Motorsport Games Inc. Q4 FY2022 Earnings Call

Thank you for standing by, and welcome to Motorsport Games Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. On today's call are Dmitry Kozko, Motorsport Games Executive Chairman and CEO; and Jason Potter, Chief Financial Officer. I will now hand it over to Ken Godskind of Motorsport Games.

Thank you, operator. By now, everyone should have access to the company's fourth quarter and full year 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, including its most recent annual report on Form 10-K for the year ended December 31, 2022, for a detailed discussion of certain 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 conference call, we will refer to certain non-GAAP financial measures such as adjusted EBITDA as we discuss the fourth quarter and full year 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 Dmitry Kozko, Chief Executive Officer of Motorsport Games. Dmitry?

Thank you, everyone, for joining us on the call and following our journey. It's no secret that it's been a tough one for us. Between the ongoing war in Ukraine, we had to shut down our Moscow studio while trying to help team members wishing to leave the country, and overall operational challenges as we continue to focus on improving our liquidity position. But it's amazing to witness the resilience our team has demonstrated through all of it, as we continue to strive toward making the thrill of Motorsport successful for everyone by creating the highest quality, most sophisticated, and innovative experiences for racers, gamers, and fans. Since our last few earnings calls, we continue to focus on efficiency and reducing costs where possible without sacrificing the quality of our future games. We're still a product-driven business; thus, it's crucial to continue to invest in our games and complementary esports programs. As previously announced, we recently completed various equity offerings, including three registered direct offerings that resulted in more than $11.3 million in aggregate gross proceeds. Each of these registered direct offerings was structured to comply with the SEC's shelf rules to maximize the amount available to us under our effective S3 registration statement. We're also able to reach an agreement with our majority shareholder, Motorsport Network, to exchange all of our outstanding debt of nearly $4 million with Motorsport Network into shares of our common stock. I personally believe this reinforces the commitment that our majority shareholder has in Motorsport Games, as well as providing us relief on our balance sheet. Additionally, at the end of January, we received a notice from NASDAQ that we regained compliance for continued NASDAQ listing. I'm proud of how we were able to complete these recent capital raise transactions in light of the challenging economic environment. However, we continue to explore additional funding in the form of potential equity and debt financing arrangements to further improve the liquidity position of our company. Let's talk about our Q4 of last year and 2022 in general. Despite the challenges we experienced with our 2021 Ignition release, in 2022, we were still able to make strides in our product release schedule. We started the year with a much-requested UI refresh to our industry-leading rFactor 2 platform, followed by consistent quarterly content drops that helped us grow the rFactor 2 installed base and rFactor 2 revenue year-over-year. rFactor 2 became the official sim racing platform of Formula E, and our partners at Kindred Labs were able to launch the amazing F1 Arcade Center in London using our rFactor 2 platform. Aligned with exciting developments in the NASCAR world in 2022, we also launched the next-gen cars for test drives within our game. We further continued to invest in our NASCAR fan base by offering them something we had never done before: providing a 2022 season expansion DLC update to existing NASCAR 21: Ignition holders for free. This came after we made NASCAR 21: Ignition compatible for the new generation consoles. Additionally, we brought our NASCAR 21: Ignition game and our karting simulator game, KartKraft, for the first time to Nvidia GeForce NOW, allowing people to enjoy these experiences by leveraging the cloud through selected mobile and smart TV devices. We finished off the year in our NASCAR franchise by releasing the new NASCAR game for the Nintendo Switch platform, which we called NASCAR Rivals, our official game of the 2022 NASCAR Cup Series season. Today, we continue to focus on the development of our INDYCAR, NASCAR, and Le Mans gaming experiences. We've recently attracted expert advisors in the gaming space to help consult on our games being developed, which we believe will further enhance our ability to meet our and our fans' expectations for these games. Of course, raising the quality bar will require further time and resources to be invested into these fantastic franchises, which we believe will translate into delays in our product release schedule. However, when we ultimately release these games, we believe they will be worth the wait. This year, we plan to bring 2023 season updates to our NASCAR game for all major platforms such as PlayStation, Xbox, PC, Nintendo Switch, and mobile, allowing our fans to enjoy the latest season excitement. For our INDYCAR game, we continue to make strides in our development efforts, but we do not believe we will be in a satisfactory position to release it to the community this year. The INDYCAR community has not had a dedicated INDYCAR game in over a decade, and we want to make sure that our INDYCAR game is on par with other major racing games out there, with enough features to keep INDYCAR and other fans excited. As the Head of Motorsport Games, I've been honored to lead this company from its inception, nurturing the idea, setting the vision, guiding it through a successful IPO, and providing the necessary resources to make key technology and team acquisitions grow in scale. Today, Motorsport Games is a multi-franchise company boasting a diverse portfolio of official racing games and development for some of the world's most renowned brands in racing, and a foundation built on cutting-edge technology for the masses. This unique combination, we believe, will drive our industry forward and already fuels our team's pursuit of creating the most immersive and engaging racing games. I'm also incredibly excited to welcome Jason Potter as our company's recently appointed new CFO. Jason is very familiar with Motorsport Games as he held various roles with Motorsport Network since September 2021, including as Chief Accounting Officer. In fact, he has been Secretary and Treasurer for Motorsport Games since January of this year. Further, Jason continues to serve as Chief Accounting Officer of the network, but prior to joining the network, he held the position of director in an audit practice of PricewaterhouseCoopers between June 2018 and September 2021, and a senior manager at PwC's national office between June 2016 and June 2018. And at this time, I'd like to hand it over to Jason Potter, Motorsport Games Chief Financial Officer, to go over our Q4 and 2022 year-end financial results.

Thank you, Dmitry. I would like to share some financial highlights for the fourth quarter and year ended December 31, 2022, starting with Q4 '22 results. Our revenues were $3.8 million compared to $8.2 million in Q4 '21. The $4.4 million, or 54% decrease, is primarily due to us releasing one new NASCAR game in Q4 '22 compared to two new NASCAR games in Q4 '21. Net loss was $4.8 million and $7 million for Q4 '22 and '21, respectively; an improvement of $2.2 million or 31%. The reduction in net losses was primarily attributable to a $1.9 million reduction in sales and marketing expenses, a $0.8 million reduction in development expenses, a $3.4 million reduction in cost of revenues, which were primarily due to other royalties and production costs, a $0.1 million decrease in impairment losses from our intangible assets, and a $0.9 million increase in foreign currency gains. These are partially offset by a $4.4 million decrease in revenues, a $0.1 million increase in expenses relating to ongoing litigation, a $0.2 million increase in general and administrative expenses, and a $0.3 million increase in interest accretion expense. Adjusted EBITDA loss for Q4 '22 was $3.5 million compared to an adjusted EBITDA loss of $5.4 million for Q4 '21. The change in adjusted EBITDA loss of $1.9 million was primarily due to the same factors driving the previously discussed change in net loss in Q4 '22 compared to Q4 '21. Turning our attention to the full year results, revenues were $10.3 million and $15.1 million for the years ended December 31, '22 and '21, respectively, a decrease year-over-year of $4.8 million or 31.5%. Gaming segment revenues decreased by $5.1 million, or 35.9%, to $9.2 million for the year ended December 31, '22, compared to $14.3 million for the year ended December 31, '21. The decrease in our gaming segment revenue was primarily due to $2.4 million in lower digital and mobile game sales and $3.4 million in lower retail game sales. This was primarily driven by the release of one NASCAR game in '22 compared to two in 2021, which resulted in lower volumes of sales. In addition, we experienced less favorable pricing and higher-than-expected retail pricing concessions on existing games in our product portfolio. These declines were partially offset by $0.6 million in revenues through the development of simulation platforms to third parties and a $0.1 million increase in license fee revenues. Esports segment revenues increased by $0.4 million or 46.1% to $1.2 million for the year ended December 31, '22 compared to $0.8 million for the year ended December 31, '21. The increase in esports segment revenue was primarily due to higher sponsorship revenue from our Le Mans' virtual series that started its 2022-2023 season in September 2022. Our net loss was $36.8 million for the year ended December 31, '22, compared to $33.7 million for the year ended December 31, '21, an increase of $3.1 million or 30.7%. The increase in net loss was primarily attributable to a $4.8 million decrease in revenues, a $9.3 million increase in impairment losses relating to our goodwill and indefinite-life intangible assets, a $1.4 million increase in expenses related to ongoing litigation, a $1.4 million reduction in gains from equity method investments, a $0.8 million increase in development expenses, a $0.6 million increase in interest accretion expense, a $0.1 million increase in depreciation expense, and a $0.8 million increase in foreign currency losses. These were partially offset by a $9 million reduction in stock-based compensation expense, a $4 million decrease in general administration expenses, which was primarily driven by lower payroll expenses, a $2.6 million reduction in the cost of revenues primarily due to lower royalties and production costs, a $0.3 million reduction in sales and marketing expenses, and a $0.2 million increase in sublease rental income. Adjusted EBITDA loss was $21.2 million for the year ended December 31, 2022, compared to $17.4 million for the year ended December 31, 2021, an increase of $3.7 million or 21.4%. The increase in adjusted EBITDA loss was primarily driven by the same factors impacting the change in net loss previously discussed. For the year ended December 31, 2022, we had an average net cash burn from operations of approximately $1.63 million, down from $1.7 million for the year ended December 31, 2021. As of March 22, 2023, we have approximately $6.5 million of cash and cash equivalents available which we believe is insufficient to fund our operations for the remainder of 2023. We will need to supplement our available liquidity with additional debt and/or equity financing as well as ongoing cost-control initiatives. At this time, we are not providing forward guidance. I would now like to turn the call back to Dmitry for closing remarks.

In closing, I want to thank our shareholders for their continuing support and belief in our vision. We went through some tough times as a company, but I'm confident that given the right amount of time, Motorsport Games will thrive and innovate, delivering exciting racing experiences to our fans around the world. Thank you all for joining, and let's go to questions.

And our first question is from Jason Tilchen with Canaccord Genuity.

Congrats on the recent capital raises. I guess the first thing I'm curious about, the cash burn for 2022 per the press release was about $1.6 million per month. And I'm just curious, is it materially different today following some of the cost-cutting measures and the restructuring in December? And then I have a follow-up after that.

Jason, this is Jason Potter. So the cash burn for $1.6 million for 2022, we expect that to remain consistent as we come into 2023. We obviously see some drop-off from the restructuring plan efforts in Q4, but what we're experiencing year-to-date, as disclosed with the closing cash position on March 22, is that we're continuing to experience a burn rate in and around $1.6 million.

Okay. Great. And then the second question is, to what extent has the restructuring or the cost-saving measures impacted the release schedule? I know in the prepared remarks, Dmitry mentioned that the INDYCAR game won't be released this year. Is there any more color on when this year the NASCAR game will be released and the plans for BTCC? Any additional color there would be greatly appreciated.

Thanks, Jason, for the question. First of all, the cost savings that we implemented last year, as you will see in our 10-K, they are in full effect just as we projected it to be, with the effect that we previously said that we project effectively $2.5 million of savings annualized in 2022, and that is what we experienced already. That did not have any impact on the development cycle or the launch of the product schedule. The cuts were mostly done outside of the product development expenses. Now as far as NASCAR is concerned for this year, we look to bring the 2023 season to pretty much all the platforms that our products are currently available on. As for the release date for that, we have a lot of historical data that shows us that sometime towards the playoffs part of the season is a good time for us to have our content ready and to bring it to the community. But when we're ready to announce that, we will definitely publicize and showcase where and on which platforms it will be released.

Great. And if there's time for one more, just curious if there's any color that you could share on how the Ignition 21 content update or the Rivals release performed relative to your expectations and how big of an impact that had on gaming segment revenue for the fourth quarter?

So we're more satisfied with our Rivals release than, obviously, anything related to the 21 Ignition title. I think our move to invest in the community and show them our good faith and also acknowledge that we take full accountability for the type of release we did in 2021 motivated our decision to release the 2022 content to the Ignition holders for free. Of course, it's easier to convert someone when you're giving them something for free. So I cannot say that it impacted us materially in terms of revenue. To us, it was an investment back into the community and a gesture of apology to show that we understand we need to hold ourselves to a much higher standard. Now, as for Rivals, it was a very good release for the Nintendo Switch platform. However, the Nintendo Switch installed base, at least in the territories where we have the most penetration, is not as significant as the major consoles. Thus, we cannot expect similar results in comparison to PlayStation and Xbox, where most of the sales come from the United States. It did meet our expectations in terms of sales derived from there. But of course, we're never satisfied and are trying to continue to bring more value to the community, enabling them to make additional purchases.

Our next question is from Michael Kupinski with NOBLE Financial Capital Markets.

Congratulations, Jason. A couple of things here. If we look at INDYCAR being pushed into next year, I was just wondering, in terms of the cash investment that you're making right now, are there any other games that might be delayed until 2024 outside of INDYCAR that your release schedules that might slip?

Michael, thank you for the question. One point I want to make clear that we discussed in our call is that we really took a step back and seriously looked at the quality of products we deliver, especially regarding an INDYCAR product, as the community hasn't seen a dedicated gaming experience in over a decade. A lot has changed in the gaming space since the last INDYCAR gaming experience. We want to ensure that the standard the INDYCAR community is looking for is surpassed; we want to exceed their expectations. Our track record with Ignition does not demonstrate that capability so far. So, we essentially have to raise our own standards to ensure that when we release that game, it starts the proper momentum. For us, it's a long-term investment, making a decision even though the game is at the proper stage right now—there are moving cars, tracks, and elements supposed to be in the game—we simply do not believe it's up to par for what the community expects. We know that taking extra time and investment into it will ultimately pay off for us in the long run. As for NASCAR or other franchises, we will look at everything through the same lens. The NASCAR community deserves a fantastic gaming experience. We understand we did not meet our own expectations regarding the Ignition release; that is why we continue to sell our previous year titles, focusing on updating content around our portfolio. But we will hold off making official announcements on those release dates until we feel absolutely confident and have feedback from the community or stakeholders that the game is taking shape satisfactorily.

Obviously, the burn rate not dropping off indicates that you are making additional investments in the game, probably more than you would normally anticipate making at this juncture. I was just wondering, in terms of just the roadmap, if funding becomes restrictive, what options you might pursue for investment in the game?

Let's consider that many titles we're working on, such as the Le Mans title, INDYCAR title, and BTCC experience, are inaugural experiences. Launching a game experience from the beginning requires the most substantial investment because we are building tracks, car models, and essential elements for a great gaming experience. That's reflected in the burn rate. We’re laser-scanning every INDYCAR track and recreating it with an accuracy that will impress those who take their virtual cars for a test drive. That requires investment, and we never want to slow down. Even when discussing expense reductions as a company, we examined areas outside of our game development budgets for those cuts. Although burn rates are remaining steady, the ratio of where we're investing money is shifting, which has begun to shift over time. As time progresses, of course, once we complete the build of the tracks and other elements, we won’t need to recreate the track again. There could be some efficiencies from a development standpoint, but only after reaching certain quality metrics. Until then, we continue to invest in gaming experiences to bring them to the highest possible fidelity.

As there are no further questions at this time, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.