# Motorsport Games Inc.: Form 10-Q for the period ended Sep 30, 2024 - Company: [Motorsport Games Inc.](/companies/msgm.md) (CIK 1821175) - Form: 10-Q - Filed: 2024-11-14 - Accepted by EDGAR: Nov 14, 2024, 16:10 ET - Period: 2024-09-30 - Accession: 0001493152-24-045867 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1821175/000149315224045867/form10-q.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1821175/000149315224045867/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2024-09-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2024-07-01 to 2024-09-30 | $1.8m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Revenue | 9 months, 2024-01-01 to 2024-09-30 | $6.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Cost of revenue | 3 months, 2024-07-01 to 2024-09-30 | $716.7k | us-gaap:CostOfRevenue | | Cost of revenue | 9 months, 2024-01-01 to 2024-09-30 | $2.2m | us-gaap:CostOfRevenue | | Gross profit | 3 months, 2024-07-01 to 2024-09-30 | $1.1m | us-gaap:GrossProfit | | Gross profit | 9 months, 2024-01-01 to 2024-09-30 | $4.6m | us-gaap:GrossProfit | | Research and development | 3 months, 2024-07-01 to 2024-09-30 | $848.5k | us-gaap:ResearchAndDevelopmentExpense | | Research and development | 9 months, 2024-01-01 to 2024-09-30 | $2.8m | us-gaap:ResearchAndDevelopmentExpense | | Operating income | 3 months, 2024-07-01 to 2024-09-30 | −$1.9m | us-gaap:OperatingIncomeLoss | | Operating income | 9 months, 2024-01-01 to 2024-09-30 | −$1.1m | us-gaap:OperatingIncomeLoss | | Interest expense | 3 months, 2024-07-01 to 2024-09-30 | $29.9k | us-gaap:InterestExpense | | Interest expense | 9 months, 2024-01-01 to 2024-09-30 | $90.5k | us-gaap:InterestExpense | | Net income | 3 months, 2024-07-01 to 2024-09-30 | $9.8k | us-gaap:NetIncomeLoss | | Net income | 9 months, 2024-01-01 to 2024-09-30 | $1.1m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.00 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 9 months, 2024-01-01 to 2024-09-30 | $0.39 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2024-07-01 to 2024-09-30 | $0.00 | us-gaap:EarningsPerShareBasic | | Basic EPS | 9 months, 2024-01-01 to 2024-09-30 | $0.39 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2024-07-01 to 2024-09-30 | 3,024,366 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 9 months, 2024-01-01 to 2024-09-30 | 2,823,274 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 9 months, 2024-01-01 to 2024-09-30 | −$697.5k | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 9 months, 2024-01-01 to 2024-09-30 | $25.1k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2024-09-30 | $751.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2024-09-30 | $2.4m | us-gaap:AssetsCurrent | | Total assets | at 2024-09-30 | $7.0m | us-gaap:Assets | | Current liabilities | at 2024-09-30 | $4.8m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2024-09-30 | $4.8m | us-gaap:Liabilities | | Shareholders' equity | at 2024-09-30 | $4.1m | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 58,414 characters. The following discussion should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”) filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2024 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 racing game developer, publisher and esports ecosystem provider of official motorsport racing series, including the iconic 24 Hours of Le Mans endurance race (“Le Mans”) and the associated FIA World Endurance Championship (the “WEC”). Our portfolio also includes the KartKraft karting simulation game, as well as Studio 397 B.V. (“Studio397”) and their rFactor 2 realistic racing simulator technology and platform. rFactor 2 also powers F1® Arcade through a partnership with Kindred Concepts. Our purpose is to make the thrill of motorsports accessible to everyone by creating the highest quality, most sophisticated and innovative experiences for racers, gamers and fans of all ages. Our products and services target a large global motorsport audience. 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 (“DLC”). We have obtained the official licenses to develop multi-platform games for the 24 Hours of Le Mans race and the WEC. We are also striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing games. 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 DLCs that are currently in our product portfolio through December 31, 2024 (the “NASCAR New Limited License”). For the three months ended September 30, 2024 and 2023, 55.6% and 77.9% of our total revenue, respectively, was generated from sales of our NASCAR racing video games. 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 sales of our NASCAR License and Traxion, which was our motorsport and racing games community content platform. 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. ### 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 | | --- | --- | | 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 | | rFactor 2: Race Control multiplayer | October 5, 2023, available on PC | | Le Mans Ultimate | February 20, 2024, available on PC | | Le Mans Ultimate – 2024 DLC Pack 1 | July 23, 2024, available on PC | | Le Mans Ultimate – 2024 DLC Pack 2 | September 24, 2024, available on PC | \* Pursuant to the NASCAR New Limited License, we have a limited non-exclusive right and license to, among other things, sell these NASCAR games and DLCs through December 31, 2024. 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. The sale of our NASCAR License and the termination of our BTCC License and INDYCAR License, as disclosed elsewhere in this Report, has impacted our long-term product release schedule as we will no longer be producing NASCAR, BTCC and INDYCAR 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 and video game consoles manufactured by third parties, such as Sony Interactive Entertainment Inc.’s (“Sony”) PlayStation and Microsoft Corporation’s (“Microsoft”) Xbox consoles, which comprised approximately 50.6% and 66.1% of our total revenue for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024 and 2023, the sale of products for Microsoft Windows via Steam comprised approximately 47.1% and 22.4% of our total revenue, respectively, and the sale of products for mobile platforms comprised approximately 2.0% and 4.9% of our total revenue, respectively. The success of our business is dependent upon consumer acceptance of video game console/PC platforms and continued growth in the installed base of these platforms. When new hardware platforms are introduced, such as those released by Sony and Microsoft in November 2020, demand for interactive entertainment used on older platforms typically declines, which may negatively affect our business during the market transition to the new consoles. The latest generation of Sony and Microsoft consoles provide “backwards compatibility” (i.e., the ability to play games for the previous generation of consoles), which could mitigate the risk of such a decline. However, we cannot be certain how backwards compatibility will affect demand for our products. ### Digital Business Players increasingly purchase our games as digital downloads, as opposed to purchasing physical discs. All of our titles that are available through retailers as packaged goods products are also available through direct digital download. For each of the nine months ended September 30, 2024, and 2023, approximately 86.8% and 86.9% 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. In 2023, we organized the grand finale of the Le Mans Virtual Series 2022/23, the 24 Hours of Le Mans Virtual event, which had a cumulative total of approximately 8.8 million video views with approximately 27 million minutes watched. The 24 Hours of Le Mans Virtual event had a global audience of 5 million across television (TV)/over-the-top (OTT) channels. Although we did not organize the Le Mans Virtual Series for the 2023/24 season, we currently plan on organizing the 2024/25 Le Mans Virtual Series to commence later this year. We also 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. ### 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, who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We classified our reportable operating segments into (i) the development and publishing of interactive racing video games, entertainment content and services (the “Gaming segment”); and (ii) the organization and facilitation of esports tournaments, competitions and events for our licensed racing games as well as on behalf of third-party video game racing series and other video game publishers (the “esports segment”). ### Components of Our Results of Operations ### Revenues We have historically derived substantially all 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 primarily attributable to our NASCAR License prior to its sale and certain other third parties relating to our NASCAR and Le Mans Ultimate 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, 2024 compared to Three Months Ended September 30, 2023 In this section, references to 2024 refer to the three months ended September 30, 2024 and references to 2023 refer to the three months ended September 30, 2023. #### Revenues | Revenues: | For the Three Months Ended September 30, 2024 | 2023 | Change $% | | | --- | ---: | ---: | ---: | ---: | | Gaming | $1,802,946 | $1,693,871 | $109,075 | 6.4% | | Esports | - | - | - | -% | | Total Revenues | $1,802,946 | $1,693,871 | $109,075 | 6.4% | Consolidated revenues, entirely comprised of the Gaming segment, were $1.8 million and $1.7 million for the three months ended September 30, 2024 and 2023, respectively, an increase of $0.1 million, or 6.4%, when compared to the prior period. The increase in Gaming segment revenues was primarily due to higher digital game sales from the sale of Le Mans Ultimate released on PC in February 2024. We did not organize a Le Mans Virtual Series (“LMVS”) event in Q3 2024 or Q3 2023, resulting in no earned sponsorship or events revenue in 2024 and 2023 in our Esports segment. #### Cost of Revenues | Cost of revenues: | For the Three Months Ended September 30, 2024 | 2023 | Change $% | | | --- | ---: | ---: | ---: | ---: | | Gaming | $716,723 | $831,479 | $(114,756) | (13.8)% | | Esports | - | - | - | -% | | Total Cost of Revenues | $716,723 | $831,479 | $(114,756) | (13.8)% | Consolidated cost of revenues, entirely comprised of the Gaming segment, was $0.7 million and $0.8 million for 2024 and 2023, respectively, a decrease of $0.1 million, or 13.8%, when compared to the prior period. The decrease in Gaming segment cost of revenues was primarily driven by a $0.1 million reduction in royalty payments, mainly related to our NASCAR titles as a direct result of lower game sales for the franchise compared to the prior period. #### Gross Profit | Gross Profit | For the Three Months Ended September 30, 2024 | 2023 | Change $% | | | --- | ---: | ---: | ---: | ---: | | Gaming | $1,086,223 | $862,392 | $223,831 | 26.0% | | Esports | - | - | - | -% | | Total Gross Profit | $1,086,223 | $862,392 | $223,831 | 26.0% | | | For the Three Months Ended September 30, 2024 | 2023 | | --- | ---: | ---: | | Gaming - Gross Profit Margin | 60.2% | 50.9% | | Esports - Gross Profit (Loss) Margin | -% | -% | | Total Gross Profit Margin | 60.2% | 50.9% | Consolidated gross profit, entirely comprised of the Gaming segment, was $1.1 million and $0.9 million for 2024 and 2023, respectively, an increase of $0.2 million, or 26.0%, when compared to the prior period. Gross profit margin was 60.2% in 2024, compared to 50.9% in 2023. The increase in our Gaming segment gross profit of $0.2 million, and corresponding increase in gross profit margin, was primarily due to higher gaming revenues, particularly related to increased digital game revenues as a result of sales of Le Mans Ultimate released on PC in February 2024. The increase in gross profit for the Gaming segment was also attributable to lower cost of revenues due to decreased royalty payments resulting from the decrease in NASCAR game sales compared to the prior period. As explained above, we did not organize a LMVS event in Q3 2024 or Q3 2023. #### Operating Expenses | Operating Expenses: | For the Three Months Ended September 30, 2024 | 2023 | Change $% | | | --- | ---: | ---: | ---: | ---: | | Sales and marketing | $175,532 | $358,120 | $(182,588) | (51.0)% | | Development | 848,528 | 1,566,839 | (718,311) | (45.8)% | | General and administrative | 1,946,897 | 1,526,614 | 420,283 | 27.5% | | Depreciation and amortization | 47,151 | 75,614 | (28,463) | (37.6)% | | Total Operating Expenses | $3,018,108 | $3,527,187 | $(509,079) | (14.4)% | Changes in operating expenses are explained in more detail below: #### Sales and Marketing Sales and marketing expenses were $0.2 million and $0.4 million for 2024 and 2023, respectively, representing a $0.2 million, or 51.0%, decrease when compared to the prior period. The reduction in sales and marketing expenses was primarily driven by a $0.2 million reduction in payroll and employee-related expense as a result of lower headcount, when compared to the prior period. #### Development Development expenses were $0.9 million and $1.6 million for 2024 and 2023, respectively, representing a $0.7 million, or 45.8%, decrease when compared to the prior period. The reduction in development expenses was primarily driven by a $0.6 million decrease in payroll as a result of lower headcount, as well as a $0.1 million decrease in external development services, when compared to the prior period. #### General and Administrative General and administrative (“G&A”) expenses were $1.9 million and $1.5 million for 2024 and 2023, respectively, an increase of $0.4 million, or 27.5%, when compared to the prior period. The increase in G&A expenses was primarily driven by a $0.4 million increase in legal & professional fees, compared to the prior period. #### Depreciation and Amortization Depreciation and amortization expenses for 2024 and 2023 presented no significant changes to the depreciation of capital assets. #### Interest Expense Interest expense was approximately $0.03 million for 2024 compared to $0.2 million in 2023, primarily from non-cash interest accretion of purchase commitment liabilities relating to the acquisition of Studio397 in April 2021. #### Other Income (Expense), net Other income (expense), net was $1.4 million for 2024, compared to ($0.6) million in 2023, an increase of $2.0 million compared to the prior period. Other income, net of $1.4 million for 2024 was primarily comprised of foreign currency gains incurred remeasuring transactions denominated in a currency other than U.S. dollars. #### Other Comprehensive Income (Loss) Other comprehensive loss was $1.1 million for 2024 compared to other comprehensive income of $0.5 million in 2023. The variance was primarily due to activity in our U.K. and Netherlands subsidiaries and represents unrealized foreign currency translation adjustments. #### Net (Loss) Income Attributable to Non-Controlling Interest Net (loss) income attributable to non-controlling interest was ($0.6) million in 2024 compared to $0.03 million for 2023. The variance was attributed to an increase in net losses in the Le Mans Esports Series Ltd joint venture. ### Nine Months Ended September 30, 2024 compared to Nine Months Ended September 30, 2023 In this section, references to 2024 refer to the nine months ended September 30, 2024 and references to 2023 refer to the nine months ended September 30, 2023. #### Revenue | Revenues: | For the Nine Months Ended September 30, 2024 | 2023 | Change $% | | | --- | ---: | ---: | ---: | ---: | | Gaming | $6,713,635 | $4,872,184 | $1,841,451 | 37.8% | | Esports | - | 290,172 | (290,172) | (100.0)% | | Total Revenues | $6,713,635 | $5,162,356 | $1,551,279 | 30.0% | Consolidated revenues were $6.7 million and $5.2 million for 2024 and 2023, respectively, an increase of $1.6 million, or 30.0%, when compared to the prior period. Gaming segment revenues represented 100.0% and 94.4% of total 2024 and 2023 revenues, respectively, increasing by $1.8 million, or 37.8%, when compared to the prior period. The increase in Gaming segment revenues was primarily due to $2.3 million in higher digital game sales due to sales of Le Mans Ultimate released on PC in February 2024, offset by $0.3 million and $0.2 million in lower revenues for NASCAR and rFactor2 titles, respectively. Esports segment revenues represented 0.0% and 5.6% of our total 2024 and 2023 revenues, respectively, decreasing by $0.3 million, or 100.0%, when compared to the prior period. The decrease in Esports segment revenue was due to us not organizing a LMVS event in 2024, resulting in no earned sponsorship or events revenue in 2024. #### Cost of Revenues | Cost of Revenues: | For the Nine Months Ended September 30, 2024 | 2023 | Change $% | | | --- | ---: | ---: | ---: | ---: | | Gaming | $2,154,997 | $2,571,627 | $(416,630) | (16.2)% | | Esports | - | 374,755 | (374,755) | (100.0)% | | Total Cost of Revenues | $2,154,997 | $2,946,382 | $(791,385) | (26.9)% | Consolidated cost of revenues were $2.2 million and $2.9 million for 2024 and 2023, respectively, a decrease of $0.8 million, or 26.9%, when compared to the prior period. Gaming segment cost of revenues represented 100.0% and 87.3% of our total 2024 and 2023 cost of revenues, respectively, decreasing by $0.4 million, or 16.2%, when compared to the prior period. The decrease in Gaming segment cost of revenues was primarily driven by a $0.7 million reduction in royalty & license payments, which was partially offset by a $0.3 million increase in amortization costs. Esports segment cost of revenues represented 0.0% and 12.7% of our total 2024 and 2023 cost of revenues, respectively, decreasing by $0.4 million, or 100.0%, when compared to the prior period. As explained above, we did not organize an LMVS event in 2024. #### Gross Profit | Gross Profit (Loss): | For the Nine Months Ended September 30, 2024 | 2023 | Change $% | | | --- | ---: | ---: | ---: | ---: | | Gaming | $4,558,638 | $2,300,557 | $2,258,081 | 98.2% | | Esports | - | (84,583) | 84,583 | (100.0)% | | Total Gross Profit | $4,558,638 | $2,215,974 | $2,342,664 | 105.7% | 31 | | For the Nine Months Ended September 30, 2024 | 2023 | | --- | ---: | ---: | | Gaming - Gross Profit Margin | 67.9% | 47.2% | | Esports - Gross Profit (Loss) Margin | - | (29.1)% | | Total Gross Profit Margin | 67.9% | 42.9% | Consolidated gross profit was $4.6 million and $2.2 million for 2024 and 2023, respectively, an increase of $2.3 million, or 105.7%, when compared to the prior period. Gross profit margin was 67.9% in 2024, compared to 42.9% in 2023. Gaming segment gross profit was $4.6 million for 2024, compared to $2.3 million for 2023, representing a gross profit margin of 67.9% for 2024 and 47.2% for 2023. The increase in our Gaming segment gross profit of $2.3 million, and corresponding increase in gross profit margin, was primarily due to higher gaming revenues, particularly related to increased digital game revenues as a result of the release of Le Mans Ultimate on PC in February 2024. The increase in gross profit for the Gaming segment was also attributable to lower cost of revenues due to decreased royalty payments resulting from the decrease in NASCAR game sales compared to the prior period. Esports segment gross profit was $0 million for 2024, compared to a loss of $0.1 million for 2023, representing a gross profit margin of 0.0% and a loss of 29.1% for 2024 and 2023, respectively. #### Operating Expenses | Operating Expenses: | For the Nine Months Ended September 30, 2024 | 2023 | Change $% | | | --- | ---: | ---: | ---: | ---: | | Sales and marketing | $631,467 | $1,411,318 | $(779,851) | (55.3)% | | Development | 2,780,630 | 5,751,741 | (2,971,111) | (51.7)% | | General and administrative | 5,548,989 | 7,459,957 | (1,910,968) | (25.6)% | | Impairment of intangible assets | - | 4,004,627 | (4,004,627) | (100.0)% | | Depreciation and amortization | 184,013 | 277,822 | (93,809) | (33.8)% | | Total Operating Expenses | $9,145,099 | $18,905,465 | $(9,760,366) | (51.6)% | Changes in operating expenses are explained in more detail below: #### Sales and Marketing Sales and marketing expenses were $0.6 million and $1.4 million for 2024 and 2023, respectively, representing a $0.8 million, or 55.3% decrease when compared to the prior period. The reduction in sales and marketing expense was primarily driven by a $0.7 million reduction in payroll and employee-related expenses as a result of lower headcount, and a $0.1 million decrease in software and travel expenses, when compared to the prior period. #### Development Development expenses were $2.8 million and $5.8 million for 2024 and 2023, respectively, representing a $3.0 million, or 51.7%, decrease when compared to the prior period. The reduction in development expense was primarily driven by a $2.0 million reduction in payroll and employee-related expenses expense as a result of lower headcount, as well as a decrease in $1.0 million in external development, when compared to the prior period. #### General and Administrative G&A expenses were $5.5 million and $7.5 million for 2024 and 2023, respectively, a decrease of $1.9 million, or 25.6%, when compared to the prior period. The reduction in G&A expense was primarily driven by a $1.3 million reduction in payroll and employee-related expenses due to lower headcount period over period, a $0.5 million reduction in severance and insurance costs, respectively, as well as a $0.2 million reduction in rent and office expense. This was partially offset by a $0.6 million increase in legal and professional fees. #### Impairment of Intangible Assets Impairment of finite-lived intangible assets was $0 million and $4.0 million in 2024 and 2023, respectively. The trigger for the impairment in 2023 was our decision to explore strategic alternatives and potential options for our business, resulting in a probable likelihood of the sale of certain licensing rights that would result in our 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 2024 and 2023 presented no significant changes to the depreciation of capital assets. #### Gain from Settlement of License Liabilities Gain from settlement of license liabilities of $3.2 million for 2024 is primarily comprised of a $2.5 million gain stemming from a Settlement and License Agreement with INDYCAR LLC executed on May 17, 2024 and a gain of $0.6 million related to the Settlement Agreement with BARC (TOCA) LIMITED, the exclusive promoter of the British Touring Car Championship on April 12, 2024. #### Other Operating Income Other operating income was $0.3 million for 2024, compared to $0 million for 2023, an increase of $0.3 million compared to the prior period. Other operating income of $0.3 million for 2024 relates to the gain from the sale of Traxion, which was our motorsport and racing games community content platform, in April 2024. #### Interest Expense Interest expense was $0.1 million and $0.7 million for 2024 and 2023 primarily from non-cash interest accretion of our INDYCAR and BTCC license liabilities, which were both fully settled in Q2 2024. #### Other Income, net Other income, net was $1.0 million for 2024, compared to $0.4 million for 2023, an increase of $0.6 million compared to the prior period. Other income, net of $1.0 million for 2024 was primarily comprised of $0.9 million in foreign currency gains arising from remeasuring transactions denominated in a currency other than U.S. dollars and $0.1 million in rental income. #### Other Comprehensive Income (Loss) Other comprehensive loss was $0.6 million for 2024, compared to other comprehensive income of $0.2 million in 2023. The $0.8 million increase in other comprehensive loss was primarily due to activity in our U.K. and Netherlands subsidiaries, and represents unrealized foreign currency translation adjustments. #### Net (Loss) Income Attributable to Non-Controlling Interest Net (loss) income attributable to non-controlling interest was $(1.3) million for 2024 compared to $0.1 million in 2023. The variance was attributed to an increase in net losses in the Le Mans Esports Series Ltd joint venture. ### Non-GAAP Financial Measures #### Adjusted EBITDA Adjusted EBITDA, a measure used by management to assess our operating performance, is defined as EBITDA, which is net loss plus interest expense, depreciation and amortization, less income tax benefit (if any), adjusted to exclude: (i) gain from settlement of license liabilities (ii) impairment of intangible assets; (iii) loss contingency expense and (iv) stock-based compensation expenses. Adjusted EBITDA (the “Non-GAAP Measure”) is not a financial measure defined by U.S. generally accepted accounting principles (“U.S. GAAP”). Reconciliations of the Non-GAAP Measure to net loss, its most directly comparable financial measure, calculated and presented in accordance with U.S. GAAP, are presented in the tables below. We use the Non-GAAP Measure to manage our business and evaluate our financial performance, as Adjusted EBITDA eliminates items that affect comparability between periods that we believe are not representative of our core ongoing operating business. Additionally, we believe that using the Non-GAAP Measure is useful to our investors because it enhances investors’ understanding and assessment of our normalized operating performance and facilitates comparisons to prior periods and our competitors’ results (who may define Adjusted EBITDA differently). The Non-GAAP Measure is not a recognized term under U.S. GAAP and does not purport to be an alternative to revenue, income/loss from operations, net loss income, or cash flows from operations or as a measure of liquidity or any other performance measure derived in accordance with U.S. GAAP. Additionally, the Non-GAAP Measure is not intended to be a measure of free cash flows available for our discretionary use, as it does not consider certain cash requirements, such as interest payments, tax payments, working capital requirements and debt service requirements. The Non-GAAP Measure has limitations as an analytical tool, and investors should not consider it in isolation or as a substitute for our results as reported under U.S. GAAP. Management compensates for the limitations of using the Non-GAAP Measure by using it to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than would be presented by using only measures in accordance with U.S. GAAP. Because not all companies use identical calculations, the Non-GAAP Measure may not be comparable to other similarly titled measures of other companies. The following table provides a reconciliation from net loss to Adjusted EBITDA for the respective periods presented: | | Three Months Ended September 30, 2024 | Three Months Ended September 30, 2023 | | --- | ---: | ---: | | Net loss | $(573,025) | $(3,534,132) | | Interest expense, net | 29,852 | 230,190 | | Depreciation and amortization (1) | 566,411 | 501,399 | | EBITDA | 23,238 | (2,802,543) | | Loss contingency expenses | - | 232,359 | | Stock-based compensation | 26,889 | 105,524 | | Adjusted EBITDA | $50,127 | $(2,464,660) | (1) Includes $519,260 and $417,794 of amortization expenses included in cost of revenues for the three months ended September 30, 2024 and 2023, respectively. The following table provides a reconciliation from net loss to Adjusted EBITDA for the respective periods presented: | | Nine Months Ended September 30, 2024 | Nine Months Ended September 30, 2023 | | --- | ---: | ---: | | Net loss | $(168,940) | $(16,994,206) | | Interest expense, net | 90,480 | 674,060 | | Depreciation and amortization (1) | 1,755,517 | 1,512,631 | | EBITDA | 1,677,057 | (14,807,515) | | Loss contingency expenses | - | 232,359 | | Gain from settlement of license liabilities | (3,248,000) | - | | Impairment of intangible assets | - | 4,004,627 | | Stock-based compensation | 105,738 | 876,060 | | Adjusted EBITDA | $(1,465,205) | $(9,694,470) | (1) Includes $1,571,504 and $1,227,147 of amortization expenses included in cost of revenues for the nine months ended September 30, 2024 and 2023, respectively. ### Liquidity and Capital Resources ### Liquidity We have historically financed our operations primarily through cash generated from operations and through sales of our equity securities. We measure our liquidity in a number of ways, including the following: | | September 30, 2024 | December 31, 2023 | | --- | ---: | ---: | | Cash and cash equivalents | $750,995 | $1,675,210 | | Working capital (deficiency) | $(2,413,591) | $(4,074,346) | For the nine months ended September 30, 2024, we incurred a net loss of $0.2 million and negative cash flows from operations of $0.7 million. As of September 30, 2024, we had an accumulated deficit of $86.3 million and cash and cash equivalents of $0.8 million, which decreased to $0.5 million as of October 31, 2024. We do not believe that our current capital resources will be sufficient to fund our operations over the next year. Based on our current expected level of operating expenditures and cash and cash equivalents on hand, management concludes that there is substantial doubt about our ability to continue as a going concern for a period of at least 12 months subsequent to the issuance of the accompanying unaudited condensed consolidated financial statements. Historically, we have financed our operations primarily through revenue generated from operations, loans and sales of our securities, and we expect to continue to seek and obtain additional capital in a similar manner. Management is actively pursuing financing and other strategic plans, however, we do not have any committed sources of financing at this time, and it is uncertain whether any additional funding will be available when we need it on terms that will be acceptable to us, or at all. There can be no assurance that we will be able to raise funds by selling additional securities, which sales, if successful, could dilute the ownership interest of our existing shareholders. The issuance of debt can result in restrictive covenants that limit operations. If funding is not available or not available at terms acceptable to us, we will seek to further reduce overhead costs and our cash obligations in the short term, as needed. In addition, we may look to divest or bring in equity partners for our various divisions and bring in near term capital. For the nine months ended September 30, 2024, we experienced an average net cash burn from operations of approximately $0.1 million per month, and while we have taken measures to reduce our costs, 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. Based on our cash and cash equivalents position and our 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. Our future liquidity and capital requirements include funds to support the planned costs to operate our business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures. In order to address our liquidity shortfall, we continue 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 our business, including, but not limited to, the sale or licensing of our assets in addition to the recent sales of our NASCAR License and Traxion; and iii) cost reduction and restructuring initiatives, each of which is described more fully below. On October 3, 2024, we implemented additional measures to continue to bring down our year-over-year operating expense through a reduction of our workforce primarily in the United States and the United Kingdom by approximately 23 employees and contractors. The workforce reduction is expected to impact approximately 38% of total employees worldwide. We recorded a restructuring charge related to the workforce reduction, primarily consisting of severance and redundancy costs of approximately $0.2 million. We expect to recognize and pay out the majority of the restructuring charge in the fourth quarter of fiscal year 2024. On July 29, 2024, we closed on a registered direct offering transaction with H.C. Wainwright & Co., LLC acting as the exclusive placement agent, which raised $1.0 million in gross proceeds before deducting the placement agent’s fees and other offering expenses. We intend to use the net proceeds from this offering for working capital and general corporate purposes. In March 2023, we entered into an Equity Distribution Agreement (the “ED Agreement”) with Canaccord Genuity LLC, as sales agent (the “Sales Agent”), pursuant to which we 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. During the three and nine months ended September 30, 2024, we did not sell any shares of Class A common stock pursuant to the terms of the ED Agreement. At the time we filed an initial prospectus supplement in connection with the offering of our shares of Class A common stock pursuant to the ED Agreement, the aggregate market value of the shares of Class A common stock eligible for sale under the initial prospectus supplement was approximately $2.9 million, which was based on the limitations of such offerings under SEC Regulations. On July 26, 2024, we filed a prospectus supplement terminating the continuous offering, although the ED Agreement remains in effect. However, due to our present liquidity position and required future funding requirements, even if we filed another prospectus supplement to reinstate the continuous offering pursuant to the ED Agreement and raised the maximum amount available for future sales via our ATM program, such proceeds would not be sufficient to satisfy our ongoing liquidity requirements and further potential Capital Financing would be required, in conjunction to the other options we are exploring. Further, there can be no assurance we will be able to obtain funds via our ATM program, should we choose to sell shares under the ED Agreement, nor can there be any other assurance that we can secure additional funding in the form of equity and/or debt financing on commercially acceptable terms, if at all, to satisfy our future needed liquidity and capital resources. Due to the continuing 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, including, but not limited to, the sale or licensing of certain of our assets in addition to the recent sales of our NASCAR License and Traxion. 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 we continue to address our liquidity constraints, we may need to make further adjustments to our product roadmap in order to reduce operating cash burn. Additionally, we continue to seek to improve our liquidity through maintaining and enhancing cost control initiatives. We plan to continue evaluating the structure of our business for additional changes in order to improve both our near-term and long-term liquidity position, as well as create a healthy and sustainable company from which to operate. 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 loans from third parties; - further reducing other discretionary spending; - entering into financing agreements on unattractive terms; and/or - significantly curtailing or discontinuing operations or dissolving and liquidating our assets under the bankruptcy laws or otherwise. 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 loans not being available from 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. 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 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 our 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 our future capital requirements. 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. In accordance with Accounting Standards Codification (“ASC”) 205-40, *Going Concern*, we have evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our 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 lack of available cash on hand to fund operations over the next year, have raised substantial doubt about our 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 condensed consolidated financial statements have been prepared on a basis that assumes we 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, 2024 and 2023 was $0.7 million and $10.1 million, respectively. The net cash used in operating activities for the nine months ended September 30, 2024 was primarily a result of cash used to fund a net loss of $0.2 million, adjusted for net non-cash adjustments of $1.3 million and $0.8 million of cash provided by changes in the levels of operating assets and liabilities. 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. ### Cash Flows from Investing Activities Net cash used in investing activities for the nine months ended September 30, 2024 and 2023 was approximately $0.03 million, 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, 2024 and 2023 was $0.8 million and $10.1 million, respectively. Cash flows provided by financing activities for the nine months ended September 30, 2024 were primarily attributable to $0.9 million raised in connection with shares sold in our registered direct offering, offset by a $0.1 million payment for purchase commitments. 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 a stock purchase commitment agreement that we entered into on December 9, 2022 with Alumni Capital LP and $10.4 million raised in connection with shares sold in our registered direct offerings, partially offset by $0.7 million of payments for purchase commitments and $0.3 million for payments relating to license liabilities. ### Promissory Note Line of Credit On April 1, 2020, we entered into a promissory note (the “$12 million Line of Credit”) with an affiliated entity, Driven Lifestyle, that provided us with a line of credit of up to $10 million (which was subsequently increased to $12 million pursuant to an amendment executed in November 2020) at an interest rate of 10% per annum, the availability of which is dependent on Driven Lifestyle’s available liquidity. The $12 million Line of Credit does not have a stated maturity date and is payable upon demand at any time at the sole and absolute discretion of Driven Lifestyle, and any principal and accrued interest owed will be accelerated and become immediately payable in the event we consummate certain corporate events, such as a capital reorganization. We 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 2023 Form 10-K. On September 8, 2022, we 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 us 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 we generate 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 us of approximately $3.9 million in owed principal and unpaid interest in exchange for an aggregate of 780,385 shares of our 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, 2024, the balance due to Driven Lifestyle under the $12 million Line of Credit was $0. As of September 30, 2024, the $12 million Line of Credit remains in place. However, we believe that there is a substantial likelihood that Driven Lifestyle will not fulfill any future borrowing requests, and therefore we do not view the $12 million Line of Credit as a viable source for future liquidity needs. ### Other Financing Activity On July 29, 2024, we closed on a registered direct offering transaction with H.C. Wainwright & Co., LLC acting as the exclusive placement agent, which raised $1.0 million in gross proceeds before deducting the placement agent’s fees and other offering expenses. We intend to use the net proceeds from this offering for working capital and general corporate purposes. On February 1, 2023, we issued 183,020 shares of our Class A common stock in a registered direct offering priced at-the-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 us. H.C. Wainwright & Co., LLC (“Wainwright”) acted as the exclusive placement agent for the $3.9 million RDO, pursuant to the engagement letter with us, dated as of January 9, 2023. In connection with the $3.9 million RDO, we 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. We 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, we issued 144,366 shares of our Class A common stock in a registered direct offering priced at-the-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 us. Wainwright acted as the exclusive placement agent for the $3.4 million RDO. In connection with the $3.4 million RDO, we 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. We 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, we issued 232,188 shares of our Class A common stock in a registered direct offering priced at-the-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 us. Wainwright acted as the exclusive placement agent for the $4.0 million RDO. In connection with the $4.0 million RDO, we 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. We have also issued to Wainwright and its designees warrants to purchase up to 13,931 shares of Class A common stock, which is equal to 6.0% of the aggregate number of shares of Class A common stock placed in the $4.0 million RDO, at an exercise price of $21.738 per share and will expire five years from the closing of the $4.0 million RDO. ### Capital Expenditures The nature of our operations do not require significant expenditures on capital assets, nor do we typically enter into significant commitments to acquire capital assets. We do not have material commitments to acquire capital assets as of September 30, 2024. ### Material Cash Requirements Except as described below, 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 2023 Form 10-K. On April 12, 2024, we entered into a settlement agreement (the “BARC Settlement Agreement”) with BARC (TOCA) Limited (“BARC”), the exclusive promoter of the British Touring Car Championship (the “BTCC”), for settlement of the remaining liability in connection with the exclusive license (the “BTCC License”) to use certain licensed intellectual property for motorsports and/or racing video gaming products related to, themed as, or containing the BTCC. Pursuant to the BARC Settlement Agreement, we and BARC, without admitting any liabilities, agreed that the prior license agreement between the parties relating to the BTCC License (the “Prior BTCC License Agreement”) was terminated without any liabilities and that any and all royalties and/or any other sums whatsoever were forgiven by BARC and discharged in their entirety in consideration of (i) our one-time payment of $225,000 to BARC and (ii) we and BARC entering, effective as of April 12, 2024, into a new license agreement to use certain licensed intellectual property related to, themed as, or containing the BTCC. Prior to entering into the BARC Settlement Agreement, we had a total remaining liability in connection with the Prior BTCC License Agreement, inclusive of unpaid installments, of $0.9 million. On May 17, 2024, we entered into a Settlement Agreement and License with INDYCAR (“the INDYCAR Agreement”). The INDYCAR Agreement resolved any and all disputes between us and INDYCAR with respect to the termination of (i) the License Agreement, dated July 13, 2021, by and between INDYCAR and us with respect to INDYCAR SERIES racing series related gaming products and (ii) the License Agreement, dated July 13, 2021, by and between INDYCAR and us with respect to INDYCAR SERIES racing series related esports events. Prior to entering into the INDYCAR Agreement, we had a total remaining liability in connection with the July 13, 2021 INDYCAR License, inclusive of unpaid installments, of $2.9 million. ### 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 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 2023 Form 10-K. ### Recently Issued Accounting Standards As an “emerging growth company”, the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act until such time as we are no longer considered to be an emerging growth company. Our analysis of recently issued accounting standards are more fully described in our condensed consolidated financial statements included elsewhere in this Report. ## Controls and procedures As filed, 3,842 characters. ### Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (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, 2024. 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, 2024 because of the material weaknesses 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 2023 Form 10-K, and that continued to exist as of September 30, 2024. ### Remediation of Material Weaknesses We have not yet remediated the material weaknesses relating to (i) our failure to design and maintain effective monitoring procedures and controls to evaluate the effectiveness of our individual control activities and (ii) 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, each of which are discussed further in Part II, Item 9A, “*Controls and Procedures”* of the 2023 Form 10-K. 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 have made limited progress on the remediation plans described in our 2023 Form 10-K, under Part II, Item 9A, “*Controls and Procedures.”* During the quarter ended September 30, 2024, we continued our evaluation and documentation of some risks and key controls forming part of the significant business processes, including internal control over financial reporting risk assessment scoping, and identification of key transaction level and entity level controls that require testing on an ongoing basis. ### Limitations on the Effectiveness of Controls In designing and evaluating the disclosure controls and procedures and internal control over financial reporting, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures and internal control over financial reporting must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. ### Changes in Internal Control over Financial Reporting Except as described above, there were no other changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) under the Exchange Act during the quarter ended September 30, 2024 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ## Risk factors As filed, 17,130 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 2023 Form 10-K, which could materially affect our business, financial condition or future results. The risks described in the 2023 Form 10-K are not the only risks facing the Company. There have been no material changes from these risk factors as of the date of filing of this Report. ***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 had negative cash flows from operations of $0.7 million for the nine months ended September 30, 2024. As of September 30, 2024, we had an accumulated deficit of $86.3 million and cash and cash equivalents of $0.8 million. We incurred a net loss of $14.3 million and had negative cash flows from operations of $12.9 million for the year ended December 31, 2023. As of December 31, 2023, we had an accumulated deficit of $87.4 million and cash and cash equivalents of $1.7 million. For the year ended December 31, 2023, we experienced an average net cash burn from operations of approximately $1.1 million per 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. Our unaudited financial statement for the quarter ended September 30, 2024 were prepared under the assumption that we will continue as a going concern; however, we have incurred losses from operations to date, and due to the lack of available cash on hand to fund our operations over the next year and the continuing uncertainty surrounding our ability to raise funding in the form of potential capital financing, there is substantial doubt about our ability to continue as a going concern for one year after the financial statements are issued. Our unaudited financial statements for the quarter ended September 30, 2024 contain an explanatory paragraph with respect to this uncertainty. The report of our independent registered public accountant on our financial statements as of and for the years ended December 31, 2023 and 2022 also includes explanatory language describing the existence of substantial doubt about our ability to continue as a going concern. There have been no adjustments to the accompanying financial statements to reflect this uncertainty. See Part I, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Going Concern” of his Report, Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Going Concern” of our 2023 Form 10-K and Note 1 – *Business Organization, Nature of Operations and Risks and Uncertainties* in our consolidated financial statements for additional 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. 41 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 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 years ended December 31, 2023 and 2022, revenues associated with our NASCAR franchise accounted for approximately 71.6% and 62.9% of our total revenue, respectively. Revenues associated with our NASCAR franchise accounted for approximately 52.6% and 70.9% of our total revenue for the nine months ended September 30, 2024 and 2023, 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 and to cease after December 31, 2024. During the three months ended September 30, 2024, three customers accounted for 22.9%, 17.7% and 43.2% of our revenue and during the nine months ended September 30, 2024, the same three customers accounted for 25.1%, 28.7% and 19.8% of our revenue. In addition, the same customers represented 30.7%, 22.4% and 27.9% of our accounts receivable at September 30, 2024. A reduction in sales from or loss of these customers, in a significant amount, will have a material adverse effect on the Company’s results of operations and financial condition. 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. Similarly, our BTCC license agreement and INDYCAR license agreements were terminated by the respective licensors, effective November 2023. 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 the termination of our BTCC license agreement and INDYCAR license agreements, 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 Class A common stock may be delisted from NASDAQ, which could affect the market price and liquidity of our Class A common stock.*** We are required to continually meet NASDAQ’s listing requirements, including, among other things, a minimum stockholders’ equity requirement of at least $2,500,000 for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(1) (the “Stockholders’ Equity Requirement”). As described in a Current Report on Form 8-K filed with the SEC on November 22, 2023, we received a deficiency letter from NASDAQ’s Listing Qualifications Department (the “NASDAQ Staff”) on November 17, 2023 notifying us that we were not in compliance with the Stockholders’ Equity Requirement. In our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, we reported stockholders’ equity of $498,897, which was below the Stockholders’ Equity Requirement. Additionally, we did not meet either of the alternative Nasdaq continued listing standards under the Nasdaq Listing Rules, which include (i) a market value of listed securities of at least $35 million or (ii) net income of $500,000 from continuing operations in the most recently completed fiscal year or in two of the three most recently completed fiscal years. As of December 31, 2023, our stockholders’ equity was $2,089,704. In accordance with NASDAQ rules, we had until January 2, 2024 to submit a plan to the NASDAQ Staff to regain compliance with the Stockholders’ Equity Requirement, which we submitted by such date. On February 5, 2024, Nasdaq notified us that, based on its review of the Company and the materials submitted by us to NASDAQ, NASDAQ Staff determined to grant us an extension to regain compliance with the Stockholders’ Equity Requirement until May 15, 2024, subject to the Company regaining and evidencing compliance with the Stockholders’ Equity Requirement by such date. Any delisting of our Class A common stock from NASDAQ, including as a result of our inability to regain compliance with the Stockholders’ Equity Requirement, could adversely affect our ability to attract new investors, reduce the liquidity of our outstanding shares of Class A common stock, reduce our ability to raise additional capital, reduce the price at which our Class A common stock trades, result in negative publicity and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholders. We cannot assure you that our Class A common stock, if delisted from NASDAQ, will be listed on another national securities exchange or quoted on an over-the-counter quotation system. In addition, delisting of our Class A common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our Class A common stock and might deter certain institutions and persons from investing in our securities at all. For these reasons and others, delisting could adversely affect our business, financial condition and liquidity. To regain compliance with the Stockholders’ Equity Requirement, we entered into the INDYCAR Agreement. Pursuant to the INDYCAR Agreement, our liability to INDYCAR, LLC in the amount of approximately $2.9 million was settled for $400,000, which resulted in a gain of approximately $2.5 million, which resulted in a $2.5 million increase to our stockholders’ equity. On June 3, 2024, the Nasdaq Stock Market LLC notified us that based on our disclosure of the INDYCAR Agreement in our Current Report on Form 8-K filed by us on May 23, 2024, Nasdaq’s staff has determined that we comply with the Stockholders’ Equity Requirement. In our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, we reported stockholders’ equity of approximately $3.0 million; however, because we report stockholders’ equity of less than $2.2 million in this Report, which is below the Stockholders’ Equity Requirement, we expect to receive a deficiency letter from the NASDAQ Staff notifying us that we are not in compliance with the Stockholders’ Equity Requirement. If we fail to timely submit a plan to the NASDAQ Staff to regain compliance with the Stockholders’ Equity Requirement, and to thereafter regain compliance with such requirement, we may be subject to delisting. At that time, Nasdaq will provide written notification to us, which we may then appeal Nasdaq’s determination to a Nasdaq Hearings Panel. ***Driven Lifestyle controls a significant amount of our Class A common stock and all our Class B common stock and therefore it has the ability to exert significant control over the direction of our business, which could prevent other stockholders from influencing significant decisions regarding our business plans and other matters.*** Driven Lifestyle currently owns all of the shares of our Class B common stock and 1,480,385 shares of our Class A common stock, which together represents a significant combined voting power of both classes of our common stock as of November 14, 2024. Our Class B common stock has ten times the voting power of our Class A common stock. As long as Driven Lifestyle continues to control a majority of the voting power of our outstanding common stock, it will generally be able to determine the outcome of all corporate actions requiring stockholder approval, including the election and removal of directors. Even if Driven Lifestyle were to control less than a majority of the voting power of our outstanding common stock, it may be able to influence the outcome of such corporate actions so long as it owns a significant portion of our common stock. In the event Driven Lifestyle or its affiliates relinquish beneficial ownership of any of the Driven Lifestyle Initial Class A Shares at any time, one share of Class B common stock held by Driven Lifestyle will be cancelled for each such Driven Lifestyle Initial Class A Share no longer beneficially owned by Driven Lifestyle or its affiliates. If, however, Driven Lifestyle does not dispose of its Driven Lifestyle Initial Class A Shares, it could remain our controlling stockholder for an extended period of time or indefinitely. Driven Lifestyle’s interests may not be the same as, or may conflict with, the interests of our other stockholders. Moreover, Mike Zoi, who is the manager of Driven Lifestyle and has sole voting and dispositive power with respect to the shares of our common stock held by Driven Lifestyle, may also have interests that are not the same as, or may conflict with, the interests of our other stockholders. Holders of our Class A common stock will not be able to affect the outcome of any stockholder vote while Driven Lifestyle controls the majority of the voting power of our outstanding common stock. As a result, Driven Lifestyle will be able to control, directly or indirectly and subject to applicable law, all matters affecting us, including: - any determination with respect to our business direction and policies, including the appointment and removal of officers and directors; - any determinations with respect to mergers, business combinations or the disposition of assets; - compensation and benefit programs and other human resources policy decisions; - the payment of dividends on our common stock; and - determinations with respect to tax matters. Because Driven Lifestyle’s interests may differ from ours or from those of our other stockholders, actions that Driven Lifestyle take with respect to us, as our controlling stockholder, may not be favorable to us or our other stockholders, including holders of our Class A common stock. ***We could be subject to unanticipated adverse effects arising from our inability to fully repay Luminis International B.V. and Technology In Business B.V., the sellers of Studio 397 B.V. (“Studio397”), relating to our acquisition of 100% of the share capital of Studio397 in April 2021.*** On April 20, 2021 we acquired 100% of the share capital of Studio 397 B.V. (“Studio397”) from Luminis International B.V. and Technology In Business B.V. (collectively, the “Sellers”). The purchase price originally consisted of a cash payment at closing and payments due at a later date. To date, we have not paid all of the payments due subsequent to the closing. Pursuant to the terms of agreements that we entered into, we are required to pay interest on the amounts owed but unpaid. The remaining balance owed as of September 30, 2024, was $0.6 million with unpaid accrued interest of $0.3 million. As security for payment of the amounts owed, we pledged stock of Studio397, the voting rights of which the seller could request to be transferred to it thirty days after such nonpayment. Filed Nov 14, 2024. Source: SEC EDGAR, the filing index for accession 0001493152-24-045867. Last ingested by Listed: Oct 24, 2026, 15:15 ET. No prices; not investment advice.