Motorsport Games - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 revenue was $2.0M (+13% YoY), but gross margin compressed to 45.8% (from 61.4% YoY) and net loss was $(2.9)M, driven by FX losses and lack of prior-year NASCAR license gain; diluted EPS was $(0.89) versus $0.97 in Q4 2023.
• Adjusted EBITDA swung to a $(2.5)M loss from $0.4M in Q4 2023; sequentially, profitability deteriorated versus Q3 2024’s $0.1M adjusted EBITDA.
• Management launched RaceControl subscriptions in Dec-2024 (first 21 days gross revenue $120k; ~6,000 active subscribers as of the call), and reached 100,000 net unit sales of Le Mans Ultimate in Q4, supporting new monetization vectors.
• Liquidity remains the principal overhang: cash was $0.9M at 12/31/24 (rose to $1.2M at 2/28/25); management reiterated that cash on hand is insufficient to fund the next 12 months and is actively pursuing financing/strategic alternatives; no forward guidance provided.

What Went Well and What Went Wrong

What Went Well

• Le Mans Ultimate momentum: “significant uplift to player numbers and consumer sentiment” with LMGT3 content, hosted servers, and subscription launch; 100,000 net unit sales achieved in Q4 2024.
• Subscription traction: “out-of-the-gate performed above internal expectations” with $120k gross in the first 21 days and ~6,000 active subscribers, demonstrating recurring revenue potential without paid marketing.
• Cost discipline and annual improvement: FY 2024 revenue +25.7% YoY to $8.7M; FY net loss improved to $(3.0)M from $(14.3)M; FY adjusted EBITDA loss narrowed to $(3.9)M from $(9.3)M.

What Went Wrong

• Margin compression and FX headwinds: Q4 gross margin fell to 45.8% (61.4% prior year), and “other expenses” increased by $2.2M primarily due to foreign currency losses, driving the Q4 net loss.
• Lapped one-time gains: Q4 2023 benefited from a $3.0M gain on NASCAR license sale, absent in Q4 2024, harming YoY comparability.
• Liquidity risk unabated: company again stated cash is insufficient for 12 months of operations; continued net cash outflows expected as product investment continues; exploring equity/debt, asset sale/licensing, and cost reductions.

Transcript

Operator (participant)

Thank you for standing by and welcome to Motorsport Games Inc fourth quarter and full year 2024 earnings call. A section of our call has been prerecorded. As such, cash used in operations for the year ended December 31, 2024, and our average monthly net cash burn from operations has been adjusted. This information will be updated at the end of the call during the Q&A session. As a reminder, today's conference is being recorded. I would like to turn the conference over to Ben Rossiter-Turner from Motorsport Games. Please go ahead.

Ben Rossiter-Turner (VP of Investor Relations)

Thank you and welcome to Motorsport Games' fourth quarter and full year 2024 earnings conference call and webcast. On today's call is Motorsport Games' Chief Executive Officer, Stephen Hood, and Chief Financial Officer, Stanley Beckley. By now, everyone should have access to the company's fourth quarter and full year 2024 earnings press release filed today after market close. This is available in 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 meanings 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 the company's filing to the SEC, including its most recent annual report on Form 10-K for the year ended December 31, 2024, 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 2024 financial results.

You will find a reconciliation of these non-GAAP measures to their most directly comparable GAAP measures, as well as other related disclosures in the press release issued earlier today, which is also available on the Investor Relations section of Motorsport Games' website at www.motorsportgames.com. I would like to turn over the call to Stephen Hood, Chief Executive Officer of Motorsport Games. Stephen?

Stephen Hood (CEO)

Thank you, everyone, for joining today's conference call. Our last earnings call in November came at a pivotal moment for Motorsport Games. While our latest title, Le Mans Ultimate, had launched with strong potential, we faced the necessary headcount reductions the prior month and publicly stated our intent to explore strategic alternatives. We never thought our turnaround would happen overnight. I think we've been incredibly diligent and unwavering in doing what needed to be done to right-size the company. Costs, be they associated with headcount or prior licensing deals, we've analyzed with a cool head and changed the organization and output of the business. We had to balance aggressive cost reductions with an unwavering commitment to improving product quality. Despite the challenges, Le Mans Ultimate was resonating positively with both consumers and industry influencers.

However, as an early access title, it remained a work in progress, requiring us to build and sustain goodwill in the face of a difficult corporate backdrop. On December 10th, we launched a planned yet significant update to Le Mans Ultimate, which sparked a surge of positivity around the game. Player numbers climbed to levels not seen since our initial launch in February 2024 and in the lead-up to the 24 Hours of Le Mans, Motorsport's most iconic endurance event and the inspiration behind our game. For months, the game had been increasingly well-received in many circles, but this update helped us break through to an even wider audience. Many players who were previously skeptical of our brand and our ability to deliver a game worthy of its prestigious name gave it a chance and came away impressed.

Remarkably, this momentum was achieved without investment in paid marketing, demonstrating the power of organic word-of-mouth from influencers, media, and passionate players. Some may view this as an overnight unscripted success, but in reality, it was 18 months in the making. Driven by hard work, resilience, strategic execution, and understanding, we were acutely aware of the issues that had led the company to falter previously, and we set out to do things the way we believed they needed to be handled. We set out to reconnect with players and prove ourselves with a passion project. At the core of our progress is our talented team at Studio 397, who not only excel in technical expertise but also understand our fundamental mission to entertain and engage. The numbers prove it. LMU, Le Mans Ultimate for short, is captivating a rapidly growing audience and earning widespread industry respect.

More recently, our February 25th update led to another notable spike in player numbers and sales. Just as encouraging is our improving player retention, showing that users are staying engaged for longer periods between releases, strengthening our ecosystem and proving to us that our audience is peeling away from competitor products and increasingly becoming heavily engaged with our offering. We provide the game and the multiplayer funnel with technology we own and control. Our battle has always been on multiple fronts, and we continue that fight in the areas that matter so that we can provide a more complete and accessible environment for our players. What we find motivating, beyond the black-and-white numbers, is the perception shift among sim racing enthusiasts. Our game and community platform are being compared favorably to industry giants like iRacing and Assetto Corsa Competizione, a testament to our progress despite being the perennial underdog.

This is friendly competition. Ultimately, we believe the racing market to be underserved, and collectively, we think top-tier racing developers are helping to grow this segment. If we can rub shoulders with longer-established and much better financed titans, imagine what we can do if we start investing in the opportunity in front of us. This success translates into the improved health of our company: increased revenue from greater sales across product, downloadable content extras, and our recently introduced subscription offerings. The widespread industry acclaim and renewed face of the company has opened additional conversations with potential investors, publishers, and partners for future projects such as console ports, which would enable us to bring Le Mans Ultimate to PlayStation and Xbox console owners.

This is an opportunity that has long been called for by our growing player base, but something we were only willing to explore once proven on the PC platform. Whilst we cannot comment on specific opportunities in negotiation today, we can say that we're having positive conversations around options that were not available to us three, six, or even twelve months ago. In December, we launched our subscription service via racecontrol.gg, a revenue stream previously untapped and a long-standing opportunity for our business. In the first 21 days of this accounting period, the service generated over $120,000 in gross revenues. As of today, we're within touching distance of 6,000 active subscribers, showing strong early adoption and long-term monetization potential without any spend towards a paid marketing campaign.

Our subscription service enables us to build a more engaging platform for sim racing in a way that would not be possible if we solely relied on product revenues from, say, a yearly product release. Our product is continually updated, and whilst players do not go out of their way to praise the concept of subscriptions, we appreciate it's a crowded scene, we're gaining recognition for continually improving the product and platform. It's also optional for players. We don't force anything on our consumers. We know the business element is showing the green shoots of recovery. It's taken time, but we're now seeing the benefits, and our recent momentum is carried along with positive player sentiment. DLC or downloadable content, extras like cars and tracks, has further helped drive Le Mans Ultimate's uptake.

Our 2024 Pack 3 introduced the first LMGT3 car models, staples of modern GT racing, featuring iconic brands such as Ferrari, Corvette, and BMW. Additionally, we offered all players the McLaren 720S as free DLC and introduced the legendary Interlagos circuit in Brazil, making this our most successful DLC pack to date whilst boosting season-pass sales, a method for players to sign up to a paid tier delivering all the content as and when it's released. This year, we'll be adding more of the very popular GT3 class cars as well as an additional circuit, completing our 2024 content roadmap. Beyond content, we have informed players of some of the headline feature updates we have in the works, namely livery creation and driver swaps.

The former will enable customization of car appearance, and the latter will enable more than one player to share the same car, taking turns and swapping control during pit stops. This will form the backbone for large-scale endurance eSports events set to return to Le Mans shortly. These features are already generating significant anticipation among players, and we are working hard to deliver the next round of updates. I earlier made reference to the corporate backdrop, so readily picked up on by today's well-read and connected players, who are winning there too. We recently announced a settlement with Luminis, the company from whom we bought the original Studio 397 and technology, which served as the springboard for where we are today.

This resolution improved our financial position by $180,000, and upon completion, we'll clear any remaining barriers to full ownership of Studio 397 and their original technology contribution to Le Mans Ultimate. This settlement should see us bring down the curtain on a long-running issue, which has been resolved amicably, and we thank the individuals involved for their support in making this happen. We also received a positive ruling in our Innovate Corporation litigation and secured a summary judgment in our favor on all counts. This could alleviate some of our existing legal fee liabilities, improving our stockholders' equity situation. Now, I would like to invite Stanley Beckley, our Chief Financial Officer, to talk about the financial results for the fourth quarter and full year 2024.

Stanley Beckley (CFO)

Thank you, Stephen, 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 2024. Revenues for the quarter were $2.0 million, up $0.3 million or 13% when compared to the same period in the prior year. Higher digital game sales from the release of Le Mans Ultimate in February 2024 were primary drivers for the increase. Net loss for the fourth quarter of 2024 was $2.9 million, compared to net income of $2.7 million for the same period in the prior year, a decrease of $5.6 million.

The increase in net loss is driven by an increase in other expenses of $2.2 million, which is primarily comprised of foreign currency gains incurred through measuring transactions denominated in a currency other than US dollars. Furthermore, in Q4 2023, other operating income included a $3.0 million gain related to the sale of a NASCAR license to iRacing in October 2023. Consequently, net loss attributable to Class A common stock was $0.89 for the fourth quarter of 2024, compared to net income of $0.97 for the same period in the prior year. We are reporting an adjusted EBITDA loss of $2.5 million for the fourth quarter of 2024, compared to an adjusted EBITDA of $0.4 million for the same period in the prior year.

The reasons for the decline in adjusted EBITDA are the same as those discussed in respect of the change in net income or loss for the period and comparative quarter, as well as the decrease in stock-based compensation compared to the prior year period. For full year 2024, revenues were $8.7 million, up $1.8 million when compared to the prior year period, primarily due to $3.0 million in digital game and downloadable content sales relating to the sales of Le Mans Ultimate released on PC in February 2024, offset by $0.5 million and $0.4 million in lower revenues for NASCAR and rFactor 2 titles, respectively. Net loss was $3.0 million for 2024, compared to $14.3 million for 2023. Adjusted EBITDA loss was $3.9 million for 2024, an improvement from the $9.3 million adjusted EBITDA loss for 2023.

The decrease in adjusted EBITDA loss of $5.4 million was primarily due to the same factors driving the previously discussed change in net loss for the fourth quarter of 2024, when compared to the same period in the prior year, as well as a decrease in stock-based compensation compared to the prior year. Net loss attributable to Class A common stock was $0.94 million in 2024, compared to a net loss of $5.56 million in the prior year. As it relates to liquidity, this continues to be a key area of focus for the company. Net cash used in operations for the year ended December 31, 2024, was approximately $3.2 million, representing an average monthly net cash burn from operations of $0.3 million, down $0.8 million when compared to the average monthly cash burn of $1.1 million for the year ended December 31, 2023.

As of December 31, 2024, the company had cash and cash equivalents of $0.9 million, which had increased to $1.2 million as of February 28, 2025. Based on our cash position and the average monthly cash burn, we do not believe there is sufficient cash on hand 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 sales of our NASCAR license and Traxion, 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 (CEO)

Thank you, Stanley, and thank you to everyone joining us on this call today. In November, I stated that with the right financing, we had the opportunity to grow this business. That belief remains stronger than ever. In the sim racing industry, respect is earned, not bought, and we are earning it. Motorsport Games, with Studio 397 firmly at the heart of who we are today, is no longer going in circles. With our recent successes, a drastically improved financial position, and strong momentum, we are a revitalized boutique entertainment studio poised for the next stage of development and growth. We're certainly not short of suitors, and we're excited for the road ahead.

Stanley Beckley (CFO)

Net cash used in operations for the year ended December 31, 2024, was approximately $2.8 million, representing an average monthly net cash burn from operations of $0.2 million, down $0.9 million when compared to the average monthly cash burn of $1.1 million for the year ended December 31, 2023.

Operator (participant)

We will now take your questions. At this time, if you would like to ask a question, please press star one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. We will pause for a moment to allow questions to queue. It appears that we have no questions at this time. That will conclude today's Motorsport Games fourth quarter and full year 2024 earnings call. Thank you for your participation. You may disconnect at.