INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2022

Goodwill and Intangible Assets Disclosure [Abstract]

INTANGIBLE ASSETS

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:

	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:

	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:

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
	$	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.