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, 2025
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)413-0812
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, 2025, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately $10,362,427.
As
of March 10, 2026, the registrant had 5,078,450 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 2026 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, 2025
TABLE
OF CONTENTS
Page
PART I
Item 1 Business 10
Item 1A Risk Factors 16
Item 1B Unresolved Staff Comments 42
Item 1C Cybersecurity 42
Item 2 Properties 43
Item 3 Legal Proceedings 43
Item 4 Mine Safety Disclosures 43
PART II
Item 6 [Reserved] 44
Item 7A Quantitative and Qualitative Disclosures About Market Risk 57
Item 8 Financial Statements and Supplementary Data 58
Item 9A Controls and Procedures 59
Item 9B Other Information 60
Item 9C Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. 60
PART III
Item 10 Directors, Executive Officers and Corporate Governance 61
Item 11 Executive Compensation 61
Item 14 Principal Accountant Fees and Services 61
PART IV
Item 15 Exhibits and Financial Statement Schedules 62
Signatures 69
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 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:
Risks Related to Our
Financial Condition and Liquidity
Risks Related to Our Business and Industry
● Government regulations applicable to us may negatively impact our business.
● We are exposed to seasonality in the sale of our retail products.
● We may experience security breaches and cyber threats.
● Our international operations are subject to increased challenges and risks.
● Catastrophic events may disrupt our business.
Risks Related to Our Relationship with Driven Lifestyle
Risks Related to Our Company
Risks Related to Ownership of Our Class A Common Stock
● We do not intend to pay dividends for the foreseeable future.
General
Risk Factors
● The requirements of being a public company may require significant resources.
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 Inc. (“Motorsport”) is a racing game developer, publisher and esports ecosystem provider of official motorsport
racing series, including games based on 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. rFactor 2 also
powers F1® Arcade through a partnership with Kindred Concepts.
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 2024 show Le Mans, which includes the WEC, having a cumulative global audience of 255 million, while the global
fanbase for Formula 1 was estimated to be 827 million in 2025.
We
develop and publish racing video games for personal computers (PCs) through various 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. On February 20, 2024, we released Le Mans Ultimate on PC in early access. Le Mans Ultimate is the official
game of the WEC and 24 Hours of Le Mans, and is the first officially licensed and dedicated 24 Hours of Le Mans video game release in
over twenty years. On July 22, 2025, we released Le Mans Ultimate Version 1.0. This milestone marks the completion of the title’s
Early Access phase and ushers in a new era of continued development and expansion for the official game of the FIA World Endurance Championship
and the 24 Hours of Le Mans.
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 any esport events during 2025 and 2024, we intend 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”). Prior to the sale of our NASCAR License,
we had been the official video game developer and publisher for the NASCAR video game racing franchise and had the exclusive right to
create and organize esports leagues and events for NASCAR using our NASCAR racing video games, in each case, subject to certain limited
exceptions. Concurrently with the sale of our NASCAR License, we entered into an agreement with NTP pursuant to which we had a limited
non-exclusive right and license to, among other things, sell our NASCAR games and DLCs that were in our product portfolio through December
31, 2024 (the “NASCAR New Limited License”). We no longer sell NASCAR games and did not sell any NASCAR games during the year ended December 31, 2025.
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
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 controlling 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.
Our
Products
Game
Products Portfolio
We
develop and publish racing video games for PCs through various digital channels, including full-game and DLCs.
Our
current video game catalog includes the following titles:
Game Image Overview Platforms Release Date
We
continually evaluate our planned product release schedule and modify the timing of upcoming products based on developments in our business,
or if we believe it will result in a better consumer experience.
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, 2024/25 or 2025/26 seasons, we currently plan on organizing
the 2026/27 Le Mans Virtual Series to commence 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 PCs through various digital channels, including full-game
and downloadable content, as well as our RaceControl subscription service. 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.
During
the years ended December 31, 2025 and 2024, we did not generate any revenue from our esports business. Prior to 2024, our esports
business generated revenues from sponsorships, advertising and media rights for events and competitions. If 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 our 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, X (formerly Twitter), Twitch, YouTube and other online social networks, online
advertising, public relations activity, broadcast advertising, participation in cooperative advertising programs, 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 PC through our platform partners, including Steam and Genba.
Customer
Concentration
For the year ended December 31, 2025, sales through one of our main distribution channels accounted for approximately 64% of our consolidated
revenues and approximately 47% of our accounts receivable as of December 31, 2025. For the year ended December 31, 2024, sales through
three of our main distribution channels accounted for approximately 86% of our consolidated revenues and approximately 77% of our accounts
receivable as of December 31, 2024. A reduction in sales from or loss of these distribution channels 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 $9,391,000 as of December 31, 2025)
as needed for development of the video game products, to be contributed on an as-needed basis during the term of the license. As of December
31, 2025, we have funded approximately $8.8 million for such development. 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.
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 required 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 was required to 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 was effective until terminated under the provisions of the agreement; however, pursuant to the terms of the agreement, we
could only actively develop new or existing authorized products during a five-year active development period, which ended on August
11, 2025.
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.
Furthermore,
as there are relatively low barriers to entry to developing mobile or online free-to-play or other casual games, we expect new competitors
to enter the market and existing competitors to allocate more resources to developing and marketing competing games and applications.
We compete, or may compete, with a vast number of small companies and individuals who are able to create and launch casual games and
other content using relatively limited resources and with relatively limited start-up time or expertise. Competition for the attention
of consumers on mobile devices is intense, as the number of applications on mobile devices has been increasing dramatically, which, in
turn, has required increased marketing to garner consumer awareness and attention. This increased competition could negatively impact
our business. In addition, a continuing industry shift to free-to-play games could result in a reprioritization of our other products
by traditional retailers and distributors.
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. 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.
Human
Capital
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, 2025 was 44, made up of 26 full-time employees and 18
contractors, with 32 people in total dedicated to game development, located primarily in the United States of America and Europe. 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. In addition, laws and
regulations relating to user privacy, including children’s data privacy, electronic contracts and communications, mobile
communications, data collection, retention, consumer protection, and publishing activities, including production and delivery of
content, advertising, localization, and information security have been adopted or are being considered for adoption by many
jurisdictions and countries throughout the world. These laws, including the General Data Protection Regulation and the California
Consumer Privacy Act, which may restrict our ability to gather and use data about our users, or could harm our business by limiting
the products and services we can offer consumers or the manner in which we advertise or offer them. Data privacy, data protection,
localization, security and consumer-protection laws are evolving, and the interpretation and application of these laws in the United
States (including compliance with the California Consumer Privacy Act), Europe (including compliance with the General Data
Protection Regulation), and elsewhere often are uncertain, contradictory and changing. It is possible that these laws may be
interpreted or applied in a manner that is adverse to us or otherwise inconsistent with our practices, which could result in
litigation, regulatory investigations and potential legal liability or require us to change our practices in a manner adverse to our
business. As a result, our reputation and brand may be harmed, we could incur substantial costs, and we could lose both gamers and
revenue. Furthermore, the costs of compliance with these laws may increase in the future as a result of the adoption of new laws,
amendments, and changes in interpretation. Any failure on our part to comply with these laws or the application of these laws in an
unanticipated manner may harm our business and result in penalties or significant legal liability.
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.
Our
Internet address is 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, 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. References to past events are provided by way of
example only and are not intended to be a complete listing or a representation as to whether or not such factors have occurred in
the past or their likelihood of occurring in the future. 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
may require additional capital to meet our financial obligations, and this capital might not be available on acceptable terms or at all.
We
may 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. Other than the line of credit that
we entered into with Citibank, N.A. (the “Citibank Line of Credit”), 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. In addition,
there can be no assurance that we will be able to comply with the covenants that we are required to comply with in order to access the
Citibank Line of Credit.
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, our liquidity position may be insufficient to satisfy our future capital requirements
if our anticipated level of revenues is not achieved because of, for example, decreased sales of our products due to the disposition
of key assets, 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; 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, or product returns, exceed the anticipated level of expenses.
Restrictions
under the Credit Agreement with Citibank may affect our ability to finance our operations.
The
Credit Agreement (as defined below) with Citibank (as defined below) and related documents require us to abide by certain
restrictive covenants, including covenants related to conducting our business and maintaining certain levels of cash flow and fixed
charges. To the extent we require additional funding while any borrowing remains outstanding under the Citibank Promissory Note (as
defined below), we will therefore be limited in the types of fundraising transactions that we are able to pursue in compliance with
the Credit Agreement. In addition, the Citibank Promissory Note is secured by a lien on substantially all our assets, and if we were
to default Citibank could foreclose on our assets. If funding is not available or not available at terms acceptable to us, we may be
compelled to further reduce overhead costs and our cash obligations in the short term. In addition, we may look to divest or bring
in equity partners for our various divisions and bring in near term capital.
Risks
Related to Our Business and Industry
If
we do not consistently deliver popular products or if consumers prefer competing products, our business may be negatively impacted.
In
order to remain competitive, we must continuously develop new products or enhancements to our existing products. Consumer preferences
for games are usually cyclical and difficult to predict, and even the most successful content remains popular for only a limited period
of time unless refreshed or otherwise enhanced. These products or enhancements may not be well-received by consumers, even if well-reviewed
and of high quality. Further, competitors may develop content that imitates or competes with our best-selling games, potentially taking
sales away from us or reducing our ability to charge the same prices we have historically charged for our products. These competing products
may take a larger share of consumer spending than anticipated, which could cause product sales to fall below expectations. If we do not
continue to develop consistently high-quality and well-received games, if our marketing fails to resonate with our consumers, if consumers
lose interest in a genre of games we produce, if the use of cross-promotion within our mobile games to retain consumers becomes less
effective, or if our competitors develop more successful products or offer competitive products at lower prices, our revenues and profit
margins could decline. Further, a failure by us to develop a high-quality product, or our development of a product that is otherwise
not well-received, could potentially result in additional expenditures to respond to consumer demands, harm our reputation, and increase
the likelihood that our future products will not be well- received. The increased importance of downloadable content to our business
amplifies these risks, as downloadable content for poorly-received games typically generates lower-than-expected sales. In addition,
our own best-selling products could compete with our other games, reducing sales for those other games.
Our
business and products are highly concentrated in the racing game genre, and our operating results may suffer if consumer preferences
shift away from this genre.
All
of our revenue is currently generated, and is expected to continue to be substantially generated, from products in the racing game genre.
Accordingly, our future success will depend on the popularity of games in the racing game genre with consumers. Consumer preferences
are difficult to predict and subject to frequent changes, and if interest in the racing game genre declines, even if our share of the
racing game genre is stable or expands, our operating results could suffer. Additionally, our concentration in the racing game genre
could place us at a disadvantage against other gaming companies that offer a more diverse selection of games.
If
we do not provide high-quality products in a timely manner, our business operations, financial performance, financial condition,
liquidity, cash flows and/or results of operations may be negatively impacted.
Consumer
expectations regarding the quality, performance and integrity of our products and services are high. Consumers may be critical of our
brands, games, services and/or business practices for a wide variety of reasons, and such negative reactions may not be foreseeable or
within our control to manage effectively. For example, if our games or services, such as our creation and organization of esports leagues
and events, do not function as consumers expect, whether because they fail to function as advertised or otherwise, our sales may suffer.
If any of these issues occur, consumers may stop playing the game and may be less likely to return to the game as often in the future,
which may negatively impact our business.
Additionally,
delays in product releases or disruptions following the commercial release of one or more new products could negatively impact our business,
our revenues and reputation and could cause our results of operations to be materially different from expectations. This is particularly
the case where we seek to release certain products in conjunction with key events, such as the beginning of a racing season or a major
racing event. If we fail to release our products in a timely manner, or if we are unable to continue to improve our existing games by
adding features and functionality that will encourage continued engagement with these games, our business may be negatively impacted.
Moreover, if we or our third-party developers experience unanticipated development delays, financial difficulties, or additional costs,
for example as a result of a pandemic or labor supply constraints affecting many industries, we may not be able to release
titles according to our schedule and at budgeted costs. There can be no assurance that our products will be sufficiently successful so
that we can recoup these costs or make a profit on these products.
Additionally,
the amount of lead time and cost involved in the development of high-quality products is increasing due to growing technical complexities
and higher expectations from consumers. As a result, it is especially critical that we accurately predict consumer demand for such products.
If our future products do not achieve expected consumer acceptance or generate sufficient revenues upon introduction, we may not be able
to recover the substantial up-front development and marketing costs associated with those products.
Declines
in consumer spending and other adverse changes in economic, market and geopolitical conditions could have a material adverse effect on
our business, financial condition and operating results.
Our
business is subject to economic, market and geopolitical conditions, which are beyond our control. In particular, our
product purchases are predominately driven by discretionary spending by consumers. We believe that consumer spending is influenced by
general economic conditions and the availability of discretionary income. This makes our products particularly sensitive to general economic
conditions and economic cycles as consumers are generally more willing to make discretionary purchases, including purchases of products
like ours, during periods in which favorable economic conditions prevail. Adverse economic, market and geopolitical conditions, such
as a prolonged U.S. or international general economic downturn, whether or not caused by a pandemic or geopolitical issues,
including the ongoing wars between Russia and Ukraine and between Israel and Hamas, could result in further periods of increased inflation,
unemployment levels, tax rates, interest rates, energy prices, or declining consumer confidence, which would also reduce consumer spending.
Reduced consumer spending may in the future result in reduced demand for our products and may also require increased selling and promotional
expenses, which has had and may continue to have an adverse effect on our business, financial condition and operating results. In addition,
during periods of relative economic weakness, our consolidated credit risk, reflecting our counterparty dealings with distributors, customers,
capital providers and others may increase, perhaps materially so. Furthermore, uncertainty and adverse changes in the economy could also
increase the risk of material losses on our investments, costs associated with developing and publishing our products, the cost and availability
of sources of financing, and our exposure to material losses from bad debts, any of which could have a material adverse effect on our