UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2022
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.☐
If securities are registered
pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether
any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
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, 2022, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately $7,687,057.
As
of March 24, 2023, the registrant had 2,827,433
shares of Class
A common stock, with 1 vote per share, and 700,000
shares of Class
B common stock, with 10 votes per share, issued and outstanding. At such date, Motorsport Network, LLC (“Motorsport
Network”) owned (i) 1,480,384
shares of Motorsport Games Inc. (the “Company” or “Motorsport Games”) issued and outstanding Class A common
stock and (ii) all 700,000
shares of the Company’s issued and outstanding Class B common stock. All Class A common stock and Class B common stock share data and share-based calculations set forth in this Annual
Report on Form 10-K have been adjusted to reflect the registrant’s 1-for-10 reverse stock split completed on November 10, 2022 on
a retroactive basis for the periods presented.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement relating to its 2023 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, 2022
TABLE
OF CONTENTS
Page
PART I
Item 1 Business 9
Item 1A Risk Factors 20
Item 1B Unresolved Staff Comments 50
Item 2 Properties 50
Item 3 Legal Proceedings 50
Item 4 Mine Safety Disclosures 50
PART II
Item 6 [Reserved] 51
Item 7A Quantitative and Qualitative Disclosures About Market Risk 66
Item 8 Financial Statements and Supplementary Data 67
Item 9A Controls and Procedures 68
Item 9B Other Information 69
Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 69
PART III
Item 10 Directors, Executive Officers and Corporate Governance 70
Item 11 Executive Compensation 70
Item 14 Principal Accountant Fees and Services 70
PART IV
Item 15 Exhibits and Financial Statement Schedules 71
Signatures 80
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Annual Report on Form 10-K (this “Report”) of Motorsport Games Inc. (the “Company,” “Motorsport Games,”
“we,” “us” or “our”) contains certain statements, which are not historical facts and are “forward-looking
statements” within the meaning of federal securities laws. These forward-looking statements are subject to certain risks, trends
and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results
of operations, plans, objectives, strategies, future performance and business. You can identify forward-looking statements by the fact
that they do not relate strictly to historical or current facts. 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. For example, forward-looking statements include,
but not limited to, statements we make relating to:
● our intended use of proceeds from the sales of our equity securities;
● our expectations relating to future impairment of intangible assets;
● our intention to not declare dividends in the foreseeable future;
● our ability to utilize net operating loss carryforwards;
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 that 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 that are difficult to predict. 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:
(x) adverse effects of increased competition;
(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 and liquidity; 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 Class A common stock; 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 of the most prestigious motorsport leagues and events in the world. Further, in 2021 we acquired the KartKraft karting simulation game as
well as Studio 397 B.V. (“Studio397”) and their rFactor 2 realistic racing simulator technology and platform, adding
both games and their underlying technology to our portfolio.
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.
The latest figures reported from 2021 show NASCAR, INDYCAR and Le Mans, which includes the WEC, having 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.
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 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 2022 and 2021, a majority 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 gaming revenues were estimated
to be 92.2 billion for 2022. We presently offer NASCAR Heat Mobile for iOS and Android and continue to evaluate further opportunities
to add to our mobile gaming portfolio to capture this large audience.
We
are striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing
games. 2022 was another successful year in esports, which began with the grand finale of the second running of the 24 Hours of Le
Mans Virtual in January, the INDYCAR-Motorsport Games Pro Challenge in February and the continuation and re-brand of elite single
seater esports rFactor 2 Formula Pro. The year concluded with the first 4 rounds of the 2022-23 Le Mans Virtual Series in September,
October, November and December. In addition, we also organized competitions to drive user engagement on our rFactor 2 platform, as
well as successfully delivering onsite esports activations with rFactor 2 at selected BTCC events in Autumn. For 2022, our esports
events had a cumulative total of approximately 2.3 million video views with approximately 6.3 million minutes watched.
Subsequently, in the first quarter of 2023, we announced our viewership figures for the 2022-23 Le Mans Virtual Series, including
the 24 Hours of Le Mans Virtual, which had a global audience of 8.5 million across television (TV)/over-the-top (OTT) channels, 36 million social media
impressions and over 10 million video views across the full 5-race season. 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 Traxion, a collective of racing, esports and gaming enthusiasts building a positive community of
likeminded gamers, sim racers. After launching in 2021, Traxion continues to grow across social, video and editorial channels, while
feeding the community the latest news, reviews, updates, opinions, and insight from the most recognized and respected names from the
world of racing games. In 2022, Traxion published over 2,000 articles and attracted nearly 10 million pageviews.
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 continue to utilize our resources and expertise to enhance the rFactor 2 platform, especially
in areas highlighted by the racing community.
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, NASCAR Heat Ultimate
Edition+ and NASCAR Rivals 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, and completed KartKraft’s full release on the Steam platform in January 2022.
Our
current video game catalog includes the following titles:
Game Image Overview Platforms Release Date
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. 2022 was
another successful year in esports which began with the second running of the 24 Hours of Le Mans Virtual in January, the
continuation and re-brand of elite single seater esports rFactor 2 Formula Pro as well as the INDYCAR-Motorsport Games Pro Challenge. In addition, we
also organized competitions to drive user engagement on our rFactor 2 platform, as well as successfully delivering onsite esports
activations with rFactor 2 at selected BTCC events in Autumn. 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.
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, as well as our own platform – Traxion – which is a source
of information and news for all things relating to virtual racing and esports.
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. In addition, we began providing product
development services to third-parties for the first time in 2022 that included the ongoing support and maintenance of developed
software.
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.
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 16 NASCAR Cup Series teams and supports the promotion of eNASCAR Heat Pro League (“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 years ended December
31, 2022 and 2021, we sold substantially all of our physical disk products for the retail channel through a single distribution partner,
which represented approximately 9% and 28% of our total revenue for the years ended December 31, 2022 and 2021, respectively.
Customer
Concentration
For
the years ended December 31, 2022 and 2021, three customers accounted for approximately 61% and four customer accounted for 83% of
our consolidated revenues, respectively. No other customer accounted for 10% or more of our revenues in those periods. For the year
ended December 31, 2022, four customers accounted for approximately 90% of our accounts receivable, and for the year ended December
31, 2021, two customers accounted for approximately 70% 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 $8,530,000 USD as of December 31,
2022) 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 required us to pay BARC an initial fee
in two equal installments of $100,000 each, both of which were made prior to their respective due dates. 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 during calendar years 2021 and 2022, after
which we will pay INDYCAR a royalty fee equal to a certain percentage of sales of physical and digital video gaming products, subject
to certain annual minimum royalty 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. This Agreement was assigned from MS Gaming Development LLC to Motorsport Games Inc. on September 3, 2021.
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.
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, 2022 was 134, of which 133 were full-time employees, including
91 developers, located primarily in the United States, the United Kingdom, Australia and the Republic of Georgia. None of our employees
were covered by collective bargaining agreements, and we believe that relations with our employees are generally good.
Government
Regulation
We
are subject to various federal, state and international laws and regulations that affect companies conducting business on the Internet
and mobile platforms, including those relating to privacy, use and protection of player and employee personal information and data (including
the collection of data from minors), the Internet, behavioral tracking, mobile applications, content, advertising and marketing activities
(including sweepstakes, contests and giveaways), and anti-corruption. Many of these laws and regulations
are continuously evolving and developing, and the application to, and ultimate impact on, us is uncertain. Additional laws in
all of these areas are likely to be passed in the future, which could result in significant limitations on or changes to the ways in
which we can collect, use, host, store or transmit the personal information and data of our customers or employees, communicate with
our players, and deliver products and services, and may significantly increase our compliance costs. As our business expands to include
new uses or collection of data that are subject to privacy or security regulations, our compliance requirements and costs will increase,
and we may be subject to increased regulatory scrutiny. See Part I, Item 1A, “Risk
Factors—Risks Related to Our Business and Industry—Government regulations applicable to us may negatively impact our business”
of this Report for additional information.
Intellectual
Property
Our
business is based on the creation, acquisition, use and protection of intellectual property. Some of this intellectual property is in
the form of software code, trademarks and copyrights, and trade secrets that we use to develop our games and to enable them to run properly
on multiple platforms. Other intellectual property we integrate includes audio-visual elements, including graphics, music and interface
design.
While
most of the intellectual property we use has been created or acquired by us, we have licensed rights to certain significant proprietary
intellectual property. We have also licensed rights from third parties to use certain significant marquee racing brands and related intellectual
property (See, “Strategic Licenses and Partnerships”). These agreements typically limit our use of the third party’s
respective intellectual property to specific uses and for specific time periods, in consideration for up-front and recurring royalty
payments that are typically based upon our sales of the respective products.
We
protect our intellectual property rights by relying on federal, state and common law rights, as well as contractual restrictions. We
control access to our proprietary technology by entering into confidentiality and invention assignment agreements with our employees
and contractors, and nondisclosure agreements with third parties. We also engage in monitoring and enforcement activities with respect
to infringing uses of our intellectual property by third parties.
In
addition to these contractual arrangements, we also rely on a combination of trade secret, copyright, trademark, trade dress and domain
names to protect our games and other intellectual property. We typically own the copyright to the software code to our content, as well
as the brand or title name trademark under which our games are marketed. We pursue the registration of our domain names, trademarks,
and service marks in the United States and in certain locations outside the United States.
Corporate
History and Available Information
Motorsport Gaming US LLC was organized as a limited liability company on August 2, 2018 under the laws of the State of Florida. On January
8, 2021, Motorsport Gaming US LLC converted into a Delaware corporation pursuant to a statutory conversion and changed its name to Motorsport
Games Inc. in connection with our IPO. Effective as of January 8, 2021, 100% of the membership interests held by the sole member of Motorsport
Gaming US LLC, Motorsport Network, converted into an aggregate of (i) 700,000 shares of Class A common stock of Motorsport Games Inc.,
which have 1 vote per share (the “MSN Initial Class A Shares”) and (ii) 700,000 shares of Class B common stock, which have
10 votes per share, of Motorsport Games Inc., which represented all of the outstanding shares of Class A and Class B common stock immediately
following the corporate conversion. Motorsport Network is the only holder of shares of the Company’s Class B common stock and does
not have any transfer, conversion, registration, or economic rights with respect to such shares of Class B common stock.
In November 2022, the
Company amended its certificate of incorporation to effectuate a reverse split of the issued and outstanding shares of Class A
common stock and Class B common stock at a ratio of 1-for-10. Shares underlying outstanding equity-based awards were proportionately