NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
NOTE
1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity
Esports and Gaming Company F/K/A Smaaash Entertainment Inc. (the “Company,” “we,” or “our”),
was a blank check company organized under the laws of the State of Delaware on April 17, 2017. The Company was formed under the
name I-AM Capital Acquisition Company for the purpose of effecting a merger, share exchange, asset acquisition, share purchase,
reorganization or similar business combination with one or more businesses (“Business Combination”). On November 20,
2018, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc. On January 2, 2019, the
Company changed its name from Smaaash Entertainment Inc. to Simplicity Esports and Gaming Company.
The
Company is a global esports organization, with an established brand, that is capitalizing on the growth in esports through three
business units, Simplicity One Brasil Ltda (“Simplicity One”), Simplicity Esports, LLC (“Simplicity Esports
LLC”) and PLAYlive Nation, Inc. (“PLAYlive”).
The
Company owns and manages numerous professional esports teams domestically and internationally. Revenue is generated from prize
winnings, corporate sponsorships, advertising, league subsidy payments and potential league revenue sharing payments from the
publishers of video games. Through a wholly owned subsidiary Simplicity Esports LLC, the Company owns and manages numerous professional
esports teams competing in games such as Overwatch, Apex Legends, PUBG and more. We are committed to growing and enhancing the
esports industry, fostering the development of amateurs to compete professionally and signing established professional gamers
to support their paths to greater success. Through a 90% owned subsidiary Simplicity One, the Company manages Flamengo eSports,
one of the leading Brazilian League of Legends® teams. Flamengo eSports was established in 2017 as the Esports division of
Clube de Regatas do Flamengo, a successful Brazilian sports organization, known for its world-famous soccer team. Flamengo eSports’
League of Legends® team won the CBLoL Championship in September 2019, which qualified the team to compete at the 2019 League
of Legends® World Championship in Europe as one of 24 teams from 13 different regions around the world.
The
Company owns and operates corporate and franchise esports gaming centers, through wholly owned subsidiaries, Simplicity Esports
LLC and PLAYlive, throughout the U.S. giving casual gamers the opportunity to play in a social setting with other members of the
gaming community. In addition, aspiring and established professional gamers can compete in local and national esports tournaments
held in the Company’s gaming centers for prizes, notoriety, and potential contracts to play for one of our professional
esports teams. In this business unit, revenue is generated from the sale of game time, memberships, tournament entry fees, birthday
party events, corporate party events, concessions and gaming-related merchandise.
The
Company’s business plan encompasses a brick and click physical and digital approach to further recognize revenue from all
verticals, which we believe to be unique in the industry. The physical centers, together with the Company’s esports teams,
lifestyle brand and marketing campaigns offer opportunities for additional revenue via strategic partnerships with both endemic
and non-endemic brands. The Company’s goal is to further engage a diverse fan base with a 360-degree approach driving traffic
to both our digital platform and physical real estate to maximize the monetization opportunities with these relationships. In
addition, we have proprietary intellectual capital, fan engagement strategies and brand development blueprints which complement
our publicly available information.
Simplicity
Esports LLC has already opened and is operating four corporate-owned retail Simplicity Esports Gaming Centers. The first Simplicity
Esports Gaming Center was opened on May 3, 2019. Furthermore, the Company has engaged a national tenant representation real estate
broker to assist in the strategic planning and negotiations for our future Simplicity Esports Gaming Center locations. The Company
contemplates that new Simplicity Esports Gaming Centers will be funded by the Company as well as a combination of tenant improvement
allowances from landlords and sponsorships.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
Due
to unsolicited interest from potential franchisees, the Company has launched a franchising program to accelerate the expansion
of planned nationwide footprint. The Company sells specific franchise territories, through a wholly owned subsidiary PLAYlive,
and assists with the establishment and buildout of esports gaming centers to potential business owners that desire to use the
Company’s branding, infrastructure and process to open and operate gaming centers. Franchise revenue is generated from the
sale of franchise territories, supplying furniture, equipment and merchandise to the franchisees for buildout of their centers,
a gross sales royalty fee and a national marketing fee. We license the use of our branding, assist in identifying and negotiating
commercial locations, assist in overseeing the buildout and development, provide access to proprietary software for point of sale,
inventory management, employee training and other HR functions. Franchisees also can participate in our national esports tournament
events, and benefit from the growing profile of our professional esports teams. Once an esports gaming center is opened, the Company
provides operational guidance, support and use of branding elements in exchange for a monthly royalty fee calculated as 6% of
gross sales and a national marketing fee of 1% of gross sales. To date, the Company has sold five of these franchises.
The
combination of the esports gaming centers, owned or franchised by wholly owned subsidiaries Simplicity Esports LLC or PLAYlive,
provides the Company with what it believes will be the largest footprint of esports gaming centers in North America. Over the
next 12 months, existing PLAYlive esports gaming centers will be rebranded to Simplicity Esports gaming centers. All newly opened
franchise esports gaming centers will be branded as Simplicity Esports gaming centers. All gaming centers in our footprint will
be participating venues in the Company’s national esports tournaments.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions
to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). Certain
information or footnote disclosures normally included in consolidated financial statements prepared in accordance with GAAP have
been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they
do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of
operations, or cash flows. In the opinion of management, the accompanying unaudited consolidated financial statements include
all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the consolidated financial
position, operating results and cash flows for the periods presented.
The
accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report
on Form 10-K as filed with the SEC on August 29, 2019. The interim results for the three and nine months ended February 29, 2020
are not necessarily indicative of the results to be expected for the year ending May 31, 2020 or for any future interim periods.
Emerging
Growth Company
Section
102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from
being required to comply with new or revised financial accounting standards until private companies (that is, those that have
not had a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), declared effective
or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect
to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but
any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which
means that when a standard is issued or revised and it has different application dates for public or private companies, the Company,
as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
Basis
of Consolidation
The
consolidated financial statements include the operations of the Company and its wholly owned subsidiaries, Simplicity Esports,
LLC, PLAYlive Nation, Inc., and PLAYlive Nation Holdings, LLC, its 90% owned subsidiary Simplicity One Brasil Ltd, and its 79%
owned subsidiaries Simplicity Happy Valley, LLC and Simplicity Redmond, LLC.
In
November 2019, the Company organized Simplicity Happy Valley, LLC and Simplicity Redmond, LLC for the purpose of converting a
franchised store into a Company owned store.
All
significant intercompany accounts and transactions have been eliminated in consolidation.
Reclassification
Certain
amounts in the prior period consolidated financial statements have been reclassified to conform to the presentation of the current
period financial statements. These reclassifications had no effect on the previously reported net loss.
Cash
and cash equivalents
The
Company considers short-term interest-bearing investments with initial maturities of three months or less to be cash equivalents.
The Company has no cash equivalents.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution,
which at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these
accounts and management believes the Company is not exposed to significant risks on such accounts.
Financial
Instruments
The
fair value of the Company’s assets and liabilities, which qualify as financial instruments under the Financial Accounting
Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements
and Disclosures,” approximates the carrying amounts represented in the consolidated balance sheet.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue
Recognition
As
of January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) (“ASC 606”). The new guidance
sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and
is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in GAAP.
The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or
services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not
addressed completely in the prior accounting guidance. The Company adopted the standard using the modified retrospective method
and the adoption did not have a material impact on its financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
The
Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product
sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the
Company expects to receive in exchange for transferring goods and services. Our revenue is derived from the three sources listed
below.
The
following describes principal activities, separated by major product or service, from which the Company generates its revenues:
Company-owned
Stores Sales
The
Company-owned stores principally generate revenue from retail esports gaming centers. Revenues from Company-owned stores are recognized
when the products are delivered, or the service is provided.
Franchise
Royalties and Fees
Franchise
royalties are based on six percent of franchise store sales after a minimum level of sales occur and are recognized as sales occur.
Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other
behaviors, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty
rate. Franchise royalties are billed on a monthly basis.
The
Company recognizes initial franchise license fee revenue when the Company has performed substantially all the services required
in the franchise agreement. Fees received that do not meet these criteria are recorded as deferred revenues until earned. The
pre-opening services provided to franchisees do not contain separate and distinct performance obligations from the franchise right;
thus, the fees collected will be amortized on a straight-line basis beginning at the store opening date through the term of the
franchise agreement, which is typically 10 years. Franchise license renewal fees, which generally occur every 10 years, are billed
before the renewal date. Fees received for future license renewal periods are amortized over the life of the renewal period.
The
Company offers various incentive programs for franchisees including royalty incentives, new store opening incentives (i.e. development
incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned
or granted under these programs that are in the form of discounts.
Commissary
sales are comprised of gaming equipment and supplies sold to franchised stores and are recognized as revenue upon shipment or
delivery of the related products to the franchisees. Payments are generally due within 30 days.
Fees
for information services, including software maintenance fees, marketing fees and website maintenance, graphic and promotion fees
are recognized as revenue as such services are provided.
Esports
revenue
Esports
is a form of competition using video games. Most commonly, esports takes the form of organized, single player and multiplayer
video game tournaments or leagues, particularly between professional players, individually or as teams. Revenues from Esports
revenues are recognized when the competition is completed, and prize money is awarded. Revenues earned from team sponsorships,
prize winnings, league sponsorships, and from the Company’s share of league revenues are included in esports revenue.
Deferred
Revenues
Deferred
revenues are classified as current or long-term based on when management estimates the revenues will be recognized.
The
Company receives payments from franchisees in advance of all performance obligations having been met, including but not limited
to franchise locations being opened. As certain conditions agreed to in these franchise agreements are performed, revenues are
recognized.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
Deferred
costs include commissions paid to brokers related to the sale of specific new franchises which have not met revenue recognition
criteria as of February 29, 2020. These costs are recognized in the same period as the initial franchise fee revenue is recognized.
Accounts
Receivable
The
Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e. franchisees), taking into
consideration the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable are written
off against the allowance when management determines it is probable the receivable is worthless. Customer account balances with
invoices dated over 90 days old are considered delinquent and considered in the allowance assessment. The Company performs credit
evaluations of its customers and, generally, requires no collateral. Management has assessed accounts receivable and an allowance
for doubtful accounts of approximately $11,000 has been recorded.
Property
and Equipment
Property
and equipment and leasehold improvements are recorded at its historical cost. The cost of property and equipment is depreciated
over the estimated useful lives, when placed in service (ranging from 3 -5 years), of the related assets utilizing the straight-line
method of depreciation. The cost of leasehold improvements is depreciated (amortized) over the lesser of the length of the related
leases or the estimated useful lives of the assets. Ordinary repairs and maintenance are expensed when incurred and major repairs
will be capitalized and expensed if they benefit future periods.
Intangible
Assets and Impairment
Intangible
assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that
carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The
Company has intangible assets subject to amortization related to its acquisition of Simplicity Esports, LLC and PLAYlive
Nation, Inc. These costs are included in intangible assets on our consolidated balance sheet and amortized on a straight-line
basis when placed into service over their estimated useful lives of the costs, which is 3 to 5 years.
The
Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less that the carrying amount
of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book
value.
Goodwill
Goodwill
is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill,
but we assess our goodwill for impairment at least annually. We have assessed goodwill and qualitative considerations indicated
no impairment.
Franchise
Locations
Through
PLAYlive, the Company’s wholly owned subsidiary, the Company has entered into franchise agreements with third parties. As
of February 29, 2020, 43 locations were open and operating, in various states including Arizona, California, Idaho, Florida, Maryland,
Michigan, Mississippi, Montana, Oregon, South Carolina, Texas, Utah and Washington, in addition we have five additional franchise
locations that are currently in the final stages of preparation for opening.
Stock-based
Compensation
The
Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation and ASC 505-50,
Equity-Based Payments to Non-Employees. All transactions in which goods or services are the consideration received for
the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of
the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the
services received as consideration are measured and recognized based on the fair value of the equity instruments issued and are
recognized over the employees required service period, which is generally the vesting period.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
Leases
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02-Leases (Topic 842), which significantly
amends the way companies are required to account for leases. Under the updated leasing guidance, some leases that did not have
to be reported previously are now required to be presented as an asset and liability on the balance sheet. In addition, for certain
leases, what was previously classified as an operating expense must now be allocated between amortization expense and interest
expense. The Company elected to adopt this update early as of January l, 2019 using the modified retrospective transition method
and prior periods have not been restated. Upon implementation, the Company recognized an initial operating lease right-of-use
asset of $110,003 and operating lease liability of $107,678. Due to the simplistic nature of the Company’s leases, no retained
earnings adjustment was required. See Note 7 for further details.
Basic
Loss Per Share
The
Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Basic loss per
share is calculated by dividing the Company’s net loss by the weighted average number of common shares outstanding
during the period. Diluted loss per share is calculated by dividing the Company’s net loss by the diluted weighted
average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the
basic weighted number of shares adjusted for any potentially dilutive debt or equity.
At
February 29, 2020, the Company had a convertible note in the principal amount of $1,000,000 and common stock warrants that could
be converted into approximately 6,924,000 common shares. These shares are not presented in the consolidated statements of operations
as the effect of these shares is anti-dilutive.
Income
Taxes
The
Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires
an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities
are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result
in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
ASC
Topic 740 prescribes a recognition threshold and a measurement attribute for the consolidated financial statements recognition
and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by taxing authorities.
On
December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was signed into law. As a result of Tax Reform,
the U.S. statutory tax rate was lowered from 35% to 21% effective January 1, 2018, among other changes. ASC Topic 740 requires
companies to recognize the effect of tax law changes in the period of enactment; therefore, the Company was required to revalue
its deferred tax assets and liabilities at the new rate. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”)
to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared,
or analyzed (including computations) in reasonable detail to complete the accounting for certain tax effects of Tax Reform. The
ultimate impact may differ from this provisional amount, possibly materially, as a result of additional analysis, changes in interpretations
and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a
result of Tax Reform.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
Recently
Issued and Recently Adopted Accounting Pronouncements
Accounting
standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future
financial statements. The following are a summary of recent accounting developments.
In
June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which aligns accounting for share-based payments issued to nonemployees to that of employees under the
existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to
nonemployees under Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. This guidance is effective for
the Company as of January 1, 2019. Based on the completed analysis, the Company has determined the adjustment did not have a material
impact on the financial statements.
The
Company periodically reviews new accounting standards that are issued. Although some of these accounting standards may be applicable
to the Company, the Company has not identified any other new standards that it believes merit further discussion, and the Company
expects that none would have a significant impact on its financial statements.
Going
Concern, Liquidity and Management’s Plan
The
Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which
contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As
reflected in the consolidated financial statements, the Company has an accumulated deficit at February 29, 2020, a net loss and
net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s
ability to continue as a going concern within one year from the of the date that the financial statements are issued.
The
Company has commenced operations and has begun to generate revenue; however, the Company’s cash position may not be sufficient
to support the Company’s daily operations. Management intends to raise additional funds by way of a private or public offering.
While the Company believes in the viability of its strategy and its ability to generate sufficient revenue and to raise additional
funds, there can be no assurances to that effect.
The
ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business
plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings.
The
consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue
as a going concern.
In December 2019, a novel strain of coronavirus
(COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused
significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally.
Because COVID-19 infections have been reported
throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations
and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may
be issued in the future. As a result, all of our corporate and franchised Simplicity Gaming Centers have been closed effective
April 1, 2020. Although our franchise agreements with franchisees of Simplicity Gaming Centers require a minimum monthly royalty
payment to us from the franchisees regardless of whether the franchised Simplicity Gaming Centers are operating, there is a potential
risk that franchisees of Simplicity Gaming Centers will default in their obligations to pay their minimum monthly royalty payment
to us.
The ultimate impact of the COVID-19 pandemic
on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be
predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity
of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct,
which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any
resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on
our business, financial condition and results of operations.
The measures taken to date will impact
the Company’s business for the fiscal fourth quarter and potentially beyond. Management expects that all of its business
segments, across all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak
on the Company’s business and the duration for which it may have an impact cannot be determined at this time.
NOTE
3 — PROPERTY, PLANT AND EQUIPMENT
The
following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
|
|
February 29, 2020
|
|
Leasehold improvements
|
|
$
|
52,189
|
|
Property and equipment
|
|
|
243,314
|
|
|
|
|
|
|
Total cost
|
|
|
295,503
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(42,537
|
)
|
|
|
|
|
|
Net, property plant and equipment
|
|
$
|
252,966
|
|
Depreciation
expense for the nine months ended February 29, 2020 and February 28, 2019 was $37,240 and $0, respectively.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
NOTE
4 — INTANGIBLE ASSETS
The
following table sets forth the intangible assets, including accumulated amortization as of February 29, 2020:
|
|
February 29, 2020
|
|
|
Remaining
|
|
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
Non-Competes
|
|
4 years
|
|
$
|
1,023,118
|
|
|
$
|
238,728
|
|
|
$
|
784,390
|
|
Trademarks
|
|
Indefinite
|
|
|
866,000
|
|
|
|
-
|
|
|
|
866,000
|
|
Customer contracts
|
|
10 years
|
|
|
594,000
|
|
|
|
-
|
|
|
|
594,000
|
|
Internet domain
|
|
2 years
|
|
|
3,000
|
|
|
|
1,167
|
|
|
|
1,833
|
|
|
|
|
|
$
|
2,486,118
|
|
|
$
|
239,895
|
|
|
$
|
2,246,223
|
|
Amortization
expense for the nine months ended February 29, 2020 and February 28, 2019 was $154,218 and $0, respectively.
NOTE
5 — ACQUISITIONS
The
Simplicity Esports, LLC Acquisition
On
January 4, 2019, the Company consummated the transactions contemplated by the share exchange agreement, dated December 21, 2018
(as amended by Amendment No. 1 to Share Exchange Agreement, dated December 28, 2018 and by Amendment No. 2 to Share Exchange Agreement,
dated December 30, 2018, the “Share Exchange Agreement”) by and among the Company, Smaaash Entertainment, Inc. (“Smaaash”),
each of the equity holders of Simplicity (“Simplicity Owners”) and Jed Kaplan, in the capacity as the representative
of the Simplicity Owners (the “Representative”). Pursuant to the Share Exchange Agreement, the Simplicity Owners transferred
all the issued and outstanding equity interests of Simplicity to the Company in exchange for newly issued shares of common stock
of the Company (the “Acquisition”).
The
Simplicity Owners received an aggregate of 300,000 shares of Company common stock at the closing of the Acquisition, an additional
700,000 shares of common stock on January 7, 2019 and the remaining 2,000,000 shares in March 2019.
The
acquisition of Simplicity, in an all-stock deal, created a pure play esports team and entertainment platform opportunity, which
we believe will increase shareholder value and boost our growth strategy as we endeavor to build out our brick and mortar esports
centers.
The
acquisition was accounted for by the Company using the acquisition method under business combination accounting. Under this method,
the purchase price paid by the acquirer is allocated to the assets acquired and liabilities assumed as of the acquisition date
based on the fair value. Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often
involves the use of significant estimates and assumptions. All fair value measurements of acquired assets and liabilities assumed
are non-recurring in nature and classified as level 3 on the fair value hierarchy.
The
aggregate purchase price consisted of the following:
Restricted stock consideration
|
|
|
6,090,000
|
|
Total
|
|
$
|
6,090,000
|
|
As
noted in the table above, the Company issued 3,000,000 restricted shares of common stock as consideration. The fair value of the
shares on the closing date was approximately $6,090,000.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
The
following table summarizes the estimated fair value of the Simplicity Esports, LLC assets acquired and liabilities assumed at
the date of acquisition:
Cash
|
|
$
|
76,000
|
|
Internet Domain
|
|
|
3,000
|
|
Trade names and trademarks
|
|
|
588,000
|
|
Non-Competes
|
|
|
1,023,118
|
|
Accounts payable and accrued liabilities
|
|
|
(56,000
|
)
|
Goodwill
|
|
|
4,455,882
|
|
Total
|
|
$
|
6,090,000
|
|
Revenue
and net loss included in unaudited consolidated financial statements for the nine months ended February 29, 2020 attributable
to Simplicity Esports, LLC is approximately $173,000 and $554,000, respectively.
The
following unaudited pro forma information presents the consolidated results of operations data as if the acquisition of Simplicity
Esports, LLC took place on June 1, 2018:
|
|
Nine Months Ended
February 28, 2019
|
|
|
|
|
|
Total Revenue
|
|
$
|
24,000
|
|
Net Loss
|
|
$
|
(3,482,692
|
)
|
Basic Net Loss Per Share
|
|
$
|
(0.97
|
)
|
PLAYlive
Nation Acquisition
On
July 29, 2019, the Company entered into a definitive agreement to acquire PLAYlive for total consideration of 750,000 shares of
Company common stock. The PLAYlive acquisition closed on July 30, 2019.
Founded
in 2009, PLAYlive has a network of 44 franchised gaming centers across 11 states, serving over 150,000 unique gamers annually.
The PLAYlive Centers offer customers a specialized entertainment gaming experience within a social setting. Customers are provided
the opportunity to play and compete across an array of gaming titles on both consoles and high-performance gaming PCs.
The
acquisition was accounted for by the Company using the acquisition method under business combination accounting. Under this method,
the purchase price paid by the acquirer is allocated to the assets acquired and liabilities assumed as of the acquisition date
based on the fair value. Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often
involves the use of significant estimates and assumptions. Certain amounts below are provisional based on our best estimates using
information available as of the reporting date. The Company is waiting for information to become available to finalize its valuation
of certain elements of this transaction. Specifically, the assigned values for intellectual property, net deferred revenues, customer
relationships, and goodwill are provisional in nature and subject to change upon the completion of the final valuation of such
elements. All fair value measurements of acquired assets and liabilities assumed are non-recurring in nature and classified as
level 3 on the fair value hierarchy.
The
aggregate purchase price consisted of the following:
Restricted stock consideration
|
|
$
|
1,440,000
|
|
Total
|
|
$
|
1,440,000
|
|
As
noted in the table above, the Company issued 750,000 restricted shares of common stock as consideration. The fair value of the
shares on the closing date was approximately $1,440,000.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
The
following table summarizes the estimated fair value of the PLAYlive assets acquired and liabilities assumed at the date of acquisition:
Cash
|
|
$
|
26,000
|
|
Property, plant and equipment (provisional)
|
|
|
10,000
|
|
Net deferred revenue (provisional)
|
|
|
(115,000
|
)
|
Customer relationships (provisional)
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
|
|
(4,000
|
)
|
Goodwill (provisional)
|
|
|
651,000
|
|
Trademarks
|
|
|
278,000
|
|
Customer contracts
|
|
|
594,000
|
|
Total
|
|
$
|
1,440,000
|
|
Revenue
and net loss included in the consolidated financial statements nine months ended February 29, 2020 attributable to PLAYlive is
approximately $432,000 and $38,000, respectively.
The
following unaudited pro forma information presents the consolidated results of operations data as if the acquisition of PLAYlive
took place on June 1, 2018:
|
|
Nine Months Ended
February 29, 2020
|
|
|
Nine Months Ended
February 28, 2019
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
705,000
|
|
|
$
|
526,000
|
|
Net Loss
|
|
$
|
(1,270,000
|
)
|
|
$
|
(3,026,000
|
)
|
Basic Net Loss Per Share
|
|
$
|
(0.17
|
)
|
|
$
|
(0.85
|
)
|
The Simplicity
One Acquisition
On January 14, 2020 the Company acquired a 90% interest in Simplicity
One Brasil Ltda for approximately $2,000.
NOTE
6 — RELATED PARTY TRANSACTIONS
I-AM
Capital Partners, LLC the Company’s sponsor (the “Sponsor”), loaned the Company $201,707 in the aggregate, to
be used for a portion of the expenses of the Company’s initial public offering and working capital purposes. The loan is
non-interest bearing, unsecured and due at the earlier of December 31, 2017 or the closing of the initial public offering. At
November 30, 2018, $120,089 of the Sponsor’s loan was repaid. As of May 31, 2019, the balance of the Sponsor loan was $93,761,
including imputed interest of $8,523. In August 2019, the Sponsor forgave this remaining balance and the Company recorded it as
debt forgiveness income.
The
Company maintains its cash balance at a financial services company that is owned by an officer of the Company.
NOTE
7 — COMMITMENTS AND CONTINGENCIES
Registration
Rights
Pursuant
to a registration rights agreement the Company entered into with its initial stockholders and initial purchasers of the private
units (and constituent securities) at the closing of the initial public offering, the Company is required to register certain
securities for sale under the Securities Act. These holders are entitled under the registration rights agreement to make up to
three demands that the Company register certain of its securities held by them for sale under the Securities Act and to have the
securities covered thereby registered for resale pursuant to Rule 415 under the Securities Act. In addition, these holders have
the right to include their securities in other registration statements filed by the Company. The Company will bear the costs and
expenses of filing any such registration statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
Unit
Purchase Option
The
Company sold to the underwriters (and/or their designees), for $100, an option to purchase up to a total of 250,000 Units (which
increased to 260,000 Units upon the partial exercise of the underwriters’ over-allotment option), exercisable at $11.50
per Unit (or an aggregate exercise price of $2,990,000) upon the closing of the initial public offering. The unit purchase option
may be exercised for cash or on a cashless basis, at the holder’s option, at any time during the period commencing on the
later of the first anniversary of the effective date of the registration statement relating to the initial public offering and
the closing of the Company’s initial Business Combination and terminating on the fifth anniversary of such effectiveness
date. The Units issuable upon exercise of this unit purchase option are identical to those offered in the initial public offering,
except that the exercise price of the warrants underlying the Units sold to the underwriters is $13.00 per share.
Note
Payable
On
November 20, 2018, the Company paid its underwriter $20,000 and issued Maxim Group, LLC, its underwriter (“Maxim”)
a secured demand promissory note (the “Note”) in the amount of $1,800,000. The Note accrued interest at 8% per annum
from the date of the Note through and including May 20, 2019, 12% per annum from and including May 21, 2019 through and including
August 20, 2019, and 15% per annum and from and including August 21, 2019, through and including November 20, 2019. If a late
payment had occurred and continued, the interest rate would have increased to 12% per annum from the date of the Note through
and including August 20, 2019 and 18% per annum from and after August 21, 2019. If a late payment had remained outstanding for
over 48 hours, Maxim could have required the Company to redeem all or any part of the Note at a redemption price equal to 125%
of the Alternate Payment Amount.
The
principal and interest of the Note was payable upon demand by Maxim or from time to time, in accordance the following schedule:
|
(i)
|
one
third of the principal, accrued and unpaid interest and any late charges on May 20, 2019;
|
|
(ii)
|
one
third of the principal, accrued and unpaid interest and any late charges on August 20, 2019; and
|
|
(iii)
|
one
third of the principal, accrued and unpaid interest and any late charges on November 20, 2019.
|
The
Note was secured by a first priority security interest in all personal property and assets of the Company excluding the assets
held in escrow with respect to (i) that certain stock purchase agreement with Polar Asset Management Partners Inc. (“Polar”),
pursuant to which Polar agreed to sell up to 490,000 shares of the Company’s common stock to the Company thirty days after
the consummation of the Business Combination and (ii) that certain stock purchase agreement with K2 Principal Fund L.P. (“K2”),
pursuant to which K2 agreed to sell up to 220,000 shares of the Company’s common stock to the Company thirty days after
the consummation of the Business Combination.
The
amount payable under the Note could also have been paid in shares of common stock of the Company or securities convertible or
exercisable into shares of common stock of the Company (the “Alternate Equity Payment”) if and only if the Company
and Maxim mutually agree on both the purchase price and, if applicable, the conversion and/or exercise price of each security
of the Company issued in such Alternative Equity Payment. Otherwise, the payment should be made in cash only.
So
long as any amount under the Note remained outstanding, all cash proceeds received by the Company from any sales of its securities
was to be used to repay this Note.
Convertible
Note Payable
On
December 20, 2018, the Company entered into a securities exchange agreement (“Exchange Agreement”) with Maxim. Pursuant
to the terms of the Exchange Agreement, Maxim agreed to surrender and exchange the Note. In exchange, the Company issued to Maxim
a Series A-1 Exchange Convertible Note in the principal amount of $500,000 (the “Series A-1 Note”) and a Series A-2
Exchange Convertible Note in the principal amount of $1,000,000 (the “Series A-2 Note,” and collectively with Series
A-1 Note, the “Exchange Notes”).
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
The
original amount of the promissory note was $1,800,000, the total amount of the two exchange notes is $1,500,000, and the difference
of $300,000 has been recorded as debt forgiveness income.
The
Series A-1 Note bears interest at 2.67% per annum, payable quarterly and has a maturity date of the earlier of the closing date
of the Acquisition (as defined below) or June 20, 2020 (the “Maturity Date”). The Company may pay the interest in
cash or at its sole discretion, in shares of its common stock or a combination of cash and common stock. However, the Company
may only pay the interest in shares of its common stock if (i) all the equity conditions specified in the note (“Equity
Conditions”) have been met (unless waived by Maxim in writing) during the 20 trading days immediately prior to the interest
payment date (“Interest Notice Period”), (ii) the Company has provided proper notice pursuant to the terms of the
note and (iii) the Company has delivered to Maxims’ account certain number of shares of its common stock to be applied against
such interest payment prior to (but no more than five trading days before) the Interest Notice Period.
The
Series A-1 Note is convertible into shares of the Company’s common stock (“Conversion Shares”) at an initial
conversion price of $1.93 per share, subject to adjustment for any stock dividends and splits, rights offerings, distributions,
combinations or similar transactions. Upon the closing of the Acquisition, the conversion price will be automatically adjusted
to equal the arithmetic average of the volume weighted average price (“VWAP”) of the Company’s common stock
in the five trading days prior to the closing date of the Acquisition. Maxim may convert the Series A-1 Note at any time, in whole
or in part, provided that upon receipt of a notice of conversion Maxim, the Company has the right to repay all or any portion
of the Series A-1 Note included in the notice of conversion.
Additionally,
the Series A-1 Note will automatically convert into shares of the Company’s common stock on the earlier of the Maturity
Date or the closing date of the Acquisition provided that (i) no event of default then exists, and (ii) solely if such automatic
conversion date is also the Maturity Date, each of the Equity Conditions have been met (unless waived in writing by Maxim) on
each trading day during the 20 trading day period ending on the trading day immediately prior to the automatic conversation date.
At
any time prior to the Maturity Date, the Company may also elect to redeem some or all of the outstanding principal amount for
cash in an amount (the “Optional Redemption Amount”) equal to the sum of (a) 100% of the then outstanding
principal amount of the note, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect
of the note (the “Optional Redemption”). The Company may only effect an Optional Redemption if each of the Equity
Conditions have been met (unless waived in writing by Maxim) on each trading day during the period commencing on the date
when the notice of the Optional Redemption is delivered to the date of the Optional Redemption and through and including the
date payment of the Optional Redemption Amount is actually made in full.
Except
as otherwise provided in the Series A-1 Note, including, without limitation, an Option Redemption, the Company may not prepay
any portion of the principal amount of the note without the prior written consent of Maxim.
The
Company is not permitted to convert any portion of the Series A-1 Note if doing so results in Maxim beneficially owning more than
4.99% of the outstanding common stock of the Company after giving effect to such conversion, provided that on 61 days’ prior
written notice from Maxim to the Company, that percentage may increase to 9.99%. However, if there is an automatic conversion,
and the conversion would result in the Company issuing a number of shares in excess of the beneficial ownership limitation, then
any such shares in excess of the beneficial ownership limitation will be held in abeyance for the benefit of Maxim until such
time or times, if ever, as its right thereto would not result in Maxim exceeding the beneficial ownership limitation, at which
time or times Maxim will be issued such shares to the same extent as if there had been no such limitation.
The
Series A-1 Note contains restrictive covenants which, among other things, restrict the Company’s ability to repay or repurchase
any indebtedness, make distributions on or repurchase its common stock or enter into transactions with its affiliates.
The
Series A-2 Note has terms substantially similar to those of the Series A-1 Note except that the Series A-2 Note has a maturity
date of June 20, 2020 and an initial conversion price of $1.93 which will be automatically adjusted to the lower of (i) the conversion
price then in effect and (ii) the greater of the arithmetic average of the VWAP of the Company’s common stock in the five
trading days prior to the notice of conversion and $0.50.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
As
of December 31, 2018, upon the closing of the Acquisition, the Series A-1 Note automatically converted into 193,648 shares of
the Company’s common stock.
Right
of Use Asset, Operating Lease
The
Company adopted Topic 842 on January 1, 2019. The Company elected to adopt this standard using the optional modified retrospective
transition method and recognized a cumulative-effect adjustment to the consolidated balance sheet on the date of adoption. Comparative
periods have not been restated. With the adoption of Topic 842, the Company’s consolidated balance sheet now contains the
following line items: Right of use asset operating lease, Operating lease obligation, current Operating lease obligation, net
of current portion.
As
all the existing leases subject to the new lease standard were previously classified as operating leases by the Company, they
were similarly classified as operating leases under the new standard. The Company has determined that the identified operating
leases did not contain non-lease components and require no further allocation of the total lease cost. Additionally, the agreements
in place did not contain information to determine the rate implicit in the leases, so we used our incremental borrowing rate as
the discount rate. Our weighted average discount rate is 10.67% and the weighted average remaining lease term is 50 months.
As
of February 29, 2020, operating lease right-of-use assets and liabilities arising from operating leases was $210,602 and $210,601,
respectively. During the nine months ended February 29, 2020, cash paid for amounts included for the measurement of lease liabilities
was approximately $85,000 and the Company recorded operating lease expense of approximately $34,000.
NOTE
8 — STOCKHOLDERS’ EQUITY
Common
Stock
The
Company is authorized to issue 20,000,000 shares of common stock with a par value of $0.0001 per share. Holders of the shares
of the Company’s common stock are entitled to one vote for each share. At February 29, 2020, there were 7,858,975 shares
of common stock issued and outstanding.
Preferred
Stock
The
Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share. At February 29, 2020,
there were no shares of preferred stock issued or outstanding.
Private
Placement
Beginning
in February 2019, the Company sold units in connection with a private offering by the Company to raise working capital of up to
$2,000,000 (the “Offering Amount” ) through the sale to accredited investors only of up to up to 1,000,000 “Units”
of the Company’s securities, at a purchase price of $2.00 per Unit, with each Unit consisting of (i) one share of common
stock, par value $0.0001 per share of the Company (the “Common Stock”) and (ii) a warrant to purchase one share of
common stock, exercisable at a price of $4.00 per share, exercisable at any time within five years of issuance (each, a “Warrant”)
as provided for in the Company’s Term Sheet for Unit Offering dated February 6, 2019 (the “Term Sheet”).
For
the year ended May 31, 2019, the Company sold 962,500 units for gross proceeds of $1,925,000. During the nine months ended February
29, 2020, the Company sold 25,000 units for gross proceeds of $50,000. The common shares underlying the units have not been issued
yet and the $50,000 is included on the balance sheet with current liabilities.
During
the nine months ended February 29, 2020, the Company issued 750,000 shares of common stock for the acquisition of PLAYlive. The
shares were valued at $1,440,000, the fair value at the time of issuance.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
Stock
- Based Compensation
On
March 27, 2019, the Company issued 180,000 shares of common stock to 3 employees. The shares were issued in conjunction with their
employment agreements and vested ratably through December 31, 2019. As of February 29, 2020, 180,000 shares have vested, and for
the year ended May 31, 2019 and the nine months ended February 29, 2020, the Company recognized $27,000 and $63,000 of stock-based
compensation, respectively, based on the trading price on March 27, 2019 (measurement date) of $0.60 per share. As of February
29, 2020, there is no further unrecognized compensation cost related to these shares.
In
November 2019, the Company recorded $90,000 of stock-based compensation for shares issued to an officer for past services provided.
Warrants
For
the year ended May 31, 2018, the Company issued 5,461,500 warrants in conjunction with its initial public offering. These warrants
are exercisable for five years from November 20, 2018, the date of the initial business combination and have an exercise price
equal to $11.50.
For
the year ended May 31, 2019, the Company issued 962,500 warrants in conjunction with the above-mentioned private placement. These
warrants are exercisable for 5 years and have an exercise price of $4.00
A
summary of the status of the Company’s outstanding stock warrants for the nine months ended February 29, 2020 is as follows:
|
|
Number of
Shares
|
|
|
Average
Exercise
Price
|
|
|
Expiration
Date
|
|
Outstanding – May 31, 2019
|
|
|
6,424,000
|
|
|
$
|
10.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted – February 29, 2020
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding – February 29, 2020
|
|
|
6,424.000
|
|
|
$
|
10.38
|
|
|
|
May 2024
|
|
Warrants exercisable at February 29, 2020
|
|
|
6,424,000
|
|
|
|
|
|
|
|
|
|
NOTE
9 — SEGMENT AND RELATED INFORMATION
Historically,
the Company had one operating segment. However, with the acquisition of PLAYlive and the opening of Company-owned retail stores,
the Company’s operations are now managed through three operating segments: Franchise royalties and license fees, Company-owned
stores and Esports revenue. These three operating segments and corporate are presented below as its reportable segments.
Summarized
financial information concerning our reportable segments for the nine months ended February 29, 2020 is shown in the following
table:
|
|
Revenues
|
|
|
Net
Loss
|
|
|
Depreciation
and
Amortization
|
|
|
Capital
Expenditures
|
|
|
Goodwill
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise royalties and fees
|
|
$
|
432,000
|
|
|
$
|
(91,000
|
)
|
|
$
|
3,000
|
|
|
$
|
-
|
|
|
$
|
651,000
|
|
|
$
|
1,713,000
|
|
Company-owned stores
|
|
|
155,000
|
|
|
|
(209,000
|
)
|
|
|
34,000
|
|
|
|
153,000
|
|
|
|
-
|
|
|
|
623,000
|
|
Esports revenue
|
|
|
114,000
|
|
|
|
(213,000
|
)
|
|
|
154,000
|
|
|
|
8,000
|
|
|
|
4,456,000
|
|
|
|
5,981,000
|
|
Corporate
|
|
|
-
|
|
|
|
(738,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
156,000
|
|
Total
|
|
$
|
701,000
|
|
|
$
|
(1,251,000
|
)
|
|
$
|
191,000
|
|
|
$
|
161,000
|
|
|
$
|
5,107,000
|
|
|
$
|
8,473,000
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
NOTE
10 — SUBSEQUENT EVENTS
On
March 12, 2020 (the “Execution Date”), the Company entered into a Common Stock Purchase Agreement (the “Common
Stock Purchase Agreement”) with Triton Funds LP (“Selling Stockholder”), dated as of March 11, 2020, pursuant
to which, upon the terms and subject to the conditions thereof, the Selling Stockholder is committed to purchase shares of the
Company’s Common Stock (the “Put Shares”) at an aggregate price of up to $500,000 (the “Maximum Commitment
Amount”) over the course of the commitment period (the “Equity Line”). In connection with the execution of the
Common Stock Purchase Agreement, the Company agreed to issue, and issued on March 11, 2020, 5,000 shares of the Company’s
Common Stock (the “Donation Shares”) to Selling Stockholder as a donation.
Pursuant
to the terms of the Common Stock Purchase Agreement, the commitment period will commence upon the effective date of the Common
Stock Purchase Agreement and will end on the earlier of (i) the date on which the Selling Stockholder has purchased Common Stock
from us pursuant to the Common Stock Purchase Agreement (“Put Shares”) equal to the Maximum Commitment Amount and
(ii) December 31, 2020.
Subject
to the terms and conditions set forth in the Common Stock Purchase Agreement, the Company has the option to sell to the Selling
Stockholder, and the Selling Stockholder is obligated to purchase from the Company, a number of Shares having an aggregate purchase
price of $500,000. From time to time over the term of the Common Stock Purchase Agreement,
commencing on the date on which a registration statement registering the Put Shares (the “Registration Statement”)
becomes effective, subject to the limitations discussed below and contained in the Common Stock Purchase Agreement, the Company
is obligated to provide the Selling Stockholder with a put notice (each a “Put Notice”) to purchase a specified number
of the Put Shares (each a “Put Amount Requested”). Upon delivery of a Put Notice, the Company must deliver the Put
Amount Requested as Deposit Withdrawal at Custodian (DWAC) shares to Selling Stockholder within two trading days following the
date of the Put Notice.
On
the third business day (“Closing Date”) following notification by the Selling
Stockholder that the Put Shares have been received in its custodial account following the delivery of a Put Notice to the Selling
stockholder, the Selling Stockholder will deliver the Put Amount to the Company via wire transfer (“Closing”). The
actual amount of proceeds the Company receives pursuant to each Put Notice (each, the “Put Amount”) is to be determined
by multiplying the Put Amount Requested by the applicable purchase price as determined on the Closing Date. The purchase price
for each of the Put Shares equals 90% of the lowest daily volume weighted average price of the Common Stock during the
five (5) trading days immediately prior to the Closing Date.
In
order to deliver a Put Notice, certain conditions set forth in the Common Stock Purchase Agreement must be met, as provided therein.
Under the terms of the Common Stock Purchase Agreement, the Company may not deliver a Put Notice to the Selling Stockholder until
the Closing pursuant to any prior Put Notice has been completed. In addition, the Selling Stockholder is not entitled to purchase
that number of Shares, which when added to the sum of the number of shares of Common Stock beneficially owned by the Selling Stockholder,
would exceed 9.99% of the number of shares of Common Stock outstanding on the Closing.
On
the Execution Date, the Company also entered into a registration rights agreement (the “Registration Rights Agreement”)
with Selling Stockholder pursuant to which the Company is obligated to file the Registration Statement to register the resale
of the Put Shares. Pursuant to the Registration Rights Agreement, the Company must (i) file the Registration Statement within
30 calendar days from the Execution Date, (ii) use reasonable best efforts to cause the Registration Statement to be declared
effective under the Securities Act of 1933, as amended, within thirty (30) calendar days, but no more than ninety (90) calendar
days after the Company has filed the Registration Statement, and (iii) use its reasonable best efforts to keep such Registration
Statement continuously effective under the Securities Act until all of the Put Shares have been sold thereunder or the
Selling Stockholder has no obligation to acquire any additional shares of Common Stock under the Common Stock Purchase agreement.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
29, 2020
UNAUDITED
On
March 22, 2020, the Company announced it would be holding weekly online esports tournaments, due to increased demand from COVID-19
related social distancing. Through the acquisition of PLAYlive Nation, Inc. the Company acquired a database of over 400,000 paying
PLAYlive Nation esports gaming center customers. The Company will be promoting its new online esports tournaments directly to
this existing customer base via text message announcements and promotions. The Company sees this as a new and sustainable business
unit that can create revenues during stay at home orders and into the future. See further discussion elsewhere herein.
On
March 30, 2020 the SEC declared a registration statement on Form S-1 effective, that was filed to register the resale of up to
725,000 shares of common stock issuable under a $500,000 equity line between the Company and Triton Funds LP. The Company can
put shares to Triton Funds LP in multiple tranches and has until December 31, 2020 to exercise the line. Triton Funds LP’s
purchase price is a 10% discount to the lowest five-day trailing volume weighted average price (VWAP).
On
April 1, 2020, the Company released multiple players and staff members from Simplicity One Brasil Ltd as part of a restructuring
to make the Flamengo Esports project profitable. The Company will be applying for ownership of a franchise spot in League of Legends
Brazil (CBLoL) once applications are opened by Riot in early summer 2020. Management expects to receive approval for franchise
ownership by the end of calendar year 2020.
On April 3, 2020 the Company furloughed
multiple members of the PLAYlive staff as a cost cutting measure during this temporary period of esports gaming center closures
due to COVID-19. During the quarter ended February 29, 2020, PLAYlive was cash flow positive. Agreements
with franchisees require a minimum monthly royalty payment that will be billed by the Company. Most
landlords have already been contacted and have begun making rent concessions.
On
April 10, 2020, the Company filed a registration statement on Form S-1 with the SEC relating to the offer by the Company of units
of the Company, each of which consists of one share of common stock and one warrant to purchase one share of our common stock.
No sales of units will be made prior to effectiveness of the registration statement on Form S-1. There can be no assurance that
the registration statement on Form S-1 will be declared effective by the SEC.