Item
1. Financial Statements.
Wizard
World, Inc.
March
31, 2017
Index
to the Condensed Consolidated Financial Statements
Wizard
World, Inc.
Condensed
Consolidated Balance Sheets
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,522,657
|
|
|
$
|
4,401,217
|
|
Accounts receivable,
net
|
|
|
164,326
|
|
|
|
187,819
|
|
Inventory
|
|
|
27,212
|
|
|
|
-
|
|
Prepaid convention
expenses
|
|
|
882,148
|
|
|
|
704,711
|
|
Prepaid insurance
|
|
|
109,004
|
|
|
|
96,076
|
|
Prepaid rent - related
party
|
|
|
150,530
|
|
|
|
181,796
|
|
Prepaid taxes
|
|
|
13,984
|
|
|
|
13,984
|
|
Other
prepaid expenses
|
|
|
29,776
|
|
|
|
13,666
|
|
Total Current
Assets
|
|
|
4,899,637
|
|
|
|
5,599,269
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
251,317
|
|
|
|
215,948
|
|
|
|
|
|
|
|
|
|
|
Security deposits
|
|
|
22,912
|
|
|
|
19,912
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
5,173,866
|
|
|
$
|
5,835,129
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
and accrued expenses
|
|
$
|
1,682,947
|
|
|
$
|
937,773
|
|
Unearned revenue
|
|
|
1,389,716
|
|
|
|
1,574,938
|
|
Derivative
liabilities - related party
|
|
|
4,615,296
|
|
|
|
6,498,737
|
|
Due
to CONtv joint venture
|
|
|
224,241
|
|
|
|
224,241
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
7,912,200
|
|
|
|
9,235,689
|
|
|
|
|
|
|
|
|
|
|
Non-current Liabilities:
|
|
|
|
|
|
|
|
|
Convertible promissory
note - related party, net
|
|
|
9,027
|
|
|
|
1,456
|
|
|
|
|
|
|
|
|
|
|
Total
Non-current Liabilities
|
|
|
9,027
|
|
|
|
1,456
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
7,921,227
|
|
|
|
9,237,145
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' Deficit
|
|
|
|
|
|
|
|
|
Preferred stock par
value $0.0001: 20,000,000 shares authorized; 50,000 shares designated, respectively
|
|
|
-
|
|
|
|
-
|
|
Series A convertible
preferred stock par value $0.0001: 50,000 shares designated; 39,101 shares issued and converted, respectively
|
|
|
-
|
|
|
|
-
|
|
Common stock par
value $0.0001: 80,000,000 shares authorized; 68,535,036 and 68,535,036 shares issued and outstanding, respectively
|
|
|
6,855
|
|
|
|
6,855
|
|
Additional paid-in
capital
|
|
|
21,270,361
|
|
|
|
21,132,386
|
|
Accumulated deficit
|
|
|
(24,012,267
|
)
|
|
|
(24,529,440
|
)
|
Non-controlling
interest
|
|
|
(12,310
|
)
|
|
|
(11,817
|
)
|
Total
Stockholders' Deficit
|
|
|
(2,747,361
|
)
|
|
|
(3,402,016
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities
and Stockholders' Deficit
|
|
$
|
5,173,866
|
|
|
$
|
5,835,129
|
|
See
accompanying notes to the condensed consolidated financial statements
Wizard
World, Inc.
Condensed
Consolidated Statements of Operations
|
|
For
the Three Months Ended
|
|
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues
|
|
|
|
|
|
|
|
|
Convention
|
|
$
|
3,447,957
|
|
|
$
|
4,993,659
|
|
ConBox
|
|
|
74,119
|
|
|
|
348,182
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
|
3,522,076
|
|
|
|
5,341,841
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
Cost
of revenue
|
|
|
3,140,330
|
|
|
|
3,136,417
|
|
|
|
|
|
|
|
|
|
|
Total
cost of revenues
|
|
|
3,140,330
|
|
|
|
3,136,417
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
381,746
|
|
|
|
2,205,424
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
1,005,330
|
|
|
|
1,319,962
|
|
Consulting
fees
|
|
|
129,253
|
|
|
|
118,018
|
|
General
and administrative
|
|
|
529,241
|
|
|
|
638,356
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
1,663,824
|
|
|
|
2,076,336
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(1,282,078
|
)
|
|
|
129,088
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(83,898
|
)
|
|
|
(806
|
)
|
Loss
on disposal of equipment
|
|
|
(785
|
)
|
|
|
-
|
|
Change
in fair value of derivative liabilities
|
|
|
1,883,441
|
|
|
|
-
|
|
Loss
on CONtv joint venture
|
|
|
-
|
|
|
|
(75,000
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
1,798,758
|
|
|
|
(75,806
|
)
|
|
|
|
|
|
|
|
|
|
Income
before income tax provision
|
|
|
516,680
|
|
|
|
53,282
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
516,680
|
|
|
|
53,282
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income attributable to non-controlling interests
|
|
|
(493
|
)
|
|
|
69,362
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common stockholders
|
|
$
|
517,173
|
|
|
$
|
(16,080
|
)
|
|
|
|
|
|
|
|
|
|
Income
(loss) per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.01
|
|
|
$
|
(0.00
|
)
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
68,535,036
|
|
|
|
51,368,386
|
|
Weighted
average common shares outstanding - diluted
|
|
|
72,456,606
|
|
|
|
51,368,386
|
|
See
accompanying notes to the condensed consolidated financial statements
WIZARD
WORLD, INC.
Condensed
Consolidated Statement of Stockholders' (Deficit) Equity
For
the Three Months Ended March 31, 2017
(Unaudited)
|
|
Preferred
Stock
Par Value $0.0001
|
|
|
Common
Stock Par Value $0.0001
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Non-controlling
|
|
|
Total
Stockholders'(Deficit)
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- December 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
68,535,036
|
|
|
$
|
6,855
|
|
|
$
|
21,132,386
|
|
|
$
|
(24,529,440
|
)
|
|
$
|
(11,817
|
)
|
|
$
|
(3,402,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
137,975
|
|
|
|
-
|
|
|
|
-
|
|
|
|
137,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
517,173
|
|
|
|
(493
|
)
|
|
|
516,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- March 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
68,535,036
|
|
|
$
|
6,855
|
|
|
$
|
21,270,361
|
|
|
$
|
(24,012,267
|
)
|
|
$
|
(12,310
|
)
|
|
$
|
(2,747,361
|
)
|
See
accompanying notes to the condensed consolidated financial statements
Wizard
World, Inc.
Condensed
Consolidated Statements of Cash Flows
|
|
For
the Three Months Ended
|
|
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
516,680
|
|
|
$
|
53,282
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
43,459
|
|
|
|
37,052
|
|
Loss
on disposal of equipment
|
|
|
785
|
|
|
|
-
|
|
Change
in fair value of derivative liabilities
|
|
|
(1,883,441
|
)
|
|
|
-
|
|
Accretion
of debt discount
|
|
|
7,571
|
|
|
|
-
|
|
Loss
on CONtv joint venture
|
|
|
-
|
|
|
|
75,000
|
|
Share-based
compensation
|
|
|
137,975
|
|
|
|
316,722
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
23,493
|
|
|
|
95,865
|
|
Inventory
|
|
|
(27,212
|
)
|
|
|
(15,374
|
)
|
Prepaid
convention expenses
|
|
|
(177,437
|
)
|
|
|
(954,069
|
)
|
Prepaid
rent - related party
|
|
|
31,266
|
|
|
|
-
|
|
Prepaid
insurance
|
|
|
(12,928
|
)
|
|
|
(45,109)
|
|
Other
prepaid expenses
|
|
|
(16,110
|
)
|
|
|
6,159
|
|
Security
deposits
|
|
|
(3,000
|
)
|
|
|
-
|
|
Accounts
payable and accrued expenses
|
|
|
745,174
|
|
|
|
(416,649
|
)
|
Unearned
revenue
|
|
|
(185,222
|
)
|
|
|
2,259,826
|
|
|
|
|
|
|
|
|
|
|
Net
Cash (Used In) Provided by Operating Activities
|
|
|
(798,947
|
)
|
|
|
1,412,705
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(79,613
|
)
|
|
|
(30,578
|
)
|
Investment
in CONtv joint venture - net
|
|
|
-
|
|
|
|
(12,500
|
)
|
|
|
|
|
|
|
|
|
|
Net
Cash Used In Investing Activities
|
|
|
(79,613
|
)
|
|
|
(43,078
|
)
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
(878,560
|
)
|
|
|
1,369,627
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of reporting period
|
|
|
4,401,217
|
|
|
|
4,723,699
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of reporting period
|
|
$
|
3,522,657
|
|
|
$
|
6,093,326
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
-
|
|
|
$
|
857
|
|
Income
tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Acquisition
of controlling interest of ConBox
|
|
$
|
-
|
|
|
$
|
96,781
|
|
See
accompanying notes to the condensed consolidated financial statements
Wizard
World, Inc.
March
31, 2017
Notes
to the Condensed Consolidated Unaudited Financial Statements
Note
1 – Organization and Operations
Wizard
World, Inc.
Wizard
World, Inc., formerly GoEnergy, Inc. (“Wizard World” or the “Company”) was incorporated on May 2, 2001,
under the laws of the State of Delaware. The Company, through its operating subsidiary, is a producer of pop culture and live
multimedia conventions across North America.
Note
2 – Going Concern Analysis
Going
Concern Analysis
The
Company had a net loss from operations of $1,282,078 and $1,182,246 for the three months ended March 31, 2017 and the year ended
December 31, 2016, respectively. As a result, prior to the Bristol financing, these conditions had raised substantial doubt regarding
our ability to continue as a going concern beyond May 2018. As of March 31, 2017, we had cash and working capital (excluding the
derivative liability) of $3,522,657 and $1,602,753, respectively.
Effective
December 1, 2016, upon the Board of Directors of the Company receiving an independent third party fairness opinion, the Company
entered into the Purchase Agreement with Bristol Investment Fund, Ltd., an entity controlled by the Chairman of the Company’s
Board of Directors, pursuant to which the Company sold to the Purchaser, for a cash purchase price of $2,500,000, securities comprising:
(i) the Debenture, (ii) Series A Warrants, and (iii) Series B Warrants. Pursuant to the Purchase Agreement, the Company paid $25,000
to the Purchaser and issue to the Purchaser 500,000 shares of Common Stock with a grant date fair value of $85,000 to cover the
Purchaser’s legal fees.
If
necessary, management also believes that it is probable that external sources of debt and/or equity financing could be obtained
based on management’s history of being able to raise capital coupled with current favorable market conditions. As a result
of management’s plans, the Company believes the initial conditions which raised substantial doubt regarding the ability
to continue as a going concern have been alleviated. Therefore, the accompanying condensed consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
The
condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein.
While the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the
ability to raise additional funds if necessary, there can be no assurances to that effect. The Company’s ability to continue
as a going concern is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control
operating expenses.
Note
3 – Significant and Critical Accounting Policies and Practices
The
management of the Company is responsible for the selection and use of appropriate accounting policies and their application. Critical
accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition
and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to
make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting
policies and practices are disclosed below as required by generally accepted accounting principles.
Basis
of Presentation - Unaudited Interim Financial Information
The
accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and
in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with
respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required
by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements furnished reflect all
adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of
the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year.
These unaudited condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial
statements of the Company for the year ended December 31, 2016 and notes thereto contained in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2016, as filed with the SEC on April 17, 2017.
Use
of Estimates and Assumptions and Critical Accounting Estimates and Assumptions
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.
Principles
of Consolidation
The
condensed consolidated financial statements include all accounts of the entities as of the reporting period ending date(s) and
for the reporting period(s) as follows:
Name
of consolidated
subsidiary or entity
|
|
State
or other jurisdiction of
incorporation or organization
|
|
Date
of incorporation
or formation (date of
acquisition, if applicable)
|
|
Attributable
interest
|
|
|
|
|
|
|
|
|
|
KTC
Corp.
|
|
The
State of Nevada, U.S.A.
|
|
September
20, 2010
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Kicking
the Can L.L.C.
|
|
The
State of Delaware, U.S.A.
|
|
April
17, 2009
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Wizard
World Digital, Inc.
|
|
The
State of Nevada, U.S.A.
|
|
March
18, 2011
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
Wiz
Wizard, LLC
|
|
The
State of Delaware, U.S.A.
|
|
December
29, 2014
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
ButtaFyngas,
LLC
|
|
The
State of Delaware, U.S.A.
|
|
April
10, 2015
|
|
|
50
|
%
|
All
inter-company balances and transactions have been eliminated. Non–controlling interest represents the minority equity investment
in the Company’s subsidiaries, plus the minority investors’ share of the net operating results and other components
of equity relating to the non–controlling interest.
As
of March 31, 2017, the aggregate non-controlling interest in ButtaFyngas was ($12,310). As of December 31, 2016, the aggregate
non-controlling interest in Wiz Wizard and ButtaFyngas was ($11,817). The non-controlling interest is separately disclosed on
the Condensed Consolidated Balance Sheet.
Accounts
Receivable and Allowance for Doubtful Accounts
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require
collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the
outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if
receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management.
The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded,
which is the face amount of the receivable net of the allowance for doubtful accounts. As of March 31, 2017 and December 31, 2016,
the allowance for doubtful accounts was $0.
Inventories
Inventories
are stated at average cost using the first-in, first-out (FIFO) valuation method. Inventory was comprised of the following:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Finished
goods
|
|
$
|
27,212
|
|
|
$
|
-
|
|
Fair
Value of Financial Instruments
The
Company follows ASC 820-10 of the FASB Accounting Standards Codification to measure the fair value of its financial instruments
and disclosures about fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value
measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes
a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.
The three (3) levels of fair value hierarchy defined by ASC 820-10 are described below:
Level
1
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
Level
2
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
|
Level
3
|
Pricing
inputs that are generally unobservable inputs and not corroborated by market data.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, inventory, prepaid
expenses and other current assets, accounts payable and accrued expenses approximate their fair values because of the short maturity
of these instruments.
In
connection with the issuance of a convertible promissory note as discussed below in Note 6, the Company evaluated the note agreement
to determine if the agreement contained any embedded components that would qualify the agreement as a derivative. The Company
identified certain put features embedded in the convertible note agreement that potentially could result in a net cash settlement
in the event of a fundamental transaction, requiring the Company to classify the conversion feature as a derivative liability.
The
Company determined that it is not practical to estimate the fair value of the convertible promissory note payable because of its
unique nature and the costs that would be incurred to obtain an independent valuation. The Company does not have comparable outstanding
debt on which to base an estimated current borrowing rate or other discount rate for purposes of estimating the fair value of
the convertible note payable and the Company has not been able to develop a valuation model that can be applied consistently in
a cost-efficient manner. These factors all contribute to the impracticability of estimating the fair value of the notes payable.
At March 31, 2017 and December 31, 2016, the carrying value of the convertible promissory note payable net of debt discount was
$9,027 and $1,456. At March 31, 2017 and December 31, 2016, the Company recorded accrued interest of $100,000 and $25,000, which
is included on the Condensed Consolidated Balance Sheets in the accounts payable and accrued expenses line item.
Transactions
involving related parties typically cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions
of competitive, free-market dealings may not exist. However, in the case of the convertible promissory note discussed in Note
6, the Company obtained a fairness opinion from an independent third party which supports that the transaction was carried out
at an arm’s length basis.
The
Company’s Level 3 financial liabilities consist of the derivative conversion features issued in 2016. The Company valued
the conversion features using a Monte Carlo model. These models incorporate transaction details such as the Company’s stock
price, contractual terms, maturity, risk free rates, and volatility as of the date of issuance and each balance sheet date.
The
Company utilized the following range of management assumptions in valuing the derivative conversion features during the
three months ended March 31, 2017:
Exercise
price
|
|
$
|
0.11 -
0.12
|
|
Risk free interest
rate
|
|
|
1.27%
- 1.90
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
114.25
|
%
|
Remaining term
|
|
|
1.75
-
4.67 years
|
|
Fair
Value of Financial Assets and Liabilities Measured on a Recurring Basis
The
Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative
liability at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the
change in the fair value of the derivative liability.
Financial
assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as
follows:
|
|
|
|
|
Fair
Value Measurement Using
|
|
|
|
Carrying
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded
conversion feature
|
|
$
|
2,243,354
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,243,354
|
|
|
$
|
2,243,354
|
|
Warrant
liability
|
|
|
2,371,942
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,371,942
|
|
|
|
2,371,942
|
|
March
31, 2017
|
|
$
|
4,615,296
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,615,296
|
|
|
$
|
4,615,296
|
|
The
unobservable level 3 inputs used by the Company was the expected volatility assumption used in the Monte Carlo pricing model.
Expected volatility is based on the historical stock price of the Company’s common stock.
The
following table provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets
measured at fair value on a recurring basis using significant unobservable inputs during the three months ended March 31, 2017.
|
|
Warrants
|
|
|
Convertible
Note
|
|
|
Total
|
|
Balance
– December 31, 2016
|
|
$
|
3,200,137
|
|
|
$
|
3,298,600
|
|
|
$
|
6,498,737
|
|
Change
in fair value of derivative liability
|
|
|
(828,195
|
)
|
|
|
(1,055,246
|
)
|
|
|
(1,833,441
|
)
|
Balance
– March 31, 2017
|
|
$
|
2,371,942
|
|
|
$
|
2,243,354
|
|
|
$
|
4,615,296
|
|
Changes
in the unobservable input values could potentially cause material changes in the fair value of the Company’s Level 3 financial
instruments. The significant unobservable inputs used in the fair value measurements is the expected volatility assumption. A
significant increase (decrease) in the expected volatility assumption could potentially result in a higher (lower) fair value
measurement.
Derivative
Instruments
The
Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of
those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-15. The result of this accounting
treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability.
In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations
as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at
the conversion date and then that fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.
Revenue
Recognition and Cost of Revenues
The
Company follows Paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company will
recognize revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned
when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped
or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is
reasonably assured.
Convention
revenue is generally earned upon completion of the convention. Unearned convention revenue is deposits received for conventions
that have not yet taken place, which are fully or partially refundable depending upon the terms and conditions of the agreements.
Unearned
ConBox revenue is non-refundable up-front payments for products. These payments are initially deferred and subsequently recognized
over the subscription period, typically three months, and upon shipment of the product.
The
Company recognizes cost of revenues in the period in which the revenues was earned. In the event the Company incurs cost of revenues
for conventions that are yet to occur, the Company records such amounts as prepaid expenses and such prepaid expenses are expensed
during the period the convention takes place.
Shipping
and Handling Costs
The
Company accounts for shipping and handling fees in accordance with paragraph 605-45-45-19 of the FASB Accounting Standards Codification.
While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of
revenue as incurred.
Shipping
and handling costs were $16,825 and $130,960 for the three months ended March 31, 2017 and 2016, respectively.
Equity–based
compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “
Compensation
– Stock Compensation
”. Under fair value recognition provisions, the Company recognizes equity–based compensation
net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite
service period of the award.
Restricted
stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally
vest over the requisite service periods, typically over a four-year period (vesting on a straight–line basis). The fair
value of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The
fair value of option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s
Common stock over the expected option life and other appropriate factors. The expected option term is computed using the “simplified”
method as permitted under the provisions of ASC 718-10-S99. The Company uses the simplified method to calculate expected term
of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term. Risk–free interest rates are calculated based on continuously compounded risk–free
rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends
on the Common stock of the Company and does not intend to pay dividends on the Common stock in the foreseeable future. The expected
forfeiture rate is estimated based on historical experience.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different assumptions, the equity–based compensation could be materially
different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only
for those shares expected to vest. If the actual forfeiture rate is materially different from the Company’s estimate, the
equity–based compensation could be significantly different from what the Company has recorded in the current period.
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 505-40, “
Equity
Based Payments to Non–Employees
”. The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments
is re-measured each reporting period over the requisite service period.
Earnings
per Share
Earnings
per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term
is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB Accounting Standards
Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available
to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the
period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred
stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned)
from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation
of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect
the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options
or warrants.
The
following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss)
attributable to common stockholders per common share.
|
|
For
the Three Months Ended
|
|
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net
income/(loss) attributable to common stockholders
|
|
$
|
517,173
|
|
|
$
|
(16,080
|
)
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
Convertible note
- Interest expense and debt discount (net)
|
|
|
(2,415,973
|
)
|
|
|
-
|
|
Net
change in derivative liabilities - warrants and convertible note
|
|
|
4,615,296
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss)
|
|
$
|
2,716,496
|
|
|
$
|
(16,080
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding - basic
|
|
|
68,535,036
|
|
|
|
51,368,386
|
|
Dilutive securities
(a):
|
|
|
|
|
|
|
|
|
Convertible note
|
|
|
1,960,785
|
|
|
|
-
|
|
Options
|
|
|
-
|
|
|
|
-
|
|
Warrants
|
|
|
1,960,785
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
and assumed conversion - diluted
|
|
|
72,456,606
|
|
|
|
51,368,386
|
|
|
|
|
|
|
|
|
|
|
Basic net
income (loss) per common share
|
|
$
|
0.01
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Diluted net
loss per common share
|
|
$
|
0.04
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
(a) - Anti-dilutive
options excluded:
|
|
|
4,687,000
|
|
|
|
9,933,500
|
|
Reclassification
Certain
prior period amounts have been reclassified to conform to current period presentation.
Recently
Issued Accounting Pronouncements
In
July 2015, the FASB issued the ASU No. 2015-11 “
Inventory (Topic 330)
:
Simplifying the Measurement of Inventory”
(“ASU
2015-11”)
.
The amendments in this ASU do not apply to inventory that is measured using last-in, first-out (LIFO)
or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in,
first-out (FIFO) or average cost. An entity should measure inventory within the scope of this ASU at the lower of cost and net
realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable
costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the
retail inventory method. For public business entities, the amendments in this ASU are effective for fiscal years beginning after
December 15, 2016, including interim periods within those fiscal years. During the three months ended March 31, 2017, the Company
adopted the methodologies prescribed by ASU 2015-11 and deemed that the adoption of the ASU did not have a material effect on
its financial position or results of operations.
In
April 2016, the FASB issued ASU No. 2016-09, “
Compensation – Stock Compensation”
(topic 718). The
FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based
payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified,
including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on
the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including
interim periods within those fiscal years. During the three months ended March 31, 2017, the Company adopted the methodologies
prescribed by ASU 2016-09 and deemed that the adoption of the ASU did not have a material effect on its financial position or
results of operations.
In
February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842).”
Under ASU 2016-02, lessees will be required
to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the
right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of
financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting
companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted
using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its consolidated
financial statements and disclosures.
In
April 2016, the FASB issued ASU No. 2016-10, “
Revenue from Contracts with Customers: Identifying Performance Obligations
and Licensing (Topic 606)
”. In March 2016, the FASB issued ASU No. 2016-08, “
Revenue from Contracts with Customers:
Principal versus Agent Considerations (Reporting Revenue Gross verses Net) (Topic 606)
”. These amendments provide additional
clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”.
The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance
obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides
a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual
property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal
versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10
and ASU 2016-08 is to coincide with an entity’s adoption of ASU 2014-09, which the Company intends to adopt for interim
and annual reporting periods beginning after December 15, 2017. The Company is in the process of evaluating the standard and does
not expect the adoption will have a material effect on its consolidated financial statements and disclosures.
In
May 2016, the FASB issued ASU No. 2016-12, “
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients”
, which narrowly amended the revenue recognition guidance regarding collectability, noncash
consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is
currently evaluating the standard and does not expect the adoption will have a material effect on its consolidated financial statements
and disclosures.
In
August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments”
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and
cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning
after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply,
in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently
in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In
October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”,
which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity
transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective
for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the
update is permitted. The Company is currently evaluating the impact of the new standard.
In
November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230)”
, requiring that the statement
of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December
15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which
requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material
effect on the accompanying consolidated financial statements.
Note
4 – Property and Equipment
Property
and equipment stated at cost, less accumulated depreciation and amortization, consisted of the following:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Computer
Equipment
|
|
$
|
62,451
|
|
|
$
|
33,858
|
|
Equipment
|
|
|
426,053
|
|
|
|
390,656
|
|
Furniture
and Fixtures
|
|
|
59,372
|
|
|
|
45,198
|
|
Leasehold
Improvements
|
|
|
22,495
|
|
|
|
22,495
|
|
|
|
|
570,371
|
|
|
|
492,207
|
|
Less:
Accumulated depreciation
|
|
|
(319,054
|
)
|
|
|
(276,259
|
)
|
|
|
$
|
251,317
|
|
|
$
|
215,948
|
|
Depreciation
expense was $43,459 and $37,052 for the three months ended March 31, 2017 and 2016, respectively.
Note
5 – Investment in CONtv Joint Venture
On
August 27, 2014, the Company entered into a joint venture and executed an Operating Agreement with Cinedigm, ROAR (a related party
co-founded by one of the Company’s directors) and Bristol Capital (a related party founded by the Company’s Chairman
of the Board). The Company owned a 47.50% interest in the newly formed entity, CONtv. The Company was accounting for the interest
in the joint venture utilizing the equity method of accounting.
On
November 16, 2015, the Company entered that certain A&R Operating Agreement by and among, the Company, Cinedigm, ROAR and
Bristol Capital, pursuant to which the Company’s interest in CONtv was reduced to a non-dilutable 10% membership interest.
Pursuant to the A&R Operating Agreement, the Company is only obligated to fund on-going costs in the amount of $25,000 in
cash on an on-going monthly basis for a period of 12 months following the effective date.
For
the three months ended March 31, 2017 and 2016, the Company recognized $0 and $75,000 in losses from this venture, respectively.
As
of March 31, 2017 and December 31, 2016, the investment in CONtv was $0.
As
of March 31, 2017 and December 31, 2016, the Company has a balance due to CONtv of $224,241.
Note
6 – Related Party Transactions
Wiz
Wizard
On
December 29, 2014, the Company and a member of the Board formed Wiz Wizard (d/b/a ConBox) in the State of Delaware. The Company
and the member of the Board each owned 50% of the membership interest and agreed to allocate the profits and losses accordingly
upon repayment of the initial capital contributions on a pro rata basis. On February 4, 2016, the member of the Board assigned
his fifty percent (50%) membership interest to the Company.
Consulting
Agreement
On
December 29, 2016, the Company entered into a Consulting Services Agreement (the “Consulting Agreement”) with Bristol
Capital, LLC, a Delaware limited liability company (“Bristol”) managed by Paul L. Kessler, the Chairman of the Company.
Pursuant to the Consulting Agreement, Mr. Kessler will serve as Executive Chairman of the Company. The initial term of the Agreement
was from December 29, 2016 through March 28, 2017 (the “Initial Term”). The term of the Consulting Agreement
will be automatically extended for additional terms of 90 day periods each (each a “Renewal Term” and together with
the Initial Term, the “Term”), unless either the Company or Bristol gives prior written notice of non-renewal to the
other party no later than thirty (30) days prior to the expiration of the then current Term.
During
the Term, the Company will pay Bristol a monthly fee (the “Monthly Fee”) of Eighteen Thousand Seven Hundred Fifty
and No/100 Dollars ($18,750).
In
addition, the Company will grant to Bristol options to purchase up to an aggregate of 600,000 shares of the Company’s common
stock.
During
the three months ended March 31, 2017, the Company incurred total expenses of $56,250 for services provided by Bristol. At March
31, 2017, the Company accrued $131,250 of monthly fees due to Bristol.
Operating
Sublease
On
June 16, 2016, the Company entered into a Standard Multi-Tenant Sublease (“Sublease”) with Bristol Capital Advisors,
LLC (“Bristol Capital Advisors”), an entity controlled by the Company’s Chairman of the Board. The term of the
Sublease is for 5 years and 3 months beginning on July 1, 2016 with monthly payments of $8,118. Upon execution of the Sublease,
the Company paid a security deposit of $9,137 and $199,238 for prepaid rent of which $150,530 remains at March 31, 2017. During
the three months ended March 31, 2017, the Company incurred total rent expense of $24,354 under the Sublease. See Note 7 for future
minimum rent payments due.
Outsourced
Marketing
During
the three months ended March 31, 2017, the Company utilized outsourced marketing support from a company affiliated with ROAR,
which is partially owned by a member of the Board. The Company had expenses of $3,000 and $0 during the three months ended March
31, 2017 and 2016. As of March 31, 2017 and December 31, 2016, the outstanding liability due to ROAR was $3,000 and $0,
respectively.
Securities
Purchase Agreement
Effective
December 1, 2016, the Company entered into the Purchase Agreement with Bristol Investment Fund, Ltd. (the “
Purchaser
”),
an entity controlled by the Chairman of the Company’s Board of Directors, pursuant to which the Company sold to the Purchaser,
for a cash purchase price of $2,500,000, securities comprising: (i) the Debenture, (ii) Series A Warrants, and (iii) Series B
Warrants. Pursuant to the Purchase Agreement, the Company paid $25,000 to the Purchaser and issue to the Purchaser 500,000 shares
of Common Stock with a grant date fair value of $85,000 to cover the Purchaser’s legal fees. The Company recorded as a debt
discount of $110,000 related to the cash paid and shares issued to Purchaser for legal fees.
The
Debenture with an initial principal balance of $2,500,000, due December 30, 2018 (the “Maturity Date”), will accrue
interest on the aggregate unconverted and then outstanding principal amount of the Debenture at the rate of 12% per annum. Interest
is payable quarterly on (i) January 1, April 1, July 1 and October 1, beginning on January 1, 2017, (ii) on each date the Purchaser
converts, in whole or in part, the Debenture into Common Stock (as to that principal amount then being converted), and (iii) on
the day that is 20 days following the Company’s notice to redeem some or all of the of the outstanding principal of the
Debenture (only as to that principal amount then being redeemed) and on the Maturity Date. The Debenture is convertible into shares
of the Company’s Common Stock at any time at the option of the holder, at an initial conversion price of $0.15 per share,
subject to adjustment. In the event of default occurs, the conversion price shall be the lesser of (i) the initial conversion
price of $0.15 and (ii) 50% of the average of the 3 lowest trading prices during the 20 trading days immediately prior to the
applicable conversion date.
The
Series A Warrants to acquire up to 16,666,667 shares of Common Stock at the Series A Initial Exercise Price of $0.15 and expiring
on December 1, 2021. The Warrants may be exercised immediately upon the issuance date, upon the option of the holder.
The
Series B Warrants to acquire up to 16,666,650 shares of Common Stock at the Series B Initial Exercise Price of $0.0001
and expiring on December 1, 2021. The Series B Warrants were exercised immediately upon the issuance date. The Company received
gross proceeds of $1,667 upon exercise of the warrants.
Derivative
Analysis
Because
the conversion feature included in the convertible note payable and warrants have full reset adjustments tied to future issuances
of equity securities by the Company, they are subject to derivative liability treatment under Section 815-40-15 of the FASB Accounting
Standard Codification (“Section 815-40-15”).
Generally
accepted accounting principles require that:
a.
|
Derivative
financial instruments be recorded at their fair value on the date of issuance and then adjusted to fair value at each subsequent
balance sheet date with any change in fair value reported in the statement of operations; and
|
|
|
b.
|
The
classification of derivative financial instruments be reassessed as of each balance sheet date and, if appropriate, be reclassified
as a result of events during the reporting period then ended.
|
Upon
issuance of the note, a debt discount was recorded and any difference in comparison to the face value of the note, representing
the fair value of the conversion feature and the warrants in excess of the debt discount, was immediately charged to derivative
expense. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the
effective interest method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated
statements of operations. There was unamortized debt discount of $2,490,973 as of March 31, 2017.
The
fair value of the embedded conversion feature was estimated using a Monte Carlo pricing model. See Note 3 for the estimates and
assumptions used.
Note
7 – Commitments and Contingencies
Operating
Lease
Effective
July 17, 2014, the Company entered into a sublease, as lessee, with Ironclad Performance Wear Corporation, as lessor, for new
space located in El Segundo, California (the “Ironclad Sublease”). The term of the Ironclad Sublease was for one year
and ten (10) months commencing on September 1, 2014. Pursuant to the Ironclad Sublease, the Company paid base rent of $11,132
per month and an initial security deposit of $11,466 was required.
The
lease matured during the three months ended March 31, 2016.
Operating
Sublease
On
June 16, 2016, the Company entered into a Standard Multi-Tenant Sublease (“Sublease”) with Bristol Capital Advisors,
an entity controlled by the Company’s Chairman of the Board, which leases the premises from a third-party and passes
actual and direct cost of the Company’s occupancy through to the Company without any fee, profit or markup. The term
of the Sublease is for 5 years and 3 months beginning on July 1, 2016 with monthly payments of $8,118. Upon execution of the Sublease,
the Company paid a security deposit of $9,137 and $199,238 for prepaid rent of which $150,530 remains at March 31, 2017. During
the three months ended March 31, 2017, the Company incurred total rent expense of $24,354 under the Sublease. See below for future
minimum rent payments due.
Future
minimum lease payments inclusive of related tax required under the non-cancelable operating lease and sublease are as follows:
Fiscal
year ending December 31:
|
|
|
|
|
|
2017
(remainder of year)
|
|
|
$
|
100,710
|
|
2018
|
|
|
|
97,416
|
|
2019
|
|
|
|
97,416
|
|
2020
|
|
|
|
97,416
|
|
Thereafter
|
|
|
|
73,062
|
|
|
|
|
$
|
466,020
|
|
Obligation
to Fund CONtv
On
November 16, 2015, pursuant to that certain A&R Operating
Agreement for CONtv, the Company’s ownership interest in CONtv was reduced to 10%. In addition, the Company is only obligated
to fund on-going costs in the amount of $25,000 in cash on an on-going monthly basis for a period of 12 months following the effective
date.
For
the three months ended March 31, 2017 and 2016, the Company recognized $0 and $75,000 in losses from this venture, respectively.
As
of March 31, 2017 and December 31, 2016, the Company has a balance due to CONtv of $0 and $224,241, respectively.
SDNY Lawsuit
On October 28,
2016, the Company filed a Complaint (the “SDNY Complaint”) and commenced a lawsuit in the United States
District Court, Southern District of New York, against Stephen Shamus, the former Chief Marketing Officer of the Company
whose employment was terminated on October 27, 2016 (the “SDNY Lawsuit”). In the SDNY Lawsuit, the
Company alleges, among other things, breach of fiduciary duty, misappropriation of corporation assets, breach of contract,
and conversion, against Mr. Shamus relating to the Company’s assertion that he used his position with the Company to
improperly obtain memorabilia at the Company’s comic conventions which he would then sell and retain the profits from
for his own benefit. On November 16, 2016, Mr. Shamus filed an Answer to the Complaint with counterclaims to the Complaint
(the “Counterclaim”). The Counterclaim alleges breach of contract and unjust enrichment against the Company and
seeks compensatory damages in the form of cash. The lawsuit was concluded on February 15, 2017 with no financial impact on
the Company’s financial statements.
DNJ Lawsuit
On December 16, 2016, the Company filed a Complaint
(the “DNJ Complaint”) and commenced a lawsuit in the United States District Court, District of New Jersey (the “DNJ
Lawsuit”), against Gareb Shamus, the founder and former Chief Executive Officer of the Company; Pivot Media LLC and 4 Brothers
LLC, entities owned and operated by Gareb Shamus; Stephen Shamus, the former Chief Marketing Officer of the Company whose employment
was terminated on October 27, 2016; Kenneth Shamus, a former director of the Company; Eric Weisblum; GEM Funding LLC; It’s
All Normal LLC; and various other defendants (collectively, the “DNJ Defendants”). In the DNJ Complaint, the Company
alleged that the DNJ Defendants violated Section 13(d) of the Exchange Act and SEC Rules 13d-1 and 13d-5. The Company sought an
injunction to compel the DNJ Defendants to make complete disclosure under Section 13(d) of the Exchange Act and to cure their past
violations. The DNJ Lawsuit was concluded on February 15, 2017 with no financial impact on the Company’s financial statements.
Silverman
Lawsuit
On
January 11, 2017, Arden B. Silverman (“Silverman”), d/b/a Capital Asset Protection, filed a complaint (the “Silverman
Complaint”) and commenced a lawsuit against the Company in the Superior Court of California, County of Los Angeles –
Central District (the “Silverman Lawsuit”). Silverman brought the claim after being assigned the right title and interest
in a claim against the Company by Rogers & Cowan, Inc., a California corporation (Rogers & Cowan). The Silverman Complaint
alleges the Company owes $42,600 plus attorney’s fees to Silverman for services provided by Rogers & Cowan to the Company.
On April 10, 2017, the Company filed a cross Cross-Complaint in the Silverman Lawsuit against Roger and Cowan, among others (the
“Cross-Complaint”). The Cross-Complaint seeks in excess of $90,000 from Rogers & Cowan, among others, and alleges,
fraud, negligent misrepresentation, breach of written agreement; breach of covenant of good faith and fair dealings, and violations
of Cal. Bus. & Prof. Code §§17200 et seq.
With
the exception of the foregoing disputes, the Company is not involved in any disputes and does not have any litigation matters
pending which the Company believes could have a materially adverse effect on the Company’s financial condition or results
of operations.
Stock
Options
The
following is a summary of the Company’s option activity:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding
– December 31, 2016
|
|
|
5,319,000
|
|
|
$
|
0.57
|
|
Granted
|
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
Forfeited/Cancelled
|
|
|
(632,000
|
)
|
|
$
|
0.57
|
|
Outstanding
– March 31, 2017
|
|
|
4,687,000
|
|
|
$
|
0.57
|
|
Exercisable
– March 31, 2017
|
|
|
1,640,500
|
|
|
$
|
0.50
|
|
Options
Outstanding
|
|
Options
Exercisable
|
Exercise
Price
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining Contractual Life
(in years)
|
|
Weighted
Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.40
-0.94
|
|
|
4,687,000
|
|
|
3.08
years
|
|
$
|
0.57
|
|
|
1,640,500
|
|
$
|
0.50
|
|
At
March 31, 2017, the total intrinsic value of options outstanding and exercisable was $0 and $0, respectively.
The
Company recognized an aggregate of $137,975 and $316,722 in compensation expense during the three months ended March 31,
2017 and 2016, respectively, related to option awards. At March 31, 2017, unrecognized stock based compensation was $396,530.
Stock
Warrants
The
following is a summary of the Company’s warrant activity:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding
– December 31, 2016
|
|
|
16,666,667
|
|
|
$
|
0.15
|
|
Exercisable
– December 31, 2016
|
|
|
16,666,667
|
|
|
$
|
0.15
|
|
Granted
|
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
Forfeited/Cancelled
|
|
|
|
|
|
$
|
|
|
Outstanding
– March 31, 2017
|
|
|
16,666,667
|
|
|
$
|
0.15
|
|
Exercisable
– March 31, 2017
|
|
|
16,666,667
|
|
|
$
|
0.15
|
|
Warrants
Outstanding
|
|
Warrants
Exercisable
|
Exercise
Price
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Contractual Life
(in years)
|
|
Weighted
Average
Exercise Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.15
|
|
|
|
16,666,667
|
|
|
4.67
years
|
|
$
|
0.15
|
|
|
16,666,667
|
|
$
|
0.15
|
|
At
March 31, 2017, the total intrinsic value of warrants outstanding and exercisable was $333,333 and $0, respectively.
The
expected warrant term is based on the contractual term. The expected option term is computed using the “simplified”
method as permitted under the provisions of ASC 718-10-S99. The Company uses the simplified method to calculate expected term
of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate expected term. The expected volatility is based on historical-volatility of the Company when stock
prices were publicly available. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the
expected term of the related option at the valuation date. Dividend yield is based on historical trends.
Note
8 – Segment Information
The
Company evaluates performance of its operating segments based on revenue and operating profit (loss). Segment information for
the three months ended March 31, 2017 and 2016 and as of March 31, 2017 and December 31, 2016, are as follows:
|
|
Conventions
|
|
|
ConBox
|
|
|
Total
|
|
Three
Months ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,447,957
|
|
|
$
|
74,119
|
|
|
$
|
3,522,076
|
|
Cost
of revenue
|
|
|
(3,084,502
|
)
|
|
|
(55,828
|
)
|
|
|
(3,140,330
|
)
|
Gross
margin
|
|
|
363,455
|
|
|
|
18,291
|
|
|
|
381,746
|
|
Operating
expenses
|
|
|
(1,580,173
|
)
|
|
|
(83,651
|
)
|
|
|
(1,663,824
|
)
|
Operating
loss
|
|
|
(1,272,546
|
)
|
|
|
(9,532
|
)
|
|
|
(1,282,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
4,993,659
|
|
|
$
|
348,182
|
|
|
$
|
5,341,841
|
|
Cost
of revenue
|
|
|
(2,912,413
|
)
|
|
|
(224,004
|
)
|
|
|
(3,136,417
|
)
|
Gross
margin
|
|
|
2,081,246
|
|
|
|
124,178
|
|
|
|
2,205,424
|
|
Operating
expenses
|
|
|
(2,063,265
|
)
|
|
|
(13,071
|
)
|
|
|
(2,076,336
|
)
|
Operating
profit
|
|
|
17,981
|
|
|
|
111,107
|
|
|
|
129,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
135,783
|
|
|
$
|
28,543
|
|
|
$
|
164,326
|
|
Total
assets
|
|
|
4,900,780
|
|
|
|
273,086
|
|
|
|
5,173,866
|
|
Unearned
revenue
|
|
|
1,294,170
|
|
|
|
95,546
|
|
|
|
1,389,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
$
|
128,561
|
|
|
$
|
298,347
|
|
|
$
|
407,142
|
|
Total
assets
|
|
|
6,106,772
|
|
|
|
664,722
|
|
|
|
6,771,494
|
|
Unearned
revenue
|
|
|
3,340,837
|
|
|
|
390,661
|
|
|
|
3,731,498
|
|
THE
FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS
AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS
THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT
FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS.
THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK
FACTORS” AND THOSE INCLUDED ELSEWHERE IN THIS REPORT.
Overview
We
intend for this discussion to provide information that will assist in understanding our financial statements, the changes in certain
key items in those financial statements, and the primary factors that accounted for those changes, as well as how certain accounting
principles affect our financial statements. This discussion should be read in conjunction with our financial statements and accompanying
notes for the quarters ended March 31, 2017 and 2016, included elsewhere in this report.
We
are currently a producer of Comic Conventions across the United States that celebrate movies, television shows, video games, technology,
toys, social networking/gaming platforms, comic books and graphic novels. Our Comic Conventions provide entertainment for fans
of the pop culture genre, as well as sales, marketing, promotions, public relations, advertising and sponsorship opportunities
for entertainment companies, toy companies, gaming companies, publishing companies, marketers, corporate sponsors, and retailers
which wish to reach our audience.
During
the three months ended March 31, 2017, the Company was able to utilize the internal controls and operating procedures employed
by the Company’s new management during 2016 in order to grow the business. With the recently reformed internal controls
in place, management continued to carefully analyze new markets for the Company’s Comic Conventions. The Company’s
new internal accounting team and new sales team have continued to implement the policies put in place by management throughout
2016.
Plan
of Operation
At
present, the Company is engaged primarily in the live event business and derives income mainly from: (i) the production of Comic
Conventions, which involves the sales of admissions and exhibitor booth space, and (ii) sale of sponsorships and advertising.
We
plan on continuing to enhance our Comic Conventions by featuring new and exciting exhibitors and high-profile celebrities. Further,
we are carefully researching and identifying new geographic markets for our Comic Convention.
Concurrently
with the Company’s efforts in the Comic Convention business, the Company is entering the digital media space. The Company
is producing and branding compelling content and reaching consumers via social media outlets such as Facebook, Twitter, YouTube,
Flickr, and Tumblr, as well as the Company’s website, www.wizardworld.com. The Company hopes to utilize its digital offerings
to bolster its Comic Convention business.
We
currently expect to produce 16 live events during 2017, although that number of conventions may change as we evaluate locations
and venues.
Results
of Operations
Summary
of Statements of Operations for the Three Months Ended March 31, 2017 and 2016:
|
|
Three
Months Ended
|
|
|
|
March
31, 2017
|
|
|
March
31, 2016
|
|
Convention
revenue
|
|
$
|
3,447,957
|
|
|
$
|
4,993,659
|
|
ConBox
revenue
|
|
$
|
74,119
|
|
|
|
348,182
|
|
Gross
profit
|
|
$
|
381,746
|
|
|
$
|
2,205,424
|
|
Operating
expenses
|
|
$
|
(1,663,824
|
)
|
|
$
|
(2,076,336
|
)
|
Income
(loss) from operations
|
|
$
|
(1,282,078
|
)
|
|
$
|
129,088
|
|
Other
income (expenses)
|
|
$
|
1,798,758
|
|
|
$
|
(75,806
|
)
|
Net
income (loss) attributable to common shareholder
|
|
$
|
517,173
|
|
|
$
|
(16,080
|
)
|
Income
(loss) per common share – basic
|
|
$
|
0.01
|
|
|
$
|
(0.00
|
)
|
Income
(loss) per common share – diluted
|
|
$
|
0.04
|
|
|
$
|
(0.00
|
)
|
Convention
Revenue
Convention
revenue was $3,447,957 for the three months ended March 31, 2017, as compared to $4,993,659 for the comparable period ended March
31, 2016, a decrease of $1,545,702. The decrease in convention revenue is primarily attributable to running fewer shows than the
prior three months. In addition, the Company increased admission prices, the overall size and scope of each event and invested
in photographic and AV equipment. The Company ran three events during the three months ended March 31, 2017, as compared to
four events during the comparable three months ended March 31, 2016. Average revenue generated per event in 2017 was $1,149,319
as compared to $1,248,415 during 2016.
ConBox
Revenue
ConBox
revenue was $74,119 for the three months ended March 31, 2017, as compared to $348,182 for the comparable three months ended March
31, 2016, a decrease of $274,063. The decrease in ConBox revenue is attributable to the new management team’s decision to
primarily focus on driving the convention business forward.
Gross
Profit
Gross
profit percentage for the convention segment decreased from a gross profit of 41% during the three months ended March 31, 2016,
to a gross profit of 9% during the three months ended March 31, 2017. The Company produced three events during the three months
ended March 31, 2017, as compared to four events during the comparable three months ended March 31, 2016. The gross profit percentage
decrease was attributable to increased investment in the programing and convention center build out, resulting in an improved
fan experience.
Gross
profit percentage for the ConBox segment decreased from a gross profit of 36% during the three months ended March 31, 2016,
to a gross profit of 25% during the three months ended March 31, 2017. The gross profit percentage decrease was
attributable to a decrease in revenue.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2017, was $1,663,824, as compared to $2,076,336 for the three months ended March
31, 2016. The change is attributable to a decrease in employee compensation and general and administrative expenses offset by
a slight increase in consulting expenses. The $314,632 decrease in compensation is primarily attributable to a decline in both
headcount and officer compensation. General and administrative expenses decreased by $109,115 since the prior three months’
comparative period due to a decrease in service fees, travel and web development.
(Loss)
Income from Operations
Loss
from operations for the three months ended March 31, 2017, was $1,282,078 as compared to income from operations of $129,088 for
the three months ended March 31, 2016. The decrease is primarily attributable to producing one fewer events, combined with increased
costs in the area of event production.
Other
Income (Expense)
Other
income (expenses) for the three months ended March 31, 2017, was income of $1,798,758, as compared to expense of $75,806
for the three months ended March 31, 2016. The change is primarily attributable to the change in fair value of derivative liabilities
giving rise to income of $1,883,441 during the current quarter, in relation to the derivative liability of the convertible note
and related warrants. The Company did not sustain a loss during the three months ended March 31, 2017 on the CONtv joint venture
with Cinedigm but recorded a loss of $75,000 during the three months ended March 31, 2016.
Net
Income (Loss) Attributable to Common Stockholder
Net
income (loss) attributable to common stockholder for the three months ended March 31, 2017, was net income of $517,173 or income
per basic share of $0.01, compared to a net loss of $16,080 or loss per basic share of $0.00, for the three months ended March
31, 2016.
Inflation
did not have a material impact on the Company’s operations for the applicable period. Other than the foregoing, management
knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company’s results
of operations.
Liquidity
and Capital Resources
The
following table summarizes total current assets, liabilities and working capital deficit at March 31, 2017 compared to December
31, 2016:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
|
Increase/(Decrease)
|
|
Current Assets
|
|
$
|
4,899,637
|
|
|
$
|
5,599,269
|
|
|
$
|
(699,632
|
)
|
Current Liabilities
|
|
$
|
7,912,200
|
|
|
$
|
9,235,689
|
|
|
$
|
(1,323,489
|
)
|
Working Capital Deficit
|
|
$
|
(3,012,563
|
)
|
|
$
|
(3,636,420
|
)
|
|
$
|
623,857
|
|
At
March 31, 2017, we had working capital deficit of $3,012,563, as compared to working capital deficit of $3,636,420, at December
31, 2016, a decrease of $623,857. The decrease is primarily attributable to a decrease in cash and cash equivalents and an increase
in accounts payable and accrued expenses. These were offset by decreases in accounts receivable and unearned revenue with an increase
to prepaid expenses.
Net
Cash
Net
cash (used in) provided by operating activities for the three months ended March 31, 2017 and 2016, was $(798,947) and $1,412,705,
respectively. The net income for the three months ended March 31, 2017 and 2016 was $516,680 and $53,282, respectively.
Going
Concern Analysis
The
Company had a net loss from operations of $1,282,078 and $1,182,246 for the three months ended March 31, 2017 and the year ended
December 31, 2016, respectively. As a result, prior to the Bristol financing, these conditions had raised substantial doubt regarding
our ability to continue as a going concern beyond May 2018. As of March 31, 2017, we had cash and working capital (excluding the
derivative liability) of $3,522,657 and $1,602,753, respectively.
Effective
December 1, 2016, upon the Board of Directors of the Company receiving an independent third party fairness opinion, the Company
entered into the Purchase Agreement with Bristol Investment Fund, Ltd., an entity controlled by the Chairman of the Company’s
Board of Directors, pursuant to which the Company sold to the Purchaser, for a cash purchase price of $2,500,000, securities comprising:
(i) the Debenture, (ii) Series A Warrants, and (iii) Series B Warrants. Pursuant to the Purchase Agreement, the Company paid $25,000
to the Purchaser and issue to the Purchaser 500,000 shares of Common Stock with a grant date fair value of $85,000 to cover the
Purchaser’s legal fees.
If
necessary, management also believes that it is probable that external sources of debt and/or equity financing could be obtained
based on management’s history of being able to raise capital coupled with current favorable market conditions. As a result
of management’s plans, the Company believes the initial conditions which raised substantial doubt regarding the ability
to continue as a going concern have been alleviated. Therefore, the accompanying condensed consolidated financial statements have
been prepared assuming that the Company will continue as a going concern.
The
condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein.
While the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the
ability to raise additional funds if necessary, there can be no assurances to that effect. The Company’s ability to continue
as a going concern is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control
operating expenses.
The
consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability
and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein.
While we believe in the viability of management’s strategy to generate sufficient revenue, control costs and the ability
to raise additional funds if necessary, there can be no assurances to that effect. The Company’s ability to continue as
a going concern is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control
operating expenses.
Off-Balance
Sheet Arrangements
As
of March 31, 2017, the Company had no off-balance sheet arrangements.
Critical
Accounting Policies
We
believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s
Discussion and Analysis of Financial Condition and Results of Operation.”
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial
statements and the reported amounts of revenues and expenses during the reporting period(s). Actual results could differ from
those estimates.
Property
and Equipment
Property
and equipment is stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization is computed
on a straight-line basis over the estimated useful lives of the assets, varying from 3 to 5 years or, when applicable, the life
of the lease, whichever is shorter.
Derivative
Liability
The
Company evaluates its debt and equity issuances to determine if those contracts or embedded components of those contracts qualify
as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB ASC.
The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet
date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in
fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation
of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then
the related fair value is reclassified to equity.
In
circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also
other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative
instruments are accounted for as a single, compound derivative instrument.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject
to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative
instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement
of the derivative instrument is expected within 12 months of the balance sheet date.
The
Company adopted Section 815-40-15 of the FASB ASC (“Section 815-40-15”) to determine whether an instrument (or an
embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step
approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including
evaluating the instrument’s contingent exercise and settlement provisions.
The
Company utilizes the Monte Carlo pricing model to compute the fair value of the derivative and to mark to market the fair value
of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income
or expense in the consolidated statements of operations.
Income
Taxes
The
Company accounts for income taxes under Section 740-10-30 of the FASB ASC. Deferred income tax assets and liabilities are determined
based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted
tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation
allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in the statements of operations in the period that includes the enactment date.
The
Company adopted section 740-10-25 of the FASB ASC (“Section 740-10-25”). Section 740-10-25 addresses the determination
of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under
Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not
that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that
has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides
guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires
increased disclosures.
The
estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying
consolidated balance sheets, as well as tax credit carry-backs and carryforwards. The Company periodically reviews the recoverability
of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.
Management
makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous
estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in
these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual
taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.
Revenue
Recognition
The
Company follows Paragraph 605-10-S99-1 of the FASB ASC for revenue recognition. The Company will recognize revenue when it is
realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria
are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered
to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.
Unearned
convention revenue is deposits received for conventions that have not yet taken place, which are fully or partially refundable
depending upon the terms and conditions of the agreements.
Unearned
ConBox revenue is non-refundable up-front payments for products. These payments are initially deferred and subsequently recognized
over the subscription period, typically three months, and upon shipment of the product.
The
Company recognizes cost of revenues in the period in which the revenues was earned. In the event the Company incurs cost of revenues
for conventions that are yet to occur, the Company records such amounts as prepaid expenses and such prepaid expenses are expensed
during the period the convention takes place.
Equity–based
compensation
The
Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “
Compensation
– Stock Compensation
”. Under fair value recognition provisions, the Company recognizes equity–based compensation
net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite
service period of the award.
Restricted
stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally
vest over the requisite service periods, typically over a four year period (vesting on a straight–line basis). The fair
value of a stock award is equal to the fair market value of a share of Company stock on the grant date.
The
fair value of option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes
option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected
stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock
and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s
Common stock over the expected option life and other appropriate factors. Risk–free interest rates are calculated based
on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company
has never paid or declared any cash dividends on our Common stock and does not intend to pay dividends on our Common stock in
the foreseeable future. The expected forfeiture rate is estimated based on historical experience.
Determining
the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the
subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially
different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only
for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the equity–based
compensation could be significantly different from what the Company has recorded in the current period.
The
Company accounts for share–based payments granted to non–employees in accordance with ASC 505-40, “
Equity
Based Payments to Non–Employees
”. The Company determines the fair value of the stock–based payment as either
the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions
as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments
is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments
is re-measured each reporting period over the requisite service period.
Fair
Value of Financial Instruments
We
follow Paragraph 825-10-50-10 of the FASB ASC for disclosures about fair value of our financial instruments and paragraph 820-10-35-37
of the FASB ASC (“Paragraph 820-10-35-37”) to measure the fair value of our financial instruments. Paragraph 820-10-35-37
establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. To increase consistency
and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy
which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy
gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest
priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described
below:
|
●
|
Level
1 – Quoted market prices available in active markets for identical assets or liabilities as of the reporting date;
|
|
|
|
|
●
|
Level
2 – Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly
observable as of the reporting date; and
|
|
|
|
|
●
|
Level
3 – Pricing inputs that are generally observable inputs and not corroborated by market data.
|
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amount of the Company’s assets and liabilities, such as cash, accounts receivable, inventory, prepaid expenses,
accounts payable and accrued liabilities, and unearned revenue approximate their fair value because of the short maturity of those
instruments.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU 2016-02,
“Leases (Topic 842).”
Under ASU 2016-02, lessees will be required
to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the
right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of
financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting
companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted
using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its consolidated
financial statements and disclosures.
In
April 2016, the FASB issued ASU No. 2016-10, “
Revenue from Contracts with Customers: Identifying Performance Obligations
and Licensing (Topic 606)”
. In March 2016, the FASB issued ASU No. 2016-08, “
Revenue from Contracts with Customers:
Principal versus Agent Considerations (Reporting Revenue Gross verses Net) (Topic 606)”.
These amendments provide additional
clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”.
The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance
obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides
a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual
property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal
versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10
and ASU 2016-08 is to coincide with an entity’s adoption of ASU 2014-09, which the Company intends to adopt for interim
and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the standard and does not
expect the adoption will have a material effect on its consolidated financial statements and disclosures.
In
May 2016, the FASB issued ASU No. 2016-12, “
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements
and Practical Expedients”
, which narrowly amended the revenue recognition guidance regarding collectability, noncash
consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is
currently evaluating the standard and does not expect the adoption will have a material effect on its consolidated financial statements
and disclosures.
In
August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments”
(“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and
cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning
after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply,
in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently
in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.
In
October 2016, the FASB issued ASU 2016-16,
“Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”,
which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity
transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective
for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the
update is permitted. The Company is currently evaluating the impact of the new standard.
In
November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230)”
, requiring that the statement
of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December
15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which
requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard.
Management
does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material
effect on the accompanying condensed consolidated financial statements.