# Motorsport Games Inc.: Form 10-Q for the period ended Jun 30, 2021

- Company: [Motorsport Games Inc.](/companies/msgm.md) (CIK 1821175)
- Form: 10-Q
- Filed: 2021-08-11
- Accepted by EDGAR: Aug 11, 2021, 16:12 ET
- Period: 2021-06-30
- Accession: 0001493152-21-019355
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1821175/000149315221019355/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1821175/000149315221019355/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-04-01 to 2021-06-30 | $2.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2021-01-01 to 2021-06-30 | $4.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2021-04-01 to 2021-06-30 | $906.3k | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2021-01-01 to 2021-06-30 | $1.7m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2021-04-01 to 2021-06-30 | $1.3m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2021-01-01 to 2021-06-30 | $3.0m | us-gaap:GrossProfit |
| Research and development | 3 months, 2021-04-01 to 2021-06-30 | $1.8m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2021-01-01 to 2021-06-30 | $3.1m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2021-04-01 to 2021-06-30 | −$6.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2021-01-01 to 2021-06-30 | −$21.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2021-04-01 to 2021-06-30 | $31.9k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2021-01-01 to 2021-06-30 | $151.4k | us-gaap:InterestExpense |
| Net income | 3 months, 2021-04-01 to 2021-06-30 | −$5.8m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2021-01-01 to 2021-06-30 | −$19.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-04-01 to 2021-06-30 | −$0.50 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 6 months, 2021-01-01 to 2021-06-30 | −$1.88 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 6 months, 2021-01-01 to 2021-06-30 | −$11.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2021-01-01 to 2021-06-30 | $348.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2021-06-30 | $28.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-06-30 | $33.5m | us-gaap:AssetsCurrent |
| Total assets | at 2021-06-30 | $58.7m | us-gaap:Assets |
| Current liabilities | at 2021-06-30 | $5.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-06-30 | $6.7m | us-gaap:Liabilities |
| Shareholders' equity | at 2021-06-30 | $50.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 52,401 characters.

*The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Report. Unless the context requires otherwise, references to the “Company,” “Motorsport,” “we,” “us” and “our” refer to Motorsport Games Inc., a Delaware corporation.*

### Overview

The following overview is a high-level discussion of our operating results, as well as some of the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers provides important context for our results for the three and six months ended June 30, 2021, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Report.

### Our Business

Motorsport Games is a leading racing game developer, publisher and esports ecosystem provider of official motorsport racing series throughout the world, including NASCAR, the iconic 24 Hours of Le Mans endurance race (“Le Mans”) and the associated FIA World Endurance Championship (the “WEC”), the British Touring Car Championship (the “BTCC”), INDYCAR and others. Through the support of our majority shareholder, Motorsport Network, the largest global media company in the motorsport industry, Motorsport Games’ corporate mission is to create the preeminent motorsport gaming and esports entertainment ecosystem by delivering the highest quality, most sophisticated and innovative experiences for racers, gamers and fans of all ages. Our products and services target a large and underserved global motorsport audience.

Started in 2018 as a wholly-owned subsidiary of the Motorsport Network, we are currently the official developer and publisher of the NASCAR video game racing franchise and have obtained the exclusive license to develop multi-platform games for the BTCC, INDYCAR, the Le Mans race and the WEC. We develop and publish multi-platform racing video games including for game consoles, personal computers (PCs) and mobile platforms through various retail and digital channels, including full-game and downloadable content (sometimes known as “games-as-a-service”). Since our formation, our NASCAR video games have sold over one million copies for game consoles and PCs. For fiscal year 2020 and the three and six months ended June 30, 2021, substantially all of our revenue was generated from sales of our racing video games.

### COVID-19 Pandemic Update

The global spread of the ongoing and prolonged COVID-19 pandemic and its variants has created significant business uncertainty for us and others, resulting in volatility and economic disruption. Additionally, the outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home or total lock-down (or similar) orders and business limitations and shutdowns. In late fiscal 2020 and early fiscal 2021, vaccines for combating COVID-19 were approved by health agencies in certain countries and regions where we operate and began to be administered, and we saw some loosening of government-mandated COVID-19 restrictions in certain locations, such as the United States, in response to improved COVID-19 infection levels. More recently, many news agencies have reported the spread of new variants of COVID-19, such as the Delta variant, that are significantly more contagious than previous strains. The spread of these new strains are causing some government authorities to reimpose some or all of the earlier restrictions or impose other restrictions, all in an effort to lessen the spread of COVID-19 and its variants.

As a result of the ongoing and prolonged COVID-19 pandemic, including the related responses from government authorities, our business and operations have been impacted, including the temporary closures of our offices in Miami, Florida, Silverstone, England, and Moscow, Russia, which has resulted in many of our employees working remotely. During the initial COVID-19 outbreak in 2020, demand for our games generally increased, which we believe was primarily attributable to a higher number of consumers staying at home due to COVID-19 related restrictions. Similarly, there was a significant increase in viewership of our esports events since the initial impact of the virus, as these events began to air on both digital and linear platforms, particularly as we were able to attract many of the top “real world” motorsport stars to compete. Conversely, several retailers have experienced, and continue to experience, closures, reduced operating hours and/or other restrictions as a result of the ongoing and prolonged COVID-19 pandemic and its variants, which has negatively impacted the sales of our products from such retailers. Additionally, in our esports business, the ongoing and prolonged COVID-19 pandemic has resulted in the cancellation or postponement of certain events to later dates or shifting events from an in-person format to online only. The emergence of the significantly more contagious Delta variant of COVID-19 and the prevalence of breakthrough cases of infection among fully vaccinated people adds additional uncertainty and could result in further impacts to our business and operations, such as those discussed above and in the section entitled “Risk Factors” in Part I, Item 1A of the 2020 Form 10-K.

We continue to monitor the evolving situation caused by the COVID-19 pandemic, and we may take further actions required by governmental authorities or that we determine are prudent to support the well-being of our employees, suppliers, business partners and others. The degree to which the ongoing and prolonged COVID-19 pandemic impacts our 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, and how quickly and to what extent normal economic and operating conditions can resume.

Further discussion of the potential impacts on our business, financial condition, results of operations, liquidity and the market price of our Class A common stock due to the ongoing and prolonged COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part I, Item 1A of the 2020 Form 10-K.

### Recent Developments

### Initial Public Offering

On January 15, 2021, Motorsport Games completed its initial public offering (“IPO”) of 3,450,000 shares of 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 us an additional 450,000 shares of Class A common stock. We received net proceeds of approximately $63.1 million from the IPO, after deducting underwriting discounts and offering expenses paid by us during 2020 and 2021.

### Amendment to Joint Venture Agreement with ACO

On January 25, 2021, we entered into an amendment to our joint venture agreement with Automobile Club de l’Ouest (“ACO”) with respect to the Le Mans Esports Series Limited joint venture. Pursuant to the amendment, we increased our ownership interest in the joint venture from 45% to 51%. Additionally, through certain multi-year licensing agreements that were entered into in connection with the amendment, we secured the rights to be the exclusive video game developer and publisher for the Le Mans race and the WEC, as well as the rights to create and organize esports leagues and events for the Le Mans race, the WEC and the 24 Hours of Le Mans Virtual event. In exchange for certain of these license rights, we agreed to fund up to €8,000,000 as needed for development of the video game products, to be contributed on an as-needed basis during the term of the applicable license.

### KartKraft Acquisition

On March 19, 2021, we acquired all assets comprising the KartKraft computer video game from Black Delta Holdings PTY, Black Delta Trading Pty Ltd and Black Delta IP Pty Ltd (collectively, “Black Delta”). The purchase price for the assets was $1,000,000, of which $750,000 was paid at closing and $250,000 was paid into escrow and will be paid on the six-month anniversary of closing. Through this acquisition, we plan to enter the simulated kart-racing space. Motorsport Games has founded a new company, Motorsport Games Australia, to support the Black Delta development team.

### Digital Tales Binding Term Sheet

On March 22, 2021, we entered into a binding term sheet with EleDa s.r.l. (“EleDa”). Pursuant to the binding term sheet, we and EleDa intend that we will acquire from EleDa all of the shares of Digital Tales USA, LLC, a Florida limited liability company (the “Interests”). The purchase price for the Interests will be $2,200,000, payable as follows: (i) $1,540,000 at closing; (ii) $260,000 on the six-month anniversary of closing; (iii) $200,000 after the SBK video game license or a substantially similar two-wheel racing brand license currently held by the Digital Tales USA, LLC is amended to be extended beyond current expiration date in 2024 for no less than 3 additional years, so long as such amendment is executed within 12 months of closing; and (iv) $200,000 after the SBK video game license or a substantially similar two-wheel racing brand license currently held by the Digital Tales USA, LLC is amended to be expanded to include console and PC video game development and publishing for the same period, so long as such amendment is executed within 12 months of closing. In addition, we agreed to reimburse EleDa for its legal fees and expenses up to $60,000. The parties are in the process of negotiating the definitive acquisition documents to complete the transaction, which is subject to customary closing conditions.

### Acquisition of 704Games Common Stock

On April 16, 2021, we closed the transactions contemplated by each of: (i) the share exchange agreement with PlayFast Games, LLC, a North Carolina limited liability (“PlayFast”), dated as of March 11, 2021, as amended by that certain amendment dated as of April 1, 2021 (as amended, the “PlayFast Exchange Agreement”); and (ii) the share exchange agreement with Ascend FS, Inc., a British Columbia corporation (“Ascend”), dated as of March 14, 2021, as amended by that certain amendment dated as of April 1, 2021 (as amended, the “Ascend Exchange Agreement”). As a result, we acquired all of the remaining equity interests in 704Games.

The transactions contemplated by the PlayFast Exchange Agreement and the Ascend Exchange Agreement were structured as a merger of 704Games Company with and into 704Games LLC, a newly-formed Delaware limited liability company and a wholly-owned subsidiary of ours, with 704Games LLC being the surviving entity in such merger. The merger consideration issued to (i) PlayFast with respect to the shares of common stock of 704Games Company it surrendered in such merger consisted of 366,542 newly-issued shares of our Class A common stock and $1,542,519 in cash and (ii) Ascend with respect to the shares of common stock of 704Games Company it surrendered in such merger consisted of 488,722 newly-issued shares of our Class A common stock and $2,056,692 in cash.

Pursuant to the PlayFast Exchange Agreement and the Ascend Exchange Agreement, we and the other defendants, without admitting any liability by any party, were released from all claims that Ascend or PlayFast could allege or assert against us as minority stockholders of 704Games. Pursuant to the Ascend Exchange Agreement, the derivative legal action previously commenced by Ascend was dismissed with prejudice on April 25, 2021. See Note 8 – Commitments and Contingencies – Litigation in our condensed consolidated financial statements for additional information.

### Acquisition of Studio397

On April 20, 2021, we closed the transactions contemplated by the share purchase agreement dated April 1, 2021 (the “SPA”) with Luminis International BV (“Luminis”) and Technology In Business B.V. (“TIB”) pursuant to which we purchased from TIB 100% of the share capital of Studio397 B.V. The purchase price for the shares was $16,000,000, payable in two installments, as follows: $12,800,000 at closing and $3,200,000 on the first-year anniversary of closing. See Note 3 – Acquisitions – Studio397 in our condensed consolidated financial statements for additional information.

### INDYCAR License

On July 13, 2021, we entered into certain license agreements with INDYCAR LLC (“INDYCAR”) to use certain licensed intellectual property for motorsports and/or racing video gaming products and esports events related to, themed as, or containing the INDYCAR SERIES. The license agreements are long-term agreements , in connection with which the parties intend to form an exclusive relationship for the development of video games and events to be the official video games and esports events of the INDYCAR SERIES.

In exchange for the gaming license, we will pay to INDYCAR an annual development fee through the date of launch, after which INDYCAR will receive a royalty equal to a certain percentage of sales of physical and digital video gaming products, subject to certain minimum guarantees. In exchange for the esports license, we will pay to INDYCAR, on an annual basis, a royalty equal to a certain percentage of the net revenue (as defined in the esports license agreement) derived from or in connection with the events during the previous calendar year. We expect the debut INDYCAR SERIES title to launch in 2023 on Xbox and PlayStation consoles, as well as on PC.

### Trends and Factors Affecting Our Business

### Product Release Schedule

Our financial results are affected by the timing of our product releases and the commercial success of those titles. Our NASCAR Heat products have historically accounted for the majority of our revenue. We currently anticipate releasing our next generation NASCAR console/PC game, NASCAR 21: Ignition, in the fourth quarter of 2021. Additionally, we obtained the exclusive license to develop multi-platform games for the BTCC in May 2020, and we recently obtained the exclusive license to develop multi-platform games for INDYCAR and the WEC series, including the iconic 24 hours of Le Mans race, in July 2021 and January 2021, respectively. The BTCC and Le Mans games are currently under development, and we currently anticipate releasing games for these racing series in 2022. The INDYCAR game is scheduled for release in 2023. Going forward, we intend to expand our license arrangements to other internationally recognized racing series and the platforms we operate on. We believe that having a broader product portfolio will improve our operating results and provide a revenue stream that is less cyclical based on the release of a single game per year.

### Economic Environment and Retailer Performance

Our physical gaming products are sold primarily through a distribution network with exclusive partners who specialize in the distribution of games, including through mass-market retailers (e.g., Target, Wal-Mart), consumer electronics stores (e.g., Best Buy), discount warehouses, game specialty stores (e.g., GameStop) and other online retail stores (e.g., Amazon). We currently derive, and expect to continue to derive, significant revenues from sales of our products to a very limited number of distribution partners. For the year ended December 31, 2020 and the six months ended June 30, 2021, we had one distribution partner through which we sold substantially all of our products for the retail channel, which represented approximately 34% and 3.0% of our total revenue, respectively. See “Risk Factors—Risks Related to Our Business and Industry—The importance of retail sales to our business exposes us to the risks of that business model” and “Risk Factors—Risks Related to Our Business and Industry—We primarily depend on a single third-party distribution partner to distribute our games for the retail channel, and our ability to negotiate favorable terms with such partner and its continued willingness to purchase our games is critical for our business” in Part I, Item 1A of the 2020 Form 10-K for additional information regarding the importance of retail sales and our distribution partners to our business.

Additionally, we continue to monitor economic conditions, including the impact of the ongoing and prolonged COVID-19 pandemic, that may unfavorably affect our businesses, such as deteriorating consumer demand, delays in development, pricing pressure on our products, credit quality of our receivables and foreign currency exchange rates. The COVID-19 pandemic has affected and may continue to affect our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time, particularly due to the emergence of the significantly more contagious Delta variant of COVID-19 and the prevalence of breakthrough cases of infection among fully vaccinated people. For example, several retailers have experienced, and continue to experience, closures, reduced operating hours and/or other restrictions as a result of the ongoing and prolonged COVID-19 pandemic, which has negatively impacted the sales of our products from such retailers. See “—COVID-19 Pandemic Update” for additional information regarding the impact of COVID-19 on our business and operations.

### Hardware Platforms

We derive most of our revenue from the sale of products made for PCs and video game consoles manufactured by third parties, such as Sony Interactive Entertainment Inc.’s (“Sony”) PlayStation and Microsoft Corporation’s (“Microsoft”) Xbox consoles, which comprised approximately 86% and 78% of our total revenue for the year ended December 31, 2020 and the six months ended June 30, 2021, respectively. For the year ended December 31, 2020 and the six months ended June 30, 2021, the sale of products for Microsoft Windows via Steam comprised approximately 5% and 18% of our total revenue, respectively, and the sale of products for mobile platforms comprised approximately 9% and 10% of our total revenue, respectively. The success of our business is dependent upon consumer acceptance of video game console/PC platforms and continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those recently released by Sony and Microsoft, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The new Sony and Microsoft consoles provide “backwards compatibility” (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products

### Digital Business

Players increasingly purchase our games as digital downloads, as opposed to purchasing physical discs. All of our titles that are available through retailers as packaged goods products are also available through direct digital download. For the year ended December 31, 2020 and the six months ended June 30, 2021, approximately 51% and 97%, respectively, of our revenue from sales of video games for game consoles and PCs was through digital channels. We believe this trend of increasing direct digital downloads is primarily due to benefits relating to convenience and accessibility that digital downloads provide, which has been heightened during the ongoing and prolonged COVID-19 pandemic. In addition, as part of our digital business strategy, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through in-game purchases and extra content.

### Esports

We are striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing games as well as on behalf of third-party racing game developers and publishers. In 2020, we facilitated 56 esports events, which included official esports events for NASCAR, 24 Hours of Le Mans, the Official World Rallycross Esports Championship, FIA Formula E and other race series. The total number of people that have watched our esports events in 2020 was approximately 55 million. Through the six months ended June 30, 2021, we have facilitated 11 esports events, and the total number of people that have watched our esports events in the first six months of 2021 was approximately 509,000. As we continue to add to our existing portfolio of games centered around popular licensed racing series, this will provide us the opportunity to further grow our esports business by having more titles to produce our esports events.

### Technological Infrastructure

As our digital business has grown, our games and services increasingly depend on the reliability, availability and security of our technological infrastructure. We are investing and expect to continue to invest in technology, hardware and software to support our games and services, including with respect to security protections. Our industry is prone to, and our systems and networks are subject to, cyberattacks, computer viruses, worms, phishing attacks, malicious software programs, and other information security incidents that seek to exploit, disable, damage, disrupt or gain access to our networks, our products and services, supporting technological infrastructure, intellectual property and other assets. As a result, we continually face cyber risks and threats that seek to damage, disrupt or gain access to our networks and our gaming platform, supporting infrastructure, intellectual property and other assets. See “Risks Related to Our Business and Industry—We may experience security breaches and cyber threats” in the section entitled “Risk Factors” in Part I, Item 1A of the 2020 Form 10-K for additional information.

### Rapidly Changing Industry

We operate in a dynamic industry that regularly experiences periods of rapid, fundamental change. In order to remain successful, we are required to anticipate, sometimes years in advance, the ways in which our products and services will compete. We adapt our business by investing in creative and technical talent and new technologies, evolving our business strategies and distribution methods and developing new and engaging products and services. For example, the global adoption of mobile devices and a business model for those devices that allows consumers to try new games with no up-front cost, and that are monetized through services associated with the game, has led to significant growth in the mobile gaming industry, which we believe is a continuing trend. Accordingly, in conjunction with the launch of our new NASCAR console and PC game, we plan to launch an updated NASCAR Heat Mobile in 2021, which is our NASCAR mobile racing game. Given the recent popularity and fast growing nature of the branded casual game experience, we also plan to introduce a slate of NASCAR branded casual gaming options, starting with the officially licensed NASCAR “match three” game in 2021.

### Recurring Revenue Sources

Our business model includes revenue that we deem recurring in nature, such as revenue from our annualized sports franchise (currently NASCAR Heat) for game consoles, PC and mobile platforms. We have been able to forecast the revenue from this area of our business with greater relative confidence than for new games, services and business models. As we continue to incorporate new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of our business.

### Reportable Segments

We use “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by our chief operating decision maker for making operating decisions and assessing performance as the source for determining our reportable segments. Our chief operating decision maker is our Chief Executive Officer (“CEO”), who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We classified our reportable operating segments into: (i) the development and publishing of interactive racing video games, entertainment content and services (the “Gaming segment”); and (ii) the organization and facilitation of esports tournaments, competitions and events for our licensed racing games as well as on behalf of third-party video game racing series and other video game publishers (the “esports segment”).

### Components of Our Results of Operations

### Revenues

We have historically derived substantially all revenue from sales of our games and related extra content that can be played by customers on a variety of platforms, including game consoles, mobile phones, PCs and tablets. Starting in 2019, we began generating sponsorship revenues from our production of live and virtual esports events.

Our product and service offerings include, but are not limited to, full PC, console and mobile games with both online and offline functionality, which generally include:

- the initial game delivered digitally or via physical disc at the time of sale and typically provides access to offline core game content;
- updates on a when-and-if-available basis, such as software patches or updates, and/or additional content to be delivered in the future, both paid and free; and
- Esports events.

### Cost of Revenues

Cost of revenues for our Gaming segment is primarily comprised of royalty expenses attributable to our license arrangement with NASCAR and certain other third-parties relating to our NASCAR racing series games. Cost of revenues for our Gaming segment is also comprised of merchant fees, disc manufacturing costs, packaging costs, shipping costs, warehouse costs, distribution fees to distribute products to retail stores, mobile platform fees associated with our mobile revenue (for transactions in which we are acting as the principal in the sale to the end customer) and amortization of certain acquired license agreements and other intangible assets acquired through our various acquisitions. Cost of revenues for our esports segment consists of the cost of producing esports events and paying prize money.

### Sales and Marketing

Sales and marketing expenses are primarily composed of salaries, benefits and related taxes of our in-house marketing teams, advertising, marketing and promotional expenses, including fees paid to social media platforms, Motorsport Network and other websites where we market our products.

### Development

Development expenses consist of the cost to develop the games we produce, as well as developing the content that we use in our esports leagues. Development expenses include salaries, benefits and operating expenses of our in-house development teams, as well as consulting expenses for any contracted external development. Development expenses also include expenses associated with our digital platform, software licenses, maintenance and development overhead.

### General and Administrative

General and administrative expenses consist primarily of salaries, benefits and other costs associated with our operations including, finance, human resources, information technology, public relations, legal, audit and compliance fees, facilities and other external general and administrative services.

### Depreciation and Amortization

Depreciation and amortization expenses include depreciation on fixed assets (primarily computers and office equipment), as well as amortization of definite lived intangible assets acquired through our various acquisitions.

### Results of Operations

### Three Months Ended June 30, 2021 compared to Three Months Ended June 30, 2020

#### Revenue

| Revenues: | For the Three Months Ended, June 30, 2021 | 2020 |
| --- | ---: | ---: |
| Gaming | $2,238,927 | $3,795,652 |
| Esports | - | 93,165 |
| Total Segment and Consolidated Revenues | $2,238,927 | $3,888,817 |

Revenues were $2,238,927 and $3,888,817 for the quarters ended June 30, 2021 and 2020, respectively, a decrease of $1,649,890 or 42%. For the three months ended June 30, 2021, revenues from our Gaming segment decreased $1,556,725, or 41%, to $2,238,927 from $3,795,652 for the three months ended June 30, 2020. The decrease in our Gaming segment revenues compared to the 2020 period was primarily due to lower sales of our console and PC games and, to a lesser extent, a reduction in mobile revenues. The NASCAR Heat 5 game was released in July 2020 and the majority of sales from a new release occur closest to the release date so we typically see a decrease in revenues over time for our games that have been released. We also benefited from additional sales of our video games during the 2020 period due to increased demand for our games, which we believe was primarily attributable to a higher number of consumers staying at home due to COVID-19 related restrictions during that time.

Esports segment revenues were $0 and $93,165 for the three months ended June 30, 2021 and 2020, respectively, a decrease of $93,165 from sponsorship revenues received in the second quarter of 2020. We held seven events during the second quarter of 2021 but did not have any sponsorship revenues from these events.

#### Cost of Revenues

| Cost of Revenues: | For the Three Months Ended, June 30, 2021 | 2020 |
| --- | ---: | ---: |
| Gaming | $902,751 | $1,174,649 |
| Esports | 3,552 | 97,590 |
| Total Segment and Consolidated Cost of Revenues | $906,303 | $1,272,239 |

Cost of revenues were $906,303 and $1,272,239 for the three months ended June 30, 2021 and 2020, respectively, a decrease of $365,936 or 29%. The decrease is primarily due to a decrease in revenues combined with lower overall costs due to a higher percentage of digital sales.

Cost of revenues from our Gaming segment were $902,752 and $1,174,649 for the three months ended June 30, 2021 and 2020, respectively, a decrease of $271,897 or 23%, primarily due to a decrease in revenues and lower overall costs due to a higher percentage of digital sales, partially offset by an increase in license amortization expense. Cost of revenues from our esports segment were $3,552 and $97,590 for the quarters ended June 30, 2021 and 2020, respectively, a decrease of $94,038 or 96%. Cost of revenues in our esports segment are primarily comprised of contract labor to staff events.

#### Gross Profit

| Gross Profit: | For the Three Months Ended, June 30, 2021 | 2020 |
| --- | ---: | ---: |
| Gaming | $1,336,176 | $2,621,003 |
| Esports | (3,552) | (4,425) |
| Total Segment and Consolidated Gross Profit | $1,332,624 | $2,616,578 |

Gross Profit was $1,332,624, or 60% of revenues and $2,616,578, or 67% of revenues, for the three months ended June 30, 2021 and 2020, respectively, a decrease of $1,283,954, or 49%. The decrease in gross profit was primarily due to the reduction of $1,556,725 in revenues from our Gaming segment and an increase of $304,998 in amortization expenses, partially offset by $283,387 of lower royalty expenses and $335,354 lower product retail and distribution expenses due to lower revenues and a higher percentage of digital games sales, which have a higher gross margin than the sale of physical units.

With lower revenues, our Gaming segment gross profit was $1,336,176 and $2,621,003 for the three months ended June 30, 2021 and 2020, respectively. Costs relating to staffing at esports events resulted in a gross loss of $3,552 and $4,425 in our esports segment for the quarters ended June 30, 2021 and 2020, respectively.

#### Operating Expenses

Operating expenses were $7,306,028 and $2,515,308 for the three months ended June 30, 2021 and 2020, respectively, an increase of $4,790,720, primarily attributable to expenses incurred in connection with acquisitions and expansion of development staff to develop more gaming titles, as described further below.

#### Sales and Marketing

Sales and marketing expenses were $704,222 and $722,046 for the three months ended June 30, 2021 and 2020, respectively. The decrease of $17,824, or 2%, is due to increased marketing payroll of $201,793, offset by a reduction in marketing spend of $181,267 and non-cash compensation expense of $38,350.

#### Development

Development expenses were $1,818,178 and $1,202,343 for the three months ended June 30, 2021 and 2020, respectively. The $615,835, or 51%, increase in development expenses is primarily due to $447,236 in higher salaries and benefits to develop and support an increased number of games and platforms. We are now actively working on 6 title games compared to 1 title game in process during 2020.

#### General and Administrative

General and administrative expenses were $4,717,180 and $582,408 for the three months ended June 30, 2021 and 2020, respectively, an increase of $4,134,772. The increase in general and administrative expenses was primarily attributable to $1,051,995 in compensation expense for the settlement of certain stock appreciation rights (“SARs”) of 704Games that were settled in cash in connection with our acquisition of the remaining equity interests in 704Games during the second quarter of 2021; a $877,773 increase in payroll expense (excluding the compensation expense for the settlement of the 704Games’ SARs and non-cash compensation expense), primarily due to the increase in our headcount to manage a larger portfolio of brands across a greater number of platforms; a $114,854 increase in non-cash compensation expense; a $635,549 increase in insurance expense due to the directors’ and officers’ insurance policy that we obtained when we became a publicly traded company; a $1,187,469 increase in professional fees, primarily relating to various acquisitions and corporate transactions, including the buyout through a merger of 704Games, litigation matters relating to our previous purchases of certain equity interests in 704Games, and an increase in consulting fees primarily to support the preparation of public company filings.

#### Depreciation and Amortization

Depreciation and amortization expenses were $66,448 and $8,511 for the quarters ended June 30, 2021 and 2020, respectively, an increase of $57,937. The increase was primarily due to additional depreciation expense for fixed assets acquired during 2021.

#### Other Income (Expense)

Interest expense was $31,899 and $218,500 for the three months ended June 30, 2021 and 2020, respectively. The decrease of $186,601, or 85%, was due to pay-downs of related party debt due to Motorsport Network that occurred during the first and second quarters of 2021.

The gain attributable to equity method investment in the Le Mans joint venture was $0 and $41,008 for the three months ended June 30, 2021 and 2020, respectively. We discontinued equity method accounting and began to fully consolidate the Le Mans joint venture upon acquiring a majority interest during the first quarter of 2021.

Other income, net was $44,360 and 44,688 for the quarters ended June 30, 2021 and 2020, respectively. This primarily represents rental income from the sub-lease of our Charlotte, NC office space.

Other comprehensive loss was $70,809 and $0 for the quarters ended June 30, 2021 and 2020, respectively. This was primarily due to increased activity in our U.K., Australian and Netherlands subsidiaries and represents unrecognized foreign currency exchange losses.

### Six Months Ended June 30, 2021 compared to Six Months Ended June 30, 2020

| Revenues: | For the Six Months Ended, June 30, 2021 | 2020 |
| --- | ---: | ---: |
| Gaming | $4,689,140 | $7,030,219 |
| Esports | 23,919 | 93,165 |
| Total Segment and Consolidated Revenues | $4,713,059 | $7,123,384 |

Revenues were $4,713,059 and $7,123,384 for the six months ended June 30, 2021 and 2020, respectively, a decrease of $2,410,325 or 34%. For the six months ended June 30, 2021, revenues from our Gaming segment decreased $2,341,079, or 33%, to $4,689,140 from $7,030,219 for the six months ended June 30, 2020. The decrease in our Gaming segment revenues compared to the 2020 period was due primarily to lower sales of our console and PC games and, to a lesser extent, a reduction in mobile revenues.

Esports segment revenues were $23,919 and $93,165 for the six months ended June 30, 2021 and 2020, respectively, a decrease of $69,246 due to lower sponsorship revenues.

#### Cost of Revenues

| Cost of Revenues: | For the Six Months Ended, June 30, 2021 | 2020 |
| --- | ---: | ---: |
| Gaming | $1,617,867 | $2,098,115 |
| Esports | 70,244 | 242,621 |
| Total Segment and Consolidated Cost of Revenues | $1,688,111 | $2,340,736 |

Cost of revenues were $1,688,111 and $2,340,736 for the six months ended June 30, 2021 and 2020, respectively, a decrease of $652,625 or 28%. The decrease is primarily due to a decrease in revenues combined with lower overall costs due to a higher percentage of digital game sales.

Cost of revenues from our Gaming segment were $1,617,867 and $2,098,115 for the six months ended June 30, 2021 and 2020, respectively, a decrease of $480,248 or 23%, primarily due to a decrease in revenues and lower overall costs due to a higher percentage of digital game sales, partially offset by an increase in license amortization expense. Cost of revenues from our esports segment were $70,244 and $242,621 for the six months ended June 30, 2021 and 2020, respectively, a decrease of $172,377, or 71%. Cost of revenues in our esports segment are primarily comprised of contract labor to staff events.

#### Gross Profit

| Gross Profit: | For the Six Months Ended, June 30, 2021 | 2020 |
| --- | ---: | ---: |
| Gaming | $3,071,273 | $4,932,104 |
| Esports | (46,325) | (149,456) |
| Total Segment and Consolidated Gross Profit | $3,024,948 | $4,782,648 |

Gross Profit was $3,024,948, or 64% of revenues, and $4,782,648, or 67% of revenues, for the six months ended June 30, 2021 and 2020, respectively, a decrease of $1,757,700 or 37%. The decrease in gross profit was primarily due to the reduction in revenues from our Gaming segment and increase in amortization expenses. This was partially offset by the increased percentage of digital game sales, which have a higher gross margin than the sale of physical units.

With lower revenues and higher amortization expense, our Gaming segment gross profit was $3,071,273 and $4,932,104 for the six months ended June 30, 2021 and 2020, respectively. Costs relating to staffing at esports events resulted in a gross loss of $46,325 and $149,456 in our esports segment for the six months ended June 30, 2021 and 2020, respectively.

#### Operating Expenses

Operating expenses were $24,375,421 and $4,800,954 for the six months ended June 30, 2021 and 2020, respectively, an increase of $19,574,467, primarily attributable to expenses incurred in connection with our IPO in January 2021 and subsequent acquisitions, non-cash compensation expenses of $9,193,190, acquisition related expenses of $878,571 and other IPO related expenses of $2,947,192.

#### Sales and Marketing

Sales and marketing expenses were $1,728,440 and $1,360,185 for the six months ended June 30, 2021 and 2020, respectively. The $368,255 increase in sales and marketing expenses includes an increase non-cash compensation expense of $83,372 primarily relating to option grants in connection with the IPO, as well as higher headcount to support an increased number of games and platforms (Xbox, PlayStation, PC, Switch and mobile), which contributed $117,637 to the increase.

#### Development

Development expenses were $3,068,540 and $2,138,147 for the six months ended June 30, 2021 and 2020, respectively. The $930,393 increase in development expenses reflects higher compensation due to additional headcount to develop and support an increased number of games and platforms and an increase in non-cash compensation expense of $58,301 relating to option grants in connection with the IPO.

#### General and Administrative

General and administrative expenses were $19,481,218 and $1,275,160 for the six months ended June 30, 2021 and 2020, respectively, an increase of $18,206,058. The increase in general and administrative expenses was primarily attributable to $12,700,110 in acquisition and IPO related expenses (including IPO bonuses and non-cash compensation expense); a $1,645,863 increase in compensation expense (excluding IPO bonuses, compensation expense for the settlement of the 704Games’ SARs and non-cash compensation expense), primarily due to the increase in our headcount to manage a larger portfolio of brands across a greater number of platforms; a $1,177,976 increase in insurance and office expense primarily due to the directors’ and officers’ insurance policy that we obtained when we became a publicly traded company; and a $2,087,881 increase in professional fees, primarily relating to a $1,202,929 increase in legal fees for various acquisitions and corporate transactions, including the buyout through a merger of 704Games, and litigation matters relating to our previous purchases of certain equity interests in 704Games.

#### Depreciation and Amortization

Depreciation and amortization expenses were $97,223 and $27,462 for the six months ended June 30, 2021 and 2020, respectively, an increase of $69,761. The increase was primarily due to additional depreciation expense on fixed assets acquired during 2021.

#### Other Income (Expense)

Interest expense was $151,438 for the six months ended June 30, 2021 as compared to $217,360 for the six months ended June 30, 2020, a decrease of $65,922 when compared to the 2020 period. This was primarily due to the interest-bearing related party loan from Motorsport Network that was paid down in the first and second quarters of 2021.

The gain (loss) attributable to equity method investment in the Le Mans joint venture was $1,370,837 for the six months ended June 30, 2021 and ($29,234) for the six months ended June 30, 2020. The 2021 gain was primarily resulting from acquiring additional ownership in the Le Mans joint venture during the first quarter of 2021. We discontinued equity method accounting and began to fully consolidate the Le Mans joint venture upon acquiring a majority interest during the first quarter of 2021.

Other income, net was $84,707 and $32,858 for the six months ended June 30, 2021 and 2020, respectively. Other income, net of $84,708 for the six months ended June 30, 2021 was primarily comprised of $91,164 in rental income from the sub-lease of our Charlotte, NC office space. For the quarter ended June 30, 2020, other income, net of $32,858 was comprised primarily of $63,584 in rental income from the sub-lease of our Charlotte, NC office space and miscellaneous income of $1,810, partially offset by $32,536 in expense for the write-off of fixed assets that were provided to the sub-lease tenant of the Charlotte, NC office.

Other comprehensive loss was $103,723 and $0 for the six months ended June 30, 2021 and 2020, respectively. This was primarily due to increased activity in our U.K., Australian and Netherlands subsidiaries and represents unrecognized foreign currency exchange losses.

### Liquidity and Capital Resources

### Liquidity

Since our inception, we have historically financed our operations primarily through advances from Motorsport Network, which were subsequently incorporated into a line of credit provided by Motorsport Network pursuant to a promissory note, as described below.

On January 15, 2021, we completed our IPO of 3,450,000 shares of 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 us an additional 450,000 shares of Class A common stock. We received net proceeds of approximately $63.1 million from the IPO, after deducting underwriting discounts and offering expenses payable by us.

We believe that our existing cash on hand will be sufficient to fund our operations for at least the next 12 months. In addition, we may choose to raise additional funds at any time through equity or debt financing arrangements, which may or may not be needed for additional working capital, capital expenditures or other strategic investments. However, there are currently no commitments in place for future financing and there can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all. If we are unable to obtain adequate funds on reasonable terms, we may be required to significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms.

Our operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including our ability to successfully develop new products or enhancements to our existing products, continued development and expansion of our esports platform and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product offerings.

### Cash Flows From Operating Activities

Cash flows (used in) from operating activities for the six months ended June 30, 2021 and 2020 were ($11,264,546) and $2,297,962, respectively. The net cash used in operating activities for the six months ended June 30, 2021 was primarily a result of cash used to fund a net loss of $20,046,366, adjusted for net non-cash expenses of $8,681,602, and $100,219 of net cash used changes in the levels of operating assets and liabilities. The net cash provided by operating activities for the six months ended June 30, 2020 was primarily a result of cash used to fund a net loss of $232,042, adjusted for net non-cash expenses of $702,162, offset by $1,827,842 of net cash provided by changes in the levels of operating assets and liabilities.

### Cash Flows From Investing Activities

Net cash used in investing activities for the six months ended June 30, 2021 was $14,008,174, which was attributable to $1,000,000 paid in connection with the acquisition of KartKraft, $12,785,463 was paid in connection with the acquisition of Studio397, the purchases of intangible assets and property and equipment of $27,928 and $348,033, respectively, partially offset by $153,250 for the purchase of additional interest in the Le Mans joint venture (net of cash acquired). Net cash used in investing activities for the six months ended June 30, 2020 was $903,154, which was attributable to purchases of property and equipment for $11,155 and the purchases of intangible assets of $891,999.

### Cash Flows From Financing Activities

We experienced positive cash flows from financing activities for the six months ended June 30, 2021 in the amount of $49,501,815, which was primarily attributable to approximately $63,700,000 of net cash provided by the sale of stock in our IPO, partially offset by approximately $10,800,000 of net repayments to Motorsport Network and $3,600,000 for the purchase of the remaining equity interests in 704Games. During the six months ended June 30, 2020, we used $66,794 of net cash from financing activities, which was attributable to $38,946 of net cash repaid to Motorsport Network and $27,848 of cash used in payment of deferred offering costs.

### Promissory Note Line of Credit

On April 1, 2020, we entered into a promissory note with Motorsport Network (the “Promissory Note”) for a line of credit of up to $10,000,000 at an interest rate of 10% per annum. The principal amount under the Promissory Note was primarily funded through one or more advances from Motorsport Network, including advances in August and October 2020 for purposes of acquiring an additional ownership interest in 704Games. Previous non-interest-bearing advances due to Motorsport Network as of December 31, 2019 also were included in the amount outstanding under the Promissory Note at the time it was executed. The Promissory Note 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 Promissory Note, dated September 4, 2020, not to demand or otherwise accelerate any amount due under the Promissory Note that would otherwise constrain the Company’s liquidity position, including the Company’s ability to continue as a going concern. We may prepay the Promissory Note in whole or in part at any time or from time to time without penalty or charge. In the event we or any of our subsidiaries consummate 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.

On November 23, 2020, the Company and Motorsport Network entered into an amendment to the Promissory Note, effective as of September 15, 2020. Under the terms of the amendment, the line of credit under the Promissory Note was increased from $10,000,000 to $12,000,000. All other terms remained the same.

During the six months ended June 30, 2021, the Company repaid $12,663,168 of the Promissory Note and drew down an additional $1,868,312, such that the balance due to Motorsport Network was $285,198 as of June 30, 2021. Subsequent to June 30, 2021, the Company repaid $132,378 of the Promissory Note.

### Off-Balance Sheet Arrangements

We did not have, during the periods presented, and we do not currently have, any relationships with any organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

### Critical Accounting Policies and Significant Accounting Estimates

Our management’s discussion and analysis of our condensed consolidated financial condition and results of operations are based on our condensed and consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these condensed and consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the condensed consolidated financial statements, as well as the reported expenses during the reporting periods. The accounting estimates that require our most significant, difficult, and subjective judgments have an impact on revenue recognition, including reserves for sales returns and price protection, valuation allowance of deferred income taxes, valuation of acquired companies and equity investments, the recognition and disclosure of contingent liabilities, and goodwill and intangible assets impairment testing. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions.

Our significant accounting policies are more fully described in our condensed consolidated financial statements included elsewhere in this Report.

### Recently Issued Accounting Standards

Our analysis of recently issued accounting standards are more fully described in our condensed consolidated financial statements included elsewhere in this Report.

## Controls and procedures

As filed, 4,683 characters.

### Evaluation of Disclosure Controls and Procedures

As of June 30, 2021, being the end of the period covered by this Report, our management conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)).

Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

Based on that evaluation, our chief executive officer and chief financial officer concluded that, as of June 30, 2021, our disclosure controls and procedures were not effective due to the material weaknesses in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) as discussed in Part II, Item 9A. Controls and Procedures in the 2020 Form 10-K, and that continued to exist as of June 30, 2021.

Subsequent to the end of the quarter ended June 30, 2021, we engaged a firm with the requisite experience to provide management with compliance advisory services relating to the Sarbanes-Oxley Act of 2002 (“SOX”), to accomplish our objectives of full SOX compliance. The advisory firm has since commenced its work with assisting management in preparing a comprehensive, quantitative and qualitative Financial Risk Assessment (“FRA”). The completion of the FRA is viewed as a required task under SOX.

To further management’s efforts in remediating the reported material weaknesses, management has prepared a Delegation of Authority Matrix with the help of our outside advisor. The organization-wide Delegation of Authority Matrix will serve as the basis of ensuring that there are adequate internal controls, including separation of duties in our financially significant processes. The Delegation of Authority Matrix is currently undergoing final management review.

Further, management is finalizing a plan to perform a top-down SOX assessment for 2021. We expect to commence documenting several higher priority entity and business processes in the 3rd quarter of 2021. Specifically, Entity Level Controls (ELC), Information Technology General Controls (ITGC), Disclosure Controls and Procedures (DCP) and Financial Statement Close and Financial Reporting (FSCFR) processes will be addressed on a priority basis.

We have also hired additional qualified finance and accounting personnel to assist in the preparation and review of our financial statements and SEC filings.

Management will continue to review and document the Segregation of Duties (SOD) and Access Rules across all processes. Management will also formulate and implement a process for review and formal documentation of management estimates, underlying assumptions and judgments that are used in the financial statement preparation and reporting process.

Management expects to make and report continuous progress: (a) in the effective remediation of the identified material weaknesses; and (b) in designing and operating a commensurate internal control and disclosure control environment.

### Limitations on the Effectiveness of Controls

In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

### Changes in Internal Control over Financial Reporting

Except as described above, there were no other changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) under the Exchange Act during the quarter ended June 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 574 characters.

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, which could materially affect our business, financial condition or future results. The risks described therein are not the only risks facing the Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or operating results.

Filed Aug 11, 2021.
Source: SEC EDGAR, the filing index for accession 0001493152-21-019355. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.