NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 — ORGANIZATION AND DESCRIPTION OF BUSINESS
Simplicity
Esports and Gaming Company (the “Company,” “we,” or “our”), was organized as a blank check company
under the laws of the State of Delaware on April 17, 2017. The Company was formed under the name I-AM Capital Acquisition Company for
the purpose of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination
with one or more businesses (“Business Combination”). On November 20, 2018, the Company changed its name from I-AM Capital
Acquisition Company to Smaaash Entertainment Inc. On January 2, 2019, the Company changed its name from Smaaash Entertainment Inc. to
Simplicity Esports and Gaming Company.
Through
our wholly owned subsidiary, Simplicity Esports, LLC, acquired on January 2, 2019, the Company implements a unique approach to ensure
the ultimate fan friendly esports experience. 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 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 opens
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.
As
of February 28, 2022, we operate 17 corporate-owned retail Simplicity Esports Gaming Centers. 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 February
28, 2022, the Company had 12 franchise locations operating in various states including Arizona, California, Florida, Maryland, Ohio,
South Carolina, Texas and Washington. PLAYlive offers a video gaming lounge concept to qualified franchisees. PLAYlive currently offers
single-unit location franchises, as well as agreements to develop multiple locations. This PLAYlive model is being interlaced with the
esports gaming centers mentioned above to create the ultimate gaming center.
The
Company’s common stock and warrants are quoted on the OTCQB under the symbols “WINR” and “WINRW,” respectively.
The Company has applied for an uplist to the Nasdaq Stock Exchange. There is no assurance that our listing application will be approved
by the Nasdaq Capital Market.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Securities and Exchange Commission (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, 2021, as filed with the SEC on August 31, 2021. The interim results for the nine months ended
February 28, 2022, are not necessarily indicative of the results to be expected for the year ending May 31, 2022 or for any future interim
periods.
Correction
of Previously Issued Financial Statements
The
accompanying condensed consolidated statement of operations for the three and nine months ended February 28, 2021 have been corrected
for a reclassification of depreciation expense of $78,093 and $151,342, respectively, to cost of goods sold related to assets utilized
in the production of inventory. The Company assessed the materiality of the misstatement quantitatively and qualitatively and has concluded
that the correction of the classification error is immaterial to the consolidated financial statements taken as a whole. As a result
of the correction, cost of goods sold for the three months ended February 28, 2021 increased from $108,187 to $186,280 with a corresponding
decrease of general and administrative expenses, resulting in a decrease to gross profit from $320,292 to $242,199. For the nine months
ended February 28, 2021, cost of goods sold increased from $216,355 to $367,697, with a corresponding decrease of general and administrative
expenses, resulting in a decrease to gross profit from $709,271 to $557,929. The correction had no impact on loss from operations and
net loss.
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 Securities Exchange Act of 1934, as amended (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.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Basis
of Consolidation
The
unaudited condensed consolidated financial statements include the operations of the Company and its wholly owned subsidiaries, its 76%
owned subsidiary (Simplicity One Brasil Ltda), its 79% owned subsidiaries (Simplicity Happy Valley, LLC and Simplicity Redmond, LLC),
and its 51% owned subsidiary (Simplicity El Paso, LLC).
All
significant intercompany accounts and transactions have been eliminated in consolidation.
Cash
and cash equivalents
The
Company considers short-term interest-bearing investments with initial maturities of three months or less to be cash equivalents. The
Company has no cash equivalents as of February 28, 2022 and May 31, 2021.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents and accounts receivable.
Cash and cash equivalents in a financial institution, which at times, may exceed the Federal depository insurance coverage of $250,000.
The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such
accounts through February 28, 2022.
Financial
Instruments
The
fair value of the Company’s assets and liabilities, which qualify as financial instruments under the Financial Accounting Standards
Board (the “FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures,”
approximates the carrying amounts represented in the condensed consolidated balance sheet.
Foreign
Currencies
Revenue
and expenses are translated at average rates of exchange prevailing during the period.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Use
of Estimates
The
preparation of unaudited condensed consolidated financial statements in conformity with GAAP requires the Company’s management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue
Recognition
In
accordance with ASC 606, Revenues from Contracts with Customers, the
Company recognizes revenue when performance obligations under the terms of a contract with the customer are satisfied. Product sales
occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects
to receive in exchange for transferring goods and services. Our revenue is derived from the three sources listed below.
The
following describes principal activities, separated by major product or service, from which the Company generates its revenues:
Company-owned Stores and Other
The
Company-owned stores principally generate revenue from retail esports gaming centers. Revenues from Company-owned stores are recognized
when the products are delivered, or the service is provided. Company-owned stores are typically in shopping malls with typical retail
hours of operations. After hours, the Company also mines for crypto currency using the computer equipment at the company-owned stores.
Crypto mining revenue is recognized as the mining occurs,
Franchise
Revenues
Franchise
revenues consist of royalties, fees and initial license fee income. Franchise royalties are based on six percent of franchise store sales
after a minimum level of sales occur and are recognized as sales occur. Any royalty reductions, including waivers or those offered as
part of a new store development incentive or as incentive for other behaviors, are recognized at the same time as the related royalty,
as they are not separately distinguishable from the full royalty rate. Franchise royalties are billed on a monthly basis.
The
Company recognizes initial franchise license fee revenue when the Company has performed substantially all the services required in the
franchise agreement. Fees received that do not meet these criteria are recorded as deferred revenues until earned. The pre-opening services
provided to franchisees do not contain separate and distinct performance obligations from the franchise right; thus, the fees collected
will be amortized on a straight-line basis beginning at the store opening date through the term of the franchise agreement, which is
typically 10 years. Franchise license renewal fees, which generally occur every 10 years, are billed before the renewal date. Fees received
for future license renewal periods are amortized over the life of the renewal period.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company offers various incentive programs for franchisees including royalty incentives, new store opening incentives (i.e., development
incentives) and other support initiatives. Royalties and franchise fees sales are reduced to reflect any royalty incentives earned or
granted under these programs that are in the form of discounts.
Commissary
sales are comprised of gaming equipment and supplies sold to franchised stores and are recognized as revenue upon shipment or delivery
of the related products to the franchisees. Payments are generally due within 30 days.
Fees
for information services, including software maintenance fees, marketing fees and website maintenance, graphic and promotion fees are
recognized as revenue as such services are provided.
Esports
Revenue
Esports
is a form of competition using video games. Most commonly, esports takes the form of organized, single player and multiplayer video game
tournaments or leagues, particularly between professional players, individually or as teams. Revenues from Esports revenues are recognized
when the competition is completed, and prize money is awarded. Revenues earned from team sponsorships, prize winnings, league sponsorships,
and from the Company’s share of league revenues are included in esports revenue.
Deferred
Revenues
Deferred
revenues are classified as current or long-term based on when management estimates the revenues will be recognized.
The
Company receives payments from franchisees in advance of all performance obligations having been met, including but not limited to franchise
locations being opened. As certain conditions agreed to in franchise agreements are performed, revenues are recognized.
During
the quarter the Company entered into a consulting agreement to provide services to a third party interested in opening a video games
related store. The third party paid for such services and the Company has deferred this revenue until its obligations are fulfilled.
These operating funds are included in the current portion of deferred revenues on the Balance Sheet.
Deferred
costs include commissions paid to brokers related to the sale of specific new franchises which have not met revenue recognition criteria
as of February 28, 2022. These costs are recognized in the same period as the initial franchise fee revenue is recognized.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Accounts
Receivable
The
Company estimates the allowance for doubtful accounts based on an analysis of specific customers (i.e., franchisees), taking into consideration
the age of past due accounts and an assessment of the customer’s ability to pay. Accounts receivable are written off against the
allowance when management determines it is probable the receivable is worthless. Customer account balances with invoices dated over 90
days old are considered delinquent and considered in the allowance assessment. The Company performs credit evaluations of its customers
and, generally, requires no collateral. As of February 28, 2022, management has recorded an allowance for doubtful accounts of $45,901.
Property
and Equipment
Property
and equipment and leasehold improvements are recorded at their historical cost. The cost of property and equipment is depreciated over
the estimated useful lives, when placed in service (ranging from 3 -5 years), of the related assets utilizing the straight-line method
of depreciation. The cost of leasehold improvements is depreciated (amortized) over the lesser of the length of the related leases or
the estimated useful lives of the assets. Ordinary repairs and maintenance are expensed when incurred and major repairs will be capitalized
and expensed if they benefit future periods.
Intangible
Assets and Impairment
Intangible
assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. These costs are included
in intangible assets on our condensed consolidated balance sheet and amortized on a straight-line basis when placed into service over
their estimated useful lives of the costs, which is 2 to 10 years.
The
Company periodically reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be fully recoverable. The Company recognizes an impairment loss when the sum of expected undiscounted future
cash flows is less that the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value.
Goodwill
Goodwill
is the excess of our purchase cost over the fair value of the net assets of acquired businesses. We do not amortize goodwill, but we
assess our goodwill for impairment at least annually. We have assessed goodwill and qualitative considerations indicated no impairment.
Franchise
Locations
Through
PLAYlive, the Company’s wholly owned subsidiary, the Company has entered into franchise agreements with third parties. As of February
28, 2022, 12 franchise locations were operational in various states, including Arizona, California, Florida, Maryland, Ohio, South Carolina,
Texas and Washington.
Stock-based
Compensation
The
Company records stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation and ASC 505-50, Equity-Based
Payments to Non-Employees. All transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable. Equity instruments issued to employees and the cost of the services received as consideration
are measured and recognized based on the fair value of the equity instruments issued and are recognized over the employees required service
period, which is generally the vesting period.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Non-employee
stock-based payments
The
Company records stock-based payments made to non-employees in accordance with FASB’s Accounting Standards Update (“ASU”)
2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns
accounting for share-based payments issued to nonemployees to that of employees under the existing guidance of Topic 718, with certain
exceptions.
Related
parties
Parties
are related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or
are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the
immediate families of principal owners of the Company and its management and other parties with which the Company may deal with if one
party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting
parties might be prevented from fully pursuing its own separate interests.
Basic
Loss Per Share
The
Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share.” Net income (loss) - per
share is calculated by dividing the Company’s net income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings or loss per common share is calculated by dividing the Company’s net income or loss available to common
stockholders by the diluted weighted average number of common shares outstanding during the period. The diluted weighted average number
of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity. For this calculation
potentially dilutive securities consist primarily of warrants, outstanding options and shares into which the company’s convertible
notes payable are convertible. When the Company records a loss from operations, all potentially dilutive shares are anti-dilutive and
are consequently excluded from the calculation of diluted net loss per common share.
Income
Taxes
The
Company complies with the accounting and reporting requirements of ASC Topic 740, “Income Taxes,” which requires an
asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed
for differences between the consolidated financial statements and tax bases of assets and liabilities that will result in future taxable
or deductible amounts, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
ASC
Topic 740 prescribes a recognition threshold and a measurement attribute for the consolidated financial statements recognition and measurement
of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not
to be sustained upon examination by taxing authorities.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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 the Company will continue as a
going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course
of business.
As
reflected in the unaudited condensed consolidated financial statements, the Company has an accumulated deficit of $20,586,755,
a working capital deficit of $2,548,029
and a net loss of $8,446,927
as of February 28, 2022. 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 generates revenue; however, the Company’s cash position may not be sufficient to support the
Company’s daily operations. Management intends to raise additional funds by way of private debt offerings and/or public equity
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. Since that time, infections have been
reported globally. Previously, certain federal, state and local governmental authorities issued stay-at-home orders, proclamations and/or
directives aimed at minimizing the spread of COVID-19. 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 17 corporate
and 12 franchised locations. Although our franchise agreements with franchisees of Simplicity gaming centers require a minimum monthly
royalty payment to us from the franchisees regardless of whether the franchised Simplicity gaming centers are operating, there is a potential
risk that franchisees of Simplicity gaming centers will default in their obligations to pay their minimum monthly royalty payment to
us, resulting in either an increase in accounts receivables or a bad debt expense where account receivables are no longer collectible
due to a franchisee’s inability to pay the minimum monthly royalty payments owed by the franchisee. Additional and/or more restrictive
orders, proclamations and/or directives may be issued in the future.
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, 2022 and will
potentially continue to impact the Company’s business. Management expects that all of its business segments, across all of its
geographies, will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on the Company’s business
and the duration for which it may have an impact cannot be determined at this time.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
3 — PROPERTY AND EQUIPMENT
The
following is a summary of property and equipment—at cost, less accumulated depreciation:
SCHEDULE OF PROPERTY AND EQUIPMENT
| | |
February 28, 2022 | | |
May 31, 2021 | |
| | |
| | |
| |
| Leasehold improvements | |
$ | 110,849 | | |
$ | 110,849 | |
| Property and equipment | |
| 1,204,613 | | |
| 755,741 | |
| Total cost | |
| 1,315,462 | | |
| 866,590 | |
| Less accumulated depreciation | |
| (538,100 | ) | |
| (292,282 | ) |
| Net property and equipment | |
$ | 777,362 | | |
$ | 574,308 | |
During
the nine months ended February 28, 2022 and 2021, the Company recorded depreciation expense of $245,817 and $151,342, respectively.
NOTE
4 — INTANGIBLE ASSETS
The
following table sets forth the intangible assets, including accumulated amortization as of February 28, 2022:
SCHEDULE OF INTANGIBLE ASSETS
| | |
February 28, 2022 | |
| | |
Remaining | | |
| | |
Accumulated | | |
Net Carrying | |
| | |
Useful Life | | |
Cost | | |
Amortization | | |
Value | |
| Non-competes | |
| 4 years | | |
$ | 1,023,118 | | |
$ | 652,267 | | |
$ | 370,851 | |
| Trademarks | |
| Indefinite | | |
| 866,000 | | |
| - | | |
| 866,000 | |
| Customer database | |
| 2 years | | |
| 35,000 | | |
| 29,167 | | |
| 5,833 | |
| Restrictive covenant | |
| 2 years | | |
| 115,000 | | |
| 95,833 | | |
| 19,167 | |
| Customer contracts | |
| 10 years | | |
| 185,563 | | |
| 34,097 | | |
| 151,466 | |
| Internet domain | |
| 2 years | | |
| 3,000 | | |
| 3,000 | | |
| - | |
| | |
| | | |
$ | 2,227,681 | | |
$ | 814,364 | | |
$ | 1,413,317 | |
The
following tables set forth the intangible assets, including accumulated amortization as of May 31, 2021:
| | |
May 31, 2021 | |
| | |
Remaining | | |
| | |
Accumulated | | |
Net Carrying | |
| | |
Useful Life | | |
Cost | | |
Amortization | | |
Value | |
| Non-competes | |
| 4.50 years | | |
$ | 1,023,118 | | |
$ | 498,799 | | |
$ | 524,319 | |
| Trademarks | |
| Indefinite | | |
| 866,000 | | |
| - | | |
| 866,000 | |
| Customer contracts | |
| 10 years | | |
| 546,000 | | |
| 301,675 | | |
| 244,325 | |
| Internet domain | |
| 2.50 years | | |
| 3,000 | | |
| 2,417 | | |
| 583 | |
| | |
| | | |
$ | 2,438,118 | | |
$ | 802,891 | | |
$ | 1,635,227 | |
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table sets forth the future amortization of the Company’s intangible assets as of February 28, 2022 for the fiscal years
ending May 31:
SCHEDULE OF FUTURE AMORTIZATION OF INTANGIBLE ASSETS
| | |
2022 | | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
Thereafter | | |
Total | |
| Non-competes | |
$ | 51,156 | | |
$ | 204,624 | | |
$ | 115,071 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 370,851 | |
| Customer contracts | |
| 4,053 | | |
| 16,211 | | |
| 16,211 | | |
| 16,211 | | |
| 16,211 | | |
| 82,569 | | |
| 151,466 | |
| Restrictive covenant | |
| 14,375 | | |
| 4,792 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 19,167 | |
| Customer database | |
| 4,375 | | |
| 1,458 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 5,833 | |
| Internet domain | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
| Total | |
$ | 73,959 | | |
$ | 227,085 | | |
$ | 131,282 | | |
$ | 16,211 | | |
$ | 16,211 | | |
$ | 82,569 | | |
$ | 547,317 | |
Amortization
expense for the nine months ended February 28, 2022 and 2021 was $221,910 and $212,343, respectively.
NOTE
5 — RELATED PARTY TRANSACTIONS
Contract
Services
On
August 27, 2021, the Company entered into a contract with Laila Cavalcanti Loss, a member of the Company’s Board of Directors,
to provide legal services to Simplicity One Brasil, LTDA, the Company’s 76%-owned subsidiary. The contract calls for monthly payments
of $2,500
and monthly equity awards of 250
shares of its common stock. The terms of the
contract were retroactive to July 1, 2020 and on February 28, 2022, the Company had accrued $13,125
and 375
shares of stock for payment pursuant to this
contract.
Note
Payable
On
December 10, 2021, the Company entered into a related party transaction with Jed Kaplan, the Company’s Chairman of the Board and
a more than 5%
shareholder, to provide a loan to the Company to provide additional operating funds for Simplicity One Brasil, LTDA, the Company’s
76%-owned subsidiary. The principal amount of the loan was $247,818.
The loan bears interest at a rate of 5%
per annum and the entire amount of the principal and accrued interest is due on June
10, 2022. For the quarter ended February 28,
2022, the Company recorded interest expense of $2,716. The
loan may be repaid by the Company, without penalty, at any time. Should the Company fail to make the principal payment due, the loan
will convert to a 17% equity stake in Simplicity One Brazil, LTDA, of which Jed Kaplan is already a 20% stakeholder.
The
Company maintains a portion of its cash balance at a financial services company that is owned by an officer of the Company.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
6 COMMITMENTS AND CONTINGENCIES
Unit
Purchase Option
On
November 20, 2018, 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 pre-reverse split (or an aggregate exercise price of $2,990,000) upon the closing of the Company’s initial public offering
(“IPO”). The unit purchase option (“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 IPO 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 the UPO are identical to those offered in the IPO, except that the exercise price
of the warrants underlying the units sold to the underwriters is $13.00 per share on a pre-reverse split basis.
Operating
Lease Right of Use Obligation
As
of February 28, 2022, operating lease right-of-use assets and liabilities arising from operating leases was $1,557,443
and $1,507,993,
respectively. During the nine months ended February 28, 2022 and 2021, the Company recorded operating lease expense of approximately
$400,975 and
$202,785,
respectively.
The
following is a schedule showing the future minimum lease payments under operating leases by fiscal years and the present value of the
minimum payments as of February 28, 2022:
SCHEDULE SHOWING THE FUTURE MINIMUM LEASE PAYMENTS
| | |
| | |
| 2022 | |
$ | 127,766 | |
| 2023 | |
| 496,354 | |
| 2024 | |
| 495,957 | |
| 2025 | |
| 392,099 | |
| 2026 and thereafter | |
| 254,493 | |
| Total Operating Lease Obligations | |
| 1,766,669 | |
| Less: Amount representing interest | |
$ | (258,676 | ) |
| Present Value of minimum lease payments | |
$ | 1,507,993 | |
NOTE
7- DEBT
The
table below presents outstanding debt instruments as of February 28, 2022, and May 31, 2021:
SCHEDULE OF OUTSTANDING DEBT INSTRUMENT
| | |
February 28,
2022 | | |
May 31,
2021 | |
| Convertible promissory notes | |
$ | 5,164,480 | | |
$ | 3,157,970 | |
| Secured notes | |
| 403,592 | | |
| - | |
| Related party note payable | |
| 247,818 | | |
| - | |
| Related debt discount | |
| (2,641,847 | ) | |
| (947,873 | ) |
| | |
| | | |
| | |
| Total promissory notes, net | |
$ | 3,215,778 | | |
$ | 2,211,097 | |
| | |
| | | |
| | |
| Current portion of promissory notes, net | |
$ | 1,689,671 | | |
$ | 2,211,097 | |
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
February
19, 2021 Labrys 12% Promissory Note and Securities Purchase Agreement
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 the first twelve months of interest shall be guaranteed). 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 intends to use the proceeds for its operational expenses, the repayment of those certain self-amortization
promissory notes previously issued to the Holder on June 18, 2020 and November 23, 2020, and the repayment of certain other existing
debt obligations. 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.
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, 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.
During
the nine months ended February 28, 2022, the Company paid the Holder a total of $865,000.
The Company paid an interim payment due to the Holder in the amount of $225,000
towards the repayment of the balance of the Note
in the amount of $90,909,
towards the repayment of guaranteed interest in the amount of $109,091
and $25,000
as an amendment fee. In addition, the Company
paid $130,000
towards the repayment of the balance of the Note
in the amount of $58,500
and towards the guaranteed interest in the amount
of $71,500
and in compliance with the renegotiated terms
of an interim payment that was due on August 19, 2021 in the amount of $363,000,
on September 30, 2021 the Company paid $500,000
towards the repayment of principal of the Note.
On February 18, 2022, the Company paid $10,000
toward the repayment of principal of the Note
and to extend the due date to March
18, 2022. On March 16, 2022, the Company
and the Holder agreed to extend the due date to September
15, 2022.
During
the quarter ended February 28, 2022, the Company incurred $264,981 of interest expense related to the amortization of the debt discount
on the Note. On February 28, 2022, the balance of the Note is $890,586 all of which is included in the current portion of convertible
notes payable, net of debt discount which has been fully amortized.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March
2021 FirstFire Global 12% Promissory Note and Securities Purchase Agreement
On
March 10, 2021, the Company, entered into a securities purchase agreement (the “March 10 FirstFire SPA”) dated as of March
10, 2021, with FirstFire Global Opportunities Fund, LLC, a Delaware limited liability company (the “FirstFire”), pursuant
to which the Company issued a 12% promissory note (“March 10 FirstFire Note”) with a maturity date of March 10, 2022, in
the principal sum of $560,000. The Company received net proceeds of $130,606, net of 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 FirstFire as a commitment fee pursuant to the SPA. Pursuant to the terms of the March 10 FirstFire 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 March 10 FirstFire Note carries an OID of
$56,000. Accordingly, on the Closing Date (as defined in the March 10 FirstFire SPA), the Holder paid the purchase price of $504,000
in exchange for the Note. The FirstFire may convert the March 10 FirstFire Note into the Company’s common stock (subject to the
beneficial ownership limitations of 4.99% in the March 10 FirstFire Note) at any time at a conversion price equal to $11.50 per share.
The
Company may prepay the March 10 FirstFire 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 March 10 FirstFire Note contains customary events of default relating to, among other things, payment defaults,
breach of representations and warranties, and breach of provisions of the March 10 FirstFire Note or March 10 FirstFire SPA.
The
Company is required to make an interim payment to FirstFire in the amount of $123,200, on or before September 10, 2021, towards the repayment
of the balance of the March 10 FirstFire Note. On September 17, 2021, the Company issued a common stock purchase warrant for the purchase
of 40,000 shares of the Company’s common stock to FirstFire as consideration for FirstFire entering into a first amendment to the
March 10 FirstFire Note in order to delay an interim payment of OID and interest due under the March 10 FirstFire Note to the maturity
date of such note. For the nine months ended February 28, 2022, the Company recorded the fair value of the warrants in the amount of
$248,547 and took a related interest expense charge of $248,547.
On
October 1, 2021, the Company issued a three-year warrant to purchase 40,000 shares of the Company’s common stock at an exercise
price of $10.73 per share to FirstFire as consideration for FirstFire entering into a second amendment to the March 10 FirstFire Note
in order to remove the capital raising ceiling in such note. For the nine months ended February 28, 2022, the Company recorded the fair
value of the warrants in the amount of $201,351 and took a related interest expense charge of $201,351.
Upon
FirstFire’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 the March 10 FirstFire Note shall become immediately due and payable and the Company shall pay to FirstFire, in full
satisfaction of its obligations hereunder, an amount equal to the 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.
During
the nine months ended February 28, 2022, the Company recognized $197,327
of interest expense related to the amortization
of debt discount related to the FirstFire Note. On February 28, 2022, the balance of FirstFire Note,
is $551,262,
all of which is included in the current portion of convertible notes payable, net of debt discount.
June
2021 FirstFire Global 12% Promissory Note and Securities Purchase Agreement
On
June 11, 2021, the Company entered into a securities purchase agreement (the “June 11 FirstFire SPA”) dated as of June 10,
2021, with FirstFire Global Opportunities Fund, LLC (“FirstFire”), pursuant to which the Company issued a 12% promissory
note (the “June 11 FirstFire Note”) with a maturity date of June 10, 2023 (the “FirstFire Maturity Date”), in
the principal sum of $1,266,666. In addition, the Company issued 11,875 shares of its common stock to FirstFire as a commitment fee pursuant
to the June 11 FirstFire SPA. Pursuant to the terms of the June 11 FirstFire Note, the Company agreed to pay to $1,266,666 (the “FirstFire
Principal Sum”) to FirstFire and to pay interest on the principal balance at the rate of 12% per annum (provided that the first
six months of interest shall be guaranteed and the remaining 18 months of interest shall be deemed earned in full if any amount is outstanding
under the FirstFire Note after 180 days from June 10, 2021). The June 11 FirstFire Note carries an OID of $126,666. Accordingly, FirstFire
paid the purchase price of $1,140,000 in exchange for the FirstFire Note. The Company intends to use the proceeds for working capital
and to pay off an existing promissory note issued by the Company in favor of Maxim. FirstFire may convert the June 11 FirstFire Note
into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the June 11 FirstFire Note; provided
however, that the limitation on conversion may be waived (up to 9.99%) by FirstFire upon, at the election of FirstFire, not less than
61 days’ prior notice to the Company) at any time at a conversion price equal to $11.50 per share, as the same may be adjusted
as provided in the June 11 FirstFire Note.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company may prepay the June 11 FirstFire Note at any time prior to maturity in accordance with the terms of the June 11 FirstFire Note.
The June 11 FirstFire Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the June 11 FirstFire Note or the June 11 FirstFire SPA.
Upon
the occurrence of any Event of Default (as defined in the June 11 FirstFire Note), which has not been cured within three calendar days,
the June 11 FirstFire Note shall become immediately due and payable and the Company shall pay to FirstFire, in full satisfaction of its
obligations hereunder, an amount equal to the FirstFire Principal Sum then outstanding plus accrued interest multiplied by 125%.
Pursuant
to the terms of the June 11 FirstFire SPA, the Company also issued to FirstFire a three-year warrant (the “June 11 FirstFire Warrant”)
to purchase 593,750 shares of the Company’s common stock at an exercise price equal to (i) 110% of the per share offering price
of the offering made in connection with any uplisting of the Company’s common stock; or (ii) prior to the determination of the
per share offering price of the offering made in connection with any uplisting of the common stock and following such time if the uplisting
contemplated in clause (i) is not completed by November 1, 2021, $10.73.
The
Company also agreed to prepare and file with the Securities and Exchange Commission a registration statement covering the resale of all
shares issued or issuable pursuant to the June 11 FirstFire SPA, including shares issued upon conversion of the June 11 FirstFire Note
or exercise of the June 11 FirstFire Warrant. The Company agreed to use its commercially reasonable efforts to have the registration
statement filed with the SEC within 90 days following June 10, 2021 and to have the registration statement declared effective by the
SEC within 120 days following June 10, 2021.
The
Company recorded the June 11 FirstFire Note in the amount of $1,266,667
and a related debt discount of $1,266,667,
interest payable of $76,000
and additional paid in capital of $1,053,999.
On September 16, 2021, the Company made an interim payment to the FirstFire Note in the amount of $175,000.
During the quarter ended February 28, 2022, the Company recorded interest expense of $240,041, which included $206,518 related to
amortization of debt discount and accrued interest in the amount of $33,523. On February 28, 2022, the balance of the June 11 FirstFire
Note is $329,966
all of which is included in the long-term portion
of convertible notes payable, net of related debt discount.
GS
Capital Securities Purchase Agreement & Note
On
June 16, 2021, the Company entered into a securities purchase agreement (the “GS SPA”) dated as of June 10, 2021, with GS
Capital Partners, LLC (“GS Capital”), pursuant to which the Company issued a 12% promissory note (the “GS Note”)
with a maturity date of June 10, 2023 (the “GS Maturity Date”), in the principal sum of $333,333. In addition, the Company
issued 3,125 shares of its common stock to GS as a commitment fee pursuant to the GS SPA. Pursuant to the terms of the GS Note, the Company
agreed to pay to $300,000.00 (the “GS Principal Sum”) to GS and to pay interest on the principal balance at the rate of 12%
per annum (provided that the first six months of interest shall be guaranteed and the remaining 18 months of interest shall be deemed
earned in full if any amount is outstanding under the GS Note after 180 days from June 10, 2021). The GS Note carries an OID of $33,333.
Accordingly, GS paid the purchase price of $300,000.00 in exchange for the GS Note. The Company intends to use the proceeds for working
capital and to pay off an existing promissory note issued by the Company in favor of Maxim. GS may convert the GS Note into the Company’s
common stock (subject to the beneficial ownership limitations of 4.99% in the GS Note; provided however, that the limitation on conversion
may be waived (up to 9.99%) by GS upon, at the election of GS, not less than 61 days’ prior notice to the Company) at any time
at a conversion price equal to $11.50 per share, as the same may be adjusted as provided in the GS Note.
The
Company may prepay the GS Note at any time prior to maturity in accordance with the terms of the GS Note. The GS Note contains customary
events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions
of the GS Note or the GS SPA.
Upon
the occurrence of any Event of Default (as defined in the GS Note), which has not been cured within three calendar days, the GS Note
shall become immediately due and payable and the Company shall pay to GS, in full satisfaction of its obligations hereunder, an amount
equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Pursuant
to the terms of the GS SPA, the Company also issued to GS a three-year warrant to purchase 156,250 shares of the Company’s common
stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting of
the Company’s common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection
with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed by November
1, 2021, $10.73.
The
Company also agreed to prepare and file with the SEC a registration statement covering the resale of all shares issued or issuable pursuant
to the GS SPA, including shares issued upon conversion of the GS Note or exercise of the GS Warrant. The Company agreed to use its commercially
reasonable efforts to have the registration statement filed with the SEC within 90 days following June 10, 2021 and to have the registration
statement declared effective by the SEC within 120 days following June 10, 2021.
The
Company recorded the GS Note in the amount of $333,333
and a related debt discount of $333,333,
interest payable of $20,000
and additional paid in capital of $280,000.
During the quarter ended February 28, 2022, the Company recorded interest expense of $65,482,
which included $56,630 related to amortization of debt discount and accrued interest in the amount of $8,822.
On February 28, 2022, the balance of the GS Note is $132,886,
all of which is included in the long-term portion
of convertible notes payable, net of related debt discount.
Jefferson
Street Capital Stock Purchase Agreement & Note
On
August 23, 2021, the Company entered into a securities purchase agreement (the “Jefferson SPA”) dated as of August 23, 2021,
with Jefferson Street Capital, LLC (“Jefferson”), pursuant to which the Company issued a 12% promissory note (the “Jefferson
Note”) with a maturity date of August 23, 2023 (the “Jefferson Maturity Date”), in the principal sum of $333,333. In
addition, the Company issued 3,125 shares of its common stock to Jefferson as a commitment fee pursuant to the Jefferson SPA. Pursuant
to the terms of the Jefferson Note, the Company agreed to pay to $300,000.00 (the “Jefferson Principal Sum”) to Jefferson
and to pay interest on the principal balance at the rate of 12% per annum (provided that the first six months of interest shall be guaranteed
and the remaining 18 months of interest shall be deemed earned in full if any amount is outstanding under the Jefferson Note after 180
days from August 23, 2021). The Jefferson Note carries an OID of $33,333. Accordingly, Jefferson paid the purchase price of $300,000.00
in exchange for the Jefferson Note. The Company intends to use the proceeds for working capital and to pay off an existing promissory
note issued by the Company in favor of Maxim. Jefferson may convert the Jefferson Note into the Company’s common stock (subject
to the beneficial ownership limitations of 4.99% in the Jefferson Note; provided however, that the limitation on conversion may be waived
(up to 9.99%) by Jefferson upon, at the election of Jefferson, not less than 61 days’ prior notice to the Company) at any time
at a conversion price equal to $11.50 per share, as the same may be adjusted as provided in the Jefferson Note.
The
Company may prepay the Jefferson Note at any time prior to maturity in accordance with the terms of the Jefferson Note. The Jefferson
Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties,
and breach of provisions of the Jefferson Note or the Jefferson SPA.
Upon
the occurrence of any Event of Default (as defined in the Jefferson Note), which has not been cured within three calendar days, the Jefferson
Note shall become immediately due and payable and the Company shall pay to Jefferson, in full satisfaction of its obligations hereunder,
an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
Pursuant
to the terms of the Jefferson SPA, the Company also issued to Jefferson a three-year warrant to purchase 156,250 shares of the Company’s
common stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting
of the Company’s common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection
with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed by November
1, 2021, $10.73.
The
Company also agreed to prepare and file with the SEC a registration statement covering the resale of all shares issued or issuable pursuant
to the Jefferson SPA, including shares issued upon conversion of the Jefferson Note or exercise of the Jefferson Warrant. The Company
agreed to use its commercially reasonable efforts to have the registration statement filed with the SEC within 90 days following August
23, 2021 and to have the registration statement declared effective by the SEC within 120 days following August 23, 2021.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company recorded the Jefferson Note in the amount of $333,333 and a related debt discount of $274,239, interest payable of $20,000 and
additional paid in capital of $205,605. During the quarter ended February 28, 2022, the Company recorded interest expense of $48,796.
On February 28, 2022, the balance of the Jefferson Note is $143,382, all of which is included in the
long-term portion of convertible notes payable, net of debt discount.
Lucas
Ventures Capital Stock Purchase Agreement & Note
On
August 31, 2021, pursuant to the terms of that certain Securities Purchase Agreement between the Company and Lucas Ventures, LLC (“LV
SPA”), the Company issued a 12% convertible promissory note (“the LV Note”) in the principal amount of $200,000 with
an effective date of September 2, 2021, guaranteed interest of $12,000 and a maturity date of September 2, 2023. In addition, the Company
issued 3,749 shares of its common stock to LV as a commitment fee pursuant to the Securities Purchase Agreement. Furthermore, the Company
issued a common stock purchase warrant for the purchase of 187,400 shares of the Company’s common stock). Accordingly, Lucas Ventures
Capital paid the purchase price of $200,000.00 in exchange for the LV Note.
The
Company may prepay the LV Note at any time prior to maturity in accordance with the terms of the LV Note. The LV Note contains customary
events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions
of the LV Note or the LV SPA.
Upon
the occurrence of any Event of Default (as defined in the LV Note), which has not been cured within three calendar days, the LV Note
shall become immediately due and payable and the Company shall pay to LV, in full satisfaction of its obligations hereunder, an amount
equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
Pursuant
to the terms of the LV SPA, the Company also issued to LV a three-year warrant to purchase 187,480 shares of the Company’s common
stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting of
the Company’s common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection
with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed by November
1, 2021, $10.73.
The
Company also agreed to prepare and file with the SEC a registration statement covering the resale of all shares issued or issuable pursuant
to the LV SPA, including shares issued upon conversion of the LV Note or exercise of the LV Warrant. The Company agreed to use its commercially
reasonable efforts to have the registration statement filed with the SEC within 90 days following September 2, 2021 and to have the registration
statement declared effective by the SEC within 120 days following September 2, 2021.
The
Company recorded the LV Note in the amount of $200,000
and a related debt discount of $200,000,
additional paid in capital of $158,999
and guaranteed interest of $12,000.
During the quarter ended February 28, 2022, the Company recorded interest expense of $34,230.
On February 28, 2022, the balance of the LV Note is $58,614
all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
LGH
Investments, LLC Note Payable
On
August 31, 2021, the Company and LGH Investments, LLC, (“LGH”) issued a 12% convertible promissory note (“LGH Note”)
in the principal amount of $200,000 effective September 2, 2021 with a maturity date of September 2, 2023.
The
Company may prepay the LGH Note at any time prior to maturity in accordance with the terms of the LGH Note. The LGH Note contains customary
events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of provisions
of the LGH Note.
Upon
the occurrence of any Event of Default (as defined in the LGH Note), which has not been cured within three calendar days, the LGH Note
shall become immediately due and payable and the Company shall pay to LGH, in full satisfaction of its obligations hereunder, an amount
equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
Company recorded the LGH Note in the amount of $200,000,
interest payable of $12,000
along with total debt discount of $ 38,500,
OID of $20,000
and origination fees of $6,500.
During the quarter ended February 28,2022, the Company recorded interest expense of $13,718.
On February 28, 2022, the balance of the LGH Note is $180,071,
all of which is included in the long-term portion of convertible notes payable, net of related debt discount.
Ionic
Ventures, LLC Capital Stock Purchase Agreement & Note
On
September 28, 2021, the Company entered into a securities purchase agreement (the “Ionic SPA”) dated as of September 28,
2021, with Ionic Ventures, LLC (“Ionic”), pursuant to which the Company issued a 12% promissory note (the “Ionic Note”)
with a maturity date of September 28, 2023 (the “Ionic Maturity Date”), in the principal sum of $1,555,555.56 with guaranteed
interest of $93,333.34. In addition, the Company issued 14,584 shares of its common stock to Ionic as a commitment fee pursuant to the
Ionic SPA. Pursuant to the terms of the Ionic Note, the Company agreed to pay to $1,400,000.00 (the “Ionic Principal Sum”)
to Ionic and to pay interest on the principal balance at the rate of 12% per annum (provided that the first six months of interest shall
be guaranteed and the remaining 18 months of interest shall be deemed earned in full if any amount is outstanding under the Ionic Note
after 180 days from September 28, 2021). The Ionic Note carries an OID of $155,555.56. Accordingly, Ionic paid the purchase price of
$1,400,000.00 in exchange for the Ionic Note. The Company intends to use the proceeds for working capital. Ionic may convert the Ionic
Note into the Company’s common stock (subject to the beneficial ownership limitations of 4.99% in the Ionic Note; provided however,
that the limitation on conversion may be waived (up to 9.99%) by Ionic upon, at the election of Ionic, not less than 61 days’ prior
notice to the Company) at any time at a conversion price equal to $11.50 per share, as the same may be adjusted as provided in the Ionic
Note.
The
Company may prepay the Ionic Note at any time prior to maturity in accordance with the terms of the Ionic Note. The Ionic Note contains
customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of
provisions of the Ionic Note or the Ionic SPA.
Upon
the occurrence of any Event of Default (as defined in the Ionic Note), which has not been cured within three calendar days, the Ionic
Note shall become immediately due and payable and the Company shall pay to Ionic, in full satisfaction of its obligations hereunder,
an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
Pursuant
to the terms of the Ionic SPA, the Company also issued to Ionic a three-year warrant to purchase 729,167 shares of the Company’s
common stock at an exercise price equal to (i) 110% of the per share offering price of the offering made in connection with any uplisting
of the Company’s common stock; or (ii) prior to the determination of the per share offering price of the offering made in connection
with any uplisting of the common stock and following such time if the uplisting contemplated in clause (i) is not completed by November
1, 2021, $10.73.
The
Company also agreed to prepare and file with the SEC a registration statement covering the resale of all shares issued or issuable pursuant
to the Ionic SPA, including shares issued upon conversion of the Ionic Note or exercise of the Ionic Warrant. The Company agreed to use
its commercially reasonable efforts to have the registration statement filed with the SEC within 90 days following September 28, 2021
and to have the registration statement declared effective by the SEC within 120 days following September 28, 2021.
The
Company recorded the Ionic Note in the amount of $1,555,555 and a related debt discount of $1,555,555, and additional paid in capital
of $1,306,665 and guaranteed interest of $93,333. During the quarter ended February 28, 2022, the Company recorded interest expense of
$248,165. On February 28, 2022, the balance of the LV Note is $382,410, all of which is included in
the long-term portion of convertible notes payable, net of related debt discount.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Secured
Promissory Note One
On
November 15, 2021, the Company entered into a 10% secured promissory note with an accredited investor (“Secured Note One”)
in the amount of $262,500 for the purpose of acquiring computers for Company owned store operations. The Secured Note One has a perfected
security interest in 50 personal computers the Company will use in its operations. In addition, the Company issued 30,000 commitment
warrants for the purchase of the Company’s common stock at an exercise price of $10.73 per share. The Secured Note One requires
60 monthly payments of principal and interest in the amount of $5,577.
The
Company recorded the Secured Note One in the amount of $262,500
along with an OID of $12,500.
Accordingly, the investor paid $250,000
in exchange for the Secured Note One. For the
quarter ended February 28, 2022, the Company paid interest in the amount of $6,478
and on February 28, 2022, the balance of the
Secured Note One is $160,650
all of which is included in the long-term portion
of convertible notes payable, net of related debt discount.
Secured
Promissory Note Two
On
November 18, 2021, the Company entered into a 10% secured promissory note accredited with an accredited investor (“Secured Note
Two”) in the amount of $157,500 for the purpose of acquiring computers for Company owned store operations. The Secured Note Two
has a perfected security interest in 30 personal computers the Company will use in its operations. In addition, the Company issued 18,000
commitment warrants for the purchase of the Company’s common s stock at an exercise price of $10.73 per share. The Secured Note
Two requires 60 monthly payments of principal and interest in the amount of $3,346.
The
Company recorded the Secured Note Two in the amount of $157,500 along with an OID of $7,500. Accordingly, the investor paid $150,000
in exchange for the Secured Note Two. For the quarter ended February 28, 2022, the Company paid interest in the amount of $3,887 and
on February 28, 2022, the balance of the Secured Note Two is $96,390, all of which is included in the
long-term portion of convertible notes payable, net of related debt discount.
Note
Payable
On
December 10, 2021, the Company entered into a related party transaction with Jed Kaplan, the Company’s Chairman of the Board and
a more than 5% shareholder to provide a loan to the Company to provide additional operating funds for Simplicity One Brasil, LTDA, the
Company’s 76%-owned subsidiary. The principal amount of the loan was $247,818. The loan bears interest at a rate of 5% per annum
and the entire amount of the principal and accrued interest is due on June 10, 2022. The loan may be repaid by the Company, without penalty,
at any time. Should the Company fail to make the principal payment due, the loan will convert to a 17% equity stake in Simplicity One
Brazil, LTDA, of which Jed Kaplan is already a 20% stakeholder.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
8 -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, 2022, 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. On February 28, 2022 and May
31, 2021, there were 1,616,022,
and 1,427,124 shares
of common stock issued and outstanding, respectively.
Warrants
During
the nine months ended February 28, 2022, the Company sold warrants to a private investor and issued warrants related to the convertible
notes payable that were issued during the nine months ended February 28, 2022.
The
Company is currently in negotiations with advisors related to the acquisition of the Ionic Note Payable and will be required to issue
warrants to the advisors on this deal. As of February 28, 2022, these warrants have not been issued.
A
summary of the status of the Company’s outstanding stock warrants as of February 28, 2022 is as follows:
SCHEDULE OF OUTSTANDING STOCK WARRANTS
| | |
Number of
Shares | | |
Average
Exercise
Price | |
| Outstanding – May 31, 2020 | |
| 789,063 | | |
$ | 83.01 | |
| | |
| | | |
| | |
| Granted during the year ended May 31, 2021 | |
| 17,063 | | |
$ | 20.66 | |
| Outstanding – May 31, 2021 | |
| 806,126 | | |
$ | 10.38 | |
| Activity during the nine months ended February 28, 2022: | |
| | | |
| | |
| Warrants granted related to debt | |
| 2,315,897 | | |
$ | 11.05 | |
| Warrants sold to a private investor | |
| 100,000 | | |
$ | 20.00 | |
| Warrants outstanding – February 28, 2022 | |
| 3,222,023 | | |
$ | 29.05 | |
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
9 — SUBSEQUENT EVENTS
Firstfire
Global Opportunities Fund, LLC Securities Purchase Agreement and 12% Convertible Promissory Note
On
March 21, 2022, Simplicity Esports and Gaming Company (the “Company”) entered into a securities purchase agreement (the “Firstfire
Global SPA”), dated as of March 21, 2022, with Firstfire Global Opportunities Fund, LLC, LLC (“Firstfire Global”),
pursuant to which the Company issued a 12%
promissory convertible note (the “Firstfire Global Note”) with a maturity date of September
21, 2022 (the “Firstfire Global Maturity Date”), in
the principal sum of $110,000.
In addition, the Company issued 935
shares of its common stock to Firstfire Global as a commitment
fee pursuant to the Firstfire Global SPA. Pursuant to the terms of the Firstfire Global Note, the Company agreed to pay to Firstfire
Global $110,000
and to pay interest on the principal balance at the rate of 12%
per annum (provided that the first six months of interest ($6,600)
shall be guaranteed and the remaining six months of interest shall be deemed earned in full as of the issue date thereof. The Firstfire
Global Note carries an OID of $10,000.
Accordingly, Firstfire Global paid the purchase price of $100,000
in exchange for the Firstfire Global Note. The Company intends
to use the proceeds for working capital. Firstfire Global may convert the Firstfire Global Note into the Company’s common stock
(subject to the beneficial ownership limitations of 4.99%
in the Firstfire Global Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by Firstfire Global
upon, at the election of Firstfire Global, not less than 61 days’ prior notice to the Company) at any time at a conversion price
equal to $1.00
per share, as the same may be adjusted as provided in the Firstfire Global Note.
The
Company may prepay the Firstfire Global Note at any time prior to maturity in accordance with the terms of the Firstfire Global Note.
The Firstfire Global Note contains customary events of default relating to, among other things, payment defaults, breach of representations
and warranties, and breach of provisions of the Firstfire Global Note or the Firstfire Global SPA.
Upon
the occurrence of any Event of Default (as defined in the Firstfire Global Note), which has not been cured within the time prescribed
in the Firstfire Global Note, it shall become immediately due and payable and the Company shall pay to Firstfire Global, in full satisfaction
of its obligations hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
Firstfire
Global Opportunities Fund, LLC Common Stock Purchase Warrant
Pursuant
to the terms of the Firstfire Global SPA, on March 21, 2022, the Company also issued to Firstfire Global a three-year warrant (the “Firstfire
Global Warrant”) to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00.
Firstfire
Global Opportunities Fund, LLC Registration Rights Agreement
Pursuant
to the terms of the Firstfire Global SPA, on March 21, 2022, the Company also entered into a registration rights agreement, dated March
21, 2022, by and between the Company and Firstfire Global (the “Firstfire Global Registration Rights Agreement”). Pursuant
to the terms of the Firstfire Global Registration Rights Agreement, the Company agreed to prepare and file with the SEC a registration
statement covering the resale of all shares issued or issuable pursuant to the Firstfire Global SPA, including shares issued upon conversion
of the Firstfire Global Note or upon exercise of the Firstfire Global Warrant. The Company agreed to use its commercially reasonable
efforts to have the registration statement filed with the SEC within 30 days following March 21, 2022 and to have the registration statement
declared effective by the SEC within 60 days following March 21, 2022.
The
Firstfire Global Registration Rights Agreement contains customary indemnification provisions.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
GS
Capital Partners, LLC Securities Purchase Agreement and 12% Convertible Promissory Note
On
March 21, 2022, the Company entered into a securities purchase agreement (the “GS Capital SPA”), dated as of March 21, 2022,
with GS Capital Partners, LLC (“GS Capital”), pursuant to which the Company issued a 12% promissory convertible note (the
“GS Capital Note”) with a maturity date of September 21, 2022 (the “GS Capital Maturity Date”), in the principal
sum of $82,500. In addition, the Company issued 703 shares of its common stock to GS Capital as a commitment fee pursuant to the GS Capital
SPA. Pursuant to the terms of the GS Capital Note, the Company agreed to pay to GS Capital $82,500 and to pay interest on the principal
balance at the rate of 12% per annum (provided that the first six months of interest ($4,950) shall be guaranteed and the remaining six
months of interest shall be deemed earned in full as of the issue date thereof. The GS Capital Note carries an OID of $7,500. Accordingly,
GS Capital paid the purchase price of $75,000.00 in exchange for the GS Capital Note. The Company intends to use the proceeds for working
capital. GS Capital may convert the GS Capital Note into the Company’s common stock (subject to the beneficial ownership limitations
of 4.99% in the GS Capital Note; provided however, that the limitation on conversion may be waived (up to 9.99%) by GS Capital upon,
at the election of GS Capital, not less than 61 days’ prior notice to the Company) at any time at a conversion price equal to $1.00
per share, as the same may be adjusted as provided in the GS Capital Note.
The
Company may prepay the GS Capital Note at any time prior to maturity in accordance with the terms of the GS Capital Note. The GS Capital
Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties,
and breach of provisions of the GS Capital Note or the GS Capital SPA.
Upon
the occurrence of any Event of Default (as defined in the GS Capital Note), which has not been cured within the time prescribed in the
GS Capital Note, it shall become immediately due and payable and the Company shall pay to GS Capital, in full satisfaction of its obligations
hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
GS
Capital Common Stock Purchase Warrant
Pursuant
to the terms of the GS Capital SPA, on March 21, 2022, the Company also issued to GS Capital a three-year warrant (the “GS Capital
Warrant”) to purchase 37,500 shares of the Company’s common stock at an exercise price of $1.00.
GS
Capital Registration Rights Agreement
Pursuant
to the terms of the GS Capital SPA, on March 21, 2022, the Company also entered into a registration rights agreement, dated March 21,
2022, by and between the Company and GS Capital (the “GS Capital Registration Rights Agreement”). Pursuant to the terms of
the GS Capital Registration Rights Agreement, the Company agreed to prepare and file with the SEC a registration statement covering the
resale of all shares issued or issuable pursuant to the GS Capital SPA, including shares issued upon conversion of the GS Capital Note
or upon exercise of the GS Capital Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement
filed with the SEC within 30 days following March 21, 2022 and to have the registration statement declared effective by the SEC within
60 days following March 21, 2022.
The
GS Capital Registration Rights Agreement contains customary indemnification provisions.
Ionic
Ventures, LLC Securities Purchase Agreement and 12% Convertible Promissory Note
On
March 21, 2022, the Company entered into a securities purchase agreement (the “Ionic SPA”), dated as of March 21, 2022, with
Ionic Ventures, LLC (“Ionic”), pursuant to which the Company issued a 12% promissory convertible note (the “Ionic Note”)
with a maturity date of September 21, 2022 (the “Ionic Maturity Date”), in the principal sum of $110,000. In addition, the
Company issued 935 shares of its common stock to Ionic as a commitment fee pursuant to the Ionic SPA. Pursuant to the terms of the Ionic
Note, the Company agreed to pay to Ionic $110,000 and to pay interest on the principal balance at the rate of 12% per annum (provided
that the first six months of interest ($6,600) shall be guaranteed and the remaining six months of interest shall be deemed earned in
full as of the Issue Date thereof. The Ionic Note carries an OID of $10,000. Accordingly, Ionic paid the purchase price of $100,000 in
exchange for the Ionic Note. The Company intends to use the proceeds for working capital. Ionic may convert the Ionic Note into the Company’s
common stock (subject to the beneficial ownership limitations of 4.99% in the Ionic Note; provided however, that the limitation on conversion
may be waived (up to 9.99%) by Ionic upon, at the election of Ionic, not less than 61 days’ prior notice to the Company) at any
time at a conversion price equal to $1.00 per share, as the same may be adjusted as provided in the Ionic Note.
The
Company may prepay the Ionic Note at any time prior to maturity in accordance with the terms of the Ionic Note. The Ionic Note contains
customary events of default relating to, among other things, payment defaults, breach of representations and warranties, and breach of
provisions of the Ionic Note or the Ionic SPA.
Upon
the occurrence of any Event of Default (as defined in the Ionic Note), which has not been cured within the time prescribed in the Ionic
Note, it shall become immediately due and payable and the Company shall pay to Ionic, in full satisfaction of its obligations hereunder,
an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
SIMPLICITY
ESPORTS AND GAMING COMPANY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Ionic
Ventures, LLC Common Stock Purchase Warrant
Pursuant
to the terms of the Ionic SPA, on March 21, 2022, the Company also issued to Ionic a three-year warrant (the “Ionic Warrant”)
to purchase 50,000 shares of the Company’s common stock at an exercise price of $1.00.
Ionic
Ventures, LLC Registration Rights Agreement
Pursuant
to the terms of the Ionic SPA, on March 21, 2022, the Company also entered into a registration rights agreement, dated March 21, 2022,
by and between the Company and Ionic (the “Ionic Registration Rights Agreement”). Pursuant to the terms of the Ionic Registration
Rights Agreement, the Company agreed to prepare and file with the SEC a registration statement covering the resale of all shares issued
or issuable pursuant to the Ionic SPA, including shares issued upon conversion of the Ionic Note or upon exercise of the Ionic Warrant.
The Company agreed to use its commercially reasonable efforts to have the registration statement filed with the SEC within 30 days following
March 21, 2022 and to have the registration statement declared effective by the SEC within 60 days following March 21, 2022.
The
Ionic Registration Rights Agreement contains customary indemnification provisions.
Labrys
Amendment
As
previously disclosed in the Company’s Current Report on Form 8-K filed by the Company on February 24, 2021 with the SEC, on February
19, 2021, the Company and Labrys Fund, LP (“Labrys”) entered a securities purchase agreement (the “Labrys SPA”),
pursuant to which the Company issued a 12% promissory note (the “Labrys Note”) with a maturity date of February 19, 2022
in the principal sum of $1,650,000. As of March 16, 2022, the Company and Labrys entered into Amendment #2 (the “Labrys Amendment”)
to the Labrys SPA and the Labrys Note, as amended. Pursuant to the terms of the Labrys Amendment, the maturity date of the Labrys Note
was extended to the earlier of (i) September 15, 2022, and (ii) the date that the Company’s common stock is listed on the Nasdaq
Stock Market or the New York Stock Exchange. In addition, the Labrys Note was amended to provide that Labrys has the right, at any time
on or following the date that an event of default occurs under the Labrys Note, as amended, to convert all or any portion of the then
outstanding and unpaid principal and interest into common stock, subject to a 4.99% equity blocker. In the Labrys Amendment, the parties
also agreed that the Company has already received cash proceeds in excess of the $2,000,000 minimum threshold referenced in the Labrys
Note. Pursuant to the terms of the Labrys Amendment, Labrys waived its rights to receive any portion of the next $750,000 of cash proceeds
received by the Company to the extent that such amounts are received by the Company between March 15, 2022 and April 9, 2022.
Except
as set forth in the Labrys Amendment, the Labrys Note, as amended, remains in full force and effect.
Lucas
Ventures Note Amendment
As
previously disclosed in the Company’s Current Report on Form 8-K filed by the Company on September 7, 2021 with the SEC, on August
31, 2021, the Company issued to Lucas Ventures, LLC (“Lucas Ventures”) a 12% promissory note (the “Lucas Ventures Note”)
with a maturity date of August 31, 2023, in the principal amount of $200,000. As of March 16, 2022, the Company and Lucas Ventures entered
into an Amendment and Waiver Pursuant to Convertible Promissory Note (the “Lucas Ventures Amendment”). Pursuant to the terms
of the Lucas Ventures Amendment, the parties agreed that the FirstFire Note, FirstFire Warrant, GS Capital Note, GS Capital Warrant,
Ionic Note, Ionic Warrant, Jefferson Street Note, and Jefferson Street Warrant would not be deemed a “Dilutive Issuance”
as provided in the Lucas Ventures Note. In addition, pursuant to the terms of the Lucas Ventures Amendment, the conversion price of the
Lucas Ventures Note was decreased from $11.50 per share to $1.00 per share; provided, however, that upon failure to make any payment
under the Lucas Ventures Note, as amended, the conversion price will be $0.50 per share, as the same may be adjusted as provided in the
Lucas Ventures Note, as amended. Pursuant to the terms of the Lucas Ventures Amendment, the parties also agreed that Lucas Ventures may
not convert the Lucas Ventures Note, as amended, prior to September 15, 2022.
Except
as set forth in the Lucas Ventures Amendment, the Lucas Ventures Note remains in full force and effect.
LGH
Note Amendment
As
previously disclosed in the Company’s Current Report on Form 8-K filed by the Company on September 7, 2021 with the SEC, on August
31, 2021, the Company issued to LGH Investments, LLC (“LGH”) a 12%
promissory note (the “LGH Note”) with a maturity date of August
31, 2023, in the principal amount of $200,000.
As of March 16, 2022, the Company and LGH entered into an Amendment and Waiver Pursuant to Convertible Promissory Note (the “LGH
Amendment”). Pursuant to the terms of the LGH Amendment, the parties agreed that the FirstFire Note, FirstFire Warrant, GS Capital
Note, GS Capital Warrant, Ionic Note, Ionic Warrant, Jefferson Street Note, and Jefferson Street Warrant would not be deemed a “Dilutive
Issuance” as provided in the LGH Note. In addition, pursuant to the terms of the LGH Amendment, the conversion price of the LGH
Note was decreased from $11.50 per share to $1.00
per share; provided, however, that upon failure
to make any payment under the LGH Note, as amended, the conversion price will be $0.50
per share, as the same may be adjusted as provided
in the LGH Note, as amended. Pursuant to the terms of the LGH Amendment, the parties also agreed that LGH may not convert the LGH Note,
as amended, prior to September 15, 2022.
Except
as set forth in the LGH Amendment, the LGH Note remains in full force and effect.
Jefferson
Street Capital LLC Securities Purchase Agreement and 12% Convertible Promissory Note
On
April 1, 2022, the Company entered into a securities purchase agreement (the “Jefferson SPA”), dated as of April 1, 2022,
with Jefferson Street Capital LLC (“Jefferson”), pursuant to which the Company issued a 12% promissory convertible note (the
“Jefferson Note”) with a maturity date of October 1, 2022 (the “Jefferson Maturity Date”), in the principal sum
of $82,500. In addition, the Company issued 703 shares of its common stock to Jefferson as a commitment fee pursuant to the Jefferson
SPA. Pursuant to the terms of the Jefferson Note, the Company agreed to pay to Jefferson $82,500 and to pay interest on the principal
balance at the rate of 12% per annum (provided that the first six months of interest ($4,950) shall be guaranteed and the remaining six
months of interest shall be deemed earned in full as of the issue date thereof). The Jefferson Note carries an original issue discount
of $7,500. Accordingly, Jefferson paid the purchase price of $75,000 in exchange for the Jefferson Note. The Company intends to use the
proceeds for working capital. Jefferson may convert the Jefferson Note into the Company’s common stock (subject to the beneficial
ownership limitations of 4.99% in the Jefferson Note; provided however, that the limitation on conversion may be waived (up to 9.99%)
by Jefferson upon, at the election of Jefferson, not less than 61 days’ prior notice to the Company) at any time at a conversion
price equal to $1.00 per share, as the same may be adjusted as provided in the Jefferson Note.
The
Company may prepay the Jefferson Note at any time prior to maturity in accordance with the terms of the Jefferson Note. The Jefferson
Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties,
and breach of provisions of the Jefferson Note or the Jefferson SPA.
Upon
the occurrence of any Event of Default (as defined in the Jefferson Note), which has not been cured within the time prescribed in the
Jefferson Note, it shall become immediately due and payable and the Company shall pay to Jefferson, in full satisfaction of its obligations
hereunder, an amount equal to the principal amount then outstanding plus accrued interest multiplied by 125%.
Jefferson
Street Capital LLC Common Stock Purchase Warrant
Pursuant
to the terms of the Jefferson SPA, on April 1, 2022, the Company also issued to Jefferson a three-year warrant (the “Jefferson
Warrant”) to purchase 37,500 shares of the Company’s common stock at an exercise price of $1.00.
Jefferson
Street Capital LLC Registration Rights Agreement
Pursuant
to the terms of the Jefferson SPA, on April 1, 2022, the Company also entered into a registration rights agreement, dated as of April
1, 2022, by and between the Company and Jefferson (the “Jefferson Registration Rights Agreement”). Pursuant to the terms
of the Jefferson Registration Rights Agreement, the Company agreed to prepare and file with the SEC a registration statement covering
the resale of all shares issued or issuable pursuant to the Jefferson SPA, including shares issued upon conversion of the Jefferson Note
or upon exercise of the Jefferson Warrant. The Company agreed to use its commercially reasonable efforts to have the registration statement
filed with the SEC within 30 days following April 1, 2022 and to have the registration statement declared effective by the SEC within
60 days following April 1, 2022.
The
Jefferson Registration Rights Agreement contains customary indemnification provisions.
Equity
Issues
On
April 8, 2022, the Company entered into an agreement to issue 20,000 shares of its common stock in partial payment for services to a
vendor.