Summary
Risk Factors
Our
business is subject to numerous risks and uncertainties, including those in the section entitled “Risk Factors” and
elsewhere in this Prospectus. These risks include, but are not limited to, the following:
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our history of losses;
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our inability to
attract sufficient demand for our services and products;
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our ability to successfully
execute our growth and acquisition strategy and manage effectively our growth;
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changes in the competitive
environment in our industry and the markets we serve, and our ability to compete effectively;
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our dependence on
a strong brand image;
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our cash needs and
the adequacy of our cash flows and earnings;
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our ability to access
additional capital;
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our dependence upon
our executive officers, founders and key employees;
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our ability to attract
and retain qualified personnel;
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our reliance on
our technology systems, the impact of technological changes and cybersecurity risks;
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changes in applicable
laws or regulations;
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our ability to protect
our trademarks or other intellectual property rights;
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potential litigation
from competitors or customers;
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public health epidemics
or outbreaks (such as the novel strain of coronavirus (COVID-19)) and our responses to such events could materially
and adversely impact our business; and
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the possibility
that we may be adversely affected by other economic, business, and/or competitive factors.
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In
addition, our management has concluded that our historical recurring losses from
operations and negative cash flows from operations as well as our dependence on securing private equity and other financings raise
substantial doubt about our ability to continue as a going concern and our auditor has included an explanatory paragraph relating
to our ability to continue as a going concern in its audit reports for the fiscal years ended May 31, 2020 and 2019.
Corporate
Information
Our
principal executive offices are located at 7000 W. Palmetto Park Road, Suite 505, Boca Raton, Florida 33433, and our telephone
number at that location is (855) 345-9467. The address of our website is www.ggsimplicity.com. The inclusion of our website address
in this Prospectus does not include or incorporate by reference the information on our website into this Prospectus.
The
name of the Company, the logos of the Company, and other trade names, trademarks or service marks of the Company appearing in
this Prospectus are the property of the Company. Trade names, trademarks and service marks of other organizations appearing in
this Prospectus are the property of their respective holders.
Nasdaq
Capital Market or NYSE American Listing, Reverse Stock Split and Increase in Authorized Shares of Common Stock
We
intend to list of our common stock on the Nasdaq Capital Market or the NYSE American. There is no assurance that our listing application
will be approved by the Nasdaq Capital Market or the NYSE American.
In
order to obtain Nasdaq Capital Market or NYSE American listing approval, we obtained approval of our board of directors and shareholders
of (i) a reverse stock split of the outstanding shares of our common stock in the range from one-for-two (1-for-2) to one-for-ten
(1-for-10), which ratio was to be selected by the board of directors and (ii) an increase in our authorized shares of common stock
from 20,000,000 to 36,000,000 shares of common stock.
On
August 17, 2020, we filed a Certificate of Amendment to increase the authorized shares of common stock from 20,000,000 to 36,000,000.
Accordingly, our authorized capital stock consists of (i) 36,000,000 shares of common stock, and (ii) 1,000,000 shares of preferred
stock.
On
November 17, 2020, our board of directors approved the Reverse Stock Split in a ratio of 1-for-8 and on November 17, 2020, we
filed an amended and restated certificate of amendment to our Third Amended and Restated Certificate of Incorporation, as amended
(the “Certificate of Incorporation”), implementing the Reverse Stock Split in a ratio of 1-for-8, effective November
19, 2020; provided, however, the Reverse Stock Split became effective for trading purposes on November 20, 2020 when it had been
processed by the Financial Industry Regulatory Authority (“FINRA”). The Reverse Stock Split is intended to allow us
to meet the minimum share price requirement of the Nasdaq Capital Market or NYSE American. There is no assurance that our listing
application will be approved by the Nasdaq Capital Market or NYSE American.
Except
as otherwise indicated and except in our financial statements and the notes thereto, all references to our common stock, share
data, per share data and related information has been adjusted for the Reverse Stock Split ratio of 1-for-8 as if it had occurred
at the beginning of the earliest period presented. The Reverse Stock Split, combined each eight shares of our outstanding common
stock into one share of common stock, without any change in the par value per share, and the Reverse Stock Split correspondingly
adjusted, among other things, the exercise rate of our warrants into our common stock. No fractional shares were issued in connection
with the Reverse Stock Split, and any fractional shares resulting from the Reverse Stock Split were rounded up to the nearest
whole share.
The
Offering by the Selling Stockholder
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Securities offered
by the Selling Stockholder:
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Up
to 125,000 shares of common stock
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Common stock outstanding
before this Offering:
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1,424,008
shares of common stock (1)
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Common stock to
be outstanding after this Offering:
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1,507,341
shares of common stock, assuming all 125,000 shares are sold to the Selling Stockholder under the Tiger Trout Agreement
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Use
of proceeds:
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We
will not receive any of the proceeds from the sale of the common stock registered hereunder. We have and will receive
proceeds from our sales of common stock to the Selling Stockholder under the Tiger Trout Agreement, however. We intend to
use such proceeds, if any, as set forth under “Use of Proceeds” beginning on page 30.
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Risk factors:
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An
investment in our securities involves a high degree of risk and could result in a loss of your entire investment. Further,
the sale by the Selling Stockholder of a significant amount of shares being registered in this Registration Statement at any
given time could cause the market price of our common stock to decline and to be highly volatile and we do not have the right
to control the timing and amount of any sales by the Selling Stockholder of such shares. Prior to making an investment decision,
you should carefully consider all of the information in this Prospectus and, in particular, you should evaluate the risk factors
set forth under the caption “Risk Factors” beginning on page 10.
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Trading symbol on
the OTCQB:
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WINR
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(1)
Unless we indicate otherwise, all information in this Prospectus:
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gives pro forma
effect to the Reverse Stock Split of our outstanding shares of common stock, options and warrants and the corresponding adjustment
of all common stock price per share and stock option and warrant exercise price data, except for the financial statements
and the notes thereto;
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is
based on 1,424,008 shares of common stock issued and outstanding as of April 27, 2021;
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excludes
803,001 shares of our common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of
$83.10 per share as of April 27, 2021; and
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excludes
an estimated 17,054 shares (based on certain formulaic assumptions) of our common stock issuable upon exercise of certain
warrants at an estimated exercise price of $21.99 (based on certain formulaic assumptions) per share as of April 27,
2021.
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SELECTED
HISTORICAL CONSOLIDATED FINANCIAL DATA
The
following table presents our selected historical consolidated financial data for the periods indicated. The selected historical
consolidated financial data for the years ended May 31, 2020 and 2019 and the balance sheet data as of May 31, 2020 and 2019 are
derived from the audited financial statements. The summary historical financial data for the nine months ended February 28, 2021
and February 29, 2020 and the balance sheet data as of February 28, 2021 and February 29, 2020 are derived from our unaudited
financial statements.
Historical
results are included for illustrative and informational purposes only and are not necessarily indicative of results we expect
in future periods, and results of interim periods are not necessarily indicative of results for the entire year. The
data presented below should be read in conjunction with, and are qualified in their entirety by reference to, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and
the notes thereto included elsewhere in this Prospectus.
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Year
Ended
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Nine
Months Ended
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May
31,
2020
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May
31,
2019
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February
28,
2021
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February
29,
2020
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(unaudited)
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Statement of Operations
Data
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Total revenues
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$
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861,410
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$
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37,995
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$
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925,626
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$
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700,792
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Total operating
expenses
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3,170,992
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4,353,189
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4,415,716
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1,692,341
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Loss from operations
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(2,732,121
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(4,315,194
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(3,706,445
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(1,339,862
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Total
other income / (expenses)
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66,342
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749,922
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(965,075
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77,883
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Loss before provision for taxes
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(2,665,779
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(3,565,272
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(4,671,520
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(1,261,979
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Income tax provisions
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-
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-
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Net loss
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$
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(2,665,779
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$
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(3,565,272
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$
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(4,671,520
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$
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(1,261,979
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Basic and diluted
net loss per share
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$
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(0.34
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$
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(1.00
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$
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(3.89
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$
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(0.16
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Balance Sheet Data (at period end)
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Cash and cash equivalents
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$
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160,208
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$
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1,540,158
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$
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571,970
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$
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235,679
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Working capital (deficit) (1)
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(2,662,032
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(277,588
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(2,846,542
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(1,359,946
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Total assets
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8,591,774
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7,754,543
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10,268,010
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8,472,674
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Total liabilities
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3,676,102
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1,886,622
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5,101,941
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2,249,667
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Stockholders’ equity (deficit)
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4,915,672
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5,867,921
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5,166,069
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6,223,007
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(1)
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Working capital represents total current assets
less total current liabilities.
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RISK
FACTORS
An
investment in our securities carries a significant degree of risk. You should carefully consider the following risks, as well
as the other information contained in this Prospectus, including our historical financial statements and related notes included
elsewhere in this Prospectus, before you decide to purchase our securities. Any one of these risks and uncertainties has the potential
to cause material adverse effects on our business, prospects, financial condition and operating results which could cause actual
results to differ materially from any forward-looking statements expressed by us and a significant decrease in the value of our
common shares. Refer to “Cautionary Statement Regarding Forward-Looking Statements.”
We
may not be successful in preventing the material adverse effects that any of the following risks and uncertainties may cause.
These potential risks and uncertainties may not be a complete list of the risks and uncertainties facing us. There may be additional
risks and uncertainties that we are presently unaware of, or presently consider immaterial, that may become material in the future
and have a material adverse effect on us. You could lose all or a significant portion of your investment due to any of these risks
and uncertainties.
Below
is a summary of material risks, uncertainties and other factors that could have a material effect on the Company and its operations:
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our history of losses;
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our inability to
attract sufficient demand for our services and products;
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our ability to successfully
execute our growth and acquisition strategy and manage effectively our growth;
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changes in the competitive
environment in our industry and the markets we serve, and our ability to compete effectively;
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our dependence on
a strong brand image;
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our cash needs and
the adequacy of our cash flows and earnings;
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our ability to access
additional capital;
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our dependence upon
our executive officers, founders and key employees;
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our ability to attract
and retain qualified personnel;
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our reliance on
our technology systems, the impact of technological changes and cybersecurity risks;
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changes in applicable
laws or regulations;
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our ability to protect
our trademarks or other intellectual property rights;
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potential litigation
from competitors or customers;
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public health epidemics
or outbreaks (such as the novel strain of coronavirus (COVID-19)) and our responses to such events could materially
and adversely impact our business; and
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the possibility
that we may be adversely affected by other economic, business, and/or competitive factors.
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Risks
Related to Our Business
We
have a relatively limited operating history and limited revenues to date and thus are subject to risks of business development
and you have no basis on which to evaluate our ability to achieve our business objective.
Because
we have a relatively limited operating history and limited revenues to date, you should consider and evaluate our operating prospects
in light of the risks and uncertainties frequently encountered by early-stage operating companies in rapidly evolving markets.
These risks include that:
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we may not have
sufficient capital to achieve our growth strategy;
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we may not develop
our product and service offerings in a manner that enables us to be profitable and meet our customers’ requirements;
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our growth strategy
may not be successful; and
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fluctuations in
our operating results will be significant relative to our revenues.
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Our
future growth will depend substantially on our ability to address these and the other risks described in this section. If we do
not successfully address these risks, our business could be significantly harmed.
We
have a history of operating losses and our management has concluded that factors raise substantial
doubt about our ability to continue as a going concern and our auditor has included an explanatory paragraph relating to our ability
to continue as a going concern in its audit report for the fiscal years ended May 31, 2020 and 2019.
To
date, we have not been profitable and have incurred significant losses and cash flow deficits. For the fiscal years ended May
31, 2020 and 2019, we reported net losses of $2,665,779 and $3,565,272, respectively,
and negative cash flow from operating activities of $1,522,486 and $1,395,255, respectively. For the nine months ended February
28, 2021, we reported a net loss of $4,671,520 and had negative cash flow from operating activities of $686,681. As of February
28, 2021, we had an aggregate accumulated deficit of $10,782,438. We anticipate that we will continue to report losses and negative
cash flow for the foreseeable future. Our management has concluded that our historical
recurring losses from operations and negative cash flows from operations as well as our dependence on private equity and other
financings raise substantial doubt about our ability to continue as a going concern and
our auditor has included an explanatory paragraph relating to our ability to continue as a going concern in its audit report
for the fiscal year ended May 31, 2020 and 2019.
Our
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These
adjustments would likely include substantial impairment of the carrying amount of our assets and potential contingent liabilities
that may arise if we are unable to fulfill various operational commitments. In addition, the value of our securities would be
greatly impaired. Our ability to continue as a going concern is dependent upon generating sufficient cash flow from operations
and obtaining additional capital and financing. If our ability to generate cash flow from operations is delayed or reduced and
we are unable to raise additional funding from other sources, we may be unable to continue in business. For further discussion
about our ability to continue as a going concern and our plan for future liquidity, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Ability to Continue as a Going Concern.”
We
are a holding company and depend upon our subsidiaries for our cash flows.
We
are a holding company. All of our operations are conducted, and almost all of our assets are owned, by our subsidiaries. Consequently,
our cash flows and our ability to meet our obligations depend upon the cash flows of our subsidiaries and the payment of funds
by these subsidiaries to us in the form of dividends, distributions or otherwise. The ability of our subsidiaries to make any
payments to us depends on their earnings, the terms of their indebtedness, including the terms of any credit facilities and legal
restrictions. Any failure to receive dividends or distributions from our subsidiaries when needed could have a material adverse
effect on our business, results of operations or financial condition.
Future
acquisitions or strategic investments could disrupt our business and harm our business, results of operations or financial condition.
We
may in the future explore potential acquisitions of companies or strategic investments to strengthen our business. Even if we
identify an appropriate acquisition candidate, we may not be successful in negotiating the terms or financing of the acquisition,
and our due diligence may fail to identify all of the problems, liabilities or other shortcomings or challenges of an acquired
business.
Acquisitions
involve numerous risks, any of which could harm our business, including:
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straining our financial
resources to acquire a company;
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anticipated benefits
may not materialize as rapidly as we expect, or at all;
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diversion of management
time and focus from operating our business to address acquisition integration challenges;
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retention of employees
from the acquired company;
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cultural challenges
associated with integrating employees from the acquired company into our organization;
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integration of the
acquired company’s accounting, management information, human resources and other administrative systems;
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the need to implement
or improve controls, procedures and policies at a business that prior to the acquisition may have lacked effective controls,
procedures and policies; and
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litigation or other
claims in connection with the acquired company, including claims from terminated employees, former stockholders or other third
parties.
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Failure
to appropriately mitigate these risks or other issues related to such strategic investments and acquisitions could result in reducing
or completely eliminating any anticipated benefits of transactions, and harm our business generally. Future acquisitions could
also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities, amortization expenses
or the impairment of goodwill, any of which could have a material adverse effect on business, results of operations or financial
condition.
We
may require additional funding for our growth plans, and such funding may result in a dilution of your investment.
We
attempted to estimate our funding requirements in order to implement our growth plans. If the costs of implementing such plans
should exceed these estimates significantly or if we come across opportunities to grow through expansion plans which cannot be
predicted at this time, and our funds generated from our operations prove insufficient for such purposes, we may need to raise
additional funds to meet these funding requirements.
These
additional funds may be raised by issuing equity or debt securities or by borrowing from banks or other resources. We cannot assure
you that we will be able to obtain any additional financing on terms that are acceptable to us, or at all. If we fail to obtain
additional financing on terms that are acceptable to us, we will not be able to implement such plans fully if at all. Such financing
even if obtained, may be accompanied by conditions that limit our ability to pay dividends or require us to seek lenders’
consent for payment of dividends, or restrict our freedom to operate our business by requiring lender’s consent for certain
corporate actions.
Further,
if we raise additional funds by way of a rights offering or through the issuance of new shares, any shareholders who are unable
or unwilling to participate in such an additional round of fund raising may suffer dilution in their investment.
We
may not have sufficient capital to fund our ongoing operations, effectively pursue our strategy or sustain our growth initiatives.
After
the consummation of the acquisition of Simplicity Esports LLC and PLAYlive Nation, Inc., our remaining liquidity and capital resources
may not be sufficient to allow us to fund our ongoing operations, effectively pursue our strategy or sustain our growth initiatives.
If we require additional capital resources, we may seek such funds directly from third party sources; however, we may not be able
to obtain sufficient equity capital and/or debt financing from third parties to allow us to fund our expected ongoing operations
or we may not be able to obtain such equity capital or debt financing on acceptable terms or conditions. Factors affecting the
availability of equity capital or debt financing to us on acceptable terms and conditions include:
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our current and
future financial results and position;
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the collateral availability
of our otherwise unsecured assets;
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the market’s,
investors and lenders’ view of our industry and products;
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the perception in
the equity and debt markets of our ability to execute our business plan or achieve our operating results expectations; and
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the price, volatility
and trading volume and history of our Common Stock.
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If
we are unable to obtain the equity capital or debt financing necessary to fund our ongoing operations, pursue our strategy and
sustain our growth initiatives, we may be forced to scale back our operations or our expansion initiatives, and our business and
operating results will be materially adversely affected.
Our
growth strategy depends on the availability of suitable locations for our Simplicity Esports Gaming Centers and our ability to
open new Simplicity Esports Gaming Centers and operate them profitably.
A
key element of our growth strategy is to extend our brand by opening corporate owned as well as franchising retail Simplicity
Esports Gaming Centers in locations in the United States that we believe will provide attractive returns on investment. We have
identified numerous sites for potential corporate Simplicity Esports Gaming Centers and many other sites for potential franchised
esports gaming centers, in the United States, however, desirable locations for additional Simplicity Esports Gaming Center openings
may not be available at an acceptable cost when we identify a particular opportunity for a new Simplicity Esports Gaming Center.
In
addition, our ability to open new Simplicity
Esports Gaming Centers on a timely and cost-effective basis, or at all, is dependent on a number of factors, many of which are
beyond our control, including our ability or the ability of the selected franchisee to:
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reach acceptable
agreements regarding the lease of the locations;
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comply with applicable
zoning, licensing, land use and environmental regulations;
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raise or have available
an adequate amount of cash or currently available financing for construction and opening costs;
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timely hire, train
and retain the skilled management and other employees necessary to meet staffing needs;
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obtain, for acceptable
cost, required permits and approvals, including liquor licenses; and
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efficiently manage
the amount of time and money used to build and open each new Simplicity Esports Gaming Center.
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If
we succeed in opening new Simplicity Esports Gaming Centers on a timely and cost-effective basis, we may nonetheless be unable
to attract enough customers to the new Simplicity Esports Gaming Centers because potential customers may be unfamiliar with our
brands or concepts, or our entertainment and menu options might not appeal to them. Our new Simplicity Esports Gaming Centers
may not meet or exceed our performance targets, including target cash-on-cash returns. New Simplicity Esports Gaming Centers may
even operate at a loss, which could have a significant adverse effect on our overall operating results.
Our
operations of Simplicity Esports Gaming Centers are significantly dependent on changes in public and customer tastes and discretionary
spending patterns. Our inability to successfully anticipate customer preferences or to gain popularity for such Simplicity Esports
Gaming Centers games may negatively impact our profitability.
Our
success depends significantly on public and customer tastes and preferences, which can be unpredictable. If we are unable to successfully
anticipate customer preferences or increase the popularity of the games offered at the Simplicity Esports Gaming Centers, the
per capita revenue and overall customer expenditures at the Simplicity Esports Gaming Centers may decrease, and thereby negatively
impact our profitability. In response to such developments, we may need to increase our marketing and product development efforts
and expenditures, adjust our game or product sale pricing, modify the games themselves, or take other actions, which may further
erode our profit margins, or otherwise adversely affect our results of operations and financial condition. In particular, we may
need to expend considerable cost and effort in carrying out extensive research and development to assess the potential interest
in a game, testing and launching new games, and to remain abreast with continually evolving technology and trends, as well as
the success and popularity of Simplicity stream team’s casters, influencers and personalities among Simplicity Esports LLC’s
dedicated fan base.
While
we may incur significant expenditures of this nature, including in the future as we continue to expand our operations, there can
be no assurance that any such expenditures or investments by us will yield expected or commensurate returns or results, within
a reasonable or anticipated time, or at all.
The
nature of our business exposes us to negative publicity or customer complaints, including in relation to, among other things,
accidents, injuries or thefts at the Simplicity Esports Gaming Centers, or health and safety concerns arising from improper use
of our game equipment or at our food and beverage venues.
Our
business inherently exposes us to negative publicity or customer complaints as a result of accidents, injuries, or in extreme
cases, deaths, arising from instances of air-borne, water-borne or food-borne contagion or illness, food contamination, spoilage,
tampering, equipment failure, improper use of our equipment, fire, explosion, terrorist attacks or civil riots, and other safety
or security issues, such as kidnapping, or associated risks arising from other actual or perceived non-compliance with safety,
quality or service standards or norms in relation to the various game, entertainment and food and beverage attractions at the
Simplicity Esports Gaming Centers. Even isolated or sporadic incidents or accidents may have a negative impact on our brand image
and reputation, and the Simplicity Esports Gaming Centers’, or games’ or our own popularity with customers. The considerable
expansion of social media in recent years has compounded the effect of any potential negative publicity.
We
cannot guarantee that our or our franchisee’s employee training, internal controls and other precautions will be sufficient
to prevent any such occurrence at the Simplicity Esports Gaming Centers, in relation to our Simplicity global virtual reality
gaming and fully integrated esports platform, or to control or mitigate any negative consequences. In addition, we or our franchisees
rely on third-party security and housekeeping staff for certain non-core functions, as well as certain technology vendors and
partners. Although we monitor vendors and partners and, in certain cases, may have a contractual indemnity or recourse in case
of any default on their part, our ability to assure a safe and satisfactory experience to our customers is necessarily limited
to the extent of our or our franchisees’, dependence on third parties, from time to time. Moreover, we may not be able to
distance or insulate ourselves from any adverse publicity or reputational damage arising from any act, omission or negligence
on the part of a vendor or other third party, which may negatively affect a customer’s experience at any of the Simplicity
Esports Gaming Centers.
We
or our franchisees may not be able to operate in the United States, or obtain and maintain licenses and permits necessary for
such operation, in compliance with laws, regulations and other requirements, which could adversely affect our business, results
of operations or financial condition.
Each
Simplicity Esports Gaming Center will be subject to licensing and regulation by alcoholic beverage control, amusement, health,
sanitation, safety, building code and fire agencies in the country, state, county and/or municipality in which the Simplicity
Esports Gaming Center is located. In the United States, each Simplicity Esports Gaming Center with a restaurant or bar will be
required to obtain a license to sell alcoholic beverages on the premises from a state authority and, in certain locations, county
and municipal authorities. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time.
In some states, the loss of a license for cause with respect to one Simplicity Esports Gaming Center may lead to the loss of licenses
at all Simplicity Esports Gaming Centers in that state and could make it more difficult to obtain additional licenses in that
state. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of each Simplicity Esports Gaming
Center, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control
and handling and storage and dispensing of alcoholic beverages. Our failure or a failure by a franchisee in obtaining and maintaining
the required licenses, permits and approvals at any one Simplicity Esports Gaming Center could impact the continuing operations
of existing Simplicity Esports Gaming Centers, or delay or prevent the opening of new Simplicity Esports Gaming Centers. Although
we do not anticipate any material difficulties occurring in the future, the failure to receive or retain a liquor license, or
any other required permit or license, in a particular location, or to continue to qualify for, or renew licenses, could have a
material adverse effect on operations and our ability to obtain such a license or permit in other locations.
As
a result of operating certain entertainment games and attractions, including skill-based games that offer redemption prizes, the
Simplicity Esports Gaming Centers in the United States are subject to amusement licensing and regulation by the countries, states,
provinces, counties and municipalities in which our Simplicity Esports Gaming Centers are located. These laws and regulations
can vary significantly by country, state, province, county, and municipality and, in some jurisdictions, may require us to modify
our business operations or alter the mix of redemption games and simulators we offer. Moreover, as more states in the United States
and local communities implement legalized gambling, the laws and corresponding enabling regulations may also be applicable to
our redemption games and regulators may create new licensing requirements, taxes or fees, or restrictions on the various types
of redemption games we offer. Furthermore, other states, provinces, counties and municipalities may make changes to existing laws
to further regulate legalized gaming and illegal gambling. Adoption of these laws, or adverse interpretation of existing laws,
after we have established a Simplicity Esports Gaming Center in the jurisdiction could require the existing center in these jurisdictions
to alter the mix of games, modify certain games, change the mix of prizes that we may offer or terminate the use of specific games,
any of which could adversely affect our operations.
We
are also subject to laws and regulations governing our relationship with our employees, including those related to minimum wage
requirements, exempt status, overtime, health insurance mandates, working and safety conditions, immigration status requirements,
child labor, and non-discrimination. Additionally, changes in federal labor laws, including card verification regulations, could
result in portions of our workforce being subjected to greater organized labor influence, which could result in an increase to
our labor costs. A significant portion of Simplicity Esports Gaming Center personnel will be paid at minimum wage rates established
by federal, state and municipal law. Increases in the minimum wage result in higher labor costs, which may be only partially offset
by price increases and operational efficiencies.
We
are also subject to the rules and regulations of the Federal Trade Commission and various state laws regulating the offer and
sale of franchises. The Federal Trade Commission and various state laws require that we furnish a franchise disclosure document
containing certain information to prospective franchisees, and a number of states require registration of the franchise disclosure
document with state authorities. State laws that regulate the franchisor-franchisee relationship presently exist in a substantial
number of states, and bills have been introduced in Congress from time to time that would provide for federal regulation of the
franchisor-franchisee relationship. The state laws often limit, among other things, the duration and scope of non-competition
provisions, the ability of a franchisor to terminate or refuse to renew a franchise and the ability of a franchisor to designate
sources of supply. We shall endeavor to make sure that any franchise disclosure document we provide, together with any applicable
state versions or supplements, and franchising procedures, comply in all material respects with both the Federal Trade Commission
guidelines and all applicable state laws regulating franchising in those states in which we have offered franchises.
If
we and our franchisees fail to comply with such laws and regulations, we may be subject to various sanctions and/or penalties
and fines or may be required to cease operations until we achieve compliance, which could have an adverse effect on our business
and our financial results.
Our
growth through franchising may not occur as rapidly as we currently anticipate and may be subject to additional risks.
As
part of our growth strategy, we will continue to seek franchisees to operate Simplicity Esports Gaming Centers in certain strategic
domestic locations or venues. We believe that our ability to recruit, retain and contract with qualified franchisees will be increasingly
important to our operations as we expand. Our franchisees are dependent upon the availability of adequate sources of financing
in order to meet their development obligations. Such financing may not be available to our franchisees, or only available upon
disadvantageous terms. Our franchise strategy may not enhance our results of operations.
Expanding
through franchising exposes our business and brand to risks because the quality of the franchised operations will be beyond our
immediate control, including risks associated with our confidential information, intellectual properties (including trademarks)
and brand reputation. Even if we have contractual remedies to cause franchisees to maintain operational standards, enforcing those
remedies may require litigation and therefore our image and reputation may suffer, unless and until such litigation is successfully
concluded.
We
could face liability from or as a result of our franchisees.
Various
state and federal laws will govern the relationship between us and our franchisees and the potential sale of a franchise. If we
fail to comply with these laws, we could be liable for damages to franchisees and fines or other penalties. A franchisee or government
agency may bring legal action against us based on the franchisee/franchisor relationship. Also, under the franchise business model,
we may face claims and liabilities based on vicarious liability, joint-employer liability, or other theories or liabilities. Such
legal actions could result in expensive litigation with our franchisees or government agencies that could adversely affect both
our profit and our important relations with our franchisees. In addition, regulatory or legal developments could result in changes
to laws or the franchisor/franchisee relationship that could negatively impact the franchise business model and, accordingly,
our profit.
We
may not be able to compete favorably in the highly competitive out-of-home and home-based entertainment market in the United States,
which could have a material adverse effect on our business, results of operations or financial condition.
The
out-of-home entertainment market in the United States is highly competitive. Simplicity Esports Gaming Centers that we or our
franchisees operate will compete for customers’ discretionary entertainment dollars with providers of out-of-home entertainment,
including localized attraction facilities such as movie theatres, sporting events, bowling alleys, sports activity centers, arcades
and entertainment centers, nightclubs and restaurants as well as theme parks. Many of the entities operating these businesses
are larger and have significantly greater financial resources, a greater number of locations, have been in business longer, have
greater name and brand recognition and are better established in the local markets where Simplicity Esports Gaming Centers are
planned to be located. As a result, they may be able to invest greater resources than we can in attracting customers and succeed
in attracting customers who would otherwise come to the Simplicity Esports Gaming Centers we or our franchisees operate. In the
United States, the legalization of casino gambling in geographic areas near any future Simplicity Esports Gaming Center would
create the possibility for adult entertainment alternatives, which could have a material adverse effect on our business and financial
condition. We will also face competition from local, regional and national establishments that offer entertainment experiences
similar to us. Simplicity Esports Gaming Centers we or our franchisees operate will also face competition from increasingly sophisticated
home-based forms of entertainment, such as internet and video gaming and home movie streaming and delivery. If we fail to compete
favorably in the competitive out-of-home and home-based entertainment markets it could have a material adverse effect on our business,
results of operations and financial condition.
Our
senior management team has limited experience in establishing, operating, licensing rights to and franchising entertainment centers
and related products.
The
members of our senior management team have extensive backgrounds in finance and the management of financial services businesses,
however, they have limited prior experience in establishing, operating, licensing rights to and franchising entertainment centers.
We will need to expand our management team, to include individuals with expertise in establishing and operating entertainment
centers as well as individuals with expertise in product licensing and franchise operations. If we are unable to recruit professionals
with acceptable backgrounds in establishing and operating entertainment centers and with backgrounds in product licensing and
financing, we may not be able to pursue our growth strategy which could have a material adverse effect on our business and results
of operations.
Our
success depends upon our ability to recruit and retain qualified management and operating personnel at Simplicity Esports Gaming
Centers.
We
and our franchisees must attract, retain and motivate a sufficient number of qualified management and operating personnel in order
to maintain consistency in our service, hospitality, quality and atmosphere of our Simplicity Esports Gaming Centers. Qualified
management and operating personnel are typically in high demand. If we and our franchisees are unable to attract and retain a
satisfactory number of qualified management and operating personnel, labor shortages could delay the planned openings of new Simplicity
Esports Gaming Centers which could have a material adverse effect on our business and results of operations.
Acquisitions,
other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that
may adversely impact our business and results of operations.
Acquisitions
are an important element of our overall corporate strategy and use of capital, and these transactions could be material to our
financial condition and results of operations. We expect to continue to evaluate and enter into discussions regarding a wide array
of potential strategic transactions. The process of integrating an acquired company, business, or product has created, and will
continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks may include, but are not
limited to:
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diversion of management’s
time and focus from operating our business to acquisition integration challenges;
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failure to successfully
further develop the acquired business or product lines;
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implementation or
remediation of controls, procedures and policies at the acquired company;
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integration of the
acquired company’s accounting, human resources and other administrative systems, and coordination of product, engineering
and sales and marketing functions;
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transition of operations,
users and customers onto our existing platforms;
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reliance on the
expertise of our strategic partners with respect to market development, sales, local regulatory compliance and other operational
matters;
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failure to obtain
required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval, under
competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or otherwise
restrict our ability to realize the expected financial or strategic goals of an acquisition;
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in the case of foreign
acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic,
currency, political and regulatory risks associated with specific countries;
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cultural challenges
associated with integrating employees from the acquired company into our organization, and retention of employees from the
businesses we acquire;
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liability for or
reputational harm from activities of the acquired company before the acquisition or from our strategic partners, including
patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown
liabilities; and
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litigation or other
claims in connection with the acquired company, including claims from terminated employees, customers, former shareholders
or other third parties.
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Our
failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments
or strategic alliances could cause us to fail to realize the anticipated benefits of such acquisitions, investments or alliances,
incur unanticipated liabilities, and harm our business generally.
Our
acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities
or amortization expenses, or impairment of goodwill and purchased long-lived assets, and restructuring charges, any of which could
harm our financial condition or results of operations and cash flows. Also, the anticipated benefits of many of our acquisitions
may not materialize.
Our
insurance coverage may not adequately protect us against all future risks, which may adversely affect our business and prospects.
We
maintain insurance coverage, including for fire, acts of god and perils, terrorism, burglary, money, loss of profit, fidelity
guarantee, fixed glass and sanitary fitting, electronic equipment, machinery breakdown, portable equipment, sign boards, commercial
general liability, marine transit, and directors’ and officers’ liability insurance, as well as employee health and
medical insurance, with standard exclusions in each instance. While we maintain insurance in amounts that we consider reasonably
sufficient for a business of our nature and scale, with insurers that we consider reliable and credit worthy, we may face losses
and liabilities that are uninsurable by their nature, or that are not covered, fully or at all, under our existing insurance policies.
Moreover, coverage under such insurance policies would generally be subject to certain standard or negotiated exclusions or qualifications
and, therefore, any future insurance claims by us may not be honored by our insurers in full, or at all. In addition, our premium
payments under our insurance policies may require a significant investment by us.
To
the extent that we suffer loss or damage that is not covered by insurance or that exceeds our insurance coverage, the loss will
have to be borne by us and our business, cash flow, financial condition, results of operations and prospects may be adversely
affected.
Changes
in laws or regulations, or a failure to comply with any laws and regulations, may adversely affect our business, investments and
results of operations.
We
are subject to laws and regulations enacted by national, regional and local governments. In particular, we are required to comply
with certain SEC and other legal requirements. Compliance with, and monitoring of, applicable laws and regulations may be difficult,
time consuming and costly. Those laws and regulations and their interpretation and application may also change from time to time
and those changes could have a material adverse effect on our business, investments and results of operations. In addition, a
failure to comply with applicable laws or regulations, as interpreted and applied, could have a material adverse effect on our
business and results of operations.
We
are dependent upon our executive officers and directors and their departure could adversely affect our ability to operate.
Our
operations are dependent upon a relatively small group of individuals and, in particular, our executive officers and directors.
We believe that our success depends on the continued service of our executive officers and directors. We do not have key-man insurance
on the life of any of our directors or executive officers. The unexpected loss of the services of one or more of our directors
or executive officers could have a detrimental effect on us.
Our
executive officers, directors, security holders and their respective affiliates may have competitive pecuniary interests that
conflict with our interests.
We
have not adopted a policy that expressly prohibits our directors, executive officers, security holders or affiliates from having
a direct or indirect pecuniary or financial interest in any investment to be acquired or disposed of by us or in any transaction
to which we are a party or have an interest. While our employment agreements with our key executive officers contain non-compete
provisions, we do not have a policy that expressly prohibits any such persons from engaging for their own account in business
activities of the types conducted by us. Accordingly, such persons or entities may have a conflict between their interests and
ours.
We
are an emerging growth company within the meaning of the Securities Act of 1933, as amended (the “Securities Act”),
and if we take advantage of certain exemptions from disclosure requirements available to emerging growth companies, this could
make our securities less attractive to investors and may make it more difficult to compare our performance with other public companies.
We
are an “emerging growth company” within the meaning of the Securities Act, as modified by the Jumpstart Our Business
Startups Act of 2012 (the “JOBS Act”), and we may take advantage of certain exemptions from various reporting requirements
that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being
required to comply with the auditor internal controls attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002,
as amended (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation
and stockholder approval of any golden parachute payments not previously approved. As a result, our stockholders may not have
access to certain information they may deem important. We could be an emerging growth company for up to five years, although circumstances
could cause us to lose that status earlier, including if the market value of our Common Stock held by non-affiliates exceeds $700
million as of any November 30 before that time, in which case we would no longer be an emerging growth company as of the following
May 31. We cannot predict whether investors will find our securities less attractive because we will rely on these exemptions.
If some investors find our securities less attractive as a result of our reliance on these exemptions, the trading prices of our
securities may be lower than they otherwise would be, there may be a less active trading market for our securities and the trading
prices of our securities may be more volatile.
Further,
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial
accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared
effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company
can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies
but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means
that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging
growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may
make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging
growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences
in accounting standards used.
Compliance
obligations under the Sarbanes-Oxley Act may require substantial financial and management resources.
Section
404 of the Sarbanes-Oxley Act requires that we evaluate and report on our system of internal controls beginning with our Annual
Report on Form 10-K for the year ended May 31, 2020. As long as we remain an emerging growth company, we will not be required
to comply with the independent registered public accounting firm attestation requirement on our internal control over financial
reporting.
Provisions
in our Certificate of Incorporation, as amended, and Delaware law may inhibit a takeover of us, which could limit the price investors
might be willing to pay in the future for our Common Stock and could entrench management.
Our
Certificate of Incorporation, as amended, contains provisions that may discourage unsolicited takeover proposals that stockholders
may consider to be in their best interests. These provisions include a staggered board of directors and the ability of the board
of directors to designate the terms of and issue new series of preferred shares, which may make more difficult the removal of
management and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for
our securities.
If
we fail to keep pace with changing industry technology and consumer preferences, we will be at a competitive disadvantage.
The
Simplicity products and services compete within industries that are characterized by swiftly changing technology, evolving industry
standards, frequent new and enhanced product introductions, rapidly changing consumer preferences and product obsolescence. In
order to continue to compete effectively, we need to respond quickly to technological changes and to understand their impact on
customers’ preferences. We may take significant time and resources to respond to these technological changes and changes
in consumer preferences. Our business and results of operations may be negatively impacted if our products and services fail to
keep pace with these changes.
Various
product safety laws and governmental regulations applicable to the distributor of Simplicity Esports LLC’s and/or PLAYlive
Nation, Inc.’s products may adversely affect our business, results of operations and financial condition.
Our
distribution of Simplicity Esports LLC’s and/or PLAYlive Nation, Inc.’s products will be subject to numerous federal,
state, provincial, local and foreign laws and regulations, including laws and regulations with respect to product safety, including
regulations enforced by the United States Consumer Products Safety Commission. We and our franchisees could incur costs in complying
with these regulations and, if they fail to comply, could incur significant penalties. A failure to comply with applicable laws
and regulations, or concerns about product safety, may also lead to a recall or post-manufacture repair of selected Simplicity
Esports LLC’s and/or PLAYlive Nation, Inc.’s products, resulting in the rejection of the products by our franchisees,
lost sales, increased customer service and support costs, and costly litigation.
Public
health epidemics or outbreaks, such as COVID-19, could materially and adversely impact our business.
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because
COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities
have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more
restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity
Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have since
reopened 14 corporate and 11 franchised Simplicity Gaming Centers as of April 27, 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, a limited number of the franchisees of Simplicity Gaming Centers have defaulted on their
obligations to pay their minimum monthly royalty payment to us. This has resulted in either an increase in accounts receivables
or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability to pay the minimum
monthly royalty payments owed by the franchisee. We have not written off as bad debt any accounts receivables attributable to
franchisee minimum monthly royalty payments owed during the COVID-19 pandemic. However, as of February 28, 2021, we have recorded
an allowance for doubtful accounts of approximately $139,867, as our collection efforts are ongoing. We have experienced an increase
in our gross account receivables by approximately $73,000, $47,000, $44,000, and $237,700 during the quarters ended May 31, 2020,
August 31, 2020, November 30, 2020 and February 28, 2021, respectively. Notwithstanding it is unclear exactly how much of the
increase in accounts receivables is attributable to the impact of COVID-19. We have waived the minimum monthly royalty payment
obligations from July 2020 through present day and are instead billing the franchisees a true-up of 6% of gross sales without
a minimum. We continue to assess possible similar accommodations to the franchisees in light of the impact of COVID-19.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date adversely impacted the Company’s business during the nine months ended February 28, 2021 and will
potentially continue to impact the Company’s business. Management expects that all of its business segments, across all
of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s
business and the duration for which it may have an impact cannot be determined at this time.
Risks
Relating to Our Esports Business
Our
esports businesses are substantially dependent on the continuing popularity of the esports industry as a whole.
The
esports industry is in the early stages of its respective development. Although the esports industry has experienced rapid growth,
consumer preferences may shift and there is no assurance this growth will continue in the future. We have taken steps to diversify
their businesses and mitigate these risks to an extent and continue to seek out new opportunities in the esports industry. However,
due to the rapidly evolving nature of technology and online gaming, the esports industry may experience volatile and declining
popularity as new options for online gaming and esports become available, or consumer preferences shift to other forms of entertainment,
and as a consequence, our businesses and results of operations may be materially negatively affected.
Our
esports business faces intense and wide-ranging competition, which may have a material negative effect on our business and results
of operations.
The
success of our esports business is dependent upon the performance and/or popularity of its teams. Simplicity Esports LLC’s
teams compete, in varying respects and degrees, with other live sporting events, and with sporting events delivered over television
networks, radio, the Internet and online services, mobile applications and other alternative sources. For example, our esports
teams compete for attendance, viewership and advertising with a wide range of alternatives available in major metropolitan areas.
During some or all of the esports season, our teams face competition, in varying respects and degrees, from professional and collegiate
basketball, hockey, baseball, football, and soccer, among others.
As
a result of the large number of options available, we face strong competition for the sports and gaming fan. We must compete with
other esports teams, traditional sports teams and sporting events, in varying respects and degrees, including on the basis of
the quality of the teams we field, their success in the leagues, tournaments and genres in which they compete, our ability to
provide an entertaining environment at any esports games that we host at our centers, prices charged for tickets and the viewing
availability of our teams on multiple media alternatives. Given the nature of esports and sports in general, there can be no assurance
that we will be able to compete effectively, including with companies that may have greater resources than we have, and as a consequence,
our business and results of operations may be materially negatively affected by competition.
Our
businesses are substantially dependent on the continued popularity and/or competitive success of Simplicity Esports LLC’s
teams, which cannot be assured.
Our
future financial results will be dependent on the Simplicity teams becoming and remaining popular with our fan base and, in varying
degrees, on the teams achieving in-game success, which can generate fan enthusiasm, resulting in sustained ticket and merchandise
sales during the season. Furthermore, success in the regular season at certain tournaments may qualify one or more of our esports
teams for participation in post-season playoffs, which provides us with additional revenue from prize money by increasing the
number of games played by our sports teams and, more importantly, by generating increased excitement and interest in our esports
teams, which can improve attendance in subsequent seasons. There can be no assurance that any of our esports teams, will develop
a significant fan base, maintain continued popularity or compete in post-season play in the future.
Defection
of our esports players to other teams or managers could hinder our success.
We
compete with other esports athlete management businesses to sign and retain world class esports players, some of which have greater
resources or brand recognition and popularity than ours. Our players may choose to defect to other esports organizations for various
reasons, including that they have been made a superior offer or they have chosen to pursue new or other opportunities. The loss
or defection of any of our esports players could have negative consequences on our businesses and results of operations. While
we take or intend to take, all appropriate steps to retain our players and protect their interests, there can be no assurances
that players will not defect to other esports organizations.
The
actions of the various esports leagues and tournaments may have a material negative effect on our business and results of operations.
The
governing bodies of the various esports leagues and tournaments, under certain circumstances, can take actions that they deem
to be in the best interests of their respective leagues or tournaments, which may not necessarily be consistent with maximizing
our results of operations and which could affect our esports teams in ways that are different than the impact on other esports
teams. For example, they can take actions relating to the rights to telecast the games of league members or tournament participants,
including the Simplicity team, licensing of the rights to produce and sell merchandise bearing the logos and/or other intellectual
property of our esports teams and the leagues or tournaments, and the internet-based activities of our esports teams. Certain
of these decisions by the esports leagues and tournaments could have a material negative effect on our business and results of
operations. From time to time, we may disagree with or challenge actions that the leagues or tournaments take or the power and
authority they assert.
We
may be unable to effectively manage the growth in the scope and complexity of our business, including our expansion into the esports
business which is untested and into adjacent business opportunities.
Our
future success depends, in part, on our ability to manage our expanded business, including our aspirations for continued expansion.
We intend to dedicate resources to a new business model that is largely untested, as is the case with esports. We do not know
to what extent our future expansions will be successful. Further, even if successful, the growth of our business could create
significant challenges for our management, operational, and financial resources, and could increase existing strain on, and divert
focus from, our core businesses. If not managed effectively, this growth could result in the over-extension of our operating infrastructure,
and our management systems, information technology systems, and internal controls and procedures may not be adequate to support
this growth. Failure to adequately manage our growth in any of these ways may cause damage to our brand, damage our reputation
or otherwise negatively impact our business.
Our
industry is subject to rapid technological change, and if we do not adapt to, and appropriately allocate our resources among,
emerging technologies and business models, our business may be negatively impacted.
Technology
changes rapidly in the interactive entertainment industry. We must continually anticipate and adapt our products, services and
business models to emerging technologies and delivery platforms in order to stay competitive. Forecasting our revenues and profitability
for these new products, services and business models is inherently uncertain and volatile, and if we invest in the development
of interactive entertainment products or services incorporating a new technology or for a new platform that does not achieve significant
commercial success, whether because of competition or otherwise, we may not recover the often substantial “up front”
costs of developing and marketing those products and services, or recover the opportunity cost of diverting management and financial
resources away from other products or services. Further, our competitors may adapt to an emerging technology or business model
more quickly or effectively than we do, creating products that are technologically superior to ours, more appealing to consumers,
or both.
If,
on the other hand, we elect not to pursue the development of products or services incorporating a new technology or for new platforms,
or otherwise elect not to pursue new business models, that achieve significant commercial success, it may have adverse consequences.
It may take significant time and resources to shift product development resources to that technology, platform or business model,
as the case may be, and may be more difficult to compete against existing products and services incorporating that technology
or for that platform or against companies using that business model.
Many
elements of our business are unique, evolving and relatively unproven. Our business and prospects depend on the continuing development
of live streaming of competitive esports gaming. The market for esports and amateur online gaming competition is relatively new
and rapidly developing and are subject to significant challenges. Our business relies upon our ability to cultivate and grow an
active gamer community, and our ability to successfully monetize such community through tournament fees, subscriptions for our
esports gaming services, and advertising and sponsorship opportunities. In addition, our continued growth depends, in part, on
our ability to respond to constant changes in the esports gaming industry, including rapid technological evolution, continued
shifts in gamer trends and demands, frequent introductions of new games and titles and the constant emergence of new industry
standards and practices. Developing and integrating new games, titles, content, products, services or infrastructure could be
expensive and time-consuming, and these efforts may not yield the benefits we expect to achieve at all. We cannot assure you that
we will succeed in any of these aspects or that the esports gaming industry will continue to grow as rapidly as it has in the
past.
We
may encounter difficulties in integrating Simplicity Esports LLC’s esports businesses or otherwise realizing the anticipated
benefits of the transaction.
As
part of our business strategy, from time to time, we acquire, make investments in, or enter into strategic alliances and joint
ventures with, complementary businesses, such as the acquisition of the Simplicity esports business in January 2019. The acquisition
of Simplicity Esports LLC involves significant risks and uncertainties, including: (i) the potential for Simplicity Esports LLC’s
business to underperform relative to our expectations and the acquisition price, (ii) the potential for Simplicity Esports LLC’s
business to cause our financial results to differ from expectations in any given period, or over the longer-term, (iii) unexpected
tax consequences from the acquisition, or the tax treatment of Simplicity Esports LLC’s business’s operations going
forward, giving rise to incremental tax liabilities that are difficult to predict, (iv) difficulty in integrating Simplicity Esports
LLC’s business, its operations and its employees in an efficient and effective manner, (v) any unknown liabilities or internal
control deficiencies assumed as part of the acquisition, and (vi) the potential loss of key employees of Simplicity Esports LLC’s
businesses. Further, the transaction may involve the risk that our senior management’s attention will be excessively diverted
from our other operations, the risk that the gaming industry does not evolve as anticipated and that any intellectual property
or personnel skills acquired do not prove to be those needed for our future success, and the risk that our strategic objectives,
cost savings or other anticipated benefits are otherwise not achieved.
Our
business may be harmed if our licensing partners, or other third parties with whom we do business, act in ways that put our brand
at risk.
We
anticipate that our business partners shall be given access to sensitive and proprietary information or control over our intellectual
property in order to provide services and support to our teams. These third parties may misappropriate our information or intellectual
property and engage in unauthorized use of it or otherwise act in a way that places our brand at risk. The failure of these third
parties to provide adequate services and technologies, the failure of third parties to adequately maintain or update their services
and technologies or the misappropriation or misuse of this information or intellectual property could result in a disruption to
our business operations or an adverse effect on our reputation, and may negatively impact our business.
Our
business is highly dependent on the success and availability of video game platforms manufactured by third parties.
We
expect to derive a substantial portion of our revenues from esports games played on game platforms manufactured by third parties,
such as Sony’s PS4®, Microsoft’s Xbox One®, and Nintendo’s Wii U® and Switch®, and PCs. The
success of our business will be driven in large part by our ability to accurately predict which platforms will be successful in
the marketplace. We also rely on the availability of an adequate supply of these video game consoles and the continued support
for these consoles by their manufacturers. We may be required to commit significant resources well in advance of the anticipated
introduction of a new platform. If increased costs are not offset by higher revenues and other cost efficiencies, our business
could be negatively impacted. If the platforms for which we invested resources do not attain significant market acceptance, we
may not be able to recover our costs, which could be significant.
The
games we support are subject to scrutiny regarding the appropriateness of their content. If the publishers and distributors we
partner with fail to receive their target ratings for certain titles, or if retailers refuse to sell such titles due to what they
perceive to be objectionable content, it could have a negative impact on our business.
Console
and PC games are subject to ratings by the Entertainment Software Rating Board (the “ESRB”), a self-regulatory body
based in the U.S. that provides U.S. and Canadian consumers of interactive entertainment software with ratings information, including
information on the content in such software, such as violence, nudity or sexual content, along with an assessment of the suitability
of the content for certain age groups. Certain other countries have also established content rating systems as prerequisites for
product sales in those countries. In addition, certain stores use other ratings systems, such as Apple’s use of its proprietary
“App Rating System” and Google Play’s use of the International Age Rating Coalition (IARC) rating system. If
the software publishers that supply our games are unable to obtain the ratings they have targeted for their products, it could
have a negative impact on our business. In some instances, the software publishers and developers may be required to modify their
products to comply with the requirements of the rating systems, which could delay or disrupt the release of any given product,
or may prevent its sale altogether in certain territories, which would limited its availability for use in the games that our
teams play.
We
will depend on servers to operate our games with online features. If we were to lose server functionality for any reason, our
business may be negatively impacted.
Our
business at our game centers will rely on the continuous operation of servers, some of which are owned and operated by third parties.
Although we shall strive to maintain more than sufficient server capacity, and provide for active redundancy in the event of limited
hardware failure, any broad-based catastrophic server malfunction, a significant service-disrupting attack or intrusion by hackers
that circumvents security measures, a failure of disaster recovery service or the failure of a company on which we are relying
for server capacity to provide that capacity for whatever reason would likely degrade or interrupt the functionality of our games
with online features, and could prevent the operation of such games altogether, any of which could result in the loss of sales
for, or in, such games.
We
also rely on networks operated by third parties, such as the PlayStation® Network, Xbox Live® and Steam®, for the
functionality of the games we use which have online features. An extended interruption to any of these services could adversely
affect our ability to operate our games with online features, negatively impacting our business.
Further,
insufficient server capacity could also negatively impact our game center business. Conversely, if we overestimate the amount
of server capacity required by our business, we may incur unnecessary additional operating costs.
The
esports gaming industry is very “hit” driven. We may not have access to “hit” games or titles.
Select
game titles dominate competitive esports and online gaming, including League of Legends, Minecraft, Fortnite and Overwatch, and
many new games titles are regularly introduced in each major industry segment (console, mobile and PC free-to-download). Despite
the number of new entrants, only a very few “hit” titles account for a significant portion of total revenue in each
segment.
The
size and engagement level of our online and in person gamers are critical to our success and are closely linked to the quality
and popularity of the esports game publishers with which we have licenses. Esports game publishers on our gaming platform, including
those who have entered into license agreements with us, may leave us for other gaming platforms or leagues which may offer better
competition, and terms and conditions than we do. Furthermore, we may lose esports game publishers if we fail to generate the
number of gamers to our tournaments and league competitions expected by such publishers. In addition, if popular esports game
publishers cease to license their games to us, or our live streams fail to attract gamers, we may experience a decline in gamer
traffic, subscriptions and engagement, which may have a material and adverse impact on our results of operations and financial
conditions.
We
must continue to attract and retain the most popular esports gaming titles in order to maintain and increase the popularity of
our leagues, tournaments and competitions, and ensure the sustainable growth of our gamer community. We must continue to identify
and enter into license agreements with esports gaming publishers developing “hit’ games that resonate with our community
on an ongoing basis. We cannot assure you that we can continue to attract and retain the same level of first-tier esports game
publishers and our ability to do so is critical to our future success.
If
we fail to keep our existing gamers highly engaged, to acquire new gamers, to successfully implement a membership model for our
gaming community, our business, profitability and prospects may be adversely affected.
Our
success depends on our ability to maintain and grow the number of gamers attending and participating in our in-person and online
tournaments and competitions, and using our gaming platform, and keeping our gamers highly engaged. Of particular importance is
the successful deployment and expansion of our membership model to our gaming community for purposes of creating predictable recurring
revenues.
In
order to attract, retain and engage gamers and remain competitive, we must continue to develop and expand our leagues, including
internationally, produce engaging tournaments and competitions, successfully license the newest “hit” esports games
and titles, implement new technologies and strategies, improve features of our gaming platform and stimulate interactions in our
gamer community.
A
decline in the number of our gamers in our ecosystem may adversely affect the engagement level of our gamers, the vibrancy of
our gamer community, or the popularity of our league play, which may in turn reduce our monetization opportunities, and have a
material and adverse effect on our business, financial condition and results of operations. If we are unable to attract and retain
gamers, our revenues may decline and our results of operations and financial condition may suffer.
We
cannot assure you that our online and in person gaming platform and centers will remain sufficiently popular with gamers to offset
the costs incurred to operate and expand them. It is vital to our operations that we remain sensitive and responsive to evolving
gamer preferences and offer first-tier esports game content that attracts our gamers. We must also keep providing gamers with
new features and functions to enable superior content viewing, and social interaction. Further, we will need to continue to develop
and improve our gaming platform and centers and to enhance our brand awareness, which may require us to incur substantial costs
and expenses. If such increased costs and expenses do not effectively translate into an improved gamer experience and long-term
engagement, our results of operations may be materially and adversely affected.
Risks
Related to International Operations
The
risks related to international operations, in particular in countries outside of the United States, could negatively affect the
Company’s results.
It
is expected that the Company will derive between 15% to 20% of its revenue from transactions denominated in currencies other than
the United States dollar, such as Brazil, and the Company expects that receivables with respect to foreign sales will account
for a significant amount of its total accounts and receivables. As such, the Company’s operations may be adversely affected
by changes in foreign government policies and legislation or social instability and other factors which are not within the control
of the Company, including, but not limited to, recessions in foreign economies, expropriation, nationalization and limitation
or restriction on repatriation of funds, assets or earnings, longer receivables collection periods and greater difficulty in collecting
accounts receivable, changes in consumer tastes and trends, renegotiation or nullification of existing contracts or licenses,
changes in gaming policies, regulatory requirements or the personnel administering them, currency fluctuations and devaluations,
exchange controls, economic sanctions and royalty and tax increases, risk of terrorist activities, revolution, border disputes,
implementation of tariffs and other trade barriers and protectionist practices, taxation policies, including royalty and tax increases
and retroactive tax claims, volatility of financial markets and fluctuations in foreign exchange rates, difficulties in the protection
of intellectual property particularly in countries with fewer intellectual property protections, the effects that evolving regulations
regarding data privacy may have on the Company’s online operations, adverse changes in the creditworthiness of parties with
whom the Company has significant receivables or forward currency exchange contracts, labor disputes and other risks arising out
of foreign governmental sovereignty over the areas in which the Company’s operations are conducted. The Company’s
operations may also be adversely affected by social, political and economic instability and by laws and policies of such foreign
jurisdictions affecting foreign trade, taxation and investment. If the Company’s operations are disrupted and/or the economic
integrity of its contracts is threatened for unexpected reasons, its business may be harmed.
The
Company’s international activities may require protracted negotiations with host governments, national companies and third
parties. Foreign government regulations may favor or require the awarding of contracts to local contractors or require foreign
contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. In the event of a dispute arising in
connection with the Company’s operations in a foreign jurisdiction where it conducts its business, the Company may be subject
to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdictions of
the courts of United States or enforcing American judgments in such other jurisdictions. The Company may also be hindered or prevented
from enforcing its rights with respect to a governmental instrumentality because of the doctrine of sovereign immunity. Accordingly,
the Company’s activities in foreign jurisdictions could be substantially affected by factors beyond the Company’s
control, any of which could have a material adverse effect on it. The Company believes that management’s experience to date
in commercializing its products, services and solutions in Brazil may be of assistance in helping to reduce these risks. Some
countries in which the Company may operate may be considered politically and economically unstable.
Doing
business in the industries in which the Company operates often requires compliance with numerous and extensive procedures and
formalities. These procedures and formalities may result in unexpected or lengthy delays in commencing important business activities.
In some cases, failure to follow such formalities or obtain relevant evidence may call into question the validity of the entity
or the actions taken. Management of the Company is unable to predict the effect of additional corporate and regulatory formalities
which may be adopted in the future including whether any such laws or regulations would materially increase the Company’s
cost of doing business or affect its operations in any area.
The
Company may in the future enter into agreements and conduct activities outside of the jurisdictions where it currently carries
on business, which expansion may present challenges and risks that the Company has not faced in the past, any of which could adversely
affect the results of operations and/or financial condition of the Company.
The
Company is subject to foreign exchange and currency risks that could adversely affect its operations, and the Company’s
ability to mitigate its foreign exchange risk through hedging transactions may be limited.
The
Company expects that it will derive between 15% and 20% of its revenues in currencies other than the United States dollar; however,
a substantial portion of the Company’s operating expenses are incurred in United States dollars. Fluctuations in the exchange
rate between the U.S. dollar, the Real (Brazil) and other currencies may have a material adverse effect on the Company’s
business, financial condition and operating results. The Company’s consolidated financial results are affected by foreign
currency exchange rate fluctuations. Foreign currency exchange rate exposures arise from current transactions and anticipated
transactions denominated in currencies other than United States dollars and from the translation of foreign-currency-denominated
balance sheet accounts into United States dollar-denominated balance sheet accounts. The Company is exposed to currency exchange
rate fluctuations because portions of its revenue and expenses are denominated in currencies other than the United States dollar,
particularly the Real. In particular, uncertainty regarding economic conditions in Brazil pose risk to the stability of the Real.
Exchange rate fluctuations could adversely affect the Company’s operating results and cash flows and the value of its assets
outside of United States. If a foreign currency is devalued in a jurisdiction in which the Company is paid in such currency, then
the Company’s customers may be required to pay higher amounts for the Company’s products or services, which they may
be unable or unwilling to pay.
While
the Company may enter into forward currency swaps and other derivative instruments intended to mitigate the foreign currency exchange
risk, there can be no assurance the Company will do so or that any instruments that the Company enters into will successfully
mitigate such risk. If the Company enters into foreign currency forward or other hedging contracts, the Company would be subject
to the risk that a counterparty to one or more of these contracts defaults on its performance under the contracts. During an economic
downturn, a counterparty’s financial condition may deteriorate rapidly and with little notice, and the Company may be unable
to take action to protect its exposure. In the event of a counterparty default, the Company could lose the benefit of its hedging
contract, which may harm its business and financial condition. In the event that one or more of the Company’s counterparties
becomes insolvent or files for bankruptcy, its ability to eventually recover any benefit lost as a result of that counterparty’s
default may be limited by the liquidity of the counterparty. The Company expects that it will not be able to hedge all of its
exposure to any particular foreign currency, and it may not hedge its exposure at all with respect to certain foreign currencies.
Changes in exchange rates and the Company’s limited ability or inability to successfully hedge exchange rate risk could
have an adverse impact on the Company’s liquidity and results of operations.
We
may be unable to obtain licenses in new jurisdictions where our customers operate.
We
are subject to regulation in any jurisdiction where our customers access our website. To expand into any such jurisdiction we
may need to be licensed, or obtain approvals of our products or services. If we do not receive, or receive a revocation of a license
in a particular jurisdiction for our products or services, we would not be able to sell or place our products or services in that
jurisdiction. Any such outcome could materially and adversely affect our results of operations and any growth plans for our business.
Privacy
concerns could result in regulatory changes and impose additional costs and liabilities on the Company, limit its use of information,
and adversely affect its business.
Personal
privacy has become a significant issue in the United States, Brazil, Europe, and many other countries in which the Company currently
operates and may operate in the future. Many federal, state, and foreign legislatures and government agencies have imposed or
are considering imposing restrictions and requirements about the collection, use, and disclosure of personal information obtained
from individuals. Changes to laws or regulations affecting privacy could impose additional costs and liability on the Company
and could limit its use of such information to add value for customers. If the Company were required to change its business activities
or revise or eliminate services, or to implement burdensome compliance measures, its business and results of operations could
be harmed. In addition, the Company may be subject to fines, penalties, and potential litigation if it fails to comply with applicable
privacy regulations, any of which could adversely affect the Company’s business, liquidity and results of operation.
The
Company’s results of operations could be affected by natural events in the locations in which it operates or where its customers
or suppliers operate.
The
Company, its customers, and its suppliers have operations in locations subject to natural occurrences such as severe weather and
other geological events, including hurricanes, earthquakes, or flood that could disrupt operations. Any serious disruption at
any of the Company’s facilities or the facilities of its customers or suppliers due to a natural disaster could have a material
adverse effect on the Company’s revenues and increase its costs and expenses. If there is a natural disaster or other serious
disruption at any of the Company’s facilities, it could impair its ability to adequately supply its customers, cause a significant
disruption to its operations, cause the Company to incur significant costs to relocate or re-establish these functions and negatively
impact its operating results. While the Company intends to seek insurance against certain business interruption risks, such insurance
may not adequately compensate the Company for any losses incurred as a result of natural or other disasters. In addition, any
natural disaster that results in a prolonged disruption to the operations of the Company’s customers or suppliers may adversely
affect its business, results of operations or financial condition.
Risks
Related to Regulation
The
Company is subject to various laws relating to trade, export controls, and foreign corrupt practices, the violation of which could
adversely affect its operations, reputation, business, prospects, operating results and financial condition.
We
are subject to risks associated with doing business outside of the United States, including exposure to complex foreign and U.S.
regulations such as the Foreign Corrupt Practices Act (the “FCPA”) and other anti-corruption laws which generally
prohibit U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining
or retaining business. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions
and other penalties. It may be difficult to oversee the conduct of any contractors, third-party partners, representatives or agents
who are not our employees, potentially exposing us to greater risk from their actions. If our employees or agents fail to comply
with applicable laws or company policies governing our international operations, we may face legal proceedings and actions which
could result in civil penalties, administration actions and criminal sanctions. Any determination that we have violated any anti-corruption
laws could have a material adverse impact on our business. Changes in trade sanctions laws may restrict the Company’s business
practices, including cessation of business activities in sanctioned countries or with sanctioned entities.
Violations
of these laws and regulations could result in significant fines, criminal sanctions against the Company, its officers or its employees,
requirements to obtain export licenses, disgorgement of profits, cessation of business activities in sanctioned countries, prohibitions
on the conduct of its business and its inability to market and sell the Company’s products or services in one or more countries.
Additionally, any such violations could materially damage the Company’s reputation, brand, international expansion efforts,
ability to attract and retain employees and the Company’s business, prospects, operating results and financial condition.
Regulations
that may be adopted with respect to the internet and electronic commerce may decrease the growth in the use of the internet and
lead to the decrease in the demand for esports products and services.
The
Company may become subject to any number of laws and regulations that may be adopted with respect to the internet and electronic
commerce. New laws and regulations that address issues such as user privacy, pricing, online content regulation, taxation, advertising,
intellectual property, information security, and the characteristics and quality of online products and services may be enacted.
As well, current laws, which predate or are incompatible with the internet and electronic commerce, may be applied and enforced
in a manner that restricts the electronic commerce market. The application of such pre-existing laws regulating communications
or commerce in the context of the internet and electronic commerce is uncertain. Moreover, it may take years to determine the
extent to which existing laws relating to issues such as intellectual property ownership and infringement, libel and personal
privacy are applicable to the internet. The adoption of new laws or regulations relating to the internet, or particular applications
or interpretations of existing laws, could decrease the growth in the use of the internet, decrease the demand for esports’
products and services, increase esports’ cost of doing business or could otherwise have a material adverse effect on esports’
business, revenues, operating results and financial condition.
Risks
Relating to Our Common Stock
Trading
on the OTC Markets is volatile and sporadic, which could depress the market price of our common stock and make it difficult for
you to resell your common stock.
Our
common stock is quoted on the OTCQB tier of the OTC Markets Group, Inc. (“OTC Markets”). Trading in securities quoted
on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to many factors, some of which
may have little to do with our operations or business prospects. This volatility could depress the market price of our common
stock for reasons unrelated to operating performance. Moreover, the OTC Markets is not a stock exchange, and trading of securities
on the OTC Markets is often more sporadic than the trading of securities listed on a quotation system like Nasdaq Capital Market
or a stock exchange like the NYSE American. These factors may result in your having difficulty reselling any shares of our common
stock.
Once
our common stock is listed on Nasdaq Capital Market or NYSE American, there can be no assurance that we will be able to comply
with the national stock exchange’s continued listing standards.
We
intend to list our common stock on the Nasdaq Capital Market or the NYSE American under the symbol “WINR.” There is
no assurance that our listing application will be approved by the Nasdaq Capital Market or the NYSE American. Assuming that our
common stock is listed, there can be no assurance any broker will be interested in trading our stock. Therefore, it may be difficult
to sell your shares of common stock if you desire or need to sell them. We cannot provide any assurance that an active and liquid
trading market in our securities will develop or, if developed, that such market will continue.
If
our common stock is approved for listing on the Nasdaq Capital Market or NYSE American, there is no guarantee that we will be
able to maintain such listing for any period of time by perpetually satisfying continued listing requirements. Our failure to
continue to meet these requirements may result in our securities being delisted from Nasdaq Capital Market or NYSE American, as
the case may be.
The
market price of our common stock is likely to be highly volatile because of several factors, including a limited public float.
The
market price of our common stock has been volatile in the past and the market price of our common stock is likely to be highly
volatile in the future. You may not be able to resell shares of our common stock following periods of volatility because of the
market’s adverse reaction to volatility.
Other
factors that could cause such volatility may include, among other things:
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actual or anticipated
fluctuations in our operating results;
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the absence of securities
analysts covering us and distributing research and recommendations about us;
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we may have a low
trading volume for a number of reasons, including that a large portion of our stock is closely held;
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overall stock market
fluctuations;
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announcements concerning
our business or those of our competitors;
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actual or perceived
limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;
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conditions or trends
in the industry;
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litigation;
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changes in market
valuations of other similar companies;
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future sales of
common stock;
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departure of key
personnel or failure to hire key personnel; and
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general market conditions.
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Any
of these factors could have a significant and adverse impact on the market price of our common stock. In addition, the stock market
in general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to
the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our
common stock, regardless of our actual operating performance.
Our
common stock has in the past been a “penny stock” under SEC rules may be subject to the “penny stock”
rules in the future. It may be more difficult to resell securities classified as “penny stock.”
In
the past, our common stock was a “penny stock” under applicable SEC rules (generally defined as non-exchange traded
stock with a per-share price below $5.00). If our common stock is not listed on the Nasdaq Capital Market, NYSE American, or other
national securities exchange, unless we maintain a per-share price above $5.00, our common stock will become “penny
stock.” These rules impose additional sales practice requirements on broker-dealers that recommend the purchase or sale
of penny stocks to persons other than those who qualify as “established customers” or “accredited investors.”
For example, broker-dealers must determine the appropriateness for non-qualifying persons of investments in penny stocks. Broker-dealers
must also provide, prior to a transaction in a penny stock not otherwise exempt from the rules, a standardized risk disclosure
document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide
the customer with current bid and offer quotations for the penny stock, disclose the compensation of the broker-dealer and its
salesperson in the transaction, furnish monthly account statements showing the market value of each penny stock held in the customer’s
account, provide a special written determination that the penny stock is a suitable investment for the purchaser, and receive
the purchaser’s written agreement to the transaction.
Legal
remedies available to an investor in “penny stocks” may include the following:
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If a “penny
stock” is sold to the investor in violation of the requirements listed above, or other federal or states securities
laws, the investor may be able to cancel the purchase and receive a refund of the investment.
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If a “penny
stock” is sold to the investor in a fraudulent manner, the investor may be able to sue the persons and firms that committed
the fraud for damages.
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These
requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that
becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our
securities. These requirements may restrict the ability of broker-dealers to sell our common stock and may affect
your ability to resell our common stock.
Many
brokerage firms will discourage or refrain from recommending investments in penny stocks. Most institutional investors will not
invest in penny stocks. In addition, many individual investors will not invest in penny stocks due, among other reasons, to the
increased financial risk generally associated with these investments.
For
these reasons, penny stocks may have a limited market and, consequently, limited liquidity. We can give no assurance at what time,
if ever, our common stock will not be classified as a “penny stock” in the future.
If
the benefits of any proposed acquisition do not meet the expectations of investors, stockholders or financial analysts, the market
price of our common stock may decline.
If
the benefits of any proposed acquisition do not meet the expectations of investors or securities analysts, the market price of
our common stock prior to the closing of the proposed acquisition may decline. The market values of our common stock at the time
of the proposed acquisition may vary significantly from their prices on the date the acquisition target was identified.
In
addition, broad market and industry factors may materially harm the market price of our common stock irrespective of our operating
performance. The stock market in general has experienced price and volume fluctuations that have often been unrelated or disproportionate
to the operating performance of the particular companies affected. The trading prices and valuations of these stocks, and of our
securities, may not be predictable. A loss of investor confidence in the market for retail stocks or the stocks of other companies
which investors perceive to be similar to us could depress our stock price regardless of our business, prospects, financial conditions
or results of operations. A decline in the market price of our securities also could adversely affect our ability to issue additional
securities and our ability to obtain additional financing in the future.
Changes
in accounting principles and guidance, or their interpretation, could result in unfavorable accounting charges or effects, including
changes to our previously filed financial statements, which could cause our stock price to decline.
We
prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States
of America (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret
and create appropriate accounting principles and guidance. A change in these principles or guidance, or in their interpretations,
may have a significant effect on our reported results and retroactively affect previously reported results.
Being
a public company results in additional expenses, diverts management’s attention and could also adversely affect our ability
to attract and retain qualified directors.
As
a public reporting company, we are subject to the reporting requirements of the Exchange Act. These requirements generate significant
accounting, legal and financial compliance costs and make some activities more difficult, time consuming or costly and may place
significant strain on our personnel and resources. The Exchange Act requires, among other things, that we maintain effective disclosure
controls and procedures and internal control over financial reporting. In order to establish the requisite disclosure controls
and procedures and internal control over financial reporting, significant resources and management oversight are required.
As
a result, management’s attention may be diverted from other business concerns, which could have an adverse and even material
effect on our business, financial condition and results of operations. These rules and regulations may also make it more difficult
and expensive for us to obtain director and officer liability insurance. If we are unable to obtain appropriate director and officer
insurance, our ability to recruit and retain qualified officers and directors, especially those directors who may be deemed independent,
could be adversely impacted.
We
are an “emerging growth company” and our election to delay adoption of new or revised accounting standards applicable
to public companies may result in our financial statements not being comparable to those of some other public companies. As a
result of this and other reduced disclosure requirements applicable to emerging growth companies, our securities may be less attractive
to investors.
As
a public reporting company with less than $1,070,000,000 in revenue during our last fiscal year, we qualify as an “emerging
growth company” under the JOBS Act. An emerging growth company may take advantage of certain reduced reporting requirements
and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. In particular,
as an emerging growth company we:
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are
not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control
over financial reporting pursuant to the Sarbanes-Oxley Act;
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are not required
to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how
those elements fit with our principles and objectives (commonly referred to as “compensation discussion and analysis”);
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are not required
to obtain a non-binding advisory vote from our stockholders on executive compensation or golden parachute arrangements (commonly
referred to as the “say-on-pay,” “say-on-frequency” and “say-on-golden-parachute” votes);
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are exempt from
certain executive compensation disclosure provisions requiring a pay-for-performance graph and CEO pay ratio disclosure;
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may present only
two years of audited financial statements and only two years of related Management’s Discussion & Analysis of Financial
Condition and Results of Operations (“MD&A”); and
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are eligible to
claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS
Act.
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We
intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods
for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in
periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging
growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.
Certain
of these reduced reporting requirements and exemptions were already available to us due to the fact that we also qualify as a
“smaller reporting company” under SEC rules. For instance, smaller reporting companies are not required to obtain
an auditor attestation and report regarding management’s assessment of internal control over financial reporting; are not
required to provide a compensation discussion and analysis; are not required to provide a pay-for-performance graph or Chief Executive
Officer pay ratio disclosure; and may present only two years of audited financial statements and related MD&A disclosure.
Under
the JOBS Act, we may take advantage of the above-described reduced reporting requirements and exemptions for up to five years
after our initial sale of common equity pursuant to a registration statement declared effective under the Securities Act or such
earlier time that we no longer meet the definition of an emerging growth company. In this regard, the JOBS Act provides that we
would cease to be an “emerging growth company” if we have more than $1,070,000,000 in annual revenues, have more than
$700 million in market value of our Common Stock held by non-affiliates, or issue more than $1.0 billion in principal amount of
non-convertible debt over a three-year period. Further, under current SEC rules we will continue to qualify as a “smaller
reporting company” for so long as we have a public float (i.e., the market value of common equity held by non-affiliates)
of less than $250 million as of the last business day of our most recently completed second fiscal quarter.
We
cannot predict if investors will find our securities less attractive due to our reliance on these exemptions.
If
we fail to maintain effective internal control over financial reporting, the price of our securities may be adversely affected.
Our
internal control over financial reporting has weaknesses and conditions that require correction or remediation. For the year ended
May 31, 2020 and the quarter ended February 28, 2021, we identified a material weakness in our assessment of the effectiveness
of disclosure controls and procedures. We did not effectively segregate certain accounting duties due to the small size of our
accounting staff. We are dependent upon our Chief Financial Officer, who is knowledgeable and experienced in the application of
GAAP, to maintain our disclosure controls and procedures and the preparation of our financial statements for the foreseeable future.
We plan to increase the size of our accounting staff at the appropriate time for our business and its size to ameliorate our concern
that we do not effectively segregate certain accounting duties, which we believe would resolve the material weakness in disclosure
controls and procedures, but there can be no assurances as to the timing of any such action or that we will be able to do so.
We
are required to comply with certain provisions of Section 404 of the Sarbanes-Oxley Act and if we fail to continue to comply,
our business could be harmed, and the price of our securities could decline.
Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act require an annual assessment of internal control over financial
reporting, and for certain issuers an attestation of this assessment by the issuer’s independent registered public accounting
firm. The standards that must be met for management to assess the internal control over financial reporting as effective are evolving
and complex, and require significant documentation, testing, and possible remediation to meet the detailed standards. We expect
to incur significant expenses and to devote resources to Section 404 compliance on an ongoing basis. It is difficult for us to
predict how long it will take or costly it will be to complete the assessment of the effectiveness of our internal control over
financial reporting for each year and to remediate any deficiencies in our internal control over financial reporting. As a result,
we may not be able to complete the assessment and remediation process on a timely basis. In the event that our Chief Executive
Officer or Chief Financial Officer determines that our internal control over financial reporting is not effective as defined under
Section 404, we cannot predict how regulators will react or how the market prices of our securities will be affected; however,
we believe that there is a risk that investor confidence and the market value of our securities may be negatively affected.
Shares
eligible for future sale may adversely affect the market.
From
time to time, certain of our stockholders may be eligible to sell all or some of their shares of common stock by means of ordinary
brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations.
In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months, subject only to the current public
information requirement. Affiliates may sell after six months, subject to the Rule 144 volume, manner of sale (for equity securities),
current public information, and notice requirements. Of the approximately 1,424,008 (11,392,064 pre-reverse split) shares of our
common stock outstanding as of April 27, 2021, approximately 787,994 (6,303,952 pre-reverse split) shares are tradable
without restriction. Given the limited trading of our common stock, resale of even a small number of shares of our common stock
pursuant to Rule 144 or an effective registration statement may adversely affect the market price of our common stock.
Anti-takeover
provisions contained in our Certificate of Incorporation, as amended, and bylaws, as well as provisions of Delaware law, could
impair a takeover attempt.
The
Company’s Certificate of Incorporation, as amended, and bylaws contain provisions that could have the effect of delaying
or preventing changes in control or changes in our management without the consent of our board of directors. These provisions
include:
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no cumulative voting
in the election of directors, which limits the ability of minority stockholders to elect director candidates;
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the exclusive right
of our board of directors to elect a director to fill a vacancy created by the expansion of the board of directors or the
resignation, death, or removal of a director, which prevents stockholders from being able to fill vacancies on our board of
directors;
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the ability of our
board of directors to determine whether to issue shares of our preferred stock and to determine the price and other terms
of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly
dilute the ownership of a hostile acquirer;
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limiting the liability
of, and providing indemnification to, our directors and officers;
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controlling the
procedures for the conduct and scheduling of stockholder meetings;
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providing that directors
may be removed prior to the expiration of their terms by stockholders only for cause; and
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advance notice procedures
that stockholders must comply with in order to nominate candidates to our board of directors or to propose matters to be acted
upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of
proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company.
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These
provisions, alone or together, could delay hostile takeovers and changes in control of the Company or changes in our board of
directors and management.
Any
provision of our Certificate of Incorporation, as amended, or bylaws or Delaware law that has the effect of delaying or deterring
a change in control could limit the opportunity for our security holders to receive a premium for their securities and could also
affect the price that some investors are willing to pay for our securities.
We
have never paid dividends on our common stock and have no plans to do so in the future.
Holders
of shares of our common stock are entitled to receive such dividends as may be declared by our board of directors. To date, we
have paid no cash dividends on our shares of common stock and we do not expect to pay cash dividends on our common stock in the
foreseeable future. We intend to retain future earnings, if any, to provide funds for operations of our business. Therefore, any
return investors in our common stock may have will be in the form of appreciation, if any, in the market value of their shares
of common stock. See “Dividend Policy.”
We
will indemnify and hold harmless our officers and directors to the maximum extent permitted by Delaware law.
Our
bylaws provide that we will indemnify and hold harmless our officers and directors against claims arising from our activities,
to the maximum extent permitted by Delaware law. If we were called upon to perform under our indemnification agreement, then the
portion of our assets expended for such purpose would reduce the amount otherwise available for our business.
Even
if our recent Reverse Stock Split achieves the requisite increase in the market price of our common stock, there can be no assurance
that we will be approved for listing on a national securities exchange or able to comply with other continued listing standards
of a national securities exchange.
Even
if our recent Reverse Stock Split increased the market price of our common stock sufficiently so that we comply with the minimum
market price requirement, we cannot assure you that we will be able to comply with the other standards that we are required to
meet in order to be approved for listing on a national securities exchange or maintain a listing of our common stock on such exchange.
The
Reverse Stock Split may decrease the liquidity of the shares of our common stock.
The
liquidity of the shares of our common stock may be affected adversely by the Reverse Stock Split given the reduced number of shares
outstanding following the Reverse Stock Split. In addition, the Reverse Stock Split may have increased the number of shareholders
who own odd lots (less than 100 shares) of our common stock, creating the potential for such shareholders to experience an increase
in the cost of selling their shares and greater difficulty affecting such sales.
USE
OF PROCEEDS
This
Prospectus relates to shares of our common stock that may be offered and sold from time to time by the Selling Stockholder. We
will receive no proceeds from the sale of shares of common stock by the Selling Stockholder in this Offering. The proceeds from
the sales will belong to the Selling Stockholder. However, we have and will receive proceeds from the sale of common stock
to the Selling Stockholder pursuant to the Tiger Trout Agreement.
We
intend to use the proceeds from the sale of common stock to the Selling Stockholder pursuant to the Tiger Trout Agreement for
general corporate purposes and working capital requirements.
DIVIDEND
POLICY
We
have not paid any cash dividends on our common stock and do not currently anticipate paying cash dividends in the foreseeable
future. The agreements into which we may enter in the future, including indebtedness, may impose limitations on our ability to
pay dividends or make other distributions on our capital stock. Payment of future dividends on our common stock, if any, will
be at the discretion of our board of directors and will depend on, among other things, our results of operations, cash requirements
and surplus, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. We
intend to retain future earnings, if any, for reinvestment in the development and expansion of our business.
MARKET
PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market
Information
Our
common stock is currently quoted on the OTCQB tier of the OTC Market Group, Inc. under the symbol “WINR.” Our warrants
issued in connection with our initial public offering (the “IPO”) in August 2017 are currently listed on OTCQB under
the symbol “WINRW.” The OTC Market is a network of security dealers who buy and sell stock. The dealers are connected
by a computer network that provides information on current “bids” and “asks”, as well as volume information.
On
October 9, 2017, our common stock and warrants commenced public trading on the Nasdaq Capital Market under the symbols “IAM”
and “IAMXW”, respectively. On November 20, 2018, we changed the symbols of our common stock and warrants to “SMSH”
and “SMSHW”, respectively, in conjunction with our name change from “I-AM Capital Acquisition Company”
to “Smaaash Entertainment, Inc.” On January 10, 2019, we changed the symbols of our common stock and warrants to “WINR”
and “WINRW”, respectively, in conjunction with our name change from “Smaaash Entertainment, Inc.” to “Simplicity
Esports and Gaming Company.” However, on January 25, 2019, the Nasdaq suspended our common stock and warrants from trading
on the Nasdaq Capital Market and the OTCQB commenced the quotation of our common stock and warrants. On April 2, 2019, the Nasdaq
Capital Market filed a Form 25 for our common stock and warrants, which became effective ten days thereafter.
We intend to list our common
stock on the Nasdaq Capital Market or the NYSE American under the symbols “WINR.” There is no assurance that our listing
application will be approved by the Nasdaq Capital Market or the NYSE American.
The following table includes
the high and low bids for our common stock since June 1, 2018. These quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual transactions. Prices in the tables below have been presented
to reflect the Reverse Stock Split of our outstanding shares of common stock as well as the pre-reverse stock split prices.
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Post-Reverse(1)
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Pre-Reverse (1)
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High
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Low
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High
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Low
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Fiscal Year 2021
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March 1 to April 27, 2021
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$
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22.00
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$
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11.47
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$
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2.75
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$
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1.4338
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December 1, 2020 to February 28, 2021
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$
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21.08
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$
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11.00
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$
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2.635
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$
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1.375
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September 1 to November 30, 2020
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$
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16.30
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$
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6.68
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$
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2.038
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$
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0.835
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June 1 to August 31, 2020
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$
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18.64
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$
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6.44
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$
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2.33
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$
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0.805
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Fiscal Year 2020
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March 1 to May 31, 2020
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$
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13.76
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$
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5.36
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$
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1.72
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$
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0.67
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December 1, 2019 to February 29, 2020
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$
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13.52
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$
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6.40
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$
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1.69
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$
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0.80
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September 1 to November 30, 2019
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$
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21.52
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$
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12.00
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$
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2.69
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$
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1.50
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June 1 to August 31, 2019
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$
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19.68
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$
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10.56
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$
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2.46
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$
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1.32
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Fiscal Year 2019
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March 1 to May 30, 2019
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$
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17.60
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$
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4.48
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$
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2.20
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$
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0.56
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December 1, 2018 to February 28, 2019
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$
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52.96
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$
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9.84
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$
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6.62
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$
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1.23
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September 1 to November 30, 2018
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$
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88.40
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$
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25.20
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$
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11.05
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$
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3.15
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June 1 to August 31, 2018
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$
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88.40
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$
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78.88
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$
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11.05
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$
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9.86
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(1)
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Our common stock
began separate trading on the Nasdaq Capital Market on October 9, 2017.
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(2)
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Our common stock
did not trade separately from the Public Units until October 9, 2017.
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On
April 27, 2021, the closing price for our common stock on the OTCQB was $12.90 ($1.6125 pre-reverse split)
per share. The volume of shares of common stock traded on the OTCQB was insignificant and therefore, does not represent a reliable
indication of the fair market value of these shares.
Holders
of Common Stock
As
of April 27, 2021, there were approximately 134 record holders of our common stock. The number of record holders
does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.
We
have not paid any cash dividends on our common stock and do not currently anticipate paying cash dividends in the foreseeable
future. We intend to retain future earnings, if any, for reinvestment in the development and expansion of our business.
Historical
Common Equity Transactions
The
following is a summary of transactions by us since our inception on April 17, 2017 involving registered and unregistered issuances
and redemption of our common equity securities.
On
May 31, 2017, we issued 179,688 (1,437,500 pre-reverse split) Founder Shares to I-AM Capital Partners LLC (“Sponsor”)
in exchange for a capital contribution of $25,000. Upon the partial exercise of the underwriters’ over-allotment option
on September 13, 2017, 17,188 (137,500 pre-reverse split) Founder Shares were forfeited by the Sponsor, for a balance of 162,500
(1,300,000 pre-reverse split) Founder Shares held by our Sponsor. Such securities were issued in connection with our organization
pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act. Our sponsor is an accredited investor
for purposes of Rule 501 of Regulation D. No underwriting discounts or commissions were paid with respect to such sales.
On
August 22, 2017, we sold 5,000,000 units at a purchase price of $10.00 per unit in our IPO of public units (“Public Units”),
generating gross proceeds of $50.0 million. Each Public Unit consisted of one share of our Common Stock (“Public Shares”),
one right to receive one-tenth of one share our Common Stock upon consummation of an initial business combination (“Public
Right”), and one redeemable warrant (“Public Warrants”). Each warrant entitled the holder to purchase one share
of common stock at an exercise price of $92.00 ($11.50 pre-reverse split) per share, subject to adjustment.
On
August 22, 2017, simultaneously with the consummation of the IPO and the sale of the Public Units, we consummated the private
placement of 254,500 units (“Private Placement Units”) at a price of $10.00 per unit, generating total gross proceeds
of $2,545,000. Each unit consisted of (i) one share of Common Stock, (ii) one right to receive one-tenth (1/10) of one share of
Common Stock upon the consummation of an initial business combination (“Private Placement Rights”), and (iii) one
5-year warrant to purchase one share of Common Stock at an exercise price of $92.00 ($11.50 pre-reverse split) per share. The
Private Placement Units, which were purchased by the Sponsor, are identical to the Public Units, except the Private Placement
Warrants underlying the Private Placement Units are non-redeemable and exercisable on a cashless basis so long as they are held
by the Sponsor or its affiliates or designees. If the Private Placement Units are held by someone other than the initial holder,
or its permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable by such holders on the same
basis as the Public Warrants.
On
August 22, 2017, we issued 6,250 (50,000 pre-reverse split) shares of Common Stock to Maxim in connection with its services as
underwriter for the IPO.
Contained
in the underwriting agreement for the IPO was an over-allotment option allowing the underwriters to purchase from the Company
up to an additional 750,000 Public Units (the “Over-Allotment Units”) and, in addition, the Company received a commitment
from the Sponsor to purchase up to an additional 26,250 Private Placement Units. On September 13, 2017, the underwriters partially
exercised their option and purchased 200,000 Over-Allotment Units, which were sold at an offering price of $10.00 per unit, generating
gross proceeds of $2,000,000.
On
September 13, 2017, simultaneously with the underwriter’s partial exercise of the over-allotment option, we consummated
the sale of an additional 875 (7,000 pre-reverse split) Private Placement Units, generating gross proceeds of $70,000.
On
September 13, 2017, we issued Maxim an additional 250 (2,000 pre-reverse split) shares of our Common Stock upon partial exercise
of the over-allotment. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
At
the Special Meeting on November 20, 2018, holders of 556,033 (4,448,260 pre-reverse split) Public Shares exercised their right
to redeem those shares for cash at a price of $81.75 ($10.2187363 pre-reverse split) per share, for an aggregate of approximately
$45,455,596.
On
November 20, 2018, we issued 250,000 (2,000,000 pre-reverse split) shares of our Common Stock to AHA Holdings Private Limited
as an upfront portion of the newly issued shares of our Common Stock to be exchanged for all of the ownership interest in Smaaash
Private within 6 months after the closing of the Business Combination.
On
November 20, 2018, we issued 26,000 (208,000 pre-reverse split) shares of Common Stock to Chardan Capital Markets, LLC (“Chardan”)
in consideration of services rendered. The shares issued to Chardan are subject to the same lock-up and will have the same registration
rights as the shares of the Company held by the Sponsor.
On
November 20, 2018, we issued 65,000 (520,000 pre-reverse split) shares of Common Stock upon conversion of the Public Rights.
On
November 20, 2018, upon the consummation of the transaction (“Business Combination”) with Smaaash Entertainment Private
Limited (“Smaaash Private”), we issued 3,269 (26,150 pre-reverse split) shares of Common Stock underlying the Private
Placement Rights to the holders of the Private Placement Rights.
In
connection with the closing of the Acquisition of Simplicity Esports LLC, we issued 37.500 (300,000 pre-reverse split), 87,500
(700,000 pre-reverse split), and 250,000 (2,000,000 pre-reverse split) shares of Common Stock, respectively, to the Simplicity
Owners on January 4, 2019, January 7, 2019, and March 27, 2019 in exchange for all of the issued and outstanding equity interest
of Simplicity Esports LLC held by Simplicity Owners.
On
January 4, 2019, upon the closing of the Acquisition of Simplicity Esports LLC, the Series A-1 Note in the amount of $500,000
and held by Maxim automatically converted into 24,206 (193,648 pre-reverse split) shares of Common Stock.
During
the period from March 1, 2019 through July 1, 2019, we sold an aggregate of 987,500 units at a purchase price of $2.00 per unit
to 12 accredited investors in exchange for receipt of $1,975,000. Each unit consisted of (i) one share of Common Stock, and (ii)
a 5-year warrant to purchase one share of Common Stock at a purchase price of $32.00 ($4.00 pre-reverse split).
On
March 27, 2019, pursuant to a Restricted Stock Award, we issued Jed Kaplan, our then-Chief Executive Officer and interim Chief
Financial Officer and a member of our board of directors, 15,000 (120,000 pre-reverse split) shares of our restricted Common Stock.
Such shares vested over the succeeding nine month period. As of April 27, 2021, all of such shares have vested. Mr. Kaplan
currently serves as our Chairman of the Board.
On
March 27, 2019, pursuant to a Restricted Stock Award, we issued Roman Franklin, our then-President and a member of our board of
directors, 4,500 (36,000 pre-reverse split) shares of our restricted Common Stock. Such shares vested over the succeeding nine
month period. As of April 27, 2021, all of such shares have vested. Mr. Franklin currently serves as our Chief Executive
Officer and a member of our board of directors.
On
March 27, 2019, pursuant to a Restricted Stock Award, we issued Steve Grossman, President of Simplicity Esports, LLC, a wholly
owned subsidiary of our Company at such time, 3,000 (24,000 pre-reverse split) shares of our restricted Common Stock. Such shares
vested over the succeeding nine month period. As of April 27, 2021 all of such shares have vested.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan,
Franklin and Grossman on December 31, 2018.
On
May 31, 2019, we issued 12,500 (100,000 pre-reverse split) shares of Common Stock to Polar in exchange for Polar Asset Management
Partners Inc.’s (“Polar”) forgiveness of $143,476 owed by us to Polar under that that certain Debt Conversion
Agreement entered into in May 2019 between Polar and us.
On
July 30, 2019, in connection with the acquisition of a 100% interest in PLAYlive Nation, Inc. (“PLAYlive”) by way
of merger, the Company issued 93,750 (750,000 pre-reverse split) shares of the Company’s common stock in exchange for 100%
of the issued and outstanding common stock from the owners of PLAYlive.
On
September 16, 2019, pursuant to a Restricted Award, we issued to Jed Kaplan, our then-Chief Executive Officer and Interim Chief
Financial Officer and a member of our board of directors, of 8,750 (70,000 pre-reverse split) shares of our restricted Common
Stock. Mr. Kaplan currently serves as our Chairman of the Board.
On
September 16, 2019, pursuant to a Restricted Award, we issued to Roman Franklin, our then-President and a member of our board
of directors, of 2,625 (21,000 pre-reverse split) shares of our restricted Common Stock. Mr. Franklin currently serves as our
Chief Executive Officer and a member of our board of directors.
On
September 16, 2019, pursuant to a Restricted Award, we issued to Steven Grossman, our Corporate Secretary, of 1,750 (14,000 pre-reverse
split) shares of our restricted Common Stock. These shares were issued in reliance on Section 4(a)(2) of the Securities Act. Mr.
Grossman has informed the Company that he will resign as Corporate Secretary effective April 15, 2021.
On
March 11, 2020, in connection with the execution of the Common Stock Purchase Agreement with Triton Funds, LP, the Company issued
625 (5,000 pre-reverse split) shares of the Company’s common stock to Triton Funds, LP (“Triton”) as a donation.
On
April 9, 2020, the Company delivered a Purchase Notice to Triton pursuant to the terms of the Common Stock Purchase Agreement
requiring Triton to acquire 15,625 (125,000 pre-reverse split) shares of common stock, which resulted in $87,700 in proceeds to
the Company. Pursuant to the terms of the Common Stock Purchase Agreement, on April 9, 2020, the Company instructed the transfer
agent to issue 15,625 (125,000 pre-reverse split) shares of common stock to a custodial account of Triton. Unfortunately, the
transfer agent erroneously transferred the entire 90,625 (725,000 pre-reverse split) shares of common stock under the Equity Line
to the custodial account of Triton, resulting in an over-issuance of 75,000 (600,000 pre-reverse split) shares to Triton. The
Company notified Triton of this error and that the Company terminated the Common Stock Purchase Agreement with Triton. On November
18, 2020, the 75,000 (600,000 pre-reverse split) shares issued in error were returned by Triton and cancelled and returned to
the treasury of the Company.
On
May 4, 2020, pursuant to the terms of that certain 10% Fixed Convertible Promissory Note dated April 29, 2020 in the principal
amount of $152,500 issued by the Company in favor of Harbor Gates Capital, LLC, the Company issued 1,250 (10,000 pre-reverse split)
shares of the Company’s common stock to Harbor Gates Capital, LLC as additional consideration for the purchase of such note.
On
May 7, 2020, we issued 2,977 (23,809 pre-reverse split) shares of our restricted Common Stock, at a price of 8.40 ($1.05 pre-reverse
split) per share, to William H. Herrmann, Jr., a member of our board of directors, for an aggregate purchase price of $25,000.
On
June 4, 2020, we issued 10,739 (85,905 pre-reverse split) shares of common stock in connection with the conversion of $100,000
in principal of a convertible note issued in favor of Maxim.
On
June 15, 2020, we issued 3,125 (25,000 pre-reverse split) shares of common stock in satisfaction of an outstanding balance owed
to a vendor.
On
June 18, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and an accredited investor,
pursuant to which the Company issued a 12% self-amortization promissory note in the principal amount of $550,000, the Company
issued 6,875 (55,000 pre-reverse split) shares of the Company’s common stock to such accredited investor as additional consideration
for the purchase of such note.
On
June 29, 2020, the Company acquired the assets of one its franchisee owned esports gaming centers located on the Fort Bliss U.S.
Military base in El Paso, TX. In connection with the acquisition the Company issued 18,750 (150,000 pre-reverse split) restricted
shares.
On
June 30, 2020, the Company issued 12,334 (98,672 pre-reverse split) shares of common stock at $7.76 ($0.97 pre-reverse split)
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.
On
July 29, 2020, the Board issued 41,875 (335,000 pre-reverse split) shares of common stock to Jed Kaplan, our then-Chief Executive
Officer and Interim Chief Financial Officer and a member of our board of directors. Mr. Kaplan now serves as our Chairman of the
Board. Of these shares, (i) 31,250 (250,000 pre-reverse split) shares of common stock related to services provided by Mr. Kaplan
to the Company during the 2020 fiscal year, (ii) 8,750 (70,000 pre-reverse split) shares of common stock related to grants that
should have been, but were not, made pursuant to the Kaplan 2018 Agreement (as hereinafter defined), and (iii) 1,875 (15,000 pre-reverse
split) shares of common stock related to grants made pursuant to the Kaplan 2020 Agreement (as hereinafter defined). The Kaplan
2018 Agreement provided for the grant to Mr. Kaplan of 1,250 (10,000 pre-reverse split) shares of common stock per month. For
the months of January 2020 through July 2020, however, such shares had not been granted. Accordingly, the July 29, 2020 grant
included an aggregate of 8,750 (70,000 pre-reverse split) shares of common stock that should have been granted for the months
of January 2020 through July 2020. The Kaplan 2020 Agreement provides for the grant to Mr. Kaplan of 1,875 (15,000 pre-reverse
split) shares of common stock per month. Such shares were fully vested and earned as of the issuance thereof.
On
July 29, 2020, the Board also issued 34,813 (278,500 pre-reverse split) shares of common stock to Roman Franklin, our then-President
and a member of our board of directors. Mr. Franklin now serves as our Chief Executive Officer and a member of our board of directors.
Of these shares, (i) 31,250 (250,000 pre-reverse split) shares of common stock related to services provided by Mr. Franklin to
the Company during the 2020 fiscal year, (ii) 2,625 (21,000 pre-reverse split) shares of common stock related to grants that should
have been, but were not, made pursuant to the Franklin 2018 Agreement (as hereinafter defined), and (iii) 938 (7,500 pre-reverse
split) shares of common stock related to grants made pursuant to the Franklin 2020 Agreement (as hereinafter defined). The Franklin
2018 Agreement provided for the grant to Mr. Franklin of 375 (3,000 pre-reverse split) shares of common stock per month. For the
months of January 2020 through July 2020, however, such shares had not been granted. Accordingly, the July 29, 2020 grant included
an aggregate of 2,625 (21,000 pre-reverse split) shares of common stock that should have been granted for the months of January
2020 through July 2020. The Franklin 2020 Agreement provides for the grant to Mr. Franklin of 782 (6,250 pre-reverse split) shares
of common stock per month. Such shares were fully vested and earned as of the issuance thereof.
On
July 29, 2020, we issued an aggregate of 24,000 (192,000 pre-reverse split) shares of common stock to an employee and the members
of the Board of Directors of the Company.
On
July 31, 2020, we entered into a marketing agreement whereby we issued 3,473 (27,778 pre-reverse split) shares of common stock.
On
August 7, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and an accredited investor
pursuant to which we issued a 12% self-amortization promissory note in the principal amount of $333,333, the Company issued 4,167
(33,333 pre-reverse split) shares of common stock.
On
September 16, 2020, we issued 13,209 (105,670 pre-reverse split) shares of common stock to employees and consultants.
On
September 16, 2020, the Company issued an aggregate of 2,813 (22,500 pre-reverse split) restricted common shares of the Company
to executive officers and employees of the Company for services rendered. More specifically, the Company issued 1,875 (15,000
pre-reverse split) of these shares to Jed Kaplan and issued 938 (7,500 pre-reverse split) of these shares to Roman Franklin. These
shares were valued at $25,420, or $9.04 ($1.13 pre-reverse split) per share, based on the quoted trading price on the date of
grant. In connection with the issuance of these shares, during the nine months ended February 28, 2021, the Company recorded stock-based
professional fees of $25,420.
On
September 22, 2020, in connection with an Asset Purchase agreement with Ignatious O’Riley, an existing franchisee to acquire
such franchisee’s assets in exchange for 2,989 (23,912 pre-reverse split) shares of the Company’s common stock with
fair value of $29,416 or $9.84 ($1.23 pre-reverse split) per share.
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, to acquire such franchisee’s assets in exchange for 4,506 (36,048
pre-reverse split) shares of the Company’s common stock with a fair value of $43,974 or $9.76 ($1.22 pre-reverse split)
per share.
On
October 1, 2020, the Company entered into an Asset Purchase agreement with Parryproject LLC, Owen Parry and Jennie Parry, an existing
franchisee, to acquire such franchisee’s assets in exchange for 3,688 (29,504 pre-reverse split) shares of the Company’s
common stock with a fair value of $38,650 or $10.48 ($1.31 pre-reverse split) per share.
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, to acquire such franchisee’s assets in exchange
for 8,402 (67,216 pre-reverse split) shares of the Company’s common stock with a fair value of $88,052 or $10.48 ($1.31
pre-reverse split) per share.
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, to acquire such franchisee’s assets in exchange
for 6,202 (49,616 pre-reverse split) shares of the Company’s common stock with a fair value of $74,423 or $12.00 ($1.50
pre-reverse split) per share.
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, to acquire such franchisee’s
assets in exchange for 4,202 (33,616 pre-reverse split) shares of the Company’s common stock with a fair value of $46,068
or $11.44 ($1.43 pre-reverse split) per share.
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, to acquire such franchisee’s assets
in exchange for 3,255 (26,040 pre-reverse split) shares of the Company’s common stock with a fair value of $37,237 or $11.44
($1.43 pre-reverse split) per share.
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, to acquire such franchisee’s assets in exchange
for 4,697 (37,576 pre-reverse split) shares of the Company’s common stock with a fair value of $52,725 or $11.44 ($1.43
pre-reverse split) per share.
During
the three months ended November 30, 2020, the Company issued an aggregate of 9,844 (78,752 pre-reverse split) restricted common
shares of the Company to executive officers of the Company for services rendered. Of these shares, the Company issued 5,625 (45,000
pre-reverse split) shares to Jed Kaplan and issued 2,344 (18,750 pre-reverse split) shares to Roman Franklin. These shares were
valued at $119,632, or per share prices ranging from $9.04 ($1.13 pre-reverse split) per share to $11.44 ($1.43 pre-reverse split)
per common share, based on the quoted trading price on the date of grant.
On
December 1, 2020, the Company’s wholly owned subsidiary, Simplicity St. Louis, LLC, entered into an Asset Purchase Agreement
with Metta Gaming, LLC, Brian Paul Van Wyk, an existing franchisee, to acquire such franchisee’s assets in exchange for
3,523 (28,184 pre-reverse split) shares of the Company’s common stock with fair value of $52,845, or $15.00 ($1.875 pre-reverse
split) per share.
On
December 3, 2020, the Company issued 5,000 (40,000 pre-reverse split) shares of its common stock in satisfaction of $50,000 in
legal fees. These shares were valued at $80,000, or $16.00 ($2.00 pre-reverse split) 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
March 11, 2021, the Company’s wholly owned subsidiary, Simplicity Fullerton, LLC, entered into an Asset Purchase Agreement
with Say K 2 Play, LLC a California limited liability company, Paresh Mital an individual and Smeeta Mital, an existing franchisee,
to acquire such franchisee’s assets in exchange for 1,600 (12,800 pre-reverse split) shares of the Company’s common
stock with fair value of $20,800 or $13.00 ($1.625 pre-reverse split) per share.
During
the three months ended February 28, 2021, the Company issued an aggregate of 108,641 (869,128 pre-reverse split) restricted common
shares of the Company to executive officers of the Company for services rendered. These shares were valued at $1,545,467, or per
share prices ranging from $13.25 ($1.66 pre-reverse split) per share to $19.75 ($2.47 pre-reverse split) per common share, based
on the quoted trading price on the date of grant. In connection with the issuance of these shares, during the three months ended
February 28, 2021, the Company recorded stock-based compensation of $1,545,467.
On
March 26, 2021, the Company’s wholly owned subsidiary, Simplicity Vancouver, LLC, entered into an Asset Purchase Agreement
with Bhavin Shah, an individual and Parshwa, Inc., a Washington corporation, an existing franchisee, to acquire such franchisee’s
assets in exchange for 2,900 (23,200 pre-reverse split) shares of the Company’s common stock with fair value of $42,900
or $16.50 ($2.0625 pre-reverse split) per share.
On
April 6, 2021, the Company issued an aggregate of 2,657 (21,256 pre-reverse split) restricted common shares of the Company to
executive officers and employees of the Company for services rendered. More specifically, the Company issued 1,875 (15,000 pre-reverse
split) of these shares to Jed Kaplan and issued 782 (6,256 pre-reverse split) of these shares to Roman Franklin. These shares
were valued at $34,488, or $12.98 ($1.6225 pre-reverse split) per share, based on the quoted trading price on the date of grant.
The
above issuances/sales were made pursuant to an exemption from registration as set forth in Section 4(a)(2) of the Securities Act
and/or Rule 506 of Regulation D promulgated under the Securities Act.
Nasdaq
Delisting
On
December 10, 2018, the Company received a written notice (the “Notice”) from the Listing Qualifications Division of
The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company has not complied with the requirements of IM-5101-2
of the listing rules of Nasdaq (the “Listing Rules”).
The
Notice stated that after its Business Combination, the Company had not demonstrated that its common stock met Listing Rule 5505(b)(1)
that requires a market value of publicly held shares of at least $15 million. Additionally, the Company has not provided evidence
that its common stock has at least 300 round lot holders as required by Listing Rule 5505(a)(3) and that its public warrant has
at least 400 round lot holders as required by Listing Rule 5515(a)(4). Finally, the Company does not comply with Listing Rule
5515(a)(2) which requires that for initial listing of a warrant the underlying security must be listed on Nasdaq.
On
January 7, 2019, the Company received a second written notice from Nasdaq informing it that the Company failed to comply with
Listing Rule 5250(e)(2) which requires companies listed on Nasdaq to timely file notification forms for the Listing of Additional
Shares (the “LAS Notification”).
The
Company was required to submit the LAS Notification 15 days prior to the issuance of the securities; however, the Company filed
the LAS Notification for the issuance of the Series A-1 Note and Series A-2 Note and for the share exchange under our Share Exchange
Agreement after such 15-day periods. Nasdaq notified the Company that each of these matters serves as an additional and separate
basis for delisting the Company’s securities and that the review panel will consider these matters in rendering a determination
regarding the Company’s continued listing on Nasdaq.
The
Company’s management decided that moving from Nasdaq to the OTCQB was more appropriate for the Company at that time, while
the Company built out its planned network of retail esports centers.
On
April 1, 2019, the Company was notified by Nasdaq that it would delist the Company’s common stock and public warrants. The
Company’s common stock and public warrants were previously suspended from trading on Nasdaq, effective January 25, 2019.
On
April 2, 2019, Nasdaq filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Exchange Act
on Form 25 with the SEC relating to the Company’s common stock and public warrants. As a result, the Company’s common
stock and public warrants were delisted from Nasdaq effective April 2, 2019.
The
Company’s common stock and public warrants currently are quoted on the OTCQB under the symbols “WINR” and “WINRW,”
respectively.
DESCRIPTION
OF BUSINESS
Unless
the context otherwise requires, “we,” “us,” “our,” or “the Company” refers to
(i) “Simplicity Esports and Gaming Company” after the consummation of the acquisition of Simplicity Esports, LLC,
(ii) “Smaaash Entertainment Inc.” before the consummation of the Acquisition of Simplicity Esports, LLC but after
the closing of the Transactions with Smaaash Entertainment Private Limited, and (iii) I-AM Capital Acquisition Company prior to
the closing of the Transactions with Smaaash Entertainment Private Limited. “Simplicity Esports LLC” means
our wholly owned subsidiary Simplicity Esports, LLC, a Florida limited liability company, and its consolidated subsidiaries. “PLAYlive”
means our wholly owned subsidiary PLAYlive Nation, Inc., a Delaware corporation, and its consolidated subsidiaries. “Simplicity
One” means our 76% owned subsidiary, Simplicity One Brasil Ltda, a Brazilian limited liability company, and its consolidated
subsidiaries. “Smaaash Private” means Smaaash Entertainment Private Limited, a private limited company incorporated
under the laws of India, and its consolidated subsidiaries.
Industry
Overview
Esports
is the competitive playing of video games by amateur and professional teams for cash prizes. Esports typically takes the form
of organized, multiplayer video games that include real-time strategy, fighting, first-person shooter, and multiplayer online
battle arena games. As of April 27, 2021, the three largest selling esports games are Dota 2®, League of Legends®
(both multiplayer online battle arena games) and Counter Strike: Global Offensive® (a first-person shooter game) . Other
popular games include SMITE®, StarCraft II®, Call of Duty®¸ Heroes of the Storm®, Hearthstone® and Fortnite®.
Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services including
twitch.tv, azubu.tv, ustream.tv and youtube.com. Esports also includes games which can be played, primarily by amateurs, in multiplayer
competitions on the Sony PlayStation®, Microsoft Xbox® and WII Nintendo® systems.
Although
official competitions have long been a part of video game culture, participation and spectatorship of such events have seen a
global surge in popularity over the last few years with the rapid growth of online streaming. The advent of online streaming technology
has turned esports into a global industry that includes professional players and teams competing in major events that are simultaneously
watched in person in stadiums, and by online viewers, which regularly exceed 1,000,000 viewers for major tournaments. According
to Business Insider, over 100 million viewers saw the 2019 League of Legends® World Championships in person and online. CNBC
reported in April 2019 that League of Legends® World Championships attract more viewers than the Super Bowl. Much like how
there is a worldwide gaming market for the sports industry, there has now developed a worldwide gaming market for the esports
industry. The impact has been so significant that many video game developers are now building features into their games designed
to facilitate competition.
According
to Newzoo, a global leader in esports, games and mobile intelligence, the total global esports audience was estimated to be 500
million in 2019, with an anticipated 27.5 million American gamers, which global audience is expected to grow to 646 million by
2023. In addition, according to Newzoo, esports produced $950 million in 2019 revenue and is projected to reach $1.1 billion in
2020 and $1.6 billion in 2023. Esports enthusiasts, which are people who watch professional esports content at least once a month,
made up 201.2 million of the 2018 total, up from 143.2 million in 2017. With a compound annual growth rate (“CAGR”)
(2017-2022) of +15.7%, this number is expected to reach almost 297 million in 2022. The global average revenue per esports enthusiast,
which includes not only gaming revenue, but also sponsorships advertising and all other esports related revenues, is projected
to be $5.45 in 2019, up +8.9% from $5.00 in 2018. The number of occasional esports viewers, (people who watch professional esports
content less than once a month), is expected to reach 252.6 million in 2019, up from 221.6 million in 2018, and is projected to
grow with a CAGR of +12.6% to surpass 347 million in 2022. The number of people who are aware of esports worldwide is expected
to reach 1.8 billion in 2019, up from 1.6 billion in 2018. According to Newtech Mag, China and the U.S. have the largest populations
of esports fans, with Brazil ranking first in Latin America, which is the fastest growing gaming market, and third globally, with
20 million fans. The increasing prominence of esports as a mainstream entertainment industry is driving the growth in awareness
in most regions. Audience and awareness growth in the emerging regions of Latin America, Middle East and Africa, Southeast Asia,
and Rest of Asia is largely driven by improving IT infrastructure and urbanization. We believe the rise of new franchises, such
as Player Unknown’s Battlegrounds® or PubG®, is an important global growth factor as the influx of millennials should
continue to drive the growth of the esports industry’s audience and in turn, the esports gaming industry.
In
2019, there were 885 major esports events that generated an estimated $56.3 million in ticket revenues. The total prize money
of all esports events held in 2019 reached $167.4 million, a slight increase from $150.8 million in 2018. The League of Legends®
World Championship was 2019’s biggest tournament by live viewership hours on Twitch and YouTube, with 105.5 million hours.
It also produced $1.9 million in ticket revenues. The Overwatch® League was the most-watched league by live viewership hours
on Twitch and YouTube, generating 104.1 million hours. A report by Forbes estimates that the top 12 esports teams had 2019 revenues
of between $8 million and $29 million and were valued at between $120 million and $400 million.
Business
Overview
We
are a global esports organization, with an established brand, that is capitalizing on the growth in esports through three business
units, Simplicity One Brasil Ltda (“Simplicity One”), Simplicity Esports, LLC (“Simplicity Esports LLC”)
and PLAYlive Nation, Inc. (“PLAYlive”). We believe that we are the only SEC reporting-completely integrated-esports
company that owns a League of Legends franchise. Additionally, we have the largest network of corporate and franchisee owned esports
gaming centers in North America.
Our
Esports Teams
We
own and manage numerous professional esports teams domestically and internationally. Revenue is generated from prize winnings,
corporate sponsorships, advertising, league subsidy payments and potential league revenue sharing payments from the publishers
of video games.
Domestic
Esports Teams – Simplicity Esports LLC
Through
our wholly owned subsidiary Simplicity Esports LLC, we own and manage numerous professional esports teams competing in games such
as Overwatch, Apex Legends, Heroes of the Storm and more. We are committed to growing and enhancing the esports industry, fostering
the development of amateurs to compete professionally and signing established professional gamers to support their paths to greater
success.
International
Esports Team - Simplicity One Brasil
Since
January 2020, through our 76% owned subsidiary Simplicity One Brasil, we manage Flamengo eSports, one of the leading Brazilian
League of Legends® teams. Flamengo eSports was established in 2017 as the Esports division of Clube de Regatas do Flamengo,
a successful Brazilian sports organization, with over 30 million followers across social media accounts, known for its world-famous
soccer team. Flamengo eSports’ League of Legends® team won the CBLoL Championship in September 2019, which qualified
the team to compete at the 2019 League of Legends® World Championship in Europe as one of 24 teams from 13 different regions
around the world. Flamengo Esports @flaesports was ranked as the 9th most tweeted about esports organization in the
world in 2020. With cost cutting steps taken during April 2020, and anticipated additional sponsorship revenue, this business
unit is expected to be cash flow positive by July 2021.
Online
Tournaments
In
response to demand from customers for online esports tournaments which was in all likelihood triggered by the social
distancing protocols attendant to the COVID-19 pandemic, we introduced in March 2020 an initiative of online esports tournaments.
Since March 2020, through our wholly owned subsidiary Simplicity Esports LLC, we have been holding weekly online esports tournaments.in
the United States. In addition, we commenced promoting these weekly online tournaments via text messages to our database of over
400,000 paying esports gaming center customers, which we acquired in our acquisition of PLAYlive. If we can convert merely 1%
of these existing customers from the PLAYlive database to play in our paid online tournaments, we anticipate this business unit
may generate approximately $1 million in annual revenues. At a 5% conversion rate, this business segment may generate approximately
$5 million in annual revenue. Management also intends to sell sponsorship and marketing activations for these online tournaments
which would create additional revenue. We also announced our initiative to offer play at home online tournaments in Brazil in
June 2020.
Our
Gaming Centers
As
of April 27, 2021, we have 33 locations, 15 corporate and 18 fully constructed franchise locations , through our wholly
owned subsidiaries, throughout the U.S., giving casual gamers the opportunity to play in a social setting with other members of
the gaming community. In addition, aspiring and established professional gamers have an opportunity to compete in local and national
esports tournaments held in our gaming centers for prizes, notoriety, and potential contracts to play for one of our professional
esports teams. In this business unit, revenue is generated from franchise royalties, the sale of game time, memberships, tournament
entry fees, birthday party events, corporate party events, concessions and gaming-related merchandise.
Our
business plan encompasses a brick and click physical and digital approach to further recognize revenue from all verticals, which
we believe to be unique in the industry. The physical centers, together with our esports teams, lifestyle brand and marketing
campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our
ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform,
tournaments (online and in-person) and physical real estate to maximize the monetization opportunities with these relationships.
In addition, we have proprietary intellectual capital, fan engagement strategies and brand development blueprints which complement
our publicly available information.
Optimally,
the esports gaming centers of Simplicity Esports LLC (“Simplicity Esports Gaming Centers”) will measure between 1,200
and 2,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology,
futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present
attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity
for sponsors and advertisers. Currently we operate approximately 80,000 square feet of retail space in desirable, high traffic
locations.
Creating
content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. Our talented team will
continue to produce unique in-depth content which showcases aspects of esports for fans. We seek to reach a broad demographic
encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic
and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while
maintaining authenticity to the gaming community that comprises our fan base.
As
a result of COVID-19 (discussed below), all of our corporate and franchised Simplicity Gaming Centers were closed effective April
1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have since reopened 14 corporate and 11
franchised Simplicity Gaming Centers as of April 27, 2021 , the majority of which are operating at restricted
capacity based on local COVID-19 regulations. See “Risk Factors—Public health epidemics or outbreaks, such as COVID-19,
could materially and adversely impact our business.”
The
12 franchise owned gaming centers that we have acquired to date generated over $2.25 million of revenue in
2019. We project a total of 17 corporate owned gaming centers by fiscal year end 2021 and accordingly expect annual revenues to
increase in 2021.
Corporate
Gaming Centers
Through
our subsidiary entities, we currently operate 15 corporate-owned retail Simplicity Esports Gaming Centers, one of which
was acquired during the third fiscal quarter ended February 28, 2021. Furthermore, we have engaged a national tenant representation
real estate broker to assist in the strategic planning and negotiations for our future Simplicity Esports Gaming Center locations.
We contemplate that new Simplicity Esports Gaming Centers will be funded by us as well as a combination of tenant improvement
allowances from landlords and sponsorships. As announced in June 2020, we are in discussions with multiple commercial property
owners regarding their desire to have us open 8,000 to 12,000 square foot MEGA centers at their properties. There are multiple
locations available to us with a percentage of gross sales rent lease structure (as opposed to fixed rent payments), and construction
funds offered by the landlord to assist with the build out and equipping of our planned MEGA centers. These MEGA centers are planned
as hubs in our hub and spoke model that will see smaller corporate- and franchisee-owned gaming centers as spokes connected to
MEGA centers as hubs for larger events and tournaments.
Franchised
Gaming Centers
Due
to interest from potential franchisees, we have launched a franchising program to accelerate the expansion of our planned nationwide
footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment
and buildout of esports gaming centers to potential business owners that desire to use our branding, infrastructure and process
to open and operate gaming centers. We currently operate 18 fully constructed franchise esports gaming centers . Franchise
revenue is generated from the sale of franchise territories, supplying furniture, equipment and merchandise to the franchisees
for buildout of their centers, a gross sales royalty fee and a national marketing fee. We license the use of our branding, assist
in identifying and negotiating commercial locations, assist in overseeing the buildout and development, provide access to proprietary
software for point of sale, inventory management, employee training and other HR functions. Franchisees also have an opportunity
to participate in our national esports tournament events, and benefit from the growing profile of our professional esports teams.
Once an esports gaming center is opened, we provide operational guidance, support and use of branding elements in exchange for
a monthly royalty fee calculated as 6% of gross sales. On January 1, 2020, we implemented a national marketing fee of 1% of gross
sales. To date, we have sold five of these franchise territories. COVID-19 travel restrictions
caused us to suspend the sale of new franchise territories from April 1, 2020 until October 1, 2020. During these nine months,
a pipeline of interested applicants has accumulated, and we anticipate new franchise territory sales over the next 12 months as
a result.
The
combination of the esports gaming centers, owned or franchised by our wholly owned subsidiaries Simplicity Esports LLC or PLAYlive,
provides us with what we believe is one of the largest footprint of esports gaming centers in North America. Over the next 12
months, existing PLAYlive esports gaming centers will be rebranded to Simplicity Esports gaming centers. All newly opened franchise
esports gaming centers will be branded as Simplicity Esports gaming centers and have numerous gaming PC’s. All gaming centers
in our footprint will be participating venues in our national esports tournaments.
Franchise
Roll Up Strategy
We
began implementing a franchise roll-up strategy in July 2020 as a result of the disruption caused by COVID-19 related stay at
home orders, and the disruption it caused to the commercial real estate market. The reduction in revenues for some franchisees
because of stay-at-home orders, and government mandates to remain closed created significant accrued rent payments due to landlords.
We have been able to come to terms with many franchisees to acquire the assets of their gaming centers and make them corporate
owned. We have simultaneously negotiated new leases with some of the largest national mall chains, including Simon Property Group
and Brookfield Asset Management, and are in the process of negotiating additional locations with other landlords. The new leases
involve significant reductions in or elimination of fixed rent and the addition of percentage of revenues rent terms. To date,
we have signed 13 letters of intent and executed definitive agreements for 12 of those locations during fiscal year 2021.
We anticipate closing the remaining acquisitions during the fourth fiscal quarter of 2021. We expect each of these locations
to be profitable as a result of the significant reduced rent expense via the percentage rent structure.
Our
Stream Team
The
Simplicity Esports LLC and Flamengo Esports stream teams encompasses over 20 commentators (commonly known as “casters”),
influencers and personalities who connect to a dedicated fan base. Our electric group of live personalities represent our organization
to the fullest with their own unique style. We are proud to support and present a diverse group of gamers as we engage fans across
a multiple of esports genres. Our Twitch affiliation has enabled our stream team influences to reach a broad fan base. Additionally,
we have created several niches within the streaming community which has enabled us to engage fans within certain titles on a 24/7
basis. Our notoriety in the industry is evidenced by our audience that views millions of minutes of Simplicity Esports’
and Flamengo Esports’ content monthly, via various social media outlets including YouTube, Twitter and Twitch. Through Simplicity
Esports LLC, we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience. Our intention
is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent. Our management
and players are known within the esports community and we plan to use their skills to create a seamless content creation plan
helping gamers feel closer to our brand than any other in the industry.
Material
Acquisitions and Licensing
Acquisition
of Simplicity Esports, LLC
On
January 4, 2019, the Company consummated the transactions contemplated by that certain share exchange agreement, dated December
21, 2018 (as amended by Amendment No. 1 to Share Exchange Agreement, dated December 28, 2018 and by Amendment No. 2 to Share Exchange
Agreement, dated December 30, 2018, the “Share Exchange Agreement”) by and among the Company, Simplicity Esports,
LLC, a Florida limited liability company (“Simplicity Esports LLC”), each of the equity holders of Simplicity Esports
LLC (“Simplicity Owners”) and Jed Kaplan, in the capacity as the representative of the Simplicity Owners (the “Representative”).
Pursuant to the Share Exchange Agreement the Simplicity Owners transferred all the issued and outstanding equity interests of
Simplicity Esports LLC to the Company in exchange for an aggregate of 375,000 (3,000,000 pre-reverse split) shares of common stock
of the Company (the “Simplicity Esports Acquisition”). As of January 4, 2019, upon the completion of the Simplicity
Esports Acquisition, esports gaming became the primary business of the Company.
On
January 4, 2019, the Simplicity Owners received an aggregate of 37,500 (300,000 pre-reverse split) shares of common stock at the
closing of the Acquisition and an additional aggregate of 87,500 (700,000 pre-reverse split) shares of common stock on January
7, 2019. The Simplicity Owners were initially entitled to receive an additional 250,000 (2,000,000 pre-reverse split) shares upon
the Company’s receipt of the approval of its stockholders to such issuance. This condition was removed as the stockholder
approval was only necessary due to the Company’s stock being listed on Nasdaq. Upon completion of the Simplicity Esports
LLC acquisition, the Company decided that moving off the Nasdaq was appropriate, and the 250,000 (2,000,000 pre-reverse split)
shares were issued to the Simplicity Owners on March 27, 2019.
In
connection with the acquisition of Simplicity Esports LLC, on January 2, 2019, the Company filed a Certificate of Amendment to
the Company’s Certificate of Incorporation (the “Certificate Amendment”) with the Delaware Secretary of State
to change the Company’s name from “Smaaash Entertainment, Inc.” to “Simplicity Esports and Gaming Company”.
In addition, the Company changed the ticker symbols of its common stock and public warrants to “WINR” and “WINRW,”
respectively, and commenced trading of its common stock and public warrants under such new ticker symbols on the OTCQB on January
10, 2019.
Acquisition
of PLAYlive
On
July 30, 2019, we acquired a 100% interest in PLAYlive by way of merger pursuant to an Agreement and Plan of Merger, dated July
25, 2019, whereby we acquired 100% of the issued and outstanding common stock of PLAYlive from the selling stockholders (“PLAYlive
Stockholders”) of PLAYlive in exchange for 150,000 (750,000 shares pre-reverse split) shares of our common stock. Following
this merger, PLAYlive became our wholly owned subsidiary. On the closing date of this merger, each of the PLAYlive Stockholders
entered into a one-year lock-up agreement with the Company and each of Duncan Wood, Jordan C. Jenson, and Alec T. Carpenter entered
into an employment agreement with PLAYlive.
Licensing
of Flamengo Esports
Effective
January 20, 2020, Simplicity One Brasil entered into an Exclusive Trademark and Symbol Use License Agreement, and Other Covenants
(the “License Agreement”), dated November 5, 2019 with Clube de Regatas do Flamengo (one of the most successful Brazilian
sports organizations, known for its world-famous soccer team), whereby Clube de Regatas do Flamengo agreed to exclusively license
its intellectual property rights (“Flamengo IP Rights”) to Simplicity One Brasil (an entity which the Company and
Team One E-Sports Ltda – ME owned a 90% and 10% equity interest in, respectively), authorizing Simplicity One Brasil to
use the Flamengo IP Rights on a League of Legends team in esports as well as in other modalities in esports, which will be maintained
and assembled by Simplicity One Brasil during the term of the Licensing Agreement. The Company has appointed Fred Tannure to act
as Simplicity One Brasil’s General Manager. The License Agreement has a term of three years, beginning on January 1, 2020
and ending on December 31, 2022, and may be renewed by mutual written agreement by the parties. In exchange for the exclusive
license, the Company shall pay Clube de Regatas do Flamengo an annual fee for the first, second and third year in the amount of
$32,882 (Reais$170,000.00), $35,784 (Reais$185,000.00), and $38,685 (Reais$200,000.00), respectively, as well as the payment of
royalties in the amount of 8% of the gross revenues (less taxes) of the eSports teams pursuant to the terms of the Licensing Agreement.
If either party unilaterally terminates the Agreement or gives rise to certain termination grounds set forth in the Agreement,
the terminating party will pay the other party a non-compensatory fine in the amount of approximately $23,870 (Reais $100,000)
to indemnify the other party, without prejudice to any losses or damages that exceed such amount.
Flamengo
Esports was established in 2017 as the Esports division of Clube de Regatas do Flamengo, a successful Brazilian sports organization,
known for its world-famous soccer team. Flamengo Esports’ League of Legends® team won the CBLoL Championship in September
2019 and competed at the 2019 League of Legends® World Championship in Europe as one of 24 teams from 13 different regions
around the world.
On
April 1, 2020, the Company released multiple players and staff members from Simplicity One Brasil Ltd as part of a restructuring
in an effort to make the Flamengo Esports project profitable. During the first quarter of the fiscal year ending May 31, 2021,
the Company applied for ownership of a franchise spot in League of Legends Brazil (CBLoL). Approval for franchise ownership was
awarded in October 2020.
In
June 2020, while Simplicity One Brasil was preparing its initial application for purchasing from Riot Games a franchise in Campeonato
Brasileiro de League of Legends, Simplicity One Brasil become aware that the 10%-ownership interest of Team One E-Sports Ltda
(“Team One E-Sports”) in Simplicity One Brasil was in contravention of Riot Games’ policy that only one League
of Legend esports team could be owned by an owner at one time because Team One had already submitted an application for purchasing
a franchise for another League of Legend esports team. Accordingly, Simplicity One Brasil needed Team One E-Sports to divest itself
of its 10%-equity interest in Simplicity One Brasil in order for Simplicity One Brasil to proceed with its franchise application.
Therefore, on June 22, 2020, Mr. Kaplan entered into a Quota Purchase Agreement with Team One E-Sports, pursuant to which Mr.
Kaplan acquired Team One Esports’ 10%-ownership equity interest for $45,000 in cash. In addition, the Company transferred
a 2%-equity interest (an aggregate of 4%) to each of Laila De Braga Cavalcanti Loss and Frederico Tannure, who live in Brazil
and run the operations of Simplicity One Brasil, in order to comply with Riot Games’ policy requiring local ownership in
Brazil in order to apply for a franchise of a league of legends sports team. Furthermore, on June 22, 2020, Mr. Kaplan agreed
to forgive the debt of the Kaplan Promissory Note with a principal balance of $90,000 in exchange for the Company assigning to
Mr. Kaplan a 10% equity interest in Simplicity One Brasil. In light of the restructuring of the ownership interest in Simplicity
One Brasil, as of April 27, 2021, the Company, Mr. Kaplan, Ms. Cavalcanti Loss, and Mr. Tannure own a 76%, 20%, 2% and
2% equity interest in Simplicity One Brasil.
COVID-19
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because
COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities
have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more
restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity
Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have since
reopened 14 corporate and 11 franchised Simplicity Gaming Centers as of April 27, 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, a limited number of the franchisees of Simplicity Gaming Centers have defaulted on their
obligations to pay their minimum monthly royalty payment to us. This has resulted in either an increase in accounts receivables
or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability to pay the minimum
monthly royalty payments owed by the franchisee. We have not written off as bad debt any accounts receivables attributable to
franchisee minimum monthly royalty payments owed during the COVID-19 pandemic. However, as of February 28, 2021, we have recorded
an allowance for doubtful accounts of approximately $139,867, as our collection efforts are ongoing. We have experienced an increase
in our gross account receivables by approximately $73,000, $47,000, $44,000, and $237,700 during the quarters ended May 31, 2020,
August 31, 2020, November 30, 2020 and February 28, 2021, respectively. Notwithstanding it is unclear exactly how much of the
increase in accounts receivables is attributable to the impact of COVID-19. We have waived the minimum monthly royalty payment
obligations from July 2020 through present day and are instead billing the franchisees a true-up of 6% of gross sales without
a minimum. We continue to assess possible similar accommodations to the franchisees in light of the impact of COVID-19.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date adversely impacted the Company’s business during the nine months ended February 28, 2021 and will
potentially continue to impact the Company’s business. Management expects that all of its business segments, across all
of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s
business and the duration for which it may have an impact cannot be determined at this time.
Corporate
History
Formation
We
were initially a blank check company organized under the laws of the State of Delaware on April 17, 2017 under the name I-AM Capital
Acquisition Company. We were formed for the purpose of effecting a merger, share exchange, asset acquisition, share purchase,
reorganization or similar business combination with one or more businesses. Although we were not limited to a particular industry
or geographic region for purposes of consummating a business combination, we focused on businesses with a connection to India.
On November 20, 2018, we changed our name from I-AM Capital Acquisition Company to Smaaash Entertainment, Inc. On January 2, 2019,
we changed our name from Smaaash Entertainment, Inc. to Simplicity Esports and Gaming Company.
Smaaash
Entertainment Private Limited
Business
Combination
On
November 20, 2018, the Company and Smaaash Entertainment Private Limited, a private limited company incorporated under the laws
of India (“Smaaash Private”), consummated the transactions (the “Transactions” or the “Business
Combination”) contemplated by the share subscription agreement (as amended, the “Subscription Agreement”), following
the approval at the special meeting of the stockholders of the Company held on November 9, 2018 (the “Special Meeting”).
Pursuant
to the Subscription Agreement, the purchase price of $150,000 was paid by the Company to Smaaash Private in exchange for 294,360
newly issued equity shares of Smaaash Private at the closing of the Transactions (the “Closing”), representing less
than 1% of Smaaash Private at such time.
At
the time of the Closing, AHA Holdings Private Limited (“AHA Holdings”) and Shripal Morakhia (together with AHA Holdings,
the “Smaaash Founders”) agreed to transfer all of their ownership interest in Smaaash Private (the “Additional
Smaaash Shares”) to the Company in exchange for newly issued shares of our Common Stock (the “Transferred Company
Shares”). In furtherance of the foregoing, at the Closing, the Company issued an aggregate of 250,000 (2,000,000 pre-reverse
split) shares of its common stock to the Smaaash Founders as an upfront portion of the Transferred Company Shares (the “Upfront
Company Shares”). In connection with the issuance of the Upfront Company Shares, the Company and the Smaaash Founders entered
into an escrow agreement pursuant to which the Upfront Company Shares would be held in escrow and will be either, (i) if the Additional
Smaaash Shares are not transferred in full to the Company within the designated six-month period, cancelled, or (ii) if the Additional
Smaaash Shares are transferred in full to the Company within the designated six-month period, released from escrow and the number
of Upfront Company Shares will be deducted from the Transferred Company Shares that will be issued to the Smaaash Founders upon
the delivery of the Additional Smaaash Shares. Pursuant to the terms of the escrow agreement, the Upfront Company Shares have
been cancelled because the Additional Smaaash Shares were not transferred in full to the Company in the designated six-month period.
In
connection with the Closing, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc.,
changed its stock symbols for its Common Stock, Public Rights, and Public Warrants to “IAM,” “IAMXR” and
“IAMXW,” respectively, and entered into a master franchise agreement (“Master Franchise Agreement”) and
a master license and distribution agreement (“Master Distribution Agreement”) with Smaaash Private. After the Closing,
the Company’s primary assets consisted of shares in Smaaash Private and the rights granted under the Master Franchise Agreement
and the Master Distribution Agreement.
Business
of Smaaash Private
At
the time of closing of the Smaaash transaction, Smaaash Private operated 40 games and entertainment centers (“Smaaash Centers”),
including 39 Smaaash Centers in India and one international Smaaash Center in the U.S., in addition to carrying out product sales
of its games and equipment that Smaaash has developed in-house, supported by its sponsorship and other revenues.
Smaaash
Private’s core concept was to offer an interactive, immersive and fun experience to customers at its Smaaash Centers, blending
Augmented Reality (“AR”) and Virtual Reality (“VR”) and other games, indoor entertainment, and attractive
food and beverage options, customized to the tastes and preferences of a diverse set of customers across age groups, genders and
backgrounds, including corporate customers, families, friends and children. Smaaash Private’s game concepts are supported
by its in-house technology, value engineering and systems integration capabilities.
Master
Franchise Agreement
Under
the Master Franchise Agreement, Smaaash Private has granted to the Company an exclusive right to establish and operate Smaaash
Centers (as defined under the Master Franchise Agreement) and to sublicense the right to establish and operate Smaaash Centers
to third party franchisees, and a license to use the products and other services developed by Smaaash Private with respect to
the Smaaash Centers, in the United States (“Territory”). Further, Smaaash Private has granted to the Company the limited
license to use the Trademarks of Smaaash Private (as set out in the Master Franchise Agreement) for the purposes of establishing
and operating the Smaaash Centers in the Territory. The Master Franchise Agreement has been executed on an arms’ length
basis between Smaaash Private and the Company.
On
November 29, 2018, the Company and Smaaash Private executed an addendum to the Master Franchise Agreement (the “Amendment”).
Pursuant to the Amendment, Smaaash Private grants the Company the exclusive rights to set up family and entertainment centers
under the name “Total Sports Center” in the United States (“Total Sports Centers”) in which 51% of the
investment will be borne by the Company and 49% by Smaaash Private. Smaaash Private will be responsible for identifying the locations
for setting up, managing and controlling the Total Sports Centers and will carry out all the fit out requirements for such centers.
Smaaash Private will also appoint the management team for the centers. Smaaash Private will be entitled to 3% of the net revenue
of each center, subject to conditions to be confirmed by the parties.
Master
License and Distribution Agreement
Under
the Master Distribution Agreement, Smaaash Private has granted to the Company an exclusive right to purchase from Smaaash Private
specialized video game equipment and products related to sports and recreational activities (“Products”) in the territory
under the brand name of Smaaash Private and sell them with a 15% markup to the customers which will be the sub-franchisees of
the Company who will operate the Smaaash Centers, as specified in the Master Franchise Agreement.
Shift
of Business Focus to Esports Gaming
Following
the January 2019 acquisition of Simplicity Esports LLC described below, we determined to shift our current primary focus to esports
gaming. Accordingly, we did not generate any revenues from Smaaash in 2019. The Master Franchise Agreement, as amended, and the
Master Distribution Agreement continue in full force and effect, however, and we may now or in the future pursue Smaaash Private
business opportunities.
Polar
and K2
On November 2, 2018, the
Company entered into a stock purchase agreement with each of Polar Asset Management Partners Inc. (“Polar”) and K2
Principal Fund L.P. (“K2”), pursuant to which Polar and K2 agreed to sell up to 61,250 (490,000 pre-reverse
split) and 27,500 (220,000 pre-reverse split) shares, respectively, of the Company’s common stock to the Company
30 days after the consummation of the transactions at a price of $89.84 ($11.23 pre-reverse split) contemplated by the
share subscription agreement with Smaaash Private.
On December 20, 2018,
the Company, Polar, K2 and the Escrow Agent, entered into an Amendment (the “Amendment”), pursuant to which, among
other things, the stock purchase agreements with Polar and K2 were amended to (x) reduce the purchase price per share payable
by the Company at the closing of the Stock Sales from $89.84 ($11.23 pre-reverse split) per share to (1) first $48.00
($6.00 pre-reverse split) per share up to 20% of the original number of Shares (as defined in the respective Purchase Agreement),
(2) then $40.00 ($5.00 pre-reverse split) per remaining share up to 20% of the original number of Shares, (3) then $32.00
($4.00 pre-reverse split) per remaining share up to 20% of the original number of Shares, (4) then $24.00 ($3.00 pre-reverse
split) per remaining Share up to 20% of the original number of Shares, and (5) then $16.00 ($2.00 pre-reverse split) per
remaining Share up to 20% of the original number of Shares, (y) to extend the outside date of the closing of the Stock Sales until
January 18, 2019, and (z) to authorize the issuance of $3,542,700 and $1,590,600 from the Escrow Account to Polar and K2, respectively,
as partial payment for the Shares prior to the final closing of the Stock Sales.
The
Amendment also included provisions regarding the reduction of the exercise price and amendment of redemption provisions of the
Company’s Public Warrants and Private Placement Warrants. On August 18, 2019, the Company held a special meeting of its
public warrant holders to approve the foregoing. However, these proposals were not approved by the requisite votes.
Acquisition
of Simplicity Esports, LLC
In
connection with the Simplicity Esports Acquisition, the Simplicity Owners received an aggregate of 37,500 (300,000 pre-reverse
split) shares of common stock at the closing on January 4, 2019, an additional aggregate of 87,500 (700,000 pre-reverse split)
shares of common stock on January 7, 2019 and the remaining 250,000 (2,000,000 pre-reverse split) shares in March of 2019.
In
connection with the Simplicity Esports Acquisition, on January 2, 2019, the Company filed a Certificate of Amendment to the Company’s
Third Amended and Restated Certificate of Incorporation (the “Certificate Amendment”) with the Delaware Secretary
of State to change the Company’s name from “Smaaash Entertainment, Inc.” to “Simplicity Esports and Gaming
Company.” In addition, the Company changed the ticker symbols of its common stock and public warrants to “WINR”
and “WINRW,” respectively, and commenced trading of its common stock and public warrants under such new ticker symbols
on the OTCQB on January 10, 2019.
Equity
Line
On
March 12, 2020, the Company entered into a Common Stock Purchase Agreement with Triton Funds LP (“Triton”), dated
as of March 11, 2020, pursuant to which, upon the terms and subject to the conditions thereof, Triton was committed to purchase
shares of the Company’s common stock at an aggregate price of up to $500,000 (the “Maximum Commitment Amount”)
over the course of the commitment period which ends on the earlier of (i) the date on which Triton purchases the Maximum Commitment
Amount and (ii) December 31, 2020 (the “Equity Line”). In connection with the execution of the Common Stock Purchase
Agreement, the Company registered the resale of up to 90,625 (725,000 pre-reverse split) shares of common stock issuable under
the Equity Line in the amount of the Maximum Commitment Amount pursuant to a registration statement declared effective by the
SEC on March 30, 2020.
On
April 9, 2020, the Company delivered a Purchase Notice to Triton pursuant to the terms of the Common Stock Purchase Agreement
requiring Triton to acquire 15,625 (125,000 pre-reverse split) shares of common stock, which resulted in $87,700 in proceeds to
the Company. Pursuant to the terms of the Common Stock Purchase Agreement, on April 9, 2020, the Company instructed the transfer
agent to issue 15,625 (125,000 pre-reverse split) shares of common stock to a custodial account of Triton. These shares were issued
in reliance on Section 4(a)(2) of the Securities Act. Unfortunately, the transfer agent erroneously transferred the entire 90,625
(725,000 pre-reverse split) shares of common stock under the Equity Line to the custodial account of Triton, resulting in an over-issuance
of 75,000 (600,000 pre-reverse split) shares to Triton. The Company notified Triton of this error and that the Company terminated
the Common Stock Purchase Agreement with Triton. On November 18, 2020, the 75,000 (600,000 pre-reverse split) shares issued in
error were returned by Triton and cancelled and returned to the treasury of the Company.
Debt
Obligations
10%
Fixed Convertible Promissory Note
On
April 29, 2020 (the “Effective Date”), the Company issued a 10% Fixed Convertible Promissory Note (the “Harbor
Gates Note”), with a maturity date of October 29, 2020 (the “Maturity Date”), in the principal sum of $152,500
in favor of Harbor Gates Capital, LLC (“Harbor Gates”). Pursuant to the terms of the Harbor Gates Note, the Company
agreed to pay to Harbor Gates $152,500 (the “Principal Sum”) and to pay “guaranteed” interest on the principal
balance at an amount equivalent to 10% of the Principal Sum, to the extent such Principal Sum and “guaranteed” interest
and any other interest, fees, liquidated damages and/or items due to Harbor Gates have not been repaid or converted into Company
common stock in accordance with the terms of the Harbor Gates Note. The Harbor Gates Note carries an original issue discount (“OID”)
of $2,500. Accordingly, on the Effective Date, Harbor Gates delivered $150,000 to the Company in exchange for the Harbor Gates
Note.
In
addition to the “guaranteed” interest, and upon the occurrence of an Event of Default (as hereinafter defined), additional
interest will accrue from the date of the Event of Default at the rate equal to the lower of 20% per annum or the highest rate
permitted by law.
The
Company may prepay the Harbor Gates Note according to the following schedule:
Days
Since
Effective
Date
|
|
Payment
Amount
|
Under 30
|
|
115% of Principal
Amount (as hereinafter defined) so paid
|
31-60
|
|
120% of Principal
Amount so paid
|
61-90
|
|
125% of Principal
Amount so paid
|
91-180
|
|
135% of Principal
Amount so paid
|
135%
of the remaining unpaid and unconverted Principal Amount, plus all accrued and unpaid interest will be due and payable on the
Maturity Date. “Principal Amount” refers to the sum of (i) the original principal amount of the Harbor Gates Note
(including the OID); (ii) all guaranteed and other accrued but unpaid interest under the Harbor Gates Note; (iii) any fees due
under the Harbor Gates Notes; (iv) liquidated damages; and (v) any default payments owing under the Harbor Gates Note, in each
case previously paid or added to the Principal Amount.
Pursuant
to the terms of the Harbor Gates Note, the Company agreed to issue Harbor Gates shares of Company common stock in two tranches
as follows:
|
(i)
|
1,250 (10,000 pre-reverse
split) 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 ($1.00
pre-reverse split) per share, then Harbor Gates will be entitled, and the Company will issue to Harbor Gates additional shares
of common stock as set forth in the Harbor Gates Note.
|
If
an Event of Default (as defined in the Promissory Note) occurs, the outstanding Principal Amount of the Harbor Gates Note owing
in respect thereof through the date of acceleration, shall become, at Harbor Gates’ election, immediately due and payable
in cash at the “Mandatory Default Amount”. The Mandatory Default Amount means 35% of the outstanding Principal Amount
of the Harbor Gates Note will be automatically added to the Principal Sum of the Harbor Gates Note and tack back to the Effective
Date for purposes of Rule 144 promulgated under the 1934 Act. Commencing five days after the occurrence of any Event of Default
that results in the eventual acceleration of the Harbor Gates Note, the Harbor Gates Note will accrue additional interest, in
addition to the Harbor Gates Note’s “guaranteed” interest, at a rate equal to the lesser of 20% per annum or
the maximum rate permitted under applicable law.
If
the Harbor Gates Note is not retired on or before the Maturity Date, then at any time and from time to time after the Maturity
Date, and subject to the terms hereof and restrictions and limitations contained in the Harbor Gates Note, Harbor Gates has the
right, at Harbor Gates’ sole option, to convert in whole or in part the outstanding and unpaid Principal Amount under the
Harbor Gates Note into shares of the Company’s common stock at the Variable Conversion Price. The “Variable Conversion
Price” will be equal to the lower of: (a) $8.00 ($1.00 pre-reverse split), or (b) 70% of the lowest volume weighted average
price of the Company’s common stock during the 15 consecutive trading days prior to the date on Harbor Gates elects to convert
all or part of the Harbor Gates Note.
On
July 2, 2020, the Company repaid $152,500 and $15,000 in accrued interest in full satisfaction of the 10% Convertible Promissory
Harbor Gates Note.
Kaplan
Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, Chairman of the Company’s Board of Directors and greater than 5% stockholder of the
Company. The Kaplan Note matures on October 12, 2020 (the “Maturity Date”). The Company used the proceeds of the Kaplan
Note to fund the operations of Simplicity One Brasil Ltda, the Company’s majority owned subsidiary (“Simplicity Brasil”).
Pursuant
to the terms of the Kaplan Note, the Company agreed to pay to Mr. Kaplan the lesser of (i) the principal sum of $90,000 (the “Maximum
Commitment”), or (ii) the aggregate principal amount of all direct advances of the proceeds of the Kaplan Note (each, an
“Advance”), together with any interest thereon, and any and all other amounts which may be due and payable thereunder
from time to time.
Subject
to the terms of the Kaplan Note, Mr. Kaplan agreed to make one direct Advance to and for the benefit of the Company on the Issue
Date in the amount of $45,000, and one additional Advance to and for the benefit of the Company at such time as the Company may
request during the two-month period following the Issue Date. The total of the aggregate principal balance of all Advances (collectively
referred to herein as the “Principal Amount”) outstanding at any time shall not exceed the Maximum Commitment. Advances
made by Mr. Kaplan to the Company under the Kaplan Note which have been repaid may not be borrowed again.
Prior
to the Maturity Date or an Event of Default (as hereinafter defined), the Principal Amount outstanding under the Kaplan Note will
bear interest at a rate of 3% (the “Interest Rate”). From and after the Maturity Date or upon and during the continuance
of an Event of Default, interest will accrue on the unpaid Principal Amount during any such period at an annual rate (the “Default
Rate”) equal to 10% plus the Interest Rate; provided, however, that in no event will the Default Rate exceed the maximum
rate permitted by law.
The
Company could prepay the Kaplan Note, in whole or in part, without a prepayment penalty, at any time provided that an Event of
Default has not then occurred.
As
of May 31, 2020, advances under the terms of this note were $64,728. On various dates subsequent to May 31, 2020, Mr. Kaplan funded
$25,272 pursuant to the Kaplan Promissory Note. With the contributions subsequent to May 31, 2020, the principal balances outstanding
and due Mr. Kaplan amounted to $90,000. On June 22, 2020, Mr. Kaplan agreed to forgive the debt of the Kaplan Promissory Note
with a principal balance of $90,000 in exchange for the Company assigning to Mr. Kaplan a 10% equity interest in Simplicity One
Brasil, Ltda, a subsidiary of the Company.
Self-Amortization
Promissory Note
On
June 18, 2020 (the “Issue Date”), the Company entered into a securities purchase agreement (the “SPA”)
with an accredited investor (the “Holder”), pursuant to which the Company issued a 12% self-amortization promissory
note (the “Amortization Note”) with a maturity date of June 18, 2021 (the “Maturity Date”), in the principal
sum of $550,000. Pursuant to the terms of the Amortization Note, the Company agreed to pay $550,000 (the “Principal Sum”)
to the Holder and to pay interest on the Principal Sum at the rate of 12% per annum. The Amortization Note carries an OID of $55,000.
Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase price of $495,000 in exchange for the Amortization
Note. In addition, pursuant to the terms of the SPA, the Company agreed to issue 6,875 (55,000 pre-reverse split) shares of the
Company’s common stock to the Holder as additional consideration.
The
Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest with no prepayment premium. The Amortization Note contains customary events of default relating to, among
other things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or
SPA.
The
Company is required to make amortization payments to the Holder according to the following schedule:
Payment Date
|
|
|
Payment Amount
|
|
10/16/2020
|
|
$
|
66,125.00
|
|
11/16/2020
|
|
$
|
66,125.00
|
|
12/16/2020
|
|
$
|
66,125.00
|
|
01/18/2021
|
|
$
|
66,125.00
|
|
02/18/2021
|
|
$
|
66,125.00
|
|
03/18/2021
|
|
$
|
66,125.00
|
|
04/16/2021
|
|
$
|
66,125.00
|
|
05/18/2021
|
|
$
|
66,125.00
|
|
06/18/2021
|
|
$
|
65,921.26
|
|
Total:
|
|
$
|
594,921.26
|
|
In
connection with the November 23, 2020 SPA discussed below, we repaid principal and interest of $198,375 on this June 18, 2020
Note.
Upon
the Holder’s provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within
five calendar days as provided in the Amortization Note, the Amortization Note shall become immediately due and payable and the
Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then
outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default,
additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest
rate permitted by law. The Company shall have the right to pay the Default Amount in cash at any time, provided, however that
the Holder may convert the Amortization Note into the Company’s common stock (subject to the beneficial ownership limitations
of 4.99% contained in the Amortization Note) at any time after the date that is five calendar days after the Amortization Note
becomes immediately due and payable as a result of an Event of Default until the Company has repaid the Amortization Note in cash.
If the aforementioned event occurs, the conversion price will be equal to the closing bid price of the Company’s common
stock on the trading day immediately preceding the date of the respective conversion. The Company intends to repay the Amortization
Note in accordance with its terms so that no amount under the Amortization Note is converted into shares of the Company’s
common stock.
While
any portion of this Note is outstanding, if the Company receives cash proceeds of more than $2,000,000 (the “Minimum Threshold”)
in the aggregate from public offerings or private placements to investors, the Company shall, within two business days of Company’s
receipt of such proceeds, inform the Holder of such receipt, following which the Holder shall have the right in its sole discretion
to require the Company to immediately apply up to 50% of all proceeds received by the Company after the Minimum Threshold is reached
to repay the outstanding amounts owed under this Note.
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 “Self-Amortization Note”) with a maturity date of August 7, 2021
(the “Maturity Date”), in the principal sum of $333,333. Pursuant to the terms of the Self-Amortization Note, the
Company agreed to pay $333,333 (the “Principal Sum”) to the Holder and to pay interest on the principal balance at
the rate of 12% per annum. The Self-Amortization Note carries an original issue discount of $33,333. Accordingly, on the Closing
Date (as defined in the SPA), the Holder paid the purchase price of $300,000 in exchange for the Self-Amortization Note. In addition,
pursuant to the terms of the SPA, the Company agreed to issue 4,167 (33,333 pre-reverse split) shares of the Company’s
common stock to the Holder as additional consideration.
The
Company may prepay the Self-Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest with no prepayment premium). The Amortization Note contains customary events of default relating to, among
other things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or
SPA.
The
Company is required to make amortization payments to the Holder according to the following schedule:
Payment Date
|
|
|
Payment
Amount
|
|
12/07/2020
|
|
$
|
40,075.75
|
|
01/07/2021
|
|
$
|
40,075.75
|
|
02/08/2021
|
|
$
|
40,075.75
|
|
03/08/2021
|
|
$
|
40,075.75
|
|
04/07/2021
|
|
$
|
40,075.75
|
|
05/07/2021
|
|
$
|
40,075.75
|
|
06/07/2021
|
|
$
|
40,075.75
|
|
07/07/2021
|
|
$
|
40,075.75
|
|
08/07/2021
|
|
$
|
39,952.34
|
|
Total:
|
|
$
|
360,558.34
|
|
Upon
the Holder’s provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within
five calendar days as provided in the Amortization Note, the Amortization Note shall become immediately due and payable and the
Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then
outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default,
additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest
rate permitted by law. The Company shall have the right to pay the Default Amount in cash at any time, provided, however that
the Holder may convert the Amortization Note into the Company’s common stock (subject to the beneficial ownership limitations
of 4.99% contained in the Amortization Note) at any time after the date that is five calendar days after the Amortization Note
becomes immediately due and payable as a result of an Event of Default until the Company has repaid the Amortization Note in cash.
If the aforementioned event occurs, the conversion price will be equal to the closing bid price of the Company’s common
stock on the trading day immediately preceding the date of the respective conversion. The Company intends to repay the Amortization
Note in accordance with its terms so that no amount under the Amortization Note is converted into shares of the Company’s
common stock.
While
any portion of this Note is outstanding, if the Company receives cash proceeds of more than $2,000,000.00 (the “Minimum
Threshold”) in the aggregate from public offerings or private placements to investors, the Company shall, within two business
days of Company’s receipt of such proceeds, inform the Holder of such receipt, following which the Holder shall have the
right in its sole discretion to require the Company to immediately apply up to 50% of all proceeds received by the Company after
the Minimum Threshold is reached to repay the outstanding amounts owed under this Note.
November
23, 2020 Self-Amortization Promissory Note
On
November 25, 2020, the Company entered into a securities purchase agreement (the “November 2020 SPA”), dated as of
November 23, 2020 (the “Effective Date”), with an accredited investor (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 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 is required to 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 November Amortization Note
or the November 2020 SPA.
The
Company is required to make amortization payments to the Holder according to the following schedule:
Payment Date
|
|
|
Payment
Amount
|
|
2/23/2021
|
|
$
|
84,000.00
|
|
3/23/2021
|
|
$
|
84,000.00
|
|
4/23/2021
|
|
$
|
84,000.00
|
|
5/21/2021
|
|
$
|
84,000.00
|
|
6/23/2021
|
|
$
|
84,000.00
|
|
7/23/2021
|
|
$
|
84,000.00
|
|
8/23/2021
|
|
$
|
84,000.00
|
|
9/23/2021
|
|
$
|
84,000.00
|
|
10/22/2021
|
|
$
|
84,000.00
|
|
11/23/2021
|
|
$
|
84,000.00
|
|
Total:
|
|
$
|
840,000.00
|
|
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 cure period shall not apply to certain events of default as set forth in
the November Amortization Note), the November 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 November 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 November 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”).
Amendments
to the Series A-2 Exchange Convertible Note
On
or about December 20, 2018, the Company issued that certain Series A-2 exchange convertible note in the original principal amount
of $1,000,000 (the “Series A-2 Note”) to Maxim.
On
June 18, 2020, the Company and Maxim entered into that certain first amendment to the Series A-2 Note (the “First Amendment”),
pursuant to which such parties agreed to the following: (i) Maxim’s resale of the Company’s common stock (the “Common
Stock”) underlying the Series A-2 Note shall be limited to 10% of the daily volume of the Common Stock on each respective
trading day, (ii) the maturity date of the Series A-2 Note was extended to December 31, 2020, (iii) the principal amount of the
Series A-2 Note was increased by $100,000 and (iv) the conversion price was reduced from $15.44 ($1.93 pre-reverse split) to $9.20
($1.15 pre-reverse split).
On
December 31, 2020, the Company and Maxim entered into a second amendment to the Series A-2 Note to extend the maturity date of
Series A-2 Note to February 15, 2021.
February
19, 2021 12% Promissory Note and Securities Purchase Agreement
On
February 19, 2021, the Company entered into a securities purchase agreement (the “SPA”) dated as of February 19, 2021,
with an accredited investor (the “Holder”), pursuant to which the Company issued a 12% promissory note (the “Note”)
with a maturity date of February 19, 2022 (the “Maturity Date”), in the principal sum of $1,650,000. In addition,
the Company issued 10,000 shares of its common stock to the Holder as a commitment fee pursuant to the SPA. Pursuant to the terms
of the Note, the Company agreed to pay to $1,650,000 (the “Principal Sum”) to the Holder and to pay interest on the
principal balance at the rate of 12% per annum (provided that the first twelve months of interest shall be guaranteed). The Note
carries an original issue discount (“OID”) of $165,000. Accordingly, on the Closing Date (as defined in the SPA),
the Holder paid the purchase price of $1,485,000 in exchange for the Note. The Company intends to use the proceeds for its operational
expenses, the repayment of those certain self-amortization promissory notes previously issued to the Holder on June 18, 2020 and
November 23, 2020, and the repayment of certain other existing debt obligations. The Holder may convert the Note into the Company’s
common stock (subject to the beneficial ownership limitations of 4.99% in the Note) at any time at a conversion price equal to
$11.50 per share.
The
Company may prepay the Note at any time prior to the date that an Event of Default (as defined in the 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 Note contains customary events of default relating to, among other things, payment defaults, breach of
representations and warranties, and breach of provisions of the Note or SPA.
The
Company is required to make an interim payment to the Holder in the amount of $363,000, on or before August 19, 2021, towards
the repayment of the balance of the Note.
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 Note), the Note shall become immediately due and payable and the Company shall pay to
the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued
interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default, additional interest
will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted
by law.
Restructuring
the Ownership in Simplicity One Brasil, LTDA
In
June 2020, while Simplicity One Brasil Ltda (“Simplicity One Brasil”) was preparing its initial application for purchasing
a franchise in Campeonato Brasileiro de League of Legends, Simplicity One Brasil become aware that the 10%-ownership interest
of Team One E-Sports Ltda (“Team One E-Sports”) in Simplicity One Brasil was in contravention of Riot Games’
policy that only one League of Legend esports team could be owned by an owner at one time because Team One had already submitted
an application for purchasing a franchise for another League of Legend esports team. Accordingly, Simplicity One Brasil needed
Team One E-Sports to divest itself of its 10%-equity interest in Simplicity One Brasil in order for Simplicity One Brasil to proceed
with its franchise application. Therefore, on June 22, 2020, Mr. Kaplan entered into a Quota Purchase Agreement with Team One
E-Sports, pursuant to which Mr. Kaplan acquired Team One Esports’ 10%-ownership equity interest for $45,000 in cash. In
addition, the Company transferred a 2%-equity interest (an aggregate of 4%) to each of Laila De Braga Cavalcanti Loss and Frederico
Tannure, who live in Brazil and run the operations of Simplicity One Brasil, in order to comply with Riot Games’ policy
requiring local ownership in Brazil in order to apply for a franchise of a league of legends sports team. Furthermore, on June
22, 2020, Mr. Kaplan agreed to forgive the debt of the Kaplan Promissory Note with a principal balance of $90,000 in exchange
for the Company assigning to Mr. Kaplan a 10% equity interest in Simplicity One Brasil. In light of the restructuring of the ownership
interest in Simplicity One Brasil, as of April 27, 2021, the Company, Mr. Kaplan, Ms. Cavalcanti Loss, and Mr. Tannure
own a 76%, 20%, 2% and 2% equity interest in Simplicity One Brasil.
Recent
Developments
FirstFire
Global 12% Promissory Note and Securities Purchase Agreement
On
March 10, 2021, the Company, entered into a securities purchase agreement (the “First Fire SPA”) dated as of March
10, 2021, with FirstFire Global Opportunities Fund, LLC, a Delaware limited liability company (the “Holder”), pursuant
to which the Company issued a 12% promissory note with a maturity date of March 10, 2022, in the principal sum of $560,000. The
Company received net proceeds of $130,606, net of OID of $56,000, net of origination fees of $8,394, and the repayment of principal
and interest of $365,000 on the August 7, 2020 Note. In addition, the Company issued 3,394 (27,152 pre-reverse split) shares of
its common stock to the Holder as a commitment fee pursuant to the SPA. Pursuant to the terms of the Note, the Company agreed
to pay to $560,000 (the “Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of
12% per annum (provided that the first twelve months of interest shall be guaranteed). The Note carries an OID of $56,000. Accordingly,
on the Closing Date (as defined in the First Fire SPA), the Holder paid the purchase price of $504,000 in exchange for the Note.
The Holder may convert the Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99%
in the Note) at any time at a conversion price equal to $11.50 per share.
The
Company may prepay the Note at any time prior to the date that an Event of Default (as defined in the 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 Note contains customary events of default relating to, among other things, payment defaults, breach of
representations and warranties, and breach of provisions of the Note or SPA.
The
Company is required to make an interim payment to FirstFire in the amount of $123,200, on or before September 10, 2021, towards
the repayment of the balance of the Note.
Upon
FirstFire’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 Note), the Note shall become immediately due and payable and the Company shall pay to
FirstFire, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued
interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default, additional interest
will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted
by law.
Form
S-8 Registration Statement
On
March 18, 2021, the Company filed a registration statement on Form S-8 for the purpose of resale or reoffer thereof, of 18,125
(145,000 pre-reverse split) shares of the Company’s common stock issued prior to the filing of such registration statement
and held by the selling stockholder named therein in connection with such selling stockholder’s provision of services to
the Company.
Appointment
of Mr. Kaplan as Chairman, Mr. Franklin as Chief Executive Officer and Mr. Lau as Chief Financial Officer; New Executive Officer
Agreements
On
March 25, 2021, our board of directors appointed Jed Kaplan, our then-Chief Executive Officer, Interim Chief Financial Officer
and a member of the Board, as Chairman of the Board, effective March 29, 2021. Also on March 25, 2021, Mr. Kaplan submitted his
resignation as Chief Executive Officer and Interim Chief Financial Officer. On the same date, our board of directors appointed
Roman Franklin, our then- President and Chief Operating Officer and a member of the Board, as our Chief Executive Officer, effective
March 29, 2021. Also on March 25, 2021, our board of directors appointed Knicks Lau to serve as our Chief Financial Officer, effective
March 29, 2021. Donald R. Caldwell, who served as Chairman of the Board until March 29, 2021, continues to serve as a member of
our board of directors and as Chairman of the Audit Committee and Chairman of the Compensation Committee.
In
connection with Mr. Franklin’s appointment, on March 25, 2021, the Company entered into an employment agreement, dated as
of March 29, 2021 by and between the Company and Mr. Franklin. See “Executive Compensation—Executive Officer and Director
Compensation—Executive Employment Agreements” for information regarding Mr. Franklin’s employment agreement.
In
connection with Mr. Lau’s appointment, on March 23, 2021, the Company entered into an employment agreement, dated as of
March 29, 2021 by and between the Company and Mr. Lau. See “Executive Compensation—Executive Officer and Director
Compensation—Executive Employment Agreements” for information regarding Mr. Lau’s employment agreement.
Tiger
Trout SPA
On March 31, 2021, the
Company entered into the Tiger Trout Agreement by and between the Company and the Selling Stockholder, pursuant to which
the Company agreed to issue and sell to Selling Stockholder an aggregate of 125,000 (1,000,000 pre-reverse split) shares
of common stock at a purchase price of $12.00 ($1.50 pre-reverse split) per share, for a total purchase price of $1,500,000.
The
Tiger Trout Agreement provides that the sale will occur in two tranches, as follows:
|
●
|
The Company agreed
to issue and sell to the Selling Stockholder on March 31, 2021 41,667 (333,336 pre-reverse split) shares of common stock (the
“First Tranche Shares”) at a purchase price of $12.00 ($1.50 pre-reverse split) per share, for a total purchase
price of $500,004 (the “First Tranche Purchase Price”). The closing of the purchase and sale of the First Tranche
Shares is referred to herein as the “First Closing”.
|
|
|
|
|
●
|
Subject
to the satisfaction or waiver, by the party for whose benefit such conditions exist, of the conditions (which are outside
the control of the Selling Stockholder) to the Second Closing (as hereinafter defined), at such time and pursuant to the
terms and conditions in the Tiger Trout Agreement, the Company agreed to issue and sell to the Selling Stockholder 83,333
(666,664 pre-reverse split) shares of common stock (the “Second Tranche Shares” and together with the First Tranche
Shares, the “Tiger Trout Shares”) at a purchase price of $12.00 ($1.50 pre-reverse split) per share, for a total
purchase price of $999,996 (the “Second Tranche Purchase Price” and together with the First Tranche Purchase Price,
the “Purchase Price”). The closing of the purchase and sale of the Second Tranche Shares is referred to herein
as the “Second Closing”.
|
In
the Tiger Trout Agreement, the Company agreed that, following the First Closing, the Company will utilize its commercially reasonable
efforts to file the resale Registration Statement pursuant to the Securities Act with the SEC for the resale of the Tiger Trout
Shares, and will use its commercially reasonable efforts to have the Registration Statement declared effective by the SEC within
30 calendar days, but not more than 90 calendar days after March 31, 2021.
The
Company also agreed to, among other things, (i) make and keep adequate current public information available, as those terms are
understood and defined in Rule 144 promulgated under the Securities Act, and (ii) file with the SEC in a timely manner all reports
and other documents required of the Company under the Securities Act and the Exchange Act so long as the Company remains subject
to such requirements and the filing of such reports and other documents as required for the applicable provisions of Rule 144.
The
obligations of the Selling Stockholder to consummate the Second Closing is subject to certain conditions, including, but not limited
to: (i) the Registration Statement shall have become effective, and (ii) from March 31, 2021 to the date of the Second Closing,
trading in the Company’s common stock shall not have been suspended by the SEC or the Company’s principal Trading
Market (as defined in the Agreement), and, at any time prior to the date of the Second Closing, trading in securities generally
as reported by Bloomberg L.P. shall not have been suspended or limited, or minimum prices shall not have been established on securities
whose trades are reported by such services, or on any Trading Market, nor shall a banking moratorium have been declared either
by the United States or New York State authorities nor shall there have occurred any material outbreak or escalation of hostilities
or other national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of the Selling Stockholder, makes it impracticable or inadvisable to purchase
the Second Tranche Shares at the Second Closing.
The
Agreement contains customary representations and warranties of the Company and the Selling Stockholder and other customary covenants
and agreements. The Agreement may be terminated by either the Company or the Selling Stockholder if the Second Closing has not
occurred by the date that is 90 calendar days after March 31, 2021.
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Media Works
Effective
April 1, 2021, in connection with compensation for services to be rendered, the Company issued 12,500 (100,000 pre-reverse split)
shares of common stock to FMW Media Works.
Maxim
Note Payable
On
April 14, 2021, the Company and Maxim entered into the third amendment to the Series A-2 Note with Maxim pursuant to which the
Company and Maxim agreed to the following:
(i)
|
The maturity date
of the Series A-2 Note is extended to October 15, 2021.
|
|
|
(ii)
|
The
principal balance of the Series A-2 Note is increased by $50,000 as of April 27, 2021.
|
(iii)
|
If the Series A-2
Note is not repaid in its entirety (in cash and/or shares of the Company’s common stock pursuant to conversion(s) of
the Series A-2 Note) on or before April 30, 2021, the principal balance of the Series A-2 Note will increase by an additional
$50,000.
|
|
|
(iv)
|
If the Series A-2
Note is not repaid in its entirety (in cash and/or shares of the Company’s common stock pursuant to conversion(s) of
the Series A-2 Note) on or before May 15, 2021, the principal balance of the Series A-2 Note will increase by an additional
$50,000.
|
|
|
(v)
|
If the Series A-2
Note is not repaid in its entirety (in cash and/or shares of the Company’s common stock pursuant to conversion(s) of
the Series A-2 Note) on or before July 15, 2021, the principal balance of the Series A-2 Note will increase by an additional
$100,000.
|
|
|
(vi)
|
If the Series A-2
Note is not repaid in its entirety (in cash and/or shares of the Company’s common stock pursuant to conversion(s) of
the Series A-2 Note) on or before September 15, 2021, the principal balance of the Series A-2 Note will increase by an additional
$100,000, representing a total cumulative increase in the principal balance of $350,000 if the Series A-2 Note is not repaid
in its entirety on or before September 15, 2021.
|
|
|
(vii)
|
The Company will,
within five business days after the Company’s receipt of the Second Tranche Purchase Price of $999,996, pay $500,000
to Maxim, which will reduce the principal owed under the Series A-2 Note by $500,000.
|
While
any portion of the Series A-2 Note is outstanding, if the Company receives cash proceeds from public offerings or private placements
of the Company’s common stock to investors (except with respect to proceeds from officers and directors of the Company),
the Company will, within five business days of the Company’s receipt of such proceeds, inform Maxim or such receipt, following
which Maxim will have the right in its sole discretion to require the Company to immediately apply up to 25% of such proceeds
received by the Company to repay the outstanding amounts owed under the Series A-2 Note. The parties understand that (a) each
dollar applied toward repayment pursuant to this clause (viii) will reduce the balance owed under the Series A-2 Note by one dollar,
and (b) this clause (viii) will not apply to the Tiger Trout transaction
Nasdaq
Capital Market or NYSE American Listing, Reverse Stock Split and Increase in Authorized Shares of Common Stock
We
intend to list our common stock on the Nasdaq Capital Market or NYSE American. There is no assurance that our listing application
will be approved by the Nasdaq Capital Market or NYSE American.
In
order to obtain Nasdaq Capital Market or NYSE American listing approval, we obtained approval of our board of directors and shareholders
of (i) a reverse stock split of the outstanding shares of our common stock in the range from one-for-two (1-for-2) to one-for-ten
(1-for-10), which ratio was to be selected by the board of directors and (ii) an increase in our authorized shares of common stock
from 20,000,000 to 36,000,000 shares of common stock.
On
August 17, 2020, we filed a Certificate of Amendment to increase the authorized shares of common stock from 20,000,000 to 36,000,000.
Accordingly, our authorized capital stock consists of (i) 36,000,000 shares of common stock, and (ii) 1,000,000 shares of preferred
stock.
On
November 17, 2020, our board of directors approved the reverse stock split in a ratio of 1-for-8 and on November 17, 2020, we
filed an amended and restated certificate of amendment to our Certificate of Incorporation, as amended, implementing the reverse
stock split in a ratio of 1-for-8, effective November 19, 2020; provided, however, the reverse stock split became effective for
trading purposes on November 20, 2020 when it had been processed by the Financial Industry Regulatory Authority (“FINRA”).
The reverse stock split is intended to allow us to meet the minimum share price requirement of the Nasdaq Capital Market or NYSE
American. There is no assurance that our listing application will be approved by the Nasdaq Capital Market or NYSE American.
Employees
As
of April 27, 2021, we had 9 full-time employees and 2 part-time employees . None of our employees is represented by
a union. We consider our relations with our employees to be good.
Legal
Proceedings
On
August 5, 2020, a lawsuit styled Duncan Wood v. PLAYlive Nation, Inc. and Simplicity eSports and Gaming Company (Case No. 20-1043)
was filed in the U.S. District Court for the District of Delaware. The complaint alleges unlawful failure to make timely and reasonable
payment of wages, 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.
From
time to time, we are involved in various claims and legal actions arising in the ordinary course of business. To the knowledge
of our management, there are no legal proceedings currently pending against us which we believe would have a material effect on
our business, financial position or results of operations and, to the best of our knowledge, there are no such legal proceedings
contemplated or threatened.
Properties
Our
corporate headquarters are located at 7000 W. Palmetto Park Road, Suite 505, Boca Raton, Florida 33433, where we lease approximately
250 rentable square feet of office space from an unaffiliated third party. This lease expires on June 1, 2022. Terms of the office
lease provide for a base rent payment of $800 per month. In total we lease approximately 28,000 rentable square feet of retail
and office space from unaffiliated third parties in eleven locations in Florida, Oregon, Texas, California, Montana, and Washington
State for our corporate offices and gaming centers. These leases expire at various times, with the first expiration being May
of 2022 and the last being July of 2030. Terms of the office and retail leases currently provide for aggregate base rent payments
of approximately $30,000 per month with annual price escalations. We believe that these facilities are adequate for our current
and near-term future needs.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References
in this Prospectus to “we,” “us” or the “Company” refer to Simplicity Esports and Gaming Company,
formerly known as Smaaash Entertainment Inc. and prior to that as I-AM Capital Acquisition Company. The following discussion and
analysis of the Company’s financial condition and results of operations should be read in conjunction with the financial
statements and the notes thereto contained elsewhere in this Prospectus.
Overview
We
are a global esports organization, with an established brand, that is capitalizing on the growth in esports through three business
units, Simplicity One Brasil Ltda (“Simplicity One”), Simplicity Esports, LLC (“Simplicity Esports LLC”)
and PLAYlive Nation, Inc. (“PLAYlive”). We believe that we are the only SEC reporting-completely integrated-esports
company that owns a League of Legends franchise. Additionally, we have the largest network of corporate and franchisee owned esports
gaming centers in North America.
Our
Esports Teams
We
own and manage numerous professional esports teams domestically and internationally. Revenue is generated from prize winnings,
corporate sponsorships, advertising, league subsidy payments and potential league revenue sharing payments from the publishers
of video games.
Domestic
Esports Teams – Simplicity Esports LLC
Through
our wholly owned subsidiary Simplicity Esports LLC, we own and manage numerous professional esports teams competing in games such
as Overwatch, Apex Legends, Heroes of the Storm and more. We are committed to growing and enhancing the esports industry, fostering
the development of amateurs to compete professionally and signing established professional gamers to support their paths to greater
success.
International
Esports Team - Simplicity One Brasil
Since
January 2020, through our 76% owned subsidiary Simplicity One Brasil, we manage Flamengo eSports, one of the leading Brazilian
League of Legends® teams. Flamengo eSports was established in 2017 as the Esports division of Clube de Regatas do Flamengo,
a successful Brazilian sports organization, with over 30 million followers across social media accounts, known for its world-famous
soccer team. Flamengo eSports’ League of Legends® team won the CBLoL Championship in September 2019, which qualified
the team to compete at the 2019 League of Legends® World Championship in Europe as one of 24 teams from 13 different regions
around the world. Flamengo Esports @flaesports was ranked as the 9th most tweeted about esports organization in the
world in 2020. With cost cutting steps taken during April 2020, and anticipated additional sponsorship revenue, this business
unit is expected to be cash flow positive by July 2021.
Online
Tournaments
In
response to demand from customers for online esports tournaments which was in all likelihood triggered by the social
distancing protocols attendant to the COVID-19 pandemic, we introduced in March 2020 an initiative of online esports tournaments.
Since March 2020, through our wholly owned subsidiary Simplicity Esports LLC, we have been holding weekly online esports tournaments.in
the United States. In addition, we commenced promoting these weekly online tournaments via text messages to our database of over
400,000 paying esports gaming center customers, which we acquired in our acquisition of PLAYlive. If we can convert merely 1%
of these existing customers from the PLAYlive database to play in our paid online tournaments, we anticipate this business unit
may generate approximately $1 million in annual revenues. At a 5% conversion rate, this business segment may generate approximately
$5 million in annual revenue. Management also intends to sell sponsorship and marketing activations for these online tournaments
which would create additional revenue. We also announced our initiative to offer play at home online tournaments in Brazil in
June 2020.
Our
Gaming Centers
As
of April 27, 2021, we have 33 location, 15 corporate and 18 fully constructed franchise locations , through our wholly
owned subsidiaries, throughout the U.S., giving casual gamers the opportunity to play in a social setting with other members of
the gaming community. In addition, aspiring and established professional gamers have an opportunity to compete in local and national
esports tournaments held in our gaming centers for prizes, notoriety, and potential contracts to play for one of our professional
esports teams. In this business unit, revenue is generated from franchise royalties, the sale of game time, memberships, tournament
entry fees, birthday party events, corporate party events, concessions and gaming-related merchandise.
Our
business plan encompasses a brick and click physical and digital approach to further recognize revenue from all verticals, which
we believe to be unique in the industry. The physical centers, together with our esports teams, lifestyle brand and marketing
campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our
ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform,
tournaments (online and in-person) and physical real estate to maximize the monetization opportunities with these relationships.
In addition, we have proprietary intellectual capital, fan engagement strategies and brand development blueprints which complement
our publicly available information.
Optimally,
the esports gaming centers of Simplicity Esports LLC (“Simplicity Esports Gaming Centers”) will measure between 1,200
and 2,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology,
futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present
attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity
for sponsors and advertisers. Currently we operate approximately 80,000 square feet of retail space in desirable, high traffic
locations.
Creating
content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. Our talented team will
continue to produce unique in-depth content which showcases aspects of esports for fans. We seek to reach a broad demographic
encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic
and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while
maintaining authenticity to the gaming community that comprises our fan base.
As
a result of COVID-19 (discussed below), all of our corporate and franchised Simplicity Gaming Centers were closed effective April
1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have since reopened 14 corporate and 11
franchised Simplicity Gaming Centers as of April 27, 2021 , the majority of which are operating at restricted
capacity based on local COVID-19 regulations. See “Risk Factors—Public health epidemics or outbreaks, such as COVID-19,
could materially and adversely impact our business.”
The
12 franchise owned gaming centers that we have acquired to date generated over $2.25 million of revenue in 2019.
We project a total of 17 corporate owned gaming centers by fiscal year end 2021 and accordingly expect annual revenues to
increase in 2021.
Corporate
Gaming Centers
Through
our subsidiary entities, we currently operate 15 corporate-owned retail Simplicity Esports Gaming Centers, one of which was acquired
during the third fiscal quarter ended February 28, 2021 . Furthermore, we have engaged
a national tenant representation real estate broker to assist in the strategic planning and negotiations for our future Simplicity
Esports Gaming Center locations. We contemplate that new Simplicity Esports Gaming Centers will be funded by us as well as a combination
of tenant improvement allowances from landlords and sponsorships. As announced in June 2020, we are in discussions with multiple
commercial property owners regarding their desire to have us open 8,000 to 12,000 square foot MEGA centers at their properties.
There are multiple locations available to us with a percentage of gross sales rent lease structure (as opposed to fixed rent payments),
and construction funds offered by the landlord to assist with the build out and equipping of our planned MEGA centers. These MEGA
centers are planned as hubs in our hub and spoke model that will see smaller corporate and franchisee owned gaming centers as
spokes connected to MEGA centers as hubs for larger events and tournaments.
Franchised
Gaming Centers
Due
to interest from potential franchisees, we have launched a franchising program to accelerate the expansion of our planned nationwide
footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment
and buildout of esports gaming centers to potential business owners that desire to use our branding, infrastructure and process
to open and operate gaming centers. We currently operate 18 fully constructed franchise esports gaming centers. Franchise revenue
is generated from the sale of franchise territories, supplying furniture, equipment and merchandise to the franchisees for buildout
of their centers, a gross sales royalty fee and a national marketing fee. We license the use of our branding, assist in identifying
and negotiating commercial locations, assist in overseeing the buildout and development, provide access to proprietary software
for point of sale, inventory management, employee training and other HR functions. Franchisees also have an opportunity to participate
in our national esports tournament events, and benefit from the growing profile of our professional esports teams. Once an esports
gaming center is opened, we provide operational guidance, support and use of branding elements in exchange for a monthly royalty
fee calculated as 6% of gross sales. On January 1, 2020, we implemented a national marketing fee of 1% of gross sales. To date,
we have sold five of these franchise territories. COVID-19 travel restrictions caused us to suspend the sale of new franchise
territories from April 1, 2020 until October 1, 2020. During these nine months, a pipeline of interested applicants has accumulated,
and we anticipate new franchise territory sales over the next 12 months as a result.
The
combination of the esports gaming centers, owned or franchised by our wholly owned subsidiaries Simplicity Esports LLC or PLAYlive,
provides us with what we believe is one of the largest footprint of esports gaming centers in North America. Over the next 12
months, existing PLAYlive esports gaming centers will be rebranded to Simplicity Esports gaming centers. All newly opened franchise
esports gaming centers will be branded as Simplicity Esports gaming centers and have numerous gaming PC’s. All gaming centers
in our footprint will be participating venues in our national esports tournaments.
Franchise
Roll Up Strategy
We
began implementing a franchise roll-up strategy in July 2020 as a result of the disruption caused by COVID-19 related stay at
home orders, and the disruption it caused to the commercial real estate market. The reduction in revenues for some franchisees
because of stay-at-home orders, and government mandates to remain closed created significant accrued rent payments due to landlords.
We have been able to come to terms with many franchisees to acquire the assets of their gaming centers and make them corporate
owned. We have simultaneously negotiated new leases with some of the largest national mall chains, including Simon Property Group
and Brookfield Asset Management, and are in the process of negotiating additional locations with other landlords. The new leases
involve significant reductions in or elimination of fixed rent and the addition of percentage of revenues rent terms. To date,
we have signed 13 letters of intent and executed definitive agreements for 12 of those locations during fiscal year 2021.
We anticipate closing the remaining acquisitions during the fourth fiscal quarter of 2021. We expect each of these locations to
be profitable as a result of the significant reduced rent expense via the percentage rent structure.
Our
Stream Team
The
Simplicity Esports LLC and Flamengo Esports stream teams encompasses over 20 commentators (commonly known as “casters”),
influencers and personalities who connect to a dedicated fan base. Our electric group of live personalities represent our organization
to the fullest with their own unique style. We are proud to support and present a diverse group of gamers as we engage fans across
a multiple of esports genres. Our Twitch affiliation has enabled our stream team influences to reach a broad fan base. Additionally,
we have created several niches within the streaming community which has enabled us to engage fans within certain titles on a 24/7
basis. Our notoriety in the industry is evidenced by our audience that views millions of minutes of Simplicity Esports’
and Flamengo Esports’ content monthly, via various social media outlets including YouTube, Twitter and Twitch. Through Simplicity
Esports LLC, we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience. Our intention
is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent. Our management
and players are known within the esports community and we plan to use their skills to create a seamless content creation plan
helping gamers feel closer to our brand than any other in the industry.
Our
Financial Position
For
the fiscal years ended May 31, 2020 and 2019, we generated revenues of $861,410 and $37,995, respectively, and reported net losses
of $2,665,779 and $3,565,272, respectively, and negative cash flow from operating activities of $1,522,486 and $1,395,255, respectively.
For the nine months ended February 28, 2021 and February 29, 2020, we generated revenues of $925,626 and $700,792 and reported
net losses of $4,671,520 and $1,261,979, respectively, and negative cash flow from operating activities of $686,681 and $1,166,267,
respectively. As noted in our consolidated financial statements, as of February 28, 2021, we had an accumulated deficit of $10,782,438.
We sold five franchise territories during the year ended May 31, 2020 for a net total of $188,000. Due to franchise accounting
rules, this $188,000 does not appear on our consolidated financial statements as revenue helping to reduce the reported loss.
Franchise territory sales are recorded as deferred revenue recognized over the 10-year life of the franchise agreements after
the franchise has opened. There is substantial doubt regarding our ability to continue as a going concern as a result of our historical
recurring losses and negative cash flows from operations as well as our dependence on private equity and financings. See “Risk
Factors—We have a history of operating losses, our management has concluded that factors raise substantial doubt about our
ability to continue as a going concern and our auditor has included an explanatory paragraph relating to our ability to continue
as a going concern in its audit report for the fiscal year ended May 31, 2020 and 2019.”
Results
of Operations
Our
only activities from April 17, 2017 (date of inception) through November 20, 2018 were organizational activities, those necessary
to prepare for the initial public offering, which was consummated on August 22, 2017, and identifying a target company for a business
combination. Following the initial public offering through and after our business combination, we had not generated any operating
revenues.
Following
the acquisition of Simplicity Esports, LLC the Company began generating revenue and incurring additional expenses.
Summary
of Statement of Operations for the Three and Nine Months Ended February 28, 2021 and February 29, 2020:
Revenue
For
the three and nine months ended February 28, 2021 and February 29, 2020, revenues consisted of the following:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
February 28, 2021 and
February 29, 2020
|
|
|
February 28, 2021 and
February 29, 2020
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise royalties and license fees
|
|
$
|
31,901
|
|
|
$
|
140,209
|
|
|
$
|
149,596
|
|
|
$
|
387,221
|
|
Franchise termination revenue
|
|
|
18,141
|
|
|
|
44,984
|
|
|
|
79,522
|
|
|
|
44,984
|
|
Company-owned stores sales
|
|
|
319,125
|
|
|
|
105,070
|
|
|
|
563,854
|
|
|
|
154,713
|
|
Esports revenue
|
|
|
59,312
|
|
|
|
90,538
|
|
|
|
132,654
|
|
|
|
113,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
428,479
|
|
|
$
|
380,801
|
|
|
$
|
925,626
|
|
|
$
|
700,792
|
|
For
the three months ended February 28, 2021, our revenues increased by $47,678, or 12.5%, as compared to the three months ended February
29, 2020. The increase was primarily due to the acquisition of Company-owned stores offset by a decrease in franchise royalties
and license fees. For the nine months ended February 28, 2021, our revenues increased by $224,834, or 32.1%, as compared to the
nine months ended February 29, 2020. The increase was primarily due to the acquisition of the Company-owned offset by a decrease
in franchise royalties and license fees. Our revenue has been affected by the COVID-19 pandemic which caused franchisee business
closures.
Cost
of Goods Sold
For
the three months ended February 28, 2021, our cost of goods sold decreased by $106,257 or 49.5% as compared to the three months
ended February 29, 2020. For the nine months ended February 28, 2021, our cost of goods sold decreased by $131,958 or 37.9% as
compared to the nine months ended February 29, 2020.
Compensation
and related benefits
Compensation
and related benefits the three months ended February 28, 2021 was $2,041,922 for as compared to $239,619 for the three months
ended February 29, 2020, an increase of $1,802,303. The increase is primarily attributed to an increase in stock-based compensation
to vendors and to employees for services rendered. Compensation and related benefits the nine months ended February 28, 2021 was
$2,710,747 for as compared to $678,109 for the nine months ended February 29, 2020, an increase of $2,032,638. The increase is
primarily attributed to an increase in stock-based compensation to vendors and to employees for services rendered.
General
and Administrative Expenses
General
and administrative expenses for the three months ended February 28,2021 was $715,255 as compared to $328,334 for the three months
ended February 29, 2020, an increase of $386,921. The increase is primarily related to an increase in operating costs. General
and administrative expenses for the nine months ended February 28, 2021 was $1,704,969 as compared to $1,014,232 for the nine
months ended February 29, 2020, an increase of $690,737. The increase is primarily related to an increase in operating costs.
Other
(Expense) Income
For
the three months ended February 28, 2021, other (expense) income amounted to $(549,842) as compared to $(5,489) for the three
months ended February 29, 2020, a change of $544,353. The increase in other expenses was primarily attributable to an increase
of cash interest expense and accretion of debt discount.
For
the nine months ended February 28, 2021, other (expense) income amounted to $(965,075) as compared to $77,883 for the nine months
ended February 29, 2020, a change of $(1,042,958). The increase in other (expense)income was primarily attributable to an increase
of cash interest expense and the accretion of debt discount.
Net
Loss
Net
loss for the three months ended February 28, 2021 was $2,986,727 as compared to a net loss of $407,085 for the three months ended
February 29, 2020, an increase of $2,579,642. Net loss for the nine months ended February 28, 2021 was $4,671,520 as compared
to $1,261,979 for the nine months ended February 29, 2020, an increase of $3,409,541.
Summary
of Statement of Operations for the Fiscal Year Ended May 31, 2020 and 2019:
Revenue
We
generated $861,410 of revenue for the fiscal year ended May 31, 2020 as compared to $37,995 for the fiscal year ended May 31,
2019.
Franchise
royalties, franchise termination revenue and company-owned stores sales, totaling $697,049, started in the fiscal year ended May
31, 2020 with the acquisition of PLAYlive and the conversion of two franchises into company owned stores. In addition, Esports
revenue was $164,361 during the fiscal year ended May 31, 2020, up from $37,995 in the fiscal year ended May 31, 2019. This increase
was due to inclusion of the full year of operations of Simplicity Esports LLC as well as the addition of Simplicity One Brazil
in January 2020.
Cost
of Goods Sold
Cost
of goods sold during the fiscal year ended May 31, 2020 totaled $422,539. There was no cost of goods sold in the fiscal year ended
May 31, 2019. Cost of goods sold in the fiscal year ended May 31, 2020 was related to brokerage commissions for franchises, royalty
fees, title licensing costs, player and team expenses related to esports revenues and cost of gaming system and store fixtures
merchandise sold to franchisees.
General
and administrative expenses
General
and administrative expenses for the fiscal year ended May 31, 2020 totaled $3,170,992, a $1,182,197 decrease from the $4,353,189
of general and administrative expense in the fiscal year ended May 31, 2019. This change was caused by a reduction in legal fees
of approximately $2,997,000, offset by increases in payroll related costs ($596,000), an increase in rent expense ($141,000) and
an increase in stock-based compensation ($783,000). The legal fees in the fiscal year ended May 31, 2019 were related to the merger
transaction between Simplicity Esports and Gaming Company and Simplicity Esports, LLC.
Other
income (expense)
Other
income during the fiscal year ended May 31, 2020 consisted of debt forgiveness income ($93,000), interest income ($3,000), rebate
income ($2,000) and interest expense ($32,000). The debt forgiveness income in the fiscal year ended May 31, 2020 was related
to the forgiveness of the sponsor loan and related accrued interest. Other income during the fiscal year ended May 31, 2019 consisted
of debt forgiveness income ($369,000), interest income ($404,000) and interest expense ($23,000). The debt forgiveness income
during the fiscal year ended May 31, 2019 was related to renegotiation of the Series A-2 Note. Interest income during the fiscal
year ended May 31, 2019 was earned on the trust account balance which was included in the merger transaction. The trust account
balance was then used to pay common stock redemption debt in February 2019.
Net
loss attributable to non-controlling interest
As
part of the conversion of two franchises into company-owned stores, the original franchisees retained a 21% interest in the stores.
As such, a portion of the net loss incurred during the year is allocated to those parties. There was no non-controlling interest
during the fiscal year ended May 31, 2019.
Liquidity
and Capital Resources
Liquidity
is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had cash of $571,970
and $160,208 as of February 28, 2021 and May 31, 2020, respectively.
Our
primary uses of cash have been for salaries, fees paid to third parties for professional services, computer and internet expenses,
and general and administrative expenses. We have received funds from the sales of franchises, from licensing fees, from Company-owned
stores sales, and from various financing activities such as from the sale of our common shares and from debt financings. The following
trends are reasonably likely to result in changes in our liquidity over the near to long term:
|
●
|
An
increase in working capital requirements to finance our current business,
|
|
|
|
|
●
|
Addition
of administrative and sales personnel as the business grows;
|
|
|
|
|
●
|
The
cost of being a public company;
|
|
|
|
|
●
|
Marketing
expense for building brand; and
|
|
|
|
|
●
|
Capital
requirements for the development of store locations.
|
Since
inception, we have raised proceeds from the sale of common shares and from debt to fund our operations.
The
following table shows a summary of our cash flows for the years ended May 31, 2020 and 2019.
|
|
Fiscal Years Ended
May 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net cash used in operating activities
|
|
$
|
(1,522,486
|
)
|
|
$
|
(1,395,255
|
)
|
Net cash used in investing activities
|
|
|
(138,068
|
)
|
|
|
(195,824
|
)
|
Net cash provided by financing activities
|
|
$
|
280,604
|
|
|
$
|
2,673,174
|
|
Net increase (decrease) in cash
|
|
$
|
(1,379,950
|
)
|
|
$
|
1,082,095
|
)
|
Cash - beginning of the period
|
|
$
|
1,540,158
|
|
|
$
|
458,063
|
|
Cash - end of the period
|
|
$
|
160,208
|
|
|
$
|
1,540,158
|
|
Net
Cash Used in Operating Activities:
For
the fiscal year ended May 31, 2020, cash used in operating activities amounted to $1,522,486, mainly resulting from a net loss
of $2,665,779 and non-cash debt forgiveness income of $93,761, offset by stock issued for services of $171,676 and depreciation
and amortization charges of $268,540. Changes in our operating liabilities and assets provided $656,189 of cash. For the fiscal
year ended May 31, 2019, cash used in operating activities amounted to $1,395,256, mainly resulting from a net loss of $3,565,272,
offset by stock issued for services of $2,170,110. Changes in our operating liabilities and assets generated cash of $532,120.
Net
Cash Provided by (Used in) Investing Activities:
For
the fiscal year ended May 31, 2020, cash used in investing activities amounted to $138,068, mainly resulting from the purchase
of property and equipment of $163,472, offset by $26,180 of cash acquired in the acquisition of PLAYlive Nation. For the fiscal
year ended May 31, 2019, cash used in investing activities amounted to $195,824, mainly resulting from a write off of a cost method
investment of $150,000 and the purchase of property and equipment of $122,529, offset by $75,930 of cash acquired in the acquisition
of Simplicity Esports, LLC.
Net
Cash Provided by Financing Activities:
For
the fiscal year ended May 31, 2020, cash provided from financing activities amounted to $280,604, mainly resulting from the sale
of private units of $112,700 and the net effect of the issuance of notes payable of $192,048. For the fiscal year ended May 31,
2019, cash provided from financing activities amounted to $2,673,175, mainly resulting from the sale of common stock of $1,925,000
and the net effect of the settlement of the redeemable common stock obligation of $736,000.
The
following table shows a summary of our cash flows for the nine months ended February 28, 2021 and February 29, 2020.
|
|
Nine months ended February 28, 2021
|
|
|
Nine months ended February 29, 2020
|
|
Net cash used in operating activities
|
|
$
|
(686,681
|
)
|
|
$
|
(1,166,267
|
)
|
Net cash used in investing activities
|
|
|
(2,879
|
)
|
|
|
(138,068
|
)
|
Net cash provided (used in) by financing activities
|
|
$
|
1,101,322
|
|
|
$
|
(144
|
)
|
Net increase (decrease) in cash
|
|
$
|
411,762
|
|
|
$
|
(1,304,479
|
)
|
Cash - beginning of the period
|
|
$
|
160,208
|
|
|
$
|
1,540,158
|
|
Cash - end of the period
|
|
$
|
571,970
|
|
|
$
|
235,679
|
|
Net
Cash Used in Operating Activities:
Net
cash flow used in operating activities for the nine months ended February 28, 2021 was $686,681 as compared to $1,166,267 for
the nine months ended February 29, 2020, a decrease of $479,586 or 41.1% The decrease is primarily attributable to cash flows
from related to the acquisition of the Company-owned stores offset by the decrease in franchise royalties and fees.
Net
Cash Used in Investing Activities:
Net
cash used in investing activities for the nine months ended February 28, 2021 was $2,879 as compared to $138,068 for the nine
months ended February 29, 2020, a decrease of $135,189 or 97.9%. The decrease is primarily attributable to purchase of property,
plant and equipment for the nine months ended February 29, 2020.
Net
Cash Provided by (Used in) Financing Activities:
Net
cash provided by financing activities for the nine months ended February 28, 2021 was $1,101,322 and compared to net cash used
in financing activities of $144 for the nine months ended February 29, 2020, an increase of $1,101,467. The increase is primarily
attributed to proceeds from note payable offset by repayment of note payable.
We
will need to raise additional funds in order to meet the expenditures required for operating our business.
Off-balance
sheet financing arrangements
We
have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in
transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest
entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered
into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments
of other entities, or purchased any non-financial assets.
Going
Concern
The
Company’s unaudited 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 $10,782,438, $2,846,542 and $4,671,520, respectively, as of and for the nine months ended February
28, 2021. 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 a private or public offering.
While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional
funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon
the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional
funds by way of a public or private offering.
The
consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue
as a going concern.
COVID-19
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because
COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities
have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more
restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity
Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers on May 1, 2020 and have since
reopened 14 corporate and 11 franchised Simplicity Gaming Centers as of April 27, 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, a limited number of the franchisees of Simplicity Gaming Centers have defaulted on their
obligations to pay their minimum monthly royalty payment to us. This has resulted in either an increase in accounts receivables
or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability to pay the minimum
monthly royalty payments owed by the franchisee. We have not written off as bad debt any accounts receivables attributable to
franchisee minimum monthly royalty payments owed during the COVID-19 pandemic. However, as of February 28, 2021, we have recorded
an allowance for doubtful accounts of approximately $139,867, as our collection efforts are ongoing. We have experienced an increase
in our gross account receivables by approximately $73,000, $47,000, $44,000, and $237,700 during the quarters ended May 31, 2020,
August 31, 2020, November 30, 2020 and February 28, 2021, respectively. Notwithstanding it is unclear exactly how much of the
increase in accounts receivables is attributable to the impact of COVID-19. We have waived the minimum monthly royalty payment
obligations from July 2020 through present day and are instead billing the franchisees a true-up of 6% of gross sales without
a minimum. We continue to assess possible similar accommodations to the franchisees in light of the impact of COVID-19.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date adversely impacted the Company’s business during the nine months ended February 28, 2021 and will
potentially continue to impact the Company’s business. Management expects that all of its business segments, across all
of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s
business and the duration for which it may have an impact cannot be determined at this time.
Contractual
obligations
We
do not have any long-term capital lease obligations, operating lease obligations or long-term liabilities, except as follows:
Attorney
Settlement Agreement
In
March of 2019, the Company entered into a settlement agreement with its prior attorney. The settlement agreement called for $200,000
to be paid upon signing the settlement agreement and then another approximate $525,000 to be paid over time. As of April 27,
2021, the Company owes this attorney approximately $250,000.
Maxim
Settlement Agreement
On
November 20, 2018, the Company entered into a settlement and release agreement (“Settlement Agreement”) with Maxim,
the underwriter for the Company’s IPO. Pursuant to the Settlement Agreement, the Company made a cash payment of $20,000
to Maxim and issued a demand secured promissory note in favor of Maxim in the amount of $1.8 million (the “Note”)
to settle the payment obligations of the Company under the underwriting agreement dated August 16, 2017, by and between the Company
and Maxim. The Company also agreed to remove the restrictive legends on an aggregate of 6,500 (52,000 pre-reverse split) shares
of its common stock held by Maxim and its affiliate. The Note was surrendered and exchanged pursuant to the securities exchange
agreement described below.
Maxim
Exchange Agreement
On
December 20, 2018, the Company entered into a securities exchange agreement (“Exchange Agreement”) with Maxim. Pursuant
to the terms of the Exchange Agreement, Maxim agreed to surrender and exchange the Note in the amount of $1.8 million which was
issued to Maxim pursuant to the Settlement Agreement (discussed immediately above). In exchange, the Company issued to the Maxim
a Series A-1 Exchange Convertible Note in the principal amount of $500,000 (the “Series A-1 Note”) and a Series A-2
Exchange Convertible Note in the principal amount of $1,000,000 (the “Series A-2 Note,” and collectively with Series
A-1 Note, the “Exchange Notes”).
As
of December 31, 2018, upon the closing of the Simplicity Esports Acquisition, the Series A-1 Note automatically converted into
24,206 (193,648 pre-reverse split) shares of the Company’s common stock.
The
Series A-2 Note bears interest at 2.67% per annum, payable quarterly and has a maturity date of June 20, 2020 (the “Maturity
Date”). The Company may pay the interest in cash or at its sole discretion, in shares of its common stock or a combination
of cash and common stock. However, the Company may only pay the interest in shares of its common stock if (i) all the equity conditions
specified in the note (“Equity Conditions”) have been met (unless waived by the Holder in writing) during the 20 trading
days immediately prior to the interest payment date (“Interest Notice Period”), (ii) the Company has provided proper
notice pursuant to the terms of the note and (iii) the Company has delivered to the Holder’s account certain number of shares
of its common stock to be applied against such interest payment prior to (but no more than five trading days before) the Interest
Notice Period.
The
Series A-2 Note is convertible into shares of the Company’s common stock (“Conversion Shares”) at an initial
conversion price of $15.44 ($1.93 pre-reverse split) per share, subject to adjustment for any stock dividends and splits, rights
offerings, distributions, combinations or similar transactions. Upon the Maturity of the Series A-2 Note, the conversion price
will be automatically adjusted to the lower of (i) the conversion price then in effect and (ii) the greater of the arithmetic
average of the volume weighted average price of the Company’s common stock in the five trading days prior to the notice
of conversion and $4.00 ($0.50 pre-reverse split). The Holder may convert the Series A-2 Note at any time, in whole or in part,
provided that upon receipt of a notice of conversion from the Holder, the Company has the right to repay all or any portion of
the Series A-2 Note included in the notice of conversion.
Additionally,
the Series A-2 Note will automatically convert into shares of the Company’s common stock on the Maturity Date provided that
(i) no event of default then exists, and (ii) each of the Equity Conditions have been met (unless waived in writing by the Holder)
on each trading day during the 20 trading day period ending on the trading day immediately prior to the automatic conversation
date.
At
any time prior to the Maturity Date, the Company may also elect to redeem some or all of the outstanding principal amount for
cash in an amount (the “Optional Redemption Amount”) equal to the sum of (a) 100% of the then outstanding principal
amount of the note, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the note
(the “Optional Redemption”). The Company may only effect an Optional Redemption if each of the Equity Conditions have
been met (unless waived in writing by the Holder) on each trading day during the period commencing on the date when the notice
of the Optional Redemption is delivered to the date of the Optional Redemption and through and including the date payment of the
Optional Redemption Amount is actually made in full.
Except
as otherwise provided in the Series A-2 Note, including, without limitation, an Optional Redemption, the Company may not prepay
any portion of the principal amount of the note without the prior written consent of the Holder.
The
Company is not permitted to convert any portion of the Series A-2 Note if doing so results in the Holder beneficially owning more
than 4.99% of the outstanding common stock of the Company after giving effect to such conversion, provided that on 61 days’
prior written notice from the Holder to the Company, that percentage may increase to 9.99%. However, if there is an automatic
conversion, and the conversion would result in the Company issuing a number of shares in excess of the beneficial ownership limitation,
then any such shares in excess of the beneficial ownership limitation will be held in abeyance for the benefit of the Holder until
such time or times, if ever, as its right thereto would not result in the Holder exceeding the beneficial ownership limitation,
at which time or times the Holder will be issued such shares to the same extent as if there had been no such limitation.
The
Series A-2 Note contains restrictive covenants which, among other things, restrict the Company’s ability to repay or repurchase
any indebtedness, make distributions on or repurchase its common stock or enter into transactions with its affiliates.
On
June 18, 2020, the Company and Maxim entered into that certain first amendment to the Series A-2 Note (the “First Amendment”),
pursuant to which such parties agreed to the following: (i) Maxim’s resale of the Company’s common stock (the “Common
Stock”) underlying the Series A-2 Note shall be limited to 10% of the daily volume of the Common Stock on each respective
trading day, (ii) the maturity date of the Series A-2 Note was extended to December 31, 2020, (iii) the principal amount of the
Series A-2 Note was increased by $100,000 and (iv) the conversion price was reduced from $15.44 ($1.93 pre-reverse split) to $9.20
($1.15 pre-reverse split).
On
December 31, 2020, Maxim and Simplicity executed an amendment of the Note extending the maturity date to February 15, 2021.
On
April 14, 2021, the Company and Maxim entered into the third amendment to the Series A-2 Note with Maxim pursuant to which the
Company and Maxim agreed to the following:
(i)
|
The
maturity date of the Series A-2 Note is extended to October 15, 2021.
|
|
|
(ii)
|
The
principal balance of the Series A-2 Note is increased by $50,000 as of April 27, 2021.
|
|
|
(iii)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s common stock pursuant to conversion(s)
of the Series A-2 Note) on or before April 30, 2021, the principal balance of the Series A-2 Note will increase by an additional
$50,000.
|
|
|
(iv)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s common stock pursuant to conversion(s)
of the Series A-2 Note) on or before May 15, 2021, the principal balance of the Series A-2 Note will increase by an additional
$50,000.
|
|
|
(v)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s common stock pursuant to conversion(s)
of the Series A-2 Note) on or before July 15, 2021, the principal balance of the Series A-2 Note will increase by an additional
$100,000.
|
|
|
(vi)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s common stock pursuant to conversion(s)
of the Series A-2 Note) on or before September 15, 2021, the principal balance of the Series A-2 Note will increase by an
additional $100,000, representing a total cumulative increase in the principal balance of $350,000 if the Series A-2 Note
is not repaid in its entirety on or before September 15, 2021.
|
|
|
(vii)
|
The
Company will, within five business days after the Company’s receipt of the Second Tranche Purchase Price of $999,996,
pay $500,000 to Maxim, which will reduce the principal owed under the Series A-2 Note by $500,000.
|
While
any portion of the Series A-2 Note is outstanding, if the Company receives cash proceeds from public offerings or private placements
of the Company’s common stock to investors (except with respect to proceeds from officers and directors of the Company),
the Company will, within five business days of the Company’s receipt of such proceeds, inform Maxim or such receipt, following
which Maxim will have the right in its sole discretion to require the Company to immediately apply up to 25% of such proceeds
received by the Company to repay the outstanding amounts owed under the Series A-2 Note. The parties understand that (a) each
dollar applied toward repayment pursuant to this clause (viii) will reduce the balance owed under the Series A-2 Note by one dollar,
and (b) this clause (viii) will not apply to the Tiger Trout transaction.
Operating
Lease
We
have long-term operating lease obligations and deferred revenues related to franchise fees to be recognized over the term of franchise
agreements with our franchises, generally ten years. We will begin to recognize deferred franchise fee revenue at the time a franchise
commences operations. We will also recognize deferred franchise fee revenue upon completing acquisitions of franchisee owned gaming
centers and converting them to corporate owned centers.
In
February 2019, the Company entered into a 5-year operating lease in Boca Raton, Florida in connection with the opening of its
first gaming center. Rent is approximately $2,300 per month for the first year and contains customary escalation clauses. In June
of 2019, the Company entered into a 5-year operating lease for its corporate office, rent is approximately $700 per month. In
August of 2019, the Company opened its second gaming center and in connection with this gaming center entered into a 5-year operating
lease in Deland, Florida. Rent is approximately $2,500 per month for the first year and contains customary escalation clauses.
On June 26, 2020, the Company entered into a 10-year operating lease in El Paso, Texas for a corporate gaming center in Fort Bliss.
It is a percentage rent lease (without a base rent) which provides for the (i) first and second year of the lease, the rent would
be 10% of gross sales of such gaming center per year, (iii) third fourth and fifth year of the lease, the rent would be 12% of
gross sales of such gaming center per year, and (iv) sixth, seventh, eighth, ninth and tenth year of the lease, the rent would
be 14% of the gross sales of such gaming center per year.
The
gaming center acquisitions that occurred in the current period were also complimented by the signing of new lease agreements with
the landlords. The leases consist of rent payments to be made as a percentage of each gaming center’s gross sales with a
minimum floor payment ranging between $1,000 and $3,000 monthly, representing 50-80% reductions in rent expense from prior leases
that were in force while the gaming centers were owned by franchisees.
Future
base lease payments under the non-cancelable operating lease related to Gaming Centers at February 28, 2021 are as follows:
Years
Ending May 31,
|
|
Amount
|
|
2021
|
|
$
|
101,854
|
|
2022
|
|
|
411,278
|
|
2023
|
|
|
391,832
|
|
2024
|
|
|
373,870
|
|
2025
|
|
|
330,017
|
|
2026
|
|
|
110,000
|
|
Total
minimum non-cancelable operating lease payments
|
|
|
1,718,851
|
|
Debt
Obligations
For
a detailed description of debt obligations of the Company, please see “Description of Business—Debt Obligations and
—Recent Developments—FirstFire Global 12% Promissory Note and Securities Purchase Agreement” on pages 44
and 50 of this Prospectus, respectively.
Adoption
of 2020 Omnibus Incentive Plan
The
board and shareholders of the Company approved of the Simplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the “2020
Plan”) on April 22, 2020 and June 23, 2020, respectively. The 2020 Plan provides for various stock-based incentive awards,
including incentive and nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units, and
other equity-based or cash-based awards.
Critical
Accounting Policies
The
preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted
in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and
income and expenses during the periods reported. Actual results could materially differ from those estimates.
Revenue
Recognition
As
of January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) (“ASC 606”). The new guidance
sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and
is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in GAAP.
The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or
services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not
addressed completely in the prior accounting guidance. The Company adopted the standard using the modified retrospective method
and the adoption did not have a material impact on its financial statements.
The
Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product
sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the
Company expects to receive in exchange for transferring goods and services. Our revenue is derived from two sources, the first
is from the sale of the rights to our players to third parties and second from participation and prize money awarded at gaming
tournaments.
The
following describes principal activities, separated by major product or service, from which the Company generates its revenues:
Company-owned
Stores Sales
The
Company-owned stores principally generate revenue from retail esports gaming centers, including the sale of game time to casual
players on our high speed, high performance gaming stations, the sale of gaming related merchandise and accessories including
controllers, collectible card games, such as Pokemon Magic the Gathering, and Yugi-Oh, registration fees from local esports tournaments
and leagues, and the sale of party packages for party events. Revenues from Company-owned stores are recognized when the products
are delivered, or the service is provided.
Franchise
Royalties and Fees
Franchise
royalties are based on six percent of franchise store sales after a minimum level of sales occur, are recognized as sales occur.
Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other
behaviors, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty
rate. Franchise royalties are billed on a monthly basis.
The
Company recognizes initial franchise license fee revenue net of costs incurred, when the Company has performed substantially all
the services required in the franchise agreement. Fees received that do not meet these criteria are recorded as deferred revenues
until earned. Initial franchise fees are generally recognized once a location is opened to the public which is when management
deems substantially all services required under the franchise agreements have been performed.
The
Company offers various incentive programs for franchisees including royalty incentives, new restaurant opening incentives (i.e.
development incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives
earned or granted under these programs that are in the form of discounts.
Commissary
sales are comprised of gaming equipment and supplies sold to franchised stores and are recognized as revenue upon shipment or
delivery of the related products to the franchisees. Payments are generally due within 30 days.
Fees
for information services, including software maintenance fees, marketing fees and website maintenance, graphic and promotion fees
are recognized as revenue as such services are provided.
Esports
revenue
Esports
is a form of competition using video games. Most commonly, esports takes the form of organized, single player and multiplayer
video game tournaments or leagues, particularly between professional players, individually or as teams. Revenues from esports
competitions are recognized when the competition is completed, and prize money is awarded. Revenues earned from team sponsorships,
prize winnings, league sponsorships, and from the Company’s share of league revenues are included in esports revenue.
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 February 28, 2021, management has recorded an allowance
for doubtful accounts of $139,867.
Goodwill
Goodwill
is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill,
but we assess our goodwill for impairment at least annually.
Intangible
Assets and Impairment
Intangible
assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The Company had
intangible assets subject to amortization related to its acquisition of Simplicity Esports, LLC. These costs were included in
intangible assets on our balance sheet and amortized on a straight-line basis when placed into service over the estimated useful
lives of the costs, which is 3 to 10 years.
The
Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less that the carrying amount
of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book
value.
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.
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.
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.
MANAGEMENT
The
following table sets forth information regarding our directors and executive officers:
Name
|
|
Age
|
|
Position
|
Jed
Kaplan
|
|
56
|
|
Chairman
and Class II Director of the Company
|
Roman
Franklin
|
|
37
|
|
Chief
Executive Officer and Class I Director of the Company
|
Knicks
Lau
|
|
39
|
|
Chief
Financial Officer
|
Donald
R. Caldwell
|
|
74
|
|
Class
I Director of the Company
|
Max
Hooper
|
|
79
|
|
Class
II Director of the Company
|
Frank
Leavy
|
|
67
|
|
Class
I Director of the Company
|
Edward
Leonard Jaroski
|
|
73
|
|
Class
I Director of the Company
|
William
H. Herrmann, Jr.
|
|
74
|
|
Class
II Director of the Company
|
Jed
Kaplan. Mr. Kaplan has been our Chairman since March 29, 2021 and a member of our board of directors since December 31,
2018. He also served as our sole Chief Executive Officer from February 8, 2019 until March 29, 2021 and as our interim Chief Financial
Officer from January 18, 2019 to March 29, 2021. From December 31, 2018 to February 8, 2019, Mr. Kaplan served as our co-Chief
Executive Officer. He founded and serves as the Chief Executive Officer of Shearson Financial Services, a FINRA-registered broker
dealer, since May 1995. As a natural leader possessing a passion for sports management, Mr. Kaplan has been involved in a wide
variety of professional sports and sports management ventures. Most recently Mr. Kaplan successfully sold the NBA G League Team,
Iowa Energy, to the Minnesota Timberwolves. Currently Mr. Kaplan is also a minority owner of the Memphis Grizzlies, Orlando City
Soccer Club and Swansea City of the English Championship League. Mr. Kaplan’s insight, vision and knowledge are all represented
as an appointed founding member of the NBA G League leadership committee. Mr. Kaplan graduated from City University of New York
in 1989 with a Bachelor of Business Administration degree.
The
Company believes Mr. Kaplan’s strong expertise in the financial services and sports management industries qualifies him
to serve on its board of directors.
Roman
Franklin. Mr. Franklin has been a member of our board of directors since August 16, 2017 and our Chief Executive Officer
since March 29, 2021. Mr. Franklin served as our President and Chief Operating Officer from December 31, 2018 to March 29, 2021.
Mr. Franklin was Chief Investment Officer of SMC Global USA from March 2016 until December 31, 2016, and prior, President of Franklin
Financial Planning from 2005 to 2016. Mr. Franklin is a 16-year veteran of the financial services industry. By the age of 22 he
held FINRA Series 7, Series 66, and Life, Health, and Variable Insurance Licenses. In 2005, he founded a fee-only registered investment
advisory firm. In 2008, he was one of the youngest recipients of the National Association of Financial Advisors (“NAPFA”)
Registered Financial Advisor (RFA) designation. In 2015, he was elected as a Board Member of the NAPFA, South Region Board of
Directors, overseeing more than a dozen states from Texas, to Florida, to North Carolina. Mr. Franklin has experience in domestic
and international investment, and has been involved in multiple business transactions tied to India, including the sale of a 50%
equity stake in his wealth management business to Indian financial services firm SMC. Mr. Franklin holds a Bachelor of Science
degree in Management from Barry University and an M.B.A. in Finance from the Graduate School of Business at Stetson University.
His civic organization roles include School Advisory Council for Volusia County Schools, City of DeLand Economic Development Committee,
and the Boys’ and Girls’ Clubs of Central Florida.
We
believe Mr. Franklin’s strong expertise in finance and international and domestic business transactions qualifies him to
serve on our board of directors.
Knicks
Lau. Mr. Lau has served as our Chief Financial Officer since March 29, 2021. He has more than 15 years of finance and
accounting experience and he has held various positions in publicly traded entities. From July 2020 to March 2021, Mr. Lau served
as Director of Finance at Parkway Realty Management, LLC. From February 2020 to July 2020, he served as Director of Financial
Reporting for Hudson Pacific Properties, Inc. (NYSE: HPP). From December 2017 to February 2020, Mr. Lau served as Controller and
Executive Director of Finance and Accounting at MGM Growth Properties LLC (NYSE: MGP). From August 2013 to December 2017, he served
as Vice President and Corporate Controller of Parkway Properties, Inc. and Parkway Inc. Mr. Lau started his career in public accounting,
most recently with PricewaterhouseCoopers LLP. He is a Certified Public Accountant and received his Master of Accounting and Bachelor
of Science in Accounting from the University of Florida.
Donald
R. Caldwell. Mr. Caldwell, who has been an independent director since August 16, 2017, and served as our Chairman of the
board of directors from August 16, 2017 to March 29, 2021, is an experienced investor, co-founded Cross Atlantic Capital Partners,
Inc., a venture capital management company, where he has served as its Chairman and Chief Executive Officer since 1999. At Cross
Atlantic Capital Partners, Inc., Mr. Caldwell has raised four investment funds totaling over $500 million of committed capital
and is responsible for the firm’s operations, building the investment team, and growing the Cross Atlantic franchise through
fundraising, network development, and deal flow generation. Prior to founding Cross Atlantic Capital Partners, Inc. in March 1999,
Mr. Caldwell was President and Chief Operating Officer of Safeguard Scientifics, Inc. (NYSE: SFE) (“Safeguard”) from
1996 to 1999, where he also previously served as Executive Vice President from 1993 to 1996. In addition to his service on our
board, Mr. Caldwell currently serves on the board of directors of two companies: Lightning Gaming, Inc. (a private company) since
June 2015, where he serves as a director and chairman of the audit committee; and Quaker Chemical Corporation (NYSE: KWR) (a public
company) since 1997, where he serves as lead director, as chairman of the executive committee and member of the compensation and
audit committees; Mr. Caldwell was previously a member of the board of directors of Diamond Cluster International, Inc. from 1994
to 2010 and has served as a director for several private companies and non-profit organizations, including software and money
management firms as well as the Pennsylvania Academy of the Fine Arts and the Committee for Economic Development. Mr. Caldwell
is a Certified Public Accountant (Retired) and holds a Bachelor of Science degree from Babson College and a Master of Business
Administration from the Graduate School of Business at Harvard University.
We
believe Mr. Caldwell’s deep financial, entrepreneurial and business expertise and extensive experience as a member of the
boards and board committees of other public companies qualifies him to serve on our board of directors.
Max
Hooper. Dr. Hooper, who has been an independent member of our board of directors since August 16, 2017, serves as Managing
Director of Merging Traffic, a web-based crowdsourcing portal, since September 2015 and Head of Investment Banking and Senior
Vice President of Triloma Securities, a subsidiary of Triloma Financial Group LLC, since January 2016. Dr. Hooper is also the
founder and owner of Partners Advisory Group and Partners Capital Group, two financial advisory firms since January 2014. Since
February 2018, Dr. Hooper’s primary focus has been as Managing Director/CEO of Managing Traffic and co-owner of Triloma
Financial Group. Prior to that, Dr. Hooper was co-founder of Equity Broadcasting Corporation, a media company that owned and operated
more than one hundred television stations across the United States. Dr. Hooper is an accomplished entrepreneur and has started
multiple businesses in technology/internet, lodging, and services industries. Dr. Hooper has served on the investment committee
of several venture capital and angel funds, and has completed “work out” transactions as a Certified Debt Arbitrator
representing banks and private transactions. Dr. Hooper also has prior experience with SPACs such as transaction structuring,
administration, research, and execution. Dr. Hooper has earned five doctorate degrees from a variety of institutions.
We
believe Dr. Hooper’s expertise in investment, management and mergers and acquisitions over various industries qualify him
to serve on our board of directors.
Frank
Leavy. Mr. Leavy has been an independent member of our board of directors since August 16, 2017. Since 2007, Mr. Leavy
has been the Senior Vice President and Director of Finance and Administration for Blake’s All Natural Foods, a manufacturer
of “better for you” frozen entrees. Prior to that, he held various financial officer positions at member companies
of Group Rossignol, a world leading company in the winter sports industry. Specifically, he was Controller of Rossignol Ski Company
from 1982 to 2006 and Vice President of Finance of Skis Dynastar, Inc. and Skis Dynastar Canada from 2000 to 2006. He also served
as Chief Operating Officer at Roger Cleveland Golf Company, a subsidiary of Group Rossignol from 1999 to 2000 and was elected
a director of the company from 2003 to 2005. Mr. Leavy holds a Bachelor of Arts degree from the College of the Holy Cross and
a Master of Science degree in accounting from the Graduate School of Professional Accounting at Northeastern University.
We
believe Mr. Leavy’s extensive experience in corporate finance qualify him to serve on our board of directors.
Edward
Leonard Jaroski. Mr. Jaroski has been an independent member of our board of directors since October 2017. Mr. Jaroski
was the founder of Capstone Asset Management Company and had served as its President and Chief Executive Officer from 1987 to
2016. Mr. Jaroski was Chairman, Chief Executive Officer and President of various Capstone/Steward Funds in the fund complex from
1987 through 2016. Mr. Jaroski was at Tenneco Financial Services from 1981 to 1987, where he was the Executive Vice President.
He started his career at Philadelphia Life Insurance Company as Manager of Investments in 1969, where he served until 1981 and
also served as its Vice President of Finance. He also served as a Director of Philadelphia Life Asset Management Company. Mr.
Jaroski holds the insurance industry professional designations of Chartered Life Underwriter, Charter Financial Consultant and
Fellow Life Management Institute. He holds a B.B.A. degree in Accounting from Temple University.
We
believe Mr. Jaroski’s experience in investments and asset management qualify him to serve on our board of directors.
William
H. Herrmann, Jr. Mr. Herrmann has been an independent member of our board of directors since October 2017. Mr. Herrmann
has over 45 years of experience in financial services, and insurance and investment planning industries. Presently, Mr. Herrmann
is the Owner of Herrmann & Associates, a financial services firm affiliated with Hudson Heritage Capital Management Inc.,
a Registered Investment Advisor since February 15, 2006. Mr. Herrmann has also served as an independent Director of Steward Funds,
from 2011 until 2017. Mr. Herrmann served as the Chairman of the Nominating and Corporate Governance Committee and was Chairman
of the Contracts Committee. He previously served as Independent Lead Director of Steward Funds Mr. Herrmann is also an Independent
Director of Church Capital Fund.
Mr.
Herrmann is a member of the Advisory Committee to the Liquidation Trustee for Church Capital Fund Liquidation Trust under TMI
Trust Company. Mr. Herrmann is also a Trustee of LuLu Shriners Investment Advisory Committee and the Chairman of Beta Rho Property
Company. Mr. Herrmann holds a B.A. from the University of Pennsylvania, and an MBA from Temple University, and holds the Chartered
Life Underwriter (CLU) designation from American College. Mr. Herrmann holds Series 7, 63, and 65 securities licenses as well
as insurance licenses in multiple states.
We
believe Mr. Herrmann’s experience in financial services and the investment planning industry qualify him to serve on our
board of directors.
Our
officers and board of directors are well qualified as leaders. In their prior positions they have gained experience in core management
skills, such as strategic and financial planning, public company financial reporting, compliance, risk management, and leadership
development. Our officers and directors also have experience serving on boards of directors and board committees of other public
companies and private companies, and have an understanding of corporate governance practices and trends, which provides an understanding
of different business processes, challenges, and strategies.
Number
and Terms of Office of Officers and Directors
Our
board of directors is comprised of nine directors, divided into two classes, Class I and Class II, with only one class of directors
being elected in each year and each class serving a two-year term. There are four Class I directors and five Class II directors.
However, as of April 27, 2021, there are two board vacancies. The board is conducting a search for replacement directors
to fill the vacancies. Once suitable replacements are found, they will serve as Class II directors.
Our
officers are elected by the board of directors and serve at the discretion of the board of directors, rather than for specific
terms of office. Our board of directors is authorized to appoint persons to the offices set forth in our bylaws as it deems appropriate.
Our bylaws provide that our officers may consist of a Chief Executive Officer, President, Chief Financial Officer, Vice Presidents,
Secretary, Assistant Secretaries, Treasurer and such other offices as may be determined by the board of directors.
Board
Committees and Director Independence
Our common stock is presently
quoted on the OTCQB under the symbol “WINR.” Our warrants issued in connection with our IPO in August 2017 are currently
listed on OTCQB under the symbol “WINRW.” Under the rules of the OTCQB, we are not required to maintain a majority
of independent directors on our Board of Directors and we are not required to establish committees of the Board of Directors consisting
of independent directors. However, we intend to list our common stock on the Nasdaq Capital Market or NYSE American. In order to
list our common stock on the Nasdaq Capital Market or NYSE American, we are required to comply with the applicable national securities
exchange’s standards relating to corporate governance, requiring, among other things, that:
|
●
|
A
majority of our Board of Directors to consist of “independent directors” as defined by the applicable rules and
regulations of the Nasdaq Capital Market or the NYSE American, as applicable;
|
|
|
|
|
●
|
The
compensation of our executive officers to be determined, or recommended to the Board of Directors for determination, by independent
directors constituting a majority of the independent directors of the Board in a vote in which only independent directors
participate or by a Compensation Committee comprised solely of independent directors;
|
|
|
|
|
●
|
That
director nominees to be selected, or recommended to the Board of Directors for selection, by independent directors constituting
a majority of the independent directors of the Board in a vote in which only independent directors participate or by a nomination
committee comprised solely of independent directors; and
|
|
|
|
|
●
|
Establishment
of an audit committee with at least three independent directors as well as composed entirely of independent directors, where
at least one of the independent directors qualifies as an audit committee financial expert under SEC rules and as a financially
sophisticated audit committee member under the applicable exchange rules.
|
Our
Board of Directors has determined in its business judgment that each of Messrs. Caldwell, Leavy, Jaroski and Herrmann and Dr.
Hooper is independent within the meaning of the applicable Nasdaq Capital Market and NYSE American rules, the Sarbanes-Oxley Act
and related SEC rules. Therefore, a majority of the members of our Board of Directors is independent.
In
addition, our Board of Directors has two standing committees: an Audit Committee and a Compensation Committee.
Committees
of the Board of Directors
Our
board of directors has two standing committees: an audit committee and a compensation committee. Both our audit committee and
our compensation committee are composed solely of independent directors.
Audit
Committee
Messrs.
Caldwell and Leavy and Dr. Hooper serve as members of our audit committee. Mr. Caldwell serves as chairman of the audit committee.
Under Nasdaq Capital Market and NYSE American listing standards and applicable SEC rules, we are required to have three members
of the audit committee, all of whom must be independent. Messrs. Caldwell, and Leavy and Dr. Hooper are independent.
Each
member of the audit committee is financially literate and our board of directors has determined that Mr. Caldwell qualifies as
an “audit committee financial expert” as defined in applicable SEC rules.
Responsibilities
of the audit committee include:
|
●
|
the
appointment, compensation, retention, replacement, and oversight of the work of the independent auditors and any other independent
registered public accounting firm engaged by us;
|
|
|
|
|
●
|
pre-approving
all audit and non-audit services to be provided by the independent auditors or any other registered public accounting firm
engaged by us, and establishing pre-approval policies and procedures;
|
|
|
|
|
●
|
reviewing
and discussing with the independent auditors all relationships the auditors have with us in order to evaluate their continued
independence;
|
|
|
|
|
●
|
setting
clear hiring policies for employees or former employees of the independent auditors;
|
|
|
|
|
●
|
setting
clear policies for audit partner rotation in compliance with applicable laws and regulations;
|
|
|
|
|
●
|
obtaining
and reviewing a report, at least annually, from the independent auditors describing (i) the independent auditor’s internal
quality-control procedures and (ii) any material issues raised by the most recent internal quality-control review, or peer
review, of the audit firm, or by any inquiry or investigation by governmental or professional authorities, within, the preceding
five years respecting one or more independent audits carried out by the firm and any steps taken to deal with such issues;
|
|
|
|
|
●
|
reviewing
and approving any related party transaction required to be disclosed pursuant to Item 404 of Regulation S-K promulgated by
the SEC prior to us entering into such transaction; and
|
|
|
|
|
●
|
reviewing
with management, the independent auditors, and our legal advisors, as appropriate, any legal, regulatory or compliance matters,
including any correspondence with regulators or government agencies and any employee complaints or published reports that
raise material issues regarding our financial statements or accounting policies and any significant changes in accounting
standards or rules promulgated by the Financial Accounting Standards Board, the SEC or other regulatory authorities.
|
Compensation
Committee
The
members of our compensation committee are Messrs. Caldwell and Jaroski and Dr. Hooper. Mr. Caldwell serves as chairman of the
compensation committee. We have adopted a compensation committee charter, which details the principal functions of the compensation
committee, including:
|
●
|
reviewing
and approving the compensation of all of our other executive officers;
|
|
|
|
|
●
|
reviewing
our executive compensation policies and plans;
|
|
|
|
|
●
|
implementing
and administering our incentive compensation equity-based remuneration plans;
|
|
|
|
|
●
|
assisting
management in complying with our proxy statement and annual report disclosure requirements;
|
|
|
|
|
●
|
approving
all special perquisites, special cash payments and other special compensation and benefit arrangements for our executive officers
and employees;
|
|
|
|
|
●
|
producing
a report on executive compensation to be included in our annual proxy statement; and
|
|
|
|
|
●
|
reviewing,
evaluating and recommending changes, if appropriate, to the remuneration for directors.
|
The
charter also provides that the compensation committee may, in its sole discretion, retain or obtain the advice of a compensation
consultant, legal counsel or other adviser and will be directly responsible for the appointment, compensation and oversight of
the work of any such adviser. However, before engaging or receiving advice from a compensation consultant, external legal counsel
or any other adviser, the compensation committee will consider the independence of each such adviser, including the factors required
by the applicable national securities exchange and the SEC.
Director
Nominations
We
do not have a standing nominating committee. In accordance with Rule 5605(e)(1)(A) of the Nasdaq Listing Rules and Section 804(a)
of the NYSE American Company Guide, a majority of the independent directors may recommend a director nominee for selection by
the board of directors. The board of directors believes that the independent directors can satisfactorily carry out the responsibility
of properly selecting or approving director nominees without the formation of a standing nominating committee. The directors who
shall participate in the consideration and recommendation of director nominees are Messrs. Caldwell, Jaroski, Leavy, and Herrmann,
and Dr. Hooper. In accordance with Nasdaq Capital Market and NYSE American rules, all such directors are independent. As there
is no standing nominating committee, we do not have a nominating committee charter in place.
The
board of directors will also consider director candidates recommended for nomination by our stockholders during such times as
they are seeking proposed nominees to stand for election. Our stockholders that wish to nominate a director for election to the
board of directors should follow the procedures set forth in our bylaws.
We
have not formerly established any specific, minimum qualifications that must be met or skills that are necessary for directors
to possess. In general, in identifying and evaluating nominees for director, the board of directors considers educational background,
diversity of professional experience, knowledge of our business, integrity, professional reputation, independence, wisdom, and
the ability to represent the best interests of our stockholders.
Code
of Ethics
We
have adopted a Code of Ethics applicable to our directors, officers and employees. We previously filed a copy of our form of Code
of Ethics as an exhibit to our registration statement on Form S-1 (File 333-219251). You will be able to review these documents
by accessing our public filings at the SEC’s web site at www.sec.gov. In addition, a copy of the Code of Ethics will
be provided without charge upon request from us. We intend to disclose any amendments to or waivers of certain provisions of our
Code of Ethics in a Current Report on Form 8-K. See “Where You Can Find Additional Information.”
Limitation
on Liability and Indemnification of Officers and Directors
Our
Certificate of Incorporation, as amended, provides that our officers and directors will be indemnified by us to the fullest extent
authorized by Delaware law, as it now exists or may in the future be amended. In addition, our restated certificate provides that
our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, except
to the extent such exemption from liability or limitation thereof is not permitted by the Delaware General Corporation Law (“DGCL”).
We
have entered into agreements with our officers and directors to provide contractual indemnification in addition to the indemnification
provided for in our third amended and restated certificate. Our bylaws also permit us to maintain insurance on behalf of any officer,
director or employee for any liability arising out of his or her actions, regardless of whether Delaware law would permit such
indemnification. We have purchased a policy of directors’ and officers’ liability insurance that insures our officers
and directors against the cost of defense, settlement or payment of a judgment in some circumstances and insures us against our
obligations to indemnify our officers and directors.
Our
officers and directors have agreed to waive any right, title, interest or claim of any kind in or to any monies in the trust account,
and have agreed to waive any right, title, interest or claim of any kind they may have in the future as a result of, or arising
out of, any services provided to us and will not seek recourse against the trust account for any reason whatsoever. Accordingly,
any indemnification we provide to our officers and directors will only be able to be satisfied by us if we have sufficient funds
outside of the trust account.
These
provisions may discourage stockholders from bringing a lawsuit against our directors for breach of their fiduciary duty. These
provisions also may have the effect of reducing the likelihood of derivative litigation against officers and directors, even though
such an action, if successful, might otherwise benefit us and our stockholders. Furthermore, a stockholder’s investment
may be adversely affected to the extent we pay the costs of settlement and damage awards against officers and directors pursuant
to these indemnification provisions.
We
believe that these provisions, the insurance and the indemnity agreements are necessary to attract and retain talented and experienced
officers and directors.
The
Board’s Role in Risk Oversight
Although
our management is primarily responsible for managing our risk exposure on a daily basis, our board of directors oversees the risk
management processes. Our board, as a whole, determines the appropriate level of risk for our Company, assesses the specific risks
that we face, and reviews management’s strategies for adequately mitigating and managing the identified risks. Although
our board administers this risk management oversight function, our audit committee supports our board in discharging its oversight
duties and addresses risks inherent in its area.
EXECUTIVE
COMPENSATION
The
following table summarizes all compensation recorded by us in the past two fiscal years ended May 31, 2020 for:
|
●
|
our
principal executive officer or other individual serving in a similar capacity, and
|
|
|
|
|
●
|
our
two most highly compensated executive officers, other than our principal executive officer, who were serving as corporate
officers as of May 31, 2020.
|
For
definitional purposes, these individuals are sometimes referred to as the “named executive officers.”
2020
Summary Compensation Table
Name
and Principal Position
|
|
Fiscal
Year
Ended
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
(1)
|
|
|
Option
Awards
($)
|
|
|
All
Other Compensation
($)
|
|
|
Total
($)
|
|
Jed
Kaplan,
|
|
5/31/2020
|
|
$
|
-
|
|
|
$
|
75,000
|
(2)
|
|
$
|
311,925
|
(3)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
386,925
|
|
Former
Chief Executive Officer and interim Chief Financial Officer (1)
|
|
5/31/2019
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
72,000
|
(3)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
72,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roman
Franklin,
|
|
5/31/2020
|
|
$
|
100,000
|
|
|
$
|
75,000
|
(2)
|
|
$
|
245,215
|
(5)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
420,215
|
|
Chief
Executive Officer and Former President (4)
|
|
5/31/2019
|
|
$
|
41,666
|
|
|
$
|
-
|
|
|
|
21,600
|
(5)
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
63,266
|
|
|
(1)
|
Mr.
Kaplan ceased to be an executive officer on March 29, 2021. On March 25, 2021, the Company’s board of directors appointed
Mr. Kaplan as Chairman of the Board, effective March 29, 2021. Mr. Kaplan resigned as Chief Executive Officer and Interim
Chief Financial Officer effective March 29, 2021.
|
|
(2)
|
Amounts
have been accrued as of May 31, 2020.
|
|
(3)
|
Includes
the aggregate grant date fair values for all restricted stock granted to the named executive officers vested in the current
fiscal year, computed in accordance with Financial Accounting Standards Board’s Accounting Standards Codification Topic
718, Compensation — Stock Compensation (“Topic 718”). Assumptions used to determine the aggregate grant
date fair value of the restricted stock include a per share grant date fair value of $4.80 ($0.60 pre-reverse split), based
on the closing stock price of the Company’s common stock as reported on OTC Markets on March 27, 2019, the grant date.
Also included herein $269,625 accrued as of May 31, 2020. Assumptions used to determine the accrued amount have been computed
in in accordance with Topic 718. Assumptions used to determine the aggregate grant date fair value of the restricted stock
include a per share grant date fair values ranging from $6.96 ($0.87 pre-reverse split) to $11.20 ($1.40 pre-reverse split),
based on the closing stock prices of the Company’s common stock as reported on OTC Markets on various dates.
|
|
(4)
|
On
March 25, 2021, our board of directors appointed Mr. Franklin as Chief Executive Officer of the Company, effective March 29,
2021. Mr. Franklin ceased to be President of the Company effective March 29, 2021.
|
|
(5)
|
Includes
the aggregate grant date fair value for all restricted stock granted to the named executive officers vested in the current
fiscal year, computed in accordance with Topic 718. Assumptions used to determine the aggregate grant date fair value of the
restricted stock include a per share grant date fair value of $4.80 ($0.60 pre-reverse split), based on the closing stock
price of the Company’s common stock as reported on OTC Markets on March 27, 2019, the grant date. Also included herein
$232,615 accrued as of May 31, 2020. Assumptions used to determine the accrued amounts have been computed in in accordance
with Topic 718. Assumptions used to determine the aggregate grant date fair value of the restricted stock include a per share
grant date fair values ranging from $6.96 ($0.87 pre-reverse split) to $11.20 ($1.40 pre-reverse split), based on the closing
stock prices of the Company’s common stock as reported on OTC Markets on various dates.
|
Outstanding
Equity Awards at 2020 Fiscal Year-End
The
following table sets forth information on outstanding options and stock awards on a post-reverse split basis held by the named
executive officers as of May 31, 2020.
|
|
Option
Awards
|
|
|
Stock
Awards
|
|
Name
|
|
Number
of Securities Underlying Unexercised Options (#) Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options (#) Unexercisable
|
|
|
Option
Exercise Price ($)
|
|
|
Option
Expiration Date
|
|
|
Number
of Shares or Units Of Stock that Have Not Vested (#)
|
|
|
Market
Value Of Shares Or Units of Stock That Have Not Vested ($)
|
|
Jed
Kaplan
|
|
|
-
|
|
|
|
-
|
|
|
$
|
N/A
|
|
|
|
N/A
|
|
|
|
-
|
|
|
$
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roman
Franklin
|
|
|
-
|
|
|
|
-
|
|
|
$
|
N/A
|
|
|
|
N/A
|
|
|
|
-
|
|
|
$
|
N/A
|
|
2020
Option Exercises and Stock Vested Table
The
following table sets forth the vesting of restricted stock on a post-reverse split basis during the fiscal year ended May 31,
2020 for the named executive officers:
|
|
Stock Awards
|
|
Name
|
|
Number of Shares Acquired on Vesting
|
|
|
Value Realized on Vesting
|
|
Jed Kaplan
|
|
|
15,000
|
|
|
$
|
11,913
|
|
|
|
|
|
|
|
|
|
|
Roman Franklin
|
|
|
4,500
|
|
|
$
|
3,574
|
|
Executive
Officer and Director Compensation
The
Company intends to develop an executive compensation program that is consistent with its existing compensation policies and philosophies,
which are designed to align compensation with our business objectives and the creation of stockholder value, while enabling us
to attract, motivate and retain individuals who contribute to the long-term success of the Company.
Decisions
on the executive compensation program will be made by the compensation committee. The following discussion is based on the present
expectations as to the executive compensation program to be adopted by the compensation committee. The executive compensation
program actually adopted will depend on the judgment of the members of the compensation committee and may differ from that set
forth in the following discussion.
We
anticipate that decisions regarding executive compensation will reflect our belief that the executive compensation program must
be competitive in order to attract and retain our executive officers. We anticipate that the compensation committee will seek
to implement our compensation policies and philosophies by linking a significant portion of our executive officers’ cash
compensation to performance objectives and by providing a portion of their compensation as long-term incentive compensation in
the form of equity awards.
We
anticipate that compensation for our executive officers will have three primary components: base salary, an annual cash incentive
bonus and long-term incentive compensation in the form of share-based awards, if any.
Base
Salary
Our
compensation committee will determine base salaries and manage the base salary review process, subject to existing employment
agreements.
Annual
Bonuses
We
intend to use annual cash incentive bonuses for the executive officers to tie a portion of their compensation to financial and
operational objectives achievable within the applicable fiscal year. We expect that, near the beginning of each year, the compensation
committee will select the performance targets, target amounts, target award opportunities and other term and conditions of annual
cash bonuses for the executive officers, subject to the terms of any employment agreement. Following the end of each year, the
compensation committee will determine the extent to which the performance targets were achieved and the amount of the award that
is payable to the executive officers.
On
July 29, 2020, the board of directors approved a cash bonus to each of Messrs. Kaplan and Franklin in the amount of $75,000 in
return for services provided during the 2020 fiscal year. Such bonuses will be deferred and paid when the Company has sufficient
funds available to pay such bonuses, as to be reasonably determined by the board of directors and the respective executives.
Stock-Based
Awards
We
intend to use stock-based awards to reward long-term performance of the executive officers. We believe that providing a meaningful
portion of the total compensation package in the form of stock-based awards will align the incentives of its executive officers
with the interests of its stockholders and serve to motivate and retain the individual executive officers. Stock-based awards
will be awarded under the Incentive Plan, which has been adopted by our Board of Directors and is being submitted to our shareholders
for approval at the special meeting in lieu of an annual meeting.
Restricted
Stock Awards
On
March 27, 2019, pursuant to a Restricted Stock Award, we issued Jed Kaplan, our then-Chief Executive Officer and interim Chief
Financial Officer and a member of our board of directors, 15,000 (120,000 pre-reverse split) shares of our restricted Common Stock.
Such shares vested over the succeeding nine month period.
On
March 27, 2019, pursuant to a Restricted Stock Award, we issued Roman Franklin, our then-President and a member of our board of
directors, 4,500 (36,000 pre-reverse split) shares of our restricted Common Stock. Such shares vested over the succeeding nine-month
period.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan
and Franklin initially executed on December 31, 2018.
On
July 29, 2020, the Board issued 41,875 (335,000 pre-reverse split) shares of common stock to Jed Kaplan, our then-Chief Executive
Officer and Interim Chief Financial Officer and a member of our board of directors. Of these shares, (i) 31,250 (250,000 pre-reverse
split) shares of common stock related to services provided by Mr. Kaplan to the Company during the 2020 fiscal year, (ii) 8,750
(70,000 pre-reverse split) shares of common stock related to grants that should have been, but were not, made pursuant to the
Kaplan 2018 Agreement (as hereinafter defined), and (iii) 1,875 (15,000 pre-reverse split) shares of common stock related to grants
made pursuant to the Kaplan 2020 Agreement (as hereinafter defined). Mr. Kaplan currently serves as our Chairman of the Board.
The Kaplan 2018 Agreement provided for the grant to Mr. Kaplan of 1,250 (10,000 pre-reverse split) shares of common stock per
month. For the months of January 2020 through July 2020, however, such shares had not been granted. Accordingly, the July 29,
2020 grant included an aggregate of 8,750 (70,000 pre-reverse split) shares of common stock that should have been granted for
the months of January 2020 through July 2020. The Kaplan 2020 Agreement provides for the grant to Mr. Kaplan of 1,875 (15,000
pre-reverse split) shares of common stock per month. Such shares were fully vested and earned as of the issuance thereof.
On
July 29, 2020, the Board also issued 34,813 (278,500 pre-reverse split) shares of common stock to Roman Franklin, our then-President
and a member of our board of directors. Of these shares, (i) 31,250 (250,000 pre-reverse split) shares of common stock related
to services provided by Mr. Franklin to the Company during the 2020 fiscal year, (ii) 2,625 (21,000 pre-reverse split) shares
of common stock related to grants that should have been, but were not, made pursuant to the Franklin 2018 Agreement (as hereinafter
defined), and (iii) 938 (7,500 pre-reverse split) shares of common stock related to grants made pursuant to the Franklin 2020
Agreement (as hereinafter defined). Mr. Franklin currently serves as our Chief Executive Officer and a member of the board of
directors. The Franklin 2018 Agreement provided for the grant to Mr. Franklin of 375 (3,000 pre-reverse split) shares of common
stock per month. For the months of January 2020 through July 2020, however, such shares had not been granted. Accordingly, the
July 29, 2020 grant included an aggregate of 2,625 (21,000 pre-reverse split) shares of common stock that should have been granted
for the months of January 2020 through July 2020. The Franklin 2020 Agreement provides for the grant to Mr. Franklin of 782 (6,250
pre-reverse split) shares of common stock per month. Such shares were fully vested and earned as of the issuance thereof.
Executive
Employment Agreements
On
December 31, 2018, the Company entered into an employment agreement (the “Kaplan 2018 Agreement”) with Jed Kaplan,
pursuant to which the parties agreed that he will serve as the Co-Chief Executive Officer of the Company until March 31, 2019,
at which point he automatically became the sole Chief Executive Officer of the Company. Under the terms of the Kaplan 2018 Agreement,
Mr. Kaplan did not receive a salary or other monetary compensation and in lieu thereof he will receive an equity grant of 1,250
(10,000 pre-reverse split) shares of Common Stock per month, which shares will be fully vested upon grant.
On
July 29, 2020, the Company entered into a new employment agreement (the “Kaplan 2020 Agreement”) with Mr. Kaplan.
Such employment agreement replaced the Kaplan 2018 Agreement. As a result, the Kaplan 2018 Agreement was terminated and is of
no further force or effect. Pursuant to the terms of the Kaplan 2020 Agreement, the Company agreed to pay Mr. Kaplan a monthly
base salary of $5,000; provided, however, that the parties agreed that such base salary will be deferred and will accumulate until
the Company has sufficient cash available to make such payments, to be reasonably determined by the Board of Directors and Mr.
Kaplan, at which time all accrued and unpaid base salary will be paid. In addition, Mr. Kaplan will receive an equity grant of
1,875 (15,000 pre-reverse split) shares of common stock per month, which shares will be fully vested upon grant. Mr. Kaplan will
also be eligible to receive a quarterly bonus in the form of cash or an equity grant of shares and will be entitled to participate
in the Company’s employee benefit plans. In addition, if, during the term of the Kaplan 2020 Agreement, the Company’s
shares are approved for listing on a U.S. national securities exchange, the Company will pay Mr. Kaplan a $50,000 cash bonus,
to be paid upon such listing begin effective.
The
term of the Kaplan 2020 Agreement is for an initial one-year term, which shall automatically renew for successive one-year terms
unless either party provides 60 days’ advance written notice of its intention not to renew the Kaplan 2020 Agreement at
the conclusion of the then applicable term. The term of the Kaplan 2020 Agreement may be terminated by the Company with or without
cause or by Mr. Kaplan with or without good reason, as such terms are defined therein.
On
March 25, 2021, the board of directors appointed Mr. Kaplan as Chairman of the Board, effective March 29, 2021, and he ceased
to be the Company’s Chief Executive Officer and Interim Chief Financial Officer.
On
December 31, 2018, the Company also entered into an employment agreement (the “Franklin 2018 Agreement”) with Roman
Franklin, pursuant to which the parties agreed that he will serve as the President of the Company. Pursuant to the terms of the
Franklin 2018 Agreement, the Company agreed to that Mr. Franklin will receive (i) a monthly base salary of $8,333.33 and (ii)
an equity grant of 375 (3,000 pre-reverse split) shares of Common Stock per month, which shares will be fully vested upon grant.
On
July 29, 2020, the Company entered into a new employment agreement (the “Franklin 2020 Agreement”) with Mr. Franklin.
Such employment agreement replaced the Franklin 2018 Agreement. As a result, the Franklin 2018 Agreement was terminated and is
of no further force or effect. Pursuant to the terms of the Franklin 2020 Agreement, the Company agreed to pay Mr. Franklin a
monthly base salary of $12,500; provided, however, that the parties agreed that such base salary will be deferred and will accumulate
until the Company has sufficient cash available to make such payments, to be reasonably determined by the Board of Directors and
Mr. Franklin, at which time all accrued and unpaid base salary will be paid. In addition, Mr. Franklin will receive an equity
grant of 782 (6,250 pre-reverse split) shares of common stock per month, which shares will be fully vested upon grant. Mr. Franklin
will also be eligible to receive a quarterly bonus in the form of cash or an equity grant of shares and will be entitled to participate
in the Company’s employee benefit plans. In addition, if, during the term of the Franklin 2020 Agreement, the Company’s
shares are approved for listing on a U.S. national securities exchange, the Company will pay Mr. Franklin a $50,000 cash bonus,
to be paid upon such listing begin effective.
Each
of the Kaplan 2020 Agreement and the Franklin 2020 Agreement contains customary non-competition and non-solicitation covenants
for a period of one year after the termination of the executive’s employment.
On
March 25, 2021, the board of directors appointed Mr. Franklin as the Company’s Chief Executive Officer, effective March
29, 2021. Mr. Kaplan ceased to be the Company’s President on such date. Mr. Franklin continues to be a member of our board
of directors. In connection with Mr. Franklin’s appointment, on March 25, 2021, the Company entered into an employment agreement,
dated as of March 29, 2021 by and between the Company and Mr. Franklin (the “2021 Franklin Employment Agreement”).
Pursuant to the terms of the 2021 Franklin Employment Agreement, in exchange for Mr. Franklin’s services, the Company agreed
to pay Mr. Franklin an annual base salary of $250,000. Mr. Franklin is also eligible to receive a quarterly bonus of up to $15,000
in the form of a cash bonus and/or equity grant of shares of the Company’s common stock. Mr. Franklin’s eligibility
for any bonus and the amount thereof will be determined solely at the discretion of the Board of Directors.
Mr.
Franklin’s employment and the 2021 Franklin Employment Agreement may be terminated by the Company with or without Cause
(as hereinafter defined), or by Mr. Franklin with or without Good Reason (as hereinafter defined). In addition, in the event of
Mr. Franklin’s death or total disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended
(“Disability”), during the term of the 2021 Franklin Employment Agreement, the term of the 2021 Franklin Employment
Agreement and Mr. Franklin’s employment will terminate on the date of death or Disability.
For
purposes of the 2021 Franklin Employment Agreement, “Cause” means, subject to the provisions of the 2021 Franklin
Employment Agreement:
|
(i)
|
Mr.
Franklin’s willful failure to perform his duties (other than any such failure resulting from incapacity due to physical
or mental illness);
|
|
(ii)
|
Mr.
Franklin’s willful failure to comply with any valid and legal directive of the Board of Directors; or
|
|
(iii)
|
Mr.
Franklin’s willful engagement in gross misconduct, which is, in each case, materially injurious to the Company or its
affiliates; or
|
|
(iv)
|
Actions
by Mr. Franklin constituting embezzlement, misappropriation, or fraud, whether or not related to Mr. Franklin’s employment
with the Company; or
|
|
(v)
|
Mr.
Franklin’s conviction of or plea of guilty or nolo contendere to a crime that constitutes a felony (or state law equivalent)
or a crime that constitutes a misdemeanor involving moral turpitude; or
|
|
(vi)
|
Mr.
Franklin’s material breach of any material obligation under the 2021 Franklin Employment Agreement, which Mr. Franklin
fails to correct within 10 days after Mr. Franklin receives written notice from the Board of Directors of such breach.
|
For
purposes of the 2021 Franklin Employment Agreement, “Good Reason” means the occurrence of any of the following, in
each case during the term of the 2021 Franklin Employment Agreement:
|
(i)
|
A
material reduction in Mr. Franklin’s base salary;
|
|
(ii)
|
A
material reduction in Mr. Franklin’s target bonus opportunity;
|
|
(iii)
|
A
relocation of Mr. Franklin’s principal place of employment from that set forth in the Franklin Employment Agreement
by more than 35 miles;
|
|
(iv)
|
A
material breach by the Company of any material provision of the Franklin Employment Agreement;
|
|
(v)
|
At
any time following a Change of Control (as defined in the Franklin Employment Agreement), a material change in Mr. Franklin’s
title or responsibilities, or a material diminution by the Company of compensation and benefits (taken as a whole) provided
to Mr. Franklin immediately prior to a Change of Control.
|
Mr.
Franklin may not terminate the 2021 Franklin Employment Agreement for Good Reason pursuant to clause (i), (ii), (iii) or (iv)
above unless (x) Mr. Franklin, within 30 days following the occurrence of the such condition giving rise to Good Reason, notifies
the Company in writing of his intent to terminate with Good Reason; (y) the Company fails to cure such condition within 30 days
after being so notified; and (z) Mr. Franklin actually terminates no later than 30 days after the end of the cure period.
Solely
in the case of an event of Cause relating to Mr. Franklin’s willful failure to perform his duties (other than any such failure
resulting from incapacity due to physical or mental illness), Mr. Franklin’s willful failure to comply with any valid and
legal directive of the Board of Directors; or Mr. Franklin’s material breach of any material obligation under the Franklin
Employment Agreement, which Mr. Franklin fails to correct within 10 days after Mr. Franklin receives written notice from the Board
of Directors of such breach (each, a “Cause Capable of Cure”), the Company may not and will not terminate the Franklin
Employment Agreement for Cause unless the Company has provided written notice to Mr. Franklin of the existence of the circumstances
providing grounds for termination for a Cause Capable of Cure, and Mr. Franklin has had at least 14 calendar days to cure such
circumstances to the reasonable satisfaction of the Company and has thereafter not cured such circumstance within such 14 calendar
day period.
Pursuant
to the terms of the 2021 Franklin Employment Agreement, upon (i) termination by the Company for Cause, (ii) termination by Mr.
Franklin without Good Reason, or (iii) a non-renewal by the Company, the Company will pay to Mr. Franklin the following amounts
(the “Franklin Accrued Amounts”):
|
(i)
|
Any
accrued but unpaid base salary;
|
|
(ii)
|
Any
bonus compensation awarded for the quarterly period preceding that in which termination occurs, but unpaid on the date of
termination (the “Prior Quarterly Period Bonus”);
|
|
(iii)
|
Reimbursement
for unreimbursed business expenses;
|
|
(iv)
|
Such
employee benefits, if any, to which Mr. Franklin may be entitled under the Company’s employee benefit plans as of the
date of termination; provided that, in no event shall Mr. Franklin be entitled to any payments in the nature of severance
or termination payments except as specifically provided in the 2021 Franklin Employment Agreement; and
|
|
(v)
|
all
amounts otherwise required to be paid or provided by law.
|
Pursuant
to the terms of the 2021 Franklin Employment Agreement, upon termination of the 2021 Franklin Employment Agreement solely as a
result of Mr. Franklin’s death or Disability, Mr. Franklin or his estate will receive the 2021 Franklin Accrued Amounts
and the pro-rated bonus as provided in the 2021 Franklin Employment Agreement.
Upon
Mr. Franklin’s termination by the Company without or other than for Cause, or (ii) resignation by Mr. Franklin with Good
Reason, then:
|
(i)
|
the
Company will pay to Mr. Franklin the Franklin Accrued Amounts and a pro-rated bonus as provided in the Franklin Employment
Agreement;
|
|
(ii)
|
the
Company will pay to Mr. Franklin $125,000 as a severance payment;
|
|
(iii)
|
the
Company will pay to Mr. Franklin any salary that Mr. Franklin would have earned through the end of the then-applicable initial
term or renewal term, as applicable; and
|
|
(iv)
|
any
unvested incentive awards then held by Mr. Franklin will immediately be vested in full.
|
Also
on March 25, 2021, the Board appointed Knicks Lau to serve as the Company’s Chief Financial Officer, effective March 29,
2021. In connection with Mr. Lau’s appointment, on March 23, 2021, the Company entered into an employment agreement, dated
as of March 29, 2021 by and between the Company and Mr. Lau (the “Lau Employment Agreement”). Pursuant to the terms
of the Lau Employment Agreement, in exchange for Mr. Lau’s services, the Company agreed to pay Mr. Lau an annual base salary
of $140,000. In addition, Mr. Lau is entitled to receive compensation in the form of an equity grant of $5,000 in the Company’s
common stock for each quarter during the term of the Lau Employment Agreement, which runs for a period ending one year after March
29, 2021 and automatically renews for successive one year terms unless either party gives 60 days’ advance written notice
of its intention not to review the Lau Employment Agreement. Mr. Lau is also eligible to receive a quarterly bonus of up to $12,500
in the form of a cash bonus and/or equity grant of shares of the Company’s common stock. Mr. Lau’s eligibility for
any bonus and the amount thereof will be determined solely at the discretion of the Board of Directors.
Mr.
Lau’s employment and the Lau Employment Agreement may be terminated by the Company with or without Cause (as hereinafter
defined), or by Mr. Lau with or without Good Reason (as hereinafter defined). In addition, in the event of Mr. Lau’s death
or total disability as defined in Section 22(e)(3) of the Internal Revenue Code of 1986, as amended (“Disability”),
during the term of the Lau Employment Agreement, the term of the Lau Employment Agreement and Mr. Lau’s employment will
terminate on the date of death or Disability.
For
purposes of the Lau Employment Agreement, “Cause” means, subject to the provisions of the Lau Employment Agreement:
|
(i)
|
Mr.
Lau’s willful failure to perform his duties (other than any such failure resulting from incapacity due to physical or
mental illness);
|
|
(ii)
|
Mr.
Lau’s willful failure to comply with any valid and legal directive of the Board of Directors; or
|
|
(iii)
|
Mr.
Lau’s willful engagement in dishonesty, illegal conduct, or gross misconduct, which is, in each case, materially injurious
to the Company or its affiliates; or
|
|
(iv)
|
Actions
by Mr. Lau constituting embezzlement, misappropriation, or fraud, whether or not related to Mr. Lau’s employment with
the Company; or
|
|
(v)
|
Mr.
Lau’s conviction of or plea of guilty or nolo contendere to a crime that constitutes a felony (or state law equivalent)
or a crime that constitutes a misdemeanor involving moral turpitude; or
|
|
(vi)
|
Mr.
Lau’s material breach of any material obligation under the Lau Employment Agreement, which Mr. Lau fails to correct
within 10 days after Mr. Lau receives written notice from the Board of Directors of such breach.
|
For
purposes of the Lau Employment Agreement, “Good Reason” means the occurrence of any of the following, in each case
during the term of the Lau Employment Agreement:
|
(i)
|
A
material reduction in Mr. Lau’s base salary;
|
|
(ii)
|
A
material reduction in Mr. Lau’s target bonus opportunity;
|
|
(iii)
|
A
relocation of Mr. Lau’s principal place of employment from that set forth in the Lau Employment Agreement by more than
35 miles;
|
|
(iv)
|
A
material breach by the Company of any material provision of the Lau Employment Agreement;
|
|
(v)
|
At
any time following a Change of Control (as defined in the Lau Employment Agreement), a material change in Mr. Lau’s
title or responsibilities, or a material diminution by the Company of compensation and benefits (taken as a whole) provided
to Mr. Lau immediately prior to a Change of Control.
|
Mr.
Lau may not terminate the Lau Employment Agreement for Good Reason pursuant to clause (i), (ii), (iii) or (iv) above unless (x)
Mr. Lau, within 30 days following the occurrence of the such condition giving rise to Good Reason, notifies the Company in writing
of his intent to terminate with Good Reason; (y) the Company fails to cure such condition within 30 days after being so notified;
and (z) Mr. Lau actually terminates no later than 30 days after the end of the cure period.
Solely
in the case of an event of Cause relating to Mr. Lau’s willful failure to perform his duties (other than any such failure
resulting from incapacity due to physical or mental illness), Mr. Lau’s willful failure to comply with any valid and legal
directive of the Board of Directors; or Mr. Lau’s material breach of any material obligation under the Lau Employment Agreement,
which Mr. Lau fails to correct within 10 days after Mr. Lau receives written notice from the Board of Directors of such breach
(each, a “Cause Capable of Cure”), the Company may not and will not terminate the Lau Employment Agreement for Cause
unless the Company has provided written notice to Mr. Lau of the existence of the circumstances providing grounds for termination
for a Cause Capable of Cure, and Mr. Lau has had at least 14 calendar days to cure such circumstances to the reasonable satisfaction
of the Company and has thereafter not cured such circumstance within such 14 calendar day period.
Pursuant
to the terms of the Lau Employment Agreement, upon (i) termination by the Company for Cause, (ii) termination by Mr. Lau without
Good Reason, or (iii) a non-renewal by the Company, the Company will pay to Mr. Lau the following amounts (the “Lau Accrued
Amounts”):
|
(i)
|
Any
accrued but unpaid base salary, any accrued but unpaid equity grants and accrued but unused vacation;
|
|
(ii)
|
Any
bonus compensation awarded for the quarterly period preceding that in which termination occurs, but unpaid on the date of
termination (the “Prior Quarterly Period Bonus”);
|
|
(iii)
|
Reimbursement
for unreimbursed business expenses;
|
|
(iv)
|
Such
employee benefits, if any, to which Mr. Lau may be entitled under the Company’s employee benefit plans as of the date
of termination; provided that, in no event shall Mr. Lau be entitled to any payments in the nature of severance or
termination payments except as specifically provided in the Lau Employment Agreement; and
|
|
(v)
|
all
amounts otherwise required to be paid or provided by law.
|
Pursuant
to the terms of the Lau Employment Agreement, upon termination of the Lau Employment Agreement solely as a result of Mr. Lau’s
death or Disability, Mr. Lau or his estate will receive the Lau Accrued Amounts and the pro-rated bonus as provided in the Lau
Employment Agreement.
Upon
Mr. Lau’s termination by the Company without or other than for Cause, or (ii) resignation by Mr. Lau with Good Reason, then:
|
(i)
|
the
Company will pay to Mr. Lau the Lau Accrued Amounts and a pro-rated bonus as provided in the Lau Employment Agreement;
|
|
(ii)
|
the
Company will pay to Mr. Lau $35,000 as a severance payment;
|
|
(iii)
|
the
Company will pay to Mr. Lau any salary that Mr. Lau would have earned through the end of the then-applicable initial term
or renewal term, as applicable;
|
|
(iv)
|
any
unvested incentive awards then held by Mr. Lau will immediately be vested in full; and
|
|
(v)
|
any
additional equity grants to which Mr. Lau would have been entitled pursuant to the terms of the Lau Employment Agreement will
be issued and paid in accordance with the terms of the Lau Employment Agreement.
|
2020
Omnibus Incentive Plan
The
board and shareholders of the Company approved of the Simplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the “2020
Plan”) on April 22, 2020 and June 23, 2020, respectively. We believe that the 2020 Plan serves as an essential element of
our compensation program and is critical to our ability to attract and retain the highly qualified employees essential for the
execution of our business strategy. We believe the 2020 Plan will (i) attract and retain key personnel, and (ii) provide a means
whereby directors, officers, employees, consultants, and advisors of the Company and its subsidiaries can acquire and maintain
an equity interest in the Company, or be paid incentive compensation, including incentive compensation measure by reference to
the value of the Company’s common stock, thereby strengthening their commitment to the welfare of the Company and its subsidiaries
and aligning their interests with those of the Company’s stockholders. The 2020 Plan provides for various stock-based incentive
awards, including incentive and nonqualified stock options, stock appreciation rights (“SARs”), restricted stock and
restricted stock units (“RSUs”), and other equity-based or cash-based awards.
2020
Plan Highlights
Highlights
of the 2020 Plan are as follows:
|
●
|
The
Compensation Committee, which is comprised solely of independent directors, administers the 2020 Plan.
|
|
|
|
|
●
|
The
total number of shares of common stock authorized for issuance under the 2020 Plan is 125,000 (1,000,000 pre-reverse split)
shares, or approximately 8.8% of the common stock outstanding at April 27, 2021.
|
|
|
|
|
●
|
No
non-employee director may be granted awards under the 2020 Plan during any calendar year if such awards, taken together with
any cash fees paid to such non-employee director would exceed a total value of $250,000 (calculated in accordance with the
terms of the 2020 Plan).
|
|
|
|
|
●
|
The
exercise price of options and SARs may not be less than the fair market value of the common stock on the date of grant.
|
|
|
|
|
●
|
In
addition to other vesting requirements, the Compensation Committee may condition the vesting of awards on the achievement
of specific performance targets.
|
Material
Features of the 2020 Plan
Term
The
2020 Plan was effective June 23, 2020. The 2020 Plan will terminate on June 23, 2030, unless the Board terminates it earlier.
Purpose
The
purpose of the 2020 Plan is to provide a means through with the Company and its subsidiaries may attract and retain key personnel,
and to provide a means whereby directors, officer, employees, consultants, and advisors of the Company and its subsidiaries can
acquire and maintain an equity interest in the Company, or be paid incentive compensation, thereby strengthening their commitment
to the welfare of the Company and its subsidiaries and aligning their interests with those of the Company’s stockholders.
Administration
Pursuant
to the terms of the 2020 Plan, a committee of the Board or any properly delegated subcommittee, or, if no such committee or subcommittee
thereof exists, the Board, shall administer the 2020 Plan. The Compensation Committee, which is comprised entirely of independent
directors, administers the 2020 Plan. The Compensation Committee will have the sole and plenary authority to (i) designate participants;
(ii) determine the type or types of awards; (iii) determine the number of shares to be covered by, or with respect to which payments,
rights, or other matters are to be calculated in connection with, awards; (iv) determine the terms and conditions of any award;
(v) determine whether, to what extent, and under what circumstances awards may be settled in, or exercised for, cash, shares of
Company common stock, other securities, other awards, or other property, or canceled, forfeited, or suspended and the method or
methods by which awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent,
and under what circumstances the delivery of cash, shares of Company common stock, other securities, other awards, or other property
and other amounts payable with respect to an award shall be deferred either automatically or at the election of the participant
or of the Compensation Committee; (vii) interpret, administer, reconcile any inconsistency in, correct any defect in, and/or supply
any omission in the 2020 Plan and any instrument or agreement relating to, or award granted under, the 2020 Plan; (viii) establish,
amend, suspend, or waive any rules and regulations and appoint such agents as the Compensation Committee shall deem appropriate
for the proper administration of the 2020 Plan; (ix) adopt sub-plans; and (x) make any other determination and take any other
action that the Compensation Committee deems necessary or desirable for the administration of the 2020 Plan.
The
Compensation Committee may delegate its authority to administer the 2020 Plan as permitted by law, except for award grants to
non-employee directors.
The
Compensation Committee will have the discretion to select particular performance targets in connection with awards under the 2020
Plan. Under the 2020 Plan, performance targets are specific levels of performance of the Company (and/or subsidiaries, divisions
or operational and/or business units, product lines, brands, business segments, administrative departments, or any combination
of the foregoing), which may be determined in accordance with GAAP or on a non-GAAP basis on the specified measures, including,
but not limited to:
|
●
|
debt
ratings;
|
|
●
|
share
price;
|
|
●
|
debt
to capital ratio;
|
|
●
|
total
stockholder return;
|
|
●
|
generation
of cash;
|
|
●
|
acquisition
or disposition of assets;
|
|
●
|
issuance
of new debt;
|
|
●
|
acquisition
or disposition of companies, entities or businesses;
|
|
●
|
establishment
of new credit facilities;
|
|
●
|
creation
of new performance and compensation criteria for key personnel;
|
|
●
|
retirement
of debt;
|
|
●
|
recruiting
and retaining key personnel;
|
|
●
|
return
measures (including, but not limited to, return on assets, return on capital, return on equity);
|
|
●
|
customer
satisfaction;
|
|
●
|
attraction
of new capital;
|
|
●
|
employee
morale;
|
|
●
|
cash
flow;
|
|
●
|
hiring
of strategic personnel;
|
|
●
|
earnings
per share;
|
|
●
|
development
and implementation of Company policies, strategies and initiatives;
|
|
●
|
net
income;
|
|
●
|
creation
of new joint ventures;
|
|
●
|
pre-tax
income;
|
|
●
|
increasing
the Company’s public visibility and corporate reputation;
|
|
●
|
pre-tax
pre-bonus income;
|
|
●
|
development
of corporate brand name;
|
|
●
|
operating
income;
|
|
●
|
overhead
cost reductions; or
|
|
●
|
gross
revenue;
|
|
●
|
any
combination of or variations on the foregoing.
|
|
●
|
net
revenue;
|
|
|
|
|
●
|
net
margin;
|
|
|
|
|
●
|
pre-tax
margin;
|
|
|
|
Eligibility
Employees,
directors and independent contractors (except those performing services in connection with the offer or sale of the Company’s
securities in a capital raising transaction, or promoting or maintaining a market for the Company’s securities) of the Company
or its subsidiaries will be eligible to receive awards under the 2020 Plan.
Maximum
Shares Available
Awards
granted under the 2020 Plan are subject to the following limitations: (i) no more than 200,000 (1,000,000 pre-reverse split) shares
of common stock (the “Absolute Share Limit”) will be available for awards under the 2020 Plan; (ii) no more than the
number of shares of common stock equal to the Absolute Share Limit may be issued in the aggregate pursuant to the exercise of
incentive stock options granted under the 2020 Plan; and (iii) the maximum number of shares of common stock subject to awards
granted during a single calendar year to any non-employee director, taken together with any cash fees paid to such non-employee
director during such calendar year, shall not exceed a total value of $250,000 (calculating the value of any such awards based
on the grant date fair value of such awards for financial reporting purposes).
When
(i) an option or SAR is granted under the 2020 Plan, the maximum number of shares subject to the option or SAR will be counted
against the Absolute Share Limit as one share for every share subject to such option or SAR, regardless of the actual number of
shares (if any) used to settle such option or SAR upon exercise; and (ii) an award other than an option or SAR is granted under
the 2020 Plan, the maximum number of shares subject to the award will be counted against the Absolute Share Limit as two shares
for every share subject to such award, regardless of the actual number of shares (if any) used to settle such award. The issuance
of shares or the payment of cash upon the exercise of an award or in consideration of the cancellation or termination of an award
shall reduce the total number of shares available under the 2020 Plan, as applicable. If shares are not issued or are withheld
from payment of an award to satisfy tax obligations with respect to the award, such shares will not be added back to the Absolute
Share Limit, but rather will count against the Absolute Share Limit.
To
the extent that an award granted under the 2020 Plan or a prior plan award expires or is canceled, forfeited or terminated, in
whole or in part without issuance to the holder thereof of shares of common stock to which the award or prior plan award related
or cash or other property in lieu thereof, the unissued shares of common stock will again be available for grant under the 2020
Plan; provided that, in any such case, the number of shares again available for grant under the 2020 Plan shall be the number
of shares previously counted against the Absolute Share Limit (or, in the case of prior plan award, the number of shares that
would have been counted against the Absolute Share Limit if such prior plan award had been granted under this 2020 Plan) with
respect to such unissued shares of common stock to which such award or prior plan award related, as determined in accordance with
the terms of the 2020 Plan.
Awards
may, in the sole discretion of the Compensation Committee, be granted under the 2020 Plan in assumption of, or in substitution
for, outstanding awards previously granted by an entity directly or indirectly acquired by the Company or with which the Company
combines (“Substitute Awards”). Substitute Awards will not be counted against the Absolute Share Limit; provided,
that Substitute Awards issued in connection with the assumption of, or in substitution for, outstanding options intended to qualify
as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
“Code”) will be counted against the aggregate number of shares of common stock available for awards of incentive stock
options under the 2020 Plan. Subject to applicable stock exchange requirements, available shares of common stock under a stockholder-approved
plan of an entity directly or indirectly acquired by the Company or with which the Company combines (as appropriately adjusted
to reflect the acquisition or combination transaction) may be used for awards under the 2020 Plan and will not reduce the number
of shares of common stock available for issuance under the 2020 Plan.
Adjustments
In
the event of a merger, consolidation, reorganization, recapitalization, reorganization, stock split or dividend, or similar event
affecting the common stock, the number (including limits on shares of common stock granted) and kind of shares granted under the
2020 Plan, the Compensation Committee will make such proportionate substitution or adjustment, if any, as it deems equitable,
to any or all of the Absolute Share Limit, the number of shares of common stock or other securities of the Company that may be
issued in respect of awards or with respect to which awards may be granted and the terms of any outstanding award.
Restricted
Stock
The
Compensation Committee will be authorized to award restricted stock under the 2020 Plan. Awards of restricted stock will be subject
to the terms and conditions established by the Compensation Committee. Restricted stock is common stock that is subject to such
restrictions as may be determined by the Compensation Committee for a specified period.
RSU
Awards
The
Compensation Committee will be authorized to award RSUs in lieu of or in addition to any restricted stock awards. RSUs will be
subject to the terms and conditions established by the Compensation Committee. Each RSU will have an initial value that is at
least equal to the fair market value of a share of Company common stock on the date of grant. RSUs may be paid at such time as
the Compensation Committee may determine in its discretion, and payments may be made in a lump sum or in installments, in cash,
shares of common stock, or a combination thereof, as determined by the Compensation Committee in its discretion.
Options
The
Compensation Committee will be authorized to grant options to purchase shares of common stock that are either “qualified,”
meaning they are intended to satisfy the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”)
for incentive stock options, or “nonqualified,” meaning they are not intended to satisfy the requirements of Section
422 of the Code. Options granted under the 2020 Plan will be subject to the terms and conditions established by the Compensation
Committee. Under the terms of the 2020 Plan, the exercise price of the options will not be less than the fair market value of
our common stock at the time of grant. Options granted under the 2020 Plan will be subject to such terms, including the exercise
price and the conditions and timing of exercise, as may be determined by the Compensation Committee and specified in the applicable
award agreement. The maximum term of an option granted under the 2020 Plan will be 10 years from the date of grant (or five years
in the case of a qualified option granted to a 10% stockholder). Payment in respect of the exercise of an option may be made in
cash or by check, by surrender of unrestricted shares (at their fair market value on the date of exercise), or through a “net
exercise,” or the Compensation Committee may, in its discretion and to the extent permitted by law, allow such payment to
be made through a broker-assisted cashless exercise mechanism or by such other method as the Compensation Committee may determine
to be appropriate.
Stock
Appreciation Rights
The
Compensation Committee will be authorized to award SARs under the 2020 Plan. SARs will be subject to the terms and conditions
established by the Compensation Committee and reflected in the award agreement. A SAR is a contractual right that allows a participant
to receive, in the form of either cash, shares or any combination of cash and shares, the appreciation, if any, in the value of
a share over a certain period of time. An option granted under the 2020 Plan may include SARs, and SARs may also be awarded to
a participant independent of the grant of an option. SARs granted in connection with an option shall be subject to terms similar
to the option corresponding to such SARs.
Other
Stock-Based Awards
The
Compensation Committee will be authorized to award other stock-based awards having terms and conditions as determined by the Compensation
Committee. These awards may be granted either alone or in tandem with other awards.
Qualified
Performance-Based Awards
Restricted
stock and RSUs granted to officers and employees of the Company may depend on the degree of achievement of one or more performance
goals relative to a pre-established targeted level or levels using one or more identified performance targets. The applicable
performance period may not be less than three months nor more than 10 years.
Dividends
and Voting Rights
Participants
awarded stock options and SARs will not receive dividends or dividend equivalents or have any voting rights with respect to shares
of common stock underlying these awards prior to the issuance of any such shares. Participants that hold unearned awards subject
to performance vesting conditions (other than or in additional to the passage of time) will not receive dividends or dividend
equivalents or have any voting rights with respect to shares of common stock underlying these awards prior to the issuance of
any such shares; provided, however, that dividends and dividend equivalents may be accumulated in respect of unearned awards
and paid within 30 days after such awards are earned and become payable or distributable.
Transferability
Awards
granted under the 2020 Plan generally will be transferable only by will or the applicable laws of descent and distribution. In
certain limited circumstances, the Compensation Committee may authorize stock options, other than incentive stock options, to
be transferred to family members or trusts controlled by family members of the participant. Restricted stock may not be sold,
transferred, assigned, pledged or otherwise encumbered or disposed of until the applicable restrictions lapse.
Change
in Control
In
the event of a Change in Control (as defined in the 2020 Plan), options become immediately exercisable in full. In addition, in
such event the Compensation Committee may accelerate the termination date of the option to a date no earlier than 30 days after
notice of such acceleration is given to the participant. Upon the giving of any such acceleration notice, the option shall become
immediately exercisable in full.
A
participant’s right to SARs under an SAR agreement immediately vest as to 100% of the total number of shares covered by
the grant (i) upon termination of the grantee’s employment on account of the grantee’s death or permanent disability;
or (ii) upon the occurrence of a Change in Control.
With
respect to restricted stock and RSUs, in the event that the grantee’s status as an employee is terminated following a Change
in Control, then all unvested shares of restricted stock and RSUs will immediately vest.
Clawback
All
awards under the 2020 Plan are subject to reduction, cancellation, forfeiture or recoupment to the extent necessary to comply
with (i) any clawback, forfeiture or other similar policy adopted by the Board or the Compensation Committee and as in effect
from time to time; and (ii) applicable law.
Amendment
and Termination
The
Board may terminate or amend the 2020 Plan or any portion thereof at any time; provided, however, that the Board may not,
without stockholder approval, amend the 2020 Plan if:
|
●
|
Such
approval is necessary to comply with any regulatory requirement applicable to the 2020 Plan;
|
|
●
|
It
would materially increase the number of securities which may be issued under the 2020 Plan (except for increases expressly
provided for in the 2020 Plan; or
|
|
●
|
It
would materially modify the requirements for participation in the 2020 Plan.
|
In
addition, any such amendment that would materially and adversely affect an award holder’s rights with respect to a previously
granted and outstanding award will not to that extent be effective without the consent of the affected holder of such award.
The
Compensation Committee may terminate or amend any award agreement, to the extent consistent with the terms of the 2020 Plan and
any applicable award agreement and so long as such termination or amendment would not materially and adversely affect an award
holder’s rights with respect to a previously granted and outstanding award (unless the affected holder consents thereto);
provided, however that the Compensation Committee may not, without stockholder approval, amend or terminate an award or
award agreement to:
|
●
|
Reduce
the exercise price of any option or the strike price of any SAR,
|
|
●
|
To
cancel any outstanding option or SAR and replace it with a new option or SAR (with a lower exercise price or strike price,
as the case may be) or other award or cash payment that is greater than the intrinsic value (if any) of the canceled option
or SAR; and
|
|
●
|
Take
any other action which is considered a “repricing” for purposes of the stockholder approval rules of any securities
exchange or inter-dealer quotation system on which the securities of the Company are listed or quoted.
|
U.S.
Federal Income Tax Consequences
The
following is a general summary of the material U.S. federal income tax consequences to 2020 Plan participants and the Company
of the grant, vesting and exercise of awards under the 2020 Plan and the disposition of shares acquired pursuant to the exercise
of such awards and is based upon an interpretation of the current federal income tax laws and regulations and may be inapplicable
if such laws and regulations are changed. This summary is not intended to be a complete statement of applicable law or constitute
tax advice, nor does it address foreign, state, local and payroll tax considerations. Moreover, the U.S. federal income tax consequences
to any particular participant may differ from those described herein by reason of, among other things, the particular circumstances
of such participant. To the extent that any awards under the 2020 Plan are subject to Section 409A of the Code (“Section
409A”), the following discussion assumes that such awards will be designed to conform to the requirements of Section 409A
and the regulations promulgated thereunder (or an exception thereto). The 2020 Plan is not subject to the protective provisions
of the Employee Retirement Income Security Act of 1974, as amended, and is not qualified under Section 401(a) of the Code.
Incentive
Stock Options. Options issued under the 2020 Plan and designated as incentive stock options are intended to qualify as such
under Section 422 of the Code. Under the provisions of Section 422 of the Code and the related regulations, holders of incentive
stock options will generally incur no federal income tax liability at the time of grant or upon exercise of those options, and
the Company will not be entitled to a deduction at the time of the grant or exercise of the option. However, the difference between
the value of the common stock received on the exercise date and the exercise price paid will be an “item of tax preference,”
which may give rise to “alternative minimum tax” liability to the holder for the taxable year in which the exercise
occurs. The taxation of gain or loss upon the sale of the common stock acquired upon exercise of an incentive stock option depends,
in part, on whether the holding period of the shares of our common stock acquired through the exercise of an incentive stock option
is at least (i) two years from the date of grant of the option and (ii) one year from the date the option was exercised. If these
holding period requirements are satisfied, any gain or loss realized on a subsequent disposition of the shares will constitute
long-term capital gain or loss, as the case may be. Assuming both holding periods are satisfied, no deduction will be allowed
to us for federal income tax purposes in connection with the grant or exercise of the incentive stock option. If these holding
periods requirements are not met, then, upon such “disqualifying disposition” of the shares, the participant will
generally realize compensation, taxable as ordinary income, at the time of such disposition in an amount equal to the difference
between the fair market value of the share on the date of exercise over the exercise price, limited to the gain on the sale, and
that amount will generally be deductible by us for federal income tax purposes, subject to the possible limitations on deductibility
under Section 162(m)of the Code for compensation paid to certain executives designated thereunder. Finally, if an otherwise qualified
incentive stock option becomes first exercisable in any one year for shares having an aggregate value in excess of $100,000 (based
on the grant date value), the portion of the incentive stock option in respect of those excess shares will be treated as a non-qualified
stock option for federal income tax purposes.
Non-qualified
Stock Options. No income will generally be realized by a participant upon grant of a non-qualified stock option. Upon the
exercise of a non-qualified stock option, the participant will recognize ordinary compensation income in an amount equal to the
excess, if any, of the fair market value of the underlying exercised shares over the option exercise price paid at the time of
exercise. We will be able to deduct this same amount for U.S. federal income tax purposes, but such deduction may be limited under
Section 162(m) of the Code for compensation paid to certain executives designated thereunder. Upon a subsequent disposition of
the shares acquired under a non-qualified stock option, the participant will realize short-term or long-term capital gain (or
loss) depending on the holding period. The capital gain (or loss) will be short-term if the shares are disposed of within one
year after the non-qualified stock option is exercised, and long-term if shares were held more than 12 months as of the sale date.
Restricted
Stock. A participant will normally not be required to recognize income for federal income tax purposes upon the grant of an
award of restricted stock, nor is the Company entitled to any deduction, to the extent that the shares awarded have not vested
(i.e., are no longer subject to a substantial risk of forfeiture). On the date an award of restricted stock is no longer subject
to a substantial risk of forfeiture, the participant will compensation taxable as ordinary income in an amount equal to the difference
between the fair market value of the vested shares on that date and the amount the participant paid for such shares, if any, unless
the participant made an election under Section 83(b) of the Code to be taxed at the time of grant. The participant may, however,
make an election under Section 83(b) of the Code, within 30 days following the grant of the restricted stock award, to be taxed
at the time of the grant of the award based on the difference between the fair market value of the shares on the date of grant
and the amount the participant paid for such shares, if any. If the shares subject to such election are subsequently forfeited,
the participant will not be entitled to any deduction, refund or loss for tax purposes with respect to the forfeited shares. We
will be able to deduct, at the same time as it is recognized by the participant, the amount of taxable compensation to the participant
for U.S. federal income tax purposes, but such deduction may be limited under Section 162(m) of the Code for compensation paid
to certain executives designated thereunder. Upon the sale of the vested shares, the participant will realize short-term or long-term
capital gain or loss depending on the holding period. The holding period generally begins when the restriction period expires.
If the recipient timely made a Section 83(b) election, the holding period commences on the date of the grant.
Deferred
Stock Units and Restricted Stock Units. A participant will not be subject to federal income tax upon the grant of a deferred
stock unit award or a restricted stock unit award, and the Company is not entitled to a deduction at the time of grant. Rather,
upon the delivery of shares or cash pursuant to a deferred stock unit award or a restricted stock unit award, the participant
will generally have compensation taxable at ordinary income rates in an amount equal to the fair market value of the number of
shares (or the amount of cash) actually received with respect to the settlement of the award of such units. We will generally
be able to deduct the amount of the ordinary income realized by the participant for U.S. federal income tax purposes, but the
deduction may be limited under Section 162(m) of the Code for compensation paid to certain executives designated thereunder. If
the participant receives shares upon settlement then, upon disposition of such shares, appreciation or depreciation after the
settlement date is treated as either short-term or long-term capital gain or loss, depending on how long the shares have been
held.
SARs.
SARs are treated very similarly to non-qualified options for tax purposes. No income will normally be realized by a participant
upon grant of a SAR. Upon the exercise of a SAR, the participant will recognize compensation taxable as ordinary income in an
amount equal to either: (i) the cash received upon exercise; or (ii) if shares are received upon the exercise of the SAR, the
fair market value of the shares received in respect of the SAR. We will be able to deduct this same amount for U.S. federal income
tax purposes, but such deduction may be limited under Section 162(m) of the Code for compensation paid to certain executives designated
thereunder.
Performance
Awards. A participant generally will not recognize income upon the grant of a performance award. Upon payment of the performance
award, the participant will recognize ordinary income in an amount equal to the cash received or, if the performance award is
payable in shares, the fair market value of the shares received. When the participant recognizes ordinary income upon payment
of a performance award, the Company generally will be entitled to a tax deduction in the same amount.
Other
Stock-Based Awards. A participant will generally have compensation taxable as ordinary income for federal income tax purposes
in an amount equal to the difference between the fair market value of the shares on the date the award is settled (whether in
shares or cash, or both) over the amount the participant paid for such shares, if any. We will generally be able to deduct, at
the same time as it is recognized by the participant, the amount of taxable compensation to the participant for U.S. federal income
tax purposes, but such deduction may be limited under Section 162(m) for compensation paid to certain executives designated thereunder.
Consequences
of Change of Control. If a change of control of the Company causes awards under the 2020 Plan to accelerate vesting or is
deemed to result in the attainment of performance goals, certain participants could, in some cases, be considered to have received
“excess parachute payments,” which could subject certain participants to a 20% excise tax on the excess parachute
payments and result in a disallowance of the Company’s deductions under Section 280G of the Code.
Section
409A. Section 409A applies to compensation that individuals earn in one year but that is not paid until a future year. This
is referred to as non-qualified deferred compensation. Section 409A, however, does not apply to qualified plans (such as a Section
401(k) plan) and certain welfare benefits. If deferred compensation covered by Section 409A meets the requirements of Section
409A, then Section 409A has no effect on the individual’s taxes. The compensation is taxed in the same manner as it would
be taxed if it were not covered by Section 409A. If a deferred compensation arrangement does not meet the requirements of Section
409A, the compensation is subject to accelerated taxation in the year in which such compensation is no longer subject to a substantial
risk of forfeiture and certain additional taxes, interest and penalties, including a 20% additional income tax. Awards of stock
options, SARs, restricted stock units and performance awards under the 2020 Plan may, in some cases, result in the deferral of
compensation that is subject to the requirements of Section 409A. Awards under the 2020 Plan are intended to comply with Section
409A, the regulations issued thereunder or an exception thereto. Notwithstanding, Section 409A may impose upon a participant certain
taxes or interest charges for which the participant is responsible. Section 409A does not impose any penalties on the Company
and does limit the Company’s deduction with respect to compensation paid to a participant.
Section
162(m). The Company generally may deduct any compensation or ordinary income recognized by the recipient of an award under
the 2020 Plan when recognized, subject to the limits of Section 162(m) of the Code (“Section 162(m)”). Prior to 2018,
Section 162(m) imposed a $1 million limit on the amount a public company may deduct for compensation paid to a Company’s
Chief Executive Officer or any of the Company’s three other most highly compensated executive officers (other than the Chief
Financial Officer) who were employed as of the end of the year. This limitation did not apply to compensation that met Code requirements
for “qualified performance-based compensation.” The performance-based compensation exemption, the last day of the
year determination date, and the exemption of the Chief Financial Officer from Code Section 162(m)’s deduction limit have
all been repealed under the Tax Cuts and Jobs Act of 2017 (“Tax Reform”), effective for taxable years beginning after
December 31, 2017, such that awards paid under the 2020 Plan to our covered executive officers may not be deductible for such
taxable years due to the application of the $1 million deduction limitation. However, under Tax Reform transition relief, compensation
provided under a written binding contract in effect on November 2, 2017 that is not materially modified after that date continues
to be subject to the performance-based compensation exception. As in prior years, while deductibility of executive compensation
for federal income tax purposes is among the factors the Compensation Committee considers when structuring our executive compensation,
it is not the sole or primary factor considered. Our Board and the Compensation Committee retain the flexibility to authorize
compensation that may not be deductible if they believe it is in our best interests.
Tax
Withholding. The Company and its affiliates have the right to deduct or withhold, or require a participant to remit to the
Company and its affiliates, an amount sufficient to satisfy federal, state and local taxes (including employment taxes) required
by law to be withheld with respect to any exercise, lapse of restriction or other taxable event arising with respect to awards
under the 2020 Plan.
Equity
Compensation Plan Information
The
table below sets forth information as of May 31, 2020 on a post-reverse split basis.
Plan Category
|
|
Number of
securities to
be issued
upon exercise
of
outstanding
options,
warrants and
rights
|
|
|
Weighted-
average
exercise price
of
outstanding
options,
warrants and
rights
|
|
|
Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved by security holders
|
|
|
—
|
|
|
$
|
—
|
|
|
|
187,500
|
(1)
|
Equity compensation plans not approved by security holders
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
|
—
|
|
|
$
|
—
|
|
|
|
187,500
|
|
(1)
This represents (i) 62,500 (500,000 pre-reverse split) shares of common stock issuable pursuant to the 2018 Equity Incentive Plan
(the “2018 Plan”), and (ii) 125,000 (1,000,000 pre-reverse split) shares of common stock issuable pursuant to the
Simplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the “2020 Plan”).
The
Company’s stockholders approved the 2018 Plan on October 4, 2018. Under the 2018 Plan, 62,500 (500,000 pre-reverse split)
shares of common stock are authorized for issuance to employees, officers, directors, consultants. The 2018 Plan authorizes the
grant of nonqualified stock options and incentive stock options, restricted stock awards, restricted stock units, stock appreciation
rights, other stock bonus awards, and performance compensation awards. There were 62,500 (500,000 pre-reverse split) shares available
for award as of May 31, 2020 under the 2018 Plan. The Company does not intend to make any grants under the 2018 Plan.
The
Board of Directors and stockholders of the Company approved the 2020 Plan on April 22, 2020 and June 23, 2020, respectively. Under
the 2020 Plan, 125,000 (1,000,000 pre-reverse split) shares of common stock are authorized for issuance to employees, directors
and independent contractors (except those performing services in connection with the offer or sale of the Company’s securities
in a capital raising transaction, or promoting or maintaining a market for the Company’s securities) of the Company or its
subsidiaries. The 2020 Plan authorizes equity-based and cash-based incentives for participants. There were 125,000 (1,000,000
pre-reverse split) shares available for award as of May 31, 2020 under the 2020 Plan.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth the number of shares of and percent of the Company’s common stock beneficially owned as of April
27, 2021 (pre-reverse split and post-reverse split) by all directors, our named executive officers, our directors and executive
officers as a group, and persons or groups known by us to own beneficially 5% or more of our common stock.
Unless
otherwise noted, the business address of each of the beneficial owners listed below is c/o Simplicity Esports and Gaming Company,
7000 W. Palmetto Park Rd., Suite 505, Boca Raton, FL 33433.
Name
of Beneficial Owner
|
|
Pre-
Reverse
Split Amount
and
Nature
of Beneficial Ownership
|
|
|
Post-
Reverse
Split Amount
and
Nature
of Beneficial Ownership
|
|
|
Percentage
of Class
(1)
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
Jed
Kaplan (2)
|
|
|
2,125,640
|
|
|
|
265,705
|
|
|
|
18.6
|
%
|
Roman
Franklin (3)
|
|
|
985,064
|
|
|
|
123,133
|
|
|
|
8.6
|
%
|
Donald
R. Caldwell (4)
|
|
|
137,000
|
|
|
|
17,125
|
|
|
|
1.2
|
%
|
Max
Hooper (5)
|
|
|
49,500
|
|
|
|
6,188
|
|
|
|
*
|
%
|
Frank
Leavy (6)
|
|
|
47,625
|
|
|
|
5,954
|
|
|
|
*
|
%
|
Edward
Leonard Jaroski (7)
|
|
|
148,500
|
|
|
|
18,563
|
|
|
|
1.3
|
%
|
William
H. Herrmann, Jr. (8)
|
|
|
72,309
|
|
|
|
9,039
|
|
|
|
*
|
%
|
All
directors and officers as a group (8 persons) (9)
|
|
|
3,565,638
|
|
|
|
445,707
|
|
|
|
30.9
|
%
|
Principal
Shareholders (more than 5%):
|
|
|
|
|
|
|
|
|
|
|
|
|
AQR
Capital Management, LLC (10)
|
|
|
812,840
|
|
|
|
101,605
|
|
|
|
6.7
|
%
|
(1)
|
The
percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares
of our capital stock outstanding on April 27, 2021. On April 27, 2021, there were 1,424,008 (11,392,064 pre-reverse
split) shares of our common stock outstanding. To calculate a stockholder’s percentage of beneficial ownership, we include
in the numerator and denominator the common stock outstanding and all shares of our common stock issuable to that person in
the event of the exercise of outstanding warrants and other derivative securities owned by that person which are exercisable
within 60 days of April 27, 2021. Common stock warrants and derivative securities held by other stockholders are disregarded
in this calculation. Therefore, the denominator used in calculating beneficial ownership among our stockholders may differ.
Unless we have indicated otherwise, each person named in the table has sole voting power and sole investment power for the
shares listed opposite such person’s name.
|
|
|
(2)
|
Includes
2,440 (19,517) shares of common stock owned indirectly through Mr. Kaplan’s wife, Jamie Kaplan, and 6,250 (50,000 pre-reverse
split) shares of common stock issuable upon exercise of 6,250 (50,000 pre-reverse split) warrants with an exercise price of
$32.00 ($4.00 pre-reverse split) which expire on February 24, 2024 that have vested or will vest within 60 days of April 27,
2021.
|
|
|
(3)
|
Includes
6,375 (51,000 pre-reverse split) shares of common stock owned indirectly through Mr. Franklin’s wife, Alyssia Franklin.
|
|
|
(4)
|
Includes
2,500 (20,000 pre-reverse split) shares of our common stock issuable upon exercise of 2,500 (20,000 pre-reverse split) warrants
with an exercise price of $92.00 ($11.50 pre-reverse split) which expire on May 22, 2024 that have vested or will vest within
60 days of April 27, 2021.
|
|
|
(5)
|
Includes
1,813 (14,500 pre-reverse split) shares of common stock owned directly by Merging Traffic, Inc., 1,250 (10,000 pre-reverse
split) shares of our common stock issuable upon exercise of 1,250 (10,000 pre-reverse split) warrants owned directly by Merging
Traffic, Inc. with an exercise price of $92.00 ($11.50 pre-reverse split) which expire on May 22, 2024 that have vested or
will vest within 60 days of April 27, 2021, and 3,125 (25,000 pre-reverse split) shares of our common stock owned directly
by Mr. Hooper. Mr. Hooper is Managing Director of Merging Traffic, Inc.
|
|
|
(6)
|
Includes
938 (7,500 pre-reverse split) shares of our common stock issuable upon exercise of 938 (7,500 pre-reverse split) warrants
with an exercise price of $92.00 ($11.50 pre-reverse split) which expire on May 22, 2024 that have vested or will vest within
60 days of April 27, 2021.
|
|
|
(7)
|
Includes
7,500 (60,000 pre-reverse split) shares of our common stock issuable upon exercise of 7,500 (60,000 pre-reverse split) warrants
with an exercise price of $32.00 ($4.00 pre-reverse split) which expire on February 24, 2024 that have vested or will vest
within 60 days of April 27, 2021.
|
|
|
(8)
|
Includes
1,250 (10,000 pre-reverse split) shares of our common stock issuable upon exercise of 1,250 (10,000 pre-reverse split) warrants
with an exercise price of $92.00 ($11.50 pre-reverse split) which expire on May 22, 2024 that have vested or will vest within
60 days of April 27, 2021.
|
|
|
(9)
|
Includes
Jed Kaplan, Roman Franklin, Knicks Lau, Donald R. Caldwell, Max Hooper, Frank Leavy, Edward Leonard Jaroski, and William H.
Herrmann, Jr.
|
|
|
(10)
|
Represents
warrants to purchase shares of the Company’s common stock. AQR Capital Management, LLC (“AQR”) is a wholly
owned subsidiary of AQR Capital Management Holdings, LLC (“AQR Holdings”). CNH Partners, LLC (“CNH”)
is deemed to be controlled by AQR. AQR serves as the investment manager to the AQR Diversified Arbitrage Fund, an open-end
registered investment company. AQR, AQR Holdings and CNH share voting and dispositive power over such shares. The principal
office of AQR, AQR Holdings and CNH is Two Greenwich Plaza, Greenwich, CT 06830.
|
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Our
audit committee must review and approve any related person transaction we propose to enter into. Our audit committee charter details
the policies and procedures relating to transactions that may present actual, potential or perceived conflicts of interest and
may raise questions as to whether such transactions are consistent with the best interest of our company and our stockholders.
A summary of such policies and procedures is set forth below.
Any
potential related party transaction that is brought to the audit committee’s attention will be analyzed by the audit committee,
in consultation with outside counsel or members of management, as appropriate, to determine whether the transaction or relationship
does, in fact, constitute a related party transaction. At its meetings, the audit committee will be provided with the details
of each new, existing or proposed related party transaction, including the terms of the transaction, the business purpose of the
transaction and the benefits to us and to the relevant related party.
In
determining whether to approve a related party transaction, the audit committee must consider, among other factors, the following
factors to the extent relevant:
|
●
|
whether
the terms of the transaction are fair to us and on the same basis as would apply if the transaction did not involve a related
party;
|
|
|
|
|
●
|
whether
there are business reasons for us to enter into the transaction;
|
|
|
|
|
●
|
whether
the transaction would impair the independence of an outside director; and
|
|
|
|
|
●
|
whether
the transaction would present an improper conflict of interest for any director or executive officer.
|
Any
member of the audit committee who has an interest in the transaction under discussion must abstain from any voting regarding the
transaction, but may, if so requested by the chairman of the audit committee, participate in some or all of the audit committee’s
discussions of the transaction. Upon completion of its review of the transaction, the audit committee may determine to permit
or to prohibit the transaction.
Working
Capital Loan
The
Sponsor, I-AM Capital Partners LLC, has loaned us $201,707 in the aggregate, to be used for a portion of the expenses of the IPO
and working capital purposes. The loan is non-interest bearing, unsecured and was due at the earlier of December 31, 2017 or the
closing of the IPO. As of November 30, 2018, $120,089 of the Sponsor’s loan has been repaid. As of May 31, 2019, the balance
of the Sponsor loan was $93,761, including imputed interest of $8,523. In August 2019, the sponsor forgave this remaining balance
and the Company recorded it as debt forgiveness income.
Cash
Balance
We
maintain our cash balance at a financial services company that Jed Kaplan, our Chairman, has a majority ownership interest in.
Restricted
Stock Awards to Certain Officers and Directors
On
March 27, 2019, pursuant to a Restricted Stock Award, we issued Jed Kaplan, our then-Chief Executive Officer and interim Chief
Financial Officer and a member of our board of directors, 15,000 (120,000 pre-reverse split) shares of our restricted common stock.
Such shares vested over the succeeding nine months. Also on March 27, 2019, pursuant to a Restricted Stock Award, we granted Roman
Franklin, our President and a member of our board of directors, 4,500 (36,000 pre-reverse split) shares of our restricted common
stock. Such shares vested over the succeeding nine months also.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan
and Franklin initially executed on December 31, 2018 (the “Kaplan 2018 Agreement” and the “Franklin 2018 Agreement”).
The
Kaplan 2018 Agreement provides for the grant to Mr. Kaplan of 1,250 (10,000 pre-reverse split) shares of common stock per month.
As of April 27, 2021, such shares have been issued for the months of January through July 2020. The Franklin 2018 Agreement
provides for the grant to Mr. Franklin of 375 (3,000 pre-reverse split) shares of common stock per month. As of April 27,
2021, such shares have been issued for the months of January through July 2020.
On
September 16, 2019, pursuant to a Restricted Award, we issued to Jed Kaplan, our Chief Executive Officer and Interim Chief Financial
Officer and a member of our board of directors, of 8,750 (70,000 pre-reverse split) shares of our restricted Common Stock. These
shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
September 16, 2019, pursuant to a Restricted Award, we issued to Roman Franklin, our then-President and a member of our board
of directors, of 2,625 (21,000 pre-reverse split) shares of our restricted Common Stock. These shares were issued in reliance
on Section 4(a)(2) of the Securities Act.
On
September 16, 2019, pursuant to a Restricted Award, we issued to Steven Grossman, our Corporate Secretary, of 1,750 (14,000 pre-reverse
split) shares of our restricted Common Stock. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
July 29, 2020, the Board issued 41,875 (335,000 pre-reverse split) shares of common stock to Jed Kaplan, our then-Chief Executive
Officer and Interim Chief Financial Officer and a member of our board of directors. Of these shares, (i) 31,250 (250,000 pre-reverse
split) shares of common stock related to services provided by Mr. Kaplan to the Company during the 2020 fiscal year, (ii) 8,750
(70,000 pre-reverse split) shares of common stock related to grants that should have been, but were not, made pursuant to the
Kaplan 2018 Agreement (as hereinafter defined), and (iii) 1,875 (15,000 pre-reverse split) shares of common stock related to grants
made pursuant to the Kaplan 2020 Agreement (as hereinafter defined). The Kaplan 2018 Agreement provided for the grant to Mr. Kaplan
of 1,250 (10,000 pre-reverse split) shares of common stock per month. For the months of January 2020 through July 2020, however,
such shares had not been granted. Accordingly, the July 29, 2020 grant included an aggregate of 8,750 (70,000 pre-reverse split)
shares of common stock that should have been granted for the months of January 2020 through July 2020. The Kaplan 2020 Agreement
provides for the grant to Mr. Kaplan of 3,000 (15,000 pre-reverse split) shares of common stock per month. Such shares were fully
vested and earned as of the issuance thereof. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
July 29, 2020, the Board also issued 34,813 (278,500 pre-reverse split) shares of common stock to Roman Franklin, our then-President
and a member of our board of directors. Of these shares, (i) 31,250 (250,000 pre-reverse split) shares of common stock related
to services provided by Mr. Franklin to the Company during the 2020 fiscal year, (ii) 2,625 (21,000 pre-reverse split) shares
of common stock related to grants that should have been, but were not, made pursuant to the Franklin 2018 Agreement (as hereinafter
defined), and (iii) 938 (7,500 pre-reverse split) shares of common stock related to grants made pursuant to the Franklin 2020
Agreement (as hereinafter defined). The Franklin 2018 Agreement provided for the grant to Mr. Franklin of 375 (3,000 pre-reverse
split) shares of common stock per month. For the months of January 2020 through July 2020, however, such shares had not been granted.
Accordingly, the July 29, 2020 grant included an aggregate of 2,625 (21,000 pre-reverse split) shares of common stock that should
have been granted for the months of January 2020 through July 2020. The Franklin 2020 Agreement provides for the grant to Mr.
Franklin of 782 (6,250 pre-reverse split) shares of common stock per month. Such shares were fully vested and earned as of the
issuance thereof. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
On
July 29, 2020, we authorized the grant of an aggregate of 24,000 (192,000 pre-reverse split) shares of common stock to an employee
and the members of the Board of Directors of the Company. These shares were issued in reliance on Section 4(a)(2) of the Securities
Act.
On
September 16, 2020, the Company issued an aggregate of 2,813 (22,500 pre-reverse split) restricted common shares of the Company
to executive officers and employees of the Company for services rendered. More specifically, the Company issued 1,875 (15,000
pre-reverse split) of these shares to Jed Kaplan and issued 938 (7,500 pre-reverse split) of these shares to Roman Franklin. These
shares were valued at $25,420, or $9.04 ($1.13 pre-reverse split) per share, based on the quoted trading price on the date of
grant. In connection with the issuance of these shares, during the nine months ended February 28, 2021, the Company recorded stock-based
professional fees of $25,420. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
During
the three months ended November 30, 2020, the Company issued an aggregate of 9,844 (78,752 pre-reverse split) restricted common
shares of the Company to executive officers of the Company for services rendered. Of these shares, the Company issued 5,625 (45,000
pre-reverse split) shares to Jed Kaplan and issued 2,344 (18,750 pre-reverse split) shares to Roman Franklin. These shares were
valued at $119,632, or per share prices ranging from $9.04 ($1.13 pre-reverse split) per share to $11.44 ($1.43 pre-reverse split)
per common share, based on the quoted trading price on the date of grant. These shares were issued in reliance on Section 4(a)(2)
of the Securities Act.
On
December 18, 2020, the Company issued an aggregate of 100,000 (800,000 pre-reverse split) shares (50,000 each) to two executive
officers as a bonus. More specifically, the Company issued 50,000 (400,000 pre-reverse split) of these shares to Jed Kaplan and
issued 50,000 (400,000 pre-reverse split) of these shares to Roman Franklin. These shares were valued at $1,410,000, or $14.10
($1,7625 pre-reverse split) 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. These shares were issued in reliance on Section 4(a)(2) of the Securities
Act.
On
February 16, 2021, the Company issued an aggregate of 2,657 (21,256 pre-reverse split) restricted common shares of the Company
to executive officers and employees of the Company for services rendered. More specifically, the Company issued 1,875 (15,000
pre-reverse split) of these shares to Jed Kaplan and issued 782 (6,256 pre-reverse split) of these shares to Roman Franklin. These
shares were valued at $39,191, or $14.75 ($1.84375 pre-reverse split) per share, based on the quoted trading price on the date
of grant.
On
March 8, 2021, the Company issued an aggregate of 2,657 (21,256 pre-reverse split) restricted common shares of the Company to
executive officers and employees of the Company for services rendered. More specifically, the Company issued 1,875 (15,000 pre-reverse
split) of these shares to Jed Kaplan and issued 782 (6,256 pre-reverse split) of these shares to Roman Franklin. These shares
were valued at $35,604, or $13.40 ($1.675 pre-reverse split) per share, based on the quoted trading price on the date of grant.
On
April 6, 2021, the Company issued an aggregate of 2,657 (21,256 pre-reverse split) restricted common shares of the Company to
executive officers and employees of the Company for services rendered. More specifically, the Company issued 1,875 (15,000 pre-reverse
split) of these shares to Jed Kaplan and issued 782 (6,256 pre-reverse split) of these shares to Roman Franklin. These shares
were valued at $34,488, or $12.98 ($1.6225 pre-reverse split) per share, based on the quoted trading price on the date of grant.
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 then-Chief Executive Officer, interim Chief Financial Officer, member
of the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on the first
business day following the 150-day anniversary of the Issue Date.
As
of May 31, 2020, advances under the terms of this note were $64,728. On various dates subsequent to May 31, 2020, Mr. Kaplan funded
$25,272 pursuant to the Kaplan Promissory Note. With the contributions subsequent to May 31, 2020, the principal balances outstanding
and due Mr. Kaplan amounted to $90,000. On June 22, 2020, Mr. Kaplan agreed to forgive the debt of the Kaplan Promissory Note
with a principal balance of $90,000 in exchange for the Company assigning to Mr. Kaplan a 10% equity interest in Simplicity One
Brasil, Ltda, a subsidiary of the Company. See “Description of Business—Recent Developments—Debt Obligations—Kaplan
Promissory Note” for a more complete description of the terms of the note.
Restructuring
the Ownership in Simplicity One Brasil, LTDA
In
June 2020, while Simplicity One Brasil Ltda (“Simplicity One Brasil”) was preparing its initial application for purchasing
a franchise in Campeonato Brasileiro de League of Legends, Simplicity One Brasil become aware that the 10%-ownership interest
of Team One E-Sports Ltda (“Team One E-Sports”) in Simplicity One Brasil was in contravention of Riot Games’
policy that only one League of Legend esports team could be owned by an owner at one time because Team One had already submitted
an application for purchasing a franchise for another League of Legend esports team. Accordingly, Simplicity One Brasil needed
Team One E-Sports to divest itself of its 10%-equity interest in Simplicity One Brasil in order for Simplicity One Brasil to proceed
with its franchise application. Therefore, on June 22, 2020, Mr. Kaplan entered into a Quota Purchase Agreement with Team One
E-Sports, pursuant to which Mr. Kaplan acquired Team One Esports’ 10%-ownership equity interest for $45,000 in cash. In
addition, the Company transferred a 2%-equity interest (an aggregate of 4%) to each of Laila De Braga Cavalcanti Loss and Frederico
Tannure, who live in Brazil and run the operations of Simplicity One Brasil, in order to comply with Riot Games’ policy
requiring local ownership in Brazil in order to apply for a franchise of a league of legends sports team. Furthermore, on June
22, 2020, Mr. Kaplan agreed to forgive the debt of the Kaplan Promissory Note with a principal balance of $90,000 in exchange
for the Company assigning to Mr. Kaplan a 10% equity interest in Simplicity One Brasil. In light of the restructuring of the ownership
interest in Simplicity One Brasil, as of April 27, 2021, the Company, Mr. Kaplan, Ms. Cavalcanti Loss, and Mr. Tannure
own a 76%, 20%, 2% and 2% equity interest in Simplicity One Brasil.
Director
Independence
For
a description of director independence of our board members, see “Management—Board Committees and Director Independence”
on page 65 of this Prospectus.
DESCRIPTION
OF SECURITIES
The
following description of our capital stock is based upon our Certificate of Incorporation, as amended, our bylaws and applicable
provisions of law, in each case as currently in effect. This discussion does not purport to be complete and is qualified in its
entirety by reference to our Certificate of Incorporation, as amended, and our bylaws, copies of which are filed with the SEC
as exhibits to the registration statement of which this Prospectus is a part.
Authorized
Capital Stock
Assuming
the filing and effectiveness of a Certificate of Amendment to increase the authorized shares of common stock from 20,000,000 to
36,000,000, our authorized capital stock consists of (i) 36,000,000 shares of common stock, par value $0.0001 per share (“Common
Stock”), and (ii) 1,000,000 shares of preferred stock, par value $0.0001 per share (“Preferred Stock”). At April
27, 2021, we had 1,424,008 (11,392,064 pre-reverse split) shares of Common Stock issued and outstanding and no Preferred
Stock issued and outstanding.
As
of April 27, 2021, there were approximately 134 holders of record of our Common Stock .
Common
Stock
Common
stockholders of record are entitled to one vote for each share held on all matters to be voted on by stockholders. Unless specified
in our Certificate of Incorporation, as amended, or bylaws, or as required by applicable provisions of the DGCL or applicable
stock exchange rules, the affirmative vote of a majority of our shares of Common Stock that are voted is required to approve any
such matter voted on by our stockholders. Our board of directors is divided into two classes, each of which will generally serve
for a term of two years with only one class of directors being elected in each year. There is no cumulative voting with respect
to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors
can elect all of the directors. Our stockholders are entitled to receive ratable dividends when, as and if declared by the board
of directors out of funds legally available therefor.
Preferred
Stock
Our
Certificate of Incorporation, as amended, provides that shares of preferred stock may be issued from time to time in one or more
series. Our board of directors will be authorized to fix the voting rights, if any, designations, powers, preferences, the relative,
participating, optional or other special rights and any qualifications, limitations and restrictions thereof, applicable to the
shares of each series. Our board of directors will be able to, without stockholder approval, issue preferred stock with voting
and other rights that could adversely affect the voting power and other rights of the holders of the common stock and could have
anti-takeover effects. The ability of our board of directors to issue preferred stock without stockholder approval could have
the effect of delaying, deferring or preventing a change of control of us or the removal of existing management. We have no preferred
stock outstanding at the date hereof. Although we do not currently intend to issue any shares of preferred stock, we cannot assure
you that we will not do so in the future.
Warrants
Public
Stockholders’ Warrants
In
August 2017, we issued 650,000 (5,200,000 pre-reverse split) warrants (“Public Warrants”) forming a part of units
which we originally issued in our IPO. Each Public Warrant entitles the registered holder to purchase one share of our Common
Stock at a price of $92.00 ($11.50 pre-reverse split) per share, subject to adjustment. The Public Warrants may be exercised at
any time commencing on December 20, 2018 until November 19, 2023. On September 30, 2019, the 650,000 (5,200,000 pre-reverse split)
shares of Common Stock issuable upon the exercise of the Public Warrants became registered under the Securities Act.
Notwithstanding
the above, if our Common Stock is at the time of any exercise of a warrant not listed on a national securities exchange such that
it satisfies the definition of a “covered security” under Section 18(b)(1) of the Securities Act, we may, at our option,
require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section
3(a)(9) of the Securities Act and, in the event we so elect, we will not be required to file or maintain in effect a registration
statement or register or qualify the shares under blue sky laws, and in the event we do not so elect, we will use our best efforts
to register or qualify the shares under the blue sky laws of the state of residence in those states in which the warrants were
initially offered by us.
Once
the warrants become exercisable, we may call the warrants for redemption:
|
●
|
in
whole and not in part;
|
|
|
|
|
●
|
at
a price of $0.01 per warrant;
|
|
|
|
|
●
|
upon
not less than 30 days’ prior written notice of redemption (the “30-day redemption period”) to each warrant
holder; and
|
|
|
|
|
●
|
if,
and only if, the reported last sale price of the common stock equals or exceeds $168.00 ($21.00 pre-reverse split) per share
for any 20 trading days within a 30-trading day period ending on the third trading day prior to the date we send to the notice
of redemption to the warrant holders.
|
If
and when the warrants become redeemable by us, we may exercise our redemption right even if the issuance of shares of Common Stock
upon exercise of the warrants is not exempt from registration or qualification under applicable state blue sky laws and we are
unable to effect such registration or qualification, subject to our obligation in such case to use our best efforts to register
or qualify the shares of Common Stock under the blue sky laws of the state of residence in those states in which the warrants
were initially offered by us.
We
have established the last of the redemption criterion discussed above to prevent a redemption call unless there is at the time
of the call a significant premium to the warrant exercise price. If the foregoing conditions are satisfied and we issue a notice
of redemption of the warrants, each warrant holder will be entitled to exercise his, her or its warrant prior to the scheduled
redemption date. However, the price of the common stock may fall below the $168.00 ($21.00 pre-reverse split) redemption trigger
price as well as the $92.00 ($11.50 pre-reverse split) warrant exercise price after the redemption notice is issued.
If
we call the warrants for redemption as described above, our management will have the option to require any holder that wishes
to exercise his, her or its warrant to do so on a “cashless basis.” In determining whether to require all holders
to exercise their warrants on a “cashless basis,” our management will consider, among other factors, our cash position,
the number of warrants that are outstanding and the dilutive effect on our stockholders of issuing the maximum number of shares
of Common Stock issuable upon the exercise of our warrants. If our management takes advantage of this option, all holders of warrants
would pay the exercise price by surrendering their warrants for that number of shares of Common Stock equal to the quotient obtained
by dividing (x) the product of the number of shares of Common Stock underlying the warrants, multiplied by the difference between
the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair
market value” shall mean the average reported last sale price of the common stock for the 10 trading days ending on the
third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. If our management takes
advantage of this option, the notice of redemption will contain the information necessary to calculate the number of shares of
Common Stock to be received upon exercise of the warrants, including the “fair market value” in such case. Requiring
a cashless exercise in this manner will reduce the number of shares to be issued and thereby lessen the dilutive effect of a warrant
redemption. We believe this feature is an attractive option to us if we do not need the cash from the exercise of the warrants
after our initial business combination. If we call our warrants for redemption and our management does not take advantage of this
option, the initial purchasers and their permitted transferees would still be entitled to exercise their Private Placement Warrants
contained in the Private Placement Units for cash or on a cashless basis using the same formula described above that other warrant
holders would have been required to use had all warrant holders been required to exercise their warrants on a cashless basis,
as described in more detail below.
A
holder of a warrant may notify us in writing in the event it elects to be subject to a requirement that such holder will not have
the right to exercise such warrant, to the extent that after giving effect to such exercise, such person (together with such person’s
affiliates), to the warrant agent’s actual knowledge, would beneficially own in excess of 4.9% or 9.8% (or such other amount
as a holder may specify) of the shares of Common Stock outstanding immediately after giving effect to such exercise.
If
the number of outstanding shares of Common Stock is increased by a stock dividend payable in shares of Common Stock, or by a split-up
of shares of Common Stock or other similar event, then, on the effective date of such stock dividend, split-up or similar event,
the number of shares of Common Stock issuable on exercise of each warrant will be increased in proportion to such increase in
the outstanding shares of Common Stock. A rights offering to holders of common stock entitling holders to purchase shares of Common
Stock at a price less than the fair market value will be deemed a stock dividend of a number of shares of Common Stock equal to
the product of (i) the number of shares of Common Stock actually sold in such rights offering (or issuable under any other equity
securities sold in such rights offering that are convertible into or exercisable for common stock) multiplied by (ii) one (1)
minus the quotient of (x) the price per share of common stock paid in such rights offering divided by (y) the fair market value.
For these purposes (i) if the rights offering is for securities convertible into or exercisable for common stock, in determining
the price payable for common stock, there will be taken into account any consideration received for such rights, as well as any
additional amount payable upon exercise or conversion and (ii) fair market value means the volume weighted average price of common
stock as reported during the ten (10) trading day period ending on the trading day prior to the first date on which the shares
of Common Stock trade on the applicable exchange or in the applicable market, regular way, without the right to receive such rights.
In
addition, if we, at any time while the warrants are outstanding and unexpired, pay a dividend or make a distribution in cash,
securities or other assets to the holders of common stock on account of such shares of Common Stock (or other shares of our capital
stock into which the warrants are convertible), other than (a) as described above, (b) certain ordinary cash dividends, (c) to
satisfy the redemption rights of the holders of common stock in connection with a proposed initial business combination, (d) as
a result of the repurchase of shares of Common Stock by the company if the proposed initial business combination is presented
to the stockholders of the company for approval, or (e) in connection with the redemption of our Public Shares upon our failure
to complete our initial business combination, then the warrant exercise price will be decreased, effective immediately after the
effective date of such event, by the amount of cash and/or the fair market value of any securities or other assets paid on each
share of common stock in respect of such event. If the number of outstanding shares of our Common Stock is decreased by a consolidation,
combination, reverse stock split or reclassification of shares of Common Stock or other similar event, then, on the effective
date of such consolidation, combination, reverse stock split, reclassification or similar event, the number of shares of Common
Stock issuable on exercise of each warrant will be decreased in proportion to such decrease in outstanding shares of Common Stock.
Whenever
the number of shares of Common Stock purchasable upon the exercise of the warrants is adjusted, as described above, the warrant
exercise price will be adjusted by multiplying the warrant exercise price immediately prior to such adjustment by a fraction (x)
the numerator of which will be the number of shares of Common Stock purchasable upon the exercise of the warrants immediately
prior to such adjustment, and (y) the denominator of which will be the number of shares of Common Stock so purchasable immediately
thereafter.
In
case of any reclassification or reorganization of the outstanding shares of Common Stock (other than those described above or
that solely affects the par value of such shares of Common Stock), or in the case of any merger or consolidation of us with or
into another corporation (other than a consolidation or merger in which we are the continuing corporation and that does not result
in any reclassification or reorganization of our outstanding shares of Common Stock), or in the case of any sale or conveyance
to another corporation or entity of the assets or other property of us as an entirety or substantially as an entirety in connection
with which we are dissolved, the holders of the warrants will thereafter have the right to purchase and receive, upon the basis
and upon the terms and conditions specified in the warrants and in lieu of the shares of our Common Stock immediately theretofore
purchasable and receivable upon the exercise of the rights represented thereby, the kind and amount of shares of stock or other
securities or property (including cash) receivable upon such reclassification, reorganization, merger or consolidation, or upon
a dissolution following any such sale or transfer, that the holder of the warrants would have received if such holder had exercised
their warrants immediately prior to such event. However, if such holders were entitled to exercise a right of election as to the
kind or amount of securities, cash or other assets receivable upon such consolidation or merger, then the kind and amount of securities,
cash or other assets for which each warrant will become exercisable will be deemed to be the weighted average of the kind and
amount received per share by such holders in such consolidation or merger that affirmatively make such election, and if a tender,
exchange or redemption offer has been made to and accepted by such holders (other than a tender, exchange or redemption offer
made by the company in connection with redemption rights held by stockholders of the company as provided for in the Company’s
Certificate of Incorporation, as amended, or as a result of the repurchase of shares of Common Stock by the company if a proposed
initial business combination is presented to the stockholders of the company for approval) under circumstances in which, upon
completion of such tender or exchange offer, the maker thereof, together with members of any group (within the meaning of Rule
13d-5(b)(1) under the Exchange Act) of which such maker is a part, and together with any affiliate or associate of such maker
(within the meaning of Rule 12b-2 under the Exchange Act) and any members of any such group of which any such affiliate or associate
is a part, own beneficially (within the meaning of Rule 13d-3 under the Exchange Act) more than 50% of the outstanding shares
of Common Stock, the holder of a warrant will be entitled to receive the highest amount of cash, securities or other property
to which such holder would actually have been entitled as a stockholder if such warrant holder had exercised the warrant prior
to the expiration of such tender or exchange offer, accepted such offer and all of the common stock held by such holder had been
purchased pursuant to such tender or exchange offer, subject to adjustments (from and after the consummation of such tender or
exchange offer) as nearly equivalent as possible to the adjustments provided for in the warrant agreement. Additionally, if less
than 70% of the consideration receivable by the holders of common stock in such a transaction is payable in the form of common
stock in the successor entity that is listed for trading on a national securities exchange or is quoted in an established over-the-counter
market, or is to be so listed for trading or quoted immediately following such event, and if the registered holder of the warrant
properly exercises the warrant within thirty days following public disclosure of such transaction, the warrant exercise price
will be reduced as specified in the warrant agreement based on the per share consideration minus Black-Scholes Warrant Value (as
defined in the warrant agreement) of the warrant in order to determine and realize the option value component of the warrant.
This formula is to compensate the warrant holder for the loss of the option value portion of the warrant value due to the requirement
that the warrant holder exercise the warrant within 30 days of the event. The Black-Scholes model is an accepted pricing model
for estimating fair market value where no quoted market price for an instrument is available.
The
warrants have been issued in registered form under a warrant agreement between Continental Stock Transfer & Trust Company,
as warrant agent, and us. You should review a copy of the warrant agreement, which will be filed as an exhibit to the registration
statement of which this Prospectus is a part, for a complete description of the terms and conditions applicable to the warrants.
The warrant agreement provides that the terms of the warrants may be amended without the consent of any holder to cure any ambiguity
or correct any defective provision, but requires the approval by the holders of at least 65% of the then outstanding Public Warrants
to make any change that adversely affects the interests of the registered holders of Public Warrants.
The
warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant
agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied
by full payment of the exercise price (or on a cashless basis, if applicable), by certified or official bank check payable to
us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of common
stock and any voting rights until they exercise their warrants and receive shares of Common Stock. After the issuance of shares
of Common Stock upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters
to be voted on by stockholders. Warrants may be exercised only for a whole number of shares of Common Stock. No fractional shares
will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional
interest in a share, we will, upon exercise, round down to the nearest whole number the number of shares of Common Stock to be
issued to the warrant holder.
As
of April 27, 2021, 650,000 (5,200,000 pre-reverse split) Public Warrants remain outstanding.
Private
Placement Warrants
In
August 2017, we issued 32,688 (261,500 pre-reverse split) warrants (“Private Placement Warrants”) forming a part of
units which we originally issued in a private placement that closed simultaneously with the consummation of our IPO. Each Private
Placement Warrant entitles the registered holder to purchase one share of our Common Stock at a price of $92.00 ($11.50 pre-reverse
split) per share, subject to adjustment. The Private Placement Warrants may be exercised at any time commencing on December 20,
2018 until November 19, 2023. On September 30, 2019, the 32,688 (261,500 pre-reverse split) shares of Common Stock issuable upon
the exercise of the Private Placement Warrants became registered under the Securities Act.
The
Private Placement Warrants (including the common stock issuable upon exercise of the Private Placement Warrants), will not be
redeemable by us so long as they are held by the initial purchasers or their permitted transferees. Otherwise, the Private Placement
Warrants have terms and provisions that are identical to those of the warrants being sold as part of the units in the IPO. If
the Private Placement Warrants are held by holders other than the initial purchasers or their permitted transferees, the Private
Placement Warrants will be redeemable by us and exercisable by the holders on the same basis as the Public Warrants.
If
holders of the Private Placement Warrants elect to exercise them on a cashless basis, they would pay the exercise price by surrendering
his, her or its warrants for that number of shares of Common Stock equal to the quotient obtained by dividing (x) the product
of the number of shares of Common Stock underlying the warrants, multiplied by the difference between the exercise price of the
warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value”
shall mean the average reported last sale price of the common stock for the 10 trading days ending on the third trading day prior
to the date on which the notice of warrant exercise is sent to the warrant agent. The reason that we have agreed that these warrants
will be exercisable on a cashless basis so long as they are held by the initial purchasers and their permitted transferees is
because it is not known at this time whether they will be affiliated with us following a business combination. If they remain
affiliated with us, their ability to sell our securities in the open market will be significantly limited. We expect to have policies
in place that prohibit insiders from selling our securities except during specific periods of time. Even during such periods of
time when insiders will be permitted to sell our securities, an insider cannot trade in our securities if he or she is in possession
of material non-public information. Accordingly, unlike Public Stockholders who could exercise their warrants and sell the shares
of Common Stock received upon such exercise freely in the open market in order to recoup the cost of such exercise, the insiders
could be significantly restricted from selling such securities. As a result, we believe that allowing the holders to exercise
such warrants on a cashless basis is appropriate.
As
of April 27, 2021, 32,688 (261,500 pre-reverse split) Private Placement Warrants remain outstanding.
2019
Warrants
During
the period from March 1, 2019 through July 1, 2019, the Company issued 123,438 (987,500 pre-reverse split) warrants (“2019
Warrants”) which formed a part of units privately placed in a units offering. The warrants expire 5-years from the date
of issuance and are exercisable at a purchase price of $32.00 ($4.00 pre-reverse split) per share. On September 30, 2019, the
shares of Common Stock issuable upon the exercise of the 2019 Warrants became registered under the Securities Act.
As
of April 27, 2021, 123,438 (987,500 pre-reverser split) 2019 Warrants remain outstanding.
Registration Rights
Tiger Trout SPA
On March 31, 2021,
the Company entered into the Tiger Trout Agreement by and between the Company and the Selling Stockholder (“Tiger Trout
Agreement”), pursuant to which the Company is obligated to file the Registration Statement
to register the resale of the Tiger Trout Shares. Pursuant to the terms of the Tiger Trout Agreement, the Company agreed
that, following the First Closing, the Company will utilize its commercially reasonable efforts to file the resale Registration
Statement pursuant to the Securities Act with the SEC for the resale of the Tiger Trout Shares, and will use its commercially
reasonable efforts to have the Registration Statement declared effective by the SEC within 30 calendar days, but not more than
90 calendar days after March 31, 2021.
We will pay all reasonable
expenses incurred in connection with the registrations described above. However, we will not be responsible for any broker or
similar concessions or any legal fees or other costs of the Selling Stockholder.
Dividends
We
have not paid any cash dividends on our Common Stock to date and do not intend to pay cash dividends. The payment of cash dividends
in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition subsequent
to completion of a business combination. The payment of any cash dividends will be within the discretion of our board of directors
at such time.
Certain
Anti-Takeover Provisions of Delaware Law and our Certificate of Incorporation, as Amended, and Bylaws
We
are subject to the provisions of Section 203 of the DGCL regulating corporate takeovers. This statute prevents certain Delaware
corporations, under certain circumstances, from engaging in a “business combination” with:
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a
stockholder who owns 15% or more of our outstanding voting stock (otherwise known as an “interested stockholder”);
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an
affiliate of an interested stockholder; or
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an
associate of an interested stockholder, for three years following the date that the stockholder became an interested stockholder.
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A
“business combination” includes a merger or sale of more than 10% of our assets. However, the above provisions of
Section 203 do not apply if:
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our
board of directors approves the transaction that made the stockholder an “interested stockholder,” prior to the
date of the transaction;
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after
the completion of the transaction that resulted in the stockholder becoming an interested stockholder, that stockholder owned
at least 85% of our voting stock outstanding at the time the transaction commenced, other than statutorily excluded shares
of Common Stock; or
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on
or subsequent to the date of the transaction, the business combination is approved by our board of directors and authorized
at a meeting of our stockholders, and not by written consent, by an affirmative vote of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder.
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Our
Certificate of Incorporation, as amended, provides that our board of directors will be classified into two classes of directors.
As a result, in most circumstances, a person can gain control of our board only by successfully engaging in a proxy contest at
two or more annual meetings.
Our
authorized but unissued common stock and preferred stock are available for future issuances without stockholder approval and could
be utilized for a variety of corporate purposes, including future offerings to raise additional capital, acquisitions and employee
benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could render more difficult
or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Exclusive
Forum for Certain Lawsuits
Our
Certificate of Incorporation, as amended, will require, to the fullest extent permitted by law, that derivative actions brought
in our name, actions against directors, officers and employees for breach of fiduciary duty and other similar actions may be brought
only in the Court of Chancery in the State of Delaware and, if brought outside of Delaware, the stockholder bringing such suit
will be deemed to have consented to service of process on such stockholder’s counsel. Although we believe this provision
benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies,
the provision may have the effect of discouraging lawsuits against our directors and officers.
Special
Meeting of Stockholders
Our
bylaws provide that special meetings of our stockholders may be called only by a majority vote of our board of directors, by our
Chief Executive Officer or by our Chairman.
Advance
Notice Requirements for Stockholder Proposals and Director Nominations
Our
bylaws provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates
for election as directors at our annual meeting of stockholders must provide timely notice of their intent in writing. To be timely,
a stockholder’s notice will need to be received by the secretary to our principal executive offices not later than the close
of business on the 90th day nor earlier than the opening of business on the 120th day prior to the scheduled date of the annual
meeting of stockholders. If our annual meeting is called for a date that is not within 30 days before or after such anniversary
date, a stockholder’s notice will need to be received not earlier than the opening of business on the 120th day before the
meeting and not later than the later of (x) the close of business on the 90th day before the meeting or (y) the close of business
on the 10th day following the day on which we first publicly announce the date of the annual meeting. Our bylaws also specify
certain requirements as to the form and content of a stockholder’s notice for an annual meeting. Specifically, a stockholder’s
notice must include: (i) a brief description of the business desired to be brought before the annual meeting, the text of the
proposal or business and the reasons for conducting such business at the annual meeting, (ii) the name and record address of such
stockholder and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class or
series and number of shares of our capital stock owned beneficially and of record by such stockholder and by the beneficial owner,
if any, on whose behalf the proposal is made, (iv) a description of all arrangements or understandings between such stockholder
and the beneficial owner, if any, on whose behalf the proposal is made and any other person or persons (including their names)
in connection with the proposal of such business by such stockholder, (v) any material interest of such stockholder and the beneficial
owner, if any, on whose behalf the proposal is made in such business and (vi) a representation that such stockholder intends to
appear in person or by proxy at the annual meeting to bring such business before such meeting. These notice requirements will
be deemed satisfied by a stockholder as to any proposal (other than nominations) if the stockholder has notified us of such stockholder’s
intention to present such proposal at an annual meeting in compliance with Rule 14a-8 of the Exchange Act, and such stockholder
has complied with the requirements of such rule for inclusion of such proposal in the proxy statement we prepare to solicit proxies
for such annual meeting. Pursuant to Rule 14a-8 of the Exchange Act, proposals seeking inclusion in our annual proxy statement
must comply with the notice periods contained therein. The foregoing provisions may limit our stockholders’ ability to bring
matters before our annual meeting of stockholders or from making nominations for directors at our annual meeting of stockholders.
Our
Transfer Agent and Warrant Agent
The
transfer agent for our Common Stock and warrant agent for our warrants is Continental Stock Transfer & Trust Company.
We have agreed to indemnify Continental Stock Transfer & Trust Company in its roles as transfer agent and warrant agent, its
agents and each of its stockholders, directors, officers and employees against all liabilities, including judgments, costs and
reasonable counsel fees that may arise out of acts performed or omitted for its activities in that capacity, except for any liability
due to any gross negligence, willful misconduct or bad faith of the indemnified person or entity.
SELLING
STOCKHOLDER
This
Prospectus relates to the possible resale from time to time by Tiger Trout Capital Puerto Rico, LLC, the Selling Stockholder,
named in the table below of any or all of the common stock that has been or will be issued by us to the Selling Stockholder under
the Tiger Trout Agreement. We are registering the common stock pursuant to the provisions of the Tiger Trout Agreement in order
to permit the Selling Stockholder to offer the shares for resale from time to time.
The
table below presents information regarding the Selling Stockholder and the common stock that it may offer from time to time under
this Prospectus. This table is prepared based on information supplied to us by the Selling Stockholder, and reflects holdings
as of April 27, 2021. As used in this Prospectus, the term “Selling Stockholder” includes the Selling Stockholder,
and any donees, pledgees, transferees, or other successors-in-interest selling shares received after the date of this Prospectus
from the Selling Stockholder as a gift, pledge, or other non-sale related transfer. The number of shares in the column “Maximum
Number of Common Stock to be Offered Pursuant to this Prospectus” represents all of the common stock that the Selling Stockholder
may offer under this Prospectus. The Selling Stockholder may sell some, all or none of its shares offered by this Prospectus.
We do not know how long the Selling Stockholder will hold the shares before selling them, and we currently have no agreements,
arrangements, or understandings with the Selling Stockholder regarding the sale of any of the shares.
Beneficial
ownership is determined in accordance with Rule 13d-3(d) promulgated by the SEC under the Exchange Act, and includes common stock
with respect to which the Selling Stockholder has voting and investment power. The fourth column assumes that none of the shares
offered by the Selling Stockholder pursuant to this Prospectus are sold.
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Number
of Shares of Common Stock Owned Prior to Offering
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Maximum
Number of Common Stock to be Offered Pursuant to this Prospectus
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Number
of Shares of Common Stock Owned after Offering
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Name
of Selling Stockholder
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Number
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Percent
(1)
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Number
(2)
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Percent
(3)
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Tiger
Trout Capital Puerto Rico, LLC
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41,667
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2.9
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%
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125,000
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125,000
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8.3
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%
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(1)
Based on 1,424,008 shares of common stock outstanding.
(2)
Assumes that none of the shares being offered pursuant to this Prospectus are sold.
(3)
Assumes the issuance of all 125,000 shares of common stock by us to the Selling Stockholder pursuant to the Tiger Trout Agreement.
PLAN
OF DISTRIBUTION
The
Selling Stockholder, including any of its pledgees, assignees and successors-in-interest may, from time to time, sell any or all
of their securities covered hereby which were acquired under the Tiger Trout Agreement on the OTCQB or any other stock exchange,
market or trading facility on which the securities are traded or in private transactions. These sales may be at market prices
prevailing at the time of sale, prices related to prevailing market prices, fixed prices or negotiated prices. The Selling Stockholder
may use any one or more of the following methods when selling securities:
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ordinary
brokerage transactions and transactions in which the broker-dealer solicits purchasers;
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block
trades in which the broker-dealer will attempt to sell the securities as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
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purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
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exchange
distributions in accordance with the rules of the applicable exchange;
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privately
negotiated transactions;
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settlements
of short sales;
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transactions
through broker-dealers that agree with the Selling Stockholders to sell a specified number of such securities at a stipulated
price per security;
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writings
or settlements of options or other hedging transactions, whether through an options exchange or otherwise;
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combinations
of any such methods of sale; or
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any
other methods permitted pursuant to applicable law.
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The
Selling Stockholder may also sell securities under Rule 144 under the Securities Act, if available, rather than under this Prospectus.
Broker-dealers
engaged by the Selling Stockholder may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholder (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser)
in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction
not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a principal transaction
a markup or markdown in compliance with FINRA IM-2440.
In
connection with the sale of the securities or interests therein, the Selling Stockholder may enter into hedging transactions with
broker-dealers or other financial institutions, which may in turn engage in short sales of the securities in the course of hedging
the positions they assume. The Selling Stockholder may also enter into option or other transactions with broker-dealers or other
financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial
institution of securities offered by this Prospectus, which securities such broker-dealer or other financial institution may resell
pursuant to this Prospectus (as supplemented or amended to reflect such transaction).
The
Selling Stockholder and any broker-dealers or agents that are involved in selling the securities may be deemed to be “underwriters”
within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers
or agents and any profit on the resale of the securities purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. The Selling Stockholder has informed the Company that it does not have any written or oral agreement
or understanding, directly or indirectly, with any person to distribute the securities.
The
Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the securities. The
Company has agreed to indemnify the Selling Stockholder against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because
the Selling Stockholder may be deemed to be an “underwriter” within the meaning of the Securities Act, it will be
subject to the Prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities
covered by this Prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather
than under this Prospectus. The Selling Stockholder has advised us that there is no underwriter or coordinating broker acting
in connection with the proposed sale of the resale securities by the Selling Stockholder.
We
have agreed to keep this Prospectus effective until the earlier of (i) the date on which the securities may be resold by the Selling
Stockholder without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without
the requirement for the Company to be in compliance with the current public information under Rule 144 under the Securities Act
or any other rule of similar effect or (ii) the sale of all of the securities pursuant to this Prospectus or Rule 144 under the
Securities Act or any other rule of similar effect. The resale securities will be sold only through registered or licensed brokers
or dealers if required under applicable state securities laws. In addition, in certain states, the resale securities covered hereby
may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration
or qualification requirement is available and is complied with.
Applicable
rules and regulations under the Exchange Act, any person engaged in the distribution of the resale securities may not simultaneously
engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation
M, prior to the commencement of the distribution. In addition, the Selling Stockholder will be subject to applicable provisions
of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases
and sales of securities of the common stock by the Selling Stockholder or any other person. We will make copies of this Prospectus
available to the Selling Stockholder and have informed it of the need to deliver a copy of this Prospectus to each purchaser at
or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act.
SHARES
ELIGIBLE FOR FUTURE SALE
We
cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common
stock for sale will have on the market price of our common stock prevailing from time to time. Future sales of our common stock
in the public market, or the availability of such shares for sale in the public market, could adversely affect market prices prevailing
from time to time. The availability for sale of a substantial number of shares of our common stock acquired through the exercise
of outstanding warrants could materially adversely affect the market price of our common stock. In addition, sales of our common
stock in the public market after the restrictions lapse as described below, or the perception that those sales may occur, could
cause the prevailing market price to decrease or to be lower than it might be in the absence of those sales or perceptions.
Sale
of Restricted Shares
As
of April 27, 2021, there were 1,424,008 (11,392,064 pre-reverse split) shares of common stock outstanding. Up to 125,000
shares of common stock being offered by this Prospectus will be freely tradable, other than by any of our
“affiliates,” as defined in Rule 144(a) under the Securities Act, without restriction or registration under the
Securities Act. In addition, 787,994 (6,303,952 pre-reverse split) outstanding shares were issued and sold by us in private
transactions and those shares are, or will be, eligible for public sale if registered under the Securities Act or sold in
accordance with Rule 144 under the Securities Act. These remaining shares are “restricted securities” within the
meaning of Rule 144 under the Securities Act.
Rule
144
In
general, under Rule 144, as currently in effect, a person (or persons whose shares are required to be aggregated), including a
person who may be deemed an “affiliate” of a company, who has beneficially owned restricted securities for at least
six months may sell, within any three-month period, a number of shares that does not exceed the greater of: (1) 1% of the then-outstanding
shares of common stock, or (2) if and when the common stock is listed on a national securities exchange, the average weekly trading
volume of the common stock during the four calendar weeks preceding the date on which notice of such sale was filed under Rule
144. Sales under Rule 144 are also subject to certain requirements as to the manner of sale, notice, and availability of current
public information about our company. A person who is not deemed to have been an affiliate of us at any time during the 90 days
preceding a sale by such person, and who has beneficially owned the restricted shares for at least one year, is entitled to sell
such shares under Rule 144 without regard to any of the restrictions described above.
We
cannot estimate the number of shares of our common stock that our existing stockholders will elect to sell under Rule 144.
Transfer
Agent
The
transfer agent and registrar, for our Common Stock is Continental Stock Transfer and Trust Company. The transfer agent and registrar’s
address is at 1 State Street, New York, New York 10004-1561. The transfer agent’s telephone (212) 509-4000.
LEGAL
MATTERS
The
validity of the securities offered by this Prospectus will be passed upon for us by Anthony L.G., PLLC, 625 N. Flagler Drive,
Suite 600, West Palm Beach, Florida 33401.
EXPERTS
Our
balance sheets as of May 31, 2020 and May 31, 2019 and the related statement of operations, changes in stockholders’ equity
and cash flows for the year ended May 31, 2020 and 2019 included in this registration statement and Prospectus have been audited
by Prager Metis CPAs LLC, independent registered public accounting firm, as indicated in their report (which report expresses
an unqualified opinion and includes an explanatory paragraph related to Simplicity Esports and Gaming Company’s ability
to continue as a going concern) with respect thereto, and have been so included in reliance upon the report of such firm given
on their authority as experts in accounting and auditing.
DISCLOSURE
OF COMMISSION’S POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Our
directors and officers are indemnified as provided by Delaware law, our Certificate of Incorporation, as amended, and our bylaws.
We have agreed to indemnify each of our directors and certain officers against certain liabilities, including liabilities under
the Securities Act. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors,
officers and controlling persons pursuant to the provisions described above, or otherwise, we have been advised that in the opinion
of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than our payment of expenses incurred or paid by
our director, officer or controlling person in the successful defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication
of such issue.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have filed with the SEC the registration statement on Form S-1 under the Securities Act for the securities offered by this Prospectus.
This Prospectus, which is a part of the registration statement, does not contain all of the information in the registration statement
and the exhibits filed with it, portions of which have been omitted as permitted by SEC rules and regulations. For further information
concerning us and the securities offered by this Prospectus, we refer to the registration statement and to the exhibits filed
with it. Statements contained in this Prospectus as to the content of any contract or other document referred to are not necessarily
complete. In each instance, we refer you to the copy of the contracts and/or other documents filed as exhibits to the registration
statement.
The
registration statement on Form S-1, of which this Prospectus forms a part, including exhibits, is available at the SEC’s
website at http://www.sec.gov. You may also read and copy any document we file with, or furnish to, the SEC at its public
reference facilities:
|
Public
Reference Room Office
|
|
100
F Street, N.E.
|
|
Room
1580
|
|
Washington,
D.C. 20549
|
You
may also obtain copies of the documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street,
N.E., Room 1580, Washington, D.C. 20549. Callers in the United States can also call (202) 551-8090 for further information on
the operations of the public reference facilities.
SIMPLICITY
ESPORTS AND GAMING COMPANY
INDEX
TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated Balance Sheets, as of May 31, 2020 and 2019 (Audited)
|
F-3
|
Consolidated Statement of Operations, Fiscal Years Ended May 31, 2020 and 2019 (Audited)
|
F-4
|
Consolidated Statement of Stockholders’ Equity, Fiscal Years Ended May 31, 2020 and 2019 (Audited)
|
F-5
|
Consolidated Statement of Cash Flows, Fiscal Years Ended May 31, 2020 and 2019 (Audited)
|
F-6
|
Notes to Audited Financial Statements
|
F-7
|
|
|
Condensed Consolidated Balance Sheets, as of February 28, 2021 and May 31, 2020 (Unaudited)
|
F-32
|
Condensed Consolidated Statement of Operations for the Three and Nine Months Ended February 28, 2021 and February 29, 2020 (Unaudited)
|
F-33
|
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended February 28, 2021 and February 29, 2020 (Unaudited)
|
F-34
|
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended February 28, 2021 and February 29, 2020 (Unaudited)
|
F-36
|
Notes to Condensed Consolidated Financial Statements (Unaudited)
|
F-37
|
Report
of Independent Registered Public Accounting Firm
To
the shareholders and the Board of Directors of Simplicity Esports and Gaming Company and Subsidiaries
Opinion
on the Financial Statements
We
have audited the accompanying balance sheet of Simplicity Esports and Gaming Co. (the “Company”) as of May 31, 2020
and 2019, and the related statements of operations, stockholders’ (deficit), and cash flows for each of the years in the
two year period ended May 31, 2020, and the related notes and schedules (collectively referred to as the “financial statements”).
In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
May 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two year period ended
May 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Going
Concern Matter
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 2 to the financial statements, the Company has not generated sufficient revenues to provide sufficient cash flow as of
May 31, 2020, which raises substantial doubt about its ability to continue as a going concern. Management’s plans concerning
these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audit provides a reasonable basis for our opinion.
/s/
Prager Metis CPAs, LLC
We
have served as the Company’s auditor since 2017
Basking
Ridge, New Jersey
August
31, 2020
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2020
|
|
|
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
160,208
|
|
|
$
|
1,540,158
|
|
Accounts
receivable, net
|
|
|
127,653
|
|
|
|
-
|
|
Inventory
|
|
|
15,787
|
|
|
|
-
|
|
Prepaid
expenses
|
|
|
5,588
|
|
|
|
-
|
|
Total
Current Assets
|
|
|
309,236
|
|
|
|
1,540,158
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,155,141
|
|
|
|
4,456,250
|
|
Intangible assets,
net
|
|
|
2,141,374
|
|
|
|
1,528,441
|
|
Deferred brokerage
fees
|
|
|
149,223
|
|
|
|
-
|
|
Property and equipment
|
|
|
232,733
|
|
|
|
117,231
|
|
Right of use asset,
operating lease
|
|
|
490,984
|
|
|
|
100,146
|
|
Security deposit
|
|
|
14,885
|
|
|
|
12,317
|
|
Deferred
financing costs
|
|
|
98,198
|
|
|
|
-
|
|
Total
Other Assets
|
|
|
8,282,538
|
|
|
|
6,214,385
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
8,591,774
|
|
|
$
|
7,754,543
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
126,716
|
|
|
$
|
-
|
|
Accrued expenses
|
|
|
1,421,842
|
|
|
|
691,940
|
|
Loan payable –
related party
|
|
|
-
|
|
|
|
93,761
|
|
Convertible note
payable
|
|
|
1,127,320
|
|
|
|
1,000,000
|
|
Note payable –
related party
|
|
|
64,728
|
|
|
|
-
|
|
Operating lease
obligation, current
|
|
|
151,867
|
|
|
|
32,045
|
|
Current portion
of deferred revenues
|
|
|
3,795
|
|
|
|
-
|
|
Stock
payable
|
|
|
75,000
|
|
|
|
-
|
|
Total
Current Liabilities
|
|
|
2,971,268
|
|
|
|
1,817,746
|
|
|
|
|
|
|
|
|
|
|
Operating lease
obligation, net of current portion
|
|
|
339,116
|
|
|
|
68,876
|
|
Deferred
revenues, less current portion
|
|
|
365,718
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
3,676,102
|
|
|
|
1,886,622
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies–Note 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
Preferred stock
- $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock - $0.0001 par value;
20,000,000 shares authorized; 7,988,975 and 7,003,975 shares issued and outstanding as of May 31, 2020 and May 31,
2019, respectively
|
|
|
799
|
|
|
|
700
|
|
Additional paid-in
capital
|
|
|
11,131,404
|
|
|
|
9,442,027
|
|
Accumulated
deficit
|
|
|
(6,195,044
|
)
|
|
|
(3,574,806
|
)
|
Subtotal
|
|
|
4,937,159
|
|
|
|
5,867,921
|
|
Non-controlling
interest
|
|
|
(21,487
|
)
|
|
|
-
|
|
Total
Stockholders’ Equity
|
|
|
4,915,672
|
|
|
|
5,867,921
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
8,591,774
|
|
|
$
|
7,754,543
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For
the Year Ended
|
|
|
|
May
31, 2020
|
|
|
May
31, 2019
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
Franchise
Royalties and License Fees
|
|
$
|
478,023
|
|
|
$
|
-
|
|
Franchise
Termination Revenue
|
|
|
44,984
|
|
|
|
-
|
|
Company-Owned
Stores Sales
|
|
|
174,042
|
|
|
|
-
|
|
Esports
Revenue
|
|
|
164,361
|
|
|
|
37,995
|
|
Total
Revenue
|
|
|
861,410
|
|
|
|
37,995
|
|
Less
Cost of Goods Sold
|
|
|
(422,539
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
438,871
|
|
|
|
37,995
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
General
and Administrative expenses
|
|
|
(3,170,992
|
)
|
|
|
(4,353,189
|
)
|
Loss
from Operations
|
|
|
(2,732,121
|
)
|
|
|
(4,315,194
|
)
|
|
|
|
|
|
|
|
|
|
Other
Income / (Expense)
|
|
|
|
|
|
|
|
|
Debt
Forgiveness Income
|
|
|
93,761
|
|
|
|
369,206
|
|
Interest
Expense
|
|
|
(32,472
|
)
|
|
|
(23,268
|
)
|
Interest
Income
|
|
|
3,034
|
|
|
|
403,984
|
|
Rebate
Income
|
|
|
2,019
|
|
|
|
-
|
|
Total
Other Income
|
|
|
66,342
|
|
|
|
749,922
|
|
|
|
|
|
|
|
|
|
|
Loss
Before Provision for Income Taxes
|
|
|
(2,665,779
|
)
|
|
|
(3,565,272
|
)
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Before Non-Controlling Interest
|
|
|
(2,665,779
|
)
|
|
|
(3,565,272
|
)
|
Net
Loss Attributable to Non-Controlling Interest
|
|
|
45,541
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Available to Common Shareholders
|
|
$
|
(2,620,238
|
)
|
|
$
|
(3,565,272
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted Net Loss per share
|
|
$
|
(0.34
|
)
|
|
$
|
(1.00
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted Weighted Average Number of common shares outstanding
|
|
|
7,722,964
|
|
|
|
3,566,488
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED MAY 31, 2020 AND 2019
|
|
Common
Stock
|
|
|
Additional
Paid-In
|
|
|
Non-
Controlling
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Interest
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- May 31, 2018
|
|
|
2,252,743
|
|
|
$
|
225
|
|
|
$
|
5,009,310
|
|
|
$
|
-
|
|
|
$
|
(9,534
|
)
|
|
$
|
5,000,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock subject to redemption not redeemed
|
|
|
112,497
|
|
|
|
11
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock redemption
|
|
|
(451,563
|
)
|
|
|
(45
|
)
|
|
|
(6,635,207
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,635,252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for advisory services
|
|
|
208,000
|
|
|
|
21
|
|
|
|
2,124,979
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued to Smaaash Founders
|
|
|
2,000,000
|
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
of Smaaash Founders shares
|
|
|
(2,000,000
|
)
|
|
|
(200
|
)
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rights
shares
|
|
|
546,150
|
|
|
|
54
|
|
|
|
383,161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
383,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares issued in acquisition
|
|
|
3,000,000
|
|
|
|
300
|
|
|
|
6,089,700
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,090,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares issued in private placement
|
|
|
962,500
|
|
|
|
96
|
|
|
|
1,924,904
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,925,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares issued from employment agreements
|
|
|
180,000
|
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting
of common shares
|
|
|
-
|
|
|
|
-
|
|
|
|
45,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for convertible note
|
|
|
193,648
|
|
|
|
20
|
|
|
|
499,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,565,272
|
)
|
|
|
(3,565,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- May 31, 2019
|
|
|
7,003,975
|
|
|
$
|
700
|
|
|
$
|
9,442,027
|
|
|
$
|
-
|
|
|
$
|
(3,574,806
|
)
|
|
$
|
5,867,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for PLAYlive Nation acquisition
|
|
|
750,000
|
|
|
|
75
|
|
|
|
1,439,925
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,440,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for vesting of employment agreement awards
|
|
|
105,000
|
|
|
|
11
|
|
|
|
153,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
153,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for cash
|
|
|
125,000
|
|
|
|
12
|
|
|
|
87,688
|
|
|
|
-
|
|
|
|
-
|
|
|
|
87,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued as compensation
|
|
|
5,000
|
|
|
|
1
|
|
|
|
5,899
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued in connection with note payable
|
|
|
-
|
|
|
|
-
|
|
|
|
2,865
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling
interest of original investment in subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,054
|
|
|
|
-
|
|
|
|
24,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to non-controlling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(45,541
|
)
|
|
|
-
|
|
|
|
(45,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,620,238
|
)
|
|
|
(2,620,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- May 31, 2020
|
|
|
7,988,975
|
|
|
$
|
799
|
|
|
$
|
11,131,404
|
|
|
$
|
(21,487
|
)
|
|
$
|
(6,195,044
|
)
|
|
$
|
4,915,672
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
YEAR
ENDED
|
|
May
31, 2020
|
|
|
May
31, 2019
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net
(loss)
|
|
$
|
(2,665,779
|
)
|
|
$
|
(3,565,272
|
)
|
Adjustments to reconcile
net (loss) income to net cash (used in) operating activities:
|
|
|
|
|
|
|
|
|
Interest earned
on marketable securities held in trust account
|
|
|
-
|
|
|
|
(403,984
|
)
|
Depreciation expense
|
|
|
57,473
|
|
|
|
5,298
|
|
Amortization expense
|
|
|
211,067
|
|
|
|
85,677
|
|
Impairment of cost
method investment
|
|
|
-
|
|
|
|
150,000
|
|
Debt forgiveness
income
|
|
|
(93,761
|
)
|
|
|
(369.206
|
)
|
Issuance of shares for services
|
|
|
161,776
|
|
|
|
2,170,110
|
|
Changes in operating
assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(127,653
|
)
|
|
|
-
|
|
Inventory
|
|
|
(15,787
|
)
|
|
|
-
|
|
Prepaid expenses
|
|
|
(5,588
|
)
|
|
|
3,170
|
|
Security deposits
|
|
|
(2,568
|
)
|
|
|
(12,318
|
)
|
Deferred brokerage
fees
|
|
|
(18,592
|
)
|
|
|
-
|
|
Deferred revenues
|
|
|
123,882
|
|
|
|
-
|
|
Accounts payable
|
|
|
123,142
|
|
|
|
-
|
|
Deferred legal fees
|
|
|
-
|
|
|
|
(100,000
|
)
|
Accrued expenses
|
|
|
729,902
|
|
|
|
641,270
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(1,522,486
|
)
|
|
|
(1,395,255
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Cash purchased in
acquisition
|
|
|
26,180
|
|
|
|
75,930
|
|
Lease liability
net of lease asset
|
|
|
(776
|
)
|
|
|
775
|
|
Investment at cost
|
|
|
-
|
|
|
|
(150,000
|
)
|
Purchase
of property and equipment
|
|
|
(163,472
|
)
|
|
|
(122,529
|
)
|
Net
cash (used in) investing activities
|
|
|
(138,068
|
)
|
|
|
(195,824
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from sale
of Private Units
|
|
|
87,700
|
|
|
|
1,925,000
|
|
Proceeds from note
payable - related party, net
|
|
|
192,048
|
|
|
|
12,143
|
|
Deferred financing
costs
|
|
|
(98,198
|
)
|
|
|
-
|
|
Non-controlling
interest of original investment in subsidiaries
|
|
|
24,054
|
|
|
|
-
|
|
Private placement
funds received
|
|
|
75,000
|
|
|
|
-
|
|
Settlement of redeemable
common stock
|
|
|
-
|
|
|
|
(46,291,685
|
)
|
Cash held in trust
account used to settle common stock redemption obligation
|
|
|
-
|
|
|
|
(7,620,432
|
)
|
Cash in trust
|
|
|
-
|
|
|
|
54,648,148
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
280,604
|
|
|
|
2,673,174
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(1,379,950
|
)
|
|
|
1,082,095
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents - beginning of period
|
|
|
1,540,158
|
|
|
|
458,063
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents - end of period
|
|
$
|
160,208
|
|
|
$
|
1,540,158
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for
interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for
income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Non-Cash Investing and Financing Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued for consideration in an acquisition
|
|
$
|
1,440,000
|
|
|
$
|
6,090,000
|
|
The
accompanying notes are an integral part of these consolidated financial statements
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
NOTE
1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity
Esports and Gaming Company F/K/A Smaaash Entertainment Inc. (the “Company,” “we,” or “our”),
was an organized as a blank check company organized under the laws of the State of Delaware on April 17, 2017. The Company was
formed under the name I-AM Capital Acquisition Company for the purpose of effecting a merger, share exchange, asset acquisition,
share purchase, reorganization or similar business combination with one or more businesses (“Business Combination”).
On November 20, 2018, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc. On January
2, 2019, the Company changed its name from Smaaash Entertainment Inc. to Simplicity Esports and Gaming Company.
Through
our wholly subsidiary, Simplicity Esports, LLC, acquired on January 2, 2019 (see Note 6). The Company has begun to implement a
unique approach to ensure the ultimate fan friendly esports experience. Our intention is to have gamers involved at the grassroots
level and feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community
and we plan to use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other
in the industry. Simplicity is an established brand in the Esports industry with an engaged fan base competing in popular games
across different genres, including PUBG, Gears of War, Smite, Guns of Boom, and multiple EA Sports titles. Additionally, the Simplicity
stream team encompasses a unique group of casters, influencers, and personalities all of whom connect to Simplicity’s dedicated
fan base. Simplicity also has begun to open and operate esports gaming centers that will provide the public an opportunity to
experience and enjoy gaming and Esports in a social setting, regardless of skill or experience.
Through our wholly owned subsidiary, PLAYlive
Nation, Inc. (“PLAYlive”), acquired on July 29, 2019 (see Note 6), the Company has a network of franchised Gaming
Centers. As May 31, 2020, approximately 43 locations were open and operating, in various states including Arizona, California,
Idaho, Florida, Maryland, Michigan, Mississippi, Montana, Oregon, South Carolina, Texas, Utah and Washington. PLAYlive offers
a video gaming lounge concept to qualified franchisees. PLAYlive currently offers single-unit location franchises as well as agreements
to develop multiple locations. This PLAYlive model is being interlaced with the esports gaming centers mentioned above to create
the ultimate gaming center.
The
Company’s sponsor was I-AM Capital Partners LLC (the “Sponsor”). The Company selected May 31 as its
fiscal year end.
Initial
Business Combination
The
Company’s management had broad discretion with respect to the specific application of the net proceeds of the Initial Public
Offering.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
On
August 21, 2018, the Company deposited into the Trust Account an aggregate of $303,610 (including interest earned on the funds
in the Trust Account available for withdrawal), representing $0.058 per public share. As a result of such payment, the Company
extended the period of time it had to consummate a Business Combination by three months to November 21, 2018.
On
November 20, 2018, the parties consummated the initial Business Combination.
Upon
consummation of the Business Combination, the Company issued 208,000 restricted shares to Chardan Capital Markets in consideration
for advisory services provided. These restricted shares are valued at $10.21 per share totaling $2,125,000 and are on the statement
of operations included in general and administrative expenses.
At
the special meeting of stockholders held on November 9, 2018, holders of 4,448,260 shares of the Company’s common stock
sold in its Initial Public Offering (“Public Shares”) exercised their right to redeem those shares for cash
at a price of $10.2187363 per share, for an aggregate of approximately $45,455,596. Immediately after giving effect to the initial
Business Combination (including as a result of the redemptions described above) the issuance of 2,000,000 shares of common stock
to the Smaaash founders, the issuance of 520,000 shares of common stock upon conversion of the rights at the Closing and the issuance
of 208,000 shares of common stock to Chardan Capital Markets as consideration for services), there were 5,119,390 shares of common
stock and warrants to purchase approximately 5,461,500 shares of common stock issued and outstanding. Upon the Closing, the Company’s
rights ceased to exist, and its common stock and warrants began trading on The Nasdaq Stock Market (“Nasdaq”).
On the Closing Date, the Company entered into
a master franchise agreement (“Master Franchise Agreement”) and a master license and distribution agreement (“Master
Distribution Agreement”) with Smaaash. As of May 31, 2020, the Master Franchise Agreement and Master Distribution
Agreement continue to be in effect.
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying consolidated financial statements are presented in U.S. dollars in conformity with accounting principles generally
accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”).
Emerging
Growth Company
Section
102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from
being required to comply with new or revised financial accounting standards until private companies (that is, those that have
not had a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), declared effective
or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect
to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but
any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which
means that when a standard is issued or revised and it has different application dates for public or private companies, the Company,
as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
Basis
of Consolidation
The
consolidated financial statements include the operations of the Company and its wholly owned subsidiaries, Simplicity Esports,
LLC, PLAYlive Nation, Inc., and PLAYlive Nation Holdings, LLC, its 90% owned subsidiary Simplicity One Brasil Ltd, and its 79%
owned subsidiaries Simplicity Happy Valley, LLC and Simplicity Redmond, LLC.
In
November 2019, the Company organized Happy Valley, LLC and Redmond, LLC for the purpose of converting franchised stores into
Company owned stores.
All
significant intercompany accounts and transactions have been eliminated in consolidation.
Cash
and cash equivalents
The
Company considers short-term interest-bearing investments with initial maturities of three months or less to be cash equivalents.
The Company has no cash equivalents.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution,
which at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these
accounts and management believes the Company is not exposed to significant risks on such accounts.
Financial
Instruments
The fair value of the Company’s assets
and liabilities, which qualify as financial instruments under Financial Accounting Standards Board’s (“FASB”)
Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” approximates
the carrying amounts represented in the consolidated balance sheet.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires the Company’s management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue
Recognition
As
of January 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) (“ASC 606”). The new guidance
sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and
is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the
transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the
goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that
were not addressed completely in the prior accounting guidance. The Company adopted the standard using the modified retrospective
method and the adoption did not have a material impact on its financial statements.
The
Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product
sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the
Company expects to receive in exchange for transferring goods and services.
The
following describes principal activities, separated by major product or service, from which the Company generates its revenues.
Company-owned
Stores Sales
The
Company-owned stores principally generate revenue from retail esports gaming centers. Revenues from Company-owned stores are recognized
when the products are delivered, or the service is provided.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Franchise
Royalties and Fees
Franchise
royalties which are based on eight percent of franchise store sales after a minimum level of sales occur and are recognized as
sales occur. Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive
for other behaviors are recognized at the same time as the related royalty as they are not separately distinguishable from the
full royalty rate. Franchise royalties are billed on a monthly basis.
The
Company recognizes initial franchise license fee revenue, when the Company has performed substantially all the services required
in the franchise agreement. Fees received that do not meet these criteria are recorded as deferred revenues until earned. The
pre-opening services provided to franchisees do not contain separate and distinct performance obligations from the franchise right;
thus, the fees collected will be amortized on a straight-line basis beginning at the store opening date through the term of the
franchise agreement, which is typically 10 years. Franchise license renewal fees, which generally occur every 10 years, are billed
before the renewal date. Fees received for future license renewal periods are amortized over the life of the renewal period.
The
Company offers various incentive programs for franchisees including royalty incentives, new store opening incentives (i.e. development
incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned
or granted under these programs that are in the form of discounts.
Commissary
sales are comprised of food and supplies sold to franchised stores and are recognized as revenue upon shipment or delivery of
the related products to the franchisees. Payments are generally due within 30 days.
Fees
for information services, including software maintenance fees, marketing fees and website maintenance, graphic and promotion fees
are recognized as revenue as such services are provided.
Esports
Revenue
Esports revenue is a form of competition using
video games. Most commonly, esports takes the form of organized, single player and multiplayer video game competitions, particularly
between professional players, individually or as teams. Revenues from Esports revenue are recognized when the competition is completed,
and prize money is awarded. Revenues earned from league sponsorships from the Company’s share of league revenues including
domestic esports teams competing in games such as Overwatch, Apex Legends, PUBG and more are included here. Revenue from international
esports teams including Flamengo esports are included here. League revenues are earned through sponsorship fees on a per tournament,
or per season basis. As of March 22, 2020, the Company commenced weekly online esports tournaments promoted directly to its existing
customer base. Revenue from these weekly tournaments, comprised of registration fees on a per player basis, is included here.
Deferred
Revenues
Deferred
revenues are classified as current or long-term based on when management estimates the revenues will be recognized.
The
Company receives payments from franchisees in advance of all performance obligations having been met, including but not limited
to franchise locations being opened. As certain conditions agreed to in these franchise agreements are performed, revenues are
recognized.
Deferred
costs include commissions paid to brokers related to the sale of specific new franchises which have not met revenue recognition
criteria as of May 31, 2020. These costs are recognized in the same period as the initial franchise fee revenue is recognized.
Accounts
Receivable
The
Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e. franchisees), taking into
consideration the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable are written
off against the allowance when management determines it is probable the receivable is worthless. Customer account balances with
invoices dated over 90 days old are considered delinquent and considered in the allowance assessment. The Company performs credit
evaluations of its customers and, generally, requires no collateral. Management has assessed accounts receivable as of May 31,
2020, and an allowance for doubtful accounts of approximately $52,400 has been recorded
Property
and equipment
Property
and equipment and leasehold improvements are recorded at its historical cost. The cost of property and equipment is depreciated
over the estimated useful lives, when placed in service, (ranging from 3 -5 years) of the related assets utilizing the straight-line
method of depreciation. The cost of leasehold improvements is depreciated (amortized) over the lesser of the length of the related
leases or the estimated useful lives of the assets. Ordinary repairs and maintenance are expensed when incurred and major repairs
will be capitalized and expensed if it benefits future periods.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Intangible
Assets and impairment
Intangible
assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. These costs were
included in intangible assets on our balance sheet and amortized on a straight-line basis when placed into service over the estimated
useful lives of the costs, which is 3 to 5 years.
The
Company periodically reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less that the carrying amount of the asset. The amount of impairment is measured as the difference
between the asset’s estimated fair value and its book value.
Goodwill
Goodwill
is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill,
but we assess our goodwill for impairment at least annually. Our assessment date was May 31, 2020, and quantitative and
qualitative considerations indicated no impairment.
Franchise
Locations
Through
PLAYlive, the Company’s wholly owned subsidiary, the Company has entered into franchise agreements with third parties.
As May 31, 2020, approximately 43 locations were open and operating, in various states including Arizona, California, Idaho, Florida,
Maryland, Michigan, Mississippi, Montana, Oregon, South Carolina, Texas, Utah and Washington.
Stock-based
compensation
The
Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation and ASC 505-50,
Equity-Based Payments to Non-Employees. All transactions in which goods or services are the consideration received for
the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of
the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the
services received as consideration are measured and recognized based on the fair value of the equity instruments issued and are
recognized over the employees required service period, which is generally the vesting period.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Amendments
to Forward Purchase Agreements and Warrants
On
December 20, 2018, the Company, Polar, K2 and the Escrow Agent, entered into an Amendment (the “Amendment”), pursuant
to which, among other things, the stock purchase agreements with Polar and K2 were amended to (x) reduce the purchase price per
share payable by the Company at the closing of the Stock Sales from $11.23 per share to (1) first $6.00 per share up to 20% of
the original number of Shares (as defined in the respective Purchase Agreement), (2) then $5.00 per remaining share up to 20%
of the original number of Shares, (3) then $4.00 per remaining share up to 20% of the original number of Shares, (4) then $3.00
per remaining Share up to 20% of the original number of Shares, and (5) then $2.00 per remaining Share up to 20% of the original
number of Shares, (y) to extend the outside date of the closing of the Stock Sales until January 18, 2019, and (z) to authorize
the issuance of $3,542,700 and $1,590,600 from the Escrow Account to Polar and K2, respectively, as partial payment for the Shares
prior to the final closing of the Stock Sales.
Investments
Investments
in non-consolidated entities are accounted for using the equity method or cost basis depending upon the level of ownership and/or
the Company’s ability to exercise significant influence over the operating and financial policies of the investee. When
the equity method is used, investments are recorded at original cost and adjusted periodically to recognize the Company’s
proportionate share of the investees’ net income or losses after the date of investment. When net losses from an investment
accounted for under the equity method exceed its carrying amount, the investment balance is reduced to zero and additional losses
are not provided for. The Company resumes accounting for the investment under the equity method if the entity subsequently reports
net income and the Company’s share of that net income exceeds the share of net losses not recognized during the period the
equity method was suspended. Investments are written down only when there is clear evidence that a decline in value that is other
than temporary has occurred.
Investments
in equity securities that do not have readily determinable fair values and do not qualify for consolidation or the equity method
are carried at cost. Dividends received from those companies are included in other income. Dividends received in excess of the
Company’s proportionate share of accumulated earnings are applied as a reduction of the cost of the investment. Other than
temporary impairments to fair value are charged against current period income. Our investments in privately held entities are
accounted for under the cost method. During the quarter ended February 28, 2019 the Company recognized $150,000 of impairment
expense related to the Smaaash acquisition.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Leases
In February of 2016, the FASB issued Accounting
Standards Update (“ASU”) No. 2016-02-Leases (Topic 842), which significantly amends the way companies are required
to account for leases. Under the updated leasing guidance, some leases that did not have to be reported previously are now required
to be presented as an asset and liability on the balance sheet. In addition, for certain leases, what was previously classified
as an operating expense must now be allocated between amortization expense and interest expense. The Company adopted this update
as of January l, 2019 using the modified retrospective transition method and prior periods have not been restated. Upon implementation,
the Company recognized initial operating lease right-of-use assets of $110,003 and operating lease liabilities of $107,678. Due
to the simplistic nature of the Company’s leases, no retained earnings adjustment was required. See Note 9 for further details.
Deferred
Financing Costs
The
Company complies with the requirements of ASC 340-10-S99-1 and SEC Staff Accounting Bulletin (SAB) Topic 5A — “Expenses
of Offering”. Offering costs of $98,198 consisting principally of legal and professional fees have been recorded as an asset
as of May 31, 2020, these amounts will be charged to additional paid in capital upon the completion of the Company’s
ongoing Public Offering.
Basic
Income (Loss) per share
The
Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Net income (loss)
per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the
period. Diluted earnings or loss per common share is calculated by dividing net income or loss available to common stockholders
by the diluted weighted-average number of common shares outstanding, which includes the effect of potentially dilutive securities.
Potentially dilutive securities for this calculation consist primarily of warrants, outstanding options, and shares into which
the convertible notes are convertible.
When
the Company records a loss from operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from
the calculation of diluted net loss per common share.
Income
Taxes
The
Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires
an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities
are computed for differences between the financial statements and tax bases of assets and liabilities that will result in future
taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected
to be realized.
ASC
Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities.
On
December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was signed into law. As a result of Tax Reform,
the U.S. statutory tax rate was lowered from 35% to 21% effective January 1, 2018, among other changes. ASC Topic 740 requires
companies to recognize the effect of tax law changes in the period of enactment; therefore, the Company was required to revalue
its deferred tax assets and liabilities at the new rate. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”)
to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared,
or analyzed (including computations) in reasonable detail to complete the accounting for certain tax effects of Tax Reform. The
ultimate impact may differ from this provisional amount, possibly materially, as a result of additional analysis, changes in interpretations
and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a
result of Tax Reform.
Recent
Accounting Pronouncements
Accounting
standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future
financial statements. The following are a summary of recent accounting developments.
In
June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which aligns accounting for share-based payments issued to nonemployees to that of employees under the
existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to
nonemployees under Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. This guidance is effective for
the Company as of January 1, 2019. Based on the completed analysis, the Company has determined the adjustment did not have
a material impact on the financial statements.
The
Company periodically reviews new accounting standards that are issued. Although some of these accounting standards may be applicable
to the Company, the Company has not identified any other new standards that it believes merit further discussion, and the Company
expects that none would have a significant impact on its financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
In February 2016, the FASB issued ASU No.
2016-02, Leases (Topic 842), followed by other related ASUs that provided targeted improvements and additional practical expedient
options (collectively “ASC 842”). ASC 842 requires lessees to recognize right-of-use (“ROU”) assets and
lease payment liabilities on the balance sheet for leases representing the Company’s right to use the underlying assets
over the lease term. Each lease that is recognized on the balance sheet is classified as either finance or operating, with such
classification affecting the pattern and classification of expense recognition in the Statements of Operations and presentation
within the Statements of Cash Flows.
The
Company adopted ASC 842 on January 1, 2019 using the modified retrospective method. The Company elected as part of its adoption
to also use the optional transition methodology whereby previously reported periods continue to be reported in accordance with
historical accounting guidance for leases that were in effect for those prior periods. Policy elections and practical expedients
that the Company has implemented as part of adopting ASC 842 include (a) excluding from the balance sheet leases with terms that
are less than or equal to one year, (b) for all existing asset classes that contain both lease and non-lease components, combining
these components together and accounting for them as a single lease component, (c) the package of practical expedients, which
among other things, allows the Company to avoid reassessing contracts that commenced prior to adoption that were properly evaluated
under legacy GAAP, and (d) excluding land easements, which were not accounted for under the previous leasing guidance, that existed
or expired before adoption of ASC 842. The scope of ASC 842 does not apply to leases used in the exploration for minerals or use
thereof, including oil, natural gas and natural gas liquids.
The
Company’s adoption of ASC 842 resulted in an increase in other assets, accounts payable and accrued liabilities, and other
liabilities line items on the accompanying Consolidated Balance Sheets as a result of the additional ROU assets and related
lease liabilities. Upon adoption on January 1, 2019, the Company recognized approximately $0.5 million in ROU assets and liabilities
for its operating leases. There was no cumulative effect to accumulated deficit upon the adoption of this guidance.
Going
Concern, Liquidity and Management’s Plan
The
Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which
contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As
reflected in the consolidated financial statements, the Company has an accumulated deficit as of May 31, 2020, a net loss
and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the
Company’s ability to continue as a going concern within one year from the of the date that the financial statements are
issued.
The Company’s cash position may not
be sufficient to support the Company’s daily operations. Management plans to raise additional funds by way of a private
or ongoing public offering. While the Company believes in the viability of its strategy and its ability to generate sufficient
revenue and to raise additional funds, there can be no assurances to that effect. Should the Company fail to raise additional
capital, it may be compelled to reduce the scope of its planned future business activities.
The
ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business
plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings.
The
consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded
asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue
as a going concern.
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Because
COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities
have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more
restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity
Gaming Centers had been closed effective April 1, 2020. Although our franchise agreements with franchisees of Simplicity Gaming
Centers require a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised Simplicity Gaming
Centers are operating, there is a potential risk that franchisees of Simplicity Gaming Centers will default in their obligations
to pay their minimum monthly royalty payment to us. As of May 31, 2020, some of our franchised gaming centers have begun to re-open.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date impacted the Company’s business for the fiscal fourth quarter and potentially beyond. Management
expects that all of its business segments, across all of its geographies, will be impacted to some degree, but the significance
of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot
be determined at this time.
NOTE
3 — INITIAL PUBLIC OFFERING AND PRIVATE PLACEMENT
Initial
Public Offering
On
August 22, 2017, the Company sold 5,000,000 Public Units at a purchase price of $10.00 per Public Unit in the Initial Public Offering,
generating gross proceeds of $50.0 million. The Company incurred offering costs of approximately $3.7 million, inclusive of approximately
$3.2 million of underwriting fees. The Company paid $1 million of underwriting fees upon the closing of the Initial Public Offering,
issued 50,000 shares of common stock for underwriting fees, and deferred $1.82 million of underwriting fees until the consummation
of the initial Business Combination.
Each
Unit consisted of one share of the Company’s common stock, one right to receive one-tenth of one share of the Company’s
common stock upon consummation of the Company’s initial Business Combination (“Right”), and one redeemable warrant
(“Warrant”). Each Warrant entitles the holder to purchase one share of common stock at an exercise price of $11.50
per share, subject to adjustment. No fractional shares will be issued upon exercise of the Warrants. The Warrants became exercisable
30 days after the completion of the initial Business Combination and will expire five years after the completion of the initial
Business Combination or earlier upon redemption or liquidation.
The
Company may redeem the Warrants, in whole and not in part, at a price of $0.01 per Warrant upon 30 days’ notice (“30-day
redemption period”), only in the event that the last sale price of the common stock equals or exceeds $21.00 per share for
any 20 trading days within a 30-trading day period ending on the third trading day prior to the date on which notice of redemption
is given, provided there is an effective registration statement with respect to the shares of common stock underlying such Warrants
and a current prospectus relating to those shares of common stock is available throughout the 30-day redemption period. If the
Company calls the Warrants for redemption as described above, the Company’s management will have the option to require all
holders that wish to exercise Warrants to do so on a “cashless basis.” In determining whether to require all holders
to exercise their warrants on a “cashless basis,” management will consider, among other factors, the Company’s
cash position, the number of Warrants that are outstanding and the dilutive effect on the Company’s stockholders of issuing
the maximum number of shares of common stock issuable upon the exercise of the Warrants.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Each
holder of a Right received one-tenth (1/10) of one share of common stock upon consummation of the Business Combination. No fractional
shares were issued upon exchange of the Rights. No additional consideration was paid by a holder of Rights in order to receive
its additional shares upon consummation of the Business Combination as the consideration related thereto has been included in
the Unit purchase price paid for by investors in the Initial Public Offering.
The
Company granted the underwriters a 45-day option to purchase up to 750,000 additional Public Units to cover any over-allotment,
at the initial public offering price less any underwriting discounts and commissions. On September 13, 2017, the underwriters
purchased 200,000 additional Public Units for gross proceeds of $2,000,000, less commissions of $110,000, of which
$70,000 are deferred.
The
Company issued Maxim Group LLC (“Maxim”), as compensation for the Initial Public Offering, an aggregate of 52,000
shares, including 2,000 shares issued in connection with the partial exercise of the over-allotment option. The Company accounted
for the fair value of these shares as an expense of the Initial Public Offering resulting in a charge directly to stockholders’
equity.
Settlement
Agreement
On
November 20, 2018, the Company entered into a settlement and release agreement (“Settlement Agreement”) with
Maxim. Pursuant to the Settlement Agreement, the Company made a cash payment of $20,000 to Maxim and issued the Note in favor
of Maxim in order to settle the payment obligations of the Company under the underwriting agreement dated August 16, 2017, by
and between the Company and Maxim. The Company also agreed to remove the restrictive legends on an aggregate of 6,500 (52,000
pre-reverse split) shares of its common stock held by Maxim and its affiliate. See “Note Payable” under Note 8
below.
Unit
Purchase Option
At
the time of the closing of the Initial Public Offering, the Company sold to Maxim, for an aggregate of $100, an option (the “UPO”)
to purchase 250,000 Units (which increased to 260,000 units upon the partial exercise of the underwriters’ over-allotment
option). The Company has accounted for the fair value of the UPO, inclusive of the receipt of the $100 cash payment, as an expense
of the Initial Public Offering resulting in a charge directly to shareholders’ equity. The Company estimates that the fair
value of this UPO is approximately $743,600 (or $2.86 per Unit) using the Black-Scholes option-pricing model. The fair value of
the UPO is estimated as of the date of grant using the following assumptions: (1) expected volatility of 35%, (2) risk-free interest
rate of 1.73% and (3) expected life of five years. The UPO may be exercised for cash or on a “cashless” basis, at
the holder’s option (except in the case of a forced cashless exercise upon the Company’s redemption of the Warrants,
as described above), such that the holder may use the appreciated value of the UPO (the difference between the exercise prices
of the UPO and the underlying Warrants and Rights, and the market price of the Units and underlying shares of common stock) to
exercise the UPO without the payment of any cash. The Company will have no obligation to net cash settle the exercise of the UPO
or the Warrants or Rights underlying the UPO. The holder of the UPO will not be entitled to exercise the UPO or the Warrants or
Rights underlying the UPO unless a registration statement covering the securities underlying the UPO is effective or an exemption
from registration is available. If the holder is unable to exercise the UPO or underlying Warrants or Rights, the UPO, Warrants
or Rights, as applicable, will expire worthless.
The
Company granted the holders of the UPO, demand and “piggy back” registration rights for periods of five and seven
years, respectively, from the effective date of the registration statement relating to the Initial Public Offering, including
securities directly and indirectly issuable upon exercise of the UPO.
Private
Placement
Concurrently
with the closing of the Initial Public Offering, the Sponsor purchased an aggregate of 254,500 Private Units at $10.00 per Private
Unit, generated gross proceeds of $2,545,000 in a Private Placement. The proceeds from the Private Units was added to the proceeds
from the Initial Public Offering held in the Trust Account. The Private Units (including their component securities) were not
transferable, assignable or salable until 30 days after the completion of the initial Business Combination and the warrants included
in the Private Units (the “Private Placement Warrants”) will be non-redeemable so long as they are held by the Sponsor
or their permitted transferees. If the Private Placement Warrants are held by someone other than the Sponsor or their permitted
transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis
as the Warrants included in the Public Units sold in the Initial Public Offering. Otherwise, the Private Placement Warrants and
the Rights underlying the Private Units have terms and provisions that are identical to those of the Warrants and Rights, respectively,
sold as part of the Public Units in the Initial Public Offering and have no net cash settlement provisions.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
On
September 13, 2017, the Sponsor purchased 7,000 additional Private Units for gross proceeds of $70,000 upon the partial
exercise of the over-allotment option.
NOTE
4 - PROPERTY, PLANT AND EQUIPMENT
The
following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
|
|
May
31,
2020
|
|
Leasehold improvements
|
|
|
52,189
|
|
Property and
equipment
|
|
|
243,314
|
|
|
|
|
|
|
Total cost
|
|
|
295,503
|
|
|
|
|
|
|
Less accumulated
depreciation
|
|
|
(62,770
|
)
|
|
|
|
|
|
Net, property
plant and equipment
|
|
$
|
232,733
|
|
Depreciation
expense for the years ended May 31, 2020, and 2019 was $57,473 and $5,297, respectively.
NOTE
5 - INTANGIBLE ASSETS
The
following tables set forth the intangible assets, including accumulated amortization at May 31, 2020:
|
|
May
31, 2020
|
|
|
|
Remaining
|
|
|
|
|
Accumulated
|
|
|
Net
Carrying
|
|
|
|
Useful
Life
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
Non-Competes
|
|
4.50 years
|
|
$
|
1,023,118
|
|
|
$
|
289,884
|
|
|
$
|
733,234
|
|
Trademarks
|
|
Indefinite
|
|
|
866,000
|
|
|
|
-
|
|
|
|
866,000
|
|
Customer Contracts
|
|
10 years
|
|
|
546,000
|
|
|
|
5,443
|
|
|
|
540,557
|
|
Internet domain
|
|
2.50 years
|
|
|
3,000
|
|
|
|
1,417
|
|
|
|
1,583
|
|
|
|
|
|
$
|
2,438,118
|
|
|
$
|
296,744
|
|
|
$
|
2,141,374
|
|
The
following table sets forth the future amortization of the Company’s intangible assets at May 31, 2020:
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Thereafter
|
|
|
Total
|
|
Non-Competes
|
|
$
|
204,624
|
|
|
$
|
204,624
|
|
|
$
|
204,624
|
|
|
$
|
119,362
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
733,234
|
|
Customer contracts
|
|
|
54,600
|
|
|
|
54,600
|
|
|
|
54,600
|
|
|
|
54,600
|
|
|
|
54,600
|
|
|
|
267,557
|
|
|
|
540,557
|
|
Internet
domain
|
|
|
1,000
|
|
|
|
583
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,583
|
|
Total
|
|
$
|
260,224
|
|
|
$
|
259,807
|
|
|
$
|
259,224
|
|
|
$
|
173,962
|
|
|
$
|
54,600
|
|
|
$
|
267,557
|
|
|
$
|
1,275,374
|
|
Amortization
expense for the years ended May 31, 2020, and 2019 was $211,067 and $85,677, respectively.
Goodwill
The Company’s goodwill carrying amounts
relate to the acquisitions of Simplicity Esports LLC and PLAYlive Nation Inc. The composition of the goodwill balance, is as follows:
|
|
Fiscal
Year
Ended
May 31, 2020
|
|
|
Fiscal
Year
Ended
May 31, 2019
|
|
|
|
|
|
|
|
|
Simplicity
Esports LLC
|
|
$
|
4,456,250
|
|
|
$
|
4,456,250
|
|
PLAYlive
Nation Inc.
|
|
|
698,891
|
|
|
|
-
|
|
Total
Goodwill
|
|
$
|
5,155,141
|
|
|
$
|
4,456,250
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
NOTE
6 - ACQUISITIONS
The
Simplicity Esports, LLC Acquisition
On
January 4, 2019, the Company consummated the transactions contemplated by the share exchange agreement, dated December 21, 2018
(as amended by Amendment No. 1 to Share Exchange Agreement, dated December 28, 2018 and by Amendment No. 2 to Share Exchange Agreement,
dated December 30, 2018, the “Share Exchange Agreement”) by and among the Company, Smaaash Entertainment, Inc. (“Smaaash”),
each of the equity holders of Simplicity (“Simplicity Owners”) and Jed Kaplan, in the capacity as the representative
of the Simplicity Owners (the “Representative”). Pursuant to the Share Exchange Agreement the Simplicity Owners transferred
all the issued and outstanding equity interests of Simplicity to the Company in exchange for newly issued shares of common stock
of the Company (the “Acquisition”).
The
Simplicity Owners received an aggregate of 300,000 shares of common stock at the closing of the Acquisition and an additional
aggregate of 700,000 shares of common stock on January 7, 2019 and the remaining 2,000,000 shares in March of 2019.
The
acquisition of Simplicity, in an all-stock deal, creates a pure play esports team and entertainment platform opportunity, which
we believe will increase shareholder value and boost our growth strategy as we endeavor the build out of our brick and mortar
esports centers.
The
acquisition was accounted for by the Company using the acquisition method under business combination accounting. Under this method,
the purchase price paid by the acquirer is allocated to the assets acquired and liabilities assumed as of the acquisition date
based on the fair value. Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often
involves the use of significant estimates and assumptions. All fair value measurements of acquired assets and liabilities assumed
are non-recurring in nature and classified as level 3 on the fair value hierarchy.
The
aggregate purchase price consisted of the following:
Restricted
stock consideration
|
|
|
6,090,000
|
|
Total
|
|
$
|
6,090,000
|
|
As
noted in the table above, the Company issued 3,000,000 restricted shares of common stock as consideration which was valued at
market at the date of the closing, fair value of approximately $6,090,000.
The
following table summarizes the estimated fair value of The Simplicity Esports, LLC assets acquired, and liabilities assumed
at the date of acquisition:
Cash
|
|
|
76,000
|
|
Internet Domain
|
|
|
3,000
|
|
Trade names and trademarks
|
|
|
588,000
|
|
Non-Competes
|
|
|
1,023,118
|
|
Accounts payable and accrued liabilities
|
|
|
(56,000
|
)
|
Goodwill
|
|
|
4,455,882
|
|
Total
|
|
$
|
6,090,000
|
|
Revenue
and net loss included in the year ended May 31, 2020, consolidated financial statements attributable to Simplicity Esports,
LLC is approximately $38,000 and $400,000, respectively.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
PLAYlive
Nation Acquisition
On
July 29, 2019, the Company entered into a definitive agreement to acquire PLAYlive for total consideration of 750,000 shares of
common stock. The PLAYlive acquisition closed on July 30, 2019.
The acquisition was accounted for by the
Company using the acquisition method under business combination accounting. Under this method, the purchase price paid by the
acquirer is allocated to the assets acquired and liabilities assumed as of the acquisition date based on the fair value. Determining
the fair value of certain assets and liabilities assumed is judgmental in nature and often involves the use of significant estimates
and assumptions. All fair value measurements of acquired assets and liabilities assumed are non-recurring in nature and classified
as level 3 on the fair value hierarchy.
The
aggregate purchase price consisted of the following:
Restricted
stock consideration
|
|
|
1,440,000
|
|
Total
|
|
$
|
1,440,000
|
|
As
noted in the table above, the Company issued 750,000 restricted shares of common stock as consideration which was valued at market
at the date of the closing, fair value of approximately $1,440,000.
The
following table summarizes the estimated fair value of the PLAYlive assets acquired and liabilities assumed at the date of acquisition:
Cash
|
|
|
26,000
|
|
Property, plant and equipment
|
|
|
10,000
|
|
Net deferred revenue
|
|
|
(115,000
|
)
|
Customer
relationships
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
(4,000
|
)
|
Goodwill
|
|
|
699,000
|
|
Trademarks
|
|
|
278,000
|
|
Customer contracts
|
|
|
546,000
|
|
Total
|
|
$
|
1,440,000
|
|
Revenue
and net loss included in the year ended May 31, 2020, consolidated financial statements attributable to PLAYlive is approximately
$442,000 and $72,000, respectively.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
NOTE
7 — RELATED PARTY TRANSACTIONS
Private
Units
In
addition, the Sponsor purchased an aggregate of 254,500 Private Units at $10.00 per Private Unit for proceeds of $2,545,000 in
the aggregate in the Private Placement. This purchase took place on a private placement basis simultaneously with the completion
of the Initial Public Offering. This issuance was be made pursuant to the exemption from registration contained in Section 4(a)(2)
of the Securities Act.
The
Sponsor committed to purchase from the Company up to an additional 26,250 Private Units if the underwriters’ over-allotment
option was exercised in full.
On
September 13, 2017, 7,000 additional Private Units were purchased by the Sponsor at $10.00 per Private Unit upon the partial exercise
of the over-allotment option.
Kaplan
Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, the Company’s Chief Executive Officer, interim Chief Financial Officer, member of
the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on the first business
day following the 150-day anniversary of the Issue Date (the “Maturity Date”). The Company will use the proceeds of
the Kaplan Note to fund the operations of Simplicity One Brasil Ltda, the Company’s majority owned subsidiary (“Simplicity
Brasil”). As of May 31, 2020, advances under the terms of this note were $64,728 (Note 8).
Equity
Sales
On
May 7, 2020, we authorized the sale of 22,936 shares of our restricted Common Stock at $1.09 per share to William
H. Herrmann, Jr. a member of our board of directors for $25,000 (Note 10).
The
Company maintains its cash balance at a financial services company that is owned by an officer of the Company.
Sponsor
Fees
The
Company agreed, commencing on the effective date of the Initial Public Offering through the earlier of the Company’s consummation
of a Business Combination or its liquidation, to pay the Sponsor a monthly fee of $10,000 for office space, utilities and secretarial
and administrative support. For the three months ended November 30, 2018, the Company paid $30,080 which is presented as general
and administrative expense on the accompanying statement of operations. In December 2018, this monthly administrative service
fee agreement was terminated.
The
Company maintains its cash balance at a financial services company that is owned by an officer of the Company.
NOTE
8 – DEBT
The
table below presents outstanding debt instruments as of May 31:
|
|
2020
|
|
|
2019
|
|
Sponsor loan
|
|
$
|
-
|
|
|
$
|
93,761
|
|
10% Fixed Convertible Promissory Note
|
|
|
152,500
|
|
|
|
-
|
|
Less Discount
|
|
|
(25,180
|
)
|
|
|
-
|
|
Related Party Note
|
|
|
64,728
|
|
|
|
-
|
|
Convertible
Note Payable
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,192,048
|
|
|
$
|
1,093,761
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Sponsor
Loan
The
Sponsor loaned the Company $201,707 in the aggregate, to be used for a portion of the expenses of the Initial Public Offering
and working capital purposes. The loan is non-interest bearing, unsecured and due at the earlier of December 31, 2017 or the closing
of the Initial Public Offering. As of May 31, 2020, and 2019, the balance of the Sponsor loan was $0 and $93,761,
respectively.
10%
Fixed Convertible Promissory Note
On
April 29, 2020 (the “Effective Date”), the Company issued a 10% Fixed Convertible Promissory Note (the “Harbor
Gates Note”), with a maturity date of October 29, 2020 (the “Maturity Date”), in the principal sum of $152,000
in favor of Harbor Gates Capital, LLC (“Harbor Gates”). Pursuant to the terms of the Harbor Gates Note, the Company
agreed to pay to Harbor Gates $152,500 (the “Principal Sum”) and to pay “guaranteed” interest on the principal
balance at an amount equivalent to 10% of the Principal Sum, to the extent such Principal Sum and “guaranteed” interest
and any other interest, fees, liquidated damages and/or items due to Harbor Gates have not been repaid or converted into Company
common stock in accordance with the terms of the Harbor Gates Note. The Harbor Gates Note carries an original issue discount (“OID”)
of $2,500. Accordingly, on the Effective Date, Harbor Gates delivered $150,000 to the Company in exchange for the Harbor Gates
Note.
In
addition to the “guaranteed” interest, and upon the occurrence of an Event of Default (as hereinafter defined), additional
interest will accrue from the date of the Event of Default at the rate equal to the lower of 20% per annum or the highest rate
permitted by law.
The
Company may prepay the Harbor Gates Note according to the following schedule:
Days
Since
Effective Date
|
|
Payment
Amount
|
Under
30
|
|
115%
of Principal Amount (as hereinafter defined) so paid
|
31-60
|
|
120%
of Principal Amount so paid
|
61-90
|
|
125%
of Principal Amount so paid
|
91-180
|
|
135%
of Principal Amount so paid
|
135%
of the remaining unpaid and unconverted Principal Amount, plus all accrued and unpaid interest will be due and payable on the
Maturity Date. “Principal Amount” refers to the sum of (i) the original principal amount of the Harbor Gates Note
(including the OID, prorated if the Harbor Gates Note has not been funded in full); (ii) all guaranteed and other accrued but
unpaid interest under the Harbor Gates Note; (iii) any fees due under the Harbor Gates Notes; (iv) liquidated damages; and (v)
any default payments owing under the Harbor Gates Note, in each case previously paid or added to the Principal Amount.
Pursuant
to the terms of the Harbor Gates Note, the Company agreed to issue Harbor Gates shares of Company common stock in two tranches
as follows:
|
(i)
|
10,000
shares of common stock within three trading days of the Effective Date; and
|
|
(ii)
|
In
the event the average of the three volume weighted average prices for the Company’s common stock during the three consecutive
trading days immediately preceding the date which is the 180th day following the Effective Date is less than $1.00
per share, then Harbor Gates will be entitled, and the Company will issue to Harbor Gates additional shares of common stock
as set forth in the Harbor Gates Note.
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
If
an Event of Default (as defined in the Promissory Note) occurs, the outstanding Principal Amount of the Harbor Gates Note owing
in respect thereof through the date of acceleration, shall become, at Harbor Gates’ election, immediately due and payable
in cash at the “Mandatory Default Amount”. The Mandatory Default Amount means 35% of the outstanding Principal Amount
of the Harbor Gates Note will be automatically added to the Principal Sum of the Harbor Gates Note and tack back to the Effective
Date for purposes of Rule 144 promulgated under the 1934 Act. Commencing five days after the occurrence of any Event of Default
that results in the eventual acceleration of the Harbor Gates Note, the Harbor Gates Note will accrue additional interest, in
addition to the Harbor Gates Note’s “guaranteed” interest, at a rate equal to the lesser of 20% per annum or
the maximum rate permitted under applicable law.
If
the Harbor Gates Note is not retired on or before the Maturity Date, then at any time and from time to time after the Maturity
Date, and subject to the terms hereof and restrictions and limitations contained in the Harbor Gates Note, Harbor Gates has the
right, at Harbor Gates’ sole option, to convert in whole or in part the outstanding and unpaid Principal Amount under the
Harbor Gates Note into shares of the Company’s common stock at the Variable Conversion Price. The “Variable Conversion
Price” will be equal to the lower of: (a) $1.00, or (b) 70% of the lowest volume weighted average price of the Company’s
common stock during the 15 consecutive trading days prior to the date on Harbor Gates elects to convert all or part of the Harbor
Gates Note. The Company intends to prepay the Harbor Gates Note in accordance with its terms so that no amount under the Harbor
Gates Note is converted into shares of the Company’s common stock.
This
note along with guaranteed interest of $15,000 was repaid on July 2, 2020.
Kaplan
Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, the Company’s Chief Executive Officer, interim Chief Financial Officer, member of
the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on the first business
day following the 150-day anniversary of the Issue Date (the “Maturity Date”). The Company will use the proceeds of
the Kaplan Note to fund the operations of Simplicity One Brasil Ltda, the Company’s majority owned subsidiary (“Simplicity
Brasil”).
Pursuant
to the terms of the Kaplan Note, the Company agreed to pay to Mr. Kaplan the lesser of (i) the principal sum of $90,000 (the “Maximum
Commitment”), or (ii) the aggregate principal amount of all direct advances of the proceeds of the Kaplan Note (each, an
“Advance”), together with any interest thereon, and any and all other amounts which may be due and payable thereunder
from time to time.
Subject
to the terms of the Kaplan Note, Mr. Kaplan agreed to make one direct Advance to and for the benefit of the Company on the Issue
Date in the amount of $45,000, and one additional Advance to and for the benefit of the Company at such time as the Company may
request during the two month period following the Issue Date. The total of the aggregate principal balance of all Advances (collectively
referred to herein as the “Principal Amount”) outstanding at any time shall not exceed the Maximum Commitment. Advances
made by Mr. Kaplan to the Company under the Kaplan Note which have been repaid may not be borrowed again.
Prior
to the Maturity Date or an Event of Default (as hereinafter defined), the Principal Amount outstanding under the Kaplan Note will
bear interest at a rate of 3% (the “Interest Rate”). From and after the Maturity Date or upon and during the continuance
of an Event of Default, interest will accrue on the unpaid Principal Amount during any such period at an annual rate (the “Default
Rate”) equal to 10% plus the Interest Rate; provided, however, that in no event will the Default Rate exceed the maximum
rate permitted by law.
The
Company may prepay the Kaplan Note, in whole or in part, without a prepayment penalty, at any time provided that an Event of Default
has not then occurred.
As
of May 31, 2020, advances under the terms of this note were $64,728.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Note
Payable
On
November 20, 2018, the Company paid its underwriter $20,000 and issued its underwriter a secured demand promissory note (the “Note”)
in the amount of $1,800,000. The Note accrued interest at 8% per annum from the date of the Note through and including May 20,
2019, 12% per annum from and including May 21, 2019, through and including August 20, 2019, and 15% per annum from and
including August 21, 2019, through and including November 20, 2019. If a late payment had occurred and continued, the interest
rate would have increased to 12% per annum from the date of the Note through and including August 20, 2019 and 18% per annum from
after August 21, 2019. If a late payment had remained outstanding for over 48 hours, Maxim could have required the Company to
redeem all or any part of the Note at a redemption price equal to 125% of the Alternate Payment Amount.
The
principal and interest of the Note was payable upon demand by Maxim or from time to time, in accordance the following schedule:
|
(i)
|
one
third of the principal, accrued and unpaid interest and any late charges on May 20, 2019;
|
|
(ii)
|
one
third of the principal, accrued and unpaid interest and any late charges on August 20, 2019; and
|
|
(iii)
|
one
third of the principal, accrued and unpaid interest and any late charges on November 20, 2019.
|
The
Note was secured by a first priority security interest in all personal property and assets of the Company excluding the assets
held in escrow with respect to (i) that certain stock purchase agreement with Polar, pursuant to which Polar agreed to sell up
to 490,000 shares of the Company’s common stock to the Company thirty days after the consummation of the Business Combination
and (ii) that certain stock purchase agreement with K2, pursuant to which K2 agreed to sell up to 220,000 shares of the Company’s
common stock to the Company thirty days after the consummation of the Business Combination.
The
amount payable under the Note could also have been paid in shares of common stock of the Company or securities convertible or
exercisable into shares of common stock of the Company (the “Alternate Equity Payment”) if and only if the Company
and Maxim mutually agree on both the purchase price and, if applicable, the conversion and/or exercise price of each security
of the Company issued in such Alternative Equity Payment. Otherwise, the payment should be made in cash only.
So
long as any amount under the Note remained outstanding, all cash proceeds received by the Company from any sales of its securities
was to be used to repay this Note.
Convertible
Note Payable
On
December 20, 2018, the Company entered into a securities exchange agreement (“Exchange Agreement”) with Maxim Group
LLC (the “Holder”). Pursuant to the terms of the Exchange Agreement, the Holder agreed to surrender and exchange the
Note. In exchange, the Company issued to the Holder a Series A-1 Exchange Convertible Note in the principal amount of $500,000
(the “Series A-1 Note”) and a Series A-2 Exchange Convertible Note in the principal amount of $1,000,000 (the “Series
A-2 Note,” and collectively with Series A-1 Note, the “Exchange Notes”). As of December 31, 2018, upon the
closing of the Acquisition, the Series A-1 Note automatically converted into 193,648 shares of the Company’s common stock.
The
original amount of the promissory note was $1,800,000, the total amount of the two exchange notes is $1,500,000, and the difference
of $300,000 has been recorded as debt forgiveness income.
Prior to conversion, the Series A-1
Note bore interest at 2.67% per annum, was payable quarterly and had a maturity date of the earlier of the
closing date of the Acquisition (as defined below) or June 20, 2020 (the “Maturity Date”). The Company was permitted
to pay the interest in cash or at its sole discretion, in shares of its common stock or a combination of cash and common stock.
However, the Company could only pay the interest in shares of its common stock if (i) all the equity conditions specified
in the note (“Equity Conditions”) had been met (unless waived by the Holder in writing) during the 20 trading
days immediately prior to the interest payment date (“Interest Notice Period”), (ii) the Company had provided
proper notice pursuant to the terms of the note and (iii) the Company had delivered to the Holder’s account certain
number of shares of its common stock to be applied against such interest payment prior to (but no more than five trading days
before) the Interest Notice Period.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
The Series A-1 Note was convertible
into shares of the Company’s common stock (“Conversion Shares”) at an initial conversion price of $1.93 per
share, subject to adjustment for any stock dividends and splits, rights offerings, distributions, combinations or similar transactions.
Upon the closing of the Acquisition, the conversion price was automatically adjusted to equal the arithmetic average of
the volume weighted average price (“VWAP”) of the Company’s common stock in the five trading days prior to the
closing date of the Acquisition. The Holder was permitted to convert the Series A-1 Note at any time, in whole or in part,
provided that upon receipt of a notice of conversion from the Holder, the Company had the right to repay all or any portion
of the Series A-1 Note included in the notice of conversion.
Additionally, the Series A-1 Note would
have automatically converted into shares of the Company’s common stock on the earlier of the Maturity Date or
the closing date of the Acquisition provided that (i) no event of default then existed, and (ii) solely if such automatic
conversion date was also the Maturity Date, each of the Equity Conditions had been met (unless waived in writing
by the Holder) on each trading day during the 20 trading day period ending on the trading day immediately prior to the automatic
conversation date.
At any time prior to the Maturity Date, the
Company also had the right to elect to redeem some or all of the outstanding principal amount for cash in an amount (the
“Optional Redemption Amount”) equal to the sum of (a) 100% of the then outstanding principal amount of the note, (b)
accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the note (the “Optional Redemption”).
The Company could only effect an Optional Redemption if each of the Equity Conditions had been met (unless waived
in writing by the Holder) on each trading day during the period commencing on the date when the notice of the Optional Redemption
was delivered to the date of the Optional Redemption and through and including the date payment of the Optional Redemption
Amount was actually made in full.
Except as otherwise provided in the Series
A-1 Note, including, without limitation, an Option Redemption, the Company could not prepay any portion of the principal
amount of the note without the prior written consent of the Holder.
Pursuant to the terms of the Series A-1
Note, the Company was not permitted to convert any portion of the Series A-1 Note if doing so results in the Holder
beneficially owning more than 4.99% of the outstanding common stock of the Company after giving effect to such conversion, provided
that on 61 days’ prior written notice from the Holder to the Company, that percentage could increase to 9.99%. However,
if there was an automatic conversion, and the conversion would result in the Company issuing a number of shares in excess of the
beneficial ownership limitation, then any such shares in excess of the beneficial ownership limitation would be held in
abeyance for the benefit of the Holder until such time or times, if ever, as its right thereto would not result in the Holder
exceeding the beneficial ownership limitation, at which time or times the Holder would be issued such shares to the same
extent as if there had been no such limitation.
The Series A-1 Note contained restrictive
covenants which, among other things, restricted the Company’s ability to repay or repurchase any indebtedness, make
distributions on or repurchase its common stock or enter into transactions with its affiliates.
The Series A-2 Note has terms substantially
similar to those of the Series A-1 Note except that the Series A-2 Note has a maturity date of June 20, 2020, and an initial
conversion price of $1.93, which will be automatically adjusted to the lower of (i) the conversion price then, in effect,
and (ii) the greater of the arithmetic average of the VWAP of the Company’s common stock in the five trading days prior
to the notice of conversion and $0.50.
As of December 31, 2018, upon the closing
of the Acquisition, the Series A-1 Note automatically converted into 193,648 shares of the Company’s common stock, resulting
in a remaining note payable balance as of May 31, 2020, and 2019 of $1,000,000 and $1,000,000 respectively.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
NOTE
9 — COMMITMENTS AND CONTINGENCIES
Nasdaq
Delisting
On
December 10, 2018, the Company received a written notice (the “Notice”) from the Listing Qualifications Division of
The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company has not complied with the requirements of IM-5101-2
of the listing rules of Nasdaq (the “Listing Rules”).
The
Notice stated that after its Business Combination, the Company had not demonstrated that its common stock met Listing Rule 5505(b)(1)
that requires a market value of publicly held shares of at least $15 million. Additionally, the Company has not provided evidence
that its common stock has at least 300 round lot holders as required by Listing Rule 5505(a)(3) and that its warrant has at least
400 round lot holders as required by Listing Rule 5515(a)(4). Finally, the Company does not comply with Listing Rule 5515(a)(2)
which requires that for initial listing of a warrant the underlying security must be listed on Nasdaq.
On
January 7, 2019, the Company received a second written notice from Nasdaq informing it that the Company failed to comply with
Listing Rule 5250(e)(2) which requires companies listed on Nasdaq to timely file notification forms for the Listing of Additional
Shares (the “LAS Notification”).
The
Company was required to submit the LAS Notification 15 days prior to the issuance of the securities, however, the Company filed
the LAS Notification for the issuance of the Series A-1 Note and Series A-2 Note and for the share exchange under our Share Exchange
Agreement after such 15-day periods. Nasdaq notified the Company that each of these matters serves as an additional and separate
basis for delisting the Company’s securities and that the review panel will consider these matters in rendering a determination
regarding the Company’s continued listing on Nasdaq.
Management
of Simplicity Esports and Gamily Company has decided that moving from The Nasdaq Stock Market (“Nasdaq”) to the OTCQB
is more appropriate for the Company at this time, while the Company builds out its planned network of retail esport centers.
On
April 1, 2019, the Company was notified by Nasdaq that it would delist the Company’s common stock and warrants. The Company’s
common stock and warrants were previously suspended from trading on Nasdaq, effective January 25, 2019.
On
April 2, 2019, Nasdaq filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities and
Exchange Act of 1934 on Form 25 with the Securities and Exchange Commission relating to the Company’s common stock and warrants.
As a result, the Company’s common stock and warrants were delisted from Nasdaq effective April 2, 2019.
The
Company’s common stock and warrants currently have been quoted on the OTCQB under the symbols “WINR” and “WINRW,”
respectively.
Registration
Rights
Pursuant
to a registration rights agreement the Company entered into with its initial stockholders and initial purchasers of the Private
Units (and constituent securities) at the closing of the Initial Public Offering, the Company is required to register certain
securities for sale under the Securities Act. These holders are entitled under the registration rights agreement to make up to
three demands that the Company register certain of its securities held by them for sale under the Securities Act and to have the
securities covered thereby registered for resale pursuant to Rule 415 under the Securities Act. In addition, these holders have
the right to include their securities in other registration statements filed by the Company. The Company will bear the costs and
expenses of filing any such registration statements.
Unit
Purchase Option
The
Company sold to the underwriters (and/or their designees), for $100, an option to purchase up to a total of 250,000 Units (which
increased to 260,000 Units upon the partial exercise of the underwriters’ over-allotment option), exercisable at $11.50
per Unit (or an aggregate exercise price of $2,990,000) upon the closing of the Initial Public Offering. The UPO may be exercised
for cash or on a cashless basis, at the holder’s option, at any time during the period commencing on the later of the first
anniversary of the effective date of the registration statement relating to the Initial Public Offering and the closing of the
Company’s initial Business Combination and terminating on the fifth anniversary of such effectiveness date. The Units issuable
upon exercise of this UPO are identical to those offered in the Initial Public Offering, except that the exercise price of the
warrants underlying the Units sold to the underwriters is $13.00 per share.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Operating
Lease Right of Use Obligation
The
Company adopted Topic 842 on January 1, 2019. The Company elected to adopt this standard using the optional modified retrospective
transition method and recognized a cumulative-effect adjustment to the consolidated balance sheet on the date of adoption. Comparative
periods have not been restated. With the adoption of Topic 842, the Company’s consolidated balance sheet now contains the
following line items: Operating lease right-of-use assets, Current portion of operating lease liabilities and Operating lease
liabilities, net of current portion.
As
all the existing leases subject to the new lease standard were previously classified as operating leases by the Company, they
were similarly classified as operating leases under the new standard. The Company has determined that the identified operating
leases did not contain non-lease components and require no further allocation of the total lease cost. Additionally, the agreements
in place did not contain information to determine the rate implicit in the leases, so we used our incremental borrowing rate as
the discount rate. Our weighted average discount rate is 10.4% and the weighted average remaining lease terms are 41 months.
As
of May 31, 2020, operating lease right-of-use assets and liabilities arising from operating leases was $490,984 and $490,983,
respectively. During the year ended May 31, 2020, the Company recorded operating lease expense of approximately $147,000.
The
following is a schedule showing the future minimum lease payments under operating leases by years and the present value of the
minimum payments as of May 31, 2020.
2020
|
|
$
|
174,728
|
|
2021
|
|
$
|
141,278
|
|
2022
|
|
$
|
145,832
|
|
2023
|
|
$
|
127,900
|
|
2024
|
|
$
|
84,017
|
|
Total Operating Lease Obligations
|
|
$
|
673,755
|
|
Less: Amount
representing interest
|
|
$
|
(184,977
|
)
|
Present
Value of minimum lease payments
|
|
$
|
488,778
|
|
Employment
Agreements, Board Compensation and Bonuses
On July 29, 2020, the Company entered into
a new employment agreement (the “Kaplan 2020 Agreement”) with Mr. Kaplan. Such employment agreement replaced the Kaplan
2018 Agreement. As a result, the Kaplan 2018 Agreement was terminated and is of no further force or effect. Pursuant to the terms
of the Kaplan 2020 Agreement, the Company agreed to pay Mr. Kaplan a monthly base salary of $5,000; provided, however,
that the parties agreed that such base salary will be deferred and will accumulate until the Company has sufficient cash available
to make such payments, to be reasonably determined by the Board of Directors and Mr. Kaplan, at which time all accrued and unpaid
base salary will be paid. In addition, Mr. Kaplan will receive an equity grant of 15,000 shares of common stock per month, which
shares will be fully vested upon grant. Mr. Kaplan will also be eligible to receive a quarterly bonus in the form of cash or equity
shares and will be entitled to participate in the Company’s employee benefit plans. In addition, if, during the term of
the Kaplan 2020 Agreement, the Company’s shares are approved for listing on a U.S. national securities exchange, the Company
will pay Mr. Kaplan a $50,000 cash bonus, to be paid upon such listing begin effective.
The
term of the Kaplan 2020 Agreement is for an initial one-year term, which shall automatically renew for successive one-year terms
unless either party provides 60 days’ advance written notice of its intention not to renew the Kaplan 2020 Agreement at
the conclusion of the then applicable term. The term of the Kaplan 2020 Agreement may be terminated by the Company with or without
cause or by Mr. Kaplan with or without good reason, as such terms are defined therein.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
On
July 29, 2020, the Board of Directors approved for Mr. Kaplan a $75,000 cash bonus and authorized the issuance of 250,000 shares
of the Company’s common stock both related to his performance during the fiscal year ended May 31, 2020. As of May 31, 2020,
the Company has accrued $75,000 related to Mr. Kaplans cash bonus and $216,625 related to the Common Shares to be issued to Mr.
Kaplan.
On
July 29, 2020, the Company entered into a new employment agreement (the “Franklin 2020 Agreement”) with Mr. Franklin.
Such employment agreement replaced the Franklin 2018 Agreement. As a result, the Franklin 2018 Agreement was terminated and is
of no further force or effect. Pursuant to the terms of the Franklin 2020 Agreement, the Company agreed to pay Mr. Franklin a
monthly base salary of $12,500; provided, however, that the parties agreed that such base salary will be deferred and will accumulate
until the Company has sufficient cash available to make such payments, to be reasonably determined by the Board of Directors and
Mr. Franklin, at which time all accrued and unpaid base salary will be paid. In addition, Mr. Franklin will receive an equity
grant of 6,250 shares of common stock per month, which shares will be fully vested upon grant. Mr. Franklin will also be eligible
to receive a quarterly bonus in the form of cash or equity shares and will be entitled to participate in the Company’s employee
benefit plans. In addition, if, during the term of the Franklin 2020 Agreement, the Company’s shares are approved for listing
on a U.S. national securities exchange, the Company will pay Mr. Franklin a $50,000 cash bonus, to be paid upon such listing begin
effective.
On
July 29, 2020, the Board of Directors approved for Mr. Franklin a $75,000 cash bonus and authorized the issuance of 250,000 fully
vested shares of the Company’s common stock both related to his performance during the fiscal year ended May 31, 2020. As
of May 31, 2020, the Company has accrued $75,000 related to Mr. Franklins cash bonus and $216,625 related to the Common Shares
to be issued to Mr. Franklin.
On
July 29, 2020, the Board of Directors approved the issuance of 192,000 shares of common stock to an employee and
the Directors of the Company for services provided during the fiscal year ended May 31, 2020. As of May 31, 2020, the Company
has accrued $166,675 related to the authorized issuance of these shares.
Litigation
On August 5, 2020, a lawsuit styled Duncan Wood v. PLAYlive Nation,
Inc. and Simplicity eSports and Gaming Company (Case No. 20-1043) was filed in the U.S. District Court for the District of Delaware.
The complaint alleges unlawful failure to make timely and reasonable payment of wages, breach of contract, breach of the duty of
good faith and fair dealing and unjust enrichment. The plaintiff seeks monetary damages for compensation alleged to be owed, treble
damages, interest on all wage compensation, reasonable attorneys’ fees and other relief as the Court deems just and proper.
Defendants’ responsive pleading is not yet due and has not been filed. The litigation is in its initial stages and the Company
is unable to reasonably predict its potential outcome. The Company, however, believes that the lawsuit is without merit and intends
to vigorously defend the claims.
NOTE
10 — STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share. At May 31, 2020 and
2019, there were no shares of preferred stock issued or outstanding.
Common
Stock
The
Company is authorized to issue 20,000,000 shares of common stock with a par value of $0.0001 per share. Holders of the shares
of the Company’s common stock are entitled to one vote for each share. At May 31, 2020, and May 31, 2019, there were
7,988,975 and 7,003,975 shares of common stock issued and outstanding respectively.
2020
Transactions
On
July 30, 2019, in connection with the PLAYlive Merger, the Company issued 750,000 shares of the Company’s common stock as
Merger Consideration (Note 6).
On
September 16, 2019, pursuant to a Restricted Award, the Company authorized the grant to Jed Kaplan, our Chief Financial
Executive Officer and Interim Chief Financial Officer and a member of our board of directors, of 70,000 shares of our restricted
Common Stock. As of May 31, 2020, these shares have been issued.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
On
September 16, 2019, pursuant to a Restricted Award, the Company authorized the grant to Roman Franklin, our President and
a member of our board of directors, of 21,000 shares of our restricted Common Stock. As of May 31, 2020, these shares have been
issued.
On
September 16, 2019, pursuant to a Restricted Award, the Company authorized the grant to Steven Grossman, our Corporate
Secretary, of 14,000 shares of our restricted Common Stock. As of May 31, 2020, these shares have been issued.
On
March 11, 2020, in connection with the execution of the Common Stock Purchase Agreement with Triton Funds, LP, the Company
issued 5,000 shares of our restricted Common Stock at $1.18 per share to Triton Funds, LP as a donation.
On
April 9, 2020, the Company delivered a Purchase Notice to Triton Funds, LP pursuant to the terms of the Common Stock Purchase
Agreement requiring Triton Funds, LP to acquire 125,000 shares of our restricted Common Stock at a price of $0.70 per share. In
accordance therewith, we issued 125,000 shares of our Common Stock to Triton Funds, LP, which rendered $87,700 in proceeds to
the Company.
On
May 4, 2020, pursuant to the terms of that certain 10% Fixed Convertible Promissory Note dated April 29, 2020 in the principal
amount of $152,500 issued by the Company in favor of Harbor Gates Capital, LLC, the Company issued 10,000 shares of our restricted
Common Stock, issued at $0.99 per share, to Harbor Gates Capital, LLC as additional consideration for the purchase of such note.
As of May 31, 2020, these shares were not issued. As of August 31, 2020, these shares have been issued.
On
May 7, 2020, the Company authorized the sale of 22,936 shares of our restricted Common Stock, at a price of $1.09 per share,
to William H. Herrmann, Jr. a member of our board of directors, for an aggregate purchase price of $25,000. As of May 31, 2020,
and August 31, 2020, such shares have not been issued.
Subsequent
to May 31, 2020, on June 4, 2020, the Company authorized the issuance of 85,905 shares of common stock in connection with the
conversion of $100,000 in principal of a convertible note payable. As of May 31, 2020 and August 31, 2020, these shares
have been issued.
Subsequent
to May 31, 2020, on June 15, 2020, we issued 25,000 shares of common stock in satisfaction of an outstanding balance owed
to a vendor.
Subsequent
to May 31, 2020, on June 18, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and
an accredited investor, pursuant to which the Company issued a 12% self-amortization promissory note (described elsewhere herein)
in the principal amount of $550,000, the Company issued 55,000 shares of the Company’s common stock to such accredited investor
as additional consideration for the purchase of such note.
Subsequent
to May 31, 2020, on June 29, 2020, the Company acquired the assets of one of its top performing franchisee owned esports gaming
centers on Fort Bliss U.S. Military base in El Paso, TX. In connection with the acquisition the Company authorized the issuance
of 150,000 restricted shares As of August 31, 2020 such shares have not been issued.
Subsequent
to May 31, 2020, on July 29, 2020, the Company authorized the grant to Mr. Kaplan of 300,000 shares of common stock.
As of August 31, 2020, such shares have not been issued.
Subsequent
to May 31, 2020, on July 29, 2020, the Company authorized the grant to Mr. Franklin of 265,000 shares of common stock.
As of August 31, 2020, such shares have not been issued.
Subsequent
to May 31, 2020, on July 29, 2020, the Company authorized the grant of 192,000 shares of common stock to an employee
and the Directors of the Company as of August 31, 2020 such shares have not been issued.
Subsequent
to May 31, 2020, on July 31, 2020, the Company entered into a marketing agreement whereby we agreed to issue 27,778 shares of
common stock. As of August 31, 2020, such shares have not
been issued.
Subsequent
to May 31, 2020, on August 7, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and
an accredited investor pursuant to which we issued a 12% self-amortization promissory note (described elsewhere herein) in the
principal amount of 333,333, the Company authorized the grant of 33,333 shares of common stock. As of August 31, 2020,
such shares have been issued.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
Private
Placement
Beginning
in February of 2019 and closing in May of 2019, the Company sold units in connection with a private offering by the Company to
raise working capital of up to $2,000,000 (the “Offering Amount”) through the sale to accredited investors only of
up to up to 1,000,000 “Units” of the Company’s securities, at a purchase price of $2.00 per Unit, with each
Unit consisting of (i) one share of common stock, par value $0.0001 per share of the Company (the “Common Stock”)
and (ii) a warrant to purchase one share of Common Stock, exercisable at a price of $4.00 per share, exercisable at any time within
five years of issuance (each, a “Warrant”) as provided for in the Company’s Term Sheet for Unit Offering dated
February 6, 2019 (the “Term Sheet”).
The
Company sold 962,500 units for gross proceeds of $1,925,000.
Stock
Based Compensation
On
March 27, 2019, the Company issued 180,000 shares of common stock at $0.60 per share to 3 employees of the Company. The shares
were issued in conjunction with their employment agreements. During the fiscal year ended May 31, 2020 105,000 shares vested ratably
through December 31, 2019. As of May 31, 2020, all 180,000 shares have vested.
On
July 29, 2020, the Company authorized the issuance of 67,000 shares of common stock at $1.02 per share to 3 employees of the Company.
The shares were issued in conjunction with their employment agreements and vested ratably through May 31, 2020.
On
July 29, 2020, the Company authorized the issuance of 690,000 shares of common stock at $0.87 per share to the Executive Officers,
an employee of the Company and the Members of the Company’s Board of Directors. The shares have all vested as of May 31,
2020.
In connection with these issuances the
Company recorded share-based compensation expense of $669,215. At May 31, 2020, the Company has no unrecognized share-based compensation.
Warrants
For
the year ended May 31, 2020, there was no activity with respect to warrants.
For
the year ended May 31, 2019, the Company issued 5,461,500 warrants in conjunction with its Initial Public Offerings. These warrants
are exercisable for five years from November 20, 2018, the date of the initial business combination and have an exercise price
equal to $11.50.
For
the year ended May 31, 2019, the Company issued 962,500 warrants in conjunction with the above-mentioned private placement.
These warrants are exercisable for 5 years and have an exercise price of $4.00.
A
summary of the status of the Company’s outstanding stock warrants for the years ended May 31, 2020 and 2019 is as follows:
|
|
Number
of
Shares
|
|
|
Average
Exercise
Price
|
|
|
Expiration
Date
|
Outstanding – May 31, 2018
|
|
|
5,461,500
|
|
|
$
|
11.50
|
|
|
Nov 2023
|
Granted – May 31, 2019
|
|
|
962,500
|
|
|
|
4.00
|
|
|
May 2024
|
Outstanding – May 31, 2019
|
|
|
6,424,000
|
|
|
|
10.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding – May 31, 2020
|
|
|
6,424.000
|
|
|
$
|
10.38
|
|
|
|
Warrants exercisable at May 31,
2020
|
|
|
6,424,000
|
|
|
|
|
|
|
|
NOTE
11 - INCOME TAXES
For
the year ended May 31, 2020 and 2019, the income tax provisions for current taxes were $0.
Deferred
income taxes reflect the net tax effects of permanent and temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. The temporary differences that result in deferred
tax assets and liabilities are the results of carry forward tax losses, amortization and impairment expense.
The
components of the net deferred tax assets for the year ended May 31, 2020 and 2019 are as follows:
|
|
Year
ended
May 31, 2020
|
|
|
Year
ended
May 31, 2019
|
|
Net Operating Loss
|
|
$
|
770,000
|
|
|
$
|
364,000
|
|
Impairment
of cost method investment
|
|
|
-
|
|
|
|
38,000
|
|
Gross deferred tax asset
|
|
|
770,000
|
|
|
|
402,000
|
|
Less: Valuation
allowance
|
|
|
(825,000
|
)
|
|
|
(381,000
|
)
|
Net deferred tax asset
|
|
$
|
55,000
|
|
|
$
|
21,000
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets
|
|
|
(55,000
|
)
|
|
|
(21,000
|
)
|
Net deferred assets/liabilities
|
|
|
-
|
|
|
|
-
|
|
In
assessing the realization of the deferred tax assets, management considers whether it is more likely than not that some portion
of all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary differences representing net future deductible amounts
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. After consideration of all of the information available, management believes
that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established
a valuation allowance, in an amount equal to gross deferred tax assets less deferred tax liabilities. For the year ended May 31,
2020, the change in the valuation allowance was $444,000.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
The
table below summarizes the reconciliation of our income tax provision computed at the federal statutory rate of 21% for the years
ended May 31, 2020 and 2019 and the actual tax provisions for the year ended May 31, 2020 and 2019.
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Expected provision (benefit)
at statutory rate
|
|
|
(21.0
|
)%
|
|
|
(21.0
|
)%
|
State taxes, net of federal tax benefit
|
|
|
(4.4
|
)%
|
|
|
(4.4
|
)%
|
Change in federal rate
|
|
|
-
|
%
|
|
|
-
|
%
|
Permanent differences-stock based compensation
|
|
|
15.0
|
|
|
|
15.0
|
|
Increase in valuation
allowance
|
|
|
10.4
|
%
|
|
|
10.4
|
%
|
Total provision
(benefit) for income taxes
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
At
May 31, 2020 and May 31, 2019, the Company had Federal net operating loss carry forwards of approximately $3,029,000 and
$1,474,000, respectively. The net operating loss of approximately $3,029,000 can be carried forward indefinitely subject
to annual usage limitations. In accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s
NOLs may be subject to an annual limitation in the event of a change in control as defined under the regulations.
The
Company files income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions and is subject to
examination by the various taxing authorities.
NOTE
12 — SEGMENT AND RELATED INFORMATION
Historically,
the Company had one operating segment. However, with the acquisition of PLAYlive and the opening of two Company-owned retail stores,
the Company’s operations are now managed through three operating segments: Franchise royalties and license fees, Company-owned
stores and Esports revenue. These three operating segments and corporate are presented below as its reportable segments.
Summarized financial information
concerning our reportable segments for the year ended May 31, 2020 is shown in the following table:
|
|
Revenues
|
|
|
Net
Income
(loss)
|
|
|
Depreciation
and
Amortization
|
|
|
Capital
Expenditures
|
|
|
Goodwill
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise royalties and
fees
|
|
$
|
523,000
|
|
|
$
|
(124,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
699,000
|
|
|
$
|
1,610,000
|
|
Company-owned stores
|
|
|
174,000
|
|
|
|
(330,000
|
)
|
|
|
54,000
|
|
|
|
142,000
|
|
|
|
-
|
|
|
|
1,124,000
|
|
Esports revenue
|
|
|
165,000
|
|
|
|
(345,000
|
)
|
|
|
215,000
|
|
|
|
9,000
|
|
|
|
4,456,000
|
|
|
|
5,750,000
|
|
Corporate
|
|
|
-
|
|
|
|
(1,856,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108,000
|
|
Total
|
|
$
|
862,000
|
|
|
$
|
(2,655,000
|
)
|
|
$
|
269,000
|
|
|
$
|
151,000
|
|
|
$
|
5,155,000
|
|
|
$
|
8,592,000
|
|
NOTE
13 — SUBSEQUENT EVENTS
Self-Amortization
Promissory Note
On
June 18, 2020 (the “Issue Date”), Simplicity Esports and Gaming Company, a Delaware corporation (the “Company”),
entered into a securities purchase agreement (the “SPA”) with an accredited investor (the “Holder”), pursuant
to which the Company issued a 12% self-amortization promissory note (the “Amortization Note”) with a maturity date
of June 18, 2021 (the “Maturity Date”), in the principal sum of $550,000. Pursuant to the terms of the Amortization
Note, the Company agreed to pay to $550,000 (the “Principal Sum”) to the Holder and to pay interest on the principal
balance at the rate of 12% per annum. The Amortization Note carries an original issue discount (“OID”) of $55,000.
Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase price of $495,000 in exchange for the Amortization
Note. In addition, pursuant to the terms of the SPA, the Company agreed to issue 55,000 shares of the Company’s common stock
to the Holder as additional consideration.
The
Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest (no prepayment premium). The Amortization Note contains customary events of default relating to, among other
things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA.
On
various dates subsequent to May 31, 2020, Jed Kaplan our Chief Executive Officer and Interim Chief Financial Officer funded
$25,272 pursuant to the Kaplan Promissory Note. With the contributions subsequent to May 31, 2020, the principal balances outstanding
and due Mr. Kaplan amount to $90,000 (Note 8). The promissory note was subsequently converted into 20% of the common equity
of Simplicity One Brasil, LTD by SEGC and Mr. Kaplan.
On
April 10, 2020, the Company filed a Registration Statement on Form S-1 relating to the Company’s offering of units. Each
unit consists of one share of the Company’s common stock and one warrant to purchase one share of the Company’s common
stock. On July 2, 2020, the Company filed Amendment No. 1 to its Registration Statement on Form S-1. The registration statement
is not yet effective. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement
becomes effective. This shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale
of these securities in any state or jurisdiction in which such an offer, solicitation or sale would be unlawful prior to registration
or qualification under the securities laws of any such state or jurisdiction.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MAY
31, 2020
On
June 23, 2020, the Company’s stockholders approved an amendment to the Company’s Third Amended and Restated Certificate
of Incorporation, as amended (the “Certificate of Incorporation”), to effect a reverse stock split of the Company’s
outstanding shares of common stock, at a ratio of no less than 1-for-2 and no more than 1-for-10, with such ratio to be determined
by the sole discretion of the Board of Directors, with any fractional shares being rounded up to the next higher whole shares
(the “Reverse Split”). The Board will implement the Reverse Split only upon a determination that the Reverse Split
is in the best interests of the stockholders at that time. The Board will then select the ratio for the Reverse Split within the
range approved by stockholders that the Board determines to be advisable and in the best interests of the stockholders, considering
relevant market conditions at the time the Reverse Split is to be implemented. The Reverse Split may be delayed or abandoned without
further action by the stockholders at any time prior to effectiveness of the Certificate of Amendment with the Delaware Secretary
of State, notwithstanding stockholder adoption and approval of the Reverse Split amendment, if the Board, in its sole discretion,
determines that it is in the best interests of the Company and its stockholders to delay or abandon the Reverse Split. If the
Certificate of Amendment implementing the Reverse Split has not been filed with the Delaware Secretary of State on or before the
date of the 2021 annual meeting of stockholders, the Board will be deemed to have abandoned the Reverse Split.
The
board and shareholders of the Company approved the Simplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the “2020
Plan”) on April 22, 2020 and June 23, 2020, respectively. Under the 2020 Plan, 1,000,000 shares of common stock are authorized
for issuance to employees, directors and independent contractors (except those performing services in connection with the offer
or sale of the Company’s securities in a capital raising transaction, or promoting or maintaining a market for the Company’s
securities) of the Company or its subsidiaries. The 2020 Plan authorizes equity-based and cash-based incentives for participants.
There were 1,000,000 shares available for award at May 31, 2020 under the 2020 Plan.
On
June 29, 2020, the Company acquired the assets of one of its top performing franchisee owned esports gaming centers on
Fort Bliss U.S. Military base in El Paso, TX. Simplicity El Paso, LLC was created by SEGC and purchased the assets of the franchisee
location for 150,000 shares of restricted Company common stock and $150,000 in cash.
On
July 2, 2020, the Company repaid $152,500 and $15,000 in accrued interest in full satisfaction of the 10% Convertible Promissory
Harbor Gates Note (Note 8).
On
July 29, 2020, the Board of Directors of the Company approved the issuance of 757,000 shares of the Common Stock of the
Company and $150,000 in cash as compensation for the year ended May 31, 2020. The shares were granted to Jed Kaplan the Company’s
Chief Executive Officer and Interim Chief Financial Officer, Roman Franklin the Company’s President, the members of the
Company’s Board of Directors as well as an employee of the Company (Note 8).
On
July 29, 2020, The Company entered into employment agreements with Jed Kaplan the Company’s Chief Executive Officer and
Interim Chief Financial Officer and Roman Franklin the Company’s President, the members of the Company’s Board of
Directors as well as an employee of the Company (Note 8).
Self-Amortization
Promissory Note
On
August 7, 2020 (the “Issue Date”), the Company, entered into a securities purchase agreement (the
“SPA”) with FirstFire Global Opportunities Fund, LLC, an accredited investor (the “Holder”), pursuant
to which the Company issued a 12% self-amortization promissory note (the “Amortization Note”) with a maturity
date of August 7, 2021 (the “Maturity Date”), in the principal sum of $333,333. Pursuant to the terms of the
Amortization Note, the Company agreed to pay to $333,333 (the “Principal Sum”) to the Holder and to pay interest
on the principal balance at the rate of 12% per annum. The Amortization Note carries an original issue discount
(“OID”) of $33,333. Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase price
of $300,000 in exchange for the Amortization Note. In addition, pursuant to the terms of the SPA, the Company agreed to
issue 33,333 shares of the Company’s common stock to the Holder as additional consideration.
Amendment of Certificate of Incorporation
On
August 17, 2020, the Company amended its certificate of incorporation to increase the total number of authorized shares of the
Company’s common stock from 20,000,000 to 36,000,000.
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
|
February 28,
2021
|
|
|
May 31, 2020
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
571,970
|
|
|
$
|
160,208
|
|
Accounts receivable, net
|
|
|
97,833
|
|
|
|
127,653
|
|
Inventory
|
|
|
176,010
|
|
|
|
15,787
|
|
Prepaid expenses
|
|
|
82,143
|
|
|
|
5,588
|
|
Total Current Assets
|
|
|
927,956
|
|
|
|
309,236
|
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
5,180,141
|
|
|
|
5,155,141
|
|
Intangible assets, net
|
|
|
1,865,108
|
|
|
|
2,141,374
|
|
Deferred brokerage fees
|
|
|
106,778
|
|
|
|
149,223
|
|
Property and equipment, net
|
|
|
576,345
|
|
|
|
232,733
|
|
Right of use asset, operating leases, net
|
|
|
1,307,524
|
|
|
|
490,984
|
|
Security deposits
|
|
|
36,885
|
|
|
|
14,885
|
|
Due from franchisees
|
|
|
31,514
|
|
|
|
-
|
|
Deferred financing costs
|
|
|
235,759
|
|
|
|
98,198
|
|
Total Other Assets
|
|
|
9,340,054
|
|
|
|
8,282,538
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
10,268,010
|
|
|
$
|
8,591,774
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
427,844
|
|
|
$
|
126,716
|
|
Accrued expenses
|
|
|
1,342,525
|
|
|
|
1,421,842
|
|
Convertible note payable
|
|
|
1,368,419
|
|
|
|
1,127,320
|
|
Note payable, net
|
|
|
309,570
|
|
|
|
-
|
|
Note payable - related party
|
|
|
-
|
|
|
|
64,728
|
|
Operating lease obligation, current
|
|
|
269,500
|
|
|
|
151,867
|
|
Current portion of deferred revenues
|
|
|
3,795
|
|
|
|
3,795
|
|
Stock payable
|
|
|
52,845
|
|
|
|
75,000
|
|
Total Current Liabilities
|
|
|
3,774,498
|
|
|
|
2,971,268
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligation, net of current portion
|
|
|
1,044,093
|
|
|
|
339,116
|
|
Deferred revenues, less current portion
|
|
|
283,350
|
|
|
|
365,718
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
5,101,941
|
|
|
|
3,676,102
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies - Note 8
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Preferred stock - $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock - $0.0001 par value; 36,000,000 shares authorized; 1,341,017 and 998,622 shares issued and outstanding as of February 28, 2021 and May 31, 2020, respectively
|
|
|
134
|
|
|
|
100
|
|
Additional paid-in capital
|
|
|
15,799,987
|
|
|
|
11,132,103
|
|
Accumulated deficit
|
|
|
(10,782,438
|
)
|
|
|
(6,195,044
|
)
|
Total Simplicity Esports and Gaming Company Stockholders’ Equity
|
|
$
|
5,017,683
|
|
|
|
4,937,159
|
|
Non-Controlling Interest
|
|
|
148,386
|
|
|
|
(21,487
|
)
|
Total Stockholders’ Equity
|
|
|
5,166,069
|
|
|
|
4,915,672
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
10,268,010
|
|
|
$
|
8,591,774
|
|
The
accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
For the Three
Months Ended
|
|
|
For the Nine
Months Ended
|
|
|
|
February 28,
2021
|
|
|
February 29,
2020
|
|
|
February 28,
2021
|
|
|
February 29,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise royalties and license fees
|
|
$
|
31,901
|
|
|
$
|
140,209
|
|
|
$
|
149,596
|
|
|
$
|
387,221
|
|
Franchise termination revenue
|
|
|
18,141
|
|
|
|
44,984
|
|
|
|
79,522
|
|
|
|
44,984
|
|
Company-owned stores sales
|
|
|
319,125
|
|
|
|
105,070
|
|
|
|
563,854
|
|
|
|
154,713
|
|
Esports revenue
|
|
|
59,312
|
|
|
|
90,538
|
|
|
|
132,654
|
|
|
|
113,874
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
428,479
|
|
|
|
380,801
|
|
|
|
925,626
|
|
|
|
700,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
(108,187
|
)
|
|
|
(214,444
|
)
|
|
|
(216,355
|
)
|
|
|
(348,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
320,292
|
|
|
|
166,357
|
|
|
|
709,271
|
|
|
|
352,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and related benefits
|
|
|
(2,041,992
|
)
|
|
|
(239,619
|
)
|
|
|
(2,710,747
|
)
|
|
|
(678,109
|
)
|
General and administrative expenses
|
|
|
(715,255
|
)
|
|
|
(328,334
|
)
|
|
|
(1,704,969
|
)
|
|
|
(1,014,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(2,436,885
|
)
|
|
|
(401,596
|
)
|
|
|
(3,706,445
|
)
|
|
|
(1,339,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt forgiveness Income
|
|
|
-
|
|
|
|
-
|
|
|
|
3,115
|
|
|
|
93,761
|
|
Interest expense
|
|
|
(548,595
|
)
|
|
|
(6,675
|
)
|
|
|
(947,383
|
)
|
|
|
(20,025
|
)
|
Interest income
|
|
|
7
|
|
|
|
70
|
|
|
|
19
|
|
|
|
3,031
|
|
Foreign exchange loss
|
|
|
(1,254
|
)
|
|
|
-
|
|
|
|
(20,826
|
)
|
|
|
-
|
|
Rebate Income
|
|
|
-
|
|
|
|
1,116
|
|
|
|
-
|
|
|
|
1,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other (Expense) Income
|
|
|
(549,842
|
)
|
|
|
(5,489
|
)
|
|
|
(965,075
|
)
|
|
|
77,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss Before Provision for Income Taxes
|
|
|
(2,986,727
|
)
|
|
|
(407,085
|
)
|
|
|
(4,671,520
|
)
|
|
|
(1,261,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
(2,986,727
|
)
|
|
|
(407,085
|
)
|
|
|
(4,671,520
|
)
|
|
|
(1,261,979
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interest
|
|
|
59,707
|
|
|
|
2,883
|
|
|
|
84,126
|
|
|
|
11,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common shareholders
|
|
$
|
(2,927,020
|
)
|
|
$
|
(404,202
|
)
|
|
$
|
(4,587,394
|
)
|
|
$
|
(1,250,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and Diluted Net Loss per share
|
|
$
|
(2.23
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(3.89
|
)
|
|
$
|
(1.31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted Weighted Average Number of Common Shares
Outstanding
|
|
|
1,309,631
|
|
|
|
982,372
|
|
|
|
1,179,925
|
|
|
|
956,669
|
|
The
accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE THREE AND NINE MONTHS ENDED FEBRUARY
28,
2021 and FEBRUARY 29, 2020
(Unaudited)
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Non-
Controlling
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Interest
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - May 31, 2020
|
|
|
998,622
|
|
|
$
|
100
|
|
|
$
|
11,132,103
|
|
|
$
|
(21,487
|
)
|
|
$
|
(6,195,044
|
)
|
|
$
|
4,915,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for cash
|
|
|
2,976
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,000
|
|
Shares issued in connection with conversion of note payable
|
|
|
10,738
|
|
|
|
1
|
|
|
|
99,999
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
Shares issued in connection with notes payable
|
|
|
12,292
|
|
|
|
1
|
|
|
|
102,216
|
|
|
|
-
|
|
|
|
-
|
|
|
|
102,217
|
|
Shares issued for payable and accrued liabilities
|
|
|
3,125
|
|
|
|
-
|
|
|
|
46,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46,000
|
|
Shares issued in connection with franchise acquisition
|
|
|
18,750
|
|
|
|
2
|
|
|
|
164,998
|
|
|
|
-
|
|
|
|
-
|
|
|
|
165,000
|
|
Shares issued in connection with consulting agreement
|
|
|
3,472
|
|
|
|
1
|
|
|
|
22,777
|
|
|
|
-
|
|
|
|
-
|
|
|
|
22,778
|
|
Shares issued to directors, officers and employees as compensation
|
|
|
116,175
|
|
|
|
12
|
|
|
|
819,297
|
|
|
|
-
|
|
|
|
-
|
|
|
|
819,309
|
|
Non-controlling interest of original investment in subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
240,000
|
|
|
|
-
|
|
|
|
240,000
|
|
Net loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,866
|
)
|
|
|
-
|
|
|
|
(15,866
|
)
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(655,214
|
)
|
|
|
(655,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - August 31, 2020
|
|
|
1,166,150
|
|
|
|
117
|
|
|
|
12,412,390
|
|
|
|
202,647
|
|
|
|
(6,850,258
|
)
|
|
|
5,764,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in connection with debt
|
|
|
-
|
|
|
|
-
|
|
|
|
157,438
|
|
|
|
-
|
|
|
|
-
|
|
|
|
157,438
|
|
Shares issued in connection with franchise acquisition
|
|
|
37,941
|
|
|
|
4
|
|
|
|
413,540
|
|
|
|
-
|
|
|
|
-
|
|
|
|
413,544
|
|
Shares issued in connection with consulting agreement
|
|
|
2,813
|
|
|
|
-
|
|
|
|
25,420
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,420
|
|
Shares issued to directors, officers and employees as compensation
|
|
|
9,844
|
|
|
|
1
|
|
|
|
119,632
|
|
|
|
-
|
|
|
|
-
|
|
|
|
119,633
|
|
Rounding related to reverse stock split
|
|
|
628
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,554
|
)
|
|
|
-
|
|
|
|
(8,554
|
)
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,005,160
|
)
|
|
|
(1,005,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - November 30, 2020
|
|
|
1,217,376
|
|
|
|
122
|
|
|
|
13,128,420
|
|
|
|
194,093
|
|
|
|
(7,855,418
|
)
|
|
|
5,467,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial conversion feature related to a convertible debt
|
|
|
-
|
|
|
|
-
|
|
|
|
904,505
|
|
|
|
-
|
|
|
|
-
|
|
|
|
904,505
|
|
Shares issued in connection with issuance of notes payable
|
|
|
10,000
|
|
|
|
1
|
|
|
|
141,605
|
|
|
|
-
|
|
|
|
-
|
|
|
|
141,606
|
|
Shares issued in connection with consulting agreement
|
|
|
5,000
|
|
|
|
-
|
|
|
|
80,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
80,000
|
|
Shares issued to directors, officers and employees as compensation
|
|
|
108,641
|
|
|
|
11
|
|
|
|
1,545,457
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,545,468
|
|
Contribution from noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,000
|
|
|
|
-
|
|
|
|
14,000
|
|
Net loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(59,707
|
)
|
|
|
-
|
|
|
|
(59,707
|
)
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,927,020
|
)
|
|
|
(2,927,020
|
)
|
Balance – February 28, 2021
|
|
|
1,341,017
|
|
|
$
|
134
|
|
|
$
|
15,799,987
|
|
|
$
|
148,386
|
|
|
$
|
(10,782,438
|
)
|
|
$
|
5,166,069
|
|
The
accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR
THE THREE AND NINE MONTHS ENDED FEBRUARY
28,
2021 and FEBRUARY 29, 2020
(Unaudited)
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Non- Controlling
|
|
|
Accumulated
|
|
|
Total Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Interest
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - May 31, 2019
|
|
|
875,497
|
|
|
$
|
88
|
|
|
$
|
9,442,639
|
|
|
$
|
-
|
|
|
$
|
(3,574,806
|
)
|
|
$
|
5,867,921
|
|
Shares issued for PLAYlive Nation acquisition
|
|
|
93,750
|
|
|
|
9
|
|
|
|
1,439,991
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,440,000
|
|
Vesting of Common Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
27,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,000
|
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(283,393
|
)
|
|
|
(283,393
|
)
|
Balance - August 31, 2019
|
|
|
969,247
|
|
|
|
97
|
|
|
|
10,909,630
|
|
|
|
-
|
|
|
|
(3,858,199
|
)
|
|
|
7,051,528
|
|
Vesting of Common Shares
|
|
|
-
|
|
|
|
-
|
|
|
|
36,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,000
|
|
Compensation to officer for shares issued for past services
|
|
|
-
|
|
|
|
-
|
|
|
|
90,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
90,000
|
|
Shares issued for vesting of employment agreement awards
|
|
|
13,125
|
|
|
|
1
|
|
|
|
10
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11
|
|
Non-controlling interest of original investment in subsidiaries
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,013
|
|
|
|
-
|
|
|
|
24,013
|
|
Net loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(8,172
|
)
|
|
|
-
|
|
|
|
(8,172
|
)
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(563,329
|
)
|
|
|
(563,329
|
)
|
Balance - November 30, 2019
|
|
|
982,372
|
|
|
|
98
|
|
|
|
11,035,640
|
|
|
|
15,841
|
|
|
|
(4,421,528
|
)
|
|
|
6,630,051
|
|
Net Loss attributable to noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,833
|
)
|
|
|
-
|
|
|
|
(2,883
|
)
|
Net Loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(404,202
|
)
|
|
|
(404,202
|
)
|
Balance – February 29, 2020
|
|
|
982,372
|
|
|
$
|
98
|
|
|
$
|
11,035,640
|
|
|
$
|
13,008
|
|
|
$
|
(4,825,730
|
)
|
|
$
|
6,222.596
|
|
The
accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Nine Months Ended
|
|
|
|
February 28, 2021
|
|
|
February 29, 2020
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,671,520
|
)
|
|
$
|
(1,261,979
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Non-cash interest expense
|
|
|
731,551
|
|
|
|
-
|
|
Depreciation expense
|
|
|
151,342
|
|
|
|
37,240
|
|
Amortization expense
|
|
|
212,343
|
|
|
|
154,218
|
|
Impairment loss
|
|
|
213,923
|
|
|
|
-
|
|
Debt forgiveness income
|
|
|
3,115
|
|
|
|
(93,761
|
)
|
Stock-based compensation
|
|
|
1,954,480
|
|
|
|
153,011
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
29,820
|
|
|
|
(95,645
|
)
|
Inventory
|
|
|
(39,839
|
)
|
|
|
(22,822
|
)
|
Prepaid expenses
|
|
|
17,272
|
|
|
|
(10,133
|
)
|
Security deposits
|
|
|
(22,000
|
)
|
|
|
(2,568
|
)
|
Deferred brokerage fees
|
|
|
42,445
|
|
|
|
(59,051
|
)
|
Deferred revenues
|
|
|
(82,368
|
)
|
|
|
126,080
|
|
Accounts payable
|
|
|
381,128
|
|
|
|
65,474
|
|
Accrued expenses
|
|
|
423,141
|
|
|
|
(143,632
|
)
|
Due from franchisees
|
|
|
(31,514
|
)
|
|
|
(12,699
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(686,681
|
)
|
|
|
(1,166,267
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Cash purchased from acquisition
|
|
|
-
|
|
|
|
26,180
|
|
Lease liability net of lease asset
|
|
|
6,070
|
|
|
|
(776
|
)
|
Purchase of property and equipment
|
|
|
(8,949
|
)
|
|
|
(163,472
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,879
|
)
|
|
|
(138,068
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayment of note payable
|
|
|
(1,554,641
|
)
|
|
|
-
|
|
Proceeds from note payable
|
|
|
2,779,524
|
|
|
|
-
|
|
Deferred financing costs
|
|
|
(137,561
|
)
|
|
|
(74,198
|
)
|
Non-controlling interest of original investment in subsidiaries
|
|
|
14,000
|
|
|
|
24,054
|
|
Private placement funds received
|
|
|
-
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,101,322
|
|
|
|
(144
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
411,762
|
|
|
|
(1,304,479
|
)
|
|
|
|
|
|
|
|
|
|
Cash - beginning of period
|
|
|
160,208
|
|
|
|
1,540,158
|
|
|
|
|
|
|
|
|
|
|
Cash - end of period
|
|
$
|
571,790
|
|
|
$
|
235,679
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
71,704
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental Non-Cash Investing and Financing Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for consideration in an acquisition of assets
|
|
$
|
782,544
|
|
|
$
|
1,440,000
|
|
Conversion of debt to common shares
|
|
$
|
100,000
|
|
|
$
|
-
|
|
Increase in prepaid expenses and accrued expenses
|
|
$
|
93,827
|
|
|
$
|
-
|
|
Common stock issued for accrued compensation
|
|
$
|
624,128
|
|
|
$
|
-
|
|
Common stock issued for debt discount
|
|
$
|
1,079,631
|
|
|
$
|
-
|
|
Warrants issued for debt discount
|
|
$
|
157,438
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Acquisition of PLAYlive and other Assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
-
|
|
|
$
|
2,226,166
|
|
Property and equipment
|
|
$
|
-
|
|
|
$
|
9,503
|
|
Deferred brokerage fees
|
|
$
|
-
|
|
|
$
|
805,975
|
|
Accounts payable
|
|
$
|
-
|
|
|
$
|
(3,574
|
)
|
Deferred revenue
|
|
$
|
-
|
|
|
$
|
(1,624,250
|
)
|
The
accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2021
(UNAUDITED)
NOTE
1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity
Esports and Gaming Company (the “Company,” “Simplicity,” “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 opened and operates esports gaming centers that 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, The Nasdaq Stock Market LLC (“Nasdaq”) filed a Notification of Removal from Listing and/or Registration
under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on Form 25 with
the Securities and Exchange Commission (the “SEC”) relating to the Company’s common stock and 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.
Through
our wholly owned subsidiary, PLAYlive Nation, Inc. (“PLAYlive”), acquired on July 29, 2019, the Company has a network
of franchised gaming centers. As of April 9, 2021, we have 33 locations, 15 corporate and 18 fully constructed franchise
locations, in various states, including Arizona, California, Idaho, Florida, Maryland, Michigan, Montana,
Oregon, South Carolina, Texas, Utah and Washington. As of April 9, 2021, 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 or the NYSE American. There is no assurance
that our listing application will be approved by the Nasdaq Capital Market or the NYSE American.
All
share and per share data in the accompanying unaudited 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., a corporation 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 Ltda, 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. Louis, LLC, a limited liability company incorporated in Missouri 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).
|
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 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 nine
months ended February 28, 2021, 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 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.
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 February 28, 2021 and February 29, 2020 were not included in
the computation of dilutive loss per common share because the effect would have been anti-dilutive:
|
|
February 28, 2021
|
|
|
February 29, 2020
|
|
Stock warrants
|
|
|
820,055
|
|
|
|
865,500
|
|
Convertible notes
|
|
|
277,331
|
|
|
|
125,000
|
|
Total
|
|
|
1,097,386
|
|
|
|
990,500
|
|
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 $10,782,438, $2,846,542 and $4,671,520, respectively, as of and for the nine months
ended February 28, 2021. 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 12 corporate and 12 franchised Simplicity Gaming Centers as of April 9, 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.
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 nine months ended February 28, 2021 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.
NOTE
3 — PROPERTY AND EQUIPMENT
The
following is a summary of property and equipment—at cost, less accumulated depreciation as of:
|
|
February 28, 2021
|
|
|
May 31, 2020
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
110,850
|
|
|
$
|
52,189
|
|
Property and equipment
|
|
|
679,607
|
|
|
|
243,314
|
|
Total cost
|
|
|
790,457
|
|
|
|
295,503
|
|
Less accumulated depreciation
|
|
|
(214,112
|
)
|
|
|
(62,770
|
)
|
Net property and equipment
|
|
$
|
576,345
|
|
|
$
|
232,733
|
|
During
the nine months ended February 28, 2021 and February 29, 2020, the Company recorded depreciation expense of $151,342 and $37,240,
respectively.
NOTE
4 — INTANGIBLE ASSETS
The
following table sets forth the intangible assets, including accumulated amortization as of:
|
|
February 28, 2021
|
|
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
|
|
|
332,077
|
|
|
|
—
|
|
|
|
546,000
|
|
Internet domain
|
|
2 years
|
|
|
3,000
|
|
|
|
2.50 years
|
|
|
|
3,000
|
|
Total intangible assets
|
|
|
|
$
|
2,374,195
|
|
|
|
|
|
|
$
|
2,438,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
(509,087
|
)
|
|
|
|
|
|
|
(296,744
|
)
|
Net carrying value
|
|
|
|
$
|
1,865,108
|
|
|
|
|
|
|
$
|
2,141,374
|
|
The
following table sets forth the future amortization of the Company’s intangible assets as of February 28, 2021:
For the fiscal years ending May 31:
|
|
|
|
2021
|
|
$
|
73,114
|
|
2022
|
|
|
290,791
|
|
2023
|
|
|
221,708
|
|
2024
|
|
|
130,197
|
|
2025
|
|
|
10,834
|
|
Thereafter
|
|
|
272,464
|
|
Total
|
|
$
|
999,108
|
|
During
the nine months ended February 28, 2021 and February 29, 2020, the Company recorded amortization expense of $212,343 and $154,218,
respectively. During the nine months ended February 28, 2021, the Company recorded impairment loss of $213,923,
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:
|
|
February 28, 2021
|
|
|
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 (“Simplicity Brasil”),
for approximately $2,000. This interest was reduced during the three months ended August 31, 2020 as more fully described
in Note 7.
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:
The following acquisitions are accounted
for as asset acquisitions under ASC Topic 805:
Simplicity
Kennewick, LLC:
On
September 22, 2020, the Company’s wholly-owned subsidiary, Simplicity Kennewick, LLC (“Simplicity Kennewick”)
entered into an Asset Purchase Agreement (“Simplicity Kennewick APA”) with Ignatious O’Riley, an existing
franchisee, to acquire Mr. O’Riley’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.
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 (“Simplicity Union Gap APA”) with Five Point Legacy Corp., an existing
franchisee (“Five Point”), to acquire Five Point’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.
Simplicity
St Petersburg, LLC:
On
October 1, 2020, the Company entered into an Asset Purchase Agreement (“Parryproject APA”) with Parryproject
LLC, Owen Parry and Jennie Parry, an existing franchisee (collectively, “Parryproject”), to acquire Parryproject’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.
Simplicity
Humble, LLC:
On
October 1, 2020, the Company’s wholly-owned subsidiary, Simplicity Humble, LLC (“Simplicity Humble”),
entered into an Asset Purchase agreement (“Team Centore APA”) with Team Centore Entertainment Corp., and Charles
Centore, an existing franchisee (collectively, “Team Centore”), to acquire Team Centore’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.
Simplicity
Frisco, LLC:
On
October 12, 2020, the Company’s wholly-owned subsidiary, Simplicity Frisco, LLC (“Simplicity Frisco”),
entered into an Asset Purchase Agreement (“JAR APA”) with JAR Mathis Holdings, Jared Mathis and Amy Mathis,
an existing franchisee (collectively, “JAR”), to acquire JAR’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.
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 (“B&R APA”) with B&R Franchise Investments, LLC, Brian
Chu and Richard Loo, an existing franchisee (collectively, “B&R”), to acquire B&R’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.
Simplicity
Brea, LLC:
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Brea, LLC (“Simplicity Brea”), entered
into an Asset Purchase Agreement (“Nextgen APA”) with Nextgen Gaming, LLC, Ajay Chunilal Shah and Shweta Shah,
an existing franchisee (collectively, “Nextgen”), to acquire Nextgen’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.
Simplicity
Billings, LLC:
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Billings, LLC (“Simplicity Billings”),
entered into an Asset Purchase Agreement (“Button Mashers APA”) with Button Mashers, Inc, Jon Bessmer and
Brandy Bessmer, an existing franchisee (collectively, “Button Mashers”), to acquire Button Mashers’
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.
Simplicity
St. Louis, LLC:
On
December 1, 2020, the Company’s wholly-owned subsidiary, Simplicity St. Louis, LLC, entered into an Asset Purchase
Agreement (“Metta APA”) with Metta Gaming, LLC, Brian Paul Van Wyk, an existing franchisee (collectively,
“Metta”), to acquire Metta’s assets in exchange for 3,523 shares of the Company’s common stock
with fair value of $52,845, or $15.00 per share, based on the fair value of assets acquired.
The
following table summarizes the total of the assets acquired during the nine months ended February 28, 2021:
Assets acquired:
|
|
|
|
Furniture, fixtures and equipment
|
|
$
|
371,417
|
|
Inventory
|
|
|
94,972
|
|
Total assets acquired at fair value
|
|
$
|
466,389
|
|
|
|
|
|
|
Purchase consideration :
|
|
|
|
|
41,464 shares of common stock
|
|
$
|
466,389
|
|
Total purchase consideration
|
|
$
|
466,389
|
|
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 permits
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
months or less. The Company entered into various lease agreements.
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.
Future
base lease payments under the non-cancelable operating lease at February 28, 2021 are as follows:
Years Ending May 31,
|
|
Amount
|
|
2021
|
|
$
|
101,854
|
|
2022
|
|
|
411,278
|
|
2023
|
|
|
391,832
|
|
2024
|
|
|
373,870
|
|
2025
|
|
|
330,017
|
|
2026
|
|
|
110,000
|
|
Total minimum non-cancelable operating lease payments
|
|
|
1,718,851
|
|
Less: discount to fair value
|
|
|
(405,258
|
)
|
Total lease liability at February 28, 2021
|
|
$
|
1,313,593
|
|
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, Chairman 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 used the proceeds of the Kaplan Note to fund the operations of Simplicity Brasil the Company’s
majority owned subsidiary (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 Brasil 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 a portion of its cash balance at a financial services company that is owned by a then-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 (UPO)
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.
Employment
Agreements, Board Compensation and Bonuses
On
July 29, 2020, the Company entered into an 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. Kaplan’s 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.
Refer
to Note 11 - Subsequent Events for additional information.
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
Convertible Notes
The
table below presents outstanding convertible notes as of the following:
|
|
February 28, 2021
|
|
|
May 31, 2020
|
|
10% Fixed Convertible Promissory Note
|
|
$
|
—
|
|
|
$
|
152,500
|
|
Maxim Convertible Note
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
February 19, 2021 Convertible Note
|
|
|
1,650,000
|
|
|
|
-
|
|
|
|
|
2,650,000
|
|
|
|
1,152,500
|
|
Less: Debt discount
|
|
|
(1,281,581
|
)
|
|
|
(25,180
|
)
|
Total Convertible notes
|
|
$
|
1,368,419
|
|
|
$
|
1,127,320
|
|
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”).
On
July 2, 2020, the Harbor Gates 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.
Maxim
Convertible Note
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 24,706 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.
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.
On
June 18, 2020, the Company and Maxim entered into the first amendment to the Maxim Note (the “First 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”.
On
December 31, 2020, the Company and Maxim entered into the second amendment to the Maxim Note (the “Second Amendment”)
pursuant to which the Parties agreed the Maturity Date (as defined in the Note) shall be extended to February 15, 2021.
During
the nine months ended February 28, 2021 the Company recorded interest expense of $44,744 related to the Maxim note. As of February
28, 2021, Maxim note had had outstanding principal and accrued interest of $1,000,000 and $82,569, respectively.
Refer to Note 11- Subsequent Events for
additional information.
June
18, 2020 Convertible Note
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 carried 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. Accordingly, the Company recorded an aggregate
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 this note.
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 contained 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 was required to make nine amortization payments to the Holder of $66,125 beginning on October 16, 2020. In connection
with the November 23, 2020 SPA and February 19, 2021 SPA discussed below, during the nine months ended February 28, 2021, the
Company repaid the principal amount due of $550,000 and all interest due on this June 18, 2020 Note.
November
23, 2020 Convertible Note
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 issued 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. Additionally, the Company concluded that the conversion
rights under the November 23, 2020 note at the time of issuance was determined to be beneficial on the measurement date. Accordingly,
the Company recorded a debt discount of $121,724 related to the beneficial conversion feature arising from the November 2020 convertible
note which was amortized over the term of this convertible note.
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.
In
connection with the February 19, 2021 SPA discussed below, during the nine months ended February 28, 2021, the Company repaid
the principal amount due of $750,000 and all interest due on this November 23, 2020 Note.
The
Holder had 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”).
February
19, 2021 Convertible Note
On
February 19, 2021, the Company entered into a securities purchase agreement (the “SPA”) dated as of February 19, 2021,
with an accredited investor (the “Holder”), pursuant to which the Company issued a 12% promissory note (the “Note”)
with a maturity date of February 19, 2022 (the “Maturity Date”), in the principal sum of $1,650,000. In addition,
the Company issued 10,000 shares of its common stock to the Holder as a commitment fee pursuant to the SPA. Pursuant to the terms
of the Note, the Company agreed to pay to $1,650,000 (the “Principal Sum”) to the Holder and to pay interest on the
principal balance at the rate of 12% per annum (provided that that the first twelve months of interest (equal to $198,000.00)
shall be guaranteed and earned in full as of the Issue Date). The Note carries an original issue discount (“OID”)
of $165,000. Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase price of $1,485,000 in exchange
for the Note. The Company used the proceeds for its operational expenses, the repayment of the promissory notes previously issued
to the Holder on June 18, 2020 and November 23, 2020. In addition, pursuant to the terms of the SPA, the Company issued 10,000
shares of the Company’s common stock to the Holder as additional consideration. The 10,000 shares were value at $154,900,
or $15.49 per share, based on the quoted trading price on the date of grant, on the issue date, the relative fair value of these
shares of $141,606 was recorded as a debt discount and an increase in paid-in capital. In connection with the guaranteed interest
due of $198,000, the Company increased interest payable by $198,000 and increased debt discount by $198,000, which will
be amortized into interest expense over the term of this Note.
The
Holder may convert the Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in
the Note) at any time at a conversion price equal to $11.50 per share.
The
Company may prepay the Note at any time prior to the date that an Event of Default (as defined in the 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 Note contains customary events of default relating to, among other things, payment defaults, breach of
representations and warranties, and breach of provisions of the Note or SPA. The Company is required to make an interim payment
to the Holder in the amount of $363,000, on or before August 19, 2021, towards the repayment of the balance of the Note.
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 Note), the Note shall become immediately due and payable and the Company shall pay to
the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued
interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default, additional interest
will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted
by law.
The
Company concluded that the conversion rights under the February 2021 convertible note at the time of issuance was determined to
be beneficial on the measurement date. Accordingly on February 19, 2021, the Company recorded a debt discount of $782,781 related
to the beneficial conversion feature arising from the February 2021 convertible debt which will amortized over the term of this
convertible note.
As
of February 28, 2021, Note had outstanding principal and accrued interest of $1,650,000 and $198,000 respectively.
In
connection with the June 2020 Note, August 2020 Note and February 2021 Note, during the nine months ended February 28, 2021, the
Company recognized interest expense of $633,221, including amortization of debt discount of $559,718.
August
7, 2020 Self-Amortization Promissory Note
On
August 7, 2020 (the “Issue Date”), the Company, entered into a securities purchase agreement (the “First Fire
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
|
|
During
the nine months ended February 28, 2021, in connection with this Note, the Company recorded interest expense of $94,069, including
$59,236 related to the amortization of debt discount. As of February 28, 2021, this Note had outstanding principal, debt discount and accrued
interest due of $333,333, $23,763 and $22,810, respectively. As of February 28, 2021, the Amortization Note is not in default.
On
March 10, 2021, the Company entered into a new convertible note with this investor. Refer to Note 11-Subsequent Events for additional
details.
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 then-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 Brasil, the Company’s majority owned subsidiary (see Note 7).
As
of May 31, 2020, the balance of the Kaplan Note was $64,728. During the nine months ended February 28, 2021 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.
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 February 28, 2021,
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, February 28, 2021 and May 31, 2020, there were 1,341,017 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.
Effective
February 19, 2021, pursuant to the terms of a Securities Purchase Agreement 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 $1,650,000, the Company
issued 10,000 shares of common stock at $15.49 per share, to such accredited investor as additional consideration for the purchase
of such note. The 10,000 shares were valued at $141,606 based on a relative fair value method, which was included in debt
discount and additional paid in capital 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.
On
December 2, 2020, the Company issued 5,000 shares of common stock at $16.00 per share in satisfaction of an outstanding balance
owed to a vendor in the amount of $80,000. In connection with the issuance of these shares, the Company reduced accounts payable
by $50,000 and recorded legal fees of $30,000.
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
(see Note 5).
On
September 22, 2020, in connection with an Asset Purchase Agreement with Ignatious O’Riley, an existing franchisee,
to acquire Mr. O’Riley’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, an existing franchisee, to acquire Five Point’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).
On
October 1, 2020, the Company entered into an Asset Purchase Agreement with Parryproject, an existing franchisee, to acquire
Parryproject’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, an existing franchisee, to acquire Team Centore’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, an existing franchisee, to acquire JAR’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, an existing franchisee, to acquire B&R’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
with Nextgen, an existing franchisee, to acquire Nextgen’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, an existing franchisee, to acquire Button Mashers’ 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.
During
the three months ended February 28, 2021, the Company issued an aggregate of 108,641 restricted common shares of the Company to
executive officers of the Company for services rendered. These shares were valued at $1,545,467, or per share prices ranging from
$13.25 per share to $19.75 per common share, based on the quoted trading price on the date of grant. In connection with the issuance
of these shares, during the three months ended February 28, 2021, the Company recorded stock-based compensation of $1,545,467.
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 nine months ended February 28, 2021 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 February 28, 2021
|
|
|
820,054
|
|
|
$
|
81.74
|
|
|
|
3.10
|
|
|
$
|
-
|
|
Exercisable, February 28, 2021
|
|
|
820,054
|
|
|
$
|
81.74
|
|
|
|
3.10
|
|
|
$
|
-
|
|
NOTE
11 — SUBSEQUENT EVENTS
Vancouver,
WA Franchisee Acquisition
Effective
March 26, 2021, the Company’s wholly-owned subsidiary, Simplicity Vancouver, LLC, entered into an Asset Purchase Agreement
with an existing franchisee to acquire the franchisee’s assets in exchange for 2,900 shares of the Company’s
common stock. This transaction closed in the fourth quarter.
Fullerton,
CA Franchisee Acquisition
Effective
January 31, 2021, the Company’s wholly-owned subsidiary, Simplicity Fullerton, LLC, entered into an Asset Purchase Agreement
with an existing franchisee to acquire the franchisee’s assets in exchange for 1,600 shares of the Company’s
common stock. This transaction closed in the fourth quarter.
August
7, 2020 Self-Amortization Promissory Note
On
March 10, 2021, the Company, entered into a securities purchase agreement (the “First Fire SPA”) dated as of March
10, 2021, with FirstFire Global Opportunities Fund, LLC, a Delaware limited liability company (the “Holder”), pursuant
to which the Company issued a 12% promissory note with a maturity date of March 10, 2022, in the principal sum of $560,000. The
Company received net proceeds of $130,606, net of OID of $56,000, net of origination fees of $8,394, and the repayment of principal
and interest of $365,000 on the August 7, 2020 Note. In addition, the Company issued 3,394 shares of its common stock to the
Holder as a commitment fee pursuant to the SPA. Pursuant to the terms of the Note, the Company agreed to pay to $560,000 (the
“Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of 12% per annum (provided
that the first twelve months of interest shall be guaranteed). The Note carries an OID of $56,000. Accordingly, on the
Closing Date (as defined in the First Fire SPA), the Holder paid the purchase price of $504,000 in exchange for the Note. The
Holder may convert the Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in
the Note) at any time at a conversion price equal to $11.50 per share.
The
Company may prepay the Note at any time prior to the date that an Event of Default (as defined in the 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 Note contains customary events of default relating to, among other things, payment defaults, breach of
representations and warranties, and breach of provisions of the Note or SPA.
The
Company is required to make an interim payment to the Holder in the amount of $123,200, on or before September 10, 2021, towards
the repayment of the balance of the Note.
Form S-8 Registration Statement
On March 18, 2021, the Company filed a
registration statement on Form S-8 for the purpose of resale or reoffer thereof, of 18,125 shares of the Company’s common
stock issued prior to the filing of such registration statement and held by the selling stockholder named therein in connection
with such selling stockholder’s provision of services to the Company.
Employment
Agreement
On
March 25, 2021, the Board appointed Roman Franklin, the Company’s then-President and Chief Operating Officer and
a member of the Board, as Chief Executive Officer of the Company. In connection with Mr. Franklin’s appointment, on March
25, 2021, the Company entered into an employment agreement, dated as of March 29, 2021 by and between the Company and Mr. Franklin
(the “Franklin Employment Agreement”). Pursuant to the terms of the Franklin Employment Agreement, in exchange for
Mr. Franklin’s services, the Company agreed to pay Mr. Franklin an annual base salary of $250,000. Mr. Franklin is also
eligible to receive a quarterly bonus of up to $15,000 in the form of a cash bonus and/or equity grant of shares of the Company’s
common stock. Mr. Franklin’s eligibility for any bonus and the amount thereof will be determined solely at the discretion
of the Board of Directors.
On
March 25, 2021, the Company appointed Mr. Lau as the Company’s Chief Financial Officer. In connection with Mr. Lau’s
appointment, on March 23, 2021, the Company entered into an employment agreement, dated as of March 29, 2021 by and between the
Company and Mr. Lau (the “Lau Employment Agreement”). Pursuant to the terms of the Lau Employment Agreement, in exchange
for Mr. Lau’s services, the Company agreed to pay Mr. Lau an annual base salary of $140,000. In addition, Mr. Lau is entitled
to receive compensation in the form of an equity grant of $5,000 in the Company’s common stock for each quarter during the
term of the Lau Employment Agreement, which runs for a period ending one year after March 29, 2021 and automatically renews for
successive one year terms unless either party gives 60 days’ advance written notice of its intention not to review the Lau
Employment Agreement. Mr. Lau is also eligible to receive a quarterly bonus of up to $12,500 in the form of a cash bonus and/or
equity grant of shares of the Company’s common stock. Mr. Lau’s eligibility for any bonus and the amount thereof will
be determined solely at the discretion of the Board of Directors.
Stock
Purchase Agreement with Tiger Trout
On
March 31, 2021, the Company entered into a Stock Purchase Agreement (this “Agreement”) by and between the Company
and Tiger Trout Capital Puerto Rico, LLC (“Tiger Trout”), pursuant to which the Company agreed to issue and sell to
Tiger Trout an aggregate of 125,000 shares of the Company’s common stock at a purchase price of $12.00 per share, for a total purchase price of $1,500,000.
The
Agreement provides that the sale will occur in two tranches, as follows:
|
●
|
The
Company agreed to issue and sell to Tiger Trout on March 31, 2021 41,667 shares of Common
Stock (the “First Tranche Shares”) at a purchase price of $12.00 per share,
for a total purchase price of $500,004 (the “First Tranche Purchase Price”).
The closing of the purchase and sale of the First Tranche Shares is referred to herein
as the “First Closing”.
|
|
●
|
Subject
to the satisfaction or waiver, by the party for whose benefit such conditions exist,
of the conditions to the Second Closing (as hereinafter defined), at such time and pursuant
to the terms and conditions in the Agreement, the Company agreed to issue and sell to
Tiger Trout 83,333 shares of Common Stock (the “Second Tranche Shares” and
together with the First Tranche Shares, the “Shares”) at a purchase price
of $12.00 per share, for a total purchase price of $999,996 (the “Second Tranche
Purchase Price” and together with the First Tranche Purchase Price, the “Purchase
Price”). The closing of the purchase and sale of the Second Tranche Shares is referred
to herein as the “Second Closing”.
|
In
the Agreement, the Company agreed that, following the First Closing, the Company will utilize its commercially reasonable efforts
to file a resale registration statement (the “Registration Statement”) pursuant to the Securities Act with the SEC
for the resale of the Shares, and will use its commercially reasonable efforts to have such registration statement declared
effective by the Commission within 30 calendar days, but not more than 90 calendar days after March 31, 2021.
The
Company also agreed to, among other things, (i) make and keep adequate current public information available, as those terms are
understood and defined in Rule 144 promulgated under the Securities Act, and (ii) file with the SEC in a timely manner all reports
and other documents required of the Company under the Securities Act and the Exchange Act so long as the Company remains subject
to such requirements and the filing of such reports and other documents as required for the applicable provisions of Rule 144.
The
obligations of Tiger Trout to consummate the Second Closing is subject to certain conditions, including, but not limited to: (i)
the Registration Statement shall have become effective, and (ii) from March 31, 2021 to the date of the Second Closing, trading
in the shares of Common Stock shall not have been suspended by the Commission of the Company’s principal Trading Market
(as defined in the Agreement), and, at any time prior to the date of the Second Closing, trading in securities generally as reported
by Bloomberg L.P. shall not have been suspended or limited, or minimum prices shall not have been established on securities whose
trades are reported by such services, or on any Trading Market, nor shall a banking moratorium have been declared either by the
United States or New York State authorities nor shall there have occurred any material outbreak or escalation of hostilities or
other national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of Tiger Trout, makes it impracticable or inadvisable to purchase the Second
Tranche Shares at the Second Closing.
The
Agreement contains customary representations and warranties of the Company and the Purchaser and other customary covenants and
agreements. The Agreement may be terminated by either the Company or Tiger Trout if the Second Closing has not occurred by the
date that is 90 calendar days after March 31, 2021.
FMW
Media Works
Effective
April 1, 2021, in connection with compensation for services to be rendered, the Company issued 12,500 shares of common stock to
FMW Media Works.
Maxim Note Payable
On
April 14, 2021, the Company and Maxim entered into the third amendment to the Series A-2 Note with Maxim pursuant to which the
Company and Maxim agreed to the following:
(i)
|
The
maturity date of the Series A-2 Note is extended to October 15, 2021.
|
|
|
(ii)
|
The
principal balance of the Series A-2 Note is increased by $50,000 as of April 14, 2021.
|
|
|
(iii)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s
common stock pursuant to conversion(s) of the Series A-2 Note) on or before April 30,
2021, the principal balance of the Series A-2 Note will increase by an additional $50,000.
|
|
|
(iv)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s
common stock pursuant to conversion(s) of the Series A-2 Note) on or before May 15, 2021,
the principal balance of the Series A-2 Note will increase by an additional $50,000.
|
|
|
(v)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s
common stock pursuant to conversion(s) of the Series A-2 Note) on or before July 15,
2021, the principal balance of the Series A-2 Note will increase by an additional $100,000.
|
|
|
(vi)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s
common stock pursuant to conversion(s) of the Series A-2 Note) on or before September
15, 2021, the principal balance of the Series A-2 Note will increase by an additional
$100,000, representing a total cumulative increase in the principal balance of $350,000
if the Series A-2 Note is not repaid in its entirety on or before September 15, 2021.
|
|
|
(vii)
|
The
Company will, within five business days after the Company’s receipt of the Second
Tranche Purchase Price of $999,996, pay $500,000 to Maxim, which will reduce the principal
owed under the Series A-2 Note by $500,000.
|
While
any portion of the Series A-2 Note is outstanding, if the Company receives cash proceeds from public offerings or private placements
of the Company’s common stock to investors (except with respect to proceeds from officers and directors of the Company),
the Company will, within five business days of the Company’s receipt of such proceeds, inform Maxim or such receipt, following
which Maxim will have the right in its sole discretion to require the Company to immediately apply up to 25% of such proceeds
received by the Company to repay the outstanding amounts owed under the Series A-2 Note. The parties understand that (a) each
dollar applied toward repayment pursuant to this clause (viii) will reduce the balance owed under the Series A-2 Note by one dollar,
and (b) this clause (viii) will not apply to the Tiger Trout transaction
SIMPLICITY
ESPORTS AND GAMING COMPANY
Up
to 125,000
Shares
of Common Stock
PROSPECTUS
__________,
2021
Through
and including ,
2021 (the 40th day after the date of this offering), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s
obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses payable by us in connection with the issuance and distribution of the securities
being registered hereunder. No expenses will be borne by the Selling Stockholder. All of the amounts shown are estimates, except
for the SEC registration fee.
Type
|
|
Amount
|
|
SEC registration fee
|
|
$
|
170
|
|
Accounting fees and expenses*
|
|
|
5,000
|
|
Legal fees and expenses*
|
|
|
20,000
|
|
Printing expenses*
|
|
|
100
|
|
Miscellaneous fees and expenses*
|
|
|
250
|
|
Total expenses*
|
|
$
|
25,520
|
|
*
Estimated
Item 14. Indemnification of Directors and Officers.
Our
third amended and restated certificate of incorporation will provide that all of our directors, officers, employees and agents
shall be entitled to be indemnified by us to the fullest extent permitted by Section 145 of the Delaware General Corporation Law
(the “DGCL”). Section 145 of the DGCL concerning indemnification of officers, directors, employees and agents is set
forth below.
Section
145. Indemnification of officers, directors, employees and agents; insurance.
|
(a)
|
A
corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or
proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe
the person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person
did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests
of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person’s
conduct was unlawful.
|
|
|
|
|
(b)
|
A
corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of
the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust
or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection
with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person
is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem
proper.
|
|
|
|
|
(c)
|
To
the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim,
issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and
reasonably incurred by such person in connection therewith.
|
|
(d)
|
Any
indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation
only as authorized in the specific case upon a determination that indemnification of the present or former director, officer,
employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in
subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer
at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding,
even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even
though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel
in a written opinion, or (4) by the stockholders.
|
|
|
|
|
(e)
|
Expenses
(including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses
(including attorneys’ fees) incurred by former officers and directors or other employees and agents may be so paid upon
such terms and conditions, if any, as the corporation deems appropriate.
|
|
|
|
|
(f)
|
The
indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall
not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s
official capacity and as to action in another capacity while holding such office. A right to indemnification or to advancement
of expenses arising under a provision of the certificate of incorporation or a bylaw shall not be eliminated or impaired by
an amendment to such provision after the occurrence of the act or omission that is the subject of the civil, criminal, administrative
or investigative action, suit or proceeding for which indemnification or advancement of expenses is sought, unless the provision
in effect at the time of such act or omission explicitly authorizes such elimination or impairment after such action or omission
has occurred.
|
|
|
|
|
(g)
|
A
corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether
or not the corporation would have the power to indemnify such person against such liability under this section.
|
|
|
|
|
(h)
|
For
purposes of this section, references to “the corporation” shall include, in addition to the resulting corporation,
any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its
separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or
agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to
the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate
existence had continued.
|
|
|
|
|
(i)
|
For
purposes of this section, references to “other enterprises” shall include employee benefit plans; references to
“fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references
to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent
of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect
to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such
person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this
section.
|
|
|
|
|
(j)
|
The
indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a person.
|
|
|
|
|
(k)
|
The
Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses
or indemnification brought under this section or under any by law, agreement, vote of stockholders or disinterested directors,
or otherwise. The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including
attorneys’ fees).
|
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers, and controlling
persons pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the SEC, such indemnification
is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment of expenses incurred or paid by a director, officer or controlling person in
a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection
with the securities being registered, we will, unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to the court of appropriate jurisdiction the question whether such indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final adjudication of such issue.
In
accordance with Section 102(b)(7) of the DGCL, our third amended and restated certificate of incorporation, as amended, will provide
that no director shall be personally liable to us or any of our stockholders for monetary damages resulting from breaches of their
fiduciary duty as directors, except to the extent such limitation on or exemption from liability is not permitted under the DGCL.
The effect of this provision of our third amended and restated certificate of incorporation, as amended, is to eliminate our rights
and those of our stockholders (through stockholders’ derivative suits on our behalf) to recover monetary damages against
a director for breach of the fiduciary duty of care as a director, including breaches resulting from negligent or grossly negligent
behavior, except, as restricted by Section 102(b)(7) of the DGCL. However, this provision does not limit or eliminate our rights
or the rights of any stockholder to seek non-monetary relief, such as an injunction or rescission, in the event of a breach of
a director’s duty of care.
If
the DGCL is amended to authorize corporate action further eliminating or limiting the liability of directors, then, in accordance
with our third amended and restated certificate of incorporation, as amended, the liability of our directors to us or our stockholders
will be eliminated or limited to the fullest extent authorized by the DGCL, as so amended. Any repeal or amendment of provisions
of our third amended and restated certificate of incorporation, as amended, limiting or eliminating the liability of directors,
whether by our stockholders or by changes in law, or the adoption of any other provisions inconsistent therewith, will (unless
otherwise required by law) be prospective only, except to the extent such amendment or change in law permits us to further limit
or eliminate the liability of directors on a retroactive basis.
Our
third amended and restated certificate of incorporation, as amended, will also provide that we will, to the fullest extent authorized
or permitted by applicable law, indemnify our current and former officers and directors, as well as those persons who, while directors
or officers of our corporation, are or were serving as directors, officers, employees or agents of another entity, trust or other
enterprise, including service with respect to an employee benefit plan, in connection with any threatened, pending or completed
proceeding, whether civil, criminal, administrative or investigative, against all expense, liability and loss (including, without
limitation, attorney’s fees, judgments, fines, ERISA excise taxes and penalties and amounts paid in settlement) reasonably
incurred or suffered by any such person in connection with any such proceeding.
Notwithstanding
the foregoing, a person eligible for indemnification pursuant to our third amended and restated certificate of incorporation,
as amended, will be indemnified by us in connection with a proceeding initiated by such person only if such proceeding was authorized
by our board of directors, except for proceedings to enforce rights to indemnification.
The
right to indemnification which will be conferred by our third amended and restated certificate of incorporation, as amended, is
a contract right that includes the right to be paid by us the expenses incurred in defending or otherwise participating in any
proceeding referenced above in advance of its final disposition, provided, however, that if the DGCL requires, an advancement
of expenses incurred by our officer or director (solely in the capacity as an officer or director of our corporation) will be
made only upon delivery to us of an undertaking, by or on behalf of such officer or director, to repay all amounts so advanced
if it is ultimately determined that such person is not entitled to be indemnified for such expenses under our third amended and
restated certificate of incorporation, as amended, or otherwise.
The
rights to indemnification and advancement of expenses will not be deemed exclusive of any other rights which any person covered
by our third amended and restated certificate of incorporation, as amended, may have or hereafter acquire under law, our third
amended and restated certificate of incorporation, as amended, our bylaws, an agreement, vote of stockholders or disinterested
directors, or otherwise.
Any
repeal or amendment of provisions of our third amended and restated certificate of incorporation, as amended, affecting indemnification
rights, whether by our stockholders or by changes in law, or the adoption of any other provisions inconsistent therewith, will
(unless otherwise required by law) be prospective only, except to the extent such amendment or change in law permits us to provide
broader indemnification rights on a retroactive basis, and will not in any way diminish or adversely affect any right or protection
existing at the time of such repeal or amendment or adoption of such inconsistent provision with respect to any act or omission
occurring prior to such repeal or amendment or adoption of such inconsistent provision. Our third amended and restated certificate
of incorporation, as amended, will also permit us, to the extent and in the manner authorized or permitted by law, to indemnify
and to advance expenses to persons other that those specifically covered by our third amended and restated certificate of incorporation,
as amended.
Our
bylaws, include the provisions relating to advancement of expenses and indemnification rights consistent with those which will
be set forth in our third amended and restated certificate of incorporation, as amended. In addition, our bylaws provide for a
right of indemnity to bring a suit in the event a claim for indemnification or advancement of expenses is not paid in full by
us within a specified period of time. Our bylaws also permit us to purchase and maintain insurance, at our expense, to protect
us and/or any director, officer, employee or agent of our corporation or another entity, trust or other enterprise against any
expense, liability or loss, whether or not we would have the power to indemnify such person against such expense, liability or
loss under the DGCL.
Any
repeal or amendment of provisions of our bylaws affecting indemnification rights, whether by our board of directors, stockholders
or by changes in applicable law, or the adoption of any other provisions inconsistent therewith, will (unless otherwise required
by law) be prospective only, except to the extent such amendment or change in law permits us to provide broader indemnification
rights on a retroactive basis, and will not in any way diminish or adversely affect any right or protection existing thereunder
with respect to any act or omission occurring prior to such repeal or amendment or adoption of such inconsistent provision.
The
registrant also intends to enter into indemnification agreements with its future directors and executive officers. The registrant
has purchased directors’ and officers’ liability insurance. The registrant believes that this insurance is necessary
to attract and retain qualified directors and officers.
Item 15. Recent Sales of Unregistered Securities.
The
following is a summary of transactions by us since our inception on April 17, 2017 involving sales of our securities that were
not registered under the Securities Act.
On
May 31, 2017, we issued 179,688 (1,437,500 pre-reverse split) Founder Shares to I-AM Capital Partners LLC (“Sponsor”)
in exchange for a capital contribution of $25,000. Upon the partial exercise of the underwriters’ over-allotment option
on September 13, 2017, 17,188 (137,500 pre-reverse split) Founder Shares were forfeited by the Sponsor, for a balance of 162,500
(1,300,000 pre-reverse split) Founder Shares held by our Sponsor. Our sponsor is an accredited investor for purposes of Rule 501
of Regulation D. No underwriting discounts or commissions were paid with respect to such sales.
On
August 22, 2017, we sold 5,000,000 units at a purchase price of $10.00 per unit in our initial public offering (“IPO”)
of public units (“Public Units”), generating gross proceeds of $50.0 million. Each Public Unit consisted of one share
of our Common Stock (“Public Shares”), one right to receive one-tenth of one share our Common Stock upon consummation
of an initial business combination (“Public Right”), and one redeemable warrant (“Public Warrants”). Each
warrant entitled the holder to purchase one share of common stock at an exercise price of $92.00 ($11.50 pre-reverse split) per
share, subject to adjustment.
On
August 22, 2017, simultaneously with the consummation of the IPO and the sale of the Public Units, we consummated the private
placement of 254,500 units (“Private Placement Units”) at a price of $10.00 per unit, generating total gross proceeds
of $2,545,000. Each unit consisted of (i) one share of Common Stock, (ii) one right to receive one-tenth (1/10) of one share of
Common Stock upon the consummation of an initial business combination (“Private Placement Rights”),and (iii) one 5-year
warrant to purchase one share of Common Stock at an exercise price of $92.00 ($11.50 pre-reverse split) per share. The Private
Placement Units, which were purchased by the Sponsor, are identical to the Public Units, except the Private Placement Warrants
underlying the Private Placement Units are non-redeemable and exercisable on a cashless basis so long as they are held by the
Sponsor or its affiliates or designees. If the Private Placement Units are held by someone other than the initial holder, or its
permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable by such holders on the same basis
as the Public Warrants.
On
August 22, 2017, we issued 6,250 (50,000 pre-reverse split) shares of Common Stock to Maxim Group LLC (“Maxim”) in
connection with its services as underwriter for the IPO.
Contained
in the underwriting agreement for the IPO was an over-allotment option allowing the underwriters to purchase from the Company
up to an additional 750,000 Public Units (the “Over-Allotment Units”) and, in addition, the Company received a commitment
from the Sponsor to purchase up to an additional 26,250 Private Placement Units. On September 13, 2017, the underwriters partially
exercised their option and purchased 200,000 Over-Allotment Units, which were sold at an offering price of $10.00 per unit, generating
gross proceeds of $2,000,000.
On
September 13, 2017, simultaneously with the underwriter’s partial exercise of the over-allotment option, we consummated
the sale of an additional 875 (7,000 pre-reverse split) Private Placement Units, generating gross proceeds of $70,000.
On
September 13, 2017, we issued Maxim an additional 250 (2,000 pre-reverse split) shares of our Common Stock upon partial exercise
of the over-allotment. These shares were issued in reliance on Section 4(a)(2) of the Securities Act.
At
the Special Meeting on November 20, 2018, holders of 556,033 (4,448,260 pre-reverse split) Public Shares exercised their right
to redeem those shares for cash at a price of $81.75 ($10.2187363 pre-reverse split) per share, for an aggregate of approximately
$45,455,596.
On
November 20, 2018, we issued 250,000 (2,000,000 pre-reverse split) shares of our Common Stock to AHA Holdings Private Limited
as an upfront portion of the newly issued shares of our Common Stock to be exchanged for all of the ownership interest in Smaaash
Private within 6 months after the closing of the Business Combination.
On
November 20, 2018, we issued 26,000 (208,000 pre-reverse split) shares of Common Stock to Chardan Capital Markets, LLC (“Chardan”)
in consideration of services rendered. The shares issued to Chardan are subject to the same lock-up and will have the same registration
rights as the shares of the Company held by the Sponsor.
On
November 20, 2018, we issued 65,000 (520,000 pre-reverse split) shares of Common Stock upon conversion of the Public Rights.
On
November 20, 2018, upon the consummation of the transaction (“Business Combination”) with Smaaash Entertainment Private
Limited (“Smaaash Private”), we issued 3,269 (26,150 pre-reverse split) shares of Common Stock underlying the Private
Placement Rights to the holders of the Private Placement Rights.
In
connection with the closing of the Acquisition of Simplicity Esports LLC, we issued 37.500 (300,000 pre-reverse split), 87,500
(700,000 pre-reverse split), and 250,000 (2,000,000 pre-reverse split) shares of Common Stock, respectively, to the Simplicity
Owners on January 4, 2019, January 7, 2019, and March 27, 2019 in exchange for all of the issued and outstanding equity interest
of Simplicity Esports LLC held by Simplicity Owners.
On
January 4, 2019, upon the closing of the Acquisition of Simplicity Esports LLC, the Series A-1 Note in the amount of $500,000
and held by Maxim automatically converted into 24,206 (193,648 pre-reverse split) shares of Common Stock.
During
the period from March 1, 2019 through July 1, 2019, we sold an aggregate of 987,500 units at a purchase price of $2.00 per unit
to 12 accredited investors in exchange for receipt of $1,975,000. Each unit consisted of (i) one share of Common Stock, and (ii)
a 5-year warrant to purchase one share of Common Stock at a purchase price of $32.00 ($4.00 pre-reverse split).
On
March 27, 2019, pursuant to a Restricted Stock Award, we issued Jed Kaplan, our then-Chief Executive Officer and interim Chief
Financial Officer and a member of our board of directors, 15,000 (120,000 pre-reverse split) shares of our restricted Common Stock.
Such shares vested over the succeeding nine month period. As of April 27, 2021, all of such shares have vested. Mr. Kaplan
currently serves as our Chairman of the Board.
On
March 27, 2019, pursuant to a Restricted Stock Award, we issued Roman Franklin, our then-President and a member of our board of
directors, 4,500 (36,000 pre-reverse split) shares of our restricted Common Stock. Such shares vested over the succeeding nine
month period. As of April 27, 2021, all of such shares have vested. Mr. Franklin currently serves as our Chief Executive
Officer and a member of our board of directors.
On
March 27, 2019, pursuant to a Restricted Stock Award, we issued Steve Grossman, President of Simplicity Esports, LLC, a wholly
owned subsidiary of our Company at such time, 3,000 (24,000 pre-reverse split) shares of our restricted Common Stock. Such shares
vested over the succeeding nine month period. As of April 27, 2021 all of such shares have vested.
Each
of the Restricted Stock Awards was entered into in connection with entry into employment agreements with each of Messrs. Kaplan,
Franklin and Grossman on December 31, 2018.
On
May 31, 2019, we issued 12,500 (100,000 pre-reverse split) shares of Common Stock to Polar in exchange for Polar Asset Management
Partners Inc.’s (“Polar”) forgiveness of $143,476 owed by us to Polar under that that certain Debt Conversion
Agreement entered into in May 2019 between Polar and us.
On
July 30, 2019, in connection with the acquisition of a 100% interest in PLAYlive Nation, Inc. (“PLAYlive”) by way
of merger, the Company issued 93,750 (750,000 pre-reverse split) shares of the Company’s common stock in exchange for 100%
of the issued and outstanding common stock from the owners of PLAYlive.
On
September 16, 2019, pursuant to a Restricted Award, we issued to Jed Kaplan, our then-Chief Executive Officer and Interim Chief
Financial Officer and a member of our board of directors, of 8,750 (70,000 pre-reverse split) shares of our restricted Common
Stock. Mr. Kaplan currently serves as our Chairman.
On
September 16, 2019, pursuant to a Restricted Award, we issued to Roman Franklin, our then-President and a member of our board
of directors, of 2,625 (21,000 pre-reverse split) shares of our restricted Common Stock. Mr. Franklin currently serves as our
Chief Executive Officer and a member of our board of directors.
On
September 16, 2019, pursuant to a Restricted Award, we issued to Steven Grossman, our Corporate Secretary, of 1,750 (14,000 pre-reverse
split) shares of our restricted Common Stock. These shares were issued in reliance on Section 4(a)(2) of the Securities Act. Mr.
Grossman has informed the Company that he will resign as Corporate Secretary effective April 15, 2021.
On
March 11, 2020, in connection with the execution of the Common Stock Purchase Agreement with Triton Funds, LP, the Company issued
625 (5,000 pre-reverse split) shares of the Company’s common stock to Triton Funds, LP (“Triton”) as a donation.
On
April 9, 2020, the Company delivered a Purchase Notice to Triton pursuant to the terms of the Common Stock Purchase Agreement
requiring Triton to acquire 15,625 (125,000 pre-reverse split) shares of common stock, which resulted in $87,700 in proceeds to
the Company. Pursuant to the terms of the Common Stock Purchase Agreement, on April 9, 2020, the Company instructed the transfer
agent to issue 15,625 (125,000 pre-reverse split) shares of common stock to a custodial account of Triton. Unfortunately, the
transfer agent erroneously transferred the entire 90,625 (725,000 pre-reverse split) shares of common stock under the Equity Line
to the custodial account of Triton, resulting in an over-issuance of 75,000 (600,000 pre-reverse split) shares to Triton. The
Company notified Triton of this error and that the Company terminated the Common Stock Purchase Agreement with Triton. On November
18, 2020, the 75,000 (600,000 pre-reverse split) shares issued in error were returned by Triton and cancelled and returned to
the treasury of the Company.
On
May 4, 2020, pursuant to the terms of that certain 10% Fixed Convertible Promissory Note dated April 29, 2020 in the principal
amount of $152,500 issued by the Company in favor of Harbor Gates Capital, LLC, the Company issued 1,250 (10,000 pre-reverse split)
shares of the Company’s common stock to Harbor Gates Capital, LLC as additional consideration for the purchase of such note.
On
May 7, 2020, we issued 2,977 (23,809 pre-reverse split) shares of our restricted Common Stock, at a price of 8.40 ($1.05 pre-reverse
split) per share, to William H. Herrmann, Jr. a member of our board of directors, for an aggregate purchase price of $25,000.
On
June 4, 2020, we issued 10,739 (85,905 pre-reverse split) shares of common stock in connection with the conversion of $100,000
in principal of a convertible note issued in favor of Maxim.
On
June 4, 2020, we issued 3,125 (25,000 pre-reverse split) shares of common stock in satisfaction of an outstanding balance owed
to a vendor.
On
June 18, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and an accredited investor,
pursuant to which the Company issued a 12% self-amortization promissory note in the principal amount of $550,000, the Company
issued 6,875 (55,000 pre-reverse split) shares of the Company’s common stock to such accredited investor as additional consideration
for the purchase of such note.
On
June 30, 2020, the Company issued 12,334 (98,672 pre-reverse split) shares of common stock at $7.76 ($0.97 pre-reverse split)
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.
On
July 1, 2020, the Company acquired the assets of one its franchisee owned esports gaming centers located on the Fort Bliss U.S.
Military base in El Paso, TX. In connection with the acquisition the Company issued 18,750 (150,000 pre-reverse split) restricted
shares.
On
July 29, 2020, the Board issued 41,875 (335,000 pre-reverse split) shares of common stock to Jed Kaplan, our then-Chief Executive
Officer and Interim Chief Financial Officer and a member of our board of directors. Mr. Kaplan now serves as our Chairman of the
Board. Of these shares, (i) 31,250 (250,000 pre-reverse split) shares of common stock related to services provided by Mr. Kaplan
to the Company during the 2020 fiscal year, (ii) 8,750 (70,000 pre-reverse split) shares of common stock related to grants that
should have been, but were not, made pursuant to the Kaplan 2018 Agreement (as hereinafter defined), and (iii) 1,875 (15,000 pre-reverse
split) shares of common stock related to grants made pursuant to the Kaplan 2020 Agreement (as hereinafter defined). The Kaplan
2018 Agreement provided for the grant to Mr. Kaplan of 1,250 (10,000 pre-reverse split) shares of common stock per month. For
the months of January 2020 through July 2020, however, such shares had not been granted. Accordingly, the July 29, 2020 grant
included an aggregate of 8,750 (70,000 pre-reverse split) shares of common stock that should have been granted for the months
of January 2020 through July 2020. The Kaplan 2020 Agreement provides for the grant to Mr. Kaplan of 1,875 (15,000 pre-reverse
split) shares of common stock per month. Such shares were fully vested and earned as of the issuance thereof.
On
July 29, 2020, the Board also issued 34,813 (278,500 pre-reverse split) shares of common stock to Roman Franklin, our then-President
and a member of our board of directors. Mr. Franklin now serves as our Chief Executive Officer and a member of our board of directors.
Of these shares, (i) 31,250 (250,000 pre-reverse split) shares of common stock related to services provided by Mr. Franklin to
the Company during the 2020 fiscal year, (ii) 2,625 (21,000 pre-reverse split) shares of common stock related to grants that should
have been, but were not, made pursuant to the Franklin 2018 Agreement (as hereinafter defined), and (iii) 938 (7,500 pre-reverse
split) shares of common stock related to grants made pursuant to the Franklin 2020 Agreement (as hereinafter defined). The Franklin
2018 Agreement provided for the grant to Mr. Franklin of 375 (3,000 pre-reverse split) shares of common stock per month. For the
months of January 2020 through July 2020, however, such shares had not been granted. Accordingly, the July 29, 2020 grant included
an aggregate of 2,625 (21,000 pre-reverse split) shares of common stock that should have been granted for the months of January
2020 through July 2020. The Franklin 2020 Agreement provides for the grant to Mr. Franklin of 782 (6,250 pre-reverse split) shares
of common stock per month. Such shares were fully vested and earned as of the issuance thereof.
On
July 29, 2020, we issued an aggregate of 24,000 (192,000 pre-reverse split) shares of common stock to an employee and the members
of the Board of Directors of the Company.
On
July 31, 2020, we entered into a marketing agreement whereby we issued 3,472 (27,778 pre-reverse split) shares of common stock
at $6.56 ($0.82 pre-reverse split) per share.
On
August 7, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and an accredited investor
pursuant to which we issued a 12% self-amortization promissory note in the principal amount of $333,333, the Company issued 4,167
(33,333 pre-reverse split) shares of common stock.
During
the three months ended August 31, 2020, the Company issued 84,062 (672,496 pre-reverse stock split) shares of common stock to
executive officers of the Company for services rendered. Additionally, the Company issued 19,779 (158,232 pre-reverse stock split)
shares of common stock to employees for services rendered. The shares were valued at per share prices ranging from $6.56 ($0.82
pre-reverse stock split) to $14.72 ($1.84 pre-reverse stock split), based on the quoted trading price on the date of grant. In
connection with the issuance of these shares, during the nine months ended November 30, 2020, the Company recorded stock-based
compensation of $54,395 and reduced prior accrued compensation by $669,215.
On
September 16, 2020, we issued 13,209 (105,670 pre-reverse split) shares of common stock to employees and consultants.
On
September 16, 2020, the Company issued an aggregate of 2,813 (22,500 pre-reverse split) restricted common shares of the Company
to executive officers and employees of the Company for services rendered. More specifically, the Company issued 1,875 (15,000
pre-reverse split) of these shares to Jed Kaplan and issued 938 (7,500 pre-reverse split) of these shares to Roman Franklin. These
shares were valued at $25,420, or $9.04 ($1.13 pre-reverse split) per share, based on the quoted trading price on the date of
grant.
On
September 22, 2020, in connection with an Asset Purchase agreement with Ignatious O’Riley, an existing franchisee to acquire
such franchisee’s assets in exchange for 2,989 (23,912 pre-reverse split) shares of the Company’s common stock with
fair value of $29,416 or $9.84 ($1.23 pre-reverse split) per share.
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, to acquire such franchisee’s assets in exchange for 4,506 (36,048
pre-reverse split) shares of the Company’s common stock with fair value of $43,974 or $9.76 ($1.22 pre-reverse split) per
share.
On
October 1, 2020, the Company entered into an Asset Purchase agreement with Parryproject LLC., Owen Parry and Jennie Parry, an
existing franchisee, to acquire such franchisee’s assets in exchange for 3,688 (29,504 pre-reverse split) shares of the
Company’s common stock with fair value of $38,650 or $10.48 ($1.31 pre-reverse split) per share.
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, to acquire such franchisee’s assets in exchange
for 8,402 (67,216 pre-reverse split) shares of the Company’s common stock with fair value of $88,052 or $10.48 ($1.31 pre-reverse
split) per share.
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), to acquire such franchisee’s assets in exchange
for 6,202 (49,616 pre-reverse split) shares of the Company’s common stock with fair value of $74,423 or $12.00 ($1.50 pre-reverse
split) per share.
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, to acquire such franchisee’s
assets in exchange for 4,202 (33,616 pre-reverse split) shares of the Company’s common stock with fair value of $46,068
or $11.44 ($1.43 pre-reverse split) per share.
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, to acquire such franchisee’s assets
in exchange for 3,255 (26,040 pre-reverse split) shares of the Company’s common stock with fair value of $37,237 or $11.44
($1.43 pre-reverse split) per share.
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, to acquire such franchisee’s assets in exchange
for 4,697 (37,576 pre-reverse split) shares of the Company’s common stock with fair value of $52,725 or $11.44 ($1.43 pre-reverse
split) per share.
During
the three months ended November 30, 2020, the Company issued an aggregate of 9,844 (78,752 pre-reverse split) restricted common
shares of the Company to executive officers of the Company for services rendered. Of these shares, the Company issued 5,625 (45,000
pre-reverse split) shares to Jed Kaplan and issued 2,344 (18,750 pre-reverse split) shares to Roman Franklin. These shares were
valued at $119,632, or per share prices ranging from $9.04 ($1.13 pre-reverse split) per share to $11.44 ($1.43 pre-reverse split)
per common share, based on the quoted trading price on the date of grant.
On
December 1, 2020, the Company’s wholly owned subsidiary, Simplicity St. Louis, LLC, entered into an Asset Purchase Agreement
with Metta Gaming, LLC, Brian Paul Van Wyk, an existing franchisee, to acquire such franchisee’s assets in exchange for
3,523 (28,184 pre-reverse split) shares of the Company’s common stock with fair value of $52,845, or $15.00 ($1.875 pre-reverse
split) per share.
On
December 2, 2020, the Company issued 5,000 (40,000 pre-reverse split) shares of its common stock in satisfaction of $50,000 in
legal fees. These shares were valued at $80,000, or $16.00 ($2.00 pre-reverse split) 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
March 11, 2021, the Company’s wholly owned subsidiary, Simplicity Fullerton, LLC, entered into an Asset Purchase Agreement
with Say K 2 Play, LLC a California limited liability company, Paresh Mital an individual and Smeeta Mital, an existing franchisee,
to acquire such franchisee’s assets in exchange for 1,600 (12,800 pre-reverse split) shares of the Company’s common
stock with fair value of $20,800 or $13.00 ($1.625 pre-reverse split) per share.
During
the three months ended February 28, 2021, the Company issued an aggregate of 108,641 (869,128 pre-reverse split) restricted common
shares of the Company to executive officers of the Company for services rendered. These shares were valued at $1,545,467, or per
share prices ranging from $13.25 ($1.66 pre-reverse split) per share to $19.75 ($2.47 pre-reverse split) per common share, based
on the quoted trading price on the date of grant.
On
March 26, 2021, the Company’s wholly owned subsidiary, Simplicity Vancouver, LLC, entered into an Asset Purchase Agreement
with Bhavin Shah, an individual and Parshwa, Inc., a Washington corporation, an existing franchisee, to acquire such franchisee’s
assets in exchange for 2,900 (23,200 pre-reverse split) shares of the Company’s common stock with fair value of $42,900
or $16.50 ($2.0625 pre-reverse split) per share.
On
April 6, 2021, the Company issued an aggregate of 2,657 (21,256 pre-reverse split) restricted common shares of the Company to
executive officers and employees of the Company for services rendered. More specifically, the Company issued 1,875 (15,000 pre-reverse
split) of these shares to Jed Kaplan and issued 782 (6,256 pre-reverse split) of these shares to Roman Franklin. These shares
were valued at $34,488, or $12.98 ($1.6225 pre-reverse split) per share, based on the quoted trading price on the date of grant.
The
above issuances/sales were made pursuant to an exemption from registration as set forth in Section 4(a)(2) of the Securities Act
and/or Rule 506 of Regulation D promulgated under the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
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(a)
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Exhibits.
The list of exhibits preceding the signature page of this registration statement is incorporated herein by reference.
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(b)
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Financial
Statements. See page F-1 for an index to the financial statements and schedules included in the registration statement.
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Item 17. Undertakings
Insofar
as indemnification for liabilities arising under the Securities Act “may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion
of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
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(a)
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Rule
415 Offering. The undersigned registrant hereby undertakes:
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(1)
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To
file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
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(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
|
|
|
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
|
|
|
|
|
(iii)
|
To
include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
|
|
|
|
|
(2)
|
That,
for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
|
|
|
|
|
(3)
|
To
remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
|
|
|
|
|
(i)
|
The
undersigned Registrant hereby undertakes that it will:
|
|
|
|
|
a.
|
for
determining any liability under the Securities Act of 1933, treat the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant
under Rule 424(b)(1), or (4) or 497(h) under the Securities Act of 1933 as part of this registration statement as of the time
the Commission declared it effective.
|
|
|
|
|
b.
|
for
determining any liability under the Securities Act of 1933, treat each post-effective amendment that contains a form of prospectus
as a new registration statement for the securities offered in the registration statement, and that offering of the securities
at that time as the initial bona fide offering of those securities.
|
EXHIBIT
INDEX
Exhibit
No.
|
|
Exhibit
|
2.1
|
|
Share Subscription Agreement, dated May 3, 2018, by and among the Company, Smaaash Private, and the Smaaash Founders, (incorporated by reference to Annex A to the Company’s Definitive Proxy Statement filed with the SEC on September 19, 2018).
|
2.2
|
|
Amendment Cum Addendum to the Share Subscription Agreement Dated May 03, 2018 (incorporated by reference to Annex A to the Company’s Definitive Proxy Statement filed with the SEC on September 19, 2018).
|
2.3
|
|
Second Amendment Cum Addendum to the Share Subscription Agreement Dated May 03, 2018 (incorporated by reference to Annex A to the Company’s Definitive Proxy Statement filed with the SEC on September 19, 2018).
|
2.4
|
|
Third Amendment Cum Addendum to the Share Subscription Agreement Dated May 03, 2018 (incorporated by reference to Annex A to the Company’s Proxy Statement Supplement, which was filed with the SEC on November 5, 2018).
|
2.5
|
|
Fourth Amendment Cum Addendum to the Share Subscription Agreement Dated May 03, 2018, dated as of November 15, 2018 (1)
|
3.1
|
|
Third Amended and Restated Certificate of Incorporation (1)
|
3.2
|
|
Certificate of Amendment to the Company’s Third Amended and Restated Certificate of Incorporation, filed with the Delaware Secretary of State on January 2, 2019 (9)
|
3.3
|
|
Certificate of Amendment to the Company’s Third Amended and Restated Certificate of Incorporation, filed with the Delaware Secretary of State on August 17, 2020 (20)
|
3.4
|
|
Certificate of Amendment to the Company’s Third Amended and Restated Certificate of Incorporation, filed with the Delaware Secretary of State on September 18, 2020 (21)
|
3.5
|
|
Certificate of Amendment to the Company’s Third Amended and Restated Certificate of Incorporation, filed with the Delaware Secretary of State on September 29, 2020 (22)
|
3.6
|
|
Certificate of Amendment to the Company’s Third Amended and Restated Certificate of Incorporation, filed with the Delaware Secretary of State on October 12, 2020 (23)
|
3.7
|
|
Certificate of Amendment to the Company’s Third Amended and Restated Certificate of Incorporation, filed with the Delaware Secretary of State on November 2, 2020 (24)
|
3.8
|
|
Certificate of Amendment to the Company’s Third Amended and Restated Certificate of Incorporation, filed with the Delaware Secretary of State on November 17, 2020 (25)
|
3.3
|
|
Bylaws (2)
|
4.1
|
|
Specimen Common Stock Certificate (4)
|
4.2
|
|
Specimen Warrant Certificate (4)
|
4.3
|
|
Warrant Agreement, dated August 16, 2017, by and between Continental Stock Transfer & Trust Company and the Company (3)
|
5.1
|
|
Opinion of Anthony L.G., PLLC*
|
10.1
|
|
Master Franchise Agreement, dated November 20, 2018, by and between the Company and Smaaash Private(1)
|
10.2
|
|
Master License and Distribution Agreement, dated November 20, 2018, by and between the Company and Smaaash Private(1)
|
10.3
|
|
Settlement and Release Agreement, dated November 20, 2018, by and between the Company and Maxim Group LLC(1)
|
10.4
|
|
Demand Secured Promissory Note, dated November 20, 2018, issued to Maxim Group LLC(1)
|
10.5
|
|
Escrow Agreement, dated November 20, 2018, by and among the Company, Ellenoff Grossman and Schole LLP and Shripal Morakhia(1)
|
10.6
|
|
Smaaash Entertainment Inc. 2018 Equity Incentive Plan (incorporated by reference to Annex F to the Company’s Proxy Statement filed with the SEC on September 19, 2018) †
|
10.7
|
|
Side Letter, dated November 16, 2018, by and between the Company and Chardan Capital Markets, LLC (1)
|
10.8
|
|
Letter of Undertaking, dated November 16, 2018, by Smaaash Private and Smaaash Founders(1)
|
10.9
|
|
Addendum to Master Franchise Agreement, dated November 29, 2018, by and between the Company and Smaaash Private(1)
|
10.10
|
|
Promissory Note, dated May 31, 2017, issued to I-AM Capital Partners LLC, our sponsor (2)
|
10.11
|
|
Letter Agreement, dated August 16, 2017, by and between the Company, the Sponsor and the officers and directors of the Company (3)
|
10.12
|
|
Registration Rights Agreement, dated August 16, 2017, by and among the Company and our sponsor (3)
|
10.13
|
|
Securities Subscription Agreement, dated May 31, 2017, among the Registrant and our sponsor (2)
|
10.14
|
|
Amended and Restated Unit Purchase Agreement, dated August 11, 2017, between the Registrant and our sponsor (5)
|
10.15
|
|
Form of Indemnity Agreement (4)
|
10.16
|
|
Administrative Services Agreement, dated August 16, 2017, by and between the Company and our sponsor (3)
|
10.17
|
|
Shareholders’ Agreement, dated May 3, 2018, by and among the Company, FW Metis Limited, Mitesh R. Gowani, the Smaaash Founders, and Smaaash Private (incorporated by reference to Annex D to the Company’s Definitive Proxy Statement filed with the SEC on September 19, 2018).
|
10.18
|
|
Stock Purchase Agreement, dated as of November 2, 2018, by and between the Company and Polar Asset Management Partners Inc. (6)
|
10.19
|
|
Stock Purchase Agreement, dated as of November 5, 2018, by and between the Company and K2 Principal Fund L.P. (6)
|
10.20
|
|
Amendment, dated December 20, 2018, by and among the Company, Polar Asset Management Partners Inc., and The K2 Principal Fund L.P. (7)
|
10.21
|
|
Share Exchange Agreement, dated December 21, 2018, by and among Smaaash Entertainment Inc., Simplicity Esports, LLC, Jed Kaplan and each of the equity holders of Simplicity Esports, LLC (8)
|
10.22
|
|
Amendment No. 1 to Share Exchange Agreement, dated December 28, 2018, by and among Smaaash Entertainment Inc., Simplicity Esports, LLC, Jed Kaplan and each of the equity holders of Simplicity Esports, LLC (8)
|
10.23
|
|
Securities Exchange Agreement, dated December 20, 2018, by and between Smaaash Entertainment Inc. and Maxim Group LLC (8)
|
10.24
|
|
Series A-1 Exchange Convertible Note (8)
|
10.25
|
|
Series A-2 Exchange Convertible Note (8)
|
10.26
|
|
Registration Rights Agreement, dated December 20, 2018, by and between Smaaash Entertainment Inc. and Maxim Group LLC (8)
|
10.27
|
|
Lock-Up Agreement, dated December 20, 2018, by and between Smaaash Entertainment Inc. and Maxim Group LLC (8)
|
10.28
|
|
Amendment No. 2 to Share Exchange Agreement, dated December 30, 2018, by and among the Company, Simplicity Esports, LLC, and Jed Kaplan (9)
|
10.29
|
|
Voting Agreement, Dated December 31, 2018, between the Company and the stockholders of the Company party thereto (9)
|
10.30
|
|
Employment Agreement, dated December 31, 2018, between the Company and Jed Kaplan (9) †
|
10.32
|
|
Employment Agreement, dated December 31, 2018, between the Company and Roman Franklin (9) †
|
10.33
|
|
Employment Agreement, dated December 31, 2018, between the Company and Steven Grossman (9) †
|
10.34
|
|
Restricted Stock Award Agreement dated March 27, 2019 between the registrant and Jed Kaplan (10) †
|
10.35
|
|
Restricted Stock Award Agreement dated March 27, 2019 between the registrant and Roman Franklin (10) †
|
10.36
|
|
Restricted Stock Award Agreement dated March 27, 2019 between the registrant and Steve Grossman (10) †
|
10.37
|
|
Agreement and Plan of Merger, dated July 25, 2019, among the registrant, PLAYlive Nation, Inc., and owners of PLAYlive Nation, Inc. (11)
|
10.38
|
|
Exclusive Trademark and Symbol Use License Agreement, and Other Covenants, dated November 4, 2019, among Simplicity One Brasil LTDA and Clube de Regatas do Flamengo (12)
|
10.39
|
|
Common Stock Purchase Agreement, dated as of March 11, 2020, between the Company and Triton Funds LP (13)
|
10.40
|
|
Registration Rights Agreement, dated as of March 11, 2020, between the Company and Triton Funds LP (13)
|
10.41
|
|
10% Fixed Convertible Promissory Note dated April 29, 2020 issued by the Company in favor of Harbor Gates Capital, LLC (14)
|
10.42
|
|
Promissory Note dated May 12, 2020 issued by the Company in favor of Jed Kaplan (15)
|
10.43
|
|
Form of Self-Amortization Promissory Note dated June 18, 2020 issued by the Company to an accredited investor (16)
|
10.44
|
|
Form of Securities Purchase Agreement dated June 18, 2020, by and between the Company and an accredited investor (16)
|
10.45
|
|
First Amendment to the Series A-2 Exchange Convertible Note issued on December 20, 2018 (16)
|
10.46
|
|
2020 Omnibus Incentive Plan (17) †
|
10.47
|
|
Employment Agreement dated July 29, 2020 by and between the Company and Jed Kaplan (18) †
|
10.48
|
|
Employment Agreement dated July 29, 2020 by and between the Company and Roman Franklin (18) †
|
10.49
|
|
Form of Self-Amortization Promissory Note dated August 7, 2020 issued by the Company to an accredited investor (19)
|
10.50
|
|
Self-Amortization Promissory Note dated November 23, 2020, issued by the Company to an accredited investor (26)
|
10.51
|
|
Securities Purchase Agreement dated November 23, 2020, by and between the Company and an accredited investor (26)
|
10.52
|
|
Common Stock Purchase Warrant dated November 23, 2020, issued by the Company to an accredited investor (26)
|
10.53
|
|
Promissory Note dated February 19, 2021, issued by the Company to the Holder (27)
|
10.54
|
|
Securities Purchase Agreement dated February 19, 2021, by and between the Company and the Holder (27)
|
10.55
|
|
Promissory Note dated March 10, 2021, issued by the Company to FirstFire Global Opportunities Fund, LLC (28)
|
10.56
|
|
Securities Purchase Agreement dated March 10, 2021, by and between the Company and FirstFire Global Opportunities Fund, LLC (28)
|
10.57
|
|
Employment Agreement, entered into on March 25, 2021 and effective March 29, 2021, by and between the Company and Roman Franklin (29) †
|
10.58
|
|
Employment Agreement, entered into on March 23, 2021 and effective March 29, 2021, by and between the Company and Knicks Lau (29) †
|
10.59
|
|
Stock Purchase Agreement, dated as of March 31, 2021, by and between the Company and Tiger Trout Capital Puerto Rico, LLC (30)
|
10.60
|
|
Third Amendment to the Series A-2 Exchange Convertible Note entered into on April 14, 2021, by and between the registrant and Maxim Group LLC (31)
|
14.1
|
|
Code of Ethics (4)
|
*
Filed herewith
†
Management contract, compensation plan or arrangement
(1)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on November 30, 2018
|
(2)
|
Incorporated
by reference to exhibits to the Company’s Registration Statement on Form S-1 filed on July 12, 2017
|
(3)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on August 22, 2017.
|
(4)
|
Incorporated
by reference to exhibits to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed on July 31, 2017
|
(5)
|
Incorporated
by reference to exhibits to Amendment No. 2 to the Company’s Registration Statement on Form S-1 filed on August 14,
2017
|
(6)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on November 7, 2018
|
(7)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on December 26, 2018
|
(8)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on December 28, 2018
|
(9)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on January 7, 2019.
|
(10)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on April 2, 2019.
|
(11)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on August 1, 2019.
|
(12)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on January 22, 2020.
|
(13)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on March 17, 2020.
|
(14)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on May 5, 2020.
|
(15)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on May 18, 2020.
|
(16)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on June 24, 2020.
|
(17)
|
Incorporated
by reference to Appendix I Company’s Proxy Statement filed on June 9, 2020.
|
(18)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed with the SEC on August 13, 2020
|
(19)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on August 13, 2018.
|
(20)
|
Incorporated
by reference to exhibits to the Company’s Annual Report on Form 10-K filed on August 31, 2020.
|
(21)
|
Incorporated
by reference to exhibits to the Company’s Post-Effective Amendment No. 1 to Registration Statement on Form S-1 filed
on October 5, 2020.
|
(22)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on October 5, 2020.
|
(23)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on October 13, 2020.
|
(24)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on November 4, 2020.
|
(25)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on November 18, 2020.
|
(26)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on December 2, 2020.
|
(27)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on February 24, 2021.
|
(28)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on March 16, 2021.
|
(29)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on March 29, 2021.
|
(30)
|
Incorporated
by reference to exhibits to the Company’s Current Report on Form 8-K filed on April 6, 2021.
|
(31)
|
Incorporated
by reference to exhibits to the Company’s Quarterly Report on Form 10-Q filed on April 14, 2021.
|
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, as amended, the registrant has duly caused this Registration Statement on Form
S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, New York, on April 28,
2021.
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
|
|
|
|
|
By:
|
/s/
Roman Franklin
|
|
|
Roman
Franklin
|
|
|
Chief
Executive Officer
(principal
executive officer)
|
POWER
OF ATTORNEY
KNOW
ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Roman Franklin as his or her true
and lawful attorneys-in-fact and agents, each with the full power of substitution, for him or her in his or her name, place or
stead, in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments),
and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon
filing pursuant to Rule 462(b) promulgated under the Securities Act of 1933, as amended, and all post-effective amendments thereto,
and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite
and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming that said attorneys-in-fact and agents, or his or her substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Act, this Registration Statement on Form S-1 has been signed by the following persons in
the capacities held on April 28, 2021.
Name
|
|
Position
|
|
Date
|
|
|
|
|
|
/s/
Roman Franklin
|
|
Chief
Executive Officer and Director
|
|
April
28, 2021
|
Roman
Franklin
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Knicks Lau
|
|
Chief
Financial Officer
|
|
April
28, 2021
|
Knicks
Lau
|
|
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
|
/s/
Jed Kaplan
|
|
Chairman
|
|
April
28, 2021
|
Jed
Kaplan
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
April
28, 2021
|
Donald
R. Caldwell
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
April
28, 2021
|
Max
Hooper
|
|
|
|
|
|
|
|
|
|
/s/
Frank Leavy
|
|
Director
|
|
April
28, 2021
|
Frank
Leavy
|
|
|
|
|
|
|
|
|
|
/s/
Edward Leonard Jaroski
|
|
Director
|
|
April
28, 2021
|
Edward
Leonard Jaroski
|
|
|
|
|
|
|
|
|
|
/s/
William H. Herrmann
|
|
Director
|
|
April
28, 2021
|
William
H. Herrmann
|
|
|
|
|
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