Notes
to the 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
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 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. As of December 31, 2018, the Company had a working capital deficiency of $2,094,505 and an accumulated deficit
of $5,880,713. 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.
Reverse
Stock Split
On
February 17, 2017, the Board of Directors of the Company approved a reverse split of its common and preferred shares on a 1 for
1,000 basis. The Articles of Incorporation were amended decreasing the authorized common shares from 2,000,000,000 to 100,000,000
and decreasing the authorized preferred shares from 450,000,000 to 2,250,000. A special meeting of the Company’s shareholders
was not required since written consent was obtained by the stockholders who held the majority of the outstanding voting stock.
The Reverse Stock Split became effective on June 14, 2017.
All
references in this Annual Report regarding the number of preferred and common shares, price per share and weighted average shares
of common stock have been adjusted to reflect the Reverse Stock Split on a retroactive basis for all prior periods presented,
unless otherwise noted, including reclassifying an amount equal to the reduction in par value of common and preferred stock to
additional paid-in capital.
2.
Summary of Significant Accounting Policies
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.
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 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 December 31, 2018 and December 31, 2017, the Company had 10,000,000 and
8,779,119 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 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 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 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.
On
December 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 December 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 balance sheet as at December
31, 2018 and 2017 as follows:
|
Description
|
|
Fair
Value Measurements at December 31, 2018 Using Fair Value Hierarchy
|
|
|
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Derivative
liability
|
|
$
|
574,797
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
574,797
|
|
|
Total
|
|
$
|
574,797
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
574,797
|
|
|
Description
|
|
Fair
Value Measurements at December 31, 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 Statements of Operations and are expensed as incurred. The
Company incurred $55,838 in advertising and promotion expenses in the year ended December 31, 2018.
Revenue
Recognition
The
Company recognizes revenues when there is persuasive evidence of an arrangement, the product or service has been provided to the
customer, the collection of our fees is reasonably assured and the amount of fees to be paid by the customer is fixed or determinable.
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
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 adopted the ASI on January 1, 2018 and the
adoption did not have a material impact on the Company’s financial statements and related disclosures.
The
Company has implemented all other new accounting pronouncements that are in effect. These pronouncements did not have any material
impact on the 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
Furniture
and fixtures consisted of the following:
|
|
|
December
31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Computers
|
|
$
|
39,226
|
|
|
$
|
14,992
|
|
|
Accumulated Depreciation
|
|
|
(10,373
|
)
|
|
|
(4,832
|
)
|
|
|
|
$
|
28,853
|
|
|
$
|
10,160
|
|
Depreciation
expense for the years ended December 31, 2018 and 2017 was $7,557 and $2,816, 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. Amortization for the years ended December 31, 2018 and 2017 was $300,000 and $240,000, respectively. During
the 4
th
Quarter of 2018, the Company assessed the useful life of the software and determined that remaining useful
life was 1.25 years. As such, the Company prospectively is amortizing the Software through December 31, 2019. The software consisted
of the following:
|
|
|
December
31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Software
|
|
$
|
1,200,000
|
|
|
$
|
1,200,000
|
|
|
Accumulated Amortization
|
|
|
(750,000
|
)
|
|
|
(450,000
|
)
|
|
|
|
$
|
450,000
|
|
|
$
|
750,000
|
|
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 amendment of the conversion price from $.10 cents to $.08
cents per share of common stock. 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, 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
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, the Company
issued SirenGPS a 0% convertible debenture of $60,000 that matured 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 Services, LLC, a Texas Limited Liability Corporation
(“ViaOne”) purchased this debenture from SirenGPS.
The
Company entered into a line of credit agreement (“Line Of Credit”) with ViaOne. This Line of Credit dated as of September
27, 2018 (the “Effective Date”), was entered into by and between the Company and ViaOne. The Company had an immediate
need for additional capital and has 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 December 31,
2018 and December 31, 2017:
The
projected annual volatility for each valuation period was based on the historic volatility of the Company of 381.8% and 431.5%
at December 31, 2018 and 2017, respectively. The risk free rate was 2.45% and 1.81% at December 31, 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, 2016
|
|
$
|
228,605
|
|
|
Change
in value
|
|
|
342,038
|
|
|
Balance,
December 31, 2017
|
|
|
570,643
|
|
|
Change
in value
|
|
|
4,154
|
|
|
Balance,
December 31, 2018
|
|
$
|
574,797
|
|
6.
Common Stock
Equity
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 Holdings converted $6,585 of convertible debt into 65,585 shares of the Company’s common stock.
On
July 5, 2017, Iconic Holdings 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 Series B Preferred Shares into 200,000 shares of the Company’s common stock.
On
July 25, 2017, Iconic Holdings 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 Shares into 250,000 shares of the Company’s common stock.
At
December 31, 2017, the Company had 21,891,805 shares of common stock reserved for issuance relating to convertible debentures
and Series D preferred stock.
Equity
Transactions for the Year Ended December 31, 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 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.
On
April 16, 2018, Iconic converted $18,000 of a convertible note into 1,892,828 shares of the Company’s common stock.
On
April 13, 2018, RedDiamond Partners, Inc. (“RedDiamond”) converted 5 shares of Series D Preferred Stock into 555,556
shares of the Company’s common stock.
On
April 17, 2018, RedDiamond converted 5 shares of Series D Preferred Stock into 609,756 shares of the Company’s common stock.
On
April 23, 2018, RedDiamond converted 5 shares of Series D Preferred Stock into 806,452 of the Company’s common stock.
On
May 9, 2018, RedDiamond converted 5 shares of Series D Preferred Stock into 1,020,408 of the Company’s common stock.
On
May 23, 2018, RedDiamond converted 5 shares of Series D Preferred Stock into 657,895 of the Company’s common stock.
On
June 19, 2018, RedDiamond converted 5 shares of Series D Preferred Stock into 1,234,756 of the Company’s common stock.
On
July 9, 2018, RedDiamond converted 5 shares of Series D Preferred Stock into 1,250,000 of the Company’s common stock.
On
July 24, 2018, RedDiamond converted 5 shares of Series D Preferred Stock into 1,467,391 of the Company’s common stock.
On
September 25, 2018, RedDiamond converted 6.50 shares of Series D Preferred Stock into 1,450,893 of the Company’s common
stock.
On
October 16, 2018, RedDiamond converted 6.50 shares of Series D Preferred Stock into 1,377,119 of the Company’s common stock.
On
November 1, 2018, RedDiamond converted 6.34 shares of Series D Preferred Stock into 792,750 of the Company’s common stock.
On
November 6, 2018, Lincoln Acquisition converted 17,314 shares of Preferred B Stock into 3,462,800 of the Company’s common
stock.
On
November 13, 2018, RedDiamond converted 6 shares of Series D Preferred Stock into 1,027,397 of the Company’s common stock.
On
November 29, 2018, RedDiamond converted 5 shares of Series D Preferred Stock into 961,538 of the Company’s common stock.
On
November 29, 2018, HGT converted $6,978 of a convertible note into 1,655,594 shares of the Company’s common stock.
On
December 14, 2018, Lincoln Acquisition converted 20,000 shares of Preferred B Stock into 4,000,000 of the Company’s common
stock.
On
December 21, 2018, RedDiamond converted 10 shares of Series D Preferred Stock into 1,811,594 of the Company’s common stock.
7.
Preferred Stock
Our
Articles of Incorporation authorize us to issue up to 2,250,350 shares of preferred stock, $0.001 par value. Of the 2,250,000
authorized shares of preferred stock, the total number of shares of Series A Preferred Shares the Corporation shall have the authority
to issue is Two Hundred Forty Nine thousand Nine Hundred Ninety Nine (249,999), with a stated par value of $0.001 per share, the
total number of shares of Series B Preferred Shares the Corporation shall have the authority to issue is Two Million (2,000,000),
with a stated par value of $0.001 per share and the total number of shares of Series C Preferred Shares the Corporation shall
have the authority to issue is One (1), 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 December 31, 2018, we had 7,500 shares of our Series A preferred stock issued and outstanding. As of December 31, 2018, we
had 69,197 shares of Series B preferred stock issued and outstanding. As of December 31, 2018, we had 1 shares of Series C Preferred
Stock issued and outstanding. At December 31, 2018, we had 6 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 69,197 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 13,989,400
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
6 issued and outstanding shares of Series D Preferred Stock as of December 31, 2018 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 price (“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. On September
21, 2018, RedDiamond modified the agreement with the Company. RedDiamond and the Company agreed that the Preferred Shares shall
convert into Common Stock (the “Conversion Shares”) at the lower of the Fixed Conversion Price ($.06) 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; for the avoidance
of doubt, RedDiamond has not waived its right to the 25% Conversion Premium as defined in the COD. The Company shall have the
obligation to redeem 46.531 of the Preferred Shares (which represents 50% of the Preferred Shares owned by RedDiamond) at 110%
of the Stated Value of $46,531 by making three equal payments of $17,061 on October 15, 2018, November 15, 2018 and December 15,
2018. On December 31, 2018, The Company had 6 shares of Preferred Stocks.
The
Series A, Series B, Series C and Series D have a liquidation preference to the common shareholders.
8.
Warrant
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 December 31, 2018, is exercisable
through April 15, 2020 and had a remaining life of 1.29 years as of December 31, 2018. The intrinsic value of the warrant at December
31, 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 $13,440 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 matures on April 1, 2018, and is convertible into Series B Preferred shares at the option
of the holder at any time. On January 08, 2019, Silver Linings Management converted their Series B Preferred share stocks into
Common Stocks.
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 to continue until December
31, 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 shall become due on September 30, 2019 (the “Maturity Date”) and bears an interest
rate of 8.0% per annum. The unpaid principal and interest of the Promissory Note after the Maturity Date shall accrue 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 Agreement and Promissory Note.
At
December 31, 2018, the total amount owed to ViaOne was $1,316,484.
The
Company’s Chairman and Chief Executive Officer is the Chairman of ViaOne.
The
prepaid expenses are an insurance policy purchased from a related Company.
10.
Income Taxes
The
Company has a net operating loss carried forward of $573,775 available to offset taxable income in future years which commence
expiring in fiscal 2030.
The
U.S. Tax Reform Act amends the Internal Revenue Code to reduce tax rates and modify policies, credits, and deductions for individuals
and business. For businesses, the Act reduces the corporate tax rate from a maximum of 35% to a flat 21% rate. The rate reduction
is effective on January 1, 2018. As a result of the rate reduction, the Company has reduced the deferred tax asset balance as
of December 31, 2017 by $80,329. As a result of the full valuation allowance on the net deferred tax assets, there was a corresponding
adjustment to the valuation allowance for this same amount. Therefore, there is no impact on the Company’s 2017 earnings
for the law change. In accordance with SAB 118, the Company has determined that there is no deferred tax benefit or expense with
respect to the re-measurement of certain deferred tax assets and liabilities due to the full valuation allowance against net deferred
tax assets. Additional analysis of the law and the impact to the Company will be performed and any impact will be recorded in
the respective quarter in 2018, if applicable
The
significant components of deferred income tax assets and liabilities at December 31, 2018 and 2017 are as follows:
|
|
|
2018
|
|
|
2017
|
|
|
Net Operating Loss Carryforward
|
|
$
|
2,598,828
|
|
|
$
|
1,607,135
|
|
|
Valuation allowance
|
|
|
(2,598,828
|
)
|
|
$
|
(1,607,135
|
)
|
|
Net Deferred
Tax Asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The
income tax benefit has been computed by applying the weighted average income tax rates of Canada (federal and provincial statutory
rates) and of the United States (federal and state rates) of 21% and 35%, respectively, 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:
|
|
|
2018
|
|
|
2017
|
|
|
Income tax recovery at statutory
rate
|
|
$
|
217,006
|
|
|
$
|
217,006
|
|
|
U.S. Tax Reform Act
|
|
|
(80,329
|
)
|
|
|
(80,329
|
)
|
|
Valuation allowance
change
|
|
|
(136,677
|
)
|
|
$
|
(136,677
|
)
|
|
Provision for
income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
11.
Commitments and Contingencies
HGT
had 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 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. 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.
As a result of the modification agreement, HGT withdrew, with prejudice, the lawsuit that it had filed against the Company.
12.
Acquisition and Discontinued Operations
On
March 21, 2018, the Company announced the acquisition of Crypto Strategies Group, Inc. for consideration of $500. The Company
intended to diversify its business and enter into the cryptocurrency market through such acquisition. As the acquisition was between
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 assets or liabilities.
On
December 12, 2018, the Company dissolved Crypto Strategies Group, Inc. and the net liabilities were assumed by a related party.
The following summarizes the operations of Crypto Strategies Group, Inc.
|
|
|
December
31,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
Revenues
|
|
$
|
28,261
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
44,819
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations of Discontinued
Operations
|
|
|
(16,558
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on
Disposal
|
|
|
16,558
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
Discontinued Operations
|
|
$
|
-
|
|
|
$
|
-
|
|
13.
Subsequent Events
On
January 2, 2019, Lincoln Acquisition converted 200 shares of Preferred B Stock into 3,750,000 of the Company’s common stock.
On
January 9, 2019
,
RedDiamond converted its remaining six (6) shares of Series D Preferred Stock into 520,833 shares of common
stock.