Thank you for standing by and welcome to the Motorsport Games Inc. Second Quarter 2021 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand over to Ashley DeSimone with Integrated Corporate Relations. Please go ahead.

Thank you, operator and welcome everyone to Motorsport Games second quarter 2021 conference call and webcast. On today's call are Dmitry Kozko, Motorsport Games' Executive Chairman and Chief Executive Officer; Stephen Hood, President; and Jon New, Chief Financial Officer. By now, everyone should have access to the company's second quarter earnings press release filed today after market closed. 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 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 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 the company's most recent annual report on form 10-K and the company's quarterly report on form 10-Q for the period ended June 30, 2021 for a detailed discussion 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 second quarter 2021 financial results. You will find a reconciliation of these non-GAAP measures to our actual GAAP results, as well as two 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 and hello, everyone. It's a pleasure to be speaking with you as we report another successful quarter of making meaningful progress towards our set forth division, as well as some exciting updates for Motorsport Games. Please check out our investor video posted on the landing page of our website, which contains some very appealing visuals from our new highly anticipated NASCAR 21: Ignition game. We hope these quarterly videos continue to give you the sense of Motorsport Games' progress towards our vision of being the household brand name for racing games and Esports. Before I dive into details, I want to say a quick thank you to our shareholders and racing fans who have been patiently waiting for the release of our upcoming NASCAR 21 title. Thank you for taking the time to learn our story and be part of this amazing journey. For all our new shareholders, let me quickly reiterate who we are and what drives us. We're an award winning, global leading racing game developer, publisher and an Esport ecosystem provider of official motorsport racing series throughout the world. Our mission in Motorsport Games is to create and spread the joy through racing games, starting with our unique access to our parent companies, approximately 16 million monthly active users and beyond. We set out to achieve this mission by developing and publishing racing games, and immersive Esport experiences for the world's most iconic races and brands who trust us with their valuable IP and often in the long-term partnership like the one we have with NASCAR and as a recently, IndyCar. These are just examples of several iconic brands we work with today, with others including ACO, which represents 24 Hours Le Mans, and British Touring Car Championship. As we acquire more IP, we plan…

Thank you, Dmitry and hello everyone. My name is Stephen Hood, and I am the President of Motorsport Games. As we approached this release milestone, a significant step in the life of our young company, I would like to give an update on the continued expansion of our capabilities, and how our development teams are scaling to handle multiple franchises. Whilst efforts to close down and release our new NASCAR projects are front and center of daily operations, we have established work streams, processes and added headcount specific to new projects from BTCC to Le Mans or more recently, IndyCar. These franchises represent the next phase in the lifecycle of our business, each benefiting from recent acquisitions, leveraging technology and skills, now owned entirely by Motorsport Games. The acquisition of rFactor and KartKraft technologies, not to mention the impending release of our first full product in NASCAR 21: Ignition provides confidence in the realization of our MSGM games platform. This is an evolving platform to be leveraged by all our franchises, which brings significant efficiencies to our development operation. A developer in our Moscow studio will be as familiar with our tool chain and processes as any other be they based in Australia, the Netherlands, the UK or US. This distributed workforce has proven essential over the last 18 months, and we continue to refine our lines of communication to ensure we get the very best from our teams. As we have looked towards recruiting additional talent to spearhead the management of these new titles. This has resulted in us adding noteworthy personnel from companies such as Splash Damage, Outplay Entertainment and EA Criterion, not to mention many others we're expected to announce in due course. Technology is important to us, use it right and we provide the foundation to…

Thank you, Stephen. We're pleased to welcome everyone to our second quarter 2021 earnings conference call. Our second quarter highlights include the acquisition, closing of Studio 397 and the buyout of the remaining minority interest in 704Games during the quarter. Revenues were 2.2 million and 3.9 million for the quarters ended June 30, 2021 and 2020 respectively, a decrease of 1.7 million or 42%. For the three months ended June 30, 2021, revenues from our gaming segment decreased 1.6 million or 41% to 2.2 million from 3.8 million in the prior year period. The decrease in our gaming segment revenues compared to the 2020 period was primarily due to lower sales of our NASCAR console and PC games, and to a lesser extent, a reduction in mobile revenues. Our Esport revenues were zero and 100,000 for the quarters ended June 30, 2021 and 2020 respectively, a decrease of 100,000 from sponsorship revenues received. While we held seven Esport events during the second quarter of 2021, we did not earn any sponsorship revenues from these events as they were primarily marketing. Gross profit was 1.3 million or 60% of revenues and 2.6 million or 67% of revenues for the quarters ended June 30, 2021 and 2020 respectively, a decrease of 1.3 million or 49%. The decrease in gross profit was primarily due to reduction of 1.6 million in games revenue and an increase of 0.3 million in amortization expense, partially offset by the increased percentage of digital sales which have a higher gross margin percentage than the sale of physical units. With lower revenues and higher amortization expense during 2021, our gaming segment gross profit was 1.3 million and 2.6 million for the quarters ended June 30, 2021 and 2020, respectively. Cost relating to prizes, staffing at Esport events resulted in…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Michael Graham from Canaccord. Please go ahead.

Thank you. Hey, guys, thanks for all the info and congrats on getting the launch of the game set. The video looks cool. So thanks for that as well. I have a few questions. And I just wanted to start with just the timing of the launch. It was about a month later than you'd indicated in the last earnings call. And so one question was just to the extent that there were development delays, can you just talk about maybe what you learned from those if anything. And then one thing that seems like a positive is that it puts the launch a little bit closer to the holiday season and I'm just wondering if that was a factor in your decision making?

Hi, Michael. I can probably take that one, it's Stephen. I think it's fair to say there's a lot learned from the scenario that we're going through at the moment. I mean, we've talked at length about the pandemic. And it's quite clear that it impacted us to certain extent when it comes to testing and tweaking a game towards the end of a project more so than we would have liked. And that's one of the reasons why we've extended the timeline, because as our different studios around the world, including the test teams and we are dotted all over this planet. At times, local restrictions have meant that people have had to relocate to work from home and contribute from home that does cause particular challenges for us. If we've learned one thing from this process, it's probably how to work effectively in a very fast changing and dynamic environment. We can't predict rules that occur around the world. And moving specific hardware from the office to home has been a technical challenge not only for us, but our partners in Sony and Microsoft and we've learned a lot from those relationships. So I think it's important to understand the ever changing dynamic that we have to address and also this kind of period of extension if I can just address this as given us the opportunity to leverage the input of recent superstars that have been joining most sport games. And their input into the product, I think has been quite significant, which improves the quality of the end game, and also rolls into subsequent products from multiple games. So there's a lot to learn. And there are positives to take on this as well.

If I may add, it's Dmitry, Michael. Thank you for the question. On the holiday part, as you heard the reasoning from Stephen on the two contributing factors, but it does give us a little added benefit with the holiday schedule being closer. So you could envision us especially at the physical stores, being closer to the locations that demonstrate the new release titles more so than in our normal cycles, we'll be going into the discounted Black Friday's type of participation. So as being newer, closer to the holiday cycle, we believe will be beneficial to us.

Okay, that makes sense. And then the other question I wanted to ask is just on the guidance. First of all, I think it's tremendous that you're issuing guidance for the first time, I think that's great. I'm just wondering when you think about some of your other revenue streams outside of the console games, like Esports and mobile did those factor significantly into your guidance? Or was your guidance built primarily around some of the console game revenue?

The guidance was primarily around the console and the PC release of our NASCAR 21: Ignition. Go ahead Jon.

And we also have revenues. Yeah, we also have revenues kicking in. We also have revenues kicking in from Studio 397, so that's starting to ramp up. So there's a little bit coming from there too.

Got I, okay and then last one for me, and I'll go back in the queue. I just - one of the things that jumped out at me in the release about the game launch was just the DLC component seemed to be a big point of emphasis, and also the career mode seem to be a big positive point of emphasis. And maybe you can just touch on sort of how much of an addition are those two features from your prior versions of NASCAR Heat, I guess, and how excited are you about those?

We're definitely excited about bringing additional content, especially champions type of content. Billy Elliot is going to be a playable character, going to carry paint schemes. There is some benefits to this whole champions edition, and ability to participate in the pre-orders that we're rolling out, more so than we've done before. But I think more importantly, what we're really excited about, since we had an opportunity to build this title from scratch, we really had a good insight from our community as to what have been - they have been kind of avoided by previous versions and what was not possible with the previous versions of the game to deliver such as a very robust paint booth to give the personalization that the fans nowadays really, really desire. So we're more excited about those fan desired features more so than just the type of downloadable content and the offerings that NASCAR allows us to bring in terms of contents concern. We're more excited about the personalization's that the users will have there in this game. But of course, since it's built from scratch, brand new physics, brand new graphics, we just know that the look and feel of this product is something that will wow the user and that's the emotion we're going for. And I think some of the early tracking of commentary around the game trailer that was just released earlier today is starting to prove that.

Okay, great. Thanks so much. I'll go back in the queue.

Thank you. Your next question is from Mike Hickey from Benchmark. Please go ahead.

Hey, Dmitry, Stephen, Jon, great quarter guys, thanks for taking my questions. I guess the first one to meet you. I think you mentioned in your prepared remarks that gave an indication of physical selling, sounded like it was pretty substantial. Could you sort of double click on that piece? I wasn't quite clear there. But it sounded like it was some sort of record compared to prior iterations.

Sure. Thanks, Mike for the question. So, yes, you're correct. Normally what happens in that cycle is before the release, we go through a series of meetings with large retailers, which are paired with our distributors. And obviously, this is what the main biggest one, which supplies majority of the stores for us. And during those is - the information that the distributor collects in order to provide pretty accurate statements, sorry, estimates. And the reason I say pretty accurate is because historically, what we have seen is their estimates translate into order, almost one for one. So it's very rare that when our distributor estimates a certain amount, the quantity of units that they either back down or increase on day one, they do increase afterwards, but they're pretty accurate on their day one order. So where we are today is that we received those estimates already from our largest distributor, which has indicated clearly when we compare our historical data to other games that Motorsport Games has published, when we compare it against those units, it is our largest order. I'm not able to say that it's significantly as you might have alluded to, it is definitely the largest, it's the record breaking for us, but we want to also create sort of a momentum and a large demand. So we want those orders to continue to come in, instead of just taking one initial one that might last throughout a period of time.

Nice. Thank you. I think you mentioned you're going to start to open up digital pre-orders tomorrow. That's exciting. Are you providing incentives there for pre-orders on digital? Or what are your expectations?

Absolutely and that's what we're very excited about. And, yes, the incentives will give folks early access to play the game, there's a two day early access, if somebody pre-orders, there's additional paint schemes that are unique to those that are pre-order. So those historically have proven to us to be large enough incentives for our early adopters to hop in. And what's good is that those pre-orders give us a good indication of additional ramp ups that we might have to do for our selling orders for the stores. So we continue to pass this data back and forth with our distributor. So even though their day one order is already essentially estimated for, we still have an ability to bring them some pre-order insight on the quantities of how we're doing to talk about let's call it a day two type of order.

Nice is NASCAR helping creating awareness for the game or are they plan to?

They absolutely are and proud to say that as we unveiled our trailer earlier today, within minutes of us unveiling, it appeared on nascar.com homepage, their social channels, and so on and so on. And not only them, there's definitely a pent up demand within drivers, within teams. So there's definitely something that we're looking forward to and we received an entire schedule of different things that NASCAR is going to be contributing towards the promotion of this title.

Thanks Dmitry. Last question I think for me here, you obviously had tough confidence last year when shuffling and home was an issue, or reality, I guess, what are you seeing sort of from player engagement on the core audience as you sort of reopen the economy?

We do still see an increase if we compare towards pre-pandemic time and now. Of course, during the pandemic times there were an additional increase, if we compared during pandemic and now, but if we - to compare a period of pre-pandemic to now, we're still higher than we were before. So pandemic times, did increase that plank, and it did go down a little bit, but not to the pre-pandemic stage. Of course, our users are also experiencing an older title than usual. So we cannot wait to see what this interaction looks like as soon as they get their hands on this new title.

Awesome, thanks, guys. Best of luck with your launch coming up in October.

Thank you, Mike.

Thank you. Your next question is from Franco Granda from D.A. Davidson. Please go ahead.

Good afternoon, everyone. Thanks for taking my questions this afternoon. Well, first of all, congrats on the launch of the trailer. It's like, everybody's excited. I've been kind of browsing social media, all of the social media channels, and people are cautiously optimistic, and some are very excited to get to see the attraction there. But one of the things that I noticed as I can look through what people are talking about was the damage models. So I guess the question for me to you is how do you feel about how your damage model in the car looks like today? And how's it shaping up ahead of launch?

Hi, Franco, it's Stephen. A very good question, everybody seems to gravitate towards the damage model in the NASCAR game, I wonder why. It's something we put a fair bit of effort into. Because for us, one of the important things is not only the visual damage that you get to see on the cars in a big accident or smash or whatever that I'm sure everybody will try on day one, we will love to do that. The really important thing for us is to try and convey the fact that you're driving a machine. But the body work is the shell, you have an engine within the car, the tires, made of rubber, they're the contact point on the ground, this stuff makes the whole experience feel more believable. So I think even in the trailer, I did see it go live, you can see for example, an engine starting to smoke and overheat in the garage as the team starting to repair it. Now a few people pick up on things like this in the trailer, but in the final game, it will feel more believable to be driving a machine rather than the toy as you do in most racing games. So it's actually goes hand in hand for us in terms of showcasing the damage visually, which is a step above the NASCAR Heat franchise, and also making the whole experience more believable. You're driving a car. So I think for the initial installment, people will be suitably impressed. But we know that we're going to do a lot more to this over time. And it will add to the experience and please fans new and old alike.

Yeah, thanks for the color. And I can assure you that they will notice this giving them a few hours. And then you obviously had no Esports revenues in the quarter. So I guess what is your outlook in the segment for the rest of the year? Obviously you have Le Mans coming up here in like 10 days or so. So any color on whether you're making any changes to how you're monetizing this event compared to last year.

Hi, Franco, it's Dmitry. Thanks for the question. So we definitely, as mentioned on the call, are getting ready to launch quite a few marquee Esport events. And if you look at our Q2, we did not have such. So, you could expect to have quite a bit of a difference in terms of the results that we could derive both in audience in terms of how quickly we could continue to grow our community and of course, revenues. And Le Mans virtual is something that we're going to be talking about very soon here, together with an official BTCC type of Esport. And with the recent addition of IndyCar, we are targeting to launch an official Esports for IndyCar, also Q4 of this year or towards the end of the year, so multiple of those official ones will be something that would be attracting sponsorship contributions towards our revenue lines. We haven't given a guidance separately on it. So we're sticking to our 20.5 for the year, which includes that.

Thank you. And then, last one from me. Do you have any update on the Esports integration onto traction later this year?

So if you're referencing Franco maybe towards some of the points we discussed in our previous call where we said towards the end of the year, we're looking to include functionality where folks will be able to sort of conduct their own events. Yes, we are in development of such. We haven't made announcements along with a couple of other features that we're looking to bring to traction. It is still in development and still on our roadmap.

All right, thank you very much for the color.

Thank you. Your next question comes from Michael Kupinski from Noble Capital Markets. Please go ahead.

Thank you for taking my questions. I greatly appreciate that. Just a couple, first of all, maybe I may have missed this. But did you go over the cash on hand - your current cash on hand?

No, we didn't, 26 million - 25 million, 26 million today between those two.

Okay, thank you. And then you talked a little bit about this. But I was just wondering in terms of the impact from COVID, related to sales of video games, particularly the curve that we normally see in terms of sales. Has it been elevated? Has prices been different, unit sales been different as we went through 2020 and into 2021, anything that you've seen differently than the normal bell curve that you might have seen for the games?

Hey, thanks Michael, for the question. So definitely, there is some uplift from COVID that we experienced, and kind of seeing a reduction of that. Also, we had the new title since July of last year. So last year, we had a newer title on our hands that does help elevate the sort of the bell curve as you referenced throughout the year. This year, we haven't had a new title like we did in the middle of last year. Therefore, it does look different. But if we were to align the release schedules, we would see a pretty small impact in terms of COVID contribution, but there is one.

And that was both on unit sales and pricing as well or on both.

Mostly on unit sales, our pricing has been pretty consistent against our historical information.

Got you and just to follow up the question in terms of the launch window for NASCAR Ignite, are there any other titles that might compete with your lunch around October 28 that might be a little bit of what I would call tent pole type launches and things like that. And then how close to the season finale on November 7 of NASCAR do you feel would be ideal launch for NASCAR Ignite? Just in case the launch slips for any reason, what would be the window? What would you hope to - I mean, would you expect that there would be a lift from the season finale, that sort of thing.

So we definitely have chosen a season finale towards the end of the season as a date for us. That allowed us a little bit more time to take in their contribution from the superstars that joined our team recently, like Stephen referenced. And we do see that that is another optimal window for us. Similar to how we speculate historical data has shown that September is a good window for us to launch. We did try last year a July launch that has proven to be less of a success as September would be. But that's only one time trying it during that month compared to three years or so trying it in September. So October is a new one for us. But we do usually see a demand towards the end of the season, just like there is a demand at the beginning of the season. So it's one of those ways that we hope to rise. Now, as far as your beginning of the question of additional titles, now there is a force of horizon that is coming out in November or scheduled to come out in November. But we are the only motorsport IP. So that does shine a light on us differently than anything else. But there's been some smirks around the quality of our game, even from Microsoft guys making jokes as to this is really up to par. So maybe they're referencing their own title.

Got you, great, that's all I had. Thank you. And good luck.

Thank you.

Thank you. [Operator Instructions] There are no further questions at this time. I'll now hand back to Dmitry Kozko for any closing remarks.

I want to thank again for participating in our earnings call. And I would like to urge those that participated to take a look at something that we're really proud of. Today has been a very special day, not just to deliver the results to you all, but all sorts of showcase for the first time ever, to the world of what the game trailer of something we've been working on for a few years already could look like. It is our marquee event for us. It's super important to be able to gather feedback. And we're super excited to be showcasing that sort of world. So I urge you all to take a look if you haven't yet. And do dig deeper into the comments. See what the fans are there to say for themselves. Thank you very much for joining again.

Thank you. That does conclude our conference call today. Thank you for participating. You may now disconnect.