Simplicity Esports and Gaming : & GAMING CO MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (kind 10-Q)

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References in this report (the “Quarterly Report”) to “we,” “us” or the
“Company” refer to Simplicity Esports and Gaming Company and its subsidiaries.
The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the notes thereto included in
this Quarterly Report and with the audited condensed consolidated financial
statements included in our Annual Report on Form 10-K for the fiscal year ended
May 31, 2019, as filed with the Securities and Exchange Commission (the “SEC”).

Special Note Regarding Forward-Looking Statements

This Quarterly Report includes “forward-looking statements” within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”) that are not historical facts, and
involve risks and uncertainties that could cause actual results to differ
materially from those expected and projected. All statements, other than
statements of historical fact included in this Quarterly Report including,
without limitation, statements in this “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” regarding the Company’s financial
position, business strategy and the plans and objectives of management for
future operations, are forward-looking statements. Words such as “expect,”
“believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar
words and expressions are intended to identify such forward-looking statements.
Such forward-looking statements relate to future events or future performance,
but reflect management’s current beliefs, based on information currently
available. A number of factors could cause actual events, performance or results
to differ materially from the events, performance and results discussed in the
forward-looking statements. For information identifying important factors that
could cause actual results to differ materially from those anticipated in the
forward-looking statements, please refer to the Risk Factors sections of the
Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2020, as
filed with the SEC, as the same may be updated from time to time, including in
this Quarterly Report. The Company’s securities filings can be accessed on the
EDGAR section of the SEC’s website at www.sec.gov. Except as expressly required
by applicable securities law, the Company disclaims any intention or obligation
to update or revise any forward-looking statements whether as a result of new
information, future events or otherwise.

Overview

Nasdaq Delisting and Subsequent Application

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

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

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

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

Management of Simplicity Esports and Gamily Company has decided that moving from
The 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.

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

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

On May 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 the Nasdaq Capital
Market during the first calendar quarter of 2021. A reverse stock split, in the
ratio of 1-for-8, became effective on November 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 as Pokemon
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.

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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 – Simplicity Esports LLC

Through our wholly owned subsidiary Simplicity Esports LLC, we own and manage
numerous professional esports teams competing in games such as Overwatch, Apex
Legends, 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

Since January 2020, through our 76% owned subsidiary Simplicity One, we own and
manage Flamengo Esports, one of the leading Brazilian League of Legends® teams.
Flamengo ESports was established in 2017 as the Esports division of Clube de
Regatas do Flamengo, a successful Brazilian sports organization, with over 40
million followers across social media accounts, known for its world-famous
soccer team. Flamengo ESports’ League of Legends® team won the CBLoL
Championship in September 2019, which qualified the team to compete at the 2019
League of Legends® World Championship in Europe as one of 24 teams from 13
different regions around the world. Flamengo Esports @flaesports was ranked as
the 9th most tweeted about 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 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.

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Optimally, the esports gaming centers of Simplicity 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 Centers

Simplicity 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 from April 1, 2020 until October
1, 2020. During these six months, a pipeline of interested applicants has
accumulated, and we anticipate new franchise territory sales over the next

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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 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 Team

The Simplicity Esports LLC stream team encompasses over 30 commentators
(commonly known as “casters”), influencers and personalities who connect to a
dedicated fan base. Our electric group of live personalities represent our
organization to the fullest with their own unique style. We are proud to support
and present a diverse group of gamers as we engage fans across a multiple of
esports genres. Our Twitch affiliation has enabled our stream team influences to
reach a broad fan base. Additionally, we have created several niches within the
streaming community which has enabled us to engage fans within certain titles on
a 24/7 basis. Our notoriety in the industry is evidenced by our audience that
views millions of minutes of Simplicity Esports’ content monthly, via various
social media outlets including YouTube, Twitter and Twitch. Through Simplicity
Esports LLC, we have begun to implement a unique approach to ensure the ultimate
fan friendly esports experience. Our intention is to have gamers involved at the
grassroots level and feel a sense of unity as we compete with top class talent.
Our management and players are known within the esports community and we plan to
use their skills to create a seamless content creation plan helping gamers feel
closer to our brand than any other in the industry.

Our Financial Position

For the fiscal years ended May 31, 2020 and 2019, we generated revenues of
$861,410 and $37,995, respectively, reported net losses of $2,665,779 and
$3,565,272, respectively, and negative cash flow from operating activities of
$1,522,486 and $1,395,255, respectively.

For the six months ended November 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 of November 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.

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Results of Operations

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

Following the acquisition of Simplicity Esports, LLC the Company began
generating revenue and incurring additional expenses.

Summary of Statement of Operations for the Three and Six Months Ended November
30, 2020 and 2019:

Revenue

For the three and six months ended November 30, 2020, revenues consisted of the
following:

For the Three Months Ended For the Six Months Ended
November 30, 2020November 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 franchisee

business closures.

Cost of Goods Sold

Cost of goods sold for the three and six months ended November 30, 2020 was
$67,657 and $108,168, respectively. These costs were related to revenues at
PLAYlive and the Company-owned stores. There was no cost of goods sold in the
three and six months ended November 30, 2019.

General and Administrative Expenses

General and administrative expenses for the three months ended November 30, 2020
was $1,013,177 as compared to $819,305 for the three months ended November 30,
2019, an increase of $193,872. General and administrative expenses for the six
months ended November 30, 2020 was $1,658,539 as compared to $1,258,257 for the
six months ended November 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 ended November 30, 2020, loss from operations amounted to
$784,288 as compared to $573,807 for the three months ended November 30, 2019,
an increase of $210,481, or 26.8%. For the six months ended November 30, 2020,
loss from operations amounted to $1,269,560 as compared to $938,266 for the six
months ended November 30, 2019, an increase of $331,294, or 59835.3%.

Other (Expense) Income

For the three months ended November 30, 2020, other (expense) income amounted to
$(229,405) as compared to $2,305 for the three months ended November 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 ended November 30, 2020, other (expense) income amounted to
$(415,233) as compared to $83,372 for the six months ended November 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 ended November 30, 2020 was $1,013,693 as compared
to a net loss of $571,502 for the three months ended November 30, 2019, an
increase of $442,191. Net loss for the six months ended November 30, 2020 was
$1,684,793 as compared to $854,894 for the six months ended November 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
of November 30, 2020 and May 31, 2020, respectively.

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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 ended
November 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 Used in Operating Activities:

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

Net Cash Provided by (Used in) Investing Activities:

Net cash provided by investing activities was $550 for the six months ended
November 30, 2020 as compared net cash used in vesting activities of $(130,915)
for the six months ended November 30, 2019. During the six months ended November
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 ended
November 30, 2020 as compared to $74,013 for the six months ended November 30,
2019. During the six months ended November 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.

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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 of November 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.

In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan,
Hubei Province, China. While initially the outbreak was largely concentrated in
China and caused significant disruptions to its economy, it has now spread to
several other countries and infections have been reported globally.

Because COVID-19 infections have been reported throughout the United States,
certain federal, state and local governmental authorities have issued
stay-at-home orders, proclamations and/or directives aimed at minimizing the
spread of COVID-19. Additional, more restrictive proclamations and/or directives
may be issued in the future. As a result, all of our corporate and franchised
Simplicity Gaming Centers were closed effective April 1, 2020. We commenced
reopening Simplicity Gaming Centers as of May 1, 2020 and have since reopened
ten corporate and 11 franchised Simplicity Gaming Centers as of January 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 and August 2020, we have waived the minimum monthly royalty
payment obligations for the months of July and August 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 ended November 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

In March 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 of October 5, 2020, the Company owes this attorney approximately
$300,000.

Maxim Settlement Agreement

On November 20, 2018, the Company entered into a settlement and release
agreement with Maxim Group, LLC (“Maxim”), the underwriter for the Company’s
initial public offering. Pursuant to the Settlement Agreement, the Company made
a cash payment of $20,000 to Maxim and issued a demand secured promissory note
(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 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 Note was surrendered and exchanged
pursuant to the Exchange Agreement (as defined below).

Maxim Exchange Agreement

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

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 December 31, 2020 Maxim and Simplicity executed an amendment of the Note
extending the maturity date to February 15, 2021.

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.

In February 2019, the Company entered into a 5-year operating lease in Boca
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 in Deland, Florida. Rent is
approximately $2,500 per month for the first year and contains customary
escalation clauses. On June 26, 2020, the Company entered into a 10-year
operating lease in El Paso, Texas for a corporate gaming center in Fort 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 November 30, 2020 are as follows:

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

On April 29, 2020 (the “Effective Date”), the Company issued a 10% Fixed
Convertible Promissory Note (the “Harbor Gates Note”), with a maturity date of
October 29, 2020 (the “Maturity Date”), in the principal sum of $152,500 in
favor of Harbor Gates Capital, LLC (“Harbor Gates”). Pursuant to the terms of
the Harbor Gates 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 Harbor Gates Note. The Harbor
Gates 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 Harbor Gates 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 Harbor Gates 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 Harbor
Gates Note (including the OID); (ii) all guaranteed and other accrued but unpaid
interest under the Harbor Gates Note; (iii) any fees due under the Harbor Gates
Notes; (iv) liquidated damages; and (v) any default payments owing under the
Harbor Gates Note, in each case previously paid or added to the Principal
Amount.

Pursuant to the terms of the Harbor Gates Note, the Company agreed to issue
Harbor Gates shares of Company common stock in two tranches as follows:

(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 be

entitled, 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 July 2, 2020, the Company repaid $152,500 and $15,000 in accrued interest in
full satisfaction of the 10% Convertible Promissory Harbor Gates Note.

Related Party – Kaplan Promissory Note

On May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the
“Kaplan Note”) in the principal sum of $90,000 in favor of Jed 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 on October 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 to Mr.
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 by Mr. 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 of May 31, 2020, advances under the terms of this note were $64,728. On
various dates subsequent to May 31, 2020, Mr. Kaplan funded $25,272 pursuant to
the Kaplan Promissory Note. With the contributions subsequent to May 31, 2020,
the principal balances outstanding and due Mr. Kaplan amounted to $90,000. On
June 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
to Mr. Kaplan a 10% equity interest in Simplicity One Brasil, Ltda, a subsidiary
of the Company.

June 18, 2020 Self-Amortization Promissory Note

On June 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 of June 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 November 23, 2020 SPA discussed below, we repaid
principal and interest of $198,375 on this June 18, 2020 Note.

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.

August 7, 2020 Self-Amortization Promissory Note

On August 7, 2020 (the “Issue Date”), the Company entered into a securities
purchase agreement (the “SPA”) with FirstFire 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 of August 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.

November 23, 2020 Self-Amortization Promissory Note

On November 25, 2020, the Company entered into a securities purchase agreement
(the “November 23, 2020 SPA”), dated as of November 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 of November 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 the June 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 to February 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 the November 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 on October 23, 2020 (the “Uplist Offering”), provided, however, that if
the Uplist Offering has not been consummated on or before May 23, 2021, then the
Exercise Price shall mean the closing bid price of the Company’s common stock on
December 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 on February 23, 2021 through November 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 the Simplicity Esports and
Gaming Company 2020 Omnibus Incentive Plan (the “2020 Plan”) on April 22, 2020
and June 23, 2020, respectively. The 2020 Plan provides for various stock-based
incentive awards, including incentive and nonqualified stock options, stock
appreciation rights, restricted stock and restricted stock units, and other
equity-based or cash-based awards.

Critical Accounting Policies

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

Revenue Recognition

As of January 1, 2018, the Company adopted 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.

34

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.

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 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.

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

Leases

In February 2016, the Financial 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 after
December 15, 2018.

On January 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.

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