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spk05: 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. At this time, all participants are in listen-only mode, and a question-and-answer session will follow the formal presentation. If anyone needs any assistance during the conference, please press star zero on your telephone keypad. I would now like to turn the conference over to Ben Roster-Turner from Motorsport Games. Please go ahead.
spk00: 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' 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 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 10Q 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 over the call to Stephen Hood, Chief Executive Officer of Motorsport Games. Stephen.
spk03: I extend my gratitude to all the participants for joining this conference call today. The preceding quarter has been marked by an intense period of activity conducted discreetly behind the scenes. 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 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. 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 resources and operational capacity in the present context. A pragmatic re-evaluation 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 realistic return potential, even when the returns are non-direct and 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 right-sizing the organization for sustainable operations. We are actively exploring diverse avenues to chart our path forward, and I retain a positive outlook on implementing the necessary adjustment. Notably, initiatives such as those centered around our R factor 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 5th, showcase a multi-revenue opportunity that capitalizes on our strengths without overextending our resources. Our ongoing investment in versatile multi-format technology geared toward mainstream gamers, particularly those playing in their living room from 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 to provide a superior experience for our consumers. 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, seeking 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.
spk04: Thank you, Stephen, and good evening, everyone. As with previous selling 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 earned through the development of simulation platforms for third parties, and lower revenues earned through esports sponsorships, the primary drivers for 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 non-cash asset impairment loss of $4 million, recognised in the second quarter of 2023. which was partially offset by a $2.2 million reduction in margin development and general and administrative expenses, as well as a $0.4 million in fair value gains and changes in the current value of certain liability classified warrants, as well as favorable foreign currency gains. Consequently, EPS for the quarter was negative $3.02, compared with 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 4.9 million on an annualized basis as of June 30, 2023, exceeding our target 4 million in annualized savings by the end of December 31, 2023. These savings were achieved through changes in global headcount, reducing certain overhead expenditures, and improvements in our internal processes. We are reporting an adjusted EBITDA loss of 2.7 million for the second quarter of 2023, compared to an adjusted EBITDA loss of 6 million for the same period in the prior year. The improvements in adjusted EBITDA loss are the same as those discussed in respect of the change in net loss for the period and comparative quarter. On a year-to-date basis, revenues for 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 for the same period in the prior year. Year-to-date adjusted loop dial was $6.9 million, down from $11.5 million for the same period last year. Non-cash asset impairment losses of $4 million and $9.4 million for the six months under June 30, 2023 and 2022, respectively. count for a significant portion of the difference between that loss and adjusted EBITDA for the respective periods. EPS loss for the year's late 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 under June 30, 2023 was 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 for the year ended December 31, 2022. As of July 31, 2023, Our cash and cash equivalents position was reduced by 0.6 million to 1.4 million, which we believe is insufficient to fund our operations for the remainder of 2023, and then 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 to, 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 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 remarks.
spk03: 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.
spk06: Operator? Thank you.
spk05: Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate 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 star keys. One moment, please, while we poll for questions. And our first question comes from the line of Jason Kilchin with Kennecor Genuity. Please proceed.
spk01: Great. Good afternoon. 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, and 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 feature perspective, from a visual perspective, these titles from some of the other racing games that are out there made by other publishers? Thanks.
spk06: Hi, Jason. It's Stephen here.
spk03: 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 how do you positively differentiate in that market? 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, you know, 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 the race begins. That is a problem for mass market appeal. So Le Mans in particular tackles 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 and Le Mans in particular, it's about a team fighting against others using a single vehicle. So there's more than one driver in a 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 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. If you think about a lot of positive things, 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 baton 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 should position us accordingly.
spk01: 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. Please talk about if there were any decisions that had to be made given where the cash position is, and is that why the burn was slower in July? 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 resolving liquidity situation. Thank you.
spk04: 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 two months in the quarter. And we did see on average just for the three months net cash burn from operations dropped to about 1.1 million a quarter versus the 1.5 for the year to date. As you are probably aware, there is always some lumpiness to our cash flows in terms of timings of minimum royalty guarantee 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 cashbound 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 program, where we've realized about $4.9 million in annualized savings, and so that's starting to filter through into our cashbound position. And so, yeah, we're starting to see a little bit of upside from that.
spk06: Great. Thank you very much.
spk05: Our next question comes from the line of Michael Kopinski with Noble Capital Markets. Please proceed.
spk02: Thank you. I have a couple of questions here. In terms of Heat 5 and the launch of the DLC and 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 me your thoughts about that and then also what the implications are for NASCAR Ignition given that you've launched a DLC for Heat 5?
spk03: 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. 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 catalogue 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. So there's a clear affinity and love in the NASCAR gaming community for the Heat franchise. It's built a decent reputation and that piece of DLC was a a good addition by Motorsport 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 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 was very vibrant with a piece of DLC that was near-ready.
spk02: 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 positives? 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.
spk03: Yes, that's something that we're undergoing at the moment, doing a broad review across the business, having a look at which titles are in production, how far they are into development, the cash needs of those products, the viability and the likely 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. 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 the actual 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 business becomes sustainable and viable for the future. So we tread lightly. But I think in this next quarter, we'll resolve all of those outstanding conversations and we'll very firmly know where we're headed and what the upside is.
spk02: Going back to my previous question, are there things in the vault, so to speak, that you can launch, um, that you're contemplating or moving forward with that maybe, um, that we outside of, you know, the Lamans and other titles that you're planning on publishing, that there are other things like heat five with the DLC that you might be able to launch, um, inexpensively and generate a favorable return on.
spk03: Uh, I think there are a number of opportunities. I mean, um, Quite clearly, nothing comes for free, and we have to be very considerate about where we invest our resources going forward, the products that 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. 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 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 are going to take years to come to fruition. I think there are some exciting opportunities there that we need to validate.
spk06: Thank you. That's all I have. Thank you. There are no further questions at this time. I'd like to turn the call back to management for closing comments. Thank you very much for everybody's time today.
spk03: Much appreciate the questions. And I thank you very much for your participation in this call.
spk06: Thank you.
spk05: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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