Notes
to the Consolidated Financial Statements
(expressed
in U.S. dollars)
(Unaudited)
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
e-sports players and participants worldwide that want to compete at the high school or college level. A substantial portion of
the Company’s activities has involved in developing a business plan and establishing contacts and visibility in the
marketplace and the Company has not generated any substantial revenue to date. Beginning in 2018, the Company began deriving revenue
by providing transaction verification services within the digital currency networks of cryptocurrencies. However, on December
12, 2018, the Company discontinued such transaction verification services by dissolving Crypto Strategies Group, Inc., its wholly-owned
subsidiary.
Going
Concern
These
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. 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.
Use
of Estimates
The
preparation of 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 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.
Certain
reclassifications have been made to prior-year amounts to conform to the current period presentation.
Cash
Equivalents
The
Company considers all highly liquid instruments with maturities 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
circumstances 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 recorded at its 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 March 31, 2020 and December 31, 2019, the Company had 10,000,000 and 10,000,000
potentially dilutive shares from outstanding convertible debentures, respectively.
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 liability 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 liability for uncertain tax positions.
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 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 March 31, 2020 and 2019 as follows:
Description
|
|
Fair Value Measurements at March 31, 2020 Using Fair Value Hierarchy
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability
|
|
$
|
748,664
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
748,664
|
|
Total
|
|
$
|
748,664
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
748,664
|
|
Description
|
|
Fair Value Measurements at March 31, 2019 Using Fair Value Hierarchy
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability
|
|
$
|
509,362
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
509,362
|
|
Total
|
|
$
|
509,362
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
509,362
|
|
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 $295 and $2,420 in advertising and promotion expenses in the three months ended March 31, 2020
and 2019, respectively.
Revenue
Recognition
Revenue
is recognized in accordance with ASC 606. The Company performs the following five steps: (i) identify the contract(s) with a customer,
(ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction
price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance
obligation. The Company applies the five-step model to arrangements that meet the definition of a contract under Topic 606, including
when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it
transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company
evaluates the goods or services promised within each contract related performance obligation and assesses whether each promised
good or service is distinct. The Company recognizes as revenue, the amount of the transaction price that is allocated to the respective
performance obligation when (or as) the performance obligation is satisfied. Revenues primarily include revenues from microtransactions.
Microtransaction 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
February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-02, Leases (Topic 842), which amends the existing accounting standards for leases. The new standard requires lessees
to record a right-of-use (“ROU”) asset and a corresponding lease liability on the balance sheet (with the exception
of short-term leases). This new standard is effective for annual reporting periods beginning after December 15, 2018, and interim
reporting periods within those annual reporting periods, with early adoption permitted. We adopted this new standard effective
January 1, 2019. Adoption did not have any effect on the Company as it does not have any leases.
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:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Computers and servers
|
|
$
|
13,446
|
|
|
$
|
19,242
|
|
|
|
|
|
|
|
|
|
|
Accumulated Depreciation
|
|
|
(9,039
|
)
|
|
|
(9,736
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,407
|
|
|
$
|
9,506
|
|
Depreciation
expense for the three months ended March 31, 2020 and 2019 was $773 and $2,114, respectively.
In
March of 2019, the Company discontinued Minecade and Olimpo servers and decided to focus on Minecraft servers. The Company recognized
a loss of $17,233 on the disposal of these servers.
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. During the 4th Quarter of 2018, the Company assessed the useful life of the software and determined that the
remaining useful life was 1.25 years. On December 31, 2019, the Company fully amortized the software. Amortization for the three
months ended March 31, 2020 and 2019 was $0 and $120,000, respectively.
The
software consisted of the following:
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Software
|
|
$
|
1,200,000
|
|
|
$
|
1,200,000
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
(1,200,000
|
)
|
|
|
(870,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
330,000
|
|
4.
Debt
Convertible
Debentures
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, 2018.
Under the terms of the debentures, the amount was unsecured and was due on October 16, 2016. The note is currently in default
and bears an interest of 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 restrictions 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 November 29, 2018, HGT converted $6,978 of a convertible note into 1,655,594 shares of the
Company’s common stock.
The
Company entered into a line of credit agreement (“Line Of Credit”) with ViaOne on September 27, 2018 (the “Effective
Date”). This Line of Credit dated as of, was entered into by and between the Company and ViaOne. The Company had an immediate
need for additional capital and asked ViaOne to make a new loan(s) in an initial amount of $25,000 on the Effective Date (the
“New Loan”). The Company may need additional capital and ViaOne has agreed pursuant to this Line of Credit to provide
for additional advances, although ViaOne shall have no obligation to make any additional loans. Any further New Loans shall be
memorialized in a promissory note with substantially the same terms as the New Loan and shall be secured by all of the assets
of the Company. On or before the Effective Date, the Company may request in writing to ViaOne that it loan the Company additional
sums of up to $250,000 and within five days of such request(s), ViaOne shall have the right, but not an obligation, to make additional
loans to the Company and the Company shall in turn immediately issue a note in the amount of such loan. In consideration for making
the New Loan, the Company entered into a security agreement whereby ViaOne received a senior security interest in all of the assets
of the Company.
5.
|
Derivative
Liabilities
|
The
following inputs and assumptions were used to value the convertible debentures outstanding during the years ended March 31, 2020
and March 31, 2019:
The
projected annual volatility for each valuation period was based on the historic volatility of the Company of 194.6% and 206.9%
at March 31, 2020 and 2019, respectively. The risk free rate was .04% and 2.43% at March 31, 2020 and 2019, 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,
March 31, 2018
|
|
$
|
325,693
|
|
Change
in value
|
|
|
183,669
|
|
Balance,
March 31, 2019
|
|
|
509,362
|
|
Change
in value
|
|
|
239,302
|
|
Balance,
March 31, 2020
|
|
|
748,664
|
|
Share
Transactions for the Quarter Ended March 31, 2019:
On
January 02, 2019, Lincoln Acquisition converted 200 shares of Series B Preferred Stock into 3,750,000 shares of the Company’s
common stock
On
January 10, 2019, RedDiamond converted 6 shares of Series D Preferred Stock into 520,833 shares of the Company’s common
stock.
Share
Transactions for the Quarter Ended March 31, 2020:
None.
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 authorized shares of preferred stock,
the total number of shares of Series A Preferred Stock the Corporation shall have the authority to issue is 2,000,000,
with a stated par value of $0.001 per share, the total number of shares of Series B Preferred Stock the Corporation shall have
the authority to issue is 249,999, with a stated par value of $0.001 per share, the total number of shares of Series
C Preferred Stock the Corporation shall have the authority to issue is 1, with a stated par value of $0.001 per share,
and the total number of shares of Series D Preferred Stock the Corporation shall have the authority to issue is 350, with a stated
par value of $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 March 31, 2020, we had 7,500 shares of our Series A preferred stock, 68,997 shares of Series B preferred stock, 1 shares of
Series C Preferred Stock, and 0 share 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 common
shares for each Series A Preferred Share. The 68,997 issued and outstanding shares of Series B Preferred Stock are convertible
into shares of common stock at a rate of 200 common shares for each Series B Preferred Share. If all of our Series A Preferred
Stock and Series B Preferred Stock are converted into shares of common stock, the number of issued and outstanding shares of our
common stock will increase by 13,949,400 shares.
The
1 issued and outstanding shares of Series C Preferred Stock has voting rights equivalent to 51% of all shares entitled to vote
and is held by ViaOne Services LLC, a Company controlled by our CEO.
The
0 issued and outstanding shares of Series D Preferred Stock were convertible into shares of common stock at the lower of the Fixed
Conversion Price ($.06 per share) or at the VWAP which shall be defined as the average of the five (5) lowest closing prices during
the 20 days prior to conversion.
The
holders of Series A, Series B, Series C and Series D have a liquidation preference to the common shareholders.
In
connection with the $100,000 convertible debenture issued to HGT Capital, LLC (“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 March
31, 2020, was exercisable through April 15, 2020 and had a remaining life of .04 years as of March 31, 2020. The intrinsic value
of the warrant at March 31, 2020 was zero as the exercise price exceeded the closing stock price on March 31, 2020. The warrant
expired unexercised on April 15, 2020.
9.
|
Related
Party Transactions
|
On
or around April 7, 2016, Silver Linings Management, LLC funded the Company $13,440 in the form of convertible debentures secured
by certain high-powered gaming machines purchased from XIDAX. Such note bore interest at a rate of 10% per annum, payable in cash
or kind at the option of the Company, matured on April 1, 2018, and was convertible into Series B Preferred shares at the option
of the holder at any time. On January 08, 2019, Silver Linings Management, LLC converted its Series B Preferred shares into shares
of the Company’s Common Stock.
On
November 30, 2016, ViaOne purchased a Secured Promissory Note equal to 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 Note was 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 has subsequently
extended the due date and has increased the funding up to 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 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. This agreement was amended on January 1, 2018. The accrued monthly management
fees, $100,000 at December 31, 2017, are convertible by ViaOne into the Company’s common stock at a rate of 125% of the
accrued fees at a conversion price of (i) $0.05 per share; or (ii) the volume weighted adjusted price (“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 Common Stock will be valued on the last trading day before
the 14th day of the month.
On
September 27, 2018, the Company and ViaOne, entered into a Line of Credit Agreement (the “LOC Agreement”), pursuant
to which the Company issued a secured promissory note with the initial principal amount of $25,000 to ViaOne in exchange for a
loan of $25,000 (the “Initial Loan Amount”). In accordance with this Agreement, the Company may request ViaOne to
provide loans of up to $250,000, including the Initial Loan Amount, and ViaOne has the right to decide whether it will honor such
request. The Initial Loan Amount became due on September 30, 2019 (the “Maturity Date”) and bore an interest rate
of 8.0% per annum. The unpaid principal and interest of the Promissory Note after the Maturity Date accrued interest at a rate
of 18.0% per annum. The principal amount of the Promissory Note may increase from time to time up to $250,000 in accordance with
the terms and conditions of the Agreement. In connection with the Agreement and Promissory Note, the Company and ViaOne executed
a security agreement dated September 27, 2018 whereby the Company granted ViaOne a security interest in all of its assets, including
without limitation, cash, inventory, account receivables, real property and intellectual properties, to secure the repayment of
the loans made pursuant to the LOC Agreement and Promissory Note.
As
of March 31, 2020, the total amount the Company owed to ViaOne Services was $1,831,801.
The
Company’s Chairman and Chief Executive Officer is the Chairman of ViaOne.
The
Company has a net operating loss carried forward of $3,341,067 available to offset taxable income in future years until the end
of the fiscal year of 2030.
The
significant components of deferred income tax assets and liabilities at March 31, 2020 and 2019 are as follows:
|
|
2019
|
|
|
2018
|
|
Net
Operating Loss Carryforward
|
|
$
|
701,580
|
|
|
$
|
554,4381
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(701,580
|
)
|
|
$
|
(554,438
|
)
|
|
|
|
|
|
|
|
|
|
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% to a net loss before income taxes calculated for each jurisdiction. The tax effects of significant temporary differences,
which comprise future tax assets and liabilities, are as follows:
|
|
2020
|
|
|
2019
|
|
Income
tax recovery at statutory rate
|
|
$
|
(17,654
|
)
|
|
$
|
(40,994)
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance change
|
|
|
17,654
|
|
|
$
|
40,994
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
11.
Commitments and Contingencies
None.
12.
Subsequent Events
None