The accompanying notes are an integral part of these unaudited consolidated financial statements
The accompanying notes are an integral part of these unaudited consolidated financial statements
The accompanying notes are an integral part of these unaudited consolidated financial statements
The accompanying notes are an integral part of these unaudited consolidated financial statements
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
NOTE
1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Simplicity
Esports and Gaming Company F/K/A Smaaash Entertainment Inc. (the “Company,” “we,” or “our”),
was a newly 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 plans 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.
On
November 20, 2018, the Company and Smaaash Entertainment Private Limited, a private limited company incorporated under the laws
of India (“Smaaash”), consummated the initial Business Combination (the “Closing”) as contemplated by
a share subscription agreement dated as of May 3, 2018 (as amended by the Amendment Cum Addendum dated June 22, 2018, the Second
Amendment Cum Addendum dated August 2, 2018, the Third Amendment Cum Addendum dated November 1, 2018 and the Fourth Amendment
Cum Addendum dated November 15, 2018, the “Subscription Agreement”), following the approval at the special meeting
of the stockholders of I-AM Capital held on November 9, 2018 (the “Special Meeting”).
In
connection with the Closing, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc.
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 $50,000,000 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
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 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 of 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 July 24, 2018. The interim results for the three and nine months ended February 28, 2019
are not necessarily indicative of the results to be expected for the year ending May 31, 2019 or for any future interim periods.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 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.
Property,
plant and equipment
Property,
plant and equipment and leasehold improvements are recorded at its historical cost. The cost of property, plant, and equipment
is depreciated over the estimated useful lives, when placed in service, (ranging from 5 -39 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.
During
the three months ended February 29, 2019, the Company paid approximately $50,000 for the construction of their first gaming center.
These amounts have been capitalized and are on the balance sheet under the caption property and equipment, net. This asset has
not been placed into service as of February 28, 2019 so no depreciation expense has been recorded.
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 asset purchase of a team logo and name. 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 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.
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 Note 8 to
the consolidated financial statements – “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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
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.
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.
Net
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 February 28, 2019 have been excluded from the calculation of
basic income (loss) per share and diluted loss per share for the three and nine months ended February 28, 2019 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, 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
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
February 2016, the FASB issued authoritative guidance, which is included in ASC 842, “Leases.” This guidance requires
lessees to recognize most leases on the balance sheet by recording a right-of-use asset and a lease liability. 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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
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 28, 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
NOTE
4 - 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. The Simplicity Owners are entitled to receive an additional
2,000,000 shares upon the Company’s receipt of the approval of its stockholders to such issuance. This provision was
removed as the stockholder approval was only necessary due to the Company’s stock being listed on NASDAQ. Upon
completion of the Simplicity Esports LLC acquisition, the Company decided that moving off the NASDAQ was appropriate and, the
2,000,000 shares are included on the balance sheet as common stock issuable at February 28, 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. 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, trade names and trademarks,
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
|
|
|
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
|
|
Property, plant and equipment (provisional)
|
|
|
0
|
|
Trade names and trademarks (provisional)
|
|
|
0
|
|
Customer relationships (provisional)
|
|
|
0
|
|
Accounts payable and accrued liabilities
|
|
|
(56,000
|
)
|
Goodwill (provisional)
|
|
|
6,070,000
|
|
Total
|
|
$
|
6,090,000
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
Revenue
and net loss included in the nine months ended February 28, 2019 consolidated financial statements attributable to Simplicity
Esports, LLC is approximately $14,000 and $100,000, 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:
|
|
Nine
Months
Ended
February 28
2019
|
|
|
Nine
Months
Ended
February 28,
2018
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
45,883
|
|
|
$
|
—
|
|
Net (Loss) Income
|
|
$
|
(3,330,960
|
)
|
|
$
|
4,165
|
|
Basic Net Loss Per Share
|
|
$
|
(0.93
|
)
|
|
$
|
0.00
|
|
NOTE
5 — 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
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 February 28, 2019, the balance of the Sponsor
loan is $85,238.
The Company maintains its cash balance
at a financial services company that is owned by an officer of the Company.
NOTE 6 — 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
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.
Private Placement
During the quarter ended February 28, 2019, the Company
raised $1,000,003 in a Private Placement. As of February, 28, 2019 this offering was not closed and the $1,000,003 is included
on the Balance Sheet under Current Liabilities as Private Placement funds received.
NOTE 7 — 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 28, 2019, there were 6,313,038 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 November 30, 2018, there were no shares of preferred stock
issued or outstanding.
NOTE 8 — 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2019
(UNAUDITED)
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
|
|
|
February 28, 2019
|
|
|
May 31, 2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and marketable securities held in Trust Account
|
|
|
1
|
|
|
$
|
-0-
|
|
|
$
|
52,895,652
|
|
NOTE 9 — SUBSEQUENT EVENTS
On March 27, 2019,
the Company sold an aggregate of 812,500 units (the “Units”) at a purchase price of $2.00 per Unit to 11 accredited
investors in exchange for receipt of $1,625,000. Each unit consists 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. The Company sold the Units in reliance on the exemption from
registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule
506 of Regulation D promulgated under the Securities Act.
In March of 2019, the Company entered into
a settlement agreement with its prior attorney. As of February 28, 2019, the Company owed this attorney approximately $900,000.
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.
On March 27, 2019,
pursuant to a Restricted Stock Award, the Company granted Jed Kaplan, the Company’s Chief Executive Officer and interim Chief
Financial Officer and a member of the Company’s board of directors, 120,000 shares of Company restricted stock. Such shares
vest over the next nine months.
Also on March 27, 2019, pursuant to a Restricted Stock Award,
the Company granted Roman Franklin, the Company President and a member of the Company’s board of directors, 36,000 shares
of Company restricted stock. Such shares vest over the next nine months also. Lastly,
on March 27, 2019, pursuant to a Restricted
Stock Award and collectively with the Kaplan Restricted Stock Award and the Franklin Restricted Stock Award, the Company granted
Steve Grossman, President of Simplicity Esports LLC, a wholly owned subsidiary of the Company, 24,000 shares of Company restricted
stock. Such shares also vest over the next nine months.
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