NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
NOTE
1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity
Esports and Gaming Company F/K/A Smaaash Entertainment Inc. (the “Company,” “we,” or “our”),
was organized as a blank check company organized under the laws of the State of Delaware on April 17, 2017. The Company was formed
under the name I-AM Capital Acquisition Company for the purpose of effecting a merger, share exchange, asset acquisition, share
purchase, reorganization or similar business combination with one or more businesses (“Business Combination”). On
November 20, 2018, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc. On January
2, 2019, the Company changed its name from Smaaash Entertainment Inc. to Simplicity Esports and Gaming Company.
Through
our wholly owned subsidiary, Simplicity Esports, LLC, acquired on January 2, 2019, the Company has begun to implement a unique
approach to ensure the ultimate fan friendly esports experience. Our intention is to have gamers involved at the grassroots level
and feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community
and we plan to use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other
in the industry. Simplicity is an established brand in the Esports industry with an engaged fan base competing in popular games
across different genres, including 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, the Company has a network
of franchised Gaming Centers. As August 31, 2020, approximately 41 locations were considered to be operational,
in various states including Arizona, California, Idaho, Florida, Maryland, Michigan, Mississippi, Montana, Oregon, South Carolina,
Texas, Utah and Washington. As of August 31, 2020, a number of these locations were unable to resume regular operations as
the result of restrictions imposed by municipalities related to COVID-19 (Note 2). PLAYlive offers a video gaming lounge concept
to qualified franchisees. PLAYlive currently offers single-unit location franchises, as well as agreements to develop multiple
locations. This PLAYlive model is being interlaced with the esports gaming centers mentioned above to create the ultimate gaming
center.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”).
Certain information or footnote disclosures normally included in condensed consolidated financial statements prepared in accordance
with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly,
they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results
of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements
include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the condensed
consolidated financial position, operating results and cash flows for the periods presented.
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual
Report on Form 10-K, as filed with the SEC on August 31, 2020. The interim results for the three months ended August 31,
2020, are not necessarily indicative of the results to be expected for the year ending May 31, 2021 or for any future interim
periods.
Emerging
Growth Company
Section
102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from
being required to comply with new or revised financial accounting standards until private companies (that is, those that have
not had a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), declared effective
or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect
to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but
any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which
means that when a standard is issued or revised and it has different application dates for public or private companies, the Company,
as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
Basis
of Consolidation
The
condensed 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 76% owned subsidiary Simplicity One Brasil Ltd, its
79% owned subsidiaries Simplicity Happy Valley, LLC and Simplicity Redmond, LLC, and its 51% owned subsidiary Simplicity El Paso,
LLC.
All
significant intercompany accounts and transactions have been eliminated in consolidation.
Cash
and cash equivalents
The
Company considers short-term interest-bearing investments with initial maturities of three months or less to be cash equivalents.
The Company has no cash equivalents.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and
accounts receivable. Cash and cash equivalents in a financial institution, which at times, may exceed the Federal depository
insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is
not exposed to significant risks on such accounts.
Financial
Instruments
The
fair value of the Company’s assets and liabilities, which qualify as financial instruments under the Financial Accounting
Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements
and Disclosures,” approximates the carrying amounts represented in the condensed consolidated balance sheet.
Foreign
Currencies
Revenue
and expenses are translated at average rates of exchange prevailing during the year.
Use
of Estimates
The
preparation of condensed consolidated financial statements in conformity with GAAP requires the Company’s management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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 the Company’s consolidated financial statements.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
The
Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product
sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the
Company expects to receive in exchange for transferring goods and services. Our revenue is derived from the three sources listed
below.
The
following describes principal activities, separated by major product or service, from which the Company generates its revenues:
Company-owned
Store Sales
The
Company-owned stores principally generate revenue from retail esports gaming centers. Revenues from Company-owned stores are recognized
when the products are delivered, or the service is provided.
Franchise
Royalties and Fees
Franchise
royalties are based on six percent of franchise store sales after a minimum level of sales occur and are recognized as sales occur.
Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other
behaviors, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty
rate. Franchise royalties are billed on, a monthly basis.
The
Company recognizes initial franchise license fee revenue 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 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
revenues 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.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
Deferred
costs include commissions paid to brokers related to the sale of specific new franchises which have not met revenue recognition
criteria as of August 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 and an allowance
for doubtful accounts of approximately $105,000 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 they benefit future periods.
Intangible
Assets and Impairment
Intangible
assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. These costs are
included in intangible assets on our condensed consolidated balance sheet and amortized on a straight-line basis when placed into
service over their estimated useful lives of the costs, which is 3 to 5 years.
The
Company periodically reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected
undiscounted future cash flows is less that the carrying amount of the asset. The amount of impairment is measured as the difference
between the asset’s estimated fair value and its book value.
Goodwill
Goodwill
is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill,
but we assess our goodwill for impairment at least annually. We have assessed goodwill and qualitative considerations indicated
no impairment.
Franchise
Locations
Through
PLAYlive, the Company’s wholly owned subsidiary, the Company has entered into franchise agreements with third parties. As
of August 31, 2020, 41 locations were considered to be operational, in various states including Arizona, California,
Idaho, Florida, Maryland, Michigan, Mississippi, Montana, Oregon, South Carolina, Texas, Utah and Washington. As of August
31, 2020, a number of these locations were unable to resume regular operations as a result of the restrictions imposed by municipalities
related to COVID-19. In addition, we have five additional franchise locations that are currently in the final stages of preparation
for opening.
Stock-based
Compensation
The
Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation and ASC 505-50,
Equity-Based Payments to Non-Employees. All transactions in which goods or services are the consideration received for
the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of
the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the
services received as consideration are measured and recognized based on the fair value of the equity instruments issued and are
recognized over the employees required service period, which is generally the vesting period.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
Leases
In
February 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 elected to adopt this update early as of January l, 2019 using the modified retrospective transition method
and prior periods have not been restated. Upon implementation, the Company recognized an initial operating lease right-of-use
asset of $110,003 and operating lease liability of $107,678. Due to the simplistic nature of the Company’s leases, no retained
earnings adjustment was required. See Note 6 for further details.
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.
Income
Taxes
The
Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires
an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities
are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result
in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to
the amount expected to be realized.
ASC
Topic 740 prescribes a recognition threshold and a measurement attribute for the consolidated financial statements recognition
and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by taxing authorities.
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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
Recently
Issued and Recently Adopted Accounting Pronouncements
Accounting
standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future
financial statements. The following is summary of recent accounting developments.
In
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.
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 of approximately
$6.9 million, a working capital deficit of approximately $2.0 million as of August 31, 2020, and a net loss of approximately
$0.7 million 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 unaudited financial statements are issued.
The
Company has commenced operations and has begun to generate revenue; however, the Company’s cash position may not be sufficient
to support the Company’s daily operations. Management intends to raise additional funds by way of 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
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 three corporate and 23 franchised Simplicity Gaming Centers as of October 15, 2020. Although our franchise agreements
with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless
of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming
Centers will default in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase in
accounts receivables or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability
to pay the minimum monthly royalty payments owed by the franchisee. We have not written off as bad debt any accounts receivables
attributable to franchisee minimum monthly royalty payments owed during the COVID-19 pandemic. However, we have recorded an allowance
for doubtful accounts of approximately $105,000, as our collection efforts are ongoing. We have experienced an increase
in our account receivables by approximately $32,000 and $14,000 during the quarters ended May 31, 2020 and August 31, 2020, respectively.
Notwithstanding, it is unclear exactly how much of the increase in accounts receivables is attributable to the impact of COVID-19.
For the months of July and August 2020, we have waived the minimum monthly royalty payment obligations for the months of July
and August 2020 and are instead billing the franchisees a true-up of 6% of gross sales without a minimum.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date will impact the Company’s business for the fiscal quarters ended May 31, 2020 and August 31, 2020
and will potentially continue to impact the Company’s business. Management expects that all of its business segments, across
all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s
business and the duration for which it may have an impact cannot be determined at this time.
NOTE
3 — PROPERTY, PLANT AND EQUIPMENT
The
following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
|
|
August
31, 2020
|
|
|
May
31, 2020
|
|
|
|
|
|
|
|
|
Leasehold
improvements
|
|
$
|
52,189
|
|
|
$
|
52,189
|
|
Property
and equipment
|
|
|
356,314
|
|
|
|
243,314
|
|
Total
cost
|
|
|
408,503
|
|
|
|
295,503
|
|
Less
accumulated depreciation
|
|
|
(89,905
|
)
|
|
|
(62,770
|
)
|
Net
property plant and equipment
|
|
$
|
318,598
|
|
|
$
|
232,713
|
|
Depreciation
expense for the three months ended August 31, 2020 and 2019 was $27,135 and $8,651, respectively.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
NOTE
4 — INTANGIBLE ASSETS
The
following table sets forth the intangible assets, including accumulated amortization as of August 31, 2020:
|
|
August
31, 2020
|
|
|
Remaining
|
|
|
|
|
Accumulated
|
|
|
Net
Carrying
|
|
|
|
Useful
Life
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
Non-Competes
|
|
4 years
|
|
$
|
1,023,118
|
|
|
$
|
341,039
|
|
|
$
|
682,079
|
|
Trademarks
|
|
Indefinite
|
|
|
866,000
|
|
|
|
-
|
|
|
|
866,000
|
|
Customer database
|
|
2 years
|
|
|
35,000
|
|
|
|
2,917
|
|
|
|
32,083
|
|
Restrictive covenant
|
|
2 years
|
|
|
115,000
|
|
|
|
9,583
|
|
|
|
105,417
|
|
Customer contracts
|
|
10 years
|
|
|
546,000
|
|
|
|
8,152
|
|
|
|
537,848
|
|
Internet domain
|
|
2 years
|
|
|
3,000
|
|
|
|
1,667
|
|
|
|
1,333
|
|
|
|
|
|
$
|
2,588,118
|
|
|
$
|
363,358
|
|
|
$
|
2,224,760
|
|
The
following tables set forth the intangible assets, including accumulated amortization as of 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 as of August 31, 2020 for the fiscal
years ending May 31:
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
2025
|
|
|
Thereafter
|
|
|
Total
|
|
Non-Competes
|
|
$
|
153,468
|
|
|
$
|
204,624
|
|
|
$
|
204,624
|
|
|
$
|
119,363
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
682,079
|
|
Customer contracts
|
|
|
53,785
|
|
|
|
53,785
|
|
|
|
53,785
|
|
|
|
53,785
|
|
|
|
53,785
|
|
|
|
268,923
|
|
|
|
537,848
|
|
Restrictive covenant
|
|
|
43,125
|
|
|
|
57,500
|
|
|
|
4,792
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
105,417
|
|
Customer database
|
|
|
13,125
|
|
|
|
17,500
|
|
|
|
1,458
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,083
|
|
Internet
domain
|
|
|
750
|
|
|
|
583
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,333
|
|
Total
|
|
$
|
264,253
|
|
|
$
|
333,992
|
|
|
$
|
264,659
|
|
|
$
|
173,148
|
|
|
$
|
53,785
|
|
|
$
|
268,923
|
|
|
$
|
1,358,760
|
|
Amortization
expense for the three months ended August 31, 2020 and 2019 was $66,614 and $51,406, respectively.
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:
|
|
August
31, 2020
|
|
|
May
31, 2020
|
|
|
|
|
|
|
|
|
Simplicity
Esports, LLC
|
|
$
|
4,456,250
|
|
|
$
|
4,456,250
|
|
Simplicity El Paso,
LLC
|
|
|
25,000
|
|
|
|
-
|
|
PLAYlive
Nation Inc.
|
|
|
698,891
|
|
|
|
698,891
|
|
Total
Goodwill
|
|
$
|
5,180,141
|
|
|
$
|
5,155,141
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
NOTE
5 — ACQUISITIONS
The
Simplicity One Acquisition
On
January 14, 2020 the Company acquired a 90% interest in Simplicity One Brasil Ltda, for approximately $2,000. This interest
was reduced during the three months ended August 31, 2020 as more fully described in Note 6.
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 August 31, 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
|
|
NOTE
6 — 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. On various dates subsequent to May 31, 2020, Mr. Kaplan funded
$25,272 pursuant to the Kaplan Promissory Note. With the contributions subsequent to May 31, 2020, the principal balances outstanding
and due Mr. Kaplan amounted to $90,000. On June 22, 2020, Mr. Kaplan agreed to exchange the debt of the Kaplan Promissory
Note with a principal balance of $90,000 in exchange for the Company assigning to Mr. Kaplan a 10% equity interest in Simplicity
One Brasil, Ltda, a subsidiary of the Company.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
Equity
Sales
Effective
June 1, 2020, the Company issued 23,809 shares of our restricted Common Stock., sold effective May 7, 2020 at a price of $1.09
per share, to William H. Herrmann, Jr. a member of our board of directors, for an aggregate purchase price of $25,000.
The
Company maintains its cash balance at a financial services company that is owned by an officer of the Company.
The
Company maintains a portion of its cash balance at a financial services company that is owned by an officer of the Company.
NOTE
7 — 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 are quoted on the OTCQB under the symbols “WINR” and “WINRW,”
respectively.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
Registration
Rights
Pursuant
to a registration rights agreement the Company entered into with its initial stockholders and initial purchasers of the Private
Units (and constituent securities) at the closing of the Initial Public Offering, the Company is required to register certain
securities for sale under the Securities Act. These holders are entitled under the registration rights agreement to make up to
three demands that the Company register certain of its securities held by them for sale under the Securities Act and to have the
securities covered thereby registered for resale pursuant to Rule 415 under the Securities Act. In addition, these holders have
the right to include their securities in other registration statements filed by the Company. The Company will bear the costs and
expenses of filing any such registration statements.
Unit
Purchase Option
The
Company sold to the underwriters (and/or their designees), for $100, an option to purchase up to a total of 250,000 Units (which
increased to 260,000 Units upon the partial exercise of the underwriters’ over-allotment option), exercisable at $11.50
per Unit (or an aggregate exercise price of $2,990,000) upon the closing of the Initial Public Offering. The UPO may be exercised
for cash or on a cashless basis, at the holder’s option, at any time during the period commencing on the later of the first
anniversary of the effective date of the registration statement relating to the Initial Public Offering and the closing of the
Company’s initial Business Combination and terminating on the fifth anniversary of such effectiveness date. The Units issuable
upon exercise of this UPO are identical to those offered in the Initial Public Offering, except that the exercise price of the
warrants underlying the Units sold to the underwriters is $13.00 per share.
Operating
Lease Right of Use Obligation
The
Company 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 condensed 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 August 31, 2020, operating lease right-of-use assets and liabilities arising from operating leases was $441,986 and $441,985,
respectively. During the year ended May 31, 2020, the Company recorded operating lease expense of approximately $56,000.
The
following is a schedule showing the future minimum lease payments under operating leases by fiscal years and the present value
of the minimum payments as of August 31, 2020.
2021
|
|
$
|
126,395
|
|
2022
|
|
$
|
147,278
|
|
2023
|
|
$
|
151,832
|
|
2024
|
|
$
|
133,900
|
|
2025
|
|
$
|
90,017
|
|
Total Operating Lease Obligations
|
|
$
|
649,422
|
|
Less: Amount
representing interest
|
|
$
|
(207,436
|
)
|
Present
Value of minimum lease payments
|
|
$
|
441,986
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
Employment
Agreements, Board Compensation and Bonuses
On
July 29, 2020, the Company entered into a new employment agreement (the “Kaplan 2020 Agreement”) with Mr. Kaplan.
Such employment agreement replaced the Kaplan 2018 Agreement. As a result, the Kaplan 2018 Agreement was terminated and is of
no further force or effect. Pursuant to the terms of the Kaplan 2020 Agreement, the Company agreed to pay Mr. Kaplan a monthly
base salary of $5,000; provided, however, that the parties agreed that such base salary will be deferred and will accumulate until
the Company has sufficient cash available to make such payments, to be reasonably determined by the Board of Directors and Mr.
Kaplan, at which time all accrued and unpaid base salary will be paid. In addition, Mr. Kaplan will receive an equity grant of
15,000 shares of common stock per month, which shares will be fully vested upon grant. Mr. Kaplan will also be eligible to receive
a quarterly bonus in the form of cash or equity shares and will be entitled to participate in the Company’s employee benefit
plans. In addition, if, during the term of the Kaplan 2020 Agreement, the Company’s shares are approved for listing on a
U.S. national securities exchange, the Company will pay Mr. Kaplan a $50,000 cash bonus, to be paid upon such listing begin effective.
The
term of the Kaplan 2020 Agreement is for an initial one-year term, which shall automatically renew for successive one-year terms
unless either party provides 60 days’ advance written notice of its intention not to renew the Kaplan 2020 Agreement at
the conclusion of the then applicable term. The term of the Kaplan 2020 Agreement may be terminated by the Company with or without
cause or by Mr. Kaplan with or without good reason, as such terms are defined therein.
On
July 29, 2020, the Board of Directors approved for Mr. Kaplan a $75,000 cash bonus and authorized the issuance of 250,000 shares
of the Company’s common stock both related to his performance during the fiscal year ended May 31, 2020. As of August 31,
2020, the Company has accrued $75,000 related to Mr. Kaplans cash bonus. During the three months ended August 31, 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 August 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.
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 and remains in discussion with
the counter-party.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
NOTE
8 - DEBT
The
table below presents outstanding debt instruments as of August 31, and May 31, 2020:
|
|
AUGUST
31, 2020
|
|
|
MAY
31,
2020
|
|
10% Fixed Convertible
Promissory Note
|
|
$
|
-
|
|
|
$
|
152,500
|
|
Discount 10% Convertible Promissory
Note
|
|
|
-
|
|
|
|
(25,180
|
)
|
June 18, 2020 self-amortization promissory note
|
|
|
555,000
|
|
|
|
-
|
|
Discount June 18, 2020 self-amortization
promissory note
|
|
|
(119,190
|
)
|
|
|
-
|
|
August 7, 2020 self-amortization
promissory note
|
|
|
333,333
|
|
|
|
-
|
|
Discount August 7, 2020 self-amortization
promissory note
|
|
|
(65,262
|
)
|
|
|
-
|
|
Related Party Note
|
|
|
-
|
|
|
|
64,728
|
|
Convertible
Note Payable
|
|
|
900,000
|
|
|
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,603,881
|
|
|
$
|
1,192,048
|
|
10%
Fixed Convertible Promissory Note
On
April 29, 2020 (the “Effective Date”), the Company issued a 10% Fixed Convertible Promissory Note (the “Harbor
Gates Note”), with a maturity date of October 29, 2020 (the “Maturity Date”), in the principal sum of $152,000
in favor of Harbor Gates Capital, LLC (“Harbor Gates”). Pursuant to the terms of the Harbor Gates Note, the Company
agreed to pay to Harbor Gates $152,500 (the “Principal Sum”) and to pay “guaranteed” interest on the principal
balance at an amount equivalent to 10% of the Principal Sum, to the extent such Principal Sum and “guaranteed” interest
and any other interest, fees, liquidated damages and/or items due to Harbor Gates have not been repaid or converted into Company
common stock in accordance with the terms of the Harbor Gates Note. The Harbor Gates Note carries an original issue discount (“OID”)
of $2,500. Accordingly, on the Effective Date, Harbor Gates delivered $150,000 to the Company in exchange for the Harbor Gates
Note.
In
addition to the “guaranteed” interest, and upon the occurrence of an Event of Default (as hereinafter defined), additional
interest would accrue from the date of the Event of Default at the rate equal to the lower of 20% per annum or the highest
rate permitted by law.
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
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 was 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
had the right, at Harbor Gates’ sole option, to convert in whole or in part the outstanding and unpaid Principal
Amount under the Harbor Gates Note into shares of the Company’s common stock at the Variable Conversion Price. The “Variable
Conversion Price” will be equal to the lower of: (a) $1.00, or (b) 70% of the lowest volume weighted average price of the
Company’s common stock during the 15 consecutive trading days prior to the date on Harbor Gates elects to convert all or
part of the Harbor Gates Note. The Company intends to prepay the Harbor Gates Note in accordance with its terms so that no amount
under the Harbor Gates Note is converted into shares of the Company’s common stock.
On
July 2, 2020, the 10% Fixed Convertible Promissory Note was repaid in full. A cash payment of $201,300 including principal of
$152,500, guaranteed interest of $15,200 and prepayment penalties of $33,600 was made to the lender. In connection with the repayment
of the note the Company recorded a charge to interest expense in the amount of $73,980 comprised of $48,800 related to interest
and prepayment penalties and $25,180 related to accelerated accretion of unamortized debt discount recorded in connection with
the original issue discount and in connection with common shares issued to the lender.
June
18, 2020 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 issued 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
The
Company is required to make amortization payments to the Holder according to the following schedule:
Payment
Date
|
|
Payment
Amount
|
|
10/16/2020
|
|
$
|
66,125.00
|
|
11/16/2020
|
|
$
|
66,125.00
|
|
12/16/2020
|
|
$
|
66,125.00
|
|
01/18/2021
|
|
$
|
66,125.00
|
|
02/18/2021
|
|
$
|
66,125.00
|
|
03/18/2021
|
|
$
|
66,125.00
|
|
04/16/2021
|
|
$
|
66,125.00
|
|
05/18/2021
|
|
$
|
66,125.00
|
|
06/18/2021
|
|
$
|
65,921.26
|
|
Total:
|
|
$
|
594,921.26
|
|
Upon
the Holder’s provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within
five (5) calendar days (provided, however, that this five (5) calendar day cure period shall not apply to any event of default
under Sections 3.1, 3.2, and 3.19 of the Amortization Note), the Amortization Note shall become immediately due and payable and
the Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then
outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default
(as hereinafter defined), additional interest will accrue from the date of the Event of Default at the rate equal to the lower
of 15% per annum or the highest rate permitted by law. The Company shall have the right to pay the Default Amount in cash at any
time, provided, however that the Holder may convert the Amortization Note into the Company’s common stock (subject to the
beneficial ownership limitations of 4.99% contained in the Amortization Note) at any time after the date that is five (5) calendar
days after the Amortization Note becomes immediately due and payable as a result of an Event of Default until the Company has
repaid the Amortization Note in cash. If the aforementioned event occurs, the conversion price will be equal to the closing bid
price of the Company’s common stock on the trading day immediately preceding the date of the respective conversion. The
Company intends to repay the Amortization Note in accordance with its terms so that no amount under the Amortization Note is converted
into shares of the Company’s common stock.
The
Company recorded a total debt discount in the amount of $149,500 in connection with the common shares issued to the lender an
original issue discount associated with the note. The Company recognized interest expense of $30,310 related to amortization of
the discount during the quarter ended August 31, 2020.
August
7, 2020 Self-Amortization Promissory Note
On
August 7, 2020 (the “Issue Date”), the Company, entered into a securities purchase agreement (the “SPA”)
with FirstFire Global Opportunities Fund, LLC, an accredited investor (the “Holder”), pursuant to which the Company
issued a 12% self-amortization promissory note (the “Amortization Note”) with a maturity date of August 7, 2021 (the
“Maturity Date”), in the principal sum of $333,333. Pursuant to the terms of the Amortization Note, the Company agreed
to pay to $333,333 (the “Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of
12% per annum. The Amortization Note carries an original issue discount (“OID”) of $33,333. Accordingly, on the Closing
Date (as defined in the SPA), the Holder paid the purchase price of $300,000 in exchange for the Amortization Note. In addition,
pursuant to the terms of the SPA, the Company agreed to issue 33,333 shares of the Company’s common stock to the Holder
as additional consideration.
The
Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest (no prepayment premium). The Amortization Note contains customary events of default relating to, among other
things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA.
The
Company is required to make amortization payments to the Holder according to the following schedule:
Payment
Date
|
|
Payment
Amount
|
|
12/07/2020
|
|
$
|
40,075.75
|
|
01/07/2021
|
|
$
|
40,075.75
|
|
02/08/2021
|
|
$
|
40,075.75
|
|
03/08/2021
|
|
$
|
40,075.75
|
|
04/07/2021
|
|
$
|
40,075.75
|
|
05/07/2021
|
|
$
|
40,075.75
|
|
06/07/2021
|
|
$
|
40,075.75
|
|
07/07/2021
|
|
$
|
40,075.75
|
|
08/07/2021
|
|
$
|
39,952.34
|
|
Total:
|
|
$
|
360,558.34
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
Upon
the Holder’s provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within
five (5) calendar days (provided, however, that this five (5) calendar day cure period shall not apply to any event of default
under Sections 3.1, 3.2, and 3.19 of the Amortization Note), the Amortization Note shall become immediately due and payable and
the Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then
outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default
(as hereinafter defined), additional interest will accrue from the date of the Event of Default at the rate equal to the lower
of 15% per annum or the highest rate permitted by law. The Company shall have the right to pay the Default Amount in cash at any
time, provided, however that the Holder may convert the Amortization Note into the Company’s common stock (subject to the
beneficial ownership limitations of 4.99% contained in the Amortization Note) at any time after the date that is five (5) calendar
days after the Amortization Note becomes immediately due and payable as a result of an Event of Default until the Company has
repaid the Amortization Note in cash. If the aforementioned event occurs, the conversion price will be equal to the closing bid
price of the Company’s common stock on the trading day immediately preceding the date of the respective conversion. The
Company intends to repay the Amortization Note in accordance with its terms so that no amount under the Amortization Note is converted
into shares of the Company’s common stock.
The
Company recorded a total debt discount in the amount of $82,999 in connection with the common shares issued to the lender an original
issue discount associated with the note. The Company recognized interest expense of $23,477 related to amortization of the discount
during the quarter ended August 31, 2020.
Related
Party - Kaplan Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, the Company’s Chief Executive Officer, interim Chief Financial Officer, member of
the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on the first business
day following the 150-day anniversary of the Issue Date (the “Maturity Date”). The Company will use the proceeds of
the Kaplan Note to fund the operations of Simplicity One Brasil Ltda, the Company’s majority owned subsidiary (“Simplicity
Brasil”).
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, the balance of the Kaplan noted was $64,728. During the three months ended August 31, 2020 Mr. Kaplan advanced
an additional $25,272 under the terms of the note. During the quarter ended August 31, 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
Convertible
Note Payable
On
December 20, 2018, the Company entered into a securities exchange agreement (“Exchange Agreement”) with Maxim. Pursuant
to the terms of the Exchange Agreement, Maxim agreed to surrender and exchange the Note. In exchange, the Company issued to Maxim
a Series A-1 Exchange Convertible Note in the principal amount of $500,000 (the “Series A-1 Note”) and a Series A-2
Exchange Convertible Note in the principal amount of $1,000,000 (the “Series A-2 Note,” and collectively with Series
A-1 Note, the “Exchange Notes”). As of December 31, 2018, upon the closing of the Acquisition, the Series A-1 Note
automatically converted into 193,648 shares of the Company’s common stock.
The
original amount of the promissory note was $1,800,000, the total amount of the two exchange notes is $1,500,000, and the difference
of $300,000 was recorded as debt forgiveness income.
Prior
to conversion, the Series A-1 Note bore interest at 2.67% per annum, was payable quarterly and had a maturity date of the earlier
of the closing date of the Acquisition (as defined below) or June 20, 2020 (the “Maturity Date”). The Company was
permitted to pay the interest in cash or at its sole discretion, in shares of its common stock or a combination of cash and common
stock. However, the Company could only pay the interest in shares of its common stock if (i) all the equity conditions specified
in the note (“Equity Conditions”) had been met (unless waived by Maxim in writing) during the 20 trading days immediately
prior to the interest payment date (“Interest Notice Period”), (ii) the Company had provided proper notice pursuant
to the terms of the note and (iii) the Company had delivered to Maxims’ account certain number of shares of its common stock
to be applied against such interest payment prior to (but no more than five trading days before) the Interest Notice Period.
The
Series A-1 Note was convertible into shares of the Company’s common stock (“Conversion Shares”) at an initial
conversion price of $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. 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
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 $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
On
June 4, 2020, $100,000 in principal was converted into 85,905 shares of common stock in accordance with the terms of the Maxim
Note.
On
June 18, 2020, the Company and Maxim entered into that certain first amendment to the Maxim Note (the “Amendment”),
pursuant to which the Parties agreed to the following: (i) Maxim’s resale of the Company’s common stock (the “Common
Stock”) underling the Maxim Note shall be limited to 10% of the daily volume of the Common Stock on each respective trading
day, (ii) the maturity date of the Maxim Note was extended to December 31, 2020, (iii) the principal amount of the Maxim Note
was increased by $100,000, and (iv) the reference to “$1.93” in Section 4(b) of the Maxim Note was replaced with “$1.15”.
During
the three months ended August 31, 2020 the company recorded interest expense of $18,044, total principal and accrued interest
on Maxim note amounted to $900,000 and $55,869 as of August 31, 2020.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
NOTE
9 -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 August 31, 2020,
there were no shares of preferred stock issued or outstanding.
Common
Stock
On
August 17, 2020, the Company amended its certificate of incorporation to increase the total number of authorized shares of the
Company’s common stock from 20,000,000 to 36,000,000. Holders of the shares of the Company’s common stock are entitled
to one vote for each share. At, August 31, 2020 and May 31, 2020, there were 9,929,190 and 7,988,975 shares of common stock issued
and outstanding respectively.
Excluded
from the Company’s outstanding shares as of August 31,
2020 are 600,000 shares issued to Triton Funds, LP., the Company’s transfer agent erroneously transferred 725,000 shares
of common stock under the Equity Line to the custodial account of Triton, resulting in an over-issuance of 600,000 shares to Triton.
The Company notified Triton of this error and that the Company terminated the Common Stock Purchase Agreement with Triton. As
of October 15, 2020, the Company is currently awaiting the return of the shares issued in error from Triton to the treasury so
such shares will no longer be issued and outstanding. In order to effectuate the return of the shares, the Company’s transfer
agent is requiring a medallion guaranteed stock power from Triton. Triton is cooperating and is currently seeking a medallion
guaranteed stock power to facilitate the cancellation of such shares.
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.
Effective
June 4, 2020, the Company issued 85,905 shares of common stock at $1.16 per share in connection with the conversion of $100,000
in principal of the Convertible Note Payable, Note 8.
Effective
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 (Note 8) in the principal amount of $550,000,
the Company issued 55,000 shares of common stock at $1.13 per share, to such accredited investor as additional consideration for
the purchase of such note.
Effective
June 30, 2020, the company issued 78,890 shares of common stock at $0.97 per share to various employees of the Company as compensation.
Effective
July 1, 2020 we issued 25,000 shares of common stock at $1.84 per share in satisfaction of an outstanding balance owed to a vendor.
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 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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
On
July 1, 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 issued 150,000 restricted shares at $1.65 per
share.
Effective
July 31, 2020 and August 31, 2020, the Company issued 320,000 and 45,000 shares of common stock to Mr. Kaplan in connection with
previously accrued compensation and current period compensation. Common shares were valued as follows; 250,000 at $0.865
per share, 50,000 at $1.01 per share, 10,000 at $1.84 per share, 20,000 at $0.93 per share 20,000 at $1.38 per share and 15,000
at $0.82 per share.
Effective
July 31, 2020 and August 31, 2020, the Company issued 271,000 and 16,500 shares of common stock to Mr. Franklin in connection
with previously accrued compensation and current period compensation. Common shares were valued as follows; 250,000 at $0.865
per share, 15,000 at $1.01 per share 3,000 at $1.84 per share, 3,000 at $0.93 per share, 9,000 at $1.38 per share and 7,500
at $0.82 per share.
Effective
July 31, 2020 and August 31, 2020, the Company issued 190,000 shares of common stock valued at $0.87 per share and 6,000
shares of common stock valued at $1.01 per share to the Directors and an employee of the Company in connection with previously
accrued compensation and current period compensation.
Effective
August 1, 2020, the Company entered into a marketing agreement whereby the Company issued 27,778 shares of common stock
at $1.10 per share.
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 33,333 shares of common stock at $0.91 per share.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
Stock
- Based Compensation
Effective
June 30, 2020, the company issued 78,890 shares of common stock at $0.97 per share to various employees of the Company as compensation.
Effective
July 31, 2020 and August 31, 2020, the Company issued 320,000 and 45,000 shares of common stock to Mr. Kaplan in connection with
previously accrued compensation and current period compensation.
Effective
July 31, 2020 and August 31, 2020, the Company issued 271,000 and 16,500 shares of common stock to Mr. Franklin in connection
with previously accrued compensation and current period compensation.
Effective
July 31, 2020 and August 31, 2020, the Company issued 190,000 and 6,000 shares of common stock to the Directors and an employee
of the Company in connection with previously accrued compensation and current period compensation.
Share
based compensation for the three months ended August 31, 2020 and August 31, 2019 was $150,095 and $45,000, respectively.
Warrants
The
Company did not issue any warrants during the quarter ended August 31, 2020.
A
summary of the status of the Company’s outstanding stock warrants as of August 31, 2020 is as follows:
|
|
Number
of
Shares
|
|
|
Average
Exercise
Price
|
|
|
Expiration
Date
|
Outstanding – May 31, 2020
|
|
|
6,424,000
|
|
|
$
|
10.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted – August 31, 2020
|
|
|
-
|
|
|
|
|
|
|
|
Outstanding – August 31,
2020
|
|
|
6,424.000
|
|
|
$
|
10.38
|
|
|
May,
2024
|
Warrants exercisable – August
31, 2020
|
|
|
6,424,000
|
|
|
|
|
|
|
|
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AUGUST
31, 2020
(UNAUDITED)
NOTE
10 — SEGMENT AND RELATED INFORMATION
Historically,
the Company had one operating segment. However, with the acquisition of PLAYlive and the opening of 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 three months ended August 31 is shown in the following tables:
August
31, 2020:
|
|
Revenues
|
|
|
Net
Loss
|
|
|
Depreciation
and
Amortization
|
|
|
Capital
Expenditures
|
|
|
Goodwill
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
royalties and fees
|
|
$
|
87,000
|
|
|
$
|
(3,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
699,000
|
|
|
$
|
1,721,000
|
|
Company-owned
stores
|
|
|
77,000
|
|
|
|
(38,000
|
)
|
|
|
38,000
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
1,329,000
|
|
Esports
revenue
|
|
|
37,000
|
|
|
|
(105,000
|
)
|
|
|
55,000
|
|
|
|
-
|
|
|
|
4,456,000
|
|
|
|
5,665,000
|
|
Corporate
|
|
|
-
|
|
|
|
(509,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
414,000
|
|
Total
|
|
$
|
201,000
|
|
|
$
|
(655,000
|
)
|
|
$
|
93,000
|
|
|
$
|
-
|
|
|
$
|
5,180,000
|
|
|
$
|
9,129,000
|
|
August
31, 2019:
|
|
Revenues
|
|
|
Net
Loss
|
|
|
Depreciation
and
Amortization
|
|
Capital
Expenditures
|
|
|
Goodwill
|
|
|
Total
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise royalties and
fees
|
|
$
|
47,000
|
|
|
$
|
500
|
|
|
$
|
400
|
|
|
$
|
-
|
|
|
$
|
2,226,000
|
|
|
$
|
2,263,000
|
|
Company-owned stores
|
|
|
4,000
|
|
|
|
(24,000
|
)
|
|
|
7,200
|
|
|
|
97,000
|
|
|
|
-
|
|
|
|
440,000
|
|
Esports revenue
|
|
|
23,000
|
|
|
|
(62,500
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
4,456,000
|
|
|
|
5,947,000
|
|
Corporate
|
|
|
-
|
|
|
|
(197,000
|
)
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000,000
|
|
Total
|
|
$
|
74,000
|
|
|
$
|
283,000
|
|
|
$
|
8,600
|
|
|
$
|
97,000
|
|
|
$
|
6,682,000
|
|
|
$
|
9,650,000
|
|
NOTE
11 — SUBSEQUENT EVENTS
The
Company has applied to list its common stock and warrants on the Nasdaq Capital Market. In order to obtain Nasdaq Capital Market
listing approval, the Company obtained approval of its Board of Directors and stockholders of (i) a reverse stock split of the
outstanding shares of the Company’s common stock in the range from 1-for-2 to 1-for-10, which ratio was to be selected by
the Company’s Board of Directors, with any fractional shares being rounded up to the next higher whole shares (the “Reverse
Split”), and (ii) an increase in the Company’s authorized shares of common stock from 20,000,000 to 36,000,000 shares
of common stock. The increase in authorized shares became effective on August 17, 2020.
On
September 28, 2020, the Company’s Board of Directors approved the Reverse Split in a ratio of 1-for-6 and on September 29,
2020, the Company filed an amended and restated certificate of amendment to the Company’s Third Amended and Restated Certificate
of Incorporation, as amended (the “Certificate of Incorporation”), implementing the Reverse 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 Reverse Split, in a ratio of 1-for-6, to November 4, 2020. The Company expects that the Reverse
Split in a ratio of 1-for-6 will be effective on or about November 4, 2020; provided, however, that in no event will the Reverse
Split become effective until it has been processed by the Financial Industry Regulatory Authority (FINRA). The Reverse Split is
intended to allow the Company to meet the minimum share price requirement of the Nasdaq Capital Market. There is no assurance
that the Company’s listing application will be approved by the Nasdaq Capital Market.
On
April 10, 2020, the Company filed a registration statement on Form S-1 with the SEC relating to the offer by the Company of units
of the Company, each of which consists of one share of common stock and one warrant to purchase one share of our common stock.
No sales of units will be made prior to effectiveness of the registration statement on Form S-1. On September 28, 2020, the Company
filed Pre-Effective Amendment No. 1 to the registration statement on Form S-1 with the SEC. There can be no assurance that the
registration statement on Form S-1, as amended, will be declared effective by the SEC.
On
September 30, 2019, the SEC declared effective the Company’s registration statement on Form S-1 (the “September 2019
Registration Statement”) related to (i) the issuance by the Company of up to 6,449,000 shares of common stock, which consist
of (a) 5,200,000 shares of common stock that may be issued upon the exercise of 5,200,000 warrants (the “Public Warrants”)
originally sold as part of units in the Company’s initial public offering (the “IPO”) and which entitle the
holder to purchase common stock at an exercise price of $11.50 per share of common stock, (b) 261,500 shares of common stock that
may be issued upon the exercise of 261,500 warrants (the “Private Placement Warrants”) underlying units originally
issued in a private placement that closed simultaneously with the consummation of the IPO (the “Private Placement Units”),
which entitle the holder to purchase common stock at an exercise price of $11.50 per share of common stock, and (c) 987,500 shares
of our common stock, which represent shares of common stock that may be issued upon the exercise of 987,500 warrants (the “2019
Warrants”, and together with the Public Warrants and Private Placement Warrants, the “Warrants”) originally
sold as part of units in a private placement that commenced on March 27, 2019 (the “2019 Private Placement”) and which
entitle the holder to purchase common stock at an exercise price of $4.00 per share of common stock, and (ii) the resale from
time to time of 6,465,617 shares of common stock and 261,500 Private Placement Warrants by the selling securityholders named in
the prospectus or their permitted transferees. On October 13, 2020, the SEC declared effective the Company’s post-effective
amendment, filed on October 5, 2020 (the “Post-Effective Amendment”), to the September 2019 Registration Statement.
The Post-Effective Amendment updates the financial statements and other information contained in the September 2019 Registration
Statement. No additional securities were registered pursuant to the Post-Effective Amendment.