MOTORSPORT GAMES INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

OverviewThe following overview is a high-level discussion of our operating results, aswell as some of the trends and drivers that affect our business. Managementbelieves that an understanding of these trends and drivers provides importantcontext for our results for the fiscal year ended December 31, 2022 and 2021, aswell as our future prospects. This summary is not intended to be exhaustive, noris it intended to be a substitute for the detailed discussion and analysisprovided elsewhere in this Report, including in the “Business” section and “RiskFactors” above, the remainder of this “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” (“MD&A”) or the consolidatedfinancial statements and related notes.Our BusinessMotorsport Games is a leading racing game developer, publisher and esportsecosystem provider of official motorsport racing series throughout the world,including NASCAR, the iconic 24 Hours of Le Mans endurance race (“Le Mans”) andthe associated FIA World Endurance Championship (the “WEC”), INDYCAR, theBritish Touring Car Championship (the “BTCC”) and others.

Our portfolio iscomprised of some of the most prestigious motorsport leagues and events in theworld. Further, in 2021 we acquired the KartKraft karting simulation game aswell as Studio 397 B.V. (“Studio397”) and their rFactor 2 realistic racingsimulator technology and platform, adding both games and their underlyingtechnology to our portfolio.Started in 2018 as a wholly-owned subsidiary of Motorsport Network, we arecurrently the official developer and publisher of the NASCAR video game racingfranchise and have obtained the official licenses to develop multi-platformgames for the BTCC, the 24 Hours of Le Mans race and the WEC, as well asINDYCAR. We develop and publish multi-platform racing video games including forgame consoles, personal computers (PCs) and mobile platforms through variousretail and digital channels, including full-game and downloadable content.

Forfiscal years 2022 and 2021, a majority of our revenue was generated from salesof our NASCAR racing video games.As of December 31, 2022, we have a total headcount of 134 people, made up of 133full-time employees, including 91 dedicated to game development, to continuedeveloping our expanded product offerings. Our headcount numbers as of December31, 2022, reflect that we have ceased our development operations in Russiaeffective September 2022, as a result of the Ukraine-Russia Conflict and assuch, we do not expect the Company’s development operations to have significantexposure to changes in circumstances arising from the Ukraine-Russa Conflict.COVID-19 Pandemic UpdateThe lingering impact of COVID-19 has continued to create significant volatilitythroughout the global economy, such as supply chain disruptions, limited laborsupplies, higher inflation, and recession, which in turn has caused constraintson consumer spending. More recently, new variants of COVID-19, such as theOmicron variant and its subvariants, that are significantly more contagious thanprevious strains, have emerged.

Further, the effectiveness of approved vaccineson these new strains remains uncertain. The spread of these new strainsinitially caused many government authorities and businesses to reimplement priorrestrictions in an effort to lessen the spread of COVID-19 and its variants.However, while many of these restrictions have been lifted, uncertainty remainsas to whether additional restrictions may be initiated or again reimplemented inresponse to surges in COVID-19 cases.Although we do not currently expect the COVID-19 pandemic to have a materialimpact on our future business and operations, we will continue to monitor theevolving situation caused by the COVID-19 pandemic, and we may take furtheractions required by governmental authorities or that we determine are prudent tosupport the well-being of our employees, suppliers, business partners andothers. The degree to which the ongoing and prolonged COVID-19 pandemic impactsour operations, business, financial results, liquidity, and financial conditionwill depend on future developments, which are highly uncertain, continuouslyevolving and cannot be predicted.

This includes, but is not limited to, theduration and spread of the pandemic; its severity; the emergence and severity ofits variants; the actions to contain the virus or treat its impact, such as theavailability and efficacy of vaccines (particularly with respect to emergingstrains of the virus) and potential hesitancy to utilize them; the effect ondiscretionary spending by consumers; and how quickly and to what extent normaleconomic and operating conditions can resume.Further discussion of the potential impacts on our business, financialcondition, results of operations, liquidity and the market price of our Class Acommon stock due to the ongoing and prolonged COVID-19 pandemic is provided inthe section entitled “Risk Factors” in Part I, Item 1A of this Report.522022 Restructuring ProgramOn September 8, 2022, the Company announced an organization restructuring (the”2022 Restructuring Program”) designed to reduce the Company’s marketing,general and administrative expenses, improve the Company’s profit and maximizeefficiency, cash flow and liquidity. The 2022 Restructuring Program includesright-sizing the organization and operating with more efficient workflows andprocesses. The primary components of the organizational restructuring involveconsolidating certain functions; reducing layers of management, whereappropriate, to increase accountability and effectiveness; and streamliningsupport functions to reflect the new organizational structure.

The leanerorganizational structure is also expected to improve communication flow andcross-functional collaboration, leveraging the more efficient businessprocesses. In addition, given the ongoing uncertain economic environment and thepotential effect that it could have on the Company’s net sales, these actionswill also provide the Company with additional flexibility.As a result of the 2022 Restructuring Program, the Company expects to eliminateapproximately 20% of its overhead costs worldwide and deliver approximately £4million of total annualized cost reductions by the end of 2023, of which £2.5million was achieved by the end of 2022. As of December 31, 2022, the Companyhad incurred restructuring costs of approximately £0.1 million, which primarilyconsisted of severance payments, and expects total restructuring costs to fallwithin the previously estimated range of £0.1 million to £0.3 million.Trends and Factors Affecting Our BusinessProduct Release ScheduleOur financial results are affected by the timing of our product releases and thecommercial success of those titles.

Our NASCAR products have historicallyaccounted for the majority of our revenue; however, we have diversified ourproduct offerings and are generating revenues from KartKraft, rFactor 2 and the24 Hours of Le Mans Virtual event, which reduced the percentage of our revenuesderived from NASCAR products for the years ended December 31, 2022 and 2021. Forexample, revenues associated with our NASCAR franchise accounted forapproximately 63% and 88% of our total revenue for the years ended December 31,2022 and 2021, respectively. Additionally, with the acquisitions of licenses todevelop multi-platform games for INDYCAR, BTCC and the WEC series, including theiconic 24 hours of Le Mans race, we expect our future revenue streams willbecome further diversified and consist of revenues from multiple games anddifferent franchises.Our recent product releases include: (i) our upgrade to our NASCAR game for nextgeneration consoles and PCs, NASCAR 21: Ignition, on October 28, 2021, and a2022 Season Expansion update on October 6, 2022; (ii) NASCAR Heat UltimateEdition+ on Nintendo Switch on November 19, 2021, the first-ever NASCAR title tocome to Nintendo Switch; (iii) the full release of the KartKraft kart racingsimulator on January 26, 2022 for the PC; (iv) NASCAR Rivals, the official gameof the 2022 NASCAR Cup Series season, on Nintendo Switch on October 14, 2022 and(v) four quarterly content releases in 2022 for our rFactor 2 realistic racingsimulation game.

In the first quarter of 2022, we modified our product releaseschedule such that our most recent NASCAR console and PC title for 2022 wasdelivered as an update to our 2021 release through the 2022 Season Expansionupdate downloadable content (DLC) and the anticipated timing of some of ourother planned product releases for other racing series have been moved to laterperiods. The NASCAR, INDYCAR, BTCC and Le Mans game experiences are currentlyunder development, and we currently anticipate releasing game experiences forthese racing series in 2023 and 2024.Going forward, we intend to expand our license arrangements to otherinternationally recognized racing series and the platforms we operate on. Webelieve that having a broader product portfolio will improve our operatingresults and provide a revenue stream that is less cyclical based on the releaseof a single game per year.Economic Environment and Retailer PerformanceOur physical gaming products are sold through a distribution network with anexclusive partner who specializes in the distribution of games throughmass-market retailers (e.g., Target, Wal-Mart), consumer electronics stores(e.g., Best Buy), discount warehouses, game specialty stores (e.g., GameStop)and other online retail stores (e.g., Amazon).

We expect to continue to derivesignificant revenues from sales of our physical gaming products to a verylimited number of distribution partners. For the years ended December 31, 2022and 2021, we sold substantially all of our physical disk products for the retailchannel through a single distribution partner, which represented approximately9% and 28% of our total revenue for the years ended December 31, 2022 and 2021,respectively. See “Risk Factors-Risks Related to Our Business and Industry-Theimportance of retail sales to our business exposes us to the risks of thatbusiness model” and “Risk Factors-Risks Related to Our Business and Industry-Weprimarily depend on a single third-party distribution partner to distribute ourgames for the retail channel, and our ability to negotiate favorable terms withsuch partner and its continued willingness to purchase our games is critical forour business” in Part I, Item 1A of this Report for additional informationregarding the importance of retail sales and our distribution partners to ourbusiness.Additionally, we continue to monitor economic conditions, including the impactof the ongoing and prolonged COVID-19 pandemic, that may unfavorably affect ourbusinesses, such as deteriorating consumer demand, delays in development,pricing pressure on our products, increased inflation and interest rates,recessionary factors (such as the impact that higher energy prices will have onconsumer purchasing behavior), supply chain constraints, labor supply issues,credit quality of our receivables and foreign currency exchange rates.53Hardware PlatformsWe derive most of our revenue from the sale of products made for PCs and videogame consoles manufactured by third parties, such as Sony InteractiveEntertainment Inc.’s (“Sony”) PlayStation and Microsoft Corporation’s(“Microsoft”) Xbox consoles, which comprised approximately 40% and 44% of ourtotal revenue for the years ended December 31, 2022 and 2021, respectively.

Forthe years ended December 31, 2022 and 2021, the sale of products for MicrosoftWindows via Steam comprised approximately 21% and 11% of our total revenue,respectively, and the sale of products for mobile platforms comprisedapproximately 5% for both the years ended December 31, 2022 and 2021. Thesuccess of our business is dependent upon consumer acceptance of video gameconsole/PC platforms and continued growth in the installed base of theseplatforms. When new hardware platforms are introduced, such as those released bySony and Microsoft in November 2020, demand for interactive entertainment usedon older platforms typically declines, which may negatively affect our businessduring the market transition to the new consoles.

The latest generation of Sonyand Microsoft consoles provide “backwards compatibility” (i.e., the ability toplay games for the previous generation of consoles), which could mitigate therisk of such a decline. However, we cannot be certain how backwardscompatibility will affect demand for our products.Digital BusinessPlayers increasingly purchase our games as digital downloads, as opposed topurchasing physical discs. All of our titles that are available throughretailers as packaged goods products are also available through direct digitaldownload.

For the years ended December 31, 2022 and 2021, approximately 68% and61%, respectively, of our revenue from sales of video games for game consolesand PCs was through digital channels. We believe this trend of increasing directdigital downloads is primarily due to benefits relating to convenience andaccessibility that digital downloads provide. In addition, as part of ourdigital business strategy, we aim to drive ongoing engagement and incrementalrevenue from recurrent consumer spending on our titles through in-game purchasesand extra content.EsportsWe are striving to become a leader in organizing and facilitating esportstournaments, competitions, and events for our licensed racing games as well ason behalf of third-party racing game developers and publishers.

2022 was anothersuccessful year for our Esports segment, which began with the grand finale ofthe second running of the 24 Hours of Le Mans Virtual in January, theINDYCAR-Motorsport Games Pro Challenge in February and the continuation andre-brand of elite single seater esports rFactor 2 Formula Pro. The yearconcluded with the first 4 rounds of the 2022-23 Le Mans Virtual Series inSeptember, October, November and December. In addition, we organizedcompetitions to drive user engagement on our rFactor 2 platform, as well assuccessfully delivering onsite esports activations with rFactor 2 at selectedBTCC events in Autumn.

For 2022, our esports events had a cumulative total ofapproximately 2.3 million video views with approximately 6.3 million minuteswatched. Subsequently, in the first quarter of 2023, we announced our viewershipfigures for the 2022-23 Le Mans Virtual Series, including the 24 Hours of LeMans Virtual, which had a global audience of 8.5 million across television(TV)/over-the-top (OTT) channels, 36 million social media impressions and over10 million video views across the full 5-race season.Technological InfrastructureAs our digital business has grown, our games and services increasingly depend onthe reliability, availability and security of our technological infrastructure.We are investing and expect to continue to invest in technology, hardware andsoftware to support our games and services, including with respect to securityprotections. Our industry is prone to, and our systems and networks are subjectto, cyberattacks, computer viruses, worms, phishing attacks, malicious softwareprograms, and other information security incidents that seek to exploit,disable, damage, disrupt or gain access to our networks, our products andservices, supporting technological infrastructure, intellectual property andother assets.

As a result, we continually face cyber risks and threats that seekto damage, disrupt or gain access to our networks and our gaming platform,supporting infrastructure, intellectual property and other assets. See “RisksRelated to Our Business and Industry-We may experience security breaches andcyber threats” in Part I, Item 1A of this Report for additional information.54Rapidly Changing IndustryWe operate in a dynamic industry that regularly experiences periods of rapid,fundamental change. In order to remain successful, we are required toanticipate, sometimes years in advance, the ways in which our products andservices will compete.

For example, the global adoption of portable and mobilegaming devices has led to significant growth in portable and mobile gaming,which we believe is a continuing trend. Accordingly, in conjunction with thelaunch of our next generation NASCAR console/PC games, we have focused ondeveloping titles for Nintendo’s Switch platform. We released NASCAR HeatUltimate Edition+ on Nintendo Switch in the fourth quarter of 2021 and followedthis up with the release of NASCAR Rivals on Nintendo Switch in the fourthquarter of 2022.Recurring Revenue SourcesOur business model includes revenue that we deem recurring in nature, such asrevenue from our annualized sports franchise (currently NASCAR) for gameconsoles, PC, and mobile platforms.

We deem this recurring because many existinggame owners purchase, sometimes free of charge, annual updates, which includesupdated drivers, liveries, and cars as they are released. We have been able toforecast the revenue from this area of our business with greater relativeconfidence than for new games, services, and business models. As we continue toincorporate new business models and modalities of play into our games, our goalis to continue to look for opportunities to expand the recurring portion ofourbusiness.Reportable SegmentsWe use “the management approach” in determining reportable operating segments.The management approach considers the internal organization and reporting usedby our chief operating decision maker for making operating decisions andassessing performance as the source for determining our reportable segments.

Ourchief operating decision maker is our Chief Executive Officer (“CEO”), whoreviews operating results to make decisions about allocating resources andassessing performance for the entire company. We classified our reportableoperating segments into (i) the development and publishing of interactive racingvideo games, entertainment content and services (the “Gaming segment”) and (ii)the organization and facilitation of esports tournaments, competitions, andevents for our licensed racing games as well as on behalf of third-party videogame racing series and other video game publishers (the “esports segment”).Components of Our Results of OperationsRevenuesWe have historically derived substantially all of our revenue from sales of ourgames and related extra content that can be played by customers on a variety ofplatforms, including game consoles, mobile phones, PCs and tablets. Starting in2019, we began generating sponsorship revenues from our production of live andvirtual esports events.

In early 2022, we also began offering softwaredevelopment services for racing simulators.Our product and service offerings included within the Gaming segment primarilyinclude, but are not limited to, full PC, console, and mobile games with bothonline 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 assoftware 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.55Cost of RevenuesCost of revenues for our Gaming segment is primarily comprised of royaltyexpenses attributable to our license arrangement with NASCAR and certain otherthird parties relating to our NASCAR racing series games. Cost of revenues forour Gaming segment is also comprised of merchant fees, disk manufacturing costs,packaging costs, shipping costs, warehouse costs, distribution fees todistribute products to retail stores, mobile platform fees associated with ourmobile revenue (for transactions in which we are acting as the principal in thesale to the end customer) and amortization of certain acquired licenseagreements and other intangible assets acquired through our variousacquisitions. Cost of revenues for our esports segment consists primarily of thecost of event staffing and event production.Sales and MarketingSales and marketing expenses are primarily composed of salaries, benefits andrelated taxes of our in-house marketing teams, advertising, marketing, andpromotional expenses, including fees paid to social media platforms, MotorsportNetwork and other websites where we market our products.DevelopmentDevelopment expenses consist of the cost to develop the games we produce, whichincludes salaries, benefits, and operating expenses of our in-house developmentteams, 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 AdministrativeGeneral and administrative expenses consist primarily of salaries, benefits andother 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 AmortizationDepreciation and amortization expenses include depreciation on fixed assets (primarily computers and office equipment), as well as amortization of definite lived intangible assets acquired through our various acquisitions.Results of OperationsYear Ended December 31, 2022 compared to Year Ended December 31, 2021Revenue For the Year Ended December 31, Change 2022 2021 £ %Revenues:Gaming £ 9,144,639 £ 14,267,735 (5,123,096 ) (35.9 )%Esports 1,179,920 807,795 372,125 46.1 %Total Segment andConsolidated Revenues £ 10,324,559 £ 15,075,530 (4,750,971 ) (31.5 )%Consolidated revenues were £10.3 million and £15.1 million for 2022 and 2021,respectively, a decrease of £4.8 million, or 31.5%, when compared to the prioryear.Gaming segment revenues represented 89% and 95% of our total 2022 and 2021revenues, respectively, decreasing by £5.1 million, or 35.9%, when compared tothe prior year.

The decrease in Gaming segment revenues was primarily due to£2.4 million in lower digital game sales, including downloadable content, and£3.4 million in lower retail game sales. This was primarily driven by therelease of one NASCAR game title in 2022, compared to two in 2021, resulting inlower volumes of sales, as well as less favorable pricing and higher thanexpected retail pricing concessions on existing games in our product portfolio.Specifically, the change in digital game sales was driven by a £3.4 millionreduction in NASCAR title sales on consoles and mobile platforms, partiallyoffset by a £0.8 million and £0.2 million increase in rFactor 2 and KartKrafttitle sales, respectively, on PC platforms. The reduction in retail game salesof £3.4 million was due to £1.4 million in lower retail sales of NASCAR titlesin 2022, as well as £2.0 million in higher-than-expected sales allowances andretail pricing concessions on NASCAR games.

These declines were partially offsetby £0.6 million in revenues earned through the development of simulationplatforms for third-parties and £0.1 million in license fee revenues.56Esports segment revenues represented 11% and 5% of our total 2022 and 2021revenues, respectively, increasing by £0.4 million, or 46.1%, when compared tothe prior year. The increase in Esports segment revenue was primarily due tohigher sponsorship revenue of £0.3 million from our Le Mans Virtual Series,which started its 2022-23 season in September 2022, and an increase of £0.1million in event entrance fees.Cost of Revenues For the Year Ended December 31, Change 2022 2021 £ %Cost of Revenues:Gaming £ 4,080,724 £ 7,041,579 £ (2,960,855 ) (42.0 )%Esports 879,593 487,576 392,017 80.4 %Total Segment andConsolidated Cost ofRevenues £ 4,960,317 £ 7,529,155 £ (2,568,838 ) (34.1 )%Consolidated cost of revenues were £5.0 million and £7.5 million for 2022 and2021, respectively, a decrease of £2.6 million, or 34.1%, when compared to theprior year.Gaming segment cost of revenues represented 82% and 94% of our total 2022 and2021 cost of revenues, respectively, decreasing by £3.0 million, or 42.0%, whencompared to the prior year. The decrease in Gaming segment cost of revenues wasprimarily driven by a £1.7 million reduction in game production costs, a £1.4million reduction in royalty payments and a £0.1 million reduction in directmarketing costs, partially offset by a £0.1 million increase in license anddeveloped technology amortization expense and a £0.1 million increase indevelopment costs to support the development of simulation platforms forthird-parties.

The decrease in production costs was due to only one NASCAR titlebeing released in 2022, compared to two NASCAR titles in 2021, and the reductionin royalty payments was driven by the decrease in digital and retail game sales.Esports segment cost of revenues represented 18% and 6% of our total 2022 and2021 cost of revenues, respectively, increasing by £0.4 million, or 80.4%, whencompared to the prior year. The increase in Esports segment cost of revenues wasprimarily driven an increase in production costs associated with the Le MansVirtual Series.Gross Profit For the Year Ended December 31, Change 2022 2021 £ %Gross Profit:Gaming £ 5,063,915 £ 7,226,156 £ (2,162,241 ) (29.9 )%Esports 300,327 320,219 (19,892 ) (6.2 )%Total Segment andConsolidated Gross Profit £ 5,364,242 £ 7,546,375 £ (2,182,133 ) (28.9 )%Gaming – Gross Profit Margin 55.4 % 50.6 %Esports – Gross ProfitMargin 25.5 % 39.6 %Total Groff Profit Margin 52.0 % 50.1 %Consolidated gross profit was £5.4 million and £7.5 million for 2022 and 2021,respectively, a decrease of £2.2 million, or 28.9%, when compared to the prioryear. Gross profit margin was 52.0% in 2022, compared to 50.1% in 2021, drivenprimarily by lower game production costs and royalty fees in the Gaming segment.57Gaming segment gross profit was £5.1 million for 2022, compared to £7.2 millionfor 2021, representing a gross profit margin of 55.4% for 2022 and 50.6% for2021.

The change in gross profit margin was partially driven by changes in thesales mix, which included third-party development revenues for the first time in2022 and accounted for approximately 180 basis point year over year improvement.The remaining change in gross profit margin was primarily due to lowerproduction costs and royalty expense, as a result of releasing one NASCAR titlein 2022 compared to two NASCAR titles in 2021.Esports segment gross profit was £0.3 million for both 2022 and 2021, representing a gross profit margin of 25.5% for 2022 and 39.6% for 2021. The £ increase in revenue was primarily offset by an increase in production costs associated with the Le Mans Virtual Series.Operating Expenses For the Year Ended December 31, Change 2022 2021 £ %Operating Expenses:Sales and marketing £ 6,172,324 £ 6,475,867 £ (303,543 ) (4.7 )%Development 10,417,260 9,621,712 795,548 8.3 %General and administrative 13,764,177 25,378,149 (11,613,972 ) (45.8 )%Impairment of goodwill 4,788,270 – 4,788,270 100.0 %Impairment of intangible assets 4,828,478 317,113 4,511,365 1,422.6 %Depreciation and amortization 420,137 280,192 139,945 49.9 %Total Operating Expenses 40,390,646 42,073,033 £ (1,682,387 ) (4.0 )%Changes in operating expenses are explained in more detail below:Sales and MarketingSales and marketing expenses were £6.2 million and £6.5 million for 2022 and2021, respectively, representing a £0.3 million, or 4.7%, decrease when comparedto the prior year. The reduction in sales and marketing expense was primarilydriven by a £1.0 million reduction in external marketing expense, which waspartially offset by an increase in payroll expense of £0.7 million as a resultof higher headcount when compared to the prior year.DevelopmentDevelopment expenses were £10.4 million and £9.6 million for 2022 and 2021,respectively, representing an increase of £0.8 million, or 8.3%, when comparedto the prior year.

The incremental development expenses were primarily driven byhigher compensation due to additional headcount and reflect increased internaldevelopment efforts to produce and support existing games in our productportfolio, as well as the development of future games such as the next INDYCARtitle.General and AdministrativeGeneral and administrative (“G&A”) expenses were £13.8 million and £25.4 millionfor 2022 and 2021, respectively, a decrease of £11.6 million, or 45.8%, whencompared to the prior year. The reduction in G&A expense was primarily driven bya £8.8 million reduction in stock based compensation expense, a £2.5 millionreduction in bonus expense due to IPO related bonus expense incurred in 2021that did not repeat in 2022, a £1.3 million reduction in legal, consultant andother professional expenses that were incurred in connection with the 2021 IPOthat did not repeat in 2022, a £0.7 million reduction in payroll and employeerelated expenses, following certain headcount reductions in 2022, and a £0.2million reduction in software expenditures. These were partially offset by anincrease of £1.4 million in lawsuit settlement expenses, driven by a £1.1million loss contingency reserve and a £0.3 million settlement expense, as wellas a £0.2 million increase in rental expense and a £0.3 million increase ininsurance related expense.

See Note 13 – Commitments and Contingencies -Litigation in our consolidated financial statements for additional informationregarding such legal proceeding.Impairment of Goodwill, Intangible and Long-Lived AssetsImpairment of goodwill was £4.8 million and £0 in 2022 and 2021, respectively.The impairment loss primarily relates to goodwill acquired in connection withthe acquisition of Studio397 that was deemed impaired as a result of impairmentassessments performed during the year. The triggers for the assessments wasprimarily revisions made in the first quarter of 2022 to the scope and timing ofcertain product releases included in our product roadmap, as well as asignificant reduction in the Company’s market capitalization since the date ofthe last annual impairment assessment. Changes to the forecasted revenues anddiscount rates, as a result of the triggers identified, were the primary driversfor the change in fair value since the annual assessment.58Impairment of Intangible AssetsImpairment of indefinite-lived intangible assets was £3.5 million and £0.3million in 2022 and 2021, respectively.

The triggers for the assessments werethe changes to the Company’s product roadmap and the Company’s marketcapitalization, as referenced above. The indefinite-lived intangible assetimpairment losses primarily relate to the rFactor 2 trade name and the Le MansVideo Gaming License and are mainly driven by a reduction in expected futurerevenues following changes made to the Company’s product roadmap in the firstquarter of 2022, as well as changes to the discount rates and royalty ratesusedwhen valuing the assets.Impairment of finite-lived intangible assets was £1.3 million and £0 in 2022 and2021, respectively. The triggers for the assessments were the changes to theCompany’s product roadmap and the Company’s market capitalization, as referencedabove.

The finite-lived intangible asset impairment losses relate to the rFactor2 technology and was primarily driven by a change in the technical obsolescenceassumption used when determining the fair value of the asset.Depreciation and AmortizationDepreciation and amortization expenses were £0.4 million and £0.3 million for2022 and 2021, respectively, an increase of £0.1 million when compared to theprior year. The increase was primarily due to additional depreciation expense onfixed assets acquired during 2022.Interest ExpenseInterest expense was £1.1 million for 2022, compared to £0.5 million for 2021,an increase of £0.6 million when compared to the prior year. The increase wasprimarily due to the ongoing non-cash interest accretion of our INDYCAR andBTCClicense liabilities.Gain Attributable to Equity Method InvestmentThe gain attributable to equity method investment in the Le Mans Esports SeriesLtd was £0 for 2022 and £1.4 million for 2021.

The decrease was due to thediscontinuation of equity method accounting as we began to fully consolidate LeMans Esports Series Ltd upon acquiring a majority interest during the firstquarter of 2021.Other Expenses, netOther expenses, net was £0.7 million for 2022, compared to £0.05 million for2021. Other expenses, net of £0.7 million for 2022 was primarily comprised of aforeign currency loss of £0.8 million, incurred remeasuring transactionsdenominated in a currency other than U.S. dollars, partially offset by£0.2 million in rental income from the sub-lease of our Charlotte, NC officespace. For 2021, other expenses, net of £0.05 million was primarily comprised of£0.2 million in rental income from the sub-lease of our Charlotte, NC officespace, offset by £0.25 million of foreign currency losses incurred remeasuringtransactions denominated in a currency other than U.S. dollars and translatingto U.S. dollars the results of our foreign operations that are denominated in afunctional currency other than U.S. dollars.Other Comprehensive Income (Loss)Other comprehensive income was £0.01 million for 2022, compared to comprehensiveloss of £1.0 million for 2021.

The £1.1 million increase was primarily due toactivity in our U.K., Australian, Russian and Netherlands subsidiaries andrepresents unrealized foreign currency translation adjustments.Net Loss Attributable to Non-Controlling InterestFor the year ended December 31, 2022, the loss attributable to thenon-controlling interest decreased by £0.3 million, or 57%, to a loss of £0.8million as compared to a loss of £0.5 million for the year ended December 31,2021.Liquidity and Capital ResourcesLiquiditySince our inception and prior to our IPO, we financed our operations primarilythrough advances from Motorsport Network, which were subsequently incorporatedinto a line of credit provided by Motorsport Network pursuant to the £12 millionLine of Credit, as described below.On January 15, 2021, we completed our IPO of 345,000 shares of Class A commonstock at a price to the public of £200 per share, which includes the exercise infull by the underwriters of their option to purchase from us an additional45,000 shares of Class A common stock. We received net proceeds of approximately£63.1 million from the IPO, after deducting underwriting discounts and offeringexpenses paid by us in 2020 and 2021.Following our IPO, we have financed our operations primarily through cash generated from operations, advances from Motorsport Network pursuant to the £12 million Line of Credit and through sales of our equity securities.59We measure our liquidity in a number of ways, including the following: December 31, December 31, 2022 2021Cash and Cash Equivalents £ 979,306 £ 17,819,640 Working Capital (Deficiency) £ (9,278,268 ) £ 16,024,590For the year ended December 31, 2022, the Company incurred a net loss of £36.8million, negative cash flows from operations of approximately £19.5 million andan accumulated deficit of £74.0 million. As of December 31, 2022, we had cashand cash equivalents of £1.0 million, which increased to £6.5 million as ofMarch 22, 2023 primarily as a result of certain registered direct offerings inFebruary 2023 discussed below under “Other Financing Activity,” which resultedin aggregate net proceeds to the Company of approximately £11.3 million.

Theproceeds are intended for use in the development of multiple games, workingcapital and general corporate purposes. We expect to continue to incursignificant operating expenses and, as a result, will need to grow revenues toreach profitability and positive cash flows. We expect to continue to incurlosses for the foreseeable future as we continue to develop our productportfolio and invest in developing new video game titles.

Based on the Company’scash and cash equivalents position and the Company’s average cash burn, we donot believe we have sufficient cash on hand to fund our operations for theremainder of 2023 and that additional funding will be required in order tocontinue operations.Our future liquidity and capital requirements include funds to support theplanned costs to operate our business, including amounts required to fundworking capital, support the development and introduction of new products,maintain existing titles, and certain capital expenditures. The adequacy of ouravailable funds generally depends on many factors, including our ability tosuccessfully develop consumer-preferred new products or enhancements to ourexisting products, continued development and expansion of our esports platformand our ability to enter into collaborations with other companies and/or acquireother companies or technologies to enhance or complement our product and serviceofferings.We continue to explore additional funding in the form of potential equity and/ordebt financing arrangements and similar transactions and consider these to beviable options to support future liquidity needs, provided that suchopportunities can be obtained on terms that are commercially competitive and onterms acceptable to the Company. We are also seeking to improve our liquidity byachieving cost reductions by maintaining and enhancing cost control initiatives,such as those that we expect to achieve through the 2022 Restructuring Program.See “2022 Restructuring Program” above for additional information.As we continue to evaluate incremental funding solutions, we re-evaluated ourproduct roadmap in the first quarter of 2022 and modified the expected timingand scope of certain new product releases.

These changes have been made not onlyto maintain the development of high-quality video game titles, but also toimprove the timing of certain working capital requirements and reduceexpenditures, thereby decreasing our expected future cash-burn and improveshort-term liquidity needs. If needed, further adjustments could be made thatwould decrease short-term working capital requirements, while pushing out thetiming of expected revenues.We expect to generate additional liquidity through consummating equity and/ordebt financings or similar transactions, achieving cost reductions bymaintaining and enhancing cost control initiatives, such as those that we expectto achieve through the 2022 Restructuring Program and/or further adjusting ourproduct roadmap to reduce near term need for working capital. If we are unableto generate adequate revenue and profit growth, there can be no assurances thatsuch actions will provide us with sufficient liquidity to meet our cashrequirements as, among other things, our liquidity can be impacted by a numberof factors, including our level of sales, costs and expenditures, economicconditions in the capital markets, especially for technology companies, as wellas accounts receivable and sales allowances.There can be no assurance that we will be able to obtain funds on commerciallyacceptable terms, if at all, to satisfy our future needed liquidity and capitalresources.

If we are unable to obtain adequate funds on acceptable terms, we maybe required to, among other things, significantly curtail or discontinueoperations or obtain funds by entering into financing agreements on unattractiveterms.If we are unable to satisfy our cash requirements from the sources identified above, we could be required to adopt one or more of the following alternatives:? selling assets or operations;? seeking additional capital contributions and/or loans from Motorsport Network, the Company’s other affiliates and/or third parties; and/or ? reducing other discretionary spending.There can be no assurance that we would be able to take any of the actionsreferred to above because of a variety of commercial or market factors,including, without limitation, market conditions being unfavorable for an equityor debt issuance or similar transactions, additional capital contributionsand/or loans not being available from Motorsport Network or affiliates and/orthird parties, or that the transactions may not be permitted under the terms ofour various debt instruments then in effect, such as due to restrictions on theincurrence of debt, incurrence of liens, asset dispositions and related partytransactions. In addition, such actions, if taken, may not enable us to satisfyour cash requirements if the actions that we are able to consummate do notgenerate a sufficient amount of additional capital.60Even if we do secure additional financing, if our anticipated level of revenuesare not achieved because of, for example, less than anticipated consumeracceptance of our offering of products and events; less than effective marketingand promotion campaigns, decreased consumer spending in response to weakeconomic conditions or weakness in the overall electronic games category;adverse changes in foreign currency exchange rates; decreased sales of ourproducts and events as a result of increased competitive activities by ourcompetitors; changes in consumer purchasing habits, such as the impact of higherenergy prices on consumer purchasing behavior; retailer inventory management orreductions in retailer display space; less than anticipated results from theCompany’s existing or new products or from its advertising and/or marketingplans; or if the Company’s expenses, including, without limitation, formarketing, advertising and promotions, product returns or price protectionexpenditures, exceed the anticipated level of expenses, our liquidity maycontinue to be insufficient to satisfy our future capital requirements.In accordance with Accounting Standards Codification (“ASC”) 205-40, GoingConcern, the Company has evaluated whether there are conditions and events,considered in the aggregate, that raise substantial doubt about the Company’sability to continue as a going concern within one year after the date that theaccompanying consolidated financial statements to this Report are issued. Thefactors described above, in particular the available cash on hand to fundoperations over the next year, have raised substantial doubt about the Company’sability to continue as a going concern.The accompanying consolidated financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

Accordingly,the consolidated financial statements have been prepared on a basis that assumesthe Company will continue as a going concern and which contemplates therealization of assets and satisfaction of liabilities and commitments in theordinary course of business.Cash Flows From Operating ActivitiesNet cash used in operating activities for the year ended December 31, 2022 and2021 was £19.5 million and £20.9 million, respectively. The net cash used inoperating activities for the year ended December 31, 2022 was primarily a resultof cash used to fund a net loss of £36.8 million, adjusted for net non-cashadjustments in the amount of £15.4 million and £1.6 million of cash provided bychanges in the levels of operating assets and liabilities. Net cash used inoperating activities for the year ended December 31, 2021 was primarily due tonet loss of £33.7 million, adjusted for net non-cash adjustments of £14.4million and £1.6 million of cash used by changes in the levels of operatingassets and liabilities.Cash Flows From Investing ActivitiesNet cash used in investing activities for the year ended December 31, 2022, was£0.3 million, which was primarily attributable to the purchase of property andequipment.

During the year ended December 31, 2021, net cash used in investingactivities was £14.4 million, which was attributable to approximately £12.8million paid in connection with the acquisition of Studio397 and £1.0 millionpaid in connection with the acquisition of KartKraft, and approximately £0.8million in purchases of property and equipment, which was partially offset by£0.2 million of net cash acquired in the purchase of an additional controllinginterest in Le Mans Esports Series Ltd.Cash Flows From Financing ActivitiesNet cash provided by financing activities during the year ended December 31,2022 and 2021 was £1.7 million and £49.3 million, respectively. Cash flowsprovided by financing activities for the year ended December 31, 2022 wereprimarily attributable to £3.8 million in advances from Motorsport Network underthe £12 million Line of Credit in September 2022, partially offset by £1.7million in payments of purchase commitment liability relating to a portion ofthe deferred installment amount due in connection with our acquisition ofStudio397 and £0.4 million in game license payments. During the year endedDecember 31, 2021, net cash provided by financing activities was primarilyattributable to approximately £63.1 million of net cash provided by the sale ofClass A Common stock in our IPO, £2.2 million in advances from affiliates,partially offset by £13.0 million of net repayments to Motorsport Network underthe £12 million Line of Credit, and £3.0 million of payments for the acquisitionof additional ownership interests from non-controlling shareholders.61Promissory Note Line of CreditOn April 1, 2020, the Company entered into a promissory note (the “£12 millionLine of Credit”) with the Company’s majority stockholder, Motorsport Network,that provides the Company with a line of credit of up to £10 million (which wassubsequently increased to £12 million pursuant to an amendment executed inNovember 2020), at an interest rate of 10% per annum, the availability of whichis dependent on Motorsport Network’s available liquidity.

The £12 million Lineof Credit does not have a stated maturity date and is payable upon demand at anytime at the sole and absolute discretion of Motorsport Network. The Company mayprepay the £12 million Line of Credit in whole or in part at any time or fromtime to time without penalty or charge. In the event the Company or any of itssubsidiaries consummates certain corporate events, including any capitalreorganization, consolidation, joint venture, spin off, merger or any otherbusiness combination or restructuring of any nature, or if certain events ofdefault occur, the entire principal amount and all accrued and unpaid interestwill be accelerated and become payable.

Additionally, see “Risk Factors – RisksRelated to Our Financial Condition and Liquidity – Limits on the Company’sborrowing capacity under the £12 million Line of Credit may affect the Company’sability to finance its operations” in Part I, Item 1A of this Report.On September 8, 2022, the Company entered into a support agreement withMotorsport Network (the “Support Agreement”) pursuant to which MotorsportNetwork issued approximately £3 million (the “September 2022 Cash Advance”) tothe Company in accordance with the £12 million Line of Credit, the proceeds ofwhich the Company is using for general corporate purposes and working capital.In the Support Agreement, Motorsport Network and the Company terminated the SideLetter Agreement dated September 4, 2020 and agreed that until June 30, 2024,Motorsport Network would not demand repayment of the September 2022 Cash Advanceor other advances under the £12 million Line of Credit unless and until suchtime that any of the following shall occur or exist: (i) the Company enters intoa new financing arrangement (whether debt, equity or otherwise) under which theCompany is then able to draw or provides the Company with available cash inexcess of amounts required in the Company’s reasonable judgment to run itsoperations in the ordinary course of business; (ii) the Company generates fromoperations available cash in excess of amounts required in the Company’sreasonable judgment to run its operations in the ordinary course of business; or(iii) the Company’s independent auditors issue an unqualified opinion on itsfinancial statements and the Company’s repayment of the advances, in whole or inpart, would not otherwise cause the independent auditor to issue a going concernqualified opinion. Upon the occurrence of any of the foregoing events, theCompany shall prepay on such date principal amount of the September 2022 CashAdvance and other advances under the £12 million Line of Credit then outstandingin an amount equal to such available excess cash or, in the case of (iii) above,the amount that would not cause the Company’s independent auditor to issue agoing concern qualified opinion, together with interest accrued but unpaid onthe unpaid September 2022 Cash Advance and other advances, which repaymentobligation shall continue until all such advances under the £12 million Line ofCredit are paid in full. The entire aggregate principal amount of the September2022 Cash Advance and the other advances under the £12 million Line of Credit,together with interest accrued but unpaid thereon, shall also become immediatelyand automatically due and payable, and the £12 million Line of Credit shallimmediately and automatically terminate, in each case without any actionrequired by Motorsport Network, if (i) the Company experience an event ofdefault under any other debt instrument, agreement or arrangement; or (ii) anyfinal judgment or final judgments for the payment of money in excess (net ofamounts covered by third-party insurance with insurance carriers who have notdisclaimed liability with respect to such judgment or judgments) of £500,000 orits foreign currency equivalent is entered against the Company or any subsidiaryand is not discharged and either (a) an enforcement proceeding has beencommenced by any creditor upon such judgment or decree or (b) there is a periodof 60 days following the entry of such judgment or decree during which suchjudgment or decree is not discharged, waived or the execution thereof stayedand, in the case of (b), such default continues for 60 consecutive days.During the year ended December 31, 2022, the Company was not required to makeany repayments to Motorsport Network under the September 2022 Cash Advance orthe £12 million Line of Credit.

As of December 31, 2022, the Company owedapproximately £3.8 million of principal and accrued interest on the £12 millionLine of Credit, compared with approximately £0 as of December 31, 2021. OnJanuary 30, 2023 and February 1, 2023, the Company entered into certaindebt-for-equity exchange agreements with Motorsport Network pursuant to whichthe entire outstanding amount due under the £12 million Line of Credit wascancelled in exchange for an aggregate of 780,385 shares of the Company’s ClassA common stock issued to Motorsport Network. See Note 17 – Subsequent Events inour consolidated financial statements for further information.Given the state of the financial markets, the Company continues to assess itsexposure to any potential non-performance by Motorsport Network and believesthat there is a substantial likelihood that Motorsport Network may not fulfillthe Company’s future borrowing requests.62Other Financing ActivityOn December 9, 2022, the Company entered into a stock purchase commitmentagreement (the “Alumni Purchase Agreement”) with Alumni Capital LP (“AlumniCapital”), which provides that the Company may sell to Alumni Capital up to£2,000,000 of shares (the “commitment amount”) of the Company’s Class A commonstock, through the commitment period expiring on December 31, 2023, or earlierif the commitment amount is reached.

Furthermore, the Company has an option toincrease the commitment amount up to £10,000,000 of shares of the Company’sClass A common stock, subject to certain terms and conditions. On January 6,2023, pursuant to the Alumni Purchase Agreement, the Company issued 90,415shares of the Company’s Class A common stock to Alumni Capital, with anapproximate fair market value of £0.4 million. On January 19, 2023, the Companyissued an additional 40,752 shares of the Company’s Class A common stock toAlumni Capital, with an approximate fair market value of £0.15 million.

OnJanuary 27, 2023, the Company issued a further 44,000 shares of the Company’sClass A common stock to Alumni Capital, with an approximate fair market value of£0.1 million. As of the date of this Report, the remaining commitment amountunder the Alumni Purchase Agreement amounted to approximately £1.3 million.On February 1, 2023, the Company issued 183,020 shares of the Company’s Class Acommon stock in a registered direct offering priced at-market under NASDAQrules, with a fair market value of approximately £3.9 million (the “£3.9 millionRDO”), before deducting placement agent fees and other offering expenses payableby the Company. H.C.

Wainwright & Co., LLC (“Wainwright”) acted as the exclusiveplacement agent for the £3.9 million RDO, pursuant to the engagement letter withthe Company, dated as of January 9, 2023. In connection with the £3.9 millionRDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of theaggregate gross proceeds from the registered direct offering, non-accountableexpenses of £50,000 and closing fees of £15,950. The Company has also issued toWainwright 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 Stockplaced in the £3.9 million RDO, at an exercise price of £26.75 per share andwill expire five years from the closing of the £3.9 million RDO.On February 2, 2023, the Company issued 144,366 shares of the Company’s Class Acommon stock in a registered direct offering priced at-market under NASDAQrules, with a fair market value of approximately £3.4 million (the “£3.4 millionRDO”), before deducting placement agent fees and other offering expenses payableby the Company.

Wainwright acted as the exclusive placement agent for the £3.4million RDO. In connection with the £3.4 million RDO, the Company paidWainwright a cash transaction fee equal to 7.0% of the aggregate gross proceedsfrom the registered direct offering, non-accountable expenses of £25,000 andclosing fees of £15,950. The Company has also issued to Wainwright warrants topurchase up to 8,662 shares of Class A Common Stock, which is equal to 6.0% ofthe aggregate number of shares of Class A Common Stock placed in the £3.4million RDO, at an exercise price of £29.375 per share and will expire fiveyears from the closing of the £3.4 million RDO.On February 3, 2023, the Company issued 232,188 shares of the Company’s Class Acommon stock in a registered direct offering priced at-market under NASDAQrules, with a fair market value of approximately £4.0 million (the “£4.0 millionRDO”), before deducting placement agent fees and other offering expenses payableby the Company.

Wainwright acted as the exclusive placement agent for the £4.0million RDO. In connection with the £4.0 million RDO, the Company paidWainwright a cash transaction fee equal to 7.0% of the aggregate gross proceedsfrom the registered direct offering, non-accountable expenses of £25,000 andclosing fees of £15,950. The Company has also issued to Wainwright warrants topurchase up to 13,931 shares of Class A Common Stock, which is equal to 6.0% ofthe aggregate number of shares of Class A Common Stock placed in the £4.0million RDO, at an exercise price of £21.738 per share and will expire fiveyears from the closing of the £4.0 million RDO.63Capital ExpendituresThe 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 December 31, 2022.Material Cash RequirementsAs of December 31, 2022, our material cash requirements were as follows (inthousands): Payments due by period Less than 1-3 3-5 More than Total 1 Year Years Years 5 YearsOperating Activities:Operating lease obligations £ 1,076,951 £ 432,978 £ 594,998 £ 48,975 £ -Minimum payment guarantees 18,120,336 2,698,000 5,739,136 6,433,200 3,250,000Other 1,525,070 978,880 546,190 – -Financing Activities:Purchase commitments 2,320,000 1,870,000 450,000 – -Total £ 23,042,357 £ 5,979,858 £ 7,330,324 £ 6,482,175 £ 3,250,000The Company intends to fund these material cash requirements with a combinationof cash generated from operations, as well as future funding arrangements thatas of December 31, 2022 have not been determined. There can be no assurance thatwe will be able to obtain funds on commercially acceptable terms, if at all.Please see “-Liquidity and Going Concern” above and Note 1 – BusinessOrganization, Nature of Operations and Risks and Uncertainties – Liquidity inour consolidated financial statements for further details on the Company’s goingconcern position as of December 31, 2022.As a normal part of our business, depending on market conditions, pricing andoverall growth strategy, we consider potential acquisitions. If any of theseopportunities were to occur, they would be financed through the incurrence ofadditional indebtedness, issuance of additional shares or through cash flowsfrom operations, provided that we are able to obtain such funds on termsacceptable to us.Off-Balance Sheet ArrangementsWe did not have, during the periods presented, and we do not currently have, anyrelationships with any organizations or financial partnerships, such asstructured finance or special purpose entities, that would have been establishedfor the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes.64Critical Accounting Policies and EstimatesThe preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America(“GAAP”) requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, contingent assets and liabilities,each as of the date of the financial statements, and revenues and expensesduring the periods presented.

On an ongoing basis, management evaluates theirestimates and assumptions, and the effects of any such revisions are reflectedin the financial statements in the period in which they are determined to benecessary. Management bases their estimates on historical experience and onvarious other factors that they believe are reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalue of assets and liabilities that are not readily apparent from othersources. Actual outcomes could differ materially from those estimates in amanner that could have a material effect on our consolidated financialstatements.While our significant accounting policies are more fully described in Note 2 -Summary of Significant Accounting Policies to our consolidated financialstatements, we believe that certain of these policies and estimates are deemedcritical, as they require management’s highest degree of judgment, estimates andassumptions.

We have discussed these accounting policies and estimates with theAudit Committee of our Board of Directors. We believe our most criticalaccounting policies and estimates are as follows:Valuation of Goodwill and Indefinite-Lived Intangible AssetsWe review goodwill at the reporting unit level and indefinite-lived intangibleassets for impairment annually or when events or circumstances dictate, morefrequently.The impairment review consists of a qualitative assessment to determine whetherit is more likely than not (that is, a likelihood of more than 50%) that thefair value of a reporting unit or the identified indefinite-lived intangibleasset is less than its carrying amount. Factors considered in the qualitativeassessment include general economic conditions, industry and marketconsiderations, cost factors, overall financial performance, entity-specificfactors such as changes to the product road map and restructuring changes, andchanges in the Company’s share price.If the Company elects to bypass the qualitative assessment, or if the Companyconcludes that it is more likely than not that the fair value of a reportingunit or indefinite-lived intangible asset is less than its carrying value, thenthe Company performs a one-step quantitative impairment test by comparing thefair value of a reporting unit to its carrying value, in order to determine ifgoodwill is impaired, and for indefinite-lived intangible assets we comparetheir carrying value to their fair value.

We recognize a loss on impairment inthe event the reporting unit or indefinite-lived intangible assets carryingvalue exceeds its fair value.Where a one-step quantitative assessment is required for goodwill, we typicallyestimate fair value of a reporting unit by utilizing discounted cash flowmodels, which may also include a combination of a market-based valuationapproach. The estimation of fair value utilizing a discounted cash flow modelincludes uncertainties that require our significant judgment when makingassumptions of expected revenues, cost of revenues, and development, marketing,and general administrative expenses. The principal assumptions used in thediscounted cash flow model for our 2022 and 2021 impairment assessment were: – Forecasted net revenues; and – Weighted average cost of capital (i.e., discount rate)The discounted cash flow model uses the most current projected operating resultsfor the upcoming fiscal year as a base.

We discount the projected cash flowsusing rates specific to the reporting unit based on its weighted-average cost ofcapital.65If the fair value of the reporting unit exceeds its carrying value, nowrite-down of goodwill is required. As amended by ASU No.

2017-04, Intangibles -Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment,if the fair value of the reporting unit is less than the carrying value of itsnet assets, an impairment is recognized based on the amount by which thecarrying value of a reporting unit exceeds its fair value, not to exceed thetotal amount of goodwill allocated to such reporting unit.Where a one-step quantitative assessment is required for our indefinite-livedintangible assets, we compare the carrying value of the asset to its fair value.We typically determine fair value using either a relief from royalty method fortrade names, and a discounted cash flow model for our other indefinite-livedintangible assets. The principal assumptions used in our cash flow models andrelief from royalty models for our 2022 and 2021 impairment assessments were: – Forecasted net revenues; – Weighted average cost of capital (i.e., discount rate); and – Royalty rate (relief from royalty method only)If the carrying value exceeds its fair value, an impairment loss is recognizedin an amount equal to that excess.

If the fair value exceeds its carrying value,the indefinite-life intangible asset is not considered impaired.Valuation of Finite-Lived Intangible Assets and Other Long-Lived AssetsWe review our finite-lived assets for impairment whenever events or changes incircumstances indicate, based on recent and projected cash flow performance andremaining useful lives, that the carrying value of these assets may not be fullyrecoverable. We evaluate asset impairment at the lowest level for whichidentifiable cash flows are largely independent of the cash flows of otherassets and liabilities. The lowest level for which we maintain identifiable cashflows that are independent of the cash flows of other assets and liabilities isat the intangible asset level, with the exception of technology intangibleassets which are at the reporting unit level.

If estimated undiscounted futurecash flows are less than the carrying value of an asset, an impairment charge isrecognized to the extent its carrying value exceeds fair value.We typically estimate fair value a cost to recreate valuation technique, howeverthe valuation method used will be dependent on the finite-lived intangible assetsubject to fair value assessment.The principal assumptions used in our cost to recreate model for the interim and annual impairment reviews completed during the year ended December 31, 2022 were: – Number of hours to recreate; – Rate per hour; and – Technological obsolescence.If the carrying value exceeds its fair value, an impairment loss is recognizedin an amount equal to that excess. If the fair value exceeds its carrying value,the finite-life intangible asset is not considered impaired. Intangible assetsassigned finite useful lives are amortized on a straight-line basis over theirestimated useful lives.Sales Allowances and Price Protection ReservesWe evaluate the collectability of our accounts receivable continuouslythroughout the year and reduce revenue for estimated future sales allowances andprice protections, which may occur with distributors and retailers (“channelpartners”).Price protection represents our practice to provide channel partners with acredit allowance to lower their wholesale price on a particular game unit thatthey have not resold to customers.

The amount of the price protection forpermanent markdowns is the difference between the original wholesale price andthe new reduced wholesale price. Credits are also given for short-termpromotions that temporarily reduce the wholesale price.When evaluating the adequacy of our sales allowances and price protectionreserves, the Company analyzes the following: historical credit allowances,current sell-through of channel partners’ inventory of the Company’s products,current trends in retail and the video game industry, changes in customerdemand, acceptance of products, and other related factors. In addition, theCompany monitors the volume of sales to its channel partners and theirinventories, as substantial overstocking in the distribution channel couldresult in higher-than-expected returns or higher price protection in subsequentperiods.

For the year ended December 31, 2022, the principal assumptions used todevelop our sales allowances and price protection reserves were: – Expected future selling prices – Expected future sell through of units in the channelRecently Issued Accounting StandardsAs an “emerging growth company”, the JOBS Act allows us to delay adoption of newor revised accounting pronouncements applicable to public companies until suchpronouncements are made applicable to private companies.

We have elected to usethis extended transition period under the JOBS Act.

We have elected to use thisextended transition period under the JOBS Act until such time as we are nolonger considered to be an emerging growth company.Our analysis of recently issued accounting standards are more fully described inour consolidated financial statements (Note 2 – Summary of SignificantAccounting Policies in our consolidated financial statements for the years endedDecember 31, 2022 and 2021).(C) Edgar Online, source Glimpses