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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 September 30, 2023
     
    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   I.R.S. Employer
Incorporation or Organization   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   MSGM   The Nasdaq Stock Market LLC
value per share       (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 November 7, 2023, the registrant had 2,722,728 shares of Class A common stock and 700,000 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 September 30, 2023

 

TABLE OF CONTENTS

 

    Page
Part I. FINANCIAL INFORMATION 6
Item 1. Condensed Consolidated Financial Statements (Unaudited) 6
  Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (Unaudited) 6
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited) 7
  Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited) 8
  Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Nine Months Ended September 30, 2023 and 2022 (Unaudited) 9
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022 (Unaudited) 10
  Notes to Unaudited Condensed Consolidated Financial Statements 11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 46
Item 4. Controls and Procedures 46
     
Part II. OTHER INFORMATION 48
Item 1. Legal Proceedings 48
Item 1A. Risk Factors 48
Item 2. Unregistered Sales of Equity Securities. Use of Proceeds, and Issuer Purchases of Equity Securities 52
Item 5. Other Information 52
Item 6. Exhibits 53
Signatures 54

 

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 over the next year based on the cash and cash equivalents available as of October 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; our expectation that if any strategic alternative is executed, 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 cost reduction and restructuring initiatives, the closure of our Australian development studio, 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 Driven Lifestyle Group LLC (“Driven Lifestyle”), formerly known as Motorsport Network, LLC, 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;
     
  ● the sale of our NASCAR License (as defined in this Report), including our belief that our existing business model will need to be modified, our risk profile relating to our operations will be significantly altered, we may encounter difficulties or challenges in continuing operations due to the sale of the license, and that our cash flows and results of operations will likely be materially adversely impacted as we anticipate the amount of revenue to be generated by our existing NASCAR products to decline over time;
     
  ● 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;

 

1
 

 

  ● 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 February 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 intention to continue exploring opportunities to expand the recurring portion of our Esports segment outside of Le Mans;
     
  ● 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 Driven Lifestyle 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;
     
  ● 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, including through the planned introduction of new annualized sports franchise games, such as with Le Mans;
     
  ● our intended use of proceeds from the sales of our equity securities;

 

2
 

 

  ● 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;
     
  ● 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; our beliefs regarding the merit of any plaintiff’s allegations and the impact of any claims and litigation that we are subject to; and our plans and intentions with respect to defending our position in any legal proceeding;
     
  ● 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 any cost reduction and restructuring initiatives, including expected savings and any restructuring charges to be incurred; 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 any cost reduction and restructuring initiatives, as well as any inability to consummate additional 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 any 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 any 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 Driven Lifestyle, the Company’s other affiliates and/or third parties; and/or (F) reducing other discretionary spending;

 

4
 

 

  (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;
     
  (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 any 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 as a result of, among other things, legal requirements in applicable foreign jurisdictions; 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)

 

   September 30,   December 31, 
   2023   2022 
         
Assets          
           
Current assets:          
Cash and cash equivalents  $1,182,342   $979,306 
Accounts receivable, net of allowances of $1,229,258 and $2,252,383 as of September 30, 2023 and December 31, 2022, respectively   704,549    1,809,110 
Due from related parties   -    206,532 
Prepaid expenses and other current assets   963,051    1,048,392 
Total Current Assets   2,849,942    4,043,340 
Property and equipment, net   312,210    522,433 
Operating lease right of use assets   247,804    971,789 
Intangible assets, net   8,003,656    13,360,230 
Total Assets  $11,413,612   $18,897,792 
           
Liabilities and Stockholders’ Equity          
           
Current liabilities:          
Accounts payable  $1,320,860   $2,372,219 
Accrued expenses and other current liabilities   3,691,941    3,416,424 
Due to related parties   246,435    4,589,211 
Purchase commitments   2,507,296    2,563,216 
Operating lease liabilities (current)   197,201    380,538 
Total Current Liabilities   7,963,733    13,321,608 
Operating lease liabilities (non-current)   52,932    617,288 
Other non-current liabilities   2,898,050    3,055,498 
Total Liabilities   10,914,715    16,994,394 
           
Commitments and contingencies (Note 9)   -    - 
           
Stockholders’ Equity:          
           
Preferred stock, $0.0001 par value per share; authorized 1,000,000 and 1,000,000 shares; and none issued and outstanding as of September 30, 2023 and December 31, 2022, respectively   -    - 
Class A common stock - $0.0001 par value per share; authorized 100,000,000 and 100,000,000 shares; 2,720,328 and 1,183,808 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively   269    117 
Class B common stock - $0.0001 par value per share; authorized 7,000,000 and 7,000,000 shares; 700,000 and 700,000 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively   70    70 
Additional paid-in capital   91,842,069    76,446,061 
Accumulated deficit   (90,741,141)   (73,979,131)
Accumulated other comprehensive loss   (688,706)   (933,406)
Total Stockholders’ Equity Attributable to Motorsport Games Inc.   412,561    1,533,711 
Non-controlling interest   86,336   369,687 
Total Stockholders’ Equity   498,897    1,903,398 
Total Liabilities and Stockholders’ Equity  $11,413,612   $18,897,792 

 

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)

 

   2023   2022   2023   2022 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
Revenues  $1,693,871   $1,223,142   $5,162,356   $6,553,918 
Cost of revenues [1]   831,479    602,856    2,946,382    3,472,819 
Gross profit   862,392    620,286    2,215,974    3,081,099 
                     
Operating expenses:                    
Sales and marketing [2]   358,120    1,440,659    1,411,318    4,669,328 
Development [3]   1,566,839    2,631,066    5,751,741    7,717,046 
General and administrative [4]   1,526,614    4,008,335    7,459,957    10,781,098 
Impairment of goodwill   -    -    -    4,788,268 
Impairment of intangible assets   -    -    4,004,627    4,640,102 
Depreciation and amortization   75,614    92,703    277,822    326,499 
Total operating expenses   3,527,187    8,172,763    18,905,465    32,922,341 
Loss from operations   (2,664,795)   (7,552,477)   (16,689,491)   (29,841,242)
Interest expense   (230,190)   (244,953)   (674,060)   (638,211)
Other income (expense), net   (639,147)   (739,285)   369,345    (1,511,978)
Net loss   (3,534,132)   (8,536,715)   (16,994,206)   (31,991,431)
Less: Net loss attributable to non-controlling interest   (44,093)   (21,431)   (232,196)   (933,234)
Net loss attributable to Motorsport Games Inc.  $(3,490,039)  $(8,515,284)  $(16,762,010)  $(31,058,197)
                     
Net loss attributable to Class A common stock per share:                    
Basic and diluted  $(1.28)  $(7.29)  $(6.60)  $(26.61)
                     
Weighted-average shares of Class A common stock outstanding:                    
Basic and diluted   2,720,328    1,167,359    2,538,863    1,167,178 

 

[1] Includes related party costs of $0 and $0 for the three months ended September 30, 2023 and 2022, respectively, and $0 and $6,228 for the nine months ended September 30, 2023 and 2022, respectively.
[2] Includes related party expenses of $0 and $0 for the three months ended September 30, 2023 and 2022, respectively, and $17,076 and $0 for the nine months ended September 30, 2023 and 2022, respectively.
[3] Includes related party expenses of $15,439 and $21,512 for the three months ended September 30, 2023 and 2022, respectively, and $46,361 and $44,942 for the nine months ended September 30, 2023 and 2022, respectively.
[4] Includes related party expenses of $116,530 and $122,714 for the three months ended September 30, 2023 and 2022, respectively, and $298,190 and $221,051 for the nine months ended September 30, 2023 and 2022, respectively.

 

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)

 

   2023   2022   2023   2022 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2023   2022   2023   2022 
Net loss  $(3,534,132)  $(8,536,715)  $(16,994,206)  $(31,991,431)
Other comprehensive income:                    
Foreign currency translation adjustments   520,239    224,230    244,700    235,961 
Comprehensive loss   (3,013,893)   (8,312,485)   (16,749,506)   (31,755,470)
Comprehensive loss attributable to non-controlling interests   (56,779)   (2,280)   (283,351)   (1,031,225)
Comprehensive loss attributable to Motorsport Games Inc.  $(2,957,114)  $(8,310,205)  $(16,466,155)  $(30,724,245)

 

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)

 

   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Games Inc.   Interest   Equity 
   For the Three and Nine Months Ended September 30, 2023 
                              

Total

Stockholders’

         
                              

Equity /

Member’s

       Total 
   Class A   Class B   Additional       Accumulated Other  

Equity

Attributable

   Non-   Stockholders’
Equity /		 
    Common Stock    Common Stock   Paid-In   Accumulated   Comprehensive   to Motorsport   controlling   Member’s 
   Shares   Amount   Shares   Amount   Capital   Deficit   Loss   Games Inc.   Interest   Equity 
Balance - January 1, 2023   1,183,808   $117    700,000   $70   $76,446,061   $(73,979,131)  $(933,406)  $1,533,711   $369,687   $1,903,398 
Issuance of common stock   734,741    74    -    -    10,571,460    -    -    10,571,534    -    10,571,534 
Issuance of common stock for extinguishment of related party debt   780,385    78    -    -    3,948,488    -    -    3,948,566    -    3,948,566 
Stock-based compensation   -    -    -    -    249,233    -    -    249,233    -    249,233 
Other comprehensive loss   -    -    -    -    -    -    (78,588)   (78,588)   (36,318)   (114,906)
Net loss   -    -    -    -    -    (5,100,947)   -    (5,100,947)   (158,245)   (5,259,192)
Balance - March 31, 2023   2,698,934   $269    700,000   $70   $91,215,242   $(79,080,078)  $(1,011,994)  $11,123,509   $175,124   $11,298,633 
Stock-based compensation   21,394    -    -    -    521,303    -    -    521,303    -    521,303 
Other comprehensive loss   -    -    -    -    -    -    (196,951)   (196,951)   (2,151)   (199,102)
Net loss   -    -    -    -    -    (8,171,024)   -    (8,171,024)  $(29,858)   (8,200,882)
Balance - June 30, 2023   2,720,328   $269    700,000   $70   $91,736,545   $(87,251,102)  $(1,208,945)  $3,276,837   $143,115   $3,419,952 
Stock-based compensation   -    -    -    -    105,524    -    -    105,524    -    105,524 
Other comprehensive income (loss)    -    -    -    -    -    -    520,239    520,239    (12,686)   507,553 
Net loss   -    -    -    -    -    (3,490,039)   -    (3,490,039)   (44,093)   (3,534,132)
Balance -September 30, 2023   2,720,328   $269    700,000   $70   $91,842,069   $(90,741,141)  $(688,706)  $412,561   $86,336)  $498,897 

 

   For the Three and Nine Months Ended September 30, 2022 
                               Total         
                               Stockholders’         
                       Equity /         
  

Class A

Common Stock

  

Class B

Common Stock

  

Additional

Paid-In

   Accumulated  

Accumulated

Other

Comprehensive

  

Member’s

Equity

Attributable

to

Motorsport

   Non-controlling  

Total

Stockholders’

Equity /

Member’s

 
   Shares   Amount   Shares   Amount   Capital   Deficit   Income (Loss)   Games Inc.   Interest   Equity 
Balance – January 1, 2022   1,163,590   $116    700,000   $70   $75,652,853   $(37,988,326)  $(945,375)  $36,719,338   $1,262,665   $37,982,003 
Stock-based compensation   3,769    -    -    -    353,030    -    -    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   1,167,359   $116    700,000   $70   $76,005,883   $(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   1,167,359   $116    700,000   $70   $76,244,456   $(60,531,239)  $(933,644)  $14,779,759   $233,720   $15,013,479 
Stock-based compensation   -    -    -    -    228,712    -    -    228,712    -    228,712 
Other comprehensive income   -    -    -    -    -    -    224,230    224,230    19,151    243,381 
Net loss   -    -    -    -    -    (8,515,284)   -    (8,515,284)   (21,431)   (8,536,715)
Balance – September 30, 2022   1,167,359   $116    700,000   $70   $76,473,168   $(69,046,523)  $(709,414)  $6,717,417   $231,440   $6,948,857 

 

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

 

9
 

 

MOTORSPORT GAMES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   2023   2022 
  

For the Nine Months Ended

September 30, 

 
   2023   2022 
Cash flows from operating activities:          
Net loss  $(16,994,206)  $(31,991,431)
Adjustments to reconcile net loss to net cash used in operating activities:          
Loss on impairment of intangible assets   4,004,627    4,640,102 
Loss on impairment of goodwill   -    4,788,268 
Loss on impairment of property, plant and equipment   7,661    - 
Depreciation and amortization   1,512,630    1,576,003 
Non-cash lease expense   -    321,882 
Purchase commitment and license liability interest accretion   621,780    620,541 
Stock-based compensation   876,060    820,315 
Changes in the fair value of stock warrants   (438,148)   - 
Sales return and price protection reserves   280,000    1,098,397 
Changes in assets and liabilities:          
Accounts receivable   822,477    3,709,280 
Due from related parties   (190,652)   - 
Operating lease liabilities   (23,694)   (327,337)
Prepaid expenses and other assets   83,338    (1,141,174)
Accounts payable   (1,046,204)   (728,322)
Due to related parties   2,884    - 
Accrued expenses and other liabilities   375,436    (310,622)
Net cash used in operating activities  $(10,106,011)  $(16,924,098)
           
Cash flows from investing activities:          
Purchase of property and equipment   (26,798)   (266,948)
Net cash used in investing activities  $(26,798)  $(266,948)
           
Cash flows from financing activities:          
Advances from related parties   -    3,012,885 
Repayments on advances from related parties   -    (119,002)
Repayments of purchase commitment liabilities   (700,000)   (1,530,000)
Payment of license liabilities   (262,500)   (275,000)
Issuance of common stock from stock purchase commitment agreement   644,750    - 
Issuance of common stock from registered direct offerings   10,404,784    - 
Net cash provided by financing activities  $10,087,034   $1,088,883 
           
Effect of exchange rate changes on cash and cash equivalents   248,811    1,499,865 
           
Net increase (decrease) in cash and cash equivalents   203,036    (14,602,298)
           
Total cash and cash equivalents at beginning of the period  $979,306   $17,819,640 
           
Total cash and cash equivalents at the end of the period  $1,182,342   $3,217,342 
           
Supplemental Disclosures of Cash Flow Information:          
Cash paid during the year for:          
Interest  $405,690   $17,670 
           
Non-cash investing and financing activities:          
Shares issued to Driven Lifestyle Group LLC for extinguishment of related party loan  $3,948,566   $- 
Extinguishment of Driven Lifestyle Group LLC related party loan for Class A shares  $(3,948,566)  $- 
Issuance of warrants in connection with registered direct offerings  $39,852   $- 

 

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 $17.0 million and negative cash flows from operations of approximately $10.1 million for the nine months ended September 30, 2023. As of September 30, 2023, the Company had an accumulated deficit of $90.7 million and cash and cash equivalents of $1.2 million, which increased to $3.2 million as of October 31, 2023. The increase in cash and cash equivalents was driven by the sale of the Company’s NASCAR License (as defined in Note 12) to iRacing.com Motorsport Simulations, LLC (“iRacing”) on October 3, 2023. See Note 12 – Subsequent Events for additional details.

 

For the three months ended September 30, 2023, the Company experienced an average net cash burn from operations of approximately $0.4 million a month, and while it has taken measures to reduce its costs, the Company expects to continue to have a net cash outflow from operations for the foreseeable future as it continues to develop its product portfolio and invest in developing new video game titles.

 

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 continues to explore 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) other strategic alternatives for its business, including, but not limited to, the sale or licensing of the Company’s assets in addition to its recent sale of its NASCAR License; 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 $10 million (subject to compliance with the limitations set forth in the SEC’s “baby shelf” rules). Subject to the terms and conditions of the ED Agreement, the Sales Agent may sell shares by any method deemed to be an “at-the-market” (“ATM”) offering as defined in Rule 415 under the Securities Act of 1933, as amended. As of September 30, 2023, the Company had an aggregate of $2.9 million available for future sales under its ATM program. However, due to the Company’s present liquidity position and required future funding requirements, any funds raised via the ATM program would not be sufficient to satisfy its ongoing liquidity requirements and further potential Capital Financing would be required, in conjunction to the other options being explored by the Company. Further, there can be no assurance the Company will be able to obtain funds via the ATM program, should it choose to sell shares under the ED Agreement, nor can there be any other assurance that the Company can secure additional funding in the form of equity and/or debt financing on commercially acceptable terms, if at all, to satisfy its future needed liquidity and capital resources.

 

11
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Due to the continuing 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 continues to explore other strategic alternatives and potential options for its business, including, but not limited to, the sale or licensing of certain of the Company’s assets in addition to its recent sale of its NASCAR License. If any such additional strategic alternative is executed, it is expected it would help to improve the Company’s working capital position and reduce overhead expenditures, thereby lowering 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 additional strategic alternatives, 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 be successful in implementing any additional strategic plans for the sale or licensing of its assets, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond the Company’s control.

 

As part of its ongoing liquidity management efforts, the Company has evaluated its product roadmap and determined that changes to the expected timing and scope of certain new product releases is required. Specifically, the Company has determined that its upcoming Le Mans Ultimate game release date will be moved from December 2023 to an anticipated February 2024 release date. In addition, following the Company’s decision on October 29, 2023 to complete a restructuring of its operations that primarily resulted in the closure of its Australian development studio, as well as the reduction of headcount in the United Kingdom, the Company determined it was necessary to suspend the development of its previously planned INDYCAR title until such time it is able to secure additional funding and capable resources to be able to deliver a high-quality INDYCAR video game title. Refer to Note 12 – Subsequent Events for further details regarding the restructuring.

 

As the Company continues to address its liquidity constraints, the Company may need to make further adjustments to its product roadmap in order to reduce operating cash burn. Additionally, the Company continues to seek to improve its liquidity 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”), as well as the closure of its Australian development studio. The Company plans to continue 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.

 

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 Driven Lifestyle Group LLC (“Driven Lifestyle”), 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 Driven Lifestyle 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.

 

12
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 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.

 

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 September 30, 2023 and for the three and nine months ended September 30, 2023. The Company’s results of operations for the three and nine months ended September 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.

 

13
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

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.

 

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.

 

14
 

 

Motorsport Games Inc. and Subsidiaries

Notes to 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.

 

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.

 

15
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

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.

 

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 $0 and $0.3 million for sales returns and price protections as a reduction of revenues for the three and nine months ended September 30, 2023, respectively. The Company recognized an expense of approximately $0 and $1.1 million for sales returns and price protections as a reduction of revenues for the three and nine months ended September 30, 2022, respectively.

 

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 $0.4 million and $0.6 million for the nine months ended September 30, 2023 and 2022, respectively.

 

16
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

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 and warrants, 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:

 

SCHEDULE OF CALCULATION WEIGHTED AVERAGE DILUTIVE SHARES

   For the Three and Nine Months Ended 
   September 30, 
   2023   2022 
Stock options   25,486    57,405 
Warrants   33,574    - 
Dilutive securities   59,060    57,405 

 

 

NOTE 3 – INTANGIBLE ASSETS

 

Licensing Agreements

 

As of September 30, 2023, the Company had license agreements with various entities related to the development of video games and the organization and facilitation of esports events, including BARC (TOCA) Limited (“BARC”) with respect to the British Touring Car Championship (the “BTCC”), and INDYCAR LLC (“INDYCAR”) with respect to the INDYCAR SERIES. As of September 30, 2023, the Company had a remaining liability in connection with these licensing agreements of approximately $0.8 million and $3.5 million, which is included in purchase commitments and other non-current liabilities, respectively, on the unaudited condensed consolidated balance sheets.

 

On October 26, 2023, BARC delivered notice to the Company terminating the BTCC License Agreement (as defined in Note 9). The termination of the BTCC License Agreement was effective as of November 3, 2023. Refer to Note 12 – Subsequent Events for further details.

 

Impairment

 

The Company identified triggering events as of June 30, 2023, 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. No further indicators of impairment were identified as of September 30, 2023. As a result of the quantitative impairment 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 of approximately $4.0 million during the nine months ended September 30, 2023.

 

The Company determined the fair value of the finite-lived intangible assets subject to assessment using either a discounted cash flow valuation model or a cost to recreate valuation model, depending on the nature of the asset. The identified impairment losses were primarily driven by a reduction in expected future cash flows, driven by the triggering event factors discussed above. The principal assumptions used in the discounted cash flow valuation model were forecasted cash flows and the expected proceeds from the sale of certain assets should the Company be successful in its Strategic Initiatives, while the principal assumptions used in the cost to recreate valuation model were 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 unaudited condensed consolidated statements of operations and comprehensive loss.

 

17
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Intangible Assets

 

The following is a summary of intangible assets as of September 30, 2023:

 

SCHEDULE OF INTANGIBLE ASSETS

                       Non-         
    Licensing     Licensing   Software   Distribution   Trade   Compete         
   Agreements   Agreements   Licenses   Contracts   Names   Agreements   Accumulated     
   (Finite)   (Indefinite)   (Finite)   (Finite)   (Indefinite)   (Finite)   Amortization   Total 
Balance as of January 1, 2023  $7,198,363   $1,546,645   $8,656,842   $560,000   $212,185   $243,243   $(5,057,048)  $13,360,230 
Amortization expense   -    -    -    -    -    -    (1,221,970)   (1,221,970)
Impairment of intangible assets   (3,457,202)   -    (483,173)   -    -    (64,252)   -    (4,004,627)
FX translation adjustments   27,506    (48,438)   (105,137)   -    (5,762)   (5,426)   7,280    (129,977)
Balance as of September 30, 2023  $3,768,667   $1,498,207   $8,068,532   $560,000   $206,423   $173,565   $(6,271,738)  $8,003,656 
                                         
Weighted average remaining amortization period as of September 30, 2023   10.8    -    3.6    -    -    0.5    -    - 

 

Accumulated amortization of intangible assets consists of the following:

  

   Licensing   Software   Distribution   Non-Compete     
   Agreements   Licenses   Contracts   Agreements   Accumulated 
   (Finite)   (Finite)   (Finite)   (Finite)   Amortization 
Balance as of January 1, 2023  $1,146,010   $3,212,135   $560,000   $138,903   $5,057,048 
Amortization expense   169,687    1,013,294    -    38,989    1,221,970 
Foreign currency translation adjustment   (9,688)   6,735    -    (4,327)   (7,280)
Balance as of September 30, 2023  $1,306,009   $4,232,164   $560,000   $173,565   $6,271,738 

 

18
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

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

  

   Total 
2023 (remaining period)  $379,619 
2024   1,480,475 
2025   1,343,999 
2026   1,097,212 
2027   

346,277

 
2028   278,396 
Thereafter   1,373,048 
Estimated aggregate amortization expense  $6,299,026 

 

Amortization expense related to intangible assets was approximately $0.4 million and $0.4 million for the three months ended September 30, 2023 and 2022, and amortization expense related to intangible assets was approximately $1.2 million and $1.3 million for the nine months ended September 30, 2023 and 2022. Within intangible assets is approximately $1.5 million of licensing agreements that are not presently subject to amortization. These non-amortizing licensing agreements will begin amortizing upon release of the first title under the respective license agreement.

 

NOTE 4 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consisted of the following:

    

   September 30,   December 31, 
   2023   2022 
Accrued royalties  $699,851   $274,085 
Accrued professional and consulting fees   768,495    720,470 
Accrued development costs   101,478    172,164 
Accrued taxes   70,452    149,842 
Accrued payroll   547,603    372,358 
Deferred revenue   208,274    311,945 
Loss contingency reserves   892,049    1,100,000 
Accrued other   403,739    315,560 
Total  $3,691,941   $3,416,424 

 

NOTE 5 – RELATED PARTY LOANS

 

On April 1, 2020, the Company entered into a promissory note (the “$12 million Line of Credit”) with the Company’s majority stockholder, Driven Lifestyle, that provided 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 Driven Lifestyle’s available liquidity. On November 23, 2020, the Company and Driven Lifestyle 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 Driven Lifestyle, and any principal and accrued interest owed will be accelerated and become immediately payable in the event the Company consummates certain corporate events, such as a capital reorganization. The Company may repay the $12 million Line of Credit in whole or in part at any time or from time to time without penalty or charge.

 

19
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

On September 8, 2022, the Company entered into a support agreement with Driven Lifestyle (the “Support Agreement”) pursuant to which Driven Lifestyle issued approximately $3 million (the “September 2022 Cash Advance”) to the Company in accordance with the $12 million Line of Credit. Additionally, the Support Agreement modified the $12 million Line of Credit such that, among other things, until June 30, 2024, Driven Lifestyle would not demand repayment of the September 2022 Cash Advance or other advances under the $12 million Line of Credit, unless certain events occurred, as prescribed in the Support Agreement, such as the completion of a new financing arrangement or the Company generates positive cash flows from operations, among others. All principal and accrued interest owed on the $12 million Line of Credit were exchanged for equity following the completion of two debt-for-equity exchange agreements with Driven Lifestyle on January 30, 2023 and February 1, 2023, relieving the Company of approximately $3.9 million in owed principal and unpaid interest in exchange for an aggregate of 780,385 shares of the Company’s Class A common stock.

 

As of September 30, 2023, the $12 million Line of Credit remains in place. However, the Company believes that there is a substantial likelihood that Driven Lifestyle will not fulfill any future borrowing requests, and therefore does not view the $12 million Line of Credit as a viable source for future liquidity needs.

 

As of September 30, 2023 and December 31, 2022, the balance due to Driven Lifestyle under the $12 million Line of Credit was $0 and $3,670,000, respectively, as well as unpaid accrued related party interest of $0 and $96,667, respectively. These amounts are presented as due to related parties in the unaudited condensed consolidated balance sheets.

 

NOTE 6 – RELATED PARTY TRANSACTIONS

 

In addition to the $12 million Line of Credit, which is discussed in Note 5 – Related Party Loans, from time to time, Driven Lifestyle, and other related entities pay for Company expenses on the Company’s behalf. During the nine months ended September 30, 2023 and 2022, the Company incurred expenses of approximately $0.3 million and $0.1 million, respectively, that were paid by Driven Lifestyle on its behalf and are reimbursable by the Company to Driven Lifestyle. During the nine months ended September 30, 2023 and 2022, approximately $1.1 million and $0.1 million, respectively, was paid to related parties in settlement of related party payables. The Company received cash advances of $0.2 million and $0 from Driven Lifestyle during the nine months ended September 30, 2023 and 2022, respectively.

 

The Company has regular related party receivables and payables outstanding as of September 30, 2023 and December 31, 2022. Specifically, the Company owed approximately $0.2 million to its related parties as of September 30, 2023. As of December 31, 2022, the Company owed approximately $4.6 million to its related parties as a related party payable and was due approximately $0.2 million from its related parties as a related party receivable.

 

Backoffice Services Agreement

 

On March 23, 2023 (but effective as of January 1, 2023), the Company entered into a new Backoffice Services Agreement with Driven Lifestyle, (the “Backoffice Services Agreement”), following the expiration of the Company’s prior services agreement with Driven Lifestyle. Pursuant to the Backoffice Services Agreement, Driven Lifestyle 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 Driven Lifestyle of $17,500. For the nine months ended September 30, 2023, the Company incurred $157,500 in fees in connection with the Backoffice Services Agreement, and $52,500 for the three months ended September 30, 2023, presented in general and administrative expenses within the unaudited condensed consolidated statements of operations.

 

20
 

 

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 7 – STOCKHOLDERS’ EQUITY

 

Class A and B Common Stock

 

As of September 30, 2023, the Company had 2,720,328 shares of Class A common stock and 700,000 shares of Class B common stock outstanding. Holders of Class A and Class B common stock are entitled to one-vote and ten-votes, respectively, for each share held on all matters submitted to a vote of stockholders.

 

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.

 

704Games Warrants

 

As of September 30, 2023 and December 31, 2022, 704Games LLC (“704Games”), a wholly-owned subsidiary of Motorsport Games Inc., has outstanding 10-year warrants to purchase 4,000 shares of common stock at an exercise price of $93.03 per share that were issued on October 2, 2015. As of September 30, 2023, the warrants had no intrinsic value and a remaining life of 2 years.

 

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 7.0% of the aggregate gross proceeds from each offering, non-accountable expenses and certain other closing fees. In addition, the Company granted warrants to the Agent (or its designees) to purchase shares of the Company’s Class A common stock equal to 6.0% of the aggregate number of shares of Class A common stock placed in each Offering (collectively, the “Wainwright Warrants”). The Offerings are summarized as follows:

  SCHEDULE OF REGISTERED DIRECT OFFERINGS AND WAINWRIGHT WARRANTS

   Offering Date  Shares Issued   Gross Proceeds   Net Proceeds