MOTORSPORT GAMES INC. 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 fiscal year endedDecember 31, 2022 and 2021, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Report, including in the "Business" section and "Risk Factors" above, the remainder of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") or the consolidated financial statements and related notes. Our Business
Motorsport Games is a leading racing game developer, publisher and esports ecosystem provider of official motorsport racing series throughout the world, includingNASCAR , the iconic 24 Hours of Le Mans endurance race ("Le Mans") and the associated FIA World Endurance Championship (the "WEC"), INDYCAR, the British Touring Car Championship (the "BTCC") and others. Our portfolio is comprised of some of the most prestigious motorsport leagues and events in the world. Further, in 2021 we acquired the KartKraft karting simulation game as well as Studio 397 B.V. ("Studio397") and their rFactor 2 realistic racing simulator technology and platform, adding both games and their underlying technology to our portfolio. Started in 2018 as a wholly-owned subsidiary ofMotorsport Network , we are currently the official developer and publisher of theNASCAR video game racing franchise and have obtained the official licenses to develop multi-platform games for the BTCC, the 24 Hours of Le Mans race and the WEC, as well as INDYCAR. We develop and publish multi-platform racing video games including for game consoles, personal computers (PCs) and mobile platforms through various retail and digital channels, including full-game and downloadable content. For fiscal years 2022 and 2021, a majority of our revenue was generated from sales of ourNASCAR racing video games. As ofDecember 31, 2022 , we have a total headcount of 134 people, made up of 133 full-time employees, including 91 dedicated to game development, to continue developing our expanded product offerings. Our headcount numbers as ofDecember 31, 2022 , reflect that we have ceased our development operations inRussia effectiveSeptember 2022 , as a result of the Ukraine-Russia Conflict and as such, we do not expect the Company's development operations to have significant exposure to changes in circumstances arising from the Ukraine-Russa Conflict. COVID-19 Pandemic Update The lingering impact of COVID-19 has continued to create significant volatility throughout the global economy, such as supply chain disruptions, limited labor supplies, higher inflation, and recession, which in turn has caused constraints on consumer spending. More recently, new variants of COVID-19, such as the Omicron variant and its subvariants, that are significantly more contagious than previous strains, have emerged. Further, the effectiveness of approved vaccines on these new strains remains uncertain. The spread of these new strains initially caused many government authorities and businesses to reimplement prior restrictions in an effort to lessen the spread of COVID-19 and its variants. However, while many of these restrictions have been lifted, uncertainty remains as to whether additional restrictions may be initiated or again reimplemented in response to surges in COVID-19 cases. 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 this Report. 52 2022 Restructuring Program OnSeptember 8, 2022 , the Company announced an organization restructuring (the "2022 Restructuring Program") designed to reduce the Company's marketing, general and administrative expenses, improve the Company's profit and maximize efficiency, cash flow and liquidity. The 2022 Restructuring Program includes right-sizing the organization and operating with more efficient workflows and processes. The primary components of the organizational restructuring involve consolidating certain functions; reducing layers of management, where appropriate, to increase accountability and effectiveness; and streamlining support functions to reflect the new organizational structure. The leaner organizational structure is also expected to improve communication flow and cross-functional collaboration, leveraging the more efficient business processes. In addition, given the ongoing uncertain economic environment and the potential effect that it could have on the Company's net sales, these actions will also provide the Company with additional flexibility. As a result of the 2022 Restructuring Program, the Company expects to eliminate approximately 20% of its overhead costs worldwide and deliver approximately$4 million of total annualized cost reductions by the end of 2023, of which$2.5 million was achieved by the end of 2022. As ofDecember 31, 2022 , the Company had incurred restructuring costs of approximately$0.1 million , which primarily consisted of severance payments, and expects total restructuring costs to fall within the previously estimated range of$0.1 million to$0.3 million .
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. OurNASCAR products have historically accounted for the majority of our revenue; however, we have diversified our product offerings and are generating revenues from KartKraft, rFactor 2 and the 24 Hours of Le Mans Virtual event, which reduced the percentage of our revenues derived fromNASCAR products for the years endedDecember 31, 2022 and 2021. For example, revenues associated with ourNASCAR franchise accounted for approximately 63% and 88% of our total revenue for the years endedDecember 31, 2022 and 2021, respectively. Additionally, with the acquisitions of licenses to develop multi-platform games for INDYCAR, BTCC and the WEC series, including the iconic 24 hours of Le Mans race, we expect our future revenue streams will become further diversified and consist of revenues from multiple games and different franchises. Our recent product releases include: (i) our upgrade to ourNASCAR game for next generation consoles and PCs,NASCAR 21: Ignition, onOctober 28, 2021 , and a 2022 Season Expansion update onOctober 6, 2022 ; (ii) NASCAR Heat Ultimate Edition+ on Nintendo Switch onNovember 19, 2021 , the first-everNASCAR title to come to Nintendo Switch; (iii) the full release of the KartKraft kart racing simulator onJanuary 26, 2022 for the PC; (iv) NASCAR Rivals, the official game of the 2022 NASCAR Cup Series season, on Nintendo Switch onOctober 14, 2022 and (v) four quarterly content releases in 2022 for our rFactor 2 realistic racing simulation game. In the first quarter of 2022, we modified our product release schedule such that our most recentNASCAR console and PC title for 2022 was delivered as an update to our 2021 release through the 2022 Season Expansion update downloadable content (DLC) and the anticipated timing of some of our other planned product releases for other racing series have been moved to later periods. TheNASCAR , INDYCAR, BTCC and Le Mans game experiences are currently under development, and we currently anticipate releasing game experiences for these racing series in 2023 and 2024. Going forward, we intend to expand our license arrangements to other internationally recognized racing series and the platforms we operate on. We believe that having a broader product portfolio will improve our operating results and provide a revenue stream that is less cyclical based on the release of a single game per year.
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,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 derive significant revenues from sales of our physical gaming products to a very limited number of distribution partners. For the years endedDecember 31, 2022 and 2021, we sold substantially all of our physical disk products for the retail channel through a single distribution partner, which represented approximately 9% and 28% of our total revenue for the years endedDecember 31, 2022 and 2021, respectively. See "Risk Factors-Risks Related to Our Business and Industry-The importance of retail sales to our business exposes us to the risks of that business model" and "Risk Factors-Risks Related to Our Business and Industry-We primarily depend on a single third-party distribution partner to distribute our games for the retail channel, and our ability to negotiate favorable terms with such partner and its continued willingness to purchase our games is critical for our business" in Part I, Item 1A of this Report for additional information regarding the importance of retail sales and our distribution partners to our business. 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 and interest rates, recessionary factors (such as the impact that higher energy prices will have on consumer purchasing behavior), supply chain constraints, labor supply issues, credit quality of our receivables and foreign currency exchange rates. 53 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 asSony Interactive Entertainment Inc.'s ("Sony")PlayStation and Microsoft Corporation's ("Microsoft") Xbox consoles, which comprised approximately 40% and 44% of our total revenue for the years endedDecember 31, 2022 and 2021, respectively. For the years endedDecember 31, 2022 and 2021, the sale of products for Microsoft Windows via Steam comprised approximately 21% and 11% of our total revenue, respectively, and the sale of products for mobile platforms comprised approximately 5% for both the years endedDecember 31, 2022 and 2021. 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 inNovember 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 the years endedDecember 31, 2022 and 2021, approximately 68% and 61%, respectively, of our revenue from sales of video games for game consoles and PCs was through digital channels. We believe this trend of increasing direct digital downloads is primarily due to benefits relating to convenience and accessibility that digital downloads provide. In addition, as part of our digital business strategy, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through in-game purchases and extra content. Esports We are striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing games as well as on behalf of third-party racing game developers and publishers. 2022 was another successful year for our Esports segment, which began with the grand finale of the second running of the 24 Hours of Le Mans Virtual in January, the INDYCAR-Motorsport Games Pro Challenge in February and the continuation and re-brand of elite single seater esports rFactor 2 Formula Pro. The year concluded with the first 4 rounds of the 2022-23 Le Mans Virtual Series in September, October, November and December. In addition, we organized competitions to drive user engagement on our rFactor 2 platform, as well as successfully delivering onsite esports activations with rFactor 2 at selected BTCC events in Autumn. For 2022, our esports events had a cumulative total of approximately 2.3 million video views with approximately 6.3 million minutes watched. Subsequently, in the first quarter of 2023, we announced our viewership figures for the 2022-23 Le Mans Virtual Series, including the 24 Hours of Le Mans Virtual, which had a global audience of 8.5 million across television (TV)/over-the-top (OTT) channels, 36 million social media impressions and over 10 million video views across the full 5-race season.
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 Part I, Item 1A of this Report for additional information. 54 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 generationNASCAR console/PC games, we have focused on developing titles for Nintendo's Switch platform. We released NASCAR Heat Ultimate Edition+ on Nintendo Switch in the fourth quarter of 2021 and followed this up with the release of NASCAR Rivals on Nintendo Switch in the fourth
quarter of 2022. Recurring Revenue Sources
Our business model includes revenue that we deem recurring in nature, such as revenue from our annualized sports franchise (currentlyNASCAR ) for game consoles, PC, and mobile platforms. We deem this recurring because many existing game owners purchase, sometimes free of charge, annual updates, which includes updated drivers, liveries, and cars as they are released. We have been able to forecast the revenue from this area of our business with greater relative confidence than for new games, services, and business models. As we continue to incorporate new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of
our
business.
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. 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.
55 Cost of Revenues Cost of revenues for our Gaming segment is primarily comprised of royalty expenses attributable to our license arrangement withNASCAR and certain other third parties relating to ourNASCAR 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. Cost of revenues for our esports segment consists primarily of the cost of event staffing and event production. Sales and Marketing Sales and marketing expenses are primarily composed of salaries, benefits and related taxes of our in-house marketing teams, advertising, marketing, and promotional expenses, including fees paid to social media platforms,Motorsport Network and other websites where we market our products. Development Development expenses consist of the cost to develop the games we produce, which includes salaries, benefits, and operating expenses of our in-house development teams, as well as consulting expenses for any contracted external development. Development expenses also include expenses relating to our software licenses, maintenance, and studio operating expenses. General and Administrative
General and administrative expenses consist primarily of salaries, benefits and other costs associated with our operations including, finance, human resources, information technology, public relations, legal audit and compliance fees, facilities, and other external general and administrative services.
Depreciation and Amortization
Depreciation and amortization expenses include depreciation on fixed assets (primarily computers and office equipment), as well as amortization of definite lived intangible assets acquired through our various acquisitions.
Results of Operations
Year Ended
Revenue
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 and
Consolidated 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 prior
year.
Gaming segment revenues represented 89% and 95% of our total 2022 and 2021 revenues, respectively, decreasing by$5.1 million , or 35.9%, when compared to the 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 the release of oneNASCAR game title in 2022, compared to two in 2021, resulting in lower volumes of sales, as well as less favorable pricing and higher than expected retail pricing concessions on existing games in our product portfolio. Specifically, the change in digital game sales was driven by a$3.4 million reduction inNASCAR title sales on consoles and mobile platforms, partially offset by a$0.8 million and$0.2 million increase in rFactor 2 and KartKraft title sales, respectively, on PC platforms. The reduction in retail game sales of$3.4 million was due to$1.4 million in lower retail sales ofNASCAR titles in 2022, as well as$2.0 million in higher-than-expected sales allowances and retail pricing concessions onNASCAR games. These declines were partially offset by$0.6 million in revenues earned through the development of simulation platforms for third-parties and$0.1 million in license fee revenues. 56
Esports segment revenues represented 11% and 5% of our total 2022 and 2021 revenues, respectively, increasing by$0.4 million , or 46.1%, when compared to the prior year. The increase in Esports segment revenue was primarily due to higher sponsorship revenue of$0.3 million from our Le Mans Virtual Series, which started its 2022-23 season inSeptember 2022 , and an increase of$0.1 million 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 and Consolidated Cost of Revenues$ 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 and 2021, respectively, a decrease of$2.6 million , or 34.1%, when compared to the prior year. Gaming segment cost of revenues represented 82% and 94% of our total 2022 and 2021 cost of revenues, respectively, decreasing by$3.0 million , or 42.0%, when compared to the prior year. The decrease in Gaming segment cost of revenues was primarily driven by a$1.7 million reduction in game production costs, a$1.4 million reduction in royalty payments and a$0.1 million reduction in direct marketing costs, partially offset by a$0.1 million increase in license and developed technology amortization expense and a$0.1 million increase in development costs to support the development of simulation platforms for third-parties. The decrease in production costs was due to only oneNASCAR title being released in 2022, compared to twoNASCAR titles in 2021, and the reduction in 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 and 2021 cost of revenues, respectively, increasing by$0.4 million , or 80.4%, when compared to the prior year. The increase in Esports segment cost of revenues was primarily driven an increase in production costs associated with the Le Mans Virtual 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 and Consolidated Gross Profit$ 5,364,242 $ 7,546,375 $ (2,182,133 ) (28.9 )% Gaming - Gross Profit Margin 55.4 % 50.6 % Esports - Gross Profit Margin 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 prior year. Gross profit margin was 52.0% in 2022, compared to 50.1% in 2021, driven primarily by lower game production costs and royalty fees in the Gaming segment. 57 Gaming segment gross profit was$5.1 million for 2022, compared to$7.2 million for 2021, representing a gross profit margin of 55.4% for 2022 and 50.6% for 2021. The change in gross profit margin was partially driven by changes in the sales mix, which included third-party development revenues for the first time in 2022 and accounted for approximately 180 basis point year over year improvement. The remaining change in gross profit margin was primarily due to lower production costs and royalty expense, as a result of releasing oneNASCAR title in 2022 compared to twoNASCAR titles in 2021.
Esports segment gross profit was
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 Marketing Sales and marketing expenses were$6.2 million and$6.5 million for 2022 and 2021, respectively, representing a$0.3 million , or 4.7%, decrease when compared to the prior year. The reduction in sales and marketing expense was primarily driven by a$1.0 million reduction in external marketing expense, which was partially offset by an increase in payroll expense of$0.7 million as a result of higher headcount when compared to the prior year. Development
Development 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 compared to the prior year. The incremental development expenses were primarily driven by higher compensation due to additional headcount and reflect increased internal development efforts to produce and support existing games in our product portfolio, as well as the development of future games such as the next INDYCAR title. General and Administrative General and administrative ("G&A") expenses were$13.8 million and$25.4 million for 2022 and 2021, respectively, a decrease of$11.6 million , or 45.8%, when compared to the prior year. The reduction in G&A expense was primarily driven by a$8.8 million reduction in stock based compensation expense, a$2.5 million reduction in bonus expense due to IPO related bonus expense incurred in 2021 that did not repeat in 2022, a$1.3 million reduction in legal, consultant and other professional expenses that were incurred in connection with the 2021 IPO that did not repeat in 2022, a$0.7 million reduction in payroll and employee related expenses, following certain headcount reductions in 2022, and a$0.2 million reduction in software expenditures. These were partially offset by an increase of$1.4 million in lawsuit settlement expenses, driven by a$1.1 million loss contingency reserve and a$0.3 million settlement expense, as well as a$0.2 million increase in rental expense and a$0.3 million increase in insurance related expense. See Note 13 - Commitments and Contingencies - Litigation in our consolidated financial statements for additional information regarding such legal proceeding.
Impairment of
Impairment of goodwill was$4.8 million and$0 in 2022 and 2021, respectively. The impairment loss primarily relates to goodwill acquired in connection with the acquisition of Studio397 that was deemed impaired as a result of impairment assessments performed during the year. The triggers for the assessments was primarily revisions made in the first quarter of 2022 to the scope and timing of certain product releases included in our product roadmap, as well as a significant reduction in the Company's market capitalization since the date of the last annual impairment assessment. Changes to the forecasted revenues and discount rates, as a result of the triggers identified, were the primary drivers for the change in fair value since the annual assessment. 58
Impairment of Intangible Assets
Impairment of indefinite-lived intangible assets was$3.5 million and$0.3 million in 2022 and 2021, respectively. The triggers for the assessments were the changes to the Company's product roadmap and the Company's market capitalization, as referenced above. The indefinite-lived intangible asset impairment losses primarily relate to the rFactor 2 trade name and the Le Mans Video Gaming License and are mainly driven by a reduction in expected future revenues following changes made to the Company's product roadmap in the first quarter of 2022, as well as changes to the discount rates and royalty rates
used when valuing the assets. Impairment of finite-lived intangible assets was$1.3 million and$0 in 2022 and 2021, respectively. The triggers for the assessments were the changes to the Company's product roadmap and the Company's market capitalization, as referenced above. The finite-lived intangible asset impairment losses relate to the rFactor 2 technology and was primarily driven by a change in the technical obsolescence assumption used when determining the fair value of the asset.
Depreciation and Amortization
Depreciation and amortization expenses were$0.4 million and$0.3 million for 2022 and 2021, respectively, an increase of$0.1 million when compared to the prior year. The increase was primarily due to additional depreciation expense on fixed assets acquired during 2022. Interest Expense Interest 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 was primarily due to the ongoing non-cash interest accretion of our INDYCAR and
BTCC license liabilities.
Gain Attributable to
The gain attributable to equity method investment in theLe Mans Esports Series Ltd was$0 for 2022 and$1.4 million for 2021. The decrease was due to the discontinuation of equity method accounting as we began to fully consolidateLe Mans Esports Series Ltd upon acquiring a majority interest during the first
quarter of 2021. Other Expenses, net Other expenses, net was$0.7 million for 2022, compared to$0.05 million for 2021. Other expenses, net of$0.7 million for 2022 was primarily comprised of a foreign currency loss of$0.8 million , incurred remeasuring transactions denominated in a currency other thanU.S. dollars, partially offset by$0.2 million in rental income from the sub-lease of ourCharlotte, NC office space. For 2021, other expenses, net of$0.05 million was primarily comprised of$0.2 million in rental income from the sub-lease of ourCharlotte, NC office space, offset by$0.25 million of foreign currency losses incurred remeasuring transactions denominated in a currency other thanU.S. dollars and translating toU.S. dollars the results of our foreign operations that are denominated in a functional currency other thanU.S. dollars.
Other Comprehensive Income (Loss)
Other comprehensive income was$0.01 million for 2022, compared to comprehensive loss of$1.0 million for 2021. The$1.1 million increase was primarily due to activity in ourU.K. , Australian, Russian andNetherlands subsidiaries and represents unrealized foreign currency translation adjustments.
Net Loss Attributable to Non-Controlling Interest
For the year endedDecember 31, 2022 , the loss attributable to the non-controlling interest decreased by$0.3 million , or 57%, to a loss of$0.8 million as compared to a loss of$0.5 million for the year endedDecember 31, 2021 .
Liquidity and Capital Resources
Liquidity Since our inception and prior to our IPO, we financed our operations primarily through advances fromMotorsport Network , which were subsequently incorporated into a line of credit provided byMotorsport Network pursuant to the$12 million Line of Credit, as described below. OnJanuary 15, 2021 , we completed our IPO of 345,000 shares of Class A common stock at a price to the public of$200 per share, which includes the exercise in full by the underwriters of their option to purchase from us an additional 45,000 shares of Class A common stock. We received net proceeds of approximately$63.1 million from the IPO, after deducting underwriting discounts and offering expenses paid by us in 2020 and 2021.
Following our IPO, we have financed our operations primarily through cash
generated from operations, advances from
59
We measure our liquidity in a number of ways, including the following:
December 31 ,December 31, 2022 2021
Cash and Cash Equivalents
For the year endedDecember 31, 2022 , the Company incurred a net loss of$36.8 million , negative cash flows from operations of approximately$19.5 million and an accumulated deficit of$74.0 million . As ofDecember 31, 2022 , we had cash and 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 resulted in aggregate net proceeds to the Company of approximately$11.3 million . The proceeds are intended for use in the development of multiple games, working capital and general corporate purposes. We expect to continue to incur significant operating expenses and, as a result, will need to grow revenues to reach profitability and positive cash flows. We expect to continue to incur losses for the foreseeable future as we continue to develop our product portfolio and invest in developing new video game titles. Based on the Company's cash and cash equivalents position and the Company's average cash burn, we do not believe we have sufficient cash on hand to fund our operations for the remainder of 2023 and that additional funding will be required in order to continue operations. 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 potential equity and/or debt financing arrangements and similar transactions and consider these to be viable options to support future liquidity needs, provided that 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, 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 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 or similar transactions, achieving cost reductions by maintaining and enhancing cost control initiatives, such as those that we expect to achieve through the 2022 Restructuring Program and/or further adjusting our product roadmap to reduce near term 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, economic conditions in the capital markets, especially for technology companies, 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 from
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 or similar transactions, additional capital contributions and/or loans not being available fromMotorsport Network or affiliates and/or third parties, or that the transactions may not be permitted under the terms of our various debt instruments then in effect, such as due to restrictions on the incurrence of debt, incurrence of liens, asset dispositions and related party transactions. In addition, such actions, if taken, may not enable us to satisfy our cash requirements if the actions that we are able to consummate do not generate a sufficient amount of additional capital. 60 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 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 the Company's existing or new products or from its advertising and/or marketing plans; or if the Company's expenses, including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the anticipated level of expenses, 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 the accompanying consolidated financial statements to this Report are issued. The factors described above, in particular the available cash on hand to fund operations over the next year, have raised substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Accordingly, the consolidated financial statements have been prepared on a basis that assumes the Company will continue as a going concern and which contemplates the realization of assets and satisfaction of liabilities and commitments in the ordinary course of business.
Cash Flows From Operating Activities
Net cash used in operating activities for the year endedDecember 31, 2022 and 2021 was$19.5 million and$20.9 million , respectively. The net cash used in operating activities for the year endedDecember 31, 2022 was primarily a result of cash used to fund a net loss of$36.8 million , adjusted for net non-cash adjustments in the amount of$15.4 million and$1.6 million of cash provided by changes in the levels of operating assets and liabilities. Net cash used in operating activities for the year endedDecember 31, 2021 was primarily due to net loss of$33.7 million , adjusted for net non-cash adjustments of$14.4 million and$1.6 million of cash used by changes in the levels of operating assets and liabilities.
Cash Flows From Investing Activities
Net cash used in investing activities for the year endedDecember 31, 2022 , was$0.3 million , which was primarily attributable to the purchase of property and equipment. During the year endedDecember 31, 2021 , net cash used in investing activities was$14.4 million , which was attributable to approximately$12.8 million paid in connection with the acquisition of Studio397 and$1.0 million paid in connection with the acquisition of KartKraft, and approximately$0.8 million in purchases of property and equipment, which was partially offset by$0.2 million of net cash acquired in the purchase of an additional controlling interest inLe Mans Esports Series Ltd.
Cash Flows From Financing Activities
Net cash provided by financing activities during the year endedDecember 31, 2022 and 2021 was$1.7 million and$49.3 million , respectively. Cash flows provided by financing activities for the year endedDecember 31, 2022 were primarily attributable to$3.8 million in advances fromMotorsport Network under the$12 million Line of Credit inSeptember 2022 , partially offset by$1.7 million in payments of purchase commitment liability relating to a portion of the deferred installment amount due in connection with our acquisition of Studio397 and$0.4 million in game license payments. During the year endedDecember 31, 2021 , net cash provided by financing activities was primarily attributable to approximately$63.1 million of net cash provided by the sale of Class A Common stock in our IPO,$2.2 million in advances from affiliates, partially offset by$13.0 million of net repayments toMotorsport Network under the$12 million Line of Credit, and$3.0 million of payments for the acquisition of additional ownership interests from non-controlling shareholders. 61
Promissory Note Line of Credit
OnApril 1, 2020 , the Company entered into a promissory note (the "$12 million Line of Credit") with the Company's majority stockholder,Motorsport Network , that provides the Company with a line of credit of up to$10 million (which was subsequently increased to$12 million pursuant to an amendment executed inNovember 2020 ), at an interest rate of 10% per annum, the availability of which is dependent onMotorsport Network'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 ofMotorsport Network . The Company may prepay the$12 million Line of Credit in whole or in part at any time or from time to time without penalty or charge. In the event the Company or any of its subsidiaries consummates certain corporate events, including any capital reorganization, consolidation, joint venture, spin off, merger or any other business combination or restructuring of any nature, or if certain events of default occur, the entire principal amount and all accrued and unpaid interest will be accelerated and become payable. Additionally, see "Risk Factors - Risks Related to Our Financial Condition and Liquidity - Limits on the Company's borrowing capacity under the$12 million Line of Credit may affect the Company's ability to finance its operations" in Part I, Item 1A of this Report. OnSeptember 8, 2022 , the Company entered into a support agreement withMotorsport Network (the "Support Agreement") pursuant to whichMotorsport Network issued approximately$3 million (the "September 2022 Cash Advance") to the Company in accordance with the$12 million Line of Credit, the proceeds of which the Company is using for general corporate purposes and working capital. In the Support Agreement,Motorsport Network and the Company terminated the Side Letter Agreement datedSeptember 4, 2020 and agreed that untilJune 30, 2024 ,Motorsport Network would not demand repayment of theSeptember 2022 Cash Advance or other advances under the$12 million Line of Credit unless and until such time that any of the following shall occur or exist: (i) the Company enters into a new financing arrangement (whether debt, equity or otherwise) under which the Company is then able to draw or provides the Company with available cash in excess of amounts required in the Company's reasonable judgment to run its operations in the ordinary course of business; (ii) the Company generates from operations available cash in excess of amounts required in the Company's reasonable judgment to run its operations in the ordinary course of business; or (iii) the Company's independent auditors issue an unqualified opinion on its financial statements and the Company's repayment of the advances, in whole or in part, would not otherwise cause the independent auditor to issue a going concern qualified opinion. Upon the occurrence of any of the foregoing events, the Company shall prepay on such date principal amount of theSeptember 2022 Cash Advance and other advances under the$12 million Line of Credit then outstanding in 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 a going concern qualified opinion, together with interest accrued but unpaid on the unpaidSeptember 2022 Cash Advance and other advances, which repayment obligation shall continue until all such advances under the$12 million Line of Credit are paid in full. The entire aggregate principal amount of theSeptember 2022 Cash Advance and the other advances under the$12 million Line of Credit, together with interest accrued but unpaid thereon, shall also become immediately and automatically due and payable, and the$12 million Line of Credit shall immediately and automatically terminate, in each case without any action required byMotorsport Network , if (i) the Company experience an event of default under any other debt instrument, agreement or arrangement; or (ii) any final judgment or final judgments for the payment of money in excess (net of amounts covered by third-party insurance with insurance carriers who have not disclaimed liability with respect to such judgment or judgments) of$500,000 or its foreign currency equivalent is entered against the Company or any subsidiary and is not discharged and either (a) an enforcement proceeding has been commenced by any creditor upon such judgment or decree or (b) there is a period of 60 days following the entry of such judgment or decree during which such judgment or decree is not discharged, waived or the execution thereof stayed and, in the case of (b), such default continues for 60 consecutive days. During the year endedDecember 31, 2022 , the Company was not required to make any repayments toMotorsport Network under theSeptember 2022 Cash Advance or the$12 million Line of Credit. As ofDecember 31, 2022 , the Company owed approximately$3.8 million of principal and accrued interest on the$12 million Line of Credit, compared with approximately$0 as ofDecember 31, 2021 . OnJanuary 30, 2023 andFebruary 1, 2023 , the Company entered into certain debt-for-equity exchange agreements withMotorsport Network pursuant to which the entire outstanding amount due under the$12 million Line of Credit was cancelled in exchange for an aggregate of 780,385 shares of the Company's Class A common stock issued toMotorsport Network . See Note 17 - Subsequent Events in our consolidated financial statements for further information. Given the state of the financial markets, the Company continues to assess its exposure to any potential non-performance byMotorsport Network and believes that there is a substantial likelihood thatMotorsport Network may not fulfill the Company's future borrowing requests. 62 Other Financing Activity OnDecember 9, 2022 , the Company entered into a stock purchase commitment agreement (the "Alumni Purchase Agreement") withAlumni Capital LP ("Alumni Capital "), which provides that the Company may sell toAlumni Capital up to$2,000,000 of shares (the "commitment amount") of the Company's Class A common stock, through the commitment period expiring onDecember 31, 2023 , or earlier if the commitment amount is reached. Furthermore, the Company has an option to increase the commitment amount up to$10,000,000 of shares of the Company's Class A common stock, subject to certain terms and conditions. OnJanuary 6, 2023 , pursuant to the Alumni Purchase Agreement, the Company issued 90,415 shares of the Company's Class A common stock toAlumni Capital , with an approximate fair market value of$0.4 million . OnJanuary 19, 2023 , the Company issued 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's Class A common stock toAlumni Capital , with an approximate fair market value of$0.1 million . As of the date of this Report, the remaining commitment amount under the Alumni Purchase Agreement amounted to approximately$1.3 million . OnFebruary 1, 2023 , the Company issued 183,020 shares of the Company's Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately$3.9 million (the "$3.9 million RDO"), before deducting placement agent fees and other offering expenses payable by the Company.H.C. Wainwright & Co., LLC ("Wainwright") acted as the exclusive placement agent for the$3.9 million RDO, pursuant to the engagement letter with the Company, dated as ofJanuary 9, 2023 . In connection with the$3.9 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of$50,000 and closing fees of$15,950 . The Company has also issued to Wainwright warrants to purchase up to 10,981 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the$3.9 million RDO, at an exercise price of$26.75 per share and will expire five years from the closing of the$3.9 million RDO. OnFebruary 2, 2023 , the Company issued 144,366 shares of the Company's Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately$3.4 million (the "$3.4 million RDO"), before deducting placement agent fees and other offering expenses payable by the Company. Wainwright acted as the exclusive placement agent for the$3.4 million RDO. In connection with the$3.4 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of$25,000 and closing fees of$15,950 . The Company has also issued to Wainwright warrants to purchase up to 8,662 shares of Class A Common Stock, which is equal to 6.0% of the aggregate number of shares of Class A Common Stock placed in the$3.4 million RDO, at an exercise price of$29.375 per share and will expire five years from the closing of the$3.4 million RDO. OnFebruary 3, 2023 , the Company issued 232,188 shares of the Company's Class A common stock in a registered direct offering priced at-market under NASDAQ rules, with a fair market value of approximately$4.0 million (the "$4.0 million RDO"), before deducting placement agent fees and other offering expenses payable by the Company. Wainwright acted as the exclusive placement agent for the$4.0 million RDO. In connection with the$4.0 million RDO, the Company paid Wainwright a cash transaction fee equal to 7.0% of the aggregate gross proceeds from the registered direct offering, non-accountable expenses of$25,000 and closing fees of$15,950 . The Company has also issued to Wainwright 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$4.0 million RDO. 63 Capital Expenditures
The nature of the Company's operations does not require significant expenditures
on capital assets, nor does the Company typically enter into significant
commitments to acquire capital assets. The Company does not have material
commitments to acquire capital assets as of
Material Cash Requirements As ofDecember 31, 2022 , our material cash requirements were as follows (in thousands): Payments due by period Less than 1-3 3-5 More than Total 1 Year Years Years 5 Years Operating Activities: Operating lease obligations$ 1,076,951 $ 432,978 $ 594,998 $ 48,975 $ - Minimum payment guarantees 18,120,336 2,698,000 5,739,136 6,433,200 3,250,000 Other 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 $ 3,250,000 The Company intends to fund these material cash requirements with a combination of cash generated from operations, as well as future funding arrangements that as ofDecember 31, 2022 have not been determined. There can be no assurance that we will be able to obtain funds on commercially acceptable terms, if at all. Please see "-Liquidity and Going Concern" above and Note 1 -Business Organization , Nature of Operations and Risks and Uncertainties - Liquidity in our consolidated financial statements for further details on the Company's going concern position as ofDecember 31, 2022 . As a normal part of our business, depending on market conditions, pricing and overall growth strategy, we consider potential acquisitions. If any of these opportunities were to occur, they would be financed through the incurrence of additional indebtedness, issuance of additional shares or through cash flows from operations, provided that we are able to obtain such funds on terms acceptable to us.
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. 64
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted inthe United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, each as of the date of the financial statements, and revenues and expenses during the periods presented. On an ongoing basis, management evaluates their estimates and assumptions, and the effects of any such revisions are reflected in the financial statements in the period in which they are determined to be necessary. Management bases their estimates on historical experience and on various other factors that they believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our consolidated financial statements. While our significant accounting policies are more fully described in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements, we believe that certain of these policies and estimates are deemed critical, as they require management's highest degree of judgment, estimates and assumptions. We have discussed these accounting policies and estimates with the Audit Committee of our Board of Directors. We believe our most critical accounting policies and estimates are as follows:
Valuation of
We review goodwill at the reporting unit level and indefinite-lived intangible assets for impairment annually or when events or circumstances dictate, more frequently. The impairment review consists of a qualitative assessment to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit or the identified indefinite-lived intangible asset is less than its carrying amount. Factors considered in the qualitative assessment include general economic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific factors such as changes to the product road map and restructuring changes, and changes in the Company's share price. If the Company elects to bypass the qualitative assessment, or if the Company concludes that it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value, then the Company performs a one-step quantitative impairment test by comparing the fair value of a reporting unit to its carrying value, in order to determine if goodwill is impaired, and for indefinite-lived intangible assets we compare their carrying value to their fair value. We recognize a loss on impairment in the event the reporting unit or indefinite-lived intangible assets carrying value exceeds its fair value. Where a one-step quantitative assessment is required for goodwill, we typically estimate fair value of a reporting unit by utilizing discounted cash flow models, which may also include a combination of a market-based valuation approach. The estimation of fair value utilizing a discounted cash flow model includes uncertainties that require our significant judgment when making assumptions of expected revenues, cost of revenues, and development, marketing, and general administrative expenses. The principal assumptions used in the discounted 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 results for the upcoming fiscal year as a base. We discount the projected cash flows using rates specific to the reporting unit based on its weighted-average cost of capital. 65 If the fair value of the reporting unit exceeds its carrying value, no write-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 its net assets, an impairment is recognized based on the amount by which the carrying value of a reporting unit exceeds its fair value, not to exceed the total amount of goodwill allocated to such reporting unit. Where a one-step quantitative assessment is required for our indefinite-lived intangible 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 for trade names, and a discounted cash flow model for our other indefinite-lived intangible assets. The principal assumptions used in our cash flow models and relief 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 recognized in 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 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 the interim and
annual impairment reviews completed during the year 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. Intangible assets assigned finite useful lives are amortized on a straight-line basis over their estimated useful lives.
Sales Allowances and Price Protection Reserves
We evaluate the collectability of our accounts receivable continuously
throughout the year and reduce revenue for estimated future sales allowances and
price protections, which may occur with distributors and retailers ("channel
partners").
Price protection represents our practice to provide channel partners with a credit allowance to lower their wholesale price on a particular game unit that they have not resold to customers. The amount of the price protection for permanent markdowns is the difference between the original wholesale price and the new reduced wholesale price. Credits are also given for short-term promotions that temporarily reduce the wholesale price. When evaluating the adequacy of our sales allowances and price protection reserves, 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 customer demand, acceptance of products, and other related factors. In addition, the Company monitors the volume of sales to its channel partners and their inventories, as substantial overstocking in the distribution channel could result in higher-than-expected returns or higher price protection in subsequent periods. For the year endedDecember 31, 2022 , the principal assumptions used to develop our sales allowances and price protection reserves were: - Expected future selling prices - Expected future sell through of units in the channel
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 consolidated financial statements (Note 2 - Summary of Significant Accounting Policies in our consolidated financial statements for the years endedDecember 31, 2022 and 2021).
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