UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2021
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 ☒
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 ☒
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 ☐
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 ☐
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 ☒ Smaller reporting company ☒
Emerging growth company ☒
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 ☒
The
aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing price
of the registrant’s Class A common stock as reported on The Nasdaq Capital Market on June 30, 2021, the last business day
of the registrant’s most recently completed second fiscal quarter, was approximately $64,902,558.
As
of March 28, 2022, the registrant had 11,673,587shares
of Class
A common stock, with 1 vote per share, and 7,000,000shares
of Class B common stock, with 10 votes per share,
issued and outstanding. At such date, Motorsport Network, LLC (“Motorsport Network”) owned (i) 7,000,000shares
of Motorsport Games Inc. (the “Company” or “Motorsport Games”) issued and outstanding Class A common stock
and (ii) all 7,000,000shares
of the Company’s issued and outstanding Class B common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement relating to its 2022 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, 2021
TABLE
OF CONTENTS
Page
PART I
Item 1 Business 6
Item 1A Risk Factors 16
Item 1B Unresolved Staff Comments 45
Item 2 Properties 46
Item 3 Legal Proceedings 46
Item 4 Mine Safety Disclosures 46
PART II
Item 6 [Reserved] 47
Item 7A Quantitative and Qualitative Disclosures About Market Risk 61
Item 8 Financial Statements and Supplementary Data 61
Item 9A Controls and Procedures 62
Item 9B Other Information 63
Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 63
PART III
Item 10 Directors, Executive Officers and Corporate Governance 64
Item 11 Executive Compensation 64
Item 14 Principal Accountant Fees and Services 64
PART IV
Item 15 Exhibits and Financial Statements 65
Signatures 72
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, results of operations, financial condition and/or liquidity, including with respect to the ongoing effects of Russia’s
invasion of Ukraine, as well as the coronavirus (“COVID-19”) pandemic; our intended corporate purpose to make the thrill
of motorsports accessible to everyone by creating the highest quality, most sophisticated and most innovative experiences for racers,
gamers and fans of all ages; new or planned products or offerings, including the anticipated timing of our new product launches; our
intentions with respect to our mobile games, including expectations that we will continue to focus on developing and further enhancing
our multi-platform games for mobile phones, as well as the anticipated timing of the release of our future mobile games; our plans to
strive 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; our belief 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; our future plans and expectations for Traxion, our online destination for
the virtual racing community, including with regards to its functionality and as a platform to grow our addressable audience, along with
being able to monetize such audience through sponsorship and advertising revenues; our intention to continue to enhance our proprietary
racing-focused Motorsport Games Engine with acquired technology, and our belief that this 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; our beliefs regarding the growing importance
and business viability of esports, especially within the racing and motorsport genres; our intention to expand our license arrangements
to other internationally recognized racing series and the platforms we operate on; our expectation that we will be able to extend or
re-negotiate our promotion agreement with Motorsport Network on reasonable terms; our intention to continue seeking to expand our audience
base through traditional marketing and sales distribution channels including Facebook, Twitter, Twitch, YouTube and other online social
networks; our belief that our esports business has the potential to generate incremental revenues through the further sale of media rights
to our esports events and competitions, as well as merchandising and sports betting, if the esports audience pattern continues to grow;
our expectations that the COVID-19 pandemic will not have a material impact on our future business and operations; our expectation that
having a broader product portfolio will improve our operating results and provide a revenue stream that is less cyclical based on the
release of a single game per year; our plans to drive ongoing engagement and incremental revenue from recurrent consumer spending on
our titles through in-game purchases and extra content; our expectation that we will continue to derive significant revenues from sales
of our products to a very limited number of distribution partners; our belief that additions to our existing portfolio of games centered
around popular licensed racing series will provide us the opportunity to further grow our esports business by having more titles to produce
our esports events; our expectation that we will continue to invest in technology, hardware and software to support our games and services,
including with respect to security protections; our belief that the global adoption of portable and mobile gaming devices leading to
significant growth in portable and mobile gaming is a continuing trend; our intention to continue to look for opportunities to expand
the recurring portion of our business; our liquidity and capital requirements, including, without limitation, our ability to continue
as a going concern, our belief that our existing cash on hand will not be sufficient to fund our operations for at least the next 12
months, our belief that it will be necessary for us to secure additional funds to continue our existing business operations and to fund
our obligations, and our belief that we have access to capital resources, as well as statements regarding our cash flows and anticipated
uses of cash; our expectations to generate additional liquidity through consummating equity and/or debt financings, as well as by continued
cost control initiatives; our expectations that we will continue to incur losses for the foreseeable future as we continue to incur significant
expenses; our plans and intentions with respect to our remediation efforts to address the material weaknesses in our internal control
over financial reporting; our beliefs regarding the merit of any plaintiff’s allegations and the impact of any claims and litigation
that we are subject to; our intention to not declare dividends in the foreseeable future; our ability to utilize net operating loss carryforwards;
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. Important factors that could cause our actual
results to differ materially from those projected in any forward-looking statements are discussed in “Risk Factors” in Part
I, Item 1A of this Report, as updated in our subsequent filings with the Securities and
Exchange Commission (the “SEC”). In addition to factors that may be described in our
filings with the SEC, including this Report, the following factors, among others, could cause our actual results to differ materially
from those expressed in any forward-looking statements made by us:
(ix) the ability to attract and retain qualified employees and key personnel;
(x) adverse effects of increased competition;
(xii) our ability to protect its intellectual property; and/or
(xiii) local, industry and general business and economic conditions.
Additionally,
there are other risks and uncertainties described from time to time in the reports that we file with 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 financial condition; risks related to our
business and industry; risks related to our relationship with Motorsport Network, LLC (“Motorsport Network”), which controls
more than a majority of our issued and outstanding voting shares; risks related to our Company; risks related to the ownership of
our common stock; risks related to our liquidity (see Note 1 – Business Organization of our consolidated financial statements);
and certain general risks, which could have a material adverse effect on our business, financial condition, liquidity, 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”), INDYCAR, the British Touring Car Championship (the “BTCC”) and others. Our portfolio
is comprised of some the most prestigious motorsport leagues and events in the world. We are the provider of official video games for
NASCAR, INDYCAR, Le Mans and BTCC. Further, in 2021 we acquired the KartKraft karting simulation game as well as Studio 397 B.V. (“Studio397”)
and their rFactor 2 realistic racing simulator technology and platform, adding both games and their underlying technology
to our portfolio.
Motorsport
Games’ purpose is to make the thrill of motorsports accessible to everyone by creating the highest quality, most sophisticated
and innovative experiences for racers, gamers and fans of all ages. Our products and services target a large global motorsport audience.
For 2021, NASCAR, INDYCAR and Le Mans, which includes the WEC, had an estimated combined global fanbase of over 1 billion, while the
global fanbase for Formula 1 was estimated to be 757 million. Motorsport Games scales its business by releasing more games
on more platforms under unique licenses, while continuing to evolve scalable technology platforms to “wow” users.
The
company believes its addressable markets include the gaming, esports and motorsports segments. The gaming and esports market for
2021 represented over $180 billion in total spending, and the motorsports market segment produces a total economic output of approximately
$175 billion.
Started
in 2018 as a wholly-owned subsidiary of Motorsport Network, we are currently the official developer and publisher of the NASCAR video
game racing franchise and have obtained the official licenses to develop multi-platform games for the BTCC, the 24 Hours of
Le Mans race and the WEC, as well as INDYCAR. We develop and publish multi-platform racing video games for game consoles (such
as Xbox, PlayStation, and Nintendo Switch), personal computers (PCs) and mobile platforms (such as iOS and Android) through
various retail and digital channels, including full-game and downloadable content. For fiscal years 2021 and 2020, substantially all
of our revenue was generated from sales of our NASCAR racing video games.
According
to data from NewZoo, an industry source for games market insight and analytics, total global mobile gamers were estimated to be 2.8 billion
for 2021. We continue to focus on developing and further enhancing our multi-platform games for mobile phones to attract this large
audience. Currently, we offer NASCAR Heat Mobile for iOS and Android, and we are in the process of developing other NASCAR mobile
games with projected release dates in 2022 and 2023.
We
are striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing
games. In 2021, we organized several esports competitions, including the DiRT Rally 2.0 World Series on the popular Codemasters
game, and the Winter Heat and Summer Showdown on NASCAR Heat 5, and the expansion of 24 Hours of Le Mans Virtual event
into a part of a longer annual series towards the end of the year with professional teams and real-world racing drivers.
In addition, we also organized competitions to drive user engagement on our rFactor 2 platform. For 2021, our esports events had cumulative
total viewership of approximately 1.5 million views with approximately 3.8 million minutes watched. Subsequently, in the first
quarter of 2022, we announced our viewership figures for the 2021-22 Le Mans Virtual Series, which reached 7 million views
and registered cumulated television and digital audience figures of more than 81 million through its five-month season.
We continue to leverage esports competitions to bring wider awareness to our gaming products, while creating events that are adventures
for viewers.
We
believe that connecting virtual racing gamers, motorsport 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 and launched in 2021 a destination for the virtual racing community called Traxion.gg (“Traxion”).
We launched Traxion in beta in the first quarter of 2021 to cover news, reviews and editorial across video, web, social and audio
platforms. Future plans for Traxion include the functionality to enable users to run their own esports competitions in a simple, turn-key
format, allowing virtual racers and fans to assemble around racing games, leagues, individual ability, and various other metrics.
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 Company (“704Games”), which holds the exclusive license to be the official video game
developer and publisher for the NASCAR video game racing franchise, subject to certain limited exceptions. Simultaneously with
the acquisition of 704Games in 2018, we extended the NASCAR license for 10 years until December 31, 2029. 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.
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 in 2019. 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 24 Hours of Le Mans race and the WEC,
which the 24 Hours of 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
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 entered the simulated kart-racing space and formed Motorsport Games Australia Pty Ltd. to
support the Black Delta development team, which joined Motorsport Games Australia following the acquisition.
In
April 2021, we acquired the remaining equity interests in 704Games Company whereby 704Games Company merged with 704Games LLC, a newly-formed
Delaware limited liability company and our wholly-owned subsidiary, with 704Games LLC being the surviving entity in such merger.
In
April 2021, we also acquired Studio397, the company behind the industry leading rFactor 2 racing simulation platform, from Luminis International
BV. Following this acquisition, Studio397 continues its work on the rFactor 2 platform while also developing the physics and handling
models for our other official games. We have begun utilizing our resources and expertise to enhance the rFactor 2 platform, especially
in areas highlighted by the racing community. For example, we delivered the 2021/22 Le Mans Virtual Series on our rFactor 2 platform
between September 2021 and January 2022, as well as the INDYCAR Pro Challenge on February 9, 2022.
In
July 2021, we entered into certain license agreements with INDYCAR LLC to use certain licensed intellectual property for motorsports
and/or racing video gaming products and esports events related to, themed as, or containing the INDYCAR SERIES. The license agreements
are long-term agreements, in connection with which the parties intend to create a relationship for the development of video games
and events to be the official video games and esports events of the INDYCAR SERIES.
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 of officially licensed
NASCAR games. We have obtained licenses to develop multi-platform games for INDYCAR, the BTCC, the 24 Hours of Le Mans race, and
the WEC. Since our formation in 2018, we have published NASCAR Heat 3, NASCAR Heat 4, NASCAR Heat 5, NASCAR 21: Ignition and NASCAR Heat
Ultimate Edition+ for various platforms, including Xbox, PlayStation, PC, and Nintendo Switch. Our current mobile offering for NASCAR
is NASCAR Heat Mobile for iOS and Android. In 2021, we added the KartKraft karting simulation game and the rFactor 2 realistic racing
simulation game to our portfolio completing its full release on the Steam platform in January 2022.
We
are making significant investments in both technology
and human talent to create one of the best racing game experiences and to maximize the potential of our current and future gaming
franchises. Starting in 2021, we introduced our next generation NASCAR console game, NASCAR 21: Ignition, offering fans of the sport
and gaming franchise a game that provides an authentic and engaging NASCAR racing experience. NASCAR 21: Ignition was internally
built from the ground up on our proprietary racing-focused Motorsport Games Engine (“MSG Engine”) that utilizes Unreal
Engine’s game engine paired with the renowned car physics of the rFactor 2 platform. We continue to enhance
the MSG Engine and believe that the MSG Engine, coupled with our 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.
Our
current video game catalog includes the following titles:
Game Image Overview Platforms Release Date
Additionally,
multi-platform games for INDYCAR, BTCC and the 24 Hours of Le Mans race are currently under development, and we currently anticipate
releasing games for these racing series in 2023 and 2024.
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 2021, we organized several
esports competitions, including the DiRT Rally 2.0 World Series on the popular Codemasters game, the Winter Heat and Summer
Showdown on NASCAR Heat 5, and the expansion of the 24 Hours of Le Mans Virtual event into a part of a longer annual
series towards the end of the year with professional teams and real-world racing drivers. In addition, we also organized
competitions to drive user engagement on our rFactor 2 platform. In 2020, we organized and facilitated e-racing series
for the eNASCAR Heat Pro League (“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.
Our
Audience and Our Community
Our
majority 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 an interactive experience to engage with motorsports and
cars by leveraging its technology, customer intelligence and brands. Motorsport Network’s global team 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 racing video games and related esports activities. 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 a passion for everything motorsport and auto-related. This 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 invest in and expand our audience base through traditional marketing and sales distribution channels including
Facebook, Twitter, Twitch, YouTube and other online social networks. Additionally, in 2021, we launched Traxion in beta as a platform
to grow our addressable audience as a source of information and news for all things virtual racing and as a hub for esports broadcasts.
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.
Our
esports business generates revenues from sponsorships, advertising and media rights for events and competitions. In addition, should
audience patterns continue to grow, 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,
we believe our Traxion platform, which launched in beta in the first quarter of 2021, will further help us monetize our audience through
sponsorship, affiliate partnerships, 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 and collaborated press releases, further expanding NASCAR and racing
enthusiasts’ awareness of our products. This is similar with our other partnerships with INDYCAR, Le Mans, WEC, BTCC,
Formula E and others.
Additionally,
704Games is a 50/50 joint venture partner with an affiliate of Race Team Alliance (“RTA”) to develop the eNHPL. RTA
is an organization consisting of 14 NASCAR Cup Series teams and supports the promotion of eNHPL events through their individual team
social and digital platforms, among other things, 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, and 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 and the NASCAR Heat franchise 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 Inc. (“Apple”),
Nintendo Co., Ltd. (“Nintendo”), Google and Steam.
Our
physical gaming products are sold through a distribution network with an exclusive partner who specializes in the distribution of games
through mass-market retailers (e.g., Target, Wal-Mart), consumer electronics stores (e.g., Best Buy), discount warehouses, game specialty
stores (e.g., GameStop) and other online retail stores (e.g., Amazon). We expect to continue to derive significant revenues from sales
of our physical gaming products to a very limited number of distribution partners. For the year ended December 31, 2021, we sold
substantially all of our physical disk products for the retail channel through a single distribution partner, which represented
approximately 28% of our total revenue.
Customer
Concentration
For
the year ended December 31, 2021, four customers accounted for approximately 83% of our consolidated revenues, and for
the year ended December 31, 2020, three customers accounted for approximately 78% of our consolidated revenues. No other customer
accounted for 10% or more of our revenues in those periods. For the year ended December 31, 2021, two customers accounted for
approximately 70% of our accounts receivable, and for the year ended December 31, 2020, one customer accounted for approximately
82% of our accounts receivable. 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
As
part of our plan to maximize our revenues and product
offerings, we utilize an audience-centric approach, by collecting audience data across all of our products, platforms,
campaigns, attribution models, and analytics tools. These metrics are then turned into actionable insights for use in the development
of our games and esports offerings.
We
monitor audience data to improve our
understanding of three key areas—consumer behavioral changes, brand perception, and location in the sales funnel—which
in turn allows us to build relationships with our customers and brand partners.
We
use this audience intelligence to personalize messaging, product positioning, and creatives based on user signals and
their position in the sales funnel. We believe this strategy is designed to minimize ad spend waste, increase customer conversion and
thereby increase our return on investment.
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. These games 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 NASCAR-branded simulation-style video gaming products as the platform for conducting
and administering esports leagues and events for NASCAR. Such exclusivity excludes 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 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, with negotiations lasting for 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.
24
Hours of 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 24 Hours of 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 24 Hours of Le Mans race
and the WEC through a separate license agreement. This license expires 10 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 $9,060,000 USD
as of December 31, 2021) 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 24 Hours of 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 agreement with the Royal Automobile Club Motor Sport Association Limited to promote the BTCC is extended, BARC shall
notify us and discussions for an extension of the license agreement shall take place no later than March 31, 2026. 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.
INDYCAR
On
July 13, 2021, we entered into a royalty-bearing license agreement (the “INDYCAR Gaming License”) with INDYCAR LLC.
Pursuant to the INDYCAR Gaming License, INDYCAR LLC licensed us to use certain licensed intellectual property (described in the
INDYCAR Gaming License) for motorsports and/or racing video gaming products related to, themed as, or containing the INDYCAR SERIES.
The INDYCAR Gaming License is a long-term agreement, in connection with which the parties intend to form an exclusive relationship for
the development of video games to be the official video games of the INDYCAR SERIES.
In
exchange for the INDYCAR Gaming License, we will pay to INDYCAR an annual development fee through the date of launch, after which INDYCAR
will receive a royalty equal to a certain percentage of sales of physical and digital video gaming products, subject to certain minimum
guarantees. We have agreed under the INDYCAR Gaming License to provide advertising and publicity to bring the INDYCAR SERIES racing video
gaming products to the attention of as many purchasers and potential purchasers as possible.
Additionally,
we and INDYCAR entered into a royalty-bearing license agreement with INDYCAR which licensed us to use certain INDYCAR
intellectual property (“Licensed IP”) for motorsports and/or racing esports events related to, themed as, or containing
the INDYCAR SERIES (including the rFactor 2 platform) (the “INDYCAR Esports License”). The INDYCAR Esports License
is a long-term agreement, in connection with which the parties intend to form an exclusive relationship for the development of events
to be the official esports events of the INDYCAR SERIES, which include the esports events related to and/or themed as or containing the
Licensed IP and related features which, prior to launch, are hosted on our rFactor 2 platform and, after launch of the products, are
hosted using the products.
RTA
On
February 18, 2019, we formed the Racing Pro League, LLC a 50/50 partnership 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 esports multiplayer
competition video gaming league based on the NASCAR Heat video game series. As part of this partnership, 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 partnership 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, non-transferable 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. This Agreement was assigned from MS Gaming
Development LLC to Motorsport Games Inc. on September 3, 2021.
Arrangements
with Console Manufacturers
Under
the terms of agreements entered into separately with Sony, Microsoft, Nintendo and their affiliates, we are authorized to develop
and distribute disc-based and digitally-delivered software products and services compatible with PlayStation, Xbox and Switch consoles,
respectively. Under these agreements with Sony, Microsoft and Nintendo, 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, Microsoft and Nintendo (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, Microsoft and Nintendo, 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 among
others, designers, producers, programmers, artists, and sound engineers, 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 also rely, in part, 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
April 2021, we acquired Studio397, the company behind the industry leading rFactor 2 racing simulation platform, as discussed above.
Following this acquisition, Studio397 continues its work on the rFactor 2 platform while also developing the physics and handling models
for our other project games.
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
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, INDYCAR or BTCC games for which we hold licenses. 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, 2021 was 189, of which 188 were full-time employees, including
131 developers, located primarily in the United States, the United Kingdom and the Russian Federation. None of our employees were
covered by collective bargaining agreements, and we believe that relations with our employees are generally good.