Title

Presentation

Operator: Thank you for standing by, and welcome to Motorsports Games Inc. First Quarter 2024 Earnings Call. As a reminder, today’s conference is being recorded. I would now like to turn the conference over to Ben Rossiter-Turner from Motorsport Games. Please go ahead.

Ben Rossiter-Turner: Thank you, and welcome to Motorsport Games’ first quarter 2024 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 first 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 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 company filings with the SEC, including its most recent quarterly report on Form 10-Q for the quarter ended March 31, 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 statement made today. In today’s conference call, we will refer to certain non-GAAP financial measures such as adjusted EBITDA as we discuss the first quarter 2024 financial results. You will find a reconciliation of these non-GAAP measures to the 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?

Stephen Hood: Thank you, everyone, for joining this conference call today. I’m very pleased to be here and to talk to you about our achievements in Q1 2024. During the last call, I spoke about the release of Le Mans Ultimate in February, but we can now share greater insight into the financial and business impact of this important product release. Thanks to the tireless work of the team at Studio 397 and with the help of our partners at the ACO, the organization behind the 24 hours of Le Mans, I’m pleased to announce the public reception too and that the sales of the game exceeded our business forecast. Given the turnaround time from project start to release was less than 12 months, we can be very happy with the initial positive results to our first internally developed game launch since the difficult release of our NASCAR Ignition title over two years ago.

A great deal has changed throughout the company since my return in April of last year, and I’m incredibly proud of the energy and determination of everyone within the business putting together to deliver and continue expansion of this great game. We have proven we have what it takes to bring a quality product to market and to great reception. Much of this is down to a deep understanding of the technology employed to deliver Le Mans Ultimate, technology we own as well as the vibrancy and determination across the organization to do what we are laser focused on, delivering innovative entertainment. This was an important milestone for our business and sets us up for the future. Le Mans Ultimate is based on a licensed series featuring desirable racing pedigree sports cars.

The series undergoing a timely renaissance with incredible manufacturer entries into the real-world sport. Automotive giants such as Ferrari, Porsche, and Cadillac all competing at the top end of the sports, all of whom have been incredibly supportive during the creation of this game. It is our belief that this game now offers a potential springboard from which to launch future downloadable content or DLC as well as development of a console port with the right partner to address what we know to be a much larger gaming audience for the title. With the right focus and ongoing development, we believe we could have a valuable gaming franchise ahead of us, one that leverages the technology, the services and know how we have within our business. Development of Le Mans Ultimate continues apace.

We’re crafting a game into a unique and exciting proposition to a wide range of players. In June this year, the month of the fabled 24 hours of Le Mans race, we anticipate a unique marketing window will be further amplified by the visibility the ACO are expected to provide. With racing fans around the world watching the greatest endurance event, we expect our game will feature throughout the weeklong festival of racing. At the same time, we plan to update the game with a free update that blurs the line between solo and online play. In a world of near infinite choice and countless apps, games and entertainment services vying for consumer attention, we intend to update Le Mans Ultimate with a cooperative feature not typically found within racing games.

Our co-op feature is designed to enable up to three friends, as many drivers as there are per team in the real life Le Mans, to play through chapters of a race, taking turns to drive the car in an ever-evolving story against AI teams. We believe this feature will enable a wider section of racing games to enjoy the unique entertainment of endurance racing without the burden of being online at the same time as their friends. We all have busy lives and Le Mans Ultimate will fit into that so that you can play when you want and still be part of the conversation with friends. Additionally, we’re investigating and developing a number of concepts to enhance our ecosystem through the use of AI or artificial intelligence. While the technology sector is awash with stories of cost saving opportunities through the use of AI, we already run an efficient operation.

And as such, we have been exploring how AI might benefit both storytelling and representation of the people within the sport we recreate. Today, the games industry uses basic AI parameters and decision making to drive cars around a track and avoid obstacles. But we are working on bringing the virtual drivers up to a whole new level of realism. AI drivers complete the skills and dynamic decision-making abilities that will bring players closer to real life than ever before. Players will find themselves more immersed in the story that runs deep through motorsport, and they will find themselves subject to virtual media attention curated and reported on by AI reporters and commentators. All of this will be enhanced by our ecosystem, which puts as much focus on the pre- and post-race as the race itself.

Much of our future development of complementary services and entertainment is built around our vision for accessible yet highly realistic racing experiences. Experiences that can be enjoyed with friends where players feel part of the racing story. We also plan to introduce new content to begin where the current game contains the tracks and cars from the prior season, the centenary of Le Mans last year. We know from our player base; they want to see the game updated to include the changes for this season. We plan on releasing a steady flow of content through the second part of this year. The initial piece of this new content will be free as will other select items as a thank you to the community that has given us great support to purchase our game during early access.

We expect premium paid content will then be made available shortly thereafter, which we believe will offset the cost of ongoing development and broaden the appeal and uniqueness of our officially licensed title. Furthermore, we are bringing subscription service to both rFactor 2 and the Le Mans Ultimate products, leveraging our race control platform, which has over 100,000 registered users all playing within our ecosystem. A gradual ramp of subscription is expected as we build the value proposition for players looking to get even more entertainment out of this exciting experience. Although we believe the free component of the online race control offering will continue, it is up to us to convince players of the value presented by a subscription service.

With the games, technologies, online service and our plans for Le Mans virtual, one of the biggest racing Esports events in the world, we believe we finally have the pieces in place to soon derive greater revenues from complementary services built around our core game. Aside from the success of our recent game release, we continue to make progress towards business efficiently and an improvement of our balance sheet. We recently announced the settlement of the previous license dispute and liability with BARC, TOCA Limited, the exclusive promoter of the BTCC, which is the British Touring Car Championship, for a significantly reduced figure. We also entered into a new licensing deal with them, which we expect will lead to further releases of official BTCC downloadable content for rFactor 2.

A computer technician working on a video game console with a gaming headset.

This deal is beneficial to both parties and we are grateful to our partners of British Touring Car Championship whom we are pleased to be working with again. This was a positive step, one of many undertaken over the last several months. Additionally, last week, we sold the assets relating to traction, our previous motorsport and racing games community content platform to a third party for $250,000 in total consideration. I previously announced we had closed this outlet in Q3 2023, and the sale of this asset brings yet more focus for the company on creating high quality racing games along with additional working capital. We retain the rights to use the channels for future Le Mans virtual eSports events to ensure that they receive the reach they deserve when the award-winning competition returns.

In the past, I’ve made a number of references to what we believe to be a somewhat fragmented team racing landscape, where established game developers bring products to market, which are then kept current and made more accessible by smaller oftentimes and teams with additional content and services from new cars to tracks, learning aids, news and discussion platforms, promoting a sense of community and even car setups. The latter enabling players to focus on driving and less so on the engineering element of motorsport. We are now gearing up to provide access to our ecosystem and games through official partnerships, integrating suppliers of services and content we ourselves do not intend to divert resources to building. This should provide a cleaner, more accessible environment for customers and bring additional revenue into reach.

But perhaps more importantly, it will enable us to elevate the experience across our games. Just recently, we signed casted up specialist Coach Dave Academy as a preferred supplier of alternative setups for Le Mans Ultimate offered directly from within the game. We expect other service providers to come on board once this partnership is fully rolled out in the summer. These partnerships could provide another source of revenue for the business and elevate our ecosystem to be best in class. Where innovators within our space join forces in Motorsport Games and Studio 397 to make sim racing stronger tomorrow. In time, we would expect to bring online a marketplace for new content and services that are considered non-competitive rather additive to our own business objectives.

In the year since I returned to the company to a business which at times struggled with identity and purpose, we have made tremendous progress. We have strategically repositioned the company around chosen IT and our best development team, enhanced focus, eradicated unnecessary spending and put in place cost control measures all whilst resolving certain outstanding liabilities relating to our prior licenses. We have launched the successful game, a partnership with F1 Arcade and Kindred Concepts that results in recurring license revenue for our technology and expertise and believe we have several potential near term revenue opportunities that are additive to our core focus, which we anticipate coming online over the course of 2024. It has not been easy, but it has been rewarding for us all and we feel there is more to come.

Our goal is to be a developer and publisher of highly innovative experiences, all connected to and enhanced by our ecosystem, at the heart of which is the rapidly growing risk control service. Now I would like to invite Stanley Beckley, our interim Chief Financial Officer to talk about the financial results for the first quarter of 2024.

Stanley Beckley: Thank you, Stephen, and good evening, everyone. As with the 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 Q1 of 2024. Revenues for the quarter were $3 million up by $1.3 million or 75.2% when compared to the same period in the prior year. Higher digital game sales were primary drivers for this increase, primarily as a result of the release of Le Mans Ultimate Game PC in February 2024. This was further driven by an increase in revenues earned through the development of simulation platforms for third parties. Net loss for the quarter was $1.7 million an improvement of $3.6 million when compared to the same period in the prior year.

The decrease in net loss was primarily driven by high gross profit and lower operating expenses required to develop and release additional new games. Consequently, EPS for the quarter was negative $0.60 dollars compared to negative $2.33 for the same period in the prior year. We are reporting an adjusted EBITDA loss of $0.4 million for the first quarter of 2024 compared to an adjusted EBITDA loss of $4.3 million for the same period in the prior year. The improvement in adjusted EBITDA loss 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 three months ended March 31, 2024, was approximately $0.8 million representing an average monthly net cash burn from operations of $0.3 million down $1.6 million when compared to the average monthly cash burn of $1.9 million for the three months ended March 31, 2023. As of March 31, 2024, the company had cash and cash equivalents of $1.3 million which we believe is insufficient to fund our operations over the next year and that additional funding will be required in order to continue operations. In order to address this increased 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 of similar transactions, strategic alternatives for our business, including but not limited to the sale or licensing of our assets in addition to the recent sales of our NASSCA license in traction 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: Thank you, Stanley, and thank you to those joining us today. We’ve worked hard over the last 12 months and the result is an upturn in our Q1 results. We still have some way to go, but I would hope you’d agree we’ve turned the page and have positive momentum. We’re excited about the remainder of this year and in particular the upcoming Le Mans event in June. Thank you.

Operator: [Operator Instructions]. We’ll take our first question from Jason Tilchen with Canaccord. Your line is open.

Jason Tilchen: Great. Thanks for taking the question and congrats on the strong launch for Le Mans Ultimate. I think one question I had on the remarks you gave there. In terms of the console opportunity, I’m curious, what does that sort of look like? Where is that in the priority list? Do you currently have the capabilities in house to sort of develop the console version of this game? And what the timeline may look like for eventually getting that launched?

Stephen Hood: Hi, Jason, it’s Stephen. Very good question. I think one of the things that should be clear in my remarks and earlier are the intent to focus and the development team that we have internally right now in Studio 397 have been the wonderful team that have managed to develop Le Mans Ultimate in what I think it could be record time and to really kind of high-quality level. And much of that has come down to the focus that we have [peevishly] (ph) demanded of everybody in the business. And I think the near-term opportunity around console development is something that I don’t think we have to bring internal in its entirety. What I would intend to do and certainly one of the things that we’ve been discussing with external potential partners is leveraging some of the resource and the technical knowhow that we have internally but ensuring the [heading] (ph) is done externally.

There are many, many partners that we can go to in our space right now where they have the ability to bring these products across to console. So, I don’t want the expense of managing the entire thing internally. I think we do it cost effectively and professionally by relying on and utilizing other partners in the industry space. If that gives you some color to the answer to your question.

Jason Tilchen: Yes, absolutely. That makes sense. And another thing you touched on in the prepared remarks was the opportunity around subscriptions. Just hoping you can maybe dive a little bit more into, sort of the differences between what sort of is offered in the free race control currently and what sort of a subscription would look like, how you sort of see that opportunity both within Le Mans Ultimate and then sort of obviously from a broader perspective as well?

Stephen Hood: Yes, sure. I mean, one of the commitments we’ve made to the community that are playing Le Mans Ultimate now is that we’ve been very price conscious. I think we’re coming out of the gates with a very attractive product at a very attractive price point and that’s done wonders for us and certainly built positive community sentiment. One of the things that we’re intent on doing is still providing a free gateway into the title. We are very confident in the experience and the entertainment value of Le Mans Ultimate. It doesn’t make any sense for us to put a brick kind of paywall in front of users. We know that if we start experiencing Le Mans Ultimate, they want to come back for some more. What we’re trying to do is ensure that that value proposition is really attractive to users that want to get even more entertainment value from the product.

And one of the things that we’re trying to do is, encourage groups of players to compete and participate together. That is really important in the racing space where most of the time, only one person can win, and friends become enemies. We’re encouraging groups of friends to play online, which is very common in our young popular console and PC games today, but not really in the rating space. We’re trying to correct that. So, one of the upsells is if you decide to take one of these subscription tiers and you’re willing to participate in this kind of recurring opportunity, we are going to amplify the sense of being part of a team. You will have heard me referencing some of the AI systems that we’re looking to employ that tell us story around your participation in the race.

These things will become available to you if one of the people in the group decides to subscribe. So, we’re looking at the bigger resource and bigger pocket of a group rather than necessarily individuals. So, we’re looking at very innovative ways of trying to make the subscription a must have for people that really want to get more from this experience. But we are not making it a requirement to participate and contribute online, if that makes sense.

Jason Tilchen: Yes, absolutely. That’s very helpful. And then one last question I had is in terms of the overall cost savings. Obviously, we saw a significant year over year improvement on the net EBITDA loss. I’m just curious sort of in terms of obviously the 2022 restructuring and then some of the moves you made in the second half of last year, just sort of in terms of the full impact of those savings relative to what we saw in Q1. Is there sort of more further improvement in terms of cost savings from here? Or have we sort of reached a point where the moves that have already been made are now sort of fully reflected in the financial performance?

Stanley Beckley: Yes. I’ll take this one. This is Stanley. So, the 2022 restructuring program that you mentioned, I think by the end of 2023, we had fully realized the benefits of that. As we disclosed in our Form 10-K, we had restructurings that impacted our Australian development studios and even some UK employees as well in Q4 of 2023. I think at this point, for Q1, we’re down to a monthly operating cash burn of about $300,000 significantly lower than Q1 of last year. I think at this point we’ve sort of fully realized the benefits of the restructuring program, but we still continue to look at other ways where we can reduce our expenses where it makes sense to do so and it’s feasible without that having business.

Jason Tilchen: Great. Thanks very much for taking the questions.

Stephen Hood: Thank you.

Operator: Thank you. We’ll take our next question from Michael Kupinski with Noble Capital Markets. Your line is open.

Michael Kupinski: Thank you, and congratulations on your quarter, and your release. Stephen, I was wondering if you can review for me the roadmap again for the release of games, DLCs and the subscription service in particular? Like what would be — what quarters would you be able to kind of identify when those will be available?

Stephen Hood: Sure. Well, the real key is when the first piece of content arrives, and we’re looking to coincide that with the Le Mans event in June. So next month is not far away at all. But that for us is the next stepping-stone in the progress and the roadmap of Le Mans Ultimate experience. Where you’ve heard me reference, it has the 2023 season content in there. Understandably, our audience is saying, well, we’re watching the 24 season now. We want the product to be as current as possible, especially as there are new cars and manufacturers coming to sport, driver changes and whatnot that people are looking to see reflected, the calendar around the circuits and whatnot. So, the first piece of content comes online in June, and then perhaps pretty much every two or three months we’re looking to launch additional content, ideally in packs.

So, there may be new car arriving in June, after that we’re looking at new circuits and then we start to update the content to make it more current to the 24 season with the different categories of cars that are online. So, for us, it’s really about trying to conclude this year and ensure that by the end of 2024, we have the entirety of the 2024 calendar, the circuit and the cars incorporated in the product. So, that really gives them six months to be rolling this out. And we think, there’s no great urgency in that because we have the entirety of the ‘23 seasons. It’s not as if we came out as a very, very thin game with very limited content. There’s an enormous amount of content in terms of the tracks and the cars and the variety on offer for established players and new people coming in over time.

But June is when it really starts. So, we’re about five weeks away from the start of that.

Michael Kupinski: Gotcha. And when do you anticipate the subscription service to be launched?

Stephen Hood: Subscription service, I think, is a case of post Le Mans. We’re starting to talk about it now. It tends to be a very sensitive subject in the racing space for some odd reason. For us, this is not really kind of pushing the audience to spend unnecessarily. We know that as we own the ecosystem and we’ve poured enormous resources into building this ecosystem, so that we have to gain, we have the online funnel in race control, and we have the services and the features being plugged into that ecosystem experience so that you and your friends can really feel as though you’re a part of a story, you feel like we’re superstars in this. Those features do come in at a fixed expense, and we’re looking for players to invest in this journey with us. So, the subscription is probably all being well coming online around July or August this year.

Michael Kupinski: Got you. And then I know there generally is a bell curve to sales. I was just wondering; can you give us a sense of how long the tail has been for the sale of Le Mans into the second quarter?

Stephen Hood: Well, look, Le Mans, we knew that out of the gate as an early access title, we’d have, originally, we thought it would be a hard sell, an early access title, not an existing franchise, based on a sport that hasn’t had a video game in place for many, many years. But actually, out of the gate it just stormed away. It was superb for us. Now we’re expecting and understand that those sales dip as we’re heading to Le Mans. So, we see that being the next peak. Out of the [Technical Difficulty] it drops off over time because we haven’t been injecting the product with new content. But what we have been doing is injecting fixes and improvements and occasionally new features. That really ramps up next month. So, we expect the next spike and that’s going to be critical for us in terms of marketing visibility, the player update, the numbers coming into the product and the general vibe around that experience at Le Mans is going to be enormously beneficial to us, we expect.

Michael Kupinski: And then my final question, do racing games offer themselves to modifications by user content creators? I was just wondering if mods are an opportunity for you.

Stephen Hood: Yes, good question. Mods in the racing space, for some titles you can consider it to be the lifeblood of titles, but typically, the titles that have been left dormant for a while by the original developers, i.e., they move on to the next shiny thing and, they need the pricing as Le Mans. Users tend to fill that gap, and there are a lot of talented people out there that make amazing content for legacy titles. Because we’re so new, there really isn’t any mod content for the Mon Ultimate. Not a path that we’re proactively trying to encourage, primarily because it’s new. But also, you’ve got to understand we have the rFactor 2 platform in our portfolio that has a lot of user generated content, much of which gets sold through the theme store or free modifications available elsewhere.

And that’s a fertile ground. It’s got a long history of this. Le Mans Ultimate is built to be much cleaner. And I talk about the ecosystem, but really, it’s about the experience being much cleaner and fresh for users. Because in rFactor 2 that’s been around for a long, long time, the quality can vary massively, massively in terms of the user generated content and some probably way past its sell by date for some users. But Le Mans Ultimate is a shiny new thing that has a far higher kind of standard and we’re really selling that as a premium product. And that experience has to be first rate, and that means we curate that content. And all of that content right now comes from within the multiple games team.

Michael Kupinski: Gotcha. Well, good luck. Thank you.

Stephen Hood: Thank you, Michael.

Operator: Thank you. We have no further questions in the queue at this time. I will turn the program back over to Mr. Hood for any additional remarks.

Stephen Hood: Thank you. I’d just like to close by offering my thanks to everybody attending this call. It’s much appreciated. We are feeling very positive about this Q1. We do see it as a steppingstone, and I’d like to thank you again for your time.

Operator: This does conclude today’s program. Thank you for your participation. You may disconnect at any time and have a wonderful day.