UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from __________ to __________
Commission
File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s
telephone number, including area code:
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N/A | N/A |
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer ☐ | Accelerated filer ☐ | |||
| Smaller
reporting company |
||||
| Emerging
growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As of November 08, 2022, there were shares of the Company’s common stock issued and outstanding.
SIMPLICITY ESPORTS AND GAMING COMPANY
Table of Contents
| 2 |
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| August 31, | May 31, | |||||||
| 2022 (Unaudited) | 2022 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Other receivable – sale of Brazil assets | ||||||||
| Inventory | ||||||||
| Prepaid franchise fees | ||||||||
| Other current assets | ||||||||
| Total Current Assets | ||||||||
| Non-Current Assets | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Deferred brokerage fees | ||||||||
| Property and equipment, net | ||||||||
| Right of use asset, operating leases, net | ||||||||
| Security deposits | ||||||||
| Due from franchisees | ||||||||
| Total Non-Current Assets | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current portion of convertible note payable, net of discount | ||||||||
| Related party loan, current portion | ||||||||
| Loan payable | ||||||||
| Operating lease obligation, current | ||||||||
| Current portion of deferred revenues | ||||||||
| Total Current Liabilities | ||||||||
| Non-Current Liabilities | ||||||||
| Operating lease obligation, net of current portion | ||||||||
| Non-current portion of convertible notes payable, net of discount | ||||||||
| Secured Promissory notes payable, net of discount | ||||||||
| Deferred revenues, less current portion | ||||||||
| Total Non-Current Liabilities | ||||||||
| Total Liabilities | ||||||||
| Commitments and Contingencies - Note 7 | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock - $ par value, shares authorized; share and shares issued and outstanding as of August 31, 2022, and May 31, 2022, respectively | ||||||||
| Common stock - $ par value; shares authorized; and shares issued and outstanding as of August 31, 2022, and May 31, 2022, respectively | ||||||||
| Common stock issuable | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total Simplicity Esports and Gaming Company Stockholders’ Deficit | ( | ) | ( | ) | ||||
| Non-Controlling Interest | ( | ) | ||||||
| Total Stockholders’ Deficit | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | $ | ||||||
The accompanying condensed unaudited notes are an integral part of these consolidated financial statements.
| 3 |
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| Revenues: | ||||||||
| Franchise revenues | $ | $ | ||||||
| Company-owned stores sales | ||||||||
| Esports revenue | ||||||||
| Total Revenues | ||||||||
| Cost of Goods Sold | ||||||||
| Gross Profit | ||||||||
| Operating Expenses: | ||||||||
| Compensation and related benefits | ||||||||
| Professional fees | ||||||||
| General and administrative expenses | ||||||||
| Impairment loss | ||||||||
| Total Operating Expenses | ||||||||
| Loss from Operations | ( | ) | ( | ) | ||||
| Other (Expense) Income: | ||||||||
| Loss on extinguishment of debt | ( | ) | ( | ) | ||||
| Loss on issuance of shares to employees and as consideration for accounts payable | ( | ) | ||||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Gain on disposition of Brazil assets | ||||||||
| Other income | ||||||||
| Total Other Expense | ( | ) | ( | ) | ||||
| Loss Before Provision for Income Taxes | ( | ) | ( | ) | ||||
| Provision for Income Taxes | ||||||||
| Net Loss | ( | ) | ( | ) | ||||
| Net (Income) Loss Attributable to Non-controlling Interest | ( | ) | ||||||
| Net Loss Attributable to Common Shareholders | $ | ( | ) | $ | ( | ) | ||
| Basic and Diluted Net Loss per Share | $ | ( | ) | $ | ( | ) | ||
| Basic and Diluted Weighted Average Number of Common Shares Outstanding | ||||||||
The accompanying condensed unaudited notes are an integral part of these consolidated financial statements.
| 4 |
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)
| Common Stock | Preferred Stock | |||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Additional Paid-In Capital | Issuable | Shares | Par Value | Additional Paid-in Capital | Non-Controlling Interest | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | |||||||||||||||||||||||||||||||
| Balance - May 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Shares issued in connection with issuance and amendments of notes payable | - | |||||||||||||||||||||||||||||||||||||||
| Shares issued for contracted services | - | |||||||||||||||||||||||||||||||||||||||
| Sale of warrants | - | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued in connection with franchise acquisition | - | |||||||||||||||||||||||||||||||||||||||
| Common stock issuable | - | - | ||||||||||||||||||||||||||||||||||||||
| Net loss attributable to non-controlling interest | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance - August 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Balance – May 31, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||
| Shares issued in connection with issuance and conversions of notes payable | - | |||||||||||||||||||||||||||||||||||||||
| Shares to be issued in connection with issuance of notes payable | - | - | ||||||||||||||||||||||||||||||||||||||
| Shares issued to directors, officers, or employees as compensation | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||||
| Shares issued as consideration for accounts payable | - | |||||||||||||||||||||||||||||||||||||||
| Sale of shares of Series X Convertible Preferred stock to Related Party | - | |||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | - | - | ||||||||||||||||||||||||||||||||||||||
| Non-controlling interest of original investment in subsidiaries | - | - | ||||||||||||||||||||||||||||||||||||||
| Net income attributable to non-controlling interest | - | - | ||||||||||||||||||||||||||||||||||||||
| Net Loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance August 31. 2022 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||
The accompanying condensed notes are an integral part of these consolidated financial statements.
| 5 |
SIMPLICITY ESPORTS AND GAMING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Three Months Ended | ||||||||
| August 31, 2022 | August 31, 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Non-cash interest expense | ||||||||
| Deferred guaranteed interest | ( | ) | ||||||
| Depreciation expense | ||||||||
| Amortization expense | ||||||||
| Impairment loss | ||||||||
| Provision for uncollectible accounts | ||||||||
| Loss on extinguishment of debt | ||||||||
| Loss on issuance of shares to employees and as consideration for accounts payable | ||||||||
| Stock-based compensation | ||||||||
| Change in lease liability net of leased asset | ( | ) | ||||||
| Deferred financing costs | ( | ) | ||||||
| Gain on disposition of assets | ( | ) | ||||||
| Gain on acquisition | ( | ) | ||||||
| Employee compensation in connection with the issuance of shares of Series X Convertible Preferred Stock | ||||||||
| Issuance of shares for services | ||||||||
| Issuance of shares for interest payment | ||||||||
| Issuance of shares for inventory purchases | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses | ||||||||
| Deferred brokerage fees | ||||||||
| Deferred revenues | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Due from franchisee | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ||||||
| Proceeds from sale of Brazil assets | ||||||||
| Net cash provided by (used) in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from sale of warrants | ||||||||
| Repayment of note payable | ( | ) | ( | ) | ||||
| Proceeds from note payable | ||||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ||||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Supplemental Non-Cash Investing and Financing Information | ||||||||
| Common stock issued as consideration for accounts payable | $ | $ | ||||||
| Common stock issued to employees | $ | $ | ||||||
| Common stock issued in connection with notes payable | $ | $ | ||||||
| Beneficial conversion feature with warrants issued for debt discount | $ | $ | ||||||
| Common stock issued for consideration in an acquisition of fixed assets | $ | $ | ||||||
| Purchase price consideration receivable – sale of Brazil assets | $ | $ | ||||||
| Common stock issuable in connection with notes payable | $ | $ | ||||||
The accompanying condensed unaudited notes are an integral part of these consolidated financial statements.
| 6 |
SIMPLICITY ESPORTS AND GAMING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2022
(UNAUDITED)
NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity Esports and Gaming Company (the “Company,” “Simplicity,” “we,” or “our”) was organized as a blank check company under the laws of the State of Delaware on April 17, 2017. The Company was formed under the name I-AM Capital Acquisition Company for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses (“Business Combination”). On November 20, 2018, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc. On January 2, 2019, the Company changed its name from Smaaash Entertainment Inc. to Simplicity Esports and Gaming Company.
Through our wholly owned subsidiary, Simplicity Esports, LLC, acquired on January 2, 2019, the Company implements a unique approach to ensure the ultimate fan friendly esports experience, involving gamers at the grassroots level to feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community, and we use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other in the industry. Simplicity is an established brand in the esports industry with an engaged fan base competing in popular games across different genres, including PUBG, Gears of War, Smite, Guns of Boom, and multiple EA Sports titles. Additionally, the Simplicity stream team encompasses a unique group of casters, influencers, and personalities, all of whom connect to Simplicity’s dedicated fan base. Simplicity also operates esports gaming centers that provide the public the opportunity to experience and enjoy gaming and esports in a social setting, regardless of skill or experience.
Through our wholly owned subsidiary, PLAYlive Nation, Inc. (“PLAYlive”), acquired on July 29, 2019, the Company has a network of franchised esports gaming centers. As of August 31, 2022, the Company had five corporate owned stores and 10 franchised locations operating in various states including Arizona, California, Florida, Idaho, Maryland, Ohio, South Carolina, Texas and Washington. PLAYlive offers a video gaming lounge concept to qualified franchisees. PLAYlive currently offers single-unit location franchises, as well as agreements to develop multiple locations. This PLAYlive model is interlaced with the esports gaming centers mentioned above to create the ultimate gaming center.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented.
The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, as filed with the SEC on September 27, 2022. The interim results for the three months ended August 31, 2022 are not necessarily indicative of the results to be expected for the year ending May 31, 2023 or for any future interim periods.
| 7 |
Basis of Consolidation
The
accompanying unaudited consolidated financial statements include the operations of the Company and its wholly owned subsidiaries, Simplicity
Esports, LLC, PLAYlive, Simplicity Union Gap, LLC, Simplicity Kennewick, LLC, Simplicity Humble, LLC, Simplicity Frisco, LLC, Simplicity
Billings, LLC, Simplicity Brea, LLC, Simplicity Santa Rosa, LLC, Simplicity St. Louis, LLC, Simplicity St. Petersburg, LLC, Simplicity
Fullerton, LLC, Simplicity Salinas, LLC, Simplicity Tracy, LLC, Simplicity Vancouver, LLC, Simplicity Fort Bliss, LLC, and PLAYlive Nation
Holdings, LLC; its
All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents
The
Company considers short-term interest-bearing investments with initial maturities of three months or less to be cash equivalents. The
Company has
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable.
Cash and cash equivalents in a financial institution, which at times, may exceed the Federal depository insurance coverage of $
Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the consolidated balance sheet.
Foreign Currencies
Revenue and expenses are translated at average rates of exchange prevailing during the period.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
In accordance with ASC 606, Revenues from Contracts with Customers, the Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods and services.
The following describes principal activities, separated by major product or service, from which the Company generates its revenues.
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.
| 8 |
Franchise Revenues
Franchise revenues consist of royalties, fees and initial license fee income. Franchise royalties are based on six percent of franchise store sales after a minimum level of sales occur and are recognized as sales occur. Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other behaviors, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty rate. Franchise royalties are billed on a monthly basis.
The
Company recognizes initial franchise license fee revenue when the Company has performed substantially all the services required in the
franchise agreement. Fees received that do not meet these criteria are recorded as deferred revenues until earned. The pre-opening services
provided to franchisees do not contain separate and distinct performance obligations from the franchise right; thus, the fees collected
will be amortized on a straight-line basis beginning at the store opening date through the term of the franchise agreement, which is
typically
The Company offers various incentive programs for franchisees including royalty incentives, new store opening incentives (i.e. development incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned or granted under these programs that are in the form of discounts.
Commissary sales are comprised of gaming equipment and supplies sold to franchised stores and are recognized as revenue upon shipment or delivery of the related products to the franchisees. Payments are generally due within 30 days.
Fees for information services, including software maintenance fees, marketing fees and website maintenance, graphic and promotion fees are recognized as revenue as such services are provided.
Esports Revenue
Esports is a form of competition using video games. Most commonly, esports takes the form of organized, single player and multiplayer video game tournaments or leagues, particularly between professional players, individually or as teams. Revenues from Esports revenues are recognized when the competition is completed, and prize money is awarded. Revenues earned from team sponsorships, prize winnings, league sponsorships, and from the Company’s share of league revenues are included in esports revenue.
Deferred Revenues
Deferred revenues are classified as current or long-term based on when management estimates the revenues will be recognized.
The Company receives payments from franchisees in advance of all performance obligations having been met, including but not limited to franchise locations being opened. As certain conditions agreed to in these franchise agreements are performed, revenues are recognized.
Deferred costs include commissions paid to brokers related to the sale of specific new franchises which have not met revenue recognition criteria as of August 31, 2022, and May 31, 2022. These costs are recognized in the same period as the initial franchise fee revenue is recognized.
| 9 |
The table below summarizes Deferred Revenues as of August 31, 2022:
| May 31, 2022 | Revenue Recognized | August 31, 2022 | ||||||||||
| Deferred Revenue | $ | $ | $ | |||||||||
| Total | $ | $ | $ | |||||||||
Accounts Receivable
The
Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e. franchisees), taking into consideration
the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable are written off against the
allowance when management determines it is probable the receivable is worthless. Customer account balances with invoices dated over 90
days old are considered delinquent and considered in the allowance assessment. The Company performs credit evaluations of its customers
and, generally, requires no collateral. Management has assessed accounts receivable and an allowance for doubtful accounts of approximately
$
Inventory
Inventories
are stated at the lower of cost or market. The company periodically reviews the value of items in inventory and provides write-downs
or write-offs of inventory based on its assessment of market conditions. The Company has recorded an impairment of approximately $
Property and Equipment
Property
and equipment and leasehold improvements are recorded at its historical cost. The cost of property and equipment is depreciated over
the estimated useful lives, when placed in service (ranging from
The
Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be
recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by
determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total
of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess
of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or
the fair value less costs to sell. The Company has recorded impairment charges of approximately $
Intangible Assets and Impairment
Intangible
assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. These costs were included
in intangible assets on our balance sheet and amortized on a straight-line basis when placed into service over the estimated useful lives
of the costs, which is
The
Company periodically reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future
cash flows is less that the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value. For the three months ended August 31, 2022, the Company performed an internal evaluation of
the intangible assets which indicated impairment was required and recorded an impairment charge of approximately $
| 10 |
Goodwill
Goodwill
is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill, but we
assess our goodwill for impairment at least annually. Our assessment date is May 31, and we performed an internal evaluation of the goodwill
value at August 31, 2022 with quantitative and qualitative considerations. Based on this internal evaluation, we recorded an impairment
charge of $
Franchise Locations
Through PLAYlive, the Company’s wholly owned subsidiary, the Company has entered into franchise agreements with third parties. As of August 31, 2022, 12 franchise locations were considered to be operational in various states including Arizona, California, Florida, Idaho, Maryland, Ohio, South Carolina, Texas and Washington.
The Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation
The Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation and ASC 505-50, Equity-Based Payments to Non-Employees. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued and are recognized over the employees required service period, which is generally the vesting period.
Non employee stock-based payments
The Company records stock-based payments made to non-employees in accordance with Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions.
The Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Net income (loss) - per share is calculated by dividing the Company’s net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings or loss per common share is calculated by dividing the Company’s net income or loss available to common stockholders by the diluted weighted average number of common shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. For this calculation potentially dilutive securities consist primarily of warrants, outstanding options and shares into which the company’s convertible notes payable are convertible. When the Company records a loss from operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per common share.
Income Taxes
The Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
| 11 |
ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the consolidated financial statements recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
Recently Issued and Recently Adopted Accounting Pronouncements
Accounting standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following are a summary of recent accounting developments.
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective June 1, 2023 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company is evaluating the impact of the adoption of ASU 2020-06 on the Company’s financial statements.
In May 2021, the FASB issued ASU 2021-04, Earning Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40), which clarified and reduced diversity in an issuer’s accounting for modifications of exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This update will be effective for the Company as of June 1, 2023. The Company is currently assessing the potential impact of ASU 2021-04 to our consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
Going Concern, Liquidity and Management’s Plan
The Company’s unaudited consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As
reflected in the unaudited consolidated financial statements, as of August 31, 2022, the Company had an accumulated deficit of $
The Company’s cash position may not be sufficient to support the Company’s daily operations. Management intends to raise additional funds by way of private and/or public offerings. While the Company believes in the viability of its strategy and its ability to generate sufficient revenue and to raise additional funds, there can be no assurances to that effect. Should the Company fail to raise additional capital, it may be compelled to reduce the scope of its planned future business activities.
The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings.
| 12 |
The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally.
Because COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers as of May 1, 2020 and subsequently reopened the majority of our company owned stores and franchise locations. Although our franchise agreements with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming Centers will default in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase in accounts receivables or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability to pay the minimum monthly royalty payments owed by the franchisee.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition and results of operations.
The measures taken to date impacted the Company’s business for the fiscal year ended May 31, 2022 as well as the fiscal quarter ended August 31, 2022 and will potentially continue to impact the Company’s business. Management expects that all of its business segments, across all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot be determined at this time.
NOTE 3 — DISPOSITIONS
On
June 10, 2022, the Company and Simplicity One, the Company’s majority owned subsidiary, entered into an asset purchase
agreement with a third party in which the third party acquired the Riot Games license for consideration of $
NOTE 4 — PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
| August 31, 2022 | May 31, 2022 | |||||||
| Leasehold improvements | $ | $ | ||||||
| Property and equipment | ||||||||
| Total cost | ||||||||
| Less accumulated depreciation | ( | ) | ( | ) | ||||
| Net property plant and equipment | $ | $ | ||||||
Depreciation
expense for the three months ended August 31, 2022, and 2021 was $
| 13 |
NOTE 5 — INTANGIBLE ASSETS
The following table sets forth the intangible assets, including accumulated amortization as of August 31, 2022:
| August 31, 2022 | ||||||||||||||
| Remaining | Accumulated | Net Carrying | ||||||||||||
| Useful Life | Cost | Amortization | Value | |||||||||||
| Internet Domain | $ | $ | $ | |||||||||||
| $ | $ | $ | ||||||||||||
The following tables set forth the intangible assets, including accumulated amortization as of May 31, 2022:
| May 31, 2022 | ||||||||||||||
| Remaining | Accumulated | Net Carrying | ||||||||||||
| Useful Life | Cost | Amortization | Value | |||||||||||
| Trademarks | ||||||||||||||
| Customer Database | ||||||||||||||
| Restrictive Covenant | ||||||||||||||
| Customer Contracts | ||||||||||||||
| $ | $ | $ | ||||||||||||
During
the three months ended August 31, 2022 and 2021, the Company recorded impairment expense of $
The following table sets forth the future amortization of the Company’s intangible assets as of August 31, 2022 for the fiscal years ending May 31:
| 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | ||||||||||||||||||||||
| Non-Competes | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
| Customer Contracts | ||||||||||||||||||||||||||||
| Restrictive Covenant | ||||||||||||||||||||||||||||
| Customer Database | ||||||||||||||||||||||||||||
| Internet Domain | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||
Amortization
expense for the three months ended August 31, 2022, and 2021 was $
Goodwill
The Company’s goodwill carrying amounts relate to the acquisitions of Simplicity Esports LLC and PLAYlive. The composition of the goodwill balance, is as follows:
Three Months Ended August 31, 2022 | Fiscal Year Ended May 31, 2022 | |||||||
| Simplicity Esports LLC | $ | $ | ||||||
| PLAYlive Nation Inc. | ||||||||
| Ft. Bliss | ||||||||
| Total Goodwill | $ | $ | ||||||
During
the three months ended August 31, 2022, and 2021 the Company recorded impairment expense of $
| 14 |
NOTE 6 — RELATED PARTY TRANSACTIONS
Kaplan Promissory Notes
On
December 10, 2021, the Company entered into a related party transaction with Jed Kaplan, the Company’s then Chairman of the Board
and a more than 5% shareholder, to provide a loan to the Company to provide additional operating funds for Simplicity One, the Company’s
majority owned subsidiary. The principal amount of the loan was $
NOTE 7 — COMMITMENTS AND CONTINGENCIES
As of August 31, 2022, the Company has entered into various leases for its corporate office and its gaming centers.
The following table summarizes the right-of use asset and lease liability as of August 31, 2022:
| Right-of-use Asset, net | $ | |||
| Lease Liability | ||||
| Current | $ | |||
| Long Term | ||||
| Total | $ |
During
the three months ended August 31, 2022, the Company recognized a loss on impairment of $
The following table summarizes the Company’s scheduled future minimum lease payments as of August 31, 2022:
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and beyond | ||||
| Total Operating Lease Obligations | $ | |||
| Less: Amount representing imputed interest | ( | ) | ||
| Present value of minimum lease payments | $ | |||
| Less current portion | ||||
| Long term portion | $ |
As
of August 31, 2022, and May 31, 2022, the weighted-average remaining lease terms was
| 15 |
Employment Agreements, Board Compensation and Bonuses
On
July 29, 2020, (i) the Company entered into an employment agreement (the “Kaplan 2020 Agreement”) with Mr. Kaplan; and (ii)
the Board of Directors approved for Mr. Kaplan a $
Effective
March 29, 2021, the Company promoted Mr. Kaplan to be the Chairman of the Board of Directors, and he ceased to be the Company’s
Chief Executive Officer and Interim Chief Financial Officer. Upon this change, Mr. Kaplan’s new monthly salary became $
On
July 29, 2020, (i) the Company entered into an employment agreement (the “Franklin 2020 Agreement”) with Mr. Franklin; and
(ii) the Board of Directors approved for Mr. Franklin a $
On
March 25, 2021, the Board of Directors appointed Mr. Franklin as the Company’s Chief Executive Officer, effective March 29, 2021.
Mr. Franklin continues to be a member of our board of directors. In connection with Mr. Franklin’s appointment, on March 25, 2021,
the Company entered into an employment agreement, dated as of March 29, 2021, by and between the Company and Mr. Franklin (the “2021
Franklin Employment Agreement”). Pursuant to the terms of the 2021 Franklin Employment Agreement, in exchange for Mr. Franklin’s
services, the Company agreed to pay Mr. Franklin an annual base salary of $
On
May 11, 2021, the Board appointed Nancy Hennessey to serve as the Company’s Chief Financial Officer, effective May 17, 2021. In
connection with Ms. Hennessey’s appointment as the Company’s Chief Financial officer, the Company entered into an employment
agreement, dated as of May 17, 2021, by and between the Company and Ms. Hennessey (the “Hennessey Employment Agreement”).
Pursuant to the terms of the Hennessey Employment Agreement, in exchange for Ms. Hennessey’s services, the Company agreed to pay
Ms. Hennessey an annual base salary of $
| 16 |
NOTE 8 - DEBT
The table below presents the Company’s outstanding debt balances as of August 31, 2022, and May 31, 2022:
| Convertible Promissory Notes | Secured Promissory Notes | Related Party Debt | Short-Term Note Payable | |||||||||||||
| Principal Balance as of May 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Carrying Value as of May 31, 2022 | ||||||||||||||||
| Principal | ||||||||||||||||
| Borrowings | ||||||||||||||||
| Repayments | ( | ) | ( | ) | ||||||||||||
| Conversions | ( | ) | ||||||||||||||
| Totals | ( | ) | ( | ) | ||||||||||||
| Unamortized Debt Issuance Costs, Beneficial Conversion Feature, and Warrant Discount | ||||||||||||||||
| Beginning Balance | ( | ) | ( | ) | ||||||||||||
| Additions | ( | ) | ||||||||||||||
| Accretion | ||||||||||||||||
| Ending Balance | ( | ) | ( | ) | ||||||||||||
| Principal Balance as of August 31, 2022 | $ | $ | $ | $ | ||||||||||||
| Carrying Value as of August 31, 2022 | ||||||||||||||||
| Less Short-Term Portion | ||||||||||||||||
| Long Term Portion | $ | $ | $ | $ | ||||||||||||
Scheduled principal maturities of the Company’s outstanding debt over the next five fiscal years is as follows:
| Fiscal year ended May 31, | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| $ | ||||
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
The Company may prepay the Labrys Note at any time prior to the date that an Event of Default (as defined in the Labrys Note) (each an “Labrys Event of Default”) occurs at an amount equal to 100% of the Labrys Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). The Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Labrys Note or Labrys SPA.
| 17 |
Upon
Labrys’s provision of notice to the Company of the occurrence of any Labrys Event of Default, which has not been cured within five
(5) calendar days, the Labrys Note shall become immediately due and payable and the Company shall pay to Labrys, in full satisfaction
of its obligations hereunder, an amount equal to the Labrys Principal Sum then outstanding plus accrued interest multiplied by
As
of March 16, 2022, the Company and Labrys entered into an amendment (the “Labrys Amendment”) to the Labrys SPA and the Labrys
Note, as amended. Pursuant to the terms of the Labrys Amendment, the maturity date of the Labrys Note was extended to the earlier of
(i)
Upon
the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of
the Labrys Note was reduced from $
During
the quarters ended August 31, 2022, the Company did not make any payments to Labrys. During the quarter ended August 31, 2022, the Company
recognized $
During
the quarter ended August 31, 2021, the Company paid interim payments to the Holder in the amount of $
As
of August 31, 2022, the carrying value and face value of the Labrys Note was $
March 2021 FirstFire Global 12% Convertible Promissory Note
On
March 10, 2021, the Company, entered into a securities purchase agreement (the “March 2021 FirstFire SPA”) with FirstFire
Global Opportunities Fund, LLC, a Delaware limited liability company (the “FirstFire”), pursuant to which the Company issued
a
Upon
the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of
the March 2021 FirstFire Note was reduced from $
| 18 |
The Company may prepay the March 2021 FirstFire Note at any time prior to the date that an Event of Default (as defined in the March 2021 FirstFire Note) (each an “March 2021 FirstFire Event of Default”) occurs at an amount equal to 100% of the March 2021 FirstFire Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). The March 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 March 2021 FirstFire Note or March 2021 FirstFire SPA.
Upon
FirstFire’s provision of notice to the Company of the occurrence of any March 2021 FirstFire Event of Default, which has not been
cured within five (5) calendar days the March 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 March 2021 FirstFire Principal Sum then outstanding
plus accrued interest multiplied by
The
Company was required to make an interim payment to FirstFire in the amount of $
On
October 1, 2021, the Company issued to FirstFire a second three-year common stock warrant to purchase
On
April 29, 2022, FirstFire converted $
On
July 27, 2022, FirstFire converted $
During
the quarter ended August 31, 2022, the Company recognized $
During
the quarter ended August 31, 2021, the Company recognized $
As
of May 31, 2022, the carrying value and face value of the March 2021 FirstFire Note was $
June 2021 FirstFire Global 12% Convertible Promissory Note
On
June 11, 2021, the Company entered into a securities purchase agreement (the “June 2021 FirstFire SPA”) with FirstFire, pursuant
to which the Company issued (i) a
| 19 |
The following are the material terms of the June 2021 FirstFire SPA and June 2021 FirstFire Note:
| ● | The
June 2021 FirstFire Note matures on | |
| ● | At
its election, FirstFire may convert the June 2021 FirstFire Note into the Company’s common stock (subject to the beneficial
ownership limitations of | |
| ● | The
Company agree to pay interest on the June 2021 Principal Sum at the rate of | |
| ● | The
June 2021 FirstFire Note carries an original issue discount of $ | |
| ● | The Company may prepay the June 2021 FirstFire Note at any time prior to maturity in accordance with the terms of the June 2021 FirstFire Note. | |
| ● | The
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 three calendar days, the June 2021
FirstFire Note shall become immediately due and payable and the Company shall pay to FirstFire, in full satisfaction of its obligations
hereunder, an amount equal to the June 2021 FirstFire Principal Sum then outstanding plus accrued interest multiplied by | |
| ● | Pursuant to the June 2021 FirstFire SPA, the June 2021 FirstFire Commitment Shares and the shares underlying the June 2021 FirstFire Note and June 2021 FirstFire Warrant carry standard registration rights. |
Upon
issuance of the June 2021 FirstFire Note, the Company received net proceeds of $
On
September 16, 2021, the Company made an interim payment to the June 2021 FirstFire Note in the amount of $
Upon
the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of
the June 2021 FirstFire Note was reduced from $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
During
the quarter ended August 31, 2021, the Company recorded interest expense of $
As
of August 31, 2022, the carrying value of the June 2021 FirstFire Note was $
| 20 |
June 2021 GS Capital Securities 12% Convertible Promissory Note
On
June 16, 2021, the Company entered into a securities purchase agreement (the “June 2021 GS SPA”) with GS Capital Partners,
LLC (“GS”), pursuant to which the Company issued (i) a
The following are the material terms of the June 2021 GS SPA and June 2021 GS Note:
| ● | The
June 2021 GS Note matures on | |
| ● | At
its election, GS may convert the June 2021 GS Note into the Company’s common stock (subject to the beneficial ownership limitations
of | |
| ● | The
Company agree to pay interest on the June 2021 GS Principal Sum at the rate of | |
| ● | The
June 2021 GS Note carries an original issue discount of $ | |
| ● | The Company may prepay the June 2021 GS Note at any time prior to maturity in accordance with the terms of the June 2021 GS Note. | |
| ● | The
June 2021 GS Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the June 2021 GS Note or the June 2021 GS SPA. Upon the occurrence of any event of default
(as defined in the June 2021 GS Note) which has not been cured within three calendar days, the June 2021 GS Note shall become immediately
due and payable and the Company shall pay to GS, in full satisfaction of its obligations hereunder, an amount equal to the June 2021
GS Principal Sum then outstanding plus accrued interest multiplied by | |
| ● | Pursuant to the June 2021 GS SPA, the June 2021 GS Commitment Shares and the shares underlying the June 2021 GS Note and June 2021 GS Warrant carry standard registration rights. |
Upon
issuance of the June 2021 GS Note, the Company received net proceeds of $
Upon
the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of
the June 2021 GS Note was reduced from $
On
April 18, 2022, GS converted $
On
July 18, 2022, GS converted $
| 21 |
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
As
of August 31, 2022, the carrying value of the June 2021 GS Note was $
August 2021 Jefferson Street Capital 12% Convertible Promissory Note
On
August 23, 2021, the Company entered into a securities purchase agreement (the “August 2021 Jefferson SPA”) with Jefferson
Street Capital, LLC (“Jefferson”), pursuant to which the Company issued (i) a
The following are the material terms of the August 2021 Jefferson SPA and August 2021 Jefferson Note:
| ● | The
August 2021 Jefferson Note matures on | |
| ● | At
its election, Jefferson may convert the August 2021 Jefferson Note into the Company’s common stock (subject to the beneficial
ownership limitations of | |
| ● | The
Company agree to pay interest on the August 2021 Jefferson Principal Sum at the rate of | |
| ● | The
August 2021 Jefferson Note carries an original issue discount of $ | |
| ● | The Company may prepay the August 2021 Jefferson Note at any time prior to maturity in accordance with the terms of the August 2021 Jefferson Note. | |
| ● | The
August 2021 Jefferson Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the August 2021 Jefferson Note or the August 2021 Jefferson SPA. Upon the occurrence
of any event of default (as defined in the August 2021 Jefferson Note) which has not been cured within three calendar days, the August
2021 Jefferson Note shall become immediately due and payable and the Company shall pay to Jefferson, in full satisfaction of its
obligations hereunder, an amount equal to the August 2021 Jefferson Principal Sum then outstanding plus accrued interest multiplied
by | |
| ● | 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 $
| 22 |
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 $
On
August 23, 2022, GS converted $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
During
the quarter ended August 31, 2021, the Company recorded interest expense of $
As
of August 31, 2022, the carrying value of the August 2021 Jefferson Note was $
August 2021 Lucas Ventures Capital 12% Convertible Note
On
August 31, 2021, the Company entered into a securities purchase agreement (the “August 2021 Lucas SPA”) with Lucas Ventures,
LLC (“Lucas”), pursuant to which the Company issued (i) a
The following are the material terms of the August 2021 Lucas SPA and August 2021 Lucas Note:
| ● | The
August 2021 Lucas Note matures on | |
| ● | At
its election, Lucas may convert the August 2021 Lucas Note into the Company’s common stock (subject to the beneficial ownership
limitations of | |
| ● | The
Company agree to pay interest on the August 2021 Lucas Principal Sum at the rate of | |
| ● | The
August 2021 Lucas Note carries an original issue discount of $ | |
| ● | The Company may prepay the August 2021 Lucas Note at any time prior to maturity in accordance with the terms of the August 2021 Lucas Note. | |
| ● | The
August 2021 Lucas Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the August 2021 Lucas Note or the August 2021 Lucas SPA. Upon the occurrence of any event
of default (as defined in the August 2021 Lucas Note) which has not been cured within three calendar days, the August 2021 Lucas
Note shall become immediately due and payable and the Company shall pay to Lucas, in full satisfaction of its obligations hereunder,
an amount equal to the August 2021 Lucas Principal Sum then outstanding plus accrued interest multiplied by | |
| ● | 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. |
| 23 |
Upon
issuance of the August 2021 Lucas Note, the Company received net proceeds of $
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 $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
As
of August 31, 2022, the carrying value of the August 2021 Lucas Note was $
August 2021 LGH Investments, LLC 12% Convertible Promissory Note
On
August 31, 2021, the Company and LGH Investments, LLC, (“LGH”) entered into a securities purchase agreement (the “August
2021 LGH SPA”) pursuant to which the Company issued a
The following are the material terms of the August 2021 LGH SPA and August 2021 LGH Note:
| ● | The
August 2021 LGH Note matures on | |
| ● | At
its election, LGH may convert the August 2021 LGH Note into the Company’s common stock (subject to the beneficial ownership
limitations of | |
| ● | The
Company agree to pay interest on the August 2021 LGH Principal Sum at the rate of | |
| ● | The
August 2021 LGH Note carries an original issue discount of $ | |
| ● | The Company may prepay the August 2021 LGH Note at any time prior to maturity in accordance with the terms of the August 2021 LGH Note. | |
| ● | The
August 2021 LGH Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the August 2021 LGH Note or the August 2021 LGH SPA. Upon the occurrence of any event
of default (as defined in the August 2021 LGH Note which has not been cured within three calendar days, the August 2021 LGH Note
shall become immediately due and payable and the Company shall pay to LGH, in full satisfaction of its obligations hereunder, an
amount equal to the August 2021 LGH Principal Sum then outstanding plus accrued interest multiplied by | |
| ● | Pursuant to the August 2021 LGH SPA, the shares underlying the August 2021 LGH Note carry standard registration rights. |
| 24 |
Upon
issuance of the August 2021 LGH Note, the Company received net proceeds of $
As
of March 16, 2022, the Company and LGH entered into an Amendment and Waiver Pursuant to Convertible Promissory Note (the “LGH Amendment”).
Pursuant to the terms of the LGH Amendment, the parties agreed that the conversion price of the August 2021 LGH Note was decreased from
$
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
As
of August 31, 2022, the carrying value of the August 2021 LGH Note was $
September 2021 Ionic Ventures, LLC 12% Convertible Promissory Note
On
September 28, 2021, the Company entered into a securities purchase agreement (the “September 2021 Ionic SPA”) with Ionic
Ventures, LLC (“Ionic”), pursuant to which the Company issued (i) a
The following are the material terms of the September 2021 Ionic SPA and September 2021 Ionic Note:
| ● | The
September 2021 Ionic Note matures on | |
| ● | At
its election, Ionic may convert the September 2021 Ionic Note into the Company’s common stock (subject to the beneficial ownership
limitations of | |
| ● | The
Company agree to pay interest on the September 2021 Ionic Principal Sum at the rate of | |
| ● | The
September 2021 Ionic Note carries an original issue discount of $ | |
| ● | The Company may prepay the September 2021 Ionic Note at any time prior to maturity in accordance with the terms of the September 2021 Ionic Note. | |
| ● | The
September 2021 Ionic Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the August 2021 Ionic Note or the September 2021 Ionic SPA. Upon the occurrence of any
event of default (as defined in the September 2021 Ionic Note) which has not been cured within three calendar days, the August 2021
Ionic Note shall become immediately due and payable and the Company shall pay to Ionic, in full satisfaction of its obligations hereunder,
an amount equal to the September 2021 Ionic Principal Sum then outstanding plus accrued interest multiplied by | |
| ● | 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. |
| 25 |
Upon
issuance of the September 2021 Ionic Note, the Company received net proceeds of $
Upon
the issuance of the March 2022 FirstFire Note, March 2022 GS Note, and March 2022 Ionic Note described below, the conversion price of
the September 2021 Ionic Note was reduced from $
On
April 25, 2022, Ionic converted $
On
July 28, 2022, Ionic converted $
On
August 24, 2022, Ionic converted $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
As
of August 31, 2022, the carrying value of the September 2021 Ionic Note was $
March 2022 FirstFire Global 12% Convertible Promissory Note
On
March 21, 2022, the Company entered into a securities purchase agreement (the “March 2022 FirstFire SPA”) with FirstFire,
pursuant to which the Company issued (i) a
The following are the material terms of the March 2022 FirstFire SPA and March 2022 FirstFire Note:
| ● | The
March 2022 FirstFire Note matures on | |
| ● | At
its election, FirstFire may convert the March 2022 FirstFire Note into the Company’s common stock (subject to the beneficial
ownership limitations of | |
| ● | The
Company agree to pay interest on the March 2022 FirstFire Principal Sum at the rate of |
| 26 |
| ● | The
March 2022 FirstFire Note carries an original issue discount of $ | |
| ● | The Company may prepay the March 2022 FirstFire Note at any time prior to maturity in accordance with the terms of the March 2022 FirstFire Note. | |
| ● | The
March 2022 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 March 2022 FirstFire Note or the March 2022 FirstFire SPA. Upon the occurrence of
any event of default (as defined in the March 2022 I FirstFire Note) which has not been cured within the period stipulated by the
March 2022 FirstFire Note, the March 2022 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 March 2022 FirstFire Principal Sum then outstanding plus
accrued interest multiplied by | |
| ● | Pursuant to the March 2022 FirstFire SPA, the March 2022 FirstFire Commitment Shares and the shares underlying the March 2022 FirstFire Note and March 2022 FirstFire Warrant carry standard registration rights. |
Upon
issuance of the March 2022 FirstFire Note, the Company received net proceeds of $
Upon
the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below,
the conversion price of the March 2022 FirstFire Note was reduced from $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
As
of August 31, 2022, the carrying value of the March 2022 FirstFire Note was $
March 2022 GS Capital Securities 12% Convertible Promissory Note
On
March 21, 2022, the Company entered into a securities purchase agreement (the “March 2022 GS SPA”) with GS, pursuant to which
the Company issued (i) a
The following are the material terms of the March 2022 GS SPA and March 2022 GS Note:
| ● | The
March 2022 GS Note matures on | |
| ● | At
its election, GS may convert the March 2022 GS Note into the Company’s common stock (subject to the beneficial ownership limitations
of | |
| ● | The
Company agree to pay interest on the March 2022 GS Principal Sum at the rate of | |
| ● | The
March 2022 GS Note carries an original issue discount of $ | |
| ● | The Company may prepay the March 2022 GS Note at any time prior to maturity in accordance with the terms of the March 2022 GS Note. |
| 27 |
| ● | The
March 2022 GS Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the March 2022 GS Note or the March 2022 GS SPA. Upon the occurrence of any event of
default (as defined in the March 2022 GS Note) which has not been cured within the period stipulated by the March 2022 GS Note, the
March 2022 GS Note shall become immediately due and payable and the Company shall pay to GS, in full satisfaction of its obligations
hereunder, an amount equal to the March 2022 GS Principal Sum then outstanding plus accrued interest multiplied by | |
| ● | Pursuant to the March 2022 GS SPA, the March 2022 GS Commitment Shares and the shares underlying the March 2022 GS Note and March 2022 GS Warrant carry standard registration rights. |
Upon
issuance of the March 2022 GS Note, the Company received net proceeds of $
Upon
the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below,
the conversion price of the March 2022 GS Note was reduced from $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
As
of August 31, 2022, the carrying value of the March 2022 GS Note was $
March 2022 Ionic Ventures 12% Convertible Promissory Note
On
March 21, 2022, the Company entered into a securities purchase agreement (the “March 2022 Ionic SPA”) with Ionic, pursuant
to which the Company issued (i) a
The following are the material terms of the March 2022 Ionic SPA and March 2022 Ionic Note:
| ● | The
March 2022 Ionic Note matures on | |
| ● | At
its election, Ionic may convert the March 2022 Ionic Note into the Company’s common stock (subject to the beneficial ownership
limitations of | |
| ● | The
Company agree to pay interest on the March 2022 Ionic Principal Sum at the rate of | |
| ● | The
March 2022 Ionic Note carries an original issue discount of $ | |
| ● | The Company may prepay the March 2022 Ionic Note at any time prior to maturity in accordance with the terms of the March 2022 Ionic Note. | |
| ● | The
March 2022 Ionic Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the March 2022 Ionic Note or the March 2022 Ionic SPA. Upon the occurrence of any event
of default (as defined in the March 2022 Ionic Note) which has not been cured within the period stipulated by the March 2022 Ionic
Note, the March 2022 Ionic Note shall become immediately due and payable and the Company shall pay to Ionic, in full satisfaction
of its obligations hereunder, an amount equal to the March 2022 Ionic Principal Sum then outstanding plus accrued interest multiplied
by | |
| ● | 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. |
| 28 |
Upon
issuance of the March 2022 Ionic Note, the Company received net proceeds of $
Upon
the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below,
the conversion price of the March 2022 Ionic Note was reduced from $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
As
of August 31, 2022, the carrying value of the March 2022 Ionic Note was $
April 2022 Jefferson Street Capital LLC 12% Convertible Promissory Note
On
April 1, 2022, the Company entered into a securities purchase agreement (the “April 2022 Jefferson SPA”) with Jefferson,
pursuant to which the Company issued (i) a
The following are the material terms of the April 2022 Jefferson SPA and April 2022 Jefferson Note:
| ● | The
April 2022 Jefferson Note matures on | |
| ● | At
its election, Jefferson may convert the April 2022 Jefferson Note into the Company’s common stock (subject to the beneficial
ownership limitations of | |
| ● | The
Company agree to pay interest on the April 2022 Jefferson Principal Sum at the rate of | |
| ● | The
April 2022 Jefferson Note carries an original issue discount of $ | |
| ● | The Company may prepay the April 2022 Jefferson Note at any time prior to maturity in accordance with the terms of the April 2022 Jefferson Note. | |
| ● | The
April 2022 Jefferson Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the April 2022 Jefferson Note or the April 2022 Jefferson SPA. Upon the occurrence of
any event of default (as defined in the April 2022 Jefferson Note) which has not been cured within the period stipulated by the April
2022 Jefferson Note, the April 2022 Jefferson Note shall become immediately due and payable and the Company shall pay to Jefferson,
in full satisfaction of its obligations hereunder, an amount equal to the April 2022 Jefferson Principal Sum then outstanding plus
accrued interest multiplied by | |
| ● | Pursuant to the April 2022 Jefferson SPA, the April 2022 Jefferson Commitment Shares and the shares underlying the April 2022 Jefferson Note and April 2022 Jefferson Warrant carry standard registration rights. |
| 29 |
Upon
issuance of the April 2022 Jefferson Note, the Company received net proceeds of $
Upon
the issuance of the July 2022 FirstFire Note, July 2022 GS Note, July 2022 Ionic Note, and July 2022 Jefferson Note described below,
the conversion price of the April 2022 Jefferson Note was reduced from $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
As
of May 31, 2022, the carrying value of the April 2022 Jefferson Note was $
July 2022 FirstFire Global 12% Convertible Promissory Note
On
July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 FirstFire SPA”) with FirstFire, pursuant
to which the Company issued (i) a
The following are the material terms of the July 2022 FirstFire SPA and July 2022 FirstFire Note:
| ● | The
July 2022 FirstFire Note matures on | |
| ● | At
its election, FirstFire may convert the July 2022 FirstFire Note into the Company’s common stock (subject to the beneficial
ownership limitations of | |
| ● | The
Company agree to pay interest on the July 2022 FirstFire Principal Sum at the rate of | |
| ● | The
July 2022 FirstFire Note carries an original issue discount of $ | |
| ● | The Company may prepay the July 2022 FirstFire Note at any time prior to maturity in accordance with the terms of the July 2022 FirstFire Note. | |
| ● | The
July 2022 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 July 2022 FirstFire Note or the July 2022 FirstFire SPA. Upon the occurrence of any
event of default (as defined in the July 2022 FirstFire Note) which has not been cured within the period stipulated by the July 2022
FirstFire Note, the July 2022 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 July 2022 FirstFire Principal Sum then outstanding plus accrued
interest multiplied by |
| 30 |
Upon
issuance of the July 2022 FirstFire Note, the Company received net proceeds of $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
July 2022 GS Capital Securities 12% Convertible Promissory Note
On
July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 GS SPA”) with GS, pursuant to which
the Company issued (i) a
The following are the material terms of the July 2022 GS SPA and July 2022 GS Note:
| ● | The
July 2022 GS Note matures on | |
| ● | At
its election, GS may convert the July 2022 GS Note into the Company’s common stock (subject to the beneficial ownership limitations
of | |
| ● | The
Company agree to pay interest on the July 2022 GS Principal Sum at the rate of | |
| ● | The
July 2022 GS Note carries an original issue discount of $ | |
| ● | The Company may prepay the July 2022 GS Note at any time prior to maturity in accordance with the terms of the July 2022 GS Note. | |
| ● | The
July 2022 GS Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the July 2022 GS Note or the July 2022 GS SPA. Upon the occurrence of any event of default
(as defined in the July 2022 GS Note) which has not been cured within the period stipulated by the July 2022 GS Note, the July 2022
GS Note shall become immediately due and payable and the Company shall pay to GS, in full satisfaction of its obligations hereunder,
an amount equal to the July 2022 GS Principal Sum then outstanding plus accrued interest multiplied by |
Upon
issuance of the July 2022 GS Note, the Company received net proceeds of $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
| 31 |
July 2022 Ionic Ventures, LLC 12% Convertible Promissory Note
On
July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 Ionic SPA”) with Ionic, pursuant
to which the Company issued (i) a
The following are the material terms of the July 2022 Ionic SPA and July 2022 Ionic Note:
| ● | The
July 2022 Ionic Note matures on | |
| ● | At
its election, Ionic may convert the July 2022 Ionic Note into the Company’s common stock (subject to the beneficial ownership
limitations of | |
| ● | The
Company agree to pay interest on the July 2022 Ionic Principal Sum at the rate of | |
| ● | The
July 2022 Ionic Note carries an original issue discount of $ | |
| ● | The Company may prepay the July 2022 Ionic Note at any time prior to maturity in accordance with the terms of the July 2022 Ionic Note. | |
| ● | The
July 2022 Ionic Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the July 2022 Ionic Note or the July 2022 Ionic SPA. Upon the occurrence of any event
of default (as defined in the July 2022 Ionic Note) which has not been cured within the period stipulated by the July 2022 Ionic
Note, the July 2022 Ionic Note shall become immediately due and payable and the Company shall pay to Ionic, in full satisfaction
of its obligations hereunder, an amount equal to the July 2022 Ionic Principal Sum then outstanding plus accrued interest multiplied
by |
Upon
issuance of the July 2022 Ionic Note, the Company received net proceeds of $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
July 2022 Jefferson Street Capital LLC 12% Convertible Promissory Note
On
July 14, 2022, the Company entered into a securities purchase agreement (the “July 2022 Jefferson SPA”) with Jefferson, pursuant
to which the Company issued (i) a
The following are the material terms of the July 2022 Jefferson SPA and July 2022 Jefferson Note:
| ● | The
July 2022 Jefferson Note matures on | |
| ● | At
its election, Jefferson may convert the July 2022 Jefferson Note into the Company’s common stock (subject to the beneficial
ownership limitations of |
| 32 |
| ● | The
Company agree to pay interest on the July 2022 Jefferson Principal Sum at the rate of | |
| ● | The
July 2022 Jefferson Note carries an original issue discount of $ | |
| ● | The Company may prepay the July 2022 Jefferson Note at any time prior to maturity in accordance with the terms of the July 2022 Jefferson Note. | |
| ● | The
July 2022 Jefferson Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the July 2022 Jefferson Note or the July 2022 Jefferson SPA. Upon the occurrence of any
event of default (as defined in the July 2022 Jefferson Note) which has not been cured within the period stipulated by the July 2022
Jefferson Note, the July 2022 Jefferson Note shall become immediately due and payable and the Company shall pay to Jefferson, in
full satisfaction of its obligations hereunder, an amount equal to the July 2022 Jefferson Principal Sum then outstanding plus accrued
interest multiplied by |
Upon
issuance of the July 2022 Jefferson Note, the Company received net proceeds of $
During
the quarter ended August 31, 2022, the Company recorded interest expense of $
Secured Promissory Notes
On
November 15, 2021, the Company entered into a
Upon
issuance of the Secured Note One and Secured Note One Warrants, the Company allocated the $
During
the quarter ended August 31, 2022, the Company made principal payments of $
On
November 18, 2021, the Company entered into a
| 33 |
Upon
issuance of the Secured Note Two and Secured Note Two Warrants, the Company allocated the $
During
the quarter ended August 31, 2022, the Company made principal payments of $
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 $
On
June 10, 2022, the loan and accrued interest of $
During
the quarter ended August 31, 2022, the Company recognized interest expense of $
Other Short Term Note Payable
During
2020, the Company received loan proceeds in the amount of $
NOTE 9 -STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue shares of preferred stock with a par value of $ per share. As of August 31, 2022, there were share of preferred stock issued or outstanding. As of May 31, 2022, there were shares of preferred stock issued and outstanding.
On August 23, 2022, the Company filed with the Delaware Secretary of State a certificate of designations (the “Certificate of Designations”) to designate one share of the Company’s preferred stock as the Series X Convertible Preferred Stock (“Series X Preferred”). The one share of Series X Preferred has a number of votes equal to all of the other votes entitled to be cast on any matter by any other shares or securities of the Company, plus one. The Series X Preferred does not have any economic or other interest in the Company. The share of Series X Preferred may not be transferred after issuance. If any transfer is attempted, the Series X Preferred will be automatically redeemed by the Company at a redemption price of $.
On
August 29, 2022, the Company issued and sold to Roman Franklin, the Company’s Chief Executive Officer, principal financial officer,
principal accounting officer, member of the Company’s Board of Directors, and greater than 5% stockholder, one share of the Company’s
Series X Preferred for a purchase price of $
| 34 |
At the election of the Series X Preferred holder at any time following the date that the Company has amended its articles of incorporation to increase the authorized shares of common stock such that there are sufficient authorized but unissued shares of common stock to permit conversion of the Series X Preferred as set forth in the Certificate of Designations, the Series X Preferred is convertible into shares of the Company’s common stock.
Upon
issuance of the Series X Preferred, the Company estimated the fair market value of the Series X Preferred to be $
Common Stock
The Company is authorized to issue shares of common stock with a par value of $ per share. Holders of the shares of the Company’s common stock are entitled to one vote for each share. As of August 31, 2022, and May 31, 2022, there were and shares of common stock issued and outstanding, respectively.
During the quarter ended August 31, 2022, the Company issued shares of its common stock as follows:
| ● | On
June 1, 2022, the Company issued shares of its common stock, valued at $ per share, as consideration for $ | |
| ● | On
June 24, 2021, the Company issued shares of its common stock, valued at $ per share, as compensation to officers and directors
of the Company and recognized a gain on issuance of shares of $ | |
| ● | On
June 24, 2021, the Company issued shares of its common stock, valued at $ per share, as compensation to officers and directors
of the Company and recognized a gain on issuance of shares of $ | |
| ● | On
June 30, 2022, the Company issued shares of its common stock, valued at $ per share, as consideration for $ | |
| ● | On
July 18, 2022, the Company issued shares of its common stock, valued at $, to an accredited investor upon conversion
of $ | |
| ● | On
July 27, 2022, the Company issued shares of its common stock, valued at $, to an accredited investor upon conversion of
$ | |
| ● | On
July 28, 2022, the Company issued shares of its common stock, valued at $, to an accredited investor upon conversion of
$ | |
| ● | On
August 4, 2022, the Company issued shares of its common stock, valued at $ per share, as consideration for $ | |
| ● | On
August 23, 2022, the Company issued shares of its common stock, valued at $, to an accredited investor upon conversion
of $ | |
| ● | On
August 30, 2022, the Company issued shares of its common stock, valued at $ per share, as consideration for $ |
| 35 |
Warrants
As of August 31, 2022, the Company has issued and outstanding warrants to purchase shares of its common stock as follows:
| Number of | ||||||||||||||||||
| Issue | Warrants | Vesting | Termination | Exercise | ||||||||||||||
| Date | Outstanding | Date | Date | Price | ||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
| $ | ||||||||||||||||||
During
the quarter ended August 31, 2022, the Company issued
During
the quarter ended August 31, 2021, the Company issued
During
the quarter ended August 31, 2021, the Company sold warrants to an accredited investor for an aggregate purchase price of $
Stock-Based Compensation
The Company did not issue any options to purchase its common shares during the quarters ended August 31, 2022, or 2021.
The table below presents option activity for the quarter ended August 31, 2022:
| Number of Shares | Weighted Average Exercise Price per Share | Weighted Average Remaining Contractual Life (in years) | ||||||||||
| Balance at May 31, 2022 | $ | |||||||||||
| Options exercised | - | - | ||||||||||
| Options granted | - | |||||||||||
| Options expired | - | - | - | |||||||||
| Options forfeited | ( | ) | ||||||||||
| Outstanding at August 31, 2022 | $ | |||||||||||
| Exercisable at August 31, 2022 | $ | |||||||||||
Stock
based compensation expense related to options for the quarters ended August 31, 2022, and August 31, 2021, amounted to $ and $,
respectively. Unrecognized compensation expense related to outstanding options amounted to $
| 36 |
NOTE 10 — SUBSEQUENT EVENTS
Conversion of Convertible Promissory Notes
Subsequent
to the reporting period, the holders of $
Approval of Increase in Authorized Shares of Common Stock
On September 1, 2022, the Board and stockholders holding of a majority of the voting power of the issued and outstanding capital stock of the Company, including the Series X Preferred, approved an amendment (the “Amendment”) to the Company’s third amended and restated certificate of incorporation, as amended (the “Certificate of Incorporation”) increasing the number of our authorized shares of common stock from to . On October 20, 2022, the Company filed a preliminary information statement on Schedule 14C relating to the Amendment. The exact timing of the authorized share increase will be determined by the Company’s Board based on its evaluation as to when such action will be the most advantageous to the Company and its stockholders, and the effective date will be publicly announced. In no event will the authorized share increase be effective sooner than 20 days after the Company mails the definitive information statement on Schedule 14C and accompanying notice to the Company’s stockholders. The Board retains the authority to abandon the increase in authorized shares for any reason at any time prior to the effective date of the increase in authorized shares.
Ionic, Jefferson Street and FirstFire Securities Purchase Agreements, Notes and Warrants
In
addition, on September 8, 2022, the Company (i) entered into securities purchase agreements with each of Ionic, Jefferson Street and
FirstFire, (ii) issued
September 2022 Ionic Securities Purchase Agreement & 12% Promissory Note
On
September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 Ionic SPA”), dated as of
September 8, 2022, with Ionic, pursuant to which the Company issued a
The
Company may prepay the September 2022 Ionic Note in accordance with the terms of the September 2022 Ionic Note, with the understanding
that $
| 37 |
September 2022 Ionic Ventures Common Stock Purchase Warrant
Pursuant
to the terms of the September 2022 Ionic SPA, on September 8, 2022, the Company also issued to Ionic a -year warrant to purchase
September 2022 Jefferson Street Securities Purchase Agreement & 12% Promissory Note
On
September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 Ionic SPA”), dated as of
September 8, 2022, with Jefferson Street, pursuant to which the Company issued a
The
Company may prepay the September 2022 Jefferson Street Note in accordance with the terms of the September 2022 Jefferson Street Note,
with the understanding that $
September 2022 Jefferson Street Common Stock Purchase Warrant
Pursuant
to the terms of the September 2022 Jefferson Street SPA, on September 8, 2022, the Company also issued to Jefferson Street a -year
warrant to purchase
September 2022 FirstFire Securities Purchase Agreement & 12% Promissory Note
On
September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 FirstFire SPA”), dated as
of September 8, 2022, with FirstFire, pursuant to which the Company issued a
The
Company may prepay the September 2022 FirstFire Note in accordance with the terms of the September 2022 FirstFire Note, with the understanding
that $
| 38 |
September 2022 FirstFire Common Stock Purchase Warrant
Pursuant
to the terms of the September 2022 FirstFire SPA, on September 8, 2022, the Company also issued to FirstFire a warrant to
purchase
Diverted River Exchange Agreement
On
September 28, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”), dated as of September 28,
2022, by and among the Company, Diverted River Technology, LLC (“Diverted River”), the member(s) of Diverted River from time
to time (the “Members”) and Zachary Johnson, as the Members’ representative. Pursuant to the terms of the Exchange
Agreement, the Company agreed to acquire from the Members
Following the Closing, Diverted River will become a wholly owned subsidiary of the Company. Also following the Closing, it is expected that the Company’s name will be changed to Diverted River Technology, Inc., and the business of the Company will become that of Diverted River, an ETO focused on a sustainable, high margin, recurring revenue business model that requires limited capital expenditures.
At the Closing, the Company will expand the size of the Company’s Board of Directors (the “Board”) by three persons, to a total of seven persons, and will name Mr. Johnson and, within 90 days after Closing, two other persons, as directors on the Board, one of whom will be an independent director. Also at the Closing, the Company will name Mr. Johnson as Chief Executive Officer of the Company. Within 90 days of Closing, the Board will name a Chief Technology Officer, subject to Mr. Johnson’s approval. At the Closing, the Company will also enter into employment agreements with Mr. Johnson and certain other Diverted River employees as identified and agreed by the parties. Within 90 days of Closing, the Company will hire Velocity 42 Limited as its primary software developer.
The
Exchange Agreement contains certain covenants, representations and warranties customary for an agreement of this type.
The parties may terminate the Exchange Agreement pursuant to the terms of the Exchange Agreement, including, but not limited to, if the conditions to Closing have not been satisfied or waived by December 15, 2022.
| 39 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References in this report (the “Quarterly Report”) to “we,” “us” or the “Company” refer to Simplicity Esports and Gaming Company and its consolidated subsidiaries. The following discussion should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in this Quarterly Report and with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2022, as filed with the Securities and Exchange Commission (the “SEC”).
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes “forward-looking statements” that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Quarterly Report including, without limitation, statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s financial position, business strategy and the plans and objectives of management for future operations, are forward-looking statements. Words such as “expect,” “believe,” “anticipate,” “intend,” “estimate,” “seek” and variations and similar words and expressions are intended to identify such forward-looking statements. Such forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently available. A number of factors could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements. For information identifying important factors that could cause actual results to differ materially from those anticipated in the forward-looking statements, please refer to the Risk Factors sections 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 a global esports organization, that is capitalizing on the growth in esports through two business units: Simplicity Esports, LLC (“Simplicity Esports LLC”) and PLAYlive Nation, Inc. (“PLAYlive”). During the fiscal year ended May 31, 2022, we also had a third business unit: Simplicity One Brasil Ltda (“Simplicity One”). 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. 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) to be paid in five equal quarterly installments.
Our Esports Teams
We own and manage multiple professional esports teams. Revenue is generated from prize winnings, corporate sponsorships, advertising, league subsidy payments and potential league revenue sharing payments from the publishers of video games.
Through our wholly owned subsidiary, Simplicity Esports LLC, we own and manage multiple professional esports teams competing in games such as Heroes of the Storm. We are committed to growing and enhancing the esports industry, fostering the development of amateurs to compete professionally and signing established professional gamers to support their paths to greater success.
In addition, from January 2020 to July 2022, we managed Flamengo eSports, one of the leading Brazilian League of Legends® teams competing in the top tier league CBLoL, through our majority owned subsidiary, Simplicity One. In July 2022, 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. 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) to be paid in five equal quarterly installments.
| 40 |
Online Tournaments
In response to demand from customers for online esports tournaments which was likely triggered by the social distancing protocols attendant to the COVID-19 pandemic, we introduced in March 2020 an initiative of online esports tournaments. Since March 2020, through our wholly owned subsidiary, Simplicity Esports LLC, we had been holding online esports tournaments in the United States. As of August 2022, we have temporarily ceased organizing online tournaments while focusing on expense reduction and operational efficiency.
Our Gaming Centers
As of August 31, 2022, we had 17 operational locations (five corporate locations and 12 franchise locations), through our subsidiaries throughout the U.S., giving casual gamers the opportunity to play in a social setting with other members of the gaming community. 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, with a goal of being cash flow positive in the next 12 to 24 months.
In addition, aspiring and established professional gamers have an opportunity to compete in local and national esports tournaments held in our gaming centers for prizes, notoriety, and potential contracts to play for one of our professional esports teams. In this business unit, revenue is generated from franchise royalties, the sale of game time, memberships, tournament entry fees, birthday party events, corporate party events, concessions and gaming-related merchandise.
Our business plan encompasses a brick-and-click physical and digital approach to further recognize revenue from all verticals, which we believe to be unique in the industry. The physical centers, together with our esports teams, lifestyle brand and marketing campaigns offer opportunities for additional revenue via strategic partnerships with both endemic and non-endemic brands. Our ultimate goal is to further engage a diverse fan base with a 360-degree approach driving traffic to both our digital platform, tournaments (online and in-person), and physical real estate to maximize the monetization opportunities with these relationships. In addition, we have proprietary intellectual capital, fan engagement strategies and brand development blueprints which complement our publicly available information.
Optimally, the esports gaming centers of Simplicity Esports LLC (“Simplicity Esports Gaming Centers”) measure between 2,000 and 4,000 square feet, with dozens of gaming stations. The Simplicity Esports Gaming Centers feature cutting edge technology, futuristic aesthetic décor and dynamic high-speed gaming equipment. We believe our brick-and-click strategy will present attractive opportunities for sponsors and advertisers to connect with our audience, creating an intriguing monetization opportunity for sponsors and advertisers. As of November 08, 2022, our corporate owned stores operate in approximately 40,000 square feet of retail space in desirable, high traffic locations.
Creating content that engages fans, sponsors and developers, while promoting our brand is one of our primary goals. In August 2021, we announced a partnership with Television Korea 24 (“ESTV”) to provide esports and gaming content for their 24-7 live linear channel around the world. ESTV can be viewed in over 45 countries, including the U.S. We seek to reach a broad demographic encompassing the casual, amateur and professional gaming community. Our philosophy is to enhance our footprint for both endemic and non-endemic partnerships. We believe we possess a deep perception of our markets and understand the new age of branding while maintaining authenticity to the gaming community that comprises our fanbase.
Corporate Gaming Centers
As of August 31, 2022, we operated five corporate-owned retail Simplicity Esports Gaming Centers in addition to 12 franchisee owned locations. 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, with a goal of being cash flow positive in the next 12 to 24 months.
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Franchised Gaming Centers
Due to interest from potential franchisees, in 2019 we launched a franchising program to accelerate the expansion of our planned nationwide footprint. We sell specific franchise territories, through our wholly owned subsidiary PLAYlive, and assist with the establishment and buildout of esports gaming centers to potential business owners that desire to use our branding, infrastructure and process to open and operate gaming centers. We currently operate 12 fully constructed franchise esports gaming centers. Franchise revenue is generated from the sale of franchise territories, supplying furniture, equipment and merchandise to the franchisees for buildout of their centers, a gross sales royalty fee and a national marketing fee. We license the use of our branding, assist in identifying and negotiating commercial locations, assist in overseeing the buildout and development, provide access to proprietary software for point of sale, inventory management, employee training and other HR functions. Franchisees also have an opportunity to participate in our national esports tournament events. Once an esports gaming center is opened, we provide operational guidance, support and use of branding elements in exchange for a monthly royalty fee calculated as 6% of gross sales. Prior to selling a franchise, among other things, the Company is required to provide a potential franchisee with a franchise disclosure document. We do not currently have an active franchise disclosure document.
The combination of the esports gaming centers, owned or franchised by our wholly owned subsidiaries Simplicity Esports LLC or PLAYlive, provides us with what we believe is one of the largest esports gaming center footprints in North America.
Franchise Roll Up Strategy
We began implementing a franchise roll-up strategy in July 2020 because of the disruption caused by COVID-19 related stay-at-home orders, and the disruption it caused to the commercial real estate market. The reduction in revenues for some franchisees because of stay-at-home orders, and government mandates to remain closed created significant accrued rent payments due to landlords. We have been able to come to terms with many franchisees to acquire the assets of their gaming centers and make them corporate owned. We have simultaneously negotiated new leases with some of the largest national mall chains, including Simon Property Group and Brookfield Asset Management, and are in the process of negotiating additional locations with other landlords. The new leases involve significant reductions in or elimination of fixed rent and the addition of percentage of revenues rent terms.
Our Stream Team
The Simplicity Esports LLC stream team encompasses commentators (commonly known as “casters”), influencers and personalities who connect to a dedicated fan base. Our electric group of live personalities represent our organization to the fullest with their own unique style. We are proud to support and present a diverse group of gamers as we engage fans across a multitude of esports genres. Our Twitch affiliation has enabled our stream team to reach a broad fan base. Additionally, we have created several niches within the streaming community which has enabled us to engage fans within certain titles on a 24/7 basis. Through Simplicity Esports LLC, we have begun to implement a unique approach to ensure the ultimate fan friendly esports experience. Our intention is to have gamers involved at the grassroots level and feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community and we plan to use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other in the industry.
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 its Simplicity Gaming Centers. Subsequently, the Company closed 12 of its 17 corporate owned esports gaming center locations. As of August 31, 2022, the Company continues to operate five corporate owned locations and 12 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 August 31, 2022, we recorded an allowance for doubtful accounts of approximately $68,879 and have written off $25,829, partly in conjunction with taking back certain franchises and converting them to company owned 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. We have waived the minimum monthly royalty payment obligations from July 2020 through present day 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. Additionally, the disruptions in commercial real estate caused by COVID-19 lockdowns have allowed the Company to strengthen its existing relationships with national landlords by signing new locations with percentage rent leases.
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The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition and results of operations.
The measures taken to date adversely impacted the Company’s business during the quarter ended August 31, 2022 and will potentially continue to impact the Company’s business. Management observes that all business segments 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 August 31, 2022 and 2021, we generated revenues of $344,113 and $904,840, respectively, reported net losses of $4,157,110 and $4,210,097, respectively, and had negative cash flow from operations of $98,942 and $943,694, respectively. As of August 31, 2022, we had an accumulated deficit of $33,995,554.
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 months ended August 31, 2022 and 2021.
| Three Months Ended | Three Months Ended | |||||||
| August 31, 2022 | August 31, 2021 | |||||||
| Franchise revenues | $ | 37,980 | $ | 62,358 | ||||
| Company-owned stores sales | 302,616 | 673,501 | ||||||
| Esports revenue | 3,517 | 168,981 | ||||||
| Total revenue | 344,113 | 904,840 | ||||||
| Less: Cost of goods sold | (94,448 | ) | (607,122 | ) | ||||
| Gross margin | 249,665 | 297,718 | ||||||
| Operating expenses | (3,711,554 | ) | (2,196,174 | ) | ||||
| Other income (expense) | (622,959 | ) | (2,367,288 | ) | ||||
| Net loss attributable to non-controlling interest | (72,262 | ) | 54,837 | |||||
| Net loss attributable to common shareholders | $ | (4,157,110 | ) | $ | (4,210,097 | ) | ||
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Summary of Statement of Operations for the Three Months Ended August 31, 2022 and 2021:
Revenues
The Company’s revenues for the three months ended August 31, 2022 were $344,113, representing a 62% decrease of $560,727, as compared to the three months ended August 31, 2021 revenue of $904,840. The decrease results from the closure of Company owned stores during the fiscal year ended May 31, 2022 and during the quarter ended August 31, 2022 coupled with the sale of the Company’s assets in Brazil.
Cost of Goods Sold
Cost of goods sold for the three months ended August 31, 2022 was $94,448, representing an 84% decrease of $512,674, compared to the three months ended August 31, 2021 cost of goods sold of $607,122. The decrease in cost of goods sold corresponds with the closure of Company owned stores during the fiscal year ended May 31, 2022 and during the fiscal quarter ended August 31, 2022.
Operating Expenses
Operating expenses for the three months ended August 31, 2022 were $3,711,554, as compared to $2,196,174 for the three months ended August 31, 2021, an increase of $1,515,380. This 69% increase over the prior period is primarily attributable to impairment losses of $2,795,316, with no comparable activity in the prior period, offset by a 57% decrease of $739,685 in compensation and benefits, an 82% decrease of $369,982 in professional fees, and a 38% decrease of $170,269 in general and administrative expenses. The decrease in compensation and benefits is related primarily to a decrease in stock-based compensation of $577,680, as well as reductions in payroll and wages due to the closure of certain locations and a reduction of management staff. The decrease in professional fees is primarily attributable to the fact that the Company was in the process of filing a registration statement during the corresponding prior period, there were no comparable expenses during the current period.
Other Income
We incurred $622,959 of non-operating loss during the quarter ended August 31, 2022 compared to a loss of $2,367,288 during the prior period representing a 74% improvement. This improvement was attributed to a loss of $1,759,969 in the prior period related to the extinguishment of certain convertible promissory notes compared to $78,800 during the current period. Our net interest expense totaled $847,117 during the current period, representing an increase of 28% over the prior period’s expense of $659,696. These increases were attributable to the additional convertible promissory notes issued during the prior year. We recognized $302,958 in other income for the three months ended August 31, 2022, as compared to other income of $52,358 for the three months ended August 31, 2021. This 479% increase was primarily due to the recognition of a gain on the sale of the RIOT license by our majority owned Brazilian subsidiary.
Net Loss
Net loss attributable to common shareholders for the three months ended August 31, 2022, was $4,157,110, representing a 1% improvement compared to a net loss of $4,210,907 during the prior period.
Liquidity and Capital Resources
As of August 31, 2022, we had cash of $97,573, which is available for use by us to cover all of the Company’s costs. In addition, as of August 31, 2022, we had accrued expenses of $1,838,325.
For the three months ended August 31, 2022, cash used in operating activities amounted to $174,442 primarily resulting from a net loss of $4,084,848, impairment losses of $2,795,316 with no comparable activity in the prior period, a decrease of $1,708,395 in loss on extinguishment of debt, and a decrease of $577,680 in stock-based compensation in non-cash interest expense. These decreases were offset by a $170,306 increase in non-cash interest expense and a $238,567 increase in gains on asset purchases and sales. Changes in our operating liabilities and assets provided cash of $253,154.
We will need to raise additional funds in order to meet the expenditures required for operating our business.
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Off-balance sheet financing arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or purchased any non-financial assets.
Going Concern
The Company’s unaudited consolidated financial statements have been prepared assuming that 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 August 31, 2022, the Company had an accumulated deficit of $33,995,554, a working capital deficit of $5,515,754, and a net loss attributable to common shareholders of $4,157,110. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the of the date that the unaudited financial statements are issued.
The Company has commenced operations and has begun to generate revenue; however, the Company’s cash position may not be sufficient to support the Company’s daily operations. Management intends to raise additional funds by way of 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 its Simplicity Gaming Centers. Subsequently, the Company closed 12 of its 17 corporate owned esports gaming center locations. As of August 31, 2022, the Company continues to operate five corporate owned locations and 12 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 August 31, 2022, we recorded an allowance for doubtful accounts of approximately $68,879 and have written off $25,829, partly in conjunction with taking back certain franchises and converting them to company owned 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. We have waived the minimum monthly royalty payment obligations from July 2020 through present day 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. Additionally, the disruptions in commercial real estate caused by COVID-19 lockdowns have allowed the Company to strengthen its existing relationships with national landlords by signing new locations with percentage rent leases.
The 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.
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The measures taken to date adversely impacted the Company’s business during the quarter ended August 31, 2022 and will potentially continue to impact the Company’s business. Management observes that all business segments 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.
Contractual obligations
We do not have any long-term capital lease obligations, operating lease obligations or long-term liabilities, except as follows:
Operating Lease
We have long-term operating lease obligations and deferred revenues related to franchise fees to be recognized over the term of franchise agreements with our franchises, generally 10 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.
Debt Obligations
The table below presents the Company’s outstanding debt balances as of August 31, 2022, and May 31, 2022:
| Convertible Promissory Notes | Secured Promissory Notes | Related Party Debt | Short-Term Note Payable | |||||||||||||
| Principal Balance as of May 31, 2022 | $ | 5,361,347 | $ | 206,772 | $ | 247,818 | $ | 41,735 | ||||||||
| Carrying Value as of May 31, 2022 | 3,093,395 | 69,636 | 247,818 | 41,375 | ||||||||||||
| Principal | ||||||||||||||||
| Borrowings | 110,000 | - | - | - | ||||||||||||
| Repayments | - | (6,922 | ) | (247,818 | ) | - | ||||||||||
| Conversions | (94,276 | ) | - | - | - | |||||||||||
| Totals | 15,724 | (6,922 | ) | - | - | |||||||||||
| Unamortized Debt Issuance Costs, Beneficial Conversion Feature, and Warrant Discount | ||||||||||||||||
| Beginning Balance | (2,267,952 | ) | (137,136 | ) | - | - | ||||||||||
| Additions | (25,842 | ) | - | - | - | |||||||||||
| Accretion | 784,291 | 5,193 | - | - | ||||||||||||
| Ending Balance | (1,509,503 | ) | (131,943 | ) | - | - | ||||||||||
| Principal Balance as of August 31, 2022 | $ | 5,377,071 | $ | 199,850 | $ | - | $ | 41,735 | ||||||||
| Carrying Value as of August 31, 2022 | 3,867,568 | 67,907 | - | 41,735 | ||||||||||||
| Less Short-Term Portion | 2,809,492 | - | - | 41,735 | ||||||||||||
| Long Term Portion | $ | 1,058,076 | $ | 67,907 | $ | - | $ | - | ||||||||
Scheduled principal maturities of the Company’s outstanding debt over the next five fiscal years is as follows:
| Fiscal year ended May 31, | ||||
| 2023 | $ | 1,956,724 | ||
| 2024 | 3,533,026 | |||
| 2025 | 46,449 | |||
| 2026 | 51,312 | |||
| 2027 | 31,145 | |||
| Thereafter | - | |||
| $ | 5,618,656 | |||
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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. In addition, the Company issued 10,000 shares of its common stock to Labrys as a commitment fee pursuant to the Labrys SPA. Pursuant to the terms of the Labrys Note, the Company agreed to pay to $1,650,000 (the “Labrys Principal Sum”) to Labrys and to pay interest on the principal balance at the rate of 12% per annum (provided that the first twelve months of interest shall be guaranteed). The Labrys Note carries an original issue discount of $165,000 (“Labrys OID”). Accordingly, the Company received net proceeds of $1,485,000 that it used for its operational expenses and the repayment of certain existing debt obligations. Labrys may convert the Labrys Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the Note) at any time at a conversion price equal to $11.50 per share, subject to certain adjustments.
The Company may prepay the Labrys Note at any time prior to the date that an Event of Default (as defined in the Labrys Note) (each an “Labrys Event of Default”) occurs at an amount equal to 100% of the Labrys Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). The Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Labrys Note or Labrys SPA.
Upon Labrys’s provision of notice to the Company of the occurrence of any Labrys Event of Default, which has not been cured within five (5) calendar days, the Labrys Note shall become immediately due and payable and the Company shall pay to Labrys, in full satisfaction of its obligations hereunder, an amount equal to the Labrys Principal Sum then outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of a Labrys Event of Default, additional interest will accrue from the date of the Labrys Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted by law.
As of March 16, 2022, the Company and Labrys entered into an amendment (the “Labrys Amendment”) to the Labrys SPA and the Labrys Note, as amended. Pursuant to the terms of the Labrys Amendment, the maturity date of the Labrys Note was extended to the earlier of (i) September 15, 2022, and (ii) the date that the Company’s common stock is listed on the Nasdaq Stock Market or the New York Stock Exchange. In addition, the Labrys Note was amended to provide that Labrys has the right, at any time on or following the date that an event of default occurs under the Labrys Note, as amended, to convert all or any portion of the then outstanding and unpaid principal and interest into common stock, subject to a 4.99% equity blocker. In the Labrys Amendment, the parties also agreed that the Company has already received cash proceeds in excess of the $2,000,000 minimum threshold referenced in the Labrys Note. Pursuant to the terms of the Labrys Amendment, Labrys waived its rights to receive any portion of the next $750,000 of cash proceeds received by the Company to the extent that such amounts are received by the Company between March 15, 2022, and April 9, 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 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.
During the quarters ended August 31, 2022, the Company did not make any payments to Labrys. During the quarter ended August 31, 2022, the Company recognized $33,671 in interest expense associated with the Labrys Note recorded as accrued interest payable.
During the quarter ended August 31, 2021, the Company paid interim payments to the Holder in the amount of $225,000 comprised of the partial repayment of the balance of the Labrys Note in the amount of $90,909, the repayment of guaranteed interest in the amount of $109,091 and $25,000 as an amendment fee, and the Company recorded $287,330 in interest expense for the amortization of debt discount.
As of August 31, 2022, the carrying value and face value of the Labrys Note was $890,591 as the debt discount was full accreted by that date.
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March 2021 FirstFire Global 12% Convertible Promissory Note
On March 10, 2021, the Company, entered into a securities purchase agreement (the “March 2021 FirstFire SPA”) with FirstFire Global Opportunities Fund, LLC, a Delaware limited liability company (the “FirstFire”), pursuant to which the Company issued a 12% convertible promissory note (“March 2021 FirstFire Note”) with a maturity date of March 10, 2022, in the principal sum of $560,000. The Company received net proceeds of $130,606, net of an original issue discount of $56,000 (“March 2021 FirstFire OID”), net of origination fees of $8,394, and the repayment of principal and interest of $365,000 on an existing debt obligation owed to FirstFire. In addition, the Company issued 3,394 shares of its common stock to the FirstFire as a commitment fee pursuant to the March 2021 FirstFire SPA. Pursuant to the terms of the March 2021 FirstFire Note, the Company agreed to pay to $560,000 (the “March 2021 FirstFire Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of 12% per annum (provided that the first twelve months of interest shall be guaranteed). The FirstFire may convert the March 2021 FirstFire Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the March 2021 FirstFire Note) at any time at a conversion price equal to $11.50 per share, subject to certain adjustments.
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.
The Company may prepay the March 2021 FirstFire Note at any time prior to the date that an Event of Default (as defined in the March 2021 FirstFire Note) (each an “March 2021 FirstFire Event of Default”) occurs at an amount equal to 100% of the March 2021 FirstFire Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). The March 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 March 2021 FirstFire Note or March 2021 FirstFire SPA.
Upon FirstFire’s provision of notice to the Company of the occurrence of any March 2021 FirstFire Event of Default, which has not been cured within five (5) calendar days the March 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 March 2021 FirstFire Principal Sum then outstanding plus accrued interest multiplied by 125% (the “March 2021 FirstFire Default Amount”). Upon the occurrence of a March 2021 FirstFire Event of Default, additional interest will accrue from the date of the March 2021 FirstFire Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted by law.
The Company was required to make an interim payment to FirstFire in the amount of $123,200, on or before September 10, 2021, towards the repayment of the balance of the March 2021 FirstFire Note. On September 17, 2021, the Company issued to FirstFire a three-year common stock warrant to purchase of 40,000 shares of the Company’s common stock at $10.73 per share as consideration for FirstFire entering into a first amendment to the March 2021 FirstFire Note in order to delay this interim payment. Upon the issuance of the warrants, the Company recorded the fair value of the warrants in the amount of $248,547 and took a related interest expense charge of $248,547.
On October 1, 2021, the Company issued to FirstFire a second three-year common stock warrant to purchase 40,000 shares of the Company’s common stock at an exercise price of $10.73 per share as consideration for FirstFire entering into a second amendment to the March 2021 FirstFire Note in order to remove the capital raising ceiling in such note. Upon the issuance of the warrants, the Company recorded the fair value of the warrants in the amount of $201,351 and took a related interest expense charge of $201,351.
On April 29, 2022, FirstFire converted $50,000 of the outstanding principal balance of the March 2021 FirstFire Note at an adjusted conversion price of $1.00 per share. At conversion, the Company issued 50,000 shares of common stock to FirstFire at a fair market value of $2.20 per share and recognized a loss on debt extinguishment of $60,000.
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On July 27, 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.
During the quarter ended August 31, 2022, the Company recognized $14,984 in interest expense associated with the March 2021 FirstFire Note recorded as accrued interest payable.
During the quarter ended August 31, 2021, the Company recognized $65,533 of amortization of debt discount related to the March 2021 FirstFire Note.
As of May 31, 2022, the carrying value and face value of the March 2021 FirstFire Note was $500,500 as the debt discount was full accreted by that date.
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.
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%) 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 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 three calendar days, 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%. | |
| ● | 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 and used such proceeds for working capital and to pay off an existing promissory note issued by the Company in favor of Maxim. 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. The fair value of the June 2021 FirstFire Commitment Shares was $22,949; the fair value of the beneficial conversion feature of the June 2021 FirstFire Note was $174,851; and the fair value of the June 2021 FirstFire Warrant was $942,200. The combination of these three components as well as the June 2021 FirstFire OID resulted in a total debt discount at issuance of $1,266,667 which is accreted over the term of the June 2021 FirstFire Note.
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On September 16, 2021, the Company made an interim payment to the June 2021 FirstFire Note in the amount of $175,000.
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.
During the quarter ended August 31, 2022, the Company recorded interest expense of $137,580, which was related to the accretion of the debt discount.
During the quarter ended August 31, 2021, the Company recorded interest expense of $140,548.
As of August 31, 2022, the carrying value of the June 2021 FirstFire Note was $668,459, net of $423,208 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.
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 of 4.99% in the June 2021 GS Note; provided however, that the limitation on conversion may be waived up to 9.99%) 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 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 Company may prepay the June 2021 GS Note at any time prior to maturity in accordance with the terms of the June 2021 GS Note. | |
| ● | The June 2021 GS Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the June 2021 GS Note or the June 2021 GS SPA. Upon the occurrence of any event of default (as defined in the June 2021 GS Note) which has not been cured within three calendar days, the June 2021 GS Note shall become immediately due and payable and the Company shall pay to GS, in full satisfaction of its obligations hereunder, an amount equal to the June 2021 GS Principal Sum then outstanding plus accrued interest multiplied by 125%. | |
| ● | 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. |
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Upon issuance of the June 2021 GS Note, the Company received net proceeds of $300,000 and used such proceeds for working capital. 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. The fair value of the June 2021 GS Commitment Shares was $5,963; the fair value of the beneficial conversion feature of the June 2021 GS Note was $53,899; and the fair value of the June 2021 GS Warrant was $240,138. The combination of these three components as well as the June 2021 GS OID resulted in a total debt discount at issuance of $333,333 which is accreted over the term of the June 2021 GS Note.
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.
On April 18, 2022, GS converted $50,333 of the outstanding principal balance the June 2021 GS Note and $3,389 in associated accrued interest at an adjusted conversion price of $1.00 per share. At conversion, the Company issued 53,720 shares of common stock to GS at a fair market value of $2.77 per share and recognized a loss on debt extinguishment of $95,085.
On July 18, 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 quarter ended August 31, 2022, the Company recorded interest expense of $56,212 related to the accretion of the debt discount.
During the quarter ended August 31, 2022, the Company recorded interest expense of $34,703.
As of August 31, 2022, the carrying value of the June 2021 GS Note was $140,836, net of $89,164 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 of 4.99% in the August 2021 Jefferson Note; provided however, that the limitation on conversion may be waived up to 9.99%) 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 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 Company may prepay the August 2021 Jefferson Note at any time prior to maturity in accordance with the terms of the August 2021 Jefferson Note. |
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| ● | The August 2021 Jefferson Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the August 2021 Jefferson Note or the August 2021 Jefferson SPA. Upon the occurrence of any event of default (as defined in the August 2021 Jefferson Note) which has not been cured within three calendar days, the August 2021 Jefferson Note shall become immediately due and payable and the Company shall pay to Jefferson, in full satisfaction of its obligations hereunder, an amount equal to the August 2021 Jefferson Principal Sum then outstanding plus accrued interest multiplied by 125%. | |
| ● | 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 and used such proceeds for working capital as well as the payment of $15,000 in fees associated with the loan. 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. The fair value of the August 2021 Jefferson Commitment Shares was $4,945; the fair value of the beneficial conversion feature of the August 2021 Jefferson Note was $62,051; and the fair value of the August 2021 Jefferson Warrant was $233,004. The combination of these three components as well as the August 2021 Jefferson OID resulted in a total debt discount at issuance of $333,333 which is accreted over the term of the August 2021 Jefferson Note. The $15,000 paid as loan origination fees was recorded directly to additional paid in capital.
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.
On August 23, 2022, GS 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.
During the quarter ended August 31, 2022, the Company recorded interest expense of $47,941, comprised of $46,941 related to the accretion of the debt discount and $1,000 in fees associated with the conversion.
During the quarter ended August 31, 2021, the Company recorded interest expense of $685.
As of August 31, 2022, the carrying value of the August 2021 Jefferson Note was $163,882, net of $159,452 in unaccreted debt discount.
August 2021 Lucas Ventures Capital 12% Convertible Note
On August 31, 2021, the Company entered into a securities purchase agreement (the “August 2021 Lucas SPA”) with Lucas Ventures, LLC (“Lucas”), pursuant to which the Company issued (i) a 12% convertible promissory note (the “August 2021 Lucas Note”) in the principal sum of $200,000 (the “August 2021 Lucas Principal Sum”), (ii) 3,749 shares of its common stock as a commitment fee (“August 2021 Lucas Commitment Shares”), and (iii) a three-year warrant (“August 2021 Lucas Warrant”) to purchase 187,400 shares of the Company’s common stock at an exercise price of $10.22, subject to certain adjustments.
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The following are the material terms of the August 2021 Lucas SPA and August 2021 Lucas Note:
| ● | The August 2021 Lucas Note matures on August 31, 2023 (the “August 2021 Lucas Maturity Date”). | |
| ● | At its election, Lucas may convert the August 2021 Lucas Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the August 2021 Lucas Note; provided however, that the limitation on conversion may be waived up to 9.99%) 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 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 Company may prepay the August 2021 Lucas Note at any time prior to maturity in accordance with the terms of the August 2021 Lucas Note. | |
| ● | The August 2021 Lucas Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the August 2021 Lucas Note or the August 2021 Lucas SPA. Upon the occurrence of any event of default (as defined in the August 2021 Lucas Note) which has not been cured within three calendar days, the August 2021 Lucas Note shall become immediately due and payable and the Company shall pay to Lucas, in full satisfaction of its obligations hereunder, an amount equal to the August 2021 Lucas Principal Sum then outstanding plus accrued interest multiplied by 125%. | |
| ● | 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 and used such proceeds for working capital as well as the payment of $9,000 in fees associated with the loan. 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. The fair value of the August 2021 Lucas Commitment Shares was $3,903; the fair value of the beneficial conversion feature of the August 2021 Lucas Note was $22,149; and the fair value of the August 2021 Lucas Warrant was $153,948. The combination of these three components as well as the August 2021 Lucas OID resulted in a total debt discount at issuance of $200,000 which is accreted over the term of the August 2021 Lucas Note. The $9,000 paid as loan origination fees was recorded directly to additional paid in capital.
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. 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 Lucas Note was further reduced from $1.00 per share to $0.10 per share.
During the quarter ended August 31, 2022, the Company recorded interest expense of $25,205, related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the August 2021 Lucas Note was $99,999, net of $100,001 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”).
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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 of 4.99% in the August 2021 LGH Note; provided however, that the limitation on conversion may be waived up to 9.99%) 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 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. | |
| ● | The August 2021 LGH Note carries an original issue discount of $20,000 (“August 2021 LGH OID”). | |
| ● | The Company may prepay the August 2021 LGH Note at any time prior to maturity in accordance with the terms of the August 2021 LGH Note. | |
| ● | The August 2021 LGH Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the August 2021 LGH Note or the August 2021 LGH SPA. Upon the occurrence of any event of default (as defined in the August 2021 LGH Note which has not been cured within three calendar days, the August 2021 LGH Note shall become immediately due and payable and the Company shall pay to LGH, in full satisfaction of its obligations hereunder, an amount equal to the August 2021 LGH Principal Sum then outstanding plus accrued interest multiplied by 125%. | |
| ● | 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 and used such proceeds for working capital as well as the payment of $6,500 in fees associated with the loan. 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. 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 LGH Note was further reduced from $1.00 per share to $0.10 per share.
During the quarter ended August 31, 2022, the Company recorded interest expense of $3,340 related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the August 2021 LGH Note was $186,750, net of $13,250 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.
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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 of 4.99% in the September 2021 Ionic Note; provided however, that the limitation on conversion may be waived up to 9.99%) 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 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 Company may prepay the September 2021 Ionic Note at any time prior to maturity in accordance with the terms of the September 2021 Ionic Note. | |
| ● | The September 2021 Ionic Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the August 2021 Ionic Note or the September 2021 Ionic SPA. Upon the occurrence of any event of default (as defined in the September 2021 Ionic Note) which has not been cured within three calendar days, the August 2021 Ionic Note shall become immediately due and payable and the Company shall pay to Ionic, in full satisfaction of its obligations hereunder, an amount equal to the September 2021 Ionic Principal Sum then outstanding plus accrued interest multiplied by 125%. | |
| ● | 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 and used such proceeds for working capital as well as the payment of $98,000 in fees associated with the loan. 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. The fair value of the September 2021 Ionic Commitment Shares was $26,721; the fair value of the beneficial conversion feature of the September 2021 Ionic Note was $335,303; and the fair value of the September 2021 Ionic Warrant was $1,037,976. The combination of these three components as well as the September 2021 Ionic OID resulted in a total debt discount at issuance of $1,555,556 which is accreted over the term of the September 2021 Ionic Note. The $98,000 paid as loan origination fees was recorded directly to additional paid in capital.
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.
On April 25, 2022, Ionic converted $87,800 of the outstanding principal balance 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.
On July 28, 2022, Ionic converted $6,776 of the outstanding principal balance 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.
On August 24, 2022, Ionic converted $15,000 of the outstanding principal balance 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. As of August 31, 2022, these shares are classified as common stock to be issued.
During the quarter ended August 31, 2022, the Company recorded interest expense of $302,506 related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the September 2021 Ionic Note was $771,322, net of $674,658 in unaccreted debt discount.
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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”). | |
| ● | At its election, FirstFire may convert the March 2022 FirstFire Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the March 2022 FirstFire Note; provided however, that the limitation on conversion may be waived up to 9.99%) at any time at a conversion price equal to $1.00 per share, subject to certain adjustments. | |
| ● | The Company agree 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 Company may prepay the March 2022 FirstFire Note at any time prior to maturity in accordance with the terms of the March 2022 FirstFire Note. | |
| ● | The March 2022 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 March 2022 FirstFire Note or the March 2022 FirstFire SPA. Upon the occurrence of any event of default (as defined in the March 2022 I FirstFire Note) which has not been cured within the period stipulated by the March 2022 FirstFire Note, the March 2022 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 March 2022 FirstFire Principal Sum then outstanding plus accrued interest multiplied by 125%. | |
| ● | 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 and used such proceeds for working capital. 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. The fair value of the March 2022 FirstFire Commitment Shares was $1,158; the fair value of the beneficial conversion feature of the March 2022 FirstFire Note was $45,418; and the fair value of the March 2022 FirstFire Warrant was $53,424. The combination of these three components as well as the March 2022 FirstFire OID resulted in a total debt discount at issuance of $110,000 which is accreted over the term of the March 2022 FirstFire Note.
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.
During the quarter ended August 31, 2022, the Company recorded interest expense of $55,000 related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the March 2022 FirstFire Note was $97,446, net of $12,554 in unaccreted debt discount.
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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 of 4.99% in the March 2022 GS Note; provided however, that the limitation on conversion may be waived up to 9.99%) at any time at a conversion price equal to $1.00 per share, subject to certain adjustments. | |
| ● | The Company agree 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 Company may prepay the March 2022 GS Note at any time prior to maturity in accordance with the terms of the March 2022 GS Note. | |
| ● | The March 2022 GS Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the March 2022 GS Note or the March 2022 GS SPA. Upon the occurrence of any event of default (as defined in the March 2022 GS Note) which has not been cured within the period stipulated by the March 2022 GS Note, the March 2022 GS Note shall become immediately due and payable and the Company shall pay to GS, in full satisfaction of its obligations hereunder, an amount equal to the March 2022 GS Principal Sum then outstanding plus accrued interest multiplied by 125%. | |
| ● | 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 and used such proceeds for working capital. 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. The fair value of the March 2022 GS Commitment Shares was $871; the fair value of the beneficial conversion feature of the March 2022 GS Note was $34,062; and the fair value of the March 2022 GS Warrant was $40,067. The combination of these three components as well as the March 2022 GS OID resulted in a total debt discount at issuance of $82,500 which is accreted over the term of the March 2022 GS Note.
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.
During the quarter ended August 31, 2022, the Company recorded interest expense of $41,250 related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the March 2022 GS Note was $73,084, net of $9,416 in unaccreted debt discount.
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.
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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 of 4.99% in the March 2022 Ionic Note; provided however, that the limitation on conversion may be waived up to 9.99%) at any time at a conversion price equal to $1.00 per share, subject to certain adjustments. | |
| ● | The Company agree 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 Company may prepay the March 2022 Ionic Note at any time prior to maturity in accordance with the terms of the March 2022 Ionic Note. | |
| ● | The March 2022 Ionic Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the March 2022 Ionic Note or the March 2022 Ionic SPA. Upon the occurrence of any event of default (as defined in the March 2022 Ionic Note) which has not been cured within the period stipulated by the March 2022 Ionic Note, the March 2022 Ionic Note shall become immediately due and payable and the Company shall pay to Ionic, in full satisfaction of its obligations hereunder, an amount equal to the March 2022 Ionic Principal Sum then outstanding plus accrued interest multiplied by 125%. | |
| ● | 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 and used such proceeds for working capital. 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. The fair value of the March 2022 Ionic Commitment Shares was $1,158; the fair value of the beneficial conversion feature of the March 2022 Ionic Note was $45,418; and the fair value of the March 2022 Ionic Warrant was $53,424. The combination of these three components as well as the March 2022 Ionic OID resulted in a total debt discount at issuance of $110,000 which is accreted over the term of the March 2022 Ionic Note.
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.
During the quarter ended August 31, 2022, the Company recorded interest expense of $55,000 related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the March 2022 Ionic Note was $97,446, net of $12,554 in unaccreted debt discount.
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.
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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 of 4.99% in the April 2022 Jefferson Note; provided however, that the limitation on conversion may be waived up to 9.99%) at any time at a conversion price equal to $1.00 per share, subject to certain adjustments. | |
| ● | The Company agree 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 Company may prepay the April 2022 Jefferson Note at any time prior to maturity in accordance with the terms of the April 2022 Jefferson Note. | |
| ● | The April 2022 Jefferson Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the April 2022 Jefferson Note or the April 2022 Jefferson SPA. Upon the occurrence of any event of default (as defined in the April 2022 Jefferson Note) which has not been cured within the period stipulated by the April 2022 Jefferson Note, the April 2022 Jefferson Note shall become immediately due and payable and the Company shall pay to Jefferson, in full satisfaction of its obligations hereunder, an amount equal to the April 2022 Jefferson Principal Sum then outstanding plus accrued interest multiplied by 125%. | |
| ● | 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 and used such proceeds for working capital. 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. The fair value of the April 2022 Jefferson Commitment Shares was $871; the fair value of the beneficial conversion feature of the April 2022 Jefferson Note was $34,062; and the fair value of the April 2022 Jefferson Warrant was $40,067. The combination of these three components as well as the April 2022 Jefferson OID resulted in a total debt discount at issuance of $82,500 which is accreted over the term of the April 2022 Jefferson Note.
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.
During the quarter ended August 31, 2022, the Company recorded interest expense of $41,250 related to the accretion of the debt discount.
As of May 31, 2022, the carrying value of the April 2022 Jefferson Note was $73,084, net of $9,416 in unaccreted debt discount.
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.
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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 of 4.99% in the July 2022 FirstFire Note; provided however, that the limitation on conversion may be waived up to 9.99%) 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. | |
| ● | The Company agree 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 Company may prepay the July 2022 FirstFire Note at any time prior to maturity in accordance with the terms of the July 2022 FirstFire Note. | |
| ● | The July 2022 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 July 2022 FirstFire Note or the July 2022 FirstFire SPA. Upon the occurrence of any event of default (as defined in the July 2022 FirstFire Note) which has not been cured within the period stipulated by the July 2022 FirstFire Note, the July 2022 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 July 2022 FirstFire Principal Sum then outstanding plus accrued interest multiplied by 125%. |
Upon issuance of the July 2022 FirstFire Note, the Company received net proceeds of $25,000 and used such proceeds for working capital. 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. The fair value of the July 2022 FirstFire Commitment Shares was $136, and the fair value of the July 2022 FirstFire Warrant was $3,825. The combination of these two components as well as the July 2022 FirstFire OID resulted in a total debt discount at issuance of $6,461 which is accreted over the term of the July 2022 FirstFire Note.
During the quarter ended August 31, 2022, the Company recorded interest expense of $5,552, which included $5,002 related to the accretion of the debt discount and accrued interest in the amount of $550. As of August 31, 2022, the carrying value of the July 2022 FirstFire Note was $26,041, net of $1,459 in unaccreted debt discount.
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 of 4.99% in the July 2022 GS Note; provided however, that the limitation on conversion may be waived up to 9.99%) at any time after 180 days from the date of issuance of the July2022 GS Note at a conversion price equal to $0.10 per share, subject to certain adjustments. | |
| ● | The Company agree 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 Company may prepay the July 2022 GS Note at any time prior to maturity in accordance with the terms of the July 2022 GS Note. | |
| ● | The July 2022 GS Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the July 2022 GS Note or the July 2022 GS SPA. Upon the occurrence of any event of default (as defined in the July 2022 GS Note) which has not been cured within the period stipulated by the July 2022 GS Note, the July 2022 GS Note shall become immediately due and payable and the Company shall pay to GS, in full satisfaction of its obligations hereunder, an amount equal to the July 2022 GS Principal Sum then outstanding plus accrued interest multiplied by 125%. |
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Upon issuance of the July 2022 GS Note, the Company received net proceeds of $25,000 and used such proceeds for working capital. 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. The fair value of the July 2022 GS Commitment Shares was $136, and the fair value of the July 2022 GS Warrant was $3,825. The combination of these two components as well as the July 2022 GS OID resulted in a total debt discount at issuance of $6,461 which is accreted over the term of the July 2022 GS Note.
During the quarter ended August 31, 2022, the Company recorded interest expense of $5,552, which included $5,002 related to the accretion of the debt discount and accrued interest in the amount of $550. As of August 31, 2022, the carrying value of the July 2022 GS Note was $26,041, net of $1,459 in unaccreted debt discount.
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 of 4.99% in the July 2022 Ionic Note; provided however, that the limitation on conversion may be waived up to 9.99%) at any time after 180 days from the date of issuance of the July2022 Ionic Note at a conversion price equal to $0.10 per share, subject to certain adjustments. | |
| ● | The Company agree 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 Company may prepay the July 2022 Ionic Note at any time prior to maturity in accordance with the terms of the July 2022 Ionic Note. | |
| ● | The July 2022 Ionic Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the July 2022 Ionic Note or the July 2022 Ionic SPA. Upon the occurrence of any event of default (as defined in the July 2022 Ionic Note) which has not been cured within the period stipulated by the July 2022 Ionic Note, the July 2022 Ionic Note shall become immediately due and payable and the Company shall pay to Ionic, in full satisfaction of its obligations hereunder, an amount equal to the July 2022 Ionic Principal Sum then outstanding plus accrued interest multiplied by 125%. |
Upon issuance of the July 2022 Ionic Note, the Company received net proceeds of $25,000 and used such proceeds for working capital. 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. The fair value of the July 2022 Ionic Commitment Shares was $136, and the fair value of the July 2022 Ionic Warrant was $3,825. The combination of these two components as well as the July 2022 Ionic OID resulted in a total debt discount at issuance of $6,461 which is accreted over the term of the July 2022 Ionic Note.
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During the quarter ended August 31, 2022, the Company recorded interest expense of $5,552, which included $5,002 related to the accretion of the debt discount and accrued interest in the amount of $550. As of August 31, 2022, the carrying value of the July 2022 Ionic Note was $26,041, net of $1,459 in unaccreted debt discount.
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 of 4.99% in the July 2022 Jefferson Note; provided however, that the limitation on conversion may be waived up to 9.99%) at any time after 180 days from the date of issuance of the July2022 Jefferson Note at a conversion price equal to $0.10 per share, subject to certain adjustments. | |
| ● | The Company agree 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. | |
| ● | The July 2022 Jefferson Note carries an original issue discount of $2,500 (“July 2022 Jefferson OID”). | |
| ● | The Company may prepay the July 2022 Jefferson Note at any time prior to maturity in accordance with the terms of the July 2022 Jefferson Note. | |
| ● | The July 2022 Jefferson Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the July 2022 Jefferson Note or the July 2022 Jefferson SPA. Upon the occurrence of any event of default (as defined in the July 2022 Jefferson Note) which has not been cured within the period stipulated by the July 2022 Jefferson Note, the July 2022 Jefferson Note shall become immediately due and payable and the Company shall pay to Jefferson, in full satisfaction of its obligations hereunder, an amount equal to the July 2022 Jefferson Principal Sum then outstanding plus accrued interest multiplied by 125%. |
Upon issuance of the July 2022 Jefferson Note, the Company received net proceeds of $25,000 and used such proceeds for working capital. 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. The fair value of the July 2022 Jefferson Commitment Shares was $136, and the fair value of the July 2022 Jefferson Warrant was $3,825. The combination of these two components as well as the July 2022 Jefferson OID resulted in a total debt discount at issuance of $6,461 which is accreted over the term of the July 2022 Jefferson Note.
During the quarter ended August 31, 2022, the Company recorded interest expense of $5,552, which included $5,002 related to the accretion of the debt discount and accrued interest in the amount of $550. As of August 31, 2022, the carrying value of the July 2022 Jefferson Note was $26,041, net of $1,459 in unaccreted debt discount.
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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”). The Secured Note One had a perfected security interest in 50 personal computers the Company intended to use in its operations. The Secured Note One required 60 monthly payments of principal and interest in the amount of $5,577.
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. The fair value of the Secured Note One Warrants was $84,517. The combination of fair market value of the Secured Note One Warrant and the Secured Note One OID resulted in a total debt discount at issuance of $97,017 which is accreted over the term of the Secured Note One.
During the quarter ended August 31, 2022, the Company made principal payments of $4,500 on Secured Note One. For the quarter ended August 31, 2022, the company recognized $8,007 in total interest expense associated with Secured Note One, comprised of $1,077 in cash interest payments, $2,079 in accrued interest payable, and $4,851 in accretion expense related to the original issuance discount and debt discount related to the warrants, with no comparable amounts during the prior period. As of August 31, 2022, the carrying value of Secured Note One is $42,268, net of $82,464 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”). The Secured Note Two has a perfected security interest in 30 personal computers the Company intended to use in its operations. The Secured Note Two required 60 monthly payments of principal and interest in the amount of $3,346.
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. The fair value of the Secured Note Two Warrants was $50,710. The combination of fair market value of the Secured Note Two Warrant and the Secured Note Two OID resulted in a total debt discount at issuance of $58,210 which is accreted over the term of the Secured Note Two.
During the quarter ended August 31, 2022, the Company made principal payments of $2,421 on Secured Note Two. For the quarter ended August 31, 2022, the company recognized $4,808 in total interest expense associated with Secured Note Two, comprised of $646 in cash interest payments, $1,252 in accrued interest payable, and $2,911 in accretion expense related to the original issuance discount and debt discount related to the warrants, with no comparable amounts in the prior period. As of August 31, 2022, the carrying value of Secured Two Note is $25,640, net of $49,478 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. 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 quarter ended August 31, 2022, the Company recognized interest expense of $339 with no comparable amount during the prior period.
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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, the Company $40,500 of the obligation was forgiven by the Small Business Administration. As of August 31, 2022, 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 (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates.
Revenue Recognition
As of January 1, 2018, the Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The Company adopted the standard using the modified retrospective method and the adoption did not have a material impact on its financial statements.
The Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods and services. Our revenue is derived from two sources, the first is from the sale of the rights to our players to third parties and second from participation and prize money awarded at gaming tournaments.
The following describes principal activities, separated by major product or service, from which the Company generates its revenues:
Company-owned Stores Sales
The Company-owned stores principally generate revenue from retail esports gaming centers. Revenues from Company-owned stores are recognized when the products are delivered, or the service is provided.
Franchise Royalties and Fees
Franchise royalties are based on 6% of franchise store sales after a minimum level of sales occur and are recognized as sales occur. Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other behaviors, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty rate. Franchise royalties are billed on a monthly basis.
The Company recognizes initial franchise license fee revenue net of costs incurred, when the Company has performed substantially all the services required in the franchise agreement. Fees received that do not meet these criteria are recorded as deferred revenues until earned. Initial franchise fees are generally recognized once a location is opened to the public which is when management deems substantially all services required under the franchise agreements have been performed.
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The Company offers various incentive programs for franchisees including royalty incentives, new restaurant opening incentives (i.e. development incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned or granted under these programs that are in the form of discounts.
Esports revenue
Esports revenue is a form of competition using video games. Most commonly, esports takes the form of organized, multiplayer video game competitions, particularly between professional players, individually or as teams. Revenues from esports revenue are recognized when the competition is completed, and prize money is awarded.
Accounts Receivable
The Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e. franchisees), taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable are written off against the allowance when management determines it is probable the receivable is worthless. Customer account balances with invoices dated over 90 days old are considered delinquent and considered in the allowance assessment. The Company performs credit evaluations of its customers and, generally, requires no collateral. Management has assessed accounts receivable and an allowance for doubtful accounts of approximately $68,000 has been recorded.
Goodwill
Goodwill is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill, but we assess our goodwill for impairment at least annually.
Intangible Assets and Impairment
Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The Company had intangible assets subject to amortization related to its acquisition of Simplicity Esports, LLC. These costs were included in intangible assets on our balance sheet and amortized on a straight-line basis when placed into service over the estimated useful lives of the costs, which is 3 to 10 years.
The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less that the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and principal financial officer, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and principal financial officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of August 31, 2022. Based upon this evaluation, our Chief Executive Officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective as of August 31, 2022.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company expects to implement changes to its internal control over financial reporting to enhance the evaluation of accounting transactions and its financial reporting process over the next year.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Not required for smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not sell any equity securities during the period covered by this Quarterly Report that were not registered under the Securities Act, except as previously disclosed in our Current Reports on Form 8-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
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| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SIMPLICITY ESPORTS AND GAMING COMPANY | ||
| Dated: November 08, 2022 | /s/ Roman Franklin | |
| Name: | Roman Franklin | |
| Title: | Chief Executive Officer (principal executive officer, principal financial officer, and principal accounting officer) | |
| 69 |
Exhibit 31.1
CERTIFICATIONS
I, Roman Franklin, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended August 31, 2022, of Simplicity Esports and Gaming Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: November 08, 2022 | /s/ Roman Franklin |
Chief Executive Officer (principal executive officer) |
Exhibit 31.2
CERTIFICATIONS
I, Roman Franklin, certify that:
1. I have reviewed this quarterly report on Form 10-Q for the quarter ended August 31, 2022, of Simplicity Esports and Gaming Company;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: November 08, 2022 | /s/ Roman Franklin |
Chief Executive Officer (principal financial officer) |
Exhibit 32.1
CERTIFICATION
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Simplicity Esports and Gaming Company (the “Company”) on Form 10-Q for the period ended August 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Roman Franklin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Dated: November 08, 2022 | /s/ Roman Franklin |
| Roman Franklin | |
Chief Executive Officer (principal executive officer and principal financial officer) |
Consolidated Balance Sheets (Unaudited) (Parenthetical) - $ / shares |
Aug. 31, 2022 |
May 31, 2022 |
|---|---|---|
| Statement of Financial Position [Abstract] | ||
| Preferred stock, par value | $ 0.0001 | $ 0.0001 |
| Preferred stock, authorized | 1,000,000 | 1,000,000 |
| Preferred stock, issued | 1 | 0 |
| Preferred stock, outstanding | 1 | 0 |
| Common stock, par value | $ 0.0001 | $ 0.0001 |
| Common stock, authorized | 36,000,000 | 36,000,000 |
| Common Stock, Shares, Outstanding | 3,120,161 | 1,830,818 |
| Common stock, issued | 3,120,161 | 1,830,818 |
ORGANIZATION AND DESCRIPTION OF BUSINESS |
3 Months Ended |
|---|---|
Aug. 31, 2022 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| ORGANIZATION AND DESCRIPTION OF BUSINESS | NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity Esports and Gaming Company (the “Company,” “Simplicity,” “we,” or “our”) was organized as a blank check company under the laws of the State of Delaware on April 17, 2017. The Company was formed under the name I-AM Capital Acquisition Company for the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businesses (“Business Combination”). On November 20, 2018, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc. On January 2, 2019, the Company changed its name from Smaaash Entertainment Inc. to Simplicity Esports and Gaming Company.
Through our wholly owned subsidiary, Simplicity Esports, LLC, acquired on January 2, 2019, the Company implements a unique approach to ensure the ultimate fan friendly esports experience, involving gamers at the grassroots level to feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community, and we use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other in the industry. Simplicity is an established brand in the esports industry with an engaged fan base competing in popular games across different genres, including PUBG, Gears of War, Smite, Guns of Boom, and multiple EA Sports titles. Additionally, the Simplicity stream team encompasses a unique group of casters, influencers, and personalities, all of whom connect to Simplicity’s dedicated fan base. Simplicity also operates esports gaming centers that provide the public the opportunity to experience and enjoy gaming and esports in a social setting, regardless of skill or experience.
Through our wholly owned subsidiary, PLAYlive Nation, Inc. (“PLAYlive”), acquired on July 29, 2019, the Company has a network of franchised esports gaming centers. As of August 31, 2022, the Company had five corporate owned stores and 10 franchised locations operating in various states including Arizona, California, Florida, Idaho, Maryland, Ohio, South Carolina, Texas and Washington. PLAYlive offers a video gaming lounge concept to qualified franchisees. PLAYlive currently offers single-unit location franchises, as well as agreements to develop multiple locations. This PLAYlive model is interlaced with the esports gaming centers mentioned above to create the ultimate gaming center.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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Aug. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||
| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented.
The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, as filed with the SEC on September 27, 2022. The interim results for the three months ended August 31, 2022 are not necessarily indicative of the results to be expected for the year ending May 31, 2023 or for any future interim periods.
Basis of Consolidation
The accompanying unaudited consolidated financial statements include the operations of the Company and its wholly owned subsidiaries, Simplicity Esports, LLC, PLAYlive, Simplicity Union Gap, LLC, Simplicity Kennewick, LLC, Simplicity Humble, LLC, Simplicity Frisco, LLC, Simplicity Billings, LLC, Simplicity Brea, LLC, Simplicity Santa Rosa, LLC, Simplicity St. Louis, LLC, Simplicity St. Petersburg, LLC, Simplicity Fullerton, LLC, Simplicity Salinas, LLC, Simplicity Tracy, LLC, Simplicity Vancouver, LLC, Simplicity Fort Bliss, LLC, and PLAYlive Nation Holdings, LLC; its 59% owned subsidiary Simplicity One Brasil Ltda. (“Simplicity One”); its 79% owned subsidiaries Simplicity Happy Valley, LLC and Simplicity Redmond, LLC; and its 51% owned subsidiary Simplicity El Paso.
All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents
The Company considers short-term interest-bearing investments with initial maturities of three months or less to be cash equivalents. The Company has no cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents in a financial institution, which at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.
Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the consolidated balance sheet.
Foreign Currencies
Revenue and expenses are translated at average rates of exchange prevailing during the period.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
In accordance with ASC 606, Revenues from Contracts with Customers, the Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods and services.
The following describes principal activities, separated by major product or service, from which the Company generates its revenues.
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.
Franchise Revenues
Franchise revenues consist of royalties, fees and initial license fee income. Franchise royalties are based on six percent of franchise store sales after a minimum level of sales occur and are recognized as sales occur. Any royalty reductions, including waivers or those offered as part of a new store development incentive or as incentive for other behaviors, are recognized at the same time as the related royalty, as they are not separately distinguishable from the full royalty rate. Franchise royalties are billed on a monthly basis.
The Company recognizes initial franchise license fee revenue when the Company has performed substantially all the services required in the franchise agreement. Fees received that do not meet these criteria are recorded as deferred revenues until earned. The pre-opening services provided to franchisees do not contain separate and distinct performance obligations from the franchise right; thus, the fees collected will be amortized on a straight-line basis beginning at the store opening date through the term of the franchise agreement, which is typically 10 years. Franchise license renewal fees, which generally occur every 10 years, are billed before the renewal date. Fees received for future license renewal periods are amortized over the life of the renewal period.
The Company offers various incentive programs for franchisees including royalty incentives, new store opening incentives (i.e. development incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned or granted under these programs that are in the form of discounts.
Commissary sales are comprised of gaming equipment and supplies sold to franchised stores and are recognized as revenue upon shipment or delivery of the related products to the franchisees. Payments are generally due within 30 days.
Fees for information services, including software maintenance fees, marketing fees and website maintenance, graphic and promotion fees are recognized as revenue as such services are provided.
Esports Revenue
Esports is a form of competition using video games. Most commonly, esports takes the form of organized, single player and multiplayer video game tournaments or leagues, particularly between professional players, individually or as teams. Revenues from Esports revenues are recognized when the competition is completed, and prize money is awarded. Revenues earned from team sponsorships, prize winnings, league sponsorships, and from the Company’s share of league revenues are included in esports revenue.
Deferred Revenues
Deferred revenues are classified as current or long-term based on when management estimates the revenues will be recognized.
The Company receives payments from franchisees in advance of all performance obligations having been met, including but not limited to franchise locations being opened. As certain conditions agreed to in these franchise agreements are performed, revenues are recognized.
Deferred costs include commissions paid to brokers related to the sale of specific new franchises which have not met revenue recognition criteria as of August 31, 2022, and May 31, 2022. These costs are recognized in the same period as the initial franchise fee revenue is recognized.
The table below summarizes Deferred Revenues as of August 31, 2022:
Accounts Receivable
The Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e. franchisees), taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable are written off against the allowance when management determines it is probable the receivable is worthless. Customer account balances with invoices dated over 90 days old are considered delinquent and considered in the allowance assessment. The Company performs credit evaluations of its customers and, generally, requires no collateral. Management has assessed accounts receivable and an allowance for doubtful accounts of approximately $68,879 and $39,000 has been recorded as of August 31, 2022, and May 31 2022, respectively.
Inventory
Inventories are stated at the lower of cost or market. The company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. The Company has recorded an impairment of approximately $75,733 during the three months ended August 31, 2022, related to the closure of Company owned stores during the fiscal quarter.
Property and Equipment
Property and equipment and leasehold improvements are recorded at its historical cost. The cost of property and equipment is depreciated over the estimated useful lives, when placed in service (ranging from 3 -5 years), of the related assets utilizing the straight-line method of depreciation. The cost of leasehold improvements is depreciated (amortized) over the lesser of the length of the related leases or the estimated useful lives of the assets. Ordinary repairs and maintenance are expensed when incurred and major repairs will be capitalized and expensed if they benefit future periods.
The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. The Company has recorded impairment charges of approximately $125,622 as of August 31, 2022, related to the closure of stores during the fiscal quarter.
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. For the three months ended August 31, 2022, the Company performed an internal evaluation of the intangible assets which indicated impairment was required and recorded an impairment charge of approximately $1,004,142 during the three months ended August 31, 2022, see Note 5. The impairment charges recorded during the quarter relate to the Company’s intention to potentially integrate a software company through an acquisition which may close in December 2022, provided multiple precedent conditions have been met.
Goodwill
Goodwill is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill, but we assess our goodwill for impairment at least annually. Our assessment date is May 31, and we performed an internal evaluation of the goodwill value at August 31, 2022 with quantitative and qualitative considerations. Based on this internal evaluation, we recorded an impairment charge of $1,472,884 during the three months ended August 31, 2022. The impairment charges recorded during the quarter relate to the Company’s intention to potentially integrate a software company through an acquisition which may close in December 2022, provided multiple precedent conditions have been met.
Franchise Locations
Through PLAYlive, the Company’s wholly owned subsidiary, the Company has entered into franchise agreements with third parties. As of August 31, 2022, 12 franchise locations were considered to be operational in various states including Arizona, California, Florida, Idaho, Maryland, Ohio, South Carolina, Texas and Washington.
The Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation
The Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation and ASC 505-50, Equity-Based Payments to Non-Employees. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued and are recognized over the employees required service period, which is generally the vesting period.
Non employee stock-based payments
The Company records stock-based payments made to non-employees in accordance with Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions.
The Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Net income (loss) - per share is calculated by dividing the Company’s net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings or loss per common share is calculated by dividing the Company’s net income or loss available to common stockholders by the diluted weighted average number of common shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. For this calculation potentially dilutive securities consist primarily of warrants, outstanding options and shares into which the company’s convertible notes payable are convertible. When the Company records a loss from operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per common share.
Income Taxes
The Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the consolidated financial statements recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
Recently Issued and Recently Adopted Accounting Pronouncements
Accounting standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following are a summary of recent accounting developments.
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective June 1, 2023 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company is evaluating the impact of the adoption of ASU 2020-06 on the Company’s financial statements.
In May 2021, the FASB issued ASU 2021-04, Earning Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40), which clarified and reduced diversity in an issuer’s accounting for modifications of exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This update will be effective for the Company as of June 1, 2023. The Company is currently assessing the potential impact of ASU 2021-04 to our consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
Going Concern, Liquidity and Management’s Plan
The Company’s unaudited consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the unaudited consolidated financial statements, as of August 31, 2022, the Company had an accumulated deficit of $33,995,554, a working capital deficit of $5,515,754, and a net loss attributable to common shareholders of $4,157,110. 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’s cash position may not be sufficient to support the Company’s daily operations. Management intends to raise additional funds by way of private and/or public offerings. While the Company believes in the viability of its strategy and its ability to generate sufficient revenue and to raise additional funds, there can be no assurances to that effect. Should the Company fail to raise additional capital, it may be compelled to reduce the scope of its planned future business activities.
The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings.
The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally.
Because COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers as of May 1, 2020 and subsequently reopened the majority of our company owned stores and franchise locations. Although our franchise agreements with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming Centers will default in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase in accounts receivables or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability to pay the minimum monthly royalty payments owed by the franchisee.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition and results of operations.
The measures taken to date impacted the Company’s business for the fiscal year ended May 31, 2022 as well as the fiscal quarter ended August 31, 2022 and will potentially continue to impact the Company’s business. Management expects that all of its business segments, across all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot be determined at this time.
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DISPOSITIONS |
3 Months Ended |
|---|---|
Aug. 31, 2022 | |
| Discontinued Operations and Disposal Groups [Abstract] | |
| DISPOSITIONS | NOTE 3 — DISPOSITIONS
On June 10, 2022, the Company and Simplicity One, the Company’s majority owned subsidiary, entered into an asset purchase agreement with a third party in which the third party acquired the Riot Games license for consideration of $391,776 payable in five equal installments between the closing date of the transaction and June 10, 2023. Upon the disposition of the license, the Company recorded $391,776 as another receivable and recognized a gain of $240,924 during the three months ended August 31, 2022. During the three months ended August 31, 2022, the Company collected $75,500 of the purchase price consideration resulting in an Other receivable sale of Brazil assets balance of $316,276 as of August 31, 2022.
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PROPERTY, PLANT AND EQUIPMENT |
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| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| PROPERTY, PLANT AND EQUIPMENT | NOTE 4 — PROPERTY, PLANT AND EQUIPMENT
The following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
Depreciation expense for the three months ended August 31, 2022, and 2021 was $18,048 and $81,737, respectively. During the three months ended August 31, 2022, and 2021 impairment expense of $125,622 and $0 was recorded by the Company, respectively.
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INTANGIBLE ASSETS |
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| Goodwill and Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INTANGIBLE ASSETS | NOTE 5 — INTANGIBLE ASSETS
The following table sets forth the intangible assets, including accumulated amortization as of August 31, 2022:
The following tables set forth the intangible assets, including accumulated amortization as of May 31, 2022:
During the three months ended August 31, 2022 and 2021, the Company recorded impairment expense of $1,004,142 and $0 respectively, related to intangible assets.
The following table sets forth the future amortization of the Company’s intangible assets as of August 31, 2022 for the fiscal years ending May 31:
Amortization expense for the three months ended August 31, 2022, and 2021 was $333 and $77,188, respectively.
Goodwill
The Company’s goodwill carrying amounts relate to the acquisitions of Simplicity Esports LLC and PLAYlive. The composition of the goodwill balance, is as follows:
During the three months ended August 31, 2022, and 2021 the Company recorded impairment expense of $1,472,884 and $0 respectively.
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RELATED PARTY TRANSACTIONS |
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Aug. 31, 2022 | |
| Related Party Transactions [Abstract] | |
| RELATED PARTY TRANSACTIONS | NOTE 6 — RELATED PARTY TRANSACTIONS
Kaplan Promissory Notes
On December 10, 2021, the Company entered into a related party transaction with Jed Kaplan, the Company’s then Chairman of the Board and a more than 5% shareholder, to provide a loan to the Company to provide additional operating funds for Simplicity One, the Company’s majority owned subsidiary. The principal amount of the loan was $247,818. The loan bears interest at a rate of 5% per annum and the entire amount of the principal and accrued interest was due on June 10, 2022. For the quarter ended August 31, 2022, the Company recorded interest expense of $339 with no similar expense in the prior period. 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% (Note 8 - Debt).
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COMMITMENTS AND CONTINGENCIES |
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| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| COMMITMENTS AND CONTINGENCIES | NOTE 7 — COMMITMENTS AND CONTINGENCIES
As of August 31, 2022, the Company has entered into various leases for its corporate office and its gaming centers.
The following table summarizes the right-of use asset and lease liability as of August 31, 2022:
During the three months ended August 31, 2022, the Company recognized a loss on impairment of $116,935 related to the closure of two Company owned stores subsequent to the end of the reporting period. The corresponding lease liabilities will remain until the Company concludes negotiation with the lessors.
The following table summarizes the Company’s scheduled future minimum lease payments as of August 31, 2022:
As of August 31, 2022, and May 31, 2022, the weighted-average remaining lease terms was 3.2 years and 3.6 years, respectively. Due to the fact that we do not have access to the rate implicit in the lease, we utilized our incremental borrowing rate as the discount rate. The weighted average discount rate associated with the lease as of August 31, 2022, and May 31, 2022, was 12%, respectively.
Employment Agreements, Board Compensation and Bonuses
On July 29, 2020, (i) the Company entered into an employment agreement (the “Kaplan 2020 Agreement”) with Mr. Kaplan; and (ii) the Board of Directors approved for Mr. Kaplan a $75,000 cash bonus and authorized the issuance of shares of the Company’s common stock, both related to his performance during the fiscal year ended May 31, 2020. As of August 31, 2022, the Company still owed Mr. Kaplan $35,000 of the 2020 bonus award.
Effective March 29, 2021, the Company promoted Mr. Kaplan to be the Chairman of the Board of Directors, and he ceased to be the Company’s Chief Executive Officer and Interim Chief Financial Officer. Upon this change, Mr. Kaplan’s new monthly salary became $4,000 per month and the Kaplan 2020 Agreement was terminated.
On July 29, 2020, (i) the Company entered into an employment agreement (the “Franklin 2020 Agreement”) with Mr. Franklin; and (ii) the Board of Directors approved for Mr. Franklin a $75,000 cash bonus and authorized the issuance of fully vested shares of the Company’s common stock, both related to his performance during the fiscal year ended May 31, 2020. As of August 31, 2022, the Company still owed Mr. Franklin $35,000 of the 2020 bonus award.
On March 25, 2021, the Board of Directors appointed Mr. Franklin as the Company’s Chief Executive Officer, effective March 29, 2021. Mr. Franklin continues to be a member of our board of directors. In connection with Mr. Franklin’s appointment, on March 25, 2021, the Company entered into an employment agreement, dated as of March 29, 2021, by and between the Company and Mr. Franklin (the “2021 Franklin Employment Agreement”). Pursuant to the terms of the 2021 Franklin Employment Agreement, in exchange for Mr. Franklin’s services, the Company agreed to pay Mr. Franklin an annual base salary of $250,000. Mr. Franklin is also eligible to receive a quarterly bonus of up to $15,000 in the form of a cash bonus and/or equity grant of shares of the Company’s common stock. Mr. Franklin’s eligibility for any bonus and the amount thereof will be determined solely at the discretion of the Board of Directors.
On May 11, 2021, the Board appointed Nancy Hennessey to serve as the Company’s Chief Financial Officer, effective May 17, 2021. In connection with Ms. Hennessey’s appointment as the Company’s Chief Financial officer, the Company entered into an employment agreement, dated as of May 17, 2021, by and between the Company and Ms. Hennessey (the “Hennessey Employment Agreement”). Pursuant to the terms of the Hennessey Employment Agreement, in exchange for Ms. Hennessey’s services, the Company agreed to pay Ms. Hennessey an annual base salary of $140,000. In addition, Ms. Hennessey was entitled to receive compensation in the form of an equity grant of $ in the Company’s common stock for each quarter during the term of the Hennessey Employment Agreement, which ran for a period ending one year after May 17, 2021, and automatically renews for successive one year terms unless either party gives 60 days’ advance written notice of its intention not to renew the Hennessey Employment Agreement. Ms. Hennessey was also eligible to receive a quarterly bonus of up to $12,500 in the form of a cash bonus and/or equity grant of shares of the Company’s common stock. Pursuant to the terms of the Hennessey Employment Agreement, Ms. Hennessey was also to receive (i) 5,000 shares of common stock upon filing of the 2021 Annual Report on Form 10-K, if completed before July 31, 2021, and (ii) 5,000 shares of common stock upon completion of an uplisting to a national exchange, such as The Nasdaq Stock Market or the NYSE American. Ms. Hennessey’s eligibility for any bonus and the amount thereof was to be determined solely at the discretion of the Board of Directors. On June 28, 2022, Nancy Hennessey submitted her resignation as the Company’s Chief Financial Officer, effective June 30, 2022. Ms. Hennessey’s resignation was not the result of any disagreement with the Company on any matter relating to the Company’s operations, policies or practices.
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DEBT |
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| Debt Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DEBT | NOTE 8 - DEBT
The table below presents the Company’s outstanding debt balances as of August 31, 2022, and May 31, 2022:
Scheduled principal maturities of the Company’s outstanding debt over the next five fiscal years is as follows:
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. In addition, the Company issued shares of its common stock to Labrys as a commitment fee pursuant to the Labrys SPA. Pursuant to the terms of the Labrys Note, the Company agreed to pay to $1,650,000 (the “Labrys Principal Sum”) to Labrys and to pay interest on the principal balance at the rate of 12% per annum (provided that the first twelve months of interest shall be guaranteed). The Labrys Note carries an original issue discount of $165,000 (“Labrys OID”). Accordingly, the Company received net proceeds of $1,485,000 that it used for its operational expenses and the repayment of certain existing debt obligations. Labrys may convert the Labrys Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the Note) at any time at a conversion price equal to $11.50 per share, subject to certain adjustments.
The Company may prepay the Labrys Note at any time prior to the date that an Event of Default (as defined in the Labrys Note) (each an “Labrys Event of Default”) occurs at an amount equal to 100% of the Labrys Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). The Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the Labrys Note or Labrys SPA.
Upon Labrys’s provision of notice to the Company of the occurrence of any Labrys Event of Default, which has not been cured within five (5) calendar days, the Labrys Note shall become immediately due and payable and the Company shall pay to Labrys, in full satisfaction of its obligations hereunder, an amount equal to the Labrys Principal Sum then outstanding plus accrued interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Labrys Event of Default, additional interest will accrue from the date of the Labrys Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted by law.
As of March 16, 2022, the Company and Labrys entered into an amendment (the “Labrys Amendment”) to the Labrys SPA and the Labrys Note, as amended. Pursuant to the terms of the Labrys Amendment, the maturity date of the Labrys Note was extended to the earlier of (i) September 15, 2022, and (ii) the date that the Company’s common stock is listed on the Nasdaq Stock Market or the New York Stock Exchange. In addition, the Labrys Note was amended to provide that Labrys has the right, at any time on or following the date that an event of default occurs under the Labrys Note, as amended, to convert all or any portion of the then outstanding and unpaid principal and interest into common stock, subject to a 4.99% equity blocker. In the Labrys Amendment, the parties also agreed that the Company has already received cash proceeds in excess of the $2,000,000 minimum threshold referenced in the Labrys Note. Pursuant to the terms of the Labrys Amendment, Labrys waived its rights to receive any portion of the next $750,000 of cash proceeds received by the Company to the extent that such amounts are received by the Company between March 15, 2022, and April 9, 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 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.
During the quarters ended August 31, 2022, the Company did not make any payments to Labrys. During the quarter ended August 31, 2022, the Company recognized $33,671 in interest expense associated with the Labrys Note recorded as accrued interest payable.
During the quarter ended August 31, 2021, the Company paid interim payments to the Holder in the amount of $225,000 comprised of the partial repayment of the balance of the Labrys Note in the amount of $90,909, the repayment of guaranteed interest in the amount of $109,091 and $25,000 as an amendment fee, and the Company recorded $287,330 in interest expense for the amortization of debt discount.
As of August 31, 2022, the carrying value and face value of the Labrys Note was $890,591 as the debt discount was fully accreted by that date.
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 Company received net proceeds of $130,606, net of an original issue discount of $56,000 (“March 2021 FirstFire OID”), net of origination fees of $8,394, and the repayment of principal and interest of $365,000 on an existing debt obligation owed to FirstFire. In addition, the Company issued shares of its common stock to the FirstFire as a commitment fee pursuant to the March 2021 FirstFire SPA. Pursuant to the terms of the March 2021 FirstFire Note, the Company agreed to pay to $560,000 (the “March 2021 FirstFire Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of 12% per annum (provided that the first twelve months of interest shall be guaranteed). The FirstFire may convert the March 2021 FirstFire Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the March 2021 FirstFire Note) at any time at a conversion price equal to $11.50 per share, subject to certain adjustments.
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.
The Company may prepay the March 2021 FirstFire Note at any time prior to the date that an Event of Default (as defined in the March 2021 FirstFire Note) (each an “March 2021 FirstFire Event of Default”) occurs at an amount equal to 100% of the March 2021 FirstFire Principal Sum then outstanding plus accrued and unpaid interest (no prepayment premium). The March 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 March 2021 FirstFire Note or March 2021 FirstFire SPA.
Upon FirstFire’s provision of notice to the Company of the occurrence of any March 2021 FirstFire Event of Default, which has not been cured within five (5) calendar days the March 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 March 2021 FirstFire Principal Sum then outstanding plus accrued interest multiplied by 125% (the “March 2021 FirstFire Default Amount”). Upon the occurrence of a March 2021 FirstFire Event of Default, additional interest will accrue from the date of the March 2021 FirstFire Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted by law.
The Company was required to make an interim payment to FirstFire in the amount of $123,200, on or before September 10, 2021, towards the repayment of the balance of the March 2021 FirstFire Note. On September 17, 2021, the Company issued to FirstFire a three-year common stock warrant to purchase of 40,000 shares of the Company’s common stock at $10.73 per share as consideration for FirstFire entering into a first amendment to the March 2021 FirstFire Note in order to delay this interim payment. Upon the issuance of the warrants, the Company recorded the fair value of the warrants in the amount of $248,547 and took a related interest expense charge of $248,547.
On October 1, 2021, the Company issued to FirstFire a second three-year common stock warrant to purchase 40,000 shares of the Company’s common stock at an exercise price of $10.73 per share as consideration for FirstFire entering into a second amendment to the March 2021 FirstFire Note in order to remove the capital raising ceiling in such note. Upon the issuance of the warrants, the Company recorded the fair value of the warrants in the amount of $201,351 and took a related interest expense charge of $201,351.
On April 29, 2022, FirstFire converted $50,000 of the outstanding principal balance of the March 2021 FirstFire Note at an adjusted conversion price of $1.00 per share. At conversion, the Company issued 50,000 shares of common stock to FirstFire at a fair market value of $ per share and recognized a loss on debt extinguishment of $60,000.
On July 27, 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 $ per share and recognized a loss on debt extinguishment of $2,850.
During the quarter ended August 31, 2022, the Company recognized $14,984 in interest expense associated with the March 2021 FirstFire Note recorded as accrued interest payable.
During the quarter ended August 31, 2021, the Company recognized $65,533 of amortization of debt discount related to the March 2021 FirstFire Note.
As of May 31, 2022, the carrying value and face value of the March 2021 FirstFire Note was $500,500 as the debt discount was full accreted by that date.
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) shares of its common stock as a commitment fee (“June 2021 FirstFire Commitment Shares”), and (iii) a -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.
The following are the material terms of the June 2021 FirstFire SPA and June 2021 FirstFire Note:
Upon issuance of the June 2021 FirstFire Note, the Company received net proceeds of $1,140,000 and used such proceeds for working capital and to pay off an existing promissory note issued by the Company in favor of Maxim. 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. The fair value of the June 2021 FirstFire Commitment Shares was $; the fair value of the beneficial conversion feature of the June 2021 FirstFire Note was $174,851; and the fair value of the June 2021 FirstFire Warrant was $942,200. The combination of these three components as well as the June 2021 FirstFire OID resulted in a total debt discount at issuance of $1,266,667 which is accreted over the term of the June 2021 FirstFire Note.
On September 16, 2021, the Company made an interim payment to the June 2021 FirstFire Note in the amount of $175,000.
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.
During the quarter ended August 31, 2022, the Company recorded interest expense of $137,580, which was related to the accretion of the debt discount.
During the quarter ended August 31, 2021, the Company recorded interest expense of $140,548.
As of August 31, 2022, the carrying value of the June 2021 FirstFire Note was $668,459, net of $423,208 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) shares of its common stock as a commitment fee (“June 2021 GS Commitment Shares”), and (iii) a -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.
The following are the material terms of the June 2021 GS SPA and June 2021 GS Note:
Upon issuance of the June 2021 GS Note, the Company received net proceeds of $300,000 and used such proceeds for working capital. 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. The fair value of the June 2021 GS Commitment Shares was $; the fair value of the beneficial conversion feature of the June 2021 GS Note was $53,899; and the fair value of the June 2021 GS Warrant was $240,138. The combination of these three components as well as the June 2021 GS OID resulted in a total debt discount at issuance of $333,333 which is accreted over the term of the June 2021 GS Note.
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.
On April 18, 2022, GS converted $50,333 of the outstanding principal balance the June 2021 GS Note and $3,389 in associated accrued interest at an adjusted conversion price of $1.00 per share. At conversion, the Company issued shares of common stock to GS at a fair market value of $ per share and recognized a loss on debt extinguishment of $95,085.
On July 18, 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 shares of common stock to GS at a fair market value of $ per share and recognized a loss on debt extinguishment of $53,942.
During the quarter ended August 31, 2022, the Company recorded interest expense of $56,212 related to the accretion of the debt discount.
During the quarter ended August 31, 2022, the Company recorded interest expense of $34,703.
As of August 31, 2022, the carrying value of the June 2021 GS Note was $140,836, net of $89,164 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) shares of its common stock as a commitment fee (“August 2021 Jefferson Commitment Shares”), and (iii) a -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:
Upon issuance of the August 2021 Jefferson Note, the Company received net proceeds of $300,000 and used such proceeds for working capital as well as the payment of $15,000 in fees associated with the loan. 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. The fair value of the August 2021 Jefferson Commitment Shares was $; the fair value of the beneficial conversion feature of the August 2021 Jefferson Note was $62,051; and the fair value of the August 2021 Jefferson Warrant was $233,004. The combination of these three components as well as the August 2021 Jefferson OID resulted in a total debt discount at issuance of $333,333 which is accreted over the term of the August 2021 Jefferson Note. The $15,000 paid as loan origination fees was recorded directly to additional paid in capital.
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.
On August 23, 2022, GS 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 shares of common stock to Jefferson at a fair market value of $ per share and recognized a gain on debt extinguishment of $2,750.
During the quarter ended August 31, 2022, the Company recorded interest expense of $47,941, comprised of $46,941 related to the accretion of the debt discount and $1,000 in fees associated with the conversion.
During the quarter ended August 31, 2021, the Company recorded interest expense of $685.
As of August 31, 2022, the carrying value of the August 2021 Jefferson Note was $163,882, net of $159,452 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) shares of its common stock as a commitment fee (“August 2021 Lucas Commitment Shares”), and (iii) a -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.
The following are the material terms of the August 2021 Lucas SPA and August 2021 Lucas Note:
Upon issuance of the August 2021 Lucas Note, the Company received net proceeds of $180,000 and used such proceeds for working capital as well as the payment of $9,000 in fees associated with the loan. 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. The fair value of the August 2021 Lucas Commitment Shares was $; the fair value of the beneficial conversion feature of the August 2021 Lucas Note was $22,149; and the fair value of the August 2021 Lucas Warrant was $153,948. The combination of these three components as well as the August 2021 Lucas OID resulted in a total debt discount at issuance of $200,000 which is accreted over the term of the August 2021 Lucas Note. The $9,000 paid as loan origination fees was recorded directly to additional paid in capital.
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. 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 Lucas Note was further reduced from $1.00 per share to $0.10 per share.
During the quarter ended August 31, 2022, the Company recorded interest expense of $25,205, related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the August 2021 Lucas Note was $99,999, net of $100,001 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:
Upon issuance of the August 2021 LGH Note, the Company received net proceeds of $180,000 and used such proceeds for working capital as well as the payment of $6,500 in fees associated with the loan. 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. 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 LGH Note was further reduced from $1.00 per share to $0.10 per share.
During the quarter ended August 31, 2022, the Company recorded interest expense of $3,340 related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the August 2021 LGH Note was $186,750, net of $13,250 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) shares of its common stock as a commitment fee (“September 2021 Ionic Commitment Shares”), and (iii) a -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:
Upon issuance of the September 2021 Ionic Note, the Company received net proceeds of $1,400,000 and used such proceeds for working capital as well as the payment of $98,000 in fees associated with the loan. 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. The fair value of the September 2021 Ionic Commitment Shares was $; the fair value of the beneficial conversion feature of the September 2021 Ionic Note was $335,303; and the fair value of the September 2021 Ionic Warrant was $1,037,976. The combination of these three components as well as the September 2021 Ionic OID resulted in a total debt discount at issuance of $1,555,556 which is accreted over the term of the September 2021 Ionic Note. The $98,000 paid as loan origination fees was recorded directly to additional paid in capital.
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.
On April 25, 2022, Ionic converted $87,800 of the outstanding principal balance the September 2021 Ionic Note at an adjusted conversion price of $1.00 per share. At conversion, the Company issued shares of common stock to Ionic at a fair market value of $ per share and recognized a loss on debt extinguishment of $141,358.
On July 28, 2022, Ionic converted $6,776 of the outstanding principal balance the September 2021 Ionic Note at an adjusted conversion price of $0.10 per share. At conversion, the Company issued shares of common stock to Ionic at a fair market value of $ per share and recognized a loss on debt extinguishment of $2,033.
On August 24, 2022, Ionic converted $15,000 of the outstanding principal balance the September 2021 Ionic Note at an adjusted conversion price of $0.10 per share. At conversion, the Company became obligated to issue shares of common stock to Ionic at a fair market value of $ per share and recognized a gain on debt extinguishment of $4,500. As of August 31, 2022, these shares are classified as common stock to be issued.
During the quarter ended August 31, 2022, the Company recorded interest expense of $302,506 related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the September 2021 Ionic Note was $771,322, net of $674,658 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) shares of its common stock as a commitment fee (“March 2022 FirstFire Commitment Shares”), and (iii) a -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:
Upon issuance of the March 2022 FirstFire Note, the Company received net proceeds of $100,000 and used such proceeds for working capital. 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. The fair value of the March 2022 FirstFire Commitment Shares was $; the fair value of the beneficial conversion feature of the March 2022 FirstFire Note was $45,418; and the fair value of the March 2022 FirstFire Warrant was $53,424. The combination of these three components as well as the March 2022 FirstFire OID resulted in a total debt discount at issuance of $110,000 which is accreted over the term of the March 2022 FirstFire Note.
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.
During the quarter ended August 31, 2022, the Company recorded interest expense of $55,000 related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the March 2022 FirstFire Note was $97,446, net of $12,554 in unaccreted debt discount.
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) shares of its common stock as a commitment fee (“March 2022 GS Commitment Shares”), and (iii) a -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:
Upon issuance of the March 2022 GS Note, the Company received net proceeds of $75,000 and used such proceeds for working capital. 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. The fair value of the March 2022 GS Commitment Shares was $; the fair value of the beneficial conversion feature of the March 2022 GS Note was $34,062; and the fair value of the March 2022 GS Warrant was $40,067. The combination of these three components as well as the March 2022 GS OID resulted in a total debt discount at issuance of $82,500 which is accreted over the term of the March 2022 GS Note.
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.
During the quarter ended August 31, 2022, the Company recorded interest expense of $41,250 related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the March 2022 GS Note was $73,084, net of $9,416 in unaccreted debt discount.
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) shares of its common stock as a commitment fee (“March 2022 Ionic Commitment Shares”), and (iii) a -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:
Upon issuance of the March 2022 Ionic Note, the Company received net proceeds of $100,000 and used such proceeds for working capital. 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. The fair value of the March 2022 Ionic Commitment Shares was $; the fair value of the beneficial conversion feature of the March 2022 Ionic Note was $45,418; and the fair value of the March 2022 Ionic Warrant was $53,424. The combination of these three components as well as the March 2022 Ionic OID resulted in a total debt discount at issuance of $110,000 which is accreted over the term of the March 2022 Ionic Note.
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.
During the quarter ended August 31, 2022, the Company recorded interest expense of $55,000related to the accretion of the debt discount.
As of August 31, 2022, the carrying value of the March 2022 Ionic Note was $97,446, net of $12,554 in unaccreted debt discount.
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) shares of its common stock as a commitment fee (“April 2022 Jefferson Commitment Shares”), and (iii) a -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:
Upon issuance of the April 2022 Jefferson Note, the Company received net proceeds of $75,000 and used such proceeds for working capital. 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. The fair value of the April 2022 Jefferson Commitment Shares was $; the fair value of the beneficial conversion feature of the April 2022 Jefferson Note was $34,062; and the fair value of the April 2022 Jefferson Warrant was $40,067. The combination of these three components as well as the April 2022 Jefferson OID resulted in a total debt discount at issuance of $82,500 which is accreted over the term of the April 2022 Jefferson Note.
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.
During the quarter ended August 31, 2022, the Company recorded interest expense of $41,250 related to the accretion of the debt discount.
As of May 31, 2022, the carrying value of the April 2022 Jefferson Note was $73,084, net of $9,416 in unaccreted debt discount.
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) shares of its common stock as a commitment fee (“July 2022 FirstFire Commitment Shares”), and (iii) a -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:
Upon issuance of the July 2022 FirstFire Note, the Company received net proceeds of $25,000 and used such proceeds for working capital. 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. The fair value of the July 2022 FirstFire Commitment Shares was $, and the fair value of the July 2022 FirstFire Warrant was $3,825. The combination of these two components as well as the July 2022 FirstFire OID resulted in a total debt discount at issuance of $6,461 which is accreted over the term of the July 2022 FirstFire Note.
During the quarter ended August 31, 2022, the Company recorded interest expense of $5,552, which included $5,002 related to the accretion of the debt discount and accrued interest in the amount of $550. As of August 31, 2022, the carrying value of the July 2022 FirstFire Note was $26,041, net of $1,459 in unaccreted debt discount.
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) shares of its common stock as a commitment fee (“July 2022 GS Commitment Shares”), and (iii) a -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:
Upon issuance of the July 2022 GS Note, the Company received net proceeds of $25,000 and used such proceeds for working capital. 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. The fair value of the July 2022 GS Commitment Shares was $, and the fair value of the July 2022 GS Warrant was $3,825. The combination of these two components as well as the July 2022 GS OID resulted in a total debt discount at issuance of $6,461 which is accreted over the term of the July 2022 GS Note.
During the quarter ended August 31, 2022, the Company recorded interest expense of $5,552, which included $5,002 related to the accretion of the debt discount and accrued interest in the amount of $550. As of August 31, 2022, the carrying value of the July 2022 GS Note was $26,041, net of $1,459 in unaccreted debt discount.
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) shares of its common stock as a commitment fee (“July 2022 Ionic Commitment Shares”), and (iii) a -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:
Upon issuance of the July 2022 Ionic Note, the Company received net proceeds of $25,000 and used such proceeds for working capital. 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. The fair value of the July 2022 Ionic Commitment Shares was $, and the fair value of the July 2022 Ionic Warrant was $3,825. The combination of these two components as well as the July 2022 Ionic OID resulted in a total debt discount at issuance of $6,461 which is accreted over the term of the July 2022 Ionic Note.
During the quarter ended August 31, 2022, the Company recorded interest expense of $5,552, which included $5,002 related to the accretion of the debt discount and accrued interest in the amount of $550. As of August 31, 2022, the carrying value of the July 2022 Ionic Note was $26,041, net of $1,459 in unaccreted debt discount.
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) shares of its common stock as a commitment fee (“July 2022 Jefferson Commitment Shares”), and (iii) a -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:
Upon issuance of the July 2022 Jefferson Note, the Company received net proceeds of $25,000 and used such proceeds for working capital. 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. The fair value of the July 2022 Jefferson Commitment Shares was $, and the fair value of the July 2022 Jefferson Warrant was $3,825. The combination of these two components as well as the July 2022 Jefferson OID resulted in a total debt discount at issuance of $6,461 which is accreted over the term of the July 2022 Jefferson Note.
During the quarter ended August 31, 2022, the Company recorded interest expense of $5,552, which included $5,002 related to the accretion of the debt discount and accrued interest in the amount of $550. As of August 31, 2022, the carrying value of the July 2022 Jefferson Note was $26,041, net of $1,459 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”). The Secured Note One had a perfected security interest in 50 personal computers the Company intended to use in its operations. The Secured Note One required 60 monthly payments of principal and interest in the amount of $5,577.
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. The fair value of the Secured Note One Warrants was $84,517. The combination of fair market value of the Secured Note One Warrant and the Secured Note One OID resulted in a total debt discount at issuance of $97,017 which is accreted over the term of the Secured Note One.
During the quarter ended August 31, 2022, the Company made principal payments of $4,500 on Secured Note One. For the quarter ended August 31, 2022, the company recognized $8,007 in total interest expense associated with Secured Note One, comprised of $1,077 in cash interest payments, $2,079 in accrued interest payable, and $4,851 in accretion expense related to the original issuance discount and debt discount related to the warrants, with no comparable amounts during the prior period. As of August 31, 2022, the carrying value of Secured Note One is $42,268, net of $82,464 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”). The Secured Note Two has a perfected security interest in 30 personal computers the Company intended to use in its operations. The Secured Note Two required 60 monthly payments of principal and interest in the amount of $3,346.
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. The fair value of the Secured Note Two Warrants was $50,710. The combination of fair market value of the Secured Note Two Warrant and the Secured Note Two OID resulted in a total debt discount at issuance of $58,210 which is accreted over the term of the Secured Note Two.
During the quarter ended August 31, 2022, the Company made principal payments of $2,421 on Secured Note Two. For the quarter ended August 31, 2022, the company recognized $4,809 in total interest expense associated with Secured Note Two, comprised of $646 in cash interest payments, $1,252 in accrued interest payable, and $2,911 in accretion expense related to the original issuance discount and debt discount related to the warrants, with no comparable amounts in the prior period. As of August 31, 2022, the carrying value of Secured Two Note is $25,640, net of $49,478 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 quarter ended August 31, 2022, the Company recognized interest expense of $339 with no comparable amount during the prior period.
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, the Company $40,500 of the obligation was forgiven by the Small Business Administration. As of August 31, 2022, the outstanding balance of this obligation was $41,735.
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STOCKHOLDERS’ EQUITY |
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| STOCKHOLDERS’ EQUITY | NOTE 9 -STOCKHOLDERS’ EQUITY
Preferred Stock
The Company is authorized to issue shares of preferred stock with a par value of $ per share. As of August 31, 2022, there were share of preferred stock issued or outstanding. As of May 31, 2022, there were shares of preferred stock issued and outstanding.
On August 23, 2022, the Company filed with the Delaware Secretary of State a certificate of designations (the “Certificate of Designations”) to designate one share of the Company’s preferred stock as the Series X Convertible Preferred Stock (“Series X Preferred”). The one share of Series X Preferred has a number of votes equal to all of the other votes entitled to be cast on any matter by any other shares or securities of the Company, plus one. The Series X Preferred does not have any economic or other interest in the Company. The share of Series X Preferred may not be transferred after issuance. If any transfer is attempted, the Series X Preferred will be automatically redeemed by the Company at a redemption price of $.
On August 29, 2022, the Company issued and sold to Roman Franklin, the Company’s Chief Executive Officer, principal financial officer, principal accounting officer, member of the Company’s Board of Directors, and greater than 5% stockholder, one share of the Company’s Series X Preferred for a purchase price of $1,000.
At the election of the Series X Preferred holder at any time following the date that the Company has amended its articles of incorporation to increase the authorized shares of common stock such that there are sufficient authorized but unissued shares of common stock to permit conversion of the Series X Preferred as set forth in the Certificate of Designations, the Series X Preferred is convertible into shares of the Company’s common stock.
Upon issuance of the Series X Preferred, the Company estimated the fair market value of the Series X Preferred to be $183,498. The Company recorded stock-based compensation expense of $ related to the sale of the Series X Preferred and an associated receivable of $1,000 for the purchase price of the share.
Common Stock
The Company is authorized to issue shares of common stock with a par value of $ per share. Holders of the shares of the Company’s common stock are entitled to one vote for each share. As of August 31, 2022, and May 31, 2022, there were and shares of common stock issued and outstanding, respectively.
During the quarter ended August 31, 2022, the Company issued shares of its common stock as follows:
Warrants
As of August 31, 2022, the Company has issued and outstanding warrants to purchase shares of its common stock as follows:
During the quarter ended August 31, 2022, the Company issued 200,000 warrants to acquire shares of common stock to accredited investors in association with issued debt instruments (See Note 8 – Debt). The fair value of these warrants was estimated at the date of issuance using the Black-Scholes option-pricing model with the following assumptions: (i) exercise price of $1.00 per share; (ii) expected dividend yield of %; (iii) expected volatility of %; (iv) risk-free interest rate of %; and (v) term of years.
During the quarter ended August 31, 2021, the Company issued 1,458,730 warrants to acquire shares of common stock to accredited investors in association with issued, amended, or extinguished debt instruments.
During the quarter ended August 31, 2021, the Company sold warrants to an accredited investor for an aggregate purchase price of $100,000 to purchase shares of common stock at an exercise price of $ per share. These warrants became exercisable upon issuance and expire on the third anniversary of issuance. No similar activity occurred during the quarter ended August 31, 2022.
Stock-Based Compensation
The Company did not issue any options to purchase its common shares during the quarters ended August 31, 2022, or 2021.
The table below presents option activity for the quarter ended August 31, 2022:
Stock based compensation expense related to options for the quarters ended August 31, 2022, and August 31, 2021, amounted to $ and $, respectively. Unrecognized compensation expense related to outstanding options amounted to $75,582 and $0 as of August 31, 2022, and August 31, 2021, respectively.
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SUBSEQUENT EVENTS |
3 Months Ended |
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Aug. 31, 2022 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | NOTE 10 — SUBSEQUENT EVENTS
Conversion of Convertible Promissory Notes
Subsequent to the reporting period, the holders of $150,535 of the Company’s convertible notes converted principal and accrued interest under such notes into an aggregate of shares of common stock.
Approval of Increase in Authorized Shares of Common Stock
On September 1, 2022, the Board and stockholders holding of a majority of the voting power of the issued and outstanding capital stock of the Company, including the Series X Preferred, approved an amendment (the “Amendment”) to the Company’s third amended and restated certificate of incorporation, as amended (the “Certificate of Incorporation”) increasing the number of our authorized shares of common stock from to . On October 20, 2022, the Company filed a preliminary information statement on Schedule 14C relating to the Amendment. The exact timing of the authorized share increase will be determined by the Company’s Board based on its evaluation as to when such action will be the most advantageous to the Company and its stockholders, and the effective date will be publicly announced. In no event will the authorized share increase be effective sooner than 20 days after the Company mails the definitive information statement on Schedule 14C and accompanying notice to the Company’s stockholders. The Board retains the authority to abandon the increase in authorized shares for any reason at any time prior to the effective date of the increase in authorized shares.
Ionic, Jefferson Street and FirstFire Securities Purchase Agreements, Notes and Warrants
In addition, on September 8, 2022, the Company (i) entered into securities purchase agreements with each of Ionic, Jefferson Street and FirstFire, (ii) issued 12% convertible promissory notes to each of Ionic, Jefferson Street and FirstFire, and (iii) issued common stock purchase warrants to each of Ionic, Jefferson Street and FirstFire.
September 2022 Ionic Securities Purchase Agreement & 12% Promissory Note
On September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 Ionic SPA”), dated as of September 8, 2022, with Ionic, pursuant to which the Company issued a 12% promissory convertible note (the “September 2022 Ionic Note”) with a maturity date of January 8, 2023, in the principal sum of $66,000. Pursuant to the terms of the September 2022 Ionic Note, the Company agreed to pay to Ionic $66,000 and to pay interest on the principal balance at the rate of 12% per annum. The September 2022 Ionic Note carries an original issue discount of $6,000. Accordingly, Ionic paid the purchase price of $60,000 in exchange for the September 2022 Ionic Note. The Company intends to use the proceeds for working capital. Ionic may convert the September 2022 Ionic Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the September 2022 Ionic Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by Ionic upon, at the election of Ionic, not less than 61 days’ prior notice to the Company) at any time at a conversion price equal to $0.02 per share, as the same may be adjusted as provided in the September 2022 Ionic Note.
The Company may prepay the September 2022 Ionic Note in accordance with the terms of the September 2022 Ionic Note, with the understanding that $2,640 of interest is guaranteed and earned in full as of September 8, 2022. The September 2022 Ionic Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the September 2022 Ionic Note or the September 2022 Ionic SPA.
Upon the occurrence of any Event of Default (as defined in the September 2022 Ionic Note), which has not been cured within the time prescribed in the September 2022 Ionic Note, it shall become immediately due and payable and the Company shall pay to Ionic, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
September 2022 Ionic Ventures Common Stock Purchase Warrant
Pursuant to the terms of the September 2022 Ionic SPA, on September 8, 2022, the Company also issued to Ionic a -year warrant to purchase 120,000 shares of the Company’s common stock at an exercise price of $1.00.
September 2022 Jefferson Street Securities Purchase Agreement & 12% Promissory Note
On September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 Ionic SPA”), dated as of September 8, 2022, with Jefferson Street, pursuant to which the Company issued a 12% promissory convertible note (the “September 2022 Jefferson Street Note”) with a maturity date of January 8, 2023, in the principal sum of $27,500. Pursuant to the terms of the September 2022 Jefferson Street Note, the Company agreed to pay to Jefferson Street $27,500 and to pay interest on the principal balance at the rate of 12% per annum. The September 2022 Jefferson Street Note carries an original issue discount of $2,500. Accordingly, Jefferson Street paid the purchase price of $25,000 in exchange for the September 2022 Jefferson Street Note. The Company intends to use the proceeds for working capital. Jefferson Street may convert the September 2022 Jefferson Street Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the September 2022 Jefferson Street Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by Jefferson Street upon, at the election of Jefferson Street, not less than 61 days’ prior notice to the Company) at any time at a conversion price equal to $0.02 per share, as the same may be adjusted as provided in the September 2022 Jefferson Street Note.
The Company may prepay the September 2022 Jefferson Street Note in accordance with the terms of the September 2022 Jefferson Street Note, with the understanding that $1,100 of interest is guaranteed and earned in full as of September 8, 2022. The September 2022 Jefferson Street Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions of the September 2022 Jefferson Street Note or the September 2022 Jefferson Street SPA.
Upon the occurrence of any Event of Default (as defined in the September 2022 Jefferson Street Note), which has not been cured within the time prescribed in the September 2022 Jefferson Street Note, it shall become immediately due and payable and the Company shall pay to Jefferson Street, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
September 2022 Jefferson Street Common Stock Purchase Warrant
Pursuant to the terms of the September 2022 Jefferson Street SPA, on September 8, 2022, the Company also issued to Jefferson Street a -year warrant to purchase 45,454 shares of the Company’s common stock at an exercise price of $1.00.
September 2022 FirstFire Securities Purchase Agreement & 12% Promissory Note
On September 8, 2022, the Company entered into a securities purchase agreement (the “September 2022 FirstFire SPA”), dated as of September 8, 2022, with FirstFire, pursuant to which the Company issued a 12% promissory convertible note (the “September 2022 FirstFire Note”) with a maturity date of January 8, 2023, in the principal sum of $66,000. Pursuant to the terms of the September 2022 FirstFire Note, the Company agreed to pay to FirstFire $66,000 and to pay interest on the principal balance at the rate of 12% per annum. The September 2022 FirstFire Note carries an original issue discount of $6,000. Accordingly, FirstFire paid the purchase price of $60,000 in exchange for the September 2022 FirstFire Note. The Company intends to use the proceeds for working capital. FirstFire may convert the September 2022 FirstFire Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the September 2022 FirstFire Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by FirstFire upon, at the election of FirstFire, not less than 61 days’ prior notice to the Company) at any time at a conversion price equal to $0.02 per share, as the same may be adjusted as provided in the September 2022 FirstFire Note.
The Company may prepay the September 2022 FirstFire Note in accordance with the terms of the September 2022 FirstFire Note, with the understanding that $2,640 of interest is guaranteed and earned in full as of September 8, 2022. The September 2022 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 September 2022 FirstFire Note or the September 2022 FirstFire SPA.
Upon the occurrence of any Event of Default (as defined in the September 2022 FirstFire Note), which has not been cured within the time prescribed in the September 2022 FirstFire Note, it shall become immediately due and payable and the Company shall pay to FirstFire, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
September 2022 FirstFire Common Stock Purchase Warrant
Pursuant to the terms of the September 2022 FirstFire SPA, on September 8, 2022, the Company also issued to FirstFire a warrant to purchase 120,000 shares of the Company’s common stock at an exercise price of $1.00.
Diverted River Exchange Agreement
On September 28, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”), dated as of September 28, 2022, by and among the Company, Diverted River Technology, LLC (“Diverted River”), the member(s) of Diverted River from time to time (the “Members”) and Zachary Johnson, as the Members’ representative. Pursuant to the terms of the Exchange Agreement, the Company agreed to acquire from the Members 100% of the membership interests of Diverted River held by the Members as of the closing (the “Closing”), in exchange for the issuance by the Company to the Members of shares of the Company’s common stock equal to 80% of the issued and outstanding shares of the Company’s common stock as of the Closing.
Following the Closing, Diverted River will become a wholly owned subsidiary of the Company. Also following the Closing, it is expected that the Company’s name will be changed to Diverted River Technology, Inc., and the business of the Company will become that of Diverted River, an ETO focused on a sustainable, high margin, recurring revenue business model that requires limited capital expenditures.
At the Closing, the Company will expand the size of the Company’s Board of Directors (the “Board”) by three persons, to a total of seven persons, and will name Mr. Johnson and, within 90 days after Closing, two other persons, as directors on the Board, one of whom will be an independent director. Also at the Closing, the Company will name Mr. Johnson as Chief Executive Officer of the Company. Within 90 days of Closing, the Board will name a Chief Technology Officer, subject to Mr. Johnson’s approval. At the Closing, the Company will also enter into employment agreements with Mr. Johnson and certain other Diverted River employees as identified and agreed by the parties. Within 90 days of Closing, the Company will hire Velocity 42 Limited as its primary software developer.
The Exchange Agreement contains certain covenants, representations and warranties customary for an agreement of this type. In addition, the Closing is subject to the satisfaction or waiver of certain conditions, including, but not limited to, (i) the increase by the Company of its authorized shares of common stock to shares; (ii) execution by Diverted River of agreements with clients generating at least $60,000 per month in revenue for at least 24 months following the Closing, with such agreements being in form and substance as agreed to by the Company and Diverted River; (iii) settlement by the Company of any debt with landlords related to the closure of the Company’s gaming center venues; (iv) the Company having obtained binding commitments from investors to invest at least $4,000,000, through the issuance of shares of Company common stock; (v) repayment by the Company of its convertible notes, or execution of agreements with noteholders to convert such notes into shares of Company common stock comprising no more than 12.5% of the issued and outstanding common stock of the Company after giving effect to the Closing; (vi) reaching an agreement with warrant holders to amend the exercise price to be $1.00 per share; (vii) execution of note amendments by holders of Company promissory notes that are not presently convertible into shares of Company common stock such that the notes will be converted into Company common stock and such notes shall have been converted, with such shares being included in the 12.5% limitation set forth in clause (v) hereof; (viii) provision by Diverted River of audited financial statements; and (ix) completion of satisfactory due diligence reviews by the Company and Diverted River.
The parties may terminate the Exchange Agreement pursuant to the terms of the Exchange Agreement, including, but not limited to, if the conditions to Closing have not been satisfied or waived by December 15, 2022. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||
| Basis of Presentation | Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented.
The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, as filed with the SEC on September 27, 2022. The interim results for the three months ended August 31, 2022 are not necessarily indicative of the results to be expected for the year ending May 31, 2023 or for any future interim periods.
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| Basis of Consolidation | Basis of Consolidation
The accompanying unaudited consolidated financial statements include the operations of the Company and its wholly owned subsidiaries, Simplicity Esports, LLC, PLAYlive, Simplicity Union Gap, LLC, Simplicity Kennewick, LLC, Simplicity Humble, LLC, Simplicity Frisco, LLC, Simplicity Billings, LLC, Simplicity Brea, LLC, Simplicity Santa Rosa, LLC, Simplicity St. Louis, LLC, Simplicity St. Petersburg, LLC, Simplicity Fullerton, LLC, Simplicity Salinas, LLC, Simplicity Tracy, LLC, Simplicity Vancouver, LLC, Simplicity Fort Bliss, LLC, and PLAYlive Nation Holdings, LLC; its 59% owned subsidiary Simplicity One Brasil Ltda. (“Simplicity One”); its 79% owned subsidiaries Simplicity Happy Valley, LLC and Simplicity Redmond, LLC; and its 51% owned subsidiary Simplicity El Paso.
All significant intercompany accounts and transactions have been eliminated in consolidation.
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| Cash and cash equivalents | Cash and cash equivalents
The Company considers short-term interest-bearing investments with initial maturities of three months or less to be cash equivalents. The Company has no cash equivalents.
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| Concentration of Credit Risk | Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable. Cash and cash equivalents in a financial institution, which at times, may exceed the Federal depository insurance coverage of $250,000. The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such accounts.
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| Financial Instruments | Financial Instruments
The fair value of the Company’s assets and liabilities, which qualify as financial instruments under the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,” approximates the carrying amounts represented in the consolidated balance sheet.
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| Foreign Currencies | Foreign Currencies
Revenue and expenses are translated at average rates of exchange prevailing during the period.
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| Use of Estimates | Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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| Revenue Recognition | Revenue Recognition
In accordance with ASC 606, Revenues from Contracts with Customers, the Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods and services.
The following describes principal activities, separated by major product or service, from which the Company generates its revenues.
The following describes principal activities, separated by major product or service, from which the Company generates its revenues:
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| Company-owned Store Sales | 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.
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| Franchise Revenues | 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.
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| Esports Revenue | 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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| Deferred Revenues | Deferred Revenues
Deferred revenues are classified as current or long-term based on when management estimates the revenues will be recognized.
The Company receives payments from franchisees in advance of all performance obligations having been met, including but not limited to franchise locations being opened. As certain conditions agreed to in these franchise agreements are performed, revenues are recognized.
Deferred costs include commissions paid to brokers related to the sale of specific new franchises which have not met revenue recognition criteria as of August 31, 2022, and May 31, 2022. These costs are recognized in the same period as the initial franchise fee revenue is recognized.
The table below summarizes Deferred Revenues as of August 31, 2022:
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| Accounts Receivable | Accounts Receivable
The Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e. franchisees), taking into consideration the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable are written off against the allowance when management determines it is probable the receivable is worthless. Customer account balances with invoices dated over 90 days old are considered delinquent and considered in the allowance assessment. The Company performs credit evaluations of its customers and, generally, requires no collateral. Management has assessed accounts receivable and an allowance for doubtful accounts of approximately $68,879 and $39,000 has been recorded as of August 31, 2022, and May 31 2022, respectively.
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| Inventory | Inventory
Inventories are stated at the lower of cost or market. The company periodically reviews the value of items in inventory and provides write-downs or write-offs of inventory based on its assessment of market conditions. The Company has recorded an impairment of approximately $75,733 during the three months ended August 31, 2022, related to the closure of Company owned stores during the fiscal quarter.
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| Property and Equipment | Property and Equipment
Property and equipment and leasehold improvements are recorded at its historical cost. The cost of property and equipment is depreciated over the estimated useful lives, when placed in service (ranging from 3 -5 years), of the related assets utilizing the straight-line method of depreciation. The cost of leasehold improvements is depreciated (amortized) over the lesser of the length of the related leases or the estimated useful lives of the assets. Ordinary repairs and maintenance are expensed when incurred and major repairs will be capitalized and expensed if they benefit future periods.
The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. The Company has recorded impairment charges of approximately $125,622 as of August 31, 2022, related to the closure of stores during the fiscal quarter.
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| Intangible Assets and Impairment | 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. For the three months ended August 31, 2022, the Company performed an internal evaluation of the intangible assets which indicated impairment was required and recorded an impairment charge of approximately $1,004,142 during the three months ended August 31, 2022, see Note 5. The impairment charges recorded during the quarter relate to the Company’s intention to potentially integrate a software company through an acquisition which may close in December 2022, provided multiple precedent conditions have been met.
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| Goodwill | Goodwill
Goodwill is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill, but we assess our goodwill for impairment at least annually. Our assessment date is May 31, and we performed an internal evaluation of the goodwill value at August 31, 2022 with quantitative and qualitative considerations. Based on this internal evaluation, we recorded an impairment charge of $1,472,884 during the three months ended August 31, 2022. The impairment charges recorded during the quarter relate to the Company’s intention to potentially integrate a software company through an acquisition which may close in December 2022, provided multiple precedent conditions have been met.
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| Franchise Locations | Franchise Locations
Through PLAYlive, the Company’s wholly owned subsidiary, the Company has entered into franchise agreements with third parties. As of August 31, 2022, 12 franchise locations were considered to be operational in various states including Arizona, California, Florida, Idaho, Maryland, Ohio, South Carolina, Texas and Washington.
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| Stock-based Compensation |
The Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation
The Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation and ASC 505-50, Equity-Based Payments to Non-Employees. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued and are recognized over the employees required service period, which is generally the vesting period.
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| Non employee stock-based payments | Non employee stock-based payments
The Company records stock-based payments made to non-employees in accordance with Accounting Standards Update (“ASU”) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain exceptions.
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| Basic Income (Loss) Per Share |
The Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Net income (loss) - per share is calculated by dividing the Company’s net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings or loss per common share is calculated by dividing the Company’s net income or loss available to common stockholders by the diluted weighted average number of common shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. For this calculation potentially dilutive securities consist primarily of warrants, outstanding options and shares into which the company’s convertible notes payable are convertible. When the Company records a loss from operations, all potentially dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per common share.
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| Income Taxes | Income Taxes
The Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC Topic 740 prescribes a recognition threshold and a measurement attribute for the consolidated financial statements recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities.
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| Recently Issued and Recently Adopted Accounting Pronouncements | Recently Issued and Recently Adopted Accounting Pronouncements
Accounting standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following are a summary of recent accounting developments.
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”) to simplify accounting for certain financial instruments. ASU 2020-06 eliminates the current models that require separation of beneficial conversion and cash conversion features from convertible instruments and simplifies the derivative scope exception guidance pertaining to equity classification of contracts in an entity’s own equity. The new standard also introduces additional disclosures for convertible debt and freestanding instruments that are indexed to and settled in an entity’s own equity. ASU 2020-06 amends the diluted earnings per share guidance, including the requirement to use the if-converted method for all convertible instruments. ASU 2020-06 is effective June 1, 2023 and should be applied on a full or modified retrospective basis, with early adoption permitted beginning on January 1, 2021. The Company is evaluating the impact of the adoption of ASU 2020-06 on the Company’s financial statements.
In May 2021, the FASB issued ASU 2021-04, Earning Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40), which clarified and reduced diversity in an issuer’s accounting for modifications of exchanges of freestanding equity-classified written call options (such as warrants) that remain equity classified after modification or exchange. This update will be effective for the Company as of June 1, 2023. The Company is currently assessing the potential impact of ASU 2021-04 to our consolidated financial statements.
Management does not believe that any other recently issued, but not yet effective, accounting standards, if currently adopted, would have a material effect on the Company’s financial statements.
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| Going Concern, Liquidity and Management’s Plan | Going Concern, Liquidity and Management’s Plan
The Company’s unaudited consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As reflected in the unaudited consolidated financial statements, as of August 31, 2022, the Company had an accumulated deficit of $33,995,554, a working capital deficit of $5,515,754, and a net loss attributable to common shareholders of $4,157,110. 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’s cash position may not be sufficient to support the Company’s daily operations. Management intends to raise additional funds by way of private and/or public offerings. While the Company believes in the viability of its strategy and its ability to generate sufficient revenue and to raise additional funds, there can be no assurances to that effect. Should the Company fail to raise additional capital, it may be compelled to reduce the scope of its planned future business activities.
The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings.
The unaudited consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries and infections have been reported globally.
Because COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers as of May 1, 2020 and subsequently reopened the majority of our company owned stores and franchise locations. Although our franchise agreements with franchisees of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming Centers will default in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase in accounts receivables or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability to pay the minimum monthly royalty payments owed by the franchisee.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition and results of operations.
The measures taken to date impacted the Company’s business for the fiscal year ended May 31, 2022 as well as the fiscal quarter ended August 31, 2022 and will potentially continue to impact the Company’s business. Management expects that all of its business segments, across all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business and the duration for which it may have an impact cannot be determined at this time. |
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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Aug. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF DEFERRED REVENUES | The table below summarizes Deferred Revenues as of August 31, 2022:
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PROPERTY, PLANT AND EQUIPMENT (Tables) |
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Aug. 31, 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property, Plant and Equipment [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF PROPERTY AND EQUIPMENT | The following is a summary of property, plant, and equipment—at cost, less accumulated depreciation:
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INTANGIBLE ASSETS (Tables) |
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| Goodwill and Intangible Assets Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF INTANGIBLE ASSETS | The following table sets forth the intangible assets, including accumulated amortization as of August 31, 2022:
The following tables set forth the intangible assets, including accumulated amortization as of May 31, 2022:
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| SCHEDULE OF FUTURE AMORTIZATION OF INTANGIBLE ASSETS | The following table sets forth the future amortization of the Company’s intangible assets as of August 31, 2022 for the fiscal years ending May 31:
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| SCHEDULE OF GOODWILL | The Company’s goodwill carrying amounts relate to the acquisitions of Simplicity Esports LLC and PLAYlive. The composition of the goodwill balance, is as follows:
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COMMITMENTS AND CONTINGENCIES (Tables) |
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| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||
| SUMMARIZES OF RIGHT OF USE ASSET AND LEASE LIABILITY | The following table summarizes the right-of use asset and lease liability as of August 31, 2022:
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| SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS | The following table summarizes the Company’s scheduled future minimum lease payments as of August 31, 2022:
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DEBT (Tables) |
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| Debt Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF OUTSTANDING DEBT BALANCES | The table below presents the Company’s outstanding debt balances as of August 31, 2022, and May 31, 2022:
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| SCHEDULE OF PRINCIPLE MATURITIES OF OUTSTANDING DEBT | Scheduled principal maturities of the Company’s outstanding debt over the next five fiscal years is as follows:
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STOCKHOLDERS’ EQUITY (Tables) |
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| Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SCHEDULE OF ISSUED AND OUTSTANDING WARRANTS TO PURCHASE | As of August 31, 2022, the Company has issued and outstanding warrants to purchase shares of its common stock as follows:
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| SCHEDULE OF OUTSTANDING STOCK WARRANTS | The table below presents option activity for the quarter ended August 31, 2022:
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SCHEDULE OF DEFERRED REVENUES (Details) - USD ($) |
Aug. 31, 2022 |
May 31, 2022 |
|---|---|---|
| Deferred Revenue | $ 174,446 | $ 180,388 |
| Total | $ 174,446 | 180,388 |
| Revenue Recognized [Member] | ||
| Deferred Revenue | 5,942 | |
| Total | $ 5,942 |
DISPOSITIONS (Details Narrative) - USD ($) |
3 Months Ended | |
|---|---|---|
Aug. 31, 2022 |
Jun. 10, 2022 |
|
| Discontinued Operations and Disposal Groups [Abstract] | ||
| Value of license disposition | $ 391,776 | |
| Value of license account receivable | 391,776 | |
| Gain on disposal license | $ 240,924 | |
| Disposal of assets | $ 75,500 | |
| Other receivable | $ 316,276 |
SCHEDULE OF PROPERTY AND EQUIPMENT (Details) - USD ($) |
Aug. 31, 2022 |
May 31, 2022 |
|---|---|---|
| Property, Plant and Equipment [Line Items] | ||
| Total cost | $ 346,688 | $ 528,793 |
| Less accumulated depreciation | (295,156) | (333,591) |
| Net property plant and equipment | 51,532 | 195,202 |
| Leasehold Improvements [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Total cost | 17,877 | 50,981 |
| Property, Plant and Equipment [Member] | ||
| Property, Plant and Equipment [Line Items] | ||
| Total cost | $ 328,811 | $ 477,812 |
PROPERTY, PLANT AND EQUIPMENT (Details Narrative) - USD ($) |
3 Months Ended | |
|---|---|---|
Aug. 31, 2022 |
Aug. 31, 2021 |
|
| Property, Plant and Equipment [Abstract] | ||
| Depreciation | $ 18,048 | $ 81,737 |
| Impairment of intangible asset | $ 125,622 | $ 0 |
SCHEDULE OF GOODWILL (Details) - USD ($) |
Aug. 31, 2022 |
May 31, 2022 |
|---|---|---|
| Restructuring Cost and Reserve [Line Items] | ||
| Total Goodwill | $ 1,472,884 | |
| Simplicity Esports L L C [Member] | ||
| Restructuring Cost and Reserve [Line Items] | ||
| Total Goodwill | 1,034,662 | |
| P L A Y Live Nation Inc [Member] | ||
| Restructuring Cost and Reserve [Line Items] | ||
| Total Goodwill | 413,222 | |
| Ft Bliss [Member] | ||
| Restructuring Cost and Reserve [Line Items] | ||
| Total Goodwill | $ 25,000 |
INTANGIBLE ASSETS (Details Narrative) - USD ($) |
3 Months Ended | |
|---|---|---|
Aug. 31, 2022 |
Aug. 31, 2021 |
|
| Goodwill and Intangible Assets Disclosure [Abstract] | ||
| Intangible asset impairment | $ 1,004,142 | $ 0 |
| Amortization expense | 333 | 77,188 |
| Goodwill impairment | $ 1,472,884 | $ 0 |
RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($) |
3 Months Ended | |||
|---|---|---|---|---|
Jun. 10, 2022 |
Dec. 10, 2021 |
Aug. 31, 2022 |
Aug. 31, 2021 |
|
| Short-Term Debt [Line Items] | ||||
| Interest expense | $ 847,117 | $ 659,696 | ||
| Kaplan Promissory Note [Member] | Jed Kaplan [Member] | ||||
| Short-Term Debt [Line Items] | ||||
| Debt Instrument, Face Amount | $ 247,818 | |||
| Debt Instrument, Interest Rate, Stated Percentage | 5.00% | |||
| Debt Instrument, Maturity Date | Jun. 10, 2022 | |||
| Interest expense | $ 6,178 | $ 339 | ||
SUMMARIZES OF RIGHT OF USE ASSET AND LEASE LIABILITY (Details) - USD ($) |
Aug. 31, 2022 |
May 31, 2022 |
|---|---|---|
| Commitments and Contingencies Disclosure [Abstract] | ||
| Right-of-use Asset, net | $ 415,958 | $ 532,216 |
| Lease Liability | ||
| Current | 357,187 | 332,519 |
| Long Term | 981,692 | $ 1,092,627 |
| Total | $ 1,338,879 |
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS (Details) - USD ($) |
Aug. 31, 2022 |
May 31, 2022 |
|---|---|---|
| Commitments and Contingencies Disclosure [Abstract] | ||
| 2023 | $ 450,377 | |
| 2024 | 452,511 | |
| 2025 | 405,795 | |
| 2026 | 321,952 | |
| 2027 and beyond | 47,500 | |
| Total Operating Lease Obligations | 1,678,135 | |
| Less: Amount representing imputed interest | (339,256) | |
| Present value of minimum lease payments | 1,338,879 | |
| Less current portion | 357,187 | $ 332,519 |
| Long term portion | $ 981,692 | $ 1,092,627 |
SCHEDULE OF PRINCIPLE MATURITIES OF OUTSTANDING DEBT (Details) |
Aug. 31, 2022
USD ($)
|
|---|---|
| Debt Disclosure [Abstract] | |
| 2023 | $ 1,956,724 |
| 2024 | 3,533,026 |
| 2025 | 46,449 |
| 2026 | 51,312 |
| 2027 | 31,145 |
| Thereafter | |
| Outstanding Debt | $ 5,618,656 |
SUBSEQUENT EVENTS (Details Narrative) |
2 Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
|
Sep. 29, 2022
USD ($)
|
Sep. 08, 2022
USD ($)
$ / shares
shares
|
Jun. 10, 2022
USD ($)
|
Nov. 08, 2022
USD ($)
shares
|
Oct. 20, 2022
shares
|
Sep. 28, 2022
$ / shares
shares
|
Sep. 01, 2022
shares
|
Aug. 31, 2022
shares
|
May 31, 2022
shares
|
|
| Subsequent Event [Line Items] | |||||||||
| Convertible notes converted principal and accrued interest | $ 6,178 | ||||||||
| Shares authorized | shares | 36,000,000 | 36,000,000 | |||||||
| Subsequent Event [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Convertible notes converted principal and accrued interest | $ 150,535 | ||||||||
| Aggregate shares of common stock | shares | 3,798,000 | ||||||||
| Shares authorized | shares | 250,000,000 | ||||||||
| Debt conversion percentage | 0.12 | ||||||||
| Exercise price | $ / shares | $ 1.00 | ||||||||
| Subsequent event description | In addition, the Closing is subject to the satisfaction or waiver of certain conditions, including, but not limited to, (i) the increase by the Company of its authorized shares of common stock to 250,000,000 shares; (ii) execution by Diverted River of agreements with clients generating at least $60,000 per month in revenue for at least 24 months following the Closing, with such agreements being in form and substance as agreed to by the Company and Diverted River; (iii) settlement by the Company of any debt with landlords related to the closure of the Company’s gaming center venues; (iv) the Company having obtained binding commitments from investors to invest at least $4,000,000, through the issuance of shares of Company common stock; (v) repayment by the Company of its convertible notes, or execution of agreements with noteholders to convert such notes into shares of Company common stock comprising no more than 12.5% of the issued and outstanding common stock of the Company after giving effect to the Closing; (vi) reaching an agreement with warrant holders to amend the exercise price to be $1.00 per share; (vii) execution of note amendments by holders of Company promissory notes that are not presently convertible into shares of Company common stock such that the notes will be converted into Company common stock and such notes shall have been converted, with such shares being included in the 12.5% limitation set forth in clause (v) hereof; (viii) provision by Diverted River of audited financial statements; and (ix) completion of satisfactory due diligence reviews by the Company and Diverted River | ||||||||
| Revenues | $ 60,000 | ||||||||
| Issuance of common stock | $ 4,000,000 | ||||||||
| Subsequent Event [Member] | Diverted River Technology LLC [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Business acquistion percentage | 100.00% | ||||||||
| Subsequent Event [Member] | Diverted River Technology LLC [Member] | Common Stock [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Business acquistion percentage | 80.00% | ||||||||
| Subsequent Event [Member] | September 2022 Ionic Securities Purchase Agreement [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Debt beneficial ownership percentage | 4.99% | ||||||||
| Subsequent Event [Member] | September 2022 Jefferson Street Securities Purchase Agreement [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Debt beneficial ownership percentage | 4.99% | ||||||||
| Subsequent Event [Member] | September Two Thousand and Twenty Two First Fire Securities Purchase Agreement [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Debt beneficial ownership percentage | 4.99% | ||||||||
| Subsequent Event [Member] | September 2022 Ionic Securities Purchase Agreement [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Debt conversion percentage | 0.12 | ||||||||
| Debt maturity date | Jan. 08, 2023 | ||||||||
| Debt principal amount | $ 66,000 | ||||||||
| Payment for debt | $ 66,000 | ||||||||
| Debt conversion percentage | 12.00% | ||||||||
| Debt original issue discount | $ 6,000 | ||||||||
| Debt purchase price | $ 60,000 | ||||||||
| Debt conversion price | $ / shares | $ 0.02 | ||||||||
| Guaranteed interest | $ 2,640 | ||||||||
| Debt instrument event of default description | Upon the occurrence of any Event of Default (as defined in the September 2022 Ionic Note), which has not been cured within the time prescribed in the September 2022 Ionic Note, it shall become immediately due and payable and the Company shall pay to Ionic, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125% | ||||||||
| Warrants term | 3 years | ||||||||
| Purchase of warrant shares | shares | 120,000 | ||||||||
| Exercise price | $ / shares | $ 1.00 | ||||||||
| Subsequent Event [Member] | September 2022 Ionic Securities Purchase Agreement [Member] | Maximum [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Debt instrument expected conversion waived rate | 9.99% | ||||||||
| Subsequent Event [Member] | September 2022 Jefferson Street Securities Purchase Agreement [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Debt conversion percentage | 0.12 | ||||||||
| Debt maturity date | Jan. 08, 2023 | ||||||||
| Debt principal amount | $ 27,500 | ||||||||
| Payment for debt | $ 27,500 | ||||||||
| Debt conversion percentage | 12.00% | ||||||||
| Debt original issue discount | $ 2,500 | ||||||||
| Debt purchase price | $ 25,000 | ||||||||
| Debt conversion price | $ / shares | $ 0.02 | ||||||||
| Guaranteed interest | $ 1,100 | ||||||||
| Debt instrument event of default description | Upon the occurrence of any Event of Default (as defined in the September 2022 Jefferson Street Note), which has not been cured within the time prescribed in the September 2022 Jefferson Street Note, it shall become immediately due and payable and the Company shall pay to Jefferson Street, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125% | ||||||||
| Warrants term | 3 years | ||||||||
| Purchase of warrant shares | shares | 45,454 | ||||||||
| Exercise price | $ / shares | $ 1.00 | ||||||||
| Subsequent Event [Member] | September 2022 Jefferson Street Securities Purchase Agreement [Member] | Maximum [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Debt instrument expected conversion waived rate | 9.99% | ||||||||
| Subsequent Event [Member] | September Two Thousand and Twenty Two First Fire Securities Purchase Agreement [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Debt conversion percentage | 0.12 | ||||||||
| Debt maturity date | Jan. 08, 2023 | ||||||||
| Debt principal amount | $ 66,000 | ||||||||
| Payment for debt | $ 66,000 | ||||||||
| Debt conversion percentage | 12.00% | ||||||||
| Debt original issue discount | $ 6,000 | ||||||||
| Debt purchase price | $ 60,000 | ||||||||
| Debt conversion price | $ / shares | $ 0.02 | ||||||||
| Guaranteed interest | $ 2,640 | ||||||||
| Debt instrument event of default description | Upon the occurrence of any Event of Default (as defined in the September 2022 FirstFire Note), which has not been cured within the time prescribed in the September 2022 FirstFire Note, it shall become immediately due and payable and the Company shall pay to FirstFire, in full satisfaction of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125% | ||||||||
| Warrants term | 3 years | ||||||||
| Purchase of warrant shares | shares | 120,000 | ||||||||
| Exercise price | $ / shares | $ 1.00 | ||||||||
| Subsequent Event [Member] | September Two Thousand and Twenty Two First Fire Securities Purchase Agreement [Member] | Maximum [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Debt instrument expected conversion waived rate | 9.99% | ||||||||
| Subsequent Event [Member] | Series X Preferred Stock [Member] | |||||||||
| Subsequent Event [Line Items] | |||||||||
| Shares authorized | shares | 250,000,000 | 36,000,000 |