PROSPECTUS
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Filed
Pursuant to Rule 424(b)(3)
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Registration
No. 333-228906
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SIMPLICITY
ESPORTS AND GAMING COMPANY
6,449,000
Shares of Common Stock Underlying Warrants
6,203,969
Shares of Common Stock for Resale by Selling Securityholders
261,500
Warrants to Purchase Common Stock for Resale by Selling Securityholders
This
prospectus relates to the issuance by us of up to 6,449,000 shares of our common stock, par value $0.0001 per share (“Common
Stock”), which consist of (a) 5,200,000 shares of Common Stock that may be issued upon the exercise of 5,200,000 warrants
(the “Public Warrants”) originally sold as part of units in our initial public offering (the “IPO”) and
which entitle the holder to purchase Common Stock at an exercise price of $11.50 per share of Common Stock, (b) 261,500 shares
of Common Stock that may be issued upon the exercise of 261,500 warrants (the “Private Placement Warrants”) underlying
units originally issued in a private placement that closed simultaneously with the consummation of the IPO (the “Private
Placement Units”), which entitle the holder to purchase Common Stock at an exercise price of $11.50 per share of Common
Stock, and (c) 987,500 shares of our Common Stock, which represent shares of Common Stock that may be issued upon the exercise
of 987,500 warrants (the “2019 Warrants”, and together with the Public Warrants and Private Placement Warrants, the
“Warrants”) originally sold as part of units in a private placement that commenced on March 27, 2019 (the “2019
Private Placement”) and which entitle the holder to purchase Common Stock at an exercise price of $4.00 per share of Common
Stock.
In
addition, this prospectus relates to the resale from time to time of 6,203,969 shares of Common Stock and 261,500 Private
Placement Warrants by the selling securityholders named in this prospectus or their permitted transferees (the “Selling
Securityholders”).
We
will receive the proceeds from the exercise of the Warrants for cash, but not from the resale of the Private Placement Warrants
or the shares of Common Stock underlying the Warrants.
The
Selling Securityholders will sell their shares registered for resale in this prospectus at a fixed price of $3.00 per share
for the duration of this offering. See “Determination of Offering Price” and “Plan of Distribution.”
We will not receive any of the proceeds from the sale of the securities owned by the Selling Securityholders. See “Use
of Proceeds” beginning on page 33 of this prospectus. We will bear all costs, expenses and fees in connection with the
registration of these securities, including with regard to compliance with state securities or “blue sky” laws.
The Selling Securityholders will bear all commissions and discounts, if any, attributable to their sale of securities. See
“Plan of Distribution” beginning on page 105 of this prospectus.
Our
Common Stock is currently quoted on the OTC Market Group, Inc.’s OTCQB tier under the symbol “WINR.” On October
2, 2020, the last reported sale price of our Common Stock was $1.60.
Our
principal executive offices are located at 7000 W. Palmetto Park Rd., Suite 505, Boca Raton, FL 33433.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 9 of this prospectus.
Neither
the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved
of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal
offense.
The
date of this prospectus is October 13, 2020.
TABLE
OF CONTENTS
No
dealer, salesperson or other individual has been authorized to give any information or to make any representation other than those
contained in this prospectus in connection with the offer made by this prospectus and, if given or made, such information or representations
must not be relied upon as having been authorized by us or the selling stockholder. This prospectus does not constitute an offer
to sell or a solicitation of an offer to buy any securities in any jurisdiction in which such an offer or solicitation is not
authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in our affairs or that information contained herein is
correct as of any time subsequent to the date hereof.
For
investors outside the United States: We have not, and the selling stockholder has not, done anything that would permit this offering
or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in
the United States. Persons outside the United States who come into possession of this prospectus must inform themselves, and observe
any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside the
United States.
Cautionary
Note Regarding Forward-Looking Statements
This
prospectus contains forward-looking statements. Specifically, forward-looking statements may include statements relating to:
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our
future financial performance;
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changes
in the market for our products and services;
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our
expansion plans and opportunities; and
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other
statements preceded by, followed by or that include the words “estimate,” “plan,” “project,”
“forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,”
“target” or similar expressions.
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These
forward-looking statements are based on information available as of the date of this prospectus and current expectations, forecasts
and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not
be relied upon as representing our views as of any subsequent date, and we do not undertake any obligation to update forward-looking
statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events
or otherwise, except as may be required under applicable securities laws.
As
a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different
from those expressed or implied by these forward-looking statements. Some factors that could cause actual results to differ include:
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the
level of demand for our products and services;
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competition
in our markets;
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our
ability to grow and manage growth profitably;
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our
ability to access additional capital;
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changes
in applicable laws or regulations;
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our
ability to attract and retain qualified personnel;
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the
possibility that we may be adversely affected by other economic, business, and/or competitive factors; and
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other
risks and uncertainties indicated in this prospectus, including those under “Risk Factors.”
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INDUSTRY
AND MARKET DATA
We
are responsible for the disclosure in this prospectus. However, this prospectus includes industry data that we obtained from internal
surveys, market research, publicly available information and industry publications. The market research, publicly available information
and industry publications that we use generally state that the information contained therein has been obtained from sources believed
to be reliable. The information therein represents the most recently available data from the relevant sources and publications
and we believe remains reliable. We did not fund and are not otherwise affiliated with any of the sources cited in this prospectus.
Forward-looking information obtained from these sources is subject to the same qualifications and additional uncertainties regarding
the other forward-looking statements in this prospectus.
TRADEMARKS
AND COPYRIGHTS
We
own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate
names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights
that protect the content of our products and the formulations for such products. This prospectus may also contain trademarks,
service marks and trade names of other companies, which are the property of their respective owners. Our use or display of third
parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and should not be read
to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, some of the copyrights, trade names
and trademarks referred to in this prospectus are listed without their ©, ® and ™ symbols, but we will assert,
to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks. All other trademarks are
the property of their respective owners.
PROSPECTUS
SUMMARY
This
summary highlights certain information about us, this offering, and selected information contained in this prospectus. This summary
is not complete and does not contain all of the information that you should consider before deciding whether to invest in our
common stock. For a more complete understanding of the Company and this offering, we encourage you to read and consider the more
detailed information in this prospectus, including “Risk Factors” and the financial statements and related notes.
Unless the context otherwise requires, “we,” “us,” “our,” or “the Company” refers
to “Simplicity Esports and Gaming Company,” a Delaware corporation, and its consolidated subsidiaries. “Simplicity
Esports LLC” means our wholly owned subsidiary, Simplicity Esports, LLC, a Florida limited liability company, and its consolidated
subsidiaries. “PLAYlive” means our wholly owned subsidiary PLAYlive Nation, Inc., a Delaware corporation and its consolidated
subsidiaries. “Simplicity One” means our 76% owned subsidiary Simplicity One Brasil Ltda, a Brazilian limited liability
company and its consolidated subsidiaries.
Industry
Overview
Esports
is the competitive playing of video games by amateur and professional teams for cash prizes. Esports typically takes the form
of organized, multiplayer video games that include real-time strategy, fighting, first-person shooter, and multiplayer online
battle arena games. As of October 5, 2020, the three largest selling esports games are Dota 2®, League of Legends®
(both multiplayer online battle arena games) and Counter Strike: Global Offensive® (a first-person shooter game). Other popular
games include SMITE®, StarCraft II®, Call of Duty®¸ Heroes of the Storm®, Hearthstone® and Fortnite®.
Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services including
twitch.tv, azubu.tv, ustream.tv and youtube.com. Esports also includes games which can be played, primarily by amateurs, in multiplayer
competitions on the Sony PlayStation®, Microsoft Xbox® and WII Nintendo® systems.
Although
official competitions have long been a part of video game culture, participation and spectatorship of such events have seen a
global surge in popularity over the last few years with the rapid growth of online streaming. The advent of online streaming technology
has turned esports into a global industry that includes professional players and teams competing in major events that are simultaneously
watched in person in stadiums, and by online viewers, which regularly exceed 1,000,000 viewers for major tournaments. According
to Business Insider, over 100 million viewers saw the 2019 League of Legends® World Championships in person and online. CNBC
reported in April 2019 that League of Legends® World Championships attract more viewers than the Super Bowl. Much like how
there is a worldwide gaming market for the sports industry, there has now developed a worldwide gaming market for the esports
industry. The impact has been so significant that many video game developers are now building features into their games designed
to facilitate competition.
According
to Newzoo, a global leader in esports, games and mobile intelligence, the total global esports audience was expected to reach
495 million in 2019, with an anticipated 27.5 million American gamers. In addition, according to Newzoo, esports produced $909
million in 2018 revenue and is projected to reach $1.1 billion in 2019. Esports enthusiasts, which are people who watch professional
esports content at least once a month, made up 201.2 million of the 2018 total, up from 143.2 million in 2017. With a compound
annual growth rate (“CAGR”) (2017-2022) of +15.7%, this number is expected to reach almost 297 million in 2022. The
global average revenue per esports enthusiast, which includes not only gaming revenue, but also sponsorships advertising and all
other esports related revenues, is projected to be $5.45 in 2019, up +8.9% from $5.00 in 2018. The number of occasional esports
viewers, (people who watch professional esports content less than once a month), is expected to reach 252.6 million in 2019, up
from 221.6 million in 2018, and is projected to grow with a CAGR of +12.6% to surpass 347 million in 2022. The number of people
who are aware of esports worldwide is expected to reach 1.8 billion in 2019, up from 1.6 billion in 2018. According to Newtech
Mag, China and the U.S. have the largest populations of esports fans, with Brazil ranking first in Latin America, and third globally,
with 20 million fans. The increasing prominence of esports as a mainstream entertainment industry is driving the growth in awareness
in most regions. Audience and awareness growth in the emerging regions of Latin America, Middle East and Africa, Southeast Asia,
and Rest of Asia is largely driven by improving IT infrastructure and urbanization. We believe the rise of new franchises, such
as Player Unknown’s Battlegrounds® or PubG®, is an important global growth factor as the influx of millennials should
continue to drive the growth of the esports industry’s audience and in turn, the esports gaming industry.
In
2018, there were 737 major esports events that generated an estimated $54.7 million in ticket revenues. The total prize money
of all esports events held in 2018 reached $150.8 million, after breaking the $100 million mark for the first time in 2017. The
League of Legends® World Championship was 2018’s biggest tournament by live viewership hours on Twitch, with 53.8 million
hours. It also produced $1.9 million in ticket revenues. The Overwatch® League was the most-watched league by live viewership
hours on Twitch, generating 79.5 million hours.
Business
Overview
We
are a global esports organization, with an established brand, that is capitalizing on the growth in esports through three business
units, Simplicity One Brasil Ltda (“Simplicity One”), Simplicity Esports, LLC (“Simplicity Esports LLC”)
and PLAYlive Nation, Inc. (“PLAYlive”).
Our
Esports Teams
We
own and manage numerous professional esports teams domestically and internationally. Revenue is generated from prize winnings,
corporate sponsorships, advertising, league subsidy payments and potential league revenue sharing payments from the publishers
of video games.
Domestic
Esports Teams – Simplicity Esports LLC
Through
our wholly owned subsidiary Simplicity Esports LLC, we own and manage numerous professional esports teams competing in games such
as Overwatch, Apex Legends, PUBG and more. We are committed to growing and enhancing the esports industry, fostering the development
of amateurs to compete professionally and signing established professional gamers to support their paths to greater success.
International
Esports Team - Simplicity One Brasil
Since
January 2020, through our 76% owned subsidiary Simplicity One Brasil, we manage Flamengo eSports, one of the leading Brazilian
League of Legends® teams. Flamengo eSports was established in 2017 as the Esports division of Clube de Regatas do Flamengo,
a successful Brazilian sports organization, with over 30 million followers across social media accounts, known for its world-famous
soccer team. Flamengo eSports’ League of Legends® team won the CBLoL Championship in September 2019, which qualified
the team to compete at the 2019 League of Legends® World Championship in Europe as one of 24 teams from 13 different regions
around the world. With cost cutting steps taken during April 2020, and anticipated additional sponsorship revenue, this business
unit is expected to be cash flow positive by January 2021. We recently entered into a binding letter of intent with our existing
sponsor, Redragon, pursuant to which Redragon would acquire a 7.5% equity stake in Simplicity One Brasil at a valuation exceeding
$6.9 million.
Online
Tournaments
In
response to demand from customers for online esports tournaments which was in all likelihood triggered by the social distancing
protocols attendant to the COVID-19 pandemic, we recently introduced a new initiative of online esports tournaments. Since March
2020, through our wholly owned subsidiary Simplicity Esports LLC, we have been holding weekly online esports tournaments.in the
United States In addition, we have commenced promoting these weekly online tournaments via text messages to our database of over
400,000 paying esports gaming center customers, which we acquired in our acquisition of PLAYlive. If we can convert merely 1%
of these existing customers from the PLAYlive database to play in our paid online tournaments, we anticipate this business unit
may generate approximately $1 million in annual revenues. At a 5% conversion rate, this business segment may generate approximately
$5 million in annual revenue. Management also intends to sell sponsorship and marketing activations for these online tournaments
which would create additional revenue. We also announced our initiative to begin to offering play at home online tournaments in
Brazil in June 2020.
Our
Gaming Centers
We
own and operate corporate and franchise esports gaming centers, through our wholly owned subsidiaries Simplicity Esports LLC and
PLAYlive, throughout the U.S. giving casual gamers the opportunity to play in a social setting with other members of the gaming
community. In addition, aspiring and established professional gamers have an opportunity to compete in local and national esports
tournaments held in our gaming centers for prizes, notoriety, and potential contracts to play for one of our professional esports
teams. In this business unit, revenue is generated from franchise royalties, the sale of game time, memberships, tournament entry
fees, birthday party events, corporate party events, concessions and gaming-related merchandise.
Our
business plan encompasses a brick and click physical and digital approach to further recognize revenue from all verticals, which
we believe to be unique in the industry. The physical centers, together with our esports teams, lifestyle brand and marketing
campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our
ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform,
tournaments (online and in-person) and physical real estate to maximize the monetization opportunities with these relationships.
In addition, we have proprietary intellectual capital, fan engagement strategies and brand development blueprints which complement
our publicly available information.
Optimally,
the esports gaming centers of Simplicity Esports LLC (“Simplicity Esports Gaming Centers”) will measure between 1,200
and 2,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology,
futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present
attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity
for sponsors and advertisers.
Creating
content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. Our talented team will
continue to produce unique in-depth content which showcases aspects of esports for fans. We seek to reach a broad demographic
encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic
and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while
maintaining authenticity to the gaming community that comprises our fan base.
As a result of COVID-19
(discussed below), all of our corporate and franchised Simplicity Gaming Centers were closed effective April 1, 2020. We commenced
reopening Simplicity Gaming Centers on May 1, 2020 and have since reopened three corporate and 20 franchised Simplicity
Gaming Centers as of October 5, 2020. See “Risk Factors—Public health epidemics or outbreaks, such as COVID-19,
could materially and adversely impact our business.”
Corporate
Gaming Centers
Simplicity
Esports LLC has already opened and is operating four corporate-owned retail Simplicity Esports Gaming Centers. Our first Simplicity
Esports Gaming Center was opened on May 3, 2019. Furthermore, we have engaged a national tenant representation real estate broker
to assist in the strategic planning and negotiations for our future Simplicity Esports Gaming Center locations. We contemplate
that new Simplicity Esports Gaming Centers will be funded by us as well as a combination of tenant improvement allowances from
landlords and sponsorships. As announced in June 2020, we are in discussions with multiple commercial property owners regarding
their desire to have us open 8,000 to 12,000 square foot MEGA centers at their properties. There are multiple locations available
to us with a percentage of gross sales rent lease structure (as opposed to fixed rent payments), and construction funds offered
by the landlord to assist with the build out and equipping of our planned MEGA centers. These MEGA centers are planned as hubs
in our hub and spoke model that will see smaller corporate and franchisee owned gaming centers as spokes connected to MEGA centers
as hubs for larger events and tournaments.
Franchised
Gaming Centers
Due
to interest from potential franchisees, we have launched a franchising program to accelerate the expansion of our planned nationwide
footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment
and buildout of esports gaming centers to potential business owners that desire to use our branding, infrastructure and process
to open and operate gaming centers. Franchise revenue is generated from the sale of franchise territories, supplying furniture,
equipment and merchandise to the franchisees for buildout of their centers, a gross sales royalty fee and a national marketing
fee. We license the use of our branding, assist in identifying and negotiating commercial locations, assist in overseeing the
buildout and development, provide access to proprietary software for point of sale, inventory management, employee training and
other HR functions. Franchisees also have an opportunity to participate in our national esports tournament events, and benefit
from the growing profile of our professional esports teams. Once an esports gaming center is opened, we provide operational guidance,
support and use of branding elements in exchange for a monthly royalty fee calculated as 6% of gross sales. On January 1, 2020,
we implemented a national marketing fee of 1% of gross sales. To date, we have sold five of these franchise territories.
The
combination of the esports gaming centers, owned or franchised by our wholly owned subsidiaries Simplicity Esports LLC or PLAYlive,
provides us with what we believe is the largest footprint of esports gaming centers in North America. Over the next 12 months,
existing PLAYlive esports gaming centers will be rebranded to Simplicity Esports gaming centers. All newly opened franchise esports
gaming centers will be branded as Simplicity Esports gaming centers and have numerous gaming PC’s. All gaming centers in
our footprint will be participating venues in our national esports tournaments.
Franchise
Roll Up Strategy
Due
to the impact of COVID-19 and the resulting disruptions in the commercial real estate market, we have signed non-binding letters
of intent with some of our existing franchisees to acquire their gaming centers. Closings are contingent upon our ability to secure
acceptable lease modifications from the landlords of the applicable properties. If the acquisitions close, the consideration paid
for each acquisition is contemplated to consist solely of restricted shares of common stock.
As
part of this strategy, we acquired our first franchisee owned gaming center, located in El Paso, Texas, on June 29, 2020. The
improved lease terms require monthly payments as a percentage of gross sales, resulting in the acquisition being EBITDA accretive
upon the commencement of operations.
Our
Stream Team
The
Simplicity Esports LLC and Flamengo Esports stream teams encompasses over 20 commentators (commonly known as “casters”),
influencers and personalities who connect to a dedicated fan base. Our electric group of live personalities represent our organization
to the fullest with their own unique style. We are proud to support and present a diverse group of gamers as we engage fans across
a multiple of esports genres. Our Twitch affiliation has enabled our stream team influences to reach a broad fan base. Additionally,
we have created several niches within the streaming community which has enabled us to engage fans within certain titles on a 24/7
basis. Our notoriety in the industry is evidenced by our audience that views millions of minutes of Simplicity Esports’
and Flamengo Esports’ content monthly, via various social media outlets including YouTube, Twitter and Twitch. Through Simplicity
Esports LLC, we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience. Our intention
is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent. Our management
and players are known within the esports community and we plan to use their skills to create a seamless content creation plan
helping gamers feel closer to our brand than any other in the industry.
COVID-19
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because
COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities
have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more
restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity
Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have since
reopened three corporate and 20 franchised Simplicity Gaming Centers as of October 5, 2020. Although our
franchise agreements with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees
regardless of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity
Gaming Centers will default in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase
in accounts receivables or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability
to pay the minimum monthly royalty payments owed by the franchisee. We have not written off as bad debt any accounts receivables
attributable to franchisee minimum monthly royalty payments owed during the COVID-19 pandemic. However, we have recorded an allowance
for doubtful accounts of approximately $52,000, as our collection efforts are ongoing. We have experienced an increase in our
account receivables by approximately $32,000 and $14,000 during the quarters ended May 31, 2020 and August 31, 2020, respectively.
Notwithstanding it is unclear exactly how much of the increase in accounts receivables is attributable to the impact of COVID-19.
For the months of July and August 2020, we have waived the minimum monthly royalty payment obligations for the months of July
and August 2020 and are instead billing the franchisees a true-up of 6% of gross sales without a minimum.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date adversely impacted the Company’s business for the fiscal quarters ended May 31, 2020 and August 31,
2020 and will potentially continue to impact the Company’s business. Management expects that all of its business segments,
across all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on
the Company’s business and the duration for which it may have an impact cannot be determined at this time.
RECENT
DEVELOPMENTS
For
a detailed description of recent developments of the Company, see “Description of Business—Recent Developments”
on page 41 of this prospectus.
Summary
Risk Factors
Our
business is subject to numerous risks and uncertainties, including those in the section entitled “Risk Factors” and
elsewhere in this prospectus. These risks include, but are not limited to, the following:
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our
history of losses;
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our
inability to attract sufficient demand for our services and products;
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our
ability to successfully execute our growth and acquisition strategy and manage effectively our growth;
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changes
in the competitive environment in our industry and the markets we serve, and our ability to compete effectively;
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our
dependence on a strong brand image;
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our
cash needs and the adequacy of our cash flows and earnings;
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ability to access additional capital;
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our
dependence upon our executive officers, founders and key employees;
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our
ability to attract and retain qualified personnel;
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our
reliance on our technology systems, the impact of technological changes and cybersecurity risks;
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changes
in applicable laws or regulations;
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our
ability to protect our trademarks or other intellectual property rights;
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potential
litigation from competitors or customers;
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public
health epidemics or outbreaks (such as the novel strain of coronavirus (COVID-19)) and our responses to such events could
materially and adversely impact our business; and
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the
possibility that we may be adversely affected by other economic, business, and/or competitive factors.
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addition, our management has concluded that our historical recurring losses from operations and negative cash flows from operations
as well as our dependence on securing private equity and other financings raise substantial doubt about our ability to continue
as a going concern and our auditor has included an explanatory paragraph relating to our ability to continue as a going concern
in its audit reports for the fiscal years ended May 31, 2020 and 2019.
Corporate
Information
Our
principal executive offices are located at 7000 W. Palmetto Park Road, Suite 505, Boca Raton, Florida 33433, and our telephone
number at that location is (855) 345-9467. The address of our website is www.ggsimplicity.com. The inclusion of our website address
in this prospectus does not include or incorporate by reference the information on our website into this prospectus.
The
name of the Company, the logos of the Company, and other trade names, trademarks or service marks of the Company appearing in
this prospectus are the property of the Company. Trade names, trademarks and service marks of other organizations appearing in
this prospectus are the property of their respective holders.
Unit
Offering, Nasdaq Listing, Reverse Stock Split and Increase in Authorized Shares of Common Stock
On
September 28, 2020, we filed with the SEC a pre-effective amendment to a registration statement on Form S-1 in connection with
our offering of units, each of which consists of one share of our common stock and one warrant to purchase one share of our common
stock, and shares of common stock issuable from time to time upon exercise of the warrants. In connection with the unit offering,
we have applied to list our common stock and warrants forming a part of the units on The Nasdaq Capital Market (“Nasdaq
Capital Market”). There is no assurance that our listing application will be approved by the Nasdaq Capital Market. The
approval of our listing on the Nasdaq Capital Market is a condition of closing the unit offering. If our application to the Nasdaq
Capital Market is not approved or we otherwise determine that we will not be able to secure the listing of the common stock and
warrants on the Nasdaq Capital Market, we will not complete the unit offering.
In
order to obtain Nasdaq Capital Market listing approval, we have obtained approval of our board of directors and shareholders of
(i) a reverse stock split of the outstanding shares of our common stock in the range from one-for-two (1-for-2) to one-for-ten
(1-for-10), which ratio is to be selected by the board of directors and (ii) an increase in our authorized shares of common stock
from 20,000,000 to 36,000,000 shares of common stock. On August 17, 2020, we filed a Certificate of Amendment to increase the
authorized shares of common stock from 20,000,000 to 36,000,000. Accordingly, our authorized capital stock consists of (i) 36,000,000
shares of common stock, and (ii) 1,000,000 shares of preferred stock. On September 29, 2020, we filed a certificate of amendment
to our certificate of incorporation, as amended, setting the ratio of the reverse stock split at one-for-six (1-for-6). We anticipate
that the reverse stock split will become effective following approval by FINRA of the reverse stock split, on or about October
13, 2020. The reverse stock split is intended to allow us to meet the minimum share price requirement of the Nasdaq Capital Market.
Except
as otherwise indicated and except in our financial statements and the notes thereto, all references to our common stock, share
data, per share data and related information has been adjusted to depict the reverse stock split ratio of 1-for-6 (“Reverse
Stock Split”), as if it were effective and as if it had occurred at the beginning of the earliest period presented. The
Reverse Stock Split, when effective, will combine each six shares of our outstanding common stock into one share of common stock,
without any change in the par value per share, and the Reverse Stock Split correspondingly will adjust, among other things, the
exercise rate of our warrants and options into our common stock. No fractional shares will be issued in connection with the Reverse
Stock Split, and any fractional shares resulting from the Reverse Stock Split will be rounded up to the nearest whole share.
We
are registering (i) the issuance by us of up to 1,074,834 (6,449,000 pre-reverse split) shares of our Common Stock
which may be issued upon the exercise of the Warrants, and (ii) the resale from time to time by the Selling Securityholders
of 1,033,995 (6,203,969 pre-reverse split) shares of Common Stock and 43,584 (261,500 pre-reverse split) warrants
(“Private Placement Warrants”) forming part of the Private Placement Units. “Warrants” means
our redeemable warrants, which includes all of our warrants sold as part of the Public Units as well as the Private Placement
Warrants and 2019 Warrants to the extent they are no longer held by the initial purchasers of the Private Placement Warrants,
2019 Warrants or their permitted transferees.
Common
Stock and Warrants Held by Selling Securityholders
Securities
Outstanding Prior to This Registration
|
|
1,654,865 (9,929,190 pre-reverse split)
shares of our Common Stock are issued and outstanding as of October 5, 2020. In addition, as of October 5, 2020,
1,074,834 (6,449,000 pre-reverse split) shares of Common Stock underlying Warrants are issuable upon exercise of the
1,074,834 (6,449,000 pre-reverse split) outstanding Warrants.
|
|
|
|
Securities
Outstanding After
This
Registration
|
|
2,729,699
(16,378,190 pre-reverse split) shares of our Common Stock, which assumes the exercise
of all Warrants. The number of outstanding shares of Common Stock that will be outstanding
after this offering excludes 250,000 (1,500,000 pre-reverse split) shares of Common Stock
reserved and available for issuance under the Simplicity Esports and Gaming Company 2020
Omnibus Incentive Plan and the 2018 Equity Incentive Plan.
|
|
|
|
Common
Stock Held by the
Selling
Securityholders
|
|
We
are registering 1,033,995 (6,203,969 pre-reverse split) shares of Common Stock
held by the Selling Securityholders named herein.
|
|
|
|
Private
Placement Warrants
offered
by certain Selling Securityholders
|
|
We
are registering 43,584 (261,500 pre-reverse split) Private Placement Warrants
to be offered from time to time by certain Selling Securityholders. Each Private Placement
Warrant entitles the holder to purchase Common Stock at an exercise price of $69.00 ($11.50
pre-reverse split) per share of Common Stock, subject to adjustment as set forth in the
warrant agreement between Continental Stock Transfer & Trust Company, as warrant
agent, and us.
|
|
|
|
Warrants
Held by the Selling Securityholders
|
|
Each
Public Warrant and Private Placement Warrant entitles the holder to purchase one share of our Common Stock at an exercise
price of $69.00 ($11.50 pre-reverse split) per share. Each 2019 Warrant entitles the holder to purchase one share of our Common
Stock at an exercise price of $24.00 ($4.00 pre-reverse split) per share. Each Public Warrant and Private Placement Warrant
may be exercised at any time commencing on December 20, 2018 until November 19, 2023, or earlier upon redemption or liquidation.
The Private Placement Warrants may also be exercised on a cashless basis pursuant to the terms of such warrants.
|
|
|
|
Terms
of Offering
|
|
The
Selling Securityholders will determine when and how they will dispose of the Common Stock and Private Placement Warrants registered
under this prospectus for resale, as well as any shares of Common Stock issued by the Company in a registered issuance under
this prospectus upon exercise of any Warrants.
|
Use
of Proceeds
|
|
We
will not receive any of the proceeds from the sale of shares of Common Stock or Private Placement Warrants by the Selling
Securityholders. However, we will receive proceeds from the cash exercise of Warrants if they are exercised by the Selling
Securityholders, provided that the Private Placement Warrants may be exercised on a cashless basis. We intend to use any net
proceeds from the cash exercise of the Warrants for working capital, and general corporate purposes.
|
|
|
|
Trading
Market and Ticker Symbol
|
|
The
Company’s Common Stock and Public Warrants currently have been quoted on the OTCQB under the symbols “WINR”
and “WINRW,” respectively.
|
Issuance
of Warrant Shares Underlying the Warrants
Warrant
Shares to be Issued upon Exercise of Warrants
|
|
1,074,834
(6,449,000 pre-reverse split) shares of Common Stock underlying the Warrants.
|
|
|
|
Shares
Outstanding Prior to Exercise of Warrants
|
|
1,654,865
(9,929,190 pre-reverse split) shares of Common Stock as of October 5, 2020.
|
|
|
|
Shares
to be Outstanding Assuming Exercise of All Warrants
|
|
2,729,699
(16,378,190 pre-reverse split) shares of Common Stock.
|
|
|
|
Terms
of Warrants
|
|
Each
Public Warrant and Private Placement Warrant entitles the holder to purchase one share of our Common Stock at an exercise
price of $69.00 ($11.50 pre-reverse split) per share. Each 2019 Warrant entitles the holder to purchase one share of our Common
Stock at an exercise price of $24.00 ($4.00 pre-reverse split) per share. Each Public Warrant and Private Placement Warrant
may be exercised at any time commencing on December 20, 2018 until November 19, 2023, or earlier upon redemption or liquidation.
|
|
|
|
Use
of Proceeds
|
|
We
expect to receive approximately $66,757,250 in gross proceeds assuming the cash exercise of all of the (i) Public Warrants
and Private Placement Warrants at an exercise price of $69.00 ($11.50 pre-reverse split) per share of Common Stock and (ii)
2019 Warrants at an exercise price of $24.00 ($4.00 pre-reverse split) per share of Common Stock. However, the Private Placement
Warrants may be exercised on a cashless basis, in which case we would expect to receive $63,750,000 in gross proceeds from
the cash exercise of the Public Warrants and 2019 Warrants. We intend to use any net proceeds from the cash exercise of the
Warrants for working capital and general corporate purposes.
|
|
|
|
Trading
Market
|
|
Our
Public Warrants are currently quoted on the OTCQB tier of the OTC Market Group, Inc. under the symbols “WINRW.”
|
SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The
following table presents our selected historical consolidated financial data for the periods indicated. The selected historical
consolidated financial data for the years ended May 31, 2020 and 2019 and the balance sheet data as of May 31, 2020 and 2019 are
derived from the audited financial statements.
Historical
results are included for illustrative and informational purposes only and are not necessarily indicative of results we expect
in future periods, and results of interim periods are not necessarily indicative of results for the entire year. The data presented
below should be read in conjunction with, and are qualified in their entirety by reference to, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto
included elsewhere in this prospectus.
|
|
Year Ended
|
|
|
|
May 31,
2020
|
|
|
May 31,
2019
|
|
|
|
|
|
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
861,410
|
|
|
$
|
37,995
|
|
Total operating expenses
|
|
|
3,170,992
|
|
|
|
4,353,189
|
|
Loss from operations
|
|
|
(2,732,121
|
)
|
|
|
(4,315,194
|
)
|
Total other income
|
|
|
66,342
|
|
|
|
749,922
|
|
Loss before provision for taxes
|
|
|
(2,665,779
|
)
|
|
|
(3,565,272
|
)
|
Income tax provisions
|
|
|
0
|
|
|
|
0
|
|
Net income (loss)
|
|
$
|
(2,620,238
|
)
|
|
$
|
(3,565,272
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(1.00
|
)
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (at period end)
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
160,208
|
|
|
$
|
1,540,158
|
|
Working capital (deficit) (1)
|
|
|
(2,662,032
|
)
|
|
|
(277,588
|
|
Total assets
|
|
|
8,591,774
|
|
|
|
7,754,543
|
|
Total liabilities
|
|
|
3,676,102
|
|
|
|
1,886,622
|
|
Stockholders’ equity (deficit)
|
|
|
4,915,672
|
|
|
|
5,867,921
|
|
(1)
|
Working
capital represents total current assets less total current liabilities.
|
RISK
FACTORS
An
investment in our securities carries a significant degree of risk. You should carefully consider the following risks, as well
as the other information contained in this prospectus, including our historical financial statements and related notes included
elsewhere in this prospectus, before you decide to purchase our securities. Any one of these risks and uncertainties has the potential
to cause material adverse effects on our business, prospects, financial condition and operating results which could cause actual
results to differ materially from any forward-looking statements expressed by us and a significant decrease in the value of our
common shares and warrants. Refer to “Cautionary Statement Regarding Forward-Looking Statements.”
We
may not be successful in preventing the material adverse effects that any of the following risks and uncertainties may cause.
These potential risks and uncertainties may not be a complete list of the risks and uncertainties facing us. There may be additional
risks and uncertainties that we are presently unaware of, or presently consider immaterial, that may become material in the future
and have a material adverse effect on us. You could lose all or a significant portion of your investment due to any of these risks
and uncertainties.
Risks
Related to Our Business
We
have a relatively limited operating history and limited revenues to date and thus are subject to risks of business development
and you have no basis on which to evaluate our ability to achieve our business objective.
Because
we have a relatively limited operating history and limited revenues to date, you should consider and evaluate our operating prospects
in light of the risks and uncertainties frequently encountered by early-stage operating companies in rapidly evolving markets.
These risks include that:
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●
|
we
may not have sufficient capital to achieve our growth strategy;
|
|
●
|
we
may not develop our product and service offerings in a manner that enables us to be profitable and meet our customers’
requirements;
|
|
|
|
|
●
|
our
growth strategy may not be successful; and
|
|
|
|
|
●
|
fluctuations
in our operating results will be significant relative to our revenues.
|
Our
future growth will depend substantially on our ability to address these and the other risks described in this section. If we do
not successfully address these risks, our business could be significantly harmed.
We
have a history of operating losses and our management has concluded that factors raise substantial doubt about our ability to
continue as a going concern and our auditor has included an explanatory paragraph relating to our ability to continue as a going
concern in its audit report for the fiscal years ended May 31, 2020 and 2019.
To
date, we have not been profitable and have incurred significant losses and cash flow deficits. For the fiscal years ended May
31, 2020 and 2019, we reported net losses of $2,620,238 and $3,565,272, respectively, and negative cash flow from operating activities
of $1,522,486 and $1,395,255, respectively. As of May 31, 2020, we had an aggregate accumulated deficit of $6,195,044. We anticipate
that we will continue to report losses and negative cash flow for the foreseeable future. Our management has concluded that our
historical recurring losses from operations and negative cash flows from operations as well as our dependence on private equity
and other financings raise substantial doubt about our ability to continue as a going concern and our auditor has included an
explanatory paragraph relating to our ability to continue as a going concern in its audit report for the fiscal year ended May
31, 2020 and 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:
|
●
|
straining
our financial resources to acquire a company;
|
|
●
|
anticipated
benefits may not materialize as rapidly as we expect, or at all;
|
|
|
|
|
●
|
diversion
of management time and focus from operating our business to address acquisition integration challenges;
|
|
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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;
|
|
|
|
|
●
|
integration
of the acquired company’s accounting, management information, human resources and other administrative systems;
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|
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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
|
|
|
|
|
●
|
litigation
or other claims in connection with the acquired company, including claims from terminated employees, former stockholders or
other third parties.
|
Failure
to appropriately mitigate these risks or other issues related to such strategic investments and acquisitions could result in reducing
or completely eliminating any anticipated benefits of transactions, and harm our business generally. Future acquisitions could
also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses
or the impairment of goodwill, any of which could have a material adverse effect on business, results of operations or financial
condition.
We
may require additional funding for our growth plans, and such funding may result in a dilution of your investment.
We
attempted to estimate our funding requirements in order to implement our growth plans. If the costs of implementing such plans
should exceed these estimates significantly or if we come across opportunities to grow through expansion plans which cannot be
predicted at this time, and our funds generated from our operations prove insufficient for such purposes, we may need to raise
additional funds to meet these funding requirements.
These
additional funds may be raised by issuing equity or debt securities or by borrowing from banks or other resources. We cannot assure
you that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to obtain
additional financing on terms that are acceptable to us, we will not be able to implement such plans fully if at all. Such financing
even if obtained, may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’
consent for payment of dividends, or restrict our freedom to operate our business by requiring lender’s consent for certain
corporate actions.
Further,
if we raise additional funds by way of a rights offering or through the issuance of new shares, any shareholders who are unable
or unwilling to participate in such an additional round of fund raising may suffer dilution in their investment.
We
may not have sufficient capital to fund our ongoing operations, effectively pursue our strategy or sustain our growth initiatives.
After
the consummation of the acquisition of Simplicity Esports LLC and PLAYlive Nation, Inc., our remaining liquidity and capital resources
may not be sufficient to allow us to fund our ongoing operations, effectively pursue our strategy or sustain our growth initiatives.
If we require additional capital resources, we may seek such funds directly from third party sources; however, we may not be able
to obtain sufficient equity capital and/or debt financing from third parties to allow us to fund our expected ongoing operations
or we may not be able to obtain such equity capital or debt financing on acceptable terms or conditions. Factors affecting the
availability of equity capital or debt financing to us on acceptable terms and conditions include:
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●
|
our
current and future financial results and position;
|
|
●
|
the
collateral availability of our otherwise unsecured assets;
|
|
|
|
|
●
|
the
market’s, investors and lenders’ view of our industry and products;
|
|
|
|
|
●
|
the
perception in the equity and debt markets of our ability to execute our business plan or achieve our operating results expectations;
and
|
|
|
|
|
●
|
the
price, volatility and trading volume and history of our Common Stock.
|
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
identified numerous sites for potential corporate Simplicity Esports Gaming Centers and many other sites for potential franchised
esports gaming centers, in the United States, however, desirable locations for additional Simplicity Esports Gaming Center openings
may not be available at an acceptable cost when we identify a particular opportunity for a new Simplicity Esports Gaming Center.
In
addition, our ability to open new Simplicity Esports Gaming Centers on a timely and cost-effective basis, or at all, is dependent
on a number of factors, many of which are beyond our control, including our ability or the ability of the selected franchisee
to:
|
●
|
reach
acceptable agreements regarding the lease of the locations;
|
|
|
|
|
●
|
comply
with applicable zoning, licensing, land use and environmental regulations;
|
|
|
|
|
●
|
raise
or have available an adequate amount of cash or currently available financing for construction and opening costs;
|
|
|
|
|
●
|
timely
hire, train and retain the skilled management and other employees necessary to meet staffing needs;
|
|
|
|
|
●
|
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.
|
If
we succeed in opening new Simplicity Esports Gaming Centers on a timely and cost-effective basis, we may nonetheless be unable
to attract enough customers to the new Simplicity Esports Gaming Centers because potential customers may be unfamiliar with our
brands or concepts, or our entertainment and menu options might not appeal to them. Our new Simplicity Esports Gaming Centers
may not meet or exceed our performance targets, including target cash-on-cash returns. New Simplicity Esports Gaming Centers may
even operate at a loss, which could have a significant adverse effect on our overall operating results.
Our
operations of Simplicity Esports Gaming Centers are significantly dependent on changes in public and customer tastes and discretionary
spending patterns. Our inability to successfully anticipate customer preferences or to gain popularity for such Simplicity Esports
Gaming Centers games may negatively impact our profitability.
Our
success depends significantly on public and customer tastes and preferences, which can be unpredictable. If we are unable to successfully
anticipate customer preferences or increase the popularity of the games offered at the Simplicity Esports Gaming Centers, the
per capita revenue and overall customer expenditures at the Simplicity Esports Gaming Centers may decrease, and thereby negatively
impact our profitability. In response to such developments, we may need to increase our marketing and product development efforts
and expenditures, adjust our game or product sale pricing, modify the games themselves, or take other actions, which may further
erode our profit margins, or otherwise adversely affect our results of operations and financial condition. In particular, we may
need to expend considerable cost and effort in carrying out extensive research and development to assess the potential interest
in a game, testing and launching new games, and to remain abreast with continually evolving technology and trends, as well as
the success and popularity of Simplicity stream team’s casters, influencers and personalities among Simplicity Esports LLC’s
dedicated fan base.
While
we may incur significant expenditures of this nature, including in the future as we continue to expand our operations, there can
be no assurance that any such expenditures or investments by us will yield expected or commensurate returns or results, within
a reasonable or anticipated time, or at all.
The
nature of our business exposes us to negative publicity or customer complaints, including in relation to, among other things,
accidents, injuries or thefts at the Simplicity Esports Gaming Centers, or health and safety concerns arising from improper use
of our game equipment or at our food and beverage venues.
Our
business inherently exposes us to negative publicity or customer complaints as a result of accidents, injuries, or in extreme
cases, deaths, arising from instances of air-borne, water-borne or food-borne contagion or illness, food contamination, spoilage,
tampering, equipment failure, improper use of our equipment, fire, explosion, terrorist attacks or civil riots, and other safety
or security issues, such as kidnapping, or associated risks arising from other actual or perceived non-compliance with safety,
quality or service standards or norms in relation to the various game, entertainment and food and beverage attractions at the
Simplicity Esports Gaming Centers. Even isolated or sporadic incidents or accidents may have a negative impact on our brand image
and reputation, and the Simplicity Esports Gaming Centers’, or games’ or our own popularity with customers. The considerable
expansion of social media in recent years has compounded the effect of any potential negative publicity.
We
cannot guarantee that our or our franchisee’s employee training, internal controls and other precautions will be sufficient
to prevent any such occurrence at the Simplicity Esports Gaming Centers, in relation to our Simplicity global virtual reality
gaming and fully integrated esports platform, or to control or mitigate any negative consequences. In addition, we or our franchisees
rely on third-party security and housekeeping staff for certain non-core functions, as well as certain technology vendors and
partners. Although we monitor vendors and partners and, in certain cases, may have a contractual indemnity or recourse in case
of any default on their part, our ability to assure a safe and satisfactory experience to our customers is necessarily limited
to the extent of our or our franchisees’, dependence on third parties, from time to time. Moreover, we may not be able to
distance or insulate ourselves from any adverse publicity or reputational damage arising from any act, omission or negligence
on the part of a vendor or other third party, which may negatively affect a customer’s experience at any of the Simplicity
Esports Gaming Centers.
We
or our franchisees may not be able to operate in the United States, or obtain and maintain licenses and permits necessary for
such operation, in compliance with laws, regulations and other requirements, which could adversely affect our business, results
of operations or financial condition.
Each
Simplicity Esports Gaming Center will be subject to licensing and regulation by alcoholic beverage control, amusement, health,
sanitation, safety, building code and fire agencies in the country, state, county and/or municipality in which the Simplicity
Esports Gaming Center is located. In the United States, each Simplicity Esports Gaming Center with a restaurant or bar will be
required to obtain a license to sell alcoholic beverages on the premises from a state authority and, in certain locations, county
and municipal authorities. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time.
In some states, the loss of a license for cause with respect to one Simplicity Esports Gaming Center may lead to the loss of licenses
at all Simplicity Esports Gaming Centers in that state and could make it more difficult to obtain additional licenses in that
state. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each Simplicity Esports Gaming
Center, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control
and handling and storage and dispensing of alcoholic beverages. Our failure or a failure by a franchisee in obtaining and maintaining
the required licenses, permits and approvals at any one Simplicity Esports Gaming Center could impact the continuing operations
of existing Simplicity Esports Gaming Centers, or delay or prevent the opening of new Simplicity Esports Gaming Centers. Although
we do not anticipate any material difficulties occurring in the future, the failure to receive or retain a liquor license, or
any other required permit or license, in a particular location, or to continue to qualify for, or renew licenses, could have a
material adverse effect on operations and our ability to obtain such a license or permit in other locations.
As
a result of operating certain entertainment games and attractions, including skill-based games that offer redemption prizes, the
Simplicity Esports Gaming Centers in the United States are subject to amusement licensing and regulation by the countries, states,
provinces, counties and municipalities in which our Simplicity Esports Gaming Centers are located. These laws and regulations
can vary significantly by country, state, province, county, and municipality and, in some jurisdictions, may require us to modify
our business operations or alter the mix of redemption games and simulators we offer. Moreover, as more states in the United States
and local communities implement legalized gambling, the laws and corresponding enabling regulations may also be applicable to
our redemption games and regulators may create new licensing requirements, taxes or fees, or restrictions on the various types
of redemption games we offer. Furthermore, other states, provinces, counties and municipalities may make changes to existing laws
to further regulate legalized gaming and illegal gambling. Adoption of these laws, or adverse interpretation of existing laws,
after we have established a Simplicity Esports Gaming Center in the jurisdiction could require the existing center in these jurisdictions
to alter the mix of games, modify certain games, change the mix of prizes that we may offer or terminate the use of specific games,
any of which could adversely affect our operations.
We
are also subject to laws and regulations governing our relationship with our employees, including those related to minimum wage
requirements, exempt status, overtime, health insurance mandates, working and safety conditions, immigration status requirements,
child labor, and non-discrimination. Additionally, changes in federal labor laws, including card verification regulations, could
result in portions of our workforce being subjected to greater organized labor influence, which could result in an increase to
our labor costs. A significant portion of Simplicity Esports Gaming Center personnel will be paid at minimum wage rates established
by federal, state and municipal law. Increases in the minimum wage result in higher labor costs, which may be only partially offset
by price increases and operational efficiencies.
We
are also subject to the rules and regulations of the Federal Trade Commission and various state laws regulating the offer and
sale of franchises. The Federal Trade Commission and various state laws require that we furnish a franchise disclosure document
containing certain information to prospective franchisees, and a number of states require registration of the franchise disclosure
document with state authorities. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial
number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the
franchisor-franchisee relationship. The state laws often limit, among other things, the duration and scope of non-competition
provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate
sources of supply. We shall endeavor to make sure that any franchise disclosure document we provide, together with any applicable
state versions or supplements, and franchising procedures, comply in all material respects with both the Federal Trade Commission
guidelines and all applicable state laws regulating franchising in those states in which we have offered franchises.
If
we and our franchisees fail to comply with such laws and regulations, we may be subject to various sanctions and/or penalties
and fines or may be required to cease operations until we achieve compliance, which could have an adverse effect on our business
and our financial results.
Our
growth through franchising may not occur as rapidly as we currently anticipate and may be subject to additional risks.
As
part of our growth strategy, we will continue to seek franchisees to operate Simplicity Esports Gaming Centers in certain strategic
domestic locations or venues. We believe that our ability to recruit, retain and contract with qualified franchisees will be increasingly
important to our operations as we expand. Our franchisees are dependent upon the availability of adequate sources of financing
in order to meet their development obligations. Such financing may not be available to our franchisees, or only available upon
disadvantageous terms. Our franchise strategy may not enhance our results of operations.
Expanding
through franchising exposes our business and brand to risks because the quality of the franchised operations will be beyond our
immediate control, including risks associated with our confidential information, intellectual properties (including trademarks)
and brand reputation. Even if we have contractual remedies to cause franchisees to maintain operational standards, enforcing those
remedies may require litigation and therefore our image and reputation may suffer, unless and until such litigation is successfully
concluded.
We
could face liability from or as a result of our franchisees.
Various
state and federal laws will govern the relationship between us and our franchisees and the potential sale of a franchise. If we
fail to comply with these laws, we could be liable for damages to franchisees and fines or other penalties. A franchisee or government
agency may bring legal action against us based on the franchisee/franchisor relationship. Also, under the franchise business model,
we may face claims and liabilities based on vicarious liability, joint-employer liability, or other theories or liabilities. Such
legal actions could result in expensive litigation with our franchisees or government agencies that could adversely affect both
our profit and our important relations with our franchisees. In addition, regulatory or legal developments could result in changes
to laws or the franchisor/franchisee relationship that could negatively impact the franchise business model and, accordingly,
our profit.
We
may not be able to compete favorably in the highly competitive out-of-home and home-based entertainment market in the United States,
which could have a material adverse effect on our business, results of operations or financial condition.
The
out-of-home entertainment market in the United States is highly competitive. Simplicity Esports Gaming Centers that we or our
franchisees operate will compete for customers’ discretionary entertainment dollars with providers of out-of-home entertainment,
including localized attraction facilities such as movie theatres, sporting events, bowling alleys, sports activity centers, arcades
and entertainment centers, nightclubs and restaurants as well as theme parks. Many of the entities operating these businesses
are larger and have significantly greater financial resources, a greater number of locations, have been in business longer, have
greater name and brand recognition and are better established in the local markets where Simplicity Esports Gaming Centers are
planned to be located. As a result, they may be able to invest greater resources than we can in attracting customers and succeed
in attracting customers who would otherwise come to the Simplicity Esports Gaming Centers we or our franchisees operate. In the
United States, the legalization of casino gambling in geographic areas near any future Simplicity Esports Gaming Center would
create the possibility for adult entertainment alternatives, which could have a material adverse effect on our business and financial
condition. We will also face competition from local, regional and national establishments that offer entertainment experiences
similar to us. Simplicity Esports Gaming Centers we or our franchisees operate will also face competition from increasingly sophisticated
home-based forms of entertainment, such as internet and video gaming and home movie streaming and delivery. If we fail to compete
favorably in the competitive out-of-home and home-based entertainment markets it could have a material adverse effect on our business,
results of operations and financial condition.
Our
senior management team has limited experience in establishing, operating, licensing rights to and franchising entertainment centers
and related products.
The
members of our senior management team have extensive backgrounds in finance and the management of financial services businesses,
however, they have limited prior experience in establishing, operating, licensing rights to and franchising entertainment centers.
We will need to expand our management team, to include individuals with expertise in establishing and operating entertainment
centers as well as individuals with expertise in product licensing and franchise operations. If we are unable to recruit professionals
with acceptable backgrounds in establishing and operating entertainment centers and with backgrounds in product licensing and
financing, we may not be able to pursue our growth strategy which could have a material adverse effect on our business and results
of operations.
Our
success depends upon our ability to recruit and retain qualified management and operating personnel at Simplicity Esports Gaming
Centers.
We
and our franchisees must attract, retain and motivate a sufficient number of qualified management and operating personnel in order
to maintain consistency in our service, hospitality, quality and atmosphere of our Simplicity Esports Gaming Centers. Qualified
management and operating personnel are typically in high demand. If we and our franchisees are unable to attract and retain a
satisfactory number of qualified management and operating personnel, labor shortages could delay the planned openings of new Simplicity
Esports Gaming Centers which could have a material adverse effect on our business and results of operations.
Acquisitions,
other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that
may adversely impact our business and results of operations.
Acquisitions
are an important element of our overall corporate strategy and use of capital, and these transactions could be material to our
financial condition and results of operations. We expect to continue to evaluate and enter into discussions regarding a wide array
of potential strategic transactions. The process of integrating an acquired company, business, or product has created, and will
continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks may include, but are not
limited to:
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diversion
of management’s time and focus from operating our business to acquisition integration challenges;
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failure
to successfully further develop the acquired business or product lines;
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implementation
or remediation of controls, procedures and policies at the acquired company;
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integration
of the acquired company’s accounting, human resources and other administrative systems, and coordination of product,
engineering and sales and marketing functions;
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transition
of operations, users and customers onto our existing platforms;
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reliance
on the expertise of our strategic partners with respect to market development, sales, local regulatory compliance and other
operational matters;
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failure
to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval,
under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or
otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition;
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in
the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address
the particular economic, currency, political and regulatory risks associated with specific countries;
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cultural
challenges associated with integrating employees from the acquired company into our organization, and retention of employees
from the businesses we acquire;
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liability
for or reputational harm from activities of the acquired company before the acquisition or from our strategic partners, including
patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown
liabilities; and
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litigation
or other claims in connection with the acquired company, including claims from terminated employees, customers, former shareholders
or other third parties.
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Our
failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments
or strategic alliances could cause us to fail to realize the anticipated benefits of such acquisitions, investments or alliances,
incur unanticipated liabilities, and harm our business generally.
Our
acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities
or amortization expenses, or impairment of goodwill and purchased long-lived assets, and restructuring charges, any of which could
harm our financial condition or results of operations and cash flows. Also, the anticipated benefits of many of our acquisitions
may not materialize.
Our
insurance coverage may not adequately protect us against all future risks, which may adversely affect our business and prospects.
We
maintain insurance coverage, including for fire, acts of god and perils, terrorism, burglary, money, loss of profit, fidelity
guarantee, fixed glass and sanitary fitting, electronic equipment, machinery breakdown, portable equipment, sign boards, commercial
general liability, marine transit, and directors’ and officers’ liability insurance, as well as employee health and
medical insurance, with standard exclusions in each instance. While we maintain insurance in amounts that we consider reasonably
sufficient for a business of our nature and scale, with insurers that we consider reliable and credit worthy, we may face losses
and liabilities that are uninsurable by their nature, or that are not covered, fully or at all, under our existing insurance policies.
Moreover, coverage under such insurance policies would generally be subject to certain standard or negotiated exclusions or qualifications
and, therefore, any future insurance claims by us may not be honored by our insurers in full, or at all. In addition, our premium
payments under our insurance policies may require a significant investment by us.
To
the extent that we suffer loss or damage that is not covered by insurance or that exceeds our insurance coverage, the loss will
have to be borne by us and our business, cash flow, financial condition, results of operations and prospects may be adversely
affected.
Changes
in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business, investments and
results of operations.
We
are subject to laws and regulations enacted by national, regional and local governments. In particular, we are required to comply
with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult,
time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time
and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a
failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our
business and results of operations.
We
are dependent upon our executive officers and directors and their departure could adversely affect our ability to operate.
Our
operations are dependent upon a relatively small group of individuals and, in particular, our executive officers and directors.
We believe that our success depends on the continued service of our executive officers and directors. We do not have key-man insurance
on the life of any of our directors or executive officers. The unexpected loss of the services of one or more of our directors
or executive officers could have a detrimental effect on us.
Our
executive officers, directors, security holders and their respective affiliates may have competitive pecuniary interests that
conflict with our interests.
We
have not adopted a policy that expressly prohibits our directors, executive officers, security holders or affiliates from having
a direct or indirect pecuniary or financial interest in any investment to be acquired or disposed of by us or in any transaction
to which we are a party or have an interest. While our employment agreements with our key executive officers contain non-compete
provisions, we do not have a policy that expressly prohibits any such persons from engaging for their own account in business
activities of the types conducted by us. Accordingly, such persons or entities may have a conflict between their interests and
ours.
We
are an emerging growth company within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure
requirements available to emerging growth companies, this could make our securities less attractive to investors and may make
it more difficult to compare our performance with other public companies.
We
are an “emerging growth company” within the meaning of the Securities Act, as modified by the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being
required to comply with the auditor internal controls attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the
requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. As a result, our stockholders may not have access to certain information they may deem important.
We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier,
including if the market value of our Common Stock held by non-affiliates exceeds $700 million as of any November 30 before that
time, in which case we would no longer be an emerging growth company as of the following May 31. We cannot predict whether investors
will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less
attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise
would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.
Further,
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial
accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared
effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company
can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies
but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means
that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging
growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may
make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging
growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences
in accounting standards used.
Compliance
obligations under the Sarbanes-Oxley Act may require substantial financial and management resources.
Section
404 of the Sarbanes-Oxley Act requires that we evaluate and report on our system of internal controls beginning with our Annual
Report on Form 10-K for the year ended May 31, 2020. As long as we remain an emerging growth company, we will not be required
to comply with the independent registered public accounting firm attestation requirement on our internal control over financial
reporting.
Provisions
in our third amended and restated certificate of incorporation, as amended, and Delaware law may inhibit a takeover of us, which
could limit the price investors might be willing to pay in the future for our Common Stock and could entrench management.
Our
third amended and restated certificate of incorporation, as amended, contains provisions that may discourage unsolicited takeover
proposals that stockholders may consider to be in their best interests. These provisions include a staggered board of directors
and the ability of the board of directors to designate the terms of and issue new series of preferred shares, which may make more
difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing
market prices for our securities.
If
we fail to keep pace with changing industry technology and consumer preferences, we will be at a competitive disadvantage.
The
Simplicity products and services compete within industries that are characterized by swiftly changing technology, evolving industry
standards, frequent new and enhanced product introductions, rapidly changing consumer preferences and product obsolescence. In
order to continue to compete effectively, we need to respond quickly to technological changes and to understand their impact on
customers’ preferences. We may take significant time and resources to respond to these technological changes and changes
in consumer preferences. Our business and results of operations may be negatively impacted if our products and services fail to
keep pace with these changes.
Various
product safety laws and governmental regulations applicable to the distributor of Simplicity Esports LLC’s and/or PLAYlive
Nation, Inc.’s products may adversely affect our business, results of operations and financial condition.
Our
distribution of Simplicity Esports LLC’s and/or PLAYlive Nation, Inc.’s products will be subject to numerous federal,
state, provincial, local and foreign laws and regulations, including laws and regulations with respect to product safety, including
regulations enforced by the United States Consumer Products Safety Commission. We and our franchisees could incur costs in complying
with these regulations and, if they fail to comply, could incur significant penalties. A failure to comply with applicable laws
and regulations, or concerns about product safety, may also lead to a recall or post-manufacture repair of selected Simplicity
Esports LLC’s and/or PLAYlive Nation, Inc.’s products, resulting in the rejection of the products by our franchisees,
lost sales, increased customer service and support costs, and costly litigation.
Public
health epidemics or outbreaks, such as COVID-19, could materially and adversely impact our business.
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because COVID-19 infections
have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home
orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations
and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity Gaming Centers were
closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have since reopened three
corporate and 20 franchised Simplicity Gaming Centers as of October 5, 2020. Although our franchise agreements
with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless
of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming
Centers will default in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase in
accounts receivables or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability
to pay the minimum monthly royalty payments owed by the franchisee. We have not written off as bad debt any accounts receivables
attributable to franchisee minimum monthly royalty payments owed during the COVID-19 pandemic. However, we have recorded an allowance
for doubtful accounts of approximately $52,000, as our collection efforts are ongoing. We have experienced an increase in our
account receivables by approximately $32,000 and $14,000 during the quarters ended May 31, 2020 and August 31, 2020, respectively.
Notwithstanding it is unclear exactly how much of the increase in accounts receivables is attributable to the impact of COVID-19.
For the months of July and August 2020, we have waived the minimum monthly royalty payment obligations for the months of July
and August 2020 and are instead billing the franchisees a true-up of 6% of gross sales without a minimum.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date adversely impacted the Company’s business for the fiscal quarters ended May 31, 2020 and August 31,
2020 and will potentially continue to impact the Company’s business. Management expects that all of its business segments,
across all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on
the Company’s business and the duration for which it may have an impact cannot be determined at this time.
Risks
Relating to Our Esports Business
Our
esports businesses are substantially dependent on the continuing popularity of the esports industry as a whole.
The
esports industry is in the early stages of its respective development. Although the esports industry has experienced rapid growth,
consumer preferences may shift and there is no assurance this growth will continue in the future. We have taken steps to diversify
their businesses and mitigate these risks to an extent and continue to seek out new opportunities in the esports industry. However,
due to the rapidly evolving nature of technology and online gaming, the esports industry may experience volatile and declining
popularity as new options for online gaming and esports become available, or consumer preferences shift to other forms of entertainment,
and as a consequence, our businesses and results of operations may be materially negatively affected.
Our
esports business faces intense and wide-ranging competition, which may have a material negative effect on our business and results
of operations.
The
success of our esports business is dependent upon the performance and/or popularity of its teams. Simplicity Esports LLC’s
teams compete, in varying respects and degrees, with other live sporting events, and with sporting events delivered over television
networks, radio, the Internet and online services, mobile applications and other alternative sources. For example, our esports
teams compete for attendance, viewership and advertising with a wide range of alternatives available in major metropolitan areas.
During some or all of the esports season, our teams face competition, in varying respects and degrees, from professional and collegiate
basketball, hockey, baseball, football, and soccer, among others.
As
a result of the large number of options available, we face strong competition for the sports and gaming fan. We must compete with
other esports teams, traditional sports teams and sporting events, in varying respects and degrees, including on the basis of
the quality of the teams we field, their success in the leagues, tournaments and genres in which they compete, our ability to
provide an entertaining environment at any esports games that we host at our centers, prices charged for tickets and the viewing
availability of our teams on multiple media alternatives. Given the nature of esports and sports in general, there can be no assurance
that we will be able to compete effectively, including with companies that may have greater resources than we have, and as a consequence,
our business and results of operations may be materially negatively affected by competition.
Our
businesses are substantially dependent on the continued popularity and/or competitive success of Simplicity Esports LLC’s
teams, which cannot be assured.
Our
future financial results will be dependent on the Simplicity teams becoming and remaining popular with our fan base and, in varying
degrees, on the teams achieving in-game success, which can generate fan enthusiasm, resulting in sustained ticket and merchandise
sales during the season. Furthermore, success in the regular season at certain tournaments may qualify one or more of our esports
teams for participation in post-season playoffs, which provides us with additional revenue from prize money by increasing the
number of games played by our sports teams and, more importantly, by generating increased excitement and interest in our esports
teams, which can improve attendance in subsequent seasons. There can be no assurance that any of our esports teams, will develop
a significant fan base, maintain continued popularity or compete in post-season play in the future.
Defection
of our esports players to other teams or managers could hinder our success.
We
compete with other esports athlete management businesses to sign and retain world class esports players, some of which have greater
resources or brand recognition and popularity than ours. Our players may choose to defect to other esports organizations for various
reasons, including that they have been made a superior offer or they have chosen to pursue new or other opportunities. The loss
or defection of any of our esports players could have negative consequences on our businesses and results of operations. While
we take or intend to take, all appropriate steps to retain our players and protect their interests, there can be no assurances
that players will not defect to other esports organizations.
The
actions of the various esports leagues and tournaments may have a material negative effect on our business and results of operations.
The
governing bodies of the various esports leagues and tournaments, under certain circumstances, can take actions that they deem
to be in the best interests of their respective leagues or tournaments, which may not necessarily be consistent with maximizing
our results of operations and which could affect our esports teams in ways that are different than the impact on other esports
teams. For example they can take actions relating to the rights to telecast the games of league members or tournament participants,
including the Simplicity team, licensing of the rights to produce and sell merchandise bearing the logos and/or other intellectual
property of our esports teams and the leagues or tournaments, and the internet-based activities of our esports teams. Certain
of these decisions by the esports leagues and tournaments could have a material negative effect on our business and results of
operations. From time to time, we may disagree with or challenge actions that the leagues or tournaments take or the power and
authority they assert.
We
may be unable to effectively manage the growth in the scope and complexity of our business, including our expansion into the esports
business which is untested and into adjacent business opportunities.
Our
future success depends, in part, on our ability to manage our expanded business, including our aspirations for continued expansion.
We intend to dedicate resources to a new business model that is largely untested, as is the case with esports. We do not know
to what extent our future expansions will be successful. Further, even if successful, the growth of our business could create
significant challenges for our management, operational, and financial resources, and could increase existing strain on, and divert
focus from, our core businesses. If not managed effectively, this growth could result in the over-extension of our operating infrastructure,
and our management systems, information technology systems, and internal controls and procedures may not be adequate to support
this growth. Failure to adequately manage our growth in any of these ways may cause damage to our brand, damage our reputation
or otherwise negatively impact our business.
Our
industry is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our resources among,
emerging technologies and business models, our business may be negatively impacted.
Technology
changes rapidly in the interactive entertainment industry. We must continually anticipate and adapt our products, services and
business models to emerging technologies and delivery platforms in order to stay competitive. Forecasting our revenues and profitability
for these new products, services and business models is inherently uncertain and volatile, and if we invest in the development
of interactive entertainment products or services incorporating a new technology or for a new platform that does not achieve significant
commercial success, whether because of competition or otherwise, we may not recover the often substantial “up front”
costs of developing and marketing those products and services, or recover the opportunity cost of diverting management and financial
resources away from other products or services. Further, our competitors may adapt to an emerging technology or business model
more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to consumers,
or both.
If,
on the other hand, we elect not to pursue the development of products or services incorporating a new technology or for new platforms,
or otherwise elect not to pursue new business models, that achieve significant commercial success, it may have adverse consequences.
It may take significant time and resources to shift product development resources to that technology, platform or business model,
as the case may be, and may be more difficult to compete against existing products and services incorporating that technology
or for that platform or against companies using that business model.
Many
elements of our business are unique, evolving and relatively unproven. Our business and prospects depend on the continuing development
of live streaming of competitive esports gaming. The market for esports and amateur online gaming competition is relatively new
and rapidly developing and are subject to significant challenges. Our business relies upon our ability to cultivate and grow an
active gamer community, and our ability to successfully monetize such community through tournament fees, subscriptions for our
esports gaming services, and advertising and sponsorship opportunities. In addition, our continued growth depends, in part, on
our ability to respond to constant changes in the esports gaming industry, including rapid technological evolution, continued
shifts in gamer trends and demands, frequent introductions of new games and titles and the constant emergence of new industry
standards and practices. Developing and integrating new games, titles, content, products, services or infrastructure could be
expensive and time-consuming, and these efforts may not yield the benefits we expect to achieve at all. We cannot assure you that
we will succeed in any of these aspects or that the esports gaming industry will continue to grow as rapidly as it has in the
past.
We
may encounter difficulties in integrating Simplicity Esports LLC’s esports businesses or otherwise realizing the anticipated
benefits of the transaction.
As
part of our business strategy, from time to time, we acquire, make investments in, or enter into strategic alliances and joint
ventures with, complementary businesses, such as the acquisition of the Simplicity esports business in January 2019. The acquisition
of Simplicity Esports LLC involves significant risks and uncertainties, including: (i) the potential for Simplicity Esports LLC’s
business to underperform relative to our expectations and the acquisition price, (ii) the potential for Simplicity Esports LLC’s
business to cause our financial results to differ from expectations in any given period, or over the longer-term, (iii) unexpected
tax consequences from the acquisition, or the tax treatment of Simplicity Esports LLC’s business’s operations going
forward, giving rise to incremental tax liabilities that are difficult to predict, (iv) difficulty in integrating Simplicity Esports
LLC’s business, its operations and its employees in an efficient and effective manner, (v) any unknown liabilities or internal
control deficiencies assumed as part of the acquisition, and (vi) the potential loss of key employees of Simplicity Esports LLC’s
businesses. Further, the transaction may involve the risk that our senior management’s attention will be excessively diverted
from our other operations, the risk that the gaming industry does not evolve as anticipated and that any intellectual property
or personnel skills acquired do not prove to be those needed for our future success, and the risk that our strategic objectives,
cost savings or other anticipated benefits are otherwise not achieved.
Our
business may be harmed if our licensing partners, or other third parties with whom we do business, act in ways that put our brand
at risk.
We
anticipate that our business partners shall be given access to sensitive and proprietary information or control over our intellectual
property in order to provide services and support to our teams. These third parties may misappropriate our information or intellectual
property and engage in unauthorized use of it or otherwise act in a way that places our brand at risk. The failure of these third
parties to provide adequate services and technologies, the failure of third parties to adequately maintain or update their services
and technologies or the misappropriation or misuse of this information or intellectual property could result in a disruption to
our business operations or an adverse effect on our reputation, and may negatively impact our business.
Our
business is highly dependent on the success and availability of video game platforms manufactured by third parties.
We
expect to derive a substantial portion of our revenues from esports games played on game platforms manufactured by third parties,
such as Sony’s PS4®, Microsoft’s Xbox One®, and Nintendo’s Wii U® and Switch®, and PCs. The
success of our business will be driven in large part by our ability to accurately predict which platforms will be successful in
the marketplace. We also rely on the availability of an adequate supply of these video game consoles and the continued support
for these consoles by their manufacturers. We may be required to commit significant resources well in advance of the anticipated
introduction of a new platform. If increased costs are not offset by higher revenues and other cost efficiencies, our business
could be negatively impacted. If the platforms for which we invested resources do not attain significant market acceptance, we
may not be able to recover our costs, which could be significant.
The
games we support are subject to scrutiny regarding the appropriateness of their content. If the publishers and distributors we
partner with fail to receive their target ratings for certain titles, or if retailers refuse to sell such titles due to what they
perceive to be objectionable content, it could have a negative impact on our business.
Console
and PC games are subject to ratings by the Entertainment Software Rating Board (the “ESRB”), a self-regulatory body
based in the U.S. that provides U.S. and Canadian consumers of interactive entertainment software with ratings information, including
information on the content in such software, such as violence, nudity or sexual content, along with an assessment of the suitability
of the content for certain age groups. Certain other countries have also established content rating systems as prerequisites for
product sales in those countries. In addition, certain stores use other ratings systems, such as Apple’s use of its proprietary
“App Rating System” and Google Play’s use of the International Age Rating Coalition (IARC) rating system. If
the software publishers that supply our games are unable to obtain the ratings they have targeted for their products, it could
have a negative impact on our business. In some instances, the software publishers and developers may be required to modify their
products to comply with the requirements of the rating systems, which could delay or disrupt the release of any given product,
or may prevent its sale altogether in certain territories, which would limited its availability for use in the games that our
teams play.
We
will depend on servers to operate our games with online features. If we were to lose server functionality for any reason, our
business may be negatively impacted.
Our
business at our game centers will rely on the continuous operation of servers, some of which are owned and operated by third parties.
Although we shall strive to maintain more than sufficient server capacity, and provide for active redundancy in the event of limited
hardware failure, any broad-based catastrophic server malfunction, a significant service-disrupting attack or intrusion by hackers
that circumvents security measures, a failure of disaster recovery service or the failure of a company on which we are relying
for server capacity to provide that capacity for whatever reason would likely degrade or interrupt the functionality of our games
with online features, and could prevent the operation of such games altogether, any of which could result in the loss of sales
for, or in, such games.
We
also rely on networks operated by third parties, such as the PlayStation® Network, Xbox Live® and Steam®, for the
functionality of the games we use which have online features. An extended interruption to any of these services could adversely
affect our ability to operate our games with online features, negatively impacting our business.
Further,
insufficient server capacity could also negatively impact our game center business. Conversely, if we overestimate the amount
of server capacity required by our business, we may incur unnecessary additional operating costs.
The
esports gaming industry is very “hit” driven. We may not have access to “hit” games or titles.
Select
game titles dominate competitive esports and online gaming, including League of Legends, Minecraft, Fortnite and Overwatch, and
many new games titles are regularly introduced in each major industry segment (console, mobile and PC free-to-download). Despite
the number of new entrants, only a very few “hit” titles account for a significant portion of total revenue in each
segment.
The
size and engagement level of our online and in person gamers are critical to our success and are closely linked to the quality
and popularity of the esports game publishers with which we have licenses. Esports game publishers on our gaming platform, including
those who have entered into license agreements with us, may leave us for other gaming platforms or leagues which may offer better
competition, and terms and conditions than we do. Furthermore, we may lose esports game publishers if we fail to generate the
number of gamers to our tournaments and league competitions expected by such publishers. In addition, if popular esports game
publishers cease to license their games to us, or our live streams fail to attract gamers, we may experience a decline in gamer
traffic, subscriptions and engagement, which may have a material and adverse impact on our results of operations and financial
conditions.
We
must continue to attract and retain the most popular esports gaming titles in order to maintain and increase the popularity of
our leagues, tournaments and competitions, and ensure the sustainable growth of our gamer community. We must continue to identify
and enter into license agreements with esports gaming publishers developing “hit’ games that resonate with our community
on an ongoing basis. We cannot assure you that we can continue to attract and retain the same level of first-tier esports game
publishers and our ability to do so is critical to our future success.
If
we fail to keep our existing gamers highly engaged, to acquire new gamers, to successfully implement a membership model for our
gaming community, our business, profitability and prospects may be adversely affected.
Our
success depends on our ability to maintain and grow the number of gamers attending and participating in our in-person and online
tournaments and competitions, and using our gaming platform, and keeping our gamers highly engaged. Of particular importance is
the successful deployment and expansion of our membership model to our gaming community for purposes of creating predictable recurring
revenues.
In
order to attract, retain and engage gamers and remain competitive, we must continue to develop and expand our leagues, including
internationally, produce engaging tournaments and competitions, successfully license the newest “hit” esports games
and titles, implement new technologies and strategies, improve features of our gaming platform and stimulate interactions in our
gamer community.
A
decline in the number of our gamers in our ecosystem may adversely affect the engagement level of our gamers, the vibrancy of
our gamer community, or the popularity of our league play, which may in turn reduce our monetization opportunities, and have a
material and adverse effect on our business, financial condition and results of operations. If we are unable to attract and retain
gamers, our revenues may decline and our results of operations and financial condition may suffer.
We
cannot assure you that our online and in person gaming platform and centers will remain sufficiently popular with gamers to offset
the costs incurred to operate and expand them. It is vital to our operations that we remain sensitive and responsive to evolving
gamer preferences and offer first-tier esports game content that attracts our gamers. We must also keep providing gamers with
new features and functions to enable superior content viewing, and social interaction. Further, we will need to continue to develop
and improve our gaming platform and centers and to enhance our brand awareness, which may require us to incur substantial costs
and expenses. If such increased costs and expenses do not effectively translate into an improved gamer experience and long-term
engagement, our results of operations may be materially and adversely affected.
Risks
Related to International Operations
The
risks related to international operations, in particular in countries outside of the United States, could negatively affect the
Company’s results.
It
is expected that the Company will derive between 15% to 20% of its revenue from transactions denominated in currencies other than
the United States dollar, such as Brazil, and the Company expects that receivables with respect to foreign sales will account
for a significant amount of its total accounts and receivables. As such, the Company’s operations may be adversely affected
by changes in foreign government policies and legislation or social instability and other factors which are not within the control
of the Company, including, but not limited to, recessions in foreign economies, expropriation, nationalization and limitation
or restriction on repatriation of funds, assets or earnings, longer receivables collection periods and greater difficulty in collecting
accounts receivable, changes in consumer tastes and trends, renegotiation or nullification of existing contracts or licenses,
changes in gaming policies, regulatory requirements or the personnel administering them, currency fluctuations and devaluations,
exchange controls, economic sanctions and royalty and tax increases, risk of terrorist activities, revolution, border disputes,
implementation of tariffs and other trade barriers and protectionist practices, taxation policies, including royalty and tax increases
and retroactive tax claims, volatility of financial markets and fluctuations in foreign exchange rates, difficulties in the protection
of intellectual property particularly in countries with fewer intellectual property protections, the effects that evolving regulations
regarding data privacy may have on the Company’s online operations, adverse changes in the creditworthiness of parties with
whom the Company has significant receivables or forward currency exchange contracts, labor disputes and other risks arising out
of foreign governmental sovereignty over the areas in which the Company’s operations are conducted. The Company’s
operations may also be adversely affected by social, political and economic instability and by laws and policies of such foreign
jurisdictions affecting foreign trade, taxation and investment. If the Company’s operations are disrupted and/or the economic
integrity of its contracts is threatened for unexpected reasons, its business may be harmed.
The
Company’s international activities may require protracted negotiations with host governments, national companies and third
parties. Foreign government regulations may favor or require the awarding of contracts to local contractors or require foreign
contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. In the event of a dispute arising in
connection with the Company’s operations in a foreign jurisdiction where it conducts its business, the Company may be subject
to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdictions of
the courts of United States or enforcing American judgments in such other jurisdictions. The Company may also be hindered or prevented
from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. Accordingly,
the Company’s activities in foreign jurisdictions could be substantially affected by factors beyond the Company’s
control, any of which could have a material adverse effect on it. The Company believes that management’s experience to date
in commercializing its products, services and solutions in Brazil may be of assistance in helping to reduce these risks. Some
countries in which the Company may operate may be considered politically and economically unstable.
Doing
business in the industries in which the Company operates often requires compliance with numerous and extensive procedures and
formalities. These procedures and formalities may result in unexpected or lengthy delays in commencing important business activities.
In some cases, failure to follow such formalities or obtain relevant evidence may call into question the validity of the entity
or the actions taken. Management of the Company is unable to predict the effect of additional corporate and regulatory formalities
which may be adopted in the future including whether any such laws or regulations would materially increase the Company’s
cost of doing business or affect its operations in any area.
The
Company may in the future enter into agreements and conduct activities outside of the jurisdictions where it currently carries
on business, which expansion may present challenges and risks that the Company has not faced in the past, any of which could adversely
affect the results of operations and/or financial condition of the Company.
The
Company is subject to foreign exchange and currency risks that could adversely affect its operations, and the Company’s
ability to mitigate its foreign exchange risk through hedging transactions may be limited.
The
Company expects that it will derive between 15% and 20% of its revenues in currencies other than the United States dollar; however,
a substantial portion of the Company’s operating expenses are incurred in United States dollars. Fluctuations in the exchange
rate between the U.S. dollar, the Real (Brazil) and other currencies may have a material adverse effect on the Company’s
business, financial condition and operating results. The Company’s consolidated financial results are affected by foreign
currency exchange rate fluctuations. Foreign currency exchange rate exposures arise from current transactions and anticipated
transactions denominated in currencies other than United States dollars and from the translation of foreign-currency-denominated
balance sheet accounts into United States dollar-denominated balance sheet accounts. The Company is exposed to currency exchange
rate fluctuations because portions of its revenue and expenses are denominated in currencies other than the United States dollar,
particularly the Real. In particular, uncertainty regarding economic conditions in Brazil pose risk to the stability of the Real.
Exchange rate fluctuations could adversely affect the Company’s operating results and cash flows and the value of its assets
outside of United States. If a foreign currency is devalued in a jurisdiction in which the Company is paid in such currency, then
the Company’s customers may be required to pay higher amounts for the Company’s products or services, which they may
be unable or unwilling to pay.
While
the Company may enter into forward currency swaps and other derivative instruments intended to mitigate the foreign currency exchange
risk, there can be no assurance the Company will do so or that any instruments that the Company enters into will successfully
mitigate such risk. If the Company enters into foreign currency forward or other hedging contracts, the Company would be subject
to the risk that a counterparty to one or more of these contracts defaults on its performance under the contracts. During an economic
downturn, a counterparty’s financial condition may deteriorate rapidly and with little notice, and the Company may be unable
to take action to protect its exposure. In the event of a counterparty default, the Company could lose the benefit of its hedging
contract, which may harm its business and financial condition. In the event that one or more of the Company’s counterparties
becomes insolvent or files for bankruptcy, its ability to eventually recover any benefit lost as a result of that counterparty’s
default may be limited by the liquidity of the counterparty. The Company expects that it will not be able to hedge all of its
exposure to any particular foreign currency, and it may not hedge its exposure at all with respect to certain foreign currencies.
Changes in exchange rates and the Company’s limited ability or inability to successfully hedge exchange rate risk could
have an adverse impact on the Company’s liquidity and results of operations.
We
may be unable to obtain licenses in new jurisdictions where our customers operate.
We
are subject to regulation in any jurisdiction where our customers access our website. To expand into any such jurisdiction we
may need to be licensed, or obtain approvals of our products or services. If we do not receive, or receive a revocation of a license
in a particular jurisdiction for our products or services, we would not be able to sell or place our products or services in that
jurisdiction. Any such outcome could materially and adversely affect our results of operations and any growth plans for our business.
Privacy
concerns could result in regulatory changes and impose additional costs and liabilities on the Company, limit its use of information,
and adversely affect its business.
Personal
privacy has become a significant issue in the United States, Brazil, Europe, and many other countries in which the Company currently
operates and may operate in the future. Many federal, state, and foreign legislatures and government agencies have imposed or
are considering imposing restrictions and requirements about the collection, use, and disclosure of personal information obtained
from individuals. Changes to laws or regulations affecting privacy could impose additional costs and liability on the Company
and could limit its use of such information to add value for customers. If the Company were required to change its business activities
or revise or eliminate services, or to implement burdensome compliance measures, its business and results of operations could
be harmed. In addition, the Company may be subject to fines, penalties, and potential litigation if it fails to comply with applicable
privacy regulations, any of which could adversely affect the Company’s business, liquidity and results of operation.
The
Company’s results of operations could be affected by natural events in the locations in which it operates or where its customers
or suppliers operate.
The
Company, its customers, and its suppliers have operations in locations subject to natural occurrences such as severe weather and
other geological events, including hurricanes, earthquakes, or flood that could disrupt operations. Any serious disruption at
any of the Company’s facilities or the facilities of its customers or suppliers due to a natural disaster could have a material
adverse effect on the Company’s revenues and increase its costs and expenses. If there is a natural disaster or other serious
disruption at any of the Company’s facilities, it could impair its ability to adequately supply its customers, cause a significant
disruption to its operations, cause the Company to incur significant costs to relocate or re-establish these functions and negatively
impact its operating results. While the Company intends to seek insurance against certain business interruption risks, such insurance
may not adequately compensate the Company for any losses incurred as a result of natural or other disasters. In addition, any
natural disaster that results in a prolonged disruption to the operations of the Company’s customers or suppliers may adversely
affect its business, results of operations or financial condition.
Risks
Related to Regulation
The
Company is subject to various laws relating to trade, export controls, and foreign corrupt practices, the violation of which could
adversely affect its operations, reputation, business, prospects, operating results and financial condition.
We
are subject to risks associated with doing business outside of the United States, including exposure to complex foreign and U.S.
regulations such as the Foreign Corrupt Practices Act (the “FCPA”) and other anti-corruption laws which generally
prohibit U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining
or retaining business. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions
and other penalties. It may be difficult to oversee the conduct of any contractors, third-party partners, representatives or agents
who are not our employees, potentially exposing us to greater risk from their actions. If our employees or agents fail to comply
with applicable laws or company policies governing our international operations, we may face legal proceedings and actions which
could result in civil penalties, administration actions and criminal sanctions. Any determination that we have violated any anti-corruption
laws could have a material adverse impact on our business. Changes in trade sanctions laws may restrict the Company’s business
practices, including cessation of business activities in sanctioned countries or with sanctioned entities.
Violations
of these laws and regulations could result in significant fines, criminal sanctions against the Company, its officers or its employees,
requirements to obtain export licenses, disgorgement of profits, cessation of business activities in sanctioned countries, prohibitions
on the conduct of its business and its inability to market and sell the Company’s products or services in one or more countries.
Additionally, any such violations could materially damage the Company’s reputation, brand, international expansion efforts,
ability to attract and retain employees and the Company’s business, prospects, operating results and financial condition.
Regulations
that may be adopted with respect to the internet and electronic commerce may decrease the growth in the use of the internet and
lead to the decrease in the demand for Esports’ products and services.
The
Company may become subject to any number of laws and regulations that may be adopted with respect to the internet and electronic
commerce. New laws and regulations that address issues such as user privacy, pricing, online content regulation, taxation, advertising,
intellectual property, information security, and the characteristics and quality of online products and services may be enacted.
As well, current laws, which predate or are incompatible with the internet and electronic commerce, may be applied and enforced
in a manner that restricts the electronic commerce market. The application of such pre-existing laws regulating communications
or commerce in the context of the internet and electronic commerce is uncertain. Moreover, it may take years to determine the
extent to which existing laws relating to issues such as intellectual property ownership and infringement, libel and personal
privacy are applicable to the internet. The adoption of new laws or regulations relating to the internet, or particular applications
or interpretations of existing laws, could decrease the growth in the use of the internet, decrease the demand for esports’
products and services, increase esports’ cost of doing business or could otherwise have a material adverse effect on esports’
business, revenues, operating results and financial condition.
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:
● actual
or anticipated fluctuations in our operating results;
● we
may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held;
● overall
stock market fluctuations;
● announcements
concerning our business or those of our competitors;
● actual
or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;
● conditions
or trends in the industry;
● litigation;
● changes
in market valuations of other similar companies;
● future
sales of common stock;
● departure
of key personnel or failure to hire key personnel; and
● general
market conditions.
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:
● 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.
● 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.
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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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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●
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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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●
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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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●
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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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●
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limiting
the liability of, and providing indemnification to, our directors and officers;
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●
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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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●
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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 $69.00 ($11.50 pre-reverse split). 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 to be sold in this offering, 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.
USE
OF PROCEEDS
All
of the shares of Common Stock offered by the Selling Securityholders pursuant to this prospectus will be sold by the Selling Securityholders
for their respective accounts. We will not receive any of the proceeds from these sales. We will receive up to an aggregate of
approximately $66,757,250 from the exercise of Warrants, assuming the exercise in full of all of the Warrants for cash. We expect
to use the net proceeds from the exercise of the Warrants for general corporate purposes.
CAPITALIZATION
The
following table sets forth our cash and cash equivalents and capitalization as of May 31, 2020 on an actual basis.
This
table should be read in conjunction with the information contained in this prospectus, including “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” and our financial statements and the related notes thereto
appearing elsewhere in this prospectus.
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As of May 31, 2020
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Actual
|
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|
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Total current assets
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$
|
309,236
|
|
Stockholders’ equity:
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Preferred stock - $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding on an actual basis
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-
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Common stock - $0.0001 par value; 20,000,000 shares authorized; 7,003,975 shares issued and outstanding on an actual basis (1)
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799
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Additional paid-in capital
|
|
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11,131,404
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Accumulated deficit
|
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(6,195,044
|
)
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Total stockholders’ equity
|
|
|
4,915,672
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Total capitalization
|
|
$
|
5,620,506
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(1)
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On
August 17, 2020, we filed a Certificate of Amendment to increase the authorized shares of common stock from 20,000,000 to
36,000,000. Accordingly, our authorized capital stock currently consists of (i) 6,000,000 (36,000,000 pre-reverse split) shares
of common stock, and (ii) 1,000,000 shares of preferred stock.
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DETERMINATION
OF OFFERING PRICE
Resale
of Common Stock by Selling Securityholders
Our
Common Stock is quoted on the OTCQB under the symbol “WINR.” The shares registered for resale in this prospectus being
offered by the Selling Securityholders will be sold at a fixed price of $18.00 ($3.00 pre-reverse split) for the duration of this
offering. The offering price of the shares bears no relation to book value, assets, earnings, or any other objective criteria
of value. It has been arbitrarily determined by the Selling Securityholders.
Resale
of Private Placement Warrants by Selling Securityholders
Our
Public Warrants are quoted on the OTCQB under the symbol “WINRW.” The actual offering price by the Selling Securityholders
of the Private Placement Warrants covered by this prospectus will be determined by prevailing market prices at the time of sale,
by private transactions negotiated by the Selling Securityholders or as otherwise described in the section entitled “Plan
of Distribution.” The exercise price of the Private Placement Warrants as well as the Public Warrants is established based
on the terms of the Warrant Agreement and bears no relationship to the book value, assets or earnings of our company or any other
recognized criteria of value.
Issuance
of Shares of Common Stock Underlying Warrants
The
price of the shares of Common Stock underlying the Warrants registered hereby is determined by reference to the exercise price
of the Warrants, such that each (i) Public Warrant and Private Placement Warrant entitles the holder to purchase one share of
our Common Stock at an exercise price of $69.00 ($11.50 pre-reverse split) per share and (ii) 2019 Warrant entitles the holder
to purchase one share of our Common Stock at an exercise price of $24.00 ($4.00 pre-reverse split) per share.
DIVIDEND
POLICY
We
have not paid any cash dividends on our common stock and do not currently anticipate paying cash dividends in the foreseeable
future. The agreements into which we may enter in the future, including indebtedness, may impose limitations on our ability to
pay dividends or make other distributions on our capital stock. Payment of future dividends on our common stock, if any, will
be at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements
and surplus, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. We
intend to retain future earnings, if any, for reinvestment in the development and expansion of our business.
MARKET
PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock is currently quoted on the OTCQB tier of the OTC Market Group, Inc. under the symbol “WINR.” Our warrants
issued in connection with our initial public offering in August 2017 are currently listed on OTCQB under the symbol “WINRW.”
The OTC Market is a network of security dealers who buy and sell stock. The dealers are connected by a computer network that provides
information on current “bids” and “asks”, as well as volume information.
On
October 9, 2017, our common stock and warrants commenced public trading on the NASDAQ Capital Market under the symbols “IAM”
and “IAMXW”, respectively. On November 20, 2018, we changed the symbols of our common stock and warrants to “SMSH”
and “SMSHW”, respectively, in conjunction with our name change from “I-AM Capital Acquisition Company”
to “Smaaash Entertainment, Inc.” On January 10, 2019, we changed the symbols of our common stock and warrants to “WINR”
and “WINRW”, respectively, in conjunction with our name change from “Smaaash Entertainment, Inc.” to “Simplicity
Esports and Gaming Company.” However, on January 25, 2019, the NASDAQ suspended our common stock and warrants from trading
on the NASDAQ Capital Market and the OTCQB commenced the quotation of our common stock and warrants. On April 2, 2019, the NASDAQ
Capital Market filed a Form 25 for our common stock and warrants, which became effective ten days thereafter.
On
September 28, 2020, we filed with the SEC a pre-effective amendment to a registration statement on Form S-1 in connection with
our offering of units, each of which consists of one share of our common stock and one warrant to purchase one share of our common
stock, and shares of common stock issuable from time to time upon exercise of the warrants. In connection with the unit offering,
we have applied to list our common stock and warrants forming a part of the units on The Nasdaq Capital Market (“Nasdaq
Capital Market”). There is no assurance that our listing application will be approved by the Nasdaq Capital Market. The
approval of our listing on the Nasdaq Capital Market is a condition of closing the unit offering.
The
following table includes the high and low bids for our common stock and warrants issued in connection with our initial public
offering (“IPO”)in August 2017 for the periods presented, since the consummation of our IPO on August 22, 2017. These
quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual
transactions.
Common
Stock
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Pre-Reverse (1)
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High
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|
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Low
|
|
Fiscal Year 2021
|
|
|
|
|
|
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September 1 to October 2, 2020
|
|
$
|
1.68
|
|
|
$
|
0.835
|
|
June 1 to August 31, 2020
|
|
$
|
2.33
|
|
|
$
|
0.805
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|
|
|
|
|
|
|
|
|
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Fiscal Year 2020
|
|
|
|
|
|
|
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March 1 to May 31, 2020
|
|
$
|
1.72
|
|
|
$
|
0.67
|
|
December 1, 2019 to February 29, 2020
|
|
$
|
1.69
|
|
|
$
|
0.80
|
|
September 1 to November 30, 2019
|
|
$
|
2.69
|
|
|
$
|
1.50
|
|
June 1 to August 31, 2019
|
|
$
|
2.46
|
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2019
|
|
|
|
|
|
|
|
|
March 1 to May 30, 2019
|
|
$
|
2.20
|
|
|
$
|
0.56
|
|
December 1, 2018 to February 28, 2019
|
|
$
|
6.62
|
|
|
$
|
1.23
|
|
September 1 to November 30, 2018
|
|
$
|
11.05
|
|
|
$
|
3.15
|
|
June 1 to August 31, 2018
|
|
$
|
11.05
|
|
|
$
|
9.86
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2018
|
|
|
|
|
|
|
|
|
March 1 to May 31, 2018
|
|
$
|
10.52
|
|
|
$
|
9.90
|
|
December 1, 2017 to February 28, 2018
|
|
$
|
10.02
|
|
|
$
|
9.80
|
|
September 1 to November 30, 2017
|
|
$
|
9.98
|
|
|
$
|
9.80
|
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August 16 to August 31, 2017 (2)
|
|
$
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N/A
|
|
|
$
|
N/A
|
|
(1)
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Our
common stock began separate trading on NASDAQ on October 9, 2017.
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(2)
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Our
common stock did not trade separately from the Public Units until October 9, 2017.
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On
October 2, 2020, the last reported sale price for our common stock on the OTCQB was $1.60 per share.
The
volume of shares of common stock traded on the OTCQB was insignificant and therefore, does not represent a reliable indication
of the fair market value of these shares.
Warrants
|
|
Pre-Reverse (1)
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|
|
|
High
|
|
|
Low
|
|
Fiscal Year 2021
|
|
|
|
|
|
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September 1 to October 2, 2020
|
|
$
|
0.25
|
|
|
$
|
0.17
|
|
June 1 to August 31, 2020
|
|
$
|
0.39
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2020
|
|
|
|
|
|
|
|
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March 1 to May 31, 2020
|
|
$
|
0.39
|
|
|
$
|
0.08
|
|
December 1, 2019 to February 29, 2020
|
|
$
|
0.45
|
|
|
$
|
0.11
|
|
September 1 to November 30, 2019
|
|
$
|
0.66
|
|
|
$
|
0.16
|
|
June 1 to August 31, 2019
|
|
$
|
0.58
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2019
|
|
|
|
|
|
|
|
|
March 1 to May 30, 2019
|
|
$
|
0.49
|
|
|
$
|
0.04
|
|
December 1, 2018 to February 28, 2019
|
|
$
|
0.52
|
|
|
$
|
0.06
|
|
September 1 to November 30, 2018
|
|
$
|
0.46
|
|
|
$
|
0.17
|
|
June 1 to August 31, 2018
|
|
$
|
0.50
|
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2018
|
|
|
|
|
|
|
|
|
March 1 to May 31, 2018
|
|
$
|
0.50
|
|
|
$
|
0.34
|
|
December 1, 2017 to February 28, 2018
|
|
$
|
0.60
|
|
|
$
|
0.21
|
|
September 1 to November 30, 2017
|
|
$
|
0.34
|
|
|
$
|
0.26
|
|
August 16 to August 31, 2017 (2)
|
|
$
|
N/A
|
|
|
$
|
N/A
|
|
(1)
|
Our
warrants began separate trading on NASDAQ on October 9, 2017.
|
|
|
(2)
|
Our
warrants did not trade separately from the Public Units until October 9, 2017.
|
On October 2, 2020,
the last reported sale price for our warrants on the OTCQB was $0.225 per share.
The
volume of warrants traded on the OTCQB was insignificant and therefore, does not represent a reliable indication of the fair market
value of these warrants.
Holders
of Common Stock
As
of October 5, 2020, there were approximately 125 record holders of our common stock and 60 record holders of our
warrants. The number of record holders does not include beneficial owners of common stock and warrants whose shares and warrants
are held in the names of banks, brokers, nominees or other fiduciaries.
We
have not paid any cash dividends on our common stock and do not currently anticipate paying cash dividends in the foreseeable
future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business.
Historical
Common Equity Transactions
The
following is a summary of transactions by us since our inception on April 17, 2017 involving registered and unregistered issuances
and redemption of our common equity securities.
On May 31, 2017, we issued
239,584 (1,437,500 pre-reverse split) Founder Shares to I-AM Capital Partners LLC (“Sponsor”) in exchange
for a capital contribution of $25,000. Upon the partial exercise of the underwriters’ over-allotment option on September
13, 2017, 22,917 (137,500 pre-reverse split) Founder Shares were forfeited by the Sponsor, for a balance of 216,667
(1,300,000 pre-reverse split) Founder Shares held by our Sponsor. Such securities were issued in connection with our organization
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act. Our sponsor is an accredited investor
for purposes of Rule 501 of Regulation D. No underwriting discounts or commissions were paid with respect to such sales.
On
August 22, 2017, we sold 5,000,000 units at a purchase price of $10.00 per unit in our 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.
On
August 22, 2017, simultaneously with the consummation of the IPO and the sale of the Public Units, we consummated the private
placement of 254,500 units (“Private Placement Units”) at a price of $10.00 per unit, generating total gross proceeds
of $2,545,000. Each unit consisted of (i) one share of Common Stock, (ii) one right receive one-tenth (1/10) of one share of Common
Stock upon the consummation of an initial business combination (“Private Placement Rights”), and (iii) one 5-year
warrant to purchase one share of Common Stock at an exercise price of $69.00 ($11.50 pre-reverse split) per share. The
Private Placement Units, which were purchased by the Sponsor, are identical to the Public Units, except the Private Placement
Warrants underlying the Private Placement Units are non-redeemable and exercisable on a cashless basis so long as they are held
by the Sponsor or its affiliates or designees. If the Private Placement Units are held by someone other than the initial holder,
or its permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable by such holders on the same
basis as the Public Warrants. The issuance of the Private Placement Units was made pursuant to the exemption from registration
contained in Section 4(a)(2) of the Securities Act.
On
August 22, 2017, we issued 8,334 (50,000 pre-reverse split) shares of Common Stock to Maxim Group LLC (“Maxim”)
in connection with its services as underwriter for the IPO. Such shares of Common Stock were issued pursuant to the exemption
from registration contained in Section 4(a)(2) of the Securities Act.
Contained
in the underwriting agreement for the IPO was an over-allotment option allowing the underwriters to purchase from the Company
up to an additional 125,000 (750,000 pre-reverse split) Public Units (the “Over-Allotment Units”) and, in addition,
the Company received a commitment from the Sponsor to purchase up to an additional 26,250 Private Placement Units. On September
13, 2017, the underwriters partially exercised their option and purchased 200,000 Over-Allotment Units, which were sold at an
offering price of $10.00 per unit, generating gross proceeds of $2,000,000.
On
September 13, 2017, simultaneously with the underwriter’s partial exercise of the over-allotment option, we consummated
the sale of an additional 1,167 (7,000 pre-reverse split) Private Placement Units, generating gross proceeds of $70,000.
The issuance of additional Private Placement Units was made pursuant to the exemption from registration contained in Section 4(a)(2)
of the Securities Act.
On
September 13, 2017, we issued Maxim an additional 334 (2,000 pre-reverse split) shares of our Common Stock upon partial
exercise of the over-allotment. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
At
the Special Meeting on November 20, 2018, holders of 741,377 (4,448,260 pre-reverse split) Public Shares exercised their right
to redeem those shares for cash at a price of $61.3124178 ($10.2187363 pre-reverse split) per share, for an aggregate of approximately
$45,455,596.
On
November 20, 2018, we issued 333,334 (2,000,000 pre-reverse split) shares of our Common Stock to AHA Holdings Private Limited
as an upfront portion of the newly issued shares of our Common Stock to be exchanged for all of the ownership interest in Smaaash
Private within 6 months after the closing of the Business Combination. These shares were issued in reliance on Section 4(a)(2)
of the Securities Act.
On
November 20, 2018, we issued 34,667 (208,000 pre-reverse split) shares of Common Stock to Chardan Capital Markets, LLC
(“Chardan”) in consideration of services rendered. These shares were issued in reliance on Section 4(a)(2) of the
Securities Act. The shares issued to Chardan are subject to the same lock-up and will have the same registration rights as the
shares of the Company held by the Sponsor.
On
November 20, 2018, we issued 86,667 (520,000 pre-reverse split) shares of Common Stock upon conversion of the Public Rights.
On
November 20, 2018, upon the consummation of the transaction (“Business Combination”) with Smaaash Entertainment Private
Limited (“Smaaash Private”), we issued 4,359 (26,150 pre-reverse split) shares of Common Stock underlying the
Private Placement Rights to the holders of the Private Placement Rights. These shares were issued in reliance on Section 4(a)(2)
of the Securities Act.
In
connection with the closing of the Acquisition of Simplicity Esports LLC, we issued 50,000 (300,000 pre-reverse split), 116,667
(700,000 pre-reverse split), and 333,334 (2,000,000 pre-reverse split) shares of Common Stock, respectively, to the Simplicity
Owners on January 4, 2019, January 7, 2019, and March 27, 2019 in exchange for all of the issued and outstanding equity interest
of Simplicity Esports LLC held by Simplicity Owners. These shares were issued in reliance on Section 4(a)(2) of the Securities
Act.
On
January 4, 2019, upon the closing of the Acquisition of Simplicity Esports LLC, the Series A-1 Note in the amount of $500,000
and held by Maxim automatically converted into 32,275 (193,648 pre-reverse split) shares of Common Stock. These shares
were issued in reliance on Section 4(a)(2) of the Securities Act.
During
the period from March 1, 2019 through July 1, 2019, we sold an aggregate of 987,500 units at a purchase price of $2.00 per unit
to 12 accredited investors in exchange for receipt of $1,975,000. Each unit consisted of (i) one share of Common Stock, and (ii)
a 5-year warrant to purchase one share of Common Stock at a purchase price of $24.00 ($4.00 pre-reverse split). We sold
the units in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation
D promulgated under the Securities Act.
On March 27, 2019, pursuant
to a Restricted Stock Award, we granted Jed Kaplan, our Chief Executive Officer and interim Chief Financial Officer and a member
of our board of directors, 20,000 (120,000 pre-reverse split) shares of our restricted Common Stock. Such shares vested
over the succeeding nine-month period. As of October 5, 2020, all of such shares have vested.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Roman Franklin, our President and a member of our board of directors,
6,000 (36,000 pre-reverse split) shares of our restricted Common Stock. Such shares vested over the succeeding nine-month
period. As of October 5, 2020, all of such shares have vested.
On March 27, 2019, pursuant
to a Restricted Stock Award, we granted Steve Grossman, President of Simplicity Esports, LLC, a wholly owned subsidiary of our
Company at such time, 4,000 (24,000 pre-reverse split) shares of our restricted Common Stock. Such shares vested over the
succeeding nine-month period. As of October 5, 2020, all of such shares have vested.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan,
Franklin and Grossman on December 31, 2018. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
May 31, 2019, we issued 16,667 (100,000 pre-reverse split) shares of Common Stock to Polar in exchange for Polar Asset
Management Partners Inc.’s (“Polar”) forgiveness of $143,476 owed by us to Polar under that that certain Debt
Conversion Agreement entered into in May 2019 between Polar and us. These shares were issued in reliance on Section 4(a)(2) of
the Securities Act.
On
July 30, 2019, in connection with the acquisition of a 100% interest in PLAYlive Nation, Inc. (“PLAYlive”) by way
of merger, the Company issued 125,000 (750,000 pre-reverse split) shares of the Company’s common stock in exchange
for 100% of the issued and outstanding common stock from the owners of PLAYlive. These shares were issued in reliance on Section
4(a)(2) of the Securities Act.
On
September 16, 2019, pursuant to a Restricted Award, we authorized the grant to Jed Kaplan, our Chief Executive Officer and Interim
Chief Financial Officer and a member of our board of directors, of 1,667 (70,000 pre-reverse split) shares of our restricted
Common Stock. As of October 5, 2020, these shares have been issued. These shares were issued in reliance on Section 4(a)(2)
of the Securities Act.
On
September 16, 2019, pursuant to a Restricted Award, we authorized the grant to Roman Franklin, our President and a member of our
board of directors, of 3,500 (21,000 pre-reverse split) shares of our restricted Common Stock. As of October 5,
2020, these shares have been issued. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
September 16, 2019, pursuant to a Restricted Award, we authorized the grant to Steven Grossman, our Corporate Secretary, of 2,334
(14,000 pre-reverse split) shares of our restricted Common Stock. As of October 5, 2020, these shares have been issued.
These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
March 11, 2020, in connection with the execution of the Common Stock Purchase Agreement with Triton Funds, LP, the Company issued
834 (5,000 pre-reverse split) shares of the Company’s common stock to Triton Funds, LP as a donation. These shares
were issued in reliance on Section 4(a)(2) of the Securities Act.
On April 9, 2020, the
Company delivered a Purchase Notice to Triton Funds, LP (“Triton”) pursuant to the terms of the Common Stock Purchase
Agreement requiring Triton to acquire 20,834 (125,000 pre-reverse split) shares of common stock, which resulted in $87,700
in proceeds to the Company. Pursuant to the terms of the Common Stock Purchase Agreement, on April 9, 2020, the Company instructed
the transfer agent to issue 20,834 (125,000 pre-reverse split) shares of common stock to a custodial account of Triton
Funds, LP. These shares were issued in reliance on Section 4(a)(2) of the Securities Act. Unfortunately, the transfer agent erroneously
transferred the entire 120.834 (725,000 pre-reverse split) shares of common stock under the Equity Line to the custodial
account of Triton, resulting in an over-issuance of 100,000 (600,000 pre-reverse split) shares to Triton. The Company notified
Triton of this error and that the Company terminated the Common Stock Purchase Agreement with Triton. As of October 5,
2020, the Company is currently awaiting the return of the shares issued in error from Triton to the treasury so such shares will
no longer be issued and outstanding. In order to effectuate the return of the shares, the Company’s transfer agent is requiring
a medallion guaranteed stock power from Triton. Triton is cooperating and is currently seeking a medallion guaranteed stock power
to facilitate the cancellation of such shares.
On May 4, 2020, pursuant
to the terms of that certain 10% Fixed Convertible Promissory Note dated April 29, 2020 in the principal amount of $152,500 issued
by the Company in favor of Harbor Gates Capital, LLC, the Company issued 10,000 shares of the Company’s common stock to Harbor
Gates Capital, LLC as additional consideration for the purchase of such note. These shares were issued in reliance on Section 4(a)(2)
of the Securities Act.
On May 7, 2020, we authorized
the sale of 3,969 (23,809 pre-reverse split) shares of our restricted Common Stock, at a price of $1.05 per share, to William
H. Herrmann, Jr. a member of our board of directors, for an aggregate purchase price of $25,000. As of October 5, 2020,
such shares have been issued. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On June 4, 2020, we authorized
the issuance of 14,318 (85,905 pre-reverse split) shares of common stock in connection with the conversion of $100,000
in principal of a convertible note issued in favor of Maxim Group LLC, the Representative. As of October 5, 2020, such
shares have been issued. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On June 15, 2020, we issued
4,167 (25,000 pre-reverse split) shares of common stock in satisfaction of an outstanding balance owed to a vendor. These
shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On June 18, 2020, pursuant
to the terms of that certain Securities Purchase Agreement between the Company and an accredited investor, pursuant to which the
Company issued a 12% self-amortization promissory note in the principal amount of $550,000, the Company agreed to issue 9,167
(55,000 pre-reverse split) shares of the Company’s common stock to such accredited investor as additional consideration
for the purchase of such note. As of October 5, 2020, such shares have been issued. These shares were issued in reliance
on Section 4(a)(2) of the Securities Act.
On June 29, 2020, the
Company acquired the assets of one its franchisee owned esports gaming centers located on the Fort Bliss U.S. Military base in
El Paso, TX. In connection with the acquisition the Company authorized the issuance of 25,000 (150,000 pre-reverse split)
restricted shares. As of October 5, 2020, such shares have been issued. These shares were issued in reliance on Section
4(a)(2) of the Securities Act.
On
July 29, 2020, the Board approved the grant of 55,834 (335,000 pre-reverse split) shares of common stock to Jed Kaplan,
our Chief Executive Officer and Interim Chief Financial Officer and a member of our board of directors. Of these shares, (i) 41,667
(250,000 pre-reverse split) shares of common stock related to services provided by Mr. Kaplan to the Company during the 2020
fiscal year, (ii) 11,667 (70,000 pre-reverse split) shares of common stock related to grants that should have been, but
were not, made pursuant to the Kaplan 2018 Agreement (as hereinafter defined), and (iii) 2,500 (15,000 pre-reverse split)
shares of common stock related to grants made pursuant to the Kaplan 2020 Agreement (as hereinafter defined). The Kaplan 2018
Agreement provided for the grant to Mr. Kaplan of 1,667 (10,000 pre-reverse split) shares of common stock per month. For
the months of January 2020 through July 2020, however, such shares had not been granted. Accordingly, the July 29, 2020 grant
included an aggregate of 70,000 shares of common stock that should have been granted for the months of January 2020 through July
2020. The Kaplan 2020 Agreement provides for the grant to Mr. Kaplan of 2,500 (15,000 pre-reverse split) shares of common
stock per month. As of October 5, 2020, the 55,834 (335,000 pre-reverse split) shares that were granted on July
29, 2020 have been issued. Such shares were fully vested and earned as of the issuance thereof. These shares were issued in reliance
on Section 4(a)(2) of the Securities Act.
On
July 29, 2020, the Board also approved the grant of 46,417 (278,500 pre-reverse split) shares of common stock to Roman
Franklin, our President and a member of our board of directors. Of these shares, (i) 41,667 (250,000 pre-reverse split)
shares of common stock related to services provided by Mr. Franklin to the Company during the 2020 fiscal year, (ii) 3,500
(21,000 pre-reverse split) shares of common stock related to grants that should have been, but were not, made pursuant to
the Franklin 2018 Agreement (as hereinafter defined), and (iii) 1,250 (7,500 pre-reverse split) shares of common stock
related to grants made pursuant to the Franklin 2020 Agreement (as hereinafter defined). The Franklin 2018 Agreement provided
for the grant to Mr. Franklin of 500 (3,000 pre-reverse split) shares of common stock per month. For the months of January
2020 through July 2020, however, such shares had not been granted. Accordingly, the July 29, 2020 grant included an aggregate
of 3,500 (21,000 pre-reverse split) shares of common stock that should have been granted for the months of January 2020
through July 2020. The Franklin 2020 Agreement provides for the grant to Mr. Franklin of 1,042 (6,250 pre-reverse split)
shares of common stock per month. As of October 5, 2020, the 46,417 (278,500 pre-reverse split) shares that were
granted on July 29, 2020 have been issued. Such shares were fully vested and earned as of the issuance thereof. These shares were
issued in reliance on Section 4(a)(2) of the Securities Act.
On July 29, 2020, we authorized
the grant of an aggregate of 32,000 (192,000 pre-reverse split) shares of common stock to an employee and the members of
the Board of Directors of the Company. As of October 5, 2020, such shares have been issued. These shares were issued in
reliance on Section 4(a)(2) of the Securities Act.
On July 31, 2020, we entered
into a marketing agreement whereby we agreed to issue 4,630 (27,778 pre-reverse split) shares of common stock. As of October
5, 2020, such shares have been issued. These shares were issued in reliance on Section 4(a)(2) of the Securities Act
On August 7, 2020, pursuant
to the terms of that certain Securities Purchase Agreement between the Company and an accredited investor pursuant to which we
issued a 12% self-amortization promissory note in the principal amount of $333,333, the Company authorized the grant of 5,556
(33,333 pre-reverse split) shares of common stock. As of October 5, 2020, such shares have been issued. These shares were
issued in reliance on Section 4(a)(2) of the Securities Act.
On September 16, 2020,
we authorized the grant of 17,612 (105,670 pre-reverse split) shares of common stock to employees and consultants. As of
October 5, 2020, such shares have been issued. These shares were issued in reliance on Section 4(a)(2) of the Securities
Act.
Nasdaq Delisting
On December 10, 2018, the
Company received a written notice (the “Notice”) from the Listing Qualifications Division of The Nasdaq Stock Market
LLC (“Nasdaq”) indicating that the Company has not complied with the requirements of IM-5101-2 of the listing rules
of Nasdaq (the “Listing Rules”).
The Notice stated that
after its Business Combination, the Company had not demonstrated that its common stock met Listing Rule 5505(b)(1) that requires
a market value of publicly held shares of at least $15 million. Additionally, the Company has not provided evidence that its common
stock has at least 300 round lot holders as required by Listing Rule 5505(a)(3) and that its public warrant has at least 400 round
lot holders as required by Listing Rule 5515(a)(4). Finally, the Company does not comply with Listing Rule 5515(a)(2) which requires
that for initial listing of a warrant the underlying security must be listed on Nasdaq.
On
January 7, 2019, the Company received a second written notice from Nasdaq informing it that the Company failed to comply with
Listing Rule 5250(e)(2) which requires companies listed on Nasdaq to timely file notification forms for the Listing of Additional
Shares (the “LAS Notification”).
The
Company was required to submit the LAS Notification 15 days prior to the issuance of the securities, however, the Company filed
the LAS Notification for the issuance of the Series A-1 Note and Series A-2 Note and for the share exchange under our Share Exchange
Agreement after such 15-day periods. Nasdaq notified the Company that each of these matters serves as an additional and separate
basis for delisting the Company’s securities and that the review panel will consider these matters in rendering a determination
regarding the Company’s continued listing on Nasdaq.
The
Company’s management decided that moving from Nasdaq to the OTCQB was more appropriate for the Company at that time, while
the Company built out its planned network of retail esports centers.
On
April 1, 2019, the Company was notified by Nasdaq that it would delist the Company’s common stock and public warrants. The
Company’s common stock and public warrants were previously suspended from trading on Nasdaq, effective January 25, 2019.
On
April 2, 2019, Nasdaq filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Exchange Act
on Form 25 with the SEC relating to the Company’s common stock and public warrants. As a result, the Company’s common
stock and public warrants were delisted from Nasdaq effective April 2, 2019.
The
Company’s common stock and public warrants currently are quoted on the OTCQB under the symbols “WINR” and “WINRW,”
respectively.
DESCRIPTION
OF BUSINESS
Unless
the context otherwise requires, “we,” “us,” “our,” or “the Company” refers to
(i) “Simplicity Esports and Gaming Company” after the consummation of the acquisition of Simplicity Esports, LLC ,
(ii) “Smaaash Entertainment Inc.” before the consummation of the Acquisition of Simplicity Esports, LLC but after
the closing of the Transactions with Smaaash Entertainment Private Limited, and (iii) I-AM Capital Acquisition Company prior to
the closing of the Transactions with Smaaash Entertainment Private Limited. “Simplicity Esports LLC” means
our wholly-owned subsidiary Simplicity Esports, LLC, a Florida limited liability company, and its consolidated subsidiaries. “PLAYlive”
means our wholly-owned subsidiary PLAYlive Nation, Inc., a Delaware corporation, and its consolidated subsidiaries. “Simplicity
One” means our 76% owned subsidiary Simplicity One Brasil Ltda, a Brazilian limited liability company and its consolidated
subsidiaries. “Smaaash Private” means Smaaash Entertainment Private Limited, a private limited company incorporated
under the laws of India, and its consolidated subsidiaries.
Industry
Overview
Esports
is the competitive playing of video games by amateur and professional teams for cash prizes. Esports typically takes the form
of organized, multiplayer video games that include real-time strategy, fighting, first-person shooter, and multiplayer online
battle arena games. As of October 5, 2020, the three largest selling esports games are Dota 2®, League of Legends®
(both multiplayer online battle arena games) and Counter Strike: Global Offensive® (a first-person shooter game). Other popular
games include SMITE®, StarCraft II®, Call of Duty®¸ Heroes of the Storm®, Hearthstone® and Fortnite®.
Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services including
twitch.tv, azubu.tv, ustream.tv and youtube.com. Esports also includes games which can be played, primarily by amateurs, in multiplayer
competitions on the Sony PlayStation®, Microsoft Xbox® and WII Nintendo® systems.
Although
official competitions have long been a part of video game culture, participation and spectatorship of such events have seen a
global surge in popularity over the last few years with the rapid growth of online streaming. The advent of online streaming technology
has turned esports into a global industry that includes professional players and teams competing in major events that are simultaneously
watched in person in stadiums, and by online viewers, which regularly exceed 1,000,000 viewers for major tournaments. According
to Business Insider, over 100 million viewers saw the 2019 League of Legends® World Championships in person and online. CNBC
reported in April 2019 that League of Legends® World Championships attract more viewers than the Super Bowl. Much like how
there is a worldwide gaming market for the sports industry, there has now developed a worldwide gaming market for the esports
industry. The impact has been so significant that many video game developers are now building features into their games designed
to facilitate competition.
According
to Newzoo, a global leader in esports, games and mobile intelligence, the total global esports audience was expected to reach
495 million in 2019, with an anticipated 27.5 million American gamers. In addition, according to Newzoo, esports produced $909
million in 2018 revenue and is projected to reach $1.1 billion in 2019. Esports enthusiasts, which are people who watch professional
esports content at least once a month, made up 201.2 million of the 2018 total, up from 143.2 million in 2017. With a compound
annual growth rate (“CAGR”) (2017-2022) of +15.7%, this number is expected to reach almost 297 million in 2022. The
global average revenue per esports enthusiast, which includes not only gaming revenue, but also sponsorships advertising and all
other esports related revenues, is projected to be $5.45 in 2019, up +8.9% from $5.00 in 2018. The number of occasional esports
viewers, (people who watch professional esports content less than once a month), is expected to reach 252.6 million in 2019, up
from 221.6 million in 2018, and is projected to grow with a CAGR of +12.6% to surpass 347 million in 2022. The number of people
who are aware of esports worldwide is expected to reach 1.8 billion in 2019, up from 1.6 billion in 2018. According to Newtech
Mag, China and the U.S. have the largest populations of esports fans, with Brazil ranking first in Latin America, and third globally,
with 20 million fans. The increasing prominence of esports as a mainstream entertainment industry is driving the growth in awareness
in most regions. Audience and awareness growth in the emerging regions of Latin America, Middle East and Africa, Southeast Asia,
and Rest of Asia is largely driven by improving IT infrastructure and urbanization. We believe the rise of new franchises, such
as Player Unknown’s Battlegrounds® or PubG®, is an important global growth factor as the influx of millennials should
continue to drive the growth of the esports industry’s audience and in turn, the esports gaming industry.
In
2018, there were 737 major esports events that generated an estimated $54.7 million in ticket revenues. The total prize money
of all esports events held in 2018 reached $150.8 million, after breaking the $100 million mark for the first time in 2017. The
League of Legends® World Championship was 2018’s biggest tournament by live viewership hours on Twitch, with 53.8 million
hours. It also produced $1.9 million in ticket revenues. The Overwatch® League was the most-watched league by live viewership
hours on Twitch, generating 79.5 million hours.
Business
Overview
We
are a global esports organization, with an established brand, that is capitalizing on the growth in esports through three business
units, Simplicity One Brasil Ltda (“Simplicity One”), Simplicity Esports, LLC (“Simplicity Esports LLC”)
and PLAYlive Nation, Inc. (“PLAYlive”).
Our
Esports Teams
We
own and manage numerous professional esports teams domestically and internationally. Revenue is generated from prize winnings,
corporate sponsorships, advertising, league subsidy payments and potential league revenue sharing payments from the publishers
of video games.
Domestic
Esports Teams – Simplicity Esports LLC
Through
our wholly owned subsidiary Simplicity Esports LLC, we own and manage numerous professional esports teams competing in games such
as Overwatch, Apex Legends, PUBG and more. We are committed to growing and enhancing the esports industry, fostering the development
of amateurs to compete professionally and signing established professional gamers to support their paths to greater success.
International
Esports Team - Simplicity One Brasil
Since
January 2020, through our 76% owned subsidiary Simplicity One Brasil, we manage Flamengo eSports, one of the leading Brazilian
League of Legends® teams. Flamengo eSports was established in 2017 as the Esports division of Clube de Regatas do Flamengo,
a successful Brazilian sports organization, with over 30 million followers across social media accounts, known for its world-famous
soccer team. Flamengo eSports’ League of Legends® team won the CBLoL Championship in September 2019, which qualified
the team to compete at the 2019 League of Legends® World Championship in Europe as one of 24 teams from 13 different regions
around the world. With cost cutting steps taken during April 2020, and anticipated additional sponsorship revenue, this business
unit is expected to be cash flow positive by January 2021. We recently entered into a binding letter of intent with our existing
sponsor, Redragon, pursuant to which Redragon would acquire a 7.5% equity stake in Simplicity One Brasil at a valuation exceeding
$6.9 million.
Online
Tournaments
In
response to demand from customers for online esports tournaments which was in all likelihood triggered by the social distancing
protocols attendant to the COVID-19 pandemic, we recently introduced a new initiative of online esports tournaments. Since March
2020, through our wholly owned subsidiary Simplicity Esports LLC, we have been holding weekly online esports tournaments.in the
United States. In addition, we have commenced promoting these weekly online tournaments via text messages to our database of over
400,000 paying esports gaming center customers, which we acquired in our acquisition of PLAYlive. If we can convert merely 1%
of these existing customers from the PLAYlive database to play in our paid online tournaments, we anticipate this business unit
may generate approximately $1 million in annual revenues. At a 5% conversion rate, this business segment may generate approximately
$5 million in annual revenue. Management also intends to sell sponsorship and marketing activations for these online tournaments
which would create additional revenue. We also announced our initiative to begin to offering play at home online tournaments in
Brazil in June 2020.
Our
Gaming Centers
We
own and operate corporate and franchise esports gaming centers, through our wholly owned subsidiaries Simplicity Esports LLC and
PLAYlive, throughout the U.S. giving casual gamers the opportunity to play in a social setting with other members of the gaming
community. In addition, aspiring and established professional gamers have an opportunity to compete in local and national esports
tournaments held in our gaming centers for prizes, notoriety, and potential contracts to play for one of our professional esports
teams. In this business unit, revenue is generated from franchise royalties, the sale of game time, memberships, tournament entry
fees, birthday party events, corporate party events, concessions and gaming-related merchandise.
Our
business plan encompasses a brick and click physical and digital approach to further recognize revenue from all verticals, which
we believe to be unique in the industry. The physical centers, together with our esports teams, lifestyle brand and marketing
campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our
ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform,
tournaments (online and in-person) and physical real estate to maximize the monetization opportunities with these relationships.
In addition, we have proprietary intellectual capital, fan engagement strategies and brand development blueprints which complement
our publicly available information.
Optimally,
the esports gaming centers of Simplicity Esports LLC (“Simplicity Esports Gaming Centers”) will measure between 1,200
and 2,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology,
futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present
attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity
for sponsors and advertisers.
Creating
content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. Our talented team will
continue to produce unique in-depth content which showcases aspects of esports for fans. We seek to reach a broad demographic
encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic
and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while
maintaining authenticity to the gaming community that comprises our fan base.
As a result of COVID-19
(discussed below), all of our corporate and franchised Simplicity Gaming Centers were closed effective April 1, 2020. We commenced
reopening Simplicity Gaming Centers on May 1, 2020 and have since reopened three corporate and 20 franchised Simplicity
Gaming Centers as of October 5, 2020. See “Risk Factors—Public health epidemics or outbreaks, such as COVID-19,
could materially and adversely impact our business.”
Corporate
Gaming Centers
Simplicity
Esports LLC has already opened and is operating four corporate-owned retail Simplicity Esports Gaming Centers. Our first Simplicity
Esports Gaming Center was opened on May 3, 2019. Furthermore, we have engaged a national tenant representation real estate broker
to assist in the strategic planning and negotiations for our future Simplicity Esports Gaming Center locations. We contemplate
that new Simplicity Esports Gaming Centers will be funded by us as well as a combination of tenant improvement allowances from
landlords and sponsorships. As announced in June 2020, we are in discussions with multiple commercial property owners regarding
their desire to have us open 8,000 to 12,000 square foot MEGA centers at their properties. There are multiple locations available
to us with a percentage of gross sales rent lease structure (as opposed to fixed rent payments), and construction funds offered
by the landlord to assist with the build out and equipping of our planned MEGA centers. These MEGA centers are planned as hubs
in our hub and spoke model that will see smaller corporate and franchisee owned gaming centers as spokes connected to MEGA centers
as hubs for larger events and tournaments.
Franchised
Gaming Centers
Due
to interest from potential franchisees, we have launched a franchising program to accelerate the expansion of our planned nationwide
footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment
and buildout of esports gaming centers to potential business owners that desire to use our branding, infrastructure and process
to open and operate gaming centers. Franchise revenue is generated from the sale of franchise territories, supplying furniture,
equipment and merchandise to the franchisees for buildout of their centers, a gross sales royalty fee and a national marketing
fee. We license the use of our branding, assist in identifying and negotiating commercial locations, assist in overseeing the
buildout and development, provide access to proprietary software for point of sale, inventory management, employee training and
other HR functions. Franchisees also have an opportunity to participate in our national esports tournament events, and benefit
from the growing profile of our professional esports teams. Once an esports gaming center is opened, we provide operational guidance,
support and use of branding elements in exchange for a monthly royalty fee calculated as 6% of gross sales. On January 1, 2020
we implemented a national marketing fee of 1% of gross sales. To date, we have sold five (5) of these franchise territories.
The
combination of the esports gaming centers, owned or franchised by our wholly owned subsidiaries Simplicity Esports LLC or PLAYlive,
provides us with what we believe is the largest footprint of esports gaming centers in North America. Over the next 12 months,
existing PLAYlive esports gaming centers will be rebranded to Simplicity Esports gaming centers. All newly opened franchise esports
gaming centers will be branded as Simplicity Esports gaming centers and have numerous gaming PC’s. All gaming centers in
our footprint will be participating venues in our national esports tournaments.
Franchise
Roll Up Strategy
Due
to the impact of COVID-19 and the resulting disruptions in the commercial real estate market, we have signed non-binding letters
of intent with some of our existing franchisees to acquire their gaming centers. Closings are contingent upon our ability to secure
acceptable lease modifications from the landlords of the applicable properties. If the acquisitions close, the consideration paid
for each acquisition is contemplated to consist solely of restricted shares of common stock.
As
part of this strategy, we acquired our first franchisee owned gaming center, located in El Paso, Texas, on June 29, 2020. The
improved lease terms require monthly payments as a percentage of gross sales, resulting in the acquisition being EBITDA accretive
upon the commencement of operations.
Our
Stream Team
The
Simplicity Esports LLC and Flamengo Esports stream teams encompasses over 20 commentators (commonly known as “casters”),
influencers and personalities who connect to a dedicated fan base. Our electric group of live personalities represent our organization
to the fullest with their own unique style. We are proud to support and present a diverse group of gamers as we engage fans across
a multiple of esports genres. Our Twitch affiliation has enabled our stream team influences to reach a broad fan base. Additionally,
we have created several niches within the streaming community which has enabled us to engage fans within certain titles on a 24/7
basis. Our notoriety in the industry is evidenced by our audience that views millions of minutes of Simplicity Esports’
and Flamengo Esports’ content monthly, via various social media outlets including YouTube, Twitter and Twitch. Through Simplicity
Esports LLC, we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience. Our intention
is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent. Our management
and players are known within the esports community and we plan to use their skills to create a seamless content creation plan
helping gamers feel closer to our brand than any other in the industry.
Material
Acquisitions and Licensing
Acquisition
of Simplicity Esports, LLC
On
January 4, 2019, the Company consummated the transactions contemplated by that certain share exchange agreement, dated December
21, 2018 (as amended by Amendment No. 1 to Share Exchange Agreement, dated December 28, 2018 and by Amendment No. 2 to Share Exchange
Agreement, dated December 30, 2018, the “Share Exchange Agreement”) by and among the Company, Simplicity Esports,
LLC, a Florida limited liability company (“Simplicity Esports LLC”), each of the equity holders of Simplicity Esports
LLC (“Simplicity Owners”) and Jed Kaplan, in the capacity as the representative of the Simplicity Owners (the “Representative”).
Pursuant to the Share Exchange Agreement the Simplicity Owners transferred all the issued and outstanding equity interests of
Simplicity Esports LLC to the Company in exchange for an aggregate of 500,000 (3,000,000 pre-reverse split) shares of common stock
of the Company (the “Simplicity Esports Acquisition”). As of January 4, 2019, upon the completion of the Simplicity
Esports Acquisition, esports gaming became the primary business of the Company.
On
January 4, 2019, the Simplicity Owners received an aggregate of 50,000 (300,000 pre-reverse split) shares of common stock at the
closing of the Acquisition and an additional aggregate of 116,667 (700,000 pre-reverse split) shares of common stock on January
7, 2019. The Simplicity Owners were initially entitled to receive an additional 333,334 (2,000,000 pre-reverse split) shares
upon the Company’s receipt of the approval of its stockholders to such issuance. This condition 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 333,334 (2,000,000 pre-reverse
split) shares were issued to the Simplicity Owners on March 27, 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.
Acquisition
of PLAYlive
On
July 30, 2019, we acquired a 100% interest in PLAYlive by way of merger pursuant to an Agreement and Plan of Merger, dated July
25, 2019, whereby we acquired 100% of the issued and outstanding common stock of PLAYlive from the selling stockholders (“PLAYlive
Stockholders”) of PLAYlive in exchange for 125,000 (750,000 shares pre-reverse split) shares of our common stock. Following
this merger, PLAYlive became our wholly owned subsidiary. On the closing date of this merger, each of the PLAYlive Stockholders
entered into a one-year lock-up agreement with the Company and each of Duncan Wood, Jordan C. Jenson, and Alec T. Carpenter entered
into an employment agreement with PLAYlive.
Licensing
of Flamengo Esports
Effective
January 20, 2020, Simplicity One Brasil entered into an Exclusive Trademark and Symbol Use License Agreement, and Other Covenants
(the “License Agreement”), dated November 5, 2019 with Clube de Regatas do Flamengo (one of the most successful Brazilian
sports organizations, known for its world-famous soccer team), whereby Clube de Regatas do Flamengo agreed to exclusively license
its intellectual property rights (“Flamengo IP Rights”) to Simplicity One Brasil (an entity which the Company and
Team One E-Sports Ltda – ME owned a 90% and 10% equity interest in, respectively), authorizing Simplicity One Brasil to
use the Flamengo IP Rights on a League of Legends team in esports as well as in other modalities in esports, which will be maintained
and assembled by Simplicity One Brasil during the term of the Licensing Agreement. The Company has appointed Fred Tannure to act
as Simplicity One Brasil’s General Manager. The License Agreement has a term of three years, beginning on January 1, 2020
and ending on December 31, 2022, and may be renewed by mutual written agreement by the parties. In exchange for the exclusive
license, the Company shall pay Clube de Regatas do Flamengo an annual fee for the first, second and third year in the amount of
$32,882 (Reais$170,000.00), $35,784 (Reais$185,000.00), and $38,685 (Reais$200,000.00), respectively, as well as the payment of
royalties in the amount of 8% of the gross revenues (less taxes) of the eSports teams pursuant to the terms of the Licensing Agreement.
If either party unilaterally terminates the Agreement or gives rise to certain termination grounds set forth in the Agreement,
the terminating party will pay the other party a non-compensatory fine in the amount of approximately $23,870 (Reais $100,000)
to indemnify the other party, without prejudice to any losses or damages that exceed such amount.
Flamengo
Esports was established in 2017 as the Esports division of Clube de Regatas do Flamengo, a successful Brazilian sports organization,
known for its world-famous soccer team. Flamengo Esports’ League of Legends® team won the CBLoL Championship in September
2019 and competed at the 2019 League of Legends® World Championship in Europe as one of 24 teams from 13 different regions
around the world.
On
April 1, 2020, the Company released multiple players and staff members from Simplicity One Brasil Ltd as part of a restructuring
in an effort to make the Flamengo Esports project profitable. During the first quarter of the fiscal year ending May 31, 2021,
the Company applied for ownership of a franchise spot in League of Legends Brazil (CBLoL). Management expects to receive approval
for franchise ownership in October 2020.
In
June 2020, while Simplicity One Brasil was preparing its initial application for purchasing from Riot Games a franchise in Campeonato
Brasileiro de League of Legends, Simplicity One Brasil become aware that the 10%-ownership interest of Team One E-Sports Ltda
(“Team One E-Sports”) in Simplicity One Brasil was in contravention of Riot Games’ policy that only one League
of Legend esports team could be owned by an owner at one time because Team One had already submitted an application for purchasing
a franchise for another League of Legend esports team. Accordingly, Simplicity One Brasil needed Team One E-Sports to divest itself
of its 10%-equity interest in Simplicity One Brasil in order for Simplicity One Brasil to proceed with its franchise application.
Therefore, on June 22, 2020, Mr. Kaplan entered into a Quota Purchase Agreement with Team One E-Sports, pursuant to which Mr.
Kaplan acquired Team One Esports’ 10%-ownership equity interest for $45,000 in cash. In addition, the Company transferred
a 2%-equity interest (an aggregate of 4%) to each of Laila De Braga Cavalcanti Loss and Frederico Tannure, who live in Brazil
and run the operations of Simplicity One Brasil , in order to comply with Riot Games’ policy requiring local ownership in
Brazil in order to apply for a franchise of a league of legends sports team. Furthermore, on June 22, 2020, Mr. Kaplan agreed
to forgive the debt of the Kaplan Promissory Note with a principal balance of $90,000 in exchange for the Company assigning to
Mr. Kaplan a 10% equity interest in Simplicity One Brasil. In light of the restructuring of the ownership interest in Simplicity
One Brasil, as of October 5, 2020, the Company, Mr. Kaplan, Ms. Cavalcanti Loss, and Mr. Tannure own a 76%, 20%, 2% and
2% equity interest in Simplicity One Brasil.
COVID-19
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because COVID-19 infections
have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home
orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations
and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity Gaming Centers were
closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have since reopened three
corporate and 20 franchised Simplicity Gaming Centers as of October 5, 2020. Although our franchise agreements
with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless
of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming
Centers will default in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase in
accounts receivables or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability
to pay the minimum monthly royalty payments owed by the franchisee. We have not written off as bad debt any accounts receivables
attributable to franchisee minimum monthly royalty payments owed during the COVID-19 pandemic. However, we have recorded an allowance
for doubtful accounts of approximately $52,000, as our collection efforts are ongoing. We have experienced an increase in our
account receivables by approximately $32,000 and $14,000 during the quarters ended May 31, 2020 and August 31, 2020, respectively.
Notwithstanding it is unclear exactly how much of the increase in accounts receivables is attributable to the impact of COVID-19.
For the months of July and August 2020, we have waived the minimum monthly royalty payment obligations for the months of July
and August 2020 and are instead billing the franchisees a true-up of 6% of gross sales without a minimum.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date adversely impacted the Company’s business for the fiscal quarters ended May 31, 2020 and August 31,
2020 and will potentially continue to impact the Company’s business. Management expects that all of its business segments,
across all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on
the Company’s business and the duration for which it may have an impact cannot be determined at this time.
Corporate
History
Formation
We
were initially a blank check company organized under the laws of the State of Delaware on April 17, 2017 under the name I-AM Capital
Acquisition Company. We were formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase,
reorganization or similar business combination with one or more businesses. Although we were not limited to a particular industry
or geographic region for purposes of consummating a business combination, we focused on businesses with a connection to India.
On November 20, 2018, we changed our name from I-AM Capital Acquisition Company to Smaaash Entertainment, Inc. On January 2, 2019,
we changed our name from Smaaash Entertainment, Inc. to Simplicity Esports and Gaming Company.
Smaaash
Entertainment Private Limited
Business
Combination
On
November 20, 2018, the Company and Smaaash Entertainment Private Limited, a private limited company incorporated under the laws
of India (“Smaaash Private”), consummated the transactions (the “Transactions” or the “Business
Combination”) contemplated by the share subscription agreement (as amended, the “Subscription Agreement”), following
the approval at the special meeting of the stockholders of the Company held on November 9, 2018 (the “Special Meeting”).
Pursuant
to the Subscription Agreement, the purchase price of $150,000 was paid by the Company to Smaaash Private in exchange for 294,360
newly issued equity shares of Smaaash Private at the closing of the Transactions (the “Closing”), representing less
than 1% of Smaaash Private at such time.
At
the time of the Closing, AHA Holdings Private Limited (“AHA Holdings”) and Shripal Morakhia (together with AHA Holdings,
the “Smaaash Founders”) agreed to transfer all of their ownership interest in Smaaash Private (the “Additional
Smaaash Shares”) to the Company in exchange for newly issued shares of our Common Stock (the “Transferred Company
Shares”). In furtherance of the foregoing, at the Closing, the Company issued an aggregate of 333,334 (2,000,000
pre-reverse split) shares of its common stock to the Smaaash Founders as an upfront portion of the Transferred Company Shares
(the “Upfront Company Shares”). In connection with the issuance of the Upfront Company Shares, the Company and the
Smaaash Founders entered into an escrow agreement pursuant to which the Upfront Company Shares would be held in escrow and will
be either, (i) if the Additional Smaaash Shares are not transferred in full to the Company within the designated six-month period,
cancelled, or (ii) if the Additional Smaaash Shares are transferred in full to the Company within the designated six-month period,
released from escrow and the number of Upfront Company Shares will be deducted from the Transferred Company Shares that will be
issued to the Smaaash Founders upon the delivery of the Additional Smaaash Shares. Pursuant to the terms of the escrow agreement,
the Upfront Company Shares have been cancelled because the Additional Smaaash Shares were not transferred in full to the Company
in the designated six-month period.
In
connection with the Closing, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc.,
changed its stock symbols for its Common Stock, Public Rights, and Public Warrants to “IAM,” “IAMXR” and
“IAMXW,” respectively, and entered into a master franchise agreement (“Master Franchise Agreement”) and
a master license and distribution agreement (“Master Distribution Agreement”) with Smaaash Private. After the Closing,
the Company’s primary assets consisted of shares in Smaaash Private and the rights granted under the Master Franchise Agreement
and the Master Distribution Agreement.
Business
of Smaaash Private
At
the time of closing of the Smaaash transaction, Smaaash Private operated 40 games and entertainment centers (“Smaaash Centers”),
including 39 Smaaash Centers in India and one international Smaaash Center in the U.S., in addition to carrying out product sales
of its games and equipment that Smaaash has developed in-house, supported by its sponsorship and other revenues.
Smaaash
Private’s core concept was to offer an interactive, immersive and fun experience to customers at its Smaaash Centers, blending
Augmented Reality (“AR”) and Virtual Reality (“VR”) and other games, indoor entertainment, and attractive
food and beverage options, customized to the tastes and preferences of a diverse set of customers across age groups, genders and
backgrounds, including corporate customers, families, friends and children. Smaaash Private’s game concepts are supported
by its in-house technology, value engineering and systems integration capabilities.
Master
Franchise Agreement
Under
the Master Franchise Agreement, Smaaash Private has granted to the Company an exclusive right to establish and operate Smaaash
Centers (as defined under the Master Franchise Agreement) and to sublicense the right to establish and operate Smaaash Centers
to third party franchisees, and a license to use the products and other services developed by Smaaash Private with respect to
the Smaaash Centers, in the United States (“Territory”). Further, Smaaash Private has granted to the Company the limited
license to use the Trademarks of Smaaash Private (as set out in the Master Franchise Agreement) for the purposes of establishing
and operating the Smaaash Centers in the Territory. The Master Franchise Agreement has been executed on an arms’ length
basis between Smaaash Private and the Company.
On
November 29, 2018, the Company and Smaaash Private executed an addendum to the Master Franchise Agreement (the “Amendment”).
Pursuant to the Amendment, Smaaash Private grants the Company the exclusive rights to set up family and entertainment centers
under the name “Total Sports Center” in the United States (“Total Sports Centers”) in which 51% of the
investment will be borne by the Company and 49% by Smaaash Private. Smaaash Private will be responsible for identifying the locations
for setting up, managing and controlling the Total Sports Centers and will carry out all the fit out requirements for such centers.
Smaaash Private will also appoint the management team for the centers. Smaaash Private will be entitled to 3% of the net revenue
of each center, subject to conditions to be confirmed by the parties.
Master
License and Distribution Agreement
Under
the Master Distribution Agreement, Smaaash Private has granted to the Company an exclusive right to purchase from Smaaash Private
specialized video game equipment and products related to sports and recreational activities (“Products”) in the territory
under the brand name of Smaaash Private and sell them with a 15% markup to the customers which will be the sub-franchisees of
the Company who will operate the Smaaash Centers, as specified in the Master Franchise Agreement.
Shift
of Business Focus to Esports Gaming
Following
the January 2019 acquisition of Simplicity Esports LLC described below, we determined to shift our current primary focus to esports
gaming. Accordingly, we did not generate any revenues from Smaaash in 2019. The Master Franchise Agreement, as amended, and the
Master Distribution Agreement continue in full force and effect, however, and we may now or in the future pursue Smaaash Private
business opportunities.
Polar
and K2
On
November 2, 2018, the Company entered into a stock purchase agreement with each of Polar Asset Management Partners Inc. (“Polar”)
and K2 Principal Fund L.P. (“K2”), pursuant to which Polar and K2 agreed to sell up to 81,667 (490,000 pre-reverse
split) and 36,667 (220,000 pre-reverse split) shares, respectively, of the Company’s common stock to the Company thirty
days after the consummation of the transactions at a price of $67.38 ($11.23 pre-reverse split) contemplated by the share subscription
agreement with Smaaash Private.
On
December 20, 2018, the Company, Polar, K2 and the Escrow Agent, entered into an Amendment (the “Amendment”), pursuant
to which, among other things, the stock purchase agreements with Polar and K2 were amended to (x) reduce the purchase price per
share payable by the Company at the closing of the Stock Sales from $67.38 ($11.23 pre-reverse split) per share to (1) first $36.00
($6.00 pre-reverse split) per share up to 20% of the original number of Shares (as defined in the respective Purchase Agreement),
(2) then $30.00 ($5.00 pre-reverse split) per remaining share up to 20% of the original number of Shares, (3) then $24.00 ($4.00
pre-reverse split) per remaining share up to 20% of the original number of Shares, (4) then $18.00 ($3.00 pre-reverse split) per
remaining Share up to 20% of the original number of Shares, and (5) then $12.00 ($2.00 pre-reverse split) per remaining Share
up to 20% of the original number of Shares, (y) to extend the outside date of the closing of the Stock Sales until January 18,
2019, and (z) to authorize the issuance of $3,542,700 and $1,590,600 from the Escrow Account to Polar and K2, respectively, as
partial payment for the Shares prior to the final closing of the Stock Sales.
The
Amendment also included provisions regarding the reduction of the exercise price and amendment of redemption provisions of the
Company’s Public Warrants and Private Placement Warrants. On August 18, 2019, the Company held a special meeting of its
public warrant holders to approve the foregoing. However, these proposals were not approved by the requisite votes.
Acquisition
of Simplicity Esports, LLC
In
connection with the Simplicity Esports Acquisition, the Simplicity Owners received an aggregate of 50,000 (300,000 pre-reverse
split) shares of common stock at the closing on January 4, 2019, an additional aggregate of 116,667 (700,000 pre-reverse split)
shares of common stock on January 7, 2019 and the remaining 333,334 (2,000,000 pre-reverse split) shares in March of 2019.
In
connection with the Simplicity Esports Acquisition, on January 2, 2019, the Company filed a Certificate of Amendment to the Company’s
Third Amended and Restated Certificate of Incorporation (the “Certificate Amendment”) with the Delaware Secretary
of State to change the Company’s name from “Smaaash Entertainment, Inc.” to “Simplicity Esports and Gaming
Company.” In addition, the Company changed the ticker symbols of its common stock and public warrants to “WINR”
and “WINRW,” respectively, and commenced trading of its common stock and public warrants under such new ticker symbols
on the OTCQB on January 10, 2019.
Equity
Line
On
March 12, 2020, the Company entered into an Common Stock Purchase Agreement with Triton Funds LP (“Selling Stockholder”),
dated as of March 11, 2020, pursuant to which, upon the terms and subject to the conditions thereof, the Selling Stockholder is
committed to purchase shares of the Company’s Common Stock at an aggregate price of up to $500,000 (the “Maximum Commitment
Amount”) over the course of the commitment period which ends on the earlier of (i) the date on which the Selling Stockholder
purchases the Maximum Commitment Amount and (ii) December 31, 2020 (the “Equity Line”). In connection with the execution
of the Common Stock Purchase Agreement, the Company registered the resale of up to 120,834 (725,000 pre-reverse split)
shares of Common Stock issuable under the Equity Line in the amount of the Maximum Commitment Amount pursuant to a registration
statement declared effective by the SEC on March 30, 2020.
On
April 9, 2020, the Company delivered a Purchase Notice to Triton Funds, LP (“Triton”) pursuant to the terms of the
Common Stock Purchase Agreement requiring Triton to acquire 20,834 (125,000 pre-reverse split) shares of common stock,
which resulted in $87,700 in proceeds to the Company. Pursuant to the terms of the Common Stock Purchase Agreement, on April 9,
2020, the Company instructed the transfer agent to issue 20,834 (125,000 pre-reverse split) shares of common stock to a
custodial account of Triton Funds, LP. These shares were issued in reliance on Section 4(a)(2) of the Securities Act. Unfortunately,
the transfer agent erroneously transferred the entire 120,834 (725,000 pre-reverse split) shares of common stock under
the Equity Line to the custodial account of Triton, resulting in an over-issuance of 100,000 (600,000 pre-reverse split) shares
to Triton. The Company notified Triton of this error and that the Company terminated the Common Stock Purchase Agreement with
Triton. As of October 5, 2020, the Company is currently awaiting the return of the shares issued in error from Triton to
the treasury so such shares will no longer be issued and outstanding. In order to effectuate the cancellation of such shares,
the Company’s transfer agent is requiring a medallion guaranteed stock power from Triton. Triton is cooperating and is currently
seeking a medallion guaranteed stock power to facilitate the return of the shares.
Recent
Developments
Debt
Obligations
10%
Fixed Convertible Promissory Note
On
April 29, 2020 (the “Effective Date”), the Company issued a 10% Fixed Convertible Promissory Note (the “Harbor
Gates Note”), with a maturity date of October 29, 2020 (the “Maturity Date”), in the principal sum of $152,500
in favor of Harbor Gates Capital, LLC (“Harbor Gates”). Pursuant to the terms of the Harbor Gates Note, the Company
agreed to pay to Harbor Gates $152,500 (the “Principal Sum”) and to pay “guaranteed” interest on the principal
balance at an amount equivalent to 10% of the Principal Sum, to the extent such Principal Sum and “guaranteed” interest
and any other interest, fees, liquidated damages and/or items due to Harbor Gates have not been repaid or converted into Company
common stock in accordance with the terms of the Harbor Gates Note. The Harbor Gates Note carries an original issue discount (“OID”)
of $2,500. Accordingly, on the Effective Date, Harbor Gates delivered $150,000 to the Company in exchange for the Harbor Gates
Note.
In
addition to the “guaranteed” interest, and upon the occurrence of an Event of Default (as hereinafter defined), additional
interest will accrue from the date of the Event of Default at the rate equal to the lower of 20% per annum or the highest rate
permitted by law.
The
Company may prepay the Harbor Gates Note according to the following schedule:
Days
Since
Effective Date
|
|
Payment
Amount
|
Under
30
|
|
115%
of Principal Amount (as hereinafter defined) so paid
|
31-60
|
|
120%
of Principal Amount so paid
|
61-90
|
|
125%
of Principal Amount so paid
|
91-180
|
|
135%
of Principal Amount so paid
|
135%
of the remaining unpaid and unconverted Principal Amount, plus all accrued and unpaid interest will be due and payable on the
Maturity Date. “Principal Amount” refers to the sum of (i) the original principal amount of the Harbor Gates Note
(including the OID); (ii) all guaranteed and other accrued but unpaid interest under the Harbor Gates Note; (iii) any fees due
under the Harbor Gates Notes; (iv) liquidated damages; and (v) any default payments owing under the Harbor Gates Note, in each
case previously paid or added to the Principal Amount.
Pursuant
to the terms of the Harbor Gates Note, the Company agreed to issue Harbor Gates shares of Company common stock in two tranches
as follows:
|
(i)
|
10,000
shares of common stock within three trading days of the Effective Date; and
|
|
(ii)
|
In
the event the average of the three volume weighted average prices for the Company’s common stock during the three consecutive
trading days immediately preceding the date which is the 180th day following the Effective Date is less than $1.00
per share, then Harbor Gates will be entitled, and the Company will issue to Harbor Gates additional shares of common stock
as set forth in the Harbor Gates Note.
|
If
an Event of Default (as defined in the Promissory Note) occurs, the outstanding Principal Amount of the Harbor Gates Note owing
in respect thereof through the date of acceleration, shall become, at Harbor Gates’ election, immediately due and payable
in cash at the “Mandatory Default Amount”. The Mandatory Default Amount means 35% of the outstanding Principal Amount
of the Harbor Gates Note will be automatically added to the Principal Sum of the Harbor Gates Note and tack back to the Effective
Date for purposes of Rule 144 promulgated under the 1934 Act. Commencing five days after the occurrence of any Event of Default
that results in the eventual acceleration of the Harbor Gates Note, the Harbor Gates Note will accrue additional interest, in
addition to the Harbor Gates Note’s “guaranteed” interest, at a rate equal to the lesser of 20% per annum or
the maximum rate permitted under applicable law.
If
the Harbor Gates Note is not retired on or before the Maturity Date, then at any time and from time to time after the Maturity
Date, and subject to the terms hereof and restrictions and limitations contained in the Harbor Gates Note, Harbor Gates has the
right, at Harbor Gates’ sole option, to convert in whole or in part the outstanding and unpaid Principal Amount under the
Harbor Gates Note into shares of the Company’s common stock at the Variable Conversion Price. The “Variable Conversion
Price” will be equal to the lower of: (a) $1.00, or (b) 70% of the lowest volume weighted average price of the Company’s
common stock during the 15 consecutive trading days prior to the date on Harbor Gates elects to convert all or part of the Harbor
Gates Note.
On
July 2, 2020, the Company repaid $152,500 and $15,000 in accrued interest in full satisfaction of the 10% Convertible Promissory
Harbor Gates Note.
Kaplan
Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, the Company’s Chief Executive Officer, interim Chief Financial Officer, member of
the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on October 12,
2020 (the “Maturity Date”). The Company has used the proceeds of the Kaplan Note to fund the operations of Simplicity
One Brasil Ltda, the Company’s majority owned subsidiary (“Simplicity Brasil”).
Pursuant
to the terms of the Kaplan Note, the Company agreed to pay to Mr. Kaplan the lesser of (i) the principal sum of $90,000 (the “Maximum
Commitment”), or (ii) the aggregate principal amount of all direct advances of the proceeds of the Kaplan Note (each, an
“Advance”), together with any interest thereon, and any and all other amounts which may be due and payable thereunder
from time to time.
Subject
to the terms of the Kaplan Note, Mr. Kaplan agreed to make one direct Advance to and for the benefit of the Company on the Issue
Date in the amount of $45,000, and one additional Advance to and for the benefit of the Company at such time as the Company may
request during the two month period following the Issue Date. The total of the aggregate principal balance of all Advances (collectively
referred to herein as the “Principal Amount”) outstanding at any time shall not exceed the Maximum Commitment. Advances
made by Mr. Kaplan to the Company under the Kaplan Note which have been repaid may not be borrowed again.
Prior
to the Maturity Date or an Event of Default (as hereinafter defined), the Principal Amount outstanding under the Kaplan Note will
bear interest at a rate of 3% (the “Interest Rate”). From and after the Maturity Date or upon and during the continuance
of an Event of Default, interest will accrue on the unpaid Principal Amount during any such period at an annual rate (the “Default
Rate”) equal to 10% plus the Interest Rate; provided, however, that in no event will the Default Rate exceed the maximum
rate permitted by law.
The
Company could prepay the Kaplan Note, in whole or in part, without a prepayment penalty, at any time provided that an Event of
Default has not then occurred.
As
of May 31, 2020, advances under the terms of this note were $64,728. On various dates subsequent to May 31, 2020, Mr. Kaplan funded
$25,272 pursuant to the Kaplan Promissory Note. With the contributions subsequent to May 31, 2020, the principal balances outstanding
and due Mr. Kaplan amounted to $90,000. On June 22, 2020, Mr. Kaplan agreed to forgive the debt of the Kaplan Promissory Note
with a principal balance of $90,000 in exchange for the Company assigning to Mr. Kaplan a 10% equity interest in Simplicity One
Brasil, Ltda, a subsidiary of the Company.
Self-Amortization
Promissory Note
On
June 18, 2020 (the “Issue Date”), the Company entered into a securities purchase agreement (the “SPA”)
with an accredited investor (the “Holder”), pursuant to which the Company issued a 12% self-amortization promissory
note (the “Amortization Note”) with a maturity date of June 18, 2021 (the “Maturity Date”), in the principal
sum of $550,000. Pursuant to the terms of the Amortization Note, the Company agreed to pay $550,000 (the “Principal Sum”)
to the Holder and to pay interest on the Principal Sum at the rate of 12% per annum. The Amortization Note carries an original
issue discount (“OID”) of $55,000. Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase
price of $495,000 in exchange for the Amortization Note. In addition, pursuant to the terms of the SPA, the Company agreed to
issue 9,167 (55,000 pre-reverse split) shares of the Company’s common stock to the Holder as additional consideration.
The
Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest with no prepayment premium. The Amortization Note contains customary events of default relating to, among
other things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or
SPA.
The
Company is required to make amortization payments to the Holder according to the following schedule:
Payment Date
|
|
Payment Amount
|
|
10/16/2020
|
|
$
|
66,125.00
|
|
11/16/2020
|
|
$
|
66,125.00
|
|
12/16/2020
|
|
$
|
66,125.00
|
|
01/18/2021
|
|
$
|
66,125.00
|
|
02/18/2021
|
|
$
|
66,125.00
|
|
03/18/2021
|
|
$
|
66,125.00
|
|
04/16/2021
|
|
$
|
66,125.00
|
|
05/18/2021
|
|
$
|
66,125.00
|
|
06/18/2021
|
|
$
|
65,921.26
|
|
Total:
|
|
$
|
594,921.26
|
|
Upon
the Holder’s provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within
five calendar days as provided in the Amortization Note, the Amortization Note shall become immediately due and payable and the
Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then
outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default,
additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest
rate permitted by law. The Company shall have the right to pay the Default Amount in cash at any time, provided, however that
the Holder may convert the Amortization Note into the Company’s common stock (subject to the beneficial ownership limitations
of 4.99% contained in the Amortization Note) at any time after the date that is five calendar days after the Amortization Note
becomes immediately due and payable as a result of an Event of Default until the Company has repaid the Amortization Note in cash.
If the aforementioned event occurs, the conversion price will be equal to the closing bid price of the Company’s common
stock on the trading day immediately preceding the date of the respective conversion. The Company intends to repay the Amortization
Note in accordance with its terms so that no amount under the Amortization Note is converted into shares of the Company’s
common stock.
While
any portion of this Note is outstanding, if the Company receives cash proceeds of more than $2,000,000.00 (the “Minimum
Threshold”) in the aggregate from public offerings or private placements to investors, the Company shall, within two business
days of Company’s receipt of such proceeds, inform the Holder of such receipt, following which the Holder shall have the
right in its sole discretion to require the Company to immediately apply up to 50% of all proceeds received by the Company after
the Minimum Threshold is reached to repay the outstanding amounts owed under this Note.
Self-Amortization
Promissory Note
On
August 7, 2020 (the “Issue Date”), the Company entered into a securities purchase agreement (the “SPA”)
with FirstFire Global Opportunities Fund, LLC, an accredited investor (the “Holder”), pursuant to which the Company
issued a 12% self-amortization promissory note (the “Self-Amortization Note”) with a maturity date of August 7, 2021
(the “Maturity Date”), in the principal sum of $333,333. Pursuant to the terms of the Self-Amortization Note, the
Company agreed to pay $333,333 (the “Principal Sum”) to the Holder and to pay interest on the principal balance at
the rate of 12% per annum. The Self-Amortization Note carries an original issue discount of $33,333. Accordingly, on the Closing
Date (as defined in the SPA), the Holder paid the purchase price of $300,000 in exchange for the Self-Amortization Note. In addition,
pursuant to the terms of the SPA, the Company agreed to issue 5,556 (33,333 pre-reverse split) shares of the Company’s common
stock to the Holder as additional consideration.
The
Company may prepay the Self-Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest with no prepayment premium). The Amortization Note contains customary events of default relating to, among
other things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or
SPA.
The
Company is required to make amortization payments to the Holder according to the following schedule:
Payment
Date
|
|
Payment
Amount
|
|
12/07/2020
|
|
$
|
40,075.75
|
|
01/07/2021
|
|
$
|
40,075.75
|
|
02/08/2021
|
|
$
|
40,075.75
|
|
03/08/2021
|
|
$
|
40,075.75
|
|
04/07/2021
|
|
$
|
40,075.75
|
|
05/07/2021
|
|
$
|
40,075.75
|
|
06/07/2021
|
|
$
|
40,075.75
|
|
07/07/2021
|
|
$
|
40,075.75
|
|
08/07/2021
|
|
$
|
39,952.34
|
|
Total:
|
|
$
|
360,558.34
|
|
Upon
the Holder’s provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within
five calendar days as provided in the Amortization Note, the Amortization Note shall become immediately due and payable and the
Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then
outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default,
additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest
rate permitted by law. The Company shall have the right to pay the Default Amount in cash at any time, provided, however that
the Holder may convert the Amortization Note into the Company’s common stock (subject to the beneficial ownership limitations
of 4.99% contained in the Amortization Note) at any time after the date that is five calendar days after the Amortization Note
becomes immediately due and payable as a result of an Event of Default until the Company has repaid the Amortization Note in cash.
If the aforementioned event occurs, the conversion price will be equal to the closing bid price of the Company’s common
stock on the trading day immediately preceding the date of the respective conversion. The Company intends to repay the Amortization
Note in accordance with its terms so that no amount under the Amortization Note is converted into shares of the Company’s
common stock.
While
any portion of this Note is outstanding, if the Company receives cash proceeds of more than $2,000,000.00 (the “Minimum
Threshold”) in the aggregate from public offerings or private placements to investors, the Company shall, within two business
days of Company’s receipt of such proceeds, inform the Holder of such receipt, following which the Holder shall have the
right in its sole discretion to require the Company to immediately apply up to 50% of all proceeds received by the Company after
the Minimum Threshold is reached to repay the outstanding amounts owed under this Note.
Amendment
to the Series A-2 Exchange Convertible Note
On
or about December 20, 2018, the Company issued that certain Series A-2 exchange convertible note in the original principal amount
of $1,000,000 (the “Series A-2 Note”) to Maxim Group LLC (“Maxim”). On June 18, 2020, the Company and
Maxim entered into that certain first amendment to the Series A-2 Note (the “Amendment”), pursuant to which such parties
agreed to the following: (i) Maxim’s resale of the Company’s common stock (the “Common Stock”) underlying
the Series A-2 Note shall be limited to 10% of the daily volume of the Common Stock on each respective trading day, (ii) the maturity
date of the Series A-2 Note was extended to December 31, 2020, (iii) the principal amount of the Series A-2 Note was increased
by $100,000 and (iv) the conversion price was reduced from $1.93 to $1.15.
Restructuring
the Ownership in Simplicity One Brasil, LTDA
In
June 2020, while Simplicity One Brasil Ltda (“Simplicity One Brasil”) was preparing its initial application for purchasing
a franchise in Campeonato Brasileiro de League of Legends, Simplicity One Brasil become aware that the 10%-ownership interest
of Team One E-Sports Ltda (“Team One E-Sports”) in Simplicity One Brasil was in contravention of Riot Games’
policy that only one League of Legend esports team could be owned by an owner at one time because Team One had already submitted
an application for purchasing a franchise for another League of Legend esports team. Accordingly, Simplicity One Brasil needed
Team One E-Sports to divest itself of its 10%-equity interest in Simplicity One Brasil in order for Simplicity One Brasil to proceed
with its franchise application. Therefore, on June 22, 2020, Mr. Kaplan entered into a Quota Purchase Agreement with Team One
E-Sports, pursuant to which Mr. Kaplan acquired Team One Esports’ 10%-ownership equity interest for $45,000 in cash. In
addition, the Company transferred a 2%-equity interest (an aggregate of 4%) to each of Laila De Braga Cavalcanti Loss and Frederico
Tannure, who live in Brazil and run the operations of Simplicity One Brasil, in order to comply with Riot Games’ policy
requiring local ownership in Brazil in order to apply for a franchise of a league of legends sports team. Furthermore, on June
22, 2020, Mr. Kaplan agreed to forgive the debt of the Kaplan Promissory Note with a principal balance of $90,000 in exchange
for the Company assigning to Mr. Kaplan a 10% equity interest in Simplicity One Brasil. In light of the restructuring of the ownership
interest in Simplicity One Brasil, as of October 5, 2020, the Company, Mr. Kaplan, Ms. Cavalcanti Loss, and Mr. Tannure
own a 76%, 20%, 2% and 2% equity interest in Simplicity One Brasil.
Unit
Offering, Nasdaq Listing, Reverse Stock Split and Increase in Authorized Shares of Common Stock
On
September 28, 2020, we filed with the SEC a pre-effective amendment to a registration statement on Form S-1 in connection with
our offering of units, each of which consists of one share of our common stock and one warrant to purchase one share of our common
stock, and shares of common stock issuable from time to time upon exercise of the warrants. In connection with the unit offering,
we have applied to list our common stock and warrants forming a part of the units on The Nasdaq Capital Market (“Nasdaq
Capital Market”). There is no assurance that our listing application will be approved by the Nasdaq Capital Market. The
approval of our listing on the Nasdaq Capital Market is a condition of closing the unit offering. If our application to the Nasdaq
Capital Market is not approved or we otherwise determine that we will not be able to secure the listing of the common stock and
warrants on the Nasdaq Capital Market, we will not complete the unit offering.
In
order to obtain Nasdaq Capital Market listing approval, we have obtained approval of our board of directors and shareholders of
(i) a reverse stock split of the outstanding shares of our common stock in the range from one-for-two (1-for-2) to one-for-ten
(1-for-10), which ratio is to be selected by the board of directors and (ii) an increase in our authorized shares of common stock
from 20,000,000 to 36,000,000 shares of common stock. On August 17, 2020, we filed a Certificate of Amendment to increase the
authorized shares of common stock from 20,000,000 to 36,000,000. Accordingly, our authorized capital stock consists of (i) 36,000,000
shares of common stock, and (ii) 1,000,000 shares of preferred stock. On September 29, 2020, we filed a certificate of amendment
to our certificate of incorporation, as amended, setting the ratio of the reverse stock split at one-for-six (1-for-6). We anticipate
that the reverse stock split will become effective following approval by FINRA of the reverse stock split, on or about October
13, 2020. The reverse stock split is intended to allow us to meet the minimum share price requirement of the Nasdaq Capital Market.
Except
as otherwise indicated and except in our financial statements and the notes thereto, all references to our common stock, share
data, per share data and related information has been adjusted to depict the reverse stock split ratio of 1-for-6 (“Reverse
Stock Split”), as if it were effective and as if it had occurred at the beginning of the earliest period presented. The
Reverse Stock Split, when effective, will combine each six shares of our outstanding common stock into one share of common stock,
without any change in the par value per share, and the Reverse Stock Split correspondingly will adjust, among other things, the
exercise rate of our warrants and options into our common stock. No fractional shares will be issued in connection with the Reverse
Stock Split, and any fractional shares resulting from the Reverse Stock Split will be rounded up to the nearest whole share.
Employees
As
of October 5, 2020, we had 9 full-time employees and 2 part-time employees. None of our employees is represented
by a union. We consider our relations with our employees to be good.
Legal
Proceedings
On
August 5, 2020, a lawsuit styled Duncan Wood v. PLAYlive Nation, Inc. and Simplicity eSports and Gaming Company (Case No. 20-1043)
was filed in the U.S. District Court for the District of Delaware. The complaint alleges unlawful failure to make timely and reasonable
payment of wages under Arizona law, breach of contract, breach of the duty of good faith and fair dealing and unjust enrichment.
The plaintiff seeks monetary damages for all wage compensation and common stock alleged to be owed, treble damages, interest on
all wage compensation, reasonable attorneys’ fees and such other monetary, injunctive, equitable, compensatory, punitive
and declaratory relief as the Court deems just and proper. Defendants’ responsive pleading is not yet due and has not been
filed. The litigation is in its initial stages and the Company is unable to reasonably predict its potential outcome. The Company,
however, believes that the lawsuit is without merit and intends to vigorously defend the claims.
From
time to time, we are involved in various claims and legal actions arising in the ordinary course of business. To the knowledge
of our management, there are no legal proceedings currently pending against us which we believe would have a material effect on
our business, financial position or results of operations and, to the best of our knowledge, there are no such legal proceedings
contemplated or threatened.
Properties
Our
corporate headquarters are located at 7000 W. Palmetto Park Road, Suite 505, Boca Raton, Florida 33433, where we lease approximately
250 rentable square feet of office space from an unaffiliated third party. This lease expires on June 1, 2022. Terms of the office
lease provide for a base rent payment of $800 per month. In total we lease approximately 8,600 rentable square feet of office
space from unaffiliated third parties in five locations in Florida, Oregon and Washington State for our corporate offices and
gaming centers. These leases expire at various times, with the first expiration being November of 2020 and the last being May
of 2025. Terms of the office leases currently provide for aggregate base rent payments of approximately $17,900 per month with
annual price escalations. We believe that these facilities are adequate for our current and near-term future needs.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References
in this prospectus to “we,” “us” or the “Company” refer to Simplicity Esports and Gaming Company,
formerly known as Smaaash Entertainment Inc. and prior to that as I-AM Capital Acquisition Company. The following discussion and
analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this prospectus.
Overview
We
are a global esports organization, with an established brand, that is capitalizing on the growth in esports through three business
units, Simplicity One Brasil Ltda (“Simplicity One”), Simplicity Esports, LLC (“Simplicity Esports LLC”)
and PLAYlive Nation, Inc. (“PLAYlive”).
Our
Esports Teams
We
own and manage numerous professional esports teams domestically and internationally. Revenue is generated from prize winnings,
corporate sponsorships, advertising, league subsidy payments and potential league revenue sharing payments from the publishers
of video games.
Domestic
Esports Teams – Simplicity Esports LLC
Through
our wholly owned subsidiary Simplicity Esports LLC, we own and manage numerous professional esports teams competing in games such
as Overwatch, Apex Legends, PUBG and more. We are committed to growing and enhancing the esports industry, fostering the development
of amateurs to compete professionally and signing established professional gamers to support their paths to greater success.
International
Esports Team - Simplicity One Brasil
Since
January 2020, through our 76% owned subsidiary Simplicity One Brasil, we manage Flamengo eSports, one of the leading Brazilian
League of Legends® teams. Flamengo eSports was established in 2017 as the Esports division of Clube de Regatas do Flamengo,
a successful Brazilian sports organization, with over 30 million followers across social media accounts, known for its world-famous
soccer team. Flamengo eSports’ League of Legends® team won the CBLoL Championship in September 2019, which qualified
the team to compete at the 2019 League of Legends® World Championship in Europe as one of 24 teams from 13 different regions
around the world. With cost cutting steps taken during April 2020, and anticipated additional sponsorship revenue, this business
unit is expected to be cash flow positive by January 2021. We recently entered into a binding letter of intent with our existing
sponsor, Redragon, pursuant to which Redragon would acquire a 7.5% equity stake in Simplicity One Brasil at a valuation exceeding
$6.9 million.
Online
Tournaments
In
response to demand from customers for online esports tournaments which was in all likelihood triggered by the social
distancing protocols attendant to the COVID-19 pandemic, we recently introduced a new initiative of online esports tournaments.
Since March 2020, through our wholly owned subsidiary Simplicity Esports LLC, we have been holding weekly online esports tournaments.in
the United States. In addition, we have commenced promoting these weekly online tournaments via text messages to our database
of over 400,000 paying esports gaming center customers, which we acquired in our acquisition of PLAYlive. If we can convert merely
1% of these existing customers from the PLAYlive database to play in our paid online tournaments, we anticipate this business
unit may generate approximately $1 million in annual revenues. At a 5% conversion rate, this business segment may generate approximately
$5 million in annual revenue. Management also intends to sell sponsorship and marketing activations for these online tournaments
which would create additional revenue. We also announced our initiative to begin to offering play at home online tournaments in
Brazil in June 2020.
Our
Gaming Centers
We
own and operate corporate and franchise esports gaming centers, through our wholly owned subsidiaries Simplicity Esports LLC and
PLAYlive, throughout the U.S. giving casual gamers the opportunity to play in a social setting with other members of the gaming
community. In addition, aspiring and established professional gamers have an opportunity to compete in local and national esports
tournaments held in our gaming centers for prizes, notoriety, and potential contracts to play for one of our professional esports
teams. In this business unit, revenue is generated from franchise royalties, the sale of game time, memberships, tournament entry
fees, birthday party events, corporate party events, concessions and gaming-related merchandise.
Our
business plan encompasses a brick and click physical and digital approach to further recognize revenue from all verticals, which
we believe to be unique in the industry. The physical centers, together with our esports teams, lifestyle brand and marketing
campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our
ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform,
tournaments (online and in-person) and physical real estate to maximize the monetization opportunities with these relationships.
In addition, we have proprietary intellectual capital, fan engagement strategies and brand development blueprints which complement
our publicly available information.
Optimally,
the esports gaming centers of Simplicity Esports LLC (“Simplicity Esports Gaming Centers”) will measure between 1,200
and 2,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology,
futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present
attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity
for sponsors and advertisers.
Creating
content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. Our talented team will
continue to produce unique in-depth content which showcases aspects of esports for fans. We seek to reach a broad demographic
encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic
and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while
maintaining authenticity to the gaming community that comprises our fan base.
As a result of COVID-19
(discussed below), all of our corporate and franchised Simplicity Gaming Centers were closed effective April 1, 2020. We commenced
reopening Simplicity Gaming Centers on May 1, 2020 and have since reopened three corporate and 20 franchised Simplicity
Gaming Centers as of October 5, 2020. See “Risk Factors—Public health epidemics or outbreaks, such as COVID-19,
could materially and adversely impact our business.”
Corporate
Gaming Centers
Simplicity
Esports LLC has already opened and is operating four corporate-owned retail Simplicity Esports Gaming Centers.
Our first Simplicity Esports Gaming Center was opened on May 3, 2019. Furthermore, we have engaged a national tenant representation
real estate broker to assist in the strategic planning and negotiations for our future Simplicity Esports Gaming Center locations.
We contemplate that new Simplicity Esports Gaming Centers will be funded by us as well as a combination of tenant improvement
allowances from landlords and sponsorships. As announced in June 2020, we are in discussions with multiple commercial property
owners regarding their desire to have us open 8,000 to 12,000 square foot MEGA centers at their properties. There are multiple
locations available to us with a percentage of gross sales rent lease structure (as opposed to fixed rent payments), and construction
funds offered by the landlord to assist with the build out and equipping of our planned MEGA centers. These MEGA centers are planned
as hubs in our hub and spoke model that will see smaller corporate and franchisee owned gaming centers as spokes connected to
MEGA centers as hubs for larger events and tournaments.
Franchised
Gaming Centers
Due
to interest from potential franchisees, we have launched a franchising program to accelerate the expansion of our planned nationwide
footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment
and buildout of esports gaming centers to potential business owners that desire to use our branding, infrastructure and process
to open and operate gaming centers. Franchise revenue is generated from the sale of franchise territories, supplying furniture,
equipment and merchandise to the franchisees for buildout of their centers, a gross sales royalty fee and a national marketing
fee. We license the use of our branding, assist in identifying and negotiating commercial locations, assist in overseeing the
buildout and development, provide access to proprietary software for point of sale, inventory management, employee training and
other HR functions. Franchisees also have an opportunity to participate in our national esports tournament events, and benefit
from the growing profile of our professional esports teams. Once an esports gaming center is opened, we provide operational guidance,
support and use of branding elements in exchange for a monthly royalty fee calculated as 6% of gross sales. On January 1, 2020
we implemented a national marketing fee of 1% of gross sales. To date, we have sold five (5) of these franchise territories.
The
combination of the esports gaming centers, owned or franchised by our wholly owned subsidiaries Simplicity Esports LLC or PLAYlive,
provides us with what we believe is the largest footprint of esports gaming centers in North America. Over the next 12 months,
existing PLAYlive esports gaming centers will be rebranded to Simplicity Esports gaming centers. All newly opened franchise esports
gaming centers will be branded as Simplicity Esports gaming centers and have numerous gaming PC’s. All gaming centers in
our footprint will be participating venues in our national esports tournaments.
Franchise
Roll Up Strategy
Due
to the impact of COVID-19 and the resulting disruptions in the commercial real estate market, we have signed non-binding letters
of intent with some of our existing franchisees to acquire their gaming centers. Closings are contingent upon our ability to secure
acceptable lease modifications from the landlords of the applicable properties. If the acquisitions close, the consideration paid
for each acquisition is contemplated to consist solely of restricted shares of common stock.
As
part of this strategy, we acquired our first franchisee owned gaming center, located in El Paso, Texas, on June 29, 2020. The
improved lease terms require monthly payments as a percentage of gross sales, resulting in the acquisition being EBITDA accretive
upon the commencement of operations.
Our
Stream Team
The
Simplicity Esports LLC and Flamengo Esports stream teams encompasses over 20 commentators (commonly known as “casters”),
influencers and personalities who connect to a dedicated fan base. Our electric group of
live personalities represent our organization to the fullest with their own unique style. We are proud to support and present
a diverse group of gamers as we engage fans across a multiple of esports genres. Our Twitch affiliation has enabled our stream
team influences to reach a broad fan base. Additionally, we have created several niches within the streaming community which has
enabled us to engage fans within certain titles on a 24/7 basis. Our notoriety in the industry is evidenced by our audience
that views millions of minutes of Simplicity Esports’ and Flamengo Esports’ content monthly, via various social media
outlets including YouTube, Twitter and Twitch. Through Simplicity Esports LLC, we have begun to implement a unique approach to
ensure the ultimate fan friendly esports experience. Our intention is to have gamers involved at the grassroots level and feel
a sense of unity as we compete with top class talent. Our management and players are known within the esports community and we
plan to use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other in
the industry.
Our
Financial Position
For
the fiscal years ended May 31, 2020 and 2019, we generated revenues of $861,410 and
$37,995, respectively, and reported net losses of $2,620,238 and $3,565,272, respectively, and negative cash flow from operating
activities of $1,522,486 and $1,395,255, respectively. As noted in our consolidated financial statements, as of May 31, 2020,
we had an accumulated deficit of $6,195,044. We sold five franchise territories during
the year ended May 31, 2020 for a net total of $188,000. Due to franchise accounting rules, this $188,000 does not appear on our
consolidated financial statements as revenue helping to reduce the reported loss. Franchise territory sales are recorded as deferred
revenue recognized over the 10-year life of the franchise agreements after the franchise has opened. As our esports gaming center
business unit is already cash flow positive, we anticipate that as a whole we will likely become cash flow positive during calendar
year 2020. There is substantial doubt regarding our ability to continue as a going concern as a result of our historical recurring
losses and negative cash flows from operations as well as our dependence on private equity and financings. See “Risk Factors—We
have a history of operating losses, our management has concluded that factors raise substantial doubt about our ability to continue
as a going concern and our auditor has included an explanatory paragraph relating to our ability to continue as a going concern
in its audit report for the fiscal year ended May 31, 2020 and 2019.”
Results
of Operations
Our
only activities from April 17, 2017 (date of inception) through November 20, 2018 were organizational activities, those necessary
to prepare for the initial public offering, which was consummated on August 22, 2017, and identifying a target company for a business
combination. Following the initial public offering through and after our business combination, we had not generated any operating
revenues.
Segment
and Related Information
Historically,
the Company had one operating segment. However, with the acquisition of PLAYlive and the opening of two Company-owned retail stores,
the Company’s operations are now managed through three operating segments: Franchise royalties and license fees, Company-owned
stores and Esports revenue. These three operating segments and corporate are presented below as its reportable segments.
Summarized
financial information concerning our reportable segments for the year ended May 31, 2020 is shown in the following table:
|
|
Revenues
|
|
|
Net
Loss
|
|
|
Depreciation
and
Amortization
|
|
|
Capital
Expenditures
|
|
|
Goodwill
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
royalties and fees
|
|
$
|
523,000
|
|
|
$
|
(124,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
699,000
|
|
|
$
|
1,610,000
|
|
Company-owned
stores
|
|
|
174,000
|
|
|
|
(330,000
|
)
|
|
|
54,000
|
|
|
|
142,000
|
|
|
|
-
|
|
|
|
1,124,000
|
|
Esports
revenue
|
|
|
165,000
|
|
|
|
(345,000
|
)
|
|
|
215,000
|
|
|
|
9,000
|
|
|
|
4,456,000
|
|
|
|
5,750,000
|
|
Corporate
|
|
|
-
|
|
|
|
(1,856,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108,000
|
|
Total
|
|
$
|
862,000
|
|
|
$
|
(2,655,000
|
)
|
|
$
|
269,000
|
|
|
$
|
151,000
|
|
|
$
|
5,155,000
|
|
|
$
|
8,592,000
|
|
The
following table summarizes our operating results for the fiscal years ended May 31, 2020 and 2019.
|
|
Fiscal
Year
Ended
May 31, 2020
|
|
|
Fiscal
Year
Ended
May 31, 2019
|
|
|
|
|
|
|
|
|
Franchise
royalties and license fees
|
|
$
|
478,023
|
|
|
$
|
-
|
|
Franchise
termination revenue
|
|
|
44,984
|
|
|
|
-
|
|
Company-owned
stores sales
|
|
|
174,042
|
|
|
|
-
|
|
Esports
revenue
|
|
|
164,361
|
|
|
|
37,995
|
|
Total
revenue
|
|
|
861,410
|
|
|
|
37,995
|
|
Less:
Cost of goods sold
|
|
|
(422,539
|
)
|
|
|
-
|
|
Gross
margin
|
|
|
438,871
|
|
|
|
37,995
|
|
General
and administrative expenses
|
|
|
(3,170,992
|
)
|
|
|
(4,353,189
|
)
|
Other
income (expense)
|
|
|
66,342
|
|
|
|
749,922
|
|
Net
loss attributable to non-controlling interest
|
|
|
45,541
|
|
|
|
-
|
|
Net
Loss
|
|
$
|
(2,620,238
|
)
|
|
$
|
(3,565,272
|
)
|
Summary
of Statement of Operations for the Fiscal Year Ended May 31, 2020 and 2019:
Revenue
We
generated $861,410 of revenue for the fiscal year ended May 31, 2020 as compared to $37,995 for the fiscal year ended May 31,
2019.
Franchise
royalties, franchise termination revenue and company-owned stores sales, totaling $697,049, started in the fiscal year ended May
31, 2020 with the acquisition of PLAYlive and the conversion of two franchises into company owned stores. In addition, Esports
revenue was $164,361 during the fiscal year ended May 31, 2020, up from $37,995 in the fiscal year ended May 31, 2019. This increase
was due to inclusion of the full year of operations of Simplicity Esports LLC as well as the addition of Simplicity One Brazil
in January 2020.
Cost
of Goods Sold
Cost
of goods sold during the fiscal year ended May 31, 2020 totaled $422,539. There was no cost of goods sold in the fiscal year ended
May 31, 2019. Cost of goods sold in the fiscal year ended May 31, 2020 was related to brokerage commissions for franchises, royalty
fees, title licensing costs, player and team expenses related to esports revenues and cost of gaming system and store fixtures
merchandise sold to franchisees.
General
and administrative expenses
General
and administrative expenses for the fiscal year ended May 31, 2020 totaled $3,170,992, a $1,182,197 decrease from the $4,353,189
of general and administrative expense in the fiscal year ended May 31, 2019. This change was caused by a reduction in legal fees
of approximately $2,997,000, offset by increases in payroll related costs ($596,000), an increase in rent expense ($141,000) and
an increase in stock-based compensation ($783,000). The legal fees in the fiscal year ended May 31, 2019 were related to the merger
transaction between Simplicity Esports and Gaming Company and Simplicity Esports, LLC.
Other
income (expense)
Other
income during the fiscal year ended May 31, 2020 consisted of debt forgiveness income ($93,000), interest income ($3,000), rebate
income ($2,000) and interest expense ($32,000). The debt forgiveness income in the fiscal year ended May 31, 2020 was related
to the forgiveness of the sponsor loan and related accrued interest. Other income during the fiscal year ended May 31, 2019 consisted
of debt forgiveness income ($369,000), interest income ($404,000) and interest expense ($23,000). The debt forgiveness income
during the fiscal year ended May 31, 2019 was related to renegotiation of the Series A-2 Note. Interest income during the fiscal
year ended May 31, 2019 was earned on the trust account balance which was included in the merger transaction. The trust account
balance was then used to pay common stock redemption debt in February 2019.
Net loss attributable to non-controlling
interest
As part of the conversion
of two franchises into company-owned stores, the original franchisees retained a 21% interest in the stores. As such, a portion
of the net loss incurred during the year is allocated to those parties. There was no non-controlling interest during the fiscal
year ended May 31, 2019.
Liquidity
and Capital Resources
The
completion of the Initial Public Offering and simultaneous Private Placement, inclusive of the underwriters’ exercise of
their over-allotment option, generated gross proceeds to the Company of $54,615,000. Related transaction costs amounted to approximately
$3,838,000, consisting of $3,360,000 of underwriting fees, including $1,820,000 of deferred underwriting commissions payable (which
was held in in a trust account) and $478,000 of Initial Public Offering costs.
Following
the Initial Public Offering and the underwriter’s partial exercise of the over-allotment option, a total of $52,780,000
was placed in the Trust Account and we had $552,190 of cash held outside of the Trust Account, after payment of all costs related
to the Initial Public Offering.
On
November 20, 2018, in connection with the closing of our initial Business Combination, the funds in the Trust Account were used
for, among other things, the following:
|
●
|
$45,455,596
to redeem 4,448,260 shares
|
|
●
|
$7,255,306
to fund the escrow agreement for Polar and K2
|
|
●
|
$150,000
to fund our investment in Smaaash
|
As
of May 31, 2020, we had no cash and marketable securities held in the Trust Account.
As
of May 31, 2020, we had cash of $160,208, which is available for use by us to cover the costs associated with general corporate
purposes. In addition, as of May 31, 2020, we had accounts payable and accrued expenses of $1,548,558.
For
the fiscal year ended May 31, 2020, cash used in operating activities amounted to $1,522,486, mainly resulting from a net loss
of $2,620,238 and non-cash debt forgiveness income of $93,761, offset by stock issued for services of $171,676 and depreciation
and amortization charges of $268,540. Changes in our operating liabilities and assets provided $656,189 of cash. Cash used in
investing activities amounted to $138,068, mainly resulting from the purchase of property and equipment of $163,472, offset by
$26,180 of cash acquired in the acquisition of PLAYlive Nation. Cash provided from financing activities amounted to $280,604,
mainly resulting from the sale of private units of $112,700 and the net effect of the issuance of notes payable of $192,048.
We
will need to raise additional funds in order to meet the expenditures required for operating our business
Off-balance
sheet financing arrangements
We
have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in
transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest
entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered
into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments
of other entities, or purchased any non-financial assets.
Going
Concern
The
Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which
contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As
reflected in the consolidated financial statements, the Company has an accumulated deficit at May 31, 2020, a net loss and net
cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s
ability to continue as a going concern within one year from the of the date that the financial statements are issued.
The
Company has commenced operations and has begun to generate revenue; however, the Company’s cash position may not be sufficient
to support the Company’s daily operations. Management intends to raise additional funds by way of a private or public offering.
While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional
funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon
the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional
funds by way of a public or private offering.
The
consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue
as a going concern.
COVID-19
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because COVID-19 infections
have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home
orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations
and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity Gaming Centers were
closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have since reopened three
corporate and 20 franchised Simplicity Gaming Centers as of October 5, 2020. Although our franchise agreements
with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless
of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming
Centers will default in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase in
accounts receivables or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability
to pay the minimum monthly royalty payments owed by the franchisee. We have not written off as bad debt any accounts receivables
attributable to franchisee minimum monthly royalty payments owed during the COVID-19 pandemic. However, we have recorded an allowance
for doubtful accounts of approximately $52,000, as our collection efforts are ongoing. We have experienced an increase in our
account receivables by approximately $32,000 and $14,000 during the quarters ended May 31, 2020 and August 31, 2020, respectively.
Notwithstanding it is unclear exactly how much of the increase in accounts receivables is attributable to the impact of COVID-19.
For the months of July and August 2020, we have waived the minimum monthly royalty payment obligations for the months of July
and August 2020 and are instead billing the franchisees a true-up of 6% of gross sales without a minimum.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date adversely impacted the Company’s business for the fiscal quarters ended May 31, 2020 and August 31,
2020 and will potentially continue to impact the Company’s business. Management expects that all of its business segments,
across all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on
the Company’s business and the duration for which it may have an impact cannot be determined at this time.
Contractual
obligations
We
do not have any long-term capital lease obligations, operating lease obligations or long-term liabilities, except as follows:
Attorney
Settlement Agreement
In
March of 2019, the Company entered into a settlement agreement with its prior attorney. The settlement agreement called for $200,000
to be paid upon signing the settlement agreement and then another approximate $525,000 to be paid over time. As of October
5, 2020, the Company owes this attorney approximately $300,000.
Maxim
Settlement Agreement
On
November 20, 2018, the Company entered into a settlement and release agreement (“Settlement Agreement”) with Maxim
Group LLC, the underwriter for the Company’s IPO (“Maxim”). Pursuant to the Settlement Agreement, the Company
made a cash payment of $20,000 to Maxim and issued a demand secured promissory note in favor of Maxim in the amount of $1.8 million
(the “Note”) to settle the payment obligations of the Company under the underwriting agreement dated August 16, 2017,
by and between the Company and Maxim. The Company also agreed to remove the restrictive legends on an aggregate of 8,667 (52,000
pre-reverse split) shares of its common stock held by Maxim and its affiliate. The Note was surrendered and exchanged pursuant
to the securities exchange agreement described below.
Maxim
Exchange Agreement
On
December 20, 2018, the Company entered into a securities exchange agreement (“Exchange Agreement”) with Maxim. Pursuant
to the terms of the Exchange Agreement, Maxim agreed to surrender and exchange the Note in the amount of $1.8 million which was
issued to Maxim pursuant to the Settlement Agreement (discussed immediately above). In exchange, the Company issued to the Maxim
a Series A-1 Exchange Convertible Note in the principal amount of $500,000 (the “Series A-1 Note”) and a Series A-2
Exchange Convertible Note in the principal amount of $1,000,000 (the “Series A-2 Note,” and collectively with Series
A-1 Note, the “Exchange Notes”).
As
of December 31, 2018, upon the closing of the Simplicity Esports Acquisition, the Series A-1 Note automatically converted into
32,275 (193,648 pre-reverse split) shares of the Company’s common stock.
The
Series A-2 Note bears interest at 2.67% per annum, payable quarterly and has a maturity date of June 20, 2020 (the “Maturity
Date”). The Company may pay the interest in cash or at its sole discretion, in shares of its common stock or a combination
of cash and common stock. However, the Company may only pay the interest in shares of its common stock if (i) all the equity conditions
specified in the note (“Equity Conditions”) have been met (unless waived by the Holder in writing) during the 20 trading
days immediately prior to the interest payment date (“Interest Notice Period”), (ii) the Company has provided proper
notice pursuant to the terms of the note and (iii) the Company has delivered to the Holder’s account certain number of shares
of its common stock to be applied against such interest payment prior to (but no more than five trading days before) the Interest
Notice Period.
The
Series A-2 Note is convertible into shares of the Company’s common stock (“Conversion Shares”) at an initial
conversion price of $11.58 ($1.93 pre-reverse split) per share, subject to adjustment for any stock dividends and splits, rights
offerings, distributions, combinations or similar transactions. Upon the Maturity of the Series A-2 Note, the conversion price
will be automatically adjusted to the lower of (i) the conversion price then in effect and (ii) the greater of the arithmetic
average of the volume weighted average price of the Company’s common stock in the five trading days prior to the notice
of conversion and $3.00 ($0.50 pre-reverse split) . The Holder may convert the Series A-2 Note at any time, in whole or in part,
provided that upon receipt of a notice of conversion from the Holder, the Company has the right to repay all or any portion of
the Series A-2 Note included in the notice of conversion.
Additionally,
the Series A-2 Note will automatically convert into shares of the Company’s common stock on the Maturity Date provided that
(i) no event of default then exists, and (ii) each of the Equity Conditions have been met (unless waived in writing by the Holder)
on each trading day during the 20 trading day period ending on the trading day immediately prior to the automatic conversation
date.
At
any time prior to the Maturity Date, the Company may also elect to redeem some or all of the outstanding principal amount for
cash in an amount (the “Optional Redemption Amount”) equal to the sum of (a) 100% of the then outstanding principal
amount of the note, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the note
(the “Optional Redemption”). The Company may only effect an Optional Redemption if each of the Equity Conditions have
been met (unless waived in writing by the Holder) on each trading day during the period commencing on the date when the notice
of the Optional Redemption is delivered to the date of the Optional Redemption and through and including the date payment of the
Optional Redemption Amount is actually made in full.
Except
as otherwise provided in the Series A-2 Note, including, without limitation, an Optional Redemption, the Company may not prepay
any portion of the principal amount of the note without the prior written consent of the Holder.
The
Company is not permitted to convert any portion of the Series A-2 Note if doing so results in the Holder beneficially owning more
than 4.99% of the outstanding common stock of the Company after giving effect to such conversion, provided that on 61 days’
prior written notice from the Holder to the Company, that percentage may increase to 9.99%. However, if there is an automatic
conversion, and the conversion would result in the Company issuing a number of shares in excess of the beneficial ownership limitation,
then any such shares in excess of the beneficial ownership limitation will be held in abeyance for the benefit of the Holder until
such time or times, if ever, as its right thereto would not result in the Holder exceeding the beneficial ownership limitation,
at which time or times the Holder will be issued such shares to the same extent as if there had been no such limitation.
The
Series A-2 Note contains restrictive covenants which, among other things, restrict the Company’s ability to repay or repurchase
any indebtedness, make distributions on or repurchase its common stock or enter into transactions with its affiliates.
Operating
Lease
We
have long-term operating lease obligations and deferred revenues related to franchise fees to be recognized over the term of franchise
agreements with our franchises, generally ten years. We will begin to recognize deferred franchise fee revenue at the time a franchise
commences operations.
In
February 2019, the Company entered into a 5-year operating lease in Boca Raton, Florida in connection with the opening of its
first gaming center. Rent is approximately $2,300 per month for the first year and contains customary escalation clauses. In June
of 2019, the Company entered into a 5-year operating lease for its corporate office, rent is approximately $700 per month. In
August of 2019, the Company opened its second gaming center and in connection with this gaming center entered into a 5-year operating
lease in Deland, Florida. Rent is approximately $2,500 per month for the first year and contains customary escalation clauses.
On June 26, 2020, the Company entered into a 10-year operating lease in El Paso, Texas for a corporate gaming center in Fort Bliss.
It is a percentage rent lease (without a base rent) which provides for the (i) first and second year of the lease, the rent would
be 10% of gross sales of such gaming center per year, (iii) third fourth and fifth year of the lease, the rent would be 12% of
gross sales of such gaming center per year, and (iv) sixth, seventh, eighth, nineth and tenth year of the lease, the rent would
be 14% of the gross sales of such gaming center per year.
Debt
Obligations
For
a detailed description of debt obligations of the Company, please see “Description of Business—Recent Developments—Debt
Obligations” on page 41 of this prospectus.
Adoption
of 2020 Omnibus Incentive Plan
The
board and shareholders of the Company approved of the Simplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the “2020
Plan”) on April 22, 2020 and June 23, 2020, respectively. The 2020 Plan provides for various stock-based incentive awards,
including incentive and nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units, and
other equity-based or cash-based awards.
Critical
Accounting Policies
The
preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted
in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and
income and expenses during the periods reported. Actual results could materially differ from those estimates.
Revenue
Recognition
As
of January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) (“ASC 606”). The new guidance
sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and
is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in GAAP.
The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or
services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not
addressed completely in the prior accounting guidance. The Company adopted the standard using the modified retrospective method
and the adoption did not have a material impact on its financial statements.
The
Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product
sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the
Company expects to receive in exchange for transferring goods and services. Our revenue is derived from two sources, the first
is from the sale of the rights to our players to third parties and second from participation and prize money awarded at gaming
tournaments.
The
following describes principal activities, separated by major product or service, from which the Company generates its revenues:
Company-owned
Stores Sales
The
Company-owned stores principally generate revenue from retail esports gaming centers. Revenues from Company-owned stores are recognized
when the products are delivered, or the service is provided.
Franchise
Royalties and Fees
Franchise
royalties are based on six percent of franchise store sales after a minimum level of sales occur and are recognized as sales occur.
Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other
behaviors, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty
rate. Franchise royalties are billed on a monthly basis.
The
Company recognizes initial franchise license fee revenue net of costs incurred, when the Company has performed substantially all
the services required in the franchise agreement. Fees received that do not meet these criteria are recorded as deferred revenues
until earned. Initial franchise fees are generally recognized once a location is opened to the public which is when management
deems substantially all services required under the franchise agreements have been performed.
The
Company offers various incentive programs for franchisees including royalty incentives, new restaurant opening incentives (i.e.
development incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives
earned or granted under these programs that are in the form of discounts.
Esports
revenue
Esports
revenue is a form of competition using video games. Most commonly, esports takes the form of organized, multiplayer video game
competitions, particularly between professional players, individually or as teams. Revenues from esports revenue are recognized
when the competition is completed, and prize money is awarded.
Accounts
Receivable
The
Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e. franchisees), taking into
consideration the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable are written
off against the allowance when management determines it is probable the receivable is worthless. Customer account balances with
invoices dated over 90 days old are considered delinquent and considered in the allowance assessment. The Company performs credit
evaluations of its customers and, generally, requires no collateral. Management has assessed accounts receivable and an allowance
for doubtful accounts of approximately $11,000 has been recorded.
Goodwill
Goodwill
is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill,
but we assess our goodwill for impairment at least annually.
Intangible
Assets and Impairment
Intangible
assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The Company had
intangible assets subject to amortization related to its acquisition of Simplicity Esports, LLC. These costs were included in
intangible assets on our balance sheet and amortized on a straight-line basis when placed into service over the estimated useful
lives of the costs, which is 3 to 10 years.
The
Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less that the carrying amount
of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book
value.
MANAGEMENT
The
following table sets forth information regarding our directors and executive officers:
Name
|
|
Age
|
|
Position
|
Jed
Kaplan
|
|
56
|
|
Chief
Executive Officer, interim Chief Financial Officer, and Class II Director of the Company
|
Donald
R. Caldwell
|
|
74
|
|
Chairman
and Class I Director of the Company
|
Roman
Franklin
|
|
37
|
|
President
and Class I Director of the Company
|
Max
Hooper
|
|
79
|
|
Class
II Director of the Company
|
Frank
Leavy
|
|
67
|
|
Class
I Director of the Company
|
Edward
Leonard Jaroski
|
|
73
|
|
Class
I Director of the Company
|
William
H. Herrmann, Jr.
|
|
74
|
|
Class
II Director of the Company
|
Jed
Kaplan. Mr. Kaplan has been a member of our board of directors since December 31, 2018 and our sole Chief Executive Officer
since February 8, 2019. From December 31, 2018 to February 8, 2019, Mr. Kaplan served as our co-Chief Executive Officer. He founded
and serves as the Chief Executive Officer of Shearson Financial Services, a FINRA-registered broker dealer, since May 1995. As
a natural leader possessing a passion for sports management, Mr. Kaplan has been involved in a wide variety of professional sports
ventures. Most recently Mr. Kaplan successfully sold the NBA G League Team, Iowa Energy, to the Minnesota Timberwolves. Currently
Mr. Kaplan is also a minority owner of both the Memphis Grizzlies and Swansea City of the English Championship League. Mr. Kaplan’s
insight, vision and knowledge are all represented as an appointed founding member of the NBA G League leadership committee. Mr.
Kaplan graduated from City University of New York in 1989 with a Bachelor of Business Administration degree.
The
Company believes Mr. Kaplan’s strong expertise in the financial services and sports management industries qualifies him
to serve on its board of directors.
Donald
R. Caldwell. Mr. Caldwell, who has been an independent director and the Chairman of our board of directors since August
16, 2017, is an experienced investor, co-founded Cross Atlantic Capital Partners, Inc., a venture capital management company,
where he has served as its Chairman and Chief Executive Officer since 1999. At Cross Atlantic Capital Partners, Inc., Mr. Caldwell
has raised four investment funds totaling over $500 million of committed capital and is responsible for the firm’s operations,
building the investment team, and growing the Cross Atlantic franchise through fundraising, network development, and deal flow
generation. Prior to founding Cross Atlantic Capital Partners, Inc. in March 1999, Mr. Caldwell was President and Chief Operating
Officer of Safeguard Scientifics, Inc. (NYSE: SFE) (“Safeguard”) from 1996 to 1999, where he also previously served
as Executive Vice President from 1993 to 1996. In addition to his service on our board, Mr. Caldwell currently serves on the board
of directors of two companies: Lightning Gaming, Inc. (a private company) since June 2015, where he serves as a director and chairman
of the audit committee; and Quaker Chemical Corporation (NYSE: KWR) (a public company) since 1997, where he serves as lead director,
as chairman of the executive committee and member of the compensation and audit committees; Mr. Caldwell was previously a member
of the board of directors of Diamond Cluster International, Inc. from 1994 to 2010 and has served as a director for several private
companies and non-profit organizations, including software and money management firms as well as the Pennsylvania Academy of the
Fine Arts and the Committee for Economic Development. Mr. Caldwell is a Certified Public Accountant (Retired) and holds a Bachelor
of Science degree from Babson College and a Master of Business Administration from the Graduate School of Business at Harvard
University.
We
believe Mr. Caldwell’s deep financial, entrepreneurial and business expertise and extensive experience as a member of the
boards and board committees of other public companies qualifies him to serve on our board of directors.
Roman
Franklin. Mr. Franklin has been a member of our board of directors since August 16, 2017 and our President since December
31, 2018. Mr. Franklin was Chief Investment Officer of SMC Global USA from March 2016 until December 31, 2016, and prior, President
of Franklin Financial Planning from 2005 to 2016. Mr. Franklin is a 16-year veteran of the financial services industry. By the
age of 22 he held FINRA Series 7, Series 66, and Life, Health, and Variable Insurance Licenses. In 2005, he founded a fee-only
registered investment advisory firm. In 2008, he was one of the youngest recipients of the National Association of Financial Advisors
(“NAPFA”) Registered Financial Advisor (RFA) designation. In 2015, he was elected as a Board Member of the NAPFA,
South Region Board of Directors, overseeing more than a dozen states from Texas, to Florida, to North Carolina. Mr. Franklin has
experience in domestic and international investment, and has been involved in multiple business transactions tied to India, including
the sale of a 50% equity stake in his wealth management business to Indian financial services firm SMC. Mr. Franklin holds a Bachelor
of Science degree in Management from Barry University and an M.B.A. in Finance from the Graduate School of Business at Stetson
University. His civic organization roles include School Advisory Council for Volusia County Schools, City of DeLand Economic Development
Committee, and the Boys’ and Girls’ Clubs of Central Florida.
We
believe Mr. Franklin’s strong expertise in finance and international and domestic business transactions qualifies him to
serve on our board of directors.
Max
Hooper. Dr. Hooper, who has been an independent member of our board of directors since August 16, 2017, serves as Managing
Director of Merging Traffic, a web-based crowdsourcing portal, since September 2015 and Head of Investment Banking and Senior
Vice President of Triloma Securities, a subsidiary of Triloma Financial Group LLC, since January 2016. Dr. Hooper is also the
founder and owner of Partners Advisory Group and Partners Capital Group, two financial advisory firms since January 2014. Since
February 2018, Dr. Hooper’s primary focus has been as Managing Director/CEO of Managing Traffic and co-owner of Triloma
Financial Group. Prior to that, Dr. Hooper was co-founder of Equity Broadcasting Corporation, a media company that owned and operated
more than one hundred television stations across the United States. Dr. Hooper is an accomplished entrepreneur and has started
multiple businesses in technology/internet, lodging, and services industries. Dr. Hooper has served on the investment committee
of several venture capital and angel funds, and has completed “work out” transactions as a Certified Debt Arbitrator
representing banks and private transactions. Dr. Hooper also has prior experience with SPACs such as transaction structuring,
administration, research, and execution. Dr. Hooper has earned five doctorate degrees from a variety of institutions.
We
believe Dr. Hooper’s expertise in investment, management and mergers and acquisitions over various industries qualify him
to serve on our board of directors.
Frank
Leavy. Mr. Leavy has been an independent member of our board of directors since August 16, 2017. Since 2007, Mr. Leavy
has been the Senior Vice President and Director of Finance and Administration for Blake’s All Natural Foods, a manufacturer
of “better for you” frozen entrees. Prior to that, he held various financial officer positions at member companies
of Group Rossignol, a world leading company in the winter sports industry. Specifically, he was Controller of Rossignol Ski Company
from 1982 to 2006 and Vice President of Finance of Skis Dynastar, Inc. and Skis Dynastar Canada from 2000 to 2006. He also served
as Chief Operating Officer at Roger Cleveland Golf Company, a subsidiary of Group Rossignol from 1999 to 2000 and was elected
a director of the company from 2003 to 2005. Mr. Leavy holds a Bachelor of Arts degree from the College of the Holy Cross and
a Master of Science degree in accounting from the Graduate School of Professional Accounting at Northeastern University.
We
believe Mr. Leavy’s extensive experience in corporate finance qualify him to serve on our board of directors.
Edward
Leonard Jaroski. Mr. Jaroski has been an independent member of our board of directors since October 2017. Mr. Jaroski
was the founder of Capstone Asset Management Company and had served as its President and Chief Executive Officer from 1987 to
2016. Mr. Jaroski was Chairman, Chief Executive Officer and President of various Capstone/Steward Funds in the fund complex from
1987 through 2016. Mr. Jaroski was at Tenneco Financial Services from 1981 to 1987, where he was the Executive Vice President.
He started his career at Philadelphia Life Insurance Company as Manager of Investments in 1969, where he served until 1981 and
also served as its Vice President of Finance. He also served as a Director of Philadelphia Life Asset Management Company. Mr.
Jaroski holds the insurance industry professional designations of Chartered Life Underwriter, Charter Financial Consultant and
Fellow Life Management Institute. He holds a B.B.A. degree in Accounting from Temple University.
We
believe Mr. Jaroski’s experience in investments and asset management qualify him to serve on our board of directors.
William
H. Herrmann, Jr. Mr. Herrmann has been an independent member of our board of directors since October 2017. Mr. Herrmann
has over 45 years of experience in financial services, and insurance and investment planning industries. Presently, Mr. Herrmann
is the Owner of Herrmann & Associates, a financial services firm affiliated with Hudson Heritage Capital Management Inc.,
a Registered Investment Advisor since February 15, 2006. Mr. Herrmann has also served as an independent Director of Steward Funds,
from 2011 until 2017. Mr. Herrmann served as the Chairman of the Nominating and Corporate Governance Committee and was Chairman
of the Contracts Committee. He previously served as Independent Lead Director of Steward Funds Mr. Herrmann is also an Independent
Director of Church Capital Fund.
Mr.
Herrmann is a member of the Advisory Committee to the Liquidation Trustee for Church Capital Fund Liquidation Trust under TMI
Trust Company. Mr. Herrmann is also a Trustee of LuLu Shriners Investment Advisory Committee and the Chairman of Beta Rho Property
Company. Mr. Herrmann holds a B.A. from the University of Pennsylvania, and an MBA from Temple University, and holds the Chartered
Life Underwriter (CLU) designation from American College. Mr. Herrmann holds Series 7, 63, and 65 securities licenses as well
as insurance licenses in multiple states.
We
believe Mr. Herrmann’s experience in financial services and the investment planning industry qualify him to serve on our
board of directors.
Our
officers and board of directors are well qualified as leaders. In their prior positions they have gained experience in core management
skills, such as strategic and financial planning, public company financial reporting, compliance, risk management, and leadership
development. Our officers and directors also have experience serving on boards of directors and board committees of other public
companies and private companies, and have an understanding of corporate governance practices and trends, which provides an understanding
of different business processes, challenges, and strategies.
Number
and Terms of Office of Officers and Directors
Our
board of directors is comprised of nine directors, divided into two classes, Class I and Class II, with only one class of directors
being elected in each year and each class serving a two-year term. There are four Class I directors and five Class II directors.
However, as of October 5, 2020, there are two board vacancies. The board is conducting a search for replacement directors
to fill the vacancies. Once suitable replacements are found, they will serve as Class II directors.
Our
officers are elected by the board of directors and serve at the discretion of the board of directors, rather than for specific
terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our bylaws as it deems appropriate.
Our bylaws provide that our officers may consist of a Chief Executive Officer, President, Chief Financial Officer, Vice Presidents,
Secretary, Assistant Secretaries, Treasurer and such other offices as may be determined by the board of directors.
Board
Committees and Director Independence
Our
common stock is presently quoted on the OTCQB under the symbol “WINR.” Our warrants issued in connection with our
initial public offering in August 2017 are currently listed on OTCQB under the symbol “WINRW.” Under the rules of
the OTCQB, we are not required to maintain a majority of independent directors on our Board of Directors and we are not required
to establish committees of the Board of Directors consisting of independent directors. However, we have applied to list our common
stock and our warrants on The Nasdaq Capital Market (“Nasdaq Capital Market”). In order to list our common stock and
our warrants on the Nasdaq Capital Market, we are required to comply with the Nasdaq Capital Market standards relating to corporate
governance, requiring, among other things, that:
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A
majority of our Board of Directors to consist of “independent directors” as defined by the applicable rules and
regulations of the Nasdaq Capital Market;
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The
compensation of our executive officers to be determined, or recommended to the Board of Directors for determination, by independent
directors constituting a majority of the independent directors of the Board in a vote in which only independent directors
participate or by a Compensation Committee comprised solely of independent directors;
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That
director nominees to be selected, or recommended to the Board of Directors for selection, by independent directors constituting
a majority of the independent directors of the Board in a vote in which only independent directors participate or by a nomination
committee comprised solely of independent directors; and
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Establishment
of an audit committee with at least three independent directors as well as composed entirely of independent directors, where
at least one of the independent directors qualifies as an audit committee financial expert under SEC rules and as a financially
sophisticated audit committee member under the Nasdaq Capital Market rules.
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Under
applicable Nasdaq Capital Market rules, a director will only qualify as an “independent director” if, in the opinion
of the listed company’s board of directors, that person does not have a relationship that would interfere with the exercise
of independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes
of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the
audit committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory,
or other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed
company or any of its subsidiaries. Our Board of Directors has determined in its business judgment that each of Messrs. Caldwell,
Leavy, Jaroski and Herrmann and Dr. Hooper is independent within the meaning of the Nasdaq Capital Market rules for U.S. Companies,
the Sarbanes-Oxley Act and related SEC rules. Therefore, a majority of the members of our Board of Directors is independent.
In
addition, our Board of Directors has two standing committees: an Audit Committee and a Compensation Committee.
Committees
of the Board of Directors
Our
board of directors has two standing committees: an audit committee and a compensation committee. Both our audit committee and
our compensation committee are composed solely of independent directors.
Audit
Committee
Messrs.
Caldwell and Leavy and Dr. Hooper serve as members of our audit committee. Mr. Caldwell serves as chairman of the audit committee.
Under Nasdaq Capital Market listing standards and applicable SEC rules, we are required to have three members of the audit committee,
all of whom must be independent. Messrs. Caldwell, and Leavy and Dr. Hooper are independent.
Each
member of the audit committee is financially literate and our board of directors has determined that Mr. Caldwell qualifies as
an “audit committee financial expert” as defined in applicable SEC rules.
Responsibilities
of the audit committee include:
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the
appointment, compensation, retention, replacement, and oversight of the work of the independent auditors and any other independent
registered public accounting firm engaged by us;
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pre-approving
all audit and non-audit services to be provided by the independent auditors or any other registered public accounting firm
engaged by us, and establishing pre-approval policies and procedures;
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reviewing
and discussing with the independent auditors all relationships the auditors have with us in order to evaluate their continued
independence;
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setting
clear hiring policies for employees or former employees of the independent auditors;
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setting
clear policies for audit partner rotation in compliance with applicable laws and regulations;
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obtaining
and reviewing a report, at least annually, from the independent auditors describing (i) the independent auditor’s internal
quality-control procedures and (ii) any material issues raised by the most recent internal quality-control review, or peer
review, of the audit firm, or by any inquiry or investigation by governmental or professional authorities, within, the preceding
five years respecting one or more independent audits carried out by the firm and any steps taken to deal with such issues;
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reviewing
and approving any related party transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by
the SEC prior to us entering into such transaction; and
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reviewing
with management, the independent auditors, and our legal advisors, as appropriate, any legal, regulatory or compliance matters,
including any correspondence with regulators or government agencies and any employee complaints or published reports that
raise material issues regarding our financial statements or accounting policies and any significant changes in accounting
standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities.
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Compensation
Committee
The
members of our compensation committee are Messrs. Caldwell and Jaroski and Dr. Hooper. Mr. Caldwell serves as chairman of the
compensation committee. We have adopted a compensation committee charter, which details the principal functions of the compensation
committee, including:
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reviewing
and approving the compensation of all of our other executive officers;
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reviewing
our executive compensation policies and plans;
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implementing
and administering our incentive compensation equity-based remuneration plans;
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assisting
management in complying with our proxy statement and annual report disclosure requirements;
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approving
all special perquisites, special cash payments and other special compensation and benefit arrangements for our executive officers
and employees;
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producing
a report on executive compensation to be included in our annual proxy statement; and
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reviewing,
evaluating and recommending changes, if appropriate, to the remuneration for directors.
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The
charter also provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation
consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of
the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel
or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required
by Nasdaq Capital Market and the SEC.
Director
Nominations
We
do not have a standing nominating committee. In accordance with Rule 5605(e)(1)(A) of the Nasdaq Listing Rules, a majority of
the independent directors may recommend a director nominee for selection by the board of directors. The board of directors believes
that the independent directors can satisfactorily carry out the responsibility of properly selecting or approving director nominees
without the formation of a standing nominating committee. The directors who shall participate in the consideration and recommendation
of director nominees are Messrs. Caldwell, Jaroski, Leavy, and Herrmann, and Dr. Hooper. In accordance with Rule 5605(e)(1)(A)
of the Nasdaq Listing Rules, all such directors are independent. As there is no standing nominating committee, we do not have
a nominating committee charter in place.
The
board of directors will also consider director candidates recommended for nomination by our stockholders during such times as
they are seeking proposed nominees to stand for election. Our stockholders that wish to nominate a director for election to the
board of directors should follow the procedures set forth in our bylaws.
We
have not formerly established any specific, minimum qualifications that must be met or skills that are necessary for directors
to possess. In general, in identifying and evaluating nominees for director, the board of directors considers educational background,
diversity of professional experience, knowledge of our business, integrity, professional reputation, independence, wisdom, and
the ability to represent the best interests of our stockholders.
Code
of Ethics
We
have adopted a Code of Ethics applicable to our directors, officers and employees. We previously filed a copy of our form of Code
of Ethics as an exhibit to our registration statement on Form S-1 (File 333-219251). You will be able to review these documents
by accessing our public filings at the SEC’s web site at www.sec.gov. In addition, a copy of the Code of Ethics will
be provided without charge upon request from us. We intend to disclose any amendments to or waivers of certain provisions of our
Code of Ethics in a Current Report on Form 8-K. See “Where You Can Find Additional Information.”
Limitation
on Liability and Indemnification of Officers and Directors
Our
third amended and restated certificate of incorporation, as amended, provides that our officers and directors will be indemnified
by us to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended. In addition, our restated
certificate provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary
duty as directors, except to the extent such exemption from liability or limitation thereof is not permitted by the Delaware General
Corporation Law (“DGCL”).
We
have entered into agreements with our officers and directors to provide contractual indemnification in addition to the indemnification
provided for in our third amended and restated certificate. Our bylaws also permit us to maintain insurance on behalf of any officer,
director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit such
indemnification. We have purchased a policy of directors’ and officers’ liability insurance that insures our officers
and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our
obligations to indemnify our officers and directors.
Our
officers and directors have agreed to waive any right, title, interest or claim of any kind in or to any monies in the trust account,
and have agreed to waive any right, title, interest or claim of any kind they may have in the future as a result of, or arising
out of, any services provided to us and will not seek recourse against the trust account for any reason whatsoever. Accordingly,
any indemnification we provide to our officers and directors will only be able to be satisfied by us if we have sufficient funds
outside of the trust account.
These
provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These
provisions also may have the effect of reducing the likelihood of derivative litigation against officers and directors, even though
such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment
may be adversely affected to the extent we pay the costs of settlement and damage awards against officers and directors pursuant
to these indemnification provisions.
We
believe that these provisions, the insurance and the indemnity agreements are necessary to attract and retain talented and experienced
officers and directors.
The
Board’s Role in Risk Oversight
Although
our management is primarily responsible for managing our risk exposure on a daily basis, our board of directors oversees the risk
management processes. Our board, as a whole, determines the appropriate level of risk for our Company, assesses the specific risks
that we face, and reviews management’s strategies for adequately mitigating and managing the identified risks. Although
our board administers this risk management oversight function, our audit committee supports our board in discharging its oversight
duties and addresses risks inherent in its area.
EXECUTIVE
COMPENSATION
The
following table summarizes all compensation recorded by us in the past two fiscal years ended May 31, 2020 for:
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our
principal executive officer or other individual serving in a similar capacity, and
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our
two most highly compensated executive officers, other than our principal executive officer, who were serving as corporate
officers as of May 31, 2020.
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For
definitional purposes, these individuals are sometimes referred to as the “named executive officers.”
2020
Summary Compensation Table
Name and Principal Position
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Fiscal
Year
Ended
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Salary
($)
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Bonus
($)
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Stock
Awards
($) (1)
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Option
Awards
($)
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All Other
Compensation
($)
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Total
($)
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Jed Kaplan,
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5/31/2020
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$
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-
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$
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75,000
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(1)
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$
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311,925
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(2)
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$
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-
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-
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$
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386,925
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Chief Executive Officer
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5/31/2019
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$
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-
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$
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-
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$
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72,000
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(2)
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$
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-
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-
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$
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72,000
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Roman Franklin,
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5/31/2020
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$
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100,000
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$
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75,000
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(1)
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$
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245,215
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(3)
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$
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-
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-
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$
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420,215
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President
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5/31/2019
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$
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41,666
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$
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-
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21,600
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(3)
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$
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-
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-
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$
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63,266
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(1)
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Amounts
have been accrued as of May 31, 2020.
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(2)
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Includes
the aggregate grant date fair values for all restricted stock granted to the named executive officers vested in the current
fiscal year, computed in accordance with Financial Accounting Standards Board’s Accounting Standards Codification Topic
718, Compensation—Stock Compensation (“Topic 718”). Assumptions used
to determine the aggregate grant date fair value of the restricted stock include a per share grant date fair value of $0.60,
based on the closing stock price of the Company’s common stock as reported on OTC Markets on March 27, 2019, the grant
date. Also included herein $269,625 accrued as of May 31, 2020. Assumptions used to determine the accrued amount have
been computed in in accordance with Topic 718. Assumptions used to determine the aggregate
grant date fair value of the restricted stock include a per share grant date fair values ranging from $0.87 to $1.40, based
on the closing stock prices of the Company’s common stock as reported on OTC Markets on various dates.
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(3)
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Includes
the aggregate grant date fair value for all restricted stock granted to the named executive officers vested in the current
fiscal year, computed in accordance with Topic 718. Assumptions used to determine the
aggregate grant date fair value of the restricted stock include a per share grant date fair value of $0.60, based on the closing
stock price of the Company’s common stock as reported on OTC Markets on March 27, 2019, the grant date. Also
included herein $232,615 accrued as of May 31, 2020. Assumptions used to determine the accrued amounts have been computed
in in accordance with Topic 718. Assumptions used to determine the aggregate grant date
fair value of the restricted stock include a per share grant date fair values ranging from $0.87 to $1.40, based on the closing
stock prices of the Company’s common stock as reported on OTC Markets on various dates.
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Outstanding
Equity Awards at 2020 Fiscal Year-End
The
following table sets forth information on outstanding options and stock awards on a pre-reverse split basis held by the named
executive officers as of May 31, 2020.
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Option Awards
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Stock Awards
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Name
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Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
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Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
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Option
Exercise
Price ($)
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Option
Expiration
Date
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Number of
Shares or
Units Of
Stock that
Have Not
Vested (#)
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Market
Value Of
Shares Or
Units of
Stock That
Have Not
Vested ($)
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Jed Kaplan
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-
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-
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$ N/A
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N/A
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-
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$ N/A
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Roman Franklin
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-
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-
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$ N/A
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N/A
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-
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$ N/A
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2020
Option Exercises and Stock Vested Table
The
following table sets forth the vesting of restricted stock on a pre-reverse split basis during the fiscal year ended May 31, 2020
for the named executive officers:
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Stock Awards
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Name
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Number of Shares
Acquired on
Vesting
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Value Realized on
Vesting
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Jed Kaplan
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120,000
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$
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95,300
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Roman Franklin
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36,000
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$
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28,590
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Executive
Officer and Director Compensation
The
Company intends to develop an executive compensation program that is consistent with its existing compensation policies and philosophies,
which are designed to align compensation with our business objectives and the creation of stockholder value, while enabling us
to attract, motivate and retain individuals who contribute to the long-term success of the Company.
Decisions
on the executive compensation program will be made by the compensation committee. The following discussion is based on the present
expectations as to the executive compensation program to be adopted by the compensation committee. The executive compensation
program actually adopted will depend on the judgment of the members of the compensation committee and may differ from that set
forth in the following discussion.
We
anticipate that decisions regarding executive compensation will reflect our belief that the executive compensation program must
be competitive in order to attract and retain our executive officers. We anticipate that the compensation committee will seek
to implement our compensation policies and philosophies by linking a significant portion of our executive officers’ cash
compensation to performance objectives and by providing a portion of their compensation as long-term incentive compensation in
the form of equity awards.
We
anticipate that compensation for our executive officers will have three primary components: base salary, an annual cash incentive
bonus and long-term incentive compensation in the form of share-based awards, if any.
Base
Salary
Our
compensation committee will determine base salaries and manage the base salary review process, subject to existing employment
agreements.
Annual
Bonuses
We
intend to use annual cash incentive bonuses for the executive officers to tie a portion of their compensation to financial and
operational objectives achievable within the applicable fiscal year. We expect that, near the beginning of each year, the compensation
committee will select the performance targets, target amounts, target award opportunities and other term and conditions of annual
cash bonuses for the executive officers, subject to the terms of any employment agreement. Following the end of each year, the
compensation committee will determine the extent to which the performance targets were achieved and the amount of the award that
is payable to the executive officers.
On
July 29, 2020, the board of directors approved a cash bonus to each of Messrs. Kaplan and Franklin in the amount of $75,000 in
return for services provided during the 2020 fiscal year. Such bonuses will be deferred and paid when the Company has sufficient
funds available to pay such bonuses, as to be reasonably determined by the board of directors and the respective executives.
Stock-Based
Awards
We
intend to use stock-based awards to reward long-term performance of the executive officers. We believe that providing a meaningful
portion of the total compensation package in the form of stock-based awards will align the incentives of its executive officers
with the interests of its stockholders and serve to motivate and retain the individual executive officers. Stock-based awards
will be awarded under the Incentive Plan, which has been adopted by our Board of Directors and is being submitted to our shareholders
for approval at the special meeting in lieu of an annual meeting.
Restricted
Stock Awards
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, 20,000 (120,000 pre-reverse split) shares of our restricted Common Stock. Such
shares vested over the succeeding nine month period. As of October 5,
2020, all of such shares have vested.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Roman Franklin, our President and a member of our board of directors,
6,000 (36,000 pre-reverse split) shares of our restricted Common Stock. Such shares vested over the succeeding nine month period.
As of October 5, 2020, all of
such shares have vested.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan
and Franklin initially executed on December 31, 2018.
On
July 29, 2020, the Board approved the grant of 55,834 (335,000 pre-reverse split) shares of common stock to Jed Kaplan,
our Chief Executive Officer and Interim Chief Financial Officer and a member of our board of directors. Of these shares, (i) 41,667
(250,000 pre-reverse split) shares of common stock related to services provided by Mr. Kaplan to the Company during the 2020 fiscal
year, (ii) 11,667 (70,000 pre-reverse split) shares of common stock related to grants that should have been, but were not, made
pursuant to the Kaplan 2018 Agreement (as hereinafter defined), and (iii) 2,500 (15,000 pre-reverse split) shares of common stock
related to grants made pursuant to the Kaplan 2020 Agreement (as hereinafter defined). The Kaplan 2018 Agreement provided for
the grant to Mr. Kaplan of 1,667 (10,000 pre-reverse split) shares of common stock per month. For the months of January 2020 through
July 2020, however, such shares had not been granted. Accordingly, the July 29, 2020 grant included an aggregate of 11,667 (70,000
pre-reverse split) shares of common stock that should have been granted for the months of January 2020 through July 2020. The
Kaplan 2020 Agreement provides for the grant to Mr. Kaplan of 2,500 (15,000 pre-reverse split) shares of common stock per month.
As of October 5, 2020, the 55,834 (335,000 pre-reverse split) shares that were granted on July 29, 2020 have been
issued. Such shares were fully vested and earned as of the issuance thereof.
On
July 29, 2020, the Board also approved the grant of 46,417 (278,500 pre-reverse split) shares of common stock to Roman Franklin,
our President and a member of our board of directors. Of these shares, (i) 41,667 (250,000 pre-reverse split) shares of common
stock related to services provided by Mr. Franklin to the Company during the 2020 fiscal year, (ii) 3,500 (21,000 pre-reverse
split) shares of common stock related to grants that should have been, but were not, made pursuant to the Franklin 2018 Agreement
(as hereinafter defined), and (iii) 1,250 (7,500 pre-reverse split) shares of common stock related to grants made pursuant to
the Franklin 2020 Agreement (as hereinafter defined). The Franklin 2018 Agreement provided for the grant to Mr. Franklin of 500
(3,000 pre-reverse split) shares of common stock per month. For the months of January 2020 through July 2020, however, such shares
had not been granted. Accordingly, the July 29, 2020 grant included an aggregate of 3,500 (21,000 pre-reverse split) shares of
common stock that should have been granted for the months of January 2020 through July 2020. The Franklin 2020 Agreement provides
for the grant to Mr. Franklin of 1,042 (6,250 pre-reverse split) shares of common stock per month. As of October 5, 2020,
the 46,417 (278,500 pre-reverse split) shares that were granted on July 29, 2020 have been issued. Such shares were fully vested
and earned as of the issuance thereof.
Executive
Employment Agreements
On
December 31, 2018, the Company entered into an employment agreement (the “Kaplan 2018 Agreement”) with Jed Kaplan,
pursuant to which the parties agreed that he will serve as the Co-Chief Executive Officer of the Company until March 31, 2019,
at which point he automatically became the sole Chief Executive Officer of the Company. Under the terms of the Kaplan 2018 Agreement,
Mr. Kaplan did not receive a salary or other monetary compensation and in lieu thereof he will receive an equity grant of 1,667
(10,000 pre-reverse split) shares of Common Stock per month, which shares will be fully vested upon grant.
On
July 29, 2020, the Company entered into a new employment agreement (the “Kaplan 2020 Agreement”) with Mr. Kaplan.
Such employment agreement replaced the Kaplan 2018 Agreement. As a result, the Kaplan 2018 Agreement was terminated and is of
no further force or effect. Pursuant to the terms of the Kaplan 2020 Agreement, the Company agreed to pay Mr. Kaplan a monthly
base salary of $5,000; provided, however, that the parties agreed that such base salary will be deferred and will accumulate until
the Company has sufficient cash available to make such payments, to be reasonably determined by the Board of Directors and Mr.
Kaplan, at which time all accrued and unpaid base salary will be paid. In addition, Mr. Kaplan will receive an equity grant of
2,500 (15,000 pre-reverse split) shares of common stock per month, which shares will be fully vested upon grant. Mr. Kaplan will
also be eligible to receive a quarterly bonus in the form of cash or an equity grant of shares and will be entitled to participate
in the Company’s employee benefit plans. In addition, if, during the term of the Kaplan 2020 Agreement, the Company’s
shares are approved for listing on a U.S. national securities exchange, the Company will pay Mr. Kaplan a $50,000 cash bonus,
to be paid upon such listing begin effective.
The
term of the Kaplan 2020 Agreement is for an initial one-year term, which shall automatically renew for successive one-year terms
unless either party provides 60 days’ advance written notice of its intention not to renew the Kaplan 2020 Agreement at
the conclusion of the then applicable term. The term of the Kaplan 2020 Agreement may be terminated by the Company with or without
cause or by Mr. Kaplan with or without good reason, as such terms are defined therein.
On
December 31, 2018, the Company also entered into an employment agreement (the “Franklin 2018 Agreement”) with Roman
Franklin, pursuant to which the parties agreed that he will serve as the President of the Company. Pursuant to the terms of the
Franklin 2018 Agreement, the Company agreed to that Mr. Franklin will receive (i) a monthly base salary of $8,333.33 and (ii)
an equity grant of 500 (3,000 pre-reverse split) shares of Common Stock per month, which shares will be fully vested upon grant.
On
July 29, 2020, the Company entered into a new employment agreement (the “Franklin 2020 Agreement”) with Mr. Franklin.
Such employment agreement replaced the Franklin 2018 Agreement. As a result, the Franklin 2018 Agreement was terminated and is
of no further force or effect. Pursuant to the terms of the Franklin 2020 Agreement, the Company agreed to pay Mr. Franklin a
monthly base salary of $12,500; provided, however, that the parties agreed that such base salary will be deferred and will accumulate
until the Company has sufficient cash available to make such payments, to be reasonably determined by the Board of Directors and
Mr. Franklin, at which time all accrued and unpaid base salary will be paid. In addition, Mr. Franklin will receive an equity
grant of 6,250 shares of common stock per month, which shares will be fully vested upon grant. Mr. Franklin will also be eligible
to receive a quarterly bonus in the form of cash or an equity grant of shares and will be entitled to participate in the Company’s
employee benefit plans. In addition, if, during the term of the Franklin 2020 Agreement, the Company’s shares are approved
for listing on a U.S. national securities exchange, the Company will pay Mr. Franklin a $50,000 cash bonus, to be paid upon such
listing begin effective.
Each
of the Kaplan 2020 Agreement and the Franklin 2020 Agreement contains customary non-competition and non-solicitation covenants
for a period of one year after the termination of the executive’s employment.
2020
Omnibus Incentive Plan
The
board and shareholders of the Company approved of the Simplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the “2020
Plan”) on April 22, 2020 and June 23, 2020, respectively. We believe that the 2020 Plan serves as an essential element of
our compensation program and is critical to our ability to attract and retain the highly qualified employees essential for the
execution of our business strategy. We believe the 2020 Plan will (i) attract and retain key personnel, and (ii) provide a means
whereby directors, officers, employees, consultants, and advisors of the Company and its subsidiaries can acquire and maintain
an equity interest in the Company, or be paid incentive compensation, including incentive compensation measure by reference to
the value of the Company’s common stock, thereby strengthening their commitment to the welfare of the Company and its subsidiaries
and aligning their interests with those of the Company’s stockholders. The 2020 Plan provides for various stock-based incentive
awards, including incentive and nonqualified stock options, stock appreciation rights (“SARs”), restricted stock and
restricted stock units (“RSUs”), and other equity-based or cash-based awards.
2020
Plan Highlights
Highlights
of the 2020 Plan are as follows:
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The
Compensation Committee, which is comprised solely of independent directors, administers the 2020 Plan.
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The
total number of shares of common stock authorized for issuance under the 2020 Plan is 1,000,000 shares, or approximately 11.7%
of the common stock outstanding at May 20, 2020.
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No
non-employee director may be granted awards under the 2020 Plan during any calendar year if such awards, taken together with
any cash fees paid to such non-employee director would exceed a total value of $250,000 (calculated in accordance with the
terms of the 2020 Plan).
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The
exercise price of options and SARs may not be less than the fair market value of the common stock on the date of grant.
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In
addition to other vesting requirements, the Compensation Committee may condition the vesting of awards on the achievement
of specific performance targets.
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Material
Features of the 2020 Plan
Term
The
2020 Plan was effective June 23, 2020. The 2020 Plan will terminate on June 23, 2030, unless the Board terminates it earlier.
Purpose
The
purpose of the 2020 Plan is to provide a means through with the Company and its subsidiaries may attract and retain key personnel,
and to provide a means whereby directors, officer, employees, consultants, and advisors of the Company and its subsidiaries can
acquire and maintain an equity interest in the Company, or be paid incentive compensation, thereby strengthening their commitment
to the welfare of the Company and its subsidiaries and aligning their interests with those of the Company’s stockholders.
Administration
Pursuant
to the terms of the 2020 Plan, a committee of the Board or any properly delegated subcommittee, or, if no such committee or subcommittee
thereof exists, the Board, shall administer the 2020 Plan. The Compensation Committee, which is comprised entirely of independent
directors, administers the 2020 Plan. The Compensation Committee will have the sole and plenary authority to (i) designate participants;
(ii) determine the type or types of awards; (iii) determine the number of shares to be covered by, or with respect to which payments,
rights, or other matters are to be calculated in connection with, awards; (iv) determine the terms and conditions of any award;
(v) determine whether, to what extent, and under what circumstances awards may be settled in, or exercised for, cash, shares of
Company common stock, other securities, other awards, or other property, or canceled, forfeited, or suspended and the method or
methods by which awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent,
and under what circumstances the delivery of cash, shares of Company common stock, other securities, other awards, or other property
and other amounts payable with respect to an award shall be deferred either automatically or at the election of the participant
or of the Compensation Committee; (vii) interpret, administer, reconcile any inconsistency in, correct any defect in, and/or supply
any omission in the 2020 Plan and any instrument or agreement relating to, or award granted under, the 2020 Plan; (viii) establish,
amend, suspend, or waive any rules and regulations and appoint such agents as the Compensation Committee shall deem appropriate
for the proper administration of the 2020 Plan; (ix) adopt sub-plans; and (x) make any other determination and take any other
action that the Compensation Committee deems necessary or desirable for the administration of the 2020 Plan.
The
Compensation Committee may delegate its authority to administer the 2020 Plan as permitted by law, except for award grants to
non-employee directors.
The
Compensation Committee will have the discretion to select particular performance targets in connection with awards under the 2020
Plan. Under the 2020 Plan, performance targets are specific levels of performance of the Company (and/or subsidiaries, divisions
or operational and/or business units, product lines, brands, business segments, administrative departments, or any combination
of the foregoing), which may be determined in accordance with GAAP or on a non-GAAP basis on the specified measures, including,
but not limited to:
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debt
ratings;
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share
price;
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debt
to capital ratio;
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total
stockholder return;
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generation
of cash;
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acquisition
or disposition of assets;
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issuance
of new debt;
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acquisition
or disposition of companies, entities or businesses;
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establishment
of new credit facilities;
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creation
of new performance and compensation criteria for key personnel;
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retirement
of debt;
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recruiting
and retaining key personnel;
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return
measures (including, but not limited to, return on assets, return on capital, return on equity);
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customer
satisfaction;
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attraction
of new capital;
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employee
morale;
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cash
flow;
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hiring
of strategic personnel;
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earnings
per share;
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development
and implementation of Company policies, strategies and initiatives;
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net
income;
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creation
of new joint ventures;
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pre-tax
income;
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increasing
the Company’s public visibility and corporate reputation;
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pre-tax
pre-bonus income;
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development
of corporate brand name;
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operating
income;
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overhead
cost reductions; or
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gross
revenue;
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any
combination of or variations on the foregoing.
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net
revenue;
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net
margin;
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pre-tax
margin;
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Eligibility
Employees,
directors and independent contractors (except those performing services in connection with the offer or sale of the Company’s
securities in a capital raising transaction, or promoting or maintaining a market for the Company’s securities) of the Company
or its subsidiaries will be eligible to receive awards under the 2020 Plan.
Maximum
Shares Available
Awards
granted under the 2020 Plan are subject to the following limitations: (i) no more than 166,667 (1,000,000 pre-reverse split) shares
of common stock (the “Absolute Share Limit”) will be available for awards under the 2020 Plan; (ii) no more than the
number of shares of common stock equal to the Absolute Share Limit may be issued in the aggregate pursuant to the exercise of
incentive stock options granted under the 2020 Plan; and (iii) the maximum number of shares of common stock subject to awards
granted during a single calendar year to any non-employee director, taken together with any cash fees paid to such non-employee
director during such calendar year, shall not exceed a total value of $250,000 (calculating the value of any such awards based
on the grant date fair value of such awards for financial reporting purposes).
When
(i) an option or SAR is granted under the 2020 Plan, the maximum number of shares subject to the option or SAR will be counted
against the Absolute Share Limit as one share for every share subject to such option or SAR, regardless of the actual number of
shares (if any) used to settle such option or SAR upon exercise; and (ii) an award other than an option or SAR is granted under
the 2020 Plan, the maximum number of shares subject to the award will be counted against the Absolute Share Limit as two shares
for every share subject to such award, regardless of the actual number of shares (if any) used to settle such award. The issuance
of shares or the payment of cash upon the exercise of an award or in consideration of the cancellation or termination of an award
shall reduce the total number of shares available under the 2020 Plan, as applicable. If shares are not issued or are withheld
from payment of an award to satisfy tax obligations with respect to the award, such shares will not be added back to the Absolute
Share Limit, but rather will count against the Absolute Share Limit.
To
the extent that an award granted under the 2020 Plan or a prior plan award expires or is canceled, forfeited or terminated, in
whole or in part without issuance to the holder thereof of shares of common stock to which the award or prior plan award related
or cash or other property in lieu thereof, the unissued shares of common stock will again be available for grant under the 2020
Plan; provided that, in any such case, the number of shares again available for grant under the 2020 Plan shall be the number
of shares previously counted against the Absolute Share Limit (or, in the case of prior plan award, the number of shares that
would have been counted against the Absolute Share Limit if such prior plan award had been granted under this 2020 Plan) with
respect to such unissued shares of common stock to which such award or prior plan award related, as determined in accordance with
the terms of the 2020 Plan.
Awards
may, in the sole discretion of the Compensation Committee, be granted under the 2020 Plan in assumption of, or in substitution
for, outstanding awards previously granted by an entity directly or indirectly acquired by the Company or with which the Company
combines (“Substitute Awards”). Substitute Awards will not be counted against the Absolute Share Limit; provided,
that Substitute Awards issued in connection with the assumption of, or in substitution for, outstanding options intended to qualify
as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
“Code”) will be counted against the aggregate number of shares of common stock available for awards of incentive stock
options under the 2020 Plan. Subject to applicable stock exchange requirements, available shares of common stock under a stockholder-approved
plan of an entity directly or indirectly acquired by the Company or with which the Company combines (as appropriately adjusted
to reflect the acquisition or combination transaction) may be used for awards under the 2020 Plan and will not reduce the number
of shares of common stock available for issuance under the 2020 Plan.
Adjustments
In
the event of a merger, consolidation, reorganization, recapitalization, reorganization, stock split or dividend, or similar event
affecting the common stock, the number (including limits on shares of common stock granted) and kind of shares granted under the
2020 Plan, the Compensation Committee will make such proportionate substitution or adjustment, if any, as it deems equitable,
to any or all of the Absolute Share Limit, the number of shares of common stock or other securities of the Company that may be
issued in respect of awards or with respect to which awards may be granted and the terms of any outstanding award.
Restricted
Stock
The
Compensation Committee will be authorized to award restricted stock under the 2020 Plan. Awards of restricted stock will be subject
to the terms and conditions established by the Compensation Committee. Restricted stock is common stock that is subject to such
restrictions as may be determined by the Compensation Committee for a specified period.
RSU
Awards
The
Compensation Committee will be authorized to award RSUs in lieu of or in addition to any restricted stock awards. RSUs will be
subject to the terms and conditions established by the Compensation Committee. Each RSU will have an initial value that is at
least equal to the fair market value of a share of Company common stock on the date of grant. RSUs may be paid at such time as
the Compensation Committee may determine in its discretion, and payments may be made in a lump sum or in installments, in cash,
shares of common stock, or a combination thereof, as determined by the Compensation Committee in its discretion.
Options
The
Compensation Committee will be authorized to grant options to purchase shares of common stock that are either “qualified,”
meaning they are intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)
for incentive stock options, or “nonqualified,” meaning they are not intended to satisfy the requirements of Section
422 of the Code. Options granted under the 2020 Plan will be subject to the terms and conditions established by the Compensation
Committee. Under the terms of the 2020 Plan, the exercise price of the options will not be less than the fair market value of
our common stock at the time of grant. Options granted under the 2020 Plan will be subject to such terms, including the exercise
price and the conditions and timing of exercise, as may be determined by the Compensation Committee and specified in the applicable
award agreement. The maximum term of an option granted under the 2020 Plan will be 10 years from the date of grant (or five years
in the case of a qualified option granted to a 10% stockholder). Payment in respect of the exercise of an option may be made in
cash or by check, by surrender of unrestricted shares (at their fair market value on the date of exercise), or through a “net
exercise,” or the Compensation Committee may, in its discretion and to the extent permitted by law, allow such payment to
be made through a broker-assisted cashless exercise mechanism or by such other method as the Compensation Committee may determine
to be appropriate.
Stock
Appreciation Rights
The
Compensation Committee will be authorized to award SARs under the 2020 Plan. SARs will be subject to the terms and conditions
established by the Compensation Committee and reflected in the award agreement. A SAR is a contractual right that allows a participant
to receive, in the form of either cash, shares or any combination of cash and shares, the appreciation, if any, in the value of
a share over a certain period of time. An option granted under the 2020 Plan may include SARs, and SARs may also be awarded to
a participant independent of the grant of an option. SARs granted in connection with an option shall be subject to terms similar
to the option corresponding to such SARs.
Other
Stock-Based Awards
The
Compensation Committee will be authorized to award other stock-based awards having terms and conditions as determined by the Compensation
Committee. These awards may be granted either alone or in tandem with other awards.
Qualified
Performance-Based Awards
Restricted
stock and RSUs granted to officers and employees of the Company may depend on the degree of achievement of one or more performance
goals relative to a pre-established targeted level or levels using one or more identified performance targets. The applicable
performance period may not be less than three months nor more than 10 years.
Dividends
and Voting Rights
Participants
awarded stock options and SARs will not receive dividends or dividend equivalents or have any voting rights with respect to shares
of common stock underlying these awards prior to the issuance of any such shares. Participants that hold unearned awards subject
to performance vesting conditions (other than or in additional to the passage of time) will not receive dividends or dividend
equivalents or have any voting rights with respect to shares of common stock underlying these awards prior to the issuance of
any such shares; provided, however, that dividends and dividend equivalents may be accumulated in respect of unearned awards
and paid within 30 days after such awards are earned and become payable or distributable.
Transferability
Awards
granted under the 2020 Plan generally will be transferable only by will or the applicable laws of descent and distribution. In
certain limited circumstances, the Compensation Committee may authorize stock options, other than incentive stock options, to
be transferred to family members or trusts controlled by family members of the participant. Restricted stock may not be sold,
transferred, assigned, pledged or otherwise encumbered or disposed of until the applicable restrictions lapse.
Change
in Control
In
the event of a Change in Control (as defined in the 2020 Plan), options become immediately exercisable in full. In addition, in
such event the Compensation Committee may accelerate the termination date of the option to a date no earlier than 30 days after
notice of such acceleration is given to the participant. Upon the giving of any such acceleration notice, the option shall become
immediately exercisable in full.
A
participant’s right to SARs under an SAR agreement immediately vest as to 100% of the total number of shares covered by
the grant (i) upon termination of the grantee’s employment on account of the grantee’s death or permanent disability;
or (ii) upon the occurrence of a Change in Control.
With
respect to restricted stock and RSUs, in the event that the grantee’s status as an employee is terminated following a Change
in Control, then all unvested shares of restricted stock and RSUs will immediately vest.
Clawback
All
awards under the 2020 Plan are subject to reduction, cancellation, forfeiture or recoupment to the extent necessary to comply
with (i) any clawback, forfeiture or other similar policy adopted by the Board or the Compensation Committee and as in effect
from time to time; and (ii) applicable law.
Amendment
and Termination
The
Board may terminate or amend the 2020 Plan or any portion thereof at any time; provided, however, that the Board may not,
without stockholder approval, amend the 2020 Plan if:
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Such
approval is necessary to comply with any regulatory requirement applicable to the 2020 Plan;
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It
would materially increase the number of securities which may be issued under the 2020 Plan (except for increases expressly
provided for in the 2020 Plan; or
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It
would materially modify the requirements for participation in the 2020 Plan.
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In
addition, any such amendment that would materially and adversely affect an award holder’s rights with respect to a previously
granted and outstanding award will not to that extent be effective without the consent of the affected holder of such award.
The
Compensation Committee may terminate or amend any award agreement, to the extent consistent with the terms of the 2020 Plan and
any applicable award agreement and so long as such termination or amendment would not materially and adversely affect an award
holder’s rights with respect to a previously granted and outstanding award (unless the affected holder consents thereto);
provided, however that the Compensation Committee may not, without stockholder approval, amend or terminate an award or
award agreement to:
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Reduce
the exercise price of any option or the strike price of any SAR,
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To
cancel any outstanding option or SAR and replace it with a new option or SAR (with a lower exercise price or strike price,
as the case may be) or other award or cash payment that is greater than the intrinsic value (if any) of the canceled option
or SAR; and
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Take
any other action which is considered a “repricing” for purposes of the stockholder approval rules of any securities
exchange or inter-dealer quotation system on which the securities of the Company are listed or quoted.
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U.S.
Federal Income Tax Consequences
The
following is a general summary of the material U.S. federal income tax consequences to 2020 Plan participants and the Company
of the grant, vesting and exercise of awards under the 2020 Plan and the disposition of shares acquired pursuant to the exercise
of such awards and is based upon an interpretation of the current federal income tax laws and regulations and may be inapplicable
if such laws and regulations are changed. This summary is not intended to be a complete statement of applicable law or constitute
tax advice, nor does it address foreign, state, local and payroll tax considerations. Moreover, the U.S. federal income tax consequences
to any particular participant may differ from those described herein by reason of, among other things, the particular circumstances
of such participant. To the extent that any awards under the 2020 Plan are subject to Section 409A of the Code (“Section
409A”), the following discussion assumes that such awards will be designed to conform to the requirements of Section 409A
and the regulations promulgated thereunder (or an exception thereto). The 2020 Plan is not subject to the protective provisions
of the Employee Retirement Income Security Act of 1974, as amended, and is not qualified under Section 401(a) of the Code.
Incentive
Stock Options. Options issued under the 2020 Plan and designated as incentive stock options are intended to qualify as such
under Section 422 of the Code. Under the provisions of Section 422 of the Code and the related regulations, holders of incentive
stock options will generally incur no federal income tax liability at the time of grant or upon exercise of those options, and
the Company will not be entitled to a deduction at the time of the grant or exercise of the option. However, the difference between
the value of the common stock received on the exercise date and the exercise price paid will be an “item of tax preference,”
which may give rise to “alternative minimum tax” liability to the holder for the taxable year in which the exercise
occurs. The taxation of gain or loss upon the sale of the common stock acquired upon exercise of an incentive stock option depends,
in part, on whether the holding period of the shares of our common stock acquired through the exercise of an incentive stock option
is at least (i) two years from the date of grant of the option and (ii) one year from the date the option was exercised. If these
holding period requirements are satisfied, any gain or loss realized on a subsequent disposition of the shares will constitute
long-term capital gain or loss, as the case may be. Assuming both holding periods are satisfied, no deduction will be allowed
to us for federal income tax purposes in connection with the grant or exercise of the incentive stock option. If these holding
periods requirements are not met, then, upon such “disqualifying disposition” of the shares, the participant will
generally realize compensation, taxable as ordinary income, at the time of such disposition in an amount equal to the difference
between the fair market value of the share on the date of exercise over the exercise price, limited to the gain on the sale, and
that amount will generally be deductible by us for federal income tax purposes, subject to the possible limitations on deductibility
under Section 162(m)of the Code for compensation paid to certain executives designated thereunder. Finally, if an otherwise qualified
incentive stock option becomes first exercisable in any one year for shares having an aggregate value in excess of $100,000 (based
on the grant date value), the portion of the incentive stock option in respect of those excess shares will be treated as a non-qualified
stock option for federal income tax purposes.
Non-qualified
Stock Options. No income will generally be realized by a participant upon grant of a non-qualified stock option. Upon the
exercise of a non-qualified stock option, the participant will recognize ordinary compensation income in an amount equal to the
excess, if any, of the fair market value of the underlying exercised shares over the option exercise price paid at the time of
exercise. We will be able to deduct this same amount for U.S. federal income tax purposes, but such deduction may be limited under
Section 162(m) of the Code for compensation paid to certain executives designated thereunder. Upon a subsequent disposition of
the shares acquired under a non-qualified stock option, the participant will realize short-term or long-term capital gain (or
loss) depending on the holding period. The capital gain (or loss) will be short-term if the shares are disposed of within one
year after the non-qualified stock option is exercised, and long-term if shares were held more than 12 months as of the sale date.
Restricted
Stock. A participant will normally not be required to recognize income for federal income tax purposes upon the grant of an
award of restricted stock, nor is the Company entitled to any deduction, to the extent that the shares awarded have not vested
(i.e., are no longer subject to a substantial risk of forfeiture). On the date an award of restricted stock is no longer subject
to a substantial risk of forfeiture, the participant will compensation taxable as ordinary income in an amount equal to the difference
between the fair market value of the vested shares on that date and the amount the participant paid for such shares, if any, unless
the participant made an election under Section 83(b) of the Code to be taxed at the time of grant. The participant may, however,
make an election under Section 83(b) of the Code, within 30 days following the grant of the restricted stock award, to be taxed
at the time of the grant of the award based on the difference between the fair market value of the shares on the date of grant
and the amount the participant paid for such shares, if any. If the shares subject to such election are subsequently forfeited,
the participant will not be entitled to any deduction, refund or loss for tax purposes with respect to the forfeited shares. We
will be able to deduct, at the same time as it is recognized by the participant, the amount of taxable compensation to the participant
for U.S. federal income tax purposes, but such deduction may be limited under Section 162(m) of the Code for compensation paid
to certain executives designated thereunder. Upon the sale of the vested shares, the participant will realize short-term or long-term
capital gain or loss depending on the holding period. The holding period generally begins when the restriction period expires.
If the recipient timely made a Section 83(b) election, the holding period commences on the date of the grant.
Deferred
Stock Units and Restricted Stock Units. A participant will not be subject to federal income tax upon the grant of a deferred
stock unit award or a restricted stock unit award, and the Company is not entitled to a deduction at the time of grant. Rather,
upon the delivery of shares or cash pursuant to a deferred stock unit award or a restricted stock unit award, the participant
will generally have compensation taxable at ordinary income rates in an amount equal to the fair market value of the number of
shares (or the amount of cash) actually received with respect to the settlement of the award of such units. We will generally
be able to deduct the amount of the ordinary income realized by the participant for U.S. federal income tax purposes, but the
deduction may be limited under Section 162(m) of the Code for compensation paid to certain executives designated thereunder. If
the participant receives shares upon settlement then, upon disposition of such shares, appreciation or depreciation after the
settlement date is treated as either short-term or long-term capital gain or loss, depending on how long the shares have been
held.
SARs.
SARs are treated very similarly to non-qualified options for tax purposes. No income will normally be realized by a participant
upon grant of a SAR. Upon the exercise of a SAR, the participant will recognize compensation taxable as ordinary income in an
amount equal to either: (i) the cash received upon exercise; or (ii) if shares are received upon the exercise of the SAR, the
fair market value of the shares received in respect of the SAR. We will be able to deduct this same amount for U.S. federal income
tax purposes, but such deduction may be limited under Section 162(m) of the Code for compensation paid to certain executives designated
thereunder.
Performance
Awards. A participant generally will not recognize income upon the grant of a performance award. Upon payment of the performance
award, the participant will recognize ordinary income in an amount equal to the cash received or, if the performance award is
payable in shares, the fair market value of the shares received. When the participant recognizes ordinary income upon payment
of a performance award, the Company generally will be entitled to a tax deduction in the same amount.
Other
Stock-Based Awards. A participant will generally have compensation taxable as ordinary income for federal income tax purposes
in an amount equal to the difference between the fair market value of the shares on the date the award is settled (whether in
shares or cash, or both) over the amount the participant paid for such shares, if any. We will generally be able to deduct, at
the same time as it is recognized by the participant, the amount of taxable compensation to the participant for U.S. federal income
tax purposes, but such deduction may be limited under Section 162(m) for compensation paid to certain executives designated thereunder.
Consequences
of Change of Control. If a change of control of the Company causes awards under the 2020 Plan to accelerate vesting or is
deemed to result in the attainment of performance goals, certain participants could, in some cases, be considered to have received
“excess parachute payments,” which could subject certain participants to a 20% excise tax on the excess parachute
payments and result in a disallowance of the Company’s deductions under Section 280G of the Code.
Section
409A. Section 409A applies to compensation that individuals earn in one year but that is not paid until a future year. This
is referred to as non-qualified deferred compensation. Section 409A, however, does not apply to qualified plans (such as a Section
401(k) plan) and certain welfare benefits. If deferred compensation covered by Section 409A meets the requirements of Section
409A, then Section 409A has no effect on the individual’s taxes. The compensation is taxed in the same manner as it would
be taxed if it were not covered by Section 409A. If a deferred compensation arrangement does not meet the requirements of Section
409A, the compensation is subject to accelerated taxation in the year in which such compensation is no longer subject to a substantial
risk of forfeiture and certain additional taxes, interest and penalties, including a 20% additional income tax. Awards of stock
options, SARs, restricted stock units and performance awards under the 2020 Plan may, in some cases, result in the deferral of
compensation that is subject to the requirements of Section 409A. Awards under the 2020 Plan are intended to comply with Section
409A, the regulations issued thereunder or an exception thereto. Notwithstanding, Section 409A may impose upon a participant certain
taxes or interest charges for which the participant is responsible. Section 409A does not impose any penalties on the Company
and does limit the Company’s deduction with respect to compensation paid to a participant.
Section
162(m). The Company generally may deduct any compensation or ordinary income recognized by the recipient of an award under
the 2020 Plan when recognized, subject to the limits of Section 162(m) of the Code (“Section 162(m)”). Prior to 2018,
Section 162(m) imposed a $1 million limit on the amount a public company may deduct for compensation paid to a Company’s
Chief Executive Officer or any of the Company’s three other most highly compensated executive officers (other than the Chief
Financial Officer) who were employed as of the end of the year. This limitation did not apply to compensation that met Code requirements
for “qualified performance-based compensation.” The performance-based compensation exemption, the last day of the
year determination date, and the exemption of the Chief Financial Officer from Code Section 162(m)’s deduction limit have
all been repealed under the Tax Cuts and Jobs Act of 2017 (“Tax Reform”), effective for taxable years beginning after
December 31, 2017, such that awards paid under the 2020 Plan to our covered executive officers may not be deductible for such
taxable years due to the application of the $1 million deduction limitation. However, under Tax Reform transition relief, compensation
provided under a written binding contract in effect on November 2, 2017 that is not materially modified after that date continues
to be subject to the performance-based compensation exception. As in prior years, while deductibility of executive compensation
for federal income tax purposes is among the factors the Compensation Committee considers when structuring our executive compensation,
it is not the sole or primary factor considered. Our Board and the Compensation Committee retain the flexibility to authorize
compensation that may not be deductible if they believe it is in our best interests.
Tax
Withholding. The Company and its affiliates have the right to deduct or withhold, or require a participant to remit to the
Company and its affiliates, an amount sufficient to satisfy federal, state and local taxes (including employment taxes) required
by law to be withheld with respect to any exercise, lapse of restriction or other taxable event arising with respect to awards
under the 2020 Plan.
Equity
Compensation Plan Information
The
table below sets forth information as of May 31, 2020.
Plan Category
|
|
Number
of securities to be
issued upon exercise of outstanding
options, warrants and rights
|
|
|
Weighted-average
exercise
price of outstanding options,
warrants and rights
|
|
|
Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in
column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
—
|
|
|
$
|
—
|
|
|
|
250,000
|
(1)
|
Equity compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
—
|
|
|
$
|
—
|
|
|
|
250,000
|
(1)
|
(1)
Post-reverse split shares (1,500,000 pre-reverse split shares). This represents (i) 83,334 (500,000 pre-reverse split)
shares of common stock issuable pursuant to the 2018 Equity Incentive Plan (the “2018 Plan”), and (ii) 166,667 (1,000,000
pre-reverse split) shares of common stock issuable pursuant to the Simplicity Esports and Gaming Company 2020 Omnibus Incentive
Plan (the “2020 Plan”).
The
Company’s stockholders approved the 2018 Plan on October 4, 2018. Under the 2018 Plan, 83,334 (500,000 pre-reverse
split) shares of common stock are authorized for issuance to employees, officers, directors, consultants. The 2018 Plan authorizes
the grant of nonqualified stock options and incentive stock options, restricted stock awards, restricted stock units, stock appreciation
rights, other stock bonus awards, and performance compensation awards. There were 83,334 (500,000 pre-reverse split) shares
available for award as of May 31, 2020 under the 2018 Plan. The Company does not intend to make any grants under the 2018 Plan.
The
Board of Directors and stockholders of the Company approved the 2020 Plan on April 22, 2020 and June 23, 2020, respectively. Under
the 2020 Plan, 166,667 (1,000,000 pre-reverse split) shares of common stock are authorized for issuance to employees, directors
and independent contractors (except those performing services in connection with the offer or sale of the Company’s securities
in a capital raising transaction, or promoting or maintaining a market for the Company’s securities) of the Company or its
subsidiaries. The 2020 Plan authorizes equity-based and cash-based incentives for participants. There were 166,667 (1,000,000
pre-reverse split) shares available for award as of May 31, 2020 under the 2020 Plan.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth the number of shares of and percent of the Company’s common stock beneficially owned as of October
5, 2020 (pre-reverse split and post-reverse split), by all directors, our named executive officers, our directors and executive
officers as a group, and persons or groups known by us to own beneficially 5% or more of our common stock.
Except
as noted below, the business address of each of the beneficial owners listed below is c/o Simplicity Esports and Gaming Company,
7000 W. Palmetto Park Rd., Suite 505, Boca Raton, FL 33433.
Name of Beneficial Owner
|
|
Pre-Reverse
Split Amount and Nature of Beneficial Ownership
|
|
|
Post-Reverse
Split Amount and Nature of Beneficial Ownership
|
|
|
Percentage
of Class
(1)
|
|
Directors and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
Jed Kaplan (2)
|
|
|
1,566,614
|
|
|
|
261,103
|
|
|
|
15.7
|
%
|
Roman Franklin (3)
|
|
|
541,267
|
|
|
|
90,212
|
|
|
|
5.5
|
%
|
Donald R. Caldwell (4)
|
|
|
137,000
|
|
|
|
22,834
|
|
|
|
1.4
|
%
|
Max Hooper (5)
|
|
|
49,500
|
|
|
|
8,250
|
|
|
|
* %
|
|
Frank Leavy (6)
|
|
|
47,625
|
|
|
|
7,938
|
|
|
|
* %
|
|
Edward Leonard Jaroski (7)
|
|
|
148,500
|
|
|
|
24,750
|
|
|
|
1.5
|
%
|
William H. Herrmann, Jr. (8)
|
|
|
72,309
|
|
|
|
12,052
|
|
|
|
* %
|
|
All directors and officers as a group (7 persons) (9)
|
|
|
2,562,815
|
|
|
|
427,136
|
|
|
|
25.4
|
%
|
Principal Shareholders (more than 5%):
|
|
|
|
|
|
|
|
|
|
|
|
|
Polar Asset Management Partners Inc. (10)
|
|
|
759,919
|
|
|
|
126,654
|
|
|
|
7.3
|
%
|
Timothy P. Schenden – SEP IRA (11)
|
|
|
522,422
|
|
|
|
87,071
|
|
|
|
5.3
|
%
|
*
|
Less
than 1%.
|
|
|
(1)
|
The
percentages in the table have been calculated on the basis of treating as outstanding
for a particular person, all shares of our capital stock outstanding on October 5,
2020. On October 5, 2020, there were 1,654,865 (9,929,190 pre-reverse split)
shares of our common stock outstanding. To calculate a stockholder’s percentage
of beneficial ownership, we include in the numerator and denominator the common stock
outstanding and all shares of our common stock issuable to that person in the event of
the exercise of outstanding warrants and other derivative securities owned by that person
which are exercisable within 60 days of October 5, 2020. Common stock warrants
and derivative securities held by other stockholders are disregarded in this calculation.
Therefore, the denominator used in calculating beneficial ownership among our stockholders
may differ. Unless we have indicated otherwise, each person named in the table has sole
voting power and sole investment power for the shares listed opposite such person’s
name.
|
|
|
(2)
|
Includes
3,253 (19,517 pre-reverse split) shares of Common Stock owned indirectly through Mr. Kaplan’s wife, Jamie Kaplan,
and 8,334 (50,000 pre-reverse split) shares of Common Stock issuable upon exercise of 8,334 (50,000 pre-reverse split)
warrants with an exercise price of $24.00 ($4.00 pre-reverse split) which expire on February 24, 2024 that have vested or
will vest within 60 days of October 5, 2020.
|
(3)
|
Includes 8,500 (51,000 pre-reverse split) shares of Common
Stock owned indirectly through Mr. Franklin’s wife, Alyssia Franklin.
|
|
|
(4)
|
Includes 3,334 (20,000 pre-reverse split) shares of our
Common Stock issuable upon exercise of 3,334 (20,000 pre-reverse split) warrants with an exercise price of $69.00 ($11.50
pre-reverse split) which expire on May 22, 2024 that have vested or will vest within 60 days of October 5, 2020.
|
|
|
(5)
|
Includes 2,417 (14,500 pre-reverse split) shares of Common Stock
owned directly by Merging Traffic, Inc., 1,667 (10,000 pre-reverse split) shares of our Common Stock issuable upon exercise
of 1,667 (10,000 pre-reverse split) warrants owned directly by Merging Traffic, Inc. with an exercise price of $69.00 ($11.50
pre-reverse split) which expire on May 22, 2024 that have vested or will vest within 60 days of October 5, 2020, and
4,167 (25,000 pre-reverse split) shares of our Common Stock owned directly by Mr. Hooper. Mr. Hooper is Managing Director
of Merging Traffic, Inc.
|
|
|
(6)
|
Includes 1,250 (7,500 pre-reverse split) shares of our Common
Stock issuable upon exercise of 1,250 (7,500 pre-reverse split) warrants with an exercise price of $69.00 ($11.50 pre-reverse
split) which expire on May 22, 2024 that have vested or will vest within 60 days of October 5, 2020.
|
|
|
(7)
|
Includes 10,000 (60,000 pre-reverse split) shares of our Common
Stock issuable upon exercise of 10,000 (60,000 pre-reverse split) warrants with an exercise price of $24.00 ($4.00 pre-reverse
split) which expire on February 24, 2024 that have vested or will vest within 60 days of October 5, 2020.
|
|
|
(8)
|
Includes 1,667 (10,000 pre-reverse split) shares of our Common
Stock issuable upon exercise of 1,667 (10,000 pre-reverse split) warrants with an exercise price of $69.00 ($11.50 pre-reverse
split) which expire on May 22, 2024 that have vested or will vest within 60 days of October 5, 2020.
|
|
|
(9)
|
Includes Jed Kaplan, Roman Franklin, Donald R. Caldwell, Max Hooper, Frank Leavy, Edward Leonard Jaroski, and William H. Herrmann, Jr.
|
|
|
(10)
|
Polar Asset Management Partners Inc. (“Polar”) serves
as investment advisor to Polar Multi-Strategy Master Fund (“PMSMF”), Crown Managed Accounts SPC (“CMA”)
and certain managed accounts (together with PMSMF and CMA, the “Polar Vehicles”) and has sole voting and investment
discretion with respect to the securities which are held by the Polar Vehicles. The principal office of the stockholder is
401 Bay Street, Suite 1900, PO Box 19, Toronto, Ontario M5H 2Y4, Canada. The number of shares of Common Stock beneficially
owned by Polar includes (i) 3,368 (20,203 pre-reverse split) shares of Common Stock held by CMA and 47,186 (283,116
pre-reverse split) shares of Common Stock held by Polar (which includes 25,000 (150,000 pre-reverse split) shares of Common
Stock transferred by the Sponsor to the Polar as additional consideration for Polar agreeing to potentially sell shares of
our Common Stock to the Company pursuant to a stock purchase agreement dated November 2, 2018 by and between the Company and
Polar) and (ii) 76,100 (456,600 pre-reverse split) shares of our Common Stock issuable upon exercise of 70,619 (423,712 pre-reverse
split) warrants held by CMA with an exercise price of $69.00 ($11.50 pre-reverse split) which expire on May 22, 2024 that
have vested or will vest within 60 days of July 2, 2020 and 5,482 (32,888 pre-reverse split) warrants held by Polar
with an exercise price of $69.00 ($11.50 pre-reverse split) which expire on May 22, 2024 that have vested or will vest within
60 days of October 5, 2020.
|
|
|
(11)
|
The principal office of the stockholder is 6599 NW 33rd Ave., Boca Raton, Florida 33496-3317
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Our
audit committee must review and approve any related person transaction we propose to enter into. Our audit committee charter details
the policies and procedures relating to transactions that may present actual, potential or perceived conflicts of interest and
may raise questions as to whether such transactions are consistent with the best interest of our company and our stockholders.
A summary of such policies and procedures is set forth below.
Any
potential related party transaction that is brought to the audit committee’s attention will be analyzed by the audit committee,
in consultation with outside counsel or members of management, as appropriate, to determine whether the transaction or relationship
does, in fact, constitute a related party transaction. At its meetings, the audit committee will be provided with the details
of each new, existing or proposed related party transaction, including the terms of the transaction, the business purpose of the
transaction and the benefits to us and to the relevant related party.
In
determining whether to approve a related party transaction, the audit committee must consider, among other factors, the following
factors to the extent relevant:
|
●
|
whether
the terms of the transaction are fair to us and on the same basis as would apply if the transaction did not involve a related
party;
|
|
|
|
|
●
|
whether
there are business reasons for us to enter into the transaction;
|
|
|
|
|
●
|
whether
the transaction would impair the independence of an outside director; and
|
|
|
|
|
●
|
whether
the transaction would present an improper conflict of interest for any director or executive officer.
|
Any
member of the audit committee who has an interest in the transaction under discussion must abstain from any voting regarding the
transaction, but may, if so requested by the chairman of the audit committee, participate in some or all of the audit committee’s
discussions of the transaction. Upon completion of its review of the transaction, the audit committee may determine to permit
or to prohibit the transaction.
Working
Capital Loan
The
Sponsor, I-AM Capital Partners LLC, has loaned us $201,707 in the aggregate, to be used for a portion of the expenses of the IPO
and working capital purposes. The loan is non-interest bearing, unsecured and was due at the earlier of December 31, 2017 or the
closing of the IPO. As of November 30, 2018, $120,089 of the Sponsor’s loan has been repaid. As
of May 31, 2019, the balance of the Sponsor loan was $93,761, including imputed interest of $8,523. In August of 2019, the sponsor
forgave this remaining balance and the Company recorded it as debt forgiveness income.
Cash
Balance
We
maintain our cash balance at a financial services company that Jed Kaplan, our Chief Executive Officer, has a majority ownership
interest in.
Restricted
Stock Awards to Certain Officers and Directors
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, 20,000 (120,000 pre-reverse split) shares of our restricted common stock. Such
shares vested over the succeeding nine months. Also on March 27, 2019, pursuant to a Restricted Stock Award, we granted Roman
Franklin, our President and a member of our board of directors, 6,000 (36,000 pre-reverse split) shares of our restricted common
stock. Such shares vested over the succeeding nine months also.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan
and Franklin initially executed on December 31, 2018 (the “Kaplan 2018 Agreement” and the “Franklin 2018 Agreement”).
The Kaplan 2018 Agreement
provides for the grant to Mr. Kaplan of 1,667 (10,000 pre-reverse split) shares of common stock per month. As of October 5,
2020, such shares have been issued for the months of January through July 2020. The Franklin 2018 Agreement provides for the
grant to Mr. Franklin of 500 (3,000 pre-reverse split) shares of common stock per month. As of October 5, 2020, such shares
have been issued for the months of January through July 2020.
On
September 16, 2019, pursuant to a Restricted Award, we authorized the grant to Jed Kaplan, our Chief Executive Officer and Interim
Chief Financial Officer and a member of our board of directors, of 11,667 (70,000 pre-reverse split) shares of our restricted
Common Stock. As of October 5, 2020, these shares have been issued. These shares were issued in reliance on Section 4(a)(2)
of the Securities Act.
On
September 16, 2019, pursuant to a Restricted Award, we authorized the grant to Roman Franklin, our President and a member of our
board of directors, of 3,500 (21,000 pre-reverse split) shares of our restricted Common Stock. As of October 5, 2020, these
shares have been issued. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
September 16, 2019, pursuant to a Restricted Award, we authorized the grant to Steven Grossman, our Corporate Secretary, of 2,334
(14,000 pre-reverse split) shares of our restricted Common Stock. As of October 5, 2020, these shares have been issued.
These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
July 29, 2020, the Board approved the grant of 55,834 (335,000 pre-reverse split) shares of common stock to Jed Kaplan,
our Chief Executive Officer and Interim Chief Financial Officer and a member of our board of directors. Of these shares, (i) 41,667
(250,000 pre-reverse split) shares of common stock related to services provided by Mr. Kaplan to the Company during the 2020 fiscal
year, (ii) 11,667 (70,000 pre-reverse split) shares of common stock related to grants that should have been, but were not, made
pursuant to the Kaplan 2018 Agreement (as hereinafter defined), and (iii) 2,500 (15,000 pre-reverse split) shares of common stock
related to grants made pursuant to the Kaplan 2020 Agreement (as hereinafter defined). The Kaplan 2018 Agreement provided for
the grant to Mr. Kaplan of 1,667 (10,000 pre-reverse split) shares of common stock per month. For the months of January 2020 through
July 2020, however, such shares had not been granted. Accordingly, the July 29, 2020 grant included an aggregate of (70,000 pre-reverse
split) shares of common stock that should have been granted for the months of January 2020 through July 2020. The Kaplan 2020
Agreement provides for the grant to Mr. Kaplan of 2,500 (15,000 pre-reverse split) shares of common stock per month. As of October
5, 2020, the 55,834 (335,000 pre-reverse split) shares that were granted on July 29, 2020 have been issued. Such shares
were fully vested and earned as of the issuance thereof. These shares were issued in reliance on Section 4(a)(2) of the Securities
Act.
On
July 29, 2020, the Board also approved the grant of 46,417 (278,500 pre-reverse split) shares of common stock to Roman Franklin,
our President and a member of our board of directors. Of these shares, (i) 41,677 (250,000 pre-reverse split) shares of common
stock related to services provided by Mr. Franklin to the Company during the 2020 fiscal year, (ii) 3,500 (21,000 pre-reverse
split) shares of common stock related to grants that should have been, but were not, made pursuant to the Franklin 2018 Agreement
(as hereinafter defined), and (iii) 1,250 (7,500 pre-reverse split) shares of common stock related to grants made pursuant to
the Franklin 2020 Agreement (as hereinafter defined). The Franklin 2018 Agreement provided for the grant to Mr. Franklin of 500
(3,000 pre-reverse split) shares of common stock per month. For the months of January 2020 through July 2020, however, such shares
had not been granted. Accordingly, the July 29, 2020 grant included an aggregate of 3,500 (21,000 pre-reverse split) shares of
common stock that should have been granted for the months of January 2020 through July 2020. The Franklin 2020 Agreement provides
for the grant to Mr. Franklin of 1,042 (6,250 pre-reverse split) shares of common stock per month. As of October 5, 2020,
the 46,417 (278,500 pre-reverse split) shares that were granted on July 29, 2020 have been issued. Such shares were fully vested
and earned as of the issuance thereof. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
July 29, 2020, we authorized the grant of an aggregate of 32,000 (192,000 pre-reverse split) shares of common stock to an employee
and the members of the Board of Directors of the Company. As of October 5, 2020, such shares have been issued. These shares
were issued in reliance on Section 4(a)(2) of the Securities Act
Kaplan Promissory
Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, the Company’s Chief Executive Officer, interim Chief Financial Officer, member of
the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on the first business
day following the 150-day anniversary of the Issue Date.
As
of May 31, 2020, advances under the terms of this note were $64,728. On various dates subsequent to May 31, 2020, Mr. Kaplan funded
$25,272 pursuant to the Kaplan Promissory Note. With the contributions subsequent to May 31, 2020, the principal balances outstanding
and due Mr. Kaplan amounted to $90,000. On June 22, 2020, Mr. Kaplan agreed to forgive the debt of the Kaplan Promissory Note
with a principal balance of $90,000 in exchange for the Company assigning to Mr. Kaplan a 10% equity interest in Simplicity One
Brasil, Ltda, a subsidiary of the Company. See “Description of Business—Recent Developments—Debt Obligations—Kaplan
Promissory Note” for a more complete description of the terms of the note.
Restructuring
the Ownership in Simplicity One Brasil, LTDA
In
June 2020, while Simplicity One Brasil Ltda (“Simplicity One Brasil”) was preparing its initial application for purchasing
a franchise in Campeonato Brasileiro de League of Legends, Simplicity One Brasil become aware that the 10%-ownership interest
of Team One E-Sports Ltda (“Team One E-Sports”) in Simplicity One Brasil was in contravention of Riot Games’
policy that only one League of Legend esports team could be owned by an owner at one time because Team One had already submitted
an application for purchasing a franchise for another League of Legend esports team. Accordingly, Simplicity One Brasil needed
Team One E-Sports to divest itself of its 10%-equity interest in Simplicity One Brasil in order for Simplicity One Brasil to proceed
with its franchise application. Therefore, on June 22, 2020, Mr. Kaplan entered into a Quota Purchase Agreement with Team One
E-Sports, pursuant to which Mr. Kaplan acquired Team One Esports’ 10%-ownership equity interest for $45,000 in cash. In
addition, the Company transferred a 2%-equity interest (an aggregate of 4%) to each of Laila De Braga Cavalcanti Loss and Frederico
Tannure, who live in Brazil and run the operations of Simplicity One Brasil , in order to comply with Riot Games’ policy
requiring local ownership in Brazil in order to apply for a franchise of a league of legends sports team. Furthermore, on June
22, 2020, Mr. Kaplan agreed to forgive the debt of the Kaplan Promissory Note with a principal balance of $90,000 in exchange
for the Company assigning to Mr. Kaplan a 10% equity interest in Simplicity One Brasil. In light of the restructuring of the ownership
interest in Simplicity One Brasil, as of October 5, 2020, the Company, Mr. Kaplan, Ms. Cavalcanti Loss, and Mr. Tannure
own a 76%, 20%, 2% and 2% equity interest in Simplicity One Brasil.
Director
Independence
For
a description of director independence of our board members under Nasdaq Capital Market standards, see “Management—
Board Committees and Director Independence” on page 66 of this prospectus.
DESCRIPTION
OF SECURITIES
The
following description of our capital stock is based upon our third amended and restated certificate of incorporation, as amended,
our bylaws and applicable provisions of law, in each case as currently in effect. This discussion does not purport to be complete
and is qualified in its entirety by reference to our third amended and restated certificate of incorporation, as amended, and
our bylaws, copies of which are filed with the SEC as exhibits to the registration statement of which this prospectus is a part.
Authorized
Capital Stock
On
August 17, 2020, we filed a Certificate of Amendment to increase the authorized shares of common stock from 20,000,000 to 36,000,000.
Accordingly, our authorized capital stock consists of (i) 36,000,000 shares of common stock, par value $0.0001 per share (“Common
Stock”), and (ii) 1,000,000 shares of preferred stock, par value $0.0001 per share (“Preferred Stock”). At October
5, 2020, we had 1,654,865 (9,929,190 pre-reverse split) shares of Common Stock issued and outstanding and no Preferred Stock
issued and outstanding.
As
of October 5, 2020, there were 125 holders of record of our Common Stock.
Common
Stock
Common
stockholders of record are entitled to one vote for each share held on all matters to be voted on by stockholders. Unless specified
in our third amended and restated certificate of incorporation, as amended, or bylaws, or as required by applicable provisions
of the DGCL or applicable stock exchange rules, the affirmative vote of a majority of our shares of Common Stock that are voted
is required to approve any such matter voted on by our stockholders. Our board of directors is divided into two classes, each
of which will generally serve for a term of two years with only one class of directors being elected in each year. There is no
cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted
for the election of directors can elect all of the directors. Our stockholders are entitled to receive ratable dividends when,
as and if declared by the board of directors out of funds legally available therefor.
Preferred
Stock
Our
third amended and restated certificate of incorporation, as amended, provides that shares of preferred stock may be issued from
time to time in one or more series. Our board of directors will be authorized to fix the voting rights, if any, designations,
powers, preferences, the relative, participating, optional or other special rights and any qualifications, limitations and restrictions
thereof, applicable to the shares of each series. Our board of directors will be able to, without stockholder approval, issue
preferred stock with voting and other rights that could adversely affect the voting power and other rights of the holders of the
common stock and could have anti-takeover effects. The ability of our board of directors to issue preferred stock without stockholder
approval could have the effect of delaying, deferring or preventing a change of control of us or the removal of existing management.
We have no preferred stock outstanding at the date hereof. Although we do not currently intend to issue any shares of preferred
stock, we cannot assure you that we will not do so in the future.
Warrants
Public
Stockholders’ Warrants
In
August 2017, we issued 866,667 (5,200,000 pre-reverse split) warrants (“Public Warrants”) forming
a part of units which we originally issued in our initial public offering. Each Public Warrant entitles the registered
holder to purchase one share of our Common Stock at a price of $69.00 ($11.50 pre-reverse split) per share, subject to adjustment.
The Public Warrants may be exercised at any time commencing on December 20, 2018 until November
19, 2023. On September 30, 2019, the 866,667 (5,200,000 pre-reverse split) shares of Common Stock issuable upon the exercise
of the Public Warrants became registered under the Securities Act.
Notwithstanding
the above, if our Common Stock is at the time of any exercise of a warrant not listed on a national securities exchange such that
it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities Act, we may, at our option,
require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section
3(a)(9) of the Securities Act and, in the event we so elect, we will not be required to file or maintain in effect a registration
statement or register or qualify the shares under blue sky laws, and in the event we do not so elect, we will use our best efforts
to register or qualify the shares under the blue sky laws of the state of residence in certain states.
Once
the warrants become exercisable, we may call the warrants for redemption:
|
●
|
in
whole and not in part;
|
|
|
|
|
●
|
at
a price of $0.01 per warrant;
|
|
|
|
|
●
|
upon
not less than 30 days’ prior written notice of redemption (the “30-day redemption period”) to each warrant
holder; and
|
|
|
|
|
●
|
if,
and only if, the reported last sale price of the common stock equals or exceeds $126.00 ($21.00 pre-reverse split) per share
for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date we send to the notice
of redemption to the warrant holders.
|
If
and when the warrants become redeemable by us, we may exercise our redemption right even if the issuance of shares of Common Stock
upon exercise of the warrants is not exempt from registration or qualification under applicable state blue sky laws and we are
unable to effect such registration or qualification, subject to our obligation in such case to use our best efforts to register
or qualify the shares of Common Stock under the blue sky laws of the state of residence in certain states.
We
have established the last of the redemption criterion discussed above to prevent a redemption call unless there is at the time
of the call a significant premium to the warrant exercise price. If the foregoing conditions are satisfied and we issue a notice
of redemption of the warrants, each warrant holder will be entitled to exercise his, her or its warrant prior to the scheduled
redemption date. However, the price of the common stock may fall below the $126.00 ($21.00 pre-reverse split) redemption trigger
price as well as the $69.00 ($11.50 pre-reverse split) warrant exercise price after the redemption notice is issued.
If
we call the warrants for redemption as described above, our management will have the option to require any holder that wishes
to exercise his, her or its warrant to do so on a “cashless basis.” In determining whether to require all holders
to exercise their warrants on a “cashless basis,” our management will consider, among other factors, our cash position,
the number of warrants that are outstanding and the dilutive effect on our stockholders of issuing the maximum number of shares
of Common Stock issuable upon the exercise of our warrants. If our management takes advantage of this option, all holders of warrants
would pay the exercise price by surrendering their warrants for that number of shares of Common Stock equal to the quotient obtained
by dividing (x) the product of the number of shares of Common Stock underlying the warrants, multiplied by the difference between
the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair
market value” shall mean the average reported last sale price of the common stock for the 10 trading days ending on the
third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. If our management takes
advantage of this option, the notice of redemption will contain the information necessary to calculate the number of shares of
Common Stock to be received upon exercise of the warrants, including the “fair market value” in such case. Requiring
a cashless exercise in this manner will reduce the number of shares to be issued and thereby lessen the dilutive effect of a warrant
redemption. We believe this feature is an attractive option to us if we do not need the cash from the exercise of the warrants
after our initial business combination. If we call our warrants for redemption and our management does not take advantage of this
option, the initial purchasers and their permitted transferees would still be entitled to exercise their Private Placement Warrants
contained in the Private Placement Units for cash or on a cashless basis using the same formula described above that other warrant
holders would have been required to use had all warrant holders been required to exercise their warrants on a cashless basis,
as described in more detail below.
A
holder of a warrant may notify us in writing in the event it elects to be subject to a requirement that such holder will not have
the right to exercise such warrant, to the extent that after giving effect to such exercise, such person (together with such person’s
affiliates), to the warrant agent’s actual knowledge, would beneficially own in excess of 4.9% or 9.8% (or such other amount
as a holder may specify) of the shares of Common Stock outstanding immediately after giving effect to such exercise.
If
the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock, or by a split-up
of shares of Common Stock or other similar event, then, on the effective date of such stock dividend, split-up or similar event,
the number of shares of Common Stock issuable on exercise of each warrant will be increased in proportion to such increase in
the outstanding shares of Common Stock. A rights offering to holders of common stock entitling holders to purchase shares of Common
Stock at a price less than the fair market value will be deemed a stock dividend of a number of shares of Common Stock equal to
the product of (i) the number of shares of Common Stock actually sold in such rights offering (or issuable under any other equity
securities sold in such rights offering that are convertible into or exercisable for common stock) multiplied by (ii) one (1)
minus the quotient of (x) the price per share of common stock paid in such rights offering divided by (y) the fair market value.
For these purposes (i) if the rights offering is for securities convertible into or exercisable for common stock, in determining
the price payable for common stock, there will be taken into account any consideration received for such rights, as well as any
additional amount payable upon exercise or conversion and (ii) fair market value means the volume weighted average price of common
stock as reported during the ten (10) trading day period ending on the trading day prior to the first date on which the shares
of Common Stock trade on the applicable exchange or in the applicable market, regular way, without the right to receive such rights.
In
addition, if we, at any time while the warrants are outstanding and unexpired, pay a dividend or make a distribution in cash,
securities or other assets to the holders of common stock on account of such shares of Common Stock (or other shares of our capital
stock into which the warrants are convertible), other than (a) as described above, (b) certain ordinary cash dividends, (c) to
satisfy the redemption rights of the holders of common stock in connection with a proposed initial business combination, (d) as
a result of the repurchase of shares of Common Stock by the company if the proposed initial business combination is presented
to the stockholders of the company for approval, or (e) in connection with the redemption of our Public Shares upon our failure
to complete our initial business combination, then the warrant exercise price will be decreased, effective immediately after the
effective date of such event, by the amount of cash and/or the fair market value of any securities or other assets paid on each
share of common stock in respect of such event. If the number of outstanding shares of our Common Stock is decreased by a consolidation,
combination, reverse stock split or reclassification of shares of Common Stock or other similar event, then, on the effective
date of such consolidation, combination, reverse stock split, reclassification or similar event, the number of shares of Common
Stock issuable on exercise of each warrant will be decreased in proportion to such decrease in outstanding shares of Common Stock.
Whenever
the number of shares of Common Stock purchasable upon the exercise of the warrants is adjusted, as described above, the warrant
exercise price will be adjusted by multiplying the warrant exercise price immediately prior to such adjustment by a fraction (x)
the numerator of which will be the number of shares of Common Stock purchasable upon the exercise of the warrants immediately
prior to such adjustment, and (y) the denominator of which will be the number of shares of Common Stock so purchasable immediately
thereafter.
In
case of any reclassification or reorganization of the outstanding shares of Common Stock (other than those described above or
that solely affects the par value of such shares of Common Stock), or in the case of any merger or consolidation of us with or
into another corporation (other than a consolidation or merger in which we are the continuing corporation and that does not result
in any reclassification or reorganization of our outstanding shares of Common Stock), or in the case of any sale or conveyance
to another corporation or entity of the assets or other property of us as an entirety or substantially as an entirety in connection
with which we are dissolved, the holders of the warrants will thereafter have the right to purchase and receive, upon the basis
and upon the terms and conditions specified in the warrants and in lieu of the shares of our Common Stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented thereby, the kind and amount of shares of stock or other
securities or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon
a dissolution following any such sale or transfer, that the holder of the warrants would have received if such holder had exercised
their warrants immediately prior to such event. However, if such holders were entitled to exercise a right of election as to the
kind or amount of securities, cash or other assets receivable upon such consolidation or merger, then the kind and amount of securities,
cash or other assets for which each warrant will become exercisable will be deemed to be the weighted average of the kind and
amount received per share by such holders in such consolidation or merger that affirmatively make such election, and if a tender,
exchange or redemption offer has been made to and accepted by such holders (other than a tender, exchange or redemption offer
made by the company in connection with redemption rights held by stockholders of the company as provided for in the company’s
amended and restated certificate of incorporation or as a result of the repurchase of shares of Common Stock by the company if
a proposed initial business combination is presented to the stockholders of the company for approval) under circumstances in which,
upon completion of such tender or exchange offer, the maker thereof, together with members of any group (within the meaning of
Rule 13d-5(b)(1) under the Exchange Act) of which such maker is a part, and together with any affiliate or associate of such maker
(within the meaning of Rule 12b-2 under the Exchange Act) and any members of any such group of which any such affiliate or associate
is a part, own beneficially (within the meaning of Rule 13d-3 under the Exchange Act) more than 50% of the outstanding shares
of Common Stock, the holder of a warrant will be entitled to receive the highest amount of cash, securities or other property
to which such holder would actually have been entitled as a stockholder if such warrant holder had exercised the warrant prior
to the expiration of such tender or exchange offer, accepted such offer and all of the common stock held by such holder had been
purchased pursuant to such tender or exchange offer, subject to adjustments (from and after the consummation of such tender or
exchange offer) as nearly equivalent as possible to the adjustments provided for in the warrant agreement. Additionally, if less
than 70% of the consideration receivable by the holders of common stock in such a transaction is payable in the form of common
stock in the successor entity that is listed for trading on a national securities exchange or is quoted in an established over-the-counter
market, or is to be so listed for trading or quoted immediately following such event, and if the registered holder of the warrant
properly exercises the warrant within thirty days following public disclosure of such transaction, the warrant exercise price
will be reduced as specified in the warrant agreement based on the per share consideration minus Black-Scholes Warrant Value (as
defined in the warrant agreement) of the warrant in order to determine and realize the option value component of the warrant.
This formula is to compensate the warrant holder for the loss of the option value portion of the warrant value due to the requirement
that the warrant holder exercise the warrant within 30 days of the event. The Black-Scholes model is an accepted pricing model
for estimating fair market value where no quoted market price for an instrument is available.
The
warrants have been issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company,
as warrant agent, and us. You should review a copy of the warrant agreement, which will be filed as an exhibit to the registration
statement of which this prospectus is a part, for a complete description of the terms and conditions applicable to the warrants.
The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity
or correct any defective provision, but requires the approval by the holders of at least 65% of the then outstanding Public Warrants
to make any change that adversely affects the interests of the registered holders of Public Warrants.
The
warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant
agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied
by full payment of the exercise price (or on a cashless basis, if applicable), by certified or official bank check payable to
us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common
stock and any voting rights until they exercise their warrants and receive shares of Common Stock. After the issuance of shares
of Common Stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters
to be voted on by stockholders. Warrants may be exercised only for a whole number of shares of Common Stock. No fractional shares
will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional
interest in a share, we will, upon exercise, round down to the nearest whole number the number of shares of Common Stock to be
issued to the warrant holder.
As
of October 5, 2020, 866,667 (5,200,000 pre-reverse split) Public Warrants remain outstanding.
Private
Placement Warrants
In
August 2017, we issued 43,584 (261,500 pre-reverse split) warrants (“Private Placement Warrants”) forming
a part of units which we originally issued in a private placement that closed simultaneously with the consummation of our initial
public offering. Each Private Placement Warrant entitles the registered holder to purchase one share of our Common Stock
at a price of $69.00 ($11.50 pre-reverse split) per share, subject to adjustment. The Private Placement Warrants may
be exercised at any time commencing on December 20, 2018 until November 19, 2023. On September 30, 2019, the 43,584
(261,500 pre-reverse split) shares of Common Stock issuable upon the exercise of the Private Placement Warrants became registered
under the Securities Act.
The
Private Placement Warrants (including the common stock issuable upon exercise of the Private Placement Warrants), will not be
redeemable by us so long as they are held by the initial purchasers or their permitted transferees. Otherwise, the Private Placement
Warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in the IPO. If
the Private Placement Warrants are held by holders other than the initial purchasers or their permitted transferees, the Private
Placement Warrants will be redeemable by us and exercisable by the holders on the same basis as the Public Warrants.
If
holders of the Private Placement Warrants elect to exercise them on a cashless basis, they would pay the exercise price by surrendering
his, her or its warrants for that number of shares of Common Stock equal to the quotient obtained by dividing (x) the product
of the number of shares of Common Stock underlying the warrants, multiplied by the difference between the exercise price of the
warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value”
shall mean the average reported last sale price of the common stock for the 10 trading days ending on the third trading day prior
to the date on which the notice of warrant exercise is sent to the warrant agent. The reason that we have agreed that these warrants
will be exercisable on a cashless basis so long as they are held by the initial purchasers and their permitted transferees is
because it is not known at this time whether they will be affiliated with us following a business combination. If they remain
affiliated with us, their ability to sell our securities in the open market will be significantly limited. We expect to have policies
in place that prohibit insiders from selling our securities except during specific periods of time. Even during such periods of
time when insiders will be permitted to sell our securities, an insider cannot trade in our securities if he or she is in possession
of material non-public information. Accordingly, unlike Public Stockholders who could exercise their warrants and sell the shares
of Common Stock received upon such exercise freely in the open market in order to recoup the cost of such exercise, the insiders
could be significantly restricted from selling such securities. As a result, we believe that allowing the holders to exercise
such warrants on a cashless basis is appropriate.
As
of October 5, 2020, 43,584 (261,500 pre-reverse split) Private Placement Warrants remain outstanding.
2019
Warrants
During
the period from March 1, 2019 through July 1, 2019, the Company issued 164,584 (987,500 pre-reverse split) warrants (“2019
Warrants”) which formed a part of units privately placed in a units offering. The warrants expire 5-years from the date
of issuance and are exercisable at a purchase price of $24.00 ($4.00 pre-reverse split) per share. On September 30, 2019, the
shares of Common Stock issuable upon the exercise of the 2019 Warrants became registered under the Securities Act.
As of October 5,
2020, 164,584 (987,500 pre-reverse split) 2019 Warrants remain outstanding.
Dividends
We
have not paid any cash dividends on our Common Stock to date and do not intend to pay cash dividends. The payment of cash dividends
in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent
to completion of a business combination. The payment of any cash dividends will be within the discretion of our board of directors
at such time. In addition, our board of directors is not currently contemplating and does not anticipate declaring any stock dividends
in the foreseeable future, except if we increase the size of the offering pursuant to Rule 462(b) under the Securities Act, in
which case we will effect a stock dividend immediately prior to the consummation of the offering in such amount as to maintain
the ownership of our initial stockholders prior to this offering at 20% of our issued and outstanding shares of our Common Stock
upon the consummation of this offering (not including the Private Placement Shares and the shares of Common Stock issuable to
Maxim upon the consummation of this offering). Further, if we incur any indebtedness, our ability to declare dividends may be
limited by restrictive covenants we may agree to in connection therewith.
Certain
Anti-Takeover Provisions of Delaware Law and our Third Amended and Restated Certificate of Incorporation, as Amended, and Bylaws
We
are subject to the provisions of Section 203 of the DGCL regulating corporate takeovers. This statute prevents certain Delaware
corporations, under certain circumstances, from engaging in a “business combination” with:
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a
stockholder who owns 15% or more of our outstanding voting stock (otherwise known as an “interested stockholder”);
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an
affiliate of an interested stockholder; or
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an
associate of an interested stockholder, for three years following the date that the stockholder became an interested stockholder.
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A
“business combination” includes a merger or sale of more than 10% of our assets. However, the above provisions of
Section 203 do not apply if:
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our
board of directors approves the transaction that made the stockholder an “interested stockholder,” prior to the
date of the transaction;
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after
the completion of the transaction that resulted in the stockholder becoming an interested stockholder, that stockholder owned
at least 85% of our voting stock outstanding at the time the transaction commenced, other than statutorily excluded shares
of Common Stock; or
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●
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on
or subsequent to the date of the transaction, the business combination is approved by our board of directors and authorized
at a meeting of our stockholders, and not by written consent, by an affirmative vote of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder.
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Our
third amended and restated certificate of incorporation, as amended, provides that our board of directors will be classified into
two classes of directors. As a result, in most circumstances, a person can gain control of our board only by successfully engaging
in a proxy contest at two or more annual meetings.
Our
authorized but unissued common stock and preferred stock are available for future issuances without stockholder approval and could
be utilized for a variety of corporate purposes, including future offerings to raise additional capital, acquisitions and employee
benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult
or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Exclusive
Forum for Certain Lawsuits
Our
third amended and restated certificate of incorporation, as amended, will require, to the fullest extent permitted by law, that
derivative actions brought in our name, actions against directors, officers and employees for breach of fiduciary duty and other
similar actions may be brought only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware, the
stockholder bringing such suit will be deemed to have consented to service of process on such stockholder’s counsel. Although
we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits
to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
Special
Meeting of Stockholders
Our
bylaws provide that special meetings of our stockholders may be called only by a majority vote of our board of directors, by our
Chief Executive Officer or by our Chairman.
Advance
Notice Requirements for Stockholder Proposals and Director Nominations
Our
bylaws provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates
for election as directors at our annual meeting of stockholders must provide timely notice of their intent in writing. To be timely,
a stockholder’s notice will need to be received by the secretary to our principal executive offices not later than the close
of business on the 90th day nor earlier than the opening of business on the 120th day prior to the scheduled date of the annual
meeting of stockholders. If our annual meeting is called for a date that is not within 30 days before or after such anniversary
date, a stockholder’s notice will need to be received not earlier than the opening of business on the 120th day before the
meeting and not later than the later of (x) the close of business on the 90th day before the meeting or (y) the close of business
on the 10th day following the day on which we first publicly announce the date of the annual meeting. Our bylaws also specify
certain requirements as to the form and content of a stockholder’s notice for an annual meeting. Specifically, a stockholder’s
notice must include: (i) a brief description of the business desired to be brought before the annual meeting, the text of the
proposal or business and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such
stockholder and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class or
series and number of shares of our capital stock owned beneficially and of record by such stockholder and by the beneficial owner,
if any, on whose behalf the proposal is made, (iv) a description of all arrangements or understandings between such stockholder
and the beneficial owner, if any, on whose behalf the proposal is made and any other person or persons (including their names)
in connection with the proposal of such business by such stockholder, (v) any material interest of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made in such business and (vi) a representation that such stockholder intends to
appear in person or by proxy at the annual meeting to bring such business before such meeting. These notice requirements will
be deemed satisfied by a stockholder as to any proposal (other than nominations) if the stockholder has notified us of such stockholder’s
intention to present such proposal at an annual meeting in compliance with Rule 14a-8 of the Exchange Act, and such stockholder
has complied with the requirements of such rule for inclusion of such proposal in the proxy statement we prepare to solicit proxies
for such annual meeting. Pursuant to Rule 14a-8 of the Exchange Act, proposals seeking inclusion in our annual proxy statement
must comply with the notice periods contained therein. The foregoing provisions may limit our stockholders’ ability to bring
matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders.
Our
Transfer Agent and Warrant Agent
The
transfer agent for our Common Stock and warrant agent for our Warrants is Continental Stock Transfer & Trust Company. We have
agreed to indemnify Continental Stock Transfer & Trust Company in its roles as transfer agent and warrant agent, its agents
and each of its stockholders, directors, officers and employees against all liabilities, including judgments, costs and reasonable
counsel fees that may arise out of acts performed or omitted for its activities in that capacity, except for any liability due
to any gross negligence, willful misconduct or bad faith of the indemnified person or entity.
SELLING
SECURITYHOLDERS
The
Selling Securityholders may offer and sell, from time to time, any or all of the Private Placement Warrants, shares of Common
Stock, and shares of Common Stock underlying the Warrants covered by this prospectus. Selling Securityholders are offering for
resale 1,033,995 (6,203,969 pre-reverse split basis) shares of Common Stock under this registration statement.
In
addition, (i) the resale by Selling Securityholders of the 43,584 (261,500 pre-reverse split) Private Placement Warrants
and (ii) the issuance by the Company of 1,074,834 (6,449,000 pre-reverse split) shares of Common Stock underlying the Warrants
(which consist of (a) 5,200,000 shares that may be issued upon the exercise of Public Warrants originally sold as part of units
in our IPO and which entitle the holder to purchase Common Stock at an exercise price of $69.00 ($11.50 pre-reverse split)
per share of Common Stock, (b) 43.584 (261,500 pre-reverse split) shares of Common Stock that may be issued upon the
exercise of the Private Placement Warrants, underlying Private Placement Units, which entitle the holder to purchase Common Stock
at an exercise price of $69.00 ($11.50 pre-reverse split) per share of Common Stock), and (c) 164,584 (987,500 pre-reverse
split) shares of Common Stock that may be issued upon the exercise of the 2019 Warrants originally sold as part of units in
the 2019 Private Placement and which entitle the holder to purchase Common Stock at an exercise price of $24.00 ($4.00 pre-reverse
split) per share of Common Stock) are being registered by the registration statement of which this prospectus forms a part
pursuant to registration rights granted to the Selling Securityholders in connection with our initial organization, the IPO, the
Transactions and/or the 2019 Private Placement. See the section entitled “Plan of Distribution” for further information
regarding the Selling Securityholders’ method of distributing these securities.
The
following table provides, as of September 20, 2019, information regarding the beneficial ownership of our Common Stock and Warrants
held by each Selling Securityholder, the securities that may be sold by each Selling Securityholder under this prospectus and
the number and percentage of securities that each Selling Securityholder will beneficially own after this offering. Applicable
percentages are based on 1,033,995 (6,203,969 pre-reverse split) shares of Common Stock offered for resale and 1,074,834
(6,449,000 pre-reverse split) shares of Common Stock underlying the Warrants as of September 20, 2019.
The
Selling Securityholders are not making any representation that any shares of Common Stock or Private Placement Warrants covered
by this prospectus will be offered for sale. Because each Selling Securityholder may dispose of all, none or some portion of their
securities, no estimate can be given as to the number of securities that will be beneficially owned by a Selling Securityholder
upon termination of this offering. For purposes of the table below, however, we have assumed that after termination of this offering
none of the securities covered by this prospectus will be beneficially owned by the Selling Securityholders and further assumed
that the Selling Securityholders will not acquire beneficial ownership of any additional securities during the offering. In addition,
the Selling Securityholders may have sold, transferred or otherwise disposed of, or may sell, transfer or otherwise dispose of,
at any time and from time to time, our securities in transactions exempt from the registration requirements of the Securities
Act after the date on which the information in the table is presented.
We
may amend or supplement this prospectus from time to time in the future to update or change this Selling Securityholders list
and the securities that may be resold.
See
the section entitled “Plan of Distribution” for further information regarding the stockholders’ method of distributing
these shares.
Common
Stock
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Number
of
Shares
of
Common
Stock
Beneficially
Owned (on a Pre-Reverse Split
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|
|
Number
of Shares of Common Stock Beneficially Owned (on a Post-Reverse
|
|
|
Number
of
Shares
of
Common
Stock
Offered
Hereby (on a Pre-Reverse Split
|
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Number
of Shares of Common Stock Beneficially Owned (on a Post-Reverse
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Shares
of Common Stock
Beneficially
Owned After
Completion
of the Offering(1)
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Name
|
|
Basis)(1)
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Split
Basis)
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|
Basis)(2)
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Split Basis)
|
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|
Number
|
|
|
Percentage
|
|
Timothy
Eden(3)
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57,000
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9,500
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57,000
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9,500
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0
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|
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0.0
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%
|
Darby
Tyser(4)
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44,500
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|
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7,417
|
|
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44,500
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|
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|
7,417
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0
|
|
|
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0.0
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%
|
Albert
Allen(5)
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|
|
44,500
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|
|
|
7,417
|
|
|
|
44,500
|
|
|
|
7,417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Wilton
Lee(6)
|
|
|
48,400
|
|
|
|
8,067
|
|
|
|
48,400
|
|
|
|
8,067
|
|
|
|
0
|
|
|
|
0.0
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%
|
NuView
Trust Company FBO Edward Jaroski(7)
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|
|
128,500
|
|
|
|
21,417
|
|
|
|
128,500
|
|
|
|
21,417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO William Herrmann(8)
|
|
|
28,500
|
|
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|
4,750
|
|
|
|
28,500
|
|
|
|
4,750
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|
|
|
0
|
|
|
|
0.0
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%
|
Merging
Traffic, Inc.(9)
|
|
|
24,500
|
|
|
|
4,084
|
|
|
|
24,500
|
|
|
|
4,084
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Sharon
Katuin(10)
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|
|
26,650
|
|
|
|
4,442
|
|
|
|
26,650
|
|
|
|
4,442
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Barbara
Winkler-Chimbor(11)
|
|
|
28,220
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|
|
|
4,704
|
|
|
|
28,220
|
|
|
|
4,704
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Frank Leavy(12)
|
|
|
27,625
|
|
|
|
4,605
|
|
|
|
27,625
|
|
|
|
4,605
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Paul
Torre(13)
|
|
|
22,250
|
|
|
|
3,709
|
|
|
|
22,250
|
|
|
|
3,709
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Erin Fitch(14)
|
|
|
18,075
|
|
|
|
3,013
|
|
|
|
18,075
|
|
|
|
3,013
|
|
|
|
0
|
|
|
|
0.0
|
%
|
David
Crossmier(15)
|
|
|
14,750
|
|
|
|
2,459
|
|
|
|
14,750
|
|
|
|
2,459
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Donald
Sera(16)
|
|
|
14,750
|
|
|
|
2,459
|
|
|
|
14,750
|
|
|
|
2,459
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO David Keenum(17)
|
|
|
14,250
|
|
|
|
2,375
|
|
|
|
14,250
|
|
|
|
2,375
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Fred
Zollinger(18)
|
|
|
14,750
|
|
|
|
2,459
|
|
|
|
14,750
|
|
|
|
2,459
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Ann
Akers(19)
|
|
|
14,500
|
|
|
|
2,417
|
|
|
|
14,500
|
|
|
|
2,417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Robert
Ripley(20)
|
|
|
15,500
|
|
|
|
2,584
|
|
|
|
15,500
|
|
|
|
2,584
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Gregory
Hall(21)
|
|
|
14,500
|
|
|
|
2,417
|
|
|
|
14,500
|
|
|
|
2,417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
William
Jones(22)
|
|
|
11,900
|
|
|
|
1,984
|
|
|
|
11,900
|
|
|
|
1,984
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Paul
Reitz(23)
|
|
|
10,350
|
|
|
|
1,725
|
|
|
|
10,350
|
|
|
|
1,725
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Joseph
Frick(24)
|
|
|
10,140
|
|
|
|
1,735
|
|
|
|
10,140
|
|
|
|
1,735
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Judith Koons(25)
|
|
|
9,100
|
|
|
|
1,517
|
|
|
|
9,100
|
|
|
|
1,517
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Shirley
W. Barnard(26)
|
|
|
7,920
|
|
|
|
1,320
|
|
|
|
7,920
|
|
|
|
1,320
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Vipul
Vassa(27)
|
|
|
7,750
|
|
|
|
1,292
|
|
|
|
7,750
|
|
|
|
1,292
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Ravi
Parik(28)
|
|
|
8,000
|
|
|
|
1,334
|
|
|
|
8,000
|
|
|
|
1,334
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Bradley
Westover(29)
|
|
|
7,750
|
|
|
|
1,292
|
|
|
|
7,750
|
|
|
|
1,292
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Suzanne
Ronneau(30)
|
|
|
8,250
|
|
|
|
1,375
|
|
|
|
8,250
|
|
|
|
1,375
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Mary Tryon(31)
|
|
|
7,750
|
|
|
|
1,292
|
|
|
|
7,750
|
|
|
|
1,292
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Marjorie
Lee(32)
|
|
|
7,250
|
|
|
|
1,209
|
|
|
|
7,250
|
|
|
|
1,209
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Silvanus
Williams(33)
|
|
|
9,250
|
|
|
|
1,542
|
|
|
|
9,250
|
|
|
|
1,542
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Ardys B. Clawson(34)
|
|
|
7,250
|
|
|
|
1,209
|
|
|
|
7,250
|
|
|
|
1,209
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView Trust Company FBO Helen Carter(35)
|
|
|
5,950
|
|
|
|
992
|
|
|
|
5,950
|
|
|
|
992
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView Trust Company FBO June Rayle(36)
|
|
|
5,950
|
|
|
|
992
|
|
|
|
5,950
|
|
|
|
992
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView Trust Company FBO Clyde Steven Batiste(37)
|
|
|
5,070
|
|
|
|
845
|
|
|
|
5,070
|
|
|
|
845
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView Trust Company FBO Francis Malanowski(38)
|
|
|
4,350
|
|
|
|
725
|
|
|
|
4,350
|
|
|
|
725
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView Trust Company FBO John T. Vonesh(39)
|
|
|
4,450
|
|
|
|
742
|
|
|
|
4,450
|
|
|
|
742
|
|
|
|
0
|
|
|
|
0.0
|
%
|
James Hermann(40)
|
|
|
6,930
|
|
|
|
1,155
|
|
|
|
6,930
|
|
|
|
1,155
|
|
|
|
0
|
|
|
|
0.0
|
%
|
William Jordan(41)
|
|
|
3,930
|
|
|
|
655
|
|
|
|
3,930
|
|
|
|
655
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Vian Borg(42)
|
|
|
3,520
|
|
|
|
587
|
|
|
|
3,520
|
|
|
|
587
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView Trust Company FBO Leon Pike(43)
|
|
|
3,310
|
|
|
|
552
|
|
|
|
3,310
|
|
|
|
552
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Jason Franklin(44)
|
|
|
3,600
|
|
|
|
600
|
|
|
|
3,600
|
|
|
|
600
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Scott Berg(45)
|
|
|
2,850
|
|
|
|
475
|
|
|
|
2,850
|
|
|
|
475
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Donald Caldwell(46)
|
|
|
97,000
|
|
|
|
16,167
|
|
|
|
97,000
|
|
|
|
16,167
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Sandeep Dhanuka(47)
|
|
|
71,580
|
|
|
|
11,930
|
|
|
|
71,580
|
|
|
|
11,930
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Buttonwood Capital LLC(48)
|
|
|
8,375
|
|
|
|
1,396
|
|
|
|
8,375
|
|
|
|
1,396
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Christian Thomas Holzman
|
|
|
1,000
|
|
|
|
167
|
|
|
|
1,000
|
|
|
|
167
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Lloyd David Franklin
|
|
|
2,750
|
|
|
|
459
|
|
|
|
2,750
|
|
|
|
459
|
|
|
|
0
|
|
|
|
0.0
|
%
|
James Mark Franklin
|
|
|
7,682
|
|
|
|
1,281
|
|
|
|
7,682
|
|
|
|
1,281
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Alyssia Marie Franklin
|
|
|
51,000
|
|
|
|
8,500
|
|
|
|
51,000
|
|
|
|
8,500
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Roman Nehemiah Franklin
|
|
|
246,679
|
|
|
|
41,114
|
|
|
|
246,679
|
|
|
|
41,114
|
|
|
|
0
|
|
|
|
0.0
|
%
|
F. Jacob Cherian
|
|
|
307,286
|
|
|
|
51,215
|
|
|
|
307,286
|
|
|
|
51,215
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Suhel Kanuga
|
|
|
307,287
|
|
|
|
51,215
|
|
|
|
307,287
|
|
|
|
51,215
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Max Hooper
|
|
|
5,000
|
|
|
|
834
|
|
|
|
5,000
|
|
|
|
834
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Christopher Dorman
|
|
|
2,500
|
|
|
|
417
|
|
|
|
2,500
|
|
|
|
417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Margaret Ticehurst
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Richard Ticehurst
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Alan Totten
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Deborah Totten
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Susan MacFadden
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Edward Nance
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Simon Franklin
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Mariel Dejesus
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Corina Jaime
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Chantina Omar
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Kendal Franklin
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Robert Franklin
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Michelle Franklin
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Barbara Franklin
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Dalaynee Deck
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Nathen Skinner
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Virginia Skinner
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Pilar Puglise
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Asalilia Heath
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Russell Smith
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Tarik Mobolaji Andwele
|
|
|
100
|
|
|
|
17
|
|
|
|
100
|
|
|
|
17
|
|
|
|
0
|
|
|
|
0.0
|
%
|
William E. Findley Living Trust Dtd 3/1/2004
|
|
|
5,000
|
|
|
|
834
|
|
|
|
5,000
|
|
|
|
834
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Cup & Cross Ministries International
|
|
|
300
|
|
|
|
50
|
|
|
|
300
|
|
|
|
50
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Maxim Partners LLC
|
|
|
2,000
|
|
|
|
334
|
|
|
|
2,000
|
|
|
|
334
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Chardan Capital Markets, LLC
|
|
|
208,000
|
|
|
|
34,667
|
|
|
|
208,000
|
|
|
|
34,667
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Crown Managed Accounts SPC(49)
|
|
|
444,415
|
|
|
|
74,070
|
|
|
|
444,415
|
|
|
|
74,070
|
|
|
|
0
|
|
|
|
0.0
|
%
|
K2 Principal Fund L.P. (50)
|
|
|
847,655
|
|
|
|
141,276
|
|
|
|
847,655
|
|
|
|
141,276
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Polar Asset Management Partners Inc. (51)
|
|
|
316,004
|
|
|
|
52,668
|
|
|
|
316,004
|
|
|
|
52,668
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Timothy P. Schenden – SEP IRA (52)
|
|
|
640,322
|
|
|
|
106,721
|
|
|
|
640,322
|
|
|
|
106,721
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Jed Kaplan – Roth IRA (53)
|
|
|
490,322
|
|
|
|
81,721
|
|
|
|
490,322
|
|
|
|
81,721
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Iris Cantor Trust (54)
|
|
|
595,164
|
|
|
|
99,194
|
|
|
|
595,164
|
|
|
|
99,194
|
|
|
|
0
|
|
|
|
0.0
|
%
|
John Desiderio Trust (55)
|
|
|
495,161
|
|
|
|
82,527
|
|
|
|
495,161
|
|
|
|
82,527
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Jed Kaplan – SEP IRA
|
|
|
331,775
|
|
|
|
55,296
|
|
|
|
331,775
|
|
|
|
55,296
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Jed Kaplan
|
|
|
360,000
|
|
|
|
60,000
|
|
|
|
360,000
|
|
|
|
60,000
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Scythe LLC (56)
|
|
|
397,580
|
|
|
|
66,264
|
|
|
|
397,580
|
|
|
|
66,264
|
|
|
|
0
|
|
|
|
0.0
|
%
|
James L. Orleans – IRA (57)
|
|
|
271,372
|
|
|
|
45,229
|
|
|
|
271,372
|
|
|
|
45,229
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Steven Grossman
|
|
|
152,400
|
|
|
|
25,400
|
|
|
|
152,400
|
|
|
|
25,400
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Steven Grossman – IRA
|
|
|
151,620
|
|
|
|
25,270
|
|
|
|
151,620
|
|
|
|
25,270
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Cant Fish LLC (58)
|
|
|
147,580
|
|
|
|
24,597
|
|
|
|
147,580
|
|
|
|
24,597
|
|
|
|
0
|
|
|
|
0.0
|
%
|
John Marchese – IRA
|
|
|
97,580
|
|
|
|
16,264
|
|
|
|
97,580
|
|
|
|
16,264
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Mike Zahalsky PSP
|
|
|
97,580
|
|
|
|
16,264
|
|
|
|
97,580
|
|
|
|
16,264
|
|
|
|
0
|
|
|
|
0.0
|
%
|
One Plus Four LLC
|
|
|
97,580
|
|
|
|
16,264
|
|
|
|
97,580
|
|
|
|
16,264
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Zahalsky Investments Holdings LLLP
|
|
|
97,580
|
|
|
|
16,264
|
|
|
|
97,580
|
|
|
|
16,264
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Bill Yates
|
|
|
91,800
|
|
|
|
15,300
|
|
|
|
91,800
|
|
|
|
15,300
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Fidelity Management Trust Company FBO Christopher Leary (59)
|
|
|
100,000
|
|
|
|
16,667
|
|
|
|
100,000
|
|
|
|
16,667
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Sterling Hall (60)
|
|
|
100,000
|
|
|
|
16,667
|
|
|
|
100,000
|
|
|
|
16,667
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Mad Money Entertainment
|
|
|
48,792
|
|
|
|
8,132
|
|
|
|
48,792
|
|
|
|
8,132
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Bryan Rosenblatt
|
|
|
29,275
|
|
|
|
4,880
|
|
|
|
29,275
|
|
|
|
4,880
|
|
|
|
0
|
|
|
|
0.0
|
%
|
RBC Capital Markets FBO Robert Winters (61)
|
|
|
50,000
|
|
|
|
8,334
|
|
|
|
50,000
|
|
|
|
8,334
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Suzanne G. Fisher Revocable Trust (62)
|
|
|
50,000
|
|
|
|
8,334
|
|
|
|
50,000
|
|
|
|
8,334
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Jamie Kaplan – SEP IRA
|
|
|
19,517
|
|
|
|
3,253
|
|
|
|
19,517
|
|
|
|
3,253
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Michael Zoller (63)
|
|
|
50,000
|
|
|
|
8,334
|
|
|
|
50,000
|
|
|
|
8,334
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Theodore Fiano & Charlene Fiano
|
|
|
15,000
|
|
|
|
2,500
|
|
|
|
15,000
|
|
|
|
2,500
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Brad Westover
|
|
|
6,750
|
|
|
|
1,125
|
|
|
|
6,750
|
|
|
|
1,125
|
|
|
|
0
|
|
|
|
0.0
|
%
|
David Keenum
|
|
|
8,571
|
|
|
|
1,429
|
|
|
|
8,571
|
|
|
|
1,429
|
|
|
|
0
|
|
|
|
0.0
|
%
|
|
(1)
|
The
amounts and percentages of Common Stock beneficially owned are determined in accordance with the SEC’s rules, pursuant
to which a person is deemed to be a “beneficial owner” of a security if that person has or shares voting or investment
power or has the right to acquire such power within 60 days through exercise of any option, warrant or other right. Securities
that can be so acquired are deemed to be outstanding for purposes of computing such person’s ownership percentage, but
not for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed beneficial
owner of the same securities, and a person may be deemed to be a beneficial owner of securities as to which such person has
no economic interest. Except as otherwise indicated in these footnotes, each of the beneficial owners has, to our knowledge,
sole voting and investment power with respect to the indicated shares of Common Stock.
|
|
|
|
|
(2)
|
The
shares of Common Stock shown in this column includes shares of Common Stock that are offered for resale by the Selling Securityholders,
as well as shares of Common Stock that are offered for sale by us pursuant to this prospectus.
|
|
|
|
|
(3)
|
The
number of shares of Common Stock beneficially owned by Timothy Eden includes 3,334 (20,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 3,334 (20,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(4)
|
The
number of shares of Common Stock beneficially owned by Darby Tyser includes 2,500 (15,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 2,500 (15,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(5)
|
The
number of shares of Common Stock beneficially owned by Albert Allen includes 2,500 (15,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 2,500 (15,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(6)
|
The
number of shares of Common Stock beneficially owned by Wilton Lee includes 234 (14,000 pre-reverse split) shares of
our Common Stock issuable upon exercise of 234 (14,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(7)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO Edward Jaroski includes 10,000 (60,000
pre-reverse split) shares of our Common Stock issuable upon exercise of 10,000 (60,000 pre-reverse split) Private
Placement Warrants.
|
|
|
|
|
(8)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO William Herrmann includes 1,667 (10,000
pre-reverse split) shares of our Common Stock issuable upon exercise of 1,667 (10,000 pre-reverse split) Private
Placement Warrants.
|
|
|
|
|
(9)
|
The
number of shares of Common Stock beneficially owned by Merging Traffic, Inc. includes 1,667 (10,000 pre-reverse split)
shares of our Common Stock issuable upon exercise of 1,667 (10,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(10)
|
The
number of shares of Common Stock beneficially owned by Sharon Katuin includes 1,417 (8,500 pre-reverse split) shares
of our Common Stock issuable upon exercise of 1,417 (8,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(11)
|
The
number of shares of Common Stock beneficially owned by Barbara Winkler-Chimbor includes 1,367 (8,200 pre-reverse split)
shares of our Common Stock issuable upon exercise of 1,367 (8,200 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(12)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO Frank Leavy includes 1,250 (7,500 pre-reverse
split) shares of our Common Stock issuable upon exercise of 1,250 (7,500 pre-reverse split) Private Placement Warrants.
|
|
(13)
|
The
number of shares of Common Stock beneficially owned by Paul Torre includes 1,250 (7,500 pre-reverse split) shares of
our Common Stock issuable upon exercise of 1,250 (7,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(14)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO Erin Fitch includes 884 (5,300 pre-reverse
split) shares of our Common Stock issuable upon exercise of 884 (5,300 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(15)
|
The
number of shares of Common Stock beneficially owned by David Crossmier includes 834 (5,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 834 (5,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(16)
|
The
number of shares of Common Stock beneficially owned by Donald Sera includes 834 (5,000 pre-reverse split) shares of
our Common Stock issuable upon exercise of 834 (5,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(17)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO David Keenum includes 834 (5,000 pre-reverse
split) shares of our Common Stock issuable upon exercise of 834 (5,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(18)
|
The
number of shares of Common Stock beneficially owned by Fred Zollinger includes 834 (5,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 834 (5,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(19)
|
The
number of shares of Common Stock beneficially owned by Ann Akers includes 834 (5,000 pre-reverse split) shares of our
Common Stock issuable upon exercise of 834 (5,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(20)
|
The
number of shares of Common Stock beneficially owned by Robert Ripley includes 834 (5,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 834 (5,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(21)
|
The
number of shares of Common Stock beneficially owned by Gregory Hall includes 834 (5,000 pre-reverse split) shares of
our Common Stock issuable upon exercise of 834 (5,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(22)
|
The
number of shares of Common Stock beneficially owned by William Jones includes 667 (4,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 667 (4,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(23)
|
The
number of shares of Common Stock beneficially owned by Paul Reitz includes 584 (3,500 pre-reverse split) shares of
our Common Stock issuable upon exercise of 584 (3,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(24)
|
The
number of shares of Common Stock beneficially owned by Joseph Frick includes 567 (3,400 pre-reverse split) shares of
our Common Stock issuable upon exercise of 567 (3,400 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(25)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO Judith Koons includes 500 (3,000 pre-reverse
split) shares of our Common Stock issuable upon exercise of 500 (3,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(26)
|
The
number of shares of Common Stock beneficially owned by Shirley W. Barnard includes 450 (2,700 pre-reverse split) shares
of our Common Stock issuable upon exercise of 450 (2,700 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(27)
|
The
number of shares of Common Stock beneficially owned by Vipul Vassa includes 417 (2,500 pre-reverse split) shares of
our Common Stock issuable upon exercise of 417 (2,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(28)
|
The
number of shares of Common Stock beneficially owned by Ravi Parik includes 417 (2,500 pre-reverse split) shares of
our Common Stock issuable upon exercise of 417 (2,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(29)
|
The
number of shares of Common Stock beneficially owned by Bradley Westover includes 417 (2,500 pre-reverse split) shares
of our Common Stock issuable upon exercise of 417 (2,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(30)
|
The
number of shares of Common Stock beneficially owned by Suzanne Ronneau includes 417 (2,500 pre-reverse split) shares
of our Common Stock issuable upon exercise of 417 (2,500 pre-reverse split) Private Placement Warrants.
|
|
(31)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO Mary Tryon includes 417 (2,500 pre-reverse
split) shares of our Common Stock issuable upon exercise of 417 (2,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(32)
|
The
number of shares of Common Stock beneficially owned by Marjorie Lee includes 417 (2,500 pre-reverse split) shares of
our Common Stock issuable upon exercise of 417 (2,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(33)
|
The
number of shares of Common Stock beneficially owned by Silvanus Williams includes 417 (2,500 pre-reverse split) shares
of our Common Stock issuable upon exercise of 417 (2,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(34)
|
The
number of shares of Common Stock beneficially owned by Ardys B. Clawson includes 417 (2,500 pre-reverse split) shares
of our Common Stock issuable upon exercise of 417 (2,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(35)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO Helen Carter includes 334 (2,000 pre-reverse
split) shares of our Common Stock issuable upon exercise of 334 (2,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(36)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO June Rayle includes 334 (2,000 pre-reverse
split) shares of our Common Stock issuable upon exercise of 334 (2,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(37)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO Clyde Steven Batiste includes 284 (1,700
pre-reverse split) shares of our Common Stock issuable upon exercise of 284 (1,700 pre-reverse split) Private Placement
Warrants.
|
|
|
|
|
(38)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO Francis Malanowski includes 250 (1,500
pre-reverse split) shares of our Common Stock issuable upon exercise of 250 (1,500 pre-reverse split) Private Placement
Warrants.
|
|
|
|
|
(39)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO John T. Vonesh includes 250 (1,500 pre-reverse
split) shares of our Common Stock issuable upon exercise of 250 (1,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(40)
|
The
number of shares of Common Stock beneficially owned by James Hermann includes (i) 217 (1,300 pre-reverse split) shares
of our Common Stock issuable upon exercise of 217 (1,300 pre-reverse split) Private Placement Warrants; (ii) 334 (2,000
pre-reverse split) shares of Common Stock that Mr. Hermann acquired as Barbara Conn’s heir following her death; and
(iii) 167 (1,000 pre-reverse split) shares of our Common Stock issuable upon exercise of 167 (1,000 pre-reverse split) Private
Placement Warrants that Mr. Hermann acquired as Ms. Conn’s heir following her death.
|
|
|
|
|
(41)
|
The
number of shares of Common Stock beneficially owned by William Jordan includes 217 (1,300 pre-reverse split) shares
of our Common Stock issuable upon exercise of 217 (1,300 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(42)
|
The
number of shares of Common Stock beneficially owned by Vian Borg includes 200 (1,200 pre-reverse split) shares of our
Common Stock issuable upon exercise of 200 (1,200 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(43)
|
The
number of shares of Common Stock beneficially owned by NuView Trust Company FBO Leon Pike includes 184 (1,100 pre-reverse
split) shares of our Common Stock issuable upon exercise of 184 (1,100 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(44)
|
The
number of shares of Common Stock beneficially owned by Jason Franklin includes 167 (1,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 167 (1,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(45)
|
The
number of shares of Common Stock beneficially owned by Scott Berg includes 167 (1,000 pre-reverse split) shares of
our Common Stock issuable upon exercise of 167 (1,000 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(46)
|
The
number of shares of Common Stock beneficially owned by Donald Caldwell includes 3,334 (20,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 3, 334 (20,000 pre-reverse split) Private Placement Warrants.
|
|
(47)
|
The
number of shares of Common Stock beneficially owned by Sandeep Dhanuka includes 3,300 (19,800 pre-reverse split) shares
of our Common Stock issuable upon exercise of 3,300 (19,800 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(48)
|
The
number of shares of Common Stock beneficially owned by Buttonwood Capital LLC includes 417 (2,500 pre-reverse split)
shares of our Common Stock issuable upon exercise of 417 (2,500 pre-reverse split) Private Placement Warrants.
|
|
|
|
|
(49)
|
The
number of shares of Common Stock beneficially owned by Crown Managed Accounts SPC includes 70,619 (423,712 pre-reverse
split) shares of our Common Stock issuable upon exercise of 70,619 (423,712 pre-reverse split) warrants.
|
|
(50)
|
The
number of shares of Common Stock beneficially owned by K2 Principal Fund L.P. includes 130,276 (781,655 pre-reverse split)
shares of our Common Stock issuable upon exercise of 130,276 (781,655 pre-reverse split) warrants.
|
|
|
|
|
(51)
|
The
number of shares of Common Stock beneficially owned by Polar Asset Management Partners Inc. includes 5,482 (32,888 pre-reverse
split) shares of our Common Stock issuable upon exercise of 5,482( 32,888 pre-reverse split) warrants.
|
|
|
|
|
(52)
|
The
number of shares of Common Stock beneficially owned by Timothy P. Schenden – SEP IRA includes 20,834 (125,000 pre-reverse
split) shares of our Common Stock issuable upon exercise of 20,834 (125,000 pre-reverse split) warrants.
|
|
|
|
|
(53)
|
The
number of shares of Common Stock beneficially owned by Jed Kaplan – Roth IRA includes 8,334 (50,000 pre-reverse split)
shares of our Common Stock issuable upon exercise of 8,334 (50,000 pre-reverse split) warrants.
|
|
|
|
|
(54)
|
The
number of shares of Common Stock beneficially owned by Iris Cantor Trust includes 33,334 (200,000 pre-reverse split)
shares of our Common Stock issuable upon exercise of 33,334 (200,000 pre-reverse split) warrants.
|
|
|
|
|
(55)
|
The
number of shares of Common Stock beneficially owned by John Desiderio Trust includes 25,000 (150,000 pre-reverse split)
shares of our Common Stock issuable upon exercise of 25,000 (150,000 pre-reverse split) warrants.
|
|
|
|
|
(56)
|
The
number of shares of Common Stock beneficially owned by Scythe LLC includes 25,000 (150,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 25,000 (150,000 pre-reverse split) warrants.
|
|
|
|
|
(57)
|
The
number of shares of Common Stock beneficially owned by James L. Orleans includes 10,417 (62,500 pre-reverse split)
shares of our Common Stock issuable upon exercise of 10,417 (62,500 pre-reverse split) warrants.
|
|
|
|
|
(58)
|
The
number of shares of Common Stock beneficially owned by Cant Fish LLC includes 4,167 (25,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 4,167 (25,000 pre-reverse split) warrants.
|
|
|
|
|
(59)
|
The
number of shares of Common Stock beneficially owned by Christopher Leary includes 8,334 (50,000 pre-reverse split)
shares of our Common Stock issuable upon exercise of 8,334 (50,000 pre-reverse split) warrants.
|
|
|
|
|
(60)
|
The
number of shares of Common Stock beneficially owned by Sterling Hall includes 8,334 (50,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 8,334 (50,000 pre-reverse split) warrants.
|
|
|
|
|
(61)
|
The
number of shares of Common Stock beneficially owned by RBC Capital Markets FBO Robert Winters includes 4,167 (25,000 pre-reverse
split) shares of our Common Stock issuable upon exercise of 4,167 (25,000 pre-reverse split) warrants.
|
|
|
|
|
(62)
|
The
number of shares of Common Stock beneficially owned by Suzanne G. Fisher Revocable Trust includes 4,167 (25,000 pre-reverse
split) shares of our Common Stock issuable upon exercise of 4,167 (25,000 pre-reverse split warrants.
|
|
|
|
|
(63)
|
The
number of shares of Common Stock beneficially owned by Michael Zoller includes 4,167 (25,000 pre-reverse split) shares
of our Common Stock issuable upon exercise of 4,167 (25,000 pre-reverse split) warrants.
|
Private
Placement Warrants
|
|
Number
of Private Placement Warrants Beneficially Owned (on a Pre-Reverse
|
|
|
Number
of Private Placement Warrants Beneficially Owned (on a Post-
|
|
|
Number
of Private
Placement Warrants Offered Hereby (on a Pre-
|
|
|
Number
of Private Placement Warrants Offered Hereby (on a Post-
|
|
|
Private
Placement Warrants
Beneficially Owned After Completion of the Offering
|
|
Name
|
|
Split
Basis) (1)
|
|
|
Reverse
Split Basis)
|
|
|
Reverse Split
Basis)
|
|
|
Reverse
Split Basis)
|
|
|
Number
|
|
|
Percentage
|
|
Timothy
Eden
|
|
|
20,000
|
|
|
|
3,334
|
|
|
|
20,000
|
|
|
|
3,334
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Darby
Tyser
|
|
|
15,000
|
|
|
|
2,500
|
|
|
|
15,000
|
|
|
|
2,500
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Albert
Allen
|
|
|
15,000
|
|
|
|
2,500
|
|
|
|
15,000
|
|
|
|
2,500
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Wilton
Lee
|
|
|
14,000
|
|
|
|
2,334
|
|
|
|
14,000
|
|
|
|
2,334
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Edward Jaroski
|
|
|
10,000
|
|
|
|
1,667
|
|
|
|
10,000
|
|
|
|
1,667
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO William Herrmann
|
|
|
10,000
|
|
|
|
1,667
|
|
|
|
10,000
|
|
|
|
1,667
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Merging
Traffic, Inc.
|
|
|
10,000
|
|
|
|
1,667
|
|
|
|
10,000
|
|
|
|
1,667
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Sharon
Katuin
|
|
|
8,500
|
|
|
|
1,417
|
|
|
|
8,500
|
|
|
|
1,417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Barbara
Winkler-Chimbor
|
|
|
8,200
|
|
|
|
1,367
|
|
|
|
8,200
|
|
|
|
1,367
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Frank Leavy
|
|
|
7,500
|
|
|
|
1,250
|
|
|
|
7,500
|
|
|
|
1,250
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Paul
Torre
|
|
|
7,500
|
|
|
|
1,250
|
|
|
|
7,500
|
|
|
|
1,250
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Erin Fitch
|
|
|
5,300
|
|
|
|
884
|
|
|
|
5,300
|
|
|
|
884
|
|
|
|
0
|
|
|
|
0.0
|
%
|
David
Crossmier
|
|
|
5,000
|
|
|
|
834
|
|
|
|
5,000
|
|
|
|
834
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Donald
Sera
|
|
|
5,000
|
|
|
|
834
|
|
|
|
5,000
|
|
|
|
834
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO David Keenum
|
|
|
5,000
|
|
|
|
834
|
|
|
|
5,000
|
|
|
|
834
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Fred
Zollinger
|
|
|
5,000
|
|
|
|
834
|
|
|
|
5,000
|
|
|
|
834
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Ann
Akers
|
|
|
5,000
|
|
|
|
834
|
|
|
|
5,000
|
|
|
|
834
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Robert
Ripley
|
|
|
5,000
|
|
|
|
834
|
|
|
|
5,000
|
|
|
|
834
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Gregory
Hall
|
|
|
5,000
|
|
|
|
834
|
|
|
|
5,000
|
|
|
|
834
|
|
|
|
0
|
|
|
|
0.0
|
%
|
William
Jones
|
|
|
4,000
|
|
|
|
667
|
|
|
|
4,000
|
|
|
|
667
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Paul
Reitz
|
|
|
3,500
|
|
|
|
584
|
|
|
|
3,500
|
|
|
|
584
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Joseph
Frick
|
|
|
3,400
|
|
|
|
567
|
|
|
|
3,400
|
|
|
|
567
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Judith Koons
|
|
|
3,000
|
|
|
|
500
|
|
|
|
3,000
|
|
|
|
500
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Shirley
W. Barnard
|
|
|
2,700
|
|
|
|
450
|
|
|
|
2,700
|
|
|
|
450
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Vipul
Vassa
|
|
|
2,500
|
|
|
|
417
|
|
|
|
2,500
|
|
|
|
417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Ravi
Parik
|
|
|
2,500
|
|
|
|
417
|
|
|
|
2,500
|
|
|
|
417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Bradley
Westover
|
|
|
2,500
|
|
|
|
417
|
|
|
|
2,500
|
|
|
|
417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Suzanne
Ronneau
|
|
|
2,500
|
|
|
|
417
|
|
|
|
2,500
|
|
|
|
417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Mary Tryon
|
|
|
2,500
|
|
|
|
417
|
|
|
|
2,500
|
|
|
|
417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Marjorie
Lee
|
|
|
2,500
|
|
|
|
417
|
|
|
|
2,500
|
|
|
|
417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Silvanus
Williams
|
|
|
2,500
|
|
|
|
417
|
|
|
|
2,500
|
|
|
|
417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Ardys
B. Clawson
|
|
|
2,500
|
|
|
|
417
|
|
|
|
2,500
|
|
|
|
417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Helen Carter
|
|
|
2,000
|
|
|
|
334
|
|
|
|
2,000
|
|
|
|
334
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO June Rayle
|
|
|
2,000
|
|
|
|
334
|
|
|
|
2,000
|
|
|
|
334
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Clyde Steven Batiste
|
|
|
1,700
|
|
|
|
284
|
|
|
|
1,700
|
|
|
|
284
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Francis Malanowski
|
|
|
1,500
|
|
|
|
250
|
|
|
|
1,500
|
|
|
|
250
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO John T. Vonesh
|
|
|
1,500
|
|
|
|
250
|
|
|
|
1,500
|
|
|
|
250
|
|
|
|
0
|
|
|
|
0.0
|
%
|
James
Hermann (1)
|
|
|
2,300
|
|
|
|
384
|
|
|
|
2,300
|
|
|
|
384
|
|
|
|
0
|
|
|
|
0.0
|
%
|
William
Jordan
|
|
|
1,300
|
|
|
|
217
|
|
|
|
1,300
|
|
|
|
217
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Vian
Borg
|
|
|
1,200
|
|
|
|
200
|
|
|
|
1,200
|
|
|
|
200
|
|
|
|
0
|
|
|
|
0.0
|
%
|
NuView
Trust Company FBO Leon Pike
|
|
|
1,100
|
|
|
|
184
|
|
|
|
1,100
|
|
|
|
184
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Jason
Franklin
|
|
|
1,000
|
|
|
|
167
|
|
|
|
1,000
|
|
|
|
167
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Scott
Berg
|
|
|
1,000
|
|
|
|
167
|
|
|
|
1,000
|
|
|
|
167
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Donald
Caldwell
|
|
|
20,000
|
|
|
|
3,334
|
|
|
|
20,000
|
|
|
|
3,334
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Sandeep
Dhanuka
|
|
|
19,800
|
|
|
|
3,300
|
|
|
|
19,800
|
|
|
|
3,300
|
|
|
|
0
|
|
|
|
0.0
|
%
|
Buttonwood
Capital LLC
|
|
|
2,500
|
|
|
|
417
|
|
|
|
2,500
|
|
|
|
417
|
|
|
|
0
|
|
|
|
0.0
|
%
|
|
(1)
|
Includes
167 (1,000 pre-reverse split) Private Placement Warrants that Mr. Hermann acquired as Ms. Conn’s heir following her
death.
|
PLAN
OF DISTRIBUTION
Issuance
of Common Stock Underlying Warrants
Pursuant
to the terms of the Warrants, the shares of Common Stock issuable upon exercise thereof will be distributed to those Warrant holders
who surrender the certificates representing the Warrants and provide payment of the exercise price through their brokers to our
warrant agent, Continental Stock Transfer & Trust Company.
Resale
of Common Stock by Selling Securityholders
We
are registering Common Stock offered by this prospectus on behalf of the Selling Securityholders. The Selling Securityholders,
which as used herein includes donees, pledgees, transferees or other successors-in-interest selling Common Stock received after
the date of this prospectus from a Selling Securityholder as a gift, pledge, limited liability company or partnership distribution
or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their securities on the OTCQB
(in the case of our Common Stock) or any other stock exchange, market or trading facility on which such securities are traded
or in private transactions. These shares of Common Stock registered for resale in this prospectus shall be sold at a fixed price
of $3.00 for the duration of this offering. The offering price of the shares bears no relation to book value, assets, earnings,
or any other objective criteria of value. It has been arbitrarily determined by the Selling Securityholders.
Resale
of Private Placement Warrants by Selling Securityholders
We
are registering Private Placement Warrants, offered by this prospectus on behalf of the Selling Securityholders. The Selling Securityholders,
which as used herein includes donees, pledgees, transferees or other successors-in-interest selling Private Placement Warrants
received after the date of this prospectus from a Selling Securityholder as a gift, pledge, limited liability company or partnership
distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their securities
on the OTCQB (in the case of our Private Placement Warrants) or any other stock exchange, market or trading facility on which
such securities are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices
at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale or at
negotiated prices.
The
Selling Securityholders may use any one or more of the following methods when disposing of their Common Stock or Private Placement
Warrants or interests therein:
●
in market transactions, including transactions on a national securities exchange or quotations service or over-the-counter market;
●
in privately negotiated transactions;
●
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
●
in a block trade in which a broker-dealer will attempt to sell a block of securities as agent but may position and resell a portion
of the block as principal to facilitate the transaction;
●
through the settlement of short sales (including short sales “against the box”), in each case subject to compliance
with the Securities Act and other applicable securities laws;
●
through one or more underwriters in a public offering on a firm commitment or best-efforts basis;
●
an exchange distribution in accordance with the rules of the applicable exchange, if any;
●
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
●
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
●
broker-dealers may agree with the Selling Securityholders to sell a specified number of such securities at a stipulated price
per security;
●
directly to one or more purchasers;
●
in other ways not involving market makers or established trading markets;
●
by pledge to secure debts and other obligations;
●
through agents; or
●
in any combination of the above or by any other legally available means.
The
Selling Securityholders may, from time to time, pledge or grant a security interest in some or all of the securities owned by
them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell
their securities, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other
applicable provision of the Securities Act amending the list of Selling Securityholders to include the pledgee, transferee or
other successors in interest as Selling Securityholders under this prospectus. The Selling Securityholders also may transfer their
securities in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling
beneficial owners for purposes of this prospectus.
In
connection with the sale of our securities or interests therein, the Selling Securityholders may enter into hedging transactions
with broker-dealers or other financial institutions, which may in turn engage in short sales of our securities in the course of
hedging the positions they assume. The Selling Securityholders may also sell their securities short and deliver these securities
to close out their short positions, or loan or pledge such securities to broker-dealers that in turn may sell these securities.
The Selling Securityholders may also enter into option or other transactions with broker-dealers or other financial institutions
or the creation of one or more derivative securities which require the delivery to such broker-dealers or other financial institutions
of securities offered by this prospectus, which securities such broker-dealers or other financial institutions may resell pursuant
to this prospectus (as supplemented or amended to reflect such transaction).
The
aggregate proceeds to the Selling Securityholders from the sale of the securities offered by them will be the purchase price of
the security less discounts or commissions, if any. Each of the Selling Securityholders reserves the right to accept and, together
with their agents from time to time, to reject, in whole or in part, any proposed purchase of their securities to be made directly
or through agents. We will not receive any of the proceeds from the resale of securities being offered by the Selling Securityholders
named herein. However, we will receive proceeds from the exercise of the Warrants if they are exercised by a holder thereof.
The
Selling Securityholders also may resell all or a portion of their securities in open market transactions in reliance upon Rule
144 under the Securities Act, provided that they meet the criteria and conform to the requirements of that rule.
The
Selling Securityholders and any broker-dealers that act in connection with the sale of securities might be deemed to be “underwriters”
within the meaning of Section 2(a)(11) of the Securities Act, and any commissions received by such broker-dealers and any profit
on the resale of the securities sold by them while acting as principals might be deemed to be underwriting discounts or commissions
under the Securities Act.
To
the extent required, the securities to be sold, the names of the Selling Securityholders, the respective purchase prices and public
offering prices, the names of any agent, dealer or underwriter, and any applicable commissions or discounts with respect to a
particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to
the registration statement that includes this prospectus.
Blue
Sky Restrictions on Resale
In
order to comply with the securities laws of some states, if applicable, our securities may be sold in these jurisdictions only
through registered or licensed brokers or dealers. In addition, in some states our securities may not be sold unless they have
been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied
with.
If
a Selling Securityholder wants to sell its securities under this prospectus in the United States, the Selling Securityholder will
also need to comply with state securities laws, also known as “Blue Sky laws,” with regard to secondary sales. All
states offer a variety of exemptions from registration for secondary sales. Many states, for example, have an exemption for secondary
trading of securities registered under Section 12(g) of the Exchange Act, or for securities of issuers that publish continuous
disclosure of financial and non-financial information in a recognized securities manual, such as Standard & Poor’s.
The broker for a Selling Securityholder will be able to advise a Selling Securityholder in which states our securities are exempt
from registration with that state for secondary sales.
Any
person who purchases our securities from a Selling Securityholder offered by this prospectus who then wants to sell such securities
will also have to comply with Blue Sky laws regarding secondary sales.
When
the registration statement that includes this prospectus becomes effective, and a Selling Securityholder indicates in which state(s)
such Selling Securityholder desires to sell such Selling Securityholder’s securities, we will be able to identify whether
such Selling Securityholder will need to register or will be able to rely on an exemption therefrom.
We
have advised the Selling Securityholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to
sales of securities in the market and to the activities of the Selling Securityholders and their affiliates. In addition, we will
make copies of this prospectus (as it may be supplemented or amended from time to time) available to the Selling Securityholders
for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The Selling Securityholders may indemnify
any broker-dealer that participates in transactions involving the sale of their securities against certain liabilities, including
liabilities arising under the Securities Act.
We
have agreed to indemnify the Selling Securityholders against liabilities, including certain liabilities under the Securities Act
and state securities laws, relating to the registration of the securities offered by this prospectus.
We
are required to pay all of our fees and expenses incident to the registration of the securities covered by this prospectus, including
with regard to compliance with state securities or “blue sky” laws. The registration expenses of any registration
effected by preparing and filing a registration statement or similar document in compliance with the requirements of the Securities
Act, and the applicable rules and regulations promulgated thereunder, and such registration statement becoming effective, will
be borne by the Company.
SHARES
ELIGIBLE FOR FUTURE SALE
We
cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common
stock for sale will have on the market price of our common stock prevailing from time to time. Future sales of our common stock
in the public market, or the availability of such shares for sale in the public market, could adversely affect market prices prevailing
from time to time. The availability for sale of a substantial number of shares of our common stock acquired through the exercise
of outstanding warrants could materially adversely affect the market price of our common stock. In addition, sales of our common
stock in the public market after the restrictions lapse as described below, or the perception that those sales may occur, could
cause the prevailing market price to decrease or to be lower than it might be in the absence of those sales or perceptions.
Sale
of Restricted Shares
As
of October 5, 2020, there were 1,654,865 (9,929,190 pre-reverse split) shares of Common Stock issued and outstanding. Of
the approximately 1,331,496 (7,988,975 pre-reverse split) shares of our common stock outstanding as of May 31, 2020, approximately
807,298 (4,843,783 pre-reverse split) shares are tradable without restriction. These remaining shares are “restricted
securities” within the meaning of Rule 144 under the Securities Act.
Rule
144
In
general, under Rule 144, as currently in effect, a person (or persons whose shares are required to be aggregated), including a
person who may be deemed an “affiliate” of a company, who has beneficially owned restricted securities for at least
six months may sell, within any three-month period, a number of shares that does not exceed the greater of: (1) 1% of the then-outstanding
shares of common stock, or (2) if and when the common stock is listed on a national securities exchange, the average weekly trading
volume of the common stock during the four calendar weeks preceding the date on which notice of such sale was filed under Rule
144. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice, and availability of current
public information about our company. A person who is not deemed to have been an affiliate of us at any time during the 90 days
preceding a sale by such person, and who has beneficially owned the restricted shares for at least one year, is entitled to sell
such shares under Rule 144 without regard to any of the restrictions described above.
We
cannot estimate the number of shares of our common stock that our existing stockholders will elect to sell under Rule 144.
Transfer
Agent
The
transfer agent and registrar, for our Common Stock is Continental Stock Transfer and Trust Company. The transfer agent and registrar’s
address is at 1 State Street, New York, New York 10004-1561. The transfer agent’s telephone (212) 509-4000.
MATERIAL
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The
following is a discussion of the material U.S. federal income tax considerations generally applicable to the acquisition, ownership
and disposition of our Common Stock and Warrants. This discussion is limited to certain U.S. federal income tax considerations
to beneficial owners of our securities who hold the securities as a capital asset within the meaning of Section 1221 of the U.S.
Internal Revenue Code of 1986, as amended (the “Code”). This discussion does not describe all of the tax consequences
that may be relevant to you in light of your particular circumstances, including the alternative minimum tax, the Medicare contribution
tax on certain investment income and the different consequences that may apply if you are subject to special rules that apply
to certain types of investors, such as:
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financial
institutions or financial services entities;
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broker-dealers;
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insurance
companies;
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governments
or agencies or instrumentalities thereof;
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regulated
investment companies;
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real
estate investment trusts;
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expatriates
or former long-term residents of the United States;
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persons
that actually or constructively own five percent or more of our voting shares;
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persons
that acquired our securities pursuant to an exercise of employee share options, in connection with employee share incentive
plans or otherwise as compensation;
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dealers
or traders subject to a mark to market method of accounting with respect to the securities;
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persons
holding the securities as part of a “straddle,” hedge, constructive sale, conversion or other integrated or similar
transaction;
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U.S.
holders (as defined below) whose functional currency is not the U.S. dollar;
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partnerships
or other pass through entities for U.S. federal income tax purposes; and
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tax
exempt entities.
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If
you are a partnership for U.S. federal income tax purposes, the U.S. federal income tax treatment of your partners will generally
depend on the status of the partners and your activities.
This
discussion is based on the Code and administrative pronouncements, judicial decisions and final, temporary and proposed Treasury
regulations as of the date hereof, changes to any of which subsequent to the date of this prospectus may affect the tax consequences
described herein. This discussion does not address any aspect of state, local or non-U.S. taxation, or any U.S. tax law other
than the U.S. federal income tax (such as gift, estate or Medicare contribution taxes) or except as discussed below, any tax reporting
obligations of a holder of our securities. This discussion also assumes that any distribution made (or deemed made on our securities
and any consideration received (or deemed received) by a holder from the sale or other disposition of our securities will be in
U.S. dollars.
We
have not sought, and will not seek, a ruling from the Internal Revenue Service (the “IRS”) as to any U.S. federal
income tax consequence described herein. The IRS may disagree with the discussion herein, and its determination may be upheld
by a court. Moreover, there can be no assurance that future legislation, regulations, administrative rulings or court decisions
will not adversely affect the accuracy of the statements in this discussion.
THIS
DISCUSSION IS ONLY A SUMMARY OF THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR
SECURITIES. EACH PROSPECTIVE INVESTOR IN OUR SECURITIES IS URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR
TAX CONSEQUENCES TO SUCH INVESTOR OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF OUR SECURITIES, INCLUDING THE APPLICABILITY
AND EFFECT OF ANY STATE, LOCAL, AND NON-U.S. TAX LAWS, AS WELL AS U.S. FEDERAL TAX LAWS AND ANY APPLICABLE TAX TREATIES.
Personal
Holding Company Status
We
could be subject to a second level of U.S. federal income tax on a portion of our income if we are determined to be a personal
holding company, or PHC, for U.S. federal income tax purposes. A U.S. corporation generally will be classified as a PHC for U.S.
federal income tax purposes in a given taxable year if (i) at any time during the last half of such taxable year, five or fewer
individuals (without regard to their citizenship or residency and including as individuals for this purpose certain entities such
as certain tax-exempt organizations, pension funds and charitable trusts) own or are deemed to own (pursuant to certain constructive
ownership rules) more than 50% of the stock of the corporation by value and (ii) at least 60% of the corporation’s adjusted
ordinary gross income, as determined for U.S. federal income tax purposes, for such taxable year consists of PHC income (which
includes, among other things, dividends, interest, certain royalties, annuities and, under certain circumstances, rents).
Depending
on the date and size of our transactions, at least 60% of our adjusted ordinary gross income may consist of PHC income as discussed
above. In addition, depending on the concentration of our stock in the hands of individuals, including the members of our sponsor
and certain tax-exempt organizations, pension funds and charitable trusts, more than 50% of our stock may be owned or deemed owned
(pursuant to the constructive ownership rules) by such persons during the last half of a taxable year. Thus, no assurance can
be given that we will not become a PHC following this offering or in the future. If we are or were to become a PHC in a given
taxable year, we would be subject to an additional PHC tax, currently 20%, on our undistributed PHC income, which generally includes
our taxable income, subject to certain adjustments. The PHC requirements may apply to us in the taxable year of the offering and/or
future taxable years.
U.S.
Holders
This
section applies to you if you are a “U.S. holder.” A U.S. holder is a beneficial owner of our securities who or that
is, for U.S. federal income tax purposes:
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an individual who is a citizen or resident of the United States;
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized in or under the laws of
the United States, any state thereof or the District of Columbia;
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an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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a trust if (i) a court within the United States is able to exercise primary supervision over the administration of the trust and
one or more U.S. persons have the authority to control all substantial decisions of the trust, or (ii) it has in effect a valid
election to be treated as a U.S. person.
Taxation
of Distributions. If we pay cash distributions to U.S. holders of shares of our Common Stock, such distributions generally
will be treated as a dividend for U.S. federal income tax purposes to the extent the distribution is paid out of our current or
accumulated earnings and profits, as determined under U.S. federal income tax principles. Distributions in excess of current and
accumulated earnings and profits will constitute a return of capital that will be applied against and reduce (but not below zero)
the U.S. holder’s adjusted tax basis in our Common Stock. Any remaining excess will be treated as gain realized on the sale
or other disposition of the common stock and will be treated as described under “U.S. holders — Gain or Loss on Sale,
Taxable Exchange or Other Taxable Disposition of Our Securities” below.
Dividends
we pay to a U.S. holder that is a taxable corporation generally will qualify for the dividends received deduction if the requisite
holding period is satisfied. With certain exceptions (including, but not limited to, dividends treated as investment income for
purposes of investment interest deduction limitations), and provided certain holding period requirements are met, dividends we
pay to a non-corporate U.S. holder generally will constitute “qualified dividends” that will be subject to tax at
the maximum tax rate accorded to long-term capital gains.
Gain
or Loss on Sale, Taxable Exchange or Other Taxable Disposition of Our Securities. Upon a sale or other taxable disposition
of our securities which, in general, would include a redemption of common stock or warrants, a U.S. holder generally will recognize
capital gain or loss in an amount equal to the difference between the amount realized and the U.S. holder’s adjusted tax
basis in such securities. Any such capital gain or loss generally will be long-term capital gain or loss if the U.S. holder’s
holding period for the securities so disposed of exceeds one year. Long-term capital gains recognized by non-corporate U.S. holders
will be eligible to be taxed at reduced rates. The deductibility of capital losses is subject to various limitations that are
not described herein because a discussion of such limitations depends on each U.S. holder’s particular facts and circumstances.
Generally,
the amount of gain or loss recognized by a U.S. holder is an amount equal to the difference between (i) the sum of the amount
of cash and the fair market value of any property received in such disposition and (ii) the U.S. holder’s adjusted tax basis
in its securities so disposed of. A U.S. holder’s adjusted tax basis in its common stock or warrants generally will equal
the U.S. holder’s acquisition cost less, in the case of a share of common stock, any prior distributions treated as a return
of capital.
Exercise
or Lapse of a Warrant. Except as discussed below with respect to the cashless exercise of a warrant, a U.S. holder generally
will not recognize taxable gain or loss from the acquisition of common stock upon exercise of a warrant for cash. The U.S. holder’s
tax basis in the share of our Common Stock received upon exercise of the warrant generally will be an amount equal to the sum
of the U.S. holder’s initial investment in the warrant and the exercise price. It is unclear whether a U.S. holder’s
holding period for the shares of Common Stock received upon exercise of the warrants will commence on the date of exercise of
the warrant or the day following the date of exercise of the warrants; in either case, the holding period will not include the
period during which the U.S. holder held the warrants. If a warrant is allowed to lapse unexercised, a U.S. holder generally will
recognize a capital loss equal to such holder’s tax basis in the warrant.
The
tax consequences of a cashless exercise of a warrant are not clear under current tax law. A cashless exercise may be tax-free,
either because the exercise is not a realization event or because the exercise is treated as a recapitalization for U.S. federal
income tax purposes. In either tax-free situation, a U.S. holder’s basis in the common stock received would equal the holder’s
basis in the warrant. If the cashless exercise were treated as not being a realization event, it is unclear whether a U.S. holder’s
holding period for the shares of Common Stock would be treated as commencing on the date of exercise of the warrant or the day
following the date of exercise of the warrant. If the cashless exercise were treated as a recapitalization, the holding period
of the common stock would include the holding period of the warrant.
It
is also possible that a cashless exercise could be treated in part as a taxable exchange in which gain or loss would be recognized.
In such event, a U.S. holder could be deemed to have surrendered warrants equal to the number of common shares having a value
equal to the exercise price for the total number of warrants to be exercised. The U.S. holder would recognize capital gain or
loss in an amount equal to the difference between the fair market value the warrants deemed surrendered and the U.S. holder’s
tax basis in the warrants deemed surrendered. In this case, a U.S. holder’s tax basis in the common stock received would
equal the sum of the fair market value of the warrants deemed surrendered and the U.S. holder’s tax basis in the warrants
exercised. It is unclear whether a U.S. holder’s holding period for the shares of Common Stock would commence on the date
of exercise of the warrant or the day following the date of exercise of the warrant.
Due
to the absence of authority on the U.S. federal income tax treatment of a cashless exercise, there can be no assurance which,
if any, of the alternative tax consequences and holding periods described above would be adopted by the IRS or a court of law.
Accordingly, U.S. holders should consult their tax advisors regarding the tax consequences of a cashless exercise.
Possible
Constructive Distributions. The terms of each warrant provide for an adjustment to the number of shares of Common Stock
for which the warrant may be exercised or to the exercise price of the warrant in certain events, as discussed in the section
of this prospectus captioned “Description of Securities — Warrants — Public Stockholders’ Warrants.”
An adjustment which has the effect of preventing dilution generally is not taxable. The U.S. holders of the warrants would, however,
be treated as receiving a constructive distribution from us if, for example, the adjustment increases the warrant holders’
proportionate interest in our assets or earnings and profits (e.g., through an increase in the number of shares of Common Stock
that would be obtained upon exercise) as a result of a distribution of cash to the holders of shares of our Common Stock which
is taxable to the U.S. holders of such shares as described under “U.S. holders — Taxation of Distributions”
above. For example, if the exercise price of the warrants is decreased as a result of certain taxable dividends paid to holders
of the common stock (as contemplated by the terms of the warrant in certain circumstances), then the amount by which such exercise
was decreased could be considered an increase in the warrant holder’s proportionate interest in our assets or earnings and
profits, which may result in a constructive distribution to holders of the warrants. Such constructive distribution would be subject
to tax as described under that section in the same manner as if the U.S. holders of the warrants received a cash distribution
from us equal to the fair market value of such increased interest. For certain information reporting purposes, we are required
to determine the date and amount of any such constructive distributions. Recently proposed Treasury regulations, which we may
rely on prior to the issuance of final regulations, specify how the date and amount of constructive distributions are determined.
Information
Reporting and Backup Withholding. In general, information reporting requirements may apply to dividends paid to a U.S. holder
and to the proceeds of the sale or other disposition of our securities, unless the U.S. holder is an exempt recipient. Backup
withholding may apply to such payments if the U.S. holder fails to provide a taxpayer identification number, a certification of
exempt status or has been notified by the IRS that it is subject to backup withholding (and such notification has not been withdrawn).
Any
amounts withheld under the backup withholding rules will be allowed as a refund or a credit against a U.S. holder’s U.S.
federal income tax liability provided the required information is timely furnished to the IRS.
Non-U.S.
Holders
This
section applies to you if you are a “Non-U.S. holder.” A Non-U.S. holder is a beneficial owner of our securities who
or that is, for U.S. federal income tax purposes:
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a non resident alien individual, other than certain former citizens and residents of the United States subject to U.S. tax as
expatriates;
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a foreign corporation; or
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an estate or trust that is not a U.S. holder;
but
does not include an individual who is present in the United States for 183 days or more in the taxable year of disposition. If
you are such an individual, you should consult your tax advisor regarding the U.S. federal income tax consequences of the sale
or other disposition of a security.
Taxation
of Distributions. In general, any distributions we make to a Non-U.S. holder of shares of our Common Stock, to the extent
paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles), will constitute
dividends for U.S. federal income tax purposes and, provided such dividends are not effectively connected with the Non-U.S. holder’s
conduct of a trade or business within the United States, we will be required to withhold tax from the gross amount of the dividend
at a rate of 30%, unless such Non-U.S. holder is eligible for a reduced rate of withholding tax under an applicable income tax
treaty and provides proper certification of its eligibility for such reduced rate (usually on an IRS Form W-8BEN or W-8BEN-E).
Any distribution not constituting a dividend will be treated first as reducing (but not below zero) the Non-U.S. holder’s
adjusted tax basis in its shares of our Common Stock and, to the extent such distribution exceeds the Non-U.S. holder’s
adjusted tax basis, as gain realized from the sale or other disposition of the common stock, which will be treated as described
under “Non-U.S. holders — Gain on Sale, Taxable Exchange or Other Taxable Disposition of Our Securities” below.
In addition, if we determine that we are classified as a “United States real property holding corporation” (see “Non-U.S.
holders — Gain on Sale, Taxable Exchange or Other Taxable Disposition of Our Securities” below), we will withhold
15% of any distribution that exceeds our current and accumulated earnings and profits.
The
withholding tax does not apply to dividends paid to a Non-U.S. holder who provides a Form W-8ECI, certifying that the dividends
are effectively connected with the Non-U.S. holder’s conduct of a trade or business within the United States. Instead, the
effectively connected dividends will be subject to regular U.S. federal income tax as if the Non-U.S. holder were a U.S. resident,
subject to an applicable income tax treaty providing otherwise. A Non-U.S. corporation receiving effectively connected dividends
may also be subject to an additional “branch profits tax” imposed at a rate of 30% (or a lower treaty rate).
Exercise
of a Warrant. The U.S. federal income tax treatment of a Non-U.S. holder’s exercise of a warrant, or the lapse
of a warrant held by a Non-U.S. holder, generally will correspond to the U.S. federal income tax treatment of the exercise or
lapse of a warrant by a U.S. holder, as described under “U.S. holders — Exercise or Lapse of a Warrant” above,
although to the extent a cashless exercise results in a taxable exchange, the consequences would be similar to those described
below in “Non-U.S. holders — Gain on Sale, Taxable Exchange or Other Taxable Disposition of Our Securities.”
Gain
on Sale, Taxable Exchange or Other Taxable Disposition of Our Securities. A Non-U.S. holder generally will not be subject
to U.S. federal income or withholding tax in respect of gain recognized on a sale, taxable exchange or other taxable disposition
of our securities unless:
●
the gain is effectively connected with the conduct of a trade or business by the Non-U.S. holder within the United States (and,
under certain income tax treaties, is attributable to a United States permanent establishment or fixed base maintained by the
Non-U.S. holder); or
●we
are or have been a “U.S. real property holding corporation” for U.S. federal income tax purposes at any time during
the shorter of the five-year period ending on the date of disposition or the period that the Non-U.S. holder held our securities,
and, in the case where shares of our Common Stock are regularly traded on an established securities market, the Non-U.S. holder
has owned, directly or constructively, more than 5% of our Common Stock at any time within the shorter of the five-year period
preceding the disposition or such Non-U.S. holder’s holding period for the shares of our Common Stock. There can be no assurance
that our Common Stock will be treated as regularly traded on an established securities market for this purpose.
Unless
an applicable treaty provides otherwise, gain described in the first bullet point above will be subject to tax at generally applicable
U.S. federal income tax rates as if the Non-U.S. holder were a U.S. resident. Any gains described in the first bullet point above
of a Non-U.S. holder that is a foreign corporation may also be subject to an additional “branch profits tax” at a
30% rate (or lower treaty rate).
If
the second bullet point above applies to a Non-U.S. holder, gain recognized by such holder on the sale, exchange or other disposition
of our securities will be subject to tax at generally applicable U.S. federal income tax rates. In addition, a buyer of our securities
from such holder may be required to withhold U.S. federal income tax at a rate of 15% of the amount realized upon such disposition.
We will be classified as a U.S. real property holding corporation if the fair market value of our “U.S. real property interests”
equals or exceeds 50% of the sum of the fair market value of our worldwide real property interests plus our other assets used
or held for use in a trade or business, as determined for U.S. federal income tax purposes.
Information
Reporting and Backup Withholding. Information returns will be filed with the IRS in connection with payments of dividends
and the proceeds from a sale or other disposition of our securities. A Non-U.S. holder may have to comply with certification procedures
to establish that it is not a United States person in order to avoid information reporting and backup withholding requirements.
The certification procedures required to claim a reduced rate of withholding under a treaty will satisfy the certification requirements
necessary to avoid the backup withholding as well. The amount of any backup withholding from a payment to a Non-U.S. holder will
be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle such holder to a refund,
provided that the required information is timely furnished to the IRS.
FATCA
Withholding Taxes. Provisions commonly referred to as “FATCA” impose withholding of 30% on payments of dividends
(including constructive dividends) on our securities, and, beginning January 1, 2019, sales or other disposition proceeds from
our securities to “foreign financial institutions” (which is broadly defined for this purpose and in general includes
investment vehicles) and certain other Non-U.S. entities unless various U.S. information reporting and due diligence requirements
(generally relating to ownership by U.S. persons of interests in or accounts with those entities) have been satisfied, or an exemption
applies (typically certified as to by the delivery of a properly completed IRS Form W-8BEN-E). If FATCA withholding is imposed,
a beneficial owner of the payment that is not a foreign financial institution (or that is a foreign financial institution entitled
to a reduced rate of withholding tax with respect to such payment under an income tax treaty) generally may be entitled to a refund
or credit of any amounts withheld by filing a U.S. federal income tax return and providing certain other information to the IRS
(which may entail significant administrative burden). Foreign financial institutions located in jurisdictions that have an intergovernmental
agreement with the United States governing FATCA may be subject to different rules. Prospective investors should consult their
tax advisers regarding the effects of FATCA on their investment in our securities.
LEGAL
MATTERS
The
validity of the securities offered by this prospectus will be passed upon for us by Anthony L.G., PLLC, 625 N. Flagler Drive,
Suite 600, West Palm Beach, Florida 33401.
EXPERTS
Our
balance sheets as of May 31, 2020 and 2019 and the related statement of operations, changes in stockholders’ equity and
cash flows for the year ended May 31, 2020 and 2019 included in this registration statement and prospectus have been audited by
Prager Metis, independent registered public accounting firm, as indicated in their report with respect thereto, and have been
so included in reliance upon the report of such firm given on their authority as experts in accounting and auditing.
DISCLOSURE
OF COMMISSION’S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our
directors and officers are indemnified as provided by Delaware law, our third amended and restated certificate of incorporation,
as amended, and our bylaws. We have agreed to indemnify each of our directors and certain officers against certain liabilities,
including liabilities under the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the provisions described above, or otherwise, we have
been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than our payment
of expenses incurred or paid by our director, officer or controlling person in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the securities being registered, we will, unless
in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have filed with the SEC the registration statement on Form S-1 under the Securities Act for the common stock offered for resale
by this prospectus. This prospectus, which is a part of the registration statement, does not contain all of the information in
the registration statement and the exhibits filed with it, portions of which have been omitted as permitted by SEC rules and regulations.
For further information relating to us and our common stock, reference is made to the registration statement, including its exhibits
and schedules. Statements made in this prospectus relating to any contract or other document are not necessarily complete and
you should refer to the exhibits attached to or incorporated by reference into the registration statement for copies of the actual
contract or document.
The
registration statement on Form S-1, of which this prospectus forms a part, including exhibits, is available at the SEC’s
website at http://www.sec.gov. You may also read and copy any document we file with, or furnish to, the SEC at its public
reference facilities:
Public
Reference Room Office
100
F Street, N.E.
Room
1580
Washington,
D.C. 20549
You
may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. Callers in the United States can also call (202) 551-8090 for further information on
the operations of the public reference facilities.
SIMPLICITY
ESPORTS AND GAMING COMPANY
INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
To
the shareholders and the Board of Directors of Simplicity Esports and Gaming Company and Subsidiaries
Opinion
on the Financial Statements
We
have audited the accompanying balance sheet of Simplicity Esports and Gaming Co. (the “Company”) as of May 31, 2020
and 2019, and the related statements of operations, stockholders’ (deficit), and cash flows for each of the years in the
two year period ended May 31, 2020, and the related notes and schedules (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
May 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two year period ended
May 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Going
Concern Matter
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company has not generated sufficient revenues to provide sufficient cash flow as of
May 31, 2020, which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning
these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audit provides a reasonable basis for our opinion.
/s/
Prager Metis CPAs, LLC
|
|
|
|
We
have served as the Company’s auditor since 2017
|
|
Basking
Ridge, New Jersey
|
|
August
31, 2020
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
160,208
|
|
|
$
|
1,540,158
|
|
Accounts receivable, net
|
|
|
127,653
|
|
|
|
-
|
|
Inventory
|
|
|
15,787
|
|
|
|
-
|
|
Prepaid expenses
|
|
|
5,588
|
|
|
|
-
|
|
Total Current Assets
|
|
|
309,236
|
|
|
|
1,540,158
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,155,141
|
|
|
|
4,456,250
|
|
Intangible assets, net
|
|
|
2,141,374
|
|
|
|
1,528,441
|
|
Deferred brokerage fees
|
|
|
149,223
|
|
|
|
-
|
|
Property and equipment
|
|
|
232,733
|
|
|
|
117,231
|
|
Right of use asset, operating lease
|
|
|
490,984
|
|
|
|
100,146
|
|
Security deposit
|
|
|
14,885
|
|
|
|
12,317
|
|
Deferred financing costs
|
|
|
98,198
|
|
|
|
-
|
|
Total Other Assets
|
|
|
8,282,538
|
|
|
|
6,214,385
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
8,591,774
|
|
|
$
|
7,754,543
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
126,716
|
|
|
$
|
-
|
|
Accrued expenses
|
|
|
1,421,842
|
|
|
|
691,940
|
|
Loan payable – related party
|
|
|
-
|
|
|
|
93,761
|
|
Convertible note payable
|
|
|
1,127,320
|
|
|
|
1,000,000
|
|
Note payable – related party
|
|
|
64,728
|
|
|
|
-
|
|
Operating lease obligation, current
|
|
|
151,867
|
|
|
|
32,045
|
|
Current portion of deferred revenues
|
|
|
3,795
|
|
|
|
-
|
|
Stock payable
|
|
|
75,000
|
|
|
|
-
|
|
Total Current Liabilities
|
|
|
2,971,268
|
|
|
|
1,817,746
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligation, net of current portion
|
|
|
339,116
|
|
|
|
68,876
|
|
Deferred revenues, less current portion
|
|
|
365,718
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,676,102
|
|
|
|
1,886,622
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies–Note 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred stock - $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock - $0.0001 par value; 20,000,000 shares authorized; 7,988,975 and 7,003,975 shares issued and outstanding as of May 31, 2020 and May 31, 2019, respectively
|
|
|
799
|
|
|
|
700
|
|
Additional paid-in capital
|
|
|
11,131,404
|
|
|
|
9,442,027
|
|
Accumulated deficit
|
|
|
(6,195,044
|
)
|
|
|
(3,574,806
|
)
|
Subtotal
|
|
|
4,937,159
|
|
|
|
5,867,921
|
|
Non-controlling interest
|
|
|
(21,487
|
)
|
|
|
-
|
|
Total Stockholders’ Equity
|
|
|
4,915,672
|
|
|
|
5,867,921
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
8,591,774
|
|
|
$
|
7,754,543
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For the Year Ended
|
|
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Franchise Royalties and License Fees
|
|
$
|
478,023
|
|
|
$
|
-
|
|
Franchise Termination Revenue
|
|
|
44,984
|
|
|
|
-
|
|
Company-Owned Stores Sales
|
|
|
174,042
|
|
|
|
-
|
|
Esports Revenue
|
|
|
164,361
|
|
|
|
37,995
|
|
Total Revenue
|
|
|
861,410
|
|
|
|
37,995
|
|
Less Cost of Goods Sold
|
|
|
(422,539
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
438,871
|
|
|
|
37,995
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
General and Administrative expenses
|
|
|
(3,170,992
|
)
|
|
|
(4,353,189
|
)
|
Loss from Operations
|
|
|
(2,732,121
|
)
|
|
|
(4,315,194
|
)
|
|
|
|
|
|
|
|
|
|
Other Income / (Expense)
|
|
|
|
|
|
|
|
|
Debt Forgiveness Income
|
|
|
93,761
|
|
|
|
369,206
|
|
Interest Expense
|
|
|
(32,472
|
)
|
|
|
(23,268
|
)
|
Interest Income
|
|
|
3,034
|
|
|
|
403,984
|
|
Rebate Income
|
|
|
2,019
|
|
|
|
-
|
|
Total Other Income
|
|
|
66,342
|
|
|
|
749,922
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
|
(2,665,779
|
)
|
|
|
(3,565,272
|
)
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Loss Before Non-Controlling Interest
|
|
|
(2,665,779
|
)
|
|
|
(3,565,272
|
)
|
Net Loss Attributable to Non-Controlling Interest
|
|
|
45,541
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Loss Available to Common Shareholders
|
|
$
|
(2,620,238
|
)
|
|
$
|
(3,565,272
|
)
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(1.00
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted Weighted Average Number of common shares outstanding
|
|
|
7,722,964
|
|
|
|
3,566,488
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED MAY 31, 2020 AND 2019
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Non-
Controlling
|
|
|
Accumulated
|
|
|
Total Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Interest
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - May 31, 2018
|
|
|
2,252,743
|
|
|
$
|
225
|
|
|
$
|
5,009,310
|
|
|
$
|
-
|
|
|
$
|
(9,534
|
)
|
|
$
|
5,000,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock subject to redemption not redeemed
|
|
|
112,497
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock redemption
|
|
|
(451,563
|
)
|
|
|
(45
|
)
|
|
|
(6,635,207
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,635,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for advisory services
|
|
|
208,000
|
|
|
|
21
|
|
|
|
2,124,979
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to Smaaash Founders
|
|
|
2,000,000
|
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation of Smaaash Founders shares
|
|
|
(2,000,000
|
)
|
|
|
(200
|
)
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rights shares
|
|
|
546,150
|
|
|
|
54
|
|
|
|
383,161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
383,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued in acquisition
|
|
|
3,000,000
|
|
|
|
300
|
|
|
|
6,089,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,090,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued in private placement
|
|
|
962,500
|
|
|
|
96
|
|
|
|
1,924,904
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,925,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued from employment agreements
|
|
|
180,000
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of common shares
|
|
|
-
|
|
|
|
-
|
|
|
|
45,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for convertible note
|
|
|
193,648
|
|
|
|
20
|
|
|
|
499,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,565,272
|
)
|
|
|
(3,565,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - May 31, 2019
|
|
|
7,003,975
|
|
|
$
|
700
|
|
|
$
|
9,442,027
|
|
|
$
|
-
|
|
|
$
|
(3,574,806
|
)
|
|
$
|
5,867,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for PLAYlive Nation acquisition
|
|
|
750,000
|
|
|
|
75
|
|
|
|
1,439,925
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,440,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for vesting of employment agreement awards
|
|
|
105,000
|
|
|
|
11
|
|
|
|
153,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for cash
|
|
|
125,000
|
|
|
|
12
|
|
|
|
87,688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued as compensation
|
|
|
5,000
|
|
|
|
1
|
|
|
|
5,899
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued in connection with note payable
|
|
|
-
|
|
|
|
-
|
|
|
|
2,865
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest of original investment in subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,054
|
|
|
|
-
|
|
|
|
24,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(45,541
|
)
|
|
|
-
|
|
|
|
(45,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,620,238
|
)
|
|
|
(2,620,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - May 31, 2020
|
|
|
7,988,975
|
|
|
$
|
799
|
|
|
$
|
11,131,404
|
|
|
$
|
(21,487
|
)
|
|
$
|
(6,195,044
|
)
|
|
$
|
4,915,672
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEAR
ENDED
|
|
May 31, 2020
|
|
|
May 31, 2019
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(2,665,779
|
)
|
|
$
|
(3,565,272
|
)
|
Adjustments to reconcile net (loss) income to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Interest earned on marketable securities held in trust account
|
|
|
-
|
|
|
|
(403,984
|
)
|
Depreciation expense
|
|
|
57,473
|
|
|
|
5,298
|
|
Amortization expense
|
|
|
211,067
|
|
|
|
85,677
|
|
Impairment of cost method investment
|
|
|
-
|
|
|
|
150,000
|
|
Debt forgiveness income
|
|
|
(93,761
|
)
|
|
|
(369.206
|
)
|
Issuance of shares for services
|
|
|
161,776
|
|
|
|
2,170,110
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(127,653
|
)
|
|
|
-
|
|
Inventory
|
|
|
(15,787
|
)
|
|
|
-
|
|
Prepaid expenses
|
|
|
(5,588
|
)
|
|
|
3,170
|
|
Security deposits
|
|
|
(2,568
|
)
|
|
|
(12,318
|
)
|
Deferred brokerage fees
|
|
|
(18,592
|
)
|
|
|
-
|
|
Deferred revenues
|
|
|
123,882
|
|
|
|
-
|
|
Accounts payable
|
|
|
123,142
|
|
|
|
-
|
|
Deferred legal fees
|
|
|
-
|
|
|
|
(100,000
|
)
|
Accrued expenses
|
|
|
729,902
|
|
|
|
641,270
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(1,522,486
|
)
|
|
|
(1,395,255
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Cash purchased in acquisition
|
|
|
26,180
|
|
|
|
75,930
|
|
Lease liability net of lease asset
|
|
|
(776
|
)
|
|
|
775
|
|
Investment at cost
|
|
|
-
|
|
|
|
(150,000
|
)
|
Purchase of property and equipment
|
|
|
(163,472
|
)
|
|
|
(122,529
|
)
|
Net cash (used in) investing activities
|
|
|
(138,068
|
)
|
|
|
(195,824
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale of Private Units
|
|
|
87,700
|
|
|
|
1,925,000
|
|
Proceeds from note payable - related party, net
|
|
|
192,048
|
|
|
|
12,143
|
|
Deferred financing costs
|
|
|
(98,198
|
)
|
|
|
-
|
|
Non-controlling interest of original investment in subsidiaries
|
|
|
24,054
|
|
|
|
-
|
|
Private placement funds received
|
|
|
75,000
|
|
|
|
-
|
|
Settlement of redeemable common stock
|
|
|
-
|
|
|
|
(46,291,685
|
)
|
Cash held in trust account used to settle common stock redemption obligation
|
|
|
-
|
|
|
|
(7,620,432
|
)
|
Cash in trust
|
|
|
-
|
|
|
|
54,648,148
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
280,604
|
|
|
|
2,673,174
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(1,379,950
|
)
|
|
|
1,082,095
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of period
|
|
|
1,540,158
|
|
|
|
458,063
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents - end of period
|
|
$
|
160,208
|
|
|
$
|
1,540,158
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental Non-Cash Investing and Financing Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for consideration in an acquisition
|
|
$
|
1,440,000
|
|
|
$
|
6,090,000
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
NOTE
1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity
Esports and Gaming Company F/K/A Smaaash Entertainment Inc. (the “Company,” “we,” or “our”),
was an organized as a blank check company organized under the laws of the State of Delaware on April 17, 2017. The Company was
formed under the name I-AM Capital Acquisition Company for the purpose of effecting a merger, share exchange, asset acquisition,
share purchase, reorganization or similar business combination with one or more businesses (“Business Combination”).
On November 20, 2018, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc. On January
2, 2019, the Company changed its name from Smaaash Entertainment Inc. to Simplicity Esports and Gaming Company.
Through
our wholly subsidiary, Simplicity Esports, LLC, acquired on January 2, 2019 (see Note 6). The Company has begun to implement a
unique approach to ensure the ultimate fan friendly esports experience. Our intention is to have gamers involved at the grassroots
level and feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community
and we plan to use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other
in the industry. Simplicity is an established brand in the Esports industry with an engaged fan base competing in popular games
across different genres, including PUBG, Gears of War, Smite, Guns of Boom, and multiple EA Sports titles. Additionally, the Simplicity
stream team encompasses a unique group of casters, influencers, and personalities all of whom connect to Simplicity’s dedicated
fan base. Simplicity also has begun to open and operate esports gaming centers that will provide the public an opportunity to
experience and enjoy gaming and Esports in a social setting, regardless of skill or experience.
Through
our wholly owned subsidiary, PLAYlive Nation, Inc. (“PLAYlive”), acquired on July 29, 2019 (see Note 6), the Company
has a network of franchised Gaming Centers. As May 31, 2020, approximately 43 locations were open and operating, in various states
including Arizona, California, Idaho, Florida, Maryland, Michigan, Mississippi, Montana, Oregon, South Carolina, Texas, Utah and
Washington. PLAYlive offers a video gaming lounge concept to qualified franchisees. PLAYlive currently offers single-unit location
franchises as well as agreements to develop multiple locations. This PLAYlive model is being interlaced with the esports gaming
centers mentioned above to create the ultimate gaming center.
The
Company’s sponsor was I-AM Capital Partners LLC (the “Sponsor”). The Company selected May 31 as its fiscal year
end.
Initial
Business Combination
The
Company’s management had broad discretion with respect to the specific application of the net proceeds of the Initial Public
Offering.
On
August 21, 2018, the Company deposited into the Trust Account an aggregate of $303,610 (including interest earned on the funds
in the Trust Account available for withdrawal), representing $0.058 per public share. As a result of such payment, the Company
extended the period of time it had to consummate a Business Combination by three months to November 21, 2018.
On
November 20, 2018, the parties consummated the initial Business Combination.
Upon
consummation of the Business Combination, the Company issued 208,000 restricted shares to Chardan Capital Markets in consideration
for advisory services provided. These restricted shares are valued at $10.21 per share totaling $2,125,000 and are on the statement
of operations included in general and administrative expenses.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
At
the special meeting of stockholders held on November 9, 2018, holders of 4,448,260 shares of the Company’s common stock
sold in its Initial Public Offering (“Public Shares”) exercised their right to redeem those shares for cash
at a price of $10.2187363 per share, for an aggregate of approximately $45,455,596. Immediately after giving effect to the initial
Business Combination (including as a result of the redemptions described above) the issuance of 2,000,000 shares of common stock
to the Smaaash founders, the issuance of 520,000 shares of common stock upon conversion of the rights at the Closing and the issuance
of 208,000 shares of common stock to Chardan Capital Markets as consideration for services), there were 5,119,390 shares of common
stock and warrants to purchase approximately 5,461,500 shares of common stock issued and outstanding. Upon the Closing, the Company’s
rights ceased to exist, and its common stock and warrants began trading on The Nasdaq Stock Market (“Nasdaq”).
On
the Closing Date, the Company entered into a master franchise agreement (“Master Franchise Agreement”) and a master
license and distribution agreement (“Master Distribution Agreement”) with Smaaash. As of May 31, 2020, the Master
Franchise Agreement and Master Distribution Agreement continue to be in effect.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements are presented in U.S. dollars in conformity with accounting principles generally
accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”).
Emerging
Growth Company
Section
102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from
being required to comply with new or revised financial accounting standards until private companies (that is, those that have
not had a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), declared effective
or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect
to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but
any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which
means that when a standard is issued or revised and it has different application dates for public or private companies, the Company,
as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
Basis
of Consolidation
The
consolidated financial statements include the operations of the Company and its wholly owned subsidiaries, Simplicity Esports,
LLC, PLAYlive Nation, Inc., and PLAYlive Nation Holdings, LLC, its 90% owned subsidiary Simplicity One Brasil Ltd, and its 79%
owned subsidiaries Simplicity Happy Valley, LLC and Simplicity Redmond, LLC.
In
November 2019, the Company organized Happy Valley, LLC and Redmond, LLC for the purpose of converting franchised stores into Company
owned stores.
All
significant intercompany accounts and transactions have been eliminated in consolidation.
Cash
and cash equivalents
The
Company considers short-term interest-bearing investments with initial maturities of three months or less to be cash equivalents.
The Company has no cash equivalents.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution,
which at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these
accounts and management believes the Company is not exposed to significant risks on such accounts.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Financial
Instruments
The
fair value of the Company’s assets and liabilities, which qualify as financial instruments under Financial Accounting Standards
Board’s (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and
Disclosures,” approximates the carrying amounts represented in the consolidated balance sheet.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue
Recognition
As
of January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) (“ASC 606”). The new guidance
sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and
is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in GAAP.
The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or
services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not
addressed completely in the prior accounting guidance. The Company adopted the standard using the modified retrospective method
and the adoption did not have a material impact on its financial statements.
The
Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product
sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the
Company expects to receive in exchange for transferring goods and services.
The
following describes principal activities, separated by major product or service, from which the Company generates its revenues.
Company-owned
Stores Sales
The
Company-owned stores principally generate revenue from retail esports gaming centers. Revenues from Company-owned stores are recognized
when the products are delivered, or the service is provided.
Franchise
Royalties and Fees
Franchise
royalties which are based on eight percent of franchise store sales after a minimum level of sales occur and are recognized as
sales occur. Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive
for other behaviors are recognized at the same time as the related royalty as they are not separately distinguishable from the
full royalty rate. Franchise royalties are billed on a monthly basis.
The
Company recognizes initial franchise license fee revenue, when the Company has performed substantially all the services required
in the franchise agreement. Fees received that do not meet these criteria are recorded as deferred revenues until earned. The
pre-opening services provided to franchisees do not contain separate and distinct performance obligations from the franchise right;
thus, the fees collected will be amortized on a straight-line basis beginning at the store opening date through the term of the
franchise agreement, which is typically 10 years. Franchise license renewal fees, which generally occur every 10 years, are billed
before the renewal date. Fees received for future license renewal periods are amortized over the life of the renewal period.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
The
Company offers various incentive programs for franchisees including royalty incentives, new store opening incentives (i.e. development
incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned
or granted under these programs that are in the form of discounts.
Commissary
sales are comprised of food and supplies sold to franchised stores and are recognized as revenue upon shipment or delivery of
the related products to the franchisees. Payments are generally due within 30 days.
Fees
for information services, including software maintenance fees, marketing fees and website maintenance, graphic and promotion fees
are recognized as revenue as such services are provided.
Esports
Revenue
Esports
revenue is a form of competition using video games. Most commonly, esports takes the form of organized, single player and multiplayer
video game competitions, particularly between professional players, individually or as teams. Revenues from Esports revenue are
recognized when the competition is completed, and prize money is awarded. Revenues earned from league sponsorships from the Company’s
share of league revenues including domestic esports teams competing in games such as Overwatch, Apex Legends, PUBG and more are
included here. Revenue from international esports teams including Flamengo esports are included here. League revenues are earned
through sponsorship fees on a per tournament, or per season basis. As of March 22, 2020, the Company commenced weekly online esports
tournaments promoted directly to its existing customer base. Revenue from these weekly tournaments, comprised of registration
fees on a per player basis, is included here.
Deferred
Revenues
Deferred
revenues are classified as current or long-term based on when management estimates the revenues will be recognized.
The
Company receives payments from franchisees in advance of all performance obligations having been met, including but not limited
to franchise locations being opened. As certain conditions agreed to in these franchise agreements are performed, revenues are
recognized.
Deferred
costs include commissions paid to brokers related to the sale of specific new franchises which have not met revenue recognition
criteria as of May 31, 2020. These costs are recognized in the same period as the initial franchise fee revenue is recognized.
Accounts
Receivable
The
Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e. franchisees), taking into
consideration the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable are written
off against the allowance when management determines it is probable the receivable is worthless. Customer account balances with
invoices dated over 90 days old are considered delinquent and considered in the allowance assessment. The Company performs credit
evaluations of its customers and, generally, requires no collateral. Management has assessed accounts receivable as of May 31,
2020, and an allowance for doubtful accounts of approximately $52,400 has been recorded
Property
and equipment
Property
and equipment and leasehold improvements are recorded at its historical cost. The cost of property and equipment is depreciated
over the estimated useful lives, when placed in service, (ranging from 3 -5 years) of the related assets utilizing the straight-line
method of depreciation. The cost of leasehold improvements is depreciated (amortized) over the lesser of the length of the related
leases or the estimated useful lives of the assets. Ordinary repairs and maintenance are expensed when incurred and major repairs
will be capitalized and expensed if it benefits future periods.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Intangible
Assets and impairment
Intangible
assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. These costs were
included in intangible assets on our balance sheet and amortized on a straight-line basis when placed into service over the estimated
useful lives of the costs, which is 3 to 5 years.
The
Company periodically reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less that the carrying amount of the asset. The amount of impairment is measured as the difference
between the asset’s estimated fair value and its book value.
Goodwill
Goodwill
is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill,
but we assess our goodwill for impairment at least annually. Our assessment date was May 31, 2020, and quantitative and qualitative
considerations indicated no impairment.
Franchise
Locations
Through
PLAYlive, the Company’s wholly owned subsidiary, the Company has entered into franchise agreements with third parties. As
May 31, 2020, approximately 43 locations were open and operating, in various states including Arizona, California, Idaho, Florida,
Maryland, Michigan, Mississippi, Montana, Oregon, South Carolina, Texas, Utah and Washington.
Stock-based
compensation
The
Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation and ASC 505-50,
Equity-Based Payments to Non-Employees. All transactions in which goods or services are the consideration received for
the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of
the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the
services received as consideration are measured and recognized based on the fair value of the equity instruments issued and are
recognized over the employees required service period, which is generally the vesting period.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Investments
Investments
in non-consolidated entities are accounted for using the equity method or cost basis depending upon the level of ownership and/or
the Company’s ability to exercise significant influence over the operating and financial policies of the investee. When
the equity method is used, investments are recorded at original cost and adjusted periodically to recognize the Company’s
proportionate share of the investees’ net income or losses after the date of investment. When net losses from an investment
accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional losses
are not provided for. The Company resumes accounting for the investment under the equity method if the entity subsequently reports
net income and the Company’s share of that net income exceeds the share of net losses not recognized during the period the
equity method was suspended. Investments are written down only when there is clear evidence that a decline in value that is other
than temporary has occurred.
Investments
in equity securities that do not have readily determinable fair values and do not qualify for consolidation or the equity method
are carried at cost. Dividends received from those companies are included in other income. Dividends received in excess of the
Company’s proportionate share of accumulated earnings are applied as a reduction of the cost of the investment. Other than
temporary impairments to fair value are charged against current period income. Our investments in privately held entities are
accounted for under the cost method. During the quarter ended February 28, 2019 the Company recognized $150,000 of impairment
expense related to the Smaaash acquisition.
Leases
In
February of 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02-Leases (Topic 842), which significantly
amends the way companies are required to account for leases. Under the updated leasing guidance, some leases that did not have
to be reported previously are now required to be presented as an asset and liability on the balance sheet. In addition, for certain
leases, what was previously classified as an operating expense must now be allocated between amortization expense and interest
expense. The Company adopted this update as of January l, 2019 using the modified retrospective transition method and prior periods
have not been restated. Upon implementation, the Company recognized initial operating lease right-of-use assets of $110,003 and
operating lease liabilities of $107,678. Due to the simplistic nature of the Company’s leases, no retained earnings adjustment
was required. See Note 9 for further details.
Deferred
Financing Costs
The
Company complies with the requirements of ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (SAB) Topic 5A — “Expenses
of Offering”. Offering costs of $98,198 consisting principally of legal and professional fees have been recorded as an asset
as of May 31, 2020, these amounts will be charged to additional paid in capital upon the completion of the Company’s ongoing
Public Offering.
Basic
Income (Loss) per share
The
Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Net income (loss)
per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the
period. Diluted earnings or loss per common share is calculated by dividing net income or loss available to common stockholders
by the diluted weighted-average number of common shares outstanding, which includes the effect of potentially dilutive securities.
Potentially dilutive securities for this calculation consist primarily of warrants, outstanding options, and shares into which
the convertible notes are convertible.
When
the Company records a loss from operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from
the calculation of diluted net loss per common share.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Income
Taxes
The
Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires
an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities
are computed for differences between the financial statements and tax bases of assets and liabilities that will result in future
taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
ASC
Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities.
On
December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was signed into law. As a result of Tax Reform,
the U.S. statutory tax rate was lowered from 35% to 21% effective January 1, 2018, among other changes. ASC Topic 740 requires
companies to recognize the effect of tax law changes in the period of enactment; therefore, the Company was required to revalue
its deferred tax assets and liabilities at the new rate. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”)
to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared,
or analyzed (including computations) in reasonable detail to complete the accounting for certain tax effects of Tax Reform. The
ultimate impact may differ from this provisional amount, possibly materially, as a result of additional analysis, changes in interpretations
and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a
result of Tax Reform.
Recent
Accounting Pronouncements
Accounting
standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future
financial statements. The following are a summary of recent accounting developments.
In
June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which aligns accounting for share-based payments issued to nonemployees to that of employees under the
existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to
nonemployees under Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. This guidance is effective for
the Company as of January 1, 2019. Based on the completed analysis, the Company has determined the adjustment did not have a material
impact on the financial statements.
The
Company periodically reviews new accounting standards that are issued. Although some of these accounting standards may be applicable
to the Company, the Company has not identified any other new standards that it believes merit further discussion, and the Company
expects that none would have a significant impact on its financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), followed by other related ASUs that provided targeted improvements
and additional practical expedient options (collectively “ASC 842”). ASC 842 requires lessees to recognize right-of-use
(“ROU”) assets and lease payment liabilities on the balance sheet for leases representing the Company’s right
to use the underlying assets over the lease term. Each lease that is recognized on the balance sheet is classified as either finance
or operating, with such classification affecting the pattern and classification of expense recognition in the Statements of
Operations and presentation within the Statements of Cash Flows.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
The
Company adopted ASC 842 on January 1, 2019 using the modified retrospective method. The Company elected as part of its adoption
to also use the optional transition methodology whereby previously reported periods continue to be reported in accordance with
historical accounting guidance for leases that were in effect for those prior periods. Policy elections and practical expedients
that the Company has implemented as part of adopting ASC 842 include (a) excluding from the balance sheet leases with terms that
are less than or equal to one year, (b) for all existing asset classes that contain both lease and non-lease components, combining
these components together and accounting for them as a single lease component, (c) the package of practical expedients, which
among other things, allows the Company to avoid reassessing contracts that commenced prior to adoption that were properly evaluated
under legacy GAAP, and (d) excluding land easements, which were not accounted for under the previous leasing guidance, that existed
or expired before adoption of ASC 842. The scope of ASC 842 does not apply to leases used in the exploration for minerals or use
thereof, including oil, natural gas and natural gas liquids.
The
Company’s adoption of ASC 842 resulted in an increase in other assets, accounts payable and accrued liabilities, and other
liabilities line items on the accompanying Consolidated Balance Sheets as a result of the additional ROU assets and related
lease liabilities. Upon adoption on January 1, 2019, the Company recognized approximately $0.5 million in ROU assets and liabilities
for its operating leases. There was no cumulative effect to accumulated deficit upon the adoption of this guidance.
Going
Concern, Liquidity and Management’s Plan
The
Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which
contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As
reflected in the consolidated financial statements, the Company has an accumulated deficit as of May 31, 2020, a net loss and
net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s
ability to continue as a going concern within one year from the of the date that the financial statements are issued.
The
Company’s cash position may not be sufficient to support the Company’s daily operations. Management plans to raise
additional funds by way of a private or ongoing public offering. While the Company believes in the viability of its strategy and
its ability to generate sufficient revenue and to raise additional funds, there can be no assurances to that effect. Should the
Company fail to raise additional capital, it may be compelled to reduce the scope of its planned future business activities.
The
ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business
plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings.
The
consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue
as a going concern.
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because
COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities
have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more
restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity
Gaming Centers had been closed effective April 1, 2020. Although our franchise agreements with franchisees of Simplicity Gaming
Centers require a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised Simplicity Gaming
Centers are operating, there is a potential risk that franchisees of Simplicity Gaming Centers will default in their obligations
to pay their minimum monthly royalty payment to us. As of May 31, 2020, some of our franchised gaming centers have begun to re-open.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date impacted the Company’s business for the fiscal fourth quarter and potentially beyond. Management
expects that all of its business segments, across all of its geographies, will be impacted to some degree, but the significance
of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot
be determined at this time.
NOTE
3 — INITIAL PUBLIC OFFERING AND PRIVATE PLACEMENT
Initial
Public Offering
On
August 22, 2017, the Company sold 5,000,000 Public Units at a purchase price of $10.00 per Public Unit in the Initial Public Offering,
generating gross proceeds of $50.0 million. The Company incurred offering costs of approximately $3.7 million, inclusive of approximately
$3.2 million of underwriting fees. The Company paid $1 million of underwriting fees upon the closing of the Initial Public Offering,
issued 50,000 shares of common stock for underwriting fees, and deferred $1.82 million of underwriting fees until the consummation
of the initial Business Combination.
Each
Unit consisted of one share of the Company’s common stock, one right to receive one-tenth of one share of the Company’s
common stock upon consummation of the Company’s initial Business Combination (“Right”), and one redeemable warrant
(“Warrant”). Each Warrant entitles the holder to purchase one share of common stock at an exercise price of $11.50
per share, subject to adjustment. No fractional shares will be issued upon exercise of the Warrants. The Warrants became exercisable
30 days after the completion of the initial Business Combination and will expire five years after the completion of the initial
Business Combination or earlier upon redemption or liquidation.
The
Company may redeem the Warrants, in whole and not in part, at a price of $0.01 per Warrant upon 30 days’ notice (“30-day
redemption period”), only in the event that the last sale price of the common stock equals or exceeds $21.00 per share for
any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which notice of redemption
is given, provided there is an effective registration statement with respect to the shares of common stock underlying such Warrants
and a current prospectus relating to those shares of common stock is available throughout the 30-day redemption period. If the
Company calls the Warrants for redemption as described above, the Company’s management will have the option to require all
holders that wish to exercise Warrants to do so on a “cashless basis.” In determining whether to require all holders
to exercise their warrants on a “cashless basis,” management will consider, among other factors, the Company’s
cash position, the number of Warrants that are outstanding and the dilutive effect on the Company’s stockholders of issuing
the maximum number of shares of common stock issuable upon the exercise of the Warrants.
Each
holder of a Right received one-tenth (1/10) of one share of common stock upon consummation of the Business Combination. No fractional
shares were issued upon exchange of the Rights. No additional consideration was paid by a holder of Rights in order to receive
its additional shares upon consummation of the Business Combination as the consideration related thereto has been included in
the Unit purchase price paid for by investors in the Initial Public Offering.
The
Company granted the underwriters a 45-day option to purchase up to 750,000 additional Public Units to cover any over-allotment,
at the initial public offering price less any underwriting discounts and commissions. On September 13, 2017, the underwriters
purchased 200,000 additional Public Units for gross proceeds of $2,000,000, less commissions of $110,000, of which $70,000 are
deferred.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
The
Company issued Maxim Group LLC (“Maxim”), as compensation for the Initial Public Offering, an aggregate of 52,000
shares, including 2,000 shares issued in connection with the partial exercise of the over-allotment option. The Company accounted
for the fair value of these shares as an expense of the Initial Public Offering resulting in a charge directly to stockholders’
equity.
Settlement
Agreement
On
November 20, 2018, the Company entered into a settlement and release agreement (“Settlement Agreement”) with Maxim.
Pursuant to the Settlement Agreement, the Company made a cash payment of $20,000 to Maxim and issued the Note in favor of Maxim
in order to settle the payment obligations of the Company under the underwriting agreement dated August 16, 2017, by and between
the Company and Maxim. The Company also agreed to remove the restrictive legends on an aggregate of 52,000 shares of its common
stock held by Maxim and its affiliate. See “Note Payable” under Note 8 below.
Unit
Purchase Option
At
the time of the closing of the Initial Public Offering, the Company sold to Maxim, for an aggregate of $100, an option (the “UPO”)
to purchase 250,000 Units (which increased to 260,000 units upon the partial exercise of the underwriters’ over-allotment
option). The Company has accounted for the fair value of the UPO, inclusive of the receipt of the $100 cash payment, as an expense
of the Initial Public Offering resulting in a charge directly to shareholders’ equity. The Company estimates that the fair
value of this UPO is approximately $743,600 (or $2.86 per Unit) using the Black-Scholes option-pricing model. The fair value of
the UPO is estimated as of the date of grant using the following assumptions: (1) expected volatility of 35%, (2) risk-free interest
rate of 1.73% and (3) expected life of five years. The UPO may be exercised for cash or on a “cashless” basis, at
the holder’s option (except in the case of a forced cashless exercise upon the Company’s redemption of the Warrants,
as described above), such that the holder may use the appreciated value of the UPO (the difference between the exercise prices
of the UPO and the underlying Warrants and Rights, and the market price of the Units and underlying shares of common stock) to
exercise the UPO without the payment of any cash. The Company will have no obligation to net cash settle the exercise of the UPO
or the Warrants or Rights underlying the UPO. The holder of the UPO will not be entitled to exercise the UPO or the Warrants or
Rights underlying the UPO unless a registration statement covering the securities underlying the UPO is effective or an exemption
from registration is available. If the holder is unable to exercise the UPO or underlying Warrants or Rights, the UPO, Warrants
or Rights, as applicable, will expire worthless.
The
Company granted the holders of the UPO, demand and “piggy back” registration rights for periods of five and seven
years, respectively, from the effective date of the registration statement relating to the Initial Public Offering, including
securities directly and indirectly issuable upon exercise of the UPO.
Private
Placement
Concurrently
with the closing of the Initial Public Offering, the Sponsor purchased an aggregate of 254,500 Private Units at $10.00 per Private
Unit, generated gross proceeds of $2,545,000 in a Private Placement. The proceeds from the Private Units was added to the proceeds
from the Initial Public Offering held in the Trust Account. The Private Units (including their component securities) were not
transferable, assignable or salable until 30 days after the completion of the initial Business Combination and the warrants included
in the Private Units (the “Private Placement Warrants”) will be non-redeemable so long as they are held by the Sponsor
or their permitted transferees. If the Private Placement Warrants are held by someone other than the Sponsor or their permitted
transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis
as the Warrants included in the Public Units sold in the Initial Public Offering. Otherwise, the Private Placement Warrants and
the Rights underlying the Private Units have terms and provisions that are identical to those of the Warrants and Rights, respectively,
sold as part of the Public Units in the Initial Public Offering and have no net cash settlement provisions.
On
September 13, 2017, the Sponsor purchased 7,000 additional Private Units for gross proceeds of $70,000 upon the partial exercise
of the over-allotment option.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
NOTE
4 - PROPERTY, PLANT AND EQUIPMENT
The
following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
|
|
May 31,
2020
|
|
Leasehold improvements
|
|
|
52,189
|
|
Property and equipment
|
|
|
243,314
|
|
|
|
|
|
|
Total cost
|
|
|
295,503
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(62,770
|
)
|
|
|
|
|
|
Net, property plant and equipment
|
|
$
|
232,733
|
|
Depreciation
expense for the years ended May 31, 2020, and 2019 was $57,473 and $5,297, respectively.
NOTE
5 - INTANGIBLE ASSETS
The
following tables set forth the intangible assets, including accumulated amortization at May 31, 2020:
|
|
May 31, 2020
|
|
|
|
Remaining
|
|
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
Non-Competes
|
|
4.50 years
|
|
$
|
1,023,118
|
|
|
$
|
289,884
|
|
|
$
|
733,234
|
|
Trademarks
|
|
Indefinite
|
|
|
866,000
|
|
|
|
-
|
|
|
|
866,000
|
|
Customer Contracts
|
|
10 years
|
|
|
546,000
|
|
|
|
5,443
|
|
|
|
540,557
|
|
Internet domain
|
|
2.50 years
|
|
|
3,000
|
|
|
|
1,417
|
|
|
|
1,583
|
|
|
|
|
|
$
|
2,438,118
|
|
|
$
|
296,744
|
|
|
$
|
2,141,374
|
|
The
following table sets forth the future amortization of the Company’s intangible assets at May 31, 2020:
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Thereafter
|
|
|
Total
|
|
Non-Competes
|
|
$
|
204,624
|
|
|
$
|
204,624
|
|
|
$
|
204,624
|
|
|
$
|
119,362
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
733,234
|
|
Customer contracts
|
|
|
54,600
|
|
|
|
54,600
|
|
|
|
54,600
|
|
|
|
54,600
|
|
|
|
54,600
|
|
|
|
267,557
|
|
|
|
540,557
|
|
Internet domain
|
|
|
1,000
|
|
|
|
583
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,583
|
|
Total
|
|
$
|
260,224
|
|
|
$
|
259,807
|
|
|
$
|
259,224
|
|
|
$
|
173,962
|
|
|
$
|
54,600
|
|
|
$
|
267,557
|
|
|
$
|
1,275,374
|
|
Amortization
expense for the years ended May 31, 2020, and 2019 was $211,067 and $85,677, respectively.
Goodwill
The
Company’s goodwill carrying amounts relate to the acquisitions of Simplicity Esports LLC and PLAYlive Nation Inc. The composition
of the goodwill balance, is as follows:
|
|
Fiscal Year
Ended
May 31, 2020
|
|
|
Fiscal Year
Ended
May 31, 2019
|
|
|
|
|
|
|
|
|
Simplicity Esports LLC
|
|
$
|
4,456,250
|
|
|
$
|
4,456,250
|
|
PLAYlive Nation Inc.
|
|
|
698,891
|
|
|
|
-
|
|
Total Goodwill
|
|
$
|
5,155,141
|
|
|
$
|
4,456,250
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
NOTE
6 - ACQUISITIONS
The
Simplicity Esports, LLC Acquisition
On
January 4, 2019, the Company consummated the transactions contemplated by the share exchange agreement, dated December 21, 2018
(as amended by Amendment No. 1 to Share Exchange Agreement, dated December 28, 2018 and by Amendment No. 2 to Share Exchange Agreement,
dated December 30, 2018, the “Share Exchange Agreement”) by and among the Company, Smaaash Entertainment, Inc. (“Smaaash”),
each of the equity holders of Simplicity (“Simplicity Owners”) and Jed Kaplan, in the capacity as the representative
of the Simplicity Owners (the “Representative”). Pursuant to the Share Exchange Agreement the Simplicity Owners transferred
all the issued and outstanding equity interests of Simplicity to the Company in exchange for newly issued shares of common stock
of the Company (the “Acquisition”).
The
Simplicity Owners received an aggregate of 300,000 shares of common stock at the closing of the Acquisition and an additional
aggregate of 700,000 shares of common stock on January 7, 2019 and the remaining 2,000,000 shares in March of 2019.
The
acquisition of Simplicity, in an all-stock deal, creates a pure play esports team and entertainment platform opportunity, which
we believe will increase shareholder value and boost our growth strategy as we endeavor the build out of our brick and mortar
esports centers.
The
acquisition was accounted for by the Company using the acquisition method under business combination accounting. Under this method,
the purchase price paid by the acquirer is allocated to the assets acquired and liabilities assumed as of the acquisition date
based on the fair value. Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often
involves the use of significant estimates and assumptions. All fair value measurements of acquired assets and liabilities assumed
are non-recurring in nature and classified as level 3 on the fair value hierarchy.
The
aggregate purchase price consisted of the following:
Restricted
stock consideration
|
|
|
6,090,000
|
|
Total
|
|
$
|
6,090,000
|
|
As
noted in the table above, the Company issued 3,000,000 restricted shares of common stock as consideration which was valued at
market at the date of the closing, fair value of approximately $6,090,000.
The
following table summarizes the estimated fair value of The Simplicity Esports, LLC assets acquired, and liabilities assumed at
the date of acquisition:
Cash
|
|
|
76,000
|
|
Internet Domain
|
|
|
3,000
|
|
Trade names and trademarks
|
|
|
588,000
|
|
Non-Competes
|
|
|
1,023,118
|
|
Accounts payable and accrued liabilities
|
|
|
(56,000
|
)
|
Goodwill
|
|
|
4,455,882
|
|
Total
|
|
$
|
6,090,000
|
|
Revenue
and net loss included in the year ended May 31, 2020, consolidated financial statements attributable to Simplicity Esports, LLC
is approximately $38,000 and $400,000, respectively.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
PLAYlive
Nation Acquisition
On
July 29, 2019, the Company entered into a definitive agreement to acquire PLAYlive for total consideration of 750,000 shares of
common stock. The PLAYlive acquisition closed on July 30, 2019.
The
acquisition was accounted for by the Company using the acquisition method under business combination accounting. Under this method,
the purchase price paid by the acquirer is allocated to the assets acquired and liabilities assumed as of the acquisition date
based on the fair value. Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often
involves the use of significant estimates and assumptions. All fair value measurements of acquired assets and liabilities assumed
are non-recurring in nature and classified as level 3 on the fair value hierarchy.
The
aggregate purchase price consisted of the following:
Restricted
stock consideration
|
|
|
1,440,000
|
|
Total
|
|
$
|
1,440,000
|
|
As
noted in the table above, the Company issued 750,000 restricted shares of common stock as consideration which was valued at market
at the date of the closing, fair value of approximately $1,440,000.
The
following table summarizes the estimated fair value of the PLAYlive assets acquired and liabilities assumed at the date of acquisition:
Cash
|
|
|
26,000
|
|
Property, plant and equipment
|
|
|
10,000
|
|
Net deferred revenue
|
|
|
(115,000
|
)
|
Customer relationships
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
(4,000
|
)
|
Goodwill
|
|
|
699,000
|
|
Trademarks
|
|
|
278,000
|
|
Customer contracts
|
|
|
546,000
|
|
Total
|
|
$
|
1,440,000
|
|
Revenue
and net loss included in the year ended May 31, 2020, consolidated financial statements attributable to PLAYlive is approximately
$442,000 and $72,000, respectively.
NOTE
7 — RELATED PARTY TRANSACTIONS
Private
Units
In
addition, the Sponsor purchased an aggregate of 254,500 Private Units at $10.00 per Private Unit for proceeds of $2,545,000 in
the aggregate in the Private Placement. This purchase took place on a private placement basis simultaneously with the completion
of the Initial Public Offering. This issuance was be made pursuant to the exemption from registration contained in Section 4(a)(2)
of the Securities Act.
The
Sponsor committed to purchase from the Company up to an additional 26,250 Private Units if the underwriters’ over-allotment
option was exercised in full.
On
September 13, 2017, 7,000 additional Private Units were purchased by the Sponsor at $10.00 per Private Unit upon the partial exercise
of the over-allotment option.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Kaplan
Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, the Company’s Chief Executive Officer, interim Chief Financial Officer, member of
the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on the first business
day following the 150-day anniversary of the Issue Date (the “Maturity Date”). The Company will use the proceeds of
the Kaplan Note to fund the operations of Simplicity One Brasil Ltda, the Company’s majority owned subsidiary (“Simplicity
Brasil”). As of May 31, 2020, advances under the terms of this note were $64,728 (Note 8).
Equity
Sales
On
May 7, 2020, we authorized the sale of 22,936 shares of our restricted Common Stock at $1.09 per share to William H. Herrmann,
Jr. a member of our board of directors for $25,000 (Note 10).
The
Company maintains its cash balance at a financial services company that is owned by an officer of the Company.
Sponsor
Fees
The
Company agreed, commencing on the effective date of the Initial Public Offering through the earlier of the Company’s consummation
of a Business Combination or its liquidation, to pay the Sponsor a monthly fee of $10,000 for office space, utilities and secretarial
and administrative support. For the three months ended November 30, 2018, the Company paid $30,080 which is presented as general
and administrative expense on the accompanying statement of operations. In December 2018, this monthly administrative service
fee agreement was terminated.
The
Company maintains its cash balance at a financial services company that is owned by an officer of the Company.
NOTE
8 – DEBT
The
table below presents outstanding debt instruments as of May 31:
|
|
2020
|
|
|
2019
|
|
Sponsor loan
|
|
$
|
-
|
|
|
$
|
93,761
|
|
10% Fixed Convertible Promissory Note
|
|
|
152,500
|
|
|
|
-
|
|
Less Discount
|
|
|
(25,180
|
)
|
|
|
-
|
|
Related Party Note
|
|
|
64,728
|
|
|
|
-
|
|
Convertible Note Payable
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,192,048
|
|
|
$
|
1,093,761
|
|
Sponsor
Loan
The
Sponsor loaned the Company $201,707 in the aggregate, to be used for a portion of the expenses of the Initial Public Offering
and working capital purposes. The loan is non-interest bearing, unsecured and due at the earlier of December 31, 2017 or the closing
of the Initial Public Offering. As of May 31, 2020, and 2019, the balance of the Sponsor loan was $0 and $93,761, respectively.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
10%
Fixed Convertible Promissory Note
On
April 29, 2020 (the “Effective Date”), the Company issued a 10% Fixed Convertible Promissory Note (the “Harbor
Gates Note”), with a maturity date of October 29, 2020 (the “Maturity Date”), in the principal sum of $152,000
in favor of Harbor Gates Capital, LLC (“Harbor Gates”). Pursuant to the terms of the Harbor Gates Note, the Company
agreed to pay to Harbor Gates $152,500 (the “Principal Sum”) and to pay “guaranteed” interest on the principal
balance at an amount equivalent to 10% of the Principal Sum, to the extent such Principal Sum and “guaranteed” interest
and any other interest, fees, liquidated damages and/or items due to Harbor Gates have not been repaid or converted into Company
common stock in accordance with the terms of the Harbor Gates Note. The Harbor Gates Note carries an original issue discount (“OID”)
of $2,500. Accordingly, on the Effective Date, Harbor Gates delivered $150,000 to the Company in exchange for the Harbor Gates
Note.
In
addition to the “guaranteed” interest, and upon the occurrence of an Event of Default (as hereinafter defined), additional
interest will accrue from the date of the Event of Default at the rate equal to the lower of 20% per annum or the highest rate
permitted by law.
The
Company may prepay the Harbor Gates Note according to the following schedule:
Days
Since
Effective
Date
|
|
Payment
Amount
|
Under 30
|
|
115% of Principal Amount (as hereinafter
defined) so paid
|
31-60
|
|
120% of Principal Amount so paid
|
61-90
|
|
125% of Principal Amount so paid
|
91-180
|
|
135% of Principal Amount so paid
|
135%
of the remaining unpaid and unconverted Principal Amount, plus all accrued and unpaid interest will be due and payable on the
Maturity Date. “Principal Amount” refers to the sum of (i) the original principal amount of the Harbor Gates Note
(including the OID, prorated if the Harbor Gates Note has not been funded in full); (ii) all guaranteed and other accrued but
unpaid interest under the Harbor Gates Note; (iii) any fees due under the Harbor Gates Notes; (iv) liquidated damages; and (v)
any default payments owing under the Harbor Gates Note, in each case previously paid or added to the Principal Amount.
Pursuant
to the terms of the Harbor Gates Note, the Company agreed to issue Harbor Gates shares of Company common stock in two tranches
as follows:
|
(i)
|
10,000
shares of common stock within three trading days of the Effective Date; and
|
|
(ii)
|
In
the event the average of the three volume weighted average prices for the Company’s common stock during the three consecutive
trading days immediately preceding the date which is the 180th day following the Effective Date is less than $1.00
per share, then Harbor Gates will be entitled, and the Company will issue to Harbor Gates additional shares of common stock
as set forth in the Harbor Gates Note.
|
If
an Event of Default (as defined in the Promissory Note) occurs, the outstanding Principal Amount of the Harbor Gates Note owing
in respect thereof through the date of acceleration, shall become, at Harbor Gates’ election, immediately due and payable
in cash at the “Mandatory Default Amount”. The Mandatory Default Amount means 35% of the outstanding Principal Amount
of the Harbor Gates Note will be automatically added to the Principal Sum of the Harbor Gates Note and tack back to the Effective
Date for purposes of Rule 144 promulgated under the 1934 Act. Commencing five days after the occurrence of any Event of Default
that results in the eventual acceleration of the Harbor Gates Note, the Harbor Gates Note will accrue additional interest, in
addition to the Harbor Gates Note’s “guaranteed” interest, at a rate equal to the lesser of 20% per annum or
the maximum rate permitted under applicable law.
If
the Harbor Gates Note is not retired on or before the Maturity Date, then at any time and from time to time after the Maturity
Date, and subject to the terms hereof and restrictions and limitations contained in the Harbor Gates Note, Harbor Gates has the
right, at Harbor Gates’ sole option, to convert in whole or in part the outstanding and unpaid Principal Amount under the
Harbor Gates Note into shares of the Company’s common stock at the Variable Conversion Price. The “Variable Conversion
Price” will be equal to the lower of: (a) $1.00, or (b) 70% of the lowest volume weighted average price of the Company’s
common stock during the 15 consecutive trading days prior to the date on Harbor Gates elects to convert all or part of the Harbor
Gates Note. The Company intends to prepay the Harbor Gates Note in accordance with its terms so that no amount under the Harbor
Gates Note is converted into shares of the Company’s common stock.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
This
note along with guaranteed interest of $15,000 was repaid on July 2, 2020.
Kaplan
Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, the Company’s Chief Executive Officer, interim Chief Financial Officer, member of
the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on the first business
day following the 150-day anniversary of the Issue Date (the “Maturity Date”). The Company will use the proceeds of
the Kaplan Note to fund the operations of Simplicity One Brasil Ltda, the Company’s majority owned subsidiary (“Simplicity
Brasil”).
Pursuant
to the terms of the Kaplan Note, the Company agreed to pay to Mr. Kaplan the lesser of (i) the principal sum of $90,000 (the “Maximum
Commitment”), or (ii) the aggregate principal amount of all direct advances of the proceeds of the Kaplan Note (each, an
“Advance”), together with any interest thereon, and any and all other amounts which may be due and payable thereunder
from time to time.
Subject
to the terms of the Kaplan Note, Mr. Kaplan agreed to make one direct Advance to and for the benefit of the Company on the Issue
Date in the amount of $45,000, and one additional Advance to and for the benefit of the Company at such time as the Company may
request during the two month period following the Issue Date. The total of the aggregate principal balance of all Advances (collectively
referred to herein as the “Principal Amount”) outstanding at any time shall not exceed the Maximum Commitment. Advances
made by Mr. Kaplan to the Company under the Kaplan Note which have been repaid may not be borrowed again.
Prior
to the Maturity Date or an Event of Default (as hereinafter defined), the Principal Amount outstanding under the Kaplan Note will
bear interest at a rate of 3% (the “Interest Rate”). From and after the Maturity Date or upon and during the continuance
of an Event of Default, interest will accrue on the unpaid Principal Amount during any such period at an annual rate (the “Default
Rate”) equal to 10% plus the Interest Rate; provided, however, that in no event will the Default Rate exceed the maximum
rate permitted by law.
The
Company may prepay the Kaplan Note, in whole or in part, without a prepayment penalty, at any time provided that an Event of Default
has not then occurred.
As
of May 31, 2020, advances under the terms of this note were $64,728.
Note
Payable
On
November 20, 2018, the Company paid its underwriter $20,000 and issued its underwriter a secured demand promissory note (the “Note”)
in the amount of $1,800,000. The Note accrued interest at 8% per annum from the date of the Note through and including May 20,
2019, 12% per annum from and including May 21, 2019, through and including August 20, 2019, and 15% per annum from and including
August 21, 2019, through and including November 20, 2019. If a late payment had occurred and continued, the interest rate would
have increased to 12% per annum from the date of the Note through and including August 20, 2019 and 18% per annum from after August
21, 2019. If a late payment had remained outstanding for over 48 hours, Maxim could have required the Company to redeem all or
any part of the Note at a redemption price equal to 125% of the Alternate Payment Amount.
The
principal and interest of the Note was payable upon demand by Maxim or from time to time, in accordance the following schedule:
|
(i)
|
one
third of the principal, accrued and unpaid interest and any late charges on May 20, 2019;
|
|
(ii)
|
one
third of the principal, accrued and unpaid interest and any late charges on August 20, 2019; and
|
|
(iii)
|
one
third of the principal, accrued and unpaid interest and any late charges on November 20, 2019.
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
The
Note was secured by a first priority security interest in all personal property and assets of the Company excluding the assets
held in escrow with respect to (i) that certain stock purchase agreement with Polar, pursuant to which Polar agreed to sell up
to 490,000 shares of the Company’s common stock to the Company thirty days after the consummation of the Business Combination
and (ii) that certain stock purchase agreement with K2, pursuant to which K2 agreed to sell up to 220,000 shares of the Company’s
common stock to the Company thirty days after the consummation of the Business Combination.
The
amount payable under the Note could also have been paid in shares of common stock of the Company or securities convertible or
exercisable into shares of common stock of the Company (the “Alternate Equity Payment”) if and only if the Company
and Maxim mutually agree on both the purchase price and, if applicable, the conversion and/or exercise price of each security
of the Company issued in such Alternative Equity Payment. Otherwise, the payment should be made in cash only.
So
long as any amount under the Note remained outstanding, all cash proceeds received by the Company from any sales of its securities
was to be used to repay this Note.
Convertible
Note Payable
On
December 20, 2018, the Company entered into a securities exchange agreement (“Exchange Agreement”) with Maxim Group
LLC (the “Holder”). Pursuant to the terms of the Exchange Agreement, the Holder agreed to surrender and exchange the
Note. In exchange, the Company issued to the Holder a Series A-1 Exchange Convertible Note in the principal amount of $500,000
(the “Series A-1 Note”) and a Series A-2 Exchange Convertible Note in the principal amount of $1,000,000 (the “Series
A-2 Note,” and collectively with Series A-1 Note, the “Exchange Notes”). 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.
The
original amount of the promissory note was $1,800,000, the total amount of the two exchange notes is $1,500,000, and the difference
of $300,000 has been recorded as debt forgiveness income.
Prior
to conversion, the Series A-1 Note bore interest at 2.67% per annum, was payable quarterly and had 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 was
permitted to 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 could only pay the interest in shares of its common stock if (i) all the equity conditions specified
in the note (“Equity Conditions”) had 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 had provided proper notice
pursuant to the terms of the note and (iii) the Company had 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 was 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 was 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 was permitted to 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 had the right
to repay all or any portion of the Series A-1 Note included in the notice of conversion.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Additionally,
the Series A-1 Note would have automatically converted 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 existed, and (ii) solely if such automatic
conversion date was also the Maturity Date, each of the Equity Conditions had 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 also had the right to 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 could only effect an Optional Redemption if each of the Equity
Conditions had 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 was delivered to the date of the Optional Redemption and through and including the
date payment of the Optional Redemption Amount was actually made in full.
Except
as otherwise provided in the Series A-1 Note, including, without limitation, an Option Redemption, the Company could not prepay
any portion of the principal amount of the note without the prior written consent of the Holder.
Pursuant
to the terms of the Series A-1 Note, the Company was 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 could increase to 9.99%.
However, if there was 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 would 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 would be issued such shares to the same extent
as if there had been no such limitation.
The
Series A-1 Note contained restrictive covenants which, among other things, restricted 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, resulting in a remaining note payable balance as of May 31, 2020, and 2019 of $1,000,000 and
$1,000,000 respectively.
NOTE
9 — COMMITMENTS AND CONTINGENCIES
Nasdaq
Delisting
On
December 10, 2018, the Company received a written notice (the “Notice”) from the Listing Qualifications Division of
The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company has not complied with the requirements of IM-5101-2
of the listing rules of Nasdaq (the “Listing Rules”).
The
Notice stated that after its Business Combination, the Company had not demonstrated that its common stock met Listing Rule 5505(b)(1)
that requires a market value of publicly held shares of at least $15 million. Additionally, the Company has not provided evidence
that its common stock has at least 300 round lot holders as required by Listing Rule 5505(a)(3) and that its warrant has at least
400 round lot holders as required by Listing Rule 5515(a)(4). Finally, the Company does not comply with Listing Rule 5515(a)(2)
which requires that for initial listing of a warrant the underlying security must be listed on Nasdaq.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
On
January 7, 2019, the Company received a second written notice from Nasdaq informing it that the Company failed to comply with
Listing Rule 5250(e)(2) which requires companies listed on Nasdaq to timely file notification forms for the Listing of Additional
Shares (the “LAS Notification”).
The
Company was required to submit the LAS Notification 15 days prior to the issuance of the securities, however, the Company filed
the LAS Notification for the issuance of the Series A-1 Note and Series A-2 Note and for the share exchange under our Share Exchange
Agreement after such 15-day periods. Nasdaq notified the Company that each of these matters serves as an additional and separate
basis for delisting the Company’s securities and that the review panel will consider these matters in rendering a determination
regarding the Company’s continued listing on Nasdaq.
Management
of Simplicity Esports and Gamily Company has decided that moving from The Nasdaq Stock Market (“Nasdaq”) to the OTCQB
is more appropriate for the Company at this time, while the Company builds out its planned network of retail esport centers.
On
April 1, 2019, the Company was notified by Nasdaq that it would delist the Company’s common stock and warrants. The Company’s
common stock and warrants were previously suspended from trading on Nasdaq, effective January 25, 2019.
On
April 2, 2019, Nasdaq filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities and
Exchange Act of 1934 on Form 25 with the Securities and Exchange Commission relating to the Company’s common stock and warrants.
As a result, the Company’s common stock and warrants were delisted from Nasdaq effective April 2, 2019.
The
Company’s common stock and warrants currently have been quoted on the OTCQB under the symbols “WINR” and “WINRW,”
respectively.
Registration
Rights
Pursuant
to a registration rights agreement the Company entered into with its initial stockholders and initial purchasers of the Private
Units (and constituent securities) at the closing of the Initial Public Offering, the Company is required to register certain
securities for sale under the Securities Act. These holders are entitled under the registration rights agreement to make up to
three demands that the Company register certain of its securities held by them for sale under the Securities Act and to have the
securities covered thereby registered for resale pursuant to Rule 415 under the Securities Act. In addition, these holders have
the right to include their securities in other registration statements filed by the Company. The Company will bear the costs and
expenses of filing any such registration statements.
Unit
Purchase Option
The
Company sold to the underwriters (and/or their designees), for $100, an option to purchase up to a total of 250,000 Units (which
increased to 260,000 Units upon the partial exercise of the underwriters’ over-allotment option), exercisable at $11.50
per Unit (or an aggregate exercise price of $2,990,000) upon the closing of the Initial Public Offering. The UPO may be exercised
for cash or on a cashless basis, at the holder’s option, at any time during the period commencing on the later of the first
anniversary of the effective date of the registration statement relating to the Initial Public Offering and the closing of the
Company’s initial Business Combination and terminating on the fifth anniversary of such effectiveness date. The Units issuable
upon exercise of this UPO are identical to those offered in the Initial Public Offering, except that the exercise price of the
warrants underlying the Units sold to the underwriters is $13.00 per share.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Operating
Lease Right of Use Obligation
The
Company adopted Topic 842 on January 1, 2019. The Company elected to adopt this standard using the optional modified retrospective
transition method and recognized a cumulative-effect adjustment to the consolidated balance sheet on the date of adoption. Comparative
periods have not been restated. With the adoption of Topic 842, the Company’s consolidated balance sheet now contains the
following line items: Operating lease right-of-use assets, Current portion of operating lease liabilities and Operating lease
liabilities, net of current portion.
As
all the existing leases subject to the new lease standard were previously classified as operating leases by the Company, they
were similarly classified as operating leases under the new standard. The Company has determined that the identified operating
leases did not contain non-lease components and require no further allocation of the total lease cost. Additionally, the agreements
in place did not contain information to determine the rate implicit in the leases, so we used our incremental borrowing rate as
the discount rate. Our weighted average discount rate is 10.4% and the weighted average remaining lease terms are 41 months.
As
of May 31, 2020, operating lease right-of-use assets and liabilities arising from operating leases was $490,984 and $490,983,
respectively. During the year ended May 31, 2020, the Company recorded operating lease expense of approximately $147,000.
The
following is a schedule showing the future minimum lease payments under operating leases by years and the present value of the
minimum payments as of May 31, 2020.
2020
|
|
$
|
174,728
|
|
2021
|
|
$
|
141,278
|
|
2022
|
|
$
|
145,832
|
|
2023
|
|
$
|
127,900
|
|
2024
|
|
$
|
84,017
|
|
Total Operating Lease
Obligations
|
|
$
|
673,755
|
|
Less:
Amount representing interest
|
|
$
|
(184,977
|
)
|
Present
Value of minimum lease payments
|
|
$
|
488,778
|
|
Employment
Agreements, Board Compensation and Bonuses
On
July 29, 2020, the Company entered into a new employment agreement (the “Kaplan 2020 Agreement”) with Mr. Kaplan.
Such employment agreement replaced the Kaplan 2018 Agreement. As a result, the Kaplan 2018 Agreement was terminated and is of
no further force or effect. Pursuant to the terms of the Kaplan 2020 Agreement, the Company agreed to pay Mr. Kaplan a monthly
base salary of $5,000; provided, however, that the parties agreed that such base salary will be deferred and will accumulate until
the Company has sufficient cash available to make such payments, to be reasonably determined by the Board of Directors and Mr.
Kaplan, at which time all accrued and unpaid base salary will be paid. In addition, Mr. Kaplan will receive an equity grant of
15,000 shares of common stock per month, which shares will be fully vested upon grant. Mr. Kaplan will also be eligible to receive
a quarterly bonus in the form of cash or equity shares and will be entitled to participate in the Company’s employee benefit
plans. In addition, if, during the term of the Kaplan 2020 Agreement, the Company’s shares are approved for listing on a
U.S. national securities exchange, the Company will pay Mr. Kaplan a $50,000 cash bonus, to be paid upon such listing begin effective.
The
term of the Kaplan 2020 Agreement is for an initial one-year term, which shall automatically renew for successive one-year terms
unless either party provides 60 days’ advance written notice of its intention not to renew the Kaplan 2020 Agreement at
the conclusion of the then applicable term. The term of the Kaplan 2020 Agreement may be terminated by the Company with or without
cause or by Mr. Kaplan with or without good reason, as such terms are defined therein.
On
July 29, 2020, the Board of Directors approved for Mr. Kaplan a $75,000 cash bonus and authorized the issuance of 250,000 shares
of the Company’s common stock both related to his performance during the fiscal year ended May 31, 2020. As of May 31, 2020,
the Company has accrued $75,000 related to Mr. Kaplans cash bonus and $216,625 related to the Common Shares to be issued to Mr.
Kaplan.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
On
July 29, 2020, the Company entered into a new employment agreement (the “Franklin 2020 Agreement”) with Mr. Franklin.
Such employment agreement replaced the Franklin 2018 Agreement. As a result, the Franklin 2018 Agreement was terminated and is
of no further force or effect. Pursuant to the terms of the Franklin 2020 Agreement, the Company agreed to pay Mr. Franklin a
monthly base salary of $12,500; provided, however, that the parties agreed that such base salary will be deferred and will accumulate
until the Company has sufficient cash available to make such payments, to be reasonably determined by the Board of Directors and
Mr. Franklin, at which time all accrued and unpaid base salary will be paid. In addition, Mr. Franklin will receive an equity
grant of 6,250 shares of common stock per month, which shares will be fully vested upon grant. Mr. Franklin will also be eligible
to receive a quarterly bonus in the form of cash or equity shares and will be entitled to participate in the Company’s employee
benefit plans. In addition, if, during the term of the Franklin 2020 Agreement, the Company’s shares are approved for listing
on a U.S. national securities exchange, the Company will pay Mr. Franklin a $50,000 cash bonus, to be paid upon such listing begin
effective.
On
July 29, 2020, the Board of Directors approved for Mr. Franklin a $75,000 cash bonus and authorized the issuance of 250,000 fully
vested shares of the Company’s common stock both related to his performance during the fiscal year ended May 31, 2020. As
of May 31, 2020, the Company has accrued $75,000 related to Mr. Franklins cash bonus and $216,625 related to the Common Shares
to be issued to Mr. Franklin.
On
July 29, 2020, the Board of Directors approved the issuance of 192,000 shares of common stock to an employee and the Directors
of the Company for services provided during the fiscal year ended May 31, 2020. As of May 31, 2020, the Company has accrued $166,675
related to the authorized issuance of these shares.
Litigation
On
August 5, 2020, a lawsuit styled Duncan Wood v. PLAYlive Nation, Inc. and Simplicity eSports and Gaming Company (Case No. 20-1043)
was filed in the U.S. District Court for the District of Delaware. The complaint alleges unlawful failure to make timely and reasonable
payment of wages, breach of contract, breach of the duty of good faith and fair dealing and unjust enrichment. The plaintiff seeks
monetary damages for compensation alleged to be owed, treble damages, interest on all wage compensation, reasonable attorneys’
fees and other relief as the Court deems just and proper. Defendants’ responsive pleading is not yet due and has not been
filed. The litigation is in its initial stages and the Company is unable to reasonably predict its potential outcome. The Company,
however, believes that the lawsuit is without merit and intends to vigorously defend the claims.
NOTE
10 — STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share. At May 31, 2020 and
2019, there were no shares of preferred stock issued or outstanding.
Common
Stock
The
Company is authorized to issue 20,000,000 shares of common stock with a par value of $0.0001 per share. Holders of the shares
of the Company’s common stock are entitled to one vote for each share. At May 31, 2020, and May 31, 2019, there were 7,988,975
and 7,003,975 shares of common stock issued and outstanding respectively.
2020
Transactions
On
July 30, 2019, in connection with the PLAYlive Merger, the Company issued 750,000 shares of the Company’s common stock as
Merger Consideration (Note 6).
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
On
September 16, 2019, pursuant to a Restricted Award, the Company authorized the grant to Jed Kaplan, our Chief Financial Executive
Officer and Interim Chief Financial Officer and a member of our board of directors, of 70,000 shares of our restricted Common
Stock. As of May 31, 2020, these shares have been issued.
On
September 16, 2019, pursuant to a Restricted Award, the Company authorized the grant to Roman Franklin, our President and a member
of our board of directors, of 21,000 shares of our restricted Common Stock. As of May 31, 2020, these shares have been issued.
On
September 16, 2019, pursuant to a Restricted Award, the Company authorized the grant to Steven Grossman, our Corporate Secretary,
of 14,000 shares of our restricted Common Stock. As of May 31, 2020, these shares have been issued.
On
March 11, 2020, in connection with the execution of the Common Stock Purchase Agreement with Triton Funds, LP, the Company issued
5,000 shares of our restricted Common Stock at $1.18 per share to Triton Funds, LP as a donation.
On
April 9, 2020, the Company delivered a Purchase Notice to Triton Funds, LP pursuant to the terms of the Common Stock Purchase
Agreement requiring Triton Funds, LP to acquire 125,000 shares of our restricted Common Stock at a price of $0.70 per share. In
accordance therewith, we issued 125,000 shares of our Common Stock to Triton Funds, LP, which rendered $87,700 in proceeds to
the Company.
On
May 4, 2020, pursuant to the terms of that certain 10% Fixed Convertible Promissory Note dated April 29, 2020 in the principal
amount of $152,500 issued by the Company in favor of Harbor Gates Capital, LLC, the Company issued 10,000 shares of our restricted
Common Stock, issued at $0.99 per share, to Harbor Gates Capital, LLC as additional consideration for the purchase of such note.
As of May 31, 2020, these shares were not issued. As of August 31, 2020, these shares have been issued.
On
May 7, 2020, the Company authorized the sale of 22,936 shares of our restricted Common Stock, at a price of $1.09 per share, to
William H. Herrmann, Jr. a member of our board of directors, for an aggregate purchase price of $25,000. As of May 31, 2020, and
August 31, 2020, such shares have not been issued.
Subsequent
to May 31, 2020, on June 4, 2020, the Company authorized the issuance of 85,905 shares of common stock in connection with the
conversion of $100,000 in principal of a convertible note payable. As of May 31, 2020 and August 31, 2020, these shares have been
issued.
Subsequent
to May 31, 2020, on June 15, 2020, we issued 25,000 shares of common stock in satisfaction of an outstanding balance owed to a
vendor.
Subsequent
to May 31, 2020, on June 18, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and
an accredited investor, pursuant to which the Company issued a 12% self-amortization promissory note (described elsewhere herein)
in the principal amount of $550,000, the Company issued 55,000 shares of the Company’s common stock to such accredited investor
as additional consideration for the purchase of such note.
Subsequent
to May 31, 2020, on June 29, 2020, the Company acquired the assets of one of its top performing franchisee owned esports gaming
centers on Fort Bliss U.S. Military base in El Paso, TX. In connection with the acquisition the Company authorized the issuance
of 150,000 restricted shares As of August 31, 2020 such shares have not been issued.
Subsequent
to May 31, 2020, on July 29, 2020, the Company authorized the grant to Mr. Kaplan of 300,000 shares of common stock. As of August
31, 2020, such shares have not been issued.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Subsequent
to May 31, 2020, on July 29, 2020, the Company authorized the grant to Mr. Franklin of 265,000 shares of common stock. As of August
31, 2020, such shares have not been issued.
Subsequent
to May 31, 2020, on July 29, 2020, the Company authorized the grant of 192,000 shares of common stock to an employee and the Directors
of the Company as of August 31, 2020 such shares have not been issued.
Subsequent
to May 31, 2020, on July 31, 2020, the Company entered into a marketing agreement whereby we agreed to issue 27,778 shares of
common stock. As of August 31, 2020, such shares have not been issued.
Subsequent
to May 31, 2020, on August 7, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and
an accredited investor pursuant to which we issued a 12% self-amortization promissory note (described elsewhere herein) in the
principal amount of 333,333, the Company authorized the grant of 33,333 shares of common stock. As of August 31, 2020, such shares
have been issued.
Private
Placement
Beginning
in February of 2019 and closing in May of 2019, the Company sold units in connection with a private offering by the Company to
raise working capital of up to $2,000,000 (the “Offering Amount”) through the sale to accredited investors only of
up to up to 1,000,000 “Units” of the Company’s securities, at a purchase price of $2.00 per Unit, with each
Unit consisting of (i) one share of common stock, par value $0.0001 per share of the Company (the “Common Stock”)
and (ii) a warrant to purchase one share of Common Stock, exercisable at a price of $4.00 per share, exercisable at any time within
five years of issuance (each, a “Warrant”) as provided for in the Company’s Term Sheet for Unit Offering dated
February 6, 2019 (the “Term Sheet”).
The
Company sold 962,500 units for gross proceeds of $1,925,000.
Stock
Based Compensation
On
March 27, 2019, the Company issued 180,000 shares of common stock at $0.60 per share to 3 employees of the Company. The shares
were issued in conjunction with their employment agreements. During the fiscal year ended May 31, 2020 105,000 shares vested ratably
through December 31, 2019. As of May 31, 2020, all 180,000 shares have vested.
On
July 29, 2020, the Company authorized the issuance of 67,000 shares of common stock at $1.02 per share to 3 employees of the Company.
The shares were issued in conjunction with their employment agreements and vested ratably through May 31, 2020.
On
July 29, 2020, the Company authorized the issuance of 690,000 shares of common stock at $0.87 per share to the Executive Officers,
an employee of the Company and the Members of the Company’s Board of Directors. The shares have all vested as of May 31,
2020.
In
connection with these issuances the Company recorded share-based compensation expense of $669,215. At May 31, 2020, the Company
has no unrecognized share-based compensation.
Warrants
For
the year ended May 31, 2020, there was no activity with respect to warrants.
For
the year ended May 31, 2019, the Company issued 5,461,500 warrants in conjunction with its Initial Public Offerings. These warrants
are exercisable for five years from November 20, 2018, the date of the initial business combination and have an exercise price
equal to $11.50.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
For
the year ended May 31, 2019, the Company issued 962,500 warrants in conjunction with the above-mentioned private placement. These
warrants are exercisable for 5 years and have an exercise price of $4.00.
A
summary of the status of the Company’s outstanding stock warrants for the years ended May 31, 2020 and 2019 is as follows:
|
|
Number
of
Shares
|
|
Average
Exercise
Price
|
|
Expiration
Date
|
Outstanding
– May 31, 2018
|
|
5,461,500
|
|
$
|
11.50
|
|
Nov 2023
|
Granted – May
31, 2019
|
|
962,500
|
|
|
4.00
|
|
May 2024
|
Outstanding
– May 31, 2019
|
|
6,424,000
|
|
|
10.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding
– May 31, 2020
|
|
6,424.000
|
|
$
|
10.38
|
|
|
Warrants
exercisable at May 31, 2020
|
|
6,424,000
|
|
|
|
|
|
NOTE
11 - INCOME TAXES
For
the year ended May 31, 2020 and 2019, the income tax provisions for current taxes were $0.
Deferred
income taxes reflect the net tax effects of permanent and temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. The temporary differences that result in deferred
tax assets and liabilities are the results of carry forward tax losses, amortization and impairment expense.
The
components of the net deferred tax assets for the year ended May 31, 2020 and 2019 are as follows:
|
|
Year ended
May 31, 2020
|
|
|
Year ended
May 31, 2019
|
|
Net Operating Loss
|
|
$
|
770,000
|
|
|
$
|
364,000
|
|
Impairment of cost method investment
|
|
|
-
|
|
|
|
38,000
|
|
Gross deferred tax asset
|
|
|
770,000
|
|
|
|
402,000
|
|
Less: Valuation allowance
|
|
|
(825,000
|
)
|
|
|
(381,000
|
)
|
Net deferred tax asset
|
|
$
|
55,000
|
|
|
$
|
21,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
(55,000
|
)
|
|
|
(21,000
|
)
|
Net deferred assets/liabilities
|
|
|
-
|
|
|
|
-
|
|
In
assessing the realization of the deferred tax assets, management considers whether it is more likely than not that some portion
of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary differences representing net future deductible amounts
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. After consideration of all of the information available, management believes
that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established
a valuation allowance, in an amount equal to gross deferred tax assets less deferred tax liabilities. For the year ended May 31,
2020, the change in the valuation allowance was $444,000.
The
table below summarizes the reconciliation of our income tax provision computed at the federal statutory rate of 21% for the years
ended May 31, 2020 and 2019 and the actual tax provisions for the year ended May 31, 2020 and 2019.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Expected provision (benefit) at statutory rate
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
State taxes, net of federal tax benefit
|
|
|
(4.4
|
)%
|
|
|
(4.4
|
)%
|
Change in federal rate
|
|
|
-
|
%
|
|
|
-
|
%
|
Permanent differences-stock based compensation
|
|
|
15.0
|
|
|
|
15.0
|
|
Increase in valuation allowance
|
|
|
10.4
|
%
|
|
|
10.4
|
%
|
Total provision (benefit) for income taxes
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
At
May 31, 2020 and May 31, 2019, the Company had Federal net operating loss carry forwards of approximately $3,029,000 and $1,474,000,
respectively. The net operating loss of approximately $3,029,000 can be carried forward indefinitely subject to annual usage limitations.
In accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s NOLs may be subject to an annual
limitation in the event of a change in control as defined under the regulations.
The
Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions and is subject to
examination by the various taxing authorities.
NOTE
12 — SEGMENT AND RELATED INFORMATION
Historically,
the Company had one operating segment. However, with the acquisition of PLAYlive and the opening of two Company-owned retail stores,
the Company’s operations are now managed through three operating segments: Franchise royalties and license fees, Company-owned
stores and Esports revenue. These three operating segments and corporate are presented below as its reportable segments.
Summarized
financial information concerning our reportable segments for the year ended May 31, 2020 is shown in the following table:
|
|
Revenues
|
|
|
Net
Income
(loss)
|
|
|
Depreciation
and
Amortization
|
|
|
Capital
Expenditures
|
|
|
Goodwill
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise royalties and fees
|
|
$
|
523,000
|
|
|
$
|
(124,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
699,000
|
|
|
$
|
1,610,000
|
|
Company-owned stores
|
|
|
174,000
|
|
|
|
(330,000
|
)
|
|
|
54,000
|
|
|
|
142,000
|
|
|
|
-
|
|
|
|
1,124,000
|
|
Esports revenue
|
|
|
165,000
|
|
|
|
(345,000
|
)
|
|
|
215,000
|
|
|
|
9,000
|
|
|
|
4,456,000
|
|
|
|
5,750,000
|
|
Corporate
|
|
|
-
|
|
|
|
(1,856,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108,000
|
|
Total
|
|
$
|
862,000
|
|
|
$
|
(2,655,000
|
)
|
|
$
|
269,000
|
|
|
$
|
151,000
|
|
|
$
|
5,155,000
|
|
|
$
|
8,592,000
|
|
NOTE
13 — SUBSEQUENT EVENTS
Self-Amortization
Promissory Note
On
June 18, 2020 (the “Issue Date”), Simplicity Esports and Gaming Company, a Delaware corporation (the “Company”),
entered into a securities purchase agreement (the “SPA”) with an accredited investor (the “Holder”), pursuant
to which the Company issued a 12% self-amortization promissory note (the “Amortization Note”) with a maturity date
of June 18, 2021 (the “Maturity Date”), in the principal sum of $550,000. Pursuant to the terms of the Amortization
Note, the Company agreed to pay to $550,000 (the “Principal Sum”) to the Holder and to pay interest on the principal
balance at the rate of 12% per annum. The Amortization Note carries an original issue discount (“OID”) of $55,000.
Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase price of $495,000 in exchange for the Amortization
Note. In addition, pursuant to the terms of the SPA, the Company agreed to issue 55,000 shares of the Company’s common stock
to the Holder as additional consideration.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
The
Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest (no prepayment premium). The Amortization Note contains customary events of default relating to, among other
things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA.
On
various dates subsequent to May 31, 2020, Jed Kaplan our Chief Executive Officer and Interim Chief Financial Officer funded $25,272
pursuant to the Kaplan Promissory Note. With the contributions subsequent to May 31, 2020, the principal balances outstanding
and due Mr. Kaplan amount to $90,000 (Note 8). The promissory note was subsequently converted into 20% of the common equity of
Simplicity One Brasil, LTD by SEGC and Mr. Kaplan.
On
April 10, 2020, the Company filed a Registration Statement on Form S-1 relating to the Company’s offering of units. Each
unit consists of one share of the Company’s common stock and one warrant to purchase one share of the Company’s common
stock. On July 2, 2020, the Company filed Amendment No. 1 to its Registration Statement on Form S-1. The registration statement
is not yet effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement
becomes effective. This shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale
of these securities in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such state or jurisdiction.
On
June 23, 2020, the Company’s stockholders approved an amendment to the Company’s Third Amended and Restated Certificate
of Incorporation, as amended (the “Certificate of Incorporation”), to effect a reverse stock split of the Company’s
outstanding shares of common stock, at a ratio of no less than 1-for-2 and no more than 1-for-10, with such ratio to be determined
by the sole discretion of the Board of Directors, with any fractional shares being rounded up to the next higher whole shares
(the “Reverse Split”). The Board will implement the Reverse Split only upon a determination that the Reverse Split
is in the best interests of the stockholders at that time. The Board will then select the ratio for the Reverse Split within the
range approved by stockholders that the Board determines to be advisable and in the best interests of the stockholders, considering
relevant market conditions at the time the Reverse Split is to be implemented. The Reverse Split may be delayed or abandoned without
further action by the stockholders at any time prior to effectiveness of the Certificate of Amendment with the Delaware Secretary
of State, notwithstanding stockholder adoption and approval of the Reverse Split amendment, if the Board, in its sole discretion,
determines that it is in the best interests of the Company and its stockholders to delay or abandon the Reverse Split. If the
Certificate of Amendment implementing the Reverse Split has not been filed with the Delaware Secretary of State on or before the
date of the 2021 annual meeting of stockholders, the Board will be deemed to have abandoned the Reverse Split.
The
board and shareholders of the Company approved the Simplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the “2020
Plan”) on April 22, 2020 and June 23, 2020, respectively. Under the 2020 Plan, 1,000,000 shares of common stock are authorized
for issuance to employees, directors and independent contractors (except those performing services in connection with the offer
or sale of the Company’s securities in a capital raising transaction, or promoting or maintaining a market for the Company’s
securities) of the Company or its subsidiaries. The 2020 Plan authorizes equity-based and cash-based incentives for participants.
There were 1,000,000 shares available for award at May 31, 2020 under the 2020 Plan.
On
June 29, 2020, the Company acquired the assets of one of its top performing franchisee owned esports gaming centers on Fort Bliss
U.S. Military base in El Paso, TX. Simplicity El Paso, LLC was created by SEGC and purchased the assets of the franchisee location
for 150,000 shares of restricted Company common stock and $150,000 in cash.
On
July 2, 2020, the Company repaid $152,500 and $15,000 in accrued interest in full satisfaction of the 10% Convertible Promissory
Harbor Gates Note (Note 8).
On
July 29, 2020, the Board of Directors of the Company approved the issuance of 757,000 shares of the Common Stock of the Company
and $150,000 in cash as compensation for the year ended May 31, 2020. The shares were granted to Jed Kaplan the Company’s
Chief Executive Officer and Interim Chief Financial Officer, Roman Franklin the Company’s President, the members of the
Company’s Board of Directors as well as an employee of the Company (Note 8).
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
On
July 29, 2020, The Company entered into employment agreements with Jed Kaplan the Company’s Chief Executive Officer and
Interim Chief Financial Officer and Roman Franklin the Company’s President, the members of the Company’s Board of
Directors as well as an employee of the Company (Note 8).
Self-Amortization
Promissory Note
On
August 7, 2020 (the “Issue Date”), the Company, entered into a securities purchase agreement (the “SPA”)
with FirstFire Global Opportunities Fund, LLC, an accredited investor (the “Holder”), pursuant to which the Company
issued a 12% self-amortization promissory note (the “Amortization Note”) with a maturity date of August 7, 2021 (the
“Maturity Date”), in the principal sum of $333,333. Pursuant to the terms of the Amortization Note, the Company agreed
to pay to $333,333 (the “Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of
12% per annum. The Amortization Note carries an original issue discount (“OID”) of $33,333. Accordingly, on the Closing
Date (as defined in the SPA), the Holder paid the purchase price of $300,000 in exchange for the Amortization Note. In addition,
pursuant to the terms of the SPA, the Company agreed to issue 33,333 shares of the Company’s common stock to the Holder
as additional consideration.
Amendment
of Certificate of Incorporation
On
August 17, 2020, the Company amended its certificate of incorporation to increase the total number of authorized shares of the
Company’s common stock from 20,000,000 to 36,000,000.
SIMPLICITY
ESPORTS AND GAMING COMPANY
6,449,000
Shares of Common Stock Underlying Warrants
6,203,969
Shares of Common Stock for Resale by Securityholders
261,500
Warrants to Purchase Common Stock for Resale by Securityholders
PROSPECTUS
October
13, 2020
Until
November 22, 2020 (40 days after the date of this prospectus) all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’
obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
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