Business context and reporting period
The filing is Golden Matrix Group, Inc.’s Form 10-K for the fiscal year ended July 31, 2016, not a filing for Meridian Holdings Inc. or a calendar-year 2016 fourth quarter. The company shifted from mineral exploration to gaming software and technology during the year, acquired gaming IP and know-how, and disposed of or transferred its mining assets. Its stated focus is social-gaming software and the Asian market.
Financial and operating results
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $20,000 | $0 |
| Operating expenses | $5,216,357 | $2,039,931 |
| Operating loss | $(5,196,357) | $(2,039,931) |
| Net loss | $(10,006,245) | $(2,621,271) |
| Interest expense | $4,551,795 | $803,149 |
| Cash at year-end | $2,296 | $0 |
| Total assets | $12,296 | $148,115 |
| Total current liabilities | $3,993,737 | $2,971,382 |
| Shareholders’ deficit | $(3,981,442) | $(2,823,267) |
All FY 2016 revenue came from one customer, Globaltech Software Services LLC, which is owned by the CEO; the filing reports $10,000 receivable from it at year-end. Gross margin is not separately reported. The balance sheet reports $1,679,414 of convertible notes net of discounts, $259,169 of accrued note interest, and $1,939,753 of derivative liabilities. The company reported no off-balance-sheet arrangements.
The cash-flow statement reports net cash provided by operating activities of $1,296 and financing activities of $1,000. However, MD&A describes operating cash flow as cash used of $1,296; the filing text does not reconcile this discrepancy.
Material changes versus the prior comparable period
- Revenue began at $20,000 versus none in FY 2015, following the change in business focus; expenses and net loss increased substantially.
- FY 2016 included $4,674,712 of amortization and impairment, including impairment charges of $1.8 million for the “We Buy Gold” intellectual property and $2,874,712 for gaming IP and know-how.
- Interest expense rose to $4,551,795 from $803,149. The company also recorded a $2,959,471 unrealized loss on convertible-note derivative liabilities, compared with a $221,809 gain in FY 2015, and a $2,701,378 gain on extinguishment of debt.
- Convertible notes were converted into shares during the year, and the company completed a 1-for-1,500 reverse split effective April 7, 2016. It reported 389,670,767 common shares outstanding at July 31; after further conversions, 1,216,829,866 were outstanding as of November 2, 2016.
Outlook, risks, contingencies and unusual items
Management anticipated operating losses while developing gaming sites and acquiring players. It expected to seek additional equity or debt financing to fund the next 12 months and said failure to obtain financing could prevent execution of its business plan or force it to discontinue operations. The auditor’s report also highlighted substantial doubt about the company’s ability to continue as a going concern, citing recurring losses and negative operating cash flows.
Management identified financing availability, online-gaming competition, and the regulatory climate as key uncertainties. No quantified revenue or earnings guidance was provided. The company’s convertible-note conversion features created material derivative liabilities and potential share dilution. Subsequent to year-end, it issued 827,159,119 shares for note conversions, for $63,218 of principal and $10,409 of accrued interest, according to the filing’s subsequent-events disclosure.
The report identifies material weaknesses in internal controls, including inadequate independent-director and audit-committee oversight, insufficient accounting staff to segregate duties, and insufficient written accounting procedures. Management’s remediation plans depend partly on obtaining additional funding. The auditor gave an unqualified opinion on the financial statements but did not audit or express an opinion on internal control effectiveness. The filing reports no material pending legal proceedings.
Important facts for investors to verify
- Confirm the issuer identity and reporting period: this is Golden Matrix Group, Inc.’s FY ended July 31, 2016, not Meridian Holdings Inc.’s filing.
- Reconcile the conflicting MD&A and cash-flow statement descriptions of operating cash flow.
- Review the related-party nature and collectability of the sole customer revenue and receivable, and the terms of CEO-affiliated agreements.
- Verify the outstanding convertible debt, derivative valuations, note cancellations, subsequent share conversions, and resulting dilution.
- Assess whether financing was obtained, whether the gaming business generated meaningful recurring revenue, and whether identified control weaknesses were remediated.