NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
NOTE
1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity
Esports and Gaming Company (the “Company,” “we,” or “our”),
was 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 owned subsidiary, Simplicity Esports, LLC, acquired on January 2, 2019, 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 League of Legends, 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.
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 are quoted on the OTCQB under the symbols “WINR” and “WINRW,” respectively.
The Company is currently list on the OTC Market under the symbol “WINR”.
Through
our wholly owned subsidiary, PLAYlive Nation, Inc. (“PLAYlive”), acquired on July 29, 2019, the Company has a network
of franchised Gaming Centers. As November 30, 2020, approximately 40 locations were considered to be operational, in various states
including Arizona, California, Idaho, Florida, Maryland, Michigan, Mississippi, Montana, Oregon, South Carolina, Texas, Utah and
Washington. As of November 30, 2020, a number of these locations were unable to resume regular operations as the result of restrictions
imposed by municipalities related to COVID-19 (Note 2). 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.
On
August 17, 2020, the Company filed a Certificate of Amendment to increase the authorized shares of common stock from 20,000,000
to 36,000,000. Accordingly, the Company’s authorized capital stock consists of (i) 36,000,000 shares of common stock, and
(ii) 1,000,000 shares of preferred stock.
On
September 28, 2020, the Company’s board of directors approved the reverse stock split in a ratio of 1-for-6 and on September
29, 2020, the Company filed an amended and restated certificate of amendment to its Third Amended and Restated Certificate of
Incorporation, as amended (the “Certificate of Incorporation”), implementing the reverse stock split in a ratio of
1-for-6, effective October 13, 2020. On October 12, 2020, the Company filed a certificate of amendment to the Certificate of Incorporation
changing the effective date of the foregoing reverse stock split to November 4, 2020. On November 17, 2020, the Company filed
a certificate of amendment to the Certificate of Incorporation, changing the reverse stock split to a ratio of 1-for-8. The reverse
stock split, in the ratio of 1-for-8, became effective on November 20, 2020. The reverse stock split is intended to allow the
Company to meet the minimum share price requirement of the Nasdaq Capital Market. There is no assurance that our listing application
will be approved by the Nasdaq Capital Market.
All
share and per share data in the accompanying condensed consolidated financial statements have been retroactively restated to reflect
the effect of the reverse stock split.
In
connection with the new business initiatives, the Company has formed the following subsidiaries:
|
●
|
Simplicity
Esports, LLC, a limited liability company incorporated in Florida and a wholly owned subsidiary of the Company.
|
|
●
|
PLAYlive
Nation, Inc., company incorporated in Delaware and a wholly owned subsidiary of the Company.
|
|
●
|
PLAYlive
Nation Holdings, LLC, a limited liability company incorporated, and a wholly owned subsidiary of the Company.
|
|
●
|
Simplicity
One Brasil Ltd, a company incorporated under the laws of Brazil and a 76% owned subsidiary of the Company.
|
|
●
|
Simplicity
Happy Valley, LLC, a limited liability company incorporated in Oregon and a 79% owned subsidiary of the Company.
|
|
●
|
Simplicity
Redmond, LLC, a limited liability company incorporated in Washington and a 79% owned subsidiary of the Company.
|
|
●
|
Simplicity
El Paso, LLC, a limited liability company incorporated in Texas and is 51% owned by the Company (see Note 5).
|
|
●
|
Simplicity
Union Gap, LLC, a limited liability company incorporated in Washington and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Kennewick, LLC, a limited liability company incorporated in Washington and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Humble, LLC, a limited liability company incorporated in Texas and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Frisco, LLC, a limited liability company incorporated in Texas and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Billings, LLC. a limited liability company incorporated in Montana and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Brea, LLC. a limited liability company incorporated in California and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Santa Rosa, LLC, a limited liability company incorporated in California and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
St. Petersburg, LLC, a limited liability company incorporated in Florida and is wholly owned by the Company (see Note 5).
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”).
Certain information or footnote disclosures normally included in condensed consolidated financial statements prepared in accordance
with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly,
they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results
of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements
include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the condensed
consolidated financial position, operating results and cash flows for the periods presented.
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual
Report on Form 10-K for the year ended May 31, 2020, as filed with the SEC on August 31, 2020. The interim results for
the six months ended November 30, 2020, are not necessarily indicative of the results to be expected for the year ending May 31,
2021 or for any future interim periods.
Emerging
Growth Company
Section
102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from
being required to comply with new or revised financial accounting standards until private companies (that is, those that have
not had a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), declared effective
or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect
to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but
any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which
means that when a standard is issued or revised and it has different application dates for public or private companies, the Company,
as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
Basis
of Consolidation
The
condensed consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries and majority-owned
subsidiaries and all 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 as of November 30, 2020 and May 31, 2020.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts
receivable. Cash and cash equivalents 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 through November 30, 2020.
Fair
Value of Financial Instruments and Fair Value Measurements
FASB
ASC 820 - Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date. FASB ASC 820 requires
disclosures about the fair value of all financial instruments, whether or not recognized, for financial statement purposes. Disclosures
about the fair value of financial instruments are based on pertinent information available to the Company on November 30, 2020.
Accordingly, the estimates presented in these financial statements are not necessarily indicative of the amounts that could be
realized on disposition of the financial instruments. FASB ASC 820 specifies a hierarchy of valuation techniques based on whether
the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent
sources, while unobservable inputs reflect market assumptions. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level
3 measurement).
The
three levels of the fair value hierarchy are as follows:
|
Level
1—Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement
date.
|
|
|
|
Level
2—Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical
or similar assets and liabilities in markets that are not active, inputs other than quoted prices that are observable, and
inputs derived from or corroborated by observable market data.
|
|
|
|
Level
3—Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the
market participants would use in pricing the asset or liability based on the best available information.
|
The
carrying amounts reported in the unaudited condensed consolidated balance sheets for cash, due from and to related parties, prepaid
expenses, accounts payable and accrued liabilities approximate their fair market value based on the short-term maturity of these
instruments.
Foreign
Currencies
Revenue
and expenses are translated at average rates of exchange prevailing during the year.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
Use
of Estimates
The
preparation of condensed consolidated 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 condensed consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates. Significant estimates during the six months ended
November 30, 2020 and 2019 include estimates for allowance for doubtful accounts on accounts receivable, the estimates for obsolete
or slow-moving inventory, the useful life of property and equipment, assumptions used in assessing impairment of long-term assets,
the estimate of the fair value of the right of use asset and lease liability, the value of beneficial conversion features, and
the fair value of non-cash equity transactions.
Revenue
Recognition
The
Company follows Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers
(“ASC 606”). This standard establishes a single comprehensive model for entities to use in accounting for revenue
arising from contracts with customers and supersedes most of the existing revenue recognition guidance. ASC 606 requires an entity
to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional disclosures.
The
Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product
sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the
Company expects to receive in exchange for transferring goods and services. Our revenue is derived from the three sources listed
below.
Deferred
Revenues
Deferred
revenues are classified as current and 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 November 30, 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. As of November 30, 2020, management has recorded an allowance
for doubtful accounts of $139,867.
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 they benefit future periods. The Company examines the possibility of decreases in the value
of these assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
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 are
included in intangible assets on our condensed consolidated balance sheet and amortized on a straight-line basis when placed into
service over their 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. We have assessed goodwill and qualitative considerations indicated
no impairment.
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
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. The Company adopted ASU 2018-07 on January 1, 2019. The adoption of ASU 2018 did not have any
material impact on the Company’s consolidated financial statements.
Related
parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal with if one party controls or can significantly influence the management or operating policies of the
other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
Leases
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The
updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the
updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue
guidance in ASC 606. The updated guidance is effective for interim and annual periods beginning after December 15, 2018.
On
January 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before
the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain
leases; and (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date,
at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company’s assessment
is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially
all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of
the asset. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone
price to determine the lease payments. The Company has elected not to recognize right-of-use (“ROU”) assets and lease
liabilities for short-term leases that have a term of 12 months or less.
Operating
lease ROU assets represents the right to use the leased asset for the lease term
and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease
term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based
on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum
lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses
in the condensed consolidated statements of operations.
Basic
Loss Per Share
The
Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Basic loss per share
is calculated by dividing the Company’s net loss by the weighted average number of common shares outstanding during the
period. Diluted loss per share is calculated by dividing the Company’s net loss by the diluted weighted average number of
shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of
shares adjusted for any potentially dilutive debt or equity. 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. The
following potentially dilutive equity securities outstanding as of November 30, 2020 and 2019 were not included in the computation
of dilutive loss per common share because the effect would have been anti-dilutive:
|
|
November
30,
|
|
|
|
2020
|
|
|
2019
|
|
Stock warrants
|
|
|
820,055
|
|
|
|
803,001
|
|
Convertible
notes
|
|
|
108,696
|
|
|
|
64,750
|
|
Total
|
|
|
928,751
|
|
|
|
867,751
|
|
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 consolidated 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 consolidated financial statements recognition
and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by taxing authorities. As of November 30, 2020 and May 31,
2020, the Company had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements.
The Company recognizes interest and penalties related to uncertain income tax positions in other expense. However, no such interest
and penalties were recorded as of November 30, 2020.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
Recently
Issued and Recently Adopted 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 is summary of recent accounting developments.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models
required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument
with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required
for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the
exception. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective
for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is
permitted. The Company is currently evaluating the impact of the adoption of the standard on the condensed consolidated financial
statements.
The
Company periodically reviews new accounting standards that are issued. Although some of these accounting standards may be applicable
to the Company, the Company has not identified any other new standards that it believes merit further discussion, and the Company
expects that none would have a significant impact on its financial statements.
Going
Concern, Liquidity and Management’s Plan
The
Company’s unaudited condensed 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 unaudited condensed consolidated financial statements, the Company has an accumulated deficit, working capital
deficit of and a net loss of $7,855,418, $2,670,387 and $1.684.793, respectively, as of November 30, 2020. Management believes
that these matters raise substantial doubt about the Company’s ability to continue as a going concern for twelve months
from the issuance date of this report.
The
Company has commenced operations and has begun to generate revenue; however, the Company’s cash position may not be sufficient
to support the Company’s daily operations. Management intends to raise additional funds by way of private and/or public
offerings. 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
unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable
to continue as a going concern.
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because COVID-19 infections have been reported
throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations
and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may
be issued in the future. As a result, all of our corporate and franchised Simplicity Gaming Centers were closed effective April
1, 2020. We commenced reopening Simplicity Gaming Centers as of May 1, 2020 and have since reopened ten corporate and 11
franchised Simplicity Gaming Centers as of January 14, 2021, the majority of which are operating at restricted capacity
based on local COVID-19 regulations. Although our franchise agreements with franchisees of Simplicity Gaming Centers require
a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised Simplicity Gaming Centers are
operating, there is a potential risk that franchisees of Simplicity Gaming Centers will default in their obligations to pay their
minimum monthly royalty payment to us resulting in either an increase in accounts receivables or a bad debt expense where account
receivables are no longer collectible due to franchisee’s inability to pay the minimum monthly royalty payments owed by
the franchisee. We have not written off as bad debt any accounts receivables attributable to franchisee minimum monthly royalty
payments owed during the COVID-19 pandemic. Notwithstanding, it is unclear exactly how much of the increase in accounts receivables
is attributable to the impact of COVID-19. For the months of July and August 2020, we have waived the minimum monthly royalty
payment obligations for the months of July and August 2020 and are instead billing the franchisees a true-up of 6% of gross sales
without a minimum.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The measures taken to date have negatively
impacted the Company’s business during the six months ended November 30, 2020 and will potentially continue
to impact the Company’s business. Management expects that all of its business segments, across all of its geographies, will
be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business and the
duration for which it may have an impact cannot be determined at this time.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
NOTE
3 — PROPERTY AND EQUIPMENT
The
following is a summary of property and equipment—at cost, less accumulated depreciation:
|
|
November
30, 2020
|
|
|
May
31, 2020
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
110,849
|
|
|
$
|
52,189
|
|
Property and
equipment
|
|
|
631,424
|
|
|
|
243,314
|
|
Total cost
|
|
|
742,273
|
|
|
|
295,503
|
|
Less accumulated
depreciation
|
|
|
(136,019
|
)
|
|
|
(62,770
|
)
|
Net
property and equipment
|
|
$
|
606,254
|
|
|
$
|
232,733
|
|
During
the six months ended November 30, 2020 and 2019, the Company recorded depreciation expense of $73,249 and $21,148, respectively
NOTE
4 — INTANGIBLE ASSETS
The
following table sets forth the intangible assets, including accumulated amortization as of November 30, 2020:
|
|
November
30, 2020
|
|
May
31, 2020
|
|
|
|
Remaining
Useful
Life
|
|
Intangible
Assets
|
|
|
Remaining
Useful
Life
|
|
|
Intangible
Assets
|
|
Non-Competes
|
|
4 years
|
|
$
|
1,023,118
|
|
|
|
4.50
years
|
|
|
$
|
1,023,118
|
|
Trademarks
|
|
Indefinite
|
|
|
866,000
|
|
|
|
Indefinite
|
|
|
|
866,000
|
|
Customer database
|
|
2 years
|
|
|
35,000
|
|
|
|
10
years
|
|
|
|
—
|
|
Restrictive covenant
|
|
2 years
|
|
|
115,000
|
|
|
|
—
|
|
|
|
—
|
|
Customer contracts
|
|
10 years
|
|
|
343,414
|
|
|
|
—
|
|
|
|
546,000
|
|
Internet domain
|
|
2 years
|
|
|
3,000
|
|
|
|
2.50
years
|
|
|
|
3,000
|
|
Total intangible assets
|
|
|
|
$
|
2,385,532
|
|
|
|
|
|
|
$
|
2,438,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
(429,973)
|
|
|
|
|
|
|
|
(296,744
|
)
|
Net carrying value
|
|
|
|
$
|
1,955,559
|
|
|
|
|
|
|
$
|
2,141,374
|
|
The
following table sets forth the future amortization of the Company’s intangible assets as of November 30, 2020:
For the fiscal years ending May 31:
|
|
|
|
2021
|
|
$
|
133,229
|
|
2022
|
|
|
266,040
|
|
2023
|
|
|
265,457
|
|
2024
|
|
|
130,197
|
|
2025
|
|
|
10,834
|
|
Thereafter
|
|
|
283,802
|
|
Total
|
|
$
|
1,089,559
|
|
During
the six months ended November 30, 2020 and 2019, the Company recorded amortization expense of $133,229 and $102,812, respectively.
During the six months ended November 30, 2020, the Company recorded $202,586 of impairment loss in relation to the customer contracts
resulting from termination of franchise agreements.
Goodwill
The
Company’s goodwill carrying amounts relate to the acquisitions of Simplicity Esports LLC, PLAYlive Nation Inc. and Simplicity
El Paso, LLC. The composition of the goodwill balance, is as follows:
|
|
November
30, 2020
|
|
|
May
31, 2020
|
|
Simplicity Esports, LLC
|
|
$
|
4,456,250
|
|
|
$
|
4,456,250
|
|
Simplicity El Paso, LLC
|
|
|
25,000
|
|
|
|
—
|
|
PLAYlive Nation
Inc.
|
|
|
698,891
|
|
|
|
698,891
|
|
Total
Goodwill
|
|
$
|
5,180,141
|
|
|
$
|
5,155,141
|
|
NOTE
5 — ACQUISITIONS
The
Simplicity One Acquisition:
On
January 14, 2020 the Company acquired a 90% interest in Simplicity One Brasil Ltda, for approximately $2,000. This interest was
reduced during the three months ended August 31, 2020 as more fully described in Note 7.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
Simplicity
El Paso, LLC:
On
June 26, 2020, the Company through its wholly owned subsidiary, Simplicity El Paso, LLC acquired a 51% controlling interest in
an existing franchise in exchange for 150,000 shares of common stock at $1.10 per share. The total purchase price for the acquisition
was $315,000 of which $150,000 was paid in cash by the 49% minority interest owner, an unrelated third party, and $165,000 in
common stock by the Company. This has been 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 are non-recurring in nature and classified as level 3 on the fair value hierarchy.
The
table below presents a provisional allocation of the gross $315,000 purchase price as of June 26, 2020:
Merchandise
|
|
$
|
27,000
|
|
Furniture, Fixtures and Equipment
|
|
|
113,000
|
|
Customer Database
|
|
|
35,000
|
|
Goodwill
|
|
|
25,000
|
|
Restrictive Covenant
|
|
|
115,000
|
|
Total value
of acquisition
|
|
$
|
315,000
|
|
Asset
Purchase Agreements:
Simplicity
Kennewick, LLC:
On
September 22, 2020, the Company’s wholly-owned subsidiary, Simplicity Kennewick, LLC (“Simplicity Kennewick”)
entered into an Asset Purchase agreement (“APA”) with Ignatious O’Riley, an existing franchisee (“Seller
or Franchisee”), to acquire the Franchisee’s assets in exchange for 2,990 shares of the Company’s common stock
with fair value of $29,416 or $9.84 per share based on the fair value of assets acquired. Pursuant to ASU 2017-01 and ASC 805,
the Company analyzed the APA to determine if the Company acquired a business or acquired assets.
Simplicity
Union Gap, LLC:
On
September 23, 2020, the Company’s wholly-owned subsidiary, Simplicity Union Gap, LLC (“Simplicity Union Gap”)
entered into an Asset Purchase agreement (“APA”) with Five Point Legacy Corp., an existing franchisee (“Seller
or Franchisee”), to acquire the Franchisee’s assets in exchange for 4,506 shares of the Company’s common stock
with fair value of $43,974 or $9.76 per share based on the fair value of assets acquired. Pursuant to ASU 2017-01 and ASC 805,
the Company analyzed the APA to determine if the Company acquired a business or acquired assets.
Simplicity
St Petersburg, LLC:
On
October 1, 2020, the Company entered into an Asset Purchase agreement (“APA”) with Parryproject LLC., Owen Parry and
Jennie Parry, an existing franchisee (collectively as “Seller or Franchisee”), to acquire the Franchisee’s assets
in exchange for 3,688 shares of the Company’s common stock with fair value of $38,650 or $10.48 per share based on the fair
value of assets acquired. These assets were transferred to the Company’s wholly-owned subsidiary, Simplicity St. Peterburg,
LLC. Pursuant to ASU 2017-01 and ASC 805, the Company analyzed the APA to determine if the Company acquired a business or
acquired assets.
Simplicity
Humble, LLC:
On
October 1, 2020, the Company’s wholly-owned subsidiary, Simplicity Humble, LLC (“Simplicity Humble”) entered
into an Asset Purchase agreement (“APA”) with Team Centore Entertainment Corp., and Charles Centore, an existing franchisee
(collectively as “Seller or Franchisee”), to acquire the Franchisee’s assets in exchange for 8,402 shares of
the Company’s common stock with fair value of $88,052 or $10.48 per share based on the fair value of assets acquired. Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the APA to determine if the Company acquired a business or acquired assets.
Simplicity
Frisco, LLC:
On
October 12, 2020, the Company’s wholly-owned subsidiary, Simplicity Frisco, LLC (“Simplicity Frisco”) entered
into an Asset Purchase agreement (“APA”) with JAR Mathis Holdings, Jared Mathis and Amy Mathis, an existing franchisee
(collectively as “Seller or Franchisee”), to acquire the Franchisee’s assets in exchange for 6,202 shares of
the Company’s common stock with fair value of $74,423 or $12.00 per share based on the fair value of assets acquired. Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the APA to determine if the Company acquired a business or acquired assets.
Simplicity
Santa Rosa, LLC:
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Santa Rosa, LLC (“Simplicity Santa Rosa”)
entered into an Asset Purchase agreement (“APA”) with B&R Franchise Investments, LLC, Brian Chu and Richard Loo,
an existing franchisee (collectively as “Seller or Franchisee”), to acquire the Franchisee’s assets in exchange
for 4,202 shares of the Company’s common stock with fair value of $48,068 or $11.44 per share based on the fair value
of assets acquired. Pursuant to ASU 2017-01 and ASC 805, the Company analyzed the APA to determine if the Company acquired a business
or acquired assets.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
Simplicity
Brea, LLC:
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Brea, LLC (“Simplicity Brea”) entered into
an Asset Purchase agreement (“APA”) with Nextgen Gaming, LLC, Ajay Chunilal Shah and Shweta Shah, an existing franchisee
(collectively as “Seller or Franchisee”), to acquire the Franchisee’s assets in exchange for 3,255 shares of
the Company’s common stock with fair value of $37,237 or $11.44 per share based on the fair value of assets acquired. Pursuant
to ASU 2017-01 and ASC 805, the Company analyzed the APA to determine if the Company acquired a business or acquired assets.
Simplicity
Billings, LLC:
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Billings, LLC (“Simplicity Billings”) entered
into an Asset Purchase agreement (“APA”) with Button Mashers, Inc, Jon Bessmer and Brandy Bessmer, an existing franchisee
(collectively as “Seller or Franchisee”), to acquire the Franchisee’s assets in exchange for 4,696 shares of
the Company’s common stock with fair value of $53,725 or $11.44 per share based on the fair value of assets acquired.
Pursuant to ASU 2017-01 and ASC 805, the Company analyzed the APA to determine if the Company acquired a business or acquired
assets.
The
following table summarizes the total of the assets acquired during the three months ended November 30, 2020:
Assets acquired:
|
|
|
|
Furniture,
Fixtures and Equipment
|
|
$
|
330,234
|
|
Inventory
|
|
|
83,310
|
|
Total assets
acquired at fair value
|
|
$
|
413,544
|
|
|
|
|
|
|
Purchase consideration
paid:
|
|
|
|
|
37,941 shares
of common stock
|
|
$
|
413,544
|
|
Total purchase
consideration paid
|
|
$
|
413,544
|
|
NOTE
6 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
In
adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permit
it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct
costs (see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12 month or
less. The Company entered various lease agreements. These leases require the Company to pay a monthly base rent plus a pro rata
share of operating expenses beginning 2019 until 2025. The Company recorded right-of-use assets and lease liabilities in aggregate
amount of $1,575,265 as of November 30, 2020.
For
the six months ended November 30, 2020, lease costs amounted to $83,042 which included base lease costs of $74,452 and common
area and other expenses of $8,589, all of which were expensed during the period and included in general and administrative expenses
on the accompanying unaudited condensed consolidated statements of operations.
The
significant assumption used to determine the present value of the lease liability was a discount rate of 10% which was based on
the Company’s estimated incremental borrowing rate.
Right-of-use
asset (“ROU”) is summarized below:
|
|
November
30, 2020
|
|
Operating leases
|
|
$
|
1,575,265
|
|
Less accumulated
reduction
|
|
|
(254,420
|
)
|
Balance of ROU asset as of November
30, 2020
|
|
$
|
1,320,845
|
|
Operating
lease liability related to the ROU asset is summarized below:
|
|
November
30, 2020
|
|
Operating
leases
|
|
$
|
1,575,265
|
|
Total lease liabilities
|
|
|
1,575,265
|
|
Reduction of
lease liability
|
|
|
(251,921
|
)
|
Total
|
|
|
1,323,344
|
|
Less: short term portion as of
November 30, 2020
|
|
|
(281,088
|
)
|
Long term portion as of November
30, 2020
|
|
$
|
1,042,256
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
Future
base lease payments under the non-cancelable operating lease at November 30, 2020 are as follows:
Years
Ending May 31,
|
|
Amount
|
|
2021
|
|
$
|
203,709
|
|
2022
|
|
|
407,278
|
|
2023
|
|
|
391,832
|
|
2024
|
|
|
373,870
|
|
2025
|
|
|
330,017
|
|
2026
|
|
|
110,000
|
|
Total minimum non-cancelable
operating lease payments
|
|
|
1,816,706
|
|
Less:
discount to fair value
|
|
|
(493,362
|
)
|
Total
lease liability at November 30, 2020
|
|
$
|
1,323,344
|
|
NOTE
7 — RELATED PARTY TRANSACTIONS
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”) (see Note 9).
As
of May 31, 2020, advances under the terms of this note were $64,728. On various dates subsequent to May 31, 2020, Mr. Kaplan funded
$25,272 pursuant to the Kaplan Promissory Note. With the contributions subsequent to May 31, 2020, the principal balances outstanding
and due Mr. Kaplan amounted to $90,000. On June 22, 2020, Mr. Kaplan agreed to exchange the debt of the Kaplan Promissory Note
with a principal balance of $90,000 in exchange for the Company assigning to Mr. Kaplan a 10% equity interest in Simplicity One
Brasil, Ltda, a subsidiary of the Company.
Equity
Sales
Effective
June 1, 2020, the Company issued 23,809 shares of our restricted Common Stock, sold effective May 7, 2020 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.
The
Company maintains its cash balance at a financial services company that is owned by an officer of the Company.
The
Company maintains a portion of its cash balance at a financial services company that is owned by an officer of the Company.
NOTE
8 — COMMITMENTS AND CONTINGENCIES
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.
Operating
Lease Right of Use Obligation
The
Company entered into various lease agreements; these leases require the Company to pay a monthly base rent plus a pro rata share
of operating expenses beginning 2019 until 2025 (see Note 6).
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
Employment
Agreements, Board Compensation and Bonuses
On
July 29, 2020, the Company entered into a new employment agreement (the “Kaplan 2020 Agreement”) with Mr. Kaplan.
Such employment agreement replaced the Kaplan 2018 Agreement. As a result, the Kaplan 2018 Agreement was terminated and is of
no further force or effect. Pursuant to the terms of the Kaplan 2020 Agreement, the Company agreed to pay Mr. Kaplan a monthly
base salary of $5,000; provided, however, that the parties agreed that such base salary will be deferred and will accumulate until
the Company has sufficient cash available to make such payments, to be reasonably determined by the Board of Directors and Mr.
Kaplan, at which time all accrued and unpaid base salary will be paid. In addition, Mr. Kaplan will receive an equity grant of
15,000 shares of common stock per month, which shares will be fully vested upon grant. Mr. Kaplan will also be eligible to receive
a quarterly bonus in the form of cash or equity shares and will be entitled to participate in the Company’s employee benefit
plans. In addition, if, during the term of the Kaplan 2020 Agreement, the Company’s shares are approved for listing on a
U.S. national securities exchange, the Company will pay Mr. Kaplan a $50,000 cash bonus, to be paid upon such listing begin effective.
The
term of the Kaplan 2020 Agreement is for an initial one-year term, which shall automatically renew for successive one-year terms
unless either party provides 60 days’ advance written notice of its intention not to renew the Kaplan 2020 Agreement at
the conclusion of the then applicable term. The term of the Kaplan 2020 Agreement may be terminated by the Company with or without
cause or by Mr. Kaplan with or without good reason, as such terms are defined therein.
On
July 29, 2020, the Board of Directors approved for Mr. Kaplan a $75,000 cash bonus and authorized the issuance of 250,000 shares
of the Company’s common stock both related to his performance during the fiscal year ended May 31, 2020. As of November
30, 2020, the Company has accrued $75,000 related to Mr. Kaplans cash bonus. During the six months ended November 30, 2020, the
250,000 shares of common stock valued at $216,625 were issued.
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 November 30, 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.
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. On October 30, 2020 Duncan Wood and Simplicity Esports and Gaming Company
executed a mutual General Release and the lawsuit was dismissed with prejudice.
NOTE
9 - DEBT
The
table below presents outstanding debt instruments as of November 30, 2020 and May 31, 2020:
|
|
November
30, 2020
|
|
|
May
31,2020
|
|
10% Fixed Convertible
Promissory Note
|
|
$
|
—
|
|
|
$
|
152,500
|
|
Self-amortization promissory notes
|
|
|
1,133,023
|
|
|
|
—
|
|
August 7, 2020 self-amortization
promissory note
|
|
|
333,333
|
|
|
|
—
|
|
Related Party Note
|
|
|
—
|
|
|
|
64,728
|
|
Convertible
Note Payable
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
2,466,356
|
|
|
|
1,217,228
|
|
Less: debt
discount
|
|
|
(366,227
|
)
|
|
|
(25,180
|
)
|
Total
|
|
$
|
2,100,129
|
|
|
$
|
1,192,048
|
|
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 would 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
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)
|
1,250
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 $8.00
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.
On
July 2, 2020, the 10% Fixed Convertible Promissory Note was repaid in full. A cash payment of $201,300 including principal of
$152,500, guaranteed interest of $15,200 and prepayment penalties of $33,600 was made to the lender. In connection with the repayment
of the note, the Company recorded a charge to interest expense in the amount of $73,980 comprised of $48,800 related to interest
and prepayment penalties and $25,180 related to accelerated accretion of unamortized debt discount recorded in connection with
the original issue discount and in connection with common shares issued to the lender.
Self-Amortization
Promissory Notes
On
June 18, 2020 (the “Issue Date”), the Company entered into a securities purchase agreement (the “June 18, 2020
SPA”) with an accredited investor (the “Holder”), pursuant to which the Company issued a 12% self-amortization
promissory note (the “June 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 June 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. The Company received net proceeds of $467,650, net of
original issue discount of $55,000 and origination fees of $27,350. In addition, pursuant to the terms of the SPA, the Company
issued 6,875 shares of the Company’s common stock to the Holder as additional consideration. The 6,875 shares were
value at $62,150, or $9.04 per share, based on the quoted trading price on the date of grant.
The
Company may prepay the June 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
|
|
11/16/2020
|
|
|
66,125
|
|
12/16/2020
|
|
|
66,125
|
|
01/18/2021
|
|
|
66,125
|
|
02/18/2021
|
|
|
66,125
|
|
03/18/2021
|
|
|
66,125
|
|
04/16/2021
|
|
|
66,125
|
|
05/18/2021
|
|
|
66,125
|
|
06/18/2021
|
|
|
65,921
|
|
Total:
|
|
$
|
594,921
|
|
In
connection with the November 23, 2020 SPA discussed below, the Company repaid principal and interest of $198,375 on this June
18, 2020 Note.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
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 (5) calendar days (provided, however, that this five (5) calendar day cure period shall not apply to any event of default
under Sections 3.1, 3.2, and 3.19 of 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
(as hereinafter defined), 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 (5) 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.
On
November 25, 2020, the Company entered into a securities purchase agreement (the “November 23, 2020 SPA”), dated as
of November 23, 2020 (the “Effective Date”) with the Holder, pursuant to which the Company issued a 12% self-amortization
promissory note (the “November Amortization Note”) with a maturity date of November 23, 2021 (the “Maturity
Date”), in the principal sum of $750,000. Pursuant to the terms of the November Amortization Note, the Company agreed to
pay to $750,000 (the “Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of 12%
per annum. The Company received net proceeds of $441,375, net of original issue discount of $75,000, origination fees of $35,250,
and the partial repayment of principal and interest of $198,375 on the June 18, 2020 Note. In addition, pursuant to the terms
of the SPA, the Company granted 17,054 warrants to purchase 17,054 shares of the Company’s common stock, subject to adjustment.
In connection with the November Amortization Note, during the first twelve months of this note, interest equal to $90,000 shall
be guaranteed and earned in full as of the Effective Date, provided, however, that if the November Amortization Note is repaid
in its entirety on or prior to February 23, 2021, then the interest shall be accrued on a per annum basis based on the number
of days elapsed as of the repayment date from the Effective Date.
In
connection with the November 23, 2020 SPA, the Company shall issue warrants equal to 375,000 divided by the Exercise Price (as
defined below) (the “Warrant Shares”) (whereby such number may be adjusted from time to time pursuant to the terms
and conditions of this Warrant) at the Exercise Price per share then in effect. For purposes of this Warrant, the term “Exercise
Price” shall mean 110% of the public offering price of the Company’s common stock under the public offering contemplated
by the registration statement on Form S-1 filed by the Company on October 23, 2020 (the “Uplist Offering”), provided,
however, that if the Uplist Offering has not been consummated on or before May 23, 2021, then the Exercise Price shall mean the
closing bid price of the Company’s common stock on December 23, 2020, subject to adjustment as provided in the warrant (including
but not limited to cashless exercise), and the term “Exercise Period” shall mean the period commencing on the earlier
of (i) the date of the Company’s consummation of the Uplist Offering or (ii) May 23, 2021, and ending on the five-year anniversary
thereof. In connection with the issuance of these warrants, on the initial measurement date, the relative fair value of the warrants
of $157,438 was recorded as a debt discount and an increase in paid-in capital.
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 ten monthly amortization payments to the Holder of $84,000 commencing on February 23, 2021 through
November 23,2021. according to the following schedule:
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 (5) calendar days (provided, however, that this five (5) calendar day cure period shall not apply to any event of default
under Sections 3.1, 3.2, and 3.19 of 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
(as hereinafter defined), 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 (5) 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
Holder shall have the right, at any time following an Uncured Default Date (as defined in this Note), to convert all or any portion
of the then outstanding and unpaid principal amount and interest (including any default interest) into shares of the Company’s
common stock at the Conversion Price. Following the Uncured Default Date the Conversion Price shall equal the lesser of (i) 105%
multiplied by the closing bid price of the Company’s common stock or (ii) the closing bid price of the Company’s common
stock immediately preceding the date of the respective conversion (the “Conversion Price”).
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.
As
of November 30, 2020, the June and August Amortization Notes are not in default.
The
Company recorded a total debt discount in the amount of $144,500 in connection with the common shares issued to the Holder and
an original issue discount associated with the note.
In
connection with the June and August Amortization Notes, during the six months ended November 30, 2020. the Company recognized
interest expense of $90,474 related to amortization of the discount
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
August
7, 2020 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. The Company received net
proceeds of $280,500, net of original issue discount of $33,333 and origination fees of $19,500. In addition, pursuant to the
terms of the SPA, the Company issued 4,167 shares of the Company’s common stock to the Holder as additional consideration.
The 4,167 shares were value at $30,166, or $7.24 per share, based on the quoted trading price on the date of grant.
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 (5) calendar days (provided, however, that this five (5) calendar day cure period shall not apply to any event of default
under Sections 3.1, 3.2, and 3.19 of 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
(as hereinafter defined), 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 (5) 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.
In
connection with the August 7, 2020 Self-Amortization promissory note, during the six months ended November 30, 2020. the Company
recognized interest expense of $38,487 related to amortization of the discount.
Related
Party - 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”) (see Note 7).
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
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, the balance of the Kaplan noted was $64,728. During the six months ended November 30, 2020 Mr. Kaplan advanced
an additional $25,272 under the terms of the note. During the quarter ended November 30, 2020, Mr. Kaplan exchanged the note together
with accrued interest in exchange for his acquisition of a 10% interest in the Company’s wholly owned subsidiary Simplicity
Brasil.
Convertible
Note Payable
On
December 20, 2018, the Company entered into a securities exchange agreement (“Exchange Agreement”) with Maxim. Pursuant
to the terms of the Exchange Agreement, Maxim agreed to surrender and exchange the Note. In exchange, the Company issued to Maxim
a Series A-1 Exchange Convertible Note in the principal amount of $500,000 (the “Series A-1 Note”) and a Series A-2
Exchange Convertible Note in the principal amount of $1,000,000 (the “Series A-2 Note,” and collectively with Series
A-1 Note, the “Exchange Notes”). As of December 31, 2018, upon the closing of the 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 was 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 Maxim 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 Maxims’ 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 $15.44 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. Maxim 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 Maxim, 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 Maxim) 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 Maxim) 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 may not prepay
any portion of the principal amount of the note without the prior written consent of Maxim.
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 Maxim 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 Maxim 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 Maxim until such time or times, if ever, as its right thereto would not result in Maxim exceeding the beneficial
ownership limitation, at which time or times Maxim 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 $15.44, 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 $4.00.
As
of December 31, 2018, upon the closing of the Acquisition, the Series A-1 Note automatically converted into 24,206 shares of the
Company’s common stock
On
June 4, 2020, $100,000 of principal balance was converted into 10,738 shares of common stock in accordance with the terms of the
Maxim Note.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
On
June 18, 2020, the Company and Maxim entered into that certain first amendment to the Maxim Note (the “Amendment”),
pursuant to which the Parties agreed to the following: (i) Maxim’s resale of the Company’s common stock (the “Common
Stock”) underling the Maxim Note shall be limited to 10% of the daily volume of the Common Stock on each respective trading
day, (ii) the maturity date of the Maxim Note was extended to December 31, 2020, (iii) the principal amount of the Maxim Note
was increased by $100,000, which is included in interest expense on the accompanying condensed consolidated statement of operations,
and (iv) the reference to “$15.44” in Section 4(b) of the Maxim Note was replaced with “$9.20”.
During
the six months ended November 30, 2020 the Company recorded interest expense of $38,069. Total principal and accrued interest
on Maxim note amounted to $1,000,000 and $75,894 as of November 30, 2020.
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. As of November 30, 2020,
there were no shares of preferred stock issued or outstanding.
Common
Stock
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. Holders of the shares of the Company’s common stock are entitled
to one vote for each share. At, November 30, 2020 and May 31, 2020, there were 1,217,376 and 998,622 shares of common stock issued
and outstanding respectively.
Common
Stock Issued for Cash
In
May 2020, the Company issued 2,976 shares of its restricted common stock at a price of $8.72 per share, to William H. Herrmann,
Jr. a member of the Company’s board of directors, for an aggregate purchase price of $25,000.
Common
Stock Issued in Connection with Debt
Effective
June 4, 2020, the Company issued 10,738 shares of common stock at $9.28 per share in connection with the conversion of $100,000
in principal balance of the Convertible Note Payable (see Note 8).
On
June 18, 2020, pursuant to the terms of the June 18, 2020 SPA between the Company and an accredited investor, pursuant to which
the Company issued a 12% self-amortization promissory note (Note 8) in the principal amount of $550,000, the Company issued 6,875
shares of common stock at $9.04 per share, to such accredited investor as additional consideration for the purchase of such note.
The 6,875 shares were value at $62,150, or $9.04 per share, based on the quoted trading price on the date of grant, which was
included in debt discount and accreted over the term of the debt.
Effective
July 1, 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 1,250 shares of our restricted
common stock, issued at $7.92 per share, to Harbor Gates Capital, LLC as additional consideration for the purchase of such note.
The 1,250 shares were value at $9,900, or $7.92 per share, based on the quoted trading price on the date of grant, which was included
in debt discount and accreted over the term of the debt.
Effective
August 10, 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 (Note 8) in the principal amount of $333,333, the Company
issued 4,167 shares of common stock at $7.28 per share. The 4,167 shares were value at $30,166, or $7.24 per share, based on the
quoted trading price on the date of grant, which was included in debt discount and accreted over the term of the debt.
Common
Stock Issued for Accounts Payable
On
June 4, 2020, the Company issued 3,125 shares of common stock at $14.72 per share in satisfaction of an outstanding balance owed
to a vendor in the amount of $46,000. In connection with this issuance, the Company reduced accounts payable by $33,865 and recorded
debt settlement expense of $12,135.
Common
Stock Issued for Acquisitions
On
July 1, 2020, the Company acquired the assets of one of its franchisee-owned esports gaming centers on Fort Bliss
U.S. Military base in El Paso, TX. In connection with the acquisition the Company issued 18,750 restricted shares at $8.80 per
share, or $165,000.
On
September 22, 2020, in connection with an Asset Purchase agreement with Ignatious O’Riley, an existing franchisee (“Seller
or Franchisee”), to acquire the Franchisee’s assets in exchange for 2,989 shares of the Company’s common stock
with fair value of $29,416 or $9.84 per share (see Note 5).
On
September 23, 2020, the Company’s wholly-owned subsidiary, Simplicity Union Gap entered into an Asset Purchase agreement
with Five Point Legacy Corp., an existing franchisee (“Seller or Franchisee”), to acquire the Franchisee’s assets
in exchange for 4,506 shares of the Company’s common stock with fair value of $43,974 or $9.76 per share (see Note 5).
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2020
(UNAUDITED)
.
On
October 1, 2020, the Company entered into an Asset Purchase agreement with Parryproject LLC., Owen Parry and Jennie Parry, an
existing franchisee (collectively as “Seller or Franchisee”), to acquire the Franchisee’s assets in exchange
for 3,688 shares of the Company’s common stock with fair value of $38,650 or $10.48 per share (see Note 5).
On
October 1, 2020, the Company’s wholly-owned subsidiary, Simplicity Humble entered into an Asset Purchase agreement with
Team Centore Entertainment Corp., and Charles Centore, an existing franchisee (collectively as “Seller or Franchisee”),
to acquire the Franchisee’s assets in exchange for 8,402 shares of the Company’s common stock with fair value of $88,052
or $10.48 per share (see Note 5).
On
October 12, 2020, the Company’s wholly-owned subsidiary, Simplicity Frisco entered into an Asset Purchase agreement with
JAR Mathis Holdings, Jared Mathis and Amy Mathis, an existing franchisee (collectively as “Seller or Franchisee”),
to acquire the Franchisee’s assets in exchange for 6,202 shares of the Company’s common stock with fair value of $74,423
or $12.00 per share (see Note 5).
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Santa Rosa entered into an Asset Purchase agreement
with B&R Franchise Investments, LLC, Brian Chu and Richard Loo, an existing franchisee (collectively as “Seller or Franchisee”),
to acquire the Franchisee’s assets in exchange for 4,202 shares of the Company’s common stock with fair value of $46,068
or $11.44 per share (see Note 5).
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Brea entered into an Asset Purchase agreement (“APA”)
with Nextgen Gaming, LLC, Ajay Chunilal Shah and Shweta Shah, an existing franchisee (collectively as “Seller or Franchisee”),
to acquire the Franchisee’s assets in exchange for 3,255 shares of the Company’s common stock with fair value of $37,237
or $11.44 per share (see Note 5).
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Billings entered into an Asset Purchase agreement with
Button Mashers, Inc, Jon Bessmer and Brandy Bessmer, an existing franchisee (collectively as “Seller or Franchisee”),
to acquire the Franchisee’s assets in exchange for 4,697 shares of the Company’s common stock with fair value of $52,725
or $11.44 per share (see Note 5).
Common
Stock Issued for Compensation
On
June 30, 2020, the Company issued 12,334 shares of common stock at $7.76 per share to various employees of the Company as compensation.
In connection with the issuance of these shares, the Company recorded stock-based compensation of $95,700.
During
the three months ended August 31, 2020, the Company issued 84,062 shares of common stock to executive officers of the Company
for services rendered. Additionally, the Company issued 19,779 shares of common stock to employees for services rendered. The
shares were valued at per share prices ranging from $6.56 to $14.72, based on the quoted trading price on the date of grant. In
connection with the issuance of these shares, during the six months ended November 30, 2020, the Company recorded stock-based
compensation of $54,395 and reduced prior accrued compensation by $669,215.
Effective
August 1, 2020, the Company entered into a marketing agreement whereby the Company issued 3,472 shares of common stock at $6.56
per share. In connection with the issuance of these shares, the Company recorded stock-based professional fees of $15,185 and
prepaid expenses of $7,593 which will be amortized over the remaining service period.
During
the three months ended November 30, 2020, the Company issued an aggregate of 9,844 restricted common shares of the Company to
executive officers of the Company for services rendered. These shares were valued at $119,632, or per share prices ranging from
$9.04 per share to $11.44 per common share, based on the quoted trading price on the date of grant. In connection with the issuance
of these shares, during the six months ended November 30, 2020, the Company recorded stock-based compensation of $119,632.
On
September 16, 2020, the Company issued an aggregate of 2,813 restricted common shares of the Company to executive officers and
employees of the Company for services rendered. These shares were valued at $25,420, or $9.04 per share, based on the quoted trading
price on the date of grant. In connection with the issuance of these shares, during the six months ended November 30, 2020, the
Company recorded stock-based professional fees of $25,420.
Warrants
In
connection with the November 23, 2020 SPA (see Note 8), the Company shall issue warrants equal to 375,000 divided by the Exercise
Price (as defined below) (the “Warrant Shares”) (whereby such number may be adjusted from time to time pursuant to
the terms and conditions of this Warrant) at the Exercise Price per share then in effect. For purposes of this Warrant, the term
“Exercise Price” shall mean 110% of the public offering price of the Company’s common stock under the public
offering contemplated by the registration statement on Form S-1 filed by the Company on October 23, 2020 (the “Uplist Offering”),
provided, however, that if the Uplist Offering has not been consummated on or before May 23, 2021, then the Exercise Price shall
mean the closing bid price of the Company’s common stock on December 23, 2020, subject to adjustment as provided in the
warrant (including but not limited to cashless exercise), and the term “Exercise Period” shall mean the period commencing
on the earlier of (i) the date of the Company’s consummation of the Uplist Offering or (ii) May 23, 2021, and ending on
the five-year anniversary thereof. In connection with the issuance of these warrants, on the initial measurement date, the relative
fair value of the warrants of $157,438 was recorded as a debt discount and an increase in paid-in capital.
Warrant
activities for the six months ended November 30, 2020 are summarized as follows:
|
|
Number
of Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance Outstanding May 31, 2020
|
|
|
803,000
|
|
|
$
|
83.04
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
17,054
|
|
|
|
21.99
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance Outstanding November 30,
2020
|
|
|
820,054
|
|
|
$
|
81.74
|
|
|
|
3.10
|
|
|
$
|
-
|
|
Exercisable, November 30, 2020
|
|
|
820,054
|
|
|
$
|
81.74
|
|
|
|
3.10
|
|
|
$
|
-
|
|
NOTE
11 — SUBSEQUENT EVENTS
On
December 3, 2020, the Company issued 5,000 shares of its common stock in satisfaction of $50,000 in legal fees. These shares were
valued at $80,000, or $16.00 per share, based on the quoted trading price on the date of grant. In connection with the issuance
of these shares, the Company reduced accounts payable by $50,000 and recorded legal fees of $30,000.
On
December 18, 2020, the Company issued an aggregate of 100,000 shares (50,000 each) to two executive officers as a bonus. These
shares were valued at $1,410,000, or $14.10 per share, based on the quoted trading price on the date of grant. In connection with
the issuance of these shares, the Company recorded stock-based compensation of $1,410,000. Additionally, these officers shall
receive a cash bonus of $125,000 each to be paid when funds are available.