NOTE 8 – SHARE-BASED COMPENSATION

On January 12, 2021, in connection with its initial public offering, Motorsport Games established the Motorsport Games Inc. 2021 Equity Incentive Plan (the “MSGM 2021 Stock Plan”). The MSGM 2021 Stock Plan provides for the grant of options, stock appreciation rights, restricted stock awards, performance share awards and restricted stock unit awards, and initially authorized 100,000 shares of Class A common stock to be available for issuance. On April 23, 2026, the Company’s stockholders approved an amendment to the MSGM 2021 Stock Plan to increase the number of shares of Class A common stock available for issuance from 100,000 to 600,000. As of June 30, 2026, there were 500,000 shares of Class A common stock available for issuance under the MSGM 2021 Stock Plan. Shares issued in connection with awards made under the MSGM 2021 Stock Plan are generally issued as new issuances of Class A common stock.

The Company did not issue stock options under its MSGM 2021 Stock Plan during the six months ended June 30, 2026. As of June 30, 2026, there were 96,828 options outstanding under the MSGM 2021 Stock Plan with a weighted average exercise price of $61.76. The majority of the options issued under the MSGM 2021 Stock Plan have time-based vesting schedules, typically vesting ratably over a three-year period. Certain stock option awards differed from this vesting schedule. All stock options issued under the MSGM 2021 Stock Plan expire 10 years from the grant date.

Non-Employee Director Compensation Awards

Pursuant to the non-employee director compensation policy adopted by the Board of Directors at the time of the Company’s initial public offering, each non-employee director is entitled to receive an annual stock option award equal to the number of shares of Class A common stock obtained by dividing $75,000 by the closing trading price of the Class A common stock on the date of grant, vesting one year from the date of grant. All such option awards immediately vest upon a change of control of the Company.

On August 29, 2025, the Board of Directors unanimously acknowledged and approved that the Company shall remain legally obligated to issue any prior equity compensation owed to each non-employee director under the policy and not granted, or to settle such obligations in cash or other consideration acceptable to the director, in each case upon a change of control of the Company (as defined in the MSGM 2021 Stock Plan) or if a director ceases to serve on the Board of Directors for any reason other than for cause (as defined in the MSGM 2021 Stock Plan). Because the obligations may be settled in cash, the Company has classified these obligations as liabilities. The fair value of each award is remeasured at each reporting date through settlement using a Black-Scholes option-pricing model with assumptions as of the applicable reporting date, and the cumulative compensation cost recognized at each reporting date equals the proportion of the requisite service period rendered through that date multiplied by the remeasured fair value of the award. The cumulative liability is presented within noncurrent liabilities on the condensed consolidated balance sheets, and changes in the cumulative liability between reporting dates are recognized in general and administrative expense in the condensed consolidated statements of operations.

Through March 31, 2026, the Company had not granted the annual non-employee director stock option awards contemplated by the above policy because there were not enough authorized shares in the MSGM 2021 Stock Plan. On April 23, 2026, the Company’s stockholders approved an amendment to the MSGM 2021 Stock Plan to increase the number of shares of Class A common stock available for issuance from 100,000 to 600,000. However, as of June 30, 2026, the Compensation Committee of the Board of Directors had not approved the issuance of the stock option awards to the Board of Directors. As a result, the Company concluded that no grant of these stock option awards had occurred as of June 30, 2026 and, therefore, the cash obligation remained within noncurrent liabilities on the condensed consolidated balance sheet. As of June 30, 2026 and December 31, 2025, the cumulative liability for the non-employee director compensation obligations described above was $1,201,995 and $789,320, respectively.

On July 30, 2026, the Company granted an aggregate of 273,934 restricted stock units to the Board of Directors, in partial satisfaction of the equity compensation previously owed to each non-employee director under the policy described above. Each restricted stock unit represents a contingent right to receive one share of Class A Common Stock and vests on the earlier of January 1, 2027, or the occurrence of a change of control, as defined, subject to the director’s continued service through the applicable vesting date.

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

Fair Value Valuation Assumptions

The fair value of the stock options and stock appreciation rights are estimated using the Black-Scholes option pricing model. The estimation of fair value for these awards is affected by subjective and complex variables, which are typically based on historical information. Judgment is required to determine if historical trends are indicators of future outcomes.

Key assumptions of the Black-Scholes option pricing model are the risk-free interest rate, expected volatility, expected term and expected dividends. The Company determined the risk-free interest rate using U.S. Treasury yields in effect at the time of the grant that matched the expected term of the options. Expected volatility is based on a combination of historical stock price volatility, as well as implied volatilities, of comparable publicly traded companies with operations similar to Motorsport Games over a 10-year period, consistent with the contractual term of the options. The Company calculated the expected term using the simplified method as prescribed by the SEC’s Staff Accounting Bulletin, topic 14 (“SAB Topic 14”). This decision was based on the lack of relevant historical data due to the Company’s limited historical experience. The dividend yield was zero, as the Company has never declared or paid dividends and has no plans to do so in the foreseeable future.

Share-based compensation expense recognized is based on awards ultimately expected to vest and therefore has been reduced for actual forfeitures occurring within the period.

The following table presents the weighted-average assumptions, weighted average grant date fair value, and the range of expected price volatility used in determining the fair value of the non-employee director liability-classified awards as of June 30, 2026 and December 31, 2025:

 SCHEDULE OF FAIR VALUE ASSUMPTION

Fair Value Hierarchy

The following table presents the Company’s liabilities measured at fair value on a recurring basis as of June 30, 2026 and December 31, 2025:

 SCHEDULE OF FAIR VALUE, ASSETS AND LIABILITIES MEASURED ON RECURRING BASIS

A reconciliation of liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) is as follows:

SCHEULE OF RECONCILIATION OF LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS 

Stock-Based Compensation

The following table summarizes stock-based compensation expense resulting from awards included in the Company’s condensed consolidated statements of operations:

SCHEDULE OF STOCK BASED COMPENSATION EXPENSE

Stock-based compensation expense for the three and six months ended June 30, 2026 of $37,644 and $412,675, respectively, represents the change in the cumulative liability for the non-employee director compensation obligations described above between December 31, 2025 ($789,320) and June 30, 2026 ($1,201,995). The change reflects (i) additional service rendered during the period under the requisite service periods of the underlying awards and (ii) the effect of remeasuring the fair value of the awards at June 30, 2026 using updated Black-Scholes assumptions as of that date.

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

As of June 30, 2026, total unrecognized share-based compensation expense related to the non-employee director compensation obligations described above was $119,600, which is expected to be recognized over a weighted-average period of approximately 0.5 years. There was no unrecognized share-based compensation expense related to other awards outstanding under the MSGM 2021 Stock Plan as of June 30, 2026.

Net Income Per Common Share

Shares of Class B common stock have no economic rights under the Company’s Certificate of Incorporation and are excluded from the calculation of basic and diluted net income per share. All Class B shares were cancelled during the three months ended June 30, 2026. Basic net income per Class A common share is computed by dividing net income attributable to Motorsport Games Inc. by the weighted average number of shares of Class A common stock outstanding during each period. Diluted net income per Class A common share includes the effect, if any, from the potential exercise or conversion of securities, such as stock options and warrants, which would result in the issuance of incremental shares of Class A common stock. The Company analyses the potential dilutive impact of options and warrants under the treasury stock method.

For the three and six months ended June 30, 2026 and 2025, respectively, the Company calculated basic and diluted net income per Class A common share as follows:

 SCHEDULE OF CALCULATED BASIC AND DILUTED NET INCOME PER COMMON SHARE

The following shares were excluded from the calculation of weighted average dilutive common shares because their inclusion would have been anti-dilutive. 

 SCHEDULE OF CALCULATION WEIGHTED AVERAGE DILUTIVE COMMON SHARES

In connection with a securities purchase agreement entered into on July 26, 2024, the Company issued warrants to investors and H.C. Wainwright & Co., LLC to purchase up to an aggregate of 949,310 shares of Class A common stock (“the Outstanding Warrants”). These warrants became exercisable on April 23, 2026, which represents the effective date of the stockholder approval for the issuance of the shares of Class A common stock issuable upon exercise of the warrants.

Motorsport Games Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements