UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For
the quarterly period ended | ||
| or | ||
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the transition period from ___________ to ___________ |
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As of August 21, 2023, the registrant had shares of Class A common stock and shares of Class B common stock outstanding. All Class A common stock and Class B common stock share data and share-based calculations set forth in this Form 10-Q have been adjusted to reflect the registrant’s 1-for-10 reverse stock split completed on November 10, 2022 on a retroactive basis for the periods presented.
Motorsport Games Inc.
Form 10-Q
For the Quarter Ended June 30, 2023
TABLE OF CONTENTS
| i |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) of Motorsport Games Inc. (the “Company,” “Motorsport Games,” “we,” “us” or “our”) contains certain statements, which are not historical facts and are “forward-looking statements” within the meaning of federal securities laws. These forward-looking statements are subject to certain risks, trends and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. We use words, such as “could,” “would,” “may,” “might,” “will,” “expect,” “likely,” “believe,” “continue,” “anticipate,” “estimate,” “intend,” “plan,” “project” and other similar expressions to identify some forward-looking statements, but not all forward-looking statements include these words. For example, forward-looking statements include, but are not limited to, statements we make relating to:
| ● | our liquidity and capital requirements, including, without limitation, as to our ability to continue as a going concern; our belief that we will not have sufficient cash on hand to fund our operations for the remainder of 2023 based on the cash and cash equivalents available as of July 31, 2023 and our average cash burn; our belief that additional funding will be required in order to continue operations; our expectation that we will continue to have a net cash outflow from operations for the foreseeable future as we continue to develop our product portfolio and invest in developing new video game titles; our expectation that we will continue to incur losses for the foreseeable future as we continue to incur significant expenses; our plans to address our liquidity short fall, including our exploration of several options, including, but not limited to: additional funding in the form of potential equity and/or debt financing arrangements or similar transactions, strategic alternatives for our business, including, but not limited to, the sale or licensing of our assets, and further cost reduction and restructuring initiatives; statements relating to a potential a sale of our NASCAR license, including that if such sale is consummated, we expect that we would no longer have the right to use the NASCAR brand for our products, subject to certain limited exceptions, as well as our belief that our existing business model will need to be modified, our risk profile relating to our operations will be significantly altered, that we may encounter difficulties or challenges in continuing operations, and that our cash flows and results of operations will likely be materially adversely impacted; our expectation that if any strategic alternative is executed, including the consummation of a sale of our NASCAR license, this would help to reduce certain working capital requirements and reduce overhead expenditures, thereby reducing our expected future cash-burn, and provide some short-term liquidity relief, but that we will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of our business and operations; our plan to continue to seek to reduce our monthly net cash-burn by reducing our cost base through maintaining and enhancing cost control initiatives, such as those that we expect to achieve through our previously announced organizational restructuring program (the “2022 Restructuring Program”), and plans to continue to evaluate the structure of our business for additional changes in order to improve both our near-term and long-term liquidity position; statements regarding potential alternatives we may be required to adopt if we are unable to satisfy our capital requirements, and our belief that if we are ultimately unable to satisfy our capital requirements, we would likely need to dissolve and liquidate our assets under the bankruptcy laws or otherwise; our belief that there is a substantial likelihood that Motorsport Network, LLC (“Motorsport Network”) will not fulfill our future borrowing requests under the $12 million Line of Credit (as defined in this Report); and statements regarding our cash flows and anticipated uses of cash; | |
| ● | our future business, results of operations, financial condition and/or liquidity, including with respect to the ongoing effects of the war between Russia and Ukraine; | |
| ● | our intended corporate purpose to make the thrill of motorsports accessible to everyone by creating the highest quality, most sophisticated and most innovative experiences for racers, gamers and fans of all ages; | |
| ● | new or planned products or offerings, including the anticipated timing of our new product launches under our updated product roadmap, such as our anticipated release of our Le Mans Ultimate game in December 2023 and our INDYCAR game in 2024, as well as the possibility of further adjustments to our product roadmap due to the continuing impact of our liquidity position; | |
| ● | our intentions with respect to our mobile games, including expectations that we will continue to focus on developing and further enhancing our multi-platform games for mobile phones, as well as the anticipated timing of the release of our future mobile games; | |
| ● | our plans to strive to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing games as well as on behalf of third-party racing game developers and publishers; | |
| ● | our belief that connecting virtual racing gamers and esports fans on a digital entertainment and social platform represents the greatest opportunity to enhance the way that people learn, watch, play, and experience racing video games and racing esports; | |
| ● | our future plans and expectations for Traxion.GG (“Traxion”), our online destination for the virtual racing community, including with regards to its functionality and content; | |
| ● | our beliefs regarding the growing importance and business viability of esports, especially within the racing and motorsport genres; | |
| ● | our intention to expand our license arrangements to other internationally recognized racing series and the platforms we operate on; | |
| ● | our expectation that we will be able to extend or re-negotiate our promotion agreement with Motorsport Network on reasonable terms; | |
| ● | our intention to continue seeking to expand our audience base through traditional marketing and sales distribution channels including Facebook, Twitter, Twitch, YouTube and other online social networks; | |
| ● | our belief that our esports business has the potential to generate incremental revenues through the further sale of media rights to our esports events and competitions, as well as merchandising and sports betting, if the esports audience pattern continues to grow; |
| 1 |
| ● | our expectation 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; | |
| ● | our plans to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through in-game purchases and extra content; | |
| ● | our expectation that we will continue to derive significant revenues from sales of our products to a very limited number of distribution partners; | |
| ● | our expectation that we will continue to invest in technology, hardware and software to support our games and services, including with respect to security protections; | |
| ● | our belief that the global adoption of portable and mobile gaming devices leading to significant growth in portable and mobile gaming is a continuing trend; | |
| ● | our intention to continue to look for opportunities to expand the recurring portion of our business; | |
| ● | our intended use of proceeds from the sales of our equity securities; | |
| ● | our statements and assumptions relating to the impairment of assets; | |
| ● | our plans and intentions with respect to our remediation efforts to address the material weakness in our internal control over financial reporting; |
| 2 |
| ● | our belief that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows, except as otherwise disclosed in this Report, and that in light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period, including, without limitation, our beliefs regarding the merit of any plaintiff’s allegations and the impact of any claims and litigation that we are subject to; | |
| ● | our intention to not declare dividends in the foreseeable future; | |
| ● | our ability to utilize net operating loss carryforwards; | |
| ● | our expectations regarding the future impact of implementing management strategies, potential acquisitions and industry trends; | |
| ● | our belief that we may decide in the future to avail ourselves of certain corporate governance requirements of The Nasdaq Stock Market LLC (“NASDAQ”) as a result of being a “controlled company” within the meaning of the NASDAQ rules; | |
| ● | our expectations relating to the 2022 Restructuring Program and any further cost reduction and restructuring initiatives, including expected savings; and | |
| ● | our expectation that our current development operations will not have significant exposure to changes in circumstances arising from the Ukraine-Russia conflict. |
| 3 |
The forward-looking statements contained in this Report are based on assumptions that we have made in light of our industry experience and our perceptions of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read and consider this Report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions that are difficult to predict. Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual operating and financial performance and cause our performance to differ materially from the performance anticipated in the forward-looking statements. Important factors that could cause our actual results to differ materially from those projected in any forward-looking statements are discussed in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) and in “Risk Factors” in Part II, Item 1A of this Report, as updated in our subsequent filings with the Securities and Exchange Commission (the “SEC”). In addition to factors that may be described in our filings with the SEC, including this Report, the following factors, among others, could cause our actual results to differ materially from those expressed in any forward-looking statements made by us:
| (i) | difficulties and/or delays in accessing available liquidity, and other unanticipated difficulties in resolving our continuing financial condition and ability to obtain additional capital to meet our financial obligations, including, without limitation, difficulties in securing funding that is on commercially acceptable terms to us or at all, such as our inability to complete in whole or in part any potential debt and/or equity financing transactions or similar transactions, any inability to achieve cost reductions, including, without limitation, those which we expect to achieve through the 2022 Restructuring Program and any further cost reduction and restructuring initiatives, as well as any inability to consummate one or more strategic alternatives for our business, including, but not limited to, the sale or licensing of our assets, and/or less than expected benefits resulting from any such strategic alternative; difficulties, delays or our inability to efficiently manage our cash and working capital; higher than expected operating expenses; adverse impacts to our liquidity position resulting from the higher interest rate and higher inflationary environment; the unavailability of funds from anticipated borrowing sources; the unavailability of funds from our inability to reduce or control costs, including, without limitation, those which we expect to achieve through the 2022 Restructuring Program and any further cost reduction and restructuring initiatives; lower than expected operating revenues, cash on hand and/or funds available from anticipated borrowings or funds expected to be generated from cost reductions resulting from the implementation of cost control initiatives, such as through the 2022 Restructuring Program and any further cost reduction and restructuring initiatives; and/or less than anticipated cash generated by our operations; and/or adverse effects on our liquidity resulting from changes in economic conditions (such as continued volatility in the financial markets, whether attributable to COVID-19, the ongoing war between Russia and Ukraine or otherwise; significantly higher rates of inflation, significantly higher interest rates and higher labor costs; the impact of higher energy prices on consumer purchasing behavior, monetary conditions and foreign currency fluctuations, tariffs, foreign currency controls and/or government-mandated pricing controls, as well as in trade, monetary, fiscal and tax policies), political conditions (such as military actions and terrorist activities) and pandemics and natural disasters; and/or the unavailability of funds from (A) delaying the implementation of or revising certain aspects of our business strategy; (B) reducing or delaying the development and launch of new products and events; (C) reducing or delaying capital spending, product development spending and marketing and promotional spending; (D) selling assets or operations; (E) seeking additional capital contributions and/or loans from Motorsport Network, the Company’s other affiliates and/or third parties; and/or (F) reducing other discretionary spending; | |
| (ii) | difficulties, delays or less than expected results in achieving our growth plans, objectives and expectations, such as due to a slower than anticipated economic recovery and/or our inability, in whole or in part, to continue to execute our business strategies and plans, such as due to less than anticipated customer acceptance of our new game titles, our experiencing difficulties or the inability to launch our games as planned, less than anticipated performance of the games impacting customer acceptance and sales and/or greater than anticipated costs and expenses to develop and launch our games, including, without limitation, higher than expected labor costs; | |
| (iii) | difficulties, delays in or unanticipated events that may impact the timing and scope of new product launches, such as due to difficulties or delays related to our transition from using development staff in Russia to using development staff in other countries and/or difficulties and/or delays arising out of any resurgence of the ongoing and prolonged COVID-19 pandemic; | |
| (iv) | less than expected benefits from implementing our management strategies and/or adverse economic, market and geopolitical conditions that negatively impact industry trends, such as significant changes in the labor markets, an extended or higher than expected inflationary environment (such as the impact on consumer discretionary spending as a result of significant increases in energy and gas prices which have been increasing since early in 2020), a higher interest rate environment, tax increases impacting consumer discretionary spending and or quantitative easing that results in higher interest rates that negatively impact consumers’ discretionary spending, or adverse developments relating to the ongoing war between Russia and Ukraine; | |
| (v) | delays and higher than anticipated expenses related to the ongoing and prolonged COVID-19 pandemic; | |
| (vi) | difficulties and/or delays adversely impacting our ability (or inability) to maintain existing, and to secure additional, licenses and other agreements with various racing series; |
| 4 |
| (vii) | difficulties and/or delays adversely impacting our ability to successfully manage and integrate any joint ventures, acquisitions of businesses, solutions or technologies; | |
| (viii) | unanticipated operating costs, transaction costs and actual or contingent liabilities; | |
| (ix) | difficulties and/or delays adversely impacting our ability to attract and retain qualified employees and key personnel; | |
| (x) | adverse effects of increased competition; | |
| (xi) | changes in consumer behavior, including as a result of general economic factors, such as increased inflation, recessionary factors, higher energy prices and higher interest rates; | |
| (xii) | difficulties and/or delays adversely impacting our ability to protect our intellectual property; | |
| (xiii) | local, industry and general business and economic conditions; | |
| (xiv) | unanticipated adverse effects on our business, prospects, results of operations, financial condition, cash flows and/or liquidity as a result of unexpected developments with respect to our legal proceedings; | |
| (xv) | difficulties, delays or our inability to successfully complete the 2022 Restructuring Program and any further cost reduction and restructuring initiatives, which could reduce the benefits realized from such activities; | |
| (xvi) | higher than anticipated restructuring charges and/or payments and/or changes in the expected timing of such charges and/or payments; and/or less than anticipated annualized cost reductions from our plans and/or changes in the timing of realizing such cost reductions, such as due to less than anticipated liquidity to fund such activities and/or more than expected costs to achieve the expected cost reductions; and | |
| (xvii) | difficulties, delays, less than expected results or our inability to successfully implement any strategic alternative or potential option for our business, including, but not limited to, the sale or licensing of certain of our assets, which could result in, among other things, less than expected financial benefits from such actions. |
Additionally, there are other risks and uncertainties described from time to time in the reports that we file with the SEC. Should one or more of these risks or uncertainties materialize or should any of these assumptions prove to be incorrect, our actual operating and financial performance may vary in material respects from the performance projected in these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement contained in this Report to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances, except as otherwise required by law. New factors that could cause our business not to develop as we expect emerge from time to time, and it is not possible for us to predict all of them. Further, we cannot assess the impact of each currently known or new factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
| 5 |
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, 2023 | December 31, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowances of $ | ||||||||
| Due from related parties | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total Current Assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right of use assets | ||||||||
| Intangible assets, net | ||||||||
| Total Assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses and other current liabilities | ||||||||
| Due to related parties | ||||||||
| Purchase commitments | ||||||||
| Operating lease liabilities (current) | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease liabilities (non-current) | ||||||||
| Other non-current liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock, $ par value per share; authorized and shares; and issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | ||||||||
| Class A common stock - $ par value per share; authorized and shares; and shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | ||||||||
| Class B common stock - $ par value per share; authorized and shares; and shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total Stockholders’ Equity Attributable to Motorsport Games Inc. | ||||||||
| Non-controlling interest | ||||||||
| Total Stockholders’ Equity | ||||||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 6 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of revenues [1] | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing [2] | ||||||||||||||||
| Development [3] | ||||||||||||||||
| General and administrative [4] | ||||||||||||||||
| Impairment of goodwill | ||||||||||||||||
| Impairment of intangible assets | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Less: Net loss attributable to non-controlling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to Motorsport Games Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss attributable to Class A common stock per share: | ||||||||||||||||
| Basic and diluted | $ | ) | $ | ) | $ | ) | $ | ) | ||||||||
| Weighted-average shares of Class A common stock outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
| [1] | |
| [2] | |
| [3] | |
| [4] |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 7 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
| Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other comprehensive (loss) income: | ||||||||||||||||
| Foreign currency translation adjustments | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to non-controlling interests | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Comprehensive loss attributable to Motorsport Games Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 8 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| For the Three and Six Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||||
Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
Equity / Member’s | Total | |||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Accumulated Other | Equity Attributable | Stockholders’ | |||||||||||||||||||||||||||||||||||
Common Stock | Common Stock | Paid-In | Accumulated | Comprehensive | to Motorsport | Non-controlling | Member’s | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Games Inc. | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance - January 1, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | | $ | |||||||||||||||||||||||||||
| Issuance of common stock | - | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for extinguishment of related party debt | - | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance - March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | $ | ( | ) | ( | ) | |||||||||||||||||||||||||||||
| Balance - June 30, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
For the Three and Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||||
| Equity | ||||||||||||||||||||||||||||||||||||||||
| Class A | Class B | Additional | Accumulated Other | Equity Attributable | Total | |||||||||||||||||||||||||||||||||||
Common Stock | Common Stock | Paid-In | Accumulated | Comprehensive | to Motorsport | Non-controlling | Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Loss | Games Inc. | Interest | Equity | |||||||||||||||||||||||||||||||
| Balance - January 1, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | | $ | |||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
| Balance - March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||
Balance - June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 9 |
MOTORSPORT GAMES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the Six Months Ended June 30, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Loss on impairment of intangible assets | ||||||||
| Loss on impairment of goodwill | ||||||||
| Loss on impairment of property, plant and equipment | ||||||||
| Depreciation and amortization | ||||||||
| Non-cash lease expense | ||||||||
| Purchase commitment and license liability interest accretion | ||||||||
| Stock-based compensation | ||||||||
| Changes in the fair value of stock warrants | ( | ) | ||||||
| Sales return and price protection reserves | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Due from related parties | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Due to related parties | ||||||||
| Other non-current liabilities | ( | ) | ||||||
| Accrued expenses and other liabilities | ( | ) | ||||||
| Net cash used in operating activities | $ | ( | ) | $ | ( | ) | ||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash used in investing activities | $ | ( | ) | $ | ( | ) | ||
| Cash flows from financing activities: | ||||||||
| Advances from related parties | ||||||||
| Repayments on advances from related parties | ( | ) | ||||||
| Repayments of purchase commitment liabilities | ( | ) | ( | ) | ||||
| Payment of license liabilities | ( | ) | ( | ) | ||||
| Issuance of common stock from stock purchase commitment agreement | ||||||||
| Issuance of common stock from registered direct offerings | ||||||||
| Net cash provided by (used in) financing activities | $ | $ | ( | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Total cash and cash equivalents at beginning of the period | $ | $ | ||||||
| Total cash and cash equivalents at the end of the period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Shares issued to Motorsport Network LLC for extinguishment of related party loan | $ | $ | ||||||
| Extinguishment of Motorsport Network LLC related party loan for Class A shares | $ | ( | ) | $ | ||||
| Issuance of warrants in connection with registered direct offerings | $ | $ | ||||||
| Purchase commitment liability | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| 10 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 1 - BUSINESS ORGANIZATION, NATURE OF OPERATIONS, AND RISKS AND UNCERTAINTIES
Organization and Operations
Motorsport Gaming US LLC (“Motorsport Gaming”) was established as a limited liability company on August 2, 2018 under the laws of the State of Florida. On January 8, 2021, Motorsport Gaming converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Motorsport Games Inc. (“Motorsport Games” or the “Company”). Upon effecting the corporate conversion on January 8, 2021, Motorsport Games now holds all the property and assets of Motorsport Gaming, and all of the debts and obligations of Motorsport Gaming were assumed by Motorsport Games by operation of law upon such corporate conversion.
Risks and Uncertainties
Liquidity and Going Concern
The
Company had a net loss of approximately $
The Company’s future liquidity and capital requirements include funds to support the planned costs to operate its business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures.
In order to address its liquidity shortfall, the Company is actively exploring several options, including, but not limited to: i) additional funding in the form of potential equity and/or debt financing arrangements or similar transactions (collectively, “Capital Financing”); ii) strategic alternatives for its business, including, but not limited to, the sale or licensing of the Company’s assets; and iii) cost reduction and restructuring initiatives, including re-evaluating its product roadmap, each of which is described more fully below.
The
Company continues to explore additional funding in the form of potential Capital Financing and has entered into an Equity Distribution
Agreement (the “ED Agreement”) with Canaccord Genuity LLC, as sales agent (the “Sales Agent”), pursuant to which
the Company may issue and sell shares of its Class A common stock having an aggregate offering price of up to $
Due to the uncertainty surrounding the Company’s ability to raise funding in the form of potential Capital Financing, and in light of its liquidity position and anticipated future funding requirements, the Company has decided to explore strategic alternatives and potential options for its business, including, but not limited to, the sale or licensing of certain of the Company’s assets. For example, the Company is currently in discussions with a third-party for the potential sale of the Company’s NASCAR license. If any such strategic alternative is executed, including the consummation of a sale of the Company’s NASCAR license, it is expected it would help to reduce certain working capital requirements and reduce overhead expenditures, thereby reducing the Company’s expected future cash-burn, and provide some short-term liquidity relief. Nonetheless, even if the Company is successful in implementing one or more strategic alternatives, including the consummation of a sale of the Company’s NASCAR license, the Company will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of its business and operations. There are no assurances that the Company will even be successful in implementing a strategic plan for the sale or licensing of its assets, including the consummation of a sale of the Company’s NASCAR license, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond the Company’s control, such as, among other things, the required consent from NASCAR with respect to any sale of the Company’s NASCAR license.
As the Company continues to address its liquidity constraints, it has re-evaluated its product roadmap in the second quarter of 2023 and modified the expected timing and scope of certain new product releases, including the release of any future NASCAR games, which have been put on hold indefinitely. Further, the Company is evaluating its ability to deliver new titles under its other licenses, such as with INDYCAR and the British Touring Car Championship (the “BTCC”), which may result in further adjustments to the Company’s product roadmap. The Company continues to seek to reduce its monthly net cash-burn by reducing its cost base through maintaining and enhancing cost control initiatives, such as those that it expects to achieve through its previously announced organizational restructuring program (the “2022 Restructuring Program”), and is evaluating the structure of its business for additional changes in order to improve both its near-term and long-term liquidity position, as well as create a healthy and sustainable Company from which to operate.
| 11 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
If the Company is unable to satisfy its capital requirements, it could be required to adopt one or more of the following alternatives:
| ● | delaying the implementation of or revising certain aspects of the Company’s business strategy; | |
| ● | further reducing or delaying the development and launch of new products and events; | |
| ● | further reducing or delaying capital spending, product development spending and marketing and promotional spending; | |
| ● | selling additional assets or operations; | |
| ● | seeking additional capital contributions and/or loans from Motorsport Network, the Company’s other affiliates and/or third parties; | |
| ● | further reducing other discretionary spending; | |
| ● | entering into financing agreements on unattractive terms; and/or | |
| ● | significantly curtailing or discontinuing operations. |
There can be no assurance that the Company would be able to take any of the actions referred to above because of a variety of commercial or market factors, including, without limitation, market conditions being unfavorable for an equity or debt issuance or similar transactions, additional capital contributions and/or loans not being available from Motorsport Network or affiliates and/or third parties, or that the transactions may not be permitted under the terms of the Company’s various debt instruments then in effect, such as due to restrictions on the incurrence of debt, incurrence of liens, asset dispositions and related party transactions. In addition, such actions, if taken, may not enable the Company to satisfy its capital requirements if the actions that the Company is able to consummate do not generate a sufficient amount of additional capital.
Even if the Company does secure additional Capital Financing, if the anticipated level of revenues are not achieved because of, for example, decreased sales of the Company’s products due to the disposition of key assets, such as the potential sale of its NASCAR license, further changes in the Company’s product roadmap and/or the Company’s inability to deliver new products for its various other licenses; less than anticipated consumer acceptance of the Company’s offering of products and events; less than effective marketing and promotion campaigns, decreased consumer spending in response to weak economic conditions or weakness in the overall electronic games category; adverse changes in foreign currency exchange rates; decreased sales of the Company’s products and events as a result of increased competitive activities by the Company’s competitors; changes in consumer purchasing habits, such as the impact of higher energy prices on consumer purchasing behavior; retailer inventory management or reductions in retailer display space; less than anticipated results from the Company’s existing or new products or from its advertising and/or marketing plans; or if the Company’s expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, the Company’s liquidity position may continue to be insufficient to satisfy its future capital requirements. If the Company is ultimately unable to satisfy its capital requirements, it would likely need to dissolve and liquidate its assets under the bankruptcy laws or otherwise.
In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the 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 unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
| 12 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In management’s opinion, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair statement of the Company’s unaudited condensed consolidated financial statements as of June 30, 2023 and for the three and six months ended June 30, 2023. The Company’s results of operations for the three and six months ended June 30, 2023 are not necessarily indicative of the operating results for the full year ending December 31, 2023 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, 2022 and 2021 and for the years then ended which are included in the 2022 Form 10-K.
Effective on November 10, 2022, the Company amended its certificate of incorporation to effectuate a reverse split of the issued and outstanding shares of Class A common stock and Class B common stock at a ratio of 1-for-10. Fractional shares of common stock resulting from the reverse stock split were settled in cash. Shares underlying outstanding equity-based awards were proportionately decreased and the respective per share exercise prices, if applicable, were proportionately increased in accordance with the terms of the agreements governing such securities. All shares of common stock, equity-based awards, and per share information presented in the unaudited condensed consolidated financial statements have been adjusted to reflect the reverse stock split on a retroactive basis for all periods presented.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
The Company’s significant estimates used in these consolidated financial statements include, but are not limited to, revenue recognition criteria, including allowances for returns and price protection, as well as current expected credit losses, valuation allowance of deferred income taxes, valuation of acquired companies and equity method investments, the recognition and disclosure of contingent liabilities, goodwill and intangible assets impairment testing, and stock-based compensation valuation. Certain of the Company’s estimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and may cause actual results to differ from those estimates.
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.
| 13 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Adoption of Accounting Pronouncements
On January 1, 2023, the Company adopted Accounting Standard Update (“ASU”) 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” (“ASU 2019-11”), issued by the Financial Accounting Standards Board (the “FASB”) in November 2019. ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument”, issued by the FASB in June 2016. ASU 2016-13, as amended by ASU 2019-11, requires an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, each reporting entity should estimate an allowance for expected credit losses, which is intended to result in more timely recognition of losses. This model replaces multiple existing impairment models in current U.S. GAAP, which generally require a loss to be incurred before it is recognized. The new standard applies to trade receivables arising from revenue transactions such as contract assets and accounts receivable. Under ASC 606, “Revenue from Contracts with Customers” (“ASC 606”) revenue is recognized when, among other criteria, it is probable that an entity will collect the consideration it is entitled to when goods or services are transferred to a customer. When trade receivables are recorded, they become subject to the CECL model and estimates of expected credit losses on trade receivables over their contractual life will be required to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. This guidance is effective for smaller reporting companies with annual periods beginning after December 15, 2022, including the interim periods in the year. Early adoption is permitted. All entities may adopt the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). Upon adoption, this guidance did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
On January 1, 2023, the Company adopted ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) – Accounting for Convertible instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”), issued by the FASB in August 2020. The amendments affect entities that issue convertible instruments, as well as contracts in an entity’s own equity. For convertible instruments, the instruments primarily affected are those issued with beneficial conversion features or cash conversion features because the accounting models for those specific features are removed. However, all entities that issue convertible instruments are affected by the amendments to the disclosure requirements in ASU 2020-06. These amendments improve U.S. GAAP by eliminating certain accounting models, therefore, simplifying the accounting for convertible instruments, and reducing complexity for preparers and practitioners, as well as improving the decision usefulness and relevance of the information provided to financial statement users. In addition to eliminating certain accounting models, these amendments enhance information transparency by making targeted improvements to the disclosures for convertible instruments and earnings-per-share guidance. For contracts in an entity’s own equity, the contracts primarily affected are freestanding instruments and embedded features that are accounted for as derivatives under the current guidance because of failure to meet the settlement conditions of the derivatives scope exception related to certain requirements of the settlement assessment. ASU 2020-06 simplifies the settlement assessment by removing the requirements (1) to consider whether the contract would be settled in registered shares, (2) to consider whether collateral is required to be posted, and (3) to assess shareholder rights. These amendments also affect the assessment of whether an embedded conversion feature in a convertible instrument qualifies for the derivatives scope exception. These amendments improve U.S. GAAP by simplifying the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions and improving inconsistency in the accounting for some contracts as derivatives while accounting for economically similar contracts as equity. Additionally, the amendments in ASU 2020-06 affect the diluted earnings per share calculation for instruments that may be settled in cash or shares and for convertible instruments. This guidance is effective for smaller reporting companies with annual periods beginning after December 15, 2023, including the interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years after December 15, 2020, 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). Entities may also elect to adopt the amendments using the fully retrospective method of transition, with the cumulative effect of the change recognized as an adjustment to the opening balance of retained earnings in the first comparative period presented. Upon adoption, this guidance did not have a material impact on the unaudited condensed consolidated financial statements.
| 14 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Significant Accounting Policies
There have been no material changes to the significant accounting policies disclosed in the audited consolidated financial statements for the year ended December 31, 2022, as included in the 2022 Form 10-K, except as disclosed in this note.
Fair Value Measurements
The Company accounts for its assets and liabilities using a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the fair-value hierarchy below. This hierarchy requires the Company to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.
| ● | Level 1 – Quoted prices for identical instruments in active markets; | |
| ● | Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and | |
| ● | Level 3 – Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable. |
The Company’s liability-classified warrants are measured at fair value on a recurring basis, with subsequent changes in fair value recognized in earnings. Certain assets, including long-lived assets, right of use assets, goodwill, indefinite-lived intangible assets, and purchase commitments are measured at fair value on a nonrecurring basis; that is, the assets are not measured at fair value on an ongoing basis, but are subject to fair value adjustments using fair value measurements with unobservable inputs are classified as Level 3. Other financial instruments, including cash and cash equivalents, accounts receivable, prepaid and other assets, accounts payable, accrued expenses, and other current liabilities are carried at cost, which approximate their fair values due to their short-term nature.
Stock Warrants
The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant’s specific terms and applicable authoritative guidance in ASC 480 - Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815 - Derivatives and Hedging (“ASC 815”). The Company’s assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, whether they meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common stock and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification. This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of each subsequent quarterly period-end date while the warrants are outstanding.
Allowances for Returns and Price Protection
The Company may permit product returns from, or grant price protection to, its customers under certain conditions. Price protection represents the Company’s practice of providing 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.
Allowances for returns and price protection are considered variable consideration under ASC 606. The Company reduces revenue for estimated future returns and price protections that may occur with distributors and retailers (“channel partners”). See Note 2 – Basis of Presentation and Summary of Significant Accounting Policies – Accounts Receivable in the 2022 Form 10-K for additional details.
| 15 |
Motorsport
Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
When evaluating the adequacy of allowances for returns and price protection, the Company analyzes the following: historical credit allowances, current sell-through of channel partners’ inventory of the Company’s products, current trends in retail and the video game industry, changes in customer demand, acceptance of products, and other related factors. In addition, the Company monitors the volume of sales to its channel partners and their inventories, as substantial overstocking in the distribution channel could result in higher-than-expected returns or higher price protection in subsequent periods.
The
Company recognized an expense of approximately $
Deferred Revenue
The Company’s deferred revenue, or contract liability, is classified as current and is included within accrued expenses and other current liabilities on the unaudited condensed consolidated balance sheets (Also refer Note 4 – Accrued Expenses and Other Current Liabilities). Revenue collected in advance of the event is recorded as deferred revenue until the event occurs. Development and coding revenues are also recorded as deferred revenue until the Company’s performance obligation is performed.
Revenue
recognized in the period from amounts included in contract liability at the beginning of the period was approximately $
Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common and dilutive common-equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of shares of options and warrants, if not anti-dilutive.
| For the Three and Six Months Ended | ||||||||
| June 30, | ||||||||
| 2023 | 2022 | |||||||
| Stock options | ||||||||
| Warrants | ||||||||
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 BTCC, and INDYCAR LLC (“INDYCAR”)
with respect to the INDYCAR SERIES. As of June 30, 2023, the Company had a remaining liability in connection with these licensing agreements
of approximately $
Impairment
During the three months ended June 30, 2023, the Company identified triggering events that indicated certain finite-lived intangible assets were at risk of impairment and as such, performed a quantitative impairment assessment to determine the recoverability of those finite-lived intangible assets. The primary trigger for the impairment review was the Company’s decision to explore strategic alternatives, including, but not limited to, the sale or licensing of the Company’s assets (the “Strategic Initiatives”), and that failure to consummate any such transaction would likely result in the Company being unable to comply with certain requirements of certain of its video game licenses.
As
a result of the quantitative assessment, the Company determined the fair value of certain licensing agreements, software and
non-compete agreements were lower than their respective carrying values and recorded an impairment loss for the three months ended
June 30, 2023 of approximately $
The impairment loss is presented as impairment of intangible assets in the unaudited condensed consolidated statements of operations and comprehensive loss.
| 16 |
Motorsport
Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Intangible Assets
The following is a summary of intangible assets as of June 30, 2023:
| Licensing Agreements (Finite) | Licensing Agreements (Indefinite) | Software Licenses (Finite) | Distribution Contracts (Finite) | Trade Names (Indefinite) | Non-Compete Agreements (Finite) | Accumulated Amortization | Total | |||||||||||||||||||||||||
| Balance as of January 1, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Amortization expense | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Impairment of intangible assets | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| FX translation adjustments | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Weighted average remaining amortization period as of June 30, 2023 | ||||||||||||||||||||||||||||||||
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 January 1, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
| Amortization expense | ||||||||||||||||||||
| Foreign currency translation adjustment | ||||||||||||||||||||
| Balance as of June 30, 2023 | $ | $ | $ | $ | $ | |||||||||||||||
Estimated aggregate amortization expense of intangible assets for the next five years and thereafter is as follows:
| Total | ||||
| 2023 (remaining period) | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ | ||||
| 17 |
Motorsport
Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Amortization
expense related to intangible assets was approximately $
NOTE 4 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consisted of the following:
| June 30, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Accrued royalties | $ | $ | ||||||
| Accrued professional and consulting fees | ||||||||
| Accrued development costs | ||||||||
| Accrued taxes | ||||||||
| Accrued payroll | ||||||||
| Deferred revenue | ||||||||
| Loss contingency reserves | ||||||||
| Accrued other | ||||||||
| Total | $ | $ | ||||||
NOTE 5 – RELATED PARTY LOANS
On
April 1, 2020, the Company entered into a promissory note (the “$
On September 8, 2022, the Company entered
into a support agreement with Motorsport Network (the “Support Agreement”) pursuant to which Motorsport Network issued approximately
$
As
of June 30, 2023, the $
As
of June 30, 2023 and December 31, 2022, the balance due to Motorsport Network under the $
| 18 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 6 – RELATED PARTY TRANSACTIONS
In
addition to the $
The
Company has regular related party receivables and payables outstanding as of June 30, 2023 and December 31, 2022. Specifically, the Company
owed approximately $
Backoffice Services Agreement
On
March 23, 2023 (but effective as of January 1, 2023), the Company entered into a new Backoffice Services Agreement with Motorsport
Network (the “Backoffice Services Agreement”), following the expiration of the Company’s prior services agreement
with Motorsport Network. Pursuant to the Backoffice Services Agreement, Motorsport Network will provide accounting, payroll and
benefits, human resources and other back-office services on a full-time basis to support the Company’s business functions. The
term of the Backoffice Services Agreement is 12 months from the effective date. The term will automatically renew for successive
12-month terms unless either party provides written notice of nonrenewal at least 30 days prior to the end of the then current term.
The Backoffice Services Agreement may be terminated by either party at any time with 60 days prior notice. Pursuant to the
Backoffice Services Agreement, the Company is required to pay a monthly fee to Motorsport Network of $
NOTE 7 – STOCKHOLDERS’ EQUITY
Class A and B Common Stock
As
of June 30, 2023, the Company had shares of Class A common stock and shares of Class B common stock outstanding.
Effective
on November 10, 2022,
704Games Warrants
As
of June 30, 2023 and December 31, 2022, 704Games LLC (“704Games”), a wholly-owned subsidiary of Motorsport Games Inc.,
has outstanding 10-year warrants to purchase
| 19 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Registered Direct Offerings and the Wainwright Warrants
On
February 1, February 2 and February 3, 2023, the Company completed three separate registered direct offerings (the “Offerings”)
priced at-market under NASDAQ rules with H.C. Wainwright & Co., LLC acting as the exclusive placement agent for each transaction
(the “Agent”). In connection with the Offerings, the Company paid the Agent a transaction fee equal to
| Offering Date | Gross Proceeds | Net Proceeds | Warrants Issued | Warrant Strike Price | Warrant Term | |||||||||||||||||||
| Registered direct offering 1 | $ | $ | $ | |||||||||||||||||||||
| Registered direct offering 2 | $ | $ | $ | |||||||||||||||||||||
| Registered direct offering 3 | $ | $ | $ | |||||||||||||||||||||
As
of June 30, 2023, the Wainwright Warrants were assessed to have a fair value of approximately $
The Company utilized a Black-Scholes Option Pricing Model to determine the fair value of the Wainwright Warrants. The Black-Scholes model requires management to make a number of key assumptions, including expected volatility, expected term, and risk-free interest rate. The risk-free interest rate is estimated using the rate of return on U.S. treasury notes with a life that approximates the expected term. The expected term assumption used in the Black-Scholes model represents the period of time that the Wainwright Warrants are expected to be outstanding and is estimated using the contractual term of the Wainwright Warrants. As of June 30, 2023, the Wainwright Warrants had no intrinsic value.
Stock Purchase Commitment Agreement
During
the six months ended June 30, 2023, the Company issued shares of the Company’s Class A common stock, with a fair value
of $
On January 12, 2021, in connection with its initial public offering, Motorsport Games established the Motorsport Games Inc. 2021 Equity Incentive Plan (the “MSGM 2021 Stock Plan”). The MSGM 2021 Stock Plan provides for the grant of options, stock appreciation rights, restricted stock awards, performance share awards and restricted stock unit awards, and initially authorized shares of Class A common stock to be available for issuance. As of June 30, 2023, 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.
| 20 |
Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The majority of the options issued under the MSGM 2021 Stock Plan have time-based vesting schedules, typically vesting ratably over a three-year period. Certain stock option awards differed from this vesting schedule, notably awards made to the Company’s former Chief Executive Officer in conjunction with the Company’s initial public offering that vested immediately, as well as those made to the Company’s current and former directors that vest on the one-year anniversary of award issuance. All stock options issued under the MSGM 2021 Stock Plan expire years from the grant date.
| Number of Options | ||||
| Awards outstanding under the MSGM 2021 Stock Plan as of January 1, 2023 (net of forfeitures) | ||||
| Stock options awarded to Board of Directors under the MSGM 2021 Stock Plan | ||||
| Forfeited, cancelled or expired | ( | ) | ||
| Awards outstanding under the MSGM 2021 Stock Plan as of June 30, 2023 (net of forfeitures) | ||||
On April 4, 2023, the Company granted an aggregate of stock option awards under the MSGM 2021 Stock Plan to its directors with a grant date fair value of approximately $ million, which will fully vest on the one-year anniversary of the award issuance date. Additionally, on June 9, 2023, the Company granted restricted shares of Class A Common Stock outside of the MSGM 2021 Stock Plan, with a grant fair value of approximately $, to a consultant pursuant to a consultancy agreement entered into in February 2023. These restricted shares of Class A Common Stock will fully vest on the one-year anniversary of the date of the consultancy agreement.
Stock-Based Compensation
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| General and Administrative | $ | $ | $ | $ | ||||||||||||
| Sales and Marketing | ( | ) | ||||||||||||||
| Development | ||||||||||||||||
| Stock-based compensation expense | $ | $ | $ | $ | ||||||||||||
As of June 30, 2023, there was approximately $million of unrecognized stock-based compensation expense which will be recognized over approximately years.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 9 – COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in various routine legal proceedings incidental to the ordinary course of its business. The Company believes that the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and/or cash flows, except as otherwise disclosed below. In light of the uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed and the level of the Company’s income for that particular period. Litigation or other legal proceedings, with or without merit, is unpredictable and generally expensive and time consuming and, even if resolved in our favor, is likely to divert significant resources from our core business, including distracting our management personnel from their normal responsibilities.
Certain conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss to the Company, but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s condensed consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material, would be disclosed.
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.
On February 11, 2021, HC2 Holdings 2 Inc. (now known as Innovate 2) and Continental General Insurance Company (“Continental”), former minority stockholders of 704Games, filed a complaint (the “HC2 and Continental Complaint”) in the U.S. District Court for the District of Delaware against the Company, the Company’s former Chief Executive Officer and Executive Chairman, the Company’s former Chief Financial Officer, and the manager of Motorsport Network. 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.
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
On
January 11, 2023, in connection with the HC2 and Continental Complaint, the Company, along with other defendants, entered into a settlement
agreement with one of the plaintiffs, Continental, to settle the claims made by Continental against the defendants and the claims made
by the defendants against Continental. Under the terms of the settlement agreement, the Company was obligated to pay the sum of $
On July 28, 2023, Wesco Insurance Company (“Wesco”) filed a complaint in state court in Florida against the Company, as well as the other defendants involved in the litigation related to the HC2 and Continental Complaint (the “Underlying Action”). The Company had previously submitted the Underlying Action for coverage under a management liability policy issued by Hallmark Specialty Insurance Company and an excess policy with Wesco (the “Wesco Policy”). Wesco’s complaint seeks declaratory relief to determine Wesco’s obligations to the defendants under an excess policy of insurance issued to the Company by Wesco for the Underlying Action. Wesco claims that there is no coverage afforded to the defendants for the Underlying Action under the Wesco Policy. The Company disagrees with and disputes Wesco’s position regarding coverage for the Underlying Action under the Wesco Policy and will defend its position.
Commitments
On
January 25, 2021, the Company entered into an amendment (the “Le Mans Amendment”) to the Le Mans Esports Series Ltd
joint venture agreement, which resulted in an increase of the Company’s ownership interest in the Le Mans Esports Series Ltd
joint venture from
Epic License Agreement
On August 11, 2020, the Company entered into a licensing agreement with Epic Games International (“Epic”) for worldwide licensing rights to Epic’s proprietary computer program known as the Unreal Engine 4. Pursuant to the agreement, upon payment of the initial license fee described below, the Company was granted a nonexclusive, non-transferable and terminable license to develop, market and sublicense (under limited circumstances and subject to conditions of the agreement) certain products using the Unreal Engine 4 for its next generation of games.
The Company will pay Epic a license fee royalty payment equal to 5% of product revenue, as defined in the licensing agreement. During the six months ended June 30, 2023, the Company did not pay any royalties to Epic under the agreement. Pursuant to the terms of the agreement, the Company has the right to actively develop new or existing authorized products during a 5-year period ending on August 11, 2025.
Minimum Royalty Guarantees
The
Company is required to make certain minimum royalty guarantee payments to third-party licensors, arising primarily from its NASCAR,
INDYCAR and BTCC licenses, Le Mans Video Gaming License and Le Mans Esports License (collectively the “Video Game
Licenses”). These minimum royalty guarantee payments apply throughout the duration of the Video Game Licenses’
agreements, which expire between fiscal years ending December 31, 2026 and 2032, and give rise to a minimum royalty guarantee
commitment of $
In addition to the minimum royalty guarantee payments, the Company is obligated by the Video Game Licenses’
agreements to spend a minimum amount on relevant marketing activities each year, aggregating to $
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 10 – CONCENTRATIONS
Customer Concentrations
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s revenues for the following periods:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Customer | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Customer B | % | % | % | % | ||||||||||||
| Customer C | % | % | % | % | ||||||||||||
| Customer D | % | % | % | % | ||||||||||||
| Total | % | % | % | % | ||||||||||||
The following table sets forth information as to each customer that accounted for 10% or more of the Company’s trade accounts receivable as of:
| Customer | June 30, 2023 | December 31, 2022 | ||||||
| Customer A | * | % | ||||||
| Customer B | % | % | ||||||
| Customer C | % | % | ||||||
| Customer D | % | % | ||||||
| Total | % | % | ||||||
| * |
A reduction in sales from or loss of these customers, in a significant amount, could have a material adverse effect on the Company’s results of operations and financial condition.
Supplier Concentrations
The following table sets forth information as to each supplier that accounted for 10% or more of the Company’s cost of revenues for the following periods:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| Supplier | 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Supplier A | % | % | % | % | ||||||||||||
| Supplier C | * | % | * | * | ||||||||||||
| Total | % | % | % | % | ||||||||||||
| * |
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Motorsport Games Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 11 – SEGMENT REPORTING
The Company’s principal operating segments coincide with the types of products and services to be sold. The products and services from which revenues are derived are consistent with the reporting structure of the Company’s internal organization. The Company’s two reportable segments for the three months six months ended June 30, 2023 and 2022 were (i) the development and publishing of interactive racing video games, entertainment content and services (the “Gaming segment”); and (ii) the organization and facilitation of esports tournaments, competitions and events for the Company’s licensed racing games as well as on behalf of third-party video game racing series and other video game publishers (the “Esports segment”). The Company’s Chief Operating Decision Maker (“CODM”) has been identified as the Company’s Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon the Company’s management organization structure as of June 30, 2023 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to the reportable segments disclosed. There are no inter-segment revenue transactions and, therefore, revenues are only to external customers. As the Company primarily generates its revenues from customers in the United States, no geographical segments are presented.
Segment operating profit is determined based upon internal performance measures used by the CODM. The Company derives the segment results from its internal management reporting system. The accounting policies the Company uses to derive reportable segment results are the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics, including net revenues, gross profit and operating loss. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. The Company manages certain operating expenses separately at the corporate level and does not allocate such expenses to the segments. Segment income from operations excludes interest income/expense and other income or expenses and income taxes according to how a particular reportable segment’s management is measured. Management does not consider impairment charges, and unallocated costs in measuring the performance of the reportable segments.
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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:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| Gaming | $ | $ | $ | $ | ||||||||||||
| Esports | ||||||||||||||||
| Total Revenues | $ | $ | $ | $ | ||||||||||||
| Cost of Revenues: | ||||||||||||||||
| Gaming | $ | $ | $ | $ | ||||||||||||
| Esports | ||||||||||||||||
| Total Cost of Revenues | $ | $ | $ | $ | ||||||||||||
| Gross Profit (Loss): | ||||||||||||||||
| Gaming | $ | $ | $ | $ | ||||||||||||
| Esports | ( | ) | ( | ) | ( | ) | ||||||||||
| Total Gross Profit | $ | $ | $ | $ | ||||||||||||
| Loss From Operations: | ||||||||||||||||
| Gaming | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Esports | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Loss From Operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Depreciation and Amortization: | ||||||||||||||||
| Gaming | $ | $ | $ | $ | ||||||||||||
| Esports | ||||||||||||||||
| Total Depreciation and Amortization | $ | $ | $ | $ | ||||||||||||
| Interest Expense, net: | ||||||||||||||||
| Gaming | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Esports | ||||||||||||||||
| Total Interest Expense, net | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Other Income (Expense), net: | ||||||||||||||||
| Gaming | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Esports | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other Income (Expense), net | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Net Loss: | ||||||||||||||||
| Gaming | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Esports | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| June 30, 2023 | December 31, 2022 | |||||||
| Total Assets: | ||||||||
| Gaming | $ | $ | ||||||
| Esports | ||||||||
| Total Assets | $ | $ | ||||||
NOTE 12 - SUBSEQUENT EVENTS
The Company evaluates subsequent events and transactions that occur after the balance sheet date up to the date that the unaudited consolidated financial statements were issued.
On July 28, 2023, Wesco filed a complaint in state court in Florida against the Company, as well as the other defendants involved in the litigation related to the HC2 and Continental Complaint. Refer to Note 9 – Commitments and Contingencies.
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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, 2022 (the “2022 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 24, 2023 and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Report. Unless the context requires otherwise, references to the “Company,” “Motorsport Games,” “we,” “us” and “our” refer to Motorsport Games Inc., a Delaware corporation.
About Motorsport Games
Motorsport Games is a leading racing game developer, publisher and esports ecosystem provider of official motorsport racing series throughout the world, including NASCAR, the iconic 24 Hours of Le Mans endurance race (“Le Mans”) and the associated FIA World Endurance Championship (the “WEC”), INDYCAR, the British Touring Car Championship (the “BTCC”) and others. Our portfolio is comprised of some of the most prestigious motorsport leagues and events in the world. Further, in 2021 we acquired the KartKraft karting simulation game as well as Studio 397 B.V. (“Studio397”) and their rFactor 2 realistic racing simulator technology and platform, adding both games and their underlying technology to our portfolio.
Started in 2018 as a wholly-owned subsidiary of Motorsport Network, we are currently the official developer and publisher of the NASCAR video game racing franchise and have obtained the official licenses to develop multi-platform games for the BTCC, the 24 Hours of Le Mans race and the WEC, as well as INDYCAR. We develop and publish multi-platform racing video games including for game consoles, personal computers (PCs) and mobile platforms through various retail and digital channels, including full-game and downloadable content. For the three and six months ended June 30, 2023 and 2022, a majority of our revenue was generated from sales of our NASCAR racing video games.
As discussed elsewhere in this Report, due to the uncertainty surrounding the Company’s ability to raise funding, and in light of its liquidity position and anticipated future funding requirements, the Company has decided to explore strategic alternatives and potential options for its business, including, but not limited to, the sale or licensing of certain of the Company’s assets. For example, the Company is currently in discussions with a third-party for the potential sale of the Company’s NASCAR license. There are no assurances that the Company will even be successful in implementing a strategic plan for the sale or licensing of its assets, including the consummation of a sale of the Company’s NASCAR license, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond the Company’s control, such as, among other things, the required consent from NASCAR with respect to any sale of the Company’s NASCAR license. Accordingly, as the Company continues to address its liquidity constraints, it has re-evaluated its product roadmap in the second quarter of 2023 and modified the expected timing and scope of certain new product releases, including the release of any future NASCAR games, which have been put on hold indefinitely. Further, the Company is evaluating its ability to deliver new titles under its other licenses, such as with INDYCAR and the BTCC, which may result in further adjustments to the Company’s product roadmap. See Note 1 – Business Organization, Nature of Operations, and Risks and Uncertainties in our condensed consolidated financial statements and “—Liquidity and Capital Resources” for further information.
As of June 30, 2023, we have a total headcount of 104 people, made up of 102 full-time employees, including 65 dedicated to game development. Our headcount numbers as of June 30, 2023, reflect that we have ceased our development operations in Russia effective September 2022, as a result of the Ukraine-Russia conflict and as such, we do not expect the Company’s development operations to have significant exposure to changes in circumstances arising from the Ukraine-Russia conflict.
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”).
2022 Restructuring Program
On September 8, 2022, the Company announced an organization restructuring (the “2022 Restructuring Program”) designed to reduce the Company’s marketing, general and administrative expenses, improve the Company’s profit and maximize efficiency, cash flow and liquidity. The 2022 Restructuring Program includes right-sizing the organization and operating with more efficient workflows and processes. The primary components of the organizational restructuring involve consolidating certain functions; reducing layers of management, where appropriate, to increase accountability and effectiveness; and streamlining support functions to reflect the new organizational structure. The leaner organizational structure is also expected to improve communication flow and cross-functional collaboration, leveraging the more efficient business processes. In addition, given the ongoing uncertain economic environment and the potential effect that it could have on the Company’s net sales, these actions will also provide the Company with additional flexibility.
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As a result of the 2022 Restructuring Program, the Company initially expected to eliminate approximately 20% of its overhead costs worldwide and deliver approximately $4 million of total annualized cost reductions by the end of 2023, of which $2.5 million was achieved by the end of 2022. As of June 30, 2023, the Company had increased its annualized savings to $4.9 million, while having incurred restructuring costs of approximately $1.3 million to date.
The Company continues to seek to reduce its monthly net cash-burn by reducing its cost base through maintaining and enhancing cost control initiatives, such as those that it expects to achieve through the 2022 Restructuring Program, and is evaluating the structure of its business for additional changes in order to improve both its near-term and long-term liquidity position.
Trends and Factors Affecting Our Business
Product Release Schedule: Our financial results are impacted by the timing of our product releases and the commercial success of those titles. Our recent product releases include:
| Title | Release Date and Platform | |
| NASCAR 21: Ignition | October 28, 2021, available on PC and consoles | |
| NASCAR Heat Ultimate Edition+ | November 19, 2021, available on Nintendo Switch | |
| KartKraft | January 26, 2022, available on PC (full release) | |
| rFactor 2 Q1 2022 Content Update | February 7, 2022, available on PC | |
| rFactor 2 Q2 2022 Content Update | May 10, 2022, available on PC | |
| rFactor 2 Q3 2022 Content Update | August 8, 2022, available on PC | |
| NASCAR 21: Ignition 2022 Season Expansion | October 6, 2022, available on PC and next generation consoles | |
| NASCAR Rivals | October 14, 2022, available on Nintendo Switch | |
| rFactor 2 Q4 2022 Content Update | November 7, 2022, available on PC | |
| rFactor 2 Q1 2023 Content Update | February 21, 2023, available on PC | |
| NASCAR Heat 5 – Next Gen Car Update | June 23, 2023, available on PC and consoles |
We continually evaluate our product release schedule and modify the timing of upcoming products if we believe it will result in a better consumer experience. For example, we recently modified the timing of the upcoming INDYCAR game to 2024, from an original planned release in 2023, and currently anticipate a December 2023 release date for our upcoming Le Mans Ultimate game, which was announced in June 2023.
Further, as discussed above and elsewhere in this Report, due to the uncertainty surrounding the Company’s ability to raise funding, and in light of its liquidity position and anticipated future funding requirements, the Company is currently in discussions with a third-party for the potential sale of the Company’s NASCAR license. There are no assurances that the Company will consummate a sale of the Company’s NASCAR license, which is subject to the satisfaction of conditions beyond the Company’s control, such as, among other things, the required consent from NASCAR. As a result, in the second quarter of 2023, the Company decided that the release of any future NASCAR games will be put on hold indefinitely. Additionally, the Company is evaluating its ability to deliver new titles under its other licenses, such as with INDYCAR and the BTCC, which may result in further adjustments to the Company’s product roadmap. See Note 1 – Business Organization, Nature of Operations, and Risks and Uncertainties in our condensed consolidated financial statements and “—Liquidity and Capital Resources” for further information.
Hardware Platforms: We derive most of our revenue from the sale of products made for PCs, mobile devices, and video game consoles manufactured by third parties, such as Sony Interactive Entertainment Inc.’s (“Sony”) PlayStation and Microsoft Corporation’s (“Microsoft”) Xbox consoles. The success of our business is dependent upon consumer acceptance of video game console/PC platforms and continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those released by Sony and Microsoft in November 2020, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The latest generation of Sony and Microsoft consoles provide “backwards compatibility” (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products.
Concentration of Sales: Our NASCAR products have historically accounted for the majority of our revenue. However, we have worked to diversify our product offerings and revenue from other sources by introducing titles such as KartKraft, rFactor 2 and the 24 Hours of Le Mans Virtual esports event to our portfolio of product offerings and thereby reducing our dependency on the NASCAR franchise as our substantially sole source of revenue. For example, revenues associated with our NASCAR franchise accounted for approximately 67.5% and 61.1% of our total revenue for the six months ended June 30, 2023 and 2022, respectively.
Retail Distribution: Our physical gaming products are sold through a distribution network with an exclusive partner who specializes in the distribution of games through mass-market retailers (e.g., Target, Wal-Mart), consumer electronics stores (e.g., Best Buy), discount warehouses, game specialty stores (e.g., GameStop) and other online retail stores (e.g., Amazon). Due to our modified product release schedule, we did not recognize significant revenue from sales of physical gaming products during the six months ended June 30, 2023. We expect to continue to use a limited number of distribution partners in the future for sales of our physical gaming products and as such, concentration risk remains a relevant factor for the Company. 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 2022 Form 10-K for additional information regarding the importance of retail sales and our distribution partners to our business.
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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 six months ended June 30, 2023, and 2022, approximately 84.2% and 67.0%, 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. 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. The first quarter of 2023 was another successful quarter for our Esports segment, with the grand finale of the Le Mans Virtual Series 2022/23, the 24 Hours of Le Mans Virtual, in January and the return of the popular community rFactor 2 competition ‘GT Challenge’. Our dedicated esports events had a cumulative total of approximately 8.8 million video views with approximately 27 million minutes watched for the three months ended June 30, 2023.
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.
Components of Our Results of Operations
Revenues
We have historically derived substantially all of our revenue from sales of our games and related extra content that can be played by customers on a variety of platforms, including game consoles, mobile phones, PCs and tablets. Starting in 2019, we began generating sponsorship revenues from our production of live and virtual esports events. In early 2022, we also began offering software development services for racing simulators.
Our product and service offerings included within the Gaming segment primarily include, but are not limited to, full PC, console, and mobile games with both online and offline functionality, which generally include:
| ● | the initial game delivered digitally or via physical disk at the time of sale, which also typically provides access to offline core game content; | |
| ● | updates to previously released games on a when-and-if-available basis, such as software patches or updates, and/or additional content to be delivered in the future, both paid and free; and | |
| ● | outsourced code and content development services. |
Our product and service offerings included within the Esports segment relate primarily to curating esports events.
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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. Furthermore, cost of revenues for our Gaming segment includes costs associated with our outsourced code and content development services. 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