Motorsport Games Inc.

Greetings and welcome to the Motorsport Games Inc. Third Quarter 2022 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. And as a reminder, this conference call is being recorded. It is now my pleasure to introduce you to Ken Godskin. Thank you, Ken. You may begin.

Thank you and welcome to Motorsport Games third quarter 2022 earnings conference call and webcast. On today's call is Dimitri Kosko, Motorsport Games executive chairman, CEO, and interim CFO. By now, everyone should have access to the company's third quarter 2022 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.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 for the quarter ended September 30, 2022, 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 third quarter 2022 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 Dimitri. Dimitri.

Thank you everyone for joining us on our Q3 2022 earnings call. Times around the world are definitely unprecedented. And to start the call, I'd like to say that I'm proud of the team that we have gathered here at Motorsport Games, which has demonstrated to be resilient and passionate in spreading the joy of racing to the masses. We continue to stay focused and to invest in our product development. The company's priorities are launching games and eSport experiences that fans enjoy and want to bring their friends into. This past quarter, we were busy finalizing products that we've been working on for months prior to it. For example, in Q3, we announced that we would launch the NASCAR Rivals, a new NASCAR game for Nintendo Switch platform on October 14th, and I'm happy to report that we were able to release this exciting game on time and on budget. Adding to the momentum from previous year's NASCAR game on Switch, we were able to add over 450 target stores to our distribution channels when compared to the previous year's title. Additionally, throughout Q3, we continued to work diligently on improving our NASCAR 21 Ignition game to patch bugs, increase content availability, and enhance the gaming experience for our players. In an effort to increase our fans' engagement with NASCAR 21 Ignition game, for Xbox, PlayStation, and PC, we released a 2022 Season Update DLC free of charge to the existing owners of the game. We believe this was a necessary investment for the long run as our NASCAR license is not due to renew until 2030. Additionally, we shifted gears and started to work on our NASCAR 2023 title. While at the same time, we have been hard at work for developing of our IndyCar and 24-hour Le Mans gaming experiences. Motorsport Games is committed to being a good stewards of these iconic racing brands and our commitment extends to our fans that have been patient with us to deliver them the gaming experience they deserve. Thank you for those that support us and believe in us. It means a lot to the team here. On an esport front, we've been making big strides. In Q3, we launched our 2022 into 2023 Le Mans Virtual Series, which is another star-packed grid and increased viewership from the year before. We thank our sponsors who came along for the ride and who allowed us to continue to increase the production and entertainment value of this exciting racing series. And we thank all participants and supporters of those participants for making this an exhilarating experience. In tier three, we also ramped up our activities where the fans are at the tracks. We made sure to bring the latest BTCC content on our factor two for the fans to try at the four recent BTCC events. Now BTCC content is available for all on our factor two. Motorsport games also showcase interactive IndyCar game content at two recent IndyCar events in Indianapolis and in St. Louis. And eager to showcase our 2022 NASCAR content to our NASCAR fans, we recently attended five NASCAR races, running a nail-biting competition on our NASCAR Rivals game. We're also pleased to announce that we have just completed our 1-for-10 reverse stock split on November 10, with a goal to regain compliance with NASDAQ's minimum closing price requirement for continuing listings. In September 2022, we announced a 2022 restructuring program to reduce our operating costs, which is expected to generate annualized cost reduction of approximately $4 million by the end of 2023. To date, we made good progress by achieving annualized savings of approximately $2.5 million and our continuing efforts to achieve further cost reductions. I'd like to now take the opportunity to discuss our financial results for Q3 2022 and our current liquidity position. Revenue for Q3 2022 were $1.2 million compared to $2.1 million for Q3 2021. The $0.9 million or 43% decrease in revenue is primarily due to $0.6 million of lower digital game sales driven by lower sales volume and lower pricing and an out-of-the-period adjustment of $0.3 million, correcting an immaterial overstatement of revenues in the three months ended June 30, 2022. Q3 2022 net loss was $8.5 million, compared to Q3 2021 net loss of $6.7 million. The $1.8 million increase in net loss was primarily due to $0.1 million increase in sales and marketing spend, 0.8 million increase in foreign currency losses, a 0.6 million decrease in gross profit, a 0.1 million increase in interest expense, and 1 million increase in lost contingency reserves. The increases in Q3 2022 expenses were partially offset by 0.4 million decrease in development expenses, 0.2 million decrease in other expenses, and 0.1 million decrease in general and administrative expenses. Q3 2022 adjusted EBITDA loss was 6.5 million, a 1 million increase in loss when compared to Q3 2021 adjusted EBITDA loss of 5.5 million. The increase in adjusted EBITDA loss was primarily driven by the same factors causing the increase in Q3 2022 net loss. Revenues were $6.6 million and $6.9 million for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $0.3 million or 4% when compared to the prior period. Gaming segment revenues decreased by $0.8 million or 12% to $5.9 million for the nine months ended September 2022, compared to $6.7 million for the nine months ended September 30, 2021. The decrease in our gaming segment revenue is primarily due to the lower retail revenues of $0.6 million, driven by higher retail pricing concessions, as well as a decrease in digital and mobile game sales of $0.8 million that was caused by lower volumes and pricing. These decreases were partially offset by $0.6 million in additional revenue earned through the development of simulation platforms for third parties. Our esports segment revenues increased by 0.5 million, but the nine months ended September 30th, 2022, as compared to the nine months ended September 30th, 2021. The increase in our esports segment revenue is due to 0.5 million of higher sponsorship revenues from our Le Mans Virtual Racing Series events, which concluded its 2021 into 2022 season in January 2022, and commenced its 2022 into 2023 season in September 2022. Net loss for the nine months ended September 30th, 2022 was 32 million compared to 26.7 million for the nine months ended September 30th, 2021. The increase in net loss was driven by a 9.4 million increase in goodwill and intangible asset impairment, a 1.6 million increase in development expenditures, a $1.6 million increase in sales and marketing spend, a $1.4 million decrease in gains from equity method investment, a $1.7 million increase in foreign currency losses, a $1.1 million decrease in gross profit, and a $0.3 million increase in interest expense, and $1 million increase in loss contingency reserves. These increases were offset by $12.8 million of lower general and administrative expense. For Q3 2022, adjusted EBITDA loss was $18 million, a $6 million increase when compared to the $12 million adjusted EBITDA loss for Q3 2021. The increase in adjusted EBITDA loss was primarily driven by the same factors as the increase in net loss for Q3 2022 when compared to Q3 year-to-date 2021. We expect to continue to incur significant operating losses. As a result, we will need to grow our revenues to reach profitability and positive cash flows. We expect to continue to incur losses for the foreseeable future as we continue to develop our product portfolio and invest in development of new game titles. As of October 31, 2022, the company had approximately $1.8 million of cash and cash equivalents, which we believe is insufficient to fund our current operations for the remainder of 2022. We will need to supplement our available liquidity with additional debt and or equity financing, cash generated by cost control initiatives, and or additional changes to our product roadmap to reduce the working capital requirements. Thank you for joining us today, and now let's go to questions.