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.
52
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.
53
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.
54
Debt Obligations
Convertible Secured
Promissory Promissory Related Short-Term
Notes Notes Party Debt 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.
55
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.
56
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.
57
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.
58
? 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.
59
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.
60
? 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.
61
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").
62
? 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.
63
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.
64
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.
65
? 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.
66
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.
67
? 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.
68
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.
69
? 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.
70
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.
71
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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