Motorsport Games Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Comparisons are with the corresponding 2020 periods unless otherwise stated. Results reflect a business focused on licensed racing games, with esports a smaller revenue stream; 2021 also included an IPO and several acquisitions.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $2.14 million, down 76% from $8.99 million | $6.85 million, down 57% from $16.11 million |
| Gross profit and margin | $1.19 million; 56%, versus $6.07 million; 68% | $4.21 million; about 62%, versus $10.85 million; about 67% |
| Operating loss | $6.39 million, versus operating income of $2.83 million | $27.74 million, versus operating income of $2.81 million |
| Net loss | $6.66 million, versus net income of $2.61 million | $26.70 million, versus net income of $2.37 million |
| Net loss attributable to Motorsport Games | $6.56 million | $26.15 million |
| Operating cash flow | Not separately presented for the quarter | Cash used: $16.72 million, versus cash provided of $0.56 million |
- Liquidity: Cash was $22.16 million at September 30, 2021, compared with $3.99 million at December 31, 2020. Current assets were $27.85 million and current liabilities $6.18 million. Total assets were $55.03 million; total liabilities were $9.98 million.
- Cash flows: Nine-month investing cash use was $14.53 million, primarily for Studio397 and KartKraft acquisitions. Financing provided $49.43 million, principally from the IPO, partly offset by related-party debt repayments and the 704Games buyout.
- Debt and obligations: The balance due under the Motorsport Network promissory note was $55,551 at quarter-end, following substantial repayments. Other notable obligations include a $3.15 million deferred Studio397 purchase payment and licensing commitments; the filing reports $3.80 million of other non-current liabilities.
- Per-share result: The filing reports basic and diluted Class A net loss per share of $0.56 for the quarter and $2.32 for the nine months. Comparative per-share figures are not clearly presented in the supplied filing text.
Material changes and business developments
- Gaming revenue fell sharply, largely because NASCAR Heat 5 had launched in July 2020 and sales typically decline after release; there was no comparable new major release before the quarter ended in 2021. Management also attributed higher 2020 sales to increased at-home gaming during COVID-19 restrictions.
- Esports revenue declined: fewer events and lower sponsorship revenue affected the quarter, while 2020 included Formula E sponsorship income that did not recur. The 2021 nine-month esports segment recorded a gross loss of $50,615.
- Operating expenses rose to $7.58 million for the quarter and $31.95 million for the nine months. Nine-month general and administrative expense increased to $22.61 million, reflecting, among other items, $9.28 million of non-cash compensation, $1.93 million of acquisition-related expenses and $2.95 million of other IPO-related expenses and bonuses.
- The company completed a $20-per-share IPO in January 2021, receiving approximately $63.1 million in net proceeds. It acquired the remaining 704Games interests, KartKraft assets, and Studio397, and increased its Le Mans joint-venture ownership to 51% and began consolidating it.
- Revenue remained highly concentrated: four customers together represented 84.7% of third-quarter revenue and 85.7% of nine-month revenue. Digital channels represented approximately 97% of console and PC game revenue for the nine months, versus 62% in full-year 2020.
Outlook, risks and unusual items
- Management said existing cash should fund operations for at least the next 12 months, while noting that additional financing may be sought and that no future financing commitments were in place.
- NASCAR 21: Ignition launched October 28, 2021; NASCAR Heat Ultimate Edition+ for Nintendo Switch was anticipated for November 2021. Management expected BTCC and Le Mans/WEC titles in 2022 and an INDYCAR title in 2023. These are forward-looking plans, not guarantees.
- The company expects a broader portfolio to make results less dependent on one annual release and aims to increase recurring consumer spending through in-game purchases and extra content. It was actively working on six game titles, compared with one title in process during 2020.
- Management cited COVID-19 and variants, consumer demand, inflation, supply-chain and labor constraints, release execution, competition, license availability, and reliance on a small number of customers and a primary retail distributor as risks.
- Disclosure controls were deemed ineffective at September 30, 2021 because previously identified material weaknesses in internal control over financial reporting remained. Management described remediation work and targeted completion during 2022.
- Litigation includes a complaint by former 704Games minority shareholders alleging securities and other violations; the company moved to dismiss and said the loss could not be reasonably estimated. A separate Digital Tales-related complaint followed the expiration of an acquisition term sheet; the company disputed the allegations. No litigation contingencies were accrued at quarter-end.
- Other notable items include $537,581 of third-quarter foreign-currency translation loss and a full valuation allowance against deferred tax assets because management was uncertain they would be realized.
Most important facts for investors to verify
- Whether upcoming game releases meet planned timing and commercial expectations, and whether the expanded development slate can translate into revenue.
- Cash burn and the sufficiency of liquidity, including the timing and funding of acquisition, development, royalty and licensing commitments.
- The persistence of customer and distribution-partner concentration and the effects of digital-versus-physical sales mix on margins.
- Progress and evidence of remediation of material weaknesses in financial reporting controls.
- Developments in the 704Games and Digital Tales litigation, including any change in estimated exposure.