UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from __________ to __________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | Accelerated filer | Smaller reporting company | Emerging growth company | |
| ☐ | ☐ | ☒ |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of January 13, 2022, there were shares of the Company’s common stock issued and outstanding.
SIMPLICITY ESPORTS AND GAMING COMPANY
Form 10-Q
November 30, 2021
Table of Contents
| 2 |
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| November 30, 2021 | May 31, 2021 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid expenses | ||||||||
| Total Current Assets | ||||||||
| Other Assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Deferred brokerage fees | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset, operating leases, net | ||||||||
| Security deposits | ||||||||
| Due from franchisees’ | ||||||||
| Deferred equity financing costs | ||||||||
| Total Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of convertible notes payable, net | ||||||||
| Notes payable | ||||||||
| Operating lease obligation, current | ||||||||
| Current portion of deferred revenues | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease obligation, net of current portion | ||||||||
| Non current portion of convertible notes payable, net | - | |||||||
| Secured notes payable, net | ||||||||
| Deferred revenues, less current portion | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies – Note 7 | ||||||||
| Stockholders’ Equity | ||||||||
| Preferred stock - $ par value, shares authorized; shares issued and outstanding | - | - | ||||||
| Common stock - $ par value; shares authorized; and shares issued and outstanding as of November 30, 2021, and May 31, 2021, respectively | ||||||||
| Common Stock Issuable | - | |||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Simplicity Esports and Gaming Company Stockholders’ Equity | ||||||||
| Non-Controlling Interest | ||||||||
| Total Stockholders’ Equity | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
The accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements.
| 3 |
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| November
30, 2021 | November 30, 2020 | November
30, 2021 | November 30, 2020 | |||||||||||||
| Revenues | ||||||||||||||||
| Franchise royalties, fees and other | $ | |||||||||||||||
| Company-owned stores sales | ||||||||||||||||
| Esports revenue | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| Cost of Goods Sold | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross Margin | ||||||||||||||||
Operating Expenses Compensation and related benefits | ||||||||||||||||
| Professional Fees | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Impairment Expense | - | - | ||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income / (Expense) | ||||||||||||||||
| Gain/(loss) on extinguishment of debt | ( | ) | ||||||||||||||
| Interest and financing expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Other Income | - | - | ||||||||||||||
| Foreign exchange (loss) | - | - | - | ( | ) | |||||||||||
| Total Other Income / (Expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss Before Provision for Income Taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for Income Taxes | - | - | - | - | ||||||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to noncontrolling interest | ||||||||||||||||
| Net loss attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and Diluted Net Loss per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted Weighted Average Number of Common Shares Outstanding | ||||||||||||||||
The accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements.
| 4 |
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2021 and 2020
(UNAUDITED)
| Common Stock | Additional Paid-In | Non-Controlling | Common Stock | Accumulated | Total Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Interest | Issuable | Deficit | Equity | ||||||||||||||||||||||
| Balance - May 31, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | | |||||||||||||||||||
| Shares issued in connection with issuance and amendments of notes payable | ||||||||||||||||||||||||||||
| Shares issued to directors, officers and employees as compensation | ||||||||||||||||||||||||||||
| Shares issued for contracted services | ||||||||||||||||||||||||||||
| Sale of warrants | - | - | ||||||||||||||||||||||||||
| Shares issued in connection with franchise acquisitions | - | |||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net Loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance - August 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Shares issued in connection with issuance and amendments of notes payable | ||||||||||||||||||||||||||||
| Shares issued for contracted services | ( |
) | ||||||||||||||||||||||||||
| Shares issued to directors, officers and employees as compensation | ( |
) | ||||||||||||||||||||||||||
| Stock Options issued | - | |||||||||||||||||||||||||||
| Shares issued in connection with franchise acquisitions | ||||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||
| Net Loss | - | - | - | - | ( | ) | ( | ) | ||||||||||||||||||||
| Balance - November 30, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Balance - May 31, 2020 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
| Shares issued for cash | ||||||||||||||||||||||||||||
| Shares issued in connection with issuance and amendments of notes payable | ||||||||||||||||||||||||||||
| Shares issued for contracted services | ||||||||||||||||||||||||||||
| Shares issued to directors, officers and employees as compensation | ||||||||||||||||||||||||||||
| Shares issued in connection with franchise acquisition | - | |||||||||||||||||||||||||||
| Non-controlling interest of original investment in subsidiaries | - | |||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance - August 31, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Shares issued in connection with franchise acquisition | ||||||||||||||||||||||||||||
| Shares issued to directors, officers and employees as compensation | ||||||||||||||||||||||||||||
| Shares issued for contracted services | ||||||||||||||||||||||||||||
| Rounding related to reverse split | ||||||||||||||||||||||||||||
| Warrants issued in connection with debt | - | |||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net Loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance - November 30, 2020 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements.
| 5 |
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Six Months Ended | ||||||||
| November 30, 2021 | November 30, 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash (used in) operating activities: | ||||||||
| Non-cash interest expense | ||||||||
| Deferred guaranteed interest | ( | ) | - | |||||
| Depreciation expense | ||||||||
| Amortization expense | ||||||||
| Provision for uncollectible accounts | - | |||||||
| Impairment loss | - | |||||||
| Lease liability net of leased asset | ||||||||
| Loss on extinguishment of debt | - | |||||||
| Stock based compensation | - | |||||||
| Gain on Asset Acquisition | ( | ) | - | |||||
| Deferred equity financing costs | ( | ) | ( | ) | ||||
| Issuance of shares for services | ||||||||
| Issuance of shares for interest payment | - | |||||||
| Issuance of shares for inventory | - | |||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ( | ) | ||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Deferred brokerage fees | ||||||||
| Deferred revenues | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ( | ) | ||||
| Due from franchisees’ | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Proceeds from note payable | ||||||||
| Proceeds from sale of warrants | - | |||||||
| Private placement funds received | - | |||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ||||||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental Non-Cash Investing and Financing Information | ||||||||
| Common stock issued for consideration in an acquisition of assets | $ | $ | ||||||
| Common stock issued in connection with notes payable | $ | $ | ||||||
| Warrants issued for debt extinguishment | $ | - | ||||||
| Beneficial conversion feature with warrants issued for debt discount | $ | $ | ||||||
The accompanying unaudited notes are an integral part of these unaudited condensed consolidated financial statements
| 6 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity Esports and Gaming Company (the “Company,” “we,” or “our”), was organized as a blank check company organized under the laws of the State of Delaware on April 17, 2017. The Company was formed under the name I-AM Capital Acquisition Company for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses (“Business Combination”). On November 20, 2018, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc. On January 22019, the Company changed its name from Smaaash Entertainment Inc. to Simplicity Esports and Gaming Company.
Through our wholly owned subsidiary, Simplicity Esports, LLC, acquired on January 2, 2019, the Company has begun to implement a unique approach to ensure the ultimate fan friendly esports experience. Our intention is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community and we plan to use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other in the industry. Simplicity is an established brand in the Esports industry with an engaged fan base competing in popular games across different genres, including League of Legends, PUBG, Gears of War, Smite, Guns of Boom, and multiple EA Sports titles. Additionally, the Simplicity stream team encompasses a unique group of casters, influencers, and personalities, all of whom connect to Simplicity’s dedicated fan base. Simplicity also has begun to open and operate esports gaming centers that will provide the public an opportunity to experience and enjoy gaming and Esports in a social setting, regardless of skill or experience.
Through
our wholly owned subsidiary, PLAYlive Nation, Inc. (“PLAYlive”), acquired on July 29, 2019, the Company has a network of
franchised Gaming Centers. As of November 30, 2021 the company had
The Company’s common stock and warrants are quoted on the OTCQB under the symbols “WINR” and “WINRW,” respectively. The Company has applied for an uplist to the Nasdaq Stock Exchange and currently has an open application, which the Company . There is no assurance that our listing application will be approved by the Nasdaq Capital Market.
| 7 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). Certain information or footnote disclosures normally included in condensed consolidated financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the condensed consolidated financial position, operating results and cash flows for the periods presented.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended May 31, 2021, as filed with the SEC on August 31, 2021. The interim results for the six months ended November 30, 2021, are not necessarily indicative of the results to be expected for the year ending May 31, 2022 or for any future interim periods.
Correction of Previously Issued Financial Statements
The
accompanying condensed consolidated statement of operations for the three and six months ended November 30, 2020 have been corrected
for a reclassification of depreciation expense of $
Emerging Growth Company
Section 102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
Basis of Consolidation
The
condensed consolidated financial statements include the operations of the Company and its wholly owned subsidiaries, its
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
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 $
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.
| 8 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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.
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 Revenues
Franchise revenues consist of royalties, fees and initial license fee income. 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
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.
Deferred costs include commissions paid to brokers related to the sale of specific new franchises which have not met revenue recognition criteria as of November 30, 2021. These costs are recognized in the same period as the initial franchise fee revenue is recognized.
| 9 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Accounts Receivable
The
Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e., franchisees), taking into
consideration the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable are written
off against the allowance when management determines it is probable the receivable is worthless. Customer account balances with invoices
dated over 90 days old are considered delinquent and considered in the allowance assessment. The Company performs credit evaluations
of its customers and, generally, requires no collateral. As of November 30, 2021, management has recorded an allowance for doubtful accounts
of $
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
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
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 November 30, 2021, 12 franchise locations were considered to be operational in various states including Arizona, California, Florida, Idaho, Maryland, Ohio, South Carolina, Texas and Washington.
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.
| 10 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Non-employee stock-based payments
The Company records stock-based payments made to non-employees in accordance with 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.
Related parties
Parties are related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
Leases
In
February 2016, the 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 $
The Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Net income (loss) - per share is calculated by dividing the Company’s net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings or loss per common share is calculated by dividing the Company’s net income or loss available to common stockholders by the diluted weighted average number of common 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. For this calculation potentially dilutive securities consist primarily of warrants, outstanding options and shares into which the company’s convertible notes payable are convertible. When the Company records a loss from operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per common share.
Income Taxes
The Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the 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.
| 11 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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.
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 $
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 debt offerings and/or public equity offerings. While the Company believes in the viability of its strategy and its ability to generate sufficient revenue and to raise additional funds, there can be no assurances to that effect. Should the Company fail to raise additional capital, it may be compelled to reduce the scope of its planned future business activities.
The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings.
The unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally.
Because COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers as of May 1, 2020 and have since reopened 17 corporate and 12 franchised locations. 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.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition and results of operations.
The measures taken to date have negatively impacted the Company’s business during the six months ended November 30, 2021 and will potentially continue to impact the Company’s business. Management expects that all of its business segments, across all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot be determined at this time.
| 12 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 — PROPERTY AND EQUIPMENT
The following is a summary of property and equipment—at cost, less accumulated depreciation:
| November 30, 2021 | May 31, 2021 | |||||||
| Leasehold improvements | $ | |||||||
| Property and equipment | ||||||||
| Total cost | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Net property and equipment | $ | |||||||
During
the six months ended November 30, 2021 and 2020, the Company recorded depreciation expense of $
NOTE 4 — INTANGIBLE ASSETS
The following table sets forth the intangible assets, including accumulated amortization as of November 30, 2020:
| November 30, 2021 | ||||||||||||||
| Remaining | Accumulated | Net Carrying | ||||||||||||
| Useful Life | Cost | Amortization | Value | |||||||||||
| Non-Competes | $ | $ | $ | |||||||||||
| Trademarks | ||||||||||||||
| Customer database | ||||||||||||||
| Restrictive covenant | ||||||||||||||
| Customer contracts | ||||||||||||||
| Internet domain | ||||||||||||||
| $ | $ | $ | ||||||||||||
The following tables set forth the intangible assets, including accumulated amortization as of May 31, 2021:
| May 31, 2021 | ||||||||||||||
| Remaining | Accumulated | Net Carrying | ||||||||||||
| Useful Life | Cost | Amortization | Value | |||||||||||
| Non-Competes | $ | $ | $ | |||||||||||
| Trademarks | ||||||||||||||
| Customer Contracts | ||||||||||||||
| Internet domain | ||||||||||||||
| $ | $ | $ | ||||||||||||
The following table sets forth the future amortization of the Company’s intangible assets as of November 30, 2021 for the fiscal years ending May 31:
| 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | ||||||||||||||||||||||
| Non-Competes | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Customer contracts | ||||||||||||||||||||||||||||
| Restrictive covenant | - | - | - | - | ||||||||||||||||||||||||
| Customer database | ||||||||||||||||||||||||||||
| Internet domain | - | - | - | - | - | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Amortization
expense for the six months ended November 30, 2021 and 2020 was $
NOTE 5 — ACQUISITIONS
Simplicity Tracy, LLC:
On
October 7, 2021, the Company’s wholly owned subsidiary, Simplicity Tracy, LLC (“Simplicity Tracy”) entered into
an Asset Purchase agreement (“APA”) with an existing franchisee (“Franchisee”), to acquire the Franchisee’s
assets in exchange for shares of the Company’s common stock with
fair value of $
NOTE 6 — RELATED PARTY TRANSACTIONS
Contract Services
On
August 27, 2021 the Company entered into a contract with Laila Cavalcanti Loss, a board member, to provide legal services to its subsidiary
Simplicity One Brasil, LTDA. The contract calls for monthly payments of $
The Company maintains a portion of its cash balance at a financial services company that is owned by an officer of the Company.
| 13 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 7 COMMITMENTS AND CONTINGENCIES
Unit Purchase Option
On
November 20, 2018 the Company sold to the underwriters
(and/or their designees), for $
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
of November 30, 2021, operating lease right-of-use assets and liabilities arising from operating leases was $
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 November 30, 2021.
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 and thereafter | ||||
| Total Operating Lease Obligations | ||||
| Less: Amount representing interest | $ | ( | ) | |
| Present Value of minimum lease payments | $ |
| 14 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 8- DEBT
The table below presents outstanding debt instruments as of November 30, 2021, and May 31, 2021
| NOVEMBER
30, 2021 | MAY
31, 2021 | |||||||
| Convertible Promissory Notes | $ | $ | ||||||
| Secured Promissory Notes | ||||||||
| Related Debt Discount | ( | ) | ( | ) | ||||
| Total promissory notes, net | $ | $ | ||||||
| Current portion of Promissory Notes, net | $ | $ | ||||||
| 15 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February 19, 2021 12% Promissory Note and Securities Purchase Agreement
On
February 19, 2021, the Company entered into a securities purchase agreement (the “SPA”) dated as of February 19, 2021, with
an accredited investor (the “Holder”), pursuant to which the Company issued a
The Company may prepay the Note at any time prior to the date that an Event of Default (as defined in the Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). The Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Note or SPA.
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, the Note shall become immediately due and payable and the Company shall pay to the Holder, in full satisfaction of
its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued interest multiplied by
During
the six months ended November 30, 2021 the Company paid the Holder a total of $
During
the quarter ended November 30, 2021, the Company incurred $
| 16 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 2021 FirstFire Global 12% Promissory Note and Securities Purchase Agreement
On
March 10, 2021, the Company, entered into a securities purchase agreement (the “March 10 FirstFire SPA”) dated as of March
10, 2021, with FirstFire Global Opportunities Fund, LLC, a Delaware limited liability company (the “FirstFire”), pursuant
to which the Company issued a
The Company may prepay the March 10 FirstFire Note at any time prior to the date that an Event of Default (as defined in the Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). The March 10 FirstFire Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the March 10 FirstFire Note or March 10 FirstFire SPA.
The
Company is required to make an interim payment to FirstFire in the amount of $
On
October 1, 2021, the Company issued a three-year warrant to purchase
Upon
FirstFire’s provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within five
(5) calendar days the March 10 FirstFire Note shall become immediately due and payable and the Company
shall pay to FirstFire, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus
accrued interest multiplied by
During the six months
ended November 30, 2021, the Company recognized $
June 2021 FirstFire Global 12% Promissory Note and Securities Purchase Agreement
On
June 11, 2021, the Company entered into a securities purchase agreement (the “June 11 FirstFire SPA”) dated as of June 10,
2021, with FirstFire Global Opportunities Fund, LLC (“FirstFire”), pursuant to which the Company issued a
| 17 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company may prepay the June 11 FirstFire Note at any time prior to maturity in accordance with the terms of the June 11 FirstFire Note. The June 11 FirstFire Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the June 11 FirstFire Note or the June 11 FirstFire SPA.
Upon
the occurrence of any Event of Default (as defined in the June 11 FirstFire Note), which has not been cured within three calendar days,
the June 11 FirstFire Note shall become immediately due and payable and the Company shall pay to FirstFire, in full satisfaction of its
obligations hereunder, an amount equal to the FirstFire Principal Sum then outstanding plus accrued interest multiplied by
Pursuant
to the terms of the June 11 FirstFire SPA, the Company also issued to FirstFire a -year warrant (the “June 11 FirstFire Warrant”)
to purchase
The Company also agreed to prepare and file with the Securities and Exchange Commission a registration statement covering the resale of all shares issued or issuable pursuant to the June 11 FirstFire SPA, including shares issued upon conversion of the June 11 FirstFire Note or exercise of the June 11 FirstFire Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with the SEC within 90 days following June 10, 2021 and to have the registration statement declared effective by the SEC within 120 days following June 10, 2021.
The
Company recorded the June 11 FirstFire Note in the amount of $
GS Capital Securities Purchase Agreement & Note
On
June 16, 2021, the Company entered into a securities purchase agreement (the “GS SPA”) dated as of June 10, 2021, with GS
Capital Partners, LLC (“GS Capital”), pursuant to which the Company issued a
The Company may prepay the GS Note at any time prior to maturity in accordance with the terms of the GS Note. The GS Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the GS Note or the GS SPA.
Upon
the occurrence of any Event of Default (as defined in the GS Note), which has not been cured within three calendar days, the GS Note
shall become immediately due and payable and the Company shall pay to GS, in full satisfaction of its obligations hereunder, an amount
equal to the principal amount then outstanding plus accrued interest multiplied by
| 18 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pursuant
to the terms of the GS SPA, the Company also issued to GS a -year warrant to purchase
The Company also agreed to prepare and file with the SEC a registration statement covering the resale of all shares issued or issuable pursuant to the GS SPA, including shares issued upon conversion of the GS Note or exercise of the GS Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with the SEC within 90 days following June 10, 2021 and to have the registration statement declared effective by the SEC within 120 days following June 10, 2021.
The
Company recorded the GS Note in the amount of $
Jefferson Street Capital Stock Purchase Agreement & Note
On
August 23, 2021, the Company entered into a securities purchase agreement (the “Jefferson SPA”) dated as of August 23, 2021,
with Jefferson Street Capital, LLC (“Jefferson”), pursuant to which the Company issued a
The Company may prepay the Jefferson Note at any time prior to maturity in accordance with the terms of the Jefferson Note. The Jefferson Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Jefferson Note or the Jefferson SPA.
Upon
the occurrence of any Event of Default (as defined in the Jefferson Note), which has not been cured within three calendar days, the Jefferson
Note shall become immediately due and payable and the Company shall pay to Jefferson, in full satisfaction of its obligations hereunder,
an amount equal to the principal amount then outstanding plus accrued interest multiplied by
Pursuant
to the terms of the Jefferson SPA, the Company also issued to Jefferson a -year warrant to purchase
The Company also agreed to prepare and file with the SEC a registration statement covering the resale of all shares issued or issuable pursuant to the Jefferson SPA, including shares issued upon conversion of the Jefferson Note or exercise of the Jefferson Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with the SEC within 90 days following August 23, 2021 and to have the registration statement declared effective by the SEC within 120 days following August 23, 2021.
| 19 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company recorded the Jefferson
Note in the amount of $
Lucas Ventures Capital Stock Purchase Agreement & Note
On
August 31, 2021, pursuant to the terms of that certain Securities Purchase Agreement between the Company and Lucas Ventures, LLC (“LV
SPA”), the Company issued a
The Company may prepay the LV Note at any time prior to maturity in accordance with the terms of the LV Note. The LV Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the LV Note or the LV SPA.
Upon
the occurrence of any Event of Default (as defined in the LV Note), which has not been cured within three calendar days, the LV Note
shall become immediately due and payable and the Company shall pay to LV, in full satisfaction of its obligations hereunder, an amount
equal to the principal amount then outstanding plus accrued interest multiplied by
Pursuant
to the terms of the LV SPA, the Company also issued to LV a -year warrant to purchase