Motorsport Games Inc. — FY2022 Form 10-K
Business context and reporting period. The company develops and publishes licensed motorsport games and runs esports events, principally in the NASCAR, Le Mans/WEC, INDYCAR and BTCC franchises. This annual report covers the year ended December 31, 2022, compared with FY2021. NASCAR remained the largest franchise, contributing approximately 63% of revenue, down from 88% in 2021. Share and per-share data reflect the November 2022 1-for-10 reverse stock split.
Key financial results
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $10.3 million | $15.1 million | Down 31.5% |
| Gross profit / margin | $5.4 million / 52.0% | $7.5 million / 50.1% | Profit down 28.9%; margin up 1.9 percentage points |
| Operating loss | $35.0 million | $34.5 million | Loss widened $0.5 million |
| Net loss | $36.8 million | $33.7 million | Loss widened $3.1 million |
| Net loss attributable to Motorsport Games | $36.0 million; $30.73 per share | $33.2 million; $29.15 per share | Loss per share increased |
| Cash used in operating activities | $19.5 million | $20.9 million | Use decreased $1.4 million |
| Cash and cash equivalents, year-end | $1.0 million | $17.8 million | Down $16.8 million |
| Working capital | Deficit of $9.3 million | Surplus of $16.0 million | Deteriorated $25.3 million |
Total assets were $18.9 million at year-end, versus $50.7 million a year earlier; total liabilities were $17.0 million versus $12.7 million. The company reported no goodwill remaining after a $4.8 million impairment. It also recorded $4.8 million of intangible-asset impairment. Interest expense was $1.1 million, compared with $0.5 million in 2021.
Material changes versus FY2021
- Gaming revenue fell 35.9% to $9.1 million. Management attributed the decline mainly to releasing one NASCAR game in 2022 versus two in 2021, weaker game sales, and retail price concessions. The company also cited the poor reception of NASCAR 21: Ignition as adversely affecting sales.
- Esports revenue rose 46.1% to $1.2 million, primarily from higher Le Mans Virtual Series sponsorship and event entrance fees. Esports gross margin declined to 25.5% from 39.6%, as production costs increased.
- General and administrative expense decreased 45.8% to $13.8 million, largely because 2021 IPO-related stock compensation, bonuses and professional fees did not recur. Development expense rose 8.3% to $10.4 million.
- Cash used in investing activities declined to $0.3 million from $14.4 million, when the company acquired Studio397 and KartKraft. Financing activities provided $1.7 million in 2022, including $3.8 million of advances from Motorsport Network.
- Three customers represented approximately 61% of 2022 revenue, versus four customers representing approximately 83% in 2021. Four customers accounted for approximately 90% of year-end receivables.
Liquidity, outlook and risks
Going concern and financing. Management and the independent auditor identified substantial doubt about the company’s ability to continue as a going concern. The company reported a $36.8 million net loss, $19.5 million of operating cash outflow and $1.0 million of cash at December 31, 2022. Management stated that available cash and its average cash burn were insufficient to fund operations for the remainder of 2023 and that additional funding would be required. The financial statements contain no adjustments for the outcome of this uncertainty.
After year-end, the company reported cash of $6.5 million as of March 22, 2023, following financing transactions. Three February 2023 registered direct offerings generated approximately $11.3 million in gross proceeds, before fees and expenses. Motorsport Network’s approximately $3.8 million year-end line-of-credit balance was exchanged for 780,385 Class A shares in January and February 2023. These transactions provide near-term financing but involve equity dilution; management did not provide assurance that future funding would be available on acceptable terms.
The $12 million related-party line of credit carried 10% interest, and its availability depended on Motorsport Network’s liquidity. The company said it believed there was a substantial likelihood Motorsport Network might not fulfill future borrowing requests. At December 31, 2022, the company disclosed $23.0 million of material cash requirements, including $18.1 million of minimum payment guarantees and $2.3 million of purchase commitments. These commitments increase the importance of execution and financing.
Management actions and outlook. The 2022 restructuring program targets approximately 20% reduction in worldwide overhead and $4 million of annualized cost savings by the end of 2023; management reported $2.5 million achieved by year-end 2022. Restructuring costs were approximately $0.1 million through year-end, with total costs expected at $0.1–$0.3 million. Management revised the product roadmap in early 2022 to change timing and scope, reduce near-term working-capital needs and lower cash burn. It anticipated NASCAR, INDYCAR, BTCC and Le Mans game experiences in 2023 and 2024, while acknowledging possible further schedule changes. No numerical revenue or earnings guidance was provided.
Other notable matters. A lawsuit by former minority shareholders resulted in a $1.1 million loss-contingency accrual in 2022; a January 2023 settlement required payment of $1.1 million, with required payments reported completed by March 24, 2023. Management disclosed material weaknesses in financial-reporting controls involving documentation and independent review of accounting judgments, segregation of duties, and monitoring controls; disclosure controls were deemed ineffective at year-end. Remediation actions include additional finance personnel, formal procedures and independent reviews. The company also cited product-quality and release risks, dependence on licensed franchises and concentrated customers/distribution, competition, foreign-exchange exposure, and the effects of the Russia-Ukraine conflict and the transition away from Russian development staff.
Motorsport Network controlled approximately 87.44% of combined voting power as of March 24, 2023 through the dual-class share structure. The company is a controlled company and may rely on Nasdaq governance exemptions. A new back-office services agreement with Motorsport Network, effective January 1, 2023, provides services for a monthly fee of $17,500.
Investor facts to verify
- Whether the February 2023 financing proceeds and subsequent cash balance are sufficient for operating needs, and the timing and terms of any additional capital required.
- Progress toward restructuring savings, and whether the 2023–2024 game release schedule and related development costs remain achievable.
- Customer and receivables concentration, retail price-protection exposure, and dependence on a single physical-game distributor and key licenses.
- Resolution of the remaining claims in the former minority-shareholder litigation and any further legal or contingent liabilities.
- Remediation and independent validation of the disclosed material weaknesses in internal control over financial reporting.