Item
1. |
Financial
Statements |
MOTORSPORT
GAMES INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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)
[1] |
Includes
related party costs of $0 and $0 for the three months ended September 30, 2022 and 2021, respectively, and $6,228 and $0 for the
nine months ended September 30, 2022 and 2021, respectively. |
[2] |
Includes
related party expenses of $0 and $71,865 for the three months ended September 30, 2022 and 2021, respectively, and $0 and $71,865 for
the nine months ended September 30, 2022 and 2021, respectively. |
[3] |
Includes
related party expenses of $21,512 and $3,132 for the three months ended September 30, 2022 and 2021, respectively, and $44,942
and $14,591 for the nine months ended September 30, 2022 and 2021, respectively. |
[4] |
Includes
related party expenses of $122,714 and $22,853 for the three months ended September 30, 2022 and 2021, respectively, and $221,051
and $1,593,371 for the nine months ended September 30, 2022 and 2021, respectively. |
[5] |
Includes
related party expenses of $0 and $0 for the three months ended September 30, 2022 and 2021, respectively. Includes related
party costs of $0 and $105,845 for the nine months ended September 30, 2022 and 2021, respectively. |
The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
MOTORSPORT
GAMES INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
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)
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Equity | | |
Capital | | |
Deficit | | |
Income
(Loss) | | |
Games
Inc. | | |
Interest | | |
Equity | |
| |
For
the Three and Nine Months Ended September 30, 2021 | |
| |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
Total | | |
| | |
| |
| |
| | |
| | |
| | |
| | |
| | |
| | |
Stockholders’
Equity
/ | | |
| | |
| |
| |
Class
A
Common
Stock | | |
Class
B
Common
Stock | | |
Member’s | | |
Additional
Paid-In | | |
Accumulated | | |
Accumulated
Other
Comprehensive | | |
Member’s
Equity Attributable
to
Motorsport | | |
Non-
controlling | | |
Total
Stockholders’
Equity
/
Member’s | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Equity | | |
Capital | | |
Deficit | | |
Income
(Loss) | | |
Games
Inc. | | |
Interest | | |
Equity | |
Balance - January 1, 2021 | |
| - | | |
$ | - | | |
| - | | |
$ | - | | |
$ | 3,791,674 | | |
$ | - | | |
$ | (4,826,335 | ) | |
$ | 4,928 | | |
$ | (1,029,733 | ) | |
$ | 2,645,559 | | |
$ | 1,615,826 | |
Conversion of membership interests into shares of
common stock | |
| 700,000 | | |
| 70 | | |
| 700,000 | | |
| 70 | | |
| (3,791,674 | ) | |
| 3,791,534 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Issuance of common stock in initial public offering,
net [1] | |
| 345,000 | | |
| 34 | | |
| - | | |
| - | | |
| - | | |
| 63,074,094 | | |
| - | | |
| - | | |
| 63,074,128 | | |
| - | | |
| 63,074,128 | |
Stock-based compensation | |
| 33,063 | | |
| 3 | | |
| - | | |
| - | | |
| - | | |
| 9,076,913 | | |
| - | | |
| - | | |
| 9,076,916 | | |
| - | | |
| 9,076,916 | |
Purchase of additional interest in Le Mans Esports
Series Ltd. | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1,584,892 | | |
| 1,584,892 | |
Comprehensive loss: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other comprehensive loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (32,914 | ) | |
| (32,914 | ) | |
| - | | |
| (32,914 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (13,811,974 | ) | |
| - | | |
| (13,811,974 | ) | |
| (273,450 | ) | |
| (14,085,424 | ) |
Balance - March 31, 2021 | |
| 1,078,063 | | |
$ | 107 | | |
| 700,000 | | |
$ | 70 | | |
$ | - | | |
$ | 75,942,541 | | |
$ | (18,638,309 | ) | |
$ | (27,986 | ) | |
$ | 57,276,423 | | |
$ | 3,957,001 | | |
$ | 61,233,424 | |
Issuance of common stock to 704Games former minority
shareholders | |
| 85,527 | | |
| 9 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 9 | | |
| - | | |
| 9 | |
Purchase of 704Games minority interest | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (939,434 | ) | |
| - | | |
| - | | |
| (939,434 | ) | |
| (2,659,786 | ) | |
| (3,599,220 | ) |
ACO Investment in Le Mans Esports Series Ltd. | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 234,754 | | |
| 234,754 | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 116,274 | | |
| - | | |
| - | | |
| 116,274 | | |
| - | | |
| 116,274 | |
Comprehensive loss: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Other comprehensive loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (70,809 | ) | |
| (70,809 | ) | |
| - | | |
| (70,809 | ) |
Net loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (5,780,094 | ) | |
| - | | |
| (5,780,094 | ) | |
| (180,849 | ) | |
| (5,960,943 | ) |
Balance - June 30, 2021 | |
| 1,163,590 | | |
$ | 116 | | |
| 700,000 | | |
$ | 70 | | |
$ | - | | |
$ | 75,119,381 | | |
$ | (24,418,403 | ) | |
$ | (98,795 | ) | |
$ | 50,602,369 | | |
$ | 1,351,120 | | |
$ | 51,953,489 | |
Beginning balance, value | |
| 1,163,590 | | |
$ | 116 | | |
| 700,000 | | |
$ | 70 | | |
$ | - | | |
$ | 75,119,381 | | |
$ | (24,418,403 | ) | |
$ | (98,795 | ) | |
$ | 50,602,369 | | |
$ | 1,351,120 | | |
$ | 51,953,489 | |
Stock-based compensation | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 292,173 | | |
| - | | |
| - | | |
| 292,173 | | |
| - | | |
| 292,173 | |
Other comprehensive loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (537,581 | ) | |
| (537,581 | ) | |
| - | | |
| (537,581 | ) |
Net loss | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| (6,559,515 | ) | |
| | | |
| (6,559,515 | ) | |
| (99,114 | ) | |
| (6,658,629 | ) |
Balance - September 30, 2021 | |
| 1,163,590 | | |
$ | 116 | | |
| 700,000 | | |
$ | 70 | | |
$ | - | | |
$ | 75,411,554 | | |
$ | (30,977,918 | ) | |
$ | (636,376 | ) | |
$ | 43,797,446 | | |
$ | 1,252,006 | | |
$ | 45,049,452 | |
Ending balance, value | |
| 1,163,590 | | |
$ | 116 | | |
| 700,000 | | |
$ | 70 | | |
$ | - | | |
$ | 75,411,554 | | |
$ | (30,977,918 | ) | |
$ | (636,376 | ) | |
$ | 43,797,446 | | |
$ | 1,252,006 | | |
$ | 45,049,452 | |
[1] |
Gross
proceeds of $69,000,000 less offering costs of $5,925,872. |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
MOTORSPORT
GAMES INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
2022 | | |
2021 | |
| |
For
the Nine Months Ended
September
30, | |
| |
2022 | | |
2021 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (31,991,431 | ) | |
$ | (26,704,996 | ) |
Adjustments to reconcile net loss to net cash used
in operating activities: | |
| | | |
| | |
Loss on impairment of intangible assets | |
| 4,640,102 | | |
| - | |
Loss on impairment of goodwill | |
| 4,788,268 | | |
| - | |
Depreciation and amortization | |
| 1,576,003 | | |
| 1,217,234 | |
Purchase commitment and license liability interest
accretion | |
| 620,541 | | |
| 188,220 | |
Non-cash lease expense | |
| 321,882 | | |
| - | |
Stock-based compensation | |
| 820,315 | | |
| 9,485,363 | |
Gain on equity method investment | |
| - | | |
| (1,370,837 | ) |
Sales return and price protection reserves | |
| 1,098,397 | | |
| 257,060 | |
Changes in assets and liabilities, net of acquisitions
and the effect of consolidation of equity affiliates: | |
| | | |
| | |
Accounts receivable | |
| 3,709,280 | | |
| 2,914,584 | |
Operating lease liabilities | |
| (327,337 | ) | |
| - | |
Prepaid expenses and other assets | |
| (1,141,174 | ) | |
| (2,277,279 | ) |
Other assets | |
| - | | |
| 25,000 | |
Accounts payable | |
| (728,322 | ) | |
| (338,895 | ) |
Other non-current liabilities | |
| - | | |
| 443,700 | |
Accrued expenses and other
liabilities | |
| (310,622 | ) | |
| (562,253 | ) |
Net cash used in operating activities | |
$ | (16,924,098 | ) | |
$ | (16,723,099 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Acquisition of Le Mans, net of cash acquired | |
| - | | |
| 153,250 | |
Acquisition of KartKraft | |
| - | | |
| (1,000,000 | ) |
Acquisition of Studio 397 | |
| - | | |
| (12,785,463 | ) |
Purchase of property and equipment | |
| (266,948 | ) | |
| (665,190 | ) |
Net cash used in investing activities | |
$ | (266,948 | ) | |
$ | (14,297,403 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Advances from related parties | |
| 3,012,885 | | |
| 2,073,312 | |
Repayments on advances from related parties | |
| (119,002 | ) | |
| (12,935,519 | ) |
Repayments of purchase commitment liabilities | |
| (1,530,000 | ) | |
| - | |
Purchase of non-controlling interest | |
| - | | |
| (3,599,211 | ) |
Contributed capital from non-controlling shareholders | |
| - | | |
| 234,754 | |
Payment of license liabilities | |
| (275,000 | ) | |
| (227,928 | ) |
Issuance of common stock in
initial public offering, net | |
| - | | |
| 63,661,128 | |
Net cash provided by financing
activities | |
$ | 1,088,883 | | |
$ | 49,206,536 | |
| |
| | | |
| | |
Effect of exchange rate changes on cash and cash equivalents | |
| 1,499,865 | | |
| (13,873 | ) |
| |
| | | |
| | |
Net (decrease) increase in cash and cash equivalents | |
| (14,602,298 | ) | |
| 18,172,161 | |
| |
| | | |
| | |
Total cash and cash equivalents
at beginning of the period | |
$ | 17,819,640 | | |
$ | 3,990,532 | |
| |
| | | |
| | |
Total cash and cash equivalents
at the end of the period | |
$ | 3,217,342 | | |
$ | 22,162,693 | |
| |
| | | |
| | |
Supplemental Disclosures of Cash Flow Information: | |
| | | |
| | |
Cash paid during the year for: | |
| | | |
| | |
Interest | |
$ | 17,670 | | |
$ | 804,674 | |
| |
| | | |
| | |
Non-cash investing and financing activities: | |
| | | |
| | |
Shares issued to 704Games former minority shareholders | |
$ | - | | |
$ | 86 | |
Purchase commitment liability | |
$ | - | | |
$ | 3,148,240 | |
Reduction of additional paid-in capital for purchased
704Games minority shares | |
$ | - | | |
$ | 939,511 | |
Reduction of additional paid-in capital for initial
public offering issuance costs that were previously paid | |
$ | - | | |
$ | 587,000 | |
Purchase of additional interest in Le Mans Esports
Series Ltd. | |
$ | - | | |
$ | 1,584,892 | |
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE
1 - BUSINESS ORGANIZATION, NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES AND BASIS OF PRESENTATION
Organization
and Operations
Motorsport
Gaming US LLC (“Motorsport Gaming”) was established as a limited liability company on August 2, 2018 under the laws of the
State of Florida. On January 8, 2021, Motorsport Gaming converted into a Delaware corporation pursuant to a statutory conversion and
changed its name to Motorsport Games Inc. (“Motorsport Games” or the “Company”). Upon effecting the corporate
conversion on January 8, 2021, Motorsport Games now holds all the property and assets of Motorsport Gaming, and all of the debts and
obligations of Motorsport Gaming were assumed by Motorsport Games by operation of law upon such corporate conversion.
Risks
and Uncertainties
COVID-19
Pandemic
The
lingering impact of COVID-19 has continued to create significant volatility throughout the global economy, such as supply chain disruptions,
limited labor supplies, higher inflation, and recession, which in turn has caused constraints on consumer spending. More recently, new
variants of COVID-19, such as the Omicron variant and its subvariants, that are significantly more contagious than previous strains,
have emerged. Further, the effectiveness of approved vaccines on these new strains remains uncertain. The spread of these new strains
initially caused many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19
and its variants. However, while many of these restrictions have been lifted, uncertainty remains as to whether additional restrictions
may be initiated or again reimplemented in response to surges in COVID-19 cases.
Although
the Company does not currently expect the COVID-19 pandemic to have a material impact on its future business and operations, the Company
continues to monitor the evolving situation caused by the COVID-19 pandemic, and the Company may take further actions required by governmental
authorities or that the Company determines are prudent to support the well-being of the Company’s employees, suppliers, business
partners and others. The degree to which the ongoing and prolonged COVID-19 pandemic impacts the Company’s operations, business,
financial results, liquidity, and financial condition will depend on future developments, which are highly uncertain, continuously evolving
and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic; its severity; the emergence and
severity of its variants; the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly
with respect to emerging strains of the virus) and potential hesitancy to utilize them; the effect on discretionary spending by consumers;
and how quickly and to what extent normal economic and operating conditions can resume.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for complete financial statements. In management’s opinion, such statements
include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the Company’s
unaudited condensed consolidated financial statements as of September 30, 2022 and for the three and nine months ended September 30,
2022. The Company’s results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative
of the operating results for the full year ending December 31, 2022 or any other period. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company’s audited consolidated financial statements and related disclosures as
of December 31, 2021 and 2020 and for the years then ended which are included in the 2021 Form 10-K.
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. All shares of common stock, stock options, restricted stock awards, and per share information
presented in the condensed consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive basis
for all periods presented.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Liquidity
and Going Concern
On January 15, 2021, the
Company completed its initial public offering which resulted in net proceeds to the Company of approximately $63.1
million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.
For
the nine months ended September 30, 2022, the Company had a net loss of approximately $32
million, negative cash flows from operations
of approximately $16.9
million and an accumulated deficit of $69
million. It is expected that the Company will
continue to incur operating expenses and, as a result, the Company will need to grow revenues to reach profitability and positive cash
flows. We expect to continue to incur losses for the foreseeable future as we continue to develop our product portfolio and invest in
developing new video game titles.
In
accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether
there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue
as a going concern within one year after the date that these condensed consolidated financial statements are issued.
Our
future liquidity and capital requirements include funds to support the planned costs to operate our business, including amounts required
to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures.
The adequacy of our available funds generally depends on many factors, including our ability to successfully develop consumer-preferred
new products or enhancements to our existing products, continued development and expansion of our esports platform and our ability to
enter into collaborations with other companies and/or acquire other companies or technologies to enhance or complement our product and
service offerings.
The
Company continues to explore additional funding in the form of potential equity and/or debt financing arrangements or similar
transactions and consider these to be viable options to support future liquidity needs, provided that such opportunities can be
obtained on terms that are commercially competitive and on terms acceptable to the Company. The Company is also seeking to improve
its liquidity by achieving cost reductions by maintaining and enhancing cost control initiatives, such as those that it expects to
achieve through its previously announced organizational restructuring (the “2022 Restructuring Program”).
As
the Company continues to evaluate incremental funding solutions, it has reevaluated its product roadmap in the first quarter of 2022
and modified the expected timing and scope of certain new product releases. These changes have been made not only to maintain the development
of high-quality video game titles, but also to improve the timing of certain working capital requirements and reduce expenditures, thereby
decreasing our expected future cash-burn and improve our short-term liquidity needs. If needed, further adjustments could be made that
would decrease short-term working capital requirements, while pushing out the timing of expected revenues.
The
Company expects to generate additional liquidity through consummating one or more potential equity and/or debt financings or similar
transactions, achieving cost reductions by maintaining and enhancing cost control initiatives, such as those that it expects to achieve through the 2022 Restructuring
Program, and/or further adjusting its product roadmap
to reduce near term need for working capital. If the Company is unable to generate adequate revenue and profit growth, there can be no
assurances that such actions will provide the Company with sufficient liquidity to meet its cash requirements as, among other things,
its liquidity position can be impacted by a number of factors, including the level of sales, costs and expenditures, economic conditions
in the capital markets, especially for technology companies, as well as accounts receivable and sales allowances.
There
can be no assurance that the Company will be able to obtain funds on commercially acceptable terms, if at all, to satisfy its future
needed liquidity and capital resources. If the Company is unable to obtain adequate funds on acceptable terms, it may be required to,
among other things, significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive
terms.
If
the Company is unable to satisfy its cash requirements from the sources identified above, it could be required to adopt one or more of
the following alternatives:
|
● |
selling
assets or operations; |
|
● |
seeking
additional capital contributions and/or loans from Motorsport Network, the Company’s other affiliates and/or third parties;
and/or |
|
● |
reducing
other discretionary spending. |
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
There
can be no assurance that 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 cash 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 financing, if the anticipated level of revenues are not achieved because of, for example, 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.
The
factors described above, in particular the available cash on hand to fund operations over the next year, have raised substantial doubt
about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty. Accordingly, the condensed consolidated financial statements
have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets
and satisfaction of liabilities and commitments in the ordinary course of business. However, substantial doubt about the Company’s
ability to continue as a going concern exists.
Out-of-Period
Adjustment
During
the three months ended September 30, 2022, the Company recorded an out-of-period adjustment of approximately $0.3 million in revenues
in our condensed consolidated statements of operations. The adjustment, which reduced revenues and accounts receivable, was made to correct
an overstatement of revenue as reported in our Form 10-Q for the period ended June 30, 2022. The Company determined the adjustment did
not have a material impact to our current or prior period condensed consolidated financial statements. In addition, the correction did
not have any impact on the cumulative year to date position in either the statement of operations, balance sheet, or statement of cash
flow for the nine months ended September 30, 2022.
Recently
Issued Accounting Standards
As
an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to
delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to
private companies. The Company has elected to use this extended transition period under the JOBS Act until such time as the Company is
no longer considered to be an EGC. The adoption dates discussed below reflect this election.
In
November 2019, the Financial Accounting Standards Board issued Accounting Standard Update (“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.
Adoption
of Accounting Pronouncements
On
January 1, 2022, the Company adopted ASU 2016-02, Leases (Topic 842) (“ASC 842”) using the modified retrospective
approach and elected the optional transition method, which allows entities to initially apply the standard at the adoption date and recognize
a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Upon adoption, the Company applied
the guidance to all existing leases.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
For
leases with a term greater than 12 months, the new guidance requires the lease rights and obligations arising from the leasing arrangements,
including operating leases, to be recognized as assets and liabilities on the balance sheet. Upon adoption of ASC 842, the Company recognized
approximately $751,000 of operating lease assets and operating lease liabilities primarily related to real estate, which were presented
in the condensed consolidated balance sheet as operating lease right-of-use assets, operating lease liabilities, current and operating
lease liabilities, non-current. There was no cumulative effect of applying the new standard and, accordingly, there was no adjustment
to retained earnings on adoption. The comparative information presented has not been restated and continues to be reported under the
accounting standards in effect for those periods. The Company opted to apply the optional package of practical expedients permitted under
ASC 842, which eliminated the requirement to reassess prior conclusions regarding lease identification, classification and initial direct
costs.
The
adoption of ASC 842 did not have a material impact on the Company’s condensed consolidated statements of operations and comprehensive
loss or condensed consolidated statements of cash flows.
On
January 1, 2022, the Company adopted ASU 2020-01, Investments—Equity Securities (“Topic 321”), Investments—Equity
Method and Joint Ventures (“Topic 323”), and Derivatives and Hedging (“Topic 815”)—Clarifying the Interactions
between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force) (“ASU 2020-01”). The amendments
in this ASU clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance
to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how
an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities
that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of
accounting or the fair value option in accordance with Topic 825, Financial Instruments. The adoption of ASU 2020-01 did not have a material
impact on the Company’s condensed consolidated financial statements.
On
January 1, 2022, the Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general
principles in ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying
and amending existing guidance. The adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated
financial statements.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There
have been no material changes to the significant accounting policies included in the audited consolidated financial statements included
in the 2021 Form 10-K, except as disclosed in this note.
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 include game consoles, PCs, mobile phones and tablets. The Company’s product and service offerings
include the following:
|
1) |
Sales
of Games – Full console, PC and mobile games contain a software license that is delivered digitally or via physical disk
at the time of sale; |
|
|
|
|
2) |
Sales
of Extra Content – Includes (a) extra content that is downloaded by console and PC players that provides the ability to
customize and/or enhance their gameplay and (b) virtual currencies that provide mobile players with the ability to purchase extra
content that allows them to customize and/or enhance their gameplay; and |
|
|
|
|
3) |
Esports
Competition Events – Hosting of online esports competitions that generate sponsorship revenue. |
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Sales
of Games. Sales of games are generally determined to have a singular distinct performance obligation, as the Company does not have
an obligation to provide future update rights or online hosting. As a result, the Company recognizes revenue equal to the full transaction
price, less any applicable reserves, at the point in time the customer obtains control of the software license and the Company satisfies
its performance obligation.
Sales
of Extra Content. Revenue recognized from sales of extra content is derived primarily from the sale of digital in-game content that
is downloaded by the Company’s console, PC and mobile customers that enhance their gameplay experience, typically by providing
car upgrades, additional drivers and/or allows them to customize their gameplay. In-game credit, and other downloadable content, may
only be used for in-game purchases and/or customizing the gameplay. Revenue related to extra content is recognized at the point in time
the Company satisfies its performance obligation, which is generally at the time the customer obtains control of the extra content, either
by downloading the digital in-game content or by purchasing the in-game credits. For console and PC customers, extra content is either
purchased in a pack or on a standalone basis.
Esports.
The Company recognizes sponsorship revenue associated with hosting online esports competition events over the period of time the
Company satisfies its performance obligation under the contract, which is generally concurrent with the time the event is held. If the
Company enters into a contract with a customer to sponsor a series of esports events, the Company allocates the transaction price between
the series of events and recognizes revenue over the period of time that each event is held and the Company satisfies its performance
obligations.
The
timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when
revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the
provision of the related services, the Company records deferred revenue until the Company’s performance obligations are satisfied.
Identifying
Performance Obligations
Performance
obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both
capable of being distinct (i.e., the customer can benefit from the goods or services either on its own or together with other resources
that are readily available), and are distinct in the context of the contract (i.e., it is separately identifiable from other goods or
services in the contract). To the extent a contract includes multiple promises, the Company must apply judgment to determine whether
those promises are separate and distinct performance obligations. If these criteria are not met, the promises are accounted for as a
combined performance obligation.
Determining
the Transaction Price
The
transaction price is determined based on the consideration that the Company will be entitled to receive in exchange for transferring
its goods and services to the customer. Determining the transaction price often requires significant judgment based on an assessment
of contractual terms and business practices. It further includes reviewing variable consideration such as discounts, sales returns, price
protection, and rebates, which is estimated at the time of the transaction. See below for additional information regarding the Company’s
sales returns and price protection reserves.
Allocating
the Transaction Price
Allocating
the transaction price requires the Company to determine an estimate of the relative stand-alone selling price for each distinct performance
obligation.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Principal
Versus Agent Considerations
The
Company evaluates sales to end customers of its full games and related content via third-party storefronts, including digital storefronts
such as Microsoft’s Xbox Store, Sony’s PlayStation Store, Nintendo’s eShop, Apple’s App Store, and Google’s
Play Store, to determine whether the Company is acting as the principal or agent in the sale to the end customer. Key indicators that
the Company evaluates in determining gross versus net treatment include but are not limited to the following:
|
● |
the
underlying contract terms and conditions between the various parties to the transaction; |
|
● |
which
party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer; |
|
● |
which
party has inventory risk before the specified good or service has been transferred to the end customer; and |
|
● |
which
party has discretion in establishing the price for the specified good or service. |
Based
on an evaluation of the above indicators, the Company determined that, apart from contracts with customers where revenue is generated
via the Apple’s App Store or Google’s Play Store, the third party is considered the principal with the end customer and,
as a result, the Company reports revenue net of the fees retained by the storefront. For contracts with customers where revenues are
generated via the Apple’s App Store or Google’s Play Store, the Company has determined that it is the principal and, as a
result, reports revenues on a gross basis, with mobile platform fees included within cost of revenues.
Sales
Returns and Price Protection Reserves
Sales
returns and price protection are considered variable consideration under ASC 606. The Company reduces revenue for estimated future returns
and price protection which may occur with distributors and retailers (“channel partners”). See Note 2 – Summary
of Significant Accounting Policies – Accounts Receivable in the 2021 Form 10-K for additional details. Price protection represents
the Company’s practice to provide channel partners with a credit allowance to lower their wholesale price on a particular game
unit that they have not resold to customers. The amount of the price protection for permanent markdowns is the difference between the
original wholesale price and the new reduced wholesale price. Credits are also given for short-term promotions that temporarily reduce
the wholesale price. When evaluating the adequacy of sales returns and price protection reserves, the Company analyzes the following:
historical credit allowances, current sell-through of channel partners’ inventory of the Company’s products, current trends
in retail and the video game industry, changes in customer demand, acceptance of products, and other related factors. In addition, the
Company monitors the volume of sales to its channel partners and their inventories, as substantial overstocking in the distribution channel
could result in higher than expected returns or higher price protection in subsequent periods. The Company’s sales returns and
price protection reserves recognized as a reduction of revenues for the three and nine months ended September 30, 2022 were approximately
$0 and $1.1 million, respectively. The Company recognized approximately $0.06 million and $0.3 million of sales returns
and price protection charges (referred to as “reserves” above) as a reduction of revenues for the three and nine months ended
September 30, 2021, respectively.
Stock-Based
Compensation
The
Company accounts for stock-based compensation in accordance with ASC 718 – Compensation – Stock 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, using the Black-Scholes option pricing model. The fair value amount is then recognized
over the period during which services are required to be provided in exchange for the award, usually the vesting period. Upon the exercise
of an award, the Company issues new shares of common stock out of its authorized shares. Stock-based compensation is adjusted for any
forfeitures, which are accounted for on an as occurred basis.
Net
Loss Per Common Share
Basic
net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.
Diluted net loss per common share is computed by dividing net loss by the weighted average number of common and dilutive common-equivalent
shares outstanding during each period. Dilutive common-equivalent shares consist of shares of options, if not anti-dilutive.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
The
following shares were excluded from the calculation of weighted average dilutive common shares because their inclusion would have been
anti-dilutive:
SCHEDULE
OF CALCULATION WEIGHTED AVERAGE DILUTIVE COMMON SHARES
| |
For the Three and Nine Months Ended | |
| |
September 30, | |
| |
2022 | | |
2021 | |
Stock options | |
| 57,405 | | |
| 57,742 | |
| |
| 57,405 | | |
| 57,742 | |
Income
Taxes
On
January 8, 2021, Motorsport Gaming, a Florida limited liability company, converted into Motorsport Games, a Delaware corporation, pursuant
to a statutory conversion.
The
Company is subject to federal and state income taxes in the U.S. The Company files income tax returns in the jurisdictions in which nexus
threshold requirements are met.
The
Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included or excluded
in the financial statements or tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between
the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted
tax rates in effect for the years in which the temporary differences are expected to reverse. ASC 740, Taxes requires that a valuation
allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized.
The
Company utilizes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return.
The
Company’s policy is to classify assessments, if any, for tax-related interest as interest expense and penalties as general and
administrative expenses in its condensed consolidated statements of operations.
NOTE
3 – INTANGIBLE ASSETS
Licensing
Agreements
The
Company has license agreements with various entities related to the development of video games and the organization and facilitation
of esports events, including BARC (TOCA) Limited (“BARC”) with respect to the British Touring Car Championship (the “BTCC”)
and INDYCAR LLC (“INDYCAR”) with respect to the INDYCAR SERIES. As of September 30, 2022, the Company had a remaining liability
in connection with these licensing agreements of approximately $0.9 million and $3.0 million, which is included in purchase commitments
and other non-current liabilities, respectively, on the condensed consolidated balance sheets.
Impairment
The
Company identified triggering events as of March 31, 2022 and as of June 30, 2022 that indicated its allocated intangible and finite-lived
intangible assets were at risk of impairment and as such, performed quantitative impairment assessments of all its intangible and finite-lived
intangible assets. No further indicators of impairment were identified as of September 30, 2022.
The
primary triggers for the impairment review for the period ended March 31, 2022 were changes made to the Company’s product roadmap
during the three months ended March 31, 2022, which resulted in changes to the scope and timing of certain product releases, as well
as changes in the value of the Company’s market capitalization which had reduced significantly since December 31, 2021, the date
of the last impairment assessment. The Company made these changes to better align its product roadmap with the Company’s ability
to produce and release high quality games. The primary triggers for the impairment review for the six-month period ended June 30, 2022
were the ongoing reduction in the Company’s share price, the receipt of a deficiency letter notice from NASDAQ and the Company’s
ongoing uncertain liquidity position.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
As
a result of the interim impairment assessments, the Company determined the fair value of its rFactor 2 trade name and Le Mans video gaming
license (the “Le Mans Gaming License”) indefinite-lived intangible assets, as well as its rFactor 2 finite-lived technology,
were lower than their respective carrying values. The Company has recorded impairment losses relating to these intangible assets of approximately
$4.6 million during the nine months ended September 30, 2022. The impairment losses consist of approximately $2.2 million for the Company’s
rFactor 2 trade name, $1.1 million for its Le Mans Gaming License and $1.3 million for its finite-lived rFactor 2 technology intangible
asset.
The
Company determined the fair value of the indefinite-lived intangible assets using a relief-from-royalty method for the trade name, a
discounted cash flow valuation model for the Le Mans Gaming License and a cost to recreate valuation model for the finite-lived technology
intangible asset. The impairment loss for indefinite- and finite-lived intangible assets was primarily driven by a reduction in expected
future revenues, following changes to the Company’s product roadmap, as well as changes to the discount rates applied, royalty
rates and technological obsolescence assumptions used in the valuation models. The principal assumptions used in the relief-from-royalty
method analysis used to determine the fair value of the rFactor 2 trade name consisted of forecasted revenues, royalty rate and weighted
average cost of capital (i.e., the discount rate), while the principal assumptions used in the discounted cash flow valuation model for
the Le Mans Gaming License were forecasted revenues and weighted average cost of capital. The principal assumptions used in determining
the fair value of the finite-lived technology intangible asset were number of production hours, cost per hour and technological obsolescence.
The Company considers these assumptions to be judgmental and subject to risk and uncertainty, which could result in further changes in
subsequent periods.
The
impairment loss is presented as impairment of intangible assets in the condensed consolidated statements of operations.
The
following is a summary of intangible assets as of September 30, 2022:
SCHEDULE
OF INTANGIBLE ASSETS
| |
Licensing Agreements (Finite) | | |
Licensing Agreements (Indefinite) | | |
Software Licenses (Finite) | | |
Distribution Contracts (Finite) | | |
Trade Names (Indefinite) | | |
Non-Compete Agreements (Finite) | | |
Accumulated Amortization | | |
Total | |
Balance as of December 31, 2021 | |
$ | 7,198,363 | | |
$ | 2,810,000 | | |
$ | 10,364,541 | | |
$ | 560,000 | | |
$ | 2,672,581 | | |
$ | 257,530 | | |
$ | (3,377,206 | ) | |
$ | 20,485,809 | |
Amortization expense | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,306,997 | ) | |
| (1,306,997 | ) |
Impairment of intangible assets | |
| - | | |
| (1,118,209 | ) | |
| (1,320,993 | ) | |
| - | | |
| (2,200,900 | ) | |
| - | | |
| - | | |
| (4,640,102 | ) |
FX translation adjustments | |
| - | | |
| (275,948 | ) | |
| (872,874 | ) | |
| - | | |
| (124,258 | ) | |
| (33,120 | ) | |
| 195,795 | | |
| (1,110,405 | ) |
Balance as of September 30, 2022 | |
$ | 7,198,363 | | |
$ | 1,415,843 | | |
$ | 8,170,674 | | |
$ | 560,000 | | |
$ | 347,423 | | |
$ | 224,410 | | |
$ | (4,488,408 | ) | |
| 13,428,305 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Weighted average remaining amortization period at September 30, 2022 | |
| - | | |
| - | | |
| 4.6 | | |
| 5.4 | | |
| - | | |
| 4.5 | | |
| - | | |
| - | |
Accumulated
amortization of intangible assets consists of the following:
SCHEDULE OF ACCUMULATED AMORTIZATION OF INTANGIBLE ASSETS
| |
Licensing Agreements (Finite) | | |
Software Licenses (Finite) | | |
Distribution Contracts (Finite) | | |
Non-Compete Agreements (Finite) | | |
Accumulated Amortization | |
Balance as of December 31, 2021 | |
$ | 912,260 | | |
$ | 1,843,716 | | |
$ | 560,000 | | |
$ | 61,230 | | |
$ | 3,377,206 | |
Amortization expense | |
| 175,312 | | |
| 1,072,168 | | |
| - | | |
| 59,517 | | |
| 1,306,997 | |
Foreign currency translation adjustment | |
| - | | |
| (184,538 | ) | |
| - | | |
| (11,257 | ) | |
| (195,795 | ) |
Balance as of September 30, 2022 | |
$ | 1,087,572 | | |
$ | 2,731,346 | | |
$ | 560,000 | | |
$ | 109,490 | | |
$ | 4,488,408 | |
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
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 | |
2022 (remaining period) | |
$ | 632,147 | |
2023 | |
| 1,892,641 | |
2024 | |
| 1,687,137 | |
2025 | |
| 1,678,365 | |
2026 | |
| 1,400,729 | |
Thereafter | |
| 2,172,544 | |
Estimated
aggregate amortization expense | |
$ | 9,463,563 | |
Amortization
expense related to intangible assets was approximately $0.4 million and $0.5 million for the three months ended September 30, 2022
and 2021, respectively, and amortization expense related to intangible assets was approximately $1.3 million and $1.1 million for
the nine months ended September 30, 2022 and 2021, respectively. Within intangible assets is approximately $3.5 million of licensing
agreements that are not presently subject to amortization. These non-amortizing licensing agreements will commence amortizing upon release
of the first title under the respective license agreement.
NOTE
4 – GOODWILL
The
carrying amount of goodwill attributable to our Gaming and Esports reporting units and the changes in such balances during the nine months
ended September 30, 2022 were as follows:
SCHEDULE OF GOODWILL
| |
Games | | |
Esports | | |
Total | |
Balance as of January 1, 2022 | |
$ | 4,802,882 | | |
$ | 64,583 | | |
$ | 4,867,465 | |
Impairment of Goodwill | |
| (4,723,685 | ) | |
| (64,583 | ) | |
| (4,788,268 | ) |
Foreign exchange | |
| (79,197 | ) | |
| - | | |
| (79,197 | ) |
Balance as of September 30, 2022 | |
$ | - | | |
$ | - | | |
$ | - | |
The
Company identified triggering events as of March 31, 2022 that indicated its goodwill associated with the acquisition of Studio397 B.V.
(“Studio397”) was at risk of impairment and as such, performed a quantitative impairment assessment to determine whether
the fair value of the associated reporting unit exceeded its fair value. The primary triggers for the impairment review were changes
made to Motorsport Games’ product roadmap during the three months ended March 31, 2022, which resulted in changes to the scope
and timing of certain product releases, as well as changes in the value of Motorsport Games’ market capitalization which had reduced
significantly subsequent to December 31, 2021, the date of the last impairment assessment.
As
a result of the March 31, 2022 interim impairment assessment, the Company determined the carrying value of its Gaming reporting unit
exceeded its fair value and the associated goodwill was fully impaired. Impairment losses of approximately $4.8 million have been recorded
during the nine months ended September 30, 2022, reducing the carrying value of the Company’s goodwill to $0. As such, no further
impairment assessments have been completed subsequent to the March 31, 2022 interim assessment.
The
Company determined the fair value of the Gaming reporting unit using a discounted cash flow valuation model. The impairment loss was
primarily driven by a reduction in expected future revenues, following changes to the Company’s product roadmap, as well as a higher
discount rate applied in the valuation model. The principal assumptions used in the discounted cash flow valuation model were forecasted
revenues and weighted average cost of capital (i.e., the discount rate).
The
impairment loss is presented as impairment of goodwill in the condensed consolidated statements of operations.
NOTE
5 - LEASES
The
Company’s operating leases primarily relate to real estate, which include office space in the U.S., the U.K., and Russia. The Company’s
leases have established fixed payment terms that are typically subject to annual rent increases throughout the term of each lease agreement.
The Company’s lease agreements have varying noncancelable rental periods and do not typically include options for the Company to
extend the lease terms.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
The
Company’s operating leases have been presented in operating lease right-of-use assets, operating lease liabilities (short-term)
and operating lease liabilities (long-term), on the Company’s condensed consolidated balance sheet as of September 30, 2022. Leases
with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet. The Company recognizes lease
expense for these leases on a straight-line basis over the lease term. Refer to Note 1, Business Organization, Nature of Operations,
Risks and Uncertainties and Basis of Presentation, for further information on the adoption of ASC 842.
Incremental
borrowing rate
The
Company’s lease agreements do not provide an implicit rate to determine the present value of lease payments. As such, the Company
uses its incremental borrowing rate to determine the present value of lease payments. The Company derives its incremental borrowing rate
from information available at the lease commencement date, which represents a collateralized rate of interest the Company would have
to pay to borrow over a similar term an amount equal to the lease payments in a similar economic environment. As the Company did not
have external borrowings at the adoption date with comparable terms to its lease agreements, the Company estimated its borrowing rate
based on prime lending rate (“Prime Rate”), adjusted for the US Treasury note rates for the same term as the associated lease
and the Company’s credit risk spread.
The
components of lease expense were as follows:
SCHEDULE
OF LEASE COST
| |
| |
| | | |
| | |
| |
Condensed Consolidated Statement of | |
Three Months Ended | | |
Nine Months Ended | |
| |
Operations Classification | |
September 30, 2022 | | |
September 30, 2022 | |
Short-term operating lease expense | |
G&A | |
$ | 45,419 | | |
$ | 98,335 | |
Operating lease expense | |
G&A | |
| 125,545 | | |
| 322,483 | |
Total lease costs | |
| |
$ | 170,964 | | |
$ | 420,818 | |
Weighted
average remaining lease terms and weighted average discount rates are as follows:
SCHEDULE OF REMAINING LEASE TERMS
| |
| | |
| |
Nine Months Ended September 30, 2022 | |
Weighted-average remaining lease term - operating leases (years) | |
| 2.80 | |
Weighted-average discount rate - operating leases | |
| 7.46 | % |
Supplemental
cash flow information related to leases is as follows:
SCHEDULE
OF CASH FLOW SUPPLEMENTAL
|
|
|
|
|
|
|
Nine
Months
Ended
September
30, 2022 |
|
Cash
paid for amounts included in the measurement of operating lease liabilities |
|
$ |
385,815 |
|
Right
of use assets obtained in exchange for new lease obligations |
|
$ |
1,086,668 |
|
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
As
of September 30, 2022, maturities related to lease liabilities were as follows:
SCHEDULE
OF MATURITIES OF LEASE LIABILITIES
| |
| | |
| |
Operating Leases | |
2022 (remaining period) | |
$ | 67,060 | |
2023 | |
| 234,007 | |
2024 | |
| 160,377 | |
2025 | |
| 26,749 | |
2026 | |
| 13,374 | |
Thereafter | |
| - | |
Total lease payments | |
$ | 501,567 | |
Less effects of imputed interest | |
| (36,336 | ) |
Present value of lease liabilities | |
$ | 465,231 | |
New
lease agreements
On
February 8, 2022, the Company entered into a new lease agreement with Lemon City Group, LLC, an entity affiliated with our majority shareholder,
Motorsport Network, for office space located in Miami, Florida (the “New Lemon City Lease”). The term of this new lease was
5 years, which commenced April 1, 2022 and was scheduled to expire on March 31, 2027, terminable upon 60-days’ written notice,
by either party, with no penalty. Concurrently with entering into the New Lemon City Lease, a previous lease agreement for office space
in Miami, Florida between 704Games LLC and Lemon City Group, LLC was terminated without penalty. The base rent from the New Lemon City
Lease was fixed at approximately $22,000 per month. On August 10, 2022, the Company provided written notice to terminate the New Lemon
City Lease in accordance with the terms of the lease agreement, without penalty, resulting in a lease modification and the remeasurement
of the lease liability and right-of-use asset balances associated with the modified lease which terminated on October 9, 2022. No gain
or loss was recognized within the condensed consolidated statement of operations as a result of the lease modification.
NOTE
6 – ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued
expenses and other liabilities consisted of the following:
SCHEDULE OF ACCRUED EXPENSES
| |
| | | |
| | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Accrued royalties | |
$ | 544,358 | | |
$ | 1,694,011 | |
Accrued professional fees | |
| 231,233 | | |
| 80,909 | |
Accrued consulting fees | |
| 115,000 | | |
| 106,006 | |
Accrued development costs | |
| 508,298 | | |
| 968,007 | |
Esport prize money | |
| 31,250 | | |
| 168,959 | |
Accrued taxes | |
| 141,376 | | |
| 31,491 | |
Accrued payroll | |
| 134,119 | | |
| 235,224 | |
Deferred revenue | |
| 670,293 | | |
| - | |
Loss contingency reserves | |
| 1,000,000 | | |
| - | |
Accrued other | |
| 173,007 | | |
| 239,664 | |
Total | |
$ | 3,548,934 | | |
$ | 3,524,271 | |
NOTE
7 – DUE TO/FROM RELATED PARTIES
On
April 1, 2020, the Company entered into a promissory note (the “$12 million Line of Credit”) with the Company’s majority
stockholder, Motorsport Network that provides the Company with a line of credit of up to $10 million at an interest rate of 10% per annum,
the availability of which is dependent on Motorsport Network’s available liquidity. On November 23, 2020, the Company and Motorsport
Network entered into an amendment to the $12 million Line of Credit, effective in 2020, pursuant to which the availability under the
$12 million Line of Credit was increased from $10 million to $12 million, with no changes to the other terms.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
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. The Company may prepay the $12 million Line of Credit in whole or in part at any time or from time to time without
penalty or charge. In the event the Company or any of its subsidiaries consummates certain corporate events, including any capital reorganization,
consolidation, joint venture, spin off, merger or any other business combination or restructuring of any nature, or if certain events
of default occur, the entire principal amount and all accrued and unpaid interest will be accelerated and become payable.
On
September 8, 2022, the Company entered into a support agreement with Motorsport Network (the “Support Agreement”) pursuant
to which Motorsport Network issued approximately $3 million (the “September 2022 Cash Advance”) to the Company in accordance
with the $12 million Line of Credit, the proceeds of which the Company is using for general corporate purposes and working capital. In
the Support Agreement, Motorsport Network and the Company terminated the Side Letter Agreement dated September 4, 2020 and agreed that
until June 30, 2024, Motorsport Network would not demand repayment of the September 2022 Cash Advance or other advances under the $12
million Line of Credit unless and until such time that any of the following shall occur or exist: (i) the Company enters into a new financing
arrangement (whether debt, equity or otherwise) under which the Company is then able to draw or provides the Company with available cash
in excess of amounts required in the Company’s reasonable judgment to run its operations in the ordinary course of business; (ii)
the Company generates from operations available cash in excess of amounts required in the Company’s reasonable judgment to run
its operations in the ordinary course of business; or (iii) the Company’s independent auditors issue an unqualified opinion on
its financial statements and the Company’s repayment of the advances, in whole or in part, would not otherwise cause the independent
auditor to issue a going concern qualified opinion. Upon the occurrence of any of the foregoing events, the Company shall prepay on such
date principal amount of the September 2022 Cash Advance and other advances under the $12 million Line of Credit then outstanding in
an amount equal to such available excess cash or, in the case of (iii) above, the amount that would not cause the Company’s independent
auditor to issue a going concern qualified opinion, together with interest accrued but unpaid on the unpaid September 2022 Cash Advance
and other advances, which repayment obligation shall continue until all such advances under the $12 million Line of Credit are paid in
full. The entire aggregate principal amount of the September 2022 Cash Advance and the other advances under the $12 million Line of Credit,
together with interest accrued but unpaid thereon, shall also become immediately and automatically due and payable, and the $12 million
Line of Credit shall immediately and automatically terminate, in each case without any action required by Motorsport Network, if (i)
the Company experience an event of default under any other debt instrument, agreement or arrangement; or (ii) any final judgment or final
judgments for the payment of money in excess (net of amounts covered by third-party insurance with insurance carriers who have not disclaimed
liability with respect to such judgment or judgments) of $500,000 or its foreign currency equivalent is entered against the Company or
any subsidiary and is not discharged and either (a) an enforcement proceeding has been commenced by any creditor upon such judgment or
decree or (b) there is a period of 60 days following the entry of such judgment or decree during which such judgment or decree is not
discharged, waived or the execution thereof stayed and, in the case of (b), such default continues for 60 consecutive days.
During
the nine months ended September 30, 2022, the Company did not repay any amounts borrowed under the $12 million Line of Credit and the
balance due to Motorsport Network under the $12 million Line of Credit was $3 million as of September 30, 2022.
Given
the state of the financial markets, the Company continues to assess its exposure to any potential non-performance by Motorsport Network
and believes that there is a substantial likelihood that Motorsport Network may not fulfill the Company’s future borrowing requests.
In
addition to the $12 million Line of Credit, the Company had regular related party receivables and payables outstanding as of September
30, 2022. Specifically, the Company owed approximately $3.1 million 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 September 30, 2022. During the nine months ended September
30, 2022, approximately $0.1 million has been paid to related parties in settlement of related party payables.
NOTE
8 – RELATED PARTY TRANSACTIONS
From
time to time, Motorsport Network, and other related entities pay for Company expenses on the Company’s behalf. During the nine
months ended September 30, 2022, the Company incurred expenses of approximately $0.1 million that were paid by Motorsport Network on
its behalf and are reimbursable by the Company to Motorsport Network. In addition, the Company has the $12 million Line of Credit, which
is discussed in Note 7 – Due To/From Related Parties.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Leasing
agreements
On
February 8, 2022, the Company entered into the New Lemon City Lease with Lemon City Group, LLC, an entity affiliated with our majority
shareholder, Motorsport Network, for office space located in Miami, Florida, which was subsequently terminated on August 10, 2022, effective
on October 9, 2022. See Note 5 – Leases for further information.
NOTE
9 – STOCKHOLDERS’ EQUITY
Initial
Public Offering
On
January 15, 2021, the Company completed its initial public offering of 345,000 shares of its Class A common stock at a price to the public
of $200.00 per share, which includes the exercise in full by the underwriters of their option to purchase from the Company an additional
45,000 shares of the Company’s Class A common stock. The net proceeds to the Company from the initial public offering were $63,073,783,
after deducting underwriting discounts and commissions and offering expenses paid by the Company during 2020 and 2021.
Stock
Warrants
As
of September 30, 2022 and December 31, 2021, 704Games has outstanding 10-year warrants to purchase 4,000 shares of common stock at an
exercise price of $93.03 per share that were issued on October 2, 2015. As of September 30, 2022, the warrants had no intrinsic value
and a remaining life of 3 years.
NOTE
10 – SHARE-BASED COMPENSATION
On
January 12, 2021, in connection with 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 100,000 shares of Class
A common stock to be available for issuance. As of September 30, 2022, 42,595 shares of Class A common stock were available for issuance
under the MSGM 2021 Stock Plan. Shares issued in connection with awards made under the MSGM 2021 Stock Plan are generally issued as new
issuances of Class A common stock.
The
majority of the options issued under the MSGM 2021 Stock Plan have time-based vesting schedules, typically vesting ratably over a 3-year
period. Certain stock option awards differed from this vesting schedule, notably awards made to Motorsport Games’ Chief Executive
Officer in conjunction with Motorsport Games’ initial public offering that vested immediately, as well as those made to Motorsport
Games’ directors that vested on the one-year anniversary of award issuance. All stock options issued under the MSGM 2021 Stock
Plan expire 10 years from the grant date.
The
following is a summary of stock-based compensation award activity for the nine months ended September 30, 2022:
SCHEDULE OF STOCK-BASED COMPENSATION OPTIONS ACTIVITY
| |
For the Nine Months Ended September 30, 2022 | |
| |
Number of Options | | |
Vesting Term | |
Contractual Term | |
Grant Date Fair Value | |
Awards outstanding under the MSGM 2021 Stock Plan as of January 1, 2022 (net of forfeitures) | |
| 29,740 | | |
| |
| |
| | |
Stock options awarded to employees under the MSGM 2021 Stock Plan | |
| 56,935 | | |
3 Years | |
10 Years | |
$ | 1,143,500 | |
Stock options awarded to Board of Directors under the MSGM 2021 Stock Plan | |
| 5,711 | | |
1 Year | |
10 Years | |
$ | 120,630 | |
Forfeited, cancelled or expired | |
| (34,981 | ) | |
| |
| |
| | |
Awards outstanding under the MSGM 2021 Stock Plan as of September 30, 2022 (net of forfeitures) | |
| 57,405 | | |
| |
| |
| | |
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
In
addition to the equity awards granted and detailed above, the Company granted 3,769 restricted stock awards under the MSGM 2021 Stock
Plan to its Board of Directors in January 2022 that vested on issuance, with a grant date fair value of approximately $0.1 million.
Stock-Based
Compensation
The
following table summarizes stock-based compensation expense resulting from equity awards included in the Company’s condensed consolidated
statement of operations:
SCHEDULE
OF STOCK BASED COMPENSATION EXPENSE
| |
| | | |
| | | |
| | | |
| | |
| |
For the Three Months Ended September 30, | | |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
G&A | |
$ | 223,953 | | |
$ | 285,318 | | |
$ | 682,276 | | |
$ | 9,264,583 | |
Sales & Marketing | |
| 1,371 | | |
| 3,793 | | |
| 80,210 | | |
| 123,139 | |
Development | |
| 3,388 | | |
| 3,062 | | |
| 57,829 | | |
| 97,641 | |
Stock-based compensation expense | |
$ | 228,712 | | |
$ | 292,173 | | |
$ | 820,315 | | |
$ | 9,485,363 | |
As
of September 30, 2022, there was approximately $1.1 million of unrecognized stock-based compensation expense which will be recognized
over approximately 2.5 years.
NOTE
11 – 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 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 consolidated financial statements. If the assessment
indicates that a potential material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed.
There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position,
and results of operations or cash flows.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
As
previously disclosed, on February 11, 2021, HC2 Holdings 2 Inc. (now known as Innovate 2) and Continental General Insurance Company,
former minority stockholders of 704Games, filed a complaint in the U.S. District Court for the District of Delaware against the
Company, the Company’s Chief Executive Officer and Executive Chairman, the Company’s Chief Financial Officer, and the
manager of Motorsport Network. The complaint was later amended and added Leo Capital Holdings LLC as an additional plaintiff and the
controller of Motorsport Network as an additional individual defendant. The complaint alleges, among other things, purported
misrepresentations and omissions concerning 704Games’ financial condition made in connection with the Company’s purchase
of these minority shareholders’ interest in 704Games in August and October 2021. The complaint asserts claims under Section
10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Rule 10b-5 thereunder; Section 20(a)
of the Exchange Act; Section 20A of the Exchange Act; breach of the Company’s obligations under the Stockholders’
Agreement dated August 14, 2018; fraudulent inducement; breach of fiduciary duties; and unjust enrichment. The plaintiffs seek,
among other things, damages from the defendants, jointly and severally, based on the alleged difference between the fair market
value of the shares of common stock of 704Games on the date of plaintiffs’ sale and the purchase price that was paid, as well
as punitive damages and other relief. In May 2021, the Company, along with the other defendants, filed a motion to dismiss the
plaintiffs’ complaint. On March 28, 2022, the court entered an order denying the motion to dismiss. The Company believes that
this action is without merit and will continue to vigorously defend itself. As of
September 30, 2022, the Company has accrued $1 million in loss contingencies as it relates to this case, which represents the
Company’s probable and reasonable estimable exposure. As of December 31, 2021, the Company had not accrued any amounts for
contingencies.
Epic
License Agreement
On
August 11, 2020, the Company entered into a licensing agreement with Epic Games International (“Epic”) for worldwide licensing
rights to Epic’s proprietary computer program known as the Unreal Engine 4. Pursuant to the agreement, upon payment of the initial
license fee described below, the Company was granted a non-exclusive, non-transferable and terminable license to develop, market and
sublicense (under limited circumstances and subject to conditions of the agreement) certain products using the Unreal Engine 4 for its
next generation of games. The Company will pay Epic a license fee royalty payment equal to 5% of product revenue, as defined in the licensing
agreement. During the three and nine months ended September 30, 2022, Epic earned royalties
of approximately $16,000 and $0.1 million, respectively, under the agreement. During a 2-year support period, Epic will use commercially
reasonable efforts to provide the Company with updates to the Unreal Engine 4 and technical support. Pursuant to the terms of the agreement,
the Company has the right to actively develop new or existing authorized products during a 5-year period ending on August 11, 2025.
Minimum
Royalty Guarantees
The
Company is required to make certain minimum royalty guarantee payments to third-party licensors, arising primarily from its NASCAR, INDYCAR
and BTCC licenses, Le Mans Video Gaming License and Le Mans Esports License. These minimum royalty guarantee payments apply throughout
the duration of the licensing agreements, which expire between fiscal years ending December 31, 2026 and 2031, and give rise to a commitment
of approximately $35.5 million, in the aggregate, for the duration of these arrangements. The Company expects to pay $3.55 million in
cash payments in order to comply with the license agreements’ minimum royalty guarantees during the fiscal year ending December
31, 2022.
Purchase
Commitment Liabilities
On
April 22, 2022, the Company entered into a letter agreement (the “Amendment”) amending the terms of (i) the share purchase
agreement dated March 31, 2021 (the “SPA”) with Luminis International BV, Technology In Business B.V. (“TIB”)
and certain of TIB’s shareholders parties to such amendment, relating to the acquisition of Studio397 and (ii) the related deed
of pledge that secured the Company’s payment of the $3.2 million deferred purchase price installment due under the SPA. Pursuant
to the Amendment, the deferred installment amount due to be paid under the SPA by the Company on the first anniversary of closing was
reduced from $3.2 million to $1 million with the remaining $2.2 million further deferred and to be paid within 90 days of the date that
the Company made the $1 million payment. Further, pursuant to the Amendment, secured obligations under the deed of pledge were correspondingly
reduced from $3.2 million to $2.2 million following the finalization of an amendment to the deed of pledge on May 12, 2022. The $1 million
payment was made on April 30, 2022.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
On
July 21, 2022, the Company entered into a letter agreement, effective as of July 19, 2022 (the “Second Amendment”), further
amending the terms of the SPA. Pursuant to the Second Amendment, the deferred purchase price installment that was otherwise due to be
paid by the Company within 90 days of the date of the $1 million payment was reduced from $2.2 million to $1.9 million as a result of
the Company’s pay down of $0.3 million in July 2022. Under the Second Amendment, the remaining balance of $1.9 million plus interest
thereon at 15% per annum, is to be paid as follows: (i) $100,000 monthly payments from August 15, 2022 through December of 2022; and
(ii) $150,000 monthly payments from January 15, 2023 until the entire unpaid $1.9 million and accrued and unpaid interest thereon are
paid in full. Further, pursuant to the Second Amendment, secured obligations under the deed of pledge have been correspondingly reduced
from $2.2 million to $1.9 million.
NOTE
12 – CONCENTRATIONS
Customer
Concentrations
The
following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues, with all the
customers listed coming from the Gaming segment, for the following periods:
SCHEDULE OF CONCENTRATIONS
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
Customer | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Customer B | |
| 39.92 | % | |
| 21.70 | % | |
| 26.75 | % | |
| 28.20 | % |
Customer C | |
| -* | | |
| 22.00 | % | |
| 21.87 | % | |
| 18.70 | % |
Customer D | |
| 39.66 | % | |
| 41.00 | % | |
| 23.00 | % | |
| 38.80 | % |
| |
| 79.58 | % | |
| 84.70 | % | |
| 71.62 | % | |
| 85.70 | % |
The
following table sets forth information as to each customer that accounted for 10% or more of the Company’s trade accounts receivable
(net), with all customers coming from the Gaming segment, as of:
Customer | |
September 30, 2022 | | |
December 31, 2021 | |
Customer A | |
| -* | | |
| 51.92 | % |
Customer B | |
| 14.14 | % | |
| 19.10 | % |
Customer C | |
| 27.38 | % | |
| -* | |
Customer E | |
| 17.41 | % | |
| -* | |
Customer F | |
| 21.11 | % | |
| -* | |
| |
| 80.04 | % | |
| 71.02 | % |
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.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Supplier
Concentrations
The
following table sets forth information as to each supplier that accounted for 10% or more of the Company’s cost of revenues, with
all suppliers relating to the Gaming segment, for the following periods:
SCHEDULE OF CONCENTRATIONS
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
Customer | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Supplier A | |
| -* | | |
| 24.30 | % | |
| 16.10 | % | |
| 32.20 | % |
Supplier B | |
| -* | | |
| 50.20 | % | |
| -* | | |
| 39.40 | % |
Supplier C | |
| -* | | |
| -* | | |
| 18.89 | % | |
| -* | |
| |
| 0.00 | % | |
| 74.50 | % | |
| 34.99 | % | |
| 71.60 | % |
NOTE
13 – 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 and nine months ended September 30, 2022 and 2021 were: (i) the development and publishing of interactive
racing video games, entertainment content and services (the “Gaming segment”); and (ii) the organization and facilitation
of esports tournaments, competitions and events for the Company’s licensed racing games as well as on behalf of third-party video
game racing series and other video game publishers (the “Esports segment”). The Company’s chief operating decision-maker
has been identified as the Company’s Chief Executive Officer, who reviews operating results to make decisions about allocating
resources and assessing performance for the entire Company. Segment information is presented based upon the Company’s management
organization structure as of September 30, 2022 and the distinctive nature of each segment. Future changes to this internal financial
structure may result in changes to the reportable segments disclosed. There are no inter-segment revenue transactions and, therefore,
revenues are only to external customers. As the Company primarily generates its revenues from customers in the U.S., no geographical
segments are presented.
Segment
operating profit is determined based upon internal performance measures used by the chief operating decision-maker. The Company derives
the segment results from its internal management reporting system. The accounting policies the Company uses to derive reportable segment
results are the same as those used for external reporting purposes. Management measures the performance of each reportable segment based
upon several metrics, including net revenues, gross profit and operating loss. Management uses these results to evaluate the performance
of, and to assign resources to, each of the reportable segments. The Company manages certain operating expenses separately at the corporate
level and does not allocate such expenses to the segments. Segment income from operations excludes interest income/expense and other
income or expenses and income taxes according to how a particular reportable segment’s management is measured. Management does
not consider impairment charges and unallocated costs in measuring the performance of the reportable segments.
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
Segment
information available with respect to these reportable business segments was as follows:
SCHEDULE OF SEGMENT REPORTING INFORMATION
| |
For the Three Months Ended September 30, | | |
For the Nine Months Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Revenues: | |
| | |
| | |
| | |
| |
Gaming | |
$ | 1,042,852 | | |
$ | 2,042,322 | | |
$ | 5,943,178 | | |
$ | 6,731,462 | |
Esports | |
| 180,290 | | |
| 96,144 | | |
| 610,740 | | |
| 120,063 | |
Total Revenues | |
$ | 1,223,142 | | |
$ | 2,138,466 | | |
$ | 6,553,918 | | |
$ | 6,851,525 | |
| |
| | | |
| | | |
| | | |
| | |
Cost of revenues: | |
| | | |
| | | |
| | | |
| | |
Gaming | |
$ | 540,519 | | |
$ | 848,705 | | |
$ | 2,765,263 | | |
$ | 2,466,572 | |
Esports | |
| 62,337 | | |
| 100,434 | | |
| 707,556 | | |
| 170,678 | |
Total Cost of Revenues | |
$ | 602,856 | | |
$ | 949,139 | | |
$ | 3,472,819 | | |
$ | 2,637,250 | |
| |
| | | |
| | | |
| | | |
| | |
Gross Profit (Loss) | |
| | | |
| | | |
| | | |
| | |
Gaming | |
$ | 502,333 | | |
$ | 1,193,617 | | |
$ | 3,177,915 | | |
$ | 4,264,890 | |
Esports | |
| 117,953 | | |
| (4,290 | ) | |
| (96,816 | ) | |
| (50,615 | ) |
Total Gross Profit | |
$ | 620,286 | | |
$ | 1,189,327 | | |
$ | 3,081,099 | | |
$ | 4,214,275 | |
| |
| | | |
| | | |
| | | |
| | |
Loss From Operations | |
| | | |
| | | |
| | | |
| | |
Gaming | |
$ | (6,515,203 | ) | |
$ | (6,035,516 | ) | |
$ | (27,952,962 | ) | |
$ | (26,945,662 | ) |
Esports | |
| (1,037,274 | ) | |
| (351,981 | ) | |
| (1,888,280 | ) | |
| (792,308 | ) |
Total Loss From Operations | |
$ | (7,552,477 | ) | |
$ | (6,387,497 | ) | |
$ | (29,841,242 | ) | |
$ | (27,737,970 | ) |
| |
| | | |
| | | |
| | | |
| | |
Depreciation and Amortization | |
| | | |
| | | |
| | | |
| | |
Gaming | |
$ | 84,326 | | |
$ | 79,394 | | |
$ | 301,465 | | |
$ | 176,617 | |
Esports | |
| 8,377 | | |
| 2,480 | | |
| 25,034 | | |
| 2,480 | |
Total Depreciation and Amortization | |
$ | 92,703 | | |
$ | 81,874 | | |
$ | 326,499 | | |
$ | 179,097 | |
| |
| | | |
| | | |
| | | |
| | |
Interest Expense, net: | |
| | | |
| | | |
| | | |
| | |
Gaming | |
$ | (244,953 | ) | |
$ | (160,310 | ) | |
$ | (638,211 | ) | |
$ | (311,748 | ) |
Esports | |
| - | | |
| - | | |
| - | | |
| - | |
Total Interest Expense, net | |
$ | (244,953 | ) | |
$ | (160,310 | ) | |
$ | (638,211 | ) | |
$ | (311,748 | ) |
| |
| | | |
| | | |
| | | |
| | |
Gain Attributable to Equity Method Investment: | |
| | | |
| | | |
| | | |
| | |
Gaming | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 1,370,837 | |
Esports | |
| - | | |
| - | | |
| - | | |
| - | |
Total Gain Attributable to Equity Method Investment | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 1,370,837 | |
| |
| | | |
| | | |
| | | |
| | |
Other (Expense) Income, Net: | |
| | | |
| | | |
| | | |
| | |
Gaming | |
$ | (729,158 | ) | |
$ | (110,192 | ) | |
$ | (1,496,763 | ) | |
$ | (27,913 | ) |
Esports | |
| (10,127 | ) | |
| (630 | ) | |
| (15,215 | ) | |
| 1,798 | |
Total Other (Expense) Income, net | |
$ | (739,285 | ) | |
$ | (110,822 | ) | |
$ | (1,511,978 | ) | |
$ | (26,115 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net Loss: | |
| | | |
| | | |
| | | |
| | |
Gaming | |
$ | (7,489,314 | ) | |
$ | (6,306,018 | ) | |
$ | (30,087,936 | ) | |
$ | (25,914,486 | ) |
Esports | |
| (1,047,401 | ) | |
| (352,611 | ) | |
| (1,903,495 | ) | |
| (790,510 | ) |
Total Net Loss | |
$ | (8,536,715 | ) | |
$ | (6,658,629 | ) | |
$ | (31,991,431 | ) | |
$ | (26,704,996 | ) |
| |
September 30,
2022 | | |
December 31,
2021 | |
Total assets: | |
| | | |
| | |
Gaming | |
$ | 18,461,380 | | |
$ | 47,511,471 | |
Esports | |
| 2,293,972 | | |
| 3,191,732 | |
Total assets | |
$ | 20,755,352 | | |
$ | 50,703,203 | |
Motorsport
Games Inc. and Subsidiaries
Notes
to Unaudited Condensed Consolidated Financial Statements
NOTE
14 - SUBSEQUENT EVENTS
The
Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the consolidated financial
statements were issued.
In
connection with the Company’s previously disclosed 2022 Restructuring Program, the Company reduced the base salaries of its most
senior executives on October 14, 2022, including the base salary of Dmitry Kozko, the Company’s CEO, by 35% to $334,750. The Compensation
Committee has the authority to reinstate Mr. Kozko’s base salary in effect immediately prior to such reduction at any time they
deem it appropriate, in their sole discretion, exercised reasonably. For purposes of any termination payments that may become payable
to Mr. Kozko in the future, such payments would be calculated without giving effect to the foregoing salary reduction.
Effective
on November 10, 2022, the Company amended its certificate of incorporation to effectuate a reverse split of the Company’s issued
and outstanding shares of Class A common stock and Class B common stock at a ratio of 1-for-10.
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, 2021 (the “2021
Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2022 and the condensed consolidated
financial statements and accompanying notes included in Part I, Item 1 of this Report. Unless the context requires otherwise, references
to the “Company,” “Motorsport,” “we,” “us” and “our” refer to Motorsport
Games Inc., a Delaware corporation.
Overview
The
following overview is a high-level discussion of our operating results, as well as some of the trends and drivers that affect our business.
Management believes that an understanding of these trends and drivers provides important context for our results for the nine months
ended September 30, 2022, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a
substitute for the detailed discussion and analysis provided elsewhere in this Report.
Our
Business
Motorsport
Games is a leading racing game developer, publisher and esports ecosystem provider of official motorsport racing series throughout the
world, including NASCAR, the iconic 24 Hours of Le Mans endurance race (“Le Mans”) and the associated FIA World Endurance
Championship (the “WEC”), INDYCAR, the British Touring Car Championship (the “BTCC”), KartKraft (karting simulation),
rFactor 2 (racing simulation) and others. Our portfolio is comprised of some the most prestigious motorsport leagues and events in the
world.
Started
in 2018 as a wholly owned subsidiary of Motorsport Network, LLC (“Motorsport Network”), we are currently the official developer and publisher of the NASCAR video
game racing franchise and have obtained the exclusive licenses to develop multi-platform games for the BTCC, the 24 Hours of Le Mans
race and the WEC, as well as a non-exclusive license with INDYCAR. We develop and publish multi-platform racing video games including
for game consoles, personal computers (PCs) and mobile platforms through various retail and digital channels, including full-game and
downloadable content. For fiscal year 2021 and the three and nine months ended September 30, 2022, a majority of our revenue was generated
from sales of our NASCAR racing video games.
As
of September 30, 2022, we have a total headcount of 146 people, made up of 145 full-time employees, including 100 dedicated to game development,
in order to continue developing our expanded product offerings.
COVID-19
Pandemic Update
The
lingering impact of COVID-19 has continued to create significant volatility throughout the global economy, such as supply chain disruptions,
limited labor supplies, higher inflation, and recession, which in turn has caused constraints on consumer spending. More recently, new
variants of COVID-19, such as the Omicron variant and its subvariants, that are significantly more contagious than previous strains,
have emerged. Further, the effectiveness of approved vaccines on these new strains remains uncertain. The spread of these new strains
initially caused many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19
and its variants. However, while many of these restrictions have been lifted, uncertainty remains as to whether additional restrictions
may be initiated or again reimplemented in response to surges in COVID-19 cases.
Although
the Company does not currently expect the COVID-19 pandemic to have a material impact on its future business and operations, the Company
continues to monitor the evolving situation caused by the COVID-19 pandemic, and the Company may take further actions required by governmental
authorities or that the Company determines are prudent to support the well-being of the Company’s employees, suppliers, business
partners and others. The degree to which the ongoing and prolonged COVID-19 pandemic impacts the Company’s operations, business,
financial results, liquidity, and financial condition will depend on future developments, which are highly uncertain, continuously evolving
and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic; its severity; the emergence and
severity of its variants; the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly
with respect to emerging strains of the virus) and potential hesitancy to utilize them; the effect on discretionary spending by consumers;
and how quickly and to what extent normal economic and operating conditions can resume. Further discussion of the potential impacts on
our business, financial condition, results of operations, liquidity and the market price of our Class A common stock due to the ongoing
and prolonged COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part I, Item 1A of the 2021 Form 10-K.
2022
Restructuring Program
On
September 8, 2022, the Company announced it is implementing an organization restructuring (the “2022 Restructuring Program”)
designed to reduce the Company’s marketing, general and administrative expenses, improve the Company’s profit and maximize
efficiency, cash flow and liquidity. The 2022 Restructuring Program includes right-sizing the organization and operating with more efficient
workflows and processes. The primary components of the organizational restructuring involve consolidating certain functions; reducing
layers of management, where appropriate, to increase accountability and effectiveness; and streamlining support functions to reflect
the new organizational structure. The leaner organizational structure is also expected to improve communication flow and cross-functional
collaboration, leveraging the more efficient business processes. In addition, given the ongoing uncertain economic environment and the
potential effect that it could have on the Company’s net sales, these actions will also provide the Company with additional flexibility.
As
a result of the 2022 Restructuring Program, the Company expects to eliminate approximately 20% of its overhead costs worldwide and deliver
approximately $4 million of total annualized cost reductions by the end of 2023, of which $2.5 million would be achieved by the end of
2022.
To
date the Company has incurred restructuring costs of approximately $0.1 million, which primarily consist of severance payments, and
expects total restructuring costs to fall within the previously estimated range of $0.1 million to $0.3 million. As a result of the
restructuring efforts, the Company has achieved annualized cost reductions of approximately $2.5 million to date and is continuing
its efforts to achieve further cost reductions.
Trends
and Factors Affecting Our Business
Product
Release Schedule
Our
financial results are affected by the timing of our product releases and the commercial success of those titles. Our NASCAR products
have historically accounted for the majority of our revenue; however, we have diversified our product offerings and are generating
revenues from KartKraft, rFactor 2 and Le Mans 24 Hour virtual event reducing the percentage of revenues from NASCAR. We released:
(i) our upgrade to our NASCAR game for the next generation consoles, NASCAR 21: Ignition, on October 28, 2021, and a 2022 season
update on October 6, 2022; (ii) NASCAR Heat Ultimate Edition+ on Nintendo Switch on November 19, 2021, the first-ever NASCAR title
to come to Nintendo Switch; (iii) the full release of the KartKraft kart racing simulator on January 26, 2022 for the PC; and (iv)
NASCAR Rivals, the official game of the 2022 NASCAR season, on Nintendo Switch on October 14, 2022. Additionally, in May 2020 and
January 2021, respectively, we obtained the exclusive licenses to develop multi-platform games for the BTCC and the WEC series,
including the iconic 24 Hours of Le Mans race, and in July 2021, we obtained the license to develop multi-platform games for
INDYCAR. In the first quarter of 2022, we modified our product release schedule such that our most recent NASCAR console and PC
title for 2022 was delivered as an update to our 2021 release through the 2022 Season Expansion Update downloadable content (DLC)
and the anticipated timing of some of our other planned product releases for other racing series have been moved to later periods.
The INDYCAR, BTCC and Le Mans game experiences are currently under development, and we currently anticipate releasing game experiences for
these racing series in 2023 and 2024. Going forward, we intend to expand our license arrangements to other internationally
recognized racing series and the platforms we operate on. We believe that having a broader product portfolio will improve our
operating results and provide a revenue stream that is less cyclical than releasing a single game per year.
Economic
Environment and Retailer Performance
Our
physical gaming products are sold through a distribution network with an exclusive partner who specializes in the distribution of games
through mass-market retailers (e.g., Target, Wal-Mart), consumer electronics stores (e.g., Best Buy), discount warehouses, game specialty
stores (e.g., GameStop) and other online retail stores (e.g., Amazon). We expect to continue to derive significant revenues from sales
of our physical gaming products to a limited number of distribution partners. For the year ended December 31, 2021 and the nine
months ended September 30, 2022, we sold substantially all of our physical disk products for the retail channel through a single distribution
partner, which represented approximately 28% and -6% of our total revenue for such periods, respectively. Revenues from the retail
channel were negative for the nine months ended September 30, 2022, due to retail pricing concessions granted to our distribution partner
and retail partners being greater than sales revenues from such parties. See “Risk Factors—Risks Related to Our Business
and Industry—The importance of retail sales to our business exposes us to the risks of that business model” and “Risk
Factors—Risks Related to Our Business and Industry—We primarily depend on a single third-party distribution partner to distribute
our games for the retail channel, and our ability to negotiate favorable terms with such partner and its continued willingness to purchase
our games is critical for our business” in Part I, Item 1A of the 2021 Form 10-K for additional information regarding the importance
of retail sales and our distribution partners to our business.
Additionally,
we continue to monitor economic conditions, including the impact of the ongoing and prolonged COVID-19 pandemic, that may unfavorably
affect our businesses, such as deteriorating consumer demand, delays in development, pricing pressure on our products, increased inflation
and interest rates, recessionary factors (such as the impact that higher energy prices will have on consumer purchasing behavior), supply
chain constraints, labor supply issues, credit quality of our receivables and foreign currency exchange rates. The COVID-19 pandemic
has affected and may continue to affect our business operations, including our employees, customers, partners, and communities, and there
is substantial uncertainty in the nature and degree of its continued effects over time, particularly due to the emergence of the significantly
more contagious Omicron variant of COVID-19 and the prevalence of breakthrough cases of infection among fully vaccinated people.
Hardware
Platforms
We
derive most of our revenue from the sale of products made for PCs and video game consoles manufactured by third parties, such as Sony
Interactive Entertainment Inc.’s (“Sony”) PlayStation and Microsoft Corporation’s (“Microsoft”) Xbox
consoles, which comprised approximately 49% and 67% of our total revenue for the nine months ended September 30, 2022 and 2021, respectively.
For the nine months ended September 30, 2022 and 2021, the sale of products for Microsoft Windows via Steam comprised approximately 23%
and 19% of our total revenue, respectively, and the sale of products for mobile platforms comprised approximately 10% and 10% of our
total revenue, respectively. The success of our business is dependent upon consumer acceptance of video game console/PC platforms and
continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those released by Sony
and Microsoft in November 2020, demand for interactive entertainment used on older platforms typically declines, which may negatively
affect our business during the market transition to the new consoles. The latest generation of Sony and Microsoft consoles provide “backwards
compatibility” (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such
a decline. However, we cannot be certain how backwards compatibility will affect demand for our products.
Digital
Business
Players
increasingly purchase our games as digital downloads, as opposed to purchasing physical discs. All of our titles that are available through
retailers as packaged goods products are also available through direct digital download. For the year ended December 31, 2021 and the
nine months ended September 30, 2022, approximately 61% and 79%, respectively, of our revenue from sales of video games for game consoles
and PCs was through digital channels. We believe this trend of increasing direct digital downloads is primarily due to benefits relating
to convenience and accessibility that digital downloads provide, which was heightened during the COVID-19 pandemic. In addition, as part
of our digital business strategy, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our
titles through in-game purchases and extra content.
Esports
We
are striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing
games as well as on behalf of third-party racing game developers and publishers. During the first quarter of 2022, we announced our viewership
figures for the 2021-22 Le Mans Virtual Series, which reached 7 million views and registered cumulated television and digital audience
figures of more than 81 million through its 5-month season. During 2021, we organized several esports competitions, including the DiRT
Rally 2.0 World Series on the popular Codemasters game, the Winter Heat and Summer Showdown on NASCAR Heat 5, and the expansion of the
24 Hours of Le Mans Virtual event into a part of a longer annual series with professional teams and real-world racing drivers. In addition,
we also organized competitions to drive user engagement on our rFactor 2 platform. For 2021, our esports events had cumulative total
viewership of approximately 1.5 million views with approximately 3.8 million minutes watched.
In
June 2022, we announced the Le Mans Virtual Series will return for 2022-23 for more elite esports competition culminating in the award-winning
24 Hours of Le Mans. Similar to the 2021/22 series, all 5 rounds of the series will be held online on the rFactor2 platform, including
the 24 Hours of Le Mans Virtual, the climax of the premier endurance esports championship. This format allows teams to compete virtually
on simulators located all around the world for a total prize fund of US $250,000. To date, 3 of the 5 rounds of competition have occurred:
the 8 hours of Bahrain on September 17, 2022, the 4 hours of Monza on October 9, 2022, and the 6 hours of SPA on November 5, 2022.
Technological
Infrastructure
As
our digital business has grown, our games and services increasingly depend on the reliability, availability and security of our technological
infrastructure. We are investing and expect to continue to invest in technology, hardware and software to support our games and services,
including with respect to security protections. Our industry is prone to, and our systems and networks are subject to, cyberattacks,
computer viruses, worms, phishing attacks, malicious software programs, and other information security incidents that seek to exploit,
disable, damage, disrupt or gain access to our networks, our products and services, supporting technological infrastructure, intellectual
property and other assets. As a result, we continually face cyber risks and threats that seek to damage, disrupt or gain access to our
networks and our gaming platform, supporting infrastructure, intellectual property and other assets. See “Risks Related to Our
Business and Industry—We may experience security breaches and cyber threats” in the section entitled “Risk Factors”
in Part I, Item 1A of the 2021 Form 10-K for additional information.
Rapidly
Changing Industry
We
operate in a dynamic industry that regularly experiences periods of rapid, fundamental change. In order to remain successful, we are
required to anticipate, sometimes years in advance, the ways in which our products and services will compete. For example, the global
adoption of portable and mobile gaming devices has led to significant growth in portable and mobile gaming, which we believe is a continuing
trend. Accordingly, in conjunction with the launch of our 2022 season update for our NASCAR console/PC game, NASCAR 21: Ignition, we
launched NASCAR Rivals, the official game of the 2022 NASCAR season, on Nintendo Switch in October 2022.
Recurring
Revenue Sources
Our
business model includes revenue that we deem recurring in nature, such as revenue from our annualized sports franchise (currently NASCAR)
for game consoles, PC and mobile platforms. We deem this recurring because many existing game owners purchase (sometimes free of charge)
annual updates, which includes updated drivers, liveries and cars as they are released. We have been able to forecast the revenue from
this area of our business with greater relative confidence than for new games, services and business models. As we continue to incorporate
new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring
portion of our business.
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”).
Components
of Our Results of Operations
Revenues
We
have historically derived substantially all of our revenue from sales of our games and related extra content that can be played by customers
on a variety of platforms, including game consoles, mobile phones, PCs and tablets. Starting in 2019, we began generating sponsorship
revenues from our production of live and virtual esports events.
Our
product and service offerings included within the Gaming segment primarily include, but are not limited to, full PC, console and mobile
games with both online and offline functionality, which generally include:
●
the initial game delivered digitally or via physical disk at the time of sale, which also typically provides access to offline core game
content; and
●
updates to previously released games on a when-and-if-available basis, such as software patches or updates, and/or additional content
to be delivered in the future, both paid and free.
Our
product and service offerings included within the Esports segment relate primarily to curating esports events.
Cost
of Revenues
Cost
of revenues for our Gaming segment is primarily comprised of royalty expenses attributable to our license arrangement with NASCAR and
certain other third-parties relating to our NASCAR racing series games. Cost of revenues for our Gaming segment is also comprised of
merchant fees, 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. Cost of revenues for our Esports segment consists primarily of the cost of event staffing and event production.
Sales
and Marketing
Sales
and marketing expenses are primarily composed of salaries, benefits and related taxes of our in-house marketing teams, advertising, marketing
and promotional expenses, including fees paid to social media platforms, Motorsport Network and other websites where we market our products.
Development
Development
expenses consist of the cost to develop the games we produce, which includes salaries, benefits and operating expenses of our in-house
development teams, as well as consulting expenses for any contracted external development. Development expenses also include expenses
relating to our software licenses, maintenance and studio operating expenses.
General
and Administrative
General
and administrative expenses consist primarily of salaries, benefits and other costs associated with our operations including, finance,
human resources, information technology, public relations, legal, audit and compliance fees, facilities, and other external general and
administrative services.
Depreciation
and Amortization
Depreciation
and amortization expenses include depreciation on fixed assets (primarily computers and office equipment), as well as amortization of
finite lived intangible assets acquired through our various acquisitions.
Results
of Operations
Three
Months Ended September 30, 2022 compared to Three Months Ended September 30, 2021
In
this section, references to 2022 refer to the three months ended September 30, 2022 and references to 2021 refer to the three months
ended September 30, 2021.
Revenue
| |
For the Three Months Ended September 30, | | |
Change | |
| |
2022 | | |
2021 | | |
$ | | |
% | |
Revenues: | |
| | |
| | |
| | |
| |
Gaming | |
$ | 1,042,852 | | |
$ | 2,042,322 | | |
$ | (999,470 | ) | |
| -48.9 | % |
Esports | |
| 180,290 | | |
| 96,144 | | |
| 84,146 | | |
| 87.5 | % |
Total Revenues | |
$ | 1,223,142 | | |
$ | 2,138,466 | | |
$ | (915,324 | ) | |
| -42.8 | % |
Consolidated
revenues were $1.2 million and $2.1 million for 2022 and 2021, respectively, a decrease of $0.9 million, or 43%, when compared to the
prior period.
Gaming
segment revenues represented 85% and 96% of our total 2022 and 2021 revenues, respectively, decreasing by $1.0 million, or 49%, when
compared to the prior period. The decrease in Gaming segment revenues was primarily driven by $0.6 million in lower digital game
sales, driven by lower volumes of sales and less favorable pricing, and an out-of-period adjustment of $0.3 million recognized
during 2022. The out-of-period adjustment was recorded to correct an immaterial overstatement of revenues in the three-month period
ended June 30, 2022.
Esports
segment revenues represented 15% and 4% of our total 2022 and 2021 revenues, respectively, increasing by $0.1 million, or 88%, when compared
to the prior period. The increase in Esports segment revenue was due to higher sponsorship revenue of $0.1 million from our Le Mans Virtual
Series, which started its 2022-23 season in September 2022.
Cost
of Revenues
| |
For the Three Months Ended September 30, | | |
Change | |
| |
2022 | | |
2021 | | |
$ | | |
% | |
Cost of revenues: | |
| | |
| | |
| | |
| |
Gaming | |
$ | 540,519 | | |
$ | 848,705 | | |
$ | (308,186 | ) | |
| -36.3 | % |
Esports | |
| 62,337 | | |
| 100,434 | | |
| (38,097 | ) | |
| -37.9 | % |
Total Cost of Revenues | |
$ | 602,856 | | |
$ | 949,139 | | |
$ | (346,283 | ) | |
| -36.5 | % |
Consolidated
cost of revenues were $0.6 million and $0.9 million for 2022 and 2021, respectively, a decrease of $0.3 million, or 37%, when compared
to the prior period.
Gaming
segment cost of revenues represented 90% and 89% of our total 2022 and 2021 cost of revenues, respectively, decreasing by $0.3 million,
or 36%, when compared to the prior period. The decrease in Gaming segment cost of revenues was primarily driven by $0.2 million in lower
royalty and license fees, due to lower digital and mobile game sales, and a $0.1 million decrease in license and developed technology
amortization expense, due to the impairment of certain license intangible assets during the three months ended March 31, 2022 and June
30, 2022.
Esports
segment cost of revenues represented 10% and 11% of our total 2022 and 2021 cost of revenues, respectively, decreasing by $0.04
million, or 38%, when compared to the prior period. The decrease in Esports segment cost of revenues was primarily driven by $0.05
million of lower prize money paid as the Ultimate Summer Showdown NASCAR HEAT 5 event that was completed in 2021 was not repeated in
2022.
Gross
Profit
| |
For the Three Months Ended September 30, | | |
Change | |
| |
2022 | | |
2021 | | |
$ | | |
% | |
Gross Profit (Loss) | |
| | | |
| | | |
| | | |
| | |
Gaming | |
$ | 502,333 | | |
$ | 1,193,617 | | |
$ | (691,284 | ) | |
| -57.9 | % |
Esports | |
| 117,953 | | |
| (4,290 | ) | |
| 122,243 | | |
| -2,849.5 | % |
Total Gross Profit (Loss) | |
$ | 620,286 | | |
$ | 1,189,327 | | |
$ | (569,041 | ) | |
| -47.8 | % |
Consolidated
gross profit was $0.6 million and $1.2 million for 2022 and 2021, respectively, a decrease of $0.6 million, or 47.8%, when compared to
the prior period.
Gaming
segment gross profit was $0.5 million for 2022, compared to $1.2 million for 2021, representing a gross profit margin of 48% for
2022 and 58% for 2021. The decrease in our Gaming segment gross profit of $0.7 million, and corresponding decrease in gross profit
margin, was primarily due to lower retail and digital revenues of $0.6 million, driven by lower sales volumes and reduced pricing of
our titles, as well as the $0.3 million out-of-period adjustment recorded in 2022 that had no corresponding impact to cost of
revenues. These were partially offset by lower cost of revenues of $0.3 million, driven by $0.2 million in lower royalty fees and
$0.1 million in lower amortization expense, when compared to the prior period.
Esports
segment gross profit (loss) was $0.1 million for 2022, compared to $(0) for 2021, representing a gross profit margin of 65% and (5)%
for 2022 and 2021, respectively. This increase in our Esports segment gross profit of $0.1 million, and corresponding increase in gross
profit margin, was primarily due to $0.1 million of higher sponsorship revenues for our Le Mans Virtual Series, as compared to 2021.
Operating
Expenses
| |
Three Months Ended September 30, | | |
Change | |
| |
2022 | | |
2021 | | |
$ | | |
% | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Sales and marketing | |
| 1,440,659 | | |
| 1,348,773 | | |
| 91,886 | | |
| 6.8 | % |
Development | |
| 2,631,066 | | |
| 3,015,233 | | |
| (384,167 | ) | |
| -12.7 | % |
General and administrative | |
| 4,008,335 | | |
| 3,130,944 | | |
| 877,391 | | |
| 28.0 | % |
Depreciation and amortization | |
| 92,703 | | |
| 81,874 | | |
| 10,829 | | |
| 13.2 | % |
Total operating expenses | |
| 8,172,763 | | |
| 7,576,824 | | |
| 595,939 | | |
| 7.9 | % |
Changes
in operating expenses are explained in more detail below:
Sales
and Marketing
Sales
and marketing expenses were $1.4 million for 2022, compared to $1.3 million for 2021. The $0.1 million, or 7%, increase in sales and
marketing expense was primarily driven by incremental marketing expense efforts, and sponsorships, to support the promotion of current
and planned future releases in our product roadmap.
Development
Development
expenses were $2.6 million for 2022, compared to $3.0 million for 2021. The $0.4 million, or 13%, decrease was driven by lower external
development expenses in 2022, as compared to 2021, as the prior period included expenses relating to finalizing the development of NASCAR
Ignition: 21, which was released in October 2021.
General
and Administrative
General
and administrative (“G&A”) expenses were $4.0 million for 2022, compared to $3.1 million for 2021. The $0.9 million,
or 28%, increase in G&A expenses was primarily attributable to an increase of $1.0 million in loss contingency reserves relating
to a legal proceeding, which was partially offset by decreases of $0.05 million in legal and professional fees, and $0.05 million in
payroll expenses. See Note 11 – Commitments and Contingencies – Litigation in our condensed consolidated financial statements
for additional information regarding such legal proceeding.
Depreciation
and Amortization
Depreciation
and amortization expenses were $0.09 million for 2022, compared to $0.08 million for 2021. The $0.01 million, or 13% increase in
depreciation and amortization expenses was primarily due to additional depreciation expense for fixed assets acquired during
2022.
Interest
Expense
Interest
expense was $0.2 million for 2022, compared to $0.1 million for 2021. The $0.1 million increase was primarily due to the ongoing non-cash
interest accretion of our INDYCAR and BTCC license liabilities.
Other
(Expense) Income, Net
Other
expense was $0.7 million for 2022, compared to $0.1 million for 2021. The $0.6 million increase in other expense was primarily comprised
of a foreign currency loss of $0.8 million incurred remeasuring transactions denominated in a currency other than U.S. dollars, partially
offset by $0.05 million in rental income from the sub-lease of our Charlotte, NC office space.
Other
Comprehensive Income (Loss)
Other
comprehensive income was $0.2 million for 2022, compared to other comprehensive loss of $0.5 million
for 2021. The $0.7 million increase was primarily driven by unrealized foreign currency translation adjustments in our subsidiaries
in the U.K., Australia, Russia and the Netherlands.
Nine
Months Ended September 30, 2022 compared to Nine Months Ended September 30, 2021
In
this section, references to 2022 refer to the nine months ended September 30, 2022 and references to 2021 refer to the nine months ended
September 30, 2021.
Revenue
| |
For the Nine Months Ended September 30, | | |
Change | |
| |
2022 | | |
2021 | | |
$ | | |
% | |
Revenues: | |
| | |
| | |
| | |
| |
Gaming | |
$ | 5,943,178 | | |
$ | 6,731,462 | | |
$ | (788,284 | ) | |
| -11.7 | % |
Esports | |
| 610,740 | | |
| 120,063 | | |
| 490,677 | | |
| 408.7 | % |
Total Revenues | |
$ | 6,553,918 | | |
$ | 6,851,525 | | |
$ | (297,607 | ) | |
| -4.3 | % |
Consolidated
revenues were $6.6 million and $6.9 million for 2022 and 2021, respectively, a decrease of $0.3 million, or 4%, when compared to the
prior period.
Gaming
segment revenues represented 91% and 98% of our total 2022 and 2021 revenues, respectively, decreasing by $0.8 million when compared
to the prior period. The decrease in our Gaming segment revenues was primarily due to lower retail revenues of $0.6 million, driven by
higher retail pricing concessions, as well as a decrease in digital and mobile game sales of $0.8 million that was caused by lower volumes
and pricing. These decreases were partially offset by $0.6 million in additional revenues earned through the development of simulation
platforms for third parties.
Esports
segment revenues represented 9% and 2% of our total 2022 and 2021 revenues, respectively, increasing by $0.5 million when compared to
the prior period. The increase in our Esports segment revenues was due to $0.5 million of higher sponsorship revenues from our Le Mans
Virtual Series event, which concluded its 2021-22 season in January 2022 and commenced its 2022-23 season in September 2022, as well as the 24 Hours of Le Mans Live event held in June 2022.
Cost
of Revenues
| |
For the Nine Months Ended September 30, | | |
Change | |
| |
2022 | | |
2021 | | |
$ | | |
% | |
Cost of revenues: | |
| | |
| | |
| | |
| |
Gaming | |
$ | 2,765,263 | | |
$ | 2,466,572 | | |
$ | 298,691 | | |
| 12.1 | % |
Esports | |
| 707,556 | | |
| 170,678 | | |
| 536,878 | | |
| 314.6 | % |
Total Cost of Revenues | |
$ | 3,472,819 | | |
$ | 2,637,250 | | |
$ | 835,569 | | |
| 31.7 | % |
Consolidated
cost of revenues were $3.5 million and $2.6 million for 2022 and 2021, respectively, an increase of $0.8 million, or 32%, when compared
to the prior period.
Gaming
segment cost of revenues represented 80% and 94% of our total 2022 and 2021 cost of revenues, respectively, increasing by $0.3
million when compared to the prior period. The increase in our Gaming segment cost of revenues was primarily due to $0.2 million of
additional license and developed technology amortization expense, and a $0.1 million increase in development costs to support the
development of simulation platforms for third parties.
Esports
segment cost of revenues represented 20% and 6% of our total 2022 and 2021 cost of revenues, respectively, increasing by $0.5
million when compared to the prior period. The increase in our Esports segment cost of revenues was primarily due to higher
production costs, including a $0.2 million increase in event staff contract labor and an increase of $0.3 million in television
production costs from our Le Mans Virtual Series events held in January and September 2022, as well as the 24 Hours of Le Mans Live
event held in June 2022.
Gross
Profit (Loss)
|
|
For
the Nine Months Ended
September 30, |
|
|
Change |
|
|
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
Gross
Profit (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming |
|
$ |
3,177,915 |
|
|
$ |
4,264,890 |
|
|
$ |
(1,086,975 |
) |
|
|
-25.5 |
% |
Esports |
|
|
(96,816 |
) |
|
|
(50,615 |
) |
|
|
(46,201 |
) |
|
|
-91.3 |
% |
Total
Gross Profit |
|
$ |
3,081,099 |
|
|
$ |
4,214,275 |
|
|
$ |
(1,133,176 |
) |
|
|
-26.9 |
% |
Consolidated
gross profit was $3.1 million and $4.2 million for 2022 and 2021, respectively, a decrease of $1.1 million, or 27%, when compared to
the prior period.
Gaming
segment gross profit was $3.2 million for 2022, compared to $4.3 million for 2021, representing a gross profit margin of 54% for
2022 and 63% for 2021. The decrease in our Gaming segment gross profit of $1.1 million, and corresponding decrease in gross profit
margin, was primarily driven by lower digital and retail revenues of $1.4 million as a result of retail and digital pricing
concessions, additional amortization expense of $0.2 million, and $0.1 million of incremental development costs to support the
production of simulation platforms for third parties. These were partially offset by $0.6 million in
revenues earned from development of a simulation platforms for third parties.
Esports
segment (loss) was $(0.1) million for 2022, compared to $(0.05) million for 2021, representing a gross profit (loss) margin of (16)%
for 2022 and (42)% for 2021. The decrease in our Esports segment gross profit $0.05 million, and corresponding improvement in gross profit
(loss) margin, was primarily driven by $0.5 million of costs relating to broadcast production, staffing, and event production during the
24 Hours of Le Mans live event held in June 2022, as well as the Le Mans Virtual Series events held in January 2022 and September 2022,
offset by $0.5 million in additional revenues earned as a result of these events.
Operating
Expenses
| |
Nine Months Ended September 30, | | |
Change | |
| |
2022 | | |
2021 | | |
$ | | |
% | |
Operating expenses: | |
| | | |
| | | |
| | | |
| | |
Sales and marketing | |
| 4,669,328 | | |
| 3,077,213 | | |
| 1,592,115 | | |
| 51.7 | % |
Development | |
| 7,717,046 | | |
| 6,083,773 | | |
| 1,633,273 | | |
| 26.8 | % |
General and administrative | |
| 10,781,098 | | |
| 22,612,162 | | |
| (11,831,064 | ) | |
| -52.3 | % |
Impairment of goodwill | |
| 4,788,268 | | |
| - | | |
| 4,788,268 | | |
| 100 | % |
Impairment of intangible assets | |
| 4,640,102 | | |
| - | | |
| 4,640,102 | | |
| 100 | % |
Depreciation and amortization | |
| 326,499 | | |
| 179,097 | | |
| 147,402 | | |
| 82.3 | % |
Total operating expenses | |
| 32,922,341 | | |
| 31,952,245 | | |
| 970,096 | | |
| 3.0 | % |
Changes
in operating expenses are explained in more detail below:
Sales
and Marketing
Sales
and marketing expenses were $4.7 million and $3.1 million in 2022 and 2021, respectively, representing a $1.6 million, or 52%, increase
as compared to the prior period. The increase was primarily driven by increased headcount expenses of $1.2 million, as well as a $0.5
million increase in sponsorships to support the promotion of current and planned future releases, partially offset by a decrease of $0.1
million in other variable marketing expenses.
Development
Development
expenses were $7.7 million and $6.1 million for 2022 and 2021, respectively, representing an increase of $1.6 million, or 27%, period
over period. The incremental development expenses were primarily driven by higher compensation due to additional headcount and reflect
increased internal development efforts to produce and support an increased number of games and platforms.
General
and Administrative
G&A expenses were
$10.8 million and $22.6 million for 2022 and 2021, respectively, a decrease of $11.8 million, or 52%, period over period. The
decrease in G&A expenses reflects $2.9 million of expenses incurred in connection with our 2021 initial public offering
(“IPO”), IPO-related bonuses and stock-based compensation expenses in the amount of $8.9 million incurred in the 2021
period, $0.3 million of expenses incurred in the acquisition of Studio397 that did not recur in 2022, as well as a $0.6 million
decrease in payroll expense when compared to the prior period. These were partially offset by an increase of $1.0 million in loss
contingency reserves in 2022 relating to a legal proceeding. See Note 11 – Commitments and Contingencies – Litigation in our condensed consolidated financial statements
for additional information regarding such legal proceeding.
Impairment
of Goodwill, Intangible and Long-Lived Assets
Impairment
of goodwill was $4.8 million and $0 in 2022 and 2021, respectively. The impairment loss primarily relates to goodwill acquired in connection
with the acquisition of Studio397 that was deemed impaired as a result of the interim impairment assessments. The trigger for the interim
assessments was 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 indefinite-lived intangible assets was $3.3 million and $0 in 2022 and 2021, respectively. The trigger for the interim assessments
was the changes to the 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 $1.3 million and $0 in 2022 and 2021, respectively. The trigger for the interim assessments was
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 were $0.3 million and $0.2 million for 2022 and 2021, respectively, an increase of $0.1 million, period over
period. The increase was primarily due to additional depreciation expense on fixed assets acquired during 2022.
Interest
Expense
Interest
expense was $0.6 million for 2022, compared to $0.3 million for 2021, an increase of $0.3 million, period over period. This was primarily
due to the ongoing non-cash interest accretion of our INDYCAR and BTCC license liabilities.
Gain
Attributable to Equity Method Investment
The
gain attributable to equity method investment in the Le Mans joint venture was $0 for 2022 and $1.4 million for 2021. The decrease was
due to the discontinuation of equity method accounting as we began to fully consolidate the Le Mans joint venture upon acquiring a majority
interest during the first quarter of 2021.
Other
(Expense) Income, Net
Other
(expense) income, net was $(1.5) million for 2022, compared to $(0.03) million for 2021. Other expense of $(1.5) million for 2022
was primarily comprised of a foreign currency loss of $1.7 million incurred remeasuring transactions denominated in a currency other
than U.S. dollars, partially offset by $0.1 million in rental income from the sub-lease of our Charlotte, NC office space. For 2021,
other (expense) income, net of $(0.03) million were primarily comprised of $0.1 million in rental income from the sub-lease of our
Charlotte, NC office space, offset by $0.2 million of foreign currency losses incurred remeasuring transactions denominated in a
currency other than U.S. dollars and translating to U.S. dollars the results of our foreign operations that are denominated in a
functional currency other than U.S. dollars.
Other
Comprehensive Income (Loss)
Other
comprehensive income was $0.2 million for 2022, compared to comprehensive loss of $0.6 million for 2021. The $0.8 million increase was
primarily due to activity in our U.K., Australian, Russian and Netherlands subsidiaries and represents unrealized foreign currency translation adjustments.
Liquidity
and Capital Resources
Liquidity
Since
our inception and prior to our IPO, we financed our operations primarily through advances from Motorsport Network, which were subsequently
incorporated into a line of credit provided by Motorsport Network pursuant to the $12 million Line of Credit, as described below.
On
January 15, 2021, we completed our IPO of 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 $63,073,783 from the IPO, after deducting underwriting discounts and offering expenses
paid by us in 2020 and 2021.
We
measure our liquidity in a number of ways, including the following:
Liquidity Measure | |
September 30, 2022 | | |
December 31, 2021 | |
Cash and cash equivalents | |
$ | 3,217,342 | | |
$ | 17,819,640 | |
Working capital | |
$ | (3,202,632 | ) | |
$ | 16,024,590 | |
For
the nine months ended September 30, 2022, the Company had a net loss of approximately $32 million, negative cash flows from
operations of approximately $16.9 million and an accumulated deficit of $69 million. As of September 30, 2022, we had cash and cash
equivalents of $3.2 million, which was reduced to $1.8 million as of October 31, 2022. We expect to continue to incur significant
operating expenses and, as a result, we will need to grow revenues to reach profitability and positive cash flows. We expect to
continue to incur losses for the foreseeable future as we continue to develop our product portfolio and invest in developing new
video game titles. Based on the cash and cash equivalents available as of October 31, 2022 and the Company’s average cash
burn, we do not believe we have sufficient cash on hand to fund our operations for the
remainder of 2022 and that additional funding will be required in order to continue operations.
See Item 1A, “Risk Factors – Risks Related to Our Financial Condition and Liquidity - Limits on the
Company’s borrowing capacity under the $12 million Line of Credit may affect the Company’s ability to finance its
operations.”
Our
future liquidity and capital requirements include funds to support the planned costs to operate our business, including amounts required
to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures.
The adequacy of our available funds generally depends on many factors, including our ability to successfully develop consumer-preferred
new products or enhancements to our existing products, continued development and expansion of our esports platform and our ability to
enter into collaborations with other companies and/or acquire other companies or technologies to enhance or complement our product and
service offerings.
We
continue to explore additional funding in the form of potential equity and/or debt financing arrangements and similar transactions
and consider these to be viable options to support future liquidity needs, provided that such opportunities can be obtained on terms
that are commercially competitive and on terms acceptable to the Company. We are also seeking to improve our liquidity by achieving
cost reductions by maintaining and enhancing cost control initiatives, such as those that we expect to achieve through the 2022
Restructuring Program. See “2022 Restructuring Program” for additional information.
As
we continue to evaluate incremental funding solutions, we re-evaluated our product roadmap in the first quarter of 2022 and modified
the expected timing and scope of certain new product releases. These changes have been made not only to maintain the development of high-quality
video game titles, but also to improve the timing of certain working capital requirements and reduce expenditures, thereby decreasing
our expected future cash-burn and improve short-term liquidity needs. If needed, further adjustments could be made that would decrease
short-term working capital requirements, while pushing out the timing of expected revenues.
We
expect to generate additional liquidity through consummating equity and/or debt financings or similar transactions, achieving cost reductions
by maintaining and enhancing cost control initiatives, such as those that we expect to achieve through the 2022 Restructuring Program
and/or further adjusting our product roadmap to reduce near term need for working capital. If we are unable to generate adequate revenue
and profit growth, there can be no assurances that such actions will provide us with sufficient liquidity to meet our cash requirements
as, among other things, our liquidity can be impacted by a number of factors, including our level of sales, costs and expenditures, economic conditions in the capital markets, especially for technology companies, as
well as accounts receivable and sales allowances.
There
can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all, to satisfy our future needed liquidity
and capital resources. If we are unable to obtain adequate funds on acceptable terms, we may be required to, among other things, significantly
curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms.
If
we are unable to satisfy our cash requirements from the sources identified above, we could be required to adopt one or more of the following
alternatives:
|
● |
selling
assets or operations; |
|
● |
seeking
additional capital contributions and/or loans from Motorsport Network, the Company’s other affiliates and/or third parties;
and/or |
|
● |
reducing
other discretionary spending. |
There
can be no assurance that we would be able to take any of the actions referred to above because of a variety of commercial or market factors,
including, without limitation, market conditions being unfavorable for an equity or debt issuance or similar transactions, additional
capital contributions and/or loans not being available from Motorsport Network or affiliates and/or third parties, or that the transactions
may not be permitted under the terms of our various debt instruments then in effect, such as due to restrictions on the incurrence of
debt, incurrence of liens, asset dispositions and related party transactions. In addition, such actions, if taken, may not enable us
to satisfy our cash requirements if the actions that we are able to consummate do not generate a sufficient amount of additional capital.
Even
if we do secure additional financing, if our anticipated level of revenues are not achieved because of, for example, less than
anticipated consumer acceptance of our offering of products and events; less than effective marketing and promotion campaigns,
decreased consumer spending in response to weak economic conditions or weakness in the overall electronic games category; adverse
changes in 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 the
Company’s existing or new products or from its advertising and/or marketing plans; or if the Company’s expenses,
including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed
the anticipated level of expenses, our liquidity may continue to be insufficient to satisfy our future capital
requirements.
In
accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether
there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue
as a going concern within one year after the date that these condensed consolidated financial statements are issued. The factors described
above, in particular the available cash on hand to fund operations over the next year, have raised substantial doubt about the Company’s
ability to continue as a going concern.
The
accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as
a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course
of business.
Cash
Flows From Operating Activities
Net
cash used in operating activities for the nine months ended September 30, 2022 and 2021 was $16.9 million and $16.7 million,
respectively. The net cash used in operating activities for the nine months ended September 30, 2022 was primarily a result of cash
used to fund a net loss of $32 million, adjusted for net non-cash adjustments of $13.9 million and $1.2 million of cash used by
changes in the levels of operating assets and liabilities. Net cash used in operating activities for the nine months ended September
30, 2021 was primarily due to net loss of $26.7 million, adjusted for non-cash expenses in the amount of $9.8 million and by $0.2
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 nine months ended September 30, 2022 was $0.3 million, which was attributable to the purchases
of property and equipment. During the nine months ended September 30, 2021, net cash used in investing activities was $14.3 million,
which was attributable to approximately $12.8 million paid in connection with the acquisition of Studio397 and $1 million paid in connection
with the acquisition of KartKraft, and approximately $0.7 million in purchases of property
and equipment, which was partially offset by $0.2 million of net cash acquired in the
purchase of an additional controlling interest in Le Mans Esports Series Ltd.
Cash
Flows From Financing Activities
Net
cash provided by financing activities during the nine months ended September 30, 2022 and 2021 was $1.1 million and $49.2 million,
respectively. Cash flows provided by financing activities for the nine months ended September 30, 2022 were primarily attributable
to $3 million in advances from Motorsport Network under the $12 million Line of Credit in September 2022, partially offset by $1.5
million in payments of purchase commitment liability relating to a portion of the deferred installment amount due in connection with
our acquisition of Studio397 and $0.3 million in game license payments. During the nine months ended September 30, 2021, net cash
provided by financing activities was primarily attributable to approximately $63.7 million of net cash provided by the sale of Class
A Common stock in our IPO, partially offset by $12.9 million of net repayments to Motorsport Network under the $12 million Line of Credit.
Promissory
Note Line of Credit
On
April 1, 2020, the Company entered into a promissory note (the “$12 million Line of Credit”) with the Company’s majority
stockholder, Motorsport Network, that provides the Company with a line of credit of up to $10 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’s available liquidity. The $12 million Line of Credit does not have a stated maturity date and
is payable upon demand at any time at the sole and absolute discretion of Motorsport Network. The Company may prepay the $12 million
Line of Credit in whole or in part at any time or from time to time without penalty or charge. In the event the Company or any of its
subsidiaries consummates certain corporate events, including any capital reorganization, consolidation, joint venture, spin off, merger
or any other business combination or restructuring of any nature, or if certain events of default occur, the entire principal amount
and all accrued and unpaid interest will be accelerated and become payable.
On
September 8, 2022, the Company entered into a support agreement with Motorsport Network (the “Support Agreement”) pursuant
to which Motorsport Network issued approximately $3 million (the “September 2022 Cash Advance”) to the Company in accordance
with the $12 million Line of Credit, the proceeds of which the Company is using for general corporate purposes and working capital. In
the Support Agreement, Motorsport Network and the Company terminated the Side Letter Agreement dated September 4, 2020 and agreed that
until June 30, 2024, Motorsport Network would not demand repayment of the September 2022 Cash Advance or other advances under the $12
million Line of Credit unless and until such time that any of the following shall occur or exist: (i) the Company enters into a new financing
arrangement (whether debt, equity or otherwise) under which the Company is then able to draw or provides the Company with available cash
in excess of amounts required in the Company’s reasonable judgment to run its operations in the ordinary course of business; (ii)
the Company generates from operations available cash in excess of amounts required in the Company’s reasonable judgment to run
its operations in the ordinary course of business; or (iii) the Company’s independent auditors issue an unqualified opinion on
its financial statements and the Company’s repayment of the advances, in whole or in part, would not otherwise cause the independent
auditor to issue a going concern qualified opinion. Upon the occurrence of any of the foregoing events, the Company shall prepay on such
date principal amount of the September 2022 Cash Advance and other advances under the $12 million Line of Credit then outstanding in
an amount equal to such available excess cash or, in the case of (iii) above, the amount that would not cause the Company’s independent
auditor to issue a going concern qualified opinion, together with interest accrued but unpaid on the unpaid September 2022 Cash Advance
and other advances, which repayment obligation shall continue until all such advances under the $12 million Line of Credit are paid in
full. The entire aggregate principal amount of the September 2022 Cash Advance and the other advances under the $12 million Line of Credit,
together with interest accrued but unpaid thereon, shall also become immediately and automatically due and payable, and the $12 million
Line of Credit shall immediately and automatically terminate, in each case without any action required by Motorsport Network, if (i)
the Company experience an event of default under any other debt instrument, agreement or arrangement; or (ii) any final judgment or final
judgments for the payment of money in excess (net of amounts covered by third-party insurance with insurance carriers who have not disclaimed
liability with respect to such judgment or judgments) of $500,000 or its foreign currency equivalent is entered against the Company or
any subsidiary and is not discharged and either (a) an enforcement proceeding has been commenced by any creditor upon such judgment or
decree or (b) there is a period of 60 days following the entry of such judgment or decree during which such judgment or decree is not
discharged, waived or the execution thereof stayed and, in the case of (b), such default continues for 60 consecutive days. See Item
1A, “Risk Factors – Risks Related to our Financial Condition and Liquidity - Limits on the Company’s borrowing capacity
under the $12 million Line of Credit may affect the Company’s ability to finance its operations.”
Capital
Expenditures
The
nature of the Company’s operations does not require significant expenditures on capital assets, nor does the Company typically
enter into significant commitments to acquire capital assets. The Company does not have material commitments to acquire capital assets
as of September 30, 2022.
Material
Cash Requirements
On
April 22, 2022, the Company entered into a letter agreement (the “Amendment”) amending the terms of (i) the share purchase
agreement dated March 31, 2021 (the “SPA”) with Luminis International BV, Technology In Business B.V. (“TIB”)
and certain of TIB’s shareholders parties to such Amendment and (ii) the related deed of pledge that secured the Company’s
payment of the $3,200,000 deferred purchase price installment under the SPA.
Pursuant
to the Amendment, the deferred purchase price installment due to be paid by the Company on the first anniversary of closing was reduced
from $3,200,000 to $1,000,000, with the remaining $2,200,000 further deferred and to be paid within 90 days of the date that the Company
made the $1,000,000 payment. Further, pursuant to the Amendment, secured obligations under the deed of pledge were correspondingly reduced
from $3,200,000 to $2,200,000 following the finalization of an amendment to the deed of pledge on May 12, 2022. The $1,000,000 payment
was made on April 30, 2022.
On
July 21, 2022, the Company and Luminis entered into a second amendment (the “Second Amendment”) to the SPA. The $2,200,000
deferred purchase price payment due under the Second Amendment shall be paid as follows:
(a)
an initial installment of $330,000 which was paid within 5 business days of executing the Second Amendment;
(b)
monthly installments of $100,000 from August 15, 2022 through December of 2022, payable on the 15th day of each month; and
(c)
monthly installments of $150,000 from January 15, 2023 until such time as the entire unpaid $1,870,000 balance of the deferred purchase
price payment due under the Second Amendment, together with simple interest on the unpaid balance accruing, starting on the date of the
Second Amendment, at 15% per annum, is paid in full, payable on the 15th day of each month.
There
have been no other material changes in our reported material cash requirements as described under “Liquidity and Capital Resources
– Material Cash Requirements” in “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in Part II, Item 7 of the 2021 Form 10-K.
Off-Balance
Sheet Arrangements
We
did not have, during the periods presented, and we do not currently have, any relationships with any organizations or financial partnerships,
such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited purposes.
Critical
Accounting Policies and Significant Accounting Estimates
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 2021 Form 10-K, with the exception of an additional critical estimate identified
in respect of finite-lived intangible assets.
Valuation
of Finite-Lived Intangible Assets
We
review our finite-lived assets for impairment whenever events or changes in circumstances indicate, based on recent and projected cash
flow performance and remaining useful lives, that the carrying value of these assets may not be fully recoverable. We evaluate asset
impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.
The lowest level for which we maintain identifiable cash flows that are independent of the cash flows of other assets and liabilities
is at the intangible asset level, with the exception of technology intangible assets which are at the reporting unit level. If estimated
undiscounted future cash flows are less than the carrying value of an asset, an impairment charge is recognized to the extent its carrying
value exceeds fair value.
We
typically estimate fair value a cost to recreate valuation technique, however the valuation method used will be dependent on the finite-lived
intangible asset subject to fair value assessment.
The
principal assumptions used in our cost to recreate model for the interim impairment reviews completed during the nine months ended September
30, 2022 were:
|
- |
Number
of hours to recreate; |
|
- |
Rate
per hour; and |
|
- |
Technological
obsolescence. |
If
the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds
its carrying value, the finite-life intangible asset is not considered impaired.
Recently
Issued Accounting Standards
As
an “emerging growth company”, the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable
to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition
period under the JOBS Act until such time as we are no longer considered to be an emerging growth company.
Our
analysis of recently issued accounting standards are more fully described in our condensed consolidated financial statements included
elsewhere in this Report.