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 | ||
| or | ||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the transition period from ___________ to ___________ |
Commission file number: 001-39868
Motorsport Games Inc.
(Exact Name of Registrant as Specified in Its Charter)
| Delaware | 86-1791356 | |
State or Other Jurisdiction of
| I.R.S. Employer
| |
5972 NE 4th Avenue Miami, FL | 33137 | |
| Address of Principal Executive Offices | Zip Code |
Registrant’s Telephone Number, Including Area Code: (305) 507-8799
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A common stock, $0.0001 par value per share | MSGM | The Nasdaq Stock Market LLC (The Nasdaq Capital Market) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 9, 2022,May 11, 2023, the registrant had shares of Class A common stock and shares of Class B common stock outstanding. All Class A common stock and Class B common stock share data and share-based calculations set forth in this Form 10-Q have been adjusted to reflect the registrant’s 1-for-10 reverse stock split completed on November 10, 2022 on a retroactive basis for the periods presented.
Motorsport Games Inc.
Form 10-Q
For the Quarter Ended June 30, 2022March 31, 2023
TABLE OF CONTENTS
| i |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This 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 not historical facts and are “forward-looking statements” within the meaning of federal securities laws. These forward-looking statements are subject to certain risks, trends and uncertainties. Forward-looking statements give our current expectations and projections relating to our 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 current facts. We use words, such as “could,” “would,” “may,” “might,” “will,” “expect,” “likely,” “believe,” “continue,” “anticipate,” “estimate,” “intend,” “plan,” “project” and other similar expressions to identify some forward-looking statements, but not all forward-looking statements include these words. For example, forward-looking statements include, but are not limited to, statements we make relating to:
| ● | our future business, results of operations, financial condition and/or liquidity, including with respect to the ongoing effects of | |
| ● | our intended corporate purpose to make the thrill of | |
| ● | new or planned products or offerings, including the anticipated timing of our new product launches under our updated product roadmap, such as our | |
| ● | 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 | |
| ● | our future plans and expectations for Traxion .GG (“Traxion”), our online destination for the virtual racing community, including with regards to its functionality and content; | |
| ● | our beliefs regarding the growing importance and business viability of esports, especially within the racing and | |
| ● | our intention to expand our license arrangements to other internationally recognized racing series and the platforms we operate on; | |
| ● | our expectation that we will be able to extend or re-negotiate our promotion agreement with Motorsport Network, LLC (“Motorsport Network”) on reasonable terms; | |
| ● | our intention to continue seeking to expand our audience base through traditional marketing and sales distribution channels including Facebook, Twitter, Twitch, YouTube and other online social networks; |
| ii |
| ● | our belief that our esports business has the potential to generate incremental revenues through the further sale of media rights to our esports events and competitions, as well as merchandising and sports betting, if the esports audience pattern continues to grow; | |
| ● | our expectation that having a broader product portfolio will improve our operating results and provide a revenue stream that is less cyclical than releasing a single game per year; | |
| ● | our expectation that future revenue streams will become further diversified and consist of revenues from multiple games and different franchises; | |
| ● | 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, as to our ability to continue as a going concern, our belief that | |
| ● | our expectations that we will continue to incur losses for the foreseeable future as we continue to incur significant expenses; | |
| ● | our intended use of proceeds from the sales of our equity securities; | |
| ● | our expectations relating to future impairment of intangible assets; | |
| ● | our plans and intentions with respect to our remediation efforts to address the material |
| ● | 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, |
| iii |
| ● | our intention to not declare dividends in the foreseeable future; | |
| ● | our ability to utilize net operating loss carryforwards; | |
| ● | our expectations regarding the future impact of implementing management strategies, potential acquisitions and industry | |
| ● | our belief that we may decide in the future to avail ourselves of certain corporate governance requirements of The Nasdaq Stock Market LLC (“NASDAQ”) as a result of being a “controlled company” within the meaning of the NASDAQ rules; | |
| ● | our expectations regarding the 2022 Restructuring Program, such as: (i) our expectations to eliminate approximately 20% of our overhead costs worldwide; (ii) our expectations regarding the amount and timing of the charges and payments related to the 2022 Restructuring Program; (iii) our expectations that as a result of the 2022 Restructuring Program, we will deliver approximately $4 million of total annualized cost reductions by the end of 2023; (iv) our expectations that total restructuring costs will fall within the previously estimated range of $0.1 million to $0.3 million; and (v) our plans to continue our efforts to achieve further cost reductions; and | |
| ● | our expectation that our current development operations will not have significant exposure to changes in circumstances arising from the Ukraine-Russia conflict. |
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 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, 20212022 (the “2022 Form 10-K”) and in “Risk Factors” in Part II, Item 1A of this Report, as updated in our subsequent filings with the Securities and Exchange Commission (the “SEC”). In addition to factors that may be described in our filings with the SEC, including this Report, the following factors, among others, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us:
| (i) | difficulties and/or delays in accessing available liquidity, and other unanticipated difficulties in resolving our continuing financial condition and ability to obtain additional capital to meet our financial obligations, including, without limitation, difficulties in securing funding that is on commercially acceptable terms to us or at all, such as our inability to complete in whole or in part any potential debt and/or equity financing transactions or similar transactions, as well as any ability to achieve cost |
| iv |
| (ii) | difficulties, delays or less than expected results in achieving our growth plans, objectives and expectations, such as due to a slower than anticipated economic recovery and/or our inability, in whole or in part, to continue to execute our business strategies and plans, such as due to less than anticipated customer acceptance of our new game titles, our experiencing difficulties or the inability to launch our games as planned, less than anticipated performance of the games impacting customer acceptance and sales and/or greater than anticipated costs and expenses to develop and launch our games, including, without limitation, higher than expected labor costs; | |
| (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 | |
| (iv) | less than expected benefits from implementing our management strategies and/or adverse economic, market and geopolitical conditions that negatively impact industry trends, such as significant changes in the labor markets, an extended or higher than expected inflationary environment (such as the impact on consumer discretionary spending as a result of significant increases in energy and gas prices which have been increasing since early in 2020), a higher interest rate environment, tax increases impacting consumer discretionary spending and or quantitative easing that results in higher interest rates that negatively impact consumers’ discretionary spending, or adverse developments relating to |
| (v) | delays and higher than anticipated expenses related to the ongoing and prolonged COVID-19 pandemic; | |
| (vi) | difficulties and/or delays adversely impacting our ability (or inability) to maintain existing, and to secure additional, licenses and other agreements with various racing series; | |
| (vii) | difficulties and/or delays adversely impacting 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) | difficulties and/or delays adversely impacting 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, recessionary factors, higher energy prices and higher interest rates; | |
| (xii) | difficulties and/or delays adversely impacting our ability to protect our intellectual property; |
| v |
| (xiii) | local, industry and general business and economic conditions; | |
| (xiv) | unanticipated adverse effects on our business, prospects, results of operations, financial condition, cash flows and/or liquidity as a result of unexpected developments with respect to our legal proceedings; | |
| (xv) | difficulties, delays or our inability to successfully complete the 2022 Restructuring Program, in whole or in part, which could result in less than expected operating and financial benefits from such actions, as well as delays in completing the 2022 Restructuring Program, which could reduce the benefits realized from such activities; and | |
| (xvi) | higher than anticipated restructuring charges and/or |
Additionally, there are other risks and uncertainties described from time to time in the reports that we file with the 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.
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| June 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 5,223,051 | $ | 17,819,640 | $ | 5,794,556 | $ | 979,306 | ||||||||
| Accounts receivable, net of allowances of $3,596,634 and $4,563,884, at June 30, 2022 and December 31, 2021, respectively | 1,472,430 | 5,490,272 | ||||||||||||||
| Accounts receivable, net of allowances of $2,532,383 and $2,252,383 as of March 31, 2023 and December 31, 2022, respectively | 899,926 | 1,809,110 | ||||||||||||||
| Due from related parties | 35,498 | 137,574 | 66,295 | 206,532 | ||||||||||||
| Prepaid expenses and other current assets | 1,711,783 | 1,175,354 | 1,279,767 | 1,048,392 | ||||||||||||
| Total Current Assets | 8,442,762 | 24,622,840 | 8,040,544 | 4,043,340 | ||||||||||||
| Property and equipment, net | 723,776 | 727,089 | 466,095 | 522,433 | ||||||||||||
| Operating lease right of use assets | 1,567,838 | - | 583,112 | 971,789 | ||||||||||||
| Goodwill | - | 4,867,465 | ||||||||||||||
| Intangible assets, net | 14,261,175 | 20,485,809 | 13,008,061 | 13,360,230 | ||||||||||||
| Total Assets | $ | 24,995,551 | $ | 50,703,203 | $ | 22,097,812 | $ | 18,897,792 | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 314,324 | $ | 1,784,645 | $ | 1,040,291 | $ | 2,372,219 | ||||||||
| Accrued expenses and other liabilities | 1,956,759 | 3,524,271 | ||||||||||||||
| Accrued expenses and other current liabilities | 2,983,428 | 3,416,424 | ||||||||||||||
| Due to related parties | 37,049 | 119,015 | 167,860 | 4,589,211 | ||||||||||||
| Purchase commitments | 2,582,122 | 3,170,319 | 2,486,011 | 2,563,216 | ||||||||||||
| Operating lease liabilities (current) | 391,113 | - | 254,472 | 380,538 | ||||||||||||
| Total Current Liabilities | 5,281,367 | 8,598,250 | 6,932,062 | 13,321,608 | ||||||||||||
| Operating lease liabilities (non-current) | 1,179,315 | - | 348,753 | 617,288 | ||||||||||||
| Other non-current liabilities | 3,521,390 | 4,122,950 | 3,518,364 | 3,055,498 | ||||||||||||
| Total Liabilities | 9,982,072 | 12,721,200 | 10,799,179 | 16,994,394 | ||||||||||||
| Commitments and contingencies (Note 11) | - | |||||||||||||||
| Commitments and contingencies (Note 9) | - | - | ||||||||||||||
| Stockholders’ Equity: | ||||||||||||||||
| Preferred stock, $ par value; authorized shares; issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | - | - | ||||||||||||||
| Class A common stock - $ par value; authorized shares; and shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | 1,168 | 1,164 | ||||||||||||||
| Class B common stock - $ par value; authorized shares; shares issued and outstanding as of June 30, 2022, and December 31, 2021 | 700 | 700 | ||||||||||||||
| Preferred stock, $ par value per share; authorized and shares; and issued and outstanding as of March 31, 2023 and December 31, 2022, respectively | - | - | ||||||||||||||
| Class A common stock - $ par value per share; authorized and shares; and shares issued and outstanding as of March 31, 2023 and December 31, 2022, respectively | 269 | 117 | ||||||||||||||
| Class B common stock - $ par value per share; authorized and shares; and shares issued and outstanding as of March 31, 2023 and December 31, 2022 | 70 | 70 | ||||||||||||||
| Common stock, value | 70 | 70 | ||||||||||||||
| Additional paid-in capital | 76,242,774 | 75,651,175 | 91,215,242 | 76,446,061 | ||||||||||||
| Accumulated deficit | (60,531,239 | ) | (37,988,326 | ) | (79,080,078 | ) | (73,979,131 | ) | ||||||||
| Accumulated other comprehensive loss | (933,644 | ) | (945,375 | ) | (1,011,994 | ) | (933,406 | ) | ||||||||
| Total Stockholders’ Equity Attributable to Motorsport Games Inc. | 14,779,759 | 36,719,338 | 11,123,509 | 1,533,711 | ||||||||||||
| Non-controlling interest | 233,720 | 1,262,665 | 175,124 | 369,687 | ||||||||||||
| Total Stockholders’ Equity | 15,013,479 | 37,982,003 | 11,298,633 | 1,903,398 | ||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 24,995,551 | $ | 50,703,203 | $ | 22,097,812 | $ | 18,897,792 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 1 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
| Revenues | $ | 2,008,987 | $ | 2,238,927 | $ | 5,330,776 | $ | 4,713,059 | $ | 1,729,355 | $ | 3,321,789 | ||||||||||||
| Cost of revenues [1] | 856,157 | 906,303 | 2,869,963 | 1,688,111 | 1,248,736 | 2,013,806 | ||||||||||||||||||
| Gross profit | 1,152,830 | 1,332,624 | 2,460,813 | 3,024,948 | 480,619 | 1,307,983 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Sales and marketing | 1,540,220 | 704,222 | 3,228,669 | 1,728,440 | ||||||||||||||||||||
| Development [2] | 2,681,643 | 1,818,178 | 5,085,980 | 3,068,540 | ||||||||||||||||||||
| General and administrative [3] | 3,349,609 | 4,717,180 | 6,772,763 | 19,481,218 | ||||||||||||||||||||
| Sales and marketing [2] | 618,410 | 1,688,449 | ||||||||||||||||||||||
| Development [3] | 2,397,134 | 2,404,338 | ||||||||||||||||||||||
| General and administrative [4] | 2,779,110 | 3,423,153 | ||||||||||||||||||||||
| Impairment of goodwill | - | - | 4,788,268 | - | - | 4,788,268 | ||||||||||||||||||
| Impairment of intangible assets | 149,048 | - | 4,640,102 | - | - | 4,491,054 | ||||||||||||||||||
| Depreciation and amortization | 117,725 | 66,448 | 233,796 | 97,223 | 97,354 | 116,071 | ||||||||||||||||||
| Total operating expenses | 7,838,245 | 7,306,028 | 24,749,578 | 24,375,421 | 5,892,008 | 16,911,333 | ||||||||||||||||||
| Loss from operations | (6,685,415 | ) | (5,973,404 | ) | (22,288,765 | ) | (21,350,473 | ) | (5,411,389 | ) | (15,603,350 | ) | ||||||||||||
| Interest expense [4] | (191,662 | ) | (31,899 | ) | (393,258 | ) | (151,438 | ) | ||||||||||||||||
| Gain attributable to equity method investment | - | - | - | 1,370,837 | ||||||||||||||||||||
| Other (expense) income, net | (610,594 | ) | 44,360 | (772,693 | ) | 84,707 | ||||||||||||||||||
| Interest expense | (199,120 | ) | (201,596 | ) | ||||||||||||||||||||
| Other income (expense), net | 351,317 | (162,099 | ) | |||||||||||||||||||||
| Net loss | (7,487,671 | ) | (5,960,943 | ) | (23,454,716 | ) | (20,046,367 | ) | (5,259,192 | ) | (15,967,045 | ) | ||||||||||||
| Less: Net loss attributable to non-controlling interest | (82,375 | ) | (180,849 | ) | (911,803 | ) | (454,299 | ) | (158,245 | ) | (829,428 | ) | ||||||||||||
| Net loss attributable to Motorsport Games Inc. | $ | (7,405,296 | ) | $ | (5,780,094 | ) | $ | (22,542,913 | ) | $ | (19,592,068 | ) | $ | (5,100,947 | ) | $ | (15,137,617 | ) | ||||||
| Net loss attributable to Class A common stock per share: | ||||||||||||||||||||||||
| Basic and diluted | $ | (0.63 | ) | $ | (0.50 | ) | $ | (1.93 | ) | $ | (1.88 | ) | $ | (2.33 | ) | $ | (12.97 | ) | ||||||
| Weighted-average shares of Class A common stock outstanding: | ||||||||||||||||||||||||
| Basic and diluted | 11,673,587 | 11,494,919 | 11,670,888 | 10,421,910 | 2,192,155 | 1,166,816 | ||||||||||||||||||
| [1] | Includes related party costs of $ and $ for the three months ended |
| [2] | Includes related party expenses of $ and $ for the three months ended |
| [3] | Includes related party expenses of $ and $ for the three months ended |
| [4] | Includes related party expenses of $ and $ for the three months ended |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 2 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS
(UNAUDITED)
| 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
| Three Months Ended June 30, | For the Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
| Net loss | $ | (7,487,671) | $ | (5,960,943 | ) | (23,454,716) | (20,046,367 | ) | $ | (5,259,192 | ) | $ | (15,967,045 | ) | ||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||
| Other comprehensive loss: | ||||||||||||||||||||||||
| Foreign currency translation adjustments | 136,976 | (70,809 | ) | 11,731 | (103,723 | ) | (78,588 | ) | (125,245 | ) | ||||||||||||||
| Comprehensive loss | (7,350,695) | (6,031,752 | ) | (23,442,985) | (20,150,090 | ) | (5,337,780 | ) | (16,092,290 | ) | ||||||||||||||
| Comprehensive loss attributable to non-controlling interests | (140,224) | (180,849 | ) | (1,028,945) | (454,299 | ) | (194,563 | ) | (888,721 | ) | ||||||||||||||
| Comprehensive loss attributable to Motorsport Games Inc. | $ | (7,210,471) | $ | (5,850,903 | ) | (22,414,040) | (19,695,791 | ) | $ | (5,143,217 | ) | $ | (15,203,569 | ) | ||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| For the Three and Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
Class A Common Stock | Class B Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive Income | Total Stockholders’ Equity / Member’s Equity Attributable to Motorsport | Non-controlling | Total Stockholders’ Equity / Member’s | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (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 | 37,690 | 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 | 11,673,587 | 1,168 | 7,000,000 | 700 | - | 76,004,201 | (53,125,943 | ) | (1,070,620 | ) | 21,809,506 | 373,944 | 22,183,450 | |||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | - | 238,573 | 238,573 | - | 238,573 | |||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | - | - | - | - | - | - | 136,976 | 136,976 | (57,849 | ) | 79,127 | |||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (7,405,296 | ) | (7,405,296 | ) | (82,375 | ) | (7,487,671 | ) | ||||||||||||||||||||||||||
| Balance - June 30, 2022 | 11,673,587 | $ | 1,168 | 7,000,000 | $ | 700 | - | $ | 76,242,774 | $ | (60,531,239 | ) | $ | (933,644 | ) | $ | 14,779,759 | $ | 233,720 | $ | 15,013,479 | |||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Games Inc. | Interest | Equity | |||||||||||||||||||||||||||||||
| For the Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||
| Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
Class A Common Stock | Class B Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Equity Attributable to Motorsport | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Games Inc. | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance – January 1, 2023 | 1,183,808 | $ | 117 | 700,000 | $ | 70 | $ | 76,446,061 | $ | (73,979,131 | ) | $ | (933,406 | ) | $ | 1,533,711 | $ | 369,687 | $ | 1,903,398 | ||||||||||||||||||||
| Issuance of common stock | 734,741 | 74 | - | - | 10,571,460 | - | - | 10,571,534 | - | 10,571,534 | ||||||||||||||||||||||||||||||
| Issuance of common stock for extinguishment of related party loan | 78 | - | - | 3,948,488 | - | - | 3,948,566 | - | 3,948,566 | |||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 249,233 | - | - | 249,233 | - | 249,233 | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | (78,588 | ) | (78,588 | ) | (36,318 | ) | (114,906 | ) | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (5,100,947 | ) | - | (5,100,947 | ) | (158,245 | ) | (5,259,192 | ) | ||||||||||||||||||||||||||
| Balance – March 31, 2023 | 2,698,934 | $ | 269 | 700,000 | $ | 70 | $ | 91,215,242 | $ | (79,080,078 | ) | $ | (1,011,994 | ) | $ | 11,123,509 | $ | 175,124 | $ | 11,298,633 | ||||||||||||||||||||
| Shares | Amount | Shares | Amount | Equity | Capital | Deficit | Income (Loss) | Games Inc. | Interest | Equity | ||||||||||||||||||||||||||||||||||
| For the Three and Six Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
| Accumulated | Total Stockholders’ Equity / Member’s Equity | Total 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 | |||||||||||||||||||||||||||||||||
| Stock-based compensation | 330,633 | 33 | - | - | - | 9,076,883 | - | - | 9,076,916 | - | 9,076,916 | |||||||||||||||||||||||||||||||||
| Purchase of additional interest in Le Mans Esports Series Ltd. | - | - | - | - | - | - | - | - | - | 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 704Games former minority shareholders | 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 Esports Series Ltd. | - | - | - | - | - | - | - | - | - | 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 | ||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| 2022 | 2021 | |||||||
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Loss | $ | (23,454,716 | ) | (20,046,367 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Impairment of intangible assets | 4,640,102 | - | ||||||
| Impairment of goodwill | 4,788,268 | - | ||||||
| Depreciation and amortization | 1,071,172 | 659,309 | ||||||
| Non-Cash lease expense | 196,938 | - | ||||||
| Stock-based compensation | 591,603 | 9,193,190 | ||||||
| Gain on equity method investment | - | (1,370,837 | ) | |||||
| Sales return and price protection reserves | 1,098,397 | 199,940 | ||||||
| (Increase) decrease in assets and increase (decrease) in liabilities, net of acquisitions and the effect of consolidation of equity affiliates: | ||||||||
| Account receivables | 2,877,935 | 2,149,685 | ||||||
| Operating lease liabilities | (194,117 | ) | - | |||||
| Prepaid expenses and other assets | (572,926 | ) | (751,480 | ) | ||||
| Other assets | - | 25,000 | ||||||
| Accounts payable | (1,455,211 | ) | (579,061 | ) | ||||
| Other non-current liabilities | (475,927 | ) | 60,946 | |||||
| Accrued expenses | (1,160,816 | ) | (804,871 | ) | ||||
| Net cash used in operating activities | (12,049,298 | ) | (11,264,546 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Acquisition of Le Mans, net of cash acquired | - | 153,250 | ||||||
| Acquisition of Motorsport Games Australia | - | (1,000,000 | ) | |||||
| Acquisition of Studio 397 | - | (12,785,463 | ) | |||||
| Purchase commitment liability | - | (27,928 | ) | |||||
| Purchase of property and equipment | (196,346 | ) | (348,033 | ) | ||||
| Net cash used in investing activities | (196,346 | ) | (14,008,174 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Advances from related parties | 143,517 | 1,868,312 | ||||||
| Repayments on advances from related parties | (24,913 | ) | (12,663,168 | ) | ||||
| Repayments of purchase commitment liabilities | (1,000,000 | ) | - | |||||
| Purchase of non-controlling interest | - | (3,599,211 | ) | |||||
| Contributed capital from non-controlling shareholders | - | 234,754 | ||||||
| Payment of license liabilities | (100,000 | ) | - | |||||
| Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting costs | - | 63,661,128 | ||||||
| Net cash (used in) provided by financing activities | (981,396 | ) | 49,501,815 | |||||
| Effect of exchange rate changes on cash | 630,451 | 83,577 | ||||||
| Net increase (decrease) in cash | (12,596,589 | ) | 24,312,672 | |||||
| Cash at beginning of period | 17,819,640 | 3,990,532 | ||||||
| Cash at end of period | $ | 5,223,051 | 28,303,204 | |||||
| Supplemental Disclosure 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 | $ | 29,681 | $ | 3,126,314 | ||||
| Reduction of additional paid-in capital for purchased 704Games minority shares | $ | - | $ | 939,511 | ||||
| Reduction of additional paid-in capital for initial public offering issuance costs that were previously paid | $ | - | $ | 587,000 | ||||
| Purchase of additional interest in Le Mans Esports Series Ltd. | $ | - | $ | 1,584,892 | ||||
| For the Three Months Ended March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||
| Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Equity Attributable to Motorsport | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Games Inc. | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance – January 1, 2022 | 1,163,590 | $ | 116 | 700,000 | $ | 70 | $ | 75,652,853 | $ | (37,988,326 | ) | $ | (945,375 | ) | $ | 36,719,338 | $ | 1,262,665 | $ | 37,982,003 | ||||||||||||||||||||
| Beginning balance | 1,163,590 | $ | 116 | 700,000 | $ | 70 | $ | 75,652,853 | $ | (37,988,326 | ) | $ | (945,375 | ) | $ | 36,719,338 | $ | 1,262,665 | $ | 37,982,003 | ||||||||||||||||||||
| Stock-based compensation | 3,769 | - | - | - | 353,030 | - | - | 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 | 1,167,359 | $ | 116 | 700,000 | $ | 70 | $ | 76,005,883 | $ | (53,125,943 | ) | $ | (1,070,620 | ) | $ | 21,809,506 | $ | 373,944 | $ | 22,183,450 | ||||||||||||||||||||
| Ending balance | 1,167,359 | $ | 116 | 700,000 | $ | 70 | $ | 76,005,883 | $ | (53,125,943 | ) | $ | (1,070,620 | ) | $ | 21,809,506 | $ | 373,944 | $ | 22,183,450 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| 2023 | 2022 | |||||||
For the Three Months Ended March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (5,259,192 | ) | $ | (15,967,045 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss on impairment of intangible assets | - | 4,491,054 | ||||||
| Loss on impairment of goodwill | - | 4,788,268 | ||||||
| Loss on disposal of property and equipment | 1,016 | - | ||||||
| Depreciation and amortization | 502,357 | 577,514 | ||||||
| Purchase commitment and license liability interest accretion | 157,661 | - | ||||||
| Non-cash lease expense | - | 70,701 | ||||||
| Stock-based compensation | 249,233 | 353,030 | ||||||
| Sales return and price protection reserves | 280,000 | 234,240 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | 630,272 | 2,497,895 | ||||||
| Due from related parties | 140,358 | - | ||||||
| Operating lease liabilities | (5,893 | ) | (60,211 | ) | ||||
| Prepaid expenses and other assets | (225,562 | ) | (541,640 | ) | ||||
| Accounts payable | (1,331,386 | ) | (1,187,721 | ) | ||||
| Due to related parties | (473,021 | ) | - | |||||
| Other non-current liabilities | (33,720 | ) | 37,705 | |||||
| Accrued expenses and other liabilities | (315,824 | ) | (882,896 | ) | ||||
| Net cash used in operating activities | $ | (5,683,701 | ) | $ | (5,589,106 | ) | ||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (15,057 | ) | (101,004 | ) | ||||
| Net cash used in investing activities | $ | (15,057 | ) | $ | (101,004 | ) | ||
| Cash flows from financing activities: | ||||||||
| Advances from related parties | - | 148,152 | ||||||
| Repayments of purchase commitment liabilities | (250,000 | ) | - | |||||
| Payment of license liabilities | (87,500 | ) | - | |||||
| Issuance of common stock from stock purchase commitment agreement | 644,694 | - | ||||||
| Issuance of common stock from registered direct offerings | 10,404,840 | - | ||||||
| Net cash provided by financing activities | $ | 10,712,034 | $ | 148,152 | ||||
| Effect of exchange rate changes on cash and cash equivalents | (198,026 | ) | 89,553 | |||||
| Net increase (decrease) in cash and cash equivalents | 4,815,250 | (5,452,405 | ) | |||||
| Total cash and cash equivalents at beginning of the period | $ | 979,306 | $ | 17,819,640 | ||||
| Total cash and cash equivalents at the end of the period | $ | 5,794,556 | $ | 12,367,235 | ||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | 9,508 | $ | - | ||||
| Non-cash investing and financing activities: | ||||||||
| Shares issued to Motorsport Network LLC for extinguishment of related party loan | $ | (3,948,566 | ) | $ | - | |||
| Extinguishment of Motorsport Network LLC related party loan for Class A shares | $ | 3,948,566 | $ | - | ||||
| Issuance of warrants in connection with registered direct offerings | $ | 478,000 | - | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - BUSINESS ORGANIZATION, NATURE OF OPERATIONS, AND RISKS AND UNCERTAINTIES AND BASIS OF PRESENTATION
Organization and Operations
Motorsport Gaming US LLC (“Motorsport Gaming”) was established as a limited liability company on August 2, 2018 under the laws of the State of Florida. On January 8, 2021, Motorsport Gaming converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Motorsport Games Inc. (“Motorsport Games” or the “Company”). Upon effecting the corporate conversion on January 8, 2021, Motorsport Games 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.
Risks and Uncertainties
COVID-19 PandemicLiquidity and Going Concern
The lingering impact of COVID-19 has continued to create significant volatility throughout the global economy, such as supply chain disruptions, limited labor supplies, higher inflation, and recession, which in turn has caused constraints on consumer spending. More recently, new variants of COVID-19, such as the Omicron variant and its subvariants, 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 initially caused many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19 and its variants. However, while many of these restrictions have been lifted, uncertainty remains as to whether additional restrictions may be initiated or again reimplemented in response to surges in COVID-19 cases.
Although the Company does not currently expect the COVID-19 pandemic to have a material impact on its future business and 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; the effect on discretionary spending by consumers; and how quickly and to what extent normal economic and operating conditions can resume.
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 management’s opinion, 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, 2022 and for the three and six months ended June 30, 2022. The Company’s results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022 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, 2021 and 2020 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 six months ended June 30, 2022, the Company had a net loss of approximately $23.55.3 million, negative cash flows from operations of approximately $12.05.7 million and an accumulated deficit of $60.579.1 million. It is expected thatmillion for the three months ended March 31, 2023. As of March 31, 2023, the Company willhad cash and cash equivalents of $5.8 million, which was reduced to $4.9 million as of April 30, 2023. The Company expects to continue to incur significant operating expenses and, as a result, the Company will need to continue to grow revenues to reach profitability and positive cash flows. We expectThe Company expects to continue to incur losses for the foreseeable future as we continueit continues to develop ourits product portfolio and invest in developing 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 ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued.
OurThe Company’s future liquidity and capital requirements include funds to support the planned costs to operate ourits business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures. The adequacy of ourthe Company’s available funds generally depends on many factors, including ourits ability to successfully develop consumer-preferred new products or enhancements to ourits existing products, continued development and expansion of ourits esports platform and ourits ability to enter into collaborations with other companies and/or acquire other companies or technologies to enhance or complement ourits product and service offerings.
We continueThe Company continues to explore additional funding in the form of potential equity and/or debt financing arrangements or similar transactions and consider these to be viable options to support future liquidity needs, provided that such opportunities can be obtained on terms that are commercially competitive and on terms acceptable to the Company. We areThe Company is also seeking to improve ourits liquidity by achieving cost reductions by maintaining and enhancing cost control initiatives.initiatives, such as those that it expects to achieve through its previously announced organizational restructuring program (the “2022 Restructuring Program”).
As we continuethe Company continues to evaluate incremental funding solutions, we haveit has reevaluated ourits product roadmap in the first quarter of 20222023 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 expectThe Company expects to generate additional liquidity through consummating one or more potential equity and/or debt financings or similar transactions, achieving cost reductions by maintaining and enhancing cost control initiatives, such as those that it expects to achieve through the 2022 Restructuring Program, and/or further adjusting ourits product roadmap to reduce near term need for working capital. If we arethe Company is unable to generate adequate revenue and profit growth, there can be no assurances that such actions will provide usthe Company with sufficient liquidity to meet ourits cash requirements as, among other things, ourits liquidity position can be impacted by a number of factors, including ourits level of sales, costs and expenditures, economic conditions in the capital markets, especially for technology companies, as well as accounts receivable and sales allowances.
There can be no assurance that wethe Company will be able to obtain funds on commercially acceptable terms, if at all, to satisfy ourits future needed liquidity and capital resources. If we arethe Company is unable to obtain adequate funds on acceptable terms, weit 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 arethe Company is unable to satisfy ourits cash requirements from the sources identified above, weit 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. |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
There can be no assurance that wethe Company 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 or similar transactions, 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 ourthe Company’s 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 usthe Company to satisfy ourits cash requirements if the actions that we arethe Company is able to consummate do not generate a sufficient amount of additional capital.
| 6 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Even if we dothe Company does secure additional financing, if ourthe anticipated level of revenues are not achieved because of, for example, less than anticipated consumer acceptance of ourthe Company’s offering of products and events; less than effective marketing and promotion campaigns, decreased consumer spending in response to weak economic conditions or weakness in the overall electronic games category; adverse changes in currency;foreign currency exchange rates; decreased sales of ourthe Company’s products and events as a result of increased competitive activities by ourthe Company’s competitors; changes in consumer purchasing habits;habits, such as the impact of higher energy prices on consumer purchasing behavior; retailer inventory management or reductions in retailer display space; less than anticipated results from the Company’s existing or new products or from its advertising and/or marketing plans; or if the Company’s expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, ourthe Company’s liquidity position may continue to be insufficient to satisfy ourits 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 the 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 unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In management’s opinion, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair statementof the Company’s unaudited condensed consolidated financial statements as of March 31, 2023 and for the three months ended March 31, 2023. The Company’s results of operations for the three months ended March 31, 2023 are not necessarily indicative of the operating results for the full year ending December 31, 2023 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, 2022 and 2021 and for the years then ended which are included in the 2022 Form 10-K.
Effective on November 10, 2022, the Company amended its certificate of incorporation to effectuate a reverse split of the issued and outstanding shares of Class A common stock and Class B common stock at a ratio of 1-for-10. Fractional shares of common stock resulting from the reverse stock split were settled in cash. Shares underlying outstanding equity-based awards were proportionately decreased and the respective per share exercise prices, if applicable, were proportionately increased in accordance with the terms of the agreements governing such securities. All shares of common stock, equity-based awards, and per share information presented in the condensed consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive basis for all periods presented.
The Company has revised the presentation of accounts payable and other non-current liabilities in the statement of cash flow as of March 31, 2022, to correct an immaterial error in the presentation of those statement of cash flow line items.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The Company’s significant estimates used in these consolidated financial statements include, but are not limited to, revenue recognition criteria, including allowances for returns and price protection, as well as current expected credit losses, valuation allowance of deferred income taxes, valuation of acquired companies and equity method investments, the recognition and disclosure of contingent liabilities, goodwill and intangible assets impairment testing, and stock-based compensation valuation. Certain of the Company’s estimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and may cause actual results to differ from those estimates.
Recently Issued Accounting Standards
As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC. The adoption dates discussed below reflect this election.
In November 2019,Adoption of Accounting Pronouncements
On January 1, 2023, the FASB issuedCompany adopted ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” (“ASU 2019-11”)., issued by the Financial Accounting Standards Board (the “FASB”) in November 2019. ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.Instrument”” The amendments update, issued by the FASB in June 2016. ASU 2016-13, as amended by ASU 2019-11, requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, oneach reporting entity should estimate an allowance for expected credit losses, for financial assets. These amendments affect loans, debt securities,which is intended to result in more timely recognition of losses. This model replaces multiple existing impairment models in current U.S. GAAP, which generally require a loss to be incurred before it is recognized. The new standard applies to trade receivables net investments in leases, off balance sheetarising from revenue transactions such as contract assets and accounts receivable. Under ASC 606, “Revenue from Contracts with Customers” (“ASC 606”) revenue is recognized when, among other criteria, it is probable that an entity will collect the consideration it is entitled to when goods or services are transferred to a customer. When trade receivables are recorded, they become subject to the CECL model and estimates of expected credit exposures, reinsurancelosses on trade receivables over their contractual life will be required to be recorded at inception based on historical information, current conditions, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in ASU 2019-11 arereasonable and supportable forecasts. This guidance is effective for smaller reporting companies with annual reporting periods beginning after December 15, 2022, including the interim periods in the year. Early adoption is permitted. 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). Upon adoption, this guidance did not have a material impact on the condensed consolidated financial statements.
On January 1, 2023, the Company adopted ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), issued by the FASB in August 2020. The amendments affect entities that issue convertible instruments, as well as contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements in ASU 202-06. These amendments improve US GAAP by eliminating certain accounting models, therefore, simplifying the accounting for convertible instruments, and reducing complexity for preparers and practitioners, as well as improving the decision usefulness and relevance of the information provided to financial statement users. In addition to eliminating certain accounting models, these amendments enhance information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. ASU 2020-06 simplifies the settlement assessment by removing the requirements (1) to consider whether the contract would be settled in registered shares, (2) to consider whether collateral is required to be posted, and (3) to assess shareholder rights. These amendments also affect the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. These amendments improve US GAAP by simplifying the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions and improving inconsistency in the accounting for some contracts as derivatives while accounting for economically similar contracts as equity. Additionally, the amendments in ASU 2020-06 affect the diluted EPS calculation for instruments that may be settled in cash or shares and for convertible instruments. This guidance is effective for smaller reporting companies with annual periods beginning after December 15, 2023, including the interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years after December 15, 2020, 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 evaluatingEntities may also elect to adopt the impact of this standard on its consolidated financial statements and disclosures.
Adoption of Accounting Pronouncements
On January 1, 2022, the Company adopted Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842) (“ASC 842”)amendments using the modifiedfully retrospective approach and electedmethod of transition, with the optional transition method, which allows entities to initially applycumulative effect of the standard at the adoption date and recognize a cumulative-effectchange recognized as an adjustment to the opening balance of retained earnings in the first comparative period of adoption. presented. Upon adoption, the Company applied thethis 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.financial statements.
On January 1,Significant Accounting Policies
There have been no material changes to the significant accounting policies disclosed in the audited consolidated financial statements for the year ended December 31, 2022, as included in 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 amendments2022 Form 10-K, except as disclosed 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.note.
Fair Value Measurements
On January 1, 2022,The Company accounts for its assets and liabilities using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the fair-value hierarchy below. This hierarchy requires the Company adopted ASU 2019 -12, Income Taxes (Topic 740): Simplifyingto minimize the Accounting for Income Taxes (“ASU 2019-12”). use of unobservable inputs and to use observable market data, if available, when determining fair value.
| ● | Level 1 – Quoted prices for identical instruments in active markets; | |
| ● | Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and | |
| ● | Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
The amendmentsCompany’s liability-classified warrants are measured at fair value on a recurring basis, with subsequent changes in ASU 2019-12 simplifyfair value recognized in earnings. Certain assets, including long-lived assets, right of use assets, goodwill, indefinite-lived intangible assets, and purchase commitments are measured at fair value on a nonrecurring basis; that is, the accounting for income taxes by removing certain exceptionsassets are not measured at fair value on an ongoing basis, but are subject to the general principles in ASC 740. The amendments also improve consistent application offair value adjustments using fair value measurements with unobservable inputs are classified as Level 3. Other financial instruments, including cash and simplify U.S. GAAP forcash equivalents, accounts receivable, prepaid and other areas of ASC 740 by clarifyingassets, accounts payable, accrued expenses, and amending existing guidance. The adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements.other current liabilities are carried at cost, which approximate their fair values due to their short-term nature.
Stock Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480 - Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815 - Derivatives and Hedging (“ASC 815”). The Company’s assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, whether they meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period-end date while the warrants are outstanding.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESAllowances for Returns and Price Protection
There have been no material changes to the significant accounting policies included in the audited consolidated financial statements included in the 2021 Form 10-K, except as disclosed in this note.
Revenue Recognition
The Company recognizes revenue under ASC 606, Revenuemay permit product returns from, Contracts with Customers (“ASC 606”). The Company determines revenue recognition through the following steps:
The Company currently derives revenue principally from sales of its games and related extra content that can be played by customers on a variety of platforms, which include game consoles, PCs, mobile phones and tablets. The Company’s product and service offerings include the following:
Sales of Games. Sales of games are generally determined to have a singular distinct performance obligation, as the Company does not 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 recognized from sales of extra content is derived primarily from the sale of digital in-game content that is downloaded by the Company’s console, PC and mobile customers that enhance their gameplay experience, typically by providing car upgrades, additional drivers and/or allows them to customize their gameplay. In-game credit, and other downloadable content, may only be used for in-game 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 purchasing the in-game credits. For console and PC customers, extra content is either purchased in a pack or on a standalone basis.
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 time the event is held. If the Company enters into a contract with a customer to sponsor 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 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
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 reviewing variable consideration such as discounts, sales returns,grant 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 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 endits 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 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:
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 revenues 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 revenues on a gross basis, with mobile platform fees included within cost of revenues.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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 2021 Form 10-K for additional details.certain conditions. Price protection represents the Company’s practice to provideof providing 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.
Allowances for returns and price protection are considered variable consideration under ASC 606. The Company reduces revenue for estimated future returns and price protections that may occur with distributors and retailers (“channel partners”). See Note 2 – Basis of Presentation and Summary of Significant Accounting Policies – Accounts Receivable in the 2022 Form 10-K for additional details.
When evaluating the adequacy of salesallowances for 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 higher than expectedhigher-than-expected returns or higher price protection in subsequent periods.
The Company’sCompany recognized an expense of approximately $0.3 million and $0.2 million for sales returns and price protection reserves recognizedprotections as a reduction of revenues for the three and six months ended June 30,March 31, 2023 and 2022, were $864,157 and $1,098,397, respectively. The Company recognized approximately $81,600 and $199,940 of sales returns and price protection charges as a reduction of revenues for the three and six months ended June 30, 2021, respectively.
Deferred Revenue
Stock-Based Compensation
The Company’s deferred revenue, or contract liability, is classified as current and is included within accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheets (Also refer Note 4 – Accrued Expenses and Other Current Liabilities). Revenue collected in advance of the event is recorded as deferred revenue until the event occurs. Development and coding revenues are also recorded as deferred revenue until the Company’s performance obligation is performed.
The Company accounts for stock-based compensationRevenue recognized in accordance with ASC 718 – Compensation – Stock Compensation. The Company measures the cost of services receivedperiod from amounts included in exchange for an award of equity instruments based oncontract liability at the fair valuebeginning of the award. The fair value of the award is measured on the grant 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 exchangewas approximately $0.3 million and $0.5 million 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.three months ended March 31, 2023 and 2022, respectively.
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common and dilutive common-equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of shares of options and warrants, if not anti-dilutive.
SCHEDULE OF CALCULATION WEIGHTED AVERAGE DILUTIVE COMMON SHARES
| For the Three and Six Months Ended | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Stock options | 761,667 | 574,073 | ||||||
| 761,667 | 574,073 | |||||||
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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, Taxes requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized.
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.
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Stock options | 47,967 | 96,984 | ||||||
| Warrants | 33,574 | - | ||||||
| 81,541 | 96,984 | |||||||
NOTE 3 – INTANGIBLE ASSETS
Licensing Agreements
The Company has license agreements with various entities related to the development of video games and the organization and facilitation of esports events, including BARC (TOCA) Limited (“BARC”) with respect to the British Touring Car Championship (the “BTCC”), and INDYCAR LLC (“INDYCAR”) with respect to the INDYCAR SERIES. As of June 30, 2022,March 31, 2023, the Company had a remaining liability in connection with these licensing agreements of approximately $774,6800.8, million and $3.3 million, which is included in purchase commitments and other non-current liabilities, respectively, on the condensed consolidated balance sheets.
Impairment
During the six months ended June 30, 2022, the Company identified triggering events during the six months ended June 30, 2022, 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 for the period ended March 31, 2022 were changes made to the Company’s product roadmap during the six months ended June 30, 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 Company’s ability to produce and release high quality games. The primary triggers for the impairment review for the three-month period ended June 30, 2022 were the ongoing reduction in the Company’s share price, the receipt of a deficiency letter notice from NASDAQ and the Company’s ongoing uncertain liquidity position.
As a result of the quantitative assessments, the Company determined that 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 six months ended June 30, 2022 of approximately $2,201,000 for its rFactor 2 trade name and $1,120,00 for the Le Mans Gaming License. Additionally, the Company recorded an impairment loss of approximately $1,320,000 for its finite-lived rFactor 2 technology during the six months ended June 30, 2022.
The Company determined the fair value of the indefinite-lived intangible assets using a relief-from-royalty method for 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.
The impairment loss is presented as impairment of intangible assets in the condensed consolidated statements of operations and comprehensive loss.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Intangible Assets
The following is a summary of intangible assets as of March 31, 2023:
SCHEDULE OF INTANGIBLE ASSETS
| Licensing Agreements (Finite) | Licensing Agreements (Indefinite) | Software Licenses (Finite) | Distribution Contracts (Finite) | Trade Names (Indefinite) | Non-Compete Agreements (Finite) | Accumulated Amortization | Total | |||||||||||||||||||||||||
| Balance as of January 1, 2023 | $ | 7,198,363 | $ | 1,546,645 | $ | 8,656,842 | $ | 560,000 | $ | 212,185 | $ | 243,243 | $ | (5,057,048 | ) | $ | 13,360,230 | |||||||||||||||
| Amortization expense | - | - | - | - | - | - | (439,640 | ) | (439,640 | ) | ||||||||||||||||||||||
| FX translation adjustments | 27,507 | (4,353 | ) | 72,920 | - | 500 | 2,054 | (11,157 | ) | 87,471 | ||||||||||||||||||||||
| Balance as of March 31, 2023 | $ | 7,225,870 | $ | 1,542,292 | $ | 8,729,762 | $ | 560,000 | $ | 212,685 | $ | 245,297 | $ | (5,507,845 | ) | $ | 13,008,061 | |||||||||||||||
| Weighted average remaining amortization period at March 31, 2023 | 4.7 | - | 4.1 | - | - | 1.0 | - | - | ||||||||||||||||||||||||
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The following is a summary of intangible assets as of June 30, 2022:
SCHEDULE OF INTANGIBLE ASSETS
| Licensing Agreements (Finite) | Licensing Agreements (Indefinite) | Software Licenses (Finite) | Distribution Contracts (Finite) | Trade Names (Indefinite) | Non-Compete Agreements (Finite) | Accumulated Amortization | Total | |||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | 7,198,363 | $ | 2,810,000 | $ | 10,364,541 | $ | 560,000 | $ | 2,672,581 | $ | 257,530 | $ | (3,377,206 | ) | $ | 20,485,809 | |||||||||||||||
| Amortization expense | - | - | - | - | - | - | (879,052 | ) | (879,052 | ) | ||||||||||||||||||||||
| Impairment of intangible assets | - | (1,118,209 | ) | (1,320,993 | ) | - | (2,200,900 | ) | - | - | (4,640,102 | ) | ||||||||||||||||||||
| FX translation adjustments | 27,507 | (213,861 | ) | (528,818 | ) | - | (74,229 | ) | (18,813 | ) | 102,734 | (705,480 | ) | |||||||||||||||||||
| Balance as of June 30, 2022 | $ | 7,225,870 | $ | 1,477,930 | $ | 8,514,730 | $ | 560,000 | $ | 397,452 | $ | 238,717 | $ | (4,153,524 | ) | $ | 14,261,175 | |||||||||||||||
Accumulated amortization of intangible assets consists of the following:
SCHEDULE OF ACCUMULATED AMORTIZATION OF INTANGIBLE ASSETS
| Licensing Agreements (Finite) | Software Licenses (Finite) | Distribution Contracts (Finite) | Non-Compete Agreements (Finite) | Accumulated Amortization | ||||||||||||||||
| Balance as of December 31, 2021 | $ | 912,260 | $ | 1,843,716 | $ | 560,000 | $ | 61,230 | $ | 3,377,206 | ||||||||||
| Amortization expense | 113,749 | 723,628 | - | 41,675 | 879,052 | |||||||||||||||
| Foreign currency translation adjustment | - | (96,403 | ) | - | (6,331 | ) | (102,734 | ) | ||||||||||||
| Balance as of June 30, 2022 | $ | 1,026,009 | $ | 2,470,941 | $ | 560,000 | $ | 96,574 | $ | 4,153,524 | ||||||||||
| Licensing Agreements (Finite) | Software Licenses (Finite) | Distribution Contracts (Finite) | Non-Compete Agreements (Finite) | Accumulated Amortization | ||||||||||||||||
| Balance as of January 1, 2023 | $ | 1,146,010 | $ | 3,212,135 | $ | 560,000 | $ | 138,903 | $ | 5,057,048 | ||||||||||
| Amortization expense | 56,562 | 362,710 | - | 20,368 | 439,640 | |||||||||||||||
| Foreign currency translation adjustment | 1,876 | 8,069 | - | 1,212 | 11,157 | |||||||||||||||
| Balance as of March 31, 2023 | $ | 1,204,448 | $ | 3,582,914 | $ | 560,000 | $ | 160,483 | $ | 5,507,845 | ||||||||||
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 Ended December 31, | Total | Total | ||||||
| 2022 (remaining period) | $ | 1,045,777 | ||||||
| 2023 | 1,892,641 | |||||||
| 2023 (remaining period) | $ | 1,318,924 | ||||||
| 2024 | 1,687,137 | 1,652,026 | ||||||
| 2025 | 1,678,365 | 1,568,894 | ||||||
| 2026 | 1,400,729 | 1,322,107 | ||||||
| 2027 | 482,338 | |||||||
| Thereafter | 2,172,544 | 1,702,871 | ||||||
| Estimated aggregate amortization expense | $ | 9,877,193 | $ | 8,047,160 | ||||
Amortization expense related to intangible assets was approximately $396,5000.4 million and $471,0000.5 million for the three months ended June 30,March 31, 2023 and 2022, and 2021, respectively, and amortization expense related to intangible assets was approximately $879,000 and $581,500 for the six months ended June 30, 2022 and 2021, respectively. Within intangible assets is approximately $3,460,0001.5 million of licensing agreements that are not presently subject to amortization. These non-amortizing licensing agreements will commencebegin amortizing upon release of the 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 six months ended June 30, 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 June 30, 2022 | $ | - | $ | - | $ | - | ||||||
During the six months ending June 30, 2022, the Company identified triggering events that indicated its goodwill associated with the acquisition of Studio397 B.V. (“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 during the six months ended June 30, 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 subsequent to December 31, 2021, the date of the last impairment assessment.
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 six months ended June 30, 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 a 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., the 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 lease 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 June 30, 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 lending rate (“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 | Three Months Ended | Six Months Ended | ||||||||
| Comprehensive Loss Classification | June 30, 2022 | June 30, 2022 | ||||||||
| Short-term operating lease expense | G&A | $ | 23,951 | $ | 52,916 | |||||
| Operating lease expense | G&A | 126,237 | 196,938 | |||||||
| Total lease costs | $ | 150,188 | $ | 249,854 | ||||||
Weighted average remaining lease terms and weighted average discount rates are as follows:
SCHEDULE OF REMAINING LEASE TERMS
| ||||
Supplemental cash flow information related to leases is as follows:
SCHEDULE OF CASH FLOW SUPPLEMENTAL
Six Months Ended June 30, 2022 | ||||
| Cash paid for amounts included in the measurement of operating lease liabilities | $ | 249,854 | ||
| Right of use assets obtained in exchange for new lease obligations | $ | 1,086,668 | ||
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2022, maturities related to lease liabilities were as follows:
SCHEDULE OF MATURITIES OF LEASE LIABILITIES
| Operating Leases | ||||
| 2022 (remaining period) | $ | 253,005 | ||
| 2023 | 509,676 | |||
| 2024 | 420,525 | |||
| 2025 | 286,897 | |||
| 2026 | 273,522 | |||
| Thereafter | 65,037 | |||
| Total lease payments | $ | 1,808,662 | ||
| Less effects of imputed interest | (238,234) | |||
| Present value of lease liabilities | $ | 1,570,428 | ||
New lease agreements
On February 8, 2022, the Company entered into a new lease agreement with Lemon City Group, LLC, an entity affiliated with our majority shareholder, Motorsport Network, for office space located in Miami, Florida (the “Lemon City Lease”). The term of this new lease is 5 years, which commenced April 1, 2022 and expires on March 31, 2027, and is terminable upon 60-days’ written notice, by either party, with no penalty. The base rent from this new lease is fixed at approximately $22,000 per month. On April 1, 2022, the previous lease agreement for office space in Miami, Florida between 704Games LLC and Lemon City Group, LLC was terminated without penalty. See Note 14 – Subsequent Events for further information regarding this lease.
NOTE 64 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
SCHEDULE OF ACCRUED EXPENSES
| June 30 | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accrued royalties | $ | 851,574 | $ | 1,694,011 | ||||
| Accrued professional fees | 50,000 | 80,909 | ||||||
| Accrued consulting fees | 352,422 | 106,006 | ||||||
| Accrued development costs | 320,359 | 968,007 | ||||||
| Esport prize money | 11,126 | 168,959 | ||||||
| Accrued taxes | 74,402 | 31,491 | ||||||
| Accrued payroll | 116,293 | 235,224 | ||||||
| Accrued other | 180,583 | 239,664 | ||||||
| Total | $ | 1,956,759 | $ | 3,524,271 | ||||
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accrued royalties | $ | 465,244 | $ | 274,085 | ||||
| Accrued professional and consulting fees | 726,224 | 720,470 | ||||||
| Accrued development costs | 207,861 | 172,164 | ||||||
| Accrued taxes | 49,659 | 149,842 | ||||||
| Accrued payroll | 319,604 | 372,358 | ||||||
| Deferred revenue | 50,026 | 311,945 | ||||||
| Loss contingency reserves | 924,307 | 1,100,000 | ||||||
| Accrued other | 240,503 | 315,560 | ||||||
| Total | $ | 2,983,428 | $ | 3,416,424 | ||||
NOTE 75 – DUE TO/FROM RELATED PARTIESPARTY LOANS
On April 1, 2020, the Company entered into a promissory note (the “$12million Line of Credit”) with the Company’s majority stockholder, Motorsport Network, LLC (“Motorsport Network”), that provides the Company with a line of credit of up to $10million at an interest rate of 1010%% per annum, the availability of which is dependent on Motorsport Network’s available liquidity. 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 million to $12 million, with no changes to the other terms.
The $12million Line of Credit does not have a stated maturity date and is payable upon demand at any time at the sole and absolute discretion of 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 otherwise 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.Network. The Company may prepay the $12million 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.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
On September 8, 2022, the Company entered into a support agreement with Motorsport Network (the “Support Agreement”) pursuant to which Motorsport Network issued approximately $3 million (the “September 2022 Cash Advance”) to the Company in accordance with the $12 million Line of Credit, the proceeds of which the Company is using for general corporate purposes and working capital. In the Support Agreement, Motorsport Network and the Company terminated the Side Letter Agreement dated September 4, 2020 and agreed that until June 30, 2024, Motorsport Network would not demand repayment of the September 2022 Cash Advance or other advances under the $12 million Line of Credit unless and until such time that any of the following shall occur or exist: (i) the Company enters into a new financing arrangement (whether debt, equity or otherwise) under which the Company is then able to draw or provides the Company with available cash in excess of amounts required in the Company’s reasonable judgment to run its operations in the ordinary course of business; (ii) the Company generates from operations available cash in excess of amounts required in the Company’s reasonable judgment to run its operations in the ordinary course of business; or (iii) the Company’s independent auditors issue an unqualified opinion on its financial statements and the Company’s repayment of the advances, in whole or in part, would not otherwise cause the independent auditor to issue a going concern qualified opinion. Upon the occurrence of any of the foregoing events, the Company shall prepay on such date principal amount of the September 2022 Cash Advance and other advances under the $12 million Line of Credit then outstanding in an amount equal to such available excess cash or, in the case of (iii) above, the amount that would not cause the Company’s independent auditor to issue a going concern qualified opinion, together with interest accrued but unpaid on the unpaid September 2022 Cash Advance and other advances, which repayment obligation shall continue until all such advances under the $12 million Line of Credit are paid in full. The entire aggregate principal amount of the September 2022 Cash Advance and the other advances under the $12 million Line of Credit, together with interest accrued but unpaid thereon, shall also become immediately and automatically due and payable, and the $12 million Line of Credit shall immediately and automatically terminate, in each case without any action required by Motorsport Network, if (i) the Company experience an event of default under any other debt instrument, agreement or arrangement; or (ii) any final judgment or final judgments for the payment of money in excess (net of amounts covered by third-party insurance with insurance carriers who have not disclaimed liability with respect to such judgment or judgments) of $500,000 or its foreign currency equivalent is entered against the Company or any subsidiary and is not discharged and either (a) an enforcement proceeding has been commenced by any creditor upon such judgment or decree or (b) there is a period of 60 days following the entry of such judgment or decree during which such judgment or decree is not discharged, waived or the execution thereof stayed and, in the case of (b), such default continues for 60 consecutive days.
On January 30, 2023, the Company entered into a debt-for-equity exchange agreement with Motorsport Network, where the Company issued to Motorsport Network shares of the Company’s Class A common stock with an approximate fair market value of $1 million, representing a portion of the Company’s outstanding debt (including the principal and unpaid interest) under the $12 million Line of Credit. On February 1, 2023, the Company entered into a second debt-for-equity exchange agreement with Motorsport Network, where the Company issued to Motorsport Network shares of the Company’s Class A common stock with an approximate fair market value of $2.9 million, representing the Company’s remaining debt outstanding (including the principal and unpaid interest) under the $12 million Line of Credit. The shares of the Company’s Class A common stock issued to Motorsport Network on January 30, 2023 and February 1, 2023 under the debt-for-equity exchange agreements were issued in consideration for the cancellation of all amounts outstanding under the $12 million Line of Credit.
Given the state of the financial markets, the Company has recently assessedcontinues to assess its exposure to any potential non-performance by Motorsport Network and believes that there is a substantial likelihood that Motorsport Network willmay not fulfill any of the Company’s future borrowing requests for the foreseeable future.requests.
During the six months ended June 30, 2022, the Company did not draw or repay amounts under the $12 million LineAs of CreditMarch 31, 2023 and December 31, 2022, the balance due to Motorsport Network under the $12 million Line of Credit was $0 and $3,670,000, respectively, as of June 30, 2022. The Company recordedwell as unpaid accrued related party interest expense for this agreement of $0 during the respective three and six months ended June 30, 2022.$96,667, respectively.
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In addition
Motorsport Games Inc. and Subsidiaries
Notes to the $12 million Line of Credit, the Company had regular related party receivables and payables outstanding as of June 30, 2022. Specifically, the Company owed $37,049 to its related parties as a related party payable and was due $35,498 from its related parties as a related party receivable. During the six months ended June 30, 2022, $132,288 has been paid to related parties in settlement of related party payables.Unaudited Condensed Consolidated Financial Statements
NOTE 86 – RELATED PARTY TRANSACTIONS
FromIn addition to the $12 million Line of Credit, which is discussed in Note 5 – Related Party Loans, from time to time, Motorsport Network, and other related entities pay for Company expenses on the Company’s behalf. During the sixthree months ended June 30,March 31, 2023 and 2022, the Company incurred expenses of approximately $143,517 0.1 million and $0, respectively, that were paid by Motorsport Network on its behalf and are reimbursable by the Company to Motorsport Network. In addition,During both the Company has a promissory note with Motorsport Network, which is discussedthree months ended March 31, 2023 and 2022, approximately $0.1 million was paid to related parties in Note 7 – Due To/From Related Parties.settlement of related party payables.
Leasing agreementsThe Company has regular related party receivables and payables outstanding as of March 31, 2023 and December 31, 2022. Specifically, the Company owed approximately $0.2 million to its related parties as a related party payable and was due approximately $0.1 million from its as a related party receivable as of March 31, 2023. As of December 31, 2022, the Company owed approximately $0.8 million to its related parties as a related party payable and was due approximately $0.2 million from its related parties as a related party receivable.
Backoffice Services Agreement
On February 8, 2022,March 23, 2023 (but effective as of January 1, 2023), the Company entered into the Lemon City Leasea new Backoffice Services Agreement with Lemon City Group, LLC, an entity affiliated with our majority shareholder, Motorsport Network (the “Backoffice Services Agreement”), following the expiration of the Company’s prior services agreement with Motorsport Network. Pursuant to the Backoffice Services Agreement, Motorsport Network will provide accounting, payroll and benefits, human resources and other back-office services on a full-time basis to support the Company’s business functions. The term of the Backoffice Services Agreement is 12-months from the effective date. The term will automatically renew for office space locatedsuccessive 12-month terms unless either party provides written notice of nonrenewal at least 30 days prior to the end of the then current term. The Backoffice Services Agreement may be terminated by either party at any time with 60 days prior notice. Pursuant to the Backoffice Services Agreement, the Company is required to pay a monthly fee to Motorsport Network of $17,500. For the three months ended March 31, 2023, the Company incurred $52,500 in Miami, Florida. See Note 5 – Leases for further information.fees in connection with the Backoffice Service Agreement, presented in general and administrative expenses with the condensed consolidated statements of operations.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 97 – STOCKHOLDERS’ EQUITY
Class A and B Common Stock
Initial Public Offering
As of March 31, 2023, the Company had shares of Class A common stock and shares of Class B common stock outstanding. Holders of Class A and Class B common stock are entitled to one-vote and ten-votes, respectively, for each share held on all matters submitted to a vote of stockholders.
On January 15, 2021, Effective on November 10, 2022, the Company completedamended its initial public offeringcertificate of incorporation to effectuate a reverse split of the issued and outstanding shares of its Class A common stock and Class B common stock at a price to the publicratio of $ per share, which includes the exercise in full by the underwriters of their option to purchase 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 were $63,073,783, after deducting underwriting discounts and commissions and offering expenses paid by the Company during 2020 and 2021..
Stock704Games Warrants
As of June 30, 2022March 31, 2023 and December 31, 2021,2022, 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 June 30, 2022,March 31, 2023, the warrants had no intrinsic value and a remaining life of years.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Registered Direct Offerings and the Wainwright Warrants
On February 1, February 2 and February 3, 2023, the Company completed three separate registered direct offerings (the “Offerings”) priced at-market under NASDAQ rules with H.C. Wainwright & Co., LLC acting as the exclusive placement agent for each transaction (the “Agent”). In connection with the Offerings, the Company paid the Agent a transaction fee equal to 7.0% of the aggregate gross proceeds from each offering, non-accountable expenses and certain other closing fees. In addition, the Company granted warrants to the Agent (or its designees) to purchase shares of the Company’s Class A common stock equal to % of the aggregate number of shares of Class A common stock placed in each Offering (collectively, the “Wainwright Warrants”). The Offerings are summarized as follows:
SCHEDULE OF REGISTERED DIRECT OFFERINGS AND WAINWRIGHT WARRANTS
| Offering Date | Gross Proceeds | Net Proceeds | Warrants Issued | Warrant Strike Price | Warrant Term | |||||||||||||||||||
| Registered direct offering 1 | February 1, 2023 | 183,020 | $ | 3.9 million | $ | 3.6 million | 10,981 | $ | 26.75 | 5 years | ||||||||||||||
| Registered direct offering 2 | February 2, 2023 | 144,366 | $ | 3.4 million | $ | 3.1 million | 8,662 | $ | 29.375 | 5 years | ||||||||||||||
| Registered direct offering 3 | February 3, 2023 | 232,188 | $ | 4.0 million | $ | 3.7 million | 13,931 | $ | 21.738 | 5 years | ||||||||||||||
As of March 31, 2023, the Wainwright Warrants were assessed to have a fair value of approximately $0.5 million and deemed to be liability-classified awards, which were recorded within other non-current liabilities on the unaudited condensed consolidated balance sheet.
The Company utilized a Black-Scholes Option Pricing Model to determine the fair value of the Wainwright Warrants. The Black-Scholes model requires management to make a number of key assumptions, including expected volatility, expected term, and risk-free interest rate. The risk-free interest rate is estimated using the rate of return on U.S. treasury notes with a life that approximates the expected term. The expected term assumption used in the Black-Scholes model represents the period of time that the Wainwright Warrants are expected to be outstanding and is estimated using the contractual term of the Wainwright Warrants. As of March 31, 2023, the Wainwright Warrants had no intrinsic value.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Stock Purchase Commitment Agreement
During the three months ended March 31, 2023, the Company issued shares of the Company’s Class A common stock, with a fair value of $657,850, to Alumni Capital LP (“Alumni Capital”). The shares were sold pursuant to a stock purchase commitment agreement, that was entered into on December 9, 2022 with Alumni Capital (the “Alumni Purchase Agreement”). Under the Alumni Purchase Agreement, the Company may sell Alumni Capital up to $ of shares of the Company’s Class A common stock, subject to certain restrictions, through the commitment period expiring December 31, 2023. As of March 31, 2023, the remaining commitment amount under the Alumni Purchase Agreement amounted to $1,302,676.
On January 12, 2021, in connection with its initial public offering, Motorsport Games established the Motorsport Games Inc. 2021 Equity Incentive Plan (the “MSGM 2021 Stock Plan”). The MSGM 2021 Stock Plan provides for the grant of options, stock appreciation rights, restricted stock awards, performance share awards and restricted stock unit awards, and initially authorized shares of Class A common stock to be available for issuance. As of June 30, 2022,March 31, 2023, 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.
In conjunction with the Company’s initial public offering, the Company granted an aggregate of shares of Class A common, with an aggregate grant date fair value of $661,266. These shares were primarily awarded to a third-party consultant, with a portion allocated to the Company’s former Chief Executive Officer and three of its former directors. 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.
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 Games’the Company’s former Chief Executive Officer in conjunction with Motorsport Games’the Company’s initial public offering that vested immediately, as well as those made to Motorsport Games’the Company’s former 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.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
SCHEDULE OF STOCK-BASED COMPENSATION OPTIONS ACTIVITY
| For the Six Months Ended June 30, 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) | 297,401 | |||||||||||
| Stock options awarded to employees under the MSGM 2021 Stock Plan | 569,348 | Years | Years | 1,171,370 | ||||||||
| Stock options awarded to Board of Directors under the MSGM 2021 Stock Plan | 57,108 | Year | Years | 120,630 | ||||||||
| Forfeited, cancelled or expired | (162,190 | ) | ||||||||||
| Awards outstanding under the MSGM 2021 Stock Plan as of June 30, 2022 (net of forfeitures) | 761,667 | |||||||||||
| Number of Options | ||||
| Awards outstanding under the MSGM 2021 Stock Plan as of January 1, 2023 (net of forfeitures) | 74,285 | |||
| Forfeited, cancelled or expired | (21,549 | ) | ||
| Awards outstanding under the MSGM 2021 Stock Plan as of March 31, 2023 (net of forfeitures) | 52,736 | |||
In addition to the equity awards granted and detailed above,On April 4, 2023, the Company granted an aggregate of restricted stock option awards under the MSGM 2021 Stock Plan to its Board of Directors in January 2022 that vested on issuance,directors with a grant date fair value of approximately $. million. Refer to Note 12 – Subsequent Events for further information.
Stock-Based Compensation
SCHEDULE OF STOCK BASED COMPENSATION EXPENSE
| 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | For the Three Months Ended
| ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | |||||||||||||||||||
| G&A | $ | 188,201 | $ | 136,155 | $ | 458,323 | $ | 9,051,518 | ||||||||||||||||
| Sales & Marketing | 32,365 | (34,350 | ) | 78,839 | 83,372 | |||||||||||||||||||
| General and Administrative | $ | 19,426 | $ | 16,394 | ||||||||||||||||||||
| Sales and Marketing | 239,717 | 302,007 | ||||||||||||||||||||||
| Development | 18,007 | 14,469 | 54,441 | 58,300 | (9,910 | ) | 34,629 | |||||||||||||||||
| Stock-based compensation expense | $ | 238,573 | $ | 116,274 | $ | 591,603 | $ | 9,193,190 | $ | 249,233 | $ | 353,030 | ||||||||||||
As of June 30, 2022,March 31, 2023, there was approximately $ million of unrecognized stock-based compensation expense which will be recognized over approximately years.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 119 – 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, inflows, except as otherwise disclosed below. In light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period. Litigation or other legal proceedings, with or without merit, is unpredictable and generally expensive and time consuming and, even if resolved in our favor, is likely to divert significant resources from our core business, including distracting our management personnel from their normal responsibilities.
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, 2022
| 17 |
Motorsport Games Inc. and December 31, 2021, the Company has not accrued any amounts for contingencies.Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
As previously disclosed, onOn February 11, 2021, HC2 Holdings 2 Inc. (now known as Innovate 2) and Continental General Insurance Company, former minority stockholders of 704Games, filed a complaint (the “HC2 and Continental Complaint”) in the U.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 manager of Motorsport Network. The complaint was later amended and added Leo Capital Holdings LLC as an additional plaintiff and the controller of Motorsport Network as an additional individual defendant. The complaint alleges, among other things, purported misrepresentations and omissions concerning 704Games’ financial condition made in connection with the Company’s purchase of these minority shareholders’ interest in 704Games in August and October 2021. The complaint asserts claims under Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 thereunder; Section 20(a) of the Exchange Act; Section 20A of the Exchange Act; breach of the Company’s obligations under the Stockholders’ Agreement dated August 14, 2018; fraudulent inducement; breach of fiduciary duties; and 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 the date of plaintiffs’ sale and the purchase price that was paid, as well as punitive damages and other relief. In May 2021, the Company, along with the other defendants, filed a motion to dismiss the plaintiffs’ complaint. On March 28, 2022, the court entered an order denying the motion to dismiss.
On January 11, 2023, in connection with the HC2 and Continental Complaint, the Company, along with other defendants, entered into a settlement agreement with one of the plaintiffs, Continental, to settle the claims made by Continental against the defendants and the claims made by the defendants against Continental. Under the terms of the settlement agreement, the Company is obligated to pay the sum of $1.1 million to Continental. The Company believes that this actionpaid an initial payment of approximately $0.1 million on January 17, 2023, and is without meritobligated to make payments of no less than approximately $40,000 every 30 days after the initial payment date until the settlement amount of $1.1 million is paid in full. As of March 31, 2023, all required payments under the settlement agreement have been made. As of March 31, 2023 and will continue to vigorously defend itself. However, litigation is inherently uncertain. Accordingly,December 31, 2022, the Company cannot predicthas accrued $0.9 million and $1.1 million, respectively in other current liabilities as it relates to this case. The Company continues to defend its position with the remaining plaintiffs, the outcome of which is uncertain at this mattertime. Refer to Note 4 – Accrued Expenses and cannot currently estimate the possible loss or range of losses, if any, that it may experience in connection with this litigation. Other Current Liabilities.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Commitments
On January 25, 2021, the Company entered into an amendment (the “Le Mans Amendment”) to the Le Mans Esports Series Ltd joint venture agreement, which resulted in an increase of the Company’s ownership interest in the Le Mans Esports Series Ltd joint venture from 45% to 51%. Additionally, through certain multi-year licensing agreements that were entered into in connection with the Le Mans Amendment, the Company secured the rights to be the exclusive video game developer and publisher for the 24 Hours of Le Mans race and the WEC, as well as the rights to create and organize esports leagues and events for the 24 Hours of Le Mans race, the WEC and the 24 Hours of Le Mans Virtual event. In exchange for certain of these license rights, the Company agreed to fund up to €8,000,000 (approximately $8,700,000 USD as of March 31, 2023) as needed for development of the video game products, to be contributed on an as-needed basis during the term of the applicable license.
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 the agreement, upon payment of the initial license fee described below, the Company was granted a non-exclusive,nonexclusive, non-transferable and terminable license to develop, market and sublicense (under limited circumstances and subject to conditions of the agreement) certain products using the Unreal Engine 4 for its next generation of games.
The Company will pay Epic a license fee royalty payment equal to 5% of product revenue, as defined in the licensing agreement. During the three and six months ended June 30, 2022,March 31, 2023, the Company paid royalties to Epic earned royalties of approximately $70,64132,000 under the agreement. During a 2-year support period, Epic will use commercially reasonable efforts to provide the Company with updates to the Unreal Engine 4 and technical support. Pursuant to the terms of the agreement, the Company has the right to actively develop new or existing authorized products during a 5-year period ending on August 11, 2025.
Minimum Royalty Guarantees
The Company is required to make certain minimum royalty guarantee payments to third-party licensors, arising primarily from its NASCAR, 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 2031,2032, and give rise to a commitment of approximately $35.528.3 million, in the aggregate, for the duration of these arrangements. The Company expects to pay $3.55paid $0.1 million in cash payments in order to comply with the license agreements’ minimum royalty guarantees during the three months ended March 31, 2023, and expects to pay further $2.4 million during the remainder of fiscal year ending December 31, 2022.
Purchase Commitment Liabilities2023.
On April 22, 2022, Motorsport Games entered into a letter agreement (the “Amendment”) amending the terms of (i) the share purchase agreement dated March 31, 2021 (the “SPA”) with Luminis International BV, Technology In Business B.V. (“TIB”) and certain of TIB’s shareholders parties to such amendment, relating to the acquisition of Studio397 and (ii) the related deed of pledge that secured the Company’s payment of the $3,200,000 deferred purchase price installment due under the SPA.
Pursuant to the Amendment, 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 made the $1,000,000 payment. Further, pursuant to the Amendment, secured obligations under the deed of pledge were correspondingly reduced from $3,200,000 to $2,200,000 following the finalization of an amendment to the deed of pledge on May 12, 2022. The $1,000,000 payment was made on April 30, 2022. On July 21, 2022, the Company entered into a letter agreement, effective as of July 19, 2022 (the “Second Amendment”), further amending the terms of the SPA. See Note 14 - Subsequent Events.
NOTE 1210 – CONCENTRATIONS
Customer Concentrations
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues with all the customers listed coming from the Gaming segment, for the following periods:
SCHEDULE OF CONCENTRATIONS
For the Three Months Ended June 30, | For the Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| Customer | 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | ||||||||||||||||||
| Customer A | -* | % | 15.3 | % | ||||||||||||||||||||
| Customer B | 39.51 | % | 24.56 | % | 26.20 | % | 30.29 | % | 29.3 | % | 24.1 | % | ||||||||||||
| Customer C | 29.72 | % | 30.60 | % | 21.61 | % | 19.24 | % | 27.2 | % | 18.2 | % | ||||||||||||
| Customer D | 24.56 | % | 31.37 | % | 21.46 | % | 36.85 | % | 27.7 | % | 16.8 | % | ||||||||||||
| Total | 93.79 | % | 86.53 | % | 69.27 | % | 86.38 | % | 84.2 | % | 74.4 | % | ||||||||||||
| * | Less than 10%. |
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s trade accounts receivable (net), with all customers coming from the Gaming segment, as of:
| June 30, | December 31, | |||||||||||||||
| Customer | 2022 | 2021 | March 31, 2023 | December 31, 2022 | ||||||||||||
| Customer A | 65.08 | % | 51.9 | % | -* | % | 50.5 | % | ||||||||
| Customer B | 29.0 | % | 11.2 | % | ||||||||||||
| Customer C | 40.3 | % | 15.2 | % | ||||||||||||
| Customer D | 16.71 | % | 17.7 | % | 18.7 | % | 13.1 | % | ||||||||
| Total | 81.79 | % | 69.6 | % | 88.0 | % | 90.0 | % | ||||||||
| * | Less than 10%. |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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 with all suppliers relating to the Gaming segment, for the following periods:
SCHEDULE OF CONCENTRATIONS
For the Three Months Ended June 30, | For the Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| Supplier | 2022 | 2021 | 2022 | 2021 | 2023 | 2022 | ||||||||||||||||||
| Supplier A | % | % | % | % | % | % | ||||||||||||||||||
| Supplier B | * | % | % | |||||||||||||||||||||
| Supplier C | % | % | * | % | % | * | % | % | ||||||||||||||||
| Total | % | % | % | % | % | % | ||||||||||||||||||
| * | Less than 10%. |
NOTE 1311 – 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 2two reportable segments for the three and six months ended June 30,March 31, 2023 and 2022 and 2021 were:were (i) the development and publishing of interactive racing video games, entertainment content and services (the “Gaming segment”); and (ii) the organization and facilitation of esports tournaments, competitions and events for the Company’s licensed racing games as well as on behalf of third-party video game racing series and other video game publishers (the “Esports segment”). The Company’s chief operating decision-makerChief Operating Decision Maker (“CODM”) has been identified as the Company’s Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon the Company’s management organization structure as of June 30, 2022March 31, 2023 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 U.S.,United States, no geographical segments are presented.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Segment operating profit is determined based upon internal performance measures used by the chief operating decision-maker.CODM. The Company derives the segment results from its internal management reporting system. The accounting policies the Company uses to derive reportable segment results are the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics, including net revenues, gross profit and operating loss. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. The Company manages certain operating expenses separately at the corporate level and does not allocate such expenses to the segments. Segment income from operations excludes interest income/expense and other income or expenses and income taxes according to how a particular reportable segment’s management is measured. Management does not consider impairment charges, and unallocated costs in measuring the performance of the reportable segments.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Segment information available with respect to these reportable business segments was as follows:
SCHEDULE OF SEGMENT REPORTING INFORMATION
| For the Three Months Ended, | For the Six Months Ended, | |||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | For the Three Months Ended March 31, | ||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Gaming | $ | 1,941,938 | $ | 2,238,927 | $ | 4,900,326 | $ | 4,689,140 | $ | 1,439,217 | $ | 2,958,388 | ||||||||||||
| Esports | 67,049 | - | 430,450 | 23,919 | 290,138 | 363,401 | ||||||||||||||||||
| Total Segment and Consolidated Revenues | $ | 2,008,987 | $ | 2,238,927 | $ | 5,330,776 | $ | 4,713,059 | ||||||||||||||||
| Total Revenues | $ | 1,729,355 | $ | 3,321,789 | ||||||||||||||||||||
| Cost of Revenues: | ||||||||||||||||||||||||
| Gaming | $ | 820,740 | $ | 902,751 | $ | 2,224,744 | $ | 1,617,867 | $ | 874,839 | $ | 1,404,007 | ||||||||||||
| Esports | 35,417 | 3,552 | 645,219 | 70,244 | 373,897 | 609,799 | ||||||||||||||||||
| Total Segment and Consolidated Cost of Revenues | $ | 856,157 | $ | 906,303 | $ | 2,869,963 | $ | 1,688,111 | ||||||||||||||||
| Total Cost of Revenues | $ | 1,248,736 | $ | 2,013,806 | ||||||||||||||||||||
| Gross Profit (Loss): | ||||||||||||||||||||||||
| Gaming | $ | 1,121,197 | $ | 1,336,176 | $ | 2,675,582 | $ | 3,071,273 | $ | 564,378 | $ | 1,554,381 | ||||||||||||
| Esports | 31,633 | (3,552 | ) | (214,769 | ) | (46,325 | ) | (83,759 | ) | (246,398 | ) | |||||||||||||
| Total Segment and Consolidated Gross Profit | $ | 1,152,830 | $ | 1,332,624 | $ | 2,460,813 | $ | 3,024,948 | ||||||||||||||||
| Total Gross Profit | $ | 480,619 | $ | 1,307,983 | ||||||||||||||||||||
| Loss From Operations: | ||||||||||||||||||||||||
| Gaming | $ | (6,393,338 | ) | $ | (5,716,887 | ) | $ | (21,437,759 | ) | $ | (20,910,146 | ) | $ | (5,105,373 | ) | $ | (15,044,421 | ) | ||||||
| Esports | (292,077 | ) | (256,517 | ) | (851,006 | ) | (440,327 | ) | (306,016 | ) | (558,929 | ) | ||||||||||||
| Total Segment and Consolidated Loss From Operations | $ | (6,685,415 | ) | $ | (5,973,404 | ) | $ | (22,288,765 | ) | $ | (21,350,473 | ) | ||||||||||||
| Total Loss from Operations | $ | (5,411,389 | ) | $ | (15,603,350 | ) | ||||||||||||||||||
| Depreciation and Amortization: | ||||||||||||||||||||||||
| Gaming | $ | 109,656 | $ | 58,496 | $ | 217,139 | $ | 85,305 | $ | 85,118 | $ | 107,483 | ||||||||||||
| Esports | 8,069 | 7,952 | 16,657 | 11,918 | 12,236 | 8,588 | ||||||||||||||||||
| Total Segment and Consolidated Depreciation and Amortization | $ | 117,725 | $ | 66,448 | $ | 233,796 | $ | 97,223 | ||||||||||||||||
| Total Depreciation and Amortization | $ | 97,354 | $ | 116,071 | ||||||||||||||||||||
| Interest Expense, net: | ||||||||||||||||||||||||
| Gaming | $ | (191,662 | ) | $ | (31,899 | ) | $ | (393,258 | ) | $ | (151,438 | ) | $ | (199,120 | ) | $ | (201,596 | ) | ||||||
| Esports | - | - | - | - | - | - | ||||||||||||||||||
| Total Segment and Consolidated Interest Expense, net | $ | (191,662 | ) | $ | (31,899 | ) | $ | (393,258 | ) | $ | (151,438 | ) | ||||||||||||
| Total Interest Expense, net | $ | (199,120 | ) | $ | (201,596 | ) | ||||||||||||||||||
| Gain attributable to equity method investment: | ||||||||||||||||||||||||
| Gaming | $ | - | $ | - | $ | - | $ | 1,370,837 | ||||||||||||||||
| Esports | - | - | - | - | ||||||||||||||||||||
| Total Gain attributable to equity method investment | $ | - | $ | - | $ | - | $ | 1,370,837 | ||||||||||||||||
| Other (Expense) Income, Net: | ||||||||||||||||||||||||
| Gaming | $ | (610,481 | ) | $ | 41,932 | $ | (767,605 | ) | $ | 82,279 | $ | 368,244 | $ | (157,123 | ) | |||||||||
| Esports | (113 | ) | 2,428 | (5,088 | ) | 2,428 | (16,927 | ) | (4,976 | ) | ||||||||||||||
| Total Other (Expense) Income, Net: | $ | (610,594 | ) | $ | 44,360 | $ | (772,693 | ) | $ | 84,707 | ||||||||||||||
| Total Other (Expense) Income, net | $ | 351,317 | $ | (162,099 | ) | |||||||||||||||||||
| Net Loss: | ||||||||||||||||||||||||
| Gaming | $ | (7,195,481 | ) | $ | (5,706,855 | ) | $ | (22,598,621 | ) | $ | (19,608,468 | ) | $ | (4,936,249 | ) | $ | (15,403,140 | ) | ||||||
| Esports | (292,190 | ) | (254,088 | ) | (856,095 | ) | (437,899 | ) | (322,943 | ) | (563,905 | ) | ||||||||||||
| Total Segment and Consolidated Net Loss | $ | (7,487,671 | ) | $ | (5,960,943 | ) | $ | (23,454,716 | ) | $ | (20,046,367 | ) | ||||||||||||
| Total Net Loss | $ | (5,259,192 | ) | $ | (15,967,045 | ) | ||||||||||||||||||
| 21 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
June 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | |||||||||||||
| Segment Total Assets: | ||||||||||||||||
| Total Assets: | ||||||||||||||||
| Gaming | $ | 23,017,840 | $ | 47,511,471 | $ | 20,026,416 | $ | 16,315,359 | ||||||||
| Esports | 1,977,711 | 3,191,732 | 2,071,396 | 2,582,433 | ||||||||||||
| Consolidated Total Assets | $ | 24,995,551 | $ | 50,703,203 | ||||||||||||
| Total Assets | $ | 22,097,812 | $ | 18,897,792 | ||||||||||||
NOTE 1412 - 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.
On July 21, 2022,April 4, 2023, the Company entered into a letter agreement effective as of July 19, 2022 (the “Second Amendment”), further amending the terms of the share purchase agreement, dated March 31, 2021 (the “SPA”), with Luminis International BV and Technology In Business B.V. (“TIB”) and certain of TIB’s shareholders.granted
Pursuant to the Second Amendment, the deferred purchase price installment that was otherwise due to be paid by the Company on July 19, 2022 was reduced from $2,200,000 to $1,870,000 as a result of the Company’s pay down of $330,000 in July 2022. Under the Second Amendment, the remaining balance of $1,870,000, plus interest thereon at 15% per annum, is to be paid as follows: (i) $100,000 monthly payments from August 15, 2022 through December of 2022; and (ii) $150,000 monthly payments from January 15, 2023 until the entire unpaid $1,870,000 and accrued and unpaid interest thereon are paid in full. Further, pursuant to the Second Amendment, secured obligationsstock option awards under the deedMSGM 2021 Stock Plan to its board of pledge have been correspondingly reduced directors with a grant date fair value of approximately $million. The options vest ratably over a three-year term and expire from $2,200,000the grant date. Also refer to $1,870,000Note 8 – Share-Based Compensation.
On August 9, 2022, the Company terminated the Lemon City Lease in accordance with its terms, without penalty, effective as of October 8, 2022.
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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, 20212022 (the “2021“2022 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 30, 202231, 2023 and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Report. Unless the context requires otherwise, references to the “Company,” “Motorsport Games,” “we,” “us” and “our” refer to Motorsport Games Inc., a Delaware corporation.
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 six months ended June 30, 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 BusinessAbout Motorsport Games
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”), KartKraft (karting simulation), rFactor 2 (racing simulation) and others. Our portfolio is comprised of some of the most prestigious motorsport leagues and events in the world. Further, in 2021 we acquired the KartKraft karting simulation game as well as Studio 397 B.V. (“Studio397”) and their rFactor 2 realistic racing simulator technology and platform, adding both games and their underlying technology to our portfolio.
Started in 2018 as a wholly-owned subsidiary of Motorsport Network, we are currently the official developer and publisher of the NASCAR video game racing franchise and have obtained the exclusiveofficial licenses to develop multi-platform games for the BTCC, the 24 Hours of Le Mans race and the WEC, as well as a non-exclusive license with INDYCAR. 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. For fiscal year 2021 and the three and six months ended June 30,March 31, 2023 and 2022, a majority of our revenue was generated from sales of our NASCAR racing video games.
As of June 30, 2022,March 31, 2023, we have a total headcount of 167128 people, made up of 166127 full-time employees, including 10990 dedicated to game development, in order to continue developing our expanded product offerings.
COVID-19 Pandemic Update
The lingering impact Our headcount numbers as of COVID-19 has continued to create significant volatility throughoutMarch 31, 2023, reflect that we have ceased our development operations in Russia effective September 2022, as a result of the global economy,Ukraine-Russia conflict and as such, as supply chain disruptions, limited labor supplies, higher inflation, and recession, which in turn has caused constraints on consumer spending. More recently, new variants of COVID-19, such as the Omicron variant and its subvariants, 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 initially caused many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19 and its variants. However, while many of these restrictions have been lifted, uncertainty remains as to whether additional restrictions may be initiated or again reimplemented in response to surges in COVID-19 cases.
Although the Company doeswe do not currently expect the COVID-19 pandemicCompany’s development operations to have a material impact on its future business and operations, the Company continuessignificant exposure 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; 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 providedchanges in the section entitled “Risk Factors” in Part I, Item 1A of the 2021 Form 10-K.
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 products have historically accounted for the majority of our revenue, however we have diversified our product offerings and are generating revenues from KartKraft, rFactor 2 and Le Mans 24 Hour virtual event reducing the percentage of revenues from NASCAR. We released: (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 May 2020 and January 2021, respectively, we obtained the exclusive licenses to develop multi-platform games for the BTCC 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 six months ended June 30, 2022, we modified our product release schedule such that our next NASCAR title for 2022 will be an update to our 2021 release and 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 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 than releasing a single game per year.
Economic Environment and Retailer Performance
Our physical gaming products are sold through a distribution network with an exclusive partner who specializes in the distribution of games 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 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, 2021 and the six months ended June 30, 2022, we sold substantially all of our physical disk products for the retail channel through a single distribution partner, which represented approximately 28% and 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 2021 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, recessionary factors, 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 Omicron variant of COVID-19 and the prevalence of breakthrough cases of infection among fully vaccinated people.
Hardware Platforms
We derive most of our revenuecircumstances arising 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 45% and 72% of our total revenue for the six-month periods ended June 30, 2022 and 2021, respectively. For the six-month periods ended June 30, 2022 and 2021, the sale of products for Microsoft Windows via Steam comprised approximately 22% and 9% of our total revenue, respectively, and the sale of products for mobile platforms comprised approximately 6% and 10% 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 latest generation of Sony and Microsoft consoles provide “backwards compatibility” (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products.Ukraine-Russia conflict.
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, 2021 and the six months ended June 30, 2022, approximately 74% and 78%, 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 was heightened during the 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. During the first quarter of 2022, we announced 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 competitions, 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 Virtual event into a part of a longer annual series with professional teams and real-world racing drivers. In addition, we also organized competitions to drive user engagement on our rFactor 2 platform. For 2021, our esports events had cumulative total viewership of approximately 1.5 million views with approximately 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 2021 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. For example, the global adoption of portable and mobile gaming devices has led to significant growth in portable and mobile gaming, which we believe is a continuing trend. Accordingly, in conjunction with the launch of our next generation NASCAR console/PC game, NASCAR 21: Ignition, we launched an updated NASCAR Heat Ultimate Edition+ on Nintendo Switch in the fourth quarter of 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) 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.
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 (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”).
2022 Restructuring Program
On September 8, 2022, the Company announced an organization restructuring (the “2022 Restructuring Program”) designed to reduce the Company’s marketing, general and administrative expenses, improve the Company’s profit and maximize efficiency, cash flow and liquidity. The 2022 Restructuring Program includes right-sizing the organization and operating with more efficient workflows and processes. The primary components of the organizational restructuring involve consolidating certain functions; reducing layers of management, where appropriate, to increase accountability and effectiveness; and streamlining support functions to reflect the new organizational structure. The leaner organizational structure is also expected to improve communication flow and cross-functional collaboration, leveraging the more efficient business processes. In addition, given the ongoing uncertain economic environment and the potential effect that it could have on the Company’s net sales, these actions will also provide the Company with additional flexibility.
As a result of the 2022 Restructuring Program, the Company expects to eliminate approximately 20% of its overhead costs worldwide and deliver approximately $4 million of total annualized cost reductions by the end of 2023, of which $2.5 million was achieved by the end of 2022. As of March 31, 2023, the Company had increased its annualized savings to $3.9 million, while having incurred restructuring costs of approximately $0.2 million to date, which primarily consisted of severance payments.
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Trends and Factors Affecting Our Business
Product Release Schedule: Our financial results are impacted by the timing of our product releases and the commercial success of those titles. Our recent product releases include:
| Title | Release Date and Platform | |
| NASCAR 21: Ignition | October 28, 2021, available on PC and next generation consoles | |
| NASCAR Heat Ultimate Edition+ | November 19, 2021, available on Nintendo Switch | |
| KartKraft | January 26, 2022, available on PC (full release) | |
| rFactor 2 Q1 2022 Content Update | February 7, 2022, available on PC | |
| rFactor 2 Q2 2022 Content Update | May 10, 2022, available on PC | |
| rFactor 2 Q3 2022 Content Update | August 8, 2022, available on PC | |
| NASCAR 21: Ignition 2022 Season Expansion | October 6, 2022, available on PC and next generation consoles | |
| NASCAR Rivals | October 14, 2022, available on Nintendo Switch | |
| rFactor 2 Q4 2022 Content Update | November 7, 2022, available on PC | |
| rFactor 2 Q1 2023 Content Update | February 21, 2023, available on PC |
We continually evaluate our product release schedule and modify the timing of upcoming products if we believe it will result in a better consumer experience. We recently modified the timing of the upcoming INDYCAR game to 2024, from an original planned release in 2023. We continue to work on this upcoming title, as well as NASCAR, BTCC and Le Mans game experiences that we currently anticipate releasing in 2023 and 2024.
Concentration of Sales: Our NASCAR products have historically accounted for the majority of our revenue; however, we have diversified our product offerings and are generating revenues from KartKraft, rFactor 2 and the 24 Hours of Le Mans Virtual event, which reduced the percentage of our revenues derived from NASCAR products for the three months ended March 31, 2023 and 2022. For example, revenues associated with our NASCAR franchise accounted for approximately 57% and 69% of our total revenue for the three months ended March 31, 2023 and 2022, respectively. Additionally, with the acquisitions of licenses to develop multi-platform games for INDYCAR, BTCC and the WEC series, including the iconic 24 hours of Le Mans race, we expect our future revenue streams will become further diversified and consist of revenues from multiple games and different franchises.
Retail Distribution: Our physical gaming products are sold through a distribution network with an exclusive partner who specializes in the distribution of games 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 expect to continue to derive significant revenues from sales of our physical gaming products to a very limited number of distribution partners. For the three months ended March 31, 2023 and 2022, we sold substantially all of our physical disk products for the retail channel through a single distribution partner, which represented approximately 0% and 15% of our total revenue for the three months ended March 31, 2023 and 2022, 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 2022 Form 10-K for additional information regarding the importance of retail sales and our distribution partners to our business.
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Hardware Platforms: We derive most of our revenue from the sale of products made for PCs, mobile devices, and video game consoles manufactured by third parties, such as Sony Interactive Entertainment Inc.’s (“Sony”) PlayStation and Microsoft Corporation’s (“Microsoft”) Xbox consoles. Sale of physical disk products for video game consoles comprised approximately 0% and 15% of our total revenue for the three months ended March 31, 2023 and 2022, respectively. For the three months ended March 31, 2023 and 2022, the sale of products for Microsoft Windows via Steam comprised approximately 28% and 17% of our total revenue, respectively, and the sale of products for mobile platforms comprised approximately 6% and 3% of our total revenue, respectively. The success of our business is dependent upon consumer acceptance of video game console/PC platforms and continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those released by Sony and Microsoft in November 2020, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The latest generation of Sony and Microsoft consoles provide “backwards compatibility” (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products.
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 three months ended March 31, 2023, and 2022, approximately 92% and 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. 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. The first quarter of 2023 was another successful quarter for our Esports segment, with the grand finale of the Le Mans Virtual Series 2022/23, the 24 Hours of Le Mans Virtual, in January and the return of the popular community rFactor2 competition ‘GT Challenge’. Our dedicated esports events had a cumulative total of approximately 8.8 million video views with approximately 27 million minutes watched for the three months ended March 31, 2023.
Recurring Revenue Sources: Our business model includes revenue that we deem recurring in nature, such as revenue from our annualized sports franchise (currently NASCAR) for game consoles, PC, and mobile platforms. We deem this recurring because many existing game owners purchase, sometimes free of charge, 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.
Components of Our Results of Operations
Revenues
We have historically derived substantially all of our revenue from sales of our games and related extra content that can be played by customers on a variety of platforms, including game consoles, mobile phones, PCs and tablets. Starting in 2019, we began generating sponsorship revenues from our production of live and virtual esports events. In early 2022, we also began offering software development services for racing simulators.
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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.
| ● | the initial game delivered digitally or via physical disk at the time of sale, which also typically provides access to offline core game content; | |
| ● | updates to previously released games on a when-and-if-available basis, such as software patches or updates, and/or additional content to be delivered in the future, both paid and free; and | |
| ● | outsourced code and content development services. |
Our product and service offerings included within the Esports segment relate primarily to curating esports events.
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-partiesthird parties relating to our NASCAR racing series games. Cost of revenues for our Gaming segment is also comprised of merchant fees, disk manufacturing costs, packaging costs, shipping costs, warehouse costs, distribution fees to distribute products to retail stores, mobile platform fees associated with our mobile revenue (for transactions in which we are acting as the principal in the sale to the end customer) and amortization of certain acquired license agreements and other intangible assets acquired through our various acquisitions. Furthermore, cost of revenues for our Gaming segment includes costs associated with our outsourced code and content development services. Cost of revenues for our Esports segment consists primarily of the cost of event staffing and 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, which includes salaries, benefits, and operating expenses of our in-house development teams, as well as consulting expenses for any contracted external development. Development expenses also include expenses relating to our software licenses, maintenance, and studio operating expenses.
General and Administrative
General and administrative expenses consist primarily of salaries, benefits and other costs associated with our operations including, finance, human resources, information technology, public relations, legal audit and compliance fees, facilities, and other external general and administrative services.
Depreciation and Amortization
Depreciation and amortization expenses include depreciation on fixed assets (primarily computers and office equipment), as well as amortization of finitedefinite lived intangible assets acquired through our various acquisitions.
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Results of Operations
Three Months Ended June 30, 2022March 31, 2023 compared to Three Months Ended June 30, 2021March 31, 2022
In this section, references to 2023 refer to the three months ended March 31, 2023 and references to 2022 refer to the three months ended March 31, 2022.
Revenue
| For the Three Months Ended, | ||||||||||||||||||||||||||
| June 30, | ||||||||||||||||||||||||||
| 2022 | 2021 | For the Three Months Ended March 31, | Change | |||||||||||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Gaming | $ | 1,941,938 | $ | 2,238,927 | ||||||||||||||||||||||
| Esports | 67,049 | - | ||||||||||||||||||||||||
| Total Consolidated Revenues | $ | 2,008,987 | $ | 2,238,927 | ||||||||||||||||||||||
| Gaming | $ | 1,439,217 | $ | 2,958,388 | $ | (1,519,171 | ) | (51.4 | )% | |||||||||||||||||
| Esports | 290,138 | 363,401 | (73,263 | ) | (20.2 | )% | ||||||||||||||||||||
| Total Revenues | $ | 1,729,355 | $ | 3,321,789 | $ | (1,592,434 | ) | (47.9 | )% | |||||||||||||||||
GamingConsolidated revenues were $1,941,938$1.7 million and $3.3 million for the three months ended June 30,2023 and 2022, respectively, a decrease of $1.6 million, or 47.9%, when compared to $2,238,927 for the three months ended June 30, 2021.prior period.
Gaming segment revenues represented 83.2% and 89.1% of our total 2023 and 2022 revenues, respectively, decreasing by $1.5 million, or 51.4%, when compared to the prior period. The $296,989, or 13%, period over period decrease reflectsin Gaming segment revenues was primarily due to $0.6 million in lower console revenuesdigital game sales and $0.8 million in lower retail sales, which were primarily driven by lower volumes of sales, as well as less favorable pricing and higher than expected retail pricing concessions and lower mobile game sales.on existing games in our product portfolio. This decrease was offsetfurthered by an additional $220,304a $0.1 million reduction in digital sales and an additional $465,397 in additional revenues earned through the development of simulation platforms usingfor third-parties. The change in digital game sales was primarily driven by a $0.5 million and $0.1 million reduction in NASCAR title sales on PC, consoles and mobile platforms and KartKraft title sales on PC, respectively. The reduction in retail game sales of $0.8 million was due to lower retail sales of our rFactor 2 platform for third parties.
For the three months ended June 30, 2022, revenues from our Esports segment increased $67,049,NASCAR titles in 2023 when compared to the three months ended June 30, 2021.same period in 2022.
Esports segment revenues represented 16.8% and 10.9% of our total 2023 and 2022 revenues, respectively, decreasing by $0.1 million, or 20.2%, when compared to the prior period. The increasedecrease in Esports segment revenue was primarily due to an increase inlower sponsorship revenue from our Le Mans EsportsVirtual Series, Ltd.which completed its 2022-23 season in January 2023.
Cost of Revenues
| For the Three Months Ended, | ||||||||||
| June 30, | ||||||||||
| 2022 | 2021 | |||||||||
| Cost of Revenues: | ||||||||||
| Gaming | $ | 820,740 | $ | 902,751 | ||||||
| Esports | 35,417 | 3,552 | ||||||||
| Total Consolidated Cost of Revenues | $ | 856,157 | $ | 906,303 | ||||||
| For the Three Months Ended March 31, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Cost of revenues: | ||||||||||||||||
| Gaming | $ | 874,839 | $ | 1,404,007 | $ | (529,168 | ) | (37.7 | )% | |||||||
| Esports | 373,897 | 609,799 | (235,902 | ) | (38.7 | )% | ||||||||||
| Total Cost of Revenues | $ | 1,248,736 | $ | 2,013,806 | $ | (765,070 | ) | (38.0 | )% | |||||||
CostConsolidated cost of revenues were $856,157$1.2 million and $2.0 million for the three months ended June 30,2023 and 2022, compared to $906,303 for the three months ended June 30, 2021, representingrespectively, a decrease of $50,146, $0.8 million, or 6%38.0%, when compared to the prior period.
Gaming segment cost of revenues represented 70.1% and 69.7% of our total 2023 and 2022 cost of revenues, respectively, decreasing by $0.5 million, or 37.7%, when compared to the prior period. CostThe decrease in Gaming segment cost of revenues from our Gaming segment decreased $82,010, or 9%.was primarily driven by a $0.2 million reduction in game production costs, a $0.2 million reduction in royalty payments and a $0.1 million reduction in license and developed technology amortization expense The decrease in production costs was primarily due to a $80,327no new physical inventory production in 2023, compared to additional units of NASCAR 21: Ignition being produced in 2022, and the reduction in royalty payments was driven by the decrease in amortization of intangible assets.digital and retail game sales.
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For the three months ended June 30,
Esports segment cost of revenues represented 29.9% and 30.3% of our total 2023 and 2022 cost of revenues, from ourrespectively, decreasing by $0.2 million, or 38.7%, when compared to the prior period. The decrease in Esports segment increased by $31,865 to $35,417 from $3,552 for the three months ended June 30, 2021. The increasecost of revenues was primarily due todriven by $0.2 million of lower studio and televised production costs associated with activities and prizes from the 24 Hoursfinal round of the Le Mans liveVirtual Series event, heldwhich took place in June 2022.January 2023.
Gross Profit
| For the Three Months Ended, | ||||||||||
| June 30, | ||||||||||
| 2022 | 2021 | |||||||||
| Gross Profit: | ||||||||||
| Gaming | $ | 1,121,197 | $ | 1,336,176 | ||||||
| Esports | 31,633 | (3,552 | ) | |||||||
| Total Consolidated Gross Profit | $ | 1,152,830 | $ | 1,332,624 | ||||||
| For the Three Months Ended March 31, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Gross Profit (Loss) | ||||||||||||||||
| Gaming | $ | 564,378 | $ | 1,554,381 | $ | (990,003 | ) | (63.7 | )% | |||||||
| Esports | (83,759 | ) | (246,398 | ) | 162,639 | (66.0 | )% | |||||||||
| Total Gross Profit (Loss) | $ | 480,619 | $ | 1,307,983 | $ | (827,364 | ) | (63.3 | )% | |||||||
| Gaming - Gross Profit Margin | 39.2 | % | 52.5 | % | ||||
| Esports - Gross Profit Margin | (28.9 | )% | $ | (67.8 | )% | |||
| Total Gross Profit Margin | 27.8 | % | 39.4 | % |
Consolidated gross profit was $0.5 million and $1.3 million for 2023 and 2022, respectively, a decrease of $0.8 million, or 63.3%, when compared to the prior period. Gross profit margin was 27.8% in 2023, compared to 39.4% in 2022, where the basis point decrease was driven primarily by lower gaming revenues and certain fixed expenses such as the minimum annual royalty guarantees, as well as amortization costs of developed technology in the Gaming segment.
Gross profit was $1,152,830 for the three months ended June 30, 2022, compared to $1,332,624 for the three months ended June 30, 2021, a decrease of $179,794, or 13%. The gross profit margin for the gaming segment was 58% and 60% of revenues for the three months ended June 30, 2022 and 2021, respectively. The decrease in the gamingGaming segment gross profit was $0.6 million for 2023, compared to $1.6 million for 2022, representing a gross profit margin of 39.2% for 2023 and 52.5% for 2022. The decrease in our Gaming segment gross profit of $1.0 million, and corresponding decrease in gross profit margin, was primarily due to a pricing concession for our consolelower retail and digital game sales of $1.5 million, whereas royalty costs declined by $0.2 million, and amortization of developed technology declined by approximately $0.1 million.
Esports segment gross loss was $0.1 million for 2023, compared to $0.2 million for 2022, representing a decreasenegative gross profit margin of 28.9% and 67.8% for 2023 and 2022, respectively. This improvement in mobile game sales, which have a higher gross margin than the sale of physical game discs. Gross profit from our Esports segment increased $35,185 as there were no esport revenues forgross loss of $0.1 million, and corresponding improvement in negative gross profit margin, was primarily due to lower production costs associated with the three months ended June 30, 2021.final round of the Le Mans Virtual Series event, which took place in January 2023.
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Operating Expenses
For the Three Months Ended March 31, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Sales and marketing | $ | 618,410 | $ | 1,688,449 | $ | (1,070,039 | ) | (63.4 | )% | |||||||
| Development | 2,397,134 | 2,404,338 | (7,204 | ) | (0.3 | )% | ||||||||||
| General and administrative | 2,779,110 | 3,423,153 | (644,043 | ) | (18.8 | )% | ||||||||||
| Impairment of goodwill | - | 4,788,268 | (4,788,268 | ) | (100.0 | )% | ||||||||||
| Impairment of intangible assets | - | 4,491,054 | (4,491,054 | ) | (100.0 | )% | ||||||||||
| Depreciation and amortization | 97,354 | 116,071 | (18,717 | ) | (16.1 | )% | ||||||||||
| Total Operating Expenses | $ | 5,892,008 | $ | 16,911,333 | $ | (11,019,325 | ) | (65.2 | )% | |||||||
Total
Changes in operating expenses were $7,838,245 for the three months ended June 30, 2022, compared to $7,306,028 for the three months ended June 30, 2021, which reflects an increase of $532,216, or 7%, as described below.are explained in more detail below:
Sales and Marketing
Sales and marketing expenses were $1,540,220$0.6 million and $704,222 $1.7 million for 2023 and 2022, respectively, representing a $1.1 million, or 63.4%, decrease when compared to the three months ended June 30, 2022 and 2021, respectively.prior period. The $835,998, or 119%, period over period increasereduction in sales and marketing expensesexpense was primarily driven by incrementala $0.8 million reduction in external marketing expense, efforts, sponsorships, andas well as a $0.3 million reduction in payroll expense as a result of lower headcount additionswhen compared to support the promotion of planned future releases in our product roadmap.prior period.
Development
Development expenses were $2,681,643$2.4 million for both 2023 and $1,818,178 for2022, representing no significant change when compared to the three months ended June 30, 2022prior period. Internal development services decreased by $0.5 million compared to the prior period, whereas external development services increased by $0.3 million and 2021, respectively.technology costs increased by $0.2 million compared to the prior period. The $863,465, or 47%, period over period increase in development expenses was primarily dueincurred relate to additional internal development expenses required tothe production and support of existing games in our product portfolio, as well as the development and launch of future new platform and game releases.games such as the planned INDYCAR title.
General and Administrative
General and administrative (“G&A”) expenses were $3,349,609 and $4,717,180 for the three months ended June 30, 2022 and 2021, respectively, resulting in a $1,367,571, or 29%, decrease. The change in G&A expenses was primarily attributable to $1,059,509 in compensation expense for the settlement of certain stock appreciation rights (“SARs”) paid in the second quarter of 2021, following the acquisition of the remaining minority interest in 704Games.
Impairment of Intangible Assets
Loss on impairment of indefinite-lived intangible assets was $149,048 for the three months ended June 30, 2022, compared to $0 for the three months ended June 30, 2021. The triggers for the interim assessment was the ongoing reduction in the Company’s share price, the receipt of a deficiency letter notice from the NASDAQ stock exchange and the Company’s ongoing liquidity position. The loss on impairment of indefinite-lived intangible assets relates to the rFactor 2 trade name and is primarily driven by a reduction in expected future revenues, as well as changes to the discount rate used when valuing the trade name.
Depreciation and Amortization
Depreciation and amortization expenses were $117,725 and $66,448 for the three months ended June 30, 2022 and 2021, respectively, an increase of $51,277, or 77%. The increase was primarily due to additional depreciation expense for fixed assets acquired during 2022.
Interest Expense
Interest expense was $191,662 and $31,899 for the three months ended June 30, 2022 and 2021, respectively. The increase of $159,763 was primarily due to an increase in non-cash interest for accretion of the INDYCAR license liability.
Other (Expense) Income, Net
Other (expense) income, net was $(610,594) and $44,360 of other income for the three months ended June 30, 2022 and 2021, respectively, an increase of $654,954. Other (expense), net for the three months ended June 30, 2022 was primarily comprised of $47,410 in rental income from the sub-lease of our Charlotte, NC office space offset by a foreign currency loss of $648,672 incurred remeasuring transactions denominated in a currency other than U.S. dollars and translating our foreign operations that are denominated in a functional currency other than U.S. dollars.
Other Comprehensive Income (Loss)
Other comprehensive income (loss) was $136,976 and $(70,809) for the three months ended June 30, 2022 and 2021, respectively. This was primarily due to unrealized foreign currency translation adjustments in our subsidiaries in the U.K., Australia, Russia and the Netherlands.
Six Months Ended June 30, 2022 compared to Six Months Ended June 30, 2021
| For the Six Months Ended, | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Revenues: | ||||||||
| Gaming | $ | 4,900,326 | $ | 4,689,140 | ||||
| Esports | 430,450 | 23,919 | ||||||
| Total Consolidated Revenues | $ | 5,330,776 | $ | 4,713,059 | ||||
Revenues were $5,330,776 and $4,713,059 for the six months ended June 30, 2022 and 2021, respectively, an increase of $617,717, or 13%, period over period. For the six months ended June 30, 2022, revenues from our Gaming segment increased $211,186, or 5%, to $4,900,326, compared to $4,689,140 for the six months ended June 30, 2021. The increase in our Gaming segment revenues compared to the 2021 period was primarily due to $685,824 in higher game sales and an increase of $625,906 in additional revenues earned through the development of simulation platforms using our rFactor 2 platform for third-parties. These increases were primarily offset by higher retail pricing concessions for our console game sales compared to the prior period.
Esports segment revenues were $430,450 and $23,919 for the six months ended June 30, 2022 and 2021, respectively, an increase of $406,531, period over period due to higher sponsorship revenues from the Le Mans Esports Series Ltd.
Cost of Revenues
| For the Six Months Ended, | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cost of Revenues: | ||||||||
| Gaming | $ | 2,224,744 | $ | 1,617,867 | ||||
| Esports | 645,219 | 70,244 | ||||||
| Total Consolidated Cost of Revenues | $ | 2,869,963 | $ | 1,688,111 | ||||
Cost of revenues were $2,869,963 and $1,688,111 for the six months ended June 30, 2022 and 2021, respectively, an increase of $1,181,852, or 70%, period over period.
Cost of revenues from our Gaming segment were $2,224,744 and $1,617,867 for the six months ended June 30, 2022 and 2021, respectively, an increase of $606,877, or 38%, period over period. The change was primarily due to an increase of $275,290 in amortization of intangible assets driven by the acquisition of Studio397, a $165,869 increase in royalties driven by the use of the Epic Unreal engine, a $80,236 increase in development costs for the development of simulation platforms using our rFactor 2 platform for third parties, and a $96,285 increase in game production costs due to manufacturing costs for Nintendo Switch.
Cost of revenues from our Esports segment were $645,219 and $70,244 for the six months ended June 30, 2022 and 2021, respectively, an increase of $574,975, period over period. Cost of revenues in our Esports segment are primarily comprised of production costs including event staff contract labor and television production costs from the 24 Hours of Le Mans live event held in June.
Gross Profit (Loss)
| For the Six Months Ended, | ||||||||
| June 30, | ||||||||
| 2022 | 2021 | |||||||
| Gross Profit: | ||||||||
| Gaming | $ | 2,675,582 | $ | 3,071,273 | ||||
| Esports | (214,769 | ) | (46,325 | ) | ||||
| Total Consolidated Gross Profit | $ | 2,460,813 | $ | 3,024,948 | ||||
Gross profit was $2,460,813, or 46% of revenues, and $3,024,948, or 64% of revenues, for the six months ended June 30, 2022 and 2021, respectively, a decrease of $564,135, or 19%, period over period.
Gaming segment gross profit was $2,675,582 for the six months ending June 30, 2022, compared to $3,071,273 for the six months ended June 30, 2021, a decrease of $395,691, or 13%, period over period. The decrease in gross profit was primarily due to $1,098,397 for retail pricing concessions, a $165,869 increase in royalties, and a $275,290 increase of amortization expense.
Esports segment gross profit loss was $214,769 for the six months ended June 30, 2022, compared to $46,325 for the six months ended June 30, 2021, an increase in loss of $168,444. The increase in gross profit loss was primarily driven by costs relating to broadcast production, staffing, and event production during the 24 Hours of Le Mans live event held in June 2022.
Operating Expenses
Operating expenses were $24,749,578 and $24,375,421 for the six months ended June 30, 2022 and 2021, respectively, an increase of $374,157, as described below.
Sales and Marketing
Sales and marketing expenses were $3,228,669 and $1,728,440 for the six months ended June 30, 2022 and 2021, respectively, representing a $1,500,229, or 87%, increase in sales and marketing expenses period over period. The change was primarily driven by increased headcount expenses of $1,048,368, as well as a $558,084 increase in variable marketing expenses and sponsorships to support the promotion of current and planned future releases.
Development
Development expenses were $5,085,980 and $3,068,540 for the six months ended June 30, 2022 and 2021, respectively, representing an increase of $2,017,440, or 66%, period over period. The incremental development expenses reflect higher compensation due to additional headcount and increased external development expense to develop and support an increased number of games and platforms.
General and Administrative
General and administrative (“G&A”) expenses were $6,772,763$2.8 million and $19,481,218$3.4 million for the six months ended June 30,2023 and 2022, and 2021, respectively, a decrease of $12,708,455,$0.6 million, or 65%18.8%, period overwhen compared to the prior period. The decreasereduction in G&A expenses reflects $2,947,192 of expenses incurredexpense was primarily driven by a $0.2 million reduction in connection with our initial public offering (“IPO”) in January 2021, IPO-related bonuses and stock-based compensation expense, a $0.2 million reduction in payroll and employee related expenses, in the amount of $8,911,361 incurred in the 2021 period and $330,479 of expenses incurred in the acquisition of Studio397 that did not recurfollowing certain headcount reductions in 2022, a $0.1 million reduction in software expenditures, a $0.1 million reduction in insurance allocations, and a $0.1 million reduction in travel costs. These reductions were partially offset by a $519,424 decrease$0.1 million increase in payroll expense primarily attributable to changes to the Company’s executive management team.legal, consultant, and other professional fees incurred in 2023.
Impairment of Goodwill Intangible and Long-Lived Assets
Loss on impairmentImpairment of goodwill was $4,788,268 for the six months ended June 30,$0 and $4.8 million in 2023 and 2022, compared to $0 for the six months ended June 30, 2021.respectively. The impairment loss for 2022 primarily relates to goodwill acquired in connection with the acquisition of Studio397.Studio397 that was deemed impaired as a result of impairment assessments performed during the year. The triggertriggers for the interim assessment wasassessments were primarily due to 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 annual impairment assessment. Changes to the forecasted revenues and discount rates, as a result of the triggers identified, were the primary drivers for the change in fair value since the annual assessment and impairment loss recorded in the six months ended June 30, 2022.assessment.
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Impairment of Intangible Assets
Loss on impairmentImpairment of indefinite-lived intangible assets was $3,319,109$0 and $3.2 million in 2023 and 2022, respectively. The triggers for the six months ended June 30, 2022, compared to $0 for the six months ended June 30, 2021. The trigger for the interim assessment wasassessments were the changes to the Company’s product roadmap and the Company’s market capitalization, as referenced above. The loss on impairment of indefinite-lived intangible assets relatesasset impairment losses primarily relate to the rFactor 2 trade name and the Le Mans Video Gaming License and is primarilyare mainly driven by a reduction in expected future revenues following changes made to the Company’s 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 impairmentImpairment of finite-lived intangible assets was $1,320,993$0 and $1.3 million in 2023 and 2022, respectively. The triggers for the six months ended June 30, 2022, compared to $0 for the six months ended June 30, 2021. The trigger for the interim assessment wasassessments were the changes to the Company’s product roadmap and the Company’s market capitalization, as referenced above. The loss on impairment of finite-lived intangible assets relatesasset impairment losses relate 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 $233,796for 2023 and $97,223 for2022 presented no significant changes to the six months ended June 30, 2022 and 2021, respectively, an increasedepreciation of $136,573, period over period. The increase was primarily due to additional depreciation expense on fixed assets acquired during 2022.capital assets.
Interest Expense
Interest expense was $393,258$0.2 million for the six months ended June 30,both 2023 and 2022 compared to $151,438 for the six months ended June 30, 2021, an increaseprimarily from ongoing non-cash interest accretion of $241,820, period over period. This was primarily due to interest expense forour INDYCAR and BTCC license accretion.
Gain Attributable to Equity Method Investment
The gain (loss) attributable to equity method investment in the Le Mans joint venture was $0 for the six months ended June 30, 2022 and $1,370,837 for the six months ended June 30, 2021. The decrease is due to the discontinuation of equity method accounting as we began to fully consolidate the Le Mans joint venture upon acquiring a majority interest during the first quarter of 2021.liabilities.
Other (Expense)(Expenses) Income, Netnet
Other (expense) income, net was ($772,693)$0.4 million for the six months ended June 30, 2022,2023, compared to $84,707other expense, net of $0.2 million for 2022, an increase of $0.6 million compared to the six months ended June 30, 2021.prior period. Other expenseincome, net of $772,693$0.4 million for the six months ended June 30, 2022,2023 was primarily comprised of $93,898foreign currency gains of $0.2 million, incurred remeasuring transactions denominated in a currency other than U.S. dollars, as well as $0.05 million in rental income from the sub-lease of our Charlotte, NC office space, offset by aand $0.1 million in interest expense forgiveness. Other expenses, net of $0.2 million for 2022 was primarily comprised of foreign currency losslosses of $842,915$0.2 million, incurred remeasuring transactions denominated in a currency other than U.S. dollars, and translating our foreign operations that are denominated in a functional currency other than U.S. dollars. For the six months ended June 30, 2021, other income, net of $84,707 was comprised primarily of $91,164 inpartially offset by rental income from the sub-lease of our Charlotte, NC office space.income.
Other Comprehensive Loss
Other comprehensive loss was $0.01 million for 2023, compared to other comprehensive loss of $0.02 million for 2022. The $0.01 million improvement was primarily due to activity in our U.K., Australian, Georgian and Netherlands subsidiaries and represents unrealized foreign currency translation adjustments.
Net Loss Attributable to Non-Controlling Interest
For 2023, the loss attributable to the non-controlling interest decreased by $0.6 million, or 81%, to a loss of $0.2 million as compared to a loss of $0.8 million for 2022. The improvement was attributed to the reduction of net losses in Le Mans Esports Series Ltd (the “Le Mans Joint Venture”). For 2023 and 2022, the Le Mans Joint Venture incurred a net loss of $0.2 million and $0.8 million respectively.
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Other Comprehensive Income (Loss)
Other comprehensive income (loss) was $11,731 and $(103,723) for the six months ended June 30, 2022 and 2021, respectively. This was primarily due to activity in our U.K., Australian, Russian and Netherlands subsidiaries and represents unrealized foreign currency exchange losses.
Liquidity and Capital Resources
Liquidity
Since our inception and prior to our IPO, we financed our operations primarily through advances from Motorsport Network, which were subsequently incorporated into a line of credit provided by Motorsport Network pursuant to the $12 million Line of Credit, as described below.
On January 15, 2021, we completed our IPO of 3,450,000345,000 shares of Class A common stock at a price to the public of $20.00$200 per share, which includes the exercise in full by the underwriters of their option to purchase from us an additional 450,00045,000 shares of Class A common stock. We received net proceeds of approximately $63,073,783$63.1 million from the IPO, after deducting underwriting discounts and offering expenses paid by us in 2020 and 2021.
Following our IPO, we have financed our operations primarily through cash generated from operations, advances from Motorsport Network pursuant to the $12 million Line of Credit and through sales of our equity securities.
We measure our liquidity in a number of ways, including the following:
| Liquidity Measure | June 30, 2022 | December 31, 2021 | March 31, 2023 | December 31, 2022 | ||||||||||||
| Cash and cash equivalents | $ | 5,223,051 | $ | 17,819,640 | $ | 5,794,556 | $ | 979,306 | ||||||||
| Working capital | $ | 3,161,395 | $ | 16,024,590 | $ | 1,108,482 | $ | (9,278,268 | ) | |||||||
For the sixthree months ended June 30, 2022,March 31, 2023, the Company had a net loss of approximately $23.5$5.3 million, negative cash flows from operations of approximately $12.0$5.7 million and an accumulated deficit of $60.5$79.1 million. As of June 30, 2022,March 31, 2023, we had cash and cash equivalents of $5.2$5.8 million, which was reduced to $3.8$4.9 million as of July 31, 2022.April 30, 2023. 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 developing new video game titles. As previously disclosed,as a result, expect to have negative cash flows from operations for the foreseeable future until our product base is suitably established to create sufficient revenues and cash inflows to support the Company’s operations. Based on the Company’s cash and cash equivalents position and the Company’s average cash burn, we do not believe that our existingwe have sufficient cash on hand will be sufficient to fund our operations for the next 12 months. See Item 1A, “Risk Factors – Risks Relatedremainder of 2023 and that additional funding will be required in order to Our Financial Condition and Liquidity - Limits on the Company’s borrowing capacity under the $12 million Line of Credit may affect the Company’s ability to finance itscontinue operations.”
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 form of potential equity and/or debt financing arrangements and similar transactions and consider these to be viable options to support future liquidity needs, provided that 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.initiatives, such as those that we expect to achieve through the 2022 Restructuring Program. See “2022 Restructuring Program” above for additional information.
As we continue to evaluate incremental funding solutions, we re-evaluated 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 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.
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We expect to generate additional liquidity through consummating equity and/or debt financings or similar transactions, achieving cost reductions by maintaining and enhancing cost control initiatives, such as those that we expect to achieve through the 2022 Restructuring Program and/or further 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, economic conditions in the capital markets, especially for technology companies, 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. |
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 or similar transactions, 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;foreign currency exchange rates; decreased sales of our products and events as a result of increased competitive activities by our competitors; changes in consumer purchasing habits;habits, such as the impact of higher energy prices on consumer purchasing behavior; retailer inventory management or reductions in retailer display space; less than anticipated results from the Company’s existing or new products or from its advertising and/or marketing plans; or if the Company’s expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, our liquidity may continue to be insufficient to satisfy our future capital requirements.
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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 condensedthe accompanying consolidated financial statements to this Report 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.
Cash Flows Fromfrom Operating Activities
Net cash used in operating activities for the sixthree months ended June 30,March 31, 2023 and 2022 was $5.7 million and 2021 was $12,049,298 and $11,264,546,$5.6 million, respectively. The net cash used in operating activities for the sixthree months ended June 30, 2022March 31, 2023 was primarily a result of cash used to fund a net loss of $23,454,716,$5.3 million, adjusted for net non-cash adjustments of $12,386,480$1.2 million and $981,062$1.6 million of cash used by changes in the levels of operating assets and liabilities. Net cash used in operating activities for the sixthree months ended June 30, 2021March 31, 2022 was primarily due to net loss of $20,046,366,$16.0 million, adjusted for non-cash expenses in the amount of $8,681,602 $10.5 million and by $100,219 $0.1 million of cash used to fund changes in the levels of operating assets and liabilities.
Cash Flows Fromfrom Investing Activities
Net cash used in investing activities for the sixthree months ended June 30,March 31, 2023 and 2022 was $196,346,$0.02 million and $0.1 million, respectively, which was attributable to the purchases of property and equipment. During the six months ended June 30, 2021, net cash used in investing activities was $14,008,174, which was attributable to approximately $12,785,500 paid in connection with the acquisition of Studio397 and $1,000,000 paid in connection with the acquisition of KartKraft, and approximately $348,000 in purchases of property and equipment, which was partially offset by $153,250 of net cash acquired in the purchase of an additional controlling interest in Le Mans Esports Series Ltd.
Cash Flows Fromfrom Financing Activities
Net cash provided by (used in) financing activities during the sixthree months ended June 30,March 31, 2023 and 2022 was $10.7 million and 2021 was ($981,396) and $49,501,815,$0.1 million, respectively. Cash flows used inprovided by financing activities for the sixthree months ended June 30, 2022 wasMarch 31, 2023 were primarily attributable to $1,000,000 payment of purchase commitment liability relating to a portion of the deferred installment amount due$0.6 million raised in connection with our acquisitionshares sold under the Alumni Purchase Agreement (as defined below) and $10.4 million raised in connection with shares sold in the Company’s registered direct offerings, partially offset by $0.3 million of Studio397 and $118,604 in net advances from related parties.payments for purchase commitments. During the sixthree months ended June 30, 2021,March 31, 2022, net cash provided by financing activities was primarily attributable to approximately $63,700,000 $0.1 million of net cash provided by the sale of Class A Common stock in our IPO, partially offset by $advances from related parties.
10,800,000 of net repayments to Motorsport Network.
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Promissory Note Line of Credit
On April 1, 2020, the Company entered into a promissory note (the “$12 million Line of Credit”) with the Company’s majority stockholder, Motorsport Network, that provides the Company with a line of credit of up to $10,000,000$10 million (which was subsequently increased to $12,000,000$12 million pursuant to an amendment executed in November 2020), at an interest rate of 10% per annum, the availability of which is dependent on Motorsport Network’s available liquidity. The $12 million Line of Credit does not have a stated maturity date and is payable upon demand at any time at the sole and absolute discretion of 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 otherwise 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.Network. 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.
During the six months ended June 30, 2022, there was no activity under the $12 million Line of Credit and the balance due to Motorsport Network was $0 as of June 30, 2022. Subsequent to June 30, 2022, the Company has not made any advances or repayments of the $12 million Line of Credit. See Item 1A, Additionally, see “Risk Factors – Risks Related to ourOur Financial Condition and Liquidity - Limits on the Company’s borrowing capacity under the $12 million Line of Credit may affect the Company’s ability to finance its operations.”operations” in Part I, Item 1A of the 2022 Form 10-K.
On September 8, 2022, the Company entered into a support agreement with Motorsport Network (the “Support Agreement”) pursuant to which Motorsport Network issued approximately $3 million (the “September 2022 Cash Advance”) to the Company in accordance with the $12 million Line of Credit, the proceeds of which the Company is using for general corporate purposes and working capital. In the Support Agreement, Motorsport Network and the Company terminated the Side Letter Agreement dated September 4, 2020 and agreed that until June 30, 2024, Motorsport Network would not demand repayment of the September 2022 Cash Advance or other advances under the $12 million Line of Credit unless and until such time that any of the following shall occur or exist: (i) the Company enters into a new financing arrangement (whether debt, equity or otherwise) under which the Company is then able to draw or provides the Company with available cash in excess of amounts required in the Company’s reasonable judgment to run its operations in the ordinary course of business; (ii) the Company generates from operations available cash in excess of amounts required in the Company’s reasonable judgment to run its operations in the ordinary course of business; or (iii) the Company’s independent auditors issue an unqualified opinion on its financial statements and the Company’s repayment of the advances, in whole or in part, would not otherwise cause the independent auditor to issue a going concern qualified opinion. Upon the occurrence of any of the foregoing events, the Company shall prepay on such date principal amount of the September 2022 Cash Advance and other advances under the $12 million Line of Credit then outstanding in an amount equal to such available excess cash or, in the case of (iii) above, the amount that would not cause the Company’s independent auditor to issue a going concern qualified opinion, together with interest accrued but unpaid on the unpaid September 2022 Cash Advance and other advances, which repayment obligation shall continue until all such advances under the $12 million Line of Credit are paid in full. The entire aggregate principal amount of the September 2022 Cash Advance and the other advances under the $12 million Line of Credit, together with interest accrued but unpaid thereon, shall also become immediately and automatically due and payable, and the $12 million Line of Credit shall immediately and automatically terminate, in each case without any action required by Motorsport Network, if (i) the Company experience an event of default under any other debt instrument, agreement or arrangement; or (ii) any final judgment or final judgments for the payment of money in excess (net of amounts covered by third-party insurance with insurance carriers who have not disclaimed liability with respect to such judgment or judgments) of $500,000 or its foreign currency equivalent is entered against the Company or any subsidiary and is not discharged and either (a) an enforcement proceeding has been commenced by any creditor upon such judgment or decree or (b) there is a period of 60 days following the entry of such judgment or decree during which such judgment or decree is not discharged, waived or the execution thereof stayed and, in the case of (b), such default continues for 60 consecutive days.
On January 30, 2023 and February 1, 2023, the Company entered into certain debt-for-equity exchange agreements with Motorsport Network pursuant to which the entire outstanding amount due under the $12 million Line of Credit was cancelled in exchange for an aggregate of 780,385 shares of the Company’s Class A common stock issued to Motorsport Network. See Note 5 – Related Party Loans in our condensed consolidated financial statements for further information. As of March 31, 2023, the balance due to Motorsport Network under the $12 million Line of Credit was $0.
Given the state of the financial markets, the Company continues to assess its exposure to any potential non-performance by Motorsport Network and believes that there is a substantial likelihood that Motorsport Network may not fulfill the Company’s future borrowing requests.
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Other Financing Activity
On December 9, 2022, the Company entered into a stock purchase commitment agreement (the “Alumni Purchase Agreement”) with Alumni Capital LP (“Alumni Capital”), which provides that the Company may sell to Alumni Capital up to $2,000,000 of shares (the “commitment amount”) of the Company’s Class A common stock, through the commitment period expiring on December 31, 2023, or earlier if the commitment amount is reached. Furthermore, the Company has an option to increase the commitment amount up to $10,000,000 of shares of the Company’s Class A common stock, subject to certain terms and conditions. During the three months ended March 31, 2023, the Company issued an aggregate of 175,167 shares of the Company’s Class A common stock to Alumni Capital under the Alumni Purchase Agreement with an aggregate fair market value of approximately $0.65 million. As of March 31, 2023, the remaining commitment amount under the Alumni Purchase Agreement amounted to approximately $1.3 million.
On February 1, 2023, the Company issued 183,020 shares of the Company’s Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately $3.9 million (the “$3.9 million RDO”), before deducting placement agent fees and other offering expenses payable by the Company. H.C. Wainwright & Co., LLC (“Wainwright”) acted as the exclusive placement agent for the $3.9 million RDO, pursuant to the engagement letter with the Company, dated as of January 9, 2023. In connection with the $3.9 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of $50,000 and closing fees of $15,950. The Company has also issued to Wainwright warrants to purchase up to 10,981 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the $3.9 million RDO, at an exercise price of $26.75 per share and will expire five years from the closing of the $3.9 million RDO.
On February 2, 2023, the Company issued 144,366 shares of the Company’s Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately $3.4 million (the “$3.4 million RDO”), before deducting placement agent fees and other offering expenses payable by the Company. Wainwright acted as the exclusive placement agent for the $3.4 million RDO. In connection with the $3.4 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of $25,000 and closing fees of $15,950. The Company has also issued to Wainwright warrants to purchase up to 8,662 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the $3.4 million RDO, at an exercise price of $29.375 per share and will expire five years from the closing of the $3.4 million RDO.
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On February 3, 2023, the Company issued 232,188 shares of the Company’s Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately $4.0 million (the “$4.0 million RDO”), before deducting placement agent fees and other offering expenses payable by the Company. Wainwright acted as the exclusive placement agent for the $4.0 million RDO. In connection with the $4.0 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of $25,000 and closing fees of $15,950. The Company has also issued to Wainwright and its designees warrants to purchase up to 13,931 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the $4.0 million RDO, at an exercise price of $21.738 per share and will expire five years from the closing of the $4.0 million RDO.
Capital Expenditures
The nature of the Company’s operations does not require significant expendituresexpenditure 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 June 30, 2022.March 31, 2023.
Material Cash Requirements
On April 22, 2022, the Company entered into a letter agreement (the “Amendment”) amending the terms of (i) the share purchase agreement dated March 31, 2021 (the “SPA”) with Luminis International BV, Technology In Business B.V. (“TIB”) and certain of TIB’s shareholders parties to such Amendment and (ii) the related deed of pledge that secured the Company’s payment of the $3,200,000 deferred purchase price installment under the SPA.
Pursuant to the Amendment, the deferred purchase price installment due to be paid 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 made the $1,000,000 payment. Further, pursuant to the Amendment, secured obligations under the deed of pledge were correspondingly reduced from $3,200,000 to $2,200,000 following the finalization of an amendment to the deed of pledge on May 12, 2022. The $1,000,000 payment was made on April 30, 2022.
On July 21, 2022, the Company and Luminis entered into a second amendment (the “Second Amendment”) to the SPA. The $2,200,000 deferred purchase price payment due under the Second Amendment shall be paid as follows:
(a) an initial installment of $330,000 which was paid within 5 business days of executing the Second Amendment;
(b) monthly installments of $100,000 from August 15, 2022 through December of 2022, payable on the 15th day of each month; and
(c) monthly installments of $150,000 from January 15, 2023 until such time as the entire unpaid $1,870,000 balance of the deferred purchase price payment due under the Second Amendment, together with simple interest on the unpaid balance accruing, starting on the date of the Second Amendment, at 15% per annum, is paid in full, payable on the 15th day of each month.
There have been no other 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 20212022 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
There have been no material changes to the items disclosed as critical accounting policies and estimates under “Liquidity and Capital Resources—Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the 20212022 Form 10-K, with the exception of an additional critical estimate identified in respect of finite-lived intangible assets.10-K.
Valuation 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 largely 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 cost to recreate model for the interim impairment reviews completed during the six months ended June 30, 2022 were:
If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying value, the finite-life intangible asset is not considered impaired.
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
Not applicable.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and 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 June 30, 2022.March 31, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2022March 31, 2023 because of the material weaknessesweakness in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) as discussed in Part II, Item 9A, “Controls and Procedures” of the 20212022 Form 10-K, and that continued to exist as of June 30, 2022.March 31, 2023.
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Remediated Material Weaknesses
RemediationDuring the first quarter of Material Weaknessesour fiscal year ended December 31, 2023, we implemented internal control procedures to address previously identified material weaknesses related to (1) the documentation of significant accounting positions, estimates and conclusions that were not contemporaneously formalized and reviewed independently of the preparer; and (2) the segregation of duties. In connection with the identification of material weaknesses in our internal control over financial reporting, we evaluated, designed, and implemented controls and procedures to address these weaknesses. These measures included enhanced documentation of accounting positions, estimates and conclusions, including reviews independent of the preparer, and the removal of segregation of duties conflicts within our key financial reporting processes. During the first quarter of our fiscal year ended December 31, 2023, we completed our assessment of the operating effectiveness of these controls. After completing our assessment of the design and operating effectiveness of these new controls and procedures, we concluded that we have remediated the previously identified material weaknesses as of March 31, 2023.
Although weRemediation of the Remaining Material Weakness
We have not yet remediated the material weaknessesweakness relating to our failure to design and maintain effective monitoring procedures and controls to evaluate the effectiveness of our individual control activities, that we identified in the 20212022 Form 10-K, we10-K. We believe that we have made and continue to make progress on the remediation plans described in our 20212022 Form 10-K, under Item 9A, “Controls and Procedures.”
During the period ended June 30, 2022,March 31, 2023, we continued to make improvements to controls and continued our evaluation and documentation of risks and key controls forming part of the significant business processes, including the internal control over financial reporting risk assessment scoping, development of risk control matrices and identification of key transaction level and entity level controls (ELCs), disclosure controls and procedures, financial statement close and financial reporting (FSCFR), revenue, equity, accounts payable, accruals, taxes, and information technology general controls. Management plans to complete the remediation of the previously identified material weaknesses during 2023.that require testing on an ongoing basis.
Limitations on the Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
Except as described above, there were no other changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) under the Exchange Act during the quarter ended June 30, 2022,March 31, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
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,flows, except as otherwise disclosed in this Report. In light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period. See Note 119 – Commitments and Contingencies – Litigation in our condensed consolidated financial statements for additional information.
Item 1A. Risk Factors
In additionto the other information set forth in this Report, you should carefully consider the factors discussed in “Risk Factors” in Part I, Item 1A of the 20212022 Form 10-K, and the risk factorfactors described below, which could materially affect our business, financial condition or future results. The risks described in the 20212022 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.
Other than the following, there have been no significant changes to the risk factors set forth in the 20212022 Form 10-K:
Risks Related to Our Financial Condition and Liquidity
Limits on the Company’s borrowing capacity under the $12 million Line of Credit may affect the Company’s ability to finance its operations.
At July 31, 2022, the Company had a total liquidity position of approximately $3.8 million, consisting of cash and cash equivalents on hand. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources – Liquidity.” With such limited capital resources, the Company has disclosed that it believes its existing cash on hand will not be sufficient to fund its operations for the next 12 months and it will be required to raise equity and/or debt capital from external sources. With there being no assurances that capital will be available from such external sources and while the $12 million Line of Credit with the Company’s majority stockholder, Motorsport Network, was undrawn as of July 31, 2022, the Company’s ability to borrow funds under such facility is limited by the lender’s ability to fund such borrowing requests. If and to the extent that Motorsport Network were to be unable to fund any such requests, the Company will not have complete access to some or all of the commitment available under the $12 million Line of Credit, but rather would have access to a lesser amount as determined by Motorsport Network’s ability to fund the Company’s borrowing requests. Given the state of the financial markets, the Company has recently assessed its exposure to any potential non-performance by Motorsport Network and believes that there is a substantial likelihood that Motorsport Network will not fulfill any of the Company’s borrowing requests for the foreseeable future. Because of these limitations, the Company does not rely on being able to meet its cash requirements with any fundings under the $12 million Line of Credit. If Motorsport Network is unable to fulfill their commitment to advance funds to the Company under the $12 million Line of Credit, it would impact the Company’s potential sources of liquidity and, depending upon the amount involved and the Company’s liquidity requirements, it could have an adverse effect on the Company’s ability to fund its operations, which could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows.
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 remains ongoing. 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:
Risks Related to Ownership of Our Class A Common StockCompany
Our Class A common stockWe may be delisted from The Nasdaq Capital Market,not successfully manage the transitions associated with certain of our executive officers, which could affect its market price and liquidity.have an adverse impact on us.
We are requiredOn September 9, 2022, Jonathan New notified us of his decision to continually meet NASDAQ’s listing requirements,resign from his role as our Chief Financial Officer, effective September 23, 2022. Effective March 20, 2023, we appointed Jason Potter to serve as our Chief Financial Officer. Prior to Mr. Potter’s appointment to the permanent Chief Financial Officer role, we had other individuals, including among other things, a minimum closing bid price requirementDmitry Kozko, our former Chief Executive Officer, serve in an Interim Chief Financial Officer capacity. Additionally, on April 14, 2023, the Company’s board of $1.00 per share for 30 consecutive business days. As described in a Current Report on Form 8-K fileddirectors determined to terminate Mr. Kozko’s employment with the SEC on June 9, 2022, on June 6, 2022, we receivedCompany as its Chief Executive Officer without “Cause” (as such term is defined in Mr. Kozko’s employment agreement) effective as of April 19, 2023. In connection with Mr. Kozko’s termination, the Company’s board of directors appointed Stephen Hood as the Company’s new Chief Executive Officer and President. Leadership transitions may be inherently difficult to manage, and inadequate transitions to a deficiency letter fromnew Chief Executive Officer and/or Chief Financial Officer may cause disruption within the Company. In addition, our financial performance and ability to meet operational goals and strategic plans may be adversely impacted. This may also impact our ability to retain and hire other key members of management. NASDAQ’s Listing Qualifications Department notifying us that, for the last 30 consecutive business days, the bid price for our Class A common stock had closed below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Rule”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until December 5, 2022, to regain compliance with the Rule. To regain compliance, the closing bid price for our Class A common stock must remain above $1.00 for 10 consecutive business days.
If we do not regain compliance with the Rule by December 5, 2022, NASDAQ will provide written notice that our Class A common stock is subject to delisting. At such time, we would be entitled to appeal the delisting determination to a NASDAQ Hearing Panel. We cannot provide any assurance that our Class A common stock price will recover within the permitted remediation period. We intend to monitor the closing bid price of our Class A common stock and may, if appropriate, consider implementing available options, including a reverse stock split, to regain compliance with the minimum closing bid price requirement.
Any delisting of our Class A common stock from The Nasdaq Capital Market could adversely affect our ability to attract new investors, reduce the liquidity of our outstanding shares of Class A common stock, reduce our ability to raise additional capital, reduce the price at which our Class A common stock trades, result in negative publicity and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholders. We cannot assure you that our Class A common stock, if delisted from The Nasdaq Capital Market, will be listed on another national securities exchange or quoted on an over-the-counter quotation system. In addition, delisting of our Class A common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our Class A common stock and might deter certain institutions and persons from investing in our securities at all. For these reasons and others, delisting could adversely affect our business, financial condition and liquidity.
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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, 2022.March 31, 2023, other than as reported in our Current Reports on Form 8-K filed with the SEC.
Purchases of Equity Securities
We did not purchase any shares of our Class A common stock during the quarter ended June 30, 2022.March 31, 2023.
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 $63,074,128 from our 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, 2022, we have used $62,227,397 of the net proceeds from our IPO, including (i) approximately $12,967,000 for the repayment of a the outstanding amount due under the $12 million Line of Credit entered into with Motorsport Network, our majority stockholder; (ii) approximately $18,399,212 in connection with the acquisitions of Studio397, KartKraft and 704Games; (iii) $27,058,687 for working capital and general corporate purposes; (iv) $855,306 in capital expenditures; and (v) $2,947,192 in IPO-related expenses and bonuses.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
On August 9, 2022, the Company terminated the Lemon City Lease in accordance with its terms, without penalty, effective as of October 8, 2022
| 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 | 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 | |||||||
| 10.2 | Letter Agreement, dated July 21, 2022 but effective as of July 19, 2022, to further 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 | 7/22/22 | |||||||
| 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 | ||||||||||
Item 6. Exhibits
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| 10.7 | Form of Securities Purchase Agreement, dated as of February 3, 2023, between Motorsport Games Inc. and the purchaser identified on the signature page thereto | 8-K | 001-39868 | 10.1 | 2/6/23 | |||||||
| 10.8 | Consultancy Agreement, executed on February 13, 2013, but effective as of February 1, 2023, among Motorsport Games Inc. and Paula Sagnier Limited. | 8-K | 001-39868 | 10.1 | 2/14/23 | |||||||
| 10.9 | Statement of Terms and Conditions of Employment, effective as of April 19, 2023, between Motorsport Games Limited (the Company’s UK subsidiary) and Stephen Hood | 8-K | 001-39868 | 10.1 | 4/19/23 | |||||||
| 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 |
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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: | /s/ | |
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ | |
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) |