PART
I
Unless
the context otherwise requires, “we,” “us,” or “the Company” refers to (i) “Simplicity
Esports and Gaming Company” after the consummation of the acquisition of Simplicity Esports, LLC, (ii) “Smaaash Entertainment
Inc.” before the consummation of the acquisition of Simplicity Esports, LLC but after the closing of the transactions with
Smaaash Entertainment Private Limited, and (iii) I-AM Capital Acquisition Company prior to the closing of the transactions with
Smaaash Entertainment Private Limited. “Simplicity Esports LLC” means Simplicity Esports, LLC, a Florida limited
liability company, and its consolidated subsidiaries. “Smaaash Private” means Smaaash Entertainment Private Limited,
a private limited company incorporated under the laws of India, and its consolidated subsidiaries.
Overview
We
are a global esports organization, with an established brand, that is capitalizing on the growth in esports through three business
units, Simplicity One Brasil Ltda (“Simplicity One”), Simplicity Esports, LLC (“Simplicity Esports LLC”)
and PLAYlive Nation, Inc. (“PLAYlive”).
Our
Esports Teams
We
own and manage numerous professional esports teams domestically and internationally. Revenue is generated from prize winnings,
corporate sponsorships, advertising, league subsidy payments and potential league revenue sharing payments from the publishers
of video games.
Domestic
Esports Teams – Simplicity Esports LLC
Through
our wholly owned subsidiary Simplicity Esports LLC, we own and manage numerous professional esports teams competing in games such
as Overwatch, Apex Legends, PUBG and more. We are committed to growing and enhancing the esports industry, fostering the development
of amateurs to compete professionally and signing established professional gamers to support their paths to greater success.
International
Esports Team - Simplicity One
Since
January 2020, through our 90% owned subsidiary Simplicity One, we manage Flamengo eSports, one of the leading Brazilian League
of Legends® teams. Flamengo eSports was established in 2017 as the Esports division of Clube de Regatas do Flamengo, a successful
Brazilian sports organization, with over 30 million followers across social media accounts, known for its world-famous soccer
team. Flamengo eSports’ League of Legends® team won the CBLoL Championship in September 2019, which qualified the team
to compete at the 2019 League of Legends® World Championship in Europe as one of 24 teams from 13 different regions around
the world. 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.
Online
Tournaments
Since
March 2020, through our wholly owned subsidiary Simplicity Esports LLC, we hold weekly online esports tournaments. In response
to demand from customers for online esports tournaments and due to increased demand from
COVID-19 related social distancing, we introduced a new initiative of online esports tournaments. We
acquired a database of over 400,000 paying esports gaming center customers in the acquisition of PLAYlive. We will directly
promote our online Simplicity Esports tournaments to this database of over 400,000 existing customers via text messages. If we
can convert merely 1% of these existing customers from the PLAYlive database to play in paid entry online Simplicity Esports tournaments,
this may be a profitable business unit resulting in approximately $1,000,000 in annual revenues. At a 5% conversion rate, this
business segment may generate approximately $5,000,000 in annual revenue. Management also intends to sell sponsorship and marketing
activations for these online tournaments that would create additional revenue.
Our
Gaming Centers
We
own and operate corporate and franchise esports gaming centers, through our wholly owned subsidiaries Simplicity Esports LLC and
PLAYlive, throughout the U.S. giving casual gamers the opportunity to play in a social setting with other members of the gaming
community. In addition, aspiring and established professional gamers have an opportunity to compete in local and national esports
tournaments held in our gaming centers for prizes, notoriety, and potential contracts to play for one of our professional esports
teams. In this business unit, revenue is generated from franchise royalties, the sale of game time, memberships, tournament entry
fees, birthday party events, corporate party events, concessions and gaming-related merchandise.
Our
business plan encompasses a brick and click physical and digital approach to further recognize revenue from all verticals, which
we believe to be unique in the industry. The physical centers, together with our esports teams, lifestyle brand and marketing
campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our
ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform,
tournaments, and physical real estate to maximize the monetization opportunities with these relationships. In addition, we have
proprietary intellectual capital, fan engagement strategies and brand development blueprints which complement our publicly available
information.
Optimally,
the esports gaming centers of Simplicity Esports LLC (“Simplicity Esports Gaming Centers”) will measure between 1,200
and 2,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology,
futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present
attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity
for sponsors and advertisers.
Creating
content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. Our talented team will
continue to produce unique in-depth content which showcases aspects of esports for fans. We seek to reach a broad demographic
encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic
and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while
maintaining authenticity to the gaming community that comprises our fanbase.
Corporate
Gaming Centers
Simplicity
Esports LLC has already opened and is operating four corporate-owned retail Simplicity Esports Gaming Centers.
Our first Simplicity Esports Gaming Center was opened on May 3, 2019. Furthermore, we have engaged a national tenant representation
real estate broker to assist in the strategic planning and negotiations for our future Simplicity Esports Gaming Center locations.
We contemplate that new Simplicity Esports Gaming Centers will be funded by us as well as a combination of tenant improvement
allowances from landlords and sponsorships. As announced on June 5, 2020, we are in discussions with multiple commercial property
owners regarding their desire to have us open 10,000 to 15,000 square foot MEGA centers at their properties. There are multiple
locations available to us with a percentage rent lease structure, 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 Simplicity being
able to secure acceptable lease modifications from the landlords. If the acquisitions close, the consideration paid for each acquisition
will be 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
within the first week of operations.
Our
Stream Team
The
Simplicity Esports LLC stream team encompasses over 30 commentators (commonly known as “casters”), influencers and
personalities who connect to a dedicated fan base. Our electric group of live personalities
represent our organization to the fullest with their own unique style. We are proud to support and present a diverse group of
gamers as we engage fans across a multiple of esports genres. Our Twitch affiliation has enabled our stream team influences to
reach a broad fan base. Additionally, we have created several niches within the streaming community which has enabled us to engage
fans within certain titles on a 24/7 basis. Our notoriety in the industry is evidenced by our audience that views millions
of minutes of Simplicity Esports’ content monthly, via various social media outlets including YouTube, Twitter and Twitch.
Through Simplicity Esports LLC, we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience.
Our intention is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent.
Our management and players are known within the esports community and we plan to use their skills to create a seamless content
creation plan helping gamers feel closer to our brand than any other in the industry.
COVID-19
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because
COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities
have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more
restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity
Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have since
reopened one corporate and 21 franchised Simplicity Gaming Centers as of August 31, 2020. Although our franchise agreements
with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless
of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming
Centers will default in their obligations to pay their minimum monthly royalty payment to us.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date will impact the Company’s business for the fiscal fourth quarter and potentially beyond. Management
expects that all of its business segments, across all of its geographies, will be impacted to some degree, but the significance
of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot
be determined at this time.
Corporate
History
Formation
We
were initially a blank check company organized under the laws of the State of Delaware on April 17, 2017 under the name I-AM Capital
Acquisition Company. We were formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase,
reorganization or similar business combination with one or more businesses. Although we were not limited to a particular industry
or geographic region for purposes of consummating a business combination, we focused on businesses with a connection to India.
On November 20, 2018, we changed our name from I-AM Capital Acquisition Company to Smaaash Entertainment, Inc. On January 2, 2019,
we changed our name from Smaaash Entertainment, Inc. to Simplicity Esports and Gaming Company.
We
are authorized to issue 21,000,000 shares of capital stock, consisting of (i) 20,000,000 shares of common stock, with a par value
of $0.0001 per share (“Common Stock”), and (ii) 1,000,000 shares of preferred stock, with a par value of $0.0001 per
share. As of August 31, 2020, there were 8,171,433 shares of Common Stock issued and outstanding and there were
no shares of preferred stock issued or outstanding.
Founder
Shares
On
May 31, 2017, we issued 1,437,500 shares of Common Stock (the “Founder Shares”) to I-AM Capital Partners LLC, our
sponsor (the “Sponsor”), in exchange for a capital contribution of $25,000. Upon the partial exercise of the underwriters’
over-allotment option on September 13, 2017, 137,500 Founder Shares were forfeited by the Sponsor, for a balance of 1,300,000
Founder Shares held by our Sponsor.
Initial
Public Offering and Private Placement
On
August 22, 2017, we sold 5,000,000 units at a purchase price of $10.00 per unit in our initial public offering (“IPO”)
of public units (“Public Units”), generating gross proceeds of $50.0 million. Each Public Unit consisted of one share
of our Common Stock (“Public Shares”), one right to receive one-tenth of one share our Common Stock upon consummation
of an initial business combination (“Public Right”), and one redeemable warrant (“Public Warrants”). Each
warrant entitled the holder to purchase one share of common stock at an exercise price of $11.50 per share, subject to adjustment.
Concurrently
with the closing of the IPO on August 22, 2017, the Sponsor purchased an aggregate of 254,500 units (“Private Placement
Units”) at $10.00 per unit, generating gross proceeds of $2,545,000 in a private placement. The Private Placement Units
(including their component securities) are not transferable, assignable or salable until 30 days after the completion of the initial
business combination and the warrants included in the Private Placement Units are non-redeemable so long as they are held by the
Sponsor or their permitted transferees.
On
August 22, 2017, we issued 50,000 shares of Common Stock to Maxim in connection with its services as underwriter for the IPO.
Contained
in the underwriting agreement for the IPO was an over-allotment option allowing the underwriters to purchase from the Company
up to an additional 750,000 Public Units (the “Over-Allotment Units”) and, in addition, the Company received a commitment
from the Sponsor to purchase up to an additional 26,250 Private Placement Units.
On
September 13, 2017, the underwriters partially exercised their option and purchased 200,000 Over-Allotment Units, which were sold
at an offering price of $10.00 per unit, generating gross proceeds of $2,000,000.
On
September 13, 2017, simultaneously with the sale of the Over-Allotment Units, the Company consummated the sale of an additional
7,000 Private Placement Units (the “Over-Allotment Placement Units”), generating gross proceeds of $70,000.
On
September 13, 2017, we issued Maxim an additional 2,000 shares of our Common Stock upon partial exercise of the over-allotment.
On
October 9, 2017, we commenced trading our Public Shares of Common Stock, Public Rights, and Public Warrants on the Nasdaq Capital
Market (“Nasdaq”) under the symbols “IAM,” “IAMXR” and “IAMXW,” respectively.
The
Founder Shares are identical to the Public Shares and holders of Founder Shares have the same stockholder rights as the holders
of our Public Shares (“Public Stockholders”) which include our initial stockholders, including the holders of our
Founder Shares prior to the IPO (“initial stockholders”) and members of our management team, including our executive
officers and directors (“management” and “management team”), to the extent our initial stockholders and/or
members of our management team purchased Public Shares, provided that each initial stockholder’s and member of our management
team’s status as a “public stockholder” shall only exist with respect to such Public Shares), except that the
Founder Shares and the shares of Common Stock (“Private Placement Shares”) forming part of the Private Placement Units
are subject to certain transfer restrictions.
Consummation
of Transactions with Smaaash Entertainment Private Limited
On
November 20, 2018 (the “Closing Date”), the Company and Smaaash Entertainment Private Limited, a private limited company
incorporated under the laws of India, consummated the transactions (the “Transactions” or the “Business Combination”)
contemplated by the share subscription agreement (as amended, the “Subscription Agreement”), following the approval
at the special meeting of the stockholders of the Company held on November 9, 2018 (the “Special Meeting”).
At
the Special Meeting, holders of 4,448,260 Public Shares exercised their right to redeem those shares for cash at a price of $10.2187363
per share, for an aggregate of approximately $45,455,596. Immediately after giving effect to the initial Transactions (including
as a result of the redemptions described above, the issuance of 2,000,000 shares of common stock to the Smaaash founders,
the issuance of 520,000 shares of common stock upon conversion of the Public Rights at the Closing and the issuance of 208,000
shares of common stock to Chardan as consideration for services), there were 5,119,390 shares of common stock and warrants to
purchase approximately.
On
November 20, 2018, upon the consummation of the Business Combination with Smaaash Private, we issued 26,150 shares of common stock
underlying the Private Placement Rights to the holders of the Private Placement Rights.
Pursuant
to the Subscription Agreement, the purchase price of $150,000 was paid by the Company to Smaaash Private in exchange for 294,360
newly issued equity shares of Smaaash Private at the closing of the Transactions (the “Closing”).
In
addition, AHA Holdings Private Limited (“AHA Holdings”) and Shripal Morakhia (together with AHA Holdings, the “Smaaash
Founders”) agreed that within six months following the Closing Date, they would transfer all of their ownership interest
in Smaaash Private (representing 33.6% of the share capital of Smaaash Private on a fully diluted basis as of June 22, 2018) (the
“Additional Smaaash Shares”) to the Company in exchange for newly issued shares of our Common Stock (the “Transferred
Company Shares”) in an amount which would enable the Smaaash Founders to retain their 33.6% ownership interest in Smaaash
Private indirectly through their interest in the Company.
At
the Closing, the Company issued an aggregate of 2,000,000 shares of its common stock to the Smaaash Founders as an upfront portion
of the Transferred Company Shares (the “Upfront Company Shares”). In connection with the issuance of the Upfront Company
Shares, the Company and the Smaaash Founders entered into an escrow agreement pursuant to which the Upfront Company Shares would
be held in escrow and will be either, (i) if the Additional Smaaash Shares are not transferred in full to the Company within the
designated six-month period, cancelled, or (ii) if the Additional Smaaash Shares are transferred in full to the Company within
the designated six-month period, released from escrow and the number of Upfront Company Shares will be deducted from the Transferred
Company Shares that will be issued to the Smaaash Founders upon the delivery of the Additional Smaaash Shares.
On
November 16, 2018, Smaaash Private and the Smaaash Founders executed a letter of undertaking, pursuant to which they agreed to
transfer 4,000,000 additional equity shares of Smaaash Private to the Company in consideration for 200,000 shares of our Common
Stock, simultaneously with the issuance of the 300,000 equity shares of Smaaash Private to the Company on or prior to November
30, 2018, as permitted by the laws of India. Such additional shares of Smaaash Private have not yet been delivered to the Company.
In connection with the
Closing, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc. and entered into a master
franchise agreement (“Master Franchise Agreement”) and a master license and distribution agreement (“Master
Distribution Agreement”) with Smaaash Private. Prior to the Closing, the Company was a shell company with no operations,
formed as a vehicle to effect a business combination with one or more operating businesses. After the Closing, the Company’s
primary assets consisted of shares in Smaaash Private and the rights granted under the Master Franchise Agreement and the
Master Distribution Agreement.
Pursuant
to the terms of the escrow agreement, the Upfront Company Shares have been cancelled because the Additional Smaaash Shares were
not transferred in full to the Company in the designated six-month period.
Master
Franchise Agreement
Franchise and license
right. Under the Master Franchise Agreement, Smaaash Private granted to the Company an exclusive right to establish and operate
Smaaash Centers (as defined under the Master Franchise Agreement) and to sublicense the right to establish and operate Smaaash
Centers to third party franchisees, and a license to use the products and other services developed by Smaaash Private with respect
to the Smaaash Centers, in the territories of North America and South America (“Territory”). Further, Smaaash Private
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.
Obligations of the
Company. The Company agreed not to directly or indirectly engage or be concerned with any business which competes
with Smaaash Private’s business in the Territory during the term of the Master Franchise Agreement. The Company agreed
to market, promote and publicize the Smaaash Centers in the Territory. The Company or third party sub-franchisees agreed
to set up at least six Smaaash Centers during the first calendar year.
Obligations of Smaaash
Private. Smaaash Private agreed to assist in training and installing the equipment and bear all the costs associated
therewith. The franchisee or sub-franchisee will bear the cost to set up the Smaaash Center.
License
fees and other payments. Franchisee or the third-party franchisee will be entitled to receive the revenue generated
from each of the Smaaash Centers. In connection with the operations of the Smaaash Centers by sub-franchisees, the Company shall
be entitled to receive (i) a signup fee equal to 5% of the capital expenditure of the sub-franchisee, (ii) 5% of the revenue of
the sub-franchisee on an annual basis; and (iii) a 15% markup of the products sold to the sub-franchisee. Smaaash Private will
not receive any portion of the revenue or other fees in connection with the Master Franchise Agreement.
Term
and Termination. The Master Franchise Agreement will commence from its execution date and continue until the
agreement is terminated in accordance with the Master Franchise Agreement. The Master Franchise Agreement may be terminated
(i) by the mutual written agreement of parties or (ii) by Smaaash Private if the Company fails to make a payment, ceases to operate
or abandons the Smaaash Centers or fails to use best efforts to market the Smaaash Centers and such failure is not cured within
30 days’ notice of the failure.
Addendum
to Master Franchise Agreement
On November 29, 2018,
the Company and Smaaash Private executed an addendum to the Master Franchise Agreement (the “Amendment”). Pursuant
to the Amendment, Smaaash Private granted the Company the exclusive rights to set up family and entertainment centers under
the name “Total Sports Center” in the United States (“Total Sports Centers”) in which 51% of the investment
will be borne by the Company and 49% by Smaaash Private. Smaaash Private will be responsible for identifying the locations for
setting up, managing and controlling the Total Sports Centers and will carry out all the fit out requirements for such centers.
Smaaash Private will also appoint the management team for the centers. Smaaash Private will be entitled to 3% of the net revenue
of each center, subject to conditions to be confirmed by the parties.
Master
License and Distribution Agreement
Grant
of license and distribution rights. Under the Master Distribution Agreement, Smaaash Private granted to the Company an exclusive
right to purchase from Smaaash Private specialized equipment and products related to sports and recreational activities (“Products”)
in the territory under the brand name of Smaaash Private and sell them with a 15% markup to the customers which will be the sub-franchisees
of the Company who will operate the Smaaash Centers, as specified in the Master Franchise Agreement.
Pricing.
The Company may sell the Products further to any third-party franchisees at a minimum of 15% margin over and above the price at
which Smaaash Private sold the Products to the Company.
Grant
of license in Smaaash Marks. Smaaash Private also granted the Company a license to use the Trademarks (as set out in the
Master Distribution Agreement) on a royalty free basis for the purpose of promoting the sale of the Products in the Territory.
Term and
Termination. The Master Distribution Agreement commence on its execution date and will continue until it
is terminated in accordance with the Master Distribution Agreement. The Master Distribution Agreement may be terminated (i)
by the mutual written agreement of parties, (ii) by Smaaash Private if the Company fails to make a payment or use best
efforts to market the Products and such failure is not cured within 30 days’ of notice of the failure, and (iii) by the
Company for any reason upon 120 days’ notice.
Settlement
Agreement
On
November 20, 2018, the Company entered into a settlement and release agreement (“Settlement Agreement”) with Maxim
Group LLC, the underwriter for the Company’s IPO (“Maxim”). Pursuant to the Settlement Agreement, the Company
made a cash payment of $20,000 to Maxim and issued a demand secured promissory note in favor of Maxim in the amount of $1.8 million
(the “Note”) to settle the payment obligations of the Company under the underwriting agreement dated August 16, 2017,
by and between the Company and Maxim. The Company also agreed to remove the restrictive legends on an aggregate of 52,000 shares
of its common stock held by Maxim and its affiliate.
The Note accrues interest
at 8% per annum from the date of the Note through and including May 20, 2019 and 12% per annum from and including May 21, 2019
through and including August 20, 2019, and 15% per annum from and including August 21, 2019, through and including
November 20, 2019. If a late payment occurs and is continuing, the interest rate will be increased to 12% per annum and if from
the date of the Note through and including August 20, 2019, and 18% per annum and if from after August 21, 2019. If a late
payment remains outstanding for over 48 hours, Maxim may require the Company to redeem all or any part of the Note (“Alternate
Payment Amount”) at a redemption price equal to 125% of the Alternate Payment Amount.
The
principal and interest of the Note will be payable upon demand by Maxim or from time to time, in accordance the following schedule:
(i)
one third of the principal, accrued and unpaid interest and any late charges on May 20, 2019;
(ii)
one third of the principal, accrued and unpaid interest and any late charges on August 20, 2019; and
(iii)
one third of the principal, accrued and unpaid interest and any late charges on November 20, 2019.
The
Note is secured by a first priority security interest in all personal property and assets of the Company excluding the assets
held in escrow with respect to (i) that certain stock purchase agreement with Polar, pursuant to which Polar agreed to sell up
to 490,000 shares of the Company’s common stock to the Company thirty days after the consummation of the Transactions and
(ii) that certain stock purchase agreement with K2 Principal Fund L.P. (“K2”), pursuant to which K2 agreed to sell
up to 220,000 shares of the Company’s common stock to the Company thirty days after the consummation of the Transactions.
The
amount payable under the Note may be paid in shares of our Common Stock or securities convertible or exercisable into shares of
our Common Stock (the “Alternate Equity Payment”) if and only if the Company and Maxim mutually agree on both the
purchase price and, if applicable, the conversion and/or exercise price of each security of the Company issued in such Alternate
Equity Payment. Otherwise the payment should be made in cash only.
So
long as any amount under the Note is outstanding, all cash proceeds received by the Company from any sales of its securities will
be used to repay this Note.
Convertible
Note Payable
On
December 20, 2018, the Company entered into a securities exchange agreement (“Exchange Agreement”) with Maxim Group
LLC (the “Holder”). Pursuant to the terms of the Exchange Agreement, the Holder agreed to surrender and exchange the
Note in the amount of $1.8 million which was issued to Maxim pursuant to the Settlement Agreement (discussed immediately above).
In exchange, the Company issued to the Holder a Series A-1 Exchange Convertible Note in the principal amount of $500,000 (the
“Series A-1 Note”) and a Series A-2 Exchange Convertible Note in the principal amount of $1,000,000 (the “Series
A-2 Note,” and collectively with Series A-1 Note, the “Exchange Notes”). 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.
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.
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 would
result 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.
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 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.
Amendments to Forward Purchase
Agreements and Warrants
On December 20, 2018, the
Company, Polar, K2 and the Escrow Agent, entered into an Amendment (the “Amendment”), pursuant to which, among other
things, the stock purchase agreements with Polar and K2 were amended to (x) reduce the purchase price per share payable by the
Company at the closing of the Stock Sales from $11.23 per share to (1) first $6.00 per share up to 20% of the original number of
Shares (as defined in the respective Purchase Agreement), (2) then $5.00 per remaining share up to 20% of the original number of
Shares, (3) then $4.00 per remaining share up to 20% of the original number of Shares, (4) then $3.00 per remaining Share up to
20% of the original number of Shares, and (5) then $2.00 per remaining Share up to 20% of the original number of Shares, (y) to
extend the outside date of the closing of the Stock Sales until January 18, 2019, and (z) to authorize the issuance of $3,542,700
and $1,590,600 from the Escrow Account to Polar and K2, respectively, as partial payment for the Shares prior to the final closing
of the Stock Sales.
In
addition, pursuant to the terms of the Amendment, the Company agreed to amend its outstanding Public Warrants and Private Placement
Warrants (1) to reduce the exercise price of the warrants from $11.50 per share to $4.00 per share, subject to adjustment (the
“Exercise Price Adjustment”) and (2) to revise the redemption provisions of the warrants to provide that the Company
may only redeem each warrant in whole at a price of $0.1 per warrant upon a minimum of 30 days’ written notice of redemption
if, and only if, the last sale price of the Company’s common stock equals or exceeds $7.00 per share (as opposed to the
current $21.00 per share) for any 20 trading days within a 30-trading day period (the “Redemption Threshold Adjustment”);
provided, however, that the Exercise Price Adjustment and the Redemption Threshold Adjustment shall only be effective upon the
approval of the requisite number of warrant holders, as required by law.
Acquisition
of Simplicity Esports, LLC
On January 4, 2019, the
Simplicity Owners received an aggregate of 300,000 shares of common stock at the closing of the Acquisition and an additional
aggregate of 700,000 shares of common stock on January 7, 2019. The Simplicity Owners are entitled to receive an additional 2,000,000
shares upon the Company’s receipt of the approval of its stockholders to such issuance. This provision was removed as the
stockholder approval was only necessary due to the Company’s stock being listed on Nasdaq. Upon completion of the
Simplicity Esports LLC acquisition, the Company decided that moving off the Nasdaq was appropriate and, the 2,000,000 shares
are included on the balance sheet as common stock issuable to Simplicity Owners at February 28, 2019.
In
connection with the acquisition of Simplicity Esports LLC, on January 2, 2019, the Company filed a Certificate of Amendment to
the Company’s Third Amended and Restated Certificate of Incorporation (the “Certificate Amendment”) with the
Delaware Secretary of State to change the Company’s name from “Smaaash Entertainment, Inc.” to “Simplicity
Esports and Gaming Company”. In addition, the Company changed the ticker symbols of its common stock and public warrants
to “WINR” and “WINRW,” respectively, and commenced trading of its common stock and public warrants under
such new ticker symbols on the OTCQB on January 10, 2019.
Acquisition
of PLAYlive
On
July 30, 2019, we acquired a 100% interest in PLAYlive by way of merger pursuant to an Agreement and Plan of Merger, dated July
25, 2019, whereby we acquired 100% of the issued and outstanding common stock of PLAYlive from the selling stockholders (“PLAYlive
Stockholders”) of PLAYlive in exchange for 750,000 shares of our common stock. Following this merger, PLAYlive became our
wholly owned subsidiary. On the closing date of this merger, each of the PLAYlive Stockholders entered into a one-year lock-up
agreement with the Company and each of Duncan Wood, Jordan C. Jenson, and Alec T. Carpenter entered into an employment agreement
with PLAYlive.
Licensing
of Flamengo Esports
Effective
January 20, 2020, Simplicity One entered into an Exclusive Trademark and Symbol Use License Agreement, and Other Covenants (the
“License Agreement”), dated November 5, 2019 with Clube de Regatas do Flamengo (one of the most successful Brazilian
sports organizations, known for its world-famous soccer team), whereby Clube de Regatas do Flamengo agreed to exclusively license
its intellectual property rights (“Flamengo IP Rights”) to Simplicity One (an entity which the Company and Team One
E-Sports Ltda – ME own a 90% and 10% equity interest in, respectively), authorizing Simplicity One to use the Flamengo IP
Rights on a League of Legends team in esports as well as in other modalities in esports, which will be maintained and assembled
by Simplicity One during the term of the Licensing Agreement. The Company has appointed Fred Tannure to act as Simplicity One’s
General Manager. The License Agreement has a term of three years, beginning on January 1, 2020 and ending on December 31, 2022,
and may be renewed by mutual written agreement by the parties. In exchange for the exclusive license, the Company shall pay Clube
de Regatas do Flamengo an annual fee for the first, second and third year in the amount of US$32,882 (Reais$170,000.00), US$35,784
(Reais$185,000.00), and US$38,685 (Reais$200,000.00), respectively, as well as the payment of royalties in the amount of 8% of
the gross revenues (less taxes) of the eSports teams pursuant to the terms of the Licensing Agreement. If either party unilaterally
terminates the Agreement or gives rise to certain termination grounds set forth in the Agreement, the terminating party will pay
the other party a non-compensatory fine in the amount of approximately $23,870 (Reais $100,000) to indemnify the other party,
without prejudice to any losses or damages that exceed such amount.
Flamengo
Esports was established in 2017 as the Esports division of Clube de Regatas do Flamengo, a successful Brazilian sports organization,
known for its world-famous soccer team. Flamengo Esports’ League of Legends® team won the CBLoL Championship in September
2019 and competed at the 2019 League of Legends® World Championship in Europe as one of 24 teams from 13 different regions
around the world.
On April 1, 2020, the
Company released multiple players and staff members from Simplicity One Brasil Ltd as part of a restructuring to make the Flamengo
Esports project profitable. 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.
Nasdaq
Delisting
On December 10, 2018,
the Company received a written notice (the “Notice”) from Nasdaq’s Listing Qualifications Division indicating
that the Company has not complied with the requirements of IM-5101-2 of the listing rules of Nasdaq (the “Listing Rules”).
The
Notice stated that after its Business Combination, the Company had not demonstrated that its common stock met Listing Rule 5505(b)(1)
that requires a market value of publicly held shares of at least $15 million. Additionally, the Company has not provided evidence
that its common stock has at least 300 round lot holders as required by Listing Rule 5505(a)(3) and that its warrant has at least
400 round lot holders as required by Listing Rule 5515(a)(4). Finally, the Company does not comply with Listing Rule 5515(a)(2)
which requires that for initial listing of a warrant the underlying security must be listed on Nasdaq.
On
January 7, 2019, the Company received a second written notice from Nasdaq informing it that the Company failed to comply with
Listing Rule 5250(e)(2) which requires companies listed on Nasdaq to timely file notification forms for the Listing of Additional
Shares (the “LAS Notification”).
The
Company was required to submit the LAS Notification 15 days prior to the issuance of the securities, however, the Company filed
the LAS Notification for the issuance of the Series A-1 Note and Series A-2 Note and for the share exchange under our Share Exchange
Agreement after such 15-day periods. Nasdaq notified the Company that each of these matters serves as an additional and separate
basis for delisting the Company’s securities and that the review panel will consider these matters in rendering a determination
regarding the Company’s continued listing on Nasdaq.
Management of Simplicity
Esports and Gamily Company decided that moving from Nasdaq to the OTCQB is more appropriate for the Company at this time,
while the Company builds out its planned network of retail esport centers.
On
April 1, 2019, the Company was notified by Nasdaq that it would delist the Company’s common stock and public warrants. The
Company’s common stock and public warrants were previously suspended from trading on Nasdaq, effective January 25, 2019.
On April 2, 2019, Nasdaq
filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) on Form 25 with the Securities and Exchange Commission (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 have been quoted on the OTCQB under the symbols “WINR”
and “WINRW,” respectively.
Recent
Developments
Equity
Line
On
March 12, 2020, the Company entered into an Common Stock Purchase Agreement with Triton Funds LP (“Selling Stockholder”),
dated as of March 11, 2020, pursuant to which, upon the terms and subject to the conditions thereof, the Selling Stockholder is
committed to purchase shares of the Company’s Common Stock at an aggregate price of up to $500,000 (the “Maximum Commitment
Amount”) over the course of the commitment period which ends on the earlier of (i) the date on which the Selling Stockholder
purchases the Maximum Commitment Amount and (ii) December 31, 2020 (the “Equity Line”). In connection with the execution
of the Common Stock Purchase Agreement, the Company registered the resale of up to 725,000 shares of Common Stock issuable under
the Equity Line in the amount of the Maximum Commitment Amount pursuant to a registration statement declared effective by the
SEC on March 30, 2020.
Online
Tournaments
On
March 22, 2020, the Company announced it would be holding weekly online esports tournaments, due to increased demand from COVID-19
related social distancing. Through the acquisition of PLAYlive, the Company acquired a database of over 400,000 paying PLAYlive
esports gaming center customers. The Company will be promoting its new online esports tournaments directly to this existing customer
base via text message announcements and promotions. The Company sees this as a new and sustainable business unit that can create
revenues during stay at home orders and into the future. See further discussion elsewhere herein.
Authorized
Issuances of Common Stock & Restricted Stock Awards
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. Such
shares were issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended (the
“Securities Act”) available to the Company by Section 4(a)(2) promulgated thereunder.
On
September 16, 2019, pursuant to a Restricted Award, we 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, we 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, we 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, we 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, we 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.
Also on that date pursuant to the Common Stock Purchase Agreement 600,000 shares were issued by our transfer agent, whereas
we have notified the counterparty that the Common Stock Purchase Agreement has been cancelled and are awaiting the return of the
shares to treasury, we do not consider these shares to be outstanding.
On
May 4, 2020, pursuant to the terms of that certain 10% Fixed Convertible Promissory Note (described below) dated April 29, 2020
in the principal amount of $152,500 issued by the Company in favor of Harbor Gates Capital, LLC, the Company agreed to
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, we 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.
On
June 4, 2020, we 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. issued. As of August 31, 2020, such shares have been issued.
On
June 15, 2020, we issued 25,000 shares of common stock in satisfaction of an outstanding balance owed to a vendor.
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 agreed to issue 55,000 shares of the Company’s common stock to such accredited investor
as additional consideration for the purchase of such note. As of August 31, 2020, such shares have been issued.
On
June 29, 2020, Simplicity Esports and Gaming 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.
On
July 29, 2020, we authorized the grant of 300,000 shares of common stock to Jed Kaplan, our Chief Financial Executive Officer
and Interim Chief Financial Officer and a member of our board of directors. As of August, 31, 2020, such shares have not been
issued.
On
July 29, 2020, we authorized the grant of 265,000 shares of common stock, to Roman Franklin, our President and a member of our
board of directors. As of August 31, 2020, such shares have not been issued.
On
July 29, 2020, we authorized the grant of 192,000 shares of common stock to an employee and the members of the Board
of Directors of the Company as of August 31, 2020, such shares have not been issued.
On
July 31, 2020, we 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.
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.
Debt
Obligations
10%
Fixed Convertible Promissory Note
On
April 29, 2020 (the “Effective Date”), the Company issued a 10% Fixed Convertible Promissory Note (the “Harbor
Gates Note”), with a maturity date of October 29, 2020 (the “Maturity Date”), in the principal sum of $152,000
in favor of Harbor Gates Capital, LLC (“Harbor Gates”). Pursuant to the terms of the Harbor Gates Note, the Company
agreed to pay to Harbor Gates $152,500 (the “Principal Sum”) and to pay “guaranteed” interest on the principal
balance at an amount equivalent to 10% of the Principal Sum, to the extent such Principal Sum and “guaranteed” interest
and any other interest, fees, liquidated damages and/or items due to Harbor Gates have not been repaid or converted into Company
common stock in accordance with the terms of the Harbor Gates Note. The Harbor Gates Note carries an original issue discount (“OID”)
of $2,500. Accordingly, on the Effective Date, Harbor Gates delivered $150,000 to the Company in exchange for the Harbor Gates
Note.
In
addition to the “guaranteed” interest, and upon the occurrence of an Event of Default (as hereinafter defined), additional
interest will accrue from the date of the Event of Default at the rate equal to the lower of 20% per annum or the highest rate
permitted by law.
The
Company may prepay the Harbor Gates Note according to the following schedule:
Days
Since
Effective
Date
|
|
Payment
Amount
|
Under
30
|
|
115%
of Principal Amount (as hereinafter defined) so paid
|
31-60
|
|
120%
of Principal Amount so paid
|
61-90
|
|
125%
of Principal Amount so paid
|
91-180
|
|
135%
of Principal Amount so paid
|
135%
of the remaining unpaid and unconverted Principal Amount, plus all accrued and unpaid interest will be due and payable on the
Maturity Date. “Principal Amount” refers to the sum of (i) the original principal amount of the Harbor Gates Note
(including the OID, prorated if the Harbor Gates Note has not been funded in full); (ii) all guaranteed and other accrued but
unpaid interest under the Harbor Gates Note; (iii) any fees due under the Harbor Gates Notes; (iv) liquidated damages; and (v)
any default payments owing under the Harbor Gates Note, in each case previously paid or added to the Principal Amount.
Pursuant
to the terms of the Harbor Gates Note, the Company agreed to issue Harbor Gates shares of Company common stock in two tranches
as follows:
|
(i)
|
10,000
shares of common stock within three trading days of the Effective Date; and
|
|
(ii)
|
In
the event the average of the three volume weighted average prices for the Company’s common stock during the three consecutive
trading days immediately preceding the date which is the 180th day following the Effective Date is less than $1.00
per share, then Harbor Gates will be entitled, and the Company will issue to Harbor Gates additional shares of common stock
as set forth in the Harbor Gates Note.
|
If
an Event of Default (as defined in the Promissory Note) occurs, the outstanding Principal Amount of the Harbor Gates Note owing
in respect thereof through the date of acceleration, shall become, at Harbor Gates’ election, immediately due and payable
in cash at the “Mandatory Default Amount”. The Mandatory Default Amount means 35% of the outstanding Principal Amount
of the Harbor Gates Note will be automatically added to the Principal Sum of the Harbor Gates Note and tack back to the Effective
Date for purposes of Rule 144 promulgated under the 1934 Act. Commencing five days after the occurrence of any Event of Default
that results in the eventual acceleration of the Harbor Gates Note, the Harbor Gates Note will accrue additional interest, in
addition to the Harbor Gates Note’s “guaranteed” interest, at a rate equal to the lesser of 20% per annum or
the maximum rate permitted under applicable law.
If
the Harbor Gates Note is not retired on or before the Maturity Date, then at any time and from time to time after the Maturity
Date, and subject to the terms hereof and restrictions and limitations contained in the Harbor Gates Note, Harbor Gates has the
right, at Harbor Gates’ sole option, to convert in whole or in part the outstanding and unpaid Principal Amount under the
Harbor Gates Note into shares of the Company’s common stock at the Variable Conversion Price. The “Variable Conversion
Price” will be equal to the lower of: (a) $1.00, or (b) 70% of the lowest volume weighted average price of the Company’s
common stock during the 15 consecutive trading days prior to the date on Harbor Gates elects to convert all or part of the Harbor
Gates Note. The Company intends to prepay the Harbor Gates Note in accordance with its terms so that no amount under the Harbor
Gates Note is converted into shares of the Company’s common stock.
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 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.
Self-Amortization
Promissory Note
On
June 18, 2020 (the “Issue Date”), the Company entered into a securities purchase agreement (the
“SPA”) with an accredited investor (the “Holder”), pursuant to which the Company issued a 12%
self-amortization promissory note (the “Amortization Note”) with a maturity date of June 18, 2021 (the
“Maturity Date”), in the principal sum of $550,000. Pursuant to the terms of the Amortization Note, the Company
agreed to pay to $550,000 (the “Principal Sum”) to the Holder and to pay interest on the principal balance at the
rate of 12% per annum. The Amortization Note carries an original issue discount (“OID”) of $55,000. Accordingly,
on the Closing Date (as defined in the SPA), the Holder paid the purchase price of $495,000 in exchange for the Amortization
Note. In addition, pursuant to the terms of the SPA, the Company agreed to issue 55,000 shares of the Company’s common
stock to the Holder as additional consideration.
The
Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest (no prepayment premium). The Amortization Note contains customary events of default relating to, among other
things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA.
The
Company is required to make amortization payments to the Holder according to the following schedule:
Payment
Date
|
|
Payment
Amount
|
|
10/16/2020
|
|
$
|
66,125.00
|
|
11/16/2020
|
|
$
|
66,125.00
|
|
12/16/2020
|
|
$
|
66,125.00
|
|
01/18/2021
|
|
$
|
66,125.00
|
|
02/18/2021
|
|
$
|
66,125.00
|
|
03/18/2021
|
|
$
|
66,125.00
|
|
04/16/2021
|
|
$
|
66,125.00
|
|
05/18/2021
|
|
$
|
66,125.00
|
|
06/18/2021
|
|
$
|
65,921.26
|
|
Total:
|
|
$
|
594,921.26
|
|
Self-Amortization
Promissory Note
On
August 7, 2020 (the “Issue Date”), Simplicity Esports and Gaming Company, a Delaware corporation (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 $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.
The
Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest (no prepayment premium). The Amortization Note contains customary events of default relating to, among other
things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA.
The Company is required
to make amortization payments to the Holder according to the following schedule:
Payment
Date
|
|
Payment
Amount
|
|
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.
PLAYlive
Nation Merger
On
July 25, 2019, the Company entered an Agreement and Plan of Merger (the “Merger Agreement”) with Esports Merger Sub,
Inc., a wholly owned subsidiary of the Company (“Merger Sub”), PLAYlive, Duncan Wood, Robert J. Steinberger, Eric
J. Charneski, Jordan C. Jenson, and Alec T. Carpenter (collectively, Messrs. Wood, Steinberger, Charneski, Jenson and Carpenter
are referred to herein as the “PLAYlive Stockholders”), and Mr. Wood in his capacity as representative of the Stockholders
(the “Stockholder Representative”), pursuant to which the Company agreed to acquire 100% of the issued and outstanding
common stock of PLAYlive by way of a merger (the “PLAYlive Merger”) pursuant to which Merger Sub merged with and into
PLAYlive, with PLAYlive surviving the Merger and continuing as a wholly owned subsidiary of the Company, in exchange for 750,000
shares of the Company’s common stock (the “Merger Consideration”). The PLAYlive Merger closed on July 30, 2019.
The
name of the surviving corporation remained “PLAYlive Nation, Inc.,” the Certificate of Incorporation of the surviving
corporation is the certificate of incorporation of PLAYlive, and the bylaws of the surviving corporation are the bylaws of PLAYlive.
The directors and officers of Merger Sub immediately prior to the effective time of the PLAYlive Merger became the directors and
officers, respectively, of PLAYlive.
At
the effective time of the PLAYlive Merger, by virtue of the PLAYlive Merger and without any action on the part of Merger Sub,
PLAYlive or the holders of shares of PLAYlive common stock, each share of PLAYlive common stock issued and outstanding immediately
prior to the effective time of the PLAYlive Merger, upon the terms and subject to the conditions set forth in the Merger Agreement
was cancelled and extinguished and was converted automatically into the right to receive the per share Merger Consideration upon
surrender of the certificate representing such shares of PLAYlive common stock as provided in the Merger Agreement. Each share
of common stock of Merger Sub issued and outstanding immediately prior to the effective time of the Merger was converted into
and exchanged for one validly issued, fully paid and nonassessable share of common stock of PLAYlive. Each stock certificate of
Merger Sub evidencing ownership of any such shares continues to evidence ownership of such shares of capital stock of PLAYlive.
Promptly
following the effective time of the PLAYlive Merger, the Company made available for exchange in accordance with the terms of the
Merger Agreement that portion of the Merger Consideration issuable pursuant to the Merger Agreement in exchange for outstanding
PLAYlive common stock, provided, however, that the Company deposited into escrow 75,000 shares of Company common stock out of
the aggregate Merger Consideration otherwise issuable to the PLAYlive Stockholders pursuant to the Merger Agreement as partial
security for the indemnification obligations set forth in the Merger Agreement. No fractional shares were issued in connection
with the PLAYlive Merger. The number of shares of Company common stock issued to each PLAYlive Stockholder in connection with
the PLAYlive Merger (after aggregating all fractional shares of Company common stock that otherwise would have been received by
such holder) were rounded up to the next whole share in lieu of such fractional share.
At
the closing of the PLAYlive Merger, PLAYlive was required to have not less than $10,000 in cash net of issued but uncleared checks,
ACHs, and drafts, on deposit in PLAYlive’s principal bank account (“Minimum Cash”). Within 60 days after the
closing date, the Company may deliver a notice to the Stockholder Representative setting forth a description of any item which
caused Minimum Cash to exceed or fall below $10,000 and the actual amount of Minimum Cash on deposit in PLAYlive’s principal
bank account as of the closing (a “Minimum Cash Adjustment Notice”). If the actual amount of Minimum Cash as of the
closing is more than $10,000, then the Company will pay to the Stockholder Representative (for distribution to the PLAYlive Stockholders),
the amount by which Minimum Cash exceeds $10,000 provided, however, in no event shall the cash payment exceed an amount that will
permit the transactions contemplated by the Merger Agreement to qualify for the intended tax treatment. If the actual amount of
Minimum Cash as of the closing is less than $10,000, then the Stockholder Representative (on behalf of the PLAYlive Stockholders)
will pay to the Company the amount by which Minimum Cash is less than $10,000.
Concurrently
with execution of the Merger Agreement, the PLAYlive Stockholders executed and delivered a restrictive covenant agreement as provided
in the Merger Agreement. At closing, each of Messrs. Wood, Jenson, and Carpenter entered into an employment agreement with PLAYlive,
and each of the PLAYlive Stockholders entered into a one-year lock-up agreement with the Company.
The
PLAYlive Merger is intended to be a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986,
as amended (the “Code”), and the Merger Agreement is intended to be a “plan of reorganization” within
the meaning of the regulations promulgated under Section 368(a) of the Code and for the purpose of qualifying as a tax-free transaction
for federal income tax purposes.
Private
Unit Offering
In
2019, the Company sold an aggregate of 987,500 units (the “Units”) at a purchase price of $2.00 per Unit to 12 accredited
investors in exchange for receipt of $1,975,000. Each unit consists of (i) one share of common stock, and (ii) a 5-year warrant
to purchase one share of common stock at a purchase price of $4.00.
Settlement
Agreement
In
March 2019, the Company entered into a settlement agreement with its prior attorney. The settlement agreement called for $200,000
to be paid upon signing the settlement agreement and then another $525,000 to be paid over-time. As of July 23, 2019, the
Company owed this attorney $300,000.
Debt
Conversion
On
May 31, 2019, we issued 100,000 shares of Common Stock to affiliates of Polar in exchange for Polar’s forgiveness of $143,476
owed by us to Polar under that that certain Stock Purchase Agreement, dated as of November 2, 2018, between Polar and us.
Overview
of Smaaash Entertainment Private Limited
Smaaash
Private operates state-of-the-art games and entertainment centers (“Smaaash Centers”) in India, in addition to carrying
out product sales of its games and equipment that Smaaash has developed in-house, supported by its sponsorship and other revenues.
Smaaash Private’s core concept is to offer an interactive, immersive and fun experience to customers at its Smaaash Centers,
blending Augmented Reality (“AR”) and Virtual Reality (“VR”) and other games, indoor entertainment, and
attractive food and beverage options, customized to the tastes and preferences of a diverse set of customers across age groups,
genders and backgrounds, including corporate customers, families, friends and children.
Following the January
2019 acquisition of Simplicity Esports LLC, we determined to shift our current primary focus to the Simplicity Esports LLC business.
Accordingly, we do not anticipate generating any material revenues from Smaaash in the next 12 months. The Master Franchise
Agreement, as amended, and the Master Distribution Agreement continue in full force and effect, however, and we may now or in
the future pursue Smaaash business opportunities.
Employees
As
of August 31, 2020, we had 16 full-time employees and 8 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 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.
RISK
FACTORS
An
investment in our securities carries a significant degree of risk. You should carefully consider the following risks, as well
as the other information contained in this Annual Report on Form 10-K, including our historical financial statements and related
notes included elsewhere herein, before you decide to purchase our securities. Any one of these risks and uncertainties has the
potential to cause material adverse effects on our business, prospects, financial condition and operating results which could
cause actual results to differ materially from any forward-looking statements expressed by us and a significant decrease in the
value of our common shares and warrants. Refer to “Cautionary Statement Regarding Forward-Looking Statements”.
We
may not be successful in preventing the material adverse effects that any of the following risks and uncertainties may cause.
These potential risks and uncertainties may not be a complete list of the risks and uncertainties facing us. There may be additional
risks and uncertainties that we are presently unaware of, or presently consider immaterial, that may become material in the future
and have a material adverse effect on us. You could lose all or a significant portion of your investment due to any of these risks
and uncertainties.
Risks
Related to Our Business
We
have a relatively limited operating history and limited revenues to date and thus are subject to risks of business development
and you have no basis on which to evaluate our ability to achieve our business objective.
Because
we have a relatively limited operating history and limited revenues to date, you should consider and evaluate our operating prospects
in light of the risks and uncertainties frequently encountered by early-stage operating companies in rapidly evolving markets.
These risks include:
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that
we may not have sufficient capital to achieve our growth strategy;
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that
we may not develop our product and service offerings in a manner that enables us to be profitable and meet our customers’
requirements;
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that
our growth strategy may not be successful; and
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that
fluctuations in our operating results will be significant relative to our revenues.
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Our
future growth will depend substantially on our ability to address these and the other risks described in this section. If we do
not successfully address these risks, our business could be significantly harmed.
We
have a history of operating losses and our 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. Our management
has concluded that our historical recurring losses from operations and negative cash flows from operations as well as our
dependence on private equity and financings raise substantial doubt about our ability to
continue as a going concern and our auditor has included an explanatory paragraph relating to our ability to continue as a going
concern in its audit report for the fiscal year ended May 31, 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, including
common stock issued in this offering, would be greatly impaired. Our ability to continue as a going concern is dependent upon
generating sufficient cash flow from operations and obtaining additional capital and financing, including funds to be raised in
this offering. If our ability to generate cash flow from operations is delayed or reduced and we are unable to raise additional
funding from other sources, we may be unable to continue in business even if this offering is successful. For further discussion
about our ability to continue as a going concern and our plan for future liquidity, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Ability to Continue as a Going Concern.”
We
are a holding company and depend upon our subsidiaries for our cash flows.
We
are a holding company. All of our operations are conducted, and almost all of our assets are owned, by our subsidiaries. Consequently,
our cash flows and our ability to meet our obligations depend upon the cash flows of our subsidiaries and the payment of funds
by these subsidiaries to us in the form of dividends, distributions or otherwise. The ability of our subsidiaries to make any
payments to us depends on their earnings, the terms of their indebtedness, including the terms of any credit facilities and legal
restrictions. Any failure to receive dividends or distributions from our subsidiaries when needed could have a material adverse
effect on our business, results of operations or financial condition.
Future
acquisitions or strategic investments could disrupt our business and harm our business, results of operations or financial condition.
We
may in the future explore potential acquisitions of companies or strategic investments to strengthen our business. Even if we
identify an appropriate acquisition candidate, we may not be successful in negotiating the terms or financing of the acquisition,
and our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired
business.
Acquisitions
involve numerous risks, any of which could harm our business, including:
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straining
our financial resources to acquire a company;
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anticipated
benefits may not materialize as rapidly as we expect, or at all;
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diversion
of management time and focus from operating our business to address acquisition integration challenges;
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retention
of employees from the acquired company;
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cultural
challenges associated with integrating employees from the acquired company into our organization;
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integration
of the acquired company’s accounting, management information, human resources and other administrative systems;
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the
need to implement or improve controls, procedures and policies at a business that prior to the acquisition may have lacked
effective controls, procedures and policies; and
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litigation
or other claims in connection with the acquired company, including claims from terminated employees, former stockholders or
other third parties.
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Failure
to appropriately mitigate these risks or other issues related to such strategic investments and acquisitions could result in reducing
or completely eliminating any anticipated benefits of transactions, and harm our business generally. Future acquisitions could
also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses
or the impairment of goodwill, any of which could have a material adverse effect on business, results of operations or financial
condition.
We
may require additional funding for our growth plans, and such funding may result in a dilution of your investment.
We
attempted to estimate our funding requirements in order to implement our growth plans. If the costs of implementing such plans
should exceed these estimates significantly or if we come across opportunities to grow through expansion plans which cannot be
predicted at this time, and our funds generated from our operations prove insufficient for such purposes, we may need to raise
additional funds to meet these funding requirements.
These
additional funds may be raised by issuing equity or debt securities or by borrowing from banks or other resources. We cannot assure
you that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to obtain
additional financing on terms that are acceptable to us, we will not be able to implement such plans fully if at all. Such financing
even if obtained, may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’
consent for payment of dividends, or restrict our freedom to operate our business by requiring lender’s consent for certain
corporate actions.
Further,
if we raise additional funds by way of a rights offering or through the issuance of new shares, any shareholders who are unable
or unwilling to participate in such an additional round of fund raising may suffer dilution in their investment.
We
may 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;
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the
collateral availability of our otherwise unsecured assets;
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the
market’s, investors and lenders’ view of our industry and products;
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the
perception in the equity and debt markets of our ability to execute our business plan or achieve our operating results expectations;
and
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the
price, volatility and trading volume and history of our Common Stock.
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If
we are unable to obtain the equity capital or debt financing necessary to fund our ongoing operations, pursue our strategy and
sustain our growth initiatives, we may be forced to scale back our operations or our expansion initiatives, and our business and
operating results will be materially adversely affected.
Our
growth strategy depends on the availability of suitable locations for our Simplicity Esports Gaming Centers and our ability to
open new Simplicity Esports Gaming Centers and operate them profitably.
A
key element of our growth strategy is to extend our brand by opening corporate owned as well as franchising retail Simplicity
Esports Gaming Centers in locations in the United States that we believe will provide attractive returns on investment. We have
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:
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reach
acceptable agreements regarding the lease of the locations;
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comply
with applicable zoning, licensing, land use and environmental regulations;
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raise
or have available an adequate amount of cash or currently available financing for construction and opening costs;
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timely
hire, train and retain the skilled management and other employees necessary to meet staffing needs;
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obtain,
for acceptable cost, required permits and approvals, including liquor licenses; and
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efficiently
manage the amount of time and money used to build and open each new Simplicity Esports Gaming Center.
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If
we succeed in opening new Simplicity Esports Gaming Centers on a timely and cost-effective basis, we may nonetheless be unable
to attract enough customers to the new Simplicity Esports Gaming Centers because potential customers may be unfamiliar with our
brands or concepts, or our entertainment and menu options might not appeal to them. Our new Simplicity Esports Gaming Centers
may not meet or exceed our performance targets, including target cash-on-cash returns. New Simplicity Esports Gaming Centers may
even operate at a loss, which could have a significant adverse effect on our overall operating results.
Our
operations of Simplicity Esports Gaming Centers are significantly dependent on changes in public and customer tastes and discretionary
spending patterns. Our inability to successfully anticipate customer preferences or to gain popularity for such Simplicity Esports
Gaming Centers games may negatively impact our profitability.
Our
success depends significantly on public and customer tastes and preferences, which can be unpredictable. If we are unable to successfully
anticipate customer preferences or increase the popularity of the games offered at the Simplicity Esports Gaming Centers, the
per capita revenue and overall customer expenditures at the Simplicity Esports Gaming Centers may decrease, and thereby negatively
impact our profitability. In response to such developments, we may need to increase our marketing and product development efforts
and expenditures, adjust our game or product sale pricing, modify the games themselves, or take other actions, which may further
erode our profit margins, or otherwise adversely affect our results of operations and financial condition. In particular, we may
need to expend considerable cost and effort in carrying out extensive research and development to assess the potential interest
in a game, testing and launching new games, and to remain abreast with continually evolving technology and trends, as well as
the success and popularity of Simplicity stream team’s casters, influencers and personalities among Simplicity Esports LLC’s
dedicated fan base.
While
we may incur significant expenditures of this nature, including in the future as we continue to expand our operations, there can
be no assurance that any such expenditures or investments by us will yield expected or commensurate returns or results, within
a reasonable or anticipated time, or at all.
The
nature of our business exposes us to negative publicity or customer complaints, including in relation to, among other things,
accidents, injuries or thefts at the Simplicity Esports Gaming Centers, or health and safety concerns arising from improper use
of our game equipment or at our food and beverage venues.
Our
business inherently exposes us to negative publicity or customer complaints as a result of accidents, injuries, or in extreme
cases, deaths, arising from instances of air-borne, water-borne or food-borne contagion or illness, food contamination, spoilage,
tampering, equipment failure, improper use of our equipment, fire, explosion, terrorist attacks or civil riots, and other safety
or security issues, such as kidnapping, or associated risks arising from other actual or perceived non-compliance with safety,
quality or service standards or norms in relation to the various game, entertainment and food and beverage attractions at the
Simplicity Esports Gaming Centers. Even isolated or sporadic incidents or accidents may have a negative impact on our brand image
and reputation, and the Simplicity Esports Gaming Centers’, or games’ or our own popularity with customers. The considerable
expansion of social media in recent years has compounded the effect of any potential negative publicity.
We
cannot guarantee that our or our franchisee’s employee training, internal controls and other precautions will be sufficient
to prevent any such occurrence at the Simplicity Esports Gaming Centers, in relation to our Simplicity global virtual reality
gaming and fully integrated esports platform, or to control or mitigate any negative consequences. In addition, we or our franchisees
rely on third-party security and housekeeping staff for certain non-core functions, as well as certain technology vendors and
partners. Although we monitor vendors and partners and, in certain cases, may have a contractual indemnity or recourse in case
of any default on their part, our ability to assure a safe and satisfactory experience to our customers is necessarily limited
to the extent of our or our franchisees’, dependence on third parties, from time to time. Moreover, we may not be able to
distance or insulate ourselves from any adverse publicity or reputational damage arising from any act, omission or negligence
on the part of a vendor or other third party, which may negatively affect a customer’s experience at any of the Simplicity
Esports Gaming Centers.
We
or our franchisees may not be able to operate in the United States, or obtain and maintain licenses and permits necessary for
such operation, in compliance with laws, regulations and other requirements, which could adversely affect our business, results
of operations or financial condition.
Each
Simplicity Esports Gaming Center will be subject to licensing and regulation by alcoholic beverage control, amusement, health,
sanitation, safety, building code and fire agencies in the country, state, county and/or municipality in which the Simplicity
Esports Gaming Center is located. In the United States, each Simplicity Esports Gaming Center with a restaurant or bar will be
required to obtain a license to sell alcoholic beverages on the premises from a state authority and, in certain locations, county
and municipal authorities. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time.
In some states, the loss of a license for cause with respect to one Simplicity Esports Gaming Center may lead to the loss of licenses
at all Simplicity Esports Gaming Centers in that state and could make it more difficult to obtain additional licenses in that
state. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each Simplicity Esports Gaming
Center, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control
and handling and storage and dispensing of alcoholic beverages. Our failure or a failure by a franchisee in obtaining and maintaining
the required licenses, permits and approvals at any one Simplicity Esports Gaming Center could impact the continuing operations
of existing Simplicity Esports Gaming Centers, or delay or prevent the opening of new Simplicity Esports Gaming Centers. Although
we do not anticipate any material difficulties occurring in the future, the failure to receive or retain a liquor license, or
any other required permit or license, in a particular location, or to continue to qualify for, or renew licenses, could have a
material adverse effect on operations and our ability to obtain such a license or permit in other locations.
As
a result of operating certain entertainment games and attractions, including skill-based games that offer redemption prizes, the
Simplicity Esports Gaming Centers in the United States are subject to amusement licensing and regulation by the countries, states,
provinces, counties and municipalities in which our Simplicity Esports Gaming Centers are located. These laws and regulations
can vary significantly by country, state, province, county, and municipality and, in some jurisdictions, may require us to modify
our business operations or alter the mix of redemption games and simulators we offer. Moreover, as more states in the United States
and local communities implement legalized gambling, the laws and corresponding enabling regulations may also be applicable to
our redemption games and regulators may create new licensing requirements, taxes or fees, or restrictions on the various types
of redemption games we offer. Furthermore, other states, provinces, counties and municipalities may make changes to existing laws
to further regulate legalized gaming and illegal gambling. Adoption of these laws, or adverse interpretation of existing laws,
after we have established a Simplicity Esports Gaming Center in the jurisdiction could require the existing center in these jurisdictions
to alter the mix of games, modify certain games, change the mix of prizes that we may offer or terminate the use of specific games,
any of which could adversely affect our operations.
We
are also subject to laws and regulations governing our relationship with our employees, including those related to minimum wage
requirements, exempt status, overtime, health insurance mandates, working and safety conditions, immigration status requirements,
child labor, and non-discrimination. Additionally, changes in federal labor laws, including card verification regulations, could
result in portions of our workforce being subjected to greater organized labor influence, which could result in an increase to
our labor costs. A significant portion of Simplicity Esports Gaming Center personnel will be paid at minimum wage rates established
by federal, state and municipal law. Increases in the minimum wage result in higher labor costs, which may be only partially offset
by price increases and operational efficiencies.
We
are also subject to the rules and regulations of the Federal Trade Commission and various state laws regulating the offer and
sale of franchises. The Federal Trade Commission and various state laws require that we furnish a franchise disclosure document
containing certain information to prospective franchisees, and a number of states require registration of the franchise disclosure
document with state authorities. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial
number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the
franchisor-franchisee relationship. The state laws often limit, among other things, the duration and scope of non-competition
provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate
sources of supply. We shall endeavor to make sure that any franchise disclosure document we provide, together with any applicable
state versions or supplements, and franchising procedures, comply in all material respects with both the Federal Trade Commission
guidelines and all applicable state laws regulating franchising in those states in which we have offered franchises.
If
we and our franchisees fail to comply with such laws and regulations, we may be subject to various sanctions and/or penalties
and fines or may be required to cease operations until we achieve compliance, which could have an adverse effect on our business
and our financial results.
Our
growth through franchising may not occur as rapidly as we currently anticipate and may be subject to additional risks.
As
part of our growth strategy, we will continue to seek franchisees to operate Simplicity Esports Gaming Centers in certain strategic
domestic locations or venues. We believe that our ability to recruit, retain and contract with qualified franchisees will be increasingly
important to our operations as we expand. Our franchisees are dependent upon the availability of adequate sources of financing
in order to meet their development obligations. Such financing may not be available to our franchisees, or only available upon
disadvantageous terms. Our franchise strategy may not enhance our results of operations.
Expanding
through franchising exposes our business and brand to risks because the quality of the franchised operations will be beyond our
immediate control, including risks associated with our confidential information, intellectual properties (including trademarks)
and brand reputation. Even if we have contractual remedies to cause franchisees to maintain operational standards, enforcing those
remedies may require litigation and therefore our image and reputation may suffer, unless and until such litigation is successfully
concluded.
We
could face liability from or as a result of our franchisees.
Various
state and federal laws will govern the relationship between us and our franchisees and the potential sale of a franchise. If we
fail to comply with these laws, we could be liable for damages to franchisees and fines or other penalties. A franchisee or government
agency may bring legal action against us based on the franchisee/franchisor relationship. Also, under the franchise business model,
we may face claims and liabilities based on vicarious liability, joint-employer liability, or other theories or liabilities. Such
legal actions could result in expensive litigation with our franchisees or government agencies that could adversely affect both
our profit and our important relations with our franchisees. In addition, regulatory or legal developments could result in changes
to laws or the franchisor/franchisee relationship that could negatively impact the franchise business model and, accordingly,
our profit.
We
may not be able to compete favorably in the highly competitive out-of-home and home-based entertainment market in the United States,
which could have a material adverse effect on our business, results of operations or financial condition.
The
out-of-home entertainment market in the United States is highly competitive. Simplicity Esports Gaming Centers that we or our
franchisees operate will compete for customers’ discretionary entertainment dollars with providers of out-of-home entertainment,
including localized attraction facilities such as movie theatres, sporting events, bowling alleys, sports activity centers, arcades
and entertainment centers, nightclubs and restaurants as well as theme parks. Many of the entities operating these businesses
are larger and have significantly greater financial resources, a greater number of locations, have been in business longer, have
greater name and brand recognition and are better established in the local markets where Simplicity Esports Gaming Centers are
planned to be located. As a result, they may be able to invest greater resources than we can in attracting customers and succeed
in attracting customers who would otherwise come to the Simplicity Esports Gaming Centers we or our franchisees operate. In the
United States, the legalization of casino gambling in geographic areas near any future Simplicity Esports Gaming Center would
create the possibility for adult entertainment alternatives, which could have a material adverse effect on our business and financial
condition. We will also face competition from local, regional and national establishments that offer entertainment experiences
similar to us. Simplicity Esports Gaming Centers we or our franchisees operate will also face competition from increasingly sophisticated
home-based forms of entertainment, such as internet and video gaming and home movie streaming and delivery. If we fail to compete
favorably in the competitive out-of-home and home-based entertainment markets it could have a material adverse effect on our business,
results of operations and financial condition.
Our
senior management team has limited experience in establishing, operating, licensing rights to and franchising entertainment centers
and related products.
The
members of our senior management team have extensive backgrounds in finance and the management of financial services businesses,
however, they have limited prior experience in establishing, operating, licensing rights to and franchising entertainment centers.
We will need to expand our management team, to include individuals with expertise in establishing and operating entertainment
centers as well as individuals with expertise in product licensing and franchise operations. If we are unable to recruit professionals
with acceptable backgrounds in establishing and operating entertainment centers and with backgrounds in product licensing and
financing, we may not be able to pursue our growth strategy which could have a material adverse effect on our business and results
of operations.
Our
success depends upon our ability to recruit and retain qualified management and operating personnel at Simplicity Esports Gaming
Centers.
We
and our franchisees must attract, retain and motivate a sufficient number of qualified management and operating personnel in order
to maintain consistency in our service, hospitality, quality and atmosphere of our Simplicity Esports Gaming Centers. Qualified
management and operating personnel are typically in high demand. If we and our franchisees are unable to attract and retain a
satisfactory number of qualified management and operating personnel, labor shortages could delay the planned openings of new Simplicity
Esports Gaming Centers which could have a material adverse effect on our business and results of operations.
Acquisitions,
other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that
may adversely impact our business and results of operations.
Acquisitions
are an important element of our overall corporate strategy and use of capital, and these transactions could be material to our
financial condition and results of operations. We expect to continue to evaluate and enter into discussions regarding a wide array
of potential strategic transactions. The process of integrating an acquired company, business, or product has created, and will
continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks may include, but are not
limited to:
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diversion
of management’s time and focus from operating our business to acquisition integration challenges;
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failure
to successfully further develop the acquired business or product lines;
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implementation
or remediation of controls, procedures and policies at the acquired company;
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integration
of the acquired company’s accounting, human resources and other administrative systems, and coordination of product,
engineering and sales and marketing functions;
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transition
of operations, users and customers onto our existing platforms;
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reliance
on the expertise of our strategic partners with respect to market development, sales, local regulatory compliance and other
operational matters;
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failure
to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval,
under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or
otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition;
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in
the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address
the particular economic, currency, political and regulatory risks associated with specific countries;
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cultural
challenges associated with integrating employees from the acquired company into our organization, and retention of employees
from the businesses we acquire;
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liability
for or reputational harm from activities of the acquired company before the acquisition or from our strategic partners, including
patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown
liabilities; and
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litigation
or other claims in connection with the acquired company, including claims from terminated employees, customers, former shareholders
or other third parties.
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Our
failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments
or strategic alliances could cause us to fail to realize the anticipated benefits of such acquisitions, investments or alliances,
incur unanticipated liabilities, and harm our business generally.
Our
acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities
or amortization expenses, or impairment of goodwill and purchased long-lived assets, and restructuring charges, any of which could
harm our financial condition or results of operations and cash flows. Also, the anticipated benefits of many of our acquisitions
may not materialize.
Our
insurance coverage may not adequately protect us against all future risks, which may adversely affect our business and prospects.
We
maintain insurance coverage, including for fire, acts of god and perils, terrorism, burglary, money, loss of profit, fidelity
guarantee, fixed glass and sanitary fitting, electronic equipment, machinery breakdown, portable equipment, sign boards, commercial
general liability, marine transit, and directors’ and officers’ liability insurance, as well as employee health and
medical insurance, with standard exclusions in each instance. While we maintain insurance in amounts that we consider reasonably
sufficient for a business of our nature and scale, with insurers that we consider reliable and credit worthy, we may face losses
and liabilities that are uninsurable by their nature, or that are not covered, fully or at all, under our existing insurance policies.
Moreover, coverage under such insurance policies would generally be subject to certain standard or negotiated exclusions or qualifications
and, therefore, any future insurance claims by us may not be honored by our insurers in full, or at all. In addition, our premium
payments under our insurance policies may require a significant investment by us.
To
the extent that we suffer loss or damage that is not covered by insurance or that exceeds our insurance coverage, the loss will
have to be borne by us and our business, cash flow, financial condition, results of operations and prospects may be adversely
affected.
Changes
in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business, investments and
results of operations.
We
are subject to laws and regulations enacted by national, regional and local governments. In particular, we are required to comply
with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult,
time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time
and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a
failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our
business and results of operations.
We
are dependent upon our executive officers and directors and their departure could adversely affect our ability to operate.
Our
operations are dependent upon a relatively small group of individuals and, in particular, our executive officers and directors.
We believe that our success depends on the continued service of our executive officers and directors. We do not have key-man insurance
on the life of any of our directors or executive officers. The unexpected loss of the services of one or more of our directors
or executive officers could have a detrimental effect on us.
Our
executive officers, directors, security holders and their respective affiliates may have competitive pecuniary interests that
conflict with our interests.
We
have not adopted a policy that expressly prohibits our directors, executive officers, security holders or affiliates from having
a direct or indirect pecuniary or financial interest in any investment to be acquired or disposed of by us or in any transaction
to which we are a party or have an interest. While our employment agreements with our key executive officers contain non-compete
provisions, we do not have a policy that expressly prohibits any such persons from engaging for their own account in business
activities of the types conducted by us. Accordingly, such persons or entities may have a conflict between their interests and
ours.
We
are an emerging growth company within the meaning of the Securities Act, and if we take advantage of certain exemptions from disclosure
requirements available to emerging growth companies, this could make our securities less attractive to investors and may make
it more difficult to compare our performance with other public companies.
We
are an “emerging growth company” within the meaning of the Securities Act, as modified by the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being
required to comply with the auditor internal controls attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced
disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the
requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. As a result, our stockholders may not have access to certain information they may deem important.
We could be an emerging growth company for up to five years, although circumstances could cause us to lose that status earlier,
including if the market value of our Common Stock held by non-affiliates exceeds $700 million as of any November 30 before that
time, in which case we would no longer be an emerging growth company as of the following May 31. We cannot predict whether investors
will find our securities less attractive because we will rely on these exemptions. If some investors find our securities less
attractive as a result of our reliance on these exemptions, the trading prices of our securities may be lower than they otherwise
would be, there may be a less active trading market for our securities and the trading prices of our securities may be more volatile.
Further,
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial
accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared
effective or do not have a class of securities registered under the 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. As long as we remain an
emerging growth company, we will not be required to comply with the independent registered public accounting firm attestation
requirement on our internal control over financial reporting.
Provisions
in our third amended and restated certificate of incorporation, as amended, and Delaware law may inhibit a takeover of us, which
could limit the price investors might be willing to pay in the future for our Common Stock and could entrench management.
Our
third amended and restated certificate of incorporation, as amended, contains provisions that may discourage unsolicited takeover
proposals that stockholders may consider to be in their best interests. These provisions include a staggered board of directors
and the ability of the board of directors to designate the terms of and issue new series of preferred shares, which may make more
difficult the removal of management and may discourage transactions that otherwise could involve payment of a premium over prevailing
market prices for our securities.
If
we fail to keep pace with changing industry technology and consumer preferences, we will be at a competitive disadvantage.
The
Simplicity products and services compete within industries that are characterized by swiftly changing technology, evolving industry
standards, frequent new and enhanced product introductions, rapidly changing consumer preferences and product obsolescence. In
order to continue to compete effectively, we need to respond quickly to technological changes and to understand their impact on
customers’ preferences. We may take significant time and resources to respond to these technological changes and changes
in consumer preferences. Our business and results of operations may be negatively impacted if our products and services fail to
keep pace with these changes.
Various
product safety laws and governmental regulations applicable to the distributor of Simplicity Esports LLC’s and/or PLAYlive
Nation, Inc.’s products may adversely affect our business, results of operations and financial condition.
Our
distribution of Simplicity Esports LLC’s and/or PLAYlive Nation, Inc.’s products will be subject to numerous federal,
state, provincial, local and foreign laws and regulations, including laws and regulations with respect to product safety, including
regulations enforced by the United States Consumer Products Safety Commission. We and our franchisees could incur costs in complying
with these regulations and, if they fail to comply, could incur significant penalties. A failure to comply with applicable laws
and regulations, or concerns about product safety, may also lead to a recall or post-manufacture repair of selected Simplicity
Esports LLC’s and/or PLAYlive Nation, Inc.’s products, resulting in the rejection of the products by our franchisees,
lost sales, increased customer service and support costs, and costly litigation.
Public
health epidemics or outbreaks, such as COVID-19, could materially and adversely impact our business.
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because
COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities
have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more
restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity
Esports Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and
have since reopened one corporate and 21 franchised Simplicity Gaming Centers as of June 28, 2020. Although our franchise agreements
with franchisees of Simplicity Esports Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless
of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Esports
Gaming Centers will default in their obligations to pay their minimum monthly royalty payment to us.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date will impact the Company’s business for the fiscal fourth quarter and potentially beyond. Management
expects that all of its business segments, across all of its geographies, will be impacted to some degree, but the significance
of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot
be determined at this time.
Risks
Relating to Our Esports Business
Our
esports businesses are substantially dependent on the continuing popularity of the esports industry as a whole.
The
esports industry is in the early stages of its respective development. Although the esports industry has experienced rapid growth,
consumer preferences may shift and there is no assurance this growth will continue in the future. We have taken steps to diversify
their businesses and mitigate these risks to an extent and continue to seek out new opportunities in the esports industry. However,
due to the rapidly evolving nature of technology and online gaming, the esports industry may experience volatile and declining
popularity as new options for online gaming and esports become available, or consumer preferences shift to other forms of entertainment,
and as a consequence, our businesses and results of operations may be materially negatively affected.
Our
esports business faces intense and wide-ranging competition, which may have a material negative effect on our business and results
of operations.
The
success of our esports business is dependent upon the performance and/or popularity of its teams. Simplicity Esports LLC’s
teams compete, in varying respects and degrees, with other live sporting events, and with sporting events delivered over television
networks, radio, the Internet and online services, mobile applications and other alternative sources. For example, our esports
teams compete for attendance, viewership and advertising with a wide range of alternatives available in major metropolitan areas.
During some or all of the esports season, our teams face competition, in varying respects and degrees, from professional and collegiate
basketball, hockey, baseball, football, and soccer, among others.
As
a result of the large number of options available, we face strong competition for the sports and gaming fan. We must compete with
other esports teams, traditional sports teams and sporting events, in varying respects and degrees, including on the basis of
the quality of the teams we field, their success in the leagues, tournaments and genres in which they compete, our ability to
provide an entertaining environment at any esports games that we host at our centers, prices charged for tickets and the viewing
availability of our teams on multiple media alternatives. Given the nature of esports and sports in general, there can be no assurance
that we will be able to compete effectively, including with companies that may have greater resources than we have, and as a consequence,
our business and results of operations may be materially negatively affected by competition.
Our
businesses are substantially dependent on the continued popularity and/or competitive success of Simplicity Esports LLC’s
teams, which cannot be assured.
Our
future financial results will be dependent on the Simplicity teams becoming and remaining popular with our fan base and, in varying
degrees, on the teams achieving in-game success, which can generate fan enthusiasm, resulting in sustained ticket and merchandise
sales during the season. Furthermore, success in the regular season at certain tournaments may qualify one or more of our esports
teams for participation in post-season playoffs, which provides us with additional revenue from prize money by increasing the
number of games played by our sports teams and, more importantly, by generating increased excitement and interest in our esports
teams, which can improve attendance in subsequent seasons. There can be no assurance that any of our esports teams, will develop
a significant fan base, maintain continued popularity or compete in post-season play in the future.
Defection
of our esports players to other teams or managers could hinder our success.
We
compete with other esports athlete management businesses to sign and retain world class esports players, some of which have greater
resources or brand recognition and popularity than ours. Our players may choose to defect to other esports organizations for various
reasons, including that they have been made a superior offer or they have chosen to pursue new or other opportunities. The loss
or defection of any of our esports players could have negative consequences on our businesses and results of operations. While
we take or intend to take, all appropriate steps to retain our players and protect their interests, there can be no assurances
that players will not defect to other esports organizations.
The
actions of the various esports leagues and tournaments may have a material negative effect on our business and results of operations.
The
governing bodies of the various esports leagues and tournaments, under certain circumstances, can take actions that they deem
to be in the best interests of their respective leagues or tournaments, which may not necessarily be consistent with maximizing
our results of operations and which could affect our esports teams in ways that are different than the impact on other esports
teams. For example they can take actions relating to the rights to telecast the games of league members or tournament participants,
including the Simplicity team, licensing of the rights to produce and sell merchandise bearing the logos and/or other intellectual
property of our esports teams and the leagues or tournaments, and the internet-based activities of our esports teams. Certain
of these decisions by the esports leagues and tournaments could have a material negative effect on our business and results of
operations. From time to time, we may disagree with or challenge actions that the leagues or tournaments take or the power and
authority they assert.
We
may be unable to effectively manage the growth in the scope and complexity of our business, including our expansion into the esports
business which is untested and into adjacent business opportunities.
Our
future success depends, in part, on our ability to manage our expanded business, including our aspirations for continued expansion.
We intend to dedicate resources to a new business model that is largely untested, as is the case with esports. We do not know
to what extent our future expansions will be successful. Further, even if successful, the growth of our business could create
significant challenges for our management, operational, and financial resources, and could increase existing strain on, and divert
focus from, our core businesses. If not managed effectively, this growth could result in the over-extension of our operating infrastructure,
and our management systems, information technology systems, and internal controls and procedures may not be adequate to support
this growth. Failure to adequately manage our growth in any of these ways may cause damage to our brand, damage our reputation
or otherwise negatively impact our business.
Our
industry is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our resources among,
emerging technologies and business models, our business may be negatively impacted.
Technology
changes rapidly in the interactive entertainment industry. We must continually anticipate and adapt our products, services and
business models to emerging technologies and delivery platforms in order to stay competitive. Forecasting our revenues and profitability
for these new products, services and business models is inherently uncertain and volatile, and if we invest in the development
of interactive entertainment products or services incorporating a new technology or for a new platform that does not achieve significant
commercial success, whether because of competition or otherwise, we may not recover the often substantial “up front”
costs of developing and marketing those products and services, or recover the opportunity cost of diverting management and financial
resources away from other products or services. Further, our competitors may adapt to an emerging technology or business model
more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to consumers,
or both.
If,
on the other hand, we elect not to pursue the development of products or services incorporating a new technology or for new platforms,
or otherwise elect not to pursue new business models, that achieve significant commercial success, it may have adverse consequences.
It may take significant time and resources to shift product development resources to that technology, platform or business model,
as the case may be, and may be more difficult to compete against existing products and services incorporating that technology
or for that platform or against companies using that business model.
Many
elements of our business are unique, evolving and relatively unproven. Our business and prospects depend on the continuing development
of live streaming of competitive esports gaming. The market for esports and amateur online gaming competition is relatively new
and rapidly developing and are subject to significant challenges. Our business relies upon our ability to cultivate and grow an
active gamer community, and our ability to successfully monetize such community through tournament fees, subscriptions for our
esports gaming services, and advertising and sponsorship opportunities. In addition, our continued growth depends, in part, on
our ability to respond to constant changes in the esports gaming industry, including rapid technological evolution, continued
shifts in gamer trends and demands, frequent introductions of new games and titles and the constant emergence of new industry
standards and practices. Developing and integrating new games, titles, content, products, services or infrastructure could be
expensive and time-consuming, and these efforts may not yield the benefits we expect to achieve at all. We cannot assure you that
we will succeed in any of these aspects or that the esports gaming industry will continue to grow as rapidly as it has in the
past.
We
may encounter difficulties in integrating Simplicity Esports LLC’s esports businesses or otherwise realizing the anticipated
benefits of the transaction.
As
part of our business strategy, from time to time, we acquire, make investments in, or enter into strategic alliances and joint
ventures with, complementary businesses, such as the acquisition of the Simplicity esports business in January 2019. The acquisition
of Simplicity Esports LLC involves significant risks and uncertainties, including: (i) the potential for Simplicity Esports LLC’s
business to underperform relative to our expectations and the acquisition price, (ii) the potential for Simplicity Esports LLC’s
business to cause our financial results to differ from expectations in any given period, or over the longer-term, (iii) unexpected
tax consequences from the acquisition, or the tax treatment of Simplicity Esports LLC’s business’s operations going
forward, giving rise to incremental tax liabilities that are difficult to predict, (iv) difficulty in integrating Simplicity Esports
LLC’s business, its operations and its employees in an efficient and effective manner, (v) any unknown liabilities or internal
control deficiencies assumed as part of the acquisition, and (vi) the potential loss of key employees of Simplicity Esports LLC’s
businesses. Further, the transaction may involve the risk that our senior management’s attention will be excessively diverted
from our other operations, the risk that the gaming industry does not evolve as anticipated and that any intellectual property
or personnel skills acquired do not prove to be those needed for our future success, and the risk that our strategic objectives,
cost savings or other anticipated benefits are otherwise not achieved.
Our
business may be harmed if our licensing partners, or other third parties with whom we do business, act in ways that put our brand
at risk.
We
anticipate that our business partners shall be given access to sensitive and proprietary information or control over our intellectual
property in order to provide services and support to our teams. These third parties may misappropriate our information or intellectual
property and engage in unauthorized use of it or otherwise act in a way that places our brand at risk. The failure of these third
parties to provide adequate services and technologies, the failure of third parties to adequately maintain or update their services
and technologies or the misappropriation or misuse of this information or intellectual property could result in a disruption to
our business operations or an adverse effect on our reputation, and may negatively impact our business.
Our
business is highly dependent on the success and availability of video game platforms manufactured by third parties.
We
expect to derive a substantial portion of our revenues from esports games played on game platforms manufactured by third parties,
such as Sony’s PS4®, Microsoft’s Xbox One®, and Nintendo’s Wii U® and Switch®, and PCs. The
success of our business will be driven in large part by our ability to accurately predict which platforms will be successful in
the marketplace. We also rely on the availability of an adequate supply of these video game consoles and the continued support
for these consoles by their manufacturers. We may be required to commit significant resources well in advance of the anticipated
introduction of a new platform. If increased costs are not offset by higher revenues and other cost efficiencies, our business
could be negatively impacted. If the platforms for which we invested resources do not attain significant market acceptance, we
may not be able to recover our costs, which could be significant.
The
games we support are subject to scrutiny regarding the appropriateness of their content. If the publishers and distributors we
partner with fail to receive their target ratings for certain titles, or if retailers refuse to sell such titles due to what they
perceive to be objectionable content, it could have a negative impact on our business.
Console
and PC games are subject to ratings by the Entertainment Software Rating Board (the “ESRB”), a self-regulatory body
based in the U.S. that provides U.S. and Canadian consumers of interactive entertainment software with ratings information, including
information on the content in such software, such as violence, nudity or sexual content, along with an assessment of the suitability
of the content for certain age groups. Certain other countries have also established content rating systems as prerequisites for
product sales in those countries. In addition, certain stores use other ratings systems, such as Apple’s use of its proprietary
“App Rating System” and Google Play’s use of the International Age Rating Coalition (IARC) rating system. If
the software publishers that supply our games are unable to obtain the ratings they have targeted for their products, it could
have a negative impact on our business. In some instances, the software publishers and developers may be required to modify their
products to comply with the requirements of the rating systems, which could delay or disrupt the release of any given product,
or may prevent its sale altogether in certain territories, which would limited its availability for use in the games that our
teams play.
We
will depend on servers to operate our games with online features. If we were to lose server functionality for any reason, our
business may be negatively impacted.
Our
business at our game centers will rely on the continuous operation of servers, some of which are owned and operated by third parties.
Although we shall strive to maintain more than sufficient server capacity, and provide for active redundancy in the event of limited
hardware failure, any broad-based catastrophic server malfunction, a significant service-disrupting attack or intrusion by hackers
that circumvents security measures, a failure of disaster recovery service or the failure of a company on which we are relying
for server capacity to provide that capacity for whatever reason would likely degrade or interrupt the functionality of our games
with online features, and could prevent the operation of such games altogether, any of which could result in the loss of sales
for, or in, such games.
We
also rely on networks operated by third parties, such as the PlayStation® Network, Xbox Live® and Steam®, for the
functionality of the games we use which have online features. An extended interruption to any of these services could adversely
affect our ability to operate our games with online features, negatively impacting our business.
Further,
insufficient server capacity could also negatively impact our game center business. Conversely, if we overestimate the amount
of server capacity required by our business, we may incur unnecessary additional operating costs.
The
esports gaming industry is very “hit” driven. We may not have access to “hit” games or titles.
Select
game titles dominate competitive esports and online gaming, including League of Legends, Minecraft, Fortnite and Overwatch, and
many new games titles are regularly introduced in each major industry segment (console, mobile and PC free-to-download). Despite
the number of new entrants, only a very few “hit” titles account for a significant portion of total revenue in each
segment.
The
size and engagement level of our online and in person gamers are critical to our success and are closely linked to the quality
and popularity of the esports game publishers with which we have licenses. Esports game publishers on our gaming platform, including
those who have entered into license agreements with us, may leave us for other gaming platforms or leagues which may offer better
competition, and terms and conditions than we do. Furthermore, we may lose esports game publishers if we fail to generate the
number of gamers to our tournaments and league competitions expected by such publishers. In addition, if popular esports game
publishers cease to license their games to us, or our live streams fail to attract gamers, we may experience a decline in gamer
traffic, subscriptions and engagement, which may have a material and adverse impact on our results of operations and financial
conditions.
We
must continue to attract and retain the most popular esports gaming titles in order to maintain and increase the popularity of
our leagues, tournaments and competitions, and ensure the sustainable growth of our gamer community. We must continue to identify
and enter into license agreements with esports gaming publishers developing “hit’ games that resonate with our community
on an ongoing basis. We cannot assure you that we can continue to attract and retain the same level of first-tier esports game
publishers and our ability to do so is critical to our future success.
If
we fail to keep our existing gamers highly engaged, to acquire new gamers, to successfully implement a membership model for our
gaming community, our business, profitability and prospects may be adversely affected.
Our
success depends on our ability to maintain and grow the number of gamers attending and participating in our in-person and online
tournaments and competitions, and using our gaming platform, and keeping our gamers highly engaged. Of particular importance is
the successful deployment and expansion of our membership model to our gaming community for purposes of creating predictable recurring
revenues.
In
order to attract, retain and engage gamers and remain competitive, we must continue to develop and expand our leagues, including
internationally, produce engaging tournaments and competitions, successfully license the newest “hit” esports games
and titles, implement new technologies and strategies, improve features of our gaming platform and stimulate interactions in our
gamer community.
A
decline in the number of our gamers in our ecosystem may adversely affect the engagement level of our gamers, the vibrancy of
our gamer community, or the popularity of our league play, which may in turn reduce our monetization opportunities, and have a
material and adverse effect on our business, financial condition and results of operations. If we are unable to attract and retain
gamers, our revenues may decline and our results of operations and financial condition may suffer.
We
cannot assure you that our online and in person gaming platform and centers will remain sufficiently popular with gamers to offset
the costs incurred to operate and expand them. It is vital to our operations that we remain sensitive and responsive to evolving
gamer preferences and offer first-tier esports game content that attracts our gamers. We must also keep providing gamers with
new features and functions to enable superior content viewing, and social interaction. Further, we will need to continue to develop
and improve our gaming platform and centers and to enhance our brand awareness, which may require us to incur substantial costs
and expenses. If such increased costs and expenses do not effectively translate into an improved gamer experience and long-term
engagement, our results of operations may be materially and adversely affected.
Risks
Related to International Operations
The
risks related to international operations, in particular in countries outside of the United States, could negatively affect the
Company’s results.
It
is expected that the Company will derive between 15% to 20% of its revenue from transactions denominated in currencies other than
the United States dollar, such as Brazil, and the Company expects that receivables with respect to foreign sales will account
for a significant amount of its total accounts and receivables. As such, the Company’s operations may be adversely affected
by changes in foreign government policies and legislation or social instability and other factors which are not within the control
of the Company, including, but not limited to, recessions in foreign economies, expropriation, nationalization and limitation
or restriction on repatriation of funds, assets or earnings, longer receivables collection periods and greater difficulty in collecting
accounts receivable, changes in consumer tastes and trends, renegotiation or nullification of existing contracts or licenses,
changes in gaming policies, regulatory requirements or the personnel administering them, currency fluctuations and devaluations,
exchange controls, economic sanctions and royalty and tax increases, risk of terrorist activities, revolution, border disputes,
implementation of tariffs and other trade barriers and protectionist practices, taxation policies, including royalty and tax increases
and retroactive tax claims, volatility of financial markets and fluctuations in foreign exchange rates, difficulties in the protection
of intellectual property particularly in countries with fewer intellectual property protections, the effects that evolving regulations
regarding data privacy may have on the Company’s online operations, adverse changes in the creditworthiness of parties with
whom the Company has significant receivables or forward currency exchange contracts, labor disputes and other risks arising out
of foreign governmental sovereignty over the areas in which the Company’s operations are conducted. The Company’s
operations may also be adversely affected by social, political and economic instability and by laws and policies of such foreign
jurisdictions affecting foreign trade, taxation and investment. If the Company’s operations are disrupted and/or the economic
integrity of its contracts is threatened for unexpected reasons, its business may be harmed.
The
Company’s international activities may require protracted negotiations with host governments, national companies and third
parties. Foreign government regulations may favor or require the awarding of contracts to local contractors or require foreign
contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. In the event of a dispute arising in
connection with the Company’s operations in a foreign jurisdiction where it conducts its business, the Company may be subject
to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdictions of
the courts of United States or enforcing American judgments in such other jurisdictions. The Company may also be hindered or prevented
from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. Accordingly,
the Company’s activities in foreign jurisdictions could be substantially affected by factors beyond the Company’s
control, any of which could have a material adverse effect on it. The Company believes that management’s experience to date
in commercializing its products, services and solutions in Brazil may be of assistance in helping to reduce these risks. Some
countries in which the Company may operate may be considered politically and economically unstable.
Doing
business in the industries in which the Company operates often requires compliance with numerous and extensive procedures and
formalities. These procedures and formalities may result in unexpected or lengthy delays in commencing important business activities.
In some cases, failure to follow such formalities or obtain relevant evidence may call into question the validity of the entity
or the actions taken. Management of the Company is unable to predict the effect of additional corporate and regulatory formalities
which may be adopted in the future including whether any such laws or regulations would materially increase the Company’s
cost of doing business or affect its operations in any area.
The
Company may in the future enter into agreements and conduct activities outside of the jurisdictions where it currently carries
on business, which expansion may present challenges and risks that the Company has not faced in the past, any of which could adversely
affect the results of operations and/or financial condition of the Company.
The
Company is subject to foreign exchange and currency risks that could adversely affect its operations, and the Company’s
ability to mitigate its foreign exchange risk through hedging transactions may be limited.
The
Company expects that it will derive between 15% and 20% of its revenues in currencies other than the United States dollar; however,
a substantial portion of the Company’s operating expenses are incurred in United States dollars. Fluctuations in the exchange
rate between the U.S. dollar, the Real (Brazil) and other currencies may have a material adverse effect on the Company’s
business, financial condition and operating results. The Company’s consolidated financial results are affected by foreign
currency exchange rate fluctuations. Foreign currency exchange rate exposures arise from current transactions and anticipated
transactions denominated in currencies other than United States dollars and from the translation of foreign-currency-denominated
balance sheet accounts into United States dollar-denominated balance sheet accounts. The Company is exposed to currency exchange
rate fluctuations because portions of its revenue and expenses are denominated in currencies other than the United States dollar,
particularly the Real. In particular, uncertainty regarding economic conditions in Brazil pose risk to the stability of the Real.
Exchange rate fluctuations could adversely affect the Company’s operating results and cash flows and the value of its assets
outside of United States. If a foreign currency is devalued in a jurisdiction in which the Company is paid in such currency, then
the Company’s customers may be required to pay higher amounts for the Company’s products or services, which they may
be unable or unwilling to pay.
While
the Company may enter into forward currency swaps and other derivative instruments intended to mitigate the foreign currency exchange
risk, there can be no assurance the Company will do so or that any instruments that the Company enters into will successfully
mitigate such risk. If the Company enters into foreign currency forward or other hedging contracts, the Company would be subject
to the risk that a counterparty to one or more of these contracts defaults on its performance under the contracts. During an economic
downturn, a counterparty’s financial condition may deteriorate rapidly and with little notice, and the Company may be unable
to take action to protect its exposure. In the event of a counterparty default, the Company could lose the benefit of its hedging
contract, which may harm its business and financial condition. In the event that one or more of the Company’s counterparties
becomes insolvent or files for bankruptcy, its ability to eventually recover any benefit lost as a result of that counterparty’s
default may be limited by the liquidity of the counterparty. The Company expects that it will not be able to hedge all of its
exposure to any particular foreign currency, and it may not hedge its exposure at all with respect to certain foreign currencies.
Changes in exchange rates and the Company’s limited ability or inability to successfully hedge exchange rate risk could
have an adverse impact on the Company’s liquidity and results of operations.
We
may be unable to obtain licenses in new jurisdictions where our customers operate.
We
are subject to regulation in any jurisdiction where our customers access our website. To expand into any such jurisdiction,
we may need to be licensed, or obtain approvals of our products or services. If we do not receive, or receive a revocation
of a license in a particular jurisdiction for our products or services, we would not be able to sell or place our products or
services in that jurisdiction. Any such outcome could materially and adversely affect our results of operations and any growth
plans for our business.
Privacy
concerns could result in regulatory changes and impose additional costs and liabilities on the Company, limit its use of information,
and adversely affect its business.
Personal
privacy has become a significant issue in the United States, Brazil, Europe, and many other countries in which the Company currently
operates and may operate in the future. Many federal, state, and foreign legislatures and government agencies have imposed or
are considering imposing restrictions and requirements about the collection, use, and disclosure of personal information obtained
from individuals. Changes to laws or regulations affecting privacy could impose additional costs and liability on the Company
and could limit its use of such information to add value for customers. If the Company were required to change its business activities
or revise or eliminate services, or to implement burdensome compliance measures, its business and results of operations could
be harmed. In addition, the Company may be subject to fines, penalties, and potential litigation if it fails to comply with applicable
privacy regulations, any of which could adversely affect the Company’s business, liquidity and results of operation.
The
Company’s results of operations could be affected by natural events in the locations in which it operates or where its customers
or suppliers operate.
The
Company, its customers, and its suppliers have operations in locations subject to natural occurrences such as severe weather and
other geological events, including hurricanes, earthquakes, or flood that could disrupt operations. Any serious disruption at
any of the Company’s facilities or the facilities of its customers or suppliers due to a natural disaster could have a material
adverse effect on the Company’s revenues and increase its costs and expenses. If there is a natural disaster or other serious
disruption at any of the Company’s facilities, it could impair its ability to adequately supply its customers, cause a significant
disruption to its operations, cause the Company to incur significant costs to relocate or re-establish these functions and negatively
impact its operating results. While the Company intends to seek insurance against certain business interruption risks, such insurance
may not adequately compensate the Company for any losses incurred as a result of natural or other disasters. In addition, any
natural disaster that results in a prolonged disruption to the operations of the Company’s customers or suppliers may adversely
affect its business, results of operations or financial condition.
Risks
Related to Regulation
The
Company is subject to various laws relating to trade, export controls, and foreign corrupt practices, the violation of which could
adversely affect its operations, reputation, business, prospects, operating results and financial condition.
We
are subject to risks associated with doing business outside of the United States, including exposure to complex foreign and U.S.
regulations such as the Foreign Corrupt Practices Act (the “FCPA”) and other anti-corruption laws which generally
prohibit U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining
or retaining business. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions
and other penalties. It may be difficult to oversee the conduct of any contractors, third-party partners, representatives or agents
who are not our employees, potentially exposing us to greater risk from their actions. If our employees or agents fail to comply
with applicable laws or company policies governing our international operations, we may face legal proceedings and actions which
could result in civil penalties, administration actions and criminal sanctions. Any determination that we have violated any anti-corruption
laws could have a material adverse impact on our business. Changes in trade sanctions laws may restrict the Company’s business
practices, including cessation of business activities in sanctioned countries or with sanctioned entities.
Violations
of these laws and regulations could result in significant fines, criminal sanctions against the Company, its officers or its employees,
requirements to obtain export licenses, disgorgement of profits, cessation of business activities in sanctioned countries, prohibitions
on the conduct of its business and its inability to market and sell the Company’s products or services in one or more countries.
Additionally, any such violations could materially damage the Company’s reputation, brand, international expansion efforts,
ability to attract and retain employees and the Company’s business, prospects, operating results and financial condition.
Regulations
that may be adopted with respect to the internet and electronic commerce may decrease the growth in the use of the internet and
lead to the decrease in the demand for Esports’ products and services.
The
Company may become subject to any number of laws and regulations that may be adopted with respect to the internet and electronic
commerce. New laws and regulations that address issues such as user privacy, pricing, online content regulation, taxation, advertising,
intellectual property, information security, and the characteristics and quality of online products and services may be enacted.
As well, current laws, which predate or are incompatible with the internet and electronic commerce, may be applied and enforced
in a manner that restricts the electronic commerce market. The application of such pre-existing laws regulating communications
or commerce in the context of the internet and electronic commerce is uncertain. Moreover, it may take years to determine the
extent to which existing laws relating to issues such as intellectual property ownership and infringement, libel and personal
privacy are applicable to the internet. The adoption of new laws or regulations relating to the internet, or particular applications
or interpretations of existing laws, could decrease the growth in the use of the internet, decrease the demand for esports’
products and services, increase esports’ cost of doing business or could otherwise have a material adverse effect on esports’
business, revenues, operating results and financial condition.
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 or a stock exchange like the NYSE American. These factors may result in investors having difficulty
reselling any shares of our common stock.
Our
stock price is likely to be highly volatile because of several factors, including a limited public float.
The
market price of our Common Stock and Public Warrants have been volatile in the past and the market price of our Common Stock and
Public Warrants and Private Placement Warrants are likely to be highly volatile in the future. You may not be able to resell shares
of our Common Stock and/or Private Placement Warrants following periods of volatility because of the market’s adverse reaction
to volatility.
Other
factors that could cause such volatility may include, among other things:
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actual
or anticipated fluctuations in our operating results;
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we
may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held;
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overall
stock market fluctuations;
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announcements
concerning our business or those of our competitors;
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actual
or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;
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conditions
or trends in the industry;
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litigation;
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changes
in market valuations of other similar companies;
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future
sales of common stock;
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departure
of key personnel or failure to hire key personnel; and
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general
market conditions.
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Any
of these factors could have a significant and adverse impact on the market price of our Common Stock and/or Private Placement
Warrants. In addition, the stock market in general has at times experienced extreme volatility and rapid decline that has often
been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations may adversely
affect the trading price of our Common Stock and/or Private Placement Warrants, regardless of our actual operating performance.
If
securities or industry analysts do not publish or cease publishing research or reports about the Company, its business, or its
market, or if they change their recommendations regarding our securities adversely, the price and trading volume of our securities
could decline.
The
trading market for our securities will be influenced by the research and reports that industry or securities analysts may publish
about us, our business, our market, or our competitors. Securities and industry analysts do not currently, and may never, publish
research on the Company. If no securities or industry analysts commence coverage of the Company, our stock price and trading volume
would likely be negatively impacted. If any of the analysts who may cover the Company change their recommendation regarding our
securities adversely, or provide more favorable relative recommendations about our competitors, the price of our securities would
likely decline. If any analyst who may cover the Company were to cease coverage of the Company or fail to regularly publish reports
on it, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
Our
common stock has in the past been a “penny stock” under SEC rules, and our warrants may be subject to the “penny
stock” rules. It may be more difficult to resell securities classified as “penny stock.”
In
the past, our common stock was a “penny stock” under applicable SEC rules (generally defined as non-exchange traded
stock with a per-share price below $5.00). Unless we successfully list our common stock and our warrants on a national stock exchange,
or maintain a per-share price above $5.00, these rules impose additional sales practice requirements on broker-dealers that recommend
the purchase or sale of penny stocks to persons other than those who qualify as “established customers” or “accredited
investors.” For example, broker-dealers must determine the appropriateness for non-qualifying persons of investments in
penny stocks. Broker-dealers must also provide, prior to a transaction in a penny stock not otherwise exempt from the rules, a
standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The
broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, disclose the compensation
of the broker-dealer and its salesperson in the transaction, furnish monthly account statements showing the market value of each
penny stock held in the customer’s account, provide a special written determination that the penny stock is a suitable investment
for the purchaser, and receive the purchaser’s written agreement to the transaction.
Legal
remedies available to an investor in “penny stocks” may include the following:
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If
a “penny stock” is sold to the investor in violation of the requirements listed above, or other federal or states
securities laws, the investor may be able to cancel the purchase and receive a refund of the investment.
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If
a “penny stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and
firms that committed the fraud for damages.
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However,
investors who have signed arbitration agreements may have to pursue their claims through arbitration.
These
requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that
becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our
securities. These requirements may restrict the ability of broker-dealers to sell our common stock or our Private Placement Warrants
and may affect your ability to resell our common stock and our Private Placement Warrants.
Many
brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not
invest in penny stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the
increased financial risk generally associated with these investments.
For
these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time,
if ever, our common stock or our Private Placement Warrants will not be classified as a “penny stock” in the future.
A
sale of a substantial number of shares of our Common Stock may cause the price of the Common Stock to decline.
If
our stockholders sell substantial amounts of our Common Stock in the public market, the market price of our Common Stock could
fall. These sales also may make it more difficult for us to sell our equity or equity-related securities in the future at a time
and price that we deem reasonable or appropriate. This risk is significant because of concentrated positions of our Common Stock
held by a small group of investors.
Because
certain of our stockholders control a significant number of shares of our Common Stock, they may have effective control over actions
requiring stockholder approval.
Our
directors, executive officers and principal stockholders, and their respective affiliates, beneficially own approximately 21.7%
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 accounting principles generally accepted in the United States
(“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create
appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations, may have
a significant effect on our reported results and retroactively affect previously reported results.
Being
a public company results in additional expenses, diverts management’s attention and could also adversely affect our ability
to attract and retain qualified directors.
As
a public reporting company, we are subject to the reporting requirements of the Exchange Act. These requirements generate significant accounting, legal and financial compliance costs and make
some activities more difficult, time consuming or costly and may place significant strain on our personnel and resources. The
Exchange Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control
over financial reporting. In order to establish the requisite disclosure controls and procedures and internal control over financial
reporting, significant resources and management oversight are required.
As
a result, management’s attention may be diverted from other business concerns, which could have an adverse and even material
effect on our business, financial condition and results of operations. These rules and regulations may also make it more difficult
and expensive for us to obtain director and officer liability insurance. If we are unable to obtain appropriate director and officer
insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent,
could be adversely impacted.
We
are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable
to public companies may result in our financial statements not being comparable to those of some other public companies. As a
result of this and other reduced disclosure requirements applicable to emerging growth companies, our securities may be less attractive
to investors.
As
a public reporting company with less than $1,070,000,000 in revenue during our last fiscal year, we qualify as an “emerging
growth company” under the JOBS Act. An emerging growth company may take advantage of certain reduced reporting requirements
and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. In particular,
as an emerging growth company we:
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are
not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control
over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
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are
not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and
analyzing how those elements fit with our principles and objectives (commonly referred to as “compensation discussion
and analysis”);
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are
not required to obtain a non-binding advisory vote from our stockholders on executive compensation or golden parachute arrangements
(commonly referred to as the “say-on-pay,” “say-on-frequency” and “say-on-golden-parachute”
votes);
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are
exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
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may
present only two years of audited financial statements and only two years of related Management’s Discussion & Analysis
of Financial Condition and Results of Operations (“MD&A”); and
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are
eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107
of the JOBS Act.
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We
intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods
for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in
periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging
growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.
Certain
of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a
“smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain
an auditor attestation and report regarding management’s assessment of internal control over financial reporting; are not
required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or Chief Executive
Officer pay ratio disclosure; and may present only two years of audited financial statements and related MD&A disclosure.
Under
the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years
after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act, 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. However, as an emerging growth company, our independent registered public
accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting
pursuant to Section 404 until the end of the fiscal year for which our second annual report is due or the date we are no longer
an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse
in the event it is not satisfied with the level at which our controls are documented, designed or operating.
To
comply with the requirements of being a public company, we have undertaken various actions, and may need to take additional actions,
such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and
maintaining internal control can divert our management’s attention from other matters that are important to the operation
of our business. Additionally, when evaluating our internal control over financial reporting, we may identify material weaknesses
that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements
of Section 404. If we identify any material weaknesses in our internal control over financial reporting or are unable to comply
with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective,
or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal
control over financial reporting once we are no longer an emerging growth company, investors may lose confidence in the accuracy
and completeness of our financial reports and the market price of our Common Stock could be negatively affected, and we could
become subject to investigations by the Financial Industry Regulatory Agency, the SEC or other regulatory authorities, which could
require additional financial and management resources.
Anti-takeover
provisions contained in our certificate of incorporation and bylaws, as well as provisions of Delaware law, could impair a takeover
attempt.
The
Company’s certificate of incorporation and bylaws contain provisions that could have the effect of delaying or preventing
changes in control or changes in our management without the consent of our board of directors. These provisions include:
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no
cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
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the
exclusive right of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors
or the resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our
board of directors;
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the
ability of our board of directors to determine whether to issue shares of our preferred stock and to determine the price and
other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to
significantly dilute the ownership of a hostile acquirer;
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●
|
limiting
the liability of, and providing indemnification to, our directors and officers;
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controlling
the procedures for the conduct and scheduling of stockholder meetings;
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●
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providing
that directors may be removed prior to the expiration of their terms by stockholders only for cause; and
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advance
notice procedures that stockholders must comply with in order to nominate candidates to our board of directors or to propose
matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting
a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of
the Company.
|
These
provisions, alone or together, could delay hostile takeovers and changes in control of the Company or changes in our board of
directors and management.
Any
provision of our certificate of incorporation or bylaws or Delaware law that has the effect of delaying or deterring a change
in control could limit the opportunity for our security holders to receive a premium for their securities and could also affect
the price that some investors are willing to pay for our securities.
In
the event that our common stock price does not exceed the exercise price of the Private Placement Warrants during the period when
the Private Placement Warrants are exercisable, the Private Placement Warrants may not have any value.
The
warrants will be immediately exercisable and expire on the fifth anniversary of the date of issuance. The Private Placement Warrants
will have an initial exercise price per share equal to $11.50. In the event that our common stock price does not exceed the exercise
price of the Private Placement Warrants during the period when the Private Placement Warrants are exercisable, the Private Placement
Warrants may not have any value.
There
is no established trading market for the Private Placement Warrants and the market for the Private Placement Warrants may be highly
volatile or may decline regardless of our operating performance. We do not intend to list the Private Placement Warrants, nor
do we expect the Private Placement Warrants to be quoted, on any securities exchange.
There
must be a current registration statement in order for you to exercise the Private Placement Warrants.
Holders
of Private Placement Warrants will be able to exercise the Private Placement Warrants only if a current registration statement
relating to the common stock underlying the Private Placement Warrants is then in effect. Although we will attempt to maintain
the effectiveness of a current registration statement covering the common stock underlying the Private Placement Warrants, there
can be no assurance that we will be able to do so. If the registration statement covering the shares issuable upon exercise of
the Private Placement Warrants is no longer effective, the Private Placement Warrants may only be exercised on a “cashless”
basis and will be issued with restrictive legends unless such shares are eligible for sale under Rule 144 of the Securities Act.
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.
Item
1B.
|
Unresolved
Staff Comments
|
Not
applicable.
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 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.
Item
3.
|
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.
Item
4.
|
Mine
Safety Disclosures
|
Not
applicable.
PART
III
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
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
|
Donald
R. Caldwell
|
|
73
|
|
Chairman
and Class I Director
|
Roman
Franklin
|
|
37
|
|
President
and Class I Director
|
Max
Hooper
|
|
73
|
|
Class
II Director
|
Frank
Leavy
|
|
67
|
|
Class
I Director
|
Edward
Leonard Jaroski
|
|
73
|
|
Class
I Director
|
William
H. Herrmann, Jr.
|
|
73
|
|
Class
II Director
|
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 public companies: Lightning Gaming, Inc., since June 2015, where he serves as a director and chairman of the audit
committee; and Quaker Chemical Corporation (NYSE: KWR) since 1997, where he serves as lead director, as chairman of the executive
committee and member of the compensation and audit committees; Mr. Caldwell was previously a member of the board of directors
of Diamond Cluster International, Inc. from 1994 to 2010 and has served as a director for several private companies and non-profit
organizations, including software and money management firms as well as the Pennsylvania Academy of the Fine Arts and the Committee
for Economic Development. Mr. Caldwell is a Certified Public Accountant (Retired) and holds a Bachelor of Science degree from
Babson College and a Master of Business Administration from the Graduate School of Business at Harvard University.
We
believe Mr. Caldwell’s deep financial, entrepreneurial and business expertise and extensive experience as a member of the
boards and board committees of other public companies qualifies him to serve on our Board of Directors.
Roman
Franklin. Mr. Franklin has been a member of our Board of Directors since August 16, 2017, and our President since
December 31, 2018. Mr. Franklin was Chief Investment Officer of SMC Global USA from March 2016 until December 31, 2016, and prior,
President of Franklin Financial Planning from 2005 to 2016. Roman Franklin is a 16-year veteran of the financial services industry.
By the age of 22 he held FINRA Series 7, Series 66, and Life, Health, and Variable Insurance Licenses. In 2005, he founded a fee-only
registered investment advisory firm. In 2008, he was one of the youngest recipients of the National Association of Financial Advisors
(“NAPFA”) Registered Financial Advisor (RFA) designation. In 2015, he was elected as a Board Member of the NAPFA,
South Region Board of Directors, overseeing more than a dozen states from Texas, to Florida, to North Carolina. Mr. Franklin has
experience in domestic and international investment, and has been involved in multiple business transactions tied to India, including
the sale of a 50% equity stake in his wealth management business to Indian financial services firm SMC. Mr. Franklin holds a Bachelor
of Science degree in Management from Barry University and an M.B.A. in Finance from the Graduate School of Business at Stetson
University. His civic organization roles include School Advisory Council for Volusia County Schools, City of DeLand Economic Development
Committee, and the Boys’ and Girls’ Clubs of Central Florida.
We
believe Mr. Franklin’s strong expertise in finance and international and domestic business transactions qualifies him to
serve on our Board of Directors.
Max
Hooper. Mr. Hooper, who has been an independent member of our Board of Directors since August 16, 2017, serves as Managing
Director of Merging Traffic, a web-based crowdsourcing portal, since September 2015 and Head of Investment Banking and Senior
Vice President of Triloma Securities, a subsidiary of Triloma Financial Group LLC, since January 2016. Dr. Hooper is also the
founder and owner of Partners Advisory Group and Partners Capital Group, two financial advisory firms since January 2014. Since
February 2018, Dr. Hooper’s primary focus has been as Managing Director/CEO of Managing Traffic and co-owner of Triloma
Financial Group. Prior to that, Dr. Hooper was co-founder of Equity Broadcasting Corporation, a media company that owned and operated
more than one hundred television stations across the United States. Dr. Hooper is an accomplished entrepreneur and has started
multiple businesses in technology/internet, lodging, and services industries. Dr. Hooper has served on the investment committee
of several venture capital and angel funds, and has completed “work out” transactions as a Certified Debt Arbitrator
representing banks and private transactions. Dr. Hooper also has prior experience with SPACs such as transaction structuring,
administration, research, and execution. Dr. Hooper has earned five doctorate degrees from a variety of institutions.
We
believe Dr. Hooper’s expertise in investment, management and mergers and acquisitions over various industries qualify him
to serve on our Board of Directors.
Frank
Leavy. Mr. Leavy has been an independent member of our Board of Directors since August 16, 2017. Since 2007, Mr. Leavy
has been the Senior Vice President and Director of Finance and Administration for Blake’s All Natural Foods, a manufacturer
of “better for you” frozen entrees. Prior to that, he held various financial officer positions at member companies
of Group Rossignol, a world leading company in the winter sports industry. Specifically, he was Controller of Rossignol Ski Company
from 1982 to 2006 and Vice President of Finance of Skis Dynastar, Inc. and Skis Dynastar Canada from 2000 to 2006. He also served
as Chief Operating Officer at Roger Cleveland Golf Company, a subsidiary of Group Rossignol from 1999 to 2000 and was elected
a director of the company from 2003 to 2005. Mr. Leavy holds a Bachelor of Arts degree from the College of the Holy Cross and
a Master of Science degree in accounting from the Graduate School of Professional Accounting at Northeastern University.
We
believe Mr. Leavy’s extensive experience in corporate finance qualify him to serve on our Board of Directors.
Edward
Leonard Jaroski. Mr. Jaroski has been an independent member of our Board of Directors since October 2017. Mr. Jaroski
was the founder of Capstone Asset Management Company and had served as its President and Chief Executive Officer from 1987 to
2016. Mr. Jaroski had been Chairman, Chief Executive Officer and President of various Capstone/Steward Funds in the fund complex
from 1987 through 2016. Mr. Jaroski was at Tenneco Financial Services from 1981 to 1987, where he was the Executive Vice President.
He started his career at Philadelphia Life Insurance Company as Manager of Investments in 1969, where he served until 1981 and
also served as its Vice President of Finance. He also served as a Director of Philadelphia Life Asset Management Company. Mr.
Jaroski holds the insurance industry professional designations of Chartered Life Underwriter, Charter Financial Consultant and
Fellow Life Management Institute. He holds a B.B.A. degree in Accounting from Temple University.
We
believe Mr. Jaroski’s experience in investments and asset management qualify him to serve on our Board of Directors.
William
H. Herrmann, Jr. Mr. Herrmann has been an independent member of our Board of Directors since October 2017. Mr. Herrmann
has over 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 August 31, 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 quoted on the OTCQB under the symbol “WINR.” Our warrants issued in connection with our initial public
offering in August 2017 are quoted on OTCQB under the symbol “WINRW.” Under the rules of the OTCQB, we are not required
to maintain a majority of independent directors on our Board of Directors and we are not required to establish committees of the
Board of Directors consisting of independent directors. However, we intend to apply to list our common stock and our warrants
on The NYSE American (“NYSE American”). In order to list our common stock and our warrants on the NYSE American, we
are required to comply with the NYSE American standards relating to corporate governance, requiring, among other things, that:
|
●
|
A
majority of our Board of Directors to consist of “independent directors” as defined by the applicable rules and
regulations of the NYSE American;
|
|
|
|
|
●
|
The
compensation of our executive officers to be determined, or recommended to the Board of Directors for determination, by independent
directors constituting a majority of the independent directors of the Board in a vote in which only independent directors
participate or by a Compensation Committee comprised solely of independent directors;
|
|
|
|
|
●
|
That
director nominees to be selected, or recommended to the Board of Directors for selection, by independent directors constituting
a majority of the independent directors of the Board in a vote in which only independent directors participate or by a nomination
committee comprised solely of independent directors; and
|
|
|
|
|
●
|
Establishment
of an audit committee with at least three independent directors as well as composed entirely of independent directors, where
at least one of the independent directors qualifies as an audit committee financial expert under SEC rules and as a financially
sophisticated audit committee member under the NYSE American rules.
|
Under
applicable NYSE American rules, a director will only qualify as an “independent director” if, in the opinion of the
listed company’s board of directors, that person does not have a relationship that would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director. In order to be considered independent for purposes of
Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit
committee, the board of directors, or any other board committee, accept, directly or indirectly, any consulting, advisory, or
other compensatory fee from the listed company or any of its subsidiaries or otherwise be an affiliated person of the listed company
or any of its subsidiaries. Our Board of Directors has determined in its business judgment that each of Messrs. Caldwell, Leavy,
Jaroski and Herrmann and Dr. Hooper is independent within the meaning of the NYSE American rules for U.S. Companies, the Sarbanes-Oxley
Act and related SEC rules. Therefore, a majority of the members of our Board of Directors is independent.
In
addition, our Board of Directors has two standing committees: an Audit Committee and a Compensation Committee.
Committees
of the Board of Directors
Our
Board of Directors has two standing committees: an audit committee and a compensation committee. Both our audit committee and
our compensation committee are composed solely of independent directors.
Audit
Committee
Messrs.
Caldwell and Leavy and Dr. Hooper will serve as members of our audit committee. Mr. Caldwell serves as chairman of the audit committee.
Under NYSE American listing standards and applicable SEC rules, we are required to have three members of the audit committee,
all of whom must be independent. Messrs. Caldwell, and Leavy and Dr. Hooper are independent.
Each
member of the audit committee is financially literate, and our Board of Directors has determined that Mr. Caldwell qualifies
as an “audit committee financial expert” as defined in applicable SEC rules.
Responsibilities
of the audit committee include:
|
●
|
the
appointment, compensation, retention, replacement, and oversight of the work of the independent auditors and any other independent
registered public accounting firm engaged by us;
|
|
|
|
|
●
|
pre-approving
all audit and non-audit services to be provided by the independent auditors or any other registered public accounting firm
engaged by us, and establishing pre-approval policies and procedures;
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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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●
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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.
|
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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●
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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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●
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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.
|
The
charter also provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation
consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of
the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel
or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required
by NYSE American and the SEC.
Director
Nominations
We
do not have a standing nominating committee. In accordance with Section 804(a) of the NYSE American Company Guide, a majority
of the independent directors may recommend a director nominee for selection by the Board of Directors. The Board of Directors
believes that the independent directors can satisfactorily carry out the responsibility of properly selecting or approving director
nominees without the formation of a standing nominating committee. The directors who shall participate in the consideration and
recommendation of director nominees are Messrs. Caldwell, Jaroski, Leavy, and Herrmann, and Dr. Hooper. In accordance with Section
804(a) of the NYSE American Company Guide, all such directors are independent. As there is no standing nominating committee, we
do not have a nominating committee charter in place.
The
Board of Directors will also consider director candidates recommended for nomination by our stockholders during such times as
they are seeking proposed nominees to stand for election. Our stockholders that wish to nominate a director for election to the
Board of Directors should follow the procedures set forth in our bylaws.
We
have not formerly established any specific, minimum qualifications that must be met or skills that are necessary for directors
to possess. In general, in identifying and evaluating nominees for director, the Board of Directors considers educational background,
diversity of professional experience, knowledge of our business, integrity, professional reputation, independence, wisdom, and
the ability to represent the best interests of our stockholders.
Code
of Ethics
We
have adopted a Code of Ethics applicable to our directors, officers and employees. We previously filed a copy of our Code of Ethics
as an exhibit to our registration statement on Form S-1 (File No. 333-219251). You can review our Code of Ethics by accessing
our public filings on 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.
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.
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.
Delinquent
Section 16(a) Reports
Section 16(a) of the Exchange
Act requires our officers, directors and persons who beneficially own more than 10% of our common stock to file reports of ownership
and changes in ownership with the SEC. These reporting persons are also required to furnish us with copies of all Section 16(a)
forms they file. Based solely upon a review of such forms, we believe that except as set forth herein, no Section 16(a) reporting
persons failed to timely file their required Section 16(a) reports during the year fiscal ended May 31, 2020. During the fiscal
year ended May 31, 2020, Mr. Franklin failed to timely file a Form 5 relating to one transaction, a gift of securities.
In addition, Mr. Herrmann failed to timely file one Form 4 relating to two transactions and one Form 4 relating
to one transaction.
Item
11. Executive Compensation.
2020
Summary Compensation Table
The
following table summarizes all compensation recorded by us in the past two fiscal years ended May 31, 2020 for:
|
●
|
our
principal executive officer or other individual serving in a similar capacity, and
|
|
|
|
|
●
|
our
two most highly compensated executive officers, other than our principal executive officer,
who were serving as corporate officers as of May 31, 2020.
|
For
definitional purposes, these individuals are sometimes referred to as the “named executive officers.”
Name
and Principal Position
|
|
Fiscal
Year
Ended
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
All
Other Compensation
($)
|
|
|
Total
($)
|
|
Jed Kaplan,
|
|
|
5/31/2020
|
|
|
$
|
-
|
|
|
$
|
75,000
|
(1)
|
|
$
|
311,925
|
(2)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
386,925
|
|
Chief Executive Officer
|
|
|
5/31/2019
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
72,000
|
(2)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
72,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roman Franklin,
|
|
|
5/31/2020
|
|
|
$
|
100,000
|
|
|
$
|
75,000
|
(1)
|
|
$
|
245,215
|
(3)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
420,215
|
|
President
|
|
|
5/31/2019
|
|
|
$
|
41,666
|
|
|
$
|
-
|
|
|
|
21,600
|
(3)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
21,600
|
|
|
(1)
|
Amounts
have been accrued as of May 31, 2020
|
|
|
|
|
(2)
|
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 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 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.
|
|
|
|
|
(3)
|
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 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 $232,615 accrued as of May 31, 2020. Assumptions used to determine
the accrued amounts have been computed in 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 values ranging from $0.87 to $1.40, based on
the closing stock prices of the Company’s common stock as reported on OTC
Markets on various dates.
|
Outstanding
Equity Awards at 2020 Fiscal Year-End
The
following table sets forth information on outstanding options and stock awards held by the named executive officers as of May
31, 2020.
|
|
Option
Awards
|
|
Stock
Awards
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options (#) Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options (#) Unexercisable
|
|
|
Option
Exercise Price ($)
|
|
|
Option
Expiration Date
|
|
Number
of Shares or Units of Stock that Have Not Vested (#) (1)
|
|
|
Market
Value of Shares Or Units of Stock That Have Not Vested ($)
|
|
Jed
Kaplan
|
|
|
-
|
|
|
|
-
|
|
|
$
|
N/A
|
|
|
N/A
|
|
|
-
|
|
|
$
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roman
Franklin
|
|
|
-
|
|
|
|
-
|
|
|
$
|
N/A
|
|
|
N/A
|
|
|
-
|
|
|
$
|
N/A
|
|
2020
Option Exercises and Stock Vested Table
The
following table sets forth the vesting of restricted stock during the fiscal year ended May 31, 2020 for the named executive officers:
|
|
Stock
Awards
|
|
Name
|
|
Number
of Shares Acquired on Vesting
|
|
|
Value
Realized on Vesting
|
|
Jed Kaplan
|
|
|
120,000
|
|
|
$
|
95,300
|
|
|
|
|
|
|
|
|
|
|
Roman Franklin
|
|
|
36,000
|
|
|
$
|
28,590
|
|
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 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 and the respective executive.
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, 120,000 shares of our restricted Common Stock. Such shares vested over the succeeding
nine-month period. As of July 2, 2020, all of such shares have vested.
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Roman Franklin, our President and a member of our board of directors,
36,000 shares of our restricted Common Stock. Such shares vested over the succeeding nine-month period. As of July
2, 2020, 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.
The
Kaplan 2018 Agreement (as hereinafter defined) provides for the grant to Mr. Kaplan of 10,000 shares of common stock per month.
As of August 31, 2020, such shares of not been issued for the months of January through May 2020. The Franklin 2018 Agreement
(as hereinafter defined) provides for the grant to Mr. Franklin of 3,000 shares of common stock per month. As of August 31, 2020,
such shares have not been issued for the months of January through May 2020.
On
July 29, 2020, the Board approved the grant of 250,000 shares of common stock to each of Messrs. Kaplan and Franklin in return
for services provided during the 2020 fiscal year. Such grants will be fully vested and earned as of the issuance thereof. As
of August 31, 2020, such shares have not been issued.
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 would 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 shall not receive a salary or other monetary compensation and in lieu thereof he shall receive an equity grant of 10,000
shares of Common Stock per month, which shares shall be fully vested upon grant. Mr. Kaplan shall also be eligible to receive
a quarterly bonus in the form of cash or equity shares and shall be entitled to participate in the Company’s employee benefit
plans. The term of the Kaplan 2018 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 2018 Agreement
at the conclusion of the then applicable term. The term of the Kaplan 2018 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 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
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 would serve as the President of the Company. Pursuant to the terms of the
Franklin 2018 Agreement, the Company agreed to that Mr. Franklin would receive (i) a monthly base salary of $8,333.33 and (ii)
an equity grant of 3,000 shares of Common Stock per month, which shares shall be fully vested upon grant. Mr. Franklin was also
eligible to receive a quarterly bonus in the form of cash or equity shares and was entitled to participate in the Company’s
employee benefit plans. The term of the Franklin 2018 Agreement was for an initial one-year term, which automatically renewed
for successive one-year terms unless either party provides 60 days’ advance written notice of its intention not to renew
the Franklin 2018 Agreement at the conclusion of the then applicable term. The term of the Franklin 2018 Agreement may be terminated
by the Company with or without cause or by Mr. Franklin with or without good reason, as such terms are defined therein.
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.
Each
of the Kaplan 2018 Agreement, the Kaplan 2020 Agreement, the Franklin 2018 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:
|
●
|
The
Compensation Committee, which is comprised solely of independent directors, administers the 2020 Plan.
|
|
|
|
|
●
|
The
total number of shares of common stock authorized for issuance under the 2020 Plan is 1,000,000 shares, or approximately 11.7%
of the common stock outstanding as of May 20, 2020.
|
|
|
|
|
●
|
No
non-employee director may be granted awards under the 2020 Plan during any calendar year if such awards, taken together with
any cash fees paid to such non-employee director would exceed a total value of $250,000 (calculated in accordance with the
terms of the 2020 Plan).
|
|
|
|
|
●
|
The
exercise price of options and SARs may not be less than the fair market value of the common stock on the date of grant.
|
|
|
|
|
●
|
In
addition to other vesting requirements, the Compensation Committee may condition the vesting of awards on the achievement
of specific performance targets.
|
Material
Features of the 2020 Plan
Term
The
2020 Plan was effective June 23, 2020. The 2020 Plan will terminate on June 23, 2030, unless the Board terminates it earlier.
Purpose
The
purpose of the 2020 Plan is to provide a means through with the Company and its subsidiaries may attract and retain key personnel,
and to provide a means whereby directors, officer, employees, consultants, and advisors of the Company and its subsidiaries can
acquire and maintain an equity interest in the Company, or be paid incentive compensation, thereby strengthening their commitment
to the welfare of the Company and its subsidiaries and aligning their interests with those of the Company’s stockholders.
Administration
Pursuant
to the terms of the 2020 Plan, a committee of the Board or any properly delegated subcommittee, or, if no such committee or subcommittee
thereof exists, the Board, shall administer the 2020 Plan. The Compensation Committee, which is comprised entirely of independent
directors, administers the 2020 Plan. The Compensation Committee will have the sole and plenary authority to (i) designate participants;
(ii) determine the type or types of awards; (iii) determine the number of shares to be covered by, or with respect to which payments,
rights, or other matters are to be calculated in connection with, awards; (iv) determine the terms and conditions of any award;
(v) determine whether, to what extent, and under what circumstances awards may be settled in, or exercised for, cash, shares of
Company common stock, other securities, other awards, or other property, or canceled, forfeited, or suspended and the method or
methods by which awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent,
and under what circumstances the delivery of cash, shares of Company common stock, other securities, other awards, or other property
and other amounts payable with respect to an award shall be deferred either automatically or at the election of the participant
or of the Compensation Committee; (vii) interpret, administer, reconcile any inconsistency in, correct any defect in, and/or supply
any omission in the 2020 Plan and any instrument or agreement relating to, or award granted under, the 2020 Plan; (viii) establish,
amend, suspend, or waive any rules and regulations and appoint such agents as the Compensation Committee shall deem appropriate
for the proper administration of the 2020 Plan; (ix) adopt sub-plans; and (x) make any other determination and take any other
action that the Compensation Committee deems necessary or desirable for the administration of the 2020 Plan.
The
Compensation Committee may delegate its authority to administer the 2020 Plan as permitted by law, except for award grants to
non-employee directors.
The
Compensation Committee will have the discretion to select particular performance targets in connection with awards under the 2020
Plan. Under the 2020 Plan, performance targets are specific levels of performance of the Company (and/or subsidiaries, divisions
or operational and/or business units, product lines, brands, business segments, administrative departments, or any combination
of the foregoing), which may be determined in accordance with GAAP or on a non-GAAP basis on the specified measures, including,
but not limited to:
|
●
|
debt
ratings;
|
|
●
|
pre-tax
income;
|
|
●
|
debt
to capital ratio;
|
|
●
|
pre-tax
pre-bonus income;
|
|
●
|
generation
of cash;
|
|
●
|
operating
income;
|
|
●
|
issuance
of new debt;
|
|
●
|
gross
revenue;
|
|
●
|
establishment
of new credit facilities;
|
|
●
|
net
revenue;
|
|
●
|
retirement
of debt;
|
|
●
|
net
margin;
|
|
●
|
return
measures (including, but not limited to, return on assets, return on capital, return
on equity);
|
|
●
|
pre-tax
margin;
|
|
●
|
customer
satisfaction;
|
|
●
|
share
price;
|
|
●
|
attraction
of new capital;
|
|
●
|
total
stockholder return;
|
|
●
|
cash
flow;
|
|
●
|
acquisition
or disposition of assets;
|
|
●
|
earnings
per share;
|
|
●
|
acquisition
or disposition of companies, entities or businesses;
|
|
●
|
net
income;
|
|
|
|
|
●
|
creation
of new performance and compensation
criteria
for key personnel;
|
|
●
|
recruiting
and retaining key personnel;
|
|
●
|
employee
morale;
|
|
●
|
hiring
of strategic personnel;
|
|
●
|
development
and implementation of Company
policies,
strategies and initiatives;
|
|
●
|
creation
of new joint ventures;
|
|
●
|
increasing
the Company’s public visibility and
corporate
reputation;
|
|
●
|
development
of corporate brand name;
|
|
●
|
overhead
cost reductions; or
|
|
●
|
any
combination of or variations on the foregoing.
|
Eligibility
Employees,
directors and independent contractors (except those performing services in connection with the offer or sale of the Company’s
securities in a capital raising transaction, or promoting or maintaining a market for the Company’s securities) of the Company
or its subsidiaries will be eligible to receive awards under the 2020 Plan.
Maximum
Shares Available
Awards
granted under the 2020 Plan are subject to the following limitations: (i) no more than 1,000,000 shares of common stock (the “Absolute
Share Limit”) will be available for awards under the 2020 Plan; (ii) no more than the number of shares of common stock equal
to the Absolute Share Limit may be issued in the aggregate pursuant to the exercise of incentive stock options granted under the
2020 Plan; and (iii) the maximum number of shares of common stock subject to awards granted during a single calendar year to any
non-employee director, taken together with any cash fees paid to such non-employee director during such calendar year, shall not
exceed a total value of $250,000 (calculating the value of any such awards based on the grant date fair value of such awards for
financial reporting purposes).
When
(i) an option or SAR is granted under the 2020 Plan, the maximum number of shares subject to the option or SAR will be counted
against the Absolute Share Limit as one share for every share subject to such option or SAR, regardless of the actual number of
shares (if any) used to settle such option or SAR upon exercise; and (ii) an award other than an option or SAR is granted under
the 2020 Plan, the maximum number of shares subject to the award will be counted against the Absolute Share Limit as two shares
for every share subject to such award, regardless of the actual number of shares (if any) used to settle such award. The issuance
of shares or the payment of cash upon the exercise of an award or in consideration of the cancellation or termination of an award
shall reduce the total number of shares available under the 2020 Plan, as applicable. If shares are not issued or are withheld
from payment of an award to satisfy tax obligations with respect to the award, such shares will not be added back to the Absolute
Share Limit, but rather will count against the Absolute Share Limit.
To
the extent that an award granted under the 2020 Plan or a prior plan award expires or is canceled, forfeited or terminated, in
whole or in part without issuance to the holder thereof of shares of common stock to which the award or prior plan award related
or cash or other property in lieu thereof, the unissued shares of common stock will again be available for grant under the 2020
Plan; provided that, in any such case, the number of shares again available for grant under the 2020 Plan shall be the number
of shares previously counted against the Absolute Share Limit (or, in the case of prior plan award, the number of shares that
would have been counted against the Absolute Share Limit if such prior plan award had been granted under this 2020 Plan) with
respect to such unissued shares of common stock to which such award or prior plan award related, as determined in accordance with
the terms of the 2020 Plan.
Awards
may, in the sole discretion of the Compensation Committee, be granted under the 2020 Plan in assumption of, or in substitution
for, outstanding awards previously granted by an entity directly or indirectly acquired by the Company or with which the Company
combines (“Substitute Awards”). Substitute Awards will not be counted against the Absolute Share Limit; provided,
that Substitute Awards issued in connection with the assumption of, or in substitution for, outstanding options intended to qualify
as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
“Code”) will be counted against the aggregate number of shares of common stock available for awards of incentive stock
options under the 2020 Plan. Subject to applicable stock exchange requirements, available shares of common stock under a stockholder-approved
plan of an entity directly or indirectly acquired by the Company or with which the Company combines (as appropriately adjusted
to reflect the acquisition or combination transaction) may be used for awards under the 2020 Plan and will not reduce the number
of shares of common stock available for issuance under the 2020 Plan.
Adjustments
In
the event of a merger, consolidation, reorganization, recapitalization, reorganization, stock split or dividend, or similar event
affecting the common stock, the number (including limits on shares of common stock granted) and kind of shares granted under the
2020 Plan, the Compensation Committee will make such proportionate substitution or adjustment, if any, as it deems equitable,
to any or all of the Absolute Share Limit, the number of shares of common stock or other securities of the Company that may be
issued in respect of awards or with respect to which awards may be granted and the terms of any outstanding award.
Restricted
Stock
The
Compensation Committee will be authorized to award restricted stock under the 2020 Plan. Awards of restricted stock will be subject
to the terms and conditions established by the Compensation Committee. Restricted stock is common stock that is subject to such
restrictions as may be determined by the Compensation Committee for a specified period.
RSU
Awards
The
Compensation Committee will be authorized to award RSUs in lieu of or in addition to any restricted stock awards. RSUs will be
subject to the terms and conditions established by the Compensation Committee. Each RSU will have an initial value that is at
least equal to the fair market value of a share of Company common stock on the date of grant. RSUs may be paid at such time as
the Compensation Committee may determine in its discretion, and payments may be made in a lump sum or in installments, in cash,
shares of common stock, or a combination thereof, as determined by the Compensation Committee in its discretion.
Options
The
Compensation Committee will be authorized to grant options to purchase shares of common stock that are either “qualified,”
meaning they are intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)
for incentive stock options, or “nonqualified,” meaning they are not intended to satisfy the requirements of Section
422 of the Code. Options granted under the 2020 Plan will be subject to the terms and conditions established by the Compensation
Committee. Under the terms of the 2020 Plan, the exercise price of the options will not be less than the fair market value of
our common stock at the time of grant. Options granted under the 2020 Plan will be subject to such terms, including the exercise
price and the conditions and timing of exercise, as may be determined by the Compensation Committee and specified in the applicable
award agreement. The maximum term of an option granted under the 2020 Plan will be 10 years from the date of grant (or five years
in the case of a qualified option granted to a 10% stockholder). Payment in respect of the exercise of an option may be made in
cash or by check, by surrender of unrestricted shares (at their fair market value on the date of exercise), or through a “net
exercise,” or the Compensation Committee may, in its discretion and to the extent permitted by law, allow such payment to
be made through a broker-assisted cashless exercise mechanism or by such other method as the Compensation Committee may determine
to be appropriate.
Stock
Appreciation Rights
The
Compensation Committee will be authorized to award SARs under the 2020 Plan. SARs will be subject to the terms and conditions
established by the Compensation Committee and reflected in the award agreement. A SAR is a contractual right that allows a participant
to receive, in the form of either cash, shares or any combination of cash and shares, the appreciation, if any, in the value of
a share over a certain period of time. An option granted under the 2020 Plan may include SARs, and SARs may also be awarded to
a participant independent of the grant of an option. SARs granted in connection with an option shall be subject to terms similar
to the option corresponding to such SARs.
Other
Stock-Based Awards
The
Compensation Committee will be authorized to award other stock-based awards having terms and conditions as determined by the Compensation
Committee. These awards may be granted either alone or in tandem with other awards.
Qualified
Performance-Based Awards
Restricted
stock and RSUs granted to officers and employees of the Company may depend on the degree of achievement of one or more performance
goals relative to a pre-established targeted level or levels using one or more identified performance targets. The applicable
performance period may not be less than three months nor more than 10 years.
Dividends
and Voting Rights
Participants
awarded stock options and SARs will not receive dividends or dividend equivalents or have any voting rights with respect to shares
of common stock underlying these awards prior to the issuance of any such shares. Participants that hold unearned awards subject
to performance vesting conditions (other than or in additional to the passage of time) will not receive dividends or dividend
equivalents or have any voting rights with respect to shares of common stock underlying these awards prior to the issuance of
any such shares; provided, however, that dividends and dividend equivalents may be accumulated in respect of unearned awards
and paid within 30 days after such awards are earned and become payable or distributable.
Transferability
Awards
granted under the 2020 Plan generally will be transferable only by will or the applicable laws of descent and distribution. In
certain limited circumstances, the Compensation Committee may authorize stock options, other than incentive stock options, to
be transferred to family members or trusts controlled by family members of the participant. Restricted stock may not be sold,
transferred, assigned, pledged or otherwise encumbered or disposed of until the applicable restrictions lapse.
Change
in Control
In
the event of a Change in Control (as defined in the 2020 Plan), options become immediately exercisable in full. In addition, in
such event the Compensation Committee may accelerate the termination date of the option to a date no earlier than 30 days after
notice of such acceleration is given to the participant. Upon the giving of any such acceleration notice, the option shall become
immediately exercisable in full.
A
participant’s right to SARs under an SAR agreement immediately vest as to 100% of the total number of shares covered by
the grant (i) upon termination of the grantee’s employment on account of the grantee’s death or permanent disability;
or (ii) upon the occurrence of a Change in Control.
With
respect to restricted stock and RSUs, in the event that the grantee’s status as an employee is terminated following a Change
in Control, then all unvested shares of restricted stock and RSUs will immediately vest.
Clawback
All
awards under the 2020 Plan are subject to reduction, cancellation, forfeiture or recoupment to the extent necessary to comply
with (i) any clawback, forfeiture or other similar policy adopted by the Board or the Compensation Committee and as in effect
from time to time; and (ii) applicable law.
Amendment
and Termination
The
Board may terminate or amend the 2020 Plan or any portion thereof at any time; provided, however, that the Board may not,
without stockholder approval, amend the 2020 Plan if:
|
●
|
Such
approval is necessary to comply with any regulatory requirement applicable to the 2020 Plan:
|
|
●
|
It
would materially increase the number of securities which may be issued under the 2020 Plan (except for increases expressly
provided for in the 2020 Plan; or
|
|
●
|
It
would materially modify the requirements for participation in the 2020 Plan.
|
In
addition, any such amendment that would materially and adversely affect an award holder’s rights with respect to a previously
granted and outstanding award will not to that extent be effective without the consent of the affected holder of such award.
The
Compensation Committee may terminate or amend any award agreement, to the extent consistent with the terms of the 2020 Plan and
any applicable award agreement and so long as such termination or amendment would not materially and adversely affect an award
holder’s rights with respect to a previously granted and outstanding award (unless the affected holder consents thereto);
provided, however that the Compensation Committee may not, without stockholder approval, amend or terminate an award or
award agreement to:
|
●
|
Reduce
the exercise price of any option or the strike price of any SAR,
|
|
●
|
To
cancel any outstanding option or SAR and replace it with a new option or SAR (with a lower exercise price or strike price,
as the case may be) or other award or cash payment that is greater than the intrinsic value (if any) of the canceled option
or SAR; and
|
|
●
|
Take
any other action which is considered a “repricing” for purposes of the stockholder approval rules of any securities
exchange or inter-dealer quotation system on which the securities of the Company are listed or quoted.
|
U.S.
Federal Income Tax Consequences
The
following is a general summary of the material U.S. federal income tax consequences to 2020 Plan participants and the Company
of the grant, vesting and exercise of awards under the 2020 Plan and the disposition of shares acquired pursuant to the exercise
of such awards and is based upon an interpretation of the current federal income tax laws and regulations and may be inapplicable
if such laws and regulations are changed. This summary is not intended to be a complete statement of applicable law or constitute
tax advice, nor does it address foreign, state, local and payroll tax considerations. Moreover, the U.S. federal income tax consequences
to any particular participant may differ from those described herein by reason of, among other things, the particular circumstances
of such participant. To the extent that any awards under the 2020 Plan are subject to Section 409A of the Code (“Section
409A”), the following discussion assumes that such awards will be designed to conform to the requirements of Section 409A
and the regulations promulgated thereunder (or an exception thereto). The 2020 Plan is not subject to the protective provisions
of the Employee Retirement Income Security Act of 1974, as amended, and is not qualified under Section 401(a) of the Code.
Incentive
Stock Options. Options issued under the 2020 Plan and designated as incentive stock options are intended to qualify as such
under Section 422 of the Code. Under the provisions of Section 422 of the Code and the related regulations, holders of incentive
stock options will generally incur no federal income tax liability at the time of grant or upon exercise of those options, and
the Company will not be entitled to a deduction at the time of the grant or exercise of the option. However, the difference between
the value of the common stock received on the exercise date and the exercise price paid will be an “item of tax preference,”
which may give rise to “alternative minimum tax” liability to the holder for the taxable year in which the exercise
occurs. The taxation of gain or loss upon the sale of the common stock acquired upon exercise of an incentive stock option depends,
in part, on whether the holding period of the shares of our common stock acquired through the exercise of an incentive stock option
is at least (i) two years from the date of grant of the option and (ii) one year from the date the option was exercised. If these
holding period requirements are satisfied, any gain or loss realized on a subsequent disposition of the shares will constitute
long-term capital gain or loss, as the case may be. Assuming both holding periods are satisfied, no deduction will be allowed
to us for federal income tax purposes in connection with the grant or exercise of the incentive stock option. If these holding
periods requirements are not met, then, upon such “disqualifying disposition” of the shares, the participant will
generally realize compensation, taxable as ordinary income, at the time of such disposition in an amount equal to the difference
between the fair market value of the share on the date of exercise over the exercise price, limited to the gain on the sale, and
that amount will generally be deductible by us for federal income tax purposes, subject to the possible limitations on deductibility
under Section 162(m)of the Code for compensation paid to certain executives designated thereunder. Finally, if an otherwise qualified
incentive stock option becomes first exercisable in any one year for shares having an aggregate value in excess of $100,000 (based
on the grant date value), the portion of the incentive stock option in respect of those excess shares will be treated as a non-qualified
stock option for federal income tax purposes.
Non-qualified
Stock Options. No income will generally be realized by a participant upon grant of a non-qualified stock option. Upon the
exercise of a non-qualified stock option, the participant will recognize ordinary compensation income in an amount equal to the
excess, if any, of the fair market value of the underlying exercised shares over the option exercise price paid at the time of
exercise. We will be able to deduct this same amount for U.S. federal income tax purposes, but such deduction may be limited under
Section 162(m) of the Code for compensation paid to certain executives designated thereunder. Upon a subsequent disposition of
the shares acquired under a non-qualified stock option, the participant will realize short-term or long-term capital gain (or
loss) depending on the holding period. The capital gain (or loss) will be short-term if the shares are disposed of within one
year after the non-qualified stock option is exercised, and long-term if shares were held more than 12 months as of the sale date.
Restricted
Stock. A participant will normally not be required to recognize income for federal income tax purposes upon the grant of an
award of restricted stock, nor is the Company entitled to any deduction, to the extent that the shares awarded have not vested
(i.e., are no longer subject to a substantial risk of forfeiture). On the date an award of restricted stock is no longer subject
to a substantial risk of forfeiture, the participant will compensation taxable as ordinary income in an amount equal to the difference
between the fair market value of the vested shares on that date and the amount the participant paid for such shares, if any, unless
the participant made an election under Section 83(b) of the Code to be taxed at the time of grant. The participant may, however,
make an election under Section 83(b) of the Code, within 30 days following the grant of the restricted stock award, to be taxed
at the time of the grant of the award based on the difference between the fair market value of the shares on the date of grant
and the amount the participant paid for such shares, if any. If the shares subject to such election are subsequently forfeited,
the participant will not be entitled to any deduction, refund or loss for tax purposes with respect to the forfeited shares. We
will be able to deduct, at the same time as it is recognized by the participant, the amount of taxable compensation to the participant
for U.S. federal income tax purposes, but such deduction may be limited under Section 162(m) of the Code for compensation paid
to certain executives designated thereunder. Upon the sale of the vested shares, the participant will realize short-term or long-term
capital gain or loss depending on the holding period. The holding period generally begins when the restriction period expires.
If the recipient timely made a Section 83(b) election, the holding period commences on the date of the grant.
Deferred
Stock Units and Restricted Stock Units. A participant will not be subject to federal income tax upon the grant of a deferred
stock unit award or a restricted stock unit award, and the Company is not entitled to a deduction at the time of grant. Rather,
upon the delivery of shares or cash pursuant to a deferred stock unit award or a restricted stock unit award, the participant
will generally have compensation taxable at ordinary income rates in an amount equal to the fair market value of the number of
shares (or the amount of cash) actually received with respect to the settlement of the award of such units. We will generally
be able to deduct the amount of the ordinary income realized by the participant for U.S. federal income tax purposes, but the
deduction may be limited under Section 162(m) of the Code for compensation paid to certain executives designated thereunder. If
the participant receives shares upon settlement then, upon disposition of such shares, appreciation or depreciation after the
settlement date is treated as either short-term or long-term capital gain or loss, depending on how long the shares have been
held.
SARs.
SARs are treated very similarly to non-qualified options for tax purposes. No income will normally be realized by a participant
upon grant of a SAR. Upon the exercise of a SAR, the participant will recognize compensation taxable as ordinary income in an
amount equal to either: (i) the cash received upon exercise; or (ii) if shares are received upon the exercise of the SAR, the
fair market value of the shares received in respect of the SAR. We will be able to deduct this same amount for U.S. federal income
tax purposes, but such deduction may be limited under Section 162(m) of the Code for compensation paid to certain executives designated
thereunder.
Performance
Awards. A participant generally will not recognize income upon the grant of a performance award. Upon payment of the performance
award, the participant will recognize ordinary income in an amount equal to the cash received or, if the performance award is
payable in shares, the fair market value of the shares received. When the participant recognizes ordinary income upon payment
of a performance award, the Company generally will be entitled to a tax deduction in the same amount.
Other
Stock-Based Awards. A participant will generally have compensation taxable as ordinary income for federal income tax purposes
in an amount equal to the difference between the fair market value of the shares on the date the award is settled (whether in
shares or cash, or both) over the amount the participant paid for such shares, if any. We will generally be able to deduct, at
the same time as it is recognized by the participant, the amount of taxable compensation to the participant for U.S. federal income
tax purposes, but such deduction may be limited under Section 162(m) for compensation paid to certain executives designated thereunder.
Consequences
of Change of Control. If a change of control of the Company causes awards under the 2020 Plan to accelerate vesting or is
deemed to result in the attainment of performance goals, certain participants could, in some cases, be considered to have received
“excess parachute payments,” which could subject certain participants to a 20% excise tax on the excess parachute
payments and result in a disallowance of the Company’s deductions under Section 280G of the Code.
Section
409A. Section 409A applies to compensation that individuals earn in one year but that is not paid until a future year. This
is referred to as non-qualified deferred compensation. Section 409A, however, does not apply to qualified plans (such as a Section
401(k) plan) and certain welfare benefits. If deferred compensation covered by Section 409A meets the requirements of Section
409A, then Section 409A has no effect on the individual’s taxes. The compensation is taxed in the same manner as it would
be taxed if it were not covered by Section 409A. If a deferred compensation arrangement does not meet the requirements of Section
409A, the compensation is subject to accelerated taxation in the year in which such compensation is no longer subject to a substantial
risk of forfeiture and certain additional taxes, interest and penalties, including a 20% additional income tax. Awards of stock
options, SARs, restricted stock units and performance awards under the 2020 Plan may, in some cases, result in the deferral of
compensation that is subject to the requirements of Section 409A. Awards under the 2020 Plan are intended to comply with Section
409A, the regulations issued thereunder or an exception thereto. Notwithstanding, Section 409A may impose upon a participant certain
taxes or interest charges for which the participant is responsible. Section 409A does not impose any penalties on the Company
and does limit the Company’s deduction with respect to compensation paid to a participant.
Section
162(m). The Company generally may deduct any compensation or ordinary income recognized by the recipient of an award under
the 2020 Plan when recognized, subject to the limits of Section 162(m) of the Code (“Section 162(m)”). Prior to 2018,
Section 162(m) imposed a $1 million limit on the amount a public company may deduct for compensation paid to a Company’s
Chief Executive Officer or any of the Company’s three other most highly compensated executive officers (other than the Chief
Financial Officer) who were employed as of the end of the year. This limitation did not apply to compensation that met Code requirements
for “qualified performance-based compensation.” The performance-based compensation exemption, the last day of the
year determination date, and the exemption of the Chief Financial Officer from Code Section 162(m)’s deduction limit have
all been repealed under the Tax Cuts and Jobs Act of 2017 (“Tax Reform”), effective for taxable years beginning after
December 31, 2017, such that awards paid under the 2020 Plan to our covered executive officers may not be deductible for such
taxable years due to the application of the $1 million deduction limitation. However, under Tax Reform transition relief, compensation
provided under a written binding contract in effect on November 2, 2017 that is not materially modified after that date continues
to be subject to the performance-based compensation exception. As in prior years, while deductibility of executive compensation
for federal income tax purposes is among the factors the Compensation Committee considers when structuring our executive compensation,
it is not the sole or primary factor considered. Our Board and the Compensation Committee retain the flexibility to authorize
compensation that may not be deductible if they believe it is in our best interests.
Tax
Withholding. The Company and its affiliates have the right to deduct or withhold, or require a participant to remit to the
Company and its affiliates, an amount sufficient to satisfy federal, state and local taxes (including employment taxes) required
by law to be withheld with respect to any exercise, lapse of restriction or other taxable event arising with respect to awards
under the 2020 Plan.
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
|
|
|
-
|
|
|
$
|
N/A
|
|
|
|
1,500,000
|
(1)
|
Equity
compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
-
|
|
|
$
|
-
|
|
|
|
1,500,000
|
|
(1)
This represents (i) 500,000 shares of common stock issuable pursuant to the 2018 Equity Incentive Plan (the “2018 Plan”),
and (ii) 1,000,000 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, 500,000 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 500,000 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, 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
as of May 31, 2020 under the 2020 Plan.
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The
following table sets forth information regarding the beneficial ownership of our common stock as of August 31, 2020, by:
|
●
|
Each
person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock;
|
|
●
|
Each
of our current named executive officers and directors that beneficially own shares of our common stock; and
|
|
●
|
All
of our executive officers and directors as a group.
|
Information
with respect to beneficial ownership has been furnished by each director, executive officer or 5% stockholder, as the case may
be. Unless otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect
to all shares of common stock beneficially owned by them.
Name of Beneficial Owner
|
|
Amount and
Nature of
Beneficial Ownership
|
|
|
Percent of
Class (1)
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
|
|
Jed Kaplan (2)
|
|
|
1,561,936
|
|
|
|
19.0
|
%
|
Roman Franklin (3)
|
|
|
527,767
|
|
|
|
6.5
|
%
|
Donald R. Caldwell (4)
|
|
|
97,000
|
|
|
|
1.2
|
%
|
Max Hooper (5)
|
|
|
29,500
|
|
|
|
*
|
|
Frank Leavy (6)
|
|
|
27,625
|
|
|
|
*
|
|
Edward Leonard Jaroski (7)
|
|
|
128,500
|
|
|
|
1.6
|
%
|
William H. Herrmann, Jr. (8)
|
|
|
57,309
|
|
|
|
*
|
|
All directors and officers as a group (7 persons) (9)
|
|
|
2,429,637
|
|
|
|
29.2
|
%
|
|
|
|
|
|
|
|
|
|
Principal Shareholders (more than 5%) Not Listed Above:
|
|
|
|
|
|
|
|
|
Polar Asset Management Partners Inc. (10)
|
|
|
738,335
|
|
|
|
9.0
|
%
|
*
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 August 31,
2020. On August 31, 2020, there were 8,171,433 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 August 31, 2020. Common stock warrants and derivative securities held
by other stockholders are disregarded in this calculation. Therefore, the denominator
used in calculating beneficial ownership among our stockholders may differ. Unless we
have indicated otherwise, each person named in the table has sole voting power and sole
investment power for the shares listed opposite such person’s name.
|
|
(2)
|
Includes
80,000 shares of our restricted common stock that have vested or will vest within 60
days of August 31, 2020, and 50,000 shares of common stock issuable upon exercise
of 50,000 warrants with an exercise price of $4.00 which expire on February 24, 2024
that have vested or will vest within 60 days of August 31, 2020.
|
|
|
|
|
(3)
|
Includes
24,000 shares of our restricted common stock that have vested or will vest within 60 days of August 31, 2020.
|
|
|
|
|
(4)
|
Includes
20,000 shares of our common stock issuable upon exercise of 20,000 warrants with an exercise price of $11.50 which expire
on May 22, 2024 that have vested or will vest within 60 days of August 31, 2020.
|
|
|
|
|
(5)
|
Includes
14,500 shares of common stock owned directly by Merging Traffic, Inc., 10,000 shares of our common stock issuable upon exercise
of 10,000 warrants owned directly by Merging Traffic, Inc. with an exercise price of $11.50 which expire on May 22, 2024 that
have vested or will vest within 60 days of August 31, 2020, and 5,000 shares of our common stock owned directly by
Mr. Hooper. Mr. Hooper is Managing Director of Merging Traffic, Inc.
|
|
|
|
|
(6)
|
Includes
7,500 shares of our common stock issuable upon exercise of 7,500 warrants with an exercise price of $11.50 which expire on
May 22, 2024 that have vested or will vest within 60 days of August 31, 2020.
|
|
|
|
|
(7)
|
Includes
60,000 shares of our common stock issuable upon exercise of 60,000 warrants with an exercise price of $4.00 which expire on
February 24, 2024 that have vested or will vest within 60 days of August 31, 2020.
|
|
|
|
|
(8)
|
Includes
10,000 shares of our common stock issuable upon exercise of 10,000 warrants with an exercise price of $11.50 which expire
on May 22, 2024 that have vested or will vest within 60 days of August 31, 2020.
|
|
|
|
|
(9)
|
Includes
Jed Kaplan, Roman Franklin, Donald R. Caldwell, Max Hooper, Frank Leavy, and Edward Leonard Jaroski.
|
|
(10)
|
The principal office of the stockholder is 401
Bay Street, Suite 1900, PO Box 19, Toronto, Ontario M5H 2Y4, Canada.
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director Independence
|
Certain
Relationships and Related 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.
Registration
Rights
We
have entered into a registration rights agreement with respect to the founder shares and private placement units (and their constituent
securities). Pursuant to the registration rights agreement, we are required to register the founder shares and private placement
units (and their constituent securities) for sale under the Securities Act. Holders of these securities are entitled to make up
to three demands that we 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 us. We will bear the costs and expenses of filing any such
registration statements.
Administrative
Services
We
agreed, commencing on the effective date of the IPO through the earlier of our 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, we have 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.
Cash
Balance
We
maintain our cash balance at a financial services company that is owned by an officer of our company.
Restricted
Stock Awards to Certain Officers
On
March 27, 2019, pursuant to a Restricted Stock Award, we granted Jed Kaplan, our Chief Executive Officer and interim Chief Financial
Officer and a member of our board of directors, 120,000 shares of our restricted common stock. Such shares vest over the next
nine months. Also, on March 27, 2019, pursuant to a Restricted Stock Award, we granted Roman Franklin, our President and
a member of our board of directors, 36,000 shares of our restricted common stock. Such shares vest over the next nine months also.
Lastly, on March 27, 2019, pursuant to a Restricted Stock Award and collectively with the Kaplan Restricted Stock Award and the
Franklin Restricted Stock Award, we granted Steve Grossman, President of Simplicity Esports, LLC, a wholly owned subsidiary of
our company, 24,000 shares of our restricted common stock. Such shares also vest over the next nine months.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan,
Franklin and Grossman on December 31, 2018.
Director
Independence
Since we are currently
quoted on the OTCQB tier of the OTC Markets Group, we are not required to comply with the corporate governance rules of a national
exchange, such as the NYSE American (“NYSE”), or national quotation system, such as the Nasdaq, and instead
may comply with less stringent corporate governance standards of the OTCQB. The OTCQB does not require any of its members to establish
any committees comprised of members of our board of directors, including an Audit Committee, a Compensation Committee or a Nominating
Committee, any committee performing a similar function. Instead, the functions of those committees may be undertaken by the board
of directors as a whole. Unlike the requirements of the NYSE or Nasdaq, the OTCQB does not require that a majority of our
board members be independent and does not require that all or any portion of our board of directors include “independent”
directors, nor are we currently required to establish or maintain an Audit Committee or other committee of our board of directors.
Although we may comply with less stringent corporate governance standards while listed on the OTCQB, we have elected to voluntarily
comply with the corporate governance rules of the NYSE American in order to provide the same protections afforded to stockholders
of companies that are subject to all of the corporate governance rules of the NYSE American. Our board of directors has
determined that Messrs. Caldwell, Leavy, Jaroski and Herrmann and Dr. Hooper are “independent directors” as defined
in the NYSE American listing standards and applicable SEC rules. Our independent directors will have regularly scheduled
meetings at which only independent directors are present.
Item
14.
|
Principal
Accountant Fees and Services.
|
The
aggregate fees billed for the fiscal years ended May 31, 2020 and 2019 for (i) professional services rendered by our principal
accountant for the audit of our annual financial statements and review of financial statements included in Form 10-Q (“Audit
Fees”), (ii) assurance and related services by the principal accountant that are reasonably related to the performance of
the audit or review of the financial statements and not reportable under Audit Fees (the “Audit Related Fees”), (iii)
tax compliance, advice, and planning (“Tax Fees”), and (iv) other products or services provided (“Other Fees”)
were:
|
|
Year
Ended
May
31, 2020
|
|
|
Year
Ended
May
31, 2019
|
|
Audit
Fees
|
|
$
|
45,000
|
|
|
$
|
30,000
|
|
Audit
Related Fees
|
|
$
|
-
|
|
|
$
|
12,500
|
|
Tax
Fees
|
|
$
|
-
|
|
|
$
|
-
|
|
All
Other Fees
|
|
$
|
-
|
|
|
$
|
-
|
|
Total
|
|
$
|
45,000
|
|
|
$
|
42,500
|
|
Our
audit committee has determined that the services provided by Prager Metis are compatible with maintaining the independence of
the auditor as our independent registered public accounting firm.
Pre-Approval
Policy
The
audit committee reviews and approves the audit and non-audit services to be provided by our independent registered public accounting
firm during the year, considers the effect that performing those services might have on audit independence and approves management’s
engagement of our independent registered public accounting firm to perform those services. The audit committee reserves the right
to appoint a different independent registered public accounting firm at any time during the year if the board of directors of
the Company and the audit committee believe that a change is in the best interest of the Company and our stockholders.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
On
August 21, 2018, the Company deposited into the Trust Account an aggregate of $303,610 (including interest earned on the funds
in the Trust Account available for withdrawal), representing $0.058 per public share. As a result of such payment, the Company
extended the period of time it had to consummate a Business Combination by three months to November 21, 2018.
On
November 20, 2018, the parties consummated the initial Business Combination.
Upon
consummation of the Business Combination, the Company issued 208,000 restricted shares to Chardan Capital Markets in consideration
for advisory services provided. These restricted shares are valued at $10.21 per share totaling $2,125,000 and are on the statement
of operations included in general and administrative expenses.
At
the special meeting of stockholders held on November 9, 2018, holders of 4,448,260 shares of the Company’s common stock
sold in its Initial Public Offering (“Public Shares”) exercised their right to redeem those shares for cash
at a price of $10.2187363 per share, for an aggregate of approximately $45,455,596. Immediately after giving effect to the initial
Business Combination (including as a result of the redemptions described above) the issuance of 2,000,000 shares of common stock
to the Smaaash founders, the issuance of 520,000 shares of common stock upon conversion of the rights at the Closing and the issuance
of 208,000 shares of common stock to Chardan Capital Markets as consideration for services), there were 5,119,390 shares of common
stock and warrants to purchase approximately 5,461,500 shares of common stock issued and outstanding. Upon the Closing, the Company’s
rights ceased to exist, and its common stock and warrants began trading on The Nasdaq Stock Market (“Nasdaq”).
On the Closing Date, the Company entered into
a master franchise agreement (“Master Franchise Agreement”) and a master license and distribution agreement (“Master
Distribution Agreement”) with Smaaash. As of 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution,
which at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these
accounts and management believes the Company is not exposed to significant risks on such accounts.
Financial
Instruments
The fair value of the Company’s assets
and liabilities, which qualify as financial instruments under 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Amendments
to Forward Purchase Agreements and Warrants
On
December 20, 2018, the Company, Polar, K2 and the Escrow Agent, entered into an Amendment (the “Amendment”), pursuant
to which, among other things, the stock purchase agreements with Polar and K2 were amended to (x) reduce the purchase price per
share payable by the Company at the closing of the Stock Sales from $11.23 per share to (1) first $6.00 per share up to 20% of
the original number of Shares (as defined in the respective Purchase Agreement), (2) then $5.00 per remaining share up to 20%
of the original number of Shares, (3) then $4.00 per remaining share up to 20% of the original number of Shares, (4) then $3.00
per remaining Share up to 20% of the original number of Shares, and (5) then $2.00 per remaining Share up to 20% of the original
number of Shares, (y) to extend the outside date of the closing of the Stock Sales until January 18, 2019, and (z) to authorize
the issuance of $3,542,700 and $1,590,600 from the Escrow Account to Polar and K2, respectively, as partial payment for the Shares
prior to the final closing of the Stock Sales.
Investments
Investments
in non-consolidated entities are accounted for using the equity method or cost basis depending upon the level of ownership and/or
the Company’s ability to exercise significant influence over the operating and financial policies of the investee. When
the equity method is used, investments are recorded at original cost and adjusted periodically to recognize the Company’s
proportionate share of the investees’ net income or losses after the date of investment. When net losses from an investment
accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional losses
are not provided for. The Company resumes accounting for the investment under the equity method if the entity subsequently reports
net income and the Company’s share of that net income exceeds the share of net losses not recognized during the period the
equity method was suspended. Investments are written down only when there is clear evidence that a decline in value that is other
than temporary has occurred.
Investments
in equity securities that do not have readily determinable fair values and do not qualify for consolidation or the equity method
are carried at cost. Dividends received from those companies are included in other income. Dividends received in excess of the
Company’s proportionate share of accumulated earnings are applied as a reduction of the cost of the investment. Other than
temporary impairments to fair value are charged against current period income. Our investments in privately held entities are
accounted for under the cost method. During the quarter ended February 28, 2019 the Company recognized $150,000 of impairment
expense related to the Smaaash acquisition.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Each
holder of a Right received one-tenth (1/10) of one share of common stock upon consummation of the Business Combination. No fractional
shares were issued upon exchange of the Rights. No additional consideration was paid by a holder of Rights in order to receive
its additional shares upon consummation of the Business Combination as the consideration related thereto has been included in
the Unit purchase price paid for by investors in the Initial Public Offering.
The
Company granted the underwriters a 45-day option to purchase up to 750,000 additional Public Units to cover any over-allotment,
at the initial public offering price less any underwriting discounts and commissions. On September 13, 2017, the underwriters
purchased 200,000 additional Public Units for gross proceeds of $2,000,000, less commissions of $110,000, of which
$70,000 are deferred.
The
Company issued Maxim Group LLC (“Maxim”), as compensation for the Initial Public Offering, an aggregate of 52,000
shares, including 2,000 shares issued in connection with the partial exercise of the over-allotment option. The Company accounted
for the fair value of these shares as an expense of the Initial Public Offering resulting in a charge directly to stockholders’
equity.
Settlement
Agreement
On
November 20, 2018, the Company entered into a settlement and release agreement (“Settlement Agreement”) with Maxim.
Pursuant to the Settlement Agreement, the Company made a cash payment of $20,000 to Maxim and issued the Note in favor of Maxim
in order to settle the payment obligations of the Company under the underwriting agreement dated August 16, 2017, by and between
the Company and Maxim. The Company also agreed to remove the restrictive legends on an aggregate of 52,000 shares of its common
stock held by Maxim and its affiliate. See “Note Payable” under Note 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
On
September 13, 2017, the Sponsor purchased 7,000 additional Private Units for gross proceeds of $70,000 upon the partial
exercise of the over-allotment option.
NOTE
4 - PROPERTY, PLANT AND EQUIPMENT
The
following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
|
|
May
31,
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
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
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
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.
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Note
Payable
On
November 20, 2018, the Company paid its underwriter $20,000 and issued its underwriter a secured demand promissory note (the “Note”)
in the amount of $1,800,000. The Note accrued interest at 8% per annum from the date of the Note through and including May 20,
2019, 12% per annum from and including May 21, 2019, through and including August 20, 2019, and 15% per annum from and
including August 21, 2019, through and including November 20, 2019. If a late payment had occurred and continued, the interest
rate would have increased to 12% per annum from the date of the Note through and including August 20, 2019 and 18% per annum from
after August 21, 2019. If a late payment had remained outstanding for over 48 hours, Maxim could have required the Company to
redeem all or any part of the Note at a redemption price equal to 125% of the Alternate Payment Amount.
The
principal and interest of the Note was payable upon demand by Maxim or from time to time, in accordance the following schedule:
|
(i)
|
one
third of the principal, accrued and unpaid interest and any late charges on May 20, 2019;
|
|
(ii)
|
one
third of the principal, accrued and unpaid interest and any late charges on August 20, 2019; and
|
|
(iii)
|
one
third of the principal, accrued and unpaid interest and any late charges on November 20, 2019.
|
The
Note was secured by a first priority security interest in all personal property and assets of the Company excluding the assets
held in escrow with respect to (i) that certain stock purchase agreement with Polar, pursuant to which Polar agreed to sell up
to 490,000 shares of the Company’s common stock to the Company thirty days after the consummation of the Business Combination
and (ii) that certain stock purchase agreement with K2, pursuant to which K2 agreed to sell up to 220,000 shares of the Company’s
common stock to the Company thirty days after the consummation of the Business Combination.
The
amount payable under the Note could also have been paid in shares of common stock of the Company or securities convertible or
exercisable into shares of common stock of the Company (the “Alternate Equity Payment”) if and only if the Company
and Maxim mutually agree on both the purchase price and, if applicable, the conversion and/or exercise price of each security
of the Company issued in such Alternative Equity Payment. Otherwise, the payment should be made in cash only.
So
long as any amount under the Note remained outstanding, all cash proceeds received by the Company from any sales of its securities
was to be used to repay this Note.
Convertible
Note Payable
On
December 20, 2018, the Company entered into a securities exchange agreement (“Exchange Agreement”) with Maxim Group
LLC (the “Holder”). Pursuant to the terms of the Exchange Agreement, the Holder agreed to surrender and exchange the
Note. In exchange, the Company issued to the Holder a Series A-1 Exchange Convertible Note in the principal amount of $500,000
(the “Series A-1 Note”) and a Series A-2 Exchange Convertible Note in the principal amount of $1,000,000 (the “Series
A-2 Note,” and collectively with Series A-1 Note, the “Exchange Notes”). 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
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).
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.
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 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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
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.
|
|
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.
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).
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.