UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from __________ to __________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| Large accelerated filer | Accelerated filer | Smaller reporting company | Emerging growth company | |
| ☐ | ☐ | ☒ |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of April 19, 2023, there were shares of the Company’s common stock issued and outstanding.
SIMPLICITY ESPORTS AND GAMING COMPANY
Table of Contents
| 2 |
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| February 28, 2023 | May 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Other receivable – sale of Brazil assets | ||||||||
| Inventory | ||||||||
| Prepaid expenses | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Other Assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Deferred brokerage fees | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset, operating leases, net | ||||||||
| Security deposits | ||||||||
| Due from franchisees | ||||||||
| Total Other Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of convertible notes payable, net of discount | ||||||||
| Derivative liability | ||||||||
| Loan payable | ||||||||
| Operating lease obligation, current | ||||||||
| Current portion of deferred revenues | ||||||||
| Related party loan, current portion | ||||||||
| Total Current Liabilities | ||||||||
| Non-Current Liabilities | ||||||||
| Non-current portion of convertible notes payable, net of discount | ||||||||
| Secured promissory notes payable, net of discount | ||||||||
| Operating lease obligation, net of current portion | ||||||||
| Deferred revenues, less current portion | ||||||||
| Total Non-Current Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies – Note 7 | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock - $ par value, shares authorized; share and shares issued and outstanding as of February 28, 2023, and May 31, 2022, respectively | ||||||||
| Common stock - $ par value; shares authorized; and shares issued and outstanding as of February 28, 2023, and May 31, 2022, respectively | ||||||||
| Common stock issuable | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Simplicity Esports and Gaming Company Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Non-Controlling Interest | ( | ) | ||||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
The accompanying condensed unaudited notes are an integral part of these unaudited consolidated financial statements.
| 3 |
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| February 28,2023 | February 28,2022 | February 28,2023 | February 28,2022 | |||||||||||||
| Revenues | ||||||||||||||||
| Franchise royalties, fees and other | $ | $ | $ | $ | ||||||||||||
| Company-owned stores sales | ||||||||||||||||
| Esports revenue | ||||||||||||||||
| Total Revenues | ||||||||||||||||
| Cost of Goods Sold | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gross Margin | ||||||||||||||||
| Operating Expenses | ||||||||||||||||
| Compensation and related benefits | ||||||||||||||||
| Professional fees | ||||||||||||||||
| General and administrative expenses | ||||||||||||||||
| Impairment loss | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Loss from Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other (Expense) Income | ||||||||||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ( | ) | ||||||||||
| Interest and financing expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | ||||||||||||||||
| Other income | ||||||||||||||||
| Loss on issuance of shares to employees and as consideration for accounts payable | ( | ) | ||||||||||||||
| Gain on disposition of assets | ||||||||||||||||
| (Loss) gain on change in fair value of derivative liability | ( | ) | ||||||||||||||
| Total Other (Expense) Income | ( | ) | ( | ) | ( | ) | ||||||||||
| (Loss) Income Before Provision for Income Taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Net (Loss) Income | ( | ) | ( | ) | ( | ) | ||||||||||
| Net Loss (Income) attributable to noncontrolling interest | ( | ) | ||||||||||||||
| Net (Loss) Income attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Basic Net (Loss) Income per share | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Diluted Net (Loss) Income Per Share | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Basic Weighted Average Number of Common Shares Outstanding | ||||||||||||||||
| Diluted Weighted Average Number of Common Shares Outstanding | ||||||||||||||||
The accompanying condensed unaudited notes are an integral part of these unaudited consolidated financial statements.
| 4 |
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THREE AND NINE MONTHS ENDED FEBRUARY 28, 2023 AND 2022
(UNAUDITED)
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Additional Paid-In Capital | Issuable | Shares | Par Value | Additional Paid-in Capital | Non-Controlling Interest | Accumulated Deficit | Total Stockholders’ Deficit | |||||||||||||||||||||||||||||||
| Balance – May 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Shares issued in connection with issuance and conversions of notes payable | - | |||||||||||||||||||||||||||||||||||||||
| Shares to be issued in connection with issuance of notes payable | - | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued to directors, officers, or employees as compensation | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||||
| Shares issued as consideration for accounts payable | - | |||||||||||||||||||||||||||||||||||||||
| Sale of shares of Series X convertible preferred stock to related party | - | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Non-controlling interest of original investment in subsidiaries | - | - | ||||||||||||||||||||||||||||||||||||||
| Net income attributable to non-controlling interest | - | - | ||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance August 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
| Shares issued in connection with issuance and conversions of notes payable | ( | ) | - | |||||||||||||||||||||||||||||||||||||
| Shares issued as consideration for accounts payable | - | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Derivative liability | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||
| Distributions to minority interest holders | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net Income | - | - | ||||||||||||||||||||||||||||||||||||||
| Balance November 30, 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
| Shares issued in connection with issuance and conversions of notes payable | - | |||||||||||||||||||||||||||||||||||||||
| Adjustments to derivative liability for sequencing | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance February 28, 2023 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
| 5 |
| Common Stock | Preferred Stock | ||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Additional Paid-In Capital | Issuable | Shares | Par Value | Additional Paid-in Capital | Non-Controlling Interest | Accumulated Deficit | Total Stockholders’ Equity |
||||||||||||||||||||||||||||||||
| Balance - May 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||||||||
| Shares issued in connection with issuance and amendments of notes payable | - | ||||||||||||||||||||||||||||||||||||||||
| Shares issued for contracted services | - | ||||||||||||||||||||||||||||||||||||||||
| Sale of warrants | - | - | |||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with franchise acquisition | - | ||||||||||||||||||||||||||||||||||||||||
| Common stock issuable | - | - | |||||||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Balance - August 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||||||||
| Shares issued in connection with issuance and amendments of notes payable | - | ||||||||||||||||||||||||||||||||||||||||
| Shares issued for contracted services | ( |
) | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued to directors, officers, or employees as compensation | ( |
) | - | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | |||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with franchise acquisitions | - | ||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Balance November 30, 2021 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||||||||
| Cash distribution from minority interest | - | ( |
) | - | ( |
) | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | |||||||||||||||||||||||||||||||||||||||
| Non-controlling interest of investment in subsidiary | - | ||||||||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( |
) | ( |
) | |||||||||||||||||||||||||||||||||||
| Balance February 28, 2022 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||||||||
The accompanying condensed unaudited notes are an integral part of these unaudited consolidated financial statements.
| 6 |
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Nine Months Ended | ||||||||
| February 28, 2023 | February 28, 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net Income (Loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Non-cash interest expense | ||||||||
| Cash paid in interest | ( | ) | ||||||
| Deferred guaranteed interest | ( | ) | ||||||
| Depreciation expense | ||||||||
| Amortization expense | ||||||||
| Provision for uncollectible accounts | ||||||||
| Impairment loss | ||||||||
| Change in lease liability net of leased asset | ( | ) | ( | ) | ||||
| Loss on extinguishment of debt | ||||||||
| Gain on change in value of derivative liability | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Gain on acquisition or disposition of assets | ( | ) | ||||||
| Gain on forgiveness of PPP loan | ( | ) | ||||||
| Loss on issuance of shares to employees and as consideration for accounts payable | ||||||||
| Deferred equity financing costs | ( | ) | ||||||
| Issuance of Series X preferred share | ||||||||
| Issuance of shares for services | ||||||||
| Issuance of shares for interest payment | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Other current assets | ( | ) | ||||||
| Prepaid expenses | ( | ) | ||||||
| Security deposits | ||||||||
| Deferred brokerage fees | ||||||||
| Deferred revenues | ( | ) | ||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Due from franchisees | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Proceeds from sale of Brazil assets | ||||||||
| Proceeds from sale of Fort Bliss assets | ||||||||
| Payments to minority interest holders | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Repayment of notes payable | ( | ) | ( | ) | ||||
| Proceeds from note payable | ||||||||
| Proceeds from sale of warrants | ||||||||
| Distribution of non-controlling interest | ( | ) | ||||||
| Contribution from non-controlling interest | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental Non-Cash Investing and Financing Information | ||||||||
| Common stock issued as consideration for accounts payable | $ | $ | ||||||
| Common stock issued for employees | $ | $ | ||||||
| Common stock issuable in connection with notes payable | $ | $ | ||||||
| Purchase price consideration receivable – sale of Brazil assets | $ | $ | ||||||
| Common stock issued for consideration in an acquisition of assets | $ | $ | ||||||
| Common stock issued in connection with conversion of notes payable | $ | $ | ||||||
| Warrants issued for debt extinguishment | $ | $ | ||||||
| Beneficial conversion feature with warrants issued for debt discount | $ | $ | ||||||
| Additional paid in capital related to derivative liability at inception | $ | $ | ||||||
| Adjustments to derivative liability based on sequencing | $ | ( | ) | $ | ||||
| Derivative liability recorded as debt discount | $ | $ | ||||||
| Minority interest distribution paid directly by acquirer of assets | $ | $ | ||||||
The accompanying condensed unaudited notes are an integral part of these consolidated financial statements.
| 7 |
SIMPLICITY ESPORTS AND GAMING COMPANY
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity Esports and Gaming Company (the “Company,” “Simplicity,” “we,” or “our”) was organized as a blank check company under the laws of the State of Delaware on April 17, 2017. The Company was formed under the name I-AM Capital Acquisition Company for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses (“Business Combination”). On November 20, 2018, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc. On January 2, 2019, the Company changed its name from Smaaash Entertainment Inc. to Simplicity Esports and Gaming Company.
Through our wholly owned subsidiary, PLAYlive Nation, Inc. (“PLAYlive”), acquired on July 29, 2019, the Company has a network of franchised esports gaming centers. As of February 28, 2023, the Company had no corporate owned stores and five franchised locations operating in California, Georgia, Ohio, South Carolina, and Texas. PLAYlive offers a video gaming lounge concept to qualified franchisees. PLAYlive currently offers single-unit location franchises, as well as agreements to develop multiple locations.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented.
The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, as filed with the SEC on September 27, 2022. The interim results for the three and nine months ended February 28, 2023, are not necessarily indicative of the results to be expected for the year ending May 31, 2023, or for any future interim periods.
Basis of Consolidation
The
accompanying unaudited consolidated financial statements include the operations of the Company and its wholly owned subsidiaries, Simplicity
Esports, LLC, PLAYlive, Simplicity Union Gap, LLC, Simplicity Kennewick, LLC, Simplicity Humble, LLC, Simplicity Frisco, LLC, Simplicity
Billings, LLC, Simplicity Brea, LLC, Simplicity Santa Rosa, LLC, Simplicity St. Louis, LLC, Simplicity St. Petersburg, LLC, Simplicity
Fullerton, LLC, Simplicity Salinas, LLC, Simplicity Tracy, LLC, Simplicity Vancouver, LLC, Simplicity Fort Bliss, LLC, and PLAYlive Nation
Holdings, LLC; its
All significant intercompany accounts and transactions have been eliminated in consolidation.
| 8 |
Cash
The
Company considers short-term interest-bearing investments with initial maturities of three months or less to be cash equivalents. The
Company has
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable.
Cash and cash equivalents in a financial institution, which at times, may exceed the Federal depository insurance coverage of $
Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the consolidated balance sheet except as noted in the Fair Value Measurement section described below.
Foreign Currencies
Revenue and expenses are translated at average rates of exchange prevailing during the period.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
In accordance with ASC 606, Revenues from Contracts with Customers, 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.
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. After hours, the Company also mines for crypto currency using the computer equipment at the company-owned stores. Crypto mining revenue is recognized as the mining occurs. As of February 28, 2023, all Company-owned stores have been sold or closed.
| 9 |
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
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 of February 28, 2023, and May 31, 2022. These costs are recognized in the same period as the initial franchise fee revenue is recognized.
The table below summarizes Deferred Revenues as of February 28, 2023:
| May 31, 2022 | Revenue Recognized | February 28, 2023 | ||||||||||
| Deferred Revenue | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
| 10 |
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
$
Inventory
Inventories
are stated at the lower of cost or market. The Company periodically reviews the value of items in inventory and provides write-downs
or write-offs of inventory based on its assessment of market conditions. The Company has recorded an impairment of approximately $
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
The
Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be
recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by
determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total
of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess
of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or
the fair value less costs to sell. The Company has recorded impairment charges of approximately $
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 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
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. During the nine months ended February 28, 2023, the Company performed an internal evaluation
of the intangible assets which indicated impairment was required and recorded an impairment charge of approximately $
| 11 |
Goodwill
Goodwill
is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill, but we
assess our goodwill for impairment at least annually. Our assessment date is May 31, and we performed an internal evaluation of the goodwill
value at August 31, 2022 with quantitative and qualitative considerations. Based on this internal evaluation, we recorded an impairment
charge of $
Franchise Locations
Through PLAYlive, the Company’s wholly owned subsidiary, the Company has entered into franchise agreements with third parties. As of February 28, 2023, five franchise locations were considered to be operational in the following states: California, Georgia, Ohio, South Carolina, and Texas.
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.
Non-employee stock-based payments
The Company records stock-based payments made to non-employees in accordance with Accounting Standards Update (“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.
As of February 28, 2023, the Company was authorized to issue shares of common stock with a par value of $ per share (the “Common Stock”). On January 20, 2023, the Company filed the Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to increase the Company’s authorized shares of Common Stock from to . Accordingly, following the filing of the Amendment, the Company has authorized shares of Common Stock. Holders of the shares of the Common Stock are entitled to one vote for each share. The Company has issued options, warrants and convertible promissory notes which are convertible into shares of Common Stock in certain situations the total of which exceeds the current authorization. The Company has adopted a policy for the sequence of usage of remaining authorized but unissued shares of Common Stock (the “Sequencing Policy”) which outlines the order in which the conversion of these equity-linked instruments may be settled in shares. Under the Company’s Sequencing Policy, the most recently issued equity-linked securities, including stock options, warrants, and convertible promissory notes, are settled in shares first.
The Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Net income (loss) – per share is calculated by dividing the Company’s net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings or loss per common share is calculated by dividing the Company’s net income or loss available to common stockholders by the diluted weighted average number of common shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. For this calculation potentially dilutive securities consist primarily of warrants, outstanding options and shares into which the company’s convertible notes payable are convertible. When the Company records a loss from operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per common share. The following table shows the computation of basic and diluted earnings per share for the three and nine months ended February 28, 2023, and 2022:
| Three Months ended | Nine Months ended | |||||||||||||||
| February 28, 2023 | February 28, 2022 | February 28, 2023 | February 28, 2022 | |||||||||||||
| Numerator: | ||||||||||||||||
| Net (Loss) Income attributable to common shareholders | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Denominator: | ||||||||||||||||
| Weighted-average basic shares outstanding | ||||||||||||||||
| Effect of dilutive securities | ||||||||||||||||
| Weighted-average diluted shares | ||||||||||||||||
| Basic (Loss) Earnings per Share | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Diluted (Loss) Earnings per Share | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| 12 |
Income Taxes
The Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the consolidated financial statements recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
| ● | Level 1 inputs are quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities. |
| ● | Level 3 inputs are unobservable and reflect the Company’s own assumptions. |
Other than the derivative liability, the Company does not have a material amount of financial assets or liabilities that are required to be measured at fair value on a recurring basis under U.S. GAAP. None of the Company’s non-financial assets or non-financial liabilities are required to be measured at fair value on a recurring basis.
The Company has not elected to use fair value measurement for any assets or liabilities for which fair value measurement is not presently required by U.S. GAAP. However, the Company believes the fair values of cash and cash equivalents, accounts receivable, inventory, accounts payable, and accrued liabilities approximate their carrying amounts.
Recently Issued and Recently Adopted Accounting Pronouncements
Accounting standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following are a summary of recent accounting developments.
| 13 |
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective June 1, 2023 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company is evaluating the impact of the adoption of ASU 2020-06 on the Company’s financial statements.
In May 2021, the FASB issued ASU 2021-04, Earning Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which clarified and reduced diversity in an issuer’s accounting for modifications of exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This update will be effective for the Company as of June 1, 2023. The Company is currently assessing the potential impact of ASU 2021-04 to our consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
Going Concern, Liquidity and Management’s Plan
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 consolidated financial statements, as of February 28, 2023, the Company had an accumulated deficit of $
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 private and/or public offerings. While the Company believes in the viability of its strategy and its ability to generate sufficient revenue and to raise additional funds, there can be no assurances to that effect. Should the Company fail to raise additional capital, it may be compelled to reduce the scope of its planned future business activities.
The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings.
The unaudited 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.
| 14 |
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 subsequently reopened the majority of our company owned stores and franchise locations. 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.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition and results of operations.
The measures taken to date impacted the Company’s business for the fiscal year ended May 31, 2022, as well as the fiscal quarter ended February 28, 2023, and will potentially continue to impact the Company’s business. Management expects that all of its business 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.
NOTE 3 — DISPOSITIONS
On
June 10, 2022, the Company and Simplicity One, the Company’s majority owned subsidiary, entered into an asset purchase agreement
with a third party in which the third party acquired the Riot Games license for consideration of $
On
November 9, 2022, the Company and Simplicity El Paso LLC, the Company’s majority owned subsidiary, entered into an asset purchase
agreement with a third party in which the third party acquired the fixed assets, real property lease (and associated property improvements
and lease liabilities), and inventory related to the Fort Bliss company owned location for $
NOTE 4 — PROPERTY AND EQUIPMENT
The following is a summary of property and equipment—at cost, less accumulated depreciation:
| February 28, 2023 | May 31, 2022 | |||||||
| Leasehold improvements | $ | $ | ||||||
| Property and equipment | ||||||||
| Total cost | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Net property and equipment | $ | $ | ||||||
| 15 |
During
the three months ended February 28, 2023, and 2022, the Company recorded depreciation expense of $
During
the three months ended February 28, 2023, and 2022, impairment expense of $
NOTE 5 — INTANGIBLE ASSETS
The following table sets forth the intangible assets, including accumulated amortization as of February 28, 2023:
| February 28, 2023 | ||||||||||||||||
| Remaining | Accumulated | Net Carrying | ||||||||||||||
| Useful Life | Cost | Amortization | Value | |||||||||||||
| Internet Domain | $ | $ | $ | |||||||||||||
| $ | $ | $ | ||||||||||||||
The following tables set forth the intangible assets, including accumulated amortization as of May 31, 2022:
| May 31, 2022 | ||||||||||||||||
| Remaining | Accumulated | Net Carrying | ||||||||||||||
| Useful Life | Cost | Amortization | Value | |||||||||||||
| Trademarks | ||||||||||||||||
| Customer Database | ||||||||||||||||
| Restrictive Covenant | ||||||||||||||||
| Customer Contracts | ||||||||||||||||
| $ | $ | $ | ||||||||||||||
During
the three months ended February 28, 2023, and 2022, the Company recorded impairment loss of $
Amortization
expense for the three months ended February 28, 2023, and 2022 was $
Goodwill
The Company’s goodwill carrying amounts relate to the acquisitions of Simplicity Esports LLC and PLAYlive. The composition of the goodwill balance is as follows:
As of February 28, 2023 | As of May 31, 2022 | |||||||
| Simplicity Esports LLC | $ | $ | ||||||
| PLAYlive Nation Inc. | ||||||||
| Ft. Bliss | ||||||||
| Total Goodwill | $ | $ | ||||||
During
the three months ended February 28, 2023, and 2022 the Company recorded impairment loss of $
| 16 |
NOTE 6 — RELATED PARTY TRANSACTIONS
Kaplan Promissory Notes
On
December 10, 2021, the Company entered into a related party transaction with Jed Kaplan, the Company’s then Chairman of the Board
and a more than 5% shareholder, to provide a loan to the Company to provide additional operating funds for Simplicity One, the Company’s
majority owned subsidiary. The principal amount of the loan was $
Preferred Stock
On August 23, 2022, the Company filed with the Delaware Secretary of State a certificate of designations (the “Certificate of Designations”) to designate one share of the Company’s preferred stock as the Series X Convertible Preferred Stock (“Series X Preferred”). The one share of Series X Preferred has a number of votes equal to all of the other votes entitled to be cast on any matter by any other shares or securities of the Company, plus one. The Series X Preferred does not have any economic or other interest in the Company. The share of Series X Preferred may not be transferred after issuance. If any transfer is attempted, the Series X Preferred will be automatically redeemed by the Company at a redemption price of $.
On
August 29, 2022, the Company issued and sold to Roman Franklin, the Company’s Chief Executive Officer, principal financial officer,
principal accounting officer, member of the Company’s Board of Directors, and greater than 5% stockholder, one share of the Company’s
Series X Preferred for a purchase price of $
At the election of the Series X Preferred holder at any time following the date that the Company has amended its articles of incorporation to increase the authorized shares of common stock such that there are sufficient authorized but unissued shares of common stock to permit conversion of the Series X Preferred as set forth in the Certificate of Designations, the Series X Preferred is convertible into shares of the Company’s common stock.
Upon
issuance of the Series X Preferred, the Company estimated the fair market value of the Series X Preferred to be $
NOTE 7 — COMMITMENTS AND CONTINGENCIES
Leases
As of February 28, 2023, the Company had entered into various leases for its corporate office and its gaming centers.
The following table summarizes the right-of use asset and lease liability as of February 28, 2023:
| Right-of-use Asset, net | $ | |||
| Lease Liability | ||||
| Current | $ | |||
| Long Term | ||||
| Total | $ |
During
the three months ended February 28, 2023, the Company did not recognize a loss on impairment related to the closure of any Company owned
stores. During the nine months ended February 28, 2023, the Company recognized a loss on impairment of $
| 17 |
The following table summarizes the Company’s scheduled future minimum lease payments as of February 28, 2023:
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and beyond | ||||
| Total Operating Lease Obligations | $ | |||
| Less: Amount representing imputed interest | ( | ) | ||
| Present value of minimum lease payments | $ | |||
| Less current portion | ||||
| Long term portion | $ |
As
of February 28, 2023, and May 31, 2022, the weighted-average remaining lease terms was
Employment Agreements, Board Compensation and Bonuses
On
July 29, 2020, (i) the Company entered into an employment agreement (the “Kaplan 2020 Agreement”) with Mr. Kaplan; and (ii)
the Board of Directors approved for Mr. Kaplan a $
Effective
March 29, 2021, the Company promoted Mr. Kaplan to be the Chairman of the Board of Directors, and he ceased to be the Company’s
Chief Executive Officer and Interim Chief Financial Officer. Upon this change, Mr. Kaplan’s new monthly salary became $
On
July 29, 2020, (i) the Company entered into an employment agreement (the “Franklin 2020 Agreement”) with Mr. Franklin; and
(ii) the Board of Directors approved for Mr. Franklin a $
On
March 25, 2021, the Board of Directors appointed Mr. Franklin as the Company’s Chief Executive Officer, effective March 29, 2021.
Mr. Franklin continues to be a member of our board of directors. In connection with Mr. Franklin’s appointment, on March 25, 2021,
the Company entered into an employment agreement, dated as of March 29, 2021, by and between the Company and Mr. Franklin (the “2021
Franklin Employment Agreement”). Pursuant to the terms of the 2021 Franklin Employment Agreement, in exchange for Mr. Franklin’s
services, the Company agreed to pay Mr. Franklin an annual base salary of $
On
May 11, 2021, the Board appointed Nancy Hennessey to serve as the Company’s Chief Financial Officer, effective May 17, 2021. In
connection with Ms. Hennessey’s appointment as the Company’s Chief Financial officer, the Company entered into an employment
agreement, dated as of May 17, 2021, by and between the Company and Ms. Hennessey (the “Hennessey Employment Agreement”).
Pursuant to the terms of the Hennessey Employment Agreement, in exchange for Ms. Hennessey’s services, the Company agreed to pay
Ms. Hennessey an annual base salary of $
| 18 |
NOTE 8 — DEBT
The table below presents the Company’s outstanding debt balances as of February 28, 2023, and May 31, 2022:
| Convertible Promissory Notes | Secured Promissory Notes | Related Party Debt | Short-Term Note Payable | |||||||||||||
| Principal Balance as of May 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Carrying Value as of May 31, 2022 | ||||||||||||||||
| Principal | ||||||||||||||||
| Borrowings | ||||||||||||||||
| Repayments | ( | ) | ( | ) | ||||||||||||
| Conversions | ( | ) | ||||||||||||||
| Totals | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ||||||
| Unamortized Debt Issuance Costs, Beneficial Conversion Feature, and Warrant Discount | ||||||||||||||||
| Beginning Balance | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Additions | ( | ) | ||||||||||||||
| Accretion | ||||||||||||||||
| Ending Balance | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||
| Principal Balance as of February 28, 2023 | $ | $ | $ | $ | ||||||||||||
| Carrying Value as of February 28, 2023 | ||||||||||||||||
| Less Short-Term Portion | ||||||||||||||||
| Long Term Portion | $ | $ | $ | $ | ||||||||||||
Scheduled principal maturities of the Company’s outstanding debt over the next five fiscal years are as follows:
| Fiscal year ending May 31, | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ | ||||
| 19 |
Convertible Promissory Notes
February 19, 2021 Labrys 12% Convertible Promissory Note
On
February 19, 2021, the Company entered into a securities purchase agreement (the “Labrys SPA”) with Labrys Fund LP (“Labrys”),
an accredited investor, pursuant to which the Company issued a
On July 16, 2022, the Company and Labrys entered into a second amendment (the “Second Labrys Amendment”) to the Labrys SPA and the Labrys Note, as amended. Pursuant to the terms of the Second Labrys Amendment, the maturity date of the Labrys Note was extended to December 31, 2023.
Upon
the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of
the Labrys Note was reduced from $
During
the three and nine months ended February 28, 2023, the Company did not make any payments to Labrys. During the three and nine months
ended February 28, 2023, the Company recognized $
As
of February 28, 2023, the carrying value and face value of the Labrys Note was $
March 2021 FirstFire Global 12% Convertible Promissory Note
On
March 10, 2021, the Company, entered into a securities purchase agreement (the “March 2021 FirstFire SPA”) with FirstFire
Global Opportunities Fund, LLC, a Delaware limited liability company (the “FirstFire”), pursuant to which the Company issued
a
Upon
the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of
the March 2021 FirstFire Note was reduced from $
Concurrent
with the adjustment to the conversion price of certain of the Company’s convertible promissory notes in September 2022 and pursuant
to the Company’s Sequencing Policy, the Company recognized a derivative liability associated with the shares of Common Stock underlying
the March 2021 FirstFire Note and associated accrued interest (see Note 10 – Derivative Liability) as well as an additional debt
discount of $
During
the three months ended August 31, 2022, FirstFire converted $
| 20 |
On
various dates during the three months ended November 30, 2022, FirstFire converted $
On
various dates during the three months ended February 28, 2023, FirstFire converted $
During
the three and nine months ended February 28, 2023, the Company recognized $
As
of February 28, 2023, the carrying value and face value of the March 2021 FirstFire Note was $
June 2021 FirstFire Global 12% Convertible Promissory Note
On
June 11, 2021, the Company entered into a securities purchase agreement (the “June 2021 FirstFire SPA”) with FirstFire, pursuant
to which the Company issued (i) a
The following are the material terms of the June 2021 FirstFire SPA and June 2021 FirstFire Note:
| ● | The
June 2021 FirstFire Note matures on | |
| ● | At
its election, FirstFire may convert the June 2021 FirstFire Note into the Company’s common stock, subject to the beneficial
ownership limitations of | |
| ● | The
Company agree to pay interest on the June 2021 Principal Sum at the rate of | |
| ● | The
June 2021 FirstFire Note carries an original issue discount of $ | |
| ● | The Company may prepay the June 2021 FirstFire Note at any time prior to maturity in accordance with the terms of the June 2021 FirstFire Note (the “Standard Prepayment Terms”). | |
| ● | The
June 2021 FirstFire Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the June 2021 FirstFire Note or the June 2021 FirstFire SPA. Upon the occurrence of any
event of default (as defined in the June 2021 FirstFire Note) which has not been cured within the period stipulated by the June 2021
FirstFire Note, the June 2021 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 June 2021 FirstFire Principal Sum then outstanding plus accrued
interest multiplied by | |
| ● | Pursuant to the June 2021 FirstFire SPA, the June 2021 FirstFire Commitment Shares and the shares underlying the June 2021 FirstFire Note and June 2021 FirstFire Warrant carry standard registration rights. |
| 21 |
Upon
issuance of the June 2021 FirstFire Note, the Company received net proceeds of $
Upon
the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of
the June 2021 FirstFire Note was reduced from $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the June 2021 FirstFire Note was $
June 2021 GS Capital Securities 12% Convertible Promissory Note
On
June 16, 2021, the Company entered into a securities purchase agreement (the “June 2021 GS SPA”) with GS Capital Partners,
LLC (“GS”), pursuant to which the Company issued (i) a
The following are the material terms of the June 2021 GS SPA and June 2021 GS Note:
| ● | The
June 2021 GS Note matures on | |
| ● | At
its election, GS may convert the June 2021 GS Note into the Company’s common stock, subject to the Beneficial Ownership Limitations,
at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the June 2021 GS Principal Sum at the rate of | |
| ● | The
June 2021 GS Note carries an original issue discount of $ | |
| ● | The June 2021 GS Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the June 2021 GS SPA, the June 2021 GS Commitment Shares and the shares underlying the June 2021 GS Note and June 2021 GS Warrant carry standard registration rights. |
Upon
issuance of the June 2021 GS Note, the Company received net proceeds of $
Upon
the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of
the June 2021 GS Note was reduced from $
| 22 |
During
the three months ended August 31, 2022, GS converted $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the June 2021 GS Note was $
August 2021 Jefferson Street Capital 12% Convertible Promissory Note
On
August 23, 2021, the Company entered into a securities purchase agreement (the “August 2021 Jefferson SPA”) with Jefferson
Street Capital, LLC (“Jefferson”), pursuant to which the Company issued (i) a
The following are the material terms of the august 2021 Jefferson SPA and August 2021 Jefferson Note:
| ● | The
August 2021 Jefferson Note matures on | |
| ● | At
its election, Jefferson may convert the August 2021 Jefferson Note into the Company’s common stock, subject to the Beneficial
Ownership Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the August 2021 Jefferson Principal Sum at the rate of | |
| ● | The
August 2021 Jefferson Note carries an original issue discount of $ | |
| ● | The August 2021 Jefferson Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the August 2021 Jefferson SPA, the August 2021 Jefferson Commitment Shares underlying and the shares underlying the August 2021 Jefferson Note and August 2021 Jefferson Warrant carry standard registration rights. |
Upon
issuance of the August 2021 Jefferson Note, the Company received net proceeds of $
Upon
the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of
the August 2021 Jefferson Note was reduced from $
| 23 |
During
the three months ended August 31, 2022, Jefferson converted $
On
various dates during the three months ended November 30, 2022, Jefferson converted $
On
various dates during the three months ended February 28, 2023, Jefferson converted $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the August 2021 Jefferson Note was $
August 2021 Lucas Ventures Capital 12% Convertible Note
On
August 31, 2021, the Company entered into a securities purchase agreement (the “August 2021 Lucas SPA”) with Lucas Ventures,
LLC (“Lucas”), pursuant to which the Company issued (i) a
The following are the material terms of the August 2021 Lucas SPA and August 2021 Lucas Note:
| ● | The
August 2021 Lucas Note matures on | |
| ● | At
its election, Lucas may convert the August 2021 Lucas Note into the Company’s common stock, subject to the Beneficial Ownership
Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the August 2021 Lucas Principal Sum at the rate of | |
| ● | The
August 2021 Lucas Note carries an original issue discount of $ | |
| ● | The August 2021 Lucas Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the August 2021 Lucas SPA, the August 2021 Lucas Commitment Shares underlying and the shares underlying the August 2021 Lucas Note and August 2021 Lucas Warrant carry standard registration rights. |
Upon
issuance of the August 2021 Lucas Note, the Company received net proceeds of $
| 24 |
On
March 16, 2022, the Company and Lucas Ventures entered into an Amendment and Waiver Pursuant to Convertible Promissory Note (the “Lucas
Amendment”). Pursuant to the terms of the Lucas Amendment, the parties agreed that the conversion price of the August 2021 Lucas
Note was decreased from $
On
July 13, 2022, the Company and Lucas Ventures entered into an Amendment and Waiver Pursuant to Convertible Promissory Note (the “Second
Lucas Amendment”). Pursuant to the terms of the Second Lucas Amendment, the parties agreed to extend the maturity date of the August
2021 Lucas Note to
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the August 2021 Lucas Note was $
August 2021 LGH Investments, LLC 12% Convertible Promissory Note
On
August 31, 2021, the Company and LGH Investments, LLC, (“LGH”) entered into a securities purchase agreement (the “August
2021 LGH SPA”) pursuant to which the Company issued a
The following are the material terms of the August 2021 LGH SPA and August 2021 LGH Note:
| ● | The
August 2021 LGH Note matures on | |
| ● | At
its election, LGH may convert the August 2021 LGH Note into the Company’s common stock, subject to the Beneficial Ownership
Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the August 2021 LGH Principal Sum at the rate of | |
| ● | The
August 2021 LGH Note carries an original issue discount of $ | |
| ● | The August 2021 LGH Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the August 2021 LGH SPA, the shares underlying the August 2021 LGH Note carry standard registration rights. |
Upon
issuance of the August 2021 LGH Note, the Company received net proceeds of $
As
of March 16, 2022, the Company and LGH entered into an Amendment and Waiver Pursuant to Convertible Promissory Note (the “LGH Amendment”).
Pursuant to the terms of the LGH Amendment, the parties agreed that the conversion price of the August 2021 LGH Note was decreased from
$
On
July 13, 2022, the Company and LGH entered into an Amendment and Waiver Pursuant to Convertible Promissory Note (the “Second LGH
Amendment”). Pursuant to the terms of the Second LGH Amendment, the parties agreed to extend the maturity date of the August 2021
LGH Note to
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the August 2021 LGH Note was $
| 25 |
September 2021 Ionic Ventures, LLC 12% Convertible Promissory Note
On
September 28, 2021, the Company entered into a securities purchase agreement (the “September 2021 Ionic SPA”) with Ionic
Ventures, LLC (“Ionic”), pursuant to which the Company issued (i) a
The following are the material terms of the September 2021 Ionic SPA and September 2021 Ionic Note:
| ● | The
September 2021 Ionic Note matures on | |
| ● | At
its election, Ionic may convert the September 2021 Ionic Note into the Company’s common stock, subject to the Beneficial Ownership
Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the September 2021 Ionic Principal Sum at the rate of | |
| ● | The
September 2021 Ionic Note carries an original issue discount of $ | |
| ● | The September 2021 Ionic Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the September 2021 Ionic SPA, the September 2021 Ionic Commitment Shares underlying and the shares underlying the September 2021 Ionic Note and September 2021 Ionic Warrant carry standard registration rights. |
Upon
issuance of the September 2021 Ionic Note, the Company received net proceeds of $
Upon
the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of
the September 2021 Ionic Note was reduced from $
During
the fiscal year ended May 31, 2022, Ionic converted $
During
the three months ended August 31, 2022, Ionic converted $
Additionally,
during the three months ended August 31, 2022, Ionic converted $
| 26 |
On
various dates during the three months ended November 30, 2022, Ionic converted $
On
various dates during the three months ended February 28, 2023, Ionic converted $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the September 2021 Ionic Note was $
March 2022 FirstFire Global 12% Convertible Promissory Note
On
March 21, 2022, the Company entered into a securities purchase agreement (the “March 2022 FirstFire SPA”) with FirstFire,
pursuant to which the Company issued (i) a
The following are the material terms of the March 2022 FirstFire SPA and March 2022 FirstFire Note:
| ● | The
March 2022 FirstFire Note matures on | |
| ● | At
its election, FirstFire may convert the March 2022 FirstFire Note into the Company’s common stock. subject to the Beneficial
Ownership Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the March 2022 FirstFire Principal Sum at the rate of | |
| ● | The
March 2022 FirstFire Note carries an original issue discount of $ | |
| ● | The March 2022 FirstFire Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the March 2022 FirstFire SPA, the March 2022 FirstFire Commitment Shares and the shares underlying the March 2022 FirstFire Note and March 2022 FirstFire Warrant carry standard registration rights. |
Upon
issuance of the March 2022 FirstFire Note, the Company received net proceeds of $
Upon
the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below,
the conversion price of the March 2022 FirstFire Note was reduced from $
| 27 |
During
the three and nine months ended February 28, 2023, the Company recorded accrued interest expense of $
As
of February 28, 2023, the carrying value of the March 2022 FirstFire Note was $
March 2022 GS Capital Securities 12% Convertible Promissory Note
On
March 21, 2022, the Company entered into a securities purchase agreement (the “March 2022 GS SPA”) with GS, pursuant to which
the Company issued (i) a
The following are the material terms of the March 2022 GS SPA and March 2022 GS Note:
| ● | The
March 2022 GS Note matures on | |
| ● | At
its election, GS may convert the March 2022 GS Note into the Company’s common stock, subject to the Beneficial Ownership Limitations,
at any time at a conversion price equal to $ | |
| ● | The Company agrees to pay interest on the March 2022 GS Principal Sum at the rate of 12% per annum provided that the first six months of interest shall be guaranteed. | |
| ● | The
March 2022 GS Note carries an original issue discount of $ | |
| ● | The March 2022 GS Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the March 2022 GS SPA, the March 2022 GS Commitment Shares and the shares underlying the March 2022 GS Note and March 2022 GS Warrant carry standard registration rights. |
Upon
issuance of the March 2022 GS Note, the Company received net proceeds of $
Upon
the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below,
the conversion price of the March 2022 GS Note was reduced from $
During
the three and nine months ended February 28, 2023, the Company recorded accrued interest expense of $
As
of February 28, 2023, the carrying value of the March 2022 GS Note was $
March 2022 Ionic Ventures 12% Convertible Promissory Note
On
March 21, 2022, the Company entered into a securities purchase agreement (the “March 2022 Ionic SPA”) with Ionic, pursuant
to which the Company issued (i) a
| 28 |
The following are the material terms of the March 2022 Ionic SPA and March 2022 Ionic Note:
| ● | The
March 2022 Ionic Note matures on | |
| ● | At
its election, Ionic may convert the March 2022 Ionic Note into the Company’s common stock, subject to the Beneficial Ownership
Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the March 2022 Ionic Principal Sum at the rate of | |
| ● | The
March 2022 Ionic Note carries an original issue discount of $ | |
| ● | The March 2022 Ionic Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the March 2022 Ionic SPA, the March 2022 Ionic Commitment Shares and the shares underlying the March 2022 Ionic Note and March 2022 Ionic Warrant carry standard registration rights. |
Upon
issuance of the March 2022 Ionic Note, the Company received net proceeds of $
Upon
the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below,
the conversion price of the March 2022 Ionic Note was reduced from $
During
the three and nine months ended February 28, 2023, the Company recorded accrued interest expense of $
As
of February 28, 2023, the carrying value of the March 2022 Ionic Note was $
April 2022 Jefferson Street Capital LLC 12% Convertible Promissory Note
On
April 1, 2022, the Company entered into a securities purchase agreement (the “April 2022 Jefferson SPA”) with Jefferson,
pursuant to which the Company issued (i) a
The following are the material terms of the April 2022 Jefferson SPA and April 2022 Jefferson Note:
| ● | The
April 2022 Jefferson Note matures on | |
| ● | At
its election, Jefferson may convert the April 2022 Jefferson Note into the Company’s common stock, subject to the Beneficial
Ownership Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the April 2022 Jefferson Principal Sum at the rate of | |
| ● | The
April 2022 Jefferson Note carries an original issue discount of $ | |
| ● | The April 2022 Jefferson Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the April 2022 Jefferson SPA, the April 2022 Jefferson Commitment Shares and the shares underlying the April 2022 Jefferson Note and April 2022 Jefferson Warrant carry standard registration rights. |
| 29 |
Upon
issuance of the April 2022 Jefferson Note, the Company received net proceeds of $
Upon
the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below,
the conversion price of the April 2022 Jefferson Note was reduced from $
During
the three and nine months ended February 28, 2023, the Company recorded accrued interest expense of $
As
of February 28, 2023, the carrying value of the April 2022 Jefferson Note was $
July 2022 FirstFire Global 12% Convertible Promissory Note
On
July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 FirstFire SPA”) with FirstFire, pursuant
to which the Company issued (i) a
The following are the material terms of the July 2022 FirstFire SPA and July 2022 FirstFire Note:
| ● | The
July 2022 FirstFire Note matures on | |
| ● | At
its election, FirstFire may convert the July 2022 FirstFire Note into the Company’s common stock, subject to the Beneficial
Ownership Limitations, at any time after 180 days from the date of issuance of the July 2022 FirstFire Note at a conversion price
equal to $ | |
| ● | The
Company agrees to pay interest on the July 2022 FirstFire Principal Sum at the rate of | |
| ● | The
July 2022 FirstFire Note carries an original issue discount of $ | |
| ● | The July 2022 FirstFire Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon
issuance of the July 2022 FirstFire Note, the Company received net proceeds of $
Upon
the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the
conversion price of the July 2022 FirstFire Note was further reduced from $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, 2022, the carrying value of the July 2022 FirstFire Note was $
| 30 |
July 2022 GS Capital Securities 12% Convertible Promissory Note
On
July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 GS SPA”) with GS, pursuant to which
the Company issued (i) a
The following are the material terms of the July 2022 GS SPA and July 2022 GS Note:
| ● | The
July 2022 GS Note matures on | |
| ● | At
its election, GS may convert the July 2022 GS Note into the Company’s common stock, subject to the Beneficial Ownership Limitations,
at any time after 180 days from the date of issuance of the July 2022 GS Note at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the July 2022 GS Principal Sum at the rate of | |
| ● | The
July 2022 GS Note carries an original issue discount of $ | |
| ● | The July 2022 GS Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon
issuance of the July 2022 GS Note, the Company received net proceeds of $
Upon
the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the
conversion price of the July 2022 GS Note was further reduced from $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, 2022, the carrying value of the July 2022 GS Note was $
July 2022 Ionic Ventures, LLC 12% Convertible Promissory Note
On
July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 Ionic SPA”) with Ionic, pursuant
to which the Company issued (i) a
The following are the material terms of the July 2022 Ionic SPA and July 2022 Ionic Note:
| ● | The
July 2022 Ionic Note matures on | |
| ● | At
its election, Ionic may convert the July 2022 Ionic Note into the Company’s common stock, subject to the Beneficial Ownership
Limitations, at any time after 180 days from the date of issuance of the July 2022 Ionic Note at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the July 2022 Ionic Principal Sum at the rate of | |
| ● | The
July 2022 Ionic Note carries an original issue discount of $ | |
| ● | The July 2022 Ionic Note contains the Standard Prepayment Terms and Standard Default Terms. |
| 31 |
Upon
issuance of the July 2022 Ionic Note, the Company received net proceeds of $
Upon
the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the
conversion price of the July 2022 Ionic Note was further reduced from $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, 2022, the carrying value of the July 2022 Ionic Note was $
July 2022 Jefferson Street Capital LLC 12% Convertible Promissory Note
On
July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 Jefferson SPA”) with Jefferson, pursuant
to which the Company issued (i) a
The following are the material terms of the July 2022 Jefferson SPA and July 2022 Jefferson Note:
| ● | The
July 2022 Jefferson Note matures on | |
| ● | At
its election, Jefferson may convert the July 2022 Jefferson Note into the Company’s common stock, subject to the Beneficial
Ownership Limitations, at any time after 180 days from the date of issuance of the July 2022 Jefferson Note at a conversion price
equal to $ | |
| ● | The
Company agrees to pay interest on the July 2022 Jefferson Principal Sum at the rate of | |
| ● | The
July 2022 Jefferson Note carries an original issue discount of $ | |
| ● | The July 2022 Jefferson Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon
issuance of the July 2022 Jefferson Note, the Company received net proceeds of $
Upon
the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the
conversion price of the July 2022 Jefferson Note was further reduced from $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the July 2022 Jefferson Note was $
September 2022 FirstFire Global 12% Convertible Promissory Note
On
September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 FirstFire SPA”) with FirstFire,
pursuant to which the Company issued (i) a
| 32 |
The following are the material terms of the September 2022 FirstFire SPA and September 2022 FirstFire Note:
| ● | The
September 2022 FirstFire Note matures on | |
| ● | At
its election, FirstFire may convert the September 2022 FirstFire Note into the Company’s common stock, subject to the Beneficial
Ownership Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the September 2022 FirstFire Principal Sum at the rate of | |
| ● | The
September 2022 FirstFire Note carries an original issue discount of $ | |
| ● | The September 2022 FirstFire Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon
issuance of the September 2022 FirstFire Note, the Company received net proceeds of $
Upon
the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the September 2022 FirstFire Note
was reduced from $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the September 2022 FirstFire Note was $
September 2022 Ionic Ventures, LLC 12% Convertible Promissory Note
On
September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 Ionic SPA”) with Ionic,
pursuant to which the Company issued (i) a
The following are the material terms of the September 2022 Ionic SPA and September 2022 Ionic Note:
| ● | The
September 2022 Ionic Note matures on | |
| ● | At
its election, Ionic may convert the September 2022 Ionic Note into the Company’s common stock, subject to the Beneficial Ownership
Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the September 2022 Ionic Principal Sum at the rate of | |
| ● | The
September 2022 Ionic Note carries an original issue discount of $ | |
| ● | The September 2022 Ionic Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon
issuance of the September 2022 Ionic Note, the Company received net proceeds of $
| 33 |
Upon
the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the September 2022 Ionic Note was
reduced from $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the September 2022 Ionic Note was $
September 2022 Jefferson Street Capital LLC 12% Convertible Promissory Note
On
September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 Jefferson SPA”) with Jefferson,
pursuant to which the Company issued (i) a
The following are the material terms of the September 2022 Jefferson SPA and September 2022 Jefferson Note:
| ● | The
September 2022 Jefferson Note matures on | |
| ● | At
its election, Jefferson may convert the September 2022 Jefferson Note into the Company’s common stock, subject to the Beneficial
Ownership Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the September 2022 Jefferson Principal Sum at the rate of | |
| ● | The
September 2022 Jefferson Note carries an original issue discount of $ | |
| ● | The September 2022 Jefferson Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the September 2022 Jefferson Note,
the Company received net proceeds of $
Upon
the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the September 2022 Jefferson Note
was reduced from $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the September 2022 Jefferson Note was $
September 2022 GS Capital Securities 12% Convertible Promissory Note
On
September 13, 2022, the Company entered into a securities purchase agreement (the “September 2022 GS SPA”) with GS, pursuant
to which the Company issued (i) a
| 34 |
The following are the material terms of the September 2022 GS SPA and September 2022 GS Note:
| ● | The
September 2022 GS Note matures on | |
| ● | At
its election, GS may convert the September 2022 GS Note into the Company’s common stock, subject to the Beneficial Ownership
Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the September 2022 GS Principal Sum at the rate of | |
| ● | The
September 2022 GS Note carries an original issue discount of $ | |
| ● | The September 2022 GS Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon
issuance of the September 2022 GS Note, the Company received net proceeds of $
Upon
the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the September 2022 GS Note was reduced
from $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the September 2022 GS Note was $
January 2023 FirstFire Global 12% Convertible Promissory Note
On
January 30, 2023, the Company entered into a securities purchase agreement (the “January 2023 FirstFire SPA”) with FirstFire,
pursuant to which the Company issued (i) a
The following are the material terms of the January 2023 FirstFire SPA and January 2023 FirstFire Note:
| ● | The
January 2023 FirstFire Note matures on | |
| ● | At
its election, FirstFire may convert the January 2023 FirstFire Note into the Company’s common stock, subject to the Beneficial
Ownership Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the January 2023 FirstFire Principal Sum at the rate of | |
| ● | The
January 2023 FirstFire Note carries an original issue discount of $ | |
| ● | The January 2023 FirstFire Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon
issuance of the January 2023 FirstFire Note, the Company received net proceeds of $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the January 2023 FirstFire Note was $
| 35 |
January 2023 Ionic Ventures, LLC 12% Convertible Promissory Note
On
January 30, 2023, the Company entered into a securities purchase agreement (the “January 2023 Ionic SPA”) with Ionic, pursuant
to which the Company issued (i) a
The following are the material terms of the January 2023 Ionic SPA and January 2023 Ionic Note:
| ● | The
January 2023 Ionic Note matures on | |
| ● | At
its election, Ionic may convert the January 2023 Ionic Note into the Company’s common stock, subject to the Beneficial Ownership
Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the January 2023 Ionic Principal Sum at the rate of | |
| ● | The
January 2023 Ionic Note carries an original issue discount of $ | |
| ● | The January 2023 Ionic Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon
issuance of the January 2023 Ionic Note, the Company received net proceeds of $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the January 2023 Ionic Note was $
February 2023 Jefferson Street Capital LLC 12% Convertible Promissory Note
On
February 3, 2023, the Company entered into a securities purchase agreement (the “February 2023 Jefferson SPA”) with Jefferson,
pursuant to which the Company issued (i) a
The following are the material terms of the February 2023 Jefferson SPA and February 2023 Jefferson Note:
| ● | The
February 2023 Jefferson Note matures on | |
| ● | At
its election, Jefferson may convert the February 2023 Jefferson Note into the Company’s common stock, subject to the Beneficial
Ownership Limitations, at any time at a conversion price equal to $ | |
| ● | The
Company agrees to pay interest on the February 2023 Jefferson Principal Sum at the rate of | |
| ● | The
February 2023 Jefferson Note carries an original issue discount of $ | |
| ● | The February 2023 Jefferson Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon
issuance of the February 2023 Jefferson Note, the Company received net proceeds of $
During
the three and nine months ended February 28, 2023, the Company recorded interest expense of $
As
of February 28, 2023, the carrying value of the February 2023 Jefferson Note was $
| 36 |
Secured Promissory Notes
On
November 15, 2021, the Company entered into a
Upon
issuance of the Secured Note One and Secured Note One Warrants, the Company allocated the $
During
the three months ended February 28, 2023, the Company did not make any principal payments. For the three months ended February 28, 2023, the company
recognized $
During
the nine months ended February 28, 2023, the Company paid $
As
of February 28, 2023, the carrying value of Secured Note One is $
On
November 18, 2021, the Company entered into a
Upon
issuance of the Secured Note Two and Secured Note Two Warrants, the Company allocated the $
During
the three months ended February 28, 2023, the Company did not make any principal payments on Secured Note Two. For the three months ended February
28, 2023, the company recognized $
For
the nine months ended February 28, 2023, the company recognized $
As
of February 28, 2023, the carrying value of Secured Two Note is $
Related Party Note Payable
On
December 10, 2021, the Company entered into a loan agreement with Jed Kaplan, the Company’s former Chairman of the Board, that
has a principal amount of $
| 37 |
On
June 10, 2022, the loan and accrued interest of $
During
the three ended February 28, 2023, and 2022, the Company recognized interest expense of $
Other Short Term Note Payable
During
2020, the Company received loan proceeds in the amount of $
NOTE 9 — STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue shares of preferred stock with a par value of $ per share. As of February 28, 2023, there was share of preferred stock issued or outstanding. As of May 31, 2022, there were shares of preferred stock issued and outstanding.
On August 23, 2022, the Company filed with the Delaware Secretary of State a certificate of designations (the “Certificate of Designations”) to designate one share of the Company’s preferred stock as the Series X Convertible Preferred Stock (“Series X Preferred”). The one share of Series X Preferred has a number of votes equal to all of the other votes entitled to be cast on any matter by any other shares or securities of the Company, plus one. The Series X Preferred does not have any economic or other interest in the Company. The share of Series X Preferred may not be transferred after issuance. If any transfer is attempted, the Series X Preferred will be automatically redeemed by the Company at a redemption price of $.
On
August 29, 2022, the Company issued and sold to Roman Franklin, the Company’s Chief Executive Officer, principal financial officer,
principal accounting officer, member of the Company’s Board of Directors, and greater than 5% stockholder, one share of the Company’s
Series X Preferred for a purchase price of $
At the election of the Series X Preferred holder at any time following the date that the Company has amended its articles of incorporation to increase the authorized shares of common stock such that there are sufficient authorized but unissued shares of common stock to permit conversion of the Series X Preferred as set forth in the Certificate of Designations, the Series X Preferred is convertible into shares of the Company’s common stock.
Upon
issuance of the Series X Preferred, the Company estimated the fair market value of the Series X Preferred to be $
Common Stock
As of February 28, 2023, the Company is authorized to issue shares of Common Stock with a par value of $ per share. Holders of the shares of the Common Stock are entitled to one vote for each share.
On September 1, 2022, the Board and stockholders holding a majority of the voting power of the issued and outstanding capital stock of the Company, including the Series X Preferred, approved an amendment (the “Amendment”) to the Company’s third amended and restated certificate of incorporation, as amended (the “Certificate of Incorporation”) increasing the number of our authorized shares of Common Stock from to .
On December 16, 2022, the Company filed a definitive information statement on Schedule 14C relating to the Amendment. The exact timing of the authorized share increase will be determined by the Company’s Board based on its evaluation as to when such action will be the most advantageous to the Company and its stockholders, and the effective date will be publicly announced. In no event will the authorized share increase be effective sooner than 20 days after the Company mails the definitive information statement on Schedule 14C and accompanying notice to the Company’s stockholders. The Board retains the authority to abandon the increase in authorized shares for any reason at any time prior to the effective date of the increase in authorized shares.
| 38 |
On January 20, 2023, the Company filed the Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the State of Delaware to increase the Company’s authorized shares of Common Stock from to . Accordingly, following the filing of the Amendment, the Company has authorized shares of Common Stock and shares of preferred stock, par value $ per share.
As of February 28, 2023, and May 31, 2022, there were and shares of Common Stock issued and outstanding, respectively. During the nine months ended February 28, 2023, the Company issued shares of its Common Stock as follows:
Issuances Related to Officers, Directors, and Third-Party Vendors:
| ● | On
June 1, 2022, the Company issued shares of its Common Stock, valued at $ per share, as consideration for $ | |
| ● | On
June 24, 2022, the Company issued shares of its Common Stock, valued at $ per share, as compensation to officers and directors
of the Company and recognized a gain on issuance of shares of $ | |
| ● | On
June 24, 2022, the Company issued shares of its Common Stock, valued at $ per share, as compensation to officers and directors
of the Company and recognized a gain on issuance of shares of $ | |
| ● | On
June 30, 2022, the Company issued shares of its Common Stock, valued at $ per share, as consideration for $ | |
| ● | On
August 4, 2022, the Company issued shares of its Common Stock, valued at $ per share, as consideration for $ | |
| ● | On
August 30, 2022, the Company issued shares of its Common Stock, valued at $ per share, as consideration for $ | |
| ● | On
September 29, 2022, the Company issued shares of its Common Stock, valued at $ per share, as consideration for $ | |
| ● | On
November 10, 2022, the Company issued shares of its Common Stock, valued at $ per share, as consideration for $ |
Issuances Related to Conversions of March 2021 FirstFire Note:
| ● | On
July 27, 2022, the Company issued shares of its Common Stock, valued at $, to FirstFire upon conversion of $ | |
| ● | On
September 29, 2022, the Company issued shares of its Common Stock, valued at $, to FirstFire upon conversion of $ | |
| ● | On
October 3, 2022, the Company issued shares of its Common Stock, valued at $, to FirstFire upon conversion of $ | |
| ● | On
October 6, 2022, the Company issued shares of its Common Stock, valued at $, to FirstFire upon conversion of $ | |
| ● | On
November 10, 2022, the Company issued shares of its Common Stock, valued at $, to FirstFire upon conversion of $ |
| 39 |
| ● | On
December 5, 2022, the Company issued shares of its Common Stock, valued at $, to FirstFire upon conversion of $ | |
| ● | On
December 6, 2022, the Company issued shares of its Common Stock, valued at $, to FirstFire upon conversion of $ | |
| ● | On
December 13, 2022, the Company issued shares of its Common Stock, valued at $, to FirstFire upon conversion of $ | |
| ● | On
December 15, 2022, the Company issued shares of its Common Stock, valued at $, to FirstFire upon conversion of $ | |
| ● | On
December 20, 2022, the Company issued shares of its Common Stock, valued at $, to FirstFire upon conversion of $ | |
| ● | On
January 3, 2023, the Company issued shares of its Common Stock, valued at $, to FirstFire upon conversion of $ |
Issuances Related to Conversions of June 2021 GS Note:
| ● | On
July 18, 2022, the Company issued shares of its Common Stock, valued at $, to GS upon conversion of $ |
Issuances Related to Conversions of August 2021 Jefferson Note:
| ● | On
August 23, 2022, the Company issued shares of its Common Stock, valued at $, to Jefferson upon conversion of $ | |
| ● | On
September 29, 2022, the Company issued shares of its Common Stock, valued at $, to Jefferson upon conversion of $ | |
| ● | On
October 9, 2022, the Company issued shares of its Common Stock, valued at $, to Jefferson upon conversion of $ | |
| ● | On
October 11, 2022, the Company issued shares of its Common Stock, valued at $, to Jefferson upon conversion of $ |
| 40 |
| ● | On
December 1, 2022, the Company issued shares of its Common Stock, valued at $, to Jefferson upon conversion of $ | |
| ● | On
December 5, 2022, the Company issued shares of its Common Stock, valued at $, to Jefferson upon conversion of $ | |
| ● | On
December 7, 2022, the Company issued shares of its Common Stock, valued at $, to Jefferson upon conversion of $ | |
| ● | On
December 12, 2022, the Company issued shares of its Common Stock, valued at $, to Jefferson upon conversion of $ | |
| ● | On
December 21, 2022, the Company issued shares of its Common Stock, valued at $, to Jefferson upon conversion of $ | |
| ● | On
January 24, 2023, the Company issued shares of its Common Stock, valued at $, to Jefferson upon conversion of $ |
Issuances Related to Conversions of September 2021 Ionic Note:
| ● | On
July 28, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
September 2, 2022, the Company completed the issuance of shares of its Common Stock to Ionic related to the conversion of
$ | |
| ● | On
September 10, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
September 27, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
September 29, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
September 30, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
October 3, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
October 5, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
October 6, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
October 7, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ |
| 41 |
| ● | On
October 24, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
November 7, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
November 10, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
November 11, 2022, the Company issued shares of its common stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
November 17, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
December 1, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
December 12, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
December 15, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
December 19, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
December 23, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
December 28, 2022, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ | |
| ● | On
January 4, 2023, the Company issued shares of its Common Stock, valued at $, to Ionic upon conversion of $ |
Warrants
As of February 28, 2023, the Company has issued and outstanding warrants to purchase shares of its Common Stock as follows:
| Number of | ||||||||||||||||
| Issue | Warrants | Vesting | Termination | Exercise | ||||||||||||
| Date | Outstanding | Date | Date | Price | ||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| $ | ||||||||||||||||
| 42 |
During
the three and nine months ended February 28, 2023, the Company issued and warrants, respectively, to acquire shares of
Common Stock to accredited investors in association with issued debt instruments (See Note 8 – Debt). Upon issuance, the fair value
of these warrants was estimated at the date of issuance using the Black-Scholes option-pricing model with the following assumptions:
(i) exercise price of $
During the three and nine months ended February 28, 2022, the Company issued to accredited investors in association with issued, amended, or extinguished debt instruments and warrants to acquire shares of Common Stock, respectively.
During
the three and nine months ended February 28, 2022, the Company sold and warrants, respectively, to an accredited investor.
The warrants were sold for an aggregate purchase price of $
Stock-Based Compensation
The Company did not grant any options to purchase its common shares during the nine months ended February 28, 2023. During the nine months ended February 28, 2022, the Company granted options to purchase shares of its Common Stock to an officer and former officer of the company.
| Number of Shares | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Life (in years) | ||||||||||
| Balance at May 31, 2022 | ||||||||||||
| Options exercised | - | |||||||||||
| Options granted | - | |||||||||||
| Options expired | - | |||||||||||
| Options forfeited | ( | ) | ||||||||||
| Outstanding at February 28, 2023 | ||||||||||||
| Exercisable at February 28, 2023 | ||||||||||||
Stock based compensation expense related to options for the three months ended February 28, 2023, and 2022, amounted to $ and $, respectively. Stock based compensation expense related to options for the nine months ended February 28, 2023, and 2022, amounted to $ and $, respectively. Unrecognized compensation expense related to outstanding options amounted to $ and $ as of February 28, 2023, and 2022, respectively.
NOTE 10 — DERIVATIVE LIABILITY
Upon
the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described above, the
conversion price of certain equity-linked instruments decreased to $
| 43 |
For the convertible promissory notes, the Company assessed whether, at inception, the convertible promissory note contained a debt discount equal to or less than the original principal value of the instrument. In such cases where the original debt discount was less than the original principal value of the note, the Company recorded a new debt discount that is to be accreted over the remaining term of the note. The difference between the value of the derivative liability as described above and the debt discount, if any, is recorded to additional paid in capital.
During any reporting period, any conversions of convertible promissory notes into shares of Common Stock or other issuances of Common Stock are assessed for treatment under the Sequencing Policy.
At the end of the reporting period, the fair market value of the derivative liability is remeasured utilizing the Black-Scholes option-pricing model with then-current inputs. Any resulting variances in the derivative liability are recorded as a gain or loss on the measurement of the liability in the income statement.
During
the three months ended November 30, 2022, the Company recorded the initial derivative liability on shares of Common Stock
underlying certain warrant and convertible promissory notes by first analyzing the fair value of the derivative liability shares utilizing
the Black-Scholes option-pricing model with the following assumptions: (i) conversion price of the applicable instrument; (ii) expected
dividend yield of
During the three months ended November 30, 2022, after the recording of the initial derivative liability, the Company recorded an additional derivative liability on an additional shares of Common Stock at the then current inputs to the Black-Scholes option-pricing model.
During
the three months ended November 30, 2022, the Company recorded an initial aggregate derivative liability of $
On
January 20, 2023, the Company filed the Amendment to its Certificate of Incorporation, as amended, with the Secretary of State of the
State of Delaware to increase the Company’s authorized shares of Common Stock from to thereby reducing the
number of shares of Common Stock on which a derivative liability was required. Upon the issuance of the January 2023 FirstFire Note and
January 2023 Ionic Note, the conversion price of certain equity-linked instruments was reduced from $
During
the three months ended February 28, 2023, the number of shares on which a derivative liability was required was reduced from
shares of Common Stock to with resulting in adjustments during the period of a decrease in the derivative liability of $
During
the three and nine months ended February 28, 2023, the Company recorded $
| 44 |
The table below presents the derivative liability balances as of February 28, 2023, and May 31, 2022:
| Derivative Liability | ||||
| Balance at May 31, 2022 | $ | |||
| Initial derivative liability recorded in additional paid in capital | ||||
| Derivative liability recorded as debt discount | ||||
| Gain on change in fair value of derivative liability | ( | ) | ||
| Balance at November 30, 2022 | $ | |||
| Adjustments to derivative liability recorded in additional paid in capital due to sequencing | ( | ) | ||
| Loss on change in fair value of derivative liability | ||||
| Balance at February 28, 2023 | $ | |||
NOTE 11 — SUBSEQUENT EVENTS
Conversion of Convertible Promissory Notes
Subsequent
to the reporting period, the holders of $
Diverted River Exchange Agreement
On
September 28, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”), dated as of September 28,
2022, by and among the Company, Diverted River Technology, LLC (“Diverted River”), the member(s) of Diverted River from time
to time (the “Members”) and Zachary Johnson, as the Members’ representative. Pursuant to the terms of the Exchange
Agreement, the Company agreed to acquire from the Members
Following the Closing, Diverted River will become a wholly owned subsidiary of the Company. Also following the Closing, it is expected that the Company’s name will be changed to Diverted River Technology, Inc., and the business of the Company will become that of Diverted River, an ETO focused on a sustainable, high margin, recurring revenue business model that requires limited capital expenditures.
At the Closing, the Company will expand the size of the Company’s Board of Directors (the “Board”) by three persons, to a total of seven persons, and will name Mr. Johnson and, within 90 days after Closing, two other persons, as directors on the Board, one of whom will be an independent director. Also at the Closing, the Company will name Mr. Johnson as Chief Executive Officer of the Company. Within 90 days of Closing, the Board will name a Chief Technology Officer, subject to Mr. Johnson’s approval. At the Closing, the Company will also enter into employment agreements with Mr. Johnson and certain other Diverted River employees as identified and agreed by the parties. Within 90 days of Closing, the Company will hire Velocity 42 Limited as its primary software developer.
The
Exchange Agreement contains certain covenants, representations and warranties customary for an agreement of this type. In addition, the
Closing is subject to the satisfaction or waiver of certain conditions, including, but not limited to, (i) the increase by the Company
of its authorized shares of common stock to shares; (ii) execution by Diverted River of agreements with clients generating
at least $
| 45 |
The parties may terminate the Exchange Agreement pursuant to the terms of the Exchange Agreement, including, but not limited to, if the conditions to Closing have not been satisfied or waived by December 15, 2022.
On December 15, 2022, the parties entered into Amendment No. 1 to Exchange Agreement (“Amendment No. 1”). Pursuant to the terms of Amendment No. 1, the termination date was amended to be February 1, 2023. Except as set forth in Amendment No. 1, the Exchange Agreement remains in full force and effect.
On March 10, 2023, the parties to the Exchange Agreement entered into Amendment No. 2 to Exchange Agreement (“Amendment No. 2”). Amendment No. 2 was executed on March 10, 2023 and placed in escrow. Amendment No. 2 was released from escrow on March 28, 2023.
Pursuant
to the terms of Amendment No. 2, the termination date was amended to be July 14, 2023. In addition, pursuant to the terms of Amendment
No. 2, the Company agreed to acquire from the Members
Except as set forth in Amendment No. 2, the Exchange Agreement, as amended, remains in full force and effect.
As of the date of the filing of this Quarterly Report on Form 10-Q, the Exchange Agreement, as amended, has not been terminated.
March 2023 Ionic SPA & 12% Convertible Note
On
March 8, 2023, the Company entered into a securities purchase agreement (the “March 2023 Ionic SPA”), dated as of March 8,
2023, with Ionic, pursuant to which the Company issued a
Pursuant
to the terms of the March 2023 Ionic Note, the Company agreed to pay to Ionic $
| 46 |
The
Company may prepay the March 2023 Ionic Note in accordance with the terms of the March 2023 Ionic Note, with the understanding that $
Upon
the occurrence of any Event of Default (as defined in the March 2023 Ionic Note), which has not been cured within the time prescribed
in the respective March 2023 Ionic Note, the March Ionic 2023 Note shall become immediately due and payable and the Company shall pay
to the holder thereof, in full satisfaction of its obligations thereunder, an amount equal to the principal amount then outstanding plus
accrued interest multiplied by
March 2023 FirstFire SPA & 12% Convertible Note
On
March 8, 2023, the Company entered into a securities purchase agreement (the “March 2023 FirstFire SPA”), dated as of March
8, 2023, with FirstFire, pursuant to which the Company issued a
Pursuant
to the terms of the March 2023 FirstFire Note, the Company agreed to pay to FirstFire $
The
Company may prepay the March 2023 FirstFire Note in accordance with the terms of the March 2023 FirstFire Note, with the understanding
that $
Upon
the occurrence of any Event of Default (as defined in the March 2023 FirstFire Note), which has not been cured within the time prescribed
in the respective March 2023 FirstFire Note, the March FirstFire 2023 Note shall become immediately due and payable and the Company shall
pay to the holder thereof, in full satisfaction of its obligations thereunder, an amount equal to the principal amount then outstanding
plus accrued interest multiplied by
Letter Agreement with Ionic, FirstFire, Jefferson, Labrys, GS and Lucas
On
March 21, 2023, the Company, Ionic Ventures, LLC (“Ionic”), FirstFire Global Opportunities Fund (“FirstFire”),
Jefferson Street Capital (“Jefferson”), Labrys Fund (“Labrys”), GS Capital Partners (“GS”), and Lucas
Ventures & LGH Investments (“Lucas” and collectively with Ionic, FirstFire, Jefferson, Labrys and GS, the “Noteholders”)
entered into a letter agreement (the “Letter Agreement”) pursuant to which the Noteholders agreed to convert their Notes
into a number of shares of the Company’s common stock equal to
| Noteholder | Origination | Principal and (In Dollars) | ||||||
| FirstFire | ||||||||
| FirstFire | ||||||||
| FirstFire | ||||||||
| FirstFire | ||||||||
| GS | ||||||||
| GS | ||||||||
| GS | ||||||||
| GS | ||||||||
| Ionic | ||||||||
| Ionic | ||||||||
| Ionic | ||||||||
| Jefferson | ||||||||
| Jefferson | ||||||||
| Jefferson | ||||||||
| Labrys | ||||||||
| LGH | ||||||||
| Lucas | ||||||||
| 47 |
The following promissory notes are expressly omitted from the definition of Notes:
| Noteholder | Origination | Principal and Interest Balance (In Dollars) | ||||
| FirstFire | ||||||
| FirstFire | ||||||
| FirstFire | ||||||
| Ionic | ||||||
| Ionic | ||||||
| Ionic | ||||||
| Jefferson | ||||||
| Jefferson | ||||||
Notwithstanding the terms of the Letter Agreement, the Noteholders are entitled to continue conversions from March 21, 2023 until the Closing. Any conversions that occur in accordance with the Letter Agreement will reduce the number of shares of common stock that would be issued to each Noteholder upon conversion of each of its respective Notes equal to the ratio multiplied by the Equity Percentage Shares.
April 2023 SPA, Ionic Secured Convertible Note & FirstFire Secured Convertible Note
On
April 17, 2023, the Company entered into a securities purchase agreement (the “April 2023 SPA”), dated as of April 17, 2023,
with Ionic and FirstFire, pursuant to which the Company issued (i) a
| ● | Convertible
Promissory Note by and between the Company, as borrower, and Ionic, as holder, in the principal
sum of $ | |
| ● | Convertible
Promissory Note by and between the Company, as borrower, and Ionic, as holder, in the principal
sum of $ | |
| ● | Convertible
Promissory Note by and between the Company, as borrower, and Ionic, as holder, in the principal
sum of $ | |
| ● | Convertible
Promissory Note by and between the Company, as borrower, and Ionic, as holder, in the principal
sum of $ | |
| ● | Convertible
Promissory Note by and between the Company, as borrower, and FirstFire, as holder, in the
principal sum of $ | |
| ● | Convertible
Promissory Note by and between the Company, as borrower, and FirstFire, as holder, in the
principal sum of $ | |
| ● | Convertible
Promissory Note by and between the Company, as borrower, and FirstFire, as holder, in the
principal sum of $ | |
| ● | Convertible
Promissory Note by and between the Company, as borrower, and FirstFire, as holder, in the
principal sum of $ |
with
each of Ionic and FirstFire receiving
Pursuant
to the terms of the April 2023 Ionic Note, the Company agreed to pay to Ionic $
Pursuant
to the terms of the April 2023 FirstFire Note, the Company agreed to pay to FirstFire $
The obligations of the Company under each of the April 2023 Notes are secured by security interest in certain property of the Company, namely the ERC Rebate.
The
Company may prepay either or both of the April 2023 Notes in accordance with the terms of the respective April 2023 Notes, with the understanding
that $
Upon
the occurrence of any Event of Default (as defined in each of the April 2023 Notes), which has not been cured within the time prescribed
in the respective April 2023 Notes, the respective April 2023 Note shall become immediately due and payable and the Company shall pay
to the holder thereof, in full satisfaction of its obligations thereunder, an amount equal to the principal amount then outstanding plus
accrued interest multiplied by
| 48 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References in this report (the “Quarterly Report”) to “we,” “us” or the “Company” refer to Simplicity Esports and Gaming Company and its consolidated subsidiaries. The following discussion should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in this Quarterly Report and with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”).
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes “forward-looking statements” 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 section of the Company’s Annual Report on Form 10-K for the fiscal year ended May 31, 2022, 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
We are an esports organization that is capitalizing on the growth in esports. During the first quarter of the fiscal year ending May 31, 2023, in an effort to focus on business operations that were currently profitable, the Company sold its League of Legends franchise asset, and exited business operations in Brazil. Accordingly, we now have only one business unit: PLAYlive Nation, Inc. (“PLAYlive”). Funding the Brazilian business operations created a monthly cash burn of approximately $45,000. The Company sold the franchise asset to Brazilian esports organization Los Grandes for total consideration of 1,920,000 Brazilian Reais (approximately $392,000 as of June 10, 2022, the closing date of the sale) to be paid in five equal quarterly installments.
Our Gaming Centers
As of February 28, 2023, and April 13, 2023, our operations consisted of five and five locations, respectively, throughout the U.S., giving casual gamers the opportunity to play in a social setting with other members of the gaming community, with no corporate owned locations as of February 28, 2023. Management is exploring strategic alternatives, including merger and acquisition opportunities, and is focused on high margin, lower capital expenditure business strategies in the esports gaming industry, specifically focused on software development and software as a service for the family entertainment industry.
| 49 |
Corporate Gaming Centers
As of February 28, 2023, all Company-owned stores have been sold or closed. Management is exploring strategic alternatives, including merger and acquisition opportunities, and is focused on high margin, lower capital expenditure business strategies in the esports gaming industry, specifically focused on software development and software as a service for the family entertainment industry.
Franchised Gaming Centers
As of February 28, 2023, and April 13, 2023, we had five and five franchised locations, respectively. Due to interest from potential franchisees, in 2019 we launched a franchising program to accelerate the expansion of our planned nationwide footprint. We currently operate five fully constructed franchise esports gaming centers. Franchise revenue is generated from a gross sales royalty fee and a national marketing fee. Historically, franchise revenue was also generated from the sale of franchise territories, supplying furniture, equipment and merchandise to the franchisees for buildout of their centers.
COVID-19
As a result of COVID-19, all of our corporate and franchised Simplicity Esports Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Esports Gaming Centers on May 1, 2020, and subsequently reopened the majority of our Simplicity Gaming Centers. Subsequently, the Company closed all of its corporate owned esports gaming center locations. As of February 28, 2023, our operations consisted of five franchisee owned locations. Although our franchise agreements with franchisees of Simplicity Esports Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised Simplicity Esports Gaming Centers are operating, a limited number of the franchisees of Simplicity Esports Gaming Centers have defaulted on their obligations to pay their minimum monthly royalty payment to us. This has resulted 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. As of February 28, 2023, we recorded an allowance for doubtful accounts of approximately $71,708 and have written off $29,829, partly in conjunction with taking back certain franchises, converting them to Company owned stores, and ultimately closing such store. Notwithstanding our efforts to support franchisees and still collect on receivables, it is unclear exactly how much of the increase in accounts receivables is attributable to the impact of COVID-19. Beginning in July 2020, we have waived the minimum monthly royalty payment obligations and are instead billing the franchisees a true-up of 6% of gross sales without a minimum. We continue to assess possible similar accommodations to the franchisees in light of the impact of COVID-19.
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.
| 50 |
The measures taken to date adversely impacted the Company’s business during the quarter ended February 28, 2023 and will potentially continue to impact the Company’s business. Management observes that all franchise gaming center locations continue to be impacted by reduced foot traffic that began as a result of COVID-19 lockdowns and has continued as consumer habits have changed.
Our Financial Position
For the three months ended February 28, 2023, and 2022, we generated revenues of $144,633 and $888,551, respectively, and reported net loss attributable to common shareholders of $775,456 and $1,954,652, respectively.
For the nine months ended February 28, 2023, and 2022, we generated revenues of $664,063, and $2,637,166, respectively, reported net income (loss) attributable to common shareholders of $619,145 and $(8,294,856), respectively, and had cash flow used in operating activities of $683,888 and $2,477,014, respectively. As of February 28, 2023, we had an accumulated deficit of $29,219,299.
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
The following table summarizes our operating results for the three and nine months ended February 28, 2023 and 2022:
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| February 28, | February 28, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Franchise revenue, fees and other | $ | 137,390 | $ | 114,317 | $ | 208,345 | $ | 273,628 | ||||||||
| Company-owned stores sales | 2,518 | 702,531 | 446,354 | 2,057,764 | ||||||||||||
| Esports revenue | 4,725 | 71,663 | 9,364 | 305,774 | ||||||||||||
| Total Revenues | 144,633 | 888,511 | 664,063 | 2,637,166 | ||||||||||||
| Less: Cost of Goods Sold | (46,151 | ) | (536,603 | ) | (214,047 | ) | (1,629,119 | ) | ||||||||
| Gross Margin | 98,482 | 351,908 | 450,016 | 1,008,047 | ||||||||||||
| Operating Expenses | 303,423 | 1,364,230 | 5,166,194 | 4,968,140 | ||||||||||||
| Other (Expense) Income | (574,267 | ) | (1,003,135 | ) | 5,397,357 | (4,486,834 | ) | |||||||||
| Net Loss (Income) attributable to non-controlling interest | $ | 3,752 | $ | 60,805 | $ | (62,034 | ) | $ | 152,071 | |||||||
| Net (Loss) Income attributable to common shareholders | $ | (775,456 | ) | $ | 1,954,652 | $ | 619,145 | $ | (8,294,856 | ) | ||||||
Summary of Statement of Operations for the Three and Nine Months Ended February 28, 2023 and 2022:
Revenue
For the three months ended February 28, 2023, our revenues decreased by $743,878, as compared to the three months ended February 28, 2022. For the nine months ended February 28, 2023, our revenues decreased by $1,973,103, as compared to the nine months ended February 28, 2022. These decreases were primarily due to the decrease in both the number of company-owned stores and franchised locations.
| 51 |
Cost of Goods Sold
Cost of goods sold for the three months ended February 28, 2023, and 2022 was $46,151 and $536,603, respectively, representing a decrease of $490,452 primarily due to decreased revenues. Cost of goods sold for the nine months ended February 28, 2023, and 2022 was $214,047 and $1,629,119, respectively, representing a decrease of $1,415,072 primarily due to decreased revenues.
Operating Expenses
Compensation and related benefits
Compensation and related benefits consist of salaries and stock-based compensation, health benefits and related payroll taxes. Compensation and related benefits for the three months ended February 28, 2023, and 2022 was $86,925 and $777,992, respectively, representing a decrease of $691,067. Compensation and related benefits for the nine months ended February 28, 2023, and 2022 was $880,465 and $2,927,004, respectively, representing a decrease of $2,046,539. The decrease is primarily due to the decrease in the number of employees and lower stock-based compensation expense.
Professional fees
Professional fees consist of costs for audits, accountants, attorneys, consultants and the costs for other experts. Professional fees for the three months ended February 28, 2023, and 2022 was $63,147 and $54,889, respectively, representing an increase of $8,258. The increase in expenses is primarily due to increased accounting and public company fees. Professional fees for the nine months ended February 28, 2023, and 2022 was $339,903 and $633,965, respectively, representing a decrease of $294,062. The decrease is primarily due to the decrease in legal expenses related to the issuance of debt instruments during the prior period.
General and Administrative Expenses
General and administrative expenses for the three months ended February 28, 2023, was $153,351 as compared to $531,549 for the three months ended February 28, 2022, representing a decrease of $377,998. General and administrative expenses for the nine months ended February 28, 2023, was $687,105 as compared to $1,407,171 for the nine months ended February 28, 2022, representing a decrease of $720,066. The decrease is primarily due to the decrease in the number of company-owned stores and the associated expenses (rent, utilities, computer expenses, insurance) to maintain the stores.
Loss from Operations
For the three months ended February 28, 2023, loss from operations amounted to $204,941 as compared to $1,012,322 for the three months ended February 28, 2022, representing a decrease of $807,381. For the nine months ended February 28, 2023, loss from operations amounted to $4,716,178 as compared to $3,960,093 for the nine months ended February 28, 2022, representing an increase of $756,085.
Other (Expense) Income
For the three months ended February 28, 2023, other loss amounted to $574,267 as compared to other loss of $1,003,135 for the three months ended February 28, 2022, representing an increase of $428,868. The increase in other income and expenses was primarily attributable to the recognition of a change in the fair value of the derivative liability of $96,971, without comparable activity in the prior period, interest expense of $476,140 during the three months ended February 28, 2023, compared to $1,003,137 during the prior period.
For the nine months ended February 28, 2023, other income amounted to $5,397,357 as compared to other expense of $4,486,834 for the nine months ended February 28, 2022, representing an increase of $9,884,191. The increase in other income and expenses was primarily attributable to the recognition of a change in the fair value of the derivative liability of $7,292,849 and a gain on the disposition of certain assets of $395,272, both without comparable activity in the prior period. These were offset by a loss on the extinguishment of debt of $276,655 during the nine months ended February 28, 2023 compared to $1,730,801 in the prior period as well as interest expense of $2,043,971 during the nine months ended February 28, 2023, compared to $2,808,627 during the prior period.
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Net (Loss) Income
Net loss for the three months ended February 28, 2023, was $775,456 as compared to a net loss of $1,954,652 for the three months ended February 28, 2022, representing an improvement of $1,179,196. Net income for the nine months ended February 28, 2023, was $619,145 as compared to a net loss of $8,294,856 for the nine months ended February 28, 2022, representing an improvement of $8,914,001.
Liquidity and Capital Resources
As of February 28, 2023, we had cash of $29,066, which is available for use by us to cover the Company’s costs. In addition, as of February 28, 2023, we had accrued expenses of $1,804,788.
For the nine months ended February 28, 2023, cash used in operating activities amounted to $683,888 primarily resulting from a net income of $681,179; non cash interest expense of $1,934,275 , representing a decrease of $678,523 over the prior period; impairment losses of $3,258,721 with no comparable activity in the prior period; a loss on the extinguishment of debt of $276,655, representing a decrease of $1,494,646 from the prior period; and stock-based compensation expense of $165,179, representing a decrease of $1,241,996 from the prior period. These adjustments were offset by a change in the fair value of the derivative liability of $7,292,849 with no comparable activity in the prior period and a $395,272 gain on the disposition of certain assets, with no comparable activity in the prior period. Changes in our operating liabilities and assets provided cash of $663,718.
We will need to raise additional funds in order to meet the expenditures required for operating our business.
Going Concern
The Company’s unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the unaudited consolidated financial statements, as of February 28, 2023, the Company had an accumulated deficit of $29,219,299, a working capital deficit of $9,194,793, net loss attributable to the common shareholders of $775,456 for the three months ended February 28, 2023, and net income attributable to common shareholders of $619,145 for the nine months ended February 28, 2023. 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 an operational business and generates 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 private and/or public offerings. 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 unaudited 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.
As a result of COVID-19, all of our corporate and franchised Simplicity Esports Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Esports Gaming Centers on May 1, 2020, and subsequently reopened a majority of our Simplicity Gaming Centers. Subsequently, the Company closed all of its corporate-owned esports gaming center locations. As of February 28, 2023, our operations consisted of five franchisee owned locations. Although our franchise agreements with franchisees of Simplicity Esports Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised Simplicity Esports Gaming Centers are operating, a limited number of the franchisees of Simplicity Esports Gaming Centers have defaulted on their obligations to pay their minimum monthly royalty payment to us. Beginning in July 2020, we have waived the minimum monthly royalty payment obligations and are instead billing the franchisees a true-up of 6% of gross sales without a minimum. We continue to assess possible similar accommodations to the franchisees in light of the impact of COVID-19. The franchisees’ defaults have resulted 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. As of February 28, 2023, we recorded an allowance for doubtful accounts of approximately $71,708 and have written off $29,829, partly in conjunction with taking back certain franchises, converting them to Company owned stores, and ultimately closing such stores. Notwithstanding our efforts to support franchisees and still collect on receivables, it is unclear exactly how much of the increase in accounts receivables is attributable to the impact of COVID-19.
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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 adversely impacted the Company’s business during the quarter ended February 28, 2023, and will potentially continue to impact the Company’s business. Management observes that all franchise gaming centers continue to be impacted by reduced foot traffic that began as a result of COVID-19 lockdowns and has continued as consumer habits have changed.
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.
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.
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Debt Obligations
| Convertible Promissory Notes | Secured Promissory Notes | Related Party Debt | Short-Term Note Payable | |||||||||||||
| Principal Balance as of May 31, 2022 | $ | 5,361,347 | $ | 206,772 | $ | 247,818 | $ | 41,735 | ||||||||
| Carrying Value as of May 31, 2022 | 3,093,395 | 69,636 | 247,818 | 41,735 | ||||||||||||
| Principal | ||||||||||||||||
| Borrowings | 386,100 | - | - | - | ||||||||||||
| Repayments | - | (6,922 | ) | (247,818 | ) | - | ||||||||||
| Conversions | (443,600 | ) | - | - | - | |||||||||||
| Totals | $ | (57,500 | ) | $ | (6,922 | ) | $ | (247,818 | ) | $ | - | |||||
| Unamortized Debt Issuance Costs, Beneficial Conversion Feature, and Warrant Discount | ||||||||||||||||
| Beginning Balance | $ | (2,267,952 | ) | $ | (137,136 | ) | $ | - | $ | - | ||||||
| Additions | (532,169 | ) | - | - | - | |||||||||||
| Accretion | 2,011,464 | 20,717 | - | - | ||||||||||||
| Ending Balance | $ | (788,657 | ) | $ | (116,419 | ) | $ | - | $ | - | ||||||
| Principal Balance as of February 28, 2023 | $ | 5,303,847 | $ | 199,850 | $ | - | $ | 41,735 | ||||||||
| Carrying Value as of February 28, 2023 | 4,515,190 | 83,431 | - | 41,735 | ||||||||||||
| Less Short-Term Portion | 4,515,190 | - | - | 41,735 | ||||||||||||
| Long Term Portion | $ | - | $ | 83,431 | $ | - | $ | - | ||||||||
Scheduled principal maturities of the Company’s outstanding debt over the next five fiscal years are as follows:
| Fiscal year ending May 31, | ||||
| 2023 | $ | 1,230,009 | ||
| 2024 | 4,164,971 | |||
| 2025 | 44,193 | |||
| 2026 | 48,820 | |||
| 2027 | 57,440 | |||
| Thereafter | - | |||
| $ | 5,545,432 | |||
Convertible Promissory Notes
February 19, 2021 Labrys 12% Convertible Promissory Note
On February 19, 2021, the Company entered into a securities purchase agreement (the “Labrys SPA”) with Labrys Fund LP (“Labrys”), an accredited investor, pursuant to which the Company issued a 12% convertible promissory note (the “Labrys Note”) with a maturity date of February 19, 2022 (the “Labrys Maturity Date”), in the principal sum of $1,650,000. The terms and conditions of the Labrys Note, as amended, are outlined in the Company’s Annual Report as filed on Form 10-K on September 27, 2022.
On July 16, 2022, the Company and Labrys entered into a second amendment (the “Second Labrys Amendment”) to the Labrys SPA and the Labrys Note, as amended. Pursuant to the terms of the Second Labrys Amendment, the maturity date of the Labrys Note was extended to December 31, 2023.
Upon the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of the Labrys Note was reduced from $11.50 per share to $1.00 per share. Upon the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below, the conversion price of the Labrys Note was further reduced from $1.00 per share to $0.10 per share. Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the Labrys Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the Labrys Note was further reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company did not make any payments to Labrys. During the three and nine months ended February 28, 2023, the Company recognized $26,352 and $83,301, respectively, in interest expense associated with the Labrys Note recorded as accrued interest payable.
As of February 28, 2023, the carrying value and face value of the Labrys Note was $890,591 as the debt discount was fully accreted by that date.
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March 2021 FirstFire Global 12% Convertible Promissory Note
On March 10, 2021, the Company, entered into a securities purchase agreement (the “March 2021 FirstFire SPA”) with FirstFire Global Opportunities Fund, LLC, a Delaware limited liability company (the “FirstFire”), pursuant to which the Company issued a 12% convertible promissory note (“March 2021 FirstFire Note”) with a maturity date of March 10, 2022, in the principal sum of $560,000. The terms and conditions of the March 2021 FirstFire Note, as amended, are outlined in the Company’s Annual Report as filed on Form 10-K on September 27, 2022.
Upon the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of the March 2021 FirstFire Note was reduced from $11.50 per share to $1.00 per share. Upon the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below, the conversion price of the March 2021 FirstFire Note was further reduced from $1.00 per share to $0.10 per share. Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the March 2022 FirstFire Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the March 2021 FirstFire Note was further reduced from $0.02 per share to $0.0175 per share.
Concurrent with the adjustment to the conversion price of certain of the Company’s convertible promissory notes in September 2022 and pursuant to the Company’s Sequencing Policy, the Company recognized a derivative liability associated with the shares of Common Stock underlying the March 2021 FirstFire Note and associated accrued interest (see Note 10 – Derivative Liability) as well as an additional debt discount of $294,227.
During the three months ended August 31, 2022, FirstFire converted $9,500 of the outstanding principal balance of the March 2021 FirstFire Note at an adjusted conversion price of $0.10 per share. At conversion, the Company issued 95,000 shares of common stock to FirstFire at a fair market value of $0.13 per share and recognized a loss on debt extinguishment of $2,850 (See Note 9 – Stockholders’ Equity).
On various dates during the three months ended November 30, 2022, FirstFire converted $19,120 of the outstanding principal balance of the March 2021 FirstFire Note at an adjusted conversion price of $0.02 per share. As a result of these conversions, the Company issued 956,000 shares of common stock to FirstFire at fair market values ranging from $0.037 to $0.162 per share and recognized a total loss on debt extinguishment of $47,906 (See Note 9 – Stockholders’ Equity).
On various dates during the three months ended February 28, 2023, FirstFire converted $73,600 of the outstanding principal balance of the March 2021 FirstFire Note at an adjusted conversion price of $0.02 per share. As a result of these conversions, the Company issued 3,680,000 shares of common stock to FirstFire at fair market values ranging from $0.013 to $0.038 per share and recognized a net loss on debt extinguishment of $6,026 (See Note 9 – Stockholders’ Equity).
During the three and nine months ended February 28, 2023, the Company recognized $12,494 and $48,587, respectively, in interest expense associated with the March 2021 FirstFire Note recorded as accrued interest payable and $82,493 and $209,900, respectively, in accretion expense related to the new debt discount associated with the derivative liability.
As of February 28, 2023, the carrying value and face value of the March 2021 FirstFire Note was $323,453, net of $84,327 in unaccreted debt discount.
June 2021 FirstFire Global 12% Convertible Promissory Note
On June 11, 2021, the Company entered into a securities purchase agreement (the “June 2021 FirstFire SPA”) with FirstFire, pursuant to which the Company issued (i) a 12% convertible promissory note (the “June 2021 FirstFire Note”) in the principal sum of $1,266,666 (the “June 2021 FirstFire Principal Sum”), (ii) 11,875 shares of its common stock as a commitment fee (“June 2021 FirstFire Commitment Shares”), and (iii) a three-year warrant (“June 2021 FirstFire Warrant”) to purchase 593,750 shares of the Company’s common stock at an exercise price of $10.73, subject to certain adjustments.
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The following are the material terms of the June 2021 FirstFire SPA and June 2021 FirstFire Note:
| ● | The June 2021 FirstFire Note matures on June 10, 2023 (the “June 2021 FirstFire Maturity Date”). | |
| ● | At its election, FirstFire may convert the June 2021 FirstFire Note into the Company’s common stock, subject to the beneficial ownership limitations of 4.99% in the June 2021 FirstFire Note; provided however, that the limitation on conversion may be waived up to 9.99%, (the “Beneficial Ownership Limitations”) at any time at a conversion price equal to $11.50 per share, subject to certain adjustments. | |
| ● | The Company agree to pay interest on the June 2021 Principal Sum 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 June 2021 FirstFire Note after 180 days from June 10, 2021. | |
| ● | The June 2021 FirstFire Note carries an original issue discount of $126,666 (“June 2021 FirstFire OID”). | |
| ● | The Company may prepay the June 2021 FirstFire Note at any time prior to maturity in accordance with the terms of the June 2021 FirstFire Note (the “Standard Prepayment Terms”). | |
| ● | The June 2021 FirstFire Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the June 2021 FirstFire Note or the June 2021 FirstFire SPA. Upon the occurrence of any event of default (as defined in the June 2021 FirstFire Note) which has not been cured within the period stipulated by the June 2021 FirstFire Note, the June 2021 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 June 2021 FirstFire Principal Sum then outstanding plus accrued interest multiplied by 125% (the “Standard Default Terms”). | |
| ● | Pursuant to the June 2021 FirstFire SPA, the June 2021 FirstFire Commitment Shares and the shares underlying the June 2021 FirstFire Note and June 2021 FirstFire Warrant carry standard registration rights. |
Upon issuance of the June 2021 FirstFire Note, the Company received net proceeds of $1,140,000. Upon issuance of the June 2021 FirstFire Commitment Shares, the June 2021 FirstFire Note, and the June 2021 First Fire Warrant, the Company allocated the $1,140,000 in net proceeds received between the fair market value of the June 2021 FirstFire Commitment Shares, the beneficial conversion feature of the June 2021 FirstFire Note, and the June 2021 FirstFire Warrant.
Upon the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of the June 2021 FirstFire Note was reduced from $11.50 per share to $1.00 per share. Upon the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below, the conversion price of the June 2021 FirstFire Note was further reduced from $1.00 per share to $0.10 per share. Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the June 2021 FirstFire Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the June 2021 FirstFire Note was further reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $134,589 and $408,523, respectively, which was related to the accretion of the debt discount.
As of February 28, 2023, the carrying value of the June 2021 FirstFire Note was $939,133, net of $152,534 in unaccreted debt discount.
June 2021 GS Capital Securities 12% Convertible Promissory Note
On June 16, 2021, the Company entered into a securities purchase agreement (the “June 2021 GS SPA”) with GS Capital Partners, LLC (“GS”), pursuant to which the Company issued (i) a 12% convertible promissory note (the “June 2021 GS Note”) in the principal sum of $333,333 (the “June 2021 GS Principal Sum”), (ii) 3,125 shares of its common stock as a commitment fee (“June 2021 GS Commitment Shares”), and (iii) a three-year warrant (“June 2021 GS Warrant”) to purchase 156,250 shares of the Company’s common stock at an exercise price of $10.73, subject to certain adjustments.
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The following are the material terms of the June 2021 GS SPA and June 2021 GS Note:
| ● | The June 2021 GS Note matures on June 10, 2023 (the “June 2021 GS Maturity Date”). | |
| ● | At its election, GS may convert the June 2021 GS Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $11.50 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the June 2021 GS Principal Sum 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 June 2021 GS Note after 180 days from June 10, 2021. | |
| ● | The June 2021 GS Note carries an original issue discount of $33,333 (“June 2021 GS OID”). | |
| ● | The June 2021 GS Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the June 2021 GS SPA, the June 2021 GS Commitment Shares and the shares underlying the June 2021 GS Note and June 2021 GS Warrant carry standard registration rights. |
Upon issuance of the June 2021 GS Note, the Company received net proceeds of $300,000. Upon issuance of the June 2021 GS Commitment Shares, the June 2021 GS Note, and the June 2021 GS Warrant, the Company allocated the $300,000 in net proceeds received between the fair market value of the June 2021 GS Commitment Shares, the beneficial conversion feature of the June 2021 GS Note, and the June 2021 GS Warrant.
Upon the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of the June 2021 GS Note was reduced from $11.50 per share to $1.00 per share. Upon the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below, the conversion price of the June 2021 GS Note was further reduced from $1.00 per share to $0.10 per share. Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the June 2021 GS Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the June 2021 GS Note was further reduced from $0.02 per share to $0.0175 per share.
During the three months ended August 31, 2022, GS converted $53,000 of the outstanding principal balance the June 2021 GS Note and $6,935 in associated accrued interest at an adjusted conversion price of $0.10 per share. At conversion, the Company issued 599,350 shares of common stock to GS at a fair market value of $0.19 per share and recognized a loss on debt extinguishment of $53,942.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $28,356 and $113,240, respectively, related to the accretion of the debt discount.
As of February 28, 2023, the carrying value of the June 2021 GS Note was $197,863, net of $32,136 in unaccreted debt discount.
August 2021 Jefferson Street Capital 12% Convertible Promissory Note
On August 23, 2021, the Company entered into a securities purchase agreement (the “August 2021 Jefferson SPA”) with Jefferson Street Capital, LLC (“Jefferson”), pursuant to which the Company issued (i) a 12% convertible promissory note (the “August 2021 Jefferson Note”) in the principal sum of $333,333 (the “August 2021 Jefferson Principal Sum”), (ii) 3,125 shares of its common stock as a commitment fee (“August 2021 Jefferson Commitment Shares”), and (iii) a three-year warrant (“August 2021 Jefferson Warrant”) to purchase 156,250 shares of the Company’s common stock at an exercise price of $10.73, subject to certain adjustments.
The following are the material terms of the august 2021 Jefferson SPA and August 2021 Jefferson Note:
| ● | The August 2021 Jefferson Note matures on August 23, 2023 (the “August 2021 Jefferson Maturity Date”). | |
| ● | At its election, Jefferson may convert the August 2021 Jefferson Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $11.50 per share, subject to certain adjustments. |
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| ● | The Company agrees to pay interest on the August 2021 Jefferson Principal Sum 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 August 2021 Jefferson Note after 180 days from August 23, 2021. | |
| ● | The August 2021 Jefferson Note carries an original issue discount of $33,333 (“August 2021 Jefferson OID”). | |
| ● | The August 2021 Jefferson Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the August 2021 Jefferson SPA, the August 2021 Jefferson Commitment Shares underlying and the shares underlying the August 2021 Jefferson Note and August 2021 Jefferson Warrant carry standard registration rights. |
Upon issuance of the August 2021 Jefferson Note, the Company received net proceeds of $300,000. Upon issuance of the August 2021 Jefferson Commitment Shares, the August 2021 Jefferson Note, and the August 2021 Jefferson Warrant, the Company allocated the $300,000 in net proceeds received between the fair market value of the August 2021 Jefferson Commitment Shares, the beneficial conversion feature of the August 2021 Jefferson Note, and the August 2021 Jefferson Warrant.
Upon the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of the August 2021 Jefferson Note was reduced from $11.50 per share to $1.00 per share. Upon the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below, the conversion price of the August 2021 Jefferson Note was further reduced from $1.00 per share to $0.10 per share. Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the August 2021 Jefferson Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the August 2021 Jefferson Note was further reduced from $0.02 per share to $0.0175 per share.
During the three months ended August 31, 2022, Jefferson converted $10,000 of the outstanding principal balance the August 2021 Jefferson Note and $1,000 in associated fees at an adjusted conversion price of $0.10 per share. At conversion, the Company issued 110,000 shares of common stock to Jefferson at a fair market value of $0.075 per share and recognized a gain on debt extinguishment of $2,750 (See Note 9 – Stockholders’ Equity).
On various dates during the three months ended November 30, 2022, Jefferson converted $13,400 of the outstanding principal balance the August 2021 Jefferson Note and $3,000 in associated fees at an adjusted conversion price of $0.02 per share. As a result of these conversions, the Company issued 820,000 shares of common stock to Jefferson at fair market values ranging from $0.036 to $0.162 per share and recognized a loss on debt extinguishment of $34,255 (See Note 9 – Stockholders’ Equity).
On various dates during the three months ended February 28, 2023, Jefferson converted $62,504 of the outstanding principal balance the August 2021 Jefferson Note and $6,000 in associated fees at an adjusted conversion price of $0.02 per share. As a result of these conversions, the Company issued 3,420,208 shares of common stock to Jefferson at fair market values ranging from $0.016 to $0.029 per share and recognized a net loss on debt extinguishment of $2,748 (See Note 9 – Stockholders’ Equity).
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $53,513 and $145,697, respectively, related to the accretion of the debt discount.
As of February 28, 2023, the carrying value of the August 2021 Jefferson Note was $186,834, net of $60,695 in unaccreted debt discount.
August 2021 Lucas Ventures Capital 12% Convertible Note
On August 31, 2021, the Company entered into a securities purchase agreement (the “August 2021 Lucas SPA”) with Lucas Ventures, LLC (“Lucas”), pursuant to which the Company issued (i) a 12% convertible promissory note (the “August 2021 Lucas Note”) in the principal sum of $200,000 (the “August 2021 Lucas Principal Sum”), (ii) 3,749 shares of its common stock as a commitment fee (“August 2021 Lucas Commitment Shares”), and (iii) a three-year warrant (“August 2021 Lucas Warrant”) to purchase 187,400 shares of the Company’s common stock at an exercise price of $10.22, subject to certain adjustments.
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The following are the material terms of the August 2021 Lucas SPA and August 2021 Lucas Note:
| ● | The August 2021 Lucas Note matures on August 31, 2023 (the “August 2021 Lucas Maturity Date”). | |
| ● | At its election, Lucas may convert the August 2021 Lucas Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $11.50 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the August 2021 Lucas Principal Sum 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 August 2021 Lucas Note after 180 days from August 31, 2021. | |
| ● | The August 2021 Lucas Note carries an original issue discount of $20,000 (“August 2021 Lucas OID”). | |
| ● | The August 2021 Lucas Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the August 2021 Lucas SPA, the August 2021 Lucas Commitment Shares underlying and the shares underlying the August 2021 Lucas Note and August 2021 Lucas Warrant carry standard registration rights. |
Upon issuance of the August 2021 Lucas Note, the Company received net proceeds of $180,000. Upon issuance of the August 2021 Lucas Commitment Shares, the August 2021 Lucas Note, and the August 2021 Lucas Warrant, the Company allocated the $180,000 in net proceeds received between the fair market value of the August 2021 Lucas Commitment Shares, the beneficial conversion feature of the August 2021 Lucas Note, and the August 2021 Lucas Warrant.
On March 16, 2022, the Company and Lucas Ventures entered into an Amendment and Waiver Pursuant to Convertible Promissory Note (the “Lucas Amendment”). Pursuant to the terms of the Lucas Amendment, the parties agreed that the conversion price of the August 2021 Lucas Note was decreased from $11.50 per share to $1.00 per share and that Lucas may not convert the August 2021 Lucas Note, as amended, prior to September 15, 2022.
On July 13, 2022, the Company and Lucas Ventures entered into an Amendment and Waiver Pursuant to Convertible Promissory Note (the “Second Lucas Amendment”). Pursuant to the terms of the Second Lucas Amendment, the parties agreed to extend the maturity date of the August 2021 Lucas Note to December 31, 2023.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $24,658 and $74,795, respectively, related to the accretion of the debt discount.
As of February 28, 2023, the carrying value of the August 2021 Lucas Note was $149,589, net of $50,411 in unaccreted debt discount.
August 2021 LGH Investments, LLC 12% Convertible Promissory Note
On August 31, 2021, the Company and LGH Investments, LLC, (“LGH”) entered into a securities purchase agreement (the “August 2021 LGH SPA”) pursuant to which the Company issued a 12% convertible promissory note (the “August 2021 LGH Note”) in the principal sum of $200,000 (the “August 2021 LGH Principal Sum”).
The following are the material terms of the August 2021 LGH SPA and August 2021 LGH Note:
| ● | The August 2021 LGH Note matures on August 31, 2023 (the “August 2021 LGH Maturity Date”). | |
| ● | At its election, LGH may convert the August 2021 LGH Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $11.50 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the August 2021 LGH Principal Sum 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 August 2021 LGH Note after 180 days from August 31, 2021. |
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| ● | The August 2021 LGH Note carries an original issue discount of $20,000 (“August 2021 LGH OID”). | |
| ● | The August 2021 LGH Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the August 2021 LGH SPA, the shares underlying the August 2021 LGH Note carry standard registration rights. |
Upon issuance of the August 2021 LGH Note, the Company received net proceeds of $180,000. Upon issuance of the August 2021 LGH, the Company recorded a total debt discount of $26,500 that includes the LGH OID and the $6,500 paid as fees associated with the issuance of the loan and is accreted over the term of the August 2021 LGH Note.
As of March 16, 2022, the Company and LGH entered into an Amendment and Waiver Pursuant to Convertible Promissory Note (the “LGH Amendment”). Pursuant to the terms of the LGH Amendment, the parties agreed that the conversion price of the August 2021 LGH Note was decreased from $11.50 per share to $1.00 per share and that LGH may not convert the LGH Note, as amended, prior to September 15, 2022.
On July 13, 2022, the Company and LGH entered into an Amendment and Waiver Pursuant to Convertible Promissory Note (the “Second LGH Amendment”). Pursuant to the terms of the Second LGH Amendment, the parties agreed to extend the maturity date of the August 2021 LGH Note to December 31, 2023.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $3,267 and $9,910, respectively, related to the accretion of the debt discount.
As of February 28, 2023, the carrying value of the August 2021 LGH Note was $193,320, net of $6,680 in unaccreted debt discount.
September 2021 Ionic Ventures, LLC 12% Convertible Promissory Note
On September 28, 2021, the Company entered into a securities purchase agreement (the “September 2021 Ionic SPA”) with Ionic Ventures, LLC (“Ionic”), pursuant to which the Company issued (i) a 12% convertible promissory note (the “September 2021 Ionic Note”) in the principal sum of $1,555,556 (the “September 2021 Ionic Principal Sum”), (ii) 14,584 shares of its common stock as a commitment fee (“September 2021 Ionic Commitment Shares”), and (iii) a three-year warrant (“September 2021 Ionic Warrant”) to purchase 729,167 shares of the Company’s common stock at an exercise price of $10.73, subject to certain adjustments.
The following are the material terms of the September 2021 Ionic SPA and September 2021 Ionic Note:
| ● | The September 2021 Ionic Note matures on September 28, 2023 (the “September 2021 Ionic Maturity Date”). | |
| ● | At its election, Ionic may convert the September 2021 Ionic Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $11.50 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the September 2021 Ionic Principal Sum 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 September 2021 Ionic Note after 180 days from September 28, 2021. | |
| ● | The September 2021 Ionic Note carries an original issue discount of $155,556 (“September 2021 Ionic OID”). | |
| ● | The September 2021 Ionic Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the September 2021 Ionic SPA, the September 2021 Ionic Commitment Shares underlying and the shares underlying the September 2021 Ionic Note and September 2021 Ionic Warrant carry standard registration rights. |
Upon issuance of the September 2021 Ionic Note, the Company received net proceeds of $1,400,000. Upon issuance of the September 2021 Ionic Commitment Shares, the September 2021 Ionic Note, and the September 2021 Ionic Warrant, the Company allocated the $1,400,000 in net proceeds received between the fair market value of the September 2021 Ionic Commitment Shares, the beneficial conversion feature of the September 2021 Ionic Note, and the September 2021 Ionic Warrant.
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Upon the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of the September 2021 Ionic Note was reduced from $11.50 per share to $1.00 per share. Upon the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below, the conversion price of the September 2021 Ionic Note was further reduced from $1.00 per share to $0.10 per share. Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the September 2021 Ionic Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the September 2021 Ionic Note was further reduced from $0.02 per share to $0.0175 per share.
During the fiscal year ended May 31, 2022, Ionic converted $87,800 of the outstanding principal balance due under the September 2021 Ionic Note at an adjusted conversion price of $1.00 per share. At conversion, the Company issued 87,800 shares of common stock to Ionic at a fair market value of $2.61 per share and recognized a loss on debt extinguishment of $141,358.
During the three months ended August 31, 2022, Ionic converted $6,776 of the outstanding principal balance due under the September 2021 Ionic Note at an adjusted conversion price of $0.10 per share. At conversion, the Company issued 67,755 shares of common stock to Ionic at a fair market value of $0.13 per share and recognized a loss on debt extinguishment of $2,033 (See Note 9 – Stockholders’ Equity).
Additionally, during the three months ended August 31, 2022, Ionic converted $15,000 of the outstanding principal balance due under the September 2021 Ionic Note at an adjusted conversion price of $0.10 per share. At conversion, the Company became obligated to issue 150,000 shares of common stock to Ionic at a fair market value of $0.075 per share and recognized a gain on debt extinguishment of $4,500. Upon conversion, these shares are classified as common stock to be issued, and subsequently, on September 2, 2022, the Company completed the issuance of the shares (See Note 9 – Stockholders’ Equity).
On various dates during the three months ended November 30, 2022, Ionic converted $80,600 of the outstanding principal balance due under the September 2021 Ionic Note at an adjusted conversion price of $0.02 per share. At conversion, the Company issued 4,030,000 shares of common stock to Ionic at fair market values ranging from $0.022 to $0.162 per share and recognized a loss on debt extinguishment of $141,762 (See Note 9 – Stockholders’ Equity).
On various dates during the three months ended February 28, 2023, Ionic converted $100,200 of the outstanding principal balance due under the September 2021 Ionic Note at an adjusted conversion price of $0.02 per share. At conversion, the Company issued 5,010,000 shares of common stock to Ionic at fair market values ranging from $0.014 to $0.038 per share and recognized a net gain on debt extinguishment of $7,618 (See Note 9 – Stockholders’ Equity).
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $197,571 and $608,008, respectively, related to the accretion of the debt discount.
As of February 28, 2023, the carrying value of the September 2021 Ionic Note was $896,025, net of $369,156 in unaccreted debt discount.
March 2022 FirstFire Global 12% Convertible Promissory Note
On March 21, 2022, the Company entered into a securities purchase agreement (the “March 2022 FirstFire SPA”) with FirstFire, pursuant to which the Company issued (i) a 12% convertible promissory note (the “March 2022 FirstFire Note”) in the principal sum of $110,000 (the “March 2022 FirstFire Principal Sum”), (ii) 935 shares of its common stock as a commitment fee (“March 2022 FirstFire Commitment Shares”), and (iii) a three-year warrant (“March 2022 FirstFire Warrant”) to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the March 2022 FirstFire SPA and March 2022 FirstFire Note:
| ● | The March 2022 FirstFire Note matures on September 21, 2022 (the “March 2022 FirstFire Maturity Date”). |
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| ● | At its election, FirstFire may convert the March 2022 FirstFire Note into the Company’s common stock. subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $1.00 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the March 2022 FirstFire Principal Sum at the rate of 12% per annum provided that the first six months of interest shall be guaranteed. | |
| ● | The March 2022 FirstFire Note carries an original issue discount of $10,000 (“March 2022 FirstFire OID”). | |
| ● | The March 2022 FirstFire Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the March 2022 FirstFire SPA, the March 2022 FirstFire Commitment Shares and the shares underlying the March 2022 FirstFire Note and March 2022 FirstFire Warrant carry standard registration rights. |
Upon issuance of the March 2022 FirstFire Note, the Company received net proceeds of $100,000. Upon issuance of the March 2022 FirstFire Commitment Shares, the March 2022 FirstFire Note, and the March 2022 FirstFire Warrant, the Company allocated the $100,000 in net proceeds received between the fair market value of the March 2022 FirstFire Commitment Shares, the beneficial conversion feature of the March 2022 FirstFire Note, and the March 2022 FirstFire Warrant.
Upon the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below, the conversion price of the March 2022 FirstFire Note was reduced from $1.00 per share to $0.10 per share. Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the March 2022 FirstFire Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the March 2022 FirstFire Note was further reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded accrued interest expense of $3,255 and $5,787, respectively. In addition, during the three and nine months ended February 28, 2023, the Company recorded accretion expense of $0 and $67,554, respectively, related to the accretion of the debt discount.
As of February 28, 2023, the carrying value of the March 2022 FirstFire Note was $110,000 as the debt discount was fully accreted.
March 2022 GS Capital Securities 12% Convertible Promissory Note
On March 21, 2022, the Company entered into a securities purchase agreement (the “March 2022 GS SPA”) with GS, pursuant to which the Company issued (i) a 12% convertible promissory note (the “March 2022 GS Note”) in the principal sum of $82,500 (the “March 2022 GS Principal Sum”), (ii) 703 shares of its common stock as a commitment fee (“March 2022 GS Commitment Shares”), and (iii) a three-year warrant (“March 2022 GS Warrant”) to purchase 37,500 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the March 2022 GS SPA and March 2022 GS Note:
| ● | The March 2022 GS Note matures on September 21, 2022 (the “March 2022 GS Maturity Date”). | |
| ● | At its election, GS may convert the March 2022 GS Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $1.00 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the March 2022 GS Principal Sum at the rate of 12% per annum provided that the first six months of interest shall be guaranteed. | |
| ● | The March 2022 GS Note carries an original issue discount of $7,500 (“March 2022 GS OID”). | |
| ● | The March 2022 GS Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the March 2022 GS SPA, the March 2022 GS Commitment Shares and the shares underlying the March 2022 GS Note and March 2022 GS Warrant carry standard registration rights. |
Upon issuance of the March 2022 GS Note, the Company received net proceeds of $75,000. Upon issuance of the March 2022 GS Commitment Shares, the March 2022 GS Note, and the March 2022 GS Warrant, the Company allocated the $75,000 in net proceeds received between the fair market value of the March 2022 GS Commitment Shares, the beneficial conversion feature of the March 2022 GS Note, and the March 2022 GS Warrant.
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Upon the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below, the conversion price of the March 2022 GS Note was reduced from $1.00 per share to $0.10 per share. Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the March 2022 GS Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the March 2022 GS Note was further reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded accrued interest expense of $2,441 and $4,340, respectively. In addition, during the three and nine months ended February 28, 2023, the Company recorded accretion expense of $0 and $50,666, respectively, related to the accretion of the debt discount.
As of February 28, 2023, the carrying value of the March 2022 GS Note was $82,500 as the debt discount was fully accreted.
March 2022 Ionic Ventures 12% Convertible Promissory Note
On March 21, 2022, the Company entered into a securities purchase agreement (the “March 2022 Ionic SPA”) with Ionic, pursuant to which the Company issued (i) a 12% convertible promissory note (the “March 2022 Ionic Note”) in the principal sum of $110,000 (the “March 2022 Ionic Principal Sum”), (ii) 935 shares of its common stock as a commitment fee (“March 2022 Ionic Commitment Shares”), and (iii) a three-year warrant (“March 2022 Ionic Warrant”) to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the March 2022 Ionic SPA and March 2022 Ionic Note:
| ● | The March 2022 Ionic Note matures on September 21, 2022 (the “March 2022 Ionic Maturity Date”). | |
| ● | At its election, Ionic may convert the March 2022 Ionic Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $1.00 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the March 2022 Ionic Principal Sum at the rate of 12% per annum provided that the first six months of interest shall be guaranteed. | |
| ● | The March 2022 Ionic Note carries an original issue discount of $10,000 (“March 2022 Ionic OID”). | |
| ● | The March 2022 Ionic Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the March 2022 Ionic SPA, the March 2022 Ionic Commitment Shares and the shares underlying the March 2022 Ionic Note and March 2022 Ionic Warrant carry standard registration rights. |
Upon issuance of the March 2022 Ionic Note, the Company received net proceeds of $100,000. Upon issuance of the March 2022 Ionic Commitment Shares, the March 2022 Ionic Note, and the March 2022 Ionic Warrant, the Company allocated the $100,000 in net proceeds received between the fair market value of the March 2022 Ionic Commitment Shares, the beneficial conversion feature of the March 2022 Ionic Note, and the March 2022 Ionic Warrant.
Upon the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below, the conversion price of the March 2022 Ionic Note was reduced from $1.00 per share to $0.10 per share. Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the March 2022 Ionic Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the March 2022 Ionic Note was further reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded accrued interest expense of $3,255 and $5,787, respectively. In addition, during the three and nine months ended February 28, 2023, the Company recorded accretion expense of $0 and $67,554, respectively, related to the accretion of the debt discount.
As of February 28, 2023, the carrying value of the March 2022 Ionic Note was $110,000 as the debt discount was fully accreted.
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April 2022 Jefferson Street Capital LLC 12% Convertible Promissory Note
On April 1, 2022, the Company entered into a securities purchase agreement (the “April 2022 Jefferson SPA”) with Jefferson, pursuant to which the Company issued (i) a 12% convertible promissory note (the “April 2022 Jefferson Note”) in the principal sum of $82,500 (the “April 2022 Jefferson Principal Sum”), (ii) 703 shares of its common stock as a commitment fee (“April 2022 Jefferson Commitment Shares”), and (iii) a three-year warrant (“April 2022 Jefferson Warrant”) to purchase 37,500 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the April 2022 Jefferson SPA and April 2022 Jefferson Note:
| ● | The April 2022 Jefferson Note matures on October 1, 2022 (the “April 2022 Jefferson Maturity Date”). | |
| ● | At its election, Jefferson may convert the April 2022 Jefferson Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $1.00 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the April 2022 Jefferson Principal Sum at the rate of 12% per annum provided that the first six months of interest shall be guaranteed. | |
| ● | The April 2022 Jefferson Note carries an original issue discount of $7,500 (“April 2022 Jefferson OID”). | |
| ● | The April 2022 Jefferson Note contains the Standard Prepayment Terms and Standard Default Terms. | |
| ● | Pursuant to the April 2022 Jefferson SPA, the April 2022 Jefferson Commitment Shares and the shares underlying the April 2022 Jefferson Note and April 2022 Jefferson Warrant carry standard registration rights. |
Upon issuance of the April 2022 Jefferson Note, the Company received net proceeds of $75,000. Upon issuance of the April 2022 Jefferson Commitment Shares, the April 2022 Jefferson Note, and the April 2022 Jefferson Warrant, the Company allocated the $75,000 in net proceeds received between the fair market value of the April 2022 Jefferson Commitment Shares, the beneficial conversion feature of the April 2022 Jefferson Note, and the April 2022 Jefferson Warrant.
Upon the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below, the conversion price of the April 2022 Jefferson Note was reduced from $1.00 per share to $0.10 per share. Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the April 2022 Jefferson Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the April 2022 Jefferson Note was further reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded accrued interest expense of $2,441 and $4,068, respectively. In addition, during the three and nine months ended February 28, 2023, the Company recorded accretion expense of $0 and $50,666, respectively, related to the accretion of the debt discount.
As of February 28, 2023, the carrying value of the April 2022 Jefferson Note was $82,500 as the debt discount was fully accreted.
July 2022 FirstFire Global 12% Convertible Promissory Note
On July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 FirstFire SPA”) with FirstFire, pursuant to which the Company issued (i) a 12% convertible promissory note (the “July 2022 FirstFire Note”) in the principal sum of $27,500 (the “July 2022 FirstFire Principal Sum”), (ii) 935 shares of its common stock as a commitment fee (“July 2022 FirstFire Commitment Shares”), and (iii) a three-year warrant (“July 2022 FirstFire Warrant”) to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the July 2022 FirstFire SPA and July 2022 FirstFire Note:
| ● | The July 2022 FirstFire Note matures on September 14, 2022 (the “July 2022 FirstFire Maturity Date”). | |
| ● | At its election, FirstFire may convert the July 2022 FirstFire Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time after 180 days from the date of issuance of the July 2022 FirstFire Note at a conversion price equal to $0.10 per share, subject to certain adjustments. |
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| ● | The Company agrees to pay interest on the July 2022 FirstFire Principal Sum at the rate of 12% per annum provided that the first two months of interest shall be guaranteed. | |
| ● | The July 2022 FirstFire Note carries an original issue discount of $2,500 (“July 2022 FirstFire OID”). | |
| ● | The July 2022 FirstFire Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the July 2022 FirstFire Note, the Company received net proceeds of $25,000. Upon issuance of the July 2022 FirstFire Commitment Shares, the July 2022 FirstFire Note, and the July 2022 FirstFire Warrant, the Company allocated the $25,000 in net proceeds received between the fair market value of the July 2022 FirstFire Commitment Shares and the July 2022 FirstFire Warrant.
Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the July 2022 FirstFire Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the July 2022 FirstFire Note was further reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $814 and $8,521, respectively, which included $0 and $6,461, respectively, related to the accretion of the debt discount and accrued interest in the amount of $814 and $2,060, respectively.
As of February 28, 2023, 2022, the carrying value of the July 2022 FirstFire Note was $27,500 as the debt discount was fully accreted.
July 2022 GS Capital Securities 12% Convertible Promissory Note
On July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 GS SPA”) with GS, pursuant to which the Company issued (i) a 12% convertible promissory note (the “July 2022 GS Note”) in the principal sum of $27,500 (the “July 2022 GS Principal Sum”), (ii) 935 shares of its common stock as a commitment fee (“July 2022 GS Commitment Shares”), and (iii) a three-year warrant (“July 2022 GS Warrant”) to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the July 2022 GS SPA and July 2022 GS Note:
| ● | The July 2022 GS Note matures on September 14, 2022 (the “July 2022 GS Maturity Date”). | |
| ● | At its election, GS may convert the July 2022 GS Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time after 180 days from the date of issuance of the July 2022 GS Note at a conversion price equal to $0.10 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the July 2022 GS Principal Sum at the rate of 12% per annum provided that the first two months of interest shall be guaranteed. | |
| ● | The July 2022 GS Note carries an original issue discount of $2,500 (“July 2022 GS OID”). | |
| ● | The July 2022 GS Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the July 2022 GS Note, the Company received net proceeds of $25,000. Upon issuance of the July 2022 GS Commitment Shares, the July 2022 GS Note, and the July 2022 GS Warrant, the Company allocated the $25,000 in net proceeds received between the fair market value of the July 2022 GS Commitment Shares and the July 2022 GS Warrant.
Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the July 2022 GS Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the July 2022 GS Note was further reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $814 and $8,521, respectively, which included $0 and $6,461, respectively, related to the accretion of the debt discount and accrued interest in the amount of $814 and $2,060, respectively.
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As of February 28, 2023, 2022, the carrying value of the July 2022 GS Note was $27,500 as the debt discount was fully accreted.
July 2022 Ionic Ventures, LLC 12% Convertible Promissory Note
On July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 Ionic SPA”) with Ionic, pursuant to which the Company issued (i) a 12% convertible promissory note (the “July 2022 Ionic Note”) in the principal sum of $27,500 (the “July 2022 Ionic Principal Sum”), (ii) 935 shares of its common stock as a commitment fee (“July 2022 Ionic Commitment Shares”), and (iii) a three-year warrant (“July 2022 Ionic Warrant”) to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the July 2022 Ionic SPA and July 2022 Ionic Note:
| ● | The July 2022 Ionic Note matures on September 14, 2022 (the “July 2022 Ionic Maturity Date”). | |
| ● | At its election, Ionic may convert the July 2022 Ionic Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time after 180 days from the date of issuance of the July 2022 Ionic Note at a conversion price equal to $0.10 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the July 2022 Ionic Principal Sum at the rate of 12% per annum provided that the first two months of interest shall be guaranteed. | |
| ● | The July 2022 Ionic Note carries an original issue discount of $2,500 (“July 2022 Ionic OID”). | |
| ● | The July 2022 Ionic Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the July 2022 Ionic Note, the Company received net proceeds of $25,000. Upon issuance of the July 2022 Ionic Commitment Shares, the July 2022 Ionic Note, and the July 2022 Ionic Warrant, the Company allocated the $25,000 in net proceeds received between the fair market value of the July 2022 Ionic Commitment Shares and the July 2022 Ionic Warrant.
Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the July 2022 Ionic Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the July 2022 Ionic Note was further reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $814 and $8,521, respectively, which included $0 and $6,461, respectively, related to the accretion of the debt discount and accrued interest in the amount of $814 and $2,060, respectively.
As of February 28, 2023, 2022, the carrying value of the July 2022 Ionic Note was $27,500 as the debt discount was fully accreted.
July 2022 Jefferson Street Capital LLC 12% Convertible Promissory Note
On July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 Jefferson SPA”) with Jefferson, pursuant to which the Company issued (i) a 12% convertible promissory note (the “July 2022 Jefferson Note”) in the principal sum of $27,500 (the “July 2022 Jefferson Principal Sum”), (ii) 935 shares of its common stock as a commitment fee (“July 2022 Jefferson Commitment Shares”), and (iii) a three-year warrant (“July 2022 Jefferson Warrant”) to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the July 2022 Jefferson SPA and July 2022 Jefferson Note:
| ● | The July 2022 Jefferson Note matures on September 14, 2022 (the “July 2022 Jefferson Maturity Date”). | |
| ● | At its election, Jefferson may convert the July 2022 Jefferson Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time after 180 days from the date of issuance of the July 2022 Jefferson Note at a conversion price equal to $0.10 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the July 2022 Jefferson Principal Sum at the rate of 12% per annum provided that the first two months of interest shall be guaranteed. |
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| ● | The July 2022 Jefferson Note carries an original issue discount of $2,500 (“July 2022 Jefferson OID”). | |
| ● | The July 2022 Jefferson Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the July 2022 Jefferson Note, the Company received net proceeds of $25,000. Upon issuance of the July 2022 Jefferson Commitment Shares, the July 2022 Jefferson Note, and the July 2022 Jefferson Warrant, the Company allocated the $25,000 in net proceeds received between the fair market value of the July 2022 Jefferson Commitment Shares and the July 2022 Jefferson Warrant.
Upon the issuance of the September 2022 FirstFire Note, September 2022 Ionic Note, and September 2022 Jefferson Note described below, the conversion price of the July 2022 Jefferson Note was further reduced from $0.10 per share to $0.02 per share. Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the July 2022 Jefferson Note was further reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $814 and $8,521, respectively, which included $0 and $6,461, respectively, related to the accretion of the debt discount and accrued interest in the amount of $814 and $2,060, respectively.
As of February 28, 2023, the carrying value of the July 2022 Jefferson Note was $27,500 as the debt discount was fully accreted by that date.
September 2022 FirstFire Global 12% Convertible Promissory Note
On September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 FirstFire SPA”) with FirstFire, pursuant to which the Company issued (i) a 12% convertible promissory note (the “September 2022 FirstFire Note”) in the principal sum of $66,000 (the “September 2022 FirstFire Principal Sum”) and (ii) a three-year warrant (“September 2022 FirstFire Warrant”) to purchase 120,000 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the September 2022 FirstFire SPA and September 2022 FirstFire Note:
| ● | The September 2022 FirstFire Note matures on January 8, 2023 (the “September 2022 FirstFire Maturity Date”). | |
| ● | At its election, FirstFire may convert the September 2022 FirstFire Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $0.02 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the September 2022 FirstFire Principal Sum at the rate of 12% per annum provided that the first four months of interest shall be guaranteed. | |
| ● | The September 2022 FirstFire Note carries an original issue discount of $6,000 (“September 2022 FirstFire OID”). | |
| ● | The September 2022 FirstFire Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the September 2022 FirstFire Note, the Company received net proceeds of $60,000 and used such proceeds for working capital. Upon issuance of the September 2022 FirstFire Note and the September 2022 FirstFire Warrant, the Company allocated the $60,000 in net proceeds received between the fair market value of the beneficial conversion feature of the September 2022 FirstFire Note and the September 2022 FirstFire Warrant. The fair value of the beneficial conversion feature of the September 2022 FirstFire Note was $57,756 and the fair value of the September 2022 FirstFire Warrant was $2,244. The combination of these two components as well as the September 2022 FirstFire OID resulted in a total debt discount at issuance of $66,000 which is accreted over the term of the September 2022 FirstFire Note.
Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the September 2022 FirstFire Note was reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $22,205 and $69,747, respectively, which included $21,098 and $66,000, respectively, related to the accretion of the debt discount and accrued interest in the amount of $1,107 and $3,747, respectively.
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As of February 28, 2023, the carrying value of the September 2022 FirstFire Note was $66,000 as the debt discount was fully accreted by that date.
September 2022 Ionic Ventures, LLC 12% Convertible Promissory Note
On September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 Ionic SPA”) with Ionic, pursuant to which the Company issued (i) a 12% convertible promissory note (the “September 2022 Ionic Note”) in the principal sum of $66,000 (the “September 2022 Ionic Principal Sum”) and (ii) a three-year warrant (“September 2022 Ionic Warrant”) to purchase 120,000 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the September 2022 Ionic SPA and September 2022 Ionic Note:
| ● | The September 2022 Ionic Note matures on January 8, 2023 (the “September 2022 Ionic Maturity Date”). | |
| ● | At its election, Ionic may convert the September 2022 Ionic Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $0.02 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the September 2022 Ionic Principal Sum at the rate of 12% per annum provided that the first four months of interest shall be guaranteed. | |
| ● | The September 2022 Ionic Note carries an original issue discount of $6,000 (“September 2022 Ionic OID”). | |
| ● | The September 2022 Ionic Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the September 2022 Ionic Note, the Company received net proceeds of $60,000 and used such proceeds for working capital. Upon issuance of the September 2022 Ionic Note and the September 2022 Ionic Warrant, the Company allocated the $60,000 in net proceeds received between the fair market value of the beneficial conversion feature of the September 2022 Ionic Note and the September 2022 Ionic Warrant. The fair value of the beneficial conversion feature of the September 2022 Ionic Note was $57,756 and the fair value of the September 2022 Ionic Warrant was $2,244. The combination of these two components as well as the September 2022 Ionic OID resulted in a total debt discount at issuance of $66,000 which is accreted over the term of the September 2022 Ionic Note.
Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the September 2022 Ionic Note was reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $22,205 and $69,747, respectively, which included $21,098 and $66,000, respectively, related to the accretion of the debt discount and accrued interest in the amount of $1,107 and $3,747, respectively.
As of February 28, 2023, the carrying value of the September 2022 Ionic Note was $66,000 as the debt discount was fully accreted by that date.
September 2022 Jefferson Street Capital LLC 12% Convertible Promissory Note
On September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 Jefferson SPA”) with Jefferson, pursuant to which the Company issued (i) a 12% convertible promissory note (the “September 2022 Jefferson Note”) in the principal sum of $27,500 (the “September 2022 Jefferson Principal Sum”) and (ii) a three-year warrant (“September 2022 Jefferson Warrant”) to purchase 45,454 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the September 2022 Jefferson SPA and September 2022 Jefferson Note:
| ● | The September 2022 Jefferson Note matures on January 8, 2023 (the “September 2022 Jefferson Maturity Date”). | |
| ● | At its election, Jefferson may convert the September 2022 Jefferson Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $0.02 per share, subject to certain adjustments. |
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| ● | The Company agrees to pay interest on the September 2022 Jefferson Principal Sum at the rate of 12% per annum provided that the first four months of interest shall be guaranteed. | |
| ● | The September 2022 Jefferson Note carries an original issue discount of $2,500 (“September 2022 Jefferson OID”). | |
| ● | The September 2022 Jefferson Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the September 2022 Jefferson Note, the Company received net proceeds of $25,000 and used such proceeds for working capital. Upon issuance of the September 2022 Jefferson Note and the September 2022 Jefferson Warrant, the Company allocated the $25,000 in net proceeds received between the fair market value of the beneficial conversion feature of the September 2022 Jefferson Note and the September 2022 Jefferson Warrant. The fair value of the beneficial conversion feature of the September 2022 Jefferson Note was $24,147, and the fair value of the September 2022 Jefferson Warrant was $853. The combination of these two components as well as the September 2022 Jefferson OID resulted in a total debt discount at issuance of $27,500 which is accreted over the term of the September 2022 Jefferson Note.
Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the September 2022 Jefferson Note was reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $9,252 and $29,061, respectively, which included $8,791 and $27,500, respectively, related to the accretion of the debt discount and accrued interest in the amount of $461 and $1,561, respectively.
As of February 28, 2023, the carrying value of the September 2022 Jefferson Note was $27,500 as the debt discount was fully accreted by that date.
September 2022 GS Capital Securities 12% Convertible Promissory Note
On September 13, 2022, the Company entered into a securities purchase agreement (the “September 2022 GS SPA”) with GS, pursuant to which the Company issued (i) a 12% convertible promissory note (the “September 2022 GS Note”) in the principal sum of $11,000 (the “September 2022 GS Principal Sum”) and (ii) a three-year warrant (“September 2022 GS Warrant”) to purchase 18,000 shares of the Company’s common stock at an exercise price of $1.00, subject to certain adjustments.
The following are the material terms of the September 2022 GS SPA and September 2022 GS Note:
| ● | The September 2022 GS Note matures on January 8, 2023 (the “September 2022 GS Maturity Date”). | |
| ● | At its election, GS may convert the September 2022 GS Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $0.02 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the September 2022 GS Principal Sum at the rate of 12% per annum provided that the first four months of interest shall be guaranteed. | |
| ● | The September 2022 GS Note carries an original issue discount of $1,000 (“September 2022 GS OID”). | |
| ● | The September 2022 GS Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the September 2022 GS Note, the Company received net proceeds of $25,000 and used such proceeds for working capital. Upon issuance of the September 2022 GS Note and the September 2022 GS Warrant, the Company allocated the $10,000 in net proceeds received between the fair market value of the beneficial conversion feature of the September 2022 GS Note and the September 2022 GS Warrant. The fair value of the beneficial conversion feature of the September 2022 GS Note was $9,604, and the fair value of the September 2022 GS Warrant was $396. The combination of these two components as well as the September 2022 GS OID resulted in a total debt discount at issuance of $11,000 which is accreted over the term of the September 2022 GS Note.
Upon the issuance of the January 2023 FirstFire Note and January 2023 Ionic Note, the conversion price of the September 2022 GS Note was reduced from $0.02 per share to $0.0175 per share.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $4,133 and $11,606, respectively, which included $3,967 and $11,000, respectively, related to the accretion of the debt discount and accrued interest in the amount of $166 and $606, respectively.
As of February 28, 2023, the carrying value of the September 2022 GS Note was $11,000 as the debt discount was fully accreted by that date.
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January 2023 FirstFire Global 12% Convertible Promissory Note
On January 30, 2023, the Company entered into a securities purchase agreement (the “January 2023 FirstFire SPA”) with FirstFire, pursuant to which the Company issued (i) a 12% convertible promissory note (the “January 2023 FirstFire Note”) in the principal sum of $35,200 (the “January 2023 FirstFire Principal Sum”).
The following are the material terms of the January 2023 FirstFire SPA and January 2023 FirstFire Note:
| ● | The January 2023 FirstFire Note matures on May 30, 2023 (the “January 2023 FirstFire Maturity Date”). | |
| ● | At its election, FirstFire may convert the January 2023 FirstFire Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $0.0175 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the January 2023 FirstFire Principal Sum at the rate of 12% per annum provided that the first three months of interest shall be guaranteed. | |
| ● | The January 2023 FirstFire Note carries an original issue discount of $3,200 (“January 2023 FirstFire OID”). | |
| ● | The January 2023 FirstFire Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the January 2023 FirstFire Note, the Company received net proceeds of $32,000 and used such proceeds for working capital. The January 2023 FirstFire OID resulted in a total debt discount at issuance of $3,200 which is accreted over the term of the January 2023 FirstFire OID.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $1,829 and $1,829, respectively, which included $773 and $773, respectively, related to the accretion of the debt discount and accrued interest in the amount of $1,056 and $1,056, respectively.
As of February 28, 2023, the carrying value of the January 2023 FirstFire Note was $32,773, net of $2,427 in unaccreted debt discount.
January 2023 Ionic Ventures, LLC 12% Convertible Promissory Note
On January 30, 2023, the Company entered into a securities purchase agreement (the “January 2023 Ionic SPA”) with Ionic, pursuant to which the Company issued (i) a 12% convertible promissory note (the “January 2023 Ionic Note”) in the principal sum of $35,200 (the “January 2023 Ionic Principal Sum”).
The following are the material terms of the January 2023 Ionic SPA and January 2023 Ionic Note:
| ● | The January 2023 Ionic Note matures on May 30, 2023 (the “January 2023 Ionic Maturity Date”). | |
| ● | At its election, Ionic may convert the January 2023 Ionic Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $0.0175 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the January 2023 Ionic Principal Sum at the rate of 12% per annum provided that the first three months of interest shall be guaranteed. | |
| ● | The January 2023 Ionic Note carries an original issue discount of $3,200 (“January 2023 Ionic OID”). | |
| ● | The January 2023 Ionic Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the January 2023 Ionic Note, the Company received net proceeds of $32,000 and used such proceeds for working capital. The January 2023 Ionic OID resulted in a total debt discount at issuance of $3,200 which is accreted over the term of the January 2023 Ionic OID.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $1,829 and $1,829, respectively, which included $773 and $773, respectively, related to the accretion of the debt discount and accrued interest in the amount of $1,056 and $1,056, respectively.
As of February 28, 2023, the carrying value of the January 2023 Ionic Note was $32,773, net of $2,427 in unaccreted debt discount.
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February 2023 Jefferson Street Capital LLC 12% Convertible Promissory Note
On February 3, 2023, the Company entered into a securities purchase agreement (the “February 2023 Jefferson SPA”) with Jefferson, pursuant to which the Company issued (i) a 12% convertible promissory note (the “February 2023 Jefferson Note”) in the principal sum of $35,200 (the “February 2023 Jefferson Principal Sum”).
The following are the material terms of the February 2023 Jefferson SPA and February 2023 Jefferson Note:
| ● | The February 2023 Jefferson Note matures on May 30, 2023 (the “February 2023 Jefferson Maturity Date”). | |
| ● | At its election, Jefferson may convert the February 2023 Jefferson Note into the Company’s common stock, subject to the Beneficial Ownership Limitations, at any time at a conversion price equal to $0.0175 per share, subject to certain adjustments. | |
| ● | The Company agrees to pay interest on the February 2023 Jefferson Principal Sum at the rate of 12% per annum provided that the first three months of interest shall be guaranteed. | |
| ● | The February 2023 Jefferson Note carries an original issue discount of $3,200 (“February 2023 Jefferson OID”). | |
| ● | The February 2023 Jefferson Note contains the Standard Prepayment Terms and Standard Default Terms. |
Upon issuance of the February 2023 Jefferson Note, the Company received net proceeds of $32,000 and used such proceeds for working capital. Upon issuance of the February 2023 Jefferson Note, the Company calculated the fair value of the beneficial conversion feature of the February 2023 Jefferson Note to be $32,000. The combination of beneficial conversion feature and the February 2023 Jefferson OID is accreted over the term of the February 2023 Jefferson Note.
During the three and nine months ended February 28, 2023, the Company recorded interest expense of $8,389 and $8,389, respectively, which included $7,333 and $7,333, respectively, related to the accretion of the debt discount and accrued interest in the amount of $1,056 and $1,056, respectively.
As of February 28, 2023, the carrying value of the February 2023 Jefferson Note was $7,333, net of $27,867 in unaccreted debt discount.
Secured Promissory Notes
On November 15, 2021, the Company entered into a 10% secured promissory note with an accredited investor (“Secured Note One”) for which it received net proceeds of $250,000, consisting of a face amount of $262,500 and an original issuance discount of $12,500 “(Secured Note One OID”). In addition, the Company issued 30,000 commitment warrants to the investor for the purchase of the Company’s common stock at an exercise price of $10.73 per share (“Secured Note One Warrants”).
Upon issuance of the Secured Note One and Secured Note One Warrants, the Company allocated the $250,000 in net proceeds received between the fair market value of Secured Note One and the Secured Note One Warrants.
During the three months ended February 28, 2023, the Company did not make any principal payments. For the three months ended February 28, 2023, the company recognized $7,969 in total interest expense associated with Secured Note One, comprised of $3,118 in accrued interest payable and $4,851 in accretion expense related to the original issuance discount and debt discount related to the warrants.
During the nine months ended February 28, 2023, the Company paid $4,500 on the Secured Note One. For the nine months ended February 28, 2023, the company recognized $53,945 in total interest expense associated with Secured Note One, comprised of $1,077 in cash interest payments, $8,315 in accrued interest payable and $14,553 in accretion expense related to the original issuance discount and debt discount related to the warrants.
As of February 28, 2023, the carrying value of Secured Note One is $51,970, net of $72,765 in unaccreted debt discounts.
On November 18, 2021, the Company entered into a 10% secured promissory note with an accredited investor (“Secured Note Two”) for which it received net proceeds of $150,000, consisting of a face amount of $157,500 and an original issuance discount of $7,500 (“Secured Note Two OID”). In addition, the Company issued 18,000 commitment warrants for the purchase of the Company’s common stock at an exercise price of $10.73 per share (“Secured Note Two Warrant”).
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Upon issuance of the Secured Note Two and Secured Note Two Warrants, the Company allocated the $150,000 in net proceeds received between the fair market value of Secured Note Two and the Secured Note Two Warrants.
During the three months ended February 28, 2023, the Company did not make any principal payments on Secured Note Two. For the three months ended February 28, 2023, the company recognized $4,789 in total interest expense associated with Secured Note Two, comprised of $1,878 in accrued interest payable and $2,911 in accretion expense related to the original issuance discount and debt discount related to the warrants.
For the nine months ended February 28, 2023, the company recognized $13,739 in total interest expense associated with Secured Note Two, comprised of $646 in cash interest payments, $5,007 in accrued interest payable and $8,732 in accretion expense related to the original issuance discount and debt discount related to the warrants.
As of February 28, 2023, the carrying value of Secured Two Note is $31,461, net of $43,657 in unaccreted debt discounts.
Related Party Note Payable
On December 10, 2021, the Company entered into a loan agreement with Jed Kaplan, the Company’s former Chairman of the Board, that has a principal amount of $247,818 (See Note 6 - Related Party Transactions). The loan bears interest at a rate of 5% per annum and matured on June 10, 2022.
On June 10, 2022, the loan and accrued interest of $6,178 were converted into a 17% equity stake in Simplicity One, increasing Kaplan’s total stake to 37% and reducing the Company’s stake to 59%.
During the three months ended February 28, 2023, and 2022, the Company recognized interest expense of $0 and $2,716, respectively. During the nine months ended February 28, 2023, and 2022, the Company recognized interest expense of $339 and $2,716, respectively.
Other Short Term Note Payable
During 2020, the Company received loan proceeds in the amount of $82,235 under the Paycheck Protection Program established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). During the year ended May 31, 2022, $40,500 of the obligation was forgiven by the Small Business Administration. As of February 28, 2023, the outstanding balance of this obligation was $41,735.
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 consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. 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.
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Revenue Recognition
In accordance with the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 606, Revenues from Contracts with Customers, 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.
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. After hours, the Company also mines for crypto currency using the computer equipment at the company-owned stores. Crypto mining revenue is recognized as the mining occurs. As of February 28, 2023, all Company-owned stores have been sold or closed.
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.
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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.
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 were included in intangible assets on our balance sheet and amortized on a straight-line basis when placed into service over the estimated useful lives of the costs, which is 3 to 5 years.
The Company periodically reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less that the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
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.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 establishes a three-tier fair value hierarchy which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
| ● | Level 1 inputs are quoted prices in active markets for identical assets or liabilities. |
| ● | Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices in active markets for similar assets or liabilities. |
| ● | Level 3 inputs are unobservable and reflect the Company’s own assumptions. |
Other than the derivative liability, the Company does not have a material amount of financial assets or liabilities that are required to be measured at fair value on a recurring basis under U.S. GAAP. None of the Company’s non-financial assets or non-financial liabilities are required to be measured at fair value on a recurring basis.
The Company has not elected to use fair value measurement for any assets or liabilities for which fair value measurement is not presently required by U.S. GAAP. However, the Company believes the fair values of cash and cash equivalents, accounts receivable, inventory, accounts payable, and accrued liabilities approximate their carrying amounts.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and principal financial officer, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and principal financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of February 28, 2023. Based upon this evaluation, our Chief Executive Officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of February 28, 2023.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company expects to implement changes to its internal control over financial reporting to enhance the evaluation of accounting transactions and its financial reporting process over the next year.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Not required for smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended February 28, 2023, the Company issued 12,110,208 shares pursuant to note conversions at a price of $0.02 per share. These issuances were made pursuant to an exemption from registration as set forth in Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and/or Rule 506 of Regulation D promulgated under the Securities Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
On April 17, 2023, the Company entered into a securities purchase agreement (the “April 2023 SPA”), dated as of April 17, 2023, with Ionic and FirstFire, pursuant to which the Company issued (i) a 12% secured convertible promissory note to Ionic (the “April 2023 Ionic Note”) with a maturity date of August 17, 2023, in the principal sum of $33,000; and (ii) a 12% secured convertible promissory note to FirstFire (the “April 2023 FirstFire Note” and together with the April 2023 Ionic Note, the “April 2023 Notes”) with a maturity date of August 17, 2023, in the principal sum of $33,000. The Company has filed with the Internal Revenue Service an employee retention credit rebate (the “ERC Rebate”) in the amount of approximately $400,000. Pursuant to the terms of the April 2023 SPA, the parties agreed that the ERC will be used to immediately repay the April 2023 Notes and the following notes held by Ionic and FirstFire:
| ● | Convertible Promissory Note by and between the Company, as borrower, and Ionic, as holder, in the principal sum of $16,500, dated March 8, 2023; | |
| ● | Convertible Promissory Note by and between the Company, as borrower, and Ionic, as holder, in the principal sum of $35,200, dated January 30, 2023; | |
| ● | Convertible Promissory Note by and between the Company, as borrower, and Ionic, as holder, in the principal sum of $66,000, dated September 8, 2022; | |
| ● | Convertible Promissory Note by and between the Company, as borrower, and Ionic, as holder, in the principal sum of $27,500, dated July 14, 2022; | |
| ● | Convertible Promissory Note by and between the Company, as borrower, and FirstFire, as holder, in the principal sum of $16,500, dated March 8, 2023; | |
| ● | Convertible Promissory Note by and between the Company, as borrower, and FirstFire, as holder, in the principal sum of $35,200, dated January 30, 2023; | |
| ● | Convertible Promissory Note by and between the Company, as borrower, and FirstFire, as holder, in the principal sum of $66,000, dated September 8, 2022; and | |
| ● | Convertible Promissory Note by and between the Company, as borrower, and FirstFire, as holder, in the principal sum of $27,500, dated July 14, 2022, |
with each of Ionic and FirstFire receiving 50% of the ERC Rebate, as well as $10,000 due to the holders’ counsel, to be paid immediately upon receipt thereof.
Pursuant to the terms of the April 2023 Ionic Note, the Company agreed to pay to Ionic $33,000 and to pay interest on the principal balance at the rate of 12% per annum. The April 2023 Ionic Note carries an original issue discount of $3,000. Accordingly, Ionic paid the purchase price of $30,000 in exchange for the April 2023 Ionic Note. The Company intends to use the proceeds for working capital. Ionic may convert the April 2023 Ionic Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the April 2023 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 $0.0175 per share, as the same may be adjusted as provided in the April 2023 Ionic Note.
Pursuant to the terms of the April 2023 FirstFire Note, the Company agreed to pay to FirstFire $33,000 and to pay interest on the principal balance at the rate of 12% per annum. The April 2023 FirstFire Note carries an original issue discount of $3,000. Accordingly, FirstFire paid the purchase price of $30,000 in exchange for the April 2023 FirstFire Note. The Company intends to use the proceeds for working capital. FirstFire may convert the April 2023 FirstFire Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the April 2023 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 $0.0175 per share, as the same may be adjusted as provided in the April 2023 FirstFire Note.
The obligations of the Company under each of the April 2023 Notes are secured by security interest in certain property of the Company, namely the ERC Rebate.
The Company may prepay either or both of the April 2023 Notes in accordance with the terms of the respective April 2023 Notes, with the understanding that $1,320 of interest under each of the April 2023 Notes is guaranteed and earned in full as of April 17, 2023. The April 2023 Notes contain customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the April 2023 SPA or the respective April 2023 Notes.
Upon the occurrence of any Event of Default (as defined in each of the April 2023 Notes), which has not been cured within the time prescribed in the respective April 2023 Notes, the respective April 2023 Note shall become immediately due and payable and the Company shall pay to the holder thereof, in full satisfaction of its obligations thereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
The description of the April 2023 SPA, the April 2023 Ionic Note and the April 2023 FirstFire Note does not purport to be complete and is qualified in its entirety by reference to the April 2023 SPA, the April 2023 Ionic Note and the April 2023 FirstFire Note, copies of which are filed as Exhibits 10.8, 10.9 and 10.10, respectively, hereto and are incorporated herein by reference.
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ITEM 6. EXHIBITS
| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SIMPLICITY ESPORTS AND GAMING COMPANY | ||
| Dated: April 19, 2023 | By: | /s/ Roman Franklin |
| Name: | Roman Franklin | |
| Title: | Chief Executive Officer (principal executive officer and principal financial officer) | |
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