Item
8. Financial Statements.
Our
consolidated financial statements are contained in pages F-1 through F-28 which appear at the end of this Annual Report.
Wizard
World, Inc.
December
31, 2017
Index
to the Consolidated Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and the Board of Directors of Wizard World, Inc.:
Opinion
on the Consolidated Financial Statements
We
have audited the accompanying consolidated balance sheets of Wizard World, Inc. (the “Company”) as of December 31,
2017 and 2016, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each
of the years in the two-year period ended December 31, 2017, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
Change
in Accounting Principle
As
discussed in Note 3 to the financial statements, the Company has changed its method of accounting for Derivatives (Topic 815)
in the fourth quarter of 2017 and the retrospective application resulting in a restatement of the 2016 audited financial statements
due to the early adoption of ASU 2017-11,
“Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception”.
The predecessor auditor reported on the financial statements
on the prior period before restatement. We also audited the adjustments described in Note 3 that were applied to restate the 2016
financial statements. In our opinion, such adjustments are appropriate and have been properly applied.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
MaughanSullivan LLC
We
have served as the Company’s auditor since 2017.
Manchester,
VT
April
2, 2018
To
the Board of Directors and
Stockholders of Wizard World, Inc.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Opinion
on the Consolidated Financial Statements
We
have audited, before the effects of the adjustments to retrospectively apply the change in accounting described in Note 3, the
consolidated balance sheet of Wizard World, Inc. (the Company) as of December 31, 2016, and the related consolidated statements
of operations, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively
referred to as the consolidated financial statements). In our opinion, the 2016 consolidated financial statements, before the
effects of the adjustments to retrospectively apply the change in accounting described in Note 3, present fairly, in all material
respects, the financial position of the Company as of December 31, 2016, and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles generally accepted in the United States of America.
We
were not engaged to audit, review, or apply any procedures to the adjustments to retrospectively apply the change in accounting
described in Note 3 and, accordingly, we do not express an opinion or any other form of assurance about whether such adjustments
are appropriate and have been properly applied. Those adjustments were audited by Maughan Sullivan LLC. (The 2016 consolidated
financial statements before the effects of the adjustments discussed in Note 3 are not presented herein.)
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audit provides a reasonable basis for our opinion.
/s/
Rosenberg Rich Baker Berman, P.A.
|
|
|
We
have served as the Company’s auditor since 2015.
|
|
|
Somerset,
New Jersey
|
|
|
April
17, 2017
|
|
Wizard
World, Inc.
Consolidated
Balance Sheets
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
As Restated (Note 3)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,769,550
|
|
|
$
|
4,401,217
|
|
Accounts receivable, net
|
|
|
336,030
|
|
|
|
187,819
|
|
Inventory
|
|
|
1,204
|
|
|
|
-
|
|
Prepaid convention expenses
|
|
|
461,986
|
|
|
|
704,711
|
|
Prepaid insurance
|
|
|
87,987
|
|
|
|
96,076
|
|
Prepaid rent – related party
|
|
|
76,006
|
|
|
|
181,796
|
|
Prepaid taxes
|
|
|
14,398
|
|
|
|
13,984
|
|
Other prepaid expenses
|
|
|
18,117
|
|
|
|
13,666
|
|
Total Current Assets
|
|
|
2,765,278
|
|
|
|
5,599,279
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
165,403
|
|
|
|
215,948
|
|
|
|
|
|
|
|
|
|
|
Security deposit
|
|
|
9,408
|
|
|
|
19,912
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
2,940,089
|
|
|
$
|
5,835,129
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
2,800,118
|
|
|
$
|
937,774
|
|
Unearned revenue
|
|
|
2,164,972
|
|
|
|
1,574,938
|
|
Convertible promissory note – related party, net
|
|
|
1,116,979
|
|
|
|
-
|
|
Due to CONtv joint venture
|
|
|
224,241
|
|
|
|
224,241
|
|
|
|
|
|
|
|
|
|
|
Total Current Liabilities
|
|
|
6,306,310
|
|
|
|
2,736,953
|
|
|
|
|
|
|
|
|
|
|
Non-current Liabilities:
|
|
|
|
|
|
|
|
|
Convertible promissory note - related party, net
|
|
|
-
|
|
|
|
1,027,176
|
|
|
|
|
|
|
|
|
|
|
Total Non-current Liabilities
|
|
|
-
|
|
|
|
1,027,176
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
6,306,310
|
|
|
|
3,764,129
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity (Deficit)
|
|
|
|
|
|
|
|
|
Preferred stock par value $0.0001: 20,000,000 shares authorized; 50,000 shares designated Series A convertible preferred stock par value $0.0001: 50,000 shares designated; 39,101 shares issued and converted
|
|
|
-
|
|
|
|
-
|
|
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
|
|
|
19,960,893
|
|
|
|
19,664,619
|
|
Accumulated deficit
|
|
|
(23,321,471
|
)
|
|
|
(17,588,657
|
)
|
Non-controlling interest
|
|
|
(12,498
|
)
|
|
|
(11,817
|
)
|
Total Stockholders’ Equity (Deficit)
|
|
|
(3,366,221
|
)
|
|
|
2,071,000
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity (Deficit)
|
|
$
|
2,940,089
|
|
|
$
|
5,835,129
|
|
See
accompanying notes to the consolidated financial statements
Wizard
World, Inc.
Consolidated
Statements of Operations
|
|
For the Years Ended
|
|
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
As Restated (Note 3)
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Convention
|
|
$
|
14,983,033
|
|
|
$
|
21,994,433
|
|
ConBox
|
|
|
84,580
|
|
|
|
707,101
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
15,067,613
|
|
|
|
22,701,534
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
15,058,297
|
|
|
|
16,002,088
|
|
Write-off of obsolete inventory
|
|
|
-
|
|
|
|
164,903
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
15,058,297
|
|
|
|
16,166,991
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
9,316
|
|
|
|
6,534,543
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
3,018,087
|
|
|
|
4,468,149
|
|
Consulting fees
|
|
|
710,634
|
|
|
|
687,054
|
|
General and administrative
|
|
|
1,618,203
|
|
|
|
2,561,586
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,346,924
|
|
|
|
7,716,789
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(5,337,608
|
)
|
|
|
(1,182,246
|
)
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(395,102
|
)
|
|
|
(26,481
|
)
|
Loss on disposal of equipment
|
|
|
(785
|
)
|
|
|
(36,876
|
)
|
Loss on CONtv joint venture
|
|
|
-
|
|
|
|
(262,500
|
)
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
(395,887
|
)
|
|
|
(325,857
|
)
|
|
|
|
|
|
|
|
|
|
Loss before income tax provision
|
|
|
(5,733,495
|
)
|
|
|
(1,508,103
|
)
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(5,733,495
|
)
|
|
|
(1,577,103
|
)
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to non-controlling interests
|
|
|
(681
|
)
|
|
|
67,258
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(5,732,814
|
)
|
|
$
|
(1,575,361
|
)
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding – basic and diluted
|
|
|
68,535,036
|
|
|
|
52,775,488
|
|
See
accompanying notes to the consolidated financial statements
Wizard
World, Inc.
Consolidated
Statements of Stockholders’ Equity (Deficit)
For
the Years Ended December 31, 2017 and 2016
|
|
Preferred Stock Par
|
|
|
Common Stock Par
|
|
|
Additional
|
|
|
|
|
|
Non-
|
|
|
Total
|
|
|
|
Value
$0.0001
|
|
|
Value
$0.0001
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
controlling
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity (Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - January 1, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
|
51,368,386
|
|
|
$
|
5,138
|
|
|
$
|
17,341,268
|
|
|
$
|
(16,013,296
|
)
|
|
$
|
17,706
|
|
|
$
|
1,350,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
777,536
|
|
|
|
-
|
|
|
|
-
|
|
|
|
777,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued as debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
50
|
|
|
|
741
|
|
|
|
-
|
|
|
|
-
|
|
|
|
791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
16,666,650
|
|
|
|
1,667
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued as debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,448,293
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,448,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of controlling interest of ConBox
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
96,781
|
|
|
|
-
|
|
|
|
(96,781
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,575,361
|
)
|
|
|
67,258
|
|
|
|
(1,508,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016 (as Restated Note 3)
|
|
|
-
|
|
|
|
-
|
|
|
|
68,535,036
|
|
|
|
6,855
|
|
|
|
19,664,619
|
|
|
|
(17,588,657
|
)
|
|
|
(11,817
|
)
|
|
|
2,071,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
296,274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
296,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,732,814
|
)
|
|
|
(681
|
)
|
|
|
(5,733,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
68,535,036
|
|
|
$
|
6,855
|
|
|
$
|
19,960,893
|
|
|
$
|
(23,321,471
|
)
|
|
$
|
(12,498
|
)
|
|
$
|
(3,366,221
|
)
|
See
accompanying notes to the consolidated financial statements
Wizard
World, Inc.
Consolidated
Statements of Cash Flows
|
|
For the Years Ended
|
|
|
|
December 31, 2017
|
|
|
December 31,2016
|
|
|
|
|
|
|
As Restated (Note 3)
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,773,495
|
)
|
|
$
|
(1,508,103
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
147,832
|
|
|
|
159,101
|
|
Write-off of obsolete inventory
|
|
|
-
|
|
|
|
164,903
|
|
Loss on disposal of equipment
|
|
|
785
|
|
|
|
36,876
|
|
Accretion of debt discount
|
|
|
89,803
|
|
|
|
1,260
|
|
Loss on CONtv joint venture
|
|
|
-
|
|
|
|
262,500
|
|
Share-based compensation
|
|
|
296,274
|
|
|
|
777,536
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(148,211
|
)
|
|
|
219,323
|
|
Inventory
|
|
|
(1,204
|
)
|
|
|
(125,351
|
)
|
Prepaid convention expenses
|
|
|
242,725
|
|
|
|
285,689
|
|
Prepaid rent- related party
|
|
|
105,790
|
|
|
|
(181,796
|
)
|
Prepaid insurance
|
|
|
8,089
|
|
|
|
(58,422
|
)
|
Prepaid taxes
|
|
|
(414
|
)
|
|
|
280,000
|
|
Other prepaid expenses
|
|
|
(4,451
|
)
|
|
|
(6,455
|
)
|
Security deposits
|
|
|
10,504
|
|
|
|
1,154
|
|
Accounts payable and accrued expenses
|
|
|
1,862,344
|
|
|
|
(639,665
|
)
|
Unearned revenue
|
|
|
590,034
|
|
|
|
(2,156,559
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Operating Activities
|
|
|
(2,533,595
|
)
|
|
|
(2,488,009
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(98,072
|
)
|
|
|
(169,802
|
)
|
Proceeds received on disposal of equipment
|
|
|
-
|
|
|
|
8,662
|
|
Investment in CONtv joint venture - net
|
|
|
-
|
|
|
|
(150,000
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Used In Investing Activities
|
|
|
(98,072
|
)
|
|
|
(311,140
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible promissory note and warrants
|
|
|
-
|
|
|
|
2,500,000
|
|
Payment of debt issuance costs
|
|
|
-
|
|
|
|
(25,000
|
)
|
Proceeds from the exercise of warrants
|
|
|
-
|
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided By Financing Activities
|
|
|
-
|
|
|
|
2,476,667
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(2,631,667
|
)
|
|
|
(322,482
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of reporting period
|
|
|
4,401,217
|
|
|
|
4,723,699
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of reporting period
|
|
$
|
1,769,550
|
|
|
$
|
4,401,217
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
-
|
|
|
$
|
200
|
|
Income tax paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Acquisition of controlling interest of ConBox
|
|
$
|
-
|
|
|
$
|
96,781
|
|
Warrants issued for debt discount recorded on convertible debt
|
|
$
|
-
|
|
|
$
|
1,448,293
|
|
Common stock issued for debt discount recorded on convertible note
|
|
$
|
-
|
|
|
$
|
791
|
|
See
accompanying notes to the consolidated financial statements
Wizard
World, Inc.
December
31, 2017
Notes
to the Consolidated 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.
Kick
the Can Corp.
Kick
the Can Corp. was incorporated on September 20, 2010, under the laws of the State of Nevada.
Kicking
the Can, L.L.C.
Kicking
the Can, L.L.C. was formed on April 17, 2009, under the laws of the State of Delaware.
Acquisition
of Kick the Can Corp. / Wizard Conventions, Inc. Recognized as a Reverse Acquisition
On
December 7, 2010, the Company entered into and consummated a share exchange agreement (“Share Exchange Agreement”)
with successor, Kick the Can Corp. (“KTC Corp.”) and its predecessors Wizard Conventions, Inc. and Kicking the Can,
L.L.C. (collectively, “Conventions”). Pursuant to the Exchange Agreement, the Company issued 32,927,596 shares of
its common stock to the KTC Corp. shareholders in exchange for 100% of the issued and outstanding shares of KTC Corp. The shares
issued represented approximately 94.9% of the issued and outstanding common stock immediately after the consummation of the Share
Exchange Agreement.
As
a result of the controlling financial interest of the former stockholder of Conventions, for financial statement reporting purposes,
the merger between the Company and Conventions has been treated as a reverse acquisition with KTC Corp. deemed the accounting
acquirer and the Company deemed the accounting acquiree under the acquisition method of accounting in accordance with section
805-10-55 of the Financial Accounting Standards Board (‘FASB”) Accounting Standards Codification (“ASC”).
The reverse merger is deemed a capital transaction and the net assets of KTC Corp. (the accounting acquirer) are carried forward
to the Company (the legal acquirer and the reporting entity) at their carrying value before the combination. The acquisition process
utilizes the capital structure of the Company and the assets and liabilities of KTC Corp. which are recorded at historical cost.
The equity of the Company is the historical equity of KTC Corp. retroactively restated to reflect the number of shares issued
by the Company in the transaction. Because of the predecessor/successor relationship between the Company and KTC Corp., Conventions
ultimately became the accounting acquirer.
Wizard
World Digital, Inc.
On
March 18, 2011, the Company formed a wholly owned subsidiary called Wizard World Digital, Inc., a Nevada corporation (“Digital”).
Digital never commenced operations or has employees, and Digital is currently dormant, pending execution of a digital strategy.
Wiz
Wizard, LLC
On
December 29, 2014, the Company and a member of the Board of Directors (the “Board”) of the Company formed Wiz Wizard,
LLC (“Wiz Wizard”) under the law of 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. The Company consolidates its 50% equity interest and reports the remaining 50% equity interest owned by a
member of the Board as the non-controlling interest in Wiz Wizard as the management of the Company believes that the Company has
the control of Wiz Wizard. In addition, the Company and Wiz Wizard, launched ComicConBox (“ConBox”) in April 2015.
ConBox is a subscription-based premium monthly box service featuring collectibles, exclusives, toys, tech and gaming, licensed
artwork, superior comics and apparel, Comic Convention tickets, special VIP discounts and more, which will be shipped on or around
the end of every month. On February 4, 2016, the member of the Board assigned his fifty percent (50%) membership interest to the
Company. Consequently, Wiz Wizard is a wholly-owned subsidiary of the Company. The Company ceased Conbox operations in 2017.
ButtaFyngas
LLC
On
April 10, 2015, the Company and an unrelated third party formed ButtaFyngas, LLC (“ButtaFyngas”) under the law of
the State of Delaware. The Company and the unrelated party each own 50% of the membership interest and shall allocate the profits
and losses accordingly upon repayment of the initial capital contributions on a pro rata basis. The Company consolidates its 50%
equity interest and reports the remaining 50% equity interest owned by the third party as the non-controlling interest in ButtaFyngas.
Note
2 – Going Concern Analysis
Going
Concern Analysis
The
Company had a loss from operations of $5,337,608 and $1,182,246 for the year ended December 31, 2017 and 2016, respectively. As
of December 31, 2017, we had cash and working capital deficit $1,769,550 and $3,541,032, respectively. We have evaluated the significance
of these conditions in relation to our ability to meet our obligations, which had previously raised doubts about the Company’s
ability to continue as a going concern through March 2019. However, the Company believes that the effects of its cost savings
efforts with regard to corporate overhead and show production expenses commenced in 2017 are not reflected in the above results,
but should be evident in 2018.
In
addition to its cost containment strategies, the Company has announced three agreements to expand its future revenues: 1) An alignment
with Sony Pictures Entertainment to explore a number of strategic initiatives; 2) An agreement to program a linear advertising
Supported channel and an SVOD Channel in China on the CN Live platform; and, 3) A programming agreement with Associated Television
International to launch the Chinese networks.
Additionally,
if necessary, management believes that both related parties (management and members of the Board of Directors of the Company)
and potential external sources of debt and/or equity financing may be obtained based on management’s history of being able
to raise capital from both internal and external sources coupled with current favorable market conditions. Therefore, the accompanying
condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
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 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
The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“US GAAP”).
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
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 December 31, 2017, the aggregate non-controlling interest in ButtaFyngas was ($12,498). 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 Consolidated Balance Sheet.
Cash
and Cash Equivalents
The
Company considers investments with original maturities of three months or less to be cash equivalents.
The
Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial
institution. The balance at times may exceed federally insured limits.
Fair
Value of Financial Instruments
For
purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged
in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amount of the Company’s
short-term financial instruments approximates fair value due to the relatively short period to maturity for these instruments.
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 December 31, 2017 and 2016, the allowance
for doubtful accounts was $0 and $0, respectively.
Inventories
Inventories
are stated at average cost using the first-in, first-out (FIFO) valuation method. Inventory was comprised of the following:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Finished goods
|
|
$
|
1,204
|
|
|
$
|
-
|
|
Property
and Equipment
Property
and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs
are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective
estimated residual values) over the estimated useful lives of the respective assets as follows:
|
|
Estimated Useful
Life (Years)
|
|
|
|
|
|
Computer equipment
|
|
|
3
|
|
|
|
|
|
|
Equipment
|
|
|
2-5
|
|
|
|
|
|
|
Furniture and fixture
|
|
|
7
|
|
|
|
|
|
|
Leasehold improvements
|
|
|
*
|
|
(*)
Amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever period is shorter.
Upon
sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and
any gain or loss is reflected in the consolidated statements of operations.
Investments
- Cost Method, Equity Method and Joint Venture
In
accordance with sub-topic 323-10 of the FASB ASC (“Sub-topic 323-10”), the Company accounts for investments in common
stock of an investee for which the Company has significant influence in the operating or financial policies even though the Company
holds 50% or less of the common stock or in-substance common stock.
Method
of Accounting
Investments
held in stock of entities other than subsidiaries, namely corporate joint ventures and other non-controlled entities usually are
accounted for by one of three methods: (i) the fair value method (addressed in Topic 320), (ii) the equity method (addressed in
Topic 323), or (iii) the cost method (addressed in Subtopic 325-20). Pursuant to Paragraph 323-10-05-5, the equity method tends
to be most appropriate if an investment enables the investor to influence the operating or financial policies of the investee.
Investment
in CONtv
On
August 27, 2014, the Company entered into a joint venture and executed an Operating Agreement for CON TV LLC (“CONtv”)
with Cinedigm Entertainment Corp. (“Cinedigm”), ROAR, LLC (a related party partially owned by a member of the Board)
(“ROAR”) and Bristol Capital, LLC (a related party controlled by a member of the Board) (“Bristol Capital”).
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, pursuant to that certain Amended and Restated Operating Agreement for CONtv by and among the aforementioned
parties (the “A&R Operating Agreement”), the Company’s ownership interest in CONtv was reduced to 10%. 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 years ended December 31, 2017 and 2016, the Company recognized $0 and $262,500 in losses from this venture, respectively.
As of December 31, 2017 and 2016, the investment in CONtv was $0.
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 securities purchase agreement and debt transactions during the year ended December 31, 2016, the Company issued
warrants, to purchase common stock with an exercise price of $0.15 and a five-year term. Upon issuance of the warrants, 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 warrants that potentially could result in a net cash
settlement in the event of a fundamental transaction, requiring the Company to classify the warrants as a derivative liability.
During the year ended December 31, 2017, the Company early adopted ASU 2017-11 on a retrospective basis (see below).
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.
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 ceased ConBox operations during
2017.
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 $21,479 and $178,931 for the years ended December 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.
Income
Taxes
The
Company follows the asset and liability method of accounting for income taxes under FASB ASC 740, “
Income Taxes
.”
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amount expected to be realized.
FASB
ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement
of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more
likely than not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of December
31, 2017. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No
amounts were accrued for the payment of interest and penalties at December 31, 2017. The Company is currently not aware of any
issues under review that could result in significant payments, accruals or material deviation from its position. The Company is
subject to income tax examinations by major taxing authorities since inception.
The
Company may be subject to potential examination by federal, state, and city taxing authorities in the areas of income taxes. These
potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions,
and compliance with federal, state, and city tax laws. The Company’s management does not expect that the total amount of
unrecognized tax benefits will materially change over the next twelve months.
The
Company is no longer subject to tax examinations by tax authorities for years prior to 2014.
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 shows the outstanding dilutive common shares excluded from the diluted net income (loss) per share calculation
as they were anti-dilutive:
|
|
Contingent shares issuance
arrangement, stock options or warrants
|
|
|
|
For the Year
Ended
December 31, 2017
|
|
|
For the Year
Ended
December 31, 2016
|
|
|
|
|
|
|
|
|
Convertible note
|
|
|
16,666,667
|
|
|
|
16,666,667
|
|
Common stock options
|
|
|
4,043,000
|
|
|
|
5,319,000
|
|
Common stock warrants
|
|
|
16,666,667
|
|
|
|
16,666,667
|
|
|
|
|
|
|
|
|
|
|
Total contingent shares issuance arrangement, stock options or warrants
|
|
|
37,376,334
|
|
|
|
38,652,334
|
|
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. The Company adopted the standard during
the year ended December 31, 2017 and the adoption did not have a material effect on its consolidated financial statements and
disclosures.
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
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. Early adoption of the update is permitted. The Company adopted the standard during
the year ended December 31, 2017 and the adoption did not 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.
In
May 2017, the FASB issued ASU 2017-09, “
Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,”
which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to
apply modification accounting in Topic 718. This standard is required to be adopted in the first quarter of 2018. The Company
is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.
In
July 2017, the FASB issued ASU 2017-11, “
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception”
. Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part
II of this update addresses the difficulty of navigating Topic 480,
Distinguishing Liabilities from Equity
, because of
the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of
the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities
and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting
effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The
Company early adopted the ASU 2017-11 in the three months ending December 31, 2017. See below.
Adoption
of ASU 2017-11
As
noted above, in connection with the securities purchase agreement and debt transactions during the year ended December 31, 2016,
the Company issued warrants, to purchase common stock with an exercise price of $0.15 and a five-year term. Upon issuance of the
warrants, 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 warrants that potentially could
result in a net cash settlement in the event of a fundamental transaction, requiring the Company to classify the warrants as a
derivative liability. The Company changed its method of accounting for the debt and warrants through the early adoption of ASU
2017-11 during the three months ended December 31, 2017 on a retrospective basis. Accordingly, the Company recorded the warrant
derivative and conversion option derivative liabilities to additional paid in capital upon issuance. Comparative disclosures to
2016 audited numbers in the footnotes represent the restated amounts due to the early adoption.
The
following table provides a summary of the derivative liability activity as a result of the adoption of ASU 2017-11:
|
|
Warrants
|
|
|
Convertible
Note
|
|
|
Total
|
|
Balance – December 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Issuance of derivative liabilities
|
|
|
5,206,444
|
|
|
|
2,294,435
|
|
|
|
7,500,879
|
|
Extinguishment of derivative liability from exercise of warrants
|
|
|
(2,831,851
|
)
|
|
|
-
|
|
|
|
(2,831,851
|
)
|
Change in fair value of derivative liability
|
|
|
825,544
|
|
|
|
1,004,165
|
|
|
|
1,829,709
|
|
Reclassified derivative liabilities of adoption
|
|
|
(3,200,137
|
)
|
|
|
(3,298,000
|
)
|
|
|
(6,498,737
|
)
|
Balance – December 31, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Tabular
summaries of the revisions and the corresponding effects on the consolidated balance sheet as of December 31, 2016 and consolidated
statement of earnings for the year ended December 31, 2016 are presented below:
|
|
Consolidated Balance Sheet
|
|
|
|
December 31, 2016
|
|
|
|
Previously
|
|
|
|
|
|
Revised
|
|
|
|
Reported
|
|
|
Revisions
|
|
|
Reported
|
|
Convertible promissory note – related party, net
|
|
$
|
1,456
|
|
|
$
|
1,025,720
|
|
|
$
|
1,027,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities – related party
|
|
|
6,498,737
|
|
|
|
(6,498,737
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid in capital
|
|
|
21,132,386
|
|
|
|
(1,467,767
|
)
|
|
|
19,664,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
(24,529,440
|
)
|
|
|
6,940,783
|
|
|
|
(17,588,657
|
)
|
|
|
Consolidated Statement of Operations
Year ended December 31, 2016
|
|
|
|
Previously Reported
|
|
|
Revisions
|
|
|
Revised
Reported
|
|
Interest expense
|
|
$
|
(26,676
|
)
|
|
$
|
195
|
|
|
$
|
(26,481
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivative liabilities
|
|
|
(1,829,709
|
)
|
|
|
1,829,709
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative expense
|
|
|
(5,110,879
|
)
|
|
|
5,110,879
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(8,448,886
|
)
|
|
$
|
6,940,783
|
|
|
$
|
(1,508,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per ordinary share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.16
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
In
September 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-13,
Revenue
Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842).
The
new standard, among other things, provides additional implementation guidance with respect to Accounting Standards Codification
(ASC) Topic 606 and ASC Topic 842. ASU 2017-03 is effective for annual and interim fiscal reporting periods beginning after December
15, 2017. The Company is currently evaluating the impact of the new standard, but does not expect it to have a material impact
on its implementation strategies or its consolidated financial statements upon adoption.
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:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Computer Equipment
|
|
$
|
43,087
|
|
|
$
|
33,858
|
|
Equipment
|
|
|
460,927
|
|
|
|
390,656
|
|
Furniture and Fixtures
|
|
|
62,321
|
|
|
|
45,198
|
|
Leasehold Improvements
|
|
|
22,495
|
|
|
|
22,495
|
|
|
|
|
588,830
|
|
|
|
492,207
|
|
Less: Accumulated depreciation
|
|
|
(423,427
|
)
|
|
|
(276,259
|
)
|
|
|
$
|
165,403
|
|
|
$
|
215,948
|
|
Depreciation
expense was $147,832 and $159,102 for the years ended December 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.
Such agreement was deemed effective on the execution date; however, Cinedigm agreed to the Company recognizing only 10% of the
losses from the period July 1, 2015 through December 31, 2015. 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 years ended December 31, 2017 and 2016, the Company recognized $0 and $262,500 in losses from this venture, respectively.
As
of December 31, 2017 and 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. The Company ceased ConBox operations in 2017.
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
is 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 year ended December 31, 2017 and 2016, the Company incurred total expenses of $208,106 and $80,132, respectively, for services
provided by Bristol. At December 31, 2017 and 2016, the Company accrued $208,106 and $75,000, respectively, 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 $76,006 and $181,796 remain at December 31,
2017 and 2016, respectively. During the year ended December 31, 2017 and 2016, the Company incurred total rent expense of $98,877
and $24,354, respectively, under the Sublease. See Note 7 for future minimum rent payments due.
Outsourced
Marketing
During
the year ended December 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 $7,500 and $5,809 during the years ended December 31,
2017 and 2016. As of December 31, 2017 and 2016, the outstanding liability due to ROAR was $2,250 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 issued 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 $25,791 related to the cash paid and the relative fair value of the 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 $0.15 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.
Upon
issuance of the note, the Company valued the warrants using the Black-Scholes Option Pricing model and accounted for it using
the relative fair value of $1,448,293 as debt discount on the consolidated balance sheet. 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 which approximates
the interest method. The amortization of debt discount is included as a component of interest expense in the consolidated statements
of operations. There was unamortized debt discount of $1,383,021 and $1,472,824 as of December 31, 2017 and 2016, respectively,
which includes the debt discount recorded upon execution of the Securities Purchase Agreement discussed above.
Note
7 – Commitments and Contingencies
Employment
Agreements
Appointment
of Executive Vice President and Chief Operating Officer
On
November 8, 2016, the Company formally entered into an employment agreement (the “Malinoff Employment Agreement”)
with Randall S. Malinoff in connection with his appointment as the Company’s Executive Vice President and Chief Operating
Officer on July 14, 2016 (the “Effective Date”) to serve for a period of two years from the Effective Date. In connection
with such appointment, Mr. Malinoff will receive an annual base salary of $225,000 and will be eligible for a performance-based
bonus at the discretion of the Board.
On
November 8, 2016, pursuant to the terms of the Malinoff Employment Agreement, the Company granted six hundred thousand (600,000)
options to purchase shares of the Company’s common stock.
On
July 5, 2017, Mr. Malinoff departed from the Company. Mr. Malinoff is currently engaged in a dispute with the Company. The dispute
pertains to his departure from the Company. Both Mr. Malinoff and the Company have retained counsel to engage on the issues in
controversy. As of December 31, 2017, all of Mr. Malinoff’s options have been cancelled.
Appointment
of President and Chief Executive Officer
On
April 22, 2016, the Board approved the appointment of Mr. John D. Maatta as the Company’s President and Chief Executive
Officer, effective as of May 3, 2016. Mr. Maatta will continue to serve as a member of the Board. In addition, the Board granted
Mr. Maatta options to purchase up to an aggregate of 1,100,000 shares of the Company’s common stock, subject to the terms
and conditions of the Third Amended and Restated 2011 Stock Incentive and Award Plan. Mr. Maatta formally entered into his Employment
Agreement with the Company on July 17, 2016.
Mr.
Maatta received the following, with effective dates as defined below:
|
1)
|
upon
the effectiveness of the Maatta Appointment on May 3, 2016, three hundred thousand (300,000) options to purchase shares of
the Company’s common stock at an exercise price of $0.50 per share, such options to vest only upon a Change in Control
(as defined in Mr. Maatta’s Employment Agreement) during Mr. Maatta’s tenure as President and Chief Executive
Officer;
|
|
|
|
|
2)
|
upon
the effectiveness of the Maatta Appointment on May 3, 2016, eight hundred thousand (800,000) options to purchase shares of
the Company’s common stock, such options to vest, at the applicable exercise price, as follows:
|
|
a.
|
one
hundred thousand (100,000) options shall be exercisable at a price of $0.50 per share and shall vest immediately;
|
|
|
|
|
b.
|
one
hundred thousand (100,000) options shall be exercisable at a price of $0.50 per share and shall vest by September 30, 2016;
|
|
c.
|
one
hundred thousand (100,000) options shall be exercisable at a price of $0.50 per share and shall vest by December 31, 2016;
|
|
|
|
|
d.
|
one
hundred thousand (100,000) options shall be exercisable at a price of $0.55 per share and shall vest by March 31, 2017;
|
|
|
|
|
e.
|
one
hundred thousand (100,000) options shall be exercisable at a price of $0.55 per share and shall vest by June 30, 2017;
|
|
|
|
|
f.
|
one
hundred thousand (100,000) options shall be exercisable at a price of $0.55 per share and shall vest by September 30, 2017;
|
|
|
|
|
g.
|
one
hundred thousand (100,000) options shall be exercisable at a price of $0.60 per share and shall vest by December 31, 2017;
and
|
|
|
|
|
h.
|
one
hundred thousand (100,000) options shall be exercisable at a price of $0.60 per share and shall vest by March 31, 2018.
|
Consulting
Agreement
As
discussed in Note 6, on December 29, 2016, the Company entered into a Consulting Services Agreement (the “Consulting Agreement”)
with 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 is 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). For services rendered by Bristol prior to entering into the Consulting Agreement, the Company will
pay Bristol the Monthly Fee, pro-rated, for the time between September 1, 2016 and December 29, 2016. Bristol may also receive
an annual bonus as determined by the Compensation Committee of the Company’s Board of Directors (the “Board”)
and approved by the Board. At December 31, 2017 and 2016, the Company accrued $208,106 and $75,000 of monthly fees due to Bristol,
respectively.
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 in accordance with the following vesting schedule and at the applicable exercise prices therein:
Bristol
received the following, with effective dates as defined below:
|
1)
|
upon
the effectiveness of the Consulting Agreement on December 29, 2016, seventy-five thousand (75,000) options to purchase shares
of the Company’s common stock at an exercise price of $0.50 per share, such options to vest upon execution of the agreement;
|
|
|
|
|
2)
|
upon
the effectiveness of the Consulting Agreement on December 29, 2016, five hundred twenty-five thousand (525,000) options to
purchase shares of the Company’s common stock, such options to vest, at the applicable exercise price, as follows:
|
|
a.
|
Seventy-five
thousand (75,000) options shall be exercisable at a price of $0.50 per share and shall vest immediately;
|
|
|
|
|
b.
|
Seventy-five
thousand (75,000) options shall be exercisable at a price of $0.55 per share and shall vest by March 31, 2017;
|
|
|
|
|
c.
|
Seventy-five
thousand (75,000) options shall be exercisable at a price of $0.55 per share and shall vest by June 30, 2017;
|
|
d.
|
Seventy-five
thousand (75,000) options shall be exercisable at a price of $0.55 per share and shall vest by September 30, 2017;
|
|
|
|
|
e.
|
Seventy-five
thousand (75,000) options shall be exercisable at a price of $0.60 per share and shall vest by December 31, 2017;
|
|
|
|
|
f.
|
Seventy-five
thousand (75,000) options shall be exercisable at a price of $0.60 per share and shall vest by March 31, 2018; and
|
|
|
|
|
g.
|
Seventy-five
thousand (75,000) options shall be exercisable at a price of $0.60 per share and shall vest by June 30, 2018.
|
Operating
Lease
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. 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 $76,006 and $181,796 remain at December 31, 2017 and 2016, respectively. During the year
ended December 31, 2017 and 2016, the Company incurred total rent expense of $98,877 and $24,354 under the Sublease, respectively.
See below for future minimum rent payments due.
Future
minimum lease payments inclusive of related tax required under the non-cancelable operating lease are as follows:
Fiscal year ending December 31:
|
|
|
|
2018
|
|
$
|
101,844
|
|
2019
|
|
|
104,899
|
|
2020
|
|
|
108,046
|
|
2021
|
|
|
83,054
|
|
|
|
$
|
397,843
|
|
Obligation
to Fund CONtv
As
discussed in Note 3, 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 years ended December 31, 2017 and 2016, the Company recognized $0 and $262,500 in losses from this venture, respectively.
As
of December 31, 2017 and 2016, the Company has a balance due to CONtv of $224,241.
Stephen
Shamus 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 SDNY Complaint with counterclaims against the Company (the “SDNY Counterclaim”).
The SDNY 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.
Gareb
Shamus 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 Securities
and Exchange Act of 1934 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 Rogers 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. The matters at issue in the Silverman lawsuit were resolved by way of
a mutual settlement with no financial impact on the Company’s financial statements in June 2017.
Malinoff
Dispute
Randall
Malinoff, the Company’s former Chief Operating Officer, who departed from on the Company as of July 5, 2017, is currently
engaged in a dispute with the Company. A complaint for breach of contract and various disability discrimination claims was filed
after the Company terminated him for cause. The Company believes that the matter, which is set for trial in 2019, is wrongful
and is without merit. The Company currently intends to proceed to trial on this matter.
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.
Note
8 – Stockholders’ Equity (Deficit)
The
Company’s authorized capital stock consists of 100,000,000 shares, of which 80,000,000 are for shares of common stock, par
value $0.0001 per share, and 20,000,000 are for shares of preferred stock, par value $0.0001 per share, of which 50,000 have been
designated as Series A Cumulative Convertible Preferred Stock.
As
of December 31, 2017 and 2016, there were 68,535,036 shares of common stock issued and outstanding. Each share of the common stock
entitles its holder to one vote on each matter submitted to the shareholders.
Equity
Incentive Plan
On
May 9, 2011, the Board approved, authorized and adopted (subject to stockholder approval) the 2011 Incentive Stock and Award Plan
(the “Plan”). The Plan was amended on September 14, 2011, April 11, 2012, July 9, 2012 and September 25, 2014. The
Plan provides for the issuance of up to 15,000,000 shares of common stock, par value $.0001 per share, of the Company through
the grant of non-qualified options (the “Non-qualified Options”), incentive options (the “Incentive Options”)
and together with the Non-qualified Options, the (“Options”) and restricted stock (the “Restricted Stock”)
to directors, officers, consultants, attorneys, advisors and employees.
The
Plan shall be administered by a committee consisting of two or more independent, non-employee and outside directors (the “Committee”).
In the absence of such a Committee, the Board shall administer the Plan.
Each
Option shall contain the following material terms:
|
(i)
|
the
exercise price, which shall be determined by the Committee at the time of grant, shall not be less than 100% of the Fair Market
Value (defined as the closing price on the final trading day immediately prior to the grant on the principal exchange or quotation
system on which the common stock is listed or quoted, as applicable) of the common stock of the Company,
provided
that
if the recipient of the Option owns more than ten percent (10%) of the total combined voting power of the Company, the exercise
price shall be at least 110% of the Fair Market Value;
|
|
|
|
|
(ii)
|
the
term of each Option shall be fixed by the Committee,
provided
that such Option shall not be exercisable more than five
(5) years after the date such Option is granted, and
provided further
that with respect to an Incentive Option, if
the recipient owns more than ten percent (10%) of the total combined voting power of the Company, the Incentive Option shall
not be exercisable more than five (5) years after the date such Incentive Option is granted;
|
|
|
|
|
(iii)
|
subject
to acceleration in the event of a Change of Control of the Company (as further described in the Plan), the period during which
the Options vest shall be designated by the Committee or, in the absence of any Option vesting periods designated by the Committee
at the time of grant, shall vest and become exercisable in equal amounts on each fiscal quarter of the Company through the
four (4) year anniversary of the date on which the Option was granted;
|
|
(iv)
|
no
Option is transferable and each is exercisable only by the recipient of such Option except in the event of the death of the
recipient; and
|
|
|
|
|
(v)
|
with
respect to Incentive Options, the aggregate Fair Market Value of common stock exercisable for the first time during any calendar
year shall not exceed $100,000.
|
Each
award of Restricted Stock is subject to the following material terms:
|
(i)
|
no
rights to an award of Restricted Stock is granted to the intended recipient of Restricted Stock unless and until the grant
of Restricted Stock is accepted within the period prescribed by the Committee;
|
|
|
|
|
(ii)
|
Restricted
Stock shall not be delivered until they are free of any restrictions specified by the Committee at the time of grant;
|
|
|
|
|
(iii)
|
recipients
of Restricted Stock have the rights of a stockholder of the Company as of the date of the grant of the Restricted Stock;
|
|
|
|
|
(iv)
|
shares
of Restricted Stock are forfeitable until the terms of the Restricted Stock grant have been satisfied or the employment with
the Company is terminated; and
|
|
|
|
|
(v)
|
the
Restricted Stock is not transferable until the date on which the Committee has specified such restrictions have lapsed.
|
Stock
Options
The
following is a summary of the Company’s option activity:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding – January 1, 2016
|
|
|
9,933,500
|
|
|
$
|
0.70
|
|
Exercisable – January 1, 2016
|
|
|
4,332,500
|
|
|
$
|
0.41
|
|
Granted
|
|
|
2,000,000
|
|
|
$
|
0.55
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
(6,614,500
|
)
|
|
$
|
-
|
|
Outstanding – December 31, 2016
|
|
|
5,319,000
|
|
|
$
|
0.57
|
|
Exercisable – December 31, 2016
|
|
|
1,640,500
|
|
|
$
|
0.47
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
Forfeited/Cancelled
|
|
|
(1,276,000
|
)
|
|
$
|
-
|
|
Outstanding – December 31, 2017
|
|
|
4,043,000
|
|
|
$
|
0.58
|
|
Exercisable – December 31, 2017
|
|
|
3,328,000
|
|
|
$
|
0.57
|
|
|
|
|
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
- 1.50
|
|
|
4,043,000
|
|
2.10
years
|
|
$
|
0.58
|
|
|
3,328,000
|
|
$
|
0.57
|
|
At
December 31, 2017, the total intrinsic value of options outstanding and exercisable was $0 and $0, respectively.
The
Company recognized an aggregate of $296,274 and $777,536 in compensation expense during the years ended December 31, 2017 and
2016, respectively, related to option awards. At December 31, 2017, unrecognized stock-based compensation was $310,519.
Stock
Warrants
The
following is a summary of the Company’s warrant activity:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
Outstanding – January 1, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Exercisable – January 1, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
33,333,317
|
|
|
$
|
0.08
|
|
Exercised
|
|
|
(16,666,650
|
)
|
|
$
|
0.00
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
$
|
-
|
|
Outstanding – December 31, 2016
|
|
|
16,666,667
|
|
|
$
|
0.15
|
|
Exercisable – December 31, 2016
|
|
|
16,666,667
|
|
|
$
|
0.15
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding – December 31, 2017
|
|
|
16,666,667
|
|
|
$
|
0.15
|
|
Exercisable – December 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
December 31, 2017, the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.
There
were no new options or warrants granted during the year ended December 31, 2017. The following table summarizes the range of assumptions
the Company utilized to estimate the fair value of the options and warrants issued during the year ended December 31, 2016:
Assumptions
|
|
December
31, 2016
|
|
Expected
term (years)
|
|
|
2.40-5.00
|
|
Expected
volatility
|
|
|
90%-115
|
%
|
Risk-free
interest rate
|
|
|
0.87%
- 1.96
|
%
|
Dividend
yield
|
|
|
0.00
|
%
|
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
9 – Credit Risk
Financial
instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash
equivalents. As of December 31, 2017, substantially all of the Company’s cash and cash equivalents were held by major financial
institutions and the balance in certain accounts exceeded the maximum amount insured by the Federal Deposits Insurance Corporation
(“FDIC”). However, the Company has not experienced losses on these accounts and management believes that the Company
is not exposed to significant risks on such accounts.
Note
10 – Segment Information
The
Company maintained operating segments; Conventions and Conbox. The Company ceased Conbox operations in 2017, which is the principal
reason for the decrease in operating results compared to 2016. The Company evaluated performance of its operating segments based
on revenue and operating profit (loss). Segment information for the years ended December 31, 2017 and 2016 and as of December
31, 2017 and 2016, are as follows:
|
|
Conventions
|
|
|
ConBox
|
|
|
Total
|
|
Year ended December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
14,983,033
|
|
|
$
|
84,580
|
|
|
$
|
15,067,613
|
|
Cost of revenue
|
|
|
(14,978,136
|
)
|
|
|
(80,161
|
)
|
|
|
(15,058,297
|
)
|
Gross margin
|
|
|
4,897
|
|
|
|
4,419
|
|
|
|
10,371,076
|
|
Operating expenses
|
|
|
(5,314,391
|
)
|
|
|
(32,533
|
)
|
|
|
(5,346,924
|
)
|
Operating loss
|
|
|
(5,309,494
|
)
|
|
|
(28,114
|
)
|
|
|
(5,337,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
21,994,433
|
|
|
$
|
707,101
|
|
|
$
|
22,701,534
|
|
Cost of revenue
|
|
|
(14,972,190
|
)
|
|
|
(1,029,898
|
)
|
|
|
(16,002,088
|
)
|
Gross margin
|
|
|
(164,903
|
|
|
|
-
|
|
|
|
(164,903
|
|
Operating expenses
|
|
|
(6,857,340
|
)
|
|
|
(322,797
|
)
|
|
|
6,534,543
|
)
|
Operating profit (loss)
|
|
|
(7,627,847
|
)
|
|
|
(88,942
|
|
|
|
(7,716,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
336,030
|
|
|
$
|
-
|
|
|
$
|
336,030
|
|
Total assets
|
|
|
2,940,089
|
|
|
|
-
|
|
|
|
2,940,089
|
|
Unearned revenue
|
|
|
2,164,972
|
|
|
|
-
|
|
|
|
2,164,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
128,561
|
|
|
$
|
59,258
|
|
|
$
|
187,819
|
|
Total assets
|
|
|
5,775,871
|
|
|
|
59,258
|
|
|
|
5,835,129
|
|
Unearned revenue
|
|
|
1,479,392
|
|
|
|
95,546
|
|
|
|
1,574,938
|
|
Note
11 – Income Tax Provision
Deferred
Tax Assets
On
December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Reform Bill”) was signed into law. Prior to the enactment of
the Tax Reform Bill, the Company measured its deferred tax assets at the federal rate of 34%. The Tax Reform Bill reduced the
federal tax rate to 21% resulting in the re-measurement of the deferred tax asset as of December 31, 2017. Beginning January 1,
2018, the lower tax rate of 21% will be used to calculate the amount of any federal income tax due on taxable income earned during
2018.
At
December 31, 2017, the Company has available for U.S. federal income tax purposes a net operating loss (“NOL”) carry-forwards
of approximately $9,919,000 that may be used to offset future taxable income through the fiscal year ending December 31, 2036.
If not used, these NOLs may be subject to limitation under Internal Revenue Code Section 382 should there be a greater than 50%
ownership change as determined under the regulations. The Company plans on undertaking a detailed analysis of any historical and/or
current Section 382 ownership changes that may limit the utilization of the net operating loss carryovers. No tax benefit has
been reported with respect to these net operating loss carry-forwards in the accompanying consolidated financial statements since
the Company believes that the realization of its net deferred tax asset of approximately $2,083,000 was not considered more likely
than not and accordingly, the potential tax benefits of the net loss carry-forwards are fully offset by a valuation allowance
of $2,083,000.
Deferred
tax assets consist primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the
deferred tax assets because of the uncertainty regarding its realizability. In assessing the realization of deferred tax assets,
management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent upon future generation for taxable income during the periods in which
temporary differences representing net future deductible amounts become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. After consideration
of all the information available, Management believes that significant uncertainty exists with respect to future realization of
the deferred tax assets and has therefore established a full valuation allowance. The valuation allowance increased by approximately
$590,000 and $249,000 for the years ended December 31, 2017 and 2016, respectively.
The
Company evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements. ASC 740 prescribes a comprehensive model for how a company should recognize, present, and disclose uncertain
positions that the Company has taken or expects to take in its tax return. For those benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or
expected to be taken in a tax return and the net benefit recognized and measured pursuant to the interpretation are referred to
as “unrecognized benefits.” A liability is recognized (or amount of net operating loss carry forward or amount of
tax refundable is reduced) for unrecognized tax benefit because it represents an enterprise’s potential future obligation
to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
If
applicable, interest costs related to the unrecognized tax benefits are required to be calculated and would be classified as “Other
expenses – Interest expense” in the statement of operations. Penalties would be recognized as a component of “General
and administrative.”
No
material interest or penalties on unpaid tax were recorded during the years ended December 31, 2017 and 2016, respectively. As
of December 31, 2017 and 2016, no liability for unrecognized tax benefits was required to be reported. The Company does not expect
any significant changes in its unrecognized tax benefits in the next year.
Components
of deferred tax assets are as follows:
|
|
December 31, 2017
|
|
|
December 31, 2016
|
|
Net deferred tax assets – Non-current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax benefit from NOL carry-forwards
|
|
$
|
2,083,000
|
|
|
$
|
1,493,000
|
|
Less valuation allowance
|
|
|
(2,083,000
|
)
|
|
|
(1,493,000
|
)
|
Deferred tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
Tax Provision in the Consolidated Statements of Operations
A
reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income
taxes is as follows:
|
|
For the Year
Ended
December 31, 2017
|
|
|
For the Year
Ended
December 31, 2016
|
|
|
|
|
|
|
|
|
Federal statutory income tax rate
|
|
|
21.0
|
%
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance on net operating loss carry-forwards
|
|
|
(21.0
|
%)
|
|
|
(34.0
|
%)
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|