LEASES

9 Months Ended

Sep. 30, 2022

Leases

LEASES

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: 

	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:

	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:

	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:

	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.