Notes
to the Consolidated Financial Statements
(expressed
in U.S. dollars)
1.
|
Nature
of Operations and Continuance of Business
|
Good
Gaming, Inc. (formerly “HDS International Corp.”, the “Company”) was incorporated on November 3, 2008
under the laws of the State of Nevada. The Company is a leading tournament gaming platform and online destination targeting over
250 million esports players and participants worldwide that want to compete at the high school or college level. A substantial
portion of the Company’s activities have involved developing a business plan and establishing contacts and visibility in
the marketplace and the Company has not generated any substantial revenue to date.
Consolidation
The
accompanying condensed consolidated financial statements include the accounts and operations of the Company and its wholly owned
subsidiary, Crypto Strategies Group, Inc. All intercompany accounts and transactions have been eliminated.
Going
Concern
These
consolidated financial statements have been prepared on a going concern basis, which implies that the Company will continue to
realize its assets and discharge its liabilities in the normal course of business. The Company has generated minimal revenues
to date and has never paid any dividends and is unlikely to pay dividends or generate significant earnings in the immediate or
foreseeable future. As of June 30, 2018, the Company had a working capital deficiency of $1,506,670 and an accumulated deficit
of $5,128,673. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders,
the ability to raise equity or debt financing, and the attainment of profitable operations from the Company’s future business.
These factors raise substantial doubt regarding the Company’s ability to continue as a going concern for a period of one
year from the issuance of these financial statements. These financial statements do not include any adjustments to the recoverability
and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable
to continue as a going concern.
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The
accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete
consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. For further information, refer to the audited consolidated financial statements
and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
Reclassifications
Certain reclassifications have been made to the three and six months ended June 30, 2017 to the statement
of operations and statement of cash flows to reflect consistency with the current presentation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to the fair values
of convertible debentures, derivative liability, stock-based compensation, and deferred income tax asset valuation allowances.
The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results
experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material
differences between the estimates and the actual results, future results of operations will be affected.
Cash
Equivalents
The
Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
Amounts receivable from credit card processors are also considered cash equivalents because they are both short-term and highly
liquid in nature.
Intangible
Assets
Intangible
assets are carried at the purchased cost less accumulated amortization. Amortization is computed over the estimated useful lives
of the respective assets, generally five years.
Impairment
of Long-Lived Assets
Long-lived
assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in
circumstance indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based
on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement
of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use
is based on the fair value of the asset. Long-lived assets and certain identifiable intangible assets to be disposed of are reported
at the lower of carrying amount or fair value less costs to sell.
Beneficial
Conversion Features
From
time to time, the Company may issue convertible notes that may contain an embedded beneficial conversion feature. A beneficial
conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which
the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation
of a portion of the note proceeds to the fair value of the warrants, if related warrants have been granted. The intrinsic value
of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital.
The debt discount is amortized to interest expense over the life of the note using the effective interest method.
Derivative
Liability
From
time to time, the Company may issue equity instruments that may contain an embedded derivative instrument which may result in
a derivative liability. A derivative liability exists on the date the equity instrument is issued when there is a contingent exercise
provision. The derivative liability is records at is fair value calculated by using an option pricing model. The fair value of
the derivative liability is then calculated on each balance sheet date with the corresponding gains and losses recorded in the
statement of operations.
Basic
and Diluted Net Loss Per Share
The
Company computes net loss per share in accordance with ASC 260, Earnings Per Share, which requires presentation of both basic
and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net loss available
to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted
EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible
preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining
the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive
potential shares if their effect is anti-dilutive. At June 30, 2018, the Company had 21,630,200 (2017 – 8,779,119) potentially
dilutive shares from outstanding convertible debentures.
Income
Taxes
Potential
benefits of income tax losses are not recognized in the accounts until realization is more likely than not. Pursuant to ASC 740,
the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net
operating losses have not been recognized in these consolidated financial statements because the Company cannot be assured it
is more likely than not it will utilize the net operating losses carried forward in future years. Unrecognized tax positions,
if ever recognized in the consolidated financial statements, are recorded in the statement of operations as part of the income
tax provision. Our policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of the income
tax provision. The Company has no liabilities for uncertain tax positions. Unrecognized tax positions, if ever recognized in the
consolidated financial statements, are recorded in the statement of operations as part of the income tax provision. The Company’s
policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of the income tax provision.
The Company has no liabilities for uncertain tax positions.
On
March 22, 2017, tax reform legislation known as the Tax Cuts and Jobs Act (the “U.S. Tax Reform Act”) was enacted
in the United States. The U.S. Tax Reform Act, among other things, reduced the U.S. corporate income tax rate from 35% to 21%
beginning in 2018. On March 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides
guidance on how to account for the effects of the U.S. Tax Reform Act under ASC 740.
Financial
Instruments
ASC
820, “Fair Value Measurements” and ASC 825, Financial Instruments, requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. It establishes a fair value hierarchy based on the
level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument is categorized
within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. It
prioritizes the inputs into three levels that may be used to measure fair value:
Level
1
Level
1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level
2
Level
2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability
such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant
inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level
3
Level
3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to
the measurement of the fair value of the assets or liabilities.
Assets
and liabilities measured at fair value on a recurring basis were presented on the Company’s consolidated balance sheet as
at June 30, 2018 and 2017 as follows:
Description
|
|
Fair
Value Measurements at June 30, 2018 Using Fair Value Hierarchy
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Derivative
liability
|
|
$
|
268,031
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
268,031
|
|
Total
|
|
$
|
268,031
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
268,031
|
|
Description
|
|
Fair
Value Measurements at June 30, 2017 Using Fair Value Hierarchy
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Derivative
liability
|
|
$
|
570,643
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
570,643
|
|
Total
|
|
$
|
570,643
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
570,643
|
|
The
carrying values of all of our other financial instruments, which include accounts payable and accrued liabilities, and amounts
due to related parties approximate their current fair values because of their nature and respective maturity dates or durations.
Advertising
Expenses
Advertising
expenses are included in general and administrative expenses in the consolidated Statements of Operations and are expensed as
incurred. The Company incurred $12,272 in advertising and promotion expenses in the three months ended June 30, 2018.
Revenue
Recognition
The
company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration
which the company expects to receive in exchange for those goods or services. To determine revenue recognition for the arrangements
that the company determines are within the scope of Topic 606, the company performs the following five steps: (1) identify the
contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4)
allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity
satisfies a performance obligation. Revenues primarily include revenues from microtransactions revenues are derived from the sale
of virtual goods to the Company’s players. Proceeds from the sales of virtual goods directly are recognized as revenues
when a player uses the virtual goods.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2014-09, Revenue from Contracts with Customers, which was amended in 2015 and 2016. The new revenue recognition standard relates
to revenue from contracts with customers and will supersede nearly all current U.S. GAAP guidance on this topic and eliminate
industry-specific guidance.
The
underlying principle is to use a five-step analysis of transactions to recognize revenue when promised goods or services are transferred
to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The standard,
as amended, is effective for annual periods beginning December 15, 2017. The Company has implemented the ASU and the adoption
of the standard did not impact our consolidated financial statements.
The
Company has implemented all other new accounting pronouncements that are in effect. These pronouncements did not have any material
impact on the consolidated financial statements unless otherwise disclosed, and the Company does not believe that there are any
other new accounting pronouncements that have been issued that might have a material impact on its financial position or results
of operations.
3.
Other Assets
Property
and Equipment consisted of the following:
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
Computers
and servers
|
|
$
|
39,226
|
|
|
$
|
13,440
|
|
|
|
|
|
|
|
|
|
|
Bitmining machines
|
|
|
118,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
157,726
|
|
|
$
|
13,440
|
|
|
|
|
|
|
|
|
|
|
Accumulated Depreciation
|
|
|
(12,071
|
)
|
|
|
(2,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,655
|
|
|
$
|
10,752
|
|
Depreciation
expense for the six months ended June 30, 2018 and 2017 was $9,255 and $2,688, respectively.
On
February 17, 2016, the Company acquired Good Gaming’s assets including intellectual property, trademarks, software code,
equipment and other from CMG Holdings Group, Inc. The Company valued the software purchased at $1,200,000. The software has a
useful life of 5 years. During the three months ended March 31, 2018, the Company acquired two additional software servers for
$26,250. Amortization for the six months ended June 30, 2018 and 2017 was $62,114 and $60,000, respectively. The software consisted
of the following:
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
Software
|
|
$
|
1,200,000
|
|
|
$
|
1,200,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
(570,000
|
)
|
|
|
(330,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
630,000
|
|
|
$
|
870,000
|
|
4.
Debt
Convertible
Debentures
On April 1, 2015, we entered into a transaction with Iconic whereby Iconic agreed to
provide up to $600,000 through a structured convertible promissory note (the “2015 Iconic Note”), with funds
to be received in tranches. The note bears interest of 10% and was due April 1, 2016. The initial proceeds of $40,000 was received
on April 9, 2015, with $30,000 remitted and delivered to us, $4,000 retained by Iconic as an original issue discount, and
$6,000 retained by Iconic for legal expenses. On February 17, 2016 as part of a settlement between Iconic and the Company, the
2015 Iconic Note along with a remaining balance of $8,300 from former JABRO-Asher notes were restructured to a principal
amount of $25,000 with a due date of June 18, 2017 and an interest rate of 0%. Iconic is subject to strict lock-up and leak-out
provisions. Additionally, as part of the February 2016 settlement with Iconic, Iconic funded $100,000 new debentures (the “$100,000
Convertible Promissory Note”) due August 2018 bearing 0% interest with the lender subject to strict lock-up and leak-out
provisions. On June 27, 2017, Iconic’s $100,000 Convertible Promissory Note issued on February 18, 2016 was amended to
reflect an advisement of the conversion price of $.10 cents to $.08 cents per common share. On July 5, 2017, Iconic converted
$15,895 of its $100,000 Convertible Promissory Note. On July 25, 2017, Iconic converted $18,950 of its $100,000 Convertible Promissory
Note. On January 23, 2018, Iconic converted $65,155 of its $100,000 Convertible Promissory Note. Accordingly, the $100,000 Convertible
Promissory Note issued on February 18, 2016 was fully converted into 1,250,001 shares of the Company’s common stock.
On
April 15, 2015, the Company issued a convertible debenture with the principal amount of $100,000 to HGT Capital, LLC (“HGT”),
a non-related party. During the quarter ended June 30, 2015, the Company received the first $50,000 in payment. The remaining
$50,000 payment would be made at the request of the borrower. No additional payments have been made as of September 30, 2017.
Under the terms of the debenture, the amount was unsecured and was due on October 16, 2016. The note is currently in default and
bears an interest at 22% per annum. It was convertible into shares of common stock any time after the maturity date at a conversion
rate of 50% of the average of the five lowest closing bid prices of the Company’s common stock for the thirty trading days
ending one trading day prior to the date the conversion notice was sent by the holder to the Company. On September 21, 2018,
the Company entered into a modification agreement with HGT with respect to the convertible promissory note which has a balance
of $107,238. Pursuant to such modification agreement, all defaults were waived and it was agreed that such note will convert at
a 25% discount to the market rather than the default rate. HGT also agreed to certain sale prohibitions which limit the amount
of shares that they can sell in any month for the next three months. HGT also agreed to dismiss, with prejudice, the lawsuit that
it had filed against the Company.
On
June 29, 2017, the Company issued to Iconic a 10% Convertible Promissory Note in the principal amount of $27,000 (the “2017
Iconic Note”). Upon the execution of such Note, the sum of $9,000 has been remitted and delivered to the Company. On August
14, 2017, Iconic remitted and delivered to the Company another $9,000. The Company is only required to repay the amount funded
and the Company is not required to repay any unfunded portion of the 2017 Iconic Note. As of March 31, 2018, the Company has received
a total $18,000 of the $27,000 principal amount. On April 16, 2018, the note was fully converted.
As
part of the asset purchase agreement between CMG Holdings Group, Inc. (“CMG Holdings”) and the Company, SirenGPS was
issued the Company’s $60,000 0% convertible debenture that matures in August 2018. The debenture is convertible into the
Company’s common stock at a 20% discount to the 20-day moving average of the Company’s common stock after a period
of seven months. The debt is subject to strict lock-up and leak-out provisions. SirenGPS has agreed to sell this security to the
Company or to an investor of the Company’s choice at face value. Recently, ViaOne purchased this debenture from SirenGPS.
5.
|
Derivative
Liabilities
|
The
following inputs and assumptions were used to value the convertible debentures outstanding during the six months ended June 30,
2018 and June 30, 2017:
The
projected annual volatility for each valuation period was based on the historic volatility of the Company of 329.9% and 173% at
June 30, 2018 and 2017, respectively. The risk free rate was 2.12% and 2.32% at June 30, 2018 and 2017, respectively. The expected
life was one year and the dividend yield was 0% for each year.
A
summary of the activity of the derivative liability is shown below:
Balance, December 31, 2017
|
|
$
|
570,643
|
|
Conversions
|
|
|
(19,374
|
)
|
Change in value
|
|
|
(283,238
|
)
|
|
|
|
|
|
Balance, June 30,
2018
|
|
|
268,031
|
|
Common
Stock Transactions for the Year Ended December 31, 2017:
On
January 4, 2017, the Hillwinds Ocean Energy converted 70,000 shares of its common stock to 500 shares of Series B Preferred Stock.
On
January 5, 2017, Iconic converted $6,585 of convertible debt into 65,585 shares of the Company’s common stock.
On
July 5, 2017, Iconic converted $15,895 of convertible debt into 198,688 shares of the Company’s common stock.
On
July 13, 2017, a shareholder converted 1,000 shares of Series B Preferred Stock (“Series B Preferred Shares”) into
200,000 shares of the Company’s common stock.
On
July 25, 2017, Iconic converted $18,950 of convertible debt into 236,875 shares of the Company’s common stock.
On
August 11, 2017, an investor converted 1,250 Series B Preferred Shares into 250,000 shares of the Company’s common stock.
At
March 31, 2017, the Company had 21,891,805 shares of common stock reserved for issuance relating to convertible debentures and
Series D Preferred Stock.
Common
Stock Transactions for the Six Months Ended June 30, 2018:
On
January 8, 2018, Silver Linings Management, LLC converted 15,000 shares of the Company’s Series B Preferred Stock into 3,000,000
shares of the Company’s common stock.
On
January 8, 2018, Britton & Associates converted 5,000 of the Company’s Series B Preferred Shares into 1,000,000 shares
of the Company’s common stock.
On
January 9, 2018, ViaOne Services, LLC (“ViaOne”) converted $200,000 of its convertible note into 8,333,333 shares
of the Company’s common stock.
On
January 12, 2018, SSB Trading converted 10,000 of the Company’s Series B Preferred Shares into 2,000,000 shares of the Company’s
common stock.
On
January 12, 2018, CMG Holdings converted 5,605 of the Company’s Series B Preferred Shares into 1,211,000 common shares of
the Company.
On
January 18, 2018, CMG Holdings converted 9,000 of the Company’s Series B Preferred Shares into 1,800,000 shares of the Company’s
common stock.
On
January 23, 2018, Iconic converted $65,155 of its convertible note into 814,438 shares of the Company’s common stock.
On
January 26, 2018, Michael Tadin converted 5,000 of the Company’s Series B Preferred Shares into 1,000,000 shares of the
Company’s common stock.
On
February 9, 2018, Vik Grover converted 8,665 of the Company’s Series B Preferred Shares into 1,733,000 shares of common
stock of the Company.
Our
Articles of Incorporation authorize us to issue up to 2,250,350 shares of preferred stock, $0.001 par value. Of the 2,250,350
shares of authorized preferred stock, the total number of shares of Series A Preferred Stock the Corporation has the authority
to issue is Two Million (2,000,000), par value $0.001 per share; the total number of shares of Series B Preferred Stock the Corporation
has the authority to issue is Two Hundred Forty Nine thousand Nine Hundred and Ninety Nine (249,999), par value $0.001 per share;
the total number of shares of Series C Preferred Stock the Corporation has the authority to issue is One (1), par value $0.001
per share; and the total number of shares of Series D Preferred Stock the Corporation has the authority to issue is three hundred
and fifty (350), par value $0.001 per share. Our Board of Directors is authorized, without further action by the shareholders,
to issue shares of preferred stock and to fix the designations, number, rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences and sinking fund terms.
We believe that the Board of Directors’ power to set the terms of, and our ability to issue, preferred stock will provide
flexibility in connection with possible financing or acquisition transactions in the future. The issuance of preferred stock,
however, could adversely affect the voting power of holders of common stock and decrease the amount of any liquidation distribution
to such holders. The presence of outstanding preferred stock could also have the effect of delaying, deterring or preventing a
change in control of our company.
As of June 30, 2018, we had 7,500 shares of
our Series A Preferred Stock issued and outstanding. As of June 30, 2018, we had 106,511 shares of Series B Preferred Stock issued
and outstanding. As of June 30, 2018, we had one (1) share of Series C Preferred Stock issued and outstanding. At June 30, 2018,
we had 210 shares of Series D Preferred Stock issued and outstanding.
The
7,500 issued and outstanding shares of Series A Preferred Stock are convertible into shares of common stock at a rate of 20 shares
of common stock for each Series A Preferred Share. The 106,511 issued and outstanding shares of Series B Preferred Stock are convertible
into shares of the Company’s common stock at a rate of 200 shares of common stock for each Series B Preferred Share. If
all of our Series A and Series B Preferred Stock, issued and outstanding as of June 30, 2018 are converted into shares of common
stock, the number of issued and outstanding shares of our common stock will increase by 21,452,200 shares.
The
one (1) share of Series C Preferred Stock, issued and outstanding, has voting rights equivalent to 51% of all shares entitled
to vote and is held by ViaOne, a Company controlled by David Dorwart, the Company’s CEO.
The
210 issued and outstanding shares of Series D Preferred Stock are convertible into shares of common stock at a rate of 125% of
the conversion amount at a price that is the lower of 110% of the volume weighted average prices (“VWAP”) of the common
stock on the closing date, the VWAP of the common stock on the conversion date or the VWAP of the common stock on the date prior
to the conversion date. Series D Preferred Stock is convertible beginning 6 months from the issue date. At June 30, 2018, all
of Series D Preferred Stock issued and outstanding was eligible to be converted to the Company’s common stock.
The
210 issued and outstanding shares of Series D Preferred Stock are entitled to cumulative dividends at a rate of 5% of the face
value of shares, or the number of shares multiplied by 1,000. The dividends commence to accrue on the issue date of the Series
D Preferred Stock and continue accruing whether or not declared by the Board of the Company and whether or not there are sufficient
earnings or surplus. The dividends are payable quarterly, with the first dividend date being March 31, 2017. The dividends are
payable in cash or shares of the Company’s common stock. At June 30, 2018, the Company had $5,149 in cumulative unpaid dividends.
On
September 21, 2018, the Company entered into a modification agreement with RedDiamond Partners, Inc. (“RedDiamond”)
relating to the remaining shares of Series D preferred stock held by RedDiamond. Pursuant to such agreement, the previous defaults
under the Certificate of Designation relating to the Series D Preferred Stock were waived and accordingly the default provisions
are not in effect anymore which would have allowed RedDiamond to convert at the default rate and instead will convert at a 25%
discount to the average of the five lowest trading days out of the 20 days’ prior to conversion which was the original discount
provided for in the agreement. The Company agreed to redeem 46.531 of the remaining 93.062 shares over the next 3 months and cancel
such shares without conversion. RedDiamond also agreed to certain sale prohibitions which limit the amount of shares that they
can sell in any month for the next three months.
All
of the Series A, B, C and D Preferred Stock have a liquidation preference to the common stock of the Company.
In connection with the $100,000 convertible
debenture issued to HGT, the Company issued HGT a warrant to purchase 100,000 shares of the Company’s common stock at $1.00
per share. This warrant was not exercised as of June 30, 2018, is exercisable through April 15, 2020 and had a remaining life
of 2.01 years as of June 30, 2018. The intrinsic value of the warrant at June 30, 2018 was zero as the exercise price exceeded
the closing stock price.
9.
|
Related
Party Transactions
|
On
or around April 7, 2016, Silver Linings Management, LLC funded the Company $13,439.50 in the form of convertible debentures secured
by certain high-powered gaming machines purchased from XIDAX. Such note bears interest at a rate of 10% per annum payable in cash
or kind at the option of the Company and became mature on April 1, 2018, and is convertible into Series B Preferred shares at
the option of the holder at any time. Such note remained outstanding as of the date of this quarterly report and the holder and
the Company were negotiating the terms to extend the note.
On
November 30, 2016, ViaOne purchased a Secured Promissory Note in a maximum initial principal amount of $150,000 issued by the
Company to ViaOne. As additional advances were made by ViaOne to the Company, the principal amount of the Secured Promissory Note
increased to $225,000 and $363,000 by amendments dated January 31, 2017 and March 1, 2017, respectively.
On
May 5, 2017, ViaOne delivered a default notice to the Company pursuant to Section 6 of the Note Purchase Agreement but subsequently
extended the due date of the Secured Promissory Note and increased the funding amount to a maximum of One Million ($1,000,000)
dollars. After giving the Company a fifteen (15)-day notice period to cure the default under the Stock Pledge Agreement dated
November 30, 2016 entered by and among the Company, CMG and ViaOne (“Pledge Agreement”), ViaOne took possession of
the Series C Preferred Stock, which was subject of the Pledge Agreement.
The
Secured Promissory Note as amended increased from time to time due to additional advances provided to the Company by ViaOne.
On
September 1, 2017, the Company executed an amended Employee Services Agreement with ViaOne, which stipulated that ViaOne would
continue providing to the Company services relating to the Company’s human resources, marketing, advertising, accounting
and financing for a monthly management fee of $25,000. The accrued monthly management fees in the amount of $175,000 at June 30,
2018, are convertible by ViaOne into the Company’s common stock at rate of 125% of the accrued fees at a conversion price
of (i) $0.05 per share; or (ii) the VWAP of the common stock on the 14th day of each month if the 14th of that month is a trading
day. In the event the 14th day of a month falls on a Saturday, Sunday, or a trading holiday, the VWAP of the Company’s common
stock will be valued on the last trading day before the 14th day of the month.
At
June 30, 2018, the total amount owed by the Company to ViaOne was $938,154.
The
Company’s Chairman and Chief Executive Officer is the Chairman of ViaOne.
Prepaid
expenses consist of an insurance policy with a Company controlled by the Company’s Chairman and Chief Executive Officer.
The
Company has a net operating loss carried forward of $1,846,788 available to offset taxable income in future years which commence
expiring in fiscal 2030.
The
significant components of deferred income tax assets and liabilities at June 30, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Net Operating
Loss Carryforward
|
|
$
|
1,846,788
|
|
|
$
|
1,203,424
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(1,846,788
|
)
|
|
$
|
(137,581
|
)
|
|
|
|
|
|
|
|
|
|
Net
Deferred Tax Asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
income tax benefit has been computed by applying the weighted average income tax rates of the United States (federal and state
rates) of 21% and 35%, respectively, to the net loss before income taxes calculated for each jurisdiction. The tax effect of the
significant temporary differences, which comprise future tax assets and liabilities, are as follows:
|
|
2018
|
|
|
2017
|
|
Income tax
recovery at statutory rate
|
|
$
|
(50,327
|
)
|
|
$
|
(64,212
|
)
|
|
|
|
|
|
|
|
|
|
Valuation
allowance change
|
|
|
(50,327
|
)
|
|
$
|
(64,212
|
)
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
11.
|
Commitments
and Contingencies
|
HGT has filed a lawsuit against the Company,
claiming breach of contract due to a default on a $50,000 junior loan made by HGT to HDS International Corp., our predecessor,
in 2015. The Company has retained counsel to represent it on this matter and responded with affirmative defenses in the Supreme
Court of New York. Oral argument on HGT’s motion for summary judgment was held on May 31, 2018. The Court reserved the decision.
The Company intends to continue vigorously contesting this action.
On
March 21, 2018, the Company announced the acquisition of Crypto Strategies Group, Inc. for consideration of $500. The Company
intends to diversify its business and enter into the cryptocurrency market through such acquisition. As the acquisition was between
the entities under common control with the Company, the assets and liabilities were recorded at their carrying amount on the date
of transfer. On the date of transfer, Crypto Strategies Group, Inc. had no asset or liabilities.
On
September 21, 2018, the Company entered into a modification agreement with RedDiamond
Partners, Inc. (“RedDiamond”) relating to the remaining shares of Series
D preferred stock held by RedDiamond. Pursuant to such agreement, the previous defaults
under the Certificate of Designation relating to the Series D Preferred Stock were waived
and accordingly the default provisions are not in effect anymore which would have allowed
RedDiamond to convert at the default rate and instead will convert at a 25% discount
to the average of the five lowest trading days out of the 20 days’ prior to conversion
which was the original discount provided for in the agreement. The Company agreed to
redeem 46.531 of the remaining 93.062 shares over the next 3 months and cancel such shares
without conversion. RedDiamond also agreed to certain sale prohibitions which limit the
amount of shares that they can sell in any month for the next three months.
On September 21, 2018, the Company entered into a modification agreement
with HGT with respect to the convertible promissory note which has a balance of $107,238. Pursuant to such modification agreement,
all defaults were waived and it was agreed that such note will convert at a 25% discount to the market rather than the default
rate. HGT also agreed to certain sale prohibitions which limit the amount of shares that they can sell in any month for the next
three months. HGT also agreed to dismiss, with prejudice, the lawsuit that it had filed against the Company.