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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
☒ |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended July 31, 2024
☐ |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
For
the transition period from ________ to ________
Commission
File Number: 01-41423
CONNEXA
SPORTS TECHNOLOGIES INC.
(Exact
name of registrant as specified in its charter)
Delaware |
|
61-1789640 |
(State
or other jurisdiction of
incorporation
or organization) |
|
(I.R.S.
Employer
Identification
No.) |
2709
NORTH ROLLING ROAD, SUITE 138
WINDSOR
MILL,
Maryland
21244
(Address
of principal executive offices, including Zip Code)
(443)
407-7564
(Registrant’s
Telephone Number, including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class |
|
Trading
Symbol(s) |
|
Name
of each exchange on which registered |
Common
Stock, $0.001 par value |
|
YYAI |
|
Nasdaq
Capital Market |
Securities
registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934
Act.
Large
accelerated filer ☐ |
Accelerated
filer ☐ |
Non-accelerated
filer ☒ |
Smaller
reporting company ☒ |
|
Emerging
growth company ☐ |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
If
securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate
by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation
received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
The
number of shares outstanding of the registrant’s Common Stock, $0.001 par value per share, as of September 10, 2024, was 6,435,454.
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
This
quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). The words “believe,” “expect,” “anticipate,” “intend,”
“estimate,” “may,” “should,” “could,” “will,” “plan,” “future,”
“continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to
historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts
of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties,
a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained
in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide
variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital
needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to
be accurate. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the
risks in the section entitled “Risk Factors” in our Form 10-K for the fiscal year ended April 30, 2024, filed on July 25, 2024, that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or achievements expressed or implied by any forward-looking statements.
Important
factors that may cause the actual results to differ from the forward-looking statements, projections or other expectations include, but
are not limited to, the following:
|
● |
risk
that we will not be able to remediate identified material weaknesses in our internal control over financial reporting and disclosure
controls and procedures; |
|
|
|
|
● |
risk
that we fail to meet the requirements of the agreements under which we acquired our business interests, including any cash payments
to the business operations, which could result in the loss of our right to continue to operate or develop the specific businesses
described in the agreements; |
|
|
|
|
● |
risk
that we will be unable to secure additional financing in the near future in order to commence and sustain our planned development
and growth plans; |
|
|
|
|
● |
risk
that we cannot attract, retain and motivate qualified personnel, particularly employees, consultants and contractors for our operations; |
|
|
|
|
● |
risks
and uncertainties relating to the various industries and operations we are currently engaged in; |
|
|
|
|
● |
results
of initial feasibility, pre-feasibility and feasibility studies, and the possibility that future growth, development or expansion
will not be consistent with our expectations; |
|
|
|
|
● |
risks
related to the inherent uncertainty of business operations including profit, cost of goods, production costs and cost estimates and
the potential for unexpected costs and expenses; |
|
|
|
|
● |
risks
related to commodity price fluctuations; |
|
|
|
|
● |
the
uncertainty of profitability based upon our history of losses; |
|
|
|
|
● |
risks
related to failure to obtain adequate financing on a timely basis and on acceptable terms for our planned development projects; |
|
|
|
|
● |
risks
related to environmental regulation and liability; |
|
|
|
|
● |
risks
related to tax assessments; and |
|
|
|
|
● |
other
risks and uncertainties related to our prospects, properties and business strategy. |
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels
of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which speak only as
of the date of this report. Except as required by law, we do not undertake to update or revise any of the forward-looking statements
to conform these statements to actual results, whether as a result of new information, future events or otherwise.
As
used in this quarterly report, the “Connexa,” “Company,” “we,” “us,” or “our”
refer to Connexa Sports Technologies Inc. and its subsidiaries, unless otherwise indicated.
Unless
otherwise indicated, all share numbers and per share totals have been adjusted to reflect the 1-40 reverse stock split that was effective
on September 25, 2023 and the 1-20 reverse stock split that was effective on June 27, 2024.
CONNEXA
SPORTS TECHNOLOGIES INC.
(FORMERLY
KNOWN AS SLINGER BAG INC. AND LAZEX INC.)
INDEX
PART
I – FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements
CONNEXA
SPORTS TECHNOLOGIES, INC.
CONSOLIDATED
BALANCE SHEETS (IN US$)
JULY
31, 2024 AND APRIL 30, 2024
| |
JULY 31, | | |
APRIL 30, | |
| |
2024 | | |
2024 | |
| |
(UNAUDITED) | | |
(AUDITED) | |
ASSETS | |
| | | |
| | |
| |
| | | |
| | |
Current Assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 1,711,283 | | |
$ | 229,705 | |
Investment, at cost | |
| 16,500,000 | | |
| 16,500,000 | |
Accounts receivable, net | |
| 258,273 | | |
| 273,874 | |
Inventories, net | |
| 1,660,847 | | |
| 1,609,196 | |
Prepaid inventory | |
| 884,266 | | |
| 810,978 | |
Prepaid expenses and other current assets | |
| 169,731 | | |
| 197,871 | |
| |
| | | |
| | |
Total Current Assets | |
| 21,184,400 | | |
| 19,621,624 | |
| |
| | | |
| | |
Non-Current Assets: | |
| | | |
| | |
Note receivable - former subsidiary | |
| 2,000,000 | | |
| 2,000,000 | |
Intangible assets, net of amortization | |
| 1,000 | | |
| 1,000 | |
| |
| | | |
| | |
Total Non-Current Assets | |
| 2,001,000 | | |
| 2,001,000 | |
| |
| | | |
| | |
TOTAL ASSETS | |
$ | 23,185,400 | | |
$ | 21,622,624 | |
| |
| | | |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
LIABILITIES | |
| | | |
| | |
Current Liabilities: | |
| | | |
| | |
Accounts payable | |
$ | 4,932,295 | | |
$ | 4,704,596 | |
Accrued expenses | |
| 4,167,750 | | |
| 3,405,372 | |
Accrued interest | |
| 676,285 | | |
| - | |
Accrued interest - related party | |
| 917,957 | | |
| 917,957 | |
Accrued interest | |
| 917,957 | | |
| 917,957 | |
Current portion of notes payable, net of discount | |
| 1,561,295 | | |
| 1,564,513 | |
Current portion of notes payable - related parties | |
| 1,169,291 | | |
| 1,169,291 | |
Current portion of notes payable | |
| 1,169,291 | | |
| 1,169,291 | |
Derivative liabilities | |
| 5,279 | | |
| 5,433 | |
Contingent consideration | |
| | | |
| - | |
Other current liabilities | |
| 316,920 | | |
| 255,648 | |
| |
| | | |
| | |
Total Current Liabilities | |
| 13,747,072 | | |
| 12,022,810 | |
| |
| | | |
| | |
Total Liabilities | |
| 13,747,072 | | |
| 12,022,810 | |
| |
| | | |
| | |
Commitments and contingency | |
| - | | |
| - | |
| |
| | | |
| | |
SHAREHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
Common stock, par value, $0.001, 1,000,000,000 and 300,000,000 shares authorized, 2,659,149 and 1,828,541 shares issued and outstanding as of July 31, 2024 and April 30, 2024, respectively | |
| 2,659 | | |
| 1,828 | |
Additional paid in capital | |
| 180,920,634 | | |
| 176,801,473 | |
Accumulated deficit | |
| (171,607,773 | ) | |
| (167,387,028 | ) |
Accumulated other comprehensive income | |
| 122,808 | | |
| 183,541 | |
| |
| | | |
| | |
Total Stockholders’ Equity | |
| 9,438,328 | | |
| 9,599,814 | |
| |
| | | |
| | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | |
$ | 23,185,400 | | |
$ | 21,622,624 | |
The
accompanying notes are an integral part of these financial statements.
CONNEXA
SPORTS TECHNOLOGIES, INC
CONSOLIDATED
STATEMENTS OF OPERATIONS (IN US$) (UNAUDITED)
THREE
MONTHS ENDED JULY 31, 2024 AND 2023
| |
JULY 31, | | |
JULY 31, | |
| |
2024 | | |
2023 | |
| |
| | |
| |
NET SALES | |
$ | 704,899 | | |
$ | 3,120,231 | |
| |
| | | |
| | |
COST OF SALES | |
| 432,778 | | |
| 2,227,482 | |
| |
| | | |
| . | |
GROSS PROFIT | |
| 272,121 | | |
| 892,749 | |
| |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | |
Selling and marketing expenses | |
| 146,137 | | |
| 242,353 | |
General and administrative expenses | |
| 3,381,179 | | |
| 2,505,060 | |
| |
| | | |
| | |
Total Operating Expenses | |
| 3,527,316 | | |
| 2,747,413 | |
| |
| | | |
| | |
OPERATING LOSS | |
| (3,255,195 | ) | |
| (1,854,664 | ) |
| |
| | | |
| | |
NON-OPERATING INCOME (EXPENSE) | |
| | | |
| | |
Amortization of debt discounts | |
| - | | |
| (777,192 | ) |
Loss on conversion of accounts payable to common stock | |
| - | | |
| (289,980 | ) |
Change in fair value of derivative liability | |
| 154 | | |
| 2,144,554 | |
Interest expense | |
| (965,704 | ) | |
| (69,483 | ) |
| |
| | | |
| | |
Total Non-Operating Income (Expenses) | |
| (965,550 | ) | |
| 1,007,899 | |
| |
| | | |
| | |
NET LOSS FROM OPERATIONS BEFORE | |
| | | |
| | |
| |
| | | |
| | |
Provision for income taxes | |
| - | | |
| - | |
| |
| | | |
| | |
NET LOSS | |
$ | (4,220,745 | ) | |
$ | (846,765 | ) |
| |
| | | |
| | |
Other comprehensive loss | |
| | | |
| | |
Foreign currency translations adjustment | |
| (60,733 | ) | |
| (27,020 | ) |
Comprehensive loss | |
$ | (4,281,478 | ) | |
$ | (873,785 | ) |
| |
| | | |
| | |
Net loss per share - basic and diluted | |
$ | (1.91 | ) | |
$ | (1.93 | ) |
| |
| | | |
| | |
Weighted average common shares outstanding - basic and diluted | |
| 2,205,834 | | |
| 438,354 | |
The
accompanying notes are an integral part of these financial statements.
CONNEXA
SPORTS TECHNOLOGIES, INC
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) (IN US$) (UNAUDITED)
FOR
THE THREE MONTHS ENDED JULY 31, 2024 AND 2023
| |
| | |
| | |
| | |
| | |
| | |
| |
| |
| | |
Additional | | |
Accumulated Other | | |
| | |
| |
| |
Common Stock | | |
Paid-In | | |
Comprehensive | | |
Accumulated | | |
| |
| |
Shares | | |
Amount | | |
Capital | | |
Income | | |
Deficit | | |
Total | |
| |
| | |
| | |
| | |
| | |
| | |
| |
Balance - May 1, 2023 | |
| 16,929 | | |
$ | 17 | | |
$ | 132,994,320 | | |
$ | 142,512 | | |
$ | (151,750,610 | ) | |
$ | (18,613,761 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock issued for: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Accounts payable | |
| 67,500 | | |
| 3 | | |
| 559,977 | | |
| - | | |
| - | | |
| 559,980 | |
Acquisition | |
| 1,350 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Services | |
| 188 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Cashless exercise of warrants | |
| 27,000 | | |
| 1 | | |
| (1 | ) | |
| - | | |
| - | | |
| - | |
Satisfaction of profit guarantee on note payable | |
| 93,680 | | |
| 5 | | |
| 558,289 | | |
| - | | |
| - | | |
| 558,294 | |
Change in comprehensive income | |
| - | | |
| - | | |
| - | | |
| (27,020 | ) | |
| - | | |
| (27,020 | ) |
Change in comprehensive income (loss) | |
| - | | |
| - | | |
| - | | |
| (27,020 | ) | |
| - | | |
| (27,020 | ) |
Net loss for the year | |
| - | | |
| - | | |
| - | | |
| - | | |
| (846,765 | ) | |
| (846,765 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance - July 31, 2023 | |
| 26,415 | | |
$ | 26 | | |
$ | 134,112,585 | | |
$ | 115,492 | | |
$ | (152,597,375 | ) | |
$ | (18,369,272 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance - May 1, 2024 | |
| 1,828,541 | | |
$ | 1,828 | | |
$ | 176,801,473 | | |
$ | 183,541 | | |
$ | (167,387,028 | ) | |
$ | 9,599,814 | |
Balance | |
| 1,828,541 | | |
$ | 1,828 | | |
$ | 176,801,473 | | |
$ | 183,541 | | |
$ | (167,387,028 | ) | |
$ | 9,599,814 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock issued for: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Services | |
| 214,128 | | |
| 214 | | |
| 2,501,602 | | |
| - | | |
| - | | |
| 2,501,816 | |
Acquisition/Contingent Consideration | |
| 10 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Exercise of warrants | |
| 505,680 | | |
| 506 | | |
| 1,617,670 | | |
| - | | |
| - | | |
| 1,618,176 | |
Fractional adjustment in reverse split | |
| 110,790 | | |
| 111 | | |
| (111 | ) | |
| - | | |
| - | | |
| - | |
Change in comprehensive income | |
| - | | |
| - | | |
| - | | |
| (60,733 | ) | |
| - | | |
| (60,733 | ) |
Net loss for the period | |
| - | | |
| - | | |
| - | | |
| - | | |
| (4,220,745 | ) | |
| (4,220,745 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Balance - July 31, 2024 | |
| 2,659,149 | | |
$ | 2,659 | | |
$ | 180,920,634 | | |
$ | 122,808 | | |
$ | (171,607,773 | ) | |
$ | 9,438,328 | |
Balance | |
| 2,659,149 | | |
$ | 2,659 | | |
$ | 180,920,634 | | |
$ | 122,808 | | |
$ | (171,607,773 | ) | |
$ | 9,438,328 | |
The
accompanying notes are an integral part of these financial statements.
CONNEXA
SPORTS TECHNOLOGIES, INC
CONSOLIDATED
STATEMENTS OF CASH FLOWS (IN US$) (UNAUDITED)
THREE
MONTHS ENDED JULY 31, 2024 AND 2023
| |
2024 | | |
2023 | |
CASH FLOW FROM OPERTING ACTIVITIES | |
| | | |
| | |
Net (loss) | |
$ | (4,220,745 | ) | |
$ | (846,765 | ) |
Adjustments to reconcile net (loss) to net cash used in operating activities | |
| | | |
| | |
Depreciation, amortization and impairment expense | |
| - | | |
| 115,072 | |
Change in fair value of derivative liability | |
| (154 | ) | |
| (2,144,554 | ) |
Shares and warrants issued for services | |
| 2,501,816 | | |
| - | |
Amortization of debt discounts | |
| - | | |
| 777,192 | |
Settlement expense | |
| - | | |
| 558,294 | |
Loss on settlement of accounts payable | |
| - | | |
| 289,980 | |
| |
| | | |
| | |
Changes in assets and liabilities, net of acquired amounts | |
| | | |
| | |
Accounts receivable | |
| 17,243 | | |
| (265,992 | ) |
Inventories | |
| (51,651 | ) | |
| 852,848 | |
Prepaid inventory | |
| (73,288 | ) | |
| (197,429 | ) |
Prepaid expenses and other current assets | |
| 28,140 | | |
| (1,316 | ) |
Accounts payable and accrued expenses | |
| 703,311 | | |
| 255,199 | |
Other current liabilities | |
| 346,397 | | |
| 326,550 | |
Accrued interest | |
| 676,285 | | |
| 16,135 | |
Total adjustments | |
| 4,148,099 | | |
| 1,113,963 | |
| |
| | | |
| | |
Net cash used in operating activities | |
| (72,646 | ) | |
| 267,198 | |
| |
| | | |
| | |
CASH FLOWS FROM FINANCING ACTIVITIES | |
| | | |
| | |
Proceeds from exercise of warrants for cash | |
| 1,618,176 | | |
| - | |
Proceeds from notes payable | |
| (3,218 | ) | |
| - | |
Payments of notes payable - related parties | |
| - | | |
| (298,834 | ) |
Payments of notes payable | |
| - | | |
| (302,168 | ) |
Net cash provided by financing activities | |
| 1,614,958 | | |
| (601,002 | ) |
| |
| | | |
| | |
Effect of exchange rate fluctuations on cash and cash equivalents | |
| (60,734 | ) | |
| (17,997 | ) |
| |
| | | |
| | |
NET INCREASE IN CASH | |
| 1,481,578 | | |
| (351,800 | ) |
| |
| | | |
| | |
CASH - BEGINNING OF PERIOD | |
| 229,705 | | |
| 202,095 | |
| |
| | | |
| | |
CASH - END OF PERIOD | |
$ | 1,711,283 | | |
$ | (149,705 | ) |
| |
| | | |
| | |
CASH PAID DURING THE PERIOD FOR: | |
| | | |
| | |
Interest expense | |
$ | 113,915 | | |
$ | - | |
| |
| | | |
| | |
Income taxes | |
$ | - | | |
$ | - | |
| |
| | | |
| | |
SUPPLEMENTAL INFORMATION - NON-CASH INVESTING AND FINANCING ACTIVITIES: | |
| | | |
| | |
| |
| | | |
| | |
Shares issued for settlement of accounts payable | |
$ | - | | |
$ | 270,000 | |
The
accompanying notes are an integral part of these financial statements.
CONNEXA
SPORTS TECHNOLOGIES INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1: ORGANIZATION AND NATURE OF BUSINESS
Organization
Lazex
Inc. (“Lazex”) was incorporated under the laws of the State of Nevada on July 12, 2015. On August 23, 2019, the majority
owner of Lazex entered into a Stock Purchase Agreement with Slinger Bag Americas Inc., a Delaware corporation (“Slinger Bag Americas”),
which was 100% owned by Slinger Bag Ltd. (“SBL”), an Israeli company. In connection with the Stock Purchase Agreement, Slinger
Bag Americas acquired 50,000 shares of common stock of Lazex for $332,239. On September 16, 2019, SBL transferred its ownership of Slinger
Bag Americas to Lazex in exchange for the 50,000 shares of Lazex acquired on August 23, 2019. As a result of these transactions, Lazex
owned 100% of Slinger Bag Americas and the sole shareholder of SBL owned 50,000 shares of common stock (approximately 82%) of Lazex.
Effective September 13, 2019, Lazex changed its name to Slinger Bag Inc.
On
October 31, 2019, Slinger Bag Americas acquired control of Slinger Bag Canada, Inc., (“Slinger Bag Canada”) a Canadian company
incorporated on November 3, 2017. There were no assets, liabilities or historical operational activity of Slinger Bag Canada.
On
February 10, 2020, Slinger Bag Americas became the 100% owner of SBL, along with SBL’s wholly owned subsidiary Slinger Bag International
(UK) Limited (“Slinger Bag UK”), which was formed on April 3, 2019. On February 10, 2020, the owner of SBL, contributed Slinger
Bag UK to Slinger Bag Americas for no consideration.
On
June 21, 2021, Slinger Bag Americas entered into a membership interest purchase agreement with Charles Ruddy to acquire a 100% ownership
stake in Foundation Sports Systems, LLC (“Foundation Sports”). On December 5, 2022, the Company sold 75% of Foundation Sports
back to the original sellers. As a result, at that time, the Company recorded a loss on the sale and deconsolidated Foundation Sports.
On
February 2, 2022, the Company entered into a share purchase agreement with Flixsense Pty, Ltd. (“Gameface”). As a result
of the share purchase agreement, Gameface became a wholly owned subsidiary of the Company.
On
February 22, 2022, the Company entered into a merger agreement with PlaySight Interactive Ltd. (“PlaySight”) and Rohit Krishnan
(the “Shareholders’ Representative”). As a result of the merger agreement, PlaySight would become a wholly owned subsidiary
of the Company. In November 2022, the Company sold PlaySight and recorded a loss on the sale.
On
May 16, 2022, the Company changed its domicile from Nevada to Delaware. On April 7, 2022, the Company effected a name change to Connexa
Sports Technologies Inc. We also changed our ticker symbol, “CNXA”.
On
June 14, 2022, the Company effected a 1-for-10 reverse stock split, where the Company’s common stock began to trade on a reverse
split adjusted basis. No fractional shares were issued in connection with the reverse stock split and all such fractional interests were
rounded up to the nearest whole number of shares of common stock. All references to the outstanding stock have been retrospectively adjusted
to reflect this reverse split. The Company also consummated a public offering of shares of its common stock and the listing of its common
stock on the Nasdaq Capital Market.
Although
the Company is currently in compliance with Nasdaq listing requirements, if the Company loses its compliance with the minimum shareholder
equity requirement in Nasdaq Listing Rule 5550(b)(1) (the “Equity Rule”), then, notwithstanding Rule 5810(c)(2), the Company
will not be permitted to provide Nasdaq with a plan of compliance with respect to such deficiency and Nasdaq will not be permitted to
grant additional time for the Company to regain compliance with respect to such deficiency, nor will the Company be afforded an applicable
cure or compliance period pursuant to Rule 5810(c)(3). Instead, Nasdaq will issue a delist determination letter and the Company will
have the opportunity to request a new hearing. The Company will have the opportunity to respond/present to the hearing panel as provided
by Listing Rule 5815(d)(4)(C) and the Company’s securities may at that time be delisted from Nasdaq.
On January 19, 2024, the Company entered into a
securities purchase agreement (the “Securities Purchase Agreement”) with three investors (the “January 2024
Investors”) for the issuance and sale to each investor of (i) 116,510 shares of Common Stock (the “Shares”) and
(ii) pre-funded warrants to purchase an aggregate of 1,258,490 shares of Common Stock (the “Pre-Funded Warrants”) at a
combined purchase price of $4 per share of Common Stock for an aggregate amount of approximately $16.5 million. The Pre-Funded
Warrants have an exercise price of $0.0002 per share of Common Stock and became exercisable beginning on May 15, 2024, the date
stockholder approval was received and effective, allowing exercisability of Pre-Funded Warrants under Nasdaq rules until the
Pre-Funded Warrants are exercised in full. The aggregate number of shares issued to the January 2024 Investors is 349,530 and the
aggregate number of Pre-Funded Warrants is 3,775,470.
From April 2024 through May 2024, the Company acknowledged and agreed to the entrance into certain warrant purchase
agreements (the “WPAs”) by the January 2024 Investors and 10 purchasers (the “Pre-Funded Warrant Purchasers”)
pursuant to which the January 2024 Investors sold all of the 3,775,470 Pre-Funded Warrants to Pre-Funded Warrant Purchasers for an aggregate
amount of $18,877,350 in cash.
On
June 27, 2024, the Company (i) increased the number of authorized shares of common stock from 300,000,000 to 1,000,000,000 and (ii)
effected a 1-for-20
reverse stock split, where the Company’s common stock began to trade on a reverse split adjusted basis. No fractional
shares were issued in connection with the reverse stock split and all such fractional interests were rounded up to the nearest whole
number of shares of common stock.
On May 28, 2024, the Company filed a registration statement in respect of 1,925,000 shares of its common stock consisting
of (a) 349,530 Shares and (b) 1,575,470 shares of Common Stock issuable upon the exercise of the Pre-Funded Warrants and on August 21,
2024 such registration statement became effective.
The
Company currently operates in the sport equipment and technology business. The Company is the owner of the Slinger Launcher, which
is a portable tennis ball launcher as well as other associated tennis accessories and Gameface AI an Australian artificial
intelligence sports software company.
The
operations of Slinger Bag Inc., Slinger Bag Americas, Slinger Bag Canada, Slinger Bag UK, SBL, and Gameface AI are collectively
referred to as the “Company.”
Basis
of Presentation
The
accompanying condensed consolidated financial statements of the Company are presented in accordance with accounting principles generally
accepted in the United States of America (“GAAP”). As a result of the transactions described above, the accompanying consolidated
financial statements include the combined results of Slinger Bag Inc., Slinger Bag Americas, Slinger Bag Canada, Slinger Bag UK, SBL,
and Gameface for the periods ended July 31, 2024 and 2023.
Impact
of COVID-19 Pandemic
The
Company continues to carefully monitor the global COVID-19 pandemic status and its impact on its business. In that regard, while the
Company has continued to sell its products it has previously experienced certain minor disruptions in its supply chains. The Company
expects the significance of the COVID-19 pandemic, including the extent of its effect on the Company’s financial and operational
results, to be dictated by, among other things, the on-going global efforts to contain it. While the Company has not experienced any
material disruptions to its business and operations as a result of the COVID-19 pandemic, it is possible such disruptions may occur in
the future which may impact its financial and operational results, and which could be material.
Impact
of Russian and Ukrainian Conflict
In
February 2022, the Russian Federation and Belarus commenced a military action with the country of Ukraine. We are closely monitoring
the unfolding events due to the Russia-Ukraine conflict and its regional and global ramifications. We have one distributor in Russia,
which is not material to our overall financial results. We do not currently have operations in Ukraine or Belarus. We are monitoring
any broader economic impact from the current crisis. The specific impact on the Company’s financial condition, results of operations,
and cash flows is also not determinable as of the date of these financial statements. However, to the extent that such military action
spreads to other countries, intensifies, or otherwise remains active, such action could have a material adverse effect on our financial
condition, results of operations, and cash flows.
Impact
of Israel and Hamas Conflict
Because
we develop products in Israel and our chief marketing officer is located in Israel, our business and operations are directly affected
by economic, political, geopolitical and military conditions affecting Israel. Since the establishment of the State of Israel in 1948,
a number of armed conflicts have occurred between Israel and its neighboring countries and other hostile non-state actors. These conflicts
have involved missile strikes, hostile infiltrations and terrorism against civilian targets in various parts of Israel, which have negatively
affected business conditions in Israel.
On
October 7, 2023, Hamas militants and members of other terrorist organizations infiltrated Israel’s southern border from the Gaza
Strip and conducted a series of terror attacks on civilian and military targets. Thereafter, these terrorists launched extensive rocket
attacks on the Israeli population and industrial centers located along the Israeli border with the Gaza Strip. As of October 7, 2023 ,
such attacks collectively resulted in over 1,478 deaths and over 5,400 injured people, in addition to the kidnapping of a currently indefinite
number of civilians, including women and children. Shortly following the attack, Israel’s security cabinet declared war against
Hamas.
The
intensity and duration of Israel’s current war against Hamas is difficult to predict, and as are such war’s economic implications
on the Company’s business and operations and on Israel’s economy in general. On October 9, 2023, the Central Bank of Israel
announced its intent to sell up to $30 billion order to protect the New Israeli Shekel (“NIS”) from collapse, however despite
the foregoing announcement the NIS weakened to approximately 3.92 NIS for one US dollar as of the same day. In addition, on October 9,
2023, the Tel Aviv-35 stock index of blue-chip companies dropped by 6.4% whereas the benchmark TA-125 index fell by 6.2%. These events
may imply wider macroeconomic indications of a deterioration of Israel’s economic standing, which may have a material adverse effect
on the Company and its ability to effectively conduct is business, operations and affairs.
On July 31, 2024, Hamas leader, Ismail Haniyeh, was assassinated in Tehran, Iran, which, although not commented on
or confirmed by Israel, is largely believed to be attributable to Israel. On July 31, 2024, Israel killed Fouad Shukur, a Hezbollah commander
in Lebanon. These actions have caused both Iran and Hezbollah to threaten to retaliate against Israel (although to-date, no retaliatory
actions have been confirmed).
It
is possible that other terrorist organizations will join the hostilities as well, including Palestinian military
organizations in the West Bank. In the event that hostilities disrupt the development of our products, our ability to deliver products
to customers in a timely manner to meet our contractual obligations with customers and vendors could be materially and adversely affected.
Our
commercial insurance does not cover losses that may occur as a result of events associated with war and terrorism. Although the Israeli
government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot
assure you that this government coverage will be maintained or that it will sufficiently cover our potential damages. Any losses or damages
incurred by us could have a material adverse effect on our business.
As
a result of the Israeli security cabinet’s decision to declare war against Hamas, several hundred thousand Israeli reservists
were drafted to perform immediate military service. If any of our employees and consultants in Israel are called for service in the
current war with Hamas, our operations may be disrupted by such absences, which may materially and adversely affect our business and
results of operations. Additionally, the absence of employees of our Israeli suppliers and contract manufacturers due to their
military service in the current war or future wars or other armed conflicts may disrupt their operations, in which event our ability
to deliver products to customers may be materially and adversely affected. In addition, popular uprisings in various
countries in the Middle East and North Africa have affected the political stability of those countries. Such instability may lead to
a deterioration in the political and trade relationships that exist between the State of Israel and these countries, such as Turkey.
Moreover, some countries around the world restrict doing business with Israel and Israeli companies, and additional countries may
impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel or political instability in the
region continues or increases. These restrictions may limit materially our ability to obtain raw materials from these countries or
sell our products to companies and customers in these countries. In addition, there have been increased efforts by activists to
cause companies and consumers to boycott Israeli goods. Such efforts, particularly if they become more widespread, may materially
and adversely impact our ability to sell our products outside of Israel.
Prior
to the Hamas attack in October 2023, the Israeli government pursued extensive changes to Israel’s judicial system, which sparked
extensive political debate and unrest. In response to such initiative, many individuals, organizations and institutions, both within
and outside of Israel, have voiced concerns that the proposed changes may negatively impact the business environment in Israel including
due to reluctance of foreign investors to invest or transact business in Israel as well as to increased currency fluctuations, downgrades
in credit rating, increased interest rates, increased volatility in security markets, and other changes in macroeconomic conditions.
The risk of such negative developments has increased in light of the recent Hamas attacks and the war against Hamas declared by Israel.
To the extent that any of these negative developments do occur, they may have an adverse effect on our business, our results of operations
and our ability to raise additional funds, if deemed necessary by our management and board of directors.
Note
2: GOING CONCERN
The
financial statements have been prepared on a going concern basis, which assumes the Company will be able to realize its assets and discharge
its liabilities in the normal course of business for the foreseeable future. The Company has an accumulated deficit of $171,607,773 as of July
31, 2024, and more losses are anticipated in the development of the business. Accordingly, there is substantial doubt about the Company’s
ability to continue as a going concern. These financial statements do not include any adjustments related to the recoverability and classification
of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going
concern.
The
ability to continue as a going concern is dependent upon the Company completing the merger as discussed in Note 13, generating
profitable operations in the future and/or being able to obtain the necessary financing to meet its obligations and repay its
liabilities arising from normal business operations when they become due. Should the merger not be consummated, Management intends
to finance operating costs over the next twelve months with existing cash on hand, loans from related parties, and/or private
placement of debt and/or common stock. In the event that the Company is unable to successfully raise capital and/or generate
revenues, the Company will likely reduce general and administrative expenses, and cease or delay its development plan until it is
able to obtain sufficient financing. The Company has begun reducing operating expenses and cash outflows by selling PlaySight, as
well as selling 75%
of Foundation Sports in November and December 2022, respectively to the former shareholders of those companies. There can be no
assurance that additional funds will be available on terms acceptable to the Company, or at all. We have recorded the 25%
investment in Foundation Sports at $0.
We have recorded our 20%
ownership stake in YYEM at $16,500,000.
Note
3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim
Financial Statements
The
accompanying condensed financial statements of the Company have been prepared without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and disclosures required by accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements reflect all
adjustments that, in the opinion of management, are necessary to present fairly the results of operations of the Company for the period
presented. The results of operations for the three months ended July 31, 2024, are not necessarily indicative of the results that may
be expected for any future period or the fiscal year ending April 30, 2025 and should be read in conjunction with the Company’s
Annual Report on Form 10-K for the year ended April 30, 2024, filed with the Securities and Exchange Commission on July 25, 2024.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Accordingly, actual results could differ from those estimates.
Financial
Statement Reclassification
Certain
prior year amounts within accounts payable, accrued expenses, and certain operating expenses have been reclassified for consistency with
the current year presentation and had no effect on the Company’s balance sheet, net loss, shareholders’ deficit or cash flows.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents.
The majority of payments due from banks for credit card transactions process within 24 to 48 hours and are accordingly classified as
cash and cash equivalents.
Accounts
Receivable
The
Company’s accounts receivable are non-interest bearing trade receivables resulting from the sale of products and payable over
terms ranging from 15 to 60 days. The Company provides an allowance for doubtful accounts at the point when collection is considered
doubtful. Once all collection efforts have been exhausted, the Company charges-off the receivable with the allowance for doubtful
accounts. The Company recorded $28,000 and $40,000
in allowance for doubtful accounts as of July 31, 2024 and April 30, 2024, respectively.
Inventory
Inventory
is valued at the lower of the cost (determined principally on a first-in, first-out basis) or net realizable value. The Company’s
valuation of inventory includes inventory reserves for inventory that will be sold below cost and the impact of inventory shrink. Inventory
reserves are based on historical information and assumptions about future demand and inventory shrink trends. The Company’s inventory
as of July 31, 2024 and April 30, 2024 consisted of the following:
SCHEDULE
OF INVENTORY
|
July 31, 2024 | | |
April 30, 2024 | |
Finished Goods |
$ | 1,845,255 | | |
$ | 995,533 | |
Component/Replacement Parts |
| (240,290 | ) | |
| 770,737 | |
Capitalized Duty/Freight |
| 90,882 | | |
| 26,171 | |
Inventory Reserve |
| (35,000 | ) | |
| (183,245 | ) |
Total |
$ | 1,660,847 | | |
$ | 1,609,196 | |
Prepaid
Inventory
Prepaid
inventory represents inventory that is in-transit that has been paid for but not received from the Company’s third-party vendors.
The Company typically prepays for the purchase of materials and receives the products within three months after making payments. The
Company continuously monitors delivery from, and payments to, the vendors. If the Company has difficulty receiving products from a vendor,
the Company would cease purchasing products from such vendors in future periods. The Company has not had difficulty receiving products
during the reporting periods.
Property
and equipment
Property
and equipment acquired through business combinations are stated at the estimated fair value at the date of the acquisition. Purchases
of property and equipment are stated at cost, net of accumulated depreciation and impairment losses. Expenditures that materially increase
the useful life of the assets are capitalized. Ordinary repairs and maintenance are expensed as incurred. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of the related assets, which is an average of 5 years.
Concentration
of Credit Risk
The
Company maintains its cash in bank deposit accounts, the balances of which at times may exceed insured limits. The Company continually
monitors its banking relationships and consequently has not experienced any losses in such accounts. While we may be exposed to credit
risk, we consider the risk remote and do not expect that any such risk would result in a significant effect on our results of operations
or financial condition. See Note 4 for further details on the Company’s concentration of credit risk as well as other risks and
uncertainties.
Revenue
Recognition
The
Company recognizes revenue for their continuing operations in accordance with Accounting Standards Codification (“ASC”) 606,
the core principle of which is that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services.
The Company recognizes revenue for its performance obligation associated with its contracts with customers at a point in time once products
are shipped. Amounts collected from customers in advance of shipping products ordered are reflected as contract liabilities on the accompanying
consolidated balance sheets. The Company’s standard terms are non-cancelable and do not provide for the right-of-return, other
than for defective merchandise covered under the Company’s standard warranty. The Company has not historically experienced any
significant returns or warranty issues.
The
Company recognizes revenue under ASC 606, “Revenue from Contracts with Customers”. The core principle of this revenue standard
is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied
to achieve that core principle:
Step
1: Identify the contract with the customer
The
Company determines that it has a contract with a customer when each party’s rights regarding the products or services to be transferred
can be identified, the payment terms for the services can be identified, the Company has determined the customer has the ability and
intent to pay, and the contract has commercial substance. At contract inception, the Company evaluates whether two or more contracts
should be combined and accounted for as a single contract and whether the combined or single contract includes more than one performance
obligation.
Step
2: Identify the performance obligations in the contract
The
Company’s customers are buying an integrated system. In evaluating whether the equipment is a separate performance obligation,
the Company’s management considered the customer’s ability to benefit from the equipment on its own or together with other
readily available resources and if so, whether the service and equipment are separately identifiable (i.e., is the service highly dependent
on, or highly interrelated with the equipment). Because the Products and Services included in the customer’s contract are integrated
and highly interdependent, and because they must work together to deliver the Solution, the Company has concluded that Products installed
on customer’s premise and Services contracted for by the customer are generally not distinct within the context of the contract
and, therefore, constitute a single, combined performance obligation.
Step
3: Determine the transaction price
The
transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods
or services to a customer. The consideration promised in a contract with a customer includes predetermined fixed amounts, variable amounts,
or both. The Company’s contracts do not include any rights of returns or refunds.
The
Company collects each year’s service fees in advance and should therefore consider the existence of a significant financing component.
However, due to the fact that the payments are provided for the service of a one-year term, the Company elected to apply the practical
expedient under ASC 606 which exempts the adjustment of the consideration for the existence of a significant financing component when
the period between the transfer of the services and the payment for such services is one year or less.
Step
4: Allocate the transaction price to the performance obligations in the contract
Contracts
that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on
each performance obligation’s relative standalone selling price (“SSP”). The Company has identified a single performance
obligation in the contract, and therefore, the allocation provisions under ASC 606 do not apply to the Company’s contracts.
Step
5: Recognize revenue when the Company satisfies a performance obligation
Revenues
for the Company’s single, combined performance obligation are recognized on a straight-line basis over the customer’s contract
term, which is the period in which the parties to the contract have enforceable rights and obligations (Typically 3-4 years).
Business
Combinations
Upon
acquisition of a company, we determine if the transaction is a business combination, which is accounted for using the acquisition method
of accounting. Under the acquisition method, once control is obtained of a business, the assets acquired, and liabilities assumed, are
recorded at fair value. We use our best estimates and assumptions to assign fair value to the tangible and intangible assets acquired
and liabilities assumed at the acquisition date. One of the most significant estimates relates to the determination of the fair value
of these assets and liabilities. The determination of the fair values is based on estimates and judgments made by management. Our estimates
of fair value are based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable. Measurement
period adjustments are reflected at the time identified, up through the conclusion of the measurement period, which is the time at which
all information for determination of the values of assets acquired and liabilities assumed is received and is not to exceed one year
from the acquisition date. We may record adjustments to the fair value of these tangible and intangible assets acquired and liabilities
assumed, with the corresponding offset to goodwill. The Company elected to apply pushdown accounting to all entities acquired.
Additionally,
uncertain tax positions and tax-related valuation allowances are initially recorded in connection with a business combination as of the
acquisition date. We continue to collect information and reevaluate these estimates and assumptions periodically and record any adjustments
to preliminary estimates to goodwill, provided we are within the measurement period. If outside of the measurement period, any subsequent
adjustments are recorded to the consolidated statement of operations.
Fair
Value of Financial Instruments
Fair
value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for
inputs used in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for assets and liabilities,
is as follows:
Level
1 — Quoted prices in active markets for identical assets or liabilities
Level
2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities
Level
3 — Unobservable pricing inputs in the market
Financial
assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair
value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment and may
affect the valuation of the assets and liabilities being measured and their categorization within the fair value hierarchy.
The
Company’s financial instruments consist of cash and cash equivalents, accounts receivable, and accounts payable. The carrying amount
of these financial instruments approximates fair value due to their short-term maturity.
The
Company’s contingent consideration in connection with the acquisition of Gameface was calculated using Level 3 inputs. The fair
value of contingent consideration as of July 31, 2024 and April 30, 2024 was $0 and $0, respectively. The Company issued shares in
October 2023 to settle the contingent consideration.
The
Company estimates the fair value of its intangible assets using Level 3 assumptions, primarily based on the income approach utilizing
the discounted cash flow method.
The
Company’s derivative liabilities were calculated using Level 2 assumptions on the issuance and balance sheet dates via a Black-Scholes
option pricing model and consisted of the following ending balances and gain amounts as of and for the three months ended July 31, 2024:
SCHEDULE
OF DERIVATIVE LIABILITIES
Note derivative is related to | |
July 31, 2024 balance | | |
(Gain) loss for the three months ended July 31, 2024 | |
8/6/21 convertible notes | |
$ | 4,716 | | |
$ | 182 | |
6/17/22 underwriter warrants | |
| 563 | | |
| (28 | ) |
Total | |
$ | 5,279 | | |
$ | 154 | |
The
Black-Scholes option pricing model assumptions for the derivative liabilities during the periods ended July 31, 2024 and 2023 consisted
of the following:
SCHEDULE
OF DERIVATIVE AND WARRANTS GRANTED VALUATION USING BLACK-SCHOLES PRICING METHOD
| |
Period Ended July 31, 2024 | | |
Period Ended July 31, 2023 | |
Expected life in years | |
2 – 3.98 years | | |
0.7-10 years |
|
Stock price volatility | |
| 150 | % | |
| 150 |
% |
Risk free interest rate | |
| 4.60 | % | |
| 4.08%-5.37 |
% |
Expected dividends | |
| 0 | % | |
| 0 |
% |
Income
Taxes
Income
taxes are accounted for in accordance with the provisions of ASC 740, Accounting for Income Taxes. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the amounts that are more likely than not to be realized.
Intangible
Assets
Intangible
assets relate to the “Slinger” technology trademark, which the Company purchased on November 10, 2020. The Company also acquired
intangible assets as a part of the Gameface acquisition. These intangible assets include tradenames, internally developed software, and
customer relationships. The acquired intangible assets are amortized based on the estimated present value of cash flows of each class
of intangible assets in order to determine their economic useful life. Refer to Note 5 for more information.
Impairment
of Long-Lived Assets
In
accordance with ASC 360-10, the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate
that their net book value may not be recoverable. Factors which could trigger impairment review include significant underperformance
relative to historical or projected future operating results, significant changes in the manner of use of the assets or the strategy
for the overall business, a significant decrease in the market value of the assets or significant negative industry or economic trends.
When such factors and circumstances exist, the Company compares the projected undiscounted future cash flows associated with the related
asset or group of assets over their estimated useful lives against their respective carrying amount. If those net undiscounted cash flows
do not exceed the carrying amount, impairment, if any, is based on the excess of the carrying amount over the fair value based on the
market value or discounted expected cash flows of those assets and is recorded in the period in which the determination is made. Refer
to Note 5 for more information.
Goodwill
The
Company accounts for goodwill in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). ASC 350 requires
that goodwill not be amortized, but reviewed for impairment if impairment indicators arise and, at a minimum, annually. The Company records
goodwill as the excess purchase price over assets acquired and includes any work force acquired as goodwill. Goodwill is evaluated for
impairment on an annual basis.
With
the adoption of the ASU 2017-04, which eliminates the second step of the goodwill impairment test, the Company tests impairment of goodwill
in one step. In this step, the Company compares the fair value of each reporting unit with goodwill to its carrying value. The Company
determines the fair value of its reporting units with goodwill using a combination of a discounted cash flow and a market value approach.
If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, the Company will
record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. If the fair value of
the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, goodwill is not impaired and the Company
will not record an impairment charge.
The
Company impaired all goodwill as of April 30, 2024.
Share-Based
Payment
The
Company accounts for share-based compensation in accordance with ASC 718, Compensation-Stock Compensation (ASC 718). Under the fair value
recognition provisions of this topic, stock-based compensation cost is measured at the grant date based on the fair value of the award
and is recognized as an expense on a straight-line basis over the requisite service period, which is the vesting period.
Warrants
The
Company grants warrants to key employees and executives as compensation on a discretionary basis. The Company also grants warrants in
connection with certain note payable agreements and other key arrangements. The Company is required to estimate the fair value of share-based
awards on the measurement date and recognize as expense that value of the portion of the award that is ultimately expected to vest over
the requisite service period. Warrants granted in connection with ongoing arrangements are more fully described in Note 11.
The
warrants granted during the periods ended July 31, 2024 and 2023 were valued using a Black-Scholes option pricing model on the date of
grant using the following assumptions:
SCHEDULE
OF WARRANTS GRANTED VALUATION USING BLACK-SCHOLES PRICING METHOD
| |
| Period Ended July 31, 2024 | | |
| Period Ended July 31, 2023 | |
Expected life in years | |
| - years | | |
| - years | |
Stock price volatility | |
| - | % | |
| - | % |
Risk free interest rate | |
| - | % | |
| - | % |
Expected dividends | |
| - | % | |
| - | % |
Foreign
Currency Translation
Our
functional currency is the U.S. dollar. The functional currency of our foreign operations, generally, is the respective local currency
for each foreign subsidiary. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot
rate in effect at the applicable reporting date. Our consolidated statements of comprehensive loss are translated at the weighted average
rate of exchange during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component
of accumulated other comprehensive loss in shareholders’ equity. Realized and unrealized transaction gains and losses generated
by transactions denominated in a currency different from the functional currency of the applicable entity are recorded in other income
(loss) in the period in which they occur.
Earnings
Per Share
Basic
earnings per share are calculated by dividing income available to shareholders by the weighted-average number of common shares outstanding
during each period. Diluted earnings per share are computed using the weighted average number of common and dilutive common share equivalents
outstanding during the period.
All
common stock equivalents such as shares to be issued for the conversion of notes payable and warrants were excluded from the calculation
of diluted earnings per share as the effect is antidilutive.
Recent
Accounting Pronouncements
Recently
Adopted
In
January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, Intangibles – Goodwill and
Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies how an entity is required
to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under ASU 2017-04, goodwill impairment will
be tested by comparing the fair value of a reporting unit with its carrying amount, and recognizing an impairment charge for the amount
by which the carrying amount exceeds the reporting unit’s fair value. The new guidance must be applied on a prospective basis and
is effective for periods beginning after December 15, 2022, with early adoption permitted. The Company adopted ASU 2017-04 effective
May 1, 2021. The adoption of the new standard did not have a material effect on the Company’s consolidated financial statements.
In
December 2019, the FASB issued Accounting Standards Update (“ASU”), 2019-12, Simplifying the Accounting for Income Taxes,
which amends ASC 740, Income Taxes (ASC 740). This update is intended to simplify accounting for income taxes by removing certain
exceptions to the general principles in ASC 740 and amending existing guidance to improve consistent application of ASC 740. This update
is effective for fiscal years beginning after December 15, 2021. The guidance in this update has various elements, some of which are
applied on a prospective basis and others on a retrospective basis with earlier application permitted. The adoption of the new standard
did not have a material effect on the Company’s consolidated financial statements.
In
August 2020, the FASB issued ASU No. 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. ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible
debt instruments and convertible preferred stock. Limiting the accounting models results in fewer embedded conversion features being
separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation
models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition
of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued
with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives
scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06
will be effective for public companies for fiscal years beginning after December 15, 2023, including interim periods within those fiscal
years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within
those fiscal years. The Company is currently evaluating the impact that the adoption of ASU 2020-06 will have on the Company’s
consolidated financial statement presentation or disclosures.
In
June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments (“ASC 326”). The guidance replaces the incurred loss methodology with an expected loss methodology that is referred
to as the current expected credit loss (“CECL”) methodology. The measurement of expected credit losses under the CECL methodology
is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also
applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credits, financial
guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842 on leases.
ASC 326 requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses as well as
the credit quality and underwriting standards of a company’s portfolio. In addition, ASC 326 made changes to the accounting for
available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down
on available-for-sale debt securities the Company does not intend to sell or believes that it is more likely than not they will be required
to sell. The ASU can be adopted no later than January 1, 2020 for SEC filers and January 1, 2023 for private companies and smaller reporting
companies. The adoption of the new standard did not have a material effect on the Company’s consolidated financial statements.
In
October 2021, the FASB issued ASU 2021-08, “Business Combinations – Accounting for Contract Assets and Contract Liabilities
(Topic 805)”. The amendments in this Update address diversity and inconsistency related to the recognition and measurement of contract
assets and contract liabilities acquired in a business combination. The amendments in this Update require that an acquirer recognize
and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts
with Customers. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal
years. The adoption of the new standard did not have a material effect on the Company’s consolidated financial statements.
The
FASB has issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock
Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2021-04 provides
guidance that an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written
call option that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument.
The standard also provides guidance on how an entity should measure and recognize the effect of a modification or an exchange of a freestanding
equity-classified written call option that remains equity classified. The amendments in this ASU are effective for the Company for fiscal
years beginning after December 15, 2021. Early adoption is permitted for all entities, including adoption in an interim period. The adoption
of the new standard did not have a material effect on the Company’s consolidated financial statements.
Other
recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s
present or future consolidated financial statements.
Note
4: CONCENTRATION OF CREDIT RISK AND OTHER RISKS AND UNCERTAINTIES
Accounts
Receivable Concentration
As
of July 31, 2024 and April 30, 2024, the Company had one and two customers that accounted for 63% and 100%
of the Company’s trade receivables balance, respectively.
Accounts
Payable Concentration
As
of July 31, 2024 and April 30, 2024, the Company had five and four significant suppliers that accounted for 65%, and 63% of the Company’s
trade payables balances, respectively.
Note
5: INTANGIBLE ASSETS
Intangible
assets reflect only those intangible assets of our continuing operations, and consist of the following:
SCHEDULE
OF INTANGIBLE ASSETS
| |
Amortization (in years) | | |
Carrying Value | | |
Accumulated Amortization | | |
Impairment Loss | | |
Net Carrying Value | |
| |
Weighted | | |
| |
| |
Average
Period | | |
July 31, 2024 | |
| |
Amortization (in years) | | |
Carrying Value | | |
Accumulated Amortization | | |
Impairment Loss | | |
Net Carrying Value | |
Tradenames and patents | |
| 15.26 | | |
$ | 385,582 | | |
$ | 24,031 | | |
$ | 360,551 | | |
$ | 1,000 | |
Customer relationships | |
| 9.92 | | |
| 3,930,000 | | |
| 50,038 | | |
| 3,879,962 | | |
| — | |
Internally developed software | |
| 4.91 | | |
| 580,000 | | |
| 79,608 | | |
| 500,392 | | |
| — | |
Total intangible assets | |
| | | |
$ | 4,895,582 | | |
$ | 153,677 | | |
$ | 4,740,905 | | |
$ | 1,000 | |
| |
Amortization (in years) | | |
Carrying Value | | |
Accumulated Amortization | | |
Impairment Loss | | |
Net Carrying Value | |
| |
Weighted | | |
| |
| |
Average
Period | | |
April 30, 2024 | |
| |
Amortization (in years) | | |
Carrying Value | | |
Accumulated Amortization | | |
Impairment Loss | | |
Net Carrying Value | |
Tradenames and patents | |
| 15.26 | | |
$ | 385,582 | | |
$ | 24,031 | | |
| 360,551 | | |
$ | 1,000 | |
Customer relationships | |
| 9.92 | | |
| 3,930,000 | | |
| 50,038 | | |
| 3,879,962 | | |
| — | |
Internally developed software | |
| 4.91 | | |
| 580,000 | | |
| 79,608 | | |
| 500,392 | | |
| — | |
Total intangible assets | |
| | | |
$ | 4,895,582 | | |
$ | 153,677 | | |
$ | 4,740,905 | | |
$ | 1,000 | |
Amortization
expense for the three months ended July 31, 2024 and 2023 was approximately $0 and $0, respectively. The Company impaired $0 in the
three months ended July 31, 2024. The remaining $1,000 is a nominal value related to the Company’s patents. This amount is not
expected to be amortized any further.
Note
6: ACCRUED EXPENSES
The
composition of accrued expenses is summarized below:
SCHEDULE
OF ACCRUED EXPENSES
|
|
July
31, 2024 |
|
|
April
30, 2024 |
|
Accrued
payroll |
|
$ |
1,465,142 |
|
|
$ |
1,304,363 |
|
Accrued
bonus |
|
|
1,177,777 |
|
|
|
1,022,751 |
|
Accrued
professional fees |
|
|
73,500 |
|
|
|
37,212 |
|
Other
accrued expenses |
|
|
1,451,331 |
|
|
|
1,041,046 |
|
Total |
|
$ |
4,167,750 |
|
|
$ |
3,405,372 |
|
Note
7: NOTE PAYABLE – RELATED PARTY
The
discussion of note payable – related party only includes those that existed as of April 30, 2024. For a discussion of all prior
note payable – related party we refer you to the Annual Report on Form 10-K filed July 25, 2024 for the fiscal year end April 30,
2024.
On
January 14, 2022, the Company entered into two loan agreements with related party lenders, each for $1,000,000, pursuant to which the
Company received a total amount of $2,000,000 (the “Loan Agreements”). The loans bear interest at a rate of 8% per annum
and are required to be repaid in full by April 30, 2022 or such other date as may be accepted by the lenders. The Company is not permitted
to make any distribution or pay any dividends unless or until the loans are repaid in full.
There
was $1,169,291 and $1,169,291 in outstanding borrowings from related parties as of July 31, 2024 and April 30, 2024. Interest expense related
to the related parties for the three months ended July 31, 2024 and 2023 amounted to $0 and $0 respectively. Accrued interest due to
related parties as of July 31, 2024 and April 30, 2024 amounted to $917,957 and $917,957, respectively. The accrued interest includes notes
that were either repaid or converted but the interest remained.
On
January 6, 2023, we sold certain of our inventory including all components, parts, additions and accessions thereto to Yonah Kalfa and
Naftali Kalfa who immediately consigned it back to us in exchange for a payment of $103 per ball launcher we sell until we have paid
them an aggregate total of $2,092,700, which represents payment in full of the principal amounts of and accrued interest in respect of
the Loan Agreements (as defined above) and certain other expenses they incurred in connection with the Company.
Note
8: CONVERTIBLE NOTES PAYABLE
As
of April 30, 2024, all outstanding convertible notes payable had been fully converted into outstanding common shares.
Note
9: NOTES PAYABLE
The
discussion of notes payable only includes those that existed as of April 30, 2024. For a discussion of all prior notes payable we refer
you to the Annual Report on Form 10-K filed July 25, 2024 for the fiscal year end April 30, 2024.
Cash
Advance Agreements
UFS
Agreement
On
March 6, 2024, the Company entered into an agreement (the “UFS Agreement”) with Unique Funding Solutions (“UFS”)
pursuant to which the Company sold $323,350
in future receivables to UFS (the “UFS
Receivables Purchased Amount”) in exchange for $200,000
in cash. The Company agreed to pay UFS
$9,798.49
each week until the UFS Receivable Amount is paid in full.
In
order to secure payment and performance of the Company’s obligations to UFS under the UFS Agreement the Company granted to UFS
a security interest in all present and future accounts receivable. The Company also agreed not to create, incur, assume, or permit to exist, directly or indirectly, any lien on or with respect to
any of such collateral.
As at the date hereof, of the UFS Receivables Purchased
Amount, $151,595 remains outstanding
Agile Capital Funding
On
January 10, 2024, the Company entered into an agreement with Agile Capital Funding, LLC (the “Agile Jan Agreement”) pursuant
to which the Company sold $1,460,000 in future receivables to Agile Capital Funding, LLC (the “Agile Jan Receivable Amount”)
in exchange for $1,000,000 in cash. The Company agreed to pay Agile Capital Funding, LLC (“Agile”) $52,142.86 each week until
the Agile Receivable Amount is paid in full. In order to secure payment and performance of the Company’s obligations to Agile under
the Agile Jan Agreement, the Company granted to Agile a security interest in the following collateral: all present and future accounts
receivable. The Company also agreed not to create, incur, assume, or permit to exist, directly or indirectly, any lien on or with respect
to any of such collateral. The proceeds from the sale of future receivables were used, in part, to pay the outstanding balance of the
ACF Receivable Amount.
As of the date hereof, of the Agile Jan Receivable Amount, $595,714 remains outstanding.
Cedar
Agreement #1
On
January 29, 2024, the Company entered into an agreement (the “Cedar Agreement”) with Cedar Advance LLC (“Cedar”)
pursuant to which the Company sold $1,183,200
in future receivables (the “Cedar Receivables
Purchased Amount”) to Cedar in exchange for payment to the Company of $752,000
in cash. The Company agreed to pay Cedar $39,440
each week until the Cedar Receivables Purchased
Amount is paid in full.
In
order to secure payment and performance of the Company’s obligations to Cedar under the Cedar Agreement, the Company granted to
Cedar a security interest in the following collateral: all accounts, including without limitation, all deposit accounts, accounts receivable
and other receivables, chattel paper, documents, equipment, instruments and inventory as those terms are defined by Article 9 of the
UCC. The Company also agreed not to create, incur, assume, or permit to exist, directly or indirectly, any lien on or with respect to
any of such collateral.
As of the date hereof, of the Cedar Receivables Purchased
Amount, $554,100 remains outstanding.
Cedar
Agreement #2
On
April 3, 2024, the Company entered into an agreement with Cedar (the “Cedar Agreement No. 2”) pursuant to which the
Company sold $438,000
in future receivables to Cedar (the “Cedar Receivables Purchased Amount No.2”) in exchange for $285,000
in cash. The Company agreed to pay Cedar $14,600 each
week until the Cedar Receivables Purchased Amount No. 2 is paid in full. In order to secure payment and performance of the
Company’s obligations to Cedar under the Cedar Agreement No.2, the Company granted to Cedar a security interest in the following
collateral: all present and future accounts receivable. The Company also agreed not to create, incur, assume, or permit to exist,
directly or indirectly, any lien on or with respect to any of such collateral.
As of the date hereof, of the Cedar Receivables Purchased
Amount No. 2, $365,000 remains outstanding.
Cedar Agreement #3
On April 22, 2024, the Company entered into an agreement
with Cedar (the “Cedar Agreement No.3”) pursuant to which the Company sold $481,800 in future receivables to Cedar Advance
LLC (the “Cedar Receivables Purchased Amount No.3”) in exchange for $310,000 in cash. The Company agreed to pay Cedar $18,530.77
each week until the Cedar Receivables Purchased Amount No. 3 is paid in full. In order to secure payment and performance of the Company’s
obligations to Cedar under the Cedar Agreement No.3, the Company granted to Cedar a security interest in the following collateral: all
present and future accounts receivable. The Company also agreed not to create, incur, assume, or permit to exist, directly or indirectly,
any lien on or with respect to any of such collateral.
As of the date hereof, of the Cedar Receivables Purchased Amount No. 3, $426,210 remains outstanding
Armistice
On
January 6, 2023, the Company entered into a loan and security agreement (the “Loan and Security Agreement”) with one or more
institutional investors (the “Lenders”) and Armistice Capital Master Fund Ltd. as agent for the Lenders (the “Agent”)
for the issuance and sale of (i) a note in an aggregate principal amount of up to $2,000,000 (the “Note”) with the initial
advance under the Loan and Security Agreement being $1,400,000 and (ii) warrants (the “Warrants”) to purchase a number of
shares of common stock of the Company equal to 200% of the face amount of the Note divided by the closing price of the common stock of
the Company on the date of the issuance of the Notes (collectively, the “Initial Issuance”). The closing price of the Company’s
common stock on January 6, 2023, as reported by Nasdaq, was $8.84 per share, so the Warrants in respect of the initial advance under
the Note are exercisable for up to 452,489 shares of the Company’s common stock. The Warrants have an exercise price per share
equal to the closing price of the common stock of the Company on the date of the issuance of the Note, or $8.84 per share and a term
of five- and one-half (5½) years following the initial exercise date. The initial exercise date of the Warrants will be the date
stockholder approval is received and effective allowing exercisability of the Warrants under Nasdaq rules. Pursuant to the terms of the
Loan and Security Agreement, an additional advance of $600,000 may be made to the Company under the Note. The Company’s obligations
under the terms of the Loan and Security Agreement are fully and unconditionally guaranteed by all of the Company’s subsidiaries
(the “Guarantors”). The Company measured the warrants granted on January 6, 2023 at $3,715,557, and discounted the note payable
to $0 and recorded a derivative expense of $1,715,557.
On
October 11, 2023, the Company entered into a loan and security modification agreement (the “Loan and Security Modification Agreement”)
with the Lenders and the Agent amending the terms of the Loan and Security Agreement dated January 6, 2023 (the “LSA”) by
and among the Company, the Lenders and the Agent to make an additional loan of $1,000,000 and modify the terms of the LSA to reflect
the New Loan. The modification of the original January 6, 2023, loan represented a material modification, and the original loan has been
extinguished, and the New Loan in the amount of $3,000,000 has been recorded. As a result of the extinguishment, the Company recognized
there was no gain or loss recognized as all of the discounts associated with the original notes were fully amortized. On October 11,
2023, the Company recognized a discount related to the issuance of the warrants noted below that will be amortized through the maturity
date of the New Loan, April 11, 2024.
In
addition, on October 11, 2023, the Company agreed to issue warrants to purchase up to 8,460 shares of Common Stock at an exercise price
of $138 per share (the “October Warrants”).
The
Company recorded a derivative liability related to the warrants granted with the October 11, 2023 amendment in the amount of $290,514.
This discount is being amortized over the life of the note.
On
December 6, 2023, the Company entered into an inducement offer letter agreement (the “Inducement Letter”) with Armistice
with regard to certain of the Company’s existing warrants to purchase up to a total of 248,611 shares of Common Stock, consisting
of: (i) 70,508 shares of Common Stock issuable upon the exercise of warrants issued on September 28, 2022 each at an exercise price of
$35.46 per share with a term of five year (the “September 2022 Five Year Warrants”); (ii) 155,479 shares of Common Stock
issuable upon the exercise of warrants issued on September 28, 2022 each at an exercise price of $70.92 per share with a term of seven
and one half years (the “September 2022 Seven and a Half Year Warrants”); and (iii) 22,625 shares of Common Stock issuable
upon the exercise of warrants issued on January 6, 2023 (the “January 2023 Warrants” and, together with the September 2022
Five Year Warran)s and)the September 2022 Seven and a Half Year Warrants, the “2022 and 2023 Warrants”).
Pursuant
to the Inducement Letter, Armistice agreed to exercise for cash the 2022 and 2023 Warrants to purchase an aggregate of 248,611 shares
of Common Stock at a reduced exercise price of $5.88 per share in consideration of the Company’s agreement to issue common stock
purchase warrants to purchase up to an aggregate of 497,221 shares of Common Stock (the “December Warrants”). The Company
received aggregate gross proceeds of $1,461,827.68 from the exercise of the 2022 and 2023 Warrants by the Holder, before deducting offering
expenses payable by it. The transaction closed on December 7, 2023.
As
of February 21, 2024, the total amount owed pursuant to the Note was $3,197,335.65. Of this amount, the Company received gross proceeds
of $3 million from the Lenders.
On
February 21, 2024, the Company and the Lenders and the Agent entered into a Waiver, Warrant Amendment and Second Loan and Security Modification
Agreement (the “Waiver, Amendment, and Modification Agreement”).
Pursuant
to the Waiver, Amendment, and Modification Agreement, the Lenders and the Agent agreed to waive certain events of default with regard
to certain covenants and obligations the Company had pursuant to (a) that certain registration rights agreement between the Company and
the Lenders and the Agent entered into in September 2022, (b) the LSA (as modified), and (c) the Inducement Letter.
Pursuant
to the Waiver, Amendment, and Modification Agreement, the Company and the Lenders and the Agent agreed to modify the Loan and Security
Agreement such that the Note is now convertible into up to 499,584 shares of Common Stock based on the agreed to conversion price of
$6.40. The Company believed that the $6.40 conversion price meets the definition of “Minimum Price” in Nasdaq Listing Rule
5635(d).
Pursuant
to the Waiver, Amendment, and Modification Agreement, the Lenders and the Agent agreed to use their reasonable best efforts to voluntarily
convert all amounts owed under the Note on or prior to the last trading day before the trading day on which the next meeting of the Company’s
shareholders would take place.
Pursuant
to the Waiver, Amendment, and Modification Agreement, the Company and the Lenders and the Agent agreed that following shareholder approval,
which the Company obtained on May 15, 2024, the October Warrants and December Warrants have been amended to lower the exercise price
of such warrants to $3.20 per share.
Pursuant
to the Waiver, Amendment, and Modification Agreement, the Company agreed that Slinger Bag Americas Inc., a Delaware subsidiary of the
Company (“Slinger”) would, within ten (10) business days of the six month anniversary of the effectiveness of the registration
statement on Form S-1 registering the shares of Common Stock issuable pursuant to the conversion of the Note (the “Effectiveness
Date”), pay in cash to the Lenders and the Agent the difference, if any, between (i) $6 million (the “Guaranteed Amount”)
and (ii) the combined gross proceeds realized by the Lenders and the Agent from its sale of the shares of Common Stock issued pursuant
to (a) conversions of the Note and (b) exercises of the October Warrants and December Warrants(the “Realized Amount”). Slinger
is obligated to fund an escrow account with $2 million within ten (10) weeks of February 21, 2024. The Company and the Lenders and the
Agent also agreed that if, due to a Force Majeure Event, the Lenders and the Agent had not fully converted the Note prior to the six-month
anniversary of the Effectiveness Date, the Company would repurchase the Note and the October Warrants and December Warrants by paying
in cash to the Lenders and the Agent the difference, if any, between the Guaranteed Amount and the Realized Amount.
Pursuant
to the Waiver, Amendment, and Modification Agreement, the Company and the Lenders and the Agent agreed that once the Note was fully repaid
(either via a combination of cash payments and conversions into shares of Common Stock or just via conversions into shares of Common
Stock) all liens and security interests of the Lenders and the Agent in any and all of the property of the Company and the Guarantors
(as defined in the Waiver, Amendment, and Modification Agreement) would be automatically released and terminated, including without limitation,
any liens and security interests evidenced by Uniform Commercial Code financing statements.
Pursuant
to the Waiver, Amendment, and Modification Agreement, the Company agreed to prepare and file a registration statement on Form S-1 registering
the shares of Common Stock issuable pursuant to the conversion of the Note with the SEC within five (5) business days of February 21,
2024 and use commercially reasonable best efforts to cause such registration statement to be declared effective by the SEC as soon as
practical thereafter and, in any event, within thirty (30) calendar days of February 21, 2024. A registration statement was filed and
became effective on March 1, 2024 in compliance with this obligation.
On
April 15, 2024, the Company acknowledged and agreed to the entrance into a warrant purchase agreement (the “Morgan WPA”)
by Armistice and Morgan Capital LLC (“Morgan”) pursuant to which Armistice sold the October and December 2023 Warrants to
Morgan for $2,500,000 in cash. Pursuant to the Morgan WPA, Armistice agreed that the obligation of Slinger Bag Americas to, within 10
Business Days of the six month anniversary of the Waiver, Amendment, and Modification Agreement, pay in cash to Armistice the difference,
if any, between (i) $6 million and (ii) the combined gross proceeds to be realized by the Holder from its sale of the Company’s
common stock issued pursuant to (a) conversions of the note (which as of the date hereof has been fully converted into shares of the
Company’s common stock) and (b) exercises of the Warrants would be terminated and of no further effect and force. In addition,
pursuant to the Morgan WPA, Armistice agreed that the obligation of Slinger Bag Americas to maintain an escrow account with its counsel
in the amount of no less than $2,000,000 would be terminated and of no further effect and force. Armistice further agreed that any and
all liens and security interests of Armistice in any and all of the property of the Company and the Guarantors (as such terms are defined
in the Waiver, Amendment, and Modification Agreement) would be automatically released and terminated, including without limitation, any
liens and security interests evidenced by Uniform Commercial Code financing statements.
Note
10: RELATED PARTY TRANSACTIONS
In
support of the Company’s efforts and cash requirements, it may rely on advances from related parties until such time that the Company
can support its operations or attain adequate financing through sales of its equity or traditional debt financing. There is no formal
written commitment for continued support by officers, directors, or shareholders. Amounts represent advances, amounts paid in satisfaction
of liabilities or accrued compensation that has been deferred. The advances are considered temporary in nature and have not been formalized
by a promissory note.
The
Company has outstanding notes payable of $1,169,291 and $1,169,291 and accrued interest of $917,957 and $917,957 due to a related party as of July
31, 2024 and April 30, 2024, respectively (see Note 7).
The
Company recognized net sales of $0 and $50,900 during the three months ended July 31, 2024 and 2023, respectively, to related parties.
As of July 31, 2024 and 2023, related parties had accounts receivable due to the Company of $11,330 and $28,800, respectively.
Note
11: SHAREHOLDERS’ EQUITY (DEFICIT)
Common
Stock
The
Company has 1,000,000,000 shares of common stock authorized with a par value of $0.001 per share. As of July 31, 2024 and April 30,
2024, the Company had 2,659,149 and 1,828,541 shares of common stock issued and outstanding, respectively.
For
the period May 1, 2024 through July 31, 2024, the Company issued 830,608 shares of common stock to true-up shares in PlaySight acquisition
(10), for services rendered (214,128), for the exercise of warrants (505,680) and for fractional shares as part of the 1 for 20 reverse
stock split (110,790).
For
the period May 1, 2023 through July 31, 2023, the Company issued 189,718 shares of common stock to ambassadors under their agreements
(188), to vendors in settlement of accounts payable (67,500), for settlement with former owners of FSS (1,350), for the exercise of warrants
(27,000) and to satisfy the profit guarantee on a note (93,680).
Note
12: COMMITMENTS AND CONTINGENCIES
Leases
The
Company leases office space under short-term leases with terms under a year. Total rent expense for the three months ended July 31, 2024
and 2023 amounted to $2,300 and $1,969, respectively.
Contingencies
In
connection with the Gameface acquisition on February 2, 2022, the Company agreed to earn-out consideration of common shares of the Company’s
common stock with a fair value of $1,334,000.
The
Company issued 14,960 common shares to the former Gameface shareholders in June 2022. The remaining balance of the contingent consideration
of $418,455 was converted on October 23, 2023.
From
time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. The Company is not presently
a party to any legal proceedings that it currently believes would individually or taken together have a material adverse effect on the
Company’s business or financial statements.
Nasdaq
Compliance
Although
the Company is currently in compliance with Nasdaq listing requirements, if the Company loses its compliance with the minimum shareholder
equity requirement in Nasdaq Listing Rule 5550(b)(1) (the “Equity Rule”), then, notwithstanding Rule 5810(c)(2), the Company
will not be permitted to provide Nasdaq with a plan of compliance with respect to such deficiency and Nasdaq will not be permitted to
grant additional time for the Company to regain compliance with respect to such deficiency, nor will the Company be afforded an applicable
cure or compliance period pursuant to Rule 5810(c)(3). Instead, Nasdaq will issue a delist determination letter and the Company will
have the opportunity to request a new hearing. The Company will have the opportunity to respond/present to the hearing panel as provided
by Listing Rule 5815(d)(4)(C) and the Company’s securities may at that time be delisted from Nasdaq.
Note
13: SUBSEQUENT EVENTS
On May 28, 2024, the Company filed a
registration statement in respect of 1,925,000
shares of its common stock consisting of (a) 349,530
Shares and (b) 1,575,470
shares of Common Stock issuable upon the exercise of the Pre-Funded Warrants and on August 21, 2024 such registration statement
became effective.
From
August 1, 2024 through the date hereof, the Company issued 3,776,305 shares of common stock, as follows:
On
August 7, 2024, the Company issued 835 shares of common stock upon the exercise of warrants by an institutional investor that were received
in connection with a convertible note transaction the Company consummated with such investor in August 2021.
On
August 16, 2024, the Company issued 3,775,470
shares of common stock upon the exercise of the Pre-Funded Warrants.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion of our financial condition and results of operations should be read in conjunction with the financial statements
and related notes included elsewhere in this report and our Annual Report on Form 10-K for the year ended April 30, 2024. Certain statements
in this discussion and elsewhere in this report constitute forward-looking statements. See “Cautionary Statement Regarding Forward
Looking Information” elsewhere in this report. Because this discussion involves risks and uncertainties, our actual results may
differ materially from those anticipated in these forward-looking statements.
Overview
Lazex
Inc. (“Lazex”) was incorporated under the laws of the State of Nevada on July 12, 2015. On August 23, 2019, the majority
owner of Lazex entered into a Stock Purchase Agreement with Slinger Bag Americas Inc., a Delaware corporation (“Slinger Bag Americas”),
which was 100% owned by Slinger Bag Ltd. (“SBL”), an Israeli company. In connection with the Stock Purchase Agreement, Slinger
Bag Americas acquired 2,000,000 shares of common stock of Lazex for $332,239. On September 16, 2019, SBL transferred its ownership of
Slinger Bag Americas to Lazex in exchange for the 2,000,000 shares of Lazex acquired on August 23, 2019. As a result of these transactions,
Lazex owned 100% of Slinger Bag Americas and the sole shareholder of SBL owned 2,000,000 shares of common stock (approximately 82%) of
Lazex. Effective September 13, 2019, Lazex changed its name to Slinger Bag Inc.
On
October 31, 2019, Slinger Bag Americas acquired control of Slinger Bag Canada, Inc., (“Slinger Bag Canada”) a Canadian company
incorporated on November 3, 2017. There were no assets, liabilities or historical operational activity of Slinger Bag Canada.
On
February 10, 2020, Slinger Bag Americas became the 100% owner of SBL, along with SBL’s wholly owned subsidiary Slinger Bag International
(UK) Limited (“Slinger Bag UK”), which was formed on April 3, 2019. On February 10, 2021, Zehava Tepler, the owner of SBL,
contributed Slinger Bag UK to Slinger Bag Americas for no consideration.
Effective
February 25, 2020, the Company increased the number of authorized shares of common stock from 75,000,000 to 300,000,000 via a four-to-one
forward split of its outstanding shares of common stock. All share and per share information contained in this report have been retroactively
adjusted to reflect the impact of the stock split.
On
June 21, 2021, Slinger Bag Americas entered into a membership interest purchase agreement with Charles Ruddy to acquire a 100% ownership
stake in Foundation Sports Systems, LLC (“Foundation Sports”).
On
February 2, 2022, the Company entered into a share purchase agreement with Flixsense Pty, Ltd. (“Gameface”). As a result
of the share purchase agreement, Gameface became a wholly owned subsidiary of the Company.
On
February 22, 2022, the Company entered into a merger agreement with PlaySight Interactive Ltd. (“PlaySight”) and Rohit Krishnan
(the “Shareholders’ Representative”). As a result of the merger agreement, PlaySight became a wholly owned subsidiary
of the Company.
On
June 14, 2022, the Company effected a 1-for-10 reverse stock split, where the Company’s common stock began to trade on a reverse
split adjusted basis. No fractional shares were issued in connection with the reverse stock split and all such fractional interests were
rounded up to the nearest whole number of shares of common stock. All references to the outstanding stock have been retrospectively adjusted
to reflect this reverse split. The Company also consummated a public offering of shares of its common stock and the listing of its common
stock on the Nasdaq Capital Market.
On
November 17, 2022, Gabriel Goldman and Rohit Krishnan resigned from the board of directors of the Company. Gabriel and Rohit were members
of the audit and compensation committees. Gabriel Goldman was a member of the Company’s Nominating and Corporate Governance Committee.
Neither Gabriel nor Rohit advised the Company of any disagreement with the Company on any matter relating to its operations, policies
or practices.
On
December 5, 2022, the Company assigned 75% of its membership interest in Foundation Sports to Charles Ruddy, its founder and granted
him the right for a period of three years to purchase the remaining 25% of its Foundation Sports membership interests for $500,000 in
cash. As of December 5, 2022, the results of Foundation Sports were no longer be consolidated in the Company’s financial statements,
the Company recorded a loss on the sale and the investment is now accounted for as an equity method investment. On December 5, 2022,
the Company analyzed this investment and established a reserve for the investment at the full amount of $500,000.
On
November 27, 2022, the Company entered into a share purchase agreement (the “Agreement”) with PlaySight, Chen Shachar and
Evgeni Khazanov (together, the “Buyer”) pursuant to which the Buyer purchased 100% of the issued and outstanding shares of
PlaySight from the Company in exchange for (1) releasing the Company from all of PlaySight’s obligations towards its vendors, employees,
tax authorities and any other (past, current and future) creditors of PlaySight; (2) waiver by the Buyer of 100% of the personal consideration
owed to them under their employment agreements in the total amount of U.S. $600,000 (which would have been increased in December 2022
to U.S. $800,000); and (3) cash consideration of U.S. $2 million to be paid to the Company as follows:
|
(i) |
a promissory note in the
amount of U.S. $2 million issued and delivered to the Company (the “Promissory Note”). |
|
|
|
|
(ii) |
The maturity due date of
the Promissory Note is December 31, 2023 subject to a one year extension in the discretion of the Buyer until December 31, 2024. |
|
|
|
|
(iii) |
The Promissory Note can
be partially paid over the time, but in the event it is not paid in full by December 31, 2024, then the remaining amount due (i.e.
U.S. $2 million less any amount paid), will be converted into ordinary shares of PlaySight (the “Deposited Shares”),
which will be deposited with the escrow company of Altshuler Shaham Trust Ltd. (the “Escrow Agent”) for the benefit of
the Company or, at the election of the Company, issued in the form of a stock certificate or recorded in some other market-standard
format to be held by the Escrow Agent. |
|
|
|
|
(iv) |
The number of the Deposited
Shares shall be determined according to the post-money valuation of the last investment round of the Company, and in the absence
of such investment round, the total number of the Deposited Shares shall be $2 million divided by the Company’s valuation to
be determined at that time by a third party appraiser, to be nominated by both the Company and the Buyer (the “Appraiser”).
The Company and the Buyer have agreed that the identity of the Appraiser shall be Murray Devine Valuation Advisers, to the extent
their cost of the appraisal shall not be higher than the cost of other appraisers from the big 4 accounting firms (i.e., E&Y,
KPMG, PWC and Deloitte). The Company and the Buyer have agreed to split the cost of the Appraiser. |
The
Company also released PlaySight from all of its obligations (except for those created by the Agreement) in respect of the Company, including
any inter-company debts on the books, and the Buyer has released the Company from all of its obligations (except for those created by
the Agreement) in respect of PlaySight and the Buyer.
The
total loss on disposal of Foundation Sports and PlaySight amounted to $0 in the year ended April 30, 2024.
In
April 2023, the Company determined that the technology utilized in Gameface would take substantially more financial resources and more
time to bring to market and achieve profitability than originally anticipated. As a result, the goodwill and intangible assets related
to Gameface were fully impaired as of April 30, 2023, resulting in an impairment loss of $11,421,817. The Company previously classified
Foundation Sports in continuing operations, until December 5, 2022 when they sold 75% of Foundation Sports back to the original owners
at which time it deconsolidated this subsidiary and recorded a loss on the sale. The Company also determined to dispose of the PlaySight
entity during the year ended April 30, 2024. The Company completed the sale in November 2022 and recorded a loss on the sale at that
time. The total loss on disposal of Foundation Sports and PlaySight amounted to $0 in the year ended April 30, 2024. The Company impaired
all goodwill as of April 30, 2024.
Although the Company is currently in compliance with Nasdaq listing requirements, if the Company loses its compliance
with the minimum shareholder equity requirement in Nasdaq Listing Rule 5550(b)(1) (the “Equity Rule”), then, notwithstanding
Rule 5810(c)(2), the Company will not be permitted to provide Nasdaq with a plan of compliance with respect to such deficiency and Nasdaq
will not be permitted to grant additional time for the Company to regain compliance with respect to such deficiency, nor will the Company
be afforded an applicable cure or compliance period pursuant to Rule 5810(c)(3). Instead, Nasdaq will issue a delist determination letter
and the Company will have the opportunity to request a new hearing. The Company will have the opportunity to respond/present to the hearing
panel as provided by Listing Rule 5815(d)(4)(C) and the Company’s securities may at that time be delisted from Nasdaq.
On
September 13, 2023, the Company held a special meeting of stockholders in which the following items were approved: (i) the issuance of
(i) 25,463 shares of the our common stock, par value $0.001 per share, that were issued on October 3, 2022, and, (ii) 295,051 shares
of our common stock issuable upon exercise of pre-funded warrants at an exercise price of $0.00001 per share, (iii) 320,513 shares of
common stock issuable upon the exercise of 5-Year Warrants at an exercise price of $15.60 per share, (iv) 641,026 shares of common stock
issuable upon the exercise of 7.5 Year Warrants at an exercise price of $17.20 per share and (v) 452,489 shares of our common stock issuable
upon the exercise of 5.5 Year Warrants at an exercise price per share equal to $8.84 per share to Armistice Capital Master Fund Ltd and
(ii) a reverse stock split of our common stock within a range of one (1)-for-ten (10) to one (1)-for-forty (40) (“Reverse Stock
Split”), with the Board of Directors of the Company to set the specific ratio and determine the date for the reverse stock split
to be effective and any other action deemed necessary to effectuate the Reverse Stock Split, without further approval or authorization
of stockholders, at any time within 12 months of the special meeting date. The Company effected a 1-for-40 reverse stock split of its
common stock on September 25, 2023.
On
September 25, 2023, as a result of the shareholder approval obtained at the special meeting of stockholders on September 13, 2023 and
the Reverse Stock Split, the aggregate number of pre-funded warrants, 5-Year Warrants, 5.5-Year Warrants and 7-Year Warrants increased
from 1,709,097 to 9,426,952 due to certain adjustments that were required to be made by the terms of the relevant warrants in the event
of receipt of shareholder approval and the occurrence of the Reverse Stock Split.
On
October 12, 2023, the Board of Directors of the Company approved an amendment to the Bylaws of the Company to reduce the percentage of
shares of stock, issued and outstanding and entitled to vote, to be present in person or represented by proxy in order to constitute
a quorum for the transaction of any business from a majority to thirty three and one third percent (33 1/3%).
On January 19, 2024, the Company
entered into a securities purchase agreement (the “Securities Purchase Agreement”) with three investors (the “January
2024 Investors”) for the issuance and sale to each investor of (i) 116,510 shares of Common Stock (the “Shares”) and
(ii) pre-funded warrants to purchase an aggregate of 1,258,490 shares of Common Stock (the “Pre-Funded Warrants”) at a combined
purchase price of $4 per share of Common Stock for an aggregate amount of approximately $16.5 million. The Pre-Funded Warrants have an
exercise price of $0.0002 per share of Common Stock and became exercisable beginning on May 15, 2024, the date stockholder approval was
received and effective, allowing exercisability of Pre-Funded Warrants under Nasdaq rules until the Pre-Funded Warrants are exercised
in full. The aggregate number of shares issued to the January 2024 Investors is 349,530 and the aggregate number of Pre-Funded Warrants
is 3,775,470.
From April 2024 through May 2024, the Company acknowledged and agreed to the entrance into certain warrant purchase
agreements (the “WPAs”) by the January 2024 Investors and 10 purchasers (the “Pre-Funded Warrant Purchasers”)
pursuant to which the January 2024 Investors sold all of the 3,775,470 Pre-Funded Warrants to Pre-Funded Warrant Purchasers for an aggregate
amount of $18,877,350 in cash.
On
June 27, 2024, the Company (i) increased the number of authorized shares of common stock from 300,000,000 to 1,000,000,000 and (ii)
effected a 1-for-20 reverse stock split, where the Company’s common stock began to trade on a reverse split adjusted basis. No
fractional shares were issued in connection with the reverse stock split and all such fractional interests were rounded up to the
nearest whole number of shares of common stock.
On May 28, 2024, the Company filed a registration statement in respect of 1,925,000 shares of its common stock consisting
of (a) 349,530 Shares and (b) 1,575,470 shares of Common Stock issuable upon the exercise of the Pre-Funded Warrants and on August 21,
2024 such registration statement became effective.
On March 18, 2024, the Company
entered into a share purchase agreement (the “Purchase Agreement”) and a share exchange agreement (the “Exchange Agreement”)
to acquire 70% of Yuanyu Enterprise Management Co., Limited (“YYEM”) from Mr. Hongyu Zhou, the sole shareholder of YYEM (“YYEM
Seller”) for a combined $56 million (the “Acquisition”). $16.5 million of this amount was paid in cash pursuant to the
Purchase Agreement, and the balance will be paid in shares pursuant to the Exchange Agreement. As of September 9, 2024, the Acquisition
has not been completed. Such closing will result in a change of control of the Company, as the shareholders of YYEM will become the owners
of approximately 75.3% of the issued and outstanding shares of Common Stock and the board of directors of Connexa (the “Board of
Directors” or the “Board”) will comprise individuals designated by the YYEM Seller. As part of this transaction, the
Company agreed to sell its wholly owned subsidiary, Slinger Bag Americas Inc., to a newly established Florida limited liability company
called J&M Sports LLC (“J&M”). J&M is owned by Yonah Kalfa and Mike Ballardie.
The Company expects the Acquisition to close following receipt of Nasdaq’s approval of YYEM’s new listing
application. The Acquisition will be completed via the purchase of 5,000 ordinary shares of YYEM, representing 50% of the issued and outstanding ordinary shares
of YYEM, in exchange for 8,127,572 newly issued shares of Common Stock to the sole
shareholder of YYEM, Mr. Hongyu Zhou representing 75.3% of the issued and outstanding shares of Common Stock as of the date of the
closing. In this connection, the Company’s directors and officers intend to resign from
their positions promptly following Nasdaq approval and to be replaced with the following individuals:
The
following table lists the names, ages and positions of the individuals who are expected to serve as executive officers and directors
of the Company upon completion of the Acquisition:
Name | |
Age | |
Position |
Thomas Tarala | |
58 | |
Chief Executive Officer and Director |
Guibao Ji | |
60 | |
Chief Financial Officer |
Hongyu Zhou | |
36 | |
Director |
Warren Thomson | |
48 | |
Director |
Chenlong Liu | |
35 | |
Director |
Kong Liu | |
35 | |
Director |
Set
forth below is a brief description of the background and business experience for the past five years of individuals who are expected
to serve as executive officers and directors of the Company upon completion of the Acquisition.
Thomas
Tarala
Thomas
Tarala has 30 years of international corporate finance experience in New York, London, and Hong Kong, including as a partner at two
leading international law firms and as General Counsel for the international operations of one of the largest private conglomerates in
China. As a partner of Baker McKenzie from 2022 to 2024 and another international firm earlier in his career, Thomas has led U.S. securities
practices in Hong Kong, advising on equity and debt transactions, as well as cross-border joint ventures involving companies listed on
Nasdaq. With a particular focus on the technology sector, he has acted for companies and investment banks in Mainland China, Hong Kong,
Singapore, Indonesia, and Thailand, including on award-winning transactions in the region.
As
General Counsel in the overseas headquarters of HNA Group (International) Company Limited, a large conglomerate, from 2017 to 2022, Thomas
worked closely with the business teams on a wide range of corporate and finance transactions, including multi-billion dollar acquisitions
and divestments of household-name companies, the sale of airlines, and a range of investments ranging from New York and London skyscrapers
to global technology companies, as well as numerous companies that were number one globally in their respective fields.
Thomas
graduated magna cum laude and Phi Beta Kappa from Georgetown University with a Bachelor of Science degree in Foreign Service and
holds a Juris Doctor degree from the University of Virginia School of Law. Thomas speaks English, French, Spanish, and Mandarin and is
qualified to practice law in New York, Connecticut, Florida, England and Wales, and Hong Kong.
Guibao
Ji
Guibao
Ji has been a certified public accountant in China for 25 years and has worked as an accountant at Shenzhen Wanda Accounting Firm
since January 2005. He is a partner of the firm and also an independent director of a number of listed companies, including Brightstar
Technology Group and Hekeda Technology Co. Ltd.
Mr.
Ji graduated from Central Radio and TV University in 1994 with a degree in Business Accounting. He was certified by the Chinese Institute
of Certified Public Accountants in 1999.
Hongyu
Zhou
Hongyu
Zhou has 15 years of experience founding, growing, and managing successful enterprises. His experience extends to such areas as enterprise
management, entertainment technology, and information technology, including as an investor and business manager of a technology company,
as a founder and manager of an innovative entertainment company, and as the founder and manager of several technology companies. Mr.
Zhou has served as the Chairman of each of Shenzhen Qiangwo Entertainment Technology Co., Ltd. and Shenzhen Qianyue Information Technology
Co., Ltd. since 2021. Mr. Zhou founded Shenzhen Yuanzu Century Network Technology Co., Ltd. in 2020 and Shenzhen Qiangwo Entertainment
Technology Co., Ltd. in 2017. In founding, managing, and growing companies across various industries, Mr. Zhou has honed his skills in
strategic planning, business development, and team leadership.
Warren
Thomson
Warren
Thomson is a lawyer with over 20 years of experience at international law firms and companies. Mr. Thomson served as a partner at
Hogan Lovells, an international law firm in Dubai from 2013 to 2017, where he advised companies of all sizes in the Middle East and Asia
through the whole of their corporate lifecycle, from incorporation through financing and expansion, and sometimes to winding-up. This
experience included mergers and acquisitions, and commercial transactions, as well as regulatory, employment, and corporate finance matters.
Mr. Thomson worked at HNA Group (International) Company Limited as Senior Counsel from 2018 to 2022 and as General Counsel in 2022, and
since 2022 he has served as General Counsel (Overseas) at Link Asset Management Limited, the manager of Link REIT, a multi-billion-dollar
real estate investment trust listed in Hong Kong.
Mr.
Thomson graduated with a Bachelor of Arts degree from Canberra University and a Bachelor of Laws degree with Honors from Australian National
University before earning a Graduate Diploma in legal practice from the College of Law in Sydney. Mr. Thomson is a member of the Australian
Chamber of Commerce (sitting on the Finance, Legal and Tax Committee) and the Association of Corporate Counsel and is qualified to practice
law in New South Wales (Australia) and Hong Kong.
Chenlong
Liu
Chenlong
Liu is a certified public accountant, as well as an investor active in the technology industry. Mr. Liu’s career has focused
on technology-related investments and mergers and acquisitions. He has participated in many well-known transactions in the industry.
As an investment director at China Fusion Capital from 2016 to 2020, he helped execute Nasdaq-listed iQiyi’s convertible bond transactions,
Kosdaq-listed Longtu’s acquisition and reverse takeover, Hong Kong-listed Kuaishou’s Series B investment round, and China
Fusion Capital’s acquisition of Particle, Inc. Since 2020, Mr. Liu has served as a director of Particle, a San Francisco-based
technology company.
Mr.
Liu earned a Bachelor of Science degree in mathematics from the University of Minnesota–Twin Cities in 2013 and was awarded a master’s
degree in accounting from George Washington University in 2015. Mr. Liu became a certified public accountant in Washington State in January
2019.
Kong
Liu
Kong
(“Luke”) Liu is an entrepreneur with experience in both traditional industries and the technology and Web3 areas. (He
is not related to Chenlong Liu.) Mr. Liu has experience in management and strategy roles in companies ranging from startups to multinationals,
and he has founded several companies over the years. Mr. Liu has has a particular focus on digital strategies at both traditional retailers
and technology companies, as well as in the recruitment field. He serves as the CEO of World@Meta, a Singapore-based technology company
developing mobile apps and games, where maximizing user engagement is a primary objective. He also serves as a managing director of MS
Consultancy Pte Ltd, a business consultancy that he founded in November 2020. In such environments, Mr. Liu has been responsible for
establishing the vision of the enterprise and working across teams to make that vision a reality.
Mr.
Liu graduated from Nanyang Polytechnic, in Singapore, with a Diploma of Information Technology and from Trent University, in Canada,
with a Bachelor of Business Administration.
The
following table identifies the individual who are expected to serve as independent and non-independent board and committee members of
the Company upon completion of the Acquisition:
Name: | |
Independent | |
Audit | |
Compensation | |
Nominating |
Thomas Tarala | |
| |
| |
| |
|
Hongyu Zhou | |
| |
| |
| |
|
Warren Thomson | |
Yes | |
Yes | |
Yes | |
Yes |
Chenlong Liu | |
Yes | |
Yes | |
Yes | |
Yes |
Kong (“Luke”) Liu | |
Yes | |
Yes | |
Yes | |
Yes |
As
an inducement to the Company to complete the Acquisition, YYEM has agreed to make an aggregate payment to the Company of $4.5
million in cash of which $2 million has been transferred to the Company to-date and of which $556,629 has been transferred to the
parties that arranged the Acquisition prior to the date hereof.
Following
the closing of the Acquisition, the Company will sell, transfer and assign all of its legacy business, assets and liabilities
related to or necessary for the operations of its “Slinger Bag” business or products (the “Legacy Business”)
to a newly established Florida limited liability company called J&M Sports LLC (“J&M”) and will agree that
J&M will have the sole right to and obligations of the Legacy Business and will be liable to the Company for any losses arising
from third-party claims against the Company arising from liabilities related to the Legacy Business.
Established
in November 2021, YYEM is based in Hong Kong and operates in the emerging love and marriage market sector. YYEM owns what the Company
believes is proprietary intellectual property (IP), that the Company believes is unique to this business sector, covering YYEM’s
online presence as well as its offline retail store operation. Its AI matchmaker application integrates with existing Big Data models
and provides an ability to connect to other larger AI models.
A
licensee partner of YYEM that is located in China operates 200 retail stores across 40 cities. One-time subscriber matchmaker fees, reaching
up to $1,500, provide the subscriber with a bespoke matchmaking service, delivered through face-to-face interactions across Hand-in-Hand
branded offline stores.
YYEM
collected royalties of approximately $1.9 million (audited) in its fiscal year ended January 31, 2024 In addition, YYEM has entered
into term sheets with three entities (one in Hong Kong for rights to use the IP in Japan and South Korea among other locations, one in
the UK for rights to use the IP in Europe, and one in the USA for rights to use the IP in Sub-Saharan Africa, with cumulative possible
revenues over the next three years of in excess of $70 million.
The
operations of Slinger Bag Inc., Slinger Bag Americas, Slinger Bag Canada, Slinger Bag UK, SBL and Gameface are collectively referred
to as the “Company.” Following the closing of the Acquisition and the separation of the Legacy Business, the Company’s
historic operations will no longer be part of the Company’s operations and YYEM will be the Company’s operating subsidiary.
The results of the Company’s operations for the three months ended July 31, 2024 reflect the Legacy Business operations and are
not necessarily representative of what the results of operations of the Company (based on YYEM’s results of operations) will be
following the closing of the Acquisition.
Results
of Operations for the Three Months Ended July 31, 2024 and 2023
The
following are the results of our operations for the three months ended July 31, 2024 as compared to 2023:
| |
For the Three Months Ended | | |
| |
| |
July 31, 2024 | | |
July 31, 2023 | | |
Change | |
| |
(Unaudited) | | |
(Unaudited) | | |
| |
| |
| | |
| | |
| |
Net sales | |
$ | 704,899 | | |
$ | 3,120,231 | | |
$ | (2,415,332 | ) |
Cost of sales | |
| 432,778 | | |
| 2,227,482 | | |
| (1,794,704 | ) |
Gross Profit | |
| 272,121 | | |
| 892,749 | | |
| (620,628 | ) |
| |
| | | |
| | | |
| | |
Operating expenses: | |
| | | |
| | | |
| | |
Selling and marketing expenses | |
| 146,137 | | |
| 242,353 | | |
| (96,216 | ) |
General and administrative expenses | |
| 3,381,179 | | |
| 2,505,060 | | |
| 876,119 | |
Research and development costs | |
| 0 | | |
| - | | |
| 0 | |
Total operating expenses | |
| 3,527,316 | | |
| 2,747,413 | | |
| 779,903 | |
Loss from operations | |
| (3,255,195 | ) | |
| (1,845,664 | ) | |
| (1,400,531 | ) |
| |
| | | |
| | | |
| | |
Other expenses (income): | |
| | | |
| | | |
| | |
Amortization of debt discounts | |
| 0 | | |
| (777,192 | ) | |
| 777,192 | |
Loss on conversion of accounts payable to common stock | |
| 0 | | |
| (289,980 | ) | |
| 289,980 | |
Gain on change in fair value of derivative liability | |
| 154 | | |
| 2,144,554 | | |
| (2,144,400 | ) |
Derivative expense | |
| 0 | | |
| - | | |
| 0 | |
Interest expense - related party | |
| 0 | | |
| - | | |
| 0 | |
Interest expense | |
| (965,704 | ) | |
| (69,483 | ) | |
| (896,221 | ) |
Total other (income) expense | |
| (965,550 | ) | |
| 1,007,899 | | |
| (1,973,449 | ) |
| |
| | | |
| | | |
| | |
Net loss from continuing operations | |
$ | (4,220,745 | ) | |
$ | (846,765 | ) | |
$ | (3,373,980 | ) |
Net
sales
Net sales decreased $2.42 million, or -77%, during the three months ended
July 31, 2024 as compared to the three months ended July 31, 2023. The decrease was as a direct result of on-going inventory availability
issues stemming back to the start of calendar 2024. The company had limited Tennis Launcher inventory (its primary revenue driver) available
for sale through our e-commerce platform in North America nor to any of our international distributor-managed markets throughout the quarter
ended July 31, 2024. The majority of revenues generated within the quarter came from our D2C Pickleball Launcher sales within North America.
Cost
of sales and Gross income
Cost of sales decreased $$1.79 million or -81% during the three months
ended July 31, 2024 as compared to the three months ended July 31, 2023, which is directly as a result of the decrease in net sales. Gross
income decreased $0.62 million, or -70%, during the three months ended July 31, 2024 as compared to the three months ended July 31, 2023.
This reduction in gross income is driven primarily as a result of the net sales reduction. Gross Margin on the actual sales made remained
positive at 41%.
Selling and marketing expenses
Selling and marketing expenses decreased
$0.96 million, or -40%, during the three months ended July 31, 2024 as compared to the three months ended July 31, 2023. This decrease
is a direct result of the reduction in net sales and the associated ceasing of all Tennis product related marketing activities.
General
and administrative expenses
General and administrative expenses, which primarily consist of compensation
(including share-based compensation) and other employee-related costs, as well as legal fees and fees for professional services, increased
$0.88 million or 35% during the three months ended July 31, 2024 as compared to the three months ended July 31, 2023. This increase is
primarily driven by an increase in debt settlement, issuance of share-based compensation to several employees and board directors and
on-going legal and other professional fees related to the acquisition of YYEM and management of the company’s Nasdaq compliance
within the period.
Research
and development costs
Research
and development costs remained at $0 or 0% during the three months ended July 31, 2024 as compared to the three months ended July
31, 2023. This inactivity in research and development activity is primarily driven by the Company’s limited cash flow being
available for investment, linked to our significant reduction in net sales.
Loss
From Operations
Loss
from operations increased by $1.4 million or 76% in the three months ended July 31, 2024 as compared to the three months ended July
31, 2023. This increase in loss in operations was driven by a combination of an $0.78 million increase in total operating expenses
recorded in the quarter, coupled with a reduced in gross profit of $0.62 million.
Other
expense
Total
other expense decreased $2.00 million or 196% during the three months ended July 31, 2024 as compared to the three months ended July
31, 2023. We recorded an improvement in both amortization of debt discounts of $0.78 million; in loss on conversion of accounts payable
to common stock of $0.29 million; in fair value of derivatives of $2.15 million. Excluding these improvements, we recorded an increase
in interest payments of $0.90 million for the periods to July 31, 2024 and 2023 respectively,
an increase of 1290%.
Liquidity
and Capital Resources
Our
financial statements have been prepared on a going concern basis, which assumes we will be able to realize our assets and discharge our
liabilities in the normal course of business for the foreseeable future. We had an accumulated deficit of $171,607,773 as of July 31,
2024, and more losses are anticipated in the development of the business. Accordingly, there is substantial doubt about our ability to
continue as a going concern. Our financial statements do not include any adjustments related to the recoverability and classification
of assets or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
The
ability to continue as a going concern is dependent upon our generating profitable operations in the future and/or being able to obtain
the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due.
Management intends to finance operating costs over the next twelve months with existing cash on hand, loans from related parties, and/or
private placement of debt and/or common stock. In respect to additional financing, refer to the consolidated financial statements herein.
In the event that the Company is unable to successfully raise capital and/or generate revenues, the Company will likely reduce general
and administrative expenses, and cease or delay its development plan until it is able to obtain sufficient financing. There can be no
assurance that additional funds will be available on terms acceptable to the Company, or at all.
The
following is a summary of our cash flows from operating, investing and financing activities for the three months ended July 31, 2024
and 2023:
| |
For the Three Months Ended | |
| |
July 31, 2024 | | |
July 31, 2023 | |
Net cash provided by operating activities | |
$ | (72,646 | ) | |
$ | 803,363 | |
Net cash used in investing activities | |
| 0 | | |
| - | |
Net cash (used in) financing activities | |
| 1,614,958 | | |
| 601,002 | |
We
had cash and cash equivalents of $1,711,283 as of July 31, 2024, as compared to $229,705 as of April 30, 2024.
Net
cash used in operating activities was $(72,646) during the three months ended July 31, 2024, as compared to net cash used in
operating activities of $803,363 during the same period in 2023. Our net cash used in operating activities during the three months
ended July 31, 2024 was primarily the result of our net income of $(4,220,745) for the period, and our net non-cash expenses of
$(965,550), incorporating the change in fair value of derivative liability, reductions in shares and warrants issued for services,
share-based compensation, amortization of debt discounts, interest and interest due to related parties, settlement expense, loss on
depreciation, amortization and impairment expenses, as well as changes in our current assets and liabilities related to our
operations. The most notable changes occurred in our inventory and prepaid inventory which decreased in the three month periods,
together with significant decreases in accounts payable, accrued expenses, derivative liabilities, contingent consideration and an
increases in accounts receivable, accrued interest, current portion of notes payable, net of discount related and other current
liabilities.
We
incurred $0 and no investing activities in either of the three-month periods ended July 31, 2024 and 2023.
Net cash used in financing activities was $1,614,958 for the three months
ended July 31, 2024, as compared to net cash provided by financing activities of $601,002 for the same period in 2023. The changes is
financing activities for the three months ended July 31, 2024 primarily consisted of proceeds of $1,618,176 resulting from the exercise
of warrants, $(3,218) from proceeds of notes payable, offset by $0 in payments of notes payable to related parties and $0 in payments
of notes payable. Changes in financing activities for the three months ended July 31, 2023 consisted of 0$(298,834) in payments of notes
to related parties and $(302,168) in payment of notes payable.
Description
of Indebtedness
Notes
Payable – Related Party
On January 14, 2022, the Company entered into two loan agreements with
Yonah Kalfa and Naftali Kalfa, each for $1,000,000, pursuant to which the Company received a total amount of $2,000,000. The loans bear
interest at a rate of 0% per annum and are required to be repaid in full by July 31, 2024 or such other date as may be accepted by the
lenders. The Company is not permitted to make any distribution or pay any dividends unless or until the loans are repaid in full. The
company has subsequently agreed with the lenders to extend the repayment deadline to Jully 31, 2025.
There were $1,169,291 and $1,169,291 in outstanding borrowings from the
Company’s related parties for the period ended July 31, 2024 and April 30, 2024, respectively. Accrued interest due to related parties
as of July 31, 2024 and April 30, 2024 amounted to $917,957 and $917,957, respectively.
On
January 6, 2023, we sold certain of our inventory including all components, parts, additions and accessions thereto to Yonah Kalfa and
Naftali Kalfa who immediately consigned it back to us in exchange for a payment of $103 per ball launcher we sell until we have paid
them an aggregate total of $2,092,700, which represents payment in full of the principal amounts of the Loan Agreements (as defined below)
and certain other expenses they incurred in connection with the Company.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements.
Effect
of Inflation and Changes in Prices
We
do not believe that inflation and changes in prices will have a material effect on our operations.
Going
Concern
Our
independent registered public accounting firm auditors’ report accompanying our April 30, 2024 financial statements contained an
explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The financial statements have been
prepared assuming that we will continue as a going concern, which contemplates that we will realize our assets and satisfy our liabilities
and commitments in the ordinary course of business.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
As
a smaller reporting company, we are not required to provide this information.
Item
4. Controls and Procedures
Disclosure
Controls and Procedures
The
Company has adopted and maintains disclosure controls and procedures that are designed to provide reasonable assurance that information
required to be disclosed in the reports filed under the Exchange Act, such as the Form 10-Q, is collected, recorded, processed, summarized
and reported within the time periods specified in the rules of the Securities and Exchange Commission. The Company’s disclosure
controls and procedures are also designed to ensure that such information is accumulated and communicated to management to allow timely
decisions regarding required disclosure. As required under Exchange Act 13a-15, the Company’s management, including the Chief Executive
Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of disclosure controls and procedures as of the
end of the period covered by this report.
Based
upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that our internal control over
financial reporting was not effective as of July 31, 2024 due to the material weaknesses that were identified and listed below.
Changes
in Internal Control Over Financial Reporting
There
have been no changes in the Company’s control over financial reporting since April 30, 2024.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
We
know of no pending proceedings to which any director, member of senior management, or affiliate is either a party adverse to us or has
a material interest adverse to us.
None
of our executive officers or directors have (i) been involved in any bankruptcy proceedings within the last five years, (ii) been convicted
in or has pending any criminal proceedings (other than traffic violations and other minor offenses), (iii) been subject to any order,
judgment or decree enjoining, barring, suspending or otherwise limiting involvement in any type of business, securities or banking activity
or (iv) been found to have violated any Federal, state or provincial securities or commodities law and such finding has not been reversed,
suspended or vacated.
Item
1A. Risk Factors
There
have been no material changes to our risk factors as previously disclosed in Part I, Item 1A. included in our Annual Report on Form 10-K
for the year ended April 30, 2024. Risk factors in respect of YYEM are set forth below:
Risks
Related to the Acquisition
The
market price of our Common Stock will continue to fluctuate.
The
market price of our Common Stock will continue to fluctuate, potentially significantly, as a result of a variety of factors, including,
among others, general market and economic conditions, and changes in our business, operations and prospects, in interest rates, in general
market, industry and economic conditions and in other factors generally affecting stock prices, federal, state and local legislation,
governmental regulation and legal developments in the industry segments in which we will operate. Our market capitalization and trading
volume may contribute to greater volatility. In addition, any significant price or volume fluctuations in the stock market generally
could have a material adverse effect on the market for, or liquidity of, our Common Stock, regardless of our actual operating performance.
Failure
to complete the Acquisition, which includes the Share Exchange, could negatively impact Connexa’s stock price and we may not be
able to avoid dissolution.
If
the Acquisition is not completed for any reason, it is likely that our Common Stock would be delisted from Nasdaq, with all the attendant
risks described below in this section. Furthermore, if the Acquisition is not completed, the price of our Common Stock may decline significantly.
If that were to occur, it is uncertain when, if ever, the price of our Common Stock would reach the price implied in the Acquisition
or at which it traded as of the date we announced the Purchase Agreement and the Exchange Agreement. Accordingly,
if the Acquisition is not completed, there can be no assurance as to the effect on the future value of your shares of our Common Stock.
Following
the Acquisition, our stockholders will have a significantly lower ownership and voting interest in us than they currently have in Connexa
and will exercise less influence over management and policies of Connexa.
Based
on the number of shares of our Common Stock outstanding as of the close of business on August 9, 2024, stockholders of the Company are
expected to own approximately 17.6% of the outstanding shares of our Common Stock and the YYEM shareholder is expected to own approximately
82.4% of the outstanding shares of our Common Stock. Consequently, the YYEM Seller will be able to exert significant influence over certain
matters, including matters that must be resolved by a general meeting of shareholders, such as the election of members to the board of
directors or the declaration of dividends or other distributions. To the extent that the interest of this shareholder may differ from
the interests of the Company’s other shareholders, the Company’s other shareholders may be disadvantaged by any actions that
this shareholder may seek to pursue. Additionally, stockholders may not realize a benefit from the Acquisition commensurate with the
ownership dilution they experienced in connection with that transaction.
Obtaining
required approvals and satisfying closing conditions may prevent or delay completion of the Acquisition.
The
Acquisition is subject to a number of conditions to Closing as specified in the Exchange Agreement. No assurance can be given that the
required governmental and regulatory consents and approvals will be obtained or that the required conditions to Closing will be satisfied.
Additionally, if all required consents and approvals are obtained and the required conditions are satisfied, no assurance can be given
as to the terms, conditions and timing of such consents and approvals. Any delay in completing the Acquisition could cause Connexa not
to realize, or to be delayed in realizing, some or all of the benefits that Connexa and YYEM expect to achieve if the Acquisition is
successfully completed within its expected time frame.
Except
in specified circumstances, if the Closing has not occurred by the Termination Date, either Connexa or YYEM Seller may choose not to
proceed with the transaction.
Either
Connexa or YYEM Seller may terminate the Exchange Agreement if the Acquisition has not been consummated by the date that is 180 days
from the date of the Exchange Agreement, the Termination Date. However, this right to terminate the Exchange Agreement will not be available
to Connexa or YYEM Seller if such party has materially breached any of its representations, warranties, covenants or agreements under
the Exchange Agreement and such breach has been a contributing factor that resulted in the failure of the Acquisition to be consummated
by the Termination Date.
Whether
or not the Acquisition is completed, the announcement and pendency of the Acquisition could cause disruptions in the business of Connexa,
which could have an adverse effect on its business and financial results.
Regardless
of whether the Acquisition is completed, the announcement and pendency of the Acquisition could cause disruptions in the business of
Connexa, including by diverting the attention of Connexa’s management toward the completion of the Acquisition. In addition, Connexa
has diverted significant management resources in an effort to complete the Acquisition and is subject to restrictions contained in the
Exchange Agreement on the conduct of its business. If the Acquisition is not completed, Connexa will have incurred significant costs,
including the diversion of management resources, for which it will have received little or no benefit.
A
market for our Common Stock may not continue, which would adversely affect the liquidity and price of our Common Stock.
Following
the Acquisition, the market price of our Common Stock may fluctuate significantly due to the market’s reaction to the Acquisition
and general market and economic conditions. An active trading market for our Common Stock following the Acquisition may never develop
or, if developed, it may not be sustained. In addition, the market price of our Common Stock after the Acquisition may vary due to general
economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally, if our Common
Stock becomes delisted from Nasdaq for any reason and is relegated to the OTC Bulletin Board (an inter-dealer automated quotation system
for equity securities that is not a national securities exchange), the liquidity and price of our Common Stock will be more limited than
if we were quoted or listed on Nasdaq or another national securities exchange. You may be unable to sell your shares of Common Stock
unless a market for our Common Stock can be established or sustained.
Although
we expect that our Common Stock will remain listed on Nasdaq, there can be no assurance that we will be able to comply with the continued
listing standards of Nasdaq.
On
several occasions in the past, we have failed to comply with Nasdaq’s listing rules. We cannot assure you that we will be able
to meet Nasdaq’s continued listing standards, and we can provide no assurance that we will be able to satisfy the initial
listing requirements.
If
Nasdaq delists our Common Stock due to our failure to meet its continued listing standards, we and our stockholders could face significant
material adverse consequences including:
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a limited availability
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a determination that our
Common Stock is a “penny stock,” which will require brokers trading in our shares to adhere to more stringent rules,
possibly resulting in a reduced level of trading activity in the secondary trading market for our shares; |
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a limited amount of analyst
coverage and more limited universe of potential investors in our securities; and |
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a decreased ability to
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Following
the Acquisition, the price of our Common Stock may be especially volatile, and if the Acquisition’s benefits do not meet the expectations
of investors, stockholders, or financial analysts, the market price of our Common Stock may decline.
Prior
to the Acquisition, there was no public market for YYEM’s securities. Accordingly, the valuation ascribed to YYEM and our Common
Stock in the Acquisition might not have been indicative of the price that will prevail in the trading market following the Acquisition.
If an active market for our Common Stock continues, the trading price could be especially volatile, and fluctuations in the price of
our Common Stock could contribute to the loss of all or part of your investment. For the period following the Acquisition and beyond,
our stock price may be subject to wide fluctuations in response to various factors, some of which are beyond our control. Any of the
factors listed below, among others, could have a material adverse effect on your investment, and our Common Stock may trade at prices
significantly below the price you paid for them. In such circumstances, the trading price of our Common Stock may not recover and may
experience a further decline.
If
the benefits of the Acquisition, and the performance of the Company more broadly, do not meet the expectations of investors or securities
analysts, the market price of our Common Stock may decline. Broad market and industry factors may materially harm the market price of
our securities irrespective of our operating performance. The stock market in general, and Nasdaq in particular, have experienced price
and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected.
The trading prices and valuations of these stocks, and of our securities, may not be predictable. A loss of investor confidence in the
market for retail stocks or the stocks of other companies which investors perceive to be similar to us could depress our stock price
regardless of our business, prospects, financial condition, or results of operations. A decline in the market price of our securities
also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future.
YYEM
may not realize anticipated growth opportunities.
We
expect that YYEM will realize growth opportunities and other financial and operating benefits as a result of the Acquisition, although
we cannot predict with certainty if or when these growth opportunities and benefits will occur, or the extent to which they actually
will be achieved. For example, the benefits from the Acquisition may be offset by costs incurred in connection with the Acquisition,
or as a result of being part of a public company.
Risks
Related to Our Business, Operations, Industry, Legal and Regulatory Requirements
References
in this section to “we,” “us,” “our,” “YYEM” and the “company” refer to YYEM
and its subsidiaries.
We
are dependent on third parties for a significant portion of our revenue through intellectual property licensing agreements, and we may
not realize the expected benefits of such arrangements.
We
have in the past entered into, and may continue to enter into, licensing arrangements with third parties that we believe will commercialize
our intellectual property and bolster our revenue.
Our
revenue from licensing agreements increased significantly in the year ended January 31, 2024 and increased further in the three-month
period ended April 30, 2024, constituting substantially all of our revenue, and our results of operations have been, and may continue
to be, affected by such arrangements. Licensing agreements involving our intellectual property are subject to various risks. Our licensees
may fail to comply with their obligations set out in the respective agreements. If the licensees generate insufficient revenue from their
operations, they may be unable to meet the minimum payments required under the agreements. Our licensees may elect to cease the licensing
arrangements due to a change in their strategic focus, the availability of funding, or other external factors. Termination of any licensing
arrangements may result in a reduction in our revenue and the need for replacement arrangements with other licensees.
Our
licensees have significant discretion in determining the efforts and resources that they will apply to their own operations, potentially
resulting in less revenue than we anticipate at the outset of the relationship. Such licensees may independently develop intellectual
property that could substitute for ours or may partner with competitors offering different technology.
Our
licensees may not properly maintain or defend our intellectual property rights or may use our intellectual property or proprietary information
in a way that gives rise to actual or threatened litigation that could jeopardize or invalidate our intellectual property rights or our
rights over our proprietary information or could expose us to potential liability.
Disputes
may arise between us and our licensees that interfere with the licensing arrangements or lead to the termination of the licensing agreements.
Such disputes could result in costly litigation or arbitration that diverts management attention and resources.
As
we expand to new jurisdictions, if we fail to enter into licensing arrangements for a particular territory with a suitable strategic
partner and do not have sufficient funds or local expertise to undertake the necessary commercialization activities ourselves, we may
not be able to generate revenue from such territory.
For
these and other reasons, we may not achieve the outcomes expected from our licensing arrangements. These arrangements are subject to
significant business, economic, and competitive uncertainties and contingencies, many of which are difficult to predict and are beyond
our control. We may face operational and financial risks including increases in near- and long-term expenditure, exposure to unknown
liabilities, disruption of our business, and diversion of our management’s time and attention. Even if we achieve the expected
benefits, we may not be able to do so within the anticipated time frame. Any of the foregoing could materially adversely affect our business,
financial condition, results of operations, and prospects.
The
love and marriage market sector, including matchmaking apps, is competitive, with low switching costs and a consistent stream of new
services and entrants, and innovation by competitors may disrupt our business.
The
love and marriage market sector, including matchmaking apps, is competitive, with a consistent stream of new services and entrants. Some
of our competitors may enjoy better competitive positions in certain geographical regions, user demographics, or other key areas that
we currently serve or may serve in the future. These advantages could enable such competitors to offer services that are more appealing
to users and potential users than our services or to respond more quickly or cost-effectively than us to new or changing opportunities.
In
addition, within the love and marriage market sector generally, costs for consumers to switch between services are low, and consumers
have a propensity to try new approaches to connecting with people and to use multiple services at the same time. As a result, new services,
entrants, and business models are likely to continue to emerge. If we become established as a dominant player in any particular market,
it is possible that a new service could gain rapid scale at the expense of existing brands by harnessing a new technology, such as generative
AI, or a new or existing distribution channel, creating a new or different approach to connecting people, or some other means. We may
need to respond by introducing new services or features, and we may not be successful in that. If we do not sufficiently innovate to
provide new services, or improve upon existing services, that our users or prospective users find appealing, we may be unable to continue
to attract new users or continue to appeal to existing users.
Potential
competitors include larger companies that could devote greater resources to the promotion or marketing of their services, take advantage
of acquisitions or other opportunities more readily, or develop and expand their services more quickly than we do. Potential competitors
also include established social media companies that may develop features or services that compete with ours or operators of mobile operating
systems and app stores. For example, Facebook offers a dating feature on its platform, which it rolled out globally several years ago
and has grown dramatically in size supported by Facebook’s massive worldwide user footprint. These social media and mobile platform
competitors could use strong or dominant positions in one or more markets, coupled with ready access to existing large pools of potential
users and personal information regarding those users, to gain competitive advantages over us, including by offering different features
or services that users may prefer or offering their services to users at no charge, which may enable them to acquire and engage users
at the expense of our user growth or engagement.
If
we are not able to compete effectively against current or future competitors as well as other services that may emerge, or if our decisions
regarding where to focus our investments are not successful in the long term, the size and level of engagement of our user base may decrease,
which could have an adverse effect on our business, financial condition, and results of operations. If, similarly, our licensees are
unable to compete effectively or are unsuccessful in this regard, the size and level of engagement of their user base may decrease, which
could impact their payments to us and therefore have an adverse effect on our business, financial condition, and results of operations.
The
limited operating history and geographic reach of YYEM’s brands and services makes it difficult to evaluate our current business
and future prospects.
We
seek to tailor our services to meet the preferences of specific geographies, demographics, and other communities of users. Building a
given brand or service is generally an iterative process that occurs over a meaningful period of time and involves considerable resources
and expenditure. The historical growth rate of any brand or service may not be indicative of future growth rates for the brand or service
or for brands and services that we may launch in other jurisdictions. We may encounter risks and difficulties as we build our brands
and services. The failure to successfully scale these brands and services and address these risks and difficulties could adversely affect
our business, financial condition, and results of operations.
If
we fail to add users, our revenue, financial results, and business may be significantly harmed.
Our
financial performance will be significantly determined by our success in adding and retaining users of our services. The size of our
user base is impacted by a number of factors, including competing products and services and global and regional business, macroeconomic,
and geopolitical conditions.
If
people do not perceive our services to be useful, we may not be able to attract or retain users. With each new generation of users, expectations
of our services change and user behaviors and priorities shift. As a result, we may need to further leverage our existing capabilities
or advances in technologies such as artificial intelligence (“AI”) and those relating to the metaverse, or adopt new technologies,
to improve our existing services or introduce new services in order to better satisfy existing users and to expand our penetration of
what continues to be a large available new-user market. However, there can be no assurance that further implementation of technologies
such as AI and those relating to the metaverse will enhance our services or be beneficial to our business, and the introduction of new
features or services to our existing services may have unintended consequences for our ecosystem, which could lead to fluctuations in
the size of our user base.
If
we are unable to maintain or increase the size of our user base (or if our licensees are unable to do so), our revenue and other financial
results may be adversely affected. Furthermore, as the size of our user base fluctuates in one or more markets from time to time, we
may become increasingly dependent on our ability to maintain or increase levels of monetization in order to grow our revenue. Any significant
decrease in user retention or growth could render our services less attractive to users, which would likely have a material and adverse
impact on our business, financial condition, and results of operations.
As
we develop our own offerings for end users, our growth and profitability will rely, in significant part, on our ability to attract and
retain users through cost-effective marketing efforts. Any failure in those efforts could adversely affect our business, financial condition,
and results of operations.
Attracting
and retaining users for our services will involve considerable expenditure for online and offline marketing, likely requiring higher
marketing outlays over time in order to sustain our growth. This also applies to our licensees, whose success is a key component of our
own. Evolving consumer behavior can affect the availability of profitable marketing opportunities. Offline campaigns may diminish in
effectiveness as consumers move increasingly online. Online campaigns may become less fruitful as large tech platforms, such as Apple
and Google, increasingly limit advertisers’ ability to access and use unique advertising identifiers, cookies, and other information
to acquire potential users (such as Apple’s rules regarding the collection and use of identifiers for advertising, often referred
to as IDFA). This is especially important for us, given that our offline storefronts are an important component of our business model
and identifying which users are most likely to be amenable to in-person services is therefore also key to our success. To continue to
reach potential users and grow our businesses, we will likely be required to identify and devote more of our overall marketing expenditure
to newer advertising channels, such as social media and online video platforms. We could have less success using these newer advertising
channels and methods to identify potential customers. There can be no assurance that we will be able to appropriately manage our marketing
efforts in response to these and other trends in the advertising industry. Any failure to do so could adversely affect our business,
financial condition, and results of operations.
Distribution
and marketing of, and access to, the online services offered by us and our licensees may rely, in significant part, on a variety of third-party
platforms, in particular, mobile app stores. If these third parties limit, prohibit, or otherwise interfere with features or services
or change their policies in any material way, it could adversely affect our business, financial condition, and results of operations.
We
will market and distribute our online services (including our AI matchmaker application) through a variety of third-party distribution
channels, some of which may limit or prohibit advertisements for services such as ours, whether because they decide to launch competing
offerings in the same industry or because they are reacting to poor behavior by other industry participants, or for some other reason.
Furthermore, certain platforms on which we market our services may not properly monitor or ensure the quality of content located adjacent
to or near our advertisements on such platforms, which may have a negative effect on consumers’ perceptions of our company. Any
of these developments could rise to a level where our business, financial condition, and results of operations is adversely affected.
Additionally,
our mobile applications will be most often accessed through the Apple App Store and Google Play Store. Both Apple and Google have broad
discretion to change their policies regarding their mobile operating systems and app stores in ways that may limit, eliminate, or otherwise
interfere with our ability to distribute or promote our applications through their stores, our ability to update our applications, and
our ability to access information that they collect about our users. To the extent either of them does so, our business, financial condition,
and results of operations could be adversely affected.
The
success of our services for end users will depend, in part, on our ability to access, collect, and use personal data about our users
and subscribers.
We
will rely extensively on the Apple App Store and Google Play Store, as well as other technology platforms, to distribute and monetize
our mobile applications. Our users and subscribers will pay through these platforms, which will prevent us from accessing key user data
that we would otherwise receive if we transacted with our users and subscribers directly. This could negatively impact our customer relationship
management efforts, our ability to reach new segments of our user and subscriber bases and the population generally, the efficiency of
our paid marketing efforts, the rates we are able to charge advertisers seeking to reach users and subscribers of our services, our ability
to comply with applicable law, and our ability to identify and exclude users and subscribers whose access would violate applicable terms
and conditions, including underage individuals and bad actors, all of which could cause our business, financial condition, and results
of operations to be adversely affected.
As
the distribution of our online services through app stores increases, in order to maintain our profit margins, we may need to take steps
to offset increasing app store fees by decreasing traditional marketing expenditure, increasing user volume or monetization per user,
or consolidating back-office and technical functions, or by engaging in other efforts to increase revenue or decrease costs generally.
While
we expect that our mobile applications will be free to download from intermediary platforms like the Apple App Store and the Google Play
Store, we intend to offer our users the opportunity to purchase subscriptions and features within the applications. These purchases are
in most cases required to be processed through the in-app payment systems provided by the intermediary, thus requiring us to pay them
a meaningful share of the revenue we receive from these transactions.
While
we are constantly innovating and developing our own payment systems and methods, given the expected increase in fees relating to these
intermediary platforms, we may in the future need to offset these increased fees by decreasing traditional marketing expenditure as a
percentage of revenue, increasing user volume or monetization per user, or consolidating back-office or technical functions, or by engaging
in other efforts to increase revenue or decrease costs generally.
Challenges
properly managing the use of artificial intelligence could result in reputational harm, competitive harm, and legal liability.
We
and our licensees are working to integrate AI technologies into our services, which integrations may become important to our operations
over time. Our competitors or other third parties may incorporate AI into their services more quickly or more successfully than us, which
could impair our ability to compete effectively and adversely affect our results of operations. Additionally, AI algorithms and training
methodologies may be flawed. If the content or recommendations that AI applications assist in producing are or are alleged to be deficient,
inaccurate, offensive, biased, or otherwise improper or harmful, we may face reputational consequences or legal liability, and our business,
financial condition, and results of operations may be adversely affected. Furthermore, the use of AI has been known to result in, and
may in the future result in, cybersecurity incidents that implicate the personal data of end users of AI-enhanced services. Any such
cybersecurity incidents related to our use of AI could adversely affect our reputation and results of operations. AI also presents emerging
ethical issues, and if our use of AI becomes controversial, we may experience reputational harm, competitive harm, or legal liability.
The rapid evolution of AI will require the dedication of significant resources to develop, test, and maintain AI technologies, including
to further implement AI ethically in order to minimize unintended harmful impact. While we will aim to deploy AI responsibly and attempt
to identify and mitigate ethical and legal issues presented by its use, we may be unsuccessful in identifying or resolving issues before
they arise.
The
legal and regulatory landscape surrounding generative AI technologies is rapidly evolving and uncertain, including in the areas of intellectual
property, discrimination, cybersecurity, and privacy and data protection. Compliance with existing, new, and changing laws, regulations,
and industry standards relating to AI may limit some uses of AI, impose significant operational costs, and limit our ability to develop,
deploy, or use AI technologies. Furthermore, the integration of AI technologies into our services may result in new or enhanced governmental
or regulatory scrutiny. Failure to appropriately respond to this evolving landscape may result in legal liability, regulatory action,
or reputational harm.
Foreign
currency exchange rate fluctuations may adversely affect our results of operations.
Because
our reporting currency is the U.S. dollar but our revenue may be received in various other currencies due to our international operations,
our revenue could be reduced when translated into U.S. dollars during periods of a strengthening U.S. dollar. In addition, as foreign
currency exchange rates fluctuate, the translation of our international revenue into U.S. dollar-denominated operating results affects
the period-to-period comparability of such results and could also result in foreign currency exchange gains and losses.
We
depend on our key personnel.
Our
future success will depend on our continued ability to identify, hire, develop, motivate, and retain highly skilled individuals across
the markets where we operate, with the continued contributions of our management, our sales teams, and our technology teams being especially
critical to our success. Competition for well-qualified employees is intense, and our continued ability to compete effectively depends,
in part, on our ability to attract new employees.
Effective
succession planning is also important to our future success. If we fail to ensure the effective transfer of management or other institutional
knowledge, our ability to execute short- and long-term strategic, financial, and operating goals, as well as our business, financial
condition, and results of operations generally, could be adversely affected.
In
addition to intense competition for talent, workforce dynamics are constantly evolving, such as recent broad shifts to hybrid work models.
If we do not manage changing workforce dynamics effectively, it could materially adversely affect our culture, reputation, and operational
flexibility going forward.
Our
success depends, in part, on the integrity of our systems and infrastructure and on our ability to enhance, expand, and adapt these in
a timely and cost-effective manner.
To
succeed, our systems and infrastructure must perform well on a consistent basis. We may from time to time experience system interruptions
that make some or all of our systems or data unavailable and prevent our services from functioning properly for our users. Any such interruption
could arise for any number of reasons, including as a result of our own actions, actions by government agencies, cyberattacks, fire,
power loss, telecommunications failures, computer viruses, software bugs, acts of God, and similar events. While we have backup systems
in place for certain aspects of our operations, not all of our systems and infrastructure are fully redundant, disaster recovery planning
is not sufficient for all eventualities, and our property and business interruption insurance coverage may not be adequate to fully compensate
us for any losses that we may suffer. Any interruptions or outages, regardless of the cause, could negatively impact our users’
experiences, tarnish our reputation, and decrease demand for our services, any or all of which could adversely affect our business, financial
condition, and results of operations.
We
will work on our technology and network to improve the experience of our users, accommodate substantial increases in the volume of traffic
to our various platforms, and ensure acceptable load times for our services, and keep up with changes in technology and user preferences.
Any failure to do so in a timely and cost-effective manner could adversely affect our users’ experience with our various services,
thereby negatively impacting the demand for our services, and could increase our costs, either of which could adversely affect our business,
financial condition, and results of operations.
From
time to time, we may augment and enhance, or transition to other, enterprise resource planning, human resources, financial, or other
systems. Such actions may cause us to experience difficulties in managing our systems and processes, which could disrupt our operations,
the management of our finances, and the reporting of our financial results, which, in turn, may result in our inability to manage the
growth of our business and to accurately forecast and report our results, each of which could adversely affect our business, financial
condition, and results of operations.
We
may not be able to protect our systems and infrastructure from cyberattacks and may be adversely affected by cyberattacks experienced
by third parties.
As
we build out our online offerings, we may find ourselves targeted by cyberattacks, computer viruses, worms, bot attacks or other destructive
or disruptive software, distributed denial of service attacks, and attempts to misappropriate customer information, including personal
user data, credit card information, and account login credentials. While we continue to invest in the protection of our systems and infrastructure,
in related personnel and training, and in employing a data minimization strategy where appropriate, there can be no assurance that our
efforts will prevent significant breaches in our systems or other such events from occurring. Any cyber or similar attack that we are
unable to protect ourselves against could damage our systems and infrastructure, prevent us from providing our services, tarnish our
reputation, result in the disclosure of confidential or sensitive information of our users, and be costly to remedy, as well as subject
us to investigation by regulatory authorities or to litigation that could result in liability to third parties.
The
impact of cyber or similar attacks experienced by any third parties who provide services to us or might otherwise process data on our
behalf could have a similar effect on us. Even cyber or similar attacks that do not directly affect us or our third-party service providers
or data processors may result in widespread access to user data, for instance through account login credentials that such users might
have used across multiple internet sites, including our sites, or directly through access to user data that these third-party service
providers could process in the context of the services they provide to us. These events can lead to government enforcement actions, fines,
and litigation, as well as a loss of consumer confidence generally, which could make users less likely to use or continue to use our
services. The occurrence of any of these events could have an adverse effect on our business, financial condition, and results of operations.
Our
success depends, in part, on the integrity of third-party systems and infrastructure.
We
may rely on third parties, primarily data centers and cloud-based, hosted web service providers, as well as third-party computer systems,
service providers, and broadband and other communications systems, in connection with the provision of our services generally, as well
as to facilitate and process certain transactions with our users. We will have no control over any of these third parties or their operations,
and such third-party systems are increasingly complex. Any changes in service levels at our data centers or hosted web service providers
or any interruptions, outages, or delays in our systems or those of our third-party providers, deterioration in the performance of these
systems, or cyber or similar attacks on these systems could impair our ability to provide our services or process transactions with our
users, which would adversely impact our business, financial condition, and results of operations.
If
the security of personal and confidential or sensitive user information that we maintain and store is breached or otherwise accessed
by unauthorized persons, it may be costly to mitigate the impact of such an event and our reputation could be harmed.
We
receive, process, store, and transmit a significant amount of personal user and other confidential or sensitive information, including,
without limitation, credit card information and user-to-user communications. We also enable our users to share their personal information
with each other. In some cases, we may engage third-party service providers to store or process this information. We work to protect
the security, integrity, and confidentiality of this information, but we cannot guarantee that inadvertent or unauthorized use or disclosure
will not occur in the future or that third parties will not gain unauthorized access to, or will not use for unauthorized purposes, this
information despite our efforts. When such events occur, we may not be able to remedy them, and we may be required by an increasing number
of laws to notify regulators and individuals whose personal information was processed, used, or disclosed without authorization. We may
also be subject to claims against us, including government enforcement actions, fines, and litigation, and have to expend significant
capital and other resources to mitigate the impact of such events, including by developing and implementing protections to prevent future
events of this nature from occurring. When breaches of security (or the security of our service providers) occur, the perception of the
effectiveness of our security measures, the security measures of our service providers, and our reputation may be harmed, we may lose
current and potential users, and our reputation and competitive position may be tarnished, any or all of which might adversely affect
our business, financial condition, and results of operations.
Our
business is subject to complex and evolving laws and regulations, including with respect to data privacy and platform liability. These
laws and regulations are subject to change and uncertain interpretation and could result in changes to our business practices, increased
cost of operations, declines in user growth or engagement, legal claims, monetary penalties, or other harm to our business.
As
we plan on expanding our footprint internationally, we will be subject to a variety of laws and regulations that involve matters that
are important to or may otherwise impact our business. We are indirectly affected by laws and regulations in jurisdictions where we do
not operate but our licensees do. Some laws and regulations can be enforced by private parties in addition to governmental entities and
are constantly evolving and subject to change. As a result, the application, interpretation, and enforcement of these laws and regulations
are often uncertain, particularly in the rapidly evolving industry in which we and our licensees operate, and such laws and regulations
may be interpreted and applied inconsistently from jurisdiction to jurisdiction. These laws and regulations, as well as any associated
inquiries, investigations, or other government actions, may be costly to comply with and may delay or impede the development of new services,
require changes to or cessation of certain business practices, result in negative publicity, increase our operating costs, require significant
management time and attention, and subject us to remedies that may harm our business, including fines or modifications to existing business
practices.
Tax
laws, in particular, are subject to interpretation by the relevant taxing authorities. While we endeavor to comply with applicable law,
there can be no assurance that the relevant taxing authorities will not take a position contrary to us, and if so, that such position
will not adversely affect us, directly or indirectly. Any events of this nature could adversely affect our business, financial condition,
and results of operations.
Proposed
or new legislation and regulations could also adversely affect our business. To the extent new or more stringent measures are required
to be implemented, impose new liability, or limit or remove existing protections, our business, financial condition, and results of operations
could be adversely affected.
The
adoption of any laws or regulations that adversely affect the popularity or growth in use of the internet or our services, including
laws or regulations that undermine open and neutrally administered internet access, could decrease user demand for our service offerings
and increase our cost of doing business, thereby negatively impacting our business, financial condition, and results of operations.
We
are subject to a number of risks related to credit card payments, including data security breaches and fraud that we or third parties
experience, any of which could adversely affect our business, financial condition, and results of operations.
We
will accept payment from our users primarily through credit card transactions and certain online payment service providers. When we or
a third party experiences a data security breach involving credit card information, affected cardholders will often cancel their credit
cards. In the case of a breach experienced by a third party, the more sizable the third party’s customer base and the greater the
number of credit card accounts impacted, the more likely it is that our users would be impacted by the breach. To the extent our users
are affected by such a breach experienced by us or a third party, we would need to contact such users to obtain new credit card information
and process any pending transactions. It is likely that we would not be able to reach all affected users, and even if we could, some
users’ new credit card information may not be obtained and some pending transactions may not be processed, which could adversely
affect our business, financial condition, and results of operations.
Even
if our users are not directly impacted by a given data security breach, they may lose confidence in the ability of service providers
to protect their personal information generally, which could cause them to stop using their credit cards online or choose alternative
payment methods that are less convenient or more costly for us or otherwise restrict our ability to process payments without significant
effort on the part of the user or us, or both.
Additionally,
if we fail to adequately prevent fraudulent credit card transactions, we may face litigation, fines, governmental enforcement action,
civil liability, diminished public perception of our security measures, significantly higher credit card-related and remediation costs,
or refusal by credit card processors to continue to process payments on our behalf, any of which could adversely affect our business,
financial condition, and results of operations.
Inappropriate
actions by certain of our users could be attributed to us and damage our reputation, which in turn could adversely affect our business.
Users
of our services may in the future be physically, financially, emotionally, or otherwise harmed by individuals that such users meet through
one of our services. If any users suffer or allege to have suffered any such harm, we could experience negative publicity or legal action
that could damage our reputation. Similar events affecting users of our competitors’ services could result in negative publicity
for our industry generally, which could in turn negatively affect our business.
In
addition, our reputation may be adversely affected by actions of our users that are deemed to be hostile, offensive, defamatory, inappropriate,
untrue, or unlawful. While our focus to date on offline matchmaking has helped to avoid such incidents, and while we intend to develop
systems and processes that aim to monitor and review the appropriateness of content accessible through our online services, together
with policies regarding illegal, offensive, or inappropriate use of our services, our users could nonetheless engage in activities that
violate our policies. Such bad actors may also use emerging technologies, such as AI, to engage in such activities, making it more difficult
for us to detect and prevent such negative behavior. Our safeguards may not be sufficient to avoid harm to our reputation, especially
if such hostile, offensive, or inappropriate use is well-publicized.
We
may fail to adequately protect our intellectual property rights or may be accused of infringing the intellectual property rights of third
parties.
We
currently rely exclusively on patents that we license out, and we expect, in the future, that we will rely heavily on our trademarks
and related domain names and logos for marketing and to build and maintain brand loyalty and recognition. We also expect to rely on other
patented and patent-pending proprietary technologies and trade secrets, such as our own app, relating to our services.
We
will continue to rely on a combination of laws and contractual restrictions to establish and protect our intellectual property rights.
For example, we continue to apply to register, or secure by contract where appropriate, trademarks and service marks as they are developed
and used, and we are reserving, registering, and renewing domain names as we deem appropriate. Effective trademark protection may not
be available or sought in every country in which our services are made available, and contractual disputes may affect the use of marks
governed by private contract. Similarly, not every variation of a domain name may be available or registered by us, even if available.
We
generally will seek to apply for patents or other similar statutory protections as and when we deem appropriate, based on then-current
facts and circumstances. No assurance can be given that any patent application we have filed or will file will result in a patent being
issued, or that any existing or future patents will afford adequate protection against competitors and similar technologies. In addition,
no assurance can be given that third parties will not create new products or methods that achieve similar results without infringing
upon patents we own.
Despite
these measures, our intellectual property rights may still not be protected in a meaningful manner, challenges to contractual rights
could arise, third parties could copy or otherwise obtain and use our intellectual property without authorization, our existing trademarks,
patents, or trade secrets could be determined to be invalid or unenforceable, or laws and interpretations of laws regarding the enforceability
of existing intellectual property rights could change over time in a manner that provides less protection. The occurrence of any of these
events could tarnish our reputation, limit our marketing ability, or impede our ability to effectively compete against competitors with
similar technologies, any of which could adversely affect our business, financial condition, and results of operations.
We
may also occasionally be subject to legal proceedings and claims regarding intellectual property, including claims of alleged infringement
of trademarks, copyrights, patents, and other intellectual property rights held by third parties and of invalidity of our own rights.
In addition, we may decide we should engage in litigation to enforce our intellectual property rights, to protect our trade secrets and
patents, or to determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of
outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely
affect our business, financial condition, and results of operations.
We
intend to expand to various international markets, including markets in which we have limited experience, and as a result, we face additional
risks in connection with those operations.
Operating
internationally, particularly in countries in which we have limited experience, exposes us to a number of additional risks, such as:
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operational and compliance
challenges caused by distance, language, and cultural differences; |
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difficulties in staffing
and managing international operations; |
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differing levels of social
and technological acceptance of our services or lack of acceptance of them generally; |
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differing and potentially
adverse tax laws; |
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compliance challenges due
to different laws and regulatory environments, particularly in the case of privacy, data security, intermediary or platform liability,
and consumer protection; |
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competitive environments
that favor local businesses or local knowledge of such environments; |
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limitations on the level
of intellectual property protection; and |
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trade sanctions, political
unrest, terrorism, war, and epidemics, or the threat of any of these events. |
These
risks could adversely affect our business, financial condition, and results of operations.
We
are subject to litigation, and adverse outcomes in such litigation could have an adverse effect on our financial condition.
From
time to time, we may become subject to litigation, and to various legal proceedings relating to employment matters, intellectual property
matters, and privacy and consumer protection laws, as well as stockholder derivative suits, class action lawsuits, mass arbitrations,
and other matters. Such litigation and proceedings may involve claims for substantial amounts of money or for other relief, may result
in significant costs for legal representation, arbitration fees, or other legal or related services, or might necessitate changes to
our business or operations. The defense of these actions is likely to be time consuming and expensive. We will evaluate these litigation
claims and legal proceedings to assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential loss.
Based on these assessments and estimates, we may establish reserves or disclose the relevant litigation claims or legal proceedings as
and when required or appropriate. These assessments and estimates will be based on information available to our management at the time
of such assessment or estimation and will involve a significant amount of judgment. As a result, actual outcomes or losses could differ
materially from those envisioned by our current assessments and estimates. Our failure to successfully defend or settle any of these
litigation claims or legal proceedings could result in liability that, to the extent not covered by our insurance, could have an adverse
effect on our business, financial condition, and results of operations.
Our
operations are subject to volatile global economic conditions, particularly those that adversely impact consumer confidence and spending
behavior.
Adverse
macroeconomic conditions, including lower consumer confidence, changes to fiscal and monetary policy, the availability and cost of credit,
and weakness in the economies in which we and our users are located may continue to adversely affect our business, financial condition,
and results of operations. In recent years, the United States, Europe and other key global markets have experienced historically high
levels of inflation, which have impacted, among other things, employee compensation expenses. If inflation rates rise again or continue
to remain historically high or further increase in those locations where inflation rates remain elevated, it will likely affect our expenses,
and may reduce consumer discretionary spending, which could affect the buying power of our users and lead to a reduction in demand for
our services. Other events and trends that could result in decreased levels of consumer confidence and discretionary spending include
a general economic downturn, recessionary concerns, high unemployment levels, and increased interest rates, as well as any sudden disruption
in business conditions. Economic growth in Mainland China has declined notably in recent years, affecting us through the impact on Hong
Kong’s economy and potentially through our China-based licensee. Additionally, geopolitical developments, such as wars in Ukraine
and the Middle East, tensions between the United States and China, climate change, and the responses by central banking authorities to
control inflation (in some economies of the West) or boost growth (in China), can increase levels of political and economic unpredictability
globally and increase the volatility of global financial markets.
Our
financial results may be adversely affected if substantial investments in businesses and operations fail to produce the expected returns.
From
time to time, we may invest in technology, business infrastructure, new businesses, product offering and manufacturing innovation and
expansion of existing businesses, such as our digital commerce operations, which require substantial cash investments and management
attention. We believe cost-effective investments are essential to business growth and profitability; however, significant investments
are subject to typical risks and uncertainties inherent in developing a new business or expanding an existing business. The failure of
any significant investment to provide expected returns or profitability could have a material adverse effect on our financial results
and divert management attention from more profitable business operations.
We
have limited financial resources. Our independent registered auditors’ report includes an explanatory paragraph stating that there
is substantial doubt about our ability to continue as a going concern.
As
a result of our deficiency in working capital on April 30, 2024 and other factors, our auditors have included a paragraph in their audit
report regarding substantial doubt about our ability to continue as a going concern. To address this issue, we plan on completing the
Acquisition, or increasing product sales, increasing production, obtaining inventory financing, seeking strategic alternatives and seeking
additional capital through future equity private placements or debt facilities if the Acquisition is terminated.
We
have recorded net losses since inception and have significant accumulated deficits. We have relied upon loans and equity financings for
operating capital. Total revenues will be insufficient to pay off existing debt and fund operations. We may be required to rely on further
debt financing, further loans from related parties, and private placements of shares of Common Stock for our additional cash needs. Such
funding sources may not be available, or the terms of such funding sources may not be acceptable to the Company.
We
will need additional capital in the future to finance our planned growth, which we may not be able to raise or which may only be available
on terms unfavorable to us or our stockholders, and this may result in our inability to fund our working capital requirements and harm
our operational results.
We
have and expect to continue to have substantial working capital needs. Our cash on hand, together with cash generated from product sales,
services, cash equivalents, and short-term investments will not meet our working capital and capital expenditure requirements for the
next twelve months. If the Acquisition does not complete, we will be required to raise additional funds throughout 2024 or we will need
to limit operations until such time as we can raise substantial funds to meet our working capital needs. In addition, we will need to
raise additional funds to fund our operations and implement our growth strategy, or to respond to competitive pressures or perceived
opportunities, such as investment, acquisition, marketing, and development activities.
If
we experience operating difficulties or other factors, many of which may be beyond our control, cause our revenue or cash flow from operations,
if any, to decrease, we may be limited in our ability to spend the capital necessary to complete our development, marketing, and growth
programs. We require additional financing, in addition to the anticipated cash generated from our operations, to fund our working capital
requirements. Additional financing might not be available on terms favorable to us, or at all. If adequate funds are not available or
are not available on acceptable terms, our ability to fund our operations, take advantage of unanticipated opportunities, develop or
enhance our business or otherwise respond to competitive pressures may be significantly limited. In such a capital restricted situation,
we may curtail our marketing, development, and operational activities or be forced to sell some of our assets on an untimely or unfavorable
basis.
Our
internal controls may be inadequate, which could cause our financial reporting to be unreliable and lead to misinformation being disseminated
to the public.
Our
management is responsible for establishing and maintaining adequate internal controls over our financial reporting. As defined in Exchange
Act Rule 13a-15(f), internal controls over financial reporting involves a process designed by, or under the supervision of, the principal
executive and principal financial officer, and effected by the Board of Directors, management, and other personnel, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and procedures that:
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pertain to the maintenance
of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; |
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provide reasonable assurance
that transactions are recorded as necessary to permit the preparation of financial statements in accordance with generally accepted
accounting principles and to ensure that receipts and expenditures of the Company are being made only in accordance with authorizations
of management or directors of the Company; and |
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provide reasonable assurance
regarding the prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could
have a material effect on the financial statements. |
Our
internal controls may be inadequate or ineffective, which could cause financial reporting to be unreliable and lead to misinformation
being disseminated to the public. Investors relying upon this misinformation may make an uninformed investment decision.
Failure
to achieve and maintain an effective internal control environment could cause us to face regulatory action and also cause investors to
lose confidence in our reported financial information, either of which could have a material adverse effect on the Company’s business,
financial condition, results of operations, and future prospects.
Our
auditors will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section
404 until we are no longer a “smaller reporting company”.
The
costs of being a public company could result in us being unable to continue as a going concern.
As
a public company, we are required to comply with numerous financial reporting and legal requirements, including those pertaining to audits
and internal controls. The costs of maintaining public company reporting requirements could be significant and may preclude us from seeking
financing or equity investments on terms acceptable to us and our shareholders. We estimate these costs to be in excess of $500,000 per
year, and they may be higher if our business volume or business activity increases significantly. Our current estimate of costs does
not include the necessary expenses associated with compliance, documentation, and specific reporting requirements of Section 404 as we
will not be subject to the full reporting requirements of Section 404 until we no longer qualify as a “smaller reporting company”.
If
our revenue is insufficient or non-existent, or we cannot satisfy many of these costs through the issuance of shares or debt, we may
be unable to satisfy these costs in the normal course of business. This would result in our being unable to continue as a going concern.
If
we fail to maintain effective internal controls over financial reporting, then the price of the Common Stock may be adversely affected.
Our
internal controls over financial reporting may have weaknesses and conditions that could require correction or remediation, the disclosure
of which may have an adverse impact on the price of the Common Stock. We are required to establish and maintain appropriate internal
controls over financial reporting. Failure to establish those controls, or any failure of those controls once established, could adversely
affect our public disclosures regarding our business, prospects, financial condition, or results of operations. In addition, management’s
assessment of internal controls over financial reporting may identify weaknesses and conditions that need to be addressed in our internal
controls over financial reporting or other matters that may raise concerns for investors. Any actual or perceived weaknesses and conditions
that need to be addressed in our internal controls over financial reporting or any disclosure of management’s critical assessment
of our internal controls over financial reporting may have an adverse impact on the price of the Common Stock.
Any
acquisitions we make could disrupt our business and seriously harm our financial condition.
We
have in the past made (and may, from time to time, consider) acquisitions of complementary companies, products or technologies. A primary
component of our growth strategy has been to acquire complementary businesses to grow our Company. For example, we acquired the business
of Foundation Sports Systems, LLC, in our fiscal year ended April 30, 2021, and the acquisitions of PlaySight and Gameface closed in
the fiscal year ended April 30, 2022. In the Company’s fiscal quarter ended January 31, 2023, the Company divested PlaySight and
75% of its interest in Foundation Sports as the required monthly cash burn became increasingly difficult to manage as inflation rose
and the cost of manufacturing the Company’s non-technological products grew. As a result, the Company sold PlaySight back to its
original owners in November 2022, and the Company sold most of Foundation Sports back to their original owners, with an option to purchase
any remaining interests. We intend to continue to pursue acquisitions of complementary technologies, products and businesses as a primary
component of our growth strategy to enhance the features and functionality of our applications, expand our customer base, and provide
access to new markets and increase benefits of scale, even after the Acquisition is completed. Acquisitions involve numerous risks, including
difficulties in the assimilation of the acquired businesses, the diversion of our management’s attention from other business concerns,
and potential adverse effects on existing business relationships, all of which could cause our actual growth or operating results to
differ from our expectations. In addition, any acquisitions could involve the incurrence of substantial additional indebtedness. We cannot
assure you that we will be able to successfully integrate any acquisitions that we pursue or that such acquisitions will perform as planned
or prove to be beneficial to our operations and cash flow. Any such failure could seriously harm our business, financial condition, and
results of operations. In addition, there might be potential inability or failure to achieve additional sales and enhance our customer
base through cross-marketing of the products to new and existing customers.
Fluctuations
in our tax obligations and effective tax rate may have a negative effect on our operating results.
We
may be subject to income taxes in multiple jurisdictions. We record tax expense based on our estimates of future payments, which include
reserves for uncertain tax provisions in multiple tax jurisdictions. At any one time, many tax years may be subject to audit by various
taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these
issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as events occur
and exposures are evaluated. Further, our effective tax rate in a given financial period may be materially impacted by changes in mix
and level of earnings or by changes to existing accounting rules or regulations. In addition, tax legislation enacted in the future could
negatively impact our current or future tax structure and effective tax rates.
We
could be subject to changes in tax rates, adoption of new tax laws, additional tax liabilities, or increased volatility in our effective
tax rate.
We
are subject to the tax laws in the U.S. and numerous foreign jurisdictions. Current economic and political conditions make tax laws and
regulations, or their interpretation and application, in any jurisdiction subject to significant change. On December 22, 2017, the U.S.
enacted the Tax Cuts and Jobs Act (the “Tax Act”), which includes a number of significant changes to previous U.S. tax laws
that impact us, including provisions for a one-time transition tax on deemed repatriation of undistributed foreign earnings, and a reduction
in the corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017, among other changes. The Tax Act also transitions
U.S. international taxation from a worldwide system to a modified territorial system and includes base erosion prevention measures on
non-U.S. earnings, which has the effect of subjecting certain earnings of our foreign subsidiaries to U.S. taxation.
We
earn a substantial portion of our income in foreign countries and are subject to the tax laws of those jurisdictions. There have been
proposals to reform foreign tax laws that could significantly impact how U.S. multinational corporations are taxed on foreign earnings.
Although we cannot predict whether or in what form these proposals will pass, several of the proposals considered, if enacted into law,
could have an adverse impact on our income tax expense and cash flows.
Portions
of our operations are subject to a reduced tax rate or are free of tax under various tax holidays and rulings. We also utilize tax rulings
and other agreements to obtain certainty in the treatment of certain tax matters. These holidays and rulings expire in whole or in part
from time to time and may be extended when certain conditions are met or terminated if certain conditions are not met. The impact of
any changes in conditions would be the loss of certainty in treatment thus potentially impacting our effective income tax rate.
We
may also be subject to the examination of our tax returns by the U.S. Internal Revenue Service (“IRS”) and other tax authorities.
We regularly assess the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of our provision
for income taxes. Although we believe our tax provisions are adequate, the final determination of tax audits and any related disputes
could be materially different from our historical income tax provisions and accruals. The results of audits or related disputes could
have an adverse effect on our financial statements for the period or periods for which the applicable final determinations are made.
For example, we and our subsidiaries are also engaged in a number of intercompany transactions across multiple tax jurisdictions. Although
we believe we have clearly reflected the economics of these transactions and the proper local transfer pricing documentation is in place,
tax authorities may propose and sustain adjustments that could result in changes that may impact our mix of earnings in countries with
differing statutory tax rates.
For
as long as we are a “smaller reporting company,” we will not be required to comply with certain reporting requirements that
apply to other publicly reporting companies. We cannot predict whether the reduced disclosure requirements applicable to smaller reporting
companies will make our Common Stock less attractive to investors.
We
are currently a “smaller reporting company.” For as long as we continue to be a smaller reporting company, we may choose
to take advantage of certain exemptions from reporting requirements applicable to other publicly reporting companies that are not smaller
reporting companies. These include not being required to comply with the auditor attestation requirements for the assessment of our internal
controls over financial reporting provided by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and not being
required to provide certain disclosure regarding executive compensation required of larger publicly reporting companies. We cannot predict
if investors will find our common shares less attractive if we choose to rely on these exemptions. If some investors find our common
shares less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our shares
and our share price may be more volatile. Further, as a result of these scaled regulatory requirements, our disclosure may be more limited
than that of other publicly reporting companies and you may not have the same protections afforded to shareholders of such companies.
We
are subject to the periodic reporting requirements of the Exchange Act, requiring us to incur audit fees and legal fees in connection
with the preparation of such reports. These additional costs could reduce or eliminate our ability to earn a profit.
We
are required to file periodic reports with the SEC pursuant to the Exchange Act and the rules and regulations promulgated thereunder.
In order to comply with these requirements, our independent registered public accounting firm will have to review our financial statements
on a quarterly basis and audit our financial statements on an annual basis. Moreover, our legal counsel will have to review and assist
in the preparation of such reports. The costs charged by these professionals for such services cannot be accurately predicted at this
time because factors such as the number and type of transactions that we engage in and the complexity of our reports cannot be determined
at this time and will affect the amount of time to be spent by our auditors and attorneys. However, the incurrence of such costs will
be an expense to our operations and thus have a negative effect on our ability to meet our overhead requirements and earn a profit.
If
we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose
confidence in our reported financial information, and the trading price of the Common Stock, could drop significantly.
Risks
Relating to Connexa following the Acquisition
Connexa
may be exposed to increased litigation, which could have an adverse effect on its business and operations following the Acquisition.
Connexa
may be exposed to increased litigation from stockholders, customers, suppliers, distributors, consumers, and other third parties following
the Acquisition. Such litigation may have an adverse impact on Connexa’s business and results of operations or may cause disruptions
to Connexa’s operations.
After
the Acquisition, holders of Connexa’s Common Stock will have no equity or other ownership interest in its current business, as
Connexa will sell, transfer, and assign its existing business to a newly formed entity. Investors will therefore have a continuing equity
interest only in the business of YYEM.
Pursuant
to a Separation Agreement to be entered into per the Exchange Agreement, after the consummation of the Acquisition, Connexa will sell,
transfer, and assign all its existing business to NewCo, a newly formed entity be owned by Yonah Kalfa and Mike Ballardie. After such
sale, transfer, assignment, or divestiture, the Common Stock of Connexa will represent equity interests solely in the business of YYEM
and not any equity interest in the current business of Connexa.
The
separation of the Legacy Business is dependent on the Acquisition and will not result in monetization, and holders of Common Stock of
Connexa will not receive any consideration in connection with the separation of the Legacy Business.
The
separation of the Legacy Business will not involve a monetization transaction, and the consummation of such sale, transfer, assignment,
or other divesture may be completed at a discount to the fair market value or on terms less favorable to Connexa and its stockholders
than might otherwise have been obtainable under other circumstances. In connection with the separation of the Legacy Business, holders
of the Common Stock of Connexa will not receive any consideration related to the Legacy Business.
On
a pro forma basis, as of July 31, 2024, the Legacy Business’ assets were approximately $5.2 million, and the liabilities
of the Legacy Business were approximately $12.0 million.
Declaration,
payment, and amounts of dividends, if any, to stockholders of Connexa following the Acquisition will be uncertain.
Connexa
has not historically paid cash dividends on its capital stock. Whether any dividends are declared or paid to stockholders of Connexa
following the Acquisition, and the amounts of any such dividends that are declared or paid, are uncertain and depend on a number of factors.
The Board of Directors following the Acquisition will have the discretion to determine the dividend policy of Connexa, including the
amount and timing of dividends, if any, that Connexa may declare from time to time, which may be impacted by any of the following factors:
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Connexa may not have enough
cash to pay such dividends or to repurchase shares due to its cash requirements, capital spending plans, cash flow, or financial
position; |
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decisions on whether, when,
and in what amounts to make any future distributions will remain at all times entirely at the discretion of the Connexa Board of
Directors following the Acquisition, which could change its dividend practices at any time and for any reason; |
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the amount of dividends
that Connexa may distribute to its stockholders is subject to restrictions under law and is potentially limited by the terms of any
future indebtedness that Connexa may incur; and |
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certain limitations on
the amount of dividends subsidiaries of Connexa can distribute to Connexa, as imposed by law, regulators, or agreements. |
Stockholders
should be aware that they have no contractual or other legal right to dividends that have not been declared.
Risks
Related to Doing Business in Hong Kong
A
joint statement by the SEC and the PCAOB, rule changes by Nasdaq, the HFCAA and AHFCAA, and the Consolidated Appropriations Act all call
for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors,
especially non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainty to our continued listing.
On
April 21, 2020, the SEC and the PCAOB released a joint statement highlighting the risks associated with investing in companies based
in or having substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack
of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.
On
December 18, 2020, the HFCAA was signed and became law. This legislation requires certain issuers of securities to establish that they
are not owned or controlled by a foreign government. Specifically, an issuer must make this certification if the PCAOB is unable to audit
specified reports because the issuer has retained a foreign public accounting firm not subject to inspection by the PCAOB. Furthermore,
under the HFCAA, if the PCAOB is unable to inspect the issuer’s public accounting firm for three consecutive years, the issuer’s
securities will be banned from trading on a national exchange or through other methods. On December 29, 2022, the AHFCAA was enacted,
which amended the HFCAA by decreasing the number of non-inspection years from three years to two, thus reducing the time period before
our Common Stock could be prohibited from trading, and therefore delisted, if the PCAOB were to determine that it could not inspect our
auditor.
On
December 2, 2021, the SEC issued amendments to finalize interim final rules previously adopted in March 2021 to implement the submission
and disclosure requirements of the HFCAA. These rules apply to registrants that the SEC identifies as having filed an annual report with
an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB is unable
to inspect or investigate completely because of a position taken by an authority in a foreign jurisdiction.
On
December 16, 2021, the PCAOB, pursuant to the HFCAA, issued a Determination Report which found that the PCAOB was then unable to completely
inspect or investigate registered public accounting firms headquartered in mainland China or Hong Kong because of a position taken by
one or more authorities in each of those jurisdictions. Pursuant to each annual determination by the PCAOB, the SEC would, on an annual
basis, identify issuers that had used non-inspected audit firms and thus were at risk of delisting in the future.
On
August 26, 2022, the CSRC, the Ministry of Finance of the PRC, and the PCAOB signed a Statement of Protocol (the “Protocol”),
governing inspections and investigations of audit firms based in China and Hong Kong. Pursuant to the Protocol, the PCAOB has independent
discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the
SEC. On December 15, 2022, the PCAOB determined that the PCAOB was able to secure complete access to inspect and investigate registered
public accounting firms headquartered in mainland China and Hong Kong and voted to vacate its previous determinations to the contrary.
However, should any PRC authorities obstruct or otherwise fail to facilitate the PCAOB’s access in the future, the PCAOB would
consider the need to issue a new determination.
Our
auditor, Olayinka Oyebola & Co., an independent public accounting firm registered with the PCAOB, and an auditor of publicly traded
companies in the United States, is subject to U.S. laws pursuant to which the PCAOB conducts regular inspections to assess its compliance
with applicable professional standards. Our auditor has been inspected by the PCAOB on a regular basis, with the last inspection in November
2023. Our auditor is not headquartered in mainland China or Hong Kong and was not identified as an accounting firm subject to the determinations
announced by the PCAOB on December 16, 2021. Nevertheless, should our auditor in the future have any work papers in China or Hong Kong
that the PCAOB is unable to fully inspect, it will be difficult to evaluate the effectiveness of our auditor’s audit procedures
or equity control procedures. Investors could consequently lose confidence in our reported financial information and procedures or in
the quality of our financial statements, which would adversely affect us and our securities. Moreover, if trading in our securities is
prohibited under the HFCAA in the future because the PCAOB determines that it cannot inspect or fully investigate our auditor at such
future time, an exchange will likely delist our securities.
The
Chinese government, in general, could exercise significant oversight and discretion over the conduct of our business and has made statements
indicating an intent to exert more oversight and control over offerings that are conducted overseas and over foreign investment in China-based
issuers.
Although
our subsidiary YYEM is based in a special administrative region of the PRC, which enjoys separate governing and economic systems from
that of mainland China under the principle of one country, two systems, Hong Kong is part of China and, as such, the Chinese government
could intervene or influence our operations at any time, which could result in a material change in YYEM’s operations and the value
of our Common Stock. Any actions by the Chinese government to exert more oversight and control over offerings that are conducted overseas
or over foreign investment in China-based issuers, in particular any effort to extend such actions directly or indirectly to Hong Kong-based
companies, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause
the value of such securities to significantly decline or be worthless.
Greater
oversight by CAC over data security, particularly for companies seeking to list on a foreign exchange, could adversely impact our business
and our offering.
Over
the years, the PRC has enacted a number of laws and regulations aimed at governing the collection and security of personal data. These
include the Cybersecurity Review Measures, which took effect on February 15, 2022 and require a government review of critical information
infrastructure operators (“CIIOs”) and of internet operators that possesses the personal information of at least one million
users or meet certain other criteria; the Network Data Security Administration (Draft for Comments), published in 2021 and not yet enacted,
which provides that companies engaging in data processing activities that may affect national security must apply for a cybersecurity
review by the CAC under certain circumstances; the PRC Data Security Law, promulgated in 2021, which imposes certain requirements for
the collection and processing of data in order to protect its security; the Personal Information Protection Law, promulgated in 2021,
which integrates various scattered rules with respect to personal information rights and privacy protection; the Rules on the Scope of
Necessary Personal Information for Common Types of Mobile Internet Applications, which came into effect in 2021 and prohibits the operators
of mobile apps from denying users access to the apps just because they do not consent to the collection of unnecessary personal information;
and the Measures for the Security Assessment of Data Cross-border Transfer, effective in 2022, which require data processors to apply
for a cross-border security assessment coordinated by the CAC under certain circumstances, including where they transfer personal information
overseas and have already transferred personal information of more than 100,000 people, or sensitive personal information of more than
10,000 people, overseas since the start of the previous year. (See also the discussion of the Confidentiality and Archives Administration
Provisions, below.)
We
do not believe YYEM is subject to cybersecurity review by the CAC, or to any of the other personal data-related laws and regulations
described above, since YYEM is a Hong Kong company without subsidiaries or operations in the PRC. In addition, it does not currently
have, and does not anticipate that it will be collecting, over one million users’ personal information in the foreseeable future,
which might otherwise subject it to the Cybersecurity Review Measures. YYEM has not received any notice from any authorities identifying
it as a CIIO or otherwise requiring it to undergo a cybersecurity review or network data security review by the CAC.
There
remains uncertainty as to how the Cybersecurity Review Measures and the Security Administration Draft will be interpreted or implemented
and whether the PRC regulatory agencies, including the CAC, may adopt new laws, regulations, rules, or detailed implementation and interpretation
related to the Cybersecurity Review Measures and the Security Administration Draft. There is no assurance that YYEM will be able to fully
or timely comply with any of the personal data and data security laws should they be deemed to be applicable to its operations. There
is no certainty as to how any review or other actions would impact YYEM’s operations, and we cannot guarantee that any clearance
could be obtained or maintained if approved.
In
the future, YYEM may be subject to PRC laws and regulations, including those regarding corporate structure, overseas listings, data-
and cybersecurity, and anti-monopoly concerns, which could result in a material negative impact on its operations and the value of the
securities we are registering for sale.
YYEM
is incorporated and registered under the laws of Hong Kong. YYEM does not have, nor does it intend to have, any subsidiary, VIE structure
or direct operations in mainland China. All of YYEM’s revenue and profit is currently generated by operations in Hong Kong. The
Basic Law of the Hong Kong Special Administrative Region (the “Basic Law”), provides that PRC laws and regulations shall
not be applied in Hong Kong except for those listed in Annex III of the Basic Law, which is confined to laws relating to national defense,
foreign affairs, and other matters that are not within the scope of autonomy. YYEM therefore is not directly subject to PRC laws and
regulations regarding the general conduct of its business or regarding overseas listings.
Nevertheless,
with its headquarters and substantial operations in Hong Kong, YYEM faces risks and uncertainties associated with the complex and evolving
PRC laws and regulations, including whether and how PRC government statements and regulatory developments, such as those relating to
corporate structure, overseas listings, data- and cybersecurity, and anti-monopoly concerns, would be applicable to Hong Kong companies
such as YYEM, and whether and when the Chinese government might exercise significant oversight over the conduct of business in Hong Kong.
If YYEM were to become subject to PRC laws and regulations, it could incur material costs to ensure compliance, and it might be subject
to fines, no longer be permitted to conduct offerings to foreign investors, or no longer be permitted to continue business operations
as presently conducted.
The
uncertainties regarding the enforcement of laws and the fact that rules and regulations in China can change quickly with little advance
notice, along with the risk that the Chinese government may intervene in or influence YYEM’s operations, could result in a material
change in its operations and the value of the securities we are registering, including the possibility that the value of such securities
could become worthless.
In
recent years, the PRC government initiated, with little advance notice, a series of regulatory actions and statements to regulate certain
types of business operations in mainland China, including cracking down on illegal activities in the securities market, enhancing supervision
over mainland China-based companies listed overseas using a variable interest entity structure, adopting new measures to extend the scope
of cybersecurity reviews, and expanding efforts in anti-monopoly enforcement. For example, the General Office of the Communist Party
of China Central Committee and the General Office of the State Council jointly issued a document to crack down on illegal activities
in the securities market, requiring various governmental authorities to strengthen cross-border oversight of law-enforcement and judicial
cooperation, to enhance supervision over mainland China-based companies listed overseas, and to establish and improve the system of extraterritorial
application of the PRC securities laws. The CAC also promulgated the various data security-related measures described above under “Greater
oversight by the Cyberspace Administration of China over data security, particularly for companies seeking to list on a foreign exchange,
could adversely impact our business and our offering.” As explained above, we believe the Company and its subsidiaries are
not directly subject to the regulations and rules issued by CAC and other governmental agencies.
On
February 17, 2023, the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Enterprises
(the “New Overseas Listing Rules”) with five interpretive guidelines, which took effect on March 31, 2023. The New Overseas
Listing Rules require Chinese domestic enterprises to complete filings with relevant governmental authorities and report related information
under certain circumstances. The new rules provide that the determination as to whether a Chinese domestic company is indirectly offering
and listing securities on an overseas market shall be made on a substance-over-form basis, and if the issuer meets the following conditions,
the offering and listing will be deemed an indirect overseas offering and listing by a Chinese domestic company: (i) the revenue, profit,
total assets or net assets of the Chinese domestic entity constitutes more than 50% of such item in the issuer’s audited consolidated
financial statements for the most recent fiscal year; or (ii) the senior managers in charge of business operations and management of
the issuer are mostly Chinese citizens or with a regular domicile in China, the main locations of its business operations are in China,
or its main business activities are conducted in China. YYEM is headquartered in Hong Kong, and at least 50% of its executive officers
and directors are based in Hong Kong and are not Chinese citizens. Furthermore, all of its assets are located in Hong Kong and all of
its revenue and profit is generated from operations in Hong Kong. We therefore believe that YYEM is not subject to the New Overseas Listing
Rules.
On
February 24, 2023, the CSRC, the Ministry of Finance, the National Administration of State Secrets Protection, and the National Archives
Administration released the Provisions on Strengthening the Confidentiality and Archives Administration Related to the Overseas Securities
Offering and Listing by Domestic Companies (the “Confidentiality and Archives Administration Provisions”), which took effect
on March 31, 2023. PRC domestic enterprises seeking to offer securities and list in overseas markets, either directly or indirectly,
are required to establish and improve their confidentiality systems and archives work and to complete various approval and filing procedures
with competent authorities, if such PRC domestic enterprises or their overseas listing entities provide or publicly disclose documents
or materials involving state secrets and work secrets of state organs to relevant securities companies, securities service institutions,
overseas regulatory agencies, or other entities and individuals.
As
of the date of this prospectus, these new laws and guidelines have not impacted YYEM’s ability to conduct its business. YYEM is
headquartered in Hong Kong and does not have a VIE structure. YYEM is not a cyberspace operator with personal information of more than
1 million users or activities that affect or may affect the national security of China, and it does not possess documents and materials
likely to affect the national security or public interest of China. However, any change in foreign investment regulations or other policies
in China, or related enforcement actions by the PRC government, could result in a material change in YYEM’s operations and the
value of our Common Stock and could significantly limit or completely hinder our ability to offer our Common Stock to investors or cause
the value of our Common Stock to significantly decline or be worthless.
We
are subject to risks relating to economic, political, legal, and social conditions in Hong Kong.
Even
though much of YYEM’s revenue is derived from licensees outside Hong Kong, any adverse changes in the economic, political, legal,
and social conditions of Hong Kong could lead to an adverse impact on the demand for YYEM’s services and result in deteriorating
financial performance of the Company.
We
cannot assure you that there will not be any political movements or large-scale political unrest in Hong Kong that could adversely impact
the market. If such unrest or movement persists for a substantial period of time, it may lead to disruption of the general economic,
political, and social conditions in Hong Kong, and YYEM’s overall business, results of operations, and financial condition may
be adversely affected.
The
Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (the “Hong Kong National Security
Law”) could impact YYEM’s operations in Hong Kong.
On
June 30, 2020, the Standing Committee of the PRC National People’s Congress adopted the Hong Kong National Security Law. This law
defines the duties of the government bodies responsible for safeguarding national security and specifies four categories of offences
— secession, subversion, terrorist activities, and collusion with a foreign country or external elements to endanger national security
— and their corresponding penalties. On July 14, 2020, the U.S. President signed the Hong Kong Autonomy Act (the “HKAA”),
into law, authorizing the U.S. administration to impose blocking sanctions against individuals and entities who are determined to have
materially contributed to the erosion of Hong Kong’s autonomy. On August 7, 2020, the U.S. government imposed HKAA-authorized sanctions
on eleven individuals, including the then Hong Kong Chief Executive Carrie Lam and the current Hong Kong Chief Executive John Lee. On
October 14, 2020, the U.S. State Department submitted to relevant committees of Congress the report required under the HKAA, identifying
persons materially contributing to “the failure of the Government of China to meet its obligations under the Joint Declaration
or the Basic Law.” The HKAA further authorizes secondary sanctions, including the imposition of blocking sanctions, against foreign
financial institutions that knowingly conduct a significant transaction with a foreign person sanctioned under this authority. The imposition
of sanctions may directly affect foreign financial institutions as well as any third parties or customers dealing with any foreign financial
institution that is targeted. The ramifications of the Hong Kong National Security Law and the HKAA are still unfolding, and it is therefore
difficult to predict the full impact on Hong Kong and companies located in Hong Kong. If YYEM is accused of violating the Hong Kong National
Security Law or the HKAA by competent authorities, its business operations, financial position, and results of operations could be materially
and adversely affected.
Risks
Related to Ownership of Our Shares
Our
stock price may be volatile, or may decline regardless of our operating performance, and you could lose all or part of your investment
as a result.
You
should consider an investment in our securities to be risky, and you should invest in our securities only if you can withstand a significant
loss and wide fluctuation in the market value of your investment. The market price of our Common Stock could be subject to significant
fluctuations in response to the factors described in this section and other factors, many of which are beyond our control. Among the
factors that could affect our stock price are:
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actual or anticipated variations
in our quarterly and annual operating results or those of companies perceived to be similar to us; |
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Changes in expectations
as to our future financial performance, including financial estimates by securities analysts and investors, or differences between
our actual results and those expected by investors and securities analysts; |
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Fluctuations in the market
valuations of companies perceived by investors to be comparable to us; |
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The public’s response
to our or our competitors’ filings with the SEC or announcements regarding new products or services, enhancements, significant
contracts, acquisitions, strategic investments, litigation, restructurings, or other significant matters; |
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Speculation about our business
in the press or the investment community; |