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 | ||
Incorporation or Organization | I.R.S. Employer Identification No. | |
5972 NE 4th Avenue | ||
Miami, FL | 33137 | |
| Address of Principal Executive Offices | Zip Code |
Registrant’s Telephone Number, Including Area Code: (305) 507-8799
Not Applicable
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Class A common stock, $0.0001 par value per share | MSGM | The Nasdaq Stock Market LLC (The Nasdaq Capital Market) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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 No☒ ☒
As of August 21, 2023,May 7, 2024, 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, 2023March 31, 2024
TABLE OF CONTENTS
| i |
CAUTIONARYNOTE 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 liquidity and capital requirements, including, without limitation, as to our ability to continue as a going concern; our belief that we will not have sufficient cash on hand to fund our operations | |
| ● | the sale of our | |
| ● | our intended corporate purpose to make the thrill of motorsports accessible to everyone by creating the highest quality, most sophisticated and most innovative experiences for racers, gamers and fans of all ages; | |
| ● | new or planned products or offerings, including the anticipated timing of |
| ii |
| ● | our plans to strive to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing games as well as on behalf of third-party racing game developers and publishers; | |
| ● | our intention to continue exploring opportunities to expand the recurring portion of our esports segment outside of Le Mans; | |
| ● | our belief that connecting virtual racing gamers and esports fans on a digital entertainment and social platform represents the greatest opportunity to enhance the way that people learn, watch, play, and experience racing video games and racing esports; | |
| ● | our | |
| ● | our belief that our esports business has the potential to generate incremental revenues through the further sale of media rights to our esports events and competitions, as well as, among other things, merchandising, |
| ● | 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 | |
| ● | our intended use of proceeds from the sales of our equity securities; | |
| ● | our statements and assumptions relating to the impairment of assets; | |
| ● | our plans and intentions with respect to our remediation efforts to address the material |
| ● | our belief that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows, except as otherwise disclosed in this Report, and that in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular | |
| ● | our intention to not declare dividends in the foreseeable future; | |
| ● | our ability to utilize net operating loss carryforwards; | |
| ● | our expectations regarding the future impact of implementing management strategies, adopting new accounting standards, potential acquisitions and industry trends; | |
| ● | our plans and intentions to regain compliance with the listing requirements of The Nasdaq Stock Market LLC (“NASDAQ”), including our plan to negotiate and implement equity financing transactions and negotiate reductions of our licensing liabilities; | |
| ● | our belief that we may decide in the future to avail ourselves of certain corporate governance requirements of | |
| ● | our expectations relating to | |
| ● | our |
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, 20222023 (the “2022“2023 Form 10-K”) and in “Risk Factors” in Part II, Item 1A of this Report, as updated in our subsequent filings with the Securities and Exchange Commission (the “SEC”). In addition to factors that may be described in our filings with the SEC, including this Report, the following factors, among others, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us:
| (i) | difficulties and/or delays in accessing available liquidity, and other unanticipated difficulties in resolving our continuing financial condition and ability to obtain additional capital to meet our financial obligations, including, without limitation, difficulties in securing funding that is on commercially acceptable terms to us or at all, such as our inability to complete in whole or in part any potential debt and/or equity financing transactions or similar transactions, any inability to achieve cost reductions, including, without limitation, those which we expect to achieve through | |
| (ii) | difficulties, delays or less than expected results in achieving our growth plans, objectives and expectations, such as due to a slower than anticipated economic recovery and/or our inability, in whole or in part, to continue to execute our business strategies and plans, such as due to less than anticipated customer acceptance of our new game titles, our experiencing difficulties or the inability to launch our games as planned, less than anticipated performance of the games impacting customer acceptance and sales and/or greater than anticipated costs and expenses to develop and launch our games, including, without limitation, higher than expected labor costs; | |
| iv |
| (iii) | difficulties, delays in or unanticipated events that may impact the timing and scope of new product launches, such as due to difficulties and/or delays related to our transition from using development staff in Russia to using development staff in other countries and/or difficulties and/or delays arising out of any resurgence of the | |
| (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 the ongoing war between Russia and Ukraine; | |
| (v) | ||
| 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; |
| difficulties and/or delays adversely impacting our ability to successfully manage and integrate any joint ventures, acquisitions of businesses, solutions or technologies; | |||
| (vii) | |||
| unanticipated operating costs, transaction costs and actual or contingent liabilities; | |||
| difficulties and/or delays adversely impacting our ability to attract and retain qualified employees and key personnel; | |||
| adverse effects of increased competition; | |||
| 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; | |||
| difficulties and/or delays adversely impacting our ability to protect our intellectual property; | |||
| local, industry and general business and economic conditions; | |||
| 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; | |||
| difficulties, delays or our inability to successfully complete | |||
| higher than anticipated restructuring charges and/or payments and/or changes in the expected timing of such charges and/or | |||
| difficulties, delays, less than expected results or our inability to successfully implement any strategic alternative or potential option for our business, including, but not limited to, the sale or licensing of certain of our assets, which could result in, among other things, less than expected financial benefits from such | |||
| (xvii) | difficulties and/or delays or unanticipated developments adversely impacting our ability to regain compliance with the NASDAQ’s listing requirements, such as our inability to negotiate and implement equity financing transactions and/or negotiate reductions of our licensing liabilities. |
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, 2023 | December 31, 2022 | March 31, 2024 | December 31, 2023 | |||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 1,966,553 | $ | 979,306 | $ | 1,252,691 | $ | 1,675,210 | ||||||||
| Accounts receivable, net of allowances of $2,532,383 and $2,252,383 as of June 30, 2023 and December 31, 2022, respectively | 1,018,784 | 1,809,110 | ||||||||||||||
| Due from related parties | 68,421 | 206,532 | ||||||||||||||
| Accounts receivable, net of allowances of $450,000 as of March 31, 2024 and December 31, 2023, respectively | 1,423,423 | 735,839 | ||||||||||||||
| Prepaid expenses and other current assets | 1,043,214 | 1,048,392 | 1,474,092 | 1,106,848 | ||||||||||||
| Total Current Assets | 4,096,972 | 4,043,340 | 4,150,206 | 3,517,897 | ||||||||||||
| Property and equipment, net | 394,608 | 522,433 | 175,199 | 247,693 | ||||||||||||
| Operating lease right of use assets | 300,265 | 971,789 | 148,725 | 197,307 | ||||||||||||
| Intangible assets, net | 8,544,394 | 13,360,230 | 5,349,403 | 5,795,807 | ||||||||||||
| Total Assets | $ | 13,336,239 | $ | 18,897,792 | $ | 9,823,533 | $ | 9,758,704 | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 876,198 | $ | 2,372,219 | $ | 1,509,469 | $ | 813,659 | ||||||||
| Accrued expenses and other current liabilities | 3,359,598 | 3,416,424 | 2,479,993 | 1,891,315 | ||||||||||||
| Due to related parties | 32,129 | 4,589,211 | 48,265 | 77,716 | ||||||||||||
| Purchase commitments | 2,239,821 | 2,563,216 | 4,628,779 | 4,656,538 | ||||||||||||
| Operating lease liabilities (current) | 190,604 | 380,538 | 109,171 | 153,015 | ||||||||||||
| Total Current Liabilities | 6,698,350 | 13,321,608 | 8,775,677 | 7,592,243 | ||||||||||||
| Operating lease liabilities (non-current) | 112,900 | 617,288 | 39,856 | 45,659 | ||||||||||||
| Other non-current liabilities | 3,105,037 | 3,055,498 | 16,175 | 31,098 | ||||||||||||
| Total Liabilities | 9,916,287 | 16,994,394 | 8,831,708 | 7,669,000 | ||||||||||||
| Commitments and contingencies (Note 9) | - | - | - | - | ||||||||||||
| Stockholders’ Equity: | ||||||||||||||||
| Preferred stock, $ par value per share; authorized and shares; and issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | - | - | ||||||||||||||
| Class A common stock - $ par value per share; authorized and shares; and shares issued and outstanding as of June 30, 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 June 30, 2023 and December 31, 2022, respectively | 70 | 70 | ||||||||||||||
| Preferred stock, $ par value; authorized and shares; and issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | - | - | ||||||||||||||
| Class A common stock, $ par value; authorized and shares; and shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | 269 | 269 | ||||||||||||||
| Class B common stock, $ par value; authorized and shares; and shares issued and outstanding as of March 31, 2024 and December 31, 2023, respectively | 70 | 70 | ||||||||||||||
| Common stock, value | 70 | 70 | 70 | 70 | ||||||||||||
| Additional paid-in capital | 91,736,545 | 76,446,061 | 91,991,502 | 91,923,311 | ||||||||||||
| Accumulated deficit | (87,251,102 | ) | (73,979,131 | ) | (88,665,020 | ) | (87,030,270 | ) | ||||||||
| Accumulated other comprehensive loss | (1,208,945 | ) | (933,406 | ) | (1,269,983 | ) | (1,850,216 | ) | ||||||||
| Total Stockholders’ Equity Attributable to Motorsport Games Inc. | 3,276,837 | 1,533,711 | 2,056,838 | 3,043,164 | ||||||||||||
| Non-controlling interest | 143,115 | 369,687 | (1,065,013 | ) | (953,460 | ) | ||||||||||
| Total Stockholders’ Equity | 3,419,952 | 1,903,398 | 991,825 | 2,089,704 | ||||||||||||
| Total Liabilities and Stockholders’ Equity | $ | 13,336,239 | $ | 18,897,792 | $ | 9,823,533 | $ | 9,758,704 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| 2024 | 2023 | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2024 | 2023 | |||||||||||||||||||
| Revenues | $ | 1,739,130 | $ | 2,008,987 | $ | 3,468,485 | $ | 5,330,776 | $ | 3,029,036 | $ | 1,729,355 | ||||||||||||
| Cost of revenues [1] | 866,167 | 856,157 | 2,114,903 | 2,869,963 | ||||||||||||||||||||
| Cost of revenues | 666,627 | 1,248,736 | ||||||||||||||||||||||
| Gross profit | 872,963 | 1,152,830 | 1,353,582 | 2,460,813 | 2,362,409 | 480,619 | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Sales and marketing [2] | 434,788 | 1,540,220 | 1,053,198 | 3,228,669 | ||||||||||||||||||||
| Development [3] | 1,787,768 | 2,681,643 | 4,184,902 | 5,085,980 | ||||||||||||||||||||
| General and administrative [4] | 3,154,233 | 3,349,609 | 5,933,343 | 6,772,763 | ||||||||||||||||||||
| Impairment of goodwill | - | - | - | 4,788,268 | ||||||||||||||||||||
| Impairment of intangible assets | 4,004,627 | 149,048 | 4,004,627 | 4,640,102 | ||||||||||||||||||||
| Sales and marketing [1] | 250,386 | 618,410 | ||||||||||||||||||||||
| Development [2] | 1,063,357 | 2,397,134 | ||||||||||||||||||||||
| General and administrative [3] | 2,190,266 | 2,779,110 | ||||||||||||||||||||||
| Depreciation and amortization | 104,854 | 117,725 | 202,208 | 233,796 | 73,724 | 97,354 | ||||||||||||||||||
| Total operating expenses | 9,486,270 | 7,838,245 | 15,378,278 | 24,749,578 | 3,577,733 | 5,892,008 | ||||||||||||||||||
| Loss from operations | (8,613,307 | ) | (6,685,415 | ) | (14,024,696 | ) | (22,288,765 | ) | (1,215,324 | ) | (5,411,389 | ) | ||||||||||||
| Interest expense | �� | (244,750 | ) | (191,662 | ) | (443,870 | ) | (393,258 | ) | (30,882 | ) | (199,120 | ) | |||||||||||
| Other income (expense), net | 657,175 | (610,594 | ) | 1,008,492 | (772,693 | ) | ||||||||||||||||||
| Other (expense) income, net | (437,192 | ) | 351,317 | |||||||||||||||||||||
| Net loss | (8,200,882 | ) | (7,487,671 | ) | (13,460,074 | ) | (23,454,716 | ) | (1,683,398 | ) | (5,259,192 | ) | ||||||||||||
| Less: Net loss attributable to non-controlling interest | (29,858 | ) | (82,375 | ) | (188,103 | ) | (911,803 | ) | (48,648 | ) | (158,245 | ) | ||||||||||||
| Net loss attributable to Motorsport Games Inc. | $ | (8,171,024 | ) | $ | (7,405,296 | ) | $ | (13,271,971 | ) | $ | (22,542,913 | ) | $ | (1,634,750 | ) | $ | (5,100,947 | ) | ||||||
| Net loss attributable to Class A common stock per share: | ||||||||||||||||||||||||
| Basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||||||
| Weighted-average shares of Class A common stock outstanding: | ||||||||||||||||||||||||
| Basic and diluted | ||||||||||||||||||||||||
| [1] | Includes related party |
| [2] | Includes related party expenses of $0 and $ |
| [3] | Includes related party expenses of $ |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
| 2024 | 2023 | |||||||||||||||||||||||
| Three Months Ended June 30, | For the Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2024 | 2023 | |||||||||||||||||||
| Net loss | $ | (8,200,882 | ) | $ | (7,487,671 | ) | $ | (13,460,074 | ) | $ | (23,454,716 | ) | $ | (1,683,398 | ) | $ | (5,259,192 | ) | ||||||
| Other comprehensive (loss) income: | ||||||||||||||||||||||||
| Other comprehensive gain (loss): | ||||||||||||||||||||||||
| Foreign currency translation adjustments | (196,951 | ) | 136,976 | (275,539 | ) | 11,731 | 580,233 | (78,588 | ) | |||||||||||||||
| Comprehensive loss | (8,397,833 | ) | (7,350,695 | ) | (13,735,613 | ) | (23,442,985 | ) | (1,103,165 | ) | (5,337,780 | ) | ||||||||||||
| Comprehensive loss attributable to non-controlling interests | (32,009 | ) | (140,224 | ) | (226,572 | ) | (1,028,945 | ) | (111,553 | ) | (194,563 | ) | ||||||||||||
| Comprehensive loss attributable to Motorsport Games Inc. | $ | (8,365,824 | ) | $ | (7,210,471 | ) | $ | (13,509,041 | ) | $ | (22,414,040 | ) | $ | (991,612 | ) | $ | (5,143,217 | ) | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| For the Three and Six Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
Equity / Member’s | Total | |||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Accumulated Other | Equity Attributable | Stockholders’ | |||||||||||||||||||||||||||||||||||
Common Stock | Common Stock | Paid-In | Accumulated | Comprehensive | to Motorsport | Non-controlling | Member’s | |||||||||||||||||||||||||||||||||
| 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 debt | 780,385 | 78 | - | - | 3,948,488 | - | - | 3,948,566 | - | 3,948,566 | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 249,233 | - | - | 249,233 | - | 249,233 | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | (78,588 | ) | (78,588 | ) | (36,318 | ) | (114,906 | ) | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (5,100,947 | ) | - | (5,100,947 | ) | (158,245 | ) | (5,259,192 | ) | ||||||||||||||||||||||||||
| Balance - March 31, 2023 | 2,698,934 | $ | 269 | 700,000 | $ | 70 | $ | 91,215,242 | $ | (79,080,078 | ) | $ | (1,011,994 | ) | $ | 11,123,509 | $ | 175,124 | $ | 11,298,633 | ||||||||||||||||||||
| Stock-based compensation | 21,394 | - | - | - | 521,303 | - | - | 521,303 | - | 521,303 | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | (196,951 | ) | (196,951 | ) | (2,151 | ) | (199,102 | ) | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (8,171,024 | ) | - | (8,171,024 | ) | $ | (29,858 | ) | (8,200,882 | ) | |||||||||||||||||||||||||
| Balance - June 30, 2023 | 2,720,328 | $ | 269 | 700,000 | $ | 70 | $ | 91,736,545 | $ | (87,251,102 | ) | $ | (1,208,945 | ) | $ | 3,276,837 | $ | 143,115 | $ | 3,419,952 | ||||||||||||||||||||
For the Three and Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
| Equity | ||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Accumulated Other | Equity Attributable | Total | |||||||||||||||||||||||||||||||||||
Common Stock | Common Stock | Paid-In | Accumulated | Comprehensive | to Motorsport | Non-controlling | 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 | ||||||||||||||||||||
| 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 | ||||||||||||||||||||
| Beginning 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 | ||||||||||||||||||||
| 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 | 1,167,359 | $ | 116 | 700,000 | $ | 70 | $ | 76,244,456 | $ | (60,531,239 | ) | $ | (933,644 | ) | $ | 14,779,759 | $ | 233,720 | $ | 15,013,479 | ||||||||||||||||||||
| Ending balance | 1,167,359 | $ | 116 | 700,000 | $ | 70 | $ | 76,244,456 | $ | (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, 2024 | ||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||
| Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Equity Attributable to Motorsport | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Games Inc. | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance – January 1, 2024 | 2,722,728 | $ | 269 | 700,000 | $ | 70 | $ | 91,923,311 | $ | (87,030,270 | ) | $ | (1,850,216 | ) | $ | 3,043,164 | $ | (953,460 | ) | $ | 2,089,704 | |||||||||||||||||||
| Stock-based compensation | - | - | - | - | 68,191 | - | - | 68,191 | - | 68,191 | ||||||||||||||||||||||||||||||
| Other comprehensive gain (loss) | - | - | - | - | - | - | 580,233 | 580,233 | (62,905 | ) | 517,328 | |||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (1,634,750 | ) | - | (1,634,750 | ) | (48,648 | ) | (1,683,398 | ) | ||||||||||||||||||||||||||
| Balance – March 31, 2024 | 2,722,728 | $ | 269 | 700,000 | $ | 70 | $ | 91,991,502 | $ | (88,665,020 | ) | $ | (1,269,983 | ) | $ | 2,056,838 | $ | (1,065,013 | ) | $ | 991,825 | |||||||||||||||||||
| For the Three Months Ended March 31, 2023 | ||||||||||||||||||||||||||||||||||||||||
| Total | ||||||||||||||||||||||||||||||||||||||||
| Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
| Class A Common Stock | Class B Common Stock | Additional Paid-In | Accumulated | Accumulated Other Comprehensive | Equity Attributable to Motorsport | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Games Inc. | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance – January 1, 2023 | 1,183,808 | $ | 117 | 700,000 | $ | 70 | $ | 76,446,061 | $ | (73,979,131 | ) | $ | (933,406 | ) | $ | 1,533,711 | $ | 369,687 | $ | 1,903,398 | ||||||||||||||||||||
| Balances | 1,183,808 | $ | 117 | 700,000 | $ | 70 | $ | 76,446,061 | $ | (73,979,131 | ) | $ | (933,406 | ) | $ | 1,533,711 | $ | 369,687 | $ | 1,903,398 | ||||||||||||||||||||
| Issuance of common stock | 734,741 | 74 | - | - | 10,571,460 | - | - | 10,571,534 | - | 10,571,534 | ||||||||||||||||||||||||||||||
| Issuance of common stock for extinguishment of related party loan | 780,385 | 78 | - | - | 3,948,488 | - | - | 3,948,566 | - | 3,948,566 | ||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | - | - | 249,233 | - | - | 249,233 | - | 249,233 | ||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | - | - | - | - | (78,588 | ) | (78,588 | ) | (36,318 | ) | (114,906 | ) | ||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (5,100,947 | ) | - | (5,100,947 | ) | (158,245 | ) | (5,259,192 | ) | ||||||||||||||||||||||||||
| Balance – March 31, 2023 | 2,698,934 | $ | 269 | 700,000 | $ | 70 | $ | 91,215,242 | $ | (79,080,078 | ) | $ | (1,011,994 | ) | $ | 11,123,509 | $ | 175,124 | $ | 11,298,633 | ||||||||||||||||||||
| Balances | 2,698,934 | $ | 269 | 700,000 | $ | 70 | $ | 91,215,242 | $ | (79,080,078 | ) | $ | (1,011,994 | ) | $ | 11,123,509 | $ | 175,124 | $ | 11,298,633 | ||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWS
(UNAUDITED)
| 2024 | 2023 | |||||||||||||||
For the Six Months Ended June 30, | For the Three Months Ended March 31, | |||||||||||||||
| 2023 | 2022 | 2024 | 2023 | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net loss | $ | (13,460,074 | ) | $ | (23,454,716 | ) | $ | (1,683,398 | ) | $ | (5,259,192 | ) | ||||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
| Loss on impairment of intangible assets | 4,004,627 | 4,640,102 | ||||||||||||||
| Loss on impairment of goodwill | - | 4,788,268 | ||||||||||||||
| Loss on impairment of property, plant and equipment | 7,661 | - | ||||||||||||||
| Loss on disposal of property and equipment | - | 1,016 | ||||||||||||||
| Depreciation and amortization | 1,011,231 | 1,071,172 | 601,946 | 502,357 | ||||||||||||
| Non-cash lease expense | - | 196,938 | ||||||||||||||
| Purchase commitment and license liability interest accretion | 396,547 | - | 22,241 | 157,661 | ||||||||||||
| Stock-based compensation | 770,536 | 591,603 | 68,191 | 249,233 | ||||||||||||
| Changes in the fair value of stock warrants | (423,403 | ) | - | |||||||||||||
| Sales return and price protection reserves | 280,000 | 1,098,397 | - | 280,000 | ||||||||||||
| Changes in the fair value of warrants | (14,922 | ) | - | |||||||||||||
| Changes in assets and liabilities: | ||||||||||||||||
| Accounts receivable | 512,452 | 2,877,935 | (689,294 | ) | 630,272 | |||||||||||
| Due from related parties | (473,136 | ) | - | - | 140,358 | |||||||||||
| Operating lease liabilities | (22,723 | ) | (194,117 | ) | (978 | ) | (5,893 | ) | ||||||||
| Prepaid expenses and other assets | 13,772 | (572,926 | ) | (363,780 | ) | (225,562 | ) | |||||||||
| Accounts payable | (1,498,530 | ) | (1,455,211 | ) | 643,942 | (1,331,386 | ) | |||||||||
| Due to related parties | 2,282 | - | (30,238 | ) | (473,021 | ) | ||||||||||
| Other non-current liabilities | - | (475,927 | ) | (22,241 | ) | (33,720 | ) | |||||||||
| Accrued expenses and other liabilities | 28,596 | (1,160,816 | ) | 620,873 | (315,824 | ) | ||||||||||
| Net cash used in operating activities | $ | (8,850,162 | ) | $ | (12,049,298 | ) | $ | (847,658 | ) | $ | (5,683,701 | ) | ||||
| Cash flows from investing activities: | ||||||||||||||||
| Purchase of property and equipment | (24,437 | ) | (196,346 | ) | - | (15,057 | ) | |||||||||
| Net cash used in investing activities | $ | (24,437 | ) | $ | (196,346 | ) | $ | - | $ | (15,057 | ) | |||||
| Cash flows from financing activities: | ||||||||||||||||
| Advances from related parties | - | 143,517 | ||||||||||||||
| Repayments on advances from related parties | - | (24,913 | ) | |||||||||||||
| Repayments of purchase commitment liabilities | (550,000 | ) | (1,000,000 | ) | (50,000 | ) | (250,000 | ) | ||||||||
| Payment of license liabilities | (262,500 | ) | (100,000 | ) | - | (87,500 | ) | |||||||||
| Issuance of common stock from stock purchase commitment agreement | 644,750 | - | - | 644,694 | ||||||||||||
| Issuance of common stock from registered direct offerings | 10,404,784 | - | - | 10,404,840 | ||||||||||||
| Net cash provided by (used in) financing activities | $ | 10,237,034 | $ | (981,396 | ) | |||||||||||
| Net cash (used in) provided by financing activities | $ | (50,000 | ) | $ | 10,712,034 | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (375,188 | ) | 630,451 | 475,139 | (198,026 | ) | ||||||||||
| Net increase (decrease) in cash and cash equivalents | 987,247 | (12,596,589 | ) | |||||||||||||
| Net (decrease) increase in cash and cash equivalents | (422,519 | ) | 4,815,250 | |||||||||||||
| Total cash and cash equivalents at beginning of the period | $ | 979,306 | $ | 17,819,640 | $ | 1,675,210 | $ | 979,306 | ||||||||
| Total cash and cash equivalents at the end of the period | $ | 1,966,553 | $ | 5,223,051 | $ | 1,252,691 | $ | 5,794,556 | ||||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||||||||||
| Cash paid during the year for: | ||||||||||||||||
| Interest | $ | 399,231 | $ | - | $ | 8,641 | $ | 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 | ) | $ | - | |||||||||||
| Shares issued to Driven Lifestyle Group LLC for extinguishment of related party loan | $ | - | $ | (3,948,566 | ) | |||||||||||
| Extinguishment of Driven Lifestyle Group LLC related party loan for Class A shares | $ | - | $ | 3,948,566 | ||||||||||||
| Issuance of warrants in connection with registered direct offerings | $ | 54,597 | $ | - | $ | - | $ | 478,000 | ||||||||
| Purchase commitment liability | $ | - | $ | 29,681 | ||||||||||||
| Receivable from sale of NASCAR License | $ | 500,000 | $ | - | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - BUSINESS ORGANIZATION, NATURE OF OPERATIONS, AND RISKS AND UNCERTAINTIES
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
Liquidity and Going Concern
The Company had a net loss of approximately $13.51.7 million and negative cash flows from operations of approximately $8.90.8 million andfor the three months ended March 31, 2024. As of March 31, 2024, the Company had an accumulated deficit of $87.388.7 million for the six months ended June 30, 2023. As of June 30, 2023, the Company hadand cash and cash equivalents of $2.01.3 million, which was reduced tomillion. As of April 30, 2024, the Company had cash equivalents of $1.41.3 million as of July 31, 2023. million.
For the three months ended June 30, 2023,March 31, 2024, the Company experienced an average net cash burn from operations of approximately $1.10.3 million aper month, and while it has taken, and continues to take, measures to reduce its costs, the Company expects to continue to have a net cash outflow from operations for the foreseeable future as it continues to develop its product portfolio and invest in developing new video game titles.
The Company’s future liquidity and capital requirements include funds to support the planned costs to operate its business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures.
In order to address its liquidity shortfall, the Company is actively exploringcontinues to explore several options, including, but not limited to: i) additional funding in the form of potential equity and/or debt financing arrangements or similar transactions (collectively, “Capital Financing”); ii) other strategic alternatives for its business, including, but not limited to, the sale or licensing of the Company’s assets;assets in addition to the recent sales of its NASCAR License (as defined below) and Traxion (as defined below); and iii) cost reduction and restructuring initiatives, including re-evaluating its product roadmap, each of which is described more fully below.
The Company continues to explore additional funding in the form of potential Capital Financing and has entered into an Equity Distribution Agreement (the “ED Agreement”) with Canaccord Genuity LLC, as sales agent (the “Sales Agent”), pursuant to which the Company may issue and sell shares of its Class A common stock having an aggregate offering price of up to $10 million (subject to compliance with the limitations set forth in the SEC’s “baby shelf” rules). Subject to the terms and conditions of the ED Agreement, the Sales Agent may sell shares by any method deemed to be an “at-the-market” (“ATM”) offering as defined in Rule 415 under the Securities Act of 1933, as amended. As of June 30, 2023,March 31, 2024, the Company had an aggregate of $2.9 million available for future sales under its ATM program.program, which was reduced to $1.3 million of availability as of the date of this Report in accordance with the SEC’s baby shelf rules. However, due to the Company’s present liquidity position and required future funding requirements, any funds raised via theits ATM program would not be sufficient to satisfy its ongoing liquidity requirements and further potential Capital Financing would be required, in conjunction to the other options being explored by the Company. Further, there can be no assurance the Company will be able to obtain funds via theits ATM program, should it choose to sell shares under the ED Agreement, nor can there be any other assurance that the Company can secure additional funding in the form of equity and/or debt financing on commercially acceptable terms, if at all, to satisfy its future needed liquidity and capital resources.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Due to the continuing uncertainty surrounding the Company’s ability to raise funding in the form of potential Capital Financing, and in light of its liquidity position and anticipated future funding requirements, the Company has decidedcontinues to explore other strategic alternatives and potential options for its business, including, but not limited to, the sale or licensing of certain of the Company’s assets. For example,assets in addition to the Company is currently in discussions with a third-partyrecent sales of its NASCAR License and Traxion. See Note 12 – Subsequent Events for more information on the potential sale of the Company’s NASCAR license. Traxion in April 2024.
If any such additional strategic alternative is executed, including the consummation of a sale of the Company’s NASCAR license, it is expected it would help to reduce certainimprove the Company’s working capital requirementsposition and reduce overhead expenditures, thereby reducinglowering the Company’s expected future cash-burn, and provide some short-term liquidity relief. Nonetheless, even if the Company is successful in implementing one or more additional strategic alternatives, including the consummation of a sale of the Company’s NASCAR license, the Company will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of its business and operations. There are no assurances that the Company will even be successful in implementing aany additional strategic planplans for the sale or licensing of its assets, including the consummation of a sale of the Company’s NASCAR license, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond the Company’s control, such as, among other things, the required consent from NASCAR with respect to any sale of the Company’s NASCAR license.control.
As the Company continues to address its liquidity constraints, it has re-evaluatedthe Company may need to make further adjustments to its product roadmap in the second quarter of 2023 and modified the expected timing and scope of certain new product releases, including the release of any future NASCAR games, which have been put on hold indefinitely. Further, the Company is evaluating its abilityorder to deliver new titles under its other licenses, such as with INDYCAR andreduce operating cash burn. Additionally, the British Touring Car Championship (the “BTCC”), which may result in further adjustments to the Company’s product roadmap. The Company continues to seek to reduceimprove its monthly net cash-burn by reducing its cost baseliquidity through maintaining and enhancing cost control initiatives, such as those that it expectsinitiatives. The Company plans to achieve through its previously announced organizational restructuring program (the “2022 Restructuring Program”), and iscontinue evaluating the structure of its business for additional changes in order to improve both its near-term and long-term liquidity position, as well as create a healthy and sustainable Company from which to operate.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
If the Company is unable to satisfy its capital requirements, it could be required to adopt one or more of the following alternatives:
| ● | delaying the implementation of or revising certain aspects of the Company’s business strategy; | |
| ● | further reducing or delaying the development and launch of new products and events; | |
| ● | further reducing or delaying capital spending, product development spending and marketing and promotional spending; | |
| ● | selling additional assets or operations; | |
| ● | seeking additional | |
| ● | further reducing other discretionary spending; | |
| ● | entering into financing agreements on unattractive terms; and/or | |
| ● | significantly curtailing or discontinuing operations. |
There can be no assurance that the Company would be able to take any of 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 the 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 the Company to satisfy its capital requirements if the actions that the Company is able to consummate do not generate a sufficient amount of additional capital.
| 7 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Even if the Company does secure additional Capital Financing, if the anticipated level of revenues are not achieved because of, for example, decreased sales of the Company’s products due to the disposition of key assets, such as the potential sale of its NASCAR license, further changes in the Company’s product roadmapLicense and/or the Company’s inability to deliver new products for its various other licenses; less than anticipated consumer acceptance of the Company’s offering of products and events; less than effective marketing and promotion campaigns, decreased consumer spending in response to weak economic conditions or weakness in the overall electronic games category; adverse changes in foreign currency exchange rates; decreased sales of the Company’s products and events as a result of increased competitive activities by the Company’s competitors; changes in consumer purchasing habits, such as the impact of higher energy prices on consumer purchasing behavior; retailer inventory management or reductions in retailer display space; less than anticipated results from the Company’s existing or new products or from its advertising and/or marketing plans; or if the Company’s expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, the Company’s liquidity position may continue to be insufficient to satisfy its future capital requirements. If the Company is ultimately unable to satisfy its capital requirements, it would likely need to dissolve and liquidate its assets under the bankruptcy laws or otherwise.
In accordance with Accounting Standards Codification (���(“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the condensed consolidated financial statements are issued. The factors described above, in particular the lack of 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.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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 statement of the Company’s unaudited condensed consolidated financial statements as of June 30, 2023March 31, 2024 and for the three and six months ended June 30, 2023.March 31, 2024. The Company’s results of operations for the three and six months ended June 30, 2023March 31, 2024 are not necessarily indicative of the operating results for the full year ending December 31, 20232024 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, 20222023 and 20212022 and for the years then ended which are included in the 20222023 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 unaudited condensed consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive basis for all periods presented.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
| 8 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The Company’s significant estimates used in these condensed consolidated financial statements include, but are not limited to, revenue recognition criteria, including allowances for returns and price protection, as well as current expected credit losses,offering periods for deferred net revenue, 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.
Non-controlling Interests
Non-controlling interests represent the portion of net assets in consolidated subsidiaries that are not attributable, directly or indirectly, to the Company. The net assets of the shared entities are attributed to the controlling and non-controlling interests based on the terms of the governing contractual arrangements.
Recently Issued Accounting Standards
As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC. The adoption dates discussed below reflect this election.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Adoption of Accounting Pronouncements
On January 1,In November 2023, the Company adopted Accounting Standard Update (“ASU”) 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” (“ASU 2019-11”), issued by the Financial Accounting Standards Board (the “FASB”(“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280). The new guidance improves reportable segment disclosures primarily through enhanced disclosures about significant segment expenses and by requiring current annual disclosures to be provided in November 2019.interim periods. The amendments in this ASU 2019-11are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The new guidance is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurementto be applied retrospectively to all prior periods presented unless impracticable to do so. As the guidance requires only additional disclosure, there will be no effects of Credit Lossesthis standard on Financial Instrument”, issued byour financial position, results of operations or cash flows.
In December 2023, the FASB in June 2016.issued 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 the2023-09, Income Taxes (Topic 740). The new guidance each reporting entity should estimate an allowance for expected credit losses, which is intended to resultenhance the transparency and decision usefulness of income tax disclosures. The amendments 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 arising 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 servicesthis ASU are transferred to a customer. When trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. This guidance is effective for smaller reporting companies with annual 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 Company’s unaudited 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 2020-06. These amendments improve U.S. 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 U.S. 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 earnings per share 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.2024. Early adoption is permitted, but no earlier than fiscal years after December 15, 2020, including interim periods within those fiscal years. All entities may adoptand the amendments throughshould be applied on a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in whichprospective basis with retrospective application permitted. As the guidance is effective (that is, a modified-retrospective approach). Entities may also elect to adopt the amendments using the fully retrospective methodrequires only additional disclosure, there will be no effects of transition, with the cumulative effectthis standard on our financial position, results of the change recognized as an adjustment to the opening balance of retained earnings in the first comparative period presented. Upon adoption, this guidance did not have a material impact on the unaudited condensed consolidated financial statements.
operations or cash flows.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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, 2022,2023, as included in the 20222023 Form 10-K, except as disclosed in this note.
Fair Value MeasurementsRevenue Recognition
The Company accounts forderives revenue principally from sales of its assetsgames, and liabilities using a hierarchy of valuation techniques basedrelated extra content and services that can be experienced on whethergame consoles, PCs and mobile phones. The Company’s product and service offerings include, but are not limited to, 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 to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.following:
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The Company evaluates and recognizes revenue by:
| ● | identifying the contract(s) with the customer; | |
| ● | identifying the performance obligations in | |
| ● | determining the transaction price; | |
| ● | allocating the transaction price to performance obligations in | |
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| 9 |
The Company’s liability-classified warrants are measured at fair value on a recurring basis, with subsequent changes in fair value recognized in earnings. Certain assets, including long-lived assets, right of use assets, goodwill, indefinite-lived intangible assets,Motorsport Games Inc. and purchase commitments are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis, but are subjectSubsidiaries
Notes to fair value adjustments using fair value measurements with unobservable inputs are classified as Level 3. Other financial instruments, including cash and cash equivalents, accounts receivable, prepaid and other assets, accounts payable, accrued expenses, and other current liabilities are carried at cost, which approximate their fair values due to their short-term nature.Unaudited Condensed Consolidated Financial Statements
Stock WarrantsOnline-Enabled Games
Games with Services.The Company’s sales of Games with Services are evaluated to determine whether the software license, future update rights and the online hosting are distinct and separable. Sales of Games with Services are generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting.
Since the Company accountsdoes not sell the performance obligations on a stand-alone basis, the Company considers market conditions and other observable inputs to estimate the stand-alone selling price for warrantseach performance obligation. For Games with Services, generally 75 percent of the sales price is allocated to the software license performance obligation and recognized at a point in time when control of the license has been transferred to the customer. The remaining 25 percent is allocated to the future update rights and the online hosting performance obligations and recognized ratably as the service is provided (over the Estimated Offering Period).
Extra Content. Revenue received from sales of downloadable content are derived primarily from the sale of digital in-game content that are designed to extend and enhance players’ game experience. Sales of extra content are accounted for in a manner consistent with the treatment for the Company’s Games with Services as discussed above, depending upon whether or not the extra content has offline functionality. That is, if the extra content has offline functionality, then the extra content is accounted for similarly to Games with Services (generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting). If the extra content does not have offline functionality, then the extra content is determined to have one distinct performance obligation: the online-hosted service.
Significant Judgments around Revenue Arrangements
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 equity-classifiedon its own or liability-classified instrumentstogether 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 judgment, based on an assessment of the warrant’s specificcontractual terms and applicable authoritative guidance in ASC 480 - Distinguishing Liabilities from Equity (“ASC 480”)business practices. It further includes review of variable consideration such as discounts, sales returns, price protection, 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,rebates, which requires the use of professional judgment, is conductedestimated at the time of warrant issuance andthe transaction. In addition, the transaction price does not include an estimate of the variable consideration related to sales-based royalties. Sales-based royalties are recognized as of each subsequent quarterly period-end date while the warrants are outstanding.
Allowances for Returns and Price Protectionsales occur.
Allocating the transaction price. Allocating the transaction price requires that the Company determine an estimate of the relative stand-alone selling price for each distinct performance obligation. Determining the relative stand-alone selling price is inherently subjective, especially in situations where the Company does not sell the performance obligation on a stand-alone basis (which occurs in the majority of transactions). In those situations, the Company determines the relative stand-alone selling price based on various observable inputs using all information that is reasonably available. Examples of observable inputs and information include historical internal pricing data and pricing data from competitors, to the extent the data is available. The Company may permit product returns from, or grant price protection to, its customers under certain conditions. Price protection representsresults of the Company’s practice of providing channel partners withanalysis resulted in a credit allowance to lower their wholesale price on a particular game unit that they have not resold to customers. The amountspecific percentage of the transaction 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.being allocated to each performance obligation.
AllowancesDetermining the Estimated Offering Period. The offering period is the period in which the Company offers to provide the future update rights and/or online hosting for returnsthe game and price protectionrelated extra content sold. Because the offering period is not an explicitly defined period, the Company must make an estimate of the offering period for the service-related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, the Company considers the average period of time customers are considered variable consideration under ASC 606.online when estimating the offering period. The Company reducesrecognizes revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. Revenue for service-related performance obligations for digitally-distributed games and extra content is recognized over an estimated 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 Receivableseven-month period beginning in the 2022 Form 10-K for additional details.month of sale.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
When evaluating the adequacy of allowances for returns and price protection, 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-expected returns or higher price protection in subsequent periods.
The Company recognized an expense of approximately $0.0 million and $0.3 million for sales returns and price protections as a reduction of revenues for the three and six months ended June 30, 2023, respectively. The Company recognized an expense of approximately $0.9 million and $1.1 million for sales returns and price protections as a reduction of revenues for the three and six months ended June 30, 2022, respectively.
Deferred Revenue
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. Furthermore, deferred revenue includes payment advances from the Company’s channel partners and sales transactions including future update rights and online hosting performance obligations, which are subject to deferral and recognized over the Estimated Offering Period.
Revenue recognized in the period from amounts included in contract liability at the beginning of the period was approximately $0.40.3 million and $0.6 million for each of the sixthree months ended June 30, 2023March 31, 2024 and 2022, respectively.2023.
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
| 2024 | 2023 | |||||||
| For the Three Months Ended | ||||||||
| March 31, | ||||||||
| 2024 | 2023 | |||||||
| Stock options | 97,953 | 47,967 | ||||||
| Warrants | 33,574 | 33,574 | ||||||
| Dilutive securities | 131,527 | 81,541 | ||||||
| 11 |
| For the Three and Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Stock options | ||||||||
| Warrants | ||||||||
| Dilutive securities | ||||||||
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 3 – INTANGIBLE ASSETS
Licensing Agreements
In March 2019, the Company entered into an agreement to facilitate the Le Mans Esports Series as part of a joint venture with Automobile Club de l’Ouest (“ACO”), the organizer of the 24 Hours of Le Mans endurance race. Through the Company’s ownership interest in this joint venture, which was increased to 51% from 45% in January 2021, the Company secured the rights to be the exclusive video game developer and publisher for the 24 Hours of Le Mans race and the FIA World Endurance Championship (the “WEC”), which the 24 Hours of Le Mans race is a part of, for a ten-year period. In addition, through this joint venture with ACO, the Company has the right to create and organize esports leagues and events for the Le Mans Esports Series. The Company hasacquired a video gaming license agreements with various entities(the “Le Mans Gaming License”) and an esports license related to its ownership interest in this joint venture with the development of video games and the organization and facilitation of esports events, including BARC (TOCA) Limited (“BARC”) with respect to the BTCC, and INDYCAR LLC (“INDYCAR”) with respect to the INDYCAR SERIES. As of June 30, 2023, the Company had a remaining liability in connection with these licensing agreements of approximately $0.8 million and $3.3 million, which is included in purchase commitments and other non-current liabilities, respectively, on the unaudited condensed consolidated balance sheets.
ImpairmentACO.
During the three months ended June 30, 2023,In 2021, the Company identified triggering events that indicated certain finite-livedalso acquired intangible assets were at riskcomprising the KartKraft computer video game as well as software, tradename and non-compete agreements related to its acquisition of impairment and as such, performed a quantitative impairment assessment to determine the recoverability of those finite-lived intangible assets. The primary trigger for the impairment review was the Company’s decision to explore strategic alternatives, including, but not limited to, the sale or licensing100% of the Company’s assets (the “Strategic Initiatives”), and that failure to consummate any such transaction would likely result in the Company being unable to comply with certain requirementsshare capital of certain of its video game licenses.Studio397 B.V.
In October 2023, the Company sold its NASCAR licensed rights under that certain Second Amended and Restated Distribution and License Agreement with NASCAR Team Properties (the “NASCAR License”) to iRacing.com Motorsport Simulations, LLC (“iRacing”). As a resultconsideration for such sale and assignment of the quantitative assessment,NASCAR License and all rights related thereto (the “Assignment”), iRacing paid the Company determined the fair value of certain licensing agreements, software and non-compete agreements were lower than their respective carrying values and recorded an impairment loss for the three months ended June 30, 2023 of approximately $4.05.0 million. The Company determined the fair valuemillion at closing of the finite-lived intangible assets subjecttransactions contemplated by the Assignment. In addition, iRacing is obligated under the Assignment to assessment using either a discounted cash flow valuation model or a cost to recreate valuation model, dependingpay the Company an additional (i) $0.5 million payable on the naturedate that is 6 months following such closing and (ii) $0.5 million on the earlier of such date when all NASCAR games have been removed by the Company from the websites, smart phone applications or other digital portal engaging in sales or providing access to the NASCAR games, including without limitation Xbox, PlayStation and Switch and all other domain names, web addresses and websites used by the Company in the its business (collectively, the “Business Platforms”), or December 31, 2024, provided that all NASCAR games have been removed by the Company from the Business Platforms, and in any event, no earlier than such date that is one year following the closing of the asset. The identified impairment losses were primarily driven by a reduction in expected future cash flows, driven by the triggering event factors discussed above. The principal assumptions used in the discounted cash flow valuation model were forecasted cash flows and the expected proceeds from the sale of certain assets should the Company be successful in its Strategic Initiatives, while the principal assumptions used in the cost to recreate valuation model were 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.Assignment.
The impairment loss is presented as impairment of intangible assets in the unaudited 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 June 30, 2023:March 31, 2024:
SCHEDULE OF INTANGIBLE ASSETS
| Licensing Agreements (Finite) | Licensing Agreements (Indefinite) | Software Licenses (Finite) | Distribution Contracts (Finite) | Trade Names (Indefinite) | Non-Compete Agreements (Finite) | Accumulated Amortization | Total | |||||||||||||||||||||||||
| Balance as of January 1, 2023 | $ | 7,198,363 | $ | 1,546,645 | $ | 8,656,842 | $ | 560,000 | $ | 212,185 | $ | 243,243 | $ | (5,057,048 | ) | $ | 13,360,230 | |||||||||||||||
| Amortization expense | - | - | - | - | - | - | (842,350 | ) | (842,350 | ) | ||||||||||||||||||||||
| Impairment of intangible assets | (3,457,202 | ) | - | (481,142 | ) | - | - | (66,283 | ) | - | (4,004,627 | ) | ||||||||||||||||||||
| FX translation adjustments | - | 45,703 | 41,880 | - | (28,768 | ) | 1,216 | (28,890 | ) | 31,141 | ||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | 3,741,161 | $ | 1,592,348 | $ | 8,217,580 | $ | 560,000 | $ | 183,417 | $ | 178,176 | $ | (5,928,288 | ) | $ | 8,544,394 | |||||||||||||||
| Weighted average remaining amortization period as of June 30, 2023 | 11.25 | - | 3.8 | - | - | 0.8 | - | - | ||||||||||||||||||||||||
| Licensing Agreements (Finite) | Licensing Agreements (Indefinite) | Software Licenses (Finite) | Distribution Contracts (Finite) | Trade Names (Indefinite) | Non- Compete Agreements (Finite) | Accumulated Amortization | Total | |||||||||||||||||||||||||
| Balance as of January 1, 2024 | $ | 906,166 | $ | 1,495,515 | $ | 8,115,937 | $ | 560,000 | $ | 223,194 | $ | 180,266 | $ | (5,685,271 | ) | $ | 5,795,807 | |||||||||||||||
| Amortization expense | - | - | - | - | - | - | (528,222 | ) | (528,222 | ) | ||||||||||||||||||||||
| Foreign currency translation adjustments | - | 33,925 | 69,407 | - | (13,821 | ) | (3,400 | ) | (4,293 | ) | 81,818 | |||||||||||||||||||||
| Balance as of March 31, 2024 | $ | 906,166 | $ | 1,529,440 | $ | 8,185,344 | $ | 560,000 | $ | 209,373 | $ | 176,866 | $ | (6,217,786 | ) | $ | 5,349,403 | |||||||||||||||
| Weighted average remaining amortization period at March 31, 2024 | 0.8 | - | 3.2 | - | - | - | - | |||||||||||||||||||||||||
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 | 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 | ||||||||||||||||||||||||||||||
| Balance as of January 1, 2024 | $ | 298,538 | $ | 4,646,467 | $ | 560,000 | $ | 180,266 | $ | 5,685,271 | ||||||||||||||||||||||||||||||
| Amortization expense | 113,124 | 690,237 | - | 38,989 | 842,350 | 151,500 | 376,722 | - | - | 528,222 | ||||||||||||||||||||||||||||||
| Foreign currency translation adjustment | 1,876 | 24,900 | - | 2,114 | 28,890 | - | 7,693 | - | (3,400 | ) | 4,293 | |||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | 1,261,010 | $ | 3,927,272 | $ | 560,000 | $ | 180,006 | $ | 5,928,288 | ||||||||||||||||||||||||||||||
| Balance as of March 31, 2024 | $ | 450,038 | $ | 5,030,882 | $ | 560,000 | $ | 176,866 | $ | 6,217,786 | ||||||||||||||||||||||||||||||
Estimated aggregate amortization expense of intangible assets for the next five years and thereafter is as follows:
SCHEDULE OF ESTIMATED AGGREGATE AMORTIZATION EXPENSE OF INTANGIBLE ASSETS
| For the Years Ended December 31, | Total | ||||
| 2024 (remaining period) | $ | 1,554,401 | |||
| 2025 | 889,025 | ||||
| 2026 | 887,396 | ||||
| 2027 | 122,291 | ||||
| 2028 | 53,130 | ||||
| Thereafter | 104,347 | ||||
| Estimated aggregate amortization expense | $ | 3,610,590 | |||
Amortization expense related to intangible assets was approximately $0.5 million and $0.4 million for the three months ended March 31, 2024 and 2023, respectively.
| Total | ||||
| 2023 (remaining period) | $ | 767,085 | ||
| 2024 | 1,494,431 | |||
| 2025 | 1,356,899 | |||
| 2026 | 1,110,113 | |||
| 2027 | 348,055 | |||
| Thereafter | 1,692,046 | |||
| Estimated aggregate amortization expense | $ | 6,768,629 | ||
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Amortization expense related to intangible assets was approximately $0.4 million for both the three months ended June 30, 2023 and 2022, and amortization expense related to intangible assets was approximately $0.8 million for both the six months ended June 30, 2023 and 2022. Within intangible assets is approximately $3.5 million of licensing agreements that are not presently subject to amortization. These non-amortizing licensing agreements will begin amortizing upon release of the first title under the respective license agreement.
NOTE 4 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
SCHEDULE OF ACCRUED EXPENSES
| June 30, | December 31, | March 31, | December 31, | |||||||||||||
| 2023 | 2022 | 2024 | 2023 | |||||||||||||
| Accrued royalties | $ | 595,472 | $ | 274,085 | $ | 275,008 | $ | 217,868 | ||||||||
| Accrued professional and consulting fees | 732,282 | 720,470 | 792,327 | 110,008 | ||||||||||||
| Accrued development costs | 93,134 | 172,164 | 36,919 | 32,214 | ||||||||||||
| Accrued taxes | 23,213 | 149,842 | 50,000 | 40,000 | ||||||||||||
| Accrued payroll | 703,686 | 372,358 | 334,834 | 500,522 | ||||||||||||
| Deferred revenue | 136,532 | 311,945 | 458,342 | 270,845 | ||||||||||||
| Loss contingency reserves | 798,268 | 1,100,000 | 419,881 | 545,920 | ||||||||||||
| Accrued other | 277,011 | 315,560 | 112,682 | 173,938 | ||||||||||||
| Total | $ | 3,359,598 | $ | 3,416,424 | $ | 2,479,993 | $ | 1,891,315 | ||||||||
NOTE 5 – RELATED PARTY LOANS
On April 1, 2020, theThe Company entered intohas a promissory note$ million line of credit with its majority shareholder, Driven Lifestyle (the “$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 million, which bears interest at an interestannual rate of % per annum,, the availability of which is dependent on Motorsport Network’sDriven Lifestyle’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 $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,Driven Lifestyle, and any principal and accrued interest owed will be accelerated and become immediately payable in the event the Company consummates certain corporate events, such as a capital reorganization. The Company may prepayrepay the $ million Line of Credit in whole or in part at any time or from time to time without penalty or charge.charge.
On September 8, 2022, the Company entered into a support agreement with Motorsport NetworkDriven Lifestyle (the “Support Agreement”) pursuant to which Motorsport NetworkDriven Lifestyle issued approximately $3 million (the “September 2022 Cash Advance”) to the Company in accordance with the $12 million Line of Credit. Additionally, the Support Agreement modified the $12$12 million Line of Credit such that, among other things, until June 30, 2024, Motorsport NetworkDriven Lifestyle would not demand repayment of the September 2022 Cash Advance or other advances under the $12million Line of Credit, unless certain events occurred, as prescribed in the Support Agreement, such as the completion of a new financing arrangement or the Company generates positive cash flows from operations, among others. All principal and accrued interest owed on the $12 million Line of Credit were exchanged for equity following the completion of two debt-for-equity exchange agreements with Motorsport NetworkDriven Lifestyle on January 30, 2023 and February 1, 2023, relieving the Company of approximately $3.9 million in owed principal and unpaid interest in exchange for an aggregate of shares of the Company’s Class A common stock.
As of June 30, 2023,March 31, 2024, the $12 million Line of Credit remains in place. However, the Company believes that there is a substantial likelihood that Motorsport NetworkDriven Lifestyle will not fulfill any future borrowing requests, and therefore does not view the $12 million Line of Credit as a viable source for future liquidity needs.
As of June 30, 2023March 31, 2024 and December 31, 2022, the2023, there was no balance due to Motorsport NetworkDriven Lifestyle under the $12 million Line of Credit was $0 and $3,670,000, respectively, as well as unpaid accrued related party interest of $0 and $96,667, respectively.Credit.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 6 – RELATED PARTY TRANSACTIONS
In addition to the $12 million Line of Credit, which is discussed in Note 5 – Related Party Loans, from time to time, Motorsport Network, andthe Company had other related entities pay forparty receivables and payables outstanding as of March 31, 2024 and December 31, 2023. Specifically, the Company expenses onowed approximately $0.1 million to its related parties as a related party payable as of March 31, 2024 and December 31, 2023. During each of the Company’s behalf. During the sixthree months ended June 30,March 31, 2024 and 2023, and 2022, the Company incurred expenses of approximately $0.20.1 million and $0.1 million, respectively, that were paid by Motorsport Network on its behalf and are reimbursable by the Company to Motorsport Network. During the six months ended June 30, 2023 and 2022, approximately $1 million and $0.1 million, respectively, was paid to related parties in settlement of related party payables. The Company’s corporate headquarters, located in Miami, Florida and consisting of approximately 2,000 square feet of office space, are owned by Driven Lifestyle and are used rent-free by the Company.
| 14 |
The Company has regular related party receivables and payables outstanding as of June 30, 2023 and December 31, 2022. Specifically, the Company owed approximately $30,000 to its related parties as a related party payable and was due approximately $0.1 million from its related parties as a related party receivable as of June 30, 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.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Backoffice Services Agreement
On March 23, 2023 (but effective as of January 1, 2023), the Company entered into a new Backoffice Services Agreement with Motorsport NetworkDriven Lifestyle (the “Backoffice Services Agreement”), following the expiration of the Company’s prior services agreement with Motorsport Network.Driven Lifestyle. Pursuant to the Backoffice Services Agreement, Motorsport NetworkDriven Lifestyle will provide accounting, payroll and benefits, human resources and other back-office services on a full-time basis to support the Company’s business functions. The term of the Backoffice Services Agreement is 12 months from the effective date. The term will automatically renew for successive 12-month terms unless either party provides written notice of nonrenewal at least 30 days prior to the end of the then current term. The Backoffice Services Agreement may be terminated by either party at any time with 60 days prior notice. Pursuant to the Backoffice Services Agreement, the Company is required to pay a monthly fee to Motorsport NetworkDriven Lifestyle of $17,500. For the sixthree months ended June 30, 2023,March 31, 2024, the Company incurred $105,00052,500 in fees in connection with the Backoffice Services Agreement, and $52,500 for the three months ended June 30, 2023,which is presented in general and administrative expenses withwithin the condensed consolidated statements of operations.
NOTE 7 – STOCKHOLDERS’ EQUITY
Class A and B Common Stock
As of June 30, 2023,March 31, 2024, the Company had shares of Class A common stock and shares of Class B common stock outstanding. Holders of Class A and Class B common stock are entitled to one-vote and ten-votes, respectively, for each share held on all matters submitted to a vote of stockholders.
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.
704Games Warrants
As of June 30, 2023March 31, 2024 and December 31, 2022,2023, 704Games LLC (“704Games”), a wholly-owned subsidiary of Motorsport Games Inc., has outstanding 10-year10-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, 2023,March 31, 2024, the warrants had intrinsic value and a remaining life of years.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements15 months.
Registered Direct Offerings and the Wainwright Warrants
On February 1, February 2 and February 3, 2023, the Company completed three separate registered direct offerings (the “Offerings”) priced at-market under NASDAQ rules with H.C. Wainwright & Co., LLC acting as the exclusive placement agent for each transaction (the “Agent”). In connection with the Offerings, the Company paid the Agent a transaction fee equal to 7.0% of the aggregate gross proceeds from each offering, non-accountable expenses and certain other closing fees. In addition, the Company granted warrants to the Agent (or its designees) to purchase shares of the Company’s Class A common stock equal to % of the aggregate number of shares of Class A common stock placed in each Offering (collectively, the “Wainwright Warrants”). The Offerings are summarized as follows:
SCHEDULE OF REGISTERED DIRECT OFFERINGS AND WAINWRIGHT WARRANTS
| Offering Date | Gross Proceeds | Net Proceeds | Warrants Issued | Warrant Strike Price | Warrant Term | 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 | 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 | 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 | February 3, 2023 | 232,188 | $ 4.0 million | $ 3.7 million | 13,931 | $ | 21.738 | 5 years | ||||||||||||||||||||||||||
As of June 30, 2023,March 31, 2024, the Wainwright Warrants were assessed to have a fair value of approximately $0.1 16,000million and deemed to be liability-classified awards, which were recorded within other non-current liabilities on the unaudited condensed consolidated balance sheet.sheets.
| 15 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The Company utilized a Black-Scholes Option Pricing Model to determine the fair value of the Wainwright Warrants. The Black-Scholes model requires management to make a number of key assumptions, including expected volatility, expected term, and risk-free interest rate. The risk-free interest rate is estimated using the rate of return on U.S. treasury notes with a life that approximates the expected term. The expected term assumption used in the Black-Scholes model represents the period of time that the Wainwright Warrants are expected to be outstanding and is estimated using the contractual term of the Wainwright Warrants. As of June 30, 2023, the Wainwright Warrants had no intrinsic value.
Stock Purchase Commitment Agreement
During the sixthree months ended June 30,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 June 30, 2023, the remaining commitment amount under theThe Alumni Purchase Agreement amounted to $1,302,676.expired on December 31, 2023.
On January 12, 2021, in connection with its initial public offering, Motorsport Games established the Motorsport Games Inc. 2021 Equity Incentive Plan (the “MSGM 2021 Stock Plan”). The MSGM 2021 Stock Plan provides for the grant of options, stock appreciation rights, restricted stock awards, performance share awards and restricted stock unit awards, and initially authorized shares of Class A common stock to be available for issuance. As of June 30, 2023,March 31, 2024, 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.
Motorsport Games Inc.The Company issued stock options under its MSGM 2021 Stock Plan during the three months ended March 31, 2024 and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
2023. The majority of the options issued under the MSGM 2021 Stock Plan have time-based vesting schedules, typically vesting ratably over a three-year period. Certain stock option awards differed from this vesting schedule, notably awards made to the Company’s former Chief Executive Officer in conjunction with the Company’s initial public offering that vested immediately, as well as those made to the Company’s current and former directors that vest on the one-year anniversary of award issuance. All stock options issued under the MSGM 2021 Stock Plan expire years from the grant date.
On January 26, 2024, the compensation committee of the board of directors of the Company approved and authorized the grant of an option award to purchase shares of the Company’s Class A common stock to Stephen Hood, the Chief Executive Officer and President of the Company, pursuant to the MSGM 2021 Stock Plan. shares underlying the option award vested immediately upon grant and the remaining shares underlying the option award will vest in three equal quarterly installments beginning on April 26, 2024.
SCHEDULE OF STOCK-BASED COMPENSATION OPTIONS ACTIVITY
| Number of Options | ||||
| Awards outstanding under the MSGM 2021 Stock Plan as of January 1, | ||||
| Forfeited, cancelled or expired | ( | ) | ||
| Awards outstanding under the MSGM 2021 Stock Plan as of | ||||
| 16 |
On April 4, 2023, the Company granted an aggregate of
26,316Motorsport Games Inc. and Subsidiaries stock option awards under the MSGM 2021 Stock Plan
Notes to its directors with a grant date fair value of approximately $ million, which will fully vest on the one-year anniversary of the award issuance date. Additionally, on June 9, 2023, the Company granted restricted shares of Class A Common Stock outside of the MSGM 2021 Stock Plan, with a grant fair value of approximately $, to a consultant pursuant to a consultancy agreement entered into in February 2023. These restricted shares of Class A Common Stock will fully vest on the one-year anniversary of the date of the consultancy agreement.Unaudited Condensed Consolidated Financial Statements
Stock-Based Compensation
SCHEDULE OF STOCK BASED COMPENSATION EXPENSE
| 2023 | 2022 | 2023 | 2022 | 2024 | 2023 | |||||||||||||||||||
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2024 | 2023 | |||||||||||||||||||
| General and Administrative | $ | 525,952 | $ | 188,201 | $ | 545,378 | $ | 458,323 | $ | 69,731 | $ | 19,426 | ||||||||||||
| Sales and Marketing | (16,982 | ) | 32,365 | 222,735 | 78,839 | 1,347 | 239,717 | |||||||||||||||||
| Development | 12,333 | 18,007 | 2,423 | 54,441 | (2,887 | ) | (9,910 | ) | ||||||||||||||||
| Stock-based compensation expense | $ | 521,303 | $ | 238,573 | $ | 770,536 | $ | 591,603 | $ | 68,191 | $ | 249,233 | ||||||||||||
As of June 30, 2023,March 31, 2024, 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 9 – 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, 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. The Company recognizes legal costs associated with loss contingencies in the period incurred.
Loss contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed. There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.
| 17 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
On February 11, 2021, HC2 Holdings 2 Inc. (now known as Innovate 2) (“Innovate”) and Continental General Insurance Company (“Continental”), former minority stockholders of 704Games, filed a complaint (the “HC2 and Continental Complaint”) in the U.S. District Court for the District of Delaware against the Company, the Company’s former Chief Executive Officer and Executive Chairman, the Company’s former Chief Financial Officer, and the manager of Motorsport Network.Driven Lifestyle. The complaint was later amended and added Leo Capital Holdings LLC (“Leo Capital”) as an additional plaintiff and the controller of Motorsport NetworkDriven Lifestyle 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 2021.2020. The complaint asserts claims under Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 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,alleged, among other things, damages from the defendants, jointly and severally, based on the alleged difference between the fair market value of the shares of common stock of 704Games on 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.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
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 was obligated to pay the sum of $1.1 million to Continental. The Company paid an initial payment of approximately $0.1 million on January 17, 2023, and was obligated to make payments of no less than approximately $40,000every 30 days after the initial payment date until the settlement amount of $1.1 million was paid in full. As of June 30,March 31, 2024, all required payments under the settlement agreement with Continental have been made.
On October 14, 2023, and December 31, 2022, the Company, along with other defendants, reached and executed a settlement agreement with Leo Capital in connection with the HC2 and Continental Complaint, which settles the claims made by Leo Capital against the defendants, as well as the claims made by the defendants against Leo Capital. Under the terms of the settlement agreement, the Company was obligated to pay the sum of $0.2 million to Leo Capital. The Company paid the full $0.2 million settlement on October 16, 2023, as required by terms of the settlement agreement.
In respect of Innovate, the Company believes that the plaintiff’s allegations are without merit and the Company intends to continue to vigorously defend its position to the fullest extent permitted by law. Given the litigation is ongoing, the outcome of the litigation remains uncertain at this time. As such, the Company does not believe it is probable a settlement will be reached, nor can any such settlement amount be reasonably estimable, and has not recognized a settlement liability of $0.8 million and $1.1 million, respectively, in other current liabilities as it relates to this case. The Company continues to defend its position withrespect of the remaining plaintiffs, the outcome of which is uncertain at this time. Refer to Note 4 – Accrued Expenses and Other Current Liabilities.plaintiff.
On July 28, 2023, Wesco Insurance Company (“Wesco”) filed a complaint in state court in Florida against the Company, as well as the other defendants involved in the litigation related to the HC2 and Continental Complaint (the “Underlying Action”). The Company had previously submitted the Underlying Action for coverage under a management liability policy issued by Hallmark Specialty Insurance Company (“Hallmark”) and an excess policy with Wesco (the “Wesco Policy”). Wesco’s complaint seeks declaratory relief to determine Wesco’s obligations to the defendants under an excess policy of insurance issued to the Company by Wesco for the Underlying Action. Wesco claims that there is no coverage afforded to the defendants for the Underlying Action under the Wesco Policy. The Company disagrees with and disputes Wesco’s position regarding coverage for the Underlying Action under the Wesco Policy and willplans to defend its position.
On November 22, 2023, the Company entered into an insurance policy and claims release with Hallmark (the “Hallmark Settlement”) related to a previously submitted Underlying Action for coverage under a management liability policy issued by Hallmark. Under the terms of the Hallmark Settlement, Hallmark agreed to pay $1.75 million, which was fully paid by Hallmark within 30 days of execution of the Hallmark Settlement.
| 18 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Commitments
On January 25, 2021, the Company entered into an amendment (the “Le Mans Amendment”) to the Le Mans Esports Series Ltd joint venture agreement, which resulted in an increase of the Company’s ownership interest in the Le Mans Esports Series Ltd joint venture from 45% to 51%. Additionally, through certain multi-year licensing agreements that were entered into in connection with the Le Mans Amendment, the Company secured the rights to be the exclusive video game developer and publisher for the 24 Hours of Le Mans race and the FIA World Endurance Championship (the “WEC”),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 $8,700,0008,640,000 USD as of June 30, 2023)March 31, 2024) as needed for development of the video game products, to be contributed on an as-needed basis during the term of the applicable license. The Company is obligated to pay ACO an annual royalty payment beginning from the time of the launch of the first video game product and continuing through each anniversary thereof for the term of the license. Further, pursuant to the Le Mans Amendment, the Company has a right to priority distribution of profits to recoup the additional funding and royalty payments made by the Company under the Le Mans Gaming License. See Note 3 – Intangible Assets for additional information.
Epic License Agreement
On August 11, 2020, the Company entered into a licensing agreement with Epic Games International (“Epic”) for worldwide licensing rights to Epic’s proprietary computer program known as the Unreal Engine 4. Pursuant to the agreement, upon payment of the initial license fee described below, the Company was granted a nonexclusive, non-transferable and terminable license to develop, market and sublicense (under limited circumstances and subject to conditions of 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%5% of product revenue, as defined in the licensing agreement. During the sixthree months ended June 30,March 31, 2024 and 2023, the Company did not pay anypaid royalties to Epic of approximately $13,000 and $32,000, respectively, under the agreement. 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 (collectively the “Video Game Licenses”). These minimum royalty guarantee payments apply throughout the duration of the Video Game Licenses’ agreements, which expire between fiscal years ending December 31, 2026 and 2032, and give rise to a minimum royalty guarantee commitment of $17.4 million for the remaining duration of these arrangements as of June 30, 2023. The Company paid an aggregate of $0.4 million to honor its minimum royalty guarantee commitments during the six months ended June 30, 2023 and expects to pay an additional $1.6 million during the remainder of 2023.Commitments
In additionOn May 29, 2020, the Company secured a licensing agreement (the “Prior BTCC License Agreement”) with BARC (TOCA) Limited (“BARC”), the exclusive promoter of the British Touring Car Championship (the “BTCC”). Pursuant to the minimum royalty guarantee payments,Prior BTCC License Agreement, the Company is obligated bywas granted an exclusive license (the “BTCC License”) to use certain licensed intellectual property for motorsports and/or racing video gaming products related to, themed as, or containing the Video Game Licenses’ agreementsBTCC, on consoles, PC and mobile applications, esports series and esports events (including the Company’s esports platform). In exchange for the BTCC License, the Prior BTCC License Agreement required the Company to spendpay BARC an initial fee in two equal installments of $100,000 each, both of which were made prior to their respective due dates. Following the initial fee, the Prior BTCC License Agreement also required the Company to pay royalties, including certain minimum annual guarantees, on an ongoing basis to BARC and to meet certain product distribution, marketing and related milestones, subject to termination penalties. On October 26, 2023, BARC delivered notice to the Company terminating the Prior BTCC License Agreement. The termination of the Prior BTCC License Agreement was effective as of November 3, 2023. As of March 31, 2024, the Company had a minimum amount on relevant marketing activities each year, aggregating tototal remaining liability in connection with the BTCC License, inclusive of the unpaid installments, of $2.350.9 million, across allwhich is included in purchase commitments liabilities on the unaudited condensed consolidated balance sheets. On April 12, 2024, the Company entered into a settlement agreement (the “BARC Settlement Agreement”) with BARC for settlement of the agreements. As of June 30, 2023,remaining liability in connection with the Company has not fulfilled any of its minimum marketing obligationBTCC License. See Note 12 – Subsequent Events for fiscal year 2023.more information.
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
On July 13, 2021, the Company entered into a license agreement with INDYCAR LLC (“INDYCAR”) pursuant to which INDYCAR granted the Company a license to use certain licensed intellectual property for motorsports and/or racing video gaming products related to, themed as, or containing the INDYCAR SERIES (the “INDYCAR Gaming License”). The INDYCAR Gaming License was a long-term agreement, in connection with which the parties intended to form an exclusive relationship for the development of video games to be the official video games of the INDYCAR SERIES. Additionally, the Company and INDYCAR entered into a license agreement pursuant to which the Company was granted a license to use certain licensed intellectual property for motorsports and/or racing esports events related to, themed as, or containing the INDYCAR SERIES (including the rFactor 2 platform) (the “INDYCAR Esports License” and together with the INDYCAR Gaming License, the “INDYCAR Licenses”). Upon execution of the INDYCAR Gaming License, the Company recorded a liability and a related intangible asset equal to the present value of the minimum royalty payments due under the agreement. The license intangible asset was impaired during 2023 as discussed further in Note 4 – Intangible Assets in the audited consolidated financial statements for the year ended December 31, 2023, as included in the 2023 Form 10-K. On November 8, 2023, INDYCAR delivered notice to the Company terminating the INDYCAR Licenses. The termination of the INDYCAR Licenses was effective as of November 8, 2023. The notice also demanded, among other things, certain liquidated damages in accordance with the INDYCAR license agreements amounting to approximately $2.9 million related to certain minimum payments due under such license agreements. The Company adjusted its liability related to the INDYCAR license agreements as a result of the termination notice, which resulted in a gain of $0.6 million. As of March 31, 2024 and December 31, 2023, the Company had a total remaining liability in connection with the INDYCAR Licenses of $2.9 million, which is included in purchase commitments liabilities on the unaudited condensed consolidated balance sheets.
Purchase Commitment Liabilities
On April 20, 2021, the Company acquired 100% of the share capital of Studio 397 B.V. (“Studio397”) from Luminis International B.V. and Technology In Business B.V. (collectively, the “Sellers”). The purchase price originally consisted of (i) $12.8 million paid at closing and (ii) $3.2 million payable April 2022 on the first anniversary of closing, as deferred consideration (the “Deferred Payment”). On April 22, 2022 and July 21, 2022, the Company entered into certain letter agreements with the Sellers pursuant to which, among other things, the Deferred Payment installment amount due to be paid by the Company on the first anniversary of closing was reduced from $3.2 million to $1 million with the remaining $2.2 million to be settled in installments of: $330,000 to be paid on July 31, 2022; for the period August 15, 2022, through December 15, 2022 monthly installments of $100,000; and for the period beginning on January 15, 2023, monthly installments of $150,000 until the remaining Deferred Payment amount is satisfied. The letter agreements also call for 15% interest on the Deferred Payment balance effective on July 19, 2022. The remaining principal balance of the Deferred Payment as of March 31, 2024 was $0.6 million with unpaid accrued interest of $0.3 million.
NOTE 10 – CONCENTRATIONS
Customer Concentrations
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the following periods:
SCHEDULE OF CONCENTRATIONS
| Three Months Ended March 31, | ||||||||
| Customer | 2024 | 2023 | ||||||
| Customer B | % | % | ||||||
| Customer C | % | % | ||||||
| Customer D | % | % | ||||||
| Total | % | % | ||||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Customer | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Customer B | 26.7 | % | 39.5 | % | 25.5 | % | 26.2 | % | ||||||||
| Customer C | 29.8 | % | 29.7 | % | 28.5 | % | 21.6 | % | ||||||||
| Customer D | 24.2 | % | 24.6 | % | 26.0 | % | 21.5 | % | ||||||||
| Total | 80.7 | % | 93.8 | % | 80.0 | % | 69.3 | % | ||||||||
| 20 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s trade accounts receivable as of:
| Customer | June 30, 2023 | December 31, 2022 | ||||||
| Customer A | - * | 50.5 | % | |||||
| Customer B | 29.5 | % | 11.2 | % | ||||
| Customer C | 46.7 | % | 15.2 | % | ||||
| Customer D | 18.4 | % | 13.1 | % | ||||
| Total | 94.6 | % | 90.0 | % | ||||
| Customer | March 31, 2024 | December 31, 2023 | ||||||
| Customer B | % | % | ||||||
| Customer C | % | % | ||||||
| Customer D | % | % | ||||||
| Total | % | % | ||||||
A reduction in sales from or loss of these customers, in a significant amount, could have a material adverse effect on the Company’s results of operations and financial condition.
Supplier Concentrations
The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s cost of revenues for the following periods:
SCHEDULE OF CONCENTRATIONS
| Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended March 31, | ||||||||||||||||||||||
| Supplier | 2023 | 2022 | 2023 | 2022 | 2024 | 2023 | ||||||||||||||||||
| Supplier A | % | % | % | % | * % | % | ||||||||||||||||||
| Supplier C | * | % | * | * | ||||||||||||||||||||
| Total | % | % | % | % | * % | % | ||||||||||||||||||
| * | Less than 10%. |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 11 – SEGMENT REPORTING
The Company’s principal operating segments coincide with the types of products and services to be sold. The products and services from which revenues are derived are consistent with the reporting structure of the Company’s internal organization. The Company’s two reportable segments for the three months six months ended June 30,March 31, 2024 and 2023 and 2022 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“esports segment”). The Company’s Chief 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, 2023March 31, 2024 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to the reportable segments disclosed. There are no inter-segment revenue transactions and, therefore, revenues are only to external customers. As the Company primarily generates its revenues from customers in the United States, no geographical segments are presented.
Segment operating profit is determined based upon internal performance measures used by the 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
| 2024 | 2023 | |||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | 2024 | 2023 | |||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Gaming | $ | 1,739,096 | $ | 1,941,938 | $ | 3,178,313 | $ | 4,900,326 | $ | 3,029,036 | $ | 1,439,217 | ||||||||||||
| Esports | 34 | 67,049 | 290,172 | 430,450 | - | 290,138 | ||||||||||||||||||
| Total Revenues | $ | 1,739,130 | $ | 2,008,987 | $ | 3,468,485 | $ | 5,330,776 | $ | 3,029,036 | $ | 1,729,355 | ||||||||||||
| Cost of Revenues: | ||||||||||||||||||||||||
| Gaming | $ | 865,309 | $ | 820,737 | $ | 1,740,148 | $ | 2,224,744 | $ | 666,627 | $ | 874,839 | ||||||||||||
| Esports | 858 | 35,420 | 374,755 | 645,219 | - | 373,897 | ||||||||||||||||||
| Total Cost of Revenues | $ | 866,167 | $ | 856,157 | $ | 2,114,903 | $ | 2,869,963 | $ | 666,627 | $ | 1,248,736 | ||||||||||||
| Gross Profit (Loss): | ||||||||||||||||||||||||
| Gaming | $ | 873,787 | $ | 1,121,201 | $ | 1,438,165 | $ | 2,675,582 | $ | 2,362,409 | $ | 564,378 | ||||||||||||
| Esports | (824 | ) | 31,629 | (84,583 | ) | (214,769 | ) | - | (83,759 | ) | ||||||||||||||
| Total Gross Profit | $ | 872,963 | $ | 1,152,830 | $ | 1,353,582 | $ | 2,460,813 | $ | 2,362,409 | $ | 480,619 | ||||||||||||
| Loss From Operations: | ||||||||||||||||||||||||
| Gaming | $ | (8,559,203 | ) | $ | (6,393,338 | ) | $ | (13,664,576 | ) | $ | (21,437,759 | ) | $ | (1,123,547 | ) | $ | (5,105,373 | ) | ||||||
| Esports | (54,104 | ) | (292,077 | ) | (360,120 | ) | (851,006 | ) | (91,777 | ) | (306,016 | ) | ||||||||||||
| Total Loss From Operations | $ | (8,613,307 | ) | $ | (6,685,415 | ) | $ | (14,024,696 | ) | $ | (22,288,765 | ) | ||||||||||||
| Total Loss from Operations | $ | (1,215,324 | ) | $ | (5,411,389 | ) | ||||||||||||||||||
| Depreciation and Amortization: | ||||||||||||||||||||||||
| Gaming | $ | 92,497 | $ | 109,656 | $ | 177,615 | $ | 217,139 | $ | 61,298 | $ | 85,118 | ||||||||||||
| Esports | 12,357 | 8,069 | 24,593 | 16,657 | 12,426 | 12,236 | ||||||||||||||||||
| Total Depreciation and Amortization | $ | 104,854 | $ | 117,725 | $ | 202,208 | $ | 233,796 | $ | 73,724 | $ | 97,354 | ||||||||||||
| Interest Expense, net: | ||||||||||||||||||||||||
| Gaming | $ | (244,750 | ) | $ | (191,662 | ) | $ | (443,870 | ) | $ | (393,258 | ) | $ | (30,882 | ) | $ | (199,120 | ) | ||||||
| Esports | - | - | - | - | - | - | ||||||||||||||||||
| Total Interest Expense, net | $ | (244,750 | ) | $ | (191,662 | ) | $ | (443,870 | ) | $ | (393,258 | ) | $ | (30,882 | ) | $ | (199,120 | ) | ||||||
| Other Income (Expense), net: | ||||||||||||||||||||||||
| Other (Expense) Income, Net: | ||||||||||||||||||||||||
| Gaming | $ | 664,264 | $ | (610,481 | ) | $ | 1,032,508 | $ | (767,605 | ) | $ | (409,164 | ) | $ | 368,244 | |||||||||
| Esports | (7,089 | ) | (113 | ) | (24,016 | ) | (5,088 | ) | (28,028 | ) | (16,927 | ) | ||||||||||||
| Total Other Income (Expense), net | $ | 657,175 | $ | (610,594 | ) | $ | 1,008,492 | $ | (772,693 | ) | ||||||||||||||
| Total Other (Expense) Income, net | $ | (437,192 | ) | $ | 351,317 | |||||||||||||||||||
| Net Loss: | ||||||||||||||||||||||||
| Gaming | $ | (8,139,689 | ) | $ | (7,195,481 | ) | $ | (13,075,938 | ) | $ | (22,598,621 | ) | $ | (1,591,569 | ) | $ | (4,936,249 | ) | ||||||
| Esports | (61,193 | ) | (292,190 | ) | (384,136 | ) | (856,095 | ) | (91,829 | ) | (322,943 | ) | ||||||||||||
| Total Net Loss | $ | (8,200,882 | ) | $ | (7,487,671 | ) | $ | (13,460,074 | ) | $ | (23,454,716 | ) | $ | (1,683,398 | ) | $ | (5,259,192 | ) | ||||||
| June 30, 2023 | December 31, 2022 | |||||||
| Total Assets: | ||||||||
| Gaming | $ | 11,104,297 | $ | 16,315,359 | ||||
| Esports | 2,231,942 | 2,582,433 | ||||||
| Total Assets | $ | 13,336,239 | $ | 18,897,792 | ||||
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
| March 31, 2024 | December 31, 2023 | |||||||
| Total Assets: | ||||||||
| Gaming | $ | 6,640,828 | $ | 7,892,388 | ||||
| Esports | 3,182,705 | 1,866,316 | ||||||
| Total Assets | $ | 9,823,533 | $ | 9,758,704 | ||||
NOTE 12 - SUBSEQUENT EVENTS
The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the unaudited condensed consolidated financial statements were issued.
On July 28, 2023, Wesco filed a complaint in state court in Florida againstApril 12, 2024, the Company as well asentered into the other defendants involved inBARC Settlement Agreement with BARC. The BARC Settlement Agreement resolved any and all disputes between the litigation relatedCompany and BARC with respect to the HC2 and Continental Complaint. Refer totermination of the Prior BTCC License Agreement. As disclosed in Note 9 – Commitments and Contingencies, the Prior BTCC License Agreement was terminated effective as of November 3, 2023. Pursuant to the BARC Settlement Agreement, the Company and BARC, without admitting any liabilities, agreed that the Prior BTCC License Agreement was terminated without any liabilities and that any and all royalties and/or any other sums whatsoever were forgiven by BARC and discharged in their entirety in consideration of (i) the Company’s one-time payment of $225,000 to BARC and (ii) the Company and BARC entering, effective as of April 12, 2024, into a new license agreement to use certain licensed intellectual property related to, themed as, or containing the BTCC (the “New BTCC License Agreement”).
On April 12, 2024, the Company and BARC entered into the New BTCC License Agreement. Pursuant to the New BTCC License Agreement, BARC granted the Company a non-exclusive license to use certain licensed intellectual property relating to the BTCC for official BTCC downloadable content digitally purchased for the rFactor 2 video game. As consideration for the license under the New BTCC License Agreement, the Company will be obligated to pay BARC an annual royalty in the amount of 50% of Adjusted Gross Annual Sales (as defined in the New BTCC License Agreement) of the Company’s BTCC downloadable content purchased for the rFactor 2 video game during the term of the New BTCC License Agreement. The term of the New BTCC License Agreement expires on December 31, 2026.
On April 26, 2024, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Traxion.GG Limited (“Traxion.GG”). Pursuant to the Purchase Agreement, the Company sold to Traxion.GG certain of the Company’s assets related to the Company’s motorsport and racing games community content platform (“Traxion”). Such sale, which closed on April 26, 2024, was in furtherance of the Company’s divestiture of non-core components. The consideration received was $250,000 consisting of a $200,000 cash payment at closing and $50,000 in value of marketing services to be provided by Traxion.GG to the Company during the period from April 26, 2024 through December 31, 2026 on YouTube, Twitch, Instagram, X (formerly known as Twitter) and Facebook, and access to the Traxion YouTube and Twitch channels for Le Mans Virtual Series and key esports and gaming events as agreed between Traxion.GG and the Company.
On May 3, 2024 (but effective as of October 1, 2023), the Company entered into a new lease agreement with Lemon City Group, LLC, an entity controlled by Driven Lifestyle, for approximately 800 square feet of storage space located in Miami, Florida. The term of the lease is nine months, with a commencement date of October 1, 2023, consistent with the Company’s initial date of occupancy, and expiring on June 30, 2024, terminable with a 60-day written notice with no penalty. The base rent from the lease commencement date through June 30, 2024 is fixed at approximately $1,800 per month.
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, 20222023 (the “2022“2023 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 24, 2023April 1, 2024 and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Report. Unless the context requires otherwise, references to the “Company,” “Motorsport Games,” “we,” “us” and “our” refer to Motorsport Games Inc., a Delaware corporation.
About 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”) and others.. Our portfolio is comprised of some of the most prestigious motorsport leagues and events in the world. Further, in 2021 we acquiredalso includes 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 gamesplatform. Our purpose is to make the thrill of motorsports accessible to everyone by creating the highest quality, most sophisticated and their underlying technology to our portfolio.innovative experiences for racers, gamers and fans of all ages. Our products and services target a large global motorsport audience.
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 official licenses to develop multi-platform games for the BTCC, the 24 Hours of Le Mans race and the WEC, as well as 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.content (“DLC”). We have obtained the official licenses to develop multi-platform games for the 24 Hours of Le Mans race and the WEC. We are also striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing games.
On October 3, 2023, we sold our NASCAR licensed rights under that certain Second Amended and Restated Distribution and License Agreement with NASCAR Team Properties (“NTP”) (the “NASCAR License”) to iRacing.com Motorsport Simulations, LLC. Prior to the sale of our NASCAR License, we had been the official video game developer and publisher for the NASCAR video game racing franchise and had the exclusive right to create and organize esports leagues and events for NASCAR using our NASCAR racing video games, in each case, subject to certain limited exceptions. Concurrently with the sale of our NASCAR License, we entered into an agreement with NTP pursuant to which we have a limited non-exclusive right and license to, among other things, sell our NASCAR games and DLCs that are currently in our product portfolio through December 31, 2024 (the “NASCAR New Limited License”). For the three and six months ended June 30,March 31, 2024 and 2023, 49% and 2022, a majority57% of our total revenue, respectively, was generated from sales of our NASCAR racing video games.
On October 26, 2023, BARC (TOCA) Limited (“BARC”), the exclusive promoter of the British Touring Car Championship (the “BTCC”), delivered notice to the Company terminating the license agreement between the parties relating to the Company’s development of video games and the organization and facilitation of esports events for the BTCC (the “Previous BTCC License”), effective as of November 3, 2023. As discussed elsewherea result, the Company no longer has the right to develop and publish the video games for the BTCC racing series or to create and organize its esports leagues and events.
On November 8, 2023, INDYCAR, LLC delivered notice to the Company terminating the license agreements between the parties relating to the Company’s development of video games and the organization and facilitation of esports events for the INDYCAR racing series (collectively, the “INDYCAR License”), effective immediately. As a result, the Company no longer has the right to develop and publish the video games for the INDYCAR racing series or to create and organize its esports leagues and events.
On February 20, 2024, we released Le Mans Ultimate on PC in this Report, dueearly access. Le Mans Ultimate is the official game of the WEC and 24 Hours of Le Mans, and is the first officially licensed and dedicated 24 Hours of Le Mans video game release in over twenty years.
On April 12, 2024, the Company and BARC entered into a settlement agreement (the “BARC Settlement Agreement”) relating to the Previous BTCC License, whereby the parties concurrently entered into a new license agreement pursuant to which BARC granted the Company a non-exclusive license to use certain licensed intellectual property relating to the BTCC for official BTCC DLC digitally purchased for the rFactor 2 video game through December 31, 2026.
On April 26, 2024, the Company sold certain assets related to its motorsport and racing games community content platform (“Traxion”) in furtherance of streamlining the Company’s operations, reduction of operational costs and divestiture of non-core components.
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Due to the uncertainty surrounding the Company’sour ability to raise funding, and in light of itsour liquidity position and anticipated future funding requirements, the Company has decidedwe continue to explore other strategic alternatives and potential options for itsour business, including, but not limited to, the sale or licensing of certain of our assets in addition to the Company’s assets. For example, the Companyrecent sales of our NASCAR License and Traxion. If any such additional strategic alternative is currentlyexecuted, it is expected it would help to improve our working capital position and reduce overhead expenditures, thereby lowering our expected future cash-burn, and provide some short-term liquidity relief. Nonetheless, even if we are successful in discussions with a third-party for the potential saleimplementing one or more additional strategic alternatives, we will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of the Company’s NASCAR license.our business and operations. There are no assurances that the Companywe will even be successful in implementing aany additional strategic planplans for the sale or licensing of itsour assets, including the consummation of a sale of the Company’s NASCAR license, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond the Company’s control, such as, among other things, the required consent from NASCAR with respect to any sale of the Company’s NASCAR license. Accordingly, as the Company continues to address its liquidity constraints, it has re-evaluated its product roadmap in the second quarter of 2023 and modified the expected timing and scope of certain new product releases, including the release of any future NASCAR games, which have been put on hold indefinitely. Further, the Company is evaluating its ability to deliver new titles under its other licenses, such as with INDYCAR and the BTCC, which may result in further adjustments to the Company’s product roadmap. See Note 1 – Business Organization, Nature of Operations, and Risks and Uncertainties in our condensed consolidated financial statements and “—Liquidity and Capital Resources” for further information.control.
As of June 30, 2023,March 31, 2024, we have a total headcount of 10465 people, made up of 10246 full-time employees, including 6551 dedicated to game development. Our headcount numbers as of June 30, 2023, reflect that we have ceaseddevelopment, to continue developing our development operations in Russia effective September 2022, as a result of the Ukraine-Russia conflict and as such, we do not expect the Company’s development operations to have significant exposure to changes in circumstances arising from the Ukraine-Russia conflict.expanded product offerings.
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”).
2022Restructuring 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 initially expected 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 June 30, 2023, the Company had increased its annualized savings to $4.9 million, while having incurred restructuring costs of approximately $1.3 million to date.
The Company continues to seek to reduce its monthly net cash-burn by reducing its cost base through maintaining and enhancing cost control initiatives, such as those that it expects to achieve through the 2022 Restructuring Program, and is evaluating the structure of its business for additional changes in order to improve both its near-term and long-term liquidity position.
Trends and Factors Affecting Our Business
Product Release Schedule: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: | 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 | October 6, 2022, available on PC and next generation consoles | |
| NASCAR | October 14, 2022, available on Nintendo Switch | |
| rFactor 2 Q4 2022 Content Update | November 7, 2022, available on PC | |
| rFactor 2 Q1 2023 Content Update | February 21, 2023, available on PC | |
| NASCAR Heat 5 – Next Gen Car | June 23, 2023, available on PC and consoles | |
| rFactor 2: Race Control multiplayer | October 5, 2023, available on PC | |
| Le Mans Ultimate | February 20, 2024, available on PC |
| * | Pursuant to the NASCAR New Limited License, we have a limited non-exclusive right and license to, among other things, sell these NASCAR games and DLCs through December 31, 2024. |
We continually evaluate our planned product release schedule and modify the timing of upcoming products based on developments in our business, or if we believe it will result in a better consumer experience. For example,The sale of our NASCAR License and the termination of our BTCC License and INDYCAR License, as disclosed elsewhere in this Report, has impacted our long-term product release schedule as we recently modified the timing of the upcomingwill no longer be producing NASCAR, BTCC and INDYCAR game to 2024, from an original planned release in 2023, and currently anticipate a December 2023 release date for our upcoming Le Mans Ultimate game, which was announced in June 2023.titles moving forward.
Further, as discussed aboveAs we continue to evaluate the cost saving initiatives and elsewhere in this Report, dueexplore other strategic alternatives and potential options for our business, including, but not limited to, the uncertainty surrounding the Company’s ability to raise funding, and in lightsale or licensing of its liquidity position and anticipated future funding requirements, the Company is currently in discussions with a third-party for the potential salecertain of the Company’s NASCAR license. There are no assurances that the Company will consummate a sale of the Company’s NASCAR license, which is subject to the satisfaction of conditions beyond the Company’s control, such as, among other things, the required consent from NASCAR. As a result, in the second quarter of 2023, the Company decided that the release of any future NASCAR games will be put on hold indefinitely. Additionally, the Company is evaluating its ability to deliver new titles under its other licenses, such as with INDYCAR and the BTCC, which may result inour assets, further adjustments to the Company’sour product roadmap. See Note 1 – Business Organization, Nature of Operations, and Risks and Uncertainties in our condensed consolidated financial statements and “—Liquidity and Capital Resources” for further information.roadmap may be required.
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Hardware Platforms: 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.consoles, which comprised approximately 49% and 57% of our total revenue for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024 and 2023, the sale of products for Microsoft Windows via Steam comprised approximately 50% and 28% of our total revenue, respectively, and the sale of products for mobile platforms comprised approximately 1% and 6% of our total revenue, respectively. The success of our business is dependent upon consumer acceptance of video game console/PC platforms and continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those released by Sony and Microsoft in November 2020, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The latest generation of Sony and Microsoft consoles provide “backwards compatibility” (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products.
Concentration of Sales:Sales
Our NASCAR products have historically accounted for the majority of our revenue. However, we have worked to diversify our product offerings and revenue from other sources by introducing titles such as Le Mans Ultimate, our recently released Le Mans video game, KartKraft and rFactor 2, andas well as introducing the 24 Hours of Le Mans Virtual esports event to our portfolio of product offerings, and thereby reducing our dependency on the NASCAR franchise as our substantially sole source of revenue. For example, revenues associated with our NASCAR franchise accounted for approximately 67.5%49% and 61.1%57% of our total revenue for the sixthree months ended June 30,March 31, 2024 and 2023, respectively. Following the sale of our NASCAR License and 2022, respectively.the execution of the NASCAR New Limited License, which allows us to sell our NASCAR games and DLCs that are currently in our product portfolio through December 31, 2024, we anticipate the amount of revenue to be generated by our existing NASCAR products to decline over time.
Retail Distribution: 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). Due to our modified productproduct release schedule, we did not recognize significantrecognized minimal revenue from sales of physical gaming products duringfor the sixthree months ended June 30,March 31, 2024 and 2023. WeHowever, we expect to continue to use a limited number of distribution partners in the future for sales of our physical gaming products and as such, concentration risk remains a relevant factor for the Company.products. See “Risk Factors—Risks Related to Our Business and Industry—The importance of retail sales to our business exposes us to the risks of that business model” and “Risk Factors—Risks Related to Our Business and Industry—We primarily depend on a single third-party distribution partner to distribute our games for the retail channel, and our ability to negotiate favorable terms with such partner and its continued willingness to purchase our games is critical for our business” in Part I, Item 1A of the 20222023 Form 10-K for additional information regarding the importance of retail sales and our distribution partners to our business.
Digital Business: 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 each of the sixthree months ended June 30,March 31, 2024, and 2023, and 2022, approximately 84.2% and 67.0%, respectively,92% of our revenue from sales of video games for game consoles and PCs was through digital channels. We believe this trend of increasing direct digital downloads is primarily due to benefits relating to convenience and accessibility that digital downloads provide. In addition, as part of our digital business strategy, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through in-game purchases and extra content.
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Esports:
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 ofIn 2023, was another successful quarter for our Esports segment, with we organized 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 rFactor 2 competition ‘GT Challenge’. Our dedicated esports events event, which had a cumulative total of approximately 8.8 million video views with approximately 27 million minutes watchedwatched. The 24 Hours of Le Mans Virtual event had a global audience of 5 million across television (TV)/over-the-top (OTT) channels. Although we did not organize the Le Mans Virtual Series for the three months ended June 30, 2023. 2023/24 season, we currently plan on organizing the 2024/25 Le Mans Virtual Series to commence later this year. We also intend to continue exploring opportunities to expand the recurring portion of our esports segment outside of Le Mans.
Recurring Revenue Sources: Sources
Our business model includes revenue that we deem recurring in nature, such aswhich historically consisted primarily of revenue from our annualized sportsNASCAR video game racing franchise (currently NASCAR) 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. Wehistorically have been able to forecast the revenue from this area of our business with greater relative confidence than for new games, services, and business models. AsFollowing the sale of our NASCAR License and as we continue to incorporate new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of our business.business, including through the planned introduction of new annualized sports franchise games, such as with Le Mans.
Reportable Segments
We use “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by our chief operating decision maker for making operating decisions and assessing performance as the source for determining our reportable segments. Our chief operating decision maker is our Chief Executive Officer, 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”).
Components of Our Results of Operations
Revenues
We have historically derived substantially all of our revenue from sales of our games and related extra content that can be played by customers on a variety of platforms, including game consoles, mobile phones, PCs and tablets. Starting in 2019, we began generating sponsorship revenues from our production of live and virtual esports events. In early 2022, we also began offering software development services for racing simulators.
Our product and service offerings included within the Gaming segment primarily include, but are not limited to, full PC, console, and mobile games with both online and offline functionality, which generally include:
| ● | the initial game delivered digitally or via physical 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 Esportsesports segment relate primarily to curating esports events.
Cost of Revenues
Cost of revenues for our Gaming segment is primarily comprised of royalty expenses, which historically has been primarily attributable to our license arrangement with NASCAR License prior to its sale and certain other third 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 Esportsesports 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 NetworkDriven Lifestyle 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 certain definite lived intangible assets acquired through our various acquisitions.
Results of Operations
Three Months Ended June 30, 2023March 31, 2024 compared to Three Months Ended June 30, 2022March 31, 2023
In this section, references to 2024 refer to the three months ended March 31, 2024 and references to 2023 refer to the three months ended June 30, 2023 and references to 2022 refer to the three months ended June 30, 2022.March 31, 2023.
RevenueRevenues
| For the Three Months Ended June 30, | Change | For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||
| Gaming | $ | 1,739,096 | $ | 1,941,938 | $ | (202,842 | ) | (10.4 | )% | $ | 3,029,036 | $ | 1,439,217 | $ | 1,589,819 | 110.5 | % | |||||||||||||||
| Esports | 34 | 67,049 | (67,015 | ) | (99.9 | )% | - | 290,138 | (290,138 | ) | (100.0 | % | ||||||||||||||||||||
| Total Revenues | $ | 1,739,130 | $ | 2,008,987 | $ | (269,857 | ) | (13.4 | )% | $ | 3,029,036 | $ | 1,729,355 | $ | 1,299,681 | 75.2 | % | |||||||||||||||
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Consolidated revenues were $3.0 million and $1.7 million for 2024 and $2.0 million for 2023, and 2022, respectively, a decreasean increase of $0.3$1.3 million, or 13.4%75.2%, when compared to the prior period.
Gaming segment revenues represented approximately 100% and 96.7%83.2% of our total 20232024 and 20222023 revenues, respectively, decreasingincreasing by $0.2$1.6 million, or 10.4%110.5%, when compared to the prior period. The decreaseincrease in Gaming segment revenues was primarily due to $0.7$1.4 million in lowerhigher digital and mobile game sales due to the release of Le Mans Ultimate on PC in February 2024. This increase was further driven by lower volumes of sales and less favorable pricing, and a $0.4$0.2 million reductionincrease in revenues earned through the development of simulation platforms for third parties. The change in digital and mobile game sales was primarily driven by a $0.5 million reduction in NASCAR title sales on PC, consoles and mobile platforms and a $0.2 million reduction in rFactor 2 and KartKraft title sales on PC. The lower period over period revenues were partially offset by a $0.8 million reduction in sales allowances recognized in 2023, when compared to 2022.third-parties.
Esports segment revenues represented approximately 0% and 3.3%16.8% of our total 20232024 and 20222023 revenues, respectively, decreasing by $0.1$0.3 million, or approximately 100%, when compared to the prior period. The decrease in Esportsesports segment revenue was primarily due to lower sponsorship revenue from ourthe Company not offering a Le Mans Virtual Series which completed its 2022-23 season(“LMVS”) event in January 2023. 2024, resulting in no earned sponsorship or events revenue, compared to $0.3 million earned in January 2023, when the Company offered the concluding LMVS event for the 2022/23 LMVS season.
Cost of Revenues
| For the Three Months Ended June 30, | Change | For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||
| Cost of Revenues: | ||||||||||||||||||||||||||||||||
| Cost of revenues: | ||||||||||||||||||||||||||||||||
| Gaming | $ | 865,309 | $ | 820,737 | $ | 44,572 | 5.4 | % | $ | 666,627 | $ | 874,839 | $ | (208,212 | ) | (23.8 | )% | |||||||||||||||
| Esports | 858 | 35,420 | (34,562 | ) | (97.6 | )% | - | 373,897 | (373,897 | ) | (100.0 | )% | ||||||||||||||||||||
| Total Cost of Revenues | $ | 866,167 | $ | 856,157 | $ | 10,010 | 1.2 | % | $ | 666,627 | $ | 1,248,736 | $ | (582,109 | ) | (46.6 | )% | |||||||||||||||
Consolidated cost of revenues were $0.9was $0.7 million and $1.2 million for both2024 and 2023, and 2022, remaining flatrespectively, a decrease of $0.6 million, or 46.6%, when compared to the prior period.
Gaming segment cost of revenues represented approximately 99.9%100.0% and 95.9%70.1% of our total 20232024 and 20222023 cost of revenues, respectively, increasingdecreasing by approximately $0.05$0.2 million, or 5.4%23.8%, when compared to the prior period. The increasedecrease in Gaming segment cost of revenues was primarily driven by a $0.1$0.3 million increasereduction in royalty and license fees, driven by increases inpayments, mainly related to our NASCAR titles as a direct result of lower game sales for the annual contractual minimum royalty guarantee payments due on our gaming licenses.franchise compared to the prior period. This increasedecrease was partially offset by a $0.05$0.1 million reductionincrease in game productionamortization costs which were higher in 2022 duerelated to the development of a simulation platform for a third-party that did not repeat in 2023. our licenses.
Esports segment cost of revenues represented approximately 0.1%0% and 4.1%29.9% of our total 20232024 and 20222023 cost of revenues, respectively, decreasing by $0.04$0.4 million or 97.6%, when compared to the prior period. The decrease in Esportsesports segment cost of revenues was primarily driven by $0.04 million of lowerdue to the Company not offering a LMVS event in January 2024, resulting in no prize winnings, studio and televised production costs. costs, compared to $0.4 million of such costs incurred in January 2023 when the Company offered the concluding LMVS event for the 2022/23 LMVS season.
Gross Profit
| For the Three Months Ended June 30, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Gross Profit (Loss): | ||||||||||||||||
| Gaming | $ | 873,787 | $ | 1,121,201 | $ | (247,414 | ) | (22.1 | )% | |||||||
| Esports | (824 | ) | 31,629 | (32,453 | ) | 102.6 | % | |||||||||
| Total Gross Profit (Loss) | $ | 872,963 | $ | 1,152,830 | $ | (279,867 | ) | (24.3 | )% | |||||||
| Gaming - Gross Profit Margin | 50.2 | % | 57.7 | % | ||||
| Esports - Gross Profit Margin | (2,423.5 | )% | 47.2 | % | ||||
| Total Gross Profit Margin | 50.2 | % | 57.4 | % |
| For the Three Months Ended March 31, | Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Gross Profit (Loss) | ||||||||||||||||
| Gaming | $ | 2,362,409 | $ | 564,378 | $ | 1,798,031 | 318.6 | % | ||||||||
| Esports | - | (83,759 | ) | 83,759 | (100.0 | )% | ||||||||||
| Total Gross Profit (Loss) | $ | 2,362,409 | $ | 480,619 | $ | 1,881,790 | 391.5 | % | ||||||||
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| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Gaming - Gross Profit Margin | 78.0 | % | 39.2 | % | ||||
| Esports - Gross Profit (Loss) Margin | 0.0 | % | (28.9 | )% | ||||
| Total Gross Profit Margin | 78.0 | % | 27.8 | % | ||||
Consolidated gross profit was $0.9$2.4 million and $1.2$0.5 million for 2024 and 2023, and 2022, respectively, a decreasean increase of $0.3$1.9 million, or 24.3%391.5%, when compared to the prior period. Gross profit margin was 50.2%78.0% in 2023,2024, compared to 57.4%27.8% in 2022, a decrease of 720 basis points. The decreases in both gross profit and gross profit margin were driven primarily by lower gaming revenues, which did not lead to a corresponding decrease in cost of revenues due to certain minimum royalty guarantees.2023.
Gaming segment gross profit was $0.9$2.4 million for 2023,2024, compared to $1.1$0.6 million for 2022,2023, representing a gross profit margin of 50.2%78.0% for 20232024 and 57.7%39.2% for 2022.2023. The decreaseincrease in our Gaming segment gross profit of $0.2$1.8 million, and corresponding decreaseincrease in gross profit margin, were was primarily due to lowerhigher gaming revenues, particularly related to increased digital game revenues as discussed above.
Esportsa result of the release of Le Mans Ultimate on PC in February 2024. The increase in gross profit for the Gaming segment was break even atalso attributable to lower cost of revenues due to decreased royalty payments resulting from the gross profit level for 2023, compared to a $0.03 million gross profit, or 47.2% gross profit margin, for 2022, a decrease of $0.03 million, or 102.6%, whenin NASCAR game sales compared to the prior year. The change inperiod.
Esports segment gross profitloss was $0 for 2024, compared to $0.1 million for 2023, when comparedrepresenting no gross loss margin in 2024 and a gross loss margin of 28.9% for 2023. As discussed above, the LMVS has not yet commenced for the 2024/25 season, which led to no revenues or cost of revenues being incurred for the prior period was primarily due to the timing of revenue and cost recognition as it relates to the Le Mans Virtual Series, which held its final eventesports segment in January 2023.
2024.
Operating Expenses
For the Three Months Ended June 30, | Change | For the Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||
| 2023 | 2022 | $ | % | 2024 | 2023 | $ | % | |||||||||||||||||||||||||
| Operating Expenses: | ||||||||||||||||||||||||||||||||
| Sales and marketing | $ | 434,788 | $ | 1,540,220 | $ | (1,105,432 | ) | (71.8 | )% | $ | 250,386 | $ | 618,410 | $ | (368,024 | ) | (59.5 | )% | ||||||||||||||
| Development | 1,787,768 | 2,681,643 | (893,875 | ) | (33.3 | )% | 1,063,357 | 2,397,134 | (1,333,777 | ) | (55.6 | )% | ||||||||||||||||||||
| General and administrative | 3,154,233 | 3,349,609 | (195,376 | ) | (5.8 | )% | 2,190,266 | 2,779,110 | (588,844 | ) | (21.2 | )% | ||||||||||||||||||||
| Impairment of intangible assets | 4,004,627 | 149,048 | 3,855,579 | 2,586.8 | % | |||||||||||||||||||||||||||
| Depreciation and amortization | 104,854 | 117,725 | (12,871 | ) | (10.9 | )% | 73,724 | 97,354 | (23,630 | ) | (24.3 | )% | ||||||||||||||||||||
| Total Operating Expenses | $ | 9,486,270 | $ | 7,838,245 | $ | 1,648,025 | 21.0 | % | $ | 3,577,733 | $ | 5,892,008 | $ | (2,314,275 | ) | (39.3 | )% | |||||||||||||||
Changes in operating expenses are explained in more detail below:
Sales and Marketing
Sales and marketing expenses were $0.4$0.3 million and $1.5$0.6 million for 20232024 and 2022,2023, respectively, representing a $1.1$0.4 million, or 71.8%59.5%, decrease when compared to the prior period. The reduction in sales and marketing expenseexpenses was primarily driven by a $0.6 million reduction in external marketing expense, as well as a $0.5$0.4 million reduction in payroll and employee related expensesemployee-related expense as a result of lower headcount when compared to the prior period.
Development
Development expenses were $1.8$1.1 million and $2.7$2.4 million for 20232024 and 2022,2023, respectively, representing a $0.9$1.3 million, or 33.3%55.6%, decrease when compared to the prior period. The reduction in development expenseexpenses was primarily driven by a $0.7 million reductiondecrease in external development services, as well as a $0.6 million decrease in payroll expense, as a result of lower headcount, when compared to the prior period, as well as a $0.2 million reduction in external development expense driven by ongoing cost rationalization measures.period.
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General and Administrative
General and administrative (“G&A”) expenses were $3.2 $2.2 million and $3.3$2.8 million for 20232024 and 2022,2023, respectively, a decrease of $0.2 $0.6 million, or 5.8%21.2%, when compared to the prior period. The reduction in G&A expenseexpenses was primarily driven by a $0.5 million reduction legal and professional costs, due to the settlement of litigation in 2022 that did not repeat in 2023, a $0.3$0.6 million reduction in payroll and employee relatedemployee-related expenses, duefollowing certain headcount reductions compared to lower headcount period overthe prior period, and a $0.3 $0.3 million reduction in insurance costs. This wasThese reductions were partially offset by a $0.6 $0.3 million increase in severance costslegal and a $0.3 million increaseprofessional fees incurred in stock-based compensation expense, both driven by the departure of the Company’s former Chief Executive Officer in 2023.2024.
Impairment of Intangible Assets
Impairment of indefinite-lived intangible assets was $0 and $0.1 million in 2023 and 2022, respectively. The triggers for the assessments in 2022 were the changes to the Company’s product roadmap and the Company’s market capitalization, resulting in a $0.1 million impairment loss relating primarily to the rFactor 2 trade name and the Le Mans Video Gaming License.
Impairment of finite-lived intangible assets was $4.0 million and $0 in 2023 and 2022, respectively. The trigger for the impairment in 2023 was the Company’s decision to explore strategic alternatives and potential options for its business, resulting in a probable likelihood of the sale of certain licensing rights that would result in the Company’s inability to comply with the terms of a licensing agreement by the end of the year and the resulting reduction in expected future revenues.
Depreciation and Amortization
Depreciation and amortization expenses for 20232024 and 2022 presented no significant changes to the depreciation of capital assets.
Interest Expense
Interest expense for 2023 and 2022 presented no significant changes, remaining flat at $0.2 million respectively. Interest expense primarily consists of ongoing non-cash interest accretion of our INDYCAR and BTCC license liabilities.
Other Income (Expense), net
Other income, net for 2023 was $0.7 million, compared to other expense, net of $0.6 million for 2022, an improvement of $1.3 million. Other income, net for 2023 primarily consisted of foreign currency gains of $0.2 million and $0.4 million gain from a change in fair value of stock warrant liabilities, compared to other expenses, net for 2022 that primarily consisted of foreign currency losses of $0.65 million. The change in other income (expense), net between 2023 and 2022 is primarily due to favorable swings in foreign currency gains and losses period over period, arising from remeasuring transactions denominated in a currency other than U.S. dollars, as well as the change in the fair value of the Company’s stock warrants liabilities.
Other Comprehensive (Loss) Income
Other comprehensive loss was $0.2 million for 2023, compared to other comprehensive income of $0.1 million for 2022. The $0.3 million change in other comprehensive (loss) income 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
The loss attributable to non-controlling interest decreased by $0.05 million to a loss of $0.03 million as compared to a loss of $0.08 million for 2022. The improvement was attributed to the reduction of net losses in Le Mans Esports Series Ltd (the “Le Mans Joint Venture”).
Six Months Ended June 30, 2023 compared to Six Months Ended June 30, 2022
In this section, references to 2023 refer to the six months ended June 30, 2023 and references to 2022 refer to the six months ended June 30, 2022.
Revenue
| For the Six Months Ended June 30, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Revenues: | ||||||||||||||||
| Gaming | $ | 3,178,313 | $ | 4,900,326 | $ | (1,722,013 | ) | (35.1 | )% | |||||||
| Esports | 290,172 | 430,450 | (140,278 | ) | (32.6 | )% | ||||||||||
| Total Revenues | $ | 3,468,485 | $ | 5,330,776 | $ | (1,862,291 | ) | (34.9 | )% | |||||||
Consolidated revenues were $3.5 million and $5.3 million for 2023 and 2022, respectively, a decrease of $1.9 million, or 34.9%, when compared to the prior period.
Gaming segment revenues represented 91.6% and 91.9% of our total 2023 and 2022 revenues, respectively, decreasing by $1.7 million, or 35.1%, when compared to the prior period. The decrease in Gaming segment revenues was primarily due to $1.3 million in lower digital and mobile game sales and $0.7 million in lower retail sales, both of which were primarily driven by lower volumes of sales, as well as less favorable pricing. The change in digital and mobile game sales was primarily driven by a $1.0 million reduction in NASCAR title sales on PC, consoles and mobile platforms, and a $0.3 million reduction in rFactor 2 and KartKraft title sales on PC, respectively. The reduction in retail game sales of $0.7 million was due to lower retail sales of our NASCAR titles in 2023 when compared to the same period in 2022.
In addition to the decreases in revenue generated by game sales, revenue earned through the development of simulation platforms for third-parties was $0.5 million lower in 2023 compared to 2022. The lower period over period revenues were partially offset by $0.8 million reduction in sales allowances recognized in 2023, when compared to 2022.
Esports segment revenues represented 8.4% and 8.1% of our total 2023 and 2022 revenues, respectively, decreasing by $0.1 million, or 32.6%, when compared to the prior period. The decrease in Esports segment revenue was primarily due to lower sponsorship revenue from our Le Mans Virtual Series, which completed its 2022-23 season in January 2023.
Cost of Revenues
| For the Six Months Ended June 30, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Cost of Revenues: | ||||||||||||||||
| Gaming | $ | 1,740,148 | $ | 2,224,744 | $ | (484,596 | ) | (21.8 | )% | |||||||
| Esports | 374,755 | 645,219 | (270,464 | ) | (41.9 | )% | ||||||||||
| Total Cost of Revenues | $ | 2,114,903 | $ | 2,869,963 | $ | (755,060 | ) | (26.3 | )% | |||||||
Consolidated cost of revenues were $2.1 million and $2.9 million for 2023 and 2022, respectively, a decrease of $0.8 million, or 26.3%, when compared to the prior period.
Gaming segment cost of revenues represented 82.3% and 77.5% of our total 2023 and 2022 cost of revenues, respectively, decreasing by $0.5 million, or 21.8%, when compared to the prior period. The decrease in Gaming segment cost of revenues was primarily driven by a $0.3 million reduction in game production costs, a $0.2 million reduction in royalty payments and a $0.1 million reduction in development costs incurred to develop a simulation platform for a third-party. The decrease in production costs was due to no 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 digital and retail game sales. These reductions were partially offset by an increase in license fees of $0.1 million.
Esports segment cost of revenues represented 17.7% and 22.5% of our total 2023 and 2022 cost of revenues, respectively, decreasing by $0.3 million, or 41.9%, when compared to the prior period. The decrease in Esports segment cost of revenues was primarily driven by $0.3 million of lower studio and televised production costs associated with the final round of the Le Mans Virtual Series event for 2023 compared to 2022.
Gross Profit
| For the Six Months Ended June 30, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Gross Profit (Loss): | ||||||||||||||||
| Gaming | $ | 1,438,165 | $ | 2,675,582 | $ | (1,237,417 | ) | (46.2 | )% | |||||||
| Esports | (84,583 | ) | (214,769 | ) | 130,186 | (60.6 | )% | |||||||||
| Total Gross Profit (Loss) | $ | 1,353,582 | $ | 2,460,813 | $ | (1,107,231 | ) | (45.0 | )% | |||||||
| Gaming – Gross Profit Margin | 45.2 | % | 54.6 | % | ||||
| Esports – Gross Profit Margin | (29.1 | )% | (49.9 | )% | ||||
| Total Gross Profit Margin | 39.0 | % | 46.2 | % |
Consolidated gross profit was $1.4 million and $2.5 million for 2023 and 2022, respectively, a decrease of $1.1 million, or 45.0%, when compared to the prior period. Gross profit margin was 39.0% in 2023, compared to 46.2% in 2022, where the basis point decrease was driven primarily by lower gaming revenues as discussed above.
Gaming segment gross profit was $1.4 million for 2023, compared to $2.7 million for 2022, representing a gross profit margin of 45.2% for 2023 and 54.6% for 2022. The decrease in our Gaming segment gross profit of $1.2 million, and corresponding decrease in gross profit margin, was primarily due to lower gaming revenues as discussed above.
Esports segment gross loss was $0.1 million for 2023, compared to $0.2 million for 2022, representing a negative gross profit margin of 29.1% and 49.9% for 2023 and 2022, respectively. This improvement in our Esports segment gross loss of $0.1 million, and corresponding improvement in negative gross profit margin, was primarily due to lower production costs associated with the final round of the Le Mans Virtual Series event for 2023 compared to 2022.
Operating Expenses
For the Six Months Ended June 30, | Change | |||||||||||||||
| 2023 | 2022 | $ | % | |||||||||||||
| Operating Expenses: | ||||||||||||||||
| Sales and marketing | $ | 1,053,198 | $ | 3,228,669 | $ | (2,175,471 | ) | (67.4 | )% | |||||||
| Development | 4,184,902 | 5,085,980 | (901,078 | ) | (17.7 | )% | ||||||||||
| General and administrative | 5,933,343 | 6,772,763 | (839,420 | ) | (12.4 | )% | ||||||||||
| Impairment of goodwill | - | 4,788,268 | (4,788,268 | ) | (100.0 | )% | ||||||||||
| Impairment of intangible assets | 4,004,627 | 4,640,102 | (635,475 | ) | (13.7 | )% | ||||||||||
| Depreciation and amortization | 202,208 | 233,796 | (31,588 | ) | (13.5 | )% | ||||||||||
| Total Operating Expenses | $ | 15,378,278 | $ | 24,749,578 | $ | (9,371,300 | ) | (37.9 | )% | |||||||
Changes in operating expenses are explained in more detail below:
Sales and Marketing
Sales and marketing expenses were $1.1 million and $3.2 million for 2023 and 2022, respectively, representing a $2.2 million, or 67.4% decrease when compared to the prior period. The reduction in sales and marketing expense was primarily driven by a $1.4 million reduction in external marketing expense, as well as a $0.8 million reduction in payroll and employee related expenses as a result of lower headcount when compared to the prior period.
Development
Development expenses were $4.2 million and $5.1 million for 2023 and 2022, respectively, representing a $0.9 million, or 17.7%, decrease when compared to the prior period. The reduction in development expense was primarily driven by a $1.1 million reduction in payroll and employee related expenses expense as a result of lower headcount when compared to the prior period, partially offset by a $0.2 million increase in software and hosting fees incurred to support our ongoing development efforts.
General and Administrative
G&A expenses were $5.9 million and $6.8 million for 2023 and 2022, respectively, a decrease of $0.8 million, or 12.4%, when compared to the prior period. The reduction in G&A expense was primarily driven by a $0.4 million reduction in legal and professional costs, including related party back office support costs, due to the settlement of litigation in 2022 that did not repeat in 2023, a $0.5 million reduction in payroll and employee related expenses, including travel expenses, due to lower headcount period over period, a $0.4 million reduction in insurance costs and a $0.2 million reduction in software and subscription costs. This was partially offset by a $0.6 million increase in severance costs, driven by the departure of the Company’s former Chief Executive Officer in 2023.
Impairment of Goodwill
Impairment of goodwill was $0 and $4.8 million in 2023 and 2022, respectively. The impairment loss for 2022 primarily relates to goodwill acquired in connection with the acquisition of Studio397 that was deemed impaired as a result of impairment assessments performed during the year. The triggers for the assessments were primarily 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.
Impairment of Intangible Assets
Impairment of indefinite-lived intangible assets was $0 and $3.3 million in 2023 and 2022, respectively. The triggers for the assessments in 2022 were the changes to the Company’s product roadmap and the Company’s market capitalization, as referenced above. The indefinite-lived intangible asset impairment losses primarily relate to the rFactor 2 trade name and the Le Mans Video Gaming License and are 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.
Impairment of finite-lived intangible assets was $4.0 million and $1.3 million in 2023 and 2022, respectively. The trigger for the impairment in 2023 was the Company’s decision to explore strategic alternatives and potential options for its business, resulting in a probable likelihood of the sale of certain licensing rights that would result in the Company’s inability to comply with the terms of a licensing agreement by the end of the year and the resulting reduction in expected future revenues. The triggers for the impairment in 2022 were the changes to the Company’s product roadmap and the Company’s market capitalization, as referenced above. The finite-lived intangible asset 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 for 2023 and 2022 presented no significant changes to the depreciation of capital assets.
Interest Expense
Interest expense was $0.4approximately $30,000 and $0.2 million for both2024 and 2023, and 2022respectively, primarily from ongoing non-cash interest accretion of our INDYCAR and BTCC license liabilities.purchase commitment liabilities relating to the acquisition of Studio397 in April 2021.
Other (Expense)(Expenses) Income, net
Other income,expenses, net was $0.4 million for 2023 was $1.0 million,2024, compared to other expense,income, net of $0.8$0.4 million for 2022, an improvement2023, a decrease of $1.8$0.8 million compared to the prior period. Other income,expenses, net for 2023 consisted of foreign currency gains of $0.4 million $0.4 million in gains from changes in the fair value of stock warrant liabilities, rental income of $0.1 million, and $0.1 million of gains derived from relief provided by certain vendors, compared to other expense, net for 2022 that consisted2024 was primarily comprised of foreign currency losses of $0.9$0.5 million and rental income of $0.1 million. The change in other (expense) income, net was primarily driven by the $1.2 million favorable swing in foreign currency gains and losses period over period, arising fromincurred remeasuring transactions denominated in a currency other than U.S. dollars, andwhich was partially offset by $0.1 million in rental income from the sub-lease of our Charlotte, NC office space. Other income, net of $0.4 million for 2023 was primarily comprised of foreign currency gains of $0.2 million incurred remeasuring transactions denominated in gains from the changesa currency other than U.S. dollars, as well as $0.05 million in fair value of stock warrant liabilities.rental income and $0.1 million in interest expense forgiveness.
Other Comprehensive Gain (Loss) Income
Other comprehensive lossgain was $0.3$0.6 million for 2023,2024, compared to other comprehensive incomeloss of $0.01$0.1 million for 2022.2023. The $0.3$0.7 million change in other comprehensive (loss) incomeimprovement was primarily due to activity in our U.K. and Netherlands subsidiaries and represents unrealized foreign currency translation adjustments arising from our activity in our U.K., Australian, Georgian and Netherlands subsidiaries.
adjustments.
Net Loss Attributable to Non-Controlling Interest
For 2023, theNet loss attributable to the non-controlling interest decreased by $0.7was $0.1 million to a loss ofand $0.2 million as compared to a loss of $0.9 million for 2022. 2024 and 2023, respectively,
The improvement was attributed to the reduction of net losses in the Le Mans Joint Venture.Esports Series Ltd joint venture.
Liquidity and Capital Resources
Liquidity
Since our inception and prior to our initial public offering (“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 345,000 shares of Class A common stock at a price to the public of $200 per share, which includes the exercise in full by the underwriters of their option to purchase from us an additional 45,000 shares of Class A common stock. We received net proceeds of approximately $63.1 million from the IPO, after deducting underwriting discounts and offering expenses paid by us in 2020 and 2021.
Following our IPO, we have historically financed our operations primarily through cash generated from operations, advances from Motorsport NetworkDriven Lifestyle pursuant to the $12 million Line of Credit (as defined below) and through sales of our equity securities.
We measure our liquidity in a number of ways, including the following:
| Liquidity Measure (in millions) | June 30, 2023 | December 31, 2022 | ||||||
| Cash and cash equivalents | $ | 2.0 | $ | 1.0 | ||||
| Working capital | $ | (2.6 | ) | $ | (9.3 | ) | ||
| March 31, 2024 | December 31, 2023 | |||||||
| Cash and cash equivalents | $ | 1,252,691 | $ | 1,675,210 | ||||
| Working capital (deficiency) | $ | (4,625,471 | ) | $ | (4,074,346 | ) | ||
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For the sixthree months ended June 30, 2023,March 31, 2024, the Company had a net loss of approximately $13.5$1.7 million and negative cash flows from operations of approximately $8.9 million and$0.8 million. As of March 31, 2024, the Company had an accumulated deficit of $87.3$88.7 million and cash and cash equivalents of $1.3 million. As of JuneApril 30, 2023, we2024, the Company had cash and cash equivalents of $2.0 million, which was reduced to $1.4 million as of July 31, 2023. $1.3 million.
For the three months ended June 30, 2023, weMarch 31, 2024, the Company experienced an average net cash burn from operations of approximately $1.1$0.3 million aper month, and while it has taken measures to reduce its costs, the Company expects to continue to have a net cash outflow from operations for the foreseeable future as it continues to develop its product portfolio and invest in developing new video game titles. Based on the Company’s cash and cash equivalents position and the Company’sits average cash burn, we dothe Company does not believe we haveit has sufficient cash on hand to fund ourits operations forover the remainder of 2023next year and that additional funding will be required in order to continue operations.
The Company’s future liquidity and capital requirements include funds to support the planned costs to operate its business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures.
In order to address its liquidity shortfall, the Company is actively exploringcontinues to explore several options, including, but not limited to: i) additional funding in the form of potential equity and/or debt financing arrangements or similar transactions (collectively, “Capital Financing”); ii) other strategic alternatives for its business, including, but not limited to, the sale or licensing of the Company’s assets;assets in addition to the recent sales of its NASCAR License and Traxion; and iii) cost reduction and restructuring initiatives, including re-evaluating its product roadmap, each of which is described more fully below.
The Company continues to explore additional funding in the form of potential Capital Financing and has entered into an Equity Distribution Agreement (the “ED Agreement”) with Canaccord Genuity LLC, as sales agent (the “Sales Agent”), pursuant to which the Company may issue and sell shares of its Class A common stock having an aggregate offering price of up to $10 million (subject to compliance with the limitations set forth in the SEC’s “baby shelf” rules). Subject to the terms and conditions of the ED Agreement, the Sales Agent may sell shares by any method deemed to be an “at-the-market” (“ATM”) offering as defined in Rule 415 under the Securities Act of 1933, as amended. As of June 30, 2023,March 31, 2024, the Company had an aggregate of $2.9 million available for future sales under its ATM program.program, which was reduced to $1.3 million of availability as of the date of this Report in accordance with the SEC’s baby shelf rules. However, due to the Company’s present liquidity position and required future funding requirements, any funds raised via theits ATM program would not be sufficient to satisfy its ongoing liquidity requirements and further potential Capital Financing would be required, in conjunction to the other options being explored by the Company. Further, there can be no assurance the Company will be able to obtain funds via theits ATM program, should it choose to sell shares under the ED Agreement, nor can there be any other assurance that the Company can secure additional funding in the form of equity and/or debt financing on commercially acceptable terms, if at all, to satisfy its future needed liquidity and capital resources.
Due to the continuing uncertainty surrounding the Company’s ability to raise funding in the form of potential Capital Financing, and in light of its liquidity position and anticipated future funding requirements, the Company has decidedcontinues to explore other strategic alternatives and potential options for its business, including, but not limited to, the sale or licensing of certain of the Company’s assets. For example,assets in addition to the Company is currently in discussions with a third-party for the potential salerecent sales of the Company’sits NASCAR license.License and Traxion. If any such additional strategic alternative is executed, including the consummation of a sale of the Company’s NASCAR license, it is expected it would help to reduce certainimprove the Company’s working capital requirementsposition and reduce overhead expenditures, thereby reducinglowering the Company’s expected future cash-burn, and provide some short-term liquidity relief. Nonetheless, even if the Company is successful in implementing one or more additional strategic alternatives, including the consummation of a sale of the Company’s NASCAR license, the Company will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of its business and operations. There are no assurances that the Company will even be successful in implementing aany additional strategic planplans for the sale or licensing of its assets, including the consummation of a sale of the Company’s NASCAR license, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond the Company’s control, such as, among other things, the required consent from NASCAR with respect to any sale of the Company’s NASCAR license.control.
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As the Company continues to address its liquidity constraints, it has re-evaluatedthe Company may need to make further adjustments to its product roadmap in the second quarter of 2023 and modified the expected timing and scope of certain new product releases, including the release of any future NASCAR games, which have been put on hold indefinitely. Further, the Company is evaluating its abilityorder to deliver new titles under its other licenses, such as with INDYCAR andreduce operating cash burn. Additionally, the British Touring Car Championship (the “BTCC”), which may result in further adjustments to the Company’s product roadmap. The Company continues to seek to reduceimprove its monthly net cash-burn by reducing its cost baseliquidity through maintaining and enhancing cost control initiatives, such as those that it expectsinitiatives. The Company plans to achieve through the 2022 Restructuring Program, and iscontinue evaluating the structure of its business for additional changes in order to improve both its near-term and long-term liquidity position, as well as create a healthy and sustainable Company from which to operate.
If the Company is unable to satisfy its capital requirements, it could be required to adopt one or more of the following alternatives:
| ● | delaying the implementation of or revising certain aspects of the Company’s business strategy; | |
| ● | further reducing or delaying the development and launch of new products and events; | |
| ● | further reducing or delaying capital spending, product development spending and marketing and promotional spending; | |
| ● | selling additional assets or operations; | |
| ● | seeking additional | |
| ● | further reducing other discretionary spending; | |
| ● | entering into financing agreements on unattractive terms; and/or | |
| ● | significantly curtailing or discontinuing operations. |
There can be no assurance that the Company would be able to take any of 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 the 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 the Company to satisfy its capital requirements if the actions that the Company is able to consummate do not generate a sufficient amount of additional capital.
Even if the Company does secure additional Capital Financing, if the anticipated level of revenues are not achieved because of, for example, decreased sales of the Company’s products due to the disposition of key assets, such as the potential sale of its NASCAR license,License, further changes in the Company’s product roadmap and/or the Company’s inability to deliver new products for its various other licenses; less than anticipated consumer acceptance of the Company’s offering of products and events; less than effective marketing and promotion campaigns, decreased consumer spending in response to weak economic conditions or weakness in the overall electronic games category; adverse changes in foreign currency exchange rates; decreased sales of the Company’s products and events as a result of increased competitive activities by the Company’s competitors; changes in consumer purchasing habits, such as the impact of higher energy prices on consumer purchasing behavior; retailer inventory management or reductions in retailer display space; less than anticipated results from the Company’s existing or new products or from its advertising and/or marketing plans; or if the Company’s expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, the Company’s liquidity position may continue to be insufficient to satisfy its future capital requirements. If the Company is ultimately unable to satisfy its capital requirements, it would likely need to dissolve and liquidate its assets under the bankruptcy laws or otherwise.
In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the accompanying consolidated financial statements to this Report are issued. The factors described above, in particular the lack of available cash on hand to fund operations over the next year, have raised substantial doubt about the Company’s ability to continue as a going concern.
The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
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Cash Flows from Operating Activities
Net cash used in operating activities for the sixthree months ended June 30,March 31, 2024 and 2023 and 2022 was $8.9$0.8 million and $12.0$5.7 million, respectively. The net cash used in operating activities for the sixthree months ended June 30, 2023March 31, 2024 was primarily a result of cash used to fund a net loss of $13.5$1.7 million, adjusted for net non-cash adjustments of $6.0$0.7 million and $1.4$0.2 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, 2022March 31, 2023 was primarily due to a net loss of $23.5$5.3 million, adjusted for non-cash expenses in the amount of $12.4$1.2 million and by $1.0$1.6 million of cash used to fund changes in the levels of operating assets and liabilities.
Cash Flows from Investing Activities
Net cash used in investing activities for the sixthree months ended June 30,March 31, 2023 and 2022 was $0.02 million, and $0.2 million, respectively, which was attributable to the purchases of property and equipment. There were no cash flows from investing activities for the three months ended March 31, 2024.
Cash Flows from Financing Activities
Net cash used in financing activities for the three months ended March 31, 2024 was $0.05 million, which was related to the repayment of purchase commitment liabilities. Net cash provided by financing activities duringfor the sixthree months ended June 30,March 31, 2023 was $10.2 million while net cash used in financing activities during the six months ended June 30, 2022 was $1.0$10.7 million. Cash flows provided by financing activities for the sixthree months ended June 30,March 31, 2023 were primarily attributable to $0.6 million raised in connection with shares sold under the Alumni Purchase Agreement (as defined below) and $10.4 million raised in connection with shares sold in the Company’s registered direct offerings, partially offset by $0.6$0.3 million of payments for purchase commitments and $0.3 million for payments relating to license liabilities. During the six months ended June 30, 2022, net cash used in financing activities was $1.0 million, driven primarily by $1.0 million in repayments of purchase commitment liabilities.
commitments.
PromissoryNote 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,Driven Lifestyle, that providesprovided the Company with a line of credit of up to $10 million (which was subsequently increased to $12 million pursuant to an amendment executed in November 2020) at an interest rate of 10% per annum, the availability of which is dependent on Motorsport Network’sDriven Lifestyle’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 $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,Driven Lifestyle, and any principal and accrued interest owed will be accelerated and become immediately payable in the event the Company consummates certain corporate events, such as a capital reorganization. The Company may prepay the $12 million Line of Credit in whole or in part at any time or from time to time without penalty or charge. Additionally, see “Risk Factors – Risks Related to Our Financial Condition and Liquidity - Limits on our borrowing capacity under the $12 million Line of Credit may affect our ability to finance our operations” in Part I, Item 1A of the 20222023 Form 10-K.
On September 8, 2022, the Company entered into a support agreement with Motorsport NetworkDriven Lifestyle (the “Support Agreement”) pursuant to which Motorsport NetworkDriven Lifestyle issued approximately $3 million (the “September 2022 Cash Advance”) to the Company in accordance with the $12 million Line of Credit. Additionally, the Support Agreement modified the $12 million Line of Credit such that, among other things, until June 30, 2024, Motorsport NetworkDriven Lifestyle would not demand repayment of the September 2022 Cash Advance or other advances under the $12 million Line of Credit, unless certain events occurred, as prescribed in the Support Agreement, such as the completion of a new financing arrangement or the Company generates positive cash flows from operations, among others. All principal and accrued interest owed on the $12 million Line of Credit were exchanged for equity following the completion of two debt-for-equity exchange agreements with Motorsport NetworkDriven Lifestyle on January 30, 2023 and February 1, 2023, relieving the Company of approximately $3.9 million in owed principal and unpaid interest in exchange for an aggregate of 780,385 shares of the Company’s Class A common stock. See Note 5 – Related Party Loans in our condensed consolidated financial statements in this Report for further information. As of June 30, 2023,March 31, 2024, the balance due to Motorsport NetworkDriven Lifestyle under the $12 million Line of Credit was $0.
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As of June 30, 2023,March 31, 2024, the $12 million Line of Credit remains in place. However, the Company believes that there is a substantial likelihood that Motorsport NetworkDriven Lifestyle will not fulfill any future borrowing requests, and therefore does not view the $12 million Line of Credit as a viable source for future liquidity needs.
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 providesprovided that the Company maycould 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 six monthsyear ended June 30,December 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 June 30, 2023, the remaining commitment amount under theThe Alumni Purchase Agreement amounted to approximately $1.3 million.expired on December 31, 2023.
On February 1, 2023, the Company issued 183,020 shares of the Company’s Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately $3.9 million (the “$3.9 million RDO”), before deducting placement agent fees and other offering expenses payable by the Company. H.C. Wainwright & Co., LLC (���(“Wainwright”) acted as the exclusive placement agent for the $3.9 million RDO, pursuant to the 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.
On February 3, 2023, the Company issued 232,188 shares of the Company’s Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately $4.0 million (the “$4.0 million RDO”), before deducting placement agent fees and other offering expenses payable by the Company. Wainwright acted as the exclusive placement agent for the $4.0 million RDO. In connection with the $4.0 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of $25,000 and closing fees of $15,950. The Company has also issued to Wainwright and its designees warrants to purchase up to 13,931 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the $4.0 million RDO, at an exercise price of $21.738 per share and will expire five years from the closing of the $4.0 million RDO.
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On March 31, 2023, the Company entered into the ED Agreement with the Sales Agent, pursuant to which the Company may issue and sell shares of its Class A common stock having an aggregate offering price of up to $10 million (subject to compliance with the limitations set forth in the SEC’s “baby shelf” rules), from time to time through the Sales Agent. Subject to the terms and conditions of the ED Agreement, the Sales Agent may sell shares by any method deemed to be an “at-the-market” offering as defined in Rule 415 under the Securities Act of 1933, as amended. The Company is not obligated to sell any shares under the ED Agreement. The Sales Agent is entitled to a commission of 3% of the aggregate gross proceeds from each sale of shares occurring pursuant to the ED Agreement. During the sixthree months ended June 30, 2023,March 31, 2024, no shares of Class A common stock were sold under the Company’s ATM program. As of June 30, 2023,March 31, 2024, the Company had an aggregate of $2.9 million available for future sales under its ATM program.program, which was reduced to $1.3 million of availability as of the date of this Report in accordance with the SEC’s baby shelf rules.
Capital Expenditures
The nature of the Company’s operations does not require significant expenditureexpenditures 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, 2023.March 31, 2024.
Material Cash Requirements
ThereExcept as described below, there have been no material changes in our reported material cash requirements as described under “Liquidity and Capital Resources – Material Cash Requirements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the 20222023 Form 10-K.
On April 12, 2024, the Company entered into the BARC Settlement Agreement with BARC. Pursuant to the BARC Settlement Agreement, the Company and BARC, without admitting any liabilities, agreed that the license agreement between the parties relating to the Previous BTCC License was terminated without any liabilities and that any and all royalties and/or any other sums whatsoever were forgiven by BARC and discharged in their entirety in consideration of (i) the Company’s one-time payment of $225,000 to BARC and (ii) the Company and BARC entering, effective as of April 12, 2024, into a new license agreement to use certain licensed intellectual property related to, themed as, or containing the BTCC. Prior to entering into the BARC Settlement Agreement, the Company had a total remaining liability in connection with the Previous BTCC License, inclusive of unpaid installments, of $0.9 million.
Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any relationships with any organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and 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 20222023 Form 10-K.
Recently Issued Accounting Standards
As an “emerging growth company”, the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act until such time as we are no longer considered to be an emerging growth company.
Our analysis of recently issued accounting standards isare 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.
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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 Interim Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2023.March 31, 2024. Based on this evaluation, our Chief Executive Officer and Interim Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of June 30, 2023March 31, 2024 because of the material weaknessweaknesses 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 20222023 Form 10-K, and that continued to exist as of June 30, 2023, as well as a newly identified material weakness as discussed in “Material Weaknesses” below.
March 31, 2024.
Remediation of Material Weaknesses
AWe have not yet remediated the material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.
As described in Part II, Item 9A, “Controls and Procedures” of the 2022 Form 10-K, we did notweaknesses relating to (i) our failure to design and maintain effective monitoring procedures and controls to evaluate and monitor the effectiveness of our individual control activities. During the quarter ended June 30, 2023, management identified a new material weakness in our internal control over financial reporting due toactivities and (ii) a lack of sufficient number of personnel with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely. timely, each of which are discussed further in Part II, Item 9A, “Controls and Procedures” of the 2023 Form 10-K.
If not remediated, or if we identify further material weaknesses in our internal controls, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our consolidated financial statements and a failure to meet our reporting and financial obligations.
Remediation of We believe that we have made and continue to make progress on the Material Weaknesses
We have not yet remediated the material weaknessesremediation plans described in our 2023 Form 10-K, under “Material Weaknesses” above. DuringPart II, Item 9A, “Controls and Procedures.” For example, during the quarter ended June 30, 2023,March 31, 2024, we continued to make improvements to controls and continued our evaluation and documentation of risks and key controls forming part of the 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 that require testing on an ongoing basis. Additionally, we expect to continue to hire additional finance and accounting employees with appropriate experience, certification, education and training.
All other material weaknesses previously identified in Part II, Item 9A, “Controls and Procedures” of the 2022 Form 10-K have been remediated, as disclosed in Part I, Item 4, “Controls and Procedures” of our Quarterly Report on Form 10-Q for the period ended March 31, 2023.
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, 2023,March 31, 2024 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, 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 9 – Commitments and Contingencies– Litigation in our condensed consolidated financial statements in this Report for additional information.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the factors discussed in “Risk Factors” in Part I, Item 1A of the 20222023 Form 10-K, and the risk factors described below, which could materially affect our business, financial condition or future results. The risks described in the 20222023 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 2022 Form 10-K:
Risks Related to Our Financial Condition and Liquidity
We have incurred significant losses since our inception, and we expect to continue to incur losses for the foreseeable future. Accordingly, our financial condition raises substantial doubt regarding our ability to continue as a going concern.
We incurred a net loss of $13.5 million, negative cash flows from operations of approximately $8.9 million and an accumulated deficit of $87.3 million for the six months ended June 30, 2023. As of June 30, 2023, we had cash and cash equivalents of $2.0 million, which was reduced to $1.4 million as of July 31, 2023. For the three months ended June 30, 2023, we experienced an average net cash burn from operations of approximately $1.1 million a month. We expect to continue to have a net cash outflow from operations for the foreseeable future as we continue to develop our product portfolio and invest in developing new video game titles.
As a result of our financial condition, management has concluded that there is substantial doubt in our ability to continue as a going concern. The report of our independent registered public accountant on our financial statements as of and for the years ended December 31, 2022 and 2021 also includes explanatory language describing the existence of substantial doubt about our ability to continue as a going concern. See Note 1 – Business Organization, Nature of Operations, and Risks and Uncertainties in our condensed consolidated financial statements and “—Liquidity and Capital Resources” for further information.
If we are unable to satisfy our capital requirements, we could be required to adopt one or more of the following alternatives:
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 capital requirements if the actions that we are able to consummate do not generate a sufficient amount of additional capital. If we are ultimately unable to satisfy our capital requirements, we would likely need to dissolve and liquidate our assets under the bankruptcy laws or otherwise.
We will require additional capital to meet our financial obligations, and this capital might not be available on acceptable terms or at all.
We expect to continue to incur losses for the foreseeable future as we continue to incur significant expenses. Accordingly, as a result of our financial condition, we will need to engage in equity and/or debt financing arrangements or similar transactions (collectively, “Capital Financing”) to secure additional funds to continue our existing business operations and to fund our obligations. There are currently no commitments in place for future financing and there can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all.
If we raise additional funds through future issuances of equity (including preferred stock) or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock, including, without limitation, in respect of the payment of dividends and the payment of liquidating distributions. Because our decision to issue debt or preferred securities in any future offering, or to borrow money from lenders, will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any such future offerings or borrowings. For example, financial market instability or disruptions to the banking system due to bank failures, particularly in light of the events that have occurred in 2023 with respect to Silicon Valley Bank and Signature Bank, may adversely affect our ability to enter into new financing arrangements and facilities, or our ability to access existing cash, cash equivalents and investments.
Holders of our Class A common stock will bear the risk of any such future offerings or borrowings. Further, any future debt financing could require compliance with restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Debt financing must be repaid regardless of whether we generate revenues or cash flows from operations and may be secured by substantially all of our assets.
Even if we do secure additional Capital Financing, if the anticipated level of revenues are not achieved because of, for example, decreased sales of our products due to the disposition of key assets, such as the potential sale of our NASCAR license, further changes in our product roadmap and/or our inability to deliver new products for our various other licenses; 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 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, 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 our existing or new products or from its advertising and/or marketing plans; or if our expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, our liquidity position may continue to be insufficient to satisfy its future capital requirements.
We may not be successful in identifying and implementing one or more strategic alternatives for our business, and any strategic alternative that we may consummate could have material adverse consequences for us.
Due to the uncertainty surrounding our ability to raise funding in the form of potential Capital Financing, and in light of our liquidity position and anticipated future funding requirements, we have decided to explore strategic alternatives and potential options for our business (a “Strategic Transaction”), including, but not limited to, the sale or licensing of certain of our assets. Any Strategic Transaction that we may consummate could harm our business, brand, operating results and financial condition. There can be no assurances that any particular Strategic Transaction, or series of Strategic Transactions, will be pursued, successfully consummated, lead to increased shareholder value, or achieve the anticipated results.
For example, we are currently in discussions with a third-party for the potential sale of our NASCAR license. There are no assurances that we will be successful in consummating a sale of our NASCAR license, which is subject to the satisfaction of conditions beyond our control, such as, among other things, the required consent from NASCAR. However, if such sale is consummated, we expect that we would no longer have the right to use the NASCAR brand for our products, subject to certain limited exceptions. This would also require us to modify our existing business model and will significantly alter the risk profile relating to our operations. Our NASCAR products have historically accounted for the majority of our revenue. For example, revenues associated with our NASCAR franchise accounted for approximately 67.5% and 61.1% of our total revenue for the six months ended June 30, 2023 and 2022, respectively. As a result, we may encounter difficulties or challenges in continuing operations if the sale of our NASCAR license is consummated, and our cash flows and results of operations will likely be materially adversely impacted.
Any Strategic Transaction, including the sale of our NASCAR license, could involve a number of other risks and uncertainties, including, but not limited to:
Additionally, even if we are successful in implementing one or more Strategic Transactions, including the consummation of a sale of our NASCAR license, we will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of our business and operations.
RisksRelated to Our Company
Impairment of our goodwill or other intangible assets has had, and in the future could have, a material adverse impact on our results of operations.
As of June 30, 2023, we had other intangible assets, net of $8.5 million. We are required under generally accepted in the United States of America to review our goodwill for impairment at least annually, and to review goodwill and other intangible assets when events or changes in circumstances indicate the carrying value may not be recoverable. Some factors that may be considered events or changes in circumstances that would require our goodwill and other intangible assets to be reviewed for impairment include, among other, general economic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific factors such as changes to our product road map and restructuring changes, and changes in our share price. We may be required to record non-cash impairment charges during any period in which we determine that our goodwill and/or other intangible assets are impaired, which has had, and in the future could have, a material adverse impact on our results of operations. For example, for the six months ended June 30, 2023, we recorded impairment of intangible assets of $4.0 million, and for the year ended December 31, 2022, we recorded impairment of intangible assets of $4.8 million and impairment of goodwill of $4.8 million.
We may not successfully manage the transitions associated with certain of our executive officers, which could have an adverse impact on us.
On September 9, 2022, Jonathan New notified us of his decision to 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 Dmitry Kozko, our former Chief Executive Officer, serve in an Interim Chief Financial Officer capacity. Additionally, on April 14, 2023, the Company’s board of directors determined to terminate Mr. Kozko’s employment with the Company 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 new 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.
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, 2023,March 31, 2024, 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, 2023.March 31, 2024.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.Rule 10b5-1 Trading Plans
During the three months ended March 31, 2024, none of our directors or officers (as defined in Exchange Act Rule 16a-1(f)) adopted or terminated a “Rule 10b5–1 trading arrangement” or a “non-Rule 10b5–1 trading arrangement,” each as defined in Item 408 of Regulation S-K.
| 38 |
Item 6. Exhibits
| Incorporated by Reference | ||||||||||||
| Exhibit Number | Description | Form | File No. | Exhibit Number | Filing Date | Filed/Furnished Herewith | ||||||
| 3.1.1 | Certificate of Incorporation of Motorsport Games Inc. | S-1/A | 333-251501 | 3.3 | 1/11/21 | |||||||
| 3.1.2 | Certificate of Amendment to the Certificate of Incorporation of Motorsport Games Inc. | 8-K | 001-39868 | 3.1 | 11/10/22 | |||||||
| 3.2.1 | Bylaws of Motorsport Games Inc. | S-1/A | 333-251501 | 3.4 | 1/11/21 | |||||||
| 3.2.2 | Amendment No. 1 to the Bylaws of Motorsport Games Inc. | 8-K | 001-39868 | 3.2 | 11/10/22 | |||||||
| 10.1 | 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 | ||||||||||
| Incorporated by Reference | ||||||||||||
| Exhibit Number | Description | Form | File No. | Exhibit Number | Filing Date | Filed/Furnished Herewith | ||||||
| 3.1.1 | Certificate of Incorporation of Motorsport Games Inc. | S-1/A | 333-251501 | 3.3 | 1/11/21 | |||||||
| 3.1.2 | Certificate of Amendment to the Certificate of Incorporation of Motorsport Games Inc. | 8-K | 001-39868 | 3.1 | 11/10/22 | |||||||
| 3.2.1 | Bylaws of Motorsport Games Inc. | S-1/A | 333-251501 | 3.4 | 1/11/21 | |||||||
| 3.2.2 | Amendment No. 1 to the Bylaws of Motorsport Games Inc. | 8-K | 001-39868 | 3.2 | 11/10/22 | |||||||
| 10.1 | Settlement Agreement, dated as of April 12, 2024, between Motorsport Games Inc. and BARC (TOCA) LIMITED | 8-K | 001-39868 | 10.1 | 4/18/24 | |||||||
| 10.2* | License Agreement, dated as of April 12, 2024, between Motorsport Games Inc. and BARC (TOCA) LIMITED | 8-K | 001-39868 | 10.2 | 4/18/24 | |||||||
| 10.3 | Asset Purchase Agreement, dated as of April 26, 2024, between Motorsport Games Inc. and Traxion.GG Limited | 8-K | 001-39868 | 10.1 | 5/1/24 | |||||||
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act | X | ||||||||||
| 31.2 | Certification of Interim Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act | X | ||||||||||
| 32.1 | Certification of Chief Executive Officer and Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350 | X | ||||||||||
| 101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | X | ||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | X | ||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | X | ||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | X | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | X | ||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | X | ||||||||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101) | X | ||||||||||
| * | Portions of the exhibit, marked by brackets, have been omitted because the omitted information (i) is not material and (ii) is the type that the Company treats as private or confidential. |
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/ Stephen Hood | |
| Stephen Hood | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| By: | /s/ | |
| Interim Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||