As
filed with the Securities and Exchange Commission on July 2, 2020
Registration
No. 333-237634
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
PRE-EFFECTIVE
AMENDMENT NO. 1 TO
Form
S-1
REGISTRATION
STATEMENT
UNDER THE SECURITIES ACT OF 1933
SIMPLICITY
ESPORTS AND GAMING COMPANY
(Exact
name of registrant as specified in its charter)
Delaware
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6770
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82-1231127
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(State
or other jurisdiction
of
incorporation or organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer
Identification
Number)
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7000
W. Palmetto Park Rd., Suite 505
Boca
Raton, FL 33433
Telephone:
(855) 345-9467
(Address,
including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Jed
Kaplan
Chief
Executive Officer
625
N. Flagler Drive, Suite 600
West
Palm Beach, FL 33401
Telephone:
(855) 345-9467
(Name,
address, including zip code, and telephone number, including area code, of agent for service)
Copies
to:
Laura
Anthony, Esq.
Craig
D. Linder, Esq.
Anthony
L.G., PLLC
625
N. Flagler Drive, Suite 600
West
Palm Beach, Florida 33401
Telephone:
(561) 514-0936
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______________
______________
______________
______________
Telephone:
(___) ___-____
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Approximate
date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933 check the following box. [X]
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ]
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Accelerated
filer [ ]
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Non-accelerated
filer [X]
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Smaller
reporting company [X]
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Emerging
growth company [X]
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If
an emerging growth company, indicate by check market if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
[ ]
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of Securities to be Registered
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Proposed
Maximum
Aggregate
Offering
Price(1)
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Amount
of
Registration
Fee
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Units(2)
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$
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10,350,000
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$
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1,344
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Common
stock, par value $0.0001 per share, included in the units
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—
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(4)
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—
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(4)
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Warrants
to purchase common stock, par value $0.0001 per share, included in the units
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—
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(4)
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—
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(4)
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Common
stock, par value $0.0001 per share, underlying the warrants included in the units(3)
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$
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12,937,500
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$
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1,679
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Underwriter’s
warrant to purchase common stock
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$
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—
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(5)
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$
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—
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(5)
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Common
stock issuable upon exercise of Underwriter’s warrants to purchase common stock (6)
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$
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646,875
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$
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84
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TOTAL
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$
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23,934,375
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$
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3,107
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(7)
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(1)
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Estimated
solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) of the Securities Act of
1933, as amended (the “Securities Act”).
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(2)
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Each
unit consists of one share of common stock, par value $0.0001 per share, and one warrant to purchase one share of common stock,
par value $0.0001 per share. Includes shares
of common stock and/or warrants to purchase shares of common
stock, which may be issued upon exercise of a 45-day option granted to the underwriters to cover over-allotments, if any.
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(3)
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The
warrants are exercisable at a per share exercise price equal to ___% of the public offering price per share of common stock.
The proposed maximum aggregate public offering price of the shares of common stock issuable upon exercise of the warrants
was calculated to be $12,937,500 (which is 125% of $10,350,000 since each investor will receive a warrant to purchase one
share of common stock for each share of common stock purchased in this offering). Pursuant to Rule 416, the registrant is
also registering an indeterminate number of additional shares of common stock that are issuable by reason of the anti-dilution
provisions of the warrants.
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(4)
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Included
in the price of the units. No fee required pursuant to Rule 457(g) under the Securities Act.
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(5)
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No
fee required pursuant to Rule 457(g) under the Securities Act.
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(6)
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The
underwriter’s warrants are exercisable at a per share exercise price equal to 125% of the public offering price per
share. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities
Act, the proposed maximum aggregate offering price of the representative’s warrants is $646,875, which is equal to 125%
of $517,500 (5% of $10,350,000). Pursuant to Rule 416, the registrant is also registering an indeterminate number of additional
shares of common stock that are issuable by reason of the anti-dilution provisions of the underwriter’s warrants.
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(7)
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Previously
paid $3,107.
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The
registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective
on such date as the Commission, acting pursuant to Section 8(a) may determine.
The
information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities,
and it is not soliciting an offer to buy these securities, in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY
PROSPECTUS
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SUBJECT
TO COMPLETION
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DATED
JULY 2, 2020
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Units
Each
Unit Consisting of One Share of Common Stock and
One
Warrant to Purchase One Share of Common Stock
Simplicity
Esports and Gaming Company
We
are offering units of Simplicity Esports and Gaming Company, a Delaware
corporation. Each unit consists of one share of our common stock, par value $0.0001 per share, and one warrant to purchase one
share of our common stock, par value $0.0001 per share, at an exercise price per share of $ ( %
of the public offering price of one unit in this offering). The warrants will expire on the five-year anniversary of the initial
exercise date. The units will have no stand-alone rights and will not be issued or certificated as stand-alone securities. Purchasers
will receive only shares of common stock and warrants. The shares of common stock and warrants may be transferred separately,
immediately upon issuance. The offering also includes the shares of common stock issuable from time to time upon exercise of the
warrants.
Our
common stock is currently quoted on the OTCQB tier of the OTC Market Group, Inc. under the symbol “WINR.” The last
reported sale price of our common stock on June 26, 2020 was $1.10 per share. Our warrants issued in connection with our
initial public offering in August 2017 are currently listed on OTCQB under the symbol “WINRW.” The last reported sale
price of our warrants on June 26, 2020 was $0.23 per warrant. At present, there is a very limited market for our
common stock and warrants. We intend to apply to list our common stock and warrants on The NYSE American (“NYSE American”)
under the symbols “XXX” and “XXX,” respectively. There is no assurance that our listing application will
be approved by the NYSE American. The approval of our listing on the NYSE American is a condition of closing this offering.
For
purposes of this prospectus, the assumed public offering price per Unit is $ , which was the last reported sale
price of our Common Stock on July 2, 2020. The actual offering price per Unit will be as determined between ________________
(the “Underwriter”) and us at the time of pricing and may be issued at a discount to the current market price
of our Common Stock.
We
are an “emerging growth company” under applicable federal securities laws and are subject to reduced public company
reporting requirements.
Investing
in our securities involves a high degree of risk. See “Risk Factors” on page 9 of this prospectus for a discussion
of information that should be considered in connection with an investment in our securities.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
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Per
Unit
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Total
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Public
offering price (1)
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$
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$
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Underwriting
discounts and commissions (2)
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$
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$
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Proceeds,
before expenses, to us (3)
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$
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$
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(1)
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The
public offering price and underwriting discount and commissions in respect of each unit correspond to a public offering price
per share of common stock of $ and a public offering
price per accompanying warrant of $ .
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(2)
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This
table depicts broker-dealer commissions of _______% of the gross offering proceeds. Underwriting discounts and commissions
do not include a non-accountable expense allowance equal to 1.0% of the public offering price payable to the Underwriter.
See “Underwriting” beginning on page 78 for disclosure regarding compensation payable to the Underwriter by us.
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(3)
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We
estimate the total expenses of this offering will be approximately $ .
Assumes no exercise of the over-allotment option we have granted to the Underwriter as described below.
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We
have granted the Underwriter an option for a period of 45 days from the date of this prospectus to purchase up to an additional
shares of common stock and/or warrants to purchase shares of common stock
at the public offering price less the underwriting discount and commissions solely to cover over-allotments, if any.
The
Underwriter expects to deliver our securities to purchasers in the offering on or about ,
2020.
___________________________
The
date of this prospectus is ,
2020
TABLE
OF CONTENTS
No
dealer, salesperson or other individual has been authorized to give any information or to make any representation other than those
contained in this prospectus in connection with the offer made by this prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities in any jurisdiction in which such an offer or solicitation is not authorized or in which the
person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under any circumstances, create any
implication that there has been no change in our affairs or that information contained herein is correct as of any time subsequent
to the date hereof.
For
investors outside the United States: We have not done anything that would permit this offering or possession or distribution of
this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside
the United States who come into possession of this prospectus must inform themselves, and observe any restrictions relating to,
the offering of the shares of our common stock and the distribution of this prospectus outside the United States.
Cautionary
Note Regarding Forward-Looking Statements
This
prospectus contains forward-looking statements. Specifically, forward-looking statements may include statements relating to:
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our
future financial performance;
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changes
in the market for our products and services;
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our
expansion plans and opportunities; and
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other
statements preceded by, followed by or that include the words “estimate,” “plan,” “project,”
“forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,”
“target” or similar expressions.
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These
forward-looking statements are based on information available as of the date of this prospectus and current expectations, forecasts
and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not
be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking
statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events
or otherwise, except as may be required under applicable securities laws.
As
a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different
from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:
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the
level of demand for our products and services;
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competition
in our markets;
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our
ability to grow and manage growth profitably;
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our
ability to access additional capital;
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changes
in applicable laws or regulations;
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our
ability to attract and retain qualified personnel;
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the
possibility that we may be adversely affected by other economic, business, and/or competitive factors; and
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other
risks and uncertainties indicated in this prospectus, including those under “Risk Factors.”
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INDUSTRY
AND MARKET DATA
We
are responsible for the disclosure in this prospectus. However, this prospectus includes industry data that we obtained from internal
surveys, market research, publicly available information and industry publications. The market research, publicly available information
and industry publications that we use generally state that the information contained therein has been obtained from sources believed
to be reliable. The information therein represents the most recently available data from the relevant sources and publications
and we believe remains reliable. We did not fund and are not otherwise affiliated with any of the sources cited in this prospectus.
Forward-looking information obtained from these sources is subject to the same qualifications and additional uncertainties regarding
the other forward-looking statements in this prospectus.
TRADEMARKS
AND COPYRIGHTS
We
own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate
names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights
that protect the content of our products and the formulations for such products. This prospectus may also contain trademarks,
service marks and trade names of other companies, which are the property of their respective owners. Our use or display of third
parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and should not be read
to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, some of the copyrights, trade names
and trademarks referred to in this prospectus are listed without their ©, ® and ™ symbols, but we will assert,
to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks. All other trademarks are
the property of their respective owners.
PROSPECTUS
SUMMARY
This
summary highlights certain information about us, this offering, and selected information contained in this prospectus. This summary
is not complete and does not contain all of the information that you should consider before deciding whether to invest in our
Units. For a more complete understanding of the Company and this offering, we encourage you to read and consider the more detailed
information in this prospectus, including “Risk Factors” and the financial statements and related notes. Unless the
context otherwise requires, “we,” “us,” “our,” or “the Company” refers to “Simplicity
Esports and Gaming Company,” a Delaware corporation, and its consolidated subsidiaries. “Simplicity Esports LLC”
means our wholly owned subsidiary, Simplicity Esports, LLC, a Florida limited liability company, and its consolidated subsidiaries.
“PLAYlive” means our wholly owned subsidiary PLAYlive Nation, Inc., a Delaware corporation and its consolidated subsidiaries.
“Simplicity One” means our 90% owned subsidiary Simplicity One Brasil Ltda, a Brazilian limited liability company
and its consolidated subsidiaries.
Industry
Overview
Esports
is the competitive playing of video games by amateur and professional teams for cash prizes. Esports typically takes the form
of organized, multiplayer video games that include real-time strategy, fighting, first-person shooter, and multiplayer online
battle arena games. As of July 2, 2020, the three largest selling esports games are Dota 2®, League of Legends®
(both multiplayer online battle arena games) and Counter Strike: Global Offensive® (a first-person shooter game). Other popular
games include SMITE®, StarCraft II®, Call of Duty®¸ Heroes of the Storm®, Hearthstone® and Fortnite®.
Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services including
twitch.tv, azubu.tv, ustream.tv and youtube.com. Esports also includes games which can be played, primarily by amateurs, in multiplayer
competitions on the Sony PlayStation®, Microsoft Xbox® and WII Nintendo® systems.
Although
official competitions have long been a part of video game culture, participation and spectatorship of such events have seen a
global surge in popularity over the last few years with the rapid growth of online streaming. The advent of online streaming technology
has turned esports into a global industry that includes professional players and teams competing in major events that are simultaneously
watched in person in stadiums, and by online viewers, which regularly exceed 1,000,000 viewers for major tournaments. According
to Business Insider, over 100 million viewers saw the 2019 League of Legends® World Championships in person and online. CNBC
reported in April 2019 that League of Legends® World Championships attract more viewers than the Super Bowl. Much like how
there is a worldwide gaming market for the sports industry, there has now developed a worldwide gaming market for the esports
industry. The impact has been so significant that many video game developers are now building features into their games designed
to facilitate competition.
According
to Newzoo, a global leader in esports, games and mobile intelligence, the total global esports audience was expected to reach
495 million in 2019, with an anticipated 27.5 million American gamers. In addition, according to Newzoo, esports produced $909
million in 2018 revenue and is projected to reach $1.1 billion in 2019. Esports enthusiasts, which are people who watch professional
esports content at least once a month, made up 201.2 million of the 2018 total, up from 143.2 million in 2017. With a compound
annual growth rate (“CAGR”) (2017-2022) of +15.7%, this number is expected to reach almost 297 million in 2022. The
global average revenue per esports enthusiast, which includes not only gaming revenue, but also sponsorships advertising and all
other esports related revenues, is projected to be $5.45 in 2019, up +8.9% from $5.00 in 2018. The number of occasional esports
viewers, (people who watch professional esports content less than once a month), is expected to reach 252.6 million in 2019, up
from 221.6 million in 2018, and is projected to grow with a CAGR of +12.6% to surpass 347 million in 2022. The number of people
who are aware of esports worldwide is expected to reach 1.8 billion in 2019, up from 1.6 billion in 2018. According to Newtech
Mag, China and the U.S. have the largest populations of esports fans, with Brazil ranking first in Latin America, and third globally,
with 20 million fans. The increasing prominence of esports as a mainstream entertainment industry is driving the growth in awareness
in most regions. Audience and awareness growth in the emerging regions of Latin America, Middle East and Africa, Southeast Asia,
and Rest of Asia is largely driven by improving IT infrastructure and urbanization. We believe the rise of new franchises, such
as Player Unknown’s Battlegrounds® or PubG®, is an important global growth factor as the influx of millennials should
continue to drive the growth of the esports industry’s audience and in turn, the esports gaming industry.
In
2018, there were 737 major esports events that generated an estimated $54.7 million in ticket revenues. The total prize money
of all esports events held in 2018 reached $150.8 million, after breaking the $100 million mark for the first time in 2017. The
League of Legends® World Championship was 2018’s biggest tournament by live viewership hours on Twitch, with 53.8 million
hours. It also produced $1.9 million in ticket revenues. The Overwatch® League was the most-watched league by live viewership
hours on Twitch, generating 79.5 million hours.
Business
Overview
We
are 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”).
Our
Esports Teams
We
own and manage 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.
Domestic
Esports Teams – Simplicity Esports LLC
Through
our wholly owned subsidiary Simplicity Esports LLC, we own and manage 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.
International
Esports Team - Simplicity One
Since
January 2020, through our 90% owned subsidiary Simplicity
One, we manage 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, with over 30 million
followers across social media accounts, 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.
Online
Tournaments
Since
March 2020, through our wholly owned subsidiary Simplicity Esports LLC, we hold weekly online esports tournaments. In
response to demand from customers for online esports tournaments and due to increased demand
from COVID-19 related social distancing, we introduced a new initiative of weekly online esports tournaments. We
acquired a database of over 400,000 paying esports gaming center customers in the acquisition of PLAYlive. We will directly
promote our online Simplicity Esports tournaments to this database of over 400,000 existing customers via text messages. If we
can convert merely 1% of these existing customers from the PLAYlive database to play in paid entry online Simplicity Esports tournaments,
this may be a profitable business unit resulting in approximately $1,000,000 in annual revenues. At a 5% conversion rate, this
business segment may generate approximately $5,000,000 in annual revenue. Management also intends to sell sponsorship and marketing
activations for these online tournaments that would create additional revenue.
Our
Gaming Centers
We
own and operate corporate and franchise esports gaming centers, through our 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 have an opportunity to compete in local and national
esports tournaments held in our 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 franchise royalties, the sale of game time, memberships,
tournament entry fees, birthday party events, corporate party events, concessions and gaming-related merchandise.
Our
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 our esports teams, lifestyle brand and
marketing campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands.
Our ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform,
tournaments, 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.
Optimally,
the esports gaming centers of Simplicity Esports LLC (“Simplicity Esports Gaming Centers”) will measure between 1,200
and 2,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology,
futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present
attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity
for sponsors and advertisers.
Creating
content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. Our talented team will
continue to produce unique in-depth content which showcases aspects of esports for fans. We seek to reach a broad demographic
encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic
and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while
maintaining authenticity to the gaming community that comprises our fanbase.
Corporate
Gaming Centers
Simplicity
Esports LLC has already opened and is operating four corporate-owned retail Simplicity Esports Gaming Centers.
Our first Simplicity Esports Gaming Center was opened on May 3, 2019. Furthermore, we have engaged a national tenant representation
real estate broker to assist in the strategic planning and negotiations for our future Simplicity Esports Gaming Center locations.
We contemplate that new Simplicity Esports Gaming Centers will be funded by us as well as a combination of tenant improvement
allowances from landlords and sponsorships.
Franchised
Gaming Centers
Due
to interest from potential franchisees, we have launched a franchising program to accelerate the expansion of our planned nationwide
footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment
and buildout of esports gaming centers to potential business owners that desire to use our 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 have an opportunity to 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, we provide operational
guidance, support and use of branding elements in exchange for a monthly royalty fee calculated as 6% of gross sales. On January
1, 2020 we implemented a national marketing fee of 1% of gross sales. To date, we have sold five (5) of these franchise
territories.
The
combination of the esports gaming centers, owned or franchised by our wholly owned subsidiaries Simplicity Esports LLC or PLAYlive,
provides us with what we believe is 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 and have numerous gaming PC’s. All gaming
centers in our footprint will be participating venues in our national esports tournaments.
Our
Stream Team
The
Simplicity Esports LLC stream team encompasses over 30 commentators (commonly known as “casters”), influencers
and personalities who connect to a dedicated fan base. Our electric group of live personalities
represent our organization to the fullest with their own unique style. We are proud to support and present a diverse group of
gamers as we engage fans across a multiple of esports genres. Our Twitch affiliation has enabled our stream team influences to
reach a broad fan base. Additionally, we have created several niches within the streaming community which has enabled us to engage
fans within certain titles on a 24/7 basis. Our notoriety in the industry is evidenced by our audience that views millions
of minutes of Simplicity Esports’ content monthly, via various social media outlets including YouTube, Twitter and Twitch.
Through Simplicity Esports LLC, we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience.
Our intention is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent.
Our management and players are known within the esports community and we plan to use their skills to create a seamless content
creation plan helping gamers feel closer to our brand than any other in the industry.
COVID-19
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. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have
since reopened 1 corporate and 22 franchised Simplicity Gaming Centers as of June 28, 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.
Summary
Risk Factors
Our
business is subject to numerous risks and uncertainties, including those in the section entitled “Risk Factors” and
elsewhere in this prospectus. These risks include, but are not limited to, the following:
|
●
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our
history of losses;
|
|
|
|
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●
|
our
inability to attract sufficient demand for our services and products;
|
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●
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our
ability to successfully execute our growth and acquisition strategy and manage effectively our growth;
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●
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changes
in the competitive environment in our industry and the markets we serve, and our ability to compete effectively;
|
|
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●
|
our
dependence on a strong brand image;
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●
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our
cash needs and the adequacy of our cash flows and earnings;
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|
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●
|
our
ability to access additional capital;
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●
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our
dependence upon our executive officers, founders and key employees;
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●
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our
ability to attract and retain qualified personnel;
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●
|
our
reliance on our technology systems, the impact of technological changes and cybersecurity risks;
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●
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changes
in applicable laws or regulations;
|
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●
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our
ability to protect our trademarks or other intellectual property rights;
|
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●
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potential
litigation from competitors or customers;
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●
|
public
health epidemics or outbreaks (such as the novel strain of coronavirus (COVID-19)) could materially
and adversely impact our business; and
|
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●
|
the
possibility that we may be adversely affected by other economic, business, and/or competitive factors.
|
In
addition, our management has concluded that our historical recurring losses from
operations and negative cash flows from operations as well as our dependence on private equity and financings raise
substantial doubt about our ability to continue as a going concern and our auditor has included an explanatory paragraph relating
to our ability to continue as a going concern in its audit report for the fiscal year ended May 31, 2019 and 2018.
Corporate
Information
Our
principal executive offices are located at 7000 W. Palmetto Park Road, Suite 505, Boca Raton, Florida 33433, and our telephone
number at that location is (855) 345-9467.
The
name of the Company, the logos of the Company, and other trade names, trademarks or service marks of the Company appearing in
this prospectus are the property of the Company. Trade names, trademarks and service marks of other organizations appearing in
this prospectus are the property of their respective holders.
NYSE
Listing, Reverse Stock Split and Increase in Authorized Shares of Common Stock
We
intend to apply to list of our common stock and warrants on the NYSE American. If our application to the NYSE American is not
approved or we otherwise determine that we will not be able to secure the listing of the common stock and warrants on the NYSE
American, we will not complete the offering.
In
order to obtain NYSE American listing approval, we have obtained approval of our board of directors and shareholders
of (i) a reverse stock split of the outstanding shares of our common stock in the range from one-for-two (1-for-2) to one-for-fifteen
(1-for-15), which ratio is to be selected by the board of directors and (ii) an increase in our authorized shares of common
stock from 20,000,000 to 36,000,000 shares of common stock. The board of directors anticipates setting the ratio of the reverse
stock split, and the reverse stock split becoming effective following approval by FINRA of the reverse stock split, prior to the
effective date of the registration statement (of which this prospectus forms a part). The reverse stock split is intended to allow
us to meet the minimum share price requirement of the NYSE American.
Except
as otherwise indicated and except in our financial statements and the notes thereto, all references to our common stock, share
data, per share data and related information has been adjusted to depict an assumed reverse stock split ratio of 1-for- (“Reverse
Stock Split”) until final determination by the board of directors as if it was effective and as if it had occurred at the
beginning of the earliest period presented. The Reverse Stock Split, when effective, will combine each shares
of our outstanding common stock into one share of common stock, without any change in the par value per share, and the Reverse
Stock Split correspondingly will adjust, among other things, the exercise rate of our warrants and options into our common stock.
No fractional shares will be issued in connection with the Reverse Stock Split, and any fractional shares resulting from the Reverse
Stock Split will be rounded up to the nearest whole share.
In
addition, all share and per-share information, as well as all financial information, contained in this prospectus has been adjusted
to depict an assumed reverse stock split ratio of 1-for- (“Reverse
Stock Split”) until final determination by the board of directors as if it was effective and as if it had occurred at the
beginning of the earliest period presented. The Reverse Stock Split, when effective, will combine each shares
of our outstanding common stock into one share of common stock, without any change in the par value per share, and the Reverse
Stock Split correspondingly will adjust, among other things, the exercise rate of our warrants and options into our common stock.
No fractional shares will be issued in connection with the Reverse Stock Split, and any fractional shares resulting from the Reverse
Stock Split will be rounded up to the nearest whole share.
The
Offering
|
|
|
|
Issuer
|
|
Simplicity
Esports and Gaming Company
|
|
|
|
Securities
offered by us
|
|
Units, each unit consists of one share of our Common Stock and one (1) warrant to purchase one (1) share of common stock (or
Units if the Underwriter exercises its over-allotment option in full). The Units will not be certificated and the shares of
our common stock and the warrants are immediately separable at closing and will be issued and tradeable separately, but will
be purchased together as a unit in this offering.
|
Offering
Price:
|
|
$
per Unit
|
Terms
of Warrants issued as part of a unit offered by us
|
|
Each
warrant will have an exercise price per share of $ ,
which is equal to % of the offering price of a Unit in this offering, will be immediately exercisable
and will expire on the fifth anniversary of the original issuance date. The warrants do not have any price protection features
or cashless exercise provisions.
|
|
|
|
Over-allotment
option
|
|
We
have granted the Underwriter an option to purchase up to an additional shares
of common stock and/or warrants to purchase up to shares
of common stock (equal to 15% of the number of shares of common stock and warrants underlying the Units sold in the offering),
from us in any combination thereof, at the public offering price less the underwriting discount and commissions solely to
cover over-allotments, if any. The Underwriter may exercise this option in full or in part at any time and from time to time
until 45 days after the date of this prospectus.
|
Common
stock outstanding before this offering
|
|
shares
of common stock (8,678,100 pre-reverse split)
|
|
|
|
Common
stock to be outstanding after this offering
|
|
shares
(assuming that none of the warrants are exercised) and
if the warrants offered hereby are exercised in full. If the representatives’ over-allotment option is exercised in
full, the total number of shares of common stock outstanding immediately after this offering would be (assuming
that none of the warrants are exercised) and if
the warrants offered hereby are exercised in full.
|
|
|
|
Underwriter
|
|
________________
(“________________”) is acting as the sole underwriter
of this offering.
|
|
|
|
Underwriter
Warrant
|
|
Upon
the closing of this offering, we have agreed to issue to the Underwriter warrants to purchase a number of shares of common
stock equal to five percent (5.0%) of the shares of common stock, forming part of the units and exercised over-allotment option,
sold in this offering (“Underwriter Warrants”). The Underwriter Warrants are exercisable commencing
180 days after the effective date of the registration statement related to this offering, and will be exercisable until the
fifth anniversary of the effective date. The Underwriter Warrants are not redeemable by us. The Underwriter Warrants have
an exercise price of $ per share (equal to 125% of
the implied price per share of common stock, forming a part of the units offered in the offering).
|
|
|
|
Use
of proceeds
|
|
We
expect to receive net proceeds from this offering of approximately $
(or approximately $ if the underwriters exercise in full their
over-allotment option) after deducting estimated underwriting discounts and commissions
(______% of the gross proceeds of the offering), and after our offering expenses, estimated at $ .
We intend to use the net proceeds from this offering to fund the expansion of our operations by the acquisition and/or build-out
of new gaming center locations, strategic acquisition of other companies, products or technologies, working capital and general
corporate purposes. See “Use of Proceeds.”
|
|
|
|
Risk
factors
|
|
See
“Risk Factors” beginning on page 9 of this prospectus for a discussion of some of the factors you should carefully
consider before deciding to invest in our common stock.
|
|
|
|
Trading
symbols
|
|
Our
common stock is presently quoted on the OTCQB Market under the symbol “WINR.” Our warrants issued in connection
with our initial public offering in August 2017 are currently listed on OTCQB under the symbol “WINRW.”
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|
|
|
Listing
Application; Separation
|
|
We
intend to apply to list our common stock on the NYSE American under the symbol “XXX”
and warrants issued in connection with our initial public offering in August 2017 and
the warrants forming part of the Units on the NYSE American under the symbols “XXX”
and “XXX,” respectively. The approval of our listing on the NYSE American
is a condition of closing this offering.
We
will not be issuing physical units in this offering. At closing, we will issue to investors only the shares of common
stock and warrants underlying the units offered hereby.
|
Dividend
policy
|
|
We
do not anticipate declaring or paying any cash dividends on our common stock following our public offering.
|
|
|
|
Reverse
Stock Split
|
|
In
order to obtain NYSE American listing approval, we have obtained approval of our board of directors and shareholders
of a reverse stock split of the outstanding shares of our common stock in the range from one-for-two (1-for-2) to one-for-fifteen
(1-for-15), which ratio is to be selected by the board of directors. The board of directors anticipates setting
the ratio of the reverse stock split, and the reverse stock split becoming effective following approval by FINRA of the reverse
stock split, prior to the effective date of the registration statement (of which this prospectus forms a part). Except
as otherwise indicated and except in our financial statements and the notes thereto, all references to our common stock, share
data, per share data and related information depict an assumed reverse stock split ratio of 1-for-
(“Reverse Stock Split”) as if it was effective and as if it had occurred at the beginning of the earliest period
presented.
|
Unless
we indicate otherwise, all information in this prospectus:
|
●
|
give
pro forma effect to the assumed Reverse Stock Split of our outstanding shares of common stock, options and warrants and the
corresponding adjustment of all common stock price per share and stock option and warrant exercise price data, except for
the financial statements and the notes thereto;
|
|
|
|
|
●
|
is
based on (8,678,100
pre-reverse split) shares of common stock issued and outstanding as of July 2, 2020;
|
|
|
|
|
●
|
assumes
no exercise by the Underwriter of its option to purchase up to an additional
shares of common stock and/or warrants to purchase shares
of common stock to cover over-allotments, if any;
|
|
|
|
|
●
|
excludes shares
of common stock issuable upon the full exercise of the warrants (forming part of the units and over-allotment option) offered
hereby;
|
|
●
|
excludes (6,424,000
pre-reverse split) shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise
price of $ ($10.38 pre-reverse split) per
share as of July 2, 2020; and
|
|
|
|
|
●
|
excludes
shares of our common stock underlying the Underwriter’s Warrant to be issued to the Underwriter in connection with this
offering, including the exercise of any over-allotment in full.
|
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The
following table presents our selected historical consolidated financial data for the periods indicated. The selected historical
consolidated financial data for the years ended May 31, 2019 and 2018 and the balance sheet data as of May 31, 2019 and 2018 are
derived from the audited financial statements. The summary historical financial data for the six months ended February 29,
2020 and February 28, 2019 and the balance sheet data as of February 29, 2020 and February 28, 2019 are derived from
our unaudited financial statements.
Historical
results are included for illustrative and informational purposes only and are not necessarily indicative of results we expect
in future periods, and results of interim periods are not necessarily indicative of results for the entire year. The
data presented below should be read in conjunction with, and are qualified in their entirety by reference to, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and
the notes thereto included elsewhere in this prospectus.
|
|
Year
Ended
|
|
|
Nine
Months Ended
|
|
|
|
May
31, 2019
|
|
|
May
31, 2018
|
|
|
February
29, 2020
|
|
|
February
28, 2019
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Statement
of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
37,995
|
|
|
$
|
0
|
|
|
$
|
700,792
|
|
|
$
|
14,070
|
|
Total
operating expenses
|
|
|
4,353,189
|
|
|
|
530,564
|
|
|
|
1,692,341
|
|
|
|
3,811,612
|
|
Loss
from operations
|
|
|
(4,315,194
|
)
|
|
|
(530,564
|
)
|
|
|
(1,339,862
|
)
|
|
|
(3,797,542
|
)
|
Total
other income
|
|
|
749,922
|
|
|
|
521,702
|
|
|
|
77,883
|
|
|
|
701,582
|
|
Loss
before provision for taxes
|
|
|
(3,565,272
|
)
|
|
|
(8,862
|
)
|
|
|
(1,261,979
|
)
|
|
|
(3,095,960
|
)
|
Income
tax provisions
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Net
income (loss)
|
|
$
|
(3,565,272
|
)
|
|
$
|
(8,862
|
)
|
|
$
|
(1,250,924
|
)
|
|
$
|
(3,095,960
|
)
|
Basic
and diluted net loss per share
|
|
$
|
(1.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
Sheet Data (at period end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,540,158
|
|
|
$
|
458,062
|
|
|
$
|
235,679
|
|
|
$
|
1,245,666
|
|
Working
capital (deficit) (1)
|
|
|
(277,588
|
)
|
|
|
216,034
|
|
|
|
(1,359,946
|
)
|
|
|
(1,710,836
|
)
|
Total
assets
|
|
|
7,754,543
|
|
|
|
53,356,883
|
|
|
|
8,472,674
|
|
|
|
7,367,438
|
|
Total
liabilities
|
|
|
1,886,622
|
|
|
|
2,065,197
|
|
|
|
2,249,667
|
|
|
|
2,956,556
|
|
Commitments
|
|
|
-
|
|
|
|
46,291,685
|
|
|
|
-
|
|
|
|
-
|
|
Stockholders’
equity (deficit)
|
|
|
5,867,921
|
|
|
|
5,000,001
|
|
|
|
6,210,008
|
|
|
|
4,410,882
|
|
(1)
|
Working
capital represents total current assets less total current liabilities.
|
RISK
FACTORS
An
investment in our securities carries a significant degree of risk. You should carefully consider the following risks, as well
as the other information contained in this prospectus, including our historical financial statements and related notes included
elsewhere in this prospectus, before you decide to purchase our securities. Any one of these risks and uncertainties has the potential
to cause material adverse effects on our business, prospects, financial condition and operating results which could cause actual
results to differ materially from any forward-looking statements expressed by us and a significant decrease in the value of our
common shares and warrants. Refer to “Cautionary Statement Regarding Forward-Looking Statements.”
We
may not be successful in preventing the material adverse effects that any of the following risks and uncertainties may cause.
These potential risks and uncertainties may not be a complete list of the risks and uncertainties facing us. There may be additional
risks and uncertainties that we are presently unaware of, or presently consider immaterial, that may become material in the future
and have a material adverse effect on us. You could lose all or a significant portion of your investment due to any of these risks
and uncertainties.
Risks
Related to Our Business
We
have a relatively limited operating history and limited revenues to date and thus are subject to risks of business development
and you have no basis on which to evaluate our ability to achieve our business objective.
Because
we have a relatively limited operating history and limited revenues to date, you should consider and evaluate our operating prospects
in light of the risks and uncertainties frequently encountered by early-stage operating companies in rapidly evolving markets.
These risks include:
|
●
|
that
we may not have sufficient capital to achieve our growth strategy;
|
|
|
|
|
●
|
that
we may not develop our product and service offerings in a manner that enables us to be profitable and meet our customers’
requirements;
|
|
|
|
|
●
|
that
our growth strategy may not be successful; and
|
|
|
|
|
●
|
that
fluctuations in our operating results will be significant relative to our revenues.
|
Our
future growth will depend substantially on our ability to address these and the other risks described in this section. If we do
not successfully address these risks, our business could be significantly harmed.
We
have a history of operating losses and our management has concluded that factors raise
substantial doubt about our ability to continue as a going concern and our auditor has included an explanatory paragraph relating
to our ability to continue as a going concern in its audit report for the fiscal year ended May 31, 2019 and 2018.
To
date, we have not been profitable and have incurred significant losses and cash flow deficits. For the fiscal years ended May
31, 2019 and 2018, we reported net losses of $3,565,272 and $8,862, respectively, and negative cash flow from operating activities
of $1,395,255 and $470,153, respectively. For the nine months ended February 29, 2020, we reported a net loss of
$1,250,924, and had negative cash flow from operating activities of $1,166,267. As of February 29, 2020,
we had an aggregate accumulated deficit of approximately $4,825,730. We anticipate that we will continue to report losses
and negative cash flow. Our management has concluded that our historical recurring
losses from operations and negative cash flows from operations as well as our dependence on private equity and financings raise
substantial doubt about our ability to continue as a going concern and our auditor has included an explanatory paragraph relating
to our ability to continue as a going concern in its audit report for the fiscal year ended May 31, 2019 and 2018.
Our
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These
adjustments would likely include substantial impairment of the carrying amount of our assets and potential contingent liabilities
that may arise if we are unable to fulfill various operational commitments. In addition, the value of our securities, including
common stock issued in this offering, would be greatly impaired. Our ability to continue as a going concern is dependent upon
generating sufficient cash flow from operations and obtaining additional capital and financing, including funds to be raised in
this offering. If our ability to generate cash flow from operations is delayed or reduced and we are unable to raise additional
funding from other sources, we may be unable to continue in business even if this offering is successful. For further discussion
about our ability to continue as a going concern and our plan for future liquidity, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Ability to Continue as a Going Concern.”
We
are a holding company and depend upon our subsidiaries for our cash flows.
We
are a holding company. All of our operations are conducted, and almost all of our assets are owned, by our subsidiaries. Consequently,
our cash flows and our ability to meet our obligations depend upon the cash flows of our subsidiaries and the payment of funds
by these subsidiaries to us in the form of dividends, distributions or otherwise. The ability of our subsidiaries to make any
payments to us depends on their earnings, the terms of their indebtedness, including the terms of any credit facilities and legal
restrictions. Any failure to receive dividends or distributions from our subsidiaries when needed could have a material adverse
effect on our business, results of operations or financial condition.
Future
acquisitions or strategic investments could disrupt our business and harm our business, results of operations or financial condition.
We
may in the future explore potential acquisitions of companies or strategic investments to strengthen our business. Even if we
identify an appropriate acquisition candidate, we may not be successful in negotiating the terms or financing of the acquisition,
and our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired
business.
Acquisitions
involve numerous risks, any of which could harm our business, including:
|
●
|
straining
our financial resources to acquire a company;
|
|
|
|
|
●
|
anticipated
benefits may not materialize as rapidly as we expect, or at all;
|
|
|
|
|
●
|
diversion
of management time and focus from operating our business to address acquisition integration challenges;
|
|
|
|
|
●
|
retention
of employees from the acquired company;
|
|
|
|
|
●
|
cultural
challenges associated with integrating employees from the acquired company into our organization;
|
|
|
|
|
●
|
integration
of the acquired company’s accounting, management information, human resources and other administrative systems;
|
|
|
|
|
●
|
the
need to implement or improve controls, procedures and policies at a business that prior to the acquisition may have lacked
effective controls, procedures and policies; and
|
|
|
|
|
●
|
litigation
or other claims in connection with the acquired company, including claims from terminated employees, former stockholders or
other third parties.
|
Failure
to appropriately mitigate these risks or other issues related to such strategic investments and acquisitions could result in reducing
or completely eliminating any anticipated benefits of transactions, and harm our business generally. Future acquisitions could
also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses
or the impairment of goodwill, any of which could have a material adverse effect on business, results of operations or financial
condition.
We
may require additional funding for our growth plans, and such funding may result in a dilution of your investment.
We
attempted to estimate our funding requirements in order to implement our growth plans. If the costs of implementing such plans
should exceed these estimates significantly or if we come across opportunities to grow through expansion plans which cannot be
predicted at this time, and our funds generated from our operations prove insufficient for such purposes, we may need to raise
additional funds to meet these funding requirements.
These
additional funds may be raised by issuing equity or debt securities or by borrowing from banks or other resources. We cannot assure
you that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to obtain
additional financing on terms that are acceptable to us, we will not be able to implement such plans fully if at all. Such financing
even if obtained, may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’
consent for payment of dividends, or restrict our freedom to operate our business by requiring lender’s consent for certain
corporate actions.
Further,
if we raise additional funds by way of a rights offering or through the issuance of new shares, any shareholders who are unable
or unwilling to participate in such an additional round of fund raising may suffer dilution in their investment.
We
may not have sufficient capital to fund our ongoing operations, effectively pursue our strategy or sustain our growth initiatives.
After
the consummation of the acquisition of Simplicity Esports LLC and PLAYlive Nation, Inc., our remaining liquidity and capital resources
may not be sufficient to allow us to fund our ongoing operations, effectively pursue our strategy or sustain our growth initiatives.
If we require additional capital resources, we may seek such funds directly from third party sources; however, we may not be able
to obtain sufficient equity capital and/or debt financing from third parties to allow us to fund our expected ongoing operations
or we may not be able to obtain such equity capital or debt financing on acceptable terms or conditions. Factors affecting the
availability of equity capital or debt financing to us on acceptable terms and conditions include:
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current and future financial results and position;
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the
collateral availability of our otherwise unsecured assets;
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the
market’s, investors and lenders’ view of our industry and products;
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the
perception in the equity and debt markets of our ability to execute our business plan or achieve our operating results expectations;
and
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the
price, volatility and trading volume and history of our Common Stock.
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If
we are unable to obtain the equity capital or debt financing necessary to fund our ongoing operations, pursue our strategy and
sustain our growth initiatives, we may be forced to scale back our operations or our expansion initiatives, and our business and
operating results will be materially adversely affected.
Our
growth strategy depends on the availability of suitable locations for our Simplicity Esports Gaming Centers and our ability to
open new Simplicity Esports Gaming Centers and operate them profitably.
A
key element of our growth strategy is to extend our brand by opening corporate owned as well as franchising retail Simplicity
Esports Gaming Centers in locations in the United States that we believe will provide attractive returns on investment. We have
initially identified five sites for potential corporate Simplicity Esports Gaming Centers and nine sites for potential franchised
esports gaming centers, in the United States, however, desirable locations for additional Simplicity Esports Gaming Center openings
may not be available at an acceptable cost when we identify a particular opportunity for a new Simplicity Esports Gaming Center.
In
addition, our ability to open new Simplicity
Esports Gaming Centers on a timely and cost-effective basis, or at all, is dependent on a number of factors, many of which are
beyond our control, including our ability or the ability of the selected franchisee to:
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reach
acceptable agreements regarding the lease of the locations;
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comply
with applicable zoning, licensing, land use and environmental regulations;
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raise
or have available an adequate amount of cash or currently available financing for construction and opening costs;
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timely
hire, train and retain the skilled management and other employees necessary to meet staffing needs;
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obtain,
for acceptable cost, required permits and approvals, including liquor licenses; and
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efficiently
manage the amount of time and money used to build and open each new Simplicity Esports Gaming Center.
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If
we succeed in opening new Simplicity Esports Gaming Centers on a timely and cost-effective basis, we may nonetheless be unable
to attract enough customers to the new Simplicity Esports Gaming Centers because potential customers may be unfamiliar with our
brands or concepts, or our entertainment and menu options might not appeal to them. Our new Simplicity Esports Gaming Centers
may not meet or exceed our performance targets, including target cash-on-cash returns. New Simplicity Esports Gaming Centers may
even operate at a loss, which could have a significant adverse effect on our overall operating results.
Our
operations of Simplicity Esports Gaming Centers are significantly dependent on changes in public and customer tastes and discretionary
spending patterns. Our inability to successfully anticipate customer preferences or to gain popularity for such Simplicity Esports
Gaming Centers games may negatively impact our profitability.
Our
success depends significantly on public and customer tastes and preferences, which can be unpredictable. If we are unable to successfully
anticipate customer preferences or increase the popularity of the games offered at the Simplicity Esports Gaming Centers, the
per capita revenue and overall customer expenditures at the Simplicity Esports Gaming Centers may decrease, and thereby negatively
impact our profitability. In response to such developments, we may need to increase our marketing and product development efforts
and expenditures, adjust our game or product sale pricing, modify the games themselves, or take other actions, which may further
erode our profit margins, or otherwise adversely affect our results of operations and financial condition. In particular, we may
need to expend considerable cost and effort in carrying out extensive research and development to assess the potential interest
in a game, testing and launching new games, and to remain abreast with continually evolving technology and trends, as well as
the success and popularity of Simplicity stream team’s casters, influencers and personalities among Simplicity Esports LLC’s
dedicated fan base.
While
we may incur significant expenditures of this nature, including in the future as we continue to expand our operations, there can
be no assurance that any such expenditures or investments by us will yield expected or commensurate returns or results, within
a reasonable or anticipated time, or at all.
The
nature of our business exposes us to negative publicity or customer complaints, including in relation to, among other things,
accidents, injuries or thefts at the Simplicity Esports Gaming Centers, or health and safety concerns arising from improper use
of our game equipment or at our food and beverage venues.
Our
business inherently exposes us to negative publicity or customer complaints as a result of accidents, injuries, or in extreme
cases, deaths, arising from instances of air-borne, water-borne or food-borne contagion or illness, food contamination, spoilage,
tampering, equipment failure, improper use of our equipment, fire, explosion, terrorist attacks or civil riots, and other safety
or security issues, such as kidnapping, or associated risks arising from other actual or perceived non-compliance with safety,
quality or service standards or norms in relation to the various game, entertainment and food and beverage attractions at the
Simplicity Esports Gaming Centers. Even isolated or sporadic incidents or accidents may have a negative impact on our
brand image and reputation, and the Simplicity Esports Gaming Centers’, or games’ or our own popularity with customers.
The considerable expansion of social media in recent years has compounded the effect of any potential negative publicity.
We
cannot guarantee that our or our franchisee’s employee training, internal controls and other precautions will be sufficient
to prevent any such occurrence at the Simplicity Esports Gaming Centers, in relation to our Simplicity global virtual reality
gaming and fully integrated esports platform, or to control or mitigate any negative consequences. In addition, we or our franchisees
rely on third-party security and housekeeping staff for certain non-core functions, as well as certain technology vendors and
partners. Although we monitor vendors and partners and, in certain cases, may have a contractual indemnity or recourse in case
of any default on their part, our ability to assure a safe and satisfactory experience to our customers is necessarily limited
to the extent of our or our franchisees’, dependence on third parties, from time to time. Moreover, we may not be able to
distance or insulate ourselves from any adverse publicity or reputational damage arising from any act, omission or negligence
on the part of a vendor or other third party, which may negatively affect a customer’s experience at any of the Simplicity
Esports Gaming Centers.
We
or our franchisees may not be able to operate in the United States, or obtain and maintain licenses and permits necessary for
such operation, in compliance with laws, regulations and other requirements, which could adversely affect our business, results
of operations or financial condition.
Each
Simplicity Esports Gaming Center will be subject to licensing and regulation by alcoholic beverage control, amusement, health,
sanitation, safety, building code and fire agencies in the country, state, county and/or municipality in which the Simplicity
Esports Gaming Center is located. In the United States, each Simplicity Esports Gaming Center with a restaurant or bar will be
required to obtain a license to sell alcoholic beverages on the premises from a state authority and, in certain locations, county
and municipal authorities. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time.
In some states, the loss of a license for cause with respect to one Simplicity Esports Gaming Center may lead to the loss of licenses
at all Simplicity Esports Gaming Centers in that state and could make it more difficult to obtain additional licenses in that
state. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each Simplicity Esports Gaming
Center, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control
and handling and storage and dispensing of alcoholic beverages. Our failure or a failure by a franchisee in obtaining and maintaining
the required licenses, permits and approvals at any one Simplicity Esports Gaming Center could impact the continuing operations
of existing Simplicity Esports Gaming Centers, or delay or prevent the opening of new Simplicity Esports Gaming Centers. Although
we do not anticipate any material difficulties occurring in the future, the failure to receive or retain a liquor license, or
any other required permit or license, in a particular location, or to continue to qualify for, or renew licenses, could have a
material adverse effect on operations and our ability to obtain such a license or permit in other locations.
As
a result of operating certain entertainment games and attractions, including skill-based games that offer redemption prizes, the
Simplicity Esports Gaming Centers in the United States are subject to amusement licensing and regulation by the countries, states,
provinces, counties and municipalities in which our Simplicity Esports Gaming Centers are located. These laws and regulations
can vary significantly by country, state, province, county, and municipality and, in some jurisdictions, may require us to modify
our business operations or alter the mix of redemption games and simulators we offer. Moreover, as more states in the United States
and local communities implement legalized gambling, the laws and corresponding enabling regulations may also be applicable to
our redemption games and regulators may create new licensing requirements, taxes or fees, or restrictions on the various types
of redemption games we offer. Furthermore, other states, provinces, counties and municipalities may make changes to existing laws
to further regulate legalized gaming and illegal gambling. Adoption of these laws, or adverse interpretation of existing laws,
after we have established a Simplicity Esports Gaming Center in the jurisdiction could require the existing center in these jurisdictions
to alter the mix of games, modify certain games, change the mix of prizes that we may offer or terminate the use of specific games,
any of which could adversely affect our operations.
We
are also subject to laws and regulations governing our relationship with our employees, including those related to minimum wage
requirements, exempt status, overtime, health insurance mandates, working and safety conditions, immigration status requirements,
child labor, and non-discrimination. Additionally, changes in federal labor laws, including card verification regulations, could
result in portions of our workforce being subjected to greater organized labor influence, which could result in an increase to
our labor costs. A significant portion of Simplicity Esports Gaming Center personnel will be paid at minimum wage rates established
by federal, state and municipal law. Increases in the minimum wage result in higher labor costs, which may be only partially offset
by price increases and operational efficiencies.
We
are also subject to the rules and regulations of the Federal Trade Commission and various state laws regulating the offer and
sale of franchises. The Federal Trade Commission and various state laws require that we furnish a franchise disclosure document
containing certain information to prospective franchisees, and a number of states require registration of the franchise disclosure
document with state authorities. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial
number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the
franchisor-franchisee relationship. The state laws often limit, among other things, the duration and scope of non-competition
provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate
sources of supply. We shall endeavor to make sure that any franchise disclosure document we provide, together with any applicable
state versions or supplements, and franchising procedures, comply in all material respects with both the Federal Trade Commission
guidelines and all applicable state laws regulating franchising in those states in which we have offered franchises.
If
we and our franchisees fail to comply with such laws and regulations, we may be subject to various sanctions and/or penalties
and fines or may be required to cease operations until we achieve compliance, which could have an adverse effect on our business
and our financial results.
Our
growth through franchising may not occur as rapidly as we currently anticipate and may be subject to additional risks.
As
part of our growth strategy, we will continue to seek franchisees to operate Simplicity Esports Gaming Centers in certain strategic
domestic locations or venues. We believe that our ability to recruit, retain and contract with qualified franchisees will be increasingly
important to our operations as we expand. Our franchisees are dependent upon the availability of adequate sources of financing
in order to meet their development obligations. Such financing may not be available to our franchisees, or only available upon
disadvantageous terms. Our franchise strategy may not enhance our results of operations.
Expanding
through franchising exposes our business and brand to risks because the quality of the franchised operations will be beyond our
immediate control, including risks associated with our confidential information, intellectual properties (including trademarks)
and brand reputation. Even if we have contractual remedies to cause franchisees to maintain operational standards, enforcing those
remedies may require litigation and therefore our image and reputation may suffer, unless and until such litigation is successfully
concluded.
We
could face liability from or as a result of our franchisees.
Various
state and federal laws will govern the relationship between us and our franchisees and the potential sale of a franchise. If we
fail to comply with these laws, we could be liable for damages to franchisees and fines or other penalties. A franchisee or government
agency may bring legal action against us based on the franchisee/franchisor relationship. Also, under the franchise business model,
we may face claims and liabilities based on vicarious liability, joint-employer liability, or other theories or liabilities. Such
legal actions could result in expensive litigation with our franchisees or government agencies that could adversely affect both
our profit and our important relations with our franchisees. In addition, regulatory or legal developments could result in changes
to laws or the franchisor/franchisee relationship that could negatively impact the franchise business model and, accordingly,
our profit.
We
may not be able to compete favorably in the highly competitive out-of-home and home-based entertainment market in the United States,
which could have a material adverse effect on our business, results of operations or financial condition.
The
out-of-home entertainment market in the United States is highly competitive. Simplicity Esports Gaming Centers that we or our
franchisees operate will compete for customers’ discretionary entertainment dollars with providers of out-of-home entertainment,
including localized attraction facilities such as movie theatres, sporting events, bowling alleys, sports activity centers, arcades
and entertainment centers, nightclubs and restaurants as well as theme parks. Many of the entities operating these businesses
are larger and have significantly greater financial resources, a greater number of locations, have been in business longer, have
greater name and brand recognition and are better established in the local markets where Simplicity Esports Gaming Centers are
planned to be located. As a result, they may be able to invest greater resources than we can in attracting customers and succeed
in attracting customers who would otherwise come to the Simplicity Esports Gaming Centers we or our franchisees operate. In the
United States, the legalization of casino gambling in geographic areas near any future Simplicity Esports Gaming Center would
create the possibility for adult entertainment alternatives, which could have a material adverse effect on our business and financial
condition. We will also face competition from local, regional and national establishments that offer entertainment experiences
similar to us. Simplicity Esports Gaming Centers we or our franchisees operate will also face competition from increasingly sophisticated
home-based forms of entertainment, such as internet and video gaming and home movie streaming and delivery. If we fail to compete
favorably in the competitive out-of-home and home-based entertainment markets it could have a material adverse effect on our business,
results of operations and financial condition.
Our
senior management team has limited experience in establishing, operating, licensing rights to and franchising entertainment centers
and related products.
The
members of our senior management team have extensive backgrounds in finance and the management of financial services businesses,
however, they have limited prior experience in establishing, operating, licensing rights to and franchising entertainment centers.
We will need to expand our management team, to include individuals with expertise in establishing and operating entertainment
centers as well as individuals with expertise in product licensing and franchise operations. If we are unable to recruit professionals
with acceptable backgrounds in establishing and operating entertainment centers and with backgrounds in product licensing and
financing, we may not be able to pursue our growth strategy which could have a material adverse effect on our business and results
of operations.
Our
success depends upon our ability to recruit and retain qualified management and operating personnel at Simplicity Esports Gaming
Centers.
We
and our franchisees must attract, retain and motivate a sufficient number of qualified management and operating personnel in order
to maintain consistency in our service, hospitality, quality and atmosphere of our Simplicity Esports Gaming Centers. Qualified
management and operating personnel are typically in high demand. If we and our franchisees are unable to attract and retain a
satisfactory number of qualified management and operating personnel, labor shortages could delay the planned openings of new Simplicity
Esports Gaming Centers which could have a material adverse effect on our business and results of operations.
Acquisitions,
other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that
may adversely impact our business and results of operations.
Acquisitions
are an important element of our overall corporate strategy and use of capital, and these transactions could be material to our
financial condition and results of operations. We expect to continue to evaluate and enter into discussions regarding
a wide array of potential strategic transactions. The process of integrating an acquired company, business, or product has created,
and will continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks may
include, but are not limited to:
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diversion
of management’s time and focus from operating our business to acquisition integration challenges;
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failure
to successfully further develop the acquired business or product lines;
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implementation
or remediation of controls, procedures and policies at the acquired company;
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integration
of the acquired company’s accounting, human resources and other administrative systems, and coordination of product,
engineering and sales and marketing functions;
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transition
of operations, users and customers onto our existing platforms;
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reliance
on the expertise of our strategic partners with respect to market development, sales, local regulatory compliance and other
operational matters;
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failure
to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval,
under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or
otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition;
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in
the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address
the particular economic, currency, political and regulatory risks associated with specific countries;
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cultural
challenges associated with integrating employees from the acquired company into our organization, and retention of employees
from the businesses we acquire;
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liability
for or reputational harm from activities of the acquired company before the acquisition or from our strategic partners, including
patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown
liabilities; and
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litigation
or other claims in connection with the acquired company, including claims from terminated employees, customers, former shareholders
or other third parties.
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Our
failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments
or strategic alliances could cause us to fail to realize the anticipated benefits of such acquisitions, investments or alliances,
incur unanticipated liabilities, and harm our business generally.
Our
acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities
or amortization expenses, or impairment of goodwill and purchased long-lived assets, and restructuring charges, any of which could
harm our financial condition or results of operations and cash flows. Also, the anticipated benefits of many of our
acquisitions may not materialize.
Our
insurance coverage may not adequately protect us against all future risks, which may adversely affect our business and prospects.
We
maintain insurance coverage, including for fire, acts of god and perils, terrorism, burglary, money, loss of profit, fidelity
guarantee, fixed glass and sanitary fitting, electronic equipment, machinery breakdown, portable equipment, sign boards, commercial
general liability, marine transit, and directors’ and officers’ liability insurance, as well as employee health and
medical insurance, with standard exclusions in each instance. While we maintain insurance in amounts that we consider reasonably
sufficient for a business of our nature and scale, with insurers that we consider reliable and credit worthy, we may face losses
and liabilities that are uninsurable by their nature, or that are not covered, fully or at all, under our existing insurance policies.
Moreover, coverage under such insurance policies would generally be subject to certain standard or negotiated exclusions or qualifications
and, therefore, any future insurance claims by us may not be honored by our insurers in full, or at all. In addition, our premium
payments under our insurance policies may require a significant investment by us.
To
the extent that we suffer loss or damage that is not covered by insurance or that exceeds our insurance coverage, the loss will
have to be borne by us and our business, cash flow, financial condition, results of operations and prospects may be adversely
affected.
Changes
in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business, investments and
results of operations.
We
are subject to laws and regulations enacted by national, regional and local governments. In particular, we are required to comply
with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult,
time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time
and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a
failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our
business and results of operations.
We
are dependent upon our executive officers and directors and their departure could adversely affect our ability to operate.
Our
operations are dependent upon a relatively small group of individuals and, in particular, our executive officers and directors.
We believe that our success depends on the continued service of our executive officers and directors. We do not have key-man insurance
on the life of any of our directors or executive officers. The unexpected loss of the services of one or more of our directors
or executive officers could have a detrimental effect on us.
Our
executive officers, directors, security holders and their respective affiliates may have competitive pecuniary interests that
conflict with our interests.
We
have not adopted a policy that expressly prohibits our directors, executive officers, security holders or affiliates from having
a direct or indirect pecuniary or financial interest in any investment to be acquired or disposed of by us or in any transaction
to which we are a party or have an interest. While our employment agreements with our key executive officers contain non-compete
provisions, we do not have a policy that expressly prohibits any such persons from engaging for their own account in business
activities of the types conducted by us. Accordingly, such persons or entities may have a conflict between their interests and
ours.
We
are an emerging growth company within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure
requirements available to emerging growth companies, this could make our securities less attractive to investors and may make
it more difficult to compare our performance with other public companies.
We
are an “emerging growth company” within the meaning of the Securities Act, as modified by the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being
required to comply with the auditor internal controls attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the
requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. As a result, our stockholders may not have access to certain information they may deem important.
We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier,
including if the market value of our Common Stock held by non-affiliates exceeds $700 million as of any November 30 before that
time, in which case we would no longer be an emerging growth company as of the following May 31. We cannot predict whether investors
will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less
attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise
would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.
Further,
Section 102(b)(1) of 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 Securities Act registration statement 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 election to opt out is irrevocable. We have 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, we, as an emerging
growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may
make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging
growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences
in accounting standards used.
Compliance
obligations under the Sarbanes-Oxley Act may require substantial financial and management resources.
Section
404 of the Sarbanes-Oxley Act requires that we evaluate and report on our system of internal controls beginning with our Annual
Report on Form 10-K for the year ended May 31, 2019. As long as we remain an emerging growth company, we will not be required
to comply with the independent registered public accounting firm attestation requirement on our internal control over financial
reporting.
Provisions
in our third amended and restated certificate of incorporation, as amended, and Delaware law may inhibit a takeover of us, which
could limit the price investors might be willing to pay in the future for our Common Stock and could entrench management.
Our
third amended and restated certificate of incorporation, as amended, contains provisions that may discourage unsolicited takeover
proposals that stockholders may consider to be in their best interests. These provisions include a staggered board of directors
and the ability of the board of directors to designate the terms of and issue new series of preferred shares, which may make more
difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing
market prices for our securities.
If
we fail to keep pace with changing industry technology and consumer preferences, we will be at a competitive disadvantage.
The
Simplicity products and services compete within industries that are characterized by swiftly changing technology, evolving industry
standards, frequent new and enhanced product introductions, rapidly changing consumer preferences and product obsolescence. In
order to continue to compete effectively, we need to respond quickly to technological changes and to understand their impact on
customers’ preferences. We may take significant time and resources to respond to these technological changes and changes
in consumer preferences. Our business and results of operations may be negatively impacted if our products and services fail to
keep pace with these changes.
Various
product safety laws and governmental regulations applicable to the distributor of Simplicity Esports LLC’s and/or PLAYlive
Nation, Inc.’s products may adversely affect our business, results of operations and financial condition.
Our
distribution of Simplicity Esports LLC’s and/or PLAYlive Nation, Inc.’s products will be subject to numerous federal,
state, provincial, local and foreign laws and regulations, including laws and regulations with respect to product safety, including
regulations enforced by the United States Consumer Products Safety Commission. We and our franchisees could incur costs in complying
with these regulations and, if they fail to comply, could incur significant penalties. A failure to comply with applicable laws
and regulations, or concerns about product safety, may also lead to a recall or post-manufacture repair of selected Simplicity
Esports LLC’s and/or PLAYlive Nation, Inc.’s products, resulting in the rejection of the products by our franchisees,
lost sales, increased customer service and support costs, and costly litigation.
Public
health epidemics or outbreaks, such as COVID-19, could materially and adversely impact our business.
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
Esports Gaming Centers have been closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020
and have since reopened 1 corporate and 22 franchised Simplicity Gaming Centers as of June 28, 2020. Although our franchise agreements
with franchisees of Simplicity Esports 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 Esports
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.
Risks
Relating to Our Esports Business
Our
esports businesses are substantially dependent on the continuing popularity of the esports industry as a whole.
The
esports industry is in the early stages of its respective development. Although the esports industry has experienced rapid growth,
consumer preferences may shift and there is no assurance this growth will continue in the future. We have taken steps to diversify
their businesses and mitigate these risks to an extent and continue to seek out new opportunities in the esports industry. However,
due to the rapidly evolving nature of technology and online gaming, the esports industry may experience volatile and declining
popularity as new options for online gaming and esports become available, or consumer preferences shift to other forms of entertainment,
and as a consequence, our businesses and results of operations may be materially negatively affected.
Our
esports business faces intense and wide-ranging competition, which may have a material negative effect on our business and results
of operations.
The
success of our esports business is dependent upon the performance and/or popularity of its teams. Simplicity Esports LLC’s
teams compete, in varying respects and degrees, with other live sporting events, and with sporting events delivered over television
networks, radio, the Internet and online services, mobile applications and other alternative sources. For example, our esports
teams compete for attendance, viewership and advertising with a wide range of alternatives available in major metropolitan areas.
During some or all of the esports season, our teams face competition, in varying respects and degrees, from professional and collegiate
basketball, hockey, baseball, football, and soccer, among others.
As
a result of the large number of options available, we face strong competition for the sports and gaming fan. We must compete with
other esports teams, traditional sports teams and sporting events, in varying respects and degrees, including on the basis of
the quality of the teams we field, their success in the leagues, tournaments and genres in which they compete, our ability to
provide an entertaining environment at any esports games that we host at our centers, prices charged for tickets and the viewing
availability of our teams on multiple media alternatives. Given the nature of esports and sports in general, there can be no assurance
that we will be able to compete effectively, including with companies that may have greater resources than we have, and as a consequence,
our business and results of operations may be materially negatively affected by competition.
Our
businesses are substantially dependent on the continued popularity and/or competitive success of Simplicity Esports LLC’s
teams, which cannot be assured.
Our
future financial results will be dependent on the Simplicity teams becoming and remaining popular with our fan base and, in varying
degrees, on the teams achieving in-game success, which can generate fan enthusiasm, resulting in sustained ticket and merchandise
sales during the season. Furthermore, success in the regular season at certain tournaments may qualify one or more of our esports
teams for participation in post-season playoffs, which provides us with additional revenue from prize money by increasing the
number of games played by our sports teams and, more importantly, by generating increased excitement and interest in our esports
teams, which can improve attendance in subsequent seasons. There can be no assurance that any of our esports teams, will develop
a significant fan base, maintain continued popularity or compete in post-season play in the future.
Defection
of our esports players to other teams or managers could hinder our success.
We
compete with other esports athlete management businesses to sign and retain world class esports players, some of which have greater
resources or brand recognition and popularity than ours. Our players may choose to defect to other esports organizations for various
reasons, including that they have been made a superior offer or they have chosen to pursue new or other opportunities. The loss
or defection of any of our esports players could have negative consequences on our businesses and results of operations. While
we take or intend to take, all appropriate steps to retain our players and protect their interests, there can be no assurances
that players will not defect to other esports organizations.
The
actions of the various esports leagues and tournaments may have a material negative effect on our business and results of operations.
The
governing bodies of the various esports leagues and tournaments, under certain circumstances, can take actions that they deem
to be in the best interests of their respective leagues or tournaments, which may not necessarily be consistent with maximizing
our results of operations and which could affect our esports teams in ways that are different than the impact on other esports
teams. For example they can take actions relating to the rights to telecast the games of league members or tournament participants,
including the Simplicity team, licensing of the rights to produce and sell merchandise bearing the logos and/or other intellectual
property of our esports teams and the leagues or tournaments, and the internet-based activities of our esports teams. Certain
of these decisions by the esports leagues and tournaments could have a material negative effect on our business and results of
operations. From time to time, we may disagree with or challenge actions that the leagues or tournaments take or the power and
authority they assert.
We
may be unable to effectively manage the growth in the scope and complexity of our business, including our expansion into the esports
business which is untested and into adjacent business opportunities.
Our
future success depends, in part, on our ability to manage our expanded business, including our aspirations for continued expansion.
We intend to dedicate resources to a new business model that is largely untested, as is the case with esports. We do not know
to what extent our future expansions will be successful. Further, even if successful, the growth of our business could create
significant challenges for our management, operational, and financial resources, and could increase existing strain on, and divert
focus from, our core businesses. If not managed effectively, this growth could result in the over-extension of our operating infrastructure,
and our management systems, information technology systems, and internal controls and procedures may not be adequate to support
this growth. Failure to adequately manage our growth in any of these ways may cause damage to our brand, damage our reputation
or otherwise negatively impact our business.
Our
industry is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our resources among,
emerging technologies and business models, our business may be negatively impacted.
Technology
changes rapidly in the interactive entertainment industry. We must continually anticipate and adapt our products, services and
business models to emerging technologies and delivery platforms in order to stay competitive. Forecasting our revenues and profitability
for these new products, services and business models is inherently uncertain and volatile, and if we invest in the development
of interactive entertainment products or services incorporating a new technology or for a new platform that does not achieve significant
commercial success, whether because of competition or otherwise, we may not recover the often substantial “up front”
costs of developing and marketing those products and services, or recover the opportunity cost of diverting management and financial
resources away from other products or services. Further, our competitors may adapt to an emerging technology or business model
more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to consumers,
or both.
If,
on the other hand, we elect not to pursue the development of products or services incorporating a new technology or for new platforms,
or otherwise elect not to pursue new business models, that achieve significant commercial success, it may have adverse consequences.
It may take significant time and resources to shift product development resources to that technology, platform or business model,
as the case may be, and may be more difficult to compete against existing products and services incorporating that technology
or for that platform or against companies using that business model.
Many
elements of our business are unique, evolving and relatively unproven. Our business and prospects depend on the continuing development
of live streaming of competitive esports gaming. The market for esports and amateur online gaming competition is relatively new
and rapidly developing and are subject to significant challenges. Our business relies upon our ability to cultivate and grow an
active gamer community, and our ability to successfully monetize such community through tournament fees, subscriptions for our
esports gaming services, and advertising and sponsorship opportunities. In addition, our continued growth depends, in part, on
our ability to respond to constant changes in the esports gaming industry, including rapid technological evolution, continued
shifts in gamer trends and demands, frequent introductions of new games and titles and the constant emergence of new industry
standards and practices. Developing and integrating new games, titles, content, products, services or infrastructure could be
expensive and time-consuming, and these efforts may not yield the benefits we expect to achieve at all. We cannot assure you that
we will succeed in any of these aspects or that the esports gaming industry will continue to grow as rapidly as it has in the
past.
We
may encounter difficulties in integrating Simplicity Esports LLC’s esports businesses or otherwise realizing the anticipated
benefits of the transaction.
As
part of our business strategy, from time to time, we acquire, make investments in, or enter into strategic alliances and joint
ventures with, complementary businesses, such as the acquisition of the Simplicity esports business in January 2019. The acquisition
of Simplicity Esports LLC involves significant risks and uncertainties, including: (i) the potential for Simplicity Esports LLC’s
business to underperform relative to our expectations and the acquisition price, (ii) the potential for Simplicity Esports LLC’s
business to cause our financial results to differ from expectations in any given period, or over the longer-term, (iii) unexpected
tax consequences from the acquisition, or the tax treatment of Simplicity Esports LLC’s business’s operations going
forward, giving rise to incremental tax liabilities that are difficult to predict, (iv) difficulty in integrating Simplicity Esports
LLC’s business, its operations and its employees in an efficient and effective manner, (v) any unknown liabilities or internal
control deficiencies assumed as part of the acquisition, and (vi) the potential loss of key employees of Simplicity Esports LLC’s
businesses. Further, the transaction may involve the risk that our senior management’s attention will be excessively diverted
from our other operations, the risk that the gaming industry does not evolve as anticipated and that any intellectual property
or personnel skills acquired do not prove to be those needed for our future success, and the risk that our strategic objectives,
cost savings or other anticipated benefits are otherwise not achieved.
Our
business may be harmed if our licensing partners, or other third parties with whom we do business, act in ways that put our brand
at risk.
We
anticipate that our business partners shall be given access to sensitive and proprietary information or control over our intellectual
property in order to provide services and support to our teams. These third parties may misappropriate our information or intellectual
property and engage in unauthorized use of it or otherwise act in a way that places our brand at risk. The failure of these third
parties to provide adequate services and technologies, the failure of third parties to adequately maintain or update their services
and technologies or the misappropriation or misuse of this information or intellectual property could result in a disruption to
our business operations or an adverse effect on our reputation, and may negatively impact our business.
Our
business is highly dependent on the success and availability of video game platforms manufactured by third parties.
We
expect to derive a substantial portion of our revenues from esports games played on game platforms manufactured by third parties,
such as Sony’s PS4®, Microsoft’s Xbox One®, and Nintendo’s Wii U® and Switch®, and PCs. The
success of our business will be driven in large part by our ability to accurately predict which platforms will be successful in
the marketplace. We also rely on the availability of an adequate supply of these video game consoles and the continued support
for these consoles by their manufacturers. We may be required to commit significant resources well in advance of the anticipated
introduction of a new platform. If increased costs are not offset by higher revenues and other cost efficiencies, our business
could be negatively impacted. If the platforms for which we invested resources do not attain significant market acceptance, we
may not be able to recover our costs, which could be significant.
The
games we support are subject to scrutiny regarding the appropriateness of their content. If the publishers and distributors we
partner with fail to receive their target ratings for certain titles, or if retailers refuse to sell such titles due to what they
perceive to be objectionable content, it could have a negative impact on our business.
Console
and PC games are subject to ratings by the Entertainment Software Rating Board (the “ESRB”), a self-regulatory body
based in the U.S. that provides U.S. and Canadian consumers of interactive entertainment software with ratings information, including
information on the content in such software, such as violence, nudity or sexual content, along with an assessment of the suitability
of the content for certain age groups. Certain other countries have also established content rating systems as prerequisites for
product sales in those countries. In addition, certain stores use other ratings systems, such as Apple’s use of its proprietary
“App Rating System” and Google Play’s use of the International Age Rating Coalition (IARC) rating system. If
the software publishers that supply our games are unable to obtain the ratings they have targeted for their products, it could
have a negative impact on our business. In some instances, the software publishers and developers may be required to modify their
products to comply with the requirements of the rating systems, which could delay or disrupt the release of any given product,
or may prevent its sale altogether in certain territories, which would limited its availability for use in the games that our
teams play.
We
will depend on servers to operate our games with online features. If we were to lose server functionality for any reason, our
business may be negatively impacted.
Our
business at our game centers will rely on the continuous operation of servers, some of which are owned and operated by third parties.
Although we shall strive to maintain more than sufficient server capacity, and provide for active redundancy in the event of limited
hardware failure, any broad-based catastrophic server malfunction, a significant service-disrupting attack or intrusion by hackers
that circumvents security measures, a failure of disaster recovery service or the failure of a company on which we are relying
for server capacity to provide that capacity for whatever reason would likely degrade or interrupt the functionality of our games
with online features, and could prevent the operation of such games altogether, any of which could result in the loss of sales
for, or in, such games.
We
also rely on networks operated by third parties, such as the PlayStation® Network, Xbox Live® and Steam®, for the
functionality of the games we use which have online features. An extended interruption to any of these services could adversely
affect our ability to operate our games with online features, negatively impacting our business.
Further,
insufficient server capacity could also negatively impact our game center business. Conversely, if we overestimate the amount
of server capacity required by our business, we may incur unnecessary additional operating costs.
The
esports gaming industry is very “hit” driven. We may not have access to “hit” games or titles.
Select
game titles dominate competitive esports and online gaming, including League of Legends, Minecraft, Fortnite and Overwatch, and
many new games titles are regularly introduced in each major industry segment (console, mobile and PC free-to-download). Despite
the number of new entrants, only a very few “hit” titles account for a significant portion of total revenue in each
segment.
The
size and engagement level of our online and in person gamers are critical to our success and are closely linked to the quality
and popularity of the esports game publishers with which we have licenses. Esports game publishers on our gaming platform, including
those who have entered into license agreements with us, may leave us for other gaming platforms or leagues which may offer better
competition, and terms and conditions than we do. Furthermore, we may lose esports game publishers if we fail to generate the
number of gamers to our tournaments and league competitions expected by such publishers. In addition, if popular esports game
publishers cease to license their games to us, or our live streams fail to attract gamers, we may experience a decline in gamer
traffic, subscriptions and engagement, which may have a material and adverse impact on our results of operations and financial
conditions.
We
must continue to attract and retain the most popular esports gaming titles in order to maintain and increase the popularity of
our leagues, tournaments and competitions, and ensure the sustainable growth of our gamer community. We must continue to identify
and enter into license agreements with esports gaming publishers developing “hit’ games that resonate with our community
on an ongoing basis. We cannot assure you that we can continue to attract and retain the same level of first-tier esports game
publishers and our ability to do so is critical to our future success.
If
we fail to keep our existing gamers highly engaged, to acquire new gamers, to successfully implement a membership model for our
gaming community, our business, profitability and prospects may be adversely affected.
Our
success depends on our ability to maintain and grow the number of gamers attending and participating in our in-person and online
tournaments and competitions, and using our gaming platform, and keeping our gamers highly engaged. Of particular importance is
the successful deployment and expansion of our membership model to our gaming community for purposes of creating predictable recurring
revenues.
In
order to attract, retain and engage gamers and remain competitive, we must continue to develop and expand our leagues, including
internationally, produce engaging tournaments and competitions, successfully license the newest “hit” esports games
and titles, implement new technologies and strategies, improve features of our gaming platform and stimulate interactions in our
gamer community.
A
decline in the number of our gamers in our ecosystem may adversely affect the engagement level of our gamers, the vibrancy of
our gamer community, or the popularity of our league play, which may in turn reduce our monetization opportunities, and have a
material and adverse effect on our business, financial condition and results of operations. If we are unable to attract and retain
gamers, our revenues may decline and our results of operations and financial condition may suffer.
We
cannot assure you that our online and in person gaming platform and centers will remain sufficiently popular with gamers to offset
the costs incurred to operate and expand them. It is vital to our operations that we remain sensitive and responsive to evolving
gamer preferences and offer first-tier esports game content that attracts our gamers. We must also keep providing gamers with
new features and functions to enable superior content viewing, and social interaction. Further, we will need to continue to develop
and improve our gaming platform and centers and to enhance our brand awareness, which may require us to incur substantial costs
and expenses. If such increased costs and expenses do not effectively translate into an improved gamer experience and long-term
engagement, our results of operations may be materially and adversely affected.
Risks
Related to International Operations
The
risks related to international operations, in particular in countries outside of the United States, could negatively affect the
Company’s results.
It
is expected that the Company will derive between 15% to 20% of its revenue from transactions denominated in currencies other than
the United States dollar, such as Brazil, and the Company expects that receivables with respect to foreign sales will account
for a significant amount of its total accounts and receivables. As such, the Company’s operations may be adversely affected
by changes in foreign government policies and legislation or social instability and other factors which are not within the control
of the Company, including, but not limited to, recessions in foreign economies, expropriation, nationalization and limitation
or restriction on repatriation of funds, assets or earnings, longer receivables collection periods and greater difficulty in collecting
accounts receivable, changes in consumer tastes and trends, renegotiation or nullification of existing contracts or licenses,
changes in gaming policies, regulatory requirements or the personnel administering them, currency fluctuations and devaluations,
exchange controls, economic sanctions and royalty and tax increases, risk of terrorist activities, revolution, border disputes,
implementation of tariffs and other trade barriers and protectionist practices, taxation policies, including royalty and tax increases
and retroactive tax claims, volatility of financial markets and fluctuations in foreign exchange rates, difficulties in the protection
of intellectual property particularly in countries with fewer intellectual property protections, the effects that evolving regulations
regarding data privacy may have on the Company’s online operations, adverse changes in the creditworthiness of parties with
whom the Company has significant receivables or forward currency exchange contracts, labor disputes and other risks arising out
of foreign governmental sovereignty over the areas in which the Company’s operations are conducted. The Company’s
operations may also be adversely affected by social, political and economic instability and by laws and policies of such foreign
jurisdictions affecting foreign trade, taxation and investment. If the Company’s operations are disrupted and/or the economic
integrity of its contracts is threatened for unexpected reasons, its business may be harmed.
The
Company’s international activities may require protracted negotiations with host governments, national companies and third
parties. Foreign government regulations may favor or require the awarding of contracts to local contractors or require foreign
contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. In the event of a dispute arising in
connection with the Company’s operations in a foreign jurisdiction where it conducts its business, the Company may be subject
to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdictions of
the courts of United States or enforcing American judgments in such other jurisdictions. The Company may also be hindered or prevented
from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. Accordingly,
the Company’s activities in foreign jurisdictions could be substantially affected by factors beyond the Company’s
control, any of which could have a material adverse effect on it. The Company believes that management’s experience to date
in commercializing its products, services and solutions in Brazil may be of assistance in helping to reduce these risks. Some
countries in which the Company may operate may be considered politically and economically unstable.
Doing
business in the industries in which the Company operates often requires compliance with numerous and extensive procedures and
formalities. These procedures and formalities may result in unexpected or lengthy delays in commencing important business activities.
In some cases, failure to follow such formalities or obtain relevant evidence may call into question the validity of the entity
or the actions taken. Management of the Company is unable to predict the effect of additional corporate and regulatory formalities
which may be adopted in the future including whether any such laws or regulations would materially increase the Company’s
cost of doing business or affect its operations in any area.
The
Company may in the future enter into agreements and conduct activities outside of the jurisdictions where it currently carries
on business, which expansion may present challenges and risks that the Company has not faced in the past, any of which could adversely
affect the results of operations and/or financial condition of the Company.
The
Company is subject to foreign exchange and currency risks that could adversely affect its operations, and the Company’s
ability to mitigate its foreign exchange risk through hedging transactions may be limited.
The
Company expects that it will derive between 15% and 20% of its revenues in currencies other than the United States dollar; however,
a substantial portion of the Company’s operating expenses are incurred in United States dollars. Fluctuations in the exchange
rate between the U.S. dollar, the Real (Brazil) and other currencies may have a material adverse effect on the Company’s
business, financial condition and operating results. The Company’s consolidated financial results are affected by foreign
currency exchange rate fluctuations. Foreign currency exchange rate exposures arise from current transactions and anticipated
transactions denominated in currencies other than United States dollars and from the translation of foreign-currency-denominated
balance sheet accounts into United States dollar-denominated balance sheet accounts. The Company is exposed to currency exchange
rate fluctuations because portions of its revenue and expenses are denominated in currencies other than the United States dollar,
particularly the Real. In particular, uncertainty regarding economic conditions in Brazil pose risk to the stability of the Real.
Exchange rate fluctuations could adversely affect the Company’s operating results and cash flows and the value of its assets
outside of United States. If a foreign currency is devalued in a jurisdiction in which the Company is paid in such currency, then
the Company’s customers may be required to pay higher amounts for the Company’s products or services, which they may
be unable or unwilling to pay.
While
the Company may enter into forward currency swaps and other derivative instruments intended to mitigate the foreign currency exchange
risk, there can be no assurance the Company will do so or that any instruments that the Company enters into will successfully
mitigate such risk. If the Company enters into foreign currency forward or other hedging contracts, the Company would be subject
to the risk that a counterparty to one or more of these contracts defaults on its performance under the contracts. During an economic
downturn, a counterparty’s financial condition may deteriorate rapidly and with little notice, and the Company may be unable
to take action to protect its exposure. In the event of a counterparty default, the Company could lose the benefit of its hedging
contract, which may harm its business and financial condition. In the event that one or more of the Company’s counterparties
becomes insolvent or files for bankruptcy, its ability to eventually recover any benefit lost as a result of that counterparty’s
default may be limited by the liquidity of the counterparty. The Company expects that it will not be able to hedge all of its
exposure to any particular foreign currency, and it may not hedge its exposure at all with respect to certain foreign currencies.
Changes in exchange rates and the Company’s limited ability or inability to successfully hedge exchange rate risk could
have an adverse impact on the Company’s liquidity and results of operations.
We
may be unable to obtain licenses in new jurisdictions where our customers operate.
We
are subject to regulation in any jurisdiction where our customers access our website. To expand into any such jurisdiction we
may need to be licensed, or obtain approvals of our products or services. If we do not receive, or receive a revocation of a license
in a particular jurisdiction for our products or services, we would not be able to sell or place our products or services in that
jurisdiction. Any such outcome could materially and adversely affect our results of operations and any growth plans for our business.
Privacy
concerns could result in regulatory changes and impose additional costs and liabilities on the Company, limit its use of information,
and adversely affect its business.
Personal
privacy has become a significant issue in the United States, Brazil, Europe, and many other countries in which the Company currently
operates and may operate in the future. Many federal, state, and foreign legislatures and government agencies have imposed or
are considering imposing restrictions and requirements about the collection, use, and disclosure of personal information obtained
from individuals. Changes to laws or regulations affecting privacy could impose additional costs and liability on the Company
and could limit its use of such information to add value for customers. If the Company were required to change its business activities
or revise or eliminate services, or to implement burdensome compliance measures, its business and results of operations could
be harmed. In addition, the Company may be subject to fines, penalties, and potential litigation if it fails to comply with applicable
privacy regulations, any of which could adversely affect the Company’s business, liquidity and results of operation.
The
Company’s results of operations could be affected by natural events in the locations in which it operates or where its customers
or suppliers operate.
The
Company, its customers, and its suppliers have operations in locations subject to natural occurrences such as severe weather and
other geological events, including hurricanes, earthquakes, or flood that could disrupt operations. Any serious disruption at
any of the Company’s facilities or the facilities of its customers or suppliers due to a natural disaster could have a material
adverse effect on the Company’s revenues and increase its costs and expenses. If there is a natural disaster or other serious
disruption at any of the Company’s facilities, it could impair its ability to adequately supply its customers, cause a significant
disruption to its operations, cause the Company to incur significant costs to relocate or re-establish these functions and negatively
impact its operating results. While the Company intends to seek insurance against certain business interruption risks, such insurance
may not adequately compensate the Company for any losses incurred as a result of natural or other disasters. In addition, any
natural disaster that results in a prolonged disruption to the operations of the Company’s customers or suppliers may adversely
affect its business, results of operations or financial condition.
Risks
Related to Regulation
The
Company is subject to various laws relating to trade, export controls, and foreign corrupt practices, the violation of which could
adversely affect its operations, reputation, business, prospects, operating results and financial condition.
We
are subject to risks associated with doing business outside of the United States, including exposure to complex foreign and U.S.
regulations such as the Foreign Corrupt Practices Act (the “FCPA”) and other anti-corruption laws which generally
prohibit U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining
or retaining business. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions
and other penalties. It may be difficult to oversee the conduct of any contractors, third-party partners, representatives or agents
who are not our employees, potentially exposing us to greater risk from their actions. If our employees or agents fail to comply
with applicable laws or company policies governing our international operations, we may face legal proceedings and actions which
could result in civil penalties, administration actions and criminal sanctions. Any determination that we have violated any anti-corruption
laws could have a material adverse impact on our business. Changes in trade sanctions laws may restrict the Company’s business
practices, including cessation of business activities in sanctioned countries or with sanctioned entities.
Violations
of these laws and regulations could result in significant fines, criminal sanctions against the Company, its officers or its employees,
requirements to obtain export licenses, disgorgement of profits, cessation of business activities in sanctioned countries, prohibitions
on the conduct of its business and its inability to market and sell the Company’s products or services in one or more countries.
Additionally, any such violations could materially damage the Company’s reputation, brand, international expansion efforts,
ability to attract and retain employees and the Company’s business, prospects, operating results and financial condition.
Regulations
that may be adopted with respect to the internet and electronic commerce may decrease the growth in the use of the internet and
lead to the decrease in the demand for Esports’ products and services.
The
Company may become subject to any number of laws and regulations that may be adopted with respect to the internet and electronic
commerce. New laws and regulations that address issues such as user privacy, pricing, online content regulation, taxation, advertising,
intellectual property, information security, and the characteristics and quality of online products and services may be enacted.
As well, current laws, which predate or are incompatible with the internet and electronic commerce, may be applied and enforced
in a manner that restricts the electronic commerce market. The application of such pre-existing laws regulating communications
or commerce in the context of the internet and electronic commerce is uncertain. Moreover, it may take years to determine the
extent to which existing laws relating to issues such as intellectual property ownership and infringement, libel and personal
privacy are applicable to the internet. The adoption of new laws or regulations relating to the internet, or particular applications
or interpretations of existing laws, could decrease the growth in the use of the internet, decrease the demand for esports’
products and services, increase esports’ cost of doing business or could otherwise have a material adverse effect on esports’
business, revenues, operating results and financial condition.
Risks
Relating to Our Common Stock, Our Warrants and the Offering
Once
our common stock and warrants are listed on NYSE American, there can be no assurance that we will be able to comply with NYSE
American’s continued listing standards.
As
a condition to consummating this offering, our common stock and the warrants offered in this prospectus must be listed on the
NYSE American or another national securities exchange. Accordingly, in connection with the filing of the registration statement
of which this prospectus forms a part, we intend to apply to list our common stock and warrants on the NYSE American under the
symbols “XXX” and “XXX”, respectively. Assuming that our common stock and warrants are listed and after
the consummation of this offering, there can be no assurance any broker will be interested in trading our stock. Therefore, it
may be difficult to sell your shares of common stock or warrants if you desire or need to sell them. Our underwriters are not
obligated to make a market in our securities, and even if it makes a market, it can discontinue market making at any time without
notice. Neither we nor the underwriters can provide any assurance that an active and liquid trading market in our securities will
develop or, if developed, that such market will continue.
Once
our common stock and warrants are approved for listing on the NYSE American, there is no guarantee that we will be able to maintain
such listing for any period of time by perpetually satisfying NYSE American’s continued listing requirements. Our failure
to continue to meet these requirements may result in our securities being delisted from NYSE American.
The
market price of our common stock and warrants is likely to be highly volatile because of several factors, including a limited
public float.
The
market price of our common stock has been volatile in the past and the market price of our common stock and our warrants is likely
to be highly volatile in the future. You may not be able to resell shares of our common stock or our warrants following periods
of volatility because of the market’s adverse reaction to volatility.
Other
factors that could cause such volatility may include, among other things:
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or anticipated fluctuations in our operating results;
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absence of securities analysts covering us and distributing research and recommendations about us;
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we
may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held;
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stock market fluctuations;
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announcements
concerning our business or those of our competitors;
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actual
or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;
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or trends in the industry;
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litigation;
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changes
in market valuations of other similar companies;
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future
sales of common stock;
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departure
of key personnel or failure to hire key personnel; and
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general
market conditions.
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Any
of these factors could have a significant and adverse impact on the market price of our common stock and/or warrants. In addition,
the stock market in general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate
to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of
our common stock and/or warrants, regardless of our actual operating performance.
Our
common stock has in the past been a “penny stock” under SEC rules, and our warrants may be subject to the “penny
stock” rules in the future. It may be more difficult to resell securities classified as “penny stock.”
In
the past (including immediately prior to this offering), our common stock was a “penny stock” under applicable SEC
rules (generally defined as non-exchange traded stock with a per-share price below $5.00). While our common stock (and trading
warrants) will not be considered “penny stock” following this offering since they will be listed on the NYSE American,
if we are unable to maintain that listing and our common stock and warrants are no longer listed on the NYSE American, unless
we maintain a per-share price above $5.00, our common stock and warrants will become “penny stock.” These rules impose
additional sales practice requirements on broker-dealers that recommend the purchase or sale of penny stocks to persons other
than those who qualify as “established customers” or “accredited investors.” For example, broker-dealers
must determine the appropriateness for non-qualifying persons of investments in penny stocks. Broker-dealers must also provide,
prior to a transaction in a penny stock not otherwise exempt from the rules, a standardized risk disclosure document that provides
information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, disclose the compensation of the broker-dealer and its salesperson in the
transaction, furnish monthly account statements showing the market value of each penny stock held in the customer’s account,
provide a special written determination that the penny stock is a suitable investment for the purchaser, and receive the purchaser’s
written agreement to the transaction.
Legal
remedies available to an investor in “penny stocks” may include the following:
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If
a “penny stock” is sold to the investor in violation of the requirements listed above, or other federal or states
securities laws, the investor may be able to cancel the purchase and receive a refund of the investment.
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If
a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and
firms that committed the fraud for damages.
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These
requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that
becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our
securities. These requirements may restrict the ability of broker-dealers to sell our common stock or our warrants and may affect
your ability to resell our common stock and our warrants.
Many
brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not
invest in penny stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the
increased financial risk generally associated with these investments.
For
these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time,
if ever, our common stock or our warrants will not be classified as a “penny stock” in the future.
If
the benefits of any proposed acquisition do not meet the expectations of investors, stockholders or financial analysts, the market
price of our Common Stock may decline.
If
the benefits of any proposed acquisition do not meet the expectations of investors or securities analysts, the market price of
our Common Stock prior to the closing of the proposed acquisition may decline. The market values of our Common Stock at the time
of the proposed acquisition may vary significantly from their prices on the date the acquisition target was identified.
In
addition, broad market and industry factors may materially harm the market price of our Common Stock irrespective of our operating
performance. The stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our
securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies
which investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions
or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional
securities and our ability to obtain additional financing in the future.
Changes
in accounting principles and guidance, or their interpretation, could result in unfavorable accounting charges or effects, including
changes to our previously filed financial statements, which could cause our stock price to decline.
We
prepare our consolidated financial statements in accordance with GAAP. These principles are subject to interpretation by the SEC
and various bodies formed to interpret and create appropriate accounting principles and guidance. A change in these principles
or guidance, or in their interpretations, may have a significant effect on our reported results and retroactively affect previously
reported results.
Being
a public company results in additional expenses, diverts management’s attention and could also adversely affect our ability
to attract and retain qualified directors.
As
a public reporting company, we are subject to the reporting requirements of the Exchange Act. These requirements generate significant
accounting, legal and financial compliance costs and make some activities more difficult, time consuming or costly and may place
significant strain on our personnel and resources. The Exchange Act requires, among other things, that we maintain effective disclosure
controls and procedures and internal control over financial reporting. In order to establish the requisite disclosure controls
and procedures and internal control over financial reporting, significant resources and management oversight are required.
As
a result, management’s attention may be diverted from other business concerns, which could have an adverse and even material
effect on our business, financial condition and results of operations. These rules and regulations may also make it more difficult
and expensive for us to obtain director and officer liability insurance. If we are unable to obtain appropriate director and officer
insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent,
could be adversely impacted.
We
are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable
to public companies may result in our financial statements not being comparable to those of some other public companies. As a
result of this and other reduced disclosure requirements applicable to emerging growth companies, our securities may be less attractive
to investors.
As
a public reporting company with less than $1,070,000,000 in revenue during our last fiscal year, we qualify as an “emerging
growth company” under the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company
may take advantage of certain reduced reporting requirements and is relieved of certain other significant requirements that are
otherwise generally applicable to public companies. In particular, as an emerging growth company we:
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are
not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control
over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
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are
not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and
analyzing how those elements fit with our principles and objectives (commonly referred to as “compensation discussion
and analysis”);
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are
not required to obtain a non-binding advisory vote from our stockholders on executive compensation or golden parachute arrangements
(commonly referred to as the “say-on-pay,” “say-on-frequency” and “say-on-golden-parachute”
votes);
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are
exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
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may
present only two years of audited financial statements and only two years of related Management’s Discussion & Analysis
of Financial Condition and Results of Operations (“MD&A”); and
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are
eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107
of the JOBS Act.
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We
intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods
for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in
periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging
growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.
Certain
of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a
“smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain
an auditor attestation and report regarding management’s assessment of internal control over financial reporting; are not
required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or Chief Executive
Officer pay ratio disclosure; and may present only two years of audited financial statements and related MD&A disclosure.
Under
the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years
after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933,
as amended (the “Securities Act”), or such earlier time that we no longer meet the definition of an emerging growth
company. In this regard, the JOBS Act provides that we would cease to be an “emerging growth company” if we have more
than $1,070,000,000 in annual revenues, have more than $700 million in market value of our Common Stock held by non-affiliates,
or issue more than $1.0 billion in principal amount of non-convertible debt over a three-year period. Further, under current SEC
rules we will continue to qualify as a “smaller reporting company” for so long as we have a public float (i.e., the
market value of common equity held by non-affiliates) of less than $75 million as of the last business day of our most recently
completed second fiscal quarter.
We
cannot predict if investors will find our securities less attractive due to our reliance on these exemptions.
If
we fail to maintain effective internal control over financial reporting, the price of our securities may be adversely affected.
Our
internal control over financial reporting have weaknesses and conditions that require correction or remediation. For the year
ended May 31, 2019 and the quarter ended August 31, 2019, we identified a material weakness in our assessment of the effectiveness
of disclosure controls and procedures. We did not effectively segregate certain accounting duties due to the small size of our
accounting staff. We are dependent upon our Chief Financial Officer, who is knowledgeable and experienced in the application of
U.S. Generally Accepted Accounting Principles, to maintain our disclosure controls and procedures and the preparation of our financial
statements for the foreseeable future. We plan to increase the size of our accounting staff at the appropriate time for our business
and its size to ameliorate our concern that we do not effectively segregate certain accounting duties, which we believe would
resolve the material weakness in disclosure controls and procedures, but there can be no assurances as to the timing of any such
action or that we will be able to do so.
We
are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley
Act”) and if we fail to continue to comply, our business could be harmed, and the price of our securities could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act require an annual assessment of internal control over financial
reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting
firm. The standards that must be met for management to assess the internal control over financial reporting as effective are evolving
and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect
to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to
predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over
financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result,
we may not be able to complete the assessment and remediation process on a timely basis. In the event that our Chief Executive
Officer or Chief Financial Officer determines that our internal control over financial reporting is not effective as defined under
Section 404, we cannot predict how regulators will react or how the market prices of our securities will be affected; however,
we believe that there is a risk that investor confidence and the market value of our securities may be negatively affected.
Our
management team will have immediate and broad discretion over the use of the net proceeds from this offering and we may use the
net proceeds in ways with which you disagree.
The
net proceeds from this offering will be immediately available to our management to use at their discretion. We currently intend
to use the net proceeds from this offering to fund the expansion of our operations by the acquisition and/or build-out of new
gaming center locations, strategic acquisition of other companies, products or technologies, working capital and general corporate
purposes. See “Use of Proceeds.” We have not allocated specific amounts of the net proceeds from this offering for
any of the foregoing purposes. Accordingly, our management will have significant discretion and flexibility in applying the net
proceeds of this offering. You will be relying on the judgment of our management with regard to the use of these net proceeds,
and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately.
It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us or our stockholders.
The failure of our management to use such funds effectively could have a material adverse effect on our business, prospects, financial
condition, and results of operation.
You
will experience immediate and substantial dilution as a result of this offering and may experience additional dilution in the
future.
You
will incur immediate and substantial dilution as a result of this offering. After giving effect to the sale by us of up to $ in
units (of which our common stock forms a part) offered in this offering, at a public offering price of $
per unit, and after deducting the underwriters’ discounts and commissions and other estimated offering expenses payable
by us, investors in this offering can expect an immediate dilution of $ per
share, or %, at the assumed public offering price. We also have a large number of outstanding stock options to purchase common
stock with exercise prices that are below the public offering price of our common stock. To the extent that these options are
exercised, you will experience further dilution.
Shares
eligible for future sale may adversely affect the market.
From
time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary
brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations.
In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months, subject only to the current public
information requirement. Affiliates may sell after six months, subject to the Rule 144 volume, manner of sale (for equity securities),
current public information, and notice requirements. Of the approximately
(7,858,975 pre-reverse split) shares of our common stock outstanding as of February 29, 2020, approximately
(4,843,783 pre-reverse split) shares are tradable without restriction. Given the limited trading of our common stock, resale
of even a small number of shares of our common stock pursuant to Rule 144 or an effective registration statement may adversely
affect the market price of our common stock.
Our
officers, directors and principal shareholders own, and will continue to own after giving effect to this offering, a controlling
interest in our voting stock and investors will not have any voice in our management, which could result in decisions adverse
to our general stockholders.
Our
officers, directors and principal shareholders, in the aggregate, beneficially own or have the right to vote approximately
% of our outstanding common shares on a fully diluted basis, and will continue to beneficially own after giving effect to this
offering (assuming no exercise of the over-allotment option and no exercise of the warrants forming part of the units and over-allotment
option), approximately or have the right to vote approximately % of our outstanding common shares on a fully diluted basis. As
a result, these stockholders, acting together, have the ability to control substantially all matters submitted to our stockholders
for approval including:
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election
of our board of directors
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removal
of any of our directors
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amendment
of our Certificate of Incorporation or Bylaws
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adoption
of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving
us
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As
a result of their ownership and positions, our officers and directors collectively are able to influence all matters requiring
stockholder approval, including the election of directors and approval of significant corporate transactions. The interests of
our officers may differ from the interests of the other stockholders, and they may influence decisions with which the other stockholders
may not agree. Such decisions may be detrimental to our business plan and/or operations and they may cause our business to fail
in which case you may lose your entire investment.
Anti-takeover
provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover
attempt.
The
Company’s certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing
changes in control or changes in our management without the consent of our board of directors. These provisions include:
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no
cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
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the
exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors
or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our
board of directors;
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the
ability of our board of directors to determine whether to issue shares of our preferred stock and to determine the price and
other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to
significantly dilute the ownership of a hostile acquirer;
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limiting
the liability of, and providing indemnification to, our directors and officers;
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controlling
the procedures for the conduct and scheduling of stockholder meetings;
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providing
that directors may be removed prior to the expiration of their terms by stockholders only for cause; and
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advance
notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose
matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting
a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of
the Company.
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These
provisions, alone or together, could delay hostile takeovers and changes in control of the Company or changes in our board of
directors and management.
Any
provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change
in control could limit the opportunity for our security holders to receive a premium for their securities and could also affect
the price that some investors are willing to pay for our securities.
We
have never paid dividends on our common stock and have no plans to do so in the future.
Holders
of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we
have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the
foreseeable future. We intend to retain future earnings, if any, to provide funds for operations of our business. Therefore, any
return investors in our common stock may have will be in the form of appreciation, if any, in the market value of their shares
of common stock. See “Dividend Policy.”
We
will indemnify and hold harmless our officers and directors to the maximum extent permitted by Delaware law.
Our
Bylaws provide that we will indemnify and hold harmless our officers and directors against claims arising from our activities,
to the maximum extent permitted by Delaware law. If we were called upon to perform under our indemnification agreement, then the
portion of our assets expended for such purpose would reduce the amount otherwise available for our business.
We
anticipate effecting a reverse stock split of our outstanding Common Stock prior to the effective date of the registration statement
(of which this prospectus forms a part). However, the reverse stock split may not increase our stock price sufficiently while
the stock is trading, and we may not be able to list our Common Stock on a national securities exchange in which case we will
not be able to close this offering.
We
expect that the Reverse Stock Split will increase the market price of our Common Stock while our stock is trading and enable us
to meet the minimum market price requirement of the listing rules of a national securities exchange. However, the effect of a
reverse stock split upon the market price of our Common Stock cannot be predicted with certainty, and the results of reverse stock
splits by companies in similar circumstances have been varied. It is possible that the market price of our Common Stock following
the reverse stock split will not increase sufficiently for us to be in compliance with the minimum market price requirement of
a national securities exchange (in which case we will not be able to consummate this offering), or if it does, that such price
will be sustained. If we are unable to meet the minimum market price requirement prior to this offering and we are unable to list
our shares on a national securities exchange, we will not be able to complete this offering. Further, if following the listing,
we are unable to maintain our stock price such that it falls below the minimum stock price required by the NYSE American, our
shares may be delisted.
Even
if the Reverse Stock Split achieves the requisite increase the market price of our Common Stock, there can be no assurance that
we will be approved for listing on a national securities exchange or able to comply with other continued listing standards of
a national securities exchange.
Even
if the market price of our Common Stock increases sufficiently so that we comply with the minimum market price requirement, we
cannot assure you that we will be able to comply with the other standards that we are required to meet in order to be approved
for listing on a national securities exchange or maintain a listing of our Common Stock on such exchange. Our failure to meet
these requirements prior to listing will result in the offering not occurring and our failure to meet these requirements following
listing may result in our Common Stock being delisted from a national securities exchange.
The
Reverse Stock Split may decrease the liquidity of the shares of our Common Stock.
The
liquidity of the shares of our Common Stock may be affected adversely by the Reverse Stock Split given the reduced number of shares
that will be outstanding following the Reverse Stock Split. In addition, the Reverse Stock Split may increase the number of shareholders
who own odd lots (less than 100 shares) of our Common Stock, creating the potential for such shareholders to experience an increase
in the cost of selling their shares and greater difficulty affecting such sales.
If
an active, liquid trading market for our warrants does not develop, you may not be able to sell your warrants quickly or at a
desirable price.
The
warrants forming a part of the units issued in this offering will be immediately exercisable and expire on the fifth anniversary
of the date of issuance. The warrants will have an initial exercise price per share equal to $9.96. In the event that the stock
price of our common stock does not exceed the exercise price of the warrants during the period when the warrants are exercisable,
the warrants may not have any value.
There
is no established trading market for the warrants sold in this offering, and the market for the warrants may be highly volatile
or may decline regardless of our operating performance. We have applied for the warrants offered in this offering to be listed
on the NYSE American under the symbol “XXX”. However, an active public market for our warrants may not develop or
be sustained. We cannot predict the extent to which investor interest in our company will lead to the development of an active
trading market in our warrants or how liquid that market might become. If a market does not develop or is not sustained, it may
be difficult for you to sell your warrants at the time you wish to sell them, at a price that is attractive to you, or at all.
Holders
of our warrants will have no rights as a common stockholder until they acquire our common stock.
Until
you acquire shares of our common stock upon exercise of your warrants, you will have no rights with respect to our common stock.
Upon exercise of your warrants, you will be entitled to exercise the rights of a common stockholder only as to matters for which
the record date occurs after the exercise date.
USE
OF PROCEEDS
We
estimate that the net proceeds from the sale of the units we are offering will be approximately $ million.
If the underwriters fully exercise the over-allotment option, the net proceeds of the units we sell will be approximately $ million.
“Net proceeds” is what we expect to receive after deducting the underwriting discount and commission and estimated
offering expenses payable by us.
We
intend to use the net proceeds of this offering primarily to fund to fund the expansion of our operations by the acquisition and/or
build-out of new gaming center locations, strategic acquisition of other companies and/or esports teams, products or technologies,
and for working capital and other general corporate purposes. The amounts that we actually spend for any specific purpose may
vary significantly, and will depend on a number of factors including, but not limited to, the pace of progress of our research
and development, market conditions, and our ability to qualify vendors. In addition, we may use a portion of any net proceeds
to acquire complementary compounds; however, we do not have plans for any acquisitions at this time.
This
expected use of net proceeds from this offering represents our intentions based upon our current plans and business conditions.
The amounts and timing of our actual expenditures may vary significantly depending on numerous factors. As a result, our management
will retain broad discretion over the allocation of the net proceeds from this offering. We may find it necessary or advisable
to use the net proceeds from this offering for other purposes, and we will have broad discretion in the application of net proceeds
from this offering.
Pending
our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments,
including short-term, investment-grade, interest-bearing instruments and U.S. government securities.
DIVIDEND
POLICY
We
have not paid any cash dividends on our common stock and do not currently anticipate paying cash dividends in the foreseeable
future. The agreements into which we may enter in the future, including indebtedness, may impose limitations on our ability to
pay dividends or make other distributions on our capital stock. Payment of future dividends on our common stock, if any, will
be at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements
and surplus, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. We
intend to retain future earnings, if any, for reinvestment in the development and expansion of our business.
CAPITALIZATION
The
following table shows:
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Our
capitalization as of February 29, 2020; and
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On
a pro forma basis, our unaudited capitalization as of February 29, 2020, as adjusted to reflect the receipt of the
net proceeds from the sale by us in this offering of units, after deducting $ in
estimated underwriting discounts and commissions and estimated offering expenses payable by us.
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We
derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, our historical
and unaudited pro forma consolidated financial statements and the accompanying notes included elsewhere in this prospectus. You
should also read this table in conjunction with “Selected Historical Consolidated Financial and Operating Data” and
“Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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As
of February 29, 2020
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Actual
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As
Adjusted (1)
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(unaudited)
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Cash
and cash equivalents
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$
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235,679
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$
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Stockholders’
equity:
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Common
stock, $0.0001 par value; 20,000,000 shares authorized and
(7,858,975 pre-reverse split) shares issued and outstanding on an actual basis, and 36,000,000 shares authorized and
shares issued and outstanding on an adjusted basis, and
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786
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Preferred
stock, $0.0001 par value 1,000,000 shares authorized and 0 shares issued and outstanding, respectively
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-
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Additional
paid-in capital
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11,034,952
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Accumulated
deficit
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(4,825,730
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)
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Total
stockholders’ equity
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6,210,008
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Total
capitalization
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$
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6,735,451
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$
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(1)
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The
number of shares of common stock to be outstanding after the offering is based on (8,678,100
pre-reverse split), which is the number of shares outstanding on July 2, 2020, assumes no exercise by the underwriters
of their option to purchase up to an additional shares of common stock and warrants to purchase shares of common stock to
cover over-allotments, if any, and excludes:
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(6,424,000
pre-reverse split) shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise
price of $ ($10.38 pre-reverse split) per share as of July 2, 2020;
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shares
of common stock issuable upon the full exercise of the warrants (forming part of the units) offered hereby; and
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shares
of common stock issuable upon exercise of the Underwriter’s Warrant granted to the Underwriter upon completion of this
offering.
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MARKET
PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock is currently quoted on the OTCQB tier of the OTC Market Group, Inc. under the symbol “WINR.” Our warrants
issued in connection with our initial public offering in August 2017 are currently listed on OTCQB under the symbol “WINRW.”
The OTC Market is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides
information on current “bids” and “asks”, as well as volume information.
On
October 9, 2017, our common stock and warrants commenced public trading on the NASDAQ Capital Market under the symbols “IAM”
and “IAMXW”, respectively. On November 20, 2018, we changed the symbols of our common stock and warrants to “SMSH”
and “SMSHW”, respectively, in conjunction with our name change from “I-AM Capital Acquisition Company”
to “Smaaash Entertainment, Inc.” On January 10, 2019, we changed the symbols of our common stock and warrants to “WINR”
and “WINRW”, respectively, in conjunction with our name change from “Smaaash Entertainment, Inc.” to “Simplicity
Esports and Gaming Company.” However, on January 25, 2019, the NASDAQ suspended our common stock and warrants from trading
on the NASDAQ Capital Market and the OTCQB commenced the quotation of our common stock and warrants. On April 2, 2019, the NASDAQ
Capital Market filed a Form 25 for our common stock and warrants, which became effective ten days thereafter.
We
intend to apply to list our common stock and warrants forming part of the Units on The NYSE American (“NYSE American”)
under the symbols “XXX” and “XXX,” respectively. There is no assurance that our listing application will
be approved by the NYSE American. The approval of our listing on the NYSE American is a condition of closing this offering.
The
following table includes the high and low bids for our common stock and warrants issued in connection with our initial public
offering in August 2017 for the periods presented, since the consummation of our IPO on August 22, 2017. These quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Prices
in the tables below have been presented to reflect the assumed Reverse Stock Split of our outstanding shares of common stock as
well as the pre-reverse stock split prices.
Common
Stock
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Post-Reverse(1)
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|
|
Pre-Reverse
(1)
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
Fiscal
Year 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
1 to June 26, 2020
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.33
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
1 to May 31, 2020
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.72
|
|
|
$
|
0.67
|
|
December
1, 2019 to February 29, 2020
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1.69
|
|
|
$
|
0.80
|
|
September
1 to November 30, 2019
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.69
|
|
|
$
|
1.50
|
|
June
1 to August 31, 2019
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.46
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
1 to May 30, 2019
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2.20
|
|
|
$
|
0.56
|
|
December
1, 2018 to February 28, 2019
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6.62
|
|
|
$
|
1.23
|
|
September
1 to November 30, 2018
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11.05
|
|
|
$
|
3.15
|
|
June
1 to August 31, 2018
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11.05
|
|
|
$
|
9.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
1 to May 31, 2018
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10.52
|
|
|
$
|
9.90
|
|
December
1, 2017 to February 28, 2018
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10.02
|
|
|
$
|
9.80
|
|
September
1 to November 30, 2017
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9.98
|
|
|
$
|
9.80
|
|
August
16 to August 31, 2017 (2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
(1)
|
Our
common stock began separate trading on NASDAQ on October 9, 2017.
|
|
|
(2)
|
Our
common stock did not trade separately from the Public Units until October 9, 2017.
|
On
June 26, 2020, the last reported sale price for our common stock on the OTCQB was $ ($1.10
pre-reverse split) per share.
The
volume of shares of common stock traded on the OTCQB was insignificant and therefore, does not represent a reliable indication
of the fair market value of these shares.
Warrants
|
|
Post-Reverse(1)
|
|
|
Pre-Reverse
(1)
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
Fiscal
Year 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
1 to June 26, 2020
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.39
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
1 to May 31, 2020
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.39
|
|
|
$
|
0.08
|
|
December
1, 2019 to February 29, 2020
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.45
|
|
|
$
|
0.11
|
|
September
1 to November 30, 2019
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.66
|
|
|
$
|
0.16
|
|
June
1 to August 31, 2019
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.58
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
1 to May 30, 2019
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.49
|
|
|
$
|
0.04
|
|
December
1, 2018 to February 28, 2019
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.52
|
|
|
$
|
0.06
|
|
September
1 to November 30, 2018
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.46
|
|
|
$
|
0.17
|
|
June
1 to August 31, 2018
|
|
$
|
|
|
|
|
|
|
|
$
|
0.50
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
Year 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
1 to May 31, 2018
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.50
|
|
|
$
|
0.34
|
|
December
1, 2017 to February 28, 2018
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.60
|
|
|
$
|
0.21
|
|
September
1 to November 30, 2017
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.34
|
|
|
$
|
0.26
|
|
August
16 to August 31, 2017 (2)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
(1)
|
Our
warrants began separate trading on NASDAQ on October 9, 2017.
|
|
|
(2)
|
Our
warrants did not trade separately from the Public Units until October 9, 2017.
|
On
June 26, 2020, the last reported sale price for our warrants on the OTCQB was $
($0.23 pre-reverse split) per share.
The
volume of warrants traded on the OTCQB was insignificant and therefore, does not represent a reliable indication of the fair market
value of these warrants.
Holders
of Common Stock
As
of July 2, 2020, there were approximately 99 record holders of our common stock and 60 record holders of our warrants.
The number of record holders does not include beneficial owners of common stock and warrants whose shares and warrants are held
in the names of banks, brokers, nominees or other fiduciaries.
We
have not paid any cash dividends on our common stock and do not currently anticipate paying cash dividends in the foreseeable
future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business.
Historical
Common Equity Transactions
The
following is a summary of transactions by us since our inception on April 17, 2017 involving registered and unregistered issuances
and redemption of our common equity securities.
On
May 31, 2017, we issued (1,437,500 pre-reverse
split) Founder Shares to Sponsor in exchange for a capital contribution of $25,000. Upon the partial exercise of the underwriters’
over-allotment option on September 13, 2017, (137,500
pre-reverse split) Founder Shares were forfeited by the Sponsor, for a balance of (1,300,000)
Founder Shares held by our Sponsor. Such securities were issued in connection with our organization pursuant to the exemption
from registration contained in Section 4(a)(2) of the Securities Act. Our sponsor is an accredited investor for purposes of Rule
501 of Regulation D. No underwriting discounts or commissions were paid with respect to such sales.
On
August 22, 2017, we sold 5,000,000 units at a purchase price of $10.00 per unit in our initial public offering (“IPO”)
of public units (“Public Units”), generating gross proceeds of $50.0 million. Each Public Unit consisted of one share
of our Common Stock (“Public Shares”), one right to receive one-tenth of one share our Common Stock upon consummation
of an initial business combination (“Public Right”), and one redeemable warrant (“Public Warrants”). Each
warrant entitled the holder to purchase one share of common stock at an exercise price of $
($11.50 pre-reverse split) per share, subject to adjustment.
On
August 22, 2017, simultaneously with the consummation of the IPO and the sale of the Public Units, we consummated the private
placement of 254,500 units (“Private Placement Units”) at a price of $10.00 per unit, generating total gross proceeds
of $2,545,000. Each unit consisted of (i) one share of Common Stock, (ii) one right receive one-tenth (1/10) of one share of Common
Stock upon the consummation of an initial business combination (“Private Placement Rights”), and (iii) one 5-year
warrant to purchase one share of Common Stock at an exercise price of $
($11.50 pre-reverse split) per share. The Private Placement Units, which were purchased by the Sponsor, are identical to the Public
Units, except the Private Placement Warrants underlying the Private Placement Units are non-redeemable and exercisable on a cashless
basis so long as they are held by the Sponsor or its affiliates or designees. If the Private Placement Units are held by someone
other than the initial holder, or its permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable
by such holders on the same basis as the Public Warrants. The issuance of the Private Placement Units was made pursuant to the
exemption from registration contained in Section 4(a)(2) of the Securities Act.
On
August 22, 2017, we issued (50,000 pre-reverse
split) shares of Common Stock to Maxim Group LLC (“Maxim”) in connection with its services as underwriter for the
IPO. Such shares of Common Stock were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities
Act.
Contained
in the underwriting agreement for the IPO was an over-allotment option allowing the underwriters to purchase from the Company
up to an additional 750,000 Public Units
(the “Over-Allotment Units”) and, in addition, the Company received a commitment from the Sponsor to purchase up to
an additional 26,250 Private Placement Units. On September 13, 2017, the underwriters partially exercised their option and purchased
200,000 Over-Allotment Units, which were sold at an offering price of $10.00 per unit, generating gross proceeds of $2,000,000.
On
September 13, 2017, simultaneously with the underwriter’s partial exercise of the over-allotment option, we consummated
the sale of an additional (7,000 pre-reverse
split) Private Placement Units, generating gross proceeds of $70,000. The issuance of additional Private Placement Units was made
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.
On
September 13, 2017, we issued Maxim an additional
(2,000 pre-reverse split) shares of our Common Stock upon partial exercise of the over-allotment. These shares were issued in
reliance on Section 4(a)(2) of the Securities Act.
At
the Special Meeting on November 20, 2018, holders of (4,448,260
pre-reverse split) Public Shares exercised their right to redeem those shares for cash at a price of $ ($10.2187363
pre-reverse split) per share, for an aggregate of approximately $45,455,596.
On
November 20, 2018, we issued (2,000,000
pre-reverse split) shares of our Common Stock to AHA Holdings Private Limited as an upfront portion of the newly issued shares
of our Common Stock to be exchanged for all of the ownership interest in Smaaash Private within 6 months after the closing of
the Business Combination. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
November 20, 2018, we issued (208,000
pre-reverse split) shares of Common Stock to Chardan Capital Markets, LLC (“Chardan”) in consideration of services
rendered. These shares were issued in reliance on Section 4(a)(2) of the Securities Act. The shares issued to Chardan are subject
to the same lock-up and will have the same registration rights as the shares of the Company held by the Sponsor.
On
November 20, 2018, we issued (520,000
pre-reverse split) shares of Common Stock upon conversion of the Public Rights.
On
November 20, 2018, upon the consummation of the Business Combination with Smaaash Private, we issued
(26,150 pre-reverse split) shares of Common Stock underlying the Private Placement Rights to the holders of the Private Placement
Rights. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
In
connection with the closing of the Acquisition of Simplicity Esports LLC, we issued (300,000
pre-reverse split), (700,000 pre-reverse
split), and (2,000,000 pre-reverse split)
shares of Common Stock, respectively, to the Simplicity Owners on January 4, 2019, January 7, 2019, and March 27, 2019 in exchange
for all of the issued and outstanding equity interest of Simplicity Esports LLC held by Simplicity Owners. These shares were issued
in reliance on Section 4(a)(2) of the Securities Act.
On
January 4, 2019, upon the closing of the Acquisition of Simplicity Esports LLC, the Series A-1 Note in the amount of $500,000
and held by Maxim automatically converted into
(193,648 pre-reverse split) shares of Common Stock. These shares were issued in reliance on Section 4(a)(2) of the Securities
Act.
During
the period from March 1, 2019 through July 1, 2019, we sold an aggregate of 987,500 units at a purchase
price of $2.00 per unit to 12 accredited investors in exchange for receipt of $1,975,000. Each unit consisted of (i) one share
of Common Stock, and (ii) a 5-year warrant to purchase one share of Common Stock at a purchase price of $ ($4.00
pre-reverse split). We sold the units in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities
Act and Rule 506 of Regulation D promulgated under the Securities Act.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Jed Kaplan, our Chief Executive Officer and interim Chief Financial
Officer and a member of our board of directors, (120,000
pre-reverse split) shares of our restricted Common Stock. Such shares vested over the succeeding nine month period. As of July
2, 2020, all of such shares have vested.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Roman Franklin, our President and a member of our board of directors,
(36,000 pre-reverse split) shares of
our restricted Common Stock. Such shares vested over the succeeding nine month period. As of July 2, 2020, all of such
shares have vested.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Steve Grossman, President of Simplicity Esports, LLC, a wholly
owned subsidiary of our Company at such time, (24,000
pre-reverse split) shares of our restricted Common Stock. Such shares vested over the succeeding nine month period. As of July
2, 2020, all of such shares have vested.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan,
Franklin and Grossman on December 31, 2018. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
May 31, 2019, we issued (100,000 pre-reverse
split) shares of Common Stock to Polar in exchange for Polar Asset Management Partners Inc.’s (“Polar”) forgiveness
of $143,476 owed by us to Polar under that that certain Debt Conversion Agreement entered into in May 2019 between Polar and us.
These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
July 30, 2019, in connection with the acquisition of a 100% interest in PLAYlive Nation, Inc. (“PLAYlive”) by way
of merger, the Company issued (750,000
pre-reverse split) shares of the Company’s common stock in exchange for 100% of the issued and outstanding common stock
from the owners of PLAYlive. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
March 11, 2020, in connection with the execution of the Common Stock Purchase agreement with Triton Funds, LP, the Company issued
(5,000 pre-reverse split) shares of the Company’s common stock to Triton Funds, LP as a donation. These shares were issued
in reliance on Section 4(a)(2) of the Securities Act.
On
April 9, 2020, the Company delivered a Purchase Notice to Triton Funds, LP pursuant to the terms of the Common Stock Purchase
Agreement requiring Triton Funds, LP to acquire (125,000 pre-reverse split) shares of common stock, which rendered $87,700 in
proceeds to the Company. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
May 4, 2020, pursuant to the terms of that certain 10% Fixed Convertible Promissory Note dated April 29, 2020 in the principal
amount of $152,500 issued by the Company in favor of Harbor Gates Capital, LLC, the Company issued
(10,000 pre-reverse split) shares of the Company’s common stock to Harbor Gates Capital, LLC as
additional consideration for the purchase of such note. These shares were issued in reliance on Section 4(a)(2) of the
Securities Act.
On
June 18, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and an
accredited investor, pursuant to which the Company issued a 12% self-amortization promissory note in the principal amount of $550,000,
the Company issued (55,000 pre-reverse split) shares of the
Company’s common stock to such accredited investor as additional consideration for
the purchase of such note. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
Nasdaq
Delisting
On
December 10, 2018, the Company received a written notice (the “Notice”) from the Listing Qualifications Division of
The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company has not complied with the requirements of IM-5101-2
of the listing rules of Nasdaq (the “Listing Rules”).
The
Notice stated that after its Business Combination, the Company had not demonstrated that its common stock met Listing Rule 5505(b)(1)
that requires a market value of publicly held shares of at least $15 million. Additionally, the Company has not provided evidence
that its common stock has at least 300 round lot holders as required by Listing Rule 5505(a)(3) and that its public warrant has
at least 400 round lot holders as required by Listing Rule 5515(a)(4). Finally, the Company does not comply with Listing Rule
5515(a)(2) which requires that for initial listing of a warrant the underlying security must be listed on Nasdaq.
On
January 7, 2019, the Company received a second written notice from Nasdaq informing it that the Company failed to comply with
Listing Rule 5250(e)(2) which requires companies listed on Nasdaq to timely file notification forms for the Listing of Additional
Shares (the “LAS Notification”).
The
Company was required to submit the LAS Notification 15 days prior to the issuance of the securities, however, the Company filed
the LAS Notification for the issuance of the Series A-1 Note and Series A-2 Note and for the share exchange under our Share Exchange
Agreement after such 15-day periods. Nasdaq notified the Company that each of these matters serves as an additional and separate
basis for delisting the Company’s securities and that the review panel will consider these matters in rendering a determination
regarding the Company’s continued listing on Nasdaq.
The
Company’s management has decided that moving from Nasdaq to the OTCQB is more appropriate for the Company at this time,
while the Company builds out its planned network of retail esport centers.
On
April 1, 2019, the Company was notified by Nasdaq that it would delist the Company’s common stock and public warrants. The
Company’s common stock and public warrants were previously suspended from trading on Nasdaq, effective January 25, 2019.
On
April 2, 2019, Nasdaq filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Exchange Act
on Form 25 with the SEC relating to the Company’s common stock and public warrants. As a result, the Company’s common
stock and public warrants were delisted from Nasdaq effective April 2, 2019.
The
Company’s common stock and public warrants currently are quoted on the OTCQB under the symbols “WINR” and “WINRW,”
respectively.
DILUTION
If
you invest in our units (comprised of our common stock and warrants) in this offering, your interest will be diluted to the extent
of the difference between the public offering price per share of common stock (which forms a part of a unit) and the pro forma
net tangible book value per share of our common stock immediately after this offering.
The
net tangible book value of our common stock as of February 29, 2020 was $ or
approximately $ per share after giving pro forma effect to the Reverse Stock Split
of our outstanding common stock. Net tangible book value per share represents our total tangible assets less our total tangible
liabilities, divided by the number of shares of common stock.
Net
tangible book value dilution per share of common stock in each unit to new investors represents the difference between the amount
per share of common stock in each unit paid by purchasers in this offering and the pro forma net tangible book value per share
of our common stock immediately after the completion of this offering, after giving pro forma effect to the Reverse Stock Split
of our outstanding common stock. After giving effect to our issuance and sale of units in this offering at the public offering
price of $ per unit, and after deducting estimated underwriting discounts and commissions
and estimated offering expenses, our pro forma net tangible book value as of February 29, 2020 would have been $ per
share after giving pro forma effect to the Reverse Stock Split of our outstanding common stock. This represents an immediate increase
in net tangible book value of $ per share to existing stockholders and an immediate
dilution in net tangible book value of $ per share to purchasers of units in this offering, as illustrated
in the following table:
Assumed
public offering price per unit
|
|
|
|
|
|
$
|
|
|
Net tangible
book value per share as of February 29, 2020
|
|
$
|
|
|
|
|
|
|
Increase
in net tangible book value per share attributable to new investors
|
|
$
|
|
|
|
|
|
|
Less:
pro forma net tangible book value per share after giving effect to the offering
|
|
|
|
|
|
$
|
|
|
Immediate
dilution in net tangible book value per share to new investors
|
|
|
|
|
|
$
|
|
|
The
foregoing illustration also does not reflect the dilution that would result from the exercise of any of the warrants sold in the
offering.
The
following table sets forth, as of February 29, 2020, the assumed number of shares of common stock purchased from us, the
total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing
units (of which shares of common stock form a part) in this offering, after giving pro forma effect to the new investors in this
offering at the public offering price of $ per unit, together with the total
consideration paid an average price per share paid by each of these groups, before deducting underwriting discounts and commissions
and estimated offering expenses.
|
|
Shares
Purchased
|
|
|
Total
Consideration
|
|
|
Average
Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
per
Share
|
|
Existing
stockholders
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
New
investors
|
|
|
|
|
|
|
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
|
|
Total
|
|
|
|
|
|
|
100.0
|
%
|
|
$
|
|
|
|
|
100.0
|
%
|
|
$
|
|
|
If
the underwriters’ over-allotment option is exercised in full for shares of common stock at the assumed offering price, the
number of shares held by new investors will increase to (assuming no exercise of the warrants), or approximately % of the total
number of shares of common stock outstanding after this offering and the shares held by existing stockholders will be (
pre-reverse split) shares of common stock but the percentage
of shares held by existing stockholders will decrease to % of the total shares outstanding.
To
the extent that the underwriters’ over-allotment option is exercised or any warrants or options are exercised, there will
be further dilution to new investors.
The
foregoing discussion and tables above do not give effect to the dilution that would result from (i) (6,424,000
pre-reverse split) shares of our common stock issuable upon the exercise of our issued and outstanding warrants at an average
exercise price of $ ($10.38 pre-reverse split) per share and (ii) shares
of common stock issuable upon exercise of the Underwriter’s Warrant granted to the Underwriter upon completion of this offering,
including the exercise of any over-allotment in full.
DESCRIPTION
OF BUSINESS
Unless
the context otherwise requires, “we,” “us,” “our,” or “the Company” refers to
(i) “Simplicity Esports and Gaming Company” after the consummation of the acquisition of Simplicity Esports, LLC ,
(ii) “Smaaash Entertainment Inc.” before the consummation of the Acquisition of Simplicity Esports, LLC but after
the closing of the Transactions with Smaaash Entertainment Private Limited, and (iii) I-AM Capital Acquisition Company prior to
the closing of the Transactions with Smaaash Entertainment Private Limited. “Simplicity Esports LLC” means
our wholly-owned subsidiary Simplicity Esports, LLC, a Florida limited liability company, and its consolidated subsidiaries. “PLAYlive”
means our wholly-owned subsidiary PLAYlive Nation, Inc., a Delaware corporation, and its consolidated subsidiaries. “Simplicity
One” means our 90% owned subsidiary Simplicity One Brasil Ltda, a Brazilian limited liability company and its consolidated
subsidiaries. “Smaaash Private” means Smaaash Entertainment Private Limited, a private limited company incorporated
under the laws of India, and its consolidated subsidiaries.
Industry
Overview
Esports
is the competitive playing of video games by amateur and professional teams for cash prizes. Esports typically takes the form
of organized, multiplayer video games that include real-time strategy, fighting, first-person shooter, and multiplayer online
battle arena games. As of July 2, 2020, the three largest selling esports games are Dota 2®, League of Legends®
(both multiplayer online battle arena games) and Counter Strike: Global Offensive® (a first-person shooter game). Other popular
games include SMITE®, StarCraft II®, Call of Duty®¸ Heroes of the Storm®, Hearthstone® and Fortnite®.
Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services including
twitch.tv, azubu.tv, ustream.tv and youtube.com. Esports also includes games which can be played, primarily by amateurs, in multiplayer
competitions on the Sony PlayStation®, Microsoft Xbox® and WII Nintendo® systems.
Although
official competitions have long been a part of video game culture, participation and spectatorship of such events have seen a
global surge in popularity over the last few years with the rapid growth of online streaming. The advent of online streaming technology
has turned esports into a global industry that includes professional players and teams competing in major events that are simultaneously
watched in person in stadiums, and by online viewers, which regularly exceed 1,000,000 viewers for major tournaments. According
to Business Insider, over 100 million viewers saw the 2019 League of Legends® World Championships in person and online. CNBC
reported in April 2019 that League of Legends® World Championships attract more viewers than the Super Bowl. Much like how
there is a worldwide gaming market for the sports industry, there has now developed a worldwide gaming market for the esports
industry. The impact has been so significant that many video game developers are now building features into their games designed
to facilitate competition.
According
to Newzoo, a global leader in esports, games and mobile intelligence, the total global esports audience was expected to reach
495 million in 2019, with an anticipated 27.5 million American gamers. In addition, according to Newzoo, esports produced $909
million in 2018 revenue and is projected to reach $1.1 billion in 2019. Esports enthusiasts, which are people who watch professional
esports content at least once a month, made up 201.2 million of the 2018 total, up from 143.2 million in 2017. With a compound
annual growth rate (“CAGR”) (2017-2022) of +15.7%, this number is expected to reach almost 297 million in 2022. The
global average revenue per esports enthusiast, which includes not only gaming revenue, but also sponsorships advertising and all
other esports related revenues, is projected to be $5.45 in 2019, up +8.9% from $5.00 in 2018. The number of occasional esports
viewers, (people who watch professional esports content less than once a month), is expected to reach 252.6 million in 2019, up
from 221.6 million in 2018, and is projected to grow with a CAGR of +12.6% to surpass 347 million in 2022. The number of people
who are aware of esports worldwide is expected to reach 1.8 billion in 2019, up from 1.6 billion in 2018. According to Newtech
Mag, China and the U.S. have the largest populations of esports fans, with Brazil ranking first in Latin America, and third globally,
with 20 million fans. The increasing prominence of esports as a mainstream entertainment industry is driving the growth in awareness
in most regions. Audience and awareness growth in the emerging regions of Latin America, Middle East and Africa, Southeast Asia,
and Rest of Asia is largely driven by improving IT infrastructure and urbanization. We believe the rise of new franchises, such
as Player Unknown’s Battlegrounds® or PubG®, is an important global growth factor as the influx of millennials should
continue to drive the growth of the esports industry’s audience and in turn, the esports gaming industry.
In
2018, there were 737 major esports events that generated an estimated $54.7 million in ticket revenues. The total prize money
of all esports events held in 2018 reached $150.8 million, after breaking the $100 million mark for the first time in 2017. The
League of Legends® World Championship was 2018’s biggest tournament by live viewership hours on Twitch, with 53.8 million
hours. It also produced $1.9 million in ticket revenues. The Overwatch® League was the most-watched league by live viewership
hours on Twitch, generating 79.5 million hours.
Business
Overview
We
are 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”).
Our
Esports Teams
We
own and manage 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.
Domestic
Esports Teams – Simplicity Esports LLC
Through
our wholly owned subsidiary Simplicity Esports LLC, we own and manage 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.
International
Esports Team - Simplicity One
Since
January 2020, through our 90% owned subsidiary Simplicity
One, we manage 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, with over 30 million
followers across social media accounts, 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.
Online
Tournaments
Since
March 2020, through our wholly owned subsidiary Simplicity Esports LLC, we hold weekly online esports tournaments. In
response to demand from customers for online esports tournaments and due to increased demand
from COVID-19 related social distancing, we introduced a new initiative of weekly online esports tournaments. We
acquired a database of over 400,000 paying esports gaming center customers in the acquisition of PLAYlive. We will directly
promote our online Simplicity Esports tournaments to this database of over 400,000 existing customers via text messages. If we
can convert merely 1% of these existing customers from the PLAYlive database to play in paid entry online Simplicity Esports tournaments,
this may be a profitable business unit resulting in approximately $1,000,000 in annual revenues. At a 5% conversion rate, this
business segment may generate approximately $5,000,000 in annual revenue. Management also intends to sell sponsorship and marketing
activations for these online tournaments that would create additional revenue.
Our
Gaming Centers
We
own and operate corporate and franchise esports gaming centers, through our 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 have an opportunity to compete in local and national
esports tournaments held in our 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 franchise royalties, the sale of game time, memberships,
tournament entry fees, birthday party events, corporate party events, concessions and gaming-related merchandise.
Our
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 our esports teams, lifestyle brand and marketing
campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our
ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform,
tournaments, 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.
Optimally,
the esports gaming centers of Simplicity Esports LLC (“Simplicity Esports Gaming Centers”) will measure between 1,200
and 2,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology,
futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present
attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity
for sponsors and advertisers.
Creating
content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. Our talented team will
continue to produce unique in-depth content which showcases aspects of esports for fans. We seek to reach a broad demographic
encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic
and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while
maintaining authenticity to the gaming community that comprises our fanbase.
Corporate
Gaming Centers
Simplicity
Esports LLC has already opened and is operating four corporate-owned retail Simplicity Esports Gaming Centers.
Our first Simplicity Esports Gaming Center was opened on May 3, 2019. Furthermore, we have engaged a national tenant representation
real estate broker to assist in the strategic planning and negotiations for our future Simplicity Esports Gaming Center locations.
We contemplate that new Simplicity Esports Gaming Centers will be funded by us as well as a combination of tenant improvement
allowances from landlords and sponsorships.
Franchised
Gaming Centers
Due
to interest from potential franchisees, we have launched a franchising program to accelerate the expansion of our planned nationwide
footprint. We sell specific franchise territories,
through our wholly owned subsidiary PLAYlive, and assist with the establishment and buildout of esports gaming centers to potential
business owners that desire to use our 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 have an opportunity
to 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, we provide operational guidance, support and use of branding elements in exchange for
a monthly royalty fee calculated as 6% of gross sales. On January 1, 2020 we implemented a national marketing fee of 1%
of gross sales. To date, we have sold five (5) of these franchise territories.
The
combination of the esports gaming centers, owned or franchised by our wholly owned subsidiaries Simplicity Esports LLC or PLAYlive,
provides us with what we believe is 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 and have numerous gaming PC’s. All gaming
centers in our footprint will be participating venues in our national esports tournaments.
Our
Stream Team
The
Simplicity Esports LLC stream team encompasses over 30 commentators (commonly known as “casters”), influencers
and personalities who connect to a dedicated fan base. Our electric group of live personalities
represent our organization to the fullest with their own unique style. We are proud to support and present a diverse group of
gamers as we engage fans across a multiple of esports genres. Our Twitch affiliation has enabled our stream team influences to
reach a broad fan base. Additionally, we have created several niches within the streaming community which has enabled us to engage
fans within certain titles on a 24/7 basis. Our notoriety in the industry is evidenced by our audience that views millions
of minutes of Simplicity Esports’ content monthly, via various social media outlets including YouTube, Twitter and Twitch.
Through Simplicity Esports LLC, we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience.
Our intention is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent.
Our management and players are known within the esports community and we plan to use their skills to create a seamless content
creation plan helping gamers feel closer to our brand than any other in the industry.
Material
Acquisitions and Licensing
Acquisition
of Simplicity Esports, LLC
On
January 4, 2019, the Company consummated the transactions contemplated by that certain 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, Simplicity Esports,
LLC, a Florida limited liability company (“Simplicity Esports LLC”), each of the equity holders of Simplicity Esports
LLC (“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 Esports LLC to the Company in exchange for an aggregate of (3,000,000
pre-reverse split) shares of common stock of the Company (the “Simplicity Esports Acquisition”). As of January 4,
2019, upon the completion of the Simplicity Esports Acquisition, esports gaming became the primary business of the Company.
The
acquisition of Simplicity Esports LLC 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 the build out of our brick and mortar Simplicity
Esports Gaming Centers. Through Simplicity Esports LLC, the Company has begun to implement a unique approach to ensure
the ultimate fan friendly esports experience.
Acquisition
of PLAYlive
On
July 30, 2019, we acquired a 100% interest in PLAYlive by way of merger pursuant to an Agreement and Plan of Merger, dated July
25, 2019, whereby we acquired 100% of the issued and outstanding common stock of PLAYlive from the selling stockholders (“PLAYlive
Stockholders”) of PLAYlive in exchange for (750,000 shares pre-reverse
split) shares of our common stock. Following this merger, PLAYlive became our wholly owned subsidiary. On the closing date of
this merger, each of the PLAYlive Stockholders entered into a one-year lock-up agreement with the Company and each of Duncan Wood,
Jordan C. Jenson, and Alec T. Carpenter entered into an employment agreement with PLAYlive.
Licensing
of Flamengo Esports
Effective
January 20, 2020, Simplicity One entered into an Exclusive Trademark and Symbol Use License Agreement, and Other Covenants (the
“License Agreement”), dated November 5, 2019 with Clube de Regatas do Flamengo (one of the most successful Brazilian
sports organizations, known for its world-famous soccer team), whereby Clube de Regatas do Flamengo agreed to exclusively license
its intellectual property rights (“Flamengo IP Rights”) to Simplicity One (an entity which the Company and Team One
E-Sports Ltda – ME own a 90% and 10% equity interest in, respectively), authorizing Simplicity One to use the Flamengo IP
Rights on a League of Legends team in esports as well as in other modalities in esports, which will be maintained and assembled
by Simplicity One during the term of the Licensing Agreement. The Company has appointed Fred Tannure to act as Simplicity One’s
General Manager. The License Agreement has a term of three years, beginning on January 1, 2020 and ending on December 31, 2022,
and may be renewed by mutual written agreement by the parties. In exchange for the exclusive license, the Company shall pay Clube
de Regatas do Flamengo an annual fee for the first, second and third year in the amount of US$32,882 (Reais$170,000.00), US$35,784
(Reais$185,000.00), and US$38,685 (Reais$200,000.00), respectively, as well
as the payment of royalties in the amount of 8% of the gross revenues (less taxes) of the eSports teams pursuant to the terms
of the Licensing Agreement. If either party unilaterally terminates the Agreement or gives rise to certain termination grounds
set forth in the Agreement, the terminating party will pay the other party a non-compensatory fine in the amount of approximately
$23,870 (Reais $100,000) to indemnify the other party, without prejudice to any losses or damages that exceed such amount.
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 and competed at the 2019 League of Legends® World Championship in Europe as one of 24 teams from 13 different regions
around the world.
Corporate
History
Formation
We
were initially a blank check company organized under the laws of the State of Delaware on April 17, 2017 under the name I-AM Capital
Acquisition Company. We were formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase,
reorganization or similar business combination with one or more businesses. Although we were not limited to a particular industry
or geographic region for purposes of consummating a business combination, we focused on businesses with a connection to India.
On November 20, 2018, we changed our name from I-AM Capital Acquisition Company to Smaaash Entertainment, Inc. On January 2, 2019,
we changed our name from Smaaash Entertainment, Inc. to Simplicity Esports and Gaming Company.
Smaaash
Entertainment Private Limited
Business
Combination
On
November 20, 2018, the Company and Smaaash Entertainment Private Limited, a private limited company incorporated under the laws
of India (“Smaaash Private”), consummated the transactions (the “Transactions” or the “Business
Combination”) contemplated by the share subscription agreement (as amended, the “Subscription Agreement”), following
the approval at the special meeting of the stockholders of the Company held on November 9, 2018 (the “Special Meeting”).
Pursuant
to the Subscription Agreement, the purchase price of $150,000 was paid by the Company to Smaaash Private in exchange for 294,360
newly issued equity shares of Smaaash Private at the closing of the Transactions (the “Closing”), representing less
than 1% of Smaaash Private at such time.
At
the time of the Closing, AHA Holdings Private Limited (“AHA Holdings”) and Shripal Morakhia (together with AHA Holdings,
the “Smaaash Founders”) agreed to transfer all of their ownership interest in Smaaash Private (the “Additional
Smaaash Shares”) to the Company in exchange for newly issued shares of our Common Stock (the “Transferred Company
Shares”). In furtherance of the foregoing, at the Closing, the Company issued an aggregate of (2,000,000
pre-reverse split) shares of its common stock to the Smaaash Founders as an upfront portion of the Transferred Company Shares
(the “Upfront Company Shares”). In connection with the issuance of the Upfront Company Shares, the Company and the
Smaaash Founders entered into an escrow agreement pursuant to which the Upfront Company Shares would be held in escrow and will
be either, (i) if the Additional Smaaash Shares are not transferred in full to the Company within the designated six-month period,
cancelled, or (ii) if the Additional Smaaash Shares are transferred in full to the Company within the designated six-month period,
released from escrow and the number of Upfront Company Shares will be deducted from the Transferred Company Shares that will be
issued to the Smaaash Founders upon the delivery of the Additional Smaaash Shares. Pursuant to the terms of the escrow agreement,
the Upfront Company Shares have been cancelled because the Additional Smaaash Shares were not transferred in full to the Company
in the designated six-month period.
In
connection with the Closing, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc.,
changed its stock symbols for its Common Stock, Public Rights, and Public Warrants to “IAM,” “IAMXR” and
“IAMXW,” respectively, and entered into a master franchise agreement (“Master Franchise Agreement”) and
a master license and distribution agreement (“Master Distribution Agreement”) with Smaaash Private. After the Closing,
the Company’s primary assets consisted of shares in Smaaash Private and the rights granted under the Master Franchise Agreement
and the Master Distribution Agreement.
Business
of Smaaash Private
At
the time of closing of the Smaaash transaction, Smaaash Private operated 40 state-of-the-art games and entertainment centers (“Smaaash
Centers”), including 39 Smaaash Centers in India and one international Smaaash Center in the U.S., in addition to carrying
out product sales of its games and equipment that Smaaash has developed in-house, supported by its sponsorship and other revenues.
Smaaash
Private’s core concept was to offer an interactive, immersive and fun experience to customers at its Smaaash Centers, blending
Augmented Reality (“AR”) and Virtual Reality (“VR”) and other games, indoor entertainment, and attractive
food and beverage options, customized to the tastes and preferences of a diverse set of customers across age groups, genders and
backgrounds, including corporate customers, families, friends and children. Smaaash Private’s game concepts are supported
by its in-house technology, value engineering and systems integration capabilities.
Master
Franchise Agreement
Under
the Master Franchise Agreement, Smaaash Private has granted to the Company an exclusive right to establish and operate Smaaash
Centers (as defined under the Master Franchise Agreement) and to sublicense the right to establish and operate Smaaash Centers
to third party franchisees, and a license to use the products and other services developed by Smaaash Private with respect to
the Smaaash Centers, in the United States (“Territory”). Further, Smaaash Private has granted to the Company the limited
license to use the Trademarks of Smaaash Private (as set out in the Master Franchise Agreement) for the purposes of establishing
and operating the Smaaash Centers in the Territory. The Master Franchise Agreement has been executed on an arms’ length
basis between Smaaash Private and the Company.
On
November 29, 2018, the Company and Smaaash Private executed an addendum to the Master Franchise Agreement (the “Amendment”).
Pursuant to the Amendment, Smaaash Private grants the Company the exclusive rights to set up family and entertainment centers
under the name “Total Sports Center” in the United States (“Total Sports Centers”) in which 51% of the
investment will be borne by the Company and 49% by Smaaash Private. Smaaash Private will be responsible for identifying the locations
for setting up, managing and controlling the Total Sports Centers and will carry out all the fit out requirements for such centers.
Smaaash Private will also appoint the management team for the centers. Smaaash Private will be entitled to 3% of the net revenue
of each center, subject to conditions to be confirmed by the parties.
Master
License and Distribution Agreement
Under
the Master Distribution Agreement, Smaaash Private has granted to the Company an exclusive right to purchase from Smaaash Private
specialized video game equipment and products related to sports and recreational activities (“Products”) in the territory
under the brand name of Smaaash Private and sell them with a 15% markup to the customers which will be the sub-franchisees of
the Company who will operate the Smaaash Centers, as specified in the Master Franchise Agreement.
Shift
of Business Focus to Esports Gaming
Following
the January 2019 acquisition of Simplicity Esports LLC described below, we determined to shift our current primary focus to esports
gaming. Accordingly, we did not generate any revenues from Smaaash in 2019. The Master Franchise Agreement, as amended, and the
Master Distribution Agreement continue in full force and effect, however, and we may now or in the future pursue Smaaash Private
business opportunities.
Polar
and K2
On
November 2, 2018, the Company entered into a stock purchase agreement with each of Polar Asset Management Partners Inc. (“Polar”)
and K2 Principal Fund L.P. (“K2”), pursuant to which Polar and K2 agreed to sell up to (490,000
pre-reverse split) and (220,000 pre-reverse split)
shares, respectively, of the Company’s common stock to the Company thirty days after the consummation of the transactions
at a price of $ ($11.23 pre-reverse split) contemplated
by the share subscription agreement with Smaaash Private.
On
December 20, 2018, the Company, Polar, K2 and the Escrow Agent, entered into an Amendment (the “Amendment”), pursuant
to which, among other things, the stock purchase agreements with Polar and K2 were amended to (x) reduce the purchase price per
share payable by the Company at the closing of the Stock Sales from $ ($11.23 pre-reverse
split) per share to (1) first $ ($6.00 pre-reverse split) per share up to 20% of the original number
of Shares (as defined in the respective Purchase Agreement), (2) then $ ($5.00 pre-reverse split)
per remaining share up to 20% of the original number of Shares, (3) then $ ($4.00 pre-reverse
split) per remaining share up to 20% of the original number of Shares, (4) then $ ($3.00
pre-reverse split) per remaining Share up to 20% of the original number of Shares, and (5) then $
($2.00 pre-reverse split) per remaining Share up to 20% of the original number of Shares, (y) to extend the outside date of the
closing of the Stock Sales until January 18, 2019, and (z) to authorize the issuance of $3,542,700 and $1,590,600 from the Escrow
Account to Polar and K2, respectively, as partial payment for the Shares prior to the final closing of the Stock Sales.
The
Amendment also included provisions regarding the reduction of the exercise price and amendment of redemption provisions of the
Company’s Public Warrants and Private Placement Warrants. On August 18, 2019, the Company held a special meeting of its
public warrant holders to approve the foregoing. However, these proposals were not approved by the requisite votes.
Acquisition
of Simplicity Esports, LLC
In
connection with the Simplicity Esports Acquisition, the Simplicity Owners received an aggregate of (300,000
pre-reverse split) shares of common stock at the closing on January 4, 2019, an additional aggregate of
(700,000 pre-reverse split) shares of common stock on January 7, 2019 and the remaining (2,000,000 pre-reverse split) shares in
March of 2019.
In
connection with the Simplicity Esports Acquisition, on January 2, 2019, the Company filed a Certificate of Amendment to the Company’s
Third Amended and Restated Certificate of Incorporation (the “Certificate Amendment”) with the Delaware Secretary
of State to change the Company’s name from “Smaaash Entertainment, Inc.” to “Simplicity Esports and Gaming
Company.” In addition, the Company changed the ticker symbols of its common stock and public warrants to “WINR”
and “WINRW,” respectively, and commenced trading of its common stock and public warrants under such new ticker symbols
on the OTCQB on January 10, 2019.
COVID-19
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. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have
since reopened 1 corporate and 22 franchised Simplicity Gaming Centers as of June 28, 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.
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.
Recent
Developments
Equity
Line
On
March 12, 2020, the Company entered into an 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 at an aggregate price of up to $500,000 (the “Maximum Commitment
Amount”) over the course of the commitment period which ends on the earlier of (i) the date on which the Selling Stockholder
purchases the Maximum Commitment Amount and (ii) December 31, 2020 (the “Equity Line”). In connection with the execution
of the Common Stock Purchase Agreement, the Company registered the resale of up to (725,000
pre-reverse split) shares of Common Stock issuable under the Equity Line in the amount of the Maximum Commitment Amount pursuant
to a registration statement declared effective by the SEC on March 30, 2020.
Online
Tournament
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.
Restructuring
Flemengo Esports
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.
Issuance
of Common Stock
On
March 11, 2020, in connection with the execution of the Common Stock Purchase Agreement with Triton Funds, LP, the Company issued
(5,000 pre-reverse split) shares of the Company’s common stock to Triton Funds, LP as a donation.
On
April 9, 2020, the Company delivered a Purchase Notice to Triton Funds, LP pursuant to the terms of the Common Stock Purchase
Agreement requiring Triton Funds, LP to acquire (125,000 pre-reverse
split) shares of common stock, which rendered $87,700 in proceeds to the Company.
On
May 4, 2020, pursuant to the terms of that certain 10% Fixed Convertible Promissory Note (described below) dated April 29, 2020
in the principal amount of $152,500 issued by the Company in favor of Harbor Gates Capital, LLC, the Company issued
(10,000 pre-reverse split) shares of the Company’s common stock to Harbor Gates Capital, LLC as
additional consideration for the purchase of such note.
On
June 18, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and an
accredited investor, pursuant to which the Company issued a 12% self-amortization promissory note (described below) in the principal
amount of $550,000, the Company issued (55,000 pre-reverse
split) shares of the Company’s common stock to such accredited investor as additional
consideration for the purchase of such note.
Debt
Obligations
10%
Fixed Convertible Promissory Note
On
April 29, 2020 (the “Effective Date”), the Company issued a 10% Fixed Convertible Promissory Note (the “Harbor
Gates Note”), with a maturity date of October 29, 2020 (the “Maturity Date”), in the principal sum of $152,000
in favor of Harbor Gates Capital, LLC (“Harbor Gates”). Pursuant to the terms of the Harbor Gates Note, the Company
agreed to pay to Harbor Gates $152,500 (the “Principal Sum”) and to pay “guaranteed” interest on the principal
balance at an amount equivalent to 10% of the Principal Sum, to the extent such Principal Sum and “guaranteed” interest
and any other interest, fees, liquidated damages and/or items due to Harbor Gates have not been repaid or converted into Company
common stock in accordance with the terms of the Harbor Gates Note. The Harbor Gates Note carries an original issue discount (“OID”)
of $2,500. Accordingly, on the Effective Date, Harbor Gates delivered $150,000 to the Company in exchange for the Harbor Gates
Note.
In
addition to the “guaranteed” interest, and upon the occurrence of an Event of Default (as hereinafter defined), additional
interest will accrue from the date of the Event of Default at the rate equal to the lower of 20% per annum or the highest rate
permitted by law.
The
Company may prepay the Harbor Gates Note according to the following schedule:
Days
Since
Effective Date
|
|
Payment
Amount
|
Under
30
|
|
115%
of Principal Amount (as hereinafter defined) so paid
|
31-60
|
|
120%
of Principal Amount so paid
|
61-90
|
|
125%
of Principal Amount so paid
|
91-180
|
|
135%
of Principal Amount so paid
|
135%
of the remaining unpaid and unconverted Principal Amount, plus all accrued and unpaid interest will be due and payable on the
Maturity Date. “Principal Amount” refers to the sum of (i) the original principal amount of the Harbor Gates Note
(including the OID, prorated if the Harbor Gates Note has not been funded in full); (ii) all guaranteed and other accrued but
unpaid interest under the Harbor Gates Note; (iii) any fees due under the Harbor Gates Notes; (iv) liquidated damages; and (v)
any default payments owing under the Harbor Gates Note, in each case previously paid or added to the Principal Amount.
Pursuant
to the terms of the Harbor Gates Note, the Company agreed to issue Harbor Gates shares of Company common stock in two tranches
as follows:
|
(i)
|
10,000
shares of common stock within three trading days of the Effective Date; and
|
|
(ii)
|
In
the event the average of the three volume weighted average prices for the Company’s common stock during the three consecutive
trading days immediately preceding the date which is the 180th day following the Effective Date is less than $1.00
per share, then Harbor Gates will be entitled, and the Company will issue to Harbor Gates additional shares of common stock
as set forth in the Harbor Gates Note.
|
If
an Event of Default (as defined in the Promissory Note) occurs, the outstanding Principal Amount of the Harbor Gates Note owing
in respect thereof through the date of acceleration, shall become, at Harbor Gates’ election, immediately due and payable
in cash at the “Mandatory Default Amount”. The Mandatory Default Amount means 35% of the outstanding Principal Amount
of the Harbor Gates Note will be automatically added to the Principal Sum of the Harbor Gates Note and tack back to the Effective
Date for purposes of Rule 144 promulgated under the 1934 Act. Commencing five days after the occurrence of any Event of Default
that results in the eventual acceleration of the Harbor Gates Note, the Harbor Gates Note will accrue additional interest, in
addition to the Harbor Gates Note’s “guaranteed” interest, at a rate equal to the lesser of 20% per annum or
the maximum rate permitted under applicable law.
If
the Harbor Gates Note is not retired on or before the Maturity Date, then at any time and from time to time after the Maturity
Date, and subject to the terms hereof and restrictions and limitations contained in the Harbor Gates Note, Harbor Gates has the
right, at Harbor Gates’ sole option, to convert in whole or in part the outstanding and unpaid Principal Amount under the
Harbor Gates Note into shares of the Company’s common stock at the Variable Conversion Price. The “Variable Conversion
Price” will be equal to the lower of: (a) $1.00, or (b) 70% of the lowest volume weighted average price of the Company’s
common stock during the 15 consecutive trading days prior to the date on Harbor Gates elects to convert all or part of the Harbor
Gates Note. The Company intends to prepay the Harbor Gates Note in accordance with its terms so that no amount under the Harbor
Gates Note is converted into shares of the Company’s common stock.
The
foregoing description of the Harbor Gates Note does not purport to be complete and is qualified in its entirety by reference to
the full text of the Harbor Gates Note, which is incorporated by reference into Exhibit 10.41 of the registration statement of
which this prospectus forms a part and is incorporated herein by reference.
Kaplan
Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, the Company’s Chief Executive Officer, interim Chief Financial Officer, member of
the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on the first business
day following the 150-day anniversary of the Issue Date (the “Maturity Date”). The Company will use the proceeds of
the Kaplan Note to fund the operations of Simplicity One Brasil Ltda, the Company’s majority owned subsidiary (“Simplicity
Brasil”).
Pursuant
to the terms of the Kaplan Note, the Company agreed to pay to Mr. Kaplan the lesser of (i) the principal sum of $90,000 (the “Maximum
Commitment”), or (ii) the aggregate principal amount of all direct advances of the proceeds of the Kaplan Note (each, an
“Advance”), together with any interest thereon, and any and all other amounts which may be due and payable thereunder
from time to time.
Subject
to the terms of the Kaplan Note, Mr. Kaplan agreed to make one direct Advance to and for the benefit of the Company on the Issue
Date in the amount of $45,000, and one additional Advance to and for the benefit of the Company at such time as the Company may
request during the two month period following the Issue Date. The total of the aggregate principal balance of all Advances (collectively
referred to herein as the “Principal Amount”) outstanding at any time shall not exceed the Maximum Commitment. Advances
made by Mr. Kaplan to the Company under the Kaplan Note which have been repaid may not be borrowed again.
Prior
to the Maturity Date or an Event of Default (as hereinafter defined), the Principal Amount outstanding under the Kaplan Note will
bear interest at a rate of 3% (the “Interest Rate”). From and after the Maturity Date or upon and during the continuance
of an Event of Default, interest will accrue on the unpaid Principal Amount during any such period at an annual rate (the “Default
Rate”) equal to 10% plus the Interest Rate; provided, however, that in no event will the Default Rate exceed the maximum
rate permitted by law.
The
Company may prepay the Kaplan Note, in whole or in part, without a prepayment penalty, at any time provided that an Event of Default
has not then occurred.
The
foregoing description of the Kaplan Note does not purport to be complete and is qualified in its entirety by reference to the
full text of the Kaplan Note, which is incorporated by reference into Exhibit 10.42 of the registration statement of which this
prospectus forms a part and is incorporated herein by reference.
Self-Amortization
Promissory Note
On
June 18, 2020 (the “Issue Date”), the Company entered into a securities purchase agreement (the “SPA”)
with an accredited investor (the “Holder”), pursuant to which the Company issued a 12% self-amortization promissory
note (the “Amortization Note”) with a maturity date of June 18, 2021 (the “Maturity Date”), in the principal
sum of $550,000. Pursuant to the terms of the Amortization Note, the Company agreed to pay to $550,000 (the “Principal Sum”)
to the Holder and to pay interest on the principal balance at the rate of 12% per annum. The Amortization Note carries an original
issue discount (“OID”) of $55,000. Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase
price of $495,000 in exchange for the Amortization Note. In addition, pursuant to the terms of the SPA, the Company agreed to
issue 55,000 shares of the Company’s common stock to the Holder as additional consideration.
The
Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest (no prepayment premium). The Amortization Note contains customary events of default relating to, among other
things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA.
The
Company is required to make amortization payments to the Holder according to the following schedule:
Payment
Date
|
|
Payment
Amount
|
|
10/16/2020
|
|
$
|
66,125.00
|
|
11/16/2020
|
|
$
|
66,125.00
|
|
12/16/2020
|
|
$
|
66,125.00
|
|
01/18/2021
|
|
$
|
66,125.00
|
|
02/18/2021
|
|
$
|
66,125.00
|
|
03/18/2021
|
|
$
|
66,125.00
|
|
04/16/2021
|
|
$
|
66,125.00
|
|
05/18/2021
|
|
$
|
66,125.00
|
|
06/18/2021
|
|
$
|
65,921.26
|
|
Total:
|
|
$
|
594,921.26
|
|
Upon
the Holder’s provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within
five (5) calendar days (provided, however, that this five (5) calendar day cure period shall not apply to any event of default
under Sections 3.1, 3.2, and 3.19 of the Amortization Note), the Amortization Note shall become immediately due and payable and
the Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then
outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default
(as hereinafter defined), additional interest will accrue from the date of the Event of Default at the rate equal to the lower
of 15% per annum or the highest rate permitted by law. The Company shall have the right to pay the Default Amount in cash at any
time, provided, however that the Holder may convert the Amortization Note into the Company’s common stock (subject to the
beneficial ownership limitations of 4.99% contained in the Amortization Note) at any time after the date that is five (5) calendar
days after the Amortization Note becomes immediately due and payable as a result of an Event of Default until the Company has
repaid the Amortization Note in cash. If the aforementioned event occurs, the conversion price will be equal to the closing bid
price of the Company’s common stock on the trading day immediately preceding the date of the respective conversion. The
Company intends to repay the Amortization Note in accordance with its terms so that no amount under the Amortization Note is converted
into shares of the Company’s common stock.
The
foregoing description of the Amortization
Note and SPA do not purport to be complete and is qualified in their entirety by reference
to the full text of the Amortization Note and SPA, which are incorporated by reference
into Exhibits 10.43 and 10.44 of the registration statement of which this prospectus forms a part and is incorporated herein by
reference.
Amendment
to the Series A-2 Exchange Convertible Note
On
or around December 20, 2018, the Company issued that certain Series A-2 exchange convertible note in the original principal amount
of $1,000,000 (the “Maxim Note”) to Maxim Group LLC (“Maxim” and together with the Company, the “Parties”).
On June 18, 2020, the Company and Maxim entered into that certain first amendment to the Maxim Note (the “Amendment”),
pursuant to which the Parties agreed to the following: (i) Maxim’s resale of the Company’s common stock (the “Common
Stock”) underling the Maxim Note shall be limited to 10% of the daily volume of the Common Stock on each respective trading
day, (ii) the maturity date of the Maxim Note was extended to December 31, 2020, (iii) the principal amount of the Maxim Note
was increased by $100,000, and (iv) the reference to “$1.93” in Section 4(b) of the Maxim Note was replaced with “$1.15”.
The
foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the full
text of the Amendment, which is incorporated by reference into Exhibit 10.45 of the registration statement of which this prospectus
forms a part and is incorporated herein by reference.
NYSE
Listing, Reverse Stock Split and Increase in Authorized Shares of Common Stock
We
intend to apply to list of our common stock and warrants on the NYSE American. If our application to the NYSE American is not
approved or we otherwise determine that we will not be able to secure the listing of the common stock and warrants on the NYSE
American, we will not complete the offering.
In
order to obtain NYSE American listing approval, we have obtained approval of our board of directors and shareholders of
(i) a reverse stock split of the outstanding shares of our common stock in the range from one-for-two (1-for-2) to one-for-fifteen
(1-for-15), which ratio is to be selected by the board of directors and (ii) an increase in our authorized shares of common stock
from 20,000,000 to 36,000,000 shares of common stock. The board of directors anticipates setting the ratio of the reverse
stock split, and the reverse stock split becoming effective following approval by FINRA of the reverse stock split, prior
to the effective date of the registration statement (of which this prospectus forms a part).
Except
as otherwise indicated and except in our financial statements and the notes thereto, all references to our common stock, share
data, per share data and related information depict an assumed reverse stock split ratio of 1-for- (“Reverse Stock Split”)
as if it was effective and as if it had occurred at the beginning of the earliest period presented. The Reverse Stock Split, when
effective, will combine each shares of our outstanding common stock into
one share of common stock, without any change in the par value per share, and the Reverse Stock Split correspondingly will adjust,
among other things, the exercise rate of our warrants and options into our common stock. No fractional shares will be issued in
connection with the Reverse Stock Split, and any fractional shares resulting from the Reverse Stock Split will be rounded up to
the nearest whole share.
Employees
As
of July 2, 2020, we had five full-time employees and four part-time employees. None of our employees is represented by
a union. We consider our relations with our employees to be good.
Legal
Proceedings
From
time to time, we are involved in various claims and legal actions arising in the ordinary course of business. To the knowledge
of our management, there are no legal proceedings currently pending against us which we believe would have a material effect on
our business, financial position or results of operations and, to the best of our knowledge, there are no such legal proceedings
contemplated or threatened.
Properties
We
lease approximately 250 rentable square feet of office space from an unaffiliated third party for our corporate office located
at 7000 W. Palmetto Park Road, Suite 505, Boca Raton, Florida 33433. This lease expires on June 1, 2022. Terms of the office lease
provide for a base rent payment of $800 per month. We also lease approximately 1,200 rentable square feet of retail space from
an unaffiliated third party for our Boca Raton Simplicity Esports Gaming Center. This lease expires in 2024. Terms of the retail
lease provide for a base rent payment of $2,200 per month and a share of the buildings operating expenses such as taxes and maintenance
of $760 per month. We also lease approximately 1,500 rentable square feet of retail space from an unaffiliated third party for
our DeLand Simplicity Esports Gaming Center. This lease expires in 2024. Terms of the retail lease provide for a gross lease of
$2,500 per month. We also lease approximately 3,000 rentable square feet of retail space from an unaffiliated third party for
our Redmond Simplicity Esports Gaming Center. The lease expires in 2022. The terms of the retail lease provide for a base rent
of $6,500 per month. The lease expires in 2025. We believe that these facilities are adequate for our current and near-term future
needs. We also lease approximately 2,500 rentable square feet of retail space from an unaffiliated third party for our Fort
Bliss Simplicity Esports Gaming Center. The lease expires in 2030. The terms of the retail lease provide for a percentage rent
lease (without a base rent) as follows: (i) first and second year of the lease, the rent would be 10% of gross sales of such gaming
center per year, (iii) third fourth and fifth year of the lease, the rent would be 12% of gross sales of such gaming center per
year, and (iv) sixth, seventh, eighth, nineth and tenth year of the lease, the rent would be 14% of the gross sales of such gaming
center per year.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References
in this prospectus to “we,” “us” or the “Company” refer to Simplicity Esports and Gaming Company,
formerly known as Smaaash Entertainment Inc. and prior to that as I-AM Capital Acquisition Company. The following discussion and
analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this prospectus.
Overview
We
are 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”).
Our
Esports Teams
We
own and manage 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.
Domestic
Esports Teams – Simplicity Esports LLC
Through
our wholly owned subsidiary Simplicity Esports LLC, we own and manage 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.
International
Esports Team - Simplicity One
Since
January 2020, through our 90% owned subsidiary Simplicity
One, we manage 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, with over 30 million
followers across social media accounts, 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.
Online
Tournaments
Since
March 2020, through our wholly owned subsidiary Simplicity Esports LLC, we hold weekly online esports tournaments. In
response to demand from customers for online esports tournaments and due to increased demand
from COVID-19 related social distancing, we introduced a new initiative of weekly online esports tournaments. We
acquired a database of over 400,000 paying esports gaming center customers in the acquisition of PLAYlive. We will directly
promote our online Simplicity Esports tournaments to this database of over 400,000 existing customers via text messages. If we
can convert merely 1% of these existing customers from the PLAYlive database to play in paid entry online Simplicity Esports tournaments,
this may be a profitable business unit resulting in approximately $1,000,000 in annual revenues. At a 5% conversion rate, this
business segment may generate approximately $5,000,000 in annual revenue. Management also intends to sell sponsorship and marketing
activations for these online tournaments that would create additional revenue.
Our
Gaming Centers
We
own and operate corporate and franchise esports gaming centers, through our 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 have an opportunity to compete in local and national
esports tournaments held in our 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 franchise royalties, the sale of game time, memberships,
tournament entry fees, birthday party events, corporate party events, concessions and gaming-related merchandise.
Our
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 our esports teams, lifestyle brand and marketing
campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our
ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform,
tournaments, 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.
Optimally,
the esports gaming centers of Simplicity Esports LLC (“Simplicity Esports Gaming Centers”) will measure between 1,200
and 2,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology,
futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present
attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity
for sponsors and advertisers.
Creating
content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. Our talented team will
continue to produce unique in-depth content which showcases aspects of esports for fans. We seek to reach a broad demographic
encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic
and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while
maintaining authenticity to the gaming community that comprises our fanbase.
Corporate
Gaming Centers
Simplicity
Esports LLC has already opened and is operating four corporate-owned retail Simplicity Esports Gaming Centers.
Our first Simplicity Esports Gaming Center was opened on May 3, 2019. Furthermore, we have engaged a national tenant representation
real estate broker to assist in the strategic planning and negotiations for our future Simplicity Esports Gaming Center locations.
We contemplate that new Simplicity Esports Gaming Centers will be funded by us as well as a combination of tenant improvement
allowances from landlords and sponsorships.
Franchised
Gaming Centers
Due
to interest from potential franchisees, we have launched a franchising program to accelerate the expansion of our planned nationwide
footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment
and buildout of esports gaming centers to potential business owners that desire to use our 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 have an opportunity to 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, we provide operational
guidance, support and use of branding elements in exchange for a monthly royalty fee calculated as 6% of gross sales. On January
1, 2020 we implemented a national marketing fee of 1% of gross sales. To date, we have sold five (5) of these franchise
territories.
The
combination of the esports gaming centers, owned or franchised by our wholly owned subsidiaries Simplicity Esports LLC or PLAYlive,
provides us with what we believe is 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 and have numerous gaming PC’s. All gaming
centers in our footprint will be participating venues in our national esports tournaments.
Our
Stream Team
The
Simplicity Esports LLC stream team encompasses over 30 commentators (commonly known as “casters”), influencers
and personalities who connect to a dedicated fan base. Our electric group of live personalities
represent our organization to the fullest with their own unique style. We are proud to support and present a diverse group of
gamers as we engage fans across a multiple of esports genres. Our Twitch affiliation has enabled our stream team influences to
reach a broad fan base. Additionally, we have created several niches within the streaming community which has enabled us to engage
fans within certain titles on a 24/7 basis. Our notoriety in the industry is evidenced by our audience that views millions
of minutes of Simplicity Esports’ content monthly, via various social media outlets including YouTube, Twitter and Twitch.
Through Simplicity Esports LLC, we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience.
Our intention is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent.
Our management and players are known within the esports community and we plan to use their skills to create a seamless content
creation plan helping gamers feel closer to our brand than any other in the industry.
Our
Financial Position
For
the fiscal years ended May 31, 2019 and 2018, we generated revenues of $37,995 and $0, respectively, and reported net losses of
$3,565,272 and $8,862, respectively, and negative cash flow from operating activities of $1,395,255 and $470,153, respectively.
For the nine months ended February 29, 2020 and February 28, 2019, we generated revenues of $700,792 and $14,070
and reported net losses of $1,250,924 and $3,095,960, respectively, and negative cash flow from operating
activities of $1,166,267 and $823,847, respectively. As noted in our consolidated financial statements, as of February
29, 2020, we had an accumulated deficit of $4,825,730. We sold four franchise territories during the nine months
ended February 29, 2020 for a net total of $188,000. Due to franchise accounting rules, this $188,000 does not appear on our consolidated
financial statements as revenue helping to reduce the reported loss. Franchise territory sales are recorded as deferred revenue
recognized over the 10-year life of the franchise agreements after the franchise has opened. As our esports gaming center business
unit is already cash flow positive, we anticipate that as a whole we will likely become cash flow positive during
calendar year 2020, unless government mandated stay at home orders continue past September 1, 2020. There is substantial
doubt regarding our ability to continue as a going concern as a result of our historical recurring losses and negative cash flows
from operations as well as our dependence on private equity and financings. See “Risk Factors—We have a history of
operating losses, our management has concluded that factors raise substantial doubt about our ability to continue as a going
concern and our auditor has included an explanatory paragraph relating to our ability to continue as a going concern in its audit
report for the fiscal year ended May 31, 2019 and 2018.”
Results
of Operations
Our
only activities from April 17, 2017 (date of inception) through November 20, 2018 were organizational activities, those necessary
to prepare for the initial public offering, which was consummated on August 22, 2017, and identifying a target company
for a business combination. Following the initial public offering through and after our business combination, we had not
generated any operating revenues.
Summarized
financial information concerning our reportable segments for the nine months ended February 29, 2020 is shown in the following
table.
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
|
|
Summary
of Statement of Operations for the Three Months Ended February 29, 2020 and February 28, 2019:
Other
Income
We
generated $5,489 of non-operating income, $70 of interest income, $6,675 in interest expense and $1,116 in
rebate income, for the three months ended February 29, 2020, as compared to $164 of interest income and $300,000
in debt forgiveness income for the three months ended February 28, 2019.
Revenue
The
Company’s revenue for the three months ended February 29, 2020 was $380,801, a $366,731 increase over
the February 28, 2019 revenue of $14,070. This increase is due to the acquisition of Simplicity Esports, LLC and
PLAYlive. During the three months ended February 29, 2020, the Company collected cash of $143,000 related to the sale of franchises,
net of brokerage commissions; these amounts do not appear on our consolidated financial statements as revenue but are deferred
and recognized over the 10 year term of the franchise agreement after the franchise has commenced operations.
General
and Administrative Expenses
General
and administrative expenses for the three months ended February 29, 2020 was $567,953 as compared to $430,010
for the three months ended February 28, 2019, an increase of $137,943. The change is primarily attributable
to the acquisition of Simplicity Esports, LLC and PLAYlive. The selling, general and administrative expenses of Simplicity Esports,
LLC consist primarily of payroll and related costs, operating costs, stock-based compensation, professional services, rent and
depreciation and amortization. The selling, general and administrative expenses of PLAYlive consist primarily of payroll and related
costs, operating costs, computer and software related costs and rent. The general and administrative costs for the three months
ended February 28, 2019 consisted primarily of professional and legal fees, insurance expense, audit and accounting fees and
filing and registration fees and depreciation and amortization. Included in general and administrative expenses are public company
costs including legal, professional, insurance, and registration fees of $137,379 for the three months ended February 29, 2020.
Also included in the general and administrative expenses are non-cash items including depreciation and amortization of $57,997
for the three months ended February 29, 2020.
Net
Loss
Net
loss for the three months ended February 29, 2020 was $404,201, as compared to net loss of $115,776 for the
three months ended February 28, 2019.
Summary
of Statement of Operations for the Nine Months Ended February 29, 2020 and February 28, 2019:
Other
Income
We
generated $77,883 of non-operating income, $3,031 of interest income, $20,025 of interest expense, $1,116
of rebate income and $93,761 of debt forgiveness income, for the nine months ended February 29, 2020
as compared $300,000 of debt forgiveness income and $401,582 of interest income for the nine months ended
February 28, 2019.
Revenue
The
Company’s revenue for the nine months ended February 29, 2020 was $700,792, a $686,722 increase
over the nine months ended February 28, 2019 revenue of $14,070. This increase is due to the acquisition of Simplicity
Esports, LLC and PLAYlive. During the nine months ended February 29, 2020, the Company collected cash of $188,000 related to
the sale of franchises; these amounts do not appear on our consolidated financial statements as revenue but are deferred and recognized
over the 10 year term of the franchise agreement after the franchise has commenced operations.
General
and Administrative Expenses
General
and administrative expenses for the nine months ended February 29, 2020 was $1,692,341 as compared to $3,811,612
for the nine months ended February 28, 2019, a decrease of $2,119,271. The change is primarily attributable
to the acquisition of Simplicity Esports, LLC and PLAYlive. The selling, general and administrative expenses of Simplicity Esports,
LLC consist primarily of payroll and related costs, operating costs, stock-based compensation, professional services, rent and
depreciation and amortization. The selling, general and administrative expenses of PLAYlive consist primarily of payroll and related
costs, operating costs, computer and software related costs and rent. The general and administrative costs for the nine
months ended February 28, 2019 consisted primarily of stock-based compensation and legal fees. Included in general
and administrative expenses are public company costs including legal, professional, insurance, and registration fees of $423,634
for the nine months ended February 29, 2020. Also included in the general and administrative expenses are non-cash
items including depreciation, amortization, and stock compensation of $344,469 for the nine months ended February
29, 2020.
Net
Loss
Net
loss for the nine months ended February 29, 2020 was $1,250,924, as compared to net loss of $3,095,960
for the nine months ended.
Summary
of Statement of Operations for the Fiscal Year Ended May 31, 2019 and 2018:
Other
Income
We
generated $403,984 of non-operating income in the form of interest income for the fiscal year ended May 31, 2019 as compared to
$521,702 for the fiscal year ended May 31, 2018.
For
the fiscal year ended May 31, 2019 and 2018, the Company had debt forgiveness income of $369,206 and $0, respectively. The debt
forgiveness income in 2019 was primarily due to the exchange notes with Maxim. The original Maxim promissory note was $1,800,000
and this was exchanged for two convertible notes totaling $1,500,000. Also, in December 2018, one of the convertible notes was
converted into 193,648 shares of common stock.
For
the fiscal year ended May 31, 2019 and 2018, the Company incurred $23,268 and $0, respectively, of interest expense. The interest
expense in 2019 was incurred due to the notes payable to Maxim and the loan payable to a related party.
Revenue
The
Company’s revenue for the fiscal year ended May 31, 2019 was $37,995, a 100% increase over the revenue of $0 for the fiscal
year ended May 31, 2018. This increase is due to the acquisition of Simplicity Esports, LLC.
General
and Administrative Expenses
General
and administrative expenses for the fiscal year ended May 31, 2019 was $4,353,189 as compared to $530,564 for fiscal year ended
May 31, 2018, an increase of $3,822,625. The change is primarily attributable to two events, first the acquisition of Simplicity
Esports, LLC. The selling, general and administrative expenses of this new acquisition consist primarily of payroll and related
costs, stock-based compensation and professional services. Second the issuance of shares for services in November 2018.
Net
Loss
Net
loss for the fiscal year ended May 31, 2019 was $3,565,272, as compared to net loss of $8,862, for the fiscal year ended May 31,
2018.
Liquidity
and Capital Resources
The
completion of the Initial Public Offering and simultaneous Private Placement, inclusive of the underwriters’ exercise of
their over-allotment option, generated gross proceeds to the Company of $54,615,000. Related transaction costs amounted to approximately
$3,838,000, consisting of $3,360,000 of underwriting fees, including $1,820,000 of deferred underwriting commissions payable (which
was held in the Trust Account) and $478,000 of Initial Public Offering costs.
Following
the Initial Public Offering and the underwriter’s partial exercise of the over-allotment option, a total of $52,780,000
was placed in the Trust Account and we had $552,190 of cash held outside of the Trust Account, after payment of all costs related
to the Initial Public Offering.
On
November 20, 2018, in connection with the closing of our initial Business Combination, the funds in the Trust Account were used
for, among other things, the following:
|
●
|
$45,455,596
to redeem (4,448,260 pre-reverse
split) shares;
|
|
●
|
$7,255,306
to fund the escrow agreement for Polar and K2;
|
|
●
|
$150,000
to fund our investment in Smaaash.
|
As
of May 31, 2019, we had no cash and marketable securities held in the Trust Account.
As
of May 31, 2019, we had cash of $1,540,158, which is available for use by us to cover the costs associated with due diligence
procedures and other general corporate purposes. In addition, as of May 31, 2019, we had accrued expenses of $691,940.
For
the fiscal year ended May 31, 2019, cash used in operating activities amounted to $1,395,256, mainly resulting from a net loss
of $3,565,272, offset by stock issued for services of $2,170,110. Changes in our operating liabilities and assets generated cash
of $532,120. Cash used in investing activities amounted to $195,824, mainly resulting from a write off of a cost method investment
of $150,000 and the purchase of property and equipment of $122,529, offset by $75,930 of cash acquired in the acquisition of Simplicity
Esports, LLC. Cash provided from financing activities amounted to $2,673,175, mainly resulting from the sale of common stock of
$1,925,000 and the net effect of the settlement of the redeemable common stock obligation of $736,000.
As
of February 29, 2020, we had cash of $235,679, which is available for use by us to cover all of the Company’s
costs including those associated with due diligence procedures and other general corporate purposes. In addition, as of
February 29, 2020, we had accrued expenses of $617,355.
For
the nine months ended February 29, 2020, cash used in operating activities amounted to $1,166,267, primarily resulting
from net loss of $1,261,979, an increase of $143,632 of accrued expenses, an increase of accounts receivable of
$95,644 and an addback of debt forgiveness income of $93,761, offset by stock issued for services of $153,011,
and amortization and depreciation expense of $192,050. Changes in our operating liabilities and assets used cash of
$154,996.
We
will need to raise additional funds in order to meet the expenditures required for operating our business.
Off-balance
sheet financing arrangements
We
have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in
transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest
entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered
into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments
of other entities, or purchased any non-financial assets.
Going
Concern
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 to generate sufficient revenue and in its ability 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 and generate sufficient revenue and its ability to raise additional
funds by way of a public or private offering.
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.
Equity
Line
On
March 12, 2020, the Company entered into an 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 at an aggregate price of up to $500,000 (the “Maximum Commitment
Amount”) over the course of the commitment period which ends on the earlier of (i) the date on which the Selling Stockholder
purchases the Maximum Commitment Amount and (ii) December 31, 2020 (the “Equity Line”). In connection with the execution
of the Common Stock Purchase Agreement, the Company registered the resale of up to (725,000
pre-reverse split) shares of Common Stock issuable under the Equity Line in the amount of the Maximum Commitment Amount pursuant
to a registration statement declared effective by the SEC on March 30, 2020. In addition, in connection with the execution of
the Common Stock Purchase Agreement, the Company agreed to issue, and issued on March 11, 2020, (5,000
pre-reverse split) shares of the Company’s Common Stock to Selling Stockholder as a donation.
COVID-19
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 were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have since
reopened 1 corporate and 22 franchised Simplicity Gaming Centers as of June 28, 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.
Contractual
obligations
We
do not have any long-term capital lease obligations, operating lease obligations or long-term liabilities, except as follows:
Attorney
Settlement Agreement
In
March of 2019, the Company entered into a settlement agreement with its prior attorney. The settlement agreement called for $200,000
to be paid upon signing the settlement agreement and then another approximate $525,000 to be paid over time. As of July 2,
2020, the Company owes this attorney approximately $300,000.
Maxim
Settlement Agreement
On
November 20, 2018, the Company entered into a settlement and release agreement (“Settlement Agreement”) with Maxim
Group LLC, the underwriter for the Company’s IPO (“Maxim”). Pursuant to the Settlement Agreement, the Company
made a cash payment of $20,000 to Maxim and issued a demand secured promissory note in favor of Maxim in the amount of $1.8 million
(the “Note”) to settle the payment obligations of the Company under the underwriting agreement dated August 16, 2017,
by and between the Company and Maxim. The Company also agreed to remove the restrictive legends on an aggregate of (52,000
pre-reverse split) shares of its common stock held by Maxim and its affiliate. The Note was surrendered and exchanged pursuant
to the securities exchange agreement described below.
Maxim
Exchange Agreement
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 the amount of $1.8 million which was
issued to Maxim pursuant to the Settlement Agreement (discussed immediately above). In exchange, the Company issued to the 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”).
As
of December 31, 2018, upon the closing of the Simplicity Esports Acquisition, the Series A-1 Note automatically converted into
(193,648 pre-reverse split) shares of the Company’s common
stock.
The
Series A-2 Note bears interest at 2.67% per annum, payable quarterly and has a maturity date of 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 the Holder 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 the Holder’s 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-2 Note is convertible into shares of the Company’s common stock (“Conversion Shares”) at an initial
conversion price of $ ($1.93 pre-reverse split) per share, subject
to adjustment for any stock dividends and splits, rights offerings, distributions, combinations or similar transactions. Upon
the Maturity of the Series A-2 Note, the conversion price 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 volume weighted average price of the Company’s common
stock in the five trading days prior to the notice of conversion and $
($0.50 pre-reverse split) . The Holder may convert the Series A-2 Note at any time, in whole or in part, provided that upon receipt
of a notice of conversion from the Holder, the Company has the right to repay all or any portion of the Series A-2 Note included
in the notice of conversion.
Additionally,
the Series A-2 Note will automatically convert into shares of the Company’s common stock on the Maturity Date provided that
(i) no event of default then exists, and (ii) each of the Equity Conditions have been met (unless waived in writing by the Holder)
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 the Holder) 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-2 Note, including, without limitation, an Optional Redemption, the Company may not prepay
any portion of the principal amount of the note without the prior written consent of the Holder.
The
Company is not permitted to convert any portion of the Series A-2 Note if doing so results in the Holder 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 the Holder 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 the Holder until
such time or times, if ever, as its right thereto would not result in the Holder exceeding the beneficial ownership limitation,
at which time or times the Holder will be issued such shares to the same extent as if there had been no such limitation.
The
Series A-2 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.
Operating
Lease
We
have long-term operating lease obligations and deferred revenues related to franchise fees to be recognized over the term of franchise
agreements with our franchises, generally ten years. We will begin to recognize deferred franchise fee revenue at the time a franchise
commences operations.
In
February 2019, the Company entered into a 5-year operating lease in Boca Raton, Florida in connection with the opening of its
first gaming center. Rent is approximately $2,300 per month for the first year and contains customary escalation clauses. In June
of 2019, the Company entered into a 5-year operating lease for its corporate office, rent is approximately $700 per month. In
August of 2019, the Company opened its second gaming center and in connection with this gaming center entered into a 5-year operating
lease in Deland, Florida. Rent is approximately $2,500 per month for the first year and contains customary escalation clauses.
On June 26, 2020, the Company entered into a 10-year operating lease in El Paso, Texas for a corporate gaming center in Fort
Bliss. It is a percentage rent lease (without a base rent) which provides for the (i) first and second year of the lease, the
rent would be 10% of gross sales of such gaming center per year, (iii) third fourth and fifth year of the lease, the rent would
be 12% of gross sales of such gaming center per year, and (iv) sixth, seventh, eighth, nineth and tenth year of the lease, the
rent would be 14% of the gross sales of such gaming center per year.
10%
Fixed Convertible Promissory Note
On
April 29, 2020 (the “Effective Date”), the Company issued a 10% Fixed Convertible Promissory Note (the “Harbor
Gates Note”), with a maturity date of October 29, 2020 (the “Maturity Date”), in the principal sum of $152,000
in favor of Harbor Gates Capital, LLC (“Harbor Gates”). Pursuant to the terms of the Harbor Gates Note, the Company
agreed to pay to Harbor Gates $152,500 (the “Principal Sum”) and to pay “guaranteed” interest on the principal
balance at an amount equivalent to 10% of the Principal Sum, to the extent such Principal Sum and “guaranteed” interest
and any other interest, fees, liquidated damages and/or items due to Harbor Gates have not been repaid or converted into Company
common stock in accordance with the terms of the Harbor Gates Note. The Harbor Gates Note carries an original issue discount (“OID”)
of $2,500. Accordingly, on the Effective Date, Harbor Gates delivered $150,000 to the Company in exchange for the Harbor Gates
Note.
In
addition to the “guaranteed” interest, and upon the occurrence of an Event of Default (as hereinafter defined), additional
interest will accrue from the date of the Event of Default at the rate equal to the lower of 20% per annum or the highest rate
permitted by law.
The
Company may prepay the Harbor Gates Note according to the following schedule:
Days
Since
Effective Date
|
|
Payment
Amount
|
Under
30
|
|
115%
of Principal Amount (as hereinafter defined) so paid
|
31-60
|
|
120%
of Principal Amount so paid
|
61-90
|
|
125%
of Principal Amount so paid
|
91-180
|
|
135%
of Principal Amount so paid
|
135%
of the remaining unpaid and unconverted Principal Amount, plus all accrued and unpaid interest will be due and payable on the
Maturity Date. “Principal Amount” refers to the sum of (i) the original principal amount of the Harbor Gates Note
(including the OID, prorated if the Harbor Gates Note has not been funded in full); (ii) all guaranteed and other accrued but
unpaid interest under the Harbor Gates Note; (iii) any fees due under the Harbor Gates Notes; (iv) liquidated damages; and (v)
any default payments owing under the Harbor Gates Note, in each case previously paid or added to the Principal Amount.
Pursuant
to the terms of the Harbor Gates Note, the Company agreed to issue Harbor Gates shares of Company common stock in two tranches
as follows:
|
(i)
|
10,000
shares of common stock within three trading days of the Effective Date; and
|
|
(ii)
|
In
the event the average of the three volume weighted average prices for the Company’s common stock during the three consecutive
trading days immediately preceding the date which is the 180th day following the Effective Date is less than $1.00
per share, then Harbor Gates will be entitled, and the Company will issue to Harbor Gates additional shares of common stock
as set forth in the Harbor Gates Note.
|
If
an Event of Default (as defined in the Promissory Note) occurs, the outstanding Principal Amount of the Harbor Gates Note owing
in respect thereof through the date of acceleration, shall become, at Harbor Gates’ election, immediately due and payable
in cash at the “Mandatory Default Amount”. The Mandatory Default Amount means 35% of the outstanding Principal Amount
of the Harbor Gates Note will be automatically added to the Principal Sum of the Harbor Gates Note and tack back to the Effective
Date for purposes of Rule 144 promulgated under the 1934 Act. Commencing five days after the occurrence of any Event of Default
that results in the eventual acceleration of the Harbor Gates Note, the Harbor Gates Note will accrue additional interest, in
addition to the Harbor Gates Note’s “guaranteed” interest, at a rate equal to the lesser of 20% per annum or
the maximum rate permitted under applicable law.
If
the Harbor Gates Note is not retired on or before the Maturity Date, then at any time and from time to time after the Maturity
Date, and subject to the terms hereof and restrictions and limitations contained in the Harbor Gates Note, Harbor Gates has the
right, at Harbor Gates’ sole option, to convert in whole or in part the outstanding and unpaid Principal Amount under the
Harbor Gates Note into shares of the Company’s common stock at the Variable Conversion Price. The “Variable Conversion
Price” will be equal to the lower of: (a) $1.00, or (b) 70% of the lowest volume weighted average price of the Company’s
common stock during the 15 consecutive trading days prior to the date on Harbor Gates elects to convert all or part of the Harbor
Gates Note. The Company intends to prepay the Harbor Gates Note in accordance with its terms so that no amount under the Harbor
Gates Note is converted into shares of the Company’s common stock.
The
foregoing description of the Harbor Gates Note does not purport to be complete and is qualified in its entirety by reference to
the full text of the Harbor Gates Note, which is incorporated by reference into Exhibit 10.41 of the registration statement of
which this prospectus forms a part and is incorporated herein by reference.
Kaplan
Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, the Company’s Chief Executive Officer, interim Chief Financial Officer, member of
the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on the first business
day following the 150-day anniversary of the Issue Date (the “Maturity Date”). The Company will use the proceeds of
the Kaplan Note to fund the operations of Simplicity One Brasil Ltda, the Company’s majority owned subsidiary (“Simplicity
Brasil”).
Pursuant
to the terms of the Kaplan Note, the Company agreed to pay to Mr. Kaplan the lesser of (i) the principal sum of $90,000 (the “Maximum
Commitment”), or (ii) the aggregate principal amount of all direct advances of the proceeds of the Kaplan Note (each, an
“Advance”), together with any interest thereon, and any and all other amounts which may be due and payable thereunder
from time to time.
Subject
to the terms of the Kaplan Note, Mr. Kaplan agreed to make one direct Advance to and for the benefit of the Company on the Issue
Date in the amount of $45,000, and one additional Advance to and for the benefit of the Company at such time as the Company may
request during the two month period following the Issue Date. The total of the aggregate principal balance of all Advances (collectively
referred to herein as the “Principal Amount”) outstanding at any time shall not exceed the Maximum Commitment. Advances
made by Mr. Kaplan to the Company under the Kaplan Note which have been repaid may not be borrowed again.
Prior
to the Maturity Date or an Event of Default (as hereinafter defined), the Principal Amount outstanding under the Kaplan Note will
bear interest at a rate of 3% (the “Interest Rate”). From and after the Maturity Date or upon and during the continuance
of an Event of Default, interest will accrue on the unpaid Principal Amount during any such period at an annual rate (the “Default
Rate”) equal to 10% plus the Interest Rate; provided, however, that in no event will the Default Rate exceed the maximum
rate permitted by law.
The
Company may prepay the Kaplan Note, in whole or in part, without a prepayment penalty, at any time provided that an Event of Default
has not then occurred.
The
foregoing description of the Kaplan Note does not
purport to be complete and is qualified in its entirety by reference to the full text of the Kaplan Note,
which are incorporated by reference into Exhibits 10.42 of the registration statement of which this prospectus forms a part and
is incorporated herein by reference.
Self-Amortization
Promissory Note
On
June 18, 2020 (the “Issue Date”), the Company entered into a securities purchase agreement (the “SPA”)
with an accredited investor (the “Holder”), pursuant to which the Company issued a 12% self-amortization promissory
note (the “Amortization Note”) with a maturity date of June 18, 2021 (the “Maturity Date”), in the principal
sum of $550,000. Pursuant to the terms of the Amortization Note, the Company agreed to pay to $550,000 (the “Principal Sum”)
to the Holder and to pay interest on the principal balance at the rate of 12% per annum. The Amortization Note carries an original
issue discount (“OID”) of $55,000. Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase
price of $495,000 in exchange for the Amortization Note. In addition, pursuant to the terms of the SPA, the Company agreed to
issue 55,000 shares of the Company’s common stock to the Holder as additional consideration.
The
Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest (no prepayment premium). The Amortization Note contains customary events of default relating to, among other
things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA.
The
Company is required to make amortization payments to the Holder according to the following schedule:
Payment
Date
|
|
Payment
Amount
|
|
10/16/2020
|
|
$
|
66,125.00
|
|
11/16/2020
|
|
$
|
66,125.00
|
|
12/16/2020
|
|
$
|
66,125.00
|
|
01/18/2021
|
|
$
|
66,125.00
|
|
02/18/2021
|
|
$
|
66,125.00
|
|
03/18/2021
|
|
$
|
66,125.00
|
|
04/16/2021
|
|
$
|
66,125.00
|
|
05/18/2021
|
|
$
|
66,125.00
|
|
06/18/2021
|
|
$
|
65,921.26
|
|
Total:
|
|
$
|
594,921.26
|
|
Upon
the Holder’s provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within
five (5) calendar days (provided, however, that this five (5) calendar day cure period shall not apply to any event of default
under Sections 3.1, 3.2, and 3.19 of the Amortization Note), the Amortization Note shall become immediately due and payable and
the Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then
outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default
(as hereinafter defined), additional interest will accrue from the date of the Event of Default at the rate equal to the lower
of 15% per annum or the highest rate permitted by law. The Company shall have the right to pay the Default Amount in cash at any
time, provided, however that the Holder may convert the Amortization Note into the Company’s common stock (subject to the
beneficial ownership limitations of 4.99% contained in the Amortization Note) at any time after the date that is five (5) calendar
days after the Amortization Note becomes immediately due and payable as a result of an Event of Default until the Company has
repaid the Amortization Note in cash. If the aforementioned event occurs, the conversion price will be equal to the closing bid
price of the Company’s common stock on the trading day immediately preceding the date of the respective conversion. The
Company intends to repay the Amortization Note in accordance with its terms so that no amount under the Amortization Note is converted
into shares of the Company’s common stock.
The
foregoing description of the Amortization Note and SPA do not purport to be complete and is qualified in their entirety by reference
to the full text of the Amortization Note and SPA, which are incorporated by reference into Exhibits 10.43 and 10.44 of the registration
statement of which this prospectus forms a part and is incorporated herein by reference.
Amendment
to the Series A-2 Exchange Convertible Note
On
or around December 20, 2018, the Company issued that certain Series A-2 exchange convertible note in the original principal amount
of $1,000,000 (the “Maxim Note”) to Maxim Group LLC (“Maxim” and together with the Company, the “Parties”).
On June 18, 2020, the Company and Maxim entered into that certain first amendment to the Maxim Note (the “Amendment”),
pursuant to which the Parties agreed to the following: (i) Maxim’s resale of the Company’s common stock (the “Common
Stock”) underling the Maxim Note shall be limited to 10% of the daily volume of the Common Stock on each respective trading
day, (ii) the maturity date of the Maxim Note was extended to December 31, 2020, (iii) the principal amount of the Maxim Note
was increased by $100,000, and (iv) the reference to “$1.93” in Section 4(b) of the Maxim Note was replaced with “$1.15”.
The
foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the full
text of the Amendment, which is incorporated by reference into Exhibit 10.45 of the registration statement of which this prospectus
forms a part and is incorporated herein by reference.
Adoption
of 2020 Omnibus Incentive Plan
The
board and shareholders of the Company approved of the Simplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the “2020
Plan”) on April 22, 2020 and June 23, 2020, respectively. The 2020 Plan provides for various stock-based incentive awards,
including incentive and nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units, and
other equity-based or cash-based aw ards.
Critical
Accounting Policies
The
preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally
accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements,
and income and expenses during the periods reported. Actual results could materially 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.
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 two sources, the first
is from the sale of the rights to our players to third parties and second from participation and prize money awarded at gaming
tournaments.
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 net of costs incurred, 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. Initial franchise fees are generally recognized once a location is opened to the public which is when management
deems substantially all services required under the franchise agreements have been performed.
The
Company offers various incentive programs for franchisees including royalty incentives, new restaurant 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.
Esports
revenue
Esports
revenue is a form of competition using video games. Most commonly, esports takes the form of organized, multiplayer video game
competitions, particularly between professional players, individually or as teams. Revenues from esports revenue are recognized
when the competition is completed, and prize money is awarded.
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.
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.
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 had
intangible assets subject to amortization related to its acquisition of Simplicity Esports, LLC. These costs were included in
intangible assets on our balance sheet and amortized on a straight-line basis when placed into service over the estimated useful
lives of the costs, which is 3 to 10 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.
MANAGEMENT
The
following table sets forth information regarding our directors and executive officers:
Name
|
|
Age
|
|
Position
|
Jed
Kaplan
|
|
55
|
|
Chief
Executive Officer, interim Chief Financial Officer, and Class II Director of the Company
|
Donald
R. Caldwell
|
|
72
|
|
Chairman
and Class I Director of the Company
|
Roman
Franklin
|
|
36
|
|
President
and Class I Director of the Company
|
Steven
Grossman
|
|
47
|
|
Secretary
of the Company
|
Max
Hooper
|
|
72
|
|
Class
II Director of the Company
|
Frank
Leavy
|
|
66
|
|
Class
I Director of the Company
|
Edward
Leonard Jaroski
|
|
72
|
|
Class
I Director of the Company
|
William
H. Herrmann, Jr.
|
|
73
|
|
Class
II Director of the Company
|
Jed
Kaplan. Mr. Kaplan has been a member of our board of directors since December 31, 2018 and our sole Chief Executive Officer
since February 8, 2019. From December 31, 2018 to February 8, 2019, Mr. Kaplan served as our co-Chief Executive Officer. He founded
and serves as the Chief Executive Officer of Shearson Financial Services, a FINRA-registered broker dealer, since May 1995. As
a natural leader possessing a passion for sports management, Mr. Kaplan has been involved in a wide variety of professional sports
ventures. Most recently Mr. Kaplan successfully sold the NBA G League Team, Iowa Energy to the Minnesota Timberwolves. Currently
Mr. Kaplan is also a minority owner of both the Memphis Grizzlies and Swansea City of the English Championship League. Mr. Kaplan’s
insight, vision and knowledge are all represented as an appointed founding member of the NBA G League leadership committee. Mr.
Kaplan graduated from City University of New York in 1989 with a Bachelor of Business Administration degree.
The
Company believes Mr. Kaplan’s strong expertise in the financial services and sports management industries qualifies him
to serve on its board of directors.
Donald
R. Caldwell. Mr. Caldwell, who has been an independent director and the Chairman of our board of directors since August
16, 2017, is an experienced investor, co-founded Cross Atlantic Capital Partners, Inc., a venture capital management company,
where he has served as its Chairman and Chief Executive Officer since 1999. At Cross Atlantic Capital Partners, Inc., Mr. Caldwell
has raised four investment funds totaling over $500 million of committed capital and is responsible for the firm’s operations,
building the investment team, and growing the Cross Atlantic franchise through fundraising, network development, and deal flow
generation. Prior to founding Cross Atlantic Capital Partners, Inc. in March 1999, Mr. Caldwell was President and Chief Operating
Officer of Safeguard Scientifics, Inc. (NYSE: SFE) (“Safeguard”) from 1996 to 1999, where he also previously served
as Executive Vice President from 1993 to 1996. In addition to his service on our board, Mr. Caldwell currently serves on the board
of directors of three public companies: InsPro Technologies Corporation (OTC: ITCC) since 2008, where he serves as chairman of
the board and member of the audit committee; Lightning Gaming, Inc., since June 2015, where he serves as a director and chairman
of the audit committee; and Quaker Chemical Corporation (NYSE: KWR) since 1997, where he serves as lead director, as chairman
of the executive committee and member of the compensation and audit committees; Mr. Caldwell was previously a member of the board
of directors of Diamond Cluster International, Inc. from 1994 to 2010 and has served as a director for several private companies
and non-profit organizations, including software and money management firms as well as the Pennsylvania Academy of the Fine Arts
and the Committee for Economic Development. Mr. Caldwell is a Certified Public Accountant (Retired) and holds a Bachelor of Science
degree from Babson College and a Master of Business Administration from the Graduate School of Business at Harvard University.
We
believe Mr. Caldwell’s deep financial, entrepreneurial and business expertise and extensive experience as a member of the
boards and board committees of other public companies qualifies him to serve on our board of directors.
Roman
Franklin. Mr. Franklin has been a member of our board of directors since August 16, 2017 and our President since December
31, 2018. Mr. Franklin was Chief Investment Officer of SMC Global USA from March 2016 until December 31, 2016, and prior, President
of Franklin Financial Planning from 2005 to 2016. Roman Franklin is a 16-year veteran of the financial services industry. By the
age of 22 he held FINRA Series 7, Series 66, and Life, Health, and Variable Insurance Licenses. In 2005, he founded a fee-only
registered investment advisory firm. In 2008, he was one of the youngest recipients of the National Association of Financial Advisors
(“NAPFA”) Registered Financial Advisor (RFA) designation. In 2015, he was elected as a Board Member of the NAPFA,
South Region Board of Directors, overseeing more than a dozen states from Texas, to Florida, to North Carolina. Mr. Franklin has
experience in domestic and international investment, and has been involved in multiple business transactions tied to India, including
the sale of a 50% equity stake in his wealth management business to Indian financial services firm SMC. Mr. Franklin holds a Bachelor
of Science degree in Management from Barry University and an M.B.A. in Finance from the Graduate School of Business at Stetson
University. His civic organization roles include School Advisory Council for Volusia County Schools, City of DeLand Economic Development
Committee, and the Boys’ and Girls’ Clubs of Central Florida.
We
believe Mr. Franklin’s strong expertise in finance and international and domestic business transactions qualifies him to
serve on our board of directors.
Max
Hooper. Mr. Hooper, who has been an independent member of our board of directors since August 16, 2017, serves as Managing
Director of Merging Traffic, a web-based crowdsourcing portal, since September 2015 and Head of Investment Banking and Senior
Vice President of Triloma Securities, a subsidiary of Triloma Financial Group LLC, since January 2016. Dr. Hooper is also the
founder and owner of Partners Advisory Group and Partners Capital Group, two financial advisory firms since January 2014. Since
February 2018, Dr. Hooper’s primary focus has been as Managing Director/CEO of Managing Traffic and co-owner of Triloma
Financial Group. Prior to that, Dr. Hooper was co-founder of Equity Broadcasting Corporation, a media company that owned and operated
more than one hundred television stations across the United States. Dr. Hooper is an accomplished entrepreneur and has started
multiple businesses in technology/internet, lodging, and services industries. Dr. Hooper has served on the investment committee
of several venture capital and angel funds, and has completed “work out” transactions as a Certified Debt Arbitrator
representing banks and private transactions. Dr. Hooper also has prior experience with SPACs such as transaction structuring,
administration, research, and execution. Dr. Hooper has earned five doctorate degrees from a variety of institutions.
We
believe Dr. Hooper’s expertise in investment, management and mergers and acquisitions over various industries qualify him
to serve on our board of directors.
Frank
Leavy. Mr. Leavy has been an independent member of our board of directors since August 16, 2017. Since 2007, Mr. Leavy
has been the Senior Vice President and Director of Finance and Administration for Blake’s All Natural Foods, a manufacturer
of “better for you” frozen entrees. Prior to that, he held various financial officer positions at member companies
of Group Rossignol, a world leading company in the winter sports industry. Specifically, he was Controller of Rossignol Ski Company
from 1982 to 2006 and Vice President of Finance of Skis Dynastar, Inc. and Skis Dynastar Canada from 2000 to 2006. He also served
as Chief Operating Officer at Roger Cleveland Golf Company, a subsidiary of Group Rossignol from 1999 to 2000 and was elected
a director of the company from 2003 to 2005. Mr. Leavy holds a Bachelor of Arts degree from the College of the Holy Cross and
a Master of Science degree in accounting from the Graduate School of Professional Accounting at Northeastern University.
We
believe Mr. Leavy’s extensive experience in corporate finance qualify him to serve on our board of directors.
Edward
Leonard Jaroski. Mr. Jaroski has been an independent member of our board of directors since October 2017. Mr. Jaroski
was the founder of Fixed Income Portfolio Manager at Capstone Asset Management Company and has served as its President and Chief
Executive Officer since 1987. Mr. Jaroski has been Chairman, Chief Executive Officer and President of various Capstone/Steward
Funds in the fund complex from 1987 through 2016. Mr. Jaroski was at Tenneco Financial Services from 1981 to 1987, where he was
the Executive Vice President. He started his career at Philadelphia Life Insurance Company as Manager of Investments in 1969,
where he served until 1981 and also served as its Vice President of Finance. He also served as a Director of Philadelphia Life
Asset Management Company. Mr. Jaroski holds the insurance industry professional designations of Chartered Life Underwriter, Charter
Financial Consultant and Fellow Life Management Institute. He holds a B.B.A. degree in Accounting from Temple University.
We
believe Mr. Jaroski’s experience in investments and asset management qualify him to serve on our board of directors.
William
H. Herrmann, Jr. Mr. Herrmann has been an independent member of our board of directors since October 2017. Mr. Herrmann
has over 40 years of experience in financial services, and insurance and investment planning industries. Presently, Mr. Herrmann
is the Owner of Herrmann & Associates, a financial services firm affiliated with Hudson Heritage Capital Management Inc.,
a Registered Investment Advisor since February 15, 2006. Mr. Herrmann has also served as Director of Steward Funds, since 2011,
and presently serves as its lead independent director. Mr. Herrmann serves as the Chairman of the Nominating and Corporate Governance
Committee of Steward Funds. He previously served as the Chairman of the Contracts Committee of Steward Funds. Mr. Herrmann is
also a Director of Church Capital Fund, where he serves as the Chairman of the Nominating and Corporate Governance Committees.
Mr. Herrmann is also a Trustee of LuLu Shriners Investment Advisory Committee and the Chairman of Beta Rho Property Company. Mr.
Herrmann holds a B.A. from the University of Pennsylvania, and an MBA from Temple University, and holds the Chartered Life Underwriter
(CLU) designation from American College. Mr. Herrmann holds Series 7, 63, and 65 securities licenses as well as insurance licenses
in multiple states.
We
believe Mr. Herrmann’s experience in financial services and the investment planning industry qualify him to serve on our
board of directors.
Steven
Grossman. Mr. Grossman has served as the Secretary of the Company since February 1, 2020. He served
as the President of our wholly-owned subsidiary Simplicity Esports, LLC from January 2018 until his resignation on February 1,
2020. Mr. Grossman has been employed by Shearson Financial Services, a FINRA registered broker dealer, since February 2001 and
has served as its President since January 2010. Mr. Grossman graduated from Towson University in 1995 with a Bachelor of Science
degree.
Mr.
Kaplan is the brother-in-law of Mr. Grossman, the former President of our wholly-owned subsidiary Simplicity Esports LLC. There
are no other family relationships among any of the Company’s directors or executive officers.
Our
officers and board of directors are well qualified as leaders. In their prior positions they have gained experience in core management
skills, such as strategic and financial planning, public company financial reporting, compliance, risk management, and leadership
development. Our officers and directors also have experience serving on boards of directors and board committees of other public
companies and private companies, and have an understanding of corporate governance practices and trends, which provides an understanding
of different business processes, challenges, and strategies.
Number
and Terms of Office of Officers and Directors
Our
board of directors is comprised of 9 directors, divided into two classes, Class I and Class II, with only one class of directors
being elected in each year and each class serving a two-year term. There are four Class I directors and five Class II directors.
However, as of June 23, 2020, there are two board vacancies. The board is conducting a search for replacement
directors to fill the vacancies. Once suitable replacements are found, they will serve as Class II
directors.
Our
officers are elected by the board of directors and serve at the discretion of the board of directors, rather than for specific
terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our bylaws as it deems appropriate.
Our bylaws provide that our officers may consist of a Chief Executive Officer, President, Chief Financial Officer, Vice Presidents,
Secretary, Assistant Secretaries, Treasurer and such other offices as may be determined by the board of directors.
Board
Committees and Director Independence
Our
common stock is presently quoted on the OTCQB under the symbol “WINR.” Our warrants issued in connection with our
initial public offering in August 2017 are currently listed on OTCQB under the symbol “WINRW.” Under the rules of
the OTCQB, we are not required to maintain a majority of independent directors on our Board of Directors and we are not required
to establish committees of the Board of Directors consisting of independent directors. However, we intend to apply to list our
common stock and our warrants on The NYSE American (“NYSE American”). In order to list our common stock and our warrants
on the NYSE American, we are required to comply with the NYSE American standards relating to corporate governance, requiring,
among other things, that:
|
●
|
A
majority of our Board of Directors to consist of “independent directors” as defined by the applicable rules and
regulations of the NYSE American;
|
|
|
|
|
●
|
The
compensation of our executive officers to be determined, or recommended to the Board of Directors for determination, by independent
directors constituting a majority of the independent directors of the Board in a vote in which only independent directors
participate or by a Compensation Committee comprised solely of independent directors;
|
|
●
|
That
director nominees to be selected, or recommended to the Board of Directors for selection, by independent directors constituting
a majority of the independent directors of the Board in a vote in which only independent directors participate or by a nomination
committee comprised solely of independent directors; and
|
|
|
|
|
●
|
Establishment
of an audit committee with at least three independent directors as well as composed entirely of independent directors, where
at least one of the independent directors qualifies as an audit committee financial expert under SEC rules and as a financially
sophisticated audit committee member under the NYSE American rules.
|
Under
applicable NYSE American rules, a director will only qualify as an “independent director” if, in the opinion of the
listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of
Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit
committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or
other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company
or any of its subsidiaries. Our Board of Directors has determined in its business judgment that each of Messrs. Caldwell, Leavy,
Jaroski and Herrmann and Dr. Hooper is independent within the meaning of the NYSE American rules for U.S. Companies, the Sarbanes-Oxley
Act and related SEC rules. Therefore, a majority of the members of our Board of Directors is independent.
In
addition, our Board of Directors has two standing committees: an Audit Committee and a Compensation Committee.
Committees
of the Board of Directors
Our
board of directors has two standing committees: an audit committee and a compensation committee. Both our audit committee and
our compensation committee are composed solely of independent directors.
Audit
Committee
Messrs.
Caldwell and Leavy and Dr. Hooper will serve as members of our audit committee. Mr. Caldwell serves as chairman of the audit committee.
Under NYSE American listing standards and applicable SEC rules, we are required to have three members of the audit committee,
all of whom must be independent. Messrs. Caldwell, and Leavy and Dr. Hooper are independent.
Each
member of the audit committee is financially literate and our board of directors has determined that Mr. Caldwell qualifies as
an “audit committee financial expert” as defined in applicable SEC rules.
Responsibilities
of the audit committee include:
|
●
|
the
appointment, compensation, retention, replacement, and oversight of the work of the independent auditors and any other independent
registered public accounting firm engaged by us;
|
|
|
|
|
●
|
pre-approving
all audit and non-audit services to be provided by the independent auditors or any other registered public accounting firm
engaged by us, and establishing pre-approval policies and procedures;
|
|
|
|
|
●
|
reviewing
and discussing with the independent auditors all relationships the auditors have with us in order to evaluate their continued
independence;
|
|
|
|
|
●
|
setting
clear hiring policies for employees or former employees of the independent auditors;
|
|
|
|
|
●
|
setting
clear policies for audit partner rotation in compliance with applicable laws and regulations;
|
|
●
|
obtaining
and reviewing a report, at least annually, from the independent auditors describing (i) the independent auditor’s internal
quality-control procedures and (ii) any material issues raised by the most recent internal quality-control review, or peer
review, of the audit firm, or by any inquiry or investigation by governmental or professional authorities, within, the preceding
five years respecting one or more independent audits carried out by the firm and any steps taken to deal with such issues;
|
|
|
|
|
●
|
reviewing
and approving any related party transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by
the SEC prior to us entering into such transaction; and
|
|
|
|
|
●
|
reviewing
with management, the independent auditors, and our legal advisors, as appropriate, any legal, regulatory or compliance matters,
including any correspondence with regulators or government agencies and any employee complaints or published reports that
raise material issues regarding our financial statements or accounting policies and any significant changes in accounting
standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities.
|
Compensation
Committee
The
members of our compensation committee are Messrs. Caldwell and Jaroski and Dr. Hooper. Mr. Caldwell serves as chairman of the
compensation committee. We have adopted a compensation committee charter, which details the principal functions of the compensation
committee, including:
|
●
|
reviewing
and approving the compensation of all of our other executive officers;
|
|
|
|
|
●
|
reviewing
our executive compensation policies and plans;
|
|
|
|
|
●
|
implementing
and administering our incentive compensation equity-based remuneration plans;
|
|
|
|
|
●
|
assisting
management in complying with our proxy statement and annual report disclosure requirements;
|
|
|
|
|
●
|
approving
all special perquisites, special cash payments and other special compensation and benefit arrangements for our executive officers
and employees;
|
|
|
|
|
●
|
producing
a report on executive compensation to be included in our annual proxy statement; and
|
|
|
|
|
●
|
reviewing,
evaluating and recommending changes, if appropriate, to the remuneration for directors.
|
The
charter also provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation
consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of
the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel
or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required
by NYSE American and the SEC.
Director
Nominations
We
do not have a standing nominating committee. In accordance with Section 804(a) of the NYSE American Company Guide, a majority
of the independent directors may recommend a director nominee for selection by the board of directors. The board of directors
believes that the independent directors can satisfactorily carry out the responsibility of properly selecting or approving director
nominees without the formation of a standing nominating committee. The directors who shall participate in the consideration and
recommendation of director nominees are Messrs. Caldwell, Jaroski, Leavy, and Herrmann, and Dr. Hooper. In accordance with Section
804(a) of the NYSE American Company Guide, all such directors are independent. As there is no standing nominating committee, we
do not have a nominating committee charter in place.
The
board of directors will also consider director candidates recommended for nomination by our stockholders during such times as
they are seeking proposed nominees to stand for election. Our stockholders that wish to nominate a director for election to the
board of directors should follow the procedures set forth in our bylaws.
We
have not formerly established any specific, minimum qualifications that must be met or skills that are necessary for directors
to possess. In general, in identifying and evaluating nominees for director, the board of directors considers educational background,
diversity of professional experience, knowledge of our business, integrity, professional reputation, independence, wisdom, and
the ability to represent the best interests of our stockholders.
Code
of Ethics
We
have adopted a Code of Ethics applicable to our directors, officers and employees. We previously filed a copy of our form of Code
of Ethics as an exhibit to our registration statement on Form S-1 (File 333-219251). You will be able to review these documents
by accessing our public filings at the SEC’s web site at www.sec.gov. In addition, a copy of the Code of Ethics will
be provided without charge upon request from us. We intend to disclose any amendments to or waivers of certain provisions of our
Code of Ethics in a Current Report on Form 8-K. See “Where You Can Find Additional Information.”
Limitation
on Liability and Indemnification of Officers and Directors
Our
third amended and restated certificate of incorporation, as amended, provides that our officers and directors will be indemnified
by us to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended. In addition, our restated
certificate provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary
duty as directors, except to the extent such exemption from liability or limitation thereof is not permitted by the DGCL.
We
have entered into agreements with our officers and directors to provide contractual indemnification in addition to the indemnification
provided for in our third amended and restated certificate. Our bylaws also permit us to maintain insurance on behalf of any officer,
director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit such
indemnification. We have purchased a policy of directors’ and officers’ liability insurance that insures our officers
and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our
obligations to indemnify our officers and directors.
Our
officers and directors have agreed to waive any right, title, interest or claim of any kind in or to any monies in the trust account,
and have agreed to waive any right, title, interest or claim of any kind they may have in the future as a result of, or arising
out of, any services provided to us and will not seek recourse against the trust account for any reason whatsoever. Accordingly,
any indemnification we provide to our officers and directors will only be able to be satisfied by us if we have sufficient funds
outside of the trust account.
These
provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These
provisions also may have the effect of reducing the likelihood of derivative litigation against officers and directors, even though
such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment
may be adversely affected to the extent we pay the costs of settlement and damage awards against officers and directors pursuant
to these indemnification provisions.
We
believe that these provisions, the insurance and the indemnity agreements are necessary to attract and retain talented and experienced
officers and directors.
The
Board’s Role in Risk Oversight
Although
our management is primarily responsible for managing our risk exposure on a daily basis, our board of directors oversees the risk
management processes. Our board, as a whole, determines the appropriate level of risk for our Company, assesses the specific risks
that we face, and reviews management’s strategies for adequately mitigating and managing the identified risks. Although
our board administers this risk management oversight function, our audit committee supports our board in discharging its oversight
duties and addresses risks inherent in its area.
EXECUTIVE
COMPENSATION
The
following table summarizes all compensation recorded by us in the past two fiscal years ending May 31, 2020 for:
|
●
|
our
principal executive officer or other individual serving in a similar capacity, and
|
|
|
|
|
●
|
our
two most highly compensated executive officers, other than our principal executive officer, who were serving as corporate
officers at May 31, 2020.
|
For
definitional purposes, these individuals are sometimes referred to as the “named executive officers.”
Name
and Principal Position
|
|
Fiscal
Year
Ended
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
(1)
|
|
|
Option
Awards
($)
|
|
|
All
Other Compensation
($)
|
|
|
Total
($)
|
|
Jed
Kaplan,
|
|
|
5/31/2020
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
42,000
|
(1)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
42,000
|
|
Chief
Executive Officer
|
|
|
5/31/2019
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
30,000
|
(2)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
30,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roman
Franklin,
|
|
|
5/31/2020
|
|
|
$
|
100,000
|
|
|
$
|
-
|
|
|
$
|
12,600
|
(1)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
112,600
|
|
President
|
|
|
5/31/2019
|
|
|
$
|
41,666
|
|
|
$
|
-
|
|
|
|
9,000
|
(2)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
50,666
|
|
|
(1)
|
Represents
the aggregate grant date fair value for all restricted stock granted to the named executive officers in the fiscal year indicated,
computed in accordance with Financial Accounting Standards Board’s Accounting Standards Codification Topic 718, Compensation
— Stock Compensation (“Topic 718). Assumptions used to determine the
aggregate grant date fair value of the restricted stock include a per share grant date fair value of $0.60, based on the closing
stock price of the Company’s common stock as reported on OTC Markets on March 27, 2019, the grant date.
|
|
(2)
|
Represents
the aggregate grant date fair value for all restricted stock granted to the named executive officers in the fiscal year indicated,
computed in accordance with Topic 718. Assumptions used to determine the aggregate grant date fair value of the restricted
stock include a per share grant date fair value of $0.60, based on the closing stock price of the Company’s common stock
as reported on OTC Markets on March 27, 2019, the grant date.
|
Outstanding
Equity Awards at 2020 Fiscal Year-End
The
following table sets forth information on outstanding options and stock awards on a pre-reverse split basis held by the named
executive officers as of May 31, 2020.
|
|
Option
Awards
|
|
Stock
Awards
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options (#) Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options (#) Unexercisable
|
|
|
Option
Exercise Price ($)
|
|
|
Option
Expiration Date
|
|
Number
of Shares or Units Of Stock that Have Not Vested (#) (1)
|
|
|
Market
Value Of Shares Or Units of Stock That Have Not Vested ($)
|
|
Jed
Kaplan
|
|
|
-
|
|
|
|
-
|
|
|
$
|
N/A
|
|
|
N/A
|
|
|
-
|
|
|
$
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roman
Franklin
|
|
|
-
|
|
|
|
-
|
|
|
$
|
N/A
|
|
|
N/A
|
|
|
-
|
|
|
$
|
N/A
|
|
(1)
|
The
shares were issued in conjunction with the respective named executive officer’s employment agreement and vest ratably
through December 31, 2020.
|
2020
Option Exercises and Stock Vested Table
The
following table sets forth the vesting of restricted stock on a pre-reverse split basis during the fiscal year ended May 31, 2020
for the named executive officers:
|
|
Stock
Awards
|
|
Name
|
|
Number
of Shares Acquired on Vesting
|
|
|
Value
Realized on Vesting
|
|
Jed
Kaplan
|
|
|
70,000
|
|
|
$
|
42,000
|
|
|
|
|
|
|
|
|
|
|
Roman
Franklin
|
|
|
21,000
|
|
|
$
|
12,600
|
|
Executive
Officer and Director Compensation
The
Company intends to develop an executive compensation program that is consistent with its existing compensation policies and philosophies,
which are designed to align compensation with our business objectives and the creation of stockholder value, while enabling us
to attract, motivate and retain individuals who contribute to the long-term success of the Company.
Decisions
on the executive compensation program will be made by the compensation committee. The following discussion is based on the present
expectations as to the executive compensation program to be adopted by the compensation committee. The executive compensation
program actually adopted will depend on the judgment of the members of the compensation committee and may differ from that set
forth in the following discussion.
We
anticipate that decisions regarding executive compensation will reflect our belief that the executive compensation program must
be competitive in order to attract and retain our executive officers. We anticipate that the compensation committee will seek
to implement our compensation policies and philosophies by linking a significant portion of our executive officers’ cash
compensation to performance objectives and by providing a portion of their compensation as long-term incentive compensation in
the form of equity awards.
We
anticipate that compensation for our executive officers will have three primary components: base salary, an annual cash incentive
bonus and long-term incentive compensation in the form of share-based awards, if any.
Base
Salary
Our
compensation committee will determine base salaries and manage the base salary review process, subject to existing employment
agreements.
Annual
Bonuses
We
intend to use annual cash incentive bonuses for the executive officers to tie a portion of their compensation to financial and
operational objectives achievable within the applicable fiscal year. We expect that, near the beginning of each year, the compensation
committee will select the performance targets, target amounts, target award opportunities and other term and conditions of annual
cash bonuses for the executive officers, subject to the terms of any employment agreement. Following the end of each year, the
compensation committee will determine the extent to which the performance targets were achieved and the amount of the award that
is payable to the executive officers.
Stock-Based
Awards
We
intend to use stock-based awards to reward long-term performance of the executive officers. We believe that providing a meaningful
portion of the total compensation package in the form of stock-based awards will align the incentives of its executive officers
with the interests of its stockholders and serve to motivate and retain the individual executive officers. Stock-based awards
will be awarded under the Incentive Plan, which has been adopted by our Board of Directors and is being submitted to our shareholders
for approval at the special meeting in lieu of an annual meeting.
Restricted
Stock Award
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Jed Kaplan, our Chief Executive Officer and interim Chief Financial
Officer and a member of our board of directors, (120,000
pre-reverse split) shares of our restricted Common Stock. Such shares vested over the succeeding nine month period. As of July
2, 2020, all of such shares have vested.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Roman Franklin, our President and
a member of our board of directors, (36,000 pre-reverse split)
shares of our restricted Common Stock. Such shares vested over the succeeding nine month period. As of July
2, 2020, all of such shares have vested.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan,
Franklin and Grossman on December 31, 2018.
Executive
Employment Agreements
On
December 31, 2018, the Company entered into an employment agreement with Jed Kaplan, pursuant to which he shall serve as the Co-Chief
Executive Officer of the Company until March 31, 2019, at which point he automatically became the sole Chief Executive Officer
of the Company. Mr. Kaplan shall not receive a salary or other monetary compensation and in lieu thereof he shall receive an equity
grant of (10,000 pre-reverse split) shares of Common
Stock per month, which shares shall be fully vested upon grant. Mr. Kaplan shall also be eligible to receive a quarterly bonus
in the form of cash or equity shares, and shall be entitled to participate in the Company’s employee benefit plans. The
term of Mr. Kaplan’s employment agreement is for an initial one-year term, which shall automatically renew for successive
one-year terms unless either party provides 60 days’ advance written notice of its intention not to renew the agreement
at the conclusion of the then applicable term. The term of the employment agreement may be terminated by the Company with or without
cause or by Mr. Kaplan with or without good reason, as such terms are defined therein.
On
December 31, 2018, the Company also entered into an employment agreement with Roman Franklin, pursuant to which he shall serve
as the President of the Company. During the term of his employment agreement, Mr. Franklin shall receive (i) a monthly base salary
of $8,333.33 and (ii) an equity grant of (3,000
pre-reverse split) shares of Common Stock per month, which shares shall be fully vested upon grant. Mr. Franklin shall also be
eligible to receive a quarterly bonus in the form of cash or equity shares, and shall be entitled to participate in the Company’s
employee benefit plans. The term of Mr. Franklin’s employment agreement is for an initial one-year term, which shall automatically
renew for successive one-year terms unless either party provides 60 days’ advance written notice of its intention not to
renew the agreement at the conclusion of the then applicable term. The term of the employment agreement may be terminated by the
Company with or without cause or by Mr. Franklin with or without good reason, as such terms are defined therein.
Each
of the employment agreements contain customary non-competition and non-solicitation covenants for a period of one year after the
termination of the executive’s employment.
2020
Omnibus Incentive Plan
The
board and shareholders of the Company approved of the Simplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the “2020
Plan”) on April 22, 2020 and June 23, 2020, respectively. We believe that the 2020 Plan serves as an essential element of
our compensation program and is critical to our ability to attract and retain the highly qualified employees essential for the
execution of our business strategy. We believe the 2020 Plan will (i) attract and retain key personnel, and (ii) provide a means
whereby directors, officers, employees, consultants, and advisors of the Company and its subsidiaries can acquire and maintain
an equity interest in the Company, or be paid incentive compensation, including incentive compensation measure by reference to
the value of the Company’s common stock, thereby strengthening their commitment to the welfare of the Company and its subsidiaries
and aligning their interests with those of the Company’s stockholders. The 2020 Plan provides for various stock-based incentive
awards, including incentive and nonqualified stock options, stock appreciation rights (“SARs”), restricted stock and
restricted stock units (“RSUs”), and other equity-based or cash-based awards.
2020
Plan Highlights
Highlights
of the 2020 Plan are as follows:
|
●
|
The
Compensation Committee, which is comprised solely of independent directors, administers the 2020 Plan.
|
|
|
|
|
●
|
The
total number of shares of common stock authorized for issuance under the 2020 Plan is 1,000,000 shares, or approximately 11.7%
of the common stock outstanding at May 20, 2020.
|
|
|
|
|
●
|
No
non-employee director may be granted awards under the 2020 Plan during any calendar year if such awards, taken together with
any cash fees paid to such non-employee director would exceed a total value of $250,000 (calculated in accordance with the
terms of the 2020 Plan).
|
|
|
|
|
●
|
The
exercise price of options and SARs may not be less than the fair market value of the common stock on the date of grant.
|
|
|
|
|
●
|
In
addition to other vesting requirements, the Compensation Committee may condition the vesting of awards on the achievement
of specific performance targets.
|
Material
Features of the 2020 Plan
Term
The
2020 Plan was effective June 23, 2020. The 2020 Plan will terminate on June 23, 2030, unless the Board terminates it earlier.
Purpose
The
purpose of the 2020 Plan is to provide a means through with the Company and its subsidiaries may attract and retain key personnel,
and to provide a means whereby directors, officer, employees, consultants, and advisors of the Company and its subsidiaries can
acquire and maintain an equity interest in the Company, or be paid incentive compensation, thereby strengthening their commitment
to the welfare of the Company and its subsidiaries and aligning their interests with those of the Company’s stockholders.
Administration
Pursuant
to the terms of the 2020 Plan, a committee of the Board or any properly delegated subcommittee, or, if no such committee or subcommittee
thereof exists, the Board, shall administer the 2020 Plan. The Compensation Committee, which is comprised entirely of independent
directors, administers the 2020 Plan. The Compensation Committee will have the sole and plenary authority to (i) designate participants;
(ii) determine the type or types of awards; (iii) determine the number of shares to be covered by, or with respect to which payments,
rights, or other matters are to be calculated in connection with, awards; (iv) determine the terms and conditions of any award;
(v) determine whether, to what extent, and under what circumstances awards may be settled in, or exercised for, cash, shares of
Company common stock, other securities, other awards, or other property, or canceled, forfeited, or suspended and the method or
methods by which awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent,
and under what circumstances the delivery of cash, shares of Company common stock, other securities, other awards, or other property
and other amounts payable with respect to an award shall be deferred either automatically or at the election of the participant
or of the Compensation Committee; (vii) interpret, administer, reconcile any inconsistency in, correct any defect in, and/or supply
any omission in the 2020 Plan and any instrument or agreement relating to, or award granted under, the 2020 Plan; (viii) establish,
amend, suspend, or waive any rules and regulations and appoint such agents as the Compensation Committee shall deem appropriate
for the proper administration of the 2020 Plan; (ix) adopt sub-plans; and (x) make any other determination and take any other
action that the Compensation Committee deems necessary or desirable for the administration of the 2020 Plan.
The
Compensation Committee may delegate its authority to administer the 2020 Plan as permitted by law, except for award grants to
non-employee directors.
The
Compensation Committee will have the discretion to select particular performance targets in connection with awards under the 2020
Plan. Under the 2020 Plan, performance targets are specific levels of performance of the Company (and/or subsidiaries, divisions
or operational and/or business units, product lines, brands, business segments, administrative departments, or any combination
of the foregoing), which may be determined in accordance with GAAP or on a non-GAAP basis on the specified measures, including,
but not limited to:
|
●
|
debt
ratings;
|
|
●
|
share
price;
|
|
●
|
debt
to capital ratio;
|
|
●
|
total
stockholder return;
|
|
●
|
generation
of cash;
|
|
●
|
acquisition
or disposition of assets;
|
|
●
|
issuance
of new debt;
|
|
●
|
acquisition
or disposition of companies, entities or businesses;
|
|
●
|
establishment
of new credit facilities;
|
|
●
|
creation
of new performance and compensation criteria for key personnel;
|
|
●
|
retirement
of debt;
|
|
●
|
recruiting
and retaining key personnel;
|
|
●
|
return
measures (including, but not limited to, return on assets, return on capital, return on equity);
|
|
●
|
customer
satisfaction;
|
|
●
|
attraction
of new capital;
|
|
●
|
employee
morale;
|
|
●
|
cash
flow;
|
|
●
|
hiring
of strategic personnel;
|
|
●
|
earnings
per share;
|
|
●
|
development
and implementation of Company policies, strategies and initiatives;
|
|
●
|
net
income;
|
|
●
|
creation
of new joint ventures;
|
|
●
|
pre-tax
income;
|
|
●
|
increasing
the Company’s public visibility and corporate reputation;
|
|
●
|
pre-tax
pre-bonus income;
|
|
●
|
development
of corporate brand name;
|
|
●
|
operating
income;
|
|
●
|
overhead
cost reductions; or
|
|
●
|
gross
revenue;
|
|
●
|
any
combination of or variations on the foregoing.
|
|
●
|
net
revenue;
|
|
|
|
|
●
|
net
margin;
|
|
|
|
|
●
|
pre-tax
margin;
|
|
|
|
Eligibility
Employees,
directors and independent contractors (except those performing services in connection with the offer or sale of the Company’s
securities in a capital raising transaction, or promoting or maintaining a market for the Company’s securities) of the Company
or its subsidiaries will be eligible to receive awards under the 2020 Plan.
Maximum
Shares Available
Awards
granted under the 2020 Plan are subject to the following limitations: (i) no more than 1,000,000 shares of common stock (the “Absolute
Share Limit”) will be available for awards under the 2020 Plan; (ii) no more than the number of shares of common stock equal
to the Absolute Share Limit may be issued in the aggregate pursuant to the exercise of incentive stock options granted under the
2020 Plan; and (iii) the maximum number of shares of common stock subject to awards granted during a single calendar year to any
non-employee director, taken together with any cash fees paid to such non-employee director during such calendar year, shall not
exceed a total value of $250,000 (calculating the value of any such awards based on the grant date fair value of such awards for
financial reporting purposes).
When
(i) an option or SAR is granted under the 2020 Plan, the maximum number of shares subject to the option or SAR will be counted
against the Absolute Share Limit as one share for every share subject to such option or SAR, regardless of the actual number of
shares (if any) used to settle such option or SAR upon exercise; and (ii) an award other than an option or SAR is granted under
the 2020 Plan, the maximum number of shares subject to the award will be counted against the Absolute Share Limit as two shares
for every share subject to such award, regardless of the actual number of shares (if any) used to settle such award. The issuance
of shares or the payment of cash upon the exercise of an award or in consideration of the cancellation or termination of an award
shall reduce the total number of shares available under the 2020 Plan, as applicable. If shares are not issued or are withheld
from payment of an award to satisfy tax obligations with respect to the award, such shares will not be added back to the Absolute
Share Limit, but rather will count against the Absolute Share Limit.
To
the extent that an award granted under the 2020 Plan or a prior plan award expires or is canceled, forfeited or terminated, in
whole or in part without issuance to the holder thereof of shares of common stock to which the award or prior plan award related
or cash or other property in lieu thereof, the unissued shares of common stock will again be available for grant under the 2020
Plan; provided that, in any such case, the number of shares again available for grant under the 2020 Plan shall be the number
of shares previously counted against the Absolute Share Limit (or, in the case of prior plan award, the number of shares that
would have been counted against the Absolute Share Limit if such prior plan award had been granted under this 2020 Plan) with
respect to such unissued shares of common stock to which such award or prior plan award related, as determined in accordance with
the terms of the 2020 Plan.
Awards
may, in the sole discretion of the Compensation Committee, be granted under the 2020 Plan in assumption of, or in substitution
for, outstanding awards previously granted by an entity directly or indirectly acquired by the Company or with which the Company
combines (“Substitute Awards”). Substitute Awards will not be counted against the Absolute Share Limit; provided,
that Substitute Awards issued in connection with the assumption of, or in substitution for, outstanding options intended to qualify
as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
“Code”) will be counted against the aggregate number of shares of common stock available for awards of incentive stock
options under the 2020 Plan. Subject to applicable stock exchange requirements, available shares of common stock under a stockholder-approved
plan of an entity directly or indirectly acquired by the Company or with which the Company combines (as appropriately adjusted
to reflect the acquisition or combination transaction) may be used for awards under the 2020 Plan and will not reduce the number
of shares of common stock available for issuance under the 2020 Plan.
Adjustments
In
the event of a merger, consolidation, reorganization, recapitalization, reorganization, stock split or dividend, or similar event
affecting the common stock, the number (including limits on shares of common stock granted) and kind of shares granted under the
2020 Plan, the Compensation Committee will make such proportionate substitution or adjustment, if any, as it deems equitable,
to any or all of the Absolute Share Limit, the number of shares of common stock or other securities of the Company that may be
issued in respect of awards or with respect to which awards may be granted and the terms of any outstanding award.
Restricted
Stock
The
Compensation Committee will be authorized to award restricted stock under the 2020 Plan. Awards of restricted stock will be subject
to the terms and conditions established by the Compensation Committee. Restricted stock is common stock that is subject to such
restrictions as may be determined by the Compensation Committee for a specified period.
RSU
Awards
The
Compensation Committee will be authorized to award RSUs in lieu of or in addition to any restricted stock awards. RSUs will be
subject to the terms and conditions established by the Compensation Committee. Each RSU will have an initial value that is at
least equal to the fair market value of a share of Company common stock on the date of grant. RSUs may be paid at such time as
the Compensation Committee may determine in its discretion, and payments may be made in a lump sum or in installments, in cash,
shares of common stock, or a combination thereof, as determined by the Compensation Committee in its discretion.
Options
The
Compensation Committee will be authorized to grant options to purchase shares of common stock that are either “qualified,”
meaning they are intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)
for incentive stock options, or “nonqualified,” meaning they are not intended to satisfy the requirements of Section
422 of the Code. Options granted under the 2020 Plan will be subject to the terms and conditions established by the Compensation
Committee. Under the terms of the 2020 Plan, the exercise price of the options will not be less than the fair market value of
our common stock at the time of grant. Options granted under the 2020 Plan will be subject to such terms, including the exercise
price and the conditions and timing of exercise, as may be determined by the Compensation Committee and specified in the applicable
award agreement. The maximum term of an option granted under the 2020 Plan will be 10 years from the date of grant (or five years
in the case of a qualified option granted to a 10% stockholder). Payment in respect of the exercise of an option may be made in
cash or by check, by surrender of unrestricted shares (at their fair market value on the date of exercise), or through a “net
exercise,” or the Compensation Committee may, in its discretion and to the extent permitted by law, allow such payment to
be made through a broker-assisted cashless exercise mechanism or by such other method as the Compensation Committee may determine
to be appropriate.
Stock
Appreciation Rights
The
Compensation Committee will be authorized to award SARs under the 2020 Plan. SARs will be subject to the terms and conditions
established by the Compensation Committee and reflected in the award agreement. A SAR is a contractual right that allows a participant
to receive, in the form of either cash, shares or any combination of cash and shares, the appreciation, if any, in the value of
a share over a certain period of time. An option granted under the 2020 Plan may include SARs, and SARs may also be awarded to
a participant independent of the grant of an option. SARs granted in connection with an option shall be subject to terms similar
to the option corresponding to such SARs.
Other
Stock-Based Awards
The
Compensation Committee will be authorized to award other stock-based awards having terms and conditions as determined by the Compensation
Committee. These awards may be granted either alone or in tandem with other awards.
Qualified
Performance-Based Awards
Restricted
stock and RSUs granted to officers and employees of the Company may depend on the degree of achievement of one or more performance
goals relative to a pre-established targeted level or levels using one or more identified performance targets. The applicable
performance period may not be less than three months nor more than 10 years.
Dividends
and Voting Rights
Participants
awarded stock options and SARs will not receive dividends or dividend equivalents or have any voting rights with respect to shares
of common stock underlying these awards prior to the issuance of any such shares. Participants that hold unearned awards subject
to performance vesting conditions (other than or in additional to the passage of time) will not receive dividends or dividend
equivalents or have any voting rights with respect to shares of common stock underlying these awards prior to the issuance of
any such shares; provided, however, that dividends and dividend equivalents may be accumulated in respect of unearned awards
and paid within 30 days after such awards are earned and become payable or distributable.
Transferability
Awards
granted under the 2020 Plan generally will be transferable only by will or the applicable laws of descent and distribution. In
certain limited circumstances, the Compensation Committee may authorize stock options, other than incentive stock options, to
be transferred to family members or trusts controlled by family members of the participant. Restricted stock may not be sold,
transferred, assigned, pledged or otherwise encumbered or disposed of until the applicable restrictions lapse.
Change
in Control
In
the event of a Change in Control (as defined in the 2020 Plan), options become immediately exercisable in full. In addition, in
such event the Compensation Committee may accelerate the termination date of the option to a date no earlier than 30 days after
notice of such acceleration is given to the participant. Upon the giving of any such acceleration notice, the option shall become
immediately exercisable in full.
A
participant’s right to SARs under an SAR agreement immediately vest as to 100% of the total number of shares covered by
the grant (i) upon termination of the grantee’s employment on account of the grantee’s death or permanent disability;
or (ii) upon the occurrence of a Change in Control.
With
respect to restricted stock and RSUs, in the event that the grantee’s status as an employee is terminated following a Change
in Control, then all unvested shares of restricted stock and RSUs will immediately vest.
Clawback
All
awards under the 2020 Plan are subject to reduction, cancellation, forfeiture or recoupment to the extent necessary to comply
with (i) any clawback, forfeiture or other similar policy adopted by the Board or the Compensation Committee and as in effect
from time to time; and (ii) applicable law.
Amendment
and Termination
The
Board may terminate or amend the 2020 Plan or any portion thereof at any time; provided, however, that the Board may not,
without stockholder approval, amend the 2020 Plan if:
|
●
|
Such
approval is necessary to comply with any regulatory requirement applicable to the 2020 Plan;
|
|
●
|
It
would materially increase the number of securities which may be issued under the 2020 Plan (except for increases expressly
provided for in the 2020 Plan; or
|
|
●
|
It
would materially modify the requirements for participation in the 2020 Plan.
|
In
addition, any such amendment that would materially and adversely affect an award holder’s rights with respect to a previously
granted and outstanding award will not to that extent be effective without the consent of the affected holder of such award.
The
Compensation Committee may terminate or amend any award agreement, to the extent consistent with the terms of the 2020 Plan and
any applicable award agreement and so long as such termination or amendment would not materially and adversely affect an award
holder’s rights with respect to a previously granted and outstanding award (unless the affected holder consents thereto);
provided, however that the Compensation Committee may not, without stockholder approval, amend or terminate an award or
award agreement to:
|
●
|
Reduce
the exercise price of any option or the strike price of any SAR,
|
|
●
|
To
cancel any outstanding option or SAR and replace it with a new option or SAR (with a lower exercise price or strike price,
as the case may be) or other award or cash payment that is greater than the intrinsic value (if any) of the canceled option
or SAR; and
|
|
●
|
Take
any other action which is considered a “repricing” for purposes of the stockholder approval rules of any securities
exchange or inter-dealer quotation system on which the securities of the Company are listed or quoted.
|
U.S.
Federal Income Tax Consequences
The
following is a general summary of the material U.S. federal income tax consequences to 2020 Plan participants and the Company
of the grant, vesting and exercise of awards under the 2020 Plan and the disposition of shares acquired pursuant to the exercise
of such awards and is based upon an interpretation of the current federal income tax laws and regulations and may be inapplicable
if such laws and regulations are changed. This summary is not intended to be a complete statement of applicable law or constitute
tax advice, nor does it address foreign, state, local and payroll tax considerations. Moreover, the U.S. federal income tax consequences
to any particular participant may differ from those described herein by reason of, among other things, the particular circumstances
of such participant. To the extent that any awards under the 2020 Plan are subject to Section 409A of the Code (“Section
409A”), the following discussion assumes that such awards will be designed to conform to the requirements of Section 409A
and the regulations promulgated thereunder (or an exception thereto). The 2020 Plan is not subject to the protective provisions
of the Employee Retirement Income Security Act of 1974, as amended, and is not qualified under Section 401(a) of the Code.
Incentive
Stock Options. Options issued under the 2020 Plan and designated as incentive stock options are intended to qualify as such
under Section 422 of the Code. Under the provisions of Section 422 of the Code and the related regulations, holders of incentive
stock options will generally incur no federal income tax liability at the time of grant or upon exercise of those options, and
the Company will not be entitled to a deduction at the time of the grant or exercise of the option. However, the difference between
the value of the common stock received on the exercise date and the exercise price paid will be an “item of tax preference,”
which may give rise to “alternative minimum tax” liability to the holder for the taxable year in which the exercise
occurs. The taxation of gain or loss upon the sale of the common stock acquired upon exercise of an incentive stock option depends,
in part, on whether the holding period of the shares of our common stock acquired through the exercise of an incentive stock option
is at least (i) two years from the date of grant of the option and (ii) one year from the date the option was exercised. If these
holding period requirements are satisfied, any gain or loss realized on a subsequent disposition of the shares will constitute
long-term capital gain or loss, as the case may be. Assuming both holding periods are satisfied, no deduction will be allowed
to us for federal income tax purposes in connection with the grant or exercise of the incentive stock option. If these holding
periods requirements are not met, then, upon such “disqualifying disposition” of the shares, the participant will
generally realize compensation, taxable as ordinary income, at the time of such disposition in an amount equal to the difference
between the fair market value of the share on the date of exercise over the exercise price, limited to the gain on the sale, and
that amount will generally be deductible by us for federal income tax purposes, subject to the possible limitations on deductibility
under Section 162(m)of the Code for compensation paid to certain executives designated thereunder. Finally, if an otherwise qualified
incentive stock option becomes first exercisable in any one year for shares having an aggregate value in excess of $100,000 (based
on the grant date value), the portion of the incentive stock option in respect of those excess shares will be treated as a non-qualified
stock option for federal income tax purposes.
Non-qualified
Stock Options. No income will generally be realized by a participant upon grant of a non-qualified stock option. Upon the
exercise of a non-qualified stock option, the participant will recognize ordinary compensation income in an amount equal to the
excess, if any, of the fair market value of the underlying exercised shares over the option exercise price paid at the time of
exercise. We will be able to deduct this same amount for U.S. federal income tax purposes, but such deduction may be limited under
Section 162(m) of the Code for compensation paid to certain executives designated thereunder. Upon a subsequent disposition of
the shares acquired under a non-qualified stock option, the participant will realize short-term or long-term capital gain (or
loss) depending on the holding period. The capital gain (or loss) will be short-term if the shares are disposed of within one
year after the non-qualified stock option is exercised, and long-term if shares were held more than 12 months as of the sale date.
Restricted
Stock. A participant will normally not be required to recognize income for federal income tax purposes upon the grant of an
award of restricted stock, nor is the Company entitled to any deduction, to the extent that the shares awarded have not vested
(i.e., are no longer subject to a substantial risk of forfeiture). On the date an award of restricted stock is no longer subject
to a substantial risk of forfeiture, the participant will compensation taxable as ordinary income in an amount equal to the difference
between the fair market value of the vested shares on that date and the amount the participant paid for such shares, if any, unless
the participant made an election under Section 83(b) of the Code to be taxed at the time of grant. The participant may, however,
make an election under Section 83(b) of the Code, within 30 days following the grant of the restricted stock award, to be taxed
at the time of the grant of the award based on the difference between the fair market value of the shares on the date of grant
and the amount the participant paid for such shares, if any. If the shares subject to such election are subsequently forfeited,
the participant will not be entitled to any deduction, refund or loss for tax purposes with respect to the forfeited shares. We
will be able to deduct, at the same time as it is recognized by the participant, the amount of taxable compensation to the participant
for U.S. federal income tax purposes, but such deduction may be limited under Section 162(m) of the Code for compensation paid
to certain executives designated thereunder. Upon the sale of the vested shares, the participant will realize short-term or long-term
capital gain or loss depending on the holding period. The holding period generally begins when the restriction period expires.
If the recipient timely made a Section 83(b) election, the holding period commences on the date of the grant.
Deferred
Stock Units and Restricted Stock Units. A participant will not be subject to federal income tax upon the grant of a deferred
stock unit award or a restricted stock unit award, and the Company is not entitled to a deduction at the time of grant. Rather,
upon the delivery of shares or cash pursuant to a deferred stock unit award or a restricted stock unit award, the participant
will generally have compensation taxable at ordinary income rates in an amount equal to the fair market value of the number of
shares (or the amount of cash) actually received with respect to the settlement of the award of such units. We will generally
be able to deduct the amount of the ordinary income realized by the participant for U.S. federal income tax purposes, but the
deduction may be limited under Section 162(m) of the Code for compensation paid to certain executives designated thereunder. If
the participant receives shares upon settlement then, upon disposition of such shares, appreciation or depreciation after the
settlement date is treated as either short-term or long-term capital gain or loss, depending on how long the shares have been
held.
SARs.
SARs are treated very similarly to non-qualified options for tax purposes. No income will normally be realized by a participant
upon grant of a SAR. Upon the exercise of a SAR, the participant will recognize compensation taxable as ordinary income in an
amount equal to either: (i) the cash received upon exercise; or (ii) if shares are received upon the exercise of the SAR, the
fair market value of the shares received in respect of the SAR. We will be able to deduct this same amount for U.S. federal income
tax purposes, but such deduction may be limited under Section 162(m) of the Code for compensation paid to certain executives designated
thereunder.
Performance
Awards. A participant generally will not recognize income upon the grant of a performance award. Upon payment of the performance
award, the participant will recognize ordinary income in an amount equal to the cash received or, if the performance award is
payable in shares, the fair market value of the shares received. When the participant recognizes ordinary income upon payment
of a performance award, the Company generally will be entitled to a tax deduction in the same amount.
Other
Stock-Based Awards. A participant will generally have compensation taxable as ordinary income for federal income tax purposes
in an amount equal to the difference between the fair market value of the shares on the date the award is settled (whether in
shares or cash, or both) over the amount the participant paid for such shares, if any. We will generally be able to deduct, at
the same time as it is recognized by the participant, the amount of taxable compensation to the participant for U.S. federal income
tax purposes, but such deduction may be limited under Section 162(m) for compensation paid to certain executives designated thereunder.
Consequences
of Change of Control. If a change of control of the Company causes awards under the 2020 Plan to accelerate vesting or is
deemed to result in the attainment of performance goals, certain participants could, in some cases, be considered to have received
“excess parachute payments,” which could subject certain participants to a 20% excise tax on the excess parachute
payments and result in a disallowance of the Company’s deductions under Section 280G of the Code.
Section
409A. Section 409A applies to compensation that individuals earn in one year but that is not paid until a future year. This
is referred to as non-qualified deferred compensation. Section 409A, however, does not apply to qualified plans (such as a Section
401(k) plan) and certain welfare benefits. If deferred compensation covered by Section 409A meets the requirements of Section
409A, then Section 409A has no effect on the individual’s taxes. The compensation is taxed in the same manner as it would
be taxed if it were not covered by Section 409A. If a deferred compensation arrangement does not meet the requirements of Section
409A, the compensation is subject to accelerated taxation in the year in which such compensation is no longer subject to a substantial
risk of forfeiture and certain additional taxes, interest and penalties, including a 20% additional income tax. Awards of stock
options, SARs, restricted stock units and performance awards under the 2020 Plan may, in some cases, result in the deferral of
compensation that is subject to the requirements of Section 409A. Awards under the 2020 Plan are intended to comply with Section
409A, the regulations issued thereunder or an exception thereto. Notwithstanding, Section 409A may impose upon a participant certain
taxes or interest charges for which the participant is responsible. Section 409A does not impose any penalties on the Company
and does limit the Company’s deduction with respect to compensation paid to a participant.
Section
162(m). The Company generally may deduct any compensation or ordinary income recognized by the recipient of an award under
the 2020 Plan when recognized, subject to the limits of Section 162(m) of the Code (“Section 162(m)”). Prior to 2018,
Section 162(m) imposed a $1 million limit on the amount a public company may deduct for compensation paid to a Company’s
Chief Executive Officer or any of the Company’s three other most highly compensated executive officers (other than the Chief
Financial Officer) who were employed as of the end of the year. This limitation did not apply to compensation that met Code requirements
for “qualified performance-based compensation.” The performance-based compensation exemption, the last day of the
year determination date, and the exemption of the Chief Financial Officer from Code Section 162(m)’s deduction limit have
all been repealed under the Tax Cuts and Jobs Act of 2017 (“Tax Reform”), effective for taxable years beginning after
December 31, 2017, such that awards paid under the 2020 Plan to our covered executive officers may not be deductible for such
taxable years due to the application of the $1 million deduction limitation. However, under Tax Reform transition relief, compensation
provided under a written binding contract in effect on November 2, 2017 that is not materially modified after that date continues
to be subject to the performance-based compensation exception. As in prior years, while deductibility of executive compensation
for federal income tax purposes is among the factors the Compensation Committee considers when structuring our executive compensation,
it is not the sole or primary factor considered. Our Board and the Compensation Committee retain the flexibility to authorize
compensation that may not be deductible if they believe it is in our best interests.
Tax
Withholding. The Company and its affiliates have the right to deduct or withhold, or require a participant to remit to the
Company and its affiliates, an amount sufficient to satisfy federal, state and local taxes (including employment taxes) required
by law to be withheld with respect to any exercise, lapse of restriction or other taxable event arising with respect to awards
under the 2020 Plan.
The
foregoing description of the 2020 Plan does not purport to be complete and is qualified in its entirety by reference to the full
text of the 2020 Plan, which is incorporated by reference into Exhibit 10.47 of the registration statement of which this prospectus
forms a part and is incorporated herein by reference.
Equity
Compensation Plan Information
The
table below sets forth information as of May 31, 2020.
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants and rights
|
|
|
Weighted-average
exercise price of outstanding options, warrants and rights
|
|
|
Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column
(a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity
compensation plans approved by security holders
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Equity
compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth the number of shares of and percent of the Company’s common stock beneficially owned as of July
2, 2020 (pre-reverse split and post-reverse split), by all directors, our named executive officers, our directors and executive
officers as a group, and persons or groups known by us to own beneficially 5% or more of our common stock, immediately prior to
this Offering, and immediately after the closing of this offering, as adjusted to reflect the assumed sale of units (which includes
shares of our common stock and immediately exercisable warrants to purchase shares of our common stock) in this Offering and the
exercise of the underwriters’ over-allotment option in full to purchase additional shares of common stock and warrants to
purchase shares of common stock, but assumes the warrants forming part of the units and over-allotment option are not exercised.
The
business address of each of the beneficial owners listed below is c/o Simplicity Esports and Gaming Company, 7000 W. Palmetto
Park Rd., Suite 505, Boca Raton, FL 33433.
Name
of Beneficial Owner
|
|
Pre-Reverse
Split Amount and Nature of Beneficial Ownership
|
|
|
Post-Reverse
Split Amount and Nature of Beneficial Ownership
|
|
|
Pre-Closing
Percentage of Class (1)
|
|
|
Post-Closing
Amount and Nature of Beneficial Ownership
|
|
|
Post-Closing
Percentage of Class (1)
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jed
Kaplan (2)
|
|
|
1,201,614
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
Roman
Franklin (3)
|
|
|
297,679
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
Donald
R. Caldwell (4)
|
|
|
97,000
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
Max
Hooper (5)
|
|
|
29,500
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
Frank
Leavy (6)
|
|
|
27,625
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
Edward
Leonard Jaroski (7)
|
|
|
128,500
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
William
H. Herrmann, Jr. (8)
|
|
|
28,500
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
All
directors and officers as a group (8 persons) (9)
|
|
|
2,138,438
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
Principal
Shareholders (more than 5%):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
K2 Principal Fund, L.P. (10)
|
|
|
875,476
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
Polar
Asset Management Partners Inc. (11)
|
|
|
759,919
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
IRIS
Cantor Trust (12)
|
|
|
395,164
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
Timothy
P. Schenden – SEP IRA (13)
|
|
|
515,322
|
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
(1)
|
The
pre-closing percentages in the table have been calculated on the basis of treating as outstanding for a particular person,
all shares of our capital stock outstanding on July 2, 2020. The post-closing percentages in the table have been calculated
on the basis of treating as outstanding for a particular person, all shares of our capital stock outstanding on July 2,
2020, plus the assumed sale of units (which includes shares of our common stock and immediately exercisable
warrants to purchase shares of our common stock) in this Offering and the exercise of the underwriters’ over-allotment
option in full to purchase shares of common stock and warrants to purchase shares of common stock, but assumes
the warrants forming part of the units and over-allotment option are not exercised. On July 2, 2020, there were
( 8,678,100 pre-reverse split) shares of our common stock outstanding. To calculate a stockholder’s percentage
of beneficial ownership, we include in the numerator and denominator the common stock outstanding and all shares of our common
stock issuable to that person in the event of the exercise of outstanding warrants and other derivative securities owned by
that person which are exercisable within 60 days of July 2, 2020. Common stock warrants and derivative securities held
by other stockholders are disregarded in this calculation. Therefore, the denominator used in calculating beneficial ownership
among our stockholders may differ. Unless we have indicated otherwise, each person named in the table has sole voting power
and sole investment power for the shares listed opposite such person’s name.
|
(2)
|
Includes
(80,000 pre-reverse split) shares of our restricted common stock that have vested or will vest within 60 days of July 2, 2020,
and (50,000 pre-reverse
split) shares of Common Stock issuable upon exercise of (50,000
pre-reverse split) warrants with an exercise price of $ ($4.00 pre-reverse
split) which expire on February 24, 2024 that have vested or will vest within 60 days of July 2, 2020.
|
|
|
(3)
|
Includes
(24,000 pre-reverse split) shares of our restricted common stock that have vested or will vest within 60 days of July 2, 2020.
|
|
|
(4)
|
Includes (20,000
pre-reverse split) shares of our Common Stock issuable upon exercise of (20,000 pre-reverse split) warrants with an exercise
price of $ ($11.50 pre-reverse split) which expire on May 22, 2024 that have vested or will
vest within 60 days of July 2, 2020.
|
|
|
(5)
|
Includes (14,500
pre-reverse split) shares of Common Stock owned directly by Merging Traffic, Inc., (10,000
pre-reverse split) shares of our Common Stock issuable upon exercise of (10,000
pre-reverse split) warrants owned directly by Merging Traffic, Inc. with an exercise price of $ ($11.50
pre-reverse split) which expire on May 22, 2024 that have vested or will vest within 60 days of July 2, 2020, and (5,000
pre-reverse split) shares of our Common Stock owned directly by Max Hooper. Max Hooper is Managing Director of Merging Traffic,
Inc.
|
|
|
(6)
|
Includes (7,500
pre-reverse split) shares of our Common Stock issuable upon exercise of (7,500
pre-reverse split) warrants with an exercise price of $ ($11.50 pre-reverse
split) which expire on May 22, 2024 that have vested or will vest within 60 days of July 2, 2020.
|
|
|
(7)
|
Includes
(60,000 pre-reverse split) shares of our Common Stock
issuable upon exercise of (60,000 pre-reverse split)
warrants with an exercise price of $ ($4.00 pre-reverse split) which expire on February
24, 2024 that have vested or will vest within 60 days of July 2, 2020.
|
|
|
(8)
|
Includes
(10,000 pre-reverse split) shares of our Common Stock issuable
upon exercise of (10,000 pre-reverse split) warrants with
an exercise price of $ ($11.50 pre-reverse split) which expire on May 22, 2024 that have
vested or will vest within 60 days of July 2, 2020.
|
|
|
(9)
|
Includes
Jed Kaplan, Roman Franklin, Donald R. Caldwell, Max Hooper, Frank Leavy, Edward Leonard Jaroski, and Steven Grossman, our
Secretary. Steven Grossman beneficially owns (328,020
pre-reverse split) shares of common stock. The
pre-closing and post-closing beneficial ownership percentages of Steven Grossman are ____% and ____%, respectively. I ncludes
(157,500 pre-reverse split)
shares of our Common Stock issuable upon exercise of (157,500 pre-reverse split)
warrants with an exercise price of $ ($4.00 pre-reverse split) which
expire on February 24, 2024 that have vested or will vest within 60 days of July 2, 2020.
|
|
|
(10)
|
K2
GenPar 2017 Inc., an Ontario corporation (“GenPar”), is the general partner of The K2 Principal Fund, L.P., an
Ontario limited partnership (the “Fund”). GenPar is a direct wholly owned subsidiary of Shawn Kimel Investments,
Inc., an Ontario corporation (“SKI”). K2 & Associates Investment Management Inc., an Ontario corporation (“K2
& Associates”), is a direct 66.5% owned subsidiary of SKI, and is the investment manager of the Fund. Shawn Kimel
is the chairman of each of SKI, GenPar and K2 & Associates. The principal office of the stockholder is 2 Bloor St West,
Suite 801, Toronto, Ontario, M4W 3E2. The number of shares of Common Stock beneficially owned by the Fund includes (i) (66,000
pre-reverse split) shares of Common Stock transferred by the Sponsor to the Fund as additional consideration for the Fund
agreeing to potentially sell shares of our Common Stock to the Company pursuant to a stock purchase agreement dated November
5, 2018 by and between the Company and the Fund and (ii) (795,144 pre-reverse split) shares
of our Common Stock issuable upon exercise of (795,144
pre-reverse split) warrants with an exercise price of $ ($11.50 pre-reverse split) which expire on
May 22, 2024 that have vested or will vest within 60 days of July 2, 2020.
|
(11)
|
Polar
Asset Management Partners Inc. (“Polar”) serves as investment advisor to
Polar Multi-Strategy Master Fund (“PMSMF”), Crown Managed Accounts SPC (“CMA”)
and certain managed accounts (together with PMSMF and CMA, the “Polar Vehicles”)
and has sole voting and investment discretion with respect to the securities which are
held by the Polar Vehicles. The principal office of the stockholder is 401 Bay Street,
Suite 1900, PO Box 19, Toronto, Ontario M5H 2Y4, Canada. The number of shares of Common
Stock beneficially owned by Polar includes (i)
(20,203 pre-reverse split) shares of Common Stock held by CMA and (283,116
pre-reverse split) shares of Common Stock held by Polar (which includes (150,000
pre-reverse split) shares of Common Stock transferred by the Sponsor to the Polar as
additional consideration for Polar agreeing to potentially sell shares of our Common
Stock to the Company pursuant to a stock purchase agreement dated November 2, 2018 by
and between the Company and Polar) and (ii) (456,600
pre-reverse split) shares of our Common Stock issuable upon exercise of
(423,712 pre-reverse split) warrants held by CMA with an exercise price of $
($11.50 pre-reverse split) which expire on May 22, 2024 that have vested or will vest
within 60 days of July 2 , 2020 and
(32,888 pre-reverse split) warrants held by Polar with an exercise price of $ ($11.50
pre-reverse split) which expire on May 22, 2024 that have vested or will vest within
60 days of July 2, 2020.
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(12)
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The
principal office of the stockholder is 220 Banyan Road, Palm Beach, Florida 33480-4804.
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(13)
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The
principal office of the stockholder is 6599 NW 33rd Ave., Boca Raton, Florida 33496-3317.
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CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Our
audit committee must review and approve any related person transaction we propose to enter into. Our audit committee charter details
the policies and procedures relating to transactions that may present actual, potential or perceived conflicts of interest and
may raise questions as to whether such transactions are consistent with the best interest of our company and our stockholders.
A summary of such policies and procedures is set forth below.
Any
potential related party transaction that is brought to the audit committee’s attention will be analyzed by the audit committee,
in consultation with outside counsel or members of management, as appropriate, to determine whether the transaction or relationship
does, in fact, constitute a related party transaction. At its meetings, the audit committee will be provided with the details
of each new, existing or proposed related party transaction, including the terms of the transaction, the business purpose of the
transaction and the benefits to us and to the relevant related party.
In
determining whether to approve a related party transaction, the audit committee must consider, among other factors, the following
factors to the extent relevant:
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●
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whether
the terms of the transaction are fair to us and on the same basis as would apply if the transaction did not involve a related
party;
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●
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whether
there are business reasons for us to enter into the transaction;
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●
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whether
the transaction would impair the independence of an outside director; and
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●
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whether
the transaction would present an improper conflict of interest for any director or executive officer.
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Any
member of the audit committee who has an interest in the transaction under discussion must abstain from any voting regarding the
transaction, but may, if so requested by the chairman of the audit committee, participate in some or all of the audit committee’s
discussions of the transaction. Upon completion of its review of the transaction, the audit committee may determine to permit
or to prohibit the transaction.
Working
Capital Loan
The
Sponsor has loaned us $201,707 in the aggregate, to be used for a portion of the expenses of the IPO and working capital purposes.
The loan is non-interest bearing, unsecured and was due at the earlier of December 31, 2017 or the closing of the IPO. As of November
30, 2018, $120,089 of the Sponsor’s loan has been repaid. As of May 31, 2019, the
balance of the Sponsor loan was $93,761, including imputed interest of $8,523. In August of 2019, the sponsor forgave this remaining
balance and the Company recorded it as debt forgiveness income.
Cash
Balance
We
maintain our cash balance at a financial services company that is owned by an officer of our company.
Related
Officers
Jed
Kaplan, our Chief Executive Officer, is the brother-in-law of Steven Grossman, the former President of our subsidiary, Simplicity
Esports, LLC.
Restricted
Stock Awards to Certain Officers
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Jed Kaplan, our Chief Executive Officer and interim Chief Financial
Officer and a member of our board of directors, (120,000
pre-reverse split) shares of our restricted common stock. Such shares vested over the succeeding nine months. Also on March 27,
2019, pursuant to a Restricted Stock Award, we granted Roman Franklin, our President and a member of our board of directors, (36,000
pre-reverse split) shares of our restricted common stock. Such shares vested over the succeeding nine months also.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan,
Franklin and Grossman on December 31, 2018.
Kaplan
Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, the Company’s Chief Executive Officer, interim Chief Financial Officer, member of
the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on the first business
day following the 150-day anniversary of the Issue Date.
Director
Independence
Our
common stock is presently quoted on the OTCQB under the symbol “WINR.” Our warrants issued in connection with our
initial public offering in August 2017 are currently listed on OTCQB under the symbol “WINRW.” Under the rules of
the OTCQB, we are not required to maintain a majority of independent directors on our Board of Directors and we are not required
to establish committees of the Board of Directors consisting of independent directors. However, we intend to apply to list our
common stock and our warrants on The NYSE American (“NYSE American”). In order to list our common stock and our warrants
on the NYSE American, we are required to comply with the NYSE American standards relating to corporate governance, requiring,
among other things, that:
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A
majority of our Board of Directors to consist of “independent directors” as defined by the applicable rules and
regulations of the NYSE American;
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The
compensation of our executive officers to be determined, or recommended to the Board of Directors for determination, by independent
directors constituting a majority of the independent directors of the Board in a vote in which only independent directors
participate or by a Compensation Committee comprised solely of independent directors;
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●
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That
director nominees to be selected, or recommended to the Board of Directors for selection, by independent directors constituting
a majority of the independent directors of the Board in a vote in which only independent directors participate or by a nomination
committee comprised solely of independent directors; and
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Establishment
of an audit committee with at least three independent directors as well as composed entirely of independent directors, where
at least one of the independent directors qualifies as an audit committee financial expert under SEC rules and as a financially
sophisticated audit committee member under the NYSE American rules.
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Under
applicable NYSE American rules, a director will only qualify as an “independent director” if, in the opinion of the
listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of
Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit
committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or
other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company
or any of its subsidiaries. Our Board of Directors has determined in its business judgment that each of Messrs. Caldwell, Leavy,
Jaroski and Herrmann and Dr. Hooper is independent within the meaning of the NYSE American rules for U.S. Companies, the Sarbanes-Oxley
Act and related SEC rules. Therefore, a majority of the members of our Board of Directors is independent.
UNDERWRITING
________________,
is acting as the representative of the underwriters of the
offering. We have entered into an underwriting agreement dated ________________, 2020 with the representative. Subject
to the terms and conditions of the underwriting agreement, we have agreed to sell to each underwriter named below, and each underwriter
named below has severally agreed to purchase from us, at the public offering price per unit less the underwriting discounts set
forth on the cover page of this prospectus, the number of units listed next to its name in the following table:
Name
of Underwriter
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Number
of Units
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________________
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Total
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The
underwriters are committed to purchase all the units offered by the Company, other than those covered by the over-allotment option
to purchase additional shares of common stock and/or warrants described below. The obligations of the underwriters may be terminated
upon the occurrence of certain events specified in the underwriting agreement. Furthermore, the underwriting agreement provides
that the obligations of the underwriters to pay for and accept delivery of the securities offered by us in this prospectus are
subject to various representations and warranties and other customary conditions specified in the underwriting agreement, such
as receipt by the underwriters of officers’ certificates and legal opinions.
We
have agreed to indemnify the underwriters against specified liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect thereof.
The
underwriters are offering the units subject to prior sale, when, as and if issued to and accepted by them, subject to approval
of legal matters by their counsel and other conditions specified in the underwriting agreement. The underwriters reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
We
have granted the underwriters an over-allotment option. This option, which is exercisable for up to 45 days after the date of
this prospectus, permits the underwriters to purchase up to an additional
shares of our common stock and/or up to an additional
warrants at the public offering price per security, less underwriting discounts and commissions, solely to cover over-allotments,
if any. If the underwriters exercise this option in whole or in part, then the underwriters will be severally committed, subject
to the conditions described in the underwriting agreement, to purchase the additional shares of common stock and/or units in proportion
to their respective commitments set forth in the prior table.
Discounts,
Commissions and Reimbursement
The
representative has advised us that the underwriters propose to offer the units to the public at the initial public offering price
per unit set forth on the cover page of this prospectus. The underwriters may offer units to securities dealers at that price
less a concession of not more than $ per unit of which up to $ per
unit may be reallowed to other dealers. After the initial offering to the public, the public offering price and other selling
terms may be changed by the representative.
The
following table summarizes the underwriting discounts and commissions and proceeds, before expenses, to us assuming both no exercise
and full exercise by the underwriters of their over-allotment option:
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Total
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Per
Unit
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Without
Option
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With
Option
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Public
offering price
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$
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$
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$
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Underwriting
discounts and commissions (_____%)
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$
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$
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$
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Non-accountable
expense allowance (____%) (1)
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$
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$
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$
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Proceeds,
before expenses, to us
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$
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$
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$
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(1)
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The
non-accountable expense allowance of ______% is not payable with respect to shares
and/or warrants sold upon exercise
of the underwriters’ over-allotment option.
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We
have paid an expense deposit of $40,000 to (or on behalf of) the representative, which will be applied against the actual out-of-pocket
accountable expenses that will be paid by us to the underwriters in connection with this offering, and will be reimbursed to us
to the extent not incurred.
In
addition, we have also agreed to pay the following expenses of the underwriters relating to the offering: (a) all fees, expenses
and disbursements relating to background checks of our officers and directors in an amount not to exceed $15,000 in the aggregate;
(b) all filing fees and communication expenses associated with the review of this offering by FINRA; (c) all fees, expenses and
disbursements relating to the registration, qualification or exemption of securities offered under the securities laws of foreign
jurisdictions designated by the underwriter, including without limitation, all filing and registration fees, and if the offering
is commenced on either The Nasdaq Global Market, The Nasdaq Global Select Market, the New York Stock Exchange or NYSE American,
we will pay $5,000 for the reasonable fees and expenses of the underwriter’s blue sky counsel at the closing of this offering,
or if the offering is commenced on The Nasdaq Capital Market, the NYSE American or OTCQB, we will pay $5,000 to such counsel upon
the commencement of blue-sky work by such counsel and an additional $10,000 at the closing of this offering; (d) $29,500 for the
underwriters’ use of Ipreo’s book-building, prospectus tracking and compliance software for this offering; (e) $3,000
for the costs associated with commemorative mementos and lucite tombstones, (f) the fees and expenses of the representatives’
legal counsel incurred in connection with this offering in an amount up to $125,000; and (g) up to $10,000 of the representative’s
actual accountable road show expenses for the offering.
We
estimate the expenses of this offering payable by us, not including underwriting discounts and commissions, will be approximately
$ .
Representative’s
Warrants
Upon
the closing of this offering, we have agreed to issue to the representative warrants, or the Representative’s Warrants,
to purchase a number of shares of common stock equal to 5% of the total number of shares of common stock sold as part of the units
sold in this public offering. The Representative’s Warrants will be exercisable at a per share exercise price equal to 125%
of the public offering price per unit sold in this offering. The Representative’s Warrants are exercisable at any time and
from time to time, in whole or in part, during the four and one half year period commencing 180 days from the effective date of
the registration statement related to this offering. The Representative’s Warrants also provide for one demand registration
right of the shares of common stock underlying the Representative’s Warrants, and unlimited “piggyback” registration
rights with respect to the registration of the shares of common stock underlying the Representative’s Warrants and customary
antidilution provisions. The demand registration right provided will not be greater than five years from the effective date of
the registration statement related to this offering in compliance with FINRA Rule 5110(f)(2)(G). The piggyback registration right
provided will not be greater than seven years from the effective date of the registration statement related to this offering in
compliance with FINRA Rule 5110(f)(2)(G).
The
Representative’s Warrants and the shares of common stock underlying the Representative’s Warrants, have been deemed
compensation by the Financial Industry Regulatory Authority, or FINRA, and are therefore subject to a 180-day lock-up pursuant
to Rule 5110(g)(1) of FINRA. The representative, or permitted assignees under such rule, may not sell, transfer, assign, pledge,
or hypothecate the Representative’s Warrants or the securities underlying the Representative’s Warrants, nor will
the representative engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective
economic disposition of the Representative’s Warrants or the underlying shares of common stock for a period of 180 days
from the effective date of the registration statement. Additionally, the Representative’s Warrants may not be sold transferred,
assigned, pledged or hypothecated for a 180-day period following the effective date of the registration statement except to any
underwriter and selected dealer participating in the offering and their bona fide officers or partners. The Representative’s
Warrants will provide for adjustment in the number and price of the Representative’s Warrants and the shares of common stock
underlying such Representative’s Warrants in the event of recapitalization, merger, stock split or other structural transaction,
or a future financing undertaken by us.
Right
of First Refusal
Until
, 2021, twelve (12) months from the closing of this offering, the representative shall have an irrevocable right of first refusal
to act as sole investment banker, sole book-runner and/or sole placement agent, at the representative sole discretion, for each
and every future public and private equity and debt offerings for the Company, or any successor to or any subsidiary of the Company,
including all equity linked financings, on terms customary to the representative. The representative shall have the sole right
to determine whether or not any other broker-dealer shall have the right to participate in any such offering and the economic
terms of any such participation. The representative will not have more than one opportunity to waive or terminate the right of
first refusal in consideration of any payment or fee.
Discretionary
Accounts
The
underwriters do not intend to confirm sales of the securities offered hereby to any accounts over which they have discretionary
authority.
Lock-Up
Agreements
The
Company, each of its directors and officers and 5% or greater holders of the Company’s outstanding shares of common stock
as of the date of this prospectus, have agreed for a period of (i) [six] months after the date of this prospectus in the case
of directors and officers and (ii) [three] months after the date of this prospectus in the case of the Company and the 5% or greater
holders of the Company’s outstanding common stock, without the prior written consent of the representative, not to directly
or indirectly:
●
issue (in the case of us), offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of any shares of common
stock or other capital stock or any securities convertible into or exercisable or exchangeable for our common stock or other capital
stock; or
●
in the case of the Company, file or cause the filing of any registration statement under the Securities Act with respect to any
shares of common stock or other capital stock or any securities convertible into or exercisable or exchangeable for our common
stock or other capital stock; or
●
complete any offering of debt securities of the Company, other than entering into a line of credit, term loan arrangement or other
debt instrument with a traditional bank; or
●
enter into any swap or other agreement, arrangement, hedge or transaction that transfers to another, in whole or in part, directly
or indirectly, any of the economic consequences of ownership of our common stock or other capital stock or any securities convertible
into or exercisable or exchangeable for our common stock or other capital stock, whether any transaction described in any of the
foregoing bullet points is to be settled by delivery of our common stock or other capital stock, other securities, in cash or
otherwise, or publicly announce an intention to do any of the foregoing.
Electronic
Offer, Sale and Distribution of Securities
A
prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters or selling
group members. The representative may agree to allocate a number of securities to underwriters and selling group members for sale
to its online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members
that will make internet distributions on the same basis as other allocations. Other than the prospectus in electronic format,
the information on these websites is not part of, nor incorporated by reference into, this prospectus or the registration statement
of which this prospectus forms a part, has not been approved or endorsed by us, and should not be relied upon by investors.
Stabilization
In
connection with this offering, the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate-covering
transactions, penalty bids and purchases to cover positions created by short sales.
Stabilizing
transactions permit bids to purchase securities so long as the stabilizing bids do not exceed a specified maximum, and are engaged
in for the purpose of preventing or retarding a decline in the market price of the securities while the offering is in progress.
Over-allotment
transactions involve sales by the underwriters of securities in excess of the number of securities the underwriters are obligated
to purchase. This creates a syndicate short position which may be either a covered short position or a naked short position. In
a covered short position, the number of securities over-allotted by the underwriters is not greater than the number of securities
that they may purchase in the over-allotment option. In a naked short position, the number of securities involved is greater than
the number of securities in the over-allotment option. The underwriters may close out any short position by exercising their over-allotment
option and/or purchasing securities in the open market.
Syndicate
covering transactions involve purchases of securities in the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of securities to close out the short position, the underwriters will
consider, among other things, the price of securities available for purchase in the open market as compared with the price at
which they may purchase securities through exercise of the over-allotment option. If the underwriters sell more securities than
could be covered by exercise of the over-allotment option and, therefore, have a naked short position, the position can be closed
out only by buying securities in the open market. A naked short position is more likely to be created if the underwriters are
concerned that after pricing there could be downward pressure on the price of the securities in the open market that could adversely
affect investors who purchase in the offering.
Penalty
bids permit the representative to reclaim a selling concession from a syndicate member when the securities originally sold by
that syndicate member are purchased in stabilizing or syndicate covering transactions to cover syndicate short positions.
These
stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market
price of our securities or preventing or retarding a decline in the market price of our securities. As a result, the price of
our common stock in the open market may be higher than it would otherwise be in the absence of these transactions. Neither we
nor the underwriters make any representation or prediction as to the effect that the transactions described above may have on
the price of our common stock. These transactions may be effected in the over-the-counter market or otherwise and, if commenced,
may be discontinued at any time.
Other
Relationships
Certain
of the underwriters and their affiliates may in the future provide various investment banking, commercial banking and other financial
services for us and our affiliates for which they may in the future receive customary fees.
Offer
restrictions outside the United States
Other
than in the United States, no action has been taken by us or the underwriters that would permit a public offering of the securities
offered by this prospectus in any jurisdiction where action for that purpose is required. The securities offered by this prospectus
may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements in
connection with the offer and sale of any such securities be distributed or published in any jurisdiction, except under circumstances
that will result in compliance with the applicable rules and regulations of that jurisdiction. Persons into whose possession this
prospectus comes are advised to inform themselves about and to observe any restrictions relating to the offering and the distribution
of this prospectus. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities offered
by this prospectus in any jurisdiction in which such an offer or a solicitation is unlawful.
Australia
This
prospectus is not a disclosure document under Chapter 6D of the Australian Corporations Act, has not been lodged with the Australian
Securities and Investments Commission and does not purport to include the information required of a disclosure document under
Chapter 6D of the Australian Corporations Act. Accordingly, (i) the offer of the securities under this prospectus is only made
to persons to whom it is lawful to offer the securities without disclosure under Chapter 6D of the Australian Corporations Act
under one or more exemptions set out in section 708 of the Australian Corporations Act, (ii) this prospectus is made available
in Australia only to those persons as set forth in clause (i) above, and (iii) the offeree must be sent a notice stating in substance
that by accepting this offer, the offeree represents that the offeree is such a person as set forth in clause (i) above, and,
unless permitted under the Australian Corporations Act, agrees not to sell or offer for sale within Australia any of the securities
sold to the offeree within 12 months after its transfer to the offeree under this prospectus.
China
The
information in this document does not constitute a public offer of the securities, whether by way of sale or subscription, in
the People’s Republic of China (excluding, for purposes of this paragraph, Hong Kong Special Administrative Region, Macau
Special Administrative Region and Taiwan). The securities may not be offered or sold directly or indirectly in the PRC to legal
or natural persons other than directly to “qualified domestic institutional investors.”
European
Economic Area—Belgium, Germany, Luxembourg and Netherlands
The
information in this document has been prepared on the basis that all offers of securities will be made pursuant to an exemption
under the Directive 2003/71/EC (“Prospectus Directive”), as implemented in Member States of the European Economic
Area (each, a “Relevant Member State”), from the requirement to produce a prospectus for offers of securities.
An
offer to the public of securities has not been made, and may not be made, in a Relevant Member State except pursuant to one of
the following exemptions under the Prospectus Directive as implemented in that Relevant Member State:
●
to legal entities that are authorized or regulated to operate in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
●
to any legal entity that has two or more of (i) an average of at least 250 employees during its last fiscal year; (ii) a total
balance sheet of more than €43,000,000 (as shown on its last annual unconsolidated or consolidated financial statements)
and (iii) an annual net turnover of more than €50,000,000 (as shown on its last annual unconsolidated or consolidated financial
statements);
●
to fewer than 100 natural or legal persons (other than qualified investors within the meaning of Article 2(1)(e) of the Prospectus
Directive) subject to obtaining the prior consent of the Company or any underwriter for any such offer; or
●
in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities
shall result in a requirement for the publication by the Company of a prospectus pursuant to Article 3 of the Prospectus Directive.
France
This
document is not being distributed in the context of a public offering of financial securities (offre au public de titres financiers)
in France within the meaning of Article L.411-1 of the French Monetary and Financial Code (Code Monétaire et Financier)
and Articles 211-1 et seq. of the General Regulation of the French Autorité des marchés financiers (“AMF”).
The securities have not been offered or sold and will not be offered or sold, directly or indirectly, to the public in France.
This
document and any other offering material relating to the securities have not been, and will not be, submitted to the AMF for approval
in France and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public in France.
Such
offers, sales and distributions have been and shall only be made in France to (i) qualified investors (investisseurs qualifiés)
acting for their own account, as defined in and in accordance with Articles L.411-2-II-2° and D.411-1 to D.411-3, D.744-1,
D.754-1 ;and D.764-1 of the French Monetary and Financial Code and any implementing regulation and/or (ii) a restricted number
of non-qualified investors (cercle restreint d’investisseurs) acting for their own account, as defined in and in
accordance with Articles L.411-2-II-2° and D.411-4, D.744-1, D.754-1; and D.764-1 of the French Monetary and Financial Code
and any implementing regulation.
Pursuant
to Article 211-3 of the General Regulation of the AMF, investors in France are informed that the securities cannot be distributed
(directly or indirectly) to the public by the investors otherwise than in accordance with Articles L.411-1, L.411-2, L.412-1 and
L.621-8 to L.621-8-3 of the French Monetary and Financial Code.
Ireland
The
information in this document does not constitute a prospectus under any Irish laws or regulations and this document has not been
filed with or approved by any Irish regulatory authority as the information has not been prepared in the context of a public offering
of securities in Ireland within the meaning of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 (the “Prospectus
Regulations”). The securities have not been offered or sold, and will not be offered, sold or delivered directly or indirectly
in Ireland by way of a public offering, except to (i) qualified investors as defined in Regulation 2(l) of the Prospectus Regulations
and (ii) fewer than 100 natural or legal persons who are not qualified investors.
Israel
The
securities offered by this prospectus have not been approved or disapproved by the Israeli Securities Authority (the ISA), or
ISA, nor have such securities been registered for sale in Israel. The securities may not be offered or sold, directly or indirectly,
to the public in Israel, absent the publication of a prospectus. The ISA has not issued permits, approvals or licenses in connection
with the offering or publishing the prospectus; nor has it authenticated the details included herein, confirmed their reliability
or completeness, or rendered an opinion as to the quality of the securities being offered. Any resale in Israel, directly or indirectly,
to the public of the securities offered by this prospectus is subject to restrictions on transferability and must be effected
only in compliance with the Israeli securities laws and regulations.
Italy
The
offering of the securities in the Republic of Italy has not been authorized by the Italian Securities and Exchange Commission
(Commissione Nazionale per le Società e la Borsa, “CONSOB” pursuant to the Italian securities legislation and,
accordingly, no offering material relating to the securities may be distributed in Italy and such securities may not be offered
or sold in Italy in a public offer within the meaning of Article 1.1(t) of Legislative Decree No. 58 of 24 February 1998 (“Decree
No. 58”), other than:
●
to Italian qualified investors, as defined in Article 100 of Decree no.58 by reference to Article 34-ter of CONSOB Regulation
no. 11971 of 14 May 1999 (“Regulation no. 1197l”) as amended (“Qualified Investors”); and
●
in other circumstances that are exempt from the rules on public offer pursuant to Article 100 of Decree No. 58 and Article 34-ter
of Regulation No. 11971 as amended.
Any
offer, sale or delivery of the securities or distribution of any offer document relating to the securities in Italy (excluding
placements where a Qualified Investor solicits an offer from the issuer) under the paragraphs above must be:
●
made by investment firms, banks or financial intermediaries permitted to conduct such activities in Italy in accordance with Legislative
Decree No. 385 of 1 September 1993 (as amended), Decree No. 58, CONSOB Regulation No. 16190 of 29 October 2007 and any other applicable
laws; and
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in compliance with all relevant Italian securities, tax and exchange controls and any other applicable laws.
Any
subsequent distribution of the securities in Italy must be made in compliance with the public offer and prospectus requirement
rules provided under Decree No. 58 and the Regulation No. 11971 as amended, unless an exception from those rules applies. Failure
to comply with such rules may result in the sale of such securities being declared null and void and in the liability of the entity
transferring the securities for any damages suffered by the investors.
Japan
The
securities have not been and will not be registered under Article 4, paragraph 1 of the Financial Instruments and Exchange Law
of Japan (Law No. 25 of 1948), as amended (the “FIEL”) pursuant to an exemption from the registration requirements
applicable to a private placement of securities to Qualified Institutional Investors (as defined in and in accordance with Article
2, paragraph 3 of the FIEL and the regulations promulgated thereunder). Accordingly, the securities may not be offered or sold,
directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan other than Qualified Institutional Investors.
Any Qualified Institutional Investor who acquires securities may not resell them to any person in Japan that is not a Qualified
Institutional Investor, and acquisition by any such person of securities is conditional upon the execution of an agreement to
that effect.
Portugal
This
document is not being distributed in the context of a public offer of financial securities (oferta pública de valores
mobiliários) in Portugal, within the meaning of Article 109 of the Portuguese Securities Code (Código dos
Valores Mobiliários). The securities have not been offered or sold and will not be offered or sold, directly or indirectly,
to the public in Portugal. This document and any other offering material relating to the securities have not been, and will not
be, submitted to the Portuguese Securities Market Commission (Comissăo do Mercado de Valores Mobiliários) for
approval in Portugal and, accordingly, may not be distributed or caused to distributed, directly or indirectly, to the public
in Portugal, other than under circumstances that are deemed not to qualify as a public offer under the Portuguese Securities Code.
Such offers, sales and distributions of securities in Portugal are limited to persons who are “qualified investors”
(as defined in the Portuguese Securities Code). Only such investors may receive this document and they may not distribute it or
the information contained in it to any other person.
Sweden
document
has not been, and will not be, registered with or approved by Finansinspektionen (the Swedish Financial Supervisory Authority).
Accordingly, this document may not be made available, nor may the securities be offered for sale in Sweden, other than under circumstances
that are deemed not to require a prospectus under the Swedish Financial Instruments Trading Act (1991:980) (Sw. lag (1991:980)
om handel med finansiella instrument). Any offering of securities in Sweden is limited to persons who are “qualified
investors” (as defined in the Financial Instruments Trading Act). Only such investors may receive this document and they
may not distribute it or the information contained in it to any other person.
Switzerland
The
securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (“SIX”) or
on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the
disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure
standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange
or regulated trading facility in Switzerland. Neither this document nor any other offering material relating to the securities
may be publicly distributed or otherwise made publicly available in Switzerland.
Neither
this document nor any other offering material relating to the securities have been or will be filed with or approved by any Swiss
regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised
by, the Swiss Financial Market Supervisory Authority (FINMA).
This
document is personal to the recipient only and not for general circulation in Switzerland.
United
Arab Emirates
Neither
this document nor the securities have been approved, disapproved or passed on in any way by the Central Bank of the United Arab
Emirates or any other governmental authority in the United Arab Emirates, nor has the Company received authorization or licensing
from the Central Bank of the United Arab Emirates or any other governmental authority in the United Arab Emirates to market or
sell the securities within the United Arab Emirates. This document does not constitute and may not be used for the purpose of
an offer or invitation. No services relating to the securities, including the receipt of applications and/or the allotment or
redemption of such securities, may be rendered within the United Arab Emirates by the Company.
No
offer or invitation to subscribe for securities is valid or permitted in the Dubai International Financial Centre.
United
Kingdom
Neither
the information in this document nor any other document relating to the offer has been delivered for approval to the Financial
Services Authority in the United Kingdom and no prospectus (within the meaning of section 85 of the Financial Services and Markets
Act 2000, as amended (“FSMA”) has been published or is intended to be published in respect of the securities. This
document is issued on a confidential basis to “qualified investors” (within the meaning of section 86(7) of FSMA)
in the United Kingdom, and the securities may not be offered or sold in the United Kingdom by means of this document, any accompanying
letter or any other document, except in circumstances which do not require the publication of a prospectus pursuant to section
86(1) FSMA. This document should not be distributed, published or reproduced, in whole or in part, nor may its contents be disclosed
by recipients to any other person in the United Kingdom.
Any
invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) received in connection with
the issue or sale of the securities has only been communicated or caused to be communicated and will only be communicated or caused
to be communicated in the United Kingdom in circumstances in which section 21(1) of FSMA does not apply to the Company.
In
the United Kingdom, this document is being distributed only to, and is directed at, persons (i) who have professional experience
in matters relating to investments falling within Article 19(5) (investment professionals) of the Financial Services and Markets
Act 2000 (Financial Promotions) Order 2005 (“FPO”), (ii) who fall within the categories of persons referred to in
Article 49(2)(a) to (d) (high net worth companies, unincorporated associations, etc.) of the FPO or (iii) to whom it may otherwise
be lawfully communicated (together “relevant persons”). The investments to which this document relates are available
only to, and any invitation, offer or agreement to purchase will be engaged in only with, relevant persons. Any person who is
not a relevant person should not act or rely on this document or any of its contents.
Canada
The
securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors,
as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are
permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.
Any resale of the securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus
requirements of applicable securities laws. Securities legislation in certain provinces or territories of Canada may provide a
purchaser with remedies for rescission or damages if this prospectus (including any amendment thereto) contains a misrepresentation,
provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities
legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities
legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor. Pursuant
to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply
with the disclosure requirements of NI33-105 regarding underwriter conflicts of interest in connection with this offering.
DESCRIPTION
OF SECURITIES
The
following description of our capital stock is based upon our third amended and restated certificate of incorporation, as amended,
our bylaws and applicable provisions of law, in each case as currently in effect. This discussion does not purport to be complete
and is qualified in its entirety by reference to our third amended and restated certificate of incorporation, as amended, and
our bylaws, copies of which are filed with the SEC as exhibits to the registration statement of which this prospectus is a part.
Authorized
Capital Stock
Assuming
the filing and effectiveness of a Certificate of Amendment to increase the authorized shares of common stock from 20,000,000 to
36,000,000 , our authorized capital stock consists of (i) 36,000,000 shares of common stock, par value $0.0001 per
share (“Common Stock”), and (ii) 1,000,000 shares of preferred stock, par value $0.0001 per share (“Preferred
Stock”). At July 2, 2020, we had
(8,678,100 pre-reverse split) shares of Common Stock issued and outstanding and no Preferred Stock issued and outstanding.
As
of July 2, 2020, there were 99 holders of record of our Common Stock.
Common
Stock
Common
stockholders of record are entitled to one vote for each share held on all matters to be voted on by stockholders. Unless specified
in our third amended and restated certificate of incorporation, as amended, or bylaws, or as required by applicable provisions
of the DGCL or applicable stock exchange rules, the affirmative vote of a majority of our shares of Common Stock that are voted
is required to approve any such matter voted on by our stockholders. Our board of directors is divided into two classes, each
of which will generally serve for a term of two years with only one class of directors being elected in each year. There is no
cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted
for the election of directors can elect all of the directors. Our stockholders are entitled to receive ratable dividends when,
as and if declared by the board of directors out of funds legally available therefor.
Preferred
Stock
Our
third amended and restated certificate of incorporation, as amended, provides that shares of preferred stock may be issued from
time to time in one or more series. Our board of directors will be authorized to fix the voting rights, if any, designations,
powers, preferences, the relative, participating, optional or other special rights and any qualifications, limitations and restrictions
thereof, applicable to the shares of each series. Our board of directors will be able to, without stockholder approval, issue
preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the
common stock and could have anti-takeover effects. The ability of our board of directors to issue preferred stock without stockholder
approval could have the effect of delaying, deferring or preventing a change of control of us or the removal of existing management.
We have no preferred stock outstanding at the date hereof. Although we do not currently intend to issue any shares of preferred
stock, we cannot assure you that we will not do so in the future. No shares of preferred stock are being issued or registered
in this offering.
Warrants
Public
Stockholders’ Warrants
In
August 2017, we issued (5,200,000
pre-reverse split) warrants (“Public Warrants”) forming a part of units which
we originally issued in our initial public offering. Each Public Warrant entitles the registered holder to purchase one
share of our Common Stock at a price of $ ($11.50 pre-reverse split) per share,
subject to adjustment. The Public Warrants may be exercised at any time commencing on December
20, 2018 until November 19, 2023. On September 30, 2019, the
(5,200,000 pre-reverse split) shares of Common Stock issuable upon the exercise of the Public Warrants became registered under
the Securities Act.
Notwithstanding
the above, if our Common Stock is at the time of any exercise of a warrant not listed on a national securities exchange such that
it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities Act, we may, at our option,
require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section
3(a)(9) of the Securities Act and, in the event we so elect, we will not be required to file or maintain in effect a registration
statement or register or qualify the shares under blue sky laws, and in the event we do not so elect, we will use our best efforts
to register or qualify the shares under the blue sky laws of the state of residence in those states in which the warrants were
initially offered by us in this offering.
Once
the warrants become exercisable, we may call the warrants for redemption:
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in
whole and not in part;
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at
a price of $0.01 per warrant;
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upon
not less than 30 days’ prior written notice of redemption (the “30-day redemption period”) to each warrant
holder; and
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if,
and only if, the reported last sale price of the common stock equals or exceeds $
($21.00 pre-reverse split) per share for any 20 trading days within a 30-trading day period ending on the third trading day
prior to the date we send to the notice of redemption to the warrant holders.
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If
and when the warrants become redeemable by us, we may exercise our redemption right even if the issuance of shares of Common Stock
upon exercise of the warrants is not exempt from registration or qualification under applicable state blue sky laws and we are
unable to effect such registration or qualification, subject to our obligation in such case to use our best efforts to register
or qualify the shares of Common Stock under the blue sky laws of the state of residence in those states in which the warrants
were initially offered by us in this offering.
We
have established the last of the redemption criterion discussed above to prevent a redemption call unless there is at the time
of the call a significant premium to the warrant exercise price. If the foregoing conditions are satisfied and we issue a notice
of redemption of the warrants, each warrant holder will be entitled to exercise his, her or its warrant prior to the scheduled
redemption date. However, the price of the common stock may fall below the $ ($21.00
pre-reverse split) redemption trigger price as well as the $ ($11.50
pre-reverse split) warrant exercise price after the redemption notice is issued.
If
we call the warrants for redemption as described above, our management will have the option to require any holder that wishes
to exercise his, her or its warrant to do so on a “cashless basis.” In determining whether to require all holders
to exercise their warrants on a “cashless basis,” our management will consider, among other factors, our cash position,
the number of warrants that are outstanding and the dilutive effect on our stockholders of issuing the maximum number of shares
of Common Stock issuable upon the exercise of our warrants. If our management takes advantage of this option, all holders of warrants
would pay the exercise price by surrendering their warrants for that number of shares of Common Stock equal to the quotient obtained
by dividing (x) the product of the number of shares of Common Stock underlying the warrants, multiplied by the difference between
the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair
market value” shall mean the average reported last sale price of the common stock for the 10 trading days ending on the
third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. If our management takes
advantage of this option, the notice of redemption will contain the information necessary to calculate the number of shares of
Common Stock to be received upon exercise of the warrants, including the “fair market value” in such case. Requiring
a cashless exercise in this manner will reduce the number of shares to be issued and thereby lessen the dilutive effect of a warrant
redemption. We believe this feature is an attractive option to us if we do not need the cash from the exercise of the warrants
after our initial business combination. If we call our warrants for redemption and our management does not take advantage of this
option, the initial purchasers and their permitted transferees would still be entitled to exercise their Private Placement Warrants
contained in the Private Placement Units for cash or on a cashless basis using the same formula described above that other warrant
holders would have been required to use had all warrant holders been required to exercise their warrants on a cashless basis,
as described in more detail below.
A
holder of a warrant may notify us in writing in the event it elects to be subject to a requirement that such holder will not have
the right to exercise such warrant, to the extent that after giving effect to such exercise, such person (together with such person’s
affiliates), to the warrant agent’s actual knowledge, would beneficially own in excess of 4.9% or 9.8% (or such other amount
as a holder may specify) of the shares of Common Stock outstanding immediately after giving effect to such exercise.
If
the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock, or by a split-up
of shares of Common Stock or other similar event, then, on the effective date of such stock dividend, split-up or similar event,
the number of shares of Common Stock issuable on exercise of each warrant will be increased in proportion to such increase in
the outstanding shares of Common Stock. A rights offering to holders of common stock entitling holders to purchase shares of Common
Stock at a price less than the fair market value will be deemed a stock dividend of a number of shares of Common Stock equal to
the product of (i) the number of shares of Common Stock actually sold in such rights offering (or issuable under any other equity
securities sold in such rights offering that are convertible into or exercisable for common stock) multiplied by (ii) one (1)
minus the quotient of (x) the price per share of common stock paid in such rights offering divided by (y) the fair market value.
For these purposes (i) if the rights offering is for securities convertible into or exercisable for common stock, in determining
the price payable for common stock, there will be taken into account any consideration received for such rights, as well as any
additional amount payable upon exercise or conversion and (ii) fair market value means the volume weighted average price of common
stock as reported during the ten (10) trading day period ending on the trading day prior to the first date on which the shares
of Common Stock trade on the applicable exchange or in the applicable market, regular way, without the right to receive such rights.
In
addition, if we, at any time while the warrants are outstanding and unexpired, pay a dividend or make a distribution in cash,
securities or other assets to the holders of common stock on account of such shares of Common Stock (or other shares of our capital
stock into which the warrants are convertible), other than (a) as described above, (b) certain ordinary cash dividends, (c) to
satisfy the redemption rights of the holders of common stock in connection with a proposed initial business combination, (d) as
a result of the repurchase of shares of Common Stock by the company if the proposed initial business combination is presented
to the stockholders of the company for approval, or (e) in connection with the redemption of our Public Shares upon our failure
to complete our initial business combination, then the warrant exercise price will be decreased, effective immediately after the
effective date of such event, by the amount of cash and/or the fair market value of any securities or other assets paid on each
share of common stock in respect of such event. If the number of outstanding shares of our Common Stock is decreased by a consolidation,
combination, reverse stock split or reclassification of shares of Common Stock or other similar event, then, on the effective
date of such consolidation, combination, reverse stock split, reclassification or similar event, the number of shares of Common
Stock issuable on exercise of each warrant will be decreased in proportion to such decrease in outstanding shares of Common Stock.
Whenever
the number of shares of Common Stock purchasable upon the exercise of the warrants is adjusted, as described above, the warrant
exercise price will be adjusted by multiplying the warrant exercise price immediately prior to such adjustment by a fraction (x)
the numerator of which will be the number of shares of Common Stock purchasable upon the exercise of the warrants immediately
prior to such adjustment, and (y) the denominator of which will be the number of shares of Common Stock so purchasable immediately
thereafter.
In
case of any reclassification or reorganization of the outstanding shares of Common Stock (other than those described above or
that solely affects the par value of such shares of Common Stock), or in the case of any merger or consolidation of us with or
into another corporation (other than a consolidation or merger in which we are the continuing corporation and that does not result
in any reclassification or reorganization of our outstanding shares of Common Stock), or in the case of any sale or conveyance
to another corporation or entity of the assets or other property of us as an entirety or substantially as an entirety in connection
with which we are dissolved, the holders of the warrants will thereafter have the right to purchase and receive, upon the basis
and upon the terms and conditions specified in the warrants and in lieu of the shares of our Common Stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented thereby, the kind and amount of shares of stock or other
securities or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon
a dissolution following any such sale or transfer, that the holder of the warrants would have received if such holder had exercised
their warrants immediately prior to such event. However, if such holders were entitled to exercise a right of election as to the
kind or amount of securities, cash or other assets receivable upon such consolidation or merger, then the kind and amount of securities,
cash or other assets for which each warrant will become exercisable will be deemed to be the weighted average of the kind and
amount received per share by such holders in such consolidation or merger that affirmatively make such election, and if a tender,
exchange or redemption offer has been made to and accepted by such holders (other than a tender, exchange or redemption offer
made by the company in connection with redemption rights held by stockholders of the company as provided for in the company’s
amended and restated certificate of incorporation or as a result of the repurchase of shares of Common Stock by the company if
a proposed initial business combination is presented to the stockholders of the company for approval) under circumstances in which,
upon completion of such tender or exchange offer, the maker thereof, together with members of any group (within the meaning of
Rule 13d-5(b)(1) under the Exchange Act) of which such maker is a part, and together with any affiliate or associate of such maker
(within the meaning of Rule 12b-2 under the Exchange Act) and any members of any such group of which any such affiliate or associate
is a part, own beneficially (within the meaning of Rule 13d-3 under the Exchange Act) more than 50% of the outstanding shares
of Common Stock, the holder of a warrant will be entitled to receive the highest amount of cash, securities or other property
to which such holder would actually have been entitled as a stockholder if such warrant holder had exercised the warrant prior
to the expiration of such tender or exchange offer, accepted such offer and all of the common stock held by such holder had been
purchased pursuant to such tender or exchange offer, subject to adjustments (from and after the consummation of such tender or
exchange offer) as nearly equivalent as possible to the adjustments provided for in the warrant agreement. Additionally, if less
than 70% of the consideration receivable by the holders of common stock in such a transaction is payable in the form of common
stock in the successor entity that is listed for trading on a national securities exchange or is quoted in an established over-the-counter
market, or is to be so listed for trading or quoted immediately following such event, and if the registered holder of the warrant
properly exercises the warrant within thirty days following public disclosure of such transaction, the warrant exercise price
will be reduced as specified in the warrant agreement based on the per share consideration minus Black-Scholes Warrant Value (as
defined in the warrant agreement) of the warrant in order to determine and realize the option value component of the warrant.
This formula is to compensate the warrant holder for the loss of the option value portion of the warrant value due to the requirement
that the warrant holder exercise the warrant within 30 days of the event. The Black-Scholes model is an accepted pricing model
for estimating fair market value where no quoted market price for an instrument is available.
The
warrants have been issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company,
as warrant agent, and us. You should review a copy of the warrant agreement, which will be filed as an exhibit to the registration
statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants.
The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity
or correct any defective provision, but requires the approval by the holders of at least 65% of the then outstanding Public Warrants
to make any change that adversely affects the interests of the registered holders of Public Warrants.
The
warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant
agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied
by full payment of the exercise price (or on a cashless basis, if applicable), by certified or official bank check payable to
us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common
stock and any voting rights until they exercise their warrants and receive shares of Common Stock. After the issuance of shares
of Common Stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters
to be voted on by stockholders. Warrants may be exercised only for a whole number of shares of Common Stock. No fractional shares
will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional
interest in a share, we will, upon exercise, round down to the nearest whole number the number of shares of Common Stock to be
issued to the warrant holder.
As
of July 2, 2020, (5,200,000 pre-reverse split) Public Warrants
remain outstanding.
Private
Placement Warrants
In
August 2017, we issued (261,500 pre-reverse split) warrants
(“Private Placement Warrants”) forming a part of units which we originally issued
in a private placement that closed simultaneously with the consummation of our initial public offering. Each Private Placement
Warrant entitles the registered holder to purchase one share of our Common Stock at a price of $ ($11.50
pre-reverse split) per share, subject to adjustment. The Private Placement Warrants may
be exercised at any time commencing on December 20, 2018 until November 19, 2023. On September 30, 2019, the (261,500
pre-reverse split) shares of Common Stock issuable upon the exercise of the Private Placement Warrants became registered under
the Securities Act.
The
Private Placement Warrants (including the common stock issuable upon exercise of the Private Placement Warrants), will not be
redeemable by us so long as they are held by the initial purchasers or their permitted transferees. Otherwise, the Private Placement
Warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in the IPO. If
the Private Placement Warrants are held by holders other than the initial purchasers or their permitted transferees, the Private
Placement Warrants will be redeemable by us and exercisable by the holders on the same basis as the Public Warrants.
If
holders of the Private Placement Warrants elect to exercise them on a cashless basis, they would pay the exercise price by surrendering
his, her or its warrants for that number of shares of Common Stock equal to the quotient obtained by dividing (x) the product
of the number of shares of Common Stock underlying the warrants, multiplied by the difference between the exercise price of the
warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value”
shall mean the average reported last sale price of the common stock for the 10 trading days ending on the third trading day prior
to the date on which the notice of warrant exercise is sent to the warrant agent. The reason that we have agreed that these warrants
will be exercisable on a cashless basis so long as they are held by the initial purchasers and their permitted transferees is
because it is not known at this time whether they will be affiliated with us following a business combination. If they remain
affiliated with us, their ability to sell our securities in the open market will be significantly limited. We expect to have policies
in place that prohibit insiders from selling our securities except during specific periods of time. Even during such periods of
time when insiders will be permitted to sell our securities, an insider cannot trade in our securities if he or she is in possession
of material non-public information. Accordingly, unlike Public Stockholders who could exercise their warrants and sell the shares
of Common Stock received upon such exercise freely in the open market in order to recoup the cost of such exercise, the insiders
could be significantly restricted from selling such securities. As a result, we believe that allowing the holders to exercise
such warrants on a cashless basis is appropriate.
As
of July 2, 2020, (261,500
pre-reverse split) Private Placement Warrants remain outstanding.
2019
Warrants
During
the period from March 1, 2019 through July 1, 2019, the Company issued (987,500
pre-reverse split) warrants (“2019 Warrants”) which formed a part of units privately placed in a units offering. The
warrants expire 5-years from the date of issuance and are exercisable at a purchase price of $ ($4.00
pre-reverse split) per share. On September 30, 2019, the shares of Common Stock issuable upon the exercise of the 2019 Warrants
became registered under the Securities Act.
As
of July 2, 2020, (987,500 pre-reverser split) 2019 Warrants remain
outstanding.
Dividends
We
have not paid any cash dividends on our Common Stock to date and do not intend to pay cash dividends. The payment of cash dividends
in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent
to completion of a business combination. The payment of any cash dividends will be within the discretion of our board of directors
at such time. In addition, our board of directors is not currently contemplating and does not anticipate declaring any stock dividends
in the foreseeable future, except if we increase the size of the offering pursuant to Rule 462(b) under the Securities Act, in
which case we will effect a stock dividend immediately prior to the consummation of the offering in such amount as to maintain
the ownership of our initial stockholders prior to this offering at 20% of our issued and outstanding shares of our Common Stock
upon the consummation of this offering (not including the Private Placement Shares and the shares of Common Stock issuable to
Maxim upon the consummation of this offering). Further, if we incur any indebtedness, our ability to declare dividends may be
limited by restrictive covenants we may agree to in connection therewith.
Description
of Securities in this Offering
Units
Each
unit consists of one share of common stock, par value $0.0001 per share, and one warrant to purchase one share of our common stock,
each as described further below. No units will actually be issued in this offering and the common stock and warrants will be immediately
separable and will be issued separately.
Warrants
In
connection with the purchase of each unit, each investor will receive one share of common stock and one warrant. Accordingly,
upon completion of this offering based on the assumed offering price we expect to have an additional warrants outstanding (if
the warrants reserved for the over-allotment are sold). Each warrant is exercisable for one share of common stock at an exercise
price of % of the price of each unit sold in the offering and is exercisable for a period
of five years from the initial exercise date.
The
number of warrants outstanding, and the exercise price of those securities, will be adjusted proportionately in the event of a
reverse or forward stock split of our common stock, a recapitalization or reclassification of our common stock, payment of dividends
or distributions in common stock to our common stock holders, or similar transactions. In the event that the Company effects a
rights offering to its common stock holders or a pro rata distribution of its assets among its common stock holders, then the
holder of the warrants will have the right to participate in such distribution and rights offering to the extent of their pro
rata share of the Company’s outstanding common stock assuming they owned the number of shares of common stock issuable upon
the exercise of their warrants. In the event of a “Fundamental Transaction” by the Company, such as a merger or consolidation
of it with another company, the sale or other disposition of all or substantially all of the Company’s assets in one or
a series of related transactions, a purchase offer, tender offer or exchange offer, or any reclassification, reorganization or
recapitalization of the Company’s common stock, then the warrant holder will have the right to receive, for each share of
common stock issuable upon the exercise of the warrant, at the option of the holder, the number of shares of common stock of the
successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration payable
as a result of the Fundamental Transaction, that would have been issued or conveyed to the warrant holder had the holder exercised
the warrant immediately preceding the closing of the Fundamental Transaction. In lieu of receiving such common stock and additional
consideration in the Fundamental Transaction, the warrant holder may elect to have the Company or the successor entity purchase
the warrant holder’s warrant for its fair market value.
The
Company will promptly notify the warrant holders in writing of any adjustment to the exercise price or to the number of the outstanding
warrants, declaration of a dividend or other distribution, a special non-recurring cash dividend on or a redemption of the common
stock, the authorization of a rights offering, the approval of the stock holders required for any proposed reclassification of
the common stock, a consolidation or merger by the Company, sale of all or substantially all of the assets of the Company, any
compulsory share exchange, or the authorization of any voluntary or involuntary dissolution, liquidation, or winding up of the
Company.
The
warrants will be issued in registered form, in each case pursuant to a Warrant Agency Agreement between the transfer agent and
registrar, as warrant agent, and us. You should review a copy of the Warrant Agency Agreement, which has been filed as an exhibit
to the registration statement of which this prospectus is a part, for a complete description of the terms and conditions applicable
to the warrants.
Certain
Anti-Takeover Provisions of Delaware Law and our Third Amended and Restated Certificate of Incorporation, as Amended, and Bylaws
We
are subject to the provisions of Section 203 of the DGCL regulating corporate takeovers. This statute prevents certain Delaware
corporations, under certain circumstances, from engaging in a “business combination” with:
|
●
|
a
stockholder who owns 15% or more of our outstanding voting stock (otherwise known as an “interested stockholder”);
|
|
|
|
|
●
|
an
affiliate of an interested stockholder; or
|
|
|
|
|
●
|
an
associate of an interested stockholder, for three years following the date that the stockholder became an interested stockholder.
|
A
“business combination” includes a merger or sale of more than 10% of our assets. However, the above provisions of
Section 203 do not apply if:
|
●
|
our
board of directors approves the transaction that made the stockholder an “interested stockholder,” prior to the
date of the transaction;
|
|
|
|
|
●
|
after
the completion of the transaction that resulted in the stockholder becoming an interested stockholder, that stockholder owned
at least 85% of our voting stock outstanding at the time the transaction commenced, other than statutorily excluded shares
of Common Stock; or
|
|
|
|
|
●
|
on
or subsequent to the date of the transaction, the business combination is approved by our board of directors and authorized
at a meeting of our stockholders, and not by written consent, by an affirmative vote of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder.
|
Our
third amended and restated certificate of incorporation, as amended, provides that our board of directors will be classified into
two classes of directors. As a result, in most circumstances, a person can gain control of our board only by successfully engaging
in a proxy contest at two or more annual meetings.
Our
authorized but unissued common stock and preferred stock are available for future issuances without stockholder approval and could
be utilized for a variety of corporate purposes, including future offerings to raise additional capital, acquisitions and employee
benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult
or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Exclusive
Forum for Certain Lawsuits
Our
third amended and restated certificate of incorporation, as amended, will require, to the fullest extent permitted by law, that
derivative actions brought in our name, actions against directors, officers and employees for breach of fiduciary duty and other
similar actions may be brought only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware, the
stockholder bringing such suit will be deemed to have consented to service of process on such stockholder’s counsel. Although
we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits
to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
Special
Meeting of Stockholders
Our
bylaws provide that special meetings of our stockholders may be called only by a majority vote of our board of directors, by our
Chief Executive Officer or by our Chairman.
Advance
Notice Requirements for Stockholder Proposals and Director Nominations
Our
bylaws provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates
for election as directors at our annual meeting of stockholders must provide timely notice of their intent in writing. To be timely,
a stockholder’s notice will need to be received by the secretary to our principal executive offices not later than the close
of business on the 90th day nor earlier than the opening of business on the 120th day prior to the scheduled date of the annual
meeting of stockholders. If our annual meeting is called for a date that is not within 45 days before or after such anniversary
date, a stockholder’s notice will need to be received not earlier than the opening of business on the 120th day before the
meeting and not later than the later of (x) the close of business on the 90th day before the meeting or (y) the close of business
on the 10th day following the day on which we first publicly announce the date of the annual meeting. Our bylaws also specify
certain requirements as to the form and content of a stockholder’s notice for an annual meeting. Specifically, a stockholder’s
notice must include: (i) a brief description of the business desired to be brought before the annual meeting, the text of the
proposal or business and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such
stockholder and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class or
series and number of shares of our capital stock owned beneficially and of record by such stockholder and by the beneficial owner,
if any, on whose behalf the proposal is made, (iv) a description of all arrangements or understandings between such stockholder
and the beneficial owner, if any, on whose behalf the proposal is made and any other person or persons (including their names)
in connection with the proposal of such business by such stockholder, (v) any material interest of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made in such business and (vi) a representation that such stockholder intends to
appear in person or by proxy at the annual meeting to bring such business before such meeting. These notice requirements will
be deemed satisfied by a stockholder as to any proposal (other than nominations) if the stockholder has notified us of such stockholder’s
intention to present such proposal at an annual meeting in compliance with Rule 14a-8 of the Exchange Act, and such stockholder
has complied with the requirements of such rule for inclusion of such proposal in the proxy statement we prepare to solicit proxies
for such annual meeting. Pursuant to Rule 14a-8 of the Exchange Act, proposals seeking inclusion in our annual proxy statement
must comply with the notice periods contained therein. The foregoing provisions may limit our stockholders’ ability to bring
matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders.
Our
Transfer Agent and Warrant Agent
The
transfer agent for our Common Stock and warrant agent for our Warrants is Continental Stock Transfer & Trust Company. We have
agreed to indemnify Continental Stock Transfer & Trust Company in its roles as transfer agent and warrant agent, its agents
and each of its stockholders, directors, officers and employees against all liabilities, including judgments, costs and reasonable
counsel fees that may arise out of acts performed or omitted for its activities in that capacity, except for any liability due
to any gross negligence, willful misconduct or bad faith of the indemnified person or entity.
LEGAL
MATTERS
The
validity of the securities offered by this prospectus will be passed upon for us by Anthony L.G., PLLC, 625 N. Flagler Drive,
Suite 600, West Palm Beach, Florida 33401. Certain legal matters in connection with this offering will be passed upon for the
underwriters by ____________.
EXPERTS
Our
balance sheets as of May 31, 2019 and May 31, 2018 and the related statement of operations, changes in stockholders’ equity
and cash flows for the year ended May 31, 2019 and 2018 included in this registration statement and prospectus have been audited
by Prager Metis, independent registered public accounting firm, as indicated in their report with respect thereto, and have been
so included in reliance upon the report of such firm given on their authority as experts in accounting and auditing.
DISCLOSURE
OF COMMISSION’S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our
directors and officers are indemnified as provided by Delaware law, our third amended and restated certificate of incorporation,
as amended, and our bylaws. We have agreed to indemnify each of our directors and certain officers against certain liabilities,
including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the provisions described above, or otherwise, we have
been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than our payment
of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless
in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have filed with the SEC the registration statement on Form S-1 under the Securities Act for the securities offered by this prospectus.
This prospectus, which is a part of the registration statement, does not contain all of the information in the registration statement
and the exhibits filed with it, portions of which have been omitted as permitted by SEC rules and regulations. For further information
concerning us and the securities offered by this prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this prospectus as to the content of any contract or other document referred to are not necessarily
complete. In each instance, we refer you to the copy of the contracts and/or other documents filed as exhibits to the registration
statement.
The
registration statement on Form S-1, of which this prospectus forms a part, including exhibits, is available at the SEC’s
website at http://www.sec.gov. You may also read and copy any document we file with, or furnish to, the SEC at its public
reference facilities:
|
Public
Reference Room Office
|
|
100
F Street, N.E.
|
|
Room
1580
|
|
Washington,
D.C. 20549
|
You
may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. Callers in the United States can also call (202) 551-8090 for further information on
the operations of the public reference facilities.
SIMPLICITY
ESPORTS AND GAMING COMPANY
INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets, as of May 31, 2019 and 2018 (Audited)
|
F-3
|
Consolidated
Statement of Operations, Fiscal Years Ended May 31, 2019 and 2018 (Audited)
|
F-4
|
Consolidated
Statement of Stockholder’s Equity, Fiscal Years Ended May 31, 2019 and 2018 (Audited)
|
F-5
|
Consolidated
Statement of Cash Flows, Fiscal Years Ended May 31, 2019 and 2018 (Audited)
|
F-6
|
Notes
to Audited Financial Statements
|
F-7
|
|
|
Consolidated
Balance Sheets, as of February 29, 2020 (Unaudited) and May 31, 2019
|
F-25
|
Consolidated
Statement of Operations for the Three and Six Months Ended February 29, 2020 and February 28, 2019 (Unaudited)
|
F-26
|
Consolidated
Statement of Stockholder’s Equity for the Three and Nine Months Ended February 29, 2020 and February 28, 2019 (Unaudited)
|
F-27
|
Consolidated
Statement of Cash Flows for the Nine Months Ended February 29, 2020 and February 28, 2019 (Unaudited)
|
F-29
|
Notes
to Interim Unaudited Financial Statements
|
F-30
|
Report
of Independent Registered Public Accounting Firm
To
the shareholders and the Board of Directors of Simplicity Esports and Gaming Company and Subsidiary (formerly known as I-AM Capital
Acquisition Company)
Opinion
on the Financial Statements
We
have audited the accompanying balance sheets of Simplicity Esports and Gaming Company and Subsidiary (formerly known as I-AM Capital
Acquisition Company) (the “Company”) as of May 31, 2019 and 2018, the related statements of operations, stockholders’
equity, and cash flows for years ended May 31, 2019 and 2018 and the related notes and schedules (collectively referred to as
the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the
financial position of the Company as of May 31, 2019 and 2018, and the results of its operations and its cash flows for the year
ended May 31, 2019 and 2018 in conformity with accounting principles generally accepted in the United States of America.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
Substantial
Doubt About the Entity’s Ability to Continue as a Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company has negative working capital at May 31, 2019, has incurred recurring losses
and recurring negative cash flow from operating activities which raises substantial doubt about its ability to continue as a going
concern. Management’s plans concerning these matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/
Prager Metis CPAs, LLC
|
|
We
have served as the Company’s auditor since 2017.
Basking
Ridge, New Jersey
August
29, 2019
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
May
31,
|
|
|
May
31,
|
|
|
|
2019
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
1,540,158
|
|
|
$
|
458,063
|
|
Prepaid
expenses
|
|
|
-
|
|
|
|
3,168
|
|
Total
Current Assets
|
|
|
1,540,158
|
|
|
|
461,231
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
4,456,250
|
|
|
|
-
|
|
Intangible
assets, net
|
|
|
1,528,441
|
|
|
|
-
|
|
Property
and equipment
|
|
|
117,231
|
|
|
|
-
|
|
Right
of use asset, operating lease
|
|
|
100,146
|
|
|
|
-
|
|
Security
deposit
|
|
|
12,317
|
|
|
|
-
|
|
Cash
held in trust account
|
|
|
-
|
|
|
|
52,895,652
|
|
Total
Other Assets
|
|
|
6,214,385
|
|
|
|
52,895,652
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
7,754,543
|
|
|
$
|
53,356,883
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Loan
payable- related party
|
|
$
|
93,761
|
|
|
$
|
81,618
|
|
Accrued
expenses
|
|
|
691,940
|
|
|
|
63,579
|
|
Convertible
note payable
|
|
|
1,000,000
|
|
|
|
-
|
|
Operating
lease obligation, current
|
|
|
32,045
|
|
|
|
-
|
|
Deferred
legal fees
|
|
|
-
|
|
|
|
100,000
|
|
Total
Current Liabilities
|
|
|
1,817,746
|
|
|
|
245,197
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligation, net of current portion
|
|
|
68,876
|
|
|
|
-
|
|
Deferred
underwriting fees
|
|
|
-
|
|
|
|
1,820,000
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
1,886,622
|
|
|
|
2,065,197
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
Common
stock subject to possible redemption, $0.0001 par value; -0- and 4,560,757 shares as of May 31, 2019 and May 31, 2018, respectively
at redemption value
|
|
|
-
|
|
|
|
46,291,685
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock - $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock - $0.0001 par value; 20,000,000 shares authorized; 7,003,975 and 2,252,743 shares issued and outstanding as of May 31,
2019 and May 31, 2018, respectively
|
|
|
700
|
|
|
|
225
|
|
Additional
paid-in capital
|
|
|
9,442,027
|
|
|
|
5,009,310
|
|
Accumulated
deficit
|
|
|
(3,574,806
|
)
|
|
|
(9,534
|
)
|
Total
Stockholders’ Equity
|
|
|
5,867,921
|
|
|
|
5,000,001
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
7,754,543
|
|
|
$
|
53,356,883
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For
the Year Ended
|
|
|
|
May
31, 2019
|
|
|
May
31, 2018
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
37,995
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
General
and Administrative expenses
|
|
|
(4,353,189
|
)
|
|
|
(530,564
|
)
|
Loss
from Operations
|
|
|
(4,315,194
|
)
|
|
|
(530,564
|
)
|
|
|
|
|
|
|
|
|
|
Other
Income / (Expense)
|
|
|
|
|
|
|
|
|
Debt
Forgiveness Income
|
|
|
369,206
|
|
|
|
-
|
|
Interest
Expense
|
|
|
(23,268
|
)
|
|
|
-
|
|
Interest
Income
|
|
|
403,984
|
|
|
|
521,702
|
|
Total
Other Income / (Expense)
|
|
|
749,922
|
|
|
|
521,702
|
|
|
|
|
|
|
|
|
|
|
Loss
Before Provision for Income Taxes
|
|
|
(3,565,272
|
)
|
|
|
(8,862
|
)
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(3,565,272
|
)
|
|
$
|
(8,862
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Net Loss per share
|
|
$
|
(1.00
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted Weighted Average Number of common shares outstanding
|
|
|
3,566,488
|
|
|
|
2,050,790
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED MAY 31, 2019 AND 2018
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- May 31, 2017
|
|
|
1,437,500
|
|
|
$
|
144
|
|
|
$
|
24,856
|
|
|
$
|
(672
|
)
|
|
$
|
24,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of 5,200,000 Units, net of underwriting discount and offering expenses
|
|
|
5,200,000
|
|
|
|
520
|
|
|
|
48,160,700
|
|
|
|
-
|
|
|
|
48,161,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale
of 261,500 Private Units
|
|
|
261,500
|
|
|
|
26
|
|
|
|
2,614,974
|
|
|
|
-
|
|
|
|
2,615,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
shares to underwriter
|
|
|
52,000
|
|
|
|
5
|
|
|
|
499,995
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Subject to Redemption
|
|
|
(4,560,757
|
)
|
|
|
(456
|
)
|
|
|
(46,291,229
|
)
|
|
|
-
|
|
|
|
(46,291,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Forfeited by Sponsor
|
|
|
(137,500
|
)
|
|
|
(14
|
)
|
|
|
14
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,862
|
)
|
|
|
(8,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- May 31, 2018
|
|
|
2,252,743
|
|
|
$
|
225
|
|
|
$
|
5,009,310
|
|
|
$
|
(9,534
|
)
|
|
$
|
5,000,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Subject to Redemption not redeemed
|
|
|
112,497
|
|
|
|
11
|
|
|
|
|
|
|
|
-
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock redemption
|
|
|
(451,563
|
)
|
|
|
(45
|
)
|
|
|
(6,635,207
|
)
|
|
|
-
|
|
|
|
(6,635,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for advisory services
|
|
|
208,000
|
|
|
|
21
|
|
|
|
2,124,979
|
|
|
|
-
|
|
|
|
2,125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued to Smaaash Founders
|
|
|
2,000,000
|
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of Smaaash Founders shares
|
|
|
(2,000,000
|
)
|
|
|
(200
|
)
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rights shares
|
|
|
546,150
|
|
|
|
54
|
|
|
|
383,161
|
|
|
|
-
|
|
|
|
383,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares Issued in Acquisition
|
|
|
3,000,000
|
|
|
|
300
|
|
|
|
6,089,700
|
|
|
|
|
|
|
|
6,090,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares issued in Private Placement
|
|
|
962,500
|
|
|
|
96
|
|
|
|
1,924,904
|
|
|
|
|
|
|
|
1,925,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Shares Issued from Employment Agreements
|
|
|
180,000
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of
Common Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
45,000
|
|
|
|
-
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Common
Shares issued for convertible note
|
|
|
193,648
|
|
|
|
20
|
|
|
|
499,980
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,565,272
|
)
|
|
|
(3,565,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- May 31, 2019
|
|
|
7,003,975
|
|
|
|
700
|
|
|
|
9,442,027
|
|
|
|
(3,574,806
|
)
|
|
|
5,867,921
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEAR
ENDED
|
|
May
31, 2019
|
|
|
May
31, 2018
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(3,565,272
|
)
|
|
$
|
(8,862
|
)
|
Adjustments
to reconcile net (loss) income to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Interest
earned on marketable securities held in trust account
|
|
|
(403,984
|
)
|
|
|
(521,702
|
)
|
Depreciation
expense
|
|
|
5,298
|
|
|
|
-
|
|
Amortization
expense
|
|
|
85,677
|
|
|
|
-
|
|
Impairment
of cost method investment
|
|
|
150,000
|
|
|
|
-
|
|
Debt
forgiveness income
|
|
|
(369,206
|
)
|
|
|
-
|
|
Issuance
of shares for services
|
|
|
2,170,110
|
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
3,170
|
|
|
|
-
|
|
Security
deposits
|
|
|
(12,318
|
)
|
|
|
-
|
|
Deferred
legal fees
|
|
|
(100,000
|
)
|
|
|
-
|
|
Accrued
expenses
|
|
|
641,270
|
|
|
|
63,579
|
|
Income
taxes payable
|
|
|
-
|
|
|
|
(3,168
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,395,255
|
)
|
|
|
(470,153
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Investment
of cash in Trust Account
|
|
|
-
|
|
|
|
(52,780,000
|
)
|
Interest
income released from Trust Account
|
|
|
-
|
|
|
|
406,050
|
|
Cash
purchased in acquisition
|
|
|
75,930
|
|
|
|
-
|
|
Lease
liability net of lease asset
|
|
|
775
|
|
|
|
|
|
Investment
at cost
|
|
|
(150,000
|
)
|
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(122,529
|
)
|
|
|
-
|
|
Net
cash provided by (used in) investing activities
|
|
|
(195,824
|
)
|
|
|
(52,373,950
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Gross
proceeds from sale of Units, net of commissions
|
|
|
-
|
|
|
|
50,860,100
|
|
Proceeds
from sale of Private Units
|
|
|
1,925,000
|
|
|
|
2,615,000
|
|
Proceeds
from note payable - related party, net
|
|
|
12,143
|
|
|
|
171,035
|
|
Repayment
of note payable - related party, net
|
|
|
-
|
|
|
|
(120,089
|
)
|
Settlement
of redeemable common stock
|
|
|
(46,291,685
|
)
|
|
|
-
|
|
Cash
held in trust account used to settle common stock redemption obligation
|
|
|
(7,620,432
|
)
|
|
|
-
|
|
Cash
in trust
|
|
|
54,648,148
|
|
|
|
-
|
|
Repayment
of offering costs
|
|
|
-
|
|
|
|
(253,880
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
2,673,174
|
|
|
|
53,272,166
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
1,082,095
|
|
|
|
428,063
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - beginning of period
|
|
|
458,063
|
|
|
|
30,000
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents - end of period
|
|
$
|
1,540,158
|
|
|
$
|
458,063
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Non-Cash Investing and Financing Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
underwriting fees charged to additional paid in capital
|
|
$
|
-
|
|
|
$
|
1,820,000
|
|
Deferred
legal fees charged to additional paid in capital
|
|
$
|
-
|
|
|
$
|
100,000
|
|
Issuance
of common stock issued to underwriters charged to additional paid in capital
|
|
$
|
-
|
|
|
$
|
44,327,271
|
|
Change
in value of common stock subject to possible redemption
|
|
$
|
-
|
|
|
$
|
1,967,441
|
|
Offering
costs charged to additional paid capital
|
|
$
|
-
|
|
|
$
|
25,000
|
|
Common
stock issued for consideration in an acquisition
|
|
$
|
6,090,000
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2019
NOTE
1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity
Esports and Gaming Company F/K/A Smaaash Entertainment Inc. (the “Company,” “we,” or “our”),
was an organized 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.
Through
our wholly subsidiary, Simplicity Esports, LLC, acquired on January 2, 2019 (see Note 4). The Company has begun to implement a
unique approach to ensure the ultimate fan friendly esports experience. Our intention is to have gamers involved at the grassroots
level and feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community
and we plan to use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other
in the industry. Simplicity is an established brand in the Esports industry with an engaged fan base competing in popular games
across different genres, including PUBG, Gears of War, Smite, Guns of Boom, and multiple EA Sports titles. Additionally, the Simplicity
stream team encompasses a unique group of casters, influencers, and personalities all of whom connect to Simplicity’s dedicated
fan base. Simplicity also has begun to open and operate esports gaming centers that will provide the public an opportunity to
experience and enjoy gaming and Esports in a social setting, regardless of skill or experience.
The
Company’s sponsor was I-AM Capital Partners LLC (the “Sponsor”). The Company selected May 31 as its fiscal year
end.
Financing
The
registration statement for the Company’s initial public offering (as described in Note 3) was declared effective by the
United States Securities and Exchange Commission (the “SEC”) on August 16, 2017. The Company financed the Business
Combination with the net proceeds from the sale of $36,000,000 of units in the initial public offering (the “Public
Units”) and the sale of $2,545,000 of units (the “Private Units” and, together with the Public Units, the “Units”)
in the simultaneous private placement (the “Private Placement” as described in Note 3). Upon the closing of the Initial
Public Offering and the Private Placement on August 22, 2017, $50,750,000 was deposited in a trust account with Continental Stock
Transfer and Trust Company acting as trustee (the “Trust Account”) as discussed below.
Contained
in the underwriting agreement for the Initial Public Offering was an over-allotment option allowing the underwriters to purchase
from the Company up to an additional 750,000 Public Units (the “Over-Allotment Units”) and, in addition, the Company
received a commitment from the Sponsor to purchase up to an additional 26,250 Private Units in order to maintain the amount of
cash in the Trust Account equal to $10.15 per Public Unit sold in the Initial Public Offering. On September 13, 2017, the underwriters
partially exercised their option and purchased 200,000 Over-Allotment Units, which were sold at an offering price of $10.00 per
Unit, generating gross proceeds of $2,000,000. Also on September 13, 2017, simultaneously with the sale of the Over-Allotment
Units, the Company consummated the sale of an additional 7,000 Placement Units (the “Over-Allotment Placement Units”),
generating gross proceeds of $70,000.
Trust
Account
The
Trust Account was invested only in U.S. government treasury bills with a maturity of one hundred and eighty (180) days or less
or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act of 1940, which invested only
in direct U.S. government obligations. Funds were to remain in the Trust Account until the earlier of (i) the consummation of
its first Business Combination or (ii) the distribution of the Trust Account as described below. The remaining proceeds outside
the Trust Account were allowed to be used to pay for business, legal and accounting due diligence on prospective acquisitions
and continuing general and administrative expenses.
Initial
Business Combination
The
Company’s management had broad discretion with respect to the specific application of the net proceeds of the Initial Public
Offering.
On
August 21, 2018, the Company deposited into the Trust Account an aggregate of $303,610 (including interest earned on the funds
in the Trust Account available for withdrawal), representing $0.058 per public share. As a result of such payment, the Company
extended the period of time it had to consummate a Business Combination by three months to November 21, 2018.
On
November 20, 2018, the parties consummated the initial Business Combination.
Upon
consummation of the Business Combination, the Company issued 208,000 restricted shares to Chardan Capital Markets in consideration
for advisory services provided. These restricted shares are valued at $10.21 per share totaling $2,125,000 and are on the statement
of operations included in general and administrative expenses.
At
the special meeting of stockholders held on November 9, 2018, holders of 4,448,260 shares of the Company’s common stock
sold in its Initial Public Offering (“Public Shares”) exercised their right to redeem those shares for cash
at a price of $10.2187363 per share, for an aggregate of approximately $45,455,596. Immediately after giving effect to the initial
Business Combination (including as a result of the redemptions described above) the issuance of 2,000,000 shares of common stock
to the Smaaash founders, the issuance of 520,000 shares of common stock upon conversion of the rights at the Closing and the issuance
of 208,000 shares of common stock to Chardan Capital Markets as consideration for services), there were 5,119,390 shares of common
stock and warrants to purchase approximately 5,461,500 shares of common stock issued and outstanding. Upon the Closing, the Company’s
rights ceased to exist, and its common stock and warrants began trading on The Nasdaq Stock Market (“Nasdaq”).
On
the Closing Date, the Company entered into a master franchise agreement (“Master Franchise Agreement”) and a master
license and distribution agreement (“Master Distribution Agreement”) with Smaaash, as of February 28, 2019 this master
franchise agreement and master distribution agreement are no longer in effect.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements are presented in U.S. dollars in conformity with accounting principles generally
accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the SEC.
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.
Basis
of Consolidation
The
consolidated financial statements include the operations of the Company and its wholly owned subsidiary, Simplicity Esports, LLC.
All
significant intercompany accounts and transactions have been eliminated in consolidation.
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 FASB ASC 820, “Fair
Value Measurements and Disclosures,” approximates the carrying amounts represented in the consolidated balance sheet.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
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 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 U.S.
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.
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 two sources, the first
is from the sale of the rights to our players to third parties and second from participation and prize money awarded at gaming
tournaments.
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 it benefits 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 had
intangible assets subject to amortization related to its acquisition of Simplicity Esports, LLC. These costs were included in
intangible assets on our balance sheet and amortized on a straight-line basis when placed into service over the estimated useful
lives of the costs, which is 3 to 5 years.
The
Company periodically reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. 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. Our assessment date was January 31, 2019 and qualitative considerations
indicated no impairment.
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.
Restricted
Cash Held in Escrow and Common Stock Redemption Obligations
This
amount is held in escrow with respect to a 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 transactions and a separate certain stock purchase agreement with the 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 Transactions. These purchase agreements were subsequently amended as of December 20, 2018, pursuant to
which, among other things, the Company distributed to Polar and K2 an aggregate of $5,133,300 out of the escrow. See below “Amendments
to Forward Purchase Agreements and Warrants,” for a more detailed description of the amendment. Under the terms of the purchase
agreements, as amended, the Company will use the funds held in escrow to pay for such shares; however, the Company is only required
to repurchase shares that were not previously sold by Polar and K2. Therefore, if the investors had already sold such shares by
the determination date, then the Company would be able to keep a portion of the remaining funds held in escrow, depending on the
prices at which the shares were sold by the investors. All shares were redeemed during the year, see statement of changes in stockholders’
equity.
Amendments
to Forward Purchase Agreements and Warrants
On
December 20, 2018, the Company, Polar, K2 and the Escrow Agent, entered into an Amendment (the “Amendment”), pursuant
to which, among other things, the stock purchase agreements with Polar and K2 were amended to (x) reduce the purchase price per
share payable by the Company at the closing of the Stock Sales from $11.23 per share to (1) first $6.00 per share up to 20% of
the original number of Shares (as defined in the respective Purchase Agreement), (2) then $5.00 per remaining share up to 20%
of the original number of Shares, (3) then $4.00 per remaining share up to 20% of the original number of Shares, (4) then $3.00
per remaining Share up to 20% of the original number of Shares, and (5) then $2.00 per remaining Share up to 20% of the original
number of Shares, (y) to extend the outside date of the closing of the Stock Sales until January 18, 2019, and (z) to authorize
the issuance of $3,542,700 and $1,590,600 from the Escrow Account to Polar and K2, respectively, as partial payment for the Shares
prior to the final closing of the Stock Sales.
Investments
Investments
in non-consolidated entities are accounted for using the equity method or cost basis depending upon the level of ownership and/or
the Company’s ability to exercise significant influence over the operating and financial policies of the investee. When
the equity method is used, investments are recorded at original cost and adjusted periodically to recognize the Company’s
proportionate share of the investees’ net income or losses after the date of investment. When net losses from an investment
accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional losses
are not provided for. The Company resumes accounting for the investment under the equity method if the entity subsequently reports
net income and the Company’s share of that net income exceeds the share of net losses not recognized during the period the
equity method was suspended. Investments are written down only when there is clear evidence that a decline in value that is other
than temporary has occurred.
Investments
in equity securities that do not have readily determinable fair values and do not qualify for consolidation or the equity method
are carried at cost. Dividends received from those companies are included in other income. Dividends received in excess of the
Company’s proportionate share of accumulated earnings are applied as a reduction of the cost of the investment. Other than
temporary impairments to fair value are charged against current period income. Our investments in privately held entities are
accounted for under the cost method. During the quarter ended February 28, 2019 the Company recognized $150,000 of impairment
expense related to the Smaaash acquisition.
Leases
In
February of 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 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 adopted this update 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 8 for further details
Offering
Costs
The
Company complies with the requirements of ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (SAB) Topic 5A — “Expenses
of Offering”. Offering costs of approximately $3,728,000 consisting principally of underwriter discounts of $3,250,000 (including
approximately $1,800,000 of which payment was deferred until the Company issued the underwriter a secured demand promissory note
in the amount of $1,800,000) and approximately $478,000 of professional, printing, filing, regulatory and other costs have been
charged to additional paid in capital upon completion of the Initial Public Offering.
Common
stock subject to possible redemption
The
Company accounts for its common stock subject to possible redemption in accordance with the guidance in Accounting Standards Codification
(“ASC”) Topic 480 “Distinguishing Liabilities from Equity.” Common stock subject to mandatory redemption
(if any) are classified as liability instruments and are measured at fair value. Conditionally redeemable common stock (including
common stock that feature redemption rights that are either within the control of the holder or subject to redemption upon the
occurrence of uncertain events not solely within the Company’s control) are classified as temporary equity. At all other
times, common stock are classified as stockholders’ equity. The Company’s common stock features certain redemption
rights that are considered to be outside of the Company’s control and subject to occurrence of uncertain future events.
Basic
Income (Loss) per share
The
Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Net income (loss)
per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the
period. Shares of common stock subject to possible redemption at May 31, 2018 have been excluded from the calculation of basic
income (loss) per share and diluted loss per share for the year ended May 31, 2018 since such shares, if redeemed, only participate
in their pro rata share of the Trust Account earnings. The Company has not considered the effect of (1) warrants sold in the Initial
Public Offering and Private Placement to purchase shares of common stock (2) rights sold in the Initial Public Offering and Private
Placement that convert into shares of common stock, and (3) the unit purchase option granted to the underwriter in the calculation
of diluted income (loss) per share, for the year ended May 31, 2018, since the exercise of the warrants and the conversion of
the rights into shares of common stock is contingent upon the occurrence of future events.
At
May 31, 2019 the Company had a convertible note, and warrants that could be converted into approximately, 6,942,000 common shares.
These 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 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 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.
Recent
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 will 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
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 May 31, 2019, 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.
The
Company is attempting to commence operations and generate sufficient 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 to commence operations and generate sufficient
revenue and in its ability 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 and generate
sufficient revenue and its ability to raise additional funds by way of a public or private offering.
The
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.
NOTE
3 — INITIAL PUBLIC OFFERING AND PRIVATE PLACEMENT
Initial
Public Offering
On
August 22, 2017, the Company sold 5,000,000 Public Units at a purchase price of $10.00 per Public Unit in the Initial Public Offering,
generating gross proceeds of $50.0 million. The Company incurred offering costs of approximately $3.7 million, inclusive of approximately
$3.2 million of underwriting fees. The Company paid $1 million of underwriting fees upon the closing of the Initial Public Offering,
issued 50,000 shares of common stock for underwriting fees, and deferred $1.82 million of underwriting fees until the consummation
of the initial Business Combination.
Each
Unit consisted of one share of the Company’s common stock, one right to receive one-tenth of one share of the Company’s
common stock upon consummation of the Company’s initial Business Combination (“Right”), and one redeemable warrant
(“Warrant”). Each Warrant entitles the holder to purchase one share of common stock at an exercise price of $11.50
per share, subject to adjustment. No fractional shares will be issued upon exercise of the Warrants. The Warrants became exercisable
30 days after the completion of the initial Business Combination and will expire five years after the completion of the initial
Business Combination or earlier upon redemption or liquidation.
The
Company may redeem the Warrants, in whole and not in part, at a price of $0.01 per Warrant upon 30 days’ notice (“30-day
redemption period”), only in the event that the last sale price of the common stock equals or exceeds $21.00 per share for
any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which notice of redemption
is given, provided there is an effective registration statement with respect to the shares of common stock underlying such Warrants
and a current prospectus relating to those shares of common stock is available throughout the 30-day redemption period. If the
Company calls the Warrants for redemption as described above, the Company’s management will have the option to require all
holders that wish to exercise Warrants to do so on a “cashless basis.” In determining whether to require all holders
to exercise their warrants on a “cashless basis,” management will consider, among other factors, the Company’s
cash position, the number of Warrants that are outstanding and the dilutive effect on the Company’s stockholders of issuing
the maximum number of shares of common stock issuable upon the exercise of the Warrants.
Each
holder of a Right received one-tenth (1/10) of one share of common stock upon consummation of the Business Combination. No fractional
shares were issued upon exchange of the Rights. No additional consideration was paid by a holder of Rights in order to receive
its additional shares upon consummation of the Business Combination as the consideration related thereto has been included in
the Unit purchase price paid for by investors in the Initial Public Offering.
The
Company granted the underwriters a 45-day option to purchase up to 750,000 additional Public Units to cover any over-allotment,
at the initial public offering price less any underwriting discounts and commissions. On September 13, 2017 the underwriters purchased
200,000 additional Public Units for gross proceeds of $2,000,000 less commissions of 110,000, of which $70,000 are deferred.
The
Company issued Maxim Group LLC (“Maxim”), as compensation for the Initial Public Offering, an aggregate of 52,000
shares, including 2,000 shares issued in connection with the partial exercise of the over-allotment option. The Company accounted
for the fair value of these shares as an expense of the Initial Public Offering resulting in a charge directly to stockholders’
equity.
Settlement
Agreement
On
November 20, 2018, the Company entered into a settlement and release agreement (“Settlement Agreement”) with Maxim.
Pursuant to the Settlement Agreement, the Company made a cash payment of $20,000 to Maxim and issued the Note in favor of Maxim
in order to settle the payment obligations of the Company under the underwriting agreement dated August 16, 2017, by and between
the Company and Maxim. The Company also agreed to remove the restrictive legends on an aggregate of 52,000 shares of its common
stock held by Maxim and its affiliate. See “Note Payable” under Note 2 above.
Unit
Purchase Option
At
the time of the closing of the Initial Public Offering, the Company sold to Maxim, for an aggregate of $100, an option (the “UPO”)
to purchase 250,000 Units (which increased to 260,000 units upon the partial exercise of the underwriters’ over-allotment
option) (See Note 5). The Company has accounted for the fair value of the UPO, inclusive of the receipt of the $100 cash payment,
as an expense of the Initial Public Offering resulting in a charge directly to shareholders’ equity. The Company estimates
that the fair value of this UPO is approximately $743,600 (or $2.86 per Unit) using the Black-Scholes option-pricing model. The
fair value of the UPO is estimated as of the date of grant using the following assumptions: (1) expected volatility of 35%, (2)
risk-free interest rate of 1.73% and (3) expected life of five years. The UPO may be exercised for cash or on a “cashless”
basis, at the holder’s option (except in the case of a forced cashless exercise upon the Company’s redemption of the
Warrants, as described above), such that the holder may use the appreciated value of the UPO (the difference between the exercise
prices of the UPO and the underlying Warrants and Rights, and the market price of the Units and underlying shares of common stock)
to exercise the UPO without the payment of any cash. The Company will have no obligation to net cash settle the exercise of the
UPO or the Warrants or Rights underlying the UPO. The holder of the UPO will not be entitled to exercise the UPO or the Warrants
or Rights underlying the UPO unless a registration statement covering the securities underlying the UPO is effective or an exemption
from registration is available. If the holder is unable to exercise the UPO or underlying Warrants or Rights, the UPO, Warrants
or Rights, as applicable, will expire worthless.
The
Company granted the holders of the UPO, demand and “piggy back” registration rights for periods of five and seven
years, respectively, from the effective date of the registration statement relating to the Initial Public Offering, including
securities directly and indirectly issuable upon exercise of the UPO.
Private
Placement
Concurrently
with the closing of the Initial Public Offering, the Sponsor purchased an aggregate of 254,500 Private Units at $10.00 per Private
Unit, generated gross proceeds of $2,545,000 in a Private Placement. The proceeds from the Private Units was added to the proceeds
from the Initial Public Offering held in the Trust Account. The Private Units (including their component securities) were not
transferable, assignable or salable until 30 days after the completion of the initial Business Combination and the warrants included
in the Private Units (the “Private Placement Warrants”) will be non-redeemable so long as they are held by the Sponsor
or their permitted transferees. If the Private Placement Warrants are held by someone other than the Sponsor or their permitted
transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis
as the Warrants included in the Public Units sold in the Initial Public Offering. Otherwise, the Private Placement Warrants and
the Rights underlying the Private Units have terms and provisions that are identical to those of the Warrants and Rights, respectively,
sold as part of the Public Units in the Initial Public Offering and have no net cash settlement provisions.
On
September 13, 2017 the Sponsor purchased 7,000 additional Private Units for gross proceeds of $70,000 upon the partial exercise
of the over-allotment option.
NOTE
4 - PROPERTY, PLANT AND EQUIPMENT
The
following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
|
|
May
31,
2019
|
|
Leasehold
improvements
|
|
|
14,818
|
|
Property
and equipment
|
|
|
107,711
|
|
|
|
|
|
|
Total
cost
|
|
|
122,529
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
(5,298
|
)
|
|
|
|
|
|
Net,
property plant and equipment
|
|
$
|
117,231
|
|
Depreciation
expense for the years ended May 31, 2019 and 2018 was $5,298 and $0, respectively.
NOTE
5 - INTANGIBLE ASSETS
The
following tables set forth the intangible assets, including accumulated amortization as of May 31, 2019:
|
|
May
31, 2019
|
|
|
Remaining
|
|
|
|
|
Accumulated
|
|
|
Net
Carrying
|
|
|
|
Useful
Life
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
Non-Competes
|
|
4.50
years
|
|
$
|
1,023,118
|
|
|
$
|
85,260
|
|
|
$
|
937,858
|
|
Trademarks
|
|
Indefinite
|
|
|
588,000
|
|
|
|
-
|
|
|
|
588,000
|
|
Internet
domain
|
|
2.50
years
|
|
|
3,000
|
|
|
|
417
|
|
|
|
2,583
|
|
|
|
|
|
$
|
1,614,118
|
|
|
$
|
85,677
|
|
|
$
|
1,528,441
|
|
The
following table sets forth the future amortization of the Company’s intangible assets at May 31, 2019:
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
Thereafter
|
|
|
Total
|
|
Non-Competes
|
|
$
|
204,624
|
|
|
$
|
204,624
|
|
|
$
|
204,624
|
|
|
$
|
204,624
|
|
|
$
|
119,362
|
|
|
$
|
-
|
|
|
$
|
937,858
|
|
Internet
domain
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
583
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,583
|
|
Total
|
|
$
|
205,624
|
|
|
$
|
205,624
|
|
|
$
|
205,207
|
|
|
$
|
204,624
|
|
|
$
|
119,362
|
|
|
$
|
-
|
|
|
$
|
940,441
|
|
Amortization
expense for the years ended May 31, 2019 and 2018 was $85,677 and $0, respectively.
NOTE
6 - 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 common stock at the closing of the Acquisition and an additional
aggregate of 700,000 shares of common stock on January 7, 2019 and the remaining 2,000,000 shares in March of 2019.
The
acquisition of Simplicity, in an all-stock deal, creates a pure play esports team and entertainment platform opportunity, which
we believe will increase shareholder value and boost our growth strategy as we endeavor the build out of 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 which was valued at
market at the date of the closing, fair value of approximately $6,090,000.
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
(provisional)
|
|
|
4,455,882
|
|
Total
|
|
$
|
6,090,000
|
|
Revenue
and net loss included in the year ended May 31, 2019 consolidated financial statements attributable to Simplicity Esports, LLC
is approximately $38,000 and $400,000, respectively.
The
following unaudited pro forma information below presents the consolidated results operations data as if the acquisition of Simplicity
Esports, LLC took place on June 1, 2017:
|
|
Year
Ended
May
31, 2019
|
|
|
Year
Ended
May
31, 2018
|
|
|
|
|
|
|
|
|
Total
Revenue
|
|
$
|
53,932
|
|
|
$
|
—
|
|
Net
(Loss)
|
|
$
|
(3,767,067
|
)
|
|
$
|
(210,657
|
)
|
Basic Net
Loss Per Share
|
|
$
|
(1.06
|
)
|
|
$
|
0.00
|
|
NOTE
7 — RELATED PARTY TRANSACTIONS
Founder
Shares
On
May 31, 2017, the Company issued 1,437,500 shares of the Company’s common stock to the Sponsor (the “Founder Shares”)
in exchange for a capital contribution of $25,000. 137,500 of the Founder Shares were forfeited by the Sponsor upon the partial
exercise of the underwriters’ over-allotment option.
The
Founder Shares are identical to the shares of common stock included in the Units and holders of Founder Shares have the same stockholder
rights as public stockholders, except that (i) the Founder Shares and the shares of common stock underlying the Private Units
are subject to certain transfer restrictions, and (ii) the Sponsor has entered into a letter agreement, pursuant to which it has
agreed (A) to waive its redemption rights with respect to the Founder Shares, and the shares of common stock underlying the Private
Units and the Public Units in connection with the completion of a Business Combination and (B) to waive its rights to liquidating
distributions from the Trust Account with respect to the Founder Shares and the shares of common stock underlying the Private
Units if the Company fails to complete a Business Combination within 12 months from the closing of the Initial Public Offering
(or up to 21 months from the closing of the Initial Public Offering if the Company extends the period of time to consummate a
Business Combination).
With
certain limited exceptions, the Founder Shares are not transferable, assignable or salable (except to the Company’s officers
and directors and other persons or entities affiliated with the Sponsor, each of whom will be subject to the same transfer restrictions)
until the earlier of one year after the completion of an initial Business Combination or earlier of (i) subsequent to the Company’s
Business Combination, the last sale price of the common stock equals or exceeds $12.00 per share (as adjusted for stock splits,
stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing
at least 150 days after an initial Business Combination, or (ii) the date following the completion of an Initial Business Combination
on which the Company completes a liquidation, merger, stock exchange or other similar transaction that results in all stockholders
having the right to exchange their shares of common stock for cash, securities or other property.
Private
Units
In
addition, the Sponsor purchased an aggregate of 254,500 Private Units at $10.00 per Private Unit for proceeds of $2,545,000 in
the aggregate in the Private Placement. This purchase took place on a private placement basis simultaneously with the completion
of the Initial Public Offering. This issuance was be made pursuant to the exemption from registration contained in Section 4(a)(2)
of the Securities Act.
The
Sponsor committed to purchase from the Company up to an additional 26,250 Private Units if the underwriters’ over-allotment
option was exercised in full.
On
September 13, 2017, 7,000 additional Private Units were purchased by the Sponsor at $10.00 per Private Unit upon the partial exercise
of the over-allotment option.
Administrative
Service Fee
The
Company agreed, commencing on the effective date of the Initial Public Offering through the earlier of the Company’s consummation
of a Business Combination or its liquidation, to pay the Sponsor a monthly fee of $10,000 for office space, utilities and secretarial
and administrative support. For the three months ended November 30, 2018, the Company has paid $30,080 which is presented as general
and administrative expense on the accompanying statement of operations. In December 2018, this monthly administrative service
fee agreement was terminated.
Loan
The
Sponsor loaned the Company $201,707 in the aggregate, to be used for a portion of the expenses of the 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. As of November 30, 2018, $120,089 of the Sponsor’s loan has been repaid. As of May 31, 2019,
the balance of the Sponsor loan is $93,761.
The
Company maintains its cash balance at a financial services company that is owned by an officer of the Company.
NOTE
8 — COMMITMENTS AND CONTINGENCIES
Nasdaq
Delisting
On
December 10, 2018, the Company received a written notice (the “Notice”) from the Listing Qualifications Division of
The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company has not complied with the requirements of IM-5101-2
of the listing rules of Nasdaq (the “Listing Rules”).
The
Notice stated that after its Business Combination, the Company had not demonstrated that its common stock met Listing Rule 5505(b)(1)
that requires a market value of publicly held shares of at least $15 million. Additionally, the Company has not provided evidence
that its common stock has at least 300 round lot holders as required by Listing Rule 5505(a)(3) and that its warrant has at least
400 round lot holders as required by Listing Rule 5515(a)(4). Finally, the Company does not comply with Listing Rule 5515(a)(2)
which requires that for initial listing of a warrant the underlying security must be listed on Nasdaq.
On
January 7, 2019, the Company received a second written notice from Nasdaq informing it that the Company failed to comply with
Listing Rule 5250(e)(2) which requires companies listed on Nasdaq to timely file notification forms for the Listing of Additional
Shares (the “LAS Notification”).
The
Company was required to submit the LAS Notification 15 days prior to the issuance of the securities, however, the Company filed
the LAS Notification for the issuance of the Series A-1 Note and Series A-2 Note and for the share exchange under our Share Exchange
Agreement after such 15-day periods. Nasdaq notified the Company that each of these matters serves as an additional and separate
basis for delisting the Company’s securities and that the review panel will consider these matters in rendering a determination
regarding the Company’s continued listing on Nasdaq.
Management
of Simplicity Esports and Gamily Company has decided that moving from The Nasdaq Stock Market (“Nasdaq”) to the OTCQB
is more appropriate for the Company at this time, while the Company builds out its planned network of retail esport centers.
On
April 1, 2019, the Company was notified by Nasdaq that it would delist the Company’s common stock and warrants. The Company’s
common stock and warrants were previously suspended from trading on Nasdaq, effective January 25, 2019.
On
April 2, 2019, Nasdaq filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities and
Exchange Act of 1934 on Form 25 with the Securities and Exchange Commission relating to the Company’s common stock and warrants.
As a result, the Company’s common stock and warrants were delisted from Nasdaq effective April 2, 2019.
The
Company’s common stock and warrants currently have been quoted on the OTCQB under the symbols “WINR” and “WINRW,”
respectively.
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.
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 UPO 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 UPO 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 its underwriter 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 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 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, 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, 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 Group
LLC (the “Holder”). Pursuant to the terms of the Exchange Agreement, the Holder agreed to surrender and exchange the
Note. In exchange, the Company issued to the Holder 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”).
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 Simplicity Esports 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 the Holder 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 the Holder’s 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 Simplicity Esports 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 Simplicity Esports Acquisition. The Holder may convert
the Series A-1 Note at any time, in whole or in part, provided that upon receipt of a notice of conversion from the Holder, 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 Simplicity Esports 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 the Holder) 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 the Holder) 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 the Holder.
The
Company is not permitted to convert any portion of the Series A-1 Note if doing so results in the Holder 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 the Holder 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 the Holder until
such time or times, if ever, as its right thereto would not result in the Holder exceeding the beneficial ownership limitation,
at which time or times the Holder 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.
As
of December 31, 2018, upon the closing of the Simplicity Esports Acquisition, the Series A-1 Note automatically converted
into 193,648 shares of the Company’s common stock.
Operating
Lease Right of Use Obligation
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: Operating lease right-of-use assets, Current portion of operating lease liabilities and Operating lease
liabilities, 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 12% and the weighted average remaining lease term is 56 months.
As
of May 31, 2019, operating lease right-of-use assets and liabilities arising from operating leases was $100,146 and $100,921,
respectively. During the year ended May 31, 2019, cash paid for amounts included for the measurement of lease liabilities was
approximately $7,000 and the Company recorded operating lease expense of $10,000.
The
following is a schedule showing the future minimum lease payments under operating leases by years and the present value of the
minimum payments as of May 31, 2019.
2020
|
|
$
|
25,858
|
|
2021
|
|
$
|
29,311
|
|
2022
|
|
$
|
30,484
|
|
2023
|
|
$
|
31,703
|
|
2024
|
|
$
|
24,484
|
|
Total
Operating Lease Obligations
|
|
$
|
141,840
|
|
Less:
Amount representing interest
|
|
$
|
(40,919
|
)
|
Present
Value of minimum lease payments
|
|
$
|
100,921
|
|
NOTE
9 — 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 May 31, 2019, there were 7,003,975 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 May 31, 2019, there
were no shares of preferred stock issued or outstanding.
Private
Placement
Beginning
in February of 2019 and closing in May of 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”).
The
Company sold 962,500 units for gross proceeds of $1,925,000.
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 vest ratably through December 31, 2019. As of May 31, 2019, 75,000 shares have vested, and the Company
recognized $45,000 of stock-based compensation based on the trading price on March 27, 2019 (measurement date) of $0.60 per share.
As of May 31, 2019, unrecognized compensation cost related to these shares is $63,000.
Warrants
For
the year ended May 31, 2018, the Company issued 5,461,500 warrants in conjunction with its Initial Public Offerings. 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 years ended May 31, 2019 and 2018 is as follows:
|
|
Number
of
Shares
|
|
|
Average
Exercise
Price
|
|
|
Expiration
Date
|
Outstanding
– May 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
Granted
– August 2017
|
|
|
5,461,500
|
|
|
|
11.50
|
|
|
November
2023
|
Outstanding
– May 31, 2018
|
|
|
5,461,500
|
|
|
|
11.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
– May 31, 2019
|
|
|
962,500
|
|
|
|
4.00
|
|
|
May
2024
|
Outstanding
– May 31, 2019
|
|
|
6,424.000
|
|
|
$
|
10.38
|
|
|
|
Warrants
exercisable at May 31, 2019
|
|
|
6,424,000
|
|
|
|
|
|
|
|
NOTE
10 - INCOME TAXES
For
the year ended May 31, 2019 and 2018, the income tax provisions for current taxes were $0.
Deferred
income taxes reflect the net tax effects of permanent and temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. The temporary differences that result in deferred
tax assets and liabilities are the results of carry forward tax losses, amortization and impairment expense.
The
components of the net deferred tax assets for the year ended May 31, 2019 and 2018 are as follows:
|
|
Year
ended
May
31, 2019
|
|
|
Year
ended
May
31, 2018
|
|
Net
Operating Loss
|
|
$
|
364,000
|
|
|
$
|
2,000
|
|
Impairment
of cost method investment
|
|
|
38,000
|
|
|
|
-
|
|
Gross
deferred tax asset
|
|
|
402,000
|
|
|
|
-
|
|
Less:
Valuation allowance
|
|
|
(381,000
|
)
|
|
|
(2,000
|
)
|
Net
deferred tax asset
|
|
$
|
21,000
|
|
|
$
|
-
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
(21,000
|
)
|
|
|
-
|
|
Net
deferred assets/liabilities
|
|
|
-
|
|
|
|
-
|
|
In
assessing the realization of the deferred tax assets, management considers whether it is more likely than not that some portion
of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary differences representing net future deductible amounts
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. After consideration of all of the information available, management believes
that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established
a valuation allowance, in an amount equal to gross deferred tax assets less deferred tax liabilities. For the year ended May 31,
2019, the change in the valuation allowance was $379,000.
The
table below summarizes the reconciliation of our income tax provision computed at the federal statutory rate of 21% for the year
ended May 31, 2019 and 28% for the year ended May 31, 2018 and the actual tax provisions for the year ended May 31, 2019 and 2018.
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Expected
provision (benefit) at statutory rate
|
|
|
(21.0
|
)%
|
|
|
(28.0
|
)%
|
State
taxes, net of federal tax benefit
|
|
|
(4.4
|
)%
|
|
|
(0
|
)%
|
Change
in federal rate
|
|
|
-
|
%
|
|
|
7
|
%
|
Permanent
differences-stock based compensation
|
|
|
15.0
|
|
|
|
-
|
|
Increase
in valuation allowance
|
|
|
10.4
|
%
|
|
|
21
|
%
|
Total
provision (benefit) for income taxes
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
At
May 31, 2019 and May 31, 2018 the Company had Federal net operating loss carry forwards of approximately $1,434,000 and $9,500,
respectively. The net operating loss of approximately $1,434,000 can be carried forward indefinitely subject to annual usage limitations.
In accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s NOLs may be subject to an annual
limitation in the event of a change in control as defined under the regulations.
On
December 22, 2017, the Tax Cuts and Jobs Act was signed into legislation. As part of the legislation, the U.S. corporate income
tax rate was reduced to 21%.
The
Company files income tax returns in the U.S. federal jurisdiction in various state and local jurisdictions and is subject to examination
by the various taxing authorities.
NOTE
11 — TRUST ACCOUNT AND FAIR VALUE MEASUREMENTS
The
Trust Account was invested in U.S. government securities, within the meaning set forth in the Investment Company Act, had a maturity
of 180 days or less or in any open-ended investment company that held itself out as a money market fund selected by the Company
meeting the conditions of Rule 2a-7 of the Investment Company Act.
The
Company’s amended and restated certificate of incorporation provided that, other than the withdrawal of interest to pay
income taxes and up to $600,000 of interest to pay working capital expenses if any, none of the funds held in the Trust Account
would be released until the earlier of: (i) the completion of the Business Combination; (ii) the redemption of 100% of the shares
of common stock included in the Public Units sold in the Initial Public Offering if the Company was unable to complete its initial
Business Combination within 12 months (or 21 months if extended) from the closing of the Initial Public Offering (subject to the
requirements of law). The funds were released from the Trust Account on November 20, 2018 upon the Closing of the initial Business
Combination.
The
Company followed the guidance in ASC 820 for its financial assets and liabilities that are re-measured and reported at fair value
at each reporting period, and non-financial assets and liabilities that are re-measured and reported at fair value at least annually.
The
fair value of the Company’s financial assets and liabilities reflects management’s estimate of amounts that the Company
would have received in connection with the sale of the assets or paid in connection with the transfer of the liabilities in an
orderly transaction between market participants at the measurement date. In connection with measuring the fair value of its assets
and liabilities, the Company sought to maximize the use of observable inputs (market data obtained from independent sources) and
to minimize the use of unobservable inputs (internal assumptions about how market participants would price assets and liabilities).
The following fair value hierarchy was used to classify assets and liabilities based on the observable inputs and unobservable
inputs used in order to value the assets and liabilities:
Level
1:
|
Quoted
prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which
transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing
basis.
|
|
|
Level
2:
|
Observable
inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or
liabilities and quoted prices for identical assets or liabilities in markets that are not active.
|
|
|
Level
3:
|
Unobservable
inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.
|
The
following table presents information about the Company’s assets that are measured at fair value on a recurring basis at
November 30, 2018 and May 31, 2018, and indicates the fair value hierarchy of the valuation inputs the Company utilized to determine
such fair value:
Description
|
|
Level
|
|
|
May
31, 2019
|
|
|
May
31, 2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and marketable securities held in Trust Account
|
|
|
1
|
|
|
$
|
-0-
|
|
|
$
|
52,895,652
|
|
NOTE
12 — SUBSEQUENT EVENTS
On
July 29, 2019, Simplicity Esports and Gaming Company entered into a definitive agreement to acquire PLAYlive Nation, Inc.
(“PLAYlive”) for total consideration of 750,000 shares of common stock. The PLAYlive acquisition closed
on July 30, 2019. This transaction will be accounted for by the Company using the acquisition method under business combination
accounting.
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.
Additionally, PLAYlive Gaming Centers serve as community gathering spaces for enthusiasts to play both board and card games
such as Magic: The Gathering, Yu-Gi-Oh, and Pokémon.
In
June of 2019, the Company entered into a 5 year operating lease for its corporate office, rent is approximately $700 per month.
In August of 2019, the Company opened its second gaming center and in connection with this gaming center entered into a 5 year
operating lease in Deland, Florida. Rent is approximately $2,500 per month for the first year and contains customary escalation
clauses.
In
August of 2019, the $93,761 Loan Payable - related party was forgiven by the related party. This will be recorded as debt forgiveness
by the Company.
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
February
29, 2020
|
|
|
May
31, 2019
|
|
|
|
(UNAUDITED)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
235,679
|
|
|
$
|
1,540,158
|
|
Accounts
receivable
|
|
|
95,644
|
|
|
|
-
|
|
Inventory
|
|
|
22,822
|
|
|
|
-
|
|
Prepaid
expenses
|
|
|
10,133
|
|
|
|
-
|
|
Total
Current Assets
|
|
|
364,278
|
|
|
|
1,540,158
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,107,141
|
|
|
|
4,456,250
|
|
Intangible
assets, net
|
|
|
2,246,223
|
|
|
|
1,528,441
|
|
Deferred
brokerage fees
|
|
|
189,682
|
|
|
|
-
|
|
Property
and equipment
|
|
|
252,966
|
|
|
|
117,231
|
|
Right
of use asset, operating lease
|
|
|
210,602
|
|
|
|
100,146
|
|
Security
deposits
|
|
|
14,885
|
|
|
|
12,317
|
|
Due
from related party
|
|
|
12,699
|
|
|
|
-
|
|
Deferred
equity issuance costs
|
|
|
74,198
|
|
|
|
-
|
|
Total
Other Assets
|
|
|
8,108,396
|
|
|
|
6,214,385
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
8,472,674
|
|
|
$
|
7,754,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Loan
payable- related party
|
|
$
|
-
|
|
|
$
|
93,761
|
|
Accounts
payable
|
|
|
69,048
|
|
|
|
-
|
|
Accrued
expenses
|
|
|
548,307
|
|
|
|
691,940
|
|
Convertible
note payable
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Operating
lease obligation, current
|
|
|
56,869
|
|
|
|
32,045
|
|
Common
stock payable
|
|
|
50,000
|
|
|
|
-
|
|
Total
Current Liabilities
|
|
|
1,724,224
|
|
|
|
1,817,746
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligation, net of current portion
|
|
|
153,732
|
|
|
|
68,876
|
|
Deferred
revenues
|
|
|
371,711
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
2,249,667
|
|
|
|
1,886,622
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred
stock - $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock - $0.0001 par value; 20,000,000 shares authorized; 7,858,975 and 7,003,975 shares issued and outstanding as of February
29, 2020 and May 31, 2019, respectively
|
|
|
786
|
|
|
|
700
|
|
Additional
paid-in capital
|
|
|
11,034,952
|
|
|
|
9,442,027
|
|
Accumulated
deficit
|
|
|
(4,825,730
|
)
|
|
|
(3,574,806
|
)
|
Total
Simplicity Esports and Gaming Company Stockholders’ Equity
|
|
|
6,210,008
|
|
|
|
5,867,921
|
|
Non-Controlling
Interest
|
|
|
12,999
|
|
|
|
-
|
|
Total
Equity
|
|
|
6,223,007
|
|
|
|
5,867,921
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
8,472,674
|
|
|
$
|
7,754,543
|
|
The
accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
February
29, 2020
|
|
|
February
28, 2019
|
|
|
February
29, 2020
|
|
|
February
28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
royalties and license fees
|
|
$
|
140,209
|
|
|
$
|
-
|
|
|
$
|
387,221
|
|
|
$
|
-
|
|
Franchise
termination revenue
|
|
|
44,984
|
|
|
|
-
|
|
|
|
44,984
|
|
|
|
-
|
|
Company-owned
stores sales
|
|
|
105,070
|
|
|
|
-
|
|
|
|
154,713
|
|
|
|
-
|
|
Esports
revenue
|
|
|
90,538
|
|
|
|
14,070
|
|
|
|
113,874
|
|
|
|
14,070
|
|
Total
Revenue
|
|
|
380,801
|
|
|
|
14,070
|
|
|
|
700,792
|
|
|
|
14,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Goods Sold
|
|
|
(214,444
|
)
|
|
|
-
|
|
|
|
(348,313
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
166,357
|
|
|
|
14,070
|
|
|
|
352,479
|
|
|
|
14,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and Administrative Expenses
|
|
|
(567,953
|
)
|
|
|
(430,010
|
)
|
|
|
(1,692,341
|
)
|
|
|
(3,811,612
|
)
|
Loss
from Operations
|
|
|
(401,596
|
)
|
|
|
(415,940
|
)
|
|
|
(1,339,862
|
)
|
|
|
(3,797,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
Forgiveness Income
|
|
|
-
|
|
|
|
300,000
|
|
|
|
93,761
|
|
|
|
300,000
|
|
Interest
Expense
|
|
|
(6,675
|
)
|
|
|
-
|
|
|
|
(20,025
|
)
|
|
|
-
|
|
Interest
Income
|
|
|
70
|
|
|
|
164
|
|
|
|
3,031
|
|
|
|
401,582
|
|
Rebate
Income
|
|
|
1,116
|
|
|
|
-
|
|
|
|
1,116
|
|
|
|
-
|
|
Total
Other Income (Expense)
|
|
|
(5,489
|
)
|
|
|
300,164
|
|
|
|
77,883
|
|
|
|
701,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Before Provision for Income Taxes
|
|
|
(407,085
|
)
|
|
|
(115,776
|
)
|
|
|
(1,261,979
|
)
|
|
|
(3,095,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to noncontrolling interest
|
|
|
2,883
|
|
|
|
-
|
|
|
|
11,055
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss available to common shareholders
|
|
$
|
(404,202
|
)
|
|
$
|
(115,776
|
)
|
|
$
|
(1,250,924
|
)
|
|
$
|
(3,095,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average number of common shares outstanding
|
|
|
7,858,975
|
|
|
|
5,790,781
|
|
|
|
7,653,355
|
|
|
|
3,575,419
|
|
The
accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE NINE MONTHS ENDED FEBRUARY 28, 2019
(UNAUDITED)
|
|
Common
Stock
|
|
|
Common
Stock
Issuable
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- May 31, 2018
|
|
|
2,252,743
|
|
|
$
|
225
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
5,009,310
|
|
|
$
|
(9,534
|
)
|
|
$
|
5,000,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for advisory services
|
|
|
423
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,311
|
|
|
|
-
|
|
|
|
4,311
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,311
|
)
|
|
|
(4,311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- August 31, 2018
|
|
|
2,253,166
|
|
|
|
225
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,013,621
|
|
|
|
(13,845
|
)
|
|
|
5,000,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock subject to redemption
|
|
|
112,497
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
Common
stock redemption
|
|
|
(451,563
|
)
|
|
|
(45
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,635,207
|
)
|
|
|
-
|
|
|
|
(6,635,252
|
)
|
Shares
issued for advisory services
|
|
|
207,577
|
|
|
|
21
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,120,668
|
|
|
|
-
|
|
|
|
2,120,689
|
|
Common
stock issued to Smaaash Founders
|
|
|
2,000,000
|
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
Rights
shares
|
|
|
546,150
|
|
|
|
54
|
|
|
|
-
|
|
|
|
-
|
|
|
|
383,161
|
|
|
|
-
|
|
|
|
383,215
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,975,873
|
)
|
|
|
(2,975,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
-November 30, 2018
|
|
|
4,667,827
|
|
|
|
466
|
|
|
|
-
|
|
|
|
-
|
|
|
|
882,243
|
|
|
|
(2,989,718
|
)
|
|
|
(2,107,009
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares issued in acquisition
|
|
|
1,000,000
|
|
|
|
100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,089,900
|
|
|
|
-
|
|
|
|
6,090,000
|
|
Common
shares issuable from acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
Common
shares issuable from employment agreements
|
|
|
-
|
|
|
|
-
|
|
|
|
30,000
|
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
Common
shares issued for convertible note
|
|
|
193,648
|
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
499,980
|
|
|
|
-
|
|
|
|
500,000
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(115,776
|
)
|
|
|
(115,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- February 28, 2019
|
|
|
5,861,475
|
|
|
$
|
586
|
|
|
$
|
2,030,000
|
|
|
$
|
203
|
|
|
$
|
7,472,123
|
|
|
$
|
(3,105,494
|
)
|
|
$
|
4,367,418
|
|
The
accompanying unaudited notes are an integral part of these unaudited consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE NINE MONTHS ENDED FEBRUARY 29, 2020
(UNAUDITED)
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Non-Controlling
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Interest
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- May 31, 2019
|
|
|
7,003,975
|
|
|
$
|
700
|
|
|
$
|
9,442,027
|
|
|
$
|
-
|
|
|
$
|
(3,574,806
|
)
|
|
$
|
5,867,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for PLAYlive Nation acquisition
|
|
|
750,000
|
|
|
|
75
|
|
|
|
1,439,925
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,440,000
|
|
Vesting of
Common Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
27,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,000
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(283,393
|
)
|
|
|
(283,393
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- August 31, 2019
|
|
|
7,753,975
|
|
|
|
775
|
|
|
|
10,908,952
|
|
|
|
-
|
|
|
|
(3,858,199
|
)
|
|
|
7,051,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
to officer for shares issued for past services
|
|
|
-
|
|
|
|
-
|
|
|
|
90,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,000
|
|
Shares
issued for vesting of employment agreement awards
|
|
|
105,000
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
Vesting
of Common Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
36,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,000
|
|
Non-controlling
interest of original investment in subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,054
|
|
|
|
-
|
|
|
|
24,054
|
|
Net
loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,172
|
)
|
|
|
-
|
|
|
|
(8,172
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(563,329
|
)
|
|
|
(563,329
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- November 30, 2019
|
|
|
7,858,975
|
|
|
|
786
|
|
|
|
11,034,952
|
|
|
|
15,882
|
|
|
|
(4,421,528
|
)
|
|
|
6,630,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,883
|
)
|
|
|
-
|
|
|
|
(2,883
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(404,202
|
)
|
|
|
(404,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- February 29, 2020
|
|
|
7,858,975
|
|
|
$
|
786
|
|
|
$
|
11,034,952
|
|
|
$
|
12,999
|
|
|
$
|
(4,825,730
|
)
|
|
$
|
6,223,007
|
|
The
accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
For
the Nine Months Ended
|
|
|
|
February
29, 2020
|
|
|
February
28, 2019
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,261,979
|
)
|
|
$
|
(3,095,960
|
)
|
Adjustments
to reconcile net (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Interest
earned on marketable securities held in trust account
|
|
|
-
|
|
|
|
(401,582
|
)
|
Impairment
of cost method investment
|
|
|
-
|
|
|
|
150,000
|
|
Depreciation
expense
|
|
|
37,240
|
|
|
|
-
|
|
Amortization
expense
|
|
|
154,218
|
|
|
|
-
|
|
Debt
forgiveness income
|
|
|
(93,761
|
)
|
|
|
(300,000
|
)
|
Issuance
of shares for services
|
|
|
153,011
|
|
|
|
2,169,143
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(95,645
|
)
|
|
|
-
|
|
Inventory
|
|
|
(22,822
|
)
|
|
|
-
|
|
Prepaid
expenses
|
|
|
(10,133
|
)
|
|
|
3,114
|
|
Security
deposits
|
|
|
(2,568
|
)
|
|
|
-
|
|
Deferred
brokerage fees
|
|
|
(59,051
|
)
|
|
|
-
|
|
Deferred
revenues
|
|
|
126,080
|
|
|
|
-
|
|
Accounts
payable
|
|
|
65,474
|
|
|
|
-
|
|
Deferred
legal fees
|
|
|
-
|
|
|
|
(100,000
|
)
|
Accrued
expenses
|
|
|
(143,632
|
)
|
|
|
751,438
|
|
Due
from related party
|
|
|
(12,699
|
)
|
|
|
-
|
|
Net
cash used in operating activities
|
|
|
(1,166,267
|
)
|
|
|
(823,847
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Cash
purchased in acquisition
|
|
|
26,180
|
|
|
|
75,930
|
|
Investment
at cost
|
|
|
-
|
|
|
|
(150,000
|
)
|
Lease
liability net of lease asset
|
|
|
(776
|
)
|
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(163,472
|
)
|
|
|
(51,350
|
)
|
Net
cash used in investing activities
|
|
|
(138,068
|
)
|
|
|
(125,420
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from note payable - related party, net
|
|
|
-
|
|
|
|
3,620
|
|
Settlement
of redeemable common stock
|
|
|
|
|
|
|
(46,291,685
|
)
|
Cash
held in trust account used to settle common stock redemption obligation
|
|
|
-
|
|
|
|
(7,620,432
|
)
|
Cash
in trust
|
|
|
-
|
|
|
|
54,645,364
|
|
Deferred
financing costs
|
|
|
(74,198
|
)
|
|
|
-
|
|
Non-controlling
interest of original investment in subsidiaries
|
|
|
24,054
|
|
|
|
-
|
|
Private
placement funds received
|
|
|
50,000
|
|
|
|
1,000,003
|
|
Net
cash used in financing activities
|
|
|
(144
|
)
|
|
|
1,736,870
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
(1,304,479
|
)
|
|
|
787,603
|
|
|
|
|
|
|
|
|
|
|
Cash
- beginning of period
|
|
|
1,540,158
|
|
|
|
458,063
|
|
|
|
|
|
|
|
|
|
|
Cash
- end of period
|
|
$
|
235,679
|
|
|
$
|
1,245,666
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY
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.
__________
Units
SIMPLICITY
ESPORTS AND GAMING COMPANY
________________________
__________,
2020
Through
and including , 2020 (the 25th day after the date of this offering),
all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver
a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with
respect to an unsold allotment or subscription.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13.
|
Other
Expenses of Issuance and Distribution
|
The
following table sets forth all expenses to be paid by the registrant, other than estimated underwriting discounts and commissions,
in connection with our public offering. All amounts shown are estimates except for the SEC registration fee, the NYSE American
listing fee and the FINRA filing fee:
Type
|
|
Amount
|
|
SEC
Registration Fee
|
|
$
|
3,107
|
|
FINRA
Filing Fee
|
|
|
5,000
|
|
NYSE
American Listing Fee
|
|
|
50,000
|
|
Legal
Fees and Expenses
|
|
|
225,000
|
|
Accounting
Fees and Expenses
|
|
|
15,000
|
|
Transfer
agent and registrar’s fees and expenses
|
|
|
10,000
|
|
Printing
and engraving expenses
|
|
|
6,000
|
|
Non-Accountable
Expense Allowance
|
|
|
90,000
|
|
Miscellaneous
expense
|
|
|
70,000
|
|
Total
Expenses
|
|
$
|
474,107
|
|
Item
14.
|
Indemnification
of Directors and Officers.
|
Our
third amended and restated certificate of incorporation will provide that all of our directors, officers, employees and agents
shall be entitled to be indemnified by us to the fullest extent permitted by Section 145 of the Delaware General Corporation Law
(the “DGCL”). Section 145 of the DGCL concerning indemnification of officers, directors, employees and agents is set
forth below.
Section
145. Indemnification of officers, directors, employees and agents; insurance.
|
(a)
|
A
corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or
proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe
the person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person’s
conduct was unlawful.
|
|
|
|
|
(b)
|
A
corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of
the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem
proper.
|
|
(c)
|
To
the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim,
issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and
reasonably incurred by such person in connection therewith.
|
|
|
|
|
(d)
|
Any
indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that indemnification of the present or former director, officer,
employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer
at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding,
even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel
in a written opinion, or (4) by the stockholders.
|
|
|
|
|
(e)
|
Expenses
(including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses
(including attorneys’ fees) incurred by former officers and directors or other employees and agents may be so paid upon
such terms and conditions, if any, as the corporation deems appropriate.
|
|
|
|
|
(f)
|
The
indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall
not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s
official capacity and as to action in another capacity while holding such office. A right to indemnification or to advancement
of expenses arising under a provision of the certificate of incorporation or a bylaw shall not be eliminated or impaired by
an amendment to such provision after the occurrence of the act or omission that is the subject of the civil, criminal, administrative
or investigative action, suit or proceeding for which indemnification or advancement of expenses is sought, unless the provision
in effect at the time of such act or omission explicitly authorizes such elimination or impairment after such action or omission
has occurred.
|
|
|
|
|
(g)
|
A
corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether
or not the corporation would have the power to indemnify such person against such liability under this section.
|
|
|
|
|
(h)
|
For
purposes of this section, references to “the corporation” shall include, in addition to the resulting corporation,
any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its
separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or
agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to
the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate
existence had continued.
|
|
(i)
|
For
purposes of this section, references to “other enterprises” shall include employee benefit plans; references to
“fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references
to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent
of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect
to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such
person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this
section.
|
|
|
|
|
(j)
|
The
indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a person.
|
|
|
|
|
(k)
|
The
Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses
or indemnification brought under this section or under any by law, agreement, vote of stockholders or disinterested directors,
or otherwise. The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including
attorneys’ fees).
|
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification
is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in
a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection
with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final adjudication of such issue.
In
accordance with Section 102(b)(7) of the DGCL, our third amended and restated certificate of incorporation, as amended, will provide
that no director shall be personally liable to us or any of our stockholders for monetary damages resulting from breaches of their
fiduciary duty as directors, except to the extent such limitation on or exemption from liability is not permitted under the DGCL.
The effect of this provision of our third amended and restated certificate of incorporation, as amended, is to eliminate our rights
and those of our stockholders (through stockholders’ derivative suits on our behalf) to recover monetary damages against
a director for breach of the fiduciary duty of care as a director, including breaches resulting from negligent or grossly negligent
behavior, except, as restricted by Section 102(b)(7) of the DGCL. However, this provision does not limit or eliminate our rights
or the rights of any stockholder to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of
a director’s duty of care.
If
the DGCL is amended to authorize corporate action further eliminating or limiting the liability of directors, then, in accordance
with our third amended and restated certificate of incorporation, as amended, the liability of our directors to us or our stockholders
will be eliminated or limited to the fullest extent authorized by the DGCL, as so amended. Any repeal or amendment of provisions
of our third amended and restated certificate of incorporation, as amended, limiting or eliminating the liability of directors,
whether by our stockholders or by changes in law, or the adoption of any other provisions inconsistent therewith, will (unless
otherwise required by law) be prospective only, except to the extent such amendment or change in law permits us to further limit
or eliminate the liability of directors on a retroactive basis.
Our
third amended and restated certificate of incorporation, as amended, will also provide that we will, to the fullest extent authorized
or permitted by applicable law, indemnify our current and former officers and directors, as well as those persons who, while directors
or officers of our corporation, are or were serving as directors, officers, employees or agents of another entity, trust or other
enterprise, including service with respect to an employee benefit plan, in connection with any threatened, pending or completed
proceeding, whether civil, criminal, administrative or investigative, against all expense, liability and loss (including, without
limitation, attorney’s fees, judgments, fines, ERISA excise taxes and penalties and amounts paid in settlement) reasonably
incurred or suffered by any such person in connection with any such proceeding.
Notwithstanding
the foregoing, a person eligible for indemnification pursuant to our third amended and restated certificate of incorporation,
as amended, will be indemnified by us in connection with a proceeding initiated by such person only if such proceeding was authorized
by our board of directors, except for proceedings to enforce rights to indemnification.
The
right to indemnification which will be conferred by our third amended and restated certificate of incorporation, as amended, is
a contract right that includes the right to be paid by us the expenses incurred in defending or otherwise participating in any
proceeding referenced above in advance of its final disposition, provided, however, that if the DGCL requires, an advancement
of expenses incurred by our officer or director (solely in the capacity as an officer or director of our corporation) will be
made only upon delivery to us of an undertaking, by or on behalf of such officer or director, to repay all amounts so advanced
if it is ultimately determined that such person is not entitled to be indemnified for such expenses under our third amended and
restated certificate of incorporation, as amended, or otherwise.
The
rights to indemnification and advancement of expenses will not be deemed exclusive of any other rights which any person covered
by our third amended and restated certificate of incorporation, as amended, may have or hereafter acquire under law, our third
amended and restated certificate of incorporation, as amended, our bylaws, an agreement, vote of stockholders or disinterested
directors, or otherwise.
Any
repeal or amendment of provisions of our third amended and restated certificate of incorporation, as amended, affecting indemnification
rights, whether by our stockholders or by changes in law, or the adoption of any other provisions inconsistent therewith, will
(unless otherwise required by law) be prospective only, except to the extent such amendment or change in law permits us to provide
broader indemnification rights on a retroactive basis, and will not in any way diminish or adversely affect any right or protection
existing at the time of such repeal or amendment or adoption of such inconsistent provision with respect to any act or omission
occurring prior to such repeal or amendment or adoption of such inconsistent provision. Our third amended and restated certificate
of incorporation, as amended, will also permit us, to the extent and in the manner authorized or permitted by law, to indemnify
and to advance expenses to persons other that those specifically covered by our third amended and restated certificate of incorporation,
as amended.
Our
bylaws, include the provisions relating to advancement of expenses and indemnification rights consistent with those which will
be set forth in our third amended and restated certificate of incorporation, as amended. In addition, our bylaws provide for a
right of indemnity to bring a suit in the event a claim for indemnification or advancement of expenses is not paid in full by
us within a specified period of time. Our bylaws also permit us to purchase and maintain insurance, at our expense, to protect
us and/or any director, officer, employee or agent of our corporation or another entity, trust or other enterprise against any
expense, liability or loss, whether or not we would have the power to indemnify such person against such expense, liability or
loss under the DGCL.
Any
repeal or amendment of provisions of our bylaws affecting indemnification rights, whether by our board of directors, stockholders
or by changes in applicable law, or the adoption of any other provisions inconsistent therewith, will (unless otherwise required
by law) be prospective only, except to the extent such amendment or change in law permits us to provide broader indemnification
rights on a retroactive basis, and will not in any way diminish or adversely affect any right or protection existing thereunder
with respect to any act or omission occurring prior to such repeal or amendment or adoption of such inconsistent provision.
The
registrant also intends to enter into indemnification agreements with its future directors and executive officers. The registrant
has purchased directors’ and officers’ liability insurance. The registrant believes that this insurance is necessary
to attract and retain qualified directors and officers.
Item
15.
|
Recent
Sales of Unregistered Securities.
|
The
following is a summary of transactions by us since our inception on April 17, 2017 involving sales of our securities that were
not registered under the Securities Act.
On
May 31, 2017, we issued (1,437,500 pre-reverse split) Founder
Shares to Sponsor in exchange for a capital contribution of $25,000. Upon the partial exercise of the underwriters’ over-allotment
option on September 13, 2017, (137,500 pre-reverse split) Founder
Shares were forfeited by the Sponsor, for a balance of (1,300,000)
Founder Shares held by our Sponsor. Such securities were issued in connection with our organization pursuant to the exemption
from registration contained in Section 4(a)(2) of the Securities Act. Our sponsor is an accredited investor for purposes of Rule
501 of Regulation D. No underwriting discounts or commissions were paid with respect to such sales.
On
August 22, 2017, simultaneously with the consummation of the IPO and the sale of the Public Units, we consummated the private
placement of 254,500 Private Placement Units at a price of $10.00 per unit, generating total gross proceeds of $2,545,000. Each
unit consisted of (i) one share of Common Stock, (ii) one right receive one-tenth (1/10) of one share of Common Stock upon the
consummation of an initial business combination (“Private Placement Rights”),and (iii) one 5-year warrant to purchase
one share of Common Stock at an exercise price of $ ($11.50
pre-reverse split) per share. The Private Placement Units, which were purchased by the Sponsor, are identical to the Public Units,
except the Private Placement Warrants underlying the Private Placement Units are non-redeemable and exercisable on a cashless
basis so long as they are held by the Sponsor or its affiliates or designees. If the Private Placement Units are held by someone
other than the initial holder, or its permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable
by such holders on the same basis as the Public Warrants. The issuance of the Private Placement Units was made pursuant to the
exemption from registration contained in Section 4(a)(2) of the Securities Act.
On
August 22, 2017, we issued (50,000 pre-reverse split) shares
of Common Stock to Maxim Group LLC in connection with its services as underwriter for the IPO. Such shares of Common Stock were
issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.
On
September 13, 2017, simultaneously with the underwriter’s partial exercise of the over-allotment option, we consummated
the sale of an additional (7,000 pre-reverse split) Private
Placement Units, generating gross proceeds of $70,000. The issuance of additional Private Placement Units was made pursuant to
the exemption from registration contained in Section 4(a)(2) of the Securities Act.
On
September 13, 2017, we issued Maxim an additional (2,000 pre-reverse
split) shares of our Common Stock upon partial exercise of the over-allotment. These shares were issued in reliance on Section
4(a)(2) of the Securities Act.
On
November 20, 2018, we issued (2,000,000 pre-reverse split) shares
of our Common Stock to AHA Holdings Private Limited as an upfront portion of the newly issued shares of our Common Stock to be
exchanged for all of the ownership interest in Smaaash Private within 6 months after the closing of the Business Combination.
These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
November 20, 2018, we issued (208,000 pre-reverse split) shares
of Common Stock to Chardan in consideration of services rendered. These shares were issued in reliance on Section 4(a)(2) of the
Securities Act. The shares issued to Chardan are subject to the same lock-up and will have the same registration rights as the
shares of the Company held by the Sponsor.
On
November 20, 2018, we issued (520,000 pre-reverse
split) shares of Common Stock upon conversion of the Public Rights.
On
November 20, 2018, upon the consummation of the Business Combination with Smaaash Private, we issued (26,150
pre-reverse split) shares of Common Stock underlying the Private Placement Rights to the holders of the Private Placement Rights.
These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
In
connection with the closing of the Acquisition of Simplicity Esports LLC, we issued (300,000
pre-reverse split), (700,000 pre-reverse split), and (2,000,000
pre-reverse split) shares of Common Stock, respectively, to the Simplicity Owners on January 4, 2019, January 7, 2019, and March
27, 2019 in exchange for all of the issued and outstanding equity interest of Simplicity Esports LLC held by Simplicity Owners.
These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
January 4, 2019, upon the closing of the Acquisition of Simplicity Esports LLC, the Series A-1 Note in the aggregate amount of
$500,000 and held by Maxim automatically converted into (193,648
pre-reverse split) shares of Common Stock. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
During
the period from March 1, 2019 through July 1, 2019, we sold an aggregate of 987,500 units at a purchase price of $2.00 per unit
to 12 accredited investors in exchange for receipt of $1,975,000. Each unit consisted of (i) one share of Common Stock, and (ii)
a 5-year warrant to purchase one share of Common Stock at a purchase price of $ ($4.00
pre-reverse split). We sold the units in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities
Act and Rule 506 of Regulation D promulgated under the Securities Act.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Jed Kaplan, our Chief Executive Officer and interim Chief Financial
Officer and a member of our board of directors, (120,000 pre-reverse
split) shares of our restricted Common Stock. Such shares vested over the succeeding nine-month period. As of July
2, 2020, all of such shares have vested.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Roman Franklin, our President and a member of our board of directors,
(36,000 pre-reverse split) shares of our restricted Common Stock.
Such shares vested over the succeeding nine-month period. As of July 2,
2020, all of such shares have vested.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Steve Grossman, President of Simplicity Esports, LLC, a wholly
owned subsidiary of our Company at such time, (24,000 pre-reverse
split) shares of our restricted Common Stock. Such shares vested over the succeeding nine-month period. As of July
2, 2020, all of such shares have vested.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan,
Franklin and Grossman on December 31, 2018. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
May 31, 2019, we issued (100,000 pre-reverse split) shares of
Common Stock to Polar in exchange for Polar Asset Management Partners Inc.’s (“Polar”) forgiveness of $143,476
owed by us to Polar under that that certain Debt Conversion Agreement entered into in May 2019 between Polar and us. These shares
were issued in reliance on Section 4(a)(2) of the Securities Act.
On
July 30, 2019, in connection with the acquisition of a 100% interest in PLAYlive Nation, Inc. (“PLAYlive”) by way
of merger, the Company issued (750,000 pre-reverse split) shares
of the Company’s common stock in exchange for 100% of the issued and outstanding common stock from the owners of PLAYlive.
These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
March 11, 2020, in connection with the execution of the Common Stock Purchase Agreement with Triton Funds, LP, the Company
issued (5,000 pre-reverse split) shares of the Company’s common
stock to Triton Funds, LP as a donation. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
April 9, 2020, the Company delivered a Purchase Notice to Triton Funds, LP pursuant to the terms of the Common Stock Purchase
Agreement requiring Triton Funds, LP to acquire (125,000 pre-reverse split) shares of common stock, which rendered $87,700 in
proceeds to the Company.
On
May 4, 2020, pursuant to the terms of that certain 10% Fixed Convertible Promissory Note dated April 29, 2020 in the principal
amount of $152,500 issued by the Company in favor of Harbor Gates Capital, LLC, the Company issued
(10,000 pre-reverse split) shares of the Company’s common stock to Harbor Gates Capital, LLC as
additional consideration for the purchase of such note. These shares were issued in reliance on Section 4(a)(2) of the
Securities Act.
On
June 18, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and an
accredited investor, pursuant to which the Company issued a 12% self-amortization promissory note in the principal amount of $550,000,
the Company issued (55,000 pre-reverse split) shares of the
Company’s common stock to such accredited investor as additional consideration for
the purchase of such note. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
Item
16.
|
Exhibits
and Financial Statement Schedules
|
|
(a)
|
Exhibits.
The list of exhibits preceding the signature page of this registration statement is incorporated herein by reference.
|
|
(b)
|
Financial
Statements. See page F-1 for an index to the financial statements and schedules included in the registration statement.
|
Insofar
as indemnification for liabilities arising under the Securities Act “may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
|
(a)
|
Rule
415 Offering. The undersigned registrant hereby undertakes:
|
|
|
|
|
(1)
|
To
file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
|
|
|
|
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
|
|
|
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
|
|
|
|
|
(iii)
|
To
include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
|
|
|
|
|
(2)
|
That,
for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
|
|
|
|
|
(3)
|
To
remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
|
|
|
|
|
(i)
|
The
undersigned Registrant hereby undertakes that it will:
|
|
|
|
|
a.
|
for
determining any liability under the Securities Act of 1933, treat the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant
under Rule 424(b)(1), or (4) or 497(h) under the Securities Act of 1933 as part of this registration statement as of the time
the Commission declared it effective.
|
|
|
|
|
b.
|
for
determining any liability under the Securities Act of 1933, treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the registration statement, and that offering of the securities
at that time as the initial bona fide offering of those securities.
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Exhibit
|
1.1
|
|
Form
of Underwriting Agreement*
|
2.1
|
|
Share
Subscription Agreement, dated May 3, 2018, by and among the Company, Smaaash Private, and the Smaaash Founders, incorporated
by reference to Annex A to the Company’s Definitive Proxy Statement filed with the SEC on September 19, 2018.
|
2.2
|
|
Amendment
Cum Addendum to the Share Subscription Agreement Dated May 03, 2018, incorporated by reference to Annex A to the Company’s
Definitive Proxy Statement filed with the SEC on September 19, 2018.
|
2.3
|
|
Second
Amendment Cum Addendum to the Share Subscription Agreement Dated May 03, 2018, incorporated by reference to Annex A to the
Company’s Definitive Proxy Statement filed with the SEC on September 19, 2018.
|
2.4
|
|
Third
Amendment Cum Addendum to the Share Subscription Agreement Dated May 03, 2018, incorporated by reference to Annex A to the
Company’s Proxy Statement Supplement, which was filed with the SEC on November 5, 2018
|
2.5
|
|
Fourth
Amendment Cum Addendum to the Share Subscription Agreement Dated May 03, 2018, dated as of November 15, 2018(1)
|
3.1
|
|
Third
Amended and Restated Certificate of Incorporation(1)
|
3.2
|
|
Certificate
of Amendment to the Company’s Third Amended and Restated Certificate of Incorporation, filed with the Delaware Secretary
of State on January 2, 2019 (9)
|
3.3
|
|
Bylaws
(2)
|
4.1
|
|
Specimen
Common Stock Certificate (4)
|
4.2
|
|
Specimen
Warrant Certificate (4)
|
4.3
|
|
Warrant
Agreement, dated August 16, 2017, by and between Continental Stock Transfer & Trust Company and the Company (3)
|
4.4
|
|
Form
of Warrant (Annex C to the Form of Warrant Agency Agreement attached as Exhibit 4.5)*
|
4.5
|
|
Form
of Warrant Agency Agreement by and between the Company and Continental Stock Transfer & Trust Company*
|
4.6
|
|
Form
of Representative’s Warrant*
|
5.1
|
|
Opinion
of Anthony L.G., PLLC*
|
10.1
|
|
Master
Franchise Agreement, dated November 20, 2018, by and between the Company and Smaaash Private(1)
|
10.2
|
|
Master
License and Distribution Agreement, dated November 20, 2018, by and between the Company and Smaaash Private(1)
|
10.3
|
|
Settlement
and Release Agreement, dated November 20, 2018, by and between the Company and Maxim Group LLC(1)
|
10.4
|
|
Demand
Secured Promissory Note, dated November 20, 2018, issued to Maxim Group LLC(1)
|
10.5
|
|
Escrow
Agreement, dated November 20, 2018, by and among the Company, Ellenoff Grossman and Schole LLP and Shripal Morakhia(1)
|
10.6
|
|
Smaaash
Entertainment Inc. 2018 Equity Incentive Plan, incorporated by reference to Annex F to the Company’s Proxy Statement
filed with the SEC on September 19, 2018 †
|
10.7
|
|
Side
Letter, dated November 16, 2018, by and between the Company and Chardan Capital Markets, LLC (1)
|
10.8
|
|
Letter
of Undertaking, dated November 16, 2018, by Smaaash Private and Smaaash Founders(1)
|
10.9
|
|
Addendum
to Master Franchise Agreement, dated November 29, 2018, by and between the Company and Smaaash Private(1)
|
10.10
|
|
Promissory
Note, dated May 31, 2017, issued to I-AM Capital Partners LLC, our sponsor (2)
|
10.11
|
|
Letter
Agreement, dated August 16, 2017, by and between the Company, the Sponsor and the officers and directors of the Company (3)
|
10.12
|
|
Registration
Rights Agreement, dated August 16, 2017, by and among the Company and our sponsor (3)
|
10.13
|
|
Securities
Subscription Agreement, dated May 31, 2017, among the Registrant and our sponsor (2)
|
10.14
|
|
Amended
and Restated Unit Purchase Agreement, dated August 11, 2017, between the Registrant and our sponsor (5)
|
10.15
|
|
Form
of Indemnity Agreement (4)
|
10.16
|
|
Administrative
Services Agreement, dated August 16, 2017, by and between the Company and our sponsor (3)
|
10.17
|
|
Shareholders’
Agreement, dated May 3, 2018, by and among the Company, FW Metis Limited, Mitesh R. Gowani, the Smaaash Founders, and Smaaash
Private, incorporated by reference to Annex D to the Company’s Definitive Proxy Statement filed with the SEC on September
19, 2018.
|
10.18
|
|
Stock
Purchase Agreement, dated as of November 2, 2018, by and between the Company and Polar Asset Management Partners Inc. (6)
|
10.19
|
|
Stock
Purchase Agreement, dated as of November 5, 2018, by and between the Company and K2 Principal Fund L.P. (6)
|
10.20
|
|
Amendment,
dated December 20, 2018, by and among the Company, Polar Asset Management Partners Inc., and The K2 Principal Fund L.P. (7)
|
10.21
|
|
Share
Exchange Agreement, dated December 21, 2018, by and among Smaaash Entertainment Inc., Simplicity Esports, LLC, Jed Kaplan
and each of the equity holders of Simplicity Esports, LLC (8)
|
10.22
|
|
Amendment
No. 1 to Share Exchange Agreement, dated December 28, 2018, by and among Smaaash Entertainment Inc., Simplicity Esports, LLC,
Jed Kaplan and each of the equity holders of Simplicity Esports, LLC (8)
|
10.23
|
|
Securities
Exchange Agreement, dated December 20, 2018, by and between Smaaash Entertainment Inc. and Maxim Group LLC (8)
|
10.24
|
|
Series
A-1 Exchange Convertible Note (8)
|
10.25
|
|
Series
A-2 Exchange Convertible Note (8)
|
10.26
|
|
Registration
Rights Agreement, dated December 20, 2018, by and between Smaaash Entertainment Inc. and Maxim Group LLC (8)
|
10.27
|
|
Lock-Up
Agreement, dated December 20, 2018, by and between Smaaash Entertainment Inc. and Maxim Group LLC (8)
|
10.28
|
|
Amendment
No. 2 to Share Exchange Agreement, dated December 30, 2018, by and among the Company, Simplicity Esports, LLC, and Jed Kaplan
(9)
|
10.29
|
|
Voting
Agreement, Dated December 31, 2018, between the Company and the stockholders of the Company party thereto (9)
|
10.30
|
|
Employment
Agreement, dated December 31, 2018, between the Company and Jed Kaplan (9) †
|
10.32
|
|
Employment
Agreement, dated December 31, 2018, between the Company and Roman Franklin (9) †
|
10.33
|
|
Employment
Agreement, dated December 31, 2018, between the Company and Steven Grossman (9) †
|
10.34
|
|
Restricted
Stock Award Agreement dated March 27, 2019 between the registrant and Jed Kaplan (10) †
|
10.35
|
|
Restricted
Stock Award Agreement dated March 27, 2019 between the registrant and Roman Franklin (10) †
|
10.36
|
|
Restricted
Stock Award Agreement dated March 27, 2019 between the registrant and Steve Grossman (10) †
|
10.37
|
|
Agreement
and Plan of Merger, dated July 25, 2019, among the registrant, PLAYlive Nation, Inc., and owners of PLAYlive Nation, Inc.
(11)
|
10.38
|
|
Exclusive
Trademark and Symbol Use License Agreement, and Other Covenants, dated November 4, 2019, among Simplicity One Brasil LTDA
and Clube de Regatas do Flamengo (12)
|
10.39
|
|
Common
Stock Purchase Agreement, dated as of March 11, 2020, between the Company and Triton Funds LP (13)
|
10.40
|
|
Registration
Rights Agreement, dated as of March 11, 2020, between the Company and Triton Funds LP (13)
|
10.41
|
|
10%
Fixed Convertible Promissory Note dated April 29, 2020 issued by the Company in favor of Harbor Gates Capital, LLC (14)
|
10.42
|
|
Promissory
Note dated May 12, 2020 issued by the Company in favor of Jed Kaplan (15)
|
10.43
|
|
Form
of Self-Amortization Promissory Note dated June 18, 2020 issued by the Company to an accredited investor (16)
|
10.44
|
|
Form
of Securities Purchase Agreement dated June 18, 2020, by and between the Company and an accredited investor (16)
|
10.45
|
|
First
Amendment to the Series A-2 Exchange Convertible Note issued on December 20, 2018 (16)
|
10.46
|
|
2020
Omnibus Incentive Plan (17) †
|
14.1
|
|
Code
of Ethics (4)
|
21.1
|
|
List
of Subsidiaries*
|
23.1
|
|
Consent
of Prager Metis CPAs, LLC*
|
23.2
|
|
Consent
of Anthony L.G., PLLC (included on Exhibit 5.1)*
|
24.1
|
|
Power
of Attorney (included on the signature page of the Registration Statement on Form S-1
filed on April 10, 2020) (18)
|
*
Filed herewith
†
Includes management contracts and compensation plans and arrangements
(1)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on November 30, 2018
|
(2)
|
Incorporated
by reference to exhibits to the Company’s Registration Statement on Form S-1 filed on July 12, 2017
|
(3)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on August 22, 2017.
|
(4)
|
Incorporated
by reference to exhibits to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed on July 31, 2017
|
(5)
|
Incorporated
by reference to exhibits to Amendment No. 2 to the Company’s Registration Statement
on Form S-1 filed on August 14, 2017
|
(6)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on November 7, 2018
|
(7)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on December 26, 2018
|
(8)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on December 28, 2018
|
(9)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on January 7, 2019.
|
(10)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on April 2, 2019.
|
(11)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on August 1, 2019.
|
(12)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on January 22, 2020.
|
(13)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on March 17, 2020.
|
(14)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on May 5, 2020.
|
(15)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on May 18, 2020.
|
(16)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on June 24, 2020.
|
(17)
|
Incorporated
by reference to Appendix I Company’s Proxy Statement filed on June 9, 2020.
|
(18)
|
Incorporated
by reference to exhibits to the Company’s Registration Statement on Form S-1 filed on April 10, 2020.
|
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Pre-Effective Amendment
No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, New York, on July 2, 2020.
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
|
|
|
|
|
By:
|
/s/
Jed Kaplan
|
|
|
Jed
Kaplan
|
|
|
Chief
Executive Officer and interim Chief Financial Officer
(principal
executive officer and principal financial officer)
|
Pursuant
to the requirements of the Securities Act, this Pre-Effective Amendment No. 1 to Registration Statement has been signed
by the following persons in the capacities held on July 2, 2020.
Name
|
|
Position
|
|
Date
|
|
|
|
|
|
/s/
Jed Kaplan
|
|
Chief
Executive Officer, interim
|
|
July
2, 2020
|
Jed
Kaplan
|
|
Chief
Financial Officer, and Director (Principal Executive Officer and Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
*
|
|
Chairman
|
|
July
2, 2020
|
Donald
R. Caldwell
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
July
2, 2020
|
Roman
Franklin
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
July
2, 2020
|
Max
Hooper
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
July
2, 2020
|
Frank
Leavy
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
July
2, 2020
|
Edward
Leonard Jaroski
|
|
|
|
|
|
|
|
|
|
*
|
|
Director
|
|
July
2, 2020
|
William
H. Herrmann
|
|
|
|
|
By:
|
/s/
Jed Kaplan
|
|
|
Jed
Kaplan
|
|
|
Attorney-in-fact*
|
|
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