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 June 30, 2021
or
| For the quarterly period ended March 31, 2022 | ||
| 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 Incorporation or Organization | I.R.S. Employer Identification No. | |
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 ☒ 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 ☒ No ☐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 ☒
As of August 10, 2021,May 16, 2022, the registrant had shares of Class A common stock and shares of Class B common stock outstanding.
Motorsport Games Inc.
Form 10-Q
For the Quarter Ended June 30, 2021March 31, 2022
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 limitedand projections relating to those relating to: our future business,financial 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, including the anticipated timing of our product launches, such as for our NASCAR 21: Ignition, British Touring Car Championship, iconic 24 Hours of Le Mans endurance race and the associated FIA World Endurance Championship, and INDYCAR video games, as well as the launch of our updated NASCAR Heat Mobile game; our intention to expand our license arrangements to other internationally recognized racing series and the platforms we operate on; our expectation that we will continue to derive significant revenues from sales of our products to a very limited number of distribution partners; our belief that additions to our existing portfolio of games centered around popular licensed racing series will provide us the opportunity to further grow our esports business by having more titles to produce our esports events; our expectation that we will continue to invest in technology, hardware and software to support our games and services, including with respect to security protections; our plans to introduce a slate of NASCAR branded casual gaming options for mobile devices; our intention to continue to look for opportunities to expand the recurring portion of our busines; our liquidity, cash flows and anticipated uses of cash; our plans and intentions with respect to our remediation efforts to address the material weaknesses in our internal control over financial reporting; our beliefs regarding the impact of any claims and litigation that we are subject to; 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 statements we make relating to:
| ● | our future business, results of operations, financial condition and/or liquidity, including with respect to the ongoing effects of Russia’s invasion of Ukraine, as well as the coronavirus (“COVID-19”) pandemic; | |
| ● | new or planned products or offerings, including the anticipated timing of our new product launches under our updated product roadmap, such as our expectation that our next NASCAR title for 2022 will be an update to our 2021 release and our anticipated release of INDYCAR, British Touring Car Championship and Le Mans games in 2023 and 2024; | |
| ● | our intentions with respect to our mobile games, including expectations that we will continue to focus on developing and further enhancing our multi-platform games for mobile phones, as well as the anticipated timing of the release of our future mobile games; | |
| ● | 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 expand our license arrangements to other internationally recognized racing series and the platforms we operate on; | |
| ● | our expectations that the COVID-19 pandemic will not have a material impact on our future business and operations; | |
| ● | our expectation that having a broader product portfolio will improve our operating results and provide a revenue stream that is less cyclical based on the release of a single game per year; | |
| ● | 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 expectation that we will continue to invest in technology, hardware and software to support our games and services, including with respect to security protections; | |
| ● | our belief that the global adoption of portable and mobile gaming devices leading to significant growth in portable and mobile gaming is a continuing trend; | |
| ● | our intention to continue to look for opportunities to expand the recurring portion of our business; | |
| ● | our liquidity and capital requirements, including, without limitation, our ability to continue as a going concern, our belief that our existing cash on hand, together with borrowing availability under the $12 million Line of Credit, will not be sufficient to fund our operations for at least the next 12 months, our belief that it will be necessary for us to secure additional funds, whether through a variety of equity and/or debt financing arrangements or implementing cost reductions through cost control initiatives, to continue our existing business operations and to fund our obligations, our expectation to generate additional liquidity through consummating equity and/or debt financings and through cost control initiatives and our belief that we have access to capital resources, as well as statements regarding our cash flows and anticipated uses of cash; | |
| ● | our expectations that we will continue to incur losses for the foreseeable future as we continue to incur significant expenses; | |
| ● | our expectations relating to future impairment of intangible 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, but 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, including, without limitation, our beliefs regarding the merit of any plaintiff’s allegations and the impact of any claims and litigation that we are subject to; | |
| ● | our ability to utilize net operating loss carryforwards; and | |
| ● | our expectations regarding the future impact of implementing management strategies, potential acquisitions and industry trends. |
| ii |
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, 20202021 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, filings, which include, but are not limited to,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:
| difficulties and/or |
| (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 | ||
| (iii) | difficulties, delays in or unanticipated events that may impact the timing and scope of new product launches, such as due to difficulties or delays in using its product development personnel in Russia due to Russia’s invasion of Ukraine and the related sanctions and/or more restrictive sanctions rendering transacting in the |
| (iv) | less than expected benefits from implementing our | |
| (v) | delays and higher than anticipated expenses related to the ongoing and prolonged COVID-19 pandemic; | |
| (vi) | our ability (or inability) to maintain existing, and to secure additional, licenses and other agreements with various racing series; | |
| (vii) | our ability to successfully manage and integrate any joint ventures, acquisitions of businesses, solutions or technologies; | |
| (viii) | unanticipated operating costs, transaction costs and actual or contingent liabilities; | |
| (ix) | our ability to attract and retain qualified employees and key personnel; | |
| (x) | adverse effects of increased competition; | |
| (xi) | changes in consumer behavior, including as a result of general economic factors, such as increased inflation, higher energy prices and higher interest rates; | |
| (xii) | our ability to protect its intellectual property; | |
| (xiii) | local, industry and general business and economic conditions; and/or | |
| (xiv) | unanticipated adverse effects on our business, |
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.
| iii |
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| June 30, 2021 | December 31, 2020 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 28,303,204 | $ | 3,990,532 | ||||
| Accounts receivable, net of allowances of $2,350,624 and $2,150,684, at June 30, 2021 and December 31, 2020, respectively | 3,840,842 | 5,975,414 | ||||||
| Prepaid expenses and other current assets | 1,312,923 | 507,177 | ||||||
| Total Current Assets | 33,456,969 | 10,473,123 | ||||||
| Property and equipment, net | 452,612 | 162,148 | ||||||
| Goodwill | 5,099,065 | 137,717 | ||||||
| Intangible assets, net | 19,657,911 | 5,568,452 | ||||||
| Deferred offering costs | - | 749,370 | ||||||
| Other assets | - | 296,200 | ||||||
| Total Assets | $ | 58,666,557 | $ | 17,387,010 | ||||
| Liabilities and Stockholders’ Equity / Member’s Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 268,981 | $ | 705,951 | ||||
| Accrued expenses | 2,114,935 | 3,355,003 | ||||||
| Due to related parties | 285,198 | 10,853,536 | ||||||
| Purchase commitment liability | 3,126,314 | - | ||||||
| Total Current Liabilities | 5,795,428 | 14,914,490 | ||||||
| Other non-current liabilities | 917,640 | 856,694 | ||||||
| Total Liabilities | 6,713,068 | 15,771,184 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders’ Equity / Member’s Equity: | ||||||||
| Preferred stock, $ par value, shares authorized; issued and outstanding as of June 30, 2021 and December 31, 2020 | - | - | ||||||
| Class A common stock - $ par value; authorized shares; and shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 1,164 | - | ||||||
| Class B common stock - $ par value; authorized shares; and shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively | 700 | - | ||||||
| Common stock value | ||||||||
| Additional paid-in capital | 75,117,703 | - | ||||||
| Member’s equity | - | 3,791,674 | ||||||
| Accumulated deficit | (24,418,403 | ) | (4,826,335 | ) | ||||
| Accumulated other comprehensive (loss) income | (98,795 | ) | 4,928 | |||||
| Total Stockholders’ Equity / Member’s Deficit Attributable to Motorsport Games Inc. | 50,602,369 | (1,029,733 | ) | |||||
| Non-controlling interest | 1,351,120 | 2,645,559 | ||||||
| Total Stockholders’ Equity / Member’s Equity | 51,953,489 | 1,615,826 | ||||||
| Total Liabilities and Stockholders’ Equity / Member’s Equity | $ | 58,666,557 | $ | 17,387,010 | ||||
March 31, 2022 | December 31, 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 12,367,235 | $ | 17,819,640 | ||||
| Accounts receivable, net of allowances of $4,798,124 and $4,563,884, at March 31, 2022 and December 31, 2021, respectively | 2,753,873 | 5,490,272 | ||||||
| Due from related parties | 39,233 | 137,574 | ||||||
| Prepaid expenses and other current assets | 1,708,330 | 1,175,354 | ||||||
| Total Current Assets | 16,868,671 | 24,622,840 | ||||||
| Property and equipment, net | 722,982 | 727,089 | ||||||
| Operating lease right of use assets | 681,315 | - | ||||||
| Goodwill | - | 4,867,465 | ||||||
| Intangible assets, net | 15,308,597 | 20,485,809 | ||||||
| Total Assets | $ | 33,581,565 | $ | 50,703,203 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | �� | |||||||
| Accounts payable | $ | 592,667 | $ | 1,784,645 | ||||
| Accrued expenses and other liabilities | 2,574,533 | 3,524,271 | ||||||
| Due to related parties | 117,153 | 119,015 | ||||||
| Purchase commitments | 3,276,863 | 3,170,319 | ||||||
| Operating lease liabilities (current) | 206,690 | - | ||||||
| Total Current Liabilities | 6,767,906 | 8,598,250 | ||||||
| Operating lease liabilities (non-current) | 485,115 | - | ||||||
| Other non-current liabilities | 4,145,094 | 4,122,950 | ||||||
| Total Liabilities | 11,398,115 | 12,721,200 | ||||||
| Commitments and contingencies (Note 11) | - | - | ||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $par value; authorized shares; issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | - | - | ||||||
| Class A common stock - $par value; authorized shares; and shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | 1,168 | 1,164 | ||||||
| Class B common stock - $par value; authorized shares; and shares issued and outstanding as of March 31, 2022, and December 31, 2021, respectively | 700 | 700 | ||||||
| Additional paid-in capital | 76,004,201 | 75,651,175 | ||||||
| Accumulated deficit | (53,125,943 | ) | (37,988,326 | ) | ||||
| Accumulated other comprehensive loss | (1,070,620 | ) | (945,375 | ) | ||||
| Total Stockholders’ Equity Attributable to Motorsport Games Inc. | 21,809,506 | 36,719,338 | ||||||
| Non-controlling interest | 373,944 | 1,262,665 | ||||||
| Total Stockholders’ Equity | 22,183,450 | 37,982,003 | ||||||
| Total Liabilities and Stockholders’ Equity | $ | 33,581,565 | $ | 50,703,203 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 1 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)(UNAUDITED)
| 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2022 | 2021 | |||||||||||||||||||
| Revenues | $ | 2,238,927 | $ | 3,888,817 | $ | 4,713,059 | $ | 7,123,384 | $ | 3,321,789 | $ | 2,474,132 | ||||||||||||
| Cost of revenues [1] | 906,303 | 1,272,239 | 1,688,111 | 2,340,736 | 2,013,806 | 781,808 | ||||||||||||||||||
| Gross profit | 1,332,624 | 2,616,578 | 3,024,948 | 4,782,648 | 1,307,983 | 1,692,324 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Sales and marketing [2] | 704,222 | 722,046 | 1,728,440 | 1,360,185 | ||||||||||||||||||||
| Development [3] | 1,818,178 | 1,202,343 | 3,068,540 | 2,138,147 | ||||||||||||||||||||
| General and administrative [4] | 4,717,180 | 582,408 | 19,481,218 | 1,275,160 | ||||||||||||||||||||
| Sales and marketing | 1,688,449 | 1,024,218 | ||||||||||||||||||||||
| Development [2] | 2,404,338 | 1,250,362 | ||||||||||||||||||||||
| General and administrative [3] | 3,423,153 | 14,764,038 | ||||||||||||||||||||||
| Impairment of goodwill | 4,788,268 | - | ||||||||||||||||||||||
| Impairment of intangible assets | 4,491,054 | - | ||||||||||||||||||||||
| Depreciation and amortization | 66,448 | 8,511 | 97,223 | 27,462 | 116,071 | 30,775 | ||||||||||||||||||
| Total operating expenses | 7,306,028 | 2,515,308 | 24,375,421 | 4,800,954 | 16,911,333 | 17,069,393 | ||||||||||||||||||
| (Loss) income from operations | (5,973,404 | ) | 101,270 | (21,350,473 | ) | (18,306 | ) | |||||||||||||||||
| Interest expense [5] | (31,899 | ) | (218,500 | ) | (151,438 | ) | (217,360 | ) | ||||||||||||||||
| Gain (loss) attributable to equity method investment | - | 41,008 | 1,370,837 | (29,234 | ) | |||||||||||||||||||
| Other income, net | 44,360 | 44,688 | 84,707 | 32,858 | ||||||||||||||||||||
| Loss from operations | (15,603,350 | ) | (15,377,069 | ) | ||||||||||||||||||||
| Interest expense [4] | (201,596 | ) | (119,539 | ) | ||||||||||||||||||||
| Gain attributable to equity method investment | - | 1,370,837 | ||||||||||||||||||||||
| Other (expense) income, net | (162,099 | ) | 40,347 | |||||||||||||||||||||
| Net loss | (5,960,943 | ) | (31,534 | ) | (20,046,367 | ) | (232,042 | ) | (15,967,045 | ) | (14,085,424 | ) | ||||||||||||
| Less: Net (loss) income attributable to non-controlling interest | (180,849 | ) | 46,781 | (454,299 | ) | 85,904 | ||||||||||||||||||
| Less: Net loss attributable to non-controlling interest | (829,428 | ) | (273,450 | ) | ||||||||||||||||||||
| Net loss attributable to Motorsport Games Inc. | $ | (5,780,094 | ) | $ | (78,315 | ) | $ | (19,592,068 | ) | $ | (317,946 | ) | $ | (15,137,617 | ) | $ | (13,811,974 | ) | ||||||
| Net loss attributable to Class A common stock per share [6]: | ||||||||||||||||||||||||
| Net loss attributable to Class A common stock per share: | ||||||||||||||||||||||||
| Basic and diluted | [6] | $ | (0.50 | ) | $ | (1.88 | ) | $ | (1.30 | ) | $ | (1.30 | ) | |||||||||||
| Weighted-average shares of Class A common stock outstanding [6]: | ||||||||||||||||||||||||
| Weighted-average shares of Class A common stock outstanding: | ||||||||||||||||||||||||
| Basic and diluted | [6] | 11,494,919 | 10,421,910 | 11,668,160 | 10,637,065 | |||||||||||||||||||
| [1] | Includes related party costs of $6,228 |
| [2] | Includes related party expenses of $22,606 |
| [3] | Includes related party expenses of $22,886 |
| [4] |
| Includes related party expenses of $0and $ |
The accompanying notes are an integral part of these condensed consolidated financial statements.
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Net loss | $ | (5,960,943 | ) | $ | (31,534 | ) | $ | (20,046,367 | ) | $ | (232,042 | ) | ||||
| Other comprehensive loss: | ||||||||||||||||
| Foreign currency translation adjustments | (70,809 | ) | - | (103,723 | ) | - | ||||||||||
| Comprehensive loss | (6,031,752 | ) | (31,534 | ) | (20,150,090 | ) | (232,042 | ) | ||||||||
| Comprehensive loss attributable to non-controlling interests | (180,849 | ) | 46,781 | (454,299 | ) | 85,904 | ||||||||||
| Comprehensive loss attributable to Motorsport Games Inc. | $ | (5,850,903 | ) | $ | (78,315 | ) | $ | (19,695,791 | ) | $ | (317,946 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 2 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| Three Months Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Net loss | $ | (15,967,045 | ) | $ | (14,085,424 | ) | ||
| Other comprehensive loss: | ||||||||
| Foreign currency translation adjustments | (125,245 | ) | (32,914 | ) | ||||
| Comprehensive loss | (16,092,290 | ) | (14,118,338 | ) | ||||
| Comprehensive loss attributable to non-controlling interests | (888,721 | ) | (273,450 | ) | ||||
| Comprehensive loss attributable to Motorsport Games Inc. | $ | (15,203,569 | ) | $ | (13,844,888 | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY / MEMBER’S EQUITY
(Unaudited)(UNAUDITED)
| Shares | Amount | Shares | Amount | Equity | Capital | Deficit | Income (Loss) | Games Inc. | Interest | Equity | ||||||||||||||||||||||||||||||||||
| For the Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Total Stockholders’ Equity / | Total | |||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Member’s Equity | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Other | 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 | |||||||||||||||||||||||||||||||||
| Issuance of common stock to Gaming Nation and Playfast | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to Gaming Nation and Playfast, Shares | ||||||||||||||||||||||||||||||||||||||||||||
| Purchase of 704Games minority interest | ||||||||||||||||||||||||||||||||||||||||||||
| ACO Investment in Le Mans joint venture | �� | |||||||||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||
| Issuance of common stock to Gaming Nation and Playfast | 855,264 | 86 | - | - | - | - | - | - | 86 | - | 86 | |||||||||||||||||||||||||||||||||
| Purchase of 704Games minority interest | - | - | - | - | - | (939,511 | ) | - | - | (939,511 | ) | (2,659,786 | ) | (3,599,297 | ) | |||||||||||||||||||||||||||||
| ACO Investment in Le Mans joint venture | - | - | - | - | - | - | - | - | - | 234,754 | 234,754 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | 116,274 | - | - | 116,274 | - | 116,274 | |||||||||||||||||||||||||||||||||
| Comprehensive loss: | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | - | (70,809 | ) | (70,809 | ) | - | (70,809 | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (5,780,094 | ) | - | (5,780,094 | ) | (180,849 | ) | (5,960,943 | ) | |||||||||||||||||||||||||||||
| Balance - June 30, 2021 | 11,635,897 | $ | 1,164 | 7,000,000 | $ | 700 | $ | - | $ | 75,117,703 | $ | (24,418,403 | ) | $ | (98,795 | ) | $ | 50,602,369 | $ | 1,351,120 | $ | 51,953,489 | ||||||||||||||||||||||
| For the Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||
Class A Common Stock | Class B Common Stock | Member’s | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Total Stockholders’ Equity Attributable to Motorsport | Non- controlling | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Equity | Capital | Deficit | Income (Loss) | Games Inc. | Interest | Equity | ||||||||||||||||||||||||||||||||||
| Balance - January 1, 2022 | 11,635,897 | $ | 1,164 | 7,000,000 | $ | 700 | $ | - | $ | 75,651,175 | $ | (37,988,326 | ) | $ | (945,375 | ) | $ | 36,719,338 | $ | 1,262,665 | $ | 37,982,003 | ||||||||||||||||||||||
| Stock-based compensation | 37,900 | 4 | - | - | - | 353,026 | - | - | 353,030 | - | 353,030 | |||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | (125,245 | ) | (125,245 | ) | (59,293 | ) | (184,538 | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (15,137,617 | ) | - | (15,137,617 | ) | (829,428 | ) | (15,967,045 | ) | |||||||||||||||||||||||||||||
| Balance - March 31, 2022 | 11,673,797 | $ | 1,168 | 7,000,000 | $ | 700 | $ | - | $ | 76,004,201 | $ | (53,125,943 | ) | $ | (1,070,620 | ) | $ | 21,809,506 | $ | 373,944 | $ | 22,183,450 | ||||||||||||||||||||||
| For the Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance - January 1, 2021 | - | $ | - | - | $ | - | $ | 3,791,674 | $ | - | $ | (4,826,335 | ) | $ | 4,928 | $ | (1,029,733 | ) | $ | 2,645,559 | $ | 1,615,826 | ||||||||||||||||||||||
| Beginning balance | - | $ | - | - | $ | - | $ | 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 | ||||||||||||||||||||||
| Ending balance | 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 | ||||||||||||||||||||||
| For the Six Months Ended June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| Total Stockholders’ Equity / | Total | |||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Member’s Equity | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Other | 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 | ||||||||||||||||||||||
| Beginning balance | - | $ | - | - | $ | - | $ | - | $ | - | $ | (3,303,985 | ) | $ | - | $ | (3,303,985 | ) | $ | 6,715,437 | $ | 3,411,452 | ||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (78,315 | ) | - | (78,315 | ) | 46,781 | (31,534 | ) | ||||||||||||||||||||||||||||||
| Balance - June 30, 2020 | - | $ | - | - | $ | - | $ | - | $ | - | $ | (3,382,300 | ) | $ | - | $ | (3,382,300 | ) | $ | 6,762,218 | $ | 3,379,918 | ||||||||||||||||||||||
| Ending Balance | - | $ | - | - | $ | - | $ | - | $ | - | $ | (3,382,300 | ) | $ | - | $ | (3,382,300 | ) | $ | 6,762,218 | $ | 3,379,918 | ||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(UNAUDITED)
| 2021 | 2020 | |||||||
| For the Six Months Ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (20,046,367 | ) | $ | (232,042 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 659,309 | 303,331 | ||||||
| Sales return and price protection reserves | 199,940 | 369,597 | ||||||
| Stock-based compensation | 9,193,190 | - | ||||||
| (Gain) loss on equity method investee | (1,370,837 | ) | 29,234 | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 2,149,685 | 41,635 | ||||||
| Prepaid expenses and other current assets | (751,480 | ) | (998,225 | ) | ||||
| Other assets | 25,000 | (85,022 | ) | |||||
| Accounts payable | (579,061 | ) | 421,350 | |||||
| Other non-current liabilities | 60,946 | 850,593 | ||||||
| Accrued expenses | (804,871 | ) | 1,597,511 | |||||
| Net Cash (Used In) Provided By Operating Activities | (11,264,546 | ) | 2,297,962 | |||||
| Cash Flows From Investing Activities: | ||||||||
| Purchase of additional interest in Le Mans, net of cash acquired | 153,250 | - | ||||||
| Acquisition of KartKraft | (1,000,000 | ) | - | |||||
| Acquisition of Studio397 | (12,785,463 | ) | - | |||||
| Purchase of intangible assets | (27,928 | ) | (891,999 | ) | ||||
| Purchase of property and equipment | (348,033 | ) | (11,155 | ) | ||||
| Net Cash Used In Investing Activities | (14,008,174 | ) | (903,154 | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Advances from related parties | 1,868,312 | 427,376 | ||||||
| Repayments on advances from related parties | (12,663,168 | ) | (466,322 | ) | ||||
| Issuance of common stock in initial public offering, net [1] | 63,661,128 | - | ||||||
| Payments of deferred offering costs | - | (27,848 | ) | |||||
| Purchase of 704Games minority interest | (3,599,211 | ) | - | |||||
| Contributed capital from non-controlling shareholders | 234,754 | - | ||||||
| Net Cash Provided By (Used In) Financing Activities | 49,501,815 | (66,794 | ) | |||||
| Effect of foreign exchange rate changes on cash | 83,577 | - | ||||||
| Net Increase In Cash | 24,312,672 | 1,328,014 | ||||||
| Cash - Beginning of the period | 3,990,532 | 1,960,279 | ||||||
| Cash - End of the period | $ | 28,303,204 | $ | 3,288,293 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 804,674 | $ | - | ||||
| Non-cash investing and financing activities: | ||||||||
| Shares issued to 704Games former minority shareholders | $ | 86 | $ | - | ||||
| Purchase commitment liability | $ | 3,126,314 | $ | - | ||||
| Accrued loss on equity method investee | $ | - | $ | (14,429 | ) | |||
| Reduction of additional paid-in capital for initial public offering issuance costs that were previously paid | $ | 587,000 | $ | - | ||||
| Reduction of additional paid-in capital for purchased 704Games minority shares | $ | 939,511 | $ | - | ||||
| Purchase of additional interest in Le Mans | $ | 1,584,892 | $ | - |
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Loss | $ | (15,967,045 | ) | $ | (14,085,424 | ) | ||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Impairment of intangible assets | 4,491,054 | - | ||||||
Impairment of goodwill | 4,788,268 | - | ||||||
Depreciation and amortization | 577,514 | 136,600 | ||||||
| Non-cash lease expense | 70,701 | - | ||||||
| Stock-based compensation | 353,030 | 9,076,916 | ||||||
| Gain on equity method investment | - | (1,370,837 | ) | |||||
| Sales return and price protection reserves | 234,240 | 40,800 | ||||||
| Changes in assets and liabilities, net of acquisitions and the effect of consolidation of equity affiliates: | ||||||||
| Account receivable | 2,497,895 | 362,766 | ||||||
| Operating lease liabilities | (60,211 | ) | - | |||||
| Prepaid expenses | (541,640 | ) | (347,787 | ) | ||||
| Other assets | - | 25,000 | ||||||
| Accounts payable | 37,705 | (288,733 | ) | |||||
| Other non-current liabilities | (1,187,721 | ) | 50,555 | |||||
| Accrued expenses | (882,896 | ) | (434,608 | ) | ||||
| Net Cash used in operating activities | (5,589,106 | ) | (6,834,752 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Acquisition of Le Mans, net of cash acquired | - | 153,250 | ||||||
| Acquisition of Motorsport Games Australia | - | (1,000,000 | ) | |||||
| Purchase commitment liability | - | (26,000 | ) | |||||
| Purchase of property and equipment | (101,004 | ) | (83,751 | ) | ||||
| Net cash used in investing activities | (101,004 | ) | (956,501 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Advances from related parties | 148,152 | 1,772,503 | ||||||
| Repayments on advances from related parties | - | (11,800,000 | ) | |||||
| Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting costs | - | 63,661,128 | ||||||
| Net cash provided by financing activities | 148,152 | 53,633,631 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 89,553 | (54,433 | ) | |||||
| Net (decrease) increase in cash and cash equivalents | (5,452,405 | ) | 45,787,945 | |||||
| Cash and cash equivalents at the beginning of period | 17,819,640 | 3,990,532 | ||||||
| Cash and cash equivalents at the end of period | $ | 12,367,235 | $ | 49,778,477 | ||||
| Supplemental Disclosure of Cash Flow Information | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | - | $ | 639,786 | ||||
| Non-cash investing and financing activities: | ||||||||
| Purchase of Le Mans additional interest | $ | - | $ | 1,584,892 | ||||
| Reduction of additional paid-in capital for initial public offering issuance costs that were previously paid | $ | - | $ | 587,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - BUSINESS ORGANIZATION, NATURE OF OPERATIONS, 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 converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Motorsport Games Inc. (“Motorsport Games”). Upon effecting the corporate conversion on January 8, 2021, Motorsport Games now holds all the property and assets of Motorsport Gaming, and all of the debts and obligations of Motorsport Gaming were assumed by Motorsport Games by operation of law upon such corporate conversion. See “Note 6 – Stockholders’ Equity – Corporate Conversion” for additional details.
Motorsport Games, through its subsidiaries, including 704Games (as defined below) (collectively, the “Company”), is a leading racing game developer, publisherRisks and esports ecosystem provider of official motorsport racing series throughout the world, including NASCAR, INDYCAR, the iconic 24 Hours of Le Mans endurance race and the associated World Endurance Championship, the British Touring Car Championship (the “BTCC”) and others. The Company develops and publishes multi-platform racing video games including for game consoles, personal computers (PCs) and mobile platforms. In addition, the Company organizes and facilitates esports tournaments, competitions, and events for its licensed racing games, as well as on behalf of third-party racing game developers and publishers.Uncertainties
On April 16, 2021, 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 a wholly-owned subsidiary of the Company, with 704Games LLC being the surviving entity in such merger. As used herein, “704Games” refers to (i) 704Games Company prior to the merger and (ii) 704Games LLC from and after the merger. On April 20, 2021, the Company acquired 100% of the share capital of Studio397 B.V. (“Studio397”), a company that specializes in realistic, accurate and engaging simulation racing experiences through their rFactor Technology platform. See “Note 3 – Acquisitions” for additional details.
COVID-19 Pandemic
The global spread of the ongoing and prolonged COVID-19 pandemic and its variants has created significant business uncertainty for the Company and others, resulting inwhich has negatively impacted the global economy, disrupted global supply chains and workforce participation, and initially created significant volatility and economic disruption. See “Management’s Discussiondisruption of financial markets. 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 Analysisrestrictions, quarantines, shelter-in-place, stay-at-home or total lock-down (or similar) orders and business limitations and shutdowns. In late fiscal 2020 and throughout fiscal 2021, vaccines for combating COVID-19 were approved by health agencies in certain countries and regions where the Company operates and began to be administered, and the Company saw some loosening of Financial Conditiongovernment-mandated COVID-19 restrictions in certain locations, such as the United States, in response to improved COVID-19 infection levels. More recently, new variants of COVID-19, such as the Omicron variant, that are significantly more contagious than previous strains, have emerged. Further, the effectiveness of approved vaccines on these new strains remains uncertain. The spread of these new strains have caused some government authorities to reimpose some or all of the earlier restrictions or impose other restrictions, all in an effort to lessen the spread of COVID-19 and Resultsits variants. While these lockdowns have begun to be lifted, the lingering impact of Operations—COVID-19 Pandemic Update”has continued to create significant volatility throughout the global economy, such as supply chain disruptions, limited labor supplies and higher inflation, which in turn has caused constraints on consumer spending.
As a result of the ongoing and prolonged COVID-19 pandemic, including the related responses from government authorities, the Company’s business and operations were impacted, including the temporary closures of its offices in Miami, Florida, Silverstone, England, and Moscow, Russia during 2021, which resulted in many of the Company’s employees working remotely. During the initial COVID-19 outbreak in 2020, demand for the Company’s games generally increased, which the Company believes was primarily attributable to a higher number of consumers staying at home due to COVID-19 related restrictions. Similarly, there was a significant increase in viewership of the Company’s esports events since the initial impact of the virus, as these events began to air on both digital and linear platforms, particularly as the Company was able to attract many of the top “real world” motorsport stars to compete. Conversely, several retailers have experienced, closures, reduced operating hours and/or other restrictions as a result of the ongoing and prolonged COVID-19 pandemic and its variants, which has negatively impacted the 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 cancellation or postponement of certain events to later dates or shifting events from an in-person format to online only. The emergence of the significantly more contagious Omicron variant of COVID-19 and the prevalence of breakthrough cases of infection among fully vaccinated people adds additional uncertainty and could result in further impacts to the Company’s business and operations, such as those discussed above and in the section entitled “Risk Factors” in Part I, Item 21A of thisthe Company’s Annual Report for information relating toon Form 10-K filed with the impact ofSEC on March 30, 2022 (the “2021 Form 10-K”).
Although the Company does not currently expect the COVID-19 pandemic to have a material impact on ourits future business and operations.operations, the Company continues to monitor the evolving situation caused by the COVID-19 pandemic, and the Company may take further actions required by governmental authorities or that the Company determines are prudent to support the well-being of the Company’s 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 limited to, the duration and spread of the pandemic; its severity; the emergence and severity of its variants; the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential hesitancy to utilize them; and the effect on discretionary spending by consumers; and how quickly and to what extent normal economic and operating conditions can resume.
| 6 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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 presentation of the Company’s unaudited condensed consolidated financial statements as of June 30, 2021March 31, 2022 and for the three and six months ended June 30, 2021 and 2020.March 31, 2022. The Company’s results of operations for the three and six months ended June 30, 2021March 31, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 20212022 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, 20202021 and 20192020 and for the years then ended which are included in the 2021 Form 10-K.
Liquidity and Going Concern
On January 15, 2021, the Company completed its initial public offering which resulted in net proceeds to the Company of approximately $63.1 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.
For the three months ended March 31, 2022, the Company had a net loss of approximately $16.0 million and negative cash flows from operations of approximately $5.6 million. As of March 31, 2022, the Company had an accumulated deficit of $53.1 million. It is expected that the Company will continue to incur operating expenses and, as a result, the Company will need to continue to grow revenues to reach profitability and positive cash flows. We expect to continue to incur losses for the foreseeable future as we continue to develop our product portfolio and invest in the development of new video game titles.
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 Annual Reportability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued. The factors described above, in particular the available cash on Form 10-K filedhand to fund operations over the next year, have raised substantial doubt about the Company’s ability to continue as a going concern.
Our future liquidity and capital requirements include funds to support the planned costs to operate our business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures. The adequacy of our available funds generally depends on many factors, including our ability to successfully develop consumer-preferred new products or enhancements to our existing products, continued development and expansion of our esports platform and our ability to enter into collaborations with other companies and/or acquire other companies or technologies to enhance or complement our product and service offerings.
We continue to explore additional funding in the SECform of equity and/or debt financing arrangements and consider these to be viable options to support future liquidity needs, providing such opportunities can be obtained on March 24, 2021 (the “2020 Form 10-K”terms that are commercially competitive and on terms acceptable to the Company. We are also seeking to improve our liquidity by achieving cost reductions by maintaining and enhancing cost control initiatives.
As we continue to evaluate incremental funding solutions, we have reevaluated our product roadmap in the first quarter of 2022 and modified the expected timing and scope of certain new product releases. These changes have been made not only to maintain the development of high-quality video game titles but also to improve the timing of certain working capital requirements and reduce expenditures, thereby decreasing our expected future cash-burn and improve our short-term liquidity needs. If needed, further adjustments could be made that would decrease short-term working capital requirements, while pushing out the timing of expected revenues.
We expect to generate additional liquidity through consummating equity and/or debt financings, achieving cost reductions by maintaining and enhancing cost control initiatives, and/or adjusting our product roadmap to reduce near term need for working capital. If we are unable to generate adequate revenue and profit growth, there can be no assurances that such actions will provide us with sufficient liquidity to meet our cash requirements as, among other things, our liquidity can be impacted by a number of factors, including our level of sales, costs and expenditures, as well as accounts receivable and sales allowances.
There can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all, to satisfy our future needed liquidity and capital resources. If we are unable to obtain adequate funds on acceptable terms, we may be required to, among other things, significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms.
If we are unable to satisfy our cash requirements from the sources identified above, we could be required to adopt one or more of the following alternatives:
| ● | selling assets or operations; | |
| ● | seeking additional capital contributions and/or loans from Motorsport Network, the Company’s other affiliates and/or third parties; and/or | |
| ● | reducing other discretionary spending. |
| 7 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
There can be no assurance that we would be able to take any of the actions 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, additional capital contributions and/or loans not being available from Motorsport Network or affiliates and/or third parties, or that the transactions may not be permitted under the terms of our various debt instruments then in effect, such as due to restrictions on the incurrence of debt, incurrence of liens, asset dispositions and related party transactions. In addition, such actions, if taken, may not enable us to satisfy our cash requirements if the actions that we are able to consummate do not generate a sufficient amount of additional capital.
Even if we do secure additional financing, if our anticipated level of revenues are not achieved because of, for example, less than anticipated consumer acceptance of our 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 currency; decreased sales of our products and events as a result of increased competitive activities by our competitors; changes in consumer purchasing habits; 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 advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, our liquidity may continue to be insufficient to satisfy our future capital requirements.
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.
Adoption of Accounting Pronouncements
On January 1, 2022, the Company adopted Accounting Standard Update 2016-02, Leases (Topic 842) (“ASC 842”) using the modified retrospective approach and elected the optional transition method, which allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Upon adoption, the Company applied the guidance to all existing leases.
For leases with a term greater than 12 months, the new guidance requires the lease rights and obligations arising from the leasing arrangements, including operating leases, to be recognized as assets and liabilities on the balance sheet. Upon adoption of ASC 842, the Company recognized approximately $751,000 of operating lease assets and operating lease liabilities primarily related to real estate, which were presented in the condensed consolidated balance sheet as operating lease right-of-use assets, operating lease liabilities, current and operating lease liabilities, non-current. There was no cumulative effect of applying the new standard and accordingly there was no adjustment to retained earnings on adoption. The comparative information presented has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company opted to apply the optional package of practical expedients permitted under ASC 842, which eliminated the requirement to reassess prior conclusions regarding lease identification, classification and initial direct costs.
The adoption of ASC 842 did not have a material impact on the Company’s condensed consolidated statements of operations and comprehensive loss or condensed consolidated statements of cash flows.
On January 1, 2022, the Company adopted ASU 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 this ASU 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. The adoption of ASU 2020-01 did not have a material impact on the Company’s condensed consolidated financial statements.
On January 1, 2022, the Company adopted 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 ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. The adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements.
| 8 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to the significant accounting policies included in the audited consolidated financial statements included in the 20202021 Form 10-K, except as disclosed in this note.
Goodwill and Intangible Assets
The Company has recorded goodwill in connection with its acquisition of 704Games, Le Mans Esports Series Limited (the “Le Mans Joint Venture”) and Studio397 and has recorded indefinite lived intangible assets in connection with its acquisition of 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, KartKraft and Studio397:
SCHEDULE OF INTANGIBLE ASSETS ESTIMATED USEFUL LIVES
Motorsport Games Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
See “Note 3 – Acquisitions” for additional details regarding the acquisition of goodwill and intangible assets.
Revenue Recognition
The Company recognizes revenue under ASC 606, “RevenueRevenue from Contracts with Customers”Customers (“ASC 606”). The Company determines revenue recognition through the following steps:
| ● | Identification of a contract with a customer; | |
| ● | Identification of the performance obligations in the contract; | |
| ● | Determination of the transaction price; | |
| ● | Allocation of the transaction price to the performance obligations in the contract; and | |
| ● | Recognition of revenue when or as the performance obligations are satisfied. |
The Company currently derives revenue principally from sales of its games and related extra content that can be played by customers on a variety of platforms, which includesinclude game consoles, PCs, mobile phones and tablets. The Company’s product and service offerings include but are not limited to, the following:
| 1) | Sales of Games- Full console, PC and mobile games contain a software license that is delivered digitally or via physical |
| 2) | Sales of Extra Content– Includes (a) extra content that is downloaded by console and PC players that provides the ability to customize and/or enhance their gameplay and (b) virtual currencies that provide mobile players with the ability to purchase extra content that allows them to customize and/or enhance their gameplay; and |
| 3) | Esports Competition Events - Hosting of online esports competitions that generate sponsorship revenue. |
Sales of Games. Sales of games are generally determined to have a singular distinct performance obligation, as the Company does not currently have an obligation to provide future update rights or online hosting. As a result, the Company recognizes revenue equal to the full transaction price, less any applicable reserves, at the point in time the customer obtains control of the software license and the Company satisfies its performance obligation.
Sales of Extra Content. Revenue receivedrecognized from sales of extra content areis derived primarily from the sale of (a) digital in-game content that is downloaded by the Company’s console, PC and PCmobile customers that enhance their gameplay experience, typically by providing car upgrades, or additional drivers and (b) virtual currencies that can be used by mobile customers to purchase content thatand/or allows them to customize and/or enhance their gameplay. Virtual currenciesIn-game credit, and other downloadable content, may notonly be used for any purpose other than for these in-game purchases.purchases and/or customizing the gameplay. Revenue related to extra content is recognized at the point in time the Company satisfies its performance obligation, which is generally at the time the customer obtains control of the extra content, either by downloading the digital in-game content or by usingpurchasing the virtual currencies to purchase extra content.in-game credits. For console and PC customers, extra content is either purchased in a pack or on a standalone basis. Revenue associated with extra content from console and PC 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.
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 concurrent with the concurrent time the event is held and the customer obtains control.held. 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 that each event is held and the Company satisfies its performance obligation.obligations.
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 Company’s performance obligations are satisfied.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
During the three and six months ended June 30,March 31, 2022 and 2021, and 2020, there waswere no revenuerevenues recognized from performance obligations satisfied (or partially satisfied) in previous periods.
Identifying Performance 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 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 ofreviewing 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 regarding the Company’s sales returns and price protection reserves.
Allocating the Transaction Price
Allocating the transaction price requires that the Company to 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, Nintendo’s eShop, Apple’s App Store, and Google’s Play Store, to determine whether or not the Company is acting as the principal or agent in the sale to the end customer. Key indicators that the Company evaluates in determining gross versus net treatment include but are not limited to the following:
● the underlying contract terms and conditions between the various parties to the transaction;
● which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer;
● which party has inventory risk before the specified good or service has been transferred to the end customer; and
● which party has discretion in establishing the price for the specified good or service.
Based on an evaluation of the above indicators, the Company determined that, apart from contracts with customers where revenue is generated via the Apple’s App Store or Google’s Play Store, the third party is considered the principal with the end customer and, as a result, the Company reports revenue net of the fees retained by the storefront. For contracts with customers where revenue isrevenues are generated via the Apple’s App Store or Google’s Play Store, the Company has determined that it is the principal and, as a result, reports revenuerevenues on a gross basis, with mobile platform fees included within cost of revenues.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Sales Allowance, Sales Returns and Price Protection Reserves
Sales returns and price protection are considered variable consideration under ASC 606. 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 20202021 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’ inventory of the Company’s products, current trends in retail and the video game industry, changes in customer demand, acceptance of products, and other related factors. In addition, the Company monitors the volume of sales to its channel partners and their inventories, as substantial overstocking in the distribution channel could result in highhigher than expected returns or higher price protection in subsequent periods. The Company recognizedCompany’s sales allowancesreturns and price protection reserves for the three and six months ended June 30,March 31, 2022 and December 31, 2021 in the amount ofwere $81,6004,798,124 and $199,9404,563,884, respectively. The Company recognized approximately $234,240 and $respectively,40,800 of sales returns and price protection charges as a reduction of revenues for the three and six months ended June 30, 2020 in the amount of $216,689March 31, 2022 and $314,517, respectively, which were included as reductions of revenues.
Motorsport Games Inc.
Notes to Unaudited Condensed Consolidated Financial Statements2021, respectively.
The Company accounts for stock-based compensation in accordance with ASC Subtopic 718-10. 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.date, using the Black-Scholes option pricing model. 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. Stock-based compensation is adjusted for any forfeitures, which are accounted for on an as occurred basis.
We account for share-based payments in accordance with ASC Subtopic 718-10. Share-based compensation expense for a given grant is recognized over the requisite service period (that is, the period for which the employee is being compensated) and is based on the value of share-based payment awards after a reduction for estimated forfeitures. Forfeitures are estimated at the time of grant and are revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We generally estimate the value of stock options using a Black-Scholes option pricing model. This estimate is affected by our stock price, as well as assumptions regarding a number of highly complex and subjective variables, including our expected stock price volatility over the term of the awards and projected employee stock option exercise behaviors.
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, if not anti-dilutive.
SCHEDULE OF CALCULATION WEIGHTED AVERAGE DILUTIVE COMMON SHARES
| For the Three and Six Months Ended | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Stock options | 574,073 | n/a | ||||||
| Shares excluded in computation of earnings per common share | 574,073 | - | ||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Stock options | 1,059,837 | 382,518 | ||||||
| 1,059,837 | 382,518 | |||||||
| 11 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Recently Issued Accounting Standards
In February 2016,As an emerging growth company (“EGC”), the Financial Accounting Standards BoardJumpstart Our Business Startups Act (“FASB”JOBS Act”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), which applies a right-of-use model that requires a lesseeallows the Company to record, for all leases with a lease termdelay adoption of more than 12 months, an asset representing its rightnew 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 underlying asset and a liability to make lease payments. ASU 2016-02 requires a lessor to classify leasesJOBS Act until such time 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 ofno longer considered to be an EGC. The adoption dates discussed below reflect this standard on its condensed consolidated financial statements and disclosures.election.
In November 2019, the FASB issued ASU 2019-11, “Codification“Codification Improvements to Topic 326, Financial Instruments – Credit Losses”Losses” (“ASU 2019-11”). ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial“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.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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 Accounting Standards Update 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 this ASU 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, a Florida limited liability company, converted into Motorsport Games, a Delaware corporation, pursuant to a statutory conversion.
The Company is subject to federal and state income taxes in the U.S. 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, Taxesrequires 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 June 30, 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.
Motorsport Games Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 3 – ACQUISITIONS
Le Mans
In January 2021, the Company, entered into an Amendment (the “Le Mans 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 Le Mans 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 Le Mans 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 operating, promoting, and running 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 Le Mans 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 Le Mans 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 Le Mans Video Gaming License (as defined below).
In January 2021, simultaneously with the execution of the Le Mans 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 “Le Mans Video Gaming License”).
The Le Mans Video Gaming License’s term is through January 25, 2031. The term will automatically renew for an additional 10-year term. In exchange for the Le Mans Video Gaming License, the Company agreed to fund up to €8,000,000 (approximately $9,000,000) 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 Le Mans Video 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.
In January 2021, the Le Mans Joint Venture (a 51% controlled subsidiary of the Company) and ACO entered into another 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 “Le Mans Esports License”).
The Le Mans Esports License’s term is through January 25, 2031. The term of the Le Mans Esports License will automatically renew for an additional 10-year term. The Le Mans 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.
In January 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 10-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.
Motorsport Games Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
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 for the Le Mans Joint Venture was completed subsequent to the acquisition date. The aggregate purchase price was allocated to the assets acquired and liabilities assumed as follows:
SUMMARY OF AGGREGATE PURCHASE PRICE
| Valuation Method | Discount Rate | GBP | USD | |||||||||||
| Cash | - | - | £ | 257,232 | $ | 350,626 | ||||||||
| Other assets | - | - | 858 | 1,169 | ||||||||||
| Le Mans Gaming license | Excess earning Method | 30.00 | % | 843,682 | 1,150,000 | |||||||||
| Le Mans Esport license | Excess earning Method | 30.00 | % | 1,217,836 | 1,660,000 | |||||||||
| Goodwill | Cost-to-recreate | 30.00 | % | 47,848 | 66,280 | |||||||||
| Accounts payable | - | (5,147 | ) | (7,016 | ) | |||||||||
| Non-controlling interest | Business Enterprise Income | 30.00 | % | (1,157,531 | ) | (1,573,624 | ) | |||||||
| FX translation adjustment | 0 | (1,059 | ) | |||||||||||
| 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 June 30, 2021 included $109,390 in operating expenses. It is impracticable to disclose revenues and net income (loss) on an unaudited pro forma basis, as the Company does not have access to the required financial information of the Le Mans Joint Venture prior to the acquisition date.
The acquisition of the Le Mans Joint Venture has 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 as required.
KartKraft
In March 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 transferred to an escrow account, which will be released on the 6-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 Australia to support the Black Delta’s development team.
The purchase price allocation for the KartKraft acquisition was completed subsequent to the acquisition date. The aggregate purchase price was allocated to the assets acquired and liabilities assumed as follows:
SUMMARY OF AGGREGATE PURCHASE PRICE
| Intangible Asset | Valuation Method | Discount Rate | USD | |||||||
| KartKraft Trade Name | Relief-from-Royalty | 27.50 | % | $ | 108,000 | |||||
| Technology | Replacement cost | 25.00 | % | 833,000 | ||||||
| Employment & Non-Compete | With & Without Method | 25.00 | % | 59,000 | ||||||
| Total Consideration | $ | 1,000,000 | ||||||||
Results of operations of KartKraft for the period from March 18, 2021 to June 30, 2021 included $94,026 in operating expenses. It is impracticable to disclose revenues and net income (loss) on an unaudited pro forma basis, as the Company does not have access to the requisite financial information of KartKraft prior to the acquisition date.
| 13 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The KartKraft acquisition has 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 as required.
Studio397
In April 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 % of the share capital (the “Studio397 Shares”) of Studio397. Studio397 is a racing simulation and technology company that provides the industry-leading racing simulation platform, rFactor2. Since early 2020, Studio397 has been providing its vehicle physics, tire modeling and artificial intelligence software to the Company’s video games.
The purchase price for the Studio397 Shares was $16,000,000, payable in the following two installments: $12,800,000 was paid at closing (the “Completion Payment”) and $3,200,000 on the first anniversary of closing (the “Deferred Payment”). The Deferred Payment was discounted to $3,111,781 using a 2.8% discount rate as of the acquisition date and a payment date of April 20, 2022. The balance of the deferred payment as of June 30, 2021 was $3,126,314.
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.
The purchase price allocation for total invested capital of $15,911,781 was completed subsequent to the Studio397 acquisition date. The aggregate purchase price was allocated to the assets acquired and liabilities assumed as follows:
SUMMARY OF AGGREGATE PURCHASE PRICE
| Valuation Method | Discount Rate | Amount | ||||||||
| Debt-free net working capital | - | - | $ | (12,450 | ) | |||||
| Fixed assets | - | - | 21,504 | |||||||
| rFactor 2 Trade Name | Relief-from-Royalty | 9.80 | % | 3,040,000 | ||||||
| Technology | Replacement Cost | 9.80 | % | 7,010,000 | ||||||
| Employment & Non-Compete Agreements | With & Without Method | 9.80 | % | 214,000 | ||||||
| Internally developed franchise | Excess earning Method | 9.80 | % | 678,000 | ||||||
| Goodwill | Cost-to-recreate | 10.00 | % | 4,895,069 | ||||||
| FX translation adjustment | 65,658 | |||||||||
| Total Consideration | $ | 15,911,781 | ||||||||
Studio397’s results of operations for the period from April 20, 2021 to June 30, 2021 included $470,564 in revenues, $286,795 in cost of sales, $469,277 in operating expenses and $341 of other income. On an unaudited pro forma basis, if the acquisition had occurred on April 1, 2021, the Company’s consolidated revenues and net loss for three months ended June 30, 2021 would have been $2,335,293 and $6,096,648, respectively. On an unaudited pro forma basis, if the acquisition had occurred on January 1, 2021, the Company’s consolidated revenues and net loss for six months ended June 30, 2021 would have been $5,417,086 and $20,508,133, respectively.
Motorsport Games Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
The components of debt free net working capital deficit are as follows:
SUMMARY OF DEBT FREE NET WORKING CAPITAL DEFICIT
| Current assets: | ||||
| Projects to be invoiced | $ | 192,658 | ||
| Trade debtors | 26,121 | |||
| Paid in advance | 47,168 | |||
| Total current assets | $ | 265,947 | ||
| Less current liabilities: | ||||
| Trade creditors | 140,049 | |||
| Advance invoices/payments | 41,063 | |||
| Audit costs | 7,148 | |||
| Holiday allowances | 49,242 | |||
| Bonuses | 42,035 | |||
| Taxes and social securities | (1,140 | ) | ||
| Total current liabilities | $ | 278,397 | ||
| Debt free net working capital deficit | $ | (12,450 | ) |
The Studio397 acquisition has been recorded in accordance with ASC 805, Business Combinations. The transaction was 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 as required.
704Games Company
In April 2021, the Company closed the transactions contemplated by each of (i) the share exchange agreement with PlayFast Games, LLC, a North Carolina limited liability (“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 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.
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) PlayFast with respect to the shares of common stock of 704Games Company it surrendered in such merger consisted of newly-issued shares of the Company’s Class A common stock and $1,542,519 in cash and (ii) Ascend with respect to the shares of common stock of 704Games Company it surrendered in such merger consisted of newly-issued shares of the Company’s Class A common stock and $2,056,692 in cash.
Pursuant to the PlayFast Exchange Agreement and the Ascend Exchange Agreement, the Company and the 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. Pursuant to the Ascend Exchange Agreement, the derivative legal action previously commenced by Ascend was dismissed with prejudice on April 25, 2021.
The Company’s consolidated revenue and net loss for the three and six months ended June 30, 2021 would have been the same as reported on the Condensed Consolidated Statements of Operations if the acquisition had occurred on January 1, 2021 and April 1, 2021, respectively.
Motorsport Games Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 43 - INTANGIBLE ASSETS
Licensing AgreementAgreements
On May 29, 2020,The Company has license agreements with various entities related to the Company secured a licensing agreement withdevelopment of video games and the organization and facilitation of esports events, including BARC (TOCA) Limited (“BARC”), with respect to the exclusive promoter ofBritish Touring Car Championship (the “BTCC”) and INDYCAR LLC (“INDYCAR”) with respect to the BTCC. Pursuant to this agreement, the Company was granted an exclusive 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 license, this agreement requires the Company to pay BARC an initial fee in two installments, the first of which was due on June 5, 2020 and the second installment on the earlier of 60 days after the release of the products contemplated by the license or May 29, 2022. Following the initial fee, this agreement also requires 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. In connection with this licensing agreement, the Company acquired the BTCC license with a cost 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, as the license terminates on December 31, 2026.INDYCAR SERIES. As of June 30,March 31, 2022 and March 31, 2021, the Company had a remaining liability in connection with thisthese licensing agreementagreements of $832,5053,812,559 and $822,184, respectively, which is included in other non-current liabilities on the condensed consolidated balance sheets.
Impairment
In connectionDuring the three months ended March 31, 2022, the Company identified triggering events that indicated its allocated intangible and finite-lived intangible assets were at risk of impairment and as such, performed quantitative impairment assessments of all its intangible and finite-lived intangible assets. The primary triggers for the impairment review were changes made to the Company’s product roadmap in the first quarter of the fiscal year ending December 31, 2022, which resulted in changes to the scope and timing of certain product releases, as well as changes in the value of the Company’s market capitalization which had reduced significantly since December 31, 2021, the date of the last impairment assessment. These changes were made by the Company to better align the product roadmap with the acquisitionCompany’s ability to produce and release high quality games.
As a result of the quantitative assessments, the Company determined the fair value of its rFactor 2 trade name and Le Mans video gaming license (the “Le Mans Gaming License”) indefinite-lived intangible assets, as well as certain finite-lived technology intangible assets, were lower than their carrying values and recorded an impairment loss for the indefinite-lived intangible assets for the period ended March 31, 2022 of $2,051,852 for rFactor 2 trade name and $1,118,209for the Le Mans Joint Venture,Gaming License. Additionally, the Company acquiredrecorded impairment of finite-lived software technology for $1,320,993 during the followingperiod ended March 31, 2022.
The Company determined the fair value of the indefinite-lived intangible assets (See Note 3 – Acquisitionsusing a relief-from-royalty method for additional details):the trade name and a discounted cash flow valuation model for the Le Mans Gaming License and used a cost to recreate valuation model for the finite-lived technology intangible asset. The impairment loss for indefinite- and finite-lived intangible assets was primarily driven by a reduction in expected future revenues, following changes to the Company’s product roadmap, as well as changes to the discount rates applied, royalty rates and technological obsolescence assumptions used in the valuation models. The principal assumptions used in the relief-from-royalty method analysis used to determine the fair value of the rFactor 2 trade name consisted of forecasted revenues, royalty rate and weighted average cost of capital (i.e., discount rate), while the principal assumptions used in the discounted cash flow valuation model for the Le Mans Gaming License were forecasted revenues and weighted average cost of capital. The principal assumptions used in determining the fair value of the finite-lived technology intangible asset were number of production hours, cost per hour and technological obsolescence. The Company considers these assumptions to be judgmental and subject to risk and uncertainty, which could result in further changes in subsequent periods.
SCHEDULE OF INTANGIBLE ASSETS ACQUISITION
| Intangible Asset | Useful Life | Cost | ||||
| Gaming license | Indefinite | $ | 1,150,000 | |||
| Esport license | Indefinite | 1,660,000 | ||||
| Total | $ | 2,810,000 | ||||
In connection with the acquisitionThe impairment loss is presented as impairment of KartKraft, the Company acquired the following intangible assets (See Note 3 – Acquisitions for additional details):in the condensed consolidated statements of operations and comprehensive loss.
| 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 | ||||
In connection with the acquisition of Studio397, the Company acquired the following intangible assets (See Note 3 – Acquisitions for additional details):
| Intangible Asset | Useful Life | Cost | ||||
| Technology | 6 years | $ | 7,010,000 | |||
| rFactor 2 Trade Name | Indefinite | 3,040,000 | ||||
| Internally developed franchise | 10 years | 678,000 | ||||
| Employment & Non-Compete Agreements | 3 years | 214,000 | ||||
| Total | $ | 10,942,000 | ||||
Motorsport Games Inc. and Subsidiaries
Motorsport Games Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
Intangible assets consist of the following:
The following is a summary of intangible assets as of March 31, 2022:
SCHEDULE OF INTANGIBLE ASSETS
| Licensing Agreements | Software | Distribution Contracts | Trade Name (Indefinite) | Non-Compete Agreement | Domain Name (Indefinite) | Accumulated Amortization | Total | |||||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | 4,511,999 | $ | 2,340,000 | $ | 560,000 | $ | - | $ | - | $ | - | $ | (1,843,547 | ) | $ | 5,568,452 | |||||||||||||||
| Intangible assets acquired through business combination | 2,839,947 | 832,754 | - | 107,968 | 58,983 | - | - | 3,839,652 | ||||||||||||||||||||||||
| Purchase of intangible assets | - | - | - | - | - | 26,000 | - | 26,000 | ||||||||||||||||||||||||
| Amortization expense | - | - | - | - | - | - | (110,297 | ) | (110,297 | ) | ||||||||||||||||||||||
| Balance as of March 31, 2021 | 7,351,946 | 3,172,754 | 560,000 | 107,968 | 58,983 | - | (1,953,844 | ) | 9,323,807 | |||||||||||||||||||||||
| Intangible assets acquired through business combination | - | 7,688,000 | - | 3,040,000 | 214,000 | - | - | 10,942,000 | ||||||||||||||||||||||||
| Purchase of intangible assets | - | - | - | - | - | 1,928 | - | 1,928 | ||||||||||||||||||||||||
| Amortization expense | - | - | - | - | - | - | (471,114 | ) | (471,114 | ) | ||||||||||||||||||||||
| FX translation adjustments | 15,668 | (114,012 | ) | - | (41,825 | ) | (3,701 | ) | - | 5,160 | (138,710 | ) | ||||||||||||||||||||
| Balance as of June 30, 2021 | $ | 7,367,614 | $ | 10,746,742 | $ | 560,000 | $ | 3,106,143 | $ | 269,282 | $ | 1,928 | $ | (2,419,798 | ) | $ | 19,657,911 | |||||||||||||||
Licensing Agreements (Finite) | Licensing Agreements (Indefinite) | Software Licenses (Finite) | Distribution Contracts (Finite) | Trade Names (Indefinite) | Non-Compete Agreement (Finite) | Accumulated Amortization | Total | |||||||||||||||||||||||||
| Balance as of January 1, 2022 | $ | 7,198,363 | $ | 2,810,000 | $ | 10,364,541 | $ | 560,000 | $ | 2,672,581 | $ | 257,530 | $ | (3,377,206 | ) | $ | 20,485,809 | |||||||||||||||
| Amortization expense | - | - | - | - | - | - | (482,716 | ) | (482,716 | ) | ||||||||||||||||||||||
| Impairment of intangible assets | - | (1,118,209 | ) | (1,320,993 | ) | - | (2,051,852 | ) | - | - | (4,491,054 | ) | ||||||||||||||||||||
| FX translation adjustments | (66,276 | ) | - | (108,717 | ) | - | (40,285 | ) | (2,048 | ) | 13,884 | (203,442 | ) | |||||||||||||||||||
| Balance as of March 31, 2022 | $ | 7,132,087 | $ | 1,691,791 | $ | 8,934,831 | $ | 560,000 | $ | 580,444 | $ | 255,482 | $ | (3,846,038 | ) | $ | 15,308,597 | |||||||||||||||
Accumulated amortization of intangible assets consists of the following:
SCHEDULE OF ACCUMULATED AMORTIZATION OF INTANGIBLE ASSETS
| Licensing Agreements | Software | Distribution Contracts | Non-Compete Agreement | Accumulated Amortization | Licensing Agreements | Software | Distribution Contracts | Non-Compete Agreement | Accumulated Amortization | |||||||||||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | 617,396 | $ | 666,151 | $ | 560,000 | $ | - | $ | 1,843,547 | ||||||||||||||||||||||||||||||
| Amortization expense | 22,254 | 83,571 | - | 4,472 | 110,297 | |||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | 639,650 | 749,722 | 560,000 | 4,472 | 1,953,844 | |||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2022 | $ | 912,260 | $ | 1,843,715 | $ | 560,000 | $ | 61,231 | $ | 3,377,206 | ||||||||||||||||||||||||||||||
| Amortization expense | 90,870 | 365,390 | - | 14,854 | 471,114 | 57,186 | 404,257 | - | 21,273 | 482,716 | ||||||||||||||||||||||||||||||
| FX translation adjustments | - | (5,160 | ) | - | - | (5,160 | ) | - | (13,470 | ) | - | (414 | ) | (13,884 | ) | |||||||||||||||||||||||||
| Balance as of June 30, 2021 | $ | 730,520 | $ | 1,109,952 | $ | 560,000 | $ | 19,326 | $ | 2,419,798 | ||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | 969,446 | $ | 2,234,502 | $ | 560,000 | $ | 82,090 | $ | 3,846,038 | ||||||||||||||||||||||||||||||
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
| For the Years Ending December 31, | Total | |||
| 2022 (remaining period) | $ | 978,499 | ||
| 2023 | 1,739,553 | |||
| 2024 | 1,679,637 | |||
| 2025 | 1,532,268 | |||
| 2026 | 1,302,260 | |||
| Thereafter | 2,027,226 | |||
| Estimated aggregate amortization expense | $ | 9,259,443 | ||
Amortization expense related to intangible assets was $471,114482,716 and $160,806110,297 for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively. Amortization expense related toWithin intangible assets wasis approximately $581,4113,457,202 and $275,869 forof non-amortizing assets. These non-amortizing licensing agreements will commence amortizing upon release of the six months ended June 30, 2021, and 2020, respectively.first title under the respective license agreement.
NOTE 4 – GOODWILL
The carrying amount of goodwill attributable to our Gaming and esports reporting units and the changes in such balances during the three months ended March 31, 2022 were as follows:
SCHEDULE OF GOODWILL
| Games | Esports | Total | ||||||||||
| Balance as of January 1, 2022 | $ | 4,802,882 | $ | 64,583 | $ | 4,867,465 | ||||||
| Impairment of Goodwill | (4,723,685 | ) | (64,583 | ) | (4,788,268 | ) | ||||||
| Foreign exchange | (79,197 | ) | - | (79,197 | ) | |||||||
| Balance as of March 31, 2022 | $ | - | $ | - | $ | - | ||||||
During the three months ending March 31, 2022, the Company identified triggering events that indicated its goodwill associated with the acquisition of Studio397 was at risk of impairment and as such, performed a quantitative impairment assessment to determine whether the fair value of the associated reporting unit exceeded its fair value. The primary triggers for the impairment review were changes made to Motorsport Games’ product roadmap in the first quarter of the fiscal year ending December 31, 2022, which resulted in changes to the scope and timing of certain product releases, as well as changes in the value of Motorsport Games’ market capitalization which had reduced significantly since December 31, 2021, the date of the last impairment assessment. These changes were made by the Company to better align the product roadmap with the Company’s ability to produce and release high quality games.
| 15 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
As a result of the quantitative assessment, the Company determined the carrying value of its Gaming reporting unit exceeded its fair value and determined the associated goodwill was fully impaired. An impairment loss of $4,788,268 was recorded for the three-months ended March 31, 2022. The Company determined the fair value of the Gaming reporting unit using a discounted cash flow valuation model. The impairment loss was primarily driven by a reduction in expected future revenues, following changes to the Company’s product roadmap, as well as higher discount rate applied in the valuation model. The principal assumptions used in the discounted cash flow valuation model were forecasted revenues and weighted average cost of capital (i.e., discount rate).
The impairment loss is presented as impairment of goodwill in the condensed consolidated statements of operations and comprehensive loss.
NOTE 5 - LEASES
The Company’s operating leases primarily relate to real estate, which include office space in the U.S., the U.K., and Russia. The Company’s leases have established fixed payment terms that are typically subject to annual rent increases throughout the term of each lease agreement. The Company’s lease agreements have varying noncancelable rental periods and do not typically include options for the Company to extend the lease terms.
The Company’s operating leases have been presented in operating right-of-use assets, operating lease liabilities (short-term) and operating lease liabilities (long-term), on the Company’s condensed consolidated balance sheet as of March 31, 2022. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Refer to Note 1, Business Organization, Nature of Operations, Risks and Uncertainties and Basis of Presentation, for further information on the adoption of ASC 842.
Incremental borrowing rate
The Company’s lease agreements do not provide an implicit rate to determine the present value of lease payments. As such, the Company uses its incremental borrowing rate to determine the present value of lease payments. The Company derives its incremental borrowing rate from information available at the lease commencement date, which represents a collateralized rate of interest the Company would have to pay to borrow over a similar term an amount equal to the lease payments in a similar economic environment. As the Company did not have external borrowings at the adoption date with comparable terms to its lease agreements, the Company estimated its borrowing rate based on Prime Rate, adjusted for the US Treasury note rates for the same term as the associated lease and the Company’s credit risk spread.
The components of lease expense were as follows:
SCHEDULE OF LEASE COST
| Condensed Consolidated Statement of Comprehensive Loss Classification | Three Months Ended March 31, 2022 | |||||
| Short-term operating lease expense | $ | 28,965 | ||||
| Operating lease expense | G&A | 70,701 | ||||
| Total lease costs | $ | 99,666 | ||||
Weighted average of the remaining lease terms and weighted average discount rates are as follows:
SCHEDULE OF REMAINING LEASE TERMS
Three Months Ended March 31, 2022 | ||||
| Weighted-average remaining lease term - operating leases (years) | 4.38 | |||
| Weighted-average discount rate - operating leases | 7.62 | % | ||
Supplemental cash flow information related to leases is as follows:
SCHEDULE OF CASH FLOW SUPPLEMENTAL
Three Months Ended | ||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 99,889 | ||
| 16 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
As of March 31, 2022, maturities related to lease liabilities were as follows:
SCHEDULE OF MATURITIES OF LEASE LIABILITIES
| Operating Leases | ||||
| 2022 (remaining period) | $ | 210,952 | ||
| 2023 | 285,528 | |||
| 2024 | 196,377 | |||
| 2025 | 38,749 | |||
| 2026 | 13,374 | |||
| Thereafter | - | |||
| Total lease payments | $ | 744,980 | ||
| Less effects of imputed interest | (53,175 | ) | ||
| Present value of lease liabilities | $ | 691,805 | ||
The above operating lease payments exclude $1,300,740 of required minimum lease payments for operating lease agreements executed but not commenced, as the Company has not received control of the leased assets as of March 31, 2022. See Note 8 – Related Party Transactions for further details.
Under ASC 840, Leases, future minimum lease payments under noncancelable operating leases as of December 31, 2021 were as follows:
SCHEDULE OF FUTURE MINIMUM REMAINING RENTAL PAYMENTS
For the Years Ending December 31, | Total | |||
| 2022 | $ | 299,442 | ||
| 2023 | 289,218 | |||
| 2024 | 189,786 | |||
| 2025 | 48,104 | |||
| 2026 | 24,069 | |||
| Total | $ | 850,619 | ||
NOTE 6 – ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consisted of the following:
SCHEDULE OF ACCRUED EXPENSES
| June 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Accrued royalties | $ | 424,223 | $ | 1,485,261 | ||||
| Accrued professional fees | 57,478 | 129,291 | ||||||
| Accrued consulting fees | 603,988 | 398,526 | ||||||
| Payable to Le Mans joint venture | 647,630 | 234,667 | ||||||
| Accrued development costs | 683 | 196,845 | ||||||
| Accrued hosting fees | 40,787 | 551 | ||||||
| Accrued rent | 31,491 | 40,787 | ||||||
| Accrued taxes | 136,531 | 54,880 | ||||||
| Accrued payroll | 30,250 | 778,918 | ||||||
| Accrued director payment | 13,820 | - | ||||||
| Accrued other | 128,054 | 35,277 | ||||||
| Total | $ | 2,114,935 | $ | 3,355,003 | ||||
NOTE 6 – STOCKHOLDERS’ EQUITY
| March 31, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued royalties | $ | 1,075,959 | $ | 1,694,011 | ||||
| Accrued professional fees | 105,091 | 80,909 | ||||||
| Accrued consulting fees | 515,564 | 106,006 | ||||||
| Accrued development costs | 394,421 | 968,007 | ||||||
| Accrued eSport prize money | - | 168,959 | ||||||
| Accrued rent | 28,145 | 40,787 | ||||||
| Accrued taxes | 35,427 | 31,491 | ||||||
| Accrued payroll | 201,742 | 235,224 | ||||||
| Accrued other | 218,184 | 198,877 | ||||||
| Total | $ | 2,574,533 | $ | 3,524,271 | ||||
Corporate Conversion
On January 8, 2021, Motorsport Gaming converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Motorsport Games Inc.
| 17 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Effective asNOTE 7 – DUE TO/FROM RELATED PARTIES
On April 1, 2020, the Company entered into a promissory note (the “$12 million Line of January 8, 2021, Credit”)100% of with the membership interests held by the sole member of Motorsport Gaming,Company’s majority stockholder, Motorsport Network, converted intoLLC (“Motorsport Network”), that provides the Company with a line of credit of up to $10,000,000 (and after the amendment described below, up to $12,000,000) at an aggregateinterest rate of (i) 7,000,00010% sharesper annum, the availability of Class A common stockwhich is dependent on Motorsport Network’s available liquidity. The principal amount under the $12 million Line of Motorsport Games and (ii) Credit7,000,000 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. was primarily funded through one or more advances from Motorsport Network, is the only holderincluding advances in August and October 2020 for purposes of sharesacquiring an additional ownership interest in 704Games. The $12 million Line of the Company’s Class B common stock andCredit does not have a stated maturity date and is payable upon demand at any transfer, conversion, registrationtime at the sole and absolute discretion of Motorsport Network, which has agreed, pursuant to a Side Letter Agreement related to the $12 million Line of Credit, dated September 4, 2020, not to demand or economic rightsotherwise accelerate any amount due under the $12 million Line of Credit that would otherwise constrain the Company’s liquidity position, including the Company’s ability to continue as a going concern. The Company may prepay the $12 million Line of Credit in whole or in part at any time or from time to time without penalty or charge. In the event the Company or any of its subsidiaries consummates certain corporate events, including any capital reorganization, consolidation, joint venture, spin off, merger or any other business combination or restructuring of any nature, or if certain events of default occur, the entire principal amount and all accrued and unpaid interest will be accelerated and become payable. On November 23, 2020, the Company and Motorsport Network entered into an amendment to the $12 million Line of Credit, effective in 2020, pursuant to which the availability under the $12 million Line of Credit was increased from $10,000,000 to $12,000,000, with respectno changes to the other terms. The Company recorded related party interest expense of $0 and $105,845 during the three months ended March 31, 2022 and 2021, respectively.
During the three months ended March 31, 2021, the Company drew down an additional $1,906,248 under the $12 million Line of Credit and repaid approximately $11,800,000 of the $12 million Line of Credit to Motorsport Network, such sharesthat the balance due to Motorsport Network under the $12 million Line of Class B common stock.Credit was $959,784 as of March 31, 2021. As of both March 31, 2022 and December 31,2021, the Company owed $0 of principal and accrued interest on the $12 million Line of Credit.
In addition to the $12 million Line of Credit, the Company had regular related party receivables and payables outstanding as of March 31, 2022. Specifically, the Company owed $117,153 to its related parties as a related party payable and was due $39,233 from its related parties as a related party receivable. $71,864 has been paid to related parties during the three months ended March 31, 2022, in settlement of related party payables.
Upon effecting the corporate conversion on JanuaryNOTE 8 2021, Motorsport Games now holds all the property and assets of Motorsport Gaming, and all of the debts and obligations of Motorsport Gaming were assumed by Motorsport Games by operation of law upon such corporate conversion.– RELATED PARTY TRANSACTIONS
Effective asFrom time to time, Motorsport Network, and other related entities pay for Company expenses on the Company’s behalf. In addition, Motorsport Network occasionally advances funds to the Company under the $12 million Line of January 8,Credit. During the three months ended March 31, 2022 and 2021, the membersCompany incurred expenses of $0 and $5,562, respectively, that were paid by Motorsport Network on its behalf and are reimbursable by the Company to Motorsport Network under the $12 million Line of Credit. During the three months ended March 31, 2022 and 2021, the Company received from Motorsport Network cash proceeds of $0 and $1,906,248, respectively, in connection with advances under the $12 million Line of Credit.
During the three months ended March 31, 2022 and 2021, an entity wholly owned by Motorsport Network provided services associated with In-Kind Consideration of $0 and $27,900, respectively, to 704Games in connection with the terms of the boardacquisition. Such amounts are reflected as related party operating expenses on the condensed consolidated statements of directors of Motorsport Gaming became the members of Motorsport Games’ board of directors, and the officers of Motorsport Gaming became the officers of Motorsport Games.operations.
As of March 31, 2022 and December 31, 2021, there was $Initial Public Offering33,856 and $24,348, respectively, related to these services included within due to related parties on the consolidated balance sheets.
Leasing agreements
On January 15, 2021,February 8, 2022, the Company completed its initial public offeringentered into a new lease agreement with Lemon City Group, LLC, an entity controlled by Mike Zoi, for office space located in Miami, Florida. The term of shares of its Class A common stock atthis new lease is 5 years which commenced April 1, 2022 and expires on March 31, 2027, and is terminable with a price to the public of $ per share, which includes the exercise in full60-day written notice, by the underwriters of their option to purchaseeither party, with no penalty. The base rent from the Company an additional shares of the Company’s Class A common stock. The net proceeds to the Company from the initial public offering werethis new lease is fixed at approximately $63.122,000 million, after deducting underwriting discountsper month. On April 1, 2022, the previous lease agreement for office space in Miami, Florida between 704Games LLC and commissions and offering expenses paid by the Company during 2020 and 2021.Lemon City Group, LLC was terminated without penalty.
Common Stock
See Note 3 – Acquisitions for details of the Company’s issuance of Class A common stock in connection with certain acquisitions.
Equity Grants – Common Stock
During the six months ended June 30, 2021, in conjunction with the Company’s initial public offering, the Company granted an aggregate of 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 $. 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.
Equity Grants – Stock Options
During the six months ended June 30, 2021, in conjunction with the Company’s initial public offering, the Company granted its Chief Executive Officer an immediately vested -year stock option to purchase shares of the Company’s Class A common stock at an exercise price of $ per share. The option had a grant date fair value of $2,189,896 which was recognized on the grant date.
During the six months ended June 30, 2021, in conjunction with the Company’s initial public offering, the Company granted -year stock options to purchase an aggregate of shares of the Company’s Class A common stock ( shares at an exercise price of $ and shares at an exercise price of $) 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 $1,931,025 which is being recognized ratably over the vesting period. Approximately $ of compensation expense was recognized during the six months ended June 30, 2021.
During the six months ended June 30, 2021, in conjunction with the Company’s initial public offering, the Company granted -year stock options to purchase an aggregate of shares of the Company’s Class A common stock at an exercise price of $ to four members of the Company’s board of directors. The options vest as follows: (i) an aggregate shares subject to the options vest on the one-year grant date anniversary, and (ii) 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 period. Approximately $ of compensation expense was recognized during the six months ended June 30, 2021.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
During the six months ended June 30, 2021, the Company granted a ten-year stock option to purchase shares of the Company’s Class A common stock at an exercise price of $ to the Company’s former Head of Music Strategy. The option were to vest as follows: (i) shares subject to the option vested immediately, (ii) shares subject to the option were to vest on the one-year grant date anniversary, and (iii) shares subject to the option were to vest ratably upon each of five confirmations of pre-approved artist introductions. The option grant date fair value of $62,955 was to be recognized pursuant to the vesting terms. During the three months ended June 30, 2021, the Company modified this option such that it is now an option to purchase shares of the Company’s Class A common stock at an exercise price of $23.90, which vested immediately on the modification date with a modified fair value of $25,418. Approximately $ of compensation expense was recognized for the six months ended June 30, 2021 as a result of the modification.
During the six months ended June 30, 2021, in conjunction with an amendment to the employment agreement of its Chief Executive Officer (as amended, the “CEO Employment Agreement”), the Company granted its Chief Executive Officer a -year stock option to purchase shares of the Company’s Class A common stock at an exercise price of $. The option vests ratably over three years from the date of grant and had a grant date fair value of $621,923 which is being recognized ratably over the vesting period. Approximately $ of compensation expense was recognized during the six months ended June 30, 2021.
During the six months ended June 30, 2021, pursuant to the terms of the CEO Employment Agreement and based on the Company’s market value following its initial public offering, the Company granted its Chief Executive Officer a -year stock option to purchase shares of the Company’s Class A common stock at an exercise price of $. The option vests ratably over three years from the date of grant and had a grant date fair value of $579,300 which is being recognized ratably over the vesting period. Approximately $ of compensation expense was recognized during the six months ended June 30, 2021.
Stock-Based Compensation
For three months ended June 30, 2021 and 2020, the Company recognized aggregate stock-based compensation expense of $ and $, respectively, related to the issuances of stock options. For the six months ended June 30, 2021 and 2020, the Company recognized aggregate stock-based compensation expense of $ and $, respectively, related to the issuances of stock options. As of June 30, 2021, there was $ of unrecognized stock-based compensation expense which will be recognized over approximately years.
Motorsport Games Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 79 – RELATED PARTY TRANSACTIONSSTOCKHOLDERS’ EQUITY
During six months ended June 30,Initial Public Offering
On January 15, 2021, the Company drew downcompleted its initial public offering of shares of its Class A common stock at a price to the public of $per share, which includes the exercise in full by the underwriters of their option to purchase from the Company an additional $, and repaid $12,663,168shares of the promissory note, resultingCompany’s Class A common stock. The net proceeds to the Company from the initial public offering were $63,073,783, after deducting underwriting discounts and commissions and offering expenses paid by the Company during 2020 and 2021.
Stock Warrants
As of March 31, 2022 and December 31, 2021, 704Games 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, 2022, the warrants had no intrinsic value and a remaining life of years.
On January 12, 2021, in connection with initial public offering, Motorsport Games established the balance dueMotorsport 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 restricted stock unit awards, and initially authorized shares of Class A common stock to be available for issuance. As of March 31, 2022, shares of Class A common stock were available for 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 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, notably awards made to Motorsport NetworkGames’ Chief Executive Officer in conjunction with Motorsport Games’ initial public offering that vested immediately, as well as those made to Motorsport Games’ directors that vested on the one-year anniversary of award issuance. All stock options issued under the MSGM 2021 Stock Plan expire years from the grant date.
SCHEDULE OF STOCK-BASED COMPENSATION OPTIONS ACTIVITY
| For the Three Months Ended March 31, 2022 | ||||||||||||||||
| Number of Options | Vesting Term | Contractual Term | Grant Date Fair Value | |||||||||||||
| Awards outstanding under the MSGM 2021 Stock Plan as of January 1, 2022 (net of forfeitures) | 312,689 | |||||||||||||||
| Stock options award to employees under the MSGM 2021 Stock Plan | 559,347 | $ | 1,151,495 | |||||||||||||
| Stock options awarded to Board of Directors under the MSGM 2021 Stock Plan | 57,108 | $ | 120,630 | |||||||||||||
| Restricted share awards to Board of Directors under the MSGM 2021 Stock Plan | 37,690 | - | $ | 148,499 | ||||||||||||
| Forfeited, cancelled or expired | (107,218 | ) | ||||||||||||||
| Awards outstanding under the MSGM 2021 Stock Plan as of March 31, 2022 (net of forfeitures) | 859,616 | |||||||||||||||
| For the Three Months Ended March 31, 2021 | ||||||||||||||||
| Number of Options | Vesting Term | Contractual Term | Grant Date Fair Value | |||||||||||||
| Awards outstanding under the MSGM 2021 Stock Plan as of January 1, 2021 (net of forfeitures) | - | |||||||||||||||
| Stock options award to employees under the MSGM 2021 Stock Plan [1] | 314,403 | - Years | $ | 2,542,356 | ||||||||||||
| Stock options awarded to Board of Directors under the MSGM 2021 Stock Plan | 11,250 | $ | 126,205 | |||||||||||||
| Restricted share awards to Board of Directors under the MSGM 2021 Stock Plan | 10,000 | - | $ | 200,000 | ||||||||||||
| Forfeited, cancelled or expired | (22,964 | ) | ||||||||||||||
| Awards outstanding under the MSGM 2021 Stock Plan as of March 31, 2021 (net of forfeitures) | 312,689 | |||||||||||||||
| [1] | awards issued on August 25, 2021 have a vesting term of and a grant date fair value of $, with the remaining awards vesting over a period and a grant date fair value of $. |
Stock-Based Compensation
For three months ended March 31, 2022 and 2021, the Company recognized aggregate stock-based compensation expense of $ asand $, respectively, related to the issuances of June 30, 2021. This balance is included within duestock options and restricted stock awards. As of March 31, 2022, there was $of unrecognized stock-based compensation expense which will be recognized over approximately .
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Motorsport Games Inc. and Subsidiaries
Notes to related parties on the Company’s condensed consolidated balance sheet.Unaudited Condensed Consolidated Financial Statements
NOTE 811 – COMMITMENTS 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. However, 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.
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.
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 June 30, 2021March 31, 2022 and December 31, 2020,2021, the Company has not accrued any amounts for contingencies.
On January 11, 2021, 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 shares of common stock of 704Games (representing approximately of the outstanding shares of 704Games) from certain selling stockholders. In connection with the closing of the transactions contemplated by the Ascend Exchange Agreement and the PlayFast Exchange Agreement, 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 Ascend Exchange Agreement, 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. and Continental General Insurance Company, 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 Chief Executive Officer and Executive Chairman, the Company’s Chief Financial Officer, and the sole manager of Motorsport Network (collectively, the “Individual Defendants”). The complaint alleges misrepresentations and omissions by the Company concerning 704Games’ financial condition and future prospects in violation of 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 Individual Defendants under 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 of Section 20A of the Exchange Act in connection with plaintiffs’ August 18, 2020 sale to the Company of an aggregate of shares of common stock of 704Games, which is equal to % of the outstanding common stock of 704Games in August 18, 2020 (the “Stock Sale”); alleged 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’ alleged fraudulent inducement of the plaintiffs to enter into a stock purchase agreement for the Stock Sale; the defendants’ alleged breach of fiduciary duty by alleged failure to disclose key financial and other information about 704Games and allegedly diverting corporate opportunities for the benefit of defendants; and alleged unjust enrichment. The plaintiffs seek, 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, 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’ amended complaint. On March 28, 2022, the court entered an order denying the motion to dismiss.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
At this time, it is premature to determine the outcome of any litigation that may result from the HC2 and Continental Complaint.this litigation. As a result, the Company has not accrued for any loss contingencies related to this claim because the amount and range of loss, if any, cannot currently be reasonably estimated. 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.
On March 22, 2021, the Company entered into a binding term sheet (as amended, the “Digital Tales Term Sheet”) with EleDa s.r.l. (“EleDa”) in connection with a contemplated acquisition by the Company of the shares of Digital Tales USA, LLC, a Florida limited liability company. The Digital Tales Term Sheet expired on September 30, 2021, and the Company and EleDa did not consummate any transaction by such date, nor does the Company expect to complete any such transaction. On September 29, 2021, EleDa filed a complaint in the Eleventh Judicial Circuit Court of Florida against the Company and its Chief Executive Officer relating to the expiration of the Digital Tales Term Sheet, without having consummated any transaction. In November 2021, the Company filed a motion to dismiss the plaintiffs’ complaint and EleDa filed an amended complaint on February 2, 2022. The Company filed a motion to extend case management deadlines in March 2022. The Company subsequently completed an out of court settlement with the plaintiff in April 2022. Please see Note 14 – Subsequent Events, for further details.
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 non-exclusive, 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 theThe 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 and six months ended June 30, 2021,March 31, 2022, Epic did not earn anyearned royalties of approximately $114,738under thisthe agreement. During a two-year2-year support period, Epic will use commercially reasonable efforts to provide the Company with updates to the Unreal Engine 4 and technical support via a licensee forum. Aftersupport. Pursuant to 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.
Operating LeasesMinimum Royalty Guarantees
The Company leasesis required to make certain minimum royalty guarantee payments to third-party licensors, arising primarily from its facilities under operating leases. The Company’s rent expense under its operating leases wasNASCAR, INDYCAR and BTCC licenses, Le Mans Video Gaming License and Le Mans Esports License. These minimum royalty guarantee payments apply throughout the duration of the licensing agreements, which expire between fiscal years ending December 31, 2026 and 2031, and give rise to a commitment of approximately $101,40335.5 and $67,658million, in the aggregate, for the three months ended June 30, 2021duration of these arrangements. The Company expects to pay $3.55 million in cash payments in order to comply with the license agreements’ minimum royalty guarantees during the fiscal year ending December 31, 2022.
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Motorsport Games Inc. and 2020, respectively. Rent expense was $Subsidiaries
191,158 and $121,959 for the six months ended June 30, 2021 and 2020, respectively.Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 912 – 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 June 30, | For the Six Months Ended June 30, | |||||||||||||||
| Customer | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Customer A | -* | 11.16 | % | -* | -* | |||||||||||
| Customer B | 24.56 | % | 30.59 | % | 30.29 | % | 32.86 | % | ||||||||
| Customer C | 30.60 | % | -* | 19.24 | % | -* | ||||||||||
| Customer D | 31.37 | % | 33.49 | % | 36.85 | % | 32.69 | % | ||||||||
| Total | 86.53 | % | 75.24 | % | 86.38 | % | 65.55 | % | ||||||||
| For the Three Months Ended March 31, | ||||||||
| Customer | 2022 | 2021 | ||||||
| Customer A | 15.3 | % | -* | |||||
| Customer B | 18.2 | % | 35.8 | % | ||||
| Customer D | 24.1 | % | 42.1 | % | ||||
| Customer E | 16.8 | % | -* | |||||
| Total | 74.4 | % | 77.9 | % | ||||
| * | Less than 10%. |
Motorsport Games Inc.
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 accounts receivable as of:
| June 30, | December 31, | March 31, | December 31, | |||||||||||||
| Customer | 2021 | 2020 | 2022 | 2021 | ||||||||||||
| Customer A | 60.94 | % | 81.84 | % | 36.6 | % | 51.9 | % | ||||||||
| Customer B | 22.6 | % | 17.7 | % | ||||||||||||
| Customer C | 15.65 | % | - | * | 17.4 | % | * | |||||||||
| Total | 76.60 | % | 81.84 | % | 76.6 | % | 69.6 | % | ||||||||
| * | Less than 10%. |
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 June 30, | For the Six Months Ended June 30, | |||||||||||||||
| Supplier | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Supplier A | 27.40 | % | 42.34 | % | 36.41 | % | 42.28 | % | ||||||||
| Supplier B | - | * | 10.57 | % | - | * | - | * | ||||||||
| Supplier C | 50.86 | % | 12.64 | % | 33.67 | % | 11.79 | % | ||||||||
| Total | 78.26 | % | 65.55 | % | 70.08 | % | 54.07 | % | ||||||||
| For the Three Months Ended March 31, | ||||||||
| Supplier | 2021 | 2020 | ||||||
| Supplier A | % | |||||||
| Supplier B | * | |||||||
| Supplier C | % | |||||||
| Total | % | |||||||
| * | Less than 10%. |
| 22 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1013 – 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 2reportable segments for the three and six months ended June 30,March 31, 2022 and 2021 and 2020 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-maker 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 June 30, 2021March 31, 2022 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,U.S., no geographical segments are presented.
Segment operating profit is determined based upon internal performance measures used by the chief operating decision-maker. 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.
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, | For the Six Months Ended, | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Gaming | $ | 2,238,927 | $ | 3,795,652 | $ | 4,689,140 | $ | 7,030,219 | ||||||||
| Esports | - | 93,165 | 23,919 | 93,165 | ||||||||||||
| Total Segment and Consolidated Revenues | $ | 2,238,927 | $ | 3,888,817 | $ | 4,713,059 | $ | 7,123,384 | ||||||||
| Cost of Revenues: | ||||||||||||||||
| Gaming | $ | 902,751 | $ | 1,174,649 | $ | 1,617,867 | $ | 2,098,115 | ||||||||
| Esports | 3,552 | 97,590 | 70,244 | 242,621 | ||||||||||||
| Total Segment and Consolidated Cost of Revenues | $ | 906,303 | $ | 1,272,239 | $ | 1,688,111 | $ | 2,340,736 | ||||||||
| Gross Profit: | ||||||||||||||||
| Gaming | $ | 1,336,176 | $ | 2,621,003 | $ | 3,071,273 | $ | 4,932,104 | ||||||||
| Esports | (3,552 | ) | (4,425 | ) | (46,325 | ) | (149,456 | ) | ||||||||
| Total Segment and Consolidated Gross Profit | $ | 1,332,624 | $ | 2,616,578 | $ | 3,024,948 | $ | 4,782,648 | ||||||||
| (Loss) Income From Operations: | ||||||||||||||||
| Gaming | $ | (5,716,887 | ) | $ | 149,581 | $ | (20,910,146 | ) | $ | 330,597 | ||||||
| Esports | (256,517 | ) | (48,311 | ) | (440,327 | ) | (348,903 | ) | ||||||||
| Total Segment and Consolidated (Loss) Income From Operations | $ | (5,973,404 | ) | $ | 101,270 | $ | (21,350,473 | ) | $ | (18,306 | ) | |||||
| Depreciation and Amortization: | ||||||||||||||||
| Gaming | $ | 58,496 | $ | 8,511 | $ | 85,305 | $ | 27,462 | ||||||||
| Esports | 7,952 | - | 11,918 | - | ||||||||||||
| Total Segment and Consolidated Depreciation and Amortization | $ | 66,448 | $ | 8,511 | $ | 97,223 | $ | 27,462 | ||||||||
| Interest Expense, net: | ||||||||||||||||
| Gaming | $ | (31,899 | ) | $ | (218,500 | ) | $ | (151,438 | ) | $ | (217,360 | ) | ||||
| Esports | - | - | - | - | ||||||||||||
| Total Segment and Consolidated Interest Expense, net | $ | (31,899 | ) | $ | (218,500 | ) | $ | (151,438 | ) | $ | (217,360 | ) | ||||
| Gain (loss) attributable to equity method investment : | ||||||||||||||||
| Gaming | $ | - | $ | 41,008 | $ | 1,370,837 | $ | (29,234 | ) | |||||||
| Esports | - | - | - | - | ||||||||||||
| Total Gain (loss) attributable to equity method investment | $ | - | $ | 41,008 | $ | 1,370,837 | $ | (29,234 | ) | |||||||
| For the Three Months Ended, | ||||||||||
| March 31, | ||||||||||
| 2022 | 2021 | |||||||||
| Revenues: | ||||||||||
| Gaming | $ | 2,958,388 | $ | 2,450,213 | ||||||
| Esports | 363,401 | 23,919 | ||||||||
| Total Segment and Consolidated Revenues | $ | 3,321,789 | $ | 2,474,132 | ||||||
| Cost of Revenues: | ||||||||||
| Gaming | $ | 1,404,007 | $ | 715,116 | ||||||
| Esports | 609,799 | 66,692 | ||||||||
| Total Segment and Consolidated Cost of Revenues | $ | 2,013,806 | $ | 781,808 | ||||||
| Gross Profit (Loss): | ||||||||||
| Gaming | $ | 1,554,381 | $ | 1,735,097 | ||||||
| Esports | (246,398 | ) | (42,773 | ) | ||||||
| Total Segment and Consolidated Gross Profit | $ | 1,307,983 | $ | 1,692,324 | ||||||
| (Loss) From Operations: | ||||||||||
| Gaming | $ | (15,044,421 | ) | $ | (15,193,260 | ) | ||||
| Esports | (558,929 | ) | (183,809 | ) | ||||||
| Total Segment and Consolidated (Loss) From Operations | $ | (15,603,350 | ) | $ | (15,377,069 | ) | ||||
| Depreciation and Amortization: | ||||||||||
| Gaming | $ | 107,483 | $ | 30,775 | ||||||
| Esports | 8,588 | - | ||||||||
| Total Segment and Consolidated Depreciation | ||||||||||
| and Amortization | $ | 116,071 | $ | 30,775 | ||||||
| Interest Expense: | ||||||||||
| Gaming | $ | (201,596 | ) | $ | (119,539 | ) | ||||
| Esports | - | - | ||||||||
| Total Segment and Consolidated Interest Expense | $ | (201,596 | ) | $ | (119,539 | ) | ||||
| Gain Attributable to Equity Method Investment: | ||||||||||
| Gaming | $ | - | $ | 1,370,837 | ||||||
| Esports | - | - | ||||||||
| Total Gain Attributable to Equity Method Investment | $ | - | $ | 1,370,837 | ||||||
| Other Income (Loss), Net: | ||||||||||
| Gaming | $ | (157,123 | ) | $ | 40,347 | |||||
| Esports | (4,976 | ) | - | |||||||
| Total Other Income (Loss), Net | $ | (162,099 | ) | $ | 40,347 | |||||
| Net Loss: | ||||||||||
| Gaming | $ | (15,403,140 | ) | $ | (13,901,611 | ) | ||||
| Esports | (563,905 | ) | (183,813 | ) | ||||||
| Total Segment and Consolidated Net Loss | $ | (15,967,045 | ) | $ | (14,085,424 | ) | ||||
| June 30, 2021 | December 31, 2020 | |||||||
| Segment Total Assets: | ||||||||
| Gaming | $ | 56,210,264 | $ | 17,377,993 | ||||
| Esports | 2,456,293 | 9,017 | ||||||
| Consolidated Total assets | $ | 58,666,557 | $ | 17,387,010 | ||||
| March 31, 2022 | December 31, 2021 | |||||||||
| Segment Total Assets: | ||||||||||
| Gaming | $ | 31,493,831 | $ | 47,511,471 | ||||||
| Esports | 2,087,734 | 3,191,732 | ||||||||
| Consolidated Total Assets | $ | 33,581,565 | $ | 50,703,203 | ||||||
NOTE 1114 - SUBSEQUENT EVENTS
The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial statements were issued. Other than as described below, theThe Company did not identify any subsequent events that would have required adjustments or disclosure in the condensed consolidated financial statements or notes.
On April 12, 2022, Motorsport Games Inc. reached a settlement agreement with Eleda, paying Eleda $INDYCAR325,000 as consideration for a full release and dismissal of all claims.
On July 13, 2021, the CompanyApril 22, 2022, Motorsport Games entered into a licenseletter agreement (the “INDYCAR Gaming License”“Amendment”) amending the terms of (i) the share purchase agreement dated March 31, 2021 (the “SPA”) with INDYCAR LLCLuminis International BV, Technology In Business B.V. (“INDYCAR”TIB”). and certain TIB’s shareholders parties to such amendment and (ii) the related deed of pledge that secured payment by the Company of the $3,200,000 deferred installment of the purchase price under the SPA.
Pursuant to the INDYCAR Gaming License, INDYCAR granted a licenseAmendment, the deferred installment amount due to be paid under the SPA by the Company on the first anniversary of closing was reduced from $3,200,000 to $1,000,000, with the remaining $2,200,000 further deferred and to be paid within 90 days of the date that the Company makes such $1,000,000 payment. Further, pursuant to the CompanyAmendment, secured obligations under the deed of pledge were correspondingly reduced from $3,200,000 to use certain licensed intellectual property (described in$2,200,000 following the INDYCAR Gaming License) for motorsports and/or racing video gaming products relatedfinalization of an amendment to themed as, or containing the INDYCAR SERIES. The INDYCAR Gaming License is a long-term agreement, in connection with which the parties intend to form an exclusive relationship for the developmentdeed of video games to be the official video games of the INDYCAR SERIES. The Company expects the debut INDYCAR SERIES title to launch in 2023pledge on Xbox and PlayStation consoles, as well as on PC.May 12, 2022.
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Motorsport Games Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
In exchange for the INDYCAR Gaming License, the Company will pay to INDYCAR an annual development fee through the date of launch, after which INDYCAR will receive a royalty equal to a certain percentage of sales of physical and digital video gaming products, subject to certain minimum guarantees. The Company has agreed under the INDYCAR Gaming License to provide advertising and publicity to bring the racing video gaming products related to, themed as, or containing the INDYCAR SERIES to the attention of as many purchasers and potential purchasers as possible.
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 described in such license (“Licensed IP”) for motorsports and/or racing esports events related to, themed as, or containing the INDYCAR SERIES (including the rFactor2 platform) (the “INDYCAR Esports License”). The INDYCAR Esports License is a long-term agreement, in connection with which the parties intend to form an exclusive relationship for the development of events to be the official esports events of the INDYCAR SERIES, which include the esports events related to and/or themed as or containing the Licensed IP and related features which, prior to launch, are hosted on the Company’s rFactor 2 and, after launch of the products, are hosted using the products. In exchange for the INDYCAR Esports License, INDYCAR will receive, on an annual basis, a royalty equal to a certain percentage of the net revenue (as defined in the INDYCAR Esports License) derived from or in connection with the events during the previous calendar year.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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, 20202021 (the “2020“2021 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2022 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,” “we,” “us” and “our” refer to Motorsport Games Inc., a Delaware corporation.
Overview
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 and six months ended June 30, 2021,March 31, 2022, 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”), INDYCAR, the British Touring Car Championship (the “BTCC”), INDYCAR and others. ThroughOur portfolio is comprised of some the support of our majority shareholder, Motorsport Network, the largest global media companymost prestigious motorsport leagues and events in the motorsport industry, Motorsport Games’ corporate mission isworld. Further, in 2021, we acquired the KartKraft karting simulation game as well as Studio397 and their rFactor 2 realistic racing simulator, adding both games to create the preeminent motorsport gaming and esports entertainment ecosystem by delivering 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.our portfolio.
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 licenselicenses to develop multi-platform games for the BTCC, INDYCAR, the 24 Hours of Le Mans race and the WEC. We develop and publish multi-platform racing video games including for game consoles, personal computers (PCs) and mobile platforms through various retail and digital channels, including full-game and downloadable content (sometimes known as “games-as-a-service”). Since our formation, our NASCAR video games have sold over one million copies for game consoles and PCs. For fiscal year 20202021 and the three and six months ended June 30, 2021, substantially allMarch 31, 2022, a majority of our revenue was generated from sales of our NASCAR racing video games.
As of March 31, 2022, we have increased our total headcount to 194 people, made up of 193 full-time employees, including 134 dedicated to game development, in order to continue the development of our expanded product offerings.
COVID-19 Pandemic Update
The global spread of the ongoing and prolonged COVID-19 pandemic and its variants has created significant business uncertainty for us and others, resulting inwhich has negatively impacted the global economy, disrupted global supply chains and workforce participation, and initially created significant volatility and economic disruption.disruption of financial markets. 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. In late fiscal 2020 and earlythroughout fiscal 2021, vaccines for combating COVID-19 were approved by health agencies in certain countries and regions where we operate and began to be administered, and we saw some loosening of government-mandated COVID-19 restrictions in certain locations, such as the United States,U.S., in response to improved COVID-19 infection levels. More recently, many news agencies have reported the spread of new variants of COVID-19, such as the DeltaOmicron variant and its subvariants, that are significantly more contagious than previous strains.strains, have emerged. Further, the effectiveness of approved vaccines on these new strains remains uncertain. The spread of these new strains are causinghave caused some government authorities to reimpose some or all of the earlier restrictions or impose other restrictions, all in an effort to lessen the spread of COVID-19 and its variants. While these lockdowns have begun to be lifted, the lingering impact of COVID-19 has continued to create significant volatility throughout the global economy, such as supply chain disruptions, limited labor supplies and higher inflation, which in turn has caused constraints on consumer spending.
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As a result of the ongoing and prolonged COVID-19 pandemic, including the related responses from government authorities, our business and operations have beenwere impacted, including the temporary closures of our offices in Miami, Florida, Silverstone, England, and Moscow, Russia during 2021, which has resulted in many of our employees working remotely. During the initial COVID-19 outbreak in 2020, demand for our games generally increased, which we believe was primarily attributable to a higher number of consumers staying at home due to COVID-19 related restrictions. Similarly, there was 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. Conversely, 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 and its variants, 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 cancellation or postponement of certain events to later dates or shifting events from an in-person format to online only. The emergence of the significantly more contagious DeltaOmicron variant of COVID-19 and the prevalence of breakthrough cases of infection among fully vaccinated people adds additional uncertainty and could result in further impacts to our business and operations, such as those discussed above and in the section entitled “Risk Factors” in Part I, Item 1A of the 20202021 Form 10-K.
WeAlthough we do not currently expect the COVID-19 pandemic to have a material impact on our future business and operations, we will 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 impacts 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,pandemic; its severity,severity; the emergence and severity of its variants,variants; the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential hesitancy to utilize them,them; the effect on discretionary spending by consumers; 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 paid by us during 2020 and 2021.
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 exclusive video game developer and publisher for the Le Mans race and the WEC, as well as the rights to create and organize esports leagues and events for the Le Mans race, the WEC and the 24 Hours of Le Mans Virtual event. In exchange for certain of these license rights, we agreed to fund up to €8,000,000 as needed for development of the video game products, to be contributed on an as-needed basis during 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 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 into escrow and 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, we entered into a binding term sheet with EleDa s.r.l. (“EleDa”). Pursuant to the binding term sheet, we and EleDa intend that we will acquire from EleDa all of the shares of Digital Tales USA, LLC, a Florida limited liability company (the “Interests”). The purchase price 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 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 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 Stock
On April 16, 2021, we closed the transactions contemplated by each of: (i) the share exchange agreement with PlayFast Games, LLC, a North Carolina limited liability (“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 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, we acquired all of the remaining equity interests in 704Games.
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 ours, 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 of our Class A common stock and $1,542,519 in cash and (ii) Ascend with respect to the shares of common stock of 704Games Company it surrendered in such merger consisted of 488,722 newly-issued shares of our Class A common stock and $2,056,692 in cash.
Pursuant to the PlayFast Exchange Agreement and the Ascend Exchange Agreement, we and the other defendants, without admitting any liability by any party, were released from all claims that Ascend or PlayFast could allege or assert against us as minority stockholders of 704Games. Pursuant to the Ascend Exchange Agreement, the derivative legal action previously commenced by Ascend was dismissed with prejudice on April 25, 2021. See Note 8 – Commitments and Contingencies – Litigation in our condensed consolidated financial statements for additional information.
Acquisition of Studio397
On April 20, 2021, we 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 we purchased from TIB 100% of the share capital of Studio397 B.V. The purchase price for the shares was $16,000,000, payable in two installments, as follows: $12,800,000 at closing and $3,200,000 on the first-year anniversary of closing. See Note 3 – Acquisitions – Studio397 in our condensed consolidated financial statements for additional information.
INDYCAR License
On July 13, 2021, we entered into certain license agreements with INDYCAR LLC (“INDYCAR”) to use certain licensed intellectual property for motorsports and/or racing video gaming products and esports events related to, themed as, or containing the INDYCAR SERIES. The license agreements are long-term agreements , in connection with which the parties intend to form an exclusive relationship for the development of video games and events to be the official video games and esports events of the INDYCAR SERIES.
In exchange for the gaming license, we will pay to INDYCAR an annual development fee through the date of launch, after which INDYCAR will receive a royalty equal to a certain percentage of sales of physical and digital video gaming products, subject to certain minimum guarantees. In exchange for the esports license, we will pay to INDYCAR, on an annual basis, a royalty equal to a certain percentage of the net revenue (as defined in the esports license agreement) derived from or in connection with the events during the previous calendar year. We expect the debut INDYCAR SERIES title to launch in 2023 on Xbox and PlayStation consoles, as well as on PC.
Trends and Factors Affecting Our Business
Product Release Schedule
Our financial results are affected by the timing of our product releases and the commercial success of those titles. Our NASCAR Heat products have historically accounted for the majority of our revenue.revenue , however we have diversified our product offerings and are generating revenues from KartKraft, rFactor2 and Le Mans 24 hour virtual event reducing the percentage of revenues from NASCAR. We currently anticipate releasingreleased: (i) our next generation NASCAR console/PC game, NASCAR 21: Ignition, on October 28, 2021; (ii) NASCAR Heat Ultimate Edition+ on Nintendo Switch on November 19, 2021, the first-ever NASCAR title to come to Nintendo Switch; and (iii) the full release of the KartKraft kart racing simulator on January 26, 2022 for the PC. Additionally, in the fourth quarter of 2021. Additionally,May 2020 and January 2021, respectively, we obtained the exclusive licenselicenses to develop multi-platform games for the BTCC in May 2020, and we recently obtained the exclusive license to develop multi-platform games for INDYCAR and the WEC series, including the iconic 24 hours of Le Mans race, and in July 2021, we obtained the license to develop multi-platform games for INDYCAR. During the three months ended March 31, 2022, we modified our product release schedule such that our next NASCAR title for 2022 will be an update to our 2021 release and January 2021, respectively.the anticipated timing of some of our other planned product releases for other racing series have been moved to later periods. The INDYCAR, BTCC and Le Mans games are currently under development, and we currently anticipate releasing games for these racing series in 2022. The INDYCAR game is scheduled for release in 2023.2023 and 2024. 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 improve our operating results and provide a revenue stream that is less cyclical based on the release of a single game per year.
Economic Environment and Retailer Performance
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 expect to continue to derive significant revenues from sales of our physical gaming products to a very limited number of distribution partners. For the year ended December 31, 20202021 and the sixthree months ended June 30, 2021, we had one distribution partner through whichMarch 31, 2022, we sold substantially all of our physical disk products for the retail channel through a single distribution partner, which represented approximately 34%28% and 3.0%15% of our total revenue for such periods, respectively. 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 20202021 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, increased inflation, supply chain constraints, labor supply issues, 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, particularly due to the emergence of the significantly more contagious DeltaOmicron variant of COVID-19 and the prevalence of breakthrough cases of infection among fully vaccinated people. 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 “—“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 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 86%18% and 78%36% of our total revenue for the yearthree-month periods ended DecemberMarch 31, 20202022 and the six months ended June 30, 2021, respectively. For the yearthree-month periods ended DecemberMarch 31, 20202022 and the six months ended June 30, 2021, the sale of products for Microsoft Windows via Steam comprised approximately 5%17% and 18%8% of our total revenue, respectively, and the sale of products for mobile platforms comprised approximately 9%3% and 10%11% 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 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 newlatest 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 productsproducts.
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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, 20202021 and the sixthree months ended June 30, 2021,March 31, 2022, approximately 51%61% and 97%65%, respectively, 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. 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.
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,During the first quarter of 2022, we facilitated 56announced our viewership figures for the 2021-22 Le Mans Virtual Series, which reached 7 million views and registered cumulated television and digital audience figures of more than 81 million through its 5-month season. During 2021, we organized several esports events, which included official esports events forcompetitions, including the DiRT Rally 2.0 World Series on the popular Codemasters game, the Winter Heat and Summer Showdown on NASCAR Heat 5, and the expansion of the 24 Hours of Le Mans the Official World Rallycross Esports Championship, FIA Formula EVirtual event into a part of a longer annual series with professional teams and other race series. The total number of people that have watchedreal-world racing drivers. In addition, we also organized competitions to drive user engagement on our rFactor 2 platform. For 2021, our esports events in 2020 washad cumulative total viewership of approximately 55 million. Through the six months ended June 30, 2021, we have facilitated 11 esports events, and the total number of people that have watched our esports events in the first six months of 2021 was1.5 million views with approximately 509,000. 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.3.8 million minutes watched.
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. See “Risks Related to Our Business and Industry—We may experience security breaches and cyber threats” in the section entitled “Risk Factors” in Part I, Item 1A of the 20202021 Form 10-K for additional information.
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 portable and mobile gaming 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 theportable and mobile gaming, industry, which we believe is a continuing trend. Accordingly, in conjunction with the launch of our newnext generation NASCAR console and console/PC game, NASCAR 21: Ignition, we plan to launchlaunched an updated NASCAR Heat MobileUltimate Edition+ on Nintendo Switch in 2021, which is our NASCAR mobile racing game. Given the recent popularity and fast growing naturefourth quarter 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 as revenue from our annualized sports franchise (currently NASCAR Heat)NASCAR) for game consoles, PC and mobile platforms. We deem this recurring because many existing game owners purchase annual updates, which includes updated drivers, liveries and cars as they are released. We 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. 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.
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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.
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 disk at the time of sale, which also typically provides access to offline core game content; and
● 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.
Our product and service offerings included within the esports segment relate primarily to curating esports events.
Cost of Revenues
Cost of revenues for our Gaming segment is primarily comprised of royalty expenses attributable to our license arrangement with NASCAR and certain other third-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. 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 Network 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-housein- 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.
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Depreciation and Amortization
Depreciation and amortization expenses include depreciation on fixed assets (primarily computers and office equipment), as well as amortization of definitefinite lived intangible assets acquired through our various acquisitions.
Results of Operations
Three Months Ended June 30, 2021March 31, 2022 compared to Three Months Ended June 30, 2020March 31, 2021
Revenue
| For the Three Months Ended, | For the Three Months Ended, | |||||||||||||||||
| June 30, | March 31, | |||||||||||||||||
| 2021 | 2020 | 2022 | 2021 | |||||||||||||||
| Revenues: | ||||||||||||||||||
| Gaming | $ | 2,238,927 | $ | 3,795,652 | ||||||||||||||
| Esports | - | 93,165 | ||||||||||||||||
| Gaming | $ | 2,958,388 | $ | 2,450,213 | ||||||||||||||
| Esports | 363,401 | 23,919 | ||||||||||||||||
| Total Segment and Consolidated Revenues | $ | 2,238,927 | $ | 3,888,817 | $ | 3,321,789 | $ | 2,474,132 | ||||||||||
Revenues were $2,238,927 and $3,888,817$3,321,789 for the quartersthree months ended June 30, 2021 and 2020, respectively, a decreaseMarch 31, 2022 versus $2,474,132 for the three months ended March 31, 2021. The $847,657, or 34%, period over period increase reflects $508,175 of $1,649,890 or 42%.higher game sales from our Gaming segment, primarily from sales of our rFactor 2 racing simulation game, which we acquired in April 2021. For the three months ended June 30, 2021,March 31, 2022 revenues from our Gamingesports segment decreased $1,556,725, or 41%,increased $339,482 compared to $2,238,927the three months ended March 31, 2021. The increase was primarily due to an increase in sponsorship and events revenue from $3,795,652Le Mans Esports Series Ltd, which held the final of its 2022 Le Mans Virtual Series in January 2022.
| For the Three Months Ended, | ||||||||||
| March 31, | ||||||||||
| 2022 | 2021 | |||||||||
| Cost of Revenues: | ||||||||||
| Gaming | $ | 1,404,007 | $ | 715,116 | ||||||
| Esports | 609,799 | 66,692 | ||||||||
| Total Segment and Consolidated Cost of Revenues | $ | 2,013,806 | $ | 781,808 | ||||||
Cost of revenues were $2,013,806 for the three months ended June 30, 2020. The decrease in our Gaming segment revenuesMarch 31, 2022 as compared to the 2020 period was primarily due to lower sales of our console and PC games and, to a lesser extent, a reduction in mobile revenues. The NASCAR Heat 5 game was released in July 2020 and the majority of sales from a new release occur closest to the release date so we typically see a decrease in revenues over time for our games that have been released. We also benefited from additional sales of our video games during the 2020 period due to increased demand for our games, which we believe was primarily attributable to a higher number of consumers staying at home due to COVID-19 related restrictions during that time.
Esports segment revenues were $0 and $93,165$781,808 for the three months ended June 30,March 31, 2021 and 2020, respectively, a decreaserepresenting an increase of $93,165 from sponsorship revenues received in the second quarter of 2020. We held seven events during the second quarter of 2021 but did not have any sponsorship revenues from these events.
Cost of Revenues
For the Three Months Ended, June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cost of Revenues: | ||||||||
| Gaming | $ | 902,751 | $ | 1,174,649 | ||||
| Esports | 3,552 | 97,590 | ||||||
| Total Segment and Consolidated Cost of Revenues | $ | 906,303 | $ | 1,272,239 | ||||
Cost of revenues were $906,303 and $1,272,239 for the three months ended June 30, 2021 and 2020, respectively, a decrease of $365,936$1,231,998 or 29%158%. The decrease is primarily due to a decrease in revenues combined with lower overall costs due to a higher percentage of digital sales.
Cost of revenues from our Gaming segment were $902,752increased $688,891, or 96%. The increase was primarily due to a $355,617 increase in amortization of intangible assets primarily driven by the acquisition of Studio397, a $198,998 increase in license/royalty fees, and $1,174,649a $131,642 increase in game production costs due to manufacturing costs for Nintendo Switch.
For the three months ended June 30, 2021 and 2020, respectively, a decrease of $271,897 or 23%, primarily due to a decrease in revenues and lower overall costs due to a higher percentage of digital sales, partially offset by an increase in license amortization expense. CostMarch 31, 2022, cost of revenues from our esports segment were $3,552 and $97,590increased by $543,107 to $609,799 from $66,692 for the quartersthree months ended June 30,March 31, 2021. The increase was primarily due to costs associated with conducting the 2022 Le Mans Virtual Series.
| For the Three Months Ended, | ||||||||||
| March 31, | ||||||||||
| 2022 | 2021 | |||||||||
| Gross Profit: | ||||||||||
| Gaming | $ | 1,554,381 | $ | 1,735,097 | ||||||
| Esports | (246,398 | ) | (42,773 | ) | ||||||
| Total Segment and Consolidated Gross Profit | $ | 1,307,983 | $ | 1,692,324 | ||||||
Gross profit was $1,307,983 for the three months ended March 31, 2022, versus $1,692,324 for the three months ended March 31, 2021, and 2020, respectively, a decrease of $94,038$384,341 or 96%23%. Cost of revenues inGross profit from our esportsgaming segment are primarily comprised of contract labor to staff events.
Gross Profit
| For the Three Months Ended, | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Gross Profit: | ||||||||
| Gaming | $ | 1,336,176 | $ | 2,621,003 | ||||
| Esports | (3,552 | ) | (4,425 | ) | ||||
| Total Segment and Consolidated Gross Profit | $ | 1,332,624 | $ | 2,616,578 | ||||
Gross Profitdecreased $180,712, or 10%. The gross profit margin for the gaming segment was $1,332,624, or 60% of revenues53% and $2,616,578, or 67%71% of revenues for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively, a decrease of $1,283,954, or 49%.respectively. The decrease in the gaming segment gross profit was primarily due to the reduction of $1,556,725a decrease in revenues from our Gaming segment and an increase of $304,998 in amortization expenses, partially offset by $283,387 of lower royalty expenses and $335,354 lower product retail and distribution expenses due to lower revenues and a higher percentage of digital gamesmobile game sales, which have a higher gross margin than the sale of physical units.game discs, as well as a higher cost of revenues driven by increased royalty and amortization expenses primarily from the acquisition of Studio397. Gross profit from our esports segment decreased $203,628 primarily due to costs relating to TV production and event staff used in connection with the final of the 2022 Le Mans Virtual Series.
With lower revenues, our Gaming segment gross profit was $1,336,176 and $2,621,003
Operating Expenses were $16,911,333 for the three months ended June 30, 2021 and 2020, respectively. Costs relatingMarch 31, 2022, compared to staffing at esports events resulted in a gross loss of $3,552 and $4,425 in our esports segment for the quarters ended June 30, 2021 and 2020, respectively.
Operating Expenses
Operating expenses were $7,306,028 and $2,515,308$17,069,393 for the three months ended June 30,March 31, 2021, and 2020, respectively, an increasewhich reflects a decrease of $4,790,720, primarily attributable to expenses incurred in connection with acquisitions and expansion of development staff to develop more gaming titles,$158,060 as described further below.
Sales and Marketing
Sales and marketing expenses were $704,222$1,688,449 and $722,046$1,024,218 for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively. The decrease$664,231 or 65%, increase in sales and marketing expenses were primarily driven by an increase in headcount to support the promotion of $17,824, or 2%, is dueadditional games and platforms that were added to increased marketing payroll of $201,793, offset by a reductionproduct and platform offerings, as well as planned future releases in marketing spend of $181,267 and non-cash compensation expense of $38,350.our product roadmap.
Development
Development expenses were $1,818,178$2,404,338 and $1,202,343$1,250,362 for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively. The $615,835,$1,153,976, or 51%92%, increase in development expenses is primarilywere due to $447,236 in higher salariesinternal and benefitsexternal development expenses required to developsupport the development and support an increased numberlaunch of gamesfuture new platform and platforms. We are now actively working on 6 title games compared to 1 title game in process during 2020.releases.
General and Administrative
General and administrative (“G&A”) expenses were $4,717,180$3,423,153 and $582,408$14,764,038 for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively, an increaseresulting in a $11,340,885 decrease in G&A expenses. The decrease in G&A expenses reflects $12,189,032 of $4,134,772. The increaseexpenses incurred in general and administrative expenses was primarily attributable to $1,051,995 in compensation expense for the settlementfirst quarter of certain stock appreciation rights (“SARs”) of 704Games that were settled in cash2021 in connection with ourthe 2021 acquisition of Studio397 and our initial public offering in January 2021 (the “IPO”), including IPO-related bonuses and stock-based compensation expenses that did not recur in the remaining equity interestsfirst quarter of 2022, partially offset by $295,382 of increased investor relations expenses, $224,274 of increased insurance expenses, $270,123 in 704Gamesadditional non-cash compensation expenses and $132,330 in increased costs for software licenses and subscriptions incurred during the second quarter of 2021; a $877,773 increase in payroll expense (excluding the compensation expense for the settlement of the 704Games’ SARs 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; a $114,854 increase in non-cash compensation expense; a $635,549 increase in insurance expense due to the directors’ and officers’ insurance policy that we obtained when we became a publicly traded company; a $1,187,469 increase in professional fees, primarily relating to various acquisitions and corporate transactions, including the buyout through a merger of 704Games, litigation matters relating to our previous purchases of certain equity interests in 704Games, and an increase in consulting fees primarily to support the preparation of public company filings.three months ended March 31, 2022.
Impairment of Goodwill, Intangible and Long-Lived Assets
Loss on impairment of goodwill was $4,788,268 for the three months ended March 31, 2022 versus $0 for the three months ended March 31, 2021. The impairment loss primarily relates to goodwill acquired in connection with the acquisition of Studio397. The trigger for the interim assessment was primarily by revisions made in the first quarter of 2022 to the scope and timing of certain product releases included in our product roadmap, as well as a significant reduction in the Company’s market capitalization since the date of the last impairment assessment. Changes to the forecasted revenues and discount rates, as a result of the triggers identified, were the primary drivers for change in fair value since the annual assessment and impairment loss recorded in the three months ended March 31, 2022.
Loss on impairment of indefinite-lived intangible assets was $3,170,061 for the three months ended March 31, 2022 versus $0 for the three months ended March 31, 2021. The trigger for the interim assessment was the changes to the product roadmap and market capitalization of the Company, as referenced above. The loss on impairment of indefinite-lived intangible assets relates to the rFactor 2 trade name and the Le Mans Video Gaming License and is primarily driven by a reduction in expected future revenues following changes made to the product roadmap in the first quarter of 2022, as well as changes to the discount rates and royalty rates used when valuing the assets.
Loss on impairment of finite-lived intangible assets was $1,320,993 for the three months ended March 31, 2022 versus $0 for the three months ended March 31, 2021. The trigger for the interim assessment was the changes to the product roadmap and market capitalization of the Company, as referenced above. The loss on impairment of finite-lived intangible assets relates to the rFactor 2 technology and was primarily driven by a change in the technical obsolescence assumption used when determining the fair value of the asset.
Depreciation and Amortization
Depreciation and amortization expenses were $66,448$116,071 and $8,511$30,775 for the quartersthree months ended June 30,March 31, 2022 and 2021, and 2020, respectively, an increase of $57,937.$85,296, or 277%. The increase was primarily due to additional depreciation expense for fixed assets acquired during 2021.2021 and the first quarter of 2022.
Other Income (Expense)Interest Expense
Interest expense was $31,899$201,596 and $218,500$119,539 for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively. The decreaseincrease of $186,601,$82,057, or 85%69%, was primarily due to pay-downsan increase in non-cash interest for accretion of related party debt dueINDYCAR license liability.
Gain Attributable to Motorsport Network that occurred during the first and second quarters of 2021.Equity Method Investment
The gain attributable to equity method investment in the Le Mans joint ventureEsports Series Ltd was $0 and $41,008$1,370,837 for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively. We discontinued equity method accounting and began to fully consolidate the Le Mans joint ventureEsports Series Ltd upon acquiring a majority interest during the first quarter of 2021.
Other (Loss) Income, Net
Other expense, net was $162,099 for the three months ended March 31, 2022. For the three months ended March 31, 2021, other income, net was $44,360$40,347. The change was primarily due to changes in foreign currency losses recorded during the three months ended March 31, 2022 and 44,688 for the quarters ended June 30, 2021 and 2020, respectively. This primarily represents rental income from the sub-lease of our Charlotte, NC office space.2021.
Other Comprehensive Loss
Other comprehensive loss was $70,809$125,245 and $0$32,914 for the quartersthree months ended June 30,March 31, 2022 and 2021, and 2020, respectively. This was primarily due to increased activity in our subsidiaries in the U.K., AustralianAustralia, Russia and the Netherlands subsidiaries and represents unrecognized foreign currency exchange losses.
Six Months Ended June 30, 2021 compared to Six Months Ended June 30, 2020
| For the Six Months Ended, | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenues: | ||||||||
| Gaming | $ | 4,689,140 | $ | 7,030,219 | ||||
| Esports | 23,919 | 93,165 | ||||||
| Total Segment and Consolidated Revenues | $ | 4,713,059 | $ | 7,123,384 | ||||
Revenues were $4,713,059 and $7,123,384 for the six months ended June 30, 2021 and 2020, respectively, a decrease of $2,410,325 or 34%. For the six months ended June 30, 2021, revenues from our Gaming segment decreased $2,341,079, or 33%, to $4,689,140 from $7,030,219 for the six months ended June 30, 2020. The decrease in our Gaming segment revenues compared to the 2020 period was due primarily to lower sales of our console and PC games and, to a lesser extent, a reduction in mobile revenues.
Esports segment revenues were $23,919 and $93,165 for the six months ended June 30, 2021 and 2020, respectively, a decrease of $69,246 due to lower sponsorship revenues.
Cost of Revenues
| For the Six Months Ended, | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Cost of Revenues: | ||||||||
| Gaming | $ | 1,617,867 | $ | 2,098,115 | ||||
| Esports | 70,244 | 242,621 | ||||||
| Total Segment and Consolidated Cost of Revenues | $ | 1,688,111 | $ | 2,340,736 | ||||
Cost of revenues were $1,688,111 and $2,340,736 for the six months ended June 30, 2021 and 2020, respectively, a decrease of $652,625 or 28%. The decrease is primarily due to a decrease in revenues combined with lower overall costs due to a higher percentage of digital game sales.
Cost of revenues from our Gaming segment were $1,617,867 and $2,098,115 for the six months ended June 30, 2021 and 2020, respectively, a decrease of $480,248 or 23%, primarily due to a decrease in revenues and lower overall costs due to a higher percentage of digital game sales, partially offset by an increase in license amortization expense. Cost of revenues from our esports segment were $70,244 and $242,621 for the six months ended June 30, 2021 and 2020, respectively, a decrease of $172,377, or 71%. Cost of revenues in our esports segment are primarily comprised of contract labor to staff events.
Gross Profit
| For the Six Months Ended, | ||||||||
| June 30, | ||||||||
| 2021 | 2020 | |||||||
| Gross Profit: | ||||||||
| Gaming | $ | 3,071,273 | $ | 4,932,104 | ||||
| Esports | (46,325 | ) | (149,456 | ) | ||||
| Total Segment and Consolidated Gross Profit | $ | 3,024,948 | $ | 4,782,648 | ||||
Gross Profit was $3,024,948, or 64% of revenues, and $4,782,648, or 67% of revenues, for the six months ended June 30, 2021 and 2020, respectively, a decrease of $1,757,700 or 37%. The decrease in gross profit was primarily due to the reduction in revenues from our Gaming segment and increase in amortization expenses. This was partially offset by the increased percentage of digital game sales, which have a higher gross margin than the sale of physical units.
With lower revenues and higher amortization expense, our Gaming segment gross profit was $3,071,273 and $4,932,104 for the six months ended June 30, 2021 and 2020, respectively. Costs relating to staffing at esports events resulted in a gross loss of $46,325 and $149,456 in our esports segment for the six months ended June 30, 2021 and 2020, respectively.
Operating Expenses
Operating expenses were $24,375,421 and $4,800,954 for the six months ended June 30, 2021 and 2020, respectively, an increase of $19,574,467, primarily attributable to expenses incurred in connection with our IPO in January 2021 and subsequent acquisitions, non-cash compensation expenses of $9,193,190, acquisition related expenses of $878,571 and other IPO related expenses of $2,947,192.
Sales and Marketing
Sales and marketing expenses were $1,728,440 and $1,360,185 for the six months ended June 30, 2021 and 2020, respectively. The $368,255 increase in sales and marketing expenses includes an increase non-cash compensation expense of $83,372 primarily 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 $117,637 to the increase.
Development
Development expenses were $3,068,540 and $2,138,147 for the six months ended June 30, 2021 and 2020, respectively. The $930,393 increase in development expenses reflects higher compensation due to additional headcount to develop and support an increased number of games and platforms and an increase in non-cash compensation expense of $58,301 relating to option grants in connection with the IPO.
General and Administrative
General and administrative expenses were $19,481,218 and $1,275,160 for the six months ended June 30, 2021 and 2020, respectively, an increase of $18,206,058. The increase in general and administrative expenses was primarily attributable to $12,700,110 in acquisition and IPO related expenses (including IPO bonuses and non-cash compensation expense); a $1,645,863 increase in compensation expense (excluding IPO bonuses, compensation expense for the settlement of the 704Games’ SARs 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; a $1,177,976 increase in insurance and office expense primarily due to the directors’ and officers’ insurance policy that we obtained when we became a publicly traded company; and a $2,087,881 increase in professional fees, primarily relating to a $1,202,929 increase in legal fees for 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.
Depreciation and Amortization
Depreciation and amortization expenses were $97,223 and $27,462 for the six months ended June 30, 2021 and 2020, respectively, an increase of $69,761. The increase was primarily due to additional depreciation expense on fixed assets acquired during 2021.
Other Income (Expense)
Interest expense was $151,438 for the six months ended June 30, 2021 as compared to $217,360 for the six months ended June 30, 2020, a decrease of $65,922 when compared to the 2020 period. This was primarily due to the interest-bearing related party loan from Motorsport Network that was paid down in the first and second quarters of 2021.
The gain (loss) attributable to equity method investment in the Le Mans joint venture was $1,370,837 for the six months ended June 30, 2021 and ($29,234) for the six months ended June 30, 2020. The 2021 gain was primarily resulting from acquiring additional ownership in the Le Mans joint venture during the first quarter of 2021. We discontinued equity method accounting and began to fully consolidate the Le Mans joint venture upon acquiring a majority interest during the first quarter of 2021.
Other income, net was $84,707 and $32,858 for the six months ended June 30, 2021 and 2020, respectively. Other income, net of $84,708 for the six months ended June 30, 2021 was primarily comprised of $91,164 in rental income from the sub-lease of our Charlotte, NC office space. For the quarter ended June 30, 2020, other income, net of $32,858 was comprised primarily of $63,584 in rental income from the sub-lease of our Charlotte, NC office space and miscellaneous income of $1,810, partially offset by $32,536 in expense for the write-off of fixed assets that were provided to the sub-lease tenant of the Charlotte, NC office.
Other comprehensive loss was $103,723 and $0 for the six months ended June 30, 2021 and 2020, respectively. This was primarily due to increased activity in our U.K., Australian and Netherlands subsidiaries and represents unrecognized foreign currency exchange losses.
Liquidity and Capital Resources
Liquidity
Since our inception and prior to our IPO, 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,the $12 million Line of Credit, 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$63,073,783 from the IPO, after deducting underwriting discounts and offering expenses payablepaid by us.us in 2020 and 2021.
We measure our liquidity in a number of ways, including the following:
| Liquidity Measure | March 31, 2022 | December 31, 2021 | ||||||
| Cash and cash equivalents | $ | 12,367,235 | $ | 17,819,640 | ||||
| Working capital | $ | 10,100,765 | $ | 16,024,590 | ||||
In addition, as of March 31, 2022, the $12 million Line of Credit (as defined below) was undrawn.
For the three months ended March 31, 2022, the Company had a net loss of approximately $16.0 million and negative cash flows from operations of approximately $5.6 million. As of March 31, 2022, we had an accumulated deficit of $53.1 million. We expect to continue to incur significant operating expenses and, as a result, we will need to continue to grow revenues to reach profitability and positive cash flows. We expect to continue to incur losses for the foreseeable future as we continue to develop our product portfolio and invest in the development of new video game titles. Accordingly, we do not believe that our existing cash on hand will be sufficient to fund our operations for at least the next 12 months. In addition, we may choose
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Our future liquidity and capital requirements include funds to raisesupport the planned costs to operate our business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures. The adequacy of our available funds generally depends on many factors, including our ability to successfully develop consumer-preferred new products or enhancements to our existing products, continued development and expansion of our esports platform and our ability to enter into collaborations with other companies and/or acquire other companies or technologies to enhance or complement our product and service offerings.
We continue to explore additional funds at any time throughfunding in the form of equity and/or debt financing arrangements which may or mayand consider these to be viable options to support future liquidity needs, providing such opportunities can be obtained on terms that are commercially competitive and on terms acceptable to the Company. We are also seeking to improve our liquidity by achieving cost reductions by maintaining and enhancing cost control initiatives.
As we continue to evaluate incremental funding solutions, we have reevaluated our product roadmap in the first quarter of 2022 and modified the expected timing and scope of certain new product releases. These changes have been made not be needed for additionalonly to maintain the development of high-quality video game titles but also to improve the timing of certain working capital requirements and reduce expenditures, thereby decreasing our expected future cash-burn and improve short-term liquidity needs. If needed, further adjustments could be made that would decrease short-term working capital requirements, while pushing out the timing of expected revenues.
We expect to generate additional liquidity through consummating equity and/or debt financings, achieving cost reductions by maintaining and enhancing cost control initiatives, and/or adjusting our product roadmap to reduce nearterm need for working capital. If we are unable to generate adequate revenue and profit growth, there can be no assurances that such actions will provide us with sufficient liquidity to meet our cash requirements as, among other things, our liquidity can be impacted by a number of factors, including our level of sales, costs and expenditures, or other strategic investments. However, there are currently no commitments in place for future financingas well as accounts receivable and theresales allowances.
There can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all.all, to satisfy our future needed liquidity and capital resources. If we are unable to obtain adequate funds on reasonableacceptable terms, we may be required to, among other things, significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms.
If we are unable to satisfy our cash requirements from the sources identified above, we could be required to adopt one or more of the following alternatives:
| ● | selling assets or operations; |
| ● | seeking additional capital contributions and/or loans from Motorsport Network, the Company’s other affiliates and/or third parties; and/or |
| ● | reducing other discretionary spending. |
There can be no assurance that we would be able to take any of the actions 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, additional capital contributions and/or loans not being available from Motorsport Network or affiliates and/or third parties, or that the transactions may not be permitted under the terms of our various debt instruments then in effect, such as due to restrictions on the incurrence of debt, incurrence of liens, asset dispositions and related party transactions. In addition, such actions, if taken, may not enable us to satisfy our cash requirements if the actions that we are able to consummate do not generate a sufficient amount of additional capital.
Our operating needs include the planned costs to operateEven if we do secure additional financing, if our business, including amounts required to fund working capital and capital expenditures. Our future capital requirements and the adequacyanticipated level of revenues are not achieved because of, for example, less than anticipated consumer acceptance of our available funds will depend on many factors, includingoffering 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 currency; decreased sales of our ability to successfully developproducts and events as a result of increased competitive activities by our competitors; changes in consumer purchasing habits; 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 advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, our liquidity may continue to be insufficient to satisfy our existing products, continued development and expansion of our esports platform and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product offerings.future capital requirements.
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 these condensed consolidated financial statements are issued. The factors described above, in particular the 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 From Operating Activities
Cash flows (used in) fromNet cash used in operating activities for the sixthree months ended June 30,March 31, 2022 and 2021 was $5,589,106 and 2020 were ($11,264,546) and $2,297,962,$6,834,752, respectively. The net cash used in operating activities for the sixthree months ended June 30, 2021March 31, 2022 was primarily a result of cash used to fund a net loss of $20,046,366,$15,967,045, adjusted for net non-cash expensesadjustments of $8,681,602,$10,514,807 and $100,219$136,868 of net cash used by changes in the levels of operating assets and liabilities. The netNet cash providedused in by operating activities for the sixthree months ended June 30, 2020March 31, 2021 was primarily a resultdue to net loss of $14,085,424, adjusted for non-cash expenses in the amount of $7,883,479 and by $632,807 of cash used to fund a net loss of $232,042, adjusted for net non-cash expenses of $702,162, offset by $1,827,842 of net cash provided by changes in the levels of operating assets and liabilities.
Cash Flows From Investing Activities
Net cash used in investing activities for the sixthree months ended June 30,March 31, 2022 was $101,004, which was primarily attributable to the purchases of property and equipment. During the three months ended March 31, 2021, net cash used in investing activities was $14,008,174,$956,501, which was attributable to $1,000,000 paid in connection with the acquisition of KartKraft, $12,785,463 was paid in connection with the acquisition of Studio397, the purchases of intangible assets and property and equipment of $27,928$26,000 and $348,033,$83,751, respectively, partially offset by $153,250 forof net cash acquired in the purchase of an additional controlling interest in the Le Mans joint venture (net of cash acquired). Net cash used in investing activities for the six months ended June 30, 2020 was $903,154, which was attributable to purchases of property and equipment for $11,155 and the purchases of intangible assets of $891,999.Esports Series Ltd.
Cash Flows From Financing Activities
We experienced positiveNet cash provided by financing activities during the three months ended March 31, 2022 and 2021 was $148,152 and $53,633,631, respectively. Cash flows from financing activities for the sixthree months ended June 30,March 31, 2022 was attributable to the receipts of advances from related parties. During the three months ended March 31, 2021, in the amount of $49,501,815, whichnet cash provided by financing activities was primarily attributable to approximately $63,700,000$63,073,783 of net cash provided by the sale of Class A Common stock in our IPO, partially offset by approximately $10,800,000$10,027,497 of net repayments to Motorsport Network and $3,600,000 for the purchase of the remaining equity interests in 704Games. During the six months ended June 30, 2020, we used $66,794 of net cash from financing activities, which was attributable to $38,946 of net cash repaid to Motorsport Network and $27,848 of cash used in payment of deferred offering costs.Network.
Promissory Note Line of Credit
On April 1, 2020, wethe Company entered into a promissory note (the “$12 million Line of Credit”) with the Company’s majority stockholder, Motorsport Network, (the “Promissory Note”) forthat provides the Company with a line of credit of up to $10,000,000 (and after the amendment described below, up to $12,000,000) at an interest rate of 10% per annum.annum, the availability of which is dependent on Motorsport Network’s available liquidity. The principal amount under the Promissory Note$12 million Line of Credit was primarily funded through one or more advances from Motorsport Network, including advances in August and October 2020 for purposes of acquiring an additional ownership interest in 704Games. Previous non-interest-bearing advances due to Motorsport Network asThe $12 million Line 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 to the Promissory Note,$12 million Line of Credit, dated September 4, 2020, not to demand or otherwise accelerate any amount due under the Promissory Note$12 million Line of Credit that would otherwise constrain the Company’s liquidity position, including the Company’s ability to continue as a going concern. WeThe 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. In the event wethe Company or any of ourits subsidiaries consummateconsummates certain corporate events, including any capital reorganization, consolidation, joint venture, spin off, merger or any other business combination or restructuring of any nature, or if certain events of default occur, the entire principal amount and all accrued and unpaid interest will be accelerated and become payable.
On November 23, 2020, the Company and Motorsport Network entered into an amendment to the Promissory Note, effective as$12 million Line of September 15, 2020. UnderCredit, pursuant to which the terms of the amendment, the line of creditavailability under the Promissory Note$12 million Line of Credit was increased from $10,000,000 to $12,000,000. All$12,000,000, with no changes to the other terms remained the same.terms.
During the sixthree months ended June 30, 2021,March 31, 2022, there was no activity under the Company repaid $12,663,168$12 million Line of the Promissory NoteCredit and drew down an additional $1,868,312, such that the balance due to Motorsport Network was $285,198$0 as of June 30, 2021.March 31, 2022. Subsequent to June 30,March 31, 2022, the Company has not made any advances or repayments of the $12 million Line of Credit. For the three months ended March 31, 2021, the Company was advanced $1,772,503 and repaid $132,378$11,800,000 of the Promissory Note.$12 million Line of Credit.
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 acquire capital assets. The Company does not have material commitments to acquire capital assets as of March 31, 2022.
Material Cash Requirements
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 2021 Form 10-K.
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 date2021 Form 10-K, with the exception 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 allowanceadditional critical estimate identified in respect of deferred income taxes, valuation of acquired companies and equity investments, the recognition and disclosure of contingent liabilities, and goodwill andfinite-lived 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.assets.
Our significant accounting policiesValuation of Finite-Lived Intangible Assets
We review our finite-lived assets for impairment whenever events or changes in circumstances indicate, based on recent and projected cash flow performance and remaining useful lives, that the carrying value of these assets may not be fully recoverable. We evaluate asset impairment at the lowest level for which identifiable cash flows are more fully describedlargely independent of the cash flows of other assets and liabilities. The lowest level for which we maintain identifiable cash flows that are independent of the cash flows of other assets and liabilities is at the intangible asset level, with the exception of technology intangible assets which are at the reporting unit level. If estimated undiscounted future cash flows are less than the carrying value of an asset, an impairment charge is recognized to the extent its carrying value exceeds fair value.
We typically estimate fair value a cost to recreate valuation technique, however the valuation method used will be dependent on the finite-lived intangible asset subject to fair value assessment.
The principal assumptions used in our condensed consolidated financial statements included elsewherecost to recreate model for our interim impairment review for the three month period ended March 31, 2022 were:
| - | Number of hours to recreate; | |
| - | Rate per hour; and | |
| - | Technological obsolescence. |
If the carrying value exceeds its fair value, an impairment loss is recognized in this Report.an amount equal to that excess. If the fair value exceeds its carrying value, the finite-life intangible asset is not considered impaired.
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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. 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 Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Not applicable.
Item 4. Controls and Procedures
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As of June 30, 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 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,Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022. Based on thatthis evaluation, our chief executive officerChief Executive Officer and chief financial officerChief Financial Officer have concluded that, as of June 30, 2021, our disclosure controls and procedures were not effective due toas of March 31, 2022 because of the material weaknesses in our internal control over financial reporting (as such term is 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 20202021 Form 10-K, and that continued to exist as of June 30, 2021.March 31, 2022.
SubsequentRemediation of Material Weaknesses
Although we have not yet remediated the material weaknesses, we identified in the 2021 Form 10-K, we believe that we have made and continue to make progress on the endremediation plans described in our 2021 Form 10-K, under Item 9A, “Controls and Procedures.”
During the period ended March 31, 2022, we continued to make improvements to controls and continued our evaluation and documentation of key business processes, including entity level controls (ELCs), disclosure controls and procedures, financial statement close and financial reporting (FSCFR), revenue, equity, accounts payable and information technology general controls. Management plans to complete the remediation of the quarter ended June 30, 2021, we engaged a firm with the requisite experience to provide management with compliance advisory services relating to the Sarbanes-Oxley Act of 2002 (“SOX”), to accomplish our objectives of full SOX compliance. The advisory firm has since commenced its work with assisting management in preparing a comprehensive, quantitative and qualitative Financial Risk Assessment (“FRA”). The completion of the FRA is viewed as a required task under SOX.previously identified material weaknesses during 2023.
To further management’s efforts in remediating the reported material weaknesses, management has prepared a Delegation of Authority Matrix with the help of our outside advisor. The organization-wide Delegation of Authority Matrix will serve as the basis of ensuring that there are adequate internal controls, including separation of duties in our financially significant processes. The Delegation of Authority Matrix is currently undergoing final management review.
Further, management is finalizing a plan to perform a top-down SOX assessment for 2021. We expect to commence documenting several higher priority entity and business processes in the 3rd quarter of 2021. Specifically, Entity Level Controls (ELC), Information Technology General Controls (ITGC), Disclosure Controls and Procedures (DCP) and Financial Statement Close and Financial Reporting (FSCFR) processes will be addressed on a priority basis.
We have also hired additional qualified finance and accounting personnel to assist in the preparation and review of our financial statements and SEC filings.
Management will continue to review and document the Segregation of Duties (SOD) and Access Rules across all processes. Management will also formulate and implement a process for review and formal documentation of management estimates, underlying assumptions and judgments that are used in the financial statement preparation and reporting process.
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 commensurate internal control and disclosure control environment.
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 June 30, 2021March 31, 2022, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
| Item 1. | Legal Proceedings |
We are subjectThe 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. However, 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 811 – CommitmentCommitments and Contingencies – Litigation in our condensed consolidated financial statements for additional information.
Item 1A. Risk Factors
| 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 2021 Form 10-K, forand the year ended December 31, 2020,risk factor described below, which could materially affect our business, financial condition or future results. The risks described thereinin the 2021 Form 10-K and below 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.
There have been no significant changes to the risk factors set forth in the 2021 Form 10-K, however we have updated our risk factor regarding the Russian military action against Ukraine to reflect the changing circumstance.
We are subject to risks related to the Russian military action against Ukraine.
In February 2022, Russian forces launched significant military actions against Ukraine, and sustained conflict and disruption in the region has subsequently occurred. We have no way to predict the progress or outcome of the current situation in Ukraine, as the conflict and governmental reactions are rapidly developing and beyond our control. However, the impact to Ukraine, as well as the actions taken by other countries, including new and stricter sanctions imposed by Canada, the U.K., the European Union, the U.S. and other nations against officials, individuals, regions, and industries in Russia, Ukraine and Belarus, each country’s potential response to such sanctions, tensions and military actions, could all have a material adverse effect on our business, financial condition, liquidity and/or results of operations in various manners.
The current and potential sanctions against Russia could have a material adverse effect on our ability to use our Russian development staff for future game development. A significant portion of our development staff is based in Russia. Our software development team in Russia continues to engage in remote software development services for us without significant interruption and we continue to pay the staff located in Russia. However, international sanctions and potential responses to such sanctions, including those that may limit or restrict our ability to transfer funds into Russia to pay for such development services or any frozen or lost funds, could significantly affect our ability to pay our developers based in Russia. Further, efficient data transfer and internet accessibility from and to Russia may also be jeopardized, such as in the event of an internet blockade by the Russian government, which may cause certain disruptions in development and maintenance activities by our Russian development staff. Any of the foregoing could result in us having to look to alternative development arrangements, which would likely delay our ability to release future game titles.
In addition, we have currency exposure arising from both sales and purchases denominated in foreign currencies, including intercompany transactions outside the U.S. In addition, some currencies may be subject to limitations on conversion into other currencies, which can limit our ability to otherwise react to rapid foreign currency devaluations. Because we have operations in Russia, our exchange rate risk is highly sensitive to the prevailing value of the U.S. dollar relative to the Russian ruble, which exchange rate has fluctuated significantly, in particular due to the recent Russian invasion of Ukraine, as well as continued sanctions and any new sanctions against Russia. While we cannot predict with precision the effect of future exchange-rate fluctuations, further significant rate fluctuations could have a material adverse effect on our business, financial condition and/or results of operations.
Our business, financial condition, liquidity and/or results of operations could also be adversely affected in a number of other ways, including, but not limited to, the following:
| ● | The termination of the employment arrangements with our Russian development staff may cause us to incur certain liabilities and severance obligations under local labor regulations, which may include payment of up to three months’ salary for each staff member terminated. | |
| ● | Russia and other countries supporting Russia in the conflict may launch cyberattacks against the U.S. and other countries, their governments and businesses. | |
| ● | Our operations in Russia may cast us in a negative light with our partners, clients and/or other stakeholders and injure our reputation, and potential adverse reputational harm may increase in the event of prolonged unrest, intensified military activities or more extensive sanctions impacting the region. |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
| 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 June 30, 2021 other than as reported in our Current Reports on Form 8-K filed with the SEC.March 31, 2022.
Purchases of Equity Securities
We did not purchase any shares of our Class A common stock during the quarter ended March 31, 2022.
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$63,074,128 from our IPO.IPO after deducting fees paid in connection with the IPO in 2020 and 2021. 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 June 30, 2021,March 31, 2022, we have used approximately $37,500,000$55,730,128 of the net proceeds from our IPO, including (i) approximately $12,700,000$12,967,000 for the repayment of a portion of the outstanding amount due under our promissory notethe $12 million Line of Credit entered into with Motorsport Network, our majority stockholder; (ii) approximately $13,800,000$17,384,674 in connection with the acquisitions of Studio397, KartKraft and KartKraft; and704Games; (iii) $11,000,000$21,575,956 for working capital and general corporate purposes.purposes; (iv) $855,306 in capital expenditures; and (v) $2,947,192 in IPO-related expenses and bonuses.
Purchases of Equity Securities
We did not purchase any shares of our Class A common stock during the quarter ended June 30, 2021.
Item 3. Defaults Upon Senior Securities
| Item 3. | Defaults Upon Senior Securities |
None.
Item 4. Mine Safety Disclosures
| Item 4. | Mine Safety Disclosures |
Not applicable.
Item 5. Other Information
| Item 5. | Other Information |
None.
Item 6. Exhibits
| Incorporated by Reference | ||||||||||||
| Exhibit Number | Description | Form | File No. | Exhibit Number | Filing Date | Filed/Furnished Herewith | ||||||
| 3.1 | Certificate of Incorporation of Motorsport Games Inc. | S-1/A | 333-251501 | 3.3 | 1/11/21 | |||||||
| 3.2 | Bylaws of Motorsport Games Inc. | S-1/A | 333-251501 | 3.4 | 1/11/21 | |||||||
| 10.1 | Lease Agreement, dated February 8, 2022, by and between Lemon City Group, LLC and Motorsport Games Inc. | 8-K | 001-39868 | 10.1 | 2/10/22 | |||||||
| 10.2 | Letter Agreement, dated April 22, 2022, to amend Share Purchase Agreement and Pledge of Shares among Motorsport Games Inc., Luminis International BV, Technology In Business B.V. and certain Technology In Business B.V. shareholders parties thereto | 8-K | 001-39868 | 10.1 | 4/28/22 | |||||||
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act | X | ||||||||||
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act | X | ||||||||||
| 32.1 | Certification of Chief Executive Officer and 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 | ||||||||||
SIGNATURES
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: | MOTORSPORT GAMES INC. | |
| By: | ||
| Dmitry Kozko | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | ||
| Jonathan New | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) |