Business context and reporting period
The filing is Golden Matrix Group, Inc.’s unaudited Form 10-Q for the three months ended October 31, 2018, its fiscal first quarter. This does not match the metadata company name, Meridian Holdings Inc. Golden Matrix describes itself as a software and social-gaming technology business focused on the Asian market. Its quarter’s reported results include substantial related-party revenue.
Financial results and position
| Metric | Quarter ended Oct. 31, 2018 | Prior-year quarter / comparison |
|---|---|---|
| Revenue | $638,695 | $30,000; up from prior period |
| Gross profit / margin | $569,171 / approximately 89.1% | $30,000 / 100% |
| Operating income (loss) | $356,644 | $(65,747) |
| Net income (loss) | $331,999 | $(458,043) |
| Operating cash flow | $234,246 | $(20,942) |
| Cash at period end | $580,407 | $42,225 at prior-year quarter-end |
Revenue growth was principally attributed to software usage fees under a license agreement with Articulate Pty Ltd, a company owned by the CEO. Articulate revenue was $608,062; Globaltech Software Services, also related to the CEO, generated $30,000. The company reported $658,562 of related-party receivables at quarter-end. Operating cash flow included a $296,274 increase in related-party receivables, so reported income and cash conversion warrant scrutiny.
At October 31, 2018, total assets were $1,249,607 and total liabilities were $1,915,216, leaving a shareholders’ deficit of $665,609. Current liabilities were $1,770,216 versus current assets of $1,249,607; the resulting arithmetic working-capital deficit is $520,609. The filing separately states a $665,609 working-capital deficit, which equals the reported shareholders’ deficit and appears inconsistent with the balance sheet. The current ratio from the balance-sheet figures is approximately 0.71. A $1,071,431 contingent related-party earn-out liability was recorded. The filing lists $40,000 of convertible-note principal, including $10,000 in default, as well as settlement payables; it also reports total liabilities that include other obligations.
Basic and diluted earnings per share were each reported as $0.00, rounded, with weighted-average basic shares of approximately 2.740 billion. Period-end common shares increased from 2.623 billion at July 31, 2018 to 2.835 billion at October 31, 2018. The filing does not provide a clear, separately stated operating margin percentage.
Material changes versus the prior comparable period
- Revenue increased from $30,000 to $638,695, almost entirely from related parties; gross profit rose to $569,171.
- The company moved from a $458,043 net loss to $331,999 net income. Lower interest expense and a much smaller derivative-related charge contributed to the comparison; these items are not necessarily indicative of recurring operating performance.
- Cash from operations improved to $234,246, while financing used $102,420, primarily reflecting settlement repayments.
- During the quarter, 209,414,000 shares were issued to convert $209,414 of debt, and 3,000,000 shares were issued for services.
Outlook, risks, contingencies and unusual items
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern without additional capital. It expects to seek debt or equity financing and ultimately relies on developing profitable gambling-business operations.
- Related-party exposure: Revenue, the GM2 asset transaction, the earn-out liability, and certain expenses and receivables/payables involve entities associated with the CEO. The GM2 earn-out is based on 50% of revenue generated over March 1, 2018–February 28, 2019; the final amount was not yet determinable and was subject to quarterly remeasurement.
- Debt settlements: The Luxor note settlement included $209,414 converted into shares, a $150,000 payment and a $290,000 interest-free loan repayable in two $145,000 installments in 2019 and 2020. The balance sheet separately presents settlement payables, including $145,000 as long-term.
- Controls and governance: Management said disclosure controls were not effective as of July 31, 2018, citing no independent directors, no audit committee financial expert, and weaknesses in disclosure controls. It reported no significant subsequent changes to internal control. The filing does not state that these weaknesses were remediated.
- Subsequent event: On November 5, 2018, the board approved a minimum 10% increase in executive base salaries effective November 1, 2018.
- Disclosure inconsistency: The statements show a $16,747 loss on the derivative liability, while the note describes an unrealized gain of $16,747 and the cash-flow reconciliation labels the adjustment a gain. The MD&A also describes the item as an unrealized loss. The direction and presentation should be reconciled.
- The company states it has no known legal disputes and no senior securities outstanding. It cautions that operating results are difficult to forecast and gives no quantitative financial guidance.
Important facts for investors to verify
- Confirm the filing identity and period: the source is Golden Matrix Group, Inc., not Meridian Holdings Inc., and covers the quarter ended October 31, 2018.
- Reconcile the stated working-capital deficit with the balance-sheet totals, and clarify the discrepancy among derivative-liability gain/loss descriptions.
- Assess collectability and subsequent receipt of related-party receivables, especially the $608,062 due from Articulate, and verify the revenue-recognition and payment terms.
- Review the earn-out valuation, related-party approvals, and the company’s ability to fund scheduled settlements and continue as a going concern.
- Evaluate dilution from shares already issued and outstanding options, and determine whether ineffective disclosure controls and governance weaknesses were addressed after the stated evaluation date.