“We do not believe that our existing cash on hand will be sufficient to fund our operations for the next 12 months.”
That’s what Motorsport Games Chief Financial Officer (CFO) Jonathan New said to investors on March 30, 2022 during the company’s fourth quarter earnings call.
Despite the apparent growth of the company that saw countless licenses acquired, multiple new game releases, and even salary increases for its executives, Motorsport Games didn’t believe it could survive another year without extra outside investment.
The developer and publisher behind the recent NASCAR 21: Ignition title along with other games like rFactor 2, KartKraft, the anticipated IndyCar title, and, as of now, the British Touring Car Championship (BTCC), Motorsport Games has been all over the place in the industry. Whether it’s gathering those said licenses for future releases or bringing titles to new platforms, Motorsport Games has made sure to be at the forefront of the racing game conversation. But despite the pretty portrait that the company has painted regarding its library and the future of its games, things haven’t been going well for quite some time within the company.
From crashing stock prices to the admission of a lack of money to keep the company going to even lawsuits levied by various parties, there is a lot going on aside from the development of video games. And Motorsport Games is at the center of everything.
When NASCAR 21: Ignition launched in October 2021, it was clear that the game shouldn’t have been released in the state it was. Former employees of the company, who spoke on the condition of anonymity, said that the company knew the poor state of the game for weeks and months leading up to launch.
“We couldn’t capture content,” a source said. “The wheels weren’t moving for screenshots or videos. [We] literally got the wheels working about two weeks before launch.”
Many within the company felt they were sold one bag of goods while being given something completely different.
“Everyone was so bummed,” one person from the team said. “Those developer diaries were done thinking we had an awesome game. We kept getting told it was good.”
With features being dropped and the Xfinity and Truck series being removed, many believed the gameplay with the NASCAR Cup Series was going to be, as one source put it, “amazing”.
Amazing it wasn’t.
“I couldn’t believe it when I first played it,” another former employee said. “It was a complete mess.”
The game was originally supposed to be released in summer 2021, but was pushed back in order to fix some of the larger outstanding issues.
“With all games, the development and testing phases are when any game’s features, status and production are constantly evolving – hence it being called ‘development and testing’,” Motorsport Games CEO Dmitry Kozko said.
“We then made a conscious, thoughtful and strategic decision to delay the release of Ignition to October 2021 in order to give the development team as much time as possible to work on it,” he added regarding the initial delay. “Motorsport Games is focused on providing players with the best experience possible and if that means delaying a game to further work on refinement, we are going to do so.”
As development continued, however, problems continued to arise. From races not being able to be completed to hovering cars to vehicles just disappearing, there was enough wrong to warrant another delay. But that was never widely discussed as the October launch grew closer.
“Nope, no delay talk, and it was due to making sure they got money in as the game was already delayed,” SGO was told.
One content creator who received early access to the game told SGO that they were given an early copy of the game’s FAQ but was forced to change a video he had worked on because of changes to the FAQ.
The creator, who doesn’t want to be named for fear of retaliation, said that he was told by Motorsport Games PR that he had to change his coverage because the FAQ referenced a feature that was removed from the game. That feature? Private lobbies.
“It was decided they’d just try and not tell the customers,” he said. “They wanted them to just figure it out after the game launched.”
NASCAR 21: Ignition released on October 26 for Xbox One, PlayStation 4, and PC. Despite the new-gen Xbox Series X|S and PlayStation 5 being available, the game wasn’t released with those systems optimized. The reason was that the team couldn’t get their hands on next-gen dev kits, but that’s not how it was presented.
“It was framed as if it was being done to make it accessible to everyone,” a source said.
Once widely available, the game was received so poorly that the company’s stock began to plummet. Around the time it was put into the hands of various reviewers and early access players (October 20, 2021), Motorsport Games shares were trading at $15.59. Within two weeks of the game’s release, shares had fallen to just $10.95. Fast-forward to April 26, and the company officially entered penny stock territory when shares fell to under $1. As of May 24, prices were even lower at just $0.67 per share, which, if trends continue, could result in a delisting on the NASDAQ.
Departures Take Hold
As the negative reaction continued post launch, problems within the company continued leading to shake ups near the top.
“The company went into full panic mode back in January,” one source said. “We had four whole company meetings in as many weeks, led by Dmitry, essentially trying to calm staff down.”
Updates would come for the game each month, but problems still remained such as cars disappearing, broken race stages, and AI logic.
During that period, Motorsport Games President Stephen Hood was also let go from the company.
“He [Kozko] very coldly announced it on a company-wide call,” a former employee says. “[He] basically laughed as he said that we could probably guess why Stephen was gone.”
Hood, when asked about his departure, wished nothing but the best for his former colleagues. He cited messages from “those few good people that remain with the company” had reinforced his “admiration for their character and professionalism”, though he wouldn’t name who those colleagues were.
“I had my own view on what was going wrong and how to fix it, which may have provoked my rather abrupt exit,” he said. “If that buys them time to reassemble, then I wish them well.”
Kozko, when asked about Hood’s departure being more a scapegoat firing than anything else, immediately denied any such reasoning.
“The only accurate part of your statement about the departure of Mr. Hood is that he was let go,” Kozko said. “We will never comment on the departure of an employee, but we do have goals and expectations that each person and position must meet.”
After that time, more people started to leave the company including the studio’s Director of Publishing, Christopher Shanley, who declined to speak for this story.
With the departures, for one reason or another, there has been growing sentiment that Motorsport Games is being used as a way to make various executives wealthier. Kozko adamantly denies that claim, saying that the company prides itself on taking care of all employees.
“We continue to invest in all of our people and are proud of what they have and continue to achieve,” he said. “Recently, we raised every employee’s salary at Motorsport Games, except my own, due to cost-of-living increases. Our team and their work is invaluable to our success.”
Sources say that the raise to all employees was 6%. That means someone making $50,000 annually would see their salary increase to just $53,000. And while sources also confirmed that Kozko himself didn’t get a salary increase in that specific raise, that doesn’t mean he hasn’t seen a significant increase in pay.
Records show that although Motorsport Games has been struggling financially, including to the point where they are no longer providing forward guidance to investors, Kozko received what equated to a 632% increase in pay for the fiscal year 2021, most coming in the form of options. A year in which shares, as mentioned, dropped over 96% in value.
Allegations of Fraud
As the problems mounted up regarding the game’s from Motorsport Games, legal issues took hold as well.
When asked about the multiple lawsuits, Kozko claimed that there was only “one singular outstanding lawsuit against the company”. For obvious reasons, he couldn’t talk more about said lawsuit due to it being ongoing.
That said, public records paint a picture of deception by Kozko and Motorsport Games.
As of writing, there is currently one outstanding lawsuit against Motorsport Games. While there had been a case in Miami-Dade County, Florida between EleDa S.R.L and Motorsport Games, that case has recently been closed due to an out-of-court settlement being reached. The terms of the settlement haven’t been disclosed.
The outstanding case against the company comes from Delaware District Court. In the suit, HC2 Holdings alleges that at the time Motorsport Games was working towards its acquisition of 704Games, the former developer of the NASCAR Heat titles, it was presented as if 704Games was an unprofitable and failing company. The shares in 26.2% of the company were then bought out for $1.2 million only to see them trading at “more than 170 times that buyout value” when Motorsport Games went public.
In addition to this, the lawsuit alleges that at the same time a grim outlook was being presented to these investors, Kozko was working on more partnerships to build up the portfolio of the company. These negotiations, the lawsuit alleges, were never made known to the investors at the time. Two such agreements that ultimately increased the value of the company were deals with Formula 1 driver Fernando Alonso Díaz as well as the Le Mans Virtual license. Both of which, had the investors been made aware, could have possibly increased the value of the shares leading to either higher profits or a non-sale.
As CEO of Motorsport Games, Kozko has a fiduciary duty to disclose these agreements. Instead the Alonso agreement was alleged to have had a confidentiality agreement to prevent others finding out without Motorsport Games’ consent.
“This is a classic case of a controlling stockholder abusing its fiduciary position to defraud minority investors and snap up their shares at a deep discount—only for the controlling stockholder to turn around and immediately realize an enormous profit on the deal,” the complaint reads.
Motorsport Games has denied these allegations, and even filed a motion to dismiss back in May 2021. In its motion, the company states that not only did HC2 Holdings not suffer any economic loss in the transaction, but that its argument is filled with contradictions.
“Plaintiffs [HC2 Holdings], however, were never shareholders of Motorsport and, accordingly, they have not alleged an actual economic loss because their alleged loss cannot be derived from the price of a stock they never owned,” the motion states. “Motorsport’s stock price in January 2021 has no relevance to the value of Plaintiffs’ minority shares in a different company, 704Games, at a different time (August 2020).”
In addition, Motorsport Games stated that HC2 Holdings admitted to having “full access to all books and records of 704Games and all of its contracts, agreements and documents”. This, Motorsport Games believed, contradicts the claims that information was withheld prior to the selling of the shares.
That motion to dismiss was denied, with the response from the Delaware District Court stating the following:
A controlling shareholder may not use its insider knowledge to mislead minority shareholders, particularly when it enters a self-interested transaction to buy their stock. Yet Motorsport allegedly did just that. So I will let the minority shareholders’ securities-fraud claim proceed. Plus, the shareholders allege plausible insider-trading, control-person, breach-of-contract, breach-of-fiduciary-duty, and unjust-enrichment claims. So I decline Motorsport’s invitation to dismiss them.
With the motion to dismiss denied, Motorsport Games responded with a denial to all allegations as well as filed a counter claim against HC2 Holdings on April 25.
The State of Partnerships
Looking at current licensing partners such as NASCAR, IndyCar, and BTCC, there have been claims of partners being left out of the know or just looking to get out of their deals altogether.
NASCAR, arguably the largest license the company has, has been actively working to find ways out of its long-term agreement. Originally reported by SGO back in April, NASCAR was so disappointed in NASCAR 21: Ignition, that they actively made sure that marketing didn’t promote the game.
NASCAR did release a statement to SGO stating that the relationship was in “good standing”. However, if the company is looking to get out of its deal, which all sources say is the case, a public statement confirming that would likely be viewed as detrimental to the case. Should NASCAR continue looking for a way out of the deal, it will have to present a solid argument for doing so in court.
NASCAR, in a public statement released to me, says that things are in "good standing" with Motorsport Games.
— Mike Straw (@MikeStrawMedia) April 19, 2022
While BTCC couldn’t be reached for comment on the state of its game, IndyCar did respond to SGO’s request.
IndyCar says that the organization is expecting the game to launch on time. In fact, it was confirmed to SGO that Motorsport Games was in Indianapolis this week to scan the drivers for the game. The organization also confirmed that track scanning has been done for the game.
“Work and collaboration on IndyCar’s title is ongoing, and right now we expect the game to be released on time and in 2023,” the company said in an official statement.
Despite a belief of IndyCar itself that it’s coming on time and Motorsport Games stating a 2023 release date is still the plan, sources still believe the likelihood of that is “less than 50% at this point.”
Kozko, while stating those who spoke to SGO weren’t “well-versed or intimately involved” in Motorsport Games, denies any license partners have been left out in the cold. He insists the exact opposite and that all license partners remain high priorities for the company.
“We value our partnerships and providing full transparency to them is of paramount importance to Motorsport Games,” he said. “To achieve this, we hold in-person meetings, have continuous open dialogue and communication and real-time updates regarding all aspects of our product development.”
Kozko continued: “We have also displayed game progress for titles in development, including current playables, and have plans for future on-site activations at select races. Our partners are always kept in the loop on timelines so it would not be possible for them to be unaware or ‘deceived’ on product progress and updates. That said, we also plan to have more information available for our fans on upcoming releases in the near future.”
One former employee, who was specifically involved in discussions about product timeline, fought back on the Kozko’s claim that the team always kept partners updated on timelines.
“Two months after the company knew BTCC was delayed, Alan Gow, BTCC chief executive, had no clue, and they were planning to drop it on him [in April],” they said. “He [Gow] was already very annoyed at the lack of updates from our side, so it was going to be a hard one to swallow already.”
Where Things Go From Here
At this point, the largest question circling Motorsport Games is what is going to happen in the future. The company has so many licenses and made so many development promises yet have stated on multiple occasions that it’s losing money and doesn’t have the funds to make it another year.
Publicly, Motorsport Games is presenting as though things will be fine and the games will be coming. So much so that it even put out its product roadmap for the next three years as a whole as well as specifically for the NASCAR series itself.
Starting with the NASCAR series, the company made a decision to not release a full follow up to NASCAR 21: Ignition in 2022. Instead, Kozko and his team made the call to provide content updates for the game throughout the rest of the year, including an upcoming next-gen update for players on PlayStation 5 and Xbox Series X|S.
“We decided to update Ignition, instead of having a full separate title launch this year, in order to move the full development team over to our NASCAR ‘23 game as soon as possible,” Kozko said. “This will give the team additional time to work on the game and provide the opportunity to start completely fresh, as NASCAR ‘23 will not inherit the technical issues that were found within Ignition.”
The next installment of the NASCAR series will no longer use the rFactor 2 engine due to problems with porting to console, among other things. Instead, the company will use the same engine as KartKraft to not only make the game easier to develop, but remove a number of the problems NASCAR 21: Ignition still has.
Kozko was asked if the choice to not release a game this year was a decision made solely to save money in order to keep the company afloat through 2022 and beyond.
“This was not a decision based on saving money, as the cost of providing a new game and this update are quite similar,” he said. “In fact, releasing a DLC vs a new 2022 title is projected to negatively impact total potential revenues.”
He added that the plan was discussed and agreed upon with NASCAR ahead of publicly announcing it.
One added concern on the development front is the locations of the developers. A large percentage of the developers are based out of Russia. With the current Russia/Ukraine conflict and various sanctions levied against Russia, doing business with those developers may become increasingly difficult.
“Our development talent that is in Russia continues to operate as usual,” Kozko told investors. “We don’t experience any material interruptions right now. Of course, the geopolitical situation could change in a year or in the future, and we’ll continue to be agile. But right now, everybody sat down focusing on the four product releases that we’re all working on.”
But what about other titles like IndyCar and BTCC? As mentioned, sources don’t believe the IndyCar will be coming in 2023. As far as the BTCC title is concerned, it was originally planned for 2022 before being removed. However, it was still listed as coming on the company’s website as well as a small bullet in the footer of the product roadmap with a note of a release date to be determined. It was then updated to state an announcement was coming in Q2 2022.
The company did see an increase in year-over-year revenue of $0.8M from $2.5M to $3.3M, but losses remained high as negative cash flows from operations of approximately $5.6 million. In total, the net loss for Q1 2022 was approximately $16M.
That brings up the question of finances and funding. If the company’s on-hand cash, approximately $9 million according to its May 16 earnings call reports, isn’t enough to cover the company for the next 12 months, how will these games get made? What is Motorsport Games going to do to acquire the funds to keep the business running?
“Our options include raising debt or equity,” Kozko told those on the earnings call. “We’re also pursuing additional opportunities to reduce near-term spend…Additionally, barring any unforeseeable events, there are additional levers we could pull, including potentially delaying some product releases to follow our cash-generating catalyst events like launching major franchise console games.”
Kozko expanded on a follow up question regarding what that could realistically look like.
“The goal is to release [the games] as we can,” he said. “That way, we have the longest possible runway during the existing licenses to monetize on it.
“So when we talk about potentially reducing the expense side on it, we could just — I’m going to simplify it – slow roll the expansion of the development, but, of course, that would mean that some of our future title releases could be delayed as a result of that. It’s not something we want to do.”
Not something they want to do, but something they may have to do. With a burn rate – based on publicly announced finances – of approximately $3M per quarter, something will have to give sooner rather than later. Otherwise there might not be a Motorsport Games much longer.
NOTE: The story was updated as it was made known that a settlement had been reached between EleDa and Motosport Games.