UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the quarterly period ended March 31, | ||
| or | ||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from ___________ to ___________ |
For the transition period from ___________ to ___________
Commission file number: 001-39868
Motorsport Games Inc.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 86-1791356 | |
State or Other Jurisdiction of
| I.R.S. Employer
|
5972 NE 4th Avenue Miami, FL | 33137 | |
| Address of Principal Executive Offices | Zip Code |
Registrant’s Telephone Number, Including Area Code: (305)507-8799
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A common stock, $0.0001 par value per share | MSGM | The Nasdaq Stock Market LLC (The Nasdaq Capital Market) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] ☒ No [ ]☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] ☒ No [ ]☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | Accelerated filer |
| Non-accelerated filer | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ]☐ No [X]☒
As of May 14, 2021,7, 2024, the registrant had 11,635,897 shares of Class A common stock and 7,000,000 shares of Class B common stock outstanding.
Motorsport Games Inc.
Form 10-Q
For the Quarter Ended March 31, 20212024
TABLE OF CONTENTS
| i |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in thisThis Quarterly Report on Form 10-Q (this “Report”) of Motorsport Games Inc. (the “Company,” “Motorsport Games,” “we,” “us” or “our”) contains certain statements, which are forward-looking statementsnot historical facts and are “forward-looking statements” within the meaning of federal securities laws, includinglaws. These forward-looking statements that involveare subject to certain risks, trends and uncertainties. Forward-looking statements give our current expectations plans or intentions, such as, but not limited to, thoseand projections relating to our future business, futurefinancial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or financial condition, including with respect to the ongoing effects of the coronavirus (“COVID-19”) pandemic, new or planned products or offerings, industry trends, potential acquisitions and management strategies.current facts. We use words, such as “could,” “would,” “may,” “might,” “will,” “expect,” “likely,” “believe,” “continue,” “anticipate,” “estimate,” “intend,” “plan,” “project” and other similar expressions to identify some forward-looking statements, but not all forward-looking statements include these words. For example, forward-looking statements include, but are not limited to, statements we make relating to:
| ● | our liquidity and capital requirements, including, without limitation, as to our ability to continue as a going concern; our belief that we will not have sufficient cash on hand to fund our operations over the next year based on the cash and cash equivalents available and our average cash burn; our belief that additional funding will be required in order to continue operations; our expectation that we will continue to have a net cash outflow from operations for the foreseeable future as we continue to develop our product portfolio and invest in developing new video game titles; our expectation that we will continue to incur losses for the foreseeable future as we continue to incur significant expenses; our plans to address our liquidity short fall, including our exploration of several options, including, but not limited to: additional funding in the form of potential equity and/or debt financing arrangements or similar transactions, strategic alternatives for our business, including, but not limited to, the sale or licensing of our assets, and further cost reduction and restructuring initiatives; our expectation that if any strategic alternative is executed, this would help to reduce certain working capital requirements and reduce overhead expenditures, thereby reducing our expected future cash-burn, and provide some short-term liquidity relief, but that we will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of our business and operations; our plan to continue to seek to reduce our monthly net cash-burn by reducing our cost base through maintaining and enhancing cost control initiatives, and plans to continue to evaluate the structure of our business for additional changes in order to improve both our near-term and long-term liquidity position; statements regarding potential alternatives we may be required to adopt if we are unable to satisfy our capital requirements, and our belief that if we are ultimately unable to satisfy our capital requirements, we would likely need to dissolve and liquidate our assets under the bankruptcy laws or otherwise; our belief that there is a substantial likelihood that Driven Lifestyle Group LLC (“Driven Lifestyle”), formerly known as Motorsport Network, LLC, will not fulfill our future borrowing requests under the $12 million Line of Credit (as defined in this Report); and statements regarding our cash flows and anticipated uses of cash; | |
| ● | the sale of our NASCAR License (as defined in this Report), including our belief that our existing business model will need to be modified, our risk profile relating to our operations will be significantly altered, we may encounter difficulties or challenges in continuing operations due to the sale of the license, and that our cash flows and results of operations will likely be materially adversely impacted as we anticipate the amount of revenue to be generated by our existing NASCAR products to decline over time; | |
| ● | our intended corporate purpose to make the thrill of motorsports accessible to everyone by creating the highest quality, most sophisticated and most innovative experiences for racers, gamers and fans of all ages; | |
| ● | new or planned products or offerings, including the anticipated timing of any new product or offering launches, such as our current plans to organize the 2024/25 Le Mans Virtual Series to commence later this year, as well as the possibility of further adjustments to our product roadmap due to the continuing impact of our liquidity position; |
| ii |
| ● | our plans to strive to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing games as well as on behalf of third-party racing game developers and publishers; | |
| ● | our intention to continue exploring opportunities to expand the recurring portion of our esports segment outside of Le Mans; | |
| ● | our belief that connecting virtual racing gamers and esports fans on a digital entertainment and social platform represents the greatest opportunity to enhance the way that people learn, watch, play, and experience racing video games and racing esports; | |
| ● | our beliefs regarding the growing importance and business viability of esports, especially within the racing and motorsport genres; | |
| ● | our belief that our esports business has the potential to generate incremental revenues through the further sale of media rights to our esports events and competitions, as well as, among other things, merchandising, if the esports audience pattern continues to grow; | |
| ● | our plans to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through in-game purchases and extra content; | |
| ● | our expectation that we will continue to derive significant revenues from sales of our products to a very limited number of distribution partners; | |
| ● | our intention to continue to look for opportunities to expand the recurring portion of our business, including through the planned introduction of new annualized sports franchise games, such as with Le Mans; | |
| ● | our intended use of proceeds from the sales of our equity securities; | |
| ● | our statements and assumptions relating to the impairment of assets; | |
| ● | our plans and intentions with respect to our remediation efforts to address the material weaknesses in our internal control over financial reporting; | |
| ● | our belief that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows, except as otherwise disclosed in this Report, and that in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period; our beliefs regarding the merit of any plaintiff’s allegations and the impact of any claims and litigation that we are subject to; and our plans and intentions with respect to defending our position in any legal proceeding; | |
| ● | our intention to not declare dividends in the foreseeable future; | |
| ● | our ability to utilize net operating loss carryforwards; | |
| ● | our expectations regarding the future impact of implementing management strategies, adopting new accounting standards, potential acquisitions and industry trends; | |
| ● | our plans and intentions to regain compliance with the listing requirements of The Nasdaq Stock Market LLC (“NASDAQ”), including our plan to negotiate and implement equity financing transactions and negotiate reductions of our licensing liabilities; | |
| ● | our belief that we may decide in the future to avail ourselves of certain corporate governance requirements of NASDAQ as a result of being a “controlled company” within the meaning of the NASDAQ rules; | |
| ● | our expectations relating to any cost reduction and restructuring initiatives, including expected savings and any restructuring charges to be incurred; and | |
| ● | our expectations that our current development operations will not have significant exposure to changes in circumstances arising from the Ukraine-Russia conflict. |
| iii |
The forward-looking statements contained in this Report are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read and consider this Report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions.assumptions that are difficult to predict. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements. Important factors that could cause our actual results to differ materially from those projected in any forward-looking statements are discussed in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, which include, but are not limited2023 (the “2023 Form 10-K”) and in “Risk Factors” in Part II, Item 1A of this Report, as updated in our subsequent filings with the Securities and Exchange Commission (the “SEC”). In addition to factors that may be described in our filings with the SEC, including this Report, the following principal risks:factors, among others, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us:
| (i) | difficulties and/or delays in accessing available liquidity, and other unanticipated difficulties in resolving our continuing financial condition and ability to obtain additional capital to meet our financial obligations, including, without limitation, difficulties in securing funding that is on commercially acceptable terms to us or at all, such as our inability to complete in whole or in part any potential debt and/or equity financing transactions or similar transactions, any inability to achieve cost reductions, including, without limitation, those which we expect to achieve through any cost reduction and restructuring initiatives, as well as any inability to consummate additional strategic alternatives for our business, including, but not limited to, the sale or licensing of our assets, and/or less than expected benefits resulting from any such strategic alternative; difficulties, delays or our inability to efficiently manage our cash and working capital; higher than expected operating expenses; adverse impacts to our liquidity position resulting from the higher interest rate and higher inflationary environment; the unavailability of funds from anticipated borrowing sources; the unavailability of funds from our inability to reduce or control costs, including, without limitation, those which we expect to achieve through any cost reduction and restructuring initiatives; lower than expected operating revenues, cash on hand and/or funds available from anticipated borrowings or funds expected to be generated from cost reductions resulting from the implementation of cost control initiatives, such as through any cost reduction and restructuring initiatives; and/or less than anticipated cash generated by our operations; and/or adverse effects on our liquidity resulting from changes in economic conditions (such as continued volatility in the financial markets, whether attributable to COVID-19, the ongoing wars between Russia and Ukraine and between Israel and Hamas or otherwise; significantly higher rates of inflation, significantly higher interest rates and higher labor costs; the impact of higher energy prices on consumer purchasing behavior, monetary conditions and foreign currency fluctuations, tariffs, foreign currency controls and/or government-mandated pricing controls, as well as in trade, monetary, fiscal and tax policies), political conditions (such as military actions and terrorist activities) and pandemics and natural disasters; and/or the unavailability of funds from (A) delaying the implementation of or revising certain aspects of our business strategy; (B) reducing or delaying the development and launch of new products and events; (C) reducing or delaying capital spending, product development spending and marketing and promotional spending; (D) selling assets or operations; (E) seeking additional capital contributions and/or loans from Driven Lifestyle, the Company’s other affiliates and/or third parties; and/or (F) reducing other discretionary spending; | |
| (ii) | difficulties, delays or less than expected results in achieving our growth plans, objectives and expectations, such as due to a slower than anticipated economic recovery and/or our inability, in whole or in part, to continue to execute our business strategies and plans, such as due to less than anticipated customer acceptance of our new game titles, our experiencing difficulties or the inability to launch our games as planned, less than anticipated performance of the games impacting customer acceptance and sales and/or greater than anticipated costs and expenses to develop and launch our games, including, without limitation, higher than expected labor costs; |
| iv |
Additionally, there are other risks and uncertainties described from time to time in the reports that we file with the Securities and Exchange Commission (the “SEC”).SEC. Should one or more of these risks or uncertainties materialize or should any of these assumptions prove to be incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement contained in this Report to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances, except as otherwise required by law. New factors that could cause our business not to develop as we expect emerge from time to time, and it is not possible for us to predict all of them. Further, we cannot assess the impact of each currently known or new factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Item 1. Condensed Consolidated Financial Statements (Unaudited)
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| �� | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 49,778,477 | $ | 3,990,532 | ||||
| Accounts receivable, net of allowances of $2,191,484 and $2,150,684, at March 31, 2021 and December 31, 2020, respectively | 5,571,848 | 5,975,414 | ||||||
| Prepaid expenses and other current assets | 856,147 | 507,177 | ||||||
| Total Current Assets | 56,206,472 | 10,473,123 | ||||||
| Property and equipment, net | 220,174 | 162,148 | ||||||
| Goodwill | 203,633 | 137,717 | ||||||
| Intangible assets, net | 9,323,807 | 5,568,452 | ||||||
| Deferred offering costs | - | 749,370 | ||||||
| Other assets | - | 296,200 | ||||||
| Total Assets | $ | 65,954,086 | $ | 17,387,010 | ||||
| Liabilities and Stockholders’ Equity / Member’s Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 417,218 | $ | 705,951 | ||||
| Accrued expenses | 2,436,410 | 3,355,003 | ||||||
| Due to related parties | 959,784 | 10,853,536 | ||||||
| Total Current Liabilities | 3,813,412 | 14,914,490 | ||||||
| Other non-current liabilities | 907,250 | 856,694 | ||||||
| Total Liabilities | 4,720,662 | 15,771,184 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ Equity / Member’s Equity: | ||||||||
| Preferred stock, $0.0001 par value, 1,000,000 shares authorized; none issued and outstanding as of March 31, 2021 and December 31, 2020 | - | - | ||||||
| Class A common stock, $0.0001 par value; authorized 100,000,000 shares; 10,780,633 and 0 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | 1,078 | - | ||||||
| Class B common stock, $0.0001 par value; authorized 7,000,000 shares; 7,000,000 and 0 shares issued and outstanding as of March 31, 2021 and December 31, 2020, respectively | 700 | - | ||||||
| Additional paid-in capital | 75,940,940 | - | ||||||
| Member’s equity | - | 3,791,674 | ||||||
| Accumulated deficit | (18,638,309 | ) | (4,826,335 | ) | ||||
| Accumulated other comprehensive loss | (27,986 | ) | 4,928 | |||||
| Total Stockholders’ Equity / Member’s Deficit Attributable to Motorsport Games Inc. | 57,276,423 | (1,029,733 | ) | |||||
| Non-controlling interest | 3,957,001 | 2,645,559 | ||||||
| Total Stockholders’ Equity / Member’s Equity | 61,233,424 | 1,615,826 | ||||||
| Total Liabilities and Stockholders’ Equity / Member’s Equity | $ | 65,954,086 | $ | 17,387,010 | ||||
(UNAUDITED)
| March 31, 2024 | December 31, 2023 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 1,252,691 | $ | 1,675,210 | ||||
| Accounts receivable, net of allowances of $450,000 as of March 31, 2024 and December 31, 2023, respectively | 1,423,423 | 735,839 | ||||||
| Prepaid expenses and other current assets | 1,474,092 | 1,106,848 | ||||||
| Total Current Assets | 4,150,206 | 3,517,897 | ||||||
| Property and equipment, net | 175,199 | 247,693 | ||||||
| Operating lease right of use assets | 148,725 | 197,307 | ||||||
| Intangible assets, net | 5,349,403 | 5,795,807 | ||||||
| Total Assets | $ | 9,823,533 | $ | 9,758,704 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,509,469 | $ | 813,659 | ||||
| Accrued expenses and other current liabilities | 2,479,993 | 1,891,315 | ||||||
| Due to related parties | 48,265 | 77,716 | ||||||
| Purchase commitments | 4,628,779 | 4,656,538 | ||||||
| Operating lease liabilities (current) | 109,171 | 153,015 | ||||||
| Total Current Liabilities | 8,775,677 | 7,592,243 | ||||||
| Operating lease liabilities (non-current) | 39,856 | 45,659 | ||||||
| Other non-current liabilities | 16,175 | 31,098 | ||||||
| Total Liabilities | 8,831,708 | 7,669,000 | ||||||
| Commitments and contingencies (Note 9) | - | - | ||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $ par value; authorized and shares; and issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | - | - | ||||||
| Class A common stock, $ par value; authorized and shares; and shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | 269 | 269 | ||||||
| Class B common stock, $ par value; authorized and shares; and shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | 70 | 70 | ||||||
| Common stock, value | 70 | 70 | ||||||
| Additional paid-in capital | 91,991,502 | 91,923,311 | ||||||
| Accumulated deficit | (88,665,020 | ) | (87,030,270 | ) | ||||
| Accumulated other comprehensive loss | (1,269,983 | ) | (1,850,216 | ) | ||||
| Total Stockholders’ Equity Attributable to Motorsport Games Inc. | 2,056,838 | 3,043,164 | ||||||
| Non-controlling interest | (1,065,013 | ) | (953,460 | ) | ||||
| Total Stockholders’ Equity | 991,825 | 2,089,704 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 9,823,533 | $ | 9,758,704 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 1 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)(UNAUDITED)
| 2024 | 2023 | |||||||||||||||
| For the Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2024 | 2023 | |||||||||||||
| Revenues | $ | 2,474,132 | $ | 3,234,567 | $ | 3,029,036 | $ | 1,729,355 | ||||||||
| Cost of revenues [1] | 781,808 | 1,068,497 | ||||||||||||||
| Cost of revenues | 666,627 | 1,248,736 | ||||||||||||||
| Gross profit | 1,692,324 | 2,166,070 | 2,362,409 | 480,619 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing [2] | 1,024,218 | 638,139 | ||||||||||||||
| Development [3] | 1,250,362 | 935,804 | ||||||||||||||
| General and administrative [4] | 14,764,038 | 692,752 | ||||||||||||||
| Sales and marketing [1] | 250,386 | 618,410 | ||||||||||||||
| Development [2] | 1,063,357 | 2,397,134 | ||||||||||||||
| General and administrative [3] | 2,190,266 | 2,779,110 | ||||||||||||||
| Depreciation and amortization | 30,775 | 18,951 | 73,724 | 97,354 | ||||||||||||
| Total operating expenses | 17,069,393 | 2,285,646 | 3,577,733 | 5,892,008 | ||||||||||||
| Loss from operations | (15,377,069 | ) | (119,576 | ) | (1,215,324 | ) | (5,411,389 | ) | ||||||||
| Interest (expense) income [5] | (119,539 | ) | 1,140 | |||||||||||||
| Gain (loss) attributable to equity method investment | 1,370,837 | (70,242 | ) | |||||||||||||
| Other income (expense), net | 40,347 | (11,830 | ) | |||||||||||||
| Interest expense | (30,882 | ) | (199,120 | ) | ||||||||||||
| Other (expense) income, net | (437,192 | ) | 351,317 | |||||||||||||
| Net loss | (14,085,424 | ) | (200,508 | ) | (1,683,398 | ) | (5,259,192 | ) | ||||||||
| Less: Net (loss) income attributable to non-controlling interest | (273,450 | ) | 39,123 | |||||||||||||
| Less: Net loss attributable to non-controlling interest | (48,648 | ) | (158,245 | ) | ||||||||||||
| Net loss attributable to Motorsport Games Inc. | $ | (13,811,974 | ) | $ | (239,631 | ) | $ | (1,634,750 | ) | $ | (5,100,947 | ) | ||||
| Net loss attributable to Class A common stock per share [6]: | ||||||||||||||||
| Net loss attributable to Class A common stock per share: | ||||||||||||||||
| Basic and diluted | $ | (1.30 | ) | $ | ) | $ | ) | |||||||||
| Weighted Average Number of Class A Common Shares Outstanding [6]: | ||||||||||||||||
| Weighted-average shares of Class A common stock outstanding: | ||||||||||||||||
| Basic and diluted | 10,637,065 | |||||||||||||||
| [1] | Includes related party |
| [2] | Includes related party expenses of |
| [3] | Includes related party expenses of |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 2 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)(UNAUDITED)
| 2024 | 2023 | |||||||||||||||
| For the Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2024 | 2023 | |||||||||||||
| Net loss | $ | (14,085,424 | ) | $ | (200,508 | ) | $ | (1,683,398 | ) | $ | (5,259,192 | ) | ||||
| Other comprehensive loss: | ||||||||||||||||
| Other comprehensive gain (loss): | ||||||||||||||||
| Foreign currency translation adjustments | (32,914 | ) | - | 580,233 | (78,588 | ) | ||||||||||
| Comprehensive loss | (14,118,338 | ) | (200,508 | ) | (1,103,165 | ) | (5,337,780 | ) | ||||||||
| Comprehensive (loss) income attributable to non-controlling interests | (273,450 | ) | 39,123 | |||||||||||||
| Comprehensive loss attributable to non-controlling interests | (111,553 | ) | (194,563 | ) | ||||||||||||
| Comprehensive loss attributable to Motorsport Games Inc. | $ | (13,844,888 | ) | $ | (239,631 | ) | $ | (991,612 | ) | $ | (5,143,217 | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY / MEMBER’S EQUITY
(Unaudited)(UNAUDITED)
| For the Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Total Stockholders’ | Total | |||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Equity / Member’s | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Other | Equity Attributable | Non- | Equity / | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Member’s | Paid-In | Accumulated | Comprehensive | to Motorsport | controlling | Member’s | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Equity | Capital | Deficit | Income (Loss) | Games Inc. | Interest | Equity | ||||||||||||||||||||||||||||||||||
| Balance - January 1, 2021 | - | $ | - | - | $ | - | $ | 3,791,674 | $ | - | $ | (4,826,335 | ) | $ | 4,928 | $ | (1,029,733 | ) | $ | 2,645,559 | $ | 1,615,826 | ||||||||||||||||||||||
| Conversion of membership interests into shares of common stock | 7,000,000 | 700 | 7,000,000 | 700 | (3,791,674 | ) | 3,790,274 | - | - | - | - | - | ||||||||||||||||||||||||||||||||
| Issuance of common stock in initial public offering, net [1] | 3,450,000 | 345 | - | - | - | 63,073,783 | - | - | 63,074,128 | - | 63,074,128 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | 330,633 | 33 | - | - | - | 9,076,883 | - | - | 9,076,916 | - | 9,076,916 | |||||||||||||||||||||||||||||||||
| Purchase of additional interest in Le Mans | - | - | - | - | - | - | - | - | - | 1,584,892 | 1,584,892 | |||||||||||||||||||||||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | - | (32,914 | ) | (32,914 | ) | - | (32,914 | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (13,811,974 | ) | - | (13,811,974 | ) | (273,450 | ) | (14,085,424 | ) | |||||||||||||||||||||||||||||
| Balance - March 31, 2021 | 10,780,633 | $ | 1,078 | 7,000,000 | $ | 700 | $ | - | $ | 75,940,940 | $ | (18,638,309 | ) | $ | (27,986 | ) | $ | 57,276,423 | $ | 3,957,001 | $ | 61,233,424 | ||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Games Inc. | Interest | Equity | |||||||||||||||||||||||||||||||
| For the Three Months Ended March 31, 2024 | ||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||
| Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Equity Attributable to Motorsport | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Games Inc. | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance – January 1, 2024 | 2,722,728 | $ | 269 | 700,000 | $ | 70 | $ | 91,923,311 | $ | (87,030,270 | ) | $ | (1,850,216 | ) | $ | 3,043,164 | $ | (953,460 | ) | $ | 2,089,704 | |||||||||||||||||||
| Stock-based compensation | - | - | - | - | 68,191 | - | - | 68,191 | - | 68,191 | ||||||||||||||||||||||||||||||
| Other comprehensive gain (loss) | - | - | - | - | - | - | 580,233 | 580,233 | (62,905 | ) | 517,328 | |||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,634,750 | ) | - | (1,634,750 | ) | (48,648 | ) | (1,683,398 | ) | ||||||||||||||||||||||||||
| Balance – March 31, 2024 | 2,722,728 | $ | 269 | 700,000 | $ | 70 | $ | 91,991,502 | $ | (88,665,020 | ) | $ | (1,269,983 | ) | $ | 2,056,838 | $ | (1,065,013 | ) | $ | 991,825 | |||||||||||||||||||
| For the Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||
| Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Equity Attributable to Motorsport | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Games Inc. | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance – January 1, 2023 | 1,183,808 | $ | 117 | 700,000 | $ | 70 | $ | 76,446,061 | $ | (73,979,131 | ) | $ | (933,406 | ) | $ | 1,533,711 | $ | 369,687 | $ | 1,903,398 | ||||||||||||||||||||
| Balances | 1,183,808 | $ | 117 | 700,000 | $ | 70 | $ | 76,446,061 | $ | (73,979,131 | ) | $ | (933,406 | ) | $ | 1,533,711 | $ | 369,687 | $ | 1,903,398 | ||||||||||||||||||||
| Issuance of common stock | 734,741 | 74 | - | - | 10,571,460 | - | - | 10,571,534 | - | 10,571,534 | ||||||||||||||||||||||||||||||
| Issuance of common stock for extinguishment of related party loan | 780,385 | 78 | - | - | 3,948,488 | - | - | 3,948,566 | - | 3,948,566 | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 249,233 | - | - | 249,233 | - | 249,233 | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | (78,588 | ) | (78,588 | ) | (36,318 | ) | (114,906 | ) | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (5,100,947 | ) | - | (5,100,947 | ) | (158,245 | ) | (5,259,192 | ) | ||||||||||||||||||||||||||
| Balance – March 31, 2023 | 2,698,934 | $ | 269 | 700,000 | $ | 70 | $ | 91,215,242 | $ | (79,080,078 | ) | $ | (1,011,994 | ) | $ | 11,123,509 | $ | 175,124 | $ | 11,298,633 | ||||||||||||||||||||
| Balances | 2,698,934 | $ | 269 | 700,000 | $ | 70 | $ | 91,215,242 | $ | (79,080,078 | ) | $ | (1,011,994 | ) | $ | 11,123,509 | $ | 175,124 | $ | 11,298,633 | ||||||||||||||||||||
[1] Gross proceeds of $69,000,000 less offering costs of $5,925,872.
| For the Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Total Stockholders’ | Total | |||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Equity / Member’s | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Other | Equity Attributable | Non- | Equity / | ||||||||||||||||||||||||||||||||||||||
| Common Stock | Common Stock | Member’s | Paid-In | Accumulated | Comprehensive | to Motorsport | controlling | Member’s | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Equity | Capital | Deficit | Income (Loss) | Games Inc. | Interest | Equity | ||||||||||||||||||||||||||||||||||
| Balance - January 1, 2020 | - | $ | - | - | $ | - | $ | - | $ | - | $ | (3,064,354 | ) | $ | - | $ | (3,064,354 | ) | $ | 6,676,314 | $ | 3,611,960 | ||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (239,631 | ) | - | (239,631 | ) | 39,123 | (200,508 | ) | ||||||||||||||||||||||||||||||
| Balance - March 31, 2020 | - | $ | - | - | $ | - | $ | - | $ | - | $ | (3,303,985 | ) | $ | - | $ | (3,303,985 | ) | $ | 6,715,437 | $ | 3,411,452 | ||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(UNAUDITED)
| For the Three Months Ended March 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (14,085,424 | ) | $ | (200,508 | ) | ||
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | ||||||||
| Depreciation and amortization | 136,600 | 134,016 | ||||||
| Sales return and price protection reserves | 40,800 | 152,907 | ||||||
| Loss on disposal of property and equipment | - | 32,537 | ||||||
| Stock-based compensation | 9,076,916 | - | ||||||
| (Gain) loss on equity method investee | (1,370,837 | ) | 70,242 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 362,766 | (559,301 | ) | |||||
| Prepaid expenses and other current assets | (347,787 | ) | (129,865 | ) | ||||
| Other assets | 25,000 | (450 | ) | |||||
| Accounts payable | (288,733 | ) | 253,272 | |||||
| Other non-current liabilities | 50,555 | 29,792 | ||||||
| Accrued expenses | (434,608 | ) | 797,004 | |||||
| Net Cash (Used In) Provided By Operating Activities | (6,834,752 | ) | 579,646 | |||||
| Cash Flows From Investing Activities: | ||||||||
| Purchase of additional interest in Le Mans, net of cash acquired | 153,250 | - | ||||||
| Acquisition of KartKraft | (1,000,000 | ) | - | |||||
| Purchase of intangible assets | (26,000 | ) | - | |||||
| Purchase of property and equipment | (83,751 | ) | (29,813 | ) | ||||
| Net Cash Used In Investing Activities | (956,501 | ) | (29,813 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Advances from related parties | 1,772,503 | 230,000 | ||||||
| Repayments of advances from related parties | (11,800,000 | ) | (271,217 | ) | ||||
| Issuance of common stock in initial public offering, net [1] | 63,661,128 | - | ||||||
| Net Cash Provided By (Used In) Financing Activities | 53,633,631 | (41,217 | ) | |||||
| Effect of foreign exchange rate changes on cash | (54,433 | ) | - | |||||
| Net Increase In Cash | 45,787,945 | 508,616 | ||||||
| Cash - Beginning of the period | 3,990,532 | 1,960,279 | ||||||
| Cash - End of the period | $ | 49,778,477 | $ | 2,468,895 | ||||
| [1] Gross proceeds of $69,000,000 less issuance costs of $5,338,872. See supplemental disclosure below for $587,000 of issuance costs paid in 2020. | ||||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the periods for: | ||||||||
| Interest | $ | 639,786 | $ | - | ||||
| Non-cash investing and financing activities: | ||||||||
| Reduction of additional paid-in capital for initial public offering issuance costs that were previously paid | $ | 587,000 | $ | - | ||||
| Accrued loss on equity method investee | $ | - | $ | (14,429 | ) | |||
| Purchase of additional interest in Le Mans | $ | 11,584,892 | $ | - | ||||
| 2024 | 2023 | |||||||
| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,683,398 | ) | $ | (5,259,192 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss on disposal of property and equipment | - | 1,016 | ||||||
| Depreciation and amortization | 601,946 | 502,357 | ||||||
| Purchase commitment and license liability interest accretion | 22,241 | 157,661 | ||||||
| Stock-based compensation | 68,191 | 249,233 | ||||||
| Sales return and price protection reserves | - | 280,000 | ||||||
| Changes in the fair value of warrants | (14,922 | ) | - | |||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (689,294 | ) | 630,272 | |||||
| Due from related parties | - | 140,358 | ||||||
| Operating lease liabilities | (978 | ) | (5,893 | ) | ||||
| Prepaid expenses and other assets | (363,780 | ) | (225,562 | ) | ||||
| Accounts payable | 643,942 | (1,331,386 | ) | |||||
| Due to related parties | (30,238 | ) | (473,021 | ) | ||||
| Other non-current liabilities | (22,241 | ) | (33,720 | ) | ||||
| Accrued expenses and other liabilities | 620,873 | (315,824 | ) | |||||
| Net cash used in operating activities | $ | (847,658 | ) | $ | (5,683,701 | ) | ||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | - | (15,057 | ) | |||||
| Net cash used in investing activities | $ | - | $ | (15,057 | ) | |||
| Cash flows from financing activities: | ||||||||
| Repayments of purchase commitment liabilities | (50,000 | ) | (250,000 | ) | ||||
| Payment of license liabilities | - | (87,500 | ) | |||||
| Issuance of common stock from stock purchase commitment agreement | - | 644,694 | ||||||
| Issuance of common stock from registered direct offerings | - | 10,404,840 | ||||||
| Net cash (used in) provided by financing activities | $ | (50,000 | ) | $ | 10,712,034 | |||
| Effect of exchange rate changes on cash and cash equivalents | 475,139 | (198,026 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | (422,519 | ) | 4,815,250 | |||||
| Total cash and cash equivalents at beginning of the period | $ | 1,675,210 | $ | 979,306 | ||||
| Total cash and cash equivalents at the end of the period | $ | 1,252,691 | $ | 5,794,556 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | 8,641 | $ | 9,508 | ||||
| Non-cash investing and financing activities: | ||||||||
| Shares issued to Driven Lifestyle Group LLC for extinguishment of related party loan | $ | - | $ | (3,948,566 | ) | |||
| Extinguishment of Driven Lifestyle Group LLC related party loan for Class A shares | $ | - | $ | 3,948,566 | ||||
| Issuance of warrants in connection with registered direct offerings | $ | - | $ | 478,000 | ||||
| Receivable from sale of NASCAR License | $ | 500,000 | $ | - | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 – - BUSINESS ORGANIZATION, NATURE OF OPERATIONS, AND RISKS AND UNCERTAINTIES AND BASIS OF PRESENTATION
Organization and Operations
Motorsport Gaming US LLC (“Motorsport Gaming”) was established as a limited liability company on August 2, 2018 under the laws of the State of Florida. On January 8, 2021, Motorsport Gaming US LLC converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Motorsport Games Inc. (“Motorsport Games” or the “Company”). Upon effecting the corporate conversion on January 8, 2021, Motorsport Games Inc. now holds all the property and assets of Motorsport Gaming, US LLC, and all of the debts and obligations of Motorsport Gaming US LLC were assumed by Motorsport Games Inc. by operation of law upon such corporate conversion. See Note 6 – Stockholders’ Equity – Corporate Conversion
Risks and Uncertainties
Liquidity and Going Concern
The Company had a net loss of $1.7 million and negative cash flows from operations of $0.8 million for the three months ended March 31, 2024. As of March 31, 2024, the Company had an accumulated deficit of $88.7 million and cash and cash equivalents of $1.3 million. As of April 30, 2024, the Company had cash equivalents of $1.3 million.
For the three months ended March 31, 2024, the Company experienced an average net cash burn from operations of approximately $0.3 million per month, and while it has taken, and continues to take, measures to reduce its costs, the Company expects to continue to have a net cash outflow from operations for the foreseeable future as it continues to develop its product portfolio and invest in developing new video game titles.
The Company’s future liquidity and capital requirements include funds to support the planned costs to operate its business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures.
In order to address its liquidity shortfall, the Company continues to explore several options, including, but not limited to: i) additional details.
Motorsport Games, throughfunding in the form of potential equity and/or debt financing arrangements or similar transactions (collectively, “Capital Financing”); ii) other strategic alternatives for its subsidiaries,business, including, 704Gamesbut not limited to, the sale or licensing of the Company’s assets in addition to the recent sales of its NASCAR License (as defined below) (collectively, the “Company”),and Traxion (as defined below); and iii) cost reduction and restructuring initiatives, each of which is a leading racing game developer, publisher and esports ecosystem provider of official motorsport racing series throughout the world, including NASCAR, the iconic 24 Hours of Le Mans endurance race and the associated World Endurance Championship, the British Touring Car Championship (the “BTCC”) and others. described more fully below.
The Company developscontinues to explore additional funding in the form of potential Capital Financing and publishes multi-platform racing video games including for game consoles, personal computer (PC) and mobile platforms. In addition,has entered into an Equity Distribution Agreement (the “ED Agreement”) with Canaccord Genuity LLC, as sales agent (the “Sales Agent”), pursuant to which the Company organizesmay issue and facilitates esports tournaments, competitions,sell shares of its Class A common stock having an aggregate offering price of up to $10 million (subject to compliance with the limitations set forth in the SEC’s “baby shelf” rules). Subject to the terms and eventsconditions of the ED Agreement, the Sales Agent may sell shares by any method deemed to be an “at-the-market” (“ATM”) offering as defined in Rule 415 under the Securities Act of 1933, as amended. As of March 31, 2024, the Company had an aggregate of $2.9 million available for future sales under its ATM program, which was reduced to $1.3 million of availability as of the date of this Report in accordance with the SEC’s baby shelf rules. However, due to the Company’s present liquidity position and required future funding requirements, any funds raised via its ATM program would not be sufficient to satisfy its ongoing liquidity requirements and further potential Capital Financing would be required, in conjunction to the other options being explored by the Company. Further, there can be no assurance the Company will be able to obtain funds via its ATM program, should it choose to sell shares under the ED Agreement, nor can there be any other assurance that the Company can secure additional funding in the form of equity and/or debt financing on commercially acceptable terms, if at all, to satisfy its future needed liquidity and capital resources.
| 6 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Due to the continuing uncertainty surrounding the Company’s ability to raise funding in the form of potential Capital Financing, and in light of its liquidity position and anticipated future funding requirements, the Company continues to explore other strategic alternatives and potential options for its licensed racing gamesbusiness, including, but not limited to, the sale or licensing of certain of the Company’s assets in addition to the recent sales of its NASCAR License and Traxion. See Note 12 – Subsequent Events for more information on the sale of Traxion in April 2024.
If any such additional strategic alternative is executed, it is expected it would help to improve the Company’s working capital position and reduce overhead expenditures, thereby lowering the Company’s expected future cash-burn, and provide some short-term liquidity relief. Nonetheless, even if the Company is successful in implementing one or more additional strategic alternatives, the Company will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of its business and operations. There are no assurances that the Company will be successful in implementing any additional strategic plans for the sale or licensing of its assets, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond the Company’s control.
As the Company continues to address its liquidity constraints, the Company may need to make further adjustments to its product roadmap in order to reduce operating cash burn. Additionally, the Company continues to seek to improve its liquidity through maintaining and enhancing cost control initiatives. The Company plans to continue evaluating the structure of its business for additional changes in order to improve both its near-term and long-term liquidity position, as well as on behalf of third-party racing game developerscreate a healthy and publishers.sustainable Company from which to operate.
On April 16, 2021,If the Company acquired the remaining equity interests in 704Games Company whereby 704Games Company merged with 704Games LLC, a newly-formed Delaware limited liability company and wholly-owned subsidiaryis unable to satisfy its capital requirements, it could be required to adopt one or more of the following alternatives:
| ● | delaying the implementation of or revising certain aspects of the Company’s business strategy; | |
| ● | further reducing or delaying the development and launch of new products and events; | |
| ● | further reducing or delaying capital spending, product development spending and marketing and promotional spending; | |
| ● | selling additional assets or operations; | |
| ● | seeking additional loans from third parties; | |
| ● | further reducing other discretionary spending; | |
| ● | entering into financing agreements on unattractive terms; and/or | |
| ● | significantly curtailing or discontinuing operations. |
There can be no assurance that the Company with 704Games LLC being the surviving entity in such merger. As used herein, “704Games” referswould be able to (i) 704Games Company prior to the merger and (ii) 704Games LLC from and after the merger. See Note 11 – Subsequent Events – Share Exchange Agreements—704Games Common Stock for additional details.
Risks and Uncertainties
The global spreadtake any of the ongoing and prolonged COVID-19 pandemic has created significant business uncertaintyactions referred to above because of a variety of commercial or market factors, including, without limitation, market conditions being unfavorable for an equity or debt issuance or similar transactions, loans not being available from third parties, or that the Company and others, resulting in volatility and economic disruption. Additionally,transactions may not be permitted under the outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home or total lock-down (or similar) orders and business limitations and shutdowns.
As a result of the COVID-19 pandemic, including the related responses from government authorities, the Company’s business and operations have been impacted, including the temporary closure of its offices in Miami, Florida, Silverstone, England, and Moscow, Russia, which has resulted in the Company’s employees working remotely. During the COVID-19 outbreak, demand for the Company’s games has generally increased, which the Company believes is primarily attributable to a higher number of consumers staying at home due to COVID-19 related restrictions. Similarly, there has been a significant increase in viewershipterms of the Company’s esports events sincevarious debt instruments then in effect, such as due to restrictions on the initial impactincurrence of the virus, as these events began to air on both digitaldebt, incurrence of liens, asset dispositions and linear platforms, particularly asrelated party transactions. In addition, such actions, if taken, may not enable the Company wasto satisfy its capital requirements if the actions that the Company is able to attract manyconsummate do not generate a sufficient amount of additional capital.
| 7 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Even if the top “real world” motorsport stars to compete. However, several retailers have experienced, and continue to experience, closures, reduced operating hours and/or other restrictions as a resultCompany does secure additional Capital Financing, if the anticipated level of the ongoing and prolonged COVID-19 pandemic, which has negatively impacted therevenues are not achieved because of, for example, decreased sales of the Company’s products from such retailers. Additionally, in the Company’s esports business, the ongoing and prolonged COVID-19 pandemic has resulted in the postponing of certain events to later dates or shifting events from an in-person format to online only.
The Company continues to monitor the evolving situation caused by the COVID-19 pandemic, and it may take further actions required by governmental authorities or that it determines are prudent to support the well-being of its employees, suppliers, business partners and others. The degree to which the ongoing and prolonged COVID-19 pandemic impacts the Company’s operations, business, financial results, liquidity, and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limiteddue to the duration and spreaddisposition of the pandemic, its severity, actions to contain the virus or treat its impact,key assets, such as the efficacysale of vaccines (particularly with respectits NASCAR License and/or the Company’s inability to emerging strainsdeliver new products for its various other licenses; less than anticipated consumer acceptance of the virus),Company’s offering of products and how quicklyevents; less than effective marketing and promotion campaigns, decreased consumer spending in response to what extent normalweak economic conditions or weakness in the overall electronic games category; adverse changes in foreign currency exchange rates; decreased sales of the Company’s products and operating conditions can resume. Adverse economic and market conditionsevents as a result of the ongoing and prolonged COVID-19 pandemic could also adversely affect the demand forincreased competitive activities by the Company’s competitors; changes in consumer purchasing habits, such as the impact of higher energy prices on consumer purchasing behavior; retailer inventory management or reductions in retailer display space; less than anticipated results from the Company’s existing or new products or from its advertising and/or marketing plans; or if the Company’s expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, the Company’s liquidity position may also impactcontinue to be insufficient to satisfy its future capital requirements. If the Company is ultimately unable to satisfy its capital requirements, it would likely need to dissolve and liquidate its assets under the bankruptcy laws or otherwise.
In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued. The factors described above, in particular the lack of its customers, vendorsavailable cash on hand to fund operations over the next year, have raised substantial doubt about the Company’s ability to continue as a going concern.
The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and suppliers satisfy their obligations towhich contemplates the Company.realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In themanagement’s opinion, of management, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentationstatement of the Company’s unaudited condensed consolidated financial statements as of March 31, 20212024 and for the three months ended March 31, 2021 and 2020.2024. The Company’s results of operations for the three months ended March 31, 20212024 are not necessarily indicative of the operating results for the full year ending December 31, 20212024 or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related disclosures as of December 31, 20202023 and 20192022 and for the years then ended which are included in the 2023 Form 10-K.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
| 8 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The Company’s significant estimates used in these condensed consolidated financial statements include, but are not limited to, revenue recognition criteria, including allowances for returns and price protection, offering periods for deferred net revenue, valuation allowance of deferred income taxes, the recognition and disclosure of contingent liabilities, and stock-based compensation valuation. Certain of the Company’s Annual Reportestimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on Form 10-K filedthe Company’s estimates and may cause actual results to differ from those estimates.
Non-controlling Interests
Non-controlling interests represent the portion of net assets in consolidated subsidiaries that are not attributable, directly or indirectly, to the Company. The net assets of the shared entities are attributed to the controlling and non-controlling interests based on the terms of the governing contractual arrangements.
Recently Issued Accounting Standards
As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC. The adoption dates discussed below reflect this election.
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280). The new guidance improves reportable segment disclosures primarily through enhanced disclosures about significant segment expenses and by requiring current annual disclosures to be provided in interim periods. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The new guidance is to be applied retrospectively to all prior periods presented unless impracticable to do so. As the SECguidance requires only additional disclosure, there will be no effects of this standard on March 24, 2021 (the “2020 Form 10-K”).our financial position, results of operations or cash flows.
NOTE 2 - SummaryIn December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740). The new guidance is intended to enhance the transparency and decision usefulness of income tax disclosures. The amendments in this ASU are effective for annual periods beginning after December 15, 2024. Early adoption is permitted, and the amendments should be applied on a prospective basis with retrospective application permitted. As the guidance requires only additional disclosure, there will be no effects of this standard on our financial position, results of operations or cash flows.
Significant Accounting Policies
There have been no material changes to the significant accounting policies includeddisclosed in the audited consolidated financial statements for the year ended December 31, 2023, as included in the 20202023 Form 10-K, except as disclosed in this note.
Goodwill and Intangible Assets
Revenue Recognition
The Company has recorded goodwill in connection with its acquisition of 704Games and Le Mans and has recorded indefinite lived intangible assets in connection with its acquisition of Le Mans Esports Series Limited (the “Le Mans Joint Venture”) and KartKraft. Under Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other (“ASC 350”), goodwill and indefinite lived intangible assets are not amortized but are reviewed annually for impairment, or more frequently, if impairment indicators arise which may indicate that the Company may not be able to recover the carrying amount of the net assets of the reporting unit. The Company has determined that its reporting units align with its operating segments. See Note 10 – Segment Reporting. In evaluating goodwill for impairment, the Company may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If the Company bypasses the qualitative assessment, or if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then the Company performs a one-step quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizes a loss on impairment if the carrying value exceeds the fair value. In assessing the fair value of a reporting unit, the Company utilizes the Income Approach-Discounted Cash Flow Method as well as the Market Approach-Guideline Public Company Method.
Intangible assets that have finite lives are amortized over their estimated useful lives and are subject to the provisions of ASC 350. The Company’s intangible assets consist of the following which were acquired in connection with the acquisition of 704Games, the Le Mans Joint Venture, and KartKraft:
See Note 3 – Acquisitions for additional details regarding the acquisition of goodwill and intangible assets.
Revenue Recognition
The Company recognizes revenue under ASC 606, “Revenue from Contracts with Customers” (“ASC 606”). The Company determines revenue recognition through the following steps:
The Company currently derives revenue principally from sales of its games, and related extra content and services that can be played by customersexperienced on a variety of platforms, which includes game consoles, PCs and mobile phones and tablets.phones. The Company’s product and service offerings include, but are not limited to, the following:
| ● | |||
| ● | |||
The Company evaluates and recognizes revenue by:
| ● | identifying the contract(s) with the customer; | |
| ● | identifying the performance obligations in the contract; | |
| ● | determining the transaction price; | |
| ● | allocating the transaction price to performance obligations in the contract; and | |
| ● | recognizing revenue as each performance obligation is satisfied through the transfer of a promised good or service to a customer (i.e., “transfer of control”). |
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Online-Enabled Games
Games with Services. The Company’s sales of Games with Services are evaluated to determine whether the software license, future update rights and the online hosting are distinct and separable. Sales of Games. Sales of gamesGames with Services are generally determined to have a singularthree distinct performance obligation, asobligations: software license, future update rights, and the online hosting.
Since the Company does not currently have ansell the performance obligations on a stand-alone basis, the Company considers market conditions and other observable inputs to estimate the stand-alone selling price for each performance obligation. For Games with Services, generally 75 percent of the sales price is allocated to the software license performance obligation and recognized at a point in time when control of the license has been transferred to providethe customer. The remaining 25 percent is allocated to the future update rights or online hosting. As a result, the Company recognizes revenue equal to the full transaction price at the point in time the customer obtains control of the software license and the Company satisfies itsonline hosting performance obligation.obligations and recognized ratably as the service is provided (over the Estimated Offering Period).
Sales of Extra Content. Revenue received from sales of extradownloadable content are derived primarily from the sale of (a) digital in-game content that is downloaded byare designed to extend and enhance players’ game experience. Sales of extra content are accounted for in a manner consistent with the treatment for the Company’s console customers that enhance their gameplay experience, typically by providing car upgradesGames with Services as discussed above, depending upon whether or additional drivers and (b) virtual currencies that can be used by mobile customers to purchasenot the extra content that allows them to customize and/or enhance their gameplay. Virtual currencies may not be used for any purpose other than for these in-game purchases. Revenue related tohas offline functionality. That is, if the extra content has offline functionality, then the extra content is recognized ataccounted for similarly to Games with Services (generally determined to have three distinct performance obligations: software license, future update rights, and the point in time the Company satisfies its performance obligation, which is generally at the time the customer obtains control ofonline hosting). If the extra content either by downloadingdoes not have offline functionality, then the digital in-game content or by using the virtual currencies to purchase extra content. For console customers, extra content is either purchased in a pack or on a standalone basis.determined to have one distinct performance obligation: the online-hosted service.
Significant Judgments around Revenue associated with extra content from console customers is deferred until the content has been delivered digitally to the customer. Revenue associated with virtual currencies is deferred until the virtual currency has been used by the customer to purchase extra content, which is the point in time the customer obtains control.Arrangements
Esports. The Company recognizes sponsorship revenue associated with hosting online esports competition events over the period of time the Company satisfies its performance obligation under the contract, which is generally the concurrent time the event is held and the customer obtains control. If the Company enters into a contract with a customer to sponsor for a series of esports events, the Company allocates the transaction price between the series of events and recognizes revenue over the period of time each event is held and the Company satisfies its performance obligation.
The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations are satisfied.
During the three months ended March 31, 2021 and 2020, there was no revenue recognized from performance obligations satisfied (or partially satisfied) in previous periods.
Identifying Performance Obligationsperformance obligations.
Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, (i.e., the customer can benefit from the goods or services either on its own or together with other resources that are readily available), and are distinct in the context of the contract (i.e., it is separately identifiable from other goods or services in the contract). To the extent a contract includes multiple promises, the Company must apply judgment to determine whether those promises are separate and distinct performance obligations. If these criteria are not met, the promises are accounted for as a combined performance obligation.
Determining the Transaction Pricetransaction price.
The transaction price is determined based on the consideration that the Company will be entitled to receive in exchange for transferring its goods and services to the customer. Determining the transaction price often requires significant judgment, based on an assessment of contractual terms and business practices. It further includes review of variable consideration such as discounts, sales returns, price protection, and rebates, which is estimated at the time of the transaction. See below for additional information regardingIn addition, the Company’stransaction price does not include an estimate of the variable consideration related to sales-based royalties. Sales-based royalties are recognized as the sales returns and price protection reserves.occur.
Allocating the Transaction Pricetransaction price.
Allocating the transaction price requires that the Company determine an estimate of the relative stand-alone selling price for each distinct performance obligation.
Principal Versus Agent Considerations
The Company evaluates sales to end customers of its full games and related content via third-party storefronts, including digital storefronts, such as Microsoft’s Xbox Store, Sony’s PlayStation Store, Apple’s App Store, and Google’s Play Store, to determine whether or not Determining the relative stand-alone selling price is inherently subjective, especially in situations where the Company is acting asdoes not sell the principal or agentperformance obligation on a stand-alone basis (which occurs in the salemajority of transactions). In those situations, the Company determines the relative stand-alone selling price based on various observable inputs using all information that is reasonably available. Examples of observable inputs and information include historical internal pricing data and pricing data from competitors, to the end customer. Key indicators thatextent the Company evaluates in determining gross versus net treatment include, but are not limited to, the following:
Based on an evaluation of the above indicators, the Company determined that, apart from contracts with customers where revenuedata is generated via the Apple App Store or Google Play Store, the third party is considered the principal and, as a result, the Company reports revenue net of the fees retained by the storefront. For contracts with customers where revenue is generated via the Apple App Store or Google Play Store, the Company has determined that it is the principal and, as a result, reports revenue on a gross basis, with mobile platform fees included within cost of revenues
Sales Allowance, Sales Returns and Price Protection Reserves
Sales returns and price protection are considered variable consideration under ASC 606.available. The Company reduces revenue for estimated future returns and price protection which may occur with distributors and retailers (“channel partners”). See Note 2 – Summary of Significant Accounting Policies – Accounts Receivable in the 2020 Form 10-K for additional details. Price protection represents the Company’s practice to provide channel partners with a credit allowance to lower their wholesale price on a particular game unit that they have not resold to customers. The amount of the price protection for permanent markdowns is the difference between the original wholesale price and the new reduced wholesale price. Credits are also given for short-term promotions that temporarily reduce the wholesale price. When evaluating the adequacy of sales returns and price protection reserves, the Company analyzes the following: historical credit allowances, current sell-through of channel partners’ inventoryresults of the Company’s products,analysis resulted in a specific percentage of the transaction price being allocated to each performance obligation.
Determining the Estimated Offering Period. The offering period is the period in which the Company offers to provide the future update rights and/or online hosting for the game and related extra content sold. Because the offering period is not an explicitly defined period, the Company must make an estimate of the offering period for the service-related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, the Company considers the average period of time customers are online when estimating the offering period. The Company recognizes revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. Revenue for service-related performance obligations for digitally-distributed games and extra content is recognized over an estimated seven-month period beginning in the month of sale.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Deferred Revenue
The Company’s deferred revenue, or contract liability, is classified as current trends in retail and the video game industry, changes in customer demand, acceptance of products,is included within accrued expenses and other related factors. In addition,current liabilities on the Company monitorsunaudited condensed consolidated balance sheets (Also refer Note 4 – Accrued Expenses and Other Current Liabilities). Revenue collected in advance of the volume of sales to itsevent is recorded as deferred revenue until the event occurs. Development and coding revenues are also recorded as deferred revenue until the Company’s performance obligation is performed. Furthermore, deferred revenue includes payment advances from the Company’s channel partners and their inventories, as substantial overstockingsales transactions including future update rights and online hosting performance obligations, which are subject to deferral and recognized over the Estimated Offering Period.
Revenue recognized in the distribution channel could resultperiod from amounts included in high returns or higher price protection in subsequent periods. The Company recognized sales allowances and price protection reservescontract liability at the beginning of the period was approximately $0.3 million for each of the three months ended March 31, 20212024 and 2020 in the amount of $118,340 and $97,828 respectively, which were included as reductions of revenues.2023.
The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Upon the exercise of an award, the Company issues new shares of common stock out of its authorized shares.
Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common and dilutive common-equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of shares of options and warrants, if not anti-dilutive.
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| Stock options | 382,518 | n/a | ||||||
| 382,518 | - | |||||||
SCHEDULE OF CALCULATION WEIGHTED AVERAGE DILUTIVE COMMON SHARES
| 2024 | 2023 | |||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Stock options | 97,953 | 47,967 | ||||||
| Warrants | 33,574 | 33,574 | ||||||
| Dilutive securities | 131,527 | 81,541 | ||||||
Recently Issued Accounting Standards
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), which applies a right-of-use model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. ASU 2016-02 requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing U.S. GAAP requirements. Classification depends on the same five criteria used by lessees under U.S. GAAP plus certain additional factors. The new leases standard addresses other considerations including identification of a lease, separating lease and non-lease components of a contract, sale and leaseback transactions, modifications, combining contracts, reassessment of the lease term, and remeasurement of lease payments. Early adoption is permitted. This update is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and disclosures.
In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” (“ASU 2019-11”). ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments update guidance on reporting credit losses for financial assets. These amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in ASU 2019-11 are effective for annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. All entities may adopt the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and disclosures.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This update is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and disclosures.
In January 2020, the FASB issued ASU No. 2020-01—Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force) (“ASU 2020-01”). The amendments in ASU 2020-01 clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. These amendments improve current U.S. GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. ASU 2020-01 is effective for the Company on January 1, 2022. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and disclosures.
Income Taxes
On January 8, 2021, Motorsport Gaming US LLC converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Motorsport Games Inc.
The Company is subject to federal and state income taxes in the United States. The Company files income tax returns in the jurisdictions in which nexus threshold requirements are met.
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included or excluded in the financial statements or tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse. ASC 740 requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized. After the performance of such reviews as of March 31, 2021, management determined that uncertainty exists with respect to the future realization of its deferred tax assets and has, therefore, established a full valuation allowance as of such date.
The Company utilizes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The Company’s policy is to classify assessments, if any, for tax-related interest as interest expense and penalties as general and administrative expenses in its condensed consolidated statements of operations.
NOTE 3 – ACQUISITIONS
Le Mans
On January 25, 2021, the Company, entered into an Amendment (the “Amendment”) to the Le Mans Esports Series Ltd Joint Venture Agreement with Automobile Club de l’Ouest, a company registered in France (“ACO”). Pursuant to the Amendment, the Company increased its ownership share in the Le Mans Joint Venture, from 45% to 51%, with the Company now holding a majority ownership share and ACO holding a 49% minority ownership share in the Le Mans Joint Venture.
Pursuant to the Amendment, the parties expanded the primary objective and purpose of the Le Mans Joint Venture to include the creation, development, and publishing of video games based on the FIA World Endurance Championship and the 24 Hours of Le Mans, in addition to the operation, promotion, and running of an electronic sports events business replicating races of the FIA World Endurance Championship and the 24 Hours of Le Mans on an electronic gaming platform.
Pursuant to the Amendment, if the board of directors of the Le Mans Joint Venture determines that the Le Mans Joint Venture’s working capital requirements for the development of future games exceeds its resources, the Company will be obligated to contribute such additional funding to the Le Mans Joint Venture as a loan (which loan shall bear no interest). Any such loan is required to be repaid when additional funding is no longer required by the Le Mans Joint Venture, as determined by its board of directors, with such repayment to occur prior to the Le Mans Joint Venture’s distribution of any of its profits to the shareholders of the Le Mans Joint Venture.
Further, pursuant to the Amendment, the Company has a right to priority distribution of profits to recoup the additional funding and royalty payments that serve as the consideration for the Gaming License (as defined below).
On January 25, 2021, simultaneously with the execution of the Amendment, the Le Mans Joint Venture and ACO entered into a license agreement pursuant to which the Le Mans Joint Venture was granted an exclusive license to use certain licensed intellectual property described in such license agreement for motorsports and/or racing video gaming products related to, themed as, or containing the FIA World Endurance Championship and the 24 Hours of Le Mans (including the Le Mans Joint Venture’s esports web platform) (the “Gaming License”).
The Gaming License’s term is through January 25, 2031. The term will automatically renew for an additional ten-year term. In exchange for the Gaming License, the Company agreed to fund up to €8,000,000 as needed by the Le Mans Joint Venture for development of the video game products, to be contributed on an as-needed basis during the term of the Gaming License. Additionally, the Company is obligated to pay ACO an annual royalty payment beginning from the time of the launch of the first video game product and continuing each anniversary thereof for the term of the license.
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On January 25, 2021, the Le Mans Joint Venture (a 51% controlled subsidiary of the Company) and ACO entered into a license agreement pursuant to which the Le Mans Joint Venture was granted an exclusive license to use certain licensed intellectual property described in such license agreement for motorsports and/or racing esports events related to, themed as, or containing the FIA World Endurance Championship and the 24 Hours of Le Mans (including the Le Mans Joint Venture’s esports web platform) (the “Esports License”).
The Esports License’s term is through January 25, 2031. The term of the Esports License will automatically renew for an additional ten-year term. The Esports License was granted to the Le Mans Joint Venture on a royalty-free basis in consideration of the investments already made into the Le Mans Joint Venture by the Company and ACO.
On January 25, 2021, the Le Mans Joint Venture and ACO entered into another esports license agreement pursuant to which the Le Mans Joint Venture was granted an exclusive license to use certain licensed intellectual property described in such license agreement to run, promote, and exploit the 24 Hours of Le Mans Virtual event (the “24 Hours of Le Mans Virtual License”).
The 24 Hours of Le Mans Virtual License’s term is through January 25, 2031. The term will automatically renew for an additional ten-year term. The 24 Hours of Le Mans Virtual License was granted to the Le Mans Joint Venture on a royalty-free basis in consideration of the investments already made into the Le Mans Joint Venture by the Company and ACO.
The following key assumptions were utilized by the Company: (i) revenue projections; (ii) risk-free rate, which was estimated based on the rate of treasury securities with the same term as the mid-period of the projection periods; and (iii) revenue volatility, which was estimated based on an analysis of historical asset volatilities for similar companies and adjusted for operating leverage to estimate revenue volatility.
The purchase price allocation was completed subsequent to the acquisition date. The aggregate purchase price was allocated to the assets acquired and liabilities assumed as follows:
| As of January 25, 2021 | ||||||||||||||
| Valuation Method | Discount Rate | GBP | USD | |||||||||||
| Cash | £ | 257,232 | $ | 350,626 | ||||||||||
| Other assets | 858 | 1,169 | ||||||||||||
| Gaming license | Excess earning method | 30.0 | % | 843,682 | 1,150,000 | |||||||||
| Esport licenses | Excess earning method | 30.0 | % | 1,217,836 | 1,660,000 | |||||||||
| Goodwill | Cost-to-recreate | 30.0 | % | 47,848 | 65,221 | |||||||||
| Accounts payable | (5,147 | ) | (7,016 | ) | ||||||||||
| Non- controlling interest | Busines Enterprise- Income | 30.0 | % | (1,157,531 | ) | (1,573,624 | ) | |||||||
| Total Fair value of Member’s equity | £ | 1,204,778 | $ | 1,646,376 | ||||||||||
| Fair value of the previously held interest | £ | 1,062,999 | $ | 1,449,000 | ||||||||||
| Fair value of the consideration | £ | 141,779 | $ | 197,376 | ||||||||||
Results of operations of the Le Mans Joint Venture for the period from January 25, 2021 to March 31, 2021 included $81,918 in operating expenses.
KartKraft
On March 18, 2021, the Company acquired all assets comprising the KartKraft computer video game from Black Delta Holdings PTY, Black Delta Trading Pty Ltd and Black Delta IP Pty Ltd. (collectively, “Black Delta”). The purchase price for the assets was $1,000,000, of which $750,000 was paid at closing and $250,000 was paid in escrow and will be paid on the six-month anniversary of closing. Through this acquisition, the Company plans to enter the simulated kart-racing space. Motorsport Games has founded a new company, Motorsport Games AustraliaInc. and Subsidiaries
Notes to support Black Delta’s development team.Unaudited Condensed Consolidated Financial Statements
The purchase price allocation was completed subsequent to the acquisition date. The aggregate purchase price was allocated to the assets acquired and liabilities assumed as follows:
| Intangible Asset | Valuation Method | Discount Rate | Amount | |||||||
| KartKraft Trade Name | Relief-from-Royalty | 27.5 | % | $ | 108,000 | |||||
| Technology | Replacement Cost | 25.0 | % | 833,000 | ||||||
| Employment & Non-Compete Agreements | With & Without Method | 25.0 | % | 59,000 | ||||||
| Total Consideration | $ | 1,000,000 | ||||||||
Results of operations of KartKraft for the period from March 18, 2021 to March 31, 2021 included $11,877 in operating expenses.
Both Le Mans and KartKraft acquisitions have been recorded in accordance with ASC 805, Business Combinations. The transactions were taxable for income tax purposes and all assets and liabilities have been recorded at fair value for both book and income tax purposes. Therefore, deferred taxes have been recorded.
NOTE 4 - Intangible Assets3 – INTANGIBLE ASSETS
Licensing AgreementAgreements
On May 29, 2020,In March 2019, the Company 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 the Company’s ownership interest in this joint venture, which was increased to 51% from 45% in January 2021, 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 (the “WEC”), which the 24 Hours of Le Mans race is a licensing agreementpart of, for a ten-year period. In addition, through this joint venture with ACO, the Company has the right to create and organize esports leagues and events for the Le Mans Esports Series. The Company acquired a video gaming license (the “Le Mans Gaming License”) and an esports license related to its ownership interest in this joint venture with the BARC (TOCA) Limited (“BARC”),ACO.
In 2021, the exclusive promoterCompany also acquired intangible assets comprising the KartKraft computer video game as well as software, tradename and non-compete agreements related to its acquisition of 100% of the BTCC. Pursuant to this agreement,share capital of Studio397 B.V.
In October 2023, the Company was granted an exclusive licensesold its NASCAR licensed rights under that certain Second Amended and Restated Distribution and License Agreement with NASCAR Team Properties (the “NASCAR License”) to use certain licensed intellectual propertyiRacing.com Motorsport Simulations, LLC (“iRacing”). As consideration for motorsports and/or racing video gaming productssuch sale and assignment of the NASCAR License and all rights related to, themed as, or containing the BTCC, on consoles and mobile applications, esports series and esports events (including the Company’s esports platform). In exchange for the license, this agreement requiresthereto (the “Assignment”), iRacing paid the Company $5.0 million at closing of the transactions contemplated by the Assignment. In addition, iRacing is obligated under the Assignment to pay BARCthe Company an initial fee in two installments,additional (i) $0.5 million payable on the first of which was due on June 5, 2020date that is 6 months following such closing and the second installment(ii) $0.5 million on the earlier of 60 days aftersuch date when all NASCAR games have been removed by the releaseCompany from the websites, smart phone applications or other digital portal engaging in sales or providing access to the NASCAR games, including without limitation Xbox, PlayStation and Switch and all other domain names, web addresses and websites used by the Company in the its business (collectively, the “Business Platforms”), or December 31, 2024, provided that all NASCAR games have been removed by the Company from the Business Platforms, and in any event, no earlier than such date that is one year following the closing of the products contemplated by the license or May 29, 2022. Following the initial fee, this agreement also requires the CompanyAssignment.
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Motorsport Games Inc. and Subsidiaries
Notes to pay royalties, including certain minimum annual guarantees, on an ongoing basis to BARC and to meet certain product distribution, marketing and related milestones, subject to termination penalties. In connection with this licensing agreement, the Company acquired the BTCC license withUnaudited Condensed Consolidated Financial Statements
Intangible Assets
The following is a costsummary of $891,999. The Company began recognizing amortization expense during the year ended December 31, 2020 over the six-and-a-half year useful life,intangible assets as the license terminates on December 31, 2026. As of March 31, 2021, the Company had a remaining liability in connection with this licensing agreement of $822,184, which is included in other non-current liabilities on the condensed consolidated balance sheets.2024:
SCHEDULE OF INTANGIBLE ASSETS
| Licensing Agreements (Finite) | Licensing Agreements (Indefinite) | Software Licenses (Finite) | Distribution Contracts (Finite) | Trade Names (Indefinite) | Non- Compete Agreements (Finite) | Accumulated Amortization | Total | |||||||||||||||||||||||||
| Balance as of January 1, 2024 | $ | 906,166 | $ | 1,495,515 | $ | 8,115,937 | $ | 560,000 | $ | 223,194 | $ | 180,266 | $ | (5,685,271 | ) | $ | 5,795,807 | |||||||||||||||
| Amortization expense | - | - | - | - | - | - | (528,222 | ) | (528,222 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustments | - | 33,925 | 69,407 | - | (13,821 | ) | (3,400 | ) | (4,293 | ) | 81,818 | |||||||||||||||||||||
| Balance as of March 31, 2024 | $ | 906,166 | $ | 1,529,440 | $ | 8,185,344 | $ | 560,000 | $ | 209,373 | $ | 176,866 | $ | (6,217,786 | ) | $ | 5,349,403 | |||||||||||||||
| Weighted average remaining amortization period at March 31, 2024 | 0.8 | - | 3.2 | - | - | - | - | |||||||||||||||||||||||||
In connection with the acquisition of the Le Mans Joint Venture, the Company acquired the following intangible assets (See Note 3 – Acquisitions for additional details):
| Intangible Asset | Useful Life | Cost | ||||
| Gaming license | Indefinite | $ | 1,150,000 | |||
| Esport licenses | Indefinite | 1,660,000 | ||||
| Total | $ | 2,810,000 | ||||
In connection with the acquisition of KartKraft, the Company acquired the following intangible assets (See Note 3 – Acquisitions for additional details):
| Intangible Asset | Useful Life | Cost | ||||
| KartKraft Trade Name | Indefinite | $ | 108,000 | |||
| Software | 6 Years | 833,000 | ||||
| Employment & Non-Compete | 3 Years | 59,000 | ||||
| Total | $ | 1,000,000 | ||||
Intangible assets consist of the following:
| Licensing Agreements | Software | Distribution Contracts | Non-Compete Agreement | Trade Name (Indefinite) | Domain Name (Indefinite) | Accumulated Amortization | Total | |||||||||||||||||||||||||
| Balance as of January 1, 2019 | $ | 3,620,000 | $ | 2,340,000 | $ | 560,000 | $ | - | $ | - | $ | - | $ | (382,594 | ) | $ | 6,137,406 | |||||||||||||||
| Amortization expense | - | - | - | - | - | - | (810,250 | ) | (810,250 | ) | ||||||||||||||||||||||
| Balance as of December 31, 2019 | 3,620,000 | 2,340,000 | 560,000 | - | - | - | (1,192,844 | ) | 5,327,156 | |||||||||||||||||||||||
| Purchase of intangible assets | 891,999 | - | - | - | - | - | - | 891,999 | ||||||||||||||||||||||||
| Amortization expense | - | - | - | - | - | - | (650,703 | ) | (650,703 | ) | ||||||||||||||||||||||
| Balance as of December 31, 2020 | 4,511,999 | 2,340,000 | 560,000 | - | - | - | (1,843,547 | ) | 5,568,452 | |||||||||||||||||||||||
| Purchase of intangible assets | 2,839,947 | 832,754 | 107,968 | 58,983 | 26,000 | 3,865,652 | ||||||||||||||||||||||||||
| Amortization expense | (110,297 | ) | (110,297 | ) | ||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | 7,351,946 | $ | 3,172,754 | $ | 560,000 | $ | 107,968 | $ | 58,983 | $ | 26,000 | $ | (1,953,844 | ) | $ | 9,323,807 | |||||||||||||||
Accumulated amortization of intangible assets consists of the following:
SCHEDULE OF ACCUMULATED AMORTIZATION OF INTANGIBLE ASSETS
| Licensing Agreements (Finite) | Software Licenses (Finite) | Distribution Contracts (Finite) | Non- Compete Agreements (Finite) | Accumulated Amortization | ||||||||||||||||
| Balance as of January 1, 2024 | $ | 298,538 | $ | 4,646,467 | $ | 560,000 | $ | 180,266 | $ | 5,685,271 | ||||||||||
| Amortization expense | 151,500 | 376,722 | - | - | 528,222 | |||||||||||||||
| Foreign currency translation adjustment | - | 7,693 | - | (3,400 | ) | 4,293 | ||||||||||||||
| Balance as of March 31, 2024 | $ | 450,038 | $ | 5,030,882 | $ | 560,000 | $ | 176,866 | $ | 6,217,786 | ||||||||||
Estimated aggregate amortization expense of intangible assets for the next five years and thereafter is as follows:
SCHEDULE OF ESTIMATED AGGREGATE AMORTIZATION EXPENSE OF INTANGIBLE ASSETS
| Licensing Agreements | Software | Distribution Contracts | Non-Compete Agreement | Accumulated Amortization | ||||||||||||||||
| Balance as of January 1, 2019 | $ | 84,844 | $ | 87,750 | $ | 210,000 | $ | - | $ | 382,594 | ||||||||||
| Amortization expense | 226,250 | 234,000 | 350,000 | 810,250 | ||||||||||||||||
| Balance as of December 31, 2019 | 311,094 | 321,750 | 560,000 | - | 1,192,844 | |||||||||||||||
| Amortization expense | 306,302 | 344,401 | - | 650,703 | ||||||||||||||||
| Balance as of December 31, 2020 | 617,396 | 666,151 | 560,000 | - | 1,843,547 | |||||||||||||||
| Amortization expense | 90,869 | 18,794 | - | 634 | 110,297 | |||||||||||||||
| Balance as of March 31, 2021 | $ | 708,265 | $ | 684,945 | $ | 560,000 | $ | 634 | $ | 1,953,844 | ||||||||||
| For the Years Ended December 31, | Total | ||||
| 2024 (remaining period) | $ | 1,554,401 | |||
| 2025 | 889,025 | ||||
| 2026 | 887,396 | ||||
| 2027 | 122,291 | ||||
| 2028 | 53,130 | ||||
| Thereafter | 104,347 | ||||
| Estimated aggregate amortization expense | $ | 3,610,590 | |||
Amortization expense related to intangible assets was $110,297approximately $0.5 million and $115,063$0.4 million for the three months ended March 31, 20212024 and 2020,2023, respectively.
| 13 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 54 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
SCHEDULE OF ACCRUED EXPENSES
| March 31, | December 31, | March 31, | December 31, | |||||||||||||
| 2021 | 2020 | 2024 | 2023 | |||||||||||||
| Accrued royalties | $ | 492,546 | $ | 1,485,261 | $ | 275,008 | $ | 217,868 | ||||||||
| Accrued professional fees | 26,010 | 129,291 | ||||||||||||||
| Accrued consulting fees | 832,666 | 398,526 | ||||||||||||||
| Payable to Le Mans joint venture | - | 234,667 | ||||||||||||||
| Accrued professional and consulting fees | 792,327 | 110,008 | ||||||||||||||
| Accrued development costs | 532,784 | 196,845 | 36,919 | 32,214 | ||||||||||||
| Accrued hosting fees | 582 | 551 | ||||||||||||||
| Accrued rent | 40,787 | 40,787 | ||||||||||||||
| Accrued taxes | 45,934 | 54,880 | 50,000 | 40,000 | ||||||||||||
| Accrued payroll | 397,884 | 778,918 | 334,834 | 500,522 | ||||||||||||
| Accrued director payment | 30,250 | - | ||||||||||||||
| Deferred revenue | 458,342 | 270,845 | ||||||||||||||
| Loss contingency reserves | 419,881 | 545,920 | ||||||||||||||
| Accrued other | 36,967 | 35,277 | 112,682 | 173,938 | ||||||||||||
| Total | $ | 2,436,410 | $ | 3,355,003 | $ | 2,479,993 | $ | 1,891,315 | ||||||||
NOTE 65 – STOCKHOLDERS’ EQUITYRELATED PARTY LOANS
Corporate ConversionThe Company has a $ million line of credit with its majority shareholder, Driven Lifestyle (the “$ million Line of Credit”), which bears interest at an annual rate of %, the availability of which is dependent on Driven Lifestyle’s available liquidity. The $ million Line of Credit does not have a stated maturity date and is payable upon demand at any time at the sole and absolute discretion of Driven Lifestyle, and any principal and accrued interest owed will be accelerated and become immediately payable in the event the Company consummates certain corporate events, such as a capital reorganization. The Company may repay the $ million Line of Credit in whole or in part at any time or from time to time without penalty or charge.
On JanuarySeptember 8, 2021, Motorsport Gaming US LLC converted2022, the Company entered into a Delaware corporationsupport agreement with Driven Lifestyle (the “Support Agreement”) pursuant to a statutory conversion and changed its namewhich Driven Lifestyle issued approximately $3 million (the “September 2022 Cash Advance”) to Motorsport Games Inc.
Effective asthe Company in accordance with the $12 million Line of January 8, 2021, 100%Credit. Additionally, the Support Agreement modified the $12 million Line of Credit such that, among other things, until June 30, 2024, Driven Lifestyle would not demand repayment of the membership interests held bySeptember 2022 Cash Advance or other advances under the sole member$12 million Line of Motorsport Gaming US LLC, Motorsport Network, converted intoCredit, unless certain events occurred, as prescribed in the Support Agreement, such as the completion of a new financing arrangement or the Company generates positive cash flows from operations, among others. All principal and accrued interest owed on the $12 million Line of Credit were exchanged for equity following the completion of two debt-for-equity exchange agreements with Driven Lifestyle on January 30, 2023 and February 1, 2023, relieving the Company of approximately $3.9 million in owed principal and unpaid interest in exchange for an aggregate of (i) 7,000,000 shares of Class A common stock of Motorsport Games Inc. and (ii) 7,000,000 shares of Class B common stock of Motorsport Games Inc., representing all of the outstanding shares of Class A and Class B common stock immediately following the corporate conversion. Motorsport Network is the only holder of shares of the Company’s Class B common stock and does not have any transfer, conversion, registration or economic rights with respect to such shares of Class B common stock.
Upon effecting the corporate conversion on January 8, 2021, Motorsport Games Inc. now holds all the property and assets of Motorsport Gaming US LLC, and all of the debts and obligations of Motorsport Gaming US LLC were assumed by Motorsport Games Inc. by operation of law upon such corporate conversion.
Effective as of January 8, 2021, the members of the board of directors of Motorsport Gaming US LLC became the members of Motorsport Games Inc.’s board of directors, and the officers of Motorsport Gaming US LLC became the officers of Motorsport Games Inc.
Initial Public Offering
On January 15, 2021, the Company completed its initial public offering of 3,450,000 shares of its Class A common stock at a price to the public of $20.00 per share, which includes the exercise in full by the underwriters of their option to purchase from the Company an additional 450,000 shares of the Company’s Class A common stock. The net proceeds
As of March 31, 2024, the $12 million Line of Credit remains in place. However, the Company believes that there is a substantial likelihood that Driven Lifestyle will not fulfill any future borrowing requests, and therefore does not view the $12 million Line of Credit as a viable source for future liquidity needs.
As of March 31, 2024 and December 31, 2023, there was no balance due to Driven Lifestyle under the $12 million Line of Credit.
NOTE 6 – RELATED PARTY TRANSACTIONS
In addition to the $12 million Line of Credit, the Company fromhad other related party receivables and payables outstanding as of March 31, 2024 and December 31, 2023. Specifically, the initial public offering wereCompany owed approximately $63.1$0.1 million after deducting underwriting discountsto its related parties as a related party payable as of March 31, 2024 and commissions and offering expenses payable by the Company.
Equity Grants – Common Stock
December 31, 2023. During each of the three months ended March 31, 2021,2024 and 2023, approximately $0.1 million was paid to related parties in conjunction withsettlement of related party payables. The Company’s corporate headquarters, located in Miami, Florida and consisting of approximately 2,000 square feet of office space, are owned by Driven Lifestyle and are used rent-free by the Company’s initial public offering, the Company granted an aggregate of 330,633 shares of Class A common stock to its Chief Executive Officer, a consultant, and three of its directors with an aggregate grant date fair value of $6,612,660. The grant date fair value of these shares was recognized as stock-based compensation expense on the date of grant as the awards were fully vested on such date.Company.
| 14 |
Equity Grants – Stock OptionsMotorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
DuringBackoffice Services Agreement
On March 23, 2023 (but effective as of January 1, 2023), the Company entered into a new Backoffice Services Agreement with Driven Lifestyle (the “Backoffice Services Agreement”) following the expiration of the Company’s prior services agreement with Driven Lifestyle. Pursuant to the Backoffice Services Agreement, Driven Lifestyle will provide accounting, payroll and benefits, human resources and other back-office services on a full-time basis to support the Company’s business functions. The term of the Backoffice Services Agreement is 12 months from the effective date. The term will automatically renew for successive 12-month terms unless either party provides written notice of nonrenewal at least 30 days prior to the end of the then current term. The Backoffice Services Agreement may be terminated by either party at any time with 60 days prior notice. Pursuant to the Backoffice Services Agreement, the Company is required to pay a monthly fee to Driven Lifestyle of $17,500. For the three months ended March 31, 2021, 2024, the Company incurred $52,500 in conjunctionfees in connection with the Company’s initial public offering, the Company issued its Chief Executive Officer an immediately vested ten-year stock option to purchase 203,333 restricted shares of the Company’s Class A common stock at an exercise price of $20.00 per share. The option had a grant date fair value of $2,189,896 which was recognized on the grant date.
During the three months ended March 31, 2021, in conjunction with the Company’s initial public offering, the Company granted ten-year stock options to purchase an aggregate of 167,477 shares of Class A common stock (145,438 shares at an exercise price of $20.00 and 22,039 shares at an exercise price of $23.90) to various employees of the Company. The options vest ratably over three years from the date of grant and had an aggregate grant date fair value of $2,043,133Backoffice Services Agreement, which is being recognized ratably overpresented in general and administrative expenses within the vesting period. Approximately $203,000condensed consolidated statements of compensation expense was recognized during the three months ended March 31, 2021.operations.
During the three months ended March 31, 2021, in conjunction with the Company’s initial public offering, the Company granted ten-year stock options to purchase an aggregate of 15,096 shares of Class A common stock at an exercise price of $20.00 to the Company’s four directors. The options vest as follows: (i) an aggregate of 11,250 shares subject to the options vest on the one-year grant date anniversary, and (ii) 3,846 shares subject to the options vest ratably over three years from the date of grant. The options had an aggregate grant date fair value of $169,377 which is being recognized ratably over the vesting periods, as applicable. Approximately $35,000 of compensation expense was recognized during the three months ended March 31, 2021.
During the three months ended March 31, 2021, the Company granted a ten-year stock option to purchase 5,114 shares of Class A common stock at an exercise price of $23.90 to the Company’s Head of Music Strategy. The option vests as follows: (i) 209 shares subject to the option vest immediately, (ii) 1,767 shares subject to the option vest on the one-year grant date anniversary, and (iii) 3,138 shares subject to the option vest ratably upon each of five confirmations of pre-approved artist introductions. The option grant date fair value of $140,000 is being recognized pursuant to the vesting terms. Approximately $36,000 of compensation expense was recognized during the three months ended March 31, 2021.
Stock-based Compensation
For three months ended March 31, 2021 and 2020, the Company recognized aggregate stock-based compensation expense of $9,076,916 and $0, respectively, related to the issuances of stock options and Class A common stock. As of March 31, 2021, there was $2,158,949 of unrecognized stock-based compensation expense which will be recognized over approximately 2.5 years.
NOTE 7 – RELATED PARTY TRANSACTIONSSTOCKHOLDERS’ EQUITY
Class A and B Common Stock
As of March 31, 2024, the Company had shares of Class A common stock and shares of Class B common stock outstanding. Holders of Class A and Class B common stock are entitled to one-vote and ten-votes, respectively, for each share held on all matters submitted to a vote of stockholders.
704Games Warrants
As of March 31, 2024 and December 31, 2023, 704Games LLC (“704Games”), a wholly-owned subsidiary of Motorsport Games Inc., has outstanding 10-year warrants to purchase 4,000 shares of common stock at an exercise price of $93.03 per share that were issued on October 2, 2015. As of March 31, 2024, the warrants had intrinsic value and a remaining life of 15 months.
Registered Direct Offerings and the Wainwright Warrants
On February 1, February 2 and February 3, 2023, the Company completed three separate registered direct offerings (the “Offerings”) priced at-market under NASDAQ rules with H.C. Wainwright & Co., LLC acting as the exclusive placement agent for each transaction (the “Agent”). In connection with the Offerings, the Company paid the Agent a transaction fee equal to 7.0% of the aggregate gross proceeds from each offering, non-accountable expenses and certain other closing fees. In addition, the Company granted warrants to the Agent (or its designees) to purchase shares of the Company’s Class A common stock equal to % of the aggregate number of shares of Class A common stock placed in each Offering (collectively, the “Wainwright Warrants”). The Offerings are summarized as follows:
SCHEDULE OF REGISTERED DIRECT OFFERINGS AND WAINWRIGHT WARRANTS
| Offering Date | Gross Proceeds | Net Proceeds | Warrants Issued | Warrant Strike Price | Warrant Term | |||||||||||||||
| Registered direct offering 1 | February 1, 2023 | 183,020 | $ 3.9 million | $ 3.6 million | 10,981 | $ | 26.75 | 5 years | ||||||||||||
| Registered direct offering 2 | February 2, 2023 | 144,366 | $ 3.4 million | $ 3.1 million | 8,662 | $ | 29.375 | 5 years | ||||||||||||
| Registered direct offering 3 | February 3, 2023 | 232,188 | $ 4.0 million | $ 3.7 million | 13,931 | $ | 21.738 | 5 years | ||||||||||||
As of March 31, 2024, the Wainwright Warrants were assessed to have a fair value of approximately $16,000 and deemed to be liability-classified awards, which were recorded within other non-current liabilities on the unaudited condensed consolidated balance sheets.
| 15 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The Company utilized a Black-Scholes Option Pricing Model to determine the fair value of the Wainwright Warrants. The Black-Scholes model requires management to make a number of key assumptions, including expected volatility, expected term, and risk-free interest rate. The risk-free interest rate is estimated using the rate of return on U.S. treasury notes with a life that approximates the expected term. The expected term assumption used in the Black-Scholes model represents the period of time that the Wainwright Warrants are expected to be outstanding and is estimated using the contractual term of the Wainwright Warrants.
Stock Purchase Commitment Agreement
During the three months ended March 31, 2021, regarding the promissory note with Motorsport Network (the “Promissory Note”) that is included within due to related parties on the condensed consolidated balance sheets,2023, the Company repaid $11,800,000issued shares of the Promissory NoteCompany’s Class A common stock, with a fair value of $657,850, to Alumni Capital LP (“Alumni Capital”). The shares were sold pursuant to a stock purchase commitment agreement, that was entered into on December 9, 2022 with Alumni Capital (the “Alumni Purchase Agreement”). Under the Alumni Purchase Agreement, the Company may sell Alumni Capital up to $ of shares of the Company’s Class A common stock, subject to certain restrictions, through the commitment period expiring December 31, 2023. The Alumni Purchase Agreement expired on December 31, 2023.
On January 12, 2021, in connection with its initial public offering, Motorsport Games established the Motorsport Games Inc. 2021 Equity Incentive Plan (the “MSGM 2021 Stock Plan”). The MSGM 2021 Stock Plan provides for the grant of options, stock appreciation rights, restricted stock awards, performance share awards and drew down an additional $1,906,248, such that the balance duerestricted stock unit awards, and initially authorized shares of Class A common stock to Motorsport Network was $959,784 asbe available for issuance. As of March 31, 2021. See Note 11 – Subsequent Events – Repayment2024, shares of Promissory NoteClass A common stock were available for additional details.issuance under the MSGM 2021 Stock Plan. Shares issued in connection with awards made under the MSGM 2021 Stock Plan are generally issued as new issuances of Class A common stock.
The Company issued stock options under its MSGM 2021 Stock Plan during the three months ended March 31, 2024 and 2023. The majority of the options issued under the MSGM 2021 Stock Plan have time-based vesting schedules, typically vesting ratably over a three-year period. Certain stock option awards differed from this vesting schedule, as well as those made to the Company’s current and former directors that vest on the one-year anniversary of award issuance. All stock options issued under the MSGM 2021 Stock Plan expire years from the grant date.
On January 26, 2024, the compensation committee of the board of directors of the Company approved and authorized the grant of an option award to purchase shares of the Company’s Class A common stock to Stephen Hood, the Chief Executive Officer and President of the Company, pursuant to the MSGM 2021 Stock Plan. shares underlying the option award vested immediately upon grant and the remaining shares underlying the option award will vest in three equal quarterly installments beginning on April 26, 2024.
SCHEDULE OF STOCK-BASED COMPENSATION OPTIONS ACTIVITY
| Number of Options | ||||
| Awards outstanding under the MSGM 2021 Stock Plan as of January 1, 2024 (net of forfeitures) | 53,371 | |||
| Granted | 46,000 | |||
| Forfeited, cancelled or expired | (1,418 | ) | ||
| Awards outstanding under the MSGM 2021 Stock Plan as of March 31, 2024 (net of forfeitures) | 97,953 | |||
| 16 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Stock-Based Compensation
SCHEDULE OF STOCK BASED COMPENSATION EXPENSE
| 2024 | 2023 | |||||||
| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| General and Administrative | $ | 69,731 | $ | 19,426 | ||||
| Sales and Marketing | 1,347 | 239,717 | ||||||
| Development | (2,887 | ) | (9,910 | ) | ||||
| Stock-based compensation expense | $ | 68,191 | $ | 249,233 | ||||
As of March 31, 2024, there was approximately $ million of unrecognized stock-based compensation expense which will be recognized over approximately years.
NOTE 89 – CommitmentsCOMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in various routine legal proceedings incidental to the ordinary course of its business. The Company believes that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows, except as otherwise disclosed below. In light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and Contingenciesthe level of the Company’s income for that particular period. Litigation or other legal proceedings, with or without merit, is unpredictable and generally expensive and time consuming and, even if resolved in our favor, is likely to divert significant resources from our core business, including distracting our management personnel from their normal responsibilities.
Litigation
Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s condensed consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed. The Company recognizes legal costs associated with loss contingencies in the period incurred.
Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows. As of March 31, 2021
| 17 |
Motorsport Games Inc. and December 31, 2020, the Company has not accrued any amounts for contingencies.Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
On January 11, 2021, Ascend FS, Inc. (“Ascend”), a minority stockholder of 704Games, filed a derivative action on behalf of 704Games in the Eleventh Judicial Circuit Court of Florida against the Company and the Company’s Chief Executive Officer and Executive Chairman. The complaint alleged breach of fiduciary duty and breach of contract in connection with the Company’s August and October 2020 purchases of an aggregate of 116,608 shares of common stock of 704Games (representing approximately 28.7% of the outstanding shares of 704Games) from certain selling stockholders. In connection with the closing of the transactions contemplated by the share exchange agreements entered into with Ascend and PlayFast Games, LLC (“PlayFast”) discussed in Note 11 – Subsequent Events – Share Exchange Agreements – 704Games Common Stock, the Company and its affiliates, without admitting any liability by any party, were released from all claims that Ascend or PlayFast could allege or assert against the Company as minority stockholders of 704Games. Pursuant to the exchange agreement with Ascend, the derivative legal action previously commenced by Ascend against the Company and certain of its affiliates was dismissed with prejudice on April 25, 2021.
On February 11, 2021, HC2 Holdings 2 Inc. (now known as Innovate 2) (“Innovate”) and Continental General Insurance Company (“Continental”), former minority stockholders of 704Games, filed a complaint (the “HC2 and Continental Complaint”) in the United StatesU.S. District Court for the District of Delaware against the Company, the Company’s former Chief Executive Officer and Executive Chairman, the Company’s former Chief Financial Officer, and the sole manager of Motorsport Network (collectively,Driven Lifestyle. The complaint was later amended and added Leo Capital Holdings LLC (“Leo Capital”) as an additional plaintiff and the “Individual Defendants”).controller of Driven Lifestyle as an additional individual defendant. The complaint alleges, among other things, purported misrepresentations and omissions by the Company concerning 704Games’ financial condition made in connection with the Company’s purchase of these minority shareholders’ interest in 704Games in August and future prospects in violation ofOctober 2020. The complaint asserts claims under Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 under the Exchange Act; joint and several liability of the Individuals Defendants underthereunder; Section 20(a) of the Exchange Act with respect to the alleged violation of Section 10(b) and Rule 10(b); alleged violation by the Company ofAct; Section 20A of the Exchange Act in connection with plaintiffs’ sale to the Company of an aggregate of 106,307 shares of common stock of 704Games, which is equal to 26.2% of the outstanding common stock of 704Games, in August 18, 2020 (the “Stock Sale”); allegedAct; breach of the Company’s obligations under the Stockholders’ Agreement dated August 14, 2018, by and among the Company and the other stockholders of 704Games, in connection with 704Games’ requirement to provide financial information about 704Games to the plaintiffs; the defendants’ alleged2018; fraudulent inducement of the plaintiffs to enter into a stock purchase agreement for the Stock Sale; the defendants’ allegedinducement; breach of fiduciary duty by alleged failure to disclose key financialduties; and other information about 704Games and allegedly diverting corporate opportunities for the benefit of defendants; and alleged unjust enrichment. The plaintiffs seek,alleged, among other things, damages from the defendants, jointly and severally, based on the alleged difference between the fair market value of the shares of common stock of 704Games on August 18, 2020, the date of the Stock Sale,plaintiffs’ sale and the purchase price that was paid, in the Stock Sale, as well as punitive damages and other relief. In May 2021, the Company, along with the other defendants, filed a motion to dismiss the plaintiffs’ complaint. On March 28, 2022, the court entered an order denying the motion to dismiss.
At this time, it is too soon to determine the outcome of any litigation that may result fromOn January 11, 2023, in connection with the HC2 and Continental Complaint. As a result,Complaint, the Company, has not accrued for any loss contingencies relatedalong with other defendants, entered into a settlement agreement with one of the plaintiffs, Continental, to this claim becausesettle the claims made by Continental against the defendants and the claims made by the defendants against Continental. Under the terms of the settlement agreement, the Company was obligated to pay the sum of $1.1 million to Continental. The Company paid an initial payment of approximately $0.1 million on January 17, 2023, and was obligated to make payments of no less than approximately $40,000 every 30 days after the initial payment date until the settlement amount of $1.1 million was paid in full. As of March 31, 2024, all required payments under the settlement agreement with Continental have been made.
On October 14, 2023, the Company, along with other defendants, reached and rangeexecuted a settlement agreement with Leo Capital in connection with the HC2 and Continental Complaint, which settles the claims made by Leo Capital against the defendants, as well as the claims made by the defendants against Leo Capital. Under the terms of loss, if any, cannot currently be reasonably estimated.the settlement agreement, the Company was obligated to pay the sum of $0.2 million to Leo Capital. The Company paid the full $0.2 million settlement on October 16, 2023, as required by terms of the settlement agreement.
In respect of Innovate, the Company believes that the plaintiff’s allegations are without merit and the Company intends to continue to vigorously defend its position to the fullest extent permitted by law. Given the litigation is ongoing, the outcome of the litigation remains uncertain at this time. As such, the Company does not believe it is probable a settlement will be reached, nor can any such settlement amount be reasonably estimable, and has not recognized a settlement liability in respect of the remaining plaintiff.
On July 28, 2023, Wesco Insurance Company (“Wesco”) filed a complaint in state court in Florida against the Company, as well as the other defendants involved in the litigation related to the HC2 and Continental Complaint (the “Underlying Action”). The Company had previously submitted the Underlying Action for coverage under a management liability policy issued by Hallmark Specialty Insurance Company (“Hallmark”) and an excess policy with Wesco (the “Wesco Policy”). Wesco’s complaint seeks declaratory relief to determine Wesco’s obligations to the defendants under an excess policy of insurance issued to the Company by Wesco for the Underlying Action. Wesco claims that there is no coverage afforded to the defendants for the Underlying Action under the Wesco Policy. The Company disagrees with and disputes Wesco’s position regarding coverage for the Underlying Action under the Wesco Policy and plans to defend its position.
On November 22, 2023, the Company entered into an insurance policy and claims release with Hallmark (the “Hallmark Settlement”) related to a previously submitted Underlying Action for coverage under a management liability policy issued by Hallmark. Under the terms of the Hallmark Settlement, Hallmark agreed to pay $1.75 million, which was fully paid by Hallmark within 30 days of execution of the Hallmark Settlement.
| 18 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Commitments
On January 25, 2021, the Company entered into an amendment (the “Le Mans Amendment”) to the Le Mans Esports Series Ltd joint venture agreement, which resulted in an increase of the Company’s ownership interest in the Le Mans Esports Series Ltd joint venture from 45% to 51%. Additionally, through certain multi-year licensing agreements that were entered into in connection with the Le Mans Amendment, the Company secured the rights to be the exclusive video game developer and publisher for the 24 Hours of Le Mans race and the WEC, as well as the rights to create and organize esports leagues and events for the 24 Hours of Le Mans race, the WEC and the 24 Hours of Le Mans Virtual event. In exchange for certain of these license rights, the Company agreed to fund up to €8,000,000 (approximately $8,640,000 USD as of March 31, 2024) as needed for development of the video game products, to be contributed on an as-needed basis during the term of the applicable license. The Company is obligated to pay ACO an annual royalty payment beginning from the time of the launch of the first video game product and continuing through each anniversary thereof for the term of the license. Further, pursuant to the Le Mans Amendment, the Company has a right to priority distribution of profits to recoup the additional funding and royalty payments made by the Company under the Le Mans Gaming License. See Note 3 – Intangible Assets for additional information.
Epic License Agreement
On August 11, 2020, the Company entered into a licensing agreement with Epic Games International (“Epic”) for worldwide licensing rights to Epic’s proprietary computer program known as the Unreal Engine 4. Pursuant to thisthe agreement, upon payment of the initial license fee described below, the Company was granted a nonexclusive, non-transferable and terminable license to develop, market and sublicense (under limited circumstances and subject to conditions of thisthe agreement) certain products using the Unreal Engine 4 for its next generation of games. In exchange for the license, this agreement requires the
The Company towill pay Epic an initiala license fee that was paid duringroyalty payment equal to 5% of product revenue, as defined in the year ended December 31, 2020.licensing agreement. During the three months ended March 31, 2021, Epic did not earn any royalties under this agreement. During a two-year support period, Epic will use commercially reasonable efforts to provide2024 and 2023, the Company with updatespaid royalties to Epic of approximately $13,000 and $32,000, respectively, under the agreement. Pursuant to the Unreal Engine 4 and technical support via a licensee forum. After the expirationterms of the support period, Epic has no further obligation to provide or to offer to provide any support services. This agreement, is effective until terminated under its provisions; however, pursuant to its terms, the Company can onlyhas the right to actively develop new or existing authorized products using the Unreal Engine 4 during a five-year active development5-year period which terminatesending on August 11, 2025.
License Commitments
On May 29, 2020, the Company secured a licensing agreement (the “Prior BTCC License Agreement”) with BARC (TOCA) Limited (“BARC”), the exclusive promoter of the British Touring Car Championship (the “BTCC”). Pursuant to the Prior BTCC License Agreement, the Company was granted an exclusive license (the “BTCC License”) to use certain licensed intellectual property for motorsports and/or racing video gaming products related to, themed as, or containing the BTCC, on consoles, PC and mobile applications, esports series and esports events (including the Company’s esports platform). In exchange for the BTCC License, the Prior BTCC License Agreement required the Company to pay BARC an initial fee in two equal installments of $100,000 each, both of which were made prior to their respective due dates. Following the initial fee, the Prior BTCC License Agreement also required the Company to pay royalties, including certain minimum annual guarantees, on an ongoing basis to BARC and to meet certain product distribution, marketing and related milestones, subject to termination penalties. On October 26, 2023, BARC delivered notice to the Company terminating the Prior BTCC License Agreement. The termination of the Prior BTCC License Agreement was effective as of November 3, 2023. As of March 31, 2024, the Company had a total remaining liability in connection with the BTCC License, inclusive of the unpaid installments, of $0.9 million, which is included in purchase commitments liabilities on the unaudited condensed consolidated balance sheets. On April 12, 2024, the Company entered into a settlement agreement (the “BARC Settlement Agreement”) with BARC for settlement of the remaining liability in connection with the BTCC License. See Note 12 – Subsequent Events for more information.
Operating LeasesMotorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
On July 13, 2021, the Company entered into a license agreement with INDYCAR LLC (“INDYCAR”) pursuant to which INDYCAR granted the Company a license to use certain licensed intellectual property for motorsports and/or racing video gaming products related to, themed as, or containing the INDYCAR SERIES (the “INDYCAR Gaming License”). The INDYCAR Gaming License was a long-term agreement, in connection with which the parties intended to form an exclusive relationship for the development of video games to be the official video games of the INDYCAR SERIES. Additionally, the Company and INDYCAR entered into a license agreement pursuant to which the Company was granted a license to use certain licensed intellectual property for motorsports and/or racing esports events related to, themed as, or containing the INDYCAR SERIES (including the rFactor 2 platform) (the “INDYCAR Esports License” and together with the INDYCAR Gaming License, the “INDYCAR Licenses”). Upon execution of the INDYCAR Gaming License, the Company recorded a liability and a related intangible asset equal to the present value of the minimum royalty payments due under the agreement. The license intangible asset was impaired during 2023 as discussed further in Note 4 – Intangible Assets in the audited consolidated financial statements for the year ended December 31, 2023, as included in the 2023 Form 10-K. On November 8, 2023, INDYCAR delivered notice to the Company terminating the INDYCAR Licenses. The termination of the INDYCAR Licenses was effective as of November 8, 2023. The notice also demanded, among other things, certain liquidated damages in accordance with the INDYCAR license agreements amounting to approximately $2.9 million related to certain minimum payments due under such license agreements. The Company leasesadjusted its facilities under operating leases.liability related to the INDYCAR license agreements as a result of the termination notice, which resulted in a gain of $0.6 million. As of March 31, 2024 and December 31, 2023, the Company had a total remaining liability in connection with the INDYCAR Licenses of $2.9 million, which is included in purchase commitments liabilities on the unaudited condensed consolidated balance sheets.
Purchase Commitment Liabilities
On April 20, 2021, the Company acquired 100% of the share capital of Studio 397 B.V. (“Studio397”) from Luminis International B.V. and Technology In Business B.V. (collectively, the “Sellers”). The Company’s rent expense under its operating leasespurchase price originally consisted of (i) $12.8 million paid at closing and (ii) $3.2 million payable April 2022 on the first anniversary of closing, as deferred consideration (the “Deferred Payment”). On April 22, 2022 and July 21, 2022, the Company entered into certain letter agreements with the Sellers pursuant to which, among other things, the Deferred Payment installment amount due to be paid by the Company on the first anniversary of closing was $89,755 and $54,301reduced from $3.2 million to $1 million with the remaining $2.2 million to be settled in installments of: $330,000 to be paid on July 31, 2022; for the three months endedperiod August 15, 2022, through December 15, 2022 monthly installments of $100,000; and for the period beginning on January 15, 2023, monthly installments of $150,000 until the remaining Deferred Payment amount is satisfied. The letter agreements also call for 15% interest on the Deferred Payment balance effective on July 19, 2022. The remaining principal balance of the Deferred Payment as of March 31, 2021 and 2020, respectively.2024 was $0.6 million with unpaid accrued interest of $0.3 million.
NOTE 910 – CONCENTRATIONS
Customer Concentrations
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the following periods:
SCHEDULE OF CONCENTRATIONS
| For the Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
| Customer | 2021 | 2020 | 2024 | 2023 | ||||||||||||
| Customer B | 35.76 | % | 35.59 | % | % | % | ||||||||||
| Customer C | % | % | ||||||||||||||
| Customer D | 42.08 | % | 29.94 | % | % | % | ||||||||||
| Customer E | * | 11.78 | % | |||||||||||||
| Total | 77.84 | % | 77.31 | % | % | % | ||||||||||
| 20 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s trade accounts receivable as of:
| March 31, | December 31, | |||||||||||||||
| Customer | 2021 | 2020 | March 31, 2024 | December 31, 2023 | ||||||||||||
| Customer A | 63.54 | % | 81.84 | % | ||||||||||||
| Customer B | 12.68 | % | * | % | % | |||||||||||
| Customer C | 17.77 | % | * | % | % | |||||||||||
| Customer D | % | % | ||||||||||||||
| Total | 93.99 | % | 81.84 | % | % | % | ||||||||||
A reduction in sales from or loss of these customers, in a significant amount, could have a material adverse effect on the Company’s results of operations and financial condition.
Supplier Concentrations
The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s cost of revenues for the following periods:
SCHEDULE OF CONCENTRATIONS
| For the Three Months Ended March 31, | Three Months Ended March 31, | |||||||||||||||
| Supplier | 2021 | 2020 | 2024 | 2023 | ||||||||||||
| Supplier A | 39.47 | % | 42.22 | % | * % | % | ||||||||||
| Supplier B | * | 12.56 | % | |||||||||||||
| Supplier C | 18.37 | % | * | |||||||||||||
| Supplier D | * | 10.70 | % | |||||||||||||
| Total | 57.84 | % | 65.48 | % | * % | % | ||||||||||
| * | Less than 10%. |
NOTE 1011 – SEGMENT REPORTING
The Company’s principal operating segments coincide with the types of products and services to be sold. The products and services from which revenues are derived are consistent with the reporting structure of the Company’s internal organization. The Company’s two reportable segments for the three months ended March 31, 20212024 and 2020 were:2023 were (i) the development and publishing of interactive racing video games, entertainment content and services (the “Gaming segment”); and (ii) the organization and facilitation of esports tournaments, competitions and events for the Company’s licensed racing games as well as on behalf of third-party video game racing series and other video game publishers (the “esports segment”). The Company’s chief operating decision-makerChief Operating Decision Maker (“CODM”) has been identified as the Company’s Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon the Company’s management organization structure as of March 31, 20212024 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to the reportable segments disclosed. There are no inter-segment revenue transactions and, therefore, revenues are only to external customers. As the Company primarily generates its revenues from customers in the United States, no geographical segments are presented. Given that the Company’s esports segment just began its operations in late 2018, it has no material separate assets. That being said, the Company expects that its esports segment will have separate assets in the future.
Segment operating profit is determined based upon internal performance measures used by the chief operating decision-maker.CODM. The Company derives the segment results from its internal management reporting system. The accounting policies the Company uses to derive reportable segment results are the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics, including net revenues, gross profit and operating loss. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. The Company manages certain operating expenses separately at the corporate level and does not allocate such expenses to the segments. Segment income from operations excludes interest income/expense and other income or expenses and income taxes according to how a particular reportable segment’s management is measured. Management does not consider impairment charges, and unallocated costs in measuring the performance of the reportable segments.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Segment information available with respect to these reportable business segments was as follows:
SCHEDULE OF SEGMENT REPORTING INFORMATION
| For the Three Months Ended, | 2024 | 2023 | ||||||||||||||
| March 31, | For the Three Months Ended March 31, | |||||||||||||||
| 2021 | 2020 | 2024 | 2023 | |||||||||||||
| Revenues: | ||||||||||||||||
| Gaming | $ | 2,450,213 | $ | 3,234,567 | $ | 3,029,036 | $ | 1,439,217 | ||||||||
| Esports | 23,919 | - | - | 290,138 | ||||||||||||
| Total Segment and Consolidated Revenues | $ | 2,474,132 | $ | 3,234,567 | ||||||||||||
| Total Revenues | $ | 3,029,036 | $ | 1,729,355 | ||||||||||||
| Cost of Revenue: | ||||||||||||||||
| Cost of Revenues: | ||||||||||||||||
| Gaming | $ | 715,116 | $ | 923,466 | $ | 666,627 | $ | 874,839 | ||||||||
| Esports | 66,692 | 145,031 | - | 373,897 | ||||||||||||
| Total Segment and Consolidated Cost of Revenues | $ | 781,808 | $ | 1,068,497 | ||||||||||||
| Total Cost of Revenues | $ | 666,627 | $ | 1,248,736 | ||||||||||||
| Gross Profit: | ||||||||||||||||
| Gross Profit (Loss): | ||||||||||||||||
| Gaming | $ | 1,735,097 | $ | 2,311,101 | $ | 2,362,409 | $ | 564,378 | ||||||||
| Esports | (42,773 | ) | (145,031 | ) | - | (83,759 | ) | |||||||||
| Total Segment and Consolidated Gross Profit | $ | 1,692,324 | $ | 2,166,070 | ||||||||||||
| Total Gross Profit | $ | 2,362,409 | $ | 480,619 | ||||||||||||
| (Loss) Income From Operations: | ||||||||||||||||
| Loss From Operations: | ||||||||||||||||
| Gaming | $ | (15,193,257 | ) | $ | 118,748 | $ | (1,123,547 | ) | $ | (5,105,373 | ) | |||||
| Esports | (183,812 | ) | (238,324 | ) | (91,777 | ) | (306,016 | ) | ||||||||
| Total Segment and Consolidated (Loss) Income | ||||||||||||||||
| From Operations | $ | (15,377,069 | ) | $ | (119,576 | ) | ||||||||||
| Total Loss from Operations | $ | (1,215,324 | ) | $ | (5,411,389 | ) | ||||||||||
| Depreciation and Amortization: | ||||||||||||||||
| Gaming | $ | 25,439 | $ | 18,732 | $ | 61,298 | $ | 85,118 | ||||||||
| Esports | 5,336 | 219 | 12,426 | 12,236 | ||||||||||||
| Total Segment and Consolidated Depreciation and Amortization | $ | 30,775 | $ | 18,951 | ||||||||||||
| Total Depreciation and Amortization | $ | 73,724 | $ | 97,354 | ||||||||||||
| Interest Income (Expense): | ||||||||||||||||
| Interest Expense, net: | ||||||||||||||||
| Gaming | $ | (119,539 | ) | $ | 1,140 | $ | (30,882 | ) | $ | (199,120 | ) | |||||
| Esports | - | - | - | - | ||||||||||||
| Total Segment and Consolidated Interest Income (Expense) | $ | (119,539 | ) | $ | 1,140 | |||||||||||
| Total Interest Expense, net | $ | (30,882 | ) | $ | (199,120 | ) | ||||||||||
| Equity investment (Loss) Income: | ||||||||||||||||
| Other (Expense) Income, Net: | ||||||||||||||||
| Gaming | $ | 1,291,647 | $ | (11,830 | ) | $ | (409,164 | ) | $ | 368,244 | ||||||
| Esports | - | (70,242 | ) | (28,028 | ) | (16,927 | ) | |||||||||
| Total Segment Equity in (Loss) Income | $ | 1,291,647 | $ | (82,072 | ) | |||||||||||
| Total Other (Expense) Income, net | $ | (437,192 | ) | $ | 351,317 | |||||||||||
| Net Loss: | ||||||||||||||||
| Gaming | $ | (1,591,569 | ) | $ | (4,936,249 | ) | ||||||||||
| Esports | (91,829 | ) | (322,943 | ) | ||||||||||||
| Total Net Loss | $ | (1,683,398 | ) | $ | (5,259,192 | ) | ||||||||||
| March 31, 2021 | December 31, 2020 | |||||||
| Segment Total Assets: | ||||||||
| Gaming | $ | 65,910,252 | $ | 17,377,993 | ||||
| Esports | 43,834 | 9,017 | ||||||
| Consolidated Total assets | $ | 65,954,086 | $ | 17,387,010 |
| 22 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
| March 31, 2024 | December 31, 2023 | |||||||
| Total Assets: | ||||||||
| Gaming | $ | 6,640,828 | $ | 7,892,388 | ||||
| Esports | 3,182,705 | 1,866,316 | ||||||
| Total Assets | $ | 9,823,533 | $ | 9,758,704 | ||||
NOTE 1112 - Subsequent EventsSUBSEQUENT EVENTS
The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the unaudited condensed consolidated financial statements were issued. Other than as described below,
On April 12, 2024, the Company did not identifyentered into the BARC Settlement Agreement with BARC. The BARC Settlement Agreement resolved any subsequent events that would have required adjustments or disclosure in the condensed consolidated financial statements or notes.
Share Exchange Agreements—704Games Common Stock
On April 16, 2021,and all disputes between the Company closed the transactions contemplated by each of (i) the share exchange agreement with PlayFast, dated as of March 11, 2021, as amended by that certain amendment dated as of April 1, 2021 (as amended, the “PlayFast Exchange Agreement”) and (ii) the share exchange agreement with Ascend, dated as of March 14, 2021, as amended by that certain amendment dated as of April 1, 2021 (as amended, the “Ascend Exchange Agreement”). As a result, the Company acquired all of the remaining equity interests in 704Games Company.
The transactions contemplated by the PlayFast Exchange Agreement and the Ascend Exchange Agreement were structured as a merger of 704Games Company with and into 704Games LLC, a newly-formed Delaware limited liability company and wholly-owned subsidiary of the Company, with 704Games LLC being the surviving entity in such merger. The merger consideration issued to (i) PlayFastBARC with respect to the shares of common stock of 704Games Company it surrendered in such merger consisted of 366,542 newly-issued sharestermination of the Company’s Class A common stockPrior BTCC License Agreement. As disclosed in Note 9 – Commitments and $1,542,519 in cash and (ii) Ascend with respect toContingencies, the sharesPrior BTCC License Agreement was terminated effective as of common stock of 704Games Company it surrendered in such merger consisted of 488,722 newly-issued shares of the Company’s Class A common stock and $2,056,692 in cash.
November 3, 2023. Pursuant to the PlayFast Exchange Agreement and the Ascend ExchangeBARC Settlement Agreement, the Company and the other defendants,BARC, without admitting any liabilityliabilities, agreed that the Prior BTCC License Agreement was terminated without any liabilities and that any and all royalties and/or any other sums whatsoever were forgiven by any party, were released from all claims that Ascend or PlayFast could allege or assert againstBARC and discharged in their entirety in consideration of (i) the Company’s one-time payment of $225,000 to BARC and (ii) the Company and BARC entering, effective as minority stockholders of 704Games.April 12, 2024, into a new license agreement to use certain licensed intellectual property related to, themed as, or containing the BTCC (the “New BTCC License Agreement”).
On April 12, 2024, the Company and BARC entered into the New BTCC License Agreement. Pursuant to the Ascend ExchangeNew BTCC License Agreement, BARC granted the Company a non-exclusive license to use certain licensed intellectual property relating to the BTCC for official BTCC downloadable content digitally purchased for the rFactor 2 video game. As consideration for the license under the New BTCC License Agreement, the derivative legal action previously commenced by Ascend was dismissedCompany will be obligated to pay BARC an annual royalty in the amount of 50% of Adjusted Gross Annual Sales (as defined in the New BTCC License Agreement) of the Company’s BTCC downloadable content purchased for the rFactor 2 video game during the term of the New BTCC License Agreement. The term of the New BTCC License Agreement expires on December 31, 2026.
On April 26, 2024, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with prejudiceTraxion.GG Limited (“Traxion.GG”). Pursuant to the Purchase Agreement, the Company sold to Traxion.GG certain of the Company’s assets related to the Company’s motorsport and racing games community content platform (“Traxion”). Such sale, which closed on April 25, 2021.26, 2024, was in furtherance of the Company’s divestiture of non-core components. The consideration received was $250,000 consisting of a $200,000 cash payment at closing and $50,000 in value of marketing services to be provided by Traxion.GG to the Company during the period from April 26, 2024 through December 31, 2026 on YouTube, Twitch, Instagram, X (formerly known as Twitter) and Facebook, and access to the Traxion YouTube and Twitch channels for Le Mans Virtual Series and key esports and gaming events as agreed between Traxion.GG and the Company.
On May 3, 2024 (but effective as of October 1, 2023), the Company entered into a new lease agreement with Lemon City Group, LLC, an entity controlled by Driven Lifestyle, for approximately 800 square feet of storage space located in Miami, Florida. The term of the lease is nine months, with a commencement date of October 1, 2023, consistent with the Company’s initial date of occupancy, and expiring on June 30, 2024, terminable with a 60-day written notice with no penalty. The base rent from the lease commencement date through June 30, 2024 is fixed at approximately $1,800 per month.
Studio397
On April 20, 2021, the Company closed the transactions contemplated by the share purchase agreement dated April 1, 2021 (the “SPA”) with Luminis International BV (“Luminis”) and Technology In Business B.V. (“TIB”) pursuant to which the Company purchased from TIB 100% of the share capital (the “Shares”) of Studio397 B.V. (“Studio397”).
The purchase price for the shares was U.S. $16,000,000, payable in two installments, as follows: U.S. $12,800,000 at closing (the “Completion Payment”) and U.S. $3,200,000 on the first-year anniversary of closing (the “Deferred Payment”).
To secure the Company’s payment of the Deferred Payment, the Company granted a right of pledge on 20% of the Shares (“Pledged Shares”) by means of execution of a deed of pledge at the closing of the transactions contemplated by the SPA. The voting rights attached to the Pledged Shares will be transferred to TIB if and to the extent that the Company fails to pay the Deferred Payment within 30 business days following receipt of TIB’s notice of such failure.
TIB agreed to fund Studio397 with sufficient funds from its proceeds of the Completion Payment at closing by way of share premium contribution so as to enable Studio397 to fully settle at closing the royalty payment amounts to be paid to Image Space Incorporated by Studio397 pursuant to the buy-out agreement, dated December 7, 2020, between Image Space Incorporated and Studio397.
Repayment of Promissory Note
On April 21, 2021, the Company repaid $863,169 of the balance relating to the Promissory Note due to Motorsport Network.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20202023 (the “2020“2023 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2024 and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Report. Unless the context requires otherwise, references to the “Company,” “Motorsport Games,” “we,” “us” and “our” refer to Motorsport Games Inc., a Delaware corporation.
OverviewAbout Motorsport Games
The following overview is a high-level discussion of our operating results, as well as some of the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers provides important context for our results for the three months ended March 31, 2021, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Report.
Our Business
Motorsport Games is a leading racing game developer, publisher and esports ecosystem provider of official motorsport racing series, throughout the world, including NASCAR, the iconic 24 Hours of Le Mans endurance race (“Le Mans”) and the associated FIA World Endurance Championship (the “WEC”),. Our portfolio also includes the British Touring Car Championship (the “BTCC”KartKraft karting simulation game, as well as Studio 397 B.V. (“Studio397”) and others. Through the support of our majority shareholder, Motorsport Network, the largest global media company in the motorsport industry, Motorsport Games’ corporate missiontheir rFactor 2 realistic racing simulator technology and platform. Our purpose is to createmake the preeminent motorsport gaming and esports entertainment ecosystemthrill of motorsports accessible to everyone by deliveringcreating the highest quality, most sophisticated and innovative experiences for racers, gamers and fans of all ages. Our products and services target a large and underserved global motorsport audience.
Started in 2018 as a wholly-owned subsidiary of the Motorsport Network, we are currently the official developer and publisher of the NASCAR video game racing franchise and have obtained the exclusive license to develop multi-platform games for the BTCC, the Le Mans race and the WEC. We develop and publish multi-platform racing video games including for game consoles, personal computer (PC)computers (PCs) and mobile platforms through various retail and digital channels, including full-game and downloadable content (sometimes known as “games-as-a- service”(“DLC”). SinceWe have obtained the official licenses to develop multi-platform games for the 24 Hours of Le Mans race and the WEC. We are also striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our formation,licensed racing games.
On October 3, 2023, we sold our NASCAR video games have sold over one million copies for game consoleslicensed rights under that certain Second Amended and PCs. For fiscal year 2020Restated Distribution and License Agreement with NASCAR Team Properties (“NTP”) (the “NASCAR License”) to iRacing.com Motorsport Simulations, LLC. Prior to the three months ended March 31, 2021, substantially allsale of our revenue was generated from sales of our racing video games.
COVID-19 Pandemic Update
The global spread ofNASCAR License, we had been the ongoing and prolonged COVID-19 pandemic has created significant business uncertainty for us and others, resulting in volatility and economic disruption. Additionally, the outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home or total lock-down (or similar) orders and business limitations and shutdowns.
As a result of the ongoing and prolonged COVID-19 pandemic, including the related responses from government authorities, our business and operations have been impacted, including the temporary closure of our offices in Miami, Florida, Silverstone, England, and Moscow, Russia, which has resulted in our employees working remotely. During the ongoing and prolonged COVID-19 outbreak, demand for our games has generally increased, which we believe is primarily attributable to a higher number of consumers staying at home due to COVID-19 related restrictions. Similarly, there has been a significant increase in viewership of our esports events since the initial impact of the virus, as these events began to air on both digital and linear platforms, particularly as we were able to attract many of the top “real world” motorsport stars to compete. However, several retailers have experienced, and continue to experience, closures, reduced operating hours and/or other restrictions as a result of the ongoing and prolonged COVID-19 pandemic, which has negatively impacted the sales of our products from such retailers. Additionally, in our esports business, the ongoing and prolonged COVID-19 pandemic has resulted in the postponing of certain events to later dates or shifting events from an in-person format to online only.
We continue to monitor the evolving situation caused by the COVID-19 pandemic, and we may take further actions required by governmental authorities or that we determine are prudent to support the well-being of our employees, suppliers, business partners and others. The degree to which the ongoing and prolonged COVID-19 pandemic continues to impact our operations, business, financial results, liquidity, and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic, its severity, actions to contain the virus or treat its impact, such as the efficacy of vaccines (particularly with respect to emerging strains of the virus), and how quickly and to what extent normal economic and operating conditions can resume.
Further discussion of the potential impacts on our business, financial condition, results of operations, liquidity and the market price of our Class A common stock due to the ongoing and prolonged COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part I, Item 1A of the 2020 Form 10-K.
Recent Developments
Initial Public Offering
On January 15, 2021, Motorsport Games completed its initial public offering (“IPO”) of 3,450,000 shares of Class A common stock at a price to the public of $20.00 per share, which includes the exercise in full by the underwriters of their option to purchase from us an additional 450,000 shares of Class A common stock. We received net proceeds of approximately $63.1 million from the IPO, after deducting underwriting discounts and offering expenses payable by us.
Amendment to Joint Venture Agreement with ACO
On January 25, 2021, we entered into an amendment to our joint venture agreement with Automobile Club de l’Ouest (“ACO”) with respect to the Le Mans Esports Series Limited joint venture. Pursuant to the amendment, we increased our ownership interest in the joint venture from 45% to 51%. Additionally, through certain multi-year licensing agreements that were entered into in connection with the amendment, we secured the rights to be the exclusiveofficial video game developer and publisher for the Le Mans raceNASCAR video game racing franchise and had the WEC, as well as the rightsexclusive right to create and organize esports leagues and events for NASCAR using our NASCAR racing video games, in each case, subject to certain limited exceptions. Concurrently with the sale of our NASCAR License, we entered into an agreement with NTP pursuant to which we have a limited non-exclusive right and license to, among other things, sell our NASCAR games and DLCs that are currently in our product portfolio through December 31, 2024 (the “NASCAR New Limited License”). For the three months ended March 31, 2024 and 2023, 49% and 57% of our total revenue, respectively, was generated from sales of our NASCAR racing video games.
On October 26, 2023, BARC (TOCA) Limited (“BARC”), the exclusive promoter of the British Touring Car Championship (the “BTCC”), delivered notice to the Company terminating the license agreement between the parties relating to the Company’s development of video games and the organization and facilitation of esports events for the BTCC (the “Previous BTCC License”), effective as of November 3, 2023. As a result, the Company no longer has the right to develop and publish the video games for the BTCC racing series or to create and organize its esports leagues and events.
On November 8, 2023, INDYCAR, LLC delivered notice to the Company terminating the license agreements between the parties relating to the Company’s development of video games and the organization and facilitation of esports events for the INDYCAR racing series (collectively, the “INDYCAR License”), effective immediately. As a result, the Company no longer has the right to develop and publish the video games for the INDYCAR racing series or to create and organize its esports leagues and events.
On February 20, 2024, we released Le Mans race,Ultimate on PC in early access. Le Mans Ultimate is the official game of the WEC and the 24 Hours of Le Mans, Virtual event. In exchange for certainand is the first officially licensed and dedicated 24 Hours of these license rights, we agreed to fund up to €8,000,000 as needed for development of theLe Mans video game products, to be contributed on an as-needed basis duringrelease in over twenty years.
On April 12, 2024, the term of the applicable license.
KartKraft Acquisition
On March 19, 2021, we acquired all assets comprising the KartKraft computer video game from Black Delta Holdings PTY, Black Delta Trading Pty LtdCompany and Black Delta IP Pty Ltd (collectively, “Black Delta”). The purchase price for the assets was $1,000,000, of which $750,000 was paid at closing and $250,000 will be paid on the six-month anniversary of closing. Through this acquisition, we plan to enter the simulated kart-racing space. Motorsport Games has founded a new company, Motorsport Games Australia, to support the Black Delta development team.
Digital Tales Binding Term Sheet
On March 22, 2021, weBARC entered into a binding term sheet with EleDa s.r.l. (“EleDa”settlement agreement (the “BARC Settlement Agreement”). Pursuant relating to the binding term sheet, we and EleDa intend that we will acquire from EleDa all ofPrevious BTCC License, whereby the shares of Digital Tales USA, LLC,parties concurrently entered into a Florida limited liability company (the “Interests”). The purchase pricenew license agreement pursuant to which BARC granted the Company a non-exclusive license to use certain licensed intellectual property relating to the BTCC for official BTCC DLC digitally purchased for the Interests will be $2,200,000, payable as follows: (i) $1,540,000 at closing; (ii) $260,000 on the six-month anniversary of closing; (iii) $200,000 after the SBKrFactor 2 video game license or a substantially similar two-wheel racing brand license currently held by the Digital Tales USA, LLC is amended to be extended beyond current expiration date in 2024 for no less than 3 additional years, so long as such amendment is executed within 12 months of closing; and (iv) $200,000 after the SBK video game license or a substantially similar two-wheel racing brand license currently held by the Digital Tales USA, LLC is amended to be expanded to include console and PC video game development and publishing for the same period, so long as such amendment is executed within 12 months of closing. In addition, we agreed to reimburse EleDa for its legal fees and expenses up to $60,000. The parties are in the process of negotiating the definitive acquisition documents to complete the transaction, which is subject to customary closing conditions.
Acquisition of 704Games Common Stockthrough December 31, 2026.
On April 16, 2021,26, 2024, the Company closed the transactions contemplated by each of: (i) the share exchange agreement with PlayFast Games, LLC, a North Carolina limited liabilitysold certain assets related to its motorsport and racing games community content platform (“PlayFast”Traxion”), dated as in furtherance of March 11, 2021, as amended by that certain amendment dated as of April 1, 2021 (as amended, the “PlayFast Exchange Agreement”); and (ii) the share exchange agreement with Ascend FS, Inc., a British Columbia corporation (“Ascend”), dated as of March 14, 2021, as amended by that certain amendment dated as of April 1, 2021 (as amended, the “Ascend Exchange Agreement”). As a result, the Company acquired all of the remaining equity interests in 704Games Company.
The transactions contemplated by the PlayFast Exchange Agreement and the Ascend Exchange Agreement were structured as a merger of 704Games Company with and into 704Games LLC, a newly-formed Delaware limited liability company and a wholly-owned subsidiary of the Company, with 704Games LLC being the surviving entity in such merger. The merger consideration issued to (i) PlayFast with respect to the shares of common stock of 704Games Company it surrendered in such merger consisted of 366,542 newly-issued shares ofstreamlining the Company’s Class A common stockoperations, reduction of operational costs and $1,542,519 in cash and (ii) Ascend with respect to the sharesdivestiture of common stock of 704Games Company it surrendered in such merger consisted of 488,722 newly-issued shares of the Company’s Class A common stock and $2,056,692 in cash.non-core components.
PursuantDue to the PlayFast Exchange Agreementuncertainty surrounding our ability to raise funding, and the Ascend Exchange Agreement, the Companyin light of our liquidity position and theanticipated future funding requirements, we continue to explore other defendants, without admitting any liability by any party, were released from all claims that Ascend or PlayFast could allege or assert against the Company as minority stockholders of 704Games. Pursuantstrategic alternatives and potential options for our business, including, but not limited to, the Ascend Exchange Agreement,sale or licensing of certain of our assets in addition to the parties agreedrecent sales of our NASCAR License and Traxion. If any such additional strategic alternative is executed, it is expected it would help to improve our working capital position and reduce overhead expenditures, thereby lowering our expected future cash-burn, and provide some short-term liquidity relief. Nonetheless, even if we are successful in implementing one or more additional strategic alternatives, we will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of our business and operations. There are no assurances that the derivative legal action commenced by Ascend was dismissed with prejudice on April 25, 2021. See Note 8 – Commitments and Contingencies – Litigationwe will be successful in our condensed consolidated financial statements forimplementing any additional information.
Acquisition of Studio397
On April 20, 2021, the Company closed the transactions contemplated by the share purchase agreement dated April 1, 2021 (the “SPA”) with Luminis International BV (“Luminis”) and Technology In Business B.V. (“TIB”) pursuant to which the Company purchased from TIB 100% of the share capital of Studio397 B.V. The purchase pricestrategic plans for the shares was U.S. $16,000,000, payable in two installments, as follows: U.S. $12,800,000 at closing and U.S. $3,200,000 onsale or licensing of our assets, or any other strategic alternative, which may be subject to the first-year anniversarysatisfaction of closing. See Note 11 – Subsequent Events – Studio397 inconditions beyond our condensed consolidated financial statements for additional information.control.
As of March 31, 2024, we have a total headcount of 65 people, made up of 46 full-time employees, including 51 dedicated to game development, to continue developing our expanded product offerings.
Trends and Factors Affecting Our Business
Product Release Schedule
Our financial results are affectedimpacted by the timing of our product releases and the commercial success of those titles. Our recent product releases include:
| Title | Release Date and Platform | |
| NASCAR 21: Ignition* | October 28, 2021, available on PC and next generation consoles | |
| NASCAR Heat Ultimate Edition+* | November 19, 2021, available on Nintendo Switch | |
| KartKraft | January 26, 2022, available on PC (full release) | |
| rFactor 2 Q1 2022 Content Update | February 7, 2022, available on PC | |
| rFactor 2 Q2 2022 Content Update | May 10, 2022, available on PC | |
| rFactor 2 Q3 2022 Content Update | August 8, 2022, available on PC | |
| NASCAR 21: Ignition 2022 Season Expansion* | October 6, 2022, available on PC and next generation consoles | |
| NASCAR Rivals* | October 14, 2022, available on Nintendo Switch | |
| rFactor 2 Q4 2022 Content Update | November 7, 2022, available on PC | |
| rFactor 2 Q1 2023 Content Update | February 21, 2023, available on PC | |
| NASCAR Heat 5 – Next Gen Car Update* | June 23, 2023, available on PC and consoles | |
| rFactor 2: Race Control multiplayer | October 5, 2023, available on PC | |
| Le Mans Ultimate | February 20, 2024, available on PC |
| * | Pursuant to the NASCAR New Limited License, we have a limited non-exclusive right and license to, among other things, sell these NASCAR games and DLCs through December 31, 2024. |
We continually evaluate our planned product release schedule and modify the timing of upcoming products based on developments in our business, or if we believe it will result in a better consumer experience. The sale of our NASCAR License and the termination of our BTCC License and INDYCAR License, as disclosed elsewhere in this Report, has impacted our long-term product release schedule as we will no longer be producing NASCAR, BTCC and INDYCAR titles moving forward.
As we continue to evaluate the cost saving initiatives and explore other strategic alternatives and potential options for our business, including, but not limited to, the sale or licensing of certain of our assets, further adjustments to our product roadmap may be required.
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Hardware Platforms
We derive most of our revenue from the sale of products made for PCs and video game consoles manufactured by third parties, such as Sony Interactive Entertainment Inc.’s (“Sony”) PlayStation and Microsoft Corporation’s (“Microsoft”) Xbox consoles, which comprised approximately 49% and 57% of our total revenue for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024 and 2023, the sale of products for Microsoft Windows via Steam comprised approximately 50% and 28% of our total revenue, respectively, and the sale of products for mobile platforms comprised approximately 1% and 6% of our total revenue, respectively. The success of our business is dependent upon consumer acceptance of video game console/PC platforms and continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those released by Sony and Microsoft in November 2020, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The latest generation of Sony and Microsoft consoles provide “backwards compatibility” (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products.
Concentration of Sales
Our NASCAR products have historically accounted for the majority of our revenue. We currently anticipate releasingHowever, we have worked to diversify our next generation NASCAR consoleproduct offerings and revenue from other sources by introducing titles such as Le Mans Ultimate, our recently released Le Mans video game, NASCAR NXT, inKartKraft and rFactor 2, as well as introducing the third quarter of 2021. Additionally, we obtained the exclusive license to develop multi-platform games for the BTCC in May 2020, and we recently obtained the exclusive license to develop multi-platform games for the WEC series, including the iconic 24 hoursHours of Le Mans race, in January 2021. The BTCCVirtual esports event to our portfolio of offerings, thereby reducing our dependency on the NASCAR franchise as our substantially sole source of revenue. For example, revenues associated with our NASCAR franchise accounted for approximately 49% and Le Mans products57% of our total revenue for the three months ended March 31, 2024 and 2023, respectively. Following the sale of our NASCAR License and the execution of the NASCAR New Limited License, which allows us to sell our NASCAR games and DLCs that are currently under development, and we currently anticipate releasing games for these racing series in 2022. Going forward, we intend to expand our license arrangements to other internationally recognized racing series and the platforms we operate on. We believe that having a broader product portfolio will improvethrough December 31, 2024, we anticipate the amount of revenue to be generated by our operating results and provide a revenue stream that is less cyclical based on the release of a single game per year.existing NASCAR products to decline over time.
Economic Environment and Retailer PerformanceRetail Distribution
Our physical gaming products are sold primarily through a distribution network with an exclusive partnerspartner who specializespecializes in the distribution of games including through mass-market retailers (e.g., Target, Wal-Mart), consumer electronics stores (e.g., Best Buy), discount warehouses, game specialty stores (e.g., GameStop) and other online retail stores (e.g., Amazon). We currently derive, and expectDue to continue to derive, significant revenuesour modified product release schedule, we recognized minimal revenue from sales of ourphysical gaming products to a very limited number of distribution partners. For the year ended December 31, 2020 andfor the three months ended March 31, 2021, we had one2024 and 2023. However, we expect to continue to use a limited number of distribution partner through which we sold substantially allpartners in the future for sales of our products for the retail channel, which represented approximately 34% and 1.7% of our total revenue, respectively.physical gaming products. See “Risk Factors—Risks Related to Our Business and Industry—The importance of retail sales to our business exposes us to the risks of that business model” and “Risk Factors—Risks Related to Our Business and Industry—We primarily depend on a single third-party distribution partner to distribute our games for the retail channel, and our ability to negotiate favorable terms with such partner and its continued willingness to purchase our games is critical for our business” in Part I, Item 1A of the 20202023 Form 10-K for additional information regarding the importance of retail sales and our distribution partners to our business.
Additionally, we continue to monitor economic conditions, including the impact of the ongoing and prolonged COVID-19 pandemic, that may unfavorably affect our businesses, such as deteriorating consumer demand, delays in development, pricing pressure on our products, credit quality of our receivables and foreign currency exchange rates. The COVID-19 pandemic has affected and may continue to affect our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time. For example, several retailers have experienced, and continue to experience, closures, reduced operating hours and/or other restrictions as a result of the ongoing and prolonged COVID-19 pandemic, which has negatively impacted the sales of our products from such retailers. See “—COVID-19 Pandemic Update” for additional information regarding the impact of COVID-19 on our business and operations.
Hardware Platforms
We derive most of our revenue from the sale of products made for video game consoles manufactured by third parties, such as Sony Interactive Entertainment Inc.’s (“Sony”) PS4 and Microsoft Corporation’s (“Microsoft”) Xbox One, which comprised approximately 86% and 78% of our total revenue for the year ended December 31, 2020 and the three months ended March 31, 2021, respectively. For the year ended December 31, 2020 and the three months ended March 31, 2021, the sale of products for Microsoft Windows via Steam comprised approximately 3% and 8% of our total revenue, respectively, and the sale of products for mobile platforms comprised approximately 9% and 11% of our total revenue, respectively. The success of our business is dependent upon consumer acceptance of video game console platforms and continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those recently released by Sony and Microsoft, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The new Sony and Microsoft consoles provide “backwards compatibility” (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products.
Digital Business
Players increasingly purchase our games as digital downloads, as opposed to purchasing physical discs. All of our titles that are available through retailers as packaged goods products are also available through direct digital download. For the year ended December 31, 2020 andeach of the three months ended March 31, 2021,2024, and 2023, approximately 51% and 98%, respectively,92% of our revenue from sales of video games for game consoles and PCs was through digital channels. We believe this trend of increasing direct digital downloads is primarily due to benefits relating to convenience and accessibility that digital downloads provide, which has been heightened during the ongoing and prolonged COVID-19 pandemic.provide. In addition, as part of our digital business strategy, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through in-game purchases and extra content.
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Esports
We are striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing games as well as on behalf of third-party racing game developers and publishers. In 2020,2023, we facilitated 56 esports events, up from 22 esports events in 2019, which included official esports events for NASCAR,organized the grand finale of the Le Mans Virtual Series 2022/23, the 24 Hours of Le Mans the Official World Rallycross Esports Championship, FIA Formula E and other race series. The total number of people that have watched our esports events in 2020 was approximately 55 million, up fromVirtual event, which had a cumulative total of approximately 3.88.8 million viewers throughout 2019. Throughvideo views with approximately 27 million minutes watched. The 24 Hours of Le Mans Virtual event had a global audience of 5 million across television (TV)/over-the-top (OTT) channels. Although we did not organize the three months ended March 31, 2021,Le Mans Virtual Series for the 2023/24 season, we have facilitated 4 esports events, andcurrently plan on organizing the total number2024/25 Le Mans Virtual Series to commence later this year. We also intend to continue exploring opportunities to expand the recurring portion of people that have watched our esports events in the first three monthssegment outside of 2021 was approximately 220,000. As we continue to add to our existing portfolio of games centered around popular licensed racing series, this will provide us the opportunity to further grow our esports business by having more titles to produce our esports events.Le Mans.
Technological Infrastructure
As our digital business has grown, our games and services increasingly depend on the reliability, availability and security of our technological infrastructure. We are investing and expect to continue to invest in technology, hardware and software to support our games and services, including with respect to security protections. Our industry is prone to, and our systems and networks are subject to, cyberattacks, computer viruses, worms, phishing attacks, malicious software programs, and other information security incidents that seek to exploit, disable, damage, disrupt or gain access to our networks, our products and services, supporting technological infrastructure, intellectual property and other assets. As a result, we continually face cyber risks and threats that seek to damage, disrupt or gain access to our networks and our gaming platform, supporting infrastructure, intellectual property and other assets.
Rapidly Changing Industry
We operate in a dynamic industry that regularly experiences periods of rapid, fundamental change. In order to remain successful, we are required to anticipate, sometimes years in advance, the ways in which our products and services will compete. We adapt our business by investing in creative and technical talent and new technologies, evolving our business strategies and distribution methods and developing new and engaging products and services. For example, the global adoption of mobile devices and a business model for those devices that allows consumers to try new games with no up-front cost, and that are monetized through services associated with the game, has led to significant growth in the mobile gaming industry, which we believe is a continuing trend. Accordingly, in conjunction with the launch of our new NASCAR console game, we plan to launch an updated NASCAR Heat Mobile in 2021, which is our NASCAR mobile racing game. Given the recent popularity and fast growing nature of the branded casual game experience, we also plan to introduce a slate of NASCAR branded casual gaming options, starting with the officially licensed NASCAR “match three” game in 2021.
Recurring Revenue Sources
Our business model includes revenue that we deem recurring in nature, such aswhich historically consisted primarily of revenue from our annualized sportsNASCAR video game racing franchise (currently NASCAR Heat) for game consoles, PC, and mobile platforms. We historically have been able to forecast the revenue from this area of our business with greater relative confidence than for new games, services, and business models. AsFollowing the sale of our NASCAR License and as we continue to incorporate new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of our business.business, including through the planned introduction of new annualized sports franchise games, such as with Le Mans.
Reportable Segments
We use “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by our chief operating decision maker for making operating decisions and assessing performance as the source for determining our reportable segments. Our chief operating decision maker is our Chief Executive Officer, (“CEO”), who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We classified our reportable operating segments into:into (i) the development and publishing of interactive racing video games, entertainment content and services (the “Gaming segment”); and (ii) the organization and facilitation of esports tournaments, competitions and events for our licensed racing games as well as on behalf of third-party video game racing series and other video game publishers (the “esports segment”).
Components of Our Results of Operations
Revenues
We have historically derived substantially all of our revenue from sales of our games and related extra content that can be played by customers on a variety of platforms, including game consoles, mobile phones, PCs and tablets. Starting in 2019, we began generating sponsorship revenues from our production of live and virtual esports events. In early 2022, we also began offering software development services for racing simulators.
Our product and service offerings included within the Gaming segment primarily include, but are not limited to, full PC, console, and mobile games with both online and offline functionality, which generally include:
| ● | the initial game delivered digitally or via physical | |
| ● | ||
| updates to previously released games on a when-and-if-available basis, such as software patches or updates, and/or additional content to be delivered in the future, both paid and free; and | ||
| ● | outsourced code and content development services. |
Our product and service offerings included within the esports segment relate primarily to curating esports events.
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Cost of Revenues
Cost of revenues for our Gaming segment is primarily comprised of royalty expenses, which historically has been primarily attributable to our license arrangement with NASCAR License prior to its sale and certain other third-partiesthird parties relating to our NASCAR racing series games. Cost of revenues for our Gaming segment is also comprised of merchant fees, discdisk manufacturing costs, packaging costs, shipping costs, warehouse costs, distribution fees to distribute products to retail stores, mobile platform fees associated with our mobile revenue (for transactions in which we are acting as the principal in the sale to the end customer) and amortization of certain acquired license agreements and other intangible assets acquired through our various acquisitions. Furthermore, cost of revenues for our Gaming segment includes costs associated with our outsourced code and content development services. Cost of revenues for our esports segment consists primarily of the cost of producing esports eventsevent staffing and paying prize money.event production.
Sales and Marketing
Sales and marketing expenses are primarily composed of salaries, benefits and related taxes of our in-house marketing teams, advertising, marketing, and promotional expenses, including fees paid to social media platforms, Motorsport NetworkDriven Lifestyle and other websites where we market our products.
Development
Development expenses consist of the cost to develop the games we produce, as well as developing the content that we use in our esports leagues. Development expenses includewhich includes salaries, benefits, and operating expenses of our in-house development teams, as well as consulting expenses for any contracted external development. Development expenses also include expenses associated withrelating to our digital platform, software licenses, maintenance, and development overhead.studio operating expenses.
General and Administrative
General and administrative expenses consist primarily of salaries, benefits and other costs associated with our operations including, finance, human resources, information technology, public relations, legal audit and compliance fees, facilities, and other external general and administrative services.
Depreciation and Amortization
Depreciation and amortization expenses include depreciation on fixed assets (primarily computers and office equipment), as well as amortization of certain definite lived intangible assets acquired through our various acquisitions.
Results of Operations
Three Months Ended March 31, 20212024 compared to Three Months Ended March 31, 20202023
Revenue
| For the Three Months Ended, | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenues: | ||||||||
| Gaming | $ | 2,450,213 | $ | 3,234,567 | ||||
| Esports | 23,919 | - | ||||||
| Total Segment and Consolidated Revenues | $ | 2,474,132 | $ | 3,234,567 | ||||
Revenues were $2,474,132 and $3,234,567 forIn this section, references to 2024 refer to the quartersthree months ended March 31, 20212024 and 2020,references to 2023 refer to the three months ended March 31, 2023.
Revenues
| For the Three Months Ended March 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Revenues: | ||||||||||||||||
| Gaming | $ | 3,029,036 | $ | 1,439,217 | $ | 1,589,819 | 110.5 | % | ||||||||
| Esports | - | 290,138 | (290,138 | ) | (100.0 | % | ||||||||||
| Total Revenues | $ | 3,029,036 | $ | 1,729,355 | $ | 1,299,681 | 75.2 | % | ||||||||
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Consolidated revenues were $3.0 million and $1.7 million for 2024 and 2023, respectively, an increase of $1.3 million, or 75.2%, when compared to the prior period.
Gaming segment revenues represented 100% and 83.2% of our total 2024 and 2023 revenues, respectively, increasing by $1.6 million, or 110.5%, when compared to the prior period. The increase in Gaming segment revenues was primarily due to $1.4 million in higher digital game sales due to the release of Le Mans Ultimate on PC in February 2024. This increase was further driven by a $0.2 million increase in revenues earned through the development of simulation platforms for third-parties.
Esports segment revenues represented 0% and 16.8% of our total 2024 and 2023 revenues, respectively, decreasing by $0.3 million, when compared to the prior period. The decrease in esports segment revenue was due to the Company not offering a Le Mans Virtual Series (“LMVS”) event in January 2024, resulting in no earned sponsorship or events revenue, compared to $0.3 million earned in January 2023, when the Company offered the concluding LMVS event for the 2022/23 LMVS season.
Cost of Revenues
| For the Three Months Ended March 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Cost of revenues: | ||||||||||||||||
| Gaming | $ | 666,627 | $ | 874,839 | $ | (208,212 | ) | (23.8 | )% | |||||||
| Esports | - | 373,897 | (373,897 | ) | (100.0 | )% | ||||||||||
| Total Cost of Revenues | $ | 666,627 | $ | 1,248,736 | $ | (582,109 | ) | (46.6 | )% | |||||||
Consolidated cost of revenues was $0.7 million and $1.2 million for 2024 and 2023, respectively, a decrease of $760,435$0.6 million, or 24%. 46.6%, when compared to the prior period.
Gaming segment cost of revenues represented 100.0% and 70.1% of our total 2024 and 2023 cost of revenues, respectively, decreasing by $0.2 million, or 23.8%, when compared to the prior period. The decrease in Gaming segment cost of revenues was primarily driven by a $0.3 million reduction in royalty payments, mainly related to our NASCAR titles as a direct result of lower game sales for the franchise compared to the prior period. This decrease was partially offset by a $0.1 million increase in amortization costs related to our licenses.
Esports segment cost of revenues represented 0% and 29.9% of our total 2024 and 2023 cost of revenues, respectively, decreasing by $0.4 million when compared to the prior period. The decrease in esports segment cost of revenues was due to the Company not offering a LMVS event in January 2024, resulting in no prize winnings, studio and televised production costs, compared to $0.4 million of such costs incurred in January 2023 when the Company offered the concluding LMVS event for the 2022/23 LMVS season.
Gross Profit
| For the Three Months Ended March 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Gross Profit (Loss) | ||||||||||||||||
| Gaming | $ | 2,362,409 | $ | 564,378 | $ | 1,798,031 | 318.6 | % | ||||||||
| Esports | - | (83,759 | ) | 83,759 | (100.0 | )% | ||||||||||
| Total Gross Profit (Loss) | $ | 2,362,409 | $ | 480,619 | $ | 1,881,790 | 391.5 | % | ||||||||
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| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Gaming - Gross Profit Margin | 78.0 | % | 39.2 | % | ||||
| Esports - Gross Profit (Loss) Margin | 0.0 | % | (28.9 | )% | ||||
| Total Gross Profit Margin | 78.0 | % | 27.8 | % | ||||
Consolidated gross profit was $2.4 million and $0.5 million for 2024 and 2023, respectively, an increase of $1.9 million, or 391.5%, when compared to the prior period. Gross profit margin was 78.0% in 2024, compared to 27.8% in 2023.
Gaming segment gross profit was $2.4 million for 2024, compared to $0.6 million for 2023, representing a gross profit margin of 78.0% for 2024 and 39.2% for 2023. The increase in our Gaming segment gross profit of $1.8 million, and corresponding increase in gross profit margin, was primarily due to higher gaming revenues, particularly related to increased digital game revenues as a result of the release of Le Mans Ultimate on PC in February 2024. The increase in gross profit for the Gaming segment was also attributable to lower cost of revenues due to decreased royalty payments resulting from the decrease in NASCAR game sales compared to the prior period.
Esports segment gross loss was $0 for 2024, compared to $0.1 million for 2023, representing no gross loss margin in 2024 and a gross loss margin of 28.9% for 2023. As discussed above, the LMVS has not yet commenced for the 2024/25 season, which led to no revenues or cost of revenues being incurred for the esports segment in 2024.
Operating Expenses
| For the Three Months Ended March 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Sales and marketing | $ | 250,386 | $ | 618,410 | $ | (368,024 | ) | (59.5 | )% | |||||||
| Development | 1,063,357 | 2,397,134 | (1,333,777 | ) | (55.6 | )% | ||||||||||
| General and administrative | 2,190,266 | 2,779,110 | (588,844 | ) | (21.2 | )% | ||||||||||
| Depreciation and amortization | 73,724 | 97,354 | (23,630 | ) | (24.3 | )% | ||||||||||
| Total Operating Expenses | $ | 3,577,733 | $ | 5,892,008 | $ | (2,314,275 | ) | (39.3 | )% | |||||||
Changes in operating expenses are explained in more detail below:
Sales and Marketing
Sales and marketing expenses were $0.3 million and $0.6 million for 2024 and 2023, respectively, representing a $0.4 million, or 59.5%, decrease when compared to the prior period. The reduction in sales and marketing expenses was primarily driven by a $0.4 million reduction in payroll and employee-related expense as a result of lower headcount when compared to the prior period.
Development
Development expenses were $1.1 million and $2.4 million for 2024 and 2023, respectively, representing a $1.3 million, or 55.6%, decrease when compared to the prior period. The reduction in development expenses was primarily driven by a $0.7 million decrease in external development services, as well as a $0.6 million decrease in payroll as a result of lower headcount, when compared to the prior period.
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General and Administrative
General and administrative (“G&A”) expenses were $2.2 million and $2.8 million for 2024 and 2023, respectively, a decrease of $0.6 million, or 21.2%, when compared to the prior period. The reduction in G&A expenses was primarily driven by a $0.6 million reduction in payroll and employee-related expenses, following certain headcount reductions compared to the prior period, and a $0.3 million reduction in insurance costs. These reductions were partially offset by a $0.3 million increase in legal and professional fees incurred in 2024.
Depreciation and Amortization
Depreciation and amortization expenses for 2024 and 2023 presented no significant changes to the depreciation of capital assets.
Interest Expense
Interest expense was approximately $30,000 and $0.2 million for 2024 and 2023, respectively, primarily from non-cash interest accretion of purchase commitment liabilities relating to the acquisition of Studio397 in April 2021.
Other (Expenses) Income, net
Other expenses, net was $0.4 million for 2024, compared to other income, net of $0.4 million for 2023, a decrease of $0.8 million compared to the prior period. Other expenses, net of $0.4 million for 2024 was primarily comprised of foreign currency losses of $0.5 million incurred remeasuring transactions denominated in a currency other than U.S. dollars, which was partially offset by $0.1 million in rental income from the sub-lease of our Charlotte, NC office space. Other income, net of $0.4 million for 2023 was primarily comprised of foreign currency gains of $0.2 million incurred remeasuring transactions denominated in a currency other than U.S. dollars, as well as $0.05 million in rental income and $0.1 million in interest expense forgiveness.
Other Comprehensive Gain (Loss)
Other comprehensive gain was $0.6 million for 2024, compared to other comprehensive loss of $0.1 million for 2023. The $0.7 million improvement was primarily due to activity in our U.K. and Netherlands subsidiaries and represents unrealized foreign currency translation adjustments.
Net Loss Attributable to Non-Controlling Interest
Net loss attributable to the non-controlling interest was $0.1 million and $0.2 million for 2024 and 2023, respectively,
The improvement was attributed to the reduction of net losses in the Le Mans Esports Series Ltd joint venture.
Liquidity and Capital Resources
Liquidity
We have historically financed our operations primarily through cash generated from operations, advances from Driven Lifestyle pursuant to the $12 million Line of Credit (as defined below) and through sales of our equity securities.
We measure our liquidity in a number of ways, including the following:
| March 31, 2024 | December 31, 2023 | |||||||
| Cash and cash equivalents | $ | 1,252,691 | $ | 1,675,210 | ||||
| Working capital (deficiency) | $ | (4,625,471 | ) | $ | (4,074,346 | ) | ||
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For the three months ended March 31, 2021, revenues2024, the Company had a net loss of $1.7 million and negative cash flows from our Gaming segment decreased $784,365, or 24%, to $2,450,213 from $3,234,567 foroperations of $0.8 million. As of March 31, 2024, the Company had an accumulated deficit of $88.7 million and cash and cash equivalents of $1.3 million. As of April 30, 2024, the Company had cash and cash equivalents of $1.3 million.
For the three months ended March 31, 2020. The decrease in our Gaming segment revenues compared2024, the Company experienced an average net cash burn from operations of approximately $0.3 million per month, and while it has taken measures to reduce its costs, the 2020 period was due primarilyCompany expects to lower sales of our console games and,continue to have a lesser extent, a reduction in mobile revenues. The NASCAR Heat 4 game was released in September 2019, which was two months later in the respective calendar year compared to the release of NASCAR Heat 5 in July 2020. This resulted in higher sales of NASCAR Heat 4 during the first quarter of 2020 as compared to the sales of NASCAR Heat 5 during the first quarter of 2021 since the majority of salesnet cash outflow from a new release occur closest to the release date.
Esports segment revenues were $23,919 and $0operations for the quarters ended March 31, 2021 and 2020, respectively, an increase of $23,919 from sponsorship revenues from the Codemaster DiRT Rally event held during the first quarter of 2021. We held three events during the first quarter of 2020 but did not have any sponsorship revenues associated with these events.
Cost of Revenues
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| Cost of Revenue | ||||||||
| Gaming | $ | 715,116 | $ | 923,466 | ||||
| Esports | 66,692 | 145,031 | ||||||
| Total Segment and Consolidated Cost of Revenues | $ | 781,808 | $ | 1,068,497 | ||||
Cost of revenues were $781,808 and $1,068,497 for the quarters ended March 31, 2021 and 2020, respectively, a decrease of $286,689 or 27%. The decrease is primarily due to a decrease in revenues combined with an increase in gross margin due to a higher percentage of digital sales.
Cost of revenues from our Gaming segment were $715,116 and $923,466 for the quarters ended March 31, 2021 and 2020, respectively, a decrease of $208,350 or 23%foreseeable future as revenues decreased proportionately. Cost of revenues from our esports segment were $66,692 and $145,031 for the quarters ended March 31, 2021 and 2020, respectively, a decrease of $78,339 or 54%. Cost of revenues in our esports segment are primarily comprised of contract labor to staff events.
Gross Profit
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2021 | 2020 | |||||||
| Gross Profit: | ||||||||
| Gaming | $ | 1,735,097 | $ | 2,311,101 | ||||
| Esports | (42,773 | ) | (145,031 | ) | ||||
| Total Segment and Consolidated Gross Profit | $ | 1,692,324 | $ | 2,166,070 | ||||
Gross Profit was $1,692,324, or 68% of revenues, and $2,166,070, or 67% of revenues, for the quarters ended March 31, 2021 and 2020, respectively, a decrease of $473,746 or 22%. The decrease in gross profit was primarily due to the reduction in revenues, partially offset by the increased percentage of digital sales which have a slightly higher gross margin than the sale of physical units.
With lower revenues and slightly higher gross margin percentage of sales, our Gaming segment gross profit was $1,735,097 and $2,311,101 for the quarters ended March 31, 2021 and 2020, respectively. Costs relating to staffing at esports events resulted in a gross loss of $42,773 and $145,031 in our esports segment for the quarters ended March 31, 2021 and 2020, respectively.
Operating Expenses
Operating expenses were $17,069,393 and $2,285,646 for the quarters ended March 31, 2021 and 2020, respectively, an increase of $14,783,747, primarily attributable to expenses incurred in connection with and following our IPO in January 2021, including non-cash compensation and acquisition expenses.
Sales and Marketing
Sales and marketing expenses were $1,024,218 and $638,139 for the quarters ended March 31, 2021 and 2020, respectively. The increase in sales and marketing expenses reflects non-cash compensation expense of $121,722 relating to option grants in connection with the IPO, as well as higher headcount to support an increased number of games and platforms (Xbox, PlayStation, PC, Switch and mobile), which contributed $264,357 to the increase.
Development
Development expenses were $1,250,362 and $935,804 for the quarters ended March 31, 2021 and 2020, respectively. The $314,558 increase in development expenses reflects non-cash compensation expense of $43,832 relating to option grants in connection with the IPO, as well as higher headcountit continues to develop its product portfolio and support an increased number of gamesinvest in developing new video game titles. Based on the Company’s cash and platforms, which contributed $270,726 tocash equivalents position and its average cash burn, the increase.
General and Administrative
General and administrative expenses were $14,764,038 and $692,752 for the quarters ended March 31, 2021 and 2020, respectively, an increase of $14,071,286. The increase in general and administrative expenses reflects acquisition and IPO related expenses (including IPO bonuses and non-cash compensation expense) of $12,189,032; an increase in compensation expense of $739,640 (excluding IPO bonuses and non-cash compensation expense) primarily due to the increase in our headcount to manage a larger portfolio of brands across a greater number of platforms; an increase in insurance expense of $419,646 due to the directors’ and officers’ insurance policy we obtained when we became a publicly traded company; an increase in legal fees of $328,106 primarily relating to various acquisitions and corporate transactions, including the buyout through a merger of 704Games, and litigation matters relating to our previous purchases of certain equity interests in 704Games; and an increase in audit and accounting fees of $190,215 primarily due to increased costs of being a publicly traded company.
Depreciation and Amortization
Depreciation and amortization expenses were $30,775 and $18,951 for the quarters ended March 31, 2021 and 2020, respectively, an increase of $11,824. The increase was primarily due to additional amortization expense for intangible assets acquired through our acquisitions of BTCC and KartKraft.
Other Income (Expense)
Total other income (expense) was $1,291,645 and ($80,932) for the quarters ended March 31, 2021 and 2020, respectively.
Interest expense was $119,539 for the three months ended March 31, 2021 as compared to interest income of $1,140 for the three months ended March 31, 2020, an increase of $120,679 when compared to the 2020 period. This was primarily due to the interest-bearing related party loan from Motorsport Network that didCompany does not exist in 2020.
The gain (loss) attributable to equity method investment in the Le Mans joint venture was $1,370,837 for the quarter ended March 31, 2021 and $(70,242) for the quarter ended March 31, 2020.
Other income of $40,347 for the quarter ended March 31, 2021 was primarily comprised of $45,135 in rental income for sub-leasing our Charlotte North Carolina office. For the quarter ended March 31, 2020, other expense was ($11,830), comprised primarily of ($32,536) in expense for the write-off of fixed assets that were provided to the sub-lease tenant of Charlotte office offset by $18,896 rental income from sub-lease of Charlotte office and miscellaneous income of $1,810.
Other comprehensive loss was $32,914 and $0 for the quarters ended March 31, 2021 and 2020, respectively. This was primarily due to increased activity in our UK subsidiary during first quarter of 2021 and represents unrecognized foreign currency exchange losses.
Liquidity and Capital Resources
Liquidity
Since our inception, we have historically financed our operations primarily through advances from Motorsport Network, which were subsequently incorporated into a line of credit provided by Motorsport Network pursuant to a promissory note, as described below.
On January 15, 2021, we completed our IPO of 3,450,000 shares of Class A common stock at a price to the public of $20.00 per share, which includes the exercise in full by the underwriters of their option to purchase from us an additional 450,000 shares of Class A common stock. We received net proceeds of approximately $63.1 million from the IPO, after deducting underwriting discounts and offering expenses payable by us.
We believe that our existingit has sufficient cash on hand to fund its operations over the next year and that additional funding will be sufficientrequired in order to fund our operations for at least the next 12 months. In addition, we may choosecontinue operations.
The Company’s future liquidity and capital requirements include funds to raise additional funds at any time through equity or debt financing arrangements, which may or may not be needed for additional working capital, capital expenditures or other strategic investments. However, there are currently no commitments in place for future financing and there can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all. If we are unable to obtain adequate funds on reasonable terms, we may be required to significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms.
Our operating needs includesupport the planned costs to operate ourits business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures.
In order to address its liquidity shortfall, the Company continues to explore several options, including, but not limited to: i) additional funding in the form of potential equity and/or debt financing arrangements or similar transactions (collectively, “Capital Financing”); ii) other strategic alternatives for its business, including, but not limited to, the sale or licensing of the Company’s assets in addition to the recent sales of its NASCAR License and Traxion; and iii) cost reduction and restructuring initiatives, each of which is described more fully below.
The Company continues to explore additional funding in the form of potential Capital Financing and has entered into an Equity Distribution Agreement (the “ED Agreement”) with Canaccord Genuity LLC, as sales agent (the “Sales Agent”), pursuant to which the Company may issue and sell shares of its Class A common stock having an aggregate offering price of up to $10 million (subject to compliance with the limitations set forth in the SEC’s “baby shelf” rules). Subject to the terms and conditions of the ED Agreement, the Sales Agent may sell shares by any method deemed to be an “at-the-market” (“ATM”) offering as defined in Rule 415 under the Securities Act of 1933, as amended. As of March 31, 2024, the Company had an aggregate of $2.9 million available for future sales under its ATM program, which was reduced to $1.3 million of availability as of the date of this Report in accordance with the SEC’s baby shelf rules. However, due to the Company’s present liquidity position and required future funding requirements, any funds raised via its ATM program would not be sufficient to satisfy its ongoing liquidity requirements and further potential Capital Financing would be required, in conjunction to the other options being explored by the Company. Further, there can be no assurance the Company will be able to obtain funds via its ATM program, should it choose to sell shares under the ED Agreement, nor can there be any other assurance that the Company can secure additional funding in the form of equity and/or debt financing on commercially acceptable terms, if at all, to satisfy its future needed liquidity and capital expenditures. Ourresources.
Due to the continuing uncertainty surrounding the Company’s ability to raise funding in the form of potential Capital Financing, and in light of its liquidity position and anticipated future funding requirements, the Company continues to explore other strategic alternatives and potential options for its business, including, but not limited to, the sale or licensing of certain of the Company’s assets in addition to the recent sales of its NASCAR License and Traxion. If any such additional strategic alternative is executed, it is expected it would help to improve the Company’s working capital position and reduce overhead expenditures, thereby lowering the Company’s expected future cash-burn, and provide some short-term liquidity relief. Nonetheless, even if the Company is successful in implementing one or more additional strategic alternatives, the Company will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of its business and operations. There are no assurances that the Company will be successful in implementing any additional strategic plans for the sale or licensing of its assets, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond the Company’s control.
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As the Company continues to address its liquidity constraints, the Company may need to make further adjustments to its product roadmap in order to reduce operating cash burn. Additionally, the Company continues to seek to improve its liquidity through maintaining and enhancing cost control initiatives. The Company plans to continue evaluating the structure of its business for additional changes in order to improve both its near-term and long-term liquidity position, as well as create a healthy and sustainable Company from which to operate.
If the Company is unable to satisfy its capital requirements, andit could be required to adopt one or more of the adequacyfollowing alternatives:
| ● | delaying the implementation of or revising certain aspects of the Company’s business strategy; | |
| ● | further reducing or delaying the development and launch of new products and events; | |
| ● | further reducing or delaying capital spending, product development spending and marketing and promotional spending; | |
| ● | selling additional assets or operations; | |
| ● | seeking additional loans from third parties; | |
| ● | further reducing other discretionary spending; | |
| ● | entering into financing agreements on unattractive terms; and/or | |
| ● | significantly curtailing or discontinuing operations. |
There can be no assurance that the Company would be able to take any of our available funds will depend on manythe actions referred to above because of a variety of commercial or market factors, including, our abilitywithout limitation, market conditions being unfavorable for an equity or debt issuance or similar transactions, additional loans not being available from third parties, or that the transactions may not be permitted under the terms of the Company’s various debt instruments then in effect, such as due to successfully developrestrictions on the incurrence of debt, incurrence of liens, asset dispositions and related party transactions. In addition, such actions, if taken, may not enable the Company to satisfy its capital requirements if the actions that the Company is able to consummate do not generate a sufficient amount of additional capital.
Even if the Company does secure additional Capital Financing, if the anticipated level of revenues are not achieved because of, for example, decreased sales of the Company’s products due to the disposition of key assets, such as the sale of its NASCAR License, further changes in the Company’s product roadmap and/or the Company’s inability to deliver new products for its various other licenses; less than anticipated consumer acceptance of the Company’s offering of products and events; less than effective marketing and promotion campaigns, decreased consumer spending in response to weak economic conditions or weakness in the overall electronic games category; adverse changes in foreign currency exchange rates; decreased sales of the Company’s products and events as a result of increased competitive activities by the Company’s competitors; changes in consumer purchasing habits, such as the impact of higher energy prices on consumer purchasing behavior; retailer inventory management or reductions in retailer display space; less than anticipated results from the Company’s existing or new products or enhancementsfrom its advertising and/or marketing plans; or if the Company’s expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, the Company’s liquidity position may continue to our existing products, continued development and expansion of our esports platform andbe insufficient to satisfy its future capital requirements. If the Company is ultimately unable to satisfy its capital requirements, it would likely need to enter into collaborationsdissolve and liquidate its assets under the bankruptcy laws or otherwise.
In accordance with other companies or acquire other companies or technologiesAccounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to enhance or complement our product offerings.continue as a going concern within one year after the date that the accompanying consolidated financial statements to this Report are issued. The factors described above, in particular the lack of available cash on hand to fund operations over the next year, have raised substantial doubt about the Company’s ability to continue as a going concern.
The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
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Cash Flows Fromfrom Operating Activities
Cash flows fromNet cash used in operating activities for the three months ended March 31, 20212024 and 2020 were $(6,834,752)2023 was $0.8 million and $579,646,$5.7 million, respectively. The net cash used in operating activities for the three months ended March 31, 20212024 was primarily a result of cash used to fund a net loss of $14,085,424,$1.7 million, adjusted for net non-cash expensesadjustments of $7,883,479,$0.7 million and $632,807$0.2 million of net cash used inby changes in the levels of operating assets and liabilities. The netNet cash provided byused in operating activities for the three months ended March 31, 20202023 was primarily a resultdue to net loss of $5.3 million, adjusted for non-cash expenses in the amount of $1.2 million and by $1.6 million of cash used to fund a net loss of $200,507, adjusted for net non-cash expenses of $389,702, partially offset by $390,452 of net cash provided by changes in the levels of operating assets and liabilities.
Cash Flows Fromfrom Investing Activities
Net cash used in investing activities for the three months ended March 31, 20212023 was $956,501,$0.02 million, which was attributable to $1,000,000 paid in connection with the acquisition of KartKraft, the purchases of intangible assets and property and equipment of $26,000 and $83,751, respectively, partially offset by $153,250 of netequipment. There were no cash acquired in the purchase of additional interest in the Le Mans joint venture. Net cash used inflows from investing activities for the three months ended March 31, 2020 was $29,813, which was attributable to purchases of property and equipment.2024.
Cash Flows Fromfrom Financing Activities
We experienced positiveNet cash flows fromused in financing activities for the three months ended March 31, 2021 in the amount of $53,633,631,2024 was $0.05 million, which was primarily attributablerelated to $63.1 millionthe repayment of netpurchase commitment liabilities. Net cash provided by the sale of stock in our IPO, partially offset by $10.0 million of net repayments to Motorsport Network. Duringfinancing activities for the three months ended March 31, 2020, we used $41,217 of net cash from2023 was $10.7 million. Cash flows provided by financing activities which represented net cash repaidfor the three months ended March 31, 2023 were primarily attributable to Motorsport Network.$0.6 million raised in connection with shares sold under the Alumni Purchase Agreement (as defined below) and $10.4 million raised in connection with shares sold in the Company’s registered direct offerings, partially offset by $0.3 million of payments for purchase commitments.
Promissory Note Line of Credit
On April 1, 2020, wethe Company entered into a promissory note (the “$12 million Line of Credit”) with Motorsport Network (the “Promissory Note”) forthe Company’s majority stockholder, Driven Lifestyle, that provided the Company with a line of credit of up to $10,000,000$10 million (which was subsequently increased to $12 million pursuant to an amendment executed in November 2020) at an interest rate of 10% per annum.annum, the availability of which is dependent on Driven Lifestyle’s available liquidity. The principal amount under the Promissory Note was primarily funded through one or more advances from Motorsport Network, including advances in August and October 2020 for purposes$12 million Line of acquiring an additional ownership interest in 704Games. Previous non-interest-bearing advances due to Motorsport Network as of December 31, 2019 also were included in the amount outstanding under the Promissory Note at the time it was executed. The Promissory NoteCredit does not have a stated maturity date and is payable upon demand at any time at the sole and absolute discretion of Motorsport Network, which has agreed, pursuant to a Side Letter Agreement related toDriven Lifestyle, and any principal and accrued interest owed will be accelerated and become immediately payable in the Promissory Note, dated September 4, 2020, not to demand or otherwise accelerate any amount due underevent the Promissory Note that would otherwise constrain the Company’s liquidity position, including the Company’s ability to continueCompany consummates certain corporate events, such as a going concern. Wecapital reorganization. The Company may prepay the Promissory Note$12 million Line of Credit in whole or in part at any time or from time to time without penalty or charge. InAdditionally, see “Risk Factors – Risks Related to Our Financial Condition and Liquidity - Limits on our borrowing capacity under the event we$12 million Line of Credit may affect our ability to finance our operations” in Part I, Item 1A of the 2023 Form 10-K.
On September 8, 2022, the Company entered into a support agreement with Driven Lifestyle (the “Support Agreement”) pursuant to which Driven Lifestyle issued approximately $3 million (the “September 2022 Cash Advance”) to the Company in accordance with the $12 million Line of Credit. Additionally, the Support Agreement modified the $12 million Line of Credit such that, among other things, until June 30, 2024, Driven Lifestyle would not demand repayment of the September 2022 Cash Advance or anyother advances under the $12 million Line of our subsidiaries consummate certain corporate events, including any capital reorganization, consolidation, joint venture, spin off, merger or any other business combination or restructuring of any nature, or ifCredit, unless certain events occurred, as prescribed in the Support Agreement, such as the completion of default occur,a new financing arrangement or the entireCompany generates positive cash flows from operations, among others. All principal amount and all accrued interest owed on the $12 million Line of Credit were exchanged for equity following the completion of two debt-for-equity exchange agreements with Driven Lifestyle on January 30, 2023 and February 1, 2023, relieving the Company of approximately $3.9 million in owed principal and unpaid interest will be accelerated and become payable.in exchange for an aggregate of 780,385 shares of the Company’s Class A common stock. See Note 5 – Related Party Loans in our condensed consolidated financial statements in this Report for further information. As of March 31, 2024, the balance due to Driven Lifestyle under the $12 million Line of Credit was $0.
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On November 23, 2020,As of March 31, 2024, the $12 million Line of Credit remains in place. However, the Company believes that there is a substantial likelihood that Driven Lifestyle will not fulfill any future borrowing requests, and Motorsport Networktherefore does not view the $12 million Line of Credit as a viable source for future liquidity needs.
Other Financing Activity
On December 9, 2022, the Company entered into a stock purchase commitment agreement (the “Alumni Purchase Agreement”) with Alumni Capital LP (“Alumni Capital”), which provided that the Company could sell to Alumni Capital up to $2,000,000 of shares (the “commitment amount”) of the Company’s Class A common stock, through the commitment period expiring on December 31, 2023, or earlier if the commitment amount is reached. During the year ended December 31, 2023, the Company issued an amendmentaggregate of 175,167 shares of the Company’s Class A common stock to Alumni Capital under the Alumni Purchase Agreement with an aggregate fair market value of approximately $0.65 million. The Alumni Purchase Agreement expired on December 31, 2023.
On February 1, 2023, the Company issued 183,020 shares of the Company’s Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately $3.9 million (the “$3.9 million RDO”), before deducting placement agent fees and other offering expenses payable by the Company. H.C. Wainwright & Co., LLC (“Wainwright”) acted as the exclusive placement agent for the $3.9 million RDO, pursuant to the Promissory Note, effectiveengagement letter with the Company, dated as of September 15, 2020. UnderJanuary 9, 2023. In connection with the $3.9 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of $50,000 and closing fees of $15,950. The Company has also issued to Wainwright warrants to purchase up to 10,981 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the $3.9 million RDO, at an exercise price of $26.75 per share and will expire five years from the closing of the $3.9 million RDO.
On February 2, 2023, the Company issued 144,366 shares of the Company’s Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately $3.4 million (the “$3.4 million RDO”), before deducting placement agent fees and other offering expenses payable by the Company. Wainwright acted as the exclusive placement agent for the $3.4 million RDO. In connection with the $3.4 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of $25,000 and closing fees of $15,950. The Company has also issued to Wainwright warrants to purchase up to 8,662 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the $3.4 million RDO, at an exercise price of $29.375 per share and will expire five years from the closing of the $3.4 million RDO.
On February 3, 2023, the Company issued 232,188 shares of the Company’s Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately $4.0 million (the “$4.0 million RDO”), before deducting placement agent fees and other offering expenses payable by the Company. Wainwright acted as the exclusive placement agent for the $4.0 million RDO. In connection with the $4.0 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of $25,000 and closing fees of $15,950. The Company has also issued to Wainwright and its designees warrants to purchase up to 13,931 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the $4.0 million RDO, at an exercise price of $21.738 per share and will expire five years from the closing of the $4.0 million RDO.
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On March 31, 2023, the Company entered into the ED Agreement with the Sales Agent, pursuant to which the Company may issue and sell shares of its Class A common stock having an aggregate offering price of up to $10 million (subject to compliance with the limitations set forth in the SEC’s “baby shelf” rules), from time to time through the Sales Agent. Subject to the terms and conditions of the amendment,ED Agreement, the line of creditSales Agent may sell shares by any method deemed to be an “at-the-market” offering as defined in Rule 415 under the Promissory Note was increasedSecurities Act of 1933, as amended. The Company is not obligated to sell any shares under the ED Agreement. The Sales Agent is entitled to a commission of 3% of the aggregate gross proceeds from $10,000,000each sale of shares occurring pursuant to $12,000,000. All other terms remained the same.
ED Agreement. During the three months ended March 31, 2021,2024, no shares of Class A common stock were sold under the Company’s ATM program. As of March 31, 2024, the Company repaid $11,800,000had an aggregate of $2.9 million available for future sales under its ATM program, which was reduced to $1.3 million of availability as of the Promissory Note and drew down an additional $1,906,248, such thatdate of this Report in accordance with the balance dueSEC’s baby shelf rules.
Capital Expenditures
The nature of the Company’s operations does not require significant expenditures on capital assets, nor does the Company typically enter into significant commitments to Motorsport Network was $959,784acquire capital assets. The Company does not have material commitments to acquire capital assets as of March 31, 2021. 2024.
Material Cash Requirements
Except as described below, there have been no material changes in our reported material cash requirements as described under “Liquidity and Capital Resources – Material Cash Requirements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the 2023 Form 10-K.
On April 21, 2021,12, 2024, the Company repaid $863,169entered into the BARC Settlement Agreement with BARC. Pursuant to the BARC Settlement Agreement, the Company and BARC, without admitting any liabilities, agreed that the license agreement between the parties relating to the Previous BTCC License was terminated without any liabilities and that any and all royalties and/or any other sums whatsoever were forgiven by BARC and discharged in their entirety in consideration of (i) the Promissory Note.Company’s one-time payment of $225,000 to BARC and (ii) the Company and BARC entering, effective as of April 12, 2024, into a new license agreement to use certain licensed intellectual property related to, themed as, or containing the BTCC. Prior to entering into the BARC Settlement Agreement, the Company had a total remaining liability in connection with the Previous BTCC License, inclusive of unpaid installments, of $0.9 million.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any relationships with any organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Significant Accounting Estimates
Our management’s discussion and analysis of our condensed consolidated financial condition and results of operations are based on our condensed and consolidated financial statements, whichThere have been preparedno material changes to the items disclosed as critical accounting policies and estimates under “Liquidity and Capital Resources—Critical Accounting Policies and Estimates” in accordance with U.S. GAAP. The preparation“Management’s Discussion and Analysis of these condensedFinancial Condition and consolidated financial statements requires us to make estimates and assumptions that affect the reported amountsResults of assets and liabilities and the disclosure of contingent assets and liabilities asOperations” in Part II, Item 7 of the date of the condensed consolidated financial statements, as well as the reported expenses during the reporting periods. The accounting estimates that require our most significant, difficult, and subjective judgments have an impact on revenue recognition, including reserves for sales returns and price protection, valuation allowance of deferred income taxes, valuation of acquired companies and equity investments, the recognition and disclosure of contingent liabilities, and goodwill and intangible assets impairment testing. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.2023 Form 10-K.
Our significant accounting policies are more fully described in our condensed consolidated financial statements included elsewhere in this quarterly report.
Recently Issued Accounting Standards
As an “emerging growth company”, the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act until such time as we are no longer considered to be an emerging growth company.
Our analysis of recently issued accounting standards are more fully described in our condensed consolidated financial statements included elsewhere in this quarterly report.Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of March 31, 2021, being the end of the period covered by this Report, our management conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosureDisclosure controls and procedures (as such term is(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).
Disclosure controls and proceduresAct) are designed to provide reasonable assuranceensure that information required to be disclosed by us in ourthe reports filedwe file or submittedsubmit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’sSEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officerChief Executive Officer and chief financial officer,Interim Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Based on that evaluation,Our management, with the participation of our chief executive officerChief Executive Officer and chief financial officer concluded that,Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2021,2024. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer have concluded that our disclosure controls and procedures were not effective due toas of March 31, 2024 because of the material weaknesses in our internal control over financial reporting (as such term is(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) as discussed in Part II, Item 9A. 9A, “Controls and Procedures inProcedures” of the 20202023 Form 10-K, and that continued to exist as of March 31, 2021.2024.
However, as partRemediation of its ongoing remediation initiative, management continuedMaterial Weaknesses
We have not yet remediated the material weaknesses relating to commit resources(i) our failure to documentingdesign and evaluatingmaintain effective monitoring procedures and controls to evaluate the effectiveness of our individual control activities and (ii) a lack of sufficient number of personnel with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely, each of which are discussed further in Part II, Item 9A, “Controls and Procedures” of the 2023 Form 10-K.
If not remediated, or if we identify further material weaknesses in our internal controls, during the quarter.
Management is reviewing the designour failure to establish and is evaluating themaintain effective disclosure controls and procedures and internal controls within various business and entity-level processes including segregation of duties among in-house personnel and support staff.
We have also hired additional qualified finance and accounting personnel to assistcontrol over financial reporting could result in the preparation and review ofmaterial misstatements in our consolidated financial statements and SEC filings.
Management will complete itsa failure to meet our reporting and financial obligations. We believe that we have made and continue to make progress on the remediation plans described in our 2023 Form 10-K, under Part II, Item 9A, “Controls and Procedures.” For example, during the quarter ended March 31, 2024, we continued to make improvements to controls and continued our evaluation and documentation of risks and key controls forming part of the design of the remediation of the identified and reported material weaknesses in internal controls and then proceed to remediate those weaknesses and validate the operational effectiveness of the remediated controls.
Management expects to make and report continuous progress: (a) in the effective remediation of the identified material weaknesses; and (b) in designing and operating a commensuratesignificant business processes, including internal control over financial reporting risk assessment scoping, development of risk control matrices and disclosure control environment.identification of key transaction level and entity level controls that require testing on an ongoing basis.
Limitations on the Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
Except as described above, there were no other changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) under the Exchange Act during the quarter ended March 31, 2021,2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are subjectItem 1. Legal Proceedings
The Company is involved in various routine legal proceedings incidental to claims and litigation arising in the ordinary course of its business. We do not believeThe Company believes that any liability from any reasonably foreseeable dispositionthe outcome of such claims and litigation, individually orall pending legal proceedings in the aggregate wouldis not reasonably likely to have a material adverse effect on our condensed consolidatedthe Company’s business, prospects, results of operations, financial statements.condition and/or cash flows, except as otherwise disclosed in this Report. In light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period. See Note 89 – CommitmentCommitments and Contingencies – Litigation in our condensed consolidated financial statements in this Report for additional information.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in “Risk Factors” in Part I, Item 1A of our Annual Report onthe 2023 Form 10-K, for the year ended December 31, 2020, which could materially affect our business, financial condition or future results. The risks described thereinin the 2023 Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
There were no unregistered sales of equity securities during the quarter ended March 31, 20212024, other than as reported in our Current Reports on Form 8-K filed with the SEC.
Use of Proceeds
On January 15, 2021, we completed our IPO pursuant to our registration statement on Form S-1 (File No. 333-251501), as amended (the “Registration Statement”), which was declared effective by the SEC on January 12, 2021. As previously reported, we received net proceeds of approximately $63.1 million from our IPO. There has been no material change in the expected use of the net proceeds from our IPO as described in our final prospectus, dated January 12, 2021, filed with the SEC pursuant to Rule 424(b) relating to our Registration Statement.
As of March 31, 2021, we have used approximately $16.9 million of the net proceeds from our IPO, including (i) $11.8 million for the repayment of a portion of the outstanding amount due under our promissory note entered into with Motorsport Network, our majority stockholder; (ii) $1.0 million in connection with the acquisitions of KartKraft (which includes $250,000 in escrow); and (iii) $2.6 million for working capital and general corporate purposes.
Purchases of Equity Securities
We did not purchase any shares of our Class A common stock during the quarter ended March 31, 2021.2024.
None.Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
None.Item 5. Other Information
Rule 10b5-1 Trading Plans
During the three months ended March 31, 2024, none of our directors or officers (as defined in Exchange Act Rule 16a-1(f)) adopted or terminated a “Rule 10b5–1 trading arrangement” or a “non-Rule 10b5–1 trading arrangement,” each as defined in Item 408 of Regulation S-K.
Item 6. Exhibits
| Incorporated by Reference | ||||||||||||
| Exhibit Number | Description | Form | File No. | Exhibit Number | Filing Date | Filed/Furnished Herewith | ||||||
| 3.1.1 | Certificate of Incorporation of Motorsport Games Inc. | S-1/A | 333-251501 | 3.3 | 1/11/21 | |||||||
| 3.1.2 | Certificate of Amendment to the Certificate of Incorporation of Motorsport Games Inc. | 8-K | 001-39868 | 3.1 | 11/10/22 | |||||||
| 3.2.1 | Bylaws of Motorsport Games Inc. | S-1/A | 333-251501 | 3.4 | 1/11/21 | |||||||
| 3.2.2 | Amendment No. 1 to the Bylaws of Motorsport Games Inc. | 8-K | 001-39868 | 3.2 | 11/10/22 | |||||||
| 10.1 | Settlement Agreement, dated as of April 12, 2024, between Motorsport Games Inc. and BARC (TOCA) LIMITED | 8-K | 001-39868 | 10.1 | 4/18/24 | |||||||
| 10.2* | License Agreement, dated as of April 12, 2024, between Motorsport Games Inc. and BARC (TOCA) LIMITED | 8-K | 001-39868 | 10.2 | 4/18/24 | |||||||
| 10.3 | Asset Purchase Agreement, dated as of April 26, 2024, between Motorsport Games Inc. and Traxion.GG Limited | 8-K | 001-39868 | 10.1 | 5/1/24 | |||||||
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act | X | ||||||||||
| 31.2 | Certification of Interim Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act | X | ||||||||||
| 32.1 | Certification of Chief Executive Officer and Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | X | ||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) | X | ||||||||||
| Portions of the exhibit, marked by brackets, have been omitted because the omitted information (i) is not material and (ii) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: May | MOTORSPORT GAMES INC. | |
| By: | /s/ | |
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ | |
| Interim Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) |