UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2018

 

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

 

For the transition period from ________ to ___________

 

Commission File # 000-52727

 

ELRAY RESOURCES, INC.

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

 

Nevada

(State or other jurisdiction of incorporation or organization)

 

98-0526438

(IRS Employer Identification Number)

 

3651 Lindell Road, Suite D, Las Vegas, NV 89103

(Address of principal executive offices)

 

(917) 775-9689

(Issuer’s telephone number)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes   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. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	o	Smaller reporting company	x
		Emerging growth company	o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o

 

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

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date. The issuer had 2,255,390,469 shares of common stock issued and outstanding as of May 9, 2018.

 

 

TABLE OF CONTENTS

 

			Page
PART I. FINANCIAL INFORMATION
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			3
	CONSOLIDATED BALANCE SHEETS (UNAUDITED)			3
	CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)			4
	CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)			5
	NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)			6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION			15
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			17
ITEM 4.	CONTROLS AND PROCEDURES			17
PART II. OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS			18
ITEM 1A.	RISK FACTORS			18
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			18
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES			18
ITEM 4.	MINE SAFETY DISCLOSURES			18
ITEM 5.	OTHER INFORMATION			18
ITEM 6.	EXHIBITS			19
SIGNATURES				20

 

2

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ELRAY RESOURCES, INC.
Consolidated Balance Sheets
(Unaudited)
		March 31,				December 31,
		2018				2017
ASSETS
Current assets:
Cash and cash equivalents		$	22,013			$	23,070
Accounts receivable –related parties			314,619				210,057
Prepaid expenses			13,988				13,988
Total current assents			350,620				247,115
Rent deposit			26,145				7,535
Total assets		$	376,765			$	254,650
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities:
Accounts payable and accrued liabilities		$	2,286,066			$	2,117,325
Accounts payable – related parties			2,956,439				2,684,009
Loan and advances from shareholders			59,391				59,391
Other payable – related party			44,824				34,824
Settlement payable			2,162,159				2,162,159
Notes payable			45,429				45,429
Convertible notes payable, net of discounts			3,139,492				3,139,492
Derivative liabilities - note conversion feature			390,127				390,135
Total liabilities			11,083,927				10,632,764
Commitments and contingencies
Shareholders’ deficit:
Series A preferred stock, par value $0.001, 300,000,000 shares authorized, 0 issued and outstanding			-				-
Series B preferred stock, par value $0.001, 280,000,000 shares authorized, 192,000,000 issued and outstanding			192,000				192,000
Series C preferred stock, par value $0.001, 10,000,000 shares authorized, 7,083,333 shares issued and outstanding			7,083				7,083
Common stock, par value $0.001, 2,500,000,000 shares authorized, 2,255,390,469 shares issued and outstanding			2,255,390				2,255,390
Additional paid-in capital			15,856,664				15,856,664
Subscriptions receivable			(75,672	)			(75,672	)
Stock issuable			5,022				5,022
Accumulated deficit			(28,947,649	)			(28,618,601	)
Total shareholders’ deficit			(10,707,162	)			(10,378,114	)
Total liabilities and shareholders’ deficit		$	376,765			$	254,650
See accompanying notes to unaudited consolidated financial statements.

 

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ELRAY RESOURCES, INC.

Consolidated Statements of Operations

(Unaudited)

 

		For the Three Months Ended March 31,
		2018				2017
Revenues – related party		$	149,061			$	156,334
Operating expenses:
General and administrative			295,735				262,934
Total operating expenses			295,735				262,934
Loss from operations			(146,674	)			(106,600	)
Other income (expense):
Interest expense			(182,382	)			(207,809	)
Gain on derivative liabilities – note conversion feature			8				732,952
Total other income (expense)			(182,374	)			525,143
Net income (loss)		$	(329,048	)		$	418,543
Net earnings (loss) per common share – basic		$	(0.00	)		$	0.00
Net earnings (loss) per common share – diluted		$	(0.00	)		$	0.00
Weighted average number of common shares outstanding - basic			2,315,835,269				1,235,190,613
Weighted average number of common shares outstanding - diluted			2,315,835,269				37,415,912,975

 

See accompanying notes to unaudited consolidated financial statements.

 

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ELRAY RESOURCES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Three Months Ended March 31,
		2018				2017
Cash flows from operating activities:
Net income (loss)		$	(329,048	)		$	418,543
Adjustments to reconcile net income (loss) to cash provided by operations activities:
Amortization of debt discount			-				47,478
Gain on derivative liabilities – note conversion feature			(8	)			(732,952	)
Changes in operating assets and liabilities:
Accounts receivable – related parties			(104,562	)			(9,982	)
Prepaid expenses			(18,610	)			(765	)
Accounts payable and accrued liabilities			168,741				33,068
Accounts payable – related parties			272,430				282,637
Net cash provided by (used in) operating activities			(11,057	)			38,027
Cash flows from financing activities:
Proceeds from other payable – related party			10,000				34,824
Repayment of short-term notes payable			-				(61,186	)
Net cash provided by (used in) financing activities			10,000				(26,362	)
Net increase (decrease) in cash and cash equivalents			(1,057	)			11,665
Cash and cash equivalents at beginning of period			23,070				18,297
Cash and cash equivalents at end of period		$	22,013			$	29,962
Supplemental disclosure of cash flows information:
Cash paid for interest		$	-			$	18,567
Cash paid for income taxes		$	-			$	-
Non-cash investing and financing activities:
Common stock issued for conversion of debt		$	-			$	3,056

 

See accompanying notes to unaudited consolidated financial statements.

 

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ELRAY RESOURCES, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION AND ACCOUNTING POLICIES

 

Elray Resources, Inc. (“Elray” or the “Company”), a Nevada Company formed on December 13, 2006, has been providing marketing and support for online gaming operations. The Company maintains its administrative office in Australia and its gaming operations is currently targeting Asian market.

 

The accompanying unaudited interim consolidated financial statements of Elray have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s annual report for the year ended December 31, 2017 on Form 10-K filed on April 13, 2018.

 

In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the consolidated financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for the most recent fiscal year ended December 31, 2017 have been omitted.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid short-term investments purchased with an original maturity of three months or less to be cash equivalents.

 

Allowance for doubtful accounts

 

The allowance for doubtful accounts reflects our best estimate of probable losses inherent in the accounts receivable balance. The Company determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. As of March 31, 2018 and December 31, 2017, allowance for doubtful accounts was $5,521.

 

Long Lived Assets

 

Long-lived assets to be held and used or disposed of other than by sale are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When required, impairment losses on assets to be held and used or disposed of other than by sale are recognized based on the fair value of the asset. Long-lived assets to be disposed of by sale are reported at the lower of its carrying amount or fair value less cost to sell.

 

Derivative Instruments

 

Derivatives are measured at their fair value on the balance sheet. In determining the appropriate fair value, the Company uses the Black-Scholes-Merton option pricing model. Changes in fair value are recorded in the statement of operations.

 

Fair Value of Financial Instruments

 

The Company measures its financial assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. A three-tier fair value hierarchy prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:

 

	·	Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
	·	Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable, such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
	·	Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one more significant inputs or significant value drivers are unobservable.

 

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Our financial instruments include cash, accounts receivable, accounts payable and accrued liabilities, notes payable, convertible notes payable, advances from shareholder, and derivative liabilities. The carrying values of these financial instruments approximate their fair value due to their short-term nature except for derivative liabilities. The derivative liabilities are stated at their fair value as a level 3 measurement. The Company used a Black-Scholes model to determine the fair values of these derivative liabilities.

 

Debt Discount

 

Debt discount is amortized over the term of the related debt using the effective interest rate method.

 

Revenues

 

Prior to January 1, 2018, revenues were recognized when the four basic criteria for recognition were met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) consideration is fixed or determinable; and (4) collectability is reasonably assured. The Company adopted new accounting guidance for revenue recognition effective January 1, 2018 which did not have a material impact on the Company’s financial statements.

 

Beginning January 1, 2018, the Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers; (ii) identification of distinct performance obligations in the contract; (iii) determination of contract transaction price; (iv) allocation of contract transaction price to the performance obligations; and (v) determination of revenue recognition based on timing of satisfaction of the performance obligation. The Company recognizes revenues upon the satisfaction of its performance obligations (upon transfer of control of promised goods or services to customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services.

 

All of the Company’s revenues for the three months ended March 31, 2018 and 2017 were related to intellectual properties (including CRM systems, payment gateway system and back office marketing systems) and related supporting services provided to one related party and were calculated based on end-users’ usage of online game content.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. On December 22, 2017, new federal tax reform legislation was enacted in the United States (the “2017 Tax Act”), resulting in significant changes from previous tax law. The 2017 Tax Act reduces the federal corporate income tax rate to a flat 21% effective January 1, 2018.

 

Tax benefits are initially recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially, and subsequently, measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts. No deferred tax asset attributable to the net operating loss carry forward has been recognized, as it is not deemed likely to be realized.

 

Earnings (Loss) Per Common Share

 

Basic net earnings (loss) per common share are computed by dividing net earnings (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted net earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

 

The dilutive effect of outstanding stock options and warrants is reflected in diluted earnings per share by application of the treasury stock method. The dilutive effect of outstanding convertible securities and preferred stock is reflected in diluted earnings per share by application of the if-converted method.

 

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The following is a reconciliation of basic and diluted earnings (loss) per common share for the three months ended March 31, 2018 and 2017:

 

		For the Three Months Ended
		March 31,
		2018				2017
Basic earnings (loss) per common share
Numerator:
Net income (loss) available to common shareholders		$	(329,048	)		$	418,543
Denominator:
Weighted average common shares outstanding			2,315,835,269				1,235,190,613
Basic earnings (loss) per common share		$	(0.00	)		$	0.00
Diluted earnings (loss) per common share
Numerator:
Net income (loss) available to common shareholders		$	(329,048	)		$	418,543
Add convertible debt interest			-				140,233
Net income (loss) available to common shareholders		$	(329,048	)		$	558,776
Denominator:
Weighted average common shares outstanding			2,315,835,269				1,235,190,613
Preferred shares			-				2,362
Convertible Debt			-				36,180,720,000
Adjusted weighted average common shares outstanding			2,315,835,269				37,415,912,975
Diluted earnings (loss) per common share		$	(0.00	)		$	0.00

 

For the three months ended March 31, 2018 fully diluted earnings per share excludes notes convertible to 35,293,450,000 common shares and preferred stock convertible to 2,362 common shares, because their inclusion would be anti-dilutive.

 

Subsequent Events

 

Elray evaluated subsequent events through the date these financial statements were issued for disclosure purposes.

 

Recent Accounting Pronouncements

 

In February 2016, a pronouncement was issued that creates new accounting and reporting guidelines for leasing arrangements. The new guidance requires organizations that lease assets to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases, regardless of whether they are classified as finance or operating leases. Consistent with current guidance, the recognition, measurement, and presentation of expenses and cash flows arising from a lease primarily will depend on its classification as a finance or operating lease. The guidance also requires new disclosures to help financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. The new standard is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early application permitted. The new standard is to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the new pronouncement on its financial statements.

 

Elray’s management does not believe that any other recently issued effective pronouncements, or pronouncements issued but not yet effective, if adopted, would have a material effect on the accompanying financial statements.

 

NOTE 2 – GOING CONCERN

 

The accompanying unaudited consolidated financial statements of Elray have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company sustained a loss of $329,048 for the three months ended March 31, 2018. The factor raises substantial doubt regarding the Company’s ability to continue as a going concern. Without realization of additional capital, it would be unlikely for Elray to continue as a going concern. Elray’s management plans on raising cash from public or private debt, on an as needed basis, and in the longer term, revenues from the gambling business. Elray’s ability to continue as a going concern is dependent on these additional cash financings, and, ultimately, upon achieving profitable operations through the development of its gambling business.

 

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NOTE 3 – SETTLEMENT PAYABLE

 

On December 20, 2013, the Company entered into a settlement agreement with Tarpon Bay Partners LLC (“Tarpon”) whereby Tarpon acquired certain notes and accounts payable against the Company in the amount of $2,656,214. Pursuant to the agreement, the Company and Tarpon submitted the settlement agreement to the Circuit Court of the Second Judicial Circuit, Leon County, Florida for a hearing on the fairness of the agreement and the exemption from registration under the Securities Act of 1933 for the shares that will be issued to Tarpon for resale (“Settlement Shares”). 75% of the proceeds less all applicable fees and charges from the resale of the Settlement Shares will be remitted to the original claim holders of the Company (“Remittance Amount”). The Company agreed to issue sufficient shares to generate proceeds such that the aggregate Remittance Amount equals $2,656,214. The settlement agreement was effective on January 27, 2014 when the court granted approval.

 

There were no shares issued to Tarpon during the three months ended March 31, 2017 and 2018. As of March 31, 2018, the Company has settlement payable of $2,162,159.

 

NOTE 4 – NOTES PAYABLE

 

Notes payable

 

Notes payable at March 31, 2018 and December 31, 2017 consisted of the following:

 

		Final Maturity		Interest Rate				March 31, 2018				December 31, 2017
Morchester International Limited		July 14, 2012			15	%		$	35,429			$	35,429
Morchester International Limited		July 14, 2012			8	%			10,000				10,000
Total								$	45,429			$	45,429

 

On December 9, 2011, Elray entered into an Amended Splitrock Agreement whereby the Company acquired certain assets and liabilities of Splitrock. As part of the liabilities assumed in terms of the Amended Splitrock Agreement, the Company assumed notes payable of $292,929 bearing interest of 8% or 15% per annum. On January 27, 2014, the court granted an approval of the settlement agreement with Tarpon whereby the Company would issue shares to Tarpon for resale to pay off certain liabilities. See Note 3. As a result, principal of $247,500 and associated accrued interest acquired by Tarpon were reclassified to settlement payable. The remaining notes issued to Morchester International Limited not purchased by Tarpon are currently in default. The default had no effect on the notes’ interest rate.

 

Convertible notes payable

 

Convertible notes payable, at March 31, 2018 and December 31, 2017, consisted of the following:

 

		Interest Rate				March 31, 2018				December 31, 2017
JSJ Investments, Inc.		10%~20		%		$	128,853			$	128,853
WHC Capital, LLC			22	%			116,936				116,936
Beaufort Capital Partners, LLC			12	%			10,966				10,966
Tangiers Investment Group, LLC			20	%			48,393				48,393
GSM Fund Management, LLC			18	%			18,390				18,390
Microcap Equity Group, LLC			10	%			4,654				4,654
Virtual Technology Group, Ltd			24	%			481,500				481,500
Gold Globe Investments Ltd			24	%			2,324,000				2,324,000
Vista Capital Investments, LLC.			12	%			5,800				5,800
Total						$	3,139,492			$	3,139,492

 

JSJ Investments, Inc.

 

On May 31, 2013, the Company entered into a convertible promissory note with JSJ Investments, Inc. (“JSJ”) for $50,000. The note matured on December 2, 2013. The note holder has the option to convert the note to common shares in the Company at a discount of 50% of the average closing price over the last 120 days prior to conversion, or the average closing price over the last seven days prior to conversion. As of March 31, 2018, the remaining principal of $10,670 has not been converted. The note is currently in default. The default had no effect on the note’s interest rate.

 

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On August 21, 2014, the Company entered into a convertible promissory note with JSJ for $50,000 cash. The note matured on February 21, 2015. Upon the maturity, the note has a cash redemption premium of 150% of the principal amount. The note is convertible to the Company’s common shares at a discount of 60% of the average of the three lowest bids on the twenty days before the date this note is executed, or 60% of the average of the three lowest bids during the twenty trading days preceding the delivery of any conversion notice, whichever is lower. The note is currently in default and has a default interest rate of 20% per annum. As of March 31, 2018, balance of this note was $45,560.

 

On January 20, 2015, the Company entered into a convertible promissory note with JSJ for $40,000. The note bears interest at 12% and matured on July 20, 2015. Upon the maturity, the note has a cash redemption premium of 150% of the principal amount. The note is convertible to the Company’s common shares at 40% of the lowest trading price on the twenty days before the date this note is executed, or 40% of the lowest trading price during the twenty trading days preceding the delivery of any conversion notice, whichever is lower. The note is currently in default. The default had no effect on the note’s interest rate. As of March 31, 2018, balance of this note was $40,000.

 

On January 20, 2015, the Company entered into a convertible promissory note with JSJ for $60,000, which was issued in exchange for a portion of the promissory note issued to VTG on January 23, 2014. The note bears interest at 12% and matured on January 20, 2015. JSJ has the right to convert the balance outstanding into the Company’s common stock at a rate equal to 50% of the lowest trading price on the twenty days before the date this note is executed, or 50% of the lowest trading price during the twenty trading days preceding the delivery of any conversion notice, whichever is lower. The Company recorded a loss on extinguishment of debt of $441 related to the exchange. The note is currently in default. The default had no effect on the note’s interest rate. As of March 31, 2018, balance of this note was $32,623.

 

WHC Capital, LLC

 

On September 23, 2014, the Company entered into a convertible promissory note with WHC Capital, LLC (“WHC”) for $75,000. The note bears interest at 12% and matured on September 23, 2015. WHC has the right at any time during the period beginning on the date of this note to convert the balance outstanding into the Company’s common stock at a rate equal to 50% of the lowest intra-day trading price during the fifteen trading days prior to the conversion date. On September 23, 2015, the Company failed to repay the outstanding balance of this note and a penalty of $41,978 was added to the outstanding balance pursuant to the note terms. As of March 31, 2018, balance of this note was $116,936. This note is currently in default and has a default interest rate of 22% per annum.

 

Beaufort Capital Partners, LLC

 

On September 2, 2014, the Company entered into a convertible promissory note with Beaufort Capital Partners, LLC (“Beaufort”) for $21,000. The note matured on March 2, 2015. Beaufort has the right after the maturity date to convert the balance outstanding into the Company’s common stock at a rate equal to 50% of the lowest trading prices during the fifteen trading days prior to the conversion date. Under certain conditions, the conversion price would be reset to $0.0001 or 65% off the lowest price of the previous five trading days. As of March 31, 2018, balance of this note was $10,966. This note is currently in default. The default had no effect on the note’s interest rate.

 

Tangiers Investment Group, LLC

 

On October 13, 2014, the Company entered into a convertible promissory note with Tangiers Investment Group LLC (“Tangiers”) for $55,000. The note matured on October 13, 2015. Tangiers has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 45% of the lowest trading prices during the twenty trading days prior to the conversion date. As of March 31, 2018, balance of this note was $15,393. This note is currently and has a default interest rate of 20% per annum.

 

On October 13, 2014, the Company entered into a convertible promissory note with Tangiers for $33,000. The note bears interest at 10% and matured on October 13, 2015. Tangiers has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 45% of the lowest trading prices during the twenty trading days prior to the conversion date. As of March 31, 2018, balance of this note was $33,000. This note is currently in default and has a default interest rate of 20% per annum.

 

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GSM Fund Management LLC

 

On January 30, 2015, the Company entered into an assignment and modification agreement to assign $62,500 of the convertible promissory note of VTG dated January 23, 2014 to GSM Fund Management LLC (“GSM”). The note bears interest at 12% and matured on January 30, 2016. GSM has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 50% of the lowest closing bid price in the 15 trading days prior to the conversion date. The Company recorded a loss on extinguishment of debt of $52,364 related to the exchange. As of March 31, 2018, balance of this note was $ 18,390. The note is currently in default and has a default interest rate of 18% per annum.

 

Microcap Equity Group, LLC

 

On February 23, 2015, the Company entered into a convertible promissory note with Microcap Equity Group LLC (“Microcap”) for $20,000, which was issued in exchange for a portion of the promissory note issued to VTG on January 23, 2014. The note matured on January 23, 2017. Microcap has the right to convert the balance outstanding into the Company’s common stock at a rate equal to 40% of the lower of the lowest bid price during the thirty trading days prior to the conversion date, or the lowest bid price on the day that the converted shares are cleared for physical delivery. The Company recorded a loss on extinguishment of debt of $28,213 related to the exchange. As of March 31, 2018, balance of this note was $4,654. The note is currently in default. The default had no effect on the note’s interest rate.

 

Virtual Technology Group, Ltd

 

On January 23, 2014, the Company entered into a convertible promissory note with VTG for $1,500,000. VTG has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 100% of the average of the closing bid prices for the seven trading days prior to the conversion date when the Company’s shares are traded in the OTCQB or during the ten trading days prior to the conversion date when the Company’s shares are traded on another other exchange. On November 10, 2014, $50,000 of this note was replaced with a note issued to LG. On January 20, January 23 and January 30, 2015, $60,000, $20,000 and $62,500 of this note were replaced with notes issued to JSJ, Microcap and GSM. As of March 31, 2018, balance of this note was $481,500. The note is currently in default and has a default interest rate of 24% per annum.

 

Gold Globe Investments Ltd

 

On January 23, 2014, the Company entered into a convertible promissory note with GGIL for $2,800,000. GGIL has the right after a period of 180 days to convert the balance outstanding into the Company’s common stock at a rate equal to 100% of the average of the lowest three trading prices during the seven trading days prior to the conversion date when the Company’s shares are traded in the OTCQB or during the ten trading days prior to the conversion date when the Company’s shares are traded on another exchange. On December 3, 2014, $45,000 of this note was replaced with a note issued to Tangiers. As of March 31, 2018, balance of this note was $2,324,000. The note is currently in default and has a default interest rate of 24% per annum.

 

Vista Capital Investments, LLC.

 

On April 15, 2014, the Company entered into a convertible promissory note with Vista Capital Investments, LLC (“Vista”) for $250,000. The note has an original issuance discount of $25,000. The note matures 2 years from the date of each payment of the principal from Vista. In the event that the note remains unpaid at maturity date, the outstanding balance shall immediately increase to 120% of the outstanding balance. Vista has the right to convert the outstanding balance into the Company’s common stock at a rate equal to the lesser of $0.008 per share or 60% of the lowest trade occurring during the twenty-five consecutive trading days preceding the conversion date. Due to certain events that occurred during 2014, the conversion price has been reset to $0.005 per share or 50% of the lowest trade occurring during the twenty-five consecutive trading days preceding the conversion date. Pursuant to the agreement, if the conversion price calculated under this agreement is less than $0.01 per share, the principal amount outstanding shall increase by $10,000 (“Sub-Penny”). $25,000 net proceeds were received on April 23, 2014. The remaining fund of this note has not been received. As of March 31, 2018, balance of this note was $5,800 which matured on April 15, 2016. The note is currently in default. The default had no effect on the note’s interest rate.

 

Loan and advances from shareholders

 

On September 5, 2008, Elmside Pty Ltd, a company related to a former director, agreed to an interest free loan of $55,991 to the Company on an as-needed basis to fund the business operations and expenses of the Company until December 9, 2011, the due date of the loan. The note is in default.

 

As of March 31, 2018 and December 31, 2017, the Company had advances of $3,400 from its officer. The advances form the officers are due on demand, unsecured with no interest.

 

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NOTE 5 – DERIVATIVE LIABILITIES – NOTE CONVERSION FEATURE

 

Due to the conversion features contained in the convertible notes issued, the actual number of shares of common stock that would be required if a conversion of the note as further described in Note 4 was made through the issuance of the Company’s common stock cannot be predicted, and the Company could be required to issue an amount of shares that may cause it to exceed its authorized share amount. As a result, the conversion feature requires derivative accounting treatment and will be bifurcated from the note and “marked to market” each reporting period through the income statement. The fair value of the conversion future of these notes was recognized as a derivative liability instrument and will be measured at fair value at each reporting period.

 

The Company remeasured the fair value of the instrument as of March 31, 2018, and recorded an unrealized gain of $8 for the three months ended March 31, 2018. The Company determined the fair values of these liabilities using a Black-Scholes valuation model with the following assumptions:

 

		December 31, 2017				March 31, 2018				Various Dates in 2018
Stock price on measurement date		$	0.0001			$	0.0001			$0.0001~0.0002
Exercise price		$0.00004~$0.00010				$0.00004~$0.00010				$0.00004~$0.00010
Discount rate			1.28	%			1.63	%		1.58%~1.99		%
Expected volatility			248	%			248	%		244%~248		%
Expected dividend yield			0.00	%			0.00	%			0.00	%

 

The following table provides a summary of the changes in fair value of the derivative financial instruments measured at fair value on a recurring basis using significant unobservable inputs:

 

Fair value at December 31, 2017		$	390,135
Change in fair value of derivative liabilities			(8	)
Fair value at March 31, 2018		$	390,127

 

NOTE 6 – COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

From time to time, we may be party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. We are not involved currently in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. We may become involved in material legal proceedings in the future.

 

Commitments and Contingencies

 

On January 22, 2018, the Company entered into a lease agreement for an office located at Tenancy 2, Level 3, 2 Grosvenor Street, Bondi Junction, Australia. The Company pays approximately $68,585 per year plus applicable local sale tax and sharing expenses. The agreement, as amended, expires on November 14, 2020.

 

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NOTE 7 – RELATED PARTY TRANSACTIONS

 

Elmside Pty Ltd

 

On September 5, 2008, Elmside Pty Ltd, a company related to a former director, agreed to an interest free loan to the Company on an as-needed basis to fund the business operations and expenses of the Company until December 9, 2011, the due date of the loan. As of March 31, 2018 and December 31, 2017, loans from Elmside, a shareholder, were $55,991. The loans are currently in default.

 

Articulate Pty Ltd and Brian Goodman

 

As of March 31, 2018 and December 31, 2017, the Company had accounts payable of $2,780,939 and $2,517,509, respectively, to its chief executive officer and Articulate Pty Ltd (“Articulate”), a company controlled by the Company’s chief executive officer, for consulting fees, reimbursement of expenses and compensation.

 

On August 24, 2016, the Company entered into a strategic partnership agreement with Articulate. Pursuant to the agreement, Articulate will provide non-exclusive back office services to the Company’s clients. In exchange for the service, Elray agreed to pay $10,000 for each month Articulate provides services. Elray will receive 0.5% of the software usage fee paid by Elray’s clients through Articulate. For the three months ended March 31, 2018 and 2017, revenues from Articulate were $149,061 and $156,334, respectively. As of March 31, 2018 and December 31, 2017, receivable from Articulate for software usage fee was $314,619 and $210,057, respectively.

 

Jay Goodman and Brett Goodman

 

On May 15, 2013, the Company entered into an agreement with Jay Goodman, son of the Company’s chief executive officer, to provide consulting services assisting the Company with data segmentation, financial and statistical services. In consideration for such services, the Company pays $3,000 per month to Jay Goodman. As of March 31, 2018 and December 31, 2017 the Company had a $175,500 and $166,500 payable to Jay Goodman, respectively.

 

On February 1, 2016, the Company entered into an agreement with Brett Goodman, another son of the Company’s chief executive officer, where Mr. Brett Goodman will provide consulting services assisting the Company with a project involving social gaming platform. Mr. Brett Goodman has been providing the Company services since 2015. During the three months ended March 31, 2018 and 2017, there was no consulting fee paid to Mr. Brett Goodman.

 

Globaltech Software Services LLC

 

The Company’s chief executive officer is a member of Globaltech Software Services LLC (“Globaltech”). As of March 31, 2018 and December 31, 2017, the Company had other payable to Globaltech of $44,824 and $34,824.

 

NOTE 8 – EQUITY

 

Preferred Stock – Series A

 

On May 3, 2012, the Company authorized the creation of 300,000,000 shares of Series A preferred stock. The Class A Preferred Series shares are convertible at a rate of 0.0000003 common shares for each Series A Preferred Share. As of March 31, 2018 and December 31, 2017, there were no Series A Preferred Stock outstanding.

 

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Preferred Stock – Series B

 

On July 1, 2012, the Company authorized the creation of 100,000,000 shares of Series B preferred stock. On September 24, 2012, the authorized Series B Preferred Stock was increased from 100,000,000 to 280,000,000. After a series of reverse stock splits, the Series B Preferred stock is convertible at a rate of 0.000000003 common stock for each Series B Preferred stock.

 

On July 14, 2013, the Company entered into a 12-month consultancy agreement with VTG to assist the Company in developing marketing and supporting the technology of virtual online horse racing products and to provide the Company the exclusive use right to certain website domains. In consideration for such services and domains, the Company issued 192,000,000 Series B Preferred shares to VTG. The 192,000,000 Series B Preferred stock have been recorded at their estimated fair value of $43,031.

 

Preferred Stock – Series C

 

On June 20, 2014, the Company authorized the creation of 10,000,000 shares of Series C preferred stock. The Series C preferred shares are convertible at a rate of 0.0003 common shares for each Series C Preferred Share.

 

On September 18, 2014, the Company entered into an agreement to acquire a 25% interest in Globaltech Software Services LLC doing business as Golden Galaxy (“Golden Galaxy”) which operates online casinos. Under the terms of the purchase agreement, the Company will be entitled to 1% of the gross wagering generated by Golden Galaxy. In consideration for the purchase, the Company issued 5,000,000 shares of the Company’s Series C preferred stock in June 2015 and recorded $5,000 of other asset. On April 1, 2015, the Company terminated the agreement and stopped receiving 1% of the gross wagering generated by Golden Galaxy. Duirng the year ended December 31, 2017, the management recorded an impairment of $5,000 due to the uncertain recoverability of the other asset.

 

On September 18, 2014, the Company entered into an agreement with Yangjiu Xie, owner of Asialink Treasure Limited (“ATL”). Pursuant to the agreement, the Company issued 2,083,333 shares of its Series C preferred stock as part of the consideration to acquire 49% of the outstanding shares of ATL in a series of transactions. These shares were recorded at their par value of $2,083 with a subscription receivable at the same amount. The Company has not received the certificate of ownership from ATL.

 

Common Stock

 

As of March 31, 2018, 60,444,800 shares were yet to be delivered for the conversion of note principal of $2,000 and accrued interest of $1,022. The fair value of derivative – note conversion feature related to this conversion was $2,000.

 

NOTE 9 – CONCENTRATION

 

The Company’s revenues for three months ended March 31, 2018 and 2017 were from one related party. As of March 31, 2018, the Company’s only customer is Articulate, a related party. Pursuant to the Company’s strategic partnership agreement with Articulate dated August 24, 2016, the agreement remains in full force indefinitely, or until a period of 12 months has lapsed after delivery of a written notice by either the Company or Articulate, terminating the agreement.

 

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

 

The following discussion and analysis summarizes the significant factors affecting our consolidated results of operations, financial condition and liquidity position for the three months ended March 31, 2018. This discussion and analysis should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for our year-ended December 31, 2017 and the consolidated unaudited financial statements and related notes included elsewhere in this filing. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements.

 

Forward-looking statements

 

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

 

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

 

Overview

 

Elray Resources, Inc. (“Elray” or “Company”) was incorporated in Nevada on December 13, 2006.

 

Elray has been providing marketing and support for online gaming operations. Elray’s strategy is to provide online gaming to players in markets where such activities are legal.

 

The Company has opened a virtual managed corporate office located in Las Vegas in order to meet potential requirements put forth by lawmakers in pending state and federal legislation. Under the proposed bills, Internet-enabled gaming operations must adhere to strict rules including locally-based operations and technology that allows for IP address restrictions and user age verification.

 

On January 23, 2014, the Company entered into a Know-How and Asset Purchase Agreement, with VTG and Gold Globe Investments Limited, a BVI company (“GGIL”). VTG and GGIL are engaged in the development of web technology and have jointly developed both an E-store and a virtual exchange platform that facilitate trading of virtual items and casino credits as well as bitcoins. The Company acquired these assets to assist the Company to continue to build and support its marketing and support business for online casinos and social games.

 

On August 24, 2016, the Company entered into a Strategic Partnership Agreement with Articulate Pty Ltd (“Articulate”), a company provides online intellectual property includes CRM systems, payment gateway system and back office marketing systems. Articulate agreed to provide online gaming support and marketing services to Elray. Both parties worked together to provide service to e-commerce and gaming companies. The agreement was made effective on August 1, 2016, and remains in full force indefinitely, or until a period of 12 months has lapsed after delivery of a written notice by either the Company or Articulate, terminating the agreement.

 

Plan of Operation

 

Elray has developed and acquired unique valuable technology that provides state of the art turnkey, marketing tools and CRM systems for online gaming operators.

 

Our primary competition is expected from overseas based online gaming technology companies. With few exceptions, significant listed gaming companies (many of which are listed on the London Stock Exchange) operate using their own software. As an independent online gaming technology provider, we believe that we retain the ability to provide the best turnkey solutions allowing operators to choose the best of breed and most profitable content available. Additionally, by ensuring that we operate in compliance with U.S. laws, we believe that in the event of legalized gaming in the U.S., we would not be precluded from taking advantage of U.S.-based gaming.

 

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Results of Operations

 

Three months ended March 31, 2018 compared to the three months ended March 31, 2017.

 

Revenues

 

We generated $149,061 revenues during the three months ended March 31, 2018 compared to $156,334 for the three months ended March 31, 2017. Revenues were related to the marketing tools and CRM systems provided to a related party.

 

Operating expenses

 

During the three months ended March 31, 2018 and 2017, general and administrative expenses were $295,735 and $262,934, respectively. Increase of general and administrative expense was mainly attributable to the increase of consulting expense.

 

Interest expenses

 

During the three months ended March 31, 2018 and 2017, interest expense was $182,382 and $207,809, respectively. The decrease of interest expense was mainly due to less amortization of debt discount on convertible debt during the three months ended March 31, 2018.

 

Gain on derivative liabilities - note conversion feature

 

Unrealized gain on derivative liabilities - note conversion feature was $8 for the three months ended March 31, 2018 compared to a gain of $732,952 for the three months ended March 31, 2017. The change was primarily resulted from the fluctuation of the Company’s stock price.

 

Net income (loss)

 

We had a net loss of $329,048 and net income of $418,543 for the three months ended March 31, 2018 and 2017, respectively. The increase of net loss in 2018 was as a result of the items discussed above.

 

Liquidity and Capital Resources

 

The Company had $22,013 cash on hand at March 31, 2018.

 

Our cash used in operating activities for the three months ended March 31, 2018 was $11,057 compared to $38,027 provided by operating activities for the three months ended March 31, 2017. The decrease was primarily due to changes in net operating asset and liabilities.

 

Our cash provided by financing activities for the three months ended March 31, 2018 was $10,000 compared to $26,362 used in financing activities for the three months ended March 31,2017. The change was mainly related to a decrease of payments on short-term notes and a decrease of proceeds from payable to a related party.

 

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

 

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

 

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Material Events and Uncertainties

 

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

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

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

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure controls and procedures

 

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

 

Internal control over financial reporting

 

The Certifying Officer reviewed our internal control over financial reporting (as defined in rules 13a-15(f) and 15d-15(f)) under the Exchange Act as of the Evaluation Date and concluded that no changes occurred in such control or in other factors during the quarter ended March 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

There are no litigation pending or threatened by or against us.

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

There were no shares issued for conversions of notes payable during the three months ended March 31, 2018.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

The Company has no senior securities outstanding.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

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ITEM 6. EXHIBITS

 

Number		Exhibit Description
3.1		Articles of Incorporation of Elray Resources, Inc.*
3.2		Bylaws of Elray Resources, Inc.*
31.1		Certificate of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certificate of principal executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS		XBRL Instance Document
101.SCH		XBRL Schema Document
101.CAL		XBRL Calculation Linkbase Document
101.DEF		XBRL Definition Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL Presentation Linkbase Document

__________

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

 

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SIGNATURES

 

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

 

 

	ELRAY RESOURCES, INC.
Date: May 15, 2018	By:	/s/ Anthony Goodman
		Anthony Goodman,
		President and Chief Financial Officer

 

 

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