The accompanying notes are an integral part
of the unaudited financial statements.
The accompanying notes are an integral part
of the unaudited financial statements.
The accompanying notes are an integral part
of the unaudited financial statements.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
NOTE 1 — DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Smaaash Entertainment Inc. (the “Company”),
was a newly organized 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”).
The Company’s sponsor was I-AM Capital
Partners LLC (the “Sponsor”). The Company selected May 31 as its fiscal year end.
On November 20, 2018, the Company and
Smaaash Entertainment Private Limited, a private limited company incorporated under the laws of India
(
“
Smaaash
”
), consummated its initial Business Combination as contemplated by a share
subscription agreement dated as of May 3, 2018 (the “Closing”).
In connection with the Closing, the Company
changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc.
Smaaash operates 40 state-of-the-art games
and entertainment centers (the “Centers”) including 39 centers in India and one international 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’s core concept is to offer
an interactive, immersive and fun experience to customers at its Centers, blending Augmented Reality (“AR”) and Virtual
Reality (“VR”) and other games, indoor entertainment, and attractive food and beverage (“F&B”) 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’s game concepts are supported by its in-house technology, value engineering
and systems integration capabilities.
Financing
The registration statement for the Company’s
Initial Public Offering (as described in Note 3) was declared effective by the United States Securities and Exchange Commission
(the “SEC”) on August 16, 2017. The Company financed the Business Combination with the net proceeds from the sale of
$50,000,000 of units in the Initial Public Offering (the “Public Units”) and the sale of $2,545,000 of units (the “Private
Units” and, together with the Public Units, the “Units”) in the simultaneous private placement (the “Private
Placement” as described in Note 3). Upon the closing of the Initial Public Offering and the Private Placement on August 22,
2017, $50,750,000 was deposited in a trust account with Continental Stock Transfer and Trust Company acting as trustee (the “Trust
Account”) as discussed below.
Contained in the underwriting agreement
for the Initial Public Offering 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 Units in order to maintain the amount of cash in the Trust Account equal to $10.15
per Public Unit sold in the Initial Public Offering. 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.
Also on September 13, 2017, simultaneously with the sale of the Over-Allotment Units, the Company consummated the sale of an additional
7,000 Placement Units (the “Over-Allotment Placement Units”), generating gross proceeds of $70,000.
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
Trust Account
The Trust Account was invested
only in U.S. government treasury bills with a maturity of one hundred and eighty (180) days or less or in money market
funds meeting certain conditions under Rule 2a-7 under the Investment Company Act of 1940, which invested only in direct
U.S. government obligations. Funds were to remain in the Trust Account until the earlier of (i) the consummation of its
first Business Combination or (ii) the distribution of the Trust Account as described below. The remaining proceeds outside
the Trust Account were allowed to be used to pay for business, legal and accounting due diligence on prospective acquisitions
and continuing general and administrative expenses.
The Company’s amended
and restated certificate of incorporation provided that, other than the withdrawal of interest to pay taxes or up to a
maximum of $600,000 of working capital expenses, if any, none of the funds held in trust were to be released until the
earlier of: (i) the completion of the initial Business Combination; or (ii) the redemption of 100% of the shares of common
stock included in the Public Units sold in the Initial Public Offering if the Company is unable to complete its initial
Business Combination within 12 months (or 21 months if extended) from the closing of the Initial Public Offering (subject to
the requirements of law).
Business Combination
The Company’s management had broad
discretion with respect to the specific application of the net proceeds of the Initial Public Offering.
On August 21, 2018, the Company deposited
into the Trust Account an aggregate of $303,610 (including interest earned on the funds in the Trust Account available for withdrawal),
representing $0.058 per public share. As a result of such payment, the Company extended the period of time it had to consummate
a Business Combination by three months to November 21, 2018.
On November 20, 2018, the parties consummated
the initial Business Combination.
Upon consummation of the
Business Combination, the Company issued 208,000 restricted shares to Chardan Capital Markets in consideration for advisory
services provided. These restricted shares are valued at $10.21 per share totaling $2,125,000 and are on the statement of
operations included in general and administrative expenses.
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”) under the symbols
“SMSH” and “SMSHW”, respectively.
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 described below.
Prior to the Closing, the Company was
a shell company with no operations, formed as a vehicle to effect a business combination with one or more operating
businesses. After the Closing, the Company’s primary assets consisted of shares in Smaaash and its rights under the
Master Franchise Agreement and Master Distribution Agreement.
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
Master Franchise Agreement
Under the Master Franchise Agreement, Smaaash
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 with respect to the Smaaash Centers, in the territories of North America and South America
(“Territory”). Further, Smaaash granted to the Company the limited license to use the trademarks of Smaaash (as set
out in the Master Franchise Agreement) for the purposes of establishing and operating the Smaaash Centers in the Territory.
The Company agreed not directly or indirectly
engage or be concerned with any business which competes with Smaaash’s business in the Territory during the term of the Master
Franchise Agreement. The Company will market, promote and publicize the Smaaash Centers in the Territory. The Company or third
party sub-franchisees shall be under an obligation to set up at least six Smaaash Centers during the first calendar year.
During the term of the agreement, Smaaash
shall assist in training and installing the equipment and bear all the costs associated therewith. The franchisee or sub-franchisee
will bear the cost to set up the Smaaash Center.
The Company or the third-party franchisee
will be entitled to receive the revenue generated from each of the Smaaash Centers. In connection with the operations of the Smaaash
Centers by sub-franchisees, the Company shall be entitled to receive (i) a signup fee equal to 5% of the capital expenditure of
the sub-franchisee, (ii) 5% of the revenue of the sub-franchisee on an annual basis; and (iii) a 15% markup of the products sold
to the sub-franchisee. Smaaash will not receive any portion of the revenue or other fees in connection with the Master Franchise
Agreement.
Smaaash will be the sole owner of all intellectual
property related to the Smaaash Centers. All future rights, goodwill and reputation of the Smaaash marks shall inure to the benefit
of Smaaash.
The Master Franchise Agreement commenced
on the Closing Date and will continue until the agreement is terminated in accordance with its terms.
On November 29, 2018, the Company and Smaaash executed an addendum
to the Master Franchise Agreement (the “Amendment”). Pursuant to the Amendment, Smaaash granted the Company the exclusive
rights to set up family and entertainment centers under the name “Total Sports Center” in the United States (“Total
Sports Centers”) in which 51% of the investment will be borne by the Company and 49% by Smaaash. Smaaash 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 will also appoint the management team for the centers. Smaaash 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 granted to
the Company an exclusive right to purchase from Smaaash specialized equipment and products related to sports and recreational
activities (“Products”) in the territory under the brand name of Smaaash 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.
The Company may sell the Products to any third party franchisees at a minimum of 15% margin over and above the price at
which Smaaash sold the Products to the Company.
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
Smaaash also granted the Company a license
to use the Trademarks (as set out in the Master Distribution Agreement) on a royalty free basis for the purpose of promoting the
sale of the Products in the Territory. Smaaash is the sole owner of any intellectual property rights relating to the Products and
all the goodwill relating thereto.
The Master Distribution Agreement commenced
on the Closing Date and will continue until the agreement is terminated in accordance with its terms.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited 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 of the
SEC. Certain information or footnote disclosures normally included in 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 financial statements include all adjustments, consisting
of a normal recurring nature, which are necessary for a fair presentation of the financial position, operating results and cash
flows for the periods presented.
The accompanying unaudited
financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K as filed with the SEC
on July 24, 2018. The interim results for the three and six months ended November 30, 2018 are not necessarily indicative of
the results to be expected for the year ending May 31, 2019 or for any future interim periods.
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our
Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with
new or revised financial accounting standards until private companies (that is, those that have not had a registration statement
under the Securities Act of 1933, as amended (the “Securities Act”), declared effective or do not have a class of securities
registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are required to comply with
the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition
period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable.
The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised
and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the
new or revised standard at the time private companies adopt the new or revised standard.
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 FASB ASC 820, “Fair Value Measurements and Disclosures,”
approximates the carrying amounts represented in the balance sheet.
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America 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.
Restricted Cash Held in Escrow
and Common Stock Redemption Obligations
This amount is held in escrow with
respect to a certain stock purchase agreement with Polar Asset Management Partners Inc. (“Polar”), pursuant to
which Polar agreed to sell up to 490,000 shares of the Company’s common stock to the Company thirty days after the
consummation of the transactions and a separate certain stock purchase agreement with the K2 Principal Fund L.P.
(“K2”), pursuant to which K2 agreed to sell up to 220,000 shares of the Company’s common stock to the
Company thirty days after the consummation of the Transactions. These purchase agreements were subsequently amended as of
December 20, 2018, pursuant to which, among other things, the Company distributed to Polar and K2 an aggregate of $5,133,300
out of the escrow. See Note 8 to the financial statements – “Amendments to Forward Purchase Agreements and
Warrants,” for a more detailed description of the amendment. Under the terms of the purchase agreements, as amended,
the Company will use the funds held in escrow to pay for such shares; however, the Company is only required to repurchase
shares that were not previously sold by Polar and K2. Therefore, if the investors had already sold such shares by the
determination date, then the Company would be able to keep a portion of the remaining funds held in escrow, depending on the
prices at which the shares were sold by the investors.
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.
Offering 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 approximately $3,728,000 consisting principally of underwriter discounts of $3,250,000 (including approximately $1,800,000 of
which payment was deferred until the Company issued the underwriter a secured demand promissory note in the amount of $1,800,000)
and approximately $478,000 of professional, printing, filing, regulatory and other costs have been charged to additional paid in
capital upon completion of the Initial Public Offering.
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.
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
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.
As described below under Note 8 “Subsequent Events”, the Note was exchanged for two convertible promissory notes on December 20, 2018.
Common stock subject to possible redemption
The Company accounts for its common stock
subject to possible redemption in accordance with the guidance in Accounting Standards Codification (“ASC”) Topic 480
“
Distinguishing Liabilities from Equity
.” Common stock subject to mandatory redemption (if any) are classified
as liability instruments and are measured at fair value. Conditionally redeemable common stock (including common stock that feature
redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events
not solely within the Company’s control) are classified as temporary equity. At all other times, common stock are classified
as stockholders’ equity. The Company’s common stock features certain redemption rights that are considered to be outside
of the Company’s control and subject to occurrence of uncertain future events.
Net 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. Shares of common stock subject
to possible redemption at November 30, 2018 have been excluded from the calculation of basic income (loss) per share and diluted
loss per share for the six months ended November 30, 2018 since such shares, if redeemed, only participate in their pro rata share
of the Trust Account earnings. The Company has not considered the effect of (1) warrants sold in the Initial Public Offering and
Private Placement to purchase shares of common stock (2) rights sold in the Initial Public Offering and Private Placement that
convert into shares of common stock, and (3) the unit purchase option granted to the underwriter in the calculation of diluted
income (loss) per share, since the exercise of the warrants and the conversion of the rights into shares of common stock is contingent
upon the occurrence of future events.
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
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 statements recognition and measurement of tax positions taken or expected
to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon
examination by taxing authorities.
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
Management does not believe that any recently
issued, but not yet adopted accounting pronouncements, would have a material effect on the Company’s financial statements.
Going Concern
The Company
’
s
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 financial statements, the Company has an
accumulated deficit at November 30, 2018, 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.
The Company is attempting to commence operations and generate
sufficient 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 commence operations and 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 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.
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.
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
The Company may redeem the Warrants, in
whole and not in part, at a price of $0.01 per Warrant upon 30 days’ notice (“30-day redemption period”), only
in the event that the last sale price of the common stock equals or exceeds $21.00 per share for any 20 trading days within a 30-trading
day period ending on the third trading day prior to the date on which notice of redemption is given, provided there is an effective
registration statement with respect to the shares of common stock underlying such Warrants and a current prospectus relating to
those shares of common stock is available throughout the 30-day redemption period. If the Company calls the Warrants for redemption
as described above, the Company’s management will have the option to require all holders that wish to exercise Warrants to
do so on a “cashless basis.” In determining whether to require all holders to exercise their warrants on a “cashless
basis,” management will consider, among other factors, the Company’s cash position, the number of Warrants that are
outstanding and the dilutive effect on the Company’s stockholders of issuing the maximum number of shares of common stock
issuable upon the exercise of the Warrants.
Each holder of a Right received one-tenth
(1/10) of one share of common stock upon consummation of the Business Combination. No fractional shares were issued upon exchange
of the Rights. No additional consideration was paid by a holder of Rights in order to receive its additional shares upon consummation
of the Business Combination as the consideration related thereto has been included in the Unit purchase price paid for by investors
in the Initial Public Offering.
The Company granted the underwriters a
45-day option to purchase up to 750,000 additional Public Units to cover any over-allotment, at the initial public offering price
less any underwriting discounts and commissions. On September 13, 2017 the underwriters purchased 200,000 additional Public Units
for gross proceeds of $2,000,000 less commissions of 110,000, of which $70,000 are deferred.
The Company issued Maxim Group LLC (“Maxim”),
as compensation for the Initial Public Offering, an aggregate of 52,000 shares, including 2,000 shares issued in connection with
the partial exercise of the over-allotment option. The Company accounted for the fair value of these shares as an expense of the
Initial Public Offering resulting in a charge directly to stockholders’ equity.
Settlement Agreement
On November 20, 2018, the Company entered into a settlement
and release agreement (“Settlement Agreement”) with Maxim. Pursuant to the Settlement Agreement, the Company made
a cash payment of $20,000 to Maxim and issued the Note in favor of Maxim in order to settle the payment obligations of the Company
under the underwriting agreement dated August 16, 2017, by and between the Company and Maxim. The Company also agreed to remove
the restrictive legends on an aggregate of 52,000 shares of its common stock held by Maxim and its affiliate. See “Note
Payable” under Note 2 above.
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) (See Note 5). 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.
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
The Company granted the holders of the
UPO, demand and “piggy back” registration rights for periods of five and seven years, respectively, from the effective
date of the registration statement relating to the Initial Public Offering, including securities directly and indirectly issuable
upon exercise of the UPO.
Private Placement
Concurrently with the closing of the Initial
Public Offering, the Sponsor purchased an aggregate of 254,500 Private Units at $10.00 per Private Unit, generated gross proceeds
of $2,545,000 in a Private Placement. The proceeds from the Private Units was added to the proceeds from the Initial Public Offering
held in the Trust Account. The Private Units (including their component securities) were not transferable, assignable or salable
until 30 days after the completion of the initial Business Combination and the warrants included in the Private Units (the “Private
Placement Warrants”) will be non-redeemable so long as they are held by the Sponsor or their permitted transferees. If the
Private Placement Warrants are held by someone other than the Sponsor or their permitted transferees, the Private Placement Warrants
will be redeemable by the Company and exercisable by such holders on the same basis as the Warrants included in the Public Units
sold in the Initial Public Offering. Otherwise, the Private Placement Warrants and the Rights underlying the Private Units have
terms and provisions that are identical to those of the Warrants and Rights, respectively, sold as part of the Public Units in
the Initial Public Offering and have no net cash settlement provisions.
On September 13, 2017 the Sponsor purchased
7,000 additional Private Units for gross proceeds of $70,000 upon the partial exercise of the over-allotment option.
NOTE 4 — RELATED PARTY TRANSACTIONS
Founder Shares
On May 31, 2017, the Company issued 1,437,500
shares of the Company’s common stock to the Sponsor (the “Founder Shares”) in exchange for a capital contribution
of $25,000. 137,500 of the Founder Shares were forfeited by the Sponsor upon the partial exercise of the underwriters’ over-allotment
option.
The Founder Shares are identical to the
shares of common stock included in the Units and holders of Founder Shares have the same stockholder rights as public stockholders,
except that (i) the Founder Shares and the shares of common stock underlying the Private Units are subject to certain transfer
restrictions, and (ii) the Sponsor has entered into a letter agreement, pursuant to which it has agreed (A) to waive its redemption
rights with respect to the Founder Shares, and the shares of common stock underlying the Private Units and the Public Units in
connection with the completion of a Business Combination and (B) to waive its rights to liquidating distributions from the Trust
Account with respect to the Founder Shares and the shares of common stock underlying the Private Units if the Company fails to
complete a Business Combination within 12 months from the closing of the Initial Public Offering (or up to 21 months from the closing
of the Initial Public Offering if the Company extends the period of time to consummate a Business Combination).
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
With certain limited exceptions, the
Founder Shares are not transferable, assignable or salable (except to the Company’s officers and directors and other
persons or entities affiliated with the Sponsor, each of whom will be subject to the same transfer restrictions) until the
earlier of one year after the completion of an initial Business Combination or earlier of (i) subsequent to the
Company’s Business Combination, the last sale price of the common stock equals or exceeds $12.00 per share (as adjusted
for stock splits, stock dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any
30-trading day period commencing at least 150 days after an initial Business Combination, or (ii) the date following the
completion of an Initial Business Combination on which the Company completes a liquidation, merger, stock exchange or other
similar transaction that results in all stockholders having the right to exchange their shares of common stock for cash,
securities or other property.
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.
Administrative Service Fee
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 has paid $30,080 which is
presented as general and administrative expense on the accompanying statement of operations.
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 November 30, 2018, $120,089 of the Sponsor’s loan has been repaid. As of November 30, 2018, the balance of the Sponsor
loan is $85,238.
NOTE 5 — 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.
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
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.
NOTE 6 — STOCKHOLDERS’ EQUITY
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 November 30, 2018, there were 5,119,390 shares of common stock issued and outstanding.
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 November 30, 2018, there were no shares of preferred stock
issued or outstanding.
NOTE 7 — TRUST ACCOUNT AND FAIR VALUE MEASUREMENTS
The Trust Account was invested in U.S.
government securities, within the meaning set forth in the Investment Company Act, had a maturity of 180 days or less or in any
open-ended investment company that held itself out as a money market fund selected by the Company meeting the conditions of Rule
2a-7 of the Investment Company Act.
The Company’s amended and restated
certificate of incorporation provided that, other than the withdrawal of interest to pay income taxes and up to $600,000 of interest
to pay working capital expenses if any, none of the funds held in the Trust Account would be released until the earlier of: (i)
the completion of the Business Combination; (ii) the redemption of 100% of the shares of common stock included in the Public Units
sold in the Initial Public Offering if the Company was unable to complete its initial Business Combination within 12 months (or
21 months if extended) from the closing of the Initial Public Offering (subject to the requirements of law). The funds were released
from the Trust Account on November 20, 2018 upon the Closing of the initial Business Combination.
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
The Company followed the guidance in ASC
820 for its financial assets and liabilities that are re-measured and reported at fair value at each reporting period, and non-financial
assets and liabilities that are re-measured and reported at fair value at least annually.
The fair value of the Company’s financial
assets and liabilities reflects management’s estimate of amounts that the Company would have received in connection with
the sale of the assets or paid in connection with the transfer of the liabilities in an orderly transaction between market participants
at the measurement date. In connection with measuring the fair value of its assets and liabilities, the Company seeked to maximize
the use of observable inputs (market data obtained from independent sources) and to minimize the use of unobservable inputs (internal
assumptions about how market participants would price assets and liabilities). The following fair value hierarchy was used to classify
assets and liabilities based on the observable inputs and unobservable inputs used in order to value the assets and liabilities:
Level 1:
|
Quoted prices in active markets for identical assets or liabilities. An active market for an asset or liability is a market in which transactions for the asset or liability occur with sufficient frequency and volume to provide pricing information on an ongoing basis.
|
|
|
Level 2:
|
Observable inputs other than Level 1 inputs. Examples of Level 2 inputs include quoted prices in active markets for similar assets or liabilities and quoted prices for identical assets or liabilities in markets that are not active.
|
|
|
Level 3:
|
Unobservable inputs based on our assessment of the assumptions that market participants would use in pricing the asset or liability.
|
The following table presents information
about the Company’s assets that are measured at fair value on a recurring basis at November 30, 2018 and May 31, 2018, and
indicates the fair value hierarchy of the valuation inputs the Company utilized to determine such fair value:
Description
|
|
Level
|
|
|
November 30, 2018
|
|
|
May 31, 2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and marketable securities held in Trust Account
|
|
|
1
|
|
|
$
|
-0-
|
|
|
$
|
52,895,652
|
|
NOTE 8 — SUBSEQUENT EVENTS
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. The Company intends to appeal the late LAS Notification filings determination along with the other bases for
delisting at a hearing before Nasdaq review panel scheduled for January 24, 2019.
Exchange Note
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”).
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
The Series A-1 Note bears interest at 2.67%
per annum, payable quarterly and has a maturity date of the earlier of the closing date of the Acquisition (as defined below) or
June 20, 2020 (the “Maturity Date”). The Company may pay the interest in cash or at its sole discretion, in shares
of its common stock or a combination of cash and common stock. However, the Company may only pay the interest in shares of its
common stock if (i) all the equity conditions specified in the note (“Equity Conditions”) have been met (unless waived
by the Holder in writing) during the 20 trading days immediately prior to the interest payment date (“Interest Notice Period”),
(ii) the Company has provided proper notice pursuant to the terms of the note and (iii) the Company has delivered to the Holder’s
account certain number of shares of its common stock to be applied against such interest payment prior to (but no more than five
trading days before) the Interest Notice Period.
The Series A-1 Note is convertible into
shares of the Company’s common stock (“Conversion Shares”) at an initial conversion price of $1.93 per share,
subject to adjustment for any stock dividends and splits, rights offerings, distributions, combinations or similar transactions.
Upon the closing of the Acquisition, the conversion price will be automatically adjusted to equal the arithmetic average of the
volume weighted average price (“VWAP”) of the Company’s common stock in the five trading days prior to the closing
date of the Acquisition. The Holder may convert the Series A-1 Note at any time, in whole or in part, provided that upon receipt
of a notice of conversion from the Holder, the Company has the right to repay all or any portion of the Series A-1 Note included
in the notice of conversion.
Additionally, the Series A-1 Note will
automatically convert into shares of the Company’s common stock on the earlier of the Maturity Date or the closing date of
the Acquisition provided that (i) no event of default then exists, and (ii) solely if such automatic conversion date is also the
Maturity Date, each of the Equity Conditions have been met (unless waived in writing by the Holder) on each trading day during
the 20 trading day period ending on the trading day immediately prior to the automatic conversation date.
At any time prior to the Maturity Date,
the Company may also elect to redeem some or all of the outstanding principal amount for cash in an amount (the “Optional
Redemption Amount”) equal to the sum of (a) 100% of the then outstanding principal amount of the note, (b) accrued but unpaid
interest and (c) all liquidated damages and other amounts due in respect of the note (the “Optional Redemption”). The
Company may only effect an Optional Redemption if each of the Equity Conditions have been met (unless waived in writing by the
Holder) on each trading day during the period commencing on the date when the notice of the Optional Redemption is delivered to
the date of the Optil Redemption and through and including the date payment of the Optional Redemption Amount is actually made
in full.
Except as otherwise provided in the Series
A-1 Note, including, without limitation, an Option Redemption, the Company may not prepay any portion of the principal amount of
the note without the prior written consent of the Holder.
The Company is not permitted to convert
any portion of the Series A-1 Note if doing so results in the Holder beneficially owning more than 4.99% of the outstanding common
stock of the Company after giving effect to such conversion, provided that on 61 days’ prior written notice from the Holder
to the Company, that percentage may increase to 9.99%. However, if there is an automatic conversion, and the conversion would result
in the Company issuing a number of shares in excess of the beneficial ownership limitation, then any such shares in excess of the
beneficial ownership limitation will be held in abeyance for the benefit of the Holder until such time or times, if ever, as its
right thereto would not result in the Holder exceeding the beneficial ownership limitation, at which time or times the Holder will
be issued such shares to the same extent as if there had been no such limitation.
The Series A-1 Note contains restrictive
covenants which, among other things, restrict the Company’s ability to repay or repurchase any indebtedness, make distributions
on or repurchase its common stock or enter into transactions with its affiliates.
SMAAASH ENTERTAINMENT INC.
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(UNAUDITED)
The Series A-2 Note has terms substantially
similar to those of the Series A-1 Note except that the Series A-2 Note has a maturity date of June 20, 2020 and an initial conversion
price of $1.93 which will be automatically adjusted to the lower of (i) the conversion price then in effect and (ii) the greater
of the arithmetic average of the VWAP of the Company’s common stock in the five trading days prior to the notice of conversion
and $0.50.
As of December 31, 2018, upon the closing
of the Acquisition, the Series A-1 Note automatically converted into 193,648 shares of the Company’s common stock.
Amendments to Forward Purchase Agreements
and Warrants
On December 20, 2018, the Company,
Polar, K2 and the Escrow Agent, entered into an Amendment (the “Amendment”), pursuant to which, among other
things, the stock purchase agreements with Polar and K2 were amended to (x) reduce the purchase price per share payable by
the Company at the closing of the Stock Sales from $11.23 per share to (1) first $6.00 per share up to 20% of the original
number of Shares (as defined in the respective Purchase Agreement), (2) then $5.00 per remaining share up to 20% of the
original number of Shares, (3) then $4.00 per remaining share up to 20% of the original number of Shares, (4) then $3.00 per
remaining Share up to 20% of the original number of Shares, and (5) then $2.00 per remaining Share up to 20% of the original
number of Shares, (y) to extend the outside date of the closing of the Stock Sales until January 18, 2019, and (z) to
authorize the issuance of $3,542,700 and $1,590,600 from the Escrow Account to Polar and K2, respectively, as partial payment
for the Shares prior to the final closing of the Stock Sales.
In addition, pursuant to the terms of the
Amendment, the Company agreed to amend its outstanding warrants (1) to reduce the exercise price of the warrants from $11.50 per
share to $4.00 per share, subject to adjustment (the “Exercise Price Adjustment”) and (2) to revise the redemption
provisions of the warrants to provide that the Company may only redeem each warrant in whole at a price of $0.01 per warrant upon
a minimum of 30 days’ written notice of redemption if, and only if, the last sale price of the Company’s common stock
equals or exceeds $7.00 per share (as opposed to the current $21.00 per share) for any 20 trading days within a 30-trading day
period (the “Redemption Threshold Adjustment”); provided, however, that the Exercise Price Adjustment and the Redemption
Threshold Adjustment shall only be effective upon the approval of the requisite number of warrant holders, as required by law.
Acquisition of Simplicity
On
December 31, 2018, 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, Simplicity Esports LLC, a Florida
limited liability company (“Simplicity”), 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. The Simplicity Owners are entitled to receive an additional 2,000,000
shares upon the Company’s receipt of the approval of its stockholders to such issuance. In the event that the Company does
not receive stockholder approval for the issuance of the additional shares by September 30, 2019 the Company and the other parties
to the Share Exchange Agreement agree to promptly take all action reasonably necessary so that the name “Simplicity”
and any trademarks and copyright and similar rights are transferred to the Representative, and the Company and its affiliates shall
thereafter cease to use the name “Simplicity” in any of its operations.