SIMPLICITY ESPORTS AND GAMING COMPANY References in this report (the "Quarterly Report") to "we," "us" or the "Company" refer toSimplicity Esports and Gaming Company and its subsidiaries. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in this Quarterly Report and with the audited condensed consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 , as filed with theSecurities and Exchange Commission (the "SEC").
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are not historical fact, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as "expect," "believe," "anticipate," "intend," "estimate," "seek" and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management's current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors sections of the Company's Annual Report on Form 10-K for the fiscal year endedMay 31, 2021 , as filed with theSEC , as the same may be updated from time to time, including in this Quarterly Report. The Company's securities filings can be accessed on the EDGAR section of theSEC's website at www.sec.gov. Except as expressly required by applicable securities law, the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Overview 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 ") andPLAYlive Nation, Inc. ("PLAYlive"). Online Tournaments We have acquired a database of over 400,000 paying esports gaming center customers in the acquisition of PLAYlive Nation. We directly promote our online Simplicity Esports tournaments to this database of over 400,000 existing customers via text messages. If we can convert merely 1% of these existing customers from the PLAYlive Nation database to play in paid entry online Simplicity Esports tournaments, this may be a profitable business unit resulting in approximately$1,000,000 in annual revenues. Management also intends to sell sponsorship and marketing activations for these online tournaments that would create additional revenue. Esports Teams We own and manage professional esports teams domestically and internationally. Revenue is generated from prize winnings, corporate sponsorships, advertising, league subsidy payments and potential league revenue sharing payments from
the publishers of video games. 23
Domestic Esports Teams -
Through our wholly owned subsidiarySimplicity Esports LLC , we own and manage numerous professional esports teams competing in games such as Overwatch, Apex Legends, PUBG and more. We are committed to growing and enhancing the esports industry, fostering the development of amateurs to compete professionally and signing established professional gamers to support their paths to greater success.
International Esports Team - Simplicity One
SinceJanuary 2020 , through our 76% owned subsidiary Simplicity One, we own and manage Flamengo ESports, one of the leadingBrazilian League of Legends® teams. Flamengo ESports was established in 2017 as the Esports division of Clube de Regatas do Flamengo, a successful Brazilian sports organization, with over 40 million followers across social media accounts, known for its world-famous soccer team.Flamengo ESports' League of Legends® team won the CBLoL Championship inSeptember 2019 , which qualified the team to compete at the 2019 League of Legends® World Championship inEurope as one of 24 teams from 13 different regions around the world. Flamengo Esports @flaesports was ranked as the 9th most tweeted about sports organization in the world in 2020. Gaming Centers
We own and operate corporate and franchise esports gaming centers, through our wholly owned subsidiariesSimplicity Esports LLC and PLAYlive, throughout theU.S. giving casual gamers the opportunity to play in a social setting with other members of the gaming community. In addition, aspiring and established professional gamers have an opportunity to compete in local and national esports tournaments held in our gaming centers for prizes, notoriety, and potential contracts to play for one of our professional esports teams. In this business unit, revenue is generated from franchise royalties, the sale of game time, memberships, tournament entry fees, birthday party events, corporate party events, concessions and gaming-related merchandise. Our business plan encompasses a brick and click physical and digital approach to further recognize revenue from all verticals, which we believe to be unique in the industry. The physical centers, together with our esports teams, lifestyle brand and marketing campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform, tournaments, and physical real estate to maximize the monetization opportunities with these relationships. In addition, we have proprietary intellectual capital, fan engagement strategies and brand development blueprints which complement our publicly available information. Optimally, the esports gaming centers ofSimplicity Esports LLC ("Simplicity Esports Gaming Centers") will measure between 2,000 and 4,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers will feature cutting edge technology, futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity for sponsors and advertisers. Creating content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. Out talented team will continue to produce unique in-depth content which showcases aspects of esports for fans. We seek to reach a broad demographic encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while maintaining authenticity to the gaming community that comprises our fanbase. Corporate Gaming Centers As ofNovember 30, 2021 through our subsidiary entities, we currently operate 17 corporate-owned retail Simplicity Esports Gaming Centers, Furthermore, we have engaged a national tenant representation real estate broker to assist in the strategic planning and negotiations for our futureSimplicity Esports Gaming Center locations. We contemplate that new Simplicity Esports Gaming Centers will be funded by us as well as a combination of tenant improvement allowances from landlords and sponsorships. The Company intends to continue the expansion of its corporate owned esports gaming center footprint through the buildout of new esports gaming centers. The disruptions in commercial real estate caused by COVID-19 lockdowns have allowed the Company to strengthen its existing relationships with national landlords by signing new locations with percentage rent leases. The locations will range between 2,000 and 4,000 square feet and be primarily located inside of shopping malls. 24 Franchised Gaming Centers Due to interest from potential franchisees, in 2019 we launched a franchising program to accelerate the expansion of our planned nationwide footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment and buildout of esports gaming centers to potential business owners that desire to use our branding, infrastructure and process to open and operate gaming centers. We currently operate 12 fully constructed franchise esports gaming centers. The 12 franchise owned gaming centers that we have acquired to date generated over$1 million of revenue in the fiscal year endedMay 31, 2021 despite operating with limited capacity due to COVID-19 restrictions. Due to interest from potential franchisees, we have launched a franchising program to accelerate the expansion of our planned nationwide footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment and buildout of esports gaming centers to potential business owners that desire to use our branding, infrastructure and process to open and operate gaming centers. Franchise revenue is generated from the sale of franchise territories, supplying furniture, equipment and merchandise to the franchisees for buildout of their centers, a gross sales royalty fee and a national marketing fee. We license the use of our branding, assist in identifying and negotiating commercial locations, assist in overseeing the buildout and development, provide access to proprietary software for point of sale, inventory management, employee training and other HR functions. Franchisees also have an opportunity to participate in our national esports tournament events, and benefit from the growing profile of our professional esports teams. Once an esports gaming center is opened, we provide operational guidance, support and use of branding elements in exchange for a monthly royalty fee calculated as 6% of gross sales. OnJanuary 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 fromApril 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 subsidiariesSimplicity Esports LLC or PLAYlive, provides us with what we believe is one of the largest esports gaming center footprints inNorth America . Over the next 12 months, existing PLAYlive esports gaming centers will be rebranded toSimplicity Esports gaming centers. All newly opened franchise esports gaming centers will be branded asSimplicity Esports gaming centers and have numerous gaming PC's. All gaming centers in our footprint will be participating venues in our national esports tournaments. Franchise Roll-Up Strategy
We began implementing a franchise roll-up strategy inJuly 2020 as a result of the disruption caused by COVID-19 related stay at home orders, and the disruption it caused to the commercial real estate market. The reduction in revenues for some franchisees because of stay-at-home orders, and government mandates to remain closed created significant accrued rent payments due to landlords. We have been able to come to terms with many franchisees to acquire the assets of their gaming centers and make them corporate owned. We have simultaneously negotiated new leases with some of the largest national mall chains, including Simon Property Group and Brookfield Asset Management, and are in the process of negotiating additional locations with other landlords. The new leases involve significant reductions in or elimination of fixed rent and the addition of percentage of revenues rent terms. Our Stream TeamThe Simplicity Esports LLC stream team encompasses over 30 commentators (commonly known as "casters"), influencers and personalities who connect to a dedicated fan base. Our electric group of live personalities represent our organization to the fullest with their own unique style. We are proud to support and present a diverse group of gamers as we engage fans across a multiple of esports genres. Our Twitch affiliation has enabled our stream team influences to reach a broad fan base. Additionally, we have created several niches within the streaming community which has enabled us to engage fans within certain titles on a 24/7 basis. Our notoriety in the industry is evidenced by our audience that views millions of minutes of Simplicity Esports' content monthly, via various social media outlets including YouTube, Twitter and Twitch. ThroughSimplicity Esports LLC , we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience. Our intention is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community, and we plan to use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other in the industry. 25 Our Financial Position
For the three months ended
For the six months endedNovember 30, 2021 and 2020, we generated revenues of$1,748,655 and$497,147 , reported net losses of$6,431,470 and$1,684,793 , respectively, and had cash flow used in operating activities of$2,105,623 and$342,098 , respectively. As ofNovember 30, 2021 , we had an accumulated deficit of$18,632,103 .
There is substantial doubt regarding our ability to continue as a going concern as a result of our historical recurring losses and negative cash flows from operations as well as our dependence on private equity and financings.
Results of Operations
Summary of Statement of Operations for the Three and Six Months Ended
Revenue For the three and six months endedNovember 30, 2021 , revenues consisted of the following: For the Three Months Ended For the Six Months Ended November 30, 2021 and 2020 November 30, 2021 and 2020 Revenues Franchise royalties, fees and other$ 96,953 $ 91,793 $ 159,311 $ 179,076 Other revenue - - Company-owned stores sales 681,732 167,791
1,355,233 244,729
Esports revenue 65,130 36,962 234,111 73,342
Total Revenues $ 843,815 $ 296,546 $ 1,748,655 $ 497,147
For the three months ended November 30, 2021 , our revenues increased by
$547,269 , as compared to the three months ended November 30, 2020 . For the six
months ended November 30, 2020 , our revenues increased by $1,251,508 , as
compared to the six months ended November 30, 2020 . These increases were
primarily due to the increase in both the number of company owned stores and the
increase in operating hours as the COVID 19 restrictions changed during the
period coupled with increased tournament prize winnings in our Esports revenue.
Cost of Goods Sold
Cost of goods sold for the three months ended November 30, 2021 and 2020 was
$485,394 and $113,771 , respectively representing an increase of $371,623
primarily due to increased revenues. Cost of goods sold for the six months ended
November 30, 2021 and 2020 was $1,092,5164 and $181,416 , respectively
representing an increase of $911,100 primarily due to increased revenues coupled
with higher inventory write off costs on higher inventory balances.
Operating Expenses
Compensation and related benefits
Compensation and related benefits for the three months endedNovember 30, 2021 and 2020 was$845,886 and$366,257 , an increase of$479,629 . Compensation and related benefits for the six months endedNovember 30, 2021 and 2020 was$2,149,012 and$668,825 , an increase of$1,480,187 . Compensation and related benefits consist of salaries and stock-based compensation, health benefits and related payroll taxes. The increase is primarily due to the increase in the number of employees and higher stock-based compensation. Professional fees
Professional fees for the three months endedNovember 30, 2021 and 2020 was$129,723 and$186,898 a decrease of$57,175 . The decline in expenses is primarily due to reduced consulting fees in the quarter. Professional fees for the six months endedNovember 30, 2021 and 2020 was$579,076 and$260,789 an increase of$318,287 . Professional fees consist of costs for audits, accountants, attorneys, consultants and the costs for other experts. The increase is primarily due to the increase in accounting and audit fees as well as legal expenses related to the increase in debt.
General and Administrative Expenses
General and administrative expenses for the three months endedNovember 30, 2021 was$432,127 as compared to$212,631 for the three months endedNovember 30, 2020 , an increase of$219,496 . General and administrative expenses for the six months endedNovember 30, 2021 was$875,822 as compared to$454,400 for the six months endedNovember 30, 2020 , an increase of$421,422 . The increase is primarily due to the increase in the number of company owned stores and the associated expenses (rent, utilities, computer expenses, insurance) to maintain the stores. 26 Loss from Operations
For the three months endedNovember 30, 2021 , loss from operations amounted to$1,049,315 as compared to$784,288 for the three months endedNovember 30, 2020 , an increase of$265,027 For the six months endedNovember 30, 2021 , loss from operations amounted to$2,947,771 as compared to$1,269,560 for the six months endedNovember 30, 2020 , an increase of$1,678,211 . Other Expense
For the three months ended
For the six months endedNovember 30, 2021 , other expense amounted to$3,483,699 as compared to$415,233 for the six months endedNovember 30, 2020 , an increase of$3,068,466 . The increase in other expenses was primarily attributable to an increase in interest expense of$1,406,702 related to an increase in debt and the amortization of debt discount coupled with an increase in debt forgiveness expense of$1,733,916 . Net Loss Net loss for the three months endedNovember 30, 2021 was$2,165,726 as compared to a net loss of$1,013,693 for the three months endedNovember 30, 2020 , an increase of$1,152,033 . Net loss for the six months endedNovember 30, 2021 was$6,431,470 as compared to$1,684,793 for the six months endedNovember 30 ,
2020, an increase of$4,746,677 .
Liquidity and Capital Resources
Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had cash of$832,423 and$414,257 as ofNovember 30, 2021 , andMay 31, 2021 , respectively. Our primary uses of cash have been for salaries, fees paid to third parties for professional services, computer and internet expenses, and general and administrative expenses. We have received funds from licensing fees, from Company-owned stores sales, and from various financing activities such as from the sale of our common shares and from debt financings. The following trends are reasonably likely to result in changes in our liquidity over the near to long term:
? An increase in working capital requirements to finance our current business,
? Addition of administrative and sales personnel as the business grows, and
? The cost of being a public company; ? Marketing expense for building brand; ? Capital requirements for the development store locations.
Since inception, we have raised proceeds from the sale of common shares and from debt to fund our operations.
The following table shows a summary of our cash flows for the six months endedNovember 30, 2021 and 2020. Six Months Ended November 30, 2021 2020 Net cash used in operating activities$ (2,105,623 ) $ (342,098 ) Net cash provided by (used in) investing activities (13,302 ) (1,949 ) Net cash provided by financing activities$ 2,537,091 $
752,279
Net increase (decrease) in cash$ 418,166 $
408,231
Cash - beginning of the period$ 414,257 $ 160,208 Cash - end of the period$ 832,423 $ 568,439 27
Net cash flow used in operating activities for the six months endedNovember 30, 2021 primarily reflected a net loss of$6,431,470 , which was then adjusted for the add-back (deduction) of non-cash items primarily consisting of depreciation of$165,563 , amortization expense of$156,096 , stock-based compensation expense of$1,218,814 , non-cash interest expense related to debt of$1,696,395 , debt forgiveness expense of$1,730,801 and changes in operating assets and liabilities consisting primarily of an decrease in accounts payable of$271,086 , a decrease in accrued expenses of$327,072 , an increase in inventory of$157,636 , an increase in other assets of$104,520 offset by a decrease in accounts receivable of$55,559 .
Net Cash Provided by (Used in) Investing Activities:
Net cash used in investing activities was$13,302 for the six months endedNovember 30, 2021 as compared net cash used in investing activities of$1,949 for the six months endedNovember 30, 2020 . During the six months endedNovember 30, 2021 , cash used for the purchase of property and equipment increased$11,353 compared to the six months endedNovember 30, 2020 .
Net Cash Provided by Financing Activities:
Net cash provided by financing activities was$2,537,091 for the six months endedNovember 30, 2021 as compared to$752,279 for the six months endedNovember 30, 2020 . During the six months endedNovember 30, 2021 , we received net cash from notes payable of$3,761,500 and cash from the sale of warrants of$100,000 , offset by the repayment of notes payable of$1,324,409 .
We will need to raise additional funds in order to meet the expenditures required for operating our business.
Off-balance sheet financing arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets. Going Concern The Company's unaudited consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the unaudited condensed consolidated financial statements, the Company has an accumulated deficit of$18,632,103 , a working capital deficit of$1,073,665 and a net loss of$6,431,470 atNovember 30, 2021 . These factors raise substantial doubt about the Company's ability to continue as a going concern within one year from the of the date that the unaudited financial statements are issued. The Company has commenced operations and has begun to generate revenue; however, the Company's cash position may not be sufficient to support the Company's daily operations. Management intends to raise additional funds by way of a private or public offering. While the Company believes in the viability of its strategy to generate sufficient revenue and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering. 28 The condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. InDecember 2020 a novel strain of coronavirus (COVID-19) emerged inWuhan ,Hubei Province ,China . While initially the outbreak was largely concentrated inChina and caused significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally. Because COVID-19 infections have been reported throughoutthe United States , certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity Gaming Centers were closed effectiveApril 1, 2020 . We commenced reopening Simplicity Gaming Centers as ofMay 1, 2020 and have since reopened 17 corporate and 12 franchised Simplicity Gaming Centers as ofNovember 30, 2021 . Although our franchise agreements with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming Centers will default in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase in accounts receivables or a bad debt expense where account receivables are no longer collectible due to franchisee's inability to pay the minimum monthly royalty payments owed by the franchisee. Notwithstanding, it is unclear exactly how much of the increase in accounts receivables is attributable to the impact of COVID-19. Contractual obligations
We do not have any long-term capital lease obligations, operating lease obligations or long-term liabilities, except as follows:
Operating Leases
We have long-term operating lease obligations and deferred revenues related to franchise fees to be recognized over the term of franchise agreements with our franchises, generally ten years. We will begin to recognize deferred franchise fee revenue at the time a franchise commences operations.
The Company is party to operating leases at its corporate office and at each of its company owned store locations which have various terms and payments.
29 Debt Obligations
OnFebruary 19, 2021 , the Company entered into a securities purchase agreement (the "SPA") dated as ofFebruary 19, 2021 , with an accredited investor (the "Holder"), pursuant to which the Company issued a 12% promissory note (the "Note") with a maturity date ofFebruary 19, 2022 (the "Maturity Date"), in the principal sum of$1,650,000 . In addition, the Company issued 10,000 shares of its common stock to the Holder as a commitment fee pursuant to the SPA. Pursuant to the terms of the Note, the Company agreed to pay to$1,650,000 (the "Principal Sum") to the Holder and to pay interest on the principal balance at the rate of 12% per annum (provided that the first twelve months of interest shall be guaranteed). The Note carries an original issue discount ("OID") of$165,000 . Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase price of$1,485,000 in exchange for the Note. The Company intends to use the proceeds for its operational expenses, the repayment of those certain self-amortization promissory notes previously issued to the Holder onJune 18, 2020 andNovember 23, 2020 , and the repayment of certain other existing debt obligations. The Holder may convert the Note into the Company's common stock (subject to the beneficial ownership limitations of 4.99% in the Note) at any time at a conversion price equal to$11.50 per share. The Company may prepay the Note at any time prior to the date that an Event of Default (as defined in the Note) (each an "Event of Default") occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). The Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Note or SPA. Upon the Holder's provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within five (5) calendar days the Note shall become immediately due and payable and the Company shall pay to the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued interest multiplied by 125% (the "Default Amount"). Upon the occurrence of an Event of Default, additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted by law. During the six months endedNovember 30, 2021 the Company paid the Holder a total of$855,000 . The Company paid an interim payment due to the Holder in the amount of$225,000 towards the repayment of the balance of the Note in the amount of$90,909 , towards the repayment of guaranteed interest in the amount of$109,091 and$25,000 as an amendment fee. In addition, the Company paid$130,000 towards the repayment of the balance of the Note in the amount of$58,500 and towards the guaranteed interest in the amount of$71,500 and in compliance with the renegotiated terms of an interim payment that was due onAugust 19, 2021 in the amount of$363,000 , onSeptember 30, 2021 the Company paid$500,000 towards the repayment of principal of the Note During the quarter endedNovember 30, 2021 , the Company incurred$290,522 of interest expense on the Note. OnNovember 30, 2021 the balance of the Note is$635,605 all of which is included in the current portion of convertible notes payable, net of debt discount. 30
OnMarch 10, 2021 , the Company, entered into a securities purchase agreement (the "March 10 FirstFire SPA") dated as ofMarch 10, 2021 , withFirstFire Global Opportunities Fund, LLC , aDelaware limited liability company (the "FirstFire"), pursuant to which the Company issued a 12% promissory note ("March 10 FirstFire Note") with a maturity date ofMarch 10, 2022 , in the principal sum of$560,000 . The Company received net proceeds of$130,606 , net of OID of$56,000 , net of origination fees of$8,394 , and the repayment of principal and interest of$365,000 on theAugust 7, 2020 Note. In addition, the Company issued 3,394 shares of its common stock to the FirstFire as a commitment fee pursuant to the SPA. Pursuant to the terms of theMarch 10 FirstFire Note, the Company agreed to pay to$560,000 (the "Principal Sum") to the Holder and to pay interest on the principal balance at the rate of 12% per annum (provided that the first twelve months of interest shall be guaranteed). TheMarch 10 FirstFire Note carries an OID of$56,000 . Accordingly, on the Closing Date (as defined in theMarch 10 FirstFire SPA), the Holder paid the purchase price of$504,000 in exchange for the Note. The FirstFire may convert theMarch 10 FirstFire Note into the Company's common stock (subject to the beneficial ownership limitations of 4.99% in theMarch 10 FirstFire Note) at any time at a conversion price equal to$11.50 per share. The Company may prepay theMarch 10 FirstFire Note at any time prior to the date that an Event of Default (as defined in the Note) (each an "Event of Default") occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). TheMarch 10 FirstFire Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of theMarch 10 FirstFire Note orMarch 10 FirstFire SPA. The Company is required to make an interim payment to FirstFire in the amount of$123,200 , on or beforeSeptember 10, 2021 , towards the repayment of the balance of theMarch 10 FirstFire Note. OnSeptember 17, 2021 , the Company issued a common stock purchase warrant for the purchase of 40,000 shares of the Company's common stock toFirstFire Global Opportunities Fund, LLC ("FirstFire") as consideration for FirstFire entering into a first amendment to theMarch 10 FirstFire Note in order to delay an interim payment of OID and interest due under theMarch 10 FirstFire Note to the maturity date of such note. For the quarter endedNovember 30, 2021 , the Company recorded the fair value of the warrants in the amount of$248,547 and took a related interest expense charge of$248,547 . OnOctober 1, 2021 , the Company issued a three-year warrant to purchase 40,000 shares of the Company's common stock at an exercise price of$10.73 per share to FirstFire as consideration for FirstFire entering into a second amendment to theMarch 10 FirstFire Note in order to remove the capital raising ceiling in such note. For the quarter endedNovember 30, 2021 , the Company recorded the fair value of the warrants in the amount of$201,351 and took a related interest expense charge of$201,351 . Upon FirstFire's provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within five (5) calendar days, theMarch 10 FirstFire Note shall become immediately due and payable and the Company shall pay to FirstFire, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued interest multiplied by 125% (the "Default Amount"). Upon the occurrence of an Event of Default, additional interest will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted by law. During the six months endedNovember 30, 2021 , the Company recognized$131,794 of interest expense related to the amortization of debt discount related to the FirstFire Note. OnNovember 30, 2021 , the balance of FirstFire Note, net of the related debt discount, is$485,729 all of which is included in the current portion of convertible notes payable, net of debt discount. 31
OnJune 11, 2021 , the Company entered into a securities purchase agreement (the "June 11 FirstFire SPA") dated as ofJune 10, 2021 , withFirstFire Global Opportunities Fund, LLC ("FirstFire"), pursuant to which the Company issued a 12% promissory note (the "June 11 FirstFire Note") with a maturity date ofJune 10, 2023 (the "FirstFire Maturity Date"), in the principal sum of$1,266,666 . In addition, the Company issued 11,875 shares of its common stock to FirstFire as a commitment fee pursuant to theJune 11 FirstFire SPA. Pursuant to the terms of theJune 11 FirstFire Note, the Company agreed to pay to$1,266,666 (the "FirstFire Principal Sum") to FirstFire and to pay interest on the principal balance at the rate of 12% per annum (provided that the first six months of interest shall be guaranteed and the remaining 18 months of interest shall be deemed earned in full if any amount is outstanding under the FirstFire Note after 180 days fromJune 10, 2021 ). TheJune 11 FirstFire Note carries an original issue discount ("OID") of$126,666 . Accordingly, FirstFire paid the purchase price of$1,140,000 in exchange for the FirstFire Note. The Company intends to use the proceeds for working capital and to pay off an existing promissory note issued by the Company in favor of Maxim. FirstFire may convert theJune 11 FirstFire Note into the Company's common stock (subject to the beneficial ownership limitations of 4.99% in theJune 11 FirstFire Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by FirstFire upon, at the election of FirstFire, not less than 61 days' prior notice to the Company) at any time at a conversion price equal to$11.50 per share, as the same may be adjusted as provided in theJune 11 FirstFire Note. The Company may prepay theJune 11 FirstFire Note at any time prior to maturity in accordance with the terms of theJune 11 FirstFire Note. TheJune 11 FirstFire Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of theJune 11 FirstFire Note or theJune 11 FirstFire SPA. Upon the occurrence of any Event of Default (as defined in theJune 11 FirstFire Note), which has not been cured within three calendar days, theJune 11 FirstFire Note shall become immediately due and payable and the Company shall pay to FirstFire, in full satisfaction of its obligations hereunder, an amount equal to the FirstFire Principal Sum then outstanding plus accrued interest multiplied by 125%. Pursuant to the terms of theJune 11 FirstFire SPA, the Company also issued to FirstFire a three-year warrant (the "June 11 FirstFire Warrant") to purchase 593,750 shares of the Company's common stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting of the Company's common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed byNovember 1, 2021 ,$10.73 . The Company also agreed to prepare and file with theSecurities and Exchange Commission a registration statement covering the resale of all shares issued or issuable pursuant to theJune 11 FirstFire SPA, including shares issued upon conversion of theJune 11 FirstFire Note or exercise of theJune 11 FirstFire Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with theSEC within 90 days followingJune 10, 2021 and to have the registration statement declared effective by theSEC within 120 days followingJune 10, 2021 . The Company recorded theJune 11 FirstFire Note in the amount of$1,266,667 and a related debt discount of$1,266,667 , interest payable of$76,000 and additional paid in capital of$1,053,999 . OnSeptember 16, 2021 , the Company made an interim payment to the FirstFire Note in the amount of$175,000 . During the six months endedNovember 30, 2021 , the Company recorded interest expense of$298,448 . OnNovember 30, 2021 , the balance of theJune 11 FirstFire Note, net of the related debt discount is$123,448 all of which is included in the long-term portion of convertible notes payable, net of debt discount. 32
GS Capital Securities Purchase Agreement & Note
OnJune 16, 2021 , the Company entered into a securities purchase agreement (the "GS SPA") dated as ofJune 10, 2021 , withGS Capital Partners, LLC ("GS Capital "), pursuant to which the Company issued a 12% promissory note (the "GS Note") with a maturity date ofJune 10, 2023 (the "GS Maturity Date"), in the principal sum of$333,333 . In addition, the Company issued 3,125 shares of its common stock to GS as a commitment fee pursuant to theGS SPA . Pursuant to the terms of the GS Note, the Company agreed to pay to$300,000.00 (the "GS Principal Sum") to GS and to pay interest on the principal balance at the rate of 12% per annum (provided that the first six months of interest shall be guaranteed and the remaining 18 months of interest shall be deemed earned in full if any amount is outstanding under the GS Note after 180 days fromJune 10, 2021 ). The GS Note carries an original issue discount ("OID") of$33,333 . Accordingly, GS paid the purchase price of$300,000.00 in exchange for the GS Note. The Company intends to use the proceeds for working capital and to pay off an existing promissory note issued by the Company in favor of Maxim. GS may convert the GS Note into the Company's common stock (subject to the beneficial ownership limitations of 4.99% in the GS Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by GS upon, at the election of GS, not less than 61 days' prior notice to the Company) at any time at a conversion price equal to$11.50 per share, as the same may be adjusted as provided in the GS Note. The Company may prepay the GS Note at any time prior to maturity in accordance with the terms of the GS Note. The GS Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the GS Note or theGS SPA .
Upon the occurrence of any Event of Default (as defined in the GS Note), which has not been cured within three calendar days, the GS Note shall become immediately due and payable and the Company shall pay to GS, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
Pursuant to the terms of theGS SPA , the Company also issued to GS a three-year warrant to purchase 156,250 shares of the Company's common stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting of the Company's common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed byNovember 1, 2021 ,$10.73 . The Company also agreed to prepare and file with theSEC a registration statement covering the resale of all shares issued or issuable pursuant to theGS SPA , including shares issued upon conversion of the GS Note or exercise of the GS Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with theSEC within 90 days followingJune 10, 2021 and to have the registration statement declared effective by theSEC within 120 days followingJune 10, 2021 . The Company recorded the GS Note in the amount of$333,333 and a related debt discount of$333,333 , interest payable of$20,000 , additional paid in capital of$280,000 . During the six months endedNovember 30, 2021 the Company recorded interest expense of$76,255 . OnNovember 30, 2021 , the balance of the GS Note, net of the related debt discount is$76,255 all of which is included in the long-term portion of convertible notes payable, net of debt discount. 33
Jefferson Street Capital Stock Purchase Agreement and Note
OnAugust 23, 2021 , the Company entered into a securities purchase agreement (the "Jefferson SPA") dated as ofAugust 23, 2021 , withJefferson Street Capital, LLC ("Jefferson"), pursuant to which the Company issued a 12% promissory note (the "Jefferson Note") with a maturity date ofAugust 23, 2023 (the "Jefferson Maturity Date"), in the principal sum of$333,333 . In addition, the Company issued 3,125 shares of its common stock to Jefferson as a commitment fee pursuant to the Jefferson SPA. Pursuant to the terms of the Jefferson Note, the Company agreed to pay to$300,000.00 (the "Jefferson Principal Sum") to Jefferson and to pay interest on the principal balance at the rate of 12% per annum (provided that the first six months of interest shall be guaranteed and the remaining 18 months of interest shall be deemed earned in full if any amount is outstanding under the Jefferson Note after 180 days fromAugust 23, 2021 ). The Jefferson Note carries an original issue discount ("OID") of$33,333 . Accordingly, Jefferson paid the purchase price of$300,000.00 in exchange for the Jefferson Note. The Company intends to use the proceeds for working capital and to pay off an existing promissory note issued by the Company in favor of Maxim. Jefferson may convert the Jefferson Note into the Company's common stock (subject to the beneficial ownership limitations of 4.99% in the Jefferson Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by Jefferson upon, at the election of Jefferson, not less than 61 days' prior notice to the Company) at any time at a conversion price equal to$11.50 per share, as the same may be adjusted as provided in the Jefferson Note. The Company may prepay the Jefferson Note at any time prior to maturity in accordance with the terms of the Jefferson Note. The Jefferson Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Jefferson Note or the Jefferson SPA. Upon the occurrence of any Event of Default (as defined in the Jefferson Note), which has not been cured within three calendar days, the Jefferson Note shall become immediately due and payable and the Company shall pay to Jefferson, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%. Pursuant to the terms of the Jefferson SPA, the Company also issued to Jefferson a three-year warrant to purchase 156,250 shares of the Company's common stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting of the Company's common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed byNovember 1, 2021 ,$10.73 . The Company also agreed to prepare and file with theSEC a registration statement covering the resale of all shares issued or issuable pursuant to the Jefferson SPA, including shares issued upon conversion of the Jefferson Note or exercise of the Jefferson Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with theSEC within 90 days followingAugust 23, 2021 and to have the registration statement declared effective by theSEC within 120 days followingAugust 23, 2021 . The Company recorded the Jefferson Note in the amount of$333,333 and a related debt discount of$274,239 , interest payable of$20,000 and additional paid in capital of$205,605 . During the six months endedNovember 30, 2021 , the Company recorded interest expense of$36,277 . OnNovember 30, 2021 , the balance of the Jefferson Note, net of the related debt discount is$95,372 all of which is included in the long-term portion of convertible notes payable, net of debt discount.
Lucas Ventures Capital Stock Purchase Agreement & Note
OnAugust 31, 2021 pursuant to the terms of that certain Securities Purchase Agreement between the Company andLucas Ventures, LLC , ("LV SPA") the Company issued a 12% convertible promissory note ("the LV Note") in the principal amount of$200,000 with an effective date ofSeptember 2, 2021 , guaranteed interest of$12,000 and a maturity date ofSeptember 2, 2023 . In addition, the Company issued 3,749 shares of its common stock toLV as a commitment fee pursuant to the Securities Purchase Agreement. Furthermore, the Company issued a common stock purchase warrant for the purchase of 187,400 shares of the Company's common stock. ). Accordingly,LV paid the purchase price of$200,000.00 in
exchange for the LV Note. 34 The Company may prepay the LV Note at any time prior to maturity in accordance with the terms of the LV Note. The LV Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the LV Note or the LV SPA.
Upon the occurrence of any Event of Default (as defined in the LV Note), which
has not been cured within three calendar days, the LV Note shall become
immediately due and payable and the Company shall pay to
Pursuant to the terms of the LV SPA, the Company also issued toLV a three-year warrant to purchase 187,480 shares of the Company's common stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting of the Company's common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed byNovember 1, 2021 ,$10.73 . The Company also agreed to prepare and file with theSEC a registration statement covering the resale of all shares issued or issuable pursuant to the LV SPA, including shares issued upon conversion of the LV Note or exercise of the LV Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with theSEC within 90 days followingSeptember 2, 2021 , and to have the registration statement declared effective by theSEC within 120 days followingSeptember 2, 2021 . The Company recorded the LV Note in the amount of$200,000 and a related debt discount of$200,000 , additional paid in capital of$158,999 and guaranteed interest of$12,000 . During the quarter, the Company recorded interest expense of$24,384 . OnNovember 30, 2021 , the balance of the LV Note, net of the related debt discount is$24,384 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
LGH Investments, LLC Note Payable
OnAugust 31, 2021 the Company andLGH Investments, LLC , ("LGH") issued a 12% convertible promissory note ("LGH Note") in the principal amount of$200,000 effectiveSeptember 2, 2021 with a maturity date ofSeptember 2, 2023 .
The Company may prepay the LGH Note at any time prior to maturity in accordance with the terms of the LGH Note. The LGH Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the LGH Note.
Upon the occurrence of any Event of Default (as defined in the LGH Note), which has not been cured within three calendar days, the LGH Note shall become immediately due and payable and the Company shall pay to LGH, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
The Company recorded the LGH Note in the amount of$200,000 , interest payable of$12,000 along with total debt discount of$38,500 , related debt discount ("OID") of$20,000 and origination fees of$6,500 . During the quarter, the Company recorded interest expense of$4,800 . OnNovember 30, 2021 , the balance of the LGH Note, net of the related debt discount is$166,299 all of which is included in the long-term portion of convertible notes payable, net of related debt
discount. 35
Ionic Ventures, LLC Capital Stock Purchase Agreement & Note
OnSeptember 28, 2021 , the Company entered into a securities purchase agreement (the "Ionic SPA") dated as ofSeptember 28, 2021 , withIonic Ventures, LLC ("Ionic"), pursuant to which the Company issued a 12% promissory note (the "Ionic Note") with a maturity date ofSeptember 28, 2023 (the "Ionic Maturity Date"), in the principal sum of$1,555,555.56 and guaranteed interest of$93,333.34 . In addition, the Company issued 14,584 shares of its common stock to Ionic as a commitment fee pursuant to the Ionic SPA. Pursuant to the terms of the Ionic Note, the Company agreed to pay to$1,400,000.00 (the "Ionic Principal Sum") to Ionic and to pay interest on the principal balance at the rate of 12% per annum (provided that the first six months of interest shall be guaranteed and the remaining 18 months of interest shall be deemed earned in full if any amount is outstanding under the Ionic Note after 180 days fromSeptember 28, 2021 ). The Ionic Note carries an original issue discount ("OID") of$155,555.56 . Accordingly, Ionic paid the purchase price of$1,400,000.00 in exchange for the Ionic Note. The Company intends to use the proceeds for working capital. Ionic may convert the Ionic Note into the Company's common stock (subject to the beneficial ownership limitations of 4.99% in the Ionic Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by Ionic upon, at the election of Ionic, not less than 61 days' prior notice to the Company) at any time at a conversion price equal to$11.50 per share, as the same may be adjusted as provided in the Ionic Note. The Company may prepay the Ionic Note at any time prior to maturity in accordance with the terms of the Ionic Note. The Ionic Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Ionic Note
or the Ionic SPA.
Upon the occurrence of any Event of Default (as defined in the Ionic Note), which has not been cured within three calendar days, the Ionic Note shall become immediately due and payable and the Company shall pay to Ionic, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
Pursuant to the terms of the Ionic SPA, the Company also issued to Ionic a three-year warrant to purchase 729,167 shares of the Company's common stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting of the Company's common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed byNovember 1, 2021 ,$10.73 . The Company also agreed to prepare and file with theSEC a registration statement covering the resale of all shares issued or issuable pursuant to the Ionic SPA, including shares issued upon conversion of the Ionic Note or exercise of the Ionic Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement filed with theSEC within 90 days followingSeptember 28, 2021 and to have the registration statement declared effective by theSEC within 120 days followingSeptember 28, 2021 . The Company recorded the Ionic Note in the amount of$1,555,555 and a related debt discount of$1,555,555 , and additional paid in capital of$1,306,665 and guaranteed interest of$93,333 . During the quarter, the Company recorded interest expense of$134,246 . OnNovember 30, 2021 , the balance of the LV Note, net of the related debt discount is$134,246 all of which is included in the long-term portion of convertible notes payable, net of related debt discount. Secured Promissory Note One OnNovember 15, 2021 , the Company entered into a 10% secured promissory note with an accredited investor ("Secured Note One") in the amount of$262,500 for the purpose of acquiring computers for company owned store operations. The Secured Note One has a perfected security interest in 50 personal computers the Company will use in its operations. In addition, the Company issued 30,000 commitment warrants for the purchase of the Company's common stock at an exercise price of$10.73 per share. The Secured Note One requires 60 monthly payments of principal and interest in the amount of$5,577 . The Company recorded the Secured Note One in the amount of$262,500 along with original issue discount ("OID") of$12,500 . Accordingly, the investor paid$250,000 in exchange for the Secured Note One. OnNovember 30, 2021 , the balance of the Secured Note One, net of the related debt discount is$165,483 all of which is included in the long-term portion of convertible notes payable, net of related debt discount. Secured Promissory Note Two OnNovember 18, 2021 , the Company entered into a 10% secured promissory note with an accredited investor ("Secured Note Two") in the amount of$157,500 for the purpose of acquiring computers for company owned store operations. The Secured Note Two has a perfected security interest in 30 personal computers the Company will use in its operations. In addition, the Company issued 18,000 commitment warrants for the purchase of the Company's common s stock at an exercise price of$10.73 per share. The Secured Note Two requires 60 monthly payments of principal and interest in the amount of$3,346 . The Company recorded the Secured Note Two in the amount of$157,500 along with original issue discount ("OID") of$7,500 . Accordingly, the investor paid$150,000 in exchange for the Secured Note Two. OnNovember 30, 2021 , the balance of the Secured Note Two, net of the related debt discount is$99,290 all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
Adoption of 2020 Omnibus Incentive Plan
The board and shareholders of the Company approved of theSimplicity Esports and Gaming Company 2020 Omnibus Incentive Plan (the "2020 Plan") onApril 22, 2020 andJune 23, 2020 , respectively. The 2020 Plan provides for various stock-based incentive awards, including incentive and nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units, and other equity-based or cash-based awards. 36 Critical Accounting Policies Revenue Recognition As ofJanuary 1, 2018 , the Company adopted Revenue from Contracts with Customers (Topic 606) ("ASC 606"). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The Company adopted the standard using the modified retrospective method and the adoption did not have a material impact on the Company's consolidated financial statements. The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods and services. Our revenue is derived from the three sources listed below.
The following describes principal activities, separated by major product or service, from which the Company generates its revenues:
Company-owned Store Sales The Company-owned stores principally generate revenue from retail esports gaming centers. Revenues from Company-owned stores are recognized when the products are delivered, or the service is provided. Franchise Revenues Franchise revenues consist of royalties, fees and initial license fee income. Franchise royalties are based on six percent of franchise store sales after a minimum level of sales occur and are recognized as sales occur. Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other behaviors, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty rate. Franchise royalties are billed on a monthly basis. The Company recognizes initial franchise license fee revenue when the Company has performed substantially all the services required in the franchise agreement. Fees received that do not meet these criteria are recorded as deferred revenues until earned. The pre-opening services provided to franchisees do not contain separate and distinct performance obligations from the franchise right; thus, the fees collected will be amortized on a straight-line basis beginning at the store opening date through the term of the franchise agreement, which is typically 10 years. Franchise license renewal fees, which generally occur every 10 years, are billed before the renewal date. Fees received for future license renewal periods are amortized over the life of the renewal period. The Company offers various incentive programs for franchisees including royalty incentives, new store opening incentives (i.e., development incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned or granted under these programs that
are in the form of discounts.
Commissary sales are comprised of gaming equipment and supplies sold to franchised stores and are recognized as revenue upon shipment or delivery of the related products to the franchisees. Payments are generally due within 30 days.
Fees for information services, including software maintenance fees, marketing fees and website maintenance, graphic and promotion fees are recognized as revenue as such services are provided.
Esports Revenue
Esports is a form of competition using video games. Most commonly, esports takes the form of organized, single player and multiplayer video game tournaments or leagues, particularly between professional players, individually or as teams. Revenues from Esports revenues are recognized when the competition is completed, and prize money is awarded. Revenues earned from team sponsorships, prize winnings, league sponsorships, and from the Company's share of league revenues are included in esports revenue. Deferred Revenues
Deferred revenues are classified as current or long-term based on when management estimates the revenues will be recognized.
The Company receives payments from franchisees in advance of all performance obligations having been met, including but not limited to franchise locations being opened. As certain conditions agreed to in these franchise agreements are performed, revenues are recognized. Deferred costs include commissions paid to brokers related to the sale of specific new franchises which have not met revenue recognition criteria as ofNovember 30, 2021 . These costs are recognized in the same period as the initial franchise fee revenue is recognized. 37 Accounts Receivable The Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e., franchisees), taking into consideration the age of past due accounts and an assessment of the customer's ability to pay. Accounts receivable are written off against the allowance when management determines it is probable the receivable is worthless. Customer account balances with invoices dated over 90 days old are considered delinquent and considered in the allowance assessment. The Company performs credit evaluations of its customers and, generally, requires no collateral. As ofNovember 30, 2021 , management has recorded an allowance for doubtful accounts of$12,943 . Property and Equipment Property and equipment and leasehold improvements are recorded at its historical cost. The cost of property and equipment is depreciated over the estimated useful lives, when placed in service (ranging from 3 -5 years), of the related assets utilizing the straight-line method of depreciation. The cost of leasehold improvements is depreciated (amortized) over the lesser of the length of the related leases or the estimated useful lives of the assets. Ordinary repairs and maintenance are expensed when incurred and major repairs will be capitalized and expensed if they benefit future periods.
Intangible Assets and Impairment
Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. These costs are included in intangible assets on our condensed consolidated balance sheet and amortized on a straight-line basis when placed into service over their estimated useful lives of the costs, which is 2 to 10 years. The Company periodically reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less that the carrying amount of the asset. The amount of impairment is measured as the difference between the asset's estimated fair value and its book value.Goodwill
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