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Motorsport Games held their earnings call detailing the 2023 earnings and losses that largely sounded quite positive and ahead of their previous projections on savings. Full details were posted on the investor relations sections of the Web site, but while they aren’t out of risk, I do believe the company itself will survive (even if de-listed from the NASDAQ later this year).

The earnings call focused deeply on Le Mans Ultimate and Stephen Hood, Motorsport Games CEO, expressed strong belief that the title would turn around company fortunes as the second in-house title ever released by the company. He stated that LMU sold as many copies in the first 36 hours of Steam Early Access as they had projected during the first ten days, selling 18,000 during that period and going on to sell more than 55,000. The title is likely to be a part of mentioned Le Mans Virtual and upcoming official Le Mans 24 events this year, taking those events away from rFactor 2.

Race Control, the system used by rFactor 2 and Le Mans Ultimate for race events and matchmaking, now has more than 100,000 registered users. It is shortly going to have a “Web interface” that will allow users to access it away from their gaming system (though they don’t really say why someone would want or need to do that). F1 Arcade launches later this month in the Boston location, using a modified rFactor 2 codebase, and the company has been supporting that installation.

Almost half the call length was taken by the usual question and answer portion and again gave a largely positive outlook. However, when asked directly, the company did state (as it has since 2021) that it will need more funding to see through the year. Other than that, Hood also said that Motorsport Games were completely focused on Studio 397 and Le Mans Ultimate, dropping everything else – including Motorsport Games Australia, Traxion and their Russian studio.

One really positive takeaway, whether it comes to fruition or not, was Stephen Hood highlighting just how important it will be to continue to support Le Mans Ultimate rather than pumping out products in the way Motorsport Games was originally setup to try to do. Maybe they learned from their mistakes.

Their text:

MOTORSPORT GAMES REPORTS FOURTH QUARTER & FULL YEAR 2023 FINANCIAL RESULTS

MIAMI, Florida – April 1, 2024 — Motorsport Games Inc. (NASDAQ: MSGM) (“Motorsport Games” or the “Company”) today reported financial results for its fourth quarter and fiscal year ended December 31, 2023. The Company has also posted the fourth quarter and fiscal year-end 2023 earnings slides highlighting key milestones that occurred in the period, which are accessible on the Company’s investor relations website.

“2023 was a year of repositioning. Reducing costs, headcount and projects allowed us to focus on what we know best, making innovative games. Having determined the correct direction for the company, we put our energy into Le Mans Ultimate, an innovative team-based racing title from our internal team, Studio 397. All efforts were redirected to make this a success, and as part of the delivery, we set about reestablishing ourselves in the eyes of players.” Stephen Hood, President and Chief Executive Officer of Motorsport Games commented. “This reworking of what had become a complex business, was at times a difficult process. But the renewed energy on display from our tightly knit team became our guiding light.”

“This past year marks a significant milestone in the rebuilding of the company” continued Hood. “With a strong sense of direction and energy, we became a games company again, ready to deliver through 2024.”

Fourth Quarter 2023 and Subsequent Business Update

Expense reductions under the previously announced 2022 Restructuring Program has yielded savings of $6.7 million as of the end of 2023
Closed Motorsport Games Australia to centralise development efforts and reduce cost
Released Le Mans Ultimate into Early Access in February 2024, the official game of the FIA World Endurance Championship and the 24 Hours of Le Mans to positive community reception with initial sales above internal forecasted levels
Financial Results for the Three Months Ended December 31, 2023

Revenue for the fourth quarter of 2023 was $1.7 million compared to $3.8 million for the same period in the prior year, a reduction of $2.1 million, or 53.7%. Gross profit was $1.1 million compared to $2.3 million for the same period in the prior year, a decrease of $1.2 million, while gross profit margin marginally increased to 61.4% from 60.6%.

Net income for the fourth quarter of 2023 was $2.7 million, or $1.35 per share, compared to a net loss of $4.8 million, or $4.17 per share, for the same period in the prior year, an improvement of $7.5 million, or $5.52 per share. Lower cost of revenues and operating expenses required to develop and release additional new games in the fourth quarter of 2023 contributed to the increase in net income, as well as a $3.0 million gain from the sale of the NASCAR license to iRacing in October 2023.

Adjusted EBITDA gain(1) for the fourth quarter of 2023 was $0.5 million, compared to an Adjusted EBITDA loss(1) of $3.2 million for the same period in the prior year. The change in Adjusted EBITDA gain(1) of $3.7 million was primarily due to the same factors driving the previously discussed change in net income for the fourth quarter of 2023 when compared to the same period in the prior year.

The following table provides a reconciliation from net income (loss) to Adjusted EBITDA gain(loss)(1) for the fourth quarter of 2023 and 2022, respectively:

Three Months Ended December 31, 2023 Three Months Ended December 31, 2022
Net Income (Loss) $ 2,671,021 $ (4,849,023)
Interest expense, net 98,929 509,993
Depreciation and Amortization 602,800 490,377
EBITDA 3,372,750 (3,848,653)
Acquisition related expenses 66,224 161,010
Loss contingency expenses – 425,000
Impairment of goodwill and intangible assets – 188,378
Gain on sale of NASCAR License (3,037,341) –
Stock-based compensation 81,242 (105,792)
Adjusted EBITDA $ 482,875 $ (3,180,057)
Financial Results for the Year Ended December 31, 2023

Revenue for the full year 2023 was $6.9 million compared to $10.3 million for the prior year period, a reduction of $3.4 million, or 33.1%. Gaming segment revenues were $6.6 million for the full year 2023, compared to $9.1 million for the prior year period, a reduction of $2.5 million, or 27.6%. Esports segment revenues were $0.3 million for the full year 2023 compared to $1.2 million for the prior year period, a reduction of $0.9 million, or 75.4%. Consolidated gross profit was $3.3 million for the full year 2023 compared to $5.4 million for the prior year period, a decrease of $2.1 million, while gross profit margin decreased to 47.6% from 52.0%.

Net loss for the full year 2023 was $14.3 million, or $5.06 per share, compared to a net loss of $36.8 million, or $30.73 per share, for the same period in the prior year, an improvement of $22.5 million, or $25.66 per share. Lower cost of goods sold, operating expenses, and impairment losses, as well as the gain on the sale of the NASCAR license, were key contributors to the decrease in net loss for the full year 2023 when compared to the prior year period, partially offset by a reduction in revenue.

Adjusted EBITDA loss(1) was $8.9 million for the full year 2023, compared to Adjusted EBITDA loss(1) of $21.2 million for the same period in prior year, an improvement of $12.3 million, or 58.0%. The decrease in Adjusted EBITDA loss(1) was primarily due to the same factors driving the previously discussed change in net loss for the full year 2023 when compared to the prior year period.

The following table provides a reconciliation from net loss to Adjusted EBITDA loss(1) for the fiscal years ended December 31, 2023 and 2022, respectively:

Twelve Months Ended
December 31, 2023

Twelve Months Ended
December 31, 2022

Net Loss $ (14,323,185) $ (36,840,454)
Interest expense, net 772,989 1,148,204
Depreciation and Amortization 2,115,4300 2,062,551
EBITDA (11,434,766) (33,629,699)
Acquisition related expenses 387,532 718,611
Loss contingency expenses 232,359 1,425,000
Impairment of goodwill and intangible assets 4,004,627 9,616,748
Gain on sale of NASCAR License (3,037,341) –
Stock-based compensation 957,302 714,523
Adjusted EBITDA $ (8,890,288) (21,154,817)
As of December 31, 2023, the Company had cash and cash equivalents of approximately $1.7 million. During the year ended December 31, 2023, the Company had negative cash flows from operations of approximately $12.9 million, representing an average monthly net cash burn from operations of approximately $1.1 million. While it has taken measures to reduce its costs, the Company expects to continue to have a net cash outflow from operations for the foreseeable future as it continues to develop its product portfolio and invest in developing new video game titles.

As of April 1, 2024, the Company’s cash and cash equivalents has decreased to $1.3million. Based on this cash and cash equivalents position, and the Company’s average cash burn, the Company does not believe it has sufficient cash on hand to fund its operations for the remainder of 2024 and that additional funding will be required in order to continue operations. In order to address its liquidity short fall, the Company is actively exploring several options, including, but not limited to: i) additional funding in the form of potential equity and/or debt financing arrangements or similar transactions; ii) other strategic alternatives for its business, including, but not limited to, the sale or licensing of the Company’s assets in addition to its recent sale of its NASCAR license; and iii) further cost reduction and restructuring initiatives.

There can be no assurances that the Company will be able to secure additional liquidity through the means referenced above, nor can there be any assurances that the Company can sufficiently reduce costs and restructure its business to sufficiently lower its cash burn to sustainable levels and therefore meet its ongoing cash requirements. Further, other factors can impact the Company’s liquidity position, including, but not limited to, the Company’s level of sales and expenditures, as well as accounts receivable, sales allowances, prepaid manufacturing expenses and accrued expenses. For additional information regarding the Company’s liquidity, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 to be filed with the Securities and Exchange Commission (the “SEC”).

(1)Use of Non-GAAP Financial Measures

Adjusted EBITDA (the “Non-GAAP Measure”) is not a financial measure defined by U.S. generally accepted accounting principles (“U.S. GAAP”). Reconciliations of the Non-GAAP Measure to net income (loss), its most directly comparable financial measure, calculated and presented in accordance with U.S. GAAP, are presented in the tables above.

Adjusted EBITDA, a measure used by management to assess the Company’s operating performance, is defined as EBITDA, which is net loss plus interest expense, depreciation and amortization, less income tax benefit (if any), adjusted to exclude: (i) acquisition related expenses; (ii) stock-based compensation expenses; (iii) impairment of goodwill and intangible assets; (iv) loss contingency expenses; and (v) charges or gains resulting from non-recurring events, such as the gain on the sale of the Company’s NASCAR license, as applicable.

The Company uses the Non-GAAP Measure to manage its business and evaluate its financial performance, as Adjusted EBITDA eliminates items that affect comparability between periods that the Company believes are not representative of its core ongoing operating business. Additionally, management believes that using the Non-GAAP Measure is useful to its investors because it enhances investors’ understanding and assessment of the Company’s normalized operating performance and facilitates comparisons to prior periods and its competitors’ results (who may define Adjusted EBITDA differently).

The Non-GAAP Measure is not a recognized term under U.S. GAAP and does not purport to be an alternative to revenue, income/loss from operations, net (loss) income, or cash flows from operations or as a measure of liquidity or any other performance measure derived in accordance with U.S. GAAP. Additionally, the Non-GAAP Measure is not intended to be a measure of free cash flows available for management’s discretionary use, as it does not consider certain cash requirements, such as interest payments, tax payments, working capital requirements and debt service requirements. The Non-GAAP Measure has limitations as an analytical tool, and investors should not consider it in isolation or as a substitute for the Company’s results as reported under U.S. GAAP. Management compensates for the limitations of using the Non-GAAP Measure by using it to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than would be presented by using only measures in accordance with U.S. GAAP. Because not all companies use identical calculations, the Non-GAAP Measure may not be comparable to other similarly titled measures of other companies.

Conference Call and Webcast Details

The Company will host a conference call and webcast at 5:00 p.m. ET today, April 1, 2024, to discuss its financial results. The live conference call can be accessed by dialing 1-888-886-7786 from the U.S., or by dialing 1 (416) 764-8658 internationally. Alternatively, participants may access the live webcast on the Motorsport Games Investor Relations website at https://ir.motorsportgames.com under “Events.”

About Motorsport Games:

Motorsport Games, a Driven Lifestyle Group company, is a racing game developer, publisher and esports ecosystem provider of official motorsport racing series. Combining innovative and engaging video games with exciting esports competitions and content for racing fans and gamers, Motorsport Games strives to make racing games that are authentically close to reality. The Company is the officially licensed video game developer and publisher for iconic motorsport racing series including the 24 Hours of Le Mans and the FIA World Endurance Championship, recently releasing Le Mans Ultimate in Early Access. Motorsport Games also owns the industry leading rFactor 2 and KartKraft simulation platforms. rFactor 2 also serves as the official sim racing platform of Formula E, while also powering F1 Arcade through a partnership with Kindred Concepts. Motorsport Games is also an award-winning esports partner of choice for the 24 Hours of Le Mans, creating the renowned Le Mans Virtual Series. Motorsport Games is building a virtual racing ecosystem where each product drives excitement, every esports event is an adventure, and every race inspires.

For more information about Motorsport Games visit: www.motorsportgames.com.

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