Motorsport Games Inc

NASDAQ:MSGM

Earnings Call Analysis

Improved EBITDA Amid Fiscal Challenges

In Q4 2023, the company saw an adjusted EBITDA gain of $0.5 million, a positive shift from a $3.2 million loss in the same quarter the previous year. Full-year 2023 revenues fell to $6.9 million, a decrease of $3.4 million, driven by lower game sales, including no NASCAR release. The full year’s net loss improved to $14.3 million from $36.8 million in 2022, still leaving an adjusted EBITDA loss of $8.9 million. Cash burn reduced to $12.9 million for the year 2023, and operating cash was $1.3 million as of March 29, 2024, prompting a strategy of exploring additional funding to sustain operations. The Le Mans Ultimate game was well received without significant marketing expense, using direct engagement and guerilla tactics which boosted community trust. Expectations are high for further visibility and sales during key racing events like Le Mans in June, supported by a joint venture with the race organizers.

Focusing Efforts Pays Off with Le Mans Ultimate

Amid a challenging phase, the company made a strategic pivot, honing in on the development and launch of its innovative game, Le Mans Ultimate, which emphasized teamplay in racing. This title became the cornerstone of their renewed focus, distinguishing itself from traditional racing games by fostering a community-centric approach. As a result, during Q4 2023, Le Mans Ultimate far exceeded sales forecasts, with more than triple the expected unit sales within the first 10 days post-launch, underscoring potential for sustainable success.

Race Control's Rising Popularity

The company's online service, Race Control, providing multiplayer functionality for its games, reached a noteworthy milestone of over 100,000 account registrations, signifying a sixfold increase. This growth not only reflects the increasing engagement and community around the company's products but also lays the groundwork for a robust ecosystem moving forward.

Financial Recovery Marks Positive Turn

Financially, the company posted an encouraging turnaround in Q4 2023, with a $1.35 earnings per share (EPS), a significant improvement from the negative EPS of $4.17 in the comparable prior-year period. Revenues, however, presented a mixed picture, falling by 53.7% to $1.7 million due to the absence of new NASCAR game releases. But reduced operating costs and a successful $3 million asset sale helped yield a net income of $2.7 million, highlighting improved cost management and strategic asset utilization.

Restructuring to Streamline Operations

In response to ongoing liquidity constraints, the company implemented strategic cost-cutting measures, including the closure of its Australian studio and a reduction of the global workforce by 40%. This tough decision, resulting in a $0.5 million restructuring expense, reflects a strong commitment to operational efficiency. Concurrently, the adjusted EBITDA showcased a gain of $0.5 million, a significant turnaround from the EBITDA loss of $3.2 million seen in the same quarter of the previous year.

A Challenging Liquidity Position

The liquidity position remains a key concern, with cash reserves dipping to $1.3 million by March 2024, indicating a runway insufficient to cover the next year’s operational costs without additional funding. To bridge this gap, the company is exploring numerous financial strategies, ranging from potential equity or debt financing to the sale or licensing of assets. Despite short-term relief from Le Mans Ultimate's success, the search for long-term financial stability is ongoing.

Earnings Call Transcript 2023-Q4

[Operator]

Thank you for standing by, and welcome to Motorsport Games Inc.'s Fourth Quarter and Full Year 2020 Earnings Call. [Operator Instructions] I would now 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' Fourth Quarter and Full Year 2023 Earnings Conference Call and Webcast. On today's call is Motorsport Games' Chief Executive Officer, Stephen Hood; and Interim Chief Financial Officer, Stanley Beckley. By now, everyone should have access to the company's fourth quarter and full year 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 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 annual report on Form 10-K for the year ended December 31, 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 fourth quarter and full year 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 further today. And now I'd like to turn over the call to Stephen Hood, Chief Executive Officer of Motorsport Games. Stephen?

[Stephen Hood, executive]

Thank you, everyone, for joining this conference call today. During Q4 2023, we continued to reduce spend and improve efficiencies across the business, carefully monitoring expenses and working diligently towards our Q1 2024 game release, Le Mans Ultimate. This would be only our second internally developed title and something we intended to correct as a matter of urgency. The folding of other projects and efforts was designed to focus our effort around the kind of game experience we believe will set us on the right path, releasing innovative games designed to foster a large player base of engaged users we can call a community. As we focused on the development of Le Mans Ultimate, we came to the understanding that this form of racing suited our vision for the future racing and driving landscape. Motorsport Games is all about player participation and not simply the dog-eat-dog world of traditional racing games, where only one player can be crowned the winner and where friends become enemies. We believe in building an accessible highly [indiscernible] ecosystem, which puts community and most importantly, teams at the heart of the experience. Look at many of the [indiscernible] popular games in the market today and you will see they center their experience around teamplay. This is starkly absent in almost all racing experiences. In the Le Mans Ultimate, teams comprise 3 drivers taking turns to drive their car in endurance race. This title is our springboard, the vision we have been working towards for the last several months, which we believe signifies a turning point in the recent history of our company. We are finally seeing the results of decisions set in motion many months prior and they are delivering better-than-expected results, not least with the recent release of our new game Le Mans Ultimate. This has been especially pleasing, given the challenges encountered by the business and the tough decisions we've made to try and turn the ship around. The first real signs of positivity have been encouraging, but we recognize that we have some way to go to deliver on what we believe the business to be capable of. The positive reception to our recent release has given us a real sense of satisfaction and provides us with a valuable stepping stone, and it seems to be resonating with our customers. Within the first 36 hours of release on February 20, in the [indiscernible] I might add, Le Mans Ultimate sold as many units as we had projected for the opening 10 days. It has gone on to continually sell above expectations, and we have revised internal forecasting sales numbers to account for this higher-than-expected uptake. We had anticipated with a strong tailwind, selling 18,000 copies in the opening 10 days. In reality, the reception was so strong that we sold more than 55,000 copies. Our development team continues to push out fixes and updates to continually improve the product, which has resonated well with our audience. These green shoots are the result of an enormous effort throughout and prior to Q4 2023. We're now pushing ahead on continued development of the title throughout the remainder of this year. We plan to bring exciting new content and features to the Le Mans Ultimate experience as well as complementary services, which we anticipate will in due course provide additional revenue streams. Race control, our online service providing multiplayer functionality to rFactor 2 and now the Le Mans Ultimate game, launched 5 months ago. It continues to play an important role in the [ U.K. ] system we are building around our products and has now broken through more than 100,000 account registrations, up from 15,000 the last time I reported on its growth. Race control drives regular activity with our games and is vital to our future strategy around community and complementary services. Enabling conversation around our game experiences, even when a user is not playing the game is important. And to this end, race control is expected to soon have a more friendly interface, making it accessible from any web browser. With race control, users will be able to learn more about the games, tips and tricks to get the most from the experiences, become a better virtual driver and more. In time, our plan is to have users to be able to manage their account and experience from this site using any mainstream connected device [indiscernible] desktop, laptop, tablet and so on. Bringing those parts that made rFactor 2 so successful across and into the Le Mans project has proven instrumental in landing the core gameplay experience. The update to this technology now forms the basis for an engine we own and expect to leverage for existing and new licensing opportunities as well as entire new titles.Our licensing agreement with Kindred Concepts [ compiled ] our F1 Arcade experience using our game technology, is one such area of further opportunity. We are proactively exploring new ideas that may be of benefit to Motorsport Games. F1 Arcade rolls out to the U.S. site of Boston later this month of April, and we have been supporting this expansion to ensure our technology is experienced in the most positive way. The focus for the year ahead is to continue building the positive momentum around our recent game release with new updates, additional services through rate control, downloadable content and to tap into the highly valuable marketing opportunities. For example, the actual 24 hours of Le Mans race takes place in June. We believe this will be another opportunity for increased visibility and sales for our Le Mans Ultimate game as well as the perfect launchpad for our anticipated reveal around the future of Le Mans Virtual Series, one of the world's most watched recent esports events over the last few years. Now I would like to invite Stanley Beckley, our Interim Chief Financial Officer, to talk about the financial results for the fourth quarter and full year 2023.

[Stanley Beckley, executive]

Thank you, Steven, 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 fourth quarter and full year 2023. Revenues for the quarter were $1.7 million, down by $2.1 million or 53.7% when compared to the same period in the prior year. Lower digital and retail game sales were primary drivers for the decrease as a result of no NASCAR games being released in fiscal year 2023. This decrease was partially offset by decreases to sales allowance as a result of lower game sales and increases to downloadable content or DLCs, specifically related to the NASCAR Heat 5 - Next Gen Car of this DLC that was released in June 2023. Net income for the quarter was $2.7 million, an increase of $7.5 million when compared to the same period in the prior year. The increase in net income was primarily driven by lower cost of revenues and operating expenses required to develop and release additional new games as well as a $3 million gain from the sale of the NASCAR license to iRacing in October 2023. Consequently, EPS for this quarter was $1.35 compared to negative $4.17 for the same period in the prior year. The reduction of overhead spend was in part driven by actions taken under the company's 2022 restructuring program, which has helped us lower our overhead cost by approximately $6.7 million on an annualized basis as of December 31, 2023, exceeding our target of $4 million in annualized savings by the end of 2023. These savings were achieved through changes in global headcount, reducing certain overhead expenditures and improvements in our internal processes. In addition to the 2022 restructuring program, on October 29, 2023, the company announced a further restructuring of its business due to its ongoing liquidity constraints. The announcement confirmed the closure of the company's Australian development studio and resulted in the reduction of the company's workforce by approximately 40 employees, the majority of whom we are based in Australia and the United Kingdom, representing approximately 40% of the company's global workforce. The company recorded a restructuring expense of approximately $0.5 million related to the workforce reduction, primarily consisting of severance and redundancy costs in the fourth quarter of fiscal year 2023. We are reporting an adjusted EBITDA gain of $0.5 million for the fourth quarter of 2023, compared to an adjusted EBITDA loss of $3.2 million for the same period in the prior year. The improvements in adjusted EBITDA gain are the same as those discussed in respect of the change in net income for the period and comparative quarter. For full year 2023, revenues were $6.9 million, down $3.4 million when compared to the prior year period, primarily due to lower digital, mobile and retail game sales, driven by lower volumes of sales as a result of no NASCAR games being released in fiscal year 2023. Net loss was $14.3 million for 2023 compared to $36.8 million for 2022. Adjusted EBITDA loss was $8.9 million for 2023, an improvement from the $21.2 million loss for 2022. Non-cash asset impairment losses of $4 million and $9.6 million for 2023 and 2022 respectively, accounted for a significant portion of the difference between net loss and adjusted EBITDA for their respective periods as well as the $3 million gain on sale of the NASCAR license in October 2023. EPS loss for 2023 was $5.06 compared to an EPS loss of $30.73 for 2022. As we list the liquidity, this continues to be a key area of focus for the company. Net cash used in operations for the 12 months ended December 31, 2020, was approximately $12.9 million, representing an average monthly net cash burn from operations of $1.1 million, down $0.5 million when compared to the average monthly cash burn of $1.6 million for the year ended December 31, 2022. As of December 31, 2023, the company had cash and cash equivalents of $1.7 million, which decreased to $1.3 million as of March 29, 2024, which we believe is insufficient to fund 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. Strategic alternatives for our business, including, but not limited to, the sale or licensing of our assets in addition to the recent sale of our NASCAR license and further cost reductions 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 those joining us today. If there is anything to take away from what I've said today, I'd like you to know that we feel like a games company again. With the recent release of Le Mans Ultimate to a very receptive market, we're doing what we know best, and I look forward to speaking further about this on our next call to discuss the Q1 2024 results.

[Operator]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] One moment, please, for your first question. Your first question comes from the line of Jason Tilchen from Canaccord Genuity.

[Jason Tilchen, analyst]

Congrats on the strong momentum surrounding the Le Mans game release. One thing I'm curious about, maybe you could talk a little about how you marketed the game, what channels performed really well and help sort of demand outpace expectations? And you mentioned the upcoming race in June and how you plan to sort of build awareness around that. Maybe if there's anything else you can share around those plans as well, that would greatly appreciated.

[Stephen Hood, executive]

Jason, it's Stephen here. Thank you for the question. And a good question. We were very interested as to what the reception would be like for Le Mans title, bearing in mind there hadn't been a Le Mans game for many years, I think it's about 20 years now. So we were going to be treading new ground. And through the duration of the development of the project throughout 2023, we did sense that there was a very positive kind of an uptake as to the news around Le Mans Ultimate, without us pretty much spending a dime on marketing. And we knew that the raw kind of understanding and the willingness and the engagement from the community existed for this kind of title. And we think that's tallied particularly well with new manufacturers coming back into the World Endurance Championship, which is built around Le Mans. And we've been surfing off that wave. So you have teams like Ferrari doing incredibly well, Lamborghini coming back into the space, they're battling with Porsche, BMW in now. So all the world's big manufacturers are in there in the new kind of hyper car class, and we've seen a huge upswell in interest in this championship. And we've surfed that wave without really spending any money. We've taken a more direct approach to engaging with the community in order to turn a page with the perception of Motorsport Games, which historically, certainly through 2022 and most of '23 wasn't particularly strong. So instead of just trying to spend the dollars and push the marketing message out there, we've been very open and transparent with the community. That seems to have done incredibly well. So we haven't been pushing typical marketing channels, but we've been engaging almost directly with consumers on social platforms like a Discord, X and Facebook. And this direct communication with the community and now consumers of Le Mans Ultimate has gone down incredibly well. And I think has also shown a very different phase for the company that has meant that our consumers, again, trust the delivery of Motorsport Games to a great extent. So there's been a lot of gorilla marketing tactics, and we managed to pull that one off.

[Jason Tilchen, analyst]

It's a really helpful overview. One follow-up, just in terms of liquidity position and where everything stands today. I know you guys laid out some of the potential options in the prepared remarks, but just wondering with the release of the game now behind you and some additional revenue coming in from that, just wondering if that at all has changed the strategy around your cash position going forward?

[Stanley Beckley, executive]

Jason, I can handle that. So in the grand scheme of things, it hasn't gotten us out of the need to get more funding. It helped a bit, but the game has been released for just under 1.5 months now and we have some relief there, but that's very short term in nature. I don't think -- and we alluded to this in our 10-K, that still does not relieve us for the need to go out for more funding and to look at more financing options like we mentioned, specifically in note 1 of our footnotes in the 10-K. So in the grand scheme of things, some short-term relief, but I think we're still, on the liquidity count, still managing expenses and our cash as much as we can. For reference, we had actually disclosed in our 10-K, $1.7 million in cash in hand as of the end of December. And as of Friday, we had about $1.3 million. So the cash position has dipped slightly, but I don't think it's completely turned around the fortunes of the company. But it doesn't promise in, like Steven alluded to, as relates to the initial inception received from the release of the game.

[Stephen Hood, executive]

Jason, if I can just add to that as well, so you're asking about the marketing effort around the Le Mans and the upcoming release in June. I mean it's very true that we see various peaks throughout the year being related to the calendar of the World Endurance Championship and in particular, Le Mans in June. And we expect to do particularly well in terms of visibility and additional sales during those periods. And the key thing to take away is that with Le Mans, this Le Mans [indiscernible], we have a joint venture with the CEO, the group behind Le Mans. So there's a joint interest in trying to raise the awareness of the game, gain additional visibility. And certainly, with the media uptick for the product, which has taken us all by surprise, I'm pleased to say the ACO and Le Mans have been supporting us with additional advertising at the track, and we have a great presence at Le Mans. So there are some real benefits to this joint venture, which I think will certainly add fuel to the fire in terms of marketing and visibility, which we intend to capitalize upon.

[Operator]

And your next question comes from the line of Michael Kupinski from Noble Capital Markets.

[Unknown Analyst]

I was wondering if you can just give me an update on -- I know that you went through the significant reduction of employee and head count and closing some offices. What's left at this point? What do you have? And where are those offices located?

[Stephen Hood, executive]

Michael, it's Stephen. Good question. I mean, throughout '23, as you're well aware, we were trying to refocus and reposition the business. And one of the key takeaways for us was trying to pick a path and follow it. And that meant trying to concentrate our efforts around the Le Mans title, which we think is a springboard for the kind of products and experiences that we intend to launch in the future. This concept of racing games being built around communities and team play rather than just individuals on their own driving as fast as they can, we believe in this being almost a festival of speed and enjoyment of racing and eventually driving. And the focus was built entirely around Studio-397. That was our PIC. Studio-397 are our internally owned development team. We brought them much closer into Motorsport Games and rallied around that operation so that we could provide them with the infrastructure and the expertise that they needed to deliver what we knew they were capable of, which is delivering great racing experiences using the technology from rFactor and the engine that we own. And that's scaling back meant removing other operations that we're working on other projects such as the INDYCAR project, which was built almost entirely out of our Australian studio. Throughout '23, we also closed our Russian office in Moscow, bolted all of those operations back so that we could just concentrate on delivering a high-quality product. For us, it was a no-brainer to deliver great gains again, and we needed to scale that back not only to save cost, but actually to give us the focus to concentrate on what does quality mean for Motorsport Games? And I think Le Mans Ultimate is a great showcase of that strategy.

[Unknown Analyst]

So are all the employees now based in the U.K. or [Technical Difficulty] is that the main office now?

[Stephen Hood, executive]

It's Europe and the U.K., these days, we have to say Europe and U.K. after the split, but they're a lot closer to home to where I am in my accent in the U.K. So a lot of the supporting team in the financial operation is still in the U.S., though we are a 24/7 company still, but a lot of the development efforts and the marketing effort is U.K. and Europe.

[Unknown Analyst]

And in terms of just thinking about Le Mans and bringing it to the next level, I know that tournaments and the sport element of that is kind of important. How are your plans to focus on tournament play and really kind of bringing the next level of the game to developing a community like that. Where do you think you are and how your plans are to develop that?

[Stephen Hood, executive]

Great question, Michael. A lot of people ask us, the route to success is to make more titles. For us, it is not. For us at Motorsport Games, it is really around building this community and activity around the racing games and the driving experiences that we do launch. They have to go hand in hand. You will hear me talking a lot about building an ecosystem. And that's quite simply because in this day and age, our player base expects to find events and tournaments and competitions, daily activities and reasons to engage with the product online, not just driving as a solo experience from the comfort of their home, but being connected in today's age means being part of the community. And that's why I'm very, very excited about the race control platform that we have built on our own technology. This is the funnel to people playing our racing games with others. This is the funnel to becoming part of the team, to rejoicing in the joy of driving racing games and being part of the team, having activities. That is already in full flow with over 100,000 people now subscribed to the system of race control, that means we have the community in one hand, and we have the game experience in the other. All of this is based on our own technology. That to us is incredibly powerful. This is really the springboard for where we need to go. And Le Mans is only in something called early access right now, which is industry speak for almost being an alpha that's released at the public. We've got a long way to go with the product, but it's already in a very strong place because it's built off technology and a product that we owned previously in rFactor 2. So we know what we're doing here. We've built the community. Now we've got to find ways to really bring those together and capitalize on it. And one big springboard could be at Le Mans when we start talking about one of the world's biggest eSports events in Le Mans Virtual coming back. And for us, this is not about throwing prize money out there to attract the top 1% of professional esports players. Really, that is yesterday's news. What we really care about is 99% of the player base people, people who aren't necessarily trying to be the fastest, but want to be part of the community, want to imagine the fantasy of being a racing driver, want to contribute to something and want to have fun and entertainment online. That's very different from what people have typically done in racing sports previously, and we think we're in a great, great place to harness that this year.

[Unknown Analyst]

That answer probably answers a portion of this next question. If you were flushed with cash, what would be the benchmark and what would be the road map that an investor would expect from the company to then deliver profitability and move towards a growth platform?

[Stephen Hood, executive]

There's many different paths, and I think we have to be quite flexible based on where we are today. We're exploring many different paths forward, different avenues, different opportunities that come to the door. And certainly, the number of people that are coming to us offering opportunities and ideas has increased as we've managed to launch a new project that's gone down particularly well. We've gone through the restructuring period of ‘23, which has been difficult for us all, but that is intended to set us on the right path, and that is to make great products. I think the important thing for us right now is to drive home that advantage around Le Mans. We really can't take our foot off the gas. It's gone down very well. There's very positive reception. The numbers are very good. Now we have to drive home the product quality. There's many more things that we need to incorporate on that, and we can see a lot of people are just sitting on the fence as to shall I buy now or shall I buy later? There's many more things that we need to do with it in terms of providing content and opportunities, potentially subscriptions to the race control service as well. Once that's up and running, and we've really got the wheel spinning around our ecosystem, I think the further step will be something we're quite excited about, which is utilizing the technology from Le Mans Ultimate in a new gaming experience, which is built around driving. That's certainly one opportunity that we have in front of us. But I'm adamant that we have to get the near-term opportunities solidified and working properly before we expand. We've made a mistake in the past, and we're doing things correct now. Without giving too much away, I think we've got plenty of ideas.

[Operator]

Thank you. [Operator Instructions] There are no further questions at this time. Please proceed.

[Stanley Beckley, executive]

Okay. I thought Steve was going to close this out. But thank you all for joining. We appreciate your time. Operator, I think we can close this out now.