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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the quarterly period ended June 30, 2022
     
    or
     
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
     
    For the transition period from ___________ to ___________

 

Commission file number: 001-39868

 

Motorsport Games Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware   86-1791356

State or Other Jurisdiction of

Incorporation or Organization

 

I.R.S. Employer

Identification No.

     

5972 NE 4th Avenue

Miami, FL

  33137
Address of Principal Executive Offices   Zip Code

 

Registrant’s Telephone Number, Including Area Code: (305) 507-8799

 

Not Applicable

 

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Class A common stock, $0.0001 par value per share   MSGM  

The Nasdaq Stock Market LLC

(The Nasdaq Capital Market)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of August 9, 2022, the registrant had 11,673,587 shares of Class A common stock and 7,000,000 shares of Class B common stock outstanding.

 

 

 

 
 

 

Motorsport Games Inc.

Form 10-Q

For the Quarter Ended June 30, 2022

 

TABLE OF CONTENTS

 

    Page
Part I. FINANCIAL INFORMATION 1
Item 1. Condensed Consolidated Financial Statements (Unaudited) 1
  Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (Unaudited) 1
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited) 2
  Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited) 3
  Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited) 4
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (Unaudited) 5
  Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
Item 4. Controls and Procedures 35
     
Part II. OTHER INFORMATION 36
Item 1. Legal Proceedings 36
Item 1A. Risk Factors 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 5. Other Information 37
Item 6. Exhibits 38
Signatures 39

 

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 statements we make relating to:

 

  our future business, results of operations, financial condition and/or liquidity, including with respect to the ongoing effects of Russia’s invasion of Ukraine, as well as the coronavirus (“COVID-19”) pandemic;
     
  new or planned products or offerings, including the anticipated timing of our new product launches under our updated product roadmap, such as our expectation that our next NASCAR title for 2022 will be an update to our 2021 release and our anticipated release of INDYCAR, British Touring Car Championship and Le Mans games in 2023 and 2024;
     
  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 expectations that the COVID-19 pandemic will not have a material impact on our future business and operations;

     
  our intention to expand our license arrangements to other internationally recognized racing series and the platforms we operate on;
     
  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 liquidity and capital requirements, including, without limitation, as to our ability to continue as a going concern, our belief that our existing cash on hand, together with borrowing availability under the $12 million Line of Credit, will not be sufficient to fund our operations for at least the next 12 months, our belief that it will be necessary for us to secure additional funds, whether through a variety of equity and/or debt financing arrangements or implementing cost reductions through cost control initiatives, to continue our existing business operations and to fund our obligations, our expectation to generate additional liquidity through consummating one or more potential equity and/or debt financings, achieving cost reductions by maintaining and enhancing cost control initiatives, and/or adjusting our product roadmap to reduce near term need for working capital, and our belief that we have access to capital resources, as well as statements regarding our cash flows and anticipated uses of cash, as well as our belief that additional funding in the form of potential equity and/or debt financing arrangements are viable options to support our future liquidity needs, provided that such opportunities can be obtained on terms that are commercially competitive and on terms acceptable to us;
     
  our expectations that we will continue to incur losses for the foreseeable future as we continue to incur significant expenses;
     
  our expectations relating to future impairment of intangible assets;
     
  our plans and intentions with respect to our remediation efforts to address the material weaknesses in our internal control over financial reporting;

 

ii
 

 

  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, but 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 ability to utilize net operating loss carryforwards; and
     
  our expectations regarding the future impact of implementing management strategies, potential acquisitions and industry trends.

 

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, 2021 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, as well as any ability to achieve cost reductions; 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 environment; the unavailability of funds from anticipated borrowing sources; the unavailability of funds from our inability to reduce or control costs; 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; 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 volatility in the financial markets, whether attributable to COVID-19, Russia’s invasion of Ukraine or otherwise; significantly higher rates of inflation, significantly higher interest rates and higher labor costs; 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 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 in using its product development personnel in Russia due to Russia’s invasion of Ukraine and the related sanctions and/or more restrictive sanctions rendering transacting in the region more difficult or costly 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 Russia’s invasion of Ukraine;

 

iii
 

 

  (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;
     
  (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; and/or
     
  (xv) difficulties and/or delays adversely impacting our ability to regain compliance with the listing requirements of The Nasdaq Stock Market LLC (“NASDAQ”).

 

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.

 

iv
 

 

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MOTORSPORT GAMES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

   June 30, 2022   December 31, 2021 
         
Assets          
           
Current assets:          
Cash and cash equivalents  $5,223,051   $17,819,640 
Accounts receivable, net of allowances of $3,596,634 and $4,563,884, at June 30, 2022 and December 31, 2021, respectively   1,472,430    5,490,272 
Due from related parties   35,498    137,574 
Prepaid expenses and other current assets   1,711,783    1,175,354 
Total Current Assets   8,442,762    24,622,840 
Property and equipment, net   723,776    727,089 
Operating lease right of use assets   1,567,838    - 
Goodwill   -    4,867,465 
Intangible assets, net   14,261,175    20,485,809 
Total Assets  $24,995,551   $50,703,203 
           
Liabilities and Stockholders’ Equity          
           
Current liabilities:          
Accounts payable  $314,324   $1,784,645 
Accrued expenses and other liabilities   1,956,759    3,524,271 
Due to related parties   37,049    119,015 
Purchase commitments   2,582,122    3,170,319 
Operating lease liabilities (current)   391,113    - 
Total Current Liabilities   5,281,367    8,598,250 
Operating lease liabilities (non-current)   1,179,315    - 
Other non-current liabilities   3,521,390    4,122,950 
Total Liabilities   9,982,072    12,721,200 
           
Commitments and contingencies (Note 11)   -      
           
Stockholders’ Equity:          
           
Preferred stock, $0.0001 par value; authorized 1,000,000 shares; none issued and outstanding as of June 30, 2022 and December 31, 2021, respectively   -    - 
Class A common stock - $0.0001 par value; authorized 100,000,000 shares; 11,673,587 and 11,635,897 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively   1,168    1,164 
Class B common stock - $0.0001 par value; authorized 7,000,000 shares;7,000,000 shares issued and outstanding as of June 30, 2022, and December 31, 2021   700    700 
Additional paid-in capital   76,242,774    75,651,175 
Accumulated deficit   (60,531,239)   (37,988,326)
Accumulated other comprehensive loss   (933,644)   (945,375)
Total Stockholders’ Equity Attributable to Motorsport Games Inc.   14,779,759    36,719,338 
Non-controlling interest   233,720    1,262,665 
Total Stockholders’ Equity   15,013,479    37,982,003 
Total Liabilities and Stockholders’ Equity  $24,995,551   $50,703,203 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

1
 

 

MOTORSPORT GAMES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   2022   2021   2022   2021 
   Three Months Ended
June 30,
  

Six Months Ended

June 30,

 
   2022   2021   2022   2021 
Revenues  $2,008,987   $2,238,927   $5,330,776   $4,713,059 
Cost of revenues [1]   856,157    906,303    2,869,963    1,688,111 
Gross profit   1,152,830    1,332,624    2,460,813    3,024,948 
                     
Operating expenses:                    
Sales and marketing   1,540,220    704,222    3,228,669    1,728,440 
Development [2]   2,681,643    1,818,178    5,085,980    3,068,540 
General and administrative [3]   3,349,609    4,717,180    6,772,763    19,481,218 
Impairment of goodwill   -    -    4,788,268    - 
Impairment of intangible assets   149,048    -    4,640,102    - 
Depreciation and amortization   117,725    66,448    233,796    97,223 
Total operating expenses   7,838,245    7,306,028    24,749,578    24,375,421 
Loss from operations   (6,685,415)   (5,973,404)   (22,288,765)   (21,350,473)
Interest expense [4]   (191,662)   (31,899)   (393,258)   (151,438)
Gain attributable to equity method investment   -    -    -    1,370,837 
Other (expense) income, net   (610,594)   44,360    (772,693)   84,707 
Net loss   (7,487,671)   (5,960,943)   (23,454,716)   (20,046,367)
Less: Net loss attributable to non-controlling interest   (82,375)   (180,849)   (911,803)   (454,299)
Net loss attributable to Motorsport Games Inc.  $(7,405,296)  $(5,780,094)  $(22,542,913)  $(19,592,068)
                     
Net loss attributable to Class A common stock per share:                    
Basic and diluted  $(0.63)  $(0.50)  $(1.93)  $(1.88)
                     
Weighted-average shares of Class A common stock outstanding:                    
Basic and diluted   11,673,587    11,494,919    11,670,888    10,421,910 

 

[1] Includes related party costs of $0 and $0 for the three months ended June 30, 2022 and 2021, respectively, and $6,228 and $0 for the six months ended June 30, 2022 and 2021, respectively.
[2] Includes related party expenses of $824 and $10,882 for the three months ended June 30, 2022 and 2021, respectively, and $23,430 and $11,459 for the six months ended June 30, 2022 and 2021, respectively.
[3] Includes related party expenses of $75,451 and $134,284 for the three months ended June 30, 2022 and 2021, respectively, and $98,337 and $1,570,518 for the six months ended June 30, 2022 and 2021, respectively.
[4] Includes related party expenses of $0 and $0 for the three months ended June 30, 2022 and 2021, respectively, and $0 and $105,845 for the six months ended June 30, 2022 and 2021, respectively.

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

2
 

 

MOTORSPORT GAMES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

 

    2022     2021     2022     2021  
    Three Months Ended
June 30,
   

For the Six Months Ended

June 30,

 
    2022     2021     2022     2021  
Net loss   $ (7,487,671)     $ (5,960,943 )     (23,454,716)       (20,046,367 )
Other comprehensive income (loss):                                
Foreign currency translation adjustments     136,976       (70,809 )     11,731       (103,723 )
Comprehensive loss     (7,350,695)       (6,031,752 )     (23,442,985)       (20,150,090 )
Comprehensive loss attributable to non-controlling interests     (140,224)       (180,849 )     (1,028,945)       (454,299 )
Comprehensive loss attributable to Motorsport Games Inc.   $ (7,210,471)     $ (5,850,903 )     (22,414,040)       (19,695,791 )

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3
 

 

MOTORSPORT GAMES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

 

                                         
   For the Three and Six Months Ended June 30, 2022 
  

Class A

Common Stock

  

Class B

Common Stock

  

Additional

Paid-In

   Accumulated  

Accumulated

Other

Comprehensive

Income

  

Total

Stockholders’

Equity /

Member’s

Equity

Attributable

to Motorsport

   Non-controlling  

Total

Stockholders’

Equity /

Member’s

 
   Shares   Amount   Shares   Amount   Capital   Deficit   (Loss)   Games Inc.   Interest   Equity 
                                         
Balance - January 1, 2022   11,635,897   $1,164    7,000,000   $700  - $75,651,175   $(37,988,326)  $(945,375)  $    36,719,338   $1,262,665   $    37,982,003 
Stock-based compensation   37,690    4    -    - -   353,026    -    -    353,030    -    353,030 
Other comprehensive loss   -    -    -    -  -  -         (125,245)   (125,245)   (59,293)   (184,538)
Net loss   -    -    -    -  -  -    (15,137,617)   -    (15,137,617)   (829,428)   (15,967,045)
Balance - March 31, 2022   11,673,587    1,168    7,000,000    700  -  76,004,201    (53,125,943)   (1,070,620)   21,809,506    373,944    22,183,450 
Stock-based compensation   -    -    -    -  -  238,573              238,573    -    238,573 
Other comprehensive income (loss)   -    -    -    -  -  -         136,976    136,976    (57,849)   79,127 
Net loss   -    -    -    -  -  -    (7,405,296)        (7,405,296)   (82,375)   (7,487,671)
Balance - June 30, 2022   11,673,587   $1,168    7,000,000   $700  - $76,242,774   $(60,531,239)  $(933,644)  $14,779,759   $233,720   $15,013,479 

 

   Shares   Amount   Shares   Amount   Equity   Capital   Deficit   Income (Loss)   Games Inc.   Interest   Equity 
   For the Three and Six Months Ended June 30, 2021 
                               Accumulated  

Total

Stockholders’

Equity /

Member’s

Equity

      

Total

Stockholders’

 
   Class A   Class B       Additional       Other   Attributable   Non-   Equity / 
   Common Stock   Common Stock   Member’s   Paid-In   Accumulated   Comprehensive   to Motorsport   controlling   Member’s 
   Shares   Amount   Shares   Amount   Equity   Capital   Deficit   Income (Loss)   Games Inc.   Interest   Equity 
                                             
Balance - January 1, 2021   -   $-    -   $-   $3,791,674   $-   $(4,826,335)  $4,928   $     (1,029,733)  $2,645,559   $      1,615,826 
Conversion of membership interests into shares of common stock   7,000,000    700    7,000,000    700    (3,791,674)   3,790,274    -    -    -    -    - 
Issuance of common stock in initial public offering, net [1]   3,450,000    345    -    -    -    63,073,783    -    -    63,074,128    -    63,074,128 
Stock-based compensation   330,633    33    -    -    -    9,076,883    -    -    9,076,916    -    9,076,916 
Purchase of additional interest in Le Mans Esports Series Ltd.   -    -    -    -    -    -    -    -    -    1,584,892    1,584,892 
Comprehensive loss:                                           -           
Other comprehensive loss   -    -    -    -    -    -    -    (32,914)   (32,914)   -    (32,914)
Net loss   -    -    -    -    -    -    (13,811,974)   -    (13,811,974)   (273,450)   (14,085,424)
Balance - March 31, 2021   10,780,633   $1,078    7,000,000   $700   $-   $75,940,940   $(18,638,309)  $(27,986)  $57,276,423   $3,957,001   $61,233,424 
Issuance of common stock to 704Games former minority shareholders   855,264    86    -    -    -    -    -    -    86    -    86 
Purchase of 704Games minority interest   -    -    -    -    -    (939,511)   -    -    (939,511)   (2,659,786)   (3,599,297)
ACO Investment in Le Mans Esports Series Ltd.   -    -    -    -    -    -    -    -    -    234,754    234,754 
Stock-based compensation   -    -    -    -    -    116,274    -    -    116,274    -    116,274 
Comprehensive loss:                                                       
Other comprehensive loss   -    -    -    -    -    -    -    (70,809)   (70,809)   -    (70,809)
Net loss   -    -    -    -    -    -    (5,780,094)   -    (5,780,094)   (180,849)   (5,960,943)
Balance - June 30, 2021   11,635,897   $1,164    7,000,000   $700   $-   $75,117,703   $(24,418,403)  $(98,795)  $50,602,369   $1,351,120   $51,953,489 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4
 

 

MOTORSPORT GAMES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   2022   2021 
   For the Six Months Ended 
   June 30, 
   2022   2021 
         
Cash flows from operating activities:          
Net Loss  $(23,454,716)   (20,046,367)
Adjustments to reconcile net loss to net cash used in operating activities:          
Impairment of intangible assets   4,640,102    - 
Impairment of goodwill   4,788,268    - 
Depreciation and amortization   1,071,172    659,309 
Non-Cash lease expense   196,938    - 
Stock-based compensation   591,603    9,193,190 
Gain on equity method investment   -    (1,370,837)
Sales return and price protection reserves   1,098,397    199,940 
(Increase) decrease in assets and increase (decrease) in liabilities, net of acquisitions and the effect of consolidation of equity affiliates:          
Account receivables   2,877,935    2,149,685 
Operating lease liabilities   (194,117)   - 
Prepaid expenses and other assets   (572,926)   (751,480)
Other assets   -    25,000 
Accounts payable   (1,455,211)   (579,061)
Other non-current liabilities   (475,927)   60,946 
Accrued expenses   (1,160,816)   (804,871)
Net cash used in operating activities   (12,049,298)   (11,264,546)
           
Cash flows from investing activities:          
Acquisition of Le Mans, net of cash acquired   -    153,250 
Acquisition of Motorsport Games Australia   -    (1,000,000)
Acquisition of Studio 397   -    (12,785,463)
Purchase commitment liability   -    (27,928)
Purchase of property and equipment   (196,346)   (348,033)
Net cash used in investing activities   (196,346)   (14,008,174)
           
Cash flows from financing activities:          
Advances from related parties   143,517    1,868,312 
Repayments on advances from related parties   (24,913)   (12,663,168)
Repayments of purchase commitment liabilities   (1,000,000)   - 
Purchase of non-controlling interest   -    (3,599,211)
Contributed capital from non-controlling shareholders   -    234,754 
Payment of license liabilities   (100,000)   - 
Proceeds from issuance of Class A common stock sold in initial public offering, net of underwriting costs   -    63,661,128 
Net cash (used in) provided by financing activities   (981,396)   49,501,815 
           
Effect of exchange rate changes on cash   630,451    83,577 
           
Net increase (decrease) in cash   (12,596,589)   24,312,672 
           
Cash at beginning of period   17,819,640    3,990,532 
Cash at end of period  $5,223,051    28,303,204 
           
Supplemental Disclosure of Cash Flow Information          
Cash paid during the period for:          
Interest  $-   $804,674 
           
Non-cash investing and financing activities:          
Shares issued to 704Games former minority shareholders  $-   $86 
Purchase commitment liability  $29,681   $3,126,314 
Reduction of additional paid-in capital for purchased 704Games minority shares  $-   $939,511 
Reduction of additional paid-in capital for initial public offering issuance costs that were previously paid  $-   $587,000 
Purchase of additional interest in Le Mans Esports Series Ltd.  $-   $1,584,892 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 1 - BUSINESS ORGANIZATION, NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES AND BASIS OF PRESENTATION

 

Organization and Operations

 

Motorsport Gaming US LLC (“Motorsport Gaming”) was established as a limited liability company on August 2, 2018 under the laws of the State of Florida. On January 8, 2021, Motorsport Gaming converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Motorsport Games Inc. (“Motorsport Games” or the “Company”). Upon effecting the corporate conversion on January 8, 2021, Motorsport Games now holds all the property and assets of Motorsport Gaming, and all of the debts and obligations of Motorsport Gaming were assumed by Motorsport Games by operation of law upon such corporate conversion.

 

Risks and Uncertainties

 

COVID-19 Pandemic

 

The lingering impact of COVID-19 has continued to create significant volatility throughout the global economy, such as supply chain disruptions, limited labor supplies, higher inflation, and recession, which in turn has caused constraints on consumer spending. More recently, new variants of COVID-19, such as the Omicron variant and its subvariants, that are significantly more contagious than previous strains, have emerged. Further, the effectiveness of approved vaccines on these new strains remains uncertain. The spread of these new strains initially caused many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19 and its variants. However, while many of these restrictions have been lifted, uncertainty remains as to whether additional restrictions may be initiated or again reimplemented in response to surges in COVID-19 cases.

 

Although the Company does not currently expect the COVID-19 pandemic to have a material impact on its future business and operations, the Company continues to monitor the evolving situation caused by the COVID-19 pandemic, and the Company may take further actions required by governmental authorities or that the Company determines are prudent to support the well-being of the Company’s employees, suppliers, business partners and others. The degree to which the ongoing and prolonged COVID-19 pandemic impacts the Company’s operations, business, financial results, liquidity, and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic; its severity; the emergence and severity of its variants; the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential hesitancy to utilize them; the effect on discretionary spending by consumers; and how quickly and to what extent normal economic and operating conditions can resume.

 

6
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In management’s opinion, such statements include all adjustments (consisting only of normal recurring items) which are considered necessary for a fair presentation of the Company’s unaudited condensed consolidated financial statements as of June 30, 2022 and for the three and six months ended June 30, 2022. The Company’s results of operations for the three and six months ended June 30, 2022 are not necessarily indicative of the operating results for the full year ending December 31, 2022 or any other period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related disclosures as of December 31, 2021 and 2020 and for the years then ended which are included in the 2021 Form 10-K.

 

Liquidity and Going Concern

 

On January 15, 2021, the Company completed its initial public offering which resulted in net proceeds to the Company of approximately $63.1 million, after deducting underwriting discounts and commissions and offering expenses paid by the Company.

 

For the six months ended June 30, 2022, the Company had a net loss of approximately $23.5 million, negative cash flows from operations of approximately $12.0 million and an accumulated deficit of $60.5 million. It is expected that the Company will continue to incur operating expenses and, as a result, the Company will need to continue to grow revenues to reach profitability and positive cash flows. We expect to continue to incur losses for the foreseeable future as we continue to develop our product portfolio and invest in developing new video game titles.

 

In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that these condensed consolidated financial statements are issued.

 

Our future liquidity and capital requirements include funds to support the planned costs to operate our business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures. The adequacy of our available funds generally depends on many factors, including our ability to successfully develop consumer-preferred new products or enhancements to our existing products, continued development and expansion of our esports platform and our ability to enter into collaborations with other companies and/or acquire other companies or technologies to enhance or complement our product and service offerings.

 

We continue to explore additional funding in the form of potential equity and/or debt financing arrangements and consider these to be viable options to support future liquidity needs, provided that such opportunities can be obtained on terms that are commercially competitive and on terms acceptable to the Company. We are also seeking to improve our liquidity by achieving cost reductions by maintaining and enhancing cost control initiatives.

 

As we continue to evaluate incremental funding solutions, we have reevaluated our product roadmap in the first quarter of 2022 and modified the expected timing and scope of certain new product releases. These changes have been made not only to maintain the development of high-quality video game titles, but also to improve the timing of certain working capital requirements and reduce expenditures, thereby decreasing our expected future cash-burn and improve our short-term liquidity needs. If needed, further adjustments could be made that would decrease short-term working capital requirements, while pushing out the timing of expected revenues.

 

We expect to generate additional liquidity through consummating one or more potential equity and/or debt financings, achieving cost reductions by maintaining and enhancing cost control initiatives, and/or further adjusting our product roadmap to reduce near term need for working capital. If we are unable to generate adequate revenue and profit growth, there can be no assurances that such actions will provide us with sufficient liquidity to meet our cash requirements as, among other things, our liquidity can be impacted by a number of factors, including our level of sales, costs and expenditures, as well as accounts receivable and sales allowances.

 

There can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all, to satisfy our future needed liquidity and capital resources. If we are unable to obtain adequate funds on acceptable terms, we may be required to, among other things, significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms.

 

If we are unable to satisfy our cash requirements from the sources identified above, we could be required to adopt one or more of the following alternatives:

 

  selling assets or operations;
  seeking additional capital contributions and/or loans from Motorsport Network, the Company’s other affiliates and/or third parties; and/or
  reducing other discretionary spending.

 

7
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

There can be no assurance that we would be able to take any of the actions referred to above because of a variety of commercial or market factors, including, without limitation, market conditions being unfavorable for an equity or debt issuance, additional capital contributions and/or loans not being available from Motorsport Network or affiliates and/or third parties, or that the transactions may not be permitted under the terms of our various debt instruments then in effect, such as due to restrictions on the incurrence of debt, incurrence of liens, asset dispositions and related party transactions. In addition, such actions, if taken, may not enable us to satisfy our cash requirements if the actions that we are able to consummate do not generate a sufficient amount of additional capital.

 

Even if we do secure additional financing, if our anticipated level of revenues are not achieved because of, for example, less than anticipated consumer acceptance of our offering of products and events; less than effective marketing and promotion campaigns, decreased consumer spending in response to weak economic conditions or weakness in the overall electronic games category; adverse changes in currency; decreased sales of our products and events as a result of increased competitive activities by our competitors; changes in consumer purchasing habits; 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 advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, our liquidity may continue to be insufficient to satisfy our future capital requirements.

 

The factors described above, in particular the available cash on hand to fund operations over the next year, have raised substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the condensed consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business. However, substantial doubt about the Company’s ability to continue as a going concern exists.

 

Recently Issued Accounting Standards

 

As an emerging growth company (“EGC”), the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act until such time as the Company is no longer considered to be an EGC. The adoption dates discussed below reflect this election.

 

In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses” (“ASU 2019-11”). ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” The amendments update guidance on reporting credit losses for financial assets. These amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in ASU 2019-11 are effective for annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years. All entities may adopt the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). The Company is currently evaluating the impact of this standard on its consolidated financial statements and disclosures. 

 

Adoption of Accounting Pronouncements

 

On January 1, 2022, the Company adopted Accounting Standard Update (“ASU”) 2016-02, Leases (Topic 842) (“ASC 842”) using the modified retrospective approach and elected the optional transition method, which allows entities to initially apply the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Upon adoption, the Company applied the guidance to all existing leases.

 

For leases with a term greater than 12 months, the new guidance requires the lease rights and obligations arising from the leasing arrangements, including operating leases, to be recognized as assets and liabilities on the balance sheet. Upon adoption of ASC 842, the Company recognized approximately $751,000 of operating lease assets and operating lease liabilities primarily related to real estate, which were presented in the condensed consolidated balance sheet as operating lease right-of-use assets, operating lease liabilities, current and operating lease liabilities, non-current. There was no cumulative effect of applying the new standard and accordingly there was no adjustment to retained earnings on adoption. The comparative information presented has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company opted to apply the optional package of practical expedients permitted under ASC 842, which eliminated the requirement to reassess prior conclusions regarding lease identification, classification and initial direct costs.

 

The adoption of ASC 842 did not have a material impact on the Company’s condensed consolidated statements of operations and comprehensive loss or condensed consolidated statements of cash flows.

 

On January 1, 2022, the Company adopted ASU 2020-01, Investments—Equity Securities (“Topic 321”), Investments—Equity Method and Joint Ventures (“Topic 323”), and Derivatives and Hedging (“Topic 815”)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the Emerging Issues Task Force) (“ASU 2020-01”). The amendments in this ASU clarify certain interactions between the guidance to account for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative or a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with Topic 825, Financial Instruments. The adoption of ASU 2020-01 did not have a material impact on the Company’s condensed consolidated financial statements.

 

On January 1, 2022, the Company adopted ASU 2019 -12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC 740. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC 740 by clarifying and amending existing guidance. The adoption of ASU 2019-12 did not have a material impact on the Company’s condensed consolidated financial statements.

 

8
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

There have been no material changes to the significant accounting policies included in the audited consolidated financial statements included in the 2021 Form 10-K, except as disclosed in this note.

 

Revenue Recognition

 

The Company recognizes revenue under ASC 606, Revenue from Contracts with Customers (“ASC 606”). The Company determines revenue recognition through the following steps:

 

  Identification of a contract with a customer;
  Identification of the performance obligations in the contract;
  Determination of the transaction price;
  Allocation of the transaction price to the performance obligations in the contract; and
  Recognition of revenue when or as the performance obligations are satisfied.

 

The Company currently derives revenue principally from sales of its games and related extra content that can be played by customers on a variety of platforms, which include game consoles, PCs, mobile phones and tablets. The Company’s product and service offerings include the following:

 

  1) Sales of Games – Full console, PC and mobile games contain a software license that is delivered digitally or via physical disk at the time of sale;
     
  2) Sales of Extra Content – Includes (a) extra content that is downloaded by console and PC players that provides the ability to customize and/or enhance their gameplay and (b) virtual currencies that provide mobile players with the ability to purchase extra content that allows them to customize and/or enhance their gameplay; and
     
  3) Esports Competition Events – Hosting of online esports competitions that generate sponsorship revenue.

 

Sales of Games. Sales of games are generally determined to have a singular distinct performance obligation, as the Company does not have an obligation to provide future update rights or online hosting. As a result, the Company recognizes revenue equal to the full transaction price, less any applicable reserves, at the point in time the customer obtains control of the software license and the Company satisfies its performance obligation.

 

Sales of Extra Content. Revenue recognized from sales of extra content is derived primarily from the sale of digital in-game content that is downloaded by the Company’s console, PC and mobile customers that enhance their gameplay experience, typically by providing car upgrades, additional drivers and/or allows them to customize their gameplay. In-game credit, and other downloadable content, may only be used for in-game purchases and/or customizing the gameplay. Revenue related to extra content is recognized at the point in time the Company satisfies its performance obligation, which is generally at the time the customer obtains control of the extra content, either by downloading the digital in-game content or by purchasing the in-game credits. For console and PC customers, extra content is either purchased in a pack or on a standalone basis.

 

Esports. The Company recognizes sponsorship revenue associated with hosting online esports competition events over the period of time the Company satisfies its performance obligation under the contract, which is generally concurrent with the time the event is held. If the Company enters into a contract with a customer to sponsor a series of esports events, the Company allocates the transaction price between the series of events and recognizes revenue over the period of time that each event is held and the Company satisfies its performance obligations.

 

The timing of the Company’s revenue recognition may differ from the timing of payment by its customers. A receivable is recorded when revenue is recognized prior to payment and the Company has an unconditional right to payment. Alternatively, when payment precedes the provision of the related services, the Company records deferred revenue until the Company’s performance obligations are satisfied.

 

9
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Identifying Performance Obligations

 

Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct (i.e., the customer can benefit from the goods or services either on its own or together with other resources that are readily available), and are distinct in the context of the contract (i.e., it is separately identifiable from other goods or services in the contract). To the extent a contract includes multiple promises, the Company must apply judgment to determine whether those promises are separate and distinct performance obligations. If these criteria are not met, the promises are accounted for as a combined performance obligation.

 

Determining the Transaction Price

 

The transaction price is determined based on the consideration that the Company will be entitled to receive in exchange for transferring its goods and services to the customer. Determining the transaction price often requires significant judgment based on an assessment of contractual terms and business practices. It further includes reviewing variable consideration such as discounts, sales returns, price protection, and rebates, which is estimated at the time of the transaction. See below for additional information regarding the Company’s sales returns and price protection reserves.

 

Allocating the Transaction Price

 

Allocating the transaction price requires the Company to determine an estimate of the relative stand-alone selling price for each distinct performance obligation.

 

Principal Versus Agent Considerations

 

The Company evaluates sales to end customers of its full games and related content via third-party storefronts, including digital storefronts such as Microsoft’s Xbox Store, Sony’s PlayStation Store, Nintendo’s eShop, Apple’s App Store, and Google’s Play Store, to determine whether the Company is acting as the principal or agent in the sale to the end customer. Key indicators that the Company evaluates in determining gross versus net treatment include but are not limited to the following:

 

  the underlying contract terms and conditions between the various parties to the transaction;
  which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer;
  which party has inventory risk before the specified good or service has been transferred to the end customer; and
  which party has discretion in establishing the price for the specified good or service.

 

Based on an evaluation of the above indicators, the Company determined that, apart from contracts with customers where revenue is generated via the Apple’s App Store or Google’s Play Store, the third party is considered the principal with the end customer and, as a result, the Company reports revenue net of the fees retained by the storefront. For contracts with customers where revenues are generated via the Apple’s App Store or Google’s Play Store, the Company has determined that it is the principal and, as a result, reports revenues on a gross basis, with mobile platform fees included within cost of revenues.

 

10
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Sales Returns and Price Protection Reserves

 

Sales returns and price protection are considered variable consideration under ASC 606. The Company reduces revenue for estimated future returns and price protection which may occur with distributors and retailers (“channel partners”). See Note 2 – Summary of Significant Accounting Policies – Accounts Receivable in the 2021 Form 10-K for additional details. Price protection represents the Company’s practice to provide channel partners with a credit allowance to lower their wholesale price on a particular game unit that they have not resold to customers. The amount of the price protection for permanent markdowns is the difference between the original wholesale price and the new reduced wholesale price. Credits are also given for short-term promotions that temporarily reduce the wholesale price. When evaluating the adequacy of sales returns and price protection reserves, the Company analyzes the following: historical credit allowances, current sell-through of channel partners’ inventory of the Company’s products, current trends in retail and the video game industry, changes in customer demand, acceptance of products, and other related factors. In addition, the Company monitors the volume of sales to its channel partners and their inventories, as substantial overstocking in the distribution channel could result in higher than expected returns or higher price protection in subsequent periods. The Company’s sales returns and price protection reserves recognized as a reduction of revenues for the three and six months ended June 30, 2022 were $864,157 and $1,098,397, respectively. The Company recognized approximately $81,600 and $199,940 of sales returns and price protection charges as a reduction of revenues for the three and six months ended June 30, 2021, respectively.

 

Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with ASC 718 – Compensation – Stock Compensation. The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. The fair value of the award is measured on the grant date, using the Black-Scholes option pricing model. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period. Upon the exercise of an award, the Company issues new shares of common stock out of its authorized shares. Stock-based compensation is adjusted for any forfeitures, which are accounted for on an as occurred basis.

 

Net Loss Per Common Share

 

Basic net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing net loss by the weighted average number of common and dilutive common-equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of shares of options, if not anti-dilutive.

 

The following shares were excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive:

 

   For the Three and Six Months Ended 
   June 30, 
   2022   2021 
Stock options   761,667    574,073 
    761,667    574,073 

 

11
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Income Taxes

 

On January 8, 2021, Motorsport Gaming, a Florida limited liability company, converted into Motorsport Games, a Delaware corporation, pursuant to a statutory conversion.

 

The Company is subject to federal and state income taxes in the U.S. The Company files income tax returns in the jurisdictions in which nexus threshold requirements are met.

 

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included or excluded in the financial statements or tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse. ASC 740, Taxes requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized.

 

The Company utilizes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

 

The Company’s policy is to classify assessments, if any, for tax-related interest as interest expense and penalties as general and administrative expenses in its condensed consolidated statements of operations.

 

NOTE 3 – INTANGIBLE ASSETS

 

Licensing Agreements

 

The Company has license agreements with various entities related to the development of video games and the organization and facilitation of esports events, including BARC (TOCA) Limited (“BARC”) with respect to the British Touring Car Championship (the “BTCC”) and INDYCAR LLC (“INDYCAR”) with respect to the INDYCAR SERIES. As of June 30, 2022, the Company had a remaining liability in connection with these licensing agreements of $774,680, which is included in other non-current liabilities on the condensed consolidated balance sheets.

 

Impairment

 

During the six months ended June 30, 2022, the Company identified triggering events during the six months ended June 30, 2022, that indicated its allocated intangible and finite-lived intangible assets were at risk of impairment and as such, performed quantitative impairment assessments of all its intangible and finite-lived intangible assets.

 

The primary triggers for the impairment review for the period ended March 31, 2022 were changes made to the Company’s product roadmap during the six months ended June 30, 2022, which resulted in changes to the scope and timing of certain product releases, as well as changes in the value of the Company’s market capitalization which had reduced significantly since December 31, 2021, the date of the last impairment assessment. These changes were made by the Company to better align the product roadmap with the Company’s ability to produce and release high quality games. The primary triggers for the impairment review for the three-month period ended June 30, 2022 were the ongoing reduction in the Company’s share price, the receipt of a deficiency letter notice from NASDAQ and the Company’s ongoing uncertain liquidity position.

 

As a result of the quantitative assessments, the Company determined that the fair value of its rFactor 2 trade name and Le Mans video gaming license (the “Le Mans Gaming License”) indefinite-lived intangible assets, as well as certain finite-lived technology intangible assets, were lower than their carrying values and recorded an impairment loss for the indefinite-lived intangible assets for the six months ended June 30, 2022 of approximately $2,201,000 for its rFactor 2 trade name and $1,120,00 for the Le Mans Gaming License. Additionally, the Company recorded an impairment loss of approximately $1,320,000 for its finite-lived rFactor 2 technology during the six months ended June 30, 2022.

 

The Company determined the fair value of the indefinite-lived intangible assets using a relief-from-royalty method for the trade name and a discounted cash flow valuation model for the Le Mans Gaming License and used a cost to recreate valuation model for the finite-lived technology intangible asset. The impairment loss for indefinite- and finite-lived intangible assets was primarily driven by a reduction in expected future revenues, following changes to the Company’s product roadmap, as well as changes to the discount rates applied, royalty rates and technological obsolescence assumptions used in the valuation models. The principal assumptions used in the relief-from-royalty method analysis used to determine the fair value of the rFactor 2 trade name consisted of forecasted revenues, royalty rate and weighted average cost of capital (i.e., discount rate), while the principal assumptions used in the discounted cash flow valuation model for the Le Mans Gaming License were forecasted revenues and weighted average cost of capital. The principal assumptions used in determining the fair value of the finite-lived technology intangible asset were number of production hours, cost per hour and technological obsolescence. The Company considers these assumptions to be judgmental and subject to risk and uncertainty, which could result in further changes in subsequent periods.

 

The impairment loss is presented as impairment of intangible assets in the condensed consolidated statements of operations and comprehensive loss.

 

12
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

The following is a summary of intangible assets as of June 30, 2022: 

 

   Licensing Agreements (Finite)   Licensing Agreements (Indefinite)   Software Licenses (Finite)   Distribution Contracts (Finite)   Trade Names (Indefinite)   Non-Compete Agreements (Finite)   Accumulated Amortization   Total 
Balance as of December 31, 2021  $7,198,363   $2,810,000   $10,364,541   $560,000   $2,672,581   $257,530   $(3,377,206)  $20,485,809 
Amortization expense   -    -    -    -    -    -    (879,052)   (879,052)
Impairment of intangible assets   -    (1,118,209)   (1,320,993)   -    (2,200,900)   -    -    (4,640,102)
FX translation adjustments   27,507    (213,861)   (528,818)   -    (74,229)   (18,813)   102,734    (705,480)
Balance as of June 30, 2022  $7,225,870   $1,477,930   $8,514,730   $560,000   $397,452   $238,717   $(4,153,524)  $14,261,175 

 

 

Accumulated amortization of intangible assets consists of the following:

 

   Licensing Agreements (Finite)   Software Licenses (Finite)   Distribution Contracts (Finite)   Non-Compete Agreements (Finite)   Accumulated Amortization 
Balance as of December 31, 2021  $912,260   $1,843,716   $560,000   $61,230   $3,377,206 
Amortization expense   113,749    723,628    -    41,675    879,052 
Foreign currency translation adjustment   -    (96,403)   -    (6,331)   (102,734)
Balance as of June 30, 2022  $1,026,009   $2,470,941   $560,000   $96,574   $4,153,524 

 

 

Estimated aggregate amortization expense of intangible assets for the next five years and thereafter is as follows:

 

For the Years Ended December 31,  Total 
2022 (remaining period)  $1,045,777 
2023   1,892,641 
2024   1,687,137 
2025   1,678,365 
2026   1,400,729 
Thereafter   2,172,544 
Estimated aggregate amortization expense  $9,877,193 

 

Amortization expense related to intangible assets was approximately $396,500 and $471,000 for the three months ended June 30, 2022 and 2021, respectively, and amortization expense related to intangible assets was approximately $879,000 and $581,500 for the six months ended June 30, 2022 and 2021, respectively. Within intangible assets is approximately $3,460,000 of licensing agreements that are not presently subject to amortization. These non-amortizing licensing agreements will commence amortizing upon release of the first title under the respective license agreement.

 

NOTE 4 – GOODWILL

 

The carrying amount of goodwill attributable to our Gaming and Esports reporting units and the changes in such balances during the six months ended June 30, 2022 were as follows: 

 

   Games   Esports   Total 
Balance as of January 1, 2022  $4,802,882   $64,583   $4,867,465 
Impairment of Goodwill   (4,723,685)   (64,583)   (4,788,268)
Foreign exchange   (79,197)   -    (79,197)
Balance as of June 30, 2022  $-   $-   $- 

 

During the six months ending June 30, 2022, the Company identified triggering events that indicated its goodwill associated with the acquisition of Studio397 B.V. (“Studio397”) was at risk of impairment and as such, performed a quantitative impairment assessment to determine whether the fair value of the associated reporting unit exceeded its fair value. The primary triggers for the impairment review were changes made to Motorsport Games’ product roadmap during the six months ended June 30, 2022, which resulted in changes to the scope and timing of certain product releases, as well as changes in the value of Motorsport Games’ market capitalization which had reduced significantly subsequent to December 31, 2021, the date of the last impairment assessment.

 

13
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

As a result of the quantitative assessment, the Company determined the carrying value of its Gaming reporting unit exceeded its fair value and determined the associated goodwill was fully impaired. An impairment loss of $4,788,268 was recorded for the six months ended June 30, 2022. The Company determined the fair value of the Gaming reporting unit using a discounted cash flow valuation model. The impairment loss was primarily driven by a reduction in expected future revenues, following changes to the Company’s product roadmap, as well as a higher discount rate applied in the valuation model. The principal assumptions used in the discounted cash flow valuation model were forecasted revenues and weighted average cost of capital (i.e., the discount rate).

 

The impairment loss is presented as impairment of goodwill in the condensed consolidated statements of operations and comprehensive loss.

 

NOTE 5 - LEASES

 

The Company’s operating leases primarily relate to real estate, which include office space in the U.S., the U.K., and Russia. The Company’s leases have established fixed payment terms that are typically subject to annual rent increases throughout the term of each lease agreement. The Company’s lease agreements have varying noncancelable rental periods and do not typically include options for the Company to extend the lease terms.

 

The Company’s operating leases have been presented in operating lease right-of-use assets, operating lease liabilities (short-term) and operating lease liabilities (long-term), on the Company’s condensed consolidated balance sheet as of June 30, 2022. Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term. Refer to Note 1, Business Organization, Nature of Operations, Risks and Uncertainties and Basis of Presentation, for further information on the adoption of ASC 842.

 

Incremental borrowing rate

 

The Company’s lease agreements do not provide an implicit rate to determine the present value of lease payments. As such, the Company uses its incremental borrowing rate to determine the present value of lease payments. The Company derives its incremental borrowing rate from information available at the lease commencement date, which represents a collateralized rate of interest the Company would have to pay to borrow over a similar term an amount equal to the lease payments in a similar economic environment. As the Company did not have external borrowings at the adoption date with comparable terms to its lease agreements, the Company estimated its borrowing rate based on prime lending rate (“Prime Rate”), adjusted for the US Treasury note rates for the same term as the associated lease and the Company’s credit risk spread.

 

The components of lease expense were as follows: 

   Condensed Consolidated Statement of  Three Months
Ended
   Six Months
Ended
 
   Comprehensive Loss Classification  June 30, 2022   June 30, 2022 
Short-term operating lease expense  G&A  $23,951   $52,916 
Operating lease expense  G&A   126,237    196,938 
Total lease costs     $150,188   $249,854 

 

Weighted average remaining lease terms and weighted average discount rates are as follows:

 

 

  

Six Months

Ended

June 30, 2022

 
Weighted-average remaining lease term - operating leases (years)   4.13 
Weighted-average discount rate - operating leases   7.54%

 

Supplemental cash flow information related to leases is as follows:

 

  

Six Months

Ended

June 30, 2022

 
Cash paid for amounts included in the measurement of operating lease liabilities  $249,854 
Right of use assets obtained in exchange for new lease obligations  $1,086,668 

 

14
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

As of June 30, 2022, maturities related to lease liabilities were as follows: 

 

    Operating Leases  
2022 (remaining period)   $ 253,005  
2023     509,676  
2024     420,525  
2025     286,897  
2026     273,522  
Thereafter     65,037  
Total lease payments   $ 1,808,662  
Less effects of imputed interest     (238,234)  
Present value of lease liabilities   $ 1,570,428  

 

New lease agreements

 

On February 8, 2022, the Company entered into a new lease agreement with Lemon City Group, LLC, an entity affiliated with our majority shareholder, Motorsport Network, for office space located in Miami, Florida (the “Lemon City Lease”). The term of this new lease is 5 years, which commenced April 1, 2022 and expires on March 31, 2027, and is terminable upon 60-days’ written notice, by either party, with no penalty. The base rent from this new lease is fixed at approximately $22,000 per month. On April 1, 2022, the previous lease agreement for office space in Miami, Florida between 704Games LLC and Lemon City Group, LLC was terminated without penalty. See Note 14 – Subsequent Events for further information regarding this lease.

 

NOTE 6 – ACCRUED EXPENSES AND OTHER LIABILITIES

 

Accrued expenses and other liabilities consisted of the following:  

 

   June 30   December 31, 
   2022   2021 
Accrued royalties  $851,574   $1,694,011 
Accrued professional fees   50,000    80,909 
Accrued consulting fees   352,422    106,006 
Accrued development costs   320,359    968,007 
Esport prize money   11,126    168,959 
Accrued taxes   74,402    31,491 
Accrued payroll   116,293    235,224 
Accrued other   180,583    239,664 
Total  $1,956,759   $3,524,271 

 

15
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 7 – DUE TO/FROM RELATED PARTIES

 

On April 1, 2020, the Company entered into a promissory note (the “$12 million Line of Credit”) with the Company’s majority stockholder, Motorsport Network, LLC (“Motorsport Network”), that provides the Company with a line of credit of up to $10 million at an interest rate of 10% per annum, the availability of which is dependent on Motorsport Network’s available liquidity. On November 23, 2020, the Company and Motorsport Network entered into an amendment to the $12 million Line of Credit, effective in 2020, pursuant to which the availability under the $12 million Line of Credit was increased from $10 million to $12 million, with no changes to the other terms.

 

The $12 million Line of Credit does not have a stated maturity date and is payable upon demand at any time at the sole and absolute discretion of Motorsport Network, which has agreed, pursuant to a Side Letter Agreement related to the $12 million Line of Credit, dated September 4, 2020, not to demand or otherwise accelerate any amount due under the $12 million Line of Credit that would otherwise constrain the Company’s liquidity position, including the Company’s ability to continue as a going concern. The Company may prepay the $12 million Line of Credit in whole or in part at any time or from time to time without penalty or charge. In the event the Company or any of its subsidiaries consummates certain corporate events, including any capital reorganization, consolidation, joint venture, spin off, merger or any other business combination or restructuring of any nature, or if certain events of default occur, the entire principal amount and all accrued and unpaid interest will be accelerated and become payable.

 

Given the state of the financial markets, the Company has recently assessed its exposure to any potential non-performance by Motorsport Network and believes that there is a substantial likelihood that Motorsport Network will not fulfill any of the Company’s borrowing requests for the foreseeable future.

 

During the six months ended June 30, 2022, the Company did not draw or repay amounts under the $12 million Line of Credit and the balance due to Motorsport Network under the $12 million Line of Credit was $0 as of June 30, 2022. The Company recorded related party interest expense for this agreement of $0 during the respective three and six months ended June 30, 2022.

 

In addition to the $12 million Line of Credit, the Company had regular related party receivables and payables outstanding as of June 30, 2022. Specifically, the Company owed $37,049 to its related parties as a related party payable and was due $35,498 from its related parties as a related party receivable. During the six months ended June 30, 2022, $132,288 has been paid to related parties in settlement of related party payables.

 

NOTE 8 – RELATED PARTY TRANSACTIONS

 

From time to time, Motorsport Network, and other related entities pay for Company expenses on the Company’s behalf. During the six months ended June 30, 2022, the Company incurred expenses of $143,517 that were paid by Motorsport Network on its behalf and are reimbursable by the Company to Motorsport Network. In addition, the Company has a promissory note with Motorsport Network, which is discussed in Note 7 – Due To/From Related Parties.

 

Leasing agreements

 

On February 8, 2022, the Company entered into the Lemon City Lease with Lemon City Group, LLC, an entity affiliated with our majority shareholder, Motorsport Network, for office space located in Miami, Florida. See Note 5 – Leases for further information.

 

16
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 9 – STOCKHOLDERS’ EQUITY

 

Initial Public Offering

 

On January 15, 2021, the Company completed its initial public offering of 3,450,000 shares of its Class A common stock at a price to the public of $20.00 per share, which includes the exercise in full by the underwriters of their option to purchase from the Company an additional 450,000 shares of the Company’s Class A common stock. The net proceeds to the Company from the initial public offering were $63,073,783, after deducting underwriting discounts and commissions and offering expenses paid by the Company during 2020 and 2021.

 

Stock Warrants

 

As of June 30, 2022 and December 31, 2021, 704Games has outstanding 10-year warrants to purchase 4,000 shares of common stock at an exercise price of $93.03 per share that were issued on October 2, 2015. As of June 30, 2022, the warrants had no intrinsic value and a remaining life of 3.3 years.

 

NOTE 10 – SHARE-BASED COMPENSATION

 

On January 12, 2021, in connection with initial public offering, Motorsport Games established the Motorsport Games Inc. 2021 Equity Incentive Plan (the “MSGM 2021 Stock Plan”). The MSGM 2021 Stock Plan provides for the grant of options, stock appreciation rights, restricted stock awards, performance share awards and restricted stock unit awards, and initially authorized 1,000,000 shares of Class A common stock to be available for issuance. As of June 30, 2022, 200,643 shares of Class A common stock were available for issuance under the MSGM 2021 Stock Plan. Shares issued in connection with awards made under the MSGM 2021 Stock Plan are generally issued as new issuances of Class A common stock.

 

The majority of the options issued under the MSGM 2021 Stock Plan have time-based vesting schedules, typically vesting ratably over a three-year period. Certain stock option awards differed from this vesting schedule, notably awards made to Motorsport Games’ Chief Executive Officer in conjunction with Motorsport Games’ initial public offering that vested immediately, as well as those made to Motorsport Games’ directors that vested on the one-year anniversary of award issuance. All stock options issued under the MSGM 2021 Stock Plan expire 10 years from the grant date.

 

The following is a summary of stock-based compensation award activity for the periods ended June 30, 2022 and 2021:

  

    For the Six Months Ended June 30, 2022  
    Number of Options     Vesting Term   Contractual Term   Grant Date Fair Value  
Awards outstanding under the MSGM 2021 Stock Plan as of January 1, 2022 (net of forfeitures)     297,401                  
Stock options awarded to employees under the MSGM 2021 Stock Plan     569,348     3 Years   10 Years     1,171,370  
Stock options awarded to Board of Directors under the MSGM 2021 Stock Plan     57,108     1 Year   10 Years     120,630  
Forfeited, cancelled or expired     (162,190