full-year financial results. You will find a historical reconciliation of adjusted EBITDA to GAAP results included in the press release issued earlier today. And now I'd like to turn the call over to Dimitri Kosko, Chief Executive Officer of Motorsport Games. Dimitri?
spk02: Thank you, Ashley, and hello, everyone. It's a pleasure to be speaking to you on our first earnings call as a public company. We're a leading racing game developer, publisher, and an esport ecosystem provider of official motorsport racing series throughout the world. Only weeks ago, we officially began trading on NASDAQ. marking a major milestone for our company, our team, partners, customers, and fans around the world. Our mission at Motorsport Games is simple. We create and spread the joy through racing games, starting with exclusive access to approximately 55 million monthly active users that our parent company carries and beyond. We achieved this mission by developing and publishing racing games and immersive esport experiences of the world's most iconic races and brands who trust us with their valuable IP and often in a long-term partnerships like we have with NASCAR. And they are one of several iconic brands we'll work with today. So thank you for these amazing partners who trust us with their global iconic brands from NASCAR to ACO, which represents 24-Hour of Le Mans and the British Touring Car Championship. I'm joined today by Steven Hood, the president of the company, and John New, our CFO. Also, note that we posted an investor video for you on our IR portion of the website. We hope this video gives you a feel for our passion and excitement we create here at Motorsport Games. Here are some phenomenal highlights to share. We executed upon our core strategy in 2020 to expand and extend our portfolio of exclusive licenses for games and esports. And thus far, we have executed on our product roadmap, and we are on pace to deliver NASCAR Next in the third quarter of 2021, along with a number of additional products on mobile and Nintendo Switch. We expanded our team in 2020 to nearly 100 team members, almost doubling the number of team members we had at the end of 2019. giving us a robust and highly talented group of resources to further execute upon our strategy. We delivered exciting eSport experiences, which yielded approximately 55 million viewers in 2020. eSports is a growing and global phenomenon, and in 2020, nearly half a billion people around the world watch an eSport event. Our eSport event, 24-hour Le Mans virtual, was one of the largest events in virtual racing history, bringing in approximately 14 million live viewers. Compared to the NBA Finals average viewership last year, the 24-hour Le Mans virtual had almost doubled the number of viewers. The global gaming market is about $175 billion, or half as big as the global broadcasting and cable TV market. We saw gaming outgrow the television market by six times from 2014 to 2019, or a CAGR of 12% versus just two. This is a fitting example of how esport audiences are rising to compete with the audiences of traditional sporting events. We're working to capitalize on this fast-growing esport ecosystem, and it is our job to evolve and develop the latest content, games, and experiences to be in the forefront of the growing demands in competitive gaming and esport entertainment. So we couldn't be more excited about our success so far and the future opportunity in esport. Let me take you through what we've been up to so far this year. As I mentioned, we completed our initial public offering on NASDAQ, successfully raising $69 million of gross proceeds. And we have continued to deliver on important strategic initiatives like the launching of our traction platform to foster, grow, and engage more deeply our growing fan base online and across our pod. We closed our first acquisition and also began two others, which I'll discuss in context of our acquisition strategy and what we look for specifically. First, we look at how we could accelerate our product-driven growth with technology or teams that expedite our go-to-market strategy and elevate the quality standard of our entertainment so that our games are world-class. Second, we look at what we bring to the table as the acquirer, as the leader in developing, marketing, and publishing racing games. In all three of the products or technology acquisitions we announced this year, the combination of Target's product or tech with our marketing and publishing muscle is a powerful marriage. We look at what the Targets have that we do not, and think how our expertise would supercharge their current product offering right now. And of course, it relates to integration, how easily technology integrates into our existing product roadmap. And third, we seek those that share the vision of creating powerful and joyful emotions through racing games. Having a common passion of our existing team is crucial to us, This is how we challenge the boundaries of what is traditional or expected. Let me review the deals one by one. Earlier this month, we announced that we entered into a binding term sheet to acquire Studio 397 and their core product, R-Factor II. We have known R-Factor's technology and the Studio 397 team for years through a longstanding successful collaboration and licensing arrangement. In many famous racers, like Fernando Alonso's opinion, Studio 397 has the leading racing simulation technology in the world, including the most realistic car physics and tire models, just to name a few. In acquiring Studio 397, we believe we'll be securing a premier IP and development team for the future development of virtual racing games. Upon completion, we plan to integrate Studio 397's technology across our upcoming console and PC product releases. We expect that the Studio 397 brand and our factor technology will also play an integral role in our esports opportunity. We believe that acquisition will foster our capabilities to provide bespoke esports events of our choosing and importantly add a game revenue stream without having a dedicated game title yet btcc for example due to release in 2022 we could potentially have an official esports series starting this year one full year prior to product release we further believe that acquisition will allow us more readily service these type of opportunities with an increase in quality and fidelity that is not readily available in today's esports marketplace. We expect that the control of this platform will increase our capabilities and reduce both intercompany dependence and time to market within a rapidly growing esports scene. We're working to deliver on the promise and potential of esports by providing a superior and exciting gaming platform dynamic and one-of-a-kind esport events, and broadcasting these events to a large and growing audience of consumers, teams, and players. Next, we recently closed the acquisition of the assets and key products comprising the CardCraft video game. This is a token acquisition of an interesting and additive product and a strong team. They have a fun and exciting product in the world of carding, Karting has a strong following, especially with a younger demographic, and has a potential to be married with some interesting IP, including racing series and celebrity drivers. In addition, KartKraft is built on the Unreal Engine, which is synergistic and well aligned with our platform, which is also utilizing Unreal Engine. Finally, we get a fantastic team and a presence in Australia. Lastly, we have entered into a binding term sheet to acquire Digital Tails, the mobile game developer that creates official mobile games for Superbike World Championship or SBK. This acquisition will bring us IP in two-wheel bikes, additive mobile games and capabilities, and additional talent team, all of which we could leverage across the portfolio for our fans. We're in the process of negotiating a definitive acquisition document to complete the Studio 397 and Digital Tales transactions, which are subject to customary closing conditions. In summary, we're excited to accelerate our product roadmap with these highly synergistic acquisitions. Moving on to Traction, we expect Traction to eventually serve as our esport as a service platform for the fans worldwide. Fraction will enable users to customize and run their own esport competition in a simple turnkey format, allowing groups to form around specific games, consoles, or individual ability. Fraction will allow users to engage with a community of like-minded virtual racers competing against each other no matter where they are. Traction recently launched as a content and a community platform that aligns perfectly with our recent acquisitions. We believe the future of this space relies heavily on innovation, and we expect to deliver the next phase of Traction integration into our ecosystem later this year. Now, Stephen is going to say a few words about our product development. Thank you.
spk04: Thank you, Dimitri. And hello, everyone. I'm Stephen Hood, president of Motorsport Games. As you will have heard, we're accelerating the growth of our business, both with strategic acquisitions and through the launch of Traction, a community and end-user focused platform which will quickly evolve to become a key component in our ecosystem. For the last two years, we have been working on a new NASCAR game which will replace the existing NASCAR Heat franchises. a franchise we have simultaneously maintained across Heat 4 in 2019 and Heat 5 released in 2020. NASCAR Heat 5 Ultimate Edition, released in February of this year for PC and PlayStation, amplifies the success we've had with this product line. Ultimate Edition will launch later on the Microsoft Xbox platform per insight on sales opportunities from their team. But looking further ahead, Our intent was always to raise product quality and to deliver the franchise our audience has been calling for. To reach further beyond our core fan, we are striving to develop a world-class product. The investment into this new franchise will provide the platform for not only this year's NASCAR games on console and PC, but the platforms for BTCC, Le Mans, and all other internally developed motorsport games products of the future. This is an important step forward in the capability and flexibility of our development infrastructure moving forward. Having the right building blocks in place sets us up for our ambitious future growth plans. NASCAR Next, as we refer to it internally, is on track to be released in Q3 of this year. This product release will be the result of collaboration across development talent located in our US, UK, and Russian studios. NASCAR Next will support both new and legacy generation consoles from Sony and Microsoft, as well as the PC format. We believe that the rate of adoption for new generation consoles is traditionally slower amongst the NASCAR gaming audience, and this will be further tempered by the ongoing global pandemic. We are going the extra mile to ensure that whatever machine our target audience owns, they will be able to enjoy NASCAR Next. Delivering this initial title will be a major milestone for our team, and we believe will set us up to differentiate to an even greater extent with future products, as we anticipate spending less time on the tech and more time on the user experience. An experience that will increasingly tie into the ambitions of our internal esports operation, bringing the capabilities of our game products into line with what we see as the future of virtual racing, as well as those opportunities now afforded to us by traction and our ongoing development of the Motorsport Games ecosystem. Pre-production teams are already forming around British Touring Car and Le Mans game experiences, identifying and sourcing content necessary for the delivery of these products in the latter part of next year. These products will utilise the aforementioned Motorsport Games platform. The addition of Studio 397 once the acquisition is completed and the formation of Motorsport Games Australia, which will continue development of KartKraft, adds new technologies and talent to the growing capabilities of our now global development operation. In addition to the headline console franchises, we believe firmly in utilization of our IP across additional platforms such as mobile and handheld. Our existing NASCAR Heat mobile product has released the first of two planned updates to maintain its currency in the fast-moving world of mobile, The second update will add 2021 content and some features to refresh the game. Our casual category extension continues with a NASCAR Match 3 title that will shortly go into soft launch ahead of an expected global rollout on Android and iOS devices in the latter part of Q2 of this year. We continue to work on bringing NASCAR to the handheld Nintendo Switch platform. This product remains in development, We intend to release the title as and when it reaches the required quality bar we set up ourselves and our partner in NASCAR. This remains a key opportunity for audience expansion, and you can expect future news on this in the future. In summary, our development roadmap and portfolio has continued to progress positively and according to plan. All titles and game releases are on track, and we now have opportunities that are additive to the picture. Now let me hand over to John New who will give some financial highlights.
spk01: Thank you, Stephen. Thank you, Dimitri. I'm John New, Chief Financial Officer. Welcome to our first earnings conference call. I'm going to review the 2020 results for the fourth quarter and full year, and I'm also going to touch on the first quarter 2021 expected results. For the full year 2020, we're very excited to report revenues increased 60% to $19 million versus $11.9 million in 2019. This includes $2.9 million for the fourth quarter of 2020, which is a 26% increase from the $2.3 million in the fourth quarter of 2019. The increase in revenue was primarily due to the release of NASCAR Heat 5 in July of 2020, which saw sales surpassing the release of NASCAR Heat 4 in 2019. Our 2020 digital marketing plan drove additional revenue and maximized the opportunity created by increased video gameplay and expanding audience size. Our gross profit was $12.4 million for 2020 as compared to $7 million in 2019, and that's primarily due to higher revenues and a shift towards more digital downloads, which have higher margins. Gross profit as a percentage of revenues increased to 65% for the year ended December 31, 2020, as compared to 59% in the prior year period. Our operating expenses of $12.5 million for 2020 were almost flat to 2019 operating expenses of $12.1 million. As a result, adjusted EBITDA was $0.9 million for the year ended December 31, 2020 versus a loss of 4.9 million for the year ended December 31, 2019. And again, that's due to increased sales and the increased margins with the shift to digital. For the fourth quarter of 2020, we saw a revenue increase of 26% to 2.9 million. This compares to 2.3 million in the fourth quarter of 2019. So growth in revenue in the fourth quarter of 2020 was driven primarily by the increase in digital NASCAR heat game sales on all platforms, Xbox, PlayStation, PC. This result is consistent with our expectations as we begin to focus on and build our audience for the upcoming NASCAR Next release. Our gross profit for the fourth quarter was $1.6 million, and that was $0.4 million in increase compared to the prior year fourth quarter gross profit of $1.2 million. Our gross profit margin was 55% of revenues in the fourth quarter of 2020 compared to 51% of revenues in the prior year period. The increase in gross margin is primarily due to increased digital sales versus sales of fiscal units, as we mentioned. Operating expenses were $4.4 million for the fourth quarter of 2020 compared to $2.6 million for the fourth quarter of 2019. So our operating expenses went up $2.4 million in the fourth quarter as we build out and enhance our development team through the course of the year. We expect to report our first quarter 2020 results on or before May 15, 2021. At this point, we're comfortable with analyst consensus estimates of revenue of 1.8 million and adjusted EBITDA loss of 2.8 million for the first quarter of 2021. For the full year 2021, analyst consensus numbers are revenues of 22.5 million and adjusted EBITDA of negative 7.3 million. We believe these numbers are reasonable and we expect to meet or exceed them based on the business today and the anticipated third quarter release of NASCAR Next. Thank you for joining us today, and now let's go to questions. Operator?
spk06: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start keys. One moment, please, while we poll for questions. Thank you. Our first question comes from Michael Graham with Canaccord Genuity. Please proceed with your question.
spk05: Hi, and thanks for taking the question. Dimitri, I wanted to start with a question about strategy. You've done a lot strategically in a really short amount of time, so congrats on that. I just wanted to ask how you're thinking about the balance of efforts over the next few months between organic execution and sort of integrating what you've put together versus further acquisitions and strategic initiatives. And I'd also love to get your thoughts about, you know, how are you feeling about the company's overall development footprint at the moment?
spk02: Thank you, Mike. Thanks for the question. Overall, we feel very confident in what we set out the strategy to be and how we're executing against it. So part of the question regarding acquisitions They are something that we set out to do in the beginning. They were part of the overall plan. A lot of these are bolt-on tech components that are bolstering our future product roadmap. They're no stranger to us. We have been working, for example, with Studio 397 for some time now. They have been integrating into our NASCAR Next products that we have been discussing all along. us making this acquisition will help us safeguard this from others potentially licensing similar type of experiences, so making this exclusive to us. As far as how we handle these type of acquisitions and in parallel our organic product roadmap and development, again, this has been part of the plan from the beginning. Our core team, which has been developing our existing products Pre-acquisitions continue to focus on such. These acquisitions are additive to ours while we will be able to bolster their existing products with more of a marketing and publishing efforts.
spk05: Okay, thanks for that. And then I wanted to ask maybe one or two more. First, can we just zoom in on the development progress with the next game and I think Steven mentioned in his remarks that progress is coming along nicely in terms of development there. I'm just wondering if there are any features or game elements worth highlighting that you guys are particularly excited about. And just maybe some color on relative to past game development cycles you've been involved with. How comfortable are you with the pacing of the progress of this important game?
spk04: Sure. So it's all going to plan on the development of NASCAR Next. We're in the phase that we describe as the road to finally now, prior to shipping the product, prior to pushing it live. So that's a switch of attention from developing additional features to preparing the game for release. In terms of the game content and the features, I think we're particularly proud of the technology integration, technology that enables us to improve the core experience versus prior games. We had a wonderful opportunity from the very beginning to integrate the tech of our choosing. For example, key components from the R Factor 2 product from Studio 307. That technology is already in NASCAR Next, is already well proven. And we believe that aligning this with the Unreal Engine, which the Motorsport Games platform uses, gives us some unique advantages. We've increased the ceiling for product quality. We have a world-class team applied to this technology, and we believe it's significantly in advance of the prior heat products and is exactly what the community has been asking for. So we're on track. Our product quality is significantly increased, and the key technology enables us to positively differentiate what's gone prior in the heat case.
spk05: Okay, thanks for that. And then, and then last one for me and I'll, and I'll go back in the queue. John, I just wonder if you can share any updated thoughts on sort of how the company's balance sheet is looking. You've, you know, you've had a lot of moves recently in IPO. You've made some acquisitions and you've given full year EBITDA guidance and just wondering how you're feeling overall about liquidity and cash levels and, you know, perhaps now and maybe as we get, you know, through to the end of the year.
spk01: Thanks, Mike. Good question. Yeah, I feel pretty good about liquidity and cash needs. We have no plans to raise any additional capital based on the models that we're running now. We netted about $64 million from the IPO, and we've spent through the first quarter $35 million. That's on paying down notes for $10.4 million, a period of 10% interest, $2.5 million of operations, $2.5 million of IPO expenses, and acquisitions for almost $20 million projected. Okay. So that's where we think we'll end up. From $64, we'll end up at about $29 at $331.
spk05: Okay, great. Thanks for the update, guys. Congrats on a lot of progress, and I'll jump back in the queue. Thank you, Mike.
spk06: Thank you. Our next question comes from Mike Hickey with the Benchmark Company. Please proceed with your question.
spk03: Hey, Dmitry, John, Stephen, Ashley. Congrats, guys, on your first quarter in the recent IPO. Pretty awesome. I guess just the... The first question on what you sort of saw, I guess, in 2020, obviously a very unique environment for you to operate in. And I'm wondering sort of how your player base responded in terms of digital download trends and maybe the size of your overall player base if you brought a lot of new players into your ecosystem. And then your opportunity, I guess, that you think you can sustain the benefit of 2021?
spk02: Thank you, Mike. Thanks for the question. Absolutely, 2020 has been an unprecedented type of year around the world with such tough times around the globe. We're happy that we're able to contribute and bring at least some joy to the times that everybody experienced through our racing products and entertainment we offered. One of the many benefits that I'd like to highlight is that we believe because the physical racing has come to a halt at a certain period of that year, we were able to carry the flag and step in and provide equivalent and sometimes maybe even very exciting entertainment for the captive audience that each one of these official motorsport series care for. So they have captive fan base, they were starved, were deprived of the type of things they're passionate about, whether it was on television or going physically to an event, and we were able to step in and provide a virtual replacement. That, we believe, has helped accelerate the adoption of what eSport and online competition is. Without that need at that time, we believe we would have taken... possibly a couple of years to educate enough consumers about how exciting esport entertainment is. Additional benefit is that we were able to really challenge ourselves technically and operationally to be able to completely operate with a distributed model, with remote working and others. And that includes not just game development, but that includes actual production of events. So you could imagine we have many events where we're producing it out of one location. Talent that is commentating on the event is in a completely different location. Participants are in a completely other location. If we take our 24-hour Le Mans virtual example, which was without a doubt one of the largest events and most viewed and interacted with racing eSport event ever done, that was with 200 different competitors spanned across 37 countries, and all being playing and participating for a 24-hour continuous event. That is something that in normal times would not be – necessary, I would say, until you come to such a point where you need to put this on, you get the audience to experience it, and you get them now excited to see more. So we see operationally we have raised our own bar. We see that we're able to create some know-how about how we produce an event with remote capabilities. and we see that the e-sport adoption has accelerated, we would estimate, a couple of years.
spk03: Thanks, Dimitri. I guess the next question on M&A, I mean, obviously some really complementary deals and strategic deals you've done in pretty quick fashion here. I think we're all excited to see NASCAR next and sort of layering of all the tech and expertise you're going to put into that game. I guess thinking about M&A moving forward, do you sort of pause here, Dimitri, and digest what you have, or are you continuing to sort of look for additional deals? And the deals that maybe you're looking at now, how do you sort of balance what's most important in your view in terms of sort of IP, which it seems like you have a lot, but you have more now, tech, and development expertise?
spk02: So, We're always exploring opportunities to accelerate and or better a product offering. As of right now, we have a couple of targets in mind, but those that we really had our eyes on for a while now and we knew would be additive to us, we have already announced. So essentially everything we had in mind, we have already announced. We continue to explore additional opportunities should they come. As far as how we handle, essentially, these additive products, which all of them come with respective studios and our existing product roadmap, some of them are already integrated to each other, like Stephen made a particular example about R-Factor 2 technology integrated into NASCAR Next. So those things already have been working together for some time. There is R Factor 2 as a standalone product that will continue to exist and be supported and will be enhanced with our marketing and publishing capabilities. As far as handling the actual development roadmap, we see that this is completely something that could be done in parallel and, if anything, could share some of the know-how between each other to better the product quality across the whole portfolio. One example of that is if you look at car craft visuals of how it actually is being consumed from visual aesthetics perspective, that is a benchmark that we would like to make sure we reach across all our other products. So in such scenarios, you could foresee that we would be asking our car craft Australian team on some of the pointers and additional, let's say, know-hows on how to really utilize the most out of the Unreal Engine visuals that is already part of our NASCAR Next and other products that we're currently developing.
spk03: Nice. I guess the last question, and then I'll circle back in with you. I guess just your initial... view of the success of traction being launched. And obviously, you have a very vibrant and vocal community, Dimitri. As gamers are, they'll give you your opinion. And you certainly saw the thumbs up with our factor acquisition. It had to make you happy. People are excited. And I guess when you look at the community and what you're trying to do What are your thoughts, I guess, on the launch and how important is this community platform in terms of reaching your audience, player conversion, marketing, engagement, all sort of the key areas that you would look at when you think about your overall ecosystem?
spk02: This is a crucial component to us, and I'd like to highlight some of the things that you said, right? This is a very passionate community, right? Right now, this community is spread all over the social sphere. For example, when we were putting on one of the largest esport events ever, the 24-hour of Le Mans Virtual, right, one of the largest racing events in esport, that interaction is which were more than 100 million mentions throughout that event, all happened on different social spheres. We want to make sure that with the launch attraction, that type of interaction, that type of passion of those like-minded individuals happens at our home base. That is very important for us. As we create more engaging products, as we create more engaging entertainment with our esports and beyond, We want to make sure that those that experience that have a home base to interact with like-minded individuals. That is essentially a third pillar of our business of why we created a destination like Traction. In the future, we'll look at Traction becoming our esports as a service platform where we will take the next step of making sure that that community is able to interact with each other on a different level. meaning that as all of us here on the call, if we so wish so, we could get on traction and quickly spin up our own competition, regardless on the type of racing game that we would be participating there. So that's important for us from a retention standpoint of view, and ultimately, one of the things that you touched on, it does become our go-to customer base, right? If we are essentially nurturing this community, We have a good understanding of the community's desires over time and how those things progress, because these desires could be across multiple racing disciplines, and we want to be able to take relevant products to that audience at the right time for the highest possible conversion. So this essentially will become our go-to customer base of passionate individuals that are just there amongst others like mine.
spk03: Nice. Thank you, Dimitri. Good luck, guys.
spk02: Thank you.
spk06: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue. There are no further questions at this time. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.
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