UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 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, 2023
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, 2023, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately $5,331,755.
As
of April 1, 2024, the registrant had 2,722,728 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, Driven Lifestyle Group LLC (“Driven Lifestyle”) owned (i) 1,480,385 shares of the registrant’s issued and outstanding Class A common
stock and (ii) all 700,000 shares of the registrant’s issued and outstanding Class B common stock.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement relating to its 2024 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, 2023
TABLE
OF CONTENTS
Page
PART I
Item 1 Business 9
Item 1A Risk Factors 16
Item 1B Unresolved Staff Comments 47
Item 1C Cybersecurity 47
Item 2 Properties 48
Item 3 Legal Proceedings 48
Item 4 Mine Safety Disclosures 48
PART II
Item 6 [Reserved] 49
Item 7A Quantitative and Qualitative Disclosures About Market Risk 65
Item 8 Financial Statements and Supplementary Data 66
Item 9A Controls and Procedures 67
Item 9B Other Information 68
Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 68
PART III
Item 10 Directors, Executive Officers and Corporate Governance 69
Item 11 Executive Compensation 69
Item 14 Principal Accountant Fees and Services 69
PART IV
Item 15 Exhibits and Financial Statement Schedules 70
Signatures 77
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 are not limited to, statements we make relating to:
● our intended use of proceeds from the sales of our equity securities;
● our statements and assumptions relating to the impairment of 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:
(ix) adverse effects of increased competition;
(xii) 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 Driven Lifestyle Group LLC (“Driven Lifestyle”), formerly
known as Motorsport Network, LLC, 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 racing game developer, publisher and esports ecosystem provider of official motorsport racing series, including the iconic 24 Hours of Le Mans endurance race (“Le Mans”) and the associated FIA World Endurance Championship (the
“WEC”). Our portfolio also includes the KartKraft karting simulation game, as well as Studio 397 B.V. (“Studio397”)
and their rFactor 2 realistic racing simulator technology and platform.
Our
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 2023 show Le Mans, which includes the WEC, having an estimated combined global fanbase of over 113 million, while
the global fanbase for Formula 1 was estimated to be 1.61 billion.
We
develop and publish multi-platform racing video games including for game consoles, personal computers (PCs) and mobile platforms through
various retail and digital channels, including full-game and downloadable content (“DLC”).
We have obtained the official licenses to develop multi-platform games for the 24 Hours of Le Mans race and the WEC. Additionally,
we have a limited non-exclusive right and license to, among other things, sell our NASCAR games and DLCs that are currently in our product
portfolio through December 31, 2024. For fiscal years 2023 and 2022, 72% and 63% of our total revenue, respectively, was generated
from sales of our NASCAR racing video games.
We
are striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing
games. In 2023, we organized the grand finale of the Le Mans Virtual Series 2022/23, the 24 Hours
of Le Mans Virtual event, which had a cumulative total of approximately 8.8 million video views with approximately 27 million
minutes watched. The 24 Hours of Le Mans Virtual event had a global audience of 5 million across television (TV)/over-the-top (OTT) channels.
We continue to leverage esports competitions to bring wider awareness and engagement to our gaming products, while creating inspiring
event spectacles for our viewers.
Company
Background
Motorsport
Games was formed in 2018 by Driven Lifestyle as a wholly-owned subsidiary in connection with the acquisition by Motorsport Games of a
controlling interest in 704Games Company, which previously held the exclusive license to be the official video game developer and publisher
for the NASCAR video game racing franchise, subject to certain limited exceptions. On October 3, 2023, we sold our NASCAR licensed rights
under that certain Second Amended and Restated Distribution and License Agreement with NASCAR Team Properties (“NTP”) (the
“NASCAR License”) to iRacing.com Motorsport Simulations, LLC (“iRacing”). Concurrently with the sale of our NASCAR
License, we entered into an agreement with NTP pursuant to which we have a limited non-exclusive right and license to, among other things,
sell our NASCAR games and DLCs that are currently in our product portfolio through December 31, 2024 (the “NASCAR New Limited License”).
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 entered into a multi-year licensing agreement to use certain licensed intellectual
property for motorsports and/or racing video gaming products related to, themed as, or containing the British Touring Car Championship
(the “BTCC”), on consoles and mobile applications, esports series and esports events. In October 2023, BARC (TOCA) Limited,
the exclusive promoter of the BTCC, delivered notice to the Company terminating the BTCC license agreement, effective as of November
3, 2023. As a result, we no longer have the right to develop and publish the video games for the BTCC racing series or to create
and organize its esports leagues and events.
In
January 2021, we completed our initial public offering (“IPO”). Prior to our IPO, Motorsport Games was a wholly-owned subsidiary
of Driven Lifestyle and, following the completion of our IPO, Driven Lifestyle 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.
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
(collectively referred to as “704Games” herein).
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 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 racings series.
In November 2023, INDYCAR, LLC delivered notice to the Company terminating the INDYCAR license agreements, effective immediately. As
a result, we no longer have the right to develop and publish the video games for the INDYCAR racing series or to create and organize
its esports leagues and events.
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 DLCs.
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. We also continue to leverage
esports competitions to bring wider awareness and engagement to our gaming products, while creating inspiring event spectacles for our
viewers. In 2023, we organized the grand finale of the Le Mans Virtual Series 2022/23, the 24 Hours
of Le Mans Virtual event, which had a cumulative total of approximately 8.8 million video views with approximately 27 million
minutes watched. The 24 Hours of Le Mans Virtual event had a global audience of 5 million across television (TV)/over-the-top (OTT) channels.
Although we did not organize the Le Mans Virtual Series for the 2023/24
season, we currently plan on organizing the 2024/25 Le Mans Virtual Series to commence later this year. We also intend to continue exploring
opportunities to expand the recurring portion of our esports segment outside of Le Mans.
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, among other things, merchandising.
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.
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 have historically been 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). Due
to our modified product release schedule, we recognized minimal revenue from sales of physical gaming products for the year ended
December 31, 2023. For the year ended December 31, 2022, we sold substantially all of our physical gaming products for the retail channel
through a single distribution partner, which represented approximately 9% of our total revenue for 2022. However, we
expect to continue to use a limited number of distribution partners in the future for sales of our physical gaming products.
Customer
Concentration
For
the years ended December 31, 2023 and 2022, three customers accounted for approximately 83% and 61% 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, 2023, three customers accounted
for approximately 89% of our accounts receivable and for the year ended December 31, 2022, four customers accounted for approximately
90% 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.
Strategic
Licenses and Partnerships
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 $8,830,000 as of December 31, 2023)
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.
NASCAR
As
discussed above, concurrently with the sale of our NASCAR License, we entered into an agreement with NTP pursuant to which we have a
limited non-exclusive right and license to, among other things, sell our NASCAR games and DLCs that are currently in our product portfolio
through December 31, 2024.
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.
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, iRacing
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 Le Mans games for which we hold an exclusive license. 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 game developer, publisher and esports ecosystem
provider of official motorsport racing series. Our headcount as of December 31, 2023 was 71, of which 50 were full-time
employees, including 52 developers, located primarily in the United States and the United Kingdom. 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, Driven Lifestyle, 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 “DL 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. Driven Lifestyle 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
decreased and the respective per share exercise prices, if applicable, were proportionately increased in accordance with the terms of
the agreements governing such securities. There was no change in the par value of the Class A common stock and Class B common stock as
a result of the reverse stock split.
Our
Internet address is www.motorsportgames.com. We regularly file reports with the SEC, including our Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We
make available free of charge through our website copies of these reports as soon as reasonably practicable after such documents are
electronically filed with, or furnished to, the SEC. The SEC also maintains a website, www.sec.gov that contains the reports,
proxy and information statements and other information regarding issuers that file electronically with the SEC. The information contained
on our website is not included as a part of, or incorporated by reference into, this Report.
Item
1A. Risk Factors
The
following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other
statements in this Report. The following information should be read in conjunction with Part II, Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes
in Part II, Item 8, “Financial Statements and Supplementary Data” of this Report.
The
business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or
unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s
actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating
results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition,
operating results and stock price. Because of the following factors, as well as other factors affecting the Company’s financial
condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance,
and investors should not use historical trends to anticipate results or trends in future periods.
Risks
Related to Our Financial Condition and Liquidity
We
have incurred significant losses since our inception, and we expect to continue to incur losses for the foreseeable future. Accordingly,
our financial condition raises substantial doubt regarding our ability to continue as a going concern.
We
incurred a net loss of $14.3 million and negative cash flows from operations of $12.9 million for the year ended December 31, 2023. As
of December 31, 2023, we had an accumulated deficit of $87.0 million and cash and cash equivalents of $1.7 million. For the year ended
December 31, 2023, we experienced an average net cash burn from operations of approximately $1.1 million per month. We expect to continue
to have a net cash outflow from operations for the foreseeable future as we continue to develop our product portfolio and invest in developing
new video game titles.
As
a result of our financial condition, management has concluded that there is substantial doubt in our ability to continue as a going concern.
The report of our independent registered public accountant on our financial statements as of and for the years ended December 31, 2023
and 2022 also includes explanatory language describing the existence of substantial doubt about our ability to continue as a going concern.
There have been no adjustments to the accompanying financial statements to reflect this uncertainty. See Part II, Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Going Concern” of this Report and
Note 1 – Business Organization, Nature of Operations and Risks and Uncertainties in our consolidated financial statements
for additional information.
If
we are unable to satisfy our capital requirements, we could be required to adopt one or more of the following alternatives:
● selling additional assets or operations;
● further reducing other discretionary spending;
● entering into financing agreements on unattractive terms; and/or
● significantly curtailing or discontinuing operations.
There
can be no assurance that we would be able to take any of the actions referred to above because of a variety of commercial or market factors,
including, without limitation, market conditions being unfavorable for an equity or debt issuance or similar transactions, additional
capital contributions and/or loans not being available from Driven Lifestyle or affiliates and/or third parties, or that the transactions
may not be permitted under the terms of our various debt instruments then in effect, such as due to restrictions on the incurrence of
debt, incurrence of liens, asset dispositions and related party transactions. In addition, such actions, if taken, may not enable us
to satisfy our capital requirements if the actions that we are able to consummate do not generate a sufficient amount of additional capital.
If we are ultimately unable to satisfy our capital requirements, we would likely need to dissolve and liquidate our assets under the
bankruptcy laws or otherwise.
We
will require additional capital to meet our financial obligations, and this capital might not be available on acceptable terms or at
all.
We
expect to continue to incur losses for the foreseeable future as we continue to incur significant expenses. Accordingly, as a result
of our financial condition, we will need to engage in equity and/or debt financing arrangements or similar transactions (collectively,
“Capital Financing”) to secure additional funds to continue our existing business operations and to fund our obligations.
There are currently no commitments in place for future financing and there can be no assurance that we will be able to obtain funds on
commercially acceptable terms, if at all.
If
we raise additional funds through future issuances of equity (including preferred stock) or convertible debt securities, our existing
stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges
superior to those of holders of our Class A common stock, including, without limitation, in respect of the payment of dividends and the
payment of liquidating distributions. Because our decision to issue debt or preferred securities in any future offering, or to borrow
money from lenders, will depend in part on market conditions and other factors beyond our control, we cannot predict or estimate the
amount, timing, or nature of any such future offerings or borrowings.
Holders
of our Class A common stock will bear the risk of any such future offerings or borrowings. Further, any future debt financing could require
compliance with restrictive covenants relating to our capital raising activities and other financial and operational matters, which may
make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. Debt
financing must be repaid regardless of whether we generate revenues or cash flows from operations and may be secured by substantially
all of our assets.
Even
if we do secure additional Capital Financing, if the anticipated level of revenues are not achieved because of, for example, decreased
sales of our products due to the disposition of key assets, such as the sale of our NASCAR License, further changes in our product roadmap
and/or our inability to deliver new products for our various other licenses; less than anticipated consumer acceptance of our offering
of products and events; less than effective marketing and promotion campaigns, decreased consumer spending in response to weak economic
conditions or weakness in the overall electronic games category; adverse changes in foreign currency exchange rates; decreased sales
of our products and events as a result of increased competitive activities by our competitors; changes in consumer purchasing habits,
such as the impact of higher energy prices on consumer purchasing behavior; retailer inventory management or reductions in retailer display
space; less than anticipated results from our existing or new products or from its advertising and/or marketing plans; or if our expenses,
including, without limitation, for marketing, advertising and promotions, product returns or price protection expenditures, exceed the
anticipated level of expenses, our liquidity position may continue to be insufficient to satisfy its future capital requirements.
Limits
on our borrowing capacity under the $12 million Line of Credit may affect our ability to finance our operations.
Our
ability to borrow additional funds under the $12 million Line of Credit is limited by Driven Lifestyle’s ability to fund such borrowing
requests. If and to the extent that Driven Lifestyle were to be unable to fund any such requests, we will not have complete access to
some or all of the commitment available under the $12 million Line of Credit, but rather would have access to a lesser amount as determined
by Driven Lifestyle’s ability to fund our borrowing requests. Given the state of the financial markets, we have recently assessed
our exposure to any potential non-performance by Driven Lifestyle and believe that there is a substantial likelihood that Driven Lifestyle
may not fulfill our future borrowing requests. Because of these limitations, we do not rely on being able to meet our cash requirements
with any additional fundings under the $12 million Line of Credit. If Driven Lifestyle is unable to fulfill their commitment to advance
funds to us under the $12 million Line of Credit, it would impact our potential sources of liquidity and, depending upon the amount involved
and our liquidity requirements, it could have an adverse effect on our ability to fund our operations, which could have a material adverse
effect on our business, prospects, results of operations, financial condition and/or cash flows.
Risks
Related to Our Business and Industry
If
we do not consistently deliver popular products or if consumers prefer competing products, our business may be negatively impacted.
In
order to remain competitive, we must continuously develop new products or enhancements to our existing products. Consumer preferences
for games are usually cyclical and difficult to predict, and even the most successful content remains popular for only a limited period
of time unless refreshed or otherwise enhanced. These products or enhancements may not be well-received by consumers, even if well-reviewed
and of high quality. Further, competitors may develop content that imitates or competes with our best-selling games, potentially taking
sales away from us or reducing our ability to charge the same prices we have historically charged for our products. These competing products
may take a larger share of consumer spending than anticipated, which could cause product sales to fall below expectations. If we do not
continue to develop consistently high-quality and well-received games, if our marketing fails to resonate with our consumers, if consumers
lose interest in a genre of games we produce, if the use of cross-promotion within our mobile games to retain consumers becomes less
effective, or if our competitors develop more successful products or offer competitive products at lower prices, our revenues and profit
margins could decline. For example, our NASCAR 21: Ignition game released in October 2021 was generally not well-received and, as a result,
our revenues for the years ended December 31, 2023 and 2022 were adversely affected due to lower game sales. Further, a failure by us
to develop a high-quality product, or our development of a product that is otherwise not well-received, could potentially result in additional
expenditures to respond to consumer demands, harm our reputation, and increase the likelihood that our future products will not be well-
received. The increased importance of downloadable content to our business amplifies these risks, as downloadable content for poorly-received
games typically generates lower-than-expected sales. In addition, our own best-selling products could compete with our other games, reducing
sales for those other games.
Our
business and products are highly concentrated in the racing game genre, and our operating results may suffer if consumer preferences
shift away from this genre.
All
of our revenue is currently generated, and is expected to continue to be substantially generated, from products in the racing game genre.
Accordingly, our future success will depend on the popularity of games in the racing game genre with consumers. Consumer preferences
are difficult to predict and subject to frequent changes, and if interest in the racing game genre declines, even if our share of the
racing game genre is stable or expands, our operating results could suffer. Additionally, our concentration in the racing game genre
could place us at a disadvantage against other gaming companies that offer a more diverse selection of games.
If
we do not provide high-quality products in a timely manner, our business operations, financial performance, financial condition,