Motorsport Games Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company develops and publishes motorsport video games and operates esports events. It completed its IPO in January 2021 and converted from an LLC to a Delaware corporation.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $2.47 million | $3.23 million; down 24% |
| Gross profit and margin | $1.69 million; 68% | $2.17 million; 67% |
| Operating expenses | $17.07 million | $2.29 million |
| Operating loss | $15.38 million | $0.12 million |
| Net loss | $14.09 million consolidated; $13.81 million attributable to Motorsport Games | $0.20 million consolidated |
| Operating cash flow | $(6.83) million | $0.58 million provided |
| Cash at March 31 | $49.78 million | $3.99 million at December 31, 2020 |
| Total liabilities | $4.72 million | $15.77 million at December 31, 2020 |
The quarter’s $14.76 million in general and administrative expense included IPO- and acquisition-related costs, including bonuses and non-cash compensation. Total stock-based compensation was $9.08 million. The company reported a $1.37 million gain attributable to its equity-method investment in Le Mans, partially offset by $0.12 million interest expense.
The IPO generated approximately $63.1 million in net proceeds. During the quarter, the company repaid $11.8 million of its related-party promissory note and reported $0.96 million due to Motorsport Network at quarter-end. It had no material conventional debt balance disclosed beyond this related-party amount and other liabilities. Management said existing cash was expected to fund operations for at least 12 months.
Material changes and operating developments
- Revenue fell primarily because NASCAR Heat 4 had been released earlier in the prior-year cycle than NASCAR Heat 5, and because mobile revenue also declined. Higher digital sales helped lift gross margin slightly.
- Gaming segment revenue was $2.45 million, down 24%; esports revenue was $23,919, compared with none in the prior-year quarter. Esports remained gross-loss-making, though its gross loss narrowed to $42,773 from $145,031.
- In January, the company raised its Le Mans joint-venture ownership from 45% to 51% and obtained exclusive game and esports licenses. It may need to fund development as required, up to €8 million under the gaming license arrangements.
- In March, the company acquired the KartKraft game assets for $1.0 million.
Outlook, risks, and unusual items
- Management anticipated releasing its next-generation NASCAR console game, NASCAR NXT, in Q3 2021 and BTCC and Le Mans/WEC games in 2022. The filing provides no quantified financial guidance.
- After quarter-end, the company acquired the remaining 704Games interests on April 16 for cash and newly issued shares; acquired Studio397 on April 20 for $16 million, including a $3.2 million deferred payment; and repaid a further $0.86 million on the Motorsport Network note on April 21. A proposed Digital Tales acquisition remained subject to definitive documents and customary closing conditions.
- COVID-19 effects remained uncertain: management cited generally stronger game demand and esports viewership, but also retailer disruptions and postponed or online-only events.
- Revenue and receivables were concentrated: two customers generated 77.84% of Q1 revenue, and three customers represented 93.99% of accounts receivable at quarter-end. The company also relies on a limited number of distribution partners and game franchises.
- The company disclosed litigation by former 704Games minority shareholders. It said the claims’ outcome and potential loss were not estimable and had not been accrued; Ascend’s separate derivative action was dismissed with prejudice after the post-quarter settlement and share exchange.
- Management concluded disclosure controls were ineffective at March 31 because previously reported material weaknesses in internal control over financial reporting continued. Remediation work was ongoing.
- COVID-19, product-release timing, consumer preferences, licensing and royalty costs, retail and platform dependence, cybersecurity, and key-personnel risks could affect results. The company also maintained a full valuation allowance against deferred tax assets.
Key facts for investors to verify
- Whether NASCAR NXT and the planned 2022 licensed games meet release schedules and achieve commercial success.
- Cash burn and remaining liquidity after the Studio397 and 704Games transactions, and the timing and funding of other planned acquisitions and Le Mans development.
- The drivers and repeatability of the unusually high Q1 stock-based compensation and IPO/acquisition expenses.
- Progress in remediating material weaknesses and the status and potential financial exposure of the 704Games-related litigation.
- Customer, distributor, platform, and franchise concentration, as well as the continuing effects of COVID-19 and digital-sales trends.