Motorsport Games Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. The company develops and publishes racing video games and runs esports events. Figures below are in U.S. dollars.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1.69 million | $1.22 million | $5.16 million | $6.55 million |
| Gross profit / margin | $0.86 million / 50.9% | $0.62 million / 50.7% | $2.22 million / 42.9% | $3.08 million / 47.0% |
| Operating loss | $2.66 million | $7.55 million | $16.69 million | $29.84 million |
| Net loss | $3.53 million | $8.54 million | $16.99 million | $31.99 million |
| Net loss attributable to Motorsport Games | $3.49 million | $8.52 million | $16.76 million | $31.06 million |
| Operating cash flow | Not presented for the quarter | Not presented for the quarter | $(10.11) million | $(16.92) million |
Q3 revenue increased 38.5%, principally from higher digital game and downloadable-content sales following the NASCAR Heat 5: Next Gen update; esports revenue was nil as the Le Mans Virtual Series season had not begun. For the first nine months, revenue declined 21.2%: gaming revenue fell 18.0% and esports revenue fell 52.5%. The nine-month gross margin contracted 4.1 percentage points, reflecting lower gaming revenue against fixed license guarantees and technology amortization. Q3 basic and diluted loss per Class A share was $1.28, versus $7.29.
Operating expenses for the first nine months were $18.91 million, down 42.6% year over year, including lower sales and marketing, development and general and administrative costs. The period included $4.00 million of intangible-asset impairment; the comparable 2022 period included $4.79 million of goodwill impairment and $4.64 million of intangible impairment.
Financial position and liquidity
- At September 30, 2023, cash and equivalents were $1.18 million; current assets were $2.85 million and current liabilities were $7.96 million. Working capital was negative $5.1 million. Total assets were $11.41 million, total liabilities $10.91 million, and stockholders’ equity $0.50 million.
- Cash used in operations for the first nine months was $10.11 million; investing cash use was $0.03 million. Financing provided $10.09 million, mainly from approximately $10.4 million net proceeds from registered direct offerings, partly offset by commitment and license payments. Cash ended the period at $1.18 million, compared with $0.98 million at December 31, 2022.
- The Driven Lifestyle related-party credit-line balance was zero at September 30 after approximately $3.9 million of principal and interest was exchanged for shares. Management said it believed there was a substantial likelihood Driven Lifestyle would not fund future borrowing requests, so it did not consider the line a viable liquidity source. The company reported no sufficient committed financing to fund operations.
- On October 31, cash was $3.2 million, an increase attributed to the NASCAR license sale. Management reported average Q3 operating cash burn of approximately $0.4 million per month and stated that available cash was insufficient to fund operations for the next year.
Material changes, outlook and risks
- Going concern: Management concluded substantial doubt existed about the company’s ability to continue as a going concern within one year after issuance of the financial statements. The statements assume continued operations and include no adjustments for the outcome of that uncertainty.
- NASCAR license sale: On October 3, 2023, the company transferred its NASCAR license to iRacing for $5 million, with two additional conditional payments of $0.5 million each. It paid NASCAR Team Properties $1.25 million from the proceeds for license-related amounts. The company retained limited rights to sell and support existing NASCAR products through December 31, 2024, but cannot develop new NASCAR content beyond specified exceptions. The company expects revenue from existing NASCAR products to decline. The sale reduced remaining minimum royalty commitments from $17.4 million to $11.0 million and annual marketing commitments from $2.4 million to $0.4 million.
- BTCC license: BARC terminated the license effective November 3, 2023; approximately $0.8 million was due to BARC as of the report date. The company no longer has rights to develop BTCC games or organize related esports events.
- Restructuring and roadmap: On October 29, the company announced closure of its Australian development studio and a workforce reduction of approximately 40 employees, about 40% of global staff. It estimated a $0.4–$0.5 million restructuring charge, primarily in Q4 2023. Development of the planned INDYCAR title was suspended pending adequate funding and resources. Le Mans Ultimate’s expected release moved from December 2023 to February 2024; further roadmap changes remain possible.
- Funding and cost actions: The company was exploring equity or debt financing, asset sales or licensing, and further cost reductions. The ATM program had $2.9 million available at September 30, subject to SEC limits, but management said proceeds would not meet ongoing liquidity needs and there was no assurance of obtaining financing on acceptable terms. The 2022 restructuring program had generated $6.7 million in annualized savings by September 2023, with approximately $1.3 million of restructuring costs incurred to date.
- Concentration and commitments: NASCAR represented approximately 70.9% of nine-month 2023 revenue. Four customers together accounted for 78.1% of nine-month revenue. Minimum royalty commitments across licenses were $11.0 million after the NASCAR sale; Le Mans development funding commitments and other license obligations also remain.
- Other notable matters: A $0.2 million settlement with Leo Capital was paid in October; litigation with Innovate remained unresolved, and insurer Wesco disputed coverage for the underlying litigation. The company reported ineffective disclosure controls due to two unremediated material weaknesses: inadequate monitoring of controls and insufficient accounting personnel with appropriate expertise. The CFO resigned effective November 8, 2023, and an interim CFO was appointed.
Important facts for investors to verify
- Current cash, monthly cash burn, and whether additional financing or asset transactions have been secured since the filing.
- Cash actually received from the NASCAR transaction, timing and conditions for the remaining $1.0 million, and the resulting revenue and royalty effects.
- Post-termination obligations to BARC and the status of remaining litigation and insurance coverage.
- Whether the restructuring savings and estimated costs were realized, and the operational impact of the workforce reduction and suspended INDYCAR development.
- Le Mans Ultimate’s release timing, funding needs, and performance, alongside any further product-roadmap changes.
- Progress remediating the material weaknesses and stability of the finance leadership team.