NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2021
(UNAUDITED)
NOTE
1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity
Esports and Gaming Company (the “Company,” “Simplicity,” “we,” or “our”)
was organized as a blank check company organized under the laws of the State of Delaware on April 17, 2017. The Company was formed
under the name I-AM Capital Acquisition Company for the purpose of effecting a merger, share exchange, asset acquisition, share
purchase, reorganization or similar business combination with one or more businesses (“Business Combination”). On
November 20, 2018, the Company changed its name from I-AM Capital Acquisition Company to Smaaash Entertainment Inc. On January
2, 2019, the Company changed its name from Smaaash Entertainment Inc. to Simplicity Esports and Gaming Company.
Through
our wholly owned subsidiary, Simplicity Esports, LLC, acquired on January 2, 2019, the Company has begun to implement a unique
approach to ensure the ultimate fan friendly esports experience. Our intention is to have gamers involved at the grassroots level
and feel a sense of unity as we compete with top class talent. Our management and players are known within the esports community
and we plan to use their skills to create a seamless content creation plan helping gamers feel closer to our brand than any other
in the industry. Simplicity is an established brand in the esports industry with an engaged fan base competing in popular
games across different genres, including League of Legends, PUBG, Gears of War, Smite, Guns of Boom, and multiple EA Sports titles.
Additionally, the Simplicity stream team encompasses a unique group of casters, influencers, and personalities, all of whom connect
to Simplicity’s dedicated fan base. Simplicity also has opened and operates esports gaming centers that provide
the public an opportunity to experience and enjoy gaming and esports in a social setting, regardless of skill or experience.
On
April 2, 2019, The Nasdaq Stock Market LLC (“Nasdaq”) filed a Notification of Removal from Listing and/or Registration
under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), on Form 25 with
the Securities and Exchange Commission (the “SEC”) relating to the Company’s common stock and warrants.
As a result, the Company’s common stock and warrants were delisted from Nasdaq effective April 2, 2019. The Company’s
common stock and warrants are quoted on the OTCQB under the symbols “WINR” and “WINRW,” respectively.
Through
our wholly owned subsidiary, PLAYlive Nation, Inc. (“PLAYlive”), acquired on July 29, 2019, the Company has a network
of franchised gaming centers. As of April 9, 2021, we have 33 locations, 15 corporate and 18 fully constructed franchise
locations, in various states, including Arizona, California, Idaho, Florida, Maryland, Michigan, Montana,
Oregon, South Carolina, Texas, Utah and Washington. As of April 9, 2021, a number of these locations were unable to resume
regular operations as the result of restrictions imposed by municipalities related to COVID-19 (Note 2). PLAYlive offers a video
gaming lounge concept to qualified franchisees. PLAYlive currently offers single-unit location franchises, as well as agreements
to develop multiple locations. This PLAYlive model is being interlaced with the esports gaming centers mentioned above to create
the ultimate gaming center.
On
August 17, 2020, the Company filed a Certificate of Amendment to increase the authorized shares of common stock from 20,000,000
to 36,000,000. Accordingly, the Company’s authorized capital stock consists of (i) 36,000,000 shares of common stock, and
(ii) 1,000,000 shares of preferred stock.
On
September 28, 2020, the Company’s board of directors approved the reverse stock split in a ratio of 1-for-6 and on September
29, 2020, the Company filed an amended and restated certificate of amendment to its Third Amended and Restated Certificate of
Incorporation, as amended (the “Certificate of Incorporation”), implementing the reverse stock split in a ratio of
1-for-6, effective October 13, 2020. On October 12, 2020, the Company filed a certificate of amendment to the Certificate of Incorporation
changing the effective date of the foregoing reverse stock split to November 4, 2020. On November 17, 2020, the Company filed
a certificate of amendment to the Certificate of Incorporation, changing the reverse stock split to a ratio of 1-for-8. The reverse
stock split, in the ratio of 1-for-8, became effective on November 20, 2020. The reverse stock split is intended to allow the
Company to meet the minimum share price requirement of the Nasdaq Capital Market or the NYSE American. There is no assurance
that our listing application will be approved by the Nasdaq Capital Market or the NYSE American.
All
share and per share data in the accompanying unaudited consolidated financial statements have been retroactively restated
to reflect the effect of the reverse stock split.
In
connection with the new business initiatives, the Company has formed the following subsidiaries:
|
●
|
Simplicity
Esports, LLC, a limited liability company incorporated in Florida and a wholly owned subsidiary of the Company.
|
|
●
|
PLAYlive
Nation, Inc., a corporation incorporated in Delaware and a wholly owned subsidiary of the Company.
|
|
●
|
PLAYlive
Nation Holdings, LLC, a limited liability company incorporated, and a wholly owned subsidiary of the Company.
|
|
●
|
Simplicity
One Brasil Ltda, a company incorporated under the laws of Brazil and a 76% owned subsidiary of the Company.
|
|
●
|
Simplicity
Happy Valley, LLC, a limited liability company incorporated in Oregon and a 79% owned subsidiary of the Company.
|
|
●
|
Simplicity
Redmond, LLC, a limited liability company incorporated in Washington and a 79% owned subsidiary of the Company.
|
|
●
|
Simplicity
El Paso, LLC, a limited liability company incorporated in Texas and is 51% owned by the Company (see Note 5).
|
|
●
|
Simplicity
Union Gap, LLC, a limited liability company incorporated in Washington and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Kennewick, LLC, a limited liability company incorporated in Washington and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Humble, LLC, a limited liability company incorporated in Texas and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Frisco, LLC, a limited liability company incorporated in Texas and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Billings, LLC, a limited liability company incorporated in Montana and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Brea, LLC, a limited liability company incorporated in California and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
Santa Rosa, LLC, a limited liability company incorporated in California and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
St. Louis, LLC, a limited liability company incorporated in Missouri and is wholly owned by the Company (see Note 5).
|
|
●
|
Simplicity
St. Petersburg, LLC, a limited liability company incorporated in Florida and is wholly owned by the Company (see Note 5).
|
NOTE
2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with
the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the SEC.
Certain information or footnote disclosures normally included in condensed consolidated financial statements prepared in accordance
with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly,
they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results
of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed consolidated financial statements
include all adjustments, consisting of a normal recurring nature, which are necessary for a fair presentation of the condensed
consolidated financial position, operating results and cash flows for the periods presented.
The
accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s Annual
Report on Form 10-K for the year ended May 31, 2020, as filed with the SEC on August 31, 2020. The interim results for the nine
months ended February 28, 2021, are not necessarily indicative of the results to be expected for the year ending May 31, 2021
or for any future interim periods.
Emerging
Growth Company
Section
102(b)(1) of the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) exempts emerging growth companies from
being required to comply with new or revised financial accounting standards until private companies (that is, those that have
not had a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), declared effective
or do not have a class of securities registered under the Exchange Act
are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect
to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but
any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which
means that when a standard is issued or revised and it has different application dates for public or private companies, the Company,
as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
Basis
of Consolidation
The
condensed consolidated financial statements include the operations of the Company and its wholly-owned subsidiaries and majority-owned
subsidiaries and all intercompany accounts and transactions have been eliminated in consolidation.
Basic
Loss Per Share
The
Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Basic loss per share
is calculated by dividing the Company’s net loss by the weighted average number of common shares outstanding during the
period. Diluted loss per share is calculated by dividing the Company’s net loss by the diluted weighted average number of
shares outstanding during the period. The diluted weighted average number of shares outstanding is the basic weighted number of
shares adjusted for any potentially dilutive debt or equity. When the Company records a loss from operations, all potentially
dilutive shares are anti-dilutive and are consequently excluded from the calculation of diluted net loss per common share. The
following potentially dilutive equity securities outstanding as of February 28, 2021 and February 29, 2020 were not included in
the computation of dilutive loss per common share because the effect would have been anti-dilutive:
|
|
February 28, 2021
|
|
|
February 29, 2020
|
|
Stock warrants
|
|
|
820,055
|
|
|
|
865,500
|
|
Convertible notes
|
|
|
277,331
|
|
|
|
125,000
|
|
Total
|
|
|
1,097,386
|
|
|
|
990,500
|
|
Recently
Issued and Recently Adopted Accounting Pronouncements
Accounting
standards promulgated by the FASB are subject to change. Changes in such standards may have an impact on the Company’s future
financial statements. The following is summary of recent accounting developments.
In
August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)—Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models
required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument
with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required
for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for the
exception. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective
for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years, and early adoption is
permitted. The Company is currently evaluating the impact of the adoption of the standard on the condensed consolidated financial
statements.
The
Company periodically reviews new accounting standards that are issued. Although some of these accounting standards may be applicable
to the Company, the Company has not identified any other new standards that it believes merit further discussion, and the Company
expects that none would have a significant impact on its financial statements.
Going
Concern, Liquidity and Management’s Plan
The
Company’s unaudited condensed consolidated financial statements have been prepared assuming that it will continue as a going
concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course
of business.
As
reflected in the unaudited condensed consolidated financial statements, the Company has an accumulated deficit, working capital
deficit of and a net loss of $10,782,438, $2,846,542 and $4,671,520, respectively, as of and for the nine months
ended February 28, 2021. Management believes that these matters raise substantial doubt about the Company’s ability to continue
as a going concern for twelve months from the issuance date of this report.
The
Company has commenced operations and has begun to generate revenue; however, the Company’s cash position may not be sufficient
to support the Company’s daily operations. Management intends to raise additional funds by way of private and/or public
offerings. While the Company believes in the viability of its strategy and its ability to generate sufficient revenue and to raise
additional funds, there can be no assurances to that effect. Should the Company fail to raise additional capital, it may be compelled
to reduce the scope of its planned future business activities.
The
ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business
plan, to generate sufficient revenue and to raise additional funds by way of public and/or private offerings.
The
unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable
to continue as a going concern.
In
December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to several other countries
and infections have been reported globally.
Because
COVID-19 infections have been reported throughout the United States, certain federal, state and local governmental authorities
have issued stay-at-home orders, proclamations and/or directives aimed at minimizing the spread of COVID-19. Additional, more
restrictive proclamations and/or directives may be issued in the future. As a result, all of our corporate and franchised Simplicity
Gaming Centers were closed effective April 1, 2020. We commenced reopening Simplicity Gaming Centers as of May 1, 2020 and have
since reopened 12 corporate and 12 franchised Simplicity Gaming Centers as of April 9, 2021, the majority
of which are operating at restricted capacity based on local COVID-19 regulations. Although our franchise agreements with franchisees
of Simplicity Gaming Centers require a minimum monthly royalty payment to us from the franchisees regardless of whether the franchised
Simplicity Gaming Centers are operating, there is a potential risk that franchisees of Simplicity Gaming Centers will default
in their obligations to pay their minimum monthly royalty payment to us resulting in either an increase in accounts receivables
or a bad debt expense where account receivables are no longer collectible due to franchisee’s inability to pay the minimum
monthly royalty payments owed by the franchisee. We have not written off as bad debt any accounts receivables attributable to
franchisee minimum monthly royalty payments owed during the COVID-19 pandemic. Notwithstanding, it is unclear exactly how much
of the increase in accounts receivables is attributable to the impact of COVID-19.
The
ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments,
which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information
which may emerge concerning the severity of the COVID-19 pandemic, and any additional preventative and protective actions that
governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer
traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated
to have a material adverse impact on our business, financial condition and results of operations.
The
measures taken to date have negatively impacted the Company’s business during the nine months ended February 28, 2021 and
will potentially continue to impact the Company’s business. Management expects that all of its business segments, across
all of its geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s
business and the duration for which it may have an impact cannot be determined at this time.
NOTE
3 — PROPERTY AND EQUIPMENT
The
following is a summary of property and equipment—at cost, less accumulated depreciation as of:
|
|
February 28, 2021
|
|
|
May 31, 2020
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
$
|
110,850
|
|
|
$
|
52,189
|
|
Property and equipment
|
|
|
679,607
|
|
|
|
243,314
|
|
Total cost
|
|
|
790,457
|
|
|
|
295,503
|
|
Less accumulated depreciation
|
|
|
(214,112
|
)
|
|
|
(62,770
|
)
|
Net property and equipment
|
|
$
|
576,345
|
|
|
$
|
232,733
|
|
During
the nine months ended February 28, 2021 and February 29, 2020, the Company recorded depreciation expense of $151,342 and $37,240,
respectively.
NOTE
4 — INTANGIBLE ASSETS
The
following table sets forth the intangible assets, including accumulated amortization as of:
|
|
February 28, 2021
|
|
May 31, 2020
|
|
|
|
Remaining
Useful Life
|
|
Intangible
Assets
|
|
|
Remaining
Useful Life
|
|
|
Intangible
Assets
|
|
Non-Competes
|
|
4 years
|
|
$
|
1,023,118
|
|
|
|
4.50 years
|
|
|
$
|
1,023,118
|
|
Trademarks
|
|
Indefinite
|
|
|
866,000
|
|
|
|
Indefinite
|
|
|
|
866,000
|
|
Customer database
|
|
2 years
|
|
|
35,000
|
|
|
|
10 years
|
|
|
|
—
|
|
Restrictive covenant
|
|
2 years
|
|
|
115,000
|
|
|
|
—
|
|
|
|
—
|
|
Customer contracts
|
|
10 years
|
|
|
332,077
|
|
|
|
—
|
|
|
|
546,000
|
|
Internet domain
|
|
2 years
|
|
|
3,000
|
|
|
|
2.50 years
|
|
|
|
3,000
|
|
Total intangible assets
|
|
|
|
$
|
2,374,195
|
|
|
|
|
|
|
$
|
2,438,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
(509,087
|
)
|
|
|
|
|
|
|
(296,744
|
)
|
Net carrying value
|
|
|
|
$
|
1,865,108
|
|
|
|
|
|
|
$
|
2,141,374
|
|
The
following table sets forth the future amortization of the Company’s intangible assets as of February 28, 2021:
For the fiscal years ending May 31:
|
|
|
|
2021
|
|
$
|
73,114
|
|
2022
|
|
|
290,791
|
|
2023
|
|
|
221,708
|
|
2024
|
|
|
130,197
|
|
2025
|
|
|
10,834
|
|
Thereafter
|
|
|
272,464
|
|
Total
|
|
$
|
999,108
|
|
During
the nine months ended February 28, 2021 and February 29, 2020, the Company recorded amortization expense of $212,343 and $154,218,
respectively. During the nine months ended February 28, 2021, the Company recorded impairment loss of $213,923,
in relation to the customer contracts resulting from termination of franchise agreements.
Goodwill
The
Company’s goodwill carrying amounts relate to the acquisitions of Simplicity Esports LLC, PLAYlive Nation Inc. and Simplicity
El Paso, LLC. The composition of the goodwill balance, is as follows:
|
|
February 28, 2021
|
|
|
May 31, 2020
|
|
Simplicity Esports, LLC
|
|
$
|
4,456,250
|
|
|
$
|
4,456,250
|
|
Simplicity El Paso, LLC
|
|
|
25,000
|
|
|
|
—
|
|
PLAYlive Nation Inc.
|
|
|
698,891
|
|
|
|
698,891
|
|
Total Goodwill
|
|
$
|
5,180,141
|
|
|
$
|
5,155,141
|
|
NOTE
5 — ACQUISITIONS
The
Simplicity One Acquisition:
On
January 14, 2020, the Company acquired a 90% interest in Simplicity One Brasil Ltda (“Simplicity Brasil”),
for approximately $2,000. This interest was reduced during the three months ended August 31, 2020 as more fully described
in Note 7.
Simplicity
El Paso, LLC:
On
June 26, 2020, the Company through its wholly owned subsidiary, Simplicity El Paso, LLC, acquired a 51% controlling interest
in an existing franchise in exchange for 150,000 shares of common stock at $1.10 per share. The total purchase price for the acquisition
was $315,000 of which $150,000 was paid in cash by the 49% minority interest owner, an unrelated third party, and $165,000 in
common stock by the Company. This has been accounted for by the Company using the acquisition method under business combination
accounting. Under this method, the purchase price paid by the acquirer is allocated to the assets acquired and liabilities assumed
as of the acquisition date based on the fair value. Determining the fair value of certain assets and liabilities assumed is judgmental
in nature and often involves the use of significant estimates and assumptions. All fair value measurements of acquired assets
and liabilities are non-recurring in nature and classified as level 3 on the fair value hierarchy.
The
table below presents a provisional allocation of the gross $315,000 purchase price as of June 26, 2020:
Merchandise
|
|
$
|
27,000
|
|
Furniture, Fixtures and Equipment
|
|
|
113,000
|
|
Customer Database
|
|
|
35,000
|
|
Goodwill
|
|
|
25,000
|
|
Restrictive Covenant
|
|
|
115,000
|
|
Total value of acquisition
|
|
$
|
315,000
|
|
Asset
Purchase Agreements:
The following acquisitions are accounted
for as asset acquisitions under ASC Topic 805:
Simplicity
Kennewick, LLC:
On
September 22, 2020, the Company’s wholly-owned subsidiary, Simplicity Kennewick, LLC (“Simplicity Kennewick”)
entered into an Asset Purchase Agreement (“Simplicity Kennewick APA”) with Ignatious O’Riley, an existing
franchisee, to acquire Mr. O’Riley’s assets in exchange for 2,990 shares of the Company’s common stock
with fair value of $29,416, or $9.84 per share, based on the fair value of assets acquired.
Simplicity
Union Gap, LLC:
On
September 23, 2020, the Company’s wholly-owned subsidiary, Simplicity Union Gap, LLC (“Simplicity Union Gap”)
entered into an Asset Purchase Agreement (“Simplicity Union Gap APA”) with Five Point Legacy Corp., an existing
franchisee (“Five Point”), to acquire Five Point’s assets in exchange for 4,506 shares of the
Company’s common stock with fair value of $43,974, or $9.76 per share, based on the fair value of assets acquired.
Simplicity
St Petersburg, LLC:
On
October 1, 2020, the Company entered into an Asset Purchase Agreement (“Parryproject APA”) with Parryproject
LLC, Owen Parry and Jennie Parry, an existing franchisee (collectively, “Parryproject”), to acquire Parryproject’s
assets in exchange for 3,688 shares of the Company’s common stock with fair value of $38,650, or $10.48 per share,
based on the fair value of assets acquired. These assets were transferred to the Company’s wholly-owned subsidiary,
Simplicity St. Peterburg, LLC.
Simplicity
Humble, LLC:
On
October 1, 2020, the Company’s wholly-owned subsidiary, Simplicity Humble, LLC (“Simplicity Humble”),
entered into an Asset Purchase agreement (“Team Centore APA”) with Team Centore Entertainment Corp., and Charles
Centore, an existing franchisee (collectively, “Team Centore”), to acquire Team Centore’s assets
in exchange for 8,402 shares of the Company’s common stock with fair value of $88,052, or $10.48 per share,
based on the fair value of assets acquired.
Simplicity
Frisco, LLC:
On
October 12, 2020, the Company’s wholly-owned subsidiary, Simplicity Frisco, LLC (“Simplicity Frisco”),
entered into an Asset Purchase Agreement (“JAR APA”) with JAR Mathis Holdings, Jared Mathis and Amy Mathis,
an existing franchisee (collectively, “JAR”), to acquire JAR’s assets in exchange for 6,202 shares
of the Company’s common stock with fair value of $74,423, or $12.00 per share, based on the fair value of
assets acquired.
Simplicity
Santa Rosa, LLC:
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Santa Rosa, LLC (“Simplicity Santa Rosa”),
entered into an Asset Purchase Agreement (“B&R APA”) with B&R Franchise Investments, LLC, Brian
Chu and Richard Loo, an existing franchisee (collectively, “B&R”), to acquire B&R’s assets
in exchange for 4,202 shares of the Company’s common stock with fair value of $48,068, or $11.44 per share,
based on the fair value of assets acquired.
Simplicity
Brea, LLC:
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Brea, LLC (“Simplicity Brea”), entered
into an Asset Purchase Agreement (“Nextgen APA”) with Nextgen Gaming, LLC, Ajay Chunilal Shah and Shweta Shah,
an existing franchisee (collectively, “Nextgen”), to acquire Nextgen’s assets in exchange for
3,255 shares of the Company’s common stock with fair value of $37,237, or $11.44 per share, based on the fair
value of assets acquired.
Simplicity
Billings, LLC:
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Billings, LLC (“Simplicity Billings”),
entered into an Asset Purchase Agreement (“Button Mashers APA”) with Button Mashers, Inc, Jon Bessmer and
Brandy Bessmer, an existing franchisee (collectively, “Button Mashers”), to acquire Button Mashers’
assets in exchange for 4,696 shares of the Company’s common stock with fair value of $53,725, or $11.44 per
share, based on the fair value of assets acquired.
Simplicity
St. Louis, LLC:
On
December 1, 2020, the Company’s wholly-owned subsidiary, Simplicity St. Louis, LLC, entered into an Asset Purchase
Agreement (“Metta APA”) with Metta Gaming, LLC, Brian Paul Van Wyk, an existing franchisee (collectively,
“Metta”), to acquire Metta’s assets in exchange for 3,523 shares of the Company’s common stock
with fair value of $52,845, or $15.00 per share, based on the fair value of assets acquired.
The
following table summarizes the total of the assets acquired during the nine months ended February 28, 2021:
Assets acquired:
|
|
|
|
Furniture, fixtures and equipment
|
|
$
|
371,417
|
|
Inventory
|
|
|
94,972
|
|
Total assets acquired at fair value
|
|
$
|
466,389
|
|
|
|
|
|
|
Purchase consideration :
|
|
|
|
|
41,464 shares of common stock
|
|
$
|
466,389
|
|
Total purchase consideration
|
|
$
|
466,389
|
|
NOTE
6 – OPERATING LEASE RIGHT-OF-USE (“ROU”) ASSETS AND OPERATING LEASE LIABILITIES
In
adopting ASC Topic 842, Leases (Topic 842), the Company has elected the ‘package of practical expedients’, which permits
it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial
direct costs (see Note 2). In addition, the Company elected not to apply ASC Topic 842 to arrangements with lease terms of 12
months or less. The Company entered into various lease agreements.
The
significant assumption used to determine the present value of the lease liability was a discount rate of 10% which was based on
the Company’s estimated incremental borrowing rate.
Future
base lease payments under the non-cancelable operating lease at February 28, 2021 are as follows:
Years Ending May 31,
|
|
Amount
|
|
2021
|
|
$
|
101,854
|
|
2022
|
|
|
411,278
|
|
2023
|
|
|
391,832
|
|
2024
|
|
|
373,870
|
|
2025
|
|
|
330,017
|
|
2026
|
|
|
110,000
|
|
Total minimum non-cancelable operating lease payments
|
|
|
1,718,851
|
|
Less: discount to fair value
|
|
|
(405,258
|
)
|
Total lease liability at February 28, 2021
|
|
$
|
1,313,593
|
|
NOTE
7 — RELATED PARTY TRANSACTIONS
Kaplan
Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, Chairman of the Company’s Board of Directors and greater than 5% stockholder
of the Company. The Kaplan Note matures on the first business day following the 150-day anniversary of the Issue Date (the “Maturity
Date”). The Company used the proceeds of the Kaplan Note to fund the operations of Simplicity Brasil the Company’s
majority owned subsidiary (see Note 9).
As
of May 31, 2020, advances under the terms of this note were $64,728. On various dates subsequent to May 31, 2020, Mr. Kaplan funded
$25,272 pursuant to the Kaplan Promissory Note. With the contributions subsequent to May 31, 2020, the principal balances outstanding
and due Mr. Kaplan amounted to $90,000. On June 22, 2020, Mr. Kaplan agreed to exchange the debt of the Kaplan Promissory Note
with a principal balance of $90,000 in exchange for the Company assigning to Mr. Kaplan a 10% equity interest in Simplicity Brasil a subsidiary of the Company.
Equity
Sales
Effective
June 1, 2020, the Company issued 23,809 shares of our restricted Common Stock, sold effective May 7, 2020 at a price of $1.09
per share, to William H. Herrmann, Jr., a member of our board of directors, for an aggregate purchase price of $25,000.
The
Company maintains a portion of its cash balance at a financial services company that is owned by a then-officer of the
Company.
NOTE
8 — COMMITMENTS AND CONTINGENCIES
Registration
Rights
Pursuant
to a registration rights agreement the Company entered into with its initial stockholders and initial purchasers of the Private
Units (and constituent securities) at the closing of the Initial Public Offering, the Company is required to register certain
securities for sale under the Securities Act. These holders are entitled under the registration rights agreement to make up to
three demands that the Company register certain of its securities held by them for sale under the Securities Act and to have the
securities covered thereby registered for resale pursuant to Rule 415 under the Securities Act. In addition, these holders have
the right to include their securities in other registration statements filed by the Company. The Company will bear the costs and
expenses of filing any such registration statements.
Unit
Purchase Option (UPO)
The
Company sold to the underwriters (and/or their designees), for $100, an option to purchase up to a total of 250,000 Units (which
increased to 260,000 Units upon the partial exercise of the underwriters’ over-allotment option), exercisable at $11.50
per Unit (or an aggregate exercise price of $2,990,000) upon the closing of the Initial Public Offering. The UPO may be exercised
for cash or on a cashless basis, at the holder’s option, at any time during the period commencing on the later of the first
anniversary of the effective date of the registration statement relating to the Initial Public Offering and the closing of the
Company’s initial Business Combination and terminating on the fifth anniversary of such effectiveness date. The Units issuable
upon exercise of this UPO are identical to those offered in the Initial Public Offering, except that the exercise price of the
warrants underlying the Units sold to the underwriters is $13.00 per share.
Employment
Agreements, Board Compensation and Bonuses
On
July 29, 2020, the Company entered into an employment agreement (the “Kaplan 2020 Agreement”) with Mr.
Kaplan. Such employment agreement replaced the Kaplan 2018 Agreement. As a result, the Kaplan 2018 Agreement was terminated and
is of no further force or effect. Pursuant to the terms of the Kaplan 2020 Agreement, the Company agreed to pay Mr. Kaplan a monthly
base salary of $5,000; provided, however, that the parties agreed that such base salary will be deferred and will accumulate until
the Company has sufficient cash available to make such payments, to be reasonably determined by the Board of Directors and Mr.
Kaplan, at which time all accrued and unpaid base salary will be paid. In addition, Mr. Kaplan will receive an equity grant of
15,000 shares of common stock per month, which shares will be fully vested upon grant. Mr. Kaplan will also be eligible to receive
a quarterly bonus in the form of cash or equity shares and will be entitled to participate in the Company’s employee benefit
plans. In addition, if, during the term of the Kaplan 2020 Agreement, the Company’s shares are approved for listing on a
U.S. national securities exchange, the Company will pay Mr. Kaplan a $50,000 cash bonus, to be paid upon such listing begin effective.
The
term of the Kaplan 2020 Agreement is for an initial one-year term, which shall automatically renew for successive one-year terms
unless either party provides 60 days’ advance written notice of its intention not to renew the Kaplan 2020 Agreement at
the conclusion of the then applicable term. The term of the Kaplan 2020 Agreement may be terminated by the Company with or without
cause or by Mr. Kaplan with or without good reason, as such terms are defined therein.
On
July 29, 2020, the Board of Directors approved for Mr. Kaplan a $75,000 cash bonus and authorized the issuance of 250,000 shares
of the Company’s common stock both related to his performance during the fiscal year ended May 31, 2020. As of November
30, 2020, the Company has accrued $75,000 related to Mr. Kaplan’s cash bonus. During the six months ended November
30, 2020, the 250,000 shares of common stock valued at $216,625 were issued.
On
July 29, 2020, the Company entered into a new employment agreement (the “Franklin 2020 Agreement”) with Mr. Franklin.
Such employment agreement replaced the Franklin 2018 Agreement. As a result, the Franklin 2018 Agreement was terminated and is
of no further force or effect. Pursuant to the terms of the Franklin 2020 Agreement, the Company agreed to pay Mr. Franklin a
monthly base salary of $12,500; provided, however, that the parties agreed that such base salary will be deferred and will accumulate
until the Company has sufficient cash available to make such payments, to be reasonably determined by the Board of Directors and
Mr. Franklin, at which time all accrued and unpaid base salary will be paid. In addition, Mr. Franklin will receive an equity
grant of 6,250 shares of common stock per month, which shares will be fully vested upon grant. Mr. Franklin will also be eligible
to receive a quarterly bonus in the form of cash or equity shares and will be entitled to participate in the Company’s employee
benefit plans. In addition, if, during the term of the Franklin 2020 Agreement, the Company’s shares are approved for listing
on a U.S. national securities exchange, the Company will pay Mr. Franklin a $50,000 cash bonus, to be paid upon such listing begin
effective.
On
July 29, 2020, the Board of Directors approved for Mr. Franklin a $75,000 cash bonus and authorized the issuance of 250,000 fully
vested shares of the Company’s common stock both related to his performance during the fiscal year ended May 31, 2020. As
of November 30, 2020, the Company has accrued $75,000 related to Mr. Franklins cash bonus and $216,625 related to the Common Shares
to be issued to Mr. Franklin.
On
July 29, 2020, the Board of Directors approved the issuance of 192,000 shares of common stock to an employee and the Directors
of the Company for services provided during the fiscal year ended May 31, 2020.
Refer
to Note 11 - Subsequent Events for additional information.
Litigation
On
August 5, 2020, a lawsuit styled Duncan Wood v. PLAYlive Nation, Inc. and Simplicity eSports and Gaming Company (Case No. 20-1043)
was filed in the U.S. District Court for the District of Delaware. The complaint alleges unlawful failure to make timely and reasonable
payment of wages, breach of contract, breach of the duty of good faith and fair dealing and unjust enrichment. The plaintiff seeks
monetary damages for compensation alleged to be owed, treble damages, interest on all wage compensation, reasonable attorneys’
fees and other relief as the Court deems just and proper. On October 30, 2020, Duncan Wood and Simplicity Esports and Gaming
Company executed a mutual General Release and the lawsuit was dismissed with prejudice.
NOTE
9 – DEBT
Convertible Notes
The
table below presents outstanding convertible notes as of the following:
|
|
February 28, 2021
|
|
|
May 31, 2020
|
|
10% Fixed Convertible Promissory Note
|
|
$
|
—
|
|
|
$
|
152,500
|
|
Maxim Convertible Note
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
February 19, 2021 Convertible Note
|
|
|
1,650,000
|
|
|
|
-
|
|
|
|
|
2,650,000
|
|
|
|
1,152,500
|
|
Less: Debt discount
|
|
|
(1,281,581
|
)
|
|
|
(25,180
|
)
|
Total Convertible notes
|
|
$
|
1,368,419
|
|
|
$
|
1,127,320
|
|
10%
Fixed Convertible Promissory Note
On
April 29, 2020 (the “Effective Date”), the Company issued a 10% Fixed Convertible Promissory Note (the “Harbor
Gates Note”), with a maturity date of October 29, 2020 (the “Maturity Date”), in the principal sum of $152,000
in favor of Harbor Gates Capital, LLC (“Harbor Gates”).
On
July 2, 2020, the Harbor Gates Note was repaid in full. A cash payment of $201,300 including principal of $152,500, guaranteed
interest of $15,200 and prepayment penalties of $33,600 was made to the lender. In connection with the repayment of the note,
the Company recorded a charge to interest expense in the amount of $73,980 comprised of $48,800 related to interest and prepayment
penalties and $25,180 related to accelerated accretion of unamortized debt discount recorded in connection with the original issue
discount and in connection with common shares issued to the lender.
Maxim
Convertible Note
On
December 20, 2018, the Company entered into a securities exchange agreement (“Exchange Agreement”) with Maxim. Pursuant
to the terms of the Exchange Agreement, Maxim agreed to surrender and exchange the Note. In exchange, the Company issued to Maxim
a Series A-1 Exchange Convertible Note in the principal amount of $500,000 (the “Series A-1 Note”) and a Series A-2
Exchange Convertible Note in the principal amount of $1,000,000 (the “Series A-2 Note,” and collectively with Series
A-1 Note, the “Exchange Notes”). As of December 31, 2018, upon the closing of the Acquisition, the Series A-1 Note
automatically converted into 24,706 shares of the Company’s common stock.
The
original amount of the promissory note was $1,800,000, the total amount of the two exchange notes is $1,500,000, and the difference
of $300,000 was recorded as debt forgiveness income.
Prior
to conversion, the Series A-1 Note bore interest at 2.67% per annum, was payable quarterly and had a maturity date of the earlier
of the closing date of the Acquisition (as defined below) or June 20, 2020 (the “Maturity Date”). The Company was
permitted to pay the interest in cash or at its sole discretion, in shares of its common stock or a combination of cash and common
stock. However, the Company could only pay the interest in shares of its common stock if (i) all the equity conditions specified
in the note (“Equity Conditions”) had been met (unless waived by Maxim in writing) during the 20 trading days immediately
prior to the interest payment date (“Interest Notice Period”), (ii) the Company had provided proper notice pursuant
to the terms of the note and (iii) the Company had delivered to Maxims’ account certain number of shares of its common stock
to be applied against such interest payment prior to (but no more than five trading days before) the Interest Notice Period.
The
Series A-1 Note was convertible into shares of the Company’s common stock (“Conversion Shares”) at an initial
conversion price of $15.44 per share, subject to adjustment for any stock dividends and splits, rights offerings, distributions,
combinations or similar transactions. Upon the closing of the Acquisition, the conversion price was automatically adjusted to
equal the arithmetic average of the volume weighted average price (“VWAP”) of the Company’s common stock in
the five trading days prior to the closing date of the Acquisition. Maxim was permitted to convert the Series A-1 Note at any
time, in whole or in part, provided that upon receipt of a notice of conversion Maxim, the Company had the right to repay all
or any portion of the Series A-1 Note included in the notice of conversion.
Additionally,
the Series A-1 Note would have automatically converted into shares of the Company’s common stock on the earlier of the Maturity
Date or the closing date of the Acquisition provided that (i) no event of default then existed, and (ii) solely if such automatic
conversion date was also the Maturity Date, each of the Equity Conditions had been met (unless waived in writing by Maxim) on
each trading day during the 20 trading day period ending on the trading day immediately prior to the automatic conversation date.
At
any time prior to the Maturity Date, the Company also had the right to elect to redeem some or all of the outstanding principal
amount for cash in an amount (the “Optional Redemption Amount”) equal to the sum of (a) 100% of the then outstanding
principal amount of the note, (b) accrued but unpaid interest and (c) all liquidated damages and other amounts due in respect
of the note (the “Optional Redemption”). The Company could only effect an Optional Redemption if each of the Equity
Conditions had been met (unless waived in writing by Maxim) on each trading day during the period commencing on the date when
the notice of the Optional Redemption was delivered to the date of the Optional Redemption and through and including the date
payment of the Optional Redemption Amount was actually made in full.
Except
as otherwise provided in the Series A-1 Note, including, without limitation, an Option Redemption, the Company may not prepay
any portion of the principal amount of the note without the prior written consent of Maxim.
Pursuant
to the terms of the Series A-1 Note, the Company was not permitted to convert any portion of the Series A-1 Note if doing so results
in Maxim beneficially owning more than 4.99% of the outstanding common stock of the Company after giving effect to such conversion,
provided that on 61 days’ prior written notice from Maxim to the Company, that percentage could increase to 9.99%. However,
if there was an automatic conversion, and the conversion would result in the Company issuing a number of shares in excess of the
beneficial ownership limitation, then any such shares in excess of the beneficial ownership limitation would be held in abeyance
for the benefit of Maxim until such time or times, if ever, as its right thereto would not result in Maxim exceeding the beneficial
ownership limitation, at which time or times Maxim would be issued such shares to the same extent as if there had been no such
limitation.
The
Series A-1 Note contained restrictive covenants which, among other things, restricted the Company’s ability to repay or
repurchase any indebtedness, make distributions on or repurchase its common stock or enter into transactions with its affiliates.
The
Series A-2 Note has terms substantially similar to those of the Series A-1 Note except that the Series A-2 Note has a maturity
date of June 20, 2020, and an initial conversion price of $15.44, which will be automatically adjusted to the lower of (i) the
conversion price then in effect, and (ii) the greater of the arithmetic average of the VWAP of the Company’s common stock
in the five trading days prior to the notice of conversion and $4.00.
On
June 4, 2020, $100,000 of principal balance was converted into 10,738 shares of common stock in accordance with the terms of the
Maxim Note.
On
June 18, 2020, the Company and Maxim entered into the first amendment to the Maxim Note (the “First Amendment”), pursuant
to which the Parties agreed to the following: (i) Maxim’s resale of the Company’s common stock (the “Common
Stock”) underling the Maxim Note shall be limited to 10% of the daily volume of the Common Stock on each respective trading
day, (ii) the maturity date of the Maxim Note was extended to December 31, 2020, (iii) the principal amount of the Maxim Note
was increased by $100,000, which is included in interest expense on the accompanying condensed consolidated statement of operations,
and (iv) the reference to “$15.44” in Section 4(b) of the Maxim Note was replaced with “$9.20”.
On
December 31, 2020, the Company and Maxim entered into the second amendment to the Maxim Note (the “Second Amendment”)
pursuant to which the Parties agreed the Maturity Date (as defined in the Note) shall be extended to February 15, 2021.
During
the nine months ended February 28, 2021 the Company recorded interest expense of $44,744 related to the Maxim note. As of February
28, 2021, Maxim note had had outstanding principal and accrued interest of $1,000,000 and $82,569, respectively.
Refer to Note 11- Subsequent Events for
additional information.
June
18, 2020 Convertible Note
On
June 18, 2020 (the “Issue Date”), the Company entered into a securities purchase agreement (the “June 18, 2020
SPA”) with an accredited investor (the “Holder”), pursuant to which the Company issued a 12% self-amortization
promissory note (the “June Amortization Note”) with a maturity date of June 18, 2021 (the “Maturity Date”),
in the principal sum of $550,000. Pursuant to the terms of the June Amortization Note, the Company agreed to pay to $550,000 (the
“Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of 12% per annum. The Amortization
Note carried an original issue discount (“OID”) of $55,000. The Company received net proceeds of $467,650, net of
original issue discount of $55,000 and origination fees of $27,350. In addition, pursuant to the terms of the SPA, the Company
issued 6,875 shares of the Company’s common stock to the Holder as additional consideration. The 6,875 shares were value
at $62,150, or $9.04 per share, based on the quoted trading price on the date of grant. Accordingly, the Company recorded an aggregate
debt discount in the amount of $144,500 in connection with the common shares issued to the Holder and an original issue discount
associated with this note.
The
Company may prepay the June Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest (no prepayment premium). The Amortization Note contained customary events of default relating to, among other
things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA.
The
Company was required to make nine amortization payments to the Holder of $66,125 beginning on October 16, 2020. In connection
with the November 23, 2020 SPA and February 19, 2021 SPA discussed below, during the nine months ended February 28, 2021, the
Company repaid the principal amount due of $550,000 and all interest due on this June 18, 2020 Note.
November
23, 2020 Convertible Note
On
November 25, 2020, the Company entered into a securities purchase agreement (the “November 23, 2020 SPA”), dated as
of November 23, 2020 (the “Effective Date”) with the Holder, pursuant to which the Company issued a 12% self-amortization
promissory note (the “November Amortization Note”) with a maturity date of November 23, 2021 (the “Maturity
Date”), in the principal sum of $750,000. Pursuant to the terms of the November Amortization Note, the Company agreed to
pay to $750,000 (the “Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of 12%
per annum. The Company received net proceeds of $441,375, net of original issue discount of $75,000, origination fees of $35,250,
and the partial repayment of principal and interest of $198,375 on the June 18, 2020 Note. In addition, pursuant to the terms
of the SPA, the Company granted 17,054 warrants to purchase 17,054 shares of the Company’s common stock, subject to adjustment.
In connection with the November Amortization Note, during the first twelve months of this note, interest equal to $90,000 shall
be guaranteed and earned in full as of the Effective Date, provided, however, that if the November Amortization Note is repaid
in its entirety on or prior to February 23, 2021, then the interest shall be accrued on a per annum basis based on the number
of days elapsed as of the repayment date from the Effective Date.
In
connection with the November 23, 2020 SPA, the Company issued warrants equal to 375,000 divided by the Exercise Price (as defined
below) (the “Warrant Shares”) (whereby such number may be adjusted from time to time pursuant to the terms and conditions
of this Warrant) at the Exercise Price per share then in effect. For purposes of this Warrant, the term “Exercise Price”
shall mean 110% of the public offering price of the Company’s common stock under the public offering contemplated by the
registration statement on Form S-1 filed by the Company on October 23, 2020 (the “Uplist Offering”), provided, however,
that if the Uplist Offering has not been consummated on or before May 23, 2021, then the Exercise Price shall mean the closing
bid price of the Company’s common stock on December 23, 2020, subject to adjustment as provided in the warrant (including
but not limited to cashless exercise), and the term “Exercise Period” shall mean the period commencing on the earlier
of (i) the date of the Company’s consummation of the Uplist Offering or (ii) May 23, 2021, and ending on the five-year anniversary
thereof. In connection with the issuance of these warrants, on the initial measurement date, the relative fair value of the warrants
of $157,438 was recorded as a debt discount and an increase in paid-in capital. Additionally, the Company concluded that the conversion
rights under the November 23, 2020 note at the time of issuance was determined to be beneficial on the measurement date. Accordingly,
the Company recorded a debt discount of $121,724 related to the beneficial conversion feature arising from the November 2020 convertible
note which was amortized over the term of this convertible note.
The
Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest (no prepayment premium). The Amortization Note contains customary events of default relating to, among other
things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA.
The
Company is required to make ten monthly amortization payments to the Holder of $84,000 commencing on February 23, 2021 through
November 23,2021.
In
connection with the February 19, 2021 SPA discussed below, during the nine months ended February 28, 2021, the Company repaid
the principal amount due of $750,000 and all interest due on this November 23, 2020 Note.
The
Holder had the right, at any time following an Uncured Default Date (as defined in this Note), to convert all or any portion of
the then outstanding and unpaid principal amount and interest (including any default interest) into shares of the Company’s
common stock at the Conversion Price. Following the Uncured Default Date the Conversion Price shall equal the lesser of (i) 105%
multiplied by the closing bid price of the Company’s common stock or (ii) the closing bid price of the Company’s common
stock immediately preceding the date of the respective conversion (the “Conversion Price”).
February
19, 2021 Convertible Note
On
February 19, 2021, the Company entered into a securities purchase agreement (the “SPA”) dated as of February 19, 2021,
with an accredited investor (the “Holder”), pursuant to which the Company issued a 12% promissory note (the “Note”)
with a maturity date of February 19, 2022 (the “Maturity Date”), in the principal sum of $1,650,000. In addition,
the Company issued 10,000 shares of its common stock to the Holder as a commitment fee pursuant to the SPA. Pursuant to the terms
of the Note, the Company agreed to pay to $1,650,000 (the “Principal Sum”) to the Holder and to pay interest on the
principal balance at the rate of 12% per annum (provided that that the first twelve months of interest (equal to $198,000.00)
shall be guaranteed and earned in full as of the Issue Date). The Note carries an original issue discount (“OID”)
of $165,000. Accordingly, on the Closing Date (as defined in the SPA), the Holder paid the purchase price of $1,485,000 in exchange
for the Note. The Company used the proceeds for its operational expenses, the repayment of the promissory notes previously issued
to the Holder on June 18, 2020 and November 23, 2020. In addition, pursuant to the terms of the SPA, the Company issued 10,000
shares of the Company’s common stock to the Holder as additional consideration. The 10,000 shares were value at $154,900,
or $15.49 per share, based on the quoted trading price on the date of grant, on the issue date, the relative fair value of these
shares of $141,606 was recorded as a debt discount and an increase in paid-in capital. In connection with the guaranteed interest
due of $198,000, the Company increased interest payable by $198,000 and increased debt discount by $198,000, which will
be amortized into interest expense over the term of this Note.
The
Holder may convert the Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in
the Note) at any time at a conversion price equal to $11.50 per share.
The
Company may prepay the Note at any time prior to the date that an Event of Default (as defined in the Note) (each an “Event
of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest (no
prepayment premium). The Note contains customary events of default relating to, among other things, payment defaults, breach of
representations and warranties, and breach of provisions of the Note or SPA. The Company is required to make an interim payment
to the Holder in the amount of $363,000, on or before August 19, 2021, towards the repayment of the balance of the Note.
Upon
the Holder’s provision of notice to the Company of the occurrence of any Event of Default, which has not been cured within
five (5) calendar days (provided, however, that this five (5) calendar day cure period shall not apply to any event of default
under Sections 3.1, 3.2, and 3.19 of the Note), the Note shall become immediately due and payable and the Company shall pay to
the Holder, in full satisfaction of its obligations hereunder, an amount equal to the Principal Sum then outstanding plus accrued
interest multiplied by 125% (the “Default Amount”). Upon the occurrence of an Event of Default, additional interest
will accrue from the date of the Event of Default at the rate equal to the lower of 15% per annum or the highest rate permitted
by law.
The
Company concluded that the conversion rights under the February 2021 convertible note at the time of issuance was determined to
be beneficial on the measurement date. Accordingly on February 19, 2021, the Company recorded a debt discount of $782,781 related
to the beneficial conversion feature arising from the February 2021 convertible debt which will amortized over the term of this
convertible note.
As
of February 28, 2021, Note had outstanding principal and accrued interest of $1,650,000 and $198,000 respectively.
In
connection with the June 2020 Note, August 2020 Note and February 2021 Note, during the nine months ended February 28, 2021, the
Company recognized interest expense of $633,221, including amortization of debt discount of $559,718.
August
7, 2020 Self-Amortization Promissory Note
On
August 7, 2020 (the “Issue Date”), the Company, entered into a securities purchase agreement (the “First Fire
SPA”) with FirstFire Global Opportunities Fund, LLC, an accredited investor (the “Holder”), pursuant to which
the Company issued a 12% self-amortization promissory note (the “Amortization Note”) with a maturity date of August
7, 2021 (the “Maturity Date”), in the principal sum of $333,333. Pursuant to the terms of the Amortization Note, the
Company agreed to pay to $333,333 (the “Principal Sum”) to the Holder and to pay interest on the principal balance
at the rate of 12% per annum. The Amortization Note carries an original issue discount (“OID”) of $33,333. The Company
received net proceeds of $280,500, net of original issue discount of $33,333 and origination fees of $19,500. In addition, pursuant
to the terms of the SPA, the Company issued 4,167 shares of the Company’s common stock to the Holder as additional consideration.
The 4,167 shares were value at $30,166, or $7.24 per share, based on the quoted trading price on the date of grant.
The
Company may prepay the Amortization Note at any time prior to the date that an Event of Default (as defined in the Amortization
Note) (each an “Event of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued
and unpaid interest (no prepayment premium). The Amortization Note contains customary events of default relating to, among other
things, payment defaults, breach of representations and warranties, and breach of provisions of the Amortization Note or SPA.
The
Company is required to make amortization payments to the Holder according to the following schedule:
Payment Date
|
|
Payment Amount
|
|
12/07/2020
|
|
$
|
40,075.75
|
|
01/07/2021
|
|
|
40,075.75
|
|
02/08/2021
|
|
|
40,075.75
|
|
03/08/2021
|
|
|
40,075.75
|
|
04/07/2021
|
|
|
40,075.75
|
|
05/07/2021
|
|
|
40,075.75
|
|
06/07/2021
|
|
|
40,075.75
|
|
07/07/2021
|
|
|
40,075.75
|
|
08/07/2021
|
|
|
39,952.34
|
|
Total:
|
|
$
|
360,558.34
|
|
During
the nine months ended February 28, 2021, in connection with this Note, the Company recorded interest expense of $94,069, including
$59,236 related to the amortization of debt discount. As of February 28, 2021, this Note had outstanding principal, debt discount and accrued
interest due of $333,333, $23,763 and $22,810, respectively. As of February 28, 2021, the Amortization Note is not in default.
On
March 10, 2021, the Company entered into a new convertible note with this investor. Refer to Note 11-Subsequent Events for additional
details.
Related
Party - Kaplan Promissory Note
On
May 12, 2020 (the “Issue Date”), the Company issued a promissory note (the “Kaplan Note”) in the principal
sum of $90,000 in favor of Jed Kaplan, the Company’s then-Chief Executive Officer, interim Chief Financial Officer, member of
the Company’s Board of Directors and greater than 5% stockholder of the Company. The Kaplan Note matures on the first business
day following the 150-day anniversary of the Issue Date (the “Maturity Date”). The Company will use the proceeds of
the Kaplan Note to fund the operations of Simplicity Brasil, the Company’s majority owned subsidiary (see Note 7).
As
of May 31, 2020, the balance of the Kaplan Note was $64,728. During the nine months ended February 28, 2021 Mr. Kaplan advanced
an additional $25,272 under the terms of the note. During the quarter ended November 30, 2020, Mr. Kaplan exchanged the note together
with accrued interest in exchange for his acquisition of a 10% interest in the Company’s wholly owned subsidiary Simplicity
Brasil.
NOTE
10 -STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $0.0001 per share. As of February 28, 2021,
there were no shares of preferred stock issued or outstanding.
Common
Stock
On
August 17, 2020, the Company amended its certificate of incorporation to increase the total number of authorized shares of the
Company’s common stock from 20,000,000 to 36,000,000. Holders of the shares of the Company’s common stock are entitled
to one vote for each share. At, February 28, 2021 and May 31, 2020, there were 1,341,017 and 998,622 shares of common stock
issued and outstanding respectively.
Common
Stock Issued for Cash
In
May 2020, the Company issued 2,976 shares of its restricted common stock at a price of $8.72 per share, to William H. Herrmann,
Jr., a member of the Company’s board of directors, for an aggregate purchase price of $25,000.
Common
Stock Issued in Connection with Debt
Effective
June 4, 2020, the Company issued 10,738 shares of common stock at $9.28 per share in connection with the conversion of $100,000
in principal balance of the Convertible Note Payable (see Note 8).
On
June 18, 2020, pursuant to the terms of the June 18, 2020 SPA between the Company and an accredited investor, pursuant to which
the Company issued a 12% self-amortization promissory note (Note 8) in the principal amount of $550,000, the Company issued 6,875
shares of common stock at $9.04 per share, to such accredited investor as additional consideration for the purchase of such note.
The 6,875 shares were value at $62,150, or $9.04 per share, based on the quoted trading price on the date of grant, which was
included in debt discount and accreted over the term of the debt.
Effective
July 1, 2020 pursuant to the terms of that certain 10% Fixed Convertible Promissory Note dated April 29, 2020 in the principal
amount of $152,500 issued by the Company in favor of Harbor Gates Capital, LLC, the Company issued 1,250 shares of our restricted
common stock, issued at $7.92 per share, to Harbor Gates Capital, LLC as additional consideration for the purchase of such note.
The 1,250 shares were value at $9,900, or $7.92 per share, based on the quoted trading price on the date of grant, which was included
in debt discount and accreted over the term of the debt.
Effective
August 10, 2020, pursuant to the terms of that certain Securities Purchase Agreement between the Company and an accredited investor
pursuant to which we issued a 12% self-amortization promissory note (Note 8) in the principal amount of $333,333, the Company
issued 4,167 shares of common stock at $7.28 per share. The 4,167 shares were value at $30,166, or $7.24 per share, based on the
quoted trading price on the date of grant, which was included in debt discount and accreted over the term of the debt.
Effective
February 19, 2021, pursuant to the terms of a Securities Purchase Agreement between the Company and an accredited investor, pursuant
to which the Company issued a 12% self-amortization promissory note (Note 8) in the principal amount of $1,650,000, the Company
issued 10,000 shares of common stock at $15.49 per share, to such accredited investor as additional consideration for the purchase
of such note. The 10,000 shares were valued at $141,606 based on a relative fair value method, which was included in debt
discount and additional paid in capital and accreted over the term of the debt.
Common
Stock Issued for Accounts Payable
On
June 4, 2020, the Company issued 3,125 shares of common stock at $14.72 per share in satisfaction of an outstanding balance owed
to a vendor in the amount of $46,000.
On
December 2, 2020, the Company issued 5,000 shares of common stock at $16.00 per share in satisfaction of an outstanding balance
owed to a vendor in the amount of $80,000. In connection with the issuance of these shares, the Company reduced accounts payable
by $50,000 and recorded legal fees of $30,000.
Common
Stock Issued for Acquisitions
On
July 1, 2020, the Company acquired the assets of one of its franchisee-owned esports gaming centers on Fort Bliss U.S. Military
base in El Paso, TX. In connection with the acquisition the Company issued 18,750 restricted shares at $8.80 per share, or $165,000
(see Note 5).
On
September 22, 2020, in connection with an Asset Purchase Agreement with Ignatious O’Riley, an existing franchisee,
to acquire Mr. O’Riley’s assets in exchange for 2,989 shares of the Company’s common stock with fair
value of $29,416 or $9.84 per share (see Note 5).
On
September 23, 2020, the Company’s wholly-owned subsidiary, Simplicity Union Gap entered into an Asset Purchase Agreement
with Five Point, an existing franchisee, to acquire Five Point’s assets in exchange for 4,506 shares of the Company’s
common stock with fair value of $43,974 or $9.76 per share (see Note 5).
On
October 1, 2020, the Company entered into an Asset Purchase Agreement with Parryproject, an existing franchisee, to acquire
Parryproject’s assets in exchange for 3,688 shares of the Company’s common stock with fair value of $38,650
or $10.48 per share (see Note 5).
On
October 1, 2020, the Company’s wholly-owned subsidiary, Simplicity Humble entered into an Asset Purchase Agreement
with Team Centore, an existing franchisee, to acquire Team Centore’s assets in exchange for 8,402 shares of the Company’s
common stock with fair value of $88,052 or $10.48 per share (see Note 5).
On
October 12, 2020, the Company’s wholly-owned subsidiary, Simplicity Frisco entered into an Asset Purchase Agreement
with JAR, an existing franchisee, to acquire JAR’s assets in exchange for 6,202 shares of the Company’s common
stock with fair value of $74,423 or $12.00 per share (see Note 5).
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Santa Rosa entered into an Asset Purchase Agreement
with B&R, an existing franchisee, to acquire B&R’s assets in exchange for 4,202 shares of the Company’s
common stock with fair value of $46,068 or $11.44 per share (see Note 5).
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Brea entered into an Asset Purchase Agreement
with Nextgen, an existing franchisee, to acquire Nextgen’s assets in exchange for 3,255 shares of the Company’s
common stock with fair value of $37,237 or $11.44 per share (see Note 5).
On
October 30, 2020, the Company’s wholly-owned subsidiary, Simplicity Billings entered into an Asset Purchase Agreement
with Button Mashers, an existing franchisee, to acquire Button Mashers’ assets in exchange for 4,697 shares of
the Company’s common stock with fair value of $52,725 or $11.44 per share (see Note 5).
Common
Stock Issued for Compensation
On
June 30, 2020, the Company issued 12,334 shares of common stock at $7.76 per share to various employees of the Company as compensation.
In connection with the issuance of these shares, the Company recorded stock-based compensation of $95,700.
During
the three months ended August 31, 2020, the Company issued 84,062 shares of common stock to executive officers of the Company
for services rendered. Additionally, the Company issued 19,779 shares of common stock to employees for services rendered. The
shares were valued at per share prices ranging from $6.56 to $14.72, based on the quoted trading price on the date of grant. In
connection with the issuance of these shares, during the six months ended November 30, 2020, the Company recorded stock-based
compensation of $54,395 and reduced prior accrued compensation by $669,215.
Effective
August 1, 2020, the Company entered into a marketing agreement whereby the Company issued 3,472 shares of common stock at $6.56
per share. In connection with the issuance of these shares, the Company recorded stock-based professional fees of $15,185 and
prepaid expenses of $7,593 which will be amortized over the remaining service period.
During
the three months ended November 30, 2020, the Company issued an aggregate of 9,844 restricted common shares of the Company to
executive officers of the Company for services rendered. These shares were valued at $119,632, or per share prices ranging from
$9.04 per share to $11.44 per common share, based on the quoted trading price on the date of grant. In connection with the issuance
of these shares, during the six months ended November 30, 2020, the Company recorded stock-based compensation of $119,632.
On
September 16, 2020, the Company issued an aggregate of 2,813 restricted common shares of the Company to executive officers and
employees of the Company for services rendered. These shares were valued at $25,420, or $9.04 per share, based on the quoted trading
price on the date of grant. In connection with the issuance of these shares, during the six months ended November 30, 2020, the
Company recorded stock-based professional fees of $25,420.
During
the three months ended February 28, 2021, the Company issued an aggregate of 108,641 restricted common shares of the Company to
executive officers of the Company for services rendered. These shares were valued at $1,545,467, or per share prices ranging from
$13.25 per share to $19.75 per common share, based on the quoted trading price on the date of grant. In connection with the issuance
of these shares, during the three months ended February 28, 2021, the Company recorded stock-based compensation of $1,545,467.
Warrants
In
connection with the November 23, 2020 SPA (see Note 8), the Company shall issue warrants equal to 375,000 divided by the Exercise
Price (as defined below) (the “Warrant Shares”) (whereby such number may be adjusted from time to time pursuant to
the terms and conditions of this Warrant) at the Exercise Price per share then in effect. For purposes of this Warrant, the term
“Exercise Price” shall mean 110% of the public offering price of the Company’s common stock under the public
offering contemplated by the registration statement on Form S-1 filed by the Company on October 23, 2020 (the “Uplist Offering”),
provided, however, that if the Uplist Offering has not been consummated on or before May 23, 2021, then the Exercise Price shall
mean the closing bid price of the Company’s common stock on December 23, 2020, subject to adjustment as provided in the
warrant (including but not limited to cashless exercise), and the term “Exercise Period” shall mean the period commencing
on the earlier of (i) the date of the Company’s consummation of the Uplist Offering or (ii) May 23, 2021, and ending on
the five-year anniversary thereof. In connection with the issuance of these warrants, on the initial measurement date, the relative
fair value of the warrants of $157,438 was recorded as a debt discount and an increase in paid-in capital.
Warrant
activities for the nine months ended February 28, 2021 are summarized as follows:
|
|
Number of Warrants
|
|
|
Weighted Average Exercise
Price
|
|
|
Weighted Average Remaining
Contractual Term (Years)
|
|
|
Aggregate Intrinsic Value
|
|
Balance Outstanding May 31, 2020
|
|
|
803,000
|
|
|
$
|
83.04
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
17,054
|
|
|
|
21.99
|
|
|
|
-
|
|
|
|
-
|
|
Cancelled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance Outstanding February 28, 2021
|
|
|
820,054
|
|
|
$
|
81.74
|
|
|
|
3.10
|
|
|
$
|
-
|
|
Exercisable, February 28, 2021
|
|
|
820,054
|
|
|
$
|
81.74
|
|
|
|
3.10
|
|
|
$
|
-
|
|
NOTE
11 — SUBSEQUENT EVENTS
Vancouver,
WA Franchisee Acquisition
Effective
March 26, 2021, the Company’s wholly-owned subsidiary, Simplicity Vancouver, LLC, entered into an Asset Purchase Agreement
with an existing franchisee to acquire the franchisee’s assets in exchange for 2,900 shares of the Company’s
common stock. This transaction closed in the fourth quarter.
Fullerton,
CA Franchisee Acquisition
Effective
January 31, 2021, the Company’s wholly-owned subsidiary, Simplicity Fullerton, LLC, entered into an Asset Purchase Agreement
with an existing franchisee to acquire the franchisee’s assets in exchange for 1,600 shares of the Company’s
common stock. This transaction closed in the fourth quarter.
August
7, 2020 Self-Amortization Promissory Note
On
March 10, 2021, the Company, entered into a securities purchase agreement (the “First Fire SPA”) dated as of March
10, 2021, with FirstFire Global Opportunities Fund, LLC, a Delaware limited liability company (the “Holder”), pursuant
to which the Company issued a 12% promissory note with a maturity date of March 10, 2022, in the principal sum of $560,000. The
Company received net proceeds of $130,606, net of OID of $56,000, net of origination fees of $8,394, and the repayment of principal
and interest of $365,000 on the August 7, 2020 Note. In addition, the Company issued 3,394 shares of its common stock to the
Holder as a commitment fee pursuant to the SPA. Pursuant to the terms of the Note, the Company agreed to pay to $560,000 (the
“Principal Sum”) to the Holder and to pay interest on the principal balance at the rate of 12% per annum (provided
that the first twelve months of interest shall be guaranteed). The Note carries an OID of $56,000. Accordingly, on the
Closing Date (as defined in the First Fire SPA), the Holder paid the purchase price of $504,000 in exchange for the Note. The
Holder may convert the Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in
the Note) at any time at a conversion price equal to $11.50 per share.
The
Company may prepay the Note at any time prior to the date that an Event of Default (as defined in the Note) (each an “Event
of Default”) occurs at an amount equal to 100% of the Principal Sum then outstanding plus accrued and unpaid interest (no
prepayment premium). The Note contains customary events of default relating to, among other things, payment defaults, breach of
representations and warranties, and breach of provisions of the Note or SPA.
The
Company is required to make an interim payment to the Holder in the amount of $123,200, on or before September 10, 2021, towards
the repayment of the balance of the Note.
Form S-8 Registration Statement
On March 18, 2021, the Company filed a
registration statement on Form S-8 for the purpose of resale or reoffer thereof, of 18,125 shares of the Company’s common
stock issued prior to the filing of such registration statement and held by the selling stockholder named therein in connection
with such selling stockholder’s provision of services to the Company.
Employment
Agreement
On
March 25, 2021, the Board appointed Roman Franklin, the Company’s then-President and Chief Operating Officer and
a member of the Board, as Chief Executive Officer of the Company. In connection with Mr. Franklin’s appointment, on March
25, 2021, the Company entered into an employment agreement, dated as of March 29, 2021 by and between the Company and Mr. Franklin
(the “Franklin Employment Agreement”). Pursuant to the terms of the Franklin Employment Agreement, in exchange for
Mr. Franklin’s services, the Company agreed to pay Mr. Franklin an annual base salary of $250,000. Mr. Franklin is also
eligible to receive a quarterly bonus of up to $15,000 in the form of a cash bonus and/or equity grant of shares of the Company’s
common stock. Mr. Franklin’s eligibility for any bonus and the amount thereof will be determined solely at the discretion
of the Board of Directors.
On
March 25, 2021, the Company appointed Mr. Lau as the Company’s Chief Financial Officer. In connection with Mr. Lau’s
appointment, on March 23, 2021, the Company entered into an employment agreement, dated as of March 29, 2021 by and between the
Company and Mr. Lau (the “Lau Employment Agreement”). Pursuant to the terms of the Lau Employment Agreement, in exchange
for Mr. Lau’s services, the Company agreed to pay Mr. Lau an annual base salary of $140,000. In addition, Mr. Lau is entitled
to receive compensation in the form of an equity grant of $5,000 in the Company’s common stock for each quarter during the
term of the Lau Employment Agreement, which runs for a period ending one year after March 29, 2021 and automatically renews for
successive one year terms unless either party gives 60 days’ advance written notice of its intention not to review the Lau
Employment Agreement. Mr. Lau is also eligible to receive a quarterly bonus of up to $12,500 in the form of a cash bonus and/or
equity grant of shares of the Company’s common stock. Mr. Lau’s eligibility for any bonus and the amount thereof will
be determined solely at the discretion of the Board of Directors.
Stock
Purchase Agreement with Tiger Trout
On
March 31, 2021, the Company entered into a Stock Purchase Agreement (this “Agreement”) by and between the Company
and Tiger Trout Capital Puerto Rico, LLC (“Tiger Trout”), pursuant to which the Company agreed to issue and sell to
Tiger Trout an aggregate of 125,000 shares of the Company’s common stock at a purchase price of $12.00 per share, for a total purchase price of $1,500,000.
The
Agreement provides that the sale will occur in two tranches, as follows:
|
●
|
The
Company agreed to issue and sell to Tiger Trout on March 31, 2021 41,667 shares of Common
Stock (the “First Tranche Shares”) at a purchase price of $12.00 per share,
for a total purchase price of $500,004 (the “First Tranche Purchase Price”).
The closing of the purchase and sale of the First Tranche Shares is referred to herein
as the “First Closing”.
|
|
●
|
Subject
to the satisfaction or waiver, by the party for whose benefit such conditions exist,
of the conditions to the Second Closing (as hereinafter defined), at such time and pursuant
to the terms and conditions in the Agreement, the Company agreed to issue and sell to
Tiger Trout 83,333 shares of Common Stock (the “Second Tranche Shares” and
together with the First Tranche Shares, the “Shares”) at a purchase price
of $12.00 per share, for a total purchase price of $999,996 (the “Second Tranche
Purchase Price” and together with the First Tranche Purchase Price, the “Purchase
Price”). The closing of the purchase and sale of the Second Tranche Shares is referred
to herein as the “Second Closing”.
|
In
the Agreement, the Company agreed that, following the First Closing, the Company will utilize its commercially reasonable efforts
to file a resale registration statement (the “Registration Statement”) pursuant to the Securities Act with the SEC
for the resale of the Shares, and will use its commercially reasonable efforts to have such registration statement declared
effective by the Commission within 30 calendar days, but not more than 90 calendar days after March 31, 2021.
The
Company also agreed to, among other things, (i) make and keep adequate current public information available, as those terms are
understood and defined in Rule 144 promulgated under the Securities Act, and (ii) file with the SEC in a timely manner all reports
and other documents required of the Company under the Securities Act and the Exchange Act so long as the Company remains subject
to such requirements and the filing of such reports and other documents as required for the applicable provisions of Rule 144.
The
obligations of Tiger Trout to consummate the Second Closing is subject to certain conditions, including, but not limited to: (i)
the Registration Statement shall have become effective, and (ii) from March 31, 2021 to the date of the Second Closing, trading
in the shares of Common Stock shall not have been suspended by the Commission of the Company’s principal Trading Market
(as defined in the Agreement), and, at any time prior to the date of the Second Closing, trading in securities generally as reported
by Bloomberg L.P. shall not have been suspended or limited, or minimum prices shall not have been established on securities whose
trades are reported by such services, or on any Trading Market, nor shall a banking moratorium have been declared either by the
United States or New York State authorities nor shall there have occurred any material outbreak or escalation of hostilities or
other national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial
market which, in each case, in the reasonable judgment of Tiger Trout, makes it impracticable or inadvisable to purchase the Second
Tranche Shares at the Second Closing.
The
Agreement contains customary representations and warranties of the Company and the Purchaser and other customary covenants and
agreements. The Agreement may be terminated by either the Company or Tiger Trout if the Second Closing has not occurred by the
date that is 90 calendar days after March 31, 2021.
FMW
Media Works
Effective
April 1, 2021, in connection with compensation for services to be rendered, the Company issued 12,500 shares of common stock to
FMW Media Works.
Maxim Note Payable
On
April 14, 2021, the Company and Maxim entered into the third amendment to the Series A-2 Note with Maxim pursuant to which the
Company and Maxim agreed to the following:
(i)
|
The
maturity date of the Series A-2 Note is extended to October 15, 2021.
|
(ii)
|
The
principal balance of the Series A-2 Note is increased by $50,000 as of April 14, 2021.
|
(iii)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s
common stock pursuant to conversion(s) of the Series A-2 Note) on or before April 30,
2021, the principal balance of the Series A-2 Note will increase by an additional $50,000.
|
(iv)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s
common stock pursuant to conversion(s) of the Series A-2 Note) on or before May 15, 2021,
the principal balance of the Series A-2 Note will increase by an additional $50,000.
|
(v)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s
common stock pursuant to conversion(s) of the Series A-2 Note) on or before July 15,
2021, the principal balance of the Series A-2 Note will increase by an additional $100,000.
|
(vi)
|
If
the Series A-2 Note is not repaid in its entirety (in cash and/or shares of the Company’s
common stock pursuant to conversion(s) of the Series A-2 Note) on or before September
15, 2021, the principal balance of the Series A-2 Note will increase by an additional
$100,000, representing a total cumulative increase in the principal balance of $350,000
if the Series A-2 Note is not repaid in its entirety on or before September 15, 2021.
|
(vii)
|
The
Company will, within five business days after the Company’s receipt of the Second
Tranche Purchase Price of $999,996, pay $500,000 to Maxim, which will reduce the principal
owed under the Series A-2 Note by $500,000.
|
While
any portion of the Series A-2 Note is outstanding, if the Company receives cash proceeds from public offerings or private placements
of the Company’s common stock to investors (except with respect to proceeds from officers and directors of the Company),
the Company will, within five business days of the Company’s receipt of such proceeds, inform Maxim or such receipt, following
which Maxim will have the right in its sole discretion to require the Company to immediately apply up to 25% of such proceeds
received by the Company to repay the outstanding amounts owed under the Series A-2 Note. The parties understand that (a) each
dollar applied toward repayment pursuant to this clause (viii) will reduce the balance owed under the Series A-2 Note by one dollar,
and (b) this clause (viii) will not apply to the Tiger Trout transaction