10-K
1
form10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2020
or
[ ] TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from ___________ to ___________
Commission
file number: 001-39868
Motorsport
Games Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Address of Principal Executive Offices Zip Code
Registrant’s
telephone number, including area code: (305) 507-8799
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No
[X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit such files). Yes [ ] No [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [X] Smaller reporting company [X]
Emerging growth company [X]
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The
registrant did not have a public float on the last business day of its most recently completed second fiscal quarter because there
was no public market for the registrant’s common equity as of such date.
As
of March 22, 2021, the registrant had 10,780,633 shares of Class A common stock and 7,000,000 shares of Class B common
stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement relating to its 2021 annual meeting of stockholders are incorporated by reference
into Part III of this Annual Report on Form 10-K where indicated. Such proxy statement will be filed with the U.S. Securities
and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.
Motorsport
Games Inc.
Form
10-K
For
the Fiscal Year Ended December 31, 2020
TABLE
OF CONTENTS
Page
PART I
Item 1 Business 5
Item 1A Risk Factors 13
Item 1B Unresolved Staff Comments 36
Item 2 Properties 36
Item 3 Legal Proceedings 36
Item 4 Mine Safety Disclosures 37
PART II
Item 6 Selected Financial Data 38
Item 7A Quantitative and Qualitative Disclosures About Market Risk 47
Item 8 Financial Statements and Supplementary Data 47
Item 9A Controls and Procedures 48
Item 9B Other Information 49
PART III
Item 10 Directors, Executive Officers and Corporate Governance 50
Item 11 Executive Compensation 50
Item 14 Principal Accountant Fees and Services 50
PART IV
Item 15 Exhibits and Financial Statements 51
Exhibit Index 51
Signatures 57
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain
statements in this Annual Report on Form 10-K (this “Report”) of Motorsport Games Inc. (the “Company,”
“Motorsport Games,” “we,” “us” or “our”) are forward-looking statements within
the meaning of federal securities laws, including statements that involve expectations, plans or intentions, such as, but not
limited to, those relating to our future business, future results of operations or financial condition, including with respect
to the ongoing effects of the coronavirus (“COVID-19”) pandemic, new or planned products or offerings, industry trends,
potential acquisitions and management strategies. We use words such as “could,”
“would,” “may,” “might,” “will,” “expect,” “likely,” “believe,”
“continue,” “anticipate,” “estimate,” “intend,” “plan,” “project”
and other similar expressions to identify some forward-looking statements, but not all forward-looking statements include these
words. The forward-looking statements contained in this Report are based on assumptions that we have made in light of our industry
experience and our perceptions of historical trends, current conditions, expected future developments and other factors we believe
are appropriate under the circumstances. As you read and consider this Report, you should understand that these statements are
not guarantees of performance or results. They involve risks, uncertainties (many of which are beyond our control) and assumptions.
Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors
could affect our actual operating and financial performance and cause our performance to differ materially from the performance
anticipated in the forward-looking statements. Accordingly, any such statements are qualified in their entirety by reference to
the information described under Part I, Item 1A, “Risk Factors” of this Report
and elsewhere in this Report.
Additionally,
there are risks and uncertainties described from time to time in the reports that we file with the Securities and Exchange Commission
(the “SEC”). Should one or more of these risks or uncertainties materialize or should any of these assumptions prove
to be incorrect, our actual operating and financial performance may vary in material respects from the performance projected in
these forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except
as required by law, we undertake no obligation to update any forward-looking statement contained in this Report to reflect events
or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances,
except as otherwise required by law. New factors that could cause our business not to develop as we expect emerge from time to
time, and it is not possible for us to predict all of them. Further, we cannot assess the impact of each currently known or new
factor on our results of operations or the extent to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
RISK
FACTORS SUMMARY
We
are subject to a variety of risks and uncertainties, including risks related to our business and industry; risks related to our
relationship with Motorsport Network, LLC (“Motorsport Network”); risks related to our Company; risks related to the
ownership of our common stock; and certain general risks, which could have a material adverse effect on our business, financial
condition, results of operations and cash flows. These risks include, but are not limited to, the following principal risks:
For
a more complete discussion of the material risk factors applicable to us, see “Risk Factors” in Part I, Item 1A of
this Report.
PART
I
Item 1.Business
Company
Overview
Motorsport
Games is a leading racing game developer, publisher and esports ecosystem provider of official motorsport racing series throughout
the world, including NASCAR, the iconic 24 Hours of Le Mans endurance race (“Le Mans”) and the associated FIA World
Endurance Championship (the “WEC”), the British Touring Car Championship (the “BTCC”) and others. Through
the support of our sole member, Motorsport Network, the largest global media company in the motorsport industry, Motorsport Games’
corporate mission is to create the preeminent motorsport gaming and esports entertainment ecosystem by delivering the highest
quality, most sophisticated and innovative experiences for racers, gamers and fans of all ages. Our products and services target
a large and underserved global motorsport audience. For 2019, Formula 1 estimates that its total global television audience reached
471 million unique viewers. Further, Le Mans estimates its total reach was approximately 100 million homes worldwide in 2019,
while NASCAR reached approximately 475 million households in 2019 and the BTCC reached approximately 62 million households in
2019.
Started
in 2018 as a wholly-owned subsidiary of the Motorsport Network, we are currently the official developer and publisher of the NASCAR
video game racing franchise and have obtained the exclusive license to develop multi-platform games for the BTCC, the Le Mans
race and the WEC. We develop and publish multi-platform racing video games including for game consoles, personal computer (PC)
and mobile platforms through various retail and digital channels, including full-game and downloadable content (sometimes known
as “games-as-a- service”). Since our formation, our NASCAR video games have sold over one million copies for game
consoles and PCs. For fiscal year 2020, substantially all of our revenue was generated from sales of our racing video games.
With
a projected 2.6 billion total mobile gamers globally for 2020 according to data from NewZoo, an industry source for games market
insight and analytics, we continue to focus on developing and further enhancing our multi- platform games for mobile phones. We
believe an important component of scaling our gamers and esports viewers is to offer a suite of official mobile games for each
of our various motorsport racing series. Currently, we offer NASCAR Heat Mobile for iOS and Android, which has had approximately
five million installs to date, and are in the process of developing two other NASCAR mobile games with projected release dates
in 2021. In addition, we have a roadmap for the development of more than a dozen anticipated mobile games, including multiple
mobile products for each of our racing series.
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. For fiscal year 2020, we facilitated 56
esports events, up from 22 esports events in 2019, which have included official esports events for NASCAR, 24 Hours of Le Mans,
the Official World Rallycross Esports Championship, FIA Formula E and other race series. The total number of people that have
watched our esports events in 2020 was approximately 55 million, up from a total of approximately 3.8 million viewers throughout
2019. Our revenue attributable to esports and other services comprised 1.6% of our total revenue during fiscal year 2020, but
we expect that revenue from this line of business will continue to increase and become material to our business moving forward.
We
believe that connecting virtual racing gamers and esports fans on a digital entertainment and social platform represents the greatest
opportunity to enhance the way that people learn, watch, play, and experience racing video games and racing esports. To that end,
we have developed a go-to destination for the virtual racing community called Traxion. We designed Traxion with the functionality
to enable users to run their own esports competitions in a simple, turn-key format, allowing groups to assemble around racing
games, leagues, individual ability, and various other metrics. We launched Traxion in beta in the first quarter of 2021.
Company
Background
Motorsport
Games was formed in 2018 by Motorsport Network as a wholly-owned subsidiary in connection with the acquisition by Motorsport Games
of a controlling interest in 704Games, which holds the exclusive license to be the official video game developer and publisher
for the NASCAR video game racing franchise. Simultaneously with the acquisition of 704Games in 2018, we extended the license for
10 years until December 31, 2029, subject to certain limited exceptions. In addition, we have the exclusive right to create and
organize esports leagues and events for NASCAR using our NASCAR racing video games, subject to certain limited exceptions.
In
2018, following the acquisition of 704Games, we acquired the leadership team of Virtually Entertained Limited, a UK-based esports
specialist. Subsequently, we entered into an agreement to facilitate the Le Mans Esports Series as part of a joint venture with
Automobile Club de l’Ouest (“ACO”), the organizer of the 24 Hours of Le Mans endurance race. Through our ownership
interest in this joint venture, which was increased to 51% from 45% in January 2021, we secured the rights to be the exclusive
video game developer and publisher for the Le Mans race and the WEC, which the Le Mans race is a part of, for a ten-year period.
In addition, through this joint venture with ACO, we have the right to create and organize esports leagues and events for the
Le Mans Esports Series.
In
2019, Motorsport Network entered into an exclusive partnership with The Codemasters Software Company Limited (“Codemasters”)
granting Motorsport Network worldwide rights (excluding China) to organize and manage official DiRT Rally 2.0 World Championship
and official GRiD eSport World Championship esports events. Through our relationship with Motorsport Network, we have organized
and managed these esports events on behalf of Motorsport Network, including the DiRT World Championship held at Autosport International
in January 2020, which attracted a large live crowd on site and audience of more than 75,000 online. In March 2020, we also announced
a partnership with Codemasters and International Management Group to create the Official World Rallycross Esports Championship.
In
May 2020, we secured a multi-year licensing agreement to exclusively develop and publish the video games for the BTCC racing series
across console, mobile and casual gaming channels. In addition, through this license, we have the right to create and organize
esports leagues and events for the BTCC racing series. The agreement expires on December 31, 2026.
In
January 2021, we completed our initial public offering (“IPO”). Prior to our IPO, Motorsport Games was a wholly-owned
subsidiary of Motorsport Network and, following the completion of our IPO, Motorsport Network continues to be our majority stockholder.
In
March 2021, we acquired all assets comprising the KartKraft computer video game from Black Delta Holdings PTY, Black Delta Trading
Pty Ltd and Black Delta IP Pty Ltd. (collectively, “Black Delta”). Through this acquisition, we plan to enter the
simulated kart-racing space. Black Delta’s development team is expected to form a new division, Motorsport Games Australia.
Our
Products
Game
Products Portfolio
We
develop and publish multi-platform racing video games including for game consoles, PCs and mobile platforms through various retail
and digital channels, including full-game and downloadable content. Our current video game product portfolio is comprised solely
of officially licensed NASCAR games. However, we have recently obtained the exclusive license to develop multi-platform games
for the BTCC, the Le Mans race and the WEC, with the goal of scaling not just the quantity of games per franchise, but also the
number of official franchises. Since acquiring a controlling interest in 704Games in 2018, we have published NASCAR Heat 3 and
NASCAR Heat 4, and developed completely in-house NASCAR Heat 5 for Xbox One, PlayStation 4 and PC, selling over one million copies
of these games in total. NASCAR Heat Mobile is our current game for iOS and Android with approximately five million total installs
to date.
To
maximize the potential of the NASCAR and future gaming franchises, including with Le Mans and the BTCC, we are making significant
investments in both technology and human talent to create one of the best racing game experiences. Starting in 2021, we plan to
introduce our next generation NASCAR console game, which will offer fans of the franchise and racing a “AAA” comparable
game that will provide one of the most authentic and engaging experiences possible. This new NASCAR offering has been internally
built from the ground up on our new proprietary racing-focused MSG Engine and will utilize Unreal Engine’s game engine,
paired with the latest car physics and other components. We believe that the MSG Engine, coupled with our exclusive licensing
and partnership rights with our existing racing series, will provide us an advantage over competing titles in the virtual racing
space and allow us to efficiently scale to other official racing game franchises in the near future.
In
conjunction with the launch of our new NASCAR console game, we plan to launch an updated NASCAR Heat Mobile in 2021, which is
our NASCAR mobile racing game that will also be developed internally. Given the recent popularity and fast growing nature of the
branded casual game experience, we also plan to introduce a slate of NASCAR branded casual gaming options, starting with the officially
licensed NASCAR “match three” game in 2021. In addition, we have a roadmap for the development of more than a dozen
anticipated mobile games, including multiple mobile products for each of our racing series.
Our
current video game catalog includes the following titles:
Game Image Overview Platforms Release Date
*(Name TBC)
Additionally,
multi-platform games for the BTCC and Le Mans are currently under development, and we currently anticipate releasing games for
these racing series in 2022.
As
our portfolio of official race franchise games grows, we plan to launch a direct-to-customer subscription model that will allow
privileged access to this portfolio of products as well as other loyalty perks. We anticipate that other virtual racing publishers
may want to participate in our subscription services, which would allow us to derive additional revenue from game titles that
are not developed or published by us.
Esports
Partnerships and Franchises
We
recognize the growing importance and business viability of esports, especially within the racing and motorsport genres. In recognition
of this importance, we manage and operate the esports platforms for numerous racing series and organizations. In 2020, we organized
and facilitated 22 e-racing series for the eNHPL, Le Mans Esports Series, 24 Hours of Le Mans Virtual, official DiRT Rally 2.0
World Championship, Official World Rallycross Esports Championship, ABB Formula E Race at Home Challenge, Race of Champions Virtual
Series and Karting Series. Throughout these 22 e-racing series during 2020, we broadcasted an aggregate of 56 events with a cumulative
total audience viewership of approximately 55 million, up from a total of approximately 3.8 million viewers throughout 2019.
Our
Audience and Our Community
Our
sole stockholder, Motorsport Network, is a leading global motorsport and automotive digital media platform. Founded in 2015, Motorsport
Network offers hundreds of millions of fans and enthusiasts around the globe a more thrilling and interactive experience to engage
with motorsports and cars by leveraging its technology, customer intelligence and brands. Since its inception, Motorsport Network
has established itself as the biggest integrated digital media company in the motorsports and automotive industry. Motorsport
Network houses a world- class team of employees, across 23 countries, that creates engaging, around-the-clock content and experiences
for passionate fans of motorsports and the automotive industry world-wide.
Pursuant
to a promotion agreement we entered into with Motorsport Network in August 2018, Motorsport Network provides us with exclusive
promotion services consisting of the use of its and its affiliates’ various media platforms to promote our business, organizations,
products and services in the racing video game market and related esports activities. Accordingly, our relationship with Motorsport
Network provides us access to its highly engaged, brand-loyal and affluent audience, including in the form of editorial coverage,
ad stack and special organic integrations that puts us in front of this targeted audience. We believe this allows us to cultivate
a passionate fanbase to engage in our offered products and services that is similar to the target audience for our racing game
products, and racing esports events and platform. We also believe this audience has an active lifestyle and a passion for everything
motorsport and auto-related with a strong track record of returning to trusted brands. The promotion agreement will remain in
effect until such date that Motorsport Network no longer holds at least 20% of the voting interest in Motorsport Games, at which
point we anticipate being able to extend or re-negotiate the promotion agreement on reasonable terms.
We
have also continued to develop our audience base through our marketing efforts as discussed below under “— Marketing,
Sales, and Distribution,” including through activities on Facebook, Twitter, Twitch, YouTube and other online social networks.
Additionally, in 2021, we plan to develop and produce live shows that include interactive broadcasts, live streaming, and social
media-oriented programs (including Twitch.tv, YouTube, Facebook, Motorsport.tv and other potential partners) for our own racing
esports channel which we expect to host on Traxion.
Revenues
We
currently generate revenue primarily by selling our racing video game products for video game consoles, PC, and mobile platforms
through various retail and digital channels, including full-game and downloadable content. The Company also generates revenue
from advertising partners and sponsors. We help our advertising partners and sponsors to generate a return on their investment
by creating engaging content that reaches our large and desirable audience. We utilize multiple points of contact with our players
and our audience and use every opportunity to upsell our products via our multiple platforms, in-game, email and original events.
Our
esports business generates revenues from sponsorships, advertising and media rights for events and competitions. In addition,
should audience patterns continue to grow and reach critical mass, we believe the esports business has the potential to generate
incremental revenues through the further sale of media rights to the Company’s esports events and competitions, as well
as merchandising and sports betting. In addition, our Traxion platform, which launched in beta in the first quarter of 2021, will
further help us monetize our audience through sponsorship and advertising revenues as we attract a large amount of traffic to
our community platform.
Marketing,
Sales, and Distribution
Many
of our products contain software that enables us to connect with our gamers directly, including through customized advertising
and in-game messaging based on customer preferences and trends. This provides a significant marketing tool that allows us to communicate
and market directly to our customers.
Other
direct marketing efforts include activities on Facebook, Twitter, Twitch, YouTube and other online social networks, online advertising,
public relations activity, print and broadcast advertising, coordinated in-store and industry promotions (including merchandising
and point of purchase displays), participation in cooperative advertising programs, direct response vehicles, and product sampling
through demonstration software distributed through the Internet or the digital online services provided by our partners. Our relationship
with Motorsport Network also provides us access to their highly engaged, brand-loyal and affluent audience, including in the form
of editorial coverage, ad stack and special organic integrations that puts us in front of this targeted audience.
From
time to time, we also receive marketing support from hardware manufacturers, producers of consumer products related to a game,
and retailers in connection with their own promotional efforts, as well as co-marketing from promotional partners. For example,
through our partnership with NASCAR, we benefit from having access to their extensive fanbase and social and digital media audience
to market our products through email marketing campaigns, coordinated social media advertising (including Facebook and Twitter)
and collaborated press releases, further expanding NASCAR and racing enthusiasts’ awareness of our products.
Additionally,
704Games is a 50/50 joint venture partner with an affiliate of the RTA to develop the eNHPL. RTA is an organization consisting
of 13 NASCAR Cup Series teams and supports the promotion of eNHPL events through their individual team social and digital platforms,
including by cross-posting Facebook livestreams of race broadcasts, adding eNHPL specific pages on team/sponsor websites, displaying
tune-in graphics and digital promotions, generating creative content with specific eNHPL drivers, supporting NASCAR Heat social
and digital content, integrating with existing partners and more. Most notable, the RTA teams include the eNHPL and NASCARHeat.com
logos on the contingency space on each of their NASCAR Cup Series vehicles for a number of NASCAR events. The contingency space
is located behind the front tire and in front of the car number, placing the logos in prime sponsorship space on the race car.
These logos are clearly visible on the cars during televised race action and are also clearly seen in Victory Lane photos, leading
to increased awareness about the eNHPL through this unique promotional channel.
We
also are able to sell directly to consumers through various digital platforms. Our products and content are available for consumers
to purchase and download at their convenience directly to their video game console, PC, or mobile device through our platform
partners, including Microsoft Corporation (“Microsoft”), Sony Interactive Entertainment Inc. (“Sony”),
Apple, Google and Steam. In the future, we expect to utilize our proprietary online gaming platform Traxion, to distribute most
of our content directly to consumers.
Our
physical gaming products are sold primarily through a distribution network with exclusive partners who specialize in the distribution
of games, including 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 currently derive, and expect
to continue to derive, significant revenues from sales of our products to a very limited number of distribution partners. For
the year ended December 31, 2020, through our main distribution partner we sold substantially all of our physical products for
the retail market, which represented approximately 34% of our total revenue.
Customer
Concentration
For
each of the years ended December 31, 2020 and 2019, our three largest customers accounted for approximately 78% of our revenue.
No other customer accounted for 10% or more of our revenues in those periods. For the years ended December 31, 2020 and 2019,
one customer accounted for approximately 82% and 83% of our accounts receivable, respectively. No other customer accounted for
10% or more of our accounts receivable in those periods. A reduction in sales from or loss of these customers would have a material
adverse effect on the Company’s results of operations and financial condition.
Digital
Marketing Strategy
At
Motorsport Games, we believe that our audience is our most valuable asset. Accordingly, in order to maximize revenue and product
offerings, we utilize an audience-centric approach, which is the engine that runs our business.
We
start with collecting audience data across all our products, platforms, campaigns, attribution models, and analytics tools. These
metrics are then turned into actionable insights. The centralization of this data is critical to our efficiency, as we are able
to spend more time analyzing insights than correlating the data.
Our
success is driven by monitoring audience signals rather than focusing on the creation of customer segments. This allows us to
understand three key areas—consumer behavior changes, brand perception, and location in the sales funnel—which in
turn allows us to build relationships that people will value instead of simply focusing on the products people may buy.
We
intend to maximize our bottom line by utilizing this intelligence to personalize messaging, product positioning, and creatives
based on user signals and their position in the funnel. This eliminates ad spend waste and increases conversion significantly
while simultaneously driving our return on investment.
To
protect our bottom line, we follow a performance marketing mind set. We set a goal and create personalized content to inspire
action by the consumer. We are then able to optimize a campaign based on how the actual results compare to the original goal.
Our in-house team then monitors the campaign to re-align and revise it on a constant basis, looking for ways to make our marketing
initiatives more efficient.
Strategic
Licenses and Partnerships
NASCAR
We
are currently party to a series of license agreements with NASCAR for worldwide rights to use the NASCAR brand. Through our acquisition
of 704Games in 2018, we obtained the exclusive right, subject to certain limited exceptions, to use certain licensed rights (including
the rights of certain NASCAR teams) to develop, promote, advertise, distribute, manufacture and package simulation-style video
gaming products, which are NASCAR-branded video game products that have a stock car and/or truck racing theme relating to NASCAR-sanctioned
events intended to replicate authentic NASCAR racing competition rules and structure. The limited exceptions to this exclusive
right represent third-party NASCAR- branded casual games, which may incorporate some mix of core characteristics of simulation-style
video gaming products provided they are utilized with additional distinguishing creative liberties which are not consistent with
authentic NASCAR racing. We also have a non-exclusive right to use certain licensed rights (including the rights of certain NASCAR
teams) to develop, promote, advertise, distribute, manufacture and package other NASCAR-branded driving or non-driving gaming
products.
In
addition, we have the exclusive right to use simulation-style video gaming products as the platform for conducting and administering
esports leagues and events for NASCAR, subject to certain limited exceptions. Such exceptions include esports events relating
to iRacing, which is a NASCAR-sanctioned motorsport racing simulation currently available for the PC platform and designed to
imitate exact NASCAR racing physics and conditions (including for certain NASCAR racing series), and certain competitive gaming
events that fall outside of the exclusivity granted to us.
Our
current license arrangement with NASCAR, which was extended 10 years simultaneously with the acquisition of 704Games, expires
on December 31, 2029. The license arrangement provides for a commitment by both parties to participate in exclusive negotiations
to renew the license, beginning March 1, 2028, and lasting for a period of at least 90 days. The license arrangement also requires
us to pay royalties, including certain minimum annual guarantees, on an ongoing basis to NASCAR and to meet certain product distribution,
development, marketing and related milestones.
Le
Mans
On
March 15, 2019, we formed Le Mans Esports Series Limited as a joint venture between Motorsport Games and ACO with the primary
purpose of carrying on the promotion of and running of an esports event business replicating races of the WEC and the Le Mans
race on an electronic gaming platform. Through our ownership interest in this joint venture, which was increased to 51% from 45%
in January 2021, we secured the rights to be the exclusive video game developer and publisher for the Le Mans race and the WEC
through a separate license agreement. This license expires ten years beginning from the date of our first release of a WEC or
Le Mans race video gaming product with the term automatically renewing for an additional ten-year term unless ACO provides written
notice of its intent not to renew. In exchange for such license, we agreed to fund up to €8,000,000 (approximately $9.8 million
USD as of December 31, 2020) as needed for development of the video game products, to be contributed on an as-needed basis during
the term of the license. Additionally, we are obligated to pay ACO an annual payment beginning from the time of the launch of
the first video game product and continuing on each anniversary thereof for the term of the license. In addition, through this
joint venture, we have the right to create and organize esports leagues and events for the Le Mans race, the WEC and the 24 Hours
of Le Mans Virtual event through certain additional license agreements. These additional license agreements, which were granted
on a royalty-free basis, each expire January 25, 2031 with the term automatically renewing for an additional ten-year term unless
ACO provides written notice of its intent not to renew. This joint venture shall continue until the earlier of the date on which
the parties cease to be beneficially entitled in the aggregate to 25% or more of the equity share capital of the joint venture,
the parties otherwise cease to control the affairs of the joint venture or the date of the commencement of the winding-up of the
joint venture. If certain events of defaults occur, the non-defaulting party has a call option pursuant to which it can force
the defaulting party to sell all (but not part) of its ownership in the joint venture in accordance with the joint venture agreement.
BTCC
On
May 29, 2020, we entered into a license agreement with BARC (TOCA) Limited (“BARC”), the exclusive promoter of the
BTCC. Pursuant to the agreement, we were granted an exclusive license to use certain licensed intellectual property for motorsports
and/or racing video gaming products related to, themed as, or containing the BTCC, on consoles and mobile applications, esports
series and esports events (including our esports platform). In exchange for the license, the agreement requires us to pay BARC
an initial fee in two installments, the first of which was due on June 5, 2020 and the second installment of which is due upon
the earlier of 60 days after the release of the products contemplated by the license or May 29, 2022. Following the initial fee,
the agreement also requires us to pay royalties, including certain minimum annual guarantees, on an ongoing basis to BARC and
to meet certain product distribution, marketing and related milestones, subject to termination penalties. The agreement shall
remain in effect through December 31, 2026. However, if BARC’s license agreement with Motorsport Games Inc.to promote the
BTCC is extended, BARC shall notify us and discussions for an extension of the agreement shall take place no later than March
31, 2026. BARC may terminate early only for cause as defined in the agreement. Upon termination, all outstanding royalty fees
become due. Except in the event of termination for breach, a sell off period will begin and continue until the earlier of 180
days from such termination or December 31, 2026.
RTA
On
March 1, 2019, we formed the Racing Pro League, LLC as a 50/50 joint venture between our subsidiary 704Games and an affiliate
of RTA, with the primary purpose to create, own and operate the eNHPL, a stock car and/or stock truck racing themed, mass market,
esports multiplayer competition video gaming league based on the NASCAR Heat video game series, pursuant to the terms and conditions
of existing license agreements with NASCAR (for so long as they are in effect). As part of this joint venture, 704Games manages
day-to-day operations of the eNHPL and RTA provides certain intellectual property rights from RTA teams and supports the promotion
of eNHPL events through their individual team social and digital platforms, team/sponsor websites, digital promotions, content
with specific eNHPL drivers, integration with existing partners and more. This joint venture shall continue until dissolved by
the approval of the board of Racing Pro League, LLC and each of 704Games and RTA, as members, or as required by law.
Epic
Games
On
August 11, 2020, through our wholly-owned subsidiary, MS Gaming Development LLC, we entered into a licensing agreement with Epic
Games International (“Epic”) for worldwide licensing rights to Epic’s proprietary computer program known as
the Unreal Engine 4. Pursuant to the agreement, we were granted a nonexclusive, nontransferable and terminable license to develop,
market and sublicense (under limited circumstances and subject to conditions of the agreement) certain products using the Unreal
Engine 4 for our next generation of games. In exchange for the license, the agreement requires us to pay Epic an initial license
fee, royalties, support fees and supplemental license fees for additional platforms. During a two-year support period, Epic will
use commercially reasonable efforts to provide us with updates to the Unreal Engine 4 and technical support via a licensee forum.
After the expiration of the support period, Epic has no further obligation to provide or to offer to provide any support services.
The agreement is effective until terminated under the provisions of the agreement; however, pursuant to the terms of the agreement,
we can only actively develop new or existing authorized products during a five-year active development period, which terminates
on August 11, 2025.
Arrangements
with Console Manufacturers
Under
the terms of agreements we have entered into with Sony and its affiliates and with Microsoft and its affiliates, we are authorized
to develop and distribute disc-based and digitally-delivered software products and services compatible with PlayStation and Xbox
consoles, respectively. Under these agreements with Sony and Microsoft, we have the non-exclusive right to use, for the specified
term and in a designated territory, technology that is owned or licensed by them to publish our games on their respective consoles.
With respect to our digitally-delivered products and services, the console manufacturers pay us either a wholesale price or a
royalty percentage on the revenue they derive from their sales of our products and services. Our transactions for packaged goods
products are made pursuant to individual purchase orders, which are accepted on a case-by case basis by Sony or Microsoft (or
their designated replicators), as the case may be. For packaged goods products, we pay the console manufacturers a per-unit royalty
for each unit manufactured. Many key commercial terms of our relationships with Sony and Microsoft, such as manufacturing terms,
delivery times, policies and approval conditions, are determined unilaterally, and are subject to change by the console manufacturers.
The
license agreements also require us to indemnify the console manufacturers for any loss, liability and expense resulting from any
claim against the console manufacturer regarding our games and services, including any claims for patent, copyright or trademark
infringement brought against the console manufacturer. Each license may be terminated by the console manufacturer or shall terminate
if a breach or default by us is not cured after we receive written notice from the console manufacturer, or if we become insolvent.
The console manufacturers are not obligated to enter into license agreements with us for any future consoles, products or services.
Product
Development and Support
We
develop and produce our titles using a model in which a group of creative, technical, and production professionals, including
designers, producers, programmers, artists, sound engineers, and others in coordination with our marketing, finance, analytics,
sales, and other professionals, has responsibility for the entire development and production process, including the supervision
and coordination of, where appropriate, external resources. We believe this model allows us to deploy the best resources for a
given task, by supplementing our internal expertise with top-quality external resources on an as-needed basis.
In
addition to our experienced development team, we rely on third-party software developers for the partial development of our titles.
From time to time, we also acquire the license rights to publish and/or distribute software products. Additionally, in March 2021,
we announced the agreement to acquire Studio397 B.V., a company that specializes in realistic, accurate and engaging simulation
racing experiences through their rFactor Technology platform. The rFactor Technology is used, for example, in providing car handling
physics and performance, and will be integrated and incorporated into our next generation NASCAR console game (NASCAR NXT), which
we currently anticipate releasing in 2021, as well as any sequels.
We
also provide various forms of product support. Central technology and development teams review, assess, and provide support to
products throughout the development process. Quality assurance personnel are also involved throughout the development and production
of published content. We subject all such content to extensive testing before public release to ensure compatibility with appropriate
hardware systems and configurations and to minimize the number of bugs and other defects found in the products. To support our
content, we generally provide rapid game support to players through various means, primarily online through our social media channels.
Competition
The
interactive entertainment industry is intensely competitive and new interactive entertainment software products and platforms
are regularly introduced. We believe that the main competitive factors in the interactive entertainment industry include: product
features, game quality, and playability; brand name recognition; compatibility of products with popular platforms; access to distribution
channels; online capability and functionality; ease of use; price; marketing support; and quality of customer service.
We
specifically compete with other publishers of virtual racing video games for console, PC, and mobile entertainment, including
Codemasters and other major video game publishers and esports companies, such as Electronic Arts. In addition to third-party software
competitors, integrated video game console hardware and software companies, such as Microsoft, Sony, and Nintendo, compete directly
with us in the development of game titles for their respective platforms, including titles in the motorsport racing genre, even
though they generally cannot create branded NASCAR, Le Mans or BTCC games for which we hold, or expect to hold, exclusive licenses,
subject to certain limited exceptions. A number of software publishers have developed and commercialized, or are currently developing,
online games for use by consumers, and we must compete with them for our audience base.
In
a broad sense, we compete for the leisure time and discretionary spending of consumers with other interactive entertainment companies,
as well as with providers of different forms of entertainment, such as film, television, social networking, music and other consumer
products.
Seasonality
in Our Business
Historically,
we have seen a high degree of seasonality in our business and financial results due to the introduction of seasonal video game
updates. We generally aim to synchronize these yearly video game updates with the start of the new racing season and race calendars.
Overall, our sales volumes are strongest around the time we launch our new products and also tend to be stronger at the start
of the NASCAR racing season. We expect similar patterns for new racing series we are or may be in the process of developing and
publishing in the future. We have also historically experienced a higher demand for our games during our fourth calendar quarter
due to seasonal holiday demand.
Employees
Our
business relies on our ability to attract and retain the right team to enable us to be a leading game developer, publisher and
esports ecosystem provider of official motorsport racing series throughout the world. We invest heavily in hiring and retaining
talented people, particularly as we grow our business. Our headcount as of December 31, 2020 was 96 full-time employees, including
65 game developers located primarily in the United States, the United Kingdom and the Russian Federation, none of which were covered
by collective bargaining agreements. We believe that relations with our employees are generally good.
Government
Regulation
We
are subject to various federal, state and international laws and regulations that affect companies conducting business on the
Internet and mobile platforms, including those relating to privacy, use and protection of player and employee personal information
and data (including the collection of data from minors), the Internet, behavioral tracking, mobile applications, content, advertising
and marketing activities (including sweepstakes, contests and giveaways), and anti-corruption. Additional laws in all of these
areas are likely to be passed in the future, which could result in significant limitations on or changes to the ways in which
we can collect, use, host, store or transmit the personal information and data of our customers or employees, communicate with
our players, and deliver products and services, and may significantly increase our compliance costs. As our business expands to
include new uses or collection of data that are subject to privacy or security regulations, our compliance requirements and costs
will increase, and we may be subject to increased regulatory scrutiny. See Part I, Item
1A, “Risk Factors—Risks Related to Our Business and Industry—Government regulations applicable to us
may negatively impact our business” for additional information.
Intellectual
Property
Our
business is based on the creation, acquisition, use and protection of intellectual property. Some of this intellectual property
is in the form of software code, trademarks and copyrights, and trade secrets that we use to develop our games and to enable them
to run properly on multiple platforms. Other intellectual property we integrate includes audio-visual elements, including graphics,
music and interface design.
While
most of the intellectual property we use is created by us, we have acquired rights to proprietary intellectual property. We have
also obtained rights to use intellectual property through licenses and service agreements with third parties. These agreements
typically limit our use of intellectual property to specific uses and for specific time periods.
We
protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions.
We control access to our proprietary technology by entering into confidentiality and invention assignment agreements with our
employees and contractors, and nondisclosure agreements with third parties. We also engage in monitoring and enforcement activities
with respect to infringing uses of our intellectual property by third parties.
In
addition to these contractual arrangements, we also rely on a combination of trade secret, copyright, trademark, trade dress and
domain names to protect our games and other intellectual property. We typically own the copyright to the software code to our
content, as well as the brand or title name trademark under which our games are marketed. We pursue the registration of our domain
names, trademarks, and service marks in the United States and in certain locations outside the United States.
Corporate
History and Available Information
Motorsport
Gaming US LLC was organized as a limited liability company on August 2, 2018 under the laws of the State of Florida. On January
8, 2021, Motorsport Gaming US LLC converted into a Delaware corporation pursuant to a statutory conversion and changed its name
to Motorsport Games Inc. in connection with our IPO. Effective as of January 8, 2021, 100% of the membership interests held by
the sole member of Motorsport Gaming US LLC, Motorsport Network, converted into an aggregate of (i) 7,000,000 shares of Class
A common stock of Motorsport Games Inc. and (ii) 7,000,000 shares of Class B common stock of Motorsport Games Inc., representing
all of the outstanding shares of Class A and Class B common stock immediately following the corporate conversion.
Our
Internet address is www.motorsportgames.com. We make available free of charge through
our website copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments
to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), as soon as reasonably practicable after such documents are electronically filed with, or furnished
to, the SEC. The SEC maintains a website, www.sec.gov, that contains the reports, proxy and information statements and
other information regarding issuers that file electronically with the SEC. The information contained on our website is not included
as a part of, or incorporated by reference into, this Report.
Item 1A.Risk Factors
The