Business Overview and History

Motorsport Games Inc. (NASDAQ: MSGM) is a racing game developer, publisher, and esports ecosystem provider, known for its official motorsport racing series titles. Founded in 2018, the company has established itself as a leading player in the racing game industry, continuously innovating and expanding its portfolio to cater to the growing demand for high-quality motorsport experiences.

Motorsport Games was established in 2018 as Motorsport Gaming US LLC, a limited liability company under the laws of the State of Florida. In January 2021, the company underwent a corporate conversion, becoming a Delaware corporation and changing its name to Motorsport Games Inc. This transformation set the stage for the company's future growth and development.

Since its inception, Motorsport Games has faced several challenges and achieved notable milestones. In 2019, the company entered into a joint venture with Automobile Club de l'Ouest, securing the exclusive rights to develop and publish video games for the 24 Hours of Le Mans race and the FIA World Endurance Championship. This partnership has been instrumental in the development of the Le Mans Ultimate game series.

In 2021, Motorsport Games expanded its portfolio through the acquisition of 100% of the share capital of Studio 397 B.V., adding the KartKraft karting simulation game and rFactor 2 realistic racing simulator to its offerings. However, the same year also brought challenges, as former minority stockholders of 704Games, which Motorsport Games had acquired, filed a complaint alleging misrepresentations and omissions concerning 704Games' financial condition. Motorsport Games vigorously defended its position in this litigation.

The year 2023 presented further challenges for the company, as it lost several key licensing agreements, including its NASCAR, BTCC, and INDYCAR licenses. This development significantly impacted Motorsport Games' product portfolio and revenue streams, prompting the company to restructure its business and operations in response to these setbacks.

Despite these obstacles, Motorsport Games has continued to focus on developing and publishing high-quality racing games, leveraging its partnerships and remaining licenses to create authentic motorsport experiences for fans worldwide.

Financial Overview

Motorsport Games' financial performance has been a mixed bag in recent years, as the company has navigated various challenges and made strategic decisions to position itself for long-term growth.

For the year ended December 31, 2023, Motorsport Games reported total revenues of $6.91 million, a decrease from $10.32 million in the prior year. The company's net loss for the year was $13.05 million, compared to a net loss of $36.84 million in 2022. The annual operating cash flow for 2023 was -$12.92 million, with a free cash flow of -$13.71 million.

In the third quarter of 2024, Motorsport Games reported revenue of $1.80 million, representing a 6.4% increase compared to the same period in the previous year. This growth was primarily driven by higher digital game sales from the launch of Le Mans Ultimate on PC in February 2024. The company's net income for Q3 2024 was $9,830, a significant improvement from the net loss reported in the prior year period.

The company's average monthly net cash burn from operations for the nine months ended September 30, 2024 was $0.1 million, a significant improvement from the $1.1 million average monthly cash burn in the prior year period.

Liquidity

As of September 30, 2024, Motorsport Games had cash and cash equivalents of $0.8 million, which had decreased to $0.5 million as of October 31, 2024. The company's liquidity position has been a key area of focus, with management actively exploring various options to address the shortfall, including additional funding in the form of potential equity and/or debt financing, strategic alternatives such as the sale or licensing of assets, and further cost reduction and restructuring initiatives.

The company's debt-to-equity ratio stands at 0.01, while its current ratio and quick ratio are both 0.49. Motorsport Games has a $12 million line of credit with Driven Lifestyle, an affiliated entity, which bears interest at 10% annually. However, the company believes there is a substantial likelihood that Driven Lifestyle will not fulfill any future borrowing requests under this line of credit.

Despite the challenges, Motorsport Games has shown resilience and a commitment to innovation. The company's successful launch of Le Mans Ultimate and the growing popularity of its esports offerings provide a solid foundation for future growth. However, the company's financial position and the need for additional funding to sustain operations remain significant concerns that will require careful management and execution of its strategic initiatives.

Risks and Challenges

Motorsport Games faces several risks and challenges that could impact its long-term success. The company's heavy reliance on a limited number of franchises, such as the NASCAR racing series, poses a significant risk. The sale of the NASCAR License in October 2023 and the termination of the company's BTCC and INDYCAR license agreements have altered the risk profile of Motorsport Games' operations and are expected to have a material adverse impact on its cash flows and results of operations.

The company's ability to maintain and secure additional licenses and agreements with various racing series is also crucial to its continued success. Failure to do so could limit the company's ability to develop and publish new gaming titles, which could negatively impact its revenue and profitability.

Moreover, Motorsport Games' liquidity position and the need for additional funding to sustain operations remain significant concerns. The company's ability to secure the necessary capital through equity and/or debt financing, or by executing strategic alternatives, will be critical in determining its long-term viability.

Motorsport Games is also involved in ongoing litigation with Innovate 2 Corp (formerly HC2 Holdings 2 Inc. and Continental General Insurance Company) regarding alleged misrepresentations and omissions concerning 704Games' financial condition made in connection with Motorsport Games' purchase of the minority shareholders' interest in 704Games in 2020. The company believes the plaintiffs' allegations are without merit and intends to vigorously defend its position.

Competitive Landscape and Industry Trends

The racing game industry is a highly competitive market, with established players such as Electronic Arts (EA) and Codemasters, as well as emerging competitors. Motorsport Games must continuously innovate and deliver high-quality gaming experiences to maintain its market position and attract and retain a loyal customer base.

The industry has also seen a growing trend towards the expansion of esports and the increasing importance of digital distribution channels. Motorsport Games' ability to capitalize on these trends and further develop its esports offerings and digital distribution capabilities will be crucial in driving long-term growth and profitability.

Segment Analysis

Motorsport Games operates in two reportable segments: Gaming and Esports.

The Gaming segment represents the majority of Motorsport Games' operations, accounting for 100% of total revenues for the three and nine months ended September 30, 2024. This segment includes the development and publishing of interactive racing video games, entertainment content, and services. For the three months ended September 30, 2024, the Gaming segment generated revenues of $1.80 million, up 6.4% compared to the prior year period. Gross profit for the Gaming segment was $1.09 million, with a gross margin of 60.2%.

For the nine months ended September 30, 2024, the Gaming segment generated revenues of $6.71 million, an increase of 37.8% year-over-year. Gross profit for the Gaming segment was $4.56 million, with a gross margin of 67.9%. The significant improvement in gross margin was attributable to the increase in higher-margin digital game sales, combined with the reduction in NASCAR-related royalty expenses.

The Esports segment represents the organization and facilitation of esports tournaments, competitions, and events for Motorsport Games' licensed racing games, as well as on behalf of third-party video game racing series and publishers. This segment did not generate any revenue for the three and nine months ended September 30, 2024, as the company did not organize any Le Mans Virtual Series events during this period.

Outlook and Guidance

In its most recent financial report, Motorsport Games provided preliminary financial results for the second quarter of 2024, anticipating net income between $1.6 million and $1.8 million, a significant improvement from the net loss of $8.2 million reported in the same period of the previous year. This expected increase in net income was primarily due to a $2.5 million gain from a settlement and licensing agreement with INDYCAR LLC, as well as a $0.6 million gain related to a settlement agreement with BARC (TOCA) LIMITED, the exclusive promoter of the British Touring Car Championship.

For the third quarter of 2024, Motorsport Games reported revenue of $1.8 million, up 6.4% year-over-year. The company also reported a net loss of $0.6 million, an improvement of $2.9 million from the prior year period, and adjusted EBITDA of $0.1 million, compared to an adjusted EBITDA loss of $2.5 million in the prior year period.

While the company has made progress in addressing its liquidity challenges and streamlining its operations, the need for additional funding to sustain its business remains a key concern. Motorsport Games has stated that it will continue to explore various strategic alternatives, including the potential sale or licensing of its assets, to improve its financial position and create shareholder value.

The company has undertaken cost reduction and restructuring initiatives, including a 23 employee and contractor reduction in October 2024, in an effort to improve its liquidity position. The company recorded a $0.2 million restructuring charge related to this workforce reduction.

Conclusion

Motorsport Games has demonstrated its ability to develop high-quality racing games and establish a presence in the growing esports market. The successful launch of Le Mans Ultimate and the company's efforts to diversify its revenue streams through esports and additional licensing agreements are promising signs. However, the company's heavy reliance on a limited number of franchises, its liquidity challenges, and the need for additional funding to sustain operations pose significant risks that must be carefully navigated.

As Motorsport Games continues to navigate the competitive landscape and adapt to industry trends, its ability to secure the necessary capital, maintain and expand its licensing agreements, and capitalize on the growing demand for immersive racing experiences will be crucial in determining its long-term success. Investors should closely monitor the company's progress in executing its strategic initiatives and managing its liquidity position to assess the viability of their investment.