NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2022
NOTE
1 - ORGANIZATION & SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
KeyStar
Corp. (the “Company,” “we”, “us” and “our”) was incorporated on April 16, 2020, under
the laws of the State of Nevada, as KeyStar Corp. The company has two wholly owned subsidiaries, one was formed on December 21, 2021,
under the State of Nevada, as UG Acquisition Sub, Inc., the second KeyStar TN LLC was formed on December 9, 2022.
Prior
to September 15, 2022, our business consisted of the retail sale of masks and similar products, and convention services (together, the
“Prior Business”). Through our e-commerce sales channel, we sold KN-95 facemasks, disposable facemasks, and disinfectant
wipes through an online store in the United States of America. Through our convention sales channel, we offered convention services,
which connect US buyers to Chinese manufacturers. Due to the COVID-19 pandemic, many traditional conventions were postponed in the United
States. Accordingly, our convention services had been intended to offer online (or virtual) convention services to potential customers.
However, as a result of the commencement of the lifting of many travel restrictions, we adjusted our convention services from coordinating
virtual conventions to focusing on certain traditional on-site convention services. Through our KeyStarCorp.com website, we offered trade
show booth staffing, trade show booth design, manufacturing, and turn-key trade show booths.
As
of June 15, 2022, we hired a new Chief Executive Officer and Chief Financial Officer along with certain key employees of ZenSports, Inc.
to explore business opportunities related to software and mobile application development and services related to such technology. On
August 26, 2022, the Company entered into an Asset Purchase Agreement to purchase certain technological assets from ZenSports, Inc. The
assets were purchased to allow us to offer gambling and entertainment opportunities through technology, principally the online gaming
technology and use of the name ZenSports. We did not acquire all the assets of the Company, the assets we didn’t purchase include,
among other assets, ZenSport’s legal entity name “ZenSports, Inc.” and those assets related to ZenSports’ physical
casino called the Big Wheel Casino, located in Lovelock, Nevada. See Notes 3, 4, and 10.
On
September 12, 2022, we entered into an Asset Purchase Agreement between the Company and Excel Members, LLC (“Excel”), a company
controlled by Bruce Cassidy, the chairman of our board of directors, to acquire certain assets of Excel a company of which a Company
controlled by Mr. Cassidy is the manager, and effectively has a controlling interest. Excel acquired certain assets of a company, Ultimate
Gamer, LLC, which was formerly an Esports tournament company, through the assignment for the benefit of the creditor’s court process.
See Notes 3, 4, and 10.
On
September 15, 2022, we executed an assignment and assumption agreement whereby we assigned our e-commerce sales channel and the convention
services operating assets to TopSight Corporation (“TopSight”), a company owned by our former Chief Financial Officer Zixiao
Chen, effectively discontinuing our historical operations.
After
the foregoing transactions, we have effectively ceased our Prior Business operations and assembled a comprehensive platform capability
that enables both business-to-business and direct-to-consumer offerings within the online sports betting, eSports, and fintech/digital
currency markets. The platform is targeted at global business opportunities and has been designed as a flexible foundation for corporate
growth.
Effective
January 10, 2023, Mr. John Linss (“Linss”) resigned as a member of the Company’s board of directors (“Board”)
and as the Company’s Chief Executive Officer, Principal Executive Officer, President, and Chief Technology Officer pursuant to
the terms of a Separation Agreement and Release dated the same date.
On
January 10, 2023, the Board appointed Mark Thomas as the new Chief Executive Officer, Principal Executive Officer, President, and Chief
Technology Officer of the Company. Prior to accepting the new position Mr. Thomas was the Company’s Chief Product Officer and was
the founder and former Chief Executive Officer of ZenSports, Inc.
As
part of the change in Chief Executive Officers the Board and Mr. Thomas laid out a plan to change the Company’s business focus
from the aforementioned comprehensive platform capability that enables both business-to-business and direct-to-consumer offerings within
the online sports betting, eSports, and fintech/digital currency markets. To a singular focus on business-to-consumer (B2C) sports betting
in one targeted jurisdiction, Tennessee, for up to a two-year period. Management is in the process of finalizing and executing the change
in business focus. See note 15.
Basis
of Presentation
The
foregoing unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q and Regulation S-X as promulgated by the Securities and Exchange Commission
(“SEC”). Accordingly, these financial statements do not include all of the disclosures required by generally accepted accounting
principles in the United States of America for complete financial statements. These unaudited interim financial statements should be
read in conjunction with the audited financial statements and the notes thereto included on Form 10-K for the year ended June 30, 2022,
filed on October 13, 2022. In the opinion of management, the unaudited interim financial statements furnished herein include all adjustments,
all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.
Operating
results for the three and nine-month periods ended March 31, 2023, are not necessarily indicative of the results that may be expected
for the year ending June 30, 2023. The condensed balance sheet at March 31, 2023, has been derived from the audited financial statements
at that date but does not include all of the information and footnotes required by generally accepted accounting principles in the U.S.
for complete financial statements.
Fiscal
Year End
The
Company’s fiscal year-end is June 30.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
Going
Concern
The
Company’s consolidated financial statements are prepared using the accrual method of accounting in accordance with accounting principles
generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities in the normal course of business. The Company has an accumulated deficit of $16,534,200 as
of March 31, 2023. The Company had a net loss from continuing operations of $13,996,513 and negative cash flows of $3,36,983 from operations
for the nine months ended March 31, 2023. These conditions raise substantial doubt about the entity’s ability to continue as a
going concern for a period of one year from the issuance of these financial statements. Our independent auditors, in their report on
our audited financial statements for the year ended June 30, 2022, expressed substantial doubt about our ability to continue as a going
concern.
The
Company is dependent upon, among other things, achieving a level of profitable operations and receiving additional cash infusions including
securing additional lines of credit and raising additional capital through placement of preferred and/or common stock in order to implement
its business plan. There can be no assurance that the Company will be successful in order to continue as a going concern. The Company
is funding its initial operations by securing a related party line of credit, issuing preferred stock, and issuing common stock through
private placements.
We
cannot be certain that capital will be provided when it is required or in amounts sufficient to meet our operating requirements. Management
believes the existing shareholders, the prospective new investors, and future sales will provide the additional cash needed to meet the
Company’s obligations as they become due and will allow the development of its core business operations. No assurance can be given
that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if
the Company is able to obtain additional financing, it may contain restrictions on our operations, in the case of debt financing, or
cause substantial dilution for our stockholders, in the case of equity financing.
Cash
and Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash includes
amounts deposited in financial institutions in excess of insurable Federal Deposit Insurance Company (FDIC) limits. At times throughout
the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of March 31, 2023, the Company’s
cash balance exceeded the FDIC limits by $541,871. The Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk in these accounts.
Equipment
Equipment
is stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the
asset’s estimated useful life. The capitalization policy for the company is to capitalize equipment purchases greater than $1,000.
Expenditures for maintenance and repairs are expensed as incurred. When retired or otherwise disposed of, the related carrying value
and accumulated depreciation are removed from the respective accounts, and the net difference less any amount realized from the disposition
is reflected in earnings. Estimated useful lives are as follows:
SUMMARY
OF PLANT AND EQUIPMENT ESTIMATED USEFUL LIVES
Intangible
Assets, internally developed capitalized software, website development costs, and capitalized gaming licenses
Internally
developed capitalized software, website development costs, and capitalized costs of gaming licenses are stated at cost, less accumulated
amortization. Amortization is calculated using the straight-line method over the asset’s estimated useful life. The capitalization
policy for the company is to capitalize intangible assets greater than $5,000. Expenditures for maintenance and repairs are expensed
as incurred. Internally developed capitalized software and development and capitalized gaming license costs are included in intangible
assets on the balance sheet. When retired or otherwise disposed of, the related carrying value and accumulated depreciation are removed
from the respective accounts and the net difference less any amount realized from the disposition is reflected in earnings.
SUMMARY
OF ESTIMATED LIVES OF INTANGIBLE ASSETS
Estimated
useful lives are as follows:
Capitalized software, website development
and capitalized gaming licenses | |
3 years |
Business
intellectual property
Business
intellectual property is principally related to technological assets acquired through Asset Purchase Agreements which are carried at
cost, less accumulated amortization. Amortization is calculated using the straight-line method over the asset’s estimated useful
life. Expenditures for maintenance and repairs are expensed as incurred. Business intellectual property is included in intangible assets
on the balance sheet. When retired or otherwise disposed of, the related carrying value and accumulated depreciation are removed from
the respective accounts, and the net difference less any amount realized from the disposition is reflected in earnings. As of March 31,
2023, the business intellectual property had not been placed in service and as such there was no depreciation during the period. See
Note 3.
At
March 31, 2023, the Company acquired definite-lived intangible assets consisting of goodwill and trademarks.
Digital
assets
Digital
assets are carried at cost and are principally comprised of our SPORTS utility token and various digital assets including Bitcoin, Ethereum,
ICX, and USDT, with indefinite useful lives. The Company identifies the lowest traded value per currency in a fiscal quarter and if the
value is lower than the recorded value, we record a permanent impairment at that time. Intangible assets determined to have an indefinite
useful life are not amortized.
Gaming
licenses
Certain
costs, generally legal and professional fees, are required to attain jurisdictional gaming licenses in order to legally operate our core
sports betting business. Gaming licenses, with indefinite useful lives, are tested at least on an annual basis as to the assets that
have been impaired. Intangible assets determined to have an indefinite useful life are not amortized. Annual gaming license fees and
legal and professional fees required to maintain the licenses are recorded as period costs in the statement of operations.
Goodwill
Goodwill
is carried at cost and is principally related to business intellectual assets acquired, with indefinite useful lives. The Company tests
at least on an annual basis whether with indefinite useful lives is impaired. Intangible assets determined to have an indefinite useful
life are not amortized.
Trademarks
Trademarks
are carried at cost and are mainly related to branding and promotion, with indefinite useful lives. The Company tests at least on an
annual basis whether trademarks with indefinite useful lives are impaired. Intangible assets determined to have an indefinite useful
life are not amortized.
The
Company conducts its annual impairment tests at June 30 of each year or whenever events and changes in circumstances suggest that the
carrying amount may not be recoverable. At March 31, 2023, management determined there was no impairment identified for any trademarks
with indefinite useful lives.
Lease
Commitments
The
Company has no long-term lease commitments. Effective January 10, 2023, The Company moved its headquarters to Miami Florida. As part
of the move effective January 1, 2023, the Company assumed the office lease of a related party, ZenSports, Inc. The lease expires on
September 30, 2023, and has a minimum monthly lease payment of $6,500.
The
Company rented office space for its former corporate headquarters in Las Vegas Nevada on a month-to-month lease for $1,700 per month.
The Las Vegas lease was terminated effective January 31, 2023. Prior to September 15, 2022, the company rented a storage facility for
its inventory on a variable month-to-month lease agreement, rents ranged from $58 to $123 per month.
Fair
Value of Financial Instruments
The
Company recognized the fair value of financial instruments in accordance with FASB ASC 820, Fair Value Measurements and Disclosures,
“Fair Value Measurements”, which provides a framework for measuring fair value under GAAP. Fair value is defined as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date. The standard also expands disclosures
about instruments measured at fair value and establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may
be used to measure fair value:
Level
1 - Quoted prices for identical assets and liabilities in active markets;
Level
2 - Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities
in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable
in active markets; and
Level
3 - Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
The
Company’s derivative liabilities are carried at fair value and are classified as Level 3 liabilities.
The
Company’s financial instruments consist principally of cash, prepaid expenses, accounts payable, accrued expenses, related party
notes payable, related party line of credit, and notes payable approximate the fair value because of their short maturities.
The
Company’s Derivative liabilities are determined based on “Level” 3 inputs, which are significant and unobservable and
have the lowest priority. There were no transfers into our out of “Level 3” during the nine months ended March 31, 2023,
or the year ended June 30, 2022.
SCHEDULE
OF DERIVATIVE LIABILITIES
Description | |
Total
fair value at March 31, 2023 | | |
Quoted
prices in Active markets (level 1) | | |
Quoted
prices in Active markets (level 2) | | |
Quoted prices in Active markets
(level 3) | |
| |
| | |
| | |
| | |
| |
Derivative
liability (1) | |
$ | 6,962,654 | | |
$ | - | | |
$ | - | | |
$ | 6,962,654 | |
Description | |
| Total fair value at June 30, 2022
| | |
| Quoted
prices in Active markets (level 1) | | |
| Quoted
prices in Active markets (level 2) | | |
| Quoted
prices in Active markets (level 3) | |
| |
| | | |
| | | |
| | | |
| | |
Derivative liability
(1) | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | - | |
(1) | The
Company has estimated the fair value of these derivatives using the Monte-Carlo model. |
Fair
value estimates are made at a specific point in time, based on relevant market information and information about the financial statement.
These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could transfer a liability in an orderly transaction between willing and able maker participants.
In general, the Company’s policy in estimating fair values is to first look at observable market prices for the identical assets
and liabilities in active markets, where available. When these are not available other inputs used to model fair value such as prices
of similar instruments, yield curves, volatilities., prepayment speeds, default rates credit spreads, rely first on observable data from
active markets. Depending on the availability of observable inputs and prices, different valuation models could produce materially different
fair value estimates. The values presented may not represent future fair value as discussed above.
Derivative
Liabilities
he
Company accounts for derivative instruments in accordance with ASC 815, “Derivatives and Hedging” and all derivative
instruments are reflected as either assets or liabilities at fair value in the balance sheet. The Company uses estimates of fair value
to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction
between willing and able market participants. In general, the Company’s policy in estimating fair values is to first look at observable
market prices for identical assets and liabilities in active markets, where available. When these are not available, other inputs are
used to model fair value such as prices of similar instruments, yield curves, volatilities, prepayment speeds, default rates, and credit
spreads, relying first on observable data from active markets. Depending on the availability of observable inputs and prices, different
valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and
may not be realizable. The Company categorizes its fair value estimates in accordance with ASC 820 based on the hierarchical framework
associated with the three levels of price transparency utilized in measuring financial instruments at fair value as discussed above.
As of March 31, 2023, and December 31, 2022, the Company had a derivative liability of $6,962,654 and $0, respectively.
Players
Balances
The
player’s balances are comprised of sports betting deposits (when the company is operating its sports betting app) and eSports and
other contest winnings. The balances are comprised of our SPORTS utility token and various digital assets including Bitcoin, Ethereum,
ICX, USDT, and USD. We fair market value each currency to the closing market value on the last day of each fiscal quarter. Gains and
losses are recorded in the statement of operations.
Revenue
Recognition
The
Company recognizes revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard
Board’s (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue From Contracts with Customers,
which consists of five steps to evaluating contracts with customers for revenue recognition: (a) identify the contract with the customer;
(ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price;
and (v) recognize revenue when or as the entity satisfied a performance obligation.
Revenue
recognition for our Prior Business occurred at the time we satisfy a service performance obligation to our customers or when control
of product transfers to customers upon shipment, provided there are no material remaining performance obligations required of the Company
or any matters of customer acceptance. We only recorded revenue when collectability was probable. All payments are received upon order
of services and prior to delivery of the product, so we have no accounts receivable.
The
Company’s Prior Business was providing quality merchandise through its former online store in the United States of America. Due
to the COVID-19 pandemic, the Company was focusing on providing disposable face masks and KN-95 face masks at affordable prices. Customers
ordered and paid for the products through the online store, when the Company confirmed the order and payment, the Company delivered the
product through common carriers, at which point the Company recognized revenue, as this is when our performance obligation is satisfied.
The Company recorded actual sales returns when the customers return the products. The transaction price has not been affected by returns
as the Company did have significant returns.
All
prior business operations, including sales and revenues, are included in the net income (loss) from discontinued operations, net of income
taxes in the statement of operations. For the three months ended March 31, 2023, and 2022, the Company recognized e-commerce sales of
products $-0- and $1,295, and Convention services revenues of $-0- and ($174) respectively. For the nine months ended March 31, 2023,
and 2022, the Company recognized e-commerce sales of products $-0- and $11,041, and Convention services revenues of $-0- and $35,416
respectively. See note 14.
For
the three and the nine months that ended March 31, 2023, there were no revenues from our continuing operations. Revenues from operations
are not expected to commence until we have been approved for a gaming license and have begun Sport Betting operations. During February
2023 we submitted our sports betting gaming application in Tennessee and are awaiting approval. We expect to generate revenues from our
sports betting mobile app offerings within 1 to 2 months after we receive license approval. See note 15.
Cost
of Revenues
Costs
of revenues from our Prior Business primarily consisted of outsourced vendors for both types of revenues. The Company includes product
costs (i.e., material, direct labor, and overhead costs) and shipping and handling expenses in cost of revenues. All prior business operations,
including cost of revenues, are included in the net income (loss) from discontinued operations, net of income taxes in the statement
of operations. See Note 14.
There
are currently no costs of revenues associated with our continuing operations.
Stock
-based Compensation
The
Company records stock-based compensation in accordance with ASC 718m “Compensation- Stock Compensation”, using the fair value
method. All transactions in which services are the consideration received for the issuance of equity instruments are accounted for based
on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The
Company accounts for Stock-based compensation awards issued to non-employees for services as prescribed by ASC 718, at either the fair
value of the services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using
the measurement date guidelines enumerated in Accounting Standards Updated (“ASE”) 2018-07.
The
Company uses certain pricing models to calculate the fair value of stock-based awards. This model is affected the Company’s stock
price as well as assumptions regarding a number of subjective variables. These subjective variables include, but are not limited to,
the Company’s expected stock price volatility over the term of the awards, and actual projected employee stock option exercise
behaviors. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the consolidated
statement of operations over the requisite service period.
Income
Taxes
The
Company accounts for income taxes under an asset and liability approach. This process involves calculating the temporary and permanent
differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. The temporary differences result in deferred tax assets and liabilities, which would be recorded on the Company’s
balance sheet in accordance with ASC 740, which established financial accounting and reporting standards for the effect of income taxes.
The Company must assess the likelihood that its deferred tax assets will be recovered from future taxable income, and, to the extent
the Company believes that recovery is not likely, the Company must establish a valuation allowance. Changes in the Company’s valuation
allowance in a period are recorded through the income tax provision on the statements of operations.
ASC
740-10 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements and prescribes a
recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on
a tax return.
Under
ASC 740-10, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is
more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized
if it has less than a 50% likelihood of being sustained. Additionally, ASC 740-10 provides guidance on derecognition, classification,
interest, and penalties, accounting in interim periods, disclosure, and transition. As a result of the implementation of ASC 740-10,
the Company recognized no material adjustment in the liability for unrecognized income tax benefits.
Earnings
per Share
Basic
earnings per share (“EPS”) are determined by dividing the net earnings by the weighted-average number of shares of
common shares outstanding during the period. Diluted EPS is determined by dividing net earnings by the weighted average number of
common shares used in the basic EPS calculation plus the number of common shares that would be issued assuming conversion of all
potentially dilutive securities outstanding under the treasury stock method. As of March 31, 2023 and 2022, there were 25,552,110
and 200,000,000 potentially dilutive shares that need to be considered as common share equivalents and because of the net loss, the
effect of these potential common shares is anti-dilutive, respectively.
Recent
Accounting Pronouncements
The
Company does not expect the adoption of recently issued accounting pronouncements to have a potential impact on the Company’s results
of operations, financial position, or cash flow.
NOTE
2 - EQUIPMENT
Equipment
and Website development costs of $7,903 of $26,037, respectively, were acquired on September 12, 2022, as part of the acquisition of
the assets of Ultimate Gamer, LLC in a related party transaction. The equipment was recorded at the
net book value of Ultimate Gamer, LLC on the date of close, and are included in the account balances below. See note 3.
The
Company’s equipment consisted of the following as of:
SCHEDULE OF EQUIPMENT, CAPITALIZED SOFTWARE AND WEBSITE
| |
March
31, 2023 | | |
June
30, 2022 | |
Equipment | |
$ | 4,980 | | |
$ | - | |
Total | |
| 4,980 | | |
| - | |
Equipment, gross | |
| 4,980 | | |
| - | |
Less: accumulated depreciation | |
| 752 | | |
| - | |
Equipment, net | |
$ | 4,228 | | |
$ | - | |
Depreciation
expense of equipment during the nine months ended March 31, 2023, and 2022 was $1,325
and $0, respectively.
NOTE
3 - STRATEGIC ASSET ACQUISITIONS
ZenSports,
Inc.
Prior
to entering the Transaction, on June 16, 2022, we hired certain employees “Key Persons” of ZenSports, Inc. including Mark
Thomas as our Chief Product Officer and is our Chief Executive Officer. Mr. Thomas is still the Chief Executive Officer and sole member
of the board of directors of ZenSports. The Key Persons, as a group, are collectively the record and beneficial owners of a majority
of the issued and outstanding shares of capital stock of the surviving ZenSports, Inc.
On
August 26, 2022, 6,500,000 shares of the Company’s common stock, valued at $1.00 per share, which is the same consideration paid
by unrelated and non-affiliated investors in our current private offering of common shares, were issued in exchange for the purchase
of certain technological assets of ZenSports, Inc. Concurrently the Company issued 750,000 shares of common stock in conjunction with
a $750,000 private placement in a public company. In connection with the Transaction, on August 31, 2022, we paid an aggregate of $1,000,000
in bonuses to Key Persons (the “Bonuses”) as defined in the Asset Purchase Agreement (APA).
ZenSports
is in the business of offering gambling and entertainment opportunities through technology and a physical casino. The Company purchased
a portion of ZenSports’ assets, principally the online gaming technology and use of the name ZenSports. The assets we didn’t
purchase include, among other assets, ZenSports legal entity name “ZenSports, Inc.” and those assets related to ZenSports’
physical casino called the Big Wheel Casino, located in Lovelock, Nevada.
Pursuant
to the terms and conditions of the APA, the aggregate purchase price paid to ZenSports consisted of cash in the amount of $481,194; cash
in the amount of $1,030,593 for Bonuses including employer payroll taxes; 5,850,000 shares of our common stock, valued at $1.00 per share,
which is the same consideration paid by unrelated and non-affiliated investors in our private offering of common shares which closed
on August 26, 2022 (the “Stock Consideration”); and (iii) 650,000 additional shares of our common stock subject to set off
or recoupment by us until August 25, 2023, in connection with any indemnified losses we may incur pursuant to the Purchase Agreement
(the “Holdback Stock,” and together with the Stock Consideration, the “Transaction Shares”).
In
connection with the Transaction and issuance of the Transaction Shares, we also entered into a Registration Rights Agreement (the “Registration
Rights Agreement”) with ZenSports (together with any other party that may become a party to the Registration Rights Agreement,
“Holders”). Pursuant to the Registration Rights Agreement, subject to the terms and conditions set forth therein, we are
obligated, among other things, to use our reasonable best efforts to prepare and file on the six-month anniversary of our common stock
becoming listed on the New York Stock Exchange, The NYSE American, The Nasdaq Global Market, The Nasdaq Global Select Market, The Nasdaq
Capital Market or any successor or substantially equivalent national securities exchange a registration statement covering the sale or
distribution from time to time of our common stock held by Holders. We are also obligated to provide for the registration of such registrable
securities for resale by Holders in accordance with any reasonable method of distribution elected by Holders, and to use our reasonable
best efforts to cause such registration statement to be declared effective by the Securities and Exchange Commission as promptly as is
reasonably practicable.
Cash
payments for ZenSports, Inc. pursuant to the APA and related financings:
In
connection with the Transaction, on August 31, 2022, we paid an aggregate of $1,000,000 in bonuses to Key Persons (the “Bonuses”)
as defined in the Asset Purchase Agreement (APA). To pay part of the Bonuses, we borrowed an additional $735,120 under the related party
LOC and we used proceeds from the $750,000 Private Offering to pay the remaining amount of the Bonuses and the employer portion of payroll
taxes owed as a result of the Bonuses.
On
August 26, 2022, we closed on a private offering of our common stock where we sold an aggregate of 750,000 shares of our common stock
to 11 third-party investors at a price of $1.00 per share for an aggregate purchase price of $750,000 (the “Private Offering”).
Each of the investors had access to information concerning us and our business prospects and represented to us in connection with their
purchase that they: (is) acquired the securities for investment only and not with a view to or for sale in connection with any distribution
thereof; (ii) were accredited investors (iii) could bear the risks of the investment, and (iv) could hold the securities for an indefinite
period of time. The offer, sale, and issuance of the shares were deemed to be exempt from registration under the Securities Act in reliance
on Section 4(a)(2) of the Securities Act and/or Rule 506(b) of Regulation D promulgated thereunder, as transactions by an issuer not
involving a public offering. See Notes 8 and 10.
The
provisional fair value of the purchase consideration issued to the ZenSports asset sellers was allocated to the net tangible assets acquired.
The Company accounted for the ZenSports asset acquisition as the purchase of a business under the acquisition method of accounting, and
the assets and liabilities we recorded as of the acquisition date, at their respective fair values and consolidated with those of the
Company. The fair value of the assets acquired as approximately $6,756,000. The excess of the aggregate fair value of the net tangible
assets has been allocated to goodwill. The Company is currently in the process of completing the preliminary purchase price allocation
as an acquisition of certain assets.
The
fair value of the assets acquired, liabilities assumed, and consideration transferred denoted below are provisional in nature and based
on management’s best estimates using information that has been obtained as of the reporting date. The Company is awaiting additional
valuation information and expects to finalize the purchase price purchase allocation before the end of the fiscal year.
The
table below shows a preliminary analysis for the ZenSports asset acquisition:
SCHEDULE
OF PRELIMINARY ANALYSIS FOR THE ASSET ACQUISITION
Purchase consideration at preliminary fair value: | |
| |
Common Stock | |
$ | 6,500,000 | |
Cash | |
| 1,511,647 | |
Amount of consideration | |
$ | 8,011,647 | |
| |
| | |
Assets acquired and liabilities assumed at
preliminary estimated fair market value: | |
| | |
Digital assets | |
$ | 45,394 | |
Prepaid expenses | |
| 7,121 | |
Players liability | |
| (39,222 | ) |
Intellectual
property | |
| 6,742,706 | |
Net assets acquired | |
$ | 6,756,000 | |
| |
| | |
Total net assets acquired | |
$ | 6,756,000 | |
Provisional
goodwill | |
| 1,255,647 | |
Total assets acquired
and liabilities assumed at preliminary fair market value | |
$ | 8,011,647 | |
Proforma
The
following unaudited proforma results of operations are presented for information purposes only. The unaudited proforma results of operations
are not intended to present actual results that would have been attained had the ZenSports asset acquisition been completed on July 1,
2021, or to project potential operating results as of any future date for any future periods.
For the nine months ended March 31, 2023, ZenSports contributed revenue
and net loss of $0 and $0, respectively, due to the fact that all operations of ZenSports had ceased for the period prior to the completion
of the asset acquisition by the Company. The
following shows the proforma results for the three and nine months ended March 31, 2023, and 2022 as if the acquisition had occurred
on July 1, 2022.
SUMMARY
OF BUSINESS ACQUISITION, PRO FORMA INFORMATION
| |
2023 | | |
2022 | |
| |
For
the three months Ended
March
31, | |
| |
2023 | | |
2022 | |
Revenue | |
$ | - | | |
$ | 9,530 | |
Net
Loss | |
$ | (11,892,866 | ) | |
$ | (1,325,829 | ) |
Net loss per common
share - basic and diluted | |
$ | (0.30 | ) | |
$ | (0.04 | ) |
Weighted average number
of common shares outstanding - basic and diluted | |
| 39,434,444 | | |
| 29,800,000 | |
| |
2023 | | |
2022 | |
| |
For the Nine months Ended
March 31, | |
| |
2023 | | |
2022 | |
Revenue | |
$ | 5,472 | | |
$ | 169,120 | |
Net
Loss | |
$ | (15,675,242 | ) | |
$ | (3,561,499 | ) |
Net loss per common
share - basic and diluted | |
$ | (0.042 | ) | |
$ | (0.12 | ) |
Weighted average number
of common shares outstanding - basic and diluted | |
| 37,178,504 | | |
| 29,800,000 | |
Ultimate
Gamer
On
September 12, 2022, we entered into an Asset Purchase Agreement with Excel Members, LLC, a company controlled by Bruce Cassidy, our Chairman
and a member of our Board of Directors, to acquire certain assets of a company acquired previously by Excel through an assignment for
the benefit of creditors. Ultimate Gamer, LLC (“UG”), which was formerly in the business of organizing and operating in-person
and online video game competitions tournaments, originally owned these assets. The purchased assets included the brand name Ultimate
Gamer.
We
purchased a portion of the UG assets, consisting primarily of intellectual property, including trademarks, domain name registrations,
and UG’s database(s) of users and gamers for 1,500,000 shares of our common stock, valued at $56,436. We did not assume any liabilities
or obligations of Excel or UG.
The
transaction is a related party transaction and as such the acquired assets were valued at net book value on the date of the acquisition
and the remaining amounts paid in excess of the net book value were recorded directly to equity and are included in additional paid-in
capital on the balance sheet. See Notes 8 and 10.
A
summary of the assets acquired at provisional net book value (NBV) allocated is as follows:
SUMMARY
OF THE ASSETS ACQUIRED
Website | |
$ | 26,637 | |
Trademarks | |
| 21,896 | |
Equipment | |
| 7,903 | |
Total assets acquired
at provisional net book value | |
$ | 56,436 | |
After
the foregoing transactions and the disposition of our prior business, we have effectively ceased our Prior Business operations. See Notes
1 and 12.
NOTE
4 - LONG LIVED INTANGIBLE ASSETS
Digital
assets are carried at cost and are principally comprised of our SPORTS utility token and various digital assets including Bitcoin, Ethereum,
ICX, and USDT, with indefinite useful lives. The impairments recorded in the statement of operations during the nine months ended March
31, 2023, for the year ended June 30, 2022, were $17,031 and $0, respectively.
Digital
assets are comprised of the following at:
SCHEDULE OF DIGITAL ASSETS
| |
March
31, 2023 | | |
June
30, 2022 | |
SPORTS utility token | |
$ | 45,329 | | |
$ | - | |
Ethereum | |
| 180 | | |
| - | |
ICX | |
| 16 | | |
| - | |
USDT | |
| 378 | | |
| - | |
Total | |
| 45,903 | | |
| - | |
Less: impairment | |
| (17,031 | ) | |
| - | |
Net carrying value | |
$ | 28,872 | | |
$ | - | |
Business
intellectual property and goodwill were recorded at estimated allocated acquired costs from ZenSports, Inc. on August 26, 2022, as part
of an asset purchase agreement. Management used the sellers outside third-party valuation to value the business intellectual property.
The company’s proprietary SPORTS utility token and player balances were valued at fair market value on the date of acquisition
using readily available digital asset market prices, net of impairment. The remaining value was allocated to goodwill. Management is
in the process of contracting with a third-party valuation firm to prepare a valuation and allocation analysis to be used in the final
purchase accounting. There was no impairment recorded during the nine months that ended March 31, 2023, or the year that ended June 30,
2022. See Notes 3 and 10.
The
trademarks were acquired on September 12, 2022, as part of the acquisition of the assets of Ultimate Gamer, LLC in a related party transaction.
The equipment and trademarks acquired were recorded at the net book value of Ultimate Gamer, LLC on the date of close, which included
the depreciation for September 2022. There was no impairment recorded during the nine months that ended March 31, 2023.
Gaming
license costs are primarily comprised of legal and professional fees associated with our application for a gaming license in Tennessee.
There was no impairment recorded during the nine months that ended March 31, 2023, or the year that ended June 30, 2022. See Note 1.
At
March 31, 2023, and June 30, 2022, digital assets, business intellectual property, gaming licenses, trademarks, and capitalized software
are included in Intangible assets, net on the balance sheet. See Notes 3, 10, and 15.
Long-lived
intangible assets are comprised of the following at:
SCHEDULE OF INTANGIBLE ASSETS AND GOODWILL
| |
March
31, 2023 | | |
June
30, 2022 | |
Business intellectual property | |
$ | 6,742,706 | | |
$ | - | |
Gaming licenses | |
| 185,419 | | |
| - | |
Trademarks | |
| 21,896 | | |
| - | |
Total | |
| 6,950,021 | | |
| - | |
Total assets, gross | |
| 6,950,021 | | |
| - | |
Less: impairment | |
| - | | |
| - | |
Provisional goodwill | |
| 1,255,647 | | |
| - | |
Net carrying value | |
$ | 8,205,668 | | |
$ | - | |
| |
March
31, 2023 | | |
June
30, 2022 | |
Capitalized software | |
$ | 528,136 | | |
$ | - | |
Website development | |
| 40,137 | | |
| - | |
Total | |
| 568,273 | | |
| - | |
Capitalized Software,
gross | |
| 568,273 | | |
| - | |
Less: accumulated amortization | |
| 2,250 | | |
| - | |
Capitalized Software,
net | |
$ | 566,023 | | |
$ | - | |
Capitalized
Software is included in intangible assets on the balance sheet. Amortization expense of capitalized software during the nine months ended
March 31, 2023, was $2,250.
NOTE
5 - PLAYERS BALANCES
The
player’s balances were comprised of sports betting deposits assumed and recorded at the fair market value acquired from ZenSports,
Inc. on August 26, 2022, as part of an asset purchase agreement. The balances as of March 31, 2023, are comprised of players betting
deposits and contestant prize winnings for eSports and other promotional events. The company is not currently licensed to operate its
sports betting app and is in the process of obtaining a gaming license, as such there are no new sports betting deposits since the initial
recording, only payouts. The Digital liabilities are valued at fair market value for each currency at the closing market value on the
last day of each fiscal quarter. Fair market value gains and losses are recorded in the statement of operations. See Note 3.
Players
balances are comprised of the following at:
SCHEDULE OF PLAYERS BALANCES
| |
March
31, 2023 | | |
June
30, 2022 | |
SPORTS utility token | |
$ | 19,792 | | |
$ | - | |
Bitcoin | |
| 5,482 | | |
| - | |
ICX | |
| 71 | | |
| - | |
USDT and USD | |
| 21,945 | | |
| - | |
Total | |
$ | 47,290 | | |
| - | |
NOTE
6 - NOTES PAYABLE - RELATED PARTY
On
April 27, 2020, the Company executed a promissory note with Zixiao Chen, our former Chief Financial Officer for $35,000. The note bears
interest at 10% per annum and is due in two business days after demand for payment. The note was repaid in full on July 25, 2022, with
$7,853 of accrued interest waived by Ms. Chen. The interest expense for the nine months ended March 31, 2023, and 2022 was $0 and $2,627
respectively. See Notes 3, 10, and 13.
On
December 30, 2020, the Company executed a promissory note with TopSight, a company owned by Zixiao Chen, our former Chief Financial Officer
for cash proceeds of $30,000. The note bears interest at 10% per annum and is due in two business days after the demand for payment.
On December 17, 2021, TopSight entered into a note purchase and assignment agreement with Eagle Investment Group, LLC, a company controlled
by Bruce Cassidy (our former Chief Executive Officer through June 14, 2022) the Chairman of our Board of Directors to assign the note
to Eagle Investment Group, LLC. Concurrently, we entered into an Allonge agreement with TopSight to change the noteholder from TopSight
to Eagle Investment Group, LLC.
As
of March 31, 2023, and June 30, 2022, the principal balance is $30,000 and $30,000 and accrued interest is $6,746 and $4,496, respectively.
The interest expense for the nine months ended March 31, 2023, and 2022 was $2,250 and $2,252, respectively. See Note 13.
On
December 28, 2021, in connection with the assignment of that certain Convertible Demand Promissory Note dated April 20, 2020, in the
principal amount of $10,000 (the “Demand Note”) that was initially in favor of Zixiao Chen (our Chief Financial Officer at
the time of the Demand Note’s issuance) was purchased from Ms. Chen by Eagle Investment Group, LLC, we amended and restated the
demand note (the “Demand Note”) that is now in favor of Eagle Investment Group, LLC. a company controlled by Bruce Cassidy
(our former Chief Executive Officer through June 14, 2022) the Chairman of our Board of Directors. As part of a related transaction,
the note was converted into shares of Series B Convertible Preferred Stock. See Note 7.
On
February 27, 2023, the Company entered into Stock Redemption and Purchase Agreement with John Linss, our former Chief Executive Officer
and member of the board of directors, and his wholly owned Corespeed, LLC for the purchase of Series C Convertible Preferred Stock owned
by Linss’ Corespeed, LLC. The Company paid $300,000 at the closing and entered into a promissory note with Mr. Linss for the remaining
$1,700,000 of the purchase price. The Note bears interest at a rate of 5% per annum,, and requires the following payments: (i) no less
than $850,000.00, in aggregate, of one or more payments is due by the 12-month anniversary of the Note; and (ii) a balloon payment for
the balance of the Note is due by the earlier of the 24-month anniversary of the Note or five days after the Company’s common stock
is listed for public trading on either the Nasdaq Stock Market, the New York Stock Exchange, or the NYSE American. See notes 1, 10, and
13.
NOTE
7 - CONVERTIBLE DEBT - RELATED PARTY
On
April 20, 2020, the Company executed a convertible promissory note with Zixiao Chen, our former Chief Financial Officer for $10,000.
The note bears interest at 10% per annum and is due in two business days after the demand for payment. This note is convertible at $0.001
per common share and can be converted by Notice of Conversion at the option of the holder. See Note 11.
On
December 28, 2021, the noteholder transferred the loan to another entity that is controlled by Bruce Cassidy (our former Chief Executive
Officer through June 14, 2022) and the Chairman of our Board of Directors. The Company and the new noteholder mutually agreed to allow
the note to be converted into shares of Series B Convertible Preferred Stock at the conversion price of $1.00 per share. The principal
balance and accrued interest were converted into 11,693 shares of Series B Convertible Preferred Stock. The fair value of the stock was
$833,000 and the Company recorded a loss on extinguishment of debt of $821,307 during the year ended June 30, 2022. See Note 10.
NOTE
8- LINE OF CREDIT - RELATED PARTY
On
February 22, 2022, the Company executed a non-revolving line of credit demand note for $250,000 with Excel Family Partners, LLLP (“Excel”)
a company controlled by Bruce Cassidy (our former Chief Executive Officer through June 14, 2022) the Chairman of and sole director our
board of directors. The note bears interest at 5% per annum. The Note does not constitute a committed line of credit. Loans under the
note are made by Excel in its sole and absolute discretion.
On
August 16, 2022, the non-revolving line of credit demand note was increased to $2,000,000 under the amended and restated discretionary
non-revolving line of credit demand note under the same terms and conditions. On August 24, 2022, we drew down a total of $1,037,430
on the line of credit of which $735,120 was used to pay net bonus payments made as part of cash payments made in association with the
ZenSports asset purchase described below, the remainder was used to pay payroll taxes associated with the ZenSports asset purchase bonus
and ongoing operating costs, principally compensation and recurring operating services.
On
February 24, 2023, the Company entered into a second amended and restated discretionary non-revolving line of credit demand note with
Excel in the principal amount of not more than $4,000,000. The Note amends and restates that certain amended and restated discretionary
non-revolving line of credit demand Note. The note does not constitute a committed line of credit. Loans under the Note are made by Excel
in its sole and absolute discretion. Upon repayment of any amount of principal or interest under the Note, we may not reborrow under
the note.
The
amended note includes a conversion option that Excel may, at its sole option, convert all or any portion of the debt into fully paid
and non-assessable shares of common stock of the Company’s common stock.at a conversion price in an amount equal to the
product of the lowest recent price multiplied by 80%. The lowest price is defined, as of each applicable conversion rate, the lowest
price per share that Company has sold one or more Shares to an investor or lender within the 24-month period prior to the applicable
conversion date; provided, however, that if no Shares were sold within such 24-month period, the lowest recent price will be $0.50
per Share. The conversion option was valued by the Company using the Monte-Carlo
model. See notes 1 and 9.
The following are the significant assumptions used in the model.
SCHEDULE
OF FAIR VALUE OF DERIVATIVES
| |
Expected
volatility | | |
Risk-free
interest rate | | |
Expected
dividend yield | | |
Expected
life (in years) | |
At March 31,
2023 | |
| 108-109% | | |
| 4.20-4.84% | | |
| 0 | % | |
| .5-2 | |
The
note includes a common stock warrant exercisable up to 4,000,000
shares of the Company’s common stock for $0.25
per share, with an expiration date of February
1, 2028. The warrants were valued by the Company using the Black-Scholes option pricing model.
The
following are the significant assumptions used in the Black-Scholes model:
SCHEDULE
OF FAIR VALUE OF DERIVATIVES
| |
Expected
volatility | | |
Risk-free
interest rate | | |
Expected
dividend yield | | |
Expected life
(in years) | |
At March 31, 2023 | |
| 111.60% | | |
| 4.20% | | |
| 0% | | |
| 2 | |
The amended note was exchanged and modified on substantially different terms from the non-revolving line of credit
demand note it replaced and as such is treated as a debt extinguishment. The excess of the carrying amount of the amended note was based
on the combined fair value of the conversion option of $5,888,692 and the fair value of the warrant of $1,736,162 which totals $7,624,859
which is included in the statement of operations as a loss on extinguishment of debt.
During
the three months ended March 31, 2023, the company drew down $1,750,124 on the Line of Credit. The funds were used for operating expenses
including costs associated with attaining a Tennessee gaming license along with funding $300,000 toward the cost of repurchasing Series
C preferred stock from John Linss, our former Chief Executive Officer. As of March 31, 2023, the principal and accrued interest balances
of the line of credit are 3,851,877 and $115,491, respectively. See Notes 3, 6, 13, and 15.
NOTE
9 – DERIVATIVE LIABILITIES
On
February 24, 2023, the Company entered into the second amended and restated discretionary non-revolving line of credit demand note (“LOC”).
The LOC contain conversion options that qualify for embedded derivative classification The fair value of the liability is re-measured
at the end of every reporting period and the change in fair value is reported in the statement of operations as a gain or loss on change
in fair value of derivatives. See note 1.
The
table below sets forth a summary of the changes in the fair value of the Company’s Level 3 financial liabilities for the three
months ended March 31, 2023:
SCHEDULE
OF FAIR VALUE OF FINANCIAL LIABILITIES
| |
March
31, 2023 | |
Balance at the beginning
of the period | |
$ | - | |
Initial valuation of embedded conversion
option at February 24,2023 | |
| 5,888,692 | |
Change in the fair value
of the embedded conversion option | |
| 1,073,962 | |
Balance at the end of
the period | |
$ | 6,962,654 | |
The
Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as their fair values were determined
by using Monte-Carlo model based on various assumptions. See note 1.
Significant
changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these are
classified based on the lowest level of input that is significant to the fair value measurement. The following table shows the assumptions
used in the calculations:
SCHEDULE
OF FAIR VALUE MEASUREMENT
| |
Expected
volatility | | |
Risk-free
interest rate | | |
Expected
dividend yield | | |
Expected life
(in years) | |
At March 31, 2023 | |
| 108-109% | | |
| 4.20-4.84% | | |
| 0% | | |
| .5-2 | |
NOTE
10 - STOCKHOLDERS’ DEFICIT
The
Company is authorized to issue 475,000,000 shares of common stock, par value $0.0001 per share, and 25,000,000 shares of preferred stock,
par value $0.0001 per share; of which 1,000,000 shares have been designated as Series A Convertible Preferred Stock, 12,000 shares have
been designated as Series B Convertible Preferred Stock and 6,700,000 shares have been designated as Series C Convertible Preferred Stock.
The
Series A Convertible Preferred Stock has a liquidation preference of $0.10 per share, has super-voting rights of 100 votes per share,
and each share of Series A may be converted into 100 shares of common stock. On August 30, 2022, the Series A shares owned by TopSight,
a company owned by Ms. Chen, the Company’s former Chief Financial Officer, were redeemed and the Company retired all of the Series
A shares. See Notes 3 and 13.
The
Series B Convertible Preferred Stock has a liquidation preference of $1.00 per share, has super-voting rights, and votes are determined
by multiplying (a) the number of Series B shares held by such holder and (b) the conversion ratio, and each Series B share may be converted
into 100 shares of common stock. The authorized Series B shares were increased from 0 to 12,000 shares during the year ended June 30,
2022.
The
Series C Convertible Preferred Stock has a liquidation preference of $0.30 per share, plus a 6% per annum liquidation coupon compounded
annually since the date of issuance paid only upon a liquidation event, have the right to vote for all matters submitted, including the
election of directors, and all other matters as required by law. The Series C shares shall automatically convert into common stock by
multiplying the number of Series C shares to be converted by the quotient obtained by dividing (x) the liquidation value by (y) the conversion
value upon the date that is the earlier of (a) the closing date of an underwritten, follow-on public offering of shares of the Company’s
common stock with gross offering proceeds of not less than $6,000,000; (b) the date the Company receives written notice from a holder
of Series C shares of such holder’s desire and intention to convert all or some of such holder’s Series C shares; and (c)
June 15, 2024. The number of Series C shares the Company is authorized to issue was increased from 0 to 475,000,000 shares during the
year ended June 30, 2022.
Series
A Convertible Preferred Stock
On
August 30, 2022, the Series A shares owned by TopSight, a company owned by Zixiao Chen, the Company’s former Chief Financial Officer,
were redeemed and the Company retired all of the Series A shares. During the nine months that ended March 31, 2023, there were no issuances
of Series A shares. See Notes 3 and 13.
Series
B Convertible Preferred Stock
During
the nine months that ended March 31, 2023, there were no issuances of Series B shares. See Notes 7 and 8.
Series
C Convertible Preferred Stock
On
July 11, 2022, the Company sold 2,166,666 shares of its Series C Convertible Preferred Stock at $0.30 per share for total proceeds of
$650,000 to related parties. A company managed by a member of Excel Family Partners, LLLP a company controlled by Bruce Cassidy (our
former Chief Executive Officer through June 14, 2022) the Chairman of our board of directors purchased 1,000,000 shares, Zen SRQ LLC
a company associated with a former member of the board of directors purchased 833,332 shares and Core Speed, LLC a Company owned by John
Linss our former Chief Executive Officer and former member of our board of directors purchased 333,333 shares. The proceeds were used
to fund operations. See notes 1 and 13.
On
August 16, 2022, John Linss our former Chief Executive Officer and former member of our board of directors was issued 2,980,000 shares
of our Series C Convertible Preferred Stock as part of an amendment to his employment agreement. The stock was valued at $0.30 per share,
the cash price paid for all previous issuances of the stock, and vests over a 3-year period unless certain milestones are met, in which
case it will fully vest sooner. During the three and nine months that ended March 31, 2023, we recorded a non-cash compensation expense
of $8,164 and $119,404, respectively to Salaries and wages in the statement of operations.
Effective
January 10, 2023, John Linss, our former Chief Executive Officer and former member of our board of directors resigned. As part of the
separation agreement and release as of that date, the parties agreed that Mr. Linss through his ownership of CoreSpeed, LLC has rights
set forth in the Award Agreement concerning the restricted Series C Convertible Preferred Stock that will be the same as though he did
not resign but that his employment was involuntarily terminated by KeyStar without Cause. Accordingly, the parties will consider Linss’
resignation a vesting acceleration event of the restricted Series C Convertible Preferred Stock. As such the $894,000 of unamortized
of the stock grant issued for services was fully recognized to salaries and wages in the statement of operations
John
Linss and Corespeed, LLC, as part of the above-noted separation and release agreement, agreed to sell and KeyStar has agreed to purchase
all of the Series C shares for a total of $2,000,000 pursuant to the terms of definitive agreements. Mr. Linss holds 2,980,000 of the
Shares in his name, and the other 333,333 Shares are held in the name of Corespeed, LLC. Mr. Linss is the sole member of Corespeed, LLC
and the beneficial owner of the Shares held by Corespeed, LLC.
On
February 27, 2023, the Company entered into stock redemption and purchase agreements with Mr. Linss and Corespeed, LLC for the purchase
of the Shares. The Company paid $300,000 at the closing and entered into a promissory note with Mr. Linss for the remaining $1,700,000
of the purchase price. The $994,000 fair value of the Series C Convertible preferred stock originally issued to John Linss was netted
against the $2,000,000 purchase price paid by the Company for the shares which resulted in a $1,006,000 deemed dividend that is included
in the Statement of Operations. See notes 1, 6, and 13.
Common
Stock
During
the three months that ended September 30, 2022, there were 6,500,000 shares of common stock issued for the Acquisition of certain assets of
ZenSports Inc pursuant to an asset purchase agreement, 1,500,000 shares of common stock issued for the Acquisition of certain assets
of Ultimate Gamer LLC pursuant to an asset purchase agreement, and an aggregate 1,430,000 shares of common stock were issued for proceeds
of $1,430,000 from the company’s private offering to unaffiliated accredited investors our various dates during the period. See
Notes 3, 4, and 13.
On
August 26, 2022, we closed on a private offering of our common stock where we sold an aggregate of 750,000 shares of our common stock
to 11 third-party investors at a price of $1.00 per share for an aggregate purchase price of $750,000 (the “Private Offering”).
Each of the investors had access to information concerning us and our business prospects and represented to us in connection with their
purchase that they: (i) acquired the securities for investment only and not with a view to or for sale in connection with any distribution
thereof; (ii) were accredited investors (iii) could bear the risks of the investment, and (iv) could hold the securities for an indefinite
period of time. The offer, sale, and issuance of the shares were deemed to be exempt from registration under the Securities Act in reliance
on Section 4(a)(2) of the Securities Act and/or Rule 506(b) of Regulation D promulgated thereunder, as transactions by an issuer not
involving a public offering. See Note 3
From
August 26 to September 26, 2022, we had multiple closings on our private offering whereby we issued a total of 680,000
shares of Common stock at $1.00
per share for proceeds of $250,000,
$80,000,
$100,000
and $250,000 totaling $680,000
to unaffiliated accredited investors. The proceeds were used for operating capital.
During
the quarter ended March 31, 2023, we opened a private offering whereby we issued 2,225,000 shares of common stock at $.50 per share for
proceeds of $1,112,500 to unaffiliated accredited investors. The proceeds were used for operating capital.
NOTE
11 - STOCK OPTIONS
The
KeyStar Corp. 2021 Stock Plan (“2021 Stock Plan”) will provide eligible participants with benefits consisting of one or more
of the following: Incentive Stock Options (“ISOs”), Nonstatutory Stock Options (“NSOs”), and bonuses in the form
of common stock in the Company (“Stock Bonuses”). The Board of Directors of the Company or a committee of directors shall
administer the 2021 Stock Plan. The Board or committee shall determine what employees or officers shall receive an award under the Plan.
ISOs, which are intended to be compliant with Section 422 of the Internal Revenue Code, may be awarded only to employees of the Company.
NSOs and Stock Bonuses are not subject to Section 422 of the Internal Revenue Code and can be awarded to employees and non-employee officers.
The aggregate number of Shares of the Company that can be awarded under the Plan is 5,960,000 shares of Common Stock, whether in the
form of ISOs, NSOs, or Stock Bonuses (or a combination thereof). Awards can be issued under the Plan for ten years from the effective
date of the Plan. ISOs may be exercised during a period no longer than 10 years from the date of the award (5 years for individuals who
own more than 10% of the combined voting power of the Company). NSOs may be exercised for a maximum period of 10 years from the date
of the award. ISOs and NSOs may not be exercised after the earlier of the following: (a) in the event of termination for cause (as defined
by the plan): the date of termination; (b) in the event of termination due to death or disability: the earlier of the ISO or NSO’s
expiration or one year after the termination due to death or disability; (c) in the event of termination for any other reason: three
months following the date of termination. No awards have yet been made under the Plan.
On April 10, 2023, the Board terminated the 2021 Plan and approved a new stock option plan for our director’s
officers, employees, advisors, and contractors containing the same terms and conditions as the 2021 Stock Plan. See note 15.
NOTE
12 - COMMITMENTS AND CONTINGENCIES
Commitments
and Contingencies are as follows:
On
January 10, 2023, the Board appointed Mark Thomas (“Thomas”) as the new Chief Executive Officer appointment, Thomas has served
as the Company’s Chief Marketing Officer and Chief Product Officer since June 2022. In lieu of an employment agreement, Thomas
received a written offer letter (the “Offer”) that states he will receive an annual salary of $380,000, and he is eligible
to participate in the Company’s benefit plans.
On
February 6, 2023, the Company entered into a supplement to the Offer agreement with Mr. Thomas that sets forth the following terms and
conditions relating to the Incentive Compensation.
Within
60 calendar days after the Company has $1,000,000 or more in Gross Gaming Revenue, the Board will engage at least two executive compensation
consultants to provide reports to the Board regarding the compensation of Chief Executive Officers of comparable companies. The Board
will timely review and consider such reports in determining potential adjustments to your “Annual Salary.” Any adjustments
will be at the Board’s sole discretion.
| 1. | In
the event that the Company receives a sports betting license (or equivalent) in the State
of Tennessee, within 30 days after the issue date, Mr. Thomas will receive a cash bonus of
$50,000. |
| 2. | For
the next 24 months, in each event that the Company receives a sports betting license (or
equivalent) in a new jurisdiction (other than the State of Tennessee), within 30 days after
the issue date, Mr. Thomas will receive a cash bonus in an amount equal to the lesser of
(a) $100,000, or (b) the product of 0.01% multiplied by the subject jurisdiction’s
trailing 12-month sports betting handle (using the most recent 12 months reported by Legal
Sports Report (“LSR”) which currently posts such data at www.legalsportsreport.com/sports-betting/revenue/).
After the 24-month period, the Board (or its Compensation Committee, if any) will review
and consider an extension or adjustment to this bonus structure. Any extensions or adjustments
will be at the Board’s sole discretion. |
| 3. | If
the net loss of the Company for its 2022-2023 fiscal year, as determined by the Company’s
Chief Financial Officer, is less than $6,197,719 (the “Benchmark”), Mr. Thomas
will be eligible for a cash bonus in an amount equal to 8% of the difference of the actual
net loss minus the Benchmark. The cash bonus will be due within 30 days after the determination
of the 2022-2023 fiscal year net loss. |
Mr.
Thomas’ employment with the Company will continue to be “at will.”. If said employment with Company is terminated without
“Cause,” he will be entitled to severance through continued payments of his current annual base salary of $380,000 for 6
months. See notes 1 and 13.
Legal
matter contingencies
The
Company believes, based on current knowledge and after consultation with counsel, that it is not currently party to any material pending
proceedings, individually or in the aggregate, the resolution of which would have a material effect on the Company. Provisions for losses
are established in accordance with ASC 450, “Contingencies” when warranted. Once established, such provisions are adjusted
when there is more information available about an event that occurs requiring a change.
NOTE
13 - RELATED PARTY TRANSACTIONS
Transactions
with our former and current Chief Executive Officers:
On
June 14, 2022, the Company entered into an employment agreement with John Linss, as the Company’s Chief Executive Officer. The
agreement was amended on August 16, 2022. The agreement and amended agreement work in tandem and provide for a 3-year term at an annual
base salary of $500,000, a $112,000 signing bonus, and certain other bonuses and stock grants.
On
July 11, 2022, the company sold 333,333 shares of its convertible preferred series C stock at $0.30 per share for total proceeds of $100,000
to Core Speed, LLC a Company owned by our Chief Executive officer. See Note 12.
Effective
January 10, 2023, John Linss, our former Chief Executive Officer and former member of our board of directors resigned. As part of the
separation agreement and release as of that date, the Parties agreed that Mr. Linss through his ownership of CoreSpeed, LLC has rights
set forth in the Award Agreement concerning the restricted preferred series C convertible stock that the Parties will consider Linss’
resignation a Vesting Acceleration Event of the restricted series C convertible stock.
Linss
and CoreSpeed, LLC, as part of the above-noted separation and release agreement, have agreed to sell and KeyStar has agreed to purchase
all of the Subject Shares for a total of $2,000,000 pursuant to the terms of the stock redemption and purchase agreement. See notes 1and
10.
On
January 10, 2023, the Board appointed Mark Thomas (“Thomas”) as the new Chief Executive Officer. In lieu of an employment
agreement, Thomas received a written offer letter (the “Offer”) that states he will receive an annual salary of $380,000,
and he is eligible to participate in the Company’s benefit plans. On February 6, 2023,the Company entered into a supplement to
the Offer agreement with Mr. Thomas that sets forth the following terms and conditions relating to the Incentive Compensation. See notes
1 and 12.
Transactions
with our former Chief Financial Officer:
During
the nine months ended March 31, 2023, and 2022, the Company’s former Chief Financial Officer, Zixiao Chen paid $0 and $4,448 of
expenses on behalf of the Company and was repaid $0 and $4,938, respectively. In addition, during July 2022, Ms. Chen was paid $20,000
as part of the Assignment and Assumption agreement described below. The balance owing Zixiao Chen is recorded in due to a related party
in the balance sheet of $0 and $28,065 as of March 31, 2023, and 2022, respectively.
On
April 27, 2020, the Company executed a promissory note with our former Chief Financial Officer for $35,000. The note bears interest at
10% per annum and is due in two business days after the demand for payment. As of March 31, 2023, and 2022, the principal balance is
$0 and $35,000 and accrued interest is $0 and $6,741. The interest expense for the nine months ended March 31, 2023, and 2022 was $0
and $2,627 respectively. The note was repaid in full on July 25, 2022. See Note 6.
On
July 26, 2022, the Company made 3 payments to the Company’s former Chief Financial Officer totaling $77,000 for the settlement
of the three above-noted liabilities, to redeem and retire the 2,000,000 shares of Series A Convertible Preferred Stock owned by her
and outstanding at June 30, 2022, and in anticipation of the execution of assignment and assumption agreement to assume agreed upon assets
and liabilities of the Prior Business. The Series A shares were redeemed and retired on July 26, 2022. The assignment and assumption
agreement was executed on September 15, 2022. The payments were made as follows. See Notes 3 and 10.
On
July 26, 2022, the Company paid off $17,837 in accrued expenses owing to the Company’s former Chief Financial Officer for $20,000,
the excess payment of $2,163 was recorded against the gain on assignment in the statement of operations.
On
July 26, 2022, the Company paid off the promissory note held by the Company’s former Chief Financial Officer for $35,000. The accrued
interest was waived. See Note 6.
On
July 26, 2022, the company redeemed and retired the 2,000,000 shares of Series A Convertible Preferred Stock owned by Ms. Chen for $22,000.
See Note 10.
Transactions
with our former Chief Executive Officer and current Chairman of our Board of Directors:
On
July 11, 2022, the company sold 1,000,000 shares of its convertible preferred series C stock at $0.30 per share for total proceeds of
$300,000 to a company managed by a member of Excel Family Partners, LLLP a company controlled by Bruce Cassidy (our former Chief Executive
Officer through June 14, 2022) and the Chairman of our board of directors. See Note 7.
On
August 16, 2022, the non-revolving line of credit demand note with Excel Family Partners, LLLP (“Excel”) a company controlled
by Bruce Cassidy (our former Chief Executive Officer through June 14, 2022) the Chairman of our board of directors, which can exert significant
influence over the Company, was increased to $2,000,000 under the same terms and conditions. See Notes 3, 6, and 10.
On
February 24, 2023, the Company entered into a second amended and restated discretionary non-revolving line of credit demand note with
Excel in the principal amount of not more than $4,000,000. The Note amends and restates that certain amended and restated discretionary
non-revolving line of credit demand note. The note does not constitute a committed line of credit. Loans under the Note are made by Excel
in its sole and absolute discretion. Upon repayment of any amount of principal or interest under the Note, we may not reborrow under
the note.
The
note includes a conversion option that Excel may, at its sole option, convert all or any portion of the debt into fully paid and non-assessable
shares of common stock of the Company’s common stock.at a conversion price in an amount equal to the product of the lowest recent
price multiplied by 80%. The lowest price is defined, as of each applicable conversion cate, the lowest price per share that Company
has sold one or more Shares to an investor or lender within the 24-month period prior to the applicable conversion date; provided, however,
that if no Shares were sold within such 24-month period, the lowest recent price will be $0.50 per Share. The conversion option was
valued Company estimated the fair value of these derivatives using the Monte-Carlo model. See notes 1 and 9.
The
amendment to the note includes a common stock warrant exercisable up to 4,000,000 shares of the Company’s common stock for $0.25
per share, with an expiration date of February 1, 2028. See notes 1 and 7.
On
September 12, 2022, we entered into an asset purchase agreement with Excel Members, LLC, a company controlled by Bruce Cassidy, our Cassidy
(our former Chief Executive Officer through June 14, 2022) the Chairman of our Board of Directors, to acquire certain assets of a company
acquired previously by Excel through an assignment for the benefit of creditors. Ultimate Gamer, LLC (“UG”), which was formerly
in the business of organizing and operating in-person and online video game competitions tournaments, originally owned these assets.
The purchased assets included the brand name Ultimate Gamer.
We
purchased a portion of UG assets, consisting primarily of intellectual property, including trademarks, domain name registrations, and
UG’s databases of users and gamers for 1,500,000 shares of our common stock, See Notes 3, and 10.
Other
related party transactions:
On
July 11, 2022, the company sold 833,332 shares of its convertible preferred series C stock at $0.30 per share for total proceeds of $250,000
to Zen SRQ LLC a company where a former member of the board of directors owns a 25% non-controlling interest. See Note12.
Effective
January 1, 2023, the Company assumed the office lease of a related party, ZenSports, Inc. The lease expires on September 30, 2023, and
has a monthly lease payment of $6,500. See note 1.
NOTE
14 - DISCONTINUED OPERATIONS
On
September 15, 2022, we entered into an agreement to assign all of the Prior Business’ (discontinued operations) rights including
certain of its assets and liabilities to TopSight, a company owned by Zixiao Chen the Company’s former Chief Financial Offer. See
Note 13.
The
assets and liabilities of our discontinued operations as of June 30, 2022, are included in the balance sheet for comparative purposes
as the assets and liabilities for the three months ended have been adjusted to reflect the assignment to TopSight and are included in
Gain on assignment of assets in the statement of operations.
The
following table shows the balance sheet of discontinued operations as of:
SCHEDULE
OF DISCONTINUED OPERATIONS FOR BALANCE SHEET
| |
June
30, 2022 | |
ASSETS | |
| | |
| |
| | |
Current assets: | |
| | |
Inventory,
net | |
$ | 992 | |
Total
assets | |
$ | 992 | |
| |
| | |
LIABILITIES
AND STOCKHOLDERS’ DEFICIT | |
| | |
| |
| | |
Current liabilities: | |
| | |
Due
to related party | |
$ | 5,690 | |
Total
liabilities | |
| 5,690 | |
| |
| | |
Stockholders’ deficit: | |
| | |
Accumulated
deficit | |
| (4,698 | ) |
Total
stockholders’ deficit | |
| (4,698 | ) |
| |
| | |
Total
liabilities and stockholders’ deficit | |
$ | 992 | |
The
following table shows the state of the unaudited discontinued operations:
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
For
the Three Months Ended March
31, | | |
For
the Nine Months Ended March
31, | |
| |
2023 | | |
2022 | | |
2023 | | |
2022 | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | - | | |
$ | 1,295 | | |
$ | 536 | | |
$ | 46,357 | |
Costs of services | |
| - | | |
| 1,964 | | |
| 2,082 | | |
| 39,604 | |
Gross
profit (loss) | |
| - | | |
| (669 | ) | |
| (1,546 | ) | |
| 6,753 | |
Operating
expenses | |
| - | | |
| 336 | | |
| 7,834 | | |
| 983 | |
Net
income (loss) from continuing operations, net of income tax | |
$ | - | | |
$ | (1,005 | ) | |
$ | (9,380 | ) | |
$ | 5,770 | |
NOTE
15 - SUBSEQUENT EVENTS
In
accordance with ASC 855-10, the Company has analyzed its operations subsequent to March 31, 2023, to the date, these financial statements
were issued, and as of February 21, 2023, there were no other material subsequent events to disclose in these financial statements.
On
December 28, 2021, the board of directors (the “Board”) approved the 2021 stock option plan (“2021 Plan”).
The 2021 Plan was subject to the approval of our stockholders within 12 months of the Board’s approval. We did not seek approval
of the 2021 Plan from our stockholders on or before December 28, 2022, and no awards of any type were granted under the 2021 Plan.
On
April 10, 2023, the Board terminated the 2021 Plan and approved a new stock option plan for our director’s officers, employees,
advisors, and contractors containing the same terms and conditions as the 2021 Plan (the “2023 Plan”). The 2023 Plan
is also subject to approval of our stockholders within 12 months from the date of the Board’s approval. In connection with the
approval of the 2023 Plan, the Board granted Incentive Stock Options (“ISOs”) and Nonstatutory Stock Options (“NSOs”)
under the 2023 Plan to employees and advisors of the Company to purchase a total of 3,250,000 shares of our common stock at an exercise
price of $0.50 per share (the “Awards”). As part of the Awards, our CEO, Mark Thomas, was granted 800,000 ISOs and
200,000 NSOs, and our CFO, Anthony Fidaleo, was granted 250,000 ISOs (collectively, the “Officer Awards”). The Officer
Awards vest as to 25% of the shares on June 16, 2023. Thereafter, the Officer Awards will further vest as to 1/48th of the shares on
the 16th day of each month, beginning July 16, 2023, for a period of 36 months; provided all vesting is subject to the officer having
provided continuous service to us or a related corporation through each such vesting date.
The
2023 Plan provides eligible participants with benefits consisting of one or more of the following: ISOs, NSOs, and bonuses in the form
of our common stock (“Stock Bonuses”). The Board or a committee of directors will administer the 2023 Plan and determine
what employees or officers will receive an award under the 2023 Plan. ISOs, which are intended to be compliant with Section 422 of the
Internal Revenue Code, may be awarded only to our employees. NSOs and Stock Bonuses are not subject to Section 422 of the Internal Revenue
Code and can be awarded to employees and non-employees.
As
with the 2021 Plan, the aggregate number of shares of our authorized but unissued common stock that can be awarded under the 2023 Plan
is 5,960,000, whether in the form ISOs, NSOs, or Stock Bonuses (or a combination thereof). Awards can be issued under the 2023 Plan for
ten years from the date the Board approved the 2023 Plan. ISOs may be exercised during a period no longer than ten years from the date
of the award (five years for individuals who own more than 10% of the combined voting power of the Company). NSOs may be exercised for
a maximum period of ten years from the date of the award.
Subsequent
to the quarter ended March 31, 2023, the company issued 225,000 shares of common stock at $0.50 per share to unaffiliated accredited
investors through a private placement offering for $450,000. The offering was closed effective May 5, 2023.
On
May 5, 2023, the Company entered into a Promissory Note with Excel Family Partners, LLLP, a company controlled by Bruce Cassidy (our
former Chief Executive Officer through June 14, 2022) the Chairman of our Board of Directors in the principal amount of $1,600,000. The
Note matures on November 4, 2023, at which time the outstanding principal amount under the Note, along with a flat funding fee of $160,000
is due and payable in full.
In
connection with entering into the Note, the Company issued a Common Stock Warrant to purchase 1,600,000 shares of our common stock at
an exercise price of $0.25 per share (the “Warrant”). The Warrant may be exercised, in whole or in part, at any time
through May 4, 2028, on either a cash or cashless basis.