Motorsport Games Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Financial statements are unaudited. Share and per-share figures reflect the 1-for-10 reverse split completed November 10, 2022.
Business context
Motorsport Games develops and publishes licensed racing games and organizes esports events. NASCAR remained its principal game franchise, while the company also operates gaming and esports businesses and develops titles for other racing series. Results are sensitive to product launch timing and sales of a limited number of titles and through concentrated customers and retail distribution.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1.22 million | $2.14 million | $6.55 million | $6.85 million |
| Gross profit | $0.62 million | $1.19 million | $3.08 million | $4.21 million |
| Gross margin | 50.7% | 55.6% | 47.0% | 61.5% |
| Operating loss | $7.55 million | $6.39 million | $29.84 million | $27.74 million |
| Net loss | $8.54 million | $6.66 million | $31.99 million | $26.70 million |
Class A basic and diluted net loss per share was $7.29 for Q3 and $26.61 for the nine-month period, compared with $5.64 and $23.17, respectively, in 2021.
- Cash and liquidity: Cash was $3.22 million at September 30, down from $17.82 million at December 31, 2021; it declined further to $1.8 million at October 31. Working capital was negative $3.20 million, versus positive $16.02 million at year-end 2021.
- Cash flow: Operating activities used $16.92 million in the first nine months, compared with $16.72 million in 2021. Investing activities used $0.27 million; financing activities provided $1.09 million. Cash declined by $14.60 million over the period.
- Balance sheet: Total assets were $20.76 million, liabilities $13.81 million, and stockholders’ equity $6.95 million. Goodwill was written down to zero; net intangible assets were $13.43 million.
- Borrowings and commitments: The company received a $3 million advance under its $12 million line of credit from majority shareholder Motorsport Network. The facility bears 10% interest; availability depends on the lender’s liquidity. The filing says Motorsport Games believes there is a substantial likelihood the lender may not meet future borrowing requests. The balance sheet also reports $3.12 million due to related parties. License minimum royalty guarantees total approximately $35.5 million over the agreements’ terms, with $3.55 million expected to be paid in 2022.
Material changes versus prior periods
- Q3 revenue fell 42.8%, primarily from lower gaming sales and an approximately $0.3 million out-of-period revenue correction; esports revenue increased on Le Mans Virtual Series sponsorships. For the nine months, revenue declined 4.3%: gaming revenue fell 11.7%, partly offset by increased esports sponsorship revenue and third-party simulation-platform development revenue.
- Gross profit declined in both periods. Nine-month cost of revenue rose 31.7%, including higher esports event production costs and gaming amortization and development costs.
- Nine-month operating expenses increased 3.0% to $32.92 million. The period included $4.79 million of goodwill impairment and $4.64 million of intangible-asset impairment. These charges followed changes to the product roadmap, lower expected revenues, and reduced market capitalization. The prior-year comparison included unusually high IPO-related and stock-based compensation costs, contributing to lower reported G&A in 2022.
- Nine-month other expense was $1.51 million, primarily reflecting $1.7 million of foreign-currency losses. Interest expense increased to $0.64 million, mainly from accretion on license liabilities.
- Retail pricing concessions exceeded retail sales revenue for the nine months, resulting in negative retail-channel revenue. Sales through three customers accounted for 71.6% of nine-month revenue; three customers represented 80.0% of net receivables at September 30.
Outlook, risks and unusual items
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern. It does not believe available cash at October 31 and its average cash burn can fund operations through the remainder of 2022; further funding is required. Financing, additional affiliate support, cost reductions, and further roadmap changes are possible but not assured. The financial statements contain no adjustments for the outcome of this uncertainty.
- Products and restructuring: The company moved or revised the timing and scope of releases to reduce near-term cash needs. It anticipated INDYCAR, BTCC, and Le Mans game experiences in 2023 and 2024. Its restructuring program targets elimination of about 20% of worldwide overhead and approximately $4 million of annualized cost reductions by the end of 2023. Management reported about $2.5 million of annualized reductions achieved to date and estimated total restructuring costs of $0.1 million to $0.3 million.
- Legal contingency: The company accrued $1 million for a lawsuit brought by former 704Games minority shareholders alleging misrepresentations and other claims. The court denied the defendants’ motion to dismiss; the company says it disputes the claims and will defend itself.
- Operations and controls: Russia-based development staff, sanctions, currency movements, and possible disruption to payments or data transfer could affect development and releases. Disclosure controls were deemed ineffective because previously reported material weaknesses in internal control over financial reporting remained; management planned to complete remediation during 2023.
- Listing and leadership: After quarter-end, the company completed a 1-for-10 reverse split. It disclosed Nasdaq deficiencies involving minimum bid price, audit committee composition, and publicly held shares. The CFO resigned; the CEO was appointed interim CFO. The CEO’s base salary was reduced by 35% in October as part of restructuring.
- Other unusual item: Q3 revenue included an approximately $0.3 million correction of a prior-quarter overstatement. The filing says it was not material and did not affect the nine-month cumulative totals.
Important facts for investors to verify
- Current cash runway, cash burn, and the status and terms of any new financing or affiliate support.
- Whether Motorsport Network can fund further line-of-credit draws, and how the facility’s repayment and default provisions affect liquidity.
- Execution, costs, and realized savings from restructuring, and whether the revised game-release schedule is achievable.
- Nasdaq compliance status, including the bid-price, audit committee, and publicly held shares requirements after the reverse split.
- Progress on internal-control remediation, leadership succession, the $1 million litigation accrual, and exposure to customer concentration and license commitments.