| Summary of Significant Accounting Policies | NOTE 2 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES Liquidity On January 15, 2021, the Company completed
its initial public offering which resulted in net proceeds to the Company of approximately $62.9 million, after deducting
underwriting discounts and commissions and offering expenses payable by the Company. The Company had a net loss of $679,854 and
positive cash flows from operations of $4,053,345 for the year ended December 31, 2020. It is expected that operating expenses
will continue to increase and, as a result, the Company will eventually need to generate significant revenues to reach profitability. The Company expects that its cash on hand will
fund its operations for at least one year from the date the consolidated financial statements were issued. Although the Company’s
management believes that it has access to capital resources, there are currently no commitments in place for new financing at this
time and there is no assurance that the Company will be able to obtain funds on commercially acceptable terms, if at all. If the
Company is unable to obtain adequate funds on reasonable terms, it may be required to significantly curtail or discontinue operations
or obtain funds by entering into financing agreements on unattractive terms. The Company’s operating needs include the planned
costs to operate its business, including amounts required to fund working capital and capital expenditures. Basis of Presentation and Principles of
Consolidation The accompanying consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”)
and include the operations of the Company and its wholly owned and majority owned subsidiaries. The interests of non-controlling
members are reflected as non-controlling interest in the accompanying consolidated financial statements. All intercompany balances
and transactions have been eliminated in consolidation. Unless otherwise indicated, information in these notes to the consolidated
financial statements relates to continuing operations. On February 18, 2019, the Company formed its
subsidiary, Racing Pro League, LLC, under the laws of the State of Delaware. On March 15, 2019, Motorsport Games entered
into a joint venture agreement whereby the parties formed Le Mans Esports Series Limited (“Le Mans”), of which Motorsport
Games acquired a 45% ownership interest. The Company accounts for its investment in its unconsolidated entity, Le Mans, using the
equity method of accounting in accordance with Accounting Standards Codification (“ASC”) 323. The equity method is
an appropriate means of recognizing increases or decreases measured by U.S. GAAP in the economic resources underlying the investments.
Under the equity method, an investor recognizes its share of the earnings or losses of an investee in the periods for which they
are reported by the investee in its financial statements rather than in the period in which an investee declares a dividend or
distribution. An investor adjusts the carrying amount of an investment for its share of the earnings or losses recognized by the
investee. See Note 10 – Commitments and Contingencies – Joint Venture Agreement for additional details. Additionally,
see Note 14 – Subsequent Events – Le Mans Agreements for additional information regarding the increase in the Company’s
ownership interest in Le Mans from 45% to 51% in January 2021. On April 4, 2019, the Company formed its wholly
owned subsidiary, MS Gaming Development LLC, under the laws of Russia. On February 6, 2020, the Company formed its
wholly owned subsidiary, Motorsport Games Limited. Use of Estimates The preparation of consolidated financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported
amounts of revenue and expenses during the reporting period. The Company’s significant estimates used
in these consolidated financial statements include, but are not limited to, revenue recognition criteria, including reserves for
sales returns and price protection, valuation allowance of deferred income taxes, valuation of acquired companies and equity method investments,
the recognition and disclosure of contingent liabilities, and goodwill and intangible assets impairment testing. 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. Cash and Cash Equivalents The Company considers all highly-liquid instruments
with an original maturity of three months or less when purchased to be cash equivalents. As of December 31, 2020 and 2019, the
Company did not have any cash equivalents. The Company maintains cash in bank accounts, which, at times, may exceed Federal Deposit
Insurance Corporation (“FDIC”) insured limits. The Company has not experienced any losses in such accounts, periodically
evaluates the creditworthiness of the financial institutions and has determined the credit exposure to be negligible. The Company’s
foreign bank accounts are not subject to FDIC insurance. Accounts Receivable Accounts receivable are carried at their contractual
amounts, less an estimate for sales allowances. Management estimates the allowance for sales based on previous experience, existing
economic conditions, actual sales and inventories on hand. See Note 2 – Summary of Significant Accounting Policies –
Revenue Recognition - Sales Allowance, Sales Returns and Price Protection Reserves for additional details. Balances that are still outstanding after management
has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable.
As of December 31, 2020 and 2019, the Company determined that all of its accounts receivable were fully collectible and, accordingly,
no allowance for doubtful accounts was recorded. Sales allowances as of December 31, 2020 and 2019 were $2,150,684 and $1,891,691,
respectively. Property and Equipment Property and equipment are stated at cost less
accumulated depreciation and amortization, which is provided on the straight-line method over the estimated useful lives of the
assets. Expenditures for maintenance and repairs are expensed as incurred. Equipment, furniture and fixtures are depreciated
over a range of three to five years. Leasehold improvements are amortized over the lives of the leases or estimated useful lives
of the assets, whichever is shorter. When assets are sold or otherwise retired, the costs and accumulated depreciation are removed
from the books and the resulting gain or loss is included in operating results. Goodwill and Intangible Assets The Company has recorded goodwill in connection
with its acquisition of 704Games. Under ASC 350, Intangibles—Goodwill and Other (“ASC 350”), goodwill is not
amortized but is reviewed annually for impairment, or more frequently, if impairment indicators arise which may indicate that the
Company may not be able to recover the carrying amount of the net assets of the reporting unit. The Company has determined that
its reporting units align with its operating segments. See Note 13 – Segment Reporting. In evaluating goodwill for impairment,
the Company may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than
50%) that the fair value of a reporting unit is less than its carrying amount. If the Company bypasses the qualitative assessment,
or if the Company concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying value,
then the Company performs a one-step quantitative impairment test by comparing the fair value of a reporting unit with its carrying
amount and recognizes a loss on impairment in the event the carrying value exceeds the fair value. In assessing the fair value
of a reporting unit, the Company utilizes the Income Approach-Discounted Cash Flow Method as well as the Market Approach-Guideline
Public Company Method. Intangible assets that have finite lives are
amortized over their estimated useful lives and are subject to the provisions of ASC 350. The Company’s intangible assets
consist of the following which were acquired in connection with the acquisition of 704Games:
Intangible Asset Useful Life
License agreements 16 years
Software 7 years
Distribution contracts 1 year Segment Reporting The Company uses “the management approach”
in determining reportable operating segments. The management approach considers the internal organization and reporting used by
the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining
the Company’s reportable segments. The Company’s chief operating decision maker is the Chief Executive Officer (“CEO”)
of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire
Company. The Company classified its 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 the Company’s licensed racing games as well as on behalf of third-party
video game racing series and other video game publishers (the “esports segment”). Revenue Recognition The Company recognizes revenue under ASC 606,
“Revenue from Contracts with Customers” (“ASC 606”). The Company determines revenue recognition through
the following steps:
● Identification of a contract with a customer;
● Identification of the performance obligations in the contract;
● Determination of the transaction price;
● Allocation of the transaction price to the performance obligations in the contract; and
● Recognition of revenue when or as the performance obligations are satisfied. The Company currently derives revenue principally
from sales of its games and related extra content that can be played by customers on a variety of platforms, which includes game
consoles, PCs, mobile phones and tablets. The Company’s product and service offerings include, but are not limited to, the
following:
1) Sales of Games
2) Sales of Extra Content
3) Esports Competition Events Sales of Games. Sales of Extra Content. Esports. The timing of the Company’s revenue recognition
may differ from the timing of payment by its customers. A receivable is recorded when revenue is recognized prior to payment and
the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services,
the Company records deferred revenue until the performance obligations are satisfied. During the years ended
December 31, 2020 and 2019, there was no revenue recognized from performance obligations satisfied (or partially satisfied) in
previous periods. The following table summarizes revenue recognized
under ASC 606 in the consolidated statements of operations:
For the Year Ended December 31,
2020 2019
Revenues:
Gaming $ 18,745,166 $ 11,775,787
Esports 300,363 75,000
Total Revenues $ 19,045,529 $ 11,850,787 Identifying Performance
Obligations Performance obligations promised in a contract
are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct,
(i.e., the customer can benefit from the goods or services either on its own or together with other resources that are readily
available), and are distinct in the context of the contract (i.e., it is separately identifiable from other goods or services in
the contract). To the extent a contract includes multiple promises, the Company must apply judgment to determine whether those
promises are separate and distinct performance obligations. If these criteria are not met, the promises are accounted for as a
combined performance obligation. Determining the Transaction Price The transaction price is determined based on
the consideration that the Company will be entitled to receive in exchange for transferring our goods and services to the customer.
Determining the transaction price often requires significant judgment based on an assessment of contractual terms and business
practices. It further includes review of variable consideration such as discounts, sales returns, price protection, and rebates,
which is estimated at the time of the transaction. See below for additional information regarding our sales returns and price protection
reserves. 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. Principal Versus Agent Considerations The Company evaluates sales to end customers
of its full games and related content via third-party storefronts, including digital storefronts such as Microsoft’s Xbox
Store, Sony’s PlayStation Store, Apple’s App Store, and Google’s Play Store, in order to determine whether or
not the Company is acting as the principal or agent in the sale to the end customer. Key indicators that the Company evaluates
in determining gross versus net treatment include but are not limited to the following:
● the underlying contract terms and conditions between the various parties to the transaction;
● which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer;
● which party has inventory risk before the specified good or service has been transferred to the end customer; and
● which party has discretion in establishing the price for the specified good or service. Based on an evaluation of the above indicators,
the Company determined that, apart from contracts with customers where revenue is generated via the Apple App Store or Google Play
Store, the third party is considered the principal and, as a result, the Company reports revenue net of the fees retained by the
storefront. For contracts with customers where revenue is generated via the Apple App Store or Google Play Store, the Company has
determined that it is the principal and, as a result, reports revenue on a gross basis, with mobile platform fees included within
cost of revenues. Sales Allowance, Sales Returns and Price
Protection Reserves Sales returns and price protection are considered
variable consideration under ASC 606. The Company reduces revenue for estimated future returns and price protection which may occur
with distributors and retailers (“channel partners”). See Note 2 – Summary of Significant Accounting Policies
– Accounts Receivable for additional details. Price protection represents our practice to provide channel partners with a
credit allowance to lower their wholesale price on a particular game unit that they have not resold to customers. The amount of
the price protection for permanent markdowns is the difference between the original wholesale price and the new reduced wholesale
price. Credits are also given for short-term promotions that temporarily reduce the wholesale price. When evaluating the adequacy
of sales returns and price protection reserves, the Company analyzes the following: historical credit allowances, current sell-through
of channel partners’ inventory of the Company’s products, current trends in retail and the video game industry, changes
in customer demand, acceptance of products, and other related factors. In addition, the Company monitors the volume of sales to
its channel partners and their inventories, as substantial overstocking in the distribution channel could result in high returns
or higher price protection in subsequent periods. The Company recognized sales allowances and price protection reserves for the
years ended December 31, 2020 and 2019 in the amount of $2,150,681 and $2,483,147, respectively, which were included as reductions
of revenues. Income Taxes On January 8, 2021, Motorsport Gaming US LLC
converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Motorsport Games Inc. The Company recognizes deferred tax assets
and liabilities for the expected future tax consequences of transactions and events. Under this method, deferred tax assets and
liabilities are determined based on the difference between financial statement book values and the tax bases of assets and liabilities
using enacted tax rates in effect for the years in which the differences are expected to reverse. If necessary, deferred tax assets
are reduced by a valuation allowance to an amount that is determined to be more likely than not recoverable in the foreseeable
future. The Company must make significant estimates and assumptions about future taxable income and future tax consequences and
tax strategies available to recognize deferred tax assets when determining the amount of the valuation allowance. The additional
guidance provided by ASC No. 740, Income Taxes (ASC 740), clarifies the accounting for uncertainty in income taxes recognized in
the financial statements. Expected outcomes of current or anticipated tax examinations, refund claims and tax-related litigation
and estimates regarding additional tax liability (including interest and penalties thereon) or refunds resulting therefrom will
be recorded based on the guidance provided by ASC 740 to the extent applicable. The Company is considered to be disregarded from
its owner for U.S. tax purposes. In addition, for its 2019 fiscal year, the Company is the parent company to another disregarded
entity, MS Gaming Development LLC, and a regarded entity taxed as a separate corporation, 704Games. 704Games was acquired on August
14, 2018 and the Company has no other material tax effective items other than those items attributed to it from 704Games. On
March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES
Act”). The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of
employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds,
modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified
improvement property. Under ASC 740, the effects of new legislation are recognized upon enactment. Accordingly, the CARES Act
is effective beginning in the quarter ended March 31, 2020. The provisions of the CARES Act do not have a material
impact on the Company’s consolidated financial statements. Stock-Based Compensation The Company
measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The
fair value of the award is measured on the grant date. The fair value amount is then recognized over the period during which services
are required to be provided in exchange for the award, usually the vesting period. Upon the exercise of an award, the Company issues
new shares of common stock out of its authorized shares. Advertising Expenses The Company
recognizes advertising expenses as incurred. Advertising expenses were Foreign Currency Translation The Company’s
functional and reporting currency is the United States Dollar. The functional currency of the Company’s operating subsidiaries
are their local currencies (the United States Dollar, the Russian Ruble and Pound Sterling). Assets and liabilities are translated
based on the exchange rates at the balance sheet date, while revenue and expense accounts are translated at the average exchange
rate in effect during the year. Equity accounts are translated at historical exchange rates. The resulting translation gain and
loss adjustments are accumulated as a component of other comprehensive income. Foreign currency gains and losses resulting from
transactions denominated in foreign currencies, including intercompany transactions, are included in the results of operations. The Company recorded
approximately $1,000 and $8,000 of transaction losses for years ended December 31, 2020 and 2019, respectively. Such amounts have
been classified within general and administrative expenses in the accompanying consolidated statements of operations. Recently Issued Accounting Standards In February 2016, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update “(ASU”) 2016-02, Leases (Topic 842), which
applies a right-of-use model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset
representing its right to use the underlying asset and a liability to make lease payments. The ASU requires a lessor to classify
leases as either sales-type, direct financing or operating, similar to existing U.S. GAAP requirements. Classification depends
on the same five criteria used by lessees under U.S. GAAP plus certain additional factors. The new leases standard addresses other
considerations including identification of a lease, separating lease and non-lease components of a contract, sale and leaseback
transactions, modifications, combining contracts, reassessment of the lease term, and remeasurement of lease payments. Early adoption
is permitted. As an emerging growth company, the JOBS Act permits the Company to take advantage of an extended transition
period to comply with new or revised accounting standards applicable to public companies. The Company is choosing to take advantage
of this provision and, as a result, will not be required to comply with new or revised accounting standards until those standards
would otherwise apply to private companies. This update is effective for fiscal years beginning after December 15, 2021, and
interim periods within fiscal years beginning after December 15, 2022. The Company is currently evaluating the impact of this standard
on its consolidated financial statements and disclosures. In November 2019, the FASB issued ASU 2019-11,
“Codification Improvements to Topic 326, Financial Instruments – Credit Losses” (“ASU 2019-11”).
ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments.” The amendments update guidance on reporting credit losses for financial
assets. These amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit
exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right
to receive cash. The amendments in ASU 2019-11 are effective for annual reporting periods beginning after December 15, 2022, including
interim periods within those fiscal years. All entities may adopt the amendments through a cumulative-effect adjustment to retained
earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective
approach). The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures. In December 2019, the FASB issued ASU 2019-12,
“Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The amendments
in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.
The amendments also improve consistent application of and simplify U.S. GAAP for other areas of Topic 740 by clarifying and amending
existing guidance. This update is effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal
years beginning after December 15, 2022. Early adoption of the amendments is permitted, including adoption in any interim period
for periods for which financial statements have not yet been made available for issuance. An entity that elects to early adopt
the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that
interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company
is currently evaluating the impact of this standard on its consolidated financial statements and disclosures. In January 2020, the FASB issued Accounting
Standards Update No. 2020-01— Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint
Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323,
and Topic 815 (a consensus of the Emerging Issues Task Force) |
