Motorsport Games Inc. quarterly report, Q2 FY2023

Motorsport Games Inc. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. The unaudited filing covers the company’s racing-game development and publishing business and esports operations.

Financial performance and position

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Revenue	$1.74 million	$2.01 million	$3.47 million	$5.33 million
Gross profit	$0.87 million	$1.15 million	$1.35 million	$2.46 million
Gross margin	50.2%	57.4%	39.0%	46.2%
Operating loss	$8.61 million	$6.69 million	$14.02 million	$22.29 million
Net loss	$8.20 million	$7.49 million	$13.46 million	$23.45 million
Net loss per Class A share, basic and diluted	$3.02	$6.34	$5.42	$19.32

At June 30, cash and cash equivalents were $1.97 million, current assets $4.10 million, current liabilities $6.70 million, and working capital was negative $2.6 million. Cash had fallen to $1.4 million by July 31.
Six-month operating cash outflow was $8.85 million, compared with $12.05 million in 2022. Investing cash outflow was $0.02 million; financing provided $10.24 million, principally from registered offerings. Cash ended the period at $1.97 million.
Total liabilities were $9.92 million and total assets $13.34 million. No balance was due on the related-party credit line at June 30; however, the company said it believes the lender is substantially unlikely to fund future borrowing requests. The filing does not present a separate total-debt figure.
Q2 included a $4.00 million impairment charge on finite-lived intangible assets. Intangible assets, net, were $8.54 million at June 30, down from $13.36 million at year-end.

Material changes versus the prior period

Revenue fell 13.4% in Q2 and 34.9% for the first half. Management attributed the first-half decline mainly to weaker digital, mobile and retail game sales, including lower NASCAR sales, and lower third-party simulation-development revenue. Lower sales allowances partly offset the decline.
First-half gross margin declined to 39.0% from 46.2%, primarily because lower gaming revenue was not matched by an equivalent reduction in costs, including minimum license royalties.
Operating expenses fell 37.9% in the first half, reflecting lower marketing, development and administrative costs and no repeat of 2022 goodwill impairment. The 2023 period nevertheless included the $4.00 million intangible impairment.
First-half net loss improved year over year, but revenue and gross profit declined. The improvement also reflects lower operating expenses and favorable changes in other income, including foreign-exchange and warrant fair-value movements.
Financing included approximately $10.4 million net proceeds from three February registered direct offerings and about $0.6 million from the Alumni Capital share-purchase agreement. Class A shares outstanding rose to 2,720,328 from 1,183,808 at year-end; the offerings and other share issuances diluted existing holders.

Outlook, risks and unusual items

Going concern and funding: Management concluded that substantial doubt exists about the company’s ability to continue as a going concern within one year after the financial statements were issued. It reported average Q2 operating cash burn of about $1.1 million per month and said available cash was insufficient to fund operations for the remainder of 2023. Additional financing is required; access to financing is not assured.
Strategic alternatives and product plans: The company was in discussions with a third party about a potential sale of its NASCAR license, subject to required consent and other conditions. Any sale could remove the right to use the NASCAR brand, which represented about 67.5% of first-half revenue in 2023. Future NASCAR games were put on indefinite hold. INDYCAR was delayed to 2024; Le Mans Ultimate was then anticipated for December 2023. Management cautioned that liquidity could prompt further roadmap changes.
Cost actions: The 2022 restructuring program had generated $4.9 million in annualized savings by June 30, against approximately $1.3 million of restructuring costs incurred to date. Further reductions or restructuring may be needed.
Commitments: Remaining minimum royalty guarantees under video-game licenses totaled $17.4 million at June 30, including $1.6 million expected to be paid during the rest of 2023. The company also had $2.35 million of minimum marketing obligations for 2023 and had not fulfilled any of them by June 30.
Legal matters: The company had recorded a $0.8 million remaining settlement liability for the Continental litigation settlement and continued to defend claims by other plaintiffs. On July 28, 2023, Wesco Insurance filed suit disputing coverage for the underlying litigation; the company disagrees with Wesco’s position.
Controls and leadership: Disclosure controls were deemed ineffective because of continuing and newly identified material weaknesses, including insufficient accounting personnel with appropriate knowledge and experience. The weaknesses had not yet been remediated. The company also noted recent CEO and CFO transitions.
Customer concentration: Three customers accounted for 80.7% of Q2 revenue and 94.6% of accounts receivable at June 30, increasing exposure to customer loss or reduced purchases.

Important facts for investors to verify

Whether the company secures sufficient financing to meet near-term obligations and whether its cash burn changes.
Whether a NASCAR-license transaction proceeds, receives required consent, and what proceeds, continuing rights, and operating impacts result.
Whether planned Le Mans Ultimate and other licensed titles can be delivered on schedule and funded, and whether the product roadmap changes further.
How the $17.4 million remaining royalty commitments and 2023 marketing obligations will be funded or addressed.
Whether litigation and insurance-coverage outcomes change the recorded liabilities or create additional exposure.
Whether material weaknesses are remediated and whether further equity financing causes additional dilution.