NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
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.
Through
our wholly subsidiary, Simplicity Esports, LLC, acquired on January 2, 2019 (see Note 6), 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.
Through
our wholly owned subsidiary, PLAYLive Nation, Inc. (“PLAYLive”), acquired on July 29, 2019 (see Note 6), the Company
has a network of franchised Gaming Centers across 11 states. PLAYLive offers a video gaming lounge concept to qualified franchisees.
PLAYLive currently offers single-unit location franchises as well as agreements to develop multiple locations.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited 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 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 months ended August 31, 2019 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
AUGUST
31, 2019
UNAUDITED
Basis
of Consolidation
The
consolidated financial statements include the operations of the Company and its wholly owned subsidiaries, Simplicity Esports,
LLC and PLAYLive Nation, Inc.
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 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 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 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
AUGUST
31, 2019
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 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 which are based on a percentage of franchise store sales 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.
Deferred
Revenues, Net
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.
Deferred
costs include commissions paid to brokers related to the sale of specific new franchises which have not met revenue recognition
criteria as of August 31, 2019. These costs are recognized in the same period as the initial franchise fee revenue is recognized.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
UNAUDITED
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 believes that
all accounts receivable are collectible; therefore, no allowance for doubtful accounts 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 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.
Franchise
Locations
Through
PLAYLive, the Company’s wholly owned subsidiary the Company has entered into franchise agreements with third
parties. As of August 31, 2019, approximately 40 locations were open and operating, in various states including Arizona, California,
Idaho, Florida, Maryland, Michigan, Mississippi, Montana, Oregon, South Carolina, Texas and Washington.
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
AUGUST
31, 2019
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 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
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.
At
August 31, 2019 the Company had a convertible note, and common stock warrants that could be converted into approximately, 6,924,000
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
UNAUDITED
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 August 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 has commenced operations and has begun to 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
UNAUDITED
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 - PROPERTY, PLANT AND EQUIPMENT
The
following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
|
|
August 31, 2019
|
|
Leasehold improvements
|
|
|
49,673
|
|
Property and equipment
|
|
|
178,865
|
|
|
|
|
|
|
Total cost
|
|
|
228,538
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(13,949
|
)
|
|
|
|
|
|
Net, property plant and equipment
|
|
$
|
214,589
|
|
Depreciation
expense for the three months ended August 31, 2019 and 2018 was $8,651 and $0, respectively.
NOTE
4 - INTANGIBLE ASSETS
The
following tables set forth the intangible assets, including accumulated amortization as of August 31, 2019:
|
|
August 31, 2019
|
|
|
Remaining
|
|
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
Non-Competes
|
|
4.25 years
|
|
$
|
1,023,118
|
|
|
$
|
136,416
|
|
|
$
|
886,702
|
|
Trademarks
|
|
Indefinite
|
|
|
588,000
|
|
|
|
-
|
|
|
|
588,000
|
|
Internet domain
|
|
2.25 years
|
|
|
3,000
|
|
|
|
667
|
|
|
|
2,333
|
|
|
|
|
|
$
|
1,614,118
|
|
|
$
|
137,083
|
|
|
$
|
1,477,035
|
|
Amortization
expense for the three months ended August 31, 2019 and 2018 was $51,406 and $0, respectively.
NOTE
5 – DEFERRED REVENUE, NET
Deferred
revenue, net consists of the following at August 31, 2019:
Deferred franchise fees received
|
|
$
|
1,624,250
|
|
Deferred costs
|
|
|
(805,975
|
)
|
|
|
|
818,275
|
|
Less: Current portion of net deferred revenues
|
|
|
715,350
|
|
|
|
|
|
|
Long-term portion of net deferred revenues
|
|
$
|
102,745
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
UNAUDITED
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
|
|
|
4,455,882
|
|
Total
|
|
$
|
6,090,000
|
|
Revenue
and net loss included in the three months ended August 31, 2019 consolidated financial statements attributable to Simplicity Esports,
LLC is approximately $28,000 and $280,000, respectively.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
UNAUDITED
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, 2018:
|
|
Three Months Ended
August 31, 2018
|
|
|
|
|
|
Total Revenue
|
|
$
|
8,000
|
|
Net (Loss)
|
|
$
|
(104,000
|
)
|
Basic Net Loss Per Share
|
|
$
|
(.05
|
)
|
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 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.
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 which was valued at market
at the date of the closing, fair value of approximately $1,440,000.
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)
|
|
|
9,000
|
|
Net deferred revenue (provisional)
|
|
|
(818,000
|
)
|
Customer relationships (provisional)
|
|
|
-
|
|
Accounts payable and accrued liabilities
|
|
|
(4,000
|
)
|
Goodwill (provisional)
|
|
|
2,227,000
|
|
Total
|
|
$
|
1,440,000
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
UNAUDITED
Revenue
and net income included in the three months ended August 31, 2019 consolidated financial statements attributable to PLAYLive
is approximately $47,000 and $500, respectively.
The
following unaudited pro forma information below presents the consolidated results operations data as if the acquisition of PLAYLive
took place on June 1, 2018:
|
|
Three
Months
Ended
August
31, 2019
|
|
|
Three
Months
Ended
August
31, 2018
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
250,000
|
|
|
$
|
176,000
|
|
Net Loss
|
|
$
|
(293,000
|
)
|
|
$
|
(14,000
|
)
|
Basic Net Loss Per Share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
NOTE
7 — RELATED PARTY TRANSACTIONS
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, 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.
The
Company maintains its cash balance at a financial services company that is owned by an officer of the Company.
As
of August 31, 2019, the Company is owed $14,108 from the former PLAYLive owners. The advance is non-interest bearing and
will be paid back within 90 days of the closing of the PLAYLive acquisition.
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”).
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
UNAUDITED
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 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 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
UNAUDITED
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 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 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. 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
UNAUDITED
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 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 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 10% and the weighted average remaining lease term is 56 months.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
UNAUDITED
As
of August 31, 2019, operating lease right-of-use assets and liabilities arising from operating leases was $240,806 and $240,805,
respectively. During the three months ended August 31, 2019, cash paid for amounts included for the measurement of lease liabilities
was approximately $8,000 and the Company recorded operating lease expense of approximately $12,000.
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 August 31, 2019, there were 7,753,975 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 August 31, 2019,
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 three months ended August
31, 2019, 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 three months ended August 31, 2019, 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.
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 August 31, 2019, 120,000 shares have vested,
and for the year ended May 31, 2019 and the three months ended August 31, 2019, the Company recognized $27,000 and $45,000 of
stock-based compensation, respectively, based on the trading price on March 27, 2019 (measurement date) of $0.60 per share. As
of August 31, 2019, unrecognized compensation cost related to these shares is $36,000.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2019
UNAUDITED
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 three months ended August 31, 2019 is as follows:
|
|
Number of
Shares
|
|
|
Average
Exercise
Price
|
|
|
Expiration
Date
|
Outstanding – May 31, 2019
|
|
|
6,424,000
|
|
|
|
10.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted – August 31, 2019
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding – August 31, 2019
|
|
|
6,424.000
|
|
|
$
|
10.38
|
|
|
May 2024
|
Warrants exercisable at August 31, 2019
|
|
|
6,424,000
|
|
|
|
|
|
|
|
NOTE
10 — SEGMENT AND RELATED INFORMATION
Historically,
the Company had one operating segment. However, with the acquisition of PLAYLive and the opening of two Company-owned retail
stores, the Company’s operations are now managed through three operating segments: Franchise royalties and 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 three months ended August 31, 2019 is shown in the following
table:
|
|
Revenues
|
|
|
Net
Income
(loss)
|
|
|
Depreciation
and
Amortization
|
|
|
Capital
Expenditures
|
|
|
Goodwill
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise royalties and fees
|
|
$
|
47,000
|
|
|
$
|
500
|
|
|
$
|
400
|
|
|
$
|
-
|
|
|
$
|
2,226,000
|
|
|
$
|
2,263,000
|
|
Company-owned stores
|
|
|
4,000
|
|
|
|
(24,000
|
)
|
|
|
7,200
|
|
|
|
97,000
|
|
|
|
-
|
|
|
|
440,000
|
|
Esports revenue
|
|
|
23,000
|
|
|
|
(62,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,456,000
|
|
|
|
5,947,000
|
|
Corporate
|
|
|
-
|
|
|
|
(197,000
|
)
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
Total
|
|
$
|
74,000
|
|
|
$
|
(283,000
|
)
|
|
$
|
8,600
|
|
|
$
|
97,000
|
|
|
$
|
6,682,000
|
|
|
$
|
9,650,000
|
|