Motorsport Games Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The company operated as Motorsport Gaming US LLC during the reporting period and converted to a Delaware corporation in January 2021. Financial comparisons are with FY2019.
Business context
Motorsport Games develops and publishes racing video games and organizes esports events. FY2020 revenue came overwhelmingly from games, particularly the NASCAR Heat franchise; esports and other services contributed a small share. It held NASCAR game rights and obtained exclusive game licenses for BTCC and Le Mans/WEC, with new titles in development.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $19.05 million | $11.85 million |
| Gross profit / margin | $12.45 million / 65% | $6.96 million / 59% |
| Operating income (loss) | $1,147 | ($5.18 million) |
| Consolidated net loss | ($679,854) | ($5.76 million) |
| Operating cash flow | $4.05 million | ($4.42 million) |
| Cash at year-end | $3.99 million | $1.96 million |
| Working capital | ($4.44 million) | ($2.04 million) |
| Total assets | $17.39 million | $12.78 million |
| Due to related parties | $10.85 million | $8.05 million |
The FY2020 net loss attributable to Motorsport Gaming US LLC was $1.76 million; consolidated net loss was $680,000, with noncontrolling interests reporting net income. Gaming revenue rose 59% and esports revenue rose from $75,000 to $300,000. Gaming gross margin improved from 59% to 66%, largely with increased digital-download sales; esports gross margin fell from 70% to 4% as event production costs grew. The consolidated gross margin was 65%.
Operating cash flow turned positive, but included a substantial contribution from changes in operating assets and liabilities, notably accrued expenses. Investing cash use was $481,000; financing cash use was $1.54 million. At year-end, the company had a $4.44 million working-capital deficit. The $10.85 million due to related parties was primarily under a Motorsport Network note bearing 10% annual interest, payable on demand, subject to a side letter limiting demands that would constrain liquidity.
Material changes and developments
- Revenue increased about 61%, driven by NASCAR Heat 5 and continued sales of earlier titles, marketing, and digital distribution. Digital channels represented approximately 62% of console-game revenue, versus 51% in 2019.
- Three customers accounted for 78% of revenue in both years; one customer represented 82% of year-end receivables. One retail distribution partner generated approximately 34% of FY2020 revenue, down from 40% in FY2019.
- Esports activity expanded to 56 events and approximately 55 million viewers, compared with 22 events and 3.8 million viewers in 2019. Esports remained only about 1.6% of FY2020 revenue.
- In January 2021, the company completed an IPO at $20 per share, receiving approximately $62.9 million in net proceeds. It repaid $10.4 million of the Motorsport Network note later that month.
Outlook, risks and unusual items
- Outlook: Management said cash, including the subsequent IPO proceeds, was expected to fund operations for at least 12 months from issuance of the financial statements. Planned releases included a next-generation NASCAR game and mobile/casual titles in 2021, and BTCC and Le Mans/WEC games anticipated in 2022. These are plans, not guaranteed results; the filing provides no quantitative revenue or earnings guidance.
- COVID-19: Management reported increased game demand and esports viewership as more consumers stayed home, but also cited retail disruption, postponed or online-only events, remote work, and uncertainty about ongoing effects.
- Concentration and execution: NASCAR Heat generated approximately 99% of revenue in both years. Results depend on a small number of franchises, licenses, customers, platforms, and a key physical-game distributor, as well as timely delivery and consumer acceptance of new titles.
- Financing and related parties: The pre-IPO note was a material, demand-payable obligation to controlling shareholder Motorsport Network. IPO proceeds improved liquidity after year-end, but the company also planned significant game development and investment spending.
- Controls: Management concluded disclosure controls were not effective due to material weaknesses in documentation and independent review of significant accounting judgments, and segregation of duties. Remediation was underway but not complete; the auditor did not attest to internal-control effectiveness.
- Contingencies: Former minority shareholders filed litigation relating to the 2020 704Games stock purchases and alleged disclosure, fiduciary-duty, and contract violations. The company disputed the allegations; losses were not accrued because they could not be reasonably estimated. Management said ordinary-course claims were not expected to be material.
- Other items: Subsequent to year-end, the company acquired KartKraft for $1 million and announced binding term sheets for potential Studio397 and Digital Tales acquisitions. These proposed transactions were subject to definitive documentation and customary conditions. The Le Mans joint-venture interest increased to 51% in January 2021, alongside new exclusive licenses and a commitment to fund up to €8 million for game development.
Important facts for investors to verify
- Whether new game releases meet schedules and sales expectations, and whether revenue diversifies beyond NASCAR Heat.
- Whether digital sales, esports monetization, and new licenses improve sustainable margins rather than only audience reach.
- Customer, receivable, and distribution-partner concentration, including collection risk and sales-return or price-protection reserves.
- Post-IPO liquidity, use of proceeds, acquisition funding needs, and the remaining balance and terms of related-party obligations.
- Progress in remediating internal-control weaknesses and developments in the 704Games-related litigation.