Motorsport Games Inc.

Item 1A. Risk Factors

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Risk Factors in Part I, Item 1A of the 2023 Form 10-K, which could materially affect our business, financial condition or future results. The risks described in the 2023 Form 10-K are not the only risks facing the Company. There have been no material changes from these risk factors as of the date of filing of this Report.

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 had negative cash flows from operations of $1.40.7 million for the sixnine months ended JuneSeptember 30, 2024. As of JuneSeptember 30, 2024, we had an accumulated deficit of $86.43 million and cash and cash equivalents of $0.58 million. We incurred a net loss of $14.3 million and had 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 $87.4 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. Our unaudited financial statement for the quarter ended September 30, 2024 were prepared under the assumption that we will continue as a going concern; however, we have incurred losses from operations to date, and due to the lack of available cash on hand to fund our operations over the next year and the continuing uncertainty surrounding our ability to raise funding in the form of potential capital financing, there is substantial doubt about our ability to continue as a going concern for one year after the financial statements are issued. Our unaudited financial statements for the quarter ended September 30, 2024 contain an explanatory paragraph with respect to this uncertainty. 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 I, Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Going Concern of his Report, Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Going Concern of our Annual Report on 2023 Form 10-K for the year ended December 31, 2023 and 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:

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

We follow a franchise model and a significant portion of our revenues has historically been derived from products based on a relatively small number of popular franchises, including our NASCAR products, which have historically accounted for the majority of our revenue. For the years ended December 31, 2023 and 2022, revenues associated with our NASCAR franchise accounted for approximately 71.6% and 62.9% of our total revenue, respectively. Revenues associated with our NASCAR franchise accounted for approximately 512.6% and 67.570.9% of our total revenue for the sixnine months ended JuneSeptember 30, 2024 and 2023, respectively. Following the sale of our NASCAR License and the execution of the NASCAR New Limited License, which allows us to sell our NASCAR games and DLCs that are currently in our product portfolio through December 31, 2024, we anticipate the amount of revenue to be generated by our existing NASCAR products to decline over time and to cease after December 31, 2024.

During the three months ended JuneSeptember 30, 2024, three customers accounted for 23.62.9%, 20.517.7% and 413.2% of our revenue and during the sixnine months ended JuneSeptember 30, 2024, the same three customers accounted for 21.25.1%, 20.68.7% and 47.319.8% of our revenue. In addition, the same customers represented 2830.7%, 31.122.4% and 30.827.9% of our accounts receivable at JuneSeptember 30, 2024.

A reduction in sales from or loss of these customers, in a significant amount, will have a material adverse effect on the Companys results of operations and financial condition.

Due to this dependence on a limited number of franchises, the failure to achieve anticipated results by one or more products based on these franchises, or the loss of any franchise, could negatively impact our business. For example, with the consummation of the sale of our NASCAR License to iRacing on October 3, 2023, we are no longer the official video game developer and publisher for the NASCAR video game racing franchise and no longer have the exclusive right to create and organize esports leagues and events for NASCAR using our NASCAR racing video games. Accordingly, we no longer have the right to use the NASCAR brand for our products other than 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. Similarly, our BTCC license agreement and INDYCAR license agreements were terminated by the respective licensors, effective November 2023. We believe this will require us to modify our existing business model and significantly alter the risk profile relating to our operations. As a result, we may encounter difficulties or challenges in continuing operations due to the sale of our NASCAR License and the termination of our BTCC license agreement and INDYCAR license agreements, and our cash flows and results of operations will likely be materially adversely impacted as we anticipate the amount of revenue to be generated by our existing NASCAR products to decline over time.

Additionally, if the popularity of a franchise declines, we may have to write off the unrecovered portion of the underlying intellectual property assets, which could negatively impact our business. In the future, we expect this trend to continue with a relatively limited number of franchises producing a disproportionately high percentage of our revenues and profits.

Our Class A common stock may be delisted from NASDAQ, which could affect the market price and liquidity of our Class A common stock.

We are required to continually meet NASDAQs listing requirements, including, among other things, a minimum stockholders equity requirement of at least $2,500,000 for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(b)(1) (the Stockholders Equity Requirement). As described in a Current Report on Form 8-K filed with the SEC on November 22, 2023, we received a deficiency letter from NASDAQs Listing Qualifications Department (the NASDAQ Staff) on November 17, 2023 notifying us that we were not in compliance with the Stockholders Equity Requirement. In our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, we reported stockholders equity of $498,897, which was below the Stockholders Equity Requirement. Additionally, we did not meet either of the alternative Nasdaq continued listing standards under the Nasdaq Listing Rules, which include (i) a market value of listed securities of at least $35 million or (ii) net income of $500,000 from continuing operations in the most recently completed fiscal year or in two of the three most recently completed fiscal years. As of December 31, 2023, our stockholders equity was $2,089,704.

In accordance with NASDAQ rules, we had until January 2, 2024 to submit a plan to the NASDAQ Staff to regain compliance with the Stockholders Equity Requirement, which we submitted by such date. On February 5, 2024, Nasdaq notified us that, based on its review of the Company and the materials submitted by us to NASDAQ, NASDAQ Staff determined to grant us an extension to regain compliance with the Stockholders Equity Requirement until May 15, 2024, subject to the Company regaining and evidencing compliance with the Stockholders Equity Requirement by such date.

Any delisting of our Class A common stock from NASDAQ, including as a result of our inability to regain compliance with the Stockholders Equity Requirement, could adversely affect our ability to attract new investors, reduce the liquidity of our outstanding shares of Class A common stock, reduce our ability to raise additional capital, reduce the price at which our Class A common stock trades, result in negative publicity and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholders. We cannot assure you that our Class A common stock, if delisted from NASDAQ, will be listed on another national securities exchange or quoted on an over-the-counter quotation system. In addition, delisting of our Class A common stock could deter broker-dealers from making a market in or otherwise seeking or generating interest in our Class A common stock and might deter certain institutions and persons from investing in our securities at all. For these reasons and others, delisting could adversely affect our business, financial condition and liquidity.

To regain compliance with the Stockholders Equity Requirement, we entered into the INDYCAR Agreement. Pursuant to the INDYCAR Agreement, our liability to INDYCAR, LLC in the amount of approximately $2.9 million was settled for $400,000, which resulted in a gain of approximately $2.5 million, which resulted in a $2.5 million increase to our stockholders equity. On June 3, 2024, the Nasdaq Stock Market LLC notified us that based on our disclosure of the INDYCAR Agreement in our Current Report on Form 8-K filed by us on May 23, 2024, Nasdaqs staff has determined that we comply with the Stockholders Equity Requirement. If n our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, we fail to evidence comreported stockholders equity of approximately $3.0 million; however, because we report stockholders equity of less than $2.2 million in this Report, which is below the Stockholders Equity Requirement, we expect to receive a deficiency letter from the NASDAQ Staff notifying us that we are not in compliance with the Stockholders Equity Requirement upo. If we fail to timely submit a plan to the filing ofNASDAQ Staff to regain compliance with this Reporte Stockholders Equity Requirement, and to thereafter regain compliance with such requirement, we may be subject to delisting. At that time, Nasdaq will provide written notification to us, which we may then appeal Nasdaqs determination to a Nasdaq Hearings Panel.

Driven Lifestyle controls a significant amount of our Class A common stock and all our Class B common stock and therefore it has the ability to exert significant control over the direction of our business, which could prevent other stockholders from influencing significant decisions regarding our business plans and other matters.

Driven Lifestyle currently owns all of the shares of our Class B common stock and 1,480,385 shares of our Class A common stock, which together represents a significant combined voting power of both classes of our common stock as of August 9November 14, 2024. Our Class B common stock has ten times the voting power of our Class A common stock. As long as Driven Lifestyle continues to control a majority of the voting power of our outstanding common stock, it will generally be able to determine the outcome of all corporate actions requiring stockholder approval, including the election and removal of directors. Even if Driven Lifestyle were to control less than a majority of the voting power of our outstanding common stock, it may be able to influence the outcome of such corporate actions so long as it owns a significant portion of our common stock. In the event Driven Lifestyle or its affiliates relinquish beneficial ownership of any of the Driven Lifestyle Initial Class A Shares at any time, one share of Class B common stock held by Driven Lifestyle will be cancelled for each such Driven Lifestyle Initial Class A Share no longer beneficially owned by Driven Lifestyle or its affiliates. If, however, Driven Lifestyle does not dispose of its Driven Lifestyle Initial Class A Shares, it could remain our controlling stockholder for an extended period of time or indefinitely.

Driven Lifestyles interests may not be the same as, or may conflict with, the interests of our other stockholders. Moreover, Mike Zoi, who is the manager of Driven Lifestyle and has sole voting and dispositive power with respect to the shares of our common stock held by Driven Lifestyle, may also have interests that are not the same as, or may conflict with, the interests of our other stockholders. Holders of our Class A common stock will not be able to affect the outcome of any stockholder vote while Driven Lifestyle controls the majority of the voting power of our outstanding common stock. As a result, Driven Lifestyle will be able to control, directly or indirectly and subject to applicable law, all matters affecting us, including:

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.

Because Driven Lifestyles interests may differ from ours or from those of our other stockholders, actions that Driven Lifestyle take with respect to us, as our controlling stockholder, may not be favorable to us or our other stockholders, including holders of our Class A common stock.

We could be subject to unanticipated adverse effects arising from our inability to fully repay Luminis International B.V. and Technology In Business B.V., the sellers of Studio 397 B.V. (Studio397), relating to our acquisition of 100% of the share capital of Studio397 in April 2021.

On April 20, 2021 we acquired 100% of the share capital of Studio 397 B.V. (Studio397) from Luminis International B.V. and Technology In Business B.V. (collectively, the Sellers). The purchase price originally consisted of a cash payment at closing and payments due at a later date. To date, we have not paid all of the payments due subsequent to the closing. Pursuant to the terms of agreements that we entered into, we are required to pay interest on the amounts owed but unpaid. The remaining balance owed as of JuneSeptember 30, 2024, was $0.6 million with unpaid accrued interest of $0.3 million. As security for payment of the amounts owed, we pledged stock of Studio397, the voting rights of which the seller could request to be transferred to it thirty days after such nonpayment.