SIMPLICITY ESPORTS & GAMING Co - Quarter Report: 2021 November (Form 10-Q)
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 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 | $ | 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 - $ 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 | 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)
| 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)
| 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.
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.
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 shares of the Company’s common stock with fair value of $41,850 or $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 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 $ and 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 Units (which increased to Units upon the partial exercise of the underwriters’ over-allotment option), exercisable at $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 $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 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 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 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 -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 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 -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 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 -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 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 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 -year warrant to purchase 187,480 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 LV SPA, including shares issued upon conversion of the LV Note or exercise of the LV Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with the SEC within 90 days following September 2, 2021 and to have the registration statement declared effective by the SEC within 120 days following September 2, 2021.
The Company recorded the LV Note in the amount of $200,000 and a related debt discount of $200,000, additional paid in capital of $158,999 and guaranteed interest of $12,000. During the quarter ended November 30, 2021, the Company recorded interest expense of $24,384. On November 30, 2021, the balance of the LV Note, net of the related debt discount is $24,384 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
LGH Investments, LLC Note Payable
On August 31, 2021 the Company and LGH Investments, LLC, (“LGH”) issued a 12% convertible promissory note (“LGH Note”) in the principal amount of $200,000 effective September 2, 2021 with a maturity date of September 2, 2023.
The Company may prepay the LGH Note at any time prior to maturity in accordance with the terms of the LGH Note. The LGH Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the LGH Note.
Upon the occurrence of any Event of Default (as defined in the LGH Note), which has not been cured within three calendar days, the LGH Note shall become immediately due and payable and the Company shall pay to LGH, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
| 20 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The Company recorded the LGH Note in the amount of $200,000, interest payable of $12,000 along with total debt discount of $ 38,500, related debt discount (“OID”) of $20,000 and origination fees of $6,500. During the quarter, the Company recorded interest expense of $4,800. On November 30, 2021, the balance of the LGH Note, net of the related debt discount is $166,299 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
Ionic Ventures, LLC Capital Stock Purchase Agreement & Note
On September 28, 2021, the Company entered into a securities purchase agreement (the “Ionic SPA”) dated as of September 28, 2021, with Ionic Ventures, LLC (“Ionic”), pursuant to which the Company issued a 12% promissory note (the “Ionic Note”) with a maturity date of September 28, 2023 (the “Ionic Maturity Date”), in the principal sum of $1,555,555.56 with guaranteed interest of $93,333.34. In addition, the Company issued shares of its common stock to Ionic as a commitment fee pursuant to the Ionic SPA. Pursuant to the terms of the Ionic Note, the Company agreed to pay to $1,400,000.00 (the “Ionic Principal Sum”) to Ionic 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 Ionic Note after 180 days from September 28, 2021). The Ionic Note carries an original issue discount (“OID”) of $155,555.56. Accordingly, Ionic paid the purchase price of $1,400,000.00 in exchange for the Ionic Note. The Company intends to use the proceeds for working capital. Ionic may convert the Ionic Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the Ionic Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by Ionic upon, at the election of Ionic, 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 Ionic Note.
The Company may prepay the Ionic Note at any time prior to maturity in accordance with the terms of the Ionic Note. The Ionic Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Ionic Note or the Ionic SPA.
Upon the occurrence of any Event of Default (as defined in the Ionic Note), which has not been cured within three calendar days, the Ionic Note shall become immediately due and payable and the Company shall pay to Ionic, 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 Ionic SPA, the Company also issued to Ionic a -year warrant to purchase 729,167 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 Ionic SPA, including shares issued upon conversion of the Ionic Note or exercise of the Ionic Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with the SEC within 90 days following September 28, 2021 and to have the registration statement declared effective by the SEC within 120 days following September 28, 2021.
The Company recorded the Ionic Note in the amount of $1,555,555 and a related debt discount of $1,555,555, and additional paid in capital of $1,306,665 and guaranteed interest of $93,333. During the quarter, the Company recorded interest expense of $134,246. On November 30, 2021, the balance of the LV Note, net of the related debt discount is $134,246 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
Secured Promissory Note One
On November 15, 2021, the Company entered into a 10% secured promissory note with an accredited investor (“Secured Note One”) in the amount of $262,500 for the purpose of acquiring computers for company owned store operations. The Secured Note One has a perfected security interest in 50 personal computers the Company will use in its operations. In addition, the Company issued 30,000 commitment warrants for the purchase of the Company’s common stock at an exercise price of $10.73 per share. The Secured Note One requires 60 monthly payments of principal and interest in the amount of $5,577.
The Company recorded the Secured Note One in the amount of $262,500 along with original issue discount (“OID”) of $12,500. Accordingly, the investor paid $250,000 in exchange for the Secured Note One. On November 30, 2021, the balance of the Secured Note One, net of the related debt discount is $165,483 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
Secured Promissory Note Two
On November 18, 2021, the Company entered into a 10% secured promissory note accredited with an accredited investor (“Secured Note Two”) in the amount of $157,500 for the purpose of acquiring computers for company owned store operations. The Secured Note Two has a perfected security interest in 30 personal computers the Company will use in its operations. In addition, the Company issued 18,000 commitment warrants for the purchase of the Company’s common s stock at an exercise price of $10.73 per share. The Secured Note Two requires 60 monthly payments of principal and interest in the amount of $3,346.
The Company recorded the Secured Note Two in the amount of $157,500 along with original issue discount (“OID”) of $7,500. Accordingly, the investor paid $150,000 in exchange for the Secured Note Two. On November 30, 2021, the balance of the Secured Note Two, net of the related debt discount is $99,290 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
| 21 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 9 -STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue shares of preferred stock with a par value of $ per share. As of November 30, 2021, there were shares of preferred stock issued or outstanding.
Common Stock
On August 17, 2020, the Company amended its certificate of incorporation to increase the total number of authorized shares of the Company’s common stock from to . Holders of the shares of the Company’s common stock are entitled to one vote for each share. At November 30, 2021 and May 31, 2021, there were and shares of common stock issued and outstanding respectively.
Warrants
The Company issued warrants related to the convertible notes payable that were issued during the six months ended November 30, 2021.
A summary of the status of the Company’s outstanding stock warrants as of November 30, 2021 is as follows:
| Number
of Shares | Average
Exercise Price | |||||||
| Outstanding – May 31, 2020 | 789,063 | $ | 83.01 | |||||
| Granted during the year ended May 31, 2021 | 17,063 | $ | 20.66 | |||||
| Outstanding – May 31, 2021 | 806,126 | $ | 10.38 | |||||
| Activity during the six months ended November 30, 2021: | ||||||||
| Warrants granted related to debt | 2,315,897 | $ | 11.05 | |||||
| Warrants sold to a private investor | 100,000 | $ | 20.00 | |||||
| Warrants outstanding – November 30, 2021 | 3,222,023 | $ | 29.05 | |||||
NOTE 10 — SUBSEQUENT EVENTS
On December 10, 2022, the Company entered into a related party transaction with Jed Kaplan, the Chairman of the Company and a more than 5% shareholder. The loan was for $247,818, bearing interest at a rate of 5% and the principal is due on June 10, 2022. The loan may be repaid by the Company, without penalty, at any time. Should the Company fail to make the principal payment due, the loan will convert to a 17% equity stake in our subsidiary, Simplicity One Brazil, of which Jed Kaplan is already a 20% stakeholder.
| 22 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References in this report (the “Quarterly Report”) to “we,” “us” or the “Company” refer to Simplicity Esports and Gaming Company and its subsidiaries. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report and with the audited condensed consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2021, as filed with the Securities and Exchange Commission (the “SEC”).
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are not historical fact, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors sections of the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2021, as filed with the SEC, as the same may be updated from time to time, including in this Quarterly Report. The Company’s securities filings can be accessed on the EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.
Overview
We are a global esports organization, with an established brand, that is capitalizing on the growth in esports through three business units, Simplicity One Brasil Ltda (“Simplicity One”), Simplicity Esports, LLC (“Simplicity Esports LLC”) and PLAYlive Nation, Inc. (“PLAYlive”).
Online Tournaments
We have acquired a database of over 400,000 paying esports gaming center customers in the acquisition of PLAYlive Nation. We directly promote our online Simplicity Esports tournaments to this database of over 400,000 existing customers via text messages. If we can convert merely 1% of these existing customers from the PLAYlive Nation database to play in paid entry online Simplicity Esports tournaments, this may be a profitable business unit resulting in approximately $1,000,000 in annual revenues. Management also intends to sell sponsorship and marketing activations for these online tournaments that would create additional revenue.
Esports Teams
We own and manage professional esports teams domestically and internationally. Revenue is generated from prize winnings, corporate sponsorships, advertising, league subsidy payments and potential league revenue sharing payments from the publishers of video games.
| 23 |
Domestic Esports Teams – Simplicity Esports LLC
Through our wholly owned subsidiary Simplicity Esports LLC, we own and manage numerous professional esports teams competing in games such as Overwatch, Apex Legends, PUBG and more. We are committed to growing and enhancing the esports industry, fostering the development of amateurs to compete professionally and signing established professional gamers to support their paths to greater success.
International Esports Team - Simplicity One
Since January 2020, through our 76% owned subsidiary Simplicity One, we own and manage Flamengo ESports, one of the leading Brazilian League of Legends® teams. Flamengo ESports was established in 2017 as the Esports division of Clube de Regatas do Flamengo, a successful Brazilian sports organization, with over 40 million followers across social media accounts, known for its world-famous soccer team. Flamengo ESports’ League of Legends® team won the CBLoL Championship in September 2019, which qualified the team to compete at the 2019 League of Legends® World Championship in Europe as one of 24 teams from 13 different regions around the world. Flamengo Esports @flaesports was ranked as the 9th most tweeted about sports organization in the world in 2020.
Gaming Centers
We own and operate corporate and franchise esports gaming centers, through our wholly owned subsidiaries Simplicity Esports LLC and PLAYlive, throughout the U.S. giving casual gamers the opportunity to play in a social setting with other members of the gaming community. In addition, aspiring and established professional gamers have an opportunity to compete in local and national esports tournaments held in our gaming centers for prizes, notoriety, and potential contracts to play for one of our professional esports teams. In this business unit, revenue is generated from franchise royalties, the sale of game time, memberships, tournament entry fees, birthday party events, corporate party events, concessions and gaming-related merchandise.
Our business plan encompasses a brick and click physical and digital approach to further recognize revenue from all verticals, which we believe to be unique in the industry. The physical centers, together with our esports teams, lifestyle brand and marketing campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform, tournaments, and physical real estate to maximize the monetization opportunities with these relationships. In addition, we have proprietary intellectual capital, fan engagement strategies and brand development blueprints which complement our publicly available information.
Optimally, the esports gaming centers of Simplicity Esports LLC (“Simplicity Esports Gaming Centers”) will measure between 2,000 and 4,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology, futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity for sponsors and advertisers.
Creating content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. Out talented team will continue to produce unique in-depth content which showcases aspects of esports for fans. We seek to reach a broad demographic encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while maintaining authenticity to the gaming community that comprises our fanbase.
Corporate Gaming Centers
As of November 30, 2021 through our subsidiary entities, we currently operate 17 corporate-owned retail Simplicity Esports Gaming Centers, Furthermore, we have engaged a national tenant representation real estate broker to assist in the strategic planning and negotiations for our future Simplicity Esports Gaming Center locations. We contemplate that new Simplicity Esports Gaming Centers will be funded by us as well as a combination of tenant improvement allowances from landlords and sponsorships. The Company intends to continue the expansion of its corporate owned esports gaming center footprint through the buildout of new esports gaming centers. The disruptions in commercial real estate caused by COVID-19 lockdowns have allowed the Company to strengthen its existing relationships with national landlords by signing new locations with percentage rent leases. The locations will range between 2,000 and 4,000 square feet and be primarily located inside of shopping malls.
| 24 |
Franchised Gaming Centers
Due to interest from potential franchisees, in 2019 we launched a franchising program to accelerate the expansion of our planned nationwide footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment and buildout of esports gaming centers to potential business owners that desire to use our branding, infrastructure and process to open and operate gaming centers. We currently operate 12 fully constructed franchise esports gaming centers. The 12 franchise owned gaming centers that we have acquired to date generated over $1 million of revenue in the fiscal year ended May 31, 2021 despite operating with limited capacity due to COVID-19 restrictions. Due to interest from potential franchisees, we have launched a franchising program to accelerate the expansion of our planned nationwide footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment and buildout of esports gaming centers to potential business owners that desire to use our branding, infrastructure and process to open and operate gaming centers. Franchise revenue is generated from the sale of franchise territories, supplying furniture, equipment and merchandise to the franchisees for buildout of their centers, a gross sales royalty fee and a national marketing fee. We license the use of our branding, assist in identifying and negotiating commercial locations, assist in overseeing the buildout and development, provide access to proprietary software for point of sale, inventory management, employee training and other HR functions. Franchisees also have an opportunity to participate in our national esports tournament events, and benefit from the growing profile of our professional esports teams. Once an esports gaming center is opened, we provide operational guidance, support and use of branding elements in exchange for a monthly royalty fee calculated as 6% of gross sales. On January 1, 2020, we implemented a national marketing fee of 1% of gross sales. To date, we have sold five of these franchise territories. COVID-19 travel restrictions caused us to suspend the sale of new franchise territories from April 1, 2020. During this time, a pipeline of interested applicants has accumulated, and we anticipate new franchise territory sales over the next 12 months as a result.
The combination of the esports gaming centers, owned or franchised by our wholly owned subsidiaries Simplicity Esports LLC or PLAYlive, provides us with what we believe is one of the largest esports gaming center footprints in North America. Over the next 12 months, existing PLAYlive esports gaming centers will be rebranded to Simplicity Esports gaming centers. All newly opened franchise esports gaming centers will be branded as Simplicity Esports gaming centers and have numerous gaming PC’s. All gaming centers in our footprint will be participating venues in our national esports tournaments.
Franchise Roll-Up Strategy
We began implementing a franchise roll-up strategy in July 2020 as a result of the disruption caused by COVID-19 related stay at home orders, and the disruption it caused to the commercial real estate market. The reduction in revenues for some franchisees because of stay-at-home orders, and government mandates to remain closed created significant accrued rent payments due to landlords. We have been able to come to terms with many franchisees to acquire the assets of their gaming centers and make them corporate owned. We have simultaneously negotiated new leases with some of the largest national mall chains, including Simon Property Group and Brookfield Asset Management, and are in the process of negotiating additional locations with other landlords. The new leases involve significant reductions in or elimination of fixed rent and the addition of percentage of revenues rent terms.
Our Stream Team
The Simplicity Esports LLC stream team encompasses over 30 commentators (commonly known as “casters”), influencers and personalities who connect to a dedicated fan base. Our electric group of live personalities represent our organization to the fullest with their own unique style. We are proud to support and present a diverse group of gamers as we engage fans across a multiple of esports genres. Our Twitch affiliation has enabled our stream team influences to reach a broad fan base. Additionally, we have created several niches within the streaming community which has enabled us to engage fans within certain titles on a 24/7 basis. Our notoriety in the industry is evidenced by our audience that views millions of minutes of Simplicity Esports’ content monthly, via various social media outlets including YouTube, Twitter and Twitch. Through Simplicity Esports LLC, we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience. Our intention is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community, and we plan to use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other in the industry.
| 25 |
Our Financial Position
For the three months ended November 30, 2021 and 2020, we generated revenues of $843,815 and $296,546 respectively, reported net losses of $2,165,726 and 1,013,693, respectively.
For the six months ended November 30, 2021 and 2020, we generated revenues of $1,748,655 and $497,147, reported net losses of $6,431,470 and $1,684,793, respectively, and had cash flow used in operating activities of $2,105,623 and $342,098, respectively. As of November 30, 2021, we had an accumulated deficit of $18,632,103.
There is substantial doubt regarding our ability to continue as a going concern as a result of our historical recurring losses and negative cash flows from operations as well as our dependence on private equity and financings.
Results of Operations
Summary of Statement of Operations for the Three and Six Months Ended November 30, 2021 and 2020:
Revenue
For the three and six months ended November 30, 2021, revenues consisted of the following:
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| November 30, 2021 and 2020 | November 30, 2021 and 2020 | |||||||||||||||
| Revenues | ||||||||||||||||
| Franchise royalties, fees and other | $ | 96,953 | $ | 91,793 | $ | 159,311 | $ | 179,076 | ||||||||
| Other revenue | - | - | ||||||||||||||
| 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 | ||||||||
For the three months ended November 30, 2021, our revenues increased by $547,269, as compared to the three months ended November 30, 2020. For the six months ended November 30, 2020, our revenues increased by $1,251,508, as compared to the six months ended November 30, 2020. These increases were primarily due to the increase in both the number of company owned stores and the increase in operating hours as the COVID 19 restrictions changed during the period coupled with increased tournament prize winnings in our Esports revenue.
Cost of Goods Sold
Cost of goods sold for the three months ended November 30, 2021 and 2020 was $485,394 and $113,771, respectively representing an increase of $371,623 primarily due to increased revenues. Cost of goods sold for the six months ended November 30, 2021 and 2020 was $1,092,5164 and $181,416, respectively representing an increase of $911,100 primarily due to increased revenues coupled with higher inventory write off costs on higher inventory balances.
Operating Expenses
Compensation and related benefits
Compensation and related benefits for the three months ended November 30, 2021 and 2020 was $845,886 and $366,257, an increase of $479,629. Compensation and related benefits for the six months ended November 30, 2021 and 2020 was $2,149,012 and $668,825, an increase of $1,480,187. Compensation and related benefits consist of salaries and stock-based compensation, health benefits and related payroll taxes. The increase is primarily due to the increase in the number of employees and higher stock-based compensation.
Professional fees
Professional fees for the three months ended November 30, 2021 and 2020 was $129,723 and $186,898 a decrease of $57,175. The decline in expenses is primarily due to reduced consulting fees in the quarter. Professional fees for the six months ended November 30, 2021 and 2020 was $579,076 and $260,789 an increase of $318,287. Professional fees consist of costs for audits, accountants, attorneys, consultants and the costs for other experts. The increase is primarily due to the increase in accounting and audit fees as well as legal expenses related to the increase in debt.
General and Administrative Expenses
General and administrative expenses for the three months ended November 30, 2021 was $432,127 as compared to $212,631 for the three months ended November 30, 2020, an increase of $219,496. General and administrative expenses for the six months ended November 30, 2021 was $875,822 as compared to $454,400 for the six months ended November 30, 2020, an increase of $421,422. The increase is primarily due to the increase in the number of company owned stores and the associated expenses (rent, utilities, computer expenses, insurance) to maintain the stores.
| 26 |
Loss from Operations
For the three months ended November 30, 2021, loss from operations amounted to $1,049,315 as compared to $784,288 for the three months ended November 30, 2020, an increase of $265,027 For the six months ended November 30, 2021, loss from operations amounted to $2,947,771 as compared to $1,269,560 for the six months ended November 30, 2020, an increase of $1,678,211.
Other Expense
For the three months ended November 30, 2021, other expense amounted to $1,116,411 as compared to $229,405 for the three months ended November 30, 2020, an increase of $887,006. The increase in other expenses was primarily attributable to an increase in interest expense of $901,134 related to an increase in debt and the amortization of debt discount.
For the six months ended November 30, 2021, other expense amounted to $3,483,699 as compared to $415,233 for the six months ended November 30, 2020, an increase of $3,068,466. The increase in other expenses was primarily attributable to an increase in interest expense of $1,406,702 related to an increase in debt and the amortization of debt discount coupled with an increase in debt forgiveness expense of $1,733,916.
Net Loss
Net loss for the three months ended November 30, 2021 was $2,165,726 as compared to a net loss of $1,013,693 for the three months ended November 30, 2020, an increase of $1,152,033. Net loss for the six months ended November 30, 2021 was $6,431,470 as compared to $1,684,793 for the six months ended November 30, 2020, an increase of $4,746,677.
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had cash of $832,423 and $414,257 as of November 30, 2021, and May 31, 2021, respectively.
Our primary uses of cash have been for salaries, fees paid to third parties for professional services, computer and internet expenses, and general and administrative expenses. We have received funds from licensing fees, from Company-owned stores sales, and from various financing activities such as from the sale of our common shares and from debt financings. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:
| ● | An increase in working capital requirements to finance our current business, | |
| ● | Addition of administrative and sales personnel as the business grows, and | |
| ● | The cost of being a public company; | |
| ● | Marketing expense for building brand; | |
| ● | Capital requirements for the development store locations. |
Since inception, we have raised proceeds from the sale of common shares and from debt to fund our operations.
The following table shows a summary of our cash flows for the six months ended November 30, 2021 and 2020.
| Six Months Ended November 30, |
||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (2,105,623 | ) | $ | (342,098 | ) | ||
| Net cash provided by (used in) investing activities | (13,302 | ) | (1,949 | ) | ||||
| Net cash provided by financing activities | $ | 2,537,091 | $ | 752,279 | ||||
| Net increase (decrease) in cash | $ | 418,166 | $ | 408,231 | ||||
| Cash - beginning of the period | $ | 414,257 | $ | 160,208 | ||||
| Cash - end of the period | $ | 832,423 | $ | 568,439 | ||||
| 27 |
Net Cash Used in Operating Activities:
Net cash flow used in operating activities for the six months ended November 30, 2021 primarily reflected a net loss of $6,431,470, which was then adjusted for the add-back (deduction) of non-cash items primarily consisting of depreciation of $165,563, amortization expense of $156,096, stock-based compensation expense of $1,218,814, non-cash interest expense related to debt of $1,696,395, debt forgiveness expense of $1,730,801 and changes in operating assets and liabilities consisting primarily of an decrease in accounts payable of $271,086, a decrease in accrued expenses of $327,072, an increase in inventory of $157,636, an increase in other assets of $104,520 offset by a decrease in accounts receivable of $55,559.
Net Cash Provided by (Used in) Investing Activities:
Net cash used in investing activities was $13,302 for the six months ended November 30, 2021 as compared net cash used in investing activities of $1,949 for the six months ended November 30, 2020. During the six months ended November 30, 2021, cash used for the purchase of property and equipment increased $11,353 compared to the six months ended November 30, 2020.
Net Cash Provided by Financing Activities:
Net cash provided by financing activities was $2,537,091 for the six months ended November 30, 2021 as compared to $752,279 for the six months ended November 30, 2020. During the six months ended November 30, 2021, we received net cash from notes payable of $3,761,500 and cash from the sale of warrants of $100,000, offset by the repayment of notes payable of $1,324,409.
We will need to raise additional funds in order to meet the expenditures required for operating our business.
Off-balance sheet financing arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Going Concern
The Company’s unaudited consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the unaudited condensed consolidated financial statements, the Company has an accumulated deficit of $18,632,103, a working capital deficit of $1,073,665 and a net loss of $6,431,470 at November 30, 2021. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the of the date that the unaudited financial statements are issued.
The Company has commenced operations and has begun to generate revenue; however, the Company’s cash position may not be sufficient to support the Company’s daily operations. Management intends to raise additional funds by way of a private or public offering. While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering.
| 28 |
The 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 2020 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 Simplicity Gaming Centers as of November 30, 2021. 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. Notwithstanding, it is unclear exactly how much of the increase in accounts receivables is attributable to the impact of COVID-19.
Contractual obligations
We do not have any long-term capital lease obligations, operating lease obligations or long-term liabilities, except as follows:
Operating Leases
We have long-term operating lease obligations and deferred revenues related to franchise fees to be recognized over the term of franchise agreements with our franchises, generally ten years. We will begin to recognize deferred franchise fee revenue at the time a franchise commences operations.
The Company is party to operating leases at its corporate office and at each of its company owned store locations which have various terms and payments.
| 29 |
Debt Obligations
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.
| 30 |
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 Global Opportunities Fund, LLC (“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.
| 31 |
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.
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 debt discount.
| 32 |
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%.
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, 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 debt discount.
| 33 |
Jefferson Street Capital Stock Purchase Agreement and 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.
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, LV paid the purchase price of $200,000.00 in exchange for the LV Note.
| 34 |
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 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 LV SPA, including shares issued upon conversion of the LV Note or exercise of the LV Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with the SEC within 90 days following September 2, 2021, and to have the registration statement declared effective by the SEC within 120 days following September 2, 2021.
The Company recorded the LV Note in the amount of $200,000 and a related debt discount of $200,000, additional paid in capital of $158,999 and guaranteed interest of $12,000. During the quarter, the Company recorded interest expense of $24,384. On November 30, 2021, the balance of the LV Note, net of the related debt discount is $24,384 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
LGH Investments, LLC Note Payable
On August 31, 2021 the Company and LGH Investments, LLC, (“LGH”) issued a 12% convertible promissory note (“LGH Note”) in the principal amount of $200,000 effective September 2, 2021 with a maturity date of September 2, 2023.
The Company may prepay the LGH Note at any time prior to maturity in accordance with the terms of the LGH Note. The LGH Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the LGH Note.
Upon the occurrence of any Event of Default (as defined in the LGH Note), which has not been cured within three calendar days, the LGH Note shall become immediately due and payable and the Company shall pay to LGH, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
The Company recorded the LGH Note in the amount of $200,000, interest payable of $12,000 along with total debt discount of $38,500, related debt discount (“OID”) of $20,000 and origination fees of $6,500. During the quarter, the Company recorded interest expense of $4,800. On November 30, 2021, the balance of the LGH Note, net of the related debt discount is $166,299 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
| 35 |
Ionic Ventures, LLC Capital Stock Purchase Agreement & Note
On September 28, 2021, the Company entered into a securities purchase agreement (the “Ionic SPA”) dated as of September 28, 2021, with Ionic Ventures, LLC (“Ionic”), pursuant to which the Company issued a 12% promissory note (the “Ionic Note”) with a maturity date of September 28, 2023 (the “Ionic Maturity Date”), in the principal sum of $1,555,555.56 and guaranteed interest of $93,333.34. In addition, the Company issued 14,584 shares of its common stock to Ionic as a commitment fee pursuant to the Ionic SPA. Pursuant to the terms of the Ionic Note, the Company agreed to pay to $1,400,000.00 (the “Ionic Principal Sum”) to Ionic 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 Ionic Note after 180 days from September 28, 2021). The Ionic Note carries an original issue discount (“OID”) of $155,555.56. Accordingly, Ionic paid the purchase price of $1,400,000.00 in exchange for the Ionic Note. The Company intends to use the proceeds for working capital. Ionic may convert the Ionic Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the Ionic Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by Ionic upon, at the election of Ionic, 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 Ionic Note.
The Company may prepay the Ionic Note at any time prior to maturity in accordance with the terms of the Ionic Note. The Ionic Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Ionic Note or the Ionic SPA.
Upon the occurrence of any Event of Default (as defined in the Ionic Note), which has not been cured within three calendar days, the Ionic Note shall become immediately due and payable and the Company shall pay to Ionic, 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 Ionic SPA, the Company also issued to Ionic a three-year warrant to purchase 729,167 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 Ionic SPA, including shares issued upon conversion of the Ionic Note or exercise of the Ionic Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with the SEC within 90 days following September 28, 2021 and to have the registration statement declared effective by the SEC within 120 days following September 28, 2021.
The Company recorded the Ionic Note in the amount of $1,555,555 and a related debt discount of $1,555,555, and additional paid in capital of $1,306,665 and guaranteed interest of $93,333. During the quarter, the Company recorded interest expense of $134,246. On November 30, 2021, the balance of the LV Note, net of the related debt discount is $134,246 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
Secured Promissory Note One
On November 15, 2021, the Company entered into a 10% secured promissory note with an accredited investor (“Secured Note One”) in the amount of $262,500 for the purpose of acquiring computers for company owned store operations. The Secured Note One has a perfected security interest in 50 personal computers the Company will use in its operations. In addition, the Company issued 30,000 commitment warrants for the purchase of the Company’s common stock at an exercise price of $10.73 per share. The Secured Note One requires 60 monthly payments of principal and interest in the amount of $5,577.
The Company recorded the Secured Note One in the amount of $262,500 along with original issue discount (“OID”) of $12,500. Accordingly, the investor paid $250,000 in exchange for the Secured Note One. On November 30, 2021, the balance of the Secured Note One, net of the related debt discount is $165,483 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
Secured Promissory Note Two
On November 18, 2021, the Company entered into a 10% secured promissory note with an accredited investor (“Secured Note Two”) in the amount of $157,500 for the purpose of acquiring computers for company owned store operations. The Secured Note Two has a perfected security interest in 30 personal computers the Company will use in its operations. In addition, the Company issued 18,000 commitment warrants for the purchase of the Company’s common s stock at an exercise price of $10.73 per share. The Secured Note Two requires 60 monthly payments of principal and interest in the amount of $3,346.
The Company recorded the Secured Note Two in the amount of $157,500 along with original issue discount (“OID”) of $7,500. Accordingly, the investor paid $150,000 in exchange for the Secured Note Two. On November 30, 2021, the balance of the Secured Note Two, net of the related debt discount is $99,290 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
Adoption of 2020 Omnibus Incentive Plan
The board and shareholders of the Company approved of the Simplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the “2020 Plan”) on April 22, 2020 and June 23, 2020, respectively. The 2020 Plan provides for various stock-based incentive awards, including incentive and nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units, and other equity-based or cash-based awards.
| 36 |
Critical Accounting Policies
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.
| 37 |
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of November 30, 2021. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of November 30, 2021.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company expects to implement changes to its internal control over financial reporting to enhance the evaluation of accounting transactions and its financial reporting process over the next year. The Company is in the process of hiring additional resources, either in the form of an independent council or as consultants to help identify processes that will strengthen our internal controls.
| 38 |
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
As a smaller reporting company, the Company is not required to disclose material changes to the risk factors that were contained in the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2021 (the “2021 10-K”). However, in light of the recent coronavirus (COVID-19) pandemic, set forth below is a risk factor relating to COVID-19. Other than as set forth below, as of the filing date of this Quarterly Report on Form 10-Q, there have been no material changes to the risk factors faced by the Company from those previously disclosed in the 2021 10-K.
Public health epidemics or outbreaks, such as COVID-19, could materially and adversely impact our business.
In December 2019 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 Simplicity Gaming Centers as of November 30, 2021. Although our franchise agreements with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming Centers will default in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase in accounts receivables or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability to pay the minimum monthly royalty payments owed by the franchisee. We have experienced a decrease in our account receivables, net of the allowance by $55,599 from the year ended May 31, 2021.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition and results of operations.
The measures taken to date adversely impacted the Company’s business for the fiscal quarters ended November 30, 2021, August 31, 2021 and the fiscal year ended May 31, 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not sell any equity securities during the period covered by this Quarterly Report that were not registered under the Securities Act, except as previously disclosed in our Current Reports on Form 8-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
| 39 |
ITEM 6. EXHIBITS
| * | Filed herewith |
| 40 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SIMPLICITY ESPORTS AND GAMING COMPANY | ||
| Dated: January 14, 2022 | By: | /s/ Nancy Hennessey |
| Name: | Nancy Hennessey | |
| Title: |
Chief Financial Officer (principal financial officer and principal accounting officer) | |
| 41 |