Motorsport Games Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited. Motorsport Games develops and publishes racing games and organizes esports events. Its principal gaming properties include Le Mans Ultimate, rFactor 2 and KartKraft.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Revenue | $3.03 million | $1.73 million; up 75.2% |
| Gross profit / margin | $2.36 million / 78.0% | $0.48 million / 27.8% |
| Operating loss | $1.22 million | $5.41 million |
| Net loss | $1.68 million | $5.26 million |
| Net loss attributable to Motorsport Games / Class A EPS | $1.63 million / $0.60 loss per share | $5.10 million / $2.33 loss per share |
| Cash used in operating activities | $0.85 million | $5.68 million |
Revenue growth reflected $1.4 million of higher digital game sales following Le Mans Ultimate’s February 2024 PC early-access release and approximately $0.2 million more development-services revenue. Gaming revenue rose 110.5% to $3.03 million. Esports revenue was zero, versus $0.29 million, because no Le Mans Virtual Series event was held in Q1 2024. Lower operating expenses also contributed to the reduced loss: sales and marketing fell 59.5%, development 55.6%, and general and administrative expense 21.2%.
Other expense was $0.44 million, versus $0.35 million of other income a year earlier, primarily reflecting approximately $0.5 million of foreign-currency losses. Interest expense declined to approximately $31,000 from $199,000. No income-tax expense or cash taxes are specified in the supplied filing text.
At March 31, cash and cash equivalents were $1.25 million, down from $1.68 million at year-end. Current assets were $4.15 million and current liabilities $8.78 million, producing a $4.63 million working-capital deficit. Total liabilities were $8.83 million; stockholders’ equity was $0.99 million. The cash-flow statement reports a $0.42 million net decrease in cash, including a positive $0.48 million exchange-rate effect.
The company reported no amount outstanding under its $12 million related-party credit line at quarter-end, but said it believes there is a substantial likelihood that its majority shareholder will not fund future borrowing requests. The facility is therefore not considered a viable liquidity source. Purchase commitments were $4.63 million at March 31; these include stated remaining INDYCAR-related liabilities of $2.9 million and BTCC-related liabilities of $0.9 million, among other commitments. Studio397 deferred consideration also included $0.6 million principal and $0.3 million accrued interest.
Material changes and business developments
- Le Mans Ultimate’s release lifted gaming revenue, but the business remains exposed to legacy NASCAR sales: NASCAR products generated 49% of Q1 revenue, down from 57%. Under the limited post-sale license, the company may sell existing NASCAR games and DLC through December 31, 2024; it expects those revenues to decline over time.
- Operating expenses fell materially year over year, mainly due to lower headcount and reduced external development services. The company reported 65 personnel, including 46 full-time employees.
- Customer concentration remains high: three customers accounted for 91.5% of revenue and 91.2% of receivables at March 31.
Outlook, risks and unusual items
- Going concern and funding: Management stated that available cash is insufficient to fund operations for the next year and that additional financing is needed. The filing concludes substantial doubt exists about the company’s ability to continue as a going concern within one year after issuance of the financial statements. Q1 average operating cash burn was approximately $0.3 million per month; management expects operating cash outflows and losses to continue for the foreseeable future.
- Financing and restructuring: The company is exploring equity or debt financing, asset sales or licensing, and further cost reductions or restructuring. Its ATM program had $2.9 million of stated capacity at March 31, reduced to $1.3 million by the report date under SEC baby-shelf limitations; management says ATM proceeds would not meet ongoing liquidity needs and funding is not assured.
- Portfolio and execution risks: The NASCAR license sale and prior BTCC and INDYCAR license terminations change the product roadmap and may reduce future revenue. Further product delays or spending cuts may be necessary. Management planned to organize the 2024/25 Le Mans Virtual Series later in 2024, but gave no quantified revenue or earnings guidance.
- Subsequent events: On April 12, 2024, the company settled with BARC for a $225,000 payment; BARC forgave the prior BTCC license liabilities, and the parties entered a non-exclusive DLC license through 2026 with royalties of 50% of adjusted gross annual sales. On April 26, the company sold certain Traxion platform assets for $250,000 in total consideration: $200,000 cash and $50,000 of marketing services.
- Controls and litigation: Disclosure controls were ineffective at March 31 because previously reported material weaknesses remained unremediated, including weaknesses in monitoring controls and accounting staffing. The Innovate litigation remains unresolved; the company says the allegations lack merit and has not recorded a settlement liability because loss is not considered probable or estimable. An insurer coverage dispute also remains disclosed.
Important facts for investors to verify
- Whether the company secures sufficient financing or other liquidity to address the going-concern uncertainty, and the actual usable capacity of its ATM program.
- Cash burn, working-capital deficit, payment timing for purchase commitments and deferred acquisition consideration, and whether related-party credit becomes available.
- Le Mans Ultimate sales, retention and development costs; the pace of declining NASCAR revenue after the limited sales license expires; and execution of planned esports events.
- Customer concentration, receivable collections, and any changes in major customer relationships.
- Progress remediating internal-control material weaknesses and developments in the unresolved litigation and disclosed insurance dispute.