Business context and reporting period
Golden Matrix Group, Inc. (not Meridian Holdings Inc., as indicated in the request metadata) filed this unaudited Form 10-Q for the quarter ended April 30, 2017, its fiscal third quarter, with nine-month comparisons to April 30, 2016. The company had shifted from mineral exploration to software technology, including social online gaming systems, and reported that it no longer held mining assets.
Financial results and liquidity
- Revenue: $30,000 for the quarter and $90,000 for nine months, versus none in the comparable 2016 periods. All reported revenue came from Globaltech Software Services LLC, a company in which the CEO has an interest.
- Operating results: Quarterly operating loss was $32,712; nine-month operating loss was $211,599. The filing does not provide a clear gross margin value.
- Net results: Net income was $200,228 for the quarter and $1,625,792 for nine months, compared with losses of $22,475,244 and $25,756,104, respectively. Current-period income substantially reflected non-operating items: derivative-liability fair-value gains of $270,448 for the quarter and $1,414,761 year to date, plus an $806,867 year-to-date gain on debt extinguishment. These gains are not evidence of operating profitability.
- Cash flow: For nine months, operating cash flow was negative $16,499, investing cash flow was zero, and financing cash flow was positive $38,000. Cash increased from $2,296 at July 31, 2016 to $23,797 at April 30, 2017. The MD&A describes operating cash flow as positive $16,499, which conflicts with the cash-flow statement.
- Liquidity and debt: Current assets were $66,297 against current liabilities of $1,821,485, a working-capital deficit of $1,755,188. Total liabilities were $1,821,485; the balance sheet lists $795,712 of related-party convertible notes and $359,743 of derivative liabilities. The notes disclose multiple notes in default, including the related-party note.
- Equity and dilution: Shareholders’ deficit was $1,755,188. Common shares outstanding rose to 93,187,906 at April 30, 2017 from 2,597,806 at July 31, 2016; the filing attributes substantial issuance to conversions of convertible notes. It reports 97,806,673 shares outstanding as of June 7, 2017.
Material changes versus the prior comparable period
- Revenue began in fiscal 2017, but remained limited and concentrated entirely in one related-party customer.
- Operating expenses fell to $62,712 for the quarter and $301,599 for nine months, from $658,284 and $1,542,589, respectively. Management attributed the decrease primarily to the shift away from mining.
- Interest expense fell to $37,508 for the quarter and $384,237 for nine months, from $916,207 and $3,509,312, respectively; management attributed the reduction mainly to cancellation of convertible debt.
- Derivative fair-value results reversed from large losses in 2016 to gains in 2017. Management said the change primarily reflected fluctuations in the company’s stock price.
Outlook, risks, contingencies, and unusual items
- Going concern: Management states that the working-capital and accumulated deficits raise substantial doubt about the company’s ability to continue as a going concern. It expects to seek public or private debt or equity financing and, longer term, to rely on revenue from its gambling business; continued operations depend on financing and achieving profitable operations.
- Risks: Results are described as difficult to forecast for a development-stage company. Customer concentration, related-party dealings, financing dependence, defaults on notes, and dilution from convertible debt are significant investor considerations. The filing provides no quantified revenue or earnings guidance.
- Controls: Management reported disclosure controls were not effective as of July 31, 2016, citing the lack of independent directors and an audit committee financial expert, and inadequate controls over required financial-statement disclosures. It reported no significant subsequent changes to internal controls.
- Contingencies and subsequent events: The company reported no known legal disputes. After quarter-end, it issued 4,618,767 shares to convert $1,800 of note principal and $471 of interest.
Important facts for investors to verify
- Reconcile the cash-flow statement’s negative $16,499 operating cash flow with the MD&A’s positive presentation.
- Assess the collectability and ongoing nature of the $42,500 receivable and $90,000 revenue from the CEO-affiliated customer.
- Review the terms, default status, conversion prices, and potential dilution of the convertible notes, including the related-party note.
- Evaluate the sustainability of reported net income apart from derivative revaluations and debt-extinguishment gains, and confirm the assumptions used for derivative valuations.
- Confirm the company’s financing runway, going-concern plans, and progress in addressing the disclosed control weaknesses.