# Motorsport Games Inc.: Form 10-Q for the period ended Jun 30, 2023

- Company: [Motorsport Games Inc.](/companies/msgm.md) (CIK 1821175)
- Form: 10-Q
- Filed: 2023-08-21
- Accepted by EDGAR: Aug 21, 2023, 16:10 ET
- Period: 2023-06-30
- Accession: 0001493152-23-029615
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1821175/000149315223029615/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1821175/000149315223029615/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $1.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $3.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $866.2k | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $2.1m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $873.0k | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $1.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-04-01 to 2023-06-30 | $1.8m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 6 months, 2023-01-01 to 2023-06-30 | $4.2m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | −$8.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | −$14.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $244.8k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $443.9k | us-gaap:InterestExpense |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | −$8.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | −$13.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | −$3.02 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | −$5.42 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | −$3.02 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | −$5.42 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 2,704,106 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 2,448,131 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | −$8.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $24.4k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Cash and equivalents | at 2023-06-30 | $2.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $4.1m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $13.3m | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $6.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $9.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-06-30 | $3.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 64,939 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 24, 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 and six months ended June 30, 2023 and 2022, a majority of our revenue was generated from sales of our NASCAR racing video games.

As discussed elsewhere in this Report, due to the uncertainty surrounding the Company’s ability to raise funding, and in light of its liquidity position and anticipated future funding requirements, the Company has decided to explore strategic alternatives and potential options for its business, including, but not limited to, the sale or licensing of certain of the Company’s assets. For example, the Company is currently in discussions with a third-party for the potential sale of the Company’s NASCAR license. There are no assurances that the Company will even be successful in implementing a strategic plan for the sale or licensing of its assets, including the consummation of a sale of the Company’s NASCAR license, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond the Company’s control, such as, among other things, the required consent from NASCAR with respect to any sale of the Company’s NASCAR license. Accordingly, as the Company continues to address its liquidity constraints, it has re-evaluated its product roadmap in the second quarter of 2023 and modified the expected timing and scope of certain new product releases, including the release of any future NASCAR games, which have been put on hold indefinitely. Further, the Company is evaluating its ability to deliver new titles under its other licenses, such as with INDYCAR and the BTCC, which may result in further adjustments to the Company’s product roadmap. See Note 1 – *Business Organization, Nature of Operations, and Risks and Uncertainties* in our condensed consolidated financial statements and “—Liquidity and Capital Resources” for further information.

As of June 30, 2023, we have a total headcount of 104 people, made up of 102 full-time employees, including 65 dedicated to game development. Our headcount numbers as of June 30, 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 initially expected 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 June 30, 2023, the Company had increased its annualized savings to $4.9 million, while having incurred restructuring costs of approximately $1.3 million to date.

The Company continues to seek to reduce its monthly net cash-burn by reducing its cost base through maintaining and enhancing cost control initiatives, such as those that it expects to achieve through the 2022 Restructuring Program, and is evaluating the structure of its business for additional changes in order to improve both its near-term and long-term liquidity position.

### 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 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 |
| NASCAR Heat 5 – Next Gen Car Update | June 23, 2023, available on PC and consoles |

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. For example, we recently modified the timing of the upcoming INDYCAR game to 2024, from an original planned release in 2023, and currently anticipate a December 2023 release date for our upcoming Le Mans Ultimate game, which was announced in June 2023.

Further, as discussed above and elsewhere in this Report, due to the uncertainty surrounding the Company’s ability to raise funding, and in light of its liquidity position and anticipated future funding requirements, the Company is currently in discussions with a third-party for the potential sale of the Company’s NASCAR license. There are no assurances that the Company will consummate a sale of the Company’s NASCAR license, which is subject to the satisfaction of conditions beyond the Company’s control, such as, among other things, the required consent from NASCAR. As a result, in the second quarter of 2023, the Company decided that the release of any future NASCAR games will be put on hold indefinitely. Additionally, the Company is evaluating its ability to deliver new titles under its other licenses, such as with INDYCAR and the BTCC, which may result in further adjustments to the Company’s product roadmap. See Note 1 – *Business Organization, Nature of Operations, and Risks and Uncertainties* in our condensed consolidated financial statements and “—Liquidity and Capital Resources” for further information.

***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. 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.

***Concentration of Sales:*** Our NASCAR products have historically accounted for the majority of our revenue. However, we have worked to diversify our product offerings and revenue from other sources by introducing titles such as KartKraft, rFactor 2 and the 24 Hours of Le Mans Virtual esports event to our portfolio of product offerings and thereby reducing our dependency on the NASCAR franchise as our substantially sole source of revenue. For example, revenues associated with our NASCAR franchise accounted for approximately 67.5% and 61.1% of our total revenue for the six months ended June 30, 2023 and 2022, respectively.

***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). Due to our modified product release schedule, we did not recognize significant revenue from sales of physical gaming products during the six months ended June 30, 2023. We expect to continue to use a limited number of distribution partners in the future for sales of our physical gaming products and as such, concentration risk remains a relevant factor for the Company. 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.

***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 six months ended June 30, 2023, and 2022, approximately 84.2% and 67.0%, 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 rFactor 2 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 June 30, 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 certain definite lived intangible assets acquired through our various acquisitions.

### Results of Operations

### Three Months Ended June 30, 2023 compared to Three Months Ended June 30, 2022

In this section, references to 2023 refer to the three months ended June 30, 2023 and references to 2022 refer to the three months ended June 30, 2022.

#### Revenue

| Revenues: | For the Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Gaming | $1,739,096 | $1,941,938 | $(202,842) | (10.4)% |
| Esports | 34 | 67,049 | (67,015) | (99.9)% |
| Total Revenues | $1,739,130 | $2,008,987 | $(269,857) | (13.4)% |

Consolidated revenues were $1.7 million and $2.0 million for 2023 and 2022, respectively, a decrease of $0.3 million, or 13.4%, when compared to the prior period.

Gaming segment revenues represented approximately 100% and 96.7% of our total 2023 and 2022 revenues, respectively, decreasing by $0.2 million, or 10.4%, when compared to the prior period. The decrease in Gaming segment revenues was primarily due to $0.7 million in lower digital and mobile game sales, driven by lower volumes of sales and less favorable pricing, and a $0.4 million reduction in revenues earned through the development of simulation platforms for third parties. The change in digital and mobile game sales was primarily driven by a $0.5 million reduction in NASCAR title sales on PC, consoles and mobile platforms and a $0.2 million reduction in rFactor 2 and KartKraft title sales on PC. The lower period over period revenues were partially offset by a $0.8 million reduction in sales allowances recognized in 2023, when compared to 2022.

Esports segment revenues represented approximately 0% and 3.3% of our total 2023 and 2022 revenues, respectively, decreasing by $0.1 million, or approximately 100%, 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 June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Gaming | $865,309 | $820,737 | $44,572 | 5.4% |
| Esports | 858 | 35,420 | (34,562) | (97.6)% |
| Total Cost of Revenues | $866,167 | $856,157 | $10,010 | 1.2% |

Consolidated cost of revenues were $0.9 million for both 2023 and 2022, remaining flat when compared to the prior period.

Gaming segment cost of revenues represented approximately 99.9% and 95.9% of our total 2023 and 2022 cost of revenues, respectively, increasing by approximately $0.05 million, or 5.4%, when compared to the prior period. The increase in Gaming segment cost of revenues was primarily driven by a $0.1 million increase in royalty and license fees, driven by increases in the annual contractual minimum royalty guarantee payments due on our gaming licenses. This increase was partially offset by a $0.05 million reduction in game production costs, which were higher in 2022 due to the development of a simulation platform for a third-party that did not repeat in 2023.

Esports segment cost of revenues represented approximately 0.1% and 4.1% of our total 2023 and 2022 cost of revenues, respectively, decreasing by $0.04 million, or 97.6%, when compared to the prior period. The decrease in Esports segment cost of revenues was primarily driven by $0.04 million of lower studio and televised production costs.

#### Gross Profit

| Gross Profit (Loss): | For the Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Gaming | $873,787 | $1,121,201 | $(247,414) | (22.1)% |
| Esports | (824) | 31,629 | (32,453) | 102.6% |
| Total Gross Profit (Loss) | $872,963 | $1,152,830 | $(279,867) | (24.3)% |

|  |  |  |
| --- | ---: | ---: |
| Gaming - Gross Profit Margin | 50.2% | 57.7% |
| Esports - Gross Profit Margin | (2,423.5)% | 47.2% |
| Total Gross Profit Margin | 50.2% | 57.4% |

31

Consolidated gross profit was $0.9 million and $1.2 million for 2023 and 2022, respectively, a decrease of $0.3 million, or 24.3%, when compared to the prior period. Gross profit margin was 50.2% in 2023, compared to 57.4% in 2022, a decrease of 720 basis points. The decreases in both gross profit and gross profit margin were driven primarily by lower gaming revenues, which did not lead to a corresponding decrease in cost of revenues due to certain minimum royalty guarantees.

Gaming segment gross profit was $0.9 million for 2023, compared to $1.1 million for 2022, representing a gross profit margin of 50.2% for 2023 and 57.7% for 2022. The decrease in our Gaming segment gross profit of $0.2 million, and corresponding decrease in gross profit margin, were primarily due to lower gaming revenues as discussed above.

Esports segment was break even at the gross profit level for 2023, compared to a $0.03 million gross profit, or 47.2% gross profit margin, for 2022, a decrease of $0.03 million, or 102.6%, when compared to the prior year. The change in gross profit for 2023 when compared to the prior period was primarily due to the timing of revenue and cost recognition as it relates to the Le Mans Virtual Series, which held its final event in January 2023.

#### Operating Expenses

| Operating Expenses: | For the Three Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Sales and marketing | $434,788 | $1,540,220 | $(1,105,432) | (71.8)% |
| Development | 1,787,768 | 2,681,643 | (893,875) | (33.3)% |
| General and administrative | 3,154,233 | 3,349,609 | (195,376) | (5.8)% |
| Impairment of intangible assets | 4,004,627 | 149,048 | 3,855,579 | 2,586.8% |
| Depreciation and amortization | 104,854 | 117,725 | (12,871) | (10.9)% |
| Total Operating Expenses | $9,486,270 | $7,838,245 | $1,648,025 | 21.0% |

Changes in operating expenses are explained in more detail below:

#### Sales and Marketing

Sales and marketing expenses were $0.4 million and $1.5 million for 2023 and 2022, respectively, representing a $1.1 million, or 71.8%, decrease when compared to the prior period. The reduction in sales and marketing expense was primarily driven by a $0.6 million reduction in external marketing expense, as well as a $0.5 million reduction in payroll and employee related expenses as a result of lower headcount when compared to the prior period.

#### Development

Development expenses were $1.8 million and $2.7 million for 2023 and 2022, respectively, representing a $0.9 million, or 33.3%, decrease when compared to the prior period. The reduction in development expense was primarily driven by a $0.7 million reduction in payroll expense, as a result of lower headcount when compared to the prior period, as well as a $0.2 million reduction in external development expense driven by ongoing cost rationalization measures.

#### General and Administrative

General and administrative (“G&A”) expenses were $3.2 million and $3.3 million for 2023 and 2022, respectively, a decrease of $0.2 million, or 5.8%, when compared to the prior period. The reduction in G&A expense was primarily driven by a $0.5 million reduction legal and professional costs, due to the settlement of litigation in 2022 that did not repeat in 2023, a $0.3 million reduction in payroll and employee related expenses due to lower headcount period over period, and a $0.3 million reduction in insurance costs. This was partially offset by a $0.6 million increase in severance costs and a $0.3 million increase in stock-based compensation expense, both driven by the departure of the Company’s former Chief Executive Officer in 2023.

#### Impairment of Intangible Assets

Impairment of indefinite-lived intangible assets was $0 and $0.1 million in 2023 and 2022, respectively. The triggers for the assessments in 2022 were the changes to the Company’s product roadmap and the Company’s market capitalization, resulting in a $0.1 million impairment loss relating primarily to the rFactor 2 trade name and the Le Mans Video Gaming License.

Impairment of finite-lived intangible assets was $4.0 million and $0 in 2023 and 2022, respectively. The trigger for the impairment in 2023 was the Company’s decision to explore strategic alternatives and potential options for its business, resulting in a probable likelihood of the sale of certain licensing rights that would result in the Company’s inability to comply with the terms of a licensing agreement by the end of the year and the resulting reduction in expected future revenues.

#### 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 for 2023 and 2022 presented no significant changes, remaining flat at $0.2 million respectively. Interest expense primarily consists of ongoing non-cash interest accretion of our INDYCAR and BTCC license liabilities.

#### Other Income (Expense), net

Other income, net for 2023 was $0.7 million, compared to other expense, net of $0.6 million for 2022, an improvement of $1.3 million. Other income, net for 2023 primarily consisted of foreign currency gains of $0.2 million and $0.4 million gain from a change in fair value of stock warrant liabilities, compared to other expenses, net for 2022 that primarily consisted of foreign currency losses of $0.65 million. The change in other income (expense), net between 2023 and 2022 is primarily due to favorable swings in foreign currency gains and losses period over period, arising from remeasuring transactions denominated in a currency other than U.S. dollars, as well as the change in the fair value of the Company’s stock warrants liabilities.

#### Other Comprehensive (Loss) Income

Other comprehensive loss was $0.2 million for 2023, compared to other comprehensive income of $0.1 million for 2022. The $0.3 million change in other comprehensive (loss) income 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

The loss attributable to non-controlling interest decreased by $0.05 million to a loss of $0.03 million as compared to a loss of $0.08 million for 2022. The improvement was attributed to the reduction of net losses in Le Mans Esports Series Ltd (the “Le Mans Joint Venture”).

### Six Months Ended June 30, 2023 compared to Six Months Ended June 30, 2022

In this section, references to 2023 refer to the six months ended June 30, 2023 and references to 2022 refer to the six months ended June 30, 2022.

#### Revenue

| Revenues: | For the Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Gaming | $3,178,313 | $4,900,326 | $(1,722,013) | (35.1)% |
| Esports | 290,172 | 430,450 | (140,278) | (32.6)% |
| Total Revenues | $3,468,485 | $5,330,776 | $(1,862,291) | (34.9)% |

Consolidated revenues were $3.5 million and $5.3 million for 2023 and 2022, respectively, a decrease of $1.9 million, or 34.9%, when compared to the prior period.

Gaming segment revenues represented 91.6% and 91.9% of our total 2023 and 2022 revenues, respectively, decreasing by $1.7 million, or 35.1%, when compared to the prior period. The decrease in Gaming segment revenues was primarily due to $1.3 million in lower digital and mobile game sales and $0.7 million in lower retail sales, both of which were primarily driven by lower volumes of sales, as well as less favorable pricing. The change in digital and mobile game sales was primarily driven by a $1.0 million reduction in NASCAR title sales on PC, consoles and mobile platforms, and a $0.3 million reduction in rFactor 2 and KartKraft title sales on PC, respectively. The reduction in retail game sales of $0.7 million was due to lower retail sales of our NASCAR titles in 2023 when compared to the same period in 2022.

In addition to the decreases in revenue generated by game sales, revenue earned through the development of simulation platforms for third-parties was $0.5 million lower in 2023 compared to 2022. The lower period over period revenues were partially offset by $0.8 million reduction in sales allowances recognized in 2023, when compared to 2022.

Esports segment revenues represented 8.4% and 8.1% of our total 2023 and 2022 revenues, respectively, decreasing by $0.1 million, or 32.6%, 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 Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Gaming | $1,740,148 | $2,224,744 | $(484,596) | (21.8)% |
| Esports | 374,755 | 645,219 | (270,464) | (41.9)% |
| Total Cost of Revenues | $2,114,903 | $2,869,963 | $(755,060) | (26.3)% |

Consolidated cost of revenues were $2.1 million and $2.9 million for 2023 and 2022, respectively, a decrease of $0.8 million, or 26.3%, when compared to the prior period.

Gaming segment cost of revenues represented 82.3% and 77.5% of our total 2023 and 2022 cost of revenues, respectively, decreasing by $0.5 million, or 21.8%, when compared to the prior period. The decrease in Gaming segment cost of revenues was primarily driven by a $0.3 million reduction in game production costs, a $0.2 million reduction in royalty payments and a $0.1 million reduction in development costs incurred to develop a simulation platform for a third-party. 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. These reductions were partially offset by an increase in license fees of $0.1 million.

Esports segment cost of revenues represented 17.7% and 22.5% of our total 2023 and 2022 cost of revenues, respectively, decreasing by $0.3 million, or 41.9%, when compared to the prior period. The decrease in Esports segment cost of revenues was primarily driven by $0.3 million of lower studio and televised production costs associated with the final round of the Le Mans Virtual Series event for 2023 compared to 2022.

#### Gross Profit

| Gross Profit (Loss): | For the Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Gaming | $1,438,165 | $2,675,582 | $(1,237,417) | (46.2)% |
| Esports | (84,583) | (214,769) | 130,186 | (60.6)% |
| Total Gross Profit (Loss) | $1,353,582 | $2,460,813 | $(1,107,231) | (45.0)% |

34

|  |  |  |
| --- | ---: | ---: |
| Gaming – Gross Profit Margin | 45.2% | 54.6% |
| Esports – Gross Profit Margin | (29.1)% | (49.9)% |
| Total Gross Profit Margin | 39.0% | 46.2% |

Consolidated gross profit was $1.4 million and $2.5 million for 2023 and 2022, respectively, a decrease of $1.1 million, or 45.0%, when compared to the prior period. Gross profit margin was 39.0% in 2023, compared to 46.2% in 2022, where the basis point decrease was driven primarily by lower gaming revenues as discussed above.

Gaming segment gross profit was $1.4 million for 2023, compared to $2.7 million for 2022, representing a gross profit margin of 45.2% for 2023 and 54.6% for 2022. The decrease in our Gaming segment gross profit of $1.2 million, and corresponding decrease in gross profit margin, was primarily due to lower gaming revenues as discussed above.

Esports segment gross loss was $0.1 million for 2023, compared to $0.2 million for 2022, representing a negative gross profit margin of 29.1% and 49.9% 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 for 2023 compared to 2022.

#### Operating Expenses

| Operating Expenses: | For the Six Months Ended June 30, 2023 | 2022 | Change $% |  |
| --- | ---: | ---: | ---: | ---: |
| Sales and marketing | $1,053,198 | $3,228,669 | $(2,175,471) | (67.4)% |
| Development | 4,184,902 | 5,085,980 | (901,078) | (17.7)% |
| General and administrative | 5,933,343 | 6,772,763 | (839,420) | (12.4)% |
| Impairment of goodwill | - | 4,788,268 | (4,788,268) | (100.0)% |
| Impairment of intangible assets | 4,004,627 | 4,640,102 | (635,475) | (13.7)% |
| Depreciation and amortization | 202,208 | 233,796 | (31,588) | (13.5)% |
| Total Operating Expenses | $15,378,278 | $24,749,578 | $(9,371,300) | (37.9)% |

Changes in operating expenses are explained in more detail below:

#### Sales and Marketing

Sales and marketing expenses were $1.1 million and $3.2 million for 2023 and 2022, respectively, representing a $2.2 million, or 67.4% decrease when compared to the prior period. The reduction in sales and marketing expense was primarily driven by a $1.4 million reduction in external marketing expense, as well as a $0.8 million reduction in payroll and employee related expenses as a result of lower headcount when compared to the prior period.

#### Development

Development expenses were $4.2 million and $5.1 million for 2023 and 2022, respectively, representing a $0.9 million, or 17.7%, decrease when compared to the prior period. The reduction in development expense was primarily driven by a $1.1 million reduction in payroll and employee related expenses expense as a result of lower headcount when compared to the prior period, partially offset by a $0.2 million increase in software and hosting fees incurred to support our ongoing development efforts.

#### General and Administrative

G&A expenses were $5.9 million and $6.8 million for 2023 and 2022, respectively, a decrease of $0.8 million, or 12.4%, when compared to the prior period. The reduction in G&A expense was primarily driven by a $0.4 million reduction in legal and professional costs, including related party back office support costs, due to the settlement of litigation in 2022 that did not repeat in 2023, a $0.5 million reduction in payroll and employee related expenses, including travel expenses, due to lower headcount period over period, a $0.4 million reduction in insurance costs and a $0.2 million reduction in software and subscription costs. This was partially offset by a $0.6 million increase in severance costs, driven by the departure of the Company’s former Chief Executive Officer 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 $3.3 million in 2023 and 2022, respectively. The triggers for the assessments in 2022 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 $4.0 million and $1.3 million in 2023 and 2022, respectively. The trigger for the impairment in 2023 was the Company’s decision to explore strategic alternatives and potential options for its business, resulting in a probable likelihood of the sale of certain licensing rights that would result in the Company’s inability to comply with the terms of a licensing agreement by the end of the year and the resulting reduction in expected future revenues. The triggers for the impairment in 2022 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 $0.4 million for both 2023 and 2022 primarily from ongoing non-cash interest accretion of our INDYCAR and BTCC license liabilities.

#### Other (Expense) Income, net

Other income, net for 2023 was $1.0 million, compared to other expense, net of $0.8 million for 2022, an improvement of $1.8 million compared to the prior period. Other income, net for 2023 consisted of foreign currency gains of $0.4 million, $0.4 million in gains from changes in the fair value of stock warrant liabilities, rental income of $0.1 million, and $0.1 million of gains derived from relief provided by certain vendors, compared to other expense, net for 2022 that consisted of foreign currency losses of $0.9 million and rental income of $0.1 million. The change in other (expense) income, net was primarily driven by the $1.2 million favorable swing in foreign currency gains and losses period over period, arising from remeasuring transactions denominated in a currency other than U.S. dollars, and $0.4 million in gains from the changes in fair value of stock warrant liabilities.

#### Other Comprehensive (Loss) Income

Other comprehensive loss was $0.3 million for 2023, compared to other comprehensive income of $0.01 million for 2022. The $0.3 million change in other comprehensive (loss) income was primarily due to unrealized foreign currency translation adjustments arising from our activity in our U.K., Australian, Georgian and Netherlands subsidiaries.

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

For 2023, the loss attributable to the non-controlling interest decreased by $0.7 million to a loss of $0.2 million as compared to a loss of $0.9 million for 2022. The improvement was attributed to the reduction of net losses in the Le Mans Joint Venture.

### Liquidity and Capital Resources

### Liquidity

Since our inception and prior to our initial public offering (“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 (in millions) | June 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Cash and cash equivalents | $2.0 | $1.0 |
| Working capital | $(2.6) | $(9.3) |

For the six months ended June 30, 2023, the Company had a net loss of approximately $13.5 million, negative cash flows from operations of approximately $8.9 million and an accumulated deficit of $87.3 million. As of June 30, 2023, we had cash and cash equivalents of $2.0 million, which was reduced to $1.4 million as of July 31, 2023. For the three months ended June 30, 2023, we experienced an average net cash burn from operations of approximately $1.1 million a month, and while it has taken measures to reduce its costs, the Company expects to continue to have a net cash outflow from operations for the foreseeable future as it continues to develop its product portfolio and invest in developing new video game titles. 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.

The Company’s future liquidity and capital requirements include funds to support the planned costs to operate its business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures.

In order to address its liquidity shortfall, the Company is actively exploring several options, including, but not limited to: i) additional funding in the form of potential equity and/or debt financing arrangements or similar transactions (collectively, “Capital Financing”); ii) strategic alternatives for its business, including, but not limited to, the sale or licensing of the Company’s assets; and iii) cost reduction and restructuring initiatives, including re-evaluating its product roadmap, each of which is described more fully below.

The Company continues to explore additional funding in the form of potential Capital Financing and has entered into an Equity Distribution Agreement (the “ED Agreement”) with Canaccord Genuity LLC, as sales agent (the “Sales Agent”), pursuant to which the Company may issue and sell shares of its Class A common stock having an aggregate offering price of up to $10 million (subject to compliance with the limitations set forth in the SEC’s “baby shelf” rules). Subject to the terms and conditions of the ED Agreement, the Sales Agent may sell shares by any method deemed to be an “at-the-market” (“ATM”) offering as defined in Rule 415 under the Securities Act of 1933, as amended. As of June 30, 2023, the Company had an aggregate of $2.9 million available for future sales under its ATM program. However, due to the Company’s present liquidity position and required future funding requirements, any funds raised via the ATM program would not be sufficient to satisfy its liquidity requirements and further potential Capital Financing would be required, in conjunction to the other options being explored by the Company. Further, there can be no assurance the Company will be able to obtain funds via the ATM program, should it choose to sell shares under the ED Agreement, nor can there be any other assurance that the Company can secure additional funding in the form of equity and/or debt financing on commercially acceptable terms, if at all, to satisfy its future needed liquidity and capital resources.

Due to the uncertainty surrounding the Company’s ability to raise funding in the form of potential Capital Financing, and in light of its liquidity position and anticipated future funding requirements, the Company has decided to explore strategic alternatives and potential options for its business, including, but not limited to, the sale or licensing of certain of the Company’s assets. For example, the Company is currently in discussions with a third-party for the potential sale of the Company’s NASCAR license. If any such strategic alternative is executed, including the consummation of a sale of the Company’s NASCAR license, it is expected it would help to reduce certain working capital requirements and reduce overhead expenditures, thereby reducing the Company’s expected future cash-burn, and provide some short-term liquidity relief. Nonetheless, even if the Company is successful in implementing one or more strategic alternatives, including the consummation of a sale of the Company’s NASCAR license, the Company will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of its business and operations. There are no assurances that the Company will even be successful in implementing a strategic plan for the sale or licensing of its assets, including the consummation of a sale of the Company’s NASCAR license, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond the Company’s control, such as, among other things, the required consent from NASCAR with respect to any sale of the Company’s NASCAR license.

As the Company continues to address its liquidity constraints, it has re-evaluated its product roadmap in the second quarter of 2023 and modified the expected timing and scope of certain new product releases, including the release of any future NASCAR games, which have been put on hold indefinitely. Further, the Company is evaluating its ability to deliver new titles under its other licenses, such as with INDYCAR and the British Touring Car Championship (the “BTCC”), which may result in further adjustments to the Company’s product roadmap. The Company continues to seek to reduce its monthly net cash-burn by reducing its cost base through maintaining and enhancing cost control initiatives, such as those that it expects to achieve through the 2022 Restructuring Program, and is evaluating the structure of its business for additional changes in order to improve both its near-term and long-term liquidity position, as well as create a healthy and sustainable Company from which to operate.

If the Company is unable to satisfy its capital requirements, it could be required to adopt one or more of the following alternatives:

- delaying the implementation of or revising certain aspects of the Company’s business strategy;
- further reducing or delaying the development and launch of new products and events;
- further reducing or delaying capital spending, product development spending and marketing and promotional spending;
- selling additional assets or operations;
- seeking additional capital contributions and/or loans from Motorsport Network, the Company’s other affiliates and/or third parties;
- further reducing other discretionary spending;
- entering into financing agreements on unattractive terms; and/or
- significantly curtailing or discontinuing operations.

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

Even if the Company does secure additional Capital Financing, if the anticipated level of revenues are not achieved because of, for example, decreased sales of the Company’s products due to the disposition of key assets, such as the potential sale of its NASCAR license, further changes in the Company’s product roadmap and/or the Company’s inability to deliver new products for its various other licenses; less than anticipated consumer acceptance of the Company’s offering of products and events; less than effective marketing and promotion campaigns, decreased consumer spending in response to weak economic conditions or weakness in the overall electronic games category; adverse changes in foreign currency exchange rates; decreased sales of the Company’s products and events as a result of increased competitive activities by the Company’s competitors; changes in consumer purchasing habits, such as the impact of higher energy prices on consumer purchasing behavior; retailer inventory management or reductions in retailer display space; less than anticipated results from the Company’s existing or new products or from its advertising and/or marketing plans; or if the Company’s expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, the Company’s liquidity position may continue to be insufficient to satisfy its future capital requirements. If the Company is ultimately unable to satisfy its capital requirements, it would likely need to dissolve and liquidate its assets under the bankruptcy laws or otherwise.

In accordance with Accounting Standards Codification (“ASC”) 205-40, *Going Concern*, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the 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 six months ended June 30, 2023 and 2022 was $8.9 million and $12.0 million, respectively. The net cash used in operating activities for the six months ended June 30, 2023 was primarily a result of cash used to fund a net loss of $13.5 million, adjusted for net non-cash adjustments of $6.0 million and $1.4 million of cash used by changes in the levels of operating assets and liabilities. Net cash used in operating activities for the six months ended June 30, 2022 was primarily due to a net loss of $23.5 million, adjusted for non-cash expenses in the amount of $12.4 million and by $1.0 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 six months ended June 30, 2023 and 2022 was $0.02 million and $0.2 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 six months ended June 30, 2023 was $10.2 million while net cash used in financing activities during the six months ended June 30, 2022 was $1.0 million. Cash flows provided by financing activities for the six months ended June 30, 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 $0.6 million of payments for purchase commitments and $0.3 million for payments relating to license liabilities. During the six months ended June 30, 2022, net cash used in financing activities was $1.0 million, driven primarily by $1.0 million in repayments of purchase commitment liabilities.

### 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 at an interest rate of 10% per annum, the availability of which is dependent on Motorsport Network’s available liquidity. On November 23, 2020, the Company and Motorsport Network entered into an amendment to the $12 million Line of Credit, effective in 2020, pursuant to which the availability under the $12 million Line of Credit was increased from $10 million to $12 million, with no changes to the other terms. The $12 million Line of Credit does not have a stated maturity date and is payable upon demand at any time at the sole and absolute discretion of Motorsport Network, and any principal and accrued interest owed will be accelerated and become immediately payable in the event the Company consummates certain corporate events, such as a capital reorganization. The Company may prepay the $12 million Line of Credit in whole or in part at any time or from time to time without penalty or charge. Additionally, see “Risk Factors – Risks Related to Our Financial Condition and Liquidity - Limits on our borrowing capacity under the $12 million Line of Credit may affect our ability to finance our 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. Additionally, the Support Agreement modified the $12 million Line of Credit such that, among other things, 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 certain events occurred, as prescribed in the Support Agreement, such as the completion of a new financing arrangement or the Company generates positive cash flows from operations, among others. All principal and accrued interest owed on the $12 million Line of Credit were exchanged for equity following the completion of two debt-for-equity exchange agreements with Motorsport Network on January 30, 2023 and February 1, 2023, relieving the Company of approximately $3.9 million in owed principal and unpaid interest in exchange for an aggregate of 780,385 shares of the Company’s Class A common stock. See Note 5 – *Related Party Loans* in our condensed consolidated financial statements for further information. As of June 30, 2023, the balance due to Motorsport Network under the $12 million Line of Credit was $0.

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

### 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 six months ended June 30, 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 June 30, 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.

On March 31, 2023, the Company entered into the ED Agreement with the Sales Agent, pursuant to which the Company may issue and sell shares of its Class A common stock having an aggregate offering price of up to $10 million (subject to compliance with the limitations set forth in the SEC’s “baby shelf” rules), from time to time through the Sales Agent. Subject to the terms and conditions of the ED Agreement, the Sales Agent may sell shares by any method deemed to be an “at-the-market” offering as defined in Rule 415 under the Securities Act of 1933, as amended. The Company is not obligated to sell any shares under the ED Agreement. The Sales Agent is entitled to a commission of 3% of the aggregate gross proceeds from each sale of shares occurring pursuant to the ED Agreement. During the six months ended June 30, 2023, no shares of Class A common stock were sold under the Company’s ATM program. As of June 30, 2023, the Company had an aggregate of $2.9 million available for future sales under its ATM program.

### 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 June 30, 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 is more fully described in our condensed consolidated financial statements included elsewhere in this Report.

## Controls and procedures

As filed, 4,704 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 June 30, 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 June 30, 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, that continued to exist as of June 30, 2023, as well as a newly identified material weakness as discussed in “Material Weaknesses” below.

### Material Weaknesses

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As described in Part II, Item 9A, “Controls and Procedures” of the 2022 Form 10-K, we did not design and maintain effective monitoring procedures and controls to evaluate and monitor the effectiveness of our individual control activities. During the quarter ended June 30, 2023, management identified a new material weakness in our internal control over financial reporting due to a lack of sufficient number of personnel with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely. If not remediated, or if we identify further material weaknesses in our internal controls, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our consolidated financial statements and a failure to meet our reporting and financial obligations.

### Remediation of the Material Weaknesses

We have not yet remediated the material weaknesses described under “Material Weaknesses” above. During the quarter ended June 30, 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. Additionally, we expect to continue to hire additional finance and accounting employees with appropriate experience, certification, education and training.

All other material weaknesses previously identified in Part II, Item 9A, “*Controls and Procedures”* of the 2022 Form 10-K have been remediated, as disclosed in Part I, Item 4, “*Controls and Procedures”* of our Quarterly Report on Form 10-Q for the period ended March 31, 2023.

### Limitations on the Effectiveness of Controls

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

### Changes in Internal Control over Financial Reporting

Except as described above, there were no other changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) under the Exchange Act during the quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 14,332 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 Financial Condition and Liquidity

***We have incurred significant losses since our inception, and we expect to continue to incur losses for the foreseeable future. Accordingly, our financial condition raises substantial doubt regarding our ability to continue as a going concern.***

We incurred a net loss of $13.5 million, negative cash flows from operations of approximately $8.9 million and an accumulated deficit of $87.3 million for the six months ended June 30, 2023. As of June 30, 2023, we had cash and cash equivalents of $2.0 million, which was reduced to $1.4 million as of July 31, 2023. For the three months ended June 30, 2023, we experienced an average net cash burn from operations of approximately $1.1 million a month. We expect to continue to have a net cash outflow from operations for the foreseeable future as we continue to develop our product portfolio and invest in developing new video game titles.

As a result of our financial condition, management has concluded that there is substantial doubt in our ability to continue as a going concern. The report of our independent registered public accountant on our financial statements as of and for the years ended December 31, 2022 and 2021 also includes explanatory language describing the existence of substantial doubt about our ability to continue as a going concern. See Note 1 – *Business Organization, Nature of Operations, and Risks and Uncertainties* in our condensed consolidated financial statements and “—Liquidity and Capital Resources” for further information.

If we are unable to satisfy our capital requirements, we could be required to adopt one or more of the following alternatives:

- delaying the implementation of or revising certain aspects of our business strategy;
- further reducing or delaying the development and launch of new products and events;
- further reducing or delaying capital spending, product development spending and marketing and promotional spending;
- selling additional assets or operations;
- seeking additional capital contributions and/or loans from Motorsport Network, our other affiliates and/or third parties;
- further reducing other discretionary spending;
- entering into financing agreements on unattractive terms; and/or
- significantly curtailing or discontinuing operations.

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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 capital requirements if the actions that we are able to consummate do not generate a sufficient amount of additional capital. If we are ultimately unable to satisfy our capital requirements, we would likely need to dissolve and liquidate our assets under the bankruptcy laws or otherwise.

***We will require additional capital to meet our financial obligations, and this capital might not be available on acceptable terms or at all.***

We expect to continue to incur losses for the foreseeable future as we continue to incur significant expenses. Accordingly, as a result of our financial condition, we will need to engage in equity and/or debt financing arrangements or similar transactions (collectively, “Capital Financing”) to secure additional funds to continue our existing business operations and to fund our obligations. 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 raise additional funds through future issuances of equity (including preferred stock) or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock, including, without limitation, in respect of the payment of dividends and the payment of liquidating distributions. Because our decision to issue debt or preferred securities in any future offering, or to borrow money from lenders, will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, or nature of any such future offerings or borrowings. For example, financial market instability or disruptions to the banking system due to bank failures, particularly in light of the events that have occurred in 2023 with respect to Silicon Valley Bank and Signature Bank, may adversely affect our ability to enter into new financing arrangements and facilities, or our ability to access existing cash, cash equivalents and investments.

Holders of our Class A common stock will bear the risk of any such future offerings or borrowings. Further, any future debt financing could require compliance with restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Debt financing must be repaid regardless of whether we generate revenues or cash flows from operations and may be secured by substantially all of our assets.

Even if we do secure additional Capital Financing, if the anticipated level of revenues are not achieved because of, for example, decreased sales of our products due to the disposition of key assets, such as the potential sale of our NASCAR license, further changes in our product roadmap and/or our inability to deliver new products for our various other licenses; 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 our existing or new products or from its advertising and/or marketing plans; or if our expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, our liquidity position may continue to be insufficient to satisfy its future capital requirements.

***We may not be successful in identifying and implementing one or more strategic alternatives for our business, and any strategic alternative that we may consummate could have material adverse consequences for us.***

Due to the uncertainty surrounding our ability to raise funding in the form of potential Capital Financing, and in light of our liquidity position and anticipated future funding requirements, we have decided to explore strategic alternatives and potential options for our business (a “Strategic Transaction”), including, but not limited to, the sale or licensing of certain of our assets. Any Strategic Transaction that we may consummate could harm our business, brand, operating results and financial condition. There can be no assurances that any particular Strategic Transaction, or series of Strategic Transactions, will be pursued, successfully consummated, lead to increased shareholder value, or achieve the anticipated results.

For example, we are currently in discussions with a third-party for the potential sale of our NASCAR license. There are no assurances that we will be successful in consummating a sale of our NASCAR license, which is subject to the satisfaction of conditions beyond our control, such as, among other things, the required consent from NASCAR. However, if such sale is consummated, we expect that we would no longer have the right to use the NASCAR brand for our products, subject to certain limited exceptions. This would also require us to modify our existing business model and will significantly alter the risk profile relating to our operations. Our NASCAR products have historically accounted for the majority of our revenue. For example, revenues associated with our NASCAR franchise accounted for approximately 67.5% and 61.1% of our total revenue for the six months ended June 30, 2023 and 2022, respectively. As a result, we may encounter difficulties or challenges in continuing operations if the sale of our NASCAR license is consummated, and our cash flows and results of operations will likely be materially adversely impacted.

Any Strategic Transaction, including the sale of our NASCAR license, could involve a number of other risks and uncertainties, including, but not limited to:

- the occurrence of significant costs related to the evaluation and consummation of any Strategic Transaction, such as legal and accounting fees and expenses and other related charges, as well as unanticipated expenses in connection with the process;
- disposing of an asset at a price or on terms that are less desirable than we had anticipated;
- uncertainties as to the timing of any Strategic Transaction and the risk that such transaction may not be completed in a timely manner or at all;
- the possibility that any or all of the conditions to the consummation of any Strategic Transaction may not be satisfied or waived;
- diversion of management’s attention from our ongoing operations;
- greater disruption to our remaining business than expected;
- reputational harm with employees, suppliers, business partners and others, as well as the loss of brand recognition and customer loyalty; and
- exposure to litigation or other claims resulting from any Strategic Transaction.

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Additionally, even if we are successful in implementing one or more Strategic Transactions, including the consummation of a sale of our NASCAR license, we will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of our business and operations.

### Risks Related to Our Company

***Impairment of our goodwill or other intangible assets has had, and in the future could have, a material adverse impact on our results of operations.***

As of June 30, 2023, we had other intangible assets, net of $8.5 million. We are required under generally accepted in the United States of America to review our goodwill for impairment at least annually, and to review goodwill and other intangible assets when events or changes in circumstances indicate the carrying value may not be recoverable. Some factors that may be considered events or changes in circumstances that would require our goodwill and other intangible assets to be reviewed for impairment include, among other, general economic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific factors such as changes to our product road map and restructuring changes, and changes in our share price. We may be required to record non-cash impairment charges during any period in which we determine that our goodwill and/or other intangible assets are impaired, which has had, and in the future could have, a material adverse impact on our results of operations. For example, for the six months ended June 30, 2023, we recorded impairment of intangible assets of $4.0 million, and for the year ended December 31, 2022, we recorded impairment of intangible assets of $4.8 million and impairment of goodwill of $4.8 million.

***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 Aug 21, 2023.
Source: SEC EDGAR, the filing index for accession 0001493152-23-029615. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.