Unless
the context otherwise requires, “we,” “us,” or “the Company” refers to (i) “Simplicity
Esports and Gaming Company” after the consummation of the Acquisition of Simplicity Esports, LLC, (ii) “Smaaash Entertainment
Inc.” before the consummation of the Acquisition of Simplicity Esports, LLC but after the closing of the Transactions with
Smaaash Entertainment Private Limited, and (iii) I-AM Capital Acquisition Company prior to the closing of the Transactions with
Smaaash Entertainment Private Limited. “Simplicity Esports LLC” means Simplicity Esports, LLC, a Florida limited
liability company, and its consolidated subsidiaries “Smaaash Private” means Smaaash Entertainment Private Limited,
a private limited company incorporated under the laws of India, and its consolidated subsidiaries
Overview
We
are a North American esports organization. We have implemented a unique approach to ensure the ultimate fan friendly 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.
Utilizing the vast resources from within the ownership group, we have already established an impressive management team and roster.
Our management and players are well known influencers within the esports community, and we plan to use their skill to create a
seamless content creation pan to help gamers feel closer to our brand that any other in the scene. Our organization intends to
take the opportunity to create a platform that will help grow the sports for generations of gamers.
Acquisition
of Simplicity Esports, LLC
On
January 4, 2019, the Company consummated the transactions contemplated by that certain share exchange agreement, dated December
21, 2018 (as amended by Amendment No. 1 to Share Exchange Agreement, dated December 28, 2018 and by Amendment No. 2 to Share Exchange
Agreement, dated December 30, 2018, the “Share Exchange Agreement”) by and among the Company, Simplicity
Esports, LLC, a Florida limited liability company (“Simplicity Esports LLC”), each of the equity holders
of Simplicity Esports LLC (“Simplicity Owners”) and Jed Kaplan, in the capacity as the representative
of the Simplicity Owners (the “Representative”). Pursuant to the Share Exchange Agreement the Simplicity
Owners transferred all the issued and outstanding equity interests of Simplicity Esports LLC to the Company in exchange for newly
issued shares of common stock of the Company (the “Acquisition”).
Background
of Simplicity Esports, LLC
Founded
in 2017, Simplicity Esports LLC is committed to growing and enhancing the Esports industry, fostering the development of amateurs
to compete professionally, and partnering with established professional gamers to support their paths to greater success. Esports
(also known as electronic sports, e-sports, or eSports) 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.
Our continued accomplishments in various games is a driving force behind the growth of our fan base including viewership of our
content.
As
of January 4, 2019, upon the completion of the acquisition of Simplicity Esports LLC, the business of Simplicity Esports LLC has
now become the primary business of the Company. Simplicity Esports LLC is an established brand in the Esports industry with an
engaged fan base competing in popular games across different genres, including Apex Legends, PUBG, Gears of War, SMITE, and NHL
19. The Simplicity Esports LLC stream team encompasses over 50 casters, influencers and personalities who connect to a dedicated
fan base. Simplicity Esports LLC’s notoriety in the industry is evidenced by its audience that views millions of minutes
of Simplicity Esports LLC content monthly, via various social media outlets including YouTube, Twitter and Twitch.
The
acquisition of Simplicity Esports LLC 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.
Through Simplicity Esports LLC, 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 Esports LLC has already
opened and is operating two corporate-owned retail esports gaming centers (“Simplicity Esports Gaming Centers”).
Simplicity Esports LLC plans to franchise Simplicity 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.
Brick
& Mortar Esports Gaming Locations
Our
business plan encompasses a brick and click physical and digital approach to further recognize revenue from all verticals. As
a professional esports organization, we will strive to be the first to market with the aforementioned business model. The physical
centers complimented with our esports team, lifestyle brand and marketing campaign offer opportunities for additional revenue
via strategic partnerships with both endemic and non-endemic brands. Our ultimate goal is to further engage a diverse fan base
with a 360 degree approach driving traffic to both our digital and physical real estate ultimately monetizing these relationships.
In addition to the presented information, we have proprietary intellectual capital, fan engagement strategies and brand development
blueprints which complement our publicly available information.
We
intend to open and operate 15 centers by the end of 2019 and a total of 50 throughout the United States over the next 24 months.
These centers are funded by us as well as a combination of tenant improvement allowances from landlords and sponsorships. Our
first center was opened May, 3 2019. Due to unsolicited interest from potential franchisees we have launched a franchising program
to accelerate the expansion of our planned nationwide footprint. Furthermore, we have engaged a national tenant representation
real estate broker to assist in the strategic planning and negotiations for our future gaming center locations.
Optimally,
our gaming centers will measure between 1200 and 2500 square feet thereby representing a national footprint unlike any esports
organization. The team Simplicity branded centers will feature cutting edge technology, futuristic aesthetic décor and
the most dynamic current high-speed gaming equipment. We believe our brick-and-click strategy will present attractive opportunities
for sponsor and advertisers to connect with our audience, creating an intriguing monetization opportunity.
Creating
content that engages fans, promotes our brand as well as sponsors and developers is one of our primary goals. Our talented team
will continue to produce unique in depth content which showcases aspects of esports which fans rarely see. We seek to reach a
broad demographic encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint
for both endemic and non-endemic partnerships. We are keen to the markets and understand the new age of branding while maintaining
authenticity.
Simplicity
Stream Team
We
are proud to support and present a diverse group of gamers as we engage fans across a multiple of esports genres. Represented
below are a few members of our talented stream team. Our electric group of live personalities represent our organization to the
fullest with their own unique style. Our Twitch affiliation has enabled our stream team influences to reach a broad fan base.
Additionally, we have created several niches within the streaming community which has enabled us to engage fans within certain
titles on a 24/7 basis.
Potential
Revenue Capacity
The
following table shows our potential revenue capacity, per location, from game play.
We
also expect opportunities for revenue from parties, tournaments, classes, gaming gear, apparel, advertising and sponsorship sales.
ANNUAL
REVENUE CAPACITY FROM GAME PLAY PER ESPORTS GAMING CENTER*
|
20
|
%
|
|
$
|
157,248
|
|
|
40
|
%
|
|
$
|
314,496
|
|
|
60
|
%
|
|
$
|
471,744
|
|
|
80
|
%
|
|
$
|
628,992
|
|
*Assumes
2,808 operational hours, 28 gaming stations, $10/hour price. Represents capacity only, and is not an indication of expected future
revenues. There can be no assurance that we will operate at any of the indicated levels of capacity, or at all.
Corporate
History
Formation
We
were initially a blank check company organized under the laws of the State of Delaware on April 17, 2017 under the name I-AM Capital
Acquisition Company. We were formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase,
reorganization or similar business combination with one or more businesses. Although we were not limited to a particular industry
or geographic region for purposes of consummating a business combination, we focused on businesses with a connection to India.
On November 20, 2018, we changed our name from I-AM Capital Acquisition Company to Smaaash Entertainment, Inc. On January 2, 2019,
we changed our name from Smaaash Entertainment, Inc. to Simplicity Esports and Gaming Company.
We
are authorized to issue 21,000,000 shares of capital stock, consisting of (i) 20,000,000 shares of common stock, with a par value
of $0.0001 per share (“Common Stock”), and (ii) 1,000,000 shares of preferred stock, with a par value of $0.0001 per
share. As of August 27, 2019, there were 7,753,975 shares of Common Stock issued and outstanding and there were no shares of preferred
stock issued or outstanding.
Founder
Shares
On
May 31, 2017, we issued 1,437,500 shares of Common Stock (the “Founder Shares”) to I-AM Capital Partners
LLC, our sponsor (the “Sponsor”), in exchange for a capital contribution of $25,000. Upon the partial
exercise of the underwriters’ over-allotment option on September 13, 2017, 137,500 Founder Shares were forfeited by the
Sponsor, for a balance of 1,300,000 Founder Shares held by our Sponsor.
Initial
Public Offering and Private Placement
On
August 22, 2017, we sold 5,000,000 units at a purchase price of $10.00 per unit in our initial public offering (“IPO”)
of public units (“Public Units”), generating gross proceeds of $50.0 million. Each Public Unit consisted
of one share of our Common Stock (“Public Shares”), one right to receive one-tenth of one share our
Common Stock upon consummation of an initial business combination (“Public Right”), and one redeemable
warrant (“Public Warrants”). Each warrant entitled the holder to purchase one share of common stock
at an exercise price of $11.50 per share, subject to adjustment.
Concurrently
with the closing of the IPO on August 22, 2017, the Sponsor purchased an aggregate of 254,500 units (“Private Placement
Units”) at $10.00 per unit, generating gross proceeds of $2,545,000 in a private placement. The Private Placement
Units (including their component securities) are not transferable, assignable or salable until 30 days after the completion of
the initial business combination and the warrants included in the Private Placement Units are non-redeemable so long as they are
held by the Sponsor or their permitted transferees.
On
August 22, 2017, we issued 50,000 shares of Common Stock to Maxim in connection with its services as underwriter for the IPO.
Contained
in the underwriting agreement for the IPO was an over-allotment option allowing the underwriters to purchase from the Company
up to an additional 750,000 Public Units (the “Over-Allotment Units”) and, in addition, the Company
received a commitment from the Sponsor to purchase up to an additional 26,250 Private Placement Units.
On
September 13, 2017, the underwriters partially exercised their option and purchased 200,000 Over-Allotment Units, which were sold
at an offering price of $10.00 per unit, generating gross proceeds of $2,000,000.
On
September 13, 2017, simultaneously with the sale of the Over-Allotment Units, the Company consummated the sale of an additional
7,000 Private Placement Units (the “Over-Allotment Placement Units”), generating gross proceeds of $70,000.
On
September 13, 2017, we issued Maxim an additional 2,000 shares of our Common Stock upon partial exercise of the over-allotment.
On
October 9, 2017, we commenced trading our Public Shares of Common Stock, Public Rights, and Public Warrants on the Nasdaq Capital
Market under the symbols “IAM,” “IAMXR” and “IAMXW,” respectively.
The
Founder Shares are identical to the Public Shares and holders of Founder Shares have the same stockholder rights as the holders
of our Public Shares (“Public Stockholders”) which include our initial stockholders, including the holders
of our Founder Shares prior to the IPO (“initial stockholders”) and members of our management team,
including our executive officers and directors (“management” and “management team”),
to the extent our initial stockholders and/or members of our management team purchased Public Shares, provided that each initial
stockholder’s and member of our management team’s status as a “public stockholder” shall only exist with
respect to such Public Shares), except that the Founder Shares and the shares of Common Stock (“Private Placement
Shares”) forming part of the Private Placement Units are subject to certain transfer restrictions.
Consummation
of Transactions with Smaaash Entertainment Private Limited
On
November 20, 2018 (the “Closing Date”), the Company and Smaaash Entertainment Private Limited, a private
limited company incorporated under the laws of India, consummated the transactions (the “Transactions”
or the “Business Combination”) contemplated by the share subscription agreement (as amended, the “Subscription
Agreement”), following the approval at the special meeting of the stockholders of the Company held on November 9,
2018 (the “Special Meeting”).
At
the Special Meeting, holders of 4,448,260 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 Transactions (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 Public Rights at the Closing and the issuance of 208,000 shares
of common stock to Chardan as consideration for services), there were 5,119,390 shares of common stock and warrants to purchase
approximately.
On
November 20, 2018, upon the consummation of the Business Combination with Smaaash Private, we issued 26,150 shares of common stock
underlying the Private Placement Rights to the holders of the Private Placement Rights.
Pursuant
to the Subscription Agreement, the purchase price of $150,000 was paid by the Company to Smaaash Private in exchange for 294,360
newly issued equity shares of Smaaash Private at the closing of the Transactions (the “Closing”).
In
addition, AHA Holdings Private Limited (“AHA Holdings”) and Shripal Morakhia (together with AHA Holdings,
the “Smaaash Founders”) agreed that within six months following the Closing Date, they would transfer
all of their ownership interest in Smaaash Private (representing 33.6% of the share capital of Smaaash Private on a fully diluted
basis as of June 22, 2018) (the “Additional Smaaash Shares”) to the Company in exchange for newly issued
shares of our Common Stock (the “Transferred Company Shares”) in an amount which would enable the Smaaash
Founders to retain their 33.6% ownership interest in Smaaash Private indirectly through their interest in the Company.
At
the Closing, the Company issued an aggregate of 2,000,000 shares of its common stock to the Smaaash Founders as an upfront portion
of the Transferred Company Shares (the “Upfront Company Shares”). In connection with the issuance of
the Upfront Company Shares, the Company and the Smaaash Founders entered into an escrow agreement pursuant to which the Upfront
Company Shares would be held in escrow and will be either, (i) if the Additional Smaaash Shares are not transferred in full to
the Company within the designated six-month period, cancelled, or (ii) if the Additional Smaaash Shares are transferred in full
to the Company within the designated six-month period, released from escrow and the number of Upfront Company Shares will be deducted
from the Transferred Company Shares that will be issued to the Smaaash Founders upon the delivery of the Additional Smaaash Shares.
On
November 16, 2018, Smaaash Private and the Smaaash Founders executed a letter of undertaking, pursuant to which they agreed to
transfer 4,000,000 additional equity shares of Smaaash Private to the Company in consideration for 200,000 shares of our Common
Stock, simultaneously with the issuance of the 300,000 equity shares of Smaaash Private to the Company on or prior to November
30, 2018, as permitted by the laws of India. Such additional shares of Smaaash Private have not yet been delivered to the Company.
In
connection with the Closing, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc.,
changed its stock symbols for its Common Stock, Public Rights, and Public Warrants to “IAM,” “IAMXR” and
“IAMXW,” respectively, and entered into a master franchise agreement (“Master Franchise Agreement”)
and a master license and distribution agreement (“Master Distribution Agreement”) with Smaaash Private.
Prior to the Closing, the Company was a shell company with no operations, formed as a vehicle to effect a business combination
with one or more operating businesses. After the Closing, the Company’s primary assets consist of shares in Smaaash Private
and the rights granted under the Master Franchise Agreement and the Master Distribution Agreement.
Pursuant
to the terms of the escrow agreement, the Upfront Company Shares have been cancelled because the Additional Smaaash Shares were
not transferred in full to the Company in the designated six-month period.
Master
Franchise Agreement
Franchise
and license right. Under the Master Franchise Agreement, Smaaash Private has granted to the Company an exclusive right to
establish and operate Smaaash Centers (as defined under the Master Franchise Agreement) and to sublicense the right to establish
and operate Smaaash Centers to third party franchisees, and a license to use the products and other services developed by Smaaash
Private with respect to the Smaaash Centers, in the territories of North America and South America (“Territory”).
Further, Smaaash Private has granted to the Company the limited license to use the Trademarks of Smaaash Private (as set out in
the Master Franchise Agreement) for the purposes of establishing and operating the Smaaash Centers in the Territory. The Master
Franchise Agreement has been executed on an arms’ length basis between Smaaash Private and the Company.
Obligations
of the Company. The Company will not directly or indirectly engage or be concerned with any business which competes with Smaaash
Private’s business in the Territory during the term of the Master Franchise Agreement. The Company will market, promote
and publicize the Smaaash Centers in the Territory. The Company or third party sub-franchisees shall be under an obligation to
set up at least six Smaaash Centers during the first calendar year.
Obligations
of Smaaash Private. Smaaash Private shall assist in training and installing the equipment and bear all the costs associated
therewith. The franchisee or sub-franchisee will bear the cost to set up the Smaaash Center.
License
fees and other payments. Franchisee or the third party franchisee will be entitled to receive the revenue generated from each
of the Smaaash Centers. In connection with the operations of the Smaaash Centers by sub-franchisees, the Company shall be entitled
to receive (i) a signup fee equal to 5% of the capital expenditure of the sub-franchisee, (ii) 5% of the revenue of the sub-franchisee
on an annual basis; and (iii) a 15% markup of the products sold to the sub-franchisee. Smaaash Private will not receive any portion
of the revenue or other fees in connection with the Master Franchise Agreement.
Ownership
of Smaaash Marks. Smaaash Private will be the sole owner of all intellectual property related to the Smaaash Centers. All
future rights, goodwill and reputation of the Smaaash Marks shall inure to the benefit of Smaaash.
Term
of the Agreement. The Master Franchise Agreement will commence from its execution date and continue until the agreement is
terminated in accordance with the Master Franchise Agreement.
Termination.
The Master Franchise Agreement may be terminated (i) by the mutual written agreement of parties or (ii) by Smaaash Private if
the Company fails to make a payment, ceases to operate or abandon’s the Smaaash Centers or fails to use best efforts to
market the Smaaash Centers and such failure is not cured within 30 days’ notice of the failure.
Addendum
to Master Franchise Agreement
On
November 29, 2018, the Company and Smaaash Private executed an addendum to the Master Franchise Agreement (the “Amendment”).
Pursuant to the Amendment, Smaaash Private grants the Company the exclusive rights to set up family and entertainment centers
under the name “Total Sports Center” in the United States (“Total Sports Centers”) in which
51% of the investment will be borne by the Company and 49% by Smaaash Private. Smaaash Private will be responsible for identifying
the locations for setting up, managing and controlling the Total Sports Centers and will carry out all the fit out requirements
for such centers. Smaaash Private will also appoint the management team for the centers. Smaaash Private will be entitled to 3%
of the net revenue of each center, subject to conditions to be confirmed by the parties.
Master
License and Distribution Agreement
Grant
of license and distribution rights. Under the Master Distribution Agreement, Smaaash Private has granted to the Company an
exclusive right to purchase from Smaaash Private specialized equipment and products related to sports and recreational activities
(“Products”) in the territory under the brand name of Smaaash Private and sell them with a 15% markup
to the customers which will be the sub-franchisees of the Company who will operate the Smaaash Centers, as specified in the Master
Franchise Agreement.
Pricing.
The Company may sell the Products further to any third party franchisees at a minimum of 15% margin over and above the price at
which Smaaash Private sold the Products to the Company.
Grant
of license in Smaaash Marks. Smaaash Private has also granted the Company a license to use the Trademarks (as set out in the
Master Distribution Agreement) on a royalty free basis for the purpose of promoting the sale of the Products in the Territory.
Ownership
of the Smaaash Games. Smaaash Private will be the sole owner of any intellectual property rights relating to the Products
and all the goodwill relating thereto.
Term.
The Master Distribution Agreement will commence from its execution date and continue until the agreement is terminated in
accordance with the Master Distribution Agreement.
Termination.
The Master Distribution Agreement may be terminated (i) by the mutual written agreement of parties, (ii) by Smaaash Private
if the Company fails to make a payment or use best efforts to market the Products and such failure is not cured within 30 days’
of notice of the failure, and (iii) by the Company for any reason upon 120 days’ notice.
Settlement
Agreement
On
November 20, 2018, the Company entered into a settlement and release agreement (“Settlement Agreement”)
with Maxim Group LLC, the underwriter for the Company’s IPO (“Maxim”). Pursuant to the Settlement
Agreement, the Company made a cash payment of $20,000 to Maxim and issued a demand secured promissory note in favor of Maxim in
the amount of $1.8 million (the “Note”) to settle the payment obligations of the Company under the underwriting
agreement dated August 16, 2017, by and between the Company and Maxim. The Company also agreed to remove the restrictive legends
on an aggregate of 52,000 shares of its common stock held by Maxim and its affiliate.
The
Note accrues interest at 8% per annum from the date of the Note through and including May 20, 2019 and 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 occurs and is continuing, the interest rate will be increased to 12% per annum
and if from the date of the Note through and including August 20, 2019 and 18% per annum and if from after August 21, 2019. If
a late payment remains outstanding for over 48 hours, Maxim may require the Company to redeem all or any part of the Note (“Alternate
Payment Amount”) at a redemption price equal to 125% of the Alternate Payment Amount.
The
principal and interest of the Note will be 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 is 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 Transactions and
(ii) that certain stock purchase agreement with K2 Principal Fund L.P. (“K2”), pursuant to which K2
agreed to sell up to 220,000 shares of the Company’s common stock to the Company thirty days after the consummation of the
Transactions.
The
amount payable under the Note may be paid in shares of our Common Stock or securities convertible or exercisable into shares of
our Common Stock (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 Alternate Equity Payment. Otherwise the payment should be made in cash only.
So
long as any amount under the Note is outstanding, all cash proceeds received by the Company from any sales of its securities will
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 the amount of $1.8 million which was issued to Maxim pursuant to the Settlement Agreement (discussed
immediately above). In exchange, the Company issued to the 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
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 Optil 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.
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.
In
addition, pursuant to the terms of the Amendment, the Company agreed to amend its outstanding Public Warrants and Private Placement
Warrants (1) to reduce the exercise price of the warrants from $11.50 per share to $4.00 per share, subject to adjustment (the
“Exercise Price Adjustment”) and (2) to revise the redemption provisions of the warrants to provide
that the Company may only redeem each warrant in whole at a price of $0.1 per warrant upon a minimum of 30 days’ written
notice of redemption if, and only if, the last sale price of the Company’s common stock equals or exceeds $7.00 per share
(as opposed to the current $21.00 per share) for any 20 trading days within a 30-trading day period (the “Redemption
Threshold Adjustment”); provided, however, that the Exercise Price Adjustment and the Redemption Threshold Adjustment
shall only be effective upon the approval of the requisite number of warrant holders, as required by law.
Acquisition
of Simplicity Esports, LLC
On
January 4, 2019, 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 to Simplicity Owners at February 28, 2019.
In
connection with the acquisition of Simplicity Esports LLC, on January 2, 2019, the Company filed a Certificate of Amendment to
the Company’s Third Amended and Restated Certificate of Incorporation (the “Certificate Amendment”) with the
Delaware Secretary of State to change the Company’s name from “Smaaash Entertainment, Inc.” to “Simplicity
Esports and Gaming Company”. In addition, the Company changed the ticker symbols of its common stock and public warrants
to “WINR” and “WINRW,” respectively, and commenced trading of its common stock and public warrants under
such new ticker symbols on the OTCQB on January 10, 2019.
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 public warrants. The
Company’s common stock and public warrants were previously suspended from trading on Nasdaq, effective January 25, 2019.
On
April 2, 2019, Nasdaq filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities and
Exchange Act of 1934 on Form 25 with the Securities and Exchange Commission relating to the Company’s common stock and public
warrants. As a result, the Company’s common stock and public warrants were delisted from Nasdaq effective April 2, 2019.
The
Company’s common stock and public warrants currently have been quoted on the OTCQB under the symbols “WINR”
and “WINRW,” respectively.
Recent
Developments
PLAYLive
Nation Merger
On
July 25, 2019, the Company entered an Agreement and Plan of Merger (the “Merger Agreement”) with Esports Merger Sub,
Inc., a wholly owned subsidiary of the Company (“Merger Sub”), PLAYLive Nation, Inc. (“PLAYLive”), Duncan
Wood, Robert J. Steinberger, Eric J. Charneski, Jordan C. Jenson, and Alec T. Carpenter (collectively, Messrs. Wood, Steinberger,
Charneski, Jenson and Carpenter are referred to herein as the “PLAYLive Stockholders”), and Mr. Wood in his capacity
as representative of the Stockholders (the “Stockholder Representative”), pursuant to which the Company agreed to
acquire 100% of the issued and outstanding common stock of PLAYLive by way of a merger (the “PLAYLive Merger”) pursuant
to which Merger Sub merged with and into PLAYLive, with PLAYLive surviving the Merger and continuing as a wholly owned subsidiary
of the Company, in exchange for 750,000 shares of the Company’s common stock (the “Merger Consideration”). The
PLAYLive Merger closed on July 30, 2019.
The
name of the surviving corporation remained “PLAYLive Nation, Inc.,” the Certificate of Incorporation of the surviving
corporation is the certificate of incorporation of PLAYLive, and the bylaws of the surviving corporation are the bylaws of PLAYLive.
The directors and officers of Merger Sub immediately prior to the effective time of the PLAYLive Merger became the directors and
officers, respectively, of PLAYLive.
At
the effective time of the PLAYLive Merger, by virtue of the PLAYLive Merger and without any action on the part of Merger Sub,
PLAYLive or the holders of shares of PLAYLive common stock, each share of PLAYLive common stock issued and outstanding immediately
prior to the effective time of the PLAYLive Merger, upon the terms and subject to the conditions set forth in the Merger Agreement
was cancelled and extinguished and was converted automatically into the right to receive the per share Merger Consideration upon
surrender of the certificate representing such shares of PLAYLive common stock as provided in the Merger Agreement. Each share
of common stock of Merger Sub issued and outstanding immediately prior to the effective time of the Merger was converted into
and exchanged for one validly issued, fully paid and nonassessable share of common stock of PLAYLive. Each stock certificate of
Merger Sub evidencing ownership of any such shares continues to evidence ownership of such shares of capital stock of PLAYLive.
Promptly
following the effective time of the PLAYLive Merger, the Company made available for exchange in accordance with the terms of the
Merger Agreement that portion of the Merger Consideration issuable pursuant to the Merger Agreement in exchange for outstanding
PLAYLive common stock, provided, however, that the Company deposited into escrow 75,000 shares of Company common stock out of
the aggregate Merger Consideration otherwise issuable to the PLAYLive Stockholders pursuant to the Merger Agreement as partial
security for the indemnification obligations set forth in the Merger Agreement. No fractional shares were issued in connection
with the PLAYLive Merger. The number of shares of Company common stock issued to each PLAYLive Stockholder in connection with
the PLAYLive Merger (after aggregating all fractional shares of Company common stock that otherwise would have been received by
such holder) were rounded up to the next whole share in lieu of such fractional share.
At
the closing of the PLAYLive Merger, PLAYLive was required to have not less than $10,000 in cash net of issued but uncleared checks,
ACHs, and drafts, on deposit in PLAYLive’s principal bank account (“Minimum Cash”). Within 60 days after the
closing date, the Company may deliver a notice to the Stockholder Representative setting forth a description of any item which
caused Minimum Cash to exceed or fall below $10,000 and the actual amount of Minimum Cash on deposit in PLAYLive’s principal
bank account as of the closing (a “Minimum Cash Adjustment Notice”). If the actual amount of Minimum Cash as of the
closing is more than $10,000, then the Company will pay to the Stockholder Representative (for distribution to the PLAYLive Stockholders),
the amount by which Minimum Cash exceeds $10,000 provided, however, in no event shall the cash payment exceed an amount that will
permit the transactions contemplated by the Merger Agreement to qualify for the intended tax treatment. If the actual amount of
Minimum Cash as of the closing is less than $10,000, then the Stockholder Representative (on behalf of the PLAYLive Stockholders)
will pay to the Company the amount by which Minimum Cash is less than $10,000.
Concurrently
with execution of the Merger Agreement, the PLAYLive Stockholders executed and delivered a restrictive covenant agreement as provided
in the Merger Agreement. At closing, each of Messrs. Wood, Jenson, and Carpenter entered into an employment agreement with PLAYLive,
and each of the PLAYLive Stockholders entered into a one-year lock-up agreement with the Company.
The
PLAYLive Merger is intended to be a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986,
as amended (the “Code”), and the Merger Agreement is intended to be a “plan of reorganization” within
the meaning of the regulations promulgated under Section 368(a) of the Code and for the purpose of qualifying as a tax-free transaction
for federal income tax purposes.
Private
Unit Offering
In
2019, the Company sold an aggregate of 987,500 units (the “Units”) at a purchase price of $2.00 per Unit to 12 accredited
investors in exchange for receipt of $1,975,000. 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.
Settlement
Agreement
In
March 2019, the Company entered into a settlement agreement with its prior attorney. The settlement agreement called for $200,000
to be paid upon signing the settlement agreement and then another $525,000 to be paid over time. As of August 28, 2019, the Company
owed this attorney 525,000.
Restricted
Stock Award
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Jed Kaplan, our Chief Executive Officer and interim Chief Financial
Officer and a member of our board of directors, 120,000 shares of our restricted Common Stock. Such shares vest over a nine-month
period. As of August 27, 2019, 80,000 of such shares have vested.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Roman Franklin, our President and a member of our board of directors,
36,000 shares of our restricted Common Stock. Such shares vest over a nine-month period. As of August 27, 2019, 24,000 of such
shares have vested.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Steve Grossman, President of Simplicity Esports, LLC, a wholly
owned subsidiary of our company, 24,000 shares of our restricted Common Stock. Such shares vest over a nine month period. As of
August 27, 2019, 16,000 of such shares have vested.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan,
Franklin and Grossman on December 31, 2018.
Debt
Conversion
On
May 31, 2019, we issued 100,000 shares of Common Stock to affiliates of Polar in exchange for Polar’s forgiveness of $143,476
owed by us to Polar under that that certain Stock Purchase Agreement, dated as of November 2, 2018, between Polar and us.
Overview
of Smaaash Entertainment Private Limited
Smaaash
Private operates 40 state-of-the-art games and entertainment centers (“Smaaash Centers”), including
39 Smaaash Centers in India and one international Smaaash Center in the U.S., in addition to carrying out product sales of its
games and equipment that Smaaash has developed in-house, supported by its sponsorship and other revenues.
Smaaash
Private’s core concept is to offer an interactive, immersive and fun experience to customers at its Smaaash Centers, blending
Augmented Reality (“AR”) and Virtual Reality (“VR”) and other games, indoor
entertainment, and attractive food and beverage options, customized to the tastes and preferences of a diverse set of customers
across age groups, genders and backgrounds, including corporate customers, families, friends and children. Smaaash Private’s
game concepts are supported by its in-house technology, value engineering and systems integration capabilities.
Smaaash
Private’s game attractions are classified as follows:
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Active
games and interactive sports simulators (“Active Games”), including active game options such as
single and multi-level go-karting lanes and bowling alleys, as well as interactive simulator-based game options such as Super
Keeper, Hoop Shot, Extreme Drone Racing and more;
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In-house
developed AR and VR games, including Finger Coaster, Jurassic Escape, Vertigo Walk The Plank, Fly Max and Haunted Hospital;
and
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Arcade
games and others, including Camel Racing, Hoop Shot and Human Claw; soft play zones which are conceptualized as indoor play
areas for young children, including a ball pool, designed to encourage longer and repeat visits to Smaaash Centers and doing
away with the requirement for families to make alternative childcare arrangements for the duration of their visits to Smaaash
Centers; and indoor game viewing areas.
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Smaaash
Private’s game offerings are complemented by its in-house food & beverage services.
Smaaash
Private launched its flagship Smaaash Center in November 2012, at Kamala Mills in Lower Parel, Mumbai, with a proprietary cricket
game (obtained by Smaaash Private under a perpetual license from its founder and the patent-holder, Shripal Morakhia, for a one-time
fee) as anchor attraction. Over the last five years, Smaaash Private has transformed into a multi-center integrated games and
entertainment company, with a wide suite of in-house developed AR and VR and other games, as well as food and beverage options
at each of the Smaaash Centers. Among other marketing initiatives, from time to time, Smaaash Private ties up with local athletes,
sports icons and celebrities, including cricket, football, basketball and ice hockey players, to customize its games and increase
their appeal to its customers, including via brand ambassadorships and game options designed around specific sports personalities.
Smaaash
Private launched its first international Smaaash Center in December 2016, at the Mall of America in Minnesota, USA. Its star attraction
in its U.S. Smaaash Center is a multi-level go-karting track and games developed and launched specifically for this Smaaash Center,
keeping in mind local preferences, such as its ice hockey-themed game called “What the Puck”, and Active Games
such as Super Keeper, Hoop Shot and Extreme Drone Racing, among others.
In
fiscal year 2018, Smaaash Private acquired PVR bluO and SVM’s bowling and gaming assets to expand its footprint across India.
The acquisitions added 20 Smaaash Centers to Smaaash Private’s portfolio.
Following
the January 2019 acquisition of Simplicity Esports LLC, we determined to shift our current primary focus to the Simplicity Esports
LLC business. Accordingly, we do not anticipate generating any material revenues from Smaaash in 2019. The Master Franchise Agreement,
as amended, and the Master Distribution Agreement continue in full force and effect, however, and we may now or in the future
pursue Smaaash business opportunities.
Employees
As
of August 28, 2019, we had eleven full-time employees and three part-time employees. None of our employees is represented by a
union. We consider our relations with our employees to be good.
RISK
FACTORS
An
investment in our securities carries a significant degree of risk. You should carefully consider the following risks, as well
as the other information contained in this Annual Report on Form 10-K, including our historical financial statements and
related notes included elsewhere herein, before you decide to purchase our securities. Any one of these risks and uncertainties
has the potential to cause material adverse effects on our business, prospects, financial condition and operating results which
could cause actual results to differ materially from any forward-looking statements expressed by us and a significant decrease
in the value of our common shares and warrants. Refer to “Cautionary Statement Regarding Forward-Looking Statements”.
We
may not be successful in preventing the material adverse effects that any of the following risks and uncertainties may cause.
These potential risks and uncertainties may not be a complete list of the risks and uncertainties facing us. There may be additional
risks and uncertainties that we are presently unaware of, or presently consider immaterial, that may become material in the future
and have a material adverse effect on us. You could lose all or a significant portion of your investment due to any of these risks
and uncertainties.
Risks
Related to Our Business
We
have a relatively limited operating history and limited revenues to date and thus are subject to risks of business development
and you have no basis on which to evaluate our ability to achieve our business objective.
Because
we have a relatively limited operating history and limited revenues to date, you should consider and evaluate our operating prospects
in light of the risks and uncertainties frequently encountered by early-stage operating companies in rapidly evolving markets.
These risks include:
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that
we may not have sufficient capital to achieve our growth strategy;
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that
we may not develop our product and service offerings in a manner that enables us to be profitable and meet our customers’
requirements;
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that
our growth strategy may not be successful; and
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that
fluctuations in our operating results will be significant relative to our revenues.
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Our
future growth will depend substantially on our ability to address these and the other risks described in this section. If we do
not successfully address these risks, our business could be significantly harmed.
We
have a history of operating losses and our auditors have indicated that there is a substantial doubt about our ability to continue
as a going concern.
To
date, we have not been profitable and have incurred significant losses and cash flow deficits. For the fiscal year ended May 31,
2018 and the period from April 17, 2017 (inception) to May 31, 2017, we reported net losses of $8,862 and $672, respectively,
and negative cash flow from operating activities of $470,153 and $672, respectively. For the nine months ended February 28, 2019
and 2018, we reported a net loss of $3,095,960 and net income of $4,165, respectively, and negative cash flow from operating activities
of $823,847 and $38,299, respectively. As of February 28, 2019, we had an aggregate accumulated deficit of approximately $3,105,494.
We anticipate that we will continue to report losses and negative cash flow. As a result of these net losses and cash flow deficits
as well as our dependence on private equity and financings, our independent auditors have indicated that there is a substantial
doubt about our ability to continue as a going concern in Note 2 of our unaudited consolidated financial statements for the nine-months
ended February 28, 2019.
Our
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These
adjustments would likely include substantial impairment of the carrying amount of our assets and potential contingent liabilities
that may arise if we are unable to fulfill various operational commitments. In addition, the value of our securities, would be greatly impaired. Our ability to continue as a going concern is dependent upon
generating sufficient cash flow from operations and obtaining additional capital and financing. If our ability to generate cash flow from operations is delayed or reduced and we are unable to raise additional
funding from other sources, we may be unable to continue in business. For further discussion
about our ability to continue as a going concern and our plan for future liquidity, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Ability to Continue as a Going Concern.”
We
are a holding company and depend upon our subsidiaries for our cash flows.
We
are a holding company. All of our operations are conducted, and almost all of our assets are owned, by our subsidiaries. Consequently,
our cash flows and our ability to meet our obligations depend upon the cash flows of our subsidiaries and the payment of funds
by these subsidiaries to us in the form of dividends, distributions or otherwise. The ability of our subsidiaries to make any
payments to us depends on their earnings, the terms of their indebtedness, including the terms of any credit facilities and legal
restrictions. Any failure to receive dividends or distributions from our subsidiaries when needed could have a material adverse
effect on our business, results of operations or financial condition.
Future
acquisitions or strategic investments could disrupt our business and harm our business, results of operations or financial condition.
We
may in the future explore potential acquisitions of companies or strategic investments to strengthen our business. Even if we
identify an appropriate acquisition candidate, we may not be successful in negotiating the terms or financing of the acquisition,
and our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired
business.
Acquisitions
involve numerous risks, any of which could harm our business, including:
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straining
our financial resources to acquire a company;
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anticipated
benefits may not materialize as rapidly as we expect, or at all;
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diversion
of management time and focus from operating our business to address acquisition integration challenges;
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retention
of employees from the acquired company;
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cultural
challenges associated with integrating employees from the acquired company into our organization;
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integration
of the acquired company’s accounting, management information, human resources and other administrative systems;
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the
need to implement or improve controls, procedures and policies at a business that prior to the acquisition may have lacked
effective controls, procedures and policies; and
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litigation
or other claims in connection with the acquired company, including claims from terminated employees, former stockholders or
other third parties.
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Failure
to appropriately mitigate these risks or other issues related to such strategic investments and acquisitions could result in reducing
or completely eliminating any anticipated benefits of transactions, and harm our business generally. Future acquisitions could
also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses
or the impairment of goodwill, any of which could have a material adverse effect on business, results of operations or financial
condition.
We
may require additional funding for our growth plans, and such funding may result in a dilution of your investment.
We
attempted to estimate our funding requirements in order to implement our growth plans. If the costs of implementing such plans
should exceed these estimates significantly or if we come across opportunities to grow through expansion plans which cannot be
predicted at this time, and our funds generated from our operations prove insufficient for such purposes, we may need to raise
additional funds to meet these funding requirements.
These
additional funds may be raised by issuing equity or debt securities or by borrowing from banks or other resources. We cannot assure
you that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to obtain
additional financing on terms that are acceptable to us, we will not be able to implement such plans fully if at all. Such financing
even if obtained, may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’
consent for payment of dividends, or restrict our freedom to operate our business by requiring lender’s consent for certain
corporate actions.
Further,
if we raise additional funds by way of a rights offering or through the issuance of new shares, any shareholders who are unable
or unwilling to participate in such an additional round of fund raising may suffer dilution in their investment.
We
may become subject to the requirements of the Investment Company Act, which would limit our business operations and require us
to spend significant resources to comply with such act.
The
Investment Company Act of 1940, as amended (the “Investment Company Act”), defines an “investment company”
as an issuer that is engaged in the business of investing, reinvesting, owning, holding or trading in securities and owns investment
securities having a value exceeding 40 percent of the issuer’s unconsolidated assets, excluding cash items and securities
issued by the federal government. While we believe that a reasonable investor would not conclude that we are engaged primarily
in investing in securities based on our business plan focused on operating a global virtual reality gaming and fully integrated
esports platform, operating corporate owned as well as franchising Simplicity Esports Gaming Centers in United States, and making
acquisitions in the active entertainment industry in the United States, the composition of our assets after the Acquisition and
Transactions, including our ownership of equity shares in Simplicity Esports LLC and Smaaash Private, could contribute to a conclusion
that we meet the threshold definition of an investment company. While the Investment Company Act also has several exclusions and
exceptions that we would seek to rely upon to avoid being deemed an investment company, our reliance on any such exclusions or
exceptions may be misplaced resulting in violation of the Investment Company Act, the consequences of which can be significant.
For example, investment companies that fail to register under the Investment Company Act are prohibited from conducting business
in interstate commerce, which includes selling securities or entering into other contracts in interstate commerce. Section 47(b)
of the Investment Company Act provides that a contract made, or whose performance involves, a violation of the Investment Company
Act is unenforceable by either party unless a court finds that enforcement would produce a more equitable result than non-enforcement.
Similarly, a court may not deny rescission to any party seeking to rescind a contract that violates the Investment Company Act,
unless the court finds that denial of rescission would produce more equitable result than granting rescission.
If
we are deemed to be an investment company under the Investment Company Act, Rule 3a-2 of the Investment Company Act provides that
inadvertent or transient investment companies will not be treated as investment companies subject to the provisions of the Investment
Company Act, provided the issuer has the requisite intent to be engaged in a non-investment business, evidenced by the issuer’s
business activities and an appropriate resolution of the issuer’s board of directors, within one year from the commencement
of the earlier of (1) the date on which the issuer owns securities and/or cash having a value exceeding 50% of the value of such
issuer’s total assets on either a consolidated or unconsolidated basis, or (2) the date on which an issuer owns or proposes
to acquire investment securities (as defined in section 3(a) of the Investment Company Act) having a value exceeding 40% of the
value of such issuer’s total assets (exclusive of government securities and cash items) on an unconsolidated basis. If the
Company becomes an inadvertent investment company, and fails to meet the requirements of the transient investment company exemption
under Rule 3a-2 of the Investment Company Act, then we will be required to register as an investment company with the SEC.
We
may not have sufficient capital to fund our ongoing operations, effectively pursue our strategy or sustain our growth initiatives.
After
the consummation of the acquisition of Simplicity Esports LLC, our remaining liquidity and capital resources may not be sufficient
to allow us to fund our ongoing operations, effectively pursue our strategy or sustain our growth initiatives. If we require additional
capital resources, we may seek such funds directly from third party sources; however, we may not be able to obtain sufficient
equity capital and/or debt financing from third parties to allow us to fund our expected ongoing operations or we may not be able
to obtain such equity capital or debt financing on acceptable terms or conditions. Factors affecting the availability of equity
capital or debt financing to us on acceptable terms and conditions include:
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Our
current and future financial results and position;
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the
collateral availability of our otherwise unsecured assets;
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the
market’s, investors and lenders’ view of our industry and products;
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the
perception in the equity and debt markets of our ability to execute our business plan or achieve our operating results expectations;
and
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the
price, volatility and trading volume and history of our Common Stock.
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If
we are unable to obtain the equity capital or debt financing necessary to fund our ongoing operations, pursue our strategy and
sustain our growth initiatives, we may be forced to scale back our operations or our expansion initiatives, and our business and
operating results will be materially adversely affected.
Our
growth strategy depends on the availability of suitable locations for our Simplicity Esports Gaming Centers and our ability to
open new Simplicity Esports Gaming Centers and operate them profitably.
A
key element of our growth strategy is to extend our brand by opening corporate owned as well as franchising retail Simplicity
Esports Gaming Centers in locations in the United States that we believe will provide attractive returns on investment. We have
initially identified five sites for potential Simplicity Esports Gaming Centers, in the United States, however, desirable locations
for additional Simplicity Esports Gaming Center openings may not be available at an acceptable cost when we identify a particular
opportunity for a new Simplicity Esports Gaming Center.
In
addition, our ability to open new Simplicity Esports Gaming Centers on a timely and cost-effective basis, or at all, is dependent
on a number of factors, many of which are beyond our control, including our ability or the ability of the selected franchisee
to:
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reach
acceptable agreements regarding the lease of the locations;
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comply
with applicable zoning, licensing, land use and environmental regulations;
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raise
or have available an adequate amount of cash or currently available financing for construction and opening costs;
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timely
hire, train and retain the skilled management and other employees necessary to meet staffing needs;
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obtain,
for acceptable cost, required permits and approvals, including liquor licenses; and
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efficiently
manage the amount of time and money used to build and open each new Simplicity Esports Gaming Center.
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If
we succeed in opening new Simplicity Esports Gaming Centers on a timely and cost-effective basis, we may nonetheless be unable
to attract enough customers to the new Simplicity Esports Gaming Centers because potential customers may be unfamiliar with our
Simplicity Esports Gaming Centers or concepts, or our entertainment and menu options might not appeal to them. Our new Simplicity
Esports Gaming Centers may not meet or exceed our performance targets, including target cash-on-cash returns. New Simplicity Esports
Gaming Centers may even operate at a loss, which could have a significant adverse effect on our overall operating results.
Our
operations of Simplicity Esports Gaming Centers are significantly dependent on changes in public and customer tastes and discretionary
spending patterns. Our inability to successfully anticipate customer preferences or to gain popularity for such Simplicity Esports
Gaming Centers games may negatively impact our profitability.
Our
success depends significantly on public and customer tastes and preferences, which can be unpredictable. If we are unable to successfully
anticipate customer preferences or increase the popularity of the games offered at the Simplicity Esports Gaming Centers, the
per capita revenue and overall customer expenditures at the Simplicity Esports Gaming Centers may decrease, and thereby negatively
impact our profitability. In response to such developments, we may need to increase our marketing and product development efforts
and expenditures, adjust our game or product sale pricing, modify the games themselves, or take other actions, which may further
erode our profit margins, or otherwise adversely affect our results of operations and financial condition. In particular, we may
need to expend considerable cost and effort in carrying out extensive research and development to assess the potential interest
in a game, testing and launching new games, and to remain abreast with continually evolving technology and trends, as well as
the success and popularity of Simplicity stream team’s casters, influencers and personalities among Simplicity Esports LLC’s
dedicated fan base.
While
we may incur significant expenditures of this nature, including in the future as we continue to expand our operations, there can
be no assurance that any such expenditures or investments by us will yield expected or commensurate returns or results, within
a reasonable or anticipated time, or at all.
The
nature of our business exposes us to negative publicity or customer complaints, including in relation to, among other things,
accidents, injuries or thefts at the Simplicity Esports Gaming Centers, or health and safety concerns arising from improper use
of our game equipment or at our food and beverage venues.
Our
business inherently exposes us to negative publicity or customer complaints as a result of accidents, injuries, or in extreme
cases, deaths, arising from instances of air-borne, water-borne or food-borne contagion or illness, food contamination, spoilage,
tampering, equipment failure, improper use of our equipment, fire, explosion, terrorist attacks or civil riots, and other safety
or security issues, such as kidnapping, or associated risks arising from other actual or perceived non-compliance with safety,
quality or service standards or norms in relation to the various game, entertainment and food and beverage attractions at the
Simplicity Esports Gaming Centers. Even isolated or sporadic incidents or accidents may have a negative impact on our brand image
and reputation, and the Simplicity Esports Gaming Centers’ or games’ or our own popularity with customers. The considerable
expansion of social media in recent years has compounded the effect of any potential negative publicity.
We
cannot guarantee that its employee training, internal controls and other precautions will be sufficient to prevent any such occurrence
at the Simplicity Esports Gaming Centers, in relation to our Simplicity global virtual reality gaming and fully integrated esports
platform, or to control or mitigate any negative consequences. In addition, we or our franchisees rely on third-party security
and housekeeping staff for certain non-core functions, as well as certain technology vendors and partners. Although we monitors
vendors and partners and, in certain cases, may have a contractual indemnity or recourse in case of any default on their part,
our ability to assure a safe and satisfactory experience to our customers is necessarily limited to the extent of our or our franchisees’,
dependence on third parties, from time to time. Moreover, we may not be able to distance or insulate ourselves from any adverse
publicity or reputational damage arising from any act, omission or negligence on the part of a vendor or other third party, which
may negatively affect a customer’s experience at any of the Simplicity Esports Gaming Centers.
We
or our franchisees may not be able to operate in the United States, or obtain and maintain licenses and permits necessary for
such operation, in compliance with laws, regulations and other requirements, which could adversely affect our business, results
of operations or financial condition.
Each
Simplicity Esports Gaming Center will be subject to licensing and regulation by alcoholic beverage control, amusement, health,
sanitation, safety, building code and fire agencies in the country, state, county and/or municipality in which the Simplicity
Esports Gaming Center is located. In the United States, each Simplicity Esports Gaming Center with a restaurant or bar will be
required to obtain a license to sell alcoholic beverages on the premises from a state authority and, in certain locations, county
and municipal authorities. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time.
In some states, the loss of a license for cause with respect to one Simplicity Esports Gaming Center may lead to the loss of licenses
at all Simplicity Esports Gaming Centers in that state and could make it more difficult to obtain additional licenses in that
state. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each Simplicity Esports Gaming
Center, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control
and handling and storage and dispensing of alcoholic beverages. Our failure or a failure by a franchisee in obtaining and maintaining
the required licenses, permits and approvals at any one Simplicity Esports Gaming Center could impact the continuing operations
of existing Simplicity Esports Gaming Centers, or delay or prevent the opening of new Simplicity Esports Gaming Centers. Although
we do not anticipate any material difficulties occurring in the future, the failure to receive or retain a liquor license, or
any other required permit or license, in a particular location, or to continue to qualify for, or renew licenses, could have a
material adverse effect on operations and our ability to obtain such a license or permit in other locations.
As
a result of operating certain entertainment games and attractions, including skill-based games that offer redemption prizes, the
Simplicity Esports Gaming Centers in the United States are subject to amusement licensing and regulation by the countries, states,
provinces, counties and municipalities in which our Simplicity Esports Gaming Centers are located. These laws and regulations
can vary significantly by country, state, province, county, and municipality and, in some jurisdictions, may require us to modify
our business operations or alter the mix of redemption games and simulators we offer. Moreover, as more states in the United States
and local communities implement legalized gambling, the laws and corresponding enabling regulations may also be applicable to
our redemption games and regulators may create new licensing requirements, taxes or fees, or restrictions on the various types
of redemption games we offer. Furthermore, other states, provinces, counties and municipalities may make changes to existing laws
to further regulate legalized gaming and illegal gambling. Adoption of these laws, or adverse interpretation of existing laws,
after we have established a Simplicity Esports Gaming Center in the jurisdiction could require the existing center in these jurisdictions
to alter the mix of games, modify certain games, change the mix of prizes that we may offer or terminate the use of specific games,
any of which could adversely affect our operations.
We
are also subject to laws and regulations governing our relationship with our employees, including those related to minimum wage
requirements, exempt status, overtime, health insurance mandates, working and safety conditions, immigration status requirements,
child labor, and non-discrimination. Additionally, changes in federal labor laws, including card verification regulations, could
result in portions of our workforce being subjected to greater organized labor influence, which could result in an increase to
our labor costs. A significant portion of Simplicity Esports Gaming Center personnel will be paid at minimum wage rates established
by federal, state and municipal law. Increases in the minimum wage result in higher labor costs, which may be only partially offset
by price increases and operational efficiencies.
We
are also subject to the rules and regulations of the Federal Trade Commission and various state laws regulating the offer and
sale of franchises. The Federal Trade Commission and various state laws require that we furnish a franchise disclosure document
containing certain information to prospective franchisees, and a number of states require registration of the franchise disclosure
document with state authorities. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial
number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the
franchisor-franchisee relationship. The state laws often limit, among other things, the duration and scope of non-competition
provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate
sources of supply. We shall endeavor to make sure that any franchise disclosure document we provide, together with any applicable
state versions or supplements, and franchising procedures, comply in all material respects with both the Federal Trade Commission
guidelines and all applicable state laws regulating franchising in those states in which we have offered franchises.
If
we and our franchisees fail to comply with such laws and regulations, we may be subject to various sanctions and/or penalties
and fines or may be required to cease operations until we achieve compliance, which could have an adverse effect on our business
and our financial results.
Our
growth through franchising may not occur as rapidly as we currently anticipate and may be subject to additional risks.
As
part of our growth strategy, we will continue to seek franchisees to operate Simplicity Esports Gaming Centers in certain strategic
domestic locations or venues. We believe that our ability to recruit, retain and contract with qualified franchisees will be increasingly
important to our operations as we expand. Our franchisees are dependent upon the availability of adequate sources of financing
in order to meet their development obligations. Such financing may not be available to our franchisees, or only available upon
disadvantageous terms. Our franchise strategy may not enhance our results of operations.
Expanding
through franchising exposes our business and brand to risks because the quality of the franchised operations will be beyond our
immediate control, including risks associated with our confidential information, intellectual properties (including trademarks)
and brand reputation. Even if we have contractual remedies to cause franchisees to maintain operational standards, enforcing those
remedies may require litigation and therefore our image and reputation may suffer, unless and until such litigation is successfully
concluded.
We
could face liability from or as a result of our franchisees.
Various
state and federal laws will govern the relationship between us and our franchisees and the potential sale of a franchise. If we
fail to comply with these laws, we could be liable for damages to franchisees and fines or other penalties. A franchisee or government
agency may bring legal action against us based on the franchisee/franchisor relationship. Also, under the franchise business model,
we may face claims and liabilities based on vicarious liability, joint-employer liability, or other theories or liabilities. Such
legal actions could result in expensive litigation with our franchisees or government agencies that could adversely affect both
our profit and our important relations with our franchisees. In addition, regulatory or legal developments could result in changes
to laws or the franchisor/franchisee relationship that could negatively impact the franchise business model and, accordingly,
our profit.
We
may not be able to compete favorably in the highly competitive out-of-home and home-based entertainment market in the United States,
which could have a material adverse effect on our business, results of operations or financial condition.
The
out-of-home entertainment market in the United States is highly competitive. Simplicity Esports Gaming Centers that we or our
franchisees operate will compete for customers’ discretionary entertainment dollars with providers of out-of-home entertainment,
including localized attraction facilities such as movie theatres, sporting events, bowling alleys, sports activity centers, arcades
and entertainment centers, nightclubs and restaurants as well as theme parks. Many of the entities operating these businesses
are larger and have significantly greater financial resources, a greater number of locations, have been in business longer, have
greater name and brand recognition and are better established in the local markets where Simplicity Esports Gaming Centers are
planned to be located. As a result, they may be able to invest greater resources than we can in attracting customers and succeed
in attracting customers who would otherwise come to the Simplicity Esports Gaming Centers we or our franchisees operate. In the
United States, the legalization of casino gambling in geographic areas near any future Simplicity Esports Gaming Center would
create the possibility for adult entertainment alternatives, which could have a material adverse effect on our business and financial
condition. We will also face competition from local, regional and national establishments that offer entertainment experiences
similar to us. Simplicity Esports Gaming Centers we or our franchisees operate will also face competition from increasingly sophisticated
home-based forms of entertainment, such as internet and video gaming and home movie streaming and delivery. If we fail to compete
favorably in the competitive out-of-home and home-based entertainment markets it could have a material adverse effect on our business,
results of operations and financial condition.
Our
senior management team has limited experience in establishing, operating, licensing rights to and franchising entertainment centers
and related products.
The
members of our senior management team have extensive backgrounds in finance and the management of financial services businesses,
however, they have limited prior experience in establishing, operating, licensing rights to and franchising entertainment centers.
We will need to expand our management team, to include individuals with expertise in establishing and operating entertainment
centers as well as individuals with expertise in product licensing and franchise operations. If we are unable to recruit professionals
with acceptable backgrounds in establishing and operating entertainment centers and with backgrounds in product licensing and
financing, we may not be able to pursue our growth strategy which could have a material adverse effect on our business and results
of operations.
Our
success depends upon our ability to recruit and retain qualified management and operating personnel at Simplicity Esports Gaming
Centers.
We
and our franchisees must attract, retain and motivate a sufficient number of qualified management and operating personnel in order
to maintain consistency in our service, hospitality, quality and atmosphere of our Simplicity Esports Gaming Centers. Qualified
management and operating personnel are typically in high demand. If we and our franchisees are unable to attract and retain a
satisfactory number of qualified management and operating personnel, labor shortages could delay the planned openings of new Simplicity
Esports Gaming Centers which could have a material adverse effect on our business and results of operations.
Our
business and operations are subject to various risks relating to the acquisitions of target companies. Our inability to complete
and successfully integrate the future acquisition targets may affect our growth strategy, market share, profitability or competitive
position.
We
plan to expand through future acquisitions of companies along with organic growth. There can be no assurance that we will be able
to successfully integrate the acquired businesses into our existing operations as planned. We may be adversely impacted by liabilities
that we assume from these acquisitions, including known and unknown obligations, intellectual property or other assets, terminated
employees, current or former clients, or other third parties, and we may fail to identify or adequately assess the magnitude of
certain liabilities, shortcomings or other circumstances prior to the acquisitions, which could result in unexpected legal or
regulatory exposure, unfavorable accounting treatment, unexpected increases in taxes, or other adverse effects on our business.
Our
insurance coverage may not adequately protect us against all future risks, which may adversely affect our business and prospects.
We
maintain insurance coverage, including for fire, acts of god and perils, terrorism, burglary, money, loss of profit, fidelity
guarantee, fixed glass and sanitary fitting, electronic equipment, machinery breakdown, portable equipment, sign boards, commercial
general liability, marine transit, and directors’ and officers’ liability insurance, as well as employee health and
medical insurance, with standard exclusions in each instance. While we maintain insurance in amounts that we consider reasonably
sufficient for a business of our nature and scale, with insurers that we consider reliable and credit worthy, we may face losses
and liabilities that are uninsurable by their nature, or that are not covered, fully or at all, under our existing insurance policies.
Moreover, coverage under such insurance policies would generally be subject to certain standard or negotiated exclusions or qualifications
and, therefore, any future insurance claims by us may not be honored by our insurers in full, or at all. In addition, our premium
payments under our insurance policies may require a significant investment by us.
To
the extent that we suffers loss or damage for which we did not obtain insurance, that is not covered by insurance or that exceeds
our insurance coverage, the loss will have to be borne by us and our business, cash flow, financial condition, results of operations
and prospects may be adversely affected.
Changes
in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business, investments and
results of operations.
We
are subject to laws and regulations enacted by national, regional and local governments. In particular, we will be required to
comply with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may
be difficult, time consuming and costly. Those laws and regulations and their interpretation and application may also change from
time to time and those changes could have a material adverse effect on our business, investments and results of operations. In
addition, a failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect
on our business and results of operations.
We
are dependent upon our executive officers and directors and their departure could adversely affect our ability to operate.
Our
operations are dependent upon a relatively small group of individuals and, in particular, our executive officers and directors.
We believe that our success depends on the continued service of our executive officers and directors. In addition, our executive
officers and directors are not required to commit any specified amount of time to our affairs and, accordingly, will have conflicts
of interest in allocating management time among various business activities, including identifying potential business combinations
and monitoring the related due diligence. We do not have an employment agreement with, or key-man insurance on the life of, any
of our directors or executive officers. The unexpected loss of the services of one or more of our directors or executive officers
could have a detrimental effect on us.
Our
executive officers, directors, security holders and their respective affiliates may have competitive pecuniary interests that
conflict with our interests.
We
have not adopted a policy that expressly prohibits our directors, executive officers, security holders or affiliates from having
a direct or indirect pecuniary or financial interest in any investment to be acquired or disposed of by us or in any transaction
to which we are a party or have an interest. Nor do we have a policy that expressly prohibits any such persons from engaging for
their own account in business activities of the types conducted by us. Accordingly, such persons or entities may have a conflict
between their interests and ours.
We
are an emerging growth company within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure
requirements available to emerging growth companies, this could make our securities less attractive to investors and may make
it more difficult to compare our performance with other public companies.
We
are an “emerging growth company” within the meaning of the Securities Act, as modified by the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being
required to comply with the auditor internal controls attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the
requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. As a result, our stockholders may not have access to certain information they may deem important.
We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier,
including if the market value of our Common Stock held by non-affiliates exceeds $700 million as of any June 30 before that time,
in which case we would no longer be an emerging growth company as of the following December 31. We cannot predict whether investors
will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less
attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise
would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.
Further,
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial
accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared
effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company
can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies
but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means
that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging
growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may
make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging
growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences
in accounting standards used.
Compliance
obligations under the Sarbanes-Oxley Act may require substantial financial and management resources.
Section
404 of the Sarbanes-Oxley Act requires that we evaluate and report on our system of internal controls beginning with our Annual
Report on Form 10-K for the year ended May 31, 2019. As long as we remain an emerging growth company, we will not be required
to comply with the independent registered public accounting firm attestation requirement on our internal control over financial
reporting.
Provisions
in our third amended and restated certificate of incorporation, as amended, and Delaware law may inhibit a takeover of us, which
could limit the price investors might be willing to pay in the future for our Common Stock and could entrench management.
Our
third amended and restated certificate of incorporation, as amended, contains provisions that may discourage unsolicited takeover
proposals that stockholders may consider to be in their best interests. These provisions include a staggered board of directors
and the ability of the board of directors to designate the terms of and issue new series of preferred shares, which may make more
difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing
market prices for our securities.
If
we fail to keep pace with changing industry technology and consumer preferences, we will be at a competitive disadvantage.
The
Simplicity products and services compete within industries that are characterized by swiftly changing technology, evolving industry
standards, frequent new and enhanced product introductions, rapidly changing consumer preferences and product obsolescence. In
order to continue to compete effectively, we need to respond quickly to technological changes and to understand their impact on
customers’ preferences. We may take significant time and resources to respond to these technological changes and changes
in consumer preferences. Our business and results of operations may be negatively impacted if our products and services fail to
keep pace with these changes.
A
failure or unanticipated delay in securing any necessary or desired certification for Simplicity Esports LLC’s products
from government or regulatory organizations could impair distribution of Simplicity Esports LLC’s products and materially
and adversely affect our results of operations and financial condition.
In
order for certain Simplicity Esports LLC’s products to be commercially distributed for use in certain target markets, they
must first be certified by certain government or regulatory organizations, such as the Underwriters Laboratory (UL) in the U.S.
and the Technischer Überwachungs-Verein (TÜV) and Conforme Européene (CE) in Europe. A failure or unanticipated
delay in securing any necessary or desired certification for the Simplicity Esports LLC’s products could impair sales of
Simplicity Esports LLC’s products and materially and adversely affect our business, results of operations and financial
condition.
Various
product safety laws and governmental regulations applicable to the distributor of Simplicity Esports LLC’s products may
adversely affect our business, results of operations and financial condition.
Our
distribution of Simplicity Esports LLC’s products will be subject to numerous federal, state, provincial, local and foreign
laws and regulations, including laws and regulations with respect to product safety, including regulations enforced by the United
States Consumer Products Safety Commission. We and our franchisees could incur costs in complying with these regulations and,
if they fail to comply, could incur significant penalties. A failure to comply with applicable laws and regulations, or concerns
about product safety, may also lead to a recall or post-manufacture repair of selected Simplicity Esports LLC’s products,
resulting in the rejection of the products by our franchisees, lost sales, increased customer service and support costs, and costly
litigation.
Risks
Relating to Our Esports Business
Our
esports business faces intense and wide-ranging competition, which may have a material negative effect on our business and results
of operations.
The
success of an esports business, like the esports business of Simplicity Esports LLC, is dependent upon the performance and/or
popularity of its teams. Simplicity Esports LLC’s teams compete, in varying respects and degrees, with other live sporting
events, and with sporting events delivered over television networks, radio, the Internet and online services, mobile applications
and other alternative sources. For example, our esports teams compete for attendance, viewership and advertising with a wide range
of alternatives available in major metropolitan areas. During some or all of the esports season, our teams face competition, in
varying respects and degrees, from professional and collegiate basketball, hockey, baseball, football, and soccer, among others.
As
a result of the large number of options available, we face strong competition for the sports and gaming fan. We must compete with
other esports teams, traditional sports teams and sporting events, in varying respects and degrees, including on the basis of
the quality of the teams we field, their success in the leagues, tournaments and genres in which they compete, our ability to
provide an entertaining environment at any esports games that we host at our centers, prices charged for tickets and the viewing
availability of our teams on multiple media alternatives. Given the nature of esports and sports in general, there can be no assurance
that we will be able to compete effectively, including with companies that may have greater resources than we have, and as a consequence,
our business and results of operations may be materially negatively affected by competition.
Our
businesses are substantially dependent on the continued popularity and/or competitive success of Simplicity Esports LLC’s
teams, which cannot be assured.
Our
future financial results will be dependent on the Simplicity teams becoming and remaining popular with our fan base and, in varying
degrees, on the team achieving in-game success, which can generate fan enthusiasm, resulting in sustained ticket and merchandise
sales during the season. Furthermore, success in the regular season at certain tournaments may qualify one or more of our esports
teams for participation in post-season playoffs, which provides us with additional revenue from prize money by increasing the
number of games played by our sports teams and, more importantly, by generating increased excitement and interest in our esports
teams, which can improve attendance in subsequent seasons. There can be no assurance that any of our esports teams, will develop
a significant fan base, maintain continued popularity or compete in post-season play in the future.
The
actions of the various esports leagues and tournaments may have a material negative effect on our business and results of operations.
The
governing bodies of the various esports leagues and tournaments, under certain circumstances, can take actions that they deem
to be in the best interests of their respective leagues or tournaments, which may not necessarily be consistent with maximizing
our results of operations and which could affect our esports teams in ways that are different than the impact on other esports
teams. For example they can take actions relating to the rights to telecast the games of league members or tournament participants,
including the Simplicity team, licensing of the rights to produce and sell merchandise bearing the logos and/or other intellectual
property of our esports teams and the leagues or tournaments, and the internet-based activities of our esports teams. Certain
of these decisions by the esports leagues and tournaments could have a material negative effect on our business and results of
operations. From time to time, we may disagree with or challenge actions that the leagues or tournaments take or the power and
authority they assert.
We
may be unable to effectively manage the growth in the scope and complexity of our business, including our expansion into the esports
business which is untested and into adjacent business opportunities.
Our
future success depends, in part, on our ability to manage our expanded business, including through the acquisition of Simplicity,
and our aspirations for continued expansion. We intend to dedicate resources to a new business model that is largely untested,
as is the case with esports. We do not know to what extent our future expansions will be successful. Further, even if successful,
the growth of our business could create significant challenges for our management, operational, and financial resources, and could
increase existing strain on, and divert focus from, our core businesses. If not managed effectively, this growth could result
in the over-extension of our operating infrastructure, and our management systems, information technology systems, and internal
controls and procedures may not be adequate to support this growth. Failure to adequately manage our growth in any of these ways
may cause damage to our brand, damage our reputation or otherwise negatively impact our business.
Our
industry is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our resources among,
emerging technologies and business models, our business may be negatively impacted.
Technology
changes rapidly in the interactive entertainment industry. We must continually anticipate and adapt our products, services and
business models to emerging technologies and delivery platforms in order to stay competitive. Forecasting our revenues and profitability
for these new products, services and business models is inherently uncertain and volatile, and if we invest in the development
of interactive entertainment products or services incorporating a new technology or for a new platform that does not achieve significant
commercial success, whether because of competition or otherwise, we may not recover the often substantial “up front”
costs of developing and marketing those products and services, or recover the opportunity cost of diverting management and financial
resources away from other products or services. Further, our competitors may adapt to an emerging technology or business model
more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to consumers,
or both.
If,
on the other hand, we elect not to pursue the development of products or services incorporating a new technology or for new platforms,
or otherwise elect not to pursue new business models, that achieve significant commercial success, it may have adverse consequences.
It may take significant time and resources to shift product development resources to that technology, platform or business model,
as the case may be, and may be more difficult to compete against existing products and services incorporating that technology
or for that platform or against companies using that business model.
We
may encounter difficulties in integrating Simplicity Esports LLC’s esports businesses or otherwise realizing the anticipated
benefits of the transaction.
As
part of our business strategy, from time to time, we acquire, make investments in, or enter into strategic alliances and joint
ventures with, complementary businesses, such as the acquisition of the Simplicity esports business. The acquisition of Simplicity
Esports LLC involves significant risks and uncertainties, including: (i) the potential for Simplicity Esports LLC’s business
to underperform relative to our expectations and the acquisition price, (ii) the potential for Simplicity Esports LLC’s
business to cause our financial results to differ from expectations in any given period, or over the longer-term, (iii) unexpected
tax consequences from the acquisition, or the tax treatment of Simplicity Esports LLC’s business’s operations going
forward, giving rise to incremental tax liabilities that are difficult to predict, (iv) difficulty in integrating Simplicity Esports
LLC’s business, its operations and its employees in an efficient and effective manner, (v) any unknown liabilities or internal
control deficiencies assumed as part of the acquisition, and (vi) the potential loss of key employees of Simplicity Esports LLC’s
businesses. Further, the transaction may involve the risk that our senior management’s attention will be excessively diverted
from our other operations, the risk that the gaming industry does not evolve as anticipated and that any intellectual property
or personnel skills acquired do not prove to be those needed for our future success, and the risk that our strategic objectives,
cost savings or other anticipated benefits are otherwise not achieved.
Our
business may be harmed if our licensing partners, or other third parties with whom we do business, act in ways that put our brand
at risk.
We
anticipate that our business partners shall be given access to sensitive and proprietary information or control over our intellectual
property in order to provide services and support to our teams. These third parties may misappropriate our information or intellectual
property and engage in unauthorized use of it or otherwise act in a way that places our brand at risk. The failure of these third
parties to provide adequate services and technologies, the failure of third parties to adequately maintain or update their services
and technologies or the misappropriation or misuse of this information or intellectual property could result in a disruption to
our business operations or an adverse effect on our reputation, and may negatively impact our business.
Our
business is highly dependent on the success and availability of video game platforms manufactured by third parties.
We
expect to derive a substantial portion of our revenues from esports games played on game platforms manufactured by third parties,
such as Sony’s PS4, Microsoft’s Xbox One, and Nintendo’s Wii U and Switch, and PCs. The success of our business
will be driven in large part by our ability to accurately predict which platforms will be successful in the marketplace. We also
rely on the availability of an adequate supply of these video game consoles and the continued support for these consoles by their
manufacturers. We may be required to commit significant resources well in advance of the anticipated introduction of a new platform.
If increased costs are not offset by higher revenues and other cost efficiencies, our business could be negatively impacted. If
the platforms for which we invested resources do not attain significant market acceptance, we may not be able to recover our costs,
which could be significant.
The
games we support are subject to scrutiny regarding the appropriateness of their content. If the publishers and distributors we
partner with fail to receive their target ratings for certain titles, or if retailers refuse to sell such titles due to what they
perceive to be objectionable content, it could have a negative impact on our business.
Console
and PC games are subject to ratings by the Entertainment Software Rating Board (the “ESRB”), a self-regulatory body
based in the U.S. that provides U.S. and Canadian consumers of interactive entertainment software with ratings information, including
information on the content in such software, such as violence, nudity or sexual content, along with an assessment of the suitability
of the content for certain age groups. Certain other countries have also established content rating systems as prerequisites for
product sales in those countries. In addition, certain stores use other ratings systems, such as Apple’s use of its proprietary
“App Rating System” and Google Play’s use of the International Age Rating Coalition (IARC) rating system. If
the software publishers that supply our games are unable to obtain the ratings they have targeted for their products, it could
have a negative impact on our business. In some instances, the software publishers and developers may be required to modify their
products to comply with the requirements of the rating systems, which could delay or disrupt the release of any given product,
or may prevent its sale altogether in certain territories, which would limited its availability for use in the games that our
teams play.
We
will depend on servers to operate our games with online features. If we were to lose server functionality for any reason, our
business may be negatively impacted.
Our
business at our game centers will rely on the continuous operation of servers, some of which are owned and operated by third parties.
Although we shall strive to maintain more than sufficient server capacity, and provide for active redundancy in the event of limited
hardware failure, any broad-based catastrophic server malfunction, a significant service-disrupting attack or intrusion by hackers
that circumvents security measures, a failure of disaster recovery service or the failure of a company on which we are relying
for server capacity to provide that capacity for whatever reason would likely degrade or interrupt the functionality of our games
with online features, and could prevent the operation of such games altogether, any of which could result in the loss of sales
for, or in, such games.
We
also rely on networks operated by third parties, such as the PlayStation Network, Xbox Live and Steam, for the functionality of
the games we use which have online features. An extended interruption to any of these services could adversely affect our ability
to operate our games with online features, negatively impacting our business.
Further,
insufficient server capacity could also negatively impact our business. Conversely, if we overestimate the amount of server capacity
required by our business, we may incur unnecessary additional operating costs.
Risks
Related to Smaaash Private
Smaaash
Private has significant indebtedness and the imposition of certain restrictive covenants in Smaaash Private debt financing arrangements
may increase Smaaash Private’s susceptibility to interest rate fluctuations, adversely impact Smaaash Private’s financial
condition and results of operations, as well as restrict Smaaash Private’s operational flexibility.
As
on December 31, 2017, Smaaash Private’s outstanding indebtedness on a consolidated basis aggregated to $44.10 million, including
$44.05 million of secured debt and $0.05 million of unsecured debt, Smaaash Private may incur additional indebtedness in the future.
Smaaash
Private’s significant indebtedness and the imposition of certain restrictive covenants in Smaaash Private’s debt financing
arrangements may increase Smaaash Private’s susceptibility to interest rate fluctuations, adversely impact Smaaash Private’s
financial condition and results of operations, as well as restricting Smaaash Private’s operational flexibility.
The
possible implications of Smaaash Private’s significant indebtedness may include, but are not limited to, the following:
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a
portion of Smaaash Private’s cash flows may be used towards repayment of Smaaash Private’s existing debt, which
will reduce the availability of cash to fund Smaaash Private’s working capital requirements, capital expenditures, planned
expansions or acquisitions or other strategic objectives, and general corporate purposes;
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Smaaash
Private’s ability to obtain additional funding in the future at reasonable, or less restrictive, terms may be restricted;
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fluctuations
in market interest rates may affect the cost of Smaaash Private’s borrowings, as Smaaash Private’s loans are,
currently as well as typically, at variable interest rates;
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Smaaash
Private’s ability to declare dividends, while any actual payments are due under the terms of Smaaash Private’s
borrowings;
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Smaaash
Private may be more vulnerable to economic downturns;
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Smaaash
Private’s ability to withstand competitive pressures may be limited;
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Smaaash
Private may have reduced operational flexibility in responding to business, regulatory and economic conditions and developments;
and
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Smaaash
Private’s requirement to obtain lenders’ consents for various activities, including, but not limited to, any change
in control or ownership of Smaaash Private.
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Smaaash
Private is continually expanding and so may need to continually raise capital. If Smaaash Private is unable to raise capital on
commercially favorable terms, including due to Smaaash Private’s high debt-equity ratio, Smaaash Private’s growth
trajectory might be affected.
Smaaash
Private is in the process of expansion and may need additional capital despite the fact that it has a significant portion of debt
on its books. Due, in part, to Smaaash Private’s significant debt there are various reasons for it not being able to raise
capital on commercially favorable terms including, but not limited to (i) high debt to equity ratio, (ii) trends in global capital
and credit markets, and (iii) existing debt terms. Smaaash Private’s inability to maintain or obtain sufficient cash flow,
credit facilities and other sources of funds, in a timely manner, or at all, to meet Smaaash Private’s expansion strategy
requirements could adversely affect Smaaash Private’s growth trajectory.
The
high fixed cost structure of Smaaash Private’s operations can result in significantly lower margins if Smaaash Private’s
revenues should decline, which may adversely affect Smaaash Private’s business, financial condition, results of operations
and prospects.
Smaaash
Private’s total aggregate expenditure was $18.9 million for fiscal year 2017, the most recent year for which data is available
to us. A large proportion of Smaaash Private’s expenses are fixed expenses, including the cost of full-time employees, fixed
rentals, interest costs, security and insurance, which do not vary significantly with retail traffic at Smaaash Centers. These
expenses may continue to increase, in the aggregate, from year to year, particularly as Smaaash Private continue to expand its
network of Smaaash Centers in the future. In the event that Smaaash Private’s expenses increase at a faster rate than Smaaash
Private’s revenues and if Smaaash Private is unable to rationalize Smaaash Private’s costs or realize efficiencies
of scale, Smaaash Private may not be able to pass on such costs to Smaaash Private’s customers or offset its expenses. In
such case, Smaaash Private may experience a decline in its profit margins and, in general, an adverse impact on its business,
financial condition, results of operations and prospects.
Smaaash
Private has significant capital expenditure requirements, and inability to raise adequate financing on commercially acceptable
terms may limit Smaaash Private’s strategic initiatives and growth prospects.
Smaaash
Private’s business is inherently capital intensive. Smaaash Private’s total capital expenditure was $19.23 million
in fiscal year 2017, the most recent year for which data is available to us. Smaaash Private is required to undertake capital
investments on a regular basis, to introduce new games and entertainment options, or to improve existing games and entertainment
options and, particularly, when Smaaash Private opens new Smaaash Centers. In addition, Smaaash Private must incur expenditures
to maintain and improve supporting or complementary infrastructure and services at Smaaash Centers, including Smaaash Private’s
food and beverage venues, parking and other facilities. The actual amounts and timing of Smaaash Private’s future capital
expenditure may differ from Smaaash Private’s estimates, from time to time, including on account of, among other things,
availability of land for future expansion, interest rates, future cash flows being less than Smaaash Private had estimated, fluctuations
in currency exchange rates or commodity prices, unforeseen delays or cost overruns on Smaaash Private’s part or on the part
of any of Smaaash Private’s equipment or technology supply or other vendors or partners, technological advances, design
changes, inability to obtain or delay in obtaining requisite regulatory approvals or third party consents such as from lenders
or lessors or others, unanticipated expenses, delays in Smaaash Private’s payments from corporate customers in Smaaash Private’s
product sales business or issues with the credit worthiness of such customers, general economic conditions, market developments
and new opportunities or challenges in the industry, or in the geographies in which Smaaash Private operate. Smaaash Private’s
capital expenditures and investments may rise in the future, given Smaaash Private’s expansion plans as well as the scope
of Smaaash Private’s existing operations. The financing required by Smaaash Private for such capital expenditures and investments
may not be available to it on commercially acceptable terms or at all, or Smaaash Private’s ability to seek additional financing
in the future may be restricted due to the terms of Smaaash Private’s existing or future borrowings, or regulatory constraints
on equity or debt capital raising, or a range of macroeconomic factors, including interest rates.
Smaaash
Private’s inability to raise adequate financing on commercially acceptable terms, or at all, in the future may limit Smaaash
Private’s strategic initiatives and growth prospects. In addition, there can be no assurance that Smaaash Private’s
capital investment will yield the planned returns at any time in the future, at expected rates, or at all. In any such event,
Smaaash Private’s business, financial condition, results of operations and prospects may be adversely affected.
Smaaash
Private, as well as its affiliated companies, have unsecured borrowings from time to time, which may be repayable on demand, including
on the occurrence of an event of default in the terms of such financing agreements. Any unexpected calls for repayment of a significant
amount of such borrowings may impact Smaaash Private’s ability to manage its debt service obligations.
Smaaash
Private, as well as Smaaash Private’s affiliates, have unsecured borrowings from time to time, which may be repayable on
demand, including on the occurrence of an actual or alleged event of default. Any unexpected calls for repayment of a significant
amount of such borrowings may impact Smaaash Private’s ability to manage its debt service obligations. Any failure to service
such indebtedness or comply with any obligations under such financing agreements may cause it to incur penalty interest or may
result in the termination of one or more of Smaaash Private’s credit facilities or acceleration or cross-acceleration of
payments under such credit facilities, as well as the declaration of an event of default or cross-default, which may adversely
affect Smaaash Private’s business, financial condition, results of operation and prospects.
Smaaash
Private has a relatively limited operating history and may not be able to sustain Smaaash Private’s growth levels in the
future.
Smaaash
Private commenced commercial operations at Smaaash Private’s first Smaaash Center in Mumbai in November 2012, and all of
Smaaash Private’s other Smaaash Centers have commenced commercial operations within the last three fiscal years. Smaaash
Private’s first international Smaaash Center, in the Mall of America, in Minnesota, U.S.A. was opened in December 2016.
Consequently, Smaaash Private currently has relatively limited operating experience, particularly, overseas, and may encounter
challenges in further expansion, including its proposed overseas expansion.
Consequently,
it may be difficult to evaluate Smaaash Private’s past performance and prospects. Smaaash Private may not be able to sustain
any historical growth rates in the future, and may not be able to leverage its experience in its existing markets in order to
grow Smaaash Private’s business in new markets.
Smaaash
Private has entered, and may continue to enter, into certain related party transactions. There can be no assurance that Smaaash
Private could not have achieved more favorable terms, if such transactions had not been entered into with related parties, or
that Smaaash Private will be able to maintain existing terms in the future, where the terms are or may be more favorable than
if the transactions had not been entered into with related parties.
Smaaash
Private has entered into various transactions with related parties. While Smaaash Private believes that all such transactions
have been conducted on an arm’s length basis and contain commercially reasonable terms, Smaaash Private may have been able
to achieve more favorable terms had such transactions been entered into with unrelated parties. It is also likely that Smaaash
Private may enter into related party transactions in the future. Although all material related party transactions that Smaaash
Private may enter into, will be subject to board or shareholder approval, as necessary under the Companies Act 2013, there can
be no assurance that such transactions, individually or in the aggregate, will not have an adverse effect on Smaaash Private’s
financial condition and results of operations or that Smaaash Private could not have achieved more favorable terms if such transactions
had not been entered into with related parties. Such related party transactions may potentially involve conflicts of interest.
Such
transactions, individually or in the aggregate, may not always be in the best interests of Smaaash Private’s minority shareholders
and will not have an adverse effect on Smaaash Private’s business, results of operations, financial condition and cash flows
Since
a majority of Smaaash Private’s directors, officers and assets reside or are located outside of the United States, we may
have difficulty enforcing judgments against Smaaash Private, its directors and officers.
Smaaash
Private is incorporated under the laws of India. Further, Smaaash Private conducts substantially all of its operations in India.
The majority of its directors and officers, reside outside the United States, and a majority of Smaaash Private’s assets
and some or all of the assets of such persons are located outside the United States. As a result, it may be difficult or impossible
to effect service of process within the United States upon Smaaash Private or those persons, or to recover against Smaaash Private
or those persons on judgments of United States courts, including judgments predicated upon the civil liability provisions of the
United States federal securities laws. An award of punitive damages by a United States courts based upon United States federal
securities laws is likely to be construed by Indian courts to be penal in nature and therefore unenforceable in India. Further,
no claim may be brought in India against Smaaash Private or its directors and officers in the first instance for a violation of
United States federal securities laws because these laws have no extraterritorial application under Indian law and are not enforceable
in India. However, an Indian court may impose civil liability, including the possibility of monetary damages, on Smaaash Private
or its directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Indian law.
Moreover, it is unlikely that a courts in India would award damages on the same basis as a foreign courts if an action were brought
in India or that the Indian courts would enforce foreign judgments if it viewed the amount of damages as excessive or inconsistent
with Indian practice or public policy.
The
courts of India will not automatically enforce judgments of United States courts obtained in actions against Smaaash Private or
its directors and officers, predicated upon the civil liability provisions of the United States federal securities laws, or entertain
actions brought in India against Smaaash Private or such persons predicated solely upon United States federal securities laws.
Further, the United States has not been declared by the Government of India to be a reciprocating territory for the purposes of
enforcement of foreign judgments, and there are grounds upon which Indian courts may decline to enforce the judgments of United
States courts. Some remedies available under the laws of United States jurisdictions, including remedies available under the United
States federal securities laws, may not be allowed in Indian courts if contrary to public policy in India. Because judgments of
United States courts are not automatically enforceable in India, it may be difficult for you to recover against Smaaash Private
or its directors and officers or some experts named in this proxy statement/prospectus based upon such judgments. In India, prior
approval of the RBI is required in order to repatriate any amount recovered pursuant to such judgments. See “Enforceability
of Civil Liabilities.”
Risks
Related to Our Ownership of Smaaash Private’s Share Equity
Smaaash
Private’s principal stockholders and management own a significant percentage of its share equity stock and will be able
to exert significant control over matters subject to shareholder approval.
Shripal
Morakhia and AHA Holdings Private Limited, his affiliated entity, and FW Metis, Smaaash Private’s principal shareholders,
beneficially own approximately 24.34% and 21.23%, respectively, of Smaaash Private’s share equity after the Transactions.
Accordingly, these shareholders have significant influence over the outcome of corporate actions requiring shareholder approval,
including the election of directors, any merger, consolidation or sale of all or substantially all of its assets or any other
significant corporate transaction. The interests of these shareholders may not be the same as or may even conflict with Smaaash
Private’s interests. The concentration in ownership may have the effect of delaying, preventing or deterring a change in
control of Smaaash Private and deprive Smaaash Private’s shareholders of an opportunity to receive a premium for their equity
shares as part of a sale of Smaaash Private.
There
is currently no trading market for Smaaash’s equity shares and liquidity of the equity shares is limited.
Smaaash’s
equity shares of are not registered under the securities laws of India, the United States or any state or other jurisdiction,
and accordingly there is no public trading market for the equity shares that we received in the Transaction and no public trading
market is expected to develop in the foreseeable future. Therefore, we may not be able to readily sell or transfer the Smaaash
Private equity shares that we own.
Risk
Factors Relating to Our Securities and Capital Structure
We
have not paid dividends on our Common Stock in the past and do not expect to pay dividends on our Common Stock in the future.
Any return on investment in our common stock may be limited to the value of our Common Stock.
We
have never paid cash dividends on our Common Stock and do not anticipate paying cash dividends on our Common Stock in the foreseeable
future. The payment of dividends on our Common Stock would depend on earnings, financial condition, and other business and economic
factors affecting us at such time as our board of directors may consider relevant. If we do not pay dividends on our Common Stock,
our Common Stock may be less valuable because a return on your investment will only occur if its stock price appreciates.
Trading
on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for
our security holders to resell their common stock and/or warrants.
Our
Common Stock and Public Warrants are quoted on the OTCQB tier of the OTC Markets Group, Inc. (“OTC Markets”).
Trading in securities quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to
many factors, some of which may have little to do with our operations or business prospects. This volatility could depress the
market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Markets is not a stock exchange,
and trading of securities on the OTC Markets is often more sporadic than the trading of securities listed on a quotation system
like Nasdaq Capital Market or a stock exchange like the NYSE American. These factors may result in investors having difficulty
reselling any shares of our common stock.
Our
stock price is likely to be highly volatile because of several factors, including a limited public float.
The
market price of our Common Stock and Public Warrants have been volatile in the past and the market price of our Common Stock and
Public Warrants and Private Placement Warrants are likely to be highly volatile in the future. You may not be able to resell shares
of our Common Stock and/or Private Placement Warrants following periods of volatility because of the market’s adverse reaction
to volatility.
Other
factors that could cause such volatility may include, among other things:
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actual
or anticipated fluctuations in our operating results;
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we
may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held;
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overall
stock market fluctuations;
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announcements
concerning our business or those of our competitors;
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actual
or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;
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conditions
or trends in the industry;
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litigation;
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changes
in market valuations of other similar companies;
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future
sales of common stock;
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departure
of key personnel or failure to hire key personnel; and
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general
market conditions.
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Any
of these factors could have a significant and adverse impact on the market price of our Common Stock and/or Private Placement
Warrants. In addition, the stock market in general has at times experienced extreme volatility and rapid decline that has often
been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations may adversely
affect the trading price of our Common Stock and/or Private Placement Warrants, regardless of our actual operating performance.
If
securities or industry analysts do not publish or cease publishing research or reports about the Company, its business, or its
market, or if they change their recommendations regarding our securities adversely, the price and trading volume of our securities
could decline.
The
trading market for our securities will be influenced by the research and reports that industry or securities analysts may publish
about us, our business, our market, or our competitors. Securities and industry analysts do not currently, and may never, publish
research on the Company. If no securities or industry analysts commence coverage of the Company, our stock price and trading volume
would likely be negatively impacted. If any of the analysts who may cover the Company change their recommendation regarding our
securities adversely, or provide more favorable relative recommendations about our competitors, the price of our securities would
likely decline. If any analyst who may cover the Company were to cease coverage of the Company or fail to regularly publish reports
on it, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
Our
common stock has in the past been a “penny stock” under SEC rules, and our warrants may be subject to the “penny
stock” rules. It may be more difficult to resell securities classified as “penny stock.”
In
the past, our common stock was a “penny stock” under applicable SEC rules (generally defined as non-exchange traded
stock with a per-share price below $5.00). Unless we successfully list our common stock and our warrants on a national stock exchange,
or maintain a per-share price above $5.00, these rules impose additional sales practice requirements on broker-dealers that recommend
the purchase or sale of penny stocks to persons other than those who qualify as “established customers” or “accredited
investors.” For example, broker-dealers must determine the appropriateness for non-qualifying persons of investments in
penny stocks. Broker-dealers must also provide, prior to a transaction in a penny stock not otherwise exempt from the rules, a
standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, disclose the compensation
of the broker-dealer and its salesperson in the transaction, furnish monthly account statements showing the market value of each
penny stock held in the customer’s account, provide a special written determination that the penny stock is a suitable investment
for the purchaser, and receive the purchaser’s written agreement to the transaction.
Legal
remedies available to an investor in “penny stocks” may include the following:
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If
a “penny stock” is sold to the investor in violation of the requirements listed above, or other federal or states
securities laws, the investor may be able to cancel the purchase and receive a refund of the investment.
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If
a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and
firms that committed the fraud for damages.
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However,
investors who have signed arbitration agreements may have to pursue their claims through arbitration.
These
requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that
becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our
securities. These requirements may restrict the ability of broker-dealers to sell our common stock or our Private Placement Warrants
and may affect your ability to resell our common stock and our Private Placement Warrants.
Many
brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not
invest in penny stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the
increased financial risk generally associated with these investments.
For
these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time,
if ever, our common stock or our Private Placement Warrants will not be classified as a “penny stock” in the future.
A
sale of a substantial number of shares of our Common Stock may cause the price of the Common Stock to decline.
If
our stockholders sell substantial amounts of our Common Stock in the public market, the market price of our Common Stock could
fall. These sales also may make it more difficult for us to sell our equity or equity-related securities in the future at a time
and price that we deem reasonable or appropriate. This risk is significant because of concentrated positions of our Common Stock
held by a small group of investors.
Because
certain of our stockholders control a significant number of shares of our Common Stock, they may have effective control over actions
requiring stockholder approval.
Our
directors, executive officers and principal stockholders, and their respective affiliates, beneficially own approximately 59.2%
of our outstanding shares of Common Stock. Accordingly, our executive officers, directors and principal stockholders, and their
respective affiliates, will have significant influence on the ability to control the Company and the outcome of issues submitted
to our stockholders.
If
the benefits of any proposed acquisition of do not meet the expectations of investors, stockholders or financial analysts, the
market price of our Common Stock may decline.
If
the benefits of any proposed acquisition of do not meet the expectations of investors or securities analysts, the market price
of our Common Stock prior to the closing of the proposed acquisition may decline. The market values of our Common Stock at the
time of the proposed acquisition may vary significantly from their prices on the date the acquisition target was identified.
In
addition, broad market and industry factors may materially harm the market price of our Common Stock irrespective of our operating
performance. The stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our
securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies
which investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions
or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional
securities and our ability to obtain additional financing in the future.
Changes
in accounting principles and guidance, or their interpretation, could result in unfavorable accounting charges or effects, including
changes to our previously filed financial statements, which could cause our stock price to decline.
We
prepare our consolidated financial statements in accordance with GAAP. These principles are subject to interpretation by the SEC
and various bodies formed to interpret and create appropriate accounting principles and guidance. A change in these principles
or guidance, or in their interpretations, may have a significant effect on our reported results and retroactively affect previously
reported results.
Being
a public company results in additional expenses, diverts management’s attention and could also adversely affect our ability
to attract and retain qualified directors.
As
a public reporting company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”). These requirements generate significant accounting, legal and financial compliance costs and make
some activities more difficult, time consuming or costly and may place significant strain on our personnel and resources. The
Exchange Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control
over financial reporting. In order to establish the requisite disclosure controls and procedures and internal control over financial
reporting, significant resources and management oversight are required.
As
a result, management’s attention may be diverted from other business concerns, which could have an adverse and even material
effect on our business, financial condition and results of operations. These rules and regulations may also make it more difficult
and expensive for us to obtain director and officer liability insurance. If we are unable to obtain appropriate director and officer
insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent,
could be adversely impacted.
We
are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable
to public companies may result in our financial statements not being comparable to those of some other public companies. As a
result of this and other reduced disclosure requirements applicable to emerging growth companies, our securities may be less attractive
to investors.
As
a public reporting company with less than $1,070,000,000 in revenue during our last fiscal year, we qualify as an “emerging
growth company” under the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth company
may take advantage of certain reduced reporting requirements and is relieved of certain other significant requirements that are
otherwise generally applicable to public companies. In particular, as an emerging growth company we:
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are
not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control
over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
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are
not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and
analyzing how those elements fit with our principles and objectives (commonly referred to as “compensation discussion
and analysis”);
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are
not required to obtain a non-binding advisory vote from our stockholders on executive compensation or golden parachute arrangements
(commonly referred to as the “say-on-pay,” “say-on-frequency” and “say-on-golden-parachute”
votes);
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are
exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
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may
present only two years of audited financial statements and only two years of related Management’s Discussion & Analysis
of Financial Condition and Results of Operations (“MD&A”); and
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are
eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107
of the JOBS Act.
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We
intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods
for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in
periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging
growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.
Certain
of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a
“smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain
an auditor attestation and report regarding management’s assessment of internal control over financial reporting; are not
required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or Chief Executive
Officer pay ratio disclosure; and may present only two years of audited financial statements and related MD&A disclosure.
Under
the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years
after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act of 1933,
as amended (the “Securities Act”), or such earlier time that we no longer meet the definition of an emerging growth
company. In this regard, the JOBS Act provides that we would cease to be an “emerging growth company” if we have more
than $1,070,000,000 in annual revenues, have more than $700 million in market value of our Common Stock held by non-affiliates,
or issue more than $1.0 billion in principal amount of non-convertible debt over a three-year period. Further, under current SEC
rules we will continue to qualify as a “smaller reporting company” for so long as we have a public float (i.e., the
market value of common equity held by non-affiliates) of less than $75 million as of the last business day of our most recently
completed second fiscal quarter.
We
cannot predict if investors will find our securities less attractive due to our reliance on these exemptions.
Failure
to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material
adverse effect on our business and stock price.
We
are required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which require management
to certify financial and other information in our quarterly and annual reports and provide an annual management report on the
effectiveness of controls over financial reporting. Though we are required to disclose changes made in our internal controls and
procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial
reporting pursuant to Section 404 until year-end 2017. However, as an emerging growth company, our independent registered public
accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting
pursuant to Section 404 until the end of the fiscal year for which our second annual report is due or the date we are no longer
an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse
in the event it is not satisfied with the level at which our controls are documented, designed or operating.
To
comply with the requirements of being a public company, we have undertaken various actions, and may need to take additional actions,
such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and
maintaining internal control can divert our management’s attention from other matters that are important to the operation
of our business. Additionally, when evaluating our internal control over financial reporting, we may identify material weaknesses
that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements
of Section 404. If we identify any material weaknesses in our internal control over financial reporting or are unable to comply
with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective,
or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal
control over financial reporting once we are no longer an emerging growth company, investors may lose confidence in the accuracy
and completeness of our financial reports and the market price of our Common Stock could be negatively affected, and we could
become subject to investigations by the Financial Industry Regulatory Agency, the SEC or other regulatory authorities, which could
require additional financial and management resources.
Anti-takeover
provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover
attempt.
The
Company’s certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing
changes in control or changes in our management without the consent of our board of directors. These provisions include:
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no
cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
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the
exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors
or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our
board of directors;
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the
ability of our board of directors to determine whether to issue shares of our preferred stock and to determine the price and
other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to
significantly dilute the ownership of a hostile acquirer;
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limiting
the liability of, and providing indemnification to, our directors and officers;
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controlling
the procedures for the conduct and scheduling of stockholder meetings;
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providing
that directors may be removed prior to the expiration of their terms by stockholders only for cause; and
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advance
notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose
matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting
a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of
the Company.
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These
provisions, alone or together, could delay hostile takeovers and changes in control of the Company or changes in our board of
directors and management.
Any
provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change
in control could limit the opportunity for our security holders to receive a premium for their securities and could also affect
the price that some investors are willing to pay for our securities.
In
the event that our common stock price does not exceed the exercise price of the Private Placement Warrants during the period when
the Private Placement Warrants are exercisable, the Private Placement Warrants may not have any value.
The
warrants will be immediately exercisable and expire on the fifth anniversary of the date of issuance. The Private Placement Warrants
will have an initial exercise price per share equal to $11.50. In the event that our common stock price does not exceed the exercise
price of the Private Placement Warrants during the period when the Private Placement Warrants are exercisable, the Private Placement
Warrants may not have any value.
There
is no established trading market for the Private Placement Warrants and the market for the Private
Placement Warrants may be highly volatile or may decline regardless of our operating performance. We do not intend to list the
Private Placement Warrants, nor do we expect the Private Placement Warrants to be quoted, on any securities exchange.
There
must be a current registration statement in order for you to exercise the Private Placement Warrants.
Holders
of Private Placement Warrants will be able to exercise the Private Placement Warrants only if a current registration statement
relating to the common stock underlying the Private Placement Warrants is then in effect. Although we will attempt to maintain
the effectiveness of a current registration statement covering the common stock underlying the Private Placement Warrants, there
can be no assurance that we will be able to do so. If the registration statement covering the shares issuable upon exercise of
the Private Placement Warrants is no longer effective, the Private Placement Warrants may only be exercised on a “cashless”
basis and will be issued with restrictive legends unless such shares are eligible for sale under Rule 144 of the Securities Act
of 1933, as amended.
Holders
of our Private Placement Warrants will have no rights as a common stockholder until they acquire our common stock.
Until
you acquire shares of our common stock upon exercise of your Private Placement Warrants, you will have no rights with respect
to our common stock. Upon exercise of your Private Placement Warrants, you will be entitled to exercise the rights of a common
stockholder only as to matters for which the record date occurs after the exercise date.