Meridian Holdings Inc./NV (MRDN) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-looking statements

The following discussion of the Company’s historical performance and financial condition should be read together with the consolidated financial statements and related notes in “Item 8. Financial Statements and Supplemental Data” of this Report. This discussion contains forward-looking statements based on the views and beliefs of our management, as well as assumptions and estimates made by our management. These statements by their nature are subject to risks and uncertainties, and are influenced by various factors. As a consequence, actual results may differ materially from those in the forward-looking statements. See “Item 1A. Risk Factors” of this Report for the discussion of risk factors and see “Cautionary Statement Regarding Forward-Looking Statements” for information on the forward-looking statements included below.

Summary of Information Contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying audited financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

Overview

We derive revenues primarily from (1) licensing fees received from gaming operators located in the Asia Pacific (APAC) region that utilize the Company’s technology, and (2) selling prize competitions directly to customers for prizes throughout the United Kingdom (UK).

As to licensing fees, the Company’s goal is to expand our customer base globally and to integrate additional operators, launch additional synergistic products and appoint more distributors. Currently the Company has more than 7.1 million registered users across all gaming operators that utilize the Company’s technology and is currently integrating additional operators to expand this usage.

As to prize competitions tickets, the Company’s goal is to expand and complete its marketing efforts throughout the UK and then expand the platform to other countries throughout Europe and Latin America that allow the selling of prize competition tickets.

As to our Online Casino in Mexico, these operations commenced in November 2022 (post October 31, 2022 year-end) and the Company’s goals are to penetrate the Mexican market with a competitive website that provides users with an online casino site Mexplay (www.mexplay.mx), that features an extensive number of table games, slots, as well as a sportsbook, and offers tournament competition prizes similar to those offered by RKings. Once the site is optimized, the Company’s goal is to expand its marketing efforts throughout Mexico and scale the site and its functions to other Latin American countries.

Our financial focus is on long-term, sustainable growth in revenue with the goal of marginal increases in expenses. The Company’s activity is highly scalable. We are highly encouraged by recent revenue growth, clearly demonstrating the acceptance and reputation of the Company’s GM-X System and its gaming content. We plan to continuously add new products to our offerings and anticipate revenue growth assuming we are successful therewith.

The Company has generated positive cash flows from operating since 2018. The Company is self-sustaining, and its cash needs are met through current operations; as of October 31, 2022, the cash balance was $14,949,673. We believe that the cash generated from our operations will be sufficient to meet our working capital needs for the next 12 months and beyond, including investments made and expenses incurred in connection with system development, marketing initiatives, and inventory purchase.

As previously noted, the Company is self-sustaining through its operations and therefore is not considering additional sources of liquidity; however, the Company may consider raising funds through debt, private placements, or additional public offerings for expansion of operations or synergetic acquisitions if additional external funds are sought. Unused sources of liquid assets, as of October 31, 2022, mainly included cash of $14,949,673, receivables (including receivables from related party) of $3,054,737 and inventory of $1,147,591, with offsetting liabilities of $2,774,932.

The Company does not have material cash requirements other than a possible payment of approximately $573,197 (GBP 500,000) in connection with the acquisition of RKings, which payment is currently subject to ongoing claims.

EBITDA – Earnings Before Interest Taxes Depreciation Amortization

In addition to our results calculated under generally accepted accounting principles in the United States (“GAAP”), we also present EBITDA below. EBITDA is a “non-GAAP financial measure” presented as a supplemental measure of the Company’s performance. It is not presented in accordance with GAAP. The Company uses EBITDA as a metric of profits and successful operations management. In particular, we use EBITDA in the incentive compensation programs applicable to some of our officers and directors in order to evaluate our company’s performance and determine whether certain restricted stock units vest as of the end of October 31, 2022, 2023 and 2024. EBITDA means net income before interest, taxes, depreciation, amortization and stock-based compensation. EBITDA should be viewed as supplemental to, and not as an alternative for net income or loss calculated in accordance with GAAP.

EBITDA is presented because we believe it provides additional useful information to investors due to the various noncash items during the period. EBITDA is also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. EBITDA is unaudited, and has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our operating results as reported under GAAP. Some of these limitations are: EBITDA does not reflect cash expenditures, or future or contractual commitments; EBITDA does not reflect changes in, or cash requirements for, capital expenditures or working capital needs; EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on debt or cash income tax payments; although depreciation and amortization are noncash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA does not reflect any cash requirements for such replacements. In addition, other companies in this industry may calculate EBITDA differently than the Company does, limiting its usefulness as a comparative measure. The Company’s presentation of these measures should not be construed as an inference that future results will be unaffected by unusual or nonrecurring items. We compensate for these limitations by providing a reconciliation of such non-GAAP measures to the most comparable GAAP measure, below. We encourage investors and others to review our business, results of operations, and financial information in their entirety, not to rely on any single financial measure, and to view non-GAAP measures in conjunction with the most directly comparable GAAP financial measure.

Reconciliation of EBITDA to Net Income:

Results of Operations

Revenues

The Company currently has three distinctive revenue streams. In the B2B segment there are two revenue streams (i) charges for usage of the Company’s software, and (ii) a royalty charged on the use of third-party gaming content. In the B2C segment, the revenue stream is related to the prize competition tickets sold to enter prize competitions in the UK through RKings.

B2B segment, revenue descriptions:

(i). The Company charges gaming operators for the use of its unique intellectual property (IP) and technology systems. Revenues derived from such charges were based on the usage of the systems by the clients.

Total revenues recognized from the usage of our Gaming IP and technology systems for the twelve months ended October 31, 2022 and 2021, nine months ended October 31, 2021 and 2020, and the twelve months ended January 31, 2021 and 2020 are shown in the following table:

The decrease in revenues, regarding the usage of our Gaming IP and technology systems, in the twelve-month period ended October 31, 2022, compared to the twelve-month period ended October 31, 2021, as well as in the nine-month transition period ended October 31, 2021, compared to the nine-month period ended October 31, 2020, is due to the Company’s shift in focus to appointing resellers of its product and services. A portion of the decrease in revenues by third-party clients can be attributed to the loss of certain major operators from our third-party customers which is being phased out.

The decrease in revenues in the twelve-month period ended January 31, 2021, compared to the twelve-month period ended January 31, 2020, is due to a marginal decrease in revenues from our third-party customers and can be attributed to the reduced performance of certain operators.

(ii) Since June 2020, the Company has contracted with certain clients to offer third party gaming content and as such become a reseller of this gaming content. The Company acquires the third-party gaming content for a fixed cost and resells the content at a margin.

Revenues derived from the reselling of gaming content during the twelve-months ended October 31, 2022 and 2021, nine-months ended October 31, 2021 and 2020, and the twelve-months ended January 31, 2021 and 2020, are shown in the following table:

The increase in this category of revenues is due to the Company’s shift in focus to appoint resellers for its products and services. The Company believes its strategy to appoint resellers will allow the Company to scale its distribution more efficiently and broaden its global reach. The Company is seeking to engage additional resellers, increase its number of operators, and broaden its global market. We believe that this is also now achievable via the Company’s GM-Ag system that is more suitable for Latin American and European markets.

The Company believes that there is a significant opportunity to scale this revenue stream with low related expenses and no capital expenditures and also to expand its global reach. We believe the revenue stream is highly scalable i.e., the running and support costs relative to the incremental revenues are low and will reduce exponentially as a percentage of revenues as revenues grow. The Company has been striving to roll out this new product offering to its existing client base and expects to scale up its revenues as a result.

B2C segment, revenue description:

Since the acquisition of 80% of RKings effective November 1, 2021 and the acquisition of GMG Assets on August 1, 2022, the Company generates revenues from sales of prize competitions tickets directly to customers for prizes throughout the United Kingdom ranging from automobiles to jewelry as well as travel and entertainment experiences.

During the twelve months ended October 31, 2022, $21,186,597 of total revenues were derived from prize competitions ticket sales. Included in this amount are $1,024,268 of revenues, since August 1, 2022, from the purchase and sale of prizes the winners opted to receive the cash value of instead of the prize. The Company did not have revenues from the sales of prize competitions tickets prior to November 1, 2021, as it acquired 80% of RKings effective on November 1, 2021 and as discussed above under “Item 1. Business”, the Company acquired 100% of RKings on November 30, 2022, effective as of November 4, 2022.

Total revenues for the twelve months ended October 31, 2022 and 2021 were $36,034,856 and $11,285,731, respectively.

Costs of goods sold

The Company currently has three distinctive sources of cost of goods sold.  Two (i.e., (i) and (ii)) are related to the B2B segment and the third is related to the B2C segment.

(i). Historically, the Company only recognized the value of stock options granted to consultants under the 2018 Equity Incentive Plan as cost of goods sold. This recognition was based on the fact that the stock options directly contributed to the revenue generated by the Company’s GM2 Asset. The amortization expenses of the stock options granted to consultants recognized in the twelve months ended October 31, 2022 and 2021, nine months ended October 31, 2021 and 2020, and the twelve months ended January 31, 2021 and 2020 are shown in the following table:

The increase in the cost of goods sold in the twelve-month period ended October 31, 2022, compared to the twelve-months ended October 31, 2021, was due to new options granted last year in March and September 2021, and in May 2022. The increase in the share price has increased the option valuation based on the Black-Scholes valuation model and therefore increased the amortization expenses over time.

The increase in the option amortization expenses of $194,657 in the nine-month transition period ended October 31, 2021, compared to the nine-months ended October 31, 2020, is due to new options granted during the nine-months ended October 31, 2021. The increase in the share price has increased the option valuation based on the Black-Scholes valuation model and therefore increased the amortization expenses.

The increase in the option amortization expense in the twelve-month period ended January 31, 2021, compared to the twelve-months ended January 31, 2020, is attributable to the options issued during the year. The increase in the share price has also increased the option valuation based on the Black-Scholes valuation model and therefore increased the amortization expenses. The negative cost of goods sold during the twelve months ended January 31, 2020 was due to the adoption of new accounting standard ASU 2018-07.

(ii). Beginning in June 2020, due to the reselling of the gaming content, the cost of usage of the third-party content is recognized as a cost of goods sold (COGS). The cost of goods sold during the twelve-months ended October 31, 2022 and 2021, nine-months ended October 31, 2021 and 2020, and the twelve-months ended January 31, 2021 and 2020 are shown in the following table:

The increase of $3,817,229 in cost of goods sold from the resale of gaming content in the twelve months ended October 31, 2022, versus the twelve months ended October 31, 2021, and the increase of $4,810,581 in cost of goods sold from the resale of gaming content in the nine months ended October 31, 2021, versus the nine months ended October 31, 2020, were attributable to the increased usage of gaming content as a result of an increased number of customers and registered players with our customers.

The increase of $1,724,272 in cost of goods sold from the resale of gaming content in the twelve months ended January 31, 2021, versus the twelve months ended January 31, 2020, is the result of the Company having no such costs before the twelve-months ended January 31, 2021.

While the Company is focusing on appointing additional resellers in order to scale its customer base, sales and global reach, the Company’s gross profit margin may be reduced. However, the Company expects a long-term benefit in the cost of goods as a result of the increase in buying power due to higher overall usage of gaming content.

(iii) Beginning November 1, 2021, in connection with the acquisition of an 80% interest in RKings (which has since increased to 100% as of November 30, 2022, effective as of November 4, 2022) the Company incurs cost of goods sold due to the prizes purchased which are awarded to winners of prize competitions throughout the United Kingdom ranging from automobiles to jewelry as well as travel and entertainment experiences. During the twelve months ended October 31, 2022, $15,956,558 of cost of goods sold related to prizes that were awarded in the prize competitions. Included in this amount are $ 962,793 of cost of goods sold, since August 1, 2022, from the purchase and sale of prizes the winners opted to receive the cash value instead of the prize. The Company did not have cost of goods sold related to prize competitions prior to November 1, 2021.

Total costs of goods sold for the twelve months ended October 31, 2022 and 2021 are $26,872,229 and $7,006,022, respectively.

Gross Profit and Gross Profit Margin

We had gross profit of $9,162,627 for the twelve months ended October 31, 2022, compared to gross profit of $4,279,709 for the twelve months ended October 31, 2021, an increase of $4,882,918, mainly due to $5,230,039 of gross profit contributed from the B2C segment which started with the acquisitions of RKings on November 1, 2021, and GMG Assets on August 1, 2022. RKings and GMG Assets contributed $5,168,564 and $61,475 respectively, to gross profit for the twelve months ended October 31, 2022 and 2021. A decrease of gross profit of $347,121 in the B2B segment was mainly due to the decrease in revenues from the usage of IP and technology systems as discussed above.

We had gross profit of $3,282,984 for the nine months ended October 31, 2021, compared to gross profit of $2,226,383 for the nine months ended October 31, 2020, an increase of $1,056,601, mainly due to the increasing revenues derived from reselling of gaming content which started in June 2020.

Gross profit margin was 25% for the twelve months ended October 31, 2022, compared to 38% for the twelve months ended October 31, 2021, mainly due to the increase in revenues in the resale of gaming content and higher revenues in the B2C segment (i.e., prize competitions), which have a lower gross profit margin compared with revenues from the usage of IP and technology systems. The gross profit margin on revenues from the resale of gaming content was approximately 26% for the twelve months ended October 31, 2022. The Company believes that this resale revenue stream is highly scalable and there is a significant opportunity to scale this resale revenue stream with low related expenses and no capital expenditures and also to expand its global reach. The gross profit margin on the B2C segment was approximately 25% for the twelve months ended October 31, 2022.

Gross profit margin was 35% for the nine months ended October 31, 2021, compared to 68% for the nine months ended October 31, 2020, mainly due to the increase in revenues from resales which had a lower gross profit margin.

Moving forward, the Company expects to consolidate several operating aspects that are redundant and plans to seek to generate increased gross profit and gross profit margin due to economies of scale. Also, the competition prizes are expected to generate larger profit margins with a focus on increasing the margins on individual prizes.

General and administrative Expenses

General and administrative expenses consist primarily of advertising and promotion expenses, travel expenses, website maintenance expenses, administrative expenses, commission expenses, lease expenses, gaming license expenses and amortization expenses on our intangible asset (see “NOTE 9 – INTANGIBLE ASSETS – SOFTWARE PLATFORM” to the financial statements included herein). Total general and administrative expenses for the twelve months ended October 31, 2022 and 2021, nine months ended October 31, 2021 and 2020, and the twelve months ended January 31, 2021 and 2020 are shown in the following table:

The increase in the general and administrative expenses for the twelve months ended October 31, 2022, compared to the twelve months ended October 31, 2021, was mainly due to $3,131,121 of general and administrative expenses from our B2C segment which started with the acquisitions of RKings on November 1, 2021, and GMG Assets on August 1, 2022.  The expenses mainly include the payroll costs, advertisement, and bank charges for the transaction fees of which RKings accounted for $3,060,844 and GMG Assets accounted for $70,277, for the twelve months ended October 31, 2022 and 2021. The increase in the general and administrative expenses in the B2B segment for the twelve months ended October 31, 2022, compared to the twelve months ended October 31, 2021, was mainly due to the increase in marketing costs and payroll costs.

The increase in the general and administrative expenses for the nine months ended October 31, 2021, compared to the nine months ended October 31, 2020, was mainly due to a marketing fee paid to one of the Company’s customers and certain new expenses which were applicable this fiscal year, but not last, including lease expenses, gaming license expenses, and amortization expenses on our intangible asset. The marketing fee is due to one customer pursuant to a Software Services Agreement which stipulates benchmark targeted gross gaming revenues that the customer is required to achieve in order to obtain a marketing rebate. As such, if the customer generates the benchmark by a predetermined date, then the customer will be granted a marketing rebate of 1% of the gross gaming revenues generated by the customer. The customer has satisfied the requirement of the stipulated June 2021 benchmark which was 4 million Euro gross gaming revenues, and as such was granted the 1% rebate. This rebate resulted in an increase in general and administrative expenses.

The increase in the general and administrative expenses for the twelve months ended January 31, 2021, compared to twelve months ended January 31, 2020, is mainly due to the marketing compensation granted to one of the Company’s customers. As per the Company’s Software Agreement with the customer, the customer is required to achieve benchmark targeted gross gaming revenues in order to obtain a marketing rebate. If the customer generates the benchmark by a predetermined date then the customer will be granted a marketing rebate of 1% of the gross gaming revenues generated by the customer. The customer has satisfied the requirement of the stipulated September 2020 benchmark which was 2 million Euro gross gaming revenues, and as such was granted the 1% rebate.

General and administrative Expenses – Related Parties

General and administrative expenses from related parties consist primarily of amortization expenses due to stock incentives granted to directors and officers, back-office expenses paid to Articulate Pty Ltd (“Articulate”), which is wholly-owned by Anthony Brian Goodman, CEO and Chairman of the Company and his wife Marla Goodman, consulting expenses and salary expenses payable to the Company’s Directors and officers. The components of general and administrative expenses from related parties for the twelve months ended October 31, 2022 and 2021, nine months ended October 31, 2021 and 2020, and the twelve months ended January 31, 2021 and 2020, are shown in the following table:

During the twelve-months ended October 31, 2022 and 2021, the stock compensation expenses increased due to the restricted stock units granted to members of the Board of Directors including executive directors and independent directors on September 16, 2022; the back-office expenses decreased due to the cancellation of a Back Office Services Agreement with Articulate on June 30, 2021; the consulting & salary expense increased by $258,384, which is principally due to the increased compensation to the Company’s directors and officers.

During the nine-months ended October 31, 2021 and 2020, the directors’ stock options amortization expense decreased due to the stock options granted to the Company’s Chief Executive Officer (options to purchase 2,700,000 shares of common stock) and the Chief Operating Officer (options to purchase 700,000 shares of common stock) in addition to other options granted under the 2018 Equity Incentive Plan becoming fully vested and fully amortized; the back-office expenses decreased due to the cancellation of a Back Office Services Agreement with Articulate (a related party owned by the Company’s Chief Executive Officer, Anthony Brian Goodman); the consulting & salary expense increased by $199,116, which is principally due to increased salaries of the Company’s Chief Executive Officer, the Chief Operating Officer and the addition of the Chief Financial Officer’s compensation.

During the twelve-months ended January 31, 2021 and 2020, the amortization expenses increased due to the stock options granted to three Independent Directors under the 2018 Equity Incentive Plan; the back office expenses (with Articulate, a related party owned by the Company’s Chief Executive Officer, Anthony Brian Goodman and his wife) increased due to the increasing cost per month thereof from $5,500 to $11,000 beginning in August 1, 2019; the consulting expenses increased due to the increasing number of Directors which the Company had, and the consulting services provided by Mr. Brett Goodman, a consultant, and the son of the Company’s Chief Executive Officer, who was engaged to assist the Company with building a Peer-to-Peer gaming system.

Professional fees

Professional fees consisted primarily of SEC filing fees, legal fees, financial service fees and accounting and audit fees. The professional fees for the twelve-months ended October 31, 2022 and 2021, the nine months ended October 31, 2021 and 2020, and the twelve months ended January 31, 2021 and 2020, are shown in the following table:

During the twelve-months ended October 31, 2022 and 2021, professional fees increased by $327,176 to $663,315, from $336,139, respectively, mainly due to the Company’s acquisition of RKings, GMG Assets, and the Company’s Nasdaq uplisting application, which was approved effective on March 17, 2022, and other one-time corporate matters which did not occur in the prior period.

During the nine-months ended October 31, 2021 and 2020, professional fees increased by $177,047 to $287,383, from $110,336, respectively, mainly due to legal and accounting fees related to corporate actions, filings with the SEC, preparation of tax returns and period end audits and reviews. Legal fees increased by $112,411 (from $54,556 to $166,967) and accounting and audit fees increased by $53,950 (from $32,550 to $86,500).

During the twelve-months ended January 31, 2021 and 2020, professional fees increased $101,584 from $57,507, to $159,091, respectively, mainly due to the corporate actions and filings with the SEC during the year including the change of fiscal year, a stock reverse split and fees in connection with the filing of our Nasdaq uplisting application.

Research and development expense

Research and development expense was incurred in connection with the building of the Company’s Seamless Aggregation Platform (“Aggregation Platform”) acquired on March 1, 2021, from Gamefish Global Pty Ltd, and the Company’s Proprietary Peer to Peer gaming system. During the twelve-months ended October 31, 2022 and 2021, the research and development expense decreased $155,533 to $23,092, from $178,625, respectively, mainly due to the termination of ongoing development work contemplated by the Asset Purchase Agreement with Gamefish, effective on November 30, 2021.

During the nine-months ended October 31, 2021 and 2020, the research and development expense increased $131,067 to $149,738, from $18,671, respectively, mainly due to increased development of the Aggregation Platform.

During the twelve-months ended January 31, 2021 and 2020, research and development expense was $47,558 and $0, respectively. The research and development expense was incurred in connection with the building of the Company’s Proprietary Peer-to-Peer gaming system.

Bad Debt Expense

During the twelve-months ended October 31, 2022 and 2021 and, the nine-months ended October 31, 2021 and 2020, bad debt expense remained unchanged at $0. Accounts receivables are monitored regularly for impairment and all amounts are collectible except for a reserve for doubtful accounts of $168,557 which was written off during the twelve months ended October 31, 2022 along with the related accounts receivable balance.

During the twelve-months ended January 31, 2021 and 2020, the bad debt expense was $0 and $179,396, respectively.

Interest Expense

During the twelve-months ended October 31, 2022 and 2021, interest expense was $0 and $955, respectively. The decrease of interest expense is mainly due to the decrease in the outstanding balance of the convertible debt and the promissory note with Luxor Capital, LLC (“Luxor”), a Nevada limited liability corporation, which is wholly-owned by the Company’s Chief Executive Officer and Chairman, Anthony Brian Goodman, that was paid in full as of January 31, 2021.

During the nine-months ended October 31, 2021 and 2020, interest expense was $0 and $10,897, respectively. Historically, interest expense was mainly attributed to settlement payable and promissory note to Luxor, a Nevada limited liability corporation, which is wholly-owned by the Company’s Chief Executive Officer and Chairman, Anthony Brian Goodman. The promissory note had an original principal balance of $1,031,567, with interest accruing on the unpaid balance at a rate of 6% per annum. The settlement payable and promissory note were paid in full as of January 31, 2021; therefore, no interest was incurred during the nine months ending October 31, 2021.

During the twelve-months ended January 31, 2021 and 2020, interest expense was $11,852 and $63,583, respectively. The decrease of interest expense is mainly due to the decrease in the outstanding balance of the convertible debt and the promissory note with Luxor that was paid in full as of January 31, 2021.

Interest income

Interest income is related to earnings on the Company’s savings account with Wells Fargo Bank, and interest charges to customers for late payments.

During the twelve-months ended October 31, 2022 and 2021, the interest income was $9,190 and $242, respectively. The increase in interest income is due to the interest charges to customers for late payments.

During the nine-months ended October 31, 2021 and 2020, the interest income was $201 and $1,570, respectively. The decrease in interest income is due to the decrease in the earnings from Wells Fargo Bank.

During the twelve-months ended January 31, 2021 and 2020, interest income was $1,611 and $26,779, respectively. The decrease in interest income is due to the decrease in the earnings from Wells Fargo Bank.

Foreign Exchange Gain (loss)

The foreign exchange gain (loss) is mainly due to the fluctuation of the Euro, British Pound against the U.S. dollar, and as a result of certain suppliers billing the Company in Euros, and settlement of other liabilities in currencies other than U.S. dollars.

During the twelve-months ended October 31, 2022 and 2021, the foreign exchange gain was $261,395 and foreign exchange loss was $39,709, respectively. The increase of foreign exchange gain was due to the settlement of three million GBP consideration payable to acquire RKings and unrealized foreign exchange gain from the GBP £500,000 RKings Purchase Agreement Holdback Amount which is a contingent liability.  The contingent liability is attributable to a dispute between the Company and Mr. Paul Hardman (the seller of a 40% interest in RKings). Mr. Hardman has alleged that he is owed his share of the Purchase Agreement, Holdback Amount (a total of £500,000 (approximately USD $573,000) (half) of the £1,000,000 aggregate amount). The amount of $573,000 is accrued and included in the Company’s liabilities.  However, the Company disputes Mr. Hardman’s claims due to the breaches of the terms of the Purchase Agreement by Mr. Hardman. The Company is vigorously pursuing the claim of breach of the Purchase Agreement by Mr. Hardman which voids the Company’s obligation to pay the Holdback Amount.

During the nine-months ended October 31, 2021 and 2020, the foreign exchange loss was $62,983 and $14,320, respectively.

During the twelve-months ended January 31, 2021 and 2020, the foreign exchange gain was $8,996 and $0, respectively.

Other Expense

On August 25, 2021, the Company first became aware of a default judgment entered against the Company (under its former name Source Gold Corp.), pursuant to an action filed against the Company by NPNC Management LLC (“NPNC”), in the Eighth Judicial District Court of Clark County, Nevada (Case No: A-15-716733-C). The action was originally filed on April 9, 2015, with a default judgment originally granted on November 3, 2015, which default judgment was renewed on August 24, 2021. The default judgment was in the amount of $42,485, plus interest at 18% per annum.

The Company was unaware of the prior default judgment until August 25, 2021, and had no knowledge of any liability, contracts with, or amounts due to, NPNC. On October 1, 2021, in an effort to settle the matter, the Company paid $40,000 to NPNC in full satisfaction of amounts owed.

There were no such expenses in prior periods or throughout the twelve months ended October 31, 2022.

Gain (loss) on derivative liability - note conversion feature

The gain (loss) on derivative liability was mainly due to the change of fair value change of derivative liabilities related to the note conversion features of convertible notes. As of January 31, 2020, all convertible notes were settled.

During the twelve-months ended October 31, 2022 and 2021 as well as the nine-months ended October 31, 2021 and 2020, there was no gain or loss on derivative liability as the convertible notes were settled.

During the twelve-months ended January 31, 2021 and 2020, the loss on derivative liability was $0 and $3,182, respectively. The loss on derivative liability during the January 31, 2020 year was mainly due to the fair value change of derivative liabilities. The Company settled all the derivative liabilities on January 31, 2020; therefore, no gains or losses on derivative liabilities accrued during the January 31, 2021 year.

Provision for income taxes

The provision for income taxes was $419,049 for the twelve months ended October 31, 2022, compared to $0 for the twelve months ended October 31, 2021. The increase was attributable to the tax expenses incurred in the B2C segment starting November 1, 2021, with our acquisition of 80% of RKings. There is no provision for income taxes in the B2B segment during the twelve months ended October 31, 2022 and 2021, as a result of operating losses carried forward in the B2B segment.

There was no provision for income taxes in prior periods.

Net income attributable to noncontrolling interest

For the twelve months ended October 31, 2022, we recorded net income of $294,066 and for the twelve months ended October 31, 2021, we recorded net income of $0, attributable to the noncontrolling interest. The net income attributable to noncontrolling interest was due to the acquisition of an 80% interest in RKingsCompetition Ltd, effective on November 1, 2021. These amounts represent the share of income that is not attributable to the Company.

Net Income (loss) attributable to the Company

During the twelve-months ended October 31, 2022 and 2021, net loss was $250,038 and net income was $700,230, respectively. The increase in net loss of $950,268 is mainly due to the increase in stock-based compensation to directors and officers of $2,095,600.

During the nine-months ended October 31, 2021 and 2020, net income was $648,072 and $345,922, respectively. The increase in net income of $302,150 is mainly due to the increase in gross profit of $1,056,601 from B2B, offset by increases in (i) general and administrative expenses of $698,021, (ii) professional fees of $177,047, and (iii) research and development expense of $131,067.

During the twelve-months ended January 31, 2021 and 2020, net income was $398,080 and $1,982,892, respectively. The decrease in net income of $1,584,812 is mainly due to the increase of $1.4 million in the option amortization expenses.

Liquidity and Capital Resources

The below table summarizes our cash and cash equivalents, working capital and shareholders’ equity as of October 31, 2022 and 2021:

The Company had $14,949,673 of cash on hand and total assets of $32,571,413 ($19,288,950 were current assets) at October 31, 2022. The Company had total working capital of $16,573,796 as of October 31, 2022. The Company had total liabilities of $2,774,932 (of which $2,715,154 were current liabilities) as of October 31, 2022, which mainly included $1,385,076 of accounts payable and accrued liabilities, $109,328 of customer deposits, and 324,147 of accrued income tax liability related to RKings’ operations, $573,197 of contingent liability related to the RKings acquisition, and $154,863 of operating lease liabilities related to the Company’s office lease. The decrease in cash was mainly due to $4,024,703 of cash consideration paid to acquire an 80% interest in RKingsCompetition Ltd, offset by cash generated by operations.

We do not currently have any additional commitments or identified sources of additional capital from third parties or from our officers, directors or majority stockholders. Additional financing may not be available on favorable terms, if at all.

In the future, we may be required to seek additional capital by selling additional debt or equity securities, or otherwise be required to bring cash flows in balance when we approach a condition of cash insufficiency. The sale of additional equity or debt securities, if accomplished, may result in dilution to our then stockholders. Financing may not be available in amounts or on terms acceptable to us, or at all. In the event we are unable to raise additional funding and/or obtain revenues sufficient to support our expenses, we may be forced to scale down our operations, which could cause our securities to decline in value.

See “Note 3 – Accounts Receivable, Net”, for a description of accounts receivable; “Note 4 – Accounts Receivable – Related Party”, for a description of related party accounts receivable; “Note 5 –  Prepaid Expenses”, for a description of prepaid expenses; “Note 6 – Short-term deposits”, for a description of the Company’s short-term deposits; each included herein under “Item 8. Financial Statements and Supplementary Data.”

The Company generated cash from operating activities of $2,771,418, $1,349,870, $1,271,119, $1,799,079, $1,878,043, and $1,599,319 for the twelve-months ended October 31, 2022 and 2021, the nine-months ended October 31, 2021 and 2020, and the twelve months ended January 31, 2021 and 2020. Cash flows from operating activities include net income adjusted for certain non-cash expenses, and changes in operating assets and liabilities. The $2,771,418 of cash generated from operating activities during the twelve-months ended October 31, 2022 was due primarily to $44,028 of net income, and non-cash expenses relating to stock-based compensation (including stocks, options and restricted stock units issued for services) which totaled $2,665,221 during the twelve-months ended October 31, 2022. The $1,349,870 cash generated from operating activities during the twelve-months ended October 31, 2021, was due primarily to $700,230 of net income, and non-cash expenses relating to stock-based compensation (including options issued for services and stocks issued for services) which were $1,691,345 during the twelve-months ended October 31, 2021.

Net cash used in investment activities was $4,405,409 and $231,314 for the twelve-months ended October 31, 2022 and 2021. During the twelve-months ended October 31, 2022, the cash used in investment activities was due primarily to $4,024,703 of cash consideration paid to acquire an 80% interest in RKingsCompetition Ltd of and $219,934 for acquiring a gaming permit in Mexico.

Net cash provided by (used in) financing activities was $32,000, $10,668,363, $4,051,165, $1,354,412, $7,971,610, and $(861,313) for the twelve-months ended October 31, 2022 and 2021, the nine-months ended October 31, 2021 and 2020, and the twelve months ended January 31, 2021 and 2020, respectively. The $32,000 cash provided by financing activities during the twelve-months ended October 31, 2022 was due primarily to the exercise of options. The $10,668,363 of cash provided by financing activities during the twelve-months ended October 31, 2021 was due primarily to sales of equity securities through private placements, warrant exercises and a public offering.

Recent Fund-Raising Activities

Private Offering of Units

On August 20, 2020, the Company sold, to eleven accredited investors, an aggregate of 527,029 units, with each unit consisting of one share of restricted common stock and one warrant to purchase one share of common stock, at a price of $3.40 per unit, raising cash of $1,791,863. The units were sold pursuant to the Company’s entry into subscription agreements with each investor. The subscription agreements provide the investors customary piggyback registration rights (for both the shares and the shares of common stock underlying the warrants) which remain in place for the lesser of one year following the closing of the offering and the date that the applicable investor is eligible to sell the applicable securities under Rule 144 of the Securities Act, as amended. Such piggyback registration rights agreements also provided that the Company is not required to register securities in a registration statement relating solely to an offering by the Company of securities for its own account if the managing underwriter or placement agent has advised the Company in writing that the inclusion of such securities would have a material adverse effect upon the ability of the Company to sell securities for its own account.

The warrants had an exercise price of $4.10 per share (and no cashless exercise rights), and were exercisable until the earlier of (a) August 20, 2022, and (b) the 30th day after the Company provided the holder of the warrants notice that the closing sales price of the Company’s common stock has closed at or above $6.80 per share for a period of ten consecutive trading days.

From November 23, 2020, to December 7, 2020 (ten consecutive trading days), the closing sales price of the Company’s common stock closed at or above $6.80 per share, and on December 8, 2020, the Company provided notice to the holders of the warrants and that they had until January 7, 2021 to exercise such warrants, or such warrants would expire pursuant to their terms. From December 9, 2020, to January 7, 2021, ten holders of warrants to purchase an aggregate of 409,029 shares of the Company’s common stock exercised such warrants and paid an aggregate exercise price of $1,677,019 to the Company. In connection with such exercises, the Company issued such warrant holders an aggregate of 409,029 shares of restricted common stock.

Separately, effective on January 7, 2021, the Board of Directors of the Company agreed to extend the expiration date of warrants to purchase 118,000 shares of common stock, which would have otherwise expired on January 7, 2021, pursuant to the terms of the warrants, to February 8, 2021, which warrants expired unexercised.

On January 20, 2021, the Company sold an aggregate of 1,000,000 units to one investor, with each unit consisting of one share of restricted common stock and one warrant to purchase one share of common stock, at a price of $5.00 per unit. In total the Company raised cash of $4,999,982 pursuant to the private offering of the units. The units were sold pursuant to the entry into a subscription agreement with the investor. The Subscription Agreement provided the investor customary piggyback registration rights (for both the shares and the shares of common stock underlying the warrants) which remain in place for the lesser of one year following the closing of the offering and the date that the investor is eligible to sell the applicable securities under Rule 144 of the Securities Act. Such piggyback registration rights agreements also provided that the Company is not required to register securities in a registration statement relating solely to an offering by the Company of securities for its own account if the managing underwriter or placement agent have advised the Company in writing that the inclusion of such securities would have a material adverse effect upon the ability of the Company to sell securities for its own account.

The warrants have an exercise price of $6.00 per share (and no cashless exercise rights), and are exercisable until the earlier of (a) January 14, 2023, and (b) the 30th day after the Company provides the holder of the Warrants notice that the closing sales price of the Company’s common stock has closed at or above $10.00 per share for a period of ten consecutive trading days. The warrants include a beneficial ownership limitation, which limits the exercise of the warrants held by the investor in the event that upon exercise such investor (and any related parties of such investor) would hold more than 4.999% of the Company’s outstanding shares of common stock (which percentage may be increased to 9.999% with at least 61 days prior written notice to the Company from the investor).

From April 26, 2021, to May 7, 2021 (the “Triggering Date”) (ten consecutive trading days), the closing sales price of the Company’s common stock closed at or above $10.00 per share. However, as the total number of shares of common stock issuable upon exercise of the Warrants would have exceeded 4.999% of the Company’s common stock, and as an accommodation to the holder of the Warrants, on May 11, 2021, the Company agreed to provide the holder 61 days from the Triggering Date to exercise the Warrants, and as a result the holder had until July 11, 2021 to exercise such Warrants.

On July 9, 2021, the holder exercised a portion of the Warrants to purchase 170,000 shares of the Company’s common stock at $6.00 per share and paid the Company $1,020,000 in connection with such exercise and funds were received by the Company in a total amount of $1,019,982 ($1,020,000 less $18 in bank charges) on July 14, 2021. The Company issued the holder 170,000 shares of common stock in connection with such exercise.

On July 14, 2021, and effective on June 6, 2021, the Company and the holder of the Warrants entered into an Agreement to Amend and Restate Common Stock Purchase Warrant (the “Amendment Agreement”), whereby, in consideration for the holder exercising a portion of the Warrants (warrants to purchase 170,000 shares of common stock, as described above), and as an accommodation to the holder, due to the fact that the Warrants did not contemplate a situation where a Triggering Event would result in the holder holding over 4.999% of the Company’s outstanding common stock, the parties agreed to enter into an Amended and Restated Common Stock Purchase Warrant, effective as of June 6, 2021, amending, restating and replacing the prior Warrant Agreement, and evidencing the right of the holder to purchase 830,000 shares of common stock of the Company (the original 1,000,000 shares less the portion of the Warrants previously exercised)(the “Amended and Restated Warrants”) to remove the Trigger Event and to fix the expiration date thereof as of November 11, 2022. The other terms of the prior Warrant Agreement were not changed and the warrant expired on November 11, 2022.

October 2021 Public Offering

On October 25, 2021, we entered into a Securities Purchase Agreement (the “SPA”) with certain institutional investors (the “Purchasers”) for the sale by the Company in a registered direct offering (the “Offering”) of an aggregate of 496,429 shares of common stock of the Company (the “Shares”), together with warrants to purchase 496,429 shares of common stock (the “Warrants”), at $7.00 per combined Share and Warrant, for aggregate gross proceeds of approximately $3.475 million, before deducting the placement agent fees and related offering expenses. The Offering closed on October 27, 2021.

EF Hutton, division of Benchmark Investments, LLC agreed to act as placement agent (the “Placement Agent”) on a “reasonable best efforts” basis, in connection with the Offering. The Company entered into a Placement Agency Agreement, dated as of October 25, 2021, by and between the Company and the Placement Agent (the “Placement Agency Agreement”). Pursuant to the Placement Agency Agreement, the Placement Agent received an aggregate cash fee of 6% of the gross proceeds of the Offering, a non-accountable expense reimbursement of 1% of the gross proceeds in the Offering, the reimbursement of certain of the Placement Agent’s expenses not to exceed $60,000, and the reimbursement of certain other expenses.

The Shares, Warrants and shares of common stock issuable upon exercise of the Warrants, were registered under the Securities Act, on the Company’s effective shelf registration statement on Form S-3 (File No. 333-260044), filed with the SEC on October 5, 2021, which was declared effective by the SEC on October 15, 2021, and the base prospectus contained therein, and a prospectus supplement forming a part of the effective Registration Statement, dated October 25, 2021, which was filed with the Commission on October 27, 2021.

The Warrants sold in the Offering have a term of three years, and an exercise price of $8.63 per share (subject to customary adjustments for stock splits, dividends and recapitalizations), the closing sales price of the Company’s common stock on October 22, 2021, the last trading day prior to the date that the SPA was entered into. The Warrants provide that they may be exercised on a ‘cashless exercise’ basis if, at any time of exercise, there is no effective registration statement registering, or no current prospectus available for, the issuance or resale of the shares of common stock issuable upon exercise of the Warrants. The exercise of the Warrants is subject to a beneficial ownership limitation, which will prohibit the exercise thereof, if upon such exercise the holder of the Warrants, its affiliates and any other persons or entities acting as a group together with the holder or any of the holder’s affiliates would hold 4.99% (or, upon election of a purchaser prior to the issuance of any shares, 9.99%) of the number of shares of the common stock outstanding immediately after giving effect to the issuance of shares of common stock issuable upon exercise of the Warrants held by the applicable holder, provided that the holders may increase or decrease the beneficial ownership limitation, provided that any increase in beneficial ownership limitation shall not be effective until 61 days following notice to us and in no event shall such beneficial ownership exceed 9.99% and such 61 day period cannot be waived.

The Warrants also include anti-dilution rights, which provide that if at any time the Warrants are outstanding, we issue (or announce any offer, sale, grant or any option to purchase or other disposition) or are deemed to have issued (which includes shares issuable upon exercise of warrants and options and conversion of convertible securities) any common stock or common stock equivalents for consideration less than the then current exercise price of the Warrants, the exercise price of such Warrants will be automatically reduced to the lowest price per share of consideration provided or deemed to have been provided for such securities, subject to certain exceptions.

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.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments 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 amount of net sales and expenses for each period. “Note 2 - Summary of Accounting Policies,” of the notes to Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of the Company’s consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions 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.

Stock-Based Compensation

The Company accounts for stock-based compensation to employees in accordance with Accounting Standards Codification (ASC) 718, “Compensation-Stock Compensation”. ASC 718 requires companies to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. Stock option forfeitures are recognized at the date of employee termination.