GOOD GAMING, INC. - Quarter Report: 2015 March (Form 10-Q)

PART I - FINANCIAL INFORMATION

HDS International Corp.

Consolidated Balance Sheets

(expressed in U.S. dollars)

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HDS International Corp.

Consolidated Statements of Operations

(expressed in U.S. dollars)

(unaudited)

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HDS International Corp.

Consolidated Statements of Cash Flows

(expressed in U.S. dollars)

(unaudited)

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HDS International Corp.

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)

(unaudited)

 

HDS International Corp. (the "Company") was incorporated on November 3, 2008 under the laws of the State of Nevada. The Company was formerly engaged in the business of providing renewable energy and eco-sustainability solutions based on its licensed technologies. On March 5, 2015, the Company entered into a Strategic Expansion Agreement and refocused its efforts from renewable energy to emergency management software services. A substantial portion of the Company's activities has involved developing a business plan and establishing contacts and visibility in the marketplace and the Company has not generated any revenue to date.  

These consolidated financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has generated no revenues to date and has never paid any dividends and is unlikely to pay dividends or generate significant earnings in the immediate or foreseeable future.  As of March 31, 2015, the Company had a working capital deficiency of $137,538 and an accumulated deficit of $2,440,254. The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the ability to raise equity or debt financing, and the attainment of profitable operations from the Company's future business. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. These consolidated 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. 

 

 

The consolidated financial statements for the periods ending March 31, 2015 and December 31, 2014 include the accounts of the Company, and HDS Energy and Ecosystems NB, Ltd., the Company's wholly owned subsidiary. All intercompany transactions and balances have been eliminated on consolidation.

These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in US dollars. The Company's fiscal year-end is December 31.

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to the fair values of convertible debentures, derivative liability, stock-based compensation, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company's estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

 

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. As of March 31, 2015 and December 31, 2014, the Company had no cash equivalents.

 

Intangible assets are carried at the purchased cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally from fifteen to twenty years

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HDS International Corp.

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)

(unaudited)

 

 

Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the asset. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell.

 

From time to time, the Company may issue convertible notes that may contain an embedded beneficial conversion feature. A beneficial conversion feature exists on the date a convertible note is issued when the fair value of the underlying common stock to which the note is convertible into is in excess of the remaining unallocated proceeds of the note after first considering the allocation of a portion of the note proceeds to the fair value of the warrants, if related warrants have been granted. The intrinsic value of the beneficial conversion feature is recorded as a debt discount with a corresponding amount to additional paid in capital. The debt discount is amortized to interest expense over the life of the note using the effective interest method.

g)	Derivative Liability

 

From time to time, the Company may issue equity instruments that may contain an embedded derivative instrument which may result in a derivative liability. A derivative liability exists on the date the equity instrument is issued when there is a contingent exercise provision. The derivative liability is records at is fair value calculated by using an option pricing model such as a multi-nominal lattice model. The fair value of the derivative liability is then calculated on each balance sheet date with the corresponding gains and losses recorded in the consolidated statement of operations.

h)	Basic and Diluted Net Loss Per Share

 

The Company computes net loss per share in accordance with ASC 260, Earnings Per Share, which requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing Diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. At March 31, 2015, the Company had 810,188,333 (December 31, 2014 – 1,572,180,000) potentially dilutive shares from outstanding convertible debentures.

i)	Interim Consolidated Financial Statements

 

There interim unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period.

 

Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted ASC 740, Income Taxes, as of its inception. Pursuant to ASC 740, the Company is required to compute tax asset benefits for net operating losses carried forward. The potential benefits of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not it will utilize the net operating losses carried forward in future years.

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HDS International Corp.

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)

(unaudited)

 

ASC 220, Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components in the financial statements. As at March 31, 2015 and December 31, 2014, the Company has no items that represent comprehensive loss and, therefore, has not included a schedule of comprehensive loss in the financial statements.

ASC 820, "Fair Value Measurements" and ASC 825, Financial Instruments, requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. It establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. It prioritizes the inputs into three levels that may be used to measure fair value:

Level 1

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

Assets and liabilities measured at fair value on a recurring basis based on level 3 inputs were presented on the Company's balance sheet as at March 31, 2015 and December 31, 2014 as follows:

The carrying values of all of our other financial instruments, which include accounts payable and accrued liabilities, convertible debentures, and amounts due to related parties approximate their current fair values because of their nature and respective maturity dates or durations.

m)	Recent Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect.  These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

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HDS International Corp.

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)

(unaudited)

 

a)

On July 15, 2013, the Company entered into a $27,500 convertible debenture with a non-related party. Under the terms of the debenture, the amount is unsecured, bears interest at 8% per annum, and is due on January 16, 2015. The note is convertible into shares of common stock 180 days after the date of issuance (January 11, 2014) at a conversion rate of 50% of the average of the five lowest closing bid prices of the Company's common stock for the thirty trading days ending one trading day prior to the date the conversion notice is sent by the holder to the Company. As at March 31, 2015, the Company recorded accrued interest of $873 (December 31, 2014 - $3,077), which has been included in accounts payable and accrued liabilities.   In accordance with ASC 470-20, "Debt with Conversion and Other Options", the Company recognized the intrinsic value of the embedded beneficial conversion feature of $27,500 as additional paid-in capital and an equivalent discount which will be charged to operations over the term of the convertible note. During the period ended March 31, 2015, the Company issued 454,000,000 common shares (December 31, 2014 - 23,312,500) for the conversion of $20,040 (December 31, 2014 - $7,460) of this debenture and $2,660 (December 31, 2014 - $nil) of accrued interest. During the period ended March 31, 2015, the Company had amortized $2,260 (December 31, 2014 - $22,461) of the debt discount to interest expense. As at March 31, 2015, the carrying value of the debenture was $nil (December 31, 2014 - $17,780).   On January 11, 2014, the note became convertible resulting in the Company recording a derivative liability of $36,272 with a corresponding adjustment to loss on change in fair value of derivative liabilities. As at March 31, 2015, the Company revalued the derivative liability to its fair value resulting in the Company recording $nil (December 31, 2014 - $23,331) as a gain on change in fair value of derivative liabilities. As at March 31, 2015, the fair value of the derivative liability was $nil (December 31, 2014 - $3,061). Refer to Note 4.

 

b)

On October 4, 2013, the Company entered into a $32,500 convertible debenture with a non-related party. Under the terms of the debenture, the amount is unsecured, bears interest at 8% per annum, and is due on July 8, 2015. The note is convertible into shares of common stock 180 days after the date of issuance (April 2, 2014) at a conversion rate of 50% of the average of the five lowest closing bid prices of the Company's common stock for the thirty trading days ending one trading day prior to the date the conversion notice is sent by the holder to the Company. As at March 31, 2015, the Company recorded accrued interest of $3,868 (December 31, 2014 - $3,227), which has been included in accounts payable and accrued liabilities.   In accordance with ASC 470-20, "Debt with Conversion and Other Options", the Company recognized the intrinsic value of the embedded beneficial conversion feature of $32,500 as additional paid-in capital and an equivalent discount which will be charged to operations over the term of the convertible note. During the period ended March 31, 2015, the Company issued 174,000,000 common shares (December 31, 2014 - nil) for the conversion of $8,700 (December 31, 2014 - $nil) of this debenture. During the period ended March 31, 2015, the Company had amortized $10,339 (December 31, 2014 - $10,123) of the debt discount to interest expense. As at March 31, 2015, the carrying value of the debenture was $13,380 (December 31, 2014 - $11,741).   On April 2, 2014, the note became convertible resulting in the Company recording a derivative liability of $47,794 with a corresponding adjustment to loss on change in fair value of derivative liabilities. As at March 31, 2015, the Company revalued the derivative liability to its fair value resulting in the Company recording $18,600 (December 31, 2014 - $2,882 gain) as a loss on change in fair value of derivative liabilities. As at March 31, 2015, the fair value of the derivative liability was $35,615 (December 31, 2014 - $44,912). Refer to Note 4.

 

c)

On February 18, 2014, the Company entered into a $15,500 convertible debenture with a non-related party. Under the terms of the debenture, the amount is unsecured, bears interest at 8% per annum, and is due on August 20, 2015. The note is convertible into shares of common stock 180 days after the date of issuance (August 17, 2014) at a conversion rate of 50% of the average of the five lowest closing bid prices of the Company's common stock for the thirty trading days ending one trading day prior to the date the conversion notice is sent by the holder to the Company. As at March 31, 2015, the Company recorded accrued interest of $1,379 (December 31, 2014 - $1,074), which has been included in accounts payable and accrued liabilities.   In accordance with ASC 470-20, "Debt with Conversion and Other Options", the Company recognized the intrinsic value of the embedded beneficial conversion feature of $15,500 as additional paid-in capital and an equivalent discount which will be charged to operations over the term of the convertible note. During the period ended March 31, 2015, the Company had amortized $2,453 (December 31, 2014 - $2,431) of the debt discount to interest expense. As at March 31, 2015, the carrying value of the debenture was $4,884 (December 31, 2014 - $2,431).

 

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HDS International Corp.

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)

(unaudited)

 

On August 17, 2014, the note became convertible resulting in the Company recording a derivative liability of $21,750 with a corresponding adjustment to loss on change in fair value of derivative liabilities. As at March 31, 2015, the Company revalued the derivative liability to its fair value resulting in the Company recording $6,789 (December 31, 2014 - $1,038 gain) as a loss on change in fair value of derivative liabilities. As at March 31, 2015, the fair value of the derivative liability was $20,802 (December 31, 2014 - $20,712). Refer to Note 4.

 

The Company records the fair value of the of the conversion price of the convertible debentures disclosed in Notes 3(a) and 3(b) in accordance with ASC 815, Derivatives and Hedging. The fair value of the derivative was calculated using a multi-nominal lattice model performed by an independent qualified business valuator. The fair value of the derivative liability is revalued on each balance sheet date with corresponding gains and losses recorded in the consolidated statement of operations. During the period ended March 31, 2015, the Company recorded a loss on the change in fair value of derivative liability of $25,389 (December 31, 2014 - $78,680). As at March 31, 2015, the Company recorded a derivative liability of $56,417 (2014 - $70,290).

The following inputs and assumptions were used to value the convertible debentures outstanding during the periods ended March 31, 2015 and December 31, 2014:

·	The underlying stock price of $0.0001 to $0.0006 was used as the fair value of the common stock as at December 31, 2014.

·	The underlying stock price of $0.0005 to $0.0011 was used as the fair value of the common stock as at March 31, 2015.

·	The principal of the debenture on the July 15, 2013 date of issuance was $27,500.

·	The balance of the principal and interest of the July 15, 2013 debenture on January 11, 2014, the date the debenture became convertible, was $28,579.

·	The balance of the principal and interest of the July 15, 2013 debenture on December 31, 2014 was $23,117.

·	The balance of the principal and interest of the July 15, 2013 debenture on March 31, 2015 was $873.

·	The principal of the debenture on the October 4, 2013 date of issuance was $32,500.

·	The balance of the principal and interest of the October 4, 2013 debenture on April 2, 2014, the date the debenture became convertible, was $33,782.

·	The balance of the principal and interest of the October 4, 2013 debenture on December 31, 2014 was $35,727.

·	The balance of the principal and interest of the October 4, 2013 debenture on March 31, 2015 was $27,668.

·	The principal of the debenture on the February 18, 2014 date of issuance was $15,500.

·	The balance of the principal and interest of the February 18, 2014 debenture on August 17, 2014, the date the debenture became convertible, was $16,112.

·	The balance of the principal and interest of the February 18, 2014 debenture on December 31, 2014 was $16,574.

·	The balance of the principal and interest of the February 18, 2014 debenture on March 31, 2015 was $16,879.

·	Capital raising events are not a factor for the debenture.

·	The debt holder would redeem based on availability of alternative financing 0% of the time increasing 1.0% monthly to a maximum of 10%.

·	The debt holder would automatically convert the note at maturity if the registration (after 120 days) was effective and the Company is not in default.

·

The projected annual volatility for each valuation period was based on the historic volatility of the Company of 176% as at December 31, 2013, 175% as at January 11, 2014, 176% as at June 30, 2014, 176% as at August 17, 2014, 170% as at September 30, 2014, 2014, 166% as at October 26, 2014, 168% as at December 2, 2014, 170% as at December 4, 2014, 172% as at December 9, 2014, 183% as at December 31, 2014, 203% as at February 6, 2015, 206% as at February 10, 2015, 209% as at February 13, 2015, 212% as at February 18, 2015, 216% as at February 23, 2015, 222% as at March 2, 2015, 223% as at March 3, 2015, 238% as at March 16, 2015, 240% as at March 17, 2015, 244% as at March 19, 2015, 249% as at March 24, 2015, 251% as at March 25, 2015, and 259% as at March 31, 2015.

·	An event of default would occur 0% of the time, increasing to 1.0% per month to a maximum of 5%. To date, the debenture is not in default nor converted by the debt holder.

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HDS International Corp.

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)

(unaudited)

 

A summary of the activity of the derivative liability is shown below:

 

a)

On March 5, 2015, the Company issued 200,000,000 common shares with a par value of $200,000 pursuant to a license agreement with a third party to acquire the rights to technologies related to emergency management and communications. As the transaction resulted in a change of control, the par value of the license was allocated to additional paid-in capital. As a result of the completion of the transaction, SirenGPS and Paul Rauner are deemed related parties.

 

b)

On March 5, 2015, the Company issued 106,050,000 common shares with a fair value of $21,210 for the settlement of accounts payable of $733,500 owing to consultants resulting in a gain on settlement of debt of $712,290. As the transaction was pursuant to the agreement which resulted in a change of control, the gain has been recorded to additional paid-in capital.

 

c)

On March 5, 2015, the Company issued 342,150,496 common shares with a fair value of $68,430 for the settlement of $300,000 of principal and $107,479 of accrued interest owing to a company controlled by the former President and CEO of the Company. The transaction resulted in a gain on settlement of debt of $339,049 which was recorded against additional paid-in capital. Refer to Note 7(a).

 

d)

On March 5, 2015, the Company issued 74,235,000 common shares with a fair value of $14,847 for the settlement of $215,225 owing to the former President and CEO and companies under his control. The transaction resulted in a gain on settlement of debt of $200,378 which was recorded against additional paid-in capital. Refer to Notes 7 and 8.

 

e)

During the period ended March 31, 2015, the Company issued 454,000,000 common shares for the conversion of $20,040 of principal and $2,660 of accrued interest of the July 15, 2013 convertible debenture. As the conversions were within the terms of the agreement, no additional gain or loss was recognized as a result of the conversion.

 

f)

During the period ended March 31, 2015, the Company issued 174,000,000 common shares for the conversion of $8,700 of principal of the October 4, 2013 convertible debenture. As the conversions were within the terms of the agreement, no additional gain or loss was recognized as a result of the conversion.

 

On March 5, 2015, the Company issued 13,624,300 Class B preferred stock with a par value of $13,624 pursuant to a license agreement with a third party to acquire the rights to technologies related to emergency management and communications. As the transaction resulted in a change of control, the par value of the license was allocated to additional paid-in capital. As a result of the completion of the transaction, SirenGPS and Paul Rauner are deemed related parties. Each Class B preferred stock is convertible into common stock of the Company at a rate of 200 shares of common stock per each Class B preferred stock.

 

a)

As at March 31, 2015, the Company owes $570 (December 31, 2014 – $nil) to the President and CEO of the Company for reimbursement of expenses which has been included in accounts payable and accrued liabilities – related parties.  The amount owing is unsecured, non-interest bearing, and due on demand.

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HDS International Corp.

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)

(unaudited)

b)

As at March 31, 2015, the Company owes $19,544 (December 31, 2014 – $7,518) to the former President and CEO of the Company for reimbursement of expenses which has been included in accounts payable and accrued liabilities – related parties. The amount owing is unsecured, non-interest bearing, and due on demand.

c)

As at March 31, 2015, the Company owes $nil (December 31, 2014 - $300,000) to a company controlled by former officers and directors of the Company. The amount owing is unsecured, bears interest at 10% per annum, and is due on demand. As at March 31, 2015, the Company has recorded accrued interest of $nil (December 31, 2014 - $102,219) which has been included in accounts payable and accrued liabilities – related parties. During the period ended March 31, 2015, the Company issued 342,150,496 common shares to settle the amounts owing. Refer to Note 5(c).

d)

As at March 31, 2015, the Company owes $nil (December 31, 2014  - $15,225) to companies under common control by former officers and directors of the Company which has been included in accounts payable and accrued liabilities – related parties. The amounts owing are unsecured, non-interest bearing, and due on demand. During the period ended March 31, 2015, the Company issued 5,251,378 common shares to settle the amounts owing. Refer to Note 5(d).

e)

During the period ended March 31, 2015, the Company has incurred $20,000 (December 31, 2014 - $120,000) to the former President and CEO of the Company for consulting services. As at March 31, 2015, the Company recorded a related party accounts payable of $nil (December 31, 2014 - $180,000), which has been included in accounts payable and accrued liabilities – related party. The amounts owing are unsecured, non-interest bearing, and due on demand. During the period ended March 31, 2015, the Company issued 68,983,622 common shares to settle the amount owing. Refer to Notes 5(d) and 8(c).

 

a)

On October 12, 2011, the Company entered into a verbal consulting agreement with a non-related party whereby the Company will pay a monthly consulting fee for services provided in the amounts of $3,000. The agreement is for a one month term automatically renewing in each successive month unless earlier terminated. On July 18, 2012, the Board of Directors reviewed the consulting agreement and authorized an increase to the monthly consulting fee from $3,000 to $3,750 per month beginning July 2012. On October 1, 2012, the Board of Directors reviewed the consulting agreement and adjusted the consulting fee from $3,750 to $3,000 per month beginning October 2012. On April 8, 2014, The Board of Directors reviewed the consulting agreement and adjusted the consulting fee from $3,000 to $500 per month effective January 1, 2014. On March 5, 2015, the Company entered into a Settlement and Mutual Release Agreement whereby the parties agreed to terminate the consulting agreement and settle all amounts owing under the consulting agreement.   During the period ended March 31, 2015, the Company incurred $1,000 (December 31, 2014 - $6,000) in consulting fees relating to this agreement, of which $nil (December 31, 2014- $48,000) has been recorded in accounts payable and accrued liabilities as at March 31, 2015. During the period ended March 31, 2015, the Company issued 31,815,000 common shares to settle the amount owing of $49,000. Refer to Note 5(b).

b)

On October 12, 2011, the Company entered into a consulting agreement with a non-related party whereby the Company will pay a monthly consulting fee for services provided in the amounts of $27,500. The agreement is for a one month term automatically renewing in each successive month unless earlier terminated. On April 8, 2014, The Board of Directors reviewed the consulting agreement and adjusted the consulting fee from $27,500 to $21,500 per month effective January 1, 2014. On March 5, 2015, the Company entered into a Settlement and Mutual Release Agreement whereby the parties agreed to terminate the consulting agreement and settle all amounts owing under the consulting agreement.   During the period ended March 31, 2015, the Company incurred $43,000 (December 31, 2014 - $258,000) in consulting fees relating to this agreement, of which $nil (December 31, 2014 - $641,500) has been recorded in accounts payable and accrued liabilities as at March 31, 2015. During the period ended March 31, 2015, the Company issued 74,235,000 common shares to settle the amount owing of $684,500. Refer to Note 5(b).

 

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HDS International Corp.

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)

(unaudited)

 

c)

On October 12, 2011, the Company entered into a consulting agreement with the former President and CEO of the Company whereby the Company will pay a monthly consulting fee for services provided in the amounts of $3,000. The agreement is for a one month term automatically renewing in each successive month unless earlier terminated. On June 10, 2012, the Board of Directors authorized an increase to the monthly consulting fee from $3,000 to $6,000 per month beginning June 2012. On July 18, 2012, the Board of Directors reviewed the consulting agreement and adjusted the monthly consulting fee to $3,750 beginning July 2012. On April 8, 2014, The Board of Directors reviewed the consulting agreement and adjusted the consulting fee from $3,750 to $10,000 per month effective January 1, 2014. On March 5, 2015, the Company entered into a Settlement and Mutual Release Agreement whereby the parties agreed to terminate the consulting agreement and settle all amounts owing under the consulting agreement.   During the period ended March 31, 2015, the Company incurred $20,000 (December 31, 2014 - $120,000) in consulting fees relating to this agreement, of which $nil (December 31, 2014 - $180,000) has been recorded in accounts payable and accrued liabilities – related parties as at March 31, 2015. During the period ended March 31, 2015, the Company issued 68,983,622 common shares to settle the amount owing of $200,000. Refer to Notes 5(d) and 7(e).

 

d)

On January 2, 2013, the Company entered into a consulting agreement with The Holden Group, LLC ("Holden") whereby the Company paid Holden $2,000 and issued 600,000 restricted common shares of the Company upon the execution of the agreement as well as pay $500 on each of the first, second and third month anniversaries of the agreement. These final three payments have been accrued and recorded in accounts payable and accrued liabilities.

 

a)

On April 1, 2015, the Company issued a draw-down convertible promissory note to a non-related party in the principal amount of up to $600,000 (The April 1, 2015 Debenture). Under the terms of the promissory note, the amount is unsecured, bears interest at 10% per annum, and is due on April 1, 2016. The note is convertible into shares of common stock at a conversion rate of 50% of the average of the three lowest end-of-day closing prices of the Company's common stock for the twenty-five trading days prior to the date the holder elects to convert all or part of the promissory note.

b)

On April 1, 2015, the Company consented to the assignment of the February 18, 2014 and the October 4, 2013 convertible debentures.  According to the terms of the assignment agreement, the February 18, 2014 note was sold to the purchaser and simultaneously exchanged for a new note (the "New February Note").  In accordance with the exchange, The New February Note was deemed to have been issued February 18, 2014, and carried substantially the same terms as the original note, with the following exceptions: the New February bears 0% interest, and the overall ownership of the purchaser at any one moment shall be limited to 9.99% of the issued and outstanding shares of our common stock. The purchaser also entered into an agreement with original debenture holder, granting the purchaser the exclusive right to acquire the October 4, 2013 note, on or before May 7, 2015.

c)

On April 2, 2015, the Company entered into an equity line of credit (ELOC) up to $4,000,000 with a non-related party, which allows the Company to "put" shares to the debtor at a 20% discount to the lowest trading price over the five consecutive trading days immediately succeeding the applicable Put Notice Date. The ELOC requires the filing of a registration statement prior to the funds becoming available to the Company. Once the registration is filed, funding under the ELOC occurs at the discretion of the Company. The minimum amount of the Put Notice is restricted to $5,000 and the maximum to 100% of the average of the daily trading dollar volume for the ten consecutive trading days immediately prior to the Put Notice Date but not to exceed an accumulated amount per month of $150,000 unless prior approval is obtained.

d)	On April 3, 2015, two shareholders of the Company agreed to convert 422,000,000 shares of common stock into 2,215,500 shares of Class B Preferred Stock at the request of the Company, to facilitate the closing of the other transactions herein described.

e)

On April 6, 2015, the Company entered into a Common Stock Purchase Warrant agreement with a non-related party providing the holder the right to purchase shares of common stock of the Company by investing up to $50,000 into new shares of common stock at a price of $0.001 per share for a period of five years. This warrant agreement was negotiated as part of the draw-down convertible promissory note as described in Note 9(a).

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HDS International Corp.

Notes to the Consolidated Financial Statements

(expressed in U.S. dollars)

(unaudited)

 

 

f)	On April 9, 2015, the Company received $40,000 under the April 1, 2015 Debenture and applied the proceeds to fund operating expenses.

g)	On April 10, 2015, the Company issued 149,844,444 common shares upon the issuance of $6,743 of principal of the February 18, 2014 convertible debenture. Refer to Note 3(c).

h)

On April 15, 2015, the Company entered into a draw-down convertible promissory note to a non-related party in the principal amount of up to $100,000 (the April 15, 2015 Debenture). Under the terms of the debenture, the amount is unsecured, bears interest at 10% per annum, and is due on October 15, 2016. The note is convertible into shares of common stock after the maturity date at a conversion rate of 50% of the average of the three lowest closing bid prices of the Company's common stock for the twenty trading days ending on the trading day the conversion notice is received by the Company.

i)	On April 15, 2015, the Company issued 100,000 warrants to a non-related party. Each warrant entitles the holder to purchase one share of common stock at $0.001 per share until April 15, 2020. The warrants are subject to a cashless conversion feature at the election of the holder.

 

j)	On April 16, 2015, the Company received $50,000 under the April 15, 2015 Debenture and applied the proceeds to fund operating expenses.

 

k)	On April 22, 2015, the Company received $20,000 under the April 1, 2015 Debenture and applied the proceeds to fund operating expenses.

 

l)	On April 23, 2015, the Company issued 164,977,778 common shares for the conversion of $7,424 of principal of the February 18, 2014 convertible debenture. Refer to Note 3(c).

 

m)

On May 7, 2015, Under the April 1, 2015 agreement the purchaser exercised the option to purchase the October 4, 2013 debenture on May 7, 2015. According to the terms of the assignment agreement, the October 4, 2013 note was sold to the purchaser and simultaneously exchanged for a new note (the "New October Note"). In accordance with the exchange, The New October Note was deemed to have been issued October 4, 2013, and carried substantially the same terms as the original note, with the following exceptions: the New October Note bears 0% interest, and the overall ownership of the purchaser at any one moment shall be limited to 9.99% of the issued and outstanding shares of our common stock.

 

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF OPERATION.

Forward Looking Statements

This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains forward-looking statements that involve known and unknown risks, significant uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed, or implied, by those forward-looking statements.  You can identify forward-looking statements by the use of the words may, will, should, could, expects, plans, anticipates, believes, estimates, predicts, intends, potential, proposed, or continue or the negative of those terms.  These statements are only predictions. In evaluating these statements, you should consider various factors which may cause our actual results to differ materially from any forward-looking statements.  Although we believe that the exceptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.  We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

We are considered a start-up corporation.  Our auditors have issued a going concern opinion on the financial statements for the year ended December 31, 2014.

RESULTS OF OPERATIONS

Working Capital

Cash Flows

Operating Revenues

We have not generated any revenues since inception.

Operating Expenses and Net Loss

Operating expenses for the three months ended March 31, 2015 were $81,494 compared with $108,860 for the three months ended March 31, 2014. The decrease in operating expenses was attributed to a decrease in consulting fees of $26,165 and professional fees of $7,850, offset by an increase in general and administrative fees of $6,649 for day-to-day operating costs.  The decrease to consulting fees is a result of the Company entering into settlement and mutual release agreements with three consultants at the beginning of March resulting in the termination of the consulting agreements compared to these consultants receiving a full three months of fees during the period ended March 31, 2014.

During the three months ended March 31, 2015, the Company recorded a net loss of $129,713 compared with a net loss of $170,989 for the three months ended March 31, 2014. In addition to the above, the Company incurred an increase of $5,453 of interest expense relating to debt balances offset by a decrease of $19,363 for loss on the change in fair value of derivatively liabilities.   The increase in interest expense is a result of the Company accreting the debt discount relating to the convertible debentures held. The decrease in the loss on the change in fair value of the derivative liabilities relates to the fact that the Company has converted $68,700 of the $108,000 convertible debentures outstanding as at March 31, 2014 leaving a balance of $39,300 as at March 31, 2015.

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Liquidity and Capital Resources

As at March 31, 2015, the Company's cash balance was $nil compared to cash balance of $73 as at December 31, 2014. As at March 31, 2015, the Company's total assets were $515 compared to total assets of $1,093 as at December 31, 2014. The decrease in the total assets was attributed to the decrease of cash of $73 and a decrease of deferred financing costs of $505.

As at March 31, 2015, the Company had total liabilities of $138,053 compared with total liabilities of $1,435,785 as at December 31, 2014. The decrease in total liabilities is attributed to a decrease of account payable and accrued liabilities of $970,176, $685,328 of which pertained to trade accounts payable and $284,848 pertained to related party accounts payable and accrued liabilities as well as a decrease in due to related parties of $300,000, convertible debentures of $13,688 and derivative liabilities of $13,873. The decrease in accounts payable and accrued liabilities and due to related parties was the result of the Company issuing 522,435,496 common shares for the settlement of  $733,500 of accounts payable and accrued liabilities, $322,704 of accounts payable and accrued liabilities – related parties, and $300,000 of due to related parties. The decrease in both the convertible debentures and derivative liability is the result of the Company converting $68,700 of the $108,000 convertible debentures outstanding as at March 31, 2014 leaving a balance of $39,300 as at March 31, 2015.

As at March 31, 2015, the Company has a working capital deficit of $137,538 compared with working capital deficit of $1,434,692 at December 31, 2014 with the decrease in the working capital deficit attributed to the decreases in accounts payable and accrued liabilities, due to related parties, convertible debentures and derivative liabilities during the period as discussed above.

Cashflow from Operating Activities

During the three months ended March 31, 2015, the Company used $73 of cash for operating activities compared to the use of $12,759 of cash for operating activities during the three months ended March 31, 2014.  The decrease in the level of cash used for operating activities was due to the increase in non-cash accretion of debt discount, amortization of intangible assets, offset by an decrease in non-cash amortization of deferred financing costs and loss on change in fair value of derivative liability as well as the change in the level of accounts payable and accrued liabilities – related parties.

Cashflow from Financing Activities

During the three months ended March 31, 2015, the Company received $nil of proceeds from financing activities compared to $16,200 during the three months ended March 31, 2014. The decrease in proceeds from financing activities was due to the Company receiving proceeds of  $15,000 for the issuance of a convertible debenture and $1,200 from a related party during the three months ended March 31, 2014 compared to $nil received during the three months ended March 31, 2015.

Subsequent Developments

On April 1, 2015, the Company issued a draw-down convertible promissory note to a non-related party in the principal amount of up to $600,000. Under the terms of the promissory note, the amount is unsecured, bears interest at 10% per annum, and is due on April 1, 2016. The note is convertible into shares of common stock at a conversion rate of 50% of the average of the three lowest end-of-day closing prices of the Company's common stock for the twenty-five trading days prior to the date the holder elects to convert all or part of the promissory note.

On April 1, 2015, the Company consented to the assignment of the February 18, 2014 and the October 4, 2013 convertible debentures.  According to the terms of the assignment agreement, the February 18, 2014 note was sold to the purchaser and simultaneously exchanged for a new note (the "New February Note").  In accordance with the exchange, The New February Note was deemed to have been issued February 18, 2014, and carried substantially the same terms as the original note, with the following exceptions: the New February bears 0% interest, and the overall ownership of the purchaser at any one moment shall be limited to 9.99% of the issued and outstanding shares of our common stock. The purchaser also entered into an agreement with original debenture holder, granting the purchaser the exclusive right to acquire the October 4, 2013 note, on or before May 7, 2015.

On April 2, 2015, the Company entered into an equity line of credit (ELOC) up to $4,000,000 with a non-related party, which allows the Company to "put" shares to the debtor at a 20% discount to the lowest trading price over the five consecutive trading days immediately succeeding the applicable Put Notice Date. The ELOC requires the filing of a registration statement prior to the funds becoming available to the Company. Once the registration is filed, funding under the ELOC occurs at the discretion of the Company. The minimum amount of the Put Notice is restricted to $5,000 and the maximum to 100% of the average of the daily trading dollar volume for the ten consecutive trading days immediately prior to the Put Notice Date but not to exceed an accumulated amount per month of $150,000 unless prior approval is obtained.

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On April 3, 2015, two shareholders of the Company agreed to convert 422,000,000 shares of common stock into 2,215,500 shares of Class B Preferred Stock at the request of the Company, to facilitate the closing of the other transactions herein described. 

On April 6, 2015, the Company entered into a Common Stock Purchase Warrant agreement with a non-related party providing the holder the right to purchase shares of common stock of the Company by investing up to $50,000 into new shares of common stock at a price of $0.001 per share for a period of five years. This warrant agreement was negotiated as part of the draw-down convertible promissory note. 

On April 10, 2015, the Company issued 149,844,444 common shares upon the issuance of $6,743 of principal of the February 18, 2014 convertible debenture.

On April 15, 2015, the Company entered into a draw-down convertible promissory note to a non-related party in the principal amount of up to $100,000. Under the terms of the debenture, the amount is unsecured, bears interest at 10% per annum, and is due on October 15, 2016. The note is convertible into shares of common stock after the maturity date at a conversion rate of 50% of the average of the three lowest closing bid prices of the Company's common stock for the twenty trading days ending on the trading day the conversion notice is received by the Company.

On April 15, 2015, the Company issued 100,000 warrants to a non-related party. Each warrant entitles the holder to purchase one share of common stock at $0.001 per share until April 15, 2020. The warrants are subject to a cashless conversion feature at the election of the holder.

On April 23, 2015, the Company issued 164,977,778 common shares for the conversion of $7,424 of principal of the February 18, 2014 convertible debenture.

Going Concern

We have not attained profitable operations and are dependent upon the continued financial support from our shareholders, the ability to raise equity or debt financing, and the attainment of profitable operations from our future business. These factors raise substantial doubt regarding our ability to continue as a going concern.

Off-Balance Sheet Arrangements

We have no significant off-balance sheet arrangements 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 stockholders.

Future Financings

We will continue to rely on equity sales of our common shares in order to continue to fund our business operations. Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional sales of the equity securities or arrange for debt or other financing to fund our operations and other activities. We are also exploring equity investment into the preferred shares of the Company.

Critical Accounting Policies

Our consolidated financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare our consolidated financial statements. A complete summary of these policies is included in the notes to our consolidated financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

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Recently Issued Accounting Pronouncements

The Company has implemented all new accounting pronouncements that are in effect. These pronouncements did not have any material impact on the financial statements unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

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.

Under the supervision and with the participation of our management, including the Principal Executive Officer and Principal Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, the Principal Executive Officer and Principal Financial Officer have concluded that these disclosure controls and procedures are not effective due to the material weaknesses resulting from the Board of Directors not currently having any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K, and controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Please refer to our Annual Report on Form 10-K as filed with the SEC on April 15, 2015, for a complete discussion relating to the foregoing evaluation of Disclosures and Procedures.

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

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.