| COMMITMENTS AND CONTINGENCIES | NOTE
9 – COMMITMENTS AND CONTINGENCIES Litigation The
Company is involved in various routine legal proceedings incidental to the ordinary course of its business. The Company believes that
the outcome of all pending legal proceedings in the aggregate is not reasonably likely to have a material adverse effect on the Company’s
business, prospects, results of operations, financial condition and/or cash flows, except as otherwise disclosed below. In light of the
uncertainties involved in legal proceedings generally, the ultimate outcome of a particular matter could be material to the Company’s
operating results for a particular period depending on, among other things, the size of the loss or the nature of the liability imposed
and the level of the Company’s income for that particular period. Litigation or other legal proceedings, with or without merit,
is unpredictable and generally expensive and time consuming and, even if resolved in our favor, is likely to divert significant resources
from our core business, including distracting our management personnel from their normal responsibilities. Certain
conditions may exist as of the date the condensed consolidated financial statements are issued, which may result in a loss to the Company,
but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are
pending against the Company, or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of
any legal proceedings or unasserted claims, as well as the perceived merits of the amount of relief sought or expected to be sought therein. If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s condensed consolidated financial statements. If
the assessment indicates that a potential material loss contingency is not probable, but is reasonably possible, or is probable but cannot
be estimated, then the nature of the contingent liability and an estimate of the range of possible losses, if determinable and material,
would be disclosed. The Company recognizes legal costs associated with loss contingencies in the period incurred. Loss
contingencies considered remote are generally not disclosed, unless they involve guarantees, in which case the guarantees would be disclosed.
There can be no assurance that such matters will not materially and adversely affect the Company’s business, financial position,
and results of operations or cash flows. Motorsport
Games Inc. and Subsidiaries Notes
to Unaudited Condensed Consolidated Financial Statements On
February 11, 2021, HC2 Holdings 2 Inc. (now known as Innovate 2) (“Innovate”) and Continental General Insurance Company (“Continental”),
former minority stockholders of 704Games, filed a complaint (the “HC2 and Continental Complaint”) in the U.S. District Court
for the District of Delaware against the Company, the Company’s former Chief Executive Officer and Executive Chairman, the Company’s
former Chief Financial Officer, and the manager of Driven Lifestyle. The complaint was later amended and added Leo Capital Holdings LLC
(“Leo Capital”) as an additional plaintiff and the controller of Driven Lifestyle as an additional individual defendant.
The complaint alleges, among other things, purported misrepresentations and omissions concerning 704Games’ financial condition
made in connection with the Company’s purchase of these minority shareholders’ interest in 704Games in August and October
2020. The complaint asserts claims under Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
and Rule 10b-5 thereunder; Section 20(a) of the Exchange Act; Section 20A of the Exchange Act; breach of the Company’s obligations
under the Stockholders’ Agreement dated August 14, 2018; fraudulent inducement; breach of fiduciary duties; and unjust enrichment.
The plaintiffs alleged, among other things, damages from the defendants, jointly and severally, based on the alleged difference between
the fair market value of the shares of common stock of 704Games on the date of plaintiffs’ sale and the purchase price that was
paid, as well as punitive damages and other relief. In May 2021, the Company, along with the other defendants, filed a motion to dismiss
the plaintiffs’ complaint. On March 28, 2022, the court entered an order denying the motion to dismiss. On
January 11, 2023, in connection with the HC2 and Continental Complaint, the Company, along with other defendants, entered into a settlement
agreement with one of the plaintiffs, Continental, to settle the claims made by Continental against the defendants and the claims made
by the defendants against Continental. Under the terms of the settlement agreement, the Company was obligated to pay the sum of $ 1.1 0.1 40,000 1.1 On
October 14, 2023, the Company, along with other defendants, reached and executed a settlement agreement with Leo Capital in connection
with the HC2 and Continental Complaint, which settles the claims made by Leo Capital against the defendants, as well as the claims made
by the defendants against Leo Capital. Under the terms of the settlement agreement, the Company was obligated to pay the sum of $ 0.2 0.2 In
respect of Innovate, the Company believes that the plaintiff’s allegations are without merit and the Company intends to continue
to vigorously defend its position to the fullest extent permitted by law. Given the litigation is ongoing, the outcome of the litigation
remains uncertain at this time. As such, the Company does not believe it is probable a settlement will be reached, nor can any such settlement
amount be reasonably estimable, and has not recognized a settlement liability in respect of the remaining plaintiff. On
July 28, 2023, Wesco Insurance Company (“Wesco”) filed a complaint in state court in Florida against the Company, as well
as the other defendants involved in the litigation related to the HC2 and Continental Complaint (the “Underlying Action”).
The Company had previously submitted the Underlying Action for coverage under a management liability policy issued by Hallmark Specialty
Insurance Company (“Hallmark”) and an excess policy with Wesco (the “Wesco Policy”). Wesco’s complaint
seeks declaratory relief to determine Wesco’s obligations to the defendants under an excess policy of insurance issued to the Company
by Wesco for the Underlying Action. Wesco claims that there is no coverage afforded to the defendants for the Underlying Action under
the Wesco Policy. The Company disagrees with and disputes Wesco’s position regarding coverage for the Underlying Action under the
Wesco Policy and plans to defend its position. On
November 22, 2023, the Company entered into an insurance policy and claims release with Hallmark (the “Hallmark Settlement”)
related to a previously submitted Underlying Action for coverage under a management liability policy issued by Hallmark. Under the terms
of the Hallmark Settlement, Hallmark agreed to pay $ 1.75 Motorsport
Games Inc. and Subsidiaries Notes
to Unaudited Condensed Consolidated Financial Statements Commitments On
January 25, 2021, the Company entered into an amendment (the “Le Mans Amendment”) to the Le Mans Esports Series Ltd joint
venture agreement, which resulted in an increase of the Company’s ownership interest in the Le Mans Esports Series Ltd joint venture
from 45 51 8,000,000 8,640,000 Intangible Assets Epic
License Agreement On
August 11, 2020, the Company 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. Pursuant to the agreement, upon payment of the initial
license fee described below, the Company was 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 its next generation
of games. The
Company will pay Epic a license fee royalty payment equal to 5 13,000 32,000 License
Commitments On
May 29, 2020, the Company secured a licensing agreement (the “Prior BTCC License Agreement”) with BARC (TOCA) Limited (“BARC”),
the exclusive promoter of the British Touring Car Championship (the “BTCC”). Pursuant to the Prior BTCC License Agreement,
the Company was granted an 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, on consoles, PC and mobile applications, esports series
and esports events (including the Company’s esports platform). In exchange for the BTCC License, the Prior BTCC License Agreement
required the Company to pay BARC an initial fee in two equal installments of $ 100,000 0.9 Subsequent Events Motorsport
Games Inc. and Subsidiaries Notes
to Unaudited Condensed Consolidated Financial Statements On
July 13, 2021, the Company entered into a license agreement with INDYCAR LLC (“INDYCAR”)
Intangible Assets 2.9 0.6 2.9 Purchase
Commitment Liabilities On
April 20, 2021, the Company acquired 100 12.8 3.2 pursuant to which, among other things, the Deferred Payment installment amount due to be paid by the Company on the first anniversary
of closing was reduced from $ 3.2 1 2.2 330,000 100,000 150,000 15 0.6 0.3 |
