UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended November 30, 2019

 

[  ] 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 or 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    

 

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 [X] 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 [X] 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. (Check one):

 

  Large accelerated filer [  ]   Accelerated filer [  ]  
  Non-accelerated filer [X]   Smaller reporting company [X]  
      Emerging growth company [X]  

 

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 [X]

 

As of January 10, 2020, there were 7,858,975 shares of the Company’s common stock issued and outstanding.

 

 

 

   

 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

 

Table of Contents

 

    Page
PART I — FINANCIAL INFORMATION  
     
Item 1. Financial Statements: 3
     
  Consolidated Balance Sheets 3
     
  Consolidated Statement of Operations 4
     
  Consolidated Statements of Changes in Stockholders’ Equity 5
     
  Consolidated Statement of Cash Flows 7
     
  Consolidated Notes to Financial Statements (unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 24
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
     
Item 4. Controls and Procedures 31
     
PART II — OTHER INFORMATION  
     
Item 1. Legal Proceedings 32
     
Item 1A. Risk Factors 32
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
     
Item 3. Defaults Upon Senior Securities 32
     
Item 4. Mine Safety Disclosures 32
     
Item 5. Other Information 32
     
Item 6. Exhibits 33
     
Signatures 34

 

2
 

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

   November 30, 2019   May 31, 2019 
   (UNAUDITED)     
ASSETS          
           
Current Assets          
Cash and cash equivalents  $647,460   $1,540,158 
Accounts receivable   67,971    - 
Inventory   18,984    - 
Prepaid expenses   5,671    - 
Total Current Assets   740,086    1,540,158 
           
Other Assets          
Goodwill   6,682,416    4,456,250 
Intangible assets, net   1,425,629    1,528,441 
Deferred brokerage fees   800,919    - 
Property and equipment   261,905    117,231 
Right of use asset, operating lease   225,322    100,146 
Security deposits   14,885    12,317 
Due from related party   13,342    - 
Total Other Assets   9,424,419    6,214,385 
           
TOTAL ASSETS  $10,164,505   $7,754,543 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current Liabilities          
Loan payable- related party  $-   $93,761 
Accounts payable   17,232    - 
Accrued expenses   602,839    691,940 
Convertible note payable   1,000,000    1,000,000 
Operating lease obligation, current   76,559    32,045 
Current portion of deferred revenues   715,350    - 
Stock payable   50,000    - 
Total Current Liabilities   2,461,980    1,817,746 
           
Operating lease obligation, net of current portion   148,762    68,876 
Deferred revenues, less current portion   923,712    - 
           
Total Liabilities   3,534,454    1,886,622 
           
Commitments   -    - 
           
Stockholders’ Equity          
Preferred stock - $0.0001 par value, 1,000,000 shares authorized; no shares issued and outstanding   -    - 
Common stock - $0.0001 par value; 20,000,000 shares authorized; 7,858,975 and 7,003,975 shares issued and outstanding as of November 30, 2019 and May 31, 2019, respectively   786    700 
Additional paid-in capital   11,034,952    9,442,027 
Accumulated deficit   (4,421,528)   (3,574,806)
Total Simplicity Esports and Gaming Company Stockholders’ Equity   6,614,210    5,867,921 
Non-Controlling Interest   15,841    - 
Total Equity   6,630,051    5,867,921 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $10,164,505   $7,754,543 

 

The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.

 

3
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   For the Three Months Ended   For the Six Months Ended 
   November 30, 2019   November 30, 2018   November 30, 2019   November 30, 2018 
                 
Revenue                    
Franchise royalties and license fees   200,274   $-   $247,012   $- 
Company-owned stores sales   45,224    -    49,643    - 
Esports revenue   -    -    23,336    - 
Total Revenue   245,498    -    319,991    - 
                     
Operating Expenses                    
General and Administrative expenses   (819,305)   (3,139,567)   (1,258,257)   (3,381,602)
Loss from Operations   (573,807)   (3,139,567)   (938,266)   (3,381,602)
                     
Other Income / (Expense)                    
Debt Forgiveness Income   8,523    -    93,761    - 
Interest Expense   (6,675)   -    (13,350)   - 
Interest Income   457    163,694    2,961    401,418 
Total Other Income / (Expense)   2,305    163,694    83,372    401,418 
                     
Loss Before Provision for Income Taxes   (571,502)   (2,975,873)   (854,894)   (2,980,184)
                     
Provision for Income Taxes   -    -    -    - 
                     
Net loss attributable to noncontrolling interest   8,172         8,172      
                     
Net loss available to common shareholders  $(563,329)  $(2,975,873)  $(846,722)  $(2,980,184)
                     
Basic and Diluted Net Loss per share  $(0.07)  $(1.21)  $(0.11)  $(1.27)
                     
Basic and diluted Weighted Average Number of common shares outstanding   7,840,513    2,457,256    7,551,106    2,354,655 

 

The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.

 

4
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED NOVEMBER 30, 2019

(UNAUDITED)

 

   Common Stock   Additional
Paid-In
   Non-Controlling   Accumulated   Total
Stockholders’
 
   Shares   Amount   Capital   Interest   Deficit   Equity 
                         
Balance - May 31, 2019   7,003,975   $700   $9,442,027        $(3,574,806)  $5,867,921 
                               
Shares issued for PLAYlive Nation acquisition   750,000    75    1,439,925         -    1,440,000 
                               
Vesting of Common Shares   -    -    63,000         -    63,000 
                               
Compensation to officer for shares issued for past services   -    -    90,000         -    90,000 
                               
Shares issued for vesting of employment agreement awards   105,000    11    -         -    11 
                               
Non-controlling interest of original investment in subsidiaries   -    -    -    24,013    -    24,013 
                               
Net loss attributable to noncontrolling interest   -    -    -    (8,172)        (8,172)
                               
Net Loss, six months ended November 30, 2019   -    -    -         (846,722)   (846,722)
                               
Balance - November 30, 2019   7,858,975   $786   $11,034,952   $15,841   $(4,421,528)  $6,630,051 

 

The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.

 

5
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED NOVEMBER 30, 2018

(UNAUDITED)

 

   Common Stock   Additional
Paid-In
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Capital   Deficit   Equity 
                     
Balance - May 31, 2018   2,252,743   $225   $5,009,310   $(9,534)  $5,000,001 
                          
Common shares issued   425    -    4,311    -    4,311 
                        - 
Net loss   -    -    -    (4,311)   (4,311)
                          
Balance - August 31, 2018   2,253,168   $225   $5,013,621   $(13,845)  $5,000,001 
                          
Common stock subject to redemption not redeemed   112,072    11    (7,138,003)   -    (7,137,992)
                          
Shares issued for advisory services   208,000    21    2,124,979    -    2,125,000 
                          
Common stock issued to Smaaash Founders   2,000,000    200    -    -    200 
                          
Rights shares   546,150    55    379,083    -    379,138 
                          
Net loss   -    -    -    (2,975,873)   (2,975,873)
                          
Balance - November 30, 2018   5,119,390   $512   $379,680   $(2,989,718)  $(2,609,526)

 

The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements.

 

6
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED

(UNAUDITED)

 

   November 30, 2019   November 30, 2018 
         
Cash flows from operating activities:          
Net loss  $(854,895)  $(2,980,184)
Adjustments to reconcile net (loss) income to net cash (used in) operating activities:          
Interest earned on marketable securities held in trust account   -    (401,418)
Accrued expense to related party   -    3,620 
Depreciation expense   21,148    - 
Amortization expense   102,812    - 
Debt forgiveness income   (93,761)   - 
Issuance of shares for services   153,011    2,125,000 
Changes in operating assets and liabilities:          
Accounts receivable   (67,971)   - 
Inventory   (18,984)   - 
Prepaid expenses   (5,671)   3,114 
Security deposits   (2,568)   - 
Deferred brokerage fees   5,056    - 
Deferred revenues   14,812    - 
Accounts payable   13,658    - 
Accrued expenses   (89,101)   872,291 
Due from related party   (13,342)   - 
           
Net cash used in operating activities   (835,796)   (377,577)
           
Cash flows from investing activities:          
Investment at cost   -    (150,000)
Interest income released from Trust Account   -    401,418 
Cash purchased in acquisition   26,180    - 
Lease liability net of lease asset   (776)   - 
Purchase of property and equipment   (156,319)   - 
           
Net cash provided by (used in) investing activities   (130,915)   251,418 
           
Cash flows from financing activities:          
Payment of offering costs   -    (20,000)
Cash in trust   -    53,178,520 
Non-controlling interest of original investment in subsidiaries   24,013    (45,455,596)
Private placement funds received   50,000    - 
Net cash provided provided by financing activities   74,013    7,702,924 
           
Net change in cash   (892,698)   7,576,765 
           
Cash - beginning of period   1,540,158    458,063 
           
Cash - end of period  $647,460   $8,034,828 
           
Supplemental Disclosures of Cash Flow Information:          
           
Cash paid for interest  $-   $- 
Cash paid for income taxes  $-   $- 
           
Supplemental Non-Cash Investing and Financing Information          
           
Common stock redemption obligation  $-   $7,973,300 
Common stock issued for consideration in an acquisition  $1,440,000   $- 
Acquisition of PLAYlive:          
Goodwill  $2,226,166   $- 
Property and equipment  $9,503   $- 
Deferred brokerage fees  $805,975   $- 
Accounts payable  $(3,574)  $- 
Deferred revenue  $(1,624,250)  $- 

 

The accompanying unaudited notes are an integral part of these unaudited consolidated financial statements

 

7
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Simplicity Esports and Gaming Company F/K/A Smaaash Entertainment Inc. (the “Company,” “we,” or “our”), was a blank check company organized under the laws of the State of Delaware on April 17, 2017. The Company was formed under the name I-AM Capital Acquisition Company for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses (“Business Combination”). On November 20, 2018, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc. On January 2, 2019, the Company changed its name from Smaaash Entertainment Inc. to Simplicity Esports and Gaming Company.

 

Through our wholly owned subsidiary Simplicity Esports, LLC, acquired on January 2, 2019 (see Note 6), 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. Simplicity is an established brand in the Esports industry with an engaged fan base competing in popular games across different genres, including Apex Legends®, PUBG®, Gears of War®, Overwatch®, League of Legends®, Smite®, and various 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 (see Note 6), the Company has a network of franchised Gaming Centers across 13 states. 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.

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented.

 

The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K as filed with the SEC on August 29, 2019. The interim results for the three and six months ended November 30, 2019 are not necessarily indicative of the results to be expected for the year ending May 31, 2020 or for any future interim periods.

 

8
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

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 consolidated financial statements include the operations of the Company and its wholly owned subsidiaries, Simplicity Esports, LLC, PLAYlive Nation, Inc., and PLAYlive Nation Holdings, LLC and its 79% owned subsidiaries Simplicity Happy Valley, LLC and Simplicity Redmond, LLC.

 

In November 2019, the Company organized Happy Valley, LLC and Redmond, LLC for the purpose of converting a franchised store into a Company owned store.

 

All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Cash and cash equivalents

 

The Company considers short-term interest-bearing investments with initial maturities of three months or less to be cash equivalents. The Company has no cash equivalents.

 

Concentration of Credit Risk

 

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

 

Financial Instruments

 

The fair value of the Company’s assets and liabilities, which qualify as financial instruments under the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the consolidated balance sheet.

 

Use of Estimates

 

The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

9
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

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 its 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 Stores Sales

 

The Company-owned stores principally generate revenue from retail esports gaming centers. Revenues from Company-owned stores are recognized when the products are delivered or the service is provided.

 

Franchise Royalties and Fees

 

Franchise royalties which are based on a percentage of franchise store sales 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 food 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.

 

10
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

Esports revenue

 

Esports revenue is a form of competition using video games. Most commonly, esports takes the form of organized, multiplayer video game competitions, particularly between professional players, individually or as teams. Revenues from Esports revenue are recognized when the competition is completed and prize money is awarded.

 

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, 2019. These costs are recognized in the same period as the initial franchise fee revenue is recognized.

 

Accounts Receivable

 

The Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e. franchisees), taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable are written off against the allowance when management determines it is probable the receivable is worthless. Customer account balances with invoices dated over 90 days old are considered delinquent and considered in the allowance assessment. The Company performs credit evaluations of its customers and, generally, requires no collateral. Management believes that all accounts receivable are collectible; therefore, no allowance for doubtful accounts has been recorded.

 

Property and equipment

 

Property and equipment and leasehold improvements are recorded at its historical cost. The cost of property and equipment is depreciated over the estimated useful lives, when placed in service, (ranging from 3 -5 years) of the related assets utilizing the straight-line method of depreciation. The cost of leasehold improvements is depreciated (amortized) over the lesser of the length of the related leases or the estimated useful lives of the assets. Ordinary repairs and maintenance are expensed when incurred and major repairs will be capitalized and expensed if it benefits 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. The Company has intangible assets subject to amortization related to its acquisition of Simplicity Esports, LLC and PLAYlive Nation, Inc. These costs are included in intangible assets on our consolidated balance sheet and amortized on a straight-line basis when placed into service over their estimated useful lives of the costs, which is 3 to 5 years.

 

The Company periodically reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less that the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

 

11
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

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. Our assessment date was January 31, 2019 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, 2019, approximately 47 locations were open and operating, in various states including Arizona, California, Idaho, Florida, Maryland, Michigan, Mississippi, Montana, Oregon, South Carolina, Texas, Utah and Washington.

 

Stock-based compensation

 

The Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation and ASC 505-50, Equity-Based Payments to Non-Employees. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued and are recognized over the employees required service period, which is generally the vesting period.

 

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 adopted this update 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 8 for further details

 

Basic Income (Loss) per share

 

The Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Basic income (loss) per share is calculated by dividing the Company’s net loss by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing the Company’s net income (loss) by the diluted weighted average number of shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity.

 

At November 30, 2019, the Company had a convertible note and common stock warrants that could be converted into approximately, 6,924,000 common shares. These are not presented in the consolidated statements of operations as the effect of these shares is anti- dilutive.

 

12
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

Income Taxes

 

The Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the financial statements and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

 

ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.

 

On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (“Tax Reform”) was signed into law. As a result of Tax Reform, the U.S. statutory tax rate was lowered from 35% to 21% effective January 1, 2018, among other changes. ASC Topic 740 requires companies to recognize the effect of tax law changes in the period of enactment; therefore, the Company was required to revalue its deferred tax assets and liabilities at the new rate. The SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain tax effects of Tax Reform. The ultimate impact may differ from this provisional amount, possibly materially, as a result of additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of Tax Reform.

 

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 are a summary of recent accounting developments.

 

In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions. This update supersedes previous guidance for equity-based payments to nonemployees under Subtopic 505-50, Equity—Equity-Based Payments to Non-Employees. This guidance is effective for the Company as of January 1, 2019. Based on the completed analysis, the Company has determined the adjustment did not have a material impact on the financial statements.

 

The Company periodically reviews new accounting standards that are issued. Although some of these accounting standards may be applicable to the Company, the Company has not identified any other new standards that it believes merit further discussion, and the Company expects that none would have a significant impact on its financial statements.

 

Going Concern, Liquidity and Management’s Plan

 

The Company’s 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 consolidated financial statements, the Company has an accumulated deficit at November 30, 2019, a net loss and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

13
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

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 commence operations and generate sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect.

 

The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering.

 

The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

NOTE 3 - PROPERTY, PLANT AND EQUIPMENT

 

The following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:

 

   November 30, 2019 
Leasehold improvements   52,189 
Property and equipment   236,147 
      
Total cost   288,336 
      
Less accumulated depreciation   (26,431)
      
Net, property plant and equipment  $261,905 

 

Depreciation expense for the six months ended November 30, 2019 and 2018 was $21,148 and $0, respectively.

 

NOTE 4 - INTANGIBLE ASSETS

 

The following tables set forth the intangible assets, including accumulated amortization as of November 30, 2019:

 

   November 30, 2019
   Remaining      Accumulated   Net Carrying 
   Useful Life  Cost   Amortization   Value 
Non-Competes  4 years  $1,023,118   $187,572   $835,546 
Trademarks  Indefinite   588,000    -    588,000 
Internet domain  2 years   3,000    917    2,083 
      $1,614,118   $188,489   $1,425,629 

 

Amortization expense for the six months ended November 30, 2019 and 2018 was $102,812 and $0, respectively.

 

14
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

NOTE 5 - ACQUISITIONS

 

The Simplicity Esports, LLC Acquisition

 

On January 4, 2019, the Company consummated the transactions contemplated by the share exchange agreement, dated December 21, 2018 (as amended by Amendment No. 1 to Share Exchange Agreement, dated December 28, 2018 and by Amendment No. 2 to Share Exchange Agreement, dated December 30, 2018, the “Share Exchange Agreement”) by and among the Company, Smaaash Entertainment, Inc. (“Smaaash”), each of the equity holders of Simplicity (“Simplicity Owners”) and Jed Kaplan, in the capacity as the representative of the Simplicity Owners (the “Representative”). Pursuant to the Share Exchange Agreement the Simplicity Owners transferred all the issued and outstanding equity interests of Simplicity to the Company in exchange for newly issued shares of common stock of the Company (the “Acquisition”).

 

The Simplicity Owners received an aggregate of 300,000 shares of common stock at the closing of the Acquisition and an additional aggregate of 700,000 shares of common stock on January 7, 2019 and the remaining 2,000,000 shares in March of 2019.

 

The acquisition of Simplicity, in an all-stock deal, creates a pure play esports team and entertainment platform opportunity, which we believe will increase shareholder value and boost our growth strategy as we endeavor the build out of our brick and mortar esports centers.

 

The acquisition was accounted for by the Company using the acquisition method under business combination accounting. Under this method, the purchase price paid by the acquirer is allocated to the assets acquired and liabilities assumed as of the acquisition date based on the fair value. Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions. All fair value measurements of acquired assets and liabilities assumed are non-recurring in nature and classified as level 3 on the fair value hierarchy.

 

The aggregate purchase price consisted of the following:

 

Restricted stock consideration   6,090,000 
Total  $6,090,000 

 

As noted in the table above, the Company issued 3,000,000 restricted shares of common stock as consideration which was valued at market at the date of the closing, fair value of approximately $6,090,000.

 

The following table summarizes the estimated fair value of the Simplicity Esports, LLC assets acquired and liabilities assumed at the date of acquisition:

 

Cash   76,000 
Internet Domain   3,000 
Trade names and trademarks   588,000 
Non-Competes   1,023,118 
Accounts payable and accrued liabilities   (56,000)
Goodwill   4,455,882 
Total  $6,090,000 

 

Revenue and net loss included in the six months ended November 30, 2019 consolidated financial statements attributable to Simplicity Esports, LLC is approximately $67,000 and $413,000, respectively.

 

15
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

The following unaudited pro forma information below presents the consolidated results operations data as if the acquisition of Simplicity Esports, LLC took place on June 1, 2018:

 

   Six Months Ended
November 30, 2018
 
     
Total Revenue  $16,000 
Net Loss  $(3,180,000)
Basic Net Loss Per Share  $(1.35)

 

PLAYlive Nation Acquisition

 

On July 29, 2019, the Company entered into a definitive agreement to acquire PLAYlive for total consideration of 750,000 shares of common stock. The PLAYlive acquisition closed on July 30, 2019.

 

Founded in 2009 PLAYlive has a network of 44 franchised Gaming Centers across 13 states, serving over 150,000 unique gamers annually. The PLAYlive Centers offer customers a specialized entertainment gaming experience within a social setting. Customers are provided the opportunity to play and compete across an array of gaming titles on both consoles and high performance gaming PCs. Additionally, PLAYlive Gaming Centers serve as community gathering spaces for enthusiasts to play both board and card games such as Magic: The Gathering, Yu-Gi-Oh, and Pokémon.

 

The acquisition was accounted for by the Company using the acquisition method under business combination accounting. Under this method, the purchase price paid by the acquirer is allocated to the assets acquired and liabilities assumed as of the acquisition date based on the fair value. Determining the fair value of certain assets and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions. Certain amounts below are provisional based on our best estimates using information available as of the reporting date. The Company is waiting for information to become available to finalize its valuation of certain elements of this transaction. Specifically, the assigned values for intellectual property, net deferred revenues, customer relationships, and goodwill are provisional in nature and subject to change upon the completion of the final valuation of such elements. All fair value measurements of acquired assets and liabilities assumed are non-recurring in nature and classified as level 3 on the fair value hierarchy.

 

The aggregate purchase price consisted of the following:

 

Restricted stock consideration     1,440,000  
Total   $ 1,440,000  

 

As noted in the table above, the Company issued 750,000 restricted shares of common stock as consideration which was valued at market at the date of the closing, fair value of approximately $1,440,000.

 

The following table summarizes the estimated fair value of the PLAYlive assets acquired and liabilities assumed at the date of acquisition:

 

Cash     26,000  
Property, plant and equipment (provisional)     9,000  
Net deferred revenue (provisional)     (818,000 )

Customer relationships (provisional)

    -  
Accounts payable and accrued liabilities     (4,000 )
Goodwill (provisional)     2,227,000  
Total   $ 1,440,000  

 

16
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

Revenue and net loss included in the six months ended November 30, 2019 consolidated financial statements attributable to PLAYlive is approximately $220,000 and $18,000, respectively.

 

The following unaudited pro forma information below presents the consolidated results operations data as if the acquisition of PLAYlive took place on June 1, 2018:

 

   Six Months Ended
November 30, 2019
   Six Months Ended
November 30, 2018
 
         
Total Revenue  $437,000   $350,000 
Net Loss  $(890,000)  $(3,017,000)
Basic Net Loss Per Share  $(0.12)  $(1.28)

 

NOTE 6 — RELATED PARTY TRANSACTIONS

 

The Sponsor loaned the Company $201,707 in the aggregate, to be used for a portion of the expenses of the Initial Public Offering and working capital purposes. The loan is non-interest bearing, unsecured and due at the earlier of December 31, 2017 or the closing of the Initial Public Offering. At November 30, 2018, $120,089 of the Sponsor’s loan was repaid. As of May 31, 2019, the balance of the Sponsor loan was $93,761, including imputed interest of $8,523. In August of 2019, the sponsor forgave this remaining balance and the Company recorded it as debt forgiveness income.

 

The Company maintains its cash balance at a financial services company that is owned by an officer of the Company.

 

As of November 30, 2019, the Company is owed $13,342 from the former PLAYlive owners. The advance is non-interest bearing and will be paid back within 90 days of the closing of the PLAYlive acquisition.

 

NOTE 7 — COMMITMENTS AND CONTINGENCIES

 

Nasdaq Delisting

 

On December 10, 2018, the Company received a written notice (the “Notice”) from the Listing Qualifications Division of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company has not complied with the requirements of IM-5101-2 of the listing rules of Nasdaq (the “Listing Rules”).

 

The Notice stated that after its Business Combination, the Company had not demonstrated that its common stock met Listing Rule 5505(b)(1) that requires a market value of publicly held shares of at least $15 million. Additionally, the Company has not provided evidence that its common stock has at least 300 round lot holders as required by Listing Rule 5505(a)(3) and that its warrant has at least 400 round lot holders as required by Listing Rule 5515(a)(4). Finally,the Company does not comply with Listing Rule 5515(a)(2) which requires that for initial listing of a warrant the underlying security must be listed on Nasdaq.

 

17
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

On January 7, 2019, the Company received a second written notice from Nasdaq informing it that the Company failed to comply with Listing Rule 5250(e)(2) which requires companies listed on Nasdaq to timely file notification forms for the Listing of Additional Shares (the “LAS Notification”).

 

The Company was required to submit the LAS Notification 15 days prior to the issuance of the securities, however, the Company filed the LAS Notification for the issuance of the Series A-1 Note and Series A-2 Note and for the share exchange under our Share Exchange Agreement after such 15-day periods. Nasdaq notified the Company that each of these matters serves as an additional and separate basis for delisting the Company’s securities and that the review panel will consider these matters in rendering a determination regarding the Company’s continued listing on Nasdaq.

 

The Company’s management decided that moving from Nasdaq to the OTCQB is more appropriate for the Company at this time, while the Company builds out its planned network of retail esport centers.

 

On April 1, 2019, the Company was notified by Nasdaq that it would delist the Company’s common stock and warrants. The Company’s common stock and warrants were previously suspended from trading on Nasdaq, effective January 25, 2019.

 

On April 2, 2019, Nasdaq filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities and Exchange Act of 1934 on Form 25 with the Securities and Exchange Commission relating to the Company’s common stock and warrants. As a result, the Company’s common stock and warrants were delisted from Nasdaq effective April 2, 2019.

 

The Company’s common stock and warrants currently have been quoted on the OTCQB under the symbols “WINR” and “WINRW,” respectively.

 

Registration Rights

 

Pursuant to a registration rights agreement the Company entered into with its initial stockholders and initial purchasers of the Private Units (and constituent securities) at the closing of the Initial Public Offering, the Company is required to register certain securities for sale under the Securities Act. These holders are entitled under the registration rights agreement to make up to three demands that the Company register certain of its securities held by them for sale under the Securities Act and to have the securities covered thereby registered for resale pursuant to Rule 415 under the Securities Act. In addition, these holders have the right to include their securities in other registration statements filed by the Company. The Company will bear the costs and expenses of filing any such registration statements.

 

Unit Purchase Option

 

The Company sold to the underwriters (and/or their designees), for $100, an option to purchase up to a total of 250,000 Units (which increased to 260,000 Units upon the partial exercise of the underwriters’ over-allotment option), exercisable at $11.50 per Unit (or an aggregate exercise price of $2,990,000) upon the closing of the Initial Public Offering. The UPO may be exercised for cash or on a cashless basis, at the holder’s option, at any time during the period commencing on the later of the first anniversary of the effective date of the registration statement relating to the Initial Public Offering and the closing of the Company’s initial Business Combination and terminating on the fifth anniversary of such effectiveness date. The Units issuable upon exercise of this UPO are identical to those offered in the Initial Public Offering, except that the exercise price of the warrants underlying the Units sold to the underwriters is $13.00 per share.

 

18
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

Note Payable

 

On November 20, 2018, the Company paid its underwriter $20,000 and issued its underwriter a secured demand promissory note (the “Note”) in the amount of $1,800,000. The Note accrued interest at 8% per annum from the date of the Note through and including May 20, 2019, 12% per annum from and including May 21, 2019 through and including August 20, 2019, and 15% per annum from and including August 21, 2019, through and including November 20, 2019. If a late payment had occurred and continued, the interest rate would have increased to 12% per annum from the date of the Note through and including August 20, 2019 and 18% per annum from after August 21, 2019. If a late payment had remained outstanding for over 48 hours, Maxim could have required the Company to redeem all or any part of the Note at a redemption price equal to 125% of the Alternate Payment Amount.

 

The principal and interest of the Note was payable upon demand by Maxim or from time to time, in accordance the following schedule:

 

  (i) one third of the principal, accrued and unpaid interest and any late charges on May 20, 2019;
  (ii) one third of the principal, accrued and unpaid interest and any late charges on August 20, 2019; and
  (iii) one third of the principal, accrued and unpaid interest and any late charges on November 20, 2019.

 

The Note was secured by a first priority security interest in all personal property and assets of the Company excluding the assets held in escrow with respect to (i) that certain stock purchase agreement with Polar, pursuant to which Polar agreed to sell up to 490,000 shares of the Company’s common stock to the Company thirty days after the consummation of the Business Combination and (ii) that certain stock purchase agreement with K2, pursuant to which K2 agreed to sell up to 220,000 shares of the Company’s common stock to the Company thirty days after the consummation of the Business Combination.

 

The amount payable under the Note could also have been paid in shares of common stock of the Company or securities convertible or exercisable into shares of common stock of the Company (the “Alternate Equity Payment”) if and only if the Company and Maxim mutually agree on both the purchase price and, if applicable, the conversion and/or exercise price of each security of the Company issued in such Alternative Equity Payment. Otherwise, the payment should be made in cash only.

 

So long as any amount under the Note remained outstanding, all cash proceeds received by the Company from any sales of its securities was to be used to repay this Note.

 

Convertible Note Payable

 

On December 20, 2018, the Company entered into a securities exchange agreement (“Exchange Agreement”) with Maxim Group LLC (the “Holder”). Pursuant to the terms of the Exchange Agreement, the Holder agreed to surrender and exchange the Note. In exchange, the Company issued to the Holder a Series A-1 Exchange Convertible Note in the principal amount of $500,000 (the “Series A-1 Note”) and a Series A-2 Exchange Convertible Note in the principal amount of $1,000,000 (the “Series A-2 Note,” and collectively with Series A-1 Note, the “Exchange Notes”).

 

The original amount of the promissory note was $1,800,000, the total amount of the two exchange notes is $1,500,000, and the difference of $300,000 has been recorded as debt forgiveness income during the three months ended February 28, 2019.

 

The Series A-1 Note bears interest at 2.67% per annum, payable quarterly and has a maturity date of the earlier of the closing date of the Acquisition (as defined below) or June 20, 2020 (the “Maturity Date”). The Company may pay the interest in cash or at its sole discretion, in shares of its common stock or a combination of cash and common stock. However, the Company may only pay the interest in shares of its common stock if (i) all the equity conditions specified in the note (“Equity Conditions”) have been met (unless waived by the Holder in writing) during the 20 trading days immediately prior to the interest payment date (“Interest Notice Period”), (ii) the Company has provided proper notice pursuant to the terms of the note and (iii) the Company has delivered to the Holder’s account certain number of shares of its common stock to be applied against such interest payment prior to (but no more than five trading days before) the Interest Notice Period.

 

19
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

The Series A-1 Note is convertible into shares of the Company’s common stock (“Conversion Shares”) at an initial conversion price of $1.93 per share, subject to adjustment for any stock dividends and splits, rights offerings, distributions, combinations or similar transactions. Upon the closing of the Acquisition, the conversion price will be automatically adjusted to equal the arithmetic average of the volume weighted average price (“VWAP”) of the Company’s common stock in the five trading days prior to the closing date of the Acquisition. The Holder may convert the Series A-1 Note at any time, in whole or in part, provided that upon receipt of a notice of conversion from the Holder, the Company has the right to repay all or any portion of the Series A-1 Note included in the notice of conversion.

 

Additionally, the Series A-1 Note will automatically convert into shares of the Company’s common stock on the earlier of the Maturity Date or the closing date of the Acquisition provided that (i) no event of default then exists, and (ii) solely if such automatic conversion date is also the Maturity Date, each of the Equity Conditions have been met (unless waived in writing by the Holder) on each trading day during the 20 trading day period ending on the trading day immediately prior to the automatic conversation date.

 

At any time prior to the Maturity Date, the Company may also elect to redeem some or all of the outstanding principal amount for cash in an amount (the “Optional Redemption Amount”) equal to the sum of (a) 100% of the then outstanding principal amount of the note, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect of the note (the “Optional Redemption”). The Company may only effect an Optional Redemption if each of the Equity Conditions have been met (unless waived in writing by the Holder) on each trading day during the period commencing on the date when the notice of the Optional Redemption is delivered to the date of the Optional Redemption and through and including the date payment of the Optional Redemption Amount is actually made in full.

 

Except as otherwise provided in the Series A-1 Note, including, without limitation, an Option Redemption, the Company may not prepay any portion of the principal amount of the note without the prior written consent of the Holder.

 

The Company is not permitted to convert any portion of the Series A-1 Note if doing so results in the Holder beneficially owning more than 4.99% of the outstanding common stock of the Company after giving effect to such conversion, provided that on 61 days’ prior written notice from the Holder to the Company, that percentage may increase to 9.99%. However, if there is an automatic conversion, and the conversion would result in the Company issuing a number of shares in excess of the beneficial ownership limitation, then any such shares in excess of the beneficial ownership limitation will be held in abeyance for the benefit of the Holder until such time or times, if ever, as its right thereto would not result in the Holder exceeding the beneficial ownership limitation, at which time or times the Holder will be issued such shares to the same extent as if there had been no such limitation.

 

The Series A-1 Note contains restrictive covenants which, among other things, restrict the Company’s ability to repay or repurchase any indebtedness, make distributions on or repurchase its common stock or enter into transactions with its affiliates.

 

The Series A-2 Note has terms substantially similar to those of the Series A-1 Note except that the Series A-2 Note has a maturity date of June 20, 2020 and an initial conversion price of $1.93 which will be automatically adjusted to the lower of (i) the conversion price then in effect and (ii) the greater of the arithmetic average of the VWAP of the Company’s common stock in the five trading days prior to the notice of conversion and $0.50.

 

20
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

As of December 31, 2018, upon the closing of the Acquisition, the Series A-1 Note automatically converted into 193,648 shares of the Company’s common stock.

 

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 consolidated balance sheet now contains the following line items: Operating lease right-of-use assets, Current portion of operating lease liabilities and Operating lease liabilities, net of current portion.

 

As all the existing leases subject to the new lease standard were previously classified as operating leases by the Company, they were similarly classified as operating leases under the new standard. The Company has determined that the identified operating leases did not contain non-lease components and require no further allocation of the total lease cost. Additionally, the agreements in place did not contain information to determine the rate implicit in the leases, so we used our incremental borrowing rate as the discount rate. Our weighted average discount rate is 12% and 10% and the weighted average remaining lease term is 56 months.

 

As of November 30, 2019, operating lease right-of-use assets and liabilities arising from operating leases was $225,322 and $225,321, respectively. During the six months ended November 30, 2019, cash paid for amounts included for the measurement of lease liabilities was approximately $16,000 and the Company recorded operating lease expense of approximately $32,000.

 

NOTE 8 — STOCKHOLDERS’ EQUITY

 

Common Stock

 

The Company is authorized to issue 20,000,000 shares of common stock with a par value of $0.0001 per share. Holders of the shares of the Company’s common stock are entitled to one vote for each share. At November 30, 2019, there were 7,858,975 shares of common stock issued and outstanding.

 

Preferred Stock

 

The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share. At November 30, 2019, there were no shares of preferred stock issued or outstanding.

 

Private Placement

 

Beginning in February 2019, the Company sold units in connection with a private offering by the Company to raise working capital of up to $2,000,000 (the “Offering Amount” ) through the sale to accredited investors only of up to up to 1,000,000 “Units” of the Company’s securities, at a purchase price of $2.00 per Unit, with each Unit consisting of (i) one share of common stock, par value $0.0001 per share of the Company (the “Common Stock”) and (ii) a warrant to purchase one share of Common Stock, exercisable at a price of $4.00 per share, exercisable at any time within five years of issuance (each, a “Warrant”) as provided for in the Company’s Term Sheet for Unit Offering dated February 6, 2019 (the “Term Sheet”).

 

For the year ended May 31, 2019, the Company sold 962,500 units for gross proceeds of $1,925,000. During the six months ended November 30, 2019, the Company sold 25,000 units for gross proceeds of $50,000, the common shares underlying the units have not been issued yet and the $50,000 is included on the balance sheet with current liabilities.

 

21
 

 

SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

During the six months ended November 30, 2019, the Company issued 750,000 shares of common stock for the acquisition of PLAYlive. The shares were valued at $1,440,000 the fair value at the time of issuance.

 

Stock-Based Compensation

 

On March 27, 2019, the Company issued 180,000 shares of common stock to three employees. The shares were issued in conjunction with their employment agreements and vest ratably through December 31, 2019. As of November 30, 2019, 180,000 shares have vested, and for the year ended May 31, 2019 and the six months ended November 30, 2019, the Company recognized $27,000 and $63,000 of stock-based compensation, respectively, based on the trading price on March 27, 2019 (measurement date) of $0.60 per share. As of November 30, 2019, unrecognized compensation cost related to these shares is nil.

 

In November 2019, the Company recorded $90,000 of stock-based compensation for shares issued to an officer for past services provided.

 

Warrants

 

For the year ended May 31, 2018, the Company issued 5,461,500 warrants in conjunction with its Initial Public Offering. These warrants are exercisable for five years from November 20, 2018, the date of the initial business combination and have an exercise price equal to $11.50.

 

For the year ended May 31, 2019, the Company issued 962,500 warrants in conjunction with the above-mentioned private placement. These warrants are exercisable for 5 years and have an exercise price of $4.00

 

A summary of the status of the Company’s outstanding stock warrants for the six months ended November 30, 2019 is as follows:

 

   Number of
Shares
   Average
Exercise
Price
   Expiration
Date
Outstanding – May 31, 2019   6,424,000    10.38    
              
Granted – November 30, 2019   -         
Outstanding – November 30, 2019   6,424.000   $10.38   May 2024
Warrants exercisable at November 30, 2019   6,424,000         

 

NOTE 9 — SEGMENT AND RELATED INFORMATION

 

Historically, the Company had one operating segment. However, with the acquisition of PLAYlive and the opening of Company-owned retail stores, the Company’s operations are now managed through three operating segments: Franchise royalties and license fees, Company-owned stores and Esports revenue. These three operating segments and corporate are presented below as its reportable segments.

 

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SIMPLICITY ESPORTS AND GAMING COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2019

(UNAUDITED)

 

Summarized financial information concerning our reportable segments for the six months ended November 30, 2019 is shown in the following table:

 

   Revenues   Net
Loss
   Depreciation
and
Amortization
   Capital
Expenditures
   Goodwill   Total
Assets
 
                         
Franchise royalties and license fees  $247,000   $(9,000)  $2,000   $-   $2,226,000   $3,147,000 
Company-owned stores   50,000    (142,000)   19,000    153,000    -    558,000 
Esports revenue   23,000    (97,000)   103,000    3,000    4,456,000    5,890,000 
Corporate   -    (607,000)   -    -    -    569,000 
Total  $320,000   $(855,000)  $124,000   $156,000   $6,682,000   $10,164,000 

 

NOTE 10 — SUBSEQUENT EVENTS

 

In accordance with ASC 855-10, Company management reviewed all material events through the date of this report and determined that there are no material subsequent events to report.

 

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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, formerly known as Smaaash Entertainment Inc. and prior to that as I-AM Capital Acquisition Company. 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 consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2019, 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 facts, 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, 2019, as filed with the SEC, and the Company’s Registration Statement on Form S-1 declared effective by the SEC on September 30, 2019. 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 North American esports organization. We have implemented a unique approach to ensure the ultimate fan friendly 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. Utilizing the vast resources from within the ownership group, we have already established an impressive management team and roster. Our management and players are well known influencers within the esports community and we plan to use their skill to create a seamless content creation pan to help gamers feel closer to our brand than any other in the scene. Our organization intends to take the opportunity to create a platform that will help grow esports for generations of gamers.

 

For the six months ended November 30, 2019 and 2018, we generated revenues of $319,991 and $0 and reported net losses of $846,722 and $2,980,184, respectively, and negative cash flow from operating activities of $835,797 and $377,577, respectively. As of November 30, 2019, we had an accumulated deficit of $4,420,637.

 

Acquisition of Simplicity Esports, LLC

 

On January 4, 2019, the Company consummated the transactions contemplated by that certain share exchange agreement, dated December 21, 2018 (as amended by Amendment No. 1 to Share Exchange Agreement, dated December 28, 2018 and by Amendment No. 2 to Share Exchange Agreement, dated December 30, 2018, the “Share Exchange Agreement”) by and among the Company, Simplicity Esports, LLC, a Florida limited liability company (“Simplicity Esports LLC”), each of the equity holders of Simplicity Esports LLC (“Simplicity Owners”) and Jed Kaplan, in the capacity as the representative of the Simplicity Owners (the “Representative”). Pursuant to the Share Exchange Agreement the Simplicity Owners transferred all the issued and outstanding equity interests of Simplicity Esports LLC to the Company in exchange for newly issued shares of common stock of the Company (the “Acquisition”).

 

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Background of Simplicity Esports, LLC

 

Founded in 2017, Simplicity Esports LLC is 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. Esports (also known as electronic sports, e-sports, or eSports) is a form of competition using video games. Most commonly, esports takes the form of organized, multiplayer video game competitions, particularly between professional players, individually or as teams. Our continued accomplishments in various games is a driving force behind the growth of our fan base including viewership of our content.

 

As of January 4, 2019, upon the completion of the acquisition of Simplicity Esports LLC, the business of Simplicity Esports LLC has now become the primary business of the Company. Simplicity Esports LLC is an established brand in the Esports industry with an engaged fan base competing in popular games across different genres, including Apex Legends®, PUBG®, Gears of War®, Overwatch®, League of Legends®, SMITE®, and various EA Sports® titles. The Simplicity Esports LLC stream team encompasses over 50 casters, influencers and personalities who connect to a dedicated fan base. Simplicity Esports LLC’s notoriety in the industry is evidenced by its audience that views millions of minutes of Simplicity Esports LLC content monthly, via various social media outlets including YouTube, Twitter and Twitch.

 

The acquisition of Simplicity Esports LLC creates a pure play esports team and entertainment platform opportunity, which we believe will increase shareholder value and boost our growth strategy as we endeavor the build out of our brick and mortar esports centers. Through Simplicity Esports LLC, 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 Esports LLC has opened and is operating two corporate-owned retail esports gaming centers (“Simplicity Esports Gaming Centers”) that provide the public an opportunity to experience. The esports gaming centers provide gamers a venue to compete in our monthly national tournaments.

 

Acquisition of PLAYlive

 

On July 30, 2019 (“Closing Date”), we acquired a 100% interest in PLAYlive Nation, Inc. (“PLAYlive”) by way of merger (“Merger”) pursuant to an Agreement and Plan of Merger, dated July 25, 2019 (“Merger Agreement”), whereby we acquired 100% of the issued and outstanding common stock of PLAYlive from the selling stockholders (“PLAYlive Stockholders”) of PLAYlive in exchange for 750,000 shares of our common stock. Following the Merger, PLAYlive became our wholly owned subsidiary. On the Closing Date, each of the PLAYlive Stockholders entered into a one-year lock-up agreement with the Company and each of Duncan Wood, Jordan C. Jenson, and Alec T. Carpenter entered into an employment agreement with PLAYlive.

 

PLAYlive has 44 operational franchise social gaming lounges across 13 states focused on uniting like-minded esports players of all ages and to creating strong community-based relationships among gamers. PLAYlive is also the franchisor to the franchise business that sells franchisees the franchising rights to a specific territory for a fee, and assists with the creation and buildout of their esports gaming centers. Once an esports gaming center is opened, PLAYlive provides operational guidance, support, and use of branding elements in exchange for a monthly royalty fee calculated as 6% of gross sales, and a national marketing fee of 1% of gross sales. Key features of each gaming lounge are as follows:

 

  Offers the newest games available for play;
  Provides gamers with a clean, fun, and cool atmosphere to play and socialize with other gamers out of the house and meet new people;
  Permits gamers to compete against others in real life for notoriety;
  Holds events regularly such as national and local tournaments, leagues, & more; and
  Sells gaming-related merchandise

 

The combination of Simplicity Esports LLC and the PLAYlive Nation esports gaming centers gives us the largest footprint of esports gaming centers in North America. Over the next 12 months, existing PLAYlive Nation esports gaming centers will be rebranded to Simplicity Esports centers. All newly opened franchise esports gaming centers will be branded as Simplicity Esports centers. All gaming centers in our footprint will be participating venues in our national esports tournaments.

 

Apex Legends®, PUBG®, Gears of War®, Overwatch®, League of Legends®, SMITE® and EA Sports® are registered trademarks of their respective owners.

 

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Results of Operations

 

Our only activities from April 17, 2017 (date of inception) through November 20, 2018 were organizational activities, those necessary to prepare for the Initial Public Offering, which was consummated on August 22, 2017, and identifying a target company for a business combination. Following the Initial Public Offering through and after our business combination, we had not generated any operating revenues.

 

Following the acquisition of Simplicity Esports and Gaming, LLC, the Company began generating revenue and incurring additional expenses. The Company has continued to generate revenues following the acquisition of PLAYlive.

 

Segment and Related Information

 

Historically, the Company had one operating segment. However, with the acquisition of PLAYlive and the opening of Company-owned retail stores, the Company’s operations are now managed through three operating segments: Franchise royalties and license fees, Company-owned stores and Esports revenue. These three operating segments and corporate are presented below as its reportable segments.

 

26
 

 

Summarized financial information concerning our reportable segments for the six months ended November 30, 2019 is shown in the following table:

 

   Revenues   Net
Loss
   Depreciation
and
Amortization
   Capital
Expenditures
   Goodwill   Total
Assets
 
                         
Franchise royalties and license fees  $247,000   $(9,000)  $2,000   $-   $2,226,000   $3,147,000 
Company-owned stores   50,000    (142,000)   19,000    153,000    -    558,000 
Esports revenue   23,000    (97,000)   103,000    3,000    4,456,000    5,890,000 
Corporate   -    (607,000)   -    -    -    569,000 
Total  $320,000   $(855,000)  $124,000   $156,000   $6,682,000   $10,164,000 

 

Summary of Statement of Operations for the Three Months Ended November 30, 2019 and 2018:

 

Other Income

 

We generated $2,305 of non-operating income, $457 of interest income, $6,675 in interest expense and $8,523 in debt forgiveness income, for the three months ended November 30, 2019, as compared to $163,694 of interest income, $0 of interest expense and $0 in debt forgiveness income for the three months ended November 30, 2018.

 

Revenue

 

The Company’s revenue for the three months ended November 30, 2019 was $245,498, a 100% increase over the November 30, 2018 revenue of $0. This increase is due to the acquisition of Simplicity Esports, LLC and PLAYlive.

 

General and Administrative Expenses

 

General and administrative expenses for the three months ended November 30, 2019 was $819,305 as compared to $3,139,567 for the three months ended November 30, 2018, a decrease of $2,320,262. The change is primarily attributable to the acquisition of Simplicity Esports, LLC and PLAYlive. The selling, general and administrative expenses of Simplicity Esports, LLC consist primarily of payroll and related costs, operating costs, stock based compensation, professional services, rent and depreciation and amortization. The selling, general and administrative expenses of PLAYlive consist primarily of payroll and related costs, operating costs, computer and software related costs and rent. The general and administrative costs for the three months ended November 30, 2018 consisted primarily of stock-based compensation and legal fees.

 

Net Loss

 

Net loss for the three months ended November 30, 2019 was $563,329, as compared to net loss of $2,975,873 for the three months ended November 30, 2018.

 

Summary of Statement of Operations for the Six Months Ended November 30, 2019 and 2018:

 

Other Income

 

We generated $83,372 of non-operating income, $2,961 of interest income, $13,350 in interest expense and $93,731 in debt forgiveness income, for the six months ended November 30, 2019 as compared to $401,418 of interest income, $0 in interest expense and $0 in debt forgiveness income for the six months ended November 30, 2018.

 

Revenue

 

The Company’s revenue for the six months ended November 30, 2019 was $319,991, a 100% increase over the November 30, 2018 revenue of $0. This increase is due to the acquisition of Simplicity Esports, LLC and PLAYlive.

 

27
 

 

General and Administrative Expenses

 

General and administrative expenses for the six months ended November 30, 2019 was $1,258,257 as compared to $3,381,602 for the six months ended November 30, 2018, a decrease of $2,123,345. The change is primarily attributable to the acquisition of Simplicity Esports, LLC and PLAYlive. The selling, general and administrative expenses of Simplicity Esports, LLC consist primarily of payroll and related costs, operating costs, stock based compensation, professional services, rent and depreciation and amortization. The selling, general and administrative expenses of PLAYlive consist primarily of payroll and related costs, operating costs, computer and software related costs and rent. The general and administrative costs for the six months ended November 30, 2018 consisted primarily of stock-based compensation and legal fees. For the six months ended November 30, 2019 and 2018 general and administrative Expenses included non-cash expenses of $277,241 and $2,125,000, respectively. For the six months ended November 30, 2019 non-cash expenses consisted of depreciation, amortization and common shares issued for services. For the six months ended November 30, 2018 non-cash expenses consisted of common shares issued for services.

 

Net Loss

 

Net loss for the six months ended November 30, 2019 was $846,722, as compared to net loss of $2,980,184 for the six months ended November 30, 2018.

 

Liquidity and Capital Resources

 

As of November 30, 2019, we had cash of $647,460, which is available for use by us to cover the Company’s expenses, including those associated with due diligence procedures and other general corporate purposes. In addition, as of November 30, 2019, we had accrued expenses of $602,839.

 

For the six months ended November 30, 2019, cash used in operating activities amounted to $835,796, primarily resulting from net loss of $854,894, a decrease of $97,624 of accrued expenses, an increase of accounts receivable of $67,971 and an addback of debt forgiveness income of $85,238, offset by stock issued for services of $153,000, and amortization and depreciation expense of $123,960. Changes in our operating liabilities and assets used cash of $172,635.

 

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 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 consolidated financial statements, the Company has an accumulated deficit at November 30, 2019, a net loss and net cash used in operating activities for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company 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 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.

 

Contractual obligations

 

Except as set forth herein, we do not have any long-term capital lease obligations, operating lease obligations or long-term liabilities.

 

On November 20, 2018, the Company entered into a settlement and release agreement (the “Settlement Agreement”) with Maxim Group, LLC (“Maxim”), the underwriter for the Company’s initial public offering. Pursuant to the Settlement Agreement, the Company made a cash payment of $20,000 to Maxim and issued a demand secured promissory note in favor of Maxim in the amount of $1.8 million to settle the payment obligations of the Company under the underwriting agreement dated August 16, 2017, by and between the Company and Maxim. The Company also agreed to remove the restrictive legends on an aggregate of 52,000 shares of its common stock held by Maxim and its affiliate.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates.

 

Revenue Recognition

 

As of January 1, 2018, the Company adopted the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) 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 its 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 two sources, the first is from the sale of the rights to our players to third parties and second from participation and prize money awarded at gaming tournaments.

 

The following describes principal activities, separated by major product or service, from which the Company generates its revenues:

 

Company-owned Stores Sales

 

The Company-owned stores principally generate revenue from retail esports gaming centers. Revenues from Company-owned stores are recognized when the products are delivered or the service is provided.

 

Franchise Royalties and Fees

 

Franchise royalties which are based on a percentage of franchise store sales 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.

 

29
 

 

The Company recognizes initial franchise license fee revenue, net of costs incurred, 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. Initial franchise fees are generally recognized once a location is opened to the public which is when management deems substantially all services required under the franchise agreements have been performed.

 

The Company offers various incentive programs for franchisees including royalty incentives, new restaurant 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.

 

Esports revenue

 

Esports revenue is a form of competition using video games. Most commonly, esports takes the form of organized, multiplayer video game competitions, particularly between professional players, individually or as teams. Revenues from Esports revenue are recognized when the competition is completed and prize money is awarded.

 

Accounts Receivable

 

Management believes that all accounts receivable are collectible; therefore, no allowance for doubtful accounts has been recorded. 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.

 

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. Our assessment date was January 31, 2019 and qualitative considerations indicated no impairment.

 

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. The Company had intangible assets subject to amortization related to its acquisition of Simplicity Esports, LLC. These costs were included in intangible assets on our balance sheet and amortized on a straight-line basis when placed into service over the estimated useful lives of the costs, which is 3 to 5 years.

 

The Company periodically reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less that the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not required for smaller reporting companies.

 

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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, 2019. Based upon their 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, 2019.

 

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 will be implementing changes to design controls to enhance the evaluation of accounting transactions and its financial reporting process over the next year.

 

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PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Not required for smaller reporting companies.

 

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.

 

32
 

 

ITEM 6. EXHIBITS

 

Exhibit

Number

  Description
     
31.1*   Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
32.1**   Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley Act of 2002.
     
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith
** Furnished herewith

 

33
 

 

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 10, 2020   /s/ Jed Kaplan
  Name: Jed Kaplan
  Title: Chief Executive Officer and interim Chief Financial Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

 

34