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

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 the iconic 24 Hours of Le Mans endurance race (“Le Mans”) and the associated FIA World Endurance Championship (the “WEC”), INDYCAR, 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 Driven Lifestyle, we have obtained the official licenses to develop multi-platform games for 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.

On October 3, 2023, we sold our NASCAR licensed rights under that certain Second Amended and Restated Distribution and License Agreement with NASCAR Team Properties (“NTP”) (the “NASCAR License”) to iRacing.com Motorsport Simulations, LLC. Prior to the sale of our NASCAR License, we had been the official video game developer and publisher for the NASCAR video game racing franchise and had the exclusive right to create and organize esports leagues and events for NASCAR using our NASCAR racing video games, in each case, subject to certain limited exceptions. Concurrently with the sale of our NASCAR License, we entered into an agreement with NTP pursuant to which we have a limited non-exclusive right and license to, among other things, sell our NASCAR games and downloadable content (“DLC”) that are currently in our product portfolio through December 31, 2024 (the “NASCAR New Limited License”). For the three and nine months ended September 30, 2023 and 2022, a majority of our revenue was generated from sales of our NASCAR racing video games.

In addition, on October 26, 2023, BARC (TOCA) Limited (“BARC”), the exclusive promoter of the BTCC, delivered notice to the Company terminating the license agreement between the parties relating to the Company’s development of video games and the organization and facilitation of esports events for the BTCC (the “BTCC License”). As a result, the Company no longer has the right to develop and publish the video games for the BTCC racing series or to create and organize its esports leagues and events.

See Note 12 – Subsequent Events in our condensed consolidated financial statements for additional details regarding our sale of the NASCAR License and the termination of the BTCC License.

Due to the uncertainty surrounding our ability to raise funding, and in light of our liquidity position and anticipated future funding requirements, we continue to explore other strategic alternatives and potential options for our business, including, but not limited to, the sale or licensing of certain of our assets in addition to the recent sale of our NASCAR License. If any such additional strategic alternative is executed, it is expected it would help to improve our working capital position and reduce overhead expenditures, thereby lowering our expected future cash-burn, and provide some short-term liquidity relief. Nonetheless, even if we are successful in implementing one or more additional strategic alternatives, 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. There are no assurances that we will be successful in implementing any additional strategic plans for the sale or licensing of our assets, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond our control.

As part of our ongoing liquidity management efforts, we have evaluated our product roadmap and determined that changes to the expected timing and scope of certain new product releases is required. Specifically, we have determined that our upcoming Le Mans Ultimate game release date will be moved from December 2023 to an anticipated February 2024 release date. In addition, following our decision on October 29, 2023 to complete a restructuring of our operations that primarily resulted in the closure of our Australian development studio, as well as the reduction of headcount in the United Kingdom, we determined it was necessary to suspend the development of our previously planned INDYCAR title until such time we are able to secure additional funding and capable resources to be able to deliver a high-quality INDYCAR video game title. We plan to continue evaluating our product roadmap and ability to deliver new titles under other licenses, which may result in further adjustments to our scheduled releases. See Note 1 – Business Organization, Nature of Operations, and Risks and Uncertainties in our condensed consolidated financial statements and “—Liquidity and Capital Resources” in this Report for further information.

As of September 30, 2023, we have a total headcount of 90 people, made up of 88 full-time employees, including 62 dedicated to game development. Our headcount numbers as of September 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. On October 29, 2023, we made a decision to further restructure our business, which resulted in the closure of our Australian development studio and a reduction of our global workforce primarily in Australia and the United Kingdom by approximately 40 employees. See “—Restructuring Initiatives” below for additional information.

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”).

Restructuring Initiatives

As previously disclosed in the 2022 Form 10-K, the Company announced an organizational restructuring program on September 8, 2022 (the “2022 Restructuring Program”) designed to reduce the Company’s marketing, general and administrative expenses, improve the Company’s profitability and maximize efficiency, cash flow and liquidity, with a goal of achieving annualized savings of $4 million by the end of fiscal year 2023. The Company achieved $2.5 million of this cost reduction target by the end of 2022 and as of September 2023, it has increased its annualized savings to $6.7 million, while having incurred restructuring costs of approximately $1.3 million to date.

In addition to the 2022 Restructuring Program, the Company announced on October 29, 2023, a further restructuring of its business due to its ongoing liquidity constraints. The announcement confirmed the closure of the Company’s Australian development studio and resulted in a reduction of the Company’s workforce by approximately 40 employees, the majority of whom were based in Australia and the United Kingdom, representing approximately 40% of the Company’s global workforce. The Company expects to record a restructuring expense of approximately $0.4 to $0.5 million related to the workforce reduction, primarily consisting of severance and redundancy costs, in the fourth quarter of fiscal year 2023. The Company believes the implementation of the workforce reduction, including cash payments, will be substantially complete by the end of the fourth quarter of fiscal year 2023. As a consequence of the closure of the Australia development studio, the Company determined it was necessary to suspend the development of its previously planned INDYCAR title until such time that it is able to secure additional funding and capable resources to be able to deliver a high-quality INDYCAR video game title.

The Company continues to seek to reduce its monthly net cash-burn by reducing its cost base through maintaining and enhancing cost control initiatives 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:

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We continually evaluate our planned product release schedule and modify the timing of upcoming products based on developments in our business, or if we believe it will result in a better consumer experience. For example, we have recently modified our produce release schedule to postpone the release of our Le Mans Ultimate game from December 2023 to February 2024 in order to deliver a better product, and we have suspended the development of our INDYCAR title until such time we have sufficient liquidity and resources to deliver a high-quality game. In addition, the sale of our NASCAR License and the termination of our BTCC License, as disclosed elsewhere in this Report, has impacted our long-term product release schedule as we will no longer be producing NASCAR and BTCC titles moving forward.

As we continue to evaluate the cost saving initiatives and explore other strategic alternatives and potential options for our business, including, but not limited to, the sale or licensing of certain of our assets, further adjustments to our product roadmap may be required.

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 70.9% and 60.5% of our total revenue for the nine months ended September 30, 2023 and 2022, respectively. Following the sale of our NASCAR License and the execution of the NASCAR New Limited License, which allows us to sell our NASCAR games and DLCs that are currently in our product portfolio through December 31, 2024, we anticipate the amount of revenue to be generated by our existing NASCAR products to decline over time.

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 nine months ended September 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 nine months ended September 30, 2023, and 2022, approximately 86.9% and 68.0%, respectively, of our revenue from sales of video games for game consoles and PCs, net of sales reserves, 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’. We intend to continue exploring opportunities to expand the recurring portion of our Esports segment outside of Le Mans.

Recurring Revenue Sources: Our business model includes revenue that we deem recurring in nature, which historically consisted primarily of revenue from our annualized NASCAR video game racing franchise for game consoles, PC, and mobile platforms. We historically 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. Following the sale of our NASCAR License and 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, including through the planned introduction of new annualized sports franchise games, such as with Le Mans.

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, which historically has been attributable to our NASCAR License prior to its sale 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, Driven Lifestyle 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 September 30, 2023 compared to Three Months Ended September 30, 2022

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

Revenue

Consolidated revenues were $1.7 million and $1.2 million for 2023 and 2022, respectively, an increase of $0.5 million, or 38.5%, when compared to the prior period.

Gaming segment revenues represented approximately 100% and 85.3% of our total 2023 and 2022 revenues, respectively, increasing by $0.7 million, or 62.4%, when compared to the prior period. The increase in Gaming segment revenues in 2023 when compared to 2022 was primarily due to higher digital game sales and downloadable content (“DLC”) sales of $0.7 million, driven by improved NASCAR product sales following the release of the NASCAR Heat 5: Next Gen Update DLC in June 2023.

Esports segment revenues represented approximately 0% and 14.7% of our total 2023 and 2022 revenues, respectively, decreasing by $0.2 million, or 100%, when compared to the prior period. The decrease in Esports segment revenues in 2023 was primarily driven by lower sponsorship revenues from the Le Mans Virtual Series which has not yet commenced its 2023-24 season. Esports segment revenues for 2022 consisted of sponsorship revenues from the Le Mans Virtual Series 2022-23 season, which commenced in September 2022.

Cost of Revenues

Consolidated cost of revenues were $0.8 million and $0.6 million for 2023 and 2022, respectively, an increase of $0.2 million, or 37.9%, when compared to the prior period.

Gaming segment cost of revenues represented approximately 100% and 89.7% of our total 2023 and 2022 cost of revenues, respectively, increasing by approximately $0.3 million, or 53.8%, when compared to the prior period. The increase in Gaming segment cost of revenues was primarily driven by a $0.3 million increase in royalty and license fees, driven by increases in the annual contractual minimum royalty guarantee payments due on our gaming licenses.

Esports segment cost of revenues represented approximately 0% and 10.3% of our total 2023 and 2022 cost of revenues, respectively, decreasing by $0.1 million, or 100%, when compared to the prior period. There were no associated cost of revenues from our Le Mans Virtual Series during 2023 as a result of the competition not yet commencing its 2023-24 season. Esports segment cost of revenues for 2022 represented costs incurred relating to the Le Mans Virtual Series 2022-23 season, which commenced in September 2022.

Gross Profit

Consolidated gross profit was $0.9 million and $0.6 million for 2023 and 2022, respectively, an increase of $0.2 million, or 39.0%, when compared to the prior period. Gross profit margin was 50.9% in 2023, compared to 50.7% in 2022, where the basis point increase was driven primarily by higher gaming revenues.

Gaming segment gross profit was $0.9 million for 2023, compared to $0.5 million for 2022, representing a gross profit margin of 50.9% for 2023 and 48.2% for 2022. The increase in our Gaming segment gross profit of $0.4 million, and corresponding increase in gross profit margin, were primarily due to higher gaming revenues as discussed above.

Esports segment gross profit was $0 for 2023, compared to $0.1 million for 2022, representing a gross profit margin of 0% for 2023 and 65.4% for 2022. As discussed above, there were no sponsorship revenues from our Le Mans Virtual Series during the three months ended September 30, 2023.

Operating Expenses

Changes in operating expenses are explained in more detail below:

Sales and Marketing

Sales and marketing expenses were $0.4 million and $1.4 million for 2023 and 2022, respectively, representing a $1.0 million, or 75.1%, 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 $0.4 million reduction in payroll and employee related expenses as a result of lower headcount when compared to the prior period.

Development

Development expenses were $1.6 million and $2.6 million for 2023 and 2022, respectively, representing a $1.1 million, or 40.4%, decrease when compared to the prior period. The reduction in development expense was primarily driven by a $0.6 million reduction in payroll expense, as a result of lower headcount when compared to the prior period, as well as a $0.5 million reduction in external development expense driven by ongoing cost rationalization measures, partially offset by a $0.1 million increase in hosting fees incurred to support our ongoing development efforts.

General and Administrative

General and administrative (“G&A”) expenses were $1.5 million and $4.0 million for 2023 and 2022, respectively, a decrease of $2.5 million, or 61.9%, when compared to the prior period. The reduction in G&A expense was primarily driven by a $1.2 million reduction in legal and professional 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 due to lower headcount period over period, a $0.3 million reduction in insurance costs, and a decrease of $0.2 million in stock-based compensation expense.

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. Interest expense primarily consists of ongoing non-cash interest accretion of our INDYCAR and BTCC license liabilities.

Other Expense, net

Other expense, net for 2023 was $0.6 million, compared to other expense, net of $0.7 million for 2022, a decrease of $0.1 million. The change in other expense, net was 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.

Other Comprehensive Income

Other comprehensive income was $0.5 million for 2023, compared to other comprehensive income of $0.2 million for 2022. The $0.3 million change in other comprehensive 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 increased by $0.02 million to a loss of $0.04 million in 2023 as compared to a loss of $0.02 million in 2022, which was attributed to the increase of net losses in Le Mans Esports Series Ltd (the “Le Mans Joint Venture”).

Nine Months Ended September 30, 2023 compared to Nine Months Ended September 30, 2022

In this section, references to 2023 refer to the nine months ended September 30, 2023 and references to 2022 refer to the nine months ended September 30, 2022.

Revenue

Consolidated revenues were $5.2 million and $6.6 million for 2023 and 2022, respectively, a decrease of $1.4 million, or 21.2%, when compared to the prior period.

Gaming segment revenues represented 94.4% and 90.7% of our total 2023 and 2022 revenues, respectively, decreasing by $1.1 million, or 18%, when compared to the prior period. The decrease in Gaming segment revenues was primarily due to a $0.6 million decrease in digital and mobile game sales and a $0.7 million decrease in retail sales, both of which were primarily driven by lower volumes of sales and less favorable pricing. The change in digital and mobile game sales was primarily driven by a $0.4 million reduction in NASCAR title sales on PC, consoles and mobile platforms, and a $0.2 million decrease in rFactor 2 and KartKraft title sales on PC. 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 decrease 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 a $0.8 million reduction in sales allowances recognized in 2023, when compared to 2022.

Esports segment revenues represented 5.6% and 9.3% of our total 2023 and 2022 revenues, respectively, decreasing by $0.3 million, or 52.5%, when compared to the prior period. The change in Esports segment revenue was due to $0.3 million lower sponsorship revenue from the Le Mans Virtual Series, during 2023 due to the timing of the commencement of the 2023-24 season compared to the 2022-23 season, as discussed above.

Cost of Revenues

Consolidated cost of revenues were $2.9 million and $3.5 million for 2023 and 2022, respectively, a decrease of $0.5 million, or 15.2%, when compared to the prior period.

Gaming segment cost of revenues represented 87.3% and 79.6% of our total 2023 and 2022 cost of revenues, respectively, decreasing by $0.2 million, or 7.0%, 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 and $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 development costs was driven by the decrease in digital and retail game sales. These reductions were partially offset by an increase in license fees of $0.2 million.

Esports segment cost of revenues represented 12.7% and 20.4% of our total 2023 and 2022 cost of revenues, respectively, decreasing by $0.3 million, or 47.0%, 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 Le Mans Virtual Series during 2023 due to the timing of the commencement of the 2023-24 season compared to the 2022-23 season, as discussed above.

Gross Profit

Consolidated gross profit was $2.2 million and $3.1 million for 2023 and 2022, respectively, a decrease of $0.9 million, or 28.1%, when compared to the prior period. Gross profit margin was 42.9% in 2023, compared to 47.0% in 2022, where the basis point decrease was driven primarily by lower gaming revenues combined with 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 $2.3 million for 2023, compared to $3.2 million for 2022, representing a gross profit margin of 47.2% for 2023 and 53.5% for 2022. The decrease in our Gaming segment gross profit of $0.9 million, and corresponding decrease in gross profit margin was primarily due to lower gaming revenues combined with certain fixed expenses as discussed above.

Esports segment gross loss was $0.1 million for both 2023 and 2022, representing a negative gross profit margin of 29.1% and 15.9% for 2023 and 2022, respectively. This erosion in the Esports segment gross profit margin was primarily due to lower revenues from the Le Mans Virtual Series, as explained above.

Operating Expenses

Changes in operating expenses are explained in more detail below:

Sales and Marketing

Sales and marketing expenses were $1.4 million and $4.7 million for 2023 and 2022, respectively, representing a $3.3 million, or 69.8% decrease when compared to the prior period. The reduction in sales and marketing expense was primarily driven by a $2.1 million reduction in external marketing expense, as well as a $1.2 million reduction in payroll and employee related expenses as a result of lower headcount when compared to the prior period.

Development

Development expenses were $5.8 million and $7.7 million for 2023 and 2022, respectively, representing a $2.0 million, or 25.5%, decrease when compared to the prior period. The reduction in development expense was primarily driven by a $1.7 million reduction in payroll and employee related expenses expense as a result of lower headcount when compared to the prior period and a $0.5 million decrease in development consulting expenses, partially offset by a $0.2 million increase in hosting fees incurred to support our ongoing development efforts.

General and Administrative

G&A expenses were $7.5 million and $10.8 million for 2023 and 2022, respectively, a decrease of $3.3 million, or 30.8%, when compared to the prior period. The reduction in G&A expense was primarily driven by a $1.6 million reduction in legal and professional costs, primarily due to the settlement of litigation in 2022 that did not repeat in 2023, a $1.2 million reduction in payroll and employee related expenses, including travel expenses, due to lower headcount period over period, a $0.7 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 related to goodwill acquired in connection with the acquisition of Studio397 that was deemed impaired as a result of impairment assessments performed during 2022. The triggers for the assessments were primarily revisions made during the three months ended March 31, 2022 to the scope and timing of certain product releases included in the Company’s 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.

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 changes to the Company’s product roadmap and the Company’s market capitalization, as referenced above. The indefinite-lived intangible asset impairment losses primarily related to the rFactor 2 trade name and the Le Mans Video Gaming License and were mainly driven by a reduction in expected future revenues following changes made to the Company’s product roadmap during the three months ended March 31, 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 changes to the Company’s product roadmap and the Company’s market capitalization, as referenced above. The finite-lived intangible asset impairment losses in 2022 related 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 $0.7 and $0.6 million for 2023 and 2022, respectively, primarily from ongoing non-cash interest accretion of our INDYCAR and BTCC license liabilities, as well interest expense relating to deferred purchase consideration in respect of our acquisition of Studio 397.

Other Income (Expense), net

Other income, net for 2023 was $0.4 million, compared to other expense, net of $1.5 million for 2022, an improvement of $1.9 million compared to the prior period. The improvement in other income (expense), net was primarily driven by a $1.4 million reduction in foreign currency losses, arising from remeasuring transactions denominated in a currency other than U.S. dollars., a $0.4 million gain in the fair value of liability settled stock warrants and a $0.1 million increase in rental and other income.

Other Comprehensive Income

Other comprehensive income presented no significant changes

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 Driven Lifestyle, which were subsequently incorporated into a line of credit provided by Driven Lifestyle 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 Driven Lifestyle 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:

For the nine months ended September 30, 2023, the Company had a net loss of approximately $17.0 million and negative cash flows from operations of approximately $10.1 million. As of September 30, 2023, we had an accumulated deficit of $90.7 million and cash and cash equivalents of $1.2 million, which increased to $3.2 million as of October 31, 2023. The increase in cash and cash equivalents was driven by the sale of the Company’s NASCAR License to iRacing on October 3, 2023. See Note 12 – Subsequent Events in our condensed consolidated financial statements in this Report for additional details.

For the three months ended September 30, 2023, we experienced an average net cash burn from operations of approximately $0.4 million a month, and while it has taken measures to reduce its costs, the Company expects to continue to have a net cash outflow from operations for the foreseeable future as it continues to develop its product portfolio and invest in developing new video game titles. 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 over the next year 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 continues to explore several options, including, but not limited to: i) additional funding in the form of potential equity and/or debt financing arrangements or similar transactions (collectively, “Capital Financing”); ii) other strategic alternatives for its business, including, but not limited to, the sale or licensing of the Company’s assets in addition to its recent sale of its NASCAR License; and iii) cost reduction and restructuring initiatives, including re-evaluating its product roadmap, each of which is described more fully below.

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

Due to the continuing uncertainty surrounding the Company’s ability to raise funding in the form of potential Capital Financing, and in light of its liquidity position and anticipated future funding requirements, the Company continues to explore other strategic alternatives and potential options for its business, including, but not limited to, the sale or licensing of certain of the Company’s assets in addition to its recent sale of the NASCAR License. If any such additional strategic alternative is executed, it is expected it would help to improve the Company’s working capital position and reduce overhead expenditures, thereby lowering the Company’s expected future cash-burn, and provide some short-term liquidity relief. Nonetheless, even if the Company is successful in implementing one or more additional strategic alternatives, the Company will continue to require additional funding and/or further cost reduction measures in order to continue operations, which includes further restructuring of its business and operations. There are no assurances that the Company will be successful in implementing any additional strategic plans for the sale or licensing of its assets, or any other strategic alternative, which may be subject to the satisfaction of conditions beyond the Company’s control.

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

As the Company continues to address its liquidity constraints, the Company may need to make further adjustments to its product roadmap in order to reduce operating cash burn. Additionally, the Company continues to seek to improve its liquidity through maintaining and enhancing cost control initiatives, such as those that it expects to achieve through its previously announced 2022 Restructuring Program, as well as the closure of its Australian development studio. The Company plans to continue evaluating the structure of its business for additional changes in order to improve both its near-term and long-term liquidity position, as well as create a healthy and sustainable Company from which to operate.

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

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

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

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

In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the 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 nine months ended September 30, 2023 and 2022 was $10.1 million and $16.9 million, respectively. The net cash used in operating activities for the nine months ended September 30, 2023 was primarily a result of cash used to fund a net loss of $17.0 million, adjusted for net non-cash adjustments of $6.9 million. Net cash used in operating activities for the nine months ended September 30, 2022 was primarily due to a net loss of $32.0 million, adjusted for non-cash expenses in the amount of $13.9 million and by $1.2 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 nine months ended September 30, 2023 and 2022 was $0.03 million and $0.3 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 nine months ended September 30, 2023 and 2022 was $10.1 million and $1.1 million, respectively. Cash flows provided by financing activities for the nine months ended September 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 $0.7 million of payments for purchase commitments and $0.3 million for payments relating to license liabilities. During the nine months ended September 30, 2022, net cash provided by financing activities was driven primarily by $3.0 million in advances from Driven Lifestyle under the $12 million Line of Credit in September 2022, partially offset by $1.5 million in payments of purchase commitment liability relating to a portion of the deferred installment amount due in connection with our acquisition of Studio397 and $0.3 million in game license payments.

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, Driven Lifestyle, that provided the Company with a line of credit of up to $10 million at an interest rate of 10% per annum, the availability of which is dependent on Driven Lifestyle’s available liquidity. On November 23, 2020, the Company and Driven Lifestyle entered into an amendment to the $12 million Line of Credit, effective in 2020, pursuant to which the availability under the $12 million Line of Credit was increased from $10 million to $12 million, with no changes to the other terms. The $12 million Line of Credit does not have a stated maturity date and is payable upon demand at any time at the sole and absolute discretion of Driven Lifestyle, and any principal and accrued interest owed will be accelerated and become immediately payable in the event the Company consummates certain corporate events, such as a capital reorganization. The Company may 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 Driven Lifestyle (the “Support Agreement”) pursuant to which Driven Lifestyle issued approximately $3 million (the “September 2022 Cash Advance”) to the Company in accordance with the $12 million Line of Credit. Additionally, the Support Agreement modified the $12 million Line of Credit such that, among other things, until June 30, 2024, Driven Lifestyle would not demand repayment of the September 2022 Cash Advance or other advances under the $12 million Line of Credit, unless certain events occurred, as prescribed in the Support Agreement, such as the completion of a new financing arrangement or the Company generates positive cash flows from operations, among others. All principal and accrued interest owed on the $12 million Line of Credit were exchanged for equity following the completion of two debt-for-equity exchange agreements with Driven Lifestyle on January 30, 2023 and February 1, 2023, relieving the Company of approximately $3.9 million in owed principal and unpaid interest in exchange for an aggregate of 780,385 shares of the Company’s Class A common stock. See Note 5 – Related Party Loans in our condensed consolidated financial statements in this Report for further information. As of September 30, 2023, the balance due to Driven Lifestyle under the $12 million Line of Credit was $0.

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

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 nine months ended September 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 September 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 nine months ended September 30, 2023, no shares of Class A common stock were sold under the Company’s ATM program. As of September 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 September 30, 2023.

Material Cash Requirements

As a result of the sale of our NASCAR License on October 3, 2023 (See Note 12 - Subsequent Events in our condensed consolidated financial statements), our future minimum royalty guarantee commitments pertaining to the NASCAR License will reduce by an aggregate of $6.3 million from that previously disclosed in the 2022 Form 10-K.

Other than as described in Note 9 – Commitments and Contingencies in our condensed consolidated financial statements in this Report and as discussed above, 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.

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 September 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 September 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 September 30, 2023, as well as an additional material weakness identified during the quarter ended June 30, 2023, as discussed below and in Part I, Item 4, “Controls and Procedures” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023, that also continued to exist.

Remediation of Material Weaknesses

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. Additionally, 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, which also has not yet been remediated. 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.

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 September 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 hired 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 quarter 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 September 30, 2023, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 $17.0 million and negative cash flows from operations of approximately $10.1 million for the nine months ended September 30, 2023. As of September 30, 2023, we had an accumulated deficit of $90.7 million and cash and cash equivalents of $1.2 million, which increased to $3.2 million as of October 31, 2023. The increase in cash and cash equivalents was driven by the sale of the Company’s NASCAR License to iRacing on October 3, 2023. For the three months ended September 30, 2023, we experienced an average net cash burn from operations of approximately $0.4 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” in this Report 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 Driven Lifestyle, 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.

48

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 Driven Lifestyle 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 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.

Risks Related to Our Business and Industry

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 continue to explore other 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 in addition to the sale of our NASCAR License to iRacing on October 3, 2023. Any Strategic Transaction that we 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.

Any Strategic Transaction 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.

Additionally, even if we are successful in implementing one or more Strategic Transactions, 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.

We depend on a relatively small number of franchises for a significant portion of our revenues and profits.

We follow a franchise model and a significant portion of our revenues has historically been derived from products based on a relatively small number of popular franchises, including our NASCAR products, which have historically accounted for the majority of our revenue. For the nine months ended September 30, 2023 and 2022, revenues associated with our NASCAR franchise accounted for approximately 70.9% and 60.5% of our total revenue, respectively.

Due to this dependence on a limited number of franchises, the failure to achieve anticipated results by one or more products based on these franchises, or the loss of any franchise, could negatively impact our business. For example, with the consummation of the sale of our NASCAR License to iRacing on October 3, 2023, we are no longer the official video game developer and publisher for the NASCAR video game racing franchise and no longer have the exclusive right to create and organize esports leagues and events for NASCAR using our NASCAR racing video games. Accordingly, we no longer have the right to use the NASCAR brand for our products other than a limited non-exclusive right and license to, among other things, sell our NASCAR games and DLCs that are currently in our product portfolio through December 31, 2024. We believe this will require us to modify our existing business model and significantly alter the risk profile relating to our operations. As a result, we may encounter difficulties or challenges in continuing operations due to the sale of our NASCAR License, and our cash flows and results of operations will likely be materially adversely impacted as we anticipate the amount of revenue to be generated by our existing NASCAR products to decline over time.

Additionally, if the popularity of a franchise declines, we may have to write off the unrecovered portion of the underlying intellectual property assets, which could negatively impact our business. In the future, we expect this trend to continue with a relatively limited number of franchises producing a disproportionately high percentage of our revenues and profits.

Our ability to acquire and maintain licenses to intellectual property, especially for racing series, affects our revenue and profitability. Competition for these licenses may make them more expensive and increase our costs.

Most of our products and services are based on or incorporate intellectual property owned by others. For example, we have obtained an exclusive license to develop multi-platform games for the 24 Hours of Le Mans race, the WEC and INDYCAR. Additionally, through a series of joint ventures and other agreements with various racing series, we own exclusive rights to operate various esports tournaments and leagues, including the Le Mans Virtual Series. Competition for these licenses and rights is intense and could result in increased minimum guarantees and royalty rates payable to licensors and developers, which would significantly increase our costs and reduce our profitability. Furthermore, if we are unable to maintain these licenses and rights or obtain additional licenses or rights with significant commercial value, our ability to develop successful and engaging games and services may be adversely affected and our revenue, profitability and cash flows may decline significantly. For example, as discussed elsewhere in this Report, we sold our NASCAR License to iRacing on October 3, 2023 and our cash flows and results of operations will likely be materially adversely impacted as we anticipate the amount of revenue to be generated by our existing NASCAR products to decline over time. Additionally, on October 26, 2023, BARC delivered notice to us terminating the BTCC License Agreement because we were unable to satisfy certain of our obligations under the BTCC License Agreement, including the release and sale of BTCC gaming and esports products within two years of the effective date off the BTCC License Agreement and the payment of certain royalties, including certain minimum annual guarantees.

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 September 30, 2023, we had other intangible assets, net of $8.0 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 nine months ended September 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 November 3, 2023, Jason Potter resigned as our Chief Financial Officer, effective as of November 8, 2023. Effective November 8, 2023, Stanley Beckley has been appointed as our Interim Chief Financial Officer. Prior to Mr. Potter’s tenure as our Chief Financial Officer, we had other individuals, including Dmitry Kozko, our former Chief Executive Officer, John Delta, a member of our board of directors, and Jonathan New serve in an Interim Chief Financial Officer or Chief Financial Officer capacity, as applicable, since January 2020. 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 a permanent 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, particularly if we are unable to attract and retain a qualified candidate to become our permanent Chief Financial Officer in a timely manner. This may also impact our ability to retain and hire other key members of management.