NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of Elray Resources, Inc. (“Elray” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report for the year ended December 31, 2013 on Form 10-K filed on March 28, 2014.
In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for the most recent fiscal year ended December 31, 2013 have been omitted.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents. The Company maintains its cash in institutions insured by the Federal Deposit Insurance Corporation (“FDIC”).
Intangible Assets
Intangible assets consist of expenditures for domain names and certain intellectual properties acquired for an online horse racing product the Company is developing. The intangible assets are recorded cost and amortized over estimated useful life of 3 years.
Revenues
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.
Subsequent Events
Elray evaluated subsequent events through the date these financial statements were issued for disclosure purposes.
Recent Accounting Pronouncements
Elray’s management does not believe that any recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.
NOTE 2 – GOING CONCERN
The accompanying unaudited consolidated financial statements of Elray have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company sustained a net loss of $3,181,301 and utilized cash for operating activities of $110,497 for the three months ended March 31, 2014. The Company had a working capital deficit, stockholders’ deficit and accumulated deficit of $10,480,167, $7,197,542 and $16,123,335, respectively, at March 31, 2014. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. Without realization of additional capital, it would be unlikely for Elray to continue as a going concern. Elray's management plans on raising cash from public or private debt or equity financing, on an as needed basis, and in the longer term, revenues from the gambling business. Elray's ability to continue as a going concern is dependent on these additional cash financings, and, ultimately, upon achieving profitable operations through the development of its gambling business.
NOTE 3 – SETTLEMENT PAYABLE
On December 20, 2013, the Company entered into a settlement agreement with Tarpon Bay Partners LLC (“Tarpon”) whereby Tarpon acquired certain claims against the Company in the amount of $2,656,152. Pursuant to the agreement, the Company and Tarpon submitted the settlement agreement to the Circuit Court of the Second Judicial Circuit, Leon County, Florida for a hearing on the fairness of the agreement and the exemption from registration under the Securities Act of 1933 for the shares that will be issued to Tarpon for resale (“Settlement Shares”). 75% of the proceeds less all applicable fees and charges from the resale of the Settlement Shares will be remitted to the original claim holders of the Company (“Remittance Amount”). The Company agreed to issue sufficient shares to generate proceeds such that the aggregate Remittance Amount equals $2,656,152. Additionally, the Company agreed to issue a convertible note of $132,000, maturing in 6 months and convertible to the Company’s common stock at 50% of the lowest closing bid price for the 20 days prior to the conversion. The settlement agreement was effective on January 27, 2014 when the court granted approval.
During the three months ended March 31, 2013, the Company issued Tarpon 1,301,000 common shares which have been sold entirely. Gross proceeds from the sale amounted to $253,846, within which $65,000 was retained by Tarpon for fees and charges, $96,277 was remitted to the original claim holders and $92,510 was not yet allocated among the claim holders. As of March 31, 2014, the Company has a remaining settlement payable of $2,467,365.
NOTE 4 – INTANGIBLE ASSETS
Intangible assets consisted of following at March 31, 2014 and December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual properties
|
|
$
|
3,467,742
|
|
|
$
|
-
|
|
Accumulated amortization
|
|
|
(192,652
|
)
|
|
|
-
|
|
Total
|
|
$
|
3,275,090
|
|
|
$
|
-
|
|
On January 23, 2014, the Company entered into a Know-How and Asset Purchase Agreement, with VTG and Gold Globe Investments Limited (“GGIL”), whereby the Company acquired from VTG and GGIL all of their know-how, intellectual property, software, documentation, designs, work products and database schemas. The purchase price for these assets consisted of a convertible note in the amount of $1.5 million payable to VTG and a second convertible note in the amount of $2.8 million payable to GGIL. The notes bear no interest and the Company recorded an initial discount to the notes of $832,258.
NOTE 5 – NOTES PAYABLE
Notes payable
Notes payable at March 31, 2014 and December 31, 2013 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C. Smith
|
9/18/11
|
|
|
8
|
%
|
|
$
|
-
|
|
|
$
|
14,850
|
|
D. Radcliffe
|
9/18/11
|
|
|
8
|
%
|
|
|
-
|
|
|
|
49,500
|
|
L. Kaswell
|
9/18/11
|
|
|
8
|
%
|
|
|
-
|
|
|
|
99,000
|
|
M. Trokel
|
9/18/11
|
|
|
8
|
%
|
|
|
-
|
|
|
|
49,500
|
|
Radcliffe Investment Partners I
|
9/18/11
|
|
|
8
|
%
|
|
|
-
|
|
|
|
34,650
|
|
Morchester International Limited
|
7/14/12
|
|
|
15
|
%
|
|
|
35,429
|
|
|
|
35,429
|
|
Morchester International Limited
|
7/14/12
|
|
|
8
|
%
|
|
|
10,000
|
|
|
|
10,000
|
|
Total
|
|
|
|
|
|
|
$
|
45,429
|
|
|
$
|
292,929
|
|
On December 9, 2011, Elray entered into an Amended Splitrock Agreement whereby the Company acquired certain assets and liabilities of Splitrock. As part of the liabilities assumed in terms of the Amended Splitrock Agreement, the Company assumed notes payable of $292,929 bearing interest of 8% or 15% per annum. All of these notes are past due and currently in default.
On January 27, 2014, the court granted an approval of the settlement agreement with Tarpon whereby the Company would issue shares to Tarpon for resale to pay off certain liabilities. Principals of $247,500 and associated accrued interest acquired by Tarpon were reclassified to settlement payable as of March 31, 2014.
Convertible notes payable
Convertible notes payable, net of discounts, at March 31, 2014 and December 31, 2013 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal, net of discounts
|
|
|
|
|
|
|
|
|
Principal, net of discounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
a. Alan Binder
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
25,000
|
|
|
$
|
-
|
|
|
$
|
25,000
|
|
b. JSJ Investments, Inc.
|
|
|
10,670
|
|
|
|
-
|
|
|
|
10,670
|
|
|
|
38,600
|
|
|
|
-
|
|
|
|
38,600
|
|
c. JSJ Investments, Inc.
|
|
|
75,000
|
|
|
|
(66,896
|
)
|
|
|
8,104
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
d. Asher Enterprises, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,500
|
|
|
|
(15,492
|
)
|
|
|
22,008
|
|
e. Asher Enterprises, Inc.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
37,500
|
|
|
|
(20,989
|
)
|
|
|
16,511
|
|
f. Asher Enterprises, Inc.
|
|
|
27,500
|
|
|
|
(12,349
|
)
|
|
|
15,151
|
|
|
|
27,500
|
|
|
|
(21,689
|
)
|
|
|
5,811
|
|
g. Asher Enterprises, Inc.
|
|
|
42,500
|
|
|
|
(23,754
|
)
|
|
|
18,746
|
|
|
|
42,500
|
|
|
|
(38,298
|
)
|
|
|
4,202
|
|
h. Asher Enterprises, Inc.
|
|
|
32,500
|
|
|
|
(24,980
|
)
|
|
|
7,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
i. Asher Enterprises, Inc.
|
|
|
32,500
|
|
|
|
(28,528
|
)
|
|
|
3,972
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
j. GEL Properties, LLC
|
|
|
50,000
|
|
|
|
(25,190
|
)
|
|
|
24,810
|
|
|
|
50,000
|
|
|
|
(42,235
|
)
|
|
|
7,765
|
|
k. LG Capital Funding, LLC
|
|
|
50,000
|
|
|
|
(25,094
|
)
|
|
|
24,906
|
|
|
|
50,000
|
|
|
|
(42,075
|
)
|
|
|
7,925
|
|
l. LG Capital Funding, LLC
|
|
|
37,000
|
|
|
|
(34,944
|
)
|
|
|
2,056
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
m. Virtual Technology Group, Ltd
|
|
|
1,500,000
|
|
|
|
(1,135,728
|
)
|
|
|
364,272
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
n. Gold Globe Investments Ltd
|
|
|
2,800,000
|
|
|
|
(2,122,026
|
)
|
|
|
677,974
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
o. Rousay Holdings Ltd.
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,290,000
|
|
|
|
-
|
|
|
|
1,290,000
|
|
p. ASC Recap
|
|
|
132,000
|
|
|
|
(91,160
|
)
|
|
|
40,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,789,670
|
|
|
$
|
(3,588,649
|
)
|
|
$
|
1,201,021
|
|
|
$
|
1,598,600
|
|
|
$
|
(180,778
|
)
|
|
$
|
1,417,822
|
|
The table below presents the changes of debt discount during the three months ended March 31, 2014:
December 31, 2013
|
|
$
|
180,778
|
|
Addition
|
|
|
3,776,742
|
|
Amortization
|
|
|
(368,871
|
)
|
March 31, 2014
|
|
$
|
3,588,649
|
|
a. On December 9, 2011, as a result of the Splitrock transaction, the Company assumed a $25,000 convertible note. The note was due on August 4, 2012 with 10% annual interest. The note was convertible to Splitrock’s common stock at $0.10 per share prior to December 9, 2011 and is now convertible to 7,545 shares of the Company’s common stock. The note was acquired by Tarpon on January 27, 2014. See Note 3.
b. On May 31, 2013, the Company entered into a convertible promissory note with JSJ for $50,000 (the "Third JSJ Note"). The note bears interest at 10% and matured on December 2, 2013. From November 31, 2013 to November 31, 2014, the note holder has the option to convert the note to common shares in the Company at a discount of 50% of the average closing price over the last 120 days prior to conversion, or the average closing price over the last seven days prior to conversion. During the three months ended March 31, 2014, JSJ converted $27,930 of its third note to 147,000 shares of common stock.
c. On January 30, 2014, the Company entered into a convertible promissory note with JSJ for $50,000 cash (the "Fourth JSJ Note"). The note bears interest at 10% and matured on January 30, 2015. Upon the maturity, the note has a cash redemption premium of 150% of the principal amount. The note is convertible to the Company’s common shares at a discount of 50% of the average of the three lowest bids on the twenty days before the date this note is executed, or 50% of the average of the three lowest bids during the twenty trading days preceding the delivery of any conversion notice, whichever is lower.
d. On July 15, 2013, the Company entered into a convertible promissory note with Asher for $37,500 (the "Seventh Asher Note"). The note bears interest at 8% and matures on April 17, 2014. In the event that the note remains unpaid at that date, the Company will pay default interest of 22%. Asher has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 45% of the average lowest three closing bid prices during the ten trading days prior to the conversion date. During the three months ended March 31, 2014, the Company issued 163,884 shares of common stock for the conversion of the Seventh Asher Note in the amount of $37,500 and accrued interest of $1,500.
e. On August 28, 2013, the Company entered into a convertible promissory note with Asher for $37,500 (the "Eighth Asher Note"). The note bears interest at 8% and matures on May 30, 2014. In the event that the note remains unpaid at that date, the Company will pay default interest of 22%. Asher has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 40% of the average lowest three closing bid prices during the ten trading days prior to the conversion date. During the three months ended March 31, 2014, the Company issued 370,940 shares of common stock for the conversion of the Eighth Asher Note in the amount of $37,500 and accrued interest of $1,500.
f. On October 24, 2013, the Company entered into a convertible promissory note with Asher for $27,500 (the "Ninth Asher Note"). The note bears interest at 8% and matures on July 28, 2014. In the event that the note remains unpaid at that date, the Company will pay default interest of 22%. Asher has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 40% of the average lowest three closing bid prices during the ten trading days prior to the conversion date.
g. On November 21, 2013, the Company entered into a convertible promissory note with Asher for $42,500 (the "Tenth Asher Note"). The note bears interest at 8% and matures on August 25, 2014. In the event that the note remains unpaid at that date, the Company will pay default interest of 22%. Asher has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 40% of the average lowest three closing bid prices during the ten trading days prior to the conversion date.
h. On January 9, 2014, the Company entered into a convertible promissory note with Asher for $32,500 (the "Eleventh Asher Note"). The note bears interest at 8% and matures on October 13, 2014. In the event that the note remains unpaid at that date, the Company will pay default interest of 22%. Asher has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 40% of the average lowest three closing bid prices during the ten trading days prior to the conversion date.
i. On February 20, 2014, the Company entered into a convertible promissory note with Asher for $32,500 (the "Twelveth Asher Note"). The note bears interest at 8% and matures on November 23, 2014. In the event that the note remains unpaid at that date, the Company will pay default interest of 22%. Asher has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 40% of the average lowest three closing bid prices during the ten trading days prior to the conversion date.
j. On November 11, 2013, the Company entered into a convertible promissory note with GEL Properties LLC ("GEL") for $50,000. The note bears interest at 8% and matures on August 11, 2014. GEL has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 55% of the average lowest three closing bid prices during the ten trading days prior to the conversion date.
k. On November 11, 2013, the Company entered into a convertible promissory note with LG Capital Funding LLC ("LG") for $50,000. The note bears interest at 8% and matures on August 11, 2014. LG has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 55% of the average lowest three closing bid prices during the ten trading days prior to the conversion date.
l. On March 6, 2014, the Company entered into a convertible promissory note with LG Capital Funding LLC (the "Second LG") for $37,000. The note bears interest at 8% and matures on March 6, 2015. LG has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 50% of the average lowest three trading prices during the fifteen trading days prior to the conversion date.
m. On January 23, 2014, the Company entered into a convertible promissory note with Virtual Technology Group LLC ("VTG") for $1,500,000. The note bears no interest and matures on January 23, 2017. An initial dicount of $290,323 was recorded on the issuance date. VTG has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 100% of the average of the closing bid prices for the seven trading days prior to the conversion date when the Company’s shares are traded in the OCTQB or during the ten trading days prior to the conversion date when the Company’s shares are traded in other exchange.
n. On January 23, 2014, the Company entered into a convertible promissory note with Gold Globe Investments Limited for $2,800,000. The note bears no interest and matures on January 23, 2017. An initial discount of $541,935 was recorded on the issuance date. GGIL has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 100% of the average of the lowest three trading prices during the seven trading days prior to the conversion date when the Company’s shares are traded in the OCTQB or during the ten trading days prior to the conversion date when the Company’s shares are traded in other exchange.
o. On April 25, 2012, the Company entered into a promissory note with Rousay Holdings Ltd. (“Rousay”) for $10,000,000 (“Original Rousay Note”). During year 2012, $2 million of the promissory note had been funded and $710,000 has been repaid. On October 8, 2012, the Company issued a new promissory note to Rousay to replace the Original Rousay Note, where the face of the note is $1,290,000. The new note was due on April 26, 2013 with an interest rate of 20% per annum. On the event of default, interest rate increases to 25% per annum. On April 26, 2013, Rousay has an option of receiving an amount of restricted common stock of the Company equal to 10% of the then outstanding and issued common stock of the Company in lieu of payment of principal and interest. The note was acquired by Tarpon on January 27, 2014. See Note 3.
p. On February 3, 2014, the Company entered into a convertible promissory note with ASC Recap LLC (“ASC”) in the amount of $132,000. The promissory note was issued in terms of a court granted and approved settlement agreement with Tarpon on January 27, 2014. See Note 3. The note bears interest at 10% and matures on August 3, 2014. ASC has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 50% of the lowest closing bid price in the 20 trading days prior to the conversion date. For interest that accrues pursuant to this note, the conversion price shall be at $0.001 regardless of the trading price. The conversion price should also be adjusted if the Company issued any shares, prior to the conversion of the note, at a price lower than the conversion price.
Due to the conversion feature of JSJ, Asher, GEL, LG, VTG, ASC and GGIL notes, the actual number of shares of common stock that would be required if a conversion of the note was made through the issuance of common stock cannot be predicted, and the Company could be required to issue an amount of shares that may cause it to exceed its authorized common share amount. As a result, the conversion feature requires derivative accounting treatment and has been bifurcated from the note and is “marked to market” each reporting period through the statements of operations.
The conversion feature of the convertible notes issued during the three months ended March 31, 2014 was valued at $4,601,062 on the issuance date. As a result, these notes were fully discounted and the fair value of the conversion feature in excess of the principal amount of the note of $1,681,578 was expensed immediately as additional interest expense.
Loans from shareholders
On September 5, 2008, Elmside Pty Ltd, a company related to a former director, agreed to an interest free loan of $55,991 to the Company on an as-needed basis to fund the business operations and expenses of the Company until December 9, 2011, the due date of the loan. The note is in default. During the three months ended March 31, 2014, the Company received $2,500 from its officer to open a new bank account.
NOTE 6 – DERIVATIVE LIABILITIES – NOTE CONVERSION FEATURE
Due to the conversion features contained in the convertible notes issued, the actual number of shares of common stock that would be required if a conversion of the note as further described in Note 5 was made through the issuance of the Company’s common stock cannot be predicted, and the Company could be required to issue an amount of shares that may cause it to exceed its authorized share amount. As a result, the conversion feature requires derivative accounting treatment and will be bifurcated from the note and “marked to market” each reporting period through the income statement. The fair value of the conversion future of these notes was recognized as a derivative liability instrument and will be measured at fair value at each reporting period.
The Company remeasured the fair value of the instrument as of March 31, 2014, and recorded an unrealized gain of $1,329 for the three months ended March 31, 2014. The Company determined the fair values of these liabilities using a Black-Scholes valuation model with the following assumptions:
|
|
December 31,
2013
|
|
|
Various Issuance Date in 2014
|
|
|
March 31,
2014
|
|
Stock price on measurement date
|
|
$
|
0.5
|
|
|
$1.05~$0.25
|
|
|
$
|
0.23
|
|
Exercise price
|
|
$0.21~$0.29
|
|
|
$0.10~$0.59
|
|
|
$0.09~$0.23
|
|
Discount rate
|
|
|
0.10
|
%
|
|
0.77%~0.07%
|
|
|
|
0.07
|
%
|
Expected volatility
|
|
|
238
|
%
|
|
|
237
|
%
|
|
|
239
|
%
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value on a recurring basis using significant unobservable inputs:
Fair value at December 31, 2013
|
|
$
|
439,424
|
|
Fair value of new financial derivatives
|
|
|
4,601,063
|
|
Reclassification to equity
|
|
|
(222,512
|
)
|
Change in fair value of derivative liabilities
|
|
|
(1,329
|
)
|
Fair value at March 31, 2014
|
|
$
|
4,816,646
|
|
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, we may be party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not involved currently in legal proceedings other than those detailed below that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.
Commitments and Contingencies
In October 2011, the Company entered into an agreement with consultants to provide services relating to the development of an online gaming site. In return for such services, the Company paid the consultants $20,000 per month. During the three months ended March 31, 2014, the Company settled a $23,000 payable to the consultant by issuing 51,032 shares. The shares were valued at $26,782 based on the fair value on the issuance date and the Company recorded a loss on settlement of $3,782. On January 27, 2014, Tarpon acquired $478,000 of the consultant’s claim against the Company. See Note 3. As of March 31, 2014, the payable to the consultants was $115,000.
On July 1, 2013, the Company entered into a lease agreement for office space in Australia. The agreement terminates on December 31, 2014 with an option to renew for another year. Rent is $30,000 per year and the Company paid a $7,535 security deposit.
On March 5, 2014, the Company entered into consulting services agreements with Neil Cherry, Altaire Inc, Andriy Levytsky to assist in SIMTV racing platform development. Pursuant to the agreement, the Company shall issue Neil Cherry 7,500 shares of its common stock upon the completion of the 30-day plan to have a demonstration system of SIMTV, 100,000 shares of its common stock to Altaire Inc. and 12,500 shares to Andriy Levytsky, respectively, upon the completion of the 90-day plan, and additional 12,500 shares to Andriy Levytsky when the Company signs its first license agreement for SIMTV system.
NOTE 8 – RELATED PARTY TRANSACTIONS
As of March 31, 2014 and December 31, 2013, loans from Elmside, a shareholder, were $55,991. The loans are currently in default.
As of March 31, 2014 and December 31, 2013, the Company had accounts payable of $870,453 and $709,984, respectively, to its chief executive officer and a company owned by the chief executive officer for reimbursement of expense, compensation, and liabilities assumed from Splitrock.
As of March 31, 2014 and December 31, 2013, the Company had accounts payable of $31,500 and $22,500 to Jay Goodman, son of the Company’s chief executive officer, for assisting the Company with data segmentation, financial and statistical services.
NOTE 9 – EQUITY
On April 16, 2014, the Company’s Board of Directors approved a reverse split of the Company’s authorized, issued and outstanding shares of common stock, par value $0.001, at a ratio of 10:1, such that every 10 shares of common stock becomes 1 share of common stock, reducing the number of authorized shares of common stock to 112,000,000 (“Reverse Stock Split”). The Company filed a certificate of amendment to affect the Reverse Stock Split of ten-for-one on May 2, 2014. All share amounts and per share information presented gives effect to the Reverse Stock Split.
Preferred Stock – Series A
On May 3, 2012, the Company authorized the creation of 300,000,000 shares of Series A preferred stock. Prior to the Reverse Stock Split, the Series A Preferred stock are convertible at a rate of 1 common stock for each Series A Preferred stock, and has voting rights of 1:1 with common stock. After the Reverse Stock Split, the Series A Preferred stock is convertible at a rate of 0.1 common stock for each Series A Preferred stock.
Preferred Stock – Series B
On July 1, 2012, the Company authorized the creation of 100,000,000 shares of Series B preferred stock. One share of Series B preferred stock was convertible to one share of the Company’s common stock and has voting rights of 1,000:1 with common stock. On September 24, 2012, the authorized Series B Preferred Stock was increased from 100,000,000 to 280,000,000. After the Reverse Stock Split, the Series B Preferred stock is convertible at a rate of 0.001 common stock for each Series B Preferred stock.
On July 3, 2012, the Company entered into an agreement with Maxwell Newbould to acquire certain assets and intellectual property related to Penny Auction Technology, in exchange for 88,000,000 shares of the Company’s Series B preferred stock. The shares were issued to Gold Globe Investments acting as an escrow agent. The Series B preferred shares are to be held by Gold Globe Investments until such time as the Company concludes its due diligence. Gold Globe Investments holds the voting rights to these shares whilst the due diligence is conducted. On completion of the due diligence to the satisfaction of the Company, Maxwell Newbould will be granted a seat on the Board of Directors of the Company and an additional 20,000,000 Series B Preferred Shares. The Company has extended the due diligence period. The 88,000,000 shares of Series B Preferred stock issued had been recorded at par value of $88,000 with a subscription receivable at the same amount.
On July 14, 2013, the Company entered into a 12-month consultancy agreement with Virtual Technology Group, LLC ("Virtual Technology") to assist the Company in developing marketing and supporting the technology of virtual online horse racing products and to provide the Company the exclusive use right to certain website domains. In consideration for such services and domains, the Company issued 30,000,000 Series B Preferred shares to Virtual Technology. The 30,000,000 Series B Preferred stock have been recorded at their estimated market value of $42,000 with a prepaid expense at the same amount. At March 31, 2013, $18,000 of the prepaid expense has not been amortized.
Common Stock
On January 1, 2014, the Company issued 51,032 shares of its common stock to settle accounts payable of $23,000 to Portspot Consultants Limited. These shares were valued at $26,782 based on the market price on the issuance date. The Company recorded a loss of $3,782 related to the settlement.
On January 20, 2014, the Company issued 100,000 shares of its common stock to Gregory Caputo and Donald Radcliffe for consulting services over the prior six months. These shares were valued at $61,000 based on the market price on the issuance date.
On January 25, 2014, the Company entered into an acquisition agreement with BetTek Inc. to acquire intellectual property and know how to be utilized to build a virtual online horse racing product and other allied products. The Company issued 106,650 shares of its common stock for the acquisition. The closing of this transaction is upon the Company’s satisfaction of the product and the product is currently under construction. The Company valued these shares based on the market price on the issuance date and recorded $73,589 subscription receivable for the shares issued.
During the three months ended March 31, 2014, the Company issued 681,824 shares of common stock for the conversion of notes (see Note 5).
During the three months ended March 31, 2014, the Company issued Tarpon 1,301,000 shares of its common stock, respectively according to the settlement agreement discussed in Note 3. The shares were valued at $437,410 based on the market price on the issuance date. $188,846 net proceeds from the sale were used to pay the original creditors of the claims Tarpon acquired. The remaining $248,623 was recorded as loss on settlement.
NOTE 10 – CONCENTRATION
All of the Company’s revenues for the three months ended March 31, 2014 were from one customer. As of March 31, 2014, amount due from this customer was $15,000.
NOTE 11 – SUBSEQUENT EVENTS
On March 24, 2014, the Company entered into a convertible promissory note with KBM Worldwide Inc. ("KBM"), an affiliate of Asher, for $32,500. The principal was received and recorded on April 16, 2014. The note bears interest at 8% and matures on January 2, 2015. In the event that the note remains unpaid at that date, the Company will pay default interest of 22%. KBM has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 40% of the average lowest three closing bid prices during the ten trading days prior to the conversion date.
On April 15, 2014, the Company entered into a convertible promissory note with Vista Capital Investments, LLC ("Vista") for $250,000. The note has an original issue discount of $25,000. The note bears interest at 12% and matures 2 years from the date of each payment of the principal from Vista. In the event that the note remains unpaid at the maturity date, the outstanding balance shall immediately increase to 120% of the outstanding balance. Vista has the right to convert the outstanding balance into the Company’s common stock at a rate equal to the lesser of $0.008 or 60% of the lowest trade occurring during the twenty-five consecutive trading days preceding the conversion date. $25,000 was received and recorded on April 23, 2014.