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

- Company: [Motorsport Games Inc.](/companies/msgm.md) (CIK 1821175)
- Form: 10-Q
- Filed: 2021-11-04
- Accepted by EDGAR: Nov 4, 2021, 16:23 ET
- Period: 2021-09-30
- Accession: 0001493152-21-027253
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1821175/000149315221027253/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1821175/000149315221027253/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-07-01 to 2021-09-30 | $2.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2021-01-01 to 2021-09-30 | $6.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2021-07-01 to 2021-09-30 | $949.1k | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2021-01-01 to 2021-09-30 | $2.6m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2021-07-01 to 2021-09-30 | $1.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2021-01-01 to 2021-09-30 | $4.2m | us-gaap:GrossProfit |
| Research and development | 3 months, 2021-07-01 to 2021-09-30 | $3.0m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2021-01-01 to 2021-09-30 | $6.1m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2021-07-01 to 2021-09-30 | −$6.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2021-01-01 to 2021-09-30 | −$27.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2021-07-01 to 2021-09-30 | $160.3k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2021-01-01 to 2021-09-30 | $311.7k | us-gaap:InterestExpense |
| Net income | 3 months, 2021-07-01 to 2021-09-30 | −$6.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2021-01-01 to 2021-09-30 | −$26.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-07-01 to 2021-09-30 | −$0.56 | us-gaap:EarningsPerShareBasicAndDiluted |
| Diluted EPS | 9 months, 2021-01-01 to 2021-09-30 | −$2.32 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 9 months, 2021-01-01 to 2021-09-30 | −$16.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2021-01-01 to 2021-09-30 | $665.2k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2021-09-30 | $22.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-09-30 | $27.9m | us-gaap:AssetsCurrent |
| Total assets | at 2021-09-30 | $55.0m | us-gaap:Assets |
| Current liabilities | at 2021-09-30 | $6.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-09-30 | $10.0m | us-gaap:Liabilities |
| Shareholders' equity | at 2021-09-30 | $43.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 52,802 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”) on March 24, 2021 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 nine months ended September 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 stockholder, Motorsport Network, whose mission is to be the leading, independent voice for the global motorsport and automotive industries and their fans, 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 Motorsport Network, 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 nine months ended September 30, 2021, substantially all of our revenue was generated from sales of our racing video games.

As of September 30, 2021, we have increased our total headcount to approximately 168 people, made up of 167 full-time employees, including 116 dedicated to game development, in order to continue the development of our expanded product offerings.

### 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 throughout 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, new variants of COVID-19, such as the Delta variant, that are significantly more contagious than previous strains, have emerged. 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; general economic factors, such as increased inflation, and the effect on discretionary spending by consumers; 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 $63,073,783 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 (approximately $9,000,000) 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 transferred to an escrow account, which was released in September 2021 on the 6-month anniversary of closing. Through this acquisition, we are entering the simulated kart-racing space. Motorsport Games has founded a new company, Motorsport Games Australia, to support the Black Delta development team.

### 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, discounted to $15,911,781, payable in two installments, as follows: $12,800,000 at closing and $3,200,000 on the one-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. Most recently, we released our next generation NASCAR console/PC game, NASCAR 21: Ignition, on October 28, 2021. We anticipate releasing NASCAR Heat Ultimate Edition+ on Nintendo Switch on November 19, 2021, the first-ever NASCAR title to come to Nintendo Switch consoles. Additionally, in May 2020 and January 2021, respectively, we obtained the exclusive licenses to develop multi-platform games for the BTCC and the WEC series, including the iconic 24 hours of Le Mans race and in July 2021 we obtained the license to develop multi-platform games for INDYCAR. 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 nine months ended September 30, 2021, we had one distribution partner through which we sold substantially all of our physical disk products for the retail channel, which represented approximately 32% and 3% of our total revenue, respectively. Physical disk sales represented a lower percentage of total revenues in 2021 as we reduced physical inventory in the channel in preparation for the launch of NASCAR 21: Ignition, which was released on October 28, 2021, as well as the lack of any new product releases in 2021 prior to the launch of NASCAR 21: Ignition. 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, increased inflation, supply chain constraints, labor supply issues, 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 67% of our total revenue for the year ended December 31, 2020 and the nine months ended September 30, 2021, respectively. For the year ended December 31, 2020 and the nine months ended September 30, 2021, the sale of products for Microsoft Windows via Steam comprised approximately 5% and 19% 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 nine months ended September 30, 2021, approximately 62% 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. For the full-year 2020, we facilitated many 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. During the three months ended September 30, 2021, we launched our Le Mans Virtual Series esports event, with the first event being watched for an average of approximately 18 minutes by viewers across our owned digital channels. 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. For example, the global adoption of portable and mobile gaming devices has led to significant growth in portable and mobile gaming, which we believe is a continuing trend. Accordingly, in conjunction with the launch of our next generation NASCAR console/PC game, NASCAR 21: Ignition, we plan to launch an updated NASCAR Heat Ultimate Edition+ on Nintendo Switch in the fourth quarter of 2021. 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 for mobile devices, starting with the officially licensed NASCAR “match three” game in 2022.

### 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 deem this recurring because many existing game owners purchase annual updates, which includes updated drivers, liveries and cars as they are released. We have been able to forecast the revenue from this area of our business with greater relative confidence than for new games, services and business models. As we continue to incorporate new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of our business.

### 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 primarily of the cost of event staffing, event production and event 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, which includes salaries, benefits and operating expenses of our in-house development teams, as well as consulting expenses for any contracted external development. Development expenses also include expenses relating to our software licenses, maintenance and studio operating expenses.

### General and Administrative

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

### Depreciation and Amortization

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

### Results of Operations

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

#### Revenue

| Revenues: |  | For the Three Months Ended, September 30, 2021 | 2020 |
| --- | --- | ---: | ---: |
|  | Gaming | $2,042,322 | $8,791,071 |
|  | Esports | 96,144 | 197,126 |
| Total Segment and Consolidated Revenues |  | $2,138,466 | $8,988,197 |

For the three months ended September 30, 2021, revenues from our Gaming segment decreased $6,748,749, or 77%, to $2,042,322 from $8,791,071 for the three months ended September 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. The NASCAR Heat 5 game was released in July 2020 and the majority of sales from a new release occur closest to the launch date. Post release, we typically see a decrease in revenues over time for our games. We recently released our next generation NASCAR console/PC game, NASCAR 21: Ignition on October 28, 2021, and anticipate releasing NASCAR Heat Ultimate Edition+ on Nintendo Switch, both in the fourth quarter of 2021. 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 $96,144 and $197,126 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $100,982, or 51%, from sponsorship revenues received during the third quarter of 2020. The decrease in esports segment revenues was due to lower number of events held in 2021 and less sponsorship revenue.

#### Cost of Revenues

| Cost of Revenues: |  | For the Three Months Ended, September 30, 2021 | 2020 |
| --- | --- | ---: | ---: |
|  | Gaming | $848,705 | $2,883,631 |
|  | Esports | 100,434 | 37,116 |
| Total Segment and Consolidated Cost of Revenues |  | $949,139 | $2,920,747 |

Cost of revenues from our Gaming segment were $848,705 and $2,883,631 for the three months ended September 30, 2021 and 2020, respectively, a decrease of $2,034,926, or 71%, primarily due to a decrease in revenues as a result of the timing of our product releases as discussed above. Cost of revenues from our esports segment were $100,434 and $37,116 for the three months ended September 30, 2021 and 2020, respectively, an increase of $63,318, or 171%. The increase for our esports segment was primarily the result of higher costs recognized from the Le Mans esports event held during the third quarter of 2021. As discussed below, we fully consolidated the Le Mans Joint Venture in the third quarter of 2021 whereas we applied equity accounting for the Le Mans Joint Venture in the third quarter of 2020. Cost of revenues in our esports segment are primarily comprised of contract labor to staff events, production costs and prize monies.

#### Gross Profit

| Gross Profit: |  | For the Three Months Ended, September 30, 2021 | 2020 |
| --- | --- | ---: | ---: |
|  | Gaming | $1,193,617 | $5,907,440 |
|  | Esports | (4,290) | 160,010 |
| Total Segment and Consolidated Gross Profit |  | $1,189,327 | $6,067,450 |

Gross Profit was $1,189,327, or 56% of revenues, and $6,067,450, or 68% of revenues, for the three months ended September 30, 2021 and 2020, respectively, a decrease of $4,878,121, or 80%. The decrease in gross profit was primarily due to the reduction in revenues from our Gaming segment and an increase of $344,274 in amortization directly attributable to the cost of revenues, partially offset by $779,007 of lower royalty expenses and $1,392,915 in lower product retail and distribution expenses due to lower revenues and a higher percentage of digital games sales. In addition, the timing of esports events resulted in $100,982 less revenue recognized during the three months ended September 30, 2021 when compared to the same period in 2020, impacting overall gross profit.

#### Operating Expenses

Operating expenses were $7,576,824 and $3,236,598 for the three months ended September 30, 2021 and 2020, respectively, an increase of $4,340,226, or 134%, primarily attributable to expenses incurred in connection with our 2021 acquisitions and expansion of development staff during the current year to develop more gaming titles, across more platforms.

#### Sales and Marketing

Sales and marketing expenses were $1,348,773 and $961,450 for the three months ended September 30, 2021 and 2020, respectively. The increase of $387,323, or 40%, was primarily due to increased marketing payroll and stock-based compensation of $381,932.

#### Development

Development expenses were $3,015,233 and $1,300,314 for the three months ended September 30, 2021 and 2020, respectively. The $1,714,919, or 132%, increase in development expenses was primarily due to higher development expenses required to support an increased number of games and platforms. We are now actively working on six title games compared to one title game in process during 2020.

#### General and Administrative

General and administrative expenses were $3,130,944 and $936,818 for the three months ended September 30, 2021 and 2020, respectively, an increase of $2,194,126, or 234%. The increase in general and administrative expenses was primarily attributable to a $842,011 increase in professional fees primarily relating to the following:

| Category | Amount | Comments |
| --- | ---: | --- |
| Management Consulting | $241,595 | Increased expenses attributable to the Le Mans Joint Venture, and general corporate expenditures arising as a result of being a public company, such as investor and public relations consultancy. |
| Legal Fees | 193,099 | Acquisition-related expenses |
| Accounting and Audit Fees | 199,081 | Additional costs from being a public company, as well as valuation support |
| Computer Consulting | 99,547 | Increased expenses attributable to the Le Mans Joint Venture and consulting fees for Studio397 |
| Recruitment Fees | 67,484 | Increased expenses attributable to staff, primarily development, to support increased number of games and platform offerings |
| Other Professional Fees | 41,205 | Various |
| Total | $842,011 |  |

Additionally, there was a $411,495 increase in compensation expense primarily due to the increase in our headcount to manage a larger portfolio of brands across a greater number of platforms; a $646,102 increase in insurance expense primarily due to the directors’ and officers’ insurance policy that we obtained when we became a publicly traded company; a $123,940 increase in travel and entertainment commensurate with increased headcount; and a $170,578 increase in other general and administrative expenses primarily due to increased software license fees.

#### Depreciation and Amortization

Depreciation and amortization expenses were $81,874 and $38,016 for the three months ended September 30, 2021 and 2020, respectively, an increase of $43,858, or 215%. The increase was primarily due to additional depreciation expense for fixed assets acquired during 2021.

#### Interest Expense

Interest expense was $160,310 and $230,965 for the three months ended September 30, 2021 and 2020, respectively. The decrease of $70,655, or 31%, was due to pay-downs of related party debt due to Motorsport Network that occurred during the first and second quarters of 2021, partially offset by an increase in non-cash interest for accretion of the INDYCAR license liability.

#### Gain (Loss) Attributable to Equity Method Investment

The loss attributable to equity method investment in the Le Mans Joint Venture was $0 and $40,530 for the three months ended September 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 (Expense), net

Other expense, net was $110,822 for the three months ended September 30, 2021. For the three months ended September 30, 2020, other income, net was $46,337 representing a variance of $157,159. This primarily represents foreign currency exchange losses.

#### Other comprehensive loss

Other comprehensive loss was $537,581 and $0 for the three months ended September 30, 2021 and 2020, respectively. This was primarily due to increased activity in our subsidiaries in the U.K., Australia, Russia and the Netherlands and represents unrecognized foreign currency exchange losses.

### Nine Months Ended September 30, 2021 compared to Nine Months Ended September 30, 2020

#### Revenues

| Revenues: |  | For the Nine Months Ended, September 30, 2021 | 2020 |
| --- | --- | ---: | ---: |
|  | Gaming | $6,731,462 | $15,821,290 |
|  | Esports | 120,063 | 290,291 |
| Total Segment and Consolidated Revenues |  | $6,851,525 | $16,111,581 |

For the nine months ended September 30, 2021, revenues from our Gaming segment decreased by $9,089,828, or 57%, to $6,731,462 from $15,821,290 for the nine months ended September 30, 2020. The decrease in revenues was due primarily to the timing of our product releases during the reporting period in 2020 versus after the reporting period in 2021, as discussed above. 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.

For the nine months ended September 30, 2021, revenues from our esports segment consisted of $120,063, which was comprised primarily of sponsorship and event revenues from Le Mans esports events. Esports segment revenue was $290,291 for the nine months ended September 30, 2020. The difference of $170,228 primarily relates to sponsorship income of $172,126 earned from Formula E esports events held during the third quarter of 2020, which did not reoccur in 2021.

#### Cost of Revenues

| Cost of Revenues: |  | For the Nine Months Ended, September 30, 2021 | 2020 |
| --- | --- | ---: | ---: |
|  | Gaming | $2,466,572 | $4,981,748 |
|  | Esports | 170,678 | 279,735 |
| Total Segment and Consolidated Cost of Revenues |  | $2,637,250 | $5,261,483 |

For the nine months ended September 30, 2021, cost of revenues from our Gaming segment decreased by $2,515,174, or 50%, to $2,466,572 from $4,981,748 for the nine months ended September 30, 2020, primarily due to decreased revenue during the current year period and the costs associated with delivering that revenue.

For the nine months ended September 30, 2021, cost of revenues from our esports segment was $170,678, which related to our event staffing, live stream production costs and cash prizes. Cost of revenues for the nine months ended September 30, 2020 were $279,737. The difference in cost of revenues for prior year period was primarily driven by increased costs associated with producing the Formula E esports events held in 2020.

#### Gross Profit

| Gross Profit: |  | For the Nine Months Ended, September 30, 2021 | 2020 |
| --- | --- | ---: | ---: |
|  | Gaming | $4,264,890 | $10,839,542 |
|  | Esports | (50,615) | 10,556 |
| Total Segment and Consolidated Gross Profit |  | $4,214,275 | $10,850,098 |

For the nine months ended September 30, 2021, gross profit from our Gaming segment decreased by $6,574,652, or 61%, to $4,264,890 from $10,839,542 for the nine months ended September 30, 2020, primarily due to the reduction in revenues from our Gaming segment that were partially offset by lower royalty and distribution expenses, as discussed above.

For the nine months ended September 30, 2021, our esports segment recorded a gross loss of $50,615 versus a gross profit of $10,554 for the nine months ended September 30, 2020. The gross loss in the 2021 period reflects revenue generated from sponsorships and live events, which were more than offset by the costs of cash prizes and esports event and production costs.

#### Sales and Marketing

For the nine months ended September 30, 2021, sales and marketing expenses increased by $755,578, or 33%, to $3,077,213 from $2,321,635 for the nine months ended September 30, 2020, primarily due to the increased staffing costs of $582,941 to support upcoming product releases, as well as additional IPO-related expenses, such as cash bonuses and stock-based compensation, and an increase in marketing spend of $172,637.

#### Development

For the nine months ended September 30, 2021, development expenses increased by $2,645,312, or 77%, to $6,083,773 from $3,438,461 for the nine months ended September 30, 2020. The increase in development expenses was primarily due to higher internal and external development expenses required to support the ongoing development of an increased number of games and platforms, as well as certain IPO -related expenses, including cash bonuses and stock-based compensation.

#### General and Administrative

For the nine months ended September 30, 2021, general and administrative expenses increased by $20,384,789, or 915%, to $22,612,162 from $2,227,373 for the nine months ended September 30, 2020. The increase was primarily attributable to expenses incurred in connection with our IPO in January 2021, increased professional fees and costs associated with acquisitions made during 2021. These expenses include non-cash compensation expense of $9,276,277, acquisition related expenses of $1,930,566 and other IPO-related expenses of $2,947,192 for the nine months ended September 30, 2021. Additionally, compensation expense increased $4,331,879 (excluding stock-based compensation), as we have staffed up to be a public company and expanded our product and platform offerings. Insurance expense increased $1,702,516 in 2021, primarily as a result of public company directors’ and officers’ insurance premium costs and other general and administrative costs. The increase in professional fees primarily related to various acquisitions and corporate transactions, including the buyout through merger of 704Games, litigation matters relating to our previous purchase of certain equity interests in 704Games, and an increase in consulting fees primarily to support the preparation of public company filings.

#### Depreciation and Amortization

For the nine months ended September 30, 2021, depreciation and amortization expense increased by $129,014, or 257%, to $179,097 from $50,083 for the nine months ended September 30, 2020. The increase was primarily due to additional depreciation expense for fixed assets acquired during 2021.

#### Interest Expense

For the nine months ended September 30, 2021, interest expense decreased by $136,577, or 31%, to $311,748 from $448,325 for the nine months ended September 30, 2020. The decrease in interest expense was due to pay-downs of related party debt due to Motorsport Network that occurred during the first and second quarters of 2021, partially offset by an increase in non-cash interest for accretion of the INDYCAR license liability.

#### Gain (Loss) Attributable to Equity Method Investment

For the nine months ended September 30, 2021, the gain attributable to equity method investment in the Le Mans Joint Venture increased by $1,440,601, to a gain of $1,370,837 from a loss of $69,764 for the nine months ended September 30, 2020. The increase was primarily due to the purchase of an additional interest in the Le Mans Joint Venture during the first quarter of 2021, by which we acquired a majority ownership position in the joint venture and began full consolidation of the Le Mans Joint Venture.

#### Other Income (Expense), net

For the nine months ended September 30, 2021, other expense, net increased by $105,230, or 133% to an expense of $26,115 from income of $79,115 for the nine months ended September 30, 2020. The $26,115 in expense for the nine months ended September 30, 2021 was primarily comprised of rental income from the sub-lease of our Charlotte, NC office space of $137,192, offset by foreign currency losses of $158,229. For the nine months ended September 30, 2020, other income, net was primarily comprised of rental income from the sub-lease of our Charlotte, NC office space.

#### Other comprehensive loss

Other comprehensive loss was $466,772 and $0 for the nine months ended September 30, 2021 and 2020, respectively, which was primarily due to unrealized currency exchange loss in our subsidiaries in the U.K., Australia, Russia and the Netherlands.

### 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 $63,073,783 from the IPO, after deducting underwriting discounts and offering expenses paid 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 or by selling assets or operations.

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

Net cash (used in) provided by operating activities for the nine months ended September 30, 2021 and 2020 was ($16,723,099) and $562,231, respectively. The net cash used in operating activities for the nine months ended September 30, 2021 was primarily a result of cash used to fund a net loss of $26,704,996, adjusted for net non-cash adjustments of $9,588,820, and $393,077 of net cash provided by changes in the levels of operating assets and liabilities. Net cash provided by operating activities for the nine months ended September 30, 2020 was primarily due to net income of $2,373,652, adjusted for non-cash expenses in the amount of $615,107 and by $2,426,528 of cash used to fund changes in the levels of operating assets and liabilities.

### Cash Flows From Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2021 was $14,525,331, which was primarily attributable to $1,000,000 paid in connection with the acquisition of KartKraft, $12,785,463 paid in connection with the acquisition of Studio397 and the purchases of intangible assets and property and equipment of $893,118. During the nine months ended September 30, 2020, net cash used in investing activities was $1,443,796, which was primarily attributable to $1,200,000 for the purchase of additional shares of common stock of 704Games, $178,640 for the purchases of intangible assets and property and equipment and $65,156 for the acquisition of equity method investee attributable to our investment in the Le Mans Joint Venture.

### Cash Flows From Financing Activities

Net cash provided by financing activities during the nine months ended September 30, 2021 and 2020 was $49,434,464 and $1,971,979, respectively. Cash flows from financing activities for the nine months ended September 30, 2021 was primarily attributable to approximately $63,700,000 of net cash provided by the sale of stock in our IPO, partially offset by approximately $12,936,000 of net repayments to Motorsport Network and $3,599,211 for the purchase of the remaining equity interests in 704Games. During the nine months ended September 30, 2020, cash provided by financing activities was primarily attributable to advances provided by Motorsport Network to fund operating and investing activities of the Company and payment of deferred offering costs for $370,947.

### 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 nine months ended September 30, 2021, the Company repaid $12,935,519 of the Promissory Note and drew down an additional $2,073,312, such that the balance due to Motorsport Network was $55,551 as of September 30, 2021. Subsequent to September 30, 2021, the Company has not made any repayments 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, 4,445 characters.

### Evaluation of Disclosure Controls and Procedures

As of September 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 September 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 September 30, 2021.

### Remediation of Material Weaknesses

During the quarter ended September 30, 2021, management continued to work with its outside Sarbanes-Oxley Act of 2002 (“SOX”) advisors to accomplish its objectives of SOX compliance. The Company completed its initial quantitative and qualitative Financial Risk Assessment (“FRA”), a required task under SOX. Further, management has finalized a plan to perform a top-down SOX assessment for 2021.

Management has commenced documenting the Company’s higher priority entity and business processes during the quarter ended September 30, 2021. Specifically, Entity Level Controls (ELC), Information Technology General Controls (ITGC), Disclosure Controls and Procedures (DCP), Financial Statement Close and Financial Reporting (FSCFR), and Revenue, Equity and Accounts Payable processes are being addressed on a priority basis.

During the quarter ended September 30, 2021, management has also taken steps to remediate the identified material weaknesses in our internal control over financial reporting by implementing measures to strengthen controls including the design of new controls relating to the Company’s segregation of duties across all business processes. This includes the development of a Delegation of Authority Matrix that will serve to identify appropriate segregation of duties across financially significant processes.

Further, management is implementing 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 plans to complete the remediation of the previously identified material weaknesses during 2022.

The Company continues to strengthen its resources by hiring additional qualified finance and accounting personnel to assist in the preparation and review of our financial statements and SEC filings.

### 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 September 30, 2021, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 539 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 the 2020 Form 10-K, which could materially affect our business, financial condition or future results. The risks described in the 2020 Form 10-K 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 Nov 4, 2021.
Source: SEC EDGAR, the filing index for accession 0001493152-21-027253. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.