Motorsport Games Inc. (NASDAQ:MSGM) is a racing game developer, publisher, and esports ecosystem provider of official motorsport racing series. Founded in 2018, the company has quickly established itself as a leading player in the racing game industry, securing exclusive licenses for iconic events like the 24 Hours of Le Mans endurance race and the FIA World Endurance Championship (WEC).

Business Overview and History

Motorsport Games was established as a limited liability company named Motorsport Gaming US LLC on August 2, 2018, under the laws of the State of Florida. On January 8, 2021, the company converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Motorsport Games Inc. The company’s mission is to make the thrill of motorsports accessible to everyone by creating the highest quality, most sophisticated, and innovative experiences for racers, gamers, and fans of all ages.

Motorsport Games has faced several challenges over the years. In 2020, the company purchased the minority shareholders’ interest in its subsidiary 704Games, which led to a complaint filed by the former minority shareholders alleging misrepresentations and omissions concerning 704Games’ financial condition. After years of litigation, the company was able to resolve the claims made by two of the plaintiffs through settlement agreements in 2023.

A key milestone for the company was in 2019 when it entered into an agreement to facilitate the Le Mans Esports Series as part of a joint venture with Automobile Club de l’Ouest (ACO), the organizer of the 24 Hours of Le Mans endurance race. Through this joint venture, the company secured the rights to be the exclusive video game developer and publisher for the 24 Hours of Le Mans race and the FIA World Endurance Championship for a ten-year period.

In 2021, Motorsport Games acquired 100% of the share capital of Studio 397 B.V., a company that owned the KartKraft karting simulation game as well as other software, tradename and non-compete agreements. This acquisition allowed the company to expand its portfolio of racing simulation products.

Motorsport Games has a diverse portfolio of racing game titles, including the Le Mans Ultimate series, the KartKraft karting simulation game, and the rFactor 2 realistic racing simulator. The company’s products and services target a large global motorsport audience, with a focus on developing and publishing multi-platform racing video games for game consoles, PCs, and mobile platforms.

One of Motorsport Games’ key strengths is its ability to secure exclusive licenses for major motorsport events and series. This strategic approach has enabled Motorsport Games to develop innovative and immersive racing simulations that capture the essence of iconic motorsport events.

In October 2023, the company made a significant strategic move by selling its NASCAR licensed rights to iRacing.com Motorsport Simulations, LLC. This decision was driven by the need to modify the company’s existing business model and address the changing landscape of the racing game industry. While the sale of the NASCAR license is expected to have a material impact on the company’s revenue and cash flows, Motorsport Games is focused on exploring new strategic alternatives and opportunities to diversify its product portfolio and secure new licensing agreements.

Financial Overview

Motorsport Games’ financial performance has been marked by both challenges and opportunities in recent years. For the year ended December 31, 2023, the company reported total revenue of $6.91 million, a decrease from the $10.32 million reported in 2022. This decline can be largely attributed to the sale of the NASCAR license and the termination of the company’s BTCC and INDYCAR license agreements.

The company’s net income for the year ended December 31, 2023, was a loss of $13.05 million, compared to a loss of $35.99 million in the previous year. This improvement in net income was driven by a decrease in operating expenses, which were reduced from $35.73 million in 2022 to $22.31 million in 2023. The company also recognized a gain of $3.25 million from the settlement of license liabilities during the nine months ended September 30, 2024.

In the most recent quarter (Q3 2024), Motorsport Games showed signs of improvement, reporting revenue of $1.80 million, representing a year-over-year growth of 6.4%. This increase was primarily due to higher digital game sales from the release of Le Mans Ultimate on PC in February 2024. The company also achieved a net income of $0.01 million for the quarter, a significant improvement from previous periods.

The gaming segment, which represents the majority of Motorsport Games’ revenues, has been the primary driver of the company’s financial performance. In Q3 2024, gaming segment revenues increased by 6.4% to $1.80 million, compared to $1.69 million in the prior year period. For the first nine months of 2024, gaming segment revenues grew by 37.8% to $6.71 million, up from $4.87 million in the same period of 2023. The increase was driven by higher digital game sales, particularly related to the Le Mans Ultimate release, which offset declines in revenues from the company’s NASCAR and rFactor2 titles.

The gaming segment’s gross profit margin also improved significantly, reaching 60.2% in Q3 2024, up from 50.9% in the prior year quarter. For the first nine months of 2024, the gaming segment’s gross profit margin increased to 67.9% from 47.2% in the same period of 2023. This improvement was primarily attributable to the higher gaming revenues and lower cost of revenues due to decreased royalty payments resulting from the decline in NASCAR game sales.

The esports segment, which previously contributed to the company’s revenue, did not generate any revenues in Q3 2024 or the first nine months of 2024, as the company did not organize a Le Mans Virtual Series (LMVS) event during these periods. This resulted in a decline in the esports segment’s gross profit margin to 0% in Q3 2024 and the first nine months of 2024, compared to a gross profit margin loss of 29.1% in the first nine months of 2023.

Liquidity and Solvency

Motorsport Games’ liquidity position has been a significant area of concern for the company. As of September 30, 2024, the company had cash and cash equivalents of $0.75 million, which had decreased to $0.50 million as of October 31, 2024. The company’s working capital deficiency stood at $2.41 million as of September 30, 2024.

The company’s net cash used in operating activities for the nine months ended September 30, 2024, was $0.70 million, representing an average monthly net cash burn of approximately $0.10 million. Management has concluded that there is substantial doubt about the company’s ability to continue as a going concern due to the lack of available cash on hand to fund operations over the next year and the continuing uncertainty surrounding the company’s ability to raise additional funding.

Motorsport Games’ current ratio and quick ratio both stand at 0.49, indicating potential liquidity challenges. The company has a $12 million line of credit with Driven Lifestyle, an affiliated entity, which bears 10% interest. However, management believes there is a substantial likelihood that Driven Lifestyle will not fulfill future borrowing requests, and therefore does not view this as a viable source of future liquidity.

To address this liquidity shortfall, Motorsport Games is actively exploring several options, including seeking additional equity and/or debt financing, exploring strategic alternatives for the business (such as the sale or licensing of assets), and implementing further cost reduction and restructuring initiatives. The outcome of these efforts will be critical in determining the company’s ability to continue operations and execute its long-term growth strategy.

Risks and Challenges

Motorsport Games faces several key risks and challenges that could impact its future performance:

Liquidity and going concern uncertainty: Motorsport Games’ financial condition raises substantial doubt about its ability to continue as a going concern. The company’s ability to secure additional funding and effectively manage its cash flow will be critical to its long-term sustainability.

Competitive landscape: The racing game industry is highly competitive, with established players and new entrants vying for market share. Motorsport Games must continually innovate and deliver high-quality, engaging experiences to maintain its competitive edge.

Reliance on licensing agreements: The company’s business model is heavily dependent on securing and maintaining exclusive licensing agreements for major motorsport events and series. The termination or non-renewal of these agreements could have a significant impact on Motorsport Games’ operations and financial performance.

Execution of strategic alternatives: The success of Motorsport Games’ efforts to explore strategic alternatives, such as the sale or licensing of assets, will be crucial in determining the company’s path forward and its ability to generate near-term liquidity and long-term growth.

Outlook and Conclusion

Motorsport Games operates in a dynamic and competitive industry, navigating turbulent waters as it seeks to secure its long-term viability and unlock its untapped potential. The company’s strategic decision to sell its NASCAR license and explore new opportunities presents both challenges and opportunities.

While Motorsport Games’ financial performance has been impacted by the loss of key licensing agreements, the company’s focus on cost optimization and the recognition of gains from the settlement of license liabilities suggest a renewed commitment to improving its financial position. The successful execution of its strategic alternatives and the ability to secure new licensing deals will be critical in determining the company’s future direction.

The recent improvement in the gaming segment’s performance, particularly with the release of Le Mans Ultimate, demonstrates the company’s potential to capitalize on its remaining franchises and develop new revenue streams. However, the lack of esports revenue in recent periods highlights the need for diversification and exploration of new growth opportunities.

Investors should closely monitor Motorsport Games’ progress in addressing its liquidity concerns, diversifying its product portfolio, and identifying new avenues for growth. The company’s ability to adapt to the changing industry landscape and capitalize on its technological strengths will be pivotal in determining its long-term success.

While Motorsport Games has not provided specific forward-looking guidance, the company’s focus on strategic alternatives, cost reduction measures, and potential financing options will be crucial in determining its future trajectory. The gaming industry’s inherent volatility and the company’s current financial position underscore the importance of careful consideration and due diligence for potential investors.

Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.