0001493152-22-001289.txt : 20220114 0001493152-22-001289.hdr.sgml : 20220114 20220114164757 ACCESSION NUMBER: 0001493152-22-001289 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 56 CONFORMED PERIOD OF REPORT: 20211130 FILED AS OF DATE: 20220114 DATE AS OF CHANGE: 20220114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SIMPLICITY ESPORTS & GAMING Co CENTRAL INDEX KEY: 0001708410 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING & DRINKING PLACES [5810] IRS NUMBER: 821231127 STATE OF INCORPORATION: DE FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38188 FILM NUMBER: 22532389 BUSINESS ADDRESS: STREET 1: 7000 W. PALMETTO PARK RD., STREET 2: SUITE 505, CITY: BOCA RATON, STATE: FL ZIP: 33433 BUSINESS PHONE: 855-345-9467 MAIL ADDRESS: STREET 1: 7000 W. PALMETTO PARK RD., STREET 2: SUITE 505, CITY: BOCA RATON, STATE: FL ZIP: 33433 FORMER COMPANY: FORMER CONFORMED NAME: SMAAASH ENTERTAINMENT INC. DATE OF NAME CHANGE: 20181127 FORMER COMPANY: FORMER CONFORMED NAME: I-AM CAPITAL ACQUISITION Co DATE OF NAME CHANGE: 20170605 10-Q 1 form10-q.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended November 30, 2021

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 001-38188

 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware   82-1231127

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

     

7000 W. Palmetto Park Road, Suite 505

Boca Raton, FL

  33433
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (855) 345-9467

 

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. Yes ☒ No ☐

 

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). Yes ☒ No ☐

 

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 Non-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 ☐ No

 

As of January 13, 2022, there were 1,616,022 shares of the Company’s common stock issued and outstanding.

 

 

 

 
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

Form 10-Q

November 30, 2021

 

Table of Contents

 

    Page
PART I — FINANCIAL INFORMATION 3
     
Item 1. Financial Statements: 3
     
  Condensed Consolidated Balance Sheets – November 30, 2020 (unaudited) and May 31, 2020 3
     
  Condensed Consolidated Statement of Operations – Three and Six Months Ended November 30, 2021 and 2020 (unaudited) 4
     
  Condensed Consolidated Statements of Changes in Stockholders’ Equity – Six Months Ended November 30, 2021 and 2020 (unaudited) 5
     
  Condensed Consolidated Statement of Cash Flows - Six Months Ended November 30, 2021 and 2020 (unaudited) 6
     
  Notes to Condensed Consolidated financial statements (unaudited) 7
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
     
Item 4. Controls and Procedures 38
     
PART II — OTHER INFORMATION 39
     
Item 1. Legal Proceedings 39
     
Item 1A. Risk Factors 39
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
     
Item 3. Defaults Upon Senior Securities 39
     
Item 4. Mine Safety Disclosures 39
     
Item 5. Other Information 39
     
Item 6. Exhibits 40
     
Signatures 41

 

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  $ 832,423   $414,257 
Accounts receivable, net    104,502    160,101 
Inventory    364,610    206,974 
Prepaid expenses    157,163    52,643 
Total Current Assets    1,458,698    833,975 
            
Other Assets           
Goodwill    5,180,141    5,180,141 
Intangible assets, net    1,479,131    1,635,227 
Deferred brokerage fees    75,135    79,943 
Property and equipment, net    518,103    574,308 
Right of use asset, operating leases, net    1,606,884    1,533,010 
Security deposits    40,307    40,307 
Due from franchisees’    7,640    23,007 
Deferred equity financing costs    427,699    307,494 
Total Other Assets    9,335,040    9,373,437 
            
TOTAL ASSETS  $ 10,793,738   $10,207,412 
            
LIABILITIES AND STOCKHOLDERS’ EQUITY           
            
Current Liabilities           
Accounts payable  $ 167,380   $438,466 
Accrued expenses    839,361    1,166,433 
Current portion of convertible notes payable, net    1,121,334    2,211,097 
Notes payable    41,735    82,235 
Operating lease obligation, current    332,519    307,013 
Current portion of deferred revenues    30,034    30,034 
Total Current Liabilities    2,532,363    4,235,278 
            
Operating lease obligation, net of current portion    1,262,098    1,199,748 
Non current portion of convertible notes payable, net    620,007    - 
Secured notes payable, net    264,773      
Deferred revenues, less current portion    169,913    182,342 
            
Total Liabilities    4,849,154    5,617,368 
            
Commitments and Contingencies – Note 7    -    - 
            
Stockholders’ Equity           
Preferred stock - $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding    -    - 
Common stock - $0.0001 par value; 36,000,000 shares authorized; 1,616,022 and 1,427,124 shares issued and outstanding as of November 30, 2021, and May 31, 2021, respectively    159    142 
Common Stock Issuable    50,625    - 
Additional paid-in capital    24,444,130    16,708,762 
Accumulated deficit    (18,632,103)   (12,291,899)
Total Simplicity Esports and Gaming Company Stockholders’ Equity    5,862,811    4,417,005 
Non-Controlling Interest    81,773    173,039
Total Stockholders’ Equity    5,944,584    4,590,044 
            
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $ 10,793,738   $10,207,412 

 

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)

 

   November 30,
2021
   November 30, 2020   November 30,
2021
   November 30, 2020 
   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  $ 96,953    91,793     159,311    179,076 
Company-owned stores sales    681,732    167,791     1,355,233    244,729 
Esports revenue    65,130    36,962     234,111    73,342 
                       
Total Revenues    843,815    296,546     1,748,655    497,147 
                       
Cost of Goods Sold    (485,394)   (113,771)    (1,092,516)   (181,416)
                       
Gross Margin    358,421     182,775     656,139    315,731 
                       

Operating Expenses

Compensation and related benefits

    845,886    366,257     2,149,012    668,825 
Professional Fees    129,723    186,898     579,076    260,789 
General and administrative expenses    432,127    212,631     875,822    454,400 
Impairment Expense    -     201,277     -     201,277 
                       
Total Operating Expenses    1,407,736    967,063     3,603,910    1,585,291 
                       
Loss from Operations    (1,049,315)   (784,288)    (2,947,771)   (1,269,560)
                       
Other Income / (Expense)                      
Gain/(loss) on extinguishment of debt    29,168    15,250     (1,730,801)   3,115 
Interest and financing expense    (1,145,794)   (244,660)    (1,805,490)   (398,788)
Interest income    9     5     28    12 
Other Income    206    -      52,564    -  
Foreign exchange (loss)    -    -      -     (19,572)
                       
Total Other Income / (Expense)    (1,116,411)    (229,405)    (3,483,699)   (415,233)
                       
Loss Before Provision for Income Taxes    (2,165,726)    (1,013,693)    (6,431,470)   (1,684,793)
                       
Provision for Income Taxes    -    -     -    -  
                       
Net Loss    (2,165,726)    (1,013,693)    (6,431,470)   (1,684,793)
                       
Net loss attributable to noncontrolling interest    36,429    8,533     91,266    24,419 
                       
Net loss attributable to common shareholders  $ (2,129,297)  $(1,005,160)  $ (6,340,204)  $(1,660,374)
                       
Basic and Diluted Net Loss per share  $ (1.39)  $(0.84)  $ (4.15)  $(1.42)
                       
Basic and diluted Weighted Average Number of Common Shares Outstanding    1,527,908    1,192,945     1,526,066    1,166,150 

 

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   1,427,124   $142   $16,708,762   $173,039   $ -     $(12,291,899)  $         4,590,044 
Shares issued in connection with issuance and amendments of notes payable   38,125    4    4,136,895    -     -      -    4,136,899 
Shares issued to directors, officers and employees as compensation   -    -    -    -     838,250      -    838,250 
Shares issued for contracted services   21,346    2    224,875    -     12,525      -    237,402 
Sale of warrants   -    -    100,000    -      -      -    100,000 
Shares issued in connection with franchise acquisitions   6,000    1    62,999    -      -      -    63,000 
Net loss attributable to noncontrolling interest   -    -    -    (54,837)    -      -    (54,837)
Net Loss   -    -    -    -     -      (4,210,907)   (4,210,907)
Balance - August 31, 2021   1,492,595   $149   $21,233,531   $118,202     850,775     $(16,502,806)  $5,699,851 
Shares issued in connection with issuance and amendments of notes payable   18,333    1    1,817,563    -     -      -    1,817,564 
Shares issued for contracted services   20,438    1    174,230    -     (3,750 )    -    170,481 
Shares issued to directors, officers and employees as compensation   84,656    8    852,085    -     (838,250 )    -    13,843 
Stock Options issued   -    -    366,721    -     -      -    366,721 
Shares issued in connection with franchise acquisitions   -    -    -    -     41,850      -    41,850 
Net loss attributable to noncontrolling interest       -     -     (36,429)    -      -    (36,429)
Net Loss       -     -     -      -      (2,129,297)   (2,129,297)
Balance - November 30, 2021   1,616,022   $159   $24,444,130   $81,773     50,625     $(18,632,103)  $5,944,584 
                                       
Balance - May 31, 2020   998,622   $100   $11,132,103   $(21,487)    -     $(6,195,044)  $4,915,672 
Shares issued for cash   2,976    -    25,000    -            -    25,000 
Shares issued in connection with issuance and amendments of notes payable   23,030    2    202,215    -     -      -    202,217 
Shares issued for contracted services   6,597    1    68,777    -     -      -    68,778 
Shares issued to directors, officers and employees as compensation   116,175    12    819,297    -     -      -    819,309 
Shares issued in connection with franchise acquisition   18,750    2    164,998          -      -     165,000 
Non-controlling interest of original investment in subsidiaries   -    -    -    240,000     -      -    240,000 
Net loss attributable to noncontrolling interest   -    -    -    (15,866)    -      -    (15,866)
Net Loss                             (655,214)   (655,214)
Balance - August 31, 2020   1,166,150   $117   $12,412,390   $202,647     -     $(6,850,258)  $5,764,896 
Shares issued in connection with franchise acquisition   37,941    4    413,540    -     -      -    413,544 
Shares issued to directors, officers and employees as compensation   9,844    1    119,632    -     -      -    119,633 
Shares issued for contracted services   2,813    -    25,420    -     -      -    25,420 
Rounding related to reverse split   628        -    -     -      -    - 
Warrants issued in connection with debt   -    -    157,438    

-

     -      

-

    157,438 
Net loss attributable to noncontrolling interest   -    -    -    (8,554)    -      -    (8,554)
Net Loss   -    -    -    -     -      (1,005,160)   (1,005,160)
Balance - November 30, 2020   1,217,376   $122   $13,128,420   $194,093     -      $(7,855,418)  $5,467,217 

 

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)

 

   November 30, 2021   November 30, 2020 
   For the Six Months Ended 
   November 30, 2021   November 30, 2020 
           
Cash flows from operating activities:           
Net loss  $ (6,431,470)  $(1,684,793)
Adjustments to reconcile net loss to net cash (used in) operating activities:           
Non-cash interest expense    1,696,395    241,557 
Deferred guaranteed interest   

(247,400

)   - 
Depreciation expense    165,653    73,249 
Amortization expense    156,096    133,229 
Provision for uncollectible accounts    12,943    - 
Impairment loss    -    202,586 
Lease liability net of leased asset    13,982    2,499 
Loss on extinguishment of debt    1,730,801    -
Stock based compensation    1,218,814    -  
Gain on Asset Acquisition    (2,357)   - 
Deferred equity financing costs    (120,205)   (137,561)
Issuance of shares for services    407,883    1,033,140 
Issuance of shares for interest payment    81,508    - 
Issuance of shares for inventory    8,703    - 
Changes in operating assets and liabilities:           
Accounts receivable    55,599    (3,668)
Inventory    (157,636 )   (20,676)
Prepaid expenses    (104,520 )   (15,122)
Deferred brokerage fees    4,808    25,884 
Deferred revenues    (12,429)   (63,279)
Accounts payable    (271,086)   110,595 
Accrued expenses    (327,072)   (194,223)
Due from franchisees’    15,367    (45,516)
            
Net cash used in operating activities    (2,105,623)   (342,099)
            
Cash flows from investing activities:           
Purchase of property and equipment    (13,302)   (1,949)
            
Net cash provided by (used in) investing activities    (13,302)   (1,949)
            
Cash flows from financing activities:           
Repayment of notes payable    (1,324,409)   (319,477)
Proceeds from note payable    3,761,500    1,046,756 
Proceeds from sale of warrants    100,000   

-

 
Private placement funds received    -     25,000 
            
Net cash provided by financing activities    2,537,091     752,279 
           
Net change in cash    418,166     408,231
           
Cash - beginning of period    414,257     160,208 
           
Cash - end of period  $ 832,423    $568,439 
           
Supplemental Disclosures of Cash Flow Information:           
            
Cash paid for interest  $ 180,950    $- 
Cash paid for income taxes  $ -   $- 
           
Supplemental Non-Cash Investing and Financing Information           
            
Common stock issued for consideration in an acquisition of assets  $ 104,850    $728,544 
Common stock issued in connection with notes payable  $ 269,539   $100,000 
Warrants issued for debt extinguishment  $ 2,392,593    - 
Beneficial conversion feature with warrants issued for debt discount  $ 3,534,556   $102,217

 

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 17 company owned stores and 12 franchise locations operating in various states including Arizona, California, Florida, Idaho, Maryland, Ohio, South Carolina, Texas and Washington. PLAYlive offers a video gaming lounge concept to qualified franchisees. PLAYlive currently offers single-unit location franchises, as well as agreements to develop multiple locations. This PLAYlive model is being interlaced with the esports gaming centers mentioned above to create the ultimate gaming center.

 

The Company’s 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 $46,114 and $73,248, respectively to cost of goods sold related to assets utilized in the production of inventory. The Company assessed the materiality of the misstatement quantitatively and qualitatively and has concluded that the correction of the classification error is immaterial to the consolidated financials taken as a whole. As a result of the correction, Cost of Goods Sold for the three months ended November 30, 2020 increased from $67,657 to $113,771 with a corresponding decrease of General and administrative expenses, resulting in a decrease to Gross Profit from $228,889 to $182,775. For the six months ended November 30, 2020, Cost of Goods Sold increased from $108,168 to $181,416 with a corresponding decrease of General and administrative expenses, resulting in a decrease to Gross Profit from $388,979 to $315,731. The correction had no impact on Loss from Operations and Net loss.

 

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 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 as of November 30, 2021 and May 31, 2021.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents in a financial institution, which at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts through November 30, 2021.

 

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 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.

 

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 $12,943.

 

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 2 to 10 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 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.

 

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.

 

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 $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 7 for further details.

 

Basic Loss Per Share

 

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 $18,632,103, a working capital deficit of $1,073,665 and a net loss of $6,431,470 as of November 30, 2021. Management believes that these matters raise substantial doubt about the Company’s ability to continue as a going concern for twelve months from the issuance date of this report.

 

The Company has commenced operations and has begun to generate revenue; however, the Company’s cash position may not be sufficient to support the Company’s daily operations. Management intends to raise additional funds by way of private 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  $110,849    110,849 
Property and equipment   865,190    755,741 
Total cost   976,069    866,590 
Less accumulated depreciation   (458,936)   (292,282)
Net property and equipment  $518,103    574,308 

 

During the six months ended November 30, 2021 and 2020, the Company recorded depreciation expense of $165,653 and $73,249, respectively

 

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  4 years  $1,023,118   $596,819   $426,299 
Trademarks  Indefinite   866,000    -    866,000 
Customer database  2 years   35,000    24,792    10,208 
Restrictive covenant  2 years   115,000    81,458    33,542 
Customer contracts  10 years   546,000    403,001    142,999 
Internet domain  2 years   3,000    2,917    83 
      $2,588,118   $1,108,987   $1,479,131 

 

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  4.50 years  $1,023,118   $498,799   $524,319 
Trademarks  Indefinite   866,000    -    866,000 
Customer Contracts  10 years   546,000    301,675    244,325 
Internet domain  2.50 years   3,000    2,417    583 
      $2,438,118   $802,891   $1,635,227 

 

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  $102,312   $204,624   $119,363   $-   $-   $-   $426,299 
Customer contracts   8,105    16,211    16,211    16,211    16,211    70,051    142,999 
Restrictive covenant   28,750    4,792    -     -     -     -     33,542 
Customer database   8,750    1,458    -    -    -    -    10,208 
Internet domain   83    -     -     -     -     -     83 
Total  $148,000   $227,085   $135,574   $16,211   $16,211   $70,051   $613,131 

 

Amortization expense for the six months ended November 30, 2021 and 2020 was $148,416 and $133,229, respectively.

 

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 4,500 shares of the Company’s common stock with fair value of $41,850 or $9.30 per share based on the fair value of assets acquired. Pursuant to ASU 2017-01 and ASC 805, the Company analyzed the APA to determine if the Company acquired a business or acquired assets. As of November 30, 2021 the shares for the acquisition are included in Common Stock Issuable.

 

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 $2,500 and monthly equity awards of 250 shares of its common stock. The terms of the contract were retroactive to July 1, 2020 and at November 30, 2021, the Company has accrued $5,625 and 375 shares of stock for the payments of this contract.

 

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 $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 pre-reverse split (or an aggregate exercise price of $2,990,000) upon the closing of the Initial Public Offering. The Unit Purchase Option (“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 on a pre-reverse split basis.

 

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 $1,581,863 and $1,590,380, respectively. During the six months ended November 30, 2021 and 2020, the Company recorded operating lease expense of approximately $280,613 and $31,453.

 

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  $264,351 
2023 

498,377

 
2024  500,511 
2025  453,795 
2026 and thereafter  225,100 
Total Operating Lease Obligations  1,942,135 
Less: Amount representing interest  $(351,755)
Present Value of minimum lease payments  $

1,590,380

 

 

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  $5,174,480   $3,157,970 
Secured Promissory Notes   

420,000

    - 
Related Debt Discount   (3,588,366)    (947,873)
           
Total promissory notes, net  $2,006,114   $2,211,097 
           
Current portion of Promissory Notes, net  $1,121,334   $2,211,097 

 

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 12% promissory note (the “Note”) with a maturity date of February 19, 2022 (the “Maturity Date”), in the principal sum of $1,650,000. In addition, the Company issued 10,000 shares of its common stock to the Holder as a commitment fee pursuant to the SPA. Pursuant to the terms of the Note, the Company agreed to pay to $1,650,000 (the “Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of 12% per annum (provided that the first twelve months of interest shall be guaranteed). The Note carries an original issue discount (“OID”) of $165,000. Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase price of $1,485,000 in exchange for the Note. The Company intends to use the proceeds for its operational expenses, the repayment of those certain self-amortization promissory notes previously issued to the Holder on June 18, 2020 and November 23, 2020, and the repayment of certain other existing debt obligations. The Holder may convert the Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the Note) at any time at a conversion price equal to $11.50 per share.

 

The Company may prepay the Note at any time prior to the date that an Event of Default (as defined in the Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). The Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Note or SPA.

 

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 125% (the “Default Amount”). Upon the occurrence of an Event of Default, additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted by law.

 

During the six months ended November 30, 2021 the Company paid the Holder a total of $855,000. The Company paid an interim payment due to the Holder in the amount of $225,000 towards the repayment of the balance of the Note in the amount of $90,909, towards the repayment of guaranteed interest in the amount of $109,091 and $25,000 as an amendment fee. In addition the Company paid $130,000 towards the repayment of the balance of the Note in the amount of $58,500 and towards the guaranteed interest in the amount of $71,500 and in compliance with the renegotiated terms of an interim payment that was due on August 19, 2021 in the amount of $363,000, on September 30, 2021 the Company paid $500,000 towards the repayment of principal of the Note

 

During the quarter ended November 30, 2021, the Company incurred $290,522 of interest expense on the Note. On November 30, 2021 the balance of the Note is $635,605 all of which is included in the current portion of convertible notes payable, net of debt discount.

 

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 12% promissory note (“March 10 FirstFire Note”) with a maturity date of March 10, 2022, in the principal sum of $560,000. The Company received net proceeds of $130,606, net of OID of $56,000, net of origination fees of $8,394, and the repayment of principal and interest of $365,000 on the August 7, 2020 Note. In addition, the Company issued 3,394 shares of its common stock to the FirstFire as a commitment fee pursuant to the SPA. Pursuant to the terms of the March 10 FirstFire Note, the Company agreed to pay to $560,000 (the “Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of 12% per annum (provided that the first twelve months of interest shall be guaranteed). The March 10 FirstFire Note carries an OID of $56,000. Accordingly, on the Closing Date (as defined in the March 10 FirstFire SPA), the Holder paid the purchase price of $504,000 in exchange for the Note. The FirstFire may convert the March 10 FirstFire Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the March 10 FirstFire Note) at any time at a conversion price equal to $11.50 per share.

 

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 $123,200, on or before September 10, 2021, towards the repayment of the balance of the March 10 FirstFire Note. On September 17, 2021, the Company issued a common stock purchase warrant for the purchase of 40,000 shares of the Company’s common stock to FirstFire as consideration for FirstFire entering into a first amendment to the March 10 FirstFire Note in order to delay an interim payment of OID and interest due under the March 10 FirstFire Note to the maturity date of such note. For the quarter ended November 30, 2021, the Company recorded the fair value of the warrants in the amount of $248,547 and took a related interest expense charge of $248,547.

 

On October 1, 2021, the Company issued a three-year warrant to purchase 40,000 shares of the Company’s common stock at an exercise price of $10.73 per share to FirstFire as consideration for FirstFire entering into a second amendment to the March 10 FirstFire Note in order to remove the capital raising ceiling in such note. For the quarter ended November 30, 2021, the Company recorded the fair value of the warrants in the amount of $201,351 and took a related interest expense charge of $201,351.

  

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 125% (the “Default Amount”). Upon the occurrence of an Event of Default, additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted by law.

 

During the six months ended November 30, 2021, the Company recognized $131,794 of interest expense related to the amortization of debt discount related to the FirstFire Note. On November 30, 2021, the balance of FirstFire Note, net of the related debt discount, is $485,729 all of which is included in the current portion of convertible notes payable, net of debt discount.

 

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 12% promissory note (the “June 11 FirstFire Note”) with a maturity date of June 10, 2023 (the “FirstFire Maturity Date”), in the principal sum of $1,266,666. In addition, the Company issued 11,875 shares of its common stock to FirstFire as a commitment fee pursuant to the June 11 FirstFire SPA. Pursuant to the terms of the June 11 FirstFire Note, the Company agreed to pay to $1,266,666 (the “FirstFire Principal Sum”) to FirstFire and to pay interest on the principal balance at the rate of 12% per annum (provided that the first six months of interest shall be guaranteed and the remaining 18 months of interest shall be deemed earned in full if any amount is outstanding under the FirstFire Note after 180 days from June 10, 2021). The June 11 FirstFire Note carries an original issue discount (“OID”) of $126,666. Accordingly, FirstFire paid the purchase price of $1,140,000 in exchange for the FirstFire Note. The Company intends to use the proceeds for working capital and to pay off an existing promissory note issued by the Company in favor of Maxim. FirstFire may convert the June 11 FirstFire Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the June 11 FirstFire Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by FirstFire upon, at the election of FirstFire, not less than 61 days’ prior notice to the Company) at any time at a conversion price equal to $11.50 per share, as the same may be adjusted as provided in the June 11 FirstFire Note.

 

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 125%.

 

Pursuant to the terms of the June 11 FirstFire SPA, the Company also issued to FirstFire a three-year warrant (the “June 11 FirstFire Warrant”) to purchase 593,750 shares of the Company’s common stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting of the Company’s common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed by November 1, 2021, $10.73.

 

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 $1,266,667 and a related debt discount of $1,266,667, interest payable of $76,000 and additional paid in capital of $1,053,999. On September 16, 2021, the Company made an interim payment to the FirstFire Note in the amount of $175,000. During the six months ended November 30, 2021, the Company recorded interest expense of $298,448. On November 30, 2021, the balance of the June 11 FirstFire Note, net of the related debt discount is $123,448 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.

 

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 12% promissory note (the “GS Note”) with a maturity date of June 10, 2023 (the “GS Maturity Date”), in the principal sum of $333,333. In addition, the Company issued 3,125 shares of its common stock to GS as a commitment fee pursuant to the GS SPA. Pursuant to the terms of the GS Note, the Company agreed to pay to $300,000.00 (the “GS Principal Sum”) to GS and to pay interest on the principal balance at the rate of 12% per annum (provided that the first six months of interest shall be guaranteed and the remaining 18 months of interest shall be deemed earned in full if any amount is outstanding under the GS Note after 180 days from June 10, 2021). The GS Note carries an original issue discount (“OID”) of $33,333. Accordingly, GS paid the purchase price of $300,000.00 in exchange for the GS Note. The Company intends to use the proceeds for working capital and to pay off an existing promissory note issued by the Company in favor of Maxim. GS may convert the GS Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the GS Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by GS upon, at the election of GS, not less than 61 days’ prior notice to the Company) at any time at a conversion price equal to $11.50 per share, as the same may be adjusted as provided in the GS Note.

 

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 125%.

 

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 three-year warrant to purchase 156,250 shares of the Company’s common stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting of the Company’s common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed by November 1, 2021, $10.73.

 

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 $333,333 and a related debt discount of $333,333, interest payable of $20,000 and additional paid in capital of $280,000. During the six months ended November 30, 2021, the Company recorded interest expense of $76,255. On November 30, 2021, the balance of the GS Note, net of the related debt discount is $76,255 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.

 

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 12% promissory note (the “Jefferson Note”) with a maturity date of August 23, 2023 (the “Jefferson Maturity Date”), in the principal sum of $333,333. In addition, the Company issued 3,125 shares of its common stock to Jefferson as a commitment fee pursuant to the Jefferson SPA. Pursuant to the terms of the Jefferson Note, the Company agreed to pay to $300,000.00 (the “Jefferson Principal Sum”) to Jefferson and to pay interest on the principal balance at the rate of 12% per annum (provided that the first six months of interest shall be guaranteed and the remaining 18 months of interest shall be deemed earned in full if any amount is outstanding under the Jefferson Note after 180 days from August 23, 2021). The Jefferson Note carries an original issue discount (“OID”) of $33,333. Accordingly, Jefferson paid the purchase price of $300,000.00 in exchange for the Jefferson Note. The Company intends to use the proceeds for working capital and to pay off an existing promissory note issued by the Company in favor of Maxim. Jefferson may convert the Jefferson Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the Jefferson Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by Jefferson upon, at the election of Jefferson, not less than 61 days’ prior notice to the Company) at any time at a conversion price equal to $11.50 per share, as the same may be adjusted as provided in the Jefferson Note.

 

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 125%.

 

Pursuant to the terms of the Jefferson SPA, the Company also issued to Jefferson a three-year warrant to purchase 156,250 shares of the Company’s common stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting of the Company’s common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed by November 1, 2021, $10.73.

 

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 $333,333 and a related debt discount of $274,239, interest payable of $20,000 and additional paid in capital of $205,605. During the six months ended November 30, 2021, the Company recorded interest expense of $36,277. On November 30, 2021, the balance of the Jefferson Note, net of the related debt discount is $95,372 all of which is included in the long-term portion of convertible notes payable, net of debt discount.

 

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 12% convertible promissory note (“the LV Note”) in the principal amount of $200,000 with an effective date of September 2, 2021, guaranteed interest of $12,000 and a maturity date of September 2, 2023. In addition, the Company issued 3,749 shares of its common stock to LV as a commitment fee pursuant to the Securities Purchase Agreement. Furthermore, the Company issued a common stock purchase warrant for the purchase of 187,400 shares of the Company’s common stock). Accordingly, Lucas Ventures Capital paid the purchase price of $200,000.00 in exchange for the LV Note.

 

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 125%.

 

Pursuant to the terms of the LV SPA, the Company also issued to LV a three-year warrant to purchase 187,480