MOTORSPORT GAMES INC. The following discussion should be read in conjunction with our Annual Report on
Form 10-K for the year ended
Overview
The following overview is a high-level discussion of our operating results, as
well as some of the trends and drivers that affect our business. Management
believes that an understanding of these trends and drivers provides important
context for our results for the three months ended
Our Business
Started in 2018 as a wholly-owned subsidiary of
As of
COVID-19 Pandemic Update
The global spread of the ongoing and prolonged COVID-19 pandemic and its
variants has created significant business uncertainty for us and others, which
has negatively impacted the global economy, disrupted global supply chains and
workforce participation, and initially created significant volatility and
disruption of financial markets. Additionally, the outbreak has resulted in
government authorities around the world implementing numerous measures to try to
reduce the spread of COVID-19, such as travel bans and restrictions,
quarantines, shelter-in-place, stay-at-home or total lock-down (or similar)
orders and business limitations and shutdowns. In late fiscal 2020 and
throughout fiscal 2021, vaccines for combating COVID-19 were approved by health
agencies in certain countries and regions where we operate and began to be
administered, and we saw some loosening of government-mandated COVID-19
restrictions in certain locations, such as the
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As a result of the ongoing and prolonged COVID-19 pandemic, including the
related responses from government authorities, our business and operations were
impacted, including the temporary closures of our offices in
Although we do not currently expect the COVID-19 pandemic to have a material impact on our future business and operations, we will continue to monitor the evolving situation caused by the COVID-19 pandemic, and we may take further actions required by governmental authorities or that we determine are prudent to support the well-being of our employees, suppliers, business partners and others. The degree to which the ongoing and prolonged COVID-19 pandemic impacts our operations, business, financial results, liquidity, and financial condition will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the pandemic; its severity; the emergence and severity of its variants; the actions to contain the virus or treat its impact, such as the availability and efficacy of vaccines (particularly with respect to emerging strains of the virus) and potential hesitancy to utilize them; the effect on discretionary spending by consumers; and how quickly and to what extent normal economic and operating conditions can resume.
Further discussion of the potential impacts on our business, financial condition, results of operations, liquidity and the market price of our Class A common stock due to the ongoing and prolonged COVID-19 pandemic is provided in the section entitled "Risk Factors" in Part I, Item 1A of the 2020 Form 10-K.
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Trends and Factors Affecting Our Business
Product Release Schedule
Our financial results are affected by the timing of our product releases and the
commercial success of those titles. Our
Economic Environment and Retailer Performance
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,
Additionally, we continue to monitor economic conditions, including the impact of the ongoing and prolonged COVID-19 pandemic, that may unfavorably affect our businesses, such as deteriorating consumer demand, delays in development, pricing pressure on our products, increased inflation, supply chain constraints, labor supply issues, credit quality of our receivables and foreign currency exchange rates. The COVID-19 pandemic has affected and may continue to affect our business operations, including our employees, customers, partners, and communities, and there is substantial uncertainty in the nature and degree of its continued effects over time, particularly due to the emergence of the significantly more contagious Omicron variant of COVID-19 and the prevalence of breakthrough cases of infection among fully vaccinated people. For example, several retailers have experienced closures, reduced operating hours and/or other restrictions as a result of the ongoing and prolonged COVID-19 pandemic, which has negatively impacted the sales of our products from such retailers. "See COVID-19 Pandemic Update" for additional information regarding the impact of COVID-19 on our business and operations.
Hardware Platforms
We derive most of our revenue from the sale of products made for PCs and video
game consoles manufactured by third parties, such as
26 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. Forthe year ended
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. During the first quarter of 2022, we announced our viewership figures for the 2021-22 Le Mans Virtual Series, which reached 7 million views and registered cumulated television and digital audience figures of more than 81 million through its 5-month season. During 2021, we organized several esports competitions, including the DiRT Rally 2.0 World Series on the popular Codemasters game, the Winter Heat and Summer Showdown on NASCAR Heat 5, and the expansion of the 24 Hours of Le Mans Virtual event into a part of a longer annual series with professional teams and real-world racing drivers. In addition, we also organized competitions to drive user engagement on our rFactor 2 platform. For 2021, our esports events had cumulative total viewership of approximately 1.5 million views with approximately 3.8 million minutes watched.
Technological Infrastructure
As our digital business has grown, our games and services increasingly depend on the reliability, availability and security of our technological infrastructure. We are investing and expect to continue to invest in technology, hardware and software to support our games and services, including with respect to security protections. Our industry is prone to, and our systems and networks are subject to, cyberattacks, computer viruses, worms, phishing attacks, malicious software programs, and other information security incidents that seek to exploit, disable, damage, disrupt or gain access to our networks, our products and services, supporting technological infrastructure, intellectual property and other assets. As a result, we continually face cyber risks and threats that seek to damage, disrupt or gain access to our networks and our gaming platform, supporting infrastructure, intellectual property and other assets. See "Risks Related to Our Business and Industry-We may experience security breaches and cyber threats" in the section entitled "Risk Factors" in Part I, Item 1A of the 2021 Form 10-K for additional information.
Rapidly Changing Industry
We operate in a dynamic industry that regularly experiences periods of rapid,
fundamental change. In order to remain successful, we are required to
anticipate, sometimes years in advance, the ways in which our products and
services will compete. For example, the global adoption of portable and mobile
gaming devices has led to significant growth in portable and mobile gaming,
which we believe is a continuing trend. Accordingly, in conjunction with the
launch of our next generation
Recurring Revenue Sources
Our business model includes revenue that we deem recurring in nature, such as
revenue from our annualized sports franchise (currently
27 Reportable Segments
We use "the management approach" in determining reportable operating segments. The management approach considers the internal organization and reporting used by our chief operating decision maker for making operating decisions and assessing performance as the source for determining our reportable segments. Our chief operating decision maker is our Chief Executive Officer ("CEO"), who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We classified our reportable operating segments into (i) the development and publishing of interactive racing video games, entertainment content and services (the "Gaming segment") and (ii) the organization and facilitation of esports tournaments, competitions and events for our licensed racing games as well as on behalf of third-party video game racing series and other video game publishers (the "esports segment").
Components of Our Results of Operations
Revenues
We have historically derived substantially all 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.
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; and
? 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.
Our product and service offerings included within the esports segment relate primarily to curating esports events.
Cost of Revenues
Cost of revenues for our Gaming segment is primarily comprised of royalty
expenses attributable to our license arrangement with
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,
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.
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Depreciation and Amortization
Depreciation and amortization expenses include depreciation on fixed assets (primarily computers and office equipment), as well as amortization of finite lived intangible assets acquired through our various acquisitions.
Results of Operations
Three Months Ended
Revenue
For the Three Months Ended,
March 31,
2022 2021
Revenues:
Gaming $ 2,958,388 $ 2,450,213
Esports 363,401 23,919
Total Segment and Consolidated Revenues $ 3,321,789 $ 2,474,132 Revenues were
For the Three Months Ended,
March 31,
2022 2021
Cost of Revenues:
Gaming $ 1,404,007 $ 715,116
Esports 609,799 66,692
Total Segment and Consolidated Cost of
Revenues $ 2,013,806 $ 781,808 Cost of revenues were
For the three months ended
For the Three Months Ended,
March 31,
2022 2021
Gross Profit:
Gaming $ 1,554,381 $ 1,735,097
Esports (246,398 ) (42,773 )
Total Segment and Consolidated Gross Profit $ 1,307,983 $ 1,692,324 Gross profit was
Operating Expenses were
Sales and Marketing
Sales and marketing expenses were
Development
Development expenses were
General and Administrative
General and administrative ("G&A") expenses were
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Impairment of
Loss on impairment of goodwill was
Loss on impairment of indefinite-lived intangible assets was
Loss on impairment of finite-lived intangible assets was
Depreciation and Amortization
Depreciation and amortization expenses were
Interest Expense
Interest expense was
Gain Attributable to
The gain attributable to equity method investment in
Other (Loss) Income, Net
Other expense, net was
Other Comprehensive Loss
Other comprehensive loss was
Liquidity and Capital Resources
Liquidity
Since our inception and prior to our IPO, we financed our operations primarily
through advances from
On
We measure our liquidity in a number of ways, including the following:
Liquidity Measure March 31, 2022 December 31, 2021 Cash and cash equivalents$ 12,367,235 $ 17,819,640 Working capital$ 10,100,765 $ 16,024,590
In addition, as of
For the three months ended
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Our future liquidity and capital requirements include funds to support the planned costs to operate our business, including amounts required to fund working capital, support the development and introduction of new products, maintain existing titles, and certain capital expenditures. The adequacy of our available funds generally depends on many factors, including our ability to successfully develop consumer-preferred new products or enhancements to our existing products, continued development and expansion of our esports platform and our ability to enter into collaborations with other companies and/or acquire other companies or technologies to enhance or complement our product and service offerings.
We continue to explore additional funding in the form of equity and/or debt financing arrangements and consider these to be viable options to support future liquidity needs, providing such opportunities can be obtained on terms that are commercially competitive and on terms acceptable to the Company. We are also seeking to improve our liquidity by achieving cost reductions by maintaining and enhancing cost control initiatives.
As we continue to evaluate incremental funding solutions, we have reevaluated our product roadmap in the first quarter of 2022 and modified the expected timing and scope of certain new product releases. These changes have been made not only to maintain the development of high-quality video game titles but also to improve the timing of certain working capital requirements and reduce expenditures, thereby decreasing our expected future cash-burn and improve short-term liquidity needs. If needed, further adjustments could be made that would decrease short-term working capital requirements, while pushing out the timing of expected revenues.
We expect to generate additional liquidity through consummating equity and/or debt financings, achieving cost reductions by maintaining and enhancing cost control initiatives, and/or adjusting our product roadmap to reduce nearterm need for working capital. If we are unable to generate adequate revenue and profit growth, there can be no assurances that such actions will provide us with sufficient liquidity to meet our cash requirements as, among other things, our liquidity can be impacted by a number of factors, including our level of sales, costs and expenditures, as well as accounts receivable and sales allowances.
There can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all, to satisfy our future needed liquidity and capital resources. If we are unable to obtain adequate funds on acceptable terms, we may be required to, among other things, significantly curtail or discontinue operations or obtain funds by entering into financing agreements on unattractive terms.
If we are unable to satisfy our cash requirements from the sources identified above, we could be required to adopt one or more of the following alternatives:
? selling assets or operations; ? seeking additional capital contributions and/or loans fromMotorsport Network ,
the Company's other affiliates and/or third parties; and/or ? reducing other discretionary spending.
There can be no assurance that we would be able to take any of the actions
referred to above because of a variety of commercial or market factors,
including, without limitation, market conditions being unfavorable for an equity
or debt issuance, additional capital contributions and/or loans not being
available from
Even if we do secure additional financing, if our anticipated level of revenues are not achieved because of, for example, less than anticipated consumer acceptance of our offering of products and events; less than effective marketing and promotion campaigns, decreased consumer spending in response to weak economic conditions or weakness in the overall electronic games category; adverse changes in currency; decreased sales of our products and events as a result of increased competitive activities by our competitors; changes in consumer purchasing habits; 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 advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, our liquidity may continue to be insufficient to satisfy our future capital requirements.
In accordance with Accounting Standards Codification ("ASC") 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company's ability to continue as a going concern within one year after the date that these condensed consolidated financial statements 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 condensed 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.
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Cash Flows From Operating Activities
Net cash used in operating activities for the three months ended
Cash Flows From Investing Activities
Net cash used in investing activities for the three months ended
Cash Flows From Financing Activities
Net cash provided by financing activities during the three months ended
Promissory Note Line of Credit
On
During the three months ended
Capital Expenditures
The nature of the Company's operations does not require significant expenditures
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
Material Cash Requirements
There have been no material changes in our reported material cash requirements as described under "Liquidity and Capital Resources-Material Cash Requirements" in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the 2021 Form 10-K.
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Off-Balance Sheet Arrangements
We did not have, during the periods presented, and we do not currently have, any relationships with any organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Significant Accounting Estimates
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 2021 Form 10-K, with the exception of an additional critical estimate identified in respect of finite-lived intangible assets.
Valuation of Finite-Lived Intangible Assets
We review our finite-lived assets for impairment whenever events or changes in circumstances indicate, based on recent and projected cash flow performance and remaining useful lives, that the carrying value of these assets may not be fully recoverable. We evaluate asset impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The lowest level for which we maintain identifiable cash flows that are independent of the cash flows of other assets and liabilities is at the intangible asset level, with the exception of technology intangible assets which are at the reporting unit level. If estimated undiscounted future cash flows are less than the carrying value of an asset, an impairment charge is recognized to the extent its carrying value exceeds fair value.
We typically estimate fair value a cost to recreate valuation technique, however the valuation method used will be dependent on the finite-lived intangible asset subject to fair value assessment.
The principal assumptions used in our cost to recreate model for our interim
impairment review for the three month period ended
- Number of hours to recreate; - Rate per hour; and - Technological obsolescence.
If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. If the fair value exceeds its carrying value, the finite-life intangible asset is not considered impaired.
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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. 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.
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