Motorsport Games Inc

NASDAQ:MSGM

Earnings Call Analysis

Motorsport Games reports revenue growth with improved financial metrics.

In the third quarter of 2024, Motorsport Games achieved revenue of $1.8 million, up 6.4% due to higher digital sales from 'Le Mans Ultimate.' The company's net loss improved significantly to $0.6 million from $3.5 million last year, thanks to a foreign currency gain of $1.4 million and reduced operating costs. Adjusted EBITDA reached $0.1 million, a notable recovery from a $2.5 million loss previously. However, cash resources remain tight, necessitating additional funding to sustain operations amid ongoing strategic initiatives for growth and product enhancement, including new subscription services expected next month.

A Transformative Journey

Motorsport Games has been navigating a transformative path as it aims to reshape its operations amid significant changes within the racing video game market. With a new strategy in place, led by CEO Stephen Hood, the company is focused on reducing expenses while simultaneously enhancing game quality. This approach isn't just about cutting costs; the management believes in the potential of their devoted team to foster innovation and deliver unique gaming experiences that could stand out in a competitive landscape.

Positive Revenue Trends

In the third quarter of 2024, Motorsport Games reported revenues of $1.8 million, a 6.4% increase compared to the same period last year. This growth was largely driven by strong sales of the recently launched 'Le Mans Ultimate' on PC, which debuted in February 2024. Such positive revenue trends provide a glimmer of hope for investors as the company seeks to return to profitability.

Improving Financial Health

The company's net loss significantly narrowed to $0.6 million for Q3 2024, an improvement of $2.9 million from a net loss of $3.5 million in the prior year. This was attributed to $1.4 million in other income, mainly from foreign currency gains, as well as a $0.5 million reduction in operating expenses due to staff cuts and lower administrative costs. Furthermore, the adjusted EBITDA improved to $0.1 million, up from a loss of $2.5 million the previous year, marking significant progress in operational efficiency.

Concerns over Cash Flow

Despite the positive trends, liquidity remains a significant concern for Motorsport Games. The company reported cash and equivalents of $0.5 million as of the end of October 2024, down from $0.8 million in September. With an average monthly cash burn of $0.1 million, it is evident that the company may not have enough liquidity to sustain operations over the next year without seeking additional funding. Therefore, exploring options such as equity or debt financing is critical for the company's short-term survival.

Product Innovation and Market Expansion

During the earnings call, Stephen Hood highlighted innovations like the co-op mode for 'Le Mans Ultimate' that enhances player engagement and positions the game as a unique offering in the market. The new update has been well-received, meeting growing user demand for multiplayer experiences and adapting to players' hectic schedules by allowing saved gameplay sessions. Moreover, partnerships, such as with Kindred Concepts, are paving the way for wider reach and increased licensing revenues, which could further enhance profitability.

Strategic Alternatives and Future Outlook

The company is actively exploring various strategic alternatives to address liquidity challenges, including the potential sale or licensing of assets. CEO Stephen Hood expresses optimism about obtaining the right financing to fuel future growth. The strategic vision involves a commitment to enhancing their product lineup while positioning their technology as a market leader in racing simulations. The expected upcoming releases, such as the real-time driver swaps feature in Q1 2025, are anticipated to increase player retention and drive future sales.

Earnings Call Transcript 2024-Q3

[Operator]

Thanks you for standing by, and welcome to the Motorsport Games Inc. Third Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, today's conference is being recorded.

I would like to turn the conference over to Ben Rossiter-Turner from Motorsport Games. Please go ahead.

[Ben Rossiter-Turner, executive]

Thank you, and welcome to Motorsport Games Third Quarter 2024 Earnings Conference Call and Webcast.

On today's call is Motorsport Games Chief Executive Officer; Stephen Hood; and Chief Financial Officer, Stanley Beckley.

By now, everyone should have access to the company's third quarter 2024 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.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, Form 10-Q, for the quarter ended September 30, 2024, for a detailed discussion on 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 2024 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, which is also available on the Investor Relations section of Motorsport Games' website at www.motorsportgames.com.

And now I'd like to turn the call over to Stephen Hood, Chief Executive Officer of Motorsport Games. Stephen?

[Stephen Hood, executive]

Thank you, everyone, for joining this conference call today.

Since our last conference call, work has diligently continued at Motorsport Games and our development team at Studio 397 to deliver improved player experiences against the backdrop of ongoing cost optimization. We continue to drive game revenues whilst reducing expenditure.

As announced last month, the company undertook further head count reductions aimed at reducing cash expenditure and streamlining operations. This was a necessary move to maintain our steadfast commitment to rightsizing the entire operation so that we can emerge stronger and ultimately prepared for success.

A reduction in personnel has not meant a reduction in productivity or progress, however. We believe we have struck the right balance between cost saving and the retaining of key staff and vital knowledge. The team we have today are more than capable of carrying this company into a new phase with continued product and technology growth, which will serve our customers, shareholders and clients.

In September, Le Mans Ultimate received its biggest update so far with large free feature updates alongside the second of our 2024 downloadable content, or DLC packs. An innovative co-op mode that I've spoken about regularly was delivered, offering a unique opportunity for racers to play together with friends at a pace that suits them in a play-by-mail gaming style and powered by our online platform RaceControl. This feature is not available in any other product on the market and something that we are particularly proud of and expect to make use of in partnership with some of our clients also seeking further opportunities for improved customer retention.

Players now have the opportunity to play 1 chapter of a story at a time of their choosing, which can only be a benefit in today's hectic world where time to play is at a premium.

Whilst the underlying technology that powers our simulation online platform and gaming is incredibly strong, we realize the deployment of our experiences must be to the benefit of a wide range of gamers. F1 Arcade, powered by our technology, is a more recent example of high-end simulation technology being very much proven as pick-up and play.

Additionally, we delivered a feature that players have been asking for since day 1, the ability to save a race and resume it in a race weekend game mode. As the simulation built to represent the 24 hours of Le Mans and the FIA World Endurance Championship, our product must be able to allow users to complete technically challenging endurance races in a way that suits them. And both this save-and-load feature and a co-op game mode fulfill this requirement.

Next up, we're on the path to deliver real-time driver swaps in the new year expected in Q1 2025, which will continue to take our product to a new level. Players will be able to team up with friends and play in real-time races, sharing their car and in turn, experiencing shared moments that will further broaden the appeal of our newest game.

Pack 2 of our 2024 season pass for Le Mans Ultimate completed the Hypercar grid for players with the Isotta Fraschini and the Alpine LMDh, both with great support from the manufacturers. We expect our subsequent packs to generate greater interest as we bring the ever popular GT3 series cars to the game.

Data from another of our products, rFactor 2, historically shows these are by far our most popular vehicle class and we're eager to see this translate into Le Mans Ultimate as we continue to bring the product up-to-date to match the real-world offering and changes in the sport.

Part of this major update is an extension to our RaceControl platform to enable new features and services as part of an optional subscription service. We made a commitment to expand the overall offering, and subscription plans are a part of that. We are conscious, however, of the never-ending stream of subscription services out there and intend for our offering to provide major value across our 2 pillar titles, rFactor 2 and the Le Mans Ultimate.

With every new game tapping into this to deliver unbeatable value, this service should go live next month and become a useful revenue stream.

I must also make mention of our partnership with Kindred Concepts, creators and operators of the hugely successful F1 Arcade. They recently expanded to a fourth venue, the latest in Washington, D.C. This is a partnership that enables us to demonstrate the appeal of game and technology, and we're hopeful of exploring more of what we can do together next year.

With every new venue opened, more players get to experience our racing simulation. We received additional per-seat license revenue from Kindred Concepts, and we position our technology as the pinnacle of single-seat racing.

As I hope you will have understood, I am upbeat about the potential future of this company, studio and its technology. Our announcement regarding strategic alternatives came about because the Board and I believe, with the right financing, we will have the opportunity to grow this business quickly and sustainably.

In the 18 months since I returned to this business with a mandate to steer a new course, we have made enormous progress: reducing debt, reducing cash spend and, at the same time, building, launching and cultivating an iconic product in Le Mans Ultimate.

Now I would like to invite Stanley Beckley, our Chief Financial Officer, to talk about the financial results for the third quarter of 2024.

[Stanley Beckley, executive]

Thank you, Stephen, and good evening, everyone. As with previous earnings calls, I wouldn't be offering any forward-looking guidance today. Instead, I will focus on providing an update on our financial results and highlights from the third quarter of 2024.

Revenues for the quarter were $1.8 million, up by $0.1 million or 6.4% when compared to the same period in the prior year. The increase in revenues was primarily due to higher digital game sales from the release of Le Mans Ultimate on PC in February 2024.

Net loss for the quarter was $0.6 million compared to a net loss of $3.5 million for the same period in the prior year, an improvement of $2.9 million. The decrease in net loss is driven by $1.4 million in other income, which is primarily comprised of foreign currency gains incurred, emerging transactions denominated in the currency other than U.S. dollars. Net loss also decreased due to a $0.5 million reduction in operating expenses related to head count reductions and lower general and administrative expenses during the 3 months ended September 30, 2024, compared to the same prior year period as well as a $0.2 million improvement in gross profit.

Net income attributable to Class A common stock was $0.00 per share for the third quarter of 2024 compared to a net loss of $1.31 for the same period in the prior year.

We are reporting adjusted EBITDA of $0.1 million for the third quarter of 2024 compared to an adjusted EBITDA loss of $2.5 million for the same period in the prior year. The improvement in adjusted EBITDA are the same as those discussed in respect of the change in net income for the period and comparative quarter as well as a decrease in stock-based compensation compared to the prior year period. As it relates to liquidity, this continues to be a key area of focus for the company.

Net cash used in operations for the 9 months ended September 30, 2024, and was approximately $0.7 million, representing an average monthly net cash burn from operations of $0.1 million, down $1.0 million when compared to the average monthly cash burn of $1.1 million for the 9 months ended September 2016.

As of September 30, 2024, the company had cash and cash equivalents of $0.8 million which had decreased to $0.5 million as of October 31, 2024.

Based on our cash position and average monthly cash burn, we do not believe there is sufficient cash on hand to fund company operations over the next year 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 to, additional funding in the form of potential equity and/or debt financing arrangements or similar transactions; other strategic alternatives for our business including, but not limited to, the sale or licensing of our assets in addition to the recent sales of its NASCAR license and Traxion and further cost reduction and restructuring initiatives.

Thank you all for your time. And now I will turn the call back to Stephen for closing remarks.

[Stephen Hood, executive]

Thank you, Stanley, and thank you to everyone joining us today.

If I could leave you with one lasting thought, it's this. We've shown that a united and focused team of passionate, talented individuals can defy the odds and transform our organization into the forward-thinking games company we were always meant to be. I'm confident that together, we will empower our people to lead us into a successful future, delivering entertainment experiences that could genuinely disrupt the racing and driving segment within which we operate.

We have perhaps the best technology, amazing people, a growing ecosystem with our race control platform, which incidentally passed the 100,000th user registration mark just this week, we are working as hard as possible.

Thank you all for your time and attention. I deeply appreciate it.

[Operator]

We will not be fielding questions today. I would now like to turn the conference back to Mr. Stephen Hood for any additional or closing remarks.

[Stephen Hood, executive]

Thank you. I would just like to say thank you for the attention that we received this evening. It is much appreciated. Thank you all for your time.

[Operator]

This does conclude today's call. We thank you for your participation. You may disconnect at any time.