SIMPLICITY ESPORTS AND GAMING COMPANY References in this report (the "Quarterly Report") to "we," "us" or the "Company" refer toSimplicity Esports and Gaming Company and its subsidiaries. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report and with the audited condensed consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2019 , as filed with theSecurities 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 endedMay 31, 2020 , as filed with theSEC , as the same may be updated from time to time, including in this Quarterly Report. The Company's securities filings can be accessed on the EDGAR section of theSEC'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
Nasdaq Delisting and Subsequent Application
OnDecember 10, 2018 , the Company received a written notice (the "Notice") from the Listing Qualifications Division ofThe 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. OnJanuary 7, 2019 , the Company received a second written notice from Nasdaq informing it that the Company failed to comply with Listing Rule 5250(e)(2) which requires companies listed on Nasdaq to timely file notification forms for the Listing of Additional Shares (the "LAS Notification"). The Company was required to submit the LAS Notification 15 days prior to the issuance of the securities, however, the Company filed the LAS Notification for the issuance of the Series A-1 Note and Series A-2 Note and for the share exchange under our Share Exchange Agreement after such 15-day periods. Nasdaq notified the Company that each of these matters serves as an additional and separate basis for delisting the Company's securities and that the review panel will consider these matters in rendering a determination regarding the Company's continued listing on Nasdaq.
Management ofSimplicity Esports and Gamily Company has decided that moving fromThe Nasdaq Stock Market ("Nasdaq") to the OTCQB is more appropriate for the Company at this time, while the Company builds out its planned network of retail esport centers. OnApril 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, effectiveJanuary 25, 2019 . OnApril 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 theSecurities 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 effectiveApril 2, 2019 . The Company's common stock and warrants are quoted on the OTCQB under the symbols "WINR" and "WINRW," respectively. OnMay 22, 2020 , the Company submitted formal application to Nasdaq for listing its shares of stock on the Nasdaq Capital Market. Management believes the Company will meet all standards required for listing on theNasdaq Capital Market during the first calendar quarter of 2021. A reverse stock split, in the ratio of 1-for-8, became effective onNovember 20, 2020 . The reverse stock split is intended to allow the Company to meet the minimum share price requirement of the Nasdaq Capital Market. There is no assurance that our listing application will be approved by the Nasdaq Capital Market.
The following describes principal activities, separated by major product or service, from which the Company generates its revenues:
Company-owned Store Sales The Company-owned stores principally generate revenue from retail esports gaming center operations including the sale of game time to casual players on our high speed, high performance gaming stations, the sale of gaming related merchandise and accessories including controllers, collectible card games, such asPokemon Magic the Gathering, and Yugi-Oh, registration fees from local esports tournaments and leagues, and the sale of party packages for party events. Revenues from Company-owned stores are recognized when the products are delivered, or the service is provided.
Franchise Royalties and Fees
Franchise royalties are based on six percent of franchise store sales after a minimum level of sales occur and are recognized as sales occur. Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other behaviors, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty rate. Franchise royalties are billed on, a monthly basis. 24 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. There are more than a dozen pending new franchisee gaming centers in the pipeline for expected opening over the next 12 months. The Company offers various incentive programs for franchisees including royalty incentives, new store opening incentives (i.e. development incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned or granted under these programs that are in the form of discounts.
Commissary sales are comprised of gaming equipment and supplies sold to franchised stores and are recognized as revenue upon shipment or delivery of the related products to the franchisees. Payments are generally due within 30 days.
Fees for information services, including software maintenance fees, marketing fees and website maintenance, graphic and promotion fees are recognized as revenue as such services are provided.
Esports Revenue
Esports is a form of competition using video games. Most commonly, esports takes
the form of organized, single player and multiplayer video game tournaments or
leagues, particularly between professional players, individually or as teams.
Revenues from Esports revenues are recognized when the competition is completed,
and prize money is awarded. Revenues earned from team sponsorships, prize
winnings, league sponsorships, and from the Company's share of league revenues
are included in esports revenue.
We are a global esports organization, with an established brand, that is
capitalizing on the growth in esports through three business units, Simplicity
One Brasil Ltda ("Simplicity One"), Simplicity Esports, LLC ("Simplicity Esports
LLC ") and PLAYlive Nation, Inc. ("PLAYlive").
Online Tournaments
We have acquired a database of over 400,000 paying esports gaming center
customers in the acquisition of PLAYlive Nation. In response to demand from
customers for online esports tournaments, we introduced a new initiative of
weekly online esports tournaments. We will directly promote our online
Simplicity Esports tournaments to this database of over 400,000 existing
customers via text messages. If we can convert merely 1% of these existing
customers from the PLAYlive Nation database to play in paid entry online
Simplicity Esports tournaments, this may be a profitable business unit resulting
in approximately $1,000,000 in annual revenues. Management also intends to sell
sponsorship and marketing activations for these online tournaments that would
create additional revenue.
Esports Teams
We own and manage numerous professional esports teams domestically and internationally. Revenue is generated from prize winnings, corporate sponsorships, advertising, league subsidy payments and potential league revenue sharing payments from the publishers of video games.
Domestic Esports Teams -
Through our wholly owned subsidiarySimplicity Esports LLC , we own and manage numerous professional esports teams competing in games such as Overwatch, Apex Legends, Heroes of the Storm and more. We are committed to growing and enhancing the esports industry, fostering the development of amateurs to compete professionally and signing established professional gamers to support their paths to greater success.
International Esports Team - Simplicity One
SinceJanuary 2020 , through our 76% owned subsidiary Simplicity One, we own and manage Flamengo Esports, one of the leadingBrazilian League of Legends® teams. Flamengo ESports was established in 2017 as the Esports division of Clube de Regatas do Flamengo, a successful Brazilian sports organization, with over 40 million followers across social media accounts, known for its world-famous soccer team.Flamengo ESports' League of Legends® team won the CBLoL Championship inSeptember 2019 , which qualified the team to compete at the 2019 League of Legends® World Championship inEurope as one of 24 teams from 13 different regions around the world. Flamengo Esports @flaesports was ranked as the 9th most tweeted about esports organization in the world in 2020. Gaming Centers
We own and operate corporate and franchise esports gaming centers, through our wholly owned subsidiariesSimplicity Esports LLC and PLAYlive, throughout theU.S. giving casual gamers the opportunity to play in a social setting with other members of the gaming community. In addition, aspiring and established professional gamers have an opportunity to compete in local and national esports tournaments held in our gaming centers for prizes, notoriety, and potential contracts to play for one of our professional esports teams. In this business unit, revenue is generated from franchise royalties, the sale of game time, memberships, tournament entry fees, birthday party events, corporate party events, concessions and gaming-related merchandise. Our business plan encompasses a brick and click physical and digital approach to further recognize revenue from all verticals, which we believe to be unique in the industry. The physical centers, together with our esports teams, lifestyle brand and marketing campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform, tournaments, and physical real estate to maximize the monetization opportunities with these relationships. In addition, we have proprietary intellectual capital, fan engagement strategies and brand development blueprints which complement our publicly available information. Optimally, the esports gaming centers ofSimplicity Esports LLC ("Simplicity Esports Gaming Centers") will measure between 1,200 and 2,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology, futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity for sponsors and
advertisers. 25 Optimally, the esports gaming centers ofSimplicity Esports LLC ("Simplicity Esports Gaming Centers") will measure between 1,500 and 3,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology, modern aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity for sponsors and advertisers. Corporate Gaming CentersSimplicity Esports LLC and other subsidiary LLCs are operating 11 corporate-owned retail Simplicity Esports Gaming Centers, eight of which were acquired during the quarter. We expect to acquire the assets of four more franchisee owned esports gaming centers, and convert them to corporate owned gaming centers during the first calendar quarter of 2021. We contemplate that new Simplicity Esports Gaming Centers will be funded by us as well as a combination of tenant improvement allowances from landlords and sponsorships. Franchised Gaming Centers We have launched a franchising program to accelerate the expansion of our nationwide footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment and buildout of esports gaming centers to potential business owners that desire to use our branding, infrastructure and process to open and operate gaming centers. Franchise revenue is generated from the sale of franchise territories, supplying furniture, equipment and merchandise to the franchisees for buildout of their centers, a gross sales royalty fee and a national marketing fee. We license the use of our branding, assist in identifying and negotiating commercial locations, assist in overseeing the buildout and development, provide access to proprietary software for point of sale, inventory management, employee training and other human resource functions. Franchisees also have an opportunity to participate in our national esports tournament events, and benefit from the growing profile of our professional esports teams. Once an esports gaming center is opened, we provide operational guidance, support and use of branding elements in exchange for a monthly royalty fee calculated as 6% of gross sales. In 2020, we implemented a national marketing fee of 1% of gross sales. To date, we have sold five of these franchise territories. COVID-19 travel restrictions caused us to suspend the sale of new franchise territories fromApril 1, 2020 untilOctober 1, 2020 . During these six months, a pipeline of interested applicants has accumulated, and we anticipate new franchise territory sales over the next
12 months, as a result. The combination of the esports gaming centers, owned or franchised by our wholly owned subsidiariesSimplicity Esports LLC or PLAYlive, provides us with what we believe is the largest footprint of esports gaming centers inNorth America . Over the next 12 months, existing PLAYlive esports gaming centers will be rebranded toSimplicity Esports gaming centers. All newly opened franchise esports gaming centers will be branded asSimplicity Esports gaming centers and have numerous gaming PC's. All gaming centers in our footprint will be participating venues in our national esports tournaments. Franchise Roll-Up Strategy We began implementing a franchise roll-up strategy inJuly 2020 , as a result of the disruption caused by COVID-19 related stay at home orders, and the disruption it caused to the commercial real estate market. The reduction in revenues for some franchisees because of stay at home orders, and government mandates to remain closed created significant accrued rent payments due to landlords. We have been able to come to terms with many franchisees to acquire the assets of their gaming centers and make them corporate owned. We have simultaneously negotiated new leases with some of the largest national mall chains and are in the process of negotiating additional locations with other landlords. The new leases involve significant reductions in or elimination of fixed rent and the addition of percentage rent terms. To date, we have signed 11 letters of intent and executed definitive agreements for eight of those locations. We anticipate closing the remaining acquisitions during the first calendar quarter of 2021. We expect each of these locations to be profitable as a result of the significant reduced rent expense via the percentage rent structure. Our Stream TeamThe Simplicity Esports LLC stream team encompasses over 30 commentators (commonly known as "casters"), influencers and personalities who connect to a dedicated fan base. Our electric group of live personalities represent our organization to the fullest with their own unique style. We are proud to support and present a diverse group of gamers as we engage fans across a multiple of esports genres. Our Twitch affiliation has enabled our stream team influences to reach a broad fan base. Additionally, we have created several niches within the streaming community which has enabled us to engage fans within certain titles on a 24/7 basis. Our notoriety in the industry is evidenced by our audience that views millions of minutes of Simplicity Esports' content monthly, via various social media outlets including YouTube, Twitter and Twitch. ThroughSimplicity Esports LLC , we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience. Our intention is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community and we plan to use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other in the industry. Our Financial Position
For the fiscal years ended
For the six months endedNovember 30, 2020 and 2019, we generated revenues of$497,147 and$319,991 , reported net losses of$1,684,793 and$854,894 , respectively, and had cash flow used in operating activities of$207,037 and$835,796 , respectively. As ofNovember 30, 2020 , we had an accumulated deficit of$7,855,418 .
There is substantial doubt regarding our ability to continue as a going concern as a result of our historical recurring losses and negative cash flows from operations as well as our dependence on private equity and financings.
26 Results of Operations Our only activities fromApril 17, 2017 (date of inception) throughNovember 20, 2018 were organizational activities, those necessary to prepare for the initial public offering, which was consummated onAugust 22, 2017 , and identifying a target company for a business combination. Following the initial public offering through and after our business combination, we had not generated any operating revenues.
Following the acquisition of
Summary of Statement of Operations for the Three and Six Months Ended
Revenue For the three and six months endedNovember 30, 2020 , revenues consisted of the following: For the Three Months Ended For the Six Months EndedNovember 30, 2020 November 30, 2020 Revenues
Franchise royalties and license fees$ 36,877 $ 200,274 $ 117,695 $ 247,012 Franchise termination revenue 54,916 45,224 61,381 - Company-owned stores sales 167,791 -
244,729 49,643
Esports revenue 36,962 - 73,342 23,336
Total Revenues $ 296,546 $ 245,498 $ 497,147 $ 319,991
For the three months ended November 30, 2020 , our revenues increased by $51,048 ,
or 20.8%, as compared to the three months ended November 30, 2019 . For the six
months ended November 30, 2020 , our revenues increased by $177,156 , or 55.4%, as
compared to the six months ended November 30, 2019 . These increases were
primarily due to the acquisition of PLAYlive, the Company-owned stores and
Simplicity One offset by a decrease in franchise royalties and license fees. Our
revenue has been affected by the COVID-19 pandemic which caused franchiseebusiness closures. Cost of Goods Sold
Cost of goods sold for the three and six months ended
General and Administrative Expenses
General and administrative expenses for the three months endedNovember 30, 2020 was$1,013,177 as compared to$819,305 for the three months endedNovember 30, 2019 , an increase of$193,872 . General and administrative expenses for the six months endedNovember 30, 2020 was$1,658,539 as compared to$1,258,257 for the six months endedNovember 30, 2019 , an increase of$400,282 . Theses change are primarily attributable to the acquisition of PLAYlive, the Company-owned stores and Simplicity One. General and administrative expenses consist primarily of payroll and related costs, stock-based compensation, operating costs, computer and software related costs, rent and impairments losses incurred from the write off of customer contracts related to the termination of franchisee agreements. The increase in selling, general and administrative expenses is primarily related to a$53,000 increase in salary related expenses, a$53,000 increase in bad debt expense and a$123,000 increase in stock-based compensation, offset by other minor reductions in other expense categories. Loss from Operations
For the three months endedNovember 30, 2020 , loss from operations amounted to$784,288 as compared to$573,807 for the three months endedNovember 30, 2019 , an increase of$210,481 , or 26.8%. For the six months endedNovember 30, 2020 , loss from operations amounted to$1,269,560 as compared to$938,266 for the six months endedNovember 30, 2019 , an increase of$331,294 , or 59835.3%. Other (Expense) Income For the three months endedNovember 30, 2020 , other (expense) income amounted to$(229,405) as compared to$2,305 for the three months endedNovember 30, 2019 , a change of$(231,710) , or 100.5%. The increase in other expenses was primarily attributable to an increase in interest expense of$237,985 related to an increase in debt and the amortization of debt discount. For the six months endedNovember 30, 2020 , other (expense) income amounted to$(415,233) as compared to$83,372 for the six months endedNovember 30, 2019 , a change of$(498,605) . The increase in other expenses was primarily attributable to an increase in interest expense of$385,438 related to an increase in debt and the amortization of debt discount and a decrease in debt forgiveness of
$90,646 . Net Loss Net loss for the three months endedNovember 30, 2020 was$1,013,693 as compared to a net loss of$571,502 for the three months endedNovember 30, 2019 , an increase of$442,191 . Net loss for the six months endedNovember 30, 2020 was$1,684,793 as compared to$854,894 for the six months endedNovember 30, 2019 , an increase of$829,899 .
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had cash of$543,439 and$160,208 as ofNovember 30, 2020 andMay 31, 2020 , respectively. 27
Our primary uses of cash have been for salaries, fees paid to third parties for professional services, computer and internet expenses, and general and administrative expenses. We have received funds from the sales of franchises, from licensing fees, from Company-owned stores sales, and from various financing activities such as from the sale of our common shares and from debt financings. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:
? An increase in working capital requirements to finance our current business,
? Addition of administrative and sales personnel as the business grows, and
? The cost of being a public company; ? Marketing expense for building brand; ? Capital requirements for the development store locations.
Since inception, we have raised proceeds from the sale of common shares and from debt to fund our operations.
The following table shows a summary of our cash flows for the six months endedNovember 30, 2020 and 2019. Six Months Ended November 30, 2020 2019 Net cash used in operating activities$ (207,037 ) $ (835,796 ) Net cash provided by (used in) operating activities 550 (130,915 ) Net cash provided by financing activities$ 614,718 $
74,013
Net increase (decrease) in cash$ 408,231 $ (892,698 ) Cash - beginning of the period$ 160,208 $ 1,540,158 Cash - end of the period$ 568,439 $ 647,460
Net cash flow used in operating activities for the six months endedNovember 30, 2020 primarily reflected a net loss of$1,684,794 , which was then adjusted for the add-back (deduction) of non-cash items primarily consisting of depreciation of$73,249 , amortization expense of$133,229 , stock-based compensation expense of$1,033,140 , non-cash interest expense related to debt of$241,557 , and impairment loss of$166,171 , and changes in operating assets and liabilities consisting primarily of an increase in accounts payable of$110,595 , a decrease in accrued expenses of$194,222 , and a decrease in amounts due to related party of$45,516 . For the six months endedNovember 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 .
Net Cash Provided by (Used in) Investing Activities:
Net cash provided by investing activities was$550 for the six months endedNovember 30, 2020 as compared net cash used in vesting activities of$(130,915) for the six months endedNovember 30, 2019 . During the six months endedNovember 30, 2019 , we primarily used cash for the purchase of property and equipment of$156,319 offset cash acquired from an acquisition of$26,180 .
Net Cash Provided by Financing Activities:
Net cash provided by financing activities was$614,718 for the six months endedNovember 30, 2020 as compared to$74,013 for the six months endedNovember 30, 2019 . During the six months endedNovember 30, 2020 , we received net cash from notes payable of$1,046,756 and cash from the sale of common stock of$25,000 , offset by the repayment of notes payable of$319,477 and the payment of deferred financing costs of$137,561 .
We will need to raise additional funds in order to meet the expenditures required for operating our business.
Off-balance sheet financing arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets. Going Concern The Company's unaudited consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the
normal course of business. 28
As reflected in the unaudited condensed consolidated financial statements, the Company has an accumulated deficit, working capital deficit of and a net loss of$7,855,418 ,$2,670,387 and$1.684.793 , respectively, as ofNovember 30, 2020 . Management believes that these matters raise substantial doubt about the Company's ability to continue as a going concern for twelve months from the issuance date of this report. The Company has commenced operations and has begun to generate revenue; however, the Company's cash position may not be sufficient to support the Company's daily operations. Management intends to raise additional funds by way of 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. 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. InDecember 2019 , a novel strain of coronavirus (COVID-19) emerged inWuhan ,Hubei Province ,China . While initially the outbreak was largely concentrated inChina and caused significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally. Because COVID-19 infections have been reported throughoutthe United States , certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity Gaming Centers were closed effectiveApril 1, 2020 . We commenced reopening Simplicity Gaming Centers as ofMay 1, 2020 and have since reopened ten corporate and 11 franchised Simplicity Gaming Centers as ofJanuary 14, 2021 , the majority of which are operating at restricted capacity based on local COVID-19 regulations. Although our franchise agreements with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming Centers will default in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase in accounts receivables or a bad debt expense where account receivables are no longer collectible due to franchisee's inability to pay the minimum monthly royalty payments owed by the franchisee. We have not written off as bad debt any accounts receivables attributable to franchisee minimum monthly royalty payments owed during the COVID-19 pandemic. Notwithstanding, it is unclear exactly how much of the increase in accounts receivables is attributable to the impact of COVID-19. For the months of July andAugust 2020 , we have waived the minimum monthly royalty payment obligations for the months of July andAugust 2020 and are instead billing the franchisees a true-up of 6% of gross sales without a minimum. The ultimate impact of the COVID-19 pandemic on the Company's operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition and results of operations. The measures taken to date have negatively impacted the Company's business during the six months endedNovember 30, 2020 and will potentially continue to impact the Company's business. Management expects that all of its business segments, across all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company's business and the duration for which it may have an impact cannot be determined at this time. Contractual obligations
We do not have any long-term capital lease obligations, operating lease obligations or long-term liabilities, except as follows:
Attorney Settlement Agreement InMarch 2019 , the Company entered into a settlement agreement with its prior attorney. The settlement agreement called for$200,000 to be paid upon signing the settlement agreement and then another approximate$525,000 to be paid over time. As ofOctober 5, 2020 , the Company owes this attorney approximately$300,000 . Maxim Settlement Agreement OnNovember 20, 2018 , the Company entered into a settlement and release agreement withMaxim 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 (the "Maxim Note") in favor of Maxim in the amount of$1.8 million to settle the payment obligations of the Company under the underwriting agreement datedAugust 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. The Note was surrendered and exchanged pursuant to the Exchange Agreement (as defined below). Maxim Exchange Agreement OnDecember 20, 2018 , the Company entered into a securities exchange agreement ("Exchange Agreement") with Maxim. Pursuant to the terms of the Exchange Agreement, Maxim agreed to surrender and exchange the Note in the amount of$1.8 million which was issued to Maxim pursuant to the Settlement Agreement (discussed immediately above). In exchange, the Company issued to the Maxim a Series A-1 Exchange Convertible Note in the principal amount of$500,000 (the "Series A-1 Note") and a Series A-2 Exchange Convertible Note in the principal amount of$1,000,000 (the "Series A-2 Note," and collectively with Series A-1 Note, the "Exchange Notes"). As ofDecember 31, 2018 , upon the closing of the Simplicity Esports Acquisition, the Series A-1 Note automatically converted into 32,275 (193,648 pre-reverse split) shares of the Company's common stock. The Series A-2 Note bears interest at 2.67% per annum, payable quarterly and has a maturity date ofJune 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. 29 The Series A-2 Note is convertible into shares of the Company's common stock ("Conversion Shares") at an initial conversion price of$11.58 ($1.93 pre-reverse split) per share, subject to adjustment for any stock dividends and splits, rights offerings, distributions, combinations or similar transactions. Upon the Maturity of the Series A-2 Note, the conversion price 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 volume weighted average price of the Company's common stock in the five trading days prior to the notice of conversion and$3.00 ($0.50 pre-reverse split) . The Holder may convert the Series A-2 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-2 Note included in the notice of conversion. Additionally, the Series A-2 Note will automatically convert into shares of the Company's common stock on the Maturity Date provided that (i) no event of default then exists, and (ii) 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-2 Note, including, without limitation, an Optional 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-2 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-2 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.
On
Operating Lease
We have long-term operating lease obligations and deferred revenues related to franchise fees to be recognized over the term of franchise agreements with our franchises, generally ten years. We will begin to recognize deferred franchise fee revenue at the time a franchise commences operations. We will also recognize deferred franchise fee revenue upon completing acquisitions of franchisee owned gaming centers and converting them to corporate owned centers. InFebruary 2019 , the Company entered into a 5-year operating lease inBoca Raton, Florida in connection with the opening of its first gaming center. Rent is approximately$2,300 per month for the first year and contains customary escalation clauses. In June of 2019, the Company entered into a 5-year operating lease for its corporate office, rent is approximately$700 per month. In August of 2019, the Company opened its second gaming center and in connection with this gaming center entered into a 5-year operating lease inDeland, Florida . Rent is approximately$2,500 per month for the first year and contains customary escalation clauses. OnJune 26, 2020 , the Company entered into a 10-year operating lease inEl Paso, Texas for a corporate gaming center inFort Bliss . It is a percentage rent lease (without a base rent) which provides for the (i) first and second year of the lease, the rent would be 10% of gross sales of such gaming center per year, (iii) third fourth and fifth year of the lease, the rent would be 12% of gross sales of such gaming center per year, and (iv) sixth, seventh, eighth, nineth and tenth year of the lease, the rent would be 14% of the gross sales of such gaming center per year. The gaming center acquisitions that occurred in the current period were also complimented by the signing of new lease agreements with the landlords. The leases consist of rent payments to be made as a percentage of each gaming center's gross sales with a minimum floor payment ranging between$1,000 and$3,000 monthly, representing 50-80% reductions in rent expense from prior leases that were in force while the gaming centers were owned by franchisees.
Future base lease payments under the non-cancelable operating lease related to
Gaming Centers at
Years Ending May 31, Amount
2021 $ 203,709
2022 407,278
2023 391,832
2024 373,870
2025 330,017
2026 110,000
Total minimum non-cancelable operating lease payments 1,816,706
30
Debt Obligations
10% Fixed Convertible Promissory Note
OnApril 29, 2020 (the "Effective Date"), the Company issued a 10% Fixed Convertible Promissory Note (the "HarborGates Note "), with a maturity date ofOctober 29, 2020 (the "Maturity Date"), in the principal sum of$152,500 in favor ofHarbor Gates Capital, LLC ("Harbor Gates"). Pursuant to the terms of the HarborGates Note , the Company agreed to pay to Harbor Gates$152,500 (the "Principal Sum") and to pay "guaranteed" interest on the principal balance at an amount equivalent to 10% of the Principal Sum, to the extent such Principal Sum and "guaranteed" interest and any other interest, fees, liquidated damages and/or items due to Harbor Gates have not been repaid or converted into Company common stock in accordance with the terms of the HarborGates Note . The HarborGates Note carries an original issue discount ("OID") of$2,500 . Accordingly, on the Effective Date, Harbor Gates delivered$150,000 to the Company in exchange for the HarborGates Note . In addition to the "guaranteed" interest, and upon the occurrence of an Event of Default (as hereinafter defined), additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 20% per annum or the highest rate permitted by law. The Company may prepay the HarborGates Note according to the following schedule: Days Since Effective Date Payment Amount Under 30 115% of Principal Amount (as hereinafter defined) so paid 31-60 120% of Principal Amount so paid 61-90 125% of Principal Amount so paid 91-180 135% of Principal Amount so paid 135% of the remaining unpaid and unconverted Principal Amount, plus all accrued and unpaid interest will be due and payable on the Maturity Date. "Principal Amount" refers to the sum of (i) the original principal amount of the HarborGates Note (including the OID); (ii) all guaranteed and other accrued but unpaid interest under the HarborGates Note ; (iii) any fees due under the Harbor Gates Notes; (iv) liquidated damages; and (v) any default payments owing under the HarborGates Note , in each case previously paid or added to the Principal Amount.
Pursuant to the terms of the Harbor
(i) 10,000 shares of common stock within three trading days of the Effective
Date; and
(ii) In the event the average of the three volume weighted average prices for
the Company's common stock during the three consecutive trading days
immediately preceding the date which is the 180th day following the
Effective Date is less than $1.00 per share, then Harbor Gates will beentitled, and the Company will issue to Harbor Gates additional shares of
common stock as set forth in the Harbor Gates Note .
If an Event of Default (as defined in the Promissory Note) occurs, the
outstanding Principal Amount of the Harbor Gates Note owing in respect thereof
through the date of acceleration, shall become, at Harbor Gates' election,
immediately due and payable in cash at the "Mandatory Default Amount". The
Mandatory Default Amount means 35% of the outstanding Principal Amount of the
Harbor Gates Note will be automatically added to the Principal Sum of the Harbor
Gates Note and tack back to the Effective Date for purposes of Rule 144
promulgated under the 1934 Act. Commencing five days after the occurrence of any
Event of Default that results in the eventual acceleration of the Harbor Gates
Note , the Harbor Gates Note will accrue additional interest, in addition to the
Harbor Gates Note's "guaranteed" interest, at a rate equal to the lesser of 20%
per annum or the maximum rate permitted under applicable law.
If the Harbor Gates Note is not retired on or before the Maturity Date, then at
any time and from time to time after the Maturity Date, and subject to the terms
hereof and restrictions and limitations contained in the Harbor Gates Note ,
Harbor Gates has the right, at Harbor Gates' sole option, to convert in whole or
in part the outstanding and unpaid Principal Amount under the Harbor Gates Note
into shares of the Company's common stock at the Variable Conversion Price. The
"Variable Conversion Price" will be equal to the lower of: (a) $1.00 , or (b) 70%
of the lowest volume weighted average price of the Company's common stock during
the 15 consecutive trading days prior to the date on Harbor Gates elects to
convert all or part of the Harbor Gates Note .
On
OnMay 12, 2020 (the "Issue Date"), the Company issued a promissory note (the "Kaplan Note") in the principal sum of$90,000 in favor ofJed Kaplan , the Company's Chief Executive Officer, interim Chief Financial Officer, member of the Company's Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures onOctober 12, 2020 (the "Maturity Date"). The Company has used the proceeds of the Kaplan Note to fund the operations of Simplicity One Brasil Ltda, the Company's majority owned subsidiary ("Simplicity Brasil"). Pursuant to the terms of the Kaplan Note, the Company agreed to pay toMr. Kaplan the lesser of (i) the principal sum of$90,000 (the "Maximum Commitment"), or (ii) the aggregate principal amount of all direct advances of the proceeds of the Kaplan Note (each, an "Advance"), together with any interest thereon, and any and all other amounts which may be due and payable thereunder from time to time. Subject to the terms of the Kaplan Note,Mr. Kaplan agreed to make one direct Advance to and for the benefit of the Company on the Issue Date in the amount of$45,000 , and one additional Advance to and for the benefit of the Company at such time as the Company may request during the two month period following the Issue Date. The total of the aggregate principal balance of all Advances (collectively referred to herein as the "Principal Amount") outstanding at any time shall not exceed the Maximum Commitment. Advances made byMr. Kaplan to the Company under the Kaplan Note which have been repaid may not be borrowed again. Prior to the Maturity Date or an Event of Default (as hereinafter defined), the Principal Amount outstanding under the Kaplan Note will bear interest at a rate of 3% (the "Interest Rate"). From and after the Maturity Date or upon and during the continuance of an Event of Default, interest will accrue on the unpaid Principal Amount during any such period at an annual rate (the "Default Rate") equal to 10% plus the Interest Rate; provided, however, that in no event will the Default Rate exceed the maximum rate permitted by law.
The Company could prepay the Kaplan Note, in whole or in part, without a prepayment penalty, at any time provided that an Event of Default has not then occurred.
31
As ofMay 31, 2020 , advances under the terms of this note were$64,728 . On various dates subsequent toMay 31, 2020 ,Mr. Kaplan funded$25,272 pursuant to the Kaplan Promissory Note. With the contributions subsequent toMay 31, 2020 , the principal balances outstanding and dueMr. Kaplan amounted to$90,000 . OnJune 22, 2020 ,Mr. Kaplan agreed to exchange the debt of the Kaplan Promissory Note with a principal balance of$90,000 in exchange for the Company assigning toMr. Kaplan a 10% equity interest in Simplicity One Brasil, Ltda, a subsidiary of the Company.
OnJune 18, 2020 (the "Issue Date"), the Company entered into a securities purchase agreement (the "SPA") with an accredited investor (the "Holder"), pursuant to which the Company issued a 12% self-amortization promissory note (the "Amortization Note") with a maturity date ofJune 18, 2021 (the "Maturity Date"), in the principal sum of$550,000 . Pursuant to the terms of the Amortization Note, the Company agreed to pay$550,000 (the "Principal Sum") to the Holder and to pay interest on the Principal Sum at the rate of 12% per annum. The Amortization Note carries an original issue discount ("OID") of$55,000 . Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase price of$495,000 in exchange for the Amortization Note. In addition, pursuant to the terms of the SPA, the Company agreed to issue 9,167 (55,000 pre-reverse split) shares of the Company's common stock to the Holder as additional consideration.
The Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization Note) (each an "Event of Default") occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest with no prepayment premium. The Amortization Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA.
The Company is required to make amortization payments to the Holder according to the following schedule:
Payment Date Payment Amount
10/16/2020 $ 66,125
11/16/2020 66,125
12/16/2020 66,125
01/18/2021 66,125
02/18/2021 66,125
03/18/2021 66,125
04/16/2021 66,125
05/18/2021 66,125
06/18/2021 65,921
Total: $ 594,921 In connection with the
Upon the Holder's provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within five calendar days as provided in the Amortization Note, the Amortization Note shall become immediately due and payable and the Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued interest multiplied by 125% (the "Default Amount"). Upon the occurrence of an Event of Default, additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted by law. The Company shall have the right to pay the Default Amount in cash at any time, provided, however that the Holder may convert the Amortization Note into the Company's common stock (subject to the beneficial ownership limitations of 4.99% contained in the Amortization Note) at any time after the date that is five calendar days after the Amortization Note becomes immediately due and payable as a result of an Event of Default until the Company has repaid the Amortization Note in cash. If the aforementioned event occurs, the conversion price will be equal to the closing bid price of the Company's common stock on the trading day immediately preceding the date of the respective conversion. The Company intends to repay the Amortization Note in accordance with its terms so that no amount under the Amortization Note is converted into shares of the Company's common stock. While any portion of this Note is outstanding, if the Company receives cash proceeds of more than$2,000,000.00 (the "Minimum Threshold") in the aggregate from public offerings or private placements to investors, the Company shall, within two business days of Company's receipt of such proceeds, inform the Holder of such receipt, following which the Holder shall have the right in its sole discretion to require the Company to immediately apply up to 50% of all proceeds received by the Company after the Minimum Threshold is reached to repay the outstanding amounts owed under this Note.
OnAugust 7, 2020 (the "Issue Date"), the Company entered into a securities purchase agreement (the "SPA") withFirstFire Global Opportunities Fund, LLC , an accredited investor (the "Holder"), pursuant to which the Company issued a 12% self-amortization promissory note (the "Self-Amortization Note") with a maturity date ofAugust 7, 2021 (the "Maturity Date"), in the principal sum of$333,333 . Pursuant to the terms of the Self-Amortization Note, the Company agreed to pay$333,333 (the "Principal Sum") to the Holder and to pay interest on the principal balance at the rate of 12% per annum. The Self-Amortization Note carries an original issue discount of$33,333 . Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase price of$300,000 in exchange for the Self-Amortization Note. In addition, pursuant to the terms of the SPA, the Company agreed to issue 5,556 (33,333 pre-reverse split) shares of the Company's common stock to the Holder as additional consideration. The Company may prepay the Self-Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization Note) (each an "Event of Default") occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest with no prepayment premium). The Amortization Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA. 32
The Company is required to make amortization payments to the Holder according to the following schedule:
Payment Date Payment Amount
12/07/2020 $ 40,075.75
01/07/2021 40,075.75
02/08/2021 40,075.75
03/08/2021 40,075.75
04/07/2021 40,075.75
05/07/2021 40,075.75
06/07/2021 40,075.75
07/07/2021 40,075.75
08/07/2021 39,952.34
Total: $ 360,558.34
Upon the Holder's provision of notice to the Company of the occurrence of any
Event of Default, which has not been cured within five calendar days as provided
in the Amortization Note, the Amortization Note shall become immediately due and
payable and the Company shall pay to the Holder, in full satisfaction of its
obligations hereunder, an amount equal to the Principal Sum then outstanding
plus accrued interest multiplied by 125% (the "Default Amount"). Upon the
occurrence of an Event of Default, additional interest will accrue from the date
of the Event of Default at the rate equal to the lower of 15% per annum or the
highest rate permitted by law. The Company shall have the right to pay the
Default Amount in cash at any time, provided, however that the Holder may
convert the Amortization Note into the Company's common stock (subject to the
beneficial ownership limitations of 4.99% contained in the Amortization Note) at
any time after the date that is five calendar days after the Amortization Note
becomes immediately due and payable as a result of an Event of Default until the
Company has repaid the Amortization Note in cash. If the aforementioned event
occurs, the conversion price will be equal to the closing bid price of the
Company's common stock on the trading day immediately preceding the date of the
respective conversion. The Company intends to repay the Amortization Note in
accordance with its terms so that no amount under the Amortization Note is
converted into shares of the Company's common stock.
While any portion of this Note is outstanding, if the Company receives cash
proceeds of more than $2,000,000.00 (the "Minimum Threshold") in the aggregate
from public offerings or private placements to investors, the Company shall,
within two business days of Company's receipt of such proceeds, inform the
Holder of such receipt, following which the Holder shall have the right in its
sole discretion to require the Company to immediately apply up to 50% of all
proceeds received by the Company after the Minimum Threshold is reached to repay
the outstanding amounts owed under this Note.
OnNovember 25, 2020 , the Company entered into a securities purchase agreement (the "November 23, 2020 SPA"), dated as ofNovember 23, 2020 (the "Effective Date"), with the Holder, pursuant to which the Company issued a 12% self-amortization promissory note (the "November Amortization Note") with a maturity date ofNovember 23, 2021 (the "Maturity Date"), in the principal sum of$750,000 . Pursuant to the terms of the November Amortization Note, the Company agreed to pay to$750,000 (the "Principal Sum") to the Holder and to pay interest on the principal balance at the rate of 12% per annum. The Company received net proceeds of$441,375 , net of original issue discount of$75,000 , origination fees of$35,250 , and the partial repayment of principal and interest of$198,375 on theJune 18, 2020 Note. In addition, pursuant to the terms of the SPA, the Company granted 17,054 warrants to purchase 17,054 shares of the Company's common stock, subject to adjustment. In connection with the November Amortization Note, during the first twelve months of this note, interest equal to$90,000 shall be guaranteed and earned in full as of the Effective Date, provided, however, that if the November Amortization Note is repaid in its entirety on or prior toFebruary 23, 2021 , then the interest shall be accrued on a per annum basis based on the number of days elapsed as of the repayment date from the Effective Date. In connection with theNovember 23, 2020 SPA, the Company shall issue warrants equal to 375,000 divided by the Exercise Price (as defined below) (the "Warrant Shares") (whereby such number may be adjusted from time to time pursuant to the terms and conditions of this Warrant) at the Exercise Price per share then in effect. For purposes of this Warrant, the term "Exercise Price" shall mean 110% of the public offering price of the Company's common stock under the public offering contemplated by the registration statement on Form S-1 filed by the Company onOctober 23, 2020 (the "Uplist Offering"), provided, however, that if the Uplist Offering has not been consummated on or beforeMay 23, 2021 , then the Exercise Price shall mean the closing bid price of the Company's common stock onDecember 23, 2020 , subject to adjustment as provided in the warrant (including but not limited to cashless exercise), and the term "Exercise Period" shall mean the period commencing on the earlier of (i) the date of the Company's consummation of the Uplist Offering or (ii)May 23, 2021 , and ending on the five-year anniversary thereof. In connection with the issuance of these warrants, on the initial measurement date, the relative fair value of the warrants of$157,438 was recorded as a debt discount and an increase in paid-in capital.
The Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization Note) (each an "Event of Default") occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). The Amortization Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA. The Company is required to make ten monthly amortization payments to the Holder of$84,000 commencing onFebruary 23, 2021 throughNovember 23,2021 . according to the following schedule: Upon the Holder's provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within five (5) calendar days (provided, however, that this five (5) calendar day cure period shall not apply to any event of default under Sections 3.1, 3.2, and 3.19 of the Amortization Note), the Amortization Note shall become immediately due and payable and the Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued interest multiplied by 125% (the "Default Amount"). Upon the occurrence of an Event of Default (as hereinafter defined), additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted by law. The Company shall have the right to pay the Default Amount in cash at any time, provided, however that the Holder may convert the Amortization Note into the Company's common stock (subject to the beneficial ownership limitations of 4.99% contained in the Amortization Note) at any time after the date that is five (5) calendar days after the Amortization Note becomes immediately due and payable as a result of an Event of Default until the Company has repaid the Amortization Note in cash. If the aforementioned event occurs, the conversion price will be equal to the closing bid price of the Company's common stock on the trading day immediately preceding the date of the respective conversion. 33 The Holder shall have the right, at any time following an Uncured Default Date (as defined in this Note), to convert all or any portion of the then outstanding and unpaid principal amount and interest (including any default interest) into shares of the Company's common stock at the Conversion Price. Following the Uncured Default Date the Conversion Price shall equal the lesser of (i) 105% multiplied by the closing bid price of the Company's common stock or (ii) the closing bid price of the Company's common stock immediately preceding the date of the respective conversion (the "Conversion Price").
Adoption of 2020 Omnibus Incentive Plan
The board and shareholders of the Company approved of theSimplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the "2020 Plan") onApril 22, 2020 andJune 23, 2020 , respectively. The 2020 Plan provides for various stock-based incentive awards, including incentive and nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units, and other equity-based or cash-based awards. Critical Accounting Policies
The preparation of condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted inthe 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 ofJanuary 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 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 are based on six percent of franchise store sales after a minimum level of sales occur and are recognized as sales occur. Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other behaviors, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty rate. Franchise royalties are billed on a monthly basis. The Company recognizes initial franchise license fee revenue 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 The Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e. franchisees), taking into consideration the age of past due accounts and an assessment of the customer's ability to pay. Accounts receivable are written off against the allowance when management determines it is probable the receivable is worthless. Customer account balances with invoices dated over 90 days old are considered delinquent and considered in the allowance assessment. The Company performs credit evaluations of its customers and, generally, requires no collateral. Management has assessed accounts receivable and an allowance for doubtful accounts of approximately$140,000 has been recorded. 34Goodwill
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 ofSimplicity 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 10 years. 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. 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. InJune 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 ofJanuary 1, 2019 . The Company adopted ASU 2018-07 onJanuary 1, 2019 . The adoption of ASU 2018 did not have any material impact on the Company's consolidated financial statements. Leases
InFebruary 2016 , theFinancial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. The updated guidance is effective for interim and annual periods beginning afterDecember 15, 2018 . OnJanuary 1, 2019 , the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases; and (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company's assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. The Company has elected not to recognize right-of-use ("ROU") assets and lease liabilities for short-term leases that have a term of 12 months or less.
Operating lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the condensed consolidated statements of operations.
© Edgar Online, source
