Item 1A.Risk Factors
The
following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding
other statements in this Report. The following information should be read in conjunction with Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and
accompanying notes in Part II, Item 8, “Financial Statements and Supplementary Data” of this Report.
The
business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known
or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause
the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future,
financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the
Company’s business, financial condition, operating results and stock price. Because of the following factors, as well as
other factors affecting the Company’s financial condition and operating results, past financial performance should not be
considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results
or trends in future periods.
Risks
Related to Our Business and Industry
If
we do not consistently deliver popular products or if consumers prefer competing products, our business may be negatively impacted.
In
order to remain competitive, we must continuously develop new products or enhancements to our existing products. Consumer preferences
for games are usually cyclical and difficult to predict, and even the most successful content remains popular for only a limited
period of time unless refreshed or otherwise enhanced. These products or enhancements may not be well-received by consumers, even
if well-reviewed and of high quality. Further, competitors may develop content that imitates or competes with our best-selling
games, potentially taking sales away from us or reducing our ability to charge the same prices we have historically charged for
our products. These competing products may take a larger share of consumer spending than anticipated, which could cause product
sales to fall below expectations. If we do not continue to develop consistently high-quality and well-received games, if our marketing
fails to resonate with our consumers, if consumers lose interest in a genre of games we produce, if the use of cross-promotion
within our mobile games to retain consumers becomes less effective, or if our competitors develop more successful products or
offer competitive products at lower prices, our revenues and profit margins could decline. Further, a failure by us to develop
a high-quality product, or our development of a product that is otherwise not well-received, could potentially result in additional
expenditures to respond to consumer demands, harm our reputation, and increase the likelihood that our future products will not
be well- received. The increased importance of downloadable content to our business amplifies these risks, as downloadable content
for poorly-received games typically generates lower-than-expected sales. In addition, our own best-selling products could compete
with our other games, reducing sales for those other games.
Our
business and products are highly concentrated in the racing game genre, and our operating results may suffer if consumer preferences
shift away from this genre.
All
of our revenue is currently generated, and is expected to continue to be substantially generated, from products in the racing
game genre. Accordingly, our future success will depend on the popularity of games in the racing game genre with consumers. Consumer
preferences are difficult to predict and subject to frequent changes, and if interest in the racing game genre declines, even
if our share of the racing game genre is stable or expands, our operating results could suffer. Additionally, our concentration
in the racing game genre could place us at a disadvantage against other gaming companies that offer a more diverse selection of
games.
If
we do not provide high-quality products, our business may be negatively impacted.
Consumer
expectations regarding the quality, performance and integrity of our products and services are high. Consumers may be critical
of our brands, games, services and/or business practices for a wide variety of reasons, and such negative reactions may not be
foreseeable or within our control to manage effectively. For example, if our games or services, such as our creation and organization
of esports leagues and events, do not function as consumers expect, whether because they fail to function as advertised or otherwise,
our sales may suffer. If any of these issues occur, consumers may stop playing the game and may be less likely to return to the
game as often in the future, which may negatively impact our business.
If
we fail to deliver products in a timely manner, our business may be negatively impacted.
Delays
in product releases or disruptions following the commercial release of one or more new products could negatively impact our business,
our revenues and reputation and could cause our results of operations to be materially different from expectations. This is particularly
the case where we seek to release certain products in conjunction with key events, such as the beginning of a racing season or
a major racing event. If we fail to release our products in a timely manner, or if we are unable to continue to improve our existing
games by adding features and functionality that will encourage continued engagement with these games, our business may be negatively
impacted. Moreover, if we or our third-party developers experience unanticipated development delays, financial difficulties, or
additional costs, for example as a result of the COVID-19 pandemic, we may not be able to release titles according to our schedule
and at budgeted costs. There can be no assurance that our products will be sufficiently successful so that we can recoup these
costs or make a profit on these products.
Additionally,
the amount of lead time and cost involved in the development of high-quality products is increasing due to growing technical complexities
and higher expectations from consumers. As a result, it is especially critical that we accurately predict consumer demand for
such products. If our future products do not achieve expected consumer acceptance or generate sufficient revenues upon introduction,
we may not be able to recover the substantial up-front development and marketing costs associated with those products.
The
recent COVID-19 pandemic has impacted our operations and could adversely affect our business operations, financial performance
and results of operations, the extent of which is uncertain and difficult to predict.
The
global spread of the COVID-19 pandemic has created significant business uncertainty for us and others, resulting in volatility
and economic disruption. Additionally, the outbreak has resulted in government authorities around the world implementing numerous
measures to try to reduce the spread of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home
or total lock-down (or similar) orders and business limitations and shutdowns.
Although
there are effective vaccines for COVID-19 that have been approved for use, distribution of the vaccines did not begin until late
2020, and a majority of the public will likely not have access to a vaccination until sometime in 2021 or later. Additionally,
new strains of COVID-19 are surfacing, and the effectiveness of the approved vaccines on these new strains is unknown. Accordingly,
there remains significant uncertainty about the duration and extent of the impact of the COVID-19 pandemic, including, among other
things, on the U.S. economy and consumer confidence. Such impact could have a material adverse effect on our business operations,
financial performance and results of operations.
As
a result of the COVID-19 pandemic, including the related responses from government authorities, our business and operations have
been impacted, including the temporary closure of our offices in Orlando, Florida, Silverstone, England, and Moscow, Russia, which
has resulted in our employees working remotely. During the COVID-19 outbreak, several retailers have experienced, and continue
to experience, closures, reduced operating hours and/or other restrictions as a result of the COVID-19 pandemic, which has negatively
impacted the sales of our products from such retailers. Additionally, in our esports business, the COVID-19 pandemic has resulted
in the postponing of certain events to later dates or shifting events from an in-person format to online only.
Our
business operations, financial performance and results of operations could be further adversely affected in a number of ways,
including, but not limited to, the following:
Additionally,
an increase in the number of employees working remotely due to the COVID-19 pandemic also increases the potential adverse impact
of risk associated with information technology systems and networks, including cyber-attacks, computer viruses, malicious software,
security breaches, and telecommunication failures, both for systems and networks we control directly and for those that employees
and third-party developers rely on to work remotely. Any failure to prevent or mitigate security breaches or cyber risks or detect,
or respond adequately to, a security breach or cyber risk, or any other disruptions to our information technology systems and
networks, can have adverse effects on our business.
The
spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations, and cancellation
of physical participation in meetings, events and conferences), and we may take further actions as may be required by government
authorities or that we determine are in the best interests of our employees, customers and business partners. Further, key personnel
could contract COVID-19, hindering their availability and productivity.
Any
of the foregoing could adversely affect our business operations, financial performance and results of operations. The potential
effects of the COVID-19 pandemic may also impact our other risk factors described in this “Risk Factors” section.
The degree to which the COVID-19 pandemic impacts our business operations, financial performance and results of operations 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, actions to contain the virus or treat its impact, such
as the efficacy of vaccines (particularly with respect to emerging strains of the virus), and how quickly and to what extent normal
economic and operating conditions can resume.
Declines
in consumer spending and other adverse changes in the economy could have a material adverse effect on our business, financial
condition and operating results.
Our
product purchases are predominately driven by discretionary spending by consumers. We believe that consumer spending is influenced
by general economic conditions and the availability of discretionary income. This makes our products particularly sensitive to
general economic conditions and economic cycles as consumers are generally more willing to make discretionary purchases, including
purchases of products like ours, during periods in which favorable economic conditions prevail. Adverse economic conditions, such
as a prolonged U.S. or international general economic downturn, whether or not caused by the COVID-19 pandemic, including periods
of increased inflation, unemployment levels, tax rates, interest rates, energy prices, or declining consumer confidence, could
also reduce consumer spending. Reduced consumer spending may in the future result in reduced demand for our products and may also
require increased selling and promotional expenses, which has had and may continue to have an adverse effect on our business,
financial condition and operating results. In addition, during periods of relative economic weakness, our consolidated credit
risk, reflecting our counterparty dealings with distributors, customers, capital providers and others may increase, perhaps materially
so. As a result of the COVID-19 pandemic, our counterparty credit risk may be particularly exacerbated, as certain of our counterparties
may face financial difficulties in paying owed amounts on a timely basis or at all. Furthermore, uncertainty and adverse changes
in the economy could also increase the risk of material losses on our investments, costs associated with developing and publishing
our products, the cost and availability of sources of financing, and our exposure to material losses from bad debts, any of which
could have a material adverse effect on our business, financial condition and operating results. If economic conditions worsen,
our business, financial condition and operating results could be adversely affected.
We
are particularly susceptible to market conditions and risks specific to the entertainment industry, which include the popularity,
price, and timing of our products; changes in consumer demographics; the availability and popularity of other forms of entertainment
and leisure; and critical reviews and public tastes and preferences, which may change rapidly and cannot necessarily be predicted.
The
video game and esports industry is significantly dependent on the popularity of a small number of games, and we may not have access
to “hit” games or titles.
The
video game and esports industries have generally been dominated by a select few “hit” game titles. Accordingly, the
success of our esports events will be closely linked to the quality and popularity of the games we publish or support for our
esports events. Further, if we are unable to produce engaging and popular games, we may fail to sell the expected number of console
games, meet our target install number for our mobile games, attract sufficient numbers of gamers to participate in our esports
events and our live esports streams may not attract a growing audience, all of which may have a material and adverse impact on
our results of operations and financial conditions.
We
depend on a relatively small number of franchises for a significant portion of our revenues and profits.
We
follow a franchise model and a significant portion of our revenues has historically been derived from products based on a relatively
small number of popular franchises. These products are responsible for a disproportionately high percentage of our profits. For
example, revenues associated with the NASCAR Heat franchise accounted for approximately 99% of our total revenue for the years
ended December 31, 2020 and 2019. In the future, we expect this trend to continue with a relatively limited number of franchises
producing a disproportionately high percentage of our revenues and profits. Due to this dependence on a limited number of franchises,
the failure to achieve anticipated results by one or more products based on these franchises could negatively impact our business.
Additionally, if the popularity of a franchise declines, we may have to write off the unrecovered portion of the underlying intellectual
property assets, which could negatively impact our business.
Our
ability to acquire and maintain licenses to intellectual property, especially for sports titles, affects our revenue and profitability.
Competition for these licenses may make them more expensive and increase our costs.
Most
of our products and services are based on or incorporate intellectual property owned by others. For example, we have obtained
an exclusive license for our NASCAR racing video games and related-esports franchise (subject to certain limited exceptions),
as well as exclusive licenses to develop multi-platform games for the BTCC, the Le Mans race and the WEC. Additionally, through
a series of joint ventures and other agreements with various racing series, we own exclusive rights to operate various esports
tournaments and leagues, including the Le Mans Esports tournament and the eNHPL. Competition for these licenses and rights is
intense. If we are unable to maintain these licenses and rights or obtain additional licenses or rights with significant commercial
value, our ability to develop successful and engaging games and services may be adversely affected and our revenue, profitability
and cash flows may decline significantly. Competition for these licenses also may increase minimum guarantees and royalty rates
payable to licensors and developers, which could significantly increase our costs and reduce our profitability.
The
importance of retail sales to our business exposes us to the risks of that business model.
While
our customer base is increasingly purchasing our games as digital downloads, retail sales will remain important to our business.
These 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). The loss of, or a significant
reduction in sales by, any of these retailers could have adverse consequences to our business and results of operations.
Moreover,
the importance of retail sales to our business exposes us to the risk of price protection with respect to our distribution partners
and retailers. Price protection, when granted, allows these distribution partners and retailers to receive a credit from us against
amounts owed to us with respect to merchandise unsold by them. We typically grant price protection to distribution partners and
retailers who meet certain conditions, which include compliance with applicable payment and marketing terms, delivery of weekly
inventory and sales information and consistent participation in the launches of premium title releases. We may also consider other
factors, including the facilitation of slow-moving inventory and other industry factors. Although we maintain a reserve for price
protection, and although we may place limits on price protection, we may be required to provide substantial price protection to
maintain our relationships with retailers and our distribution partners.
Further,
retailers typically have a limited amount of “brick and mortar” shelf space and promotional resources, and there is
intense competition for high-quality retail shelf space and promotional support from retailers. Similarly, for online retail sales,
there is increasing competition for premium placement on websites. Competition for shelf space or premium online placement may
intensify and require us to increase our marketing expenditures. Additionally, retailers with limited shelf space typically devote
the most and highest quality shelf space to those products expected to be best sellers, such as those perceived to be “AAA”
titles. We cannot be certain that our new products will achieve such “best seller” status. Due to increased competition
for limited shelf space, retailers and distribution partners are in an increasingly strong position to negotiate favorable terms
of sale, including price discounts, price protection and marketing and display fees, as applicable. Our products constitute a
relatively small percentage of most retailers’ sales volume. We cannot be certain that retailers will continue to purchase
our products or provide those products with adequate levels of shelf space and promotional support on acceptable terms.
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.
As
discussed above, our products are sold primarily through a distribution network with exclusive partners that specialize in the
distribution of games and, in turn, sell our products to retailers. 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, we
had one distribution partner through which we sold substantially all of our products for the retail market, which represented
approximately 34% of our total revenue. This concentration of sales to a single distribution partner could lead to a disruption
to our business if this partner significantly reduces its purchases or ceases to offer our products. We also could be more vulnerable
to collection risk if this partner experiences a deterioration of its business or declares bankruptcy. Having a significant portion
of our retail sales concentrated through a single distribution partner could also reduce our negotiating leverage. Accordingly,
if we are unable to negotiate favorable terms with our existing or future distribution partners, our business and results of operations
could be adversely affected.
Our
digital entertainment and social platform, www.motorsportgames.com, and our other current and future digital entertainment and
social platforms, are dependent on our ability to provide interesting and useful high-quality content.
The
quality of the content offered on www.motorsportgames.com and our other current and future digital entertainment and social platforms
is critical to the success of such platforms. In order to attract and retain users, we must offer interesting and useful high-quality
content and enhance our users’ viewing experience. Further, we must remain sensitive to and responsive to evolving user
preferences and offer content that appeals to our users. For example, in 2021, we plan to develop and produce live shows that
include interactive broadcasts, live streaming, and social media-oriented programs (including on Twitch.tv, YouTube, Facebook,
Motorsport.tv and other potential partners) for our own racing esports channel, which we expect to host on Traxion, our go-to
destination for the virtual racing community that launched in beta in the first quarter of 2021. If we are unable to generate
quality content satisfactory to our users, we may suffer from reduced user traffic, which could negatively impact our business.
Our
business is partly dependent on our ability to enter into successful software development arrangements with third parties.
We
currently rely on third-party software developers for the partial development of all of our titles, and in the future, we expect
to continue to rely on third-party software developers for the partial development of some of our titles. Accordingly, our success
depends in part on our ability to enter into successful software development arrangements with such third-party developers. Generally,
quality third-party developers are continually in high demand. Software developers who have helped develop titles for us in the
past may not be available to develop software for us in the future for various reasons, including their engagement on other projects.
Due to the limited number of quality third-party software developers and the limited control that we exercise over them, these
developers may not be able to complete titles for us on a timely basis, within acceptable quality standards, or at all. Additionally,
we have entered into agreements with certain third parties to use licensed intellectual property in our titles. These agreements
typically require us to make development payments, pay license fees and satisfy other conditions. Our development payments may
not be sufficient to permit developers to develop new software successfully, which could result in material delays and significantly
increase our costs in bringing particular products to market. Future sales of our titles may not be sufficient to recover development
payments and advances to software developers and licensors, and we may not have adequate financial and other resources to satisfy
our contractual commitments to such developers. If we fail to satisfy our obligations under agreements with third-party developers
and licensors, the agreements may be terminated or modified in ways that are burdensome to us, and have a material adverse effect
on our business, financial condition and operating results.
Our
business depends in part on the success and availability of platforms and mass media channels developed by third parties and our
ability to develop commercially successful content, products, and services for those platforms.
The
success of our business is driven in part by the commercial success and adequate supply of third-party platforms for which we
develop our products and services or through which our products and services are distributed or marketed, including our league
tournaments and competitions, such as through Twitch. Our success also depends on our ability to accurately predict which channels,
platforms and distribution methods will be successful in the marketplace, our ability to develop commercially successful content,
products and services for these platforms, our ability to simultaneously manage products and services on multiple platforms, our
ability to effectively transition our products and services to new platforms, and our ability to effectively manage the transition
of our gamers from one generation or demographic to the next. We must make product development decisions and commit significant
resources well in advance of the commercial availability of new platforms and channels, and we may incur significant expense to
adjust our product portfolio and development efforts in response to changing consumer preferences. Additionally, we may enter
into certain exclusive licensing arrangements that affect our ability to deliver or market products or services on certain channels
and platforms. A platform for which we are developing products and services may not succeed as expected or new platforms may take
market share and interactive entertainment consumers away from platforms for which we have devoted significant resources. If consumer
demand for the channels or platforms for which we are developing products and services is lower than our expectations, we may
be unable to fully recover the investments we have made in developing our products and services, and our financial performance
will be harmed. Alternatively, a channel or platform for which we have not devoted significant resources could be more successful
than we initially anticipated, causing us to not be able to take advantage of meaningful revenue opportunities.
Third-party
platform providers may be able to influence our products and costs.
We
plan to derive significant revenues from the distribution of certain of our future products on third-party mobile and web platforms,
such as the Apple App Store, the Google Play Store, and Facebook. These platforms may also serve as significant online distribution
platforms for, and/or provide other services critical for the operation of, a number of our games. If these platforms modify their
current or future discovery mechanisms, communication channels available to developers, operating systems, terms of service or
other policies (including fees), or they develop their own competitive offerings, our business could be negatively impacted. Additionally,
if these platform providers are required to change how they label free-to-play games or take payment for in-app purchases or change
how the personal information of consumers is made available to developers, our business could be negatively impacted.
Moreover,
when we develop interactive entertainment software products for hardware platforms offered by companies such as Sony, Microsoft,
or Nintendo, the physical products are replicated exclusively by that hardware manufacturer or their approved replicator. The
agreements with these manufacturers typically include certain provisions, such as approval rights over all software products and
related promotional materials and the ability to change the fee they charge for the manufacturing of products, which allow the
hardware manufacturers substantial influence over the cost and the release schedule of such interactive entertainment software
products. In addition, because each of the manufacturers is also a publisher of games for its own hardware platforms and may manufacture
products for other licensees, a manufacturer may give priority to its own products or those of our competitors. Accordingly, console
manufacturers like Sony, Microsoft, or Nintendo could cause unanticipated delays in the release of our products, as well as increases
to projected development, manufacturing, marketing or distribution costs, any of which could negatively impact our business.
The
platform providers also control the networks over which consumers purchase digital products and services for their platforms and
through which we provide online game capabilities for our products. The control that the platform providers have over the fee
structures and/or retail pricing for products and services for their platforms and online networks could impact the volume of
purchases of our products made over their networks and our profitability. With respect to certain downloadable content and microtransactions,
the networks provided by these platform providers are the exclusive means of selling and distributing this content. Further, increased
competition for limited premium “digital shelf space” has placed the platform providers in an increasingly better
position to negotiate favorable terms of sale. If the platform provider establishes terms that restrict our offerings on its platform,
significantly changes the financial terms on which these products or services are offered, or does not approve the inclusion of
online capabilities in our console products, our business could be negatively impacted.
The
increasing importance of free-to-play games to our business exposes us to the risks of that business model, including the dependence
on a relatively small number of consumers for a significant portion of revenues and profits from any given game.
Currently,
only our NASCAR Heat Mobile title is a free-to-play game, but the success of our business is partially dependent on our ability
to develop, enhance and monetize additional free-to-play games. As such, we are increasingly exposed to the risks of the free-to-play
business model. For example, we may invest in the development of new free-to- play interactive entertainment products that do
not achieve significant commercial success, in which case our revenues from those products likely will be lower than anticipated
and we may not recover our development costs. Further, if: (1) we are unable to continue to offer free-to-play games that encourage
consumers to purchase our virtual currency and subsequently use it to buy our virtual items; (2) we fail to offer monetization
features that appeal to these consumers; (3) these consumers do not continue to play our free-to-play games or purchase virtual
items at the same rate; (4) our platform providers make it more difficult or expensive for players to purchase our virtual currency;
or (5) we cannot encourage significant additional consumers to purchase virtual items in our free-to-play games, our business
may be negatively impacted.
Furthermore,
as there are relatively low barriers to entry to developing mobile or online free-to-play or other casual games, we expect new
competitors to enter the market and existing competitors to allocate more resources to developing and marketing competing games
and applications. We compete, or may compete, with a vast number of small companies and individuals who are able to create and
launch casual games and other content using relatively limited resources and with relatively limited start-up time or expertise.
Competition for the attention of consumers on mobile devices is intense, as the number of applications on mobile devices has been
increasing dramatically, which, in turn, has required increased marketing to garner consumer awareness and attention. This increased
competition could negatively impact our business. In addition, a continuing industry shift to free-to-play games could result
in a deprioritization of our other products by traditional retailers and distributors.
We
are subject to risks associated with operating in a rapidly developing industry and a relatively new market.
Many
elements of our business are unique, evolving and relatively unproven. In particular, our esports business and prospects depend
on the continuing development of live streaming of competitive esports gaming. The market for esports and amateur online gaming
competitions is relatively new and rapidly developing and is subject to significant challenges. Our business relies upon our ability
to cultivate and grow an active gamer community, and our ability to successfully monetize such community through tournament fees,
subscriptions for our esports gaming services, and advertising and sponsorship opportunities. In addition, our continued growth
depends, in part, on our ability to respond to constant changes in the esports gaming industry, including rapid technological
evolution, continued shifts in gamer trends and demands, frequent introductions of new games and titles and the constant emergence
of new industry standards and practices. Developing and integrating new games, titles, content, products, services or infrastructure
could be expensive and time-consuming, and these efforts may not yield the benefits we expect to achieve. We cannot assure you
that we will succeed in any of these aspects or that the esports gaming industry will continue to grow as rapidly as it has in
the past.
We
plan to continue to generate a portion of our revenues from advertising and sponsorship during our esports events. If we fail
to attract more advertisers and sponsors to our gaming platform, tournaments or competitions, our revenues may be adversely affected.
We
plan to continue to generate a portion of our revenues from advertising and sponsorship during our esports events as online viewership
of our esports gaming offerings expand. Our revenues from advertising and sponsorship partly depend on the continual development
of the online advertising industry and advertisers’ willingness to allocate budgets to online advertising in the esports
gaming industry. In addition, companies that decide to advertise or promote online may utilize more established methods or channels,
such as more established internet portals or search engines, over advertising on our gaming platform. If the online advertising
and sponsorship market does not continue to grow, or if we are unable to capture and retain a sufficient share of that market,
our ability to increase our current level of advertising and sponsorship revenue and our profitability and prospects may be materially
and adversely affected.
We
are reliant on the retention of certain key personnel and the hiring of strategically valuable personnel, and we may lose or be
unable to hire one or more of such personnel.
Our
success depends in part on the continued service of our senior management team, key technical employees and other highly skilled
personnel and on our ability to identify, hire, develop, motivate, retain and integrate highly qualified personnel for all areas
of our organization. Certain employees, such as game designers, product managers and engineers, are in high demand, and we devote
significant resources to identifying, hiring, training, successfully integrating and retaining these employees. We have historically
hired a number of key personnel through acquisitions, and as competition with several other game companies increases, we may incur
significant expenses in continuing this practice. If we are unable to attract and retain the necessary personnel, particularly
in critical areas of our business, we may not achieve our strategic goals.
Competition
in the interactive entertainment industry is intense, and our existing and potential users may be attracted to competing products
or other forms of entertainment.
We
compete with other publishers of interactive entertainment software, both within and outside the United States. Generally, some
of our competitors include very large corporations with significantly greater financial, marketing and product development resources
than we have. Our larger competitors may be able to leverage their greater financial, technical, personnel and other resources
to provide larger budgets for development and marketing and make higher offers to licensors and developers for commercially desirable
properties, as well as adopt more aggressive pricing policies to develop more commercially successful video game products than
we do. In addition, competitors with large portfolios and popular games typically have greater influence with platform providers,
retailers, distributors and other customers who may, in turn, provide more favorable support to those competitors’ games.
Further,
the esports gaming industry generally is highly competitive. For our esports business, our competitors range from established
leagues and championships owned directly, as well as leagues franchised by, well-known and capitalized game publishers and developers,
interactive entertainment companies and diversified media companies to emerging start-ups, and we expect new competitors to continue
to emerge throughout the amateur esports gaming ecosystem. If our competitors develop and launch competing amateur city leagues,
tournaments or competitions, or develop a more successful amateur online gaming platform for games similar to ours, then our revenue,
margins, and profitability will decline.
Additionally,
we compete with other forms of entertainment and leisure activities. As our business continues to expand in complexity and scope,
we have increased exposure to additional competitors, including those with access to large existing user bases and control over
distribution channels. Further, it is difficult to predict and prepare for rapid changes in consumer demand that could materially
alter public preferences for different forms of entertainment and leisure activities. Failure to adequately identify and adapt
to these competitive pressures could negatively impact our business.
Our
revenue may be harmed by the proliferation of “cheating” programs and scam offers that seek to exploit our games and
players, which may negatively affect players’ game-playing experiences and our ability to reliably validate our audience
metric reporting and may lead players to stop playing our games.
Unrelated
third parties have developed, and may continue to develop, “cheating” programs that enable players to exploit vulnerabilities
in our games, play them in an automated way, collude to alter the intended game play or obtain unfair advantages over other players
who do play fairly. These programs harm the experience of players who play fairly and may reduce the demand for virtual items,
disrupting our in-game economy. If we are unable to discover and disable these programs quickly, our operations may be disrupted,
our reputation may be damaged, players may stop playing our games and our ability to reliably validate our audience metrics may
be negatively affected. These “cheating” programs and scam offers may result in lost revenue from paying players,
disrupt our in-game economies, divert our personnel’s time, increase costs of developing technological measures to combat
these programs and activities, increase our customer service costs needed to respond to dissatisfied players, and lead to legal
claims.
Some
of our players may make sales or purchases of virtual items used in our games through unauthorized or fraudulent third-party websites,
which may reduce our revenue.
Virtual
items in our games have no monetary value outside of our games. Nonetheless, some of our players may make sales and/or purchases
of our virtual items through unauthorized third-party sellers in exchange for real currency. These unauthorized or fraudulent
transactions are usually arranged on third-party websites. The virtual items offered may have been obtained through unauthorized
means such as exploiting vulnerabilities in our games, scamming our players with fake offers for virtual items or other game benefits,
or credit card fraud. We do not generate any revenue from these transactions. These unauthorized purchases and sales from third-party
sellers could impede our revenue and profit growth by, among other things:
● decreasing revenue from authorized transactions;
● increasing chargebacks from unauthorized credit card transactions;
● increasing customer support costs to respond to dissatisfied players.
There
can be no assurance that our efforts to prevent or minimize these unauthorized or fraudulent transactions will be successful.
The
success of our business relies heavily on our marketing and branding efforts, and these efforts may not be successful.
Because
we are a consumer brand, we rely heavily on marketing and advertising to increase brand visibility with potential customers. We
currently advertise through a blend of direct and indirect advertising channels, including through 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. If we are unable to recover our marketing costs, or if our broad marketing
campaigns are not successful or are terminated, it could have a material adverse effect on our growth, results of operations and
financial condition.
Our
games are subject to scrutiny regarding the appropriateness of their content. If we fail to receive our target ratings for certain
titles, or if our retailers refuse to sell such titles due to what they perceive to be objectionable content, it could have a
negative impact on our business.
Certain
of our gaming products are subject to ratings by the Entertainment Software Rating Board (the “ESRB”), a self-regulatory
body based in the United States that provides U.S. and Canadian consumers of interactive entertainment software with ratings information,
including information on the content in such software, such as violence, nudity, or sexual content, along with an assessment of
the suitability of the content for certain age groups. Certain other countries have also established content rating systems as
prerequisites for product sales in those countries. In addition, certain stores use other ratings systems, such as Apple Inc.’s
(“Apple”) use of its proprietary “App Rating System” and Google Play’s use of the International
Age Rating Coalition (IARC) rating system. If we are unable to obtain the ratings we have targeted for our products, it could
have a negative impact on our business. In some instances, we may be required to modify our products to meet the requirements
of the rating systems, which could delay or disrupt the release of any given product, or may prevent its sale altogether in certain
territories. Further, if one of our games is “re-rated” for any reason, a ratings organization could require corrective
actions, which could include a recall, retailers could refuse to sell it and demand that we accept the return of any unsold or
returned copies or consumers could demand a refund for copies previously purchased.
Additionally,
although lawsuits seeking damages for injuries allegedly suffered by third parties as a result of video games have generally been
unsuccessful in the courts, claims of this kind may be asserted and be successful in the future.
We
rely on Internet search engines and social networking sites to help drive traffic to our website, and if we fail to appear prominently
in search results or fail to drive traffic through paid advertising, our traffic would decline and our business would be adversely
affected.
We
depend in part on Internet search engines such as Google, Bing and Yahoo! and social networking sites such as Facebook to drive
traffic to our websites. Our ability to maintain and increase the number of visitors directed to our websites is not entirely
within our control. Our competitors may increase their search engine optimization efforts and outbid us for search terms on various
search engines, resulting in their websites receiving a higher search result page ranking than ours. Additionally, Internet search
engines could revise their methodologies in a way that would adversely affect our search result rankings. If Internet search engines
modify their search algorithms in ways that are detrimental to us, or if our competitors’ efforts are more successful than
ours, overall growth in our customer base could slow or our customer base could decline. Our websites have experienced fluctuations
in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of users
directed to our website through Internet search engines could harm our business and operating results.
Government
regulations applicable to us may negatively impact our business.
We
are subject to a number of foreign and domestic laws and regulations that affect companies conducting business on the Internet.
In addition, laws and regulations relating to user privacy, electronic contracts and communications, mobile communications, data
collection, retention, consumer protection, and publishing activities, including production and delivery of content, advertising,
localization, and information security have been adopted or are being considered for adoption by many jurisdictions and countries
throughout the world. These laws, including the General Data Protection Regulation and the California Consumer Privacy Act, which
have restricted our ability to gather and use data about our users, could harm our business by limiting the products and services
we can offer consumers or the manner in which we offer them. Data privacy, data protection, localization, security and consumer-protection
laws are evolving, and the interpretation and application of these laws in the United States (including compliance with the California
Consumer Privacy Act), Europe (including compliance with the General Data Protection Regulation), and elsewhere often are uncertain,
contradictory and changing. It is possible that these laws may be interpreted or applied in a manner that is averse to us or otherwise
inconsistent with our practices, which could result in litigation, regulatory investigations and potential legal liability or
require us to change our practices in a manner adverse to our business. As a result, our reputation and brand may be harmed, we
could incur substantial costs, and we could lose both gamers and revenue. Furthermore, the costs of compliance with these laws
may increase in the future as a result of changes in interpretation. Any failure on our part to comply with these laws or the
application of these laws in an unanticipated manner may harm our business and result in penalties or significant legal liability.
Certain
of our business models could be subject to new laws or regulations or evolving interpretations of existing laws and regulations.
For example, the growth and development of electronic commerce, virtual items and virtual currency has prompted calls for laws
and regulations that could limit or restrict the sale of our products and services or otherwise impact our products and services.
In addition, we include modes in our games that allow players to compete against each other and manage player competitions that
are based on our products and services. New laws related to these business models, or changes in the interpretation of current
laws that impact these business models, could subject us to additional regulation and oversight, lessen the engagement with, and
growth of, profitable business models, and expose us to increased compliance costs, significant liability, penalties and harm
to our reputation and brand.
We
are subject to laws in certain foreign countries, and adhere to industry standards in the United States, that mandate rating requirements
or set other restrictions on the advertisement or distribution of interactive entertainment software based on content. In addition,
certain foreign countries allow government censorship of interactive entertainment software products. Adoption of ratings systems,
censorship or restrictions on distribution of interactive entertainment software based on content could harm our business by limiting
the products we are able to offer to our customers. In addition, compliance with new and possibly inconsistent regulations for
different territories could be costly, delay or prevent the release of our products in those territories.
Companies
and governmental agencies may restrict access to platforms, our website, mobile applications or the Internet generally, which
could lead to the loss or slower growth of our player base.
Our
players generally need to access the Internet and platforms such as the Apple App Store, Google Play Store, Facebook, or our gaming
platform to play many of our games. Companies and governmental agencies could block access to any platform, our website, mobile
applications or the Internet generally for a number of reasons such as security or confidentiality concerns or regulatory reasons,
or they may adopt policies that prohibit employees from accessing Apple, Google, Facebook, and our website or any social platform.
If companies or governmental entities block or limit access or otherwise adopt policies restricting players from playing our games,
our business could be negatively impacted and we could lose or experience slower growth in our player base.
If
we do not adequately address the shift to mobile device technology by our customers, operating results could be harmed and our
growth could be negatively affected.
Consumers
are increasingly using their mobile devices for entertainment, including for playing mobile games. As a result, our future success
depends in part on our ability to provide adequate functionality for mobile gamers. The shift to mobile technology by our users
may harm our business in the following ways:
If
we do not develop suitable functionality for users who visit our website using a mobile device or consumers do not play our mobile
gaming products, our business and operating results could be harmed.
We
are exposed to seasonality in the sale of our retail products.
Historically,
we have seen a high degree of seasonality in our business and financial results due to the introduction of seasonal video game
updates. For example, we have typically experienced higher levels of consumer demand occurring during and around the launch of
the seasonal annual update of a racing series product, the overall start of the racing season, and the calendar year-end holiday
buying season. Receivables and credit risk are likewise higher during these periods, as retailers increase their purchases of
our products in anticipation of increased demand. Delays in development, approvals or manufacturing could affect the timing of
the release of products, causing us to miss key selling periods, which could negatively impact our business.
Our
retail products, online gaming platform and games offered through our gaming platform may contain defects.
Our
retail products, online gaming platform and the games offered through our gaming platform are extremely complex and are difficult
to develop and distribute. We have quality controls in place to detect defects in our retail products and gaming platform before
they are released. Nonetheless, these quality controls are subject to human error, overriding, and resource or technical constraints.
Further, we have not undertaken independent third-party testing, verification or analysis of our gaming platform and associated
systems and controls. Therefore, our products, gaming platform and quality controls and the preventative measures we have implemented
may not be effective in detecting all defects in our products and gaming platform. In the event a significant defect in our retail
products, gaming platform and associated systems and controls is realized, we could be required to offer refunds, suspend the
availability of our esports events and other gameplay, or expend significant resources to cure the defect, each of which could
significantly harm our business and operating results.
We
may be held liable for information or content displayed on, retrieved from or linked to our gaming platform, or distributed to
our users.
Our
interactive live streaming platform enables gamers to exchange information and engage in various other online activities. Although
we require our gamers to register under their real names, we do not require user identifications used and displayed during gameplay
to contain any real-name information, and hence we are unable to verify the sources of all the information posted by our gamers.
In addition, because a majority of the communications on our online and in- person gaming platform is conducted in real time,
we are unable to examine the content generated by gamers before it is posted or streamed. Therefore, it is possible that gamers
may engage in illegal, obscene or incendiary conversations or activities, including publishing of inappropriate or illegal content.
If any content on our platform is deemed illegal, obscene or incendiary, or if appropriate licenses and third-party consents have
not been obtained, claims may be brought against us for defamation, libel, negligence, copyright, patent or trademark infringement,
other unlawful activities or other theories and claims based on the nature and content of the information delivered on or otherwise
accessed through our platform. Moreover, the costs of compliance may continue to increase when more content is made available
on our platform as a result of our growing base of gamers, which may adversely affect our results of operations.
Additionally,
we currently generate, and intend to generate in the future, revenue through offering advertising within certain of our franchises.
The content of in-game advertisements is generally created and delivered by third-party advertisers without our pre-approval,
and, as such, objectionable content may be published in our games by these advertisers. This objectionable third party-created
content may expose us to regulatory action or claims related to content, or otherwise negatively impact our business.
We
may experience security breaches and cyber threats.
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. In addition, we rely on technological infrastructure, including
third-party cloud hosting and broadband, provided by third-party business partners to support the in-person and online functionality
of our gaming platform. These business partners are also subject to cyber risks and threats. Such cyber risks and threats may
be difficult to detect, and the techniques that may be used to obtain unauthorized access or disable, degrade, exploit or sabotage
our networks and gaming platform change frequently and often are not detected. Our systems and processes to guard against cyber
risks and to help protect our data and systems, and the systems and processes of our third-party business partners, may not be
adequate. Any failure to prevent or mitigate security breaches or cyber risks, or respond adequately to a security breach or cyber
risk, could result in interruptions to our gaming platform, degrade the gamer experience, cause gamers to lose confidence in our
gaming platform and cease utilizing it, as well as significant legal and financial exposure. This could harm our business and
reputation, disrupt our relationships with partners and diminish our competitive position.
Our
business could be adversely affected if our data privacy and security practices are inadequate, or are perceived as being inadequate,
to prevent data breaches, or under the applicable data privacy and security laws generally.
In
the course of our business, we may collect, process, store and use gamer and other information, including personally identifiable
information, passwords and credit card information. Our security controls, policies and practices may not be able to prevent the
improper or unauthorized access, acquisition or disclosure of such information. The unauthorized access, acquisition or disclosure
of this information, or a perception that we do not adequately secure this information, could result in legal liability, costly
remedial measures, governmental and regulatory investigations, harm our profitability and reputation and cause our financial results
to be materially affected. In addition, third-party vendors and business partners receive access to information that we collect.
These vendors and business partners may not prevent data security breaches with respect to the information we provide them or
fully enforce our policies, contractual obligations and disclosures regarding the collection, use, storage, transfer and retention
of personal data. A data security breach of one of our vendors or business partners could cause reputational harm to them and/or
negatively impact our credibility to our gamer community.
We
depend on servers and Internet bandwidth to operate our games and digital services with online features. If we were to lose server
capacity or lack sufficient Internet bandwidth for any reason, our business could suffer.
We
rely on data servers, including those owned or controlled by third parties, to enable our customers to download our games and
other downloadable content, to access our online gaming platform, and to operate other products with online functionality. Events
such as limited hardware failure, any broad-based catastrophic server malfunction, a significant intrusion by hackers that circumvents
security measures, or a failure of disaster recovery services would likely interrupt the functionality of our games with online
services and could result in a loss of sales for games and related services. An extended interruption of service could materially
adversely affect our business, financial condition and operating results. See “—Risks Related to Our Business and
Industry—A significant disruption in service on our website or platforms could damage our reputation and result in a loss
of traffic and visitors, which could harm our business, brand, operating results and financial condition” for additional
information.
If
we underestimate the amount of server capacity our business requires or if our business were to grow more quickly than expected,
our consumers may experience service problems, such as slow or interrupted gaming access. Insufficient server capacity may result
in decreased sales, a loss of our consumer base and adverse consequences to our reputation. Conversely, if we overestimate the
amount of server capacity required by our business, we may incur additional operating costs.
Because
of the importance of our online business to our revenues and results of operations, our ability to access adequate Internet bandwidth
and online computational resources to support our business is critical. If the price of either such resource increases, we may
not be able to increase our prices or subscriber levels to compensate for such costs, which could materially adversely affect
our business, financial condition and operating results.