Annual Report for Fiscal Year Ending December 31, 2025 (Form 10-K)

Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

The following overview is a high-level discussion of our operating results, as well as some of the trends and drivers that affect our business. Management believes that an understanding of these trends and drivers provides important context for our results for the fiscal years ended December 31, 2025 and 2024, as well as our future prospects. This summary is not intended to be exhaustive, nor is it intended to be a substitute for the detailed discussion and analysis provided elsewhere in this Report, including in the "Business" section and "Risk Factors" above, the remainder of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") or the consolidated financial statements and related notes.

Our Business

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. 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.

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. We are also striving to become a leader in organizing and facilitating esports tournaments, competitions, and events for our licensed racing games.

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.

As of December 31, 2025, we have a total headcount of 44 people, made up of 26 full-time employees and 18 contractors, with 32 people in total dedicated to game development.

Trends and Factors Affecting Our Business

Product Release Schedule

Our financial results are impacted by the timing of our product releases and the commercial success of those titles. Our recent product releases include:

Title		Release Date and Platform
Le Mans Ultimate		February 20, 2024, available on PC
Le Mans Ultimate - 2024 DLC Pack 1		July 23, 2024, available on PC
Le Mans Ultimate - 2024 DLC Pack 2		September 24, 2024, available on PC
Le Mans Ultimate - 2024 DLC Pack 3		December 10, 2024, available on PC
Le Mans Ultimate - 2024 DLC Pack 4		February 25, 2025, available on PC
Le Mans Ultimate - 2024 DLC Pack 5		June 10, 2025, available on PC
Le Mans Ultimate - Version 1.0 Release		July 22, 2025, available on PC
Le Mans Ultimate - ELMS Pack 1 and Version 1.1 Release		September 23, 2025, available on PC
Le Mans Ultimate - ELMS Pack 2 and Version 1.2 Release		December 9, 2025, available on PC

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.

Hardware Platforms

In the past, we derived most of our revenue from the sale of products made for PCs and video game consoles manufactured by third parties, such as Sony Interactive Entertainment Inc.'s ("Sony") PlayStation and Microsoft Corporation's ("Microsoft") Xbox consoles, which comprised approximately 2% and 45% of our total revenue for the years ended December 31, 2025 and 2024, respectively. For the years ended December 31, 2025 and 2024, the sale of products for Microsoft Windows via Steam comprised approximately 64% and 44% of our total revenue, respectively, and the sale of products via Genba comprised approximately 18% and 1% for the years ended December 31, 2025 and 2024. We expect to derive the vast majority of our revenues via Steam and Genba during the next twelve months. The success of our business is dependent upon consumer acceptance of video game console/PC platforms and continued growth in the installed base of these platforms.

Concentration of Sales

Prior to January 1, 2025, our NASCAR products historically accounted for the majority of our revenue. However, we have worked to diversify our product offerings and revenue from other sources by introducing titles such as Le Mans Ultimate to our portfolio of product offerings and thereby reducing our dependency on the NASCAR franchise as our substantially sole source of revenue. Revenues associated with our Le Mans Ultimate franchise accounted for approximately 78% and 34% of our total revenue for the years ended December 31, 2025 and 2024, respectively. We aim to explore ways to capitalize on new trends and diversify our product mix.

Digital Business

Players increasingly purchase our games as digital downloads, as opposed to purchasing physical discs. All of our titles are available through direct digital download. For the year ended December 31, 2025, substantially all of our revenue from sales of video games for PCs was through digital channels. For the year ended December 31, 2024, approximately 88% of our revenue from sales of video games for game consoles and PCs was through digital channels. We believe this trend of increasing direct digital downloads is primarily due to benefits relating to convenience and accessibility that digital downloads provide. In addition, as part of our digital business strategy, we aim to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through in-game purchases and extra content.

Esports

We intend to generate future revenue from organizing and facilitating esports tournaments, competitions, and events for our licensed racing games as well as on behalf of third-party racing game developers and publishers. In 2023, we organized the grand finale of the Le Mans Virtual Series 2022/23, the 24 Hours of Le Mans Virtualevent, 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 our esports segment outside of Le Mans.

Recurring Revenue Sources

Our business model includes revenue that we deem recurring in nature, which historically consisted primarily of revenue from our annualized NASCAR video game racing franchise for game consoles, PC, and mobile platforms, as well as our RaceControl subscription service. We historically have been able to forecast the revenue from this area of our business with greater relative confidence than for new games, services, and business models. Following the sale of our NASCAR License and as we continue to incorporate new business models and modalities of play into our games, our goal is to continue to look for opportunities to expand the recurring portion of our business, including through subscriptions. We plan to drive ongoing engagement and incremental revenue from recurrent consumer spending on our titles through in-game purchases, RaceControl subscription offerings and extra content.

Reportable Segments

We use the "management approach" in determining reportable operating segments. The management approach considers the internal organization and reporting used by our chief operating decision maker for making operating decisions and assessing performance as the source for determining our reportable segments. Our chief operating decision maker is our Chief Executive Officer ("CEO"), who reviews operating results to make decisions about allocating resources and assessing performance for the entire company. We classified our reportable operating segments into (i) the development and publishing of interactive racing video games, entertainment content and services (the "Gaming segment") and (ii) the organization and facilitation of esports tournaments, competitions, and events for our licensed racing games as well as on behalf of third-party video game racing series and other video game publishers (the "esports segment").

Components of Our Results of Operations

Revenues

We have historically derived substantially all of our revenue from sales of our games and related extra content that can be played by customers on a variety of platforms, including game consoles, mobile phones, PCs and tablets. Starting in 2019, we began generating sponsorship revenues from our production of live and virtual esports events; however, during 2025 and 2024 we did not generate any revenue for esports events as we did not organize any such events. In early 2022, we also began offering software development services for racing simulators and in December 2024, we started offering a subscription service via RaceControl, our matchmaking and online racing platform.

Our product and service offerings included within the Gaming segment primarily include, but are not limited to, full PC, console, and mobile games with both online and offline functionality, which generally include:

	●	the initial game delivered digitally or via physical disk at the time of sale, which also typically provides access to offline core game content;
	●	updates to previously released games 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
	●	outsourced code and content development services.

Our product and service offerings included within the esports segment relate primarily to curating esports events.

Cost of Revenues

Cost of revenues for our Gaming segment is primarily comprised of royalty expenses, license fees, web hosting costs and amortization of certain acquired license agreements and other intangible assets acquired through our various acquisitions and internally-developed software. Cost of revenues in 2024 from our Gaming segment is also comprised of merchant fees, disk manufacturing costs, packaging costs, shipping costs, warehouse costs, distribution fees to distribute products to retail stores, and mobile platform fees associated with our mobile revenue (for transactions in which we are acting as the principal in the sale to the end customer). Furthermore, cost of revenues for our Gaming segment includes costs associated with our outsourced code and content development services. Cost of revenues for our esports segment consists primarily of the cost of event staffing and event production.

Sales and Marketing

Sales and marketing expenses are primarily composed of salaries, benefits and related taxes of our in-house marketing teams, advertising, marketing, and promotional expenses, including fees paid to social media platforms and other websites where we market our products.

Development

Development expenses consist of the cost to develop the games we produce, which includes salaries, benefits, and operating expenses of our in-house development teams, as well as consulting expenses for any contracted external development. Development expenses also include expenses relating to our software licenses, maintenance, and studio operating expenses.

General and Administrative

General and administrative expenses consist primarily of salaries, benefits and other costs associated with our operations including finance, human resources, information technology, public relations, legal audit and compliance fees, facilities, and other external general and administrative services.

Depreciation and Amortization

Depreciation and amortization expenses include depreciation on fixed assets (primarily computers and office equipment), as well as amortization of certain definite lived intangible assets acquired through our various acquisitions.

Results of Operations

Year Ended December 31, 2025 compared to Year Ended December 31, 2024

In this section, references to 2025 refer to the fiscal year ended December 31, 2025 and references to 2024 refer to the fiscal year ended December 31, 2024.

Revenues

		For the Year Ended December 31,								Change
		2025				2024				$				%
Revenues:
Gaming		$	11,297,898			$	8,687,462			$	2,610,436				30.0	%
Esports			-				-				-				-	%
Total Revenues		$	11,297,898			$	8,687,462			$	2,610,436				30.0	%

Consolidated revenues were $11.3 million and $8.7 million for 2025 and 2024, respectively, an increase of $2.6 million, or 30.0%, when compared to the prior year.

Gaming segment revenues represented 100% of our total 2025 and 2024 revenues, respectively, increasing by $2.6 million, or 30.0%, when compared to the prior year. The increase in Gaming segment revenues was primarily due to a $5.8 million increase in 2025 from sales of our Le Mans Ultimate racing title released in February 2024, particularly DLC sales, which were higher compared to 2024, and $1.2 million from RaceControl, offset by a $4.4 million decrease in revenues in 2025 related to NASCAR, a gaming title we are no longer authorized to sell starting in 2025.

We did not organize a Le Mans Virtual Series ("LMVS") event in 2025 or 2024, resulting in no earned sponsorship or events revenue in 2025 and 2024 in our Esports segment.

Cost of Revenues

		For the Year Ended December 31,								Change
		2025				2024				$				%
Cost of Revenues:
Gaming		$	2,010,140			$	2,930,635			$	(920,495	)			(31.4	)%
Esports			83,170				295,115				(211,945	)			(71.8	)%
Total Cost of Revenues		$	2,093,310			$	3,225,750			$	(1,132,440	)			(35.1	)%

Consolidated cost of revenues were $2.1 million and $3.2 million for 2025 and 2024, respectively, a decrease of $1.1 million, or 35.1%, when compared to the prior year.

Gaming segment cost of revenues represented 96.0% and 90.9% of our total 2025 and 2024 cost of revenues, respectively, decreasing by $0.9 million, or 31.4%, when compared to the prior year. The decrease in Gaming segment cost of revenues was primarily driven by a decrease in amortization and a reduction in royalty payments, mainly related to our NASCAR titles as a direct result of no significant game sales for the franchise in 2025 compared to the prior period.

Esports segment cost of revenues represented 4.0% and 9.1% of our total 2025 and 2024 cost of revenues, respectively, decreasing by $0.2 million, or 71.8%, when compared to the prior year. The decrease in Esports segment cost of revenues was primarily driven by a decrease in amortization of our Le Mans license.

Gross Profit (Loss)

		For the Year Ended December 31,								Change
		2025				2024				$				%
Gross Profit (Loss):
Gaming		$	9,287,758			$	5,756,827			$	3,530,931				61.3	%
Esports			(83,170	)			(295,115	)			211,945				(71.8	)%
Total Gross Profit		$	9,204,588			$	5,461,712			$	3,742,876				68.5	%
Gaming - Gross Profit Margin			82.2	%			66.3	%
Esports - Gross Profit Margin			NM				NM
Total Gross Profit Margin			81.5	%			62.9	%

NM = not meaningful

Consolidated gross profit was $9.2 million and $5.5 million for 2025 and 2024, respectively, an increase of $3.8 million, or 68.5%, when compared to the prior year. Total gross profit margin was 81.5% in 2025, compared to 62.9% in 2024. The increase in our Gaming segment gross profit of $3.5 million, and an increase in gross profit margin, was primarily due to higher revenues and a reduction in amortization and royalty payments, mainly related to our NASCAR titles as a direct result of no significant game sales for the franchise in 2025 compared to the prior period.

As explained above, we did not organize an LMVS event in 2025 or 2024.

Operating Expenses

		For the Year Ended December 31,								Change
		2025				2024				$				%
Operating Expenses:
Sales and marketing		$	624,623			$	739,098			$	(114,475	)			(15.5	)%
Development			1,760,183				3,378,346				(1,618,163	)			(47.9	)%
General and administrative			5,132,434				6,883,468				(1,751,034	)			(25.4	)%
Depreciation and amortization			47,045				208,652				(161,607	)			(77.5	)%
Total Operating Expenses		$	7,564,285			$	11,209,564			$	(3,645,279	)			(32.5	)%

Changes in operating expenses are explained in more detail below:

Sales and Marketing

Sales and marketing expenses were $0.6 million and $0.7 million for 2025 and 2024, respectively, representing a $0.1 million, or 15.5% decrease when compared to the prior year. The reduction in sales and marketing expenses was primarily driven by a $0.1 million reduction in payroll and employee-related expense as a result of lower headcount, when compared to the prior year.

Development

Development expenses were $1.8 million and $3.4 million for 2025 and 2024, respectively, representing a decrease of $1.6 million, or 47.9%, when compared to the prior year. The reduction in development expense was primarily driven by a $1.1 million capitalization of development costs in 2025, as well as a $0.4 million decrease in external development services, when compared to the prior year. Development expenses in 2024 were charged to expense because technological feasibility was not reached. Once technological feasibility was reached in 2025, relevant development costs were capitalized and amortized to cost of revenue over the estimated lives of the products.

General and Administrative

General and administrative ("G&A") expenses were $5.1 million and $6.9 million for 2025 and 2024, respectively, a decrease of $1.8 million, or 25.4%, when compared to the prior year. The reduction in G&A expense was primarily driven by a $2.1 million decrease in legal and professional fees from the settlement of litigation-related matters, a $0.4 million reduction in insurance costs, and a $0.2 million decrease in severance costs and filing and compliance fees, respectively, offset by a $0.6 million increase in stock-based compensation due to the increase in fair value related to the increase in our stock price and a $0.1 million increase in board of director fees, when compared to the prior year.

Depreciation and Amortization

Depreciation and amortization expenses were $0.1 million and $0.2 million for 2025 and 2024, respectively, representing a decrease of $0.1 million or 77.5%, when compared to the prior year. The decrease was primarily due to some fixed assets being fully depreciated in 2024.

Gain from Settlement of License Liabilities

Gain from settlement of license liabilities of $3.2 million for 2024 is primarily comprised of a $2.4 million gain stemming from a Settlement and License Agreement with INDYCAR LLC executed on May 17, 2024 and a gain of $0.6 million related to the Settlement Agreement with BARC (TOCA) LIMITED, the exclusive promoter of the British Touring Car Championship on April 12, 2024.

Other Operating Income

Other operating income was $1.6 million for 2025, compared to $0.8 million for 2024, an increase of $0.8 million compared to the prior period. Other operating income of $1.6 million for 2025 primarily includes $0.8 million from the Wesco Insurance Company settlement, $0.5 million from a settlement agreement with HC2 Holdings 2 Inc. (now known as Innovate 2) and $0.3 million related to discounts negotiated on a few outstanding vendor invoices. Other operating income of $0.8 million for 2024 is comprised of $0.5 million related to the sale of our NASCAR License to iRacing in October 2023 and a $0.3 million gain from the sale of Traxion, which was our motorsport and racing games community content platform, in April 2024.

Interest Expense, Net

Interest expense was approximately $19,000 and $121,000 for 2025 and 2024, respectively. Interest expense primarily relates to non-cash interest accretion of purchase commitment liabilities relating to the acquisition of Studio397 from Luminis International B.V. and Technology In Business B.V. (collectively, the "Sellers") in April 2021. In February 2025, we entered into a Settlement Agreement with the Sellers pursuant to which certain interest expenses relating to amounts owed to the Sellers for the acquisition of Studio397 were not incurred after February 2025.

Other (Expense) Income, net

Other income, net was $3.4 million for 2025, compared to other expense of $1.2 million for 2024, an increase of $4.6 million compared to the prior year. Other income, net of $3.4 million for 2025 was primarily comprised of $3.2 million in foreign currency gains arising from remeasuring transactions denominated in a currency and a $0.2 million gain from the Settlement Agreement entered into with Luminis on February 20, 2025. Other expense, net of $1.2 million for 2024 was primarily comprised of $1.3 million in foreign currency losses arising from remeasuring transactions denominated in a currency other than U.S. dollars, offset by $0.1 million in rental income.

Provision for Income Taxes

Provision for income taxes of $0.2 million for 2025 was driven by operating activity related to our Le Mans Ultimate racing title.

Other Comprehensive Income (Loss)

Other comprehensive loss was $2.7 million for 2025, compared to other comprehensive income of $1.1 million for 2024. The $3.8 million increase in other comprehensive loss was primarily due to activity in our U.K. and Netherlands subsidiaries, and represents unrealized foreign currency translation adjustments.

Net Loss Attributable to Non-Controlling Interest

Net loss attributable to non-controlling interest was approximately $83,000 and $295,000 for 2025 and 2024, respectively, and is attributed to the Le Mans Esports Series Ltd joint venture.

Liquidity and Capital Resources

Liquidity

After our IPO in 2021, we have financed our operations primarily through cash generated from operations, advances from Driven Lifestyle pursuant to the $12 million Line of Credit and sales of our equity securities. We have entered into a line of credit with Citibank N.A. that will provide us with up to an additional $3 million provided we meet the requirements for use of the line of credit.

We measure our liquidity in a number of ways, including the following:

		December 31,				December 31,
		2025				2024
Cash and Cash Equivalents		$	4,993,390			$	859,271
Working Capital (Deficiency)		$	4,221,682			$	(2,225,300	)

For the year ended December 31, 2025, we generated net income of $6.8 million and positive cash flows from operations of approximately $4.1 million. As of December 31, 2025, we had an accumulated deficit of $84.9 million and cash and cash equivalents of $5.0 million, which increased to $6.0 million as of February 28, 2026. We expect that our cash on hand will fund our operations for at least one year from the date the consolidated financial statements are issued. Our future liquidity and capital requirements include funds to support the planned costs to operate our business, including amounts required to fund working capital, support the development and introduction of new products and maintain existing titles, and certain capital expenditures.

Historically, we have financed our operations primarily through revenue generated from operations, loans and sales of our securities, and we expect to continue to seek and obtain additional capital in a similar manner. There can be no assurance that we will be able to raise funds by selling additional securities, which sales, if successful, could dilute the ownership interest of our existing shareholders. In addition, our ability to sell additional securities may be limited by the terms of the right of first refusal granted to the purchasers in the private placement offering that closed on April 11, 2025 (the "April Private Placement"). The issuance of debt can result in restrictive covenants that limit operations. If funding is not available or not available at terms acceptable to us, we will seek to further reduce overhead costs and our cash obligations in the short term, as needed. In addition, we may look to divest or bring in equity partners for our various divisions and bring in near term capital.

Cash Flows From Operating Activities

Net cash provided by (used in) operating activities for the years ended December 31, 2025 and 2024 was $4.1 million and ($2.8) million, respectively. Net cash provided by operating activities in 2025 was due to increased profitability, $0.8 million from the Wesco Insurance Company settlement in June 2025 and $0.5 million from a settlement agreement with HC2 Holdings 2 Inc. in March 2025. The net cash provided by operating activities for the year ended December 31, 2025 was primarily a result of our net income of $6.8 million, adjusted for net non-cash adjustments of $1.8 million and $0.9 million of cash used by changes in the levels of operating assets and liabilities. The net cash used in operating activities for the year ended December 31, 2024 was primarily a result of cash used to fund a net loss of $3.0 million, adjusted for net non-cash adjustments in the amount of $0.3 million and $0.1 million of cash used by changes in the levels of operating assets and liabilities.

Cash Flows From Investing Activities

Net cash (used in) provided by investing activities for the years ended December 31, 2025 and 2024 was approximately ($1.1) million and $1.2 million, respectively. The net cash used in investing activities during the year ended December 31, 2025 relates to capitalization of internally-developed software. Development expenses in 2024 were charged to expense because technological feasibility was not reached. Once technological feasibility was reached in 2025, relevant development costs were capitalized and amortized to cost of revenue over the estimated lives of the products. The net cash provided by investing activities during the year ended December 31, 2024 was primarily attributable to $1.0 million in proceeds from the sale of the Company's NASCAR License and $0.2 million from the sale of Traxion, which was our motorsport and racing games community content platform, in April 2024.

Cash Flows From Financing Activities

Net cash provided by financing activities during the year ended December 31, 2025 and 2024 was $1.1 million and $0.8 million, respectively. Cash flows provided by financing activities during the year ended December 31, 2025 were primarily attributable to $2.3 million raised in connection with shares sold in a private placement offering in April 2025, offset by a $0.8 million payment for purchase commitments and $0.4 million for payment on notes payable. Cash flows provided by financing activities for the year ended December 31, 2024 were primarily attributable to $0.9 million raised in connection with shares sold in our registered direct offering, offset by a $0.1 million payment for purchase commitments.

Lines of Credit

On April 1, 2020, we entered into a promissory note (the "$12 million Line of Credit") with an affiliated entity, Driven Lifestyle, that provided us with a line of credit of up to $10 million (which was subsequently increased to $12 million pursuant to an amendment executed in November 2020) at an interest rate of 10% per annum, the availability of which was dependent on Driven Lifestyle's available liquidity. The $12 million Line of Credit did not have a stated maturity date and was payable upon demand at any time at the sole and absolute discretion of Driven Lifestyle, and any principal and accrued interest owed would be accelerated and become immediately payable in the event we consummated certain corporate events, such as a capital reorganization. We were permitted to prepay the $12 million Line of Credit in whole or in part at any time or from time to time without penalty or charge. On November 5, 2025, we terminated the $12 million Line of Credit Agreement pursuant to a Loan Termination Agreement with Driven Lifestyle. Prior to this termination, we believed that there was a substantial likelihood that Driven Lifestyle would not fulfill any future borrowing requests, and therefore did not view the $12 million Line of Credit as a viable source for future liquidity needs. See Note 7 - Related Party Loans in our consolidated financial statements in this Report for further information. As of December 31, 2025, the balance due to Driven Lifestyle under the $12 million Line of Credit was $0.

On February 20, 2026, we entered into a business loan agreement (the "Credit Agreement") with Citibank, N.A. ("Citibank"), pursuant to which Citibank provided us with a revolving line of credit of up to $3.0 million at an interest rate equal to the Adjusted Term SOFR (as defined in the Credit Agreement) plus 2.250%, subject to increase upon an event of default. The Adjusted Term SOFR has a floor of 0.75%. The revolving line of credit is evidenced by a promissory note (the "Citibank Promissory Note") that we issued to Citibank in the principal amount of up to $3.0 million. The Citibank Promissory Note has a stated maturity date of February 20, 2027. We also entered into a commercial security agreement pursuant to which we granted Citibank a lien on substantially all of our assets. The Credit Agreement includes certain affirmative covenants related to conducting our business and maintaining certain levels of cash flow and fixed charges, including a requirement to maintain a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) in excess of 1.200 to 1.000 and a Cash Flow Leverage Ratio (as such term is defined in the Credit Agreement) not in excess of 2.500 to 1.000. The Credit Agreement also contains negative covenants including prohibitions on the creation or existence of any liens or security interests on our assets. The Credit Agreement also contains events of default, including failure to make payments under the Note or any related documents, failure to comply with covenants, obligations or conditions contained in the Note or any related document, defaults under other loans, extension of credit or security agreement and any change in our ownership of twenty five percent (25%) or more of our common stock. The occurrence of an event of default can result in the exercise of remedies including an increase in the applicable rate of interest by 3.00% and declaration that all outstanding amounts owed under the Citibank Promissory Note immediately become due and payable.

Other Financing Activity

On July 29, 2024, we completed a registered direct offering and a concurrent private placement (the "July 2024 Offerings") with certain investors, which raised approximately $1.0 million in gross proceeds (the "$1.0 million RDO") before deducting $0.1 million in placement agent's fees and other offering expenses. In connection with the $1.0 million RDO, we issued Series A warrants (the "Series A Warrants") to purchase up to 460,830 shares of Class A common stock and Series B warrants (the "Series B Warrants," and collectively with the Series A Warrants, the "Purchase Warrants") to purchase up to 460,830 shares of Class A common stock. The Series A Warrants and the Series B Warrants both have an exercise price of $2.17 per share. The shares of Class A common stock issuable upon the exercise of the Purchase Warrants are collectively referred to as the "Warrant Shares." The Purchase Warrants will become exercisable on the effective date of the stockholder approval for the issuance of the shares of Class A common stock issuable upon exercise of the Purchase Warrants (the "Stockholder Approval Date"). The Series A Warrants will expire five and one-half years following the Stockholder Approval Date and the Series B Warrants will expire 18 months following the Stockholder Approval Date. H.C. Wainwright & Co., LLC ("HCW") acted as the exclusive placement agent for the July 2024 Offerings, and we issued to its designees warrants to purchase up to 27,650 shares of Class A common stock (the "Placement Agent Warrants") as compensation. As of the date of the filing of this Annual Report on Form 10-K, the exercise of the Purchase Warrants and Placement Agent Warrants have not been approved by stockholders.

On April 11, 2025, we entered into securities purchase agreements (the "April Purchase Agreements") with several institutional and accredited investors for the issuance and sale in the April Private Placement of the following securities for gross proceeds of approximately $2.5 million: (i) 1,894,892 shares of our Class A common stock and (ii) a pre-funded warrant (the "April Pre-Funded Warrant") to purchase up to 377,836 shares of our Class A common stock at an exercise price of $0.0001 per share. The purchase price for one share of Class A common stock was $1.10 and the purchase price for one pre-funded warrant was $1.0999 per share. We received net proceeds of approximately $2.35 million from the April Private Placement, after deducting offering expenses paid by us. The April Pre-Funded Warrant became exercisable commencing on May 29, 2025, and will not expire until exercised in full. The April Purchase Agreements provide that the purchasers have the right to participate in certain subsequent financings in an amount equal to 100% of the amount of the subsequent financing (or 80% in the case of a public offering or an offering of securities registered under a shelf registration statement on Form S-3) on the same terms, conditions and price provided for in the subsequent financing (the "Right of First Refusal"). The Right of First Refusal is effective commencing on May 29, 2025, until the first anniversary of the closing date of the April Private Placement.

The April Purchase Agreements provided that our board of directors (the "Board") would appoint an individual designated by the purchasers that purchased at least 50.1% in interest of the shares of Class A common stock and pre-funded warrants issued in the April Private Placement based on the initial subscription amounts under the April Purchase Agreement to serve as a Class II director on the Board for a term expiring at our 2026 annual meeting of stockholders. In accordance with the foregoing, Mr. Guoquan (Paul) Huang was appointed to the Board effective as of April 16, 2025. The April Purchase Agreement further provides that the purchasers holding a 50.1% interest in the securities issued upon closing of the April Private Placement shall have the right to appoint an individual to our management team, subject to Board approval.

Capital Expenditures

The nature of our operations do not require significant expenditures on capital assets, nor do we typically enter into significant commitments to acquire capital assets. We do not have material commitments to acquire capital assets as of December 31, 2025.

Material Cash Requirements

As of December 31, 2025, we did not have any material cash requirements.

On April 12, 2024, we entered into a settlement agreement (the "BARC Settlement Agreement") with BARC (TOCA) Limited ("BARC"), the exclusive promoter of the British Touring Car Championship (the "BTCC"), for settlement of the remaining liability in connection with the exclusive license (the "BTCC License") to use certain licensed intellectual property for motorsports and/or racing video gaming products related to, themed as, or containing the BTCC. Pursuant to the BARC Settlement Agreement, we and BARC, without admitting any liabilities, agreed that the prior license agreement between the parties relating to the BTCC License (the "Prior BTCC License Agreement") was terminated without any liabilities and that any and all royalties and/or any other sums whatsoever were forgiven by BARC and discharged in their entirety in consideration of (i) our one-time payment of $225,000 to BARC and (ii) we and BARC entering, effective as of April 12, 2024, into a new license agreement to use certain licensed intellectual property related to, themed as, or containing the BTCC.

On May 17, 2024, we entered into a Settlement Agreement and License with INDYCAR ("the INDYCAR Agreement"). The INDYCAR Agreement resolved any and all disputes between us and INDYCAR with respect to the termination of (i) the License Agreement, dated July 13, 2021, by and between INDYCAR and us with respect to INDYCAR SERIES racing series related gaming products and (ii) the License Agreement, dated July 13, 2021, by and between INDYCAR and us with respect to INDYCAR SERIES racing series related esports events.

On February 20, 2025, we entered into a Settlement Agreement (the "Settlement Agreement") with Technology In Business B.V. and Luminis International B.V. ("Luminis"), pursuant to which we agreed, among other things, to pay to Luminis an aggregate of $750,000 in full satisfaction of all amounts due relating to the purchase commitment for Studio397. As of December 31, 2025, all amounts due to Luminis under the Settlement Agreement have been paid.

As a normal part of our business, depending on market conditions, pricing and overall growth strategy, we consider potential acquisitions. If any of these opportunities were to occur, they would be financed through the incurrence of additional indebtedness, issuance of additional shares or through cash flows from operations, provided that we are able to obtain such funds on terms acceptable to us.

Off-Balance Sheet Arrangements

We did not have, during the periods presented, and we do not currently have, any relationships with any organizations or financial partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, contingent assets and liabilities, each as of the date of the financial statements, and revenues and expenses during the periods presented. On an ongoing basis, management evaluates their estimates and assumptions, and the effects of any such revisions are reflected in the financial statements in the period in which they are determined to be necessary. Management bases their estimates on historical experience and on various other factors that they believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual outcomes could differ materially from those estimates in a manner that could have a material effect on our consolidated financial statements.

While our significant accounting policies are more fully described in Note 2 - Summary of Significant Accounting Policies to our consolidated financial statements, we believe that certain of these policies and estimates are deemed critical, as they require management's highest degree of judgment, estimates and assumptions. We have discussed these accounting policies and estimates with the Audit Committee of our Board of Directors. We believe our most critical accounting policies and estimates are as follows:

Revenue Recognition - Identifying Performance Obligations

We generate revenue primarily through the sale of digital and physical video game titles, including extra content, principally for the console, PC and mobile platforms. In addition, we generate additional revenues through esports activities including sponsorships and participation fees.

Performance obligations promised in a contract are identified based on the goods and services that will be transferred to the customer that are both capable of being distinct, (i.e., the customer can benefit from the goods or services either on its own or together with other resources that are readily available), and are distinct in the context of the contract (i.e., it is separately identifiable from other goods or services in the contract). To the extent a contract includes multiple promises, we must apply judgment to determine whether those promises are separate and distinct performance obligations. If these criteria are not met, the promises are accounted for as a combined performance obligation. Our sales of games with services are evaluated to determine whether the software license, future update rights and the online hosting are distinct and separable. Sales of games with services are generally determined to have three distinct performance obligations: software license, future update rights, and the online hosting. This policy is critical due to the subjective judgment involved along with the significant impact that the conclusion would have on the timing of revenue recognition.

Revenue Recognition - Determining and Allocating the Transaction Price

We determine the transaction price based on the consideration that we will be entitled to receive in exchange for transferring our goods and services to the customer. Determining the transaction price often requires judgment, based on an assessment of contractual terms and business practices. It further includes review of variable consideration such as discounts and sales returns, which is estimated at the time of the transaction

Allocating the transaction price requires us to determine an estimate of the relative stand-alone selling price for each distinct performance obligation. Determining the relative stand-alone selling price is inherently subjective, especially in situations where we do not sell the performance obligation on a stand-alone basis (which occurs in the majority of transactions). In those situations, we determine the relative stand-alone selling price based on various observable inputs using all information that is reasonably available. Examples of observable inputs and information include historical internal pricing data and pricing data from competitors, to the extent the data is available. The results of our analysis resulted in a specific percentage of the transaction price being allocated to each performance obligation.

Revenue Recognition - Determining the Estimated Offering Period

The offering period is the period in which we offer to provide the future update rights and/or online hosting for the game and related extra content sold. Because the offering period is not an explicitly defined period, we must make an estimate of the offering period for the service-related performance obligations (i.e., future update rights and online hosting). Determining the Estimated Offering Period is inherently subjective and is subject to regular revision. Generally, we consider the average period of time customers are online when estimating the offering period. We recognize revenue for future update rights and online hosting performance obligations ratably on a straight-line basis over this period as there is a consistent pattern of delivery for these performance obligations. Revenue for service-related performance obligations for digitally-distributed games and extra content is recognized over an estimated seven-month period beginning in the month of sale.

Revenue Recognition - Principal Versus Agent Considerations

We evaluate sales to end customers of our full games and related content via third-party storefronts, including digital storefronts such as Microsoft's Xbox Store, Sony's PlayStation Store, Nintendo's eShop, Apple's App Store, Steam and Google's Play Store, to determine whether we are acting as the principal or agent in the sale to the end customer. Key indicators we evaluate in determining gross versus net treatment include but are not limited to the following:

	●	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.

Based on an evaluation of the above indicators, we determined that, apart from contracts with customers where revenue is generated via the Apple's App Store or Google Play Store, the third party is considered the principal with the end customer and, as a result, we report revenue net of the fees retained by the storefront. For contracts with customers where revenues are generated via the Apple's App Store or Google's Play Store, we have determined that we are the principal and, as a result, we report revenues on a gross basis, with mobile platform fees included within cost of revenues.

Valuation of Finite-Lived Intangible Assets and Other Long-Lived Assets

We review our finite-lived assets for impairment whenever events or changes in circumstances indicate, based on recent and projected cash flow performance and remaining useful lives, that the carrying value of these assets may not be fully recoverable. We evaluate asset impairment at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The lowest level for which we maintain identifiable cash flows that are independent of the cash flows of other assets and liabilities is at the intangible asset level, with the exception of technology intangible assets which are at the reporting unit level. If estimated undiscounted future cash flows are less than the carrying value of an asset, an impairment charge is recognized to the extent its carrying value exceeds fair value.

Development Costs

Costs incurred internally in developing a software product to be marketed or sold to external users are charged to expense until technological feasibility has been established for the product. Once technological feasibility is established, software costs are capitalized until the product is available for general release to customers. Technological feasibility for the Company's software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to production. The amortization of these costs is included in cost of revenue over the estimated life of the products.

Financial Instruments - Stock Based Compensation

The Company accounts for warrants as either equity-classified or liability-classified instruments based on an assessment of the warrant's specific terms and applicable authoritative literature. This assessment, which requires the use of professional judgment, can be complex and subject to interpretation. The fair value of stock options is assessed at each reporting period (for liability warrants) based on the Black-Scholes model, which uses significant assumptions including risk-free interest rate, expected volatility, stock price and expect term. We generally determine expected volatility using a historical analysis of our stock price and adjusting for outliers which were determined to not reflect expected future outcomes.

Recently Issued Accounting Standards

As an "emerging growth company", the JOBS Act allows us to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. We have elected to use this extended transition period under the JOBS Act. We have elected to use this extended transition period under the JOBS Act until such time as we are no longer considered to be an emerging growth company.

Our analysis of recently issued accounting standards are more fully described in our consolidated financial statements (Note 2 - Summary of Significant Accounting Policies in our consolidated financial statements for the years ended December 31, 2025 and 2024).

Non-GAAP Financial Measures

Adjusted EBITDA

Adjusted EBITDA, a measure used by management to assess our operating performance, is defined as EBITDA, which is net income (loss) plus interest expense, depreciation and amortization, less income tax benefit (if any), adjusted to exclude: (i) gain from settlement of license liabilities and other agreements; (ii) gain from sale of gaming licenses; (iii) impairment of intangible assets; (iv) loss contingency expense; and (v) stock-based compensation expenses.

Adjusted EBITDA (the "Non-GAAP Measure") is not a financial measure defined by U.S. GAAP. Reconciliations of the Non-GAAP Measure to net income (loss), its most directly comparable financial measure, calculated and presented in accordance with U.S. GAAP, are presented in the tables below. We use the Non-GAAP Measure to manage our business and evaluate our financial performance, as Adjusted EBITDA eliminates items that affect comparability between periods that we believe are not representative of our core ongoing operating business. Additionally, we believe that using the Non-GAAP Measure is useful to our investors because it enhances investors' understanding and assessment of our normalized operating performance and facilitates comparisons to prior periods and our competitors' results (who may define Adjusted EBITDA differently).

The Non-GAAP Measure is not a recognized term under U.S. GAAP and does not purport to be an alternative to revenue, income/loss from operations, net income (loss), or cash flows from operations or as a measure of liquidity or any other performance measure derived in accordance with U.S. GAAP. Additionally, the Non-GAAP Measure is not intended to be a measure of free cash flows available for our discretionary use, as it does not consider certain cash requirements, such as interest payments, tax payments, working capital requirements and debt service requirements. The Non-GAAP Measure has limitations as an analytical tool, and investors should not consider it in isolation or as a substitute for our results as reported under U.S. GAAP. Management compensates for the limitations of using the Non-GAAP Measure by using it to supplement U.S. GAAP results to provide a more complete understanding of the factors and trends affecting the business than would be presented by using only measures in accordance with U.S. GAAP. Because not all companies use identical calculations, the Non-GAAP Measure may not be comparable to other similarly titled measures of other companies.

The following table provides a reconciliation from net income (loss) to Adjusted EBITDA for the respective periods presented:

		Year Ended December 31, 2025				Year Ended December 31, 2024
Net income (loss)		$	6,844,897			$	(3,048,071	)
Interest expense, net			18,786				120,757
Depreciation and amortization (1)			1,122,159				2,589,437
EBITDA			7,985,842				(337,877	)
Gain from settlement of license liabilities			-				(3,248,000	)
Gain on sale of NASCAR License			-				(500,000	)
Gain from settlement of purchase commitment			(175,460	)			-
Gain from Settlement Agreement			(500,000	)			-
Gain from Wesco Settlement Agreement			(800,000	)			-
Stock-based compensation			789,352				152,959
Adjusted EBITDA		$	7,299,734			$	(3,932,918	)

(1)	Includes $1,075,114 and $2,380,785 of amortization expenses included in cost of revenues for the years ended December 31, 2025 and 2024, respectively.