Motorsport Games Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; balance sheet compared with December 31, 2020. Figures are unaudited. Motorsport Games develops and publishes licensed racing games and operates esports events. It completed its IPO in January 2021 and expanded through acquisitions during the period.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $2.24 million, down 42% from $3.89 million | $4.71 million, down 34% from $7.12 million |
| Gross profit / margin | $1.33 million / 60%, versus $2.62 million / 67% | $3.02 million / 64%, versus $4.78 million / 67% |
| Operating loss | $5.97 million, versus operating income of $0.10 million | $21.35 million, versus operating loss of $0.02 million |
| Net loss | $5.96 million; attributable to Motorsport Games: $5.78 million | $20.05 million; attributable to Motorsport Games: $19.59 million |
- Q2 basic and diluted loss per Class A share was $0.50. The filing does not present a comparable six-month per-share figure in the provided financial statements.
- Revenue was principally from gaming; esports revenue was zero in Q2 and $23,919 for the first half. Management attributed lower gaming revenue mainly to the timing of game sales after NASCAR Heat 5’s July 2020 release and stronger pandemic-related demand in the prior-year period.
- Six-month operating expenses rose to $24.38 million from $4.80 million. The increase included $9.19 million of stock-based compensation and substantial IPO-, acquisition- and public-company-related costs. Q2 G&A expense was $4.72 million, up from $0.58 million, including acquisition, legal, insurance, payroll and SAR settlement costs.
- Six-month operating cash flow was negative $11.26 million, compared with positive $2.30 million in 2020. Investing cash outflow was $14.01 million, primarily reflecting the Studio397 and KartKraft acquisitions. Financing cash inflow was $49.50 million, mainly from the IPO.
Liquidity, balance sheet and capital
- Cash was $28.30 million at June 30, 2021, versus $3.99 million at year-end 2020; current assets were $33.46 million and current liabilities $5.80 million.
- Total liabilities were $6.71 million, including $285,198 due to related parties and a $3.13 million deferred Studio397 purchase payment. The related-party promissory note had a 10% interest rate and was payable on demand, subject to the lender’s side-letter commitment not to demand payment in a manner that constrained liquidity. The company repaid a substantial portion during the half and repaid a further $132,378 after quarter-end.
- Net IPO proceeds were approximately $63.1 million. By June 30, approximately $37.5 million had been used for related-party debt repayment, acquisitions, working capital and general corporate purposes. Management said existing cash was expected to fund operations for at least 12 months; no future financing commitments were in place.
Material changes, outlook and risks
- The company acquired the remaining 704Games interests, KartKraft assets and 100% of Studio397, and increased its Le Mans joint-venture ownership to 51%. These transactions broadened its game portfolio but increased development spending and acquired intangible assets.
- Management expected NASCAR 21: Ignition in Q4 2021; BTCC and Le Mans/WEC games in 2022; and an INDYCAR title in 2023. An INDYCAR gaming and esports licensing agreement was signed after quarter-end in July 2021. These are forward-looking plans, not guarantees.
- COVID-19 and the Delta variant continued to create uncertainty for development, retail, events and operations. Other key exposures include dependence on a small number of racing franchises, concentrated customers and distribution partners, product timing and consumer acceptance, licensing costs, competition, cybersecurity, and the shift to mobile and digital gaming.
- Three customers represented 86.53% of Q2 revenue; two represented more than half of accounts receivable at June 30. Management also disclosed substantial supplier concentration.
- A securities-related lawsuit by former minority holders of 704Games remained pending. The company said the claims were without merit, but the possible loss could not be reasonably estimated and no accrual was recorded. A separate Ascend derivative action was dismissed with prejudice following the 704Games buyout.
- Management concluded disclosure controls were ineffective at June 30 because previously reported material weaknesses in internal control over financial reporting remained. Remediation work was underway, including hiring finance personnel and engaging an advisory firm.
Important facts for investors to verify
- Whether planned game launches occur on schedule and generate sales sufficient to offset lower revenue and higher development costs.
- Cash consumption, acquisition-related obligations, and the continuing adequacy of liquidity against management’s 12-month assessment.
- Progress in remediating material weaknesses and the status and potential exposure of the pending HC2 and Continental litigation.
- Revenue and receivable concentration, reliance on key distribution partners, and the economics and funding commitments under gaming licenses.
- The sustainability of reported results after excluding unusually high IPO, acquisition, stock-compensation and other transaction-related expenses; the filing does not provide a single adjusted earnings measure.