ELRAY RESOURCES, INC. - Quarter Report: 2012 September (Form 10-Q)

elray_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

o TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to ___________

Commission File # 000-52727

ELRAY RESOURCES, INC.

(Exact name of small business issuer as specified in its charter)

Nevada

(State or other jurisdiction of incorporation or organization)

98-0526438

(IRS Employer Identification Number)

575 Madison Avenue, Suite 1006, New York, NY 10022

(Address of principal executive offices)

(917) 775-9689

(Issuer’s telephone number)

Indicate by check mark whether the registrant(1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 day. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes þ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). o Yes þ No

On June 30, 2012, the last business day of the registrant’s most recently completed second quarter, the aggregate market value of the Common Stock held by non-affiliates of the registrant was $4,537,140, based upon the closing price on that date of the Common Stock of the registrant on the OTC Bulletin Board system of $0.006. For purposes of this response, the registrant has assumed that its directors, executive officers and beneficial owners of 5% or more of its Common Stock are deemed affiliates of the registrant.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. The issuer had 1,262,519,593, 211,018,516, and 88,000,000 shares of common stock, Series A preferred stock, and Series B preferred stock, respectively, issued and outstanding as of November 8, 2012.

TABLE OF CONTENTS

		PAGE
PART I. FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		3
	CONSOLIDATED BALANCE SHEETS		3
	CONSOLIDATED STATEMENTS OF OPERATIONS		4
	CONSOLIDATED STATEMENTS OF CASH FLOWS		5
	NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS		7
ITEM 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION		13
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		17
ITEM 4.	CONTROLS AND PROCEDURES		17

PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS		18
ITEM 1A.	RISK FACTORS		18
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		18
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES		20
ITEM 4.	MINE SAFETY DISCLOSURES		20
ITEM 5.	OTHER INFORMATION		20
ITEM 6.	EXHIBITS		20

SIGNATURES			21

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ELRAY REOUSRCES, INC.
(A Development Stage Company)
Consolidated Balance Sheets
(Unaudited)
	September 30,			December 31,
	2012			2011
ASSETS

Current assets:
Cash	$	3,538		$	16,762
Restricted cash		900,337			-
Total assets	$	903,875		$	16,762

LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
Accounts payable and accrued liabilities	$	845,185		$	587,073
Accounts payable – related parties		231,866			314,298
Advances from shareholders		55,991			55,991
Notes payable		292,929			292,929
Convertible notes payable, net of discounts		2,075,807			25,844
Derivative liabilities - note conversion feature		119,389			28,595
Total liabilities		3,621,167			1,304,730

Commitments and contingencies

Shareholders' deficit:
Series A preferred stock, par value $0.001, 300,000,000 shares authorized, 211,018,516 and 0 shares issued and outstanding		211,019			-
Series B preferred stock, par value $0.001, 280,000,000 shares authorized, 88,000,000 and 0 shares issued and outstanding, respectively		88,000			-
Common stock, par value $0.001, 1,700,000,000 shares authorized, 1,018,648,476 and 844,092,578 shares issued and outstanding, respectively		1,018,649			844,093
Additional paid-in capital		5,296,428			4,888,278
Subscriptions receivable		(299,019	)		-
Accumulated deficit during the development stage		(9,032,369	)		(7,020,339	)
Total shareholders' deficit		(2,717,292	)		(1,287,968	)
Total liabilities and shareholders' deficit	$	903,875		$	16,762

See accompanying notes to unaudited consolidated financial statements.

ELRAY RESOURCES, INC.

(A Development Stage Company)

Consolidated Statements of Operations

(Unaudited)

	For the three months ended September 30,						For the nine months ended September 30,						Inception (June 26, 2006) through September 30,
	2012			2011			2012			2011			2012

Operating expenses:
General and administrative expenses	$	930,977		$	6,322		$	1,663,222		$	757,458		$	2,984,322
Impairment of intangibles and mineral properties		-			-			-			-			3,463,668
Compensation expense to related party for extinguishment of debt		-			-			-			1,177,000			1,184,000
Depreciation		-			6,930			-			20,826			125,537
Exploration		-			-			-			-			857,738
Loss on disposal of assets		-			-			-			-			39,044
Total operating expenses		930,977			13,252			1,663,222			1,955,284			8,654,309
Loss from operations		(930,977	)		(13,252	)		(1,663,222	)		(1,955,284	)		(8,654,309	)

Other income (expense):
Interest expense		(173,537	)		-			(353,504	)		-			(375,323	)
Interest income		400			-			1,190			-			1,190
Unrealized gain on derivative liability - note conversion feature		11,045			-			3,506			-			12,073
Loss on settlement of accounts payable		-			-			-			-			(16,000	)
Total other income (expense)		(162,092	)		-			(348,808	)		-			(378,060	)
Net loss	$	(1,093,069	)	$	(13,252	)	$	(2,012,030	)	$	(1,955,284	)	$	(9,032,369	)


Net loss per common share - basic and diluted	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.01	)

Weighted average common shares outstanding - basic and diluted		947,407,853			224,847,500			888,589,697			171,257,756

See accompanying notes to unaudited consolidated financial statements.

ELRAY RESOURCES, INC.
(A Development Stage Company)
Consolidated Statements Of Cash Flows
(Unaudited)

	For the Nine Months Ended September 30,						Inception (June 26,2006) through September 30,
	2012			2011			2012
Cash flows from operating activities:
Net loss	$	(2,012,030	)	$	(1,955,284	)	$	(9,032,369	)
Adjustments to reconcile net loss to cash used in operations activities:
Stock-based compensation		418,415			720,000			1,276,586
Impairment of intangibles and mineral properties		-			-			3,463,668
Share-based compensation expense to related party for extinguishment of debt		-			1,177,000			1,184,000
Depreciation		-			20,826			125,537
Loss on disposal of asset		-			-			39,044
Amortization of debt discount		117,463			-			123,488
Non-cash interest expense related to conversion feature of notes payable		51,935			-			64,097
Unrealized gain on derivative liabilities - note conversion feature		(3,506	)		-			(12,073	)
Loss on settlement of accounts payable		-			-			16,000
Changes in operating assets and liabilities:
Accounts payable and accrued liabilities		259,568			5,458			459,800
Accounts payable – related parties		(87,232	)		-			47,066
Net cash used in operating activities		(1,255,387	)		(32,000	)		(2,245,156	)

Cash flows from investing activities:
Increase in restricted cash		(900,337	)		-			(900,337	)
Purchase of mineral properties		-			-			(209,122	)
Purchase of property and equipment		-			-			(164,538	)
Cash acquired from share exchange transaction		-			-			1,694
Net cash used in investing activities		(900,337	)		-			(1,272,303	)

Cash flows from financing activities:
Proceeds from convertible notes payable		2,132,500			-			2,157,500
Proceeds from notes payable - related parties		-			32,000			155,991
Common stock issued for cash		10,000			-			25,000
Contributed capital		-			-			1,182,506
Net cash provided by financing activities		2,142,500			32,000			3,520,997
Net increase (decrease) in cash		(13,224	)		-			3,538
Cash at beginning of period		16,762			-			-
Cash at end of period	$	3,538		$	-		$	3,538

ELRAY RESOURCES, INC.

(A Development Stage Company)

Consolidated Statements Of Cash Flows (Continued)

(Unaudited)

	For the nine Months Ended September 30,				Inception (June 26,2006) through September 30,
	2012		2011		2012
Supplemental disclosure of cash flow information:
Cash paid for interest	$	-	$	-	$	-
Cash paid for taxes	$	-	$	-	$	-

Non-cash investing and financing activities:
Preferred stock issued for acquisition of assets	$	299,019	$	-	$	299,019
Common stock issued for the acquisition of assets	$	-	$	-	$	2,369,819
Common stock issued for conversion of loans	$	160,157	$	93,000	$	260,157
Debt discount-beneficial conversion feature	$	-	$	-	$	5,181
Debt discount-derivative liability on note conversion feature	$	132,500	$	-	$	157,500

See accompanying notes to unaudited consolidated financial statements.

ELRAY RESOURCES, INC.

(A Development Stage Company)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2012

(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, 2011 on Form 10-K filed on April 13, 2012.

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, 2011 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”). Beginning December 31, 2010 through December 31, 2012, all noninterest-bearing transaction accounts were fully insured, regardless of the balance of the account, at all FDIC-insured institutions. This unlimited insurance coverage was separate from, and in addition to, the insurance coverage provided to the depositor’s other accounts held by a FDIC-insured institution, which are insured for balances up to $250,000 per depositor until December 31, 2013. At September 30, 2012, the amounts held in banks did not exceed the insured limit.

Restricted Cash

At September 30, 2012, the Company owed $2,000,000 to Rousay Holdings Ltd. who later entered into an amended note agreement with the Company. The Company has proceeds from the note payable to Rousay Holdings Ltd. of $900,337 held in an attorney escrow account at September 30, 2012. Subsequent to September 30, 2012, the $900,337 was returned to Rousay Holdings Ltd. as a result of the amendment of the original note agreement dated April 25, 2012 (See Note 3).

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 $2,012,030 and utilized cash for operating activities of $1,255,387 for the nine months ended September 30, 2012. The Company had a working capital deficiency, stockholders’ deficiency and accumulated deficit of $2,717,292, $2,717,292 and $9,032,369, respectively, at September 30, 2012. 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 – NOTES PAYABLE

Notes payable

Notes payable at September 30, 2012 and December 31, 2011 consisted of the following:

	Final Maturity	Interest Rate			September 30, 2012		December 31, 2011

C. Smith	9/18/11		8	%	$	14,850	$	14,850
D. Radcliffe	9/18/11		8	%		49,500		49,500
L. Kaswell	9/18/11		8	%		99,000		99,000
M. Trokel	9/18/11		8	%		49,500		49,500
Radcliffe Investment Partners I	9/18/11		8	%		34,650		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					$	292,929	$	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.

Convertible notes payable

Convertible notes payable, net of discounts, at September 30, 2012 and December 31, 2011 consisted of the following:

	September 30, 2012							December 31, 2011
	Principal		Unamortized Discount			Principal, net of Discounts		Principal		Unamortized Discount			Principal, net of Discounts

Alan Binder	$	25,000	$	-		$	25,000	$	25,000	$	(4,704	)	$	20,296
JSJ Investments, Inc.		-		-			-		25,000		(19,452	)		5,548
JSJ Investments, Inc.		25,000		(9,085	)		15,915		-		-			-
Asher Enterprises, Inc.		-		-			-		-		-			-
Asher Enterprises, Inc.		32,500		(9,319	)		23,181		-		-			-
Asher Enterprises, Inc.		32,500		(20,789	)		11,711
Rousay Holdings Ltd.		2,000,000		-			2,000,000		-		-			-
Total	$	2,115,000	$	(39,193	)	$	2,075,807	$	50,000	$	(24,156	)	$	25,844

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 7,545,272 shares of the Company’s common stock. The Company recorded a beneficial conversion feature of $5,181 on December 9, 2011 and amortized debt discount of $4,704 during the nine months ended September 30, 2012. The Company did not repay the note on August 4, 2012 and this note is currently in default.

On October 12, 2011, the Company entered into a convertible note agreement with JSJ Investments, Inc. (“JSJ”) for $25,000 in cash. The note is for one year and bears interest at a rate of 8% per annum. From April 12, 2012 to April 12, 2013, the note holder has the option to convert the note to common shares in the Company at a discount of 50% of the average of the preceding seven days closing price. On May 4, 2012, JSJ converted this note into 11,986,301 shares of common stock.

On January 19, 2012, the Company entered into an agreement with JSJ in which JSJ agreed to loan the Company $25,000 (the “Second JSJ note”). The note is for one year and bears interest at a rate of 10% per annum. From July 19, 2012 to July 19, 2013, the note holder has the option to convert the note to common shares in the Company at a discount of 50% of the average of the preceding seven days closing price.

On February 1, 2012, the Company entered into a convertible promissory note with Asher Enterprises, Inc. (“Asher”) for $42,500 (the “First Asher Note”). The note bears interest at 8% and matures on November 6, 2012. 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 common shares in the Company at a rate equal to 58% of the average lowest three closing prices during the ten trading days prior to the conversion date. During the third quarter of year 2012, Asher converted this note into 70,569,597 shares of common stock.

On March 15, 2012, the Company entered into a convertible promissory note with Asher for $32,500 (the “Second Asher Note”). The note bears interest at 8% and matures on December 19, 2012. 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 58% of the average lowest three closing prices during the ten trading days prior to the conversion date.

On April 25, 2012, the Company entered into a promissory note with Rousay Holdings Ltd. (“Rousay”) for $10,000,000. (“Original Rousay Note”). If funded in full, the note will be secured by the issuance of 923,206,006 shares of the Company’s common stock and will be due in one year at an interest rate of 20% payable in arrears. On maturity, the interest of $2,000,000 is payable in cash and the note holder may elect to take ownership of the shares held, in lieu of repayment of principal. As of September 30, 2012, $2 million of the promissory note had been funded. 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 which consists of $1,200,000 principal plus interest of $90,000 accrued on the Original Rousay Note. The new note is due on April 26, 2013 with an interest rate of 20% per annum. On April 26, 2013, Rousay has an option of receiving an amount of restricted common stock of the Company equals to 10% of the then outstanding and issued common stock of the Company in lieu of payment of principal and interest.

On June 5, 2012, the Company entered into a convertible promissory note with Asher for $32,500 (the “Third Asher Note”). The principal was received and recorded on July 3, 2012. The note bears interest at 8% and matures on March 7, 2013. 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 58% of the average lowest three closing prices during the ten trading days prior to the conversion date.

Due to the JSJ and Asher notes’ conversion feature, 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 Second JSJ Note, the First Asher Note, Second Asher Note, and the Third Asher Note was valued at $40,743, $54,486, $42,236, and $46,970, respectively, 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 these notes totaled $51,935 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.

Long-term note payable

On February 1, 2012, the Company entered into an agreement with Gold Globe Investments Limited (“GoldGlobe”) whereby Gold Globe would loan the Company $20,000 in tranches of $5,000 each, paid as needed by the Company. The loan is due in two years at an interest rate of 12% per annum. As of September 30, 2012, the Company had repaid the $10,000 received to GoldGlobe.

NOTE 4 – DERIVATIVE LIABILITIES – NOTE CONVERSION FEATURE

Due to the conversion feature contained in the First JSJ Note, the Second JSJ Note, the First Asher Note, the Second Asher Note and the Third Asher Note issued, the actual number of shares of common stock that would be required if a conversion of the note as further described in Note 3 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 September 30, 2012, and recorded an unrealized gain of $3,506 for the nine months ended September 30, 2012. At September, 2012 and December 31, 2011, the derivative liability associated with the note conversion feature was $119,389 and $28,595, respectively. The Company determined the fair values of these liabilities using a Black-Scholes valuation model with the following assumptions:

	December 31, 2011			January 19, 2012			February 1, 2012			March 15, 2012			July 3, 2012			September 30, 2012
Estimated market value of common stock on measurement date	$	0.01650		$	0.01250		$	0.00800		$	0.00800		$	0.00520		$	0.00080
Exercise price	$	0.00825		$	0.00625		$	0.00464		$	0.00464		$	0.00302		$	0.00046
Discount rate		0.3050	%		0.3350	%		0.3300	%		0.3300	%		0.1500	%		0.1400	%
Expected volatility		192	%		221	%		218	%		245	%		303	%		299	%
Expected dividend yield		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%

NOTE 5 – 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 in Note 7 and Note 8 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 a one-year agreement with consultants to provide services relating to the development of an online gaming site. In return for such services, the Company pays the consultants $20,000 per month. As of September 30, 2012, payable to the consultants was $280,000 which included amount owed for services provided before the agreement was entered.

On June 1, 2012, the Company entered into an agreement with Ludlow Capital, Inc. (“Ludlow”) to provide investor relations services to the Company for six months. In consideration for such services, the Company agreed to issue 2,000,000 shares to Ludlow. The Company has recorded consulting expense of $1,066, based on the market price at September 30, 2012, for services provided during the nine months ended September 30, 2012. As of September 30, 2012, none of these shares had been issued.

NOTE 6 – RELATED PARTY TRANSACTIONS

As of September 30, 2012 and December 31, 2011, loans from Elmside, a shareholder, were $55,991. The loans are due on demand.

As of September 30, 2012 and December 31, 2011, the Company had accounts payable of $227,066 and $297,298 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 September 30, 2012, and December 31, 2011, the Company had stock payable to its two non-executive directors of $4,800 and $17,000 for director fees.

NOTE 7 – EQUITY

Preferred Stock – Series A

On March 22, 2012, Elray entered into a binding letter of intent with Golden Match Holdings Limited (“GM”), a company incorporated in the British Virgin Islands. Pursuant to the letter of intent, Elray and GM would enter into an acquisition agreement in which Elray was to acquire all of the outstanding shares of GM and the shareholders and consultants of GM was to acquire a minimum of 95% of the Company’s common stock. Pursuant to the agreement, Elray had 30 days to secure a $10,000,000 line of credit or loan before Elray and GM enter into a definitive purchase agreement.

On May 3, 2012, in anticipation of the imminent closing of the GM acquisition, the Company authorized the creation of 300,000,000 shares of Series A preferred stock. Prior to a planned reverse split of common shares at a ratio of 100:1, the Class A Preferred Series shares are convertible at a rate of 100 common shares for each Class A Preferred Share.

On May 4, 2012, the Company entered into an acquisition agreement under which the Company acquired all of the outstanding shares of GM. This follows the letter of intent previously signed on March 22, 2012. Under the terms of the acquisition agreement, Elray acquired 100% of GM, an investment holding company which has a profit sharing agreement with CALI Promocao de Jogos Sociedade Unipessoal Lda., a company incorporated under the laws of the Special Administrative Region of Macau. In the agreement, the Company transferred to the principals of GM 211,018,516 of its Series A Preferred Stock, which on a fully diluted basis, was equal to 95% of the Company's then outstanding shares. In accordance with the above-referenced agreement, Mr. Lao Sio I had been appointed to the Company’s Board of Directors. On July 1, 2012, the Board of Directors held a special board meeting, wherein a motion was approved to remove Mr. Lao Sio I as a director. As of the date of this report, the Company is seeking rescission of the transaction and is engaged in legal proceedings with Mr. Lao Sio I.

As of September 30, 2012, the 211,018,516 shares of Series A Preferred Stock issued had been recorded at $211,019, par value, with a subscription receivable at the same amount.

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 is 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.

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 recently extended the due diligence period for a further 120 days and expects to conclude its due diligence within year 2012.

The 88,000,000 shares of Series B Preferred stock issued had been recorded at $88,000, par value, with a subscription receivable at the same amount.

Common Stock

On April 30, 2012, the Company issued 2,500,000 shares for cash of $10,000.

During the 9 months ended September 30, 2012, the Company issued 23,500,000 shares of common stock for services, valued at $124,550, based on the market price on the issuance date. The value of stock issued is amortized over the service period according to the related agreements.

On April 12, 2012, the Company issued 6,000,000 shares of common stock valued at $42,000, based on the stock price of issuance date, to two directors in consideration of their services.

On August 1, 2012, the Company issued 60,000,000 shares of common stock valued at $246,000, based on the stock price of issuance date, for services related to the development of certain financial applications. 20,000,000 shares were issued to Mark Frost and 40,000,000 shares were issued to Gold Globe Investments acting as escrow agent. On achievement of certain benchmarks by Mark Frost, Gold Globe Investments will transfer 30,000,000 shares to Mark Frost. The balance of 10,000,000 shares will remain with Gold Globe Investments in consideration for its services.

On September 19, 2012, the Company increased authorized common stock to 1,700,000,000.

NOTE 8 – SUBSEQUENT EVENTS

The Company was engaged in legal proceedings with Rousay Holdings Ltd. (“Rousay”) in the United States District Court of New York wherein Rousay asserted various claims against the defendant. The Company denied liability and asserted defenses. The parties agreed to settle the controversies between them.

On October 8, 2012, the Company reached a Stipulation and Order of Settlement with Rousay in the United States District Court of New York. In terms of this Stipulation and Order of Settlement with Rousay, the Company agreed to repay $900,337 of the $2 million convertible promissory note dated April 25, 2012 (See note 3). The Company also agreed to issue 10% of the then outstanding and issued common stock of the Company to Rousay. On October 13, 2012, the Company issued 101,864,848 restricted shares of common stock to Rousay equaling 10% of the then outstanding and issued common stock.

Subsequent to September 30, 2012, Asher converted $43,000 of the Second Asher Note and the Third Asher Note into 142,006,269 shares of common stock.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis summarizes the significant factors affecting our consolidated results of operations, financial condition and liquidity position for the three and nine months ended September 30, 2012. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for our year-ended December 31, 2011 and the consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

Forward-looking statements

This Quarterly Report on Form 10-Q contains forward looking statements, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

In some cases, you can identify forward-looking statements by terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘could,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ or ‘‘continue’’ or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this Report.

Overview

Elray Resource, Inc. was incorporated in Nevada on December 13, 2006. Its wholly-owned subsidiary, Angkor Wat Minerals Ltd. was incorporated in Cambodia on June 26, 2006.

Elray owned a 100% interest in Porphyry Creek, a 90 square kilometer gold and copper claim located in Cambodia. On February 10, 2011, Elray entered into an agreement to dispose of Angkor Wat Minerals in exchange for 56,847,500 ordinary shares of Cambodian Gold PLC, and the majority shareholders and board of directors of the Company approved a dividend of 56,847,500 shares of Cambodian Gold PLC to the Elray shareholders of record as of February 7, 2011 on a basis of one share of Cambodian Gold for each share owned in Elray. As of the current date, Cambodian Gold PLC has failed to take transfer of the gold mining assets and issue the shares in exchange. Elray has failed to find a buyer for these assets and has discontinued maintenance and exploitation of the gold mining properties. Exploitation of the gold mining properties is not part of the current business strategy and therefore does not justify the expenditure and resources necessary to maintain and exploit them.

On February 23, 2011, Elray entered into a Purchase Agreement (the “Splitrock Agreement”) to acquire 100% of the issued and outstanding shares of Splitrock Ventures (BVI) Limited (“Splitrock”), a British Virgin Islands company, in consideration of the issuance of 592,454,728 shares of common stock of the Company. Splitrock is in the online gaming business. On the closing date, pursuant to the terms of the Splitrock Agreement, Anthony Goodman, representing the shareholders of Splitrock, acquired the 592,454,728 shares of Elray’s common stock, which resulted in a change of control under which 70% of the shares of Elray are now held by the previous shareholders of Splitrock. In accordance with the Splitrock Agreement, Barry J. Lucas resigned as Chairman and Director and Anthony Goodman was elected as a replacement; Neil Crang resigned as Director and Donald Radcliffe and Roy Sugarman were elected as replacements; and Michael J. Malbourne resigned as Secretary and David E Price, Esq. was appointed as a replacement.

On December 9, 2011, Elray entered into an Amended Purchase Agreement (“Amended Splitrock Agreement”) which amended certain elements of the Splitrock Agreement originally entered into by the parties of February 23, 2011. Whereas under the Splitrock Agreement, the Company was to acquire 100% of the shares of Splitrock, pursuant to the Amended Splitrock Agreement, the Company shall instead acquire only certain assets and liabilities of Splitrock. As consideration for the acquisition of Splitrock, on December 9, 2011, the Company has issued 592,454,728 shares to the shareholders of Splitrock as full consideration therefore.

On March 8, 2012, the Company finalized negotiations for advanced Web Application Intellectual Property that will allow Elray to build unique Consumer Web Products that will be marketed under the brand CrazyJapps. The Company is currently performing final due diligence and is expected to finalize the purchase agreement in the coming weeks. The Company is continuing to conduct due diligence.

On March 22, 2012, Elray entered into a binding letter of intent with Golden Match (“GM”), a company incorporated in the British Virgin Islands. Pursuant to the letter of intent, Elray and Golden Match will enter into an acquisition agreement in which Elray was to acquire all of the outstanding shares of GM and the shareholders and consultants of GM was to acquire a minimum of 95% of the Company’s common stock. Pursuant to the agreement, Elray had 30 days to secure a $10,000,000 line of credit or loan before Elray and GM enter into a definitive purchase agreement.

On April 25, 2012, the Company entered into a promissory note with Rousay Holdings Ltd for $10,000,000. If funded in full, the note will be secured by the issue of 923,206,006 shares and will be due in one year at an interest rate of 20% payable in arrears. On maturity, the interest of $2,000,000 is repayable in cash and the note holder may elect to take ownership of the shares held, in lieu of repayment of principal. On October 8, 2012, the Company issued a new promissory note to Rousay to replace the original note, where the face of the note is $1,290,000 which consists of $1,200,000 principal plus interest of $90,000 accrued on the original note. The new note is due on April 26, 2013 with an interest rate of 20% per annum. On April 26, 2013, Rousay has an option of receiving an amount of restricted common stock of the Company equals to 10% of the then outstanding and issued common stock of the Company in lieu of payment of principal and interest.

On May 4, 2012, the Company entered into an acquisition agreement under which the Company acquired all of the outstanding shares of GM. This follows the letter of intent previously signed on March 22, 2012. Under the terms of the acquisition agreement, Elray acquired 100% of GM, an investment holding company which has a profit share agreement with CALI Promocao de Jogos Sociedade Unipessoal Lda., a company incorporated under the laws of the Special Administrative Region of Macau. In terms of the agreement, Elray transferred, to the principals of GM, 211,018,516 of its Series A Preferred Stock, which on a fully diluted basis will equal 95% of the Company's then outstanding shares. The principals of GM then became the Company’s majority shareholder. In accordance with the above-referenced agreement, Mr. Lao Sio I had been appointed to the Company’s Board of Directors. Subsequently, on July 1, 2012, the Board of Directors held a Special Board Meeting, wherein a motion was approved to remove Mr Lao Sio I. as a director. As of the date of this report, the Company is seeking rescission of the transaction and is engaged in legal proceedings with Mr Lao Sio I.

Plan of Operation

Elray is in the process of developing an online casino and related technologies to provide gaming to customers where such activity is legal. Elray will utilize software provided by a third party vendor to provide online casino games in selected markets. Development of the online casino games requires Elray to customize the appearance and branding of the third party software and establish merchant services to accept payments and facilitate distribution of winnings.

After completion of the development phase, our primary function is to market the online casino and provide support to online gamers.

Player acquisition is a key factor for organic growth in the online gaming industry. Players are primarily acquired from affiliates for a fixed fee or percentage of earnings based on negotiated predetermined criteria. Affiliates are websites or individuals that attract players through various means such as player news/interest websites, email campaigns or other relationships. The key is that payment to affiliates takes place only when negotiated criteria are met. The criteria may be player minimum deposit, level of play, or revenue earned. The critical element is that unlike most marketing campaigns, the revenues returned by marketing spend is predictable.

The key elements of player retention are the creation of exciting opportunities to maintain player interest and increase play frequency. Similar to land-based casinos’ compensation programs; the tools used for this purpose include prizes, “free money,” opportunities to play against famous (or infamous) players, and tournament qualification.

Results of Operations

Three months ended September 30, 2012 compared to the three months ended September 30, 2011.

Revenues

We did not generate any revenues during the reporting periods.

Expenses

During the three months ended September 30, 2012 and 2011, general and administrative expenses were $930,977 and $13,252, respectively. The increase in general and administrative expense was primarily a result of the increase of stock-based compensation, legal fees, and consulting fees. Stock-based compensation for services was $280,133 and $0 for the three months ended September 30, 2012 and 2011, respectively. Stock-based compensation for the three months ended September 30, 2012 was mainly for the consulting services related to financial applications from Mark Frost. Legal fees related to litigation for the three months ended September 30, 2012 was $331,889 compared to $0 for the three months ended September 30, 2011. Consulting fees for the three months ended September 30, 2012 was $127,544 compared to $0 for the three months ended September 30, 2011.

Interest Expenses

During the three months ended September 30, 2012 and 2011, interest expense was $173,537 and $0, respectively. The increase of interest expense was due to the liabilities assumed in December 2011 pursuant to the Amended Splitrock Agreement and notes issued during the nine months ended September 30, 2012.

Net Loss

We incurred net losses from operations of $1,093,069 and $13,252 for the three months ended September 30, 2012 and 2011, respectively. The increase of net loss in 2012 was as a result of the items discussed above.

Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.

Revenues

We did not generate any revenues during the reporting periods.

Expenses

During the nine months ended September 30, 2012 and 2011, general and administrative expenses were $1,663,222 and $757,458, respectively. In 2012, the Company incurred consulting fees $430,044, stock-based compensation of $418,415, legal fees related to litigation of $335,520, and online gaming and related technology development costs of $313,370 whereas in 2011, these expenses were $0, $720,000, $0, and $0, respectively. Stock-based compensation for the three months ended June 30, 2011 was mainly for the consulting services related to the acquisition of assets from Splitrock Ventures (BVI) Limited and the planned divestment of the Angor Wat mining operation.

Interest Expenses

During the nine months ended September 30, 2012 and 2011, interest expense was $353,504 and $0, respectively. The increase of interest expense was due to the liabilities assumed in December 2011 pursuant to the Amended Splitrock Agreement and notes issued during the nine months ended September 30, 2012.

Net Loss

We incurred net losses from operations of $2,012,030 and $1,955,284 for the nine months ended September 30, 2012 and 2011, respectively. The increase of net loss in 2012 was as a result of the items discussed above.

Liquidity and Capital Resources

Our cash used in operating activities for the nine months ended September 30, 2012 was $1,255,387 compared to $32,000 for the nine months ended September 30, 2011. The increase in cash used in operations was primarily attributable to activities related to the acquisition and legal proceedings with Golden Match, and new project development during the nine months ended September 30, 2012.

Our cash used in investing activities for the nine months ended September 30, 2012 was $900,337, compared to $0 for the nine months ended September 30, 2011. The increase is due to restricted cash of $900,337 held in escrow during the settlement process with Rousay Holdings, Ltd. related to a promissory note.

Our cash provided by financing activities for the nine months ended September 30, 2012 was $2,142,500, compared to $32,000 for the nine months ended September 30, 2011. The increase is mainly due to proceeds from the issuance of convertible note payable received in 2012 of $2,132,500.

Since its inception, the Company has financed its cash requirements from the sale of common stock and shareholder loans. Uses of funds have included activities to establish our business, professional fees, exploration expenses and other general and administrative expenses.

Due to our lack of operating history and present inability to generate revenues, there is substantial doubt about our ability to continue as a going concern.

Material Events and Uncertainties

Our operating results are difficult to forecast. Our prospects should be evaluated in light of the risks, expenses and difficulties commonly encountered by comparable development stage companies.

There can be no assurance that we will successfully address such risks, expenses and difficulties.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures

As of the end of the period covered by this report (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of the Company's Principal Executive Officer and Principal Financial Officer (the “Certifying Officers”) of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e)) under the Exchange Act. Based on that evaluation, the Certifying Officers have concluded that, as of the Evaluation Date, the disclosure controls and procedures in place were not effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported on a timely basis in accordance with applicable rules and regulations.

Internal control over financial reporting

The Certifying Officers reviewed our internal control over financial reporting (as defined in rules 13a-15(f) and 15d-15(f)) under the Exchange Act as of the Evaluation Date and concluded that no changes occurred in such control or in other factors during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There is pending Litigation between Elray and Mr Lao Sio I, Millennium Commodity Trading Pty Ltd, Millennium Holdings Pty Ltd in relation to “Public Stock for Private Acquisition Agreement” signed on the May 4, 2012 with Mr Lao Sio I.

The Company will vigorously defend this action and will pursue counterclaims seeking rescission of the transaction and damages.

ITEM 1A. RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On January 25, 2011, Elray increased the number of authorized common shares to 750,000,000 shares. On March 28, 2011, Elray increased the number of authorized common shares to 1,500,000,000 shares.

On February 10, 2011, Elray settled a debt carried forward since 2008 to Elmside Pty Ltd. equal to $93,000 for 93,000,000 shares of the Company’s common stock valued at $720,000 (or $0.012 per share).

On May 26, 2011, Elray settled a debt carried forward since 2008 to Elmside Pty Ltd. equal to $7,000 for 14,000,000 shares of the Company’s common stock.

On May 26, 2011, Elray issued 60,000,000 shares of the Company’s common stock valued at $720,000 (or $0.012 per share) as compensation for services provided in relation to the acquisition of Splitrock Ventures (BVI) Limited and the planned divestment of the Angor Wat mining operation.

On June 30, 2011, Elray issued 1,000,000 shares of the Company’s common stock for $10,000 cash to the Princess Trust.

On October 28, 2011, the Company issued 12,000,000 shares of the Company’s common stock valued at $36,000 in settlement of a payable of $20,000.

On October 28, 2011, the Company issued 1,500,000 shares of the Company’s common stock valued at $4,500 to David Price in consideration for services provided.

On October 28, 2011, the Company issued 10,000,000 shares of the Company’s common stock valued at $30,000 to DMS Consulting LLC in consideration for services provided.

On October 28, 2011, the Company issued 2,500,000 shares of the Company’s common stock valued at $7,500 to Peter Thornton in consideration for services provided.

On October 28, 2011, the Company issued 790,350 shares of the Company’s common stock valued at $2,371 to David Boyle in consideration for services provided.

On February 23, 2011, the Company entered into a Purchase Agreement to acquire 100% of the issued and outstanding shares of Splitrock in exchange for 592,454,728 shares of the Company’s common stock (the “Splitrock Agreement”). On December 9, 2011, Elray entered into the Amended Splitrock Agreement which amended certain elements of the Splitrock Agreement. Whereas under the Splitrock Agreement, the Company was to acquire 100% of the shares of Splitrock, pursuant to the Amended Splitrock Agreement, the Company instead acquired only certain assets and liabilities of Splitrock. As consideration for the acquisition of Splitrock’s assets, the Company issued 592,454,728 shares to the shareholders of Splitrock as full consideration. These shares were valued at $2,369,819 based on the market price on the acquisition date of $0.004 per share.

On January 1, 2012, the Company entered into an agreement with Ludlow Capital, Inc. (“Ludlow”) to provide investor relations services to the Company for six months. In consideration for such services the Company agreed to issue 1,000,000 shares to Ludlow. On May 4, 2012, 1,000,000 shares are issued to Ludlow.

On February 25, 2012, the Company entered into a subscription agreement for the private placement of 2,500,000 shares at $0.004 per share for a total consideration of $10,000. On May 4, 2012, these shares are issued.

On March 6, 2012, the Company entered into an agreement with DMS Consulting, LLC (“DMS”) to provide public relations services for the Company. In consideration for such services, the Company agreed to issue 6,000,000 restricted shares to DMS. On May 4, 2012, 6,000,000 shares are issued to DMS. This consulting service shall continue until September 2nd, 2012.

On April 12, 2012, the Company issued 6,000,000 shares of common stock to its directors for services provided.

On May 4, 2012, the Company entered into an acquisition agreement under which the Company acquired all of the outstanding shares of GM. Under the terms of the acquisition agreement, Elray acquired 100% of GM, an investment holding company which has a profit share agreement with CALI Promocao de Jogos Sociedade Unipessoal Lda., a company duly incorporated under the laws of the Special Administrative Region of Macau. In terms of the agreement, Elray transferred, to the principals of GM, 211,018,516 of its Series A Preferred Stock, which on a fully dilutive basis will equal 95% of the Company's then outstanding shares. The principals of GM than became the Company’s majority shareholder. As of the date of this report, this transaction is being unwound.

On May 4, 2012, the Company issued 6,250,000 shares to Clinton Greyling, 3,750,000 shares to Tom Hogshead, 5,000,000 shares to Jacqueline Hawksworth, and 1,500,000 shares to David Price, Esq for services provided.

On July 3, 2012, the Company entered into an agreement with Maxwell Newbould to acquire Penny Auction, a technology business, in exchange for 88,000,000 shares of Series B preferred stock. The shares were issued to Gold Globe Investments and are being held in escrow for 120 days.

On August 1, 2012, the Company issued 60,000,000 shares of common stock valued at $246,000, based on the stock price of issuance date, for services related to the development of certain financial applications. 20,000,000 shares were issued to Mark Frost and 40,000,000 shares were issued to Gold Globe Investments acting as escrow agent. On achievement of certain benchmarks by Mark Frost, Gold Globe Investments will transfer 30,000,000 shares to Mark Frost. The rest 10,000,000 shares will remain with Gold Globe Investments for its services.

On October 13, 2012, in terms of an Order of Settlement with Rousay Holdings Ltd., the Company issued 101,864,848 restricted shares of common stock to Rousay Holdings Ltd.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The Company has no senior securities outstanding.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Number		Exhibit Description

3.1		Articles of Incorporation of Elray Resources, Inc.*

3.2		Bylaws of Elray Resources, Inc.*

31.1		Certificate of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certificate of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS		XBRL Instance Document

101.SCH		XBRL Schema Document

101.CAL		XBRL Calculation Linkbase Document

101.DEF		XBRL Definition Linkbase Document

101.LAB		XBRL Label Linkbase Document

101.PRE		XBRL Presentation Linkbase Document

_______

* Filed as an exhibit to our registration statement on Form SB-2 filed June 11, 2007 and incorporated herein by this reference

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ELRAY RESOURCES, INC.

Date: November 13, 2012	By:	/s/ Anthony Goodman
		Anthony Goodman,
		President and Chief Financial Officer