References herein 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 and analysis of
the Company's financial condition and results of operations should be read in
conjunction with the financial statements and the notes thereto contained
elsewhere herein.
49
Overview
We are a global esports organization, 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
As mentioned elsewhere herein, we acquired a database of over 400,000 paying
esports gaming center customers in the acquisition of PLAYlive. In response to
demand from customers for online esports tournaments and due to increased demand
from COVID-19 related social distancing, we introduced a new initiative of
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 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. At a 5% conversion rate, this business unit may generate
approximately $5,000,000 in annual revenue. Management also intends to sell
sponsorship and marketing activations for these online tournaments that would
create additional revenue.
Esports Teams
We own and manage m 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 - Simplicity Esports LLC
Through our wholly owned subsidiary Simplicity Esports LLC, we own and manage
multiple professional esports teams competing in games such as Overwatch, Apex
Legends, PUBG and more. We are committed to growing and enhancing the esports
industry, fostering the development of amateurs to compete professionally and
signing established professional gamers to support their paths to greater
success.
International Esports Team - Simplicity One
Since January 2020, through our 90% owned subsidiary Simplicity One, we manage
Flamengo eSports, one of the leading Brazilian League of Legends® teams.
Flamengo eSports was established in 2017 as the Esports division of Clube de
Regatas do Flamengo, a successful Brazilian sports organization, with over 30
million followers across social media accounts, known for its world-famous
soccer team. Flamengo eSports' League of Legends® team won the CBLoL
Championship in September 2019, which qualified the team to compete at the 2019
League of Legends® World Championship in Europe as one of 24 teams from 13
different regions around the world. Flamengo Esports @flaesports was ranked as
the 9th most tweeted about esports organization in the world in 2020.
Gaming Centers
We own and operate corporate and franchise esports gaming centers, through our
wholly owned subsidiaries Simplicity Esports LLC and PLAYlive, throughout the
U.S. giving casual gamers the opportunity to play in a social setting with other
members of the gaming community. In addition, aspiring and established
professional gamers have an opportunity to compete in local and national esports
tournaments held in our gaming centers for prizes, notoriety, and potential
contracts to play for one of our professional esports teams. In this business
unit, revenue is generated from franchise royalties, the sale of game time,
memberships, tournament entry fees, birthday party events, corporate party
events, concessions and gaming-related merchandise.
Our business plan encompasses a brick and click physical and digital approach to
further recognize revenue from all verticals, which we believe to be unique in
the industry. The physical centers, together with our esports teams, lifestyle
brand and marketing campaigns offer opportunities for additional revenue via
strategic partnerships with both endemic and non-endemic brands. Our ultimate
goal is to further engage a diverse fan base with a 360-degree approach driving
traffic to both our digital platform, tournaments, and physical real estate to
maximize the monetization opportunities with these relationships. In addition,
we have proprietary intellectual capital, fan engagement strategies and brand
development blueprints which complement our publicly available information.
Optimally, the esports gaming centers of Simplicity Esports LLC ("Simplicity
Esports Gaming Centers") will measure between 2,000 and 4000 square feet, with
dozens of gaming stations. The Simplicity Esports Gaming Centers will feature
cutting edge technology, futuristic aesthetic décor and dynamic high-speed
gaming equipment. We believe our brick-and-click strategy will present
attractive opportunities for sponsors and advertisers to connect with our
audience, creating an intriguing monetization opportunity for sponsors and
advertisers.
Creating content that engages fans, sponsors and developers, while promoting our
brand is one of our primary goals. Our talented team will continue to produce
unique in-depth content which showcases aspects of esports for fans. We seek to
reach a broad demographic encompassing the casual, amateur and professional
gaming community. Our philosophy is to enhance our footprint for both endemic
and non-endemic partnerships. We believe we possess a deep perception of our
markets and understand the new age of branding while maintaining authenticity to
the gaming community that comprises our fanbase.
50
Corporate Gaming Centers
Through our subsidiary entities, we currently operate 15 corporate-owned retail
Simplicity Esports Gaming Centers, one of which was acquired during the third
fiscal quarter ended February 28, 2021 and two of which were acquired in the
fourth fiscal quarter ended May 31, 2021. Furthermore, we have engaged a
national tenant representation real estate broker to assist in the strategic
planning and negotiations for our future Simplicity Esports Gaming Center
locations. We contemplate that new Simplicity Esports Gaming Centers will be
funded by us as well as a combination of tenant improvement allowances from
landlords and sponsorships. As announced in June 2020, we are in discussions
with commercial property owners regarding their desire to have us open 7,000 to
12,000 square foot Arenas at their properties. There are multiple locations
available to us with a percentage of gross sales rent lease structure (as
opposed to fixed rent payments), and construction funds offered by the landlord
to assist with the build out and equipping of our planned Arenas. These Arenas
are planned as hubs in our hub and spoke model that will see smaller corporate
and franchisee owned gaming centers as spokes connected to Arenas as hubs for
larger events and tournaments.
Franchised Gaming Centers
Due to interest from potential franchisees, we have launched a franchising
program to accelerate the expansion of our planned nationwide footprint. We sell
specific franchise territories, through our wholly owned subsidiary PLAYlive,
and assist with the establishment and buildout of esports gaming centers to
potential business owners that desire to use our branding, infrastructure and
process to open and operate gaming centers. We currently operate 12 fully
constructed franchise esports gaming centers. Franchise revenue is generated
from the sale of franchise territories, supplying furniture, equipment and
merchandise to the franchisees for buildout of their centers, a gross sales
royalty fee and a national marketing fee. We license the use of our branding,
assist in identifying and negotiating commercial locations, assist in overseeing
the buildout and development, provide access to proprietary software for point
of sale, inventory management, employee training and other HR functions.
Franchisees also have an opportunity to participate in our national esports
tournament events, and benefit from the growing profile of our professional
esports teams. Once an esports gaming center is opened, we provide operational
guidance, support and use of branding elements in exchange for a monthly royalty
fee calculated as 6% of gross sales. On January 1, 2020, we implemented a
national marketing fee of 1% of gross sales. To date, we have sold five of these
franchise territories. COVID-19 travel restrictions caused us to suspend the
sale of new franchise territories from April 1, 2020 until October 1, 2020.
During this time, a pipeline of interested applicants has accumulated, and we
anticipate new franchise territory sales over the next 12 months as a result.
The combination of the esports gaming centers, owned or franchised by our wholly
owned subsidiaries Simplicity Esports LLC or PLAYlive, provides us with what we
believe is the largest footprint of esports gaming centers in North America.
Over the next 12 months, existing PLAYlive esports gaming centers will be
rebranded to Simplicity Esports gaming centers. All newly opened franchise
esports gaming centers will be branded as Simplicity Esports gaming centers and
have numerous gaming PC's. All gaming centers in our footprint will be
participating venues in our national esports tournaments.
Franchise Roll Up Strategy
We began implementing a franchise roll-up strategy in July 2020 as a result of
the disruption caused by COVID-19 related stay at home orders, and the
disruption it caused to the commercial real estate market. The reduction in
revenues for some franchisees because of stay-at-home orders, and government
mandates to remain closed created significant accrued rent payments due to
landlords. We have been able to come to terms with many franchisees to acquire
the assets of their gaming centers and make them corporate owned. We have
simultaneously negotiated new leases with some of the largest national mall
chains, including Simon Property Group and Brookfield Asset Management, and are
in the process of negotiating additional locations with other landlords. The new
leases involve significant reductions in or elimination of fixed rent and the
addition of percentage of revenues rent terms. To date, we have signed 13
letters of intent and executed definitive agreements for 11 of those locations
during fiscal year 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 Team
The Simplicity Esports and Flamengo Esports stream team encompasses over 30
commentators (commonly known as "casters"), influencers and personalities who
connect to a dedicated fan base. This 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' and Flamengo Esports' content
monthly, via various social media outlets including YouTube, Twitter and Twitch.
Through Simplicity Esports LLC, we have begun to implement a unique approach to
ensure the ultimate fan friendly esports experience. Our intention is to have
gamers involved at the grassroots level and feel a sense of unity as we compete
with top class talent. Our management and players are known within the esports
community and we plan to use their skills to create a seamless content creation
plan helping gamers feel closer to our brand than any other in the industry.
For the fiscal years ended May 31, 2021 and 2020, we generated revenues of
$1,552,000 and $861,000 and reported net losses of $6,096,000 and $2,620,000,
respectively, and negative cash flow from operating activities of $1,416,452 and
$1,522,486, respectively. We had an accumulated deficit of $12,292,000 at May
31, 2021. We anticipate that we will continue to report losses and negative cash
flow. 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. See
"Risk Factors- We have a history of operating losses and our auditors have
indicated that there is a substantial doubt about our ability to continue as a
going concern."
51
Results of Operations
The following table summarizes our operating results for the fiscal years ended
May 31, 2021 and 2020.
Fiscal Year Fiscal Year
Ended Ended
May 31, 2021 May 31, 2020
Franchise royalties and license fees $ 151,634 $ 478,023
Franchise deposit revenue 154,291 44,984
Company-owned stores sales 1,053,226 174,042
Esports revenue 192,772 164,361
Total revenue 1,551,923 861,410
Less: Cost of goods sold (1,014,310 ) (591,541,068 )
Gross margin 537,613 269,869
Operating expenses (5,335,112 ) (3,001,9902 )
Other income (expense) (1,397,329 ) 66,342
Net loss attributable to non-controlling interest 97,973 45,541
Net Loss $ 6,096,855 $ (2,620,238 )
Summary of Statement of Operations for the Fiscal Year Ended May 31, 2021 and
2020:
Revenue
We generated $1,551,923 of revenue for the fiscal year ended May 31, 2021 as
compared to $861,410 for the fiscal year ended May 31, 2020. The increase in
revenue is principally due to the increase in the number of company owned stores
we operate offset by a reduction in franchise royalties as franchises were
converted to company owned stores.
Franchise royalties, franchise deposit and termination revenue and company-owned
stores sales, totaling $1,359,000 and $697,000, in the fiscal year ended May 31,
2021 and 2020. In addition, Esports revenue was $193,000 during the fiscal year
ended May 31, 2021, up from $164,000 in the fiscal year ended May 31, 2020. This
increase was due to inclusion of the full year of operations of Simplicity One
Brazil which was acquired in January 2020.
Cost of Goods Sold
Cost of goods sold during the fiscal years ended May 31, 2021 and 2020 totaled
$1,014,000 and $592,000, respectively. Cost of goods sold is related to player
and team expenses related to esports revenues and cost of gaming system and
store merchandise sold at company owned store including the depreciation on the
gaming equipment needed to generate these revenues. The increase is cost of
goods sold is directly related to the increase in company owned store revenues.
Other Operating Expenses
Other operating expenses for the fiscal year ended May 31, 2021 totaled
$5,335,000, a $3,002,000 increase from the $2,333,000 of other operating expense
in the fiscal year ended May 31, 2020. Included in this increase were
compensation and related benefits increase of $1,227,000 primarily due to
$862,000 increase in stock based compensation coupled with a $253,000 increase
in salaries, wages and the related insurance and taxes predominantly driven by
the increase in employees related to the new company owned stores; professional
fees increase of $272,000 of which $175,000 was for new design services and the
$97,000 was for increased legal, accounting and consulting services; an increase
in general and administrative expenses of $475,000 primarily due to an increase
in amortization of $85,000, an increase in rent of $198,000, an increase in
contracted services of $141,000 and an increase in utilities of $51,000. In
addition, there was an increase of $359,000 in impairment expense on terminated
franchises.
Other income (expense)
Other income/(expense) was an expense of $1,397,000 and income of $66,000 during
the fiscal years ended May 31, 2021 and 2020, respectively. The increase in
other expense of $1,463,000 is due to an increase of $1,368,000 of interest
expense on the notes payable mentioned herein, $20,000 increase in foreign
exchange losses, a $94,000 reduction in debt forgiveness income and a $69,000
reduction in other income offset by a $19,000 increase in other income.
Net loss attributable to non-controlling interest
As part of the conversion of franchises into company-owned stores, two of the
original franchisees retained a 21% interest in the stores, one retained a 49%
interest and 24% of our interest in Simplicity One Brasil, some of which is
owned by our Chairman, as noted in the related party footnote. As such, a
portion of the net loss incurred during the year is allocated to those parties.
For the fiscal year ended May 31, 2021 the net loss attributable to
non-controlling interests was $98,000 which is an increase of $52,000 from the
year ended May 31, 2020.
52
Liquidity and Capital Resources
In 2018, the completion of the Initial Public Offering and simultaneous Private
Placement, inclusive of the underwriters' exercise of their over-allotment
option, generated gross proceeds to the Company of $54,615,000. Related
transaction costs amounted to approximately $3,838,000, consisting of $3,360,000
of underwriting fees, including $1,820,000 of deferred underwriting commissions
payable (which was held in the Trust Account) and $478,000 of Initial Public
Offering costs.
Following the Initial Public Offering and the underwriter's partial exercise of
the over-allotment option, a total of $52,780,000 was placed in the Trust
Account and we had $552,190 of cash held outside of the Trust Account, after
payment of all costs related to the Initial Public Offering.
On November 20, 2018, in connection with the closing of our initial Business
Combination, the funds in the Trust Account were used for, among other things,
the following:
? $45,455,596 to redeem 4,448,260 shares
? $7,255,306 to fund the escrow agreement for Polar and K2
? $150,000 to fund our investment in Smaaash
As of May 31, 2020, we had no cash and marketable securities held in the Trust
Account.
As of May 31, 2021 and 2020, we had cash of $414,000 and $160,000, which is
available for use by us to cover the costs associated with general corporate
purposes. In addition, as of May 31, 2021 and 2020, we had accounts payable and
accrued expenses of $1,605,000 and $1,549,000, respectively.
For the fiscal years ended May 31, 2021 and 2020, cash used in operating
activities amounted to $1,409,000 and $1,523,000, respectively. The decline in
net cash used of $115,000 is due to an increase in shares for services of
$2,822,000, and increase in non-cash interest expense of $1,118,000, an
impairment loss of $359,000 an increase in depreciation and amortization charges
of $258,000 and a decline in debt forgiveness income of $94,000 offset by an
increased net loss of $3,529,000. In addition changes in our operating
liabilities and assets used $174,000 of cash, a decline of $981,000 from May 31,
2020. The decline in cash provided is due to reduced accounts payable and
accrued expenses of $778.000, a reduction in deferred revenues of $281,000, an
increase in inventory of $47,000, an increase in prepaid expenses and security
deposits of $34,000 and an increase in due from franchisee of $25,000, offset by
reduced accounts receivable of $96,000 and increased deferred brokerage fees of
$88,000. Cash used in investing activities amounted to $152,000, a reduction of
$15,000 from the prior year. The reduction is attributable to reduced purchase
of property and equipment of $161,000, offset by higher use of cash for
acquisitions of $176,000. Cash provided from financing activities amounted to
$1,815,000, an increase of $1,534,000 over the prior year. The increase is
mainly attributable to a net cash increase of $1,087,000 for the net effect of
the issuance in notes payable, coupled with an increase in funds received from
private placement units of $379,000, an increase non-controlling interest in
subsidiaries of $179,000, offset by an increase in deferred financing costs of
$111,000.
We will need to raise additional funds in order to meet the expenditures
required for operating our business.
Off-balance sheet 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.
53
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 consolidated financial statements, the Company has an
accumulated deficit as of May 31, 2021, 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
within one year from the of the date that the financial statements are issued.
The Company's cash position may not be sufficient to support the Company's daily
operations. Management plans to raise additional funds by way of a private or
public offering. While the Company believes in the viability of its strategy and
its ability to generate sufficient revenue and to raise additional funds, there
can be no assurances to that effect. Should the Company fail to raise additional
capital, it may be compelled to reduce the scope of its planned future business
activities.
The ability of the Company to continue as a going concern is dependent upon the
Company's ability to further implement its business plan, to generate sufficient
revenue and to raise additional funds by way of public and/or private offerings.
The consolidated financial statements do not include any adjustments related to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan,
Hubei Province, China. While initially the outbreak was largely concentrated in
China and caused significant disruptions to its economy, it has now spread to
several other countries and infections have been reported globally.
Because COVID-19 infections have been reported throughout the United States,
certain federal, state and local governmental authorities have issued
stay-at-home orders, proclamations and/or directives aimed at minimizing the
spread of COVID-19. Additional, more restrictive proclamations and/or directives
may be issued in the future. As a result, all of our corporate and franchised
Simplicity Gaming Centers had been closed effective April 1, 2020. 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. As of May 31,
2020, some of our franchised gaming centers have begun to re-open.
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 impacted the Company's business for the fiscal fourth
quarter and potentially beyond. 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.
54
Contractual obligations
We do not have any long-term capital lease obligations, operating lease
obligations or long-term liabilities, except as follows:
On November 20, 2018, the Company entered into a settlement and release
agreement with Maxim Group, LLC, the underwriter for the IPO. 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.
The Company has entered into various lease agreements in support of our
corporate offices and our gaming centers. The majority of the gaming center
leases have all been recorded with the appropriate Right of Use ("ROU") asset
and related liability.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity
with 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 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.
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. For the
year ended May 31, 2021, the company used a third-party valuation expert to
review our intangible assets and based upon this independent valuation, the
company did not need to take an impairment charge.
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 May 31, 2021,
and the company used a third-party valuation expert to review our goodwill and
this independent valuation, indicated no impairment.
Operating Lease Right-of-Use Assets and Operating Lease Liabilities
The Company adopted ASC Topic 842, Leases (Topic 842) and has elected the
'package of practical expedients', which permits it not to reassess under the
new standard its prior conclusions about lease identification, lease
classification and initial direct costs. In addition, the Company elected not to
apply Topic 842 to arrangements with lease terms of 12 months or less. The
Company has entered into various lease agreements mainly to support the
operations of its gaming centers.
The significant assumption used to determine the present value of the lease
liability was a discount rate ranging from 10% to 12% which was based upon the
Company's estimated incremental borrowing rate at the start of the lease term.
© Edgar Online, source Glimpses
SIMPLICITY ESPORTS AND GAMING COMPANY 
