Motorsport Games Inc 10-K for FY2020

Motorsport Games Inc. (MSGM)

10-K 2021-03-24 For: 2020-12-31

Added on April 10, 2026

About this 10-K

Motorsport Games Inc filed this 10-K on March 24, 2021, covering the fiscal year ended December 31, 2020 (FY2020).

Headline figures

Fiscal year ended December 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $19.05M; up 60.7% from $11.85M a year earlier
Net loss: $1.76M; compared with a net loss of $3.56M a year earlier

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Delaware		86-1791356
State or Other Jurisdiction of Incorporation or Organization		I.R.S. Employer Identification No.

5972 NE 4th Avenue Miami, FL		33137
Address of Principal Executive Offices		Zip Code

Large accelerated filer [ ]	Accelerated filer [ ]
Non-accelerated filer [X]	Smaller reporting company [X]
	Emerging growth company [X]

		Page
	PART I
Item 1	Business	5
Item 1A	Risk Factors	13
Item 1B	Unresolved Staff Comments	36
Item 2	Properties	36
Item 3	Legal Proceedings	36
Item 4	Mine Safety Disclosures	37

	PART II
Item 5	Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	37
Item 6	Selected Financial Data	38
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	47
Item 8	Financial Statements and Supplementary Data	47
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	48
Item 9A	Controls and Procedures	48
Item 9B	Other Information	49

	PART III
Item 10	Directors, Executive Officers and Corporate Governance	50
Item 11	Executive Compensation	50
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	50
Item 13	Certain Relationships and Related Transactions, and Director Independence	50
Item 14	Principal Accountant Fees and Services	50

	PART IV
Item 15	Exhibits and Financial Statements	51
Item 16	Form 10-K Summary	56
Exhibit Index		51
Signatures		57

	●	If we do not consistently deliver popular products or if consumers prefer competing products, our business may be negatively impacted.

	●	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.

	●	If we do not provide high-quality products in a timely manner, our business may be negatively impacted.

	●	The recent COVID-19 pandemic has impacted our operations and could adversely affect our business operations, financial performance and results of operations, the extent of which is uncertain and difficult to predict.

	●	Declines in consumer spending and other adverse changes in the economy could have a material adverse effect on our business, financial condition and operating results.

	●	We depend on a relatively small number of franchises for a significant portion of our revenues and profits.

	●	Our ability to acquire and maintain licenses to intellectual property, especially for sports titles, affects our revenue and profitability.

	●	The importance of retail sales to our business exposes us to the risks of that business model.

	●	We primarily depend on a single third-party distribution partner to distribute our games for the retail channel, and our ability to negotiate favorable terms with such partner and its continued willingness to purchase our games is critical for our business.

	●	We plan to continue to generate a portion of our revenues from advertising and sponsorship during our esports events. If we fail to attract more advertisers and sponsors to our gaming platform, tournaments or competitions, our revenues may be adversely affected.

	●	We are reliant on the retention of certain key personnel and the hiring of strategically valuable personnel, and we may lose or be unable to hire one or more of such personnel.

	●	The success of our business relies heavily on our marketing and branding efforts, and these efforts may not be successful.

	●	If we do not adequately address the shift to mobile device technology by our customers, operating results could be harmed and our growth could be negatively affected.

	●	Failure to adequately protect our intellectual property, technology and confidential information could harm our business and operating results.

	●	Motorsport Network controls the direction of our business and its ownership of our Class A common stock and Class B common stock will prevent you and other stockholders from influencing significant decisions.

	●	If we are no longer controlled by or affiliated with Motorsport Network, we may be unable to continue to benefit from that relationship, which may adversely affect our operations and have a material adverse effect on us.

	●	We have incurred significant losses since our inception, and we may continue to experience losses in the future.

	●	Our limited operating history makes it difficult to evaluate our current business and future prospects, and we may not be able to effectively grow our business or implement our business strategies.

	●	We are an emerging growth company and a smaller reporting company, and we cannot be certain if the reduced disclosure requirements applicable to us will make our Class A common stock less attractive to investors.

	●	The dual class structure of our common stock may adversely affect the trading market for our Class A common stock.

Game	Image	Overview	Platforms	Release Date
NASCAR Heat 3		NASCAR Heat 3 is a racing video game simulating the 2018 NASCAR Cup Series and feeder competitions. It was developed by Monster Games, Inc. and published by 704Games.	Xbox One, PlayStation 4, and Microsoft Windows via Steam	September 7, 2018

NASCAR Heat Mobile		NASCAR Heat Mobile is the only officially licensed, authentic NASCAR racing experience for mobile devices. It was developed by Firebrands Games and published by 704Games. To date, NASCAR Heat Mobile has had approximately five million total installs.	iOS and Android	April 25, 2017

NASCAR Heat 4		NASCAR Heat 4 is a racing video game simulating the 2019 NASCAR season. It was developed by Monster Games, Inc. and was published by 704Games. To date, NASCAR Heat 4 is the most successful sequel of the NASCAR Heat franchise based on quantity of units sold.	Xbox One, PlayStation 4, and Microsoft Windows via Steam	September 13, 2019

NASCAR Heat 5		NASCAR Heat 5 is a racing video game simulating the 2020 NASCAR season. It was developed by 704Games and was published by Motorsport Games.	Xbox One, PlayStation 4, and Microsoft Windows via Steam	July 7 and 10, 2020

NASCAR NXT*		NASCAR NXT is an upcoming racing video game simulating the 2021 NASCAR season. This is a first installment of the new series, which changes the game engine, physics, artificial intelligence and many other game fundamental components.	Xbox, PlayStation, Microsoft Windows via Steam and Nintendo Switch	Projected (Q3-2021)
*(Name TBC)

	●	reduced consumer demand for our products and adverse effects on the discretionary spending patterns of our customers, including the ability of our customers to pay for our products;

	●	the operations and seasons of the motorsports industry may be further altered or even canceled due to the COVID-19 pandemic, which may further affect the demand for our products and esports business;

	●	further disruptions to our operations, including any additional closures of our offices and facilities, which may affect our ability to develop, market, and sell our products;

	●	disruptions to the operations of our counterparties, including the physical retail, digital download online platforms, and cloud streaming services we rely on for the distribution of our products, the suppliers who manufacture our physical products and other third parties with which we partner (e.g., to market or ship our products);

	●	limitations on employee resources and availability, including due to sickness, government restrictions, the desire of employees to avoid contact with large groups of people or mass transit disruptions;

	●	a fluctuation in foreign currency exchange rates, which could impact our operations in the United Kingdom and Russia, or interest rates could result from market uncertainties; and

	●	an increase in the cost or the difficulty of obtaining debt or equity financing could affect our financial condition or our ability to fund operations or future investment opportunities.

	●	decreasing revenue from authorized transactions;

	●	creating downward pressure on the prices we charge players for our virtual currency and virtual items;

	●	increasing chargebacks from unauthorized credit card transactions;

	●	causing us to lose revenue from dissatisfied players who stop playing a particular game;

	●	increasing costs we incur to develop technological measures to curtail unauthorized transactions;

	●	resulting in negative publicity or harming our reputation with players and partners; and

	●	increasing customer support costs to respond to dissatisfied players.

	●	Customers visiting our website from a mobile device may not accept mobile technology as a viable long- term platform to play. This may occur for a number of reasons, including our ability to provide the same level of website functionality to a mobile device that we provide on a desktop computer, the actual or perceived lack of security of information on a mobile device and possible disruptions of service or connectivity.

	●	We may not continue to innovate and introduce enhanced products that can be suitably conveyed on mobile platforms.

	●	Consumers using mobile devices may believe that our competitors offer superior products and features based in part on our inability to provide sufficient website functionality to convince a mobile device user to transact with us.

	●	inability to offer certain games in certain foreign countries;

	●	recruiting and retaining talented and capable management and employees in foreign countries;

	●	challenges caused by distance, language and cultural differences;

	●	developing and customizing games and other offerings that appeal to the tastes and preferences of players in international markets;

	●	competition from local game makers with intellectual property rights and significant market share in those markets and with a better understanding of local player preferences;

	●	utilizing, protecting, defending and enforcing our intellectual property rights;

	●	negotiating agreements with local distribution platforms that are sufficiently economically beneficial to us and protective of our rights;

	●	the inability to extend proprietary rights in our brand, content or technology into new jurisdictions;

	●	implementing alternative payment methods for virtual items in a manner that complies with local laws and practices and protects us from fraud;

	●	compliance with applicable foreign laws and regulations, including privacy laws and laws relating to content and consumer protection, including, but not limited to, the United States Federal Trade Commission Act, various state consumer protection and video game control laws, and the United Kingdom’s Office of Fair Trading’s 2014 principles relating to in-app purchases in free-to-play games that are directed toward children 16 and under;

	●	compliance with anti-bribery laws, including the Foreign Corrupt Practices Act in the United States and the Bribery Act 2010 in the United Kingdom;

	●	credit risk and higher levels of payment fraud;

	●	currency exchange rate fluctuations;

	●	protectionist laws and business practices that favor local businesses in some countries;

	●	potentially adverse tax consequences due to changes in the tax laws of the U.S. or the foreign jurisdictions in which we operate;

	●	political, economic and social instability;

	●	public health crises, such as the COVID-19 pandemic, which can result in varying impacts to our employees, players, vendors and commercial partners internationally;

	●	higher costs associated with doing business internationally;

	●	export or import regulations; and

	●	trade and tariff restrictions.

	●	any determination with respect to our business direction and policies, including the appointment and removal of officers and directors;

	●	any determinations with respect to mergers, business combinations or the disposition of assets;

	●	compensation and benefit programs and other human resources policy decisions;

	●	the payment of dividends on our common stock; and

	●	determinations with respect to tax matters.

	●	the requirement that a majority of the board of directors consist of independent directors;

	●	the requirement that our nominating and corporate governance committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

	●	the requirement that our compensation committee be composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

	●	the requirement for an annual performance evaluation of our corporate governance and compensation committees.

	●	tax, employee benefit, indemnification and other matters arising from our relationship with Motorsport Network or its subsidiaries;

	●	business combinations involving us;

	●	business opportunities that may be attractive to us and Motorsport Network or its subsidiaries;

	●	intellectual property or other proprietary rights; and

	●	joint sales and marketing activities with Motorsport Network or its subsidiaries.

	●	increase the number of players of our games or unique visitors to our digital platform www.motorsportgames.gg;

	●	continue developing innovative technologies, tournaments and competitions in response to shifting demand in esports and online gaming;

	●	develop new sources of revenues;

	●	expand our brand awareness;

	●	further improve the quality of our product offerings, features and complementary products and services, and introduce high-quality new products, services and features; or

	●	introduce additional third-party products and services.

	●	diversion of management time and focus from operating our business;

	●	coordination of technology, research and development and sales and marketing functions;

	●	transition of the acquired company’s users to our website and mobile applications;

	●	retention of employees from the acquired company;

	●	cultural challenges associated with integrating employees from the acquired company into our organization;

	●	integration of the acquired company’s accounting, management information, human resources and other administrative systems;

	●	the need to implement or improve controls, policies and procedures at a business that prior to the acquisition may have lacked effective controls, policies and procedures;

	●	potential write-offs of intangibles or other assets acquired in such transactions that may have an adverse effect on our operating results;

	●	known and unknown liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, and tax liabilities; and

	●	litigation or other claims resulting from the acquisition of the company, including claims from terminated employees, consumers, former stockholders, or other third parties.

	●	changes in the valuation of our deferred tax assets and liabilities;

	●	expected timing and amount of the release of any tax valuation allowances;

	●	expiration of, or detrimental changes in, research and development tax credit laws;

	●	changes in tax laws, regulations or interpretations thereof; or

	●	expansion into or future activities in additional jurisdictions.

	●	breach of their duty of loyalty to us or our stockholders;

	●	act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;

	●	unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the Delaware General Corporation Law; or

	●	transactions for which the directors derived an improper personal benefit.

	●	establish an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations of persons for election to our board of directors;

	●	create a classified board of directors;

	●	prohibit cumulative voting in the election of directors; and

	●	reflect two classes of common stock, as discussed above.

	●	changes to our industry, including demand and regulations;

	●	our ability to compete successfully against current and future competitors;

	●	competitive pricing pressures;

	●	our ability to obtain working capital financing as required;

	●	additions or departures of key personnel;

	●	sales of our Class A common stock;

	●	our ability to execute our business plan;

	●	operating results that fall below expectations;

	●	our loss of any strategic relationship, sponsor or licensor;

	●	any major change in our management;

	●	changes in accounting standards, procedures, guidelines, interpretations or principles; and

	●	economic, geo-political and other external factors.

	●	the initial game delivered digitally or via physical disc at the time of sale and typically provides access to offline core game content;
	●	updates on a when-and-if-available basis, such as software patches or updates, and/or additional content to be delivered in the future, both paid and free; and esports events.

	For the Year Ended December 31,
	2020		2019
Revenues:
Gaming	$	18,745,166	$	11,775,787
Esports		300,363		75,000
Total Segment and Consolidated Revenues	$	19,045,529	$	11,850,787

	For the Year Ended December 31,					For the Year Ended December 31,
	2020		%			2019		%
Gross Profit:
Gaming	$	12,438,584		66	%	$	6,909,410		59	%
Esports		11,072		4	%		52,500		70	%
Total Segment and Consolidated Gross Profit	$	12,449,657		65	%	$	6,961,910		59	%

	December 31,			December 31,
	2020			2019

Cash	$	3,990,532		$	1,960,279
Working Capital (Deficiency)	$	(4,441,367	)	$	(2,035,682	)

	Page
Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets as of December 31, 2020 and 2019	F-2

Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019	F-3

Consolidated Statements of Changes in Member’s Equity for the Years Ended December 31, 2020 and 2019	F-4

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019	F-5

Notes to the Consolidated Financial Statements	F-6

	Member’s
	Deficiency
	Attributable to
	Motorsport						Total
	Gaming US			Noncontrolling			Member’s
	LLC			Interest			Equity
Balance - January 1, 2019	$	499,792		$	8,867,732		$	9,367,524
Net loss		(3,564,146	)		(2,191,418	)		(5,755,564	)
Balance - December 31, 2019	$	(3,064,354	)	$	6,676,314		$	3,611,960
Change of control adjustments		3,791,268			(5,107,548	)		(1,316,280	)
Net (loss) income		(1,756,647	)		1,076,793			(679,854	)
Balance - December 31, 2020	$	(1,029,733	)	$	2,645,559		$	1,615,826

	●	704Games Company
	●	Racing Pro League, LLC
	●	MS Gaming Development LLC
	●	Motorsport Games Limited (formed on February 6, 2020)

Intangible Asset			Useful Life
License agreements			16 years
Software			7 years
Distribution contracts			1 year

	●	Identification of a contract with a customer;
	●	Identification of the performance obligations in the contract;
	●	Determination of the transaction price;
	●	Allocation of the transaction price to the performance obligations in the contract; and
	●	Recognition of revenue when or as the performance obligations are satisfied.

	1)	Sales of Games - Full console and mobile games contain a software license that is delivered digitally or via physical disc at the time of sale;

	2)	Sales of Extra Content – Includes (a) extra content that is downloaded by console players that provides the ability to customize and/or enhance their gameplay and (b) virtual currencies that provide mobile players with the ability to purchase extra content that allows them to customize and/or enhance their gameplay; and

	3)	Esports Competition Events - Hosting of online esports competitions that generates sponsorship revenue.

	●	the underlying contract terms and conditions between the various parties to the transaction;
	●	which party is primarily responsible for fulfilling the promise to provide the specified good or service to the end customer;
	●	which party has inventory risk before the specified good or service has been transferred to the end customer; and
	●	which party has discretion in establishing the price for the specified good or service.

	Licensing Agreements		Software		Distribution Contracts		Accumulated Amortization			Total
Balance as of January 1, 2019	$	3,620,000	$	2,340,000	$	560,000	$	(382,594	)	$	6,137,406
Amortization expense		-		-		-		(810,250	)		(810,250	)
Balance as of December 31, 2019		3,620,000		2,340,000		560,000		(1,192,844	)		5,327,156
Purchase of intangible assets		891,999		-		-		-			891,999
Amortization expense		-		-		-		(650,703	)		(650,703	)
Balance as of December 31, 2020	$	4,511,999	$	2,340,000	$	560,000	$	(1,843,547	)	$	5,568,452

Weighted average remaining amortization period at December 31, 2020 (in years)		11.8		5.2		-

For the Years Ended December 31,	Total
2021	$	631,086
2022		697,767
2023		697,767
2024		697,767
2025		697,767
Thereafter		2,146,298
	$	5,568,452

Balance - January 1, 2019	$	712,732
Loss on impairment of goodwill		(575,015	)
Balance - December 31, 2019		137,717
Loss on impairment of goodwill		-
Balance - December 31, 2020	$	137,717

For the Years Ending December 31,	Total
2021	$	387,641
2022		244,320
2023		222,782
2024		163,628
2025		12,000
	$	1,030,371

	i.	Automobile Club de l’Ouest has and will continue to provide a dedicated team to develop and implement the business and has and will continue to make the 24 Hours of Le Mans brand available to Le Mans under a separate license agreement; and
	ii.	Motorsport Games has provided and will continue to provide a dedicated team to develop and implement the business and has and will continue to make itself and its employees, who have experience in e-sports and e-gaming platforms, available to develop the business and create a dedicated gaming platform for use by and to facilitate the continued development of the business.