Movie Games S.A. Q3 2025 Forensic Analysis: Paper Profits Mask Core Revenue Contraction and IP Conflict

Executive Summary: The Elephant in the Room

The Q3 2025 report for Movie Games S.A. presents a classic case of "paper profit" masking underlying operational weakness. While the company reports an Operating Profit (EBIT) of 3.66M PLN, this figure is entirely sustained by a non-recurring accounting event: a 4.5M PLN contractual penalty charged to a developer. Without this accounting entry, the company would likely have reported a significant operating loss.

Core revenues from the sale of products and services have contracted sharply by 31.9% YoY, dropping from 12.27M PLN to 8.36M PLN for the nine-month period. The company is currently engaged in a high-stakes conflict with the creator of its flagship IP (Drug Dealer Simulator), raising serious questions about the long-term viability of its most lucrative asset. The verdict is Bearish, driven by the contraction of the core business, reliance on litigation for profitability, and shrinking cash reserves.

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Key Financial Metrics (Consolidated)

The table below highlights the disconnect between top-line degradation and bottom-line optics, driven by the "Other Operating Income" anomaly.

*Comparison vs Sept 30, 2024.

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Portfolio & Sales Performance: Forensic Breakdown

The revenue mix confirms an alarming dependence on a single franchise, which is currently the subject of an internal legal battle.

Title-Specific Performance (Jan 1, 2025 – Sept 30, 2025)

• Drug Dealer Simulator 2 (DDS2):
  • Revenue: 3,181,000 PLN.
  • Share of Total Sales: 38.1%.
  • Analysis: Despite being the primary revenue driver, the performance appears underwhelming relative to the IP's legacy. Management has explicitly blamed the external developer (Rafal Pecherzewski) for "numerous bugs," which resulted in the issuance of a 4.5M PLN penalty note. This creates a paradox: the company's top-performing asset is simultaneously described as technically deficient.
• Drug Dealer Simulator 1 (DDS1):
  • Revenue: 2,203,000 PLN.
  • Share of Total Sales: 26.4%.
  • Analysis: The back-catalog strength of the original title is notable, generating nearly 70% of the sequel's revenue. While this demonstrates the "long tail" value of the IP, it underscores that Movie Games S.A. is effectively a "single-IP company" at this stage, with the DDS franchise accounting for 64.5% of total sales.
• Alaskan Road Truckers:
  • Revenue: 2,066,000 PLN.
  • Share of Total Sales: 24.7%.
  • Analysis: This title is providing a secondary revenue floor, but it has not broken out as a major hit sufficient to offset the decline in legacy portfolio sales.
• Beyond Sunset:
  • Revenue: Not disclosed in the top 3 list (grouped in "Others" < 10%).
  • Analysis: Released on September 12, 2025. The absence of this title from the "Basic Products" breakdown (which has a cutoff of ~900k PLN) implies the launch was commercially insignificant during the reporting period. This is a red flag for the pipeline's ability to deliver new hits.

Amortization & Recoupment Analysis

• Amortization Velocity: The company recorded 4.71M PLN in amortization expenses for the first three quarters against 8.36M PLN in revenue. This high ratio indicates aggressive write-downs of development costs, suggesting that profit margins on individual units sold are being compressed by the capitalization of development expenses.
• Completed Development Work (Finished Goods): This balance sheet item dropped from 6.07M PLN (Dec 31, 2024) to 2.95M PLN (Sept 30, 2025). This is a positive signal that the company is not "hoarding zombie assets"—they are expensing the cost of released games rapidly.
• WIP (Intangibles): Work in Progress has risen to 9.63M PLN. This accumulation of costs represents future risk. If DDS3 or Road Truckers: New Beginning fail to perform, this capitalized sum will trigger massive future impairments.

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The "Paper Profit" Anomaly

Investors must scrutinize Note 9 and Note IV.9 of the report. The reported Operating Profit of 3.66M PLN is distorted by 4.503M PLN recognized as "Other Operating Income".

• The Source: A penalty note issued to the developer of DDS2 (Rafał Pęcherzewski) for failure to fix bugs.
• The Reality: This is non-cash revenue until collected. The report admits, "As of September 30, 2025, the penalty has not been settled".
• The Implication: If we exclude this one-off legal claim, the company's core operations generated an Operating Loss of approximately 0.84M PLN (3.66M Profit - 4.5M Penalty). The narrative of profitability is built entirely on a disputed claim against a former partner.

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Future Outlook & Pipeline

Management is attempting to pivot development internally following the fallout with external partners.

• Drug Dealer Simulator 3: Currently in the "Vertical Slice" phase (approx. 30% complete). The company emphasizes this will be developed by "internal resources," aiming to capture 100% of the margin. However, removing the original creator (Rafal Pecherzewski) from the development process introduces significant creative and execution risk.
• Console Ports: DDS2 (Xbox/PS5) and Alaskan Road Truckers (Consoles) are the immediate revenue bridges. The report notes DDS2 passed certification for Xbox single-player, with multiplayer pending.
• Road Truckers: New Beginning: A new iteration in the trucking simulation genre. Management claims production is "below the assumed budget," which is prudent, but the commercial ceiling of this sub-genre remains untested.

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Risk Assessment

• Legal & Key Man Risk: The public dispute with Rafal Pecherzewski is toxic. He is contractually the key creative force behind DDS. While Movie Games claims full IP ownership and the right to create sequels/ports without him, prolonged litigation could distract management and tarnish the brand within the player community.
• Cash Flow Deterioration: Cash and equivalents dropped from 5.01M PLN (Dec 31, 2024) to 2.49M PLN (Sept 30, 2025). With operational cash flow shrinking (-59.4% YoY) and core sales falling, the runway is tightening.
• IP Concentration: The portfolio is dangerously overweight on the Drug Dealer Simulator franchise. Any underperformance in DDS3 or the DDS2 console ports could threaten the company's solvency.

Management Commentary Verification

Management asserts that the penalty note is "neutral for VAT" and legitimate. However, they also claim the allegations by the developer regarding unpaid royalties or rights are "baseless". This "he said, she said" dynamic is typical in GameDev publishing disputes, but it rarely ends well for share value in the short term. The focus on "internal development" for DDS3 is a strategic pivot designed to reassure investors that the IP is safe, but execution remains the variable.