UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For
the quarterly period ended:
or
For the transition period from ____________ to _____________
Commission
File Number:
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Securities registered pursuant to Section 12(b) of the Act:
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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
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has been subject to such filing requirements for the past 90 days.
Indicate
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| Emerging
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
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As
of August 19, 2024, there were a total of
SIGNING DAY SPORTS, INC.
Quarterly Report on Form 10-Q
Period Ended June 30, 2024
TABLE OF CONTENTS
| PART I FINANCIAL INFORMATION |
||
| Item 1. | Financial Statements | 1 |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 29 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 60 |
| Item 4. | Controls and Procedures | 60 |
| PART II OTHER INFORMATION |
||
| Item 1. | Legal Proceedings | 61 |
| Item 1A. | Risk Factors | 61 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 61 |
| Item 3. | Defaults Upon Senior Securities | 61 |
| Item 4. | Mine Safety Disclosures | 61 |
| Item 5. | Other Information | 61 |
| Item 6. | Exhibits | 62 |
| Signatures | 64 | |
i
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SIGNING DAY SPORTS, INC.
UNAUDITED FINANCIAL STATEMENTS
1
SIGNING DAY SPORTS, INC.
Balance Sheets
| June 30, 2024 | December 31, | |||||||
| (Unaudited) | 2023 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short term investments | ||||||||
| Accounts receivable | ||||||||
| Prepaid expense | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Internally developed software, net | ||||||||
| Operating lease right of use asset, net | ||||||||
| Intangible assets, net | ||||||||
| Deferred tax asset | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Deferred revenue | ||||||||
| Current operating lease right of use liability | ||||||||
| Loans payable | ||||||||
| Line of credit | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities | ||||||||
| Noncurrent operating lease liability | ||||||||
| Total liabilities | $ | $ | ||||||
| Stockholders’ equity (deficit) | ||||||||
| Common stock: par value $ | ||||||||
| Preferred Stock: | ||||||||
| Additional paid-in capital | ||||||||
| Subscription receivable | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity (deficit) | ||||||||
The accompanying notes are an integral part of these unaudited financial statements.
2
SIGNING DAY SPORTS, INC.
Statements of Operations
(Unaudited)
| For the Six Months Ended | Three Months Ended | Three Months Ended | ||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenues, net | $ | $ | $ | $ | ||||||||||||
| Cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating cost and expenses | ||||||||||||||||
| Advertising and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Net loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest income | - | |||||||||||||||
| Deferred tax income, net | - | |||||||||||||||
| Other income (expense), net | ( | ) | ( | ) | ||||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares outstanding - basic | ||||||||||||||||
| Weighted average common shares outstanding - diluted | ||||||||||||||||
| Net loss per common share - basic | ||||||||||||||||
| Net loss per common share - diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
3
SIGNING DAY SPORTS,
INC.
Statements of Stockholders’ Equity (Deficit)
(Unaudited)
| Common Stock | Additional Paid-in | Subscription | Accumulated Equity | Total Stockholders’ Equity | ||||||||||||||||||||
| Shares | Amount | Capital | Receivable | (Deficit) | (Deficit) | |||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||
| Stock repurchase and retirement | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||
| Stock-based compensation expense | - | ( | ) | ( | ) | |||||||||||||||||||
| Issuance of common stock | ( | ) | ||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2023 | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
| Stock-based compensation expense | - | |||||||||||||||||||||||
| Issuance of common stock pursuant to initial public offering, net of issuance costs of $ | ||||||||||||||||||||||||
| Issuance of common stock pursuant to convertible notes, net of interest cancelled | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||
| Issuance of common stock pursuant to equity line of credit | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | ( | ) | ( | ) | $ | ||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||||||||||
| Stock-based compensation canceled / returned | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of commitment fee Firstfire Prom Note | ||||||||||||||||||||||||
| Boustead Issuance on Firstfire Transaction | ||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | ||||||||||||||
The accompanying notes are an integral part of these unaudited financial statements.
4
SIGNING DAY SPORTS, INC.
Statements of Cash Flows
(Unaudited)
| For the Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock-based compensation | ||||||||
| (Increase) decrease in assets: | ||||||||
| Accounts receivable | ||||||||
| Prepaid and other assets | ( | ) | ( | ) | ||||
| Operating lease right of use asset | ( | ) | ||||||
| Deferred offering costs | ( | ) | ||||||
| Deferred tax asset | ||||||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable and accrued liabilities | ||||||||
| Accrued liabilities | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Deferred rent | ( | ) | ||||||
| Lease liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Proceeds from investments | ( | ) | ||||||
| Development of internal software | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ||||||
| Net cash used in investing activates | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Proceeds from issuance of convertible notes | ||||||||
| Proceeds from revolving line of credit | ||||||||
| Proceeds from loans | ||||||||
| Proceeds from issuance of common stock pursuant to initial public offering | ( | ) | ||||||
| Payments for commitment fee of the equity line of credit | ||||||||
| Proceeds from issuance of common stock | - | |||||||
| Distribution to member | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental cash flow information | ||||||||
| Cash paid for interest expense | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited financial statements.
5
SIGNING
DAY SPORTS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Principal Business Activity and Significant Accounting Policies
Principal Business Activity
Signing Day Sports, Inc. (formerly known as Signing Day Sports, LLC) (“Company”) was formed and began operations in January 2019 and provides a digital ecosystem to help high school athletes get discovered and recruited by college coaches across the United States of America.
The Company’s website and mobile phone application provides an opportunity for athletes to create a personal profile by uploading measurables, videos of key drills, testing stats, academics and demographic information. Coaches can evaluate a prospect’s video, watch two separate prospects side by side simultaneously, and perform other actions with the video to visually evaluate talent. Intangible assets consist of development software, customer lists, trademarks, software IP, and customer data in the form of verifiable video uploads, player statistics, and academic records.
Going Concern Considerations
Our
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. We sustained significant losses and negative cash flows from operations
and are dependent on debt and equity financing to fund operations. We incurred a net loss of approximately $
The Company is continuing its path to profitability through increased business development, marketing and sales of the Company’s multiple lines of subscriptions.
Failure to successfully continue to grow operational revenues could harm our profitability and adversely affect our financial condition and results of operations. We face all of the risks inherent in a new business, including the need for significant additional capital, management’s potential underestimation of initial and ongoing costs, and potential delays and other problems in connection with establishing sales channels.
We are continuing our plan to further grow and expand operations and seek sources of capital to pay our contractual obligations as they come due. Management believes that its current operating strategy will provide the opportunity for us to continue as a going concern as long as we are able to obtain additional financing; however, there is no assurance this will occur. The accompanying financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Basis of Presentation
These unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Estimates
The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all short-term, highly liquid investments, including certificates of deposit (“CDs”) purchased with an original maturity of three months or less at the date of purchase, to be cash equivalents. Cash deposits are held with financial institutions with investment-grade ratings in the United States of America, or U.S. Cash deposits typically exceed federally insured limits. As of June 30, 2024 and December 31, 2023, cash and cash equivalents consisted of cash on deposit with banks denominated in U.S. dollars and investments in money market funds.
6
Short-term Investments
The Company classifies its certificates of deposit as short-term investments and reassesses the appropriateness of the classification of its investments at the end of each reporting period. Certificates of deposit held for investment with an original maturity greater than three months are carried at amortized cost and reported as short-term investments on the balance sheets. The type of certificates of deposit that the Company invests in are not considered debt securities under Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 320, Investments - Debt Securities.
As
of June 30, 2024 and December 31, 2023, the Company had approximately $
Receivables and Credit Policy
The
Company estimates an allowance for doubtful accounts based upon an evaluation of the status of receivables, historical experience, and
other factors as necessary. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change.
There were $
Payment Terms
Users may access the Company’s website and application on either a free-trial or paid basis. Users that are not eligible or no longer eligible for free-trial access are required to have subscriptions by making payment to the Company prior to access to the Company’s website and application, except that user organizations may have subscriptions by agreeing to make payment on a monthly installment basis. If a required payment is not made, access to the Company’s website and application is suspended until the required payment is received.
Property and Equipment
Property and equipment is recorded at cost. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense. When equipment is retired or sold, the cost and related accumulated depreciation are eliminated from the accounts and the resultant gain or loss is reflected in income.
Depreciation
is provided using the straight-line method, based on useful lives of the assets which range from
The Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition, and other economic factors. Based on this assessment there was no impairment at June 30, 2024 and December 31, 2023.
Internally Developed Software
Software
consists of an internally developed information system for use by the Company in matching athletes with qualified coaches. The Company
has capitalized costs incurred with development and upgrades of the information systems in accordance with applicable accounting standards.
Costs incurred up to and including the feasibility stage of development as well as maintenance costs are expensed as incurred. The Company
amortizes these capitalized costs on a straight-line basis over the estimated useful life of the asset of
7
The Company periodically performs reviews of the recoverability of such capitalized technology costs. At the time a determination is made that capitalized amounts are not recoverable based on estimated cash flows to be generated from technology; any remaining capitalized amounts are written off. During the three months ended June 30, 2024 and 2023, the Company did not have an impairment charge.
Intangible Assets
Intangible assets consist of purchased development software, customer lists, trademarks, software IP, and customer data in the form of verifiable video uploads, player statistics, and academic records. Intangible assets are stated at cost less accumulated amortization. For intangible assets that have finite lives, the assets are amortized using the straight-line method over the estimated useful lives of the related assets. For intangible assets with indefinite lives, the assets are tested periodically for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.
Stock Subscription Revenue
The Company records stock issuances at the effective date. If the subscription is not funded upon issuance, the Company records a stock subscription receivable as an asset on the balance sheet. When stock subscription receivables are not received prior to the issuance of financial statements at a reporting date in satisfaction of the requirements under ASC 505-10-45-2, the stock subscription receivable is reclassified as a contra account to stockholder’s equity (deficit) on the balance sheet.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and short-term investments consisting of CDs. Total cash balances exceeded insured balances by the Federal Deposit Insurance Corporation as of June 30, 2024 and December 31, 2023. The company has cash equivalents that are invested in highly rated money market funds invested only in obligations of the U.S. government and its agencies.
Fair Value Measurements
The Company uses the fair value framework that prioritizes the inputs to valuation techniques for recognizing financial assets and liabilities measured on a recurring basis and for non-financial assets and liabilities when these items are re-measured. Fair value is considered to be the exchange price in an orderly transaction between market participants, to sell an asset or transfer a liability at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. The Company categorizes each of its fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety.
These levels are:
Level 1 – This level consists of valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are identical to the assets or liabilities being measured.
Level 2 – This level consists of valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are observable in active markets are Level 2 valuation techniques.
Level 3 – This level consists of valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are valuation technique inputs that reflect assumptions about inputs that market participants would use in pricing an asset or liability.
8
The Company’s financial instruments also include accounts receivable, accounts payable, and accrued liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.
ASC 825-10, Financial Instruments, allows entities to voluntarily choose to measure certain financial assets and liabilities at fair value (fair value option). The fair value option may be elected on an instrument-by-instrument basis and is irrevocable unless a new election date occurs. If the fair value option is elected for an instrument, unrealized gains and losses for that instrument should be reported in earnings at each subsequent reporting date.
The Company did not identify any assets or liabilities that are required to be presented on the balance sheets at fair value in accordance with ASC 820, Fair Value Measurement.
Due to the short-term nature of all financial assets and liabilities, their carrying value approximates their fair value as of the balance sheet dates.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of internally developed software and net operating loss and research and development tax credit carry forwards for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The Company converted to a C corporation in August of 2021. As a limited liability company for the 2020 year and through the date of conversion in 2021, the Company’s taxable loss was allocated to members in accordance with their respective percentage of ownership. Therefore, no provision for income taxes has been included in the financial statements for the period prior to the Company’s conversion to a C corporation.
The
Company evaluates its tax positions that have been taken or are expected to be taken on income tax returns to determine if an accrual
is necessary for uncertain tax positions. As of June 30, 2024 and December 31, 2023, the unrecognized tax benefits accrual was
Deferred Revenue
Deferred revenues are contract liabilities for collections on subscription agreements in excess of revenue recognized.
Revenue Recognition
The Company accounts for revenue under the guidance of ASC 606, Revenue from Contracts from Customers (“ASC 606”).
ASC 606 prescribes a five-step model that focuses on transfer of control and entitlement to payment when determining the amount of revenue to be recognized. Under the ASC 606 guidance, an entity is required to perform the following five steps:
(1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Revenue from performance obligations satisfied at a point in time consist of sales to individuals representing a one-month subscription and are recognized at the end of the subscription.
Revenue
from performance obligations satisfied over time consists of the sale of subscription agreements to individual organizations or customers
that are more than one month in duration and are recognized on a monthly basis over the life of the subscription agreement. There were
$
9
Debt Issuance Costs
Debt
issuance costs are amortized over the period the related obligation is outstanding using the straight-line method. The straight-line
method is a reasonable estimate of the effective interest method due to the relatively short maturities of the related debt. Debt issuance
costs are included within long-term debt on the balance sheet. Amortization of debt issuance costs is included in interest expense in
the accompanying financial statements. As of June 30, 2024 and December 31, 2023, unamortized debt issuance costs are
Advertising Costs
Advertising
and marketing costs are expensed as incurred. Such costs amounted to $
Contract Costs
Incremental costs of obtaining a contract are expensed as incurred as the amortization period of the asset that otherwise would have been recognized is estimated to be one year or less.
Stock-Based Compensation
The Company accounts for stock-based compensation costs under the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to vest. Stock-based compensation expense recognized includes the compensation cost for all stock-based payments granted to employees, officers, and directors based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied to awards modified, repurchased, or cancelled during the periods reported. Stock-based compensation is recognized as expense over the employee’s requisite vesting period and over the nonemployee’s period of providing goods or services.
Basic and Diluted Net Loss per Common Share
Basic
loss per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding for each
period. Diluted loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding
plus the dilutive effect of shares issuable through the common stock equivalents.
| Three
Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Numerator: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Weighted-average common shares outstanding - basic | ||||||||
| Effect of potentially dilutive securities: | ||||||||
| Stock options | ||||||||
| Weighted-average common shares outstanding - diluted | ||||||||
| Net loss per share - basic | $ | ( | ) | ( | ) | |||
| Net loss per share - diluted | $ | ( | ) | ( | ) | |||
10
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Numerator: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Weighted-average common shares outstanding - basic | ||||||||
| Effect of potentially dilutive securities: | ||||||||
| Stock options | ||||||||
| Weighted-average common shares outstanding - diluted | ||||||||
| Net (loss) income per share - basic | $ | ( | ) | ( | ) | |||
| Net (loss) income per share - diluted | $ | ( | ) | ( | ) | |||
| Three Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Stock options | ||||||||
| Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Stock options | ||||||||
Leases
At the inception or modification of a contract, the Company determines whether a lease exists and classifies its leases as an operating or finance lease at commencement. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent their obligation to make lease payments arising from the lease.
As most of the Company’s leases do not provide an implicit interest rate, the lease liability is calculated at lease commencement as the present value of unpaid lease payments using the Company’s estimated incremental borrowing rate. The incremental borrowing rate represents the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term and is determined using a portfolio approach based on information available at the commencement date of the lease.
The lease asset also reflects any prepaid rent, initial direct costs incurred and lease incentives received. The Company’s lease terms may include optional extension periods when it is reasonably certain that those options will be exercised.
Leases with an initial expected term of 12 months or less are not recorded in the Balance Sheet and the related lease expense is recognized on a straight-line basis over the lease term. For certain classes of underlying assets, the Company has elected to not separate fixed lease components from the fixed non-lease components.
11
Deferred Offering Costs
The Company capitalizes certain legal, accounting, and other third-party fees that are directly related to the Company’s equity financings, including the Company’s initial public offering, until such financings are consummated. After consummation of an equity financing, these costs are then recorded as a reduction of the proceeds received as a result of the financing. Should a planned equity financing be abandoned, terminated, or significantly delayed, the deferred offering costs would be immediately written off to operating expenses. Upon the closing of the initial public offering in November 2023, all deferred offering costs in the accompanying balance sheets were reclassified from prepaid expenses and other current assets and recorded against the initial public offering proceeds as a reduction to additional paid-in capital. There were no deferred offering costs capitalized as of June 30, 2024 and December 31, 2023.
Adopted Accounting Pronouncements
On January 1, 2023, the Company adopted ASC 326: Measurement of Credit Losses on Financial Instruments (“ASC 326”). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, such as accounts receivable. The adoption did not have a material impact on the Company’s financial statements.
New Accounting Pronouncements
The Company has reviewed recently issued accounting pronouncements and plans to adopt those that are applicable to it. The Company does not expect the adoption of any other pronouncements to have an impact on its results of operations or financial position.
Reclassification of Prior Period Presentation
Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations.
Note 2 - Revenue
| For the Three Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Revenue recognized over time | $ | $ | ||||||
| Revenue recognized at a point in time | $ | $ | ||||||
| Total revenue from contracts with customers recognized over time | $ | $ | ||||||
| For the Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Revenue recognized over time | $ | $ | ||||||
| Revenue recognized at a point in time | $ | $ | ||||||
| Total revenue from contracts with customers recognized over time | $ | $ | ||||||
12
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Contract liabilities (deferred revenue) | $ | $ | ||||||
| For the Three Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Revenue recognized in the period from | ||||||||
| Amounts included in contract liabilities at the beginning of the period | $ | $ | ||||||
| For the Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Revenue recognized in the period from | ||||||||
| Amounts included in contract liabilities at the beginning of the period | $ | $ | ||||||
The
Company recognized revenue of $
Note 3 - Property and Equipment, net
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Office Furniture | $ | $ | ||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
13
Note 4 - Internally Developed Software
| Cost Basis | Accumulated Amortization | Net | ||||||||||
| June 30, 2024 | ||||||||||||
| Internally developed software | $ | $ | ( | ) | $ | |||||||
| December 31, 2023 | ||||||||||||
| Internally developed software | $ | $ | ( | ) | $ | |||||||
Amortization
expense for the three and six months ended June 30, 2024 is $
Note 5 - Intangible Assets
| Accumulated | ||||||||||||
| Cost Basis | Amortization | Net | ||||||||||
| June 30, 2024 | ||||||||||||
| Intellectual property | $ | $ | ( | ) | $ | |||||||
| Proprietary technology | ( | ) | ||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
| December 31, 2023 | ||||||||||||
| Intellectual property | $ | $ | ( | ) | $ | |||||||
| Proprietary technology | ( | ) | ||||||||||
| Total | $ | $ | ( | ) | $ | |||||||
Amortization
expense for the three and six months ended June 30, 2024 is $
| Amount | ||||
| Years Ended December 31, | ||||
| 2024 (remaining six months) | ||||
| 2025 | ||||
| Total | $ | |||
14
Note
6 -
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Accrued Expenses | $ | | $ | |||||
| Accrued Payroll | ||||||||
| Accrued Interest | ||||||||
| Total Accrued Expenses | $ | $ | ||||||
Note 7 - Notes Payable
6% Convertible Unsecured Promissory Notes
On
October 15, 2021, the Company entered into nine unsecured convertible notes payable, for $
On
November 12, 2021, the Company entered into twelve unsecured convertible notes payable, for $
On
December 23, 2021, the Company entered into six unsecured convertible notes payable, for $
In
connection with the closing of the Company’s initial public offering on November 16, 2023, the Company’s
8% Convertible Unsecured Promissory Notes
During
the year ended December 31, 2022, the Company entered into thirteen unsecured convertible notes payable, for $
During
the year ended December 31, 2023, the Company entered into two unsecured convertible notes payable, for $
On
August 7, 2023, the fifteen
15
In
connection with the closing of the Company’s initial public offering, the Company’s
8% Nonconvertible Unsecured Promissory Notes
During
the year ended December 31, 2023, the Company entered into 11 unsecured nonconvertible notes payable, for $
In connection
with the closing of the Company’s initial public offering, warrants to purchase a total of
Offering of 15% OID Promissory Notes
On August
2, 2023, August 18, 2023, September 11, 2023, and September 22, 2023, the Company issued
On
November 20, 2023, the Company repaid the aggregate balance of $
Secured Revolving Line of Credit
Under
a Business Loan Agreement, dated October 6, 2023, between the Company and Commerce Bank of Arizona (“CBAZ”) (the “First
CBAZ Loan Agreement”), the Company and CBAZ entered into a $
On
December 11, 2023, the Company entered into a Revolving Line of Credit with Commerce Bank of Arizona secured with a 12-month certificate
of deposit of $
16
Daniel Nelson Promissory Note
On
April 11, 2024, Daniel Nelson, the Chief Executive Officer, Chairman and a director of the Company, advanced $
The outstanding balance at June 30, 2024 is $
Firstfire Convertible Note
On
May 16, 2024, the Company entered into a Securities Purchase Agreement, dated as of May 16, 2024, between the Company and FirstFire,
as amended (as amended, the “May 2024 FF Purchase Agreement”) by that certain Amendment to the Transaction Documents, dated
as of June 18, 2024, between the Company and FirstFire (the “Amendment to May 2024 FF Transaction Documents”), pursuant to
which, as a private placement transaction, the Company was required to issue FirstFire a senior secured promissory note, as amended by
that certain Amendment to Senior Secured Promissory Note and Warrants, dated as of May 20, 2024, between the Company and FirstFire (the
“Amendment to May 2024 FF Note and May 2024 FF Warrants”), in the principal amount of $
The
Company also entered into a Security Agreement, dated as of May 16, 2024, between the Company and FirstFire (the “May 2024 FF Security
Agreement”), under which the Company agreed to grant FirstFire a security interest to secure the Company’s obligations under
the May 2024 FF Note in all assets of the Company except for a certificate of deposit account with Commerce Bank of Arizona (“CBAZ”)
with an approximate balance of $
The
closing of the initial transaction contemplated by the May 2024 FF Purchase Agreement, including FirstFire’s payment of the purchase
price of $
17
The outstanding balance
at June 30, 2024 is $
Firstfire Convertible Note
On
June 18, 2024, the Company entered into the Securities Purchase Agreement, dated as of June 18, 2024 (the “June 2024 FF Purchase
Agreement”), between the Company and FirstFire, pursuant to which, as a private placement transaction, the Company was required
to issue FirstFire a senior secured promissory note on June 18, 2024, in the principal amount of $
The Company also entered into a Security Agreement, dated as of June 18, 2024, between the Company and FirstFire (the “June 2024 FF Security Agreement”), under which the Company agreed to grant FirstFire a security interest to secure the Company’s obligations under the June 2024 FF Note in all assets of the Company except for the CBAZ Collateral, until the full repayment of the Second CBAZ Promissory Note, pursuant to the Second CBAZ Loan Agreement.
The
closing of the transaction contemplated by the June 2024 FF Purchase Agreement, including FirstFire’s payment of the purchase price
of $
The outstanding balance
at June 30, 2024 is $
Note 8 - Leases
The
Company leased office space under a long-term operating lease from a third party through May 31, 2023. Monthly rent was $
In
November 2022, the company signed a 6-month short-term lease for office space which expired on
Leases
with an initial expected term of
| June 30, | December 31, | |||||||
| 2024 | 2023 | |||||||
| Operating lease right of use asset | $ | $ | ||||||
| Less: operating asset lease accumulated depreciation | ( | ) | ( | ) | ||||
| Net operating lease right of use asset | $ | |||||||
| Current operating lease liability | $ | $ | ||||||
| Noncurrent operating lease liability | ||||||||
| Total operating lease liability | $ | $ | ||||||
18
| Amount | ||||
| Years ending December 31, | ||||
| 2024 (remaining six months) | $ | |||
| 2025 | ||||
| 2026 | ||||
| Total future minimum lease payments | $ | |||
| Less: interest | ||||
| Total lease liability | $ | |||
Note 9 - Income Taxes
There
was deferred tax income for the three months ended June 30, 2024 of $
| June 30, 2024 | December 31, 2023 | |||||||
| Deferred Tax Asset | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Internally developed software / Intangibles | ||||||||
| Furniture and fixtures | ( | ) | ( | ) | ||||
| R&D Tax Credit Carryforwards | ||||||||
| AZ Refundable R&D Tax Credit | ||||||||
| Net deferred tax assets before valuation allowance | $ | $ | ||||||
| Less valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets | $ | $ | ||||||
The Company has a valuation allowance against most of the amount of its net deferred tax assets due to the uncertainty of realization of the deferred tax assets due to the operating loss history of the Company. The Company currently provides a valuation allowance against deferred taxes when it is more likely than not that some portion, or all of its deferred tax assets will not be realized. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable income.
The Company’s effective income tax rate is lower than what would be expected if the federal statutory rate were applied to income from continuing operations primarily because of expenses deductible for financial reporting purposes that are not deductible for tax purposes and tax-exempt income.
19
As
of June 30, 2024 and December 31, 2023, the Company had approximately $
Note 10 - Recapitalization
At inception, the Company was organized as a limited liability company (LLC). During 2020, The LLC formed two wholly- owned subsidiaries, Signing Day Sports Football, LLC (SDSF LLC) and Signing Day Sports Baseball, LLC (SDSB LLC).
Signing Day Sports, LLC, an Arizona limited liability company (“SDS LLC – AZ”), was formed on January 21, 2019. SDS LLC – AZ formed two wholly-owned subsidiaries, Signing Day Sports Football, LLC, an Arizona limited liability company (“SDSF LLC”), and Signing Day Sports Baseball, LLC, an Arizona limited liability company (“SDSB LLC”), on September 29, 2020 and November 25, 2020, respectively.
On June 5, 2020, a process to change SDS LLC – AZ into a Delaware corporation was initiated. On that date, a certificate of formation for Signing Day Sports, LLC, a Delaware limited liability company (“SDS LLC – DE”), and a certificate of conversion of SDS LLC – AZ into SDS LLC – DE, were filed with the Delaware Secretary of State. On September 9, 2021, a certificate of incorporation for Signing Day Sports, Inc., a Delaware corporation (“SDS Inc. – DE” or the “Company”), and a certificate of conversion of SDS LLC – DE into SDS Inc. – DE were filed with the Delaware Secretary of State. From September 9, 2021 to July 11, 2022, SDS Inc. – DE operated as the successor entity to SDS LLC – AZ, and SDS LLC – AZ continued to be registered as an active entity with the Arizona Corporation Commission while its conversion into SDS LLC – DE pended.
On July 11, 2022, an Agreement and Plan of Merger was entered into between SDS LLC – AZ, SDSF LLC, SDSB LLC, and SDS Inc. – DE (the “Merger Agreement”). On the same date, pursuant to the Merger Agreement, a certificate of merger was filed with the Delaware Secretary of State and a statement of merger was filed with the Arizona Secretary of State effecting the merger of SDS LLC – AZ, SDSF LLC, and SDSB LLC with and into SDS Inc. – DE, and SDS Inc. – DE succeeded to the rights, property, obligations, and liabilities of each of SDS LLC – AZ, SDSF LLC, and SDSB LLC. In anticipation of the Merger Agreement and its consummation, in April 2022 and May 2022, SDS LLC – AZ, SDS Inc. – DE, and each of the members or stockholders of SDS LLC – AZ, SDSF LLC, SDSB LLC, and SDS Inc. – DE, entered into Settlement Agreement and Releases (collectively, the “Settlement Agreements”), which provided, among other things, for the mutual general release of all claims by the parties against and relating to SDS LLC – AZ, SDSF LLC, SDSB LLC, and SDS Inc. – DE, and confirmed the owners and related amounts of all outstanding shares of common stock of SDS Inc. represented by the capitalization table exhibit to the Settlement Agreements.
SDS
Inc. – DE has
Note 11 - Stockholder’s Deficit
Common Stock
The
Company is authorized to issue
Preferred Stock
The
Company is authorized to issue up to
20
Reverse Stock Split
On
April 14, 2023 (the “Effective Date”),
the Company filed a Certificate of Amendment with the Secretary of State of the State of Delaware. Upon the filing and effectiveness,
April 14, 2023, pursuant to the Delaware General Corporation Law of this Certificate of Amendment to the Certificate of Incorporation
of the Corporation, each five (
The Certificate of Amendment effected a 1-for-5 Reverse Stock Split on the Effective Date and was approved by shareholders on April 4, 2023, and the board of directors on April 11, 2023. Accordingly, all share and per share amounts for all periods presented in the accompanying financial statements and notes thereto have been adjusted retroactively, where applicable, to reflect this reverse stock split.
Stock Repurchase and Retirement
On
March 31, 2023, under the terms of a Repurchase and Resignation Agreement, dated March 21, 2023, the Company paid an aggregate purchase
price of $
Initial Public Offering and Underwriting Agreement
On
November 13, 2023, we entered into an Underwriting Agreement (the “Underwriting Agreement”), with Boustead Securities, LLC,
a registered broker-dealer (“Boustead”), as representative of the underwriters named on Schedule 1 thereto, relating to the
Company’s initial public offering of
On November 14, 2023, the IPO Shares were listed and commenced trading on NYSE American LLC (“NYSE American”).
Equity Incentive Plan
In
August 2022, the board of directors adopted the Company’s 2022 Equity Incentive Plan (as amended, the “Plan”), effective
as of August 31, 2022. Awards that may be granted under the Plan include: (a) Incentive Stock Options, (b) Non-qualified Stock Options,
(c) Stock Appreciation Rights, (d) Restricted Awards, (e) Performance Share Awards, and (f) Performance Compensation Awards. The persons
eligible to receive awards are the employees, consultants and directors of the Company and its affiliates and such other individuals
designated by the Compensation Committee of the board of directors (the “Compensation Committee”) who are reasonably expected
to become employees, consultants and directors after the receipt of awards. The purpose of the Plan is to attract and retain the types
of employees, consultants and directors who will contribute to the Company’s long-term success; (b) provide incentives that align
the interests of employees, consultants and directors with those of the stockholders of the Company; and (c) promote the success of the
Company’s business. The Plan shall be administered by the Compensation Committee or, in the board’s sole discretion, by the
board. Subject to the terms of the Plan and the provisions of Section 409A of the U.S. Internal Revenue Code of 1986, as amended (if
applicable), the Compensation Committee’s charter and applicable laws, and in addition to other express powers and authorization
conferred by the Plan. The board initially reserved
As
of June 30, 2024, there were
21
Share-Based Payment Valuation
Stock Options
The grant date fair value of stock options granted containing service-based vesting conditions and generally vesting in certain increments over time is determined using the Black-Scholes option-pricing model. Prior to the start of trading of the Company’s common stock on November 14, 2023 on the NYSE American LLC stock exchange, the grant-date fair value of the underlying common stock was calculated utilizing a probability-weighted expected return valuation model as of the date the awards are granted. Beginning November 14, 2023, the grant-date fair value of the underlying common stock is calculated utilizing the daily closing price as reported by NYSE American LLC.
| Weighted | ||||||||||||
| Average | ||||||||||||
| Options | Exercise Price | Intrinsic Value | ||||||||||
| Outstanding at March 31, 2024 | ||||||||||||
| Granted | ||||||||||||
| Exercised | ||||||||||||
| Forfeited or expired | ( | ) | ||||||||||
| Outstanding at June 30, 2024 | $ | $ | | |||||||||
| Exercisable at June 30, 2024 | $ | $ | ||||||||||
| Restricted Stock | Weighted Average Grant Date | |||||||
| Awards | Fair Value | |||||||
| Outstanding non-vested, beginning of period | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Cancelled | ( | ) | ||||||
| Outstanding non-vested, end of period | ||||||||
The
total grant-date fair value of the restricted stock granted during the three and six months ended June 30, 2024 is $
Private Placement
In
March 2023 and April 2023 the Company conducted one private placement, and in May 2023 the Company completed a subsequent private placement
in which the Company entered into subscription agreements with a number of accredited investors, pursuant to which the Company issued
22
Boustead
acted as placement agent in these private placements. Pursuant to the Company’s engagement letter agreement with Boustead, in addition
to a commission equal to
Under
the subscription agreements with the investors in the first of these two private placements, the Company was required to use the first
$
Note 12 - Commitments and Contingencies
Legal
The Company may be a party to various legal actions arising from the normal course of business. In management’s opinion, the Company has adequate legal defenses and/or insurance coverage and does not believe the outcome of such legal actions will materially affect the Company’s operation and/or financial position.
Claim of John Dorsey
On
or about November 29, 2022, John Dorsey, a former Chief Executive Officer and director of the Company, through his counsel, sent the
Company a letter demanding full payment on a $
Amendment to Midwestern Settlement Agreement
On April 11, 2024, under
an Amendment No. 1 to Settlement Agreement and Release (the “Amendment to Midwestern Release Agreement”), dated as of April
11, 2024, between the Company and Midwestern Interactive, LLC, a Missouri limited liability company (“Midwestern”), the Company
and Midwestern agreed to amend the Settlement Agreement and Release, dated as of December 12, 2023, between the Company and Midwestern
(the “Midwestern Release Agreement”). Pursuant to the Midwestern Release Agreement, the Company was required to pay Midwestern
a total of $
In addition, the Company agreed to execute an Amended Stipulation to Final Judgment and Confessed Judgment (the “Midwestern Stipulation”) and an Amended Affidavit of Verified Confession of Judgment in favor of Midwestern as to the obligations to pay the Midwestern Release Amount plus interest accruing on the unpaid portion of the Midwestern Release Amount from and including April 13, 2024 plus any costs or expenses, including, but not limited to, attorney’s fees and costs expended to pursue the matter to judgment, and to enforce and collect the judgment, if necessary, if the terms and conditions of the Midwestern Settlement Agreement, as amended, and the Midwestern Stipulation are not fully adhered to.
The Company and Midwestern entered into the Midwestern Release Agreement,
as amended, to resolve a dispute between them involving allegations, on the
23
Collaborative Arrangements
The company has entered into collaborative arrangements with various parties for the cross promotion of technologies and services within certain geographical areas. These arrangements do not commit the Company or the counterpart to any financial obligation. If these arrangements result in a formal project, the Company and the counterparties will receive certain equity consideration in the project or be given first right of refusal to provide their products or services to the projects, as defined by the respective agreements. To date, these arrangements have not resulted in any formal projects.
Note 13 - Related Party Transactions
On
April 10, 2023, the Company issued Richard Symington, the
Company’s former President, Chief Technology Officer, Chief Marketing Officer, and director,
an
Under
a lease agreement dated as of October 7, 2021 and an addendum dated the same date, we leased our former corporate offices consisting
of approximately
April 2024 Promissory Note
On
April 11, 2024, Daniel Nelson, the Chief Executive Officer, Chairman and a director of the Company, advanced $
24
Employment Agreement with Craig Smith
On
April 22, 2024, the Compensation Committee approved an Executive Employment Agreement with Craig Smith, which was dated as of and entered
into by the Company and Mr. Smith on April 23, 2024
(the “Smith Employment Agreement”). Under the Smith Employment Agreement, Mr. Smith was employed as the Company’s
Chief Operating Officer. Mr. Smith’s annual base salary will be $
On
March 12, 2024, the Compensation Committee granted an award of
Employment Agreement with Jeffry Hecklinski
On
April 9, 2024, the Compensation Committee approved an Executive Employment Agreement with Jeffry Hecklinski, the President of the Company,
which was dated and entered into by the Company and Mr. Hecklinski on the same date (the “Hecklinski Employment Agreement”).
Prior to April 9, 2024, Mr. Hecklinski was employed as the Company’s General Manager under an
employment offer letter, dated March 7, 2023, between Mr. Hecklinski and the Company (the “Former Hecklinski Employment Agreement”).
Mr. Hecklinski’s annual base salary was $
Under
the Hecklinski Employment Agreement, Mr. Hecklinski is employed as the Company’s President. Mr. Hecklinski’s annual base
salary is $
25
On
March 12, 2024, the Compensation Committee granted an award of
Note 14 - Subsequent Events
Redemption Agreement with FirstFire Global Opportunities Fund, LLC
On August
12, 2024, the Company entered into a Redemption Agreement (the “FirstFire Warrants Redemption Agreement”), dated as of August
12, 2024, with FirstFire Global Opportunities Fund, LLC, a Delaware limited liability company (“FirstFire”). The FirstFire
Warrants Redemption Agreement provides that the Company will have the right (the “Redemption Right”) to purchase the unexercised
portion of (i) the First May 2024 FF Warrant (as defined in “—Contractual Obligations – Debt – May 2024 Private
Placement of Convertible Senior Secured Promissory Note and Warrants”), and (ii) the First June 2024 FF Warrant (as defined
in “—Contractual Obligations – Debt – June 2024 Private Placement of Convertible Senior Secured Promissory
Note and Warrants”), from August 12, 2024 to February 12, 2025, for up to an aggregate consideration of $
Payoff of Second CBAZ Promissory Note
On July 26, 2024, the Company fully repaid the Second CBAZ Promissory Note (as defined in “—Debt – Revolving Lines of Credit with Commerce Bank of Arizona”). The certificate of deposit account underlying the CBAZ Collateral (as defined in “—Debt – Revolving Lines of Credit with Commerce Bank of Arizona”) was closed and redeemed, and the CBAZ Assignment of Deposit (as defined in “—Debt – Revolving Lines of Credit with Commerce Bank of Arizona”) and the Second CBAZ Loan Agreement (as defined in “—Debt – Revolving Lines of Credit with Commerce Bank of Arizona”) are no longer in effect. See “—Debt – Revolving Lines of Credit with Commerce Bank of Arizona”.
Transactions with Clayton Adams
On
July 23, 2024, the Company entered into a Consulting Agreement (the “Adams Consulting Agreement”), dated as of July 23, 2024,
with Clayton Adams (“Adams”). The Adams Consulting Agreement provided that Adams will provide certain consulting services
to the Company on mergers, acquisitions, financing sources, public company and governance matters, building market awareness, and other
duties as may reasonably be requested by the Company. In consideration for these services, the Company granted Adams
On
July 25, 2024, the Company entered into Amendment No. 1 to Consulting Agreement with Adams, dated as of July 25, 2024 (the “Adams
Consulting Agreement Amendment”). The Adams Consulting Agreement Amendment amended the Adams Consulting Agreement to provide that
the Company will grant Birddog Capital, LLC, a Nebraska limited liability company (“Birddog Capital”), an entity beneficially
owned by Adams,
26
In
addition, on July 23, 2024, the Company entered into a subscription agreement, dated as of July 23, 2024, with Adams (the “Subscription
Agreement”). The Subscription Agreement provided for the payment of $
Placement Agent Compensation Relating to Adams Warrant Transaction
Under
the Company’s engagement letter agreement, dated August 9, 2021, as amended (the “Boustead Engagement Letter”), with
Boustead Securities, LLC, a registered broker-dealer (“Boustead”), and the Underwriting Agreement between the Company and
Boustead, dated as of November 13, 2023 (the “Underwriting Agreement”), Boustead was required to be paid certain compensation
as the Company’s placement agent in connection with the transaction described above with respect to the issuance of the Adams Warrant.
Pursuant to the Boustead Engagement Letter, the Company was required to pay Boustead a cash fee equal to
July 2024 BPLLC Letter Agreement and BPLLC Warrant
On
July 15, 2024, the Company entered into a letter agreement (the “BPLLC Letter Agreement”) with Bevilacqua PLLC, a District
of Columbia professional limited liability company (“Bevilacqua PLLC”). The BPLLC Letter Agreement amended and supplemented
the engagement agreement, dated July 20, 2022, as previously amended by a supplement, dated February 17, 2023, between Bevilacqua PLLC
and the Company. Under the BPLLC Letter Agreement, the Company agreed that the Company was obligated to pay Bevilacqua PLLC $
In
addition, pursuant to the BPLLC Letter Agreement, in consideration for the deferring of the Outstanding Fees, on July 15, 2024, the Company
issued Bevilacqua PLLC a pre-funded warrant to purchase
27
July 2024 Amendments to Management Agreements
Amendment to CEO Agreement
On July 9, 2024, the Company entered into Amendment No. 1 to Executive Employment Agreement, dated as of July 9, 2024, between the Company and Daniel Nelson, the Company’s Chief Executive Officer, Chairman, and director (the “Amendment to CEO Agreement”). The Amendment to CEO Agreement amended the Amended and Restated Executive Employment Agreement, dated as of March 1, 2024, between the Company and Mr. Nelson (the “Amended and Restated CEO Employment Agreement”), to amend and restate the severance provisions of the Amended and Restated CEO Employment Agreement. As amended, the Amended and Restated CEO Employment Agreement provides that if the Company terminates Mr. Nelson without cause, Mr. Nelson will be entitled to severance payments in cash in the amount of base salary in effect on the date of such termination payable in 12 monthly installments. If the Company terminates Mr. Nelson upon a Change of Control (as defined in the Amendment to CEO Agreement), Mr. Nelson will be entitled to severance payments in cash in the amount of one-half of base salary in effect on the date of such termination payable in six monthly installments. The payment of severance may be conditioned on receiving a release of any and all claims that Mr. Nelson may have against the Company.
Amendment to Hecklinski Agreement
On July 9, 2024, the Company entered into Amendment No. 1 to Executive Employment Agreement, dated as of July 9, 2024, between the Company and Jeffry Hecklinski, the Company’s President and director (the “Amendment to Hecklinski Agreement”). The Amendment to Hecklinski Agreement amended the Executive Employment Agreement, dated as of April 9, 2024, between the Company and Mr. Hecklinski (the “Hecklinski Employment Agreement”), to amend and restate the severance provisions of the Hecklinski Employment Agreement. As amended, the Hecklinski Employment Agreement provides that if the Company terminates Mr. Hecklinski upon a Change of Control (as defined in the Amendment to Hecklinski Agreement), Mr. Hecklinski will be entitled to severance payments in cash in the amount of one-half of base salary in effect on the date of such termination payable in six monthly installments. The payment of severance may be conditioned on receiving a release of any and all claims that Mr. Hecklinski may have against the Company.
Amendment to Smith Agreement
On July 9, 2024, the Company entered into Amendment No. 1 to Executive Employment Agreement, dated as of July 9, 2024, between the Company and Craig Smith, the Company’s President and director (the “Amendment to Smith Agreement”). The Amendment to Smith Agreement amended the Executive Employment Agreement, dated as of April 22, 2024, between the Company and Mr. Smith (the “Smith Employment Agreement”), to amend and restate the severance provisions of the Smith Employment Agreement. As amended, the Smith Employment Agreement provides that if the Company terminates Mr. Smith upon a Change of Control (as defined in the Amendment to Smith Agreement), Mr. Smith will be entitled to severance payments in cash in the amount of one-half of base salary in effect on the date of such termination payable in six monthly installments. The payment of severance may be conditioned on receiving a release of any and all claims that Mr. Smith may have against the Company.
We have evaluated subsequent events through August 19, 2024, the date the financial statements were available to be issued. Based on our evaluation, no additional events than listed above have occurred that would require adjustment to or disclosure in the financial statements.
28
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management’s discussion and analysis of financial condition and results of operations provides information that management believes is relevant to an assessment and understanding of our plans and financial condition. The following financial information is derived from our financial statements and should be read in conjunction with such condensed financial statements and notes thereto set forth elsewhere herein.
Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to “we,” “us,” “our,” the “Company,” “Signing Day Sports,” and “our company” refer to the operations of Signing Day Sports, Inc., a Delaware corporation. “Common stock” refers to the Company’s common stock, par value $0.0001 per share. Unless otherwise noted, the share and per share information in this report have been adjusted to give effect to the one-for-five (1-for-5) reverse stock split of the outstanding common stock which became effective on April 14, 2023.
Note Regarding Trademarks, Trade Names and Service Marks
We use various trademarks, trade names and service marks in our business. For convenience, we may not include the ℠, ® or ™ symbols, but such omission is not meant to indicate that we would not protect our intellectual property rights to the fullest extent allowed by law. Any other trademarks, trade names or service marks referred to in this report are the property of their respective owners.
Special Note Regarding Forward-Looking Statements
This report contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts are forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
| ● | anticipated benefits from strategic alliances, sponsorships, and collaborations with certain sports organizations or celebrity professional sports consultants; |
| ● | our ability to implement certain desired artificial intelligence features into our platform; |
| ● | our anticipated ability to obtain additional funding to develop additional services and offerings; |
| ● | expected market acceptance of our existing and new offerings; |
| ● | anticipated competition from existing online offerings or new offerings that may emerge; |
| ● | anticipated favorable impacts from strategic changes to our business on our net sales, revenues, income from continuing operations, or other results of operations; |
| ● | our expected ability to attract new users and customers, with respect to football, sports other than football, or both; |
| ● | our expected ability to increase the rate of subscription renewals; |
| ● | our expected ability to slow the rate of user attrition; |
| ● | our expected ability to retain or obtain intellectual property rights; |
| ● | our expected ability to adequately support future growth; |
| ● | our expected ability to comply with user data privacy laws and other legal requirements; |
| ● | anticipated legal and regulatory requirements and our ability to comply with such requirements; and |
| ● | our expected ability to attract and retain key personnel to manage our business effectively. |
In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the Securities and Exchange Commission (the “SEC”) on March 29, 2024 (the “2023 Annual Report”), and elsewhere in this report. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.
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In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.
The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.
Overview
We are a technology company developing and operating a platform to give significantly more student-athletes the opportunity to go to college and continue playing sports. Our platform, Signing Day Sports, is a digital ecosystem to help student-athletes get discovered and recruited by coaches and recruiters across the country. We fully support football, baseball, softball, and men’s and women’s soccer, and we plan to expand the Signing Day Sports platform to include additional sports. Each sport is led by former professional athletes and coaches who know what it takes to get to the big leagues.
Signing Day Sports launched in 2019. During 2023, 3,846 aspiring high school athletes and groups throughout the United States subscribed to the Signing Day Sports platform. Colleges in the National Collegiate Athletic Association (NCAA) Division I, Division II, and Division III, and the National Association of Intercollegiate Athletics (NAIA), have utilized our platform for recruitment purposes.
In short, we offer a comprehensive solution that services the needs of all participants in the sports recruitment process. Our goal is to change the way sports recruitment is done for the betterment of everyone.
Our Historical Performance
The Company’s independent registered public accounting firm has expressed substantial doubt as to the Company’s ability to continue as a going concern. We have incurred losses for each period from our inception and a significant accumulated deficit. For the six months ended June 30, 2024 and 2023, our net loss was approximately $3.8 million and approximately $1.7 million, respectively, and our net cash used in operating activities was approximately $3.0 million and approximately $1.2 million, respectively. For the fiscal years ended December 31, 2023 and 2022, our net loss was approximately $5.5 million and approximately $6.7 million, respectively, and our cash used in operating activities was approximately $4.8 million and approximately $4.9 million, respectively. As of June 30, 2024 and December 31, 2023, we had an accumulated deficit of approximately $20.8 million and approximately $17.0 million, respectively. We expect to incur expenses and operating losses over the next several years. We plan to finance our operations primarily using proceeds from capital raises until our transition to profitable operations, at which point we plan to finance operations primarily from profits. These plans, if successful, will mitigate the factors which raise substantial doubt about the Company’s ability to continue as a going concern. There can also be no assurance that we will succeed in generating sufficient revenues to continue our operations as a going concern. For further discussion, see “—Liquidity and Capital Resources – Going Concern”.
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Emerging Growth Company and Smaller Reporting Company
We qualify as an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
| ● | have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”); |
| ● | present three years, and may instead present only two years, of audited financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure in certain filings with the SEC; |
| ● | comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); |
| ● | comply with certain greenhouse gas emissions disclosure and related third-party assurance requirements; |
| ● | submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and |
| ● | disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. |
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.
We will remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1,235,000,000, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.
To the extent that we continue to qualify as a “smaller reporting company,” as such term is defined in Rule 12b-2 under the Exchange Act, after we cease to qualify as an emerging growth company, certain of the exemptions available to us as an emerging growth company may continue to be available to us as a smaller reporting company, including as to: (i) the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act; (ii) scaled executive compensation disclosures; (iii) presenting two years of audited financial statements, instead of three years; and (iv) compliance with certain greenhouse gas emissions disclosure and related third-party assurance requirements.
Principal Factors Affecting Our Financial Performance
Our operating results are primarily affected by the following factors:
| ● | our ability to acquire new customers and users or retain existing customers and users; |
| ● | our ability to offer competitive product pricing; |
| ● | our ability to broaden product offerings; |
| ● | our ability to leverage technology and use and develop efficient processes; |
| ● | our ability to attract and retain talented employees; |
| ● | industry demand and competition; and |
| ● | market conditions and our market position. |
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Results of Operations
Comparison of Three Months Ended June 30, 2024 and 2023
| Three Months Ended | ||||||||
| June 30, 2024 | June 30, 2023 | |||||||
| Revenues, net | $ | 204,962 | $ | 116,810 | ||||
| Cost of revenues | 62,160 | 9,686 | ||||||
| Gross profit | 142,802 | 107,124 | ||||||
| Operating cost and expenses | ||||||||
| Advertising and marketing | 884 | 107,194 | ||||||
| General and administrative | 1,267,952 | 665,394 | ||||||
| Total operating expenses | 1,268,836 | 772,588 | ||||||
| Net income (loss) from operations | (1,126,034 | ) | (665,464 | ) | ||||
| Other Income (expense) | ||||||||
| Interest expense | (41,156 | ) | (255,141 | ) | ||||
| Other income (expense), net | 27,832 | - | ||||||
| Deferred tax income, net | 16,571 | - | ||||||
| Other income (expense), net | (190,055 | ) | 29,682 | |||||
| Total other (expense), net | (186,808 | ) | (225,459 | ) | ||||
| Net loss | $ | (1,312,842 | ) | $ | (890,923 | ) | ||
Revenues, Net
Net revenues for the three months ended June 30, 2024 and 2023 were approximately $0.20 million and approximately $0.12 million, respectively. Net revenues increased approximately $0.08 million, or 75.5%, primarily due to an increase in event fee payments of approximately $0.04 million and subscription revenue of approximately $0.04 million.
The following table presents information about the number of users of our platform under subscriptions by type of subscription plan for each of the three-month periods ended June 30, 2024 and 2023. Subscriptions to our platform require payment prior to platform access except that group subscriptions may make payments on a monthly installment basis.
| Users with Subscriptions | ||||||||
| Subscription Type | Three Months Ended June 30, | Three Months Ended June 30, | ||||||
| Monthly | 2,653 | 1,852 | ||||||
| Annual | 26 | 30 | ||||||
| Total: | 2,679 | 1,882 | ||||||
We anticipate that the number of users with subscriptions and revenues will continue to increase in future periods due to four strategic changes to our business during the fourth quarter of 2022. First, our former promotional free use arrangement for certain high school sports programs was discontinued, and since that time we have generally required that all users other than college coaches be covered under a subscription after a temporary trial period. Second, we reextended our app and website design and related marketing approach from the prior model of a recruitment tool for college sports recruiters to restore a major direct-to-consumer component including by increasing in-person recruiting events and consumer digital marketing, reducing our monthly subscription fee from $29.99 to $24.99, and enhancing education resources on our website and other communication channels. Third, during 2023, we signed strategic alliance and sponsorship agreements with significant college sports recruiting industry participants, including GOAT Farm Sports, the owner of the U.S. Army Bowl, and SAJE Enterprises LLC (DBA Elite Development Program Soccer), or EDP, providing preferential access to student-athletes at many sports combines and events throughout the year for which we have committed to act as an official events sponsor and college sports recruitment platform, for college football and soccer recruitment-related events. Fourth, we determined to extend our app and website to support baseball, softball, and men’s and women’s soccer recruitment as well as football, to support these sports now or in the future, to support the particular priorities of strategic sports recruiting allies and collaborators, and to apply the other aspects of our business model to the end of generating revenues from the significant markets for these major college sports areas, alliances, and collaborations. These changes are anticipated to increase first-time subscriptions by both individual users and groups, increase the rate of subscription renewals by individual monthly subscribers, and slow individual user attrition due to the inherently limited college recruiting cycle for each student-athlete.
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However, we caution that the extent and timing of any favorable impacts from the strategic changes to our business described above on our net sales, revenues, income from continuing operations, or other results of operations, are subject to, and may be offset by, unfavorable impacts on our results of operations, due to many other factors and uncertainties that are discussed throughout this report, including under “Cautionary Statement Regarding Forward-Looking Statements”, “—Principal Factors Affecting Our Financial Performance”, “—Liquidity and Capital Resources – Going Concern”, and in the notes to the financial statements accompanying this report.
Cost of Revenues
Cost of revenues for the three months ended June 30, 2024 and 2023 was approximately $0.06 million and approximately $0.01 million, respectively. Cost of revenue increased approximately $0.05 million, or 541.8%, primarily due to an increase in aggregate wages as a result of internal software development staff hires.
Advertising and Marketing
Advertising and marketing expenses were approximately $0.001 million and approximately $0.107 million for the three months ended June 30, 2024 and 2023, respectively. The decrease of approximately $0.106 million, or 99.2%, was primarily due to the economization of the Company’s advertising and marketing strategy.
General and Administrative
General and administrative expenses were approximately $1.27 million and approximately $0.67 million for the three months ended June 30, 2024 and 2023, respectively. The increase of approximately $0.60 million, or 90.6%, was primarily due to an increase in legal expenses of approximately $0.31 million and stock-based compensation expenses of approximately $0.23 million.
Total Other Expense, Net
Total other expense, net was approximately $0.19 million and approximately $0.23 million for the three months ended June 30, 2024 and 2023, respectively. The decrease of approximately $0.04 million, or 17.1%, was primarily due to a decrease in interest expense of approximately $0.21 million due to the reduced balance under certain convertible and nonconvertible notes payable and related reduced interest expense, offset by a change to other expense, net of approximately $0.19 million consisting of commitment fee expense of approximately $0.13 million and discount on loan payable of approximately $0.06 million for the three months ended June 30, 2024 from other net income, net of approximately $0.03 million consisting of sublease income of approximately $0.03 million for the three months ended June 30, 2023.
Comparison of Six Months Ended June 30, 2024 and 2023
| Six Months Ended | ||||||||
| June 30, 2024 | June 30, 2023 | |||||||
| Revenues, net | $ | 439,589 | $ | 170,830 | ||||
| Cost of revenues | 131,194 | 14,226 | ||||||
| Gross profit | 308,395 | 156,604 | ||||||
| Operating cost and expenses | ||||||||
| Advertising and marketing | 93,609 | 197,816 | ||||||
| General and administrative | 3,310,921 | 1,216,270 | ||||||
| Total operating expenses | 3,404,530 | 1,414,086 | ||||||
| Net income (loss) from operations | (3,096,135 | ) | (1,257,482 | ) | ||||
| Other Income (expense) | ||||||||
| Interest expense | (79,229 | ) | (455,448 | ) | ||||
| Interest income | 57,120 | 1,100 | ||||||
| Deferred tax income, net | 32,571 | - | ||||||
| Other income (expense), net | (725,054 | ) | 58,264 | |||||
| Total other (expense), net | (714,592 | ) | (396,084 | ) | ||||
| Net loss | $ | (3,810,727 | ) | $ | (1,653,566 | ) | ||
Revenues, Net
Net revenues for the six months ended June 30, 2024 and 2023 were approximately $0.44 million and approximately $0.17 million, respectively. Net revenues increased approximately $0.27 million, or 157.3%, primarily due to an increase in event fee payments of approximately $0.19 million and subscription revenue of approximately $0.08 million.
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The following table presents information about the number of users of our platform under subscriptions by type of subscription plan for each of the six-month periods ended June 30, 2024 and 2023. Subscriptions to our platform require payment prior to platform access except that group subscriptions may make payments on a monthly installment basis.
| Users with Subscriptions | ||||||||
| Subscription Type | Six Months Ended June 30, | Six Months Ended June 30, | ||||||
| Monthly | 4,780 | 2,424 | ||||||
| Annual | 46 | 37 | ||||||
| Total: | 4,826 | 2,461 | ||||||
We anticipate that the number of users with subscriptions and revenues will continue to increase in future periods due to four strategic changes to our business during the fourth quarter of 2022. First, our former promotional free use arrangement for certain high school sports programs was discontinued, and since that time we have generally required that all users other than college coaches be covered under a subscription after a temporary trial period. Second, we reextended our app and website design and related marketing approach from the prior model of a recruitment tool for college sports recruiters to restore a major direct-to-consumer component including by increasing in-person recruiting events and consumer digital marketing, reducing our monthly subscription fee from $29.99 to $24.99, and enhancing education resources on our website and other communication channels. Third, during 2023, we signed strategic alliance and sponsorship agreements with significant college sports recruiting industry participants, including GOAT Farm Sports, the owner of the U.S. Army Bowl, and SAJE Enterprises LLC (DBA Elite Development Program Soccer), or EDP, providing preferential access to student-athletes at many sports combines and events throughout the year for which we have committed to act as an official events sponsor and college sports recruitment platform, for college football and soccer recruitment-related events. Fourth, we determined to extend our app and website to support baseball, softball, and men’s and women’s soccer recruitment as well as football, to support these sports now or in the future, to support the particular priorities of strategic sports recruiting allies and collaborators, and to apply the other aspects of our business model to the end of generating revenues from the significant markets for these major college sports areas, alliances, and collaborations. These changes are anticipated to increase first-time subscriptions by both individual users and groups, increase the rate of subscription renewals by individual monthly subscribers, and slow individual user attrition due to the inherently limited college recruiting cycle for each student-athlete.
However, we caution that the extent and timing of any favorable impacts from the strategic changes to our business described above on our net sales, revenues, income from continuing operations, or other results of operations, are subject to, and may be offset by, unfavorable impacts on our results of operations, due to many other factors and uncertainties that are discussed throughout this report, including under “Cautionary Statement Regarding Forward-Looking Statements”, “—Principal Factors Affecting Our Financial Performance”, “—Liquidity and Capital Resources – Going Concern”, and in the notes to the financial statements accompanying this report.
Cost of Revenues
Cost of revenues for the six months ended June 30, 2024 and 2023 was approximately $0.13 million and approximately $0.01 million, respectively. Cost of revenue increased approximately $0.12 million, or 822.2%, primarily due to an increase in aggregate wages as a result of internal software development staff hires.
Advertising and Marketing
Advertising and marketing expenses were approximately $0.09 million and approximately $0.20 million for the six months ended June 30, 2024 and 2023, respectively. The decrease of approximately $0.11 million, or 54.4%, was primarily due to the economization of the Company’s advertising and marketing strategy.
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General and Administrative
General and administrative expenses were approximately $3.31 million and approximately $1.22 million for the six months ended June 30, 2024 and 2023, respectively. The increase of approximately $2.09 million, or 172.2%, was due to an increase in legal expenses of approximately $0.57 million, stock-based compensation expenses of approximately $0.49 million, corporate regulatory expenses of approximately $0.36 million, event expenses of approximately $0.35 million, and directors’ and officers’ liability insurance premium expenses of approximately $0.32 million.
Total Other Expense, Net
Total other expense, net was approximately $0.71 million and approximately $0.40 million for the six months ended June 30, 2024 and 2023, respectively. The increase of approximately $0.31 million, or 80.4%, was primarily due to a change to other expense, net of approximately $0.73 million consisting of commitment fee expense of approximately $0.67 million, and discount on loan payable of approximately $0.06 million for the six months ended June 30, 2024 from other net income, net of approximately $0.06 million consisting of sublease income of approximately $0.06 million for the six months ended June 30, 2023 which was offset by a decrease in interest expense of approximately $0.38 million due to the reduced balance under certain convertible and nonconvertible notes payable and related reduced interest expense.
Liquidity and Capital Resources
As of June 30, 2024, we had cash and cash equivalents of $35,943 and short-term investments of $2,164,382. As of June 30, 2024, we also had total current liabilities of $4,387,046. As of June 30, 2024, we have financed our operations primarily from private placements of securities and our initial public offering. In November 2023, we raised approximately $4.7 million in net proceeds from our initial public offering, all of which had been used to finance our operations as of December 31, 2023. In February 2024, we also gained access to an equity line of credit for up to $25,000,000, subject to certain terms and conditions. However, this facility did not raise net proceeds and was terminated in May 2024.
We believe that our current levels of cash will only be sufficient to meet our anticipated cash needs for our operations and other cash requirements until June 30, 2025 and for at least 12 months beyond that period, including our costs associated with being a public reporting company, if we receive additional financing. We may also in the future require additional or alternative cash resources due to changing business conditions, pursuit of rapid product development, significant expansion or introduction of major marketing campaigns, or to fund significant business investments or acquisitions. Since our own financial resources may be insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities in public offerings, private placements or credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Our auditor’s opinion included in our audited financial statements for the years ended December 31, 2023 and 2022 contain an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. In recent years, we have suffered recurring losses from operations, negative working capital and cash outflows from operating activities, and therefore have been dependent upon external sources for financing our operations.
Our ability to continue as a going concern is conditioned on generating a level of revenue adequate to support our cost structure. We must continue our path to profitability through increased business development, marketing and sales of the Company’s platform subscriptions. Our management has evaluated the significance as well as the time in which we have to complete these tasks and has determined that we can meet these operating obligations for the foreseeable future. We plan to finance our operations primarily using proceeds from capital raises until our transition to profitable operations, at which point we plan to finance operations primarily from profits. These plans, if successful, will mitigate the factors which raise substantial doubt about the Company’s ability to continue as a going concern.
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However, there can be no assurance that we will succeed in generating sufficient revenues to continue our operations as a going concern. There can also be no assurance that our financial resources will be sufficient to remain in operation or that necessary financing will be available on satisfactory terms, if at all. If we are unable to secure needed financing, management may be forced to take additional restructuring actions, which may include significantly reducing our anticipated level of expenditures, which may slow or reverse our growth or ability to become profitable. The financial statements that accompany this report do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Signing Day Sports, Inc. 2022 Equity Incentive Plan
On August 31, 2022, the Company adopted the Signing Day Sports, Inc. 2022 Equity Incentive Plan (the “Plan”) for the purpose of granting restricted stock, stock options, and other forms of incentive compensation to officers, employees, directors, and consultants of the Company. On February 27, 2024, the stockholders of the Company approved an amendment to the Plan to increase the number of shares of common stock reserved for issuance under the Plan. A maximum of 2,250,000 shares of common stock are available for issuance under the Plan. Stock options have been granted under the Plan to certain officers, directors, employees, and consultants that may be exercised to purchase a total of 299,333 shares of common stock, not including stock options that terminated without exercise. In addition, a total of 1,950,667 shares of restricted stock have been granted to officers, directors, employees, and consultants, not including restricted stock grants that have been forfeited due to employee, officer, or director departures prior to vesting. See Item 11. “Executive Compensation – Signing Day Sports, Inc. 2022 Equity Incentive Plan” of the 2023 Annual Report for a summary of the principal features of the Plan.
Summary of Cash Flow
The following table provides detailed information about our net cash flow for the six months ended June 30, 2024 and 2023.
Six Months Ended June 30, | ||||||||
| 2024 | 2023 | |||||||
| Net cash provided used in operating activities | $ | (2,973,530 | ) | $ | (1,184,417 | ) | ||
| Net cash provided used in investing activities | (6,972 | ) | (768,454 | ) | ||||
| Net cash provided used in financing activities | 1,892,915 | 1,753,666 | ||||||
| Net change in cash and cash equivalents | (1,087,586 | ) | (199,205 | ) | ||||
| Cash and cash equivalents, beginning of period | 1,123,529 | 254,409 | ||||||
| Cash and cash equivalents, end of period | $ | 35,943 | $ | 55,204 | ||||
Net cash used in operating activities was approximately $2.97 million for the six months ended June 30, 2024, as compared to net cash used in operating activities of approximately $1.18 million for the six months ended June 30, 2023. The increase was primarily due to an increase of net loss to approximately $3.84 million from approximately $1.65 million.
Net cash used in investing activities was approximately $0.01 million for the six months ended June 30, 2024 and approximately $0.768 million for the six months ended June 30, 2023. The decrease was primarily due to a decrease in development of internal software.
Net cash provided by financing activities was approximately $1.89 million for the six months ended June 30, 2024 and approximately $1.75 million for the six months ended June 30, 2023. The increase was primarily due to an increase in proceeds from the Company’s bank line of credit of approximately $1.25 million, offset by the nonrecurrence of proceeds of approximately $2.49 million from the issuance of convertible notes during the six months ended June 30, 2023.
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Recent Developments
Redemption Agreement with FirstFire Global Opportunities Fund, LLC
On August 12, 2024, the Company entered into a Redemption Agreement (the “FirstFire Warrants Redemption Agreement”), dated as of August 12, 2024, with FirstFire Global Opportunities Fund, LLC, a Delaware limited liability company (“FirstFire”). The FirstFire Warrants Redemption Agreement provides that the Company will have the right (the “Redemption Right”) to purchase the unexercised portion of (i) the First May 2024 FF Warrant (as defined in “—Contractual Obligations – Debt – May 2024 Private Placement of Convertible Senior Secured Promissory Note and Warrants”), and (ii) the First June 2024 FF Warrant (as defined in “—Contractual Obligations – Debt – June 2024 Private Placement of Convertible Senior Secured Promissory Note and Warrants”), from August 12, 2024 to February 12, 2025, for up to an aggregate consideration of $100,000, reduced pro rata to the extent that the First May 2024 FF Warrant and the First June 2024 FF Warrant are exercised prior to the Company’s exercise of the Redemption Right.
The FirstFire Warrants Redemption Agreement is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q, and the description above is qualified in its entirety by reference to the full text of such exhibit.
Payoff of Second CBAZ Promissory Note
On July 26, 2024, the Company fully repaid the Second CBAZ Promissory Note (as defined in “—Debt – Revolving Lines of Credit with Commerce Bank of Arizona”). The certificate of deposit account underlying the CBAZ Collateral (as defined in “—Debt – Revolving Lines of Credit with Commerce Bank of Arizona”) was closed and redeemed, and the CBAZ Assignment of Deposit (as defined in “—Debt – Revolving Lines of Credit with Commerce Bank of Arizona”) and the Second CBAZ Loan Agreement (as defined in “—Debt – Revolving Lines of Credit with Commerce Bank of Arizona”) are no longer in effect. See “—Debt – Revolving Lines of Credit with Commerce Bank of Arizona”.
Transactions with Clayton Adams
On July 23, 2024, the Company entered into a Consulting Agreement (the “Adams Consulting Agreement”), dated as of July 23, 2024, with Clayton Adams (“Adams”). The Adams Consulting Agreement provided that Adams will provide certain consulting services to the Company on mergers, acquisitions, financing sources, public company and governance matters, building market awareness, and other duties as may reasonably be requested by the Company. In consideration for these services, the Company granted Adams 127,826 shares of common stock (the “Plan Shares”) under the Plan. In addition, the Consulting Agreement provided that the Company will grant Adams 668,841 shares of common stock (the “Adams Deferred Shares”), as a private placement not subject to the terms of the Plan, under a separate Non-Plan Restricted Stock Award Agreement entered into between the Company and Adams on July 23, 2024, dated as of July 23, 2024 (the “Adams Deferred Award Agreement”), within one (1) business day of the date of the later of the authorization of the grant of the Adams Deferred Shares by (i) the NYSE American LLC (the “NYSE American”) and (ii) the board of directors of the Company or the Compensation Committee of the board of directors (the “Compensation Committee”). The Compensation Committee approved the grants of the Plan Shares and the Adams Deferred Shares on July 22, 2024.
On July 25, 2024, the Company entered into Amendment No. 1 to Consulting Agreement with Adams, dated as of July 25, 2024 (the “Adams Consulting Agreement Amendment”). The Adams Consulting Agreement Amendment amended the Adams Consulting Agreement to provide that the Company will grant Birddog Capital, LLC, a Nebraska limited liability company (“Birddog Capital”), an entity beneficially owned by Adams, 668,841 shares of common stock (the “Birddog Deferred Shares”), as a private placement not subject to the terms of the Plan, under a separate Non-Plan Restricted Stock Award Agreement between the Company and Birddog Capital, dated as of July 25, 2024 (the “Birddog Deferred Award Agreement”), within one (1) business day of the date of the later of the authorization of the grant of the Birddog Deferred Shares by (i) the NYSE American and (ii) the board of directors or the Compensation Committee. The Compensation Committee approved the grant of the Birddog Deferred Shares on July 25, 2024. The Birddog Deferred Award Agreement provides certain registration rights with respect to the Birddog Deferred Shares and also provides that the grant of the Birddog Deferred Shares is subject to authorization by the NYSE American. Pursuant to the terms of the Adams Consulting Agreement Amendment, the Company will not grant the Adams Deferred Shares. On August 2, 2024, the NYSE American authorized the issuance of the Birddog Deferred Shares, and the Birddog Deferred Shares were issued on August 5, 2024.
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In addition, on July 23, 2024, the Company entered into a subscription agreement, dated as of July 23, 2024, with Adams (the “Subscription Agreement”). The Subscription Agreement provided for the payment of $100,000 by Adams to the Company and the issuance of a pre-funded warrant to purchase 333,333 shares of common stock of the Company to Adams at an exercise price of $0.01 per share (the “Adams Warrant”). The Subscription Agreement also provided certain registration rights with respect to the shares issuable upon exercise of the Adams Warrant. The Adams Warrant is subject to a limitation on beneficial ownership to 4.99% of the common stock that would be outstanding immediately after exercise. Any change in this beneficial ownership limitation will not be effective until the 61st day after such change is agreed to. The Adams Warrant became exercisable on the date that the NYSE American authorized the issuance of shares pursuant to exercise of the Adams Warrant with respect to the number of shares authorized for such issuance, or the date that the Company is no longer listed on the NYSE American. Pursuant to the Subscription Agreement, the Company issued the Adams Warrant to Adams on July 23, 2024. On August 2, 2024, the NYSE American authorized the issuance of the shares of common stock issuable upon exercise of the Adams Warrant.
The Adams Warrant, the Adams Consulting Agreement, the Adams Consulting Agreement Amendment, the Birddog Deferred Award Agreement, and the Subscription Agreement are filed as Exhibit 4.1, Exhibit 10.2, Exhibit 10.3, Exhibit 10.4, and Exhibit 10.5 to this Quarterly Report on Form 10-Q, respectively, and the description above is qualified in its entirety by reference to the full text of such exhibits.
Placement Agent Compensation Relating to Adams Warrant Transaction
Under the Company’s engagement letter agreement, dated August 9, 2021, as amended (the “Boustead Engagement Letter”), with Boustead Securities, LLC, a registered broker-dealer (“Boustead”), and the Underwriting Agreement between the Company and Boustead, dated as of November 13, 2023 (the “Underwriting Agreement”), Boustead was required to be paid certain compensation as the Company’s placement agent in connection with the transaction described above with respect to the issuance of the Adams Warrant. Pursuant to the Boustead Engagement Letter, the Company was required to pay Boustead a cash fee equal to 7% of the gross proceeds from this transaction, and a non-accountable expense allowance of cash equal to 1% of the gross proceeds from this transaction. Boustead has deferred its rights to such cash compensation with respect to this transaction. In addition, the Company was required to issue a placement agent warrant to Boustead for the purchase of 23,333 shares of common stock, equal to 7% of the number of the shares of common stock that may be issued upon exercise of the Adams Warrant (the “July 2024 Boustead Warrant”). The July 2024 Boustead Warrant became exercisable on the date that the NYSE American authorized the issuance of shares pursuant to exercise of the July 2024 Boustead Warrant with respect to the number of shares authorized for such issuance, or the date that the Company is no longer listed on the NYSE American. On August 2, 2024, the NYSE American authorized the issuance of the shares of common stock issuable upon exercise of the July 2024 Boustead Warrant. The July 2024 Boustead Warrant will be exercisable for a period of five years from the date of issuance, contains cashless exercise provisions, and may have certain registration rights.
The July 2024 Boustead Warrant is filed as Exhibit 4.2 to this report, and the description above is qualified in its entirety by reference to the full text of such exhibit.
July 2024 BPLLC Letter Agreement and BPLLC Warrant
On July 15, 2024, the Company entered into a letter agreement (the “BPLLC Letter Agreement”) with Bevilacqua PLLC, a District of Columbia professional limited liability company (“Bevilacqua PLLC”). The BPLLC Letter Agreement amended and supplemented the engagement agreement, dated July 20, 2022, as previously amended by a supplement, dated February 17, 2023, between Bevilacqua PLLC and the Company. Under the BPLLC Letter Agreement, the Company agreed that the Company was obligated to pay Bevilacqua PLLC $684,350.98 for services rendered to the Company by Bevilacqua PLLC through June 30, 2024 (the “Outstanding Fees”). The BPLLC Letter Agreement provided that Bevilacqua PLLC agreed to defer payment of the Outstanding Fees until the earlier of either the closing of the Company’s next financing transaction or a business combination. The BPLLC Letter Agreement provides that if a financing transaction results in proceeds of less than $2,000,000, the Company will pay Bevilacqua PLLC 20% of the net proceeds from such financing against the Outstanding Fees. If a financing transaction results in proceeds of more than $2,000,000, the Company will pay Bevilacqua PLLC the amount of the Outstanding Fees.
In addition, pursuant to the BPLLC Letter Agreement, in consideration for the deferring of the Outstanding Fees, on July 15, 2024, the Company issued Bevilacqua PLLC a pre-funded warrant to purchase 2,500,000 shares of the Company’s common stock (the “BPLLC Warrant”). The BPLLC Warrant has an exercise price of $0.01 per share and provides for piggyback registration rights with respect to the shares of common stock issuable upon exercise of the BPLLC Warrant. The BPLLC Warrant is subject to a limitation on beneficial ownership to 4.99% of the common stock that would be outstanding immediately after exercise. Any change in this beneficial ownership limitation will not be effective until the 61st day after such change is agreed to. The BPLLC Warrant will become exercisable on the date that the NYSE American authorizes the issuance of shares pursuant to exercise of the BPLLC Warrant with respect to the number of shares authorized for such issuance, or the date that the Company is no longer listed on the NYSE American. On July 24, 2024, the NYSE American authorized the issuance of the shares of common stock issuable upon exercise of the BPLLC Warrant.
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The BPLLC Warrant and the BPLLC Letter Agreement are filed as Exhibit 4.3 and Exhibit 10.6 to this Quarterly Report on Form 10-Q, and the description above is qualified in its entirety by reference to the full text of such exhibit.
July 2024 Amendments to Management Agreements
Amendment to CEO Agreement
On July 9, 2024, the Company entered into Amendment No. 1 to Executive Employment Agreement, dated as of July 9, 2024, between the Company and Daniel Nelson, the Company’s Chief Executive Officer, Chairman, and director (the “Amendment to CEO Agreement”). The Amendment to CEO Agreement amended the Amended and Restated Executive Employment Agreement, dated as of March 1, 2024, between the Company and Mr. Nelson (the “Amended and Restated CEO Employment Agreement”), to amend and restate the severance provisions of the Amended and Restated CEO Employment Agreement. As amended, the Amended and Restated CEO Employment Agreement provides that if the Company terminates Mr. Nelson without cause, Mr. Nelson will be entitled to severance payments in cash in the amount of base salary in effect on the date of such termination payable in 12 monthly installments. If the Company terminates Mr. Nelson upon a Change of Control (as defined in the Amendment to CEO Agreement), Mr. Nelson will be entitled to severance payments in cash in the amount of one-half of base salary in effect on the date of such termination payable in six monthly installments. The payment of severance may be conditioned on receiving a release of any and all claims that Mr. Nelson may have against the Company.
The Amendment to CEO Agreement is filed as Exhibit 10.7 to this Quarterly Report on Form 10-Q, and the description above is qualified in its entirety by reference to the full text of such exhibit.
Amendment to Hecklinski Agreement
On July 9, 2024, the Company entered into Amendment No. 1 to Executive Employment Agreement, dated as of July 9, 2024, between the Company and Jeffry Hecklinski, the Company’s President and director (the “Amendment to Hecklinski Agreement”). The Amendment to Hecklinski Agreement amended the Executive Employment Agreement, dated as of April 9, 2024, between the Company and Mr. Hecklinski (the “Hecklinski Employment Agreement”), to amend and restate the severance provisions of the Hecklinski Employment Agreement. As amended, the Hecklinski Employment Agreement provides that if the Company terminates Mr. Hecklinski upon a Change of Control (as defined in the Amendment to Hecklinski Agreement), Mr. Hecklinski will be entitled to severance payments in cash in the amount of one-half of base salary in effect on the date of such termination payable in six monthly installments. The payment of severance may be conditioned on receiving a release of any and all claims that Mr. Hecklinski may have against the Company.
The Amendment to Hecklinski Agreement is filed as Exhibit 10.8 to this Quarterly Report on Form 10-Q, and the description above is qualified in its entirety by reference to the full text of such exhibit.
Amendment to Smith Agreement
On July 9, 2024, the Company entered into Amendment No. 1 to Executive Employment Agreement, dated as of July 9, 2024, between the Company and Craig Smith, the Company’s President and director (the “Amendment to Smith Agreement”). The Amendment to Smith Agreement amended the Executive Employment Agreement, dated as of April 22, 2024, between the Company and Mr. Smith (the “Smith Employment Agreement”), to amend and restate the severance provisions of the Smith Employment Agreement. As amended, the Smith Employment Agreement provides that if the Company terminates Mr. Smith upon a Change of Control (as defined in the Amendment to Smith Agreement), Mr. Smith will be entitled to severance payments in cash in the amount of one-half of base salary in effect on the date of such termination payable in six monthly installments. The payment of severance may be conditioned on receiving a release of any and all claims that Mr. Smith may have against the Company.
The Amendment to Smith Agreement is filed as Exhibit 10.9 to this Quarterly Report on Form 10-Q, and the description above is qualified in its entirety by reference to the full text of such exhibit.
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Contractual Obligations
Summary of Future Contractual Financial Obligations
The following table outlines our future contractual financial obligations by period in which payment is expected, as of June 30, 2024:
| Total | Short-Term | Long-Term | ||||||||||
| Operating lease obligations | $ | 186,999 | $ | 86,553 | $ | 100,446 | ||||||
| Loans payable | $ | 795,641 | 795,641 | 0 | ||||||||
| Total contractual obligations | $ | 982,640 | $ | 882,194 | $ | 100,446 | ||||||
Midwestern Settlement Agreement
On April 11, 2024, under the Amendment No. 1 to Settlement Agreement and Release (the “Amendment to Midwestern Release Agreement”), dated as of April 11, 2024, between the Company and Midwestern Interactive, LLC, a Missouri limited liability company (“Midwestern”), the Company and Midwestern agreed to amend the Settlement Agreement and Release, dated as of December 12, 2023, between the Company and Midwestern (the “Midwestern Release Agreement”). Pursuant to the Midwestern Release Agreement, the Company was required to pay Midwestern a total of $600,000 (the “Midwestern Release Amount”), of which $300,000 was to be paid within three business days of December 12, 2023, and the remaining $300,000 (the “Second Tranche”) was to be paid on or before April 12, 2024. The Company paid the first amount of $300,000 timely and in full. Under the Amendment to Midwestern Release Agreement, the Second Tranche must be paid with interest on the outstanding amount at 6% per annum commencing April 13, 2024, according to the following schedule: $200,000 must be paid on or before April 12, 2024; $25,000 with accrued interest must be paid on or before May 31, 2024; $25,000 with accrued interest must be paid on or before June 30, 2024; $25,000 with accrued interest must be paid on or before July 31, 2024; and $25,000 with accrued interest must be paid on or before August 31, 2024.
In addition, the Company agreed to execute an Amended Stipulation to Final Judgment and Confessed Judgment (the “Midwestern Stipulation”) and an Amended Affidavit of Verified Confession of Judgment in favor of Midwestern as to the obligations to pay the Midwestern Release Amount plus interest accruing on the unpaid portion of the Midwestern Release Amount from and including April 13, 2024 plus any costs or expenses, including, but not limited to, attorney’s fees and costs expended to pursue the matter to judgment, and to enforce and collect the judgment, if necessary, if the terms and conditions of the Midwestern Settlement Agreement, as amended, and the Midwestern Stipulation are not fully adhered to.
The Company and Midwestern entered into the Midwestern Release Agreement, as amended, to resolve a dispute between them involving allegations, on the one hand, by Midwestern that it performed work on behalf of the Company for which Midwestern had not been paid pursuant to a Work for Hire – Acknowledgement and Assignment, dated December 21, 2022 (the “Work For Hire Agreement”), and, on the other hand, by the Company that Midwestern did not perform as required by the Work For Hire Agreement.
The Amendment to Midwestern Release Agreement is filed as Exhibit 10.10 to this Quarterly Report on Form 10-Q, and the description above is qualified in its entirety by reference to the full text of such exhibit.
Contractual Obligations to Boustead Securities, LLC
Under the Boustead Engagement Letter, we must compensate Boustead with a cash fee equal to 7% and non-accountable expense allowance equal to 1% of the gross proceeds received by the Company from the sale of securities in an investment transaction, or up to 10% of the gross proceeds from certain other merger, acquisition, or joint venture, strategic alliance, license, research and development, or other similar transactions, with a party, including any investor in a private placement in which Boustead served as placement agent, or in our recent initial public offering in November 2023, or who became aware of the Company or who became known to the Company prior to the termination or expiration of the Boustead Engagement Letter, for such transactions that occur during the 12-month period following the termination or expiration of the Boustead Engagement Letter (the “Tail Rights”). The Boustead Engagement Letter will expire upon the later to occur of November 16, 2024 (12 months from the completion date of the initial public offering), or mutual written agreement of the Company and Boustead. Notwithstanding the foregoing, in the event the Boustead Engagement Letter is terminated for “Cause,” which shall mean a material breach by Boustead of the Boustead Engagement Letter, and which such material breach is not cured, no Tail Rights will be due.
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The Boustead Engagement Letter and the Underwriting Agreement provide Boustead a right of first refusal (the “Right of First Refusal”) for two years following the consummation of the Company’s initial public offering on November 16, 2023, or 18 months following the termination or expiration of the engagement with Boustead to act as financial advisor or to act as joint financial advisor on or at least equal economic terms on any public or private financing (debt or equity), merger, business combination, recapitalization or sale of some or all of our equity or our assets. In the event that we engage Boustead to provide such services, Boustead will be compensated consistent with the Boustead Engagement Letter, unless we mutually agree otherwise. Notwithstanding the foregoing, in the event the Boustead Engagement Letter is terminated for “Cause,” which shall mean a material breach by Boustead of the engagement agreement, and which such material breach is not cured, Boustead’s Right of First Refusal will terminate, and the Company will be entitled to pursue any future transaction without adhering to the terms of the Right of First Refusal. The exercise of such right of termination for cause will eliminate the Company’s obligations with respect to the provisions of the Boustead Engagement Letter relating to the Right of First Refusal.
Under the Boustead Engagement Letter, in connection with a transaction as to which Boustead duly exercises the Right of First Refusal or is entitled to the Tail Rights, Boustead shall receive compensation as follows:
| ● | other than normal course of business activities, as to any sale, merger, acquisition, joint venture, strategic alliance, license, research and development, or other similar agreements, Boustead will accrue compensation under a percentage fee of the Aggregate Consideration (defined to include amounts paid or received, indebtedness assumed or remaining outstanding, fair market value of excluded assets, fair market value of retained or non-acquired ownership interests, and contingent payments in connection with the transaction) calculated as follows: |
| o | 10.0% for Aggregate Consideration of less than $10,000,000; plus | |
| o | 8.0% for Aggregate Consideration between $10,000,000 and $25,000,000; plus | |
| o | 6.0% for Aggregate Consideration between $25,000,001 and $50,000,000; plus | |
| o | 4.0% for Aggregate Consideration between $50,000,001 and $75,000,000; plus | |
| o | 2.0% for Aggregate Consideration between $75,000,001 and $100,000,000; plus | |
| o | 1.0% for Aggregate Consideration above $100,000,000; |
| ● | for any investment transaction including any common stock, preferred stock, convertible stock, limited liability company or limited partnership memberships, debt, convertible debentures, convertible debt, debt with warrants, or any other securities convertible into common stock, any form of debt instrument involving any form of equity participation, and including the conversion or exercise of any securities sold in any transaction, Boustead shall receive upon each investment transaction closing a success fee, payable in (i) cash, equal to 7% of the gross amount to be disbursed to the Company from each such investment transaction closing, plus (ii) a non-accountable expense allowance equal to 1% of the gross amount to be disbursed to the Company from each such investment transaction closing, plus (iii) warrants equal to 7% of the gross amount to be disbursed to the Company from each such investment transaction closing, including shares issuable upon conversion or exercise of the securities sold in any transaction, and in the event that warrants or other rights are issued in the investment transaction, 7% of the shares issuable upon exercise of the warrants or other rights, and in the event of a debt or convertible debt financing, warrants to purchase an amount of Company stock equal to 7% of the gross amount or facility received by the Company in a debt financing divided by the warrant exercise share. The warrant exercise price will be the lower of: (i) the price per share paid by investors in each respective financing; (ii) in the event that convertible securities are sold in the financing, the conversion price of such securities; or (iii) in the event that warrants or other rights are issued in the financing, the exercise price of such warrants or other rights; |
| ● | any warrants required to be issued to Boustead as compensation as described above will be transferable in accordance with the rules of FINRA and SEC regulations, exercisable from the date of issuance and for a term of five years, contain cashless exercise provisions, be non-callable and non-cancelable with immediate piggyback registration rights, have customary anti-dilution provisions and will have adjustments to the exercise price in the event that other Company outstanding warrants are re-priced below their exercise price or issues securities at a price below the exercise price per share, will have terms no less favorable than the terms of any warrants issued to participants in the related transaction, and provide for automatic exercise immediately prior to expiration; and |
| ● | reasonable out-of-pocket expenses in connection with the performance of its services, regardless of whether a transaction occurs. |
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The Boustead Engagement Letter contains other customary representations, warranties and covenants by the Company, customary conditions
to closing, indemnification obligations of the Company and Boustead, including for liabilities under the Securities Act, other obligations
of the parties, and termination provisions. The representations, warranties and covenants contained in the Boustead Engagement Letter
were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to such agreement,
and may be subject to limitations agreed upon by the contracting parties.
Pursuant to the Underwriting Agreement, as of November 13, 2023, we are subject to a lock-up agreement that provides that we may not, for 12 months, subject to certain exceptions, (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant or modify the terms of any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company; (ii) file or cause to be filed any registration statement with the SEC relating to the offering of any shares of capital stock of the Company or any securities convertible into or exercisable or exchangeable for shares of capital stock of the Company (other than pursuant to a registration statement on Form S-8 for employee benefit plans); or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of the Company, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of shares of capital stock of the Company or such other securities, in cash or otherwise. These restrictions do not apply to certain transactions including issuances of common stock under the Company’s existing and disclosed stock option or bonus plans, shares of common stock, options or convertible securities issued to banks, equipment lessors, other financial institutions, real property lessors pursuant to an equipment leasing or real property leasing transaction approved by a majority of the disinterested directors of the Company, or shares of common stock, options or convertible securities issued in connection with sponsored research, collaboration, technology license, development, marketing, investor relations or other similar agreements or strategic partnerships approved by a majority of the disinterested directors of the Company.
The Underwriting Agreement contains other customary representations, warranties and covenants by the Company, customary conditions to closing, indemnification obligations of the Company and Boustead, including for liabilities under the Securities Act, other obligations of the parties, and termination provisions. The representations, warranties and covenants contained in the Underwriting Agreement were made only for purposes of such agreement and as of specific dates, were solely for the benefit of the parties to such agreement, and may be subject to limitations agreed upon by the contracting parties.
The Underwriting Agreement is filed as Exhibit 10.29 to the 2023 Annual Report, and the description above is qualified in its entirety by reference to the full text of such exhibit.
Management Employment Agreements
Employment Agreement with Daniel Nelson
Under the Executive Employment Agreement, dated as of November 22, 2023, between the Company and Daniel Nelson, the Company’s Chief Executive Officer, Chairman, and a director (the “Original CEO Employment Agreement”), Mr. Nelson was employed in his current capacity as the Company’s Chief Executive Officer. Mr. Nelson’s annual base salary was $425,000 from November 22, 2023 to February 29, 2024, subject to modification upon execution of an amendment or addendum to the Original CEO Employment Agreement.
Pursuant to the Original CEO Employment Agreement, on November 22, 2023, Mr. Nelson was granted a stock option pursuant to the Plan and execution of a Stock Option Agreement. The stock option provides Mr. Nelson the right to purchase 100,000 shares of common stock of the Company at an exercise price of $2.25 per share. The option was exercisable as to half the shares immediately upon the date of grant and was subject to vesting as to the remaining half in six equal monthly portions after the grant date subject to continuous service.
Under the Amended and Restated Executive Employment Agreement, the Original CEO Employment Agreement was amended and restated to reduce Mr. Nelson’s annual base salary from $425,000 to $200,000, effective March 1, 2024.
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The Company will pay or reimburse Mr. Nelson for all reasonable and necessary expenses actually incurred or paid by Mr. Nelson during his employment in the performance of his duties. Mr. Nelson will be eligible to participate in comprehensive benefits plans of the Company, including medical, dental and life insurance options, and will be entitled to paid time off and holiday pay in accordance with the Company’s policies in effect from time to time.
The Amended and Restated CEO Employment Agreement originally provided that if the Company terminates Mr. Nelson without cause, Mr. Nelson will be entitled to the following severance payments: (i) cash in the amount of base salary in effect on the date of such termination payable in 12 monthly installments; and (ii) all previously earned, accrued, and unpaid benefits from the Company and its employee benefit plans. The payment of severance may be conditioned on receiving a release of any and all claims that Mr. Nelson may have against the Company.
The Original CEO Employment Agreement is filed as Exhibit 10.32 to the 2023 Annual Report. The Amended and Restated CEO Employment Agreement is filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 15, 2024 (the “2024 First Quarter Report”). The description above is qualified in its entirety by reference to the full text of such exhibits.
See “—Recent Developments – July 2024 Amendments to Management Agreements – Amendment to CEO Agreement” for related recent developments.
Consulting Agreement with Damon Rich
On June 13, 2024, the Compensation Committee approved a Consulting Agreement with Damon Rich, which was dated as of and entered into by the Company and Mr. Rich as of June 14, 2024 (the “Rich Consulting Agreement”). Under the Rich Consulting Agreement, Mr. Rich will continue to provide the consulting services to the Company that Mr. Rich has provided as its Interim Chief Financial Officer since his appointment to this position as of April 19, 2024. Under the Rich Consulting Agreement, the Company will pay Mr. Rich $120 per hour for up to 120 hours per month of invoiced services. Pursuant to the Rich Consulting Agreement, on June 14, 2024, Mr. Rich was granted an award of 20,000 shares of restricted common stock under the Plan, which vested upon grant. The grant is subject to the Company’s standard form of restricted stock award agreement under the Plan. The Company will reimburse Mr. Rich for all reasonable expenses incurred by Mr. Rich directly related to the performance of services under the Rich Consulting Agreement. The Rich Consulting Agreement may be terminated by either party upon five days’ written notice.
The Rich Consulting Agreement is filed as Exhibit 10.11 to this Quarterly Report on Form 10-Q, and the description above is qualified in its entirety by reference to the full text of such exhibit.
Employment Agreement with Jeffry Hecklinski
Under the employment offer letter, dated March 7, 2023, between Jeffry Hecklinski and the Company (the “Former Hecklinski Employment Agreement”), Mr. Hecklinski was employed as the General Manager of the Company. Mr. Hecklinski’s annual base salary was $200,000. Pursuant to the Former Hecklinski Employment Agreement, on March 14, 2023, Mr. Hecklinski was granted a stock option pursuant to the Plan and execution of a stock option agreement in the Company’s standard form under the Plan. The stock option provides Mr. Hecklinski the right to purchase 40,000 shares of common stock of the Company at an exercise price of $3.10 per share. The option was vested and exercisable as to 10,000 shares immediately upon the date of grant, vested as to 7,500 shares on the one-year anniversary of the date of grant, and vests as to 625 shares at the end of each of the following 36 calendar months. Mr. Hecklinski was eligible to participate in standard benefits plans of the Company, including medical, dental and life insurance options, and was entitled to ten public holidays, ten vacation days, and five sick days per year, subject to the Company’s leave policies. Mr. Hecklinski’s employment was at-will.
The Hecklinski Employment Agreement amended, restated and superseded the Former Hecklinski Employment Agreement. Under the Hecklinski Employment Agreement, Mr. Hecklinski was employed as the Company’s President. Mr. Hecklinski’s annual base salary will remain $200,000. The Company agreed to pay or reimburse Mr. Hecklinski for all reasonable and necessary expenses actually incurred or paid by Mr. Hecklinski during his employment in the performance of his duties under the Hecklinski Employment Agreement. Mr. Hecklinski will be eligible to participate in comprehensive benefits plans of the Company, including medical, dental and life insurance options, and will be entitled to ten public holidays, ten vacation days, and five sick days per year, subject to the Company’s leave policies.
On March 12, 2024, the Compensation Committee granted an award of 120,000 shares of restricted common stock to Mr. Hecklinski, which vested as to 30,000 shares upon grant and vests as to the remaining 90,000 shares in eight equal quarterly increments over the two years following the grant date. The grant is subject to the Company’s standard form of restricted stock award agreement under the Plan.
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On June 13, 2024, the Compensation Committee granted an award of 100,000 shares of restricted common stock under the Plan to Mr. Nelson. The restricted shares are subject to the following vesting schedule: 50,000 of the restricted shares will vest on each of September 13, 2024, December 13, 2024, March 13, 2025, and June 13, 2025. The grant is subject to the Company’s standard form of restricted stock award agreement under the Plan.
The Former Hecklinski Employment Agreement is filed as Exhibit 10.9 to the 2024 First Quarter Report and the Hecklinski Employment Agreement is filed as Exhibit 10.12 to this Quarterly Report on Form 10-Q, and the description above is qualified in its entirety by reference to the full text of such exhibits.
See “—Recent Developments – July 2024 Amendments to Management Agreements – Amendment to Hecklinski Agreement” for related recent developments.
Employment Agreement with Craig Smith
Under the Smith Employment Agreement, Mr. Smith was employed as the Company’s Chief Operating Officer. Mr. Smith’s annual base salary will be $150,000. The Company agreed to pay or reimburse Mr. Smith for all reasonable and necessary expenses actually incurred or paid by Mr. Smith during his employment in the performance of his duties under the Smith Employment Agreement. Mr. Smith will be eligible to participate in comprehensive benefits plans of the Company, including medical, dental and life insurance options, and will be entitled to ten public holidays, ten vacation days, and five sick days per year, subject to the Company’s leave policies.
On March 12, 2024, the Compensation Committee granted an award of 90,000 shares of restricted common stock under the Plan to Mr. Smith, which vested as to 22,500 shares upon grant and vests as to the remaining 67,500 shares in eight approximately equal quarterly increments over the two years following the grant date. The grant is subject to the Company’s standard form of restricted stock award agreement under the Plan.
On June 13, 2024, the Compensation Committee granted an award of 100,000 shares of restricted common stock under the Plan to Mr. Smith. The restricted shares are subject to the following vesting schedule: 50,000 of the restricted shares will vest on each of September 13, 2024, December 13, 2024, March 13, 2025, and June 13, 2025. The grant is subject to the Company’s standard form of restricted stock award agreement under the Plan.
The Smith Employment Agreement is filed as Exhibit 10.13 to this Quarterly Report on Form 10-Q, and the description above is qualified in its entirety by reference to the full text of such exhibit.
See “—Recent Developments – July 2024 Amendments to Management Agreements – Amendment to Smith Agreement” for related recent developments.
Management Indemnification Agreements and Insurance
We have separately entered into an indemnification agreement with each of our directors and executive officers. Each indemnification agreement provides for indemnification to the fullest extent permitted by law, including: (i) all expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by an executive officer, or on their behalf, in connection with any proceeding other than proceedings by or in the right of the Company or any claim, issue or matter therein, if the executive officer acted in good faith and in a manner the executive officer reasonably believed to be in or not opposed to the best interests of the Company, and with respect to any criminal proceeding, had no reasonable cause to believe the executive officer’s conduct was unlawful; (ii) all expenses actually and reasonably incurred by an executive officer, or on their behalf, in connection with a proceedings by or in the right of the Company if the executive officer acted in good faith and in a manner the executive officer reasonably believed to be in or not opposed to the best interests of the Company, provided that if applicable law so provides, no indemnification against such expenses shall be made in respect of any claim, issue or matter in such proceeding as to which the executive officer shall have been adjudged to be liable to the Company unless and to the extent that the Court of Chancery of the State of Delaware shall determine that such indemnification may be made; (iii) to the extent that a executive officer is, by reason of the executive officer’s executive officer status, a party to and is successful, on the merits or otherwise, in any proceeding, including by dismissal of such proceeding with or without prejudice, then the executive officer shall be indemnified to the maximum extent permitted by law, as such may be amended from time to time, against all expenses actually and reasonably incurred by the executive officer or on the executive officer’s behalf in connection therewith; and (iv) all expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by an executive officer or on an executive officer’s behalf if, by reason of the executive officer’s status as an executive officer, the executive officer is, or is threatened to be made, a party to or participant in any proceeding (including a proceeding by or in the right of the Company), including, without limitation, all liability arising out of the negligence or active or passive wrongdoing of the executive officer, except where the payment is finally determined (under the procedures, and subject to the presumptions, set forth in the indemnification agreements) to be unlawful. The Company shall also advance all such expenses incurred by or on behalf of each executive officer in connection with any of the above proceedings by reason of the executive officer’s executive officer status within 30 days after the receipt by the Company of a statement or statements from the executive officer requesting such advance or advances from time to time, whether prior to or after final disposition of such proceeding. Such statement or statements shall reasonably evidence the expenses incurred by the executive officer and shall include or be preceded or accompanied by a written undertaking by or on behalf of the executive officer to repay any expenses advanced if it shall ultimately be determined that the executive officer is not entitled to be indemnified against such expenses. Any advances and undertakings to repay shall be unsecured and interest-free. The indemnification agreements also provide for payments by the Company for the entire amount of any judgment or settlement of any action, suit or proceeding in which it is liable or would be liable if joined in such action, subject to the other terms and provisions of the indemnification agreements, and certain other indemnification and payment obligations. The indemnification agreements also provide that if we maintain a directors’ and officers’ liability insurance policy, that each director and executive officer will be covered by the policy to the maximum extent of the coverage available for any of the Company’s directors or executive officers.
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The form of the indemnification agreement with each executive officer and director of the Company is filed as Exhibit 10.14 to the 2023 Annual Report, and the description above is qualified in its entirety by reference to the full text of such exhibit.
We have obtained standard directors and officers liability insurance under which coverage is provided (a) to our directors and officers against loss rising from claims made by reason of breach of duty or other wrongful act, and (b) to us with respect to payments which we may make to such officers and directors pursuant to the indemnification agreements described above or otherwise as a matter of law.
Management Confidentiality Agreements
Each of the executive officers named above was required to sign an Employee Confidential Information and Inventions Assignment Agreement or similar agreement which prohibits unauthorized use or disclosure of the Company’s proprietary information, contains a general assignment of rights to inventions and intellectual property rights, non-competition provisions that apply during the term of employment, non-solicitation provisions that apply during the term of employment and for one year after the term of employment, and non-disparagement provisions that apply during and after the term of employment.
The Employee Confidential Information and Inventions Assignment Agreement executed by Craig Smith and the Confidential Information and Inventions Assignment Agreement executed by Damon Rich are filed as Exhibit 10.14 and Exhibit 10.15 to this Quarterly Report on Form 10-Q, respectively, and the description above is qualified in its entirety by reference to the full text of such exhibits. The Employee Confidential Information and Inventions Assignment Agreement executed by each of Daniel Nelson and Jeffry Hecklinski are filed as Exhibit 10.11 and Exhibit 10.33 to the 2023 Annual Report, respectively, and the description above is qualified in its entirety by reference to the full text of such exhibits.
Debt
May 2024 Private Placement of Convertible Senior Secured Promissory Note and Warrants
On May 16, 2024, the Company entered into a Securities Purchase Agreement, dated as of May 16, 2024, between the Company and FirstFire, as amended (as amended, the “May 2024 FF Purchase Agreement”) by that certain Amendment to the Transaction Documents, dated as of June 18, 2024, between the Company and FirstFire (the “Amendment to May 2024 FF Transaction Documents”), pursuant to which, as a private placement transaction, the Company was required to issue FirstFire a senior secured promissory note, as amended by that certain Amendment to Senior Secured Promissory Note and Warrants, dated as of May 20, 2024, between the Company and FirstFire (the “Amendment to May 2024 FF Note and May 2024 FF Warrants”), in the principal amount of $412,500 (as amended, the “May 2024 FF Note”); 187,500 shares of common stock (the “May 2024 FF Commitment Shares, as partial consideration for the purchase of the May 2024 FF Note; a warrant to purchase up to 1,375,000 shares of common stock at an initial exercise price of $0.30 per share, as amended by the Amendment to May 2024 FF Note and May 2024 FF Warrants (as amended, the “First May 2024 FF Warrant”), as partial consideration for the purchase of the May 2024 FF Note; and a warrant to purchase up to 250,000 shares of common stock at an initial exercise price of $0.01 per share exercisable from the date of an “Event of Default” as defined by the May 2024 FF Note (an “FF Notes Event of Default”) under the May 2024 FF Note, as amended by the Amendment to May 2024 FF Note and May 2024 FF Warrants (as amended, the “Second May 2024 FF Warrant” and together with the First May 2024 FF Warrant, the “May 2024 FF Warrants”), as partial consideration for the purchase of the May 2024 FF Note.
The Company also entered into a Security Agreement, dated as of May 16, 2024, between the Company and FirstFire (the “May 2024 FF Security Agreement”), under which the Company agreed to grant FirstFire a security interest to secure the Company’s obligations under the May 2024 FF Note in all assets of the Company except for a certificate of deposit account with Commerce Bank of Arizona (“CBAZ”) with an approximate balance of $2,100,000 together with (i) all interest, whether now accrued or hereafter accruing; (ii) all additional deposits made to such account; (iii) any and all proceeds from such account; and (iv) all renewals, replacements and substitutions for any of the foregoing (the “CBAZ Collateral”), which is subject to that certain Assignment of Deposit Account, dated as of December 11, 2023, between the Company and CBAZ (the “CBAZ Assignment of Deposit”), until the full repayment of that certain promissory note in the original principal amount of $2,000,000 issued by the Company to CBAZ, dated as of December 11, 2023 and maturing on December 11, 2024 (the “Second CBAZ Promissory Note”), pursuant to that certain Business Loan Agreement, dated as of December 11, 2023, between the Company and CBAZ (the “Second CBAZ Loan Agreement”).
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The closing of the initial transaction contemplated by the May 2024 FF Purchase Agreement, including FirstFire’s payment of the purchase price of $375,000, was subject to certain conditions. On May 20, 2024, such conditions were met. As a result, the May 2024 FF Commitment Shares, the May 2024 FF Note and the May 2024 FF Warrants were released from escrow and issued as of May 16, 2024, and FirstFire paid $375,000, of which the Company received $336,500 in net proceeds after deductions of the placement agent’s fee of $26,250 and non-accountable expense allowance of $3,750, and FirstFire counsel’s fees of $8,500.
May 2024 FF Purchase Agreement
Under the May 2024 FF Purchase Agreement, until the May 2024 FF Note has been fully converted or repaid, the May 2024 FF Note holder will have participation rights and rights of first refusal on any offers of the Company’s securities other than offerings previously disclosed in the Company’s reports filed with the SEC or any Excluded Issuance (as defined in the May 2024 FF Note and the June 2024 FF Note (as defined in “—June 2024 Private Placement of Convertible Senior Secured Promissory Note and Warrants”)), and most favored nation rights on any offers of the Company’s securities other than for an Excluded Issuance. The Company will also be prohibited from effecting or entering into an agreement involving a Variable Rate Transaction (as defined in the June 2024 FF Purchase Agreement (as defined in “—June 2024 Private Placement of Convertible Senior Secured Promissory Note and Warrants”) and the May 2024 FF Purchase Agreement) other than pursuant to an “at-the-market” agreement with a registered broker-dealer, whereby such registered broker-dealer is acting as principal in the purchase of common stock from the Company or an Equity Line of Credit (as defined in the May 2024 FF Note and the June 2024 FF Note), without the consent of FirstFire, which may not be unreasonably withheld. In addition, the Company may not issue or agree, propose, or offer to issue any shares of common stock or securities with underlying common stock prior to the 30th calendar day after the date of the May 2024 FF Purchase Agreement.
The May 2024 FF Purchase Agreement (as well as the May 2024 FF Note and the May 2024 FF Warrants) provides that the maximum amount of shares of common stock issuable under the May 2024 FF Note and the May 2024 FF Warrants is limited to the FF Exchange Limitation (as defined below) until we obtain stockholder approval (the “FF Stockholder Approval”) to issue shares in excess of 19.99% of the issued and outstanding common stock of the Company as of the date of the May 2024 FF Purchase Agreement, or 3,074,792 shares of common stock, which number of shares shall be reduced, on a share-for-share basis, by the number of shares of common stock issued or issuable pursuant to any transaction or series of transactions that may be aggregated with the transactions contemplated by the May 2024 FF Purchase Agreement under applicable rules of the NYSE American (“FF Exchange Limitation”). The Company is required to hold a meeting of stockholders on or before the date that is six months after the date of the May 2024 FF Purchase Agreement, for the purpose of obtaining the FF Stockholder Approval, with the recommendation of the Company’s board of directors that such proposal be approved; the Company must solicit proxies from the Company’s stockholders in connection with the proposal in the same manner as all other management proposals in such proxy statement; and all management-appointed proxyholders must vote their proxies in favor of such proposal. In addition, all members of the Company’s board of directors and all of the Company’s executive officers must vote in favor of such proposal, for purposes of obtaining the FF Stockholder Approval, with respect to all of the Company’s securities then held by such persons, and the Company must generally use the Company’s commercially reasonable efforts to obtain the FF Stockholder Approval. If the Company does not obtain the FF Stockholder Approval at the first meeting at which the proposal is voted upon, the Company must call a stockholder meeting as often as possible thereafter to seek the FF Stockholder Approval until the FF Stockholder Approval is obtained.
May 2024 FF Registration Rights Agreement
As required by the May 2024 FF Purchase Agreement, the Company entered into a Registration Rights Agreement, dated as of May 16, 2024, between the Company and FirstFire (the “May 2024 FF Registration Rights Agreement”), pursuant to which the Company agreed to register the resale of the May 2024 FF Commitment Shares and the shares of common stock underlying the May 2024 FF Note and the May 2024 FF Warrants under the Securities Act pursuant to a registration statement. The Company agreed to file the registration statement with the SEC within 90 calendar days from the date of the May 2024 FF Purchase Agreement and have the registration statement declared effective by the SEC within 120 days from the date of the May 2024 FF Purchase Agreement. The Company also granted FirstFire certain piggyback registration rights pursuant to the May 2024 FF Purchase Agreement. A registration statement was filed with the SEC on July 5, 2024 in order to comply with these requirements. Pursuant to the May 2024 FF Registration Rights Agreement, if the total number of shares issuable upon conversion of the May 2024 FF Notes or upon exercise of the May 2024 FF Warrants becomes greater than the number that may be offered for resale by means of the prospectus that forms a part of such registration statement, then the Company will be required to register the additional shares of common stock for resale by means of one or more separate prospectuses.
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May 2024 FF Note
The principal amount of the May 2024 FF Note is based on an original issue discount of 10% and will bear interest at the rate of 10% per annum on a 365-day basis. The interest will be guaranteed, which requires that all interest that would accrue through the latest date of maturity (equal to $41,250) be paid. The May 2024 FF Note will mature on the earlier of the 12-month anniversary date of the issuance date, or May 16, 2025, and the date of the consummation of a sale, conveyance or disposition of all or substantially all of the assets of the Company, or the consolidation, merger or other business combination of the Company with or into any other entity when the Company is not the survivor.
Under the May 2024 FF Note, the Company is required to make eight monthly amortization payments of $56,715 each, commencing September 16, 2024, and pay the entire remaining outstanding balance on May 16, 2025. The Company may prepay the May 2024 FF Note any time prior to an FF Notes Event of Default on 15 trading days’ prior written notice for an amount equal to 110% of the principal amount then outstanding and 110% of the accrued and unpaid interest outstanding.
Under the May 2024 FF Note, the holder of the May 2024 FF Note may at any time and from time to time, subject to a limitation on beneficial ownership to 4.99% of the common stock that would be outstanding immediately after conversion or exercise (the “FF Beneficial Ownership Limitation”) and the FF Exchange Limitation, convert the outstanding principal amount and accrued interest under the May 2024 FF Note into shares of common stock at an initial conversion price of $0.30 per share, subject to adjustment, including adjustments under full-ratchet anti-dilution provisions for any issuances of securities at a lower price per share or per underlying share of common stock to match the price of such lower-priced securities, other than for an Excluded Issuance (the “FF Notes Fixed Conversion Price”). If the Company fails to make an amortization payment when due under the May 2024 FF Note, the balance remaining under the May 2024 FF Note will become convertible, and the conversion price will become the lower of the then-applicable FF Notes Fixed Conversion Price and 80% of the lowest closing price of the common stock during the ten trading days prior to the date of a conversion of the May 2024 FF Note. If an FF Notes Event of Default occurs, then the balance remaining under the May 2024 FF Note will become convertible at the lower of the FF Notes Fixed Conversion Price, the closing price of the common stock on the date of the FF Notes Event of Default (or the next trading day if such date is not on a trading day), and $0.195 per share.
An FF Notes Event of Default will occur upon the occurrence of any of the following: The failure to pay obligations when due; failure to issue shares upon conversions as required; a material breach of representations and warranties or covenants; the entry of material judgments against certain of the Company’s subsidiaries; the initiation of bankruptcy or insolvency proceedings of certain of our subsidiaries; defaults on other indebtedness; failure to remain subject to and compliant with the Exchange Act; failure to maintain intellectual property and other necessary assets; the restatement of any financial statements; disclosure or attempted disclosure of material non-public information to the May 2024 FF Note holder; unavailability of Rule 144 under the Securities Act (“Rule 144”) for resales of the Company’s securities on or after six months from the issuance date of the May 2024 FF Note; and the delisting or suspension of listing of the Company’s common stock by the NYSE American. The occurrence of an FF Notes Event of Default will result in a number of additional obligations to the May 2024 FF Note holder, including acceleration and multiplication by 125% of the May 2024 FF Note balance; default interest at the rate of the lesser of (i) 15% per annum and (ii) the maximum amount permitted by law from the due date thereof until the same is paid; and the increase of the principal balance of the May 2024 FF Note by $3,000 each calendar month until the May 2024 FF Note is repaid in its entirety.
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If, at any time prior to the full repayment or full conversion of all amounts owed under the May 2024 FF Note, the Company receives cash proceeds from any source or series of related or unrelated sources on or after the date of the May 2024 FF Note, including but not limited to, from payments from customers, the issuance of equity or debt, the incurrence of Indebtedness (as defined in the June 2024 FF Note and the May 2024 FF Note), a merchant cash advance, sale of receivables or similar transaction, the exercise of outstanding warrants of the Company, the issuance of securities pursuant to an Equity Line of Credit of the Company or the Company’s offering of securities under Regulation A under the Securities Act, or the Company’s sale of assets (including but not limited to real property), the Company shall, within one business day of the Company’s receipt of such proceeds, inform the holder of the May 2024 FF Note of or publicly disclose such receipt, following which the holder of the May 2024 FF Note shall have the right in its sole discretion to require the Company to immediately apply up to 100% of such proceeds to repay all or any portion of the outstanding principal amount and interest (including any default interest) then due under the May 2024 FF Note. The 110% prepayment premium will apply to any repayment of the May 2024 FF Note pursuant to this requirement prior to the occurrence of an FF Notes Event of Default.
The May 2024 FF Note will be a senior secured obligation of the Company, with priority over all existing and future indebtedness of the Company, except that the May 2024 FF Note will be junior in priority to the Second CBAZ Promissory Note and, in accordance with the Amendment to May 2024 FF Transaction Documents, pari passu in priority to the June 2024 FF Note. The Company may not incur any Indebtedness that is senior to or pari passu with the obligations under the May 2024 FF Note. During the period that any obligation under the May 2024 FF Note remains outstanding, the Company may not, without the May 2024 FF Note holder’s prior written consent, declare or pay any dividends or other distributions on shares of capital stock except in the form of shares of common stock or distributions pursuant to a stockholders’ rights plan approved by a majority of the Company’s disinterested directors. The Company also may not repurchase any capital stock or repay any indebtedness other than the May 2024 FF Note and the Second CBAZ Promissory Note while the Company has any obligation under the May 2024 FF Note without FirstFire’s written consent. The Company also may not (a) change the nature of its business; (b) sell, divest, change the structure of any material assets other than in the ordinary course of business; (c) enter into a Variable Rate Transaction; or (d) enter into any merchant cash advance transaction, sale of receivables transaction, or any other similar transaction, without the consent of FirstFire, which may not be unreasonably withheld. The May 2024 FF Note also contains a most favored nations provision with respect to the issuance of any debt securities of the Company.
May 2024 FF Warrants
First May 2024 FF Warrant
The First May 2024 FF Warrant will be exercisable for up to 1,375,000 shares of common stock from the date of issuance until the fifth anniversary of the date of issuance. The holder may exercise the First May 2024 FF Warrant by a “cashless” exercise if the Market Price (as defined below) is less than the exercise price then in effect and there is no effective registration statement for the resale of the shares. The “Market Price” is defined as the highest traded price of the common stock during the 30 trading days before the date of the cashless exercise. The number of shares issuable upon cashless exercise will equal (i) the product of (a) the number of shares of common stock that the holder elects to purchase under the First May 2024 FF Warrant, times (b) the Market Price less the exercise price, divided by (ii) the Market Price.
Under the First May 2024 FF Warrant, the holder of the First May 2024 FF Warrant may at any time and from time to time, subject to the FF Beneficial Ownership Limitation and the FF Exchange Limitation, exercise the First May 2024 FF Warrant to purchase shares of common stock at an initial exercise price of $0.30 per share, subject to adjustment, including adjustments under full-ratchet anti-dilution provisions for any issuances of securities at a lower price per share or per underlying share of common stock other than for an Excluded Issuance, or for any issuances of securities at a price which varies or may vary with the market price of the common stock, to match the price of such lower-priced or variable-priced securities, or for other dilution events. Simultaneous with any adjustment to the exercise price as a result of an anti-dilution adjustment, the number of shares underlying the First May 2024 FF Warrant will be adjusted proportionately so that after such adjustment the aggregate exercise price payable under the First May 2024 FF Warrant for the adjusted number of shares underlying the First May 2024 FF Warrant will be the same as the aggregate exercise price in effect immediately prior to such adjustment (without regard to any limitations on exercise). The First May 2024 FF Warrant also contains rights to any rights to purchase securities of the Company distributed pro rata to the stockholders of the Company.
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Second May 2024 FF Warrant
The Second May 2024 FF Warrant will be exercisable for up to 250,000 shares of common stock at an initial exercise price of $0.01 per share from the date (the “Second FF Warrants Trigger Date”) of an FF Notes Event of Default until the fifth anniversary of the Second FF Warrants Trigger Date, subject to the FF Beneficial Ownership Limitation and the FF Exchange Limitation. The Second May 2024 FF Warrant will automatically be canceled if the May 2024 FF Note is fully repaid in cash prior to any FF Notes Event of Default. The Second May 2024 FF Warrant otherwise has the same terms and conditions as the First May 2024 FF Warrant.
The foregoing summary of the terms and conditions of the May 2024 FF Note, the First May 2024 FF Warrant, the Second May 2024 FF Warrant, the May 2024 FF Purchase Agreement, the May 2024 FF Security Agreement, the May 2024 FF Registration Rights Agreement, and the Amendment to May 2024 FF Note and May 2024 FF Warrants does not purport to be complete and is qualified in its entirety by reference to the full text of the May 2024 FF Note, the First May 2024 FF Warrant, the Second May 2024 FF Warrant, the May 2024 FF Purchase Agreement, the May 2024 FF Security Agreement, the May 2024 FF Registration Rights Agreement, and the Amendment to May 2024 FF Note and May 2024 FF Warrants, copies or forms of which are filed as Exhibit 4.4, Exhibit 4.5, Exhibit 4.6, Exhibit 10.16, Exhibit 10.17, Exhibit 10.18, and Exhibit 10.19 to this Quarterly Report on Form 10-Q, respectively.
June 2024 Amendment to May 2024 Transaction Documents with FirstFire
On June 18, 2024, the Company entered into the Amendment to May 2024 FF Transaction Documents. The Amendment to May 2024 FF Transaction Documents contained agreements relating to the May 2024 FF Purchase Agreement and the May 2024 FF Note and an amendment to the original May 2024 FF Purchase Agreement.
The Amendment to May 2024 FF Transaction Documents provided that neither the Company’s execution of the June 2024 FF Purchase Agreement and the related transaction documents, nor the Company’s issuance of securities to FirstFire pursuant to the June 2024 FF Purchase Agreement and the related transaction documents, will cause a breach of any provision of the May 2024 FF Purchase Agreement or an FF Notes Event of Default. The Amendment to May 2024 FF Transaction Documents further provided that the issuance of the June 2024 FF Note was permitted, and that the June 2024 FF Note will be pari passu in priority to the May 2024 FF Note, notwithstanding anything to the contrary in the May 2024 FF Purchase Agreement or the May 2024 FF Note. In addition, the original May 2024 FF Purchase Agreement was amended to delete a provision that, upon meeting certain terms and conditions, at the Company’s option, FirstFire would be required to fund the purchase price of at least an additional $175,000 under the same terms and conditions as the May 2024 FF Purchase Agreement and related transaction documents.
The foregoing summary of the terms and conditions of the Amendment to May 2024 FF Transaction Documents does not purport to be complete and is qualified in its entirety by reference to the full text of the Amendment to May 2024 FF Transaction Documents, a copy of which is filed as Exhibit 10.20 to this Quarterly Report on Form 10-Q.
Placement Agent Compensation Relating to May 2024 Private Placement
Under the Boustead Engagement Letter and the Underwriting Agreement, under which Boustead acted as the placement agent in connection with the initial transaction contemplated by the May 2024 FF Purchase Agreement, the Company paid to Boustead a cash fee of $26,250, equal to 7% of the purchase price of the May 2024 FF Note, and a non-accountable expense allowance of $3,750, equal to 1% of the purchase price of the May 2024 FF Note. The Company also issued Boustead 13,125 shares of common stock, equal to 7% of the May 2024 FF Commitment Shares. In addition, the Company issued a placement agent warrant to purchase up to 7% of the shares issuable upon exercise of the First May 2024 FF Warrant, or 96,250 shares, with an exercise price of $0.30 per share (the “FF Placement Agent Warrant”). The number of shares that may be issued upon exercise of the FF Placement Agent Warrant is limited by the FF Exchange Limitation until the Company obtains the FF Stockholder Approval. The FF Placement Agent Warrant will be exercisable for a period of five years from the date of issuance, contains cashless exercise provisions, and may have certain registration rights.
Under the Boustead Engagement Letter, the Company also issued to Boustead a placement agent warrant to purchase up to a number of shares equal to 7% of the shares of common stock issuable upon exercise of the Second May 2024 FF Warrant, or 17,500 shares, at an exercise price of $0.01 per share (the “Second May 2024 Placement Agent Warrant”), exercisable for five years from the Second FF Warrants Trigger Date.
On June 18, 2024, the Company entered into a Warrant Cancellation Agreement, dated as of June 18, 2024, between the Company and Boustead (the “Warrant Cancellation Agreement”), which provided that the Second May 2024 Placement Agent Warrant was cancelled and of no further effect, and that no other compensation will be issued to Boustead by the Company in lieu of the Second May 2024 Placement Agent Warrant. No portion of the Second May 2024 Placement Agent Warrant had been exercised prior to its cancellation.
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General
The foregoing summary of the terms and conditions of the FF Placement Agent Warrant and the Warrant Cancellation Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the FF Placement Agent Warrant and the Warrant Cancellation Agreement, forms or copies of which are filed as Exhibit 4.7 and Exhibit 10.21 to this Quarterly Report on Form 10-Q, respectively.
June 2024 Private Placement of Convertible Senior Secured Promissory Note and Warrants
On June 18, 2024, the Company entered into the Securities Purchase Agreement, dated as of June 18, 2024 (the “June 2024 FF Purchase Agreement”), between the Company and FirstFire, pursuant to which, as a private placement transaction, the Company was required to issue FirstFire a senior secured promissory note on June 18, 2024, in the principal amount of $198,611 (the “June 2024 FF Note” and together with the May 2024 FF Note, the “FF Notes”); 90,277 shares of common stock (the “June 2024 FF Commitment Shares”), as partial consideration for the purchase of the June 2024 FF Note; a warrant at an initial exercise price of $0.30 per share (the “First June 2024 FF Warrant”) for the purchase of up to 662,036 shares of common stock at an initial exercise price of $0.30 per share, as partial consideration for the purchase of the June 2024 FF Note; and a warrant (the “Second June 2024 FF Warrant” and together with the First June 2024 FF Warrant, the “June 2024 FF Warrants” and the June 2024 FF Warrants together with the May 2024 FF Warrants, the “FF Warrants”) for the purchase of up to 120,370 shares of common stock at an initial exercise price of $0.01 per share exercisable from the Second FF Warrants Trigger Date, that we issued to FirstFire as partial consideration for the purchase of the June 2024 FF Note.
The Company also entered into a Security Agreement, dated as of June 18, 2024, between the Company and FirstFire (the “June 2024 FF Security Agreement”), under which the Company agreed to grant FirstFire a security interest to secure the Company’s obligations under the June 2024 FF Note in all assets of the Company except for the CBAZ Collateral, until the full repayment of the Second CBAZ Promissory Note, pursuant to the Second CBAZ Loan Agreement.
The closing of the transaction contemplated by the June 2024 FF Purchase Agreement, including FirstFire’s payment of the purchase price of $175,000, was subject to certain conditions. On June 18, 2024, such conditions were met. As a result, the June 2024 FF Commitment Shares, the June 2024 FF Note and the June 2024 FF Warrants were issued as of June 18, 2024, and FirstFire paid $175,000, of which the Company received $154,500 in net proceeds after deductions of the placement agent’s fee of $12,250 and non-accountable expense allowance of $1,750, and FirstFire counsel’s fees of $6,500.
June 2024 FF Purchase Agreement
Under the June 2024 FF Purchase Agreement, until the June 2024 FF Note has been fully converted or repaid, the June 2024 FF Note holder will have participation rights and rights of first refusal on any offers of the Company’s securities other than offerings previously disclosed in the Company’s reports filed with the SEC or any Excluded Issuance, and most favored nation rights on any offers of the Company’s securities other than for an Excluded Issuance. The Company will also be prohibited from effecting or entering into an agreement involving a Variable Rate Transaction other than pursuant to an “at-the-market” agreement with a registered broker-dealer, whereby such registered broker-dealer is acting as principal in the purchase of common stock from the Company or an Equity Line of Credit, without the consent of FirstFire, which may not be unreasonably withheld. In addition, the Company may not issue or agree, propose, or offer to issue any shares of common stock or securities with underlying common stock prior to the 30th calendar day after the date of the June 2024 FF Purchase Agreement other than an Excluded Issuance.
The June 2024 FF Purchase Agreement (as well as the June 2024 FF Note and the June 2024 FF Warrants) provides that the maximum amount of shares of common stock issuable under the June 2024 FF Note and the June 2024 FF Warrants is limited to the FF Exchange Limitation until the Company obtains the FF Stockholder Approval. The Company is required to hold a meeting of stockholders on or before the date that is six months after the date of the June 2024 FF Purchase Agreement, for the purpose of obtaining the FF Stockholder Approval, with the recommendation of the Company’s board of directors that such proposal be approved; the Company must solicit proxies from the Company’s stockholders in connection with the proposal in the same manner as all other management proposals in such proxy statement; and all management-appointed proxyholders must vote their proxies in favor of such proposal. In addition, all members of the Company’s board of directors and all of the Company’s executive officers must vote in favor of such proposal, for purposes of obtaining the FF Stockholder Approval, with respect to all of the Company’s securities then held by such persons, and the Company must generally use the Company’s commercially reasonable efforts to obtain the FF Stockholder Approval. If the Company does not obtain the FF Stockholder Approval at the first meeting at which the proposal is voted upon, the Company must call a stockholder meeting as often as possible thereafter to seek the FF Stockholder Approval until the FF Stockholder Approval is obtained.
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June 2024 FF Registration Rights Agreement
As required by the June 2024 FF Purchase Agreement, the Company entered into a Registration Rights Agreement, dated as of June 18, 2024, between the Company and FirstFire (the “June 2024 FF Registration Rights Agreement”), pursuant to which the Company agreed to register the resale of the June 2024 FF Commitment Shares and the shares of common stock underlying the June 2024 FF Note and the June 2024 FF Warrants under the Securities Act pursuant to a registration statement. The Company agreed to file the registration statement with the SEC within 90 calendar days from the date of the June 2024 FF Purchase Agreement and to have the registration statement declared effective by the SEC within 120 days from the date of the June 2024 FF Purchase Agreement. The Company also granted FirstFire certain piggyback registration rights pursuant to the June 2024 FF Purchase Agreement. A registration statement was filed with the SEC on July 5, 2024 in order to comply with these requirements. Pursuant to the June 2024 FF Registration Rights Agreement, if the total number of shares issuable upon conversion of the June 2024 FF Note or upon exercise of the June 2024 FF Warrants becomes greater than the number that may be offered for resale by means of the prospectus that forms a part of such registration statement, then the Company will be required to register the additional shares of common stock for resale by means of one or more separate prospectuses.
June 2024 FF Note
The principal amount of the June 2024 FF Note is based on an original issue discount of 10% and will bear interest at the rate of 10% per annum on a 365-day basis. The interest will be guaranteed, which requires that all interest that would accrue through the latest date of maturity (equal to approximately $19,861) be paid. The June 2024 FF Note will mature on the earlier of the 12-month anniversary date of the issuance date, or June 18, 2025, and the date of the consummation of a sale, conveyance or disposition of all or substantially all of the assets of the Company, or the consolidation, merger or other business combination of the Company with or into any other entity when the Company is not the survivor.
Under the June 2024 FF Note, the Company is required to make eight monthly amortization payments of approximately $27,309 each, commencing October 18, 2024, and pay the entire remaining outstanding balance on June 18, 2025. The Company may prepay the June 2024 FF Note any time prior to an FF Notes Event of Default on 15 trading days’ prior written notice for an amount equal to 110% of the principal amount then outstanding and 110% of the accrued and unpaid interest outstanding.
Under the June 2024 FF Note, the holder of the June 2024 FF Note may at any time and from time to time, subject to the FF Beneficial Ownership Limitation and the FF Exchange Limitation, convert the outstanding principal amount and accrued interest under the June 2024 FF Note into shares of common stock at the initial FF Notes Fixed Conversion Price. If the Company fails to make an amortization payment when due under the June 2024 FF Note, the balance remaining under the June 2024 FF Note will become convertible, and the conversion price will become the lower of the then-applicable FF Notes Fixed Conversion Price and 80% of the lowest closing price of the common stock during the ten trading days prior to the date of a conversion of the June 2024 FF Note. If an FF Notes Event of Default occurs under the June 2024 FF Note, then the balance remaining under the June 2024 FF Note will become convertible at the lower of the FF Notes Fixed Conversion Price, the closing price of the common stock on the date of the FF Notes Event of Default (or the next trading day if such date is not on a trading day), and $0.195 per share.
An FF Notes Event of Default will occur upon the occurrence of any of the following: The failure to pay obligations when due; failure to issue shares upon conversions as required; a material breach of representations and warranties or covenants; the entry of material judgments against certain of the Company’s subsidiaries; the initiation of bankruptcy or insolvency proceedings of certain of the Company’s subsidiaries; defaults on other indebtedness; failure to remain subject to and compliant with the Exchange Act; failure to maintain intellectual property and other necessary assets; the restatement of any financial statements; disclosure or attempted disclosure of material non-public information to the June 2024 FF Note holder; unavailability of Rule 144 for resales of the Company’s securities on or after six months from the issuance date of the June 2024 FF Note; and the delisting or suspension of listing of the Company’s common stock by the NYSE American. The occurrence of an FF Notes Event of Default will result in a number of additional obligations to the June 2024 FF Note holder, including acceleration and multiplication by 125% of the June 2024 FF Note balance; default interest at the rate of the lesser of (i) 15% per annum and (ii) the maximum amount permitted by law from the due date thereof until the same is paid; and the increase of the principal balance of the June 2024 FF Note by $3,000 each calendar month until the June 2024 FF Note is repaid in its entirety.
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If at any time prior to the full repayment or full conversion of all amounts owed under the June 2024 FF Note the Company receives cash proceeds from any source or series of related or unrelated sources on or after the date of the June 2024 FF Note, including but not limited to, payments from customers, the issuance of equity or debt, the incurrence of Indebtedness, a merchant cash advance, sale of receivables or similar transaction, the exercise of outstanding warrants of the Company, the issuance of securities pursuant to an Equity Line of Credit of the Company or the Company’s offering of securities under Regulation A under the Securities Act, or the Company’s sale of assets (including but not limited to real property), the Company shall, within one business day of the Company’s receipt of such proceeds, inform the holder of the June 2024 FF Note of or publicly disclose such receipt, following which the holder of the June 2024 FF Note shall have the right in its sole discretion to require the Company to immediately apply up to 100% of such proceeds to repay all or any portion of the outstanding principal amount and interest (including any default interest) then due under the June 2024 FF Note, not including any such proceeds used to repay the May 2024 FF Note. The 110% prepayment premium will apply to any repayment of the June 2024 FF Note pursuant to this requirement prior to the occurrence of an FF Notes Event of Default.
The June 2024 FF Note will be a senior secured obligation of the Company, with priority over all existing and future indebtedness of the Company, except that the June 2024 FF Note provides that it will be pari passu in priority to the May 2024 FF Note, and junior in priority to the Second CBAZ Promissory Note. The Company may not incur any Indebtedness that is senior to or pari passu with the obligations under the June 2024 FF Note. During the period that any obligation under the June 2024 FF Note remains outstanding, the Company may not, without the June 2024 FF Note holder’s prior written consent, declare or pay any dividends or other distributions on shares of capital stock except in the form of shares of common stock or distributions pursuant to a stockholders’ rights plan approved by a majority of the Company’s disinterested directors. The Company also may not repurchase any capital stock or repay any indebtedness other than the May 2024 FF Note and the Second CBAZ Promissory Note while the Company has any obligation under the June 2024 FF Note without FirstFire’s written consent. The Company also may not (a) change the nature of its business; (b) sell, divest, change the structure of any material assets other than in the ordinary course of business; (c) enter into a Variable Rate Transaction; or (d) enter into any merchant cash advance transaction, sale of receivables transaction, or any other similar transaction, without the consent of FirstFire, which may not be unreasonably withheld. The June 2024 FF Note also contains a most favored nations provision with respect to the issuance of any debt securities of the Company.
June 2024 FF Warrants
First June 2024 FF Warrant
The First June 2024 FF Warrant will be exercisable for up to 662,036 shares of common stock from the date of issuance until the fifth anniversary of the date of issuance. The holder may exercise the First June 2024 FF Warrant by a “cashless” exercise if the Market Price is less than the exercise price then in effect and there is no effective registration statement for the resale of the shares. The number of shares issuable upon cashless exercise will equal (i) the product of (a) the number of shares of common stock that the holder elects to purchase under the First June 2024 FF Warrant, times (b) the Market Price less the exercise price, divided by (ii) the Market Price.
Under the First June 2024 FF Warrant, the holder of the First June 2024 FF Warrant may at any time and from time to time, subject to the FF Beneficial Ownership Limitation and the FF Exchange Limitation, exercise the First June 2024 FF Warrant to purchase shares of common stock at an initial exercise price of $0.30 per share, subject to adjustment, including adjustments under full-ratchet anti-dilution provisions for any issuances of securities at a lower price per share or per underlying share of common stock other than for an Excluded Issuance, or for any issuances of securities at a price which varies or may vary with the market price of the common stock, to match the price of such lower-priced or variable-priced securities, or for other dilution events. Simultaneous with any adjustment to the exercise price as a result of an anti-dilution adjustment, the number of shares underlying the First June 2024 FF Warrant will be adjusted proportionately so that after such adjustment the aggregate exercise price payable under the First June 2024 FF Warrant for the adjusted number of shares underlying the First June 2024 FF Warrant will be the same as the aggregate exercise price in effect immediately prior to such adjustment (without regard to any limitations on exercise). The First June 2024 FF Warrant also contains rights to any rights to purchase securities of the Company distributed pro rata to the stockholders of the Company.
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Second June 2024 FF Warrant
The Second June 2024 FF Warrant will be exercisable for up to 120,370 shares of common stock at an initial exercise price of $0.01 per share from the Second FF Warrants Trigger Date until the fifth anniversary of the Second FF Warrants Trigger Date, subject to the FF Beneficial Ownership Limitation and the FF Exchange Limitation. The Second June 2024 FF Warrant will automatically be cancelled if the June 2024 FF Note is fully repaid in cash prior to any FF Notes Event of Default. The Second June 2024 FF Warrant otherwise has the same terms and conditions as the First June 2024 FF Warrant.
General
The foregoing summary of the terms and conditions of the June 2024 FF Note, the First June 2024 FF Warrant, the Second June 2024 FF Warrant, the June 2024 FF Purchase Agreement, the June 2024 FF Security Agreement, and the June 2024 FF Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the June 2024 FF Note, the First June 2024 FF Warrant, the Second June 2024 FF Warrant, the June 2024 FF Purchase Agreement, the June 2024 FF Security Agreement, and the June 2024 FF Registration Rights Agreement, copies or forms of which are filed as Exhibit 4.8, Exhibit 4.9, Exhibit 4.10, Exhibit 10.22, Exhibit 10.23, and Exhibit 10.24 to this Quarterly Report on Form 10-Q, respectively.
Placement Agent Compensation Relating to June 2024 Private Placement
Under the Boustead Engagement Letter and the Underwriting Agreement, Boustead acted as placement agent in the transaction described above. Pursuant to the Boustead Engagement Letter, the Company paid Boustead a commission of $12,250, equal to 7% of the gross proceeds from this transaction, and a non-accountable expense allowance of $1,750, equal to 1% of the gross proceeds from this transaction. Boustead waived any rights to compensation from the issuance of warrants to purchase common stock of the Company under the Boustead Engagement Letter with respect to this transaction, and deferred any rights to compensation from the issuance of shares of common stock under the Boustead Engagement Letter with respect to this transaction.
April 2024 Promissory Note
On April 11, 2024, Daniel Nelson, the Chief Executive Officer, Chairman and a director of the Company, advanced $100,000 to the Company, without repayment terms. On April 25, 2024, the Company issued a promissory note to Mr. Nelson, dated April 25, 2024, in the base principal amount of $100,000 (the “April 2024 Note”). The April 2024 Note permits Mr. Nelson to make advances under the April 2024 Note of up to $100,000 in addition to the $100,000 base principal amount. On May 1, 2024, Mr. Nelson, advanced $75,000 subject to the terms of the April 2024 Note. On June 14, 2024, Mr. Nelson advanced $2,500 subject to the terms of the April 2024 Note. The base principal and all advances under the April 2024 Note will accrue interest at a monthly rate of 3.5%, compounded monthly, while such funds are outstanding, from the 30th day following the date of issuance of the April 2024 Note to the 150th day following the date of issuance of the April 2024 Note, such that total interest of $3,500 will accrue as of the end of the first month, $3,622.50 as of the end of the second month, and so on, with respect to the base principal, assuming that it is not prepaid. The base principal, any advances, and accrued interest become payable on the earlier of June 25, 2024 or upon the Company receiving any funding of $1,000,000 (the “April 2024 Note Maturity Date”). The Company is required to make full repayment of the balance of the base principal, advances, and accrued interest within two business days of receiving a written demand from Mr. Nelson on or after the April 2024 Note Maturity Date. The Company may prepay the base principal, any advances, and any interest then due without penalty.
The April 2024 Note is filed as Exhibit 4.11 to this Quarterly Report on Form 10-Q, and the description above is qualified in its entirety by reference to the full text of such exhibit.
Revolving Lines of Credit with Commerce Bank of Arizona
Under a Business Loan Agreement, dated October 6, 2023, between the Company and Commerce Bank of Arizona (“CBAZ”) (the “First CBAZ Loan Agreement”), the Company and CBAZ entered into a $350,000 secured revolving line of credit (the “First CBAZ LOC”). In connection with the First CBAZ LOC, CBAZ issued a promissory note to the Company, dated October 6, 2023 (the “First CBAZ Promissory Note”), with an initial principal amount of $350,000. The Company paid loan origination and other fees totaling $4,124. The principal balance under the First CBAZ Promissory Note bore interest at a variable rate per annum equal to one percentage point above The Wall Street Journal Prime Rate, initially 9.5% per annum, and was to mature on April 6, 2024. There was no penalty for prepayment of the First CBAZ Promissory Note. The First CBAZ LOC was required to be guaranteed by Daniel Nelson, Chief Executive Officer, Chairman and a director of the Company, Jodi B. Nelson, who is Mr. Nelson’s wife, and The Nelson Revocable Living Trust, an Arizona trust provided for by the Nelson Revocable Living Trust Agreement established on March 9, 1999 and amended and restated on November 21, 2005 (the “Nelson Trust”), and secured by the property of the Company, Daniel Nelson, Jodi B. Nelson, and the Nelson Trust. The First CBAZ LOC had been further conditioned on the issuance of Employee Retention Credit payroll tax refunds that the Company expected to be received by April 2024, and was subject to certain other terms and conditions.
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Under a Business Loan Agreement, dated December 11, 2023, between the Company and CBAZ (the “Second CBAZ Loan Agreement”), the Company and CBAZ entered into a $2,000,000 secured revolving line of credit (the “Second CBAZ LOC”). In connection with the Second CBAZ LOC, CBAZ issued a promissory note to the Company, dated December 11, 2023 (the “Second CBAZ Promissory Note”), with principal of $2,000,000. The Company paid loan origination and other fees totaling $5,500 and CBAZ immediately disbursed $334,625 of the funds in connection with the Second CBAZ LOC for crediting the full prepayment of the balance in that amount outstanding in connection with the First CBAZ LOC. The principal balance under the Second CBAZ Promissory Note bears interest at a fixed rate per annum of 7.21% per annum, and will mature on December 11, 2024. There is no penalty for prepayment of the Second CBAZ Promissory Note. The Second CBAZ LOC was required to be secured by a 12-month certificate of deposit account held with CBAZ with a minimum balance of $2,100,000 (the “CD Collateral”) under the Assignment of Deposit Account, dated December 11, 2023, between the Company and CBAZ (the “Assignment of Deposit Account”).
In connection with the Second CBAZ LOC, the Company agreed to the following negative covenants: (i) incurring any other indebtedness; (ii) permitting other liens on its property; (iii) selling any of its accounts receivable with recourse to any third party; (iv) engaging in substantially different business activities; (v) ceasing operations, engaging in certain corporate transactions, or selling the CD Collateral; or (vi) paying cash dividends on its stock except to pay certain income taxes of stockholders or repurchasing or retiring any of the Company’s outstanding common stock. The following events will constitute a default under the Second CBAZ LOC: (i) the Company fails to comply with the negative covenants described above; (ii) any change in ownership of 25% or more of the common stock of the Company; (iii) a material adverse change in the Company’s financial condition or CBAZ believes the prospect of payment or performance under any loans under the Second CBAZ LOZ is impaired; and (iv) other customary events of default including insolvency, foreclosure or forfeiture proceedings, and failure to make payment when due. Any late payments due will be charged 5% of the regularly scheduled payments. Upon an event of default, the interest rate on the Second CBAZ Promissory Note will increase to 13.21%; all indebtedness under the Second CBAZ Promissory Note will become due at the option of CBAZ, except that if an event of default occurs due to an insolvency or certain similar events, the indebtedness will become due immediately automatically; all of CBAZ’s obligations under the Second CBAZ Loan Agreement will terminate; and CBAZ may take any actions permitted under the Assignment of Deposit Account, including application of account proceeds under the CD Collateral to outstanding indebtedness, and use of all rights and remedies of a secured creditor under the Arizona Uniform Commercial Code. The Second CBAZ LOC was also subject to certain other terms and conditions. The outstanding balance under the Second CBAZ LOC was $2,000,000 and $1,540,125 as of June 30, 2024 and December 31, 2023, respectively.
The First CBAZ Loan Agreement, the First CBAZ Promissory Note, the Second CBAZ Loan Agreement, the Second CBAZ Promissory Note, and the Assignment of Deposit Account are filed as Exhibit 10.36, Exhibit 10.37, Exhibit 10.38, Exhibit 10.39, and Exhibit 10.40 to the 2023 Annual Report, respectively, and the description above is qualified in its entirety by reference to the full text of such exhibits.
See “—Recent Developments – Payoff of Second CBAZ Promissory Note” for related recent developments.
Nonconvertible 8% Unsecured Promissory Notes
In connection with the closing of the Company’s initial public offering, warrants to purchase a total of 940,000 shares of common stock at an exercise price of $2.50 per share were automatically exercised and the proceeds were automatically used to repay the outstanding principal underlying the 8% nonconvertible promissory notes consisting of $2,350,000. On the same date, a total of $113,304 in accrued interest under these promissory notes became due. As of June 30, 2024 and December 31, 2023, $101,468 and $113,304 of accrued interest under these promissory notes remained due. See Exhibit 4.1 to the 2023 Annual Report for a further description of the 8% unsecured promissory notes and related warrants.
Leases
The Company leases its corporate offices consisting of approximately 3,154 square feet under a lease agreement dated November 1, 2022, as amended by an addendum dated November 2, 2022 (the “Amendment to Office Lease”), and as further amended under a first amendment to lease dated April 1, 2023 (as amended, the “Office Lease”). The Office Lease’s initial term from November 1, 2022 to April 30, 2023 was extended for a 39-month term beginning on May 4, 2023 and ending on August 3, 2026. Under the Office Lease, rent for the first month was $6,742 and was $7,491 for each subsequent month through April 2023, plus applicable rental taxes, sales taxes, and operating expenses. Monthly rent will be $7,359 from May 4, 2023 to May 3, 2024, abated for the first three months of this period; $7,580 from May 4, 2024 to May 3, 2025; $7,808 from May 4, 2025 to May 3, 2026; and $8,042 from May 4, 2026 to August 3, 2026, plus applicable rental taxes. Parking fees were $290.50 for the first month and will be $325.00 for each subsequent month. The Company also paid an initial security deposit of $8,000 in November 2022 and a second security deposit of $16,000 in May 2023. The initial security deposit will be refunded and credited toward monthly rent for the months beginning May 4, 2024 and May 4, 2025 if the Company has performed all obligations under the Office Lease, including making all rent payments when due. The Company may exercise a one-time option to extend the Office Lease for an additional three-year term upon 9-12 months’ notice for the fair market rent at the time of the extension, as determined in accordance with the Office Lease, and which will not be less than 103% of the final rent amount under the current term. Under the Office Lease, the Company must pay for any tenant improvements above the allowance provided for such improvements of $37,848 or that are not in compliance with the terms of the amended lease agreement.
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The Office Lease and the Amendment to Office Lease are filed as Exhibit 10.12 and Exhibit 10.22 to the 2023 Annual Report, respectively, and the description above is qualified in its entirety by reference to the full text of such exhibits.
The Company also leased office space under a lease agreement that expired on May 31, 2023. Monthly rent was $12,075 and included annual escalations. In December 2021, the Company entered into an agreement to sublease its office space. The sublease ended on May 31, 2023 and included fixed rent of $9,894 per month.
Termination of Common Stock Purchase Agreement and Waiver of Prohibition Against Certain Transactions
Under a Common Stock Purchase Agreement, dated as of January 5, 2024 (the “Tumim Purchase Agreement”), and a Registration Rights Agreement, dated as of January 5, 2024 (the “Tumim Registration Rights Agreement”), each between the Company and Tumim Stone Capital LLC (“Tumim”), Tumim had committed to purchase, upon the terms and conditions specified in the Tumim Purchase Agreement and the Tumim Registration Rights Agreement, up to $25 million of the Company’s common stock.
On May 16, 2024, the Company and Tumim agreed by mutual written consent and pursuant to its terms to terminate the Tumim Purchase Agreement, effective immediately.
In connection with this termination, Tumim also waived the prohibition under the Tumim Purchase Agreement on the Company entering into a transaction defined as a “Variable Rate Transaction” under the Tumim Purchase Agreement, which otherwise would have survived termination of the Tumim Purchase Agreement for a six-month period.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with United States generally accepted accounting principles requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require management’s difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management’s current judgments.
See Note 1 – Principal Business Activity and Significant Accounting Policies in the financial statements included elsewhere in this report for a description of our other significant accounting policies. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of internally developed software and net operating loss and research and development tax credit carry forwards for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
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The Company converted to a C corporation in September 2021. As a limited liability company for the 2020 year and through the date of conversion in 2021, the Company’s taxable loss was allocated to members in accordance with their respective percentage of ownership. Therefore, no provision for income taxes has been included in the financial statements for the period prior to the Company’s conversion to a C corporation.
The Company evaluates its tax positions that have been taken or are expected to be taken on income tax returns to determine if an accrual is necessary for uncertain tax positions. As of June 30, 2024 and December 31, 2023, the unrecognized tax benefits accrual was zero. The Company will recognize future accrued interest and penalties related to unrecognized tax benefits in income tax expense if incurred. As of June 30, 2024 and December 31, 2023, the 2020 through 2022 tax years generally remain subject to examination by federal and state authorities.
Internally Developed Software
Software consists of an internally developed information system for use by the Company in matching student-athletes with qualified coaches. The Company has capitalized costs incurred with development and upgrades of the information systems in accordance with applicable accounting standards. Costs incurred up to and including the feasibility stage of development as well as maintenance costs are expensed as incurred. The Company amortizes these capitalized costs on a straight-line basis over the estimated useful life of the asset of five years.
In accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 350-40, “Internal-Use Software,” amortization of internal-use software should begin when the software is ready for its intended use. Software is ready for its intended use after all substantial testing is completed. On January 1, 2023, all substantial testing of the Company’s platform for purposes of football recruitment was completed. Amortization of the platform’s capitalized costs for purposes of football recruitment therefore started on January 1, 2023, due to its ready-for-use status.
In accordance with ASC Subtopic 350-40-25, during the application development stage, some costs are capitalized while other costs are expensed as incurred. In general, costs that are directly attributable to the development of the software are capitalized. The Company’s platform remained in the application development stage for soccer, baseball, and softball recruitment and additional feature development and enhancements for purposes of football recruitment during the three and six months ended June 30, 2024 and 2023. Capitalized costs associated with the platform during the three and six months ended June 30, 2024 and 2023 consisted of fees paid to third parties for services provided to develop the software during the application development stage, costs incurred to obtain computer software from third parties, and payroll and payroll-related costs for employees who are directly associated with and who devote time to the internal-use computer software project, to the extent of the time spent directly on the project. The following other costs during the three and six months ended June 30, 2024 and 2023 were incurred as expenses and were not capitalized: Training costs, data conversion costs except for costs to develop or obtain software that allows for access or conversion of old data by new systems, and general and administrative costs and overhead costs.
The Company periodically performs reviews of the recoverability of such capitalized technology costs. At the time a determination is made that capitalized amounts are not recoverable based on estimated cash flows to be generated from technology; any remaining capitalized amounts are written off. During the three and six months ended June 30, 2024 and 2023, the Company wrote off net capitalized software development costs of $0.
Revenue Recognition
The Company accounts for revenue under the guidance of ASC Topic 606, “Revenue from Contracts from Customers” (“ASC 606”).
ASC 606 prescribes a five-step model that focuses on transfer of control and entitlement to payment when determining the amount of revenue to be recognized. Under the ASC 606 guidance, an entity is required to perform the following five steps:
(1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
Revenue from performance obligations satisfied at a point in time consist of sales to individuals representing a one-month subscription and are recognized at the end of the subscription.
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Revenue from performance obligations satisfied over time consists of the sale of subscription agreements to individual organizations or customers that are more than one month in duration and are recognized on a monthly basis over the life of the subscription agreement. There were $43,182 of open receivables at June 30, 2024 and $58,775 at December 31, 2023.
In accordance with ASC 606, contracts may be amended to account for changes in contract specifications and requirements. Contract modifications exist when the amendment either creates new, or changes existing, enforceable rights and obligations. When contract modifications create new performance obligations and the increase in consideration approximates the standalone selling price for goods and services related to such new performance obligations as adjusted for specific facts and circumstances of the contract, the modification is considered to be a separate contract and revenue is recognized prospectively. If a contract modification is not accounted for as a separate contract, the Company accounts for the promised goods or services not yet transferred at the date of the contract modification (the remaining promised goods or services) prospectively, as if it were a termination of the existing contract and the creation of a new contract, if the remaining goods or services are distinct from the goods or services transferred on or before the date of the contract modification. The Company accounts for a contract modification as if it were a part of the existing contract if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied at the date of the contract modification. In such case the effect that the contract modification has on the transaction price, and on the entity’s measure of progress toward complete satisfaction of the performance obligation, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) at the date of the contract modification (the adjustment to revenue is made on a cumulative catch-up basis).
Stock-Based Compensation
The Company accounts for stock-based compensation costs under the provisions of ASC Topic 718, Compensation—Stock Compensation (“ASC Topic 718”), which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to vest. Stock-based compensation expense recognized includes the compensation cost for all stock-based payments granted to employees, consultants, officers, and directors based on the grant date fair value estimated in accordance with the provisions of ASC Topic 718. ASC Topic 718 is also applied to awards modified, repurchased, or cancelled during the periods reported. Stock-based compensation is recognized as expense over the employee’s requisite vesting period and over the nonemployee’s period of providing goods or services. The Company measures and recognizes compensation expense for the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award.
The fair value of options on the grant date is estimated using the Black-Scholes option-pricing model, which requires the use of certain subjective assumptions including expected term, volatility, risk-free interest rate and the fair value of our common stock. These assumptions generally require significant judgment. The resulting costs are recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. The Company amortizes the fair value of stock-based compensation on a straight-line basis over the requisite service periods. The Company recognizes forfeitures as they occur as a reduction to stock-based compensation expense and to additional paid-in-capital.
Expected term. Using the simplified method, the expected term is estimated as the midpoint of the expected time to vest and the contractual term, as permitted by the SEC. For out-of-the-money option grants, we estimate the expected lives based on the midpoint of the expected time to a liquidity event and the contractual term.
Volatility. With respect to grants of equity awards made prior to the listing of our common stock on the NYSE American on November 14, 2023, given the absence of an active market for our common stock, the Company’s expected volatility was derived from the historical volatilities of several unrelated public companies in the digital media and social platform industries because we had little information on the volatility of the price of our common stock because we had no trading history. When making the selections of our industry peer companies to be used in the volatility calculation, we consider operational area, size, business model, industry and the business of potential comparable companies. These historical volatilities are weighted based on certain qualitative factors and combined to produce a single volatility factor. With respect to grants of equity awards made after the listing, the Company determines the expected volatility by weighing the historical average volatilities of publicly traded industry peers and its own trading history. The Company intends to continue to consistently apply this methodology using the same or similar public companies until a sufficient amount of historical information regarding the volatility of the Company’s own common stock price becomes available, unless circumstances change such that the identified companies are no longer similar to the Company, in which case more suitable companies whose stock prices are publicly available would be utilized in the calculation.
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Risk free rate. The risk free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.
Dividend yield. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future. Consequently, we use an expected dividend yield of zero.
Fair Value of Common Stock. With respect to equity grants made before the listing of our common stock on the NYSE American on November 14, 2023, given the absence of an active market for our common stock, the estimated fair value of restricted stock grants and common stock underlying grants of stock options was determined using a modified probability-weighted expected return methodology (“PWERM”). For valuations after our listing on November 14, 2023, the fair value of restricted stock grants and common stock underlying grants of stock options is calculated utilizing the daily closing price as reported by the NYSE American.
If in the future the Company determines that another method is more reasonable, or if another method for calculating these input assumptions is prescribed by authoritative guidance, and, therefore, should be used to estimate volatility or expected life, the fair value calculated for our stock options could change significantly. Higher volatility and longer expected lives result in an increase to stock-based compensation expense determined at the date of grant. Stock-based compensation expenses affect our general and administrative expenses.
The following table presents, on a weighted average basis, the assumptions used in the Black-Scholes option-pricing model to determine the grant-date fair value of stock options granted during the six months ended June 30, 2024 and 2023:
| Six Months Ended | Six Months Ended | |||||||
| June 30, 2024 | June 30, 2023 | |||||||
| Risk-free interest rate | - | 3.52 | % | |||||
| Expected term (in years) | - | 5.42 | ||||||
| Expected volatility | - | 50 | % | |||||
| Expected dividend yield | $ | - | $ | - | ||||
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The following table summarizes, by grant date, the number of stock options granted during the six months ended June 30, 2023, and the associated per share exercise price and estimated fair value:
| Common shares underlying options granted | Exercise price per share | Fair value per common share as determined by the board of directors at grant date | Fair value per common share for financial reporting purposes at grant date | Intrinsic value per underlying common share | ||||||||||||||||
| March 14, 2023 | 53,800 | 3.10 | 3.10 | 1.72 | 0.00 | |||||||||||||||
| April 5, 2023 | 100,000 | 2.50 | 2.50 | 1.275 | 0.00 | |||||||||||||||
| April 11, 2023 | 3,000 | 2.50 | 2.50 | 1.84 | 0.00 | |||||||||||||||
| April 19, 2023 | 16,000 | 2.50 | 2.50 | 1.02 | 0.00 | |||||||||||||||
| May 3, 2023 | 100,000 | 2.50 | 2.50 | 1.02 | 0.00 | |||||||||||||||
| May 9, 2023 | 24,000 | 2.50 | 2.50 | 1.02 | 0.00 |
The following table summarizes by grant date the number of restricted stock awards granted during the six months ended June 30, 2023:
| RSAs | Fair value per common share as determined by the board of directors at grant date | Fair value per common share for financial reporting purposes at grant date | ||||||||||
| March 14, 2023 | 90,000 | $ | 3.10 | $ | 1.72 | |||||||
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On March 14, 2023, stock options to purchase 53,800 shares of common stock were granted to employees. The valuation of the shares of common stock underlying the stock options was determined by the Board to be $3.10 per share.
On March 14, 2023, the Company’s board of directors approved a non-convertible note private placement with warrants having a $2.50 exercise price. The Company used the valuation of this private placement to value all new stock option grants from April 2023 to May 2023. From April 2023 to May 2023, stock options to purchase 243,000 shares of common stock were granted to employees and a newly-appointed independent director. The valuation of the shares of common stock underlying the stock options was $2.50 per share pursuant to resolutions adopted by the Company’s board of directors with respect to April 5, 2023, April 11, 2023, April 19, 2023, May 3, 2023, and May 9, 2023. The valuation was determined using the private placement warrant exercise price of $2.50 per share.
Independent Third-Party Valuation
A third-party independent valuation firm’s valuation report concluded that as of August 31, 2022, which the Company considered representative of the fair value of the underlying common stock of the options granted on September 9, 2022 and September 28, 2022 and modified on October 18, 2022 as described above, the fair value of the Company’s common stock was $1.74 per share. The valuation report as of August 31, 2022 applied a PWERM analysis that reflected a 45% probability that the Company would complete an initial public offering, and a 55% probability that the Company would continue to operate privately. The Company performed a retrospective analysis based on the valuation on the financial statements previously issued and determined that any difference to stock compensation expense previously booked is not material to the financial statements as a whole for the year ended December 31, 2022 and the three-month period ended March 31, 2023. A valuation analysis as of March 31, 2023, which the Company considered representative of the fair value of the underlying common stock of the options granted on March 14, 2023, April 5, 2023, April 11, 2023, April 19, 2023, May 3, 2023 and May 9, 2023, concluded that the fair value of the Company’s common stock was $2.22 per share. The valuation report as of March 31, 2023 applied a PWERM analysis that reflected a 70% probability that the Company would complete an initial public offering and a 30% probability that the Company would continue to operate privately.
After taking into consideration each PWERM analysis, the Company calculated the grant date fair value for financial reporting purposes of grants of options and restricted stock prior to the date of the listing of the Company’s common stock on the NYSE American on November 14, 2023 based on additional factors not taken into account by the valuation reports, including the Company’s ability to continue as a going concern.
Recent Accounting Pronouncements
See the sections titled “Principal Business Activity and Significant Accounting Policies — Adopted Accounting Pronouncements” and “—New Accounting Pronouncements” in Note 1 to our financial statements included elsewhere in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) prior to the filing of this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were, in design and operation, effective at a reasonable assurance level.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The information in Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations – Midwestern Settlement Agreement” is incorporated by reference herein. Other than as disclosed above, during the three months ended June 30, 2024, there were no material pending legal proceedings or material developments in pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company is a party or of which any of their property is the subject.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Unregistered Sales of Equity Securities
During the three months ended June 30, 2024, we did not sell any equity securities that were not registered under the Securities Act and that were not previously disclosed in a Current Report on Form 8-K, except as disclosed below.
Purchases of Equity Securities
No repurchases of our common stock were made during the three months ended June 30, 2024.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5.
No information was required to be disclosed in a Current Report on Form 8-K during the three months ended June 30, 2024 but was not reported, other than as disclosed below.
The information in Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations – June 2024 Private Placement of Convertible Senior Secured Promissory Note and Warrants – Placement Agent Compensation Relating to June 2024 Private Placement” is incorporated by reference herein.
There have been no material changes to the procedures by which security holders may recommend nominees to the Board where those changes were implemented after the Company last provided disclosure of such procedures.
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ITEM 6. EXHIBITS.
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| † | Executive compensation plan or arrangement |
| * | 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.
|
Date: August 19, 2024 |
SIGNING DAY SPORTS, INC. | |
| /s/ Daniel Nelson | ||
| Name: | Daniel Nelson | |
| Title: | Chief Executive Officer | |
|
(Principal Executive Officer) | |
| /s/ Damon Rich | ||
| Name: | Damon Rich | |
| Title: | Interim Chief Financial Officer | |
| (Principal Accounting Officer and Principal Financial Officer) | ||
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