ESPORTS ENTERTAINMENT GROUP, INC. - Quarter Report: 2018 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Commission File Number: 000-55954

ESPORTS ENTERTAINMENT GROUP, INC.

 (Exact name of registrant as specified in its charter)

170 Pater House, Psaila St

Birkirkara BKR 9077 Malta

 (Address of principal executive offices)

Registrant’s telephone number, including area code: (268) 562-9111

_______________________________________

(Former name or former address if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 days.

Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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).   Yes [X]   No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).  

                                       Yes [   ]   No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of December 31st, 2018, the registrant had 87,278,118 shares of common stock, $0.001 par value, issued and outstanding.

PART 1. FINANCIAL STATEMENTS

ESPORTS ENTERTAINMENT GROUP, INC.

December 31, 2018

(Unaudited)

INDEX TO CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

2

Esports Entertainment Group, Inc.

Condensed Interim Consolidated Balance Sheets

(Unaudited)

 (Amounts expressed in US dollars)

See accompanying notes to condensed interim consolidated financial statements

3

Esports Entertainment Group, Inc.

Condensed Interim Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

 (Amounts expressed in US dollars)

See accompanying notes to condensed interim consolidated financial statements

4

Esports Entertainment Group, Inc.

Condensed Interim Consolidated Statements of Cash Flows

(Unaudited)

(Amounts expressed in US dollars)

5

Esports Entertainment Group, Inc.

Condensed Interim Consolidated Statements of Changes in Stockholders’ (Deficiency) Equity

(Unaudited)

(Amounts expressed in US dollars)

6

Esports Entertainment Group, Inc.

Notes to the Condensed Interim Consolidated Financial Statements

December 31, 2018

(Unaudited)

(Expressed in U.S. dollars)

1.

Nature of Operations and Going Concern

Esports Entertainment Group, Inc. (formerly VGambling Inc.) (the “Company”) was incorporated in the state of Nevada on July 22, 2008.  

On April 18, 2017, the majority of the shareholders of the Company’s common stock voted to approve a change of the name of the Company from VGambling, Inc. to Esports Entertainment Group, Inc.

The Company’s activities are subject to significant risks and uncertainties, including failing to obtain the licenses required to operate its gambling business, failing to secure the additional funding required to fully operationalize the Company’s business, and the risk of existing or future competitors offering similar or more advanced technology.

The Company is in the development stage and has not yet realized profitable operations and has relied on non-operational sources to fund operations.  The Company has incurred recurring losses and additional future losses are anticipated as the Company has not yet been able to generate revenue.

These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize it assets and discharge its liabilities in the normal course of business.  As of December 31, 2018, the Company had an accumulated deficit of $6,799,708 and a working capital deficiency amounting $2,319,591. The Company has not generated any revenues during the period ended December 31, 2018.  The Company is licensed to conduct online gambling.  The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability of the Company to obtain necessary equity financing to continue operations, and the attainment of profitable operations.

These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. Management’s evaluations are based on relevant conditions and events that are known and reasonably to be knowable as of March 5, 2019.  Based on the following, management believes that it is probable that management will be unable to meet its obligations as they come due within one year that the financial statements are issued.

These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.  Such adjustments could be material.

2.

Presentation of Financial Statements

Basis of Presentation

The accompanying unaudited condensed interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) set forth in Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Unaudited interim results are not necessarily indicative of the

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results for the full fiscal year. These financial statements should be read along with the Annual Report filed on Form 10-K of the Company for June 30, 2018.

The Company’s consolidated financial statements are prepared using the accrual method of accounting. The consolidated statements include the accounts of the Company and its wholly owned subsidiaries Esports Services Antigua Ltd., Vie Esports Services B.V., Esports Services (Malta) Limited and Esports Entertainment (Malta) Ltd.  All material intercompany transactions and balances have been eliminated on consolidation.

Recent Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements.

ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The ASU provides clarity to preparers on the treatment of eight specific items within an entity’s statement of cash flows. The guidance becomes effective for all public entities in fiscal years beginning after December 15, 2017, including interim periods therein. The adoption of the amended guidance did not have a material impact on the Company’s financial statements.

ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting. The ASU amends the scope of modification accounting for share-based arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The guidance becomes effective for annual reporting periods, including interim periods within those annual reporting periods, beginning after December 15, 2017. The adoption of the amended guidance did not have a material impact on the Company’s financial statements.

In March 2018, FASB issued ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. ASU 2018-05 amends SEC paragraphs in ASC 740 to reflect SEC Staff Accounting Bulletin (SAB) No.118. When the 2017 Tax Cuts and Jobs Act (the “Act”) was signed into law, the SEC staff released SAB 118 for applying Topic 740 as it relates to the Act. SAB 118 outlines the approach companies may take if they determine that the necessary information is not available (in reasonable detail) to evaluate, compute, and prepare accounting entries to recognize the effect(s) of the Act by the time the financial statements are required to be filed. Companies may use this approach when the timely determination of some or all of the income tax effect(s) from the Act is incomplete by the due date of the financial statements. SAB 118 also prescribes disclosures that reporting entities must provide in these circumstances. The amendments to the Accounting Standards Codification became effective upon issuance. The adoption of the amended guidance did not have a material impact on the Company’s financial statements.

The following are new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) (ASU 2016-02). The FASB issued the update to require the recognition of lease assets and liabilities on the balance sheet of lessees. ASU 2016-02 will be effective for the Company on December 1, 2019, including interim periods. ASU 2016-02 requires a modified retrospective transition method with the option to elect a package of practical expedients. Early adoption is permitted. The Company is evaluating the effect that ASU 2016-02 will have on its financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40). This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The

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amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance to determine the impact it may have on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). The FASB issued the update to simplify the measurement of goodwill by eliminating step 2 from the goodwill impairment test. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. ASU 2017-04 will be effective for public companies for fiscal years beginning after December 15, 2019, including interim periods. Early adoption is permitted. The Company is evaluating the effect that ASU 2017-04 will have on its financial statements and related disclosures.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic: 260), Distinguishing Liabilities from Equity (Topic: 480), Derivatives and Hedges (Topic 815) (ASU 2017-11). FASB issued the update to simplify the accounting for certain financial instruments with down round features. ASU 2017-11 will be effective for public companies for fiscal years beginning after December 15, 2018, including interim periods. Earlier adoption is permitted for all entities as of the beginning of an interim period for which financial statements (interim or annual) have not been issued or have not been made available for issuance.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07).  FASB issued the update to include share-based payment transaction for acquiring goods or services from nonemployees in Topic 718, Compensation – Stock Compensation. ASU 2018-07 will be effective for public companies for fiscal years beginning after December 15, 2018, including interim periods. Early adoption is permitted, but no earlier than a company’s adoption date of Topic 606, Revenue from Contracts with Customers.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic: 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13).  FASB issued the update to modify the disclosure requirements in Topic 820. ASU 2018-07 will be effective for public companies for fiscal years beginning after December 15, 2018, including interim periods. Early adoption is permitted.

3.

Intangible Assets

During the six months ended December 31, 2018, the Company recorded total depreciation expense of $21,187 (December 31, 2017 - $10,593).

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4.

Equipment

During the six months ended December 31, 2018, the Company recorded depreciation expense of $4,477 (December 31, 2017 - $2,228).

5.

Accounts Payable

Accounts payable were $244,714 as at December 31, 2018 (June 30, 2018 - $248,356).  Accounts payable are primarily comprised of trade payables of $235,803 (June 30, 2018 - $210,380) and payroll liabilities of $8,911(June 30, 2018 - $37,976).

6.

Related Party Transactions

a) On May 20, 2013, the Company appointed Grant Johnson as President and a Director of the Company. Mr. Johnson is paid $120,000 per year for serving as President. During the six months ended December 31, 2018, the Company incurred salary of $60,000 (December 31, 2017 - $60,000) to the President of the Company. As of December 31, 2018, the Company owed the President $13,535 (June 30, 2018 - $30,975). As of December 31, 2018, the Company has a prepaid with the President of $10,000 (June 30, 2018 - $Nil).

b) During the six months ended December 31, 2018, the Company incurred rent of $3,000 (December 31, 2017 - $1,292), charged by the President of the Company. As of December 31, 2018, the Company owed $1,551 (June 30, 2018 - $1,551) to the President related to rent payments.

c) On January 30, 2015, the Company appointed Chul Woong Alex Lim as a Director of the Company for which he receives annual compensation of $20,000.  Mr. Lim left the Company as of October 26, 2016. On March 15, 2018, the Company re-appointed Mr. Lim as a Director of the Company. During the six months ended December 31, 2018, the Company paid $10,000 (December 31, 2017 - $5,000) in director’s fees.  During the 2018 fiscal year, the Company issued 20,000 stock options to Mr. Alex Lim and during the six months ended December 31, 2018, the Company recorded stock-based compensation expense of $4,857 (December 31, 2017 - $Nil).  As of December 31, 2018, the Company owed $Nil (June 30, 2018 - $1,667) to Mr. Lim for his director fees.

d) On March 9, 2015, the Company appointed Yan Rozum as a Director of the Company for which he receives annual compensation of $20,000.  Director’s fees for Mr. Rozum for the six months ended December 31, 2018 totaled $Nil (2017 - $20,000).  On November 22, 2017, the Company appointed Yan Rozum as Chief Technical Officer (“CTO”) of the Company for which he receives annual compensation of $75,000.  CTO fees for Mr. Rozum for the six months ended December 31, 2018 totaled $37,500 (December 31, 2017 - $Nil). During the 2018 fiscal year, the Company issued 75,000 stock options to Mr. Rozum and recorded stock-based compensation expense for six months ended December 31, 2018 of $18,216 (December 31, 2017 - $Nil).  The Company owed $Nil to Mr. Rozum as of December 31, 2018 (June 30, 2018 - $Nil).

e) On October 26, 2016, the Company appointed David Watt as a Director for which he receives annual compensation of $25,000. Director’s fees for Mr. Watt for the six months ended December 31, 2018 totaled $12,500 (December 31, 2017 - $5,000). The Company owed $9,348 to Mr. Watt as of December 31, 2018 (June 30, 2018 - $23,059). During the 2018 fiscal year, the Company issued 20,000 stock options to Mr.

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Watt and recorded stock-based compensation expense for six months ended December 31, 2018 of $4,893 (December 31, 2017 - $Nil).  The Company had provided an expense advance of $11,331 as of December 31, 2018 (June 30, 2018 - $11,331) to Mr. Watt, and the amounts are included in amounts receivable.  

f) On December 11, 2017, the Company appointed Michał Kozłowski as Vice President of Finance. Mr. Kozłowski was paid 20,000 Polish Zloty ($5,311) per month before March 15, 2018 and 25,000 Polish Zloty ($6,638) per month after March 15, 2018. The Company owed $Nil to Mr. Kozłowski as of December 31, 2018 (June 30, 2018 - $Nil). During the six months ended December 31, 2018, the Company incurred salary of $41,015 (December 31, 2017 - $Nil) to the Vice President of Accounting. During the 2018 fiscal year, the Company issued 80,000 stock options to Mr. Kozlowski and recorded stock-based compensation for six months ended December 31, 2018 of $19,431 (December 31, 2017 - $Nil).

g) During the six months ended December 31, 2018, Swiss Interactive Software GmbH (“Swiss”) charged the Company software consulting fees of $Nil (December 31, 2017 - $23,598) related to the development of the Company’s online gaming website.  Mr. Rozum is the controlling shareholder of Swiss and a director and the CTO of the Company. The Company owed $Nil to Swiss as of December 31, 2018 (June 30, 2018 - $20,000).

h) During the six months ended December 31, 2018, Ardmore Software SP.Z.O.O. (“Ardmore”) charged the Company IT consulting fees of $243,426 (December 31, 2017 - $Nil) and $35,379 (December 31, 2017 - $Nil) in rent expense, totalling $278,804. Mr. Rozum is the controlling shareholder of Ardmore and a director and the CTO of the Company. The Company owed $53,000 to Ardmore as of December 31, 2018 (June 30, 2018 - $84,869).

i) On November 15, 2018, the Company appointed Christopher Malone as Chief Financial Officer (“CFO”) of the Company for which he receives annual compensation of $84,000. During the six months ended December 31, 2018, the CFO charged the Company $7,000 in salary (December 31, 2017 - $Nil). As of December 31, 3018, the Company owed $Nil to the CFO (June 30, 2018 - $Nil).

Amounts payable to related parties as disclosed above, are unsecured, non-interest bearing and due on demand.

Amounts due to shareholder are unsecured, non-interest bearing and due on demand. The shareholder is also a director and officer of the Company.

See also Notes 7, 8 and 15.

7.

Promissory note

On August 13, 2018, the Company signed a promissory note with a shareholder, for principal of $50,000 bearing interest at 2% per month repayable by September 30, 2018. As a result of failure to repay the note by September 30, 2018, interest increased to 5% per month. On December 3, 2018, the Company settled the promissory note and accrued interest with a cash payment of $56,500.

8.

Commitments and Contingencies

Management Agreements

On May 20, 2013, the Company appointed Grant Johnson as President and a Director of the Company.  Mr. Johnson is paid $120,000 per year for serving as President. In addition, the Company may pay a performance bonus of up to 50% of his base salary. The Company must pay three months’ salary for terminating the President without cause. 

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On December 7, 2017, the Company appointed Yan Rozum as Chief Technology Officer of the Company.  Mr. Rozum will be paid $75,000 per year before the Company’s common stock is listing on the NASDAQ stock exchange, and $120,000 per year after the Company’s common stock is listed on the NASDAQ stock exchange. The Company must pay three months’ salary for terminating the Chief Technology Officer without cause and an additional one month’s salary for each full year of service.

On December 11, 2017, the Company appointed Michał Kozłowski as Vice President Accounting. Mr. Kozłowski will be paid 25,000 Polish Zloty ($6,638) per month for serving as Vice President Accounting. The Company must pay three months’ salary for terminating the Vice President Accounting without cause and an additional one month’s salary for each full year of service.

On November 15, 2018, the Company appointed Christopher Malone as Chief Financial Officer of the Company.  Mr. Malone will be paid $84,000 per year before the Company’s common stock is listing on the NASDAQ stock exchange, and $120,000 per year after the Company’s common stock is listed on the NASDAQ stock exchange. The Company must pay three months’ salary for terminating the Chief Financial Officer without cause and an additional one month’s salary for each full year of service.

Consultant Agreements

The Company has entered into various consulting agreements with minimum termination commitments totalling $91,000.

On June 12, 2014, the Company entered into a Betting Gaming Platform Software Agreement with Swiss Interactive Software GmbH. The monthly fees due under the agreement are based on the percentage of total revenues per month ranging from 5.0% to 10.0%. Monthly fees for platform support and maintenance services are set at a minimum of 2,500 Euros ($2,859) and a maximum of 25,000 Euros ($28,595). The Company must provide 30 days notice to terminate the agreement.

On August 1, 2017, the Company entered into a consulting agreement for compensation of $48,000 per year. If the Company’s generates revenues exceeding $1,000,000 per month for three consecutive months the base annual salary will increase to $72,000 per year.

On July 13, 2018, the Company entered into an agreement in principle with an arm’s length party to assist the Company with an offering of common stock of the Company or any other financing.  Pursuant to this agreement, the Company advanced $50,000 for expenses which has been included in prepaid expenses as a deferred financing cost as at December 31, 2018 (June 30, 2018 - $Nil).  In the event the agreement is terminated, the Company has agreed to reimburse the third party for the full amount of accountable expenses incurred to such date, up to a maximum of $200,000.  This agreement is subject to execution of a definitive underwriting agreement.

Lease Agreements

The Company entered into a five year lease agreement with Polskie Nieruchomości Sp. Z.O.O. to rent office space starting on July 1, 2018 and terminating on November 20, 2022.  Minimum payments for successive years ending June 30, are as follows:

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The Company entered into a three year lease agreement with Caribbean Developments (Antigua) Ltd. to rent commercial space starting on May 1, 2017 terminating on April 30, 2020. After the first twelve months, either party can terminate the lease agreement. Minimum payments for successive years ending June 30, are as follows:

Service Agreements

On December 6, 2016, the Company entered into an affiliate marketing agreement for a six month period from launch of the website, www.vie.gg. Affiliate fees under this agreement range from 20% to 40% of monthly revenue. The Company must provide thirty days written notice for termination.

On February 26, 2018, the Company entered into a one year service agreement expiring on March 1, 2019. Minimum monthly commitment of 7,500 Euros ($8,578) of which the Company must pay three months’ notice if terminated.

On December 19, 2018, the Company entered into a legal service agreement with an effective start date of January 1, 2019. The minimum fixed fee for legal services under this agreement is $125,000.

Contingency

Boustead Securities, LLC (“Boustead”) has notified the Company that it owes Boustead $192,664, as well as warrants to purchase 1,417,909 common shares of the Company, as compensation for their acting as the placement agent for the sale of Company securities between June 2017 and 2018.  Unless this matter is settled, Boustead has notified us that they plan to file an arbitration claim to resolve this dispute.  Management believes this claim to be without merit as it is management’s position that Boustead has been paid in full for the services provided and that no further cash or warrants are owed.  

The Company was notified that a claim was made against the Company for approximately $117,000, as compensation for financing commissions in 2017. Management believes this claim to be without merit as it is management’s position that the individual is not entitled to any compensation.  

Restricted Cash

Under the terms of a payment service agreement, the Company is required to keep a $250,000 (June 30, 2018 - $Nil) security deposit with the bank, which has been reflected as restricted cash in the balance sheet.

9.

Convertible Debt

$2,200,000 Secured Convertible Note

On November 13, 2018, the Company issued face value $2,200,000 5% Secured Convertible Notes (the “Notes”) issued at a 10% original issue discount along with 3,666,666 warrants for net proceeds of $2,000,000. Cash fees paid for financing costs were $360,772. The Note is secured by all of the Company’s assets and accrues interest at 5% per annum, payable in cash at maturity. However, the principal amount may be converted at the option of the holder at any time during the term to maturity into shares of the Company’s common stock at a conversion price of $0.60 per share subject to adjustment for capital reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below $0.60. The Note also embodies certain traditional default provisions that are linked to credit or interest risks, such as bankruptcy proceedings, liquidation events and corporate existence. The Company has concluded that the embedded conversion option is not indexed to the Company’s own stock due to the

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down-round protection features afforded to the holder. Therefore, the embedded conversion option is subject to classification in the condensed interim consolidated financial statement a derivative liability at fair value, both at inception and subsequently, pursuant to ASC 815.

In connection with the issuance of the Note, the Company issued the holders warrants to purchase the Company’s common stock. The warrants are exercisable until November 13, 2021 for 3,666,666 of shares at a purchase price of $0.75 per share, subject to adjustment for capital reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below $0.75. The Company has concluded that the warrants are not indexed to the Company’s own stock due to the down-round protection. Accordingly, the Company’s analysis resulted in the conclusion that these warrants require classification in the condensed interim consolidated financial statements as a derivative liability at fair value, both at inception and subsequently, pursuant to ASC 815.

Additionally, the Company issued  agent commission warrants to purchase the Company’s common stock. The warrants are exercisable until December 12, 2023 for 733,333 of shares at a purchase price of $0.75 per share, subject to adjustment for capital reorganization events and subsequent sales by the Company of shares of its common stock at a price per share below $0.75. The Company has concluded that the warrants are not indexed to the Company’s stock due to the down-round protection. Accordingly, the Company’s analysis resulted in the conclusion that these warrants require classification in the condensed interim consolidated financial statements as a derivative liability at fair value, both at inception and subsequently, pursuant to ASC 815.

Accounting for the Secured Convertible Notes

The Company has evaluated the terms and conditions of the Notes under the guidance of ASC 815. Due to  the economic characteristics and risks of the equity-linked conversion options not being clearly and closely related to a debt-type host, the conversion features require classification and measurement as derivative financial instruments. Further, these features individually were not afforded the exemption normally available to derivatives indexed to a company’s own stock. Accordingly, the Company’s evaluation resulted in the conclusion that this compound derivative financial instrument requires bifurcation and liability classification, at fair value. Current standards contemplate that the classification of financial instruments requires evaluation at each report date.

The following tables reflect the allocation of the purchase on the financing dates:

The carrying value of the Notes at December 31, 2018 was $55,621 (June 30, 2018 - $Nil).

Discounts (premiums) on the convertible notes arise from (i) the allocation of basis to other instruments issued in the transaction, (ii) fees paid directly to the creditor, and (iii) initial recognition at fair value, which is lower than face value. Discounts (premiums) are amortized through charges (credits) to interest expense over the term of the debt agreement.  Amortization of debt discounts (premiums) amounted to ($55,621) (2017 - $Nil) during the six month period ended December 31, 2018.

In addition to the debt discounts, cash paid for financing costs of $360,772 (2017 - $Nil) and the fair value of placement agent warrants issued of $415,307 (2017 - $Nil)  are included in interest expense for the six month period ended December 31, 2018.

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Derivative Financial Instruments

Derivative Liabilities

The carrying value of the embedded derivative and warrant derivative liabilities are recorded in the condensed interim consolidated balance sheet, with changes in the carrying value being recorded as change in fair value of derivative liabilities in the condensed interim consolidated statement of operations and comprehensive loss.  The components of the embedded derivative and warrant derivative liabilities as of December 31, 2018 are:

The following table summarizes the effects on the Company’s gain (loss) associated with changes in the fair values of the Company’s derivative financial instruments by type of financing for the six month period ended December 31, 2018:

Fair Value Considerations

GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

Level 1 valuations:

Quoted prices in active markets for identical assets and liabilities.

Level 2 valuations:

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs or significant value drivers are observable.

Level 3 valuations:

Significant inputs to valuation model are unobservable.

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The Company follow the provisions of ASC 820 with respect to the Company’s financial instruments. As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. The Company’s derivative financial instruments which are required to be measured at fair value on a recurring basis under of ASC 815 as of December 31, 2018 are all measured at fair value using Level 3 inputs. Level 3 inputs are unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The features embedded in the secured convertible notes and the warrants were valued using a binomial-lattice-based valuation model. The lattice-based valuation technique was utilized because it embodies all of the requisite assumptions (including the underlying price, exercise price, term, volatility, and risk-free interest-rate) that are necessary to fair value these instruments. For forward contracts that contingently require net-cash settlement as the principal means of settlement, the Company project and discount future cash flows applying probability-weighted to multiple possible outcomes. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading market price of the Company’s common stock.  Due to derivative financial instruments initially and subsequently carried at fair values, the Company’s condensed interim consolidated statement of operations and comprehensive loss will reflect the volatility in these estimate and assumption changes. The following table sets forth (i) the range of inputs for each significant assumption, and (ii) the equivalent, or averages, of each significant assumption as of December 31, 2018:

10.

Common Stock

Issued

a) On July 5, 2017, the Company issued 800,000 units at $0.25 per unit for cash proceeds of $200,000. Each unit consists of one common share and one warrant. Each warrant entitles the holder to purchase one common share at $0.25. The warrants are exercisable before July 5, 2020.  The warrants are callable by the Company any time after July 5, 2018 with 30 days notice at a price of $0.05 per warrant.

b) On July 6, 2017, the Company issued 400,000 units at $0.25 per unit for cash proceeds of $100,000.  Each unit consists of one common share and one warrant.  Each warrant entitles the holder to purchase one common share at $0.25. The warrants are exercisable before July 6, 2020.  The warrants are callable by the

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Company any time after July 6, 2018 with 30 days notice at a price of $0.05 per warrant.

c)

On July 16, 2017, the Company issued 100,000 units at $0.25 per unit for cash proceeds of $25,000. Each unit consists of one common share and one warrant. Each warrant entitles the holder to purchase one common share at $0.25. The warrants are exercisable before July 16, 2020.  The warrants are callable by the Company any time after July 16, 2018 with 30 days notice at a price of $0.05 per warrant.

d)

On July 17, 2017, the Company issued 290,000 units at $0.25 per unit for cash proceeds of $72,500. Each unit consists of one common share and one warrant. Each warrant entitles the holder to purchase one common share at $0.25. The warrants are exercisable before July 17, 2020.  The warrants are callable by the Company any time after July 17, 2018 with 30 days notice at a price of $0.05 per warrant.

e)

On July 19, 2017, the Company issued 200,000 units at $0.15 per unit to an arm’s length consultant in exchange for services of $30,000.  Each unit consists of one common share and one warrant. Each warrant entitles the holder to purchase one common share at $0.15. The warrants are exercisable before July 19, 2020.  The warrants are callable by the Company any time after July 19, 2018 with 30 days notice at a price of $0.05 per warrant.

f)

On July 20, 2017, the Company issued 100,000 units at $0.25 per unit for cash proceeds of $25,000. Each unit consists of one common share and one warrant. Each warrant entitles the holder to purchase one common share at $0.25. The warrants are exercisable before July 19, 2020. The warrants are callable by the issuer any time after July 20, 2018 with 30 days notice at a price of $0.05 per warrant.

g) On July 24, 2017, the Company issued 5,000 units at $0.50 per unit for cash proceeds of $2,500. Each unit consists of one common share and one warrant. Each warrant entitles the holder to purchase one common share at $2.00. The warrants are exercisable before July 24, 2018.  

h) On August 8, 2017, the Company issued 10,000 units at $1.25 per unit for cash proceeds of $12,500. Each unit consists of one common share and one warrant. Each warrant entitles the holder to purchase one common share at $2.00. The warrants are exercisable before February 8, 2019.  

i) On August 27, 2017, the Company issued 300,000 common shares at $0.25 per share for cash proceeds of $75,000.

j) On December 7, 2017, the Company issued 20,000 units at $1.25 per unit for cash proceeds of $25,000. Each unit consists of one common share and one warrant. Each warrant entitles the holder to purchase one common share at $4.00. The warrants are exercisable before March 6, 2019.  

k) On December 21, 2017, the Company issued 156,667 common shares upon the exercise of 166,667 warrants exercised at $0.15 on a cashless basis. 10,000 common shares were held back by the Company as consideration for the exercise.

l) On December 26, 2017, the Company issued 101,000 common shares at $0.15 per share upon the exercise of 101,000 warrants.

m) On December 27, 2017, the Company issued 44,800 units at $1.25 per unit for cash proceeds of $56,000. Each unit consists of one common share and one warrant. Each warrant entitles the holder to purchase one common share at $4.00. The warrants are exercisable before March 30, 2019.  

n) On December 29, 2017, the Company issued 4,000 units at $1.25 per unit for cash proceeds of $5,000. Each unit consists of one common share, one warrant and one piggyback warrant. Each warrant entitles the holder to purchase one common share at $2.00. Each piggyback warrant entitles the holder to purchase one common share at $4.00. The warrant is exercisable before December 24, 2018 and the piggyback warrant is exercisable before December 24, 2019.

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o) On December 29, 2017, the Company issued 16,000 units at $1.25 per unit for cash proceeds of $20,000. Each unit consists of one common share, one warrant and one piggyback warrant. Each warrant entitles the holder to purchase one common share at $2.00. Each piggyback warrant entitles the holder to purchase one common share at $4.00. The warrant is exercisable before December 28, 2018 and the piggyback warrant is exercisable before December 28, 2019.  

p) On October 17, 2017, the Company issued 66,667 common shares at $0.15 per share upon the exercise of 66,667 warrants.  

q) On October 31, 2017, the Company issued 315,500 common shares at $0.15 per share upon the exercise of 315,500 warrants.

r) On November 7, 2017, the Company issued 15,500 common shares at $0.25 per share for cash proceeds of $3,875.

s) On March 2, 2018, the Company issued 120,000 common shares at $0.75 per share to an arm’s length consultant for marketing services provided, of which $42,557 is reflected as a prepaid expense at December 31, 2018 (June 30, 2018 - $84,706). The share value was based on the quoted value of the stock at the time of issue.

t) On April 4, 2018, the Company issued 16,000 common shares at $0.25 per share upon the exercise of 16,000 warrants.

u) On April 26, 2018, the Company issued 100,000 common shares at $0.20 per share for cash proceeds of $20,000.

v) On April 26, 2018, the Company issued 166,667 common shares at $0.20 per share for cash proceeds of $33,333.

w) On May 21, 2018, the Company issued 170,000 common shares at $0.15 per share upon the exercise of 170,000 warrants.

x) On June 11, 2018, the Company issued 250,000 common shares at $1.00 per share to an arm’s length consultant for referral services of which, $Nil is reflected as a prepaid expense as of December 31, 3018 (June 30, 3018 - $185,625).  The share value was based on the quoted value of the stock at the time of issue.

y) On June 18, 2018, the Company issued 25,000 common shares at $0.20 per share for cash proceeds of $5,000.

z) On June 20, 2018, the Company issued 20,000 common shares at $0.80 per share to an arm’s length consultant for advisory services provided. The share value was based on the quoted value of the stock at the time of issue.

aa) On July 26, 2018, the Company issued 360,000 common shares at $0.15 per share upon the exercise of 360,000 warrants. As of June 30, 2018, 193,333 of the warrants exercised had been reflected as shares to be issued.

bb) On July 26, 2018, the Company issued 15,000 common shares at $0.80 per share in exchange for services of $12,000 to a consultant for advisory services provided.  

cc) On July 26, 2018, the Company issued 206,667 common shares at $0.15 per share. As of June 30, 2018, this had been reflected as shares to be issued.

dd) On July 31, 2018, the Company issued 150,000 common shares to a consultant at $0.85 per share for advisory services of $127,500 pursuant to an agreement dated June 19, 2018. As of June 30, 2018, this had

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been reflected as shares to be issued.

ee) On August 3, 2018, the Company issued 333,333 common shares at $0.15 per share upon the exercise of 333,333 warrants.

ff) On August 16, 2018, the Company issued 1,566,667 common shares at $0.15 per share upon the exercise of 1,566,667 warrants. As of June 30, 2018, 1,266,667 of the warrants exercised had been reflected as shares to be issued.

gg) On August 27, 2018, the Company issued 100,000 common shares at $0.15 per share for exercise of warrants.

hh) On September 5, 2018, the Company issued 66,667 common shares at $0.15 per share upon the exercise of 66,667 warrants.

ii) On September 6, 2018, the Company issued 300,000 common shares at $0.25 per share upon the exercise of 300,000 warrants.

jj) On September 6, 2018, the Company issued 200,000 common shares at $0.15 per share upon the exercise of 200,000 warrants.

(kk) On October 4, 2018, the Company issued 15,000 common shares at $0.70 per share to an arm’s length consultant for advisory services provided. The share value was based on the quoted value of the stock at the time of issue.

(ll) On October 12, 2018, the Company issued 100,000 common shares at $0.62 per share to an arm’s length consultant for advisory services provided. The share value was based on the quoted value of the stock at the time of issue.

(mm) On October 24, 2018, the Company issued 263,525 common shares at $0.15 per share upon the exercise of 263,525 warrants.

(nn) On December 18, 2018, the Company issued 20,000 common shares at $0.80 per share to to an arm’s length consultant for advisory services provided. The share value was based on the quoted value of the stock at the time of issue.

11.

Warrants

A summary of the Company’s warrant activities is as follows:

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The intrinsic value of the warrants exercised during the six months ended December 31, 2018 was $1,789,666. The intrinsic value of the 639,834 warrants exercised during the six months ended December 31, 2017 was $1,448,628.  

As at December 31, 2018, the following warrants were outstanding:

12.

Stock Options

On August 1, 2017, the Company adopted the 2017 Stock Incentive Plan (the “2017 Plan”) whereby incentive stock options issued to employees, officers, and directors of the Company shall not exceed 2,500,000 of which the purchase price of the stock options shall not be less than 100% of the fair market value of the Company’s common stock and the period for exercising the stock options not exceed 10 years from the date of grant. The option price per share with respect to each option shall be determined by the committee for non-qualified stock options.

A summary of the Company’s stock option activity is as follows:

On October 12, 2018, the Company cancelled 120,000 options that were granted to a consultant of the Company.  

As at December 31, 2018, the following options were outstanding:

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As at December 31, 2018, the weighted average remaining life of the options was 3.83 years.

During the six months ended December 31, 2018, the Company recorded stock-based compensation expense of $168,459 (December 31, 2017 - $185,540) which has been recorded as stock based compensation in the statements of operations. As of December 31, 2018, there was $207,321 of unrecognized expense related to non-vested stock-based compensation arrangements (June 30, 2018 - $347,952).

The following table provides the details of the total stock-based payments expense during the six months ended December 31, 2018 and 2017:

13.

Segmented Information

The following tables summarizes financial information by geographic segment.

Six months ended December 31, 2018:

Six months ended December 31, 2017:

As at December 31, 2018:

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As at June 30, 2018:

14.

General and Administrative Expenses

The following table summarizes general and administrative expenses for the six months ended December 31, 2018 and 2017:

15.

Subsequent Events

On January 1, 2019, the Company entered into a sub-lease agreement with a minimum commitment of one year equivalent to $13,730 (Euros 12,000).

On January 1, 2019, the Company entered into a sponsorship agreement with minimum commitments of $46,000 over the next five months.

On January 3, 2019, the Company entered into a sponsorship agreement up to January 2020 with minimum commitments of $30,457 (Pounds 24,000).

On January 2, 2019, the Company entered into a service agreement that requires a minimum termination notice of three months equivalent to $12,010 (Euros 10,500).

On January 23, 2019, the Company acquired all of the issued and outstanding capital stock of Ardmore Software SP.Z.O.O, (“Ardmore”) a company incorporated in Poland with nominal assets for $1,328 (PLN 5,000).  Ardmore is a software development and network administration services company controlled by Yan Rozum, a director of the Company.

On February 9, 2019, 10,000 warrants with an exercise price of $2.00 expired.

On February 13, 2019, 100,000 common shares were issued to the CFO as a one time bonus under his employment agreement at a value of $0.60 per share. The share value was based on the quoted value of the stock at the time of issue.

On March 1, 2019, the Company entered into a consulting agreement for a term of six years that requires a minimum commitment of $24,000.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

This section of this report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions.

Overview

We are an online gambling company.  We offer persons (which we sometimes refer to as “players”) the ability to wager on a wide variety of esports events in a licensed and secure environment.  Esports is the competitive playing of video games by amateur and professional teams for cash prizes. Esports event gambling involves players wagering online on the outcome of professional esports events.  In the future, we intend to also offer players the ability to participate in video game tournaments for cash prizes.  

We were incorporated in Nevada on July 22, 2008.  Our company was engaged in a number of different enterprises up until May 20, 2013, when, pursuant to the terms of the Share Exchange Agreement, we acquired all of the outstanding capital stock of H&H Arizona in exchange for 50,000,000 shares of our common stock.  From May 2013 until August 2018, our operations were limited to designing, developing and testing our wagering systems. We launched our online esports wagering website (www.vie.gg) in August 2018. We are currently the only online gambling company focused on esports to offer bet exchange style wagering, player VS player (“PvP”) betting, on professional esports events.

Esports is video game played competitively for spectators, typically by professional gamers.  Esports typically takes the form of organized, multiplayer video games that include real-time strategy, fighting, first-person shooter, and multiplayer online battle arena games. A well-known example of an Esport game is Call of Duty. Currently, however, the two largest selling esports games are Dota 2, League of Legends (a multiplayer online battle arena game) and Counter Strike: Global Offensive (a first-person shooter game).  Other popular games include Smite, StarCraft II, Call of Duty¸ Heroes of the Storm, Hearthstone and Fortnite. Esports also includes games which can be played, primarily by amateurs, in multiplayer competitions such as WII (Nintendo), and Halo (343 Industries).  Most major professional esports events and a wide range of amateur esports events are broadcast live via streaming services including, twitch.tv, azubu.tv, ustream.tv and youtube.com.

According to market research firm Newzoo, in 2018 the total global esports audience will reach 380.2 million. Esports Enthusiasts, which are people who watch professional esports content at least once a month, will make up 165.0 million of the total up from 143.2 million in 2017, and will grow with a CAGR (2016-2021) of +15.6% to reach almost 250 million in 2021. The number of Occasional Viewers, which are people who watch professional esports content less than once a month, will reach 215.2 million in 2018, up from 191.9 million in 2017, and will grow with a CAGR of +14.0% to surpass 306 million in 2021. The number of people who are aware of esports worldwide will reach 1.6 billion in 2018, up from 1.3 billion in 2017. China is expected to contribute most to global esports awareness, with 468.3 million people aware of esports. The increasing exposure of esports as a mainstream entertainment industry is driving the growth in awareness in most regions.  Audience and awareness growth in the emerging regions of Latin America, Middle East and Africa, Southeast Asia, and Rest of Asia is largely driven by improving IT infrastructure and urbanization. The rise of new franchises, such as PLAYERUNKNOWN’S BATTLEGROUNDS or PubG, is an important global growth factor. The influx of millennials, to whom esports is a natural phenomenon, will further drive the growth of the industry’s audience.

In 2017, there were 588 major esports events that generated an estimated $59 million in ticket revenues, up from $32 million in 2016. The total prize money of all esports events held in 2017 reached $112 million, breaking the $100 million mark for the first year.

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Forbes magazine projects fans of esports will wager $23 billion on professional esports events by 2020.

Although official competitions have long been a part of video game culture, participation and spectatorship of such events have seen a massive global surge in popularity with the rapid growth of online streaming over the last few years. The advent of online streaming technology has turned esports into a global industry that includes professional players and teams competing in major events that are simultaneously watched in person in stadiums (which are often sold out), and by online viewers (which regularly exceed 1,000,000 for major tournaments).  The impact has been so significant, that many video game developers now build features into their games designed to facilitate competition.

Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report.

Material changes in line items in our Statement of Operations for the six months ended December 31, 2018 as compared to the same period last year, are discussed below:

Revenue and Expenses

Our operating expenses are classified into several categories:

·

Directors Compensation

·

Consulting Fees

·

Professional Fees

·

General and Administrative Expenses

·

Stock Based Compensation

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Directors Compensation is comprised of cash and stock option compensation paid to the directors of the Company.  These amounted to $13,270 for the three months ended December 31, 2018, $66,245 for the three months ended December 31, 2017.  The decrease of $52,975 in director’s compensation period over period is attributable primarily to no stock options being granted in the three months ended  September 30, 2018. These amounted to $26,541 for the six months ended December 31, 2018, $124,067 for the six months ended December 31, 2017.  The decrease of $97,526 in director’s compensation period over period is attributable primarily to no stock options being granted in the six months ended December 31, 2018.

Consulting Fees are comprised of cash and stock option compensation paid to consultants to the Company. These amounted to $93,822 for the three months ended December 31, 2018, $128,183 for the three months ended December 31, 2017.  The decrease of $34,361 in the six months in professional fees period over period is attributable primarily to increases in accounting, legal and audit fees for preparation and review of our filings with the Securities & Exchange Commission (“SEC”) and financing fees related to the convertible debt issuance in the three months ended September 30, 2018. These amounted to $260,137 for the six months ended December 31, 2018, and $269,297 for the six months ended December 31, 2017. The decrease of $9,160 in consulting fees over the prior period is attributed primarily to less work being contracted out by the Company to third party consultants in the six months ended December 31, 2018.

Professional Fees consist primarily of our contracted accounting, legal and audit fees. These amounted to $48,363 for the three months ended December 31, 2018, $11,521 for the three months ended December 31, 2017.  The increase of $36,843 in professional fees period over period is attributable primarily to increases in accounting, legal and audit fees for preparation and review of our filings with the Securities & Exchange Commission (“SEC”) in the three months ended December 31, 2018. These amounted to $74,357 for the six months ended December 31, 2018, and $59,745 for the six months ended December 31, 2017.  The increase of $14,612 in the six months in professional fees period over period is attributable primarily to increases in accounting, legal and audit fees for preparation and review of our filings with the Securities & Exchange Commission (“SEC”) in the six months ended December 31, 2018.

General and Administrative Expenses refers to our salaries, occupancy costs, marketing costs, travel costs, office supplies, telephone expenses, bank charges, fees to process and file documents with the SEC, stock transfer fees, investors relations costs, corporate filing fees with the State of Nevada, and other administrative expenses. These amounted to $317,696 for the three months ended December 31, 2018, $300,388 for the three months ended December 31, 2017.  The increase of $17,308 in 2018 versus 2017 is attributable primarily to increased business development activities associated with the commencement of online operations. These amounted to $858,066 for the six months ended December 31, 2018, and $627,880 for the six months ended December 31, 2017, respectively. The increase of $230,186 in 2018 versus 2017 is attributable primarily to increased business development activities associated with the commencement of online operations.

Stock based compensation refers to stock options issued to employees and consultants as part of the compensation package. These amounted to $41,630 for the three months ended December 31, 2018 and $185,540 for the three months ended December 31, 2017. The decrease of $143,910 in 2018 versus 2017 is attributable to options being issued in 2017 versus options only vesting in 2018. These amounted to $168,459 for the six months ended December 31, 2018 and $185,540 for the six months ended December 31, 2017. The decrease of $17,081 in 2018 versus 2017 is attributable to options being issued in 2017 versus options only vesting in 2018.

For the three months ending December 31, 2018 and 2017, we incurred total operating expenses and resulting net loss of $514,781 and $2,123,964, respectively, and for the three months ending December 31, 2017, we incurred total operating expenses and resulting net loss of $691,877 and $691,877, respectively. For the six months ending December 31, 2018, we incurred total operating expenses and resulting net loss of $1,387,560 and $2,996,886 respectively, and for the six months ending December 31, 2017, we incurred total operating expenses and resulting net loss of $1,266,529 and $1,266,905, respectively.

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Capital Resources and Liquidity

The Company’s sources and (uses) of cash for the six months ended December 31, 2018 and 2017 are shown below:

Our projected capital requirements during the next 18 months are as follows:

In addition to the $7,500,000 purchase price the Grand Princess casino, we will also need additional capital to refurbish and renovate the casino and to purchase equipment for the casino, estimated at approximately $15,000,000, and to provide working capital during the start-up phase following its opening. We expect the monthly operating expenses for the casino to be approximately $25,000. Our current cash holdings will not satisfy our capital requirements and we will require additional financing to pursue our planned business activities. We are in the process of seeking equity financing to fund our operations over the next 12 months.  If we are unsuccessful in raising additional equity capital we will then have to seek additional funds through debt financing, which would be highly difficult for a new development stage company to secure and, which may not be available. However, if such financing were available, we would likely have to pay additional costs associated with high risk loans and be subject to an above market interest rate. At such time these funds are required, management would evaluate the terms of available debt financing and determine whether our business could sustain operations, growth and manage the debt load. If we cannot raise additional capital we would be required to cease operations. As a result, investors in our common stock may lose all of their investment.

Our auditor’s report on our June 30, 2018 financial statements expresses an opinion that substantial doubt exists as to whether we can continue as an ongoing business.

Other than the foregoing, we do not know of any trends that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Off Balance Sheet Arrangements

None.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not required.

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

We conducted an evaluation, with the participation of our Chief Executive Officer/Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, as of December 31, 2018, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms, including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our principal executive/principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer/Chief Financial Officer have concluded that as of December 31, 2018, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses identified and described below.

Management identified the following four material weaknesses that have caused management to conclude that, as of December 31, 2018, our disclosure controls and procedures were not effective at the reasonable assurance level:

1.

Our documentation with respect to our internal control policies and procedures is not adequate.  Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act as of the period ending December 31, 2018. We plan to progressively implement the written policies and procedures commencing in the immediate future.

2.

We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Based on the current magnitude of our operations, it is impractical to employ sufficient staff to fully address the separation of duties issue. As the business plan is implemented and additional staff is required, we will be able to and intend to address this identified weakness.

3.

Effective controls over the control environment have not been fully implemented. Specifically, management has not developed and effectively communicated to employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, our Board of Directors has only two independent members. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. As the expansion plans are implemented, we intend to communicate our accounting policies and procedures to our employees.

4.

We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience and training in the application of GAAP commensurate with our complexity and our financial accounting and reporting requirements. This control deficiency is pervasive in nature. Further, there is a reasonable possibility that material misstatements of the financial statements including disclosures will not be prevented or detected on a timely basis as a result.

The Company plans to initiate a program to address the above weakness. While segregation of duties is very difficult in a small company.  The Company has an internal policy that all major expenditures must be approved by a majority of the Board of Directors.  In addition, the Company has constituted an Audit Committee, consisting of two non-management directors with an Independent Director as the Chair.

To address the material weaknesses identified, management performed additional analyses and

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other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

As part of the implementation strategy for the expansion of the Company we have engaged a third-party firm to assist us with the development of any additional systems required. We intend to remedy our material weakness with regard to insufficient segregation of duties by hiring additional employees as funding becomes available to implement the business plan in order to segregate duties in a manner that establishes effective internal controls. All such required remedies are dependent on having the financial resources available to complete them.

Notwithstanding the above, our principal executive officers do not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officers have determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Changes in internal controls.

No change in our system of internal control over financial reporting occurred during the period covered by this report, the period ended December 31, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

Boustead Securities, LLC has notified us that we owe Boustead $192,664, as well as warrants to purchase 1,417,909 shares of our common stock, as compensation for their acting as the placement agent for the sale of our securities between June 2017 and 2018.

Unless this matter is settled, Boustead has notified us that they plan to file an arbitration claim to resolve this dispute.

It is our position that we have paid Boustead in fill for the services it provided to us.  We deny that we owe Boustead any additional cash or warrants.

The Company was notified that a claim was made against the Company for approximately $117,000, as compensation for financing commissions in 2017. Management believes this claim to be without merit as it is management’s position that the individual is not entitled to any compensation.  

Item 1A.  Risk Factors

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

There have been no unregistered sales of equity securities that have not been previously disclosed in a Current Report on Form 8-K since the Company’s Quarterly Report on Form 10-Q filed with the SEC on November 19, 2018.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosure

Not Applicable.

Item 5.  Other Information

None.

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Item 6.  Exhibits

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SIGNATURES

In accordance with Section 13 or 15(a) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on the 6th day of March 2019.

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