NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
Elray Resources, Inc. (“Elray” or the “Company”), a Nevada corporation, formed on December 13, 2006 has been providing marketing and support for online gaming operations. The Company maintains its administrative office in Australia and its gaming operations is currently targeting Asian market.
The accompanying consolidated financial statements of Elray include the accounts of Elray and its wholly-owned subsidiary, Angkor Wat Minerals, Ltd. (“Angkor Wat”), and have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission. All intercompany balances have been eliminated.
NOTE 2 – GOING CONCERN
The accompanying consolidated financial statements of Elray have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has loss from operations and negative working capital of $9,886,749 at December 31, 2016. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. Without realization of additional capital, it would be unlikely for Elray to continue as a going concern. Elray’s management plans on raising cash from public or private debt or equity financing, on an as needed basis, and in the longer term, revenues from the gambling business. Elray’s ability to continue as a going concern is dependent on these additional cash financings, and ultimately upon achieving profitable operations through the development of its gambling business.
NOTE 3 – SUMMARY OF ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates.
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. As of December 31, 2016 and 2015, allowance for doubtful accounts was $5,521 and $0, respectively.
Long Lived Assets
Long-lived assets to be held and used or disposed of other than by sale are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When required, impairment losses on assets to be held and used or disposed of other than by sale are recognized based on the fair value of the asset. Long-lived assets to be disposed of by sale are reported at the lower of its carrying amount or fair value less cost to sell.
Intangible Assets
Intangible assets consist of expenditures for domain names and certain intellectual properties. The intangible assets are recorded at cost and amortized over its estimated useful life of 3 years.
Derivative Instruments
Derivatives are measured at their fair value on the balance sheet. In determining the appropriate fair value, the Company uses the Black-Scholes-Merton option pricing model. Changes in fair value are recorded in the statement of operations.
Debt Discount
Debt discount is amortized over the term of the related debt using the effective interest rate method.
Revenues
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable. For the seven months ended July 31, 2016 and the year ended December 31, 2015, the Company recorded revenue at gross charge to its customers as the Company was the principal of the transactions. Started from August 1, 2016, due to compliance and legal environment concern, the Company modified its business model and changes its role to be an agent. Therefore, revenues recorded after August 1, 2016 was presented net with software usage costs.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. A three-tier fair value hierarchy prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
|
·
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
|
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
|
|
|
·
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one more significant inputs or significant value drivers are unobservable.
|
Our financial instruments include cash, accounts receivable, accounts payable and accrued liabilities, notes payable, convertible notes payable, advances from shareholder, and derivative liabilities. The carrying values of these financial instruments approximate their fair value due to their short-term nature except for derivative liabilities. The derivative liabilities are stated at their fair value as a level 3 measurement. The Company used a Black-Scholes model to determine the fair values of these derivative liabilities.
Stock-Based Compensation
Stock-based compensation expense is recorded for stock and stock options awarded in return for services rendered. The expense is measured at the grant-date fair value of the award and recognized as compensation expense on a straight-line basis over the service period, which is typically the vesting period.
Income Taxes
Deferred income taxes reflect the net effect of (a) temporary differences between the carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax reporting purposes, and (b) net operating loss carry forwards. No net provision for refundable Federal income tax has been made in the accompanying statement of operations because no recoverable taxes were paid previously. Similarly, no deferred tax asset attributable to the net operating loss carry forward has been recognized, as it is not deemed likely to be realized.
Earnings (Loss) Per Common Share
Basic net earnings (loss) per common share are computed by dividing net earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The dilutive effect of outstanding stock options and warrants is reflected in diluted earnings per share by application of the treasury stock method. The dilutive effect of outstanding convertible securities is reflected in diluted earnings per share by application of the if-converted method.
The following is a reconciliation of basic and diluted earnings (loss) per common share for 2016 and 2015:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
198,854
|
|
|
$
|
(4,865,847
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
703,994,058
|
|
|
|
9,247,179
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
0.00
|
|
|
$
|
(0.53
|
)
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
198,854
|
|
|
$
|
(4,865,847
|
)
|
Add convertible debt interest
|
|
|
76,441
|
|
|
|
-
|
|
Net income (loss) available to common shareholders
|
|
$
|
275,295
|
|
|
$
|
(4,865,847
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
703,994,058
|
|
|
|
9,247,179
|
|
Preferred shares
|
|
|
2,362
|
|
|
|
-
|
|
Convertible Debt
|
|
|
36,224,580,000
|
|
|
|
-
|
|
Adjusted weighted average common shares outstanding
|
|
|
36,928,576,420
|
|
|
|
9,247,179
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
|
$
|
0.00
|
|
|
$
|
(0.53
|
)
|
For the year ended December 31, 2015 fully diluted earnings per share excludes notes convertible to 6,406,682,407 common shares and preferred stock convertible to 2,362 common shares, because their inclusion would be anti-dilutive.
Subsequent Events
Elray evaluated subsequent events through the date these financial statements were issued for disclosure purposes.
Recently Issued Accounting Standards
In May 2014, a pronouncement was issued that creates common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The new guidance supersedes most preexisting revenue recognition guidance. The core principle of the guidance 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 in exchange for those goods or services. The new standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with an option to adopt the standard one year earlier. The new standard is to be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of the new pronouncement on its financial statements.
In February 2016, a pronouncement was issued that creates new accounting and reporting guidelines for leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. The new standard is to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the new pronouncement on its financial statements.
The Company does not believe that any other recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
NOTE 4 – INTANGIBLE ASSETS
Intangible assets consisted of following at December 31, 2016 and 2015:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Intellectual properties
|
|
$
|
-
|
|
|
$
|
3,467,742
|
|
Accumulated amortization and impairment
|
|
|
-
|
|
|
|
(3,467,742
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
On January 23, 2014, the Company entered into a Know-How and Asset Purchase Agreement, with Virtual Technology Group, LLC (“VTG”) and Gold Globe Investments Limited (“GGIL”), whereby the Company acquired from VTG and GGIL all of their know-how, intellectual property, software, documentation, designs, work products and database schemas. The purchase price for these assets consisted of a convertible note in the amount of $1.5 million payable to VTG and a second convertible note in the amount of $2.8 million payable to GGIL. The Company recorded an initial discount to the notes of $832,258.
During the year ended December 31, 2015, management evaluated the carrying value on the intangible and recorded an impairment of $1,252,244 due to uncertain recoverability.
NOTE 5 – SETTLEMENT PAYABLE
On December 20, 2013, the Company entered into a settlement agreement with Tarpon Bay Partners LLC (“Tarpon”) whereby Tarpon acquired certain notes and accounts payable against the Company in the amount of $2,656,214. Pursuant to the agreement, the Company and Tarpon submitted the settlement agreement to the Circuit Court of the Second Judicial Circuit, Leon County, Florida for a hearing on the fairness of the agreement and the exemption from registration under the Securities Act of 1933 for the shares that will be issued to Tarpon for resale (“Settlement Shares”). 75% of the proceeds less all applicable fees and charges from the resale of the Settlement Shares will be remitted to the original claim holders of the Company (“Remittance Amount”). The Company agreed to issue sufficient shares to generate proceeds such that the aggregate Remittance Amount equals $2,656,214. Additionally, the Company agreed to issue a convertible note of $132,000, maturing in 6 months and convertible to the Company’s common stock at a 50% of the lowest closing bid price for the 20 days prior to the conversion. The settlement agreement was effective on January 27, 2014 when the court granted approval.
On December 29, 2015 the Company issued Tarpon 4,101,000 shares which were sold during the year ended December 31, 2016. During the year ended December 31, 2016, the Company issued Tarpon 5,136,000 common shares which have been sold entirely during 2016. Net proceeds from the sales amounted to $933 was remitted to the original claim holders. As of December 31, 2016, the Company has settlement payable of $2,162,159.
During the year ended December 31, 2015, the Company issued Tarpon 13,184,575 common shares, 9,083,575 of which have been sold as of December 31, 2015. Net proceeds from the sale amounted to $30,903 was remitted to the original claim holders. As of December 31, 2015, the Company had settlement payable of $2,163,092.
NOTE 6 – NOTES PAYABLE
Notes payable
Notes payable at December 31, 2016 and 2015 consisted of the following:
|
|
Final Maturity
|
|
Interest Rate
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Morchester International Limited
|
|
7/14/12
|
|
|
15
|
%
|
|
$
|
35,429
|
|
|
$
|
35,429
|
|
Morchester International Limited
|
|
7/14/12
|
|
|
8
|
%
|
|
|
10,000
|
|
|
|
10,000
|
|
PowerUp Lending Group, Ltd
|
|
8/15/16
|
|
|
43
|
%
|
|
|
-
|
|
|
|
96,428
|
|
PowerUp Lending Group, Ltd
|
|
8/5/16
|
|
|
54
|
%
|
|
|
-
|
|
|
|
46,429
|
|
PowerUp Lending Group, Ltd
|
|
2/22/17
|
|
|
33
|
%
|
|
|
13,934
|
|
|
|
-
|
|
Auctus Private Equity Fund, LLC
|
|
6/27/17
|
|
|
N/A
|
|
|
|
25,758
|
|
|
|
-
|
|
PowerUp Lending Group, Ltd
|
|
5/6/17
|
|
|
46
|
%
|
|
|
42,999
|
|
|
|
-
|
|
PowerUp Lending Group, Ltd
|
|
7/20/17
|
|
|
46
|
%
|
|
|
35,230
|
|
|
|
-
|
|
Total
|
|
|
|
|
|
|
|
$
|
163,350
|
|
|
$
|
188,286
|
|
On December 9, 2011, Elray entered into an Amended Splitrock Agreement whereby the Company acquired certain assets and liabilities of Splitrock. As part of the liabilities assumed in terms of the Amended Splitrock Agreement, the Company assumed notes payable of $292,929 bearing interest of 8% or 15% per annum.
On January 27, 2014, the court granted an approval of the settlement agreement with Tarpon whereby the Company would issue shares to Tarpon for resale to pay off certain liabilities. See Note 5. As a result, principal of $247,500 and associated accrued interest acquired by Tarpon were reclassified to settlement payable.
The remaining notes issued to Morchester International Limited not purchased by Tarpon are currently in default. The default had no effect on the notes’ interest rate.
On October 19, 2015, the Company entered into a loan agreement with PowerUp Lending Group, Ltd. ("PowerUp") for $125,000. Total repayment amount for the loan is $168,750. The loan is payable daily at $804. As of December 31, 2016, the loan has been paid off.
On December 10, 2015, the Company entered into another loan agreement with PowerUp for $50,000. Total repayment amount for the loan is $67,500. The loan is payable daily at $402, secured by all of the Company’s assets. As of December 31, 2016, the loan has been paid off.
On May 6, 2016, the Company entered into a third loan agreement with PowerUp for $60,000. Total repayment amount for the loan is $76,000. The loan is payable daily at $360, secured by all of the Company’s assets. As of December 31, 2016, balance of this note was $13,934.
On June 27, 2016, the Company reached a settlement agreement with Auctus. Pursuant to the agreement, the Company agreed to pay $61,819 in full and final settlement of all outstanding convertible notes and accrued interest. As of December 31, 2016, balance of this note was $25,758.
On July 28, 2016, the Company entered into a fourth loan agreement with PowerUp for $75,000. Total repayment amount for the loan is $95,250. The loan is payable daily at $451, secured by all of the Company’s assets. As of December 31, 2016, balance of this note was $42,999.
On September 14, 2016, the Company entered into a fifth loan agreement with PowerUp for $50,000. Total repayment amount for the loan is $63,500. The loan is payable daily at $301, secured by all of the Company’s assets. As of December 31, 2016, balance of this note was $35,230.
Convertible notes payable
Convertible notes payable at December 31, 2016 and 2015 consisted of the following:
|
|
Interest Rate
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
JSJ Investments, Inc.
|
|
10~12%
|
|
|
$
|
128,853
|
|
|
$
|
133,293
|
|
LG Capital Funding, LLC
|
|
|
8
|
%
|
|
|
8,707
|
|
|
|
28,250
|
|
WHC Capital, LLC
|
|
|
12
|
%
|
|
|
116,936
|
|
|
|
116,936
|
|
Beaufort Capital Partners, LLC
|
|
|
12
|
%
|
|
|
10,966
|
|
|
|
10,966
|
|
Tangiers Investment Group, LLC
|
|
0%~10
|
%
|
|
|
48,394
|
|
|
|
69,356
|
|
GSM Fund Management , LLC
|
|
|
12
|
%
|
|
|
38,442
|
|
|
|
48,666
|
|
Auctus Private Equity Fund, LLC
|
|
|
8
|
%
|
|
|
-
|
|
|
|
40,000
|
|
Microcap Equity Group , LLC
|
|
|
10
|
%
|
|
|
18,892
|
|
|
|
18,892
|
|
Virtual Technology Group, Ltd
|
|
|
0
|
%
|
|
|
481,500
|
|
|
|
481,500
|
|
Gold Globe Investment Ltd
|
|
|
0
|
%
|
|
|
2,324,000
|
|
|
|
2,324,000
|
|
Vista Capital Investments, LLC
|
|
|
12
|
%
|
|
|
5,800
|
|
|
|
5,800
|
|
Subtotal
|
|
|
|
|
|
|
3,182,489
|
|
|
|
3,277,659
|
|
Debt discount
|
|
|
|
|
|
|
(47,478
|
)
|
|
|
(803,022
|
)
|
Total
|
|
|
|
|
|
$
|
3,135,011
|
|
|
$
|
2,474,637
|
|
JSJ Investments, Inc.
On May 31, 2013, the Company entered into a convertible promissory note with JSJ Investments, Inc. (“JSJ”) for $50,000. The note matured on December 2, 2013. The note holder has the option to convert the note to common shares in the Company at a discount of 50% of the average closing price over the last 120 days prior to conversion, or the average closing price over the last seven days prior to conversion. As of December 31, 2016, the remaining principal of $10,670 has not been converted. The note is currently in default. The default had no effect on the note’s interest rate.
On August 21, 2014, the Company entered into a convertible promissory note with JSJ for $50,000 cash. The note matured on February 21, 2015. Upon the maturity, the note has a cash redemption premium of 150% of the principal amount. The note is convertible to the Company’s common shares at a discount of 60% of the average of the three lowest bids on the twenty days before the date this note is executed, or 60% of the average of the three lowest bids during the twenty trading days preceding the delivery of any conversion notice, whichever is lower. The note is currently in default and has a default interest rate of 20% per annum. During the year ended December 31, 2016, JSJ converted $4,440 of its note to 56,061,179 shares of common stock. As of December 31, 2016, balance of this note was $45,560.
On January 20, 2015, the Company entered into a convertible promissory note with JSJ for $40,000. The note bears interest at 12% and matured on July 20, 2015. Upon the maturity, the note has a cash redemption premium of 150% of the principal amount. The note is convertible to the Company's common shares at 40% of the lowest trading price on the twenty days before the date this note is executed, or 40% of the lowest trading price during the twenty trading days preceding the delivery of any conversion notice, whichever is lower. The note is currently in default. The default had no effect on the note’s interest rate. As of December 31, 2016, balance of this note was $40,000.
On January 20, 2015, the Company entered into a convertible promissory note with JSJ for $60,000, which was issued in exchange for a portion of the promissory note issued to VTG on January 23, 2014. The note bears interest at 12% and matured on January 20, 2015. JSJ has the right to convert the balance outstanding into the Company's common stock at a rate equal to 50% of the lowest trading price on the twenty days before the date this note is executed, or 50% of the lowest trading price during the twenty trading days preceding the delivery of any conversion notice, whichever is lower. The Company recorded a loss on extinguishment of debt of $441 related to the exchange. The note is currently in default. The default had no effect on the note’s interest rate. As of December 31, 2016, balance of this note was $32,623.
LG Capital Funding, LLC
On November 10, 2014, the Company entered into a convertible promissory note with LG Capital Funding, LLC ("LG") for $37,000. The note matured on November 10, 2015. LG has the right after a period of 180 days to convert the balance outstanding into the Company's common stock at a rate equal to 50% of the average lowest three trading prices during the fifteen trading days prior to the conversion date. During the year ended December 31, 2016, the Company issued 303,712,534 shares of common stock for the conversion of this note in the amount of $19,543 and accrued interest of $2,477. The note is currently in default and has a default interest rate of 24% per annum.
WHC Capital, LLC
On September 23, 2014, the Company entered into a convertible promissory note with WHC Capital, LLC ("WHC") for $75,000. The note bears interest at 12% and matured on September 23, 2015. WHC has the right at any time during the period beginning on the date of this note to convert the balance outstanding into the Company's common stock at a rate equal to 50% of the lowest intra-day trading price during the fifteen trading days prior to the conversion date. On September 23, 2015, the Company failed to repay the outstanding balance of this note and a penalty of $41,978 was added to the outstanding balance pursuant to the note terms. As of December 31, 2016, balance of this note was $116,936. This note is currently in default and has a default interest rate of 22% per annum.
Beaufort Capital Partners, LLC
On September 2, 2014, the Company entered into a convertible promissory note with Beaufort Capital Partners, LLC ("Beaufort") for $21,000. The note matured on March 2, 2015. Beaufort has the right after the maturity date to convert the balance outstanding into the Company's common stock at a rate equal to 50% of the lowest trading prices during the fifteen trading days prior to the conversion date. Under certain conditions, the conversion price would be reset to $0.0001 or 65% off the lowest price of the previous five trading days. As of December 31, 2016, balance of this note was $10,966. This note is currently in default. The default had no effect on the note’s interest rate.
Tangiers Investment Group, LLC
On October 13, 2014, the Company entered into a convertible promissory note with Tangiers Investment Group LLC ("Tangiers") for $55,000. The note matured on October 13, 2015. Tangiers has the right after a period of 180 days to convert the balance outstanding into the Company's common stock at a rate equal to 45% of the lowest trading prices during the twenty trading days prior to the conversion date. During the year ended December 31, 2016, the Company issued 391,396,676 shares of common stock for the conversion of this note in the amount of $20,963. As of December 31, 2016, balance of this note was $15,393.This note is currently in default and has a default interest rate of 20% per annum.
On October 13, 2014, the Company entered into a convertible promissory note with Tangiers for $33,000. The note bears interest at 10% and matured on October 13, 2015. Tangiers has the right after a period of 180 days to convert the balance outstanding into the Company's common stock at a rate equal to 45% of the lowest trading prices during the twenty trading days prior to the conversion date. This note is currently in default and has a default interest rate of 20% per annum.
GSM Fund Management LLC
On January 30, 2015, the Company entered into an assignment and modification agreement to assign $62,500 of the convertible promissory note of VTG dated January 23, 2014 to GSM Fund Management LLC ("GSM"). The note bears interest at 12% and matured on January 30, 2016. GSM has the right after a period of 180 days to convert the balance outstanding into the Company's common stock at a rate equal to 50% of the lowest closing bid price in the 15 trading days prior to the conversion date. The Company recorded a loss on extinguishment of debt of $52,364 related to the exchange. During the year ended December 31, 2016, the Company issued 178,597,750 shares of common stock for the conversion of this note in the amount of $10,234. As of December 31, 2016, balance of this note was $38,442. This note is currently in default and has a default interest rate of 18% per annum.
Auctus Private Equity Fund LLC
On November 7, 2014, the Company entered into a convertible promissory note with Auctus Private Equity Fund LLC ("Auctus") for $40,000. The note matured on August 7, 2015. Auctus has the right after a period of 180 days to convert the balance outstanding into the Company's common stock at a rate equal to 50% of the average of the lowest two trading prices during the twenty-five trading days prior to the conversion date. During the year ended December 31, 2016, the Company issued 2,845,000 shares of common stock for the conversion of accrued interest in the amount of $341.
On June 27, 2016, the Company reached a settlement agreement with Auctus. Pursuant to the settlement agreement, the Company agreed to pay $61,819 in full and final settlement of all outstanding convertible notes and accrued interest. The Company removed note principal of $40,000, accrued interest of $7,430, derivative liabilities on note conversion feature of $40,000 and recorded a gain of $25,611 related to this settlement.
Microcap Equity Group, LLC
On February 23, 2015, the Company entered into a convertible promissory note with Microcap Equity Group LLC ("Microcap") for $20,000, which was issued in exchange for a portion of the promissory note issued to VTG on January 23, 2014. The note matured on January 23, 2017. Microcap has the right to convert the balance outstanding into the Company's common stock at a rate equal to 40% of the lower of the lowest bid price during the thirty trading days prior to the conversion date, or the lowest bid price on the day that the converted shares are cleared for physical delivery. The Company recorded a loss on extinguishment of debt of $28,213 related to the exchange. As of December 31, 2016, balance of this note was $18,892. The note became in default on January 23, 2017 as the Company was not able to repay the outstanding balance. The default had no effect on the note’s interest rate.
Virtual
Technology
Group, Ltd.
On January 23, 2014, the Company entered into a convertible promissory note with VTG for $1,500,000. VTG has the right after a period of 180 days to convert the balance outstanding into the Company's common stock at a rate equal to 100% of the average of the closing bid prices for the seven trading days prior to the conversion date when the Company's shares are traded in the OTCQB or during the ten trading days prior to the conversion date when the Company's shares are traded on another other exchange. On November 10, 2014, $50,000 of this note was replaced with a note issued to LG. On January 20, January 23 and January 30, 2015, $60,000, $20,000 and $62,500 of this note were replaced with notes issued to JSJ, Microcap and GSM. As of December 31, 2016, balance of this note was $481,500. The note matured on January 23, 2017 and became in default on January 23, 2017 as the Company was not able to repay the outstanding balance. The default had no effect on the note’s interest rate.
Gold
Globe
Investments, Ltd.
On January 23, 2014, the Company entered into a convertible promissory note with GGIL for $2,800,000. GGIL has the right after a period of 180 days to convert the balance outstanding into the Company's common stock at a rate equal to 100% of the average of the lowest three trading prices during the seven trading days prior to the conversion date when the Company's shares are traded in the OTCQB or during the ten trading days prior to the conversion date when the Company's shares are traded on another exchange. On December 3, 2014, $45,000 of this note was replaced with a note issued to Tangiers. As of December 31, 2016, balance of this note was $2,324,000. The note matured on January 23, 2017 and became in default on January 23, 2017 as the Company was not able to repay the outstanding balance. The default had no effect on the note’s interest rate.
Vista
Capital
Investments, LLC
On April 15, 2014, the Company entered into a convertible promissory note with Vista Capital Investments, LLC ("Vista") for $250,000. The note has an original issuance discount of $25,000. The note matured 2 years from the date of each payment of the principal from Vista. In the event that the note remains unpaid at maturity date, the outstanding balance shall immediately increase to 120% of the outstanding balance. Vista has the right to convert the outstanding balance into the Company's common stock at a rate equal to the lesser of $0.008 per share or 60% of the lowest trade occurring during the twenty-five consecutive trading days preceding the conversion date. Due to certain events that occurred during 2014, the conversion price has been reset to $0.005 per share or 50% of the lowest trade occurring during the twenty-five consecutive trading days preceding the conversion date. Pursuant to the agreement, if the conversion price calculated under this agreement is less than $0.01 per share, the principal amount outstanding shall increase by $10,000 ("Sub-Penny"). $25,000 net proceeds were received on April 23, 2014. The remaining fund of this note has not been received. As of December 31, 2016, balance of this note was $5,800 which matured on April 15, 2016. The note is currently in default. The default had no effect on the note’s interest rate.
Debt discount
The table below presents the changes of the debt discount during the years ended December 31, 2016 and 2015:
|
|
Amount
|
|
|
|
|
|
December 31, 2014
|
|
$
|
1,998,018
|
|
Additions
|
|
|
40,000
|
|
Amortization
|
|
|
(1,234,996
|
)
|
December 31, 2015
|
|
|
803,022
|
|
Amortization
|
|
|
(755,544
|
)
|
December 31, 2016
|
|
$
|
47,478
|
|
Loans from shareholders
On September 5, 2008, Elmside Pty Ltd, a company related to a former director, agreed to an interest free loan of $55,991 to the Company on an as-needed basis to fund the business operations and expenses of the Company until December 9, 2011, the due date of the loan. The note is currently in default.
During the year ended December 31, 2016, the Company received a loan of $900 from its officer to open a new bank account. As of December 31, 2016, the Company had advances of $3,400 from its officer. The advances form the officers are due on demand, unsecured with no interest.
NOTE 7 – DERIVATIVE LIABILITIES – NOTE CONVERSION FEATURE
Due to the conversion features contained in the convertible notes issued, the actual number of shares of common stock that would be required if a conversion of the notes as further described in Note 6 was made through the issuance of the Company’s common stock cannot be predicted, and the Company could be required to issue an amount of shares that may cause it to exceed its authorized share amount. As a result, the conversion feature requires derivative accounting treatment and will be bifurcated from the notes and “marked to market” each reporting period through the income statement. The fair value of the conversion future of the notes was recognized as a derivative liability instrument and will be measured at fair value at each reporting period.
The conversion feature of the convertible notes issued during the years ended December 31, 2016 and 2015 was valued at $0 and $5,124,723, respectively, on the issuance date. As a result, these notes were fully discounted and the fair value of the conversion feature in excess of the principal amount of the note of $0 and $84,723, respectively, was expensed immediately as additional interest expense.
The Company remeasured the fair value of the instruments as of December 31, 2016 and 2015, and recorded an unrealized gain of $1,607,279 and $243,541 for the years ended December 31, 2016 and 2015, respectively. At December 31, 2016 and 2015, the derivative liability associated with the note conversion features were $1,173,213 and $2,985,575, respectively. The Company determined the fair values of these liabilities using a Black-Scholes valuation model with the following assumptions:
|
|
During 2016
|
|
|
During 2015
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Estimated market value of common stock on measurement date
|
|
$0.0001~$0.0009
|
|
|
$0.0005~$90.01
|
|
|
$0.0001
|
|
|
$0.0006
|
|
Exercise price
|
|
$0.00004~$0.0012
|
|
|
$0.00009~$15.00
|
|
|
$0.00004~0.00010
|
|
|
$0.00024~0.00060
|
|
Discount rate
|
|
0.11%~0.41%
|
|
|
0.01%~0.54%
|
|
|
0.20% ~0.36%
|
|
|
0.14% ~0.65%
|
|
Expected volatility
|
|
277%~281%
|
|
|
270%~309%
|
|
|
265%
|
|
|
282%
|
|
Expected dividend yield
|
|
0.00%
|
|
|
0.00%
|
|
|
0.00%
|
|
|
0.00%
|
|
The following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value on a recurring basis using significant unobservable inputs:
|
|
Amount
|
|
|
|
|
|
Fair value at December 31, 2014
|
|
$
|
3,960,098
|
|
Fair value of new financial derivatives
|
|
|
124,723
|
|
Increase due to exchange
|
|
|
81,018
|
|
Reclassification to equity
|
|
|
(860,103
|
)
|
Change in fair value of derivative liabilities
|
|
|
(243,541
|
)
|
Gain from settlement
|
|
|
(76,620
|
)
|
Fair value at December 31, 2015
|
|
|
2,985,575
|
|
Reclassification to equity
|
|
|
(165,083
|
)
|
Change in fair value of derivative liabilities
|
|
|
(1,607,279
|
)
|
Loss on settlement
|
|
|
(40,000
|
)
|
Fair value at December 31, 2016
|
|
$
|
1,173,213
|
|
NOTE 8 – RELATED PARTY TRANSACTIONS
Elmside Pty Ltd
On September 5, 2008, Elmside Pty Ltd, a company related to a former director, agreed to an interest free loan to the Company on an as-needed basis to fund the business operations and expenses of the Company until December 9, 2011, the due date of the loan. As of December 31, 2016 and 2015, loans from Elmside, a shareholder, were $55,991 and $55,991, respectively. The loans are currently in default.
Universal Technology Investments Limited
On May 19, 2016, the Company’s chief executive officer became the sole director and shareholder of Universal Technology Investments Limited (“UTI”). For the years ended December 31, 2016 and 2015, revenues from UTI were $3,697,967 and $3,022,477, respectively.
Golden Matrix Group, Inc.
On July 9, 2016, the Company entered into a loan agreement with Golden Matrix Group, Inc. (“GMGI”), a company controlled by Elray’s chief executive officer and one director. Pursuant to the agreement, the Company agreed to lend GMGI up to $20,000. The borrowings mature in 180 days and accrue interest at 5% per annum. GMGI agreed to assist the Company in developing social gaming technology. As of December 31, 2016, note receivable from GMGI was $15,195.
Articulate Pty Ltd, Brian Goodman
As of December 31, 2016 and 2015, the Company had accounts payable of $1,611,815 and $1,604,915, respectively, to its chief executive officer and Articulate Pty Ltd (“Articulate”), a company controlled by the Company’s chief executive officer, for consulting fees, reimbursement of expenses and compensation.
On August 24, 2016, the Company entered into a strategic partnership agreement with Articulate Pty Ltd (Articulate), a company controlled by Elray’s chief executive officer. Pursuant to the agreement, Articulate will provide non-exclusive back office services to the Company’s clients. In exchange for the service, Elray agreed to pay $10,000 for each month Articulate provides services. Elray will receive 0.5% of the software usage fee paid by Elray’s clients through Articulate. As a result of the agreement with Articulate, the Company terminated its original agreements with UTI and became an agent that receives net commission from Articulate. For the years ended December 31, 2016 and 2015, revenues from Articulate were $160,168 and $0, respectively.
On January 31, 2017, the Company entered into a Settlement Agreement with Articulate and UTI wherein it was agreed that an amount payable by the Company to Articulate in the amount of $1,372,907 would be offset against the same amount of the Company’s account receivable from UTI. The offset was made effective on December 31, 2016.
Jay Goodman and Brett Goodman
On May 15, 2013, the Company entered into an agreement with Jay Goodman, son of the Company’s chief executive officer, to provide consulting services assisting the Company with data segmentation, financial and statistical services. In consideration for such services, the Company pays $3,000 per month to Jay Goodman. As of December 31, 2016 and 2015, the Company had a $130,500 and $94,500 payable to Jay Goodman, respectively.
On February 1, 2016, the Company entered into an agreement with Brett Goodman, another son of the Company’s chief executive officer, where Mr. Brett Goodman will provide consulting services assisting the Company with a project involving social gaming platform. Mr. Brett Goodman has been providing the Company services since 2015. During the years ended December 31, 2016 and 2015, the Company paid $46,119 and $4,511 consulting fees to Mr. Brett Goodman, respectively. As of December 31, 2016 and 2015, there was no payable to Mr. Brett Goodman.
Globaltech Software Services LLC
During 2016, the Company’s chief executive officer became a member of Globaltech Software Services LLC (“Globaltech”). For the years ended December 31, 2016 and 2015, the Company had revenues from Globaltech of $0 and $22,924, respectively. As of December 31, 2016 and 2015, the Company had receivable of $31,352 from Globaltech.
NOTE 9 – EQUITY
On December 16, 2014, the Company’s Board of Directors approved a reverse split of the Company’s authorized, issued and outstanding shares of common stock, par value $0.001, at a ratio of 30:1, such that every 30 shares of common stock becomes 1 share of common stock, reducing the number of authorized shares of common stock to 276,333,333. The reverse stock split of thirty-for-one was effective on January 15, 2015 upon approval of shareholders holding a majority of the voting stock.
On April 2, 2015, the Company’s Board of Director approved a reserve split of the Company’s authorized, issued and outstanding shares of common stock, par value $0.001, at a ratio of 100:1, such that every 100 shares of common stock becomes 1 shares of common stock, reducing the number of authorized shares of common stock to 50 million. The reverse stock split of one hundred-for-one was effective on May 18, 2015. On May 26, 2015, the authorized number of share of common stock was changed to 3 billion.
On October 22, 2015, the Company’s Board of Director approved a reserve split of the Company’s authorized, issued and outstanding shares of common stock, par value $0.001, at a ratio of 100:1, such that every 100 shares of common stock becomes 1 shares of common stock, reducing the number of authorized shares to 30 million .The reverse stock split of one hundred-for-one was effective on October 23, 2015. On December 1, 2015, the authorized number of shares of common stock was increased to 1 billion.
All share numbers or per share information are presented given the effects of the reverse stock splits.
Preferred Stock – Series A
On May 3, 2012, the Company authorized the creation of 300,000,000 shares of Series A preferred stock. The Class A Preferred Series shares are convertible at a rate of 0.0000003 common shares for each Series A Preferred Share. As of December 31, 2016 and 2015, there were no Series A Preferred Stock outstanding.
Preferred Stock – Series B
On July 1, 2012, the Company authorized the creation of 100,000,000 shares of Series B preferred stock. On September 24, 2012, the authorized Series B Preferred Stock was increased from 100,000,000 to 280,000,000. The Series B Preferred stock is convertible at a rate of 0.000000003 common stock for each Series B Preferred stock.
On July 3, 2012, the Company entered into an agreement with Maxwell Newbould to acquire certain assets and intellectual property related to Penny Auction Technology, in exchange for 88,000,000 shares of the Company’s Series B preferred stock. The shares were issued to Gold Globe Investments acting as an escrow agent. The Series B preferred shares are to be held by Gold Globe Investments until such time as the Company concludes its due diligence. Gold Globe Investments holds the voting rights to these shares whilst the due diligence is conducted. The 88,000,000 shares of Series B Preferred stock issued was recorded at par value of $88,000 with a subscription receivable at the same amount. During the year ended December 31, 2015, the Company terminated this project. The 88,000,000 shares of the Company’s Series B preferred stock were returned to the Company.
On July 14, 2013, the Company entered into a 12-month consultancy agreement with VTG to assist the Company in developing, marketing and supporting the technology of virtual online horse racing products and to provide the Company the exclusive use right to certain website domains. In consideration for such services and domains, the Company issued 192,000,000 Series B Preferred shares to VTG. The 192,000,000 Series B Preferred stock have been recorded at their estimated market value of $43,031.
Preferred Stock – Series
C
On June 20, 2014, the Company authorized the creation of 10,000,000 shares of Series C preferred stock. The Series C preferred shares are convertible at a rate of 0.0003 common shares for each Series C Preferred Share.
On September 18, 2014, the Company entered into an agreement to acquire a 25% interest in Global Tech Software Solutions LLC doing business as Golden Galaxy (“Golden Galaxy”) which operates online casinos. Under the terms of the purchase agreement, the Company will be entitled to 1% of the gross wagering generated by Golden Galaxy. In consideration for the purchase, the Company issued 5,000,000 shares of the Company’s Series C preferred stock in June 2015 and recorded $5,000 of other asset. On April 1, 2015, the Company terminated the agreement and stopped receiving 1% of the gross wagering generated by Golden Galaxy.
On September 18, 2014, the Company entered into an agreement with Yangjiu Xie, owner of Asialink Treasure Limited (“ATL”). Pursuant to the agreement, the Company issued 2,083,333 shares of its Series C preferred stock as part of the consideration to acquire 49% of the outstanding shares of ATL in a series of transactions. These shares were recorded at their par value of $2,083 with a subscription receivable at the same amount. The Company has not received the certificate of ownership from ATL.
Common Stock
During the year ended December 31, 2016, the Company issued 932,613,139 shares of common stock for the conversion of notes payable and accrued interest of $55,170 and $2,818 respectively.
On April 14, 2016, the Company issued 233,333,334 shares of common stock to settle accounts payable of $90,000 with Mr. Brian Goodman.
On December 29, 2015, the Company issued Tarpon 4,101,000 shares of its common stock according to the settlement agreement discussed in Note 3, which were sold during the year end December 31, 2016. During the year ended December 31, 2016, the Company issued Tarpon 5,136,000 shares of its common stock according to the settlement agreement discussed in Note 3. These shares were valued at $6,669 based on the market price on the issuance date. $933 net proceeds from the sale were used to pay the original creditors of the claims Tarpon acquired. The remaining $5,736 was recorded as loss on settlement.
During the year ended December 31, 2015, the Company issued 351,300 shares for legal services. These shares are valued at $17,256 based on the market price on the issuance date.
During the year ended December 31, 2015, the Company issued 37,252,905 shares of common stock for the conversion of notes payable and accrued interest in the amounts of $431,184 and $8,197, respectively.
During the year ended December 31, 2015, the Company issued Tarpon 13,184,575 shares of its common stock according to the settlement agreement discussed in Note 3. These shares were valued at $112,936 based on the market price on the issuance date. $30,908 net proceeds from the sale were used to pay the original creditors of the claims Tarpon acquired. The remaining $82,028 was recorded as a loss on settlement of debt.
On June 15, 2015, the Company issued 1,085,645 shares of common stock to settle accounts payable of $90,000 to Mr. Goodman.
During the year ended December 31, 2015, a company controlled by the Company’s chief executive officer paid $427,000 software usage cost on behalf of the Company and forgave the amount the Company owed. The Company recorded the software cost and capital contribution for such transaction.
NOTE 10 – INCOME TAXES
No net provision for refundable federal income tax has been made in the accompanying statement of operations because no recoverable taxes were paid previously. Similarly, no deferred tax asset attributable to the net operating loss carry forward has been recognized, as it is not deemed likely to be realized. Additionally, as a result of the change in control in common stock transactions, the utilization of some or all of the net operating losses may be restricted as defined under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended.
NOTE 11 – CONCENTRATIONS
The Company’s revenues for the year ended December 31, 2016 were from two related parties. The Company’s software usage cost for the year ended December 31, 2016 was all related to charges pass through to Elray by an entity controlled by the Company’s chief executive officer. All of the software cost was related to fees pay to one vendor for online casino game contents. As of December 31, 2016, the Company’s only customer is Articulate, a related party.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
On July 1, 2013, the Company entered into a lease agreement for office space in Australia. The agreement expires on October 31, 2019. Rent is approximately $36,000 per year and the Company paid a $7,535 security deposit.
On September 28, 2016, the Company entered into a settlement agreement with the U.S. Security and Exchange Commission. Pursuant the agreement, the Company agreed to pay $50,000 civil penalties for failing to disclose the sale of unregistered equity securities and the existence of the related agreements. As of December 31, 2016, the Company has made $15,000 payment and the remaining $35,000 payable related to this settlement was included in accounts payable and accrued liabilities on the balance sheet.
NOTE 13 – SUBSEQUENT EVENTS
On January 1, 2017, the Company agreed to modify the loan agreement with GMGI to extend the original due date to May 31, 2017.
On March 3, 2017, the Company issued 61,115,600 shares of common stock for the conversion of LG note in the principal amount of $2,193 and accrued interest of $863.
On March 31, 2017, the Company submitted a certificate of correction to the Nevada Secretary of State to correct the Company’s authorized common shares from 10,000,000 to 1,500,000,000 shares.