Motorsport Games Inc. quarterly report, Q1 FY2023

全文

Motorsport Games Inc. — Q1 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023. Unaudited consolidated results; comparisons are with the three months ended March 31, 2022 unless otherwise noted. Motorsport Games develops and publishes licensed racing games and operates esports events.

Financial performance and liquidity

  • Revenue: $1.73 million, down 47.9% from $3.32 million. Gaming revenue fell 51.4% to $1.44 million; esports revenue fell 20.2% to $0.29 million.
  • Gross profit and margin: $0.48 million and 27.8%, versus $1.31 million and 39.4%. Gaming margin declined to 39.2% from 52.5%; esports remained loss-making, with gross loss improving to $0.08 million from $0.25 million.
  • Operating expenses and losses: Operating expenses were $5.89 million, down 65.2%; 2022 included $9.28 million of goodwill and intangible-asset impairment charges. Operating loss was $5.41 million versus $15.60 million. Net loss was $5.26 million versus $15.97 million; net loss attributable to Motorsport Games was $5.10 million versus $15.14 million.
  • Cash flow: Operating cash outflow was $5.68 million, compared with $5.59 million. Investing cash outflow was $0.02 million. Financing provided $10.71 million, mainly from registered direct offerings and stock sales under a purchase commitment. Cash increased to $5.79 million at quarter-end from $0.98 million at December 31, 2022, but was $4.9 million at April 30, 2023.
  • Liquidity: Working capital was positive $1.11 million at March 31, compared with negative $9.28 million at year-end. Current assets were $8.04 million and current liabilities $6.93 million. Management said available cash and average cash burn were insufficient to fund operations for the remainder of 2023 and additional funding was required.
  • Debt and equity financing: The $12 million related-party line of credit balance was extinguished in January and February 2023 in exchange for 780,385 Class A shares valued at approximately $3.95 million. The company raised approximately $10.4 million net from three registered direct offerings and received approximately $0.65 million from stock sales to Alumni Capital. Offerings also included five-year placement-agent warrants.
  • Other balance-sheet items: Total liabilities were $10.80 million. Intangible assets were $13.01 million. Class A shares outstanding rose to 2,698,934 from 1,183,808 at December 31, 2022; Class B shares remained 700,000.

Material changes and business developments

  • Gaming revenue declines reflected lower digital and retail sales, particularly of NASCAR titles, lower volumes, less favorable pricing, and higher-than-expected retail price concessions. Esports revenue declined primarily because of lower Le Mans Virtual Series sponsorship revenue.
  • The company moved the anticipated INDYCAR game release from 2023 to 2024. It continued work on NASCAR, BTCC and Le Mans game experiences, which it anticipated releasing in 2023 and 2024; timing remains subject to change.
  • The 2022 Restructuring Program had produced approximately $3.9 million in annualized savings by March 31, 2023, against a target of approximately $4 million by year-end 2023 and an expected reduction of approximately 20% of worldwide overhead. Reported restructuring costs to date were approximately $0.2 million.
  • Digital channels represented approximately 92% of game-console and PC sales revenue, up from 65%. Four customers accounted for 84.2% of total revenue, versus 74.4% a year earlier, highlighting customer concentration.

Outlook, risks, contingencies and controls

  • Going concern: Management concluded that substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance of the financial statements. Statements assume continued operations and do not include adjustments that might result from this uncertainty. The company expects further losses and negative operating cash flow for the foreseeable future.
  • Funding and cost actions: Management is pursuing potential equity or debt financing, cost reductions, and product-roadmap changes to reduce near-term cash needs. It warned that financing may not be available on acceptable terms and that Motorsport Network may not fulfill future borrowing requests. Failure to obtain funding could require significant curtailment or discontinuation of operations.
  • Commitments: Minimum royalty guarantees under licensing arrangements totaled approximately $28.3 million over their terms; approximately $2.4 million was expected to be paid during the remainder of 2023. The company also committed to fund up to €8.0 million for development under Le Mans-related licensing arrangements, as needed.
  • Legal matter: The company agreed to pay $1.1 million to settle claims by Continental in litigation brought by former minority shareholders of 704Games. It reported $0.9 million accrued at March 31, 2023, with required payments through that date made. Claims by the remaining plaintiffs continue, and the outcome is uncertain.
  • Leadership and controls: The company disclosed the April 2023 termination of CEO Dmitry Kozko and appointment of Stephen Hood as CEO and President. Disclosure controls were deemed ineffective at March 31 because one material weakness remained, relating to monitoring the effectiveness of control activities. Two previously identified weaknesses were reported remediated.
  • Additional exposures: Results remain sensitive to game performance and release timing, consumer demand, retailer and distribution-partner reliance, licensing costs, financing conditions, and foreign exchange. Russia development operations ceased in September 2022; management said current development operations were not expected to have significant exposure to the Russia-Ukraine conflict.

Key facts for investors to verify

  • Subsequent cash balances, cash burn, and whether new financing was secured on acceptable terms; management’s stated cash runway was insufficient for the remainder of 2023.
  • Progress on releases and commercial performance of the NASCAR, INDYCAR, BTCC and Le Mans titles, including schedule changes and working-capital effects.
  • Whether restructuring savings reach the approximately $4 million annualized target and translate into lower cash use.
  • Customer concentration, receivable collectability, and the effect of returns and price-protection allowances on revenue.
  • Remaining litigation exposure, license and royalty obligations, and the status of the material weakness in internal controls.
  • Equity dilution from 2023 financings and debt conversion, including outstanding warrants; share data in the filing reflects the November 2022 1-for-10 reverse split.