Motorsport Games Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited results; filed August 10, 2022. The company develops and publishes licensed motorsport video games and operates esports events.
Financial performance
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 |
|---|---|---|
| Revenue | $2.01 million, down 10% year over year | $5.33 million, up 13% |
| Gross profit / margin | $1.15 million / 57%; prior-year margin 59% | $2.46 million / 46%; prior-year margin 64% |
| Operating loss | $6.69 million | $22.29 million |
| Net loss | $7.49 million | $23.45 million |
| Net loss attributable to Motorsport Games | $7.41 million | $22.54 million |
| Operating cash flow | Not provided for the quarter | $(12.05) million |
For Q2, gaming revenue fell 13%, mainly from lower console sales reflecting retail pricing concessions and weaker mobile sales. Increased digital sales and third-party simulation-platform development revenue partly offset the decline. Six-month growth reflected higher game sales, third-party rFactor 2 platform work and esports sponsorship revenue. Esports revenue was $430,450 for the half-year, but the segment recorded a $214,769 gross loss.
Six-month operating expenses were $24.75 million, including $4.79 million of goodwill impairment and $4.64 million of intangible-asset impairment. Sales and marketing rose 87% and development expense rose 66% year over year; G&A fell 65%, principally because prior-year IPO-related and stock-based compensation costs did not recur. Foreign-currency losses contributed to other expense of $772,693 for the half-year.
Balance sheet, cash flow and funding
- Cash was $5.22 million at June 30, down from $17.82 million at December 31, 2021; management reported cash of $3.8 million at July 31.
- Working capital was $3.16 million, compared with $16.02 million at year-end. Total assets were $25.00 million and total liabilities $9.98 million.
- Cash used in operations was $12.05 million for the first half. Investing used $196,346 and financing used $981,396; ending cash was $5.22 million.
- The $12 million related-party credit line had no balance outstanding, but availability depends on Motorsport Network’s liquidity. Management said it believed there was a substantial likelihood the lender would not fund borrowing requests for the foreseeable future and does not rely on the facility as a funding source.
- The company disclosed substantial doubt about its ability to continue as a going concern within one year. It expects to seek equity and/or debt financing, reduce costs and potentially adjust its product roadmap; no assurance is provided that these measures will be available or sufficient.
- After June 30, deferred Studio397 purchase consideration was amended: $330,000 was paid in July, leaving $1.87 million plus 15% annual interest, payable in installments beginning August 2022. The company also disclosed approximately $35.5 million in aggregate minimum royalty guarantees over license terms, with $3.55 million expected to be paid in 2022.
Changes, outlook and material risks
- The company revised its product roadmap in Q1 2022 to change the scope and timing of releases, reducing near-term development cash needs. The next 2022 NASCAR title was planned as an update to the 2021 release; INDYCAR, BTCC and Le Mans games were anticipated in 2023 and 2024. These are expectations, not guaranteed release dates.
- It fully impaired goodwill: $4.79 million, primarily associated with Studio397. Intangible impairments included rFactor 2 and Le Mans-related assets. Management cited the revised roadmap, reduced market capitalization, lower expected revenues and valuation assumptions; further impairment remains possible.
- Revenue and receivables are concentrated: three customers represented 93.79% of Q2 revenue and 81.79% of trade receivables at June 30. A single distribution partner handled substantially all physical retail sales; it represented about 15% of first-half revenue.
- A significant portion of development staff is in Russia. The filing cites potential disruption to staff payments, internet and data access, development schedules, and foreign exchange from the Russia-Ukraine conflict and sanctions.
- NASDAQ notified the company of a bid-price deficiency; it had until December 5, 2022 to regain compliance, subject to exchange requirements. Delisting could affect share liquidity and access to capital.
- Disclosure controls were deemed ineffective because material weaknesses in internal control over financial reporting remained; management planned remediation during 2023.
- In a securities and related shareholder lawsuit concerning the 704Games minority-interest purchase, the court denied defendants’ motion to dismiss in March 2022. The company disputes the claims, but said it could not estimate a possible loss. No contingency amounts were accrued.
- No formal financial guidance was provided. Management expects continued losses for the foreseeable future. It said it did not currently expect COVID-19 to materially affect operations, while noting continuing uncertainty and economic risks including inflation, weaker consumer spending, labor costs and higher interest rates.
Most important facts for investors to verify
- Cash burn since June 30, financing availability and the company’s ability to fund operations through the next 12 months.
- Progress and terms of any external financing, cost reductions, and payments on the amended Studio397 consideration.
- Execution and timing of the revised game-release roadmap, including consumer demand and realized sales.
- Customer and distribution-partner concentration, sales-return and price-protection reserves, and gross-margin trends.
- NASDAQ bid-price compliance status, internal-control remediation, and developments in the 704Games litigation.