# Motorsport Games Inc.: Form 10-Q for the period ended Mar 31, 2023

- Company: [Motorsport Games Inc.](/companies/msgm.md) (CIK 1821175)
- Form: 10-Q
- Filed: 2023-05-11
- Accepted by EDGAR: May 11, 2023, 16:31 ET
- Period: 2023-03-31
- Accession: 0001493152-23-016408
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1821175/000149315223016408/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1821175/000149315223016408/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-01-01 to 2023-03-31 | $1.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-01-01 to 2023-03-31 | $1.2m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-01-01 to 2023-03-31 | $480.6k | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-01-01 to 2023-03-31 | $2.4m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-01-01 to 2023-03-31 | −$5.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $199.1k | us-gaap:InterestExpense |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | −$5.1m | us-gaap:NetIncomeLoss |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | −$2.33 | us-gaap:EarningsPerShareBasic |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | −$5.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $15.1k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-03-31 | $5.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-03-31 | $8.0m | us-gaap:AssetsCurrent |
| Total assets | at 2023-03-31 | $22.1m | us-gaap:Assets |
| Current liabilities | at 2023-03-31 | $6.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-03-31 | $10.8m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-03-31 | $11.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 50,204 characters.

The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on March 31, 2023 and the condensed consolidated financial statements and accompanying notes included in Part I, Item 1 of this Report. Unless the context requires otherwise, references to the “Company,” “Motorsport Games,” “we,” “us” and “our” refer to Motorsport Games Inc., a Delaware corporation.

### About Motorsport Games

Motorsport Games is a leading racing game developer, publisher and esports ecosystem provider of official motorsport racing series throughout the world, including NASCAR, the iconic 24 Hours of Le Mans endurance race (“Le Mans”) and the associated FIA World Endurance Championship (the “WEC”), INDYCAR, the British Touring Car Championship (the “BTCC”) and others. Our portfolio is comprised of some of the most prestigious motorsport leagues and events in the world. Further, in 2021 we acquired the KartKraft karting simulation game as well as Studio 397 B.V. (“Studio397”) and their rFactor 2 realistic racing simulator technology and platform, adding both games and their underlying technology to our portfolio.

Started in 2018 as a wholly-owned subsidiary of Motorsport Network, we are currently the official developer and publisher of the NASCAR video game racing franchise and have obtained the official licenses to develop multi-platform games for the BTCC, the 24 Hours of Le Mans race and the WEC, as well as INDYCAR. We develop and publish multi-platform racing video games including for game consoles, personal computers (PCs) and mobile platforms through various retail and digital channels, including full-game and downloadable content. For the three months ended March 31, 2023 and 2022, a majority of our revenue was generated from sales of our NASCAR racing video games.

As of March 31, 2023, we have a total headcount of 128 people, made up of 127 full-time employees, including 90 dedicated to game development, to continue developing our expanded product offerings. Our headcount numbers as of March 31, 2023, reflect that we have ceased our development operations in Russia effective September 2022, as a result of the Ukraine-Russia conflict and as such, we do not expect the Company’s development operations to have significant exposure to changes in circumstances arising from the Ukraine-Russia conflict.

### Reportable Segments

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

### 2022 Restructuring Program

On September 8, 2022, the Company announced an organization restructuring (the “2022 Restructuring Program”) designed to reduce the Company’s marketing, general and administrative expenses, improve the Company’s profit and maximize efficiency, cash flow and liquidity. The 2022 Restructuring Program includes right-sizing the organization and operating with more efficient workflows and processes. The primary components of the organizational restructuring involve consolidating certain functions; reducing layers of management, where appropriate, to increase accountability and effectiveness; and streamlining support functions to reflect the new organizational structure. The leaner organizational structure is also expected to improve communication flow and cross-functional collaboration, leveraging the more efficient business processes. In addition, given the ongoing uncertain economic environment and the potential effect that it could have on the Company’s net sales, these actions will also provide the Company with additional flexibility.

As a result of the 2022 Restructuring Program, the Company expects to eliminate approximately 20% of its overhead costs worldwide and deliver approximately $4 million of total annualized cost reductions by the end of 2023, of which $2.5 million was achieved by the end of 2022. As of March 31, 2023, the Company had increased its annualized savings to $3.9 million, while having incurred restructuring costs of approximately $0.2 million to date, which primarily consisted of severance payments.

### Trends and Factors Affecting Our Business

***Product Release Schedule:*** Our financial results are impacted by the timing of our product releases and the commercial success of those titles. Our recent product releases include:

|  |  |
| --- | --- |
| Title | Release Date and Platform |
| NASCAR 21: Ignition | October 28, 2021, available on PC and next generation consoles |
| NASCAR Heat Ultimate Edition+ | November 19, 2021, available on Nintendo Switch |
| KartKraft | January 26, 2022, available on PC (full release) |
| rFactor 2 Q1 2022 Content Update | February 7, 2022, available on PC |
| rFactor 2 Q2 2022 Content Update | May 10, 2022, available on PC |
| rFactor 2 Q3 2022 Content Update | August 8, 2022, available on PC |
| NASCAR 21: Ignition 2022 Season Expansion | October 6, 2022, available on PC and next generation consoles |
| NASCAR Rivals | October 14, 2022, available on Nintendo Switch |
| rFactor 2 Q4 2022 Content Update | November 7, 2022, available on PC |
| rFactor 2 Q1 2023 Content Update | February 21, 2023, available on PC |

We continually evaluate our product release schedule and modify the timing of upcoming products if we believe it will result in a better consumer experience. We recently modified the timing of the upcoming INDYCAR game to 2024, from an original planned release in 2023. We continue to work on this upcoming title, as well as NASCAR, BTCC and Le Mans game experiences that we currently anticipate releasing in 2023 and 2024.

***Concentration of Sales:*** Our NASCAR products have historically accounted for the majority of our revenue; however, we have diversified our product offerings and are generating revenues from KartKraft, rFactor 2 and the 24 Hours of Le Mans Virtual event, which reduced the percentage of our revenues derived from NASCAR products for the three months ended March 31, 2023 and 2022. For example, revenues associated with our NASCAR franchise accounted for approximately 57% and 69% of our total revenue for the three months ended March 31, 2023 and 2022, respectively. Additionally, with the acquisitions of licenses to develop multi-platform games for INDYCAR, BTCC and the WEC series, including the iconic 24 hours of Le Mans race, we expect our future revenue streams will become further diversified and consist of revenues from multiple games and different franchises.

***Retail Distribution:*** Our physical gaming products are sold through a distribution network with an exclusive partner who specializes in the distribution of games through mass-market retailers (e.g., Target, Wal-Mart), consumer electronics stores (e.g., Best Buy), discount warehouses, game specialty stores (e.g., GameStop) and other online retail stores (e.g., Amazon). We expect to continue to derive significant revenues from sales of our physical gaming products to a very limited number of distribution partners. For the three months ended March 31, 2023 and 2022, we sold substantially all of our physical disk products for the retail channel through a single distribution partner, which represented approximately 0% and 15% of our total revenue for the three months ended March 31, 2023 and 2022, 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 2022 Form 10-K for additional information regarding the importance of retail sales and our distribution partners to our business.

***Hardware Platforms:*** We derive most of our revenue from the sale of products made for PCs, mobile devices, and video game consoles manufactured by third parties, such as Sony Interactive Entertainment Inc.’s (“Sony”) PlayStation and Microsoft Corporation’s (“Microsoft”) Xbox consoles. Sale of physical disk products for video game consoles comprised approximately 0% and 15% of our total revenue for the three months ended March 31, 2023 and 2022, respectively. For the three months ended March 31, 2023 and 2022, the sale of products for Microsoft Windows via Steam comprised approximately 28% and 17% of our total revenue, respectively, and the sale of products for mobile platforms comprised approximately 6% and 3% 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 released by Sony and Microsoft in November 2020, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The latest generation of Sony and Microsoft consoles provide “backwards compatibility” (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products.

***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 three months ended March 31, 2023, and 2022, approximately 92% and 65%, respectively, of our revenue from sales of video games for game consoles and PCs was through digital channels. We believe this trend of increasing direct digital downloads is primarily due to benefits relating to convenience and accessibility that digital downloads provide. In addition, as part of our digital business strategy, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through in-game purchases and extra content.

***Esports:*** We are striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing games as well as on behalf of third-party racing game developers and publishers. The first quarter of 2023 was another successful quarter for our Esports segment, with the grand finale of the Le Mans Virtual Series 2022/23, the 24 Hours of Le Mans Virtual, in January and the return of the popular community rFactor2 competition ‘GT Challenge’. Our dedicated esports events had a cumulative total of approximately 8.8 million video views with approximately 27 million minutes watched for the three months ended March 31, 2023.

***Recurring Revenue Sources:*** Our business model includes revenue that we deem recurring in nature, such as revenue from our annualized sports franchise (currently NASCAR) for game consoles, PC, and mobile platforms. We deem this recurring because many existing game owners purchase, sometimes free of charge, annual updates, which includes updated drivers, liveries, and cars as they are released. We have been able to forecast the revenue from this area of our business with greater relative confidence than for new games, services, and business models. As we continue to incorporate new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of our business.

### Components of Our Results of Operations

### Revenues

We have historically derived substantially all of our revenue from sales of our games and related extra content that can be played by customers on a variety of platforms, including game consoles, mobile phones, PCs and tablets. Starting in 2019, we began generating sponsorship revenues from our production of live and virtual esports events. In early 2022, we also began offering software development services for racing simulators.

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

- the initial game delivered digitally or via physical disk at the time of sale, which also typically provides access to offline core game content;
- updates to previously released games on a when-and-if-available basis, such as software patches or updates, and/or additional content to be delivered in the future, both paid and free; and
- outsourced code and content development services.

Our product and service offerings included within the Esports segment relate primarily to curating esports events.

### Cost of Revenues

Cost of revenues for our Gaming segment is primarily comprised of royalty expenses attributable to our license arrangement with NASCAR and certain other third parties relating to our NASCAR racing series games. Cost of revenues for our Gaming segment is also comprised of merchant fees, disk manufacturing costs, packaging costs, shipping costs, warehouse costs, distribution fees to distribute products to retail stores, mobile platform fees associated with our mobile revenue (for transactions in which we are acting as the principal in the sale to the end customer) and amortization of certain acquired license agreements and other intangible assets acquired through our various acquisitions. Furthermore, cost of revenues for our Gaming segment includes costs associated with our outsourced code and content development services. Cost of revenues for our Esports segment consists primarily of the cost of event staffing and event production.

### Sales and Marketing

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

### Development

Development expenses consist of the cost to develop the games we produce, which includes salaries, benefits, and operating expenses of our in-house development teams, as well as consulting expenses for any contracted external development. Development expenses also include expenses relating to our software licenses, maintenance, and studio operating expenses.

### General and Administrative

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

### Depreciation and Amortization

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

### Results of Operations

### Three Months Ended March 31, 2023 compared to Three Months Ended March 31, 2022

In this section, references to 2023 refer to the three months ended March 31, 2023 and references to 2022 refer to the three months ended March 31, 2022.

#### Revenue

| Revenues: | For the Three Months Ended March 31, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Gaming | $1,439,217 | $2,958,388 | $(1,519,171) | (51.4)% |
| Esports | 290,138 | 363,401 | (73,263) | (20.2)% |
| Total Revenues | $1,729,355 | $3,321,789 | $(1,592,434) | (47.9)% |

Consolidated revenues were $1.7 million and $3.3 million for 2023 and 2022, respectively, a decrease of $1.6 million, or 47.9%, when compared to the prior period.

Gaming segment revenues represented 83.2% and 89.1% of our total 2023 and 2022 revenues, respectively, decreasing by $1.5 million, or 51.4%, when compared to the prior period. The decrease in Gaming segment revenues was primarily due to $0.6 million in lower digital game sales and $0.8 million in lower retail sales, which were primarily driven by lower volumes of sales, as well as less favorable pricing and higher than expected retail pricing concessions on existing games in our product portfolio. This was furthered by a $0.1 million reduction in revenues earned through the development of simulation platforms for third-parties. The change in digital game sales was primarily driven by a $0.5 million and $0.1 million reduction in NASCAR title sales on PC, consoles and mobile platforms and KartKraft title sales on PC, respectively. The reduction in retail game sales of $0.8 million was due to lower retail sales of our NASCAR titles in 2023 when compared to the same period in 2022.

Esports segment revenues represented 16.8% and 10.9% of our total 2023 and 2022 revenues, respectively, decreasing by $0.1 million, or 20.2%, when compared to the prior period. The decrease in Esports segment revenue was primarily due to lower sponsorship revenue from our Le Mans Virtual Series, which completed its 2022-23 season in January 2023.

#### Cost of Revenues

| Cost of revenues: | For the Three Months Ended March 31, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Gaming | $874,839 | $1,404,007 | $(529,168) | (37.7)% |
| Esports | 373,897 | 609,799 | (235,902) | (38.7)% |
| Total Cost of Revenues | $1,248,736 | $2,013,806 | $(765,070) | (38.0)% |

Consolidated cost of revenues were $1.2 million and $2.0 million for 2023 and 2022, respectively, a decrease of $0.8 million, or 38.0%, when compared to the prior period.

Gaming segment cost of revenues represented 70.1% and 69.7% of our total 2023 and 2022 cost of revenues, respectively, decreasing by $0.5 million, or 37.7%, when compared to the prior period. The decrease in Gaming segment cost of revenues was primarily driven by a $0.2 million reduction in game production costs, a $0.2 million reduction in royalty payments and a $0.1 million reduction in license and developed technology amortization expense The decrease in production costs was due to no new physical inventory production in 2023, compared to additional units of NASCAR 21: Ignition being produced in 2022, and the reduction in royalty payments was driven by the decrease in digital and retail game sales.

Esports segment cost of revenues represented 29.9% and 30.3% of our total 2023 and 2022 cost of revenues, respectively, decreasing by $0.2 million, or 38.7%, when compared to the prior period. The decrease in Esports segment cost of revenues was primarily driven by $0.2 million of lower studio and televised production costs associated with the final round of the Le Mans Virtual Series event, which took place in January 2023.

#### Gross Profit

| Gross Profit (Loss) | For the Three Months Ended March 31, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Gaming | $564,378 | $1,554,381 | $(990,003) | (63.7)% |
| Esports | (83,759) | (246,398) | 162,639 | (66.0)% |
| Total Gross Profit (Loss) | $480,619 | $1,307,983 | $(827,364) | (63.3)% |

|  |  |  |
| --- | ---: | ---: |
| Gaming - Gross Profit Margin | 39.2% | 52.5% |
| Esports - Gross Profit Margin | (28.9)% | $(67.8)% |
| Total Gross Profit Margin | 27.8% | 39.4% |

Consolidated gross profit was $0.5 million and $1.3 million for 2023 and 2022, respectively, a decrease of $0.8 million, or 63.3%, when compared to the prior period. Gross profit margin was 27.8% in 2023, compared to 39.4% in 2022, where the basis point decrease was driven primarily by lower gaming revenues and certain fixed expenses such as the minimum annual royalty guarantees, as well as amortization costs of developed technology in the Gaming segment.

Gaming segment gross profit was $0.6 million for 2023, compared to $1.6 million for 2022, representing a gross profit margin of 39.2% for 2023 and 52.5% for 2022. The decrease in our Gaming segment gross profit of $1.0 million, and corresponding decrease in gross profit margin, was primarily due to lower retail and digital game sales of $1.5 million, whereas royalty costs declined by $0.2 million, and amortization of developed technology declined by approximately $0.1 million.

Esports segment gross loss was $0.1 million for 2023, compared to $0.2 million for 2022, representing a negative gross profit margin of 28.9% and 67.8% for 2023 and 2022, respectively. This improvement in our Esports segment gross loss of $0.1 million, and corresponding improvement in negative gross profit margin, was primarily due to lower production costs associated with the final round of the Le Mans Virtual Series event, which took place in January 2023.

#### Operating Expenses

| Operating Expenses: | For the Three Months Ended March 31, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Sales and marketing | $618,410 | $1,688,449 | $(1,070,039) | (63.4)% |
| Development | 2,397,134 | 2,404,338 | (7,204) | (0.3)% |
| General and administrative | 2,779,110 | 3,423,153 | (644,043) | (18.8)% |
| Impairment of goodwill | - | 4,788,268 | (4,788,268) | (100.0)% |
| Impairment of intangible assets | - | 4,491,054 | (4,491,054) | (100.0)% |
| Depreciation and amortization | 97,354 | 116,071 | (18,717) | (16.1)% |
| Total Operating Expenses | $5,892,008 | $16,911,333 | $(11,019,325) | (65.2)% |

Changes in operating expenses are explained in more detail below:

#### Sales and Marketing

Sales and marketing expenses were $0.6 million and $1.7 million for 2023 and 2022, respectively, representing a $1.1 million, or 63.4%, decrease when compared to the prior period. The reduction in sales and marketing expense was primarily driven by a $0.8 million reduction in external marketing expense, as well as a $0.3 million reduction in payroll expense as a result of lower headcount when compared to the prior period.

#### Development

Development expenses were $2.4 million for both 2023 and 2022, representing no significant change when compared to the prior period. Internal development services decreased by $0.5 million compared to the prior period, whereas external development services increased by $0.3 million and technology costs increased by $0.2 million compared to the prior period. The development expenses incurred relate to the production and support of existing games in our product portfolio, as well as the development of future games such as the planned INDYCAR title.

#### General and Administrative

General and administrative (“G&A”) expenses were $2.8 million and $3.4 million for 2023 and 2022, respectively, a decrease of $0.6 million, or 18.8%, when compared to the prior period. The reduction in G&A expense was primarily driven by a $0.2 million reduction in stock-based compensation expense, a $0.2 million reduction in payroll and employee related expenses, following certain headcount reductions in 2022, a $0.1 million reduction in software expenditures, a $0.1 million reduction in insurance allocations, and a $0.1 million reduction in travel costs. These reductions were partially offset by a $0.1 million increase in legal, consultant, and other professional fees incurred in 2023.

#### Impairment of Goodwill

Impairment of goodwill was $0 and $4.8 million in 2023 and 2022, respectively. The impairment loss for 2022 primarily relates to goodwill acquired in connection with the acquisition of Studio397 that was deemed impaired as a result of impairment assessments performed during the year. The triggers for the assessments were primarily revisions made in the first quarter of 2022 to the scope and timing of certain product releases included in our product roadmap, as well as a significant reduction in the Company’s market capitalization since the date of the last annual impairment assessment. Changes to the forecasted revenues and discount rates, as a result of the triggers identified, were the primary drivers for the change in fair value since the annual assessment.

#### Impairment of Intangible Assets

Impairment of indefinite-lived intangible assets was $0 and $3.2 million in 2023 and 2022, respectively. The triggers for the assessments were the changes to the Company’s product roadmap and the Company’s market capitalization, as referenced above. The indefinite-lived intangible asset impairment losses primarily relate to the rFactor 2 trade name and the Le Mans Video Gaming License and are mainly driven by a reduction in expected future revenues following changes made to the Company’s product roadmap in the first quarter of 2022, as well as changes to the discount rates and royalty rates used when valuing the assets.

Impairment of finite-lived intangible assets was $0 and $1.3 million in 2023 and 2022, respectively. The triggers for the assessments were the changes to the Company’s product roadmap and the Company’s market capitalization, as referenced above. The finite-lived intangible asset impairment losses relate to the rFactor 2 technology and was primarily driven by a change in the technical obsolescence assumption used when determining the fair value of the asset.

#### Depreciation and Amortization

Depreciation and amortization expenses for 2023 and 2022 presented no significant changes to the depreciation of capital assets.

#### Interest Expense

Interest expense was $0.2 million for both 2023 and 2022 primarily from ongoing non-cash interest accretion of our INDYCAR and BTCC license liabilities.

#### Other (Expenses) Income, net

Other income, net was $0.4 million for 2023, compared to other expense, net of $0.2 million for 2022, an increase of $0.6 million compared to the prior period. Other income, net of $0.4 million for 2023 was primarily comprised of foreign currency gains of $0.2 million, incurred remeasuring transactions denominated in a currency other than U.S. dollars, as well as $0.05 million in rental income from the sub-lease of our Charlotte, NC office space, and $0.1 million in interest expense forgiveness. Other expenses, net of $0.2 million for 2022 was primarily comprised of foreign currency losses of $0.2 million, incurred remeasuring transactions denominated in a currency other than U.S. dollars, partially offset by rental income.

#### Other Comprehensive Loss

Other comprehensive loss was $0.01 million for 2023, compared to other comprehensive loss of $0.02 million for 2022. The $0.01 million improvement was primarily due to activity in our U.K., Australian, Georgian and Netherlands subsidiaries and represents unrealized foreign currency translation adjustments.

#### Net Loss Attributable to Non-Controlling Interest

For 2023, the loss attributable to the non-controlling interest decreased by $0.6 million, or 81%, to a loss of $0.2 million as compared to a loss of $0.8 million for 2022. The improvement was attributed to the reduction of net losses in Le Mans Esports Series Ltd (the “Le Mans Joint Venture”). For 2023 and 2022, the Le Mans Joint Venture incurred a net loss of $0.2 million and $0.8 million respectively.

### Liquidity and Capital Resources

### Liquidity

Since our inception and prior to our IPO, we financed our operations primarily through advances from Motorsport Network, which were subsequently incorporated into a line of credit provided by Motorsport Network pursuant to the $12 million Line of Credit, as described below.

On January 15, 2021, we completed our IPO of 345,000 shares of Class A common stock at a price to the public of $200 per share, which includes the exercise in full by the underwriters of their option to purchase from us an additional 45,000 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 in 2020 and 2021.

Following our IPO, we have financed our operations primarily through cash generated from operations, advances from Motorsport Network pursuant to the $12 million Line of Credit and through sales of our equity securities.

We measure our liquidity in a number of ways, including the following:

| Liquidity Measure | March 31, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Cash and cash equivalents | $5,794,556 | $979,306 |
| Working capital | $1,108,482 | $(9,278,268) |

For the three months ended March 31, 2023, the Company had a net loss of approximately $5.3 million, negative cash flows from operations of approximately $5.7 million and an accumulated deficit of $79.1 million. As of March 31, 2023, we had cash and cash equivalents of $5.8 million, which was reduced to $4.9 million as of April 30, 2023. We expect to continue to incur significant operating expenses as we develop our product portfolio and, as a result, expect to have negative cash flows from operations for the foreseeable future until our product base is suitably established to create sufficient revenues and cash inflows to support the Company’s operations. Based on the Company’s cash and cash equivalents position and the Company’s average cash burn, we do not believe we have sufficient cash on hand to fund our operations for the remainder of 2023 and that additional funding will be required in order to continue operations.

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

We continue to explore additional funding in the form of potential equity and/or debt financing arrangements and similar transactions and consider these to be viable options to support future liquidity needs, provided that such opportunities can be obtained on terms that are commercially competitive and on terms acceptable to the Company. We are also seeking to improve our liquidity by achieving cost reductions by maintaining and enhancing cost control initiatives, such as those that we expect to achieve through the 2022 Restructuring Program. See “2022 Restructuring Program” above for additional information.

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

We expect to generate additional liquidity through consummating equity and/or debt financings or similar transactions, achieving cost reductions by maintaining and enhancing cost control initiatives, such as those that we expect to achieve through the 2022 Restructuring Program and/or further adjusting our product roadmap to reduce near term need for working capital. If we are unable to generate adequate revenue and profit growth, there can be no assurances that such actions will provide us with sufficient liquidity to meet our cash requirements as, among other things, our liquidity can be impacted by a number of factors, including our level of sales, costs and expenditures, economic conditions in the capital markets, especially for technology companies, as well as accounts receivable and sales allowances.

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

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

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

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

Even if we do secure additional financing, if our anticipated level of revenues are not achieved because of, for example, less than anticipated consumer acceptance of our offering of products and events; less than effective marketing and promotion campaigns, decreased consumer spending in response to weak economic conditions or weakness in the overall electronic games category; adverse changes in foreign currency exchange rates; decreased sales of our products and events as a result of increased competitive activities by our competitors; changes in consumer purchasing habits, such as the impact of higher energy prices on consumer purchasing behavior; retailer inventory management or reductions in retailer display space; less than anticipated results from the Company’s existing or new products or from its advertising and/or marketing plans; or if the Company’s expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, our liquidity may continue to be insufficient to satisfy our future capital requirements.

In accordance with Accounting Standards Codification (“ASC”) 205-40, *Going Concern*, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the accompanying consolidated financial statements to this Report are issued. The factors described above, in particular the available cash on hand to fund operations over the next year, have raised substantial doubt about the Company’s ability to continue as a going concern.

The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.

### Cash Flows from Operating Activities

Net cash used in operating activities for the three months ended March 31, 2023 and 2022 was $5.7 million and $5.6 million, respectively. The net cash used in operating activities for the three months ended March 31, 2023 was primarily a result of cash used to fund a net loss of $5.3 million, adjusted for net non-cash adjustments of $1.2 million and $1.6 million of cash used by changes in the levels of operating assets and liabilities. Net cash used in operating activities for the three months ended March 31, 2022 was primarily due to net loss of $16.0 million, adjusted for non-cash expenses in the amount of $10.5 million and by $0.1 million 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 three months ended March 31, 2023 and 2022 was $0.02 million and $0.1 million, respectively, which was attributable to the purchases of property and equipment.

### Cash Flows from Financing Activities

Net cash provided by financing activities during the three months ended March 31, 2023 and 2022 was $10.7 million and $0.1 million, respectively. Cash flows provided by financing activities for the three months ended March 31, 2023 were primarily attributable to $0.6 million raised in connection with shares sold under the Alumni Purchase Agreement (as defined below) and $10.4 million raised in connection with shares sold in the Company’s registered direct offerings, partially offset by $0.3 million of payments for purchase commitments. During the three months ended March 31, 2022, net cash provided by financing activities was primarily attributable to approximately $0.1 million of advances from related parties.

### Promissory Note Line of Credit

On April 1, 2020, the Company entered into a promissory note (the “$12 million Line of Credit”) with the Company’s majority stockholder, Motorsport Network, that provides the Company with a line of credit of up to $10 million (which was subsequently increased to $12 million pursuant to an amendment executed in November 2020), at an interest rate of 10% per annum, the availability of which is dependent on Motorsport Network’s available liquidity. The $12 million Line of Credit does not have a stated maturity date and is payable upon demand at any time at the sole and absolute discretion of Motorsport Network. The Company may prepay the $12 million Line of Credit in whole or in part at any time or from time to time without penalty or charge. In the event the Company or any of its subsidiaries consummates certain corporate events, including any capital reorganization, consolidation, joint venture, spin off, merger or any other business combination or restructuring of any nature, or if certain events of default occur, the entire principal amount and all accrued and unpaid interest will be accelerated and become payable. Additionally, see “Risk Factors – Risks Related to Our Financial Condition and Liquidity - Limits on the Company’s borrowing capacity under the $12 million Line of Credit may affect the Company’s ability to finance its operations” in Part I, Item 1A of the 2022 Form 10-K.

On September 8, 2022, the Company entered into a support agreement with Motorsport Network (the “Support Agreement”) pursuant to which Motorsport Network issued approximately $3 million (the “September 2022 Cash Advance”) to the Company in accordance with the $12 million Line of Credit, the proceeds of which the Company is using for general corporate purposes and working capital. In the Support Agreement, Motorsport Network and the Company terminated the Side Letter Agreement dated September 4, 2020 and agreed that until June 30, 2024, Motorsport Network would not demand repayment of the September 2022 Cash Advance or other advances under the $12 million Line of Credit unless and until such time that any of the following shall occur or exist: (i) the Company enters into a new financing arrangement (whether debt, equity or otherwise) under which the Company is then able to draw or provides the Company with available cash in excess of amounts required in the Company’s reasonable judgment to run its operations in the ordinary course of business; (ii) the Company generates from operations available cash in excess of amounts required in the Company’s reasonable judgment to run its operations in the ordinary course of business; or (iii) the Company’s independent auditors issue an unqualified opinion on its financial statements and the Company’s repayment of the advances, in whole or in part, would not otherwise cause the independent auditor to issue a going concern qualified opinion. Upon the occurrence of any of the foregoing events, the Company shall prepay on such date principal amount of the September 2022 Cash Advance and other advances under the $12 million Line of Credit then outstanding in an amount equal to such available excess cash or, in the case of (iii) above, the amount that would not cause the Company’s independent auditor to issue a going concern qualified opinion, together with interest accrued but unpaid on the unpaid September 2022 Cash Advance and other advances, which repayment obligation shall continue until all such advances under the $12 million Line of Credit are paid in full. The entire aggregate principal amount of the September 2022 Cash Advance and the other advances under the $12 million Line of Credit, together with interest accrued but unpaid thereon, shall also become immediately and automatically due and payable, and the $12 million Line of Credit shall immediately and automatically terminate, in each case without any action required by Motorsport Network, if (i) the Company experience an event of default under any other debt instrument, agreement or arrangement; or (ii) any final judgment or final judgments for the payment of money in excess (net of amounts covered by third-party insurance with insurance carriers who have not disclaimed liability with respect to such judgment or judgments) of $500,000 or its foreign currency equivalent is entered against the Company or any subsidiary and is not discharged and either (a) an enforcement proceeding has been commenced by any creditor upon such judgment or decree or (b) there is a period of 60 days following the entry of such judgment or decree during which such judgment or decree is not discharged, waived or the execution thereof stayed and, in the case of (b), such default continues for 60 consecutive days.

On January 30, 2023 and February 1, 2023, the Company entered into certain debt-for-equity exchange agreements with Motorsport Network pursuant to which the entire outstanding amount due under the $12 million Line of Credit was cancelled in exchange for an aggregate of 780,385 shares of the Company’s Class A common stock issued to Motorsport Network. See Note 5 – *Related Party Loans* in our condensed consolidated financial statements for further information. As of March 31, 2023, the balance due to Motorsport Network under the $12 million Line of Credit was $0.

Given the state of the financial markets, the Company continues to assess its exposure to any potential non-performance by Motorsport Network and believes that there is a substantial likelihood that Motorsport Network may not fulfill the Company’s future borrowing requests.

### Other Financing Activity

On December 9, 2022, the Company entered into a stock purchase commitment agreement (the “Alumni Purchase Agreement”) with Alumni Capital LP (“Alumni Capital”), which provides that the Company may sell to Alumni Capital up to $2,000,000 of shares (the “commitment amount”) of the Company’s Class A common stock, through the commitment period expiring on December 31, 2023, or earlier if the commitment amount is reached. Furthermore, the Company has an option to increase the commitment amount up to $10,000,000 of shares of the Company’s Class A common stock, subject to certain terms and conditions. During the three months ended March 31, 2023, the Company issued an aggregate of 175,167 shares of the Company’s Class A common stock to Alumni Capital under the Alumni Purchase Agreement with an aggregate fair market value of approximately $0.65 million. As of March 31, 2023, the remaining commitment amount under the Alumni Purchase Agreement amounted to approximately $1.3 million.

On February 1, 2023, the Company issued 183,020 shares of the Company’s Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately $3.9 million (the “$3.9 million RDO”), before deducting placement agent fees and other offering expenses payable by the Company. H.C. Wainwright & Co., LLC (“Wainwright”) acted as the exclusive placement agent for the $3.9 million RDO, pursuant to the engagement letter with the Company, dated as of January 9, 2023. In connection with the $3.9 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of $50,000 and closing fees of $15,950. The Company has also issued to Wainwright warrants to purchase up to 10,981 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the $3.9 million RDO, at an exercise price of $26.75 per share and will expire five years from the closing of the $3.9 million RDO.

On February 2, 2023, the Company issued 144,366 shares of the Company’s Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately $3.4 million (the “$3.4 million RDO”), before deducting placement agent fees and other offering expenses payable by the Company. Wainwright acted as the exclusive placement agent for the $3.4 million RDO. In connection with the $3.4 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of $25,000 and closing fees of $15,950. The Company has also issued to Wainwright warrants to purchase up to 8,662 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the $3.4 million RDO, at an exercise price of $29.375 per share and will expire five years from the closing of the $3.4 million RDO.

On February 3, 2023, the Company issued 232,188 shares of the Company’s Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately $4.0 million (the “$4.0 million RDO”), before deducting placement agent fees and other offering expenses payable by the Company. Wainwright acted as the exclusive placement agent for the $4.0 million RDO. In connection with the $4.0 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of $25,000 and closing fees of $15,950. The Company has also issued to Wainwright and its designees warrants to purchase up to 13,931 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the $4.0 million RDO, at an exercise price of $21.738 per share and will expire five years from the closing of the $4.0 million RDO.

### Capital Expenditures

The nature of the Company’s operations does not require significant expenditure on capital assets, nor does the Company typically enter into significant commitments to acquire capital assets. The Company does not have material commitments to acquire capital assets as of March 31, 2023.

### Material Cash Requirements

There have been no material changes in our reported material cash requirements as described under “Liquidity and Capital Resources – Material Cash Requirements” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the 2022 Form 10-K.

### 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 Estimates

There have been no material changes to the items disclosed as critical accounting policies and estimates under “Liquidity and Capital Resources—Critical Accounting Policies and Estimates” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the 2022 Form 10-K.

### Recently Issued Accounting Standards

As an “emerging growth company”, the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act until such time as we are no longer considered to be an emerging growth company.

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, 4,480 characters.

### Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC 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.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2023 because of the material weakness in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) as discussed in Part II, Item 9A, “*Controls and Procedures”* of the 2022 Form 10-K, and that continued to exist as of March 31, 2023.

### Remediated Material Weaknesses

During the first quarter of our fiscal year ended December 31, 2023, we implemented internal control procedures to address previously identified material weaknesses related to (1) the documentation of significant accounting positions, estimates and conclusions that were not contemporaneously formalized and reviewed independently of the preparer; and (2) the segregation of duties. In connection with the identification of material weaknesses in our internal control over financial reporting, we evaluated, designed, and implemented controls and procedures to address these weaknesses. These measures included enhanced documentation of accounting positions, estimates and conclusions, including reviews independent of the preparer, and the removal of segregation of duties conflicts within our key financial reporting processes. During the first quarter of our fiscal year ended December 31, 2023, we completed our assessment of the operating effectiveness of these controls. After completing our assessment of the design and operating effectiveness of these new controls and procedures, we concluded that we have remediated the previously identified material weaknesses as of March 31, 2023.

### Remediation of the Remaining Material Weakness

We have not yet remediated the material weakness relating to our failure to design and maintain effective monitoring procedures and controls to evaluate the effectiveness of our individual control activities, that we identified in the 2022 Form 10-K. We believe that we have made and continue to make progress on the remediation plans described in our 2022 Form 10-K, under Item 9A, “*Controls and Procedures.”*

During the period ended March 31, 2023, we continued to make improvements to controls and continued our evaluation and documentation of risks and key controls forming part of the significant business processes, including the internal control over financial reporting risk assessment scoping, development of risk control matrices and identification of key transaction level and entity level controls that require testing on an ongoing basis.

### 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 March 31, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 2,184 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 2022 Form 10-K, and the risk factors described below, which could materially affect our business, financial condition or future results. The risks described in the 2022 Form 10-K and below, 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.

Other than the following, there have been no significant changes to the risk factors set forth in the 2022 Form 10-K:

### Risks Related to Our Company

***We may not successfully manage the transitions associated with certain of our executive officers, which could have an adverse impact on us.***

On September 9, 2022, Jonathan New notified us of his decision to resign from his role as our Chief Financial Officer, effective September 23, 2022. Effective March 20, 2023, we appointed Jason Potter to serve as our Chief Financial Officer. Prior to Mr. Potter’s appointment to the permanent Chief Financial Officer role, we had other individuals, including Dmitry Kozko, our former Chief Executive Officer, serve in an Interim Chief Financial Officer capacity. Additionally, on April 14, 2023, the Company’s board of directors determined to terminate Mr. Kozko’s employment with the Company as its Chief Executive Officer without “Cause” (as such term is defined in Mr. Kozko’s employment agreement) effective as of April 19, 2023. In connection with Mr. Kozko’s termination, the Company’s board of directors appointed Stephen Hood as the Company’s new Chief Executive Officer and President. Leadership transitions may be inherently difficult to manage, and inadequate transitions to a new Chief Executive Officer and/or Chief Financial Officer may cause disruption within the Company. In addition, our financial performance and ability to meet operational goals and strategic plans may be adversely impacted. This may also impact our ability to retain and hire other key members of management.

Filed May 11, 2023.
Source: SEC EDGAR, the filing index for accession 0001493152-23-016408. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.