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| EX-21 - Red Giant Entertainment, Inc. | ex21.txt |
| EX-4.10 - Red Giant Entertainment, Inc. | ex4-10.txt |
| EX-10.2 - Red Giant Entertainment, Inc. | ex10-2.txt |
| EX-10.3 - Red Giant Entertainment, Inc. | ex10-3.txt |
| EX-10.4 - Red Giant Entertainment, Inc. | ex10-4.txt |
| EX-10.5 - Red Giant Entertainment, Inc. | ex10-5.txt |
| EX-2.2 - Red Giant Entertainment, Inc. | ex2-2.txt |
| EX-10.6 - Red Giant Entertainment, Inc. | ex10-6.txt |
| EX-31.1 - Red Giant Entertainment, Inc. | ex31-1.txt |
| EX-31.2 - Red Giant Entertainment, Inc. | ex31-2.txt |
| EX-32 - Red Giant Entertainment, Inc. | ex32.txt |
| EX-4.4 - Red Giant Entertainment, Inc. | ex4-4.txt |
| EX-4.5 - Red Giant Entertainment, Inc. | ex4-5.txt |
| EX-4.6 - Red Giant Entertainment, Inc. | ex4-6.txt |
| EX-4.7 - Red Giant Entertainment, Inc. | ex4-7.txt |
| EX-4.8 - Red Giant Entertainment, Inc. | ex4-8.txt |
| EX-4.9 - Red Giant Entertainment, Inc. | ex4-9.txt |
| EXCEL - IDEA: XBRL DOCUMENT - Red Giant Entertainment, Inc. | Financial_Report.xls |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended August 31, 2013
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number: 000-34039
RED GIANT ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
Nevada 98-0471928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
614 E. Hwy 50, Suite 235, Clermont, Florida 34711
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (866) 926-6427
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.0001 par value per share
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or such shorter period that the registrant was required to
submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold as of February 28, 2013, the last business day of the registrant's
most recently completed second fiscal quarter, was $41,384,280 (based on
311,160,000 shares at $0.133 per share).
The registrant had 457,558,273 shares of common stock outstanding as of November
29, 2013.
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS .......................................................... 1
ITEM 1A. RISK FACTORS ...................................................... 6
ITEM 1B. UNRESOLVED STAFF COMMENTS ......................................... 6
ITEM 2. PROPERTIES ........................................................ 6
ITEM 3. LEGAL PROCEEDINGS ................................................. 6
ITEM 4. MINE SAFETY DISCLOSURES ........................................... 6
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ................. 6
ITEM 6. SELECTED FINANCIAL DATA ........................................... 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ............................................. 10
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........ 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ....................... 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE .......................................... 30
ITEM 9A. CONTROLS AND PROCEDURES ........................................... 30
ITEM 9B. OTHER INFORMATION ................................................. 31
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE ........... 31
ITEM 11. EXECUTIVE COMPENSATION ............................................ 34
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS ................................... 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE ...................................................... 37
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES ............................ 38
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES ........................... 39
SIGNATURES ................................................................. 40
i
PART I
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this "Annual Report") contains forward-looking
statements within the meaning of the federal securities laws. These
forward-looking statements are not historical facts, but rather are based on our
current expectations, estimates, and projections about us and our industry. You
can identify these forward-looking statements when you see us using words such
as "expect," "anticipate," "estimate," "plan," "believe," "seek," and other
similar expressions that are intended to identify forward-looking statements.
Although we believe that the expectations reflected in these forward-looking
statements are reasonable, these statements are not guarantees of future
performance and are subject to certain risks, uncertainties, and other factors,
some of which are beyond our control, are difficult to predict, and could cause
actual results to differ materially from those expressed or forecasted. All
statements other than statements of historical facts included in this Annual
Report including, without limitation, any projections and assumptions in this
Annual Report, are forward-looking statements.
You should not place undue reliance on these forward-looking statements, which
reflect our management's view only on the date of this Annual Report. We
undertake no obligation to update these statements or to report the result of
any revision to the forward-looking statements that we may make to reflect
events or circumstances after the date of this Annual Report or to reflect the
occurrence of unanticipated events. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by these cautionary statements.
ITEM 1. BUSINESS
GENERAL
Red Giant Entertainment, Inc. (OTCQB: REDG) is a developer of comic book style
properties intended for both the print and online comic book market and also for
use in other media such as movies, video games, television, novels, toys,
apparel, and apps. As used herein, "the registrant," "we," "our," and similar
terms include Red Giant Entertainment, Inc. and its subsidiaries, unless the
context indicates otherwise.
We were incorporated in the State of Nevada on June 27, 2005 under the name
Castmor Resources, Ltd. Prior to June 2012, we were primarily engaged in the
acquisition and exploration of mining properties which were ultimately
forfeited. Since we had minimal operations, we were considered a "shell company"
as that term is defined under Rule 405 of the Securities Exchange Act of 1934
(the "Exchange Act"). Effective with the acquisition of Red Giant Entertainment,
Inc., a Florida corporation ("RGE"), on June 11, 2012, we became an operating
company and are no longer considered a "shell company."
For accounting and operational purposes, our acquisition of RGE was a
recapitalization conducted as a reverse acquisition with RGE being regarded as
the acquirer. Consistent with reverse acquisition accounting, all of the assets,
liabilities and accumulated earning (deficit) of RGE are retained on our
financial statements as the accounting acquirer.
On June 26, 2012, we changed our name to Red Giant Entertainment, Inc., and on
July 19, 2012, we effectuated a 6-for-1 forward split of our common stock.
On March 4, 2013, we acquired ComicGenesis, LLC ("ComicGenesis"), a Nevada
limited liability company that operates a user-generated comic site that hosts
over 10,000 independent webcomics.
Our principal executive offices are located at 614 E. Highway 50, Suite 235,
Clermont, Florida 34711, and our telephone number is (866) 926-6427. Our
corporate website is www.redgiantentertainment.com. The contents of our
corporate website are not incorporated into this Annual Report and our corporate
website should be considered to be a website under development.
1
OUR BUSINESS PLAN
We acquire co-ownership, development, publishing or other rights from creators
of comic properties and other properties, such as films and novels, including
properties created and initially owned by our officers. We expect to leverage
our officers' years of experience in the comic book and film industry to
discover up and coming properties we can acquire rights in and creators we can
forge relationship with. Our officers and their affiliates have ownership or
other rights to several comic book properties to which we may acquire ownership
or other rights.
We anticipate that our purchase of ComicGenesis will give us even greater access
to up and coming comic properties and their creators in addition to providing
new opportunities to sell advertising and increase consumer recognition. In
addition, we expect that our relationship with Intrinsic Value Films
("Intrinsic"), a developer, producer and seller of independent films that is
headed and co-owned by Isen Robbins and Amy Schoof, two of our officers and
members of our Board of Directors (the "Board"), will enable us to identify
films that we can adapt into comic book form. Intrinsic films are showcased on
our corporate website so that we can educate audiences as to properties we may
wish to develop and to gauge potential interest in such films among visitors to
our website, and we may explore options to convert Intrinsic films into comic
book form on a case-by-case basis.
We primarily intend to develop properties to which we or our affiliates have
ownership or other rights for the comic book market, with many properties being
published in Webcomic form to be accessible to consumers at no charge. We may
also develop properties for use in other media such as movies, video games,
television, and novels, and develop toys, and apparel and telephone wireless
applications based on such properties depending on their popularity and demand.
We may engage in either the direct production of such properties or enter into
licensing agreements with others to accomplish these goals.
We have not established a timeline to reflect our anticipated plan of operations
and we have not established any anticipated operational milestones.
CREATIVE AND PRODUCTION PROCESS
Our creative process generally begins with the development of a story line,
following which a writer develops characters' actions and motivations into a
plot. After a writer has developed the plot, a pencil artist translates it into
an action-filled pictorial sequence of events. The penciled story then is
returned to the writer who adds dialogue, indicating where the balloons and
captions should be placed. The completed dialogue and artwork are forwarded to a
letterer who letters the dialogue and captions in the balloons. Next, an inker
enhances the pencil artist's work in order to make the drawing appear three
dimensional.
The artwork is then sent to a coloring artist. Typically using only four colors
in varying shades, the coloring artist uses overlays to create over 100
different tones. This artwork is subcontracted to a color separator who produces
separations and sends the finished material to the printer.
We intend to retain freelance artists and writers who generally are paid on a
per-page basis throughout this creative process, including artists and writers
whose comic properties are being published by us or ComicGenesis. We may also
use our officers or their affiliates at any stage of the creative process.
Artists and writers will be eligible to receive incentives or royalties based on
the number of copies sold (net of returns) of the titles in which their work
appears. Rates of payment for these artists and writers will vary widely
depending on the artist or writer, and on the work required. Benny R. Powell,
our Chief Executive Officer, President, Chief Financial Officer, and Secretary,
and a member of the Board, has entered into an independent contractor agreement
with a third-party artist to provide creative services (e.g., artwork, writing,
advertising and other creative endeavors) with respect to Wayward Sons(TM) and
related properties. Mr. Powell's contract with the third party artist
contemplates paying such artist out of net revenues derived from the respective
titles. We have not directly entered into any agreements with any artists or
writers, and there is no guarantee that we will be able to enter into agreements
with such artists and writers on favorable terms, if at all. In addition, from
time to time, we may retain Glass House Graphics, a sole proprietorship owned by
David Campiti, our Chief Operating Officer and a member of the Board, to perform
creative services for us. To the extent that we have our officers or their
affiliates perform any work for us, such persons will not receive compensation
in excess of what we would expect to pay to an unrelated third party with
comparable experience and quality.
2
It is anticipated that printing services for our print form titles will be done
by Active Media Publishing LLC ("Active Media"), an entity controlled by Benny
R. Powell, our Chief Executive Officer, President, Chief Financial Officer, and
Secretary, and a member of the Board.
Digital form publication of our titles will be done on Keenspot Entertainment's
("Keenspot") Keenspot.com hosted websites pursuant to our exclusive web
publishing agreement with Keenspot.
PRODUCTS AND SERVICES
Properties to which we or our affiliates have ownership or other rights are
currently available in webcomic form and collected volume form. We intend to
engage in the direct production of a "Giant-Size" line of titles that will be
provided at no charge, with revenue being earned through selling advertising in
such Giant-Size titles. In addition, we may license the development and
publication of such properties in comic book or other forms to affiliates and
third parties.
While our current lineup of titles is geared mainly toward the young-adult
market, we also have family-friendly titles suitable for all ages. While many of
our titles naturally are from the superhero or supernatural genre, we also have
titles from the horror, science fiction, historical and other genres.
ELECTRONIC BOOK DISTRIBUTION
We have been operating under an agreement with Keenspot to host the internet
webcomic versions of our titles on an exclusive basis as well as handle the
digital application and mobile media distribution channels. Keenspot.com
currently has comic properties which include a network of more than five dozen
Keenspot webcomic sites and receives over two million unique visitors each month
according to Google Analytics Data. As of the date of this Annual Report, the
following properties we or our affiliates co-own or have rights to have Keenspot
sites: Banzai Girl(TM), Buzzboy(TM), Exposure(TM), Jade Warriors(TM),
Katrina(TM), Medusa's Daughter(TM), Porcelein(TM), Shockwave: Darkside(TM),
Supernovas(TM) and Wayward Sons(TM). Our Keenspot sites have received an average
of 376,855 visits per month in the fiscal year ended August 31, 2013. Keenspot
also manages the web publication of properties to which we or our affiliates
have ownership or other rights through comiXology's main app for the iPhone,
iPad, Android, Kindle, and Windows 8 as well as on comiXology's website. The
contents of our titles' Keenspot sites or any comiXology app or website are not
incorporated into this Annual Report.
We anticipate continuing to offer our titles through our Keenspot sites at no
charge and obtaining revenues from advertising rather than sales, but may offer
certain titles on a subscription basis on the Internet depending on their
popularity and demand. We expect that this strategic partnership with Keenspot
will increase consumer recognition and demand for properties to which we or our
affiliates have ownership or other rights that we anticipate will enable us to
collect issues of popular titles into our Collected Book line for sale, either
directly or through a third-party distributor.
COLLECTED BOOK DISTRIBUTION
Our "Collected" line consists of four to five issues bundled together with extra
material to create what is called a "graphic novel." These books can be in
either hardcover or softcover and currently are sold direct to consumers through
an online store which we maintain on our website and at conventions we attend at
prices currently ranging from $14.95 to $49.95 before taxes or shipping. We sell
products on Amazon through its standard terms of service. The price points for
our Collected line of products varies based on page count, type of cover and
binding and other factors.
While we do not have any active third-party distribution as of the date of this
Annual Report, we retain the ability to distribute our titles to book retailers,
specialty shops and comic book shops through Diamond Comic Distributors, Inc.
("DCD") under their standard terms, as we had distributed products through DCD
prior to February 2012. We may also seek other third-party distribution
opportunities.
3
We anticipate collecting issues of titles published online through our Keenspot
sites or included in our Giant-Size line (as discussed below) (collectively,
"free titles") into our Collected line depending on their popularity and demand.
There is no guarantee, however, that any of the free titles will ever acquire
sufficient consumer recognition to make it to our Collected line.
GIANT-SIZED BOOK DISTRIBUTION
Our planned Giant-Size line is expected to consist of four main monthly books
with a fifth quarterly book that will fill out the calendar for a full 52 week
schedule. We do not intend to reprint properties published online on our
Keenspot sites online for these books; instead, each book will have new material
and stories. Initial books are planned to feature works such as Duel
Identity(TM), Tesla(TM), a modern version of Wayward Sons(TM), Pandora's
Blog(TM), and four to six other works in any given month. Currently anticipated
names for our monthly books are "Giant-Size Action(TM)," "Giant-Size
Fatales(TM)," "Giant-Size Thrills(TM)," "Giant-Size Fantasy(TM)," and
"Giant-Size Quarterly(TM)."
Each book will appeal to a diverse demographic group by hosting a different
genre of stories. Giant-Size Action will feature mainstream science-fiction,
fantasy, action, and adventure stories that appeal to a wide audience.
Giant-Size Fatales will feature works by women creators that appeal to audiences
of all genders, but are told from a female's perspective. Giant-Size Thrills
will feature works of suspense, horror, thrillers and nail-biters of all sorts
that appeal to the older teen and adult audiences. Giant-Size Fantasy will play
host to all-ages fare suitable and enjoyable for the whole family. Their
Giant-Size Quarterly book will rotate a wide range of books that will touch on
each of these targets in a unique manner.
Each book is intended to be offered at no charge to book retailers, specialty
shops and comic book shops through a third-party distributor, with revenues
earned through selling advertising space in the books. By providing these books
free of charge, we expect to build consumer recognition and demand that we
anticipate will allow us to collect issues of popular titles into our Collected
Book line for sale, either directly or through a third-party distributor.
Currently, we anticipate that each book will have two issues (one from each of
two titles) for approximately 32 pages of content, with two to four pages for
editorial and up to 30 interior pages and three "premium" cover pages (inside
front, inside back and back cover) for advertising. The "Center Spread" will
also be a premium spot and will always be reserved for advertisements. We intend
to use the saddle stitch binding typically used for individual comic book issues
for our Giant-Size line.
ADVERTISING
We intend to sell advertising space on our Keenspot websites and in our
Giant-Size line, as well as on our corporate website.
Keenspot and we share 50% of revenues generated by Keenspot from advertising on
our Keenspot sites and from Keenspot's management of the web publication of
properties to which we or our affiliates have ownership or other rights. We
share 25% of the revenue generated from advertising on our corporate website
with Project Wonderful for its services. All rates are based upon bids by
advertisers and are not set by us.
Other than our agreements with Keenspot and our acceptance of Project
Wonderful's standard terms of service, however, we have not entered into any
agreements for advertising and there is no assurance that other companies will
want to advertise in our websites or Giant-Size Books on favorable terms, if at
all.
There is no guarantee that we will generate enough revenues from selling
advertising space on our Keenspot websites or in our Giant-Size line to either
(i) recoup the expenses we incur in producing such products; or (ii) make such
products profitable without considering their potential contribution to any
profits made through the sale of our Collected line.
4
LICENSING AND FILM ADAPTATION
We may license the use of properties to which we or our affiliates have
ownership or other rights for merchandising as toys and apparel and for
production in comic book or Webcomic form or as novels, video games, apps, films
or television shows. In addition, several properties to which we or our
affiliates have ownership or other rights have either been developed into
feature-length films or are in process of being so developed, including without
limitation Journey to Magika(TM), Supernovas(TM), Wayward Sons: Legends(TM),
Last Blood(TM), and Katrina(TM). We expect to receive royalties on the
production of such properties in any form by licensees. We have not reached any
final agreement with any licensee, and there can be no guarantee that we will be
able to license such properties for any specific product-type on favorable
terms, if at all.
OTHER ACTIVITIES
We also provide creative services (e.g., artwork, writing, advertising and other
creative endeavors) for outside clients through our network of artists and
writers, and obtain revenues through the sale of advertising space on our
corporate website through ProjectWonderful.com ("Project Wonderful") under their
standard terms of service.
COMPETITION
The comic book and related intellectual development industries are highly
competitive with little or no barriers to entry. We compete with publishers and
creative individuals.
Most of our competitors are part of integrated entertainment companies and all
have greater resources and financing than us. We also face competition from
other entertainment media, such as movies and video games.
The market for digital distribution of content and products and related Internet
services and products is intensely competitive. Since there are no substantial
barriers to entry, we expect competition in these markets to intensify. We
believe that the principal competitive factors in these markets are name
recognition, performance, ease of use and functionality. Our existing
competitors, as well as a number of potential new competitors, may have longer
operating histories in the digital distribution market, greater name
recognition, larger customer bases and databases and significantly greater
financial, technical, and marketing resources. Such competitors may be able to
undertake more extensive marketing campaigns and make more attractive offers to
potential employees. Further, there can be no assurance that our competitors
will not develop services and products that are equal or superior to ours or
that achieve greater market acceptance than our offerings in the area of name
recognition, performance, ease of use and functionality. There can be no
assurance that we will be able to compete successfully against our current or
future competitors or that competition will not have a material adverse effect
on our business, results of operations and financial condition.
Our competitors include DC Entertainment, home to DC Comics, Vertigo, and Mad
Magazine; and Marvel Entertainment, LLC, a wholly-owned subsidiary of The Walt
Disney Company.
PATENT, TRADEMARK, LICENSE AND FRANCHISE RESTRICTIONS AND CONTRACTUAL
OBLIGATIONS
We do not currently have any patent or trademark applications pending, but we
plan to obtain protection with applicable patents and trademarks. We also intend
to protect our intellectual properties from license infringements or violations
through our contracts with third parties.
We have not entered into any franchise agreements or other contracts that have
given, or could give rise to obligations or concessions.
Our success depends in part upon our protection of our intellectual properties.
We will principally rely upon copyright and contract law to protect our
proprietary properties. There can be no assurance that the steps taken will be
adequate to prevent misappropriation of our intellectual properties.
5
EMPLOYEES
We currently have one employee, Benny R. Powell, and four independent
contractors, consisting of our remaining officers.
ITEM 1A. RISK FACTORS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide the information under this
item.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We are a smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide the information under this
item.
ITEM 2. PROPERTIES
We lease a virtual office at 614 E. Highway 50, Suite 235, Clermont, Florida
34711 on a month-to-month basis for $300 per month. We will continue to use this
space for our executive offices for the foreseeable future. Other office space
and storage space for print products is provided to us by our officers at no
charge.
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to, nor are any of our property currently the
subject of, any other material legal proceeding other than as set forth herein.
None of our directors, officers, or affiliates is involved in a proceeding
adverse to our business or has a material interest adverse to our business.
On May 13, 2013, George Sharp ("Plaintiff") filed a Complaint in San Diego
Superior Court, Central District, Case No. 37-2013-00048310-CU-MC-CTL, against
14 companies, including us (collectively, "Defendants"). We were served with the
Complaint on May 23, 2013. The Complaint alleges that the Plaintiff received
unsolicited promotional emails being sent by Defendant, Victory Mark Corp. Ltd.,
discussing the other 13 corporate Defendants, including us. The Plaintiff is
seeking liquidated damages in the amount of $1,000 for each email he received
for a total of $1,204,000 collectively for all Defendants. After denial of our
Demurrer to the Complaint, we filed an Answer to the Complaint. The Plaintiff
has filed a Demurrer to our Answer, which will be heard February 14, 2014.
In the ordinary course of business, we may be from time to time involved in
various pending or threatened legal actions. The litigation process is
inherently uncertain and it is possible that the resolution of such matters
could have a material adverse effect upon our financial condition and/or results
of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET FOR COMMON EQUITY
Our common stock is traded on the OTCQB tier of the OTC Markets under the symbol
"REDG." Prior to August 28, 2012, our symbol was "CASL."
There is a limited trading market for our common stock at present. There is no
assurance that an active trading market will ever develop or, if such a market
does develop, that it will continue. Prior to December 21, 2012, the only trade
6
known to us was a private sale of 10,080,000 shares of our common stock on April
4, 2012, at a price of $0.0022 per shares, as reported on a Form 4 filed with
the SEC on April 4, 2012.
The following table sets forth, for the periods indicated the quarterly high and
low bid prices per share as reported by OTC Markets. These quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission and may not
represent actual transactions.
Period High Price(Bid) Low Price(Bid)
------ --------------- --------------
Year ended August 31, 2013
First Quarter (Sep-Nov) $0.25 $0.25
Second Quarter (Dec-Feb) $0.26 $0.07
Third Quarter (Mar-May) $0.20 $0.01
Fourth Quarter (Jun-Aug) $0.02 $0.01
There was no volume of trading for the first quarter of 2013. We have engaged in
a stock repurchase program since June 25, 2013 (see "Stock Repurchase Plan"
below).
HOLDERS
As of November 29, 2013, there were 40 holders of record of our common stock.
DIVIDENDS
We have paid no dividends on our common stock since inception and do not
anticipate or contemplate paying cash dividends in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
As disclosed under "Item 13. Certain Relationships and Related Transactions, and
Director Independence," we issued 500,000 shares of our common stock to Chris
Crosby, our Chief Technology Officer and a member of the Board, in exchange for
all of the shares of ComicGenesis.
The following is a summary of the following transactions and is qualified by
reference to the full text of the documents underlying those transactions as
filed by us with the SEC as shown our Exhibit Index hereto, which full text is
incorporated herein by this reference.
TRANSACTIONS WITH ICONIC HOLDINGS, LLC ("ICONIC")
As of April 15, 2013, we entered into a Securities Purchase Agreement (the
"Iconic SPA") with Iconic providing that at any time during the period beginning
upon the effective date of a registration statement for the registration of the
resale by Iconic of the restricted shares of our common stock issued under, or
issuable upon exercise of any warrants issued under, the Iconic SPA (the
"Registration Statement") (the "Effective Date") and ending on the earliest to
occur of:
(1) the date on which Iconic has purchased a total of $5,000,000 worth of
our common stock pursuant to the Iconic SPA; or
(2) the date of termination of the Iconic SPA; or
(3) the date which is 36 months from the Effective Date or 48 months from
the Effective Date if 36 months after the Effective Date, we file an
amendment to the Registration Statement or a new registration
statement is declared effective, (the "Commitment Period");
we may sell shares of our common stock to Iconic for a purchase price of:
7
(1) 92.5% of the lowest trading price of our common stock during the five
consecutive trading days including and immediately following the date
of our notice of sale (the "Market Price"); or
(2) 90% of the Market Price if our common stock is eligible for
Deposit/Withdrawal at Custodian ("DWAC"); or
(3) 80% of the Market Price if our common stock is under a chill order of
the Depository Trust & Clearing Corporation.
Pursuant to the Iconic SPA, we agreed to issue to Iconic shares of our common
stock as a commitment fee valued at $100,000 in aggregate, with 10% of such
value issued at execution, 45% issued 90 days following execution, and 45%
issued 180 days after execution. At each issuance date, the stock was valued at
the average volume weighted average price of our common stock during the five
business days immediately preceding the date of issuance as quoted on Bloomberg,
LP. Under this provision, we issued to Iconic an aggregate of 8,252,546 shares,
of which 772,798 shares were transferred to Iconic from shares held by Benny R.
Powell, our President.
We also entered into a Registration Rights Agreement with Iconic as of April 15,
2013 (the "Registration Rights Agreement") under which we are required, among
other things, to file the Registration Statement prior to selling any securities
to Iconic under the Iconic SPA, to keep the Registration Statement effective
until the fulfillment of the Commitment Period and to pay all expenses incurred
in connection with the registration.
In addition, on April 15, 2013, we issued Iconic a 9.9% Secured Convertible
Promissory Note in the amount of $130,000 for which we received $125,000 (the
"Iconic Note") with an original issue discount of $5,000. The Iconic Note
matures on April 15, 2014 and is convertible into our common stock at 60% of the
lowest trading price of any day during the ten consecutive trading days prior to
the date of conversion. The shares of common stock into which the Iconic Note is
convertible are not being registered in the Registration Statement. As of the
date of this report Iconic has converted $62,000 of amounts owed to it under the
Iconic Note into 22,636,273 shares.
No securities have been sold under the Iconic SPA as of the date of this Annual
Report.
The Iconic Note was issued, and securities under the Iconic SPA will be issued,
if at all, to Iconic pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder.
Iconic has represented to us that it is an accredited investor and had adequate
information about us as well as the opportunity to ask questions and receive
responses from our management.
12% SECURED CONVERTIBLE DEBENTURE TO WHC CAPITAL, LLC ("WHC")
On August 1, 2013, we issued a $166,000 12% secured convertible debenture (the
"Debenture") to WHC. The Debenture matures on August 1, 2014, and interest on
the Debenture is payable in cash upon maturity. If we fail to repay the
Debenture with interest upon maturity, the interest rate increases to 22%. The
Debenture is secured by 35,000,000 shares of common stock pledged by Benny R.
Powell, our Chief Executive Officer, President, Chief Financial Officer, and
Secretary, and a member of the Board, from his individual holdings. Funding of
this note was received subsequent to our fiscal year end.
In addition, the Debenture requires us to register 300% of the principal amount
of the shares into which the Debenture may be converted. Therefore, we are
preparing a registration statement to register 48,823,528 shares of our common
stock. The registration will also include any shares that may be converted which
comprise interest on the principal. If this registration is not declared
effective by the Securities and Exchange Commission (the "SEC") by December 9,
2013, the principal amount of the Debenture will be increased to 140% ($232,400)
and that certain number of shares subject to conversion upon that larger amount
are also being registered pursuant to the Debenture.
8
All or any portion of the amounts due under the Debenture may be converted at
any time at the option of WHC into shares of our common stock at a conversion
price equal to 60% of the lowest intra-day trading price of our common stock for
the ten trading days immediately preceding the conversion date.
The Debenture was issued to WHC pursuant to the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933. WHC represented to us that
it is an accredited investor and had adequate information about us as well as
the opportunity to ask questions and receive responses from our management.
UNSECURED CONVERTIBLE NOTE TO JSJ INVESTMENTS, INC. ("JSJ")
On August 5, 2013, we issued a $27,500 convertible note (the "JSJ Note") to JSJ.
The JSJ Note is due and payable in six months from issuance at a premium of 125%
of the principal amount. If we fail to repay the JSJ Note upon maturity, a
default interest rate of 10% shall also apply from such date.
The JSJ Note is convertible into shares of our common stock at a conversion
price equal to the lower of 55% of the average of the three lowest trading
prices in (i) the ten trading days prior to the date of conversion; or (ii) the
ten trading days prior to the execution of the JSJ Note.
The Debenture was issued to JSJ pursuant to the exemption from registration set
forth in Section 4(2) of the Securities Act of 1933 and regulations promulgated
thereunder. We believe that JSJ is an accredited investor and had adequate
information about us as well as the opportunity to ask questions and receive
responses from our management.
UNSECURED 9% CONVERTIBLE NOTE TO LG CAPITAL FUNDING, LLC ("LG")
On October 2, 2013, we issued a $55,000 convertible note (the "LG Note") to LG
with an original issue discount of 10% covering $5,000 in LG's due diligence and
legal fees in connection with the LG Note. The LG Note is due and payable on
October 2, 2015, with interest payable in our common stock. If we fail to repay
the LG Note upon maturity, a default interest rate of 24% shall also apply from
such date, or at the highest rate permitted by law.
We may redeem the LG Note with a payment of 150% of the outstanding principal
amount, and are required to redeem the LG Note upon certain sales events as set
forth in the LG Note.
The LG Note is convertible after the running of the applicable Rule 144 holding
period without restrictive legend into shares of our common stock at a
conversion price equal to 60% of the lowest trading price of our common stock as
reported on the OTCQB for any of the ten trading days prior to and including the
date upon which notice of conversion is received.
The LG Note was issued pursuant to the exemption from registration set forth in
Section 4(2) of the Securities Act of 1933 and regulations promulgated
thereunder. We believe that LG is an accredited investor and had adequate
information about us as well as the opportunity to ask questions and receive
responses from our management.
TRANSACTIONS WITH ASHER ENTERPRISES, INC. ("ASHER")
On September 30, 2013 and November 11, 2013, we entered into Securities Purchase
Agreements (the "Asher SPAs") and 8% Convertible Promissory Notes (the "Asher
Notes") with Asher in the principal amounts of $37,500 and $53,000,
respectively. The two transactions are substantially the same, and the documents
relating to the November 11, 2013 investment are filed herewith. The Asher Notes
are due approximately one year from their respective issuances and carries with
them a default interest rate of 22%. We may prepay the Asher Notes following
issuance at rates starting at 120% of all amounts owed under such Asher Note for
the first 30 calendar days after issuance, and increasing by 5% for each
subsequent 30 calendar day period; provided, however, that we may not prepay
either Asher Note after 180 calendar days after its respective issuance.
The Asher Notes are convertible at a conversion price equal to 58% of the
average of the three lowest closing bid prices during the ten days prior to
conversion; provided, however, that the conversion price time frame remains
9
constant at the public announcement of certain major events until such time as
the announced events are consummated or terminated.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
We have no compensation plans (including individual compensation arrangements)
under which our equity securities are authorized for issuance, including any
underlying options or warrants.
STOCK REPURCHASE PLAN
On June 25, 2013, we announced that we had authorized a stock repurchase program
permitting us to repurchase shares of our common stock over the next six to 12
months. The shares are to be repurchased from time to time in open market
transactions or in privately negotiated transactions in our discretion.
To date, we have made the following repurchases:
Total Number of Shares Purchased
Total Number of Average Price Paid as Part of Publicly Announced
Period Shares Purchased Per Share Plans or Programs
------ ---------------- --------- -----------------
June 2013 615,900 $0.0141 615,900
July 2013 1,170,000 $0.0192 1,785,900
August 2013 -0- -0- 1,785,900
September 2013 -0- -0- 1,785,900
October 2013 -0- -0- 1,785,900
November 2013 -0- -0- 1,785,900
December 2013 (through
December 2) -0- -0- 1,785,900
The shares repurchased as listed above have not yet been returned to authorized
but unissued status, but upon doing so, will result in us having outstanding
455,802,373 shares of common stock.
ITEM 6. SELECTED FINANCIAL DATA
We are a smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide the information under this
item.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion and analysis should be read in conjunction with our
financial statements, including the notes thereto, appearing elsewhere in this
Annual Report.
PRINCIPLES OF CONSOLIDATION
We operate under the name of Red Giant Entertainment, Inc. and our wholly owned
subsidiaries Active Media, LLC and ComicGenesis, LLC. The companies have been
incorporated for the intentions of developing brand names. The wholly owned
companies are inactive. Any activities of these subsidiaries or holdings have
been included in our consolidated financial statements, with elimination of any
intercompany accounts and transactions.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
10
expenses. In consultation with the Board, we have identified several accounting
principles that we believe are key to the understanding of our financial
statements. These important accounting policies require management's most
difficult, subjective judgments.
GOING CONCERN
The financial statements included in our filings have been prepared in
conformity with generally accepted accounting principles that contemplate our
continuance as a going concern. Management may use borrowings and security sales
to mitigate the effects of its cash position; however, no assurance can be given
that debt or equity financing, if and when required, will be available. The
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets and classification of
liabilities that might be necessary should we be unable to continue existence.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires our management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses for
the reporting period. We review our estimates on an ongoing basis. The estimates
were based on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances. Actual results could differ
from these estimates. We believe the judgments and estimates required in our
accounting policies to be critical in the preparation of our financial
statements.
REVENUE RECOGNITION
Our revenue is recognized from three primary sources: Advertising Revenue,
Publishing Sales and Creative Services. Revenue was processed through our Paypal
Account and Project Wonderful accounts where applicable.
Advertising Revenue comes from the following sources and is stated at net after
commissions:
* Keenspot: Revenue is recognized from Keenspot's arrangements with
advertisers at an agreed upon cost per thousand verified impressions
(CPM) to our Keenspot sites whereby advertisers pay based on the
number of times the target audience is exposed to the advertisement.
This revenue is recognized on a net basis in the monthly period in
which the impressions occur (i.e., advertisers pay us within 90
calendar days of receiving Keenspot's invoices). The particular CPM
rate varies based upon bids by advertisers and other customary
factors. In exchange for advertising, hosting, IT, and sales
management, Keenspot takes 50% commission of ad revenue for their
services.
* Project Wonderful: Revenue is paid immediately and based upon bids by
advertisers for a set amount of time at the prevailing highest winning
rate. Project Wonderful takes a 25% commission of ad revenue for their
services.
Publishing Revenue comes from the following sources:
* Kickstarter Campaigns: These are presales for books and revenue is
recognized only once the books arrive and are shipped to the buyers.
* Direct Sales: Through our online store, we sell directly to clients
and the transactions process through our Paypal account. All orders
are shipped immediately and revenue is recognized immediately.
Creative Services are artwork, writing, advertising, and other creative
endeavors we handle for outside clients. Revenue is recognized upon completion
of the services and payment has been tendered.
Shipping and Handling for purchases are paid directly by the consumer through
Paypal. The Company has not established an allowance for doubtful accounts, as
all transactions are handled through Paypal directly by the consumer.
11
COST OF GOODS SOLD
Cost of goods sold includes the cost of creating services or artwork,
advertising and books.
EARNINGS (LOSS) PER SHARE
We follow financial accounting standards, which provides for calculation of
"basic" and "diluted" earnings per share. Basic earnings per share includes no
dilution and is computed by dividing net income available to common shareholders
by the weighted average common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution of securities that could share
in the earnings of an entity similar to fully diluted earnings per share. There
were approximately 28,985,500 common stock equivalents outstanding, attributable
to the convertible debt agreements as of August 31, 2013.
INCOME TAXES
We have adopted ASC 740, Income Taxes, which requires us to recognize deferred
tax liabilities and assets for the expected future tax consequences of events
that have been recognized in our financial statements or tax returns using the
liability method. Under this method, deferred tax liabilities and assets are
determined based on the temporary differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect in the
years in which the differences are expected to reverse.
ADVERTISING
Advertising costs are expensed as incurred. We expensed advertising costs of
$2,735 and $962, respectively, for the periods ending August 31, 2013 and August
31, 2012.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, we consider all highly liquid
investments and short-term debt instruments with original maturities of three
months or less to be cash equivalents. As of August 31, 2013 and August 31,
2012, we had $14,937 and $269, respectively in cash equivalents.
RESULTS OF OPERATIONS
YEARS ENDED AUGUST 31, 2013 AND 2013
REVENUES. Our revenues increased to $497,486 for the fiscal year ended August
31, 2013 as compared to revenues of $97,486 for the fiscal year ended August 31,
2012.
COST OF SALES. Our cost of sales increased to $148,215 for the fiscal year ended
August 31, 2013, as compared to $69,651 for the fiscal year ended August 31,
2012.
OPERATING EXPENSES. Operating expenses increased to $421,865 for the fiscal year
ended August 31, 2013, as compared to $44,304 for the fiscal year ended August
31, 2012. This change occurred due to proportionally higher General &
Administrative expenses, while our Depreciation & Amortization expenses and
Professional Fees increased proportionally less.
NET LOSS. We had a net loss of $72,594 for the fiscal year ended August 31, 2013
compared to a net loss of $16,469 for the fiscal year ended August 31, 2012.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2013, we had cash of $14,937 compared to $269 at August 31, 2012.
The bulk of our other assets consist of prepaid expenses. We are currently
generating revenues from operations sufficient to meet our operating expenses.
However, our management believes that given the current economic environment and
the continuing need to strengthen our cash position, there is still doubt about
our ability to continue as a going concern. We are currently pursuing various
12
funding options, including seeking debt or equity financing, licensing
opportunities, as well as a strategic or other transaction, to obtain additional
funding to continue the development of, and successfully commercialize, our
products. There can be no assurance that we will be successful in these. Should
we be unable to obtain adequate financing or generate sufficient revenue in the
future, our business, results of operations, liquidity and financial condition
would be materially and adversely harmed, and we will be unable to continue as a
going concern.
The disclosures contained in "Item 5. Market For Registrant's Common Equity,
Related Stockholder Matters, And Issuer Purchases Of Equity Securities-- Recent
Sales of Unregistered Securities" above are incorporated herein by reference.
On June 25, 2013, we announced that we had authorized a stock repurchase program
permitting us to repurchase shares of our common stock over the next six to 12
months. The shares are to be repurchased from time to time in open market
transactions or in privately negotiated transactions in our discretion. We
purchased 615,9000 shares in June 2013 for an average price of $0.0141 and
1,170,000 shares in July 2013 for an average price of $0.0192. We have not
purchased any shares under this program from August 2013 though the date of this
report. The shares repurchased as listed above have not yet been returned to
authorized but unissued status, but upon doing so, will result in us having
outstanding 455,772,373 shares of common stock.
Our net cash used by operating activities was $118,808 for the fiscal year ended
August 31, 2013 as compared to $7,364 for the fiscal year ended August 31, 2012.
Cash used in investing activities increased from $3,332 for the fiscal year
ended August 31, 2012 to $8,211 for the fiscal year ended August 31, 2013.
Cash provided by financing activities for the fiscal years ended August 31, 2013
and 2012 was $141,687 and $10,869, respectively, largely due to proceeds from
notes payable of $157,500 in the fiscal year ended August 31, 2013, as compared
with no notes payable proceeds in the fiscal year ended August 31, 2012.
OFF BALANCE SHEET ARRANGEMENTS
We have no off balance sheet arrangements.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2012, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2012-02, "Intangibles--Goodwill and
Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment"
(the "Update"). The Update simplifies the guidance for testing the decline in
the realizable value (impairment) of indefinite-lived intangible assets other
than goodwill. Examples of intangible assets subject to the guidance include
indefinite-lived trademarks, licenses and distribution rights. The new standard
is effective for fiscal years beginning after September 15, 2012. As of August
31, 2013, none of the our intangible assets are amortized as indefinite-lived
intangible assets. Therefore, the adoption of this amendment is not expected to
have a material impact on our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide the information under this
item.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
------------------------------------------ ----
Reports of Independent Registered Public Accounting Firms 15
Consolidated Balance Sheets 17
Consolidated Statements of Operations 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to the Consolidated Financial Statements 21
All financial statement schedules have been omitted, since the required
information is not applicable or is not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements and notes thereto.
14
--------------------------------------------------------------------------------
MESSINEO & CO., CPAS LLC
2471 N MCMULLEN BOOTH RD, STE. 302
CLEARWATER, FL 33759-1362
T: (727) 421-6268
F: (727) 674-0511
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders:
Red Giant Entertainment, Inc.
Clermont, Florida
We have audited the consolidated balance sheet of Red Giant Entertainment, Inc.,
as of August 31, 2013 the related consolidated statement of operations,
consolidated changes in stockholders' deficit, and consolidated cash flows for
the year ended August 31, 2013. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
consolidated financial statements of Red Giant Entertainment, Inc. as of August
31, 2012, and for the eight month period ending August 31, 2013, were audited by
other auditors whose report dated January 2, 3013, expressed an unqualified
opinion on those statements, except that the report contained an explanatory
paragraph stating that there was substantial doubt about the Company's ability
to continue as a going concern.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements were free of material misstatement. The
Company was not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit
procedures that were appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements, referred to above,
present fairly, in all material respects, the consolidated financial position of
Red Giant Entertainment, Inc. as of August 31, 2013 and the results of its
operations, changes in its stockholders' deficit and its cash flows for the year
ended August 31, 2013, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred losses resulting in accumulated
deficit and may be unable to raise further funds through equity or other
traditional financing. These factors raise substantial doubt about its ability
to continue as a going concern. Management's plans regarding those matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Messineo & Co., CPAs, LLC
-------------------------------------
Messineo & Co., CPAs, LLC
Clearwater, Florida
December 2, 2013
15
[LETTERHEAD OF MARTINELLIMICK PLLC]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Red Giant Entertainment, Inc.
We have audited the accompanying balance sheet of Red Giant Entertainment, Inc.
as of August 31, 2012, and the related statements of operations, stockholders'
equity, and cash flows for the period then ended. Red Giant Entertainment,
Inc.'s management is responsible for these financial statements. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Red Giant Entertainment, Inc.
as of August 31, 2012, and the results of its operations and its cash flows for
the period then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's accumulated deficit and net loss raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding the resolution of this issue are also discussed in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ MartinelliMick PLLC
--------------------------------
MartinelliMick PLLC
Spokane, Washington
January 2, 2013
16
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Consolidated Balance Sheets
August 31, August 31,
2013 2012
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents $ 14,937 $ 269
Inventory 52,107 10,928
Prepaid and other current assets 82,000 20,000
---------- ----------
Total Current Assets 149,044 31,197
Property and equipment, net of accumulated
depreciation of $996 and $56, respectively 10,548 3,277
Intellectual property, net of accumulated
amortization of $15,600 and $9,750, respectively 13,650 19,500
---------- ----------
TOTAL ASSETS $ 173,242 $ 53,974
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Accounts payable and accrued expenses $ 81,332 $ 19,776
Due to related parties 39,187 --
Convertible notes payable 100,710 --
Derivative liability 271,321 --
---------- ----------
Total Current Liabilities 492,550 19,776
---------- ----------
TOTAL LIABILITIES 492,550 19,776
---------- ----------
Commitments and Contingencies -- --
---------- ----------
Stockholders' (Deficit) Equity
Preferred stock: 100,000 authorized; $0.0001 par value
0 shares issued and outstanding -- --
Common stock: 900,000,000 authorized; $0.0001 par value
434,922,000 and 434,922,000 shares issued and outstanding 43,492 43,492
Discount on common stock (1,947) (1,947)
Treasury stock, at cost, 1,785,900 shares (55,000) --
Accumulated deficit (305,853) (7,348)
---------- ----------
Total Stockholders' (Deficit) Equity (319,308) 34,197
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 173,242 $ 53,974
========== ==========
See auditor's report and notes to the audited financial statements
17
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Consolidated Statements of Operations
For the eight month
For the year ending period ending
August 31, August 31,
2013 2012
------------ ------------
Revenues $ 497,486 $ 97,486
Cost of sales 148,215 69,651
------------ ------------
Gross profit 349,271 27,835
------------ ------------
Operating Expenses
Selling and marketing 50,373 6,175
General and administrative 180,189 5,376
Compensation 52,781 7,302
Professional 131,732 21,495
Depreciation and amortization 6,790 3,956
------------ ------------
Total operating expenses 421,865 44,304
------------ ------------
NET LOSS FROM OPERATIONS (72,594) (16,469)
OTHER INCOME (EXPENSE)
Interest expense (112,090) --
Change in derivative (113,821) --
Income taxes -- --
------------ ------------
NET LOSS $ (298,505) $ (16,469)
============ ============
BASIC AND DILUTIVE LOSS PER SHARE $ (0.00) $ (0.00)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 434,922,000 283,256,653
============ ============
See auditor's report and notes to the audited financial statements
18
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Consolidated Statement of Stockholders' Deficit
Discount
Preferred Stock Common Stock Additional on Treasury Shares
---------------- ------------------- Paid in Common ------------------ Accumulated
Shares Amount Shares Amount Capital Stock Shares Amount Deficit Total
------ ------ ------ ------ ------- ----- ------ ------ ------- -----
BALANCE,
DECEMBER 31, 2011 -- $ -- 240,000,000 $24,000 $ 6,676 $ -- -- $ -- $ 9,121 $ 39,797
Recapitalization
from reverse
merger -- -- 194,922,000 19,492 (17,545) (1,947) -- -- -- --
Contributed capital -- -- -- -- 10,869 -- -- -- -- 10,869
Net loss (for the
eight month
period ending
August 31, 2012 (16,469) (16,469)
------ ------- ----------- ------- --------- -------- --------- -------- --------- ---------
BALANCE,
AUGUST 31, 2012 -- -- 434,922,000 43,492 -- (1,947) -- -- (7,348) 34,197
Stock buy-back
program -- -- -- -- -- -- 1,785,900 (55,000) -- (55,000)
Acquisition of
ComicGenesis -- -- -- -- 45,000 -- -- -- -- --
Contribution of
capital -- -- -- -- (45,000) -- -- -- -- --
Net loss (298,505) (298,505)
------ ------- ----------- ------- --------- -------- --------- -------- --------- ---------
BALANCE,
AUGUST 31, 2013 -- $ -- 434,922,000 $43,492 $ -- $ (1,947) 1,785,900 $(55,000) $(305,853) $(319,308)
====== ======= =========== ======= ========= ======== ========= ======== ========= =========
See auditor's report and notes to the audited financial statements
19
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Consolidated Statements of Cash Flows
For the eight month
For the year ending period ending
August 31, August 31,
2013 2012
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (298,505) $ (16,469)
Adjustment to reconcile Net Income to net
cash provided by operations:
Depreciation and amortization 6,790 3,956
Amortization of deferred financing costs 100,710 --
Change in derivative 113,821 --
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Inventory (41,179) 5,373
Prepaid expenses and other assets (62,000) (20,000)
Increase (decrease) in operating liabilities: -- --
Accounts payable and accrued expenses 61,555 19,776
---------- ----------
Total adjustments 179,697 9,105
---------- ----------
Net Cash (Used in) Operating Activities (118,808) (7,364)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (8,211) (3,333)
Acquisition of intangible property -- --
---------- ----------
Net Cash (Used in) Investing Activities (8,211) (3,333)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder loans, net 39,187 --
Proceeds from Loan(s) 157,500 --
Purchase of treasury stock, at cost (55,000) --
Contributed capital -- 10,869
---------- ----------
Net Cash Provided by Financing Activities 141,687 10,869
---------- ----------
Net increase in cash and cash equivalents 14,668 172
Cash and cash equivalents, beginning of period 269 97
---------- ----------
Cash and cash equivalents, end of period $ 14,937 $ 269
========== ==========
Supplemental cash flow information
Cash paid for interest $ -- $ --
========== ==========
Cash paid for taxes $ -- $ --
========== ==========
See auditor's report and notes to the audited financial statements
20
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Notes to the Consolidated Financial Statements
August 31, 2013 and 2012
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Red Giant Entertainment LLC, (hereinafter "the Company") was formed in the State
of Florida, U.S.A., on January 1, 2011. The Company's fiscal year end is
December 31. On May 9, 2012, the Company incorporated and changed its name to
Red Giant Entertainment, Inc. ("RGE") All income and expenses in these financial
statements have been recharacterized for reporting purposes to be all inclusive
for the corporate entity. The Company was originally a publishing company, but
has expanded its operations to include mass media and graphic novel artwork
development.
On June 11, 2012, Castmor Resources Ltd., a Nevada corporation entered into a
Share Exchange Agreement (the "Share Exchange Agreement") with Red Giant
Entertainment Inc., and Benny R. Powell, who had owned 100% of the issued and
outstanding shares in RGE. Pursuant to the terms and conditions of the Share
Exchange Agreement, RGE exchanged 100% of the outstanding shares in RGE for
forty million (40,000,000; 240,000,000 post split) newly-issued restricted
shares of the Company's common stock. Due to the recapitalization and reverse
merger with Castmor Resources Ltd, 32,487,000 shares (194,922,000 post split)
were issued in the entity. The Company subsequently approved a 6 to 1 forward
stock split of all shares of record in June, 2012.
The exchange resulted in RGE becoming a wholly-owned subsidiary of the Company.
As a result of the Share Exchange Agreement, the Company will now conduct all
current operations through Red Giant Entertainment, and our principal business
became the business of RGE. The Company's fiscal year end adopted August 31. All
share information has been restated for both the reverse merger and the forward
stock split for all periods presented.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Company have been prepared in accordance with
the generally accepted accounting principles in the United States of America.
Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily
involves the use of estimates that have been made using careful judgment. The
financial statements have, in management's opinion been properly prepared within
reasonable limits of materiality and within the framework of the significant
accounting policies summarized below:
PRINCIPLES OF CONSOLIDATION
The Company operates under the name of Red Giant Entertainment, Inc. and its
wholly owned subsidiaries Active Media, LLC and ComicGenesis, LLC. The companies
have been incorporated for the intentions of developing brand names. The wholly
owned companies are inactive. Any activities of these subsidiaries or holdings
have been included in the consolidated financial statements, with elimination of
any intercompany accounts and transactions.
ACCOUNTING METHOD
The Company's financial statements are prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America and have been consistently applied in the preparation
of the financial statements.
RECLASSIFICATION
Certain amounts in the prior period financial statements have been reclassified
to conform to the current period presentation. These reclassifications had no
effect on reported losses.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses for the reporting
period. The Company reviews its estimates on an ongoing basis. The estimates
were based on historical experience and on various other assumptions that the
Company believes to be reasonable under the circumstances. Actual results could
21
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Notes to the Consolidated Financial Statements
August 31, 2013 and 2012
differ from these estimates. The Company believes the judgments and estimates
required in its accounting policies to be critical in the preparation of the
Company's financial statements.
FAIR VALUE MEASUREMENTS
Topic 820 in the Accounting Standards Codification (ASC 820) defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. ASC
820 applies whenever other standards require (or permit) assets or liabilities
to be measured at fair value but does not expand the use of fair value in any
new circumstances. In this standard, the FASB clarifies the principle that fair
value should be based on the assumptions market participants would use when
pricing the asset or liability. In support of this principle, ASC 820
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy is as follows:
* Level 1 inputs -- Unadjusted quoted process in active markets for
identical assets or liabilities that the entity has the ability to
access at the measurement date.
* Level 2 inputs -- Inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly or
indirectly. These might include quoted prices for similar assets and
liabilities in active markets, and inputs other than quoted prices
that are observable for the asset or liability, such as interest rates
and yield curves that are observable at commonly quoted intervals.
* Level 3 inputs -- Unobservable inputs for determining the fair values
of assets or liabilities that reflect an entity's own assumptions
about the assumptions that market participants would use in pricing
the assets or liabilities.
The Company currently does not have any assets that are measured at fair value
on a recurring or non-recurring basis, consequently, the Company did not have
any fair value adjustments for assets and liabilities measured at fair value at
August 31, 2013, nor gains or losses reported in the statement of operations
that are attributable to the change in unrealized gains or losses relating to
those assets and liabilities still held at the reporting date for the period
ended August 31, 2013.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments and short-term debt instruments with original maturities of
three months or less to be cash equivalents. As of August 31, 2013, the company
has $14,937 of cash equivalents.
ACCOUNTS RECEIVABLE AND CREDIT
The Company currently does not issue credit on services or product provided,
therefore there are no accounts receivable. No allowance for doubtful accounts
is considered necessary to be established for amounts that may not be
recoverable, since there has been no credit issued.
ASSET RETIREMENT OBLIGATIONS
The Company has adopted ASC 410, Asset Retirement and Environmental Obligations,
which requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred. ASC 410 requires
the Company to record a liability for the present value of the estimated site
restoration costs with corresponding increase to the carrying amount of the
related long-lived assets. The liability will be accreted and the asset will be
depreciated over the life of the related assets. Adjustments for changes
resulting from the passage of time and changes to either the timing or amount of
the original present value estimate underlying the obligation will be made. As
at August 31, 2013, the Company does not have any asset retirement obligations.
LONG-LIVED ASSETS IMPAIRMENT
Long-lived assets of the Company are reviewed for impairment whenever events or
circumstances indicate that the carrying amount of assets may not be
recoverable, pursuant to guidance established in ASC 360, Property, Plant and
Equipment. Management considers assets to be impaired if the carrying value
22
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Notes to the Consolidated Financial Statements
August 31, 2013 and 2012
exceeds the future projected cash flows from related operations (undiscounted
and without interest charges). If impairment is deemed to exist, the assets will
be written down to fair value. Fair value is generally determined using a
discounted cash flow analysis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at historical cost and capitalized.
Depreciation is calculated on a straight-line basis over the estimated useful
life of the asset. The Company currently has equipment being depreciated for
estimated lives of three to five years.
REVENUE RECOGNITION
Revenue for the Company is recognized from three primary sources: Advertising
Revenue, Publishing Sales and Creative Services. Revenue was processed through
our Paypal Account and Project Wonderful accounts where applicable.
Advertising Revenue comes from the following sources and is stated at net after
commissions:
* Keenspot: Revenue is earned on a net 90 basis and is based upon
traffic to Red Giant property Web sites. It is calculated on a Cost
Per Thousand (CPM) of verified impressions and varies based upon bids
by advertisers and other customary factors. In exchange for
advertising, hosting, IT, and sales management, Keenspot takes 50%
commission of ad revenue for their services.
* Project Wonderful: Revenue is paid immediately and based upon bids by
advertisers for a set amount of time at the prevailing highest winning
rate. Project Wonderful takes a 25% commission of ad revenue for their
services.
Publishing Revenue comes from the following sources:
* Kickstarter Campaigns: These are presales for books and revenue is
recognized only once the books arrive and are shipped to the buyers.
* Direct Sales: Through our online store, we sell directly to clients
and the transactions process through our credit processing service
(Paypal) account. All orders are shipped immediately and revenue is
recognized immediately.
Creative Services are artwork, writing, advertising, and other creative
endeavors we handle for outside clients. Revenue is recognized upon completion
of the services and payment has been tendered.
Shipping and Handling for purchases are paid directly by the consumer through a
credit processing service.
COST OF GOODS SOLD
Cost of goods sold includes the cost of creating services or artwork,
advertising and books.
ADVERTISING
Advertising costs are expensed as incurred. The Company expensed advertising
costs of $3,506 and $962 for the periods ending August 31, 2013 and 2012,
respectively.
SHARE-BASED COMPENSATION
In accordance with FASB ASC No. 718, Compensation - Stock Compensation ("ASC
718"). Under ASC 718, companies are required to measure the compensation costs
of share-based compensation arrangements based on the grant-date fair value and
recognize the costs in the financial statements over the period during which
employees are required to provide services. Share-based compensation
arrangements include stock options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. As such,
compensation cost is measured on the date of grant at their fair value. Such
compensation amounts, if any, are amortized over the respective vesting periods
of the option grant. The Company applies this statement prospectively.
Equity instruments ("instruments") issued to other than employees are recorded
on the basis of the fair value of the instruments, as required by FASB ASC 718.
FASB ASC No. 505, Equity Based Payments to Non-Employees ("ASC 505") defines the
23
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Notes to the Consolidated Financial Statements
August 31, 2013 and 2012
measurement date and recognition period for such instruments. In general, the
measurement date is (a) when a performance commitment, as defined, is reached or
(b) when the earlier of (i) the non-employee performance is complete or (ii) the
instruments are vested. The measured value related to the instruments is
recognized over a period based on the facts and circumstances of each particular
grant as defined in the ASC 505. During the periods ending August 31, 2013 and
2012, there were no stock-based shares issued.
INCOME TAXES
The Company has adopted ASC 740, Income Taxes, which requires the Company to
recognize deferred tax liabilities and assets for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns using the liability method. Under this method,
deferred tax liabilities and assets are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
EARNINGS (LOSS) PER SHARE
The Company follows financial accounting standards, which provides for
calculation of "basic" and "diluted" earnings per share. Basic earnings per
share includes no dilution and is computed by dividing net income available to
common shareholders by the weighted average common shares outstanding for the
period. Diluted earnings per share reflect the potential dilution of securities
that could share in the earnings of an entity similar to fully diluted earnings
per share. There were approximately 28,985,500 common stock equivalents
outstanding, attributable to the convertible debt agreements as of August 31,
2013.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2012, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2012-02, "Intangibles--Goodwill and
Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment"
(the "Update"). The Update simplifies the guidance for testing the decline in
the realizable value (impairment) of indefinite-lived intangible assets other
than goodwill. Examples of intangible assets subject to the guidance include
indefinite-lived trademarks, licenses and distribution rights. The new standard
is effective for fiscal years beginning after September 15, 2012. As of May 31,
2013, none of the Company's intangible assets are amortized as indefinite-lived
intangible assets. Therefore, the adoption of this amendment is not expected to
have a material impact on the Company's financial position or results of
operations.
We have reviewed the FASB issued Accounting Standards Update ("ASU") accounting
pronouncements and interpretations thereof that have effectiveness dates during
the periods reported and in future periods. The Company has carefully considered
the new pronouncements that alter previous generally accepted accounting
principles and does not believe that any new or modified principles will have a
material impact on the corporation's reported consolidated financial position or
consolidated operations in the near term. The applicability of any standard is
subject to the formal review of our financial management and certain standards
are under consideration.
NOTE 3 - MANAGEMENT STATEMENT REGARDING GOING CONCERN
The Company is currently generating revenues from operations sufficient to meet
its operating expenses. However, management believes that given the current
economic environment and the continuing need to strengthen our cash position,
there is still doubt about the Company's ability to continue as a going concern.
Management is currently pursuing various funding options, including seeking debt
or equity financing, licensing opportunities, as well as a strategic or other
transaction, to obtain additional funding to continue the development of, and
successfully commercialize, its products. There can be no assurance that the
Company will be successful in its efforts and this raises substantial doubt
about the Company's future. Should the Company be unable to obtain adequate
financing or generate sufficient revenue in the future, the Company's business,
results of operations, liquidity and financial condition would be materially and
adversely harmed, and the Company will be unable to continue as a going concern.
The Company believes that its ability to execute its business plan, and
therefore continue as a going concern, is dependent upon its ability to do the
following:
24
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Notes to the Consolidated Financial Statements
August 31, 2013 and 2012
* Obtain adequate sources of funding to fund long-term business
operations;
* Enter into a licensing or other relationship that allows the Company
to commercialize its products;
* Manage or control working capital requirements; and
* Develop new and enhance existing relationships with product
distributors and other points of distribution for the Company's
products.
There can be no assurance that the Company will be successful in achieving its
short- or long-term plans as set forth above, or that such plans, if
consummated, will enable the Company to obtain profitable operations or continue
in the long-term as a going concern.
NOTE 4 - INVENTORY
As of August 31, 2013, inventory consisted of physical copies of published
books, as well as artwork that's used for digitally distributed works for
advertising revenue and future publications. The inventory is valued at a
standard cost to produce.
Prepaid expenses include advanced funds for the production of our print. As of
August 31, 2013 and 2012, these advanced payments were $82,000 and $20,000,
respectively, which were made to a related party.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of:
August 31,
--------------------------
2013 2012
-------- --------
Computers and equipment $ 3,333 $ 3,333
Trade booth and equipment 8,211 --
-------- --------
Total property and equipment 11,544 3,333
Less accumulated depreciation 996 56
-------- --------
Property and equipment, net $ 10,548 $ 3,277
======== ========
Depreciation for the periods ended August 31, 2013 and 2012 was $640 and $56,
respectively.
NOTE 6 - INTELLECTUAL PROPERTY
The Company's intellectual property consists of graphic novel artwork and was
contributed by a shareholder to the Company and valued at $29,250, which was
determined based on the historical costs for artists and printing. The
intangible is being amortized over its estimated life of five years.
August 31,
--------------------------
2013 2012
-------- --------
Intellectual property $ 29,250 $ 29,250
Less accumulated amortization 15,600 9,750
-------- --------
Intellectual property, net $ 13,650 $ 19,500
======== ========
Amortization cost for the periods ended August 31, 2013 and 2012 was $5,850 and
$3,900, respectively. The Company expects to amortize the remaining $13,650 over
the remaining life of approximately three years at $5,850 per year.
25
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Notes to the Consolidated Financial Statements
August 31, 2013 and 2012
Future amortization:
2013 $ 5,850
2014 5,850
2015 1,950
thereafter --
--------
$ 13,650
========
NOTE 7 - CONVERTIBLE NOTES PAYABLE
The Company entered into lending arrangements with two entities, each with
convertible features. The Company evaluated the terms of the convertible notes,
with face values totaling $157,500, in accordance with ASC Topic No. 815 - 40,
DERIVATIVES AND HEDGING - CONTRACTS IN ENTITY'S OWN STOCK and that the
underlying common stock is indexed to the Company's common stock. The Company
determined that the conversion features meet the definition of a liability and
therefore bi-furcated the conversion feature and accounted for it as a separate
derivative liability. The Company evaluated the conversion feature for a
beneficial conversion feature. The effective conversion price was compared to
the market price on the date of the note and was deemed to be less than the
market value of underlying common stock at the inception of the note. Therefore,
the Company recognized a debt discount on the notes in the amount of $157,500 on
the origination date. The debt discount was recorded as reduction
(contra-liability) to the Convertible Notes Payable. The debt discount is being
amortized over the life of the notes. Additionally, the notes called for an
immediate withholding of $5,000 for service charges, which has been treated as
an original issue discount or deferred financing costs, a contra-liability
charge, which is to be amortized as finance cost over the life of the loan.
Expense, in the amount of $100,710 was recognized for the period ended August
31, 2013.
A derivative liability, in the amount of $271,321 has been recorded, as of
August 31, 2013, related to the above notes. The derivative value was calculated
using the Black-Scholes method. Assumptions used in the derivative valuation
were as follows:
Weighted Average:
Dividend rate 0.0%
Risk-free interest rate 0.05%
Expected lives (years) 0.563
Expected price volatility 288.2%
Forfeiture Rate 0.0%
The convertible notes outstanding as of August 31 are summarized below:
26
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Notes to the Consolidated Financial Statements
August 31, 2013 and 2012
2013 2012
-------- --------
Convertible promissory note, dated April 15, 2013, original face value of $130,000 $ --
$130,000, maturing April 15, 2014, 9.9% interest. Conversion price shall be
equal to 60% (40% discount) of the lowest trading price of any day during the
10 consecutive trading days prior to the date on which Holder elects to
convert all or part of the note.
Convertible promissory note, dated August 5, 2013, original face value of
$27,500, maturing February 5, 2014, 10% interest. Conversion price shall be
equal to 55% (45% discount) of the average of the three lowest trades on the
previous 10 trading days prior to the date of conversion, with a maximum
conversion price equal to the that price that would be obtained if the
conversion were to be made on the date that the note was executed. 27,500 --
-------- --------
Total debt $157,500 $ --
Less: unexpired debt discounts and deferred finance costs 56,790 --
-------- --------
Total $100,710 $ --
======== ========
Unexpired debt discounts and deferred finance costs, in the amount of $56,790,
will be recognized as interest expense in for year ending August 31, 2014. If
converted as of August 31, 2013, there would be approximately 28,985,500
additional shares to be issued.
NOTE 8 - PROVISION FOR INCOME TAXES
Income taxes are provided based upon the liability method. Under this approach,
deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year-end. A valuation allowance is recorded
against deferred tax assets if management does not believe the Company has met
the "more likely than not" standard imposed by accounting standards to allow
recognition of such an asset.
At August 31, 2013 and 2012, the Company expected no net deferred tax assets to
be recognized, resulting from net operating losses. Deferred tax assets were
offset by a corresponding allowance of 100%.
For the tax year ended December 31, 2011, the predecessor entity to Red Giant
Entertainment, Inc. was a limited liability company, and as such, all tax
benefits and obligations passed through the entity to its members. No provisions
have been made at December 31, 2011, nor does management believe that any tax
modifications would have a material effect on the financials. The Company has
accrued approximately $1,300 in penalties associated with delinquent filings.
Although Management believes that its estimates are reasonable, no assurance can
be given that the final tax outcome of these matters will not be different than
that which is reflected in our tax provisions. Ultimately, the actual tax
benefits to be realized will be based upon future taxable earnings levels, which
are very difficult to predict.
ACCOUNTING FOR INCOME TAX UNCERTAINTIES AND RELATED MATTERS
The Company may be assessed penalties and interest related to the underpayment
of income taxes. Such assessments would be treated as a provision of income tax
expense on the financial statements. At August 31, 2013, the tax return for 2011
and 2012 has not being filed. No income tax expense has been realized as a
result of operations and no income tax penalties and interest have been accrued
related to uncertain tax positions. The Company has not filed a tax return for
the new entity. These filings will be subject to a three year statute of
27
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Notes to the Consolidated Financial Statements
August 31, 2013 and 2012
limitations. No adjustments have been made to reduce the estimated income tax
benefit at fiscal year end. Any valuations relating to these income tax
provisions will comply with U.S. generally accepted accounting principles.
NOTE 9 - CAPITAL STOCK
The Company has 100,000,000 shares of preferred stock authorized and none have
been issued.
The Company has 900,000,000 shares of common stock authorized, of which
434,922,000 shares are issued and outstanding. All shares of common stock are
non-assessable and non-cumulative, with no preemptive rights. During the year,
the company purchased back 1,785,900 shares of its common stock. As of the date
of filing, these shares have not been cancelled and remain outstanding in the
name of Red Giant Entertainment, Inc. It is anticipated that these shares will
be cancelled in the following quarter.
During the eight months ended, August 31, 2012, $10,869 of contributed capital
was added to additional paid in capital.
In June, 2012, Castmor Resources Ltd., entered into Share Exchange Agreement
(the "Share Exchange Agreement") with Red Giant Entertainment Inc., ("RGE"), and
Benny R. Powell, who had owned 100% of the issued and outstanding shares in RGE.
Pursuant to the terms and conditions of the Share Exchange Agreement, RGE
exchanged 100% of the outstanding shares in RGE for forty million (240,000,000
post split) newly-issued restricted shares of the Company's common stock. Due to
the recapitalization and reverse merger of Castmor Resources Ltd, an additional
32,487,000 (194,922,000 post split) shares were issued. The Company approved a 6
to 1 stock split of all shares issued in June of 2012. All share information has
been restated for both the reverse merger and the forward stock split for all
periods presented.
During the year ending August 31, 2013 the Company entered into a stock buy-back
plan, whereby 1,785,900 shares were repurchased for $55,000 cost. The shares
remain in the name of the Corporation until such time as they are cancelled.
NOTE 10 - RELATED PARTIES
Benny R. Powell was an officer and director of both parties to the merger. See
Note 1. Mr. Powell continues as the Company's officer and director post merger.
Mr. Powell also provides rent and other services to the Company through his
other ventures.
The Company purchases print materials through a wholly owned entity, Active
Media Publishing, Inc, ("AMPI") of Mr. Powell. AMPI has certain arrangements
with overseas printing companies, whereby the printing is facilitated to the
Company. Agreement with AMPI states processing is at near cost prices on a
non-exclusive basis. During the year ended August 31, 2013, the Company
purchased print media in the amount of $165,540.
Keenspot has been paid or accrued commissions in the amount of approximately
$6,785 for the year ending August 31, 2013.
During the year ending August 31, 2013, the President and Chief Executive
Officer has advanced assets in the amount of $39,187, which includes transfer of
3 million shares of common stock, personally held, to an unrelated vendor for
securing services. Those services were valued at $36,000, per the agreement and
the fair value of the stock at the date of the exchange. As of August 31, 2013
and 2012, the Company was indebted to the President and Chief Executive, in the
amount of $39,187 and $0, respectively.
The Company does not have employment contracts with its controlling shareholder
who is President and Chief Executive Officer of the Company, although it has
independent contractor agreements with its other officers.
28
Red Giant Entertainment, Inc.
(formerly known as Castmor Resources, Inc.)
Notes to the Consolidated Financial Statements
August 31, 2013 and 2012
We also from time to time have retained Glass House Graphics, a sole
proprietorship owned by David Campiti, our Chief Operating Officer and a member
of the Board, to provide creative services for us. We paid an aggregate of
$2,035 to Glass House Graphics in the fiscal year ended August 31, 2013.
The amounts and terms of the above transactions may not necessarily be
indicative of the amounts and terms that would have been incurred had comparable
transactions been entered into with independent third parties.
NOTE 11 - BUSINESS SEGMENTS
The Company generates revenues from three service offerings: Advertising, Book
publishing and Creative. The Company's management measures its performance by
revenue lines and does not allocate its selling, general and administrative
expenses to each revenue offering. A summary of the lines of revenue are as
follows:
August 31,
-------------------------------
2013 2012
-------- --------
Revenues:
Advertising $ 6,842 $ 5,538
Book publishing 253,146 82,684
Creative 237,498 9,264
-------- --------
497,486 97,486
-------- --------
Cost of Sales:
Advertising 5,843 4,757
Book publishing 112,792 51,936
Creative 29,580 12,958
-------- --------
148,215 69,651
-------- --------
Gross Margin:
Advertising 999 781
Book publishing 140,354 30,748
Creative 207,918 (3,694)
-------- --------
$349,271 $ 27,835
======== ========
NOTE 12 - COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company may become a party to litigation
matters involving claims against the Company. The Company's management is aware
of a certain pending or threatened assertion and believe that the matter is
without legal merit and if defense is successful would not have a material
effect on the Company's financial position or results of operations.
Some of the officers and directors of the Company are involved in other business
activities and may, in the future, become involved in other business
opportunities that become available. They may face a conflict in selecting
between the Company and other business interests. The Company has not formulated
a policy for the resolution of such conflicts.
NOTE 13 - SUBSEQUENT EVENTS
Subsequent to August 31, 2013, the Company issued 22,636,273 shares of its
common stock, at a fair market value of $142,210 in exchange of debt totaling
$62,000. The Company will recognize a reduction in the derivative liability of
$80,210.
In period from September through November 2013 the Company issued four (4)
convertible promissory notes with an aggregate face value of $311,500, interest
of 8-12% interest, maturing in nine months to one year.
Management has evaluated subsequent events through November 27, 2013. There was
no event of which management was aware that occurred after the balance sheet
date that would require any adjustment to, or disclosure in, the accompanying
consolidated financial statements, except as mentioned above.
29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Benny R. Powell, our Chief Executive Officer, President, Chief Financial
Officer, and Secretary, and a member of the Board, has evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of
period covered by this Annual Report Based upon such evaluation, Mr. Powell
concluded that our disclosure controls and procedures were not effective to
ensure that the information required to be disclosed by us in the reports that
we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and is accumulated and communicated to our management,
including Mr. Powell, as appropriate to allow timely decisions regarding
required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes to our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934) that occurred during the period covered by this report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) to provide reasonable assurance regarding the
reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted
accounting principles.
Management assessed our internal control over financial reporting as of August
31, 2013, the end of our fiscal-year. Management based its assessment on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Management's
assessment included evaluation of elements such as the design and operating
effectiveness of key financial reporting controls, process documentation,
accounting policies, and our overall control environment.
Based on our assessment, management has concluded that our internal control over
financial reporting was not effective as of the end of the fiscal-year to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles. We reviewed the
results of management's assessment with the Board.
A material weakness is a control deficiency, or a combination of deficiencies,
in internal control over financial reporting such that there is a reasonable
possibility that a material misstatement of our annual or interim financial
statements will not be prevented or detected on a timely basis. The material
weaknesses identified are disclosed below:
* We do not have an audit committee or any other governing body to
oversee management.
* Documentation of proper accounting procedures is not present and
fundamental elements of an effective control environment were not
present as of August 31, 2013, including formalized monitoring
procedures.
* While we now have five officers, there is still no segregation of
duties with respect to internal controls, no management oversight, and
no additional persons reviewing control documentation, and no control
documentation is being produced at this time.
30
INHERENT LIMITATIONS ON EFFECTIVENESS OF CONTROLS
Our management does not expect that our disclosure controls or our internal
control over financial reporting will prevent or detect all error and all fraud.
A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system's objectives will be
met. The design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Further, because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues
and instances of fraud, if any, have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that
breakdowns can occur because of simple error or mistake. Controls can also be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Projections of any
evaluation of controls effectiveness to future periods are subject to risks.
Over time, controls may become inadequate because of changes in conditions or
deterioration in the degree of compliance with policies or procedures.
Because we are a smaller reporting company, the rules and regulations of the SEC
do not require that we include a report of our independent registered public
accounting firm regarding our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On October 25, 2013, we entered into an Independent Contractor Agreement with
each of our officers other than Benny R. Powell. Under such Independent
Contractor Agreements, we have agreed to pay each of Ms. Schoof and Messrs.
Campiti, Crosby and Isen $18,000 per year in monthly increments of $1,500. The
Independent Contractor Agreements have an initial term of one year and renews
automatically for subsequent one year terms unless terminated. The Independent
Contractor Agreements provide that our officers may perform services for other
companies.
The disclosures set forth above under "Item 5. Market For Registrant's Common
Equity, Related Stockholder Matters, And Issuer Purchases Of Equity Securities--
Recent Sales of Unregistered Securities" regarding the JSJ Note are incorporated
herein by this reference.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
Name Age Position
---- --- --------
Benny R. Powell 39 Chief Executive Officer, President, Chief Financial
Officer, Secretary, Director
David Campiti 55 Chief Operations Officer, Director
Chris Crosby 36 Chief Technology Officer, Director
Isen Robbins 45 Chief Intellectual Property Officer, Director
Aimee Schoof 42 Chief Business Development Officer, Director
The mailing address for all our officers and directors is 614 E. Hwy 50, Suite
235, Clermont, Florida 34711.
31
DUTIES, RESPONSIBILITIES AND EXPERIENCE
BENNY R. POWELL, CHIEF EXECUTIVE OFFICER, PRESIDENT, CHIEF FINANCIAL OFFICER,
SECRETARY, AND DIRECTOR. Mr. Powell has served as our Chief Executive Officer,
President, Chief Financial Officer, and Secretary, and as a member of the Board,
since June 11, 2012. Mr. Powell was the founder of RGE (acquired by us in June
2012) and served as its Chief Executive Officer from formation in January 2011.
He also founded and has served as Chief Executive Officer of Active Media
Publishing, LLC ("Active Media") from May 2003 to present. From November 2002 to
June 2007, Mr. Powell also served as CEO for Total Solutions Marketing, LLC, a
full service marketing company. From January 1995 to February 1999, Mr. Powell
worked as a writer at Marvel Comics Group. Mr. Powell is a co-owner of several
of properties, including without limitation Duel Identity(TM), Katrina(TM),
Wayward Sons(TM), and Wayward Sons: Legends(TM).
DAVID CAMPITI, CHIEF OPERATIONS OFFICER AND DIRECTOR. Mr. Campiti has served as
our Chief Operations Officer and a member of the Board since March 5, 2013. He
has also served as CEO and Global Talent Supervisor for Glass House Graphics, a
sole proprietorship professional services firm dba Studio Sakka Graphics &
Animation, Art & Comics Store, and The Academy of Comic Book Arts that provides
development and organizational services as well as illustrators, writers,
painters and designers, since 1993. Mr. Campiti oversees two Glass House
Graphics offices in Brazil; one in Manila, Philippines; one in New Delhi, India;
two locations in Indonesia, and one in Europe--coordinating creative services
from a roster of more than 120 talents worldwide to produce animation, art, and
digital graphics for scores of clients.
Mr. Campiti has over 30 years of experience in the comic book industry,
including writing for DC Comics, and helped launch Amazing Comics, Wonder Color
Comics, Pied Piper Press, Eternity Comics, New Sirius Productions (both Sirius
Comics and Prelude Graphics), and other companies. Mr. Campiti is a co-owner of
several properties featured on our website, including without limitation Banzai
Girl(TM), Exposure(TM), Jade Warriors(TM), Pandora's Blog(TM), The Shadow
Children(TM), and Journey to Magika(TM), which he also produced as an animated
film. Journey to Magika previewed at Tribeca Film Festival and is due for
release in 2014 (Trailer: http://nikothemovie.com/trailer.html).
CHRIS CROSBY, CHIEF TECHNOLOGY OFFICER AND DIRECTOR. Mr. Crosby has served as
our Chief Technology Officer and a member of the Board since March 1, 2013. He
has also co-founded Keenspot, our strategic partner, in March 2000 and Blatant
Comics, an independent comic book publisher, in July 1997. Mr. Crosby has served
as CEO of Keenspot and as Vice President and Editor-in-Chief of Blatant Comics
since such companies' respective founding dates. Mr. Crosby has over 20 years
experience in the comic book industry, and in 1994 he became one of the first
creators to step into the new world of online comics. In 1999, he launched one
of the first daily online-exclusive comic strips, Superosity(TM). Mr. Crosby is
the creator or co-creator of several properties featured on our website and
owned by Keenspot and its affiliates, including without limitation Crow
Scare(TM), The First Daughter(TM), Godmode(TM), Last Blood(TM), Sore Thumbs(TM),
and Wicked Powered(TM).
ISEN ROBBINS, CHIEF INTELLECTUAL PROPERTY OFFICER AND DIRECTOR. Mr. Robbins has
served as our Chief Intellectual Property Officer and a member of the Board
since March 5, 2013. Mr. Robbins also co-founded Intrinsic in 1998 and has
served as a Co-CEO of Intrinsic since that time. He has produced more than 30
feature films, including seven that premiered at the Sundance Film Festival,
four at the Tribeca Film Festival, three at SXSW, and one at each of the
Toronto, Venice, New Directors/ New Films, and Berlin Film Festivals.
Intrinsic's films have been distributed worldwide and have won many awards and
been honored with numerous accolades, including winning the Sundance Special
Grand Jury prize, and being nominated for two Gotham and four Independent Spirit
awards.
Mr. Robbins has received a producer credit on the following films: Blue Caprice
(Isaiah Washington, Tim Blake Nelson, Joey Lauren Adams), Run (William Moseley,
Kelsey Chow, Adrian Pasdar, Eric Roberts), Alphabet Killer (Eliza Dushku, Cary
Elwes, Timothy Hutton), XX/XY (Mark Ruffalo, Kathlean Robertson), Skeptic (Zoe
Saldana, Tom Arnold, Timothy Daly), Anything but Love (Andrew McCarthy, Eartha
Kitt), Hebrew Hammer (Judy Greer, Adam Goldberg, Andy Dick, Mario Van Peebles),
Brother to Brother (Anthony Mackie, Daniel Sunjata, Aunjanue Ellis) and M.I.A
(Danny Glover, Ron Perlman, Linda Hamilton and David Strathairn).
AIMEE SCHOOF, CHIEF BUSINESS DEVELOPMENT OFFICER AND DIRECTOR. Ms. Schoof has
served as our Chief Business Development Officer and a member of the Board since
March 5, 2013. Ms. Schoof also co-founded Intrinsic in 1998 and has served as a
32
Co-CEO of Intrinsic since that time. She has produced more than 30 feature
films, including seven that premiered at the Sundance Film Festival, four at the
Tribeca Film Festival, three at SXSW, and one at each of the Toronto, Venice,
New Directors/ New Films, and Berlin Film Festivals. Intrinsic's films have been
distributed worldwide and have won many awards and been honored with numerous
accolades, including winning the Sundance Special Grand Jury prize, and being
nominated for two Gotham and four Independent Spirit awards.
Ms. Schoof has received a producer credit on the following films: Blue Caprice
(Isiaiah Washington, Tim Blake Nelson, Joey Lauren Adams), Run (William Moseley,
Kelsey Chow, Adrian Pasdar, Eric Roberts) Alphabet Killer (Eliza Dushku, Cary
Elwes, Timothy Huton), XX/XY (Mark Ruffalo, Kathlean Robertson), Skeptic (Zoe
Saldana, Tom Arnold, Timothy Daly), Anything but Love (Andrew McCarthy, Eartha
Kitt), Hebrew Hammer (Judy Greer, Adam Goldberg, Andy Dick, Mario Van Peebles),
Brother to Brother (Anthony Mackie, Daniel Sunjata, Aunjanue Ellis) and M.I.A
(Danny Glover, Ron Perlman, Linda Hamilton and David Strathairn).
Ms. Schoof founded a nonprofit called AmaYoga in 2010 which creates yoga
programs in homeless shelters and transitional housing around Los Angeles,
California. Aimee has also mentored film students through The Film and Radio
Recording Connection Mentoring program since 2009.
TERM OF OFFICE
Our by-laws provide that all directors hold office until the next annual
stockholder's meeting or until their death, resignation, retirement, removal,
disqualification, or until their successors have been elected and qualified. Our
officers serve at the will of the Board.
There are no agreements or understandings for any of our officers or directors
to resign at the request of another person and none of the officers or directors
is acting on behalf of or will act at the direction of any other person.
Members of the Board serve for one year terms and are elected at the next annual
meeting of stockholders, or until their successors have been elected.
MEETINGS OF THE BOARD AND INFORMATION REGARDING COMMITTEES
There currently are no committees of the Board. We believe the functions of any
audit, compensation or nominating and corporate governance committees can be
adequately performed by the Board.
Prior to March 1, 2013, Benny R. Powell was our only director. The Board held
ten meetings by teleconference from March through August 2013. All directors
attended 100% of such meetings of the Board of Directors.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
During the past five years, none of our officers or directors has been a party
to or executive officer of an entity that has filed any bankruptcy petitions.
During the past five years, none of our officers or directors have been
convicted or been a named subject of any pending criminal proceedings. During
the past five years, none of our officers or directors has been held to have
violated any State or Federal Securities laws or any Federal commodities law or
otherwise have been subject to any order, judgment or decree not subsequently
reversed, suspended or vacated permanently enjoining such officer or director
from the activities enumerated in Regulation S-K Item 4.01(f)(3).
CODE OF ETHICS
We have adopted a Code of Ethics for Senior Financial Officers to promote
ethical conduct by our senior financial officers. Our sole senior financial
officer is Benny R. Powell, our Chief Executive Officer and Chief Financial
Officer. We expect our senior financial officer to act with honesty and
integrity, including the ethical handling of actual or apparent conflicts of
interest between personal and professional relationships; to provide full,
accurate, timely and understandable disclosure in reports and documents filed
with the SEC as well as other public communications; to comply with all
applicable laws, rules and regulations; and to promote adherence to our Code of
33
Ethics. We will provide a copy of this document to any person, without charge,
upon receipt of a request addressed to us at Red Giant Entertainment, Inc., 614
E. Hwy 50, Suite 235, Clermont, Florida 34711.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires that our officers and directors and
persons who own more than 10% of our common stock, file reports of ownership and
changes in ownership with the SEC. Based solely on our review of the SEC's EDGAR
database, copies of such forms received by us, or written representations from
certain reporting persons, we believe that during the fiscal year ended August
31, 2013, the following delinquencies have occurred:
No. of Transactions
No. of Late Not Filed on Known Failures
Name and Affiliation Reports Timely Basis to File
-------------------- ------- ------------ -------
Benny R. Powell, Chief Executive
Officer, President, Chief Financial
Officer, Secretary, Director 4 27 None
David Campiti, Chief Operations Officer,
Director 1 0 None
Chris Crosby, Chief Technology Officer,
Director 3 1 None
Isen Robbins, Chief Intellectual
Property Officer, Director 1 0 None
Aimee Schoof, Chief Business Development
Officer, Director 1 0 None
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE AND DIRECTOR COMPENSATION
GENERAL COMPENSATION DISCUSSION
All decisions regarding compensation for our executive officers and executive
compensation programs are reviewed, discussed, and approved by the Board. All
compensation decisions are determined following a detailed review and assessment
of external competitive data, the individual's contributions to our success, any
significant changes in role or responsibility, and internal equity of pay
relationships.
SUMMARY COMPENSATION TABLE
Set forth below is a summary of compensation for our officers for all services
rendered in all capacities to us. There have been no annuity, pension or
retirement benefits ever paid to our officers, directors or employees.
With the exception of reimbursement of expenses incurred by our principal
executive officer during the scope of his employment or service as a director,
and unless expressly stated otherwise in a footnote below, our executive
officers did not receive any other compensation.
34
Stock All Other
Name and Principal Position Year Salary($) Awards($) Compensation($) Total($)
--------------------------- ---- --------- --------- --------------- --------
Benny R. Powell, Chief Executive 2013 $48,781 0 0 (1) $48,781
Officer, President, Chief Financial 2012 0 0 0 0
Officer, Secretary, Director
David Campiti, Chief Operations Officer,
Director (2) 2013 0 (3) 0 (4) 0 (1) 0 (4)
Chris Crosby, Chief Technology Officer,
Director (5) 2013 0 (3) 0 (6) 0 0 (6)
Isen Robbins, Chief Intellectual
Property Officer, Director (2) 2013 0 (3) 0 (4) 0 0 (4)
Aimee Schoof, Chief Business Development
Officer, Director (2) 2013 0 (3) 0 (4) 0 0 (4)
----------
1. We have also transacted business with sole proprietorships run by or
entities controlled by our officers as set forth under "Item 13. Certain
Relationship and Related Transactions, and Director Independence."
2. Appointed as an officer and director on March 5, 2013.
3. We have entered into independent contractor agreements with each of Ms.
Schoof and Messrs. Campiti, Crosby and Robbins, each dated October 25,
2013, under which each such officer will be entitled to $18,000 per year in
salary for services provided.
4. Each of Mr. Campiti, Mr. Isen and Ms. Schoof received 43,300,000 shares of
our common stock directly from Mr. Powell for services to be rendered as a
director.
5. Appointed as an officer and director on March 1, 2013.
6. Mr. Crosby received 34,140,000 shares of our common stock directly from Mr.
Powell for services to be rendered as a director.
INDEPENDENT CONTRACTOR AGREEMENTS
As set forth above under "Item 9B. Other Information," we have entered into
independent contractor agreements with David Campiti, Chris Crosby, Isen Robbins
and Aimee Schoof on October 25, 2013. We have no written agreement with Benny R.
Powell, but we have paid $48,781 in salary compensation to Mr. Powell for
services provided in the fiscal year ended August 31, 2013. We contemplate
paying Benny R. Powell a monthly salary of $5,000 per month in the future.
We reserve the right to engage our officers and directors, or their affiliates,
to perform services to us and compensate them for such services, other than as
required to be performed under any employment or independent contractor
agreement with them, or as generally required of persons in their offices, at
rates no greater than we expect to pay an unrelated third party with comparable
experience and quality.
Furthermore, none of our officers or directors is required to spend all of their
time and resources on us and each are involved in other companies. See
"Executive Officers and Directors" in this Item.
OTHER COMPENSATION
As of the date of this Annual Report, we do not have any annuity, pension,
health, stock options, profit sharing retirement, or other similar benefit
plans; however, we may adopt such plans in the future. As of the date of this
Annual Report, there are no personal benefits available to our officers and
directors.
GRANTS OF PLAN BASED AWARDS
There were no grants of plan based awards made in the fiscal year ended August
31, 2013.
35
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
We do not currently have any arrangements or contracts pursuant to which our
officers and directors are compensated for any services, including any
additional amounts payable for committee participation or special assignments.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information with respect to our equity
securities owned of record or beneficially by (i) each of our named executive
officers and directors; (ii) each person who owns beneficially more than 5% of
each class of our outstanding equity securities; and (iii) all directors and
officers as a group. Beneficial ownership is determined in accordance with the
rules of the SEC and generally includes voting or investment power with respect
to securities. Shares of common stock are deemed to be outstanding and to be
beneficially owned by the person listed below for the purpose of computing the
percentage ownership of the person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person, if that
person has the right to acquire beneficial ownership of such shares within 60
days of the date of this Annual Report.
Unless otherwise indicated below, the address of each beneficial owner is c/o
Red Giant Entertainment, Inc., 614 Hwy. 50, Suite 235, Clermont, Florida 34711.
Unless otherwise indicated below, we believe that each of the persons listed in
the table (subject to applicable community property laws) has the sole power to
vote and to dispose of the shares listed opposite the shareholder's name. All
calculations are based on 457,558,273 shares of common stock outstanding as of
November 29, 2013.
Number of Shares Percent of
Name of Beneficial Owner of Common Stock Class
------------------------ --------------- -----
Benny R. Powell, Chief Executive Officer,
President, Chief Financial Officer, Secretary,
Director 146,801,600 (1) 32.08%
David Campiti, Chief Operations Officer, Director 43,300,000 9.46%
Chris Crosby, Chief Technology Officer, Director 34,640,000 7.57%
Isen Robbins, Chief Intellectual Property Officer,
Director 43,300,000 9.46%
Aimee Schoof, Chief Business Development Officer,
Director 43,300,000 9.46%
All executive officers (including named executive
officers) and directors as a group (five persons) 311,340,600 68.04%
Iconic Holdings, LLC
7200 Wisconsin Ave., Suite 260
Bethesda, Maryland 20814 49,952,943 (2) 9.99%
WHC Capital, LLC
303 Merrick Road, Suite 504
Lynbrook, NY 11563 50,783,325 (3) 9.99%
Asher Enterprises, Inc.
1 Linden Place, Suite 207
Great Neck, NY 11021 32,507,183 (4) 6.63%
----------
1. Includes 35,000,000 shares pledged as security to WHC to secure the
Debenture. While Mr. Powell shares investment power over such shares, he
retains voting rights in such shares unless we default on the 12% Secured
Convertible Debenture.
2. Includes 42,473,195 shares of common stock issuable upon conversion at
Iconic's option of $125,000 in principal under the Iconic Note. The Iconic
Note is convertible into common stock at 60% of the lowest trading price
during the ten consecutive trading days prior to the date of conversion,
subject to a maximum beneficial ownership of 9.99% (the calculation in this
Annual Report is based on a purchase price equal to $0.0029 per share (60%
of $.0048, the lowest price for the ten trading days prior to December 3,
2013) and represents the maximum beneficial ownership of 9.99%). The
calculation presented herein does not include (i) interest convertible at
the rate set forth above; or (ii) shares we may sell to Iconic under the
Iconic SPA with Iconic upon meeting certain conditions.
36
3. Consists of shares of common stock issuable upon conversion at WHC's option
of up to $166,000 in principal and any interest under the Debenture
convertible into common stock at 60% of the lowest trading price during the
ten consecutive trading days prior to the date of conversion, subject to a
maximum beneficial ownership of 9.99% (the calculation in this Annual
Report is based on a purchase price equal to $0.0029 per share (60% of
$.0048, the lowest price for the ten trading days prior to December 3,
2013) and represents the maximum beneficial ownership of 9.99%). The
calculation presented herein does not include interest convertible at the
rate set forth above.
4. Consists of shares of common stock issuable upon conversion at Asher's
option of up to $90,500 in principal and any interest under the Debenture
convertible into common stock at 58% of the lowest trading price during the
ten consecutive trading days prior to the date of conversion, subject to a
maximum beneficial ownership of 9.99% (the calculation in this Annual
Report is based on a purchase price equal to $0.0028 per share (58% of
$.0048, the lowest price for the ten trading days prior to December 3,
2013) and represents the maximum beneficial ownership of 9.99%). The
calculation presented herein does not include interest convertible at the
rate set forth above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have not entered into any material transactions with any director, executive
officer, promoter, security holder who is a beneficial owner of 5% or more of
our common stock, or any immediate family member of such persons other than as
set forth below. In the future, we intend to enter into agreements with our
officers and directors and their affiliates to obtain co-ownership or other
rights to properties that our officers and their affiliates have allowed us to
showcase on our website and will disclose any material agreements at the time we
enter into any such agreements as required under the Exchange Act.
PRINTING AGREEMENT WITH ACTIVE MEDIA
On March 13, 2013, we entered into a Printing Agreement with Active Media, an
entity controlled by our Chief Executive Officer, President, Chief Financial
Officer, Secretary, and a member of the Board, Benny R. Powell. This Printing
Agreement reduces to writing the oral understanding between us and Active Media
under which Active Media agreed to provide printing services to us at near cost
prices on a non-exclusive basis. We paid an aggregate of $115,665.28 to Active
Media in the fiscal year ended August 31, 2013.
EXCLUSIVE WEB PUBLISHING CONTRACT WITH KEENSPOT
We have published properties online through websites hosted by Keenspot under an
Exclusive Web Publishing Contract dated June 30, 2010 between Benny R. Powell
and Keenspot, a general partnership co-founded by Chris Crosby, our Chief
Technology Officer and a member of the Board, co-founded, in which Mr. Crosby
serves as Chief Executive Officer. Under this Agreement, Keenspot sells
advertising on websites featuring our properties at an agreed upon cost per
thousand verified impressions (CPM) to our Keenspot sites whereby advertisers
pay based on the number of times the target audience is exposed to the
advertisement. The particular CPM rate varies based upon bids by advertisers and
other customary factors. In exchange for providing advertising, hosting, IT, and
sales management services, Keenspot receives a 50% commission on advertising
revenue. In the fiscal years ended August 31, 2013 and 2012, Keenspot received
$6,785 and $9,975, respectively from this agreement.
STOCK EXCHANGE AGREEMENT WITH COMICGENESIS
In March 2013, we entered into a Stock Exchange Agreement with ComicGenesis, a
limited liability company owned at that time by Chris Crosby, our Chief
Technology Officer and member of the Board, under which we acquired 5,000,000
shares of ComicGenesis from Mr. Crosby in exchange for 500,000 shares of our
common stock from shares held by our President, Benny R. Powell. ComicGenesis
was not valued, as it was essentially an inactive entity.
37
Shares exchanged for ComicGenesis were valued at a fair market value of $45,000,
the fair market value at the date of exchange. The shares exchanged were
contributed by Mr. Powell and the related indebteness was forgiven to the
Company as a contribution of capital. The related investment in ComicGenesis is
eliminated in consolidation.
OTHER ARRANGEMENTS WITH OFFICERS
During the year ending August 31, 2013, Benny R. Powell, our President and Chief
Executive Officer, has advanced assets in the amount of $39,187 to us, which
includes transfer of 3 million shares of common stock, personally held, to an
unrelated vendor for securing services. Those services were valued at $36,000,
per the agreement and the fair value of the stock at the date of the exchange.
As of August 31, 2013 and 2012, we were indebted to Mr. Powell in the amount of
$39,187 and $0, respectively.
Our officers provide office and storage space to us at no charge through their
other ventures.
We also from time to time have retained Glass House Graphics, a sole
proprietoship owned by David Campiti, our Chief Operating Office and a member
of the Board, to provide creative services for us. We paid an aggregate of
$2,035 to Glass House Graphics in the fiscal year ended August 21, 2013.
We also from time to time have retained Glass House Graphics, a sole
proprietorship owned by David Campiti, our Chief Operating Officer and a member
of the Board, to provide creative services for us. We paid an aggregate of
$2,035 to Glass House Graphics in the fiscal year ended August 31, 2013.
DIRECTOR INDEPENDENCE
We apply the definition of "independent director" provided under the Listing
Rules of The NASDAQ Stock Market LLC ("NASDAQ"). Under NASDAQ rules, the Board
has considered all relevant facts and circumstances regarding our directors and
has affirmatively determined that none of the directors serving on the Board are
independent of us under NASDAQ rules, as each director also serves as an officer
of us.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under our Articles of Incorporation and bylaws of the corporation, we may
indemnify an officer or director who is made a party to any proceeding,
including a lawsuit, because of his or her position, if he or she acted in good
faith and in a manner he or she reasonably believed to be in our best interest.
We may advance expenses incurred in defending a proceeding. To the extent that
the officer or director is successful on the merits in a proceeding as to which
he or she is to be indemnified, we must indemnify him or her against all
expenses incurred, including attorney's fees. With respect to a derivative
action, indemnity may be made only for expenses actually and reasonably incurred
in defending the proceeding, and if the officer or director is judged liable,
only by a court order. The indemnification is intended to be to the fullest
extent permitted by the laws of the State of Nevada.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to our directors, officers, and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
MartinelliMick, PLLC ("MMPLLC"), our independent registered public accounting
firm prior to DKM, notified us on April 3, 2013 that MMPLLC had resigned. MMPLLC
audited our financial statements for the fiscal year ended August 31, 2012 and
reviewed our Quarterly Report on Form 10-Q for the quarter ended November 30,
2012.
On April 5, 2013, we appointed Drake Klein Messineo, CPAs, PA ("DKM") as our
independent registered public accounting firm. DKM has not issued any reports on
our financial statements, but reviewed our Quarterly Report on Form 10-Q for the
quarter ended February 28, 2013. On May 10, 2013, we notified DKM that DKM was
dismissed as our independent registered public accounting firm. DKM has not
issued any reports on our financial statements.
On May 10, 2013, we engaged Messineo & Co., CPAs, LLC ("M&Co") as our
independent registered public accounting firm to audit our consolidated
financial statements for the fiscal year ended August 31, 2013, and to perform
procedures related to the financial statements included in our quarterly reports
on Form 10-Q, beginning with the quarter ended May 31, 2013.
38
AUDIT FEES
M&Co. was paid aggregate fees of approximately $12,000 for the year ended August
31, 2013, DKM was paid aggregate fees of approximately $2,000 for the year ended
August 31, 2013, and MMPLLC was paid aggregate fees of approximately $24,000 and
$18,400, respectively, for the years ended August 31, 2012 and 2013, for
professional services rendered for the audit of our annual financial statements
and for the reviews of the financial statements included in our quarterly
reports on Form 10-Q during such fiscal years.
AUDIT RELATED FEES
Neither of our independent registered public accounting firms was paid
additional fees for the years ended August 31, 2013 and August 31, 2012 for
assurance and related services reasonably related to the performance of the
audit or review of our financial statements.
TAX FEES
Neither of our independent registered public accounting firms was paid
additional fees for the years ended August 31, 2013 and August 31, 2012 for
professional services rendered for tax compliance, tax advice, and tax planning
during this fiscal year period.
ALL OTHER FEES
Neither of our independent registered public accounting firms was paid any other
fees for professional services during the years ended August 31, 2013 and August
31, 2012.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
1. Financial Statements.
Our consolidated financial statements are included in Part II, Item 8 of this
report:
Page
----
Report of Independent Registered Public Accounting Firm 15
Consolidated Balance Sheets 17
Consolidated Statements of Operations 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to the Consolidated Financial Statements 21
2. Financial statement schedules.
All financial statement schedules have been omitted, since the required
information is not applicable or is not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements and notes thereto.
3. Exhibits.
A list of the exhibits filed or furnished with this report on Form 10-K (or
incorporated by reference to exhibits previously filed or furnished by us) is
provided in the Exhibit Index beginning on page 39 of this Annual Report. Those
exhibits incorporated by reference herein are indicated as such by the
information supplied in the parenthetical thereafter. Otherwise, the exhibits
are filed herewith.
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
RED GIANT ENTERTAINMENT, INC.
DATED: December 4, 2013 By: /s/ Benny R. Powell
----------------------------------------
Benny R. Powell
CEO, President, CFO, Secretary, Director
(Principal Executive Officer, Principal
Financial Officer and Director)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
DATED: December 4, 2013 By: /s/ Benny R. Powell
---------------------------------------------
Benny R. Powell
CEO, President, CFO, Secretary, Director
(Principal Executive, Financial and
Accounting Officer)
DATED: December 4, 2013 By: /s/ David Campiti
--------------------------------------------
David Campiti
Chief Operations Officer, Director
DATED: December 4, 2013 By: /s/ Chris Crosby
---------------------------------------------
Chris Crosby
Chief Technology Officer, Director
40
EXHIBIT INDEX
Exhibit Description
------- -----------
2.1 Share Exchange Agreement among the Registrant, Red Giant
Entertainment, Inc., and Benny Powell dated June 6, 2012
(incorporated herein by reference to Amendment Number 1 for the
Form 8-K, filed November 6, 2012).
2.2(1) Stock Exchange Agreement between the Registrant and Chris Crosby
dated March 4, 2013
3.1 Amended and Restated Articles of Incorporation of the Registrant
filed with the Nevada Secretary of State on August 23, 2010, which
are incorporated herein by reference to Exhibit 3.1 to our Annual
Report on Form 10-K filed with the SEC on November 29, 2010.
3.2 Certificate of Amendment to Articles of Incorporation of the
Registrant filed with the Nevada Secretary of State on June 26,
2012, which is incorporated herein by reference to Exhibit 3.3 to
our Annual Report on Form 10-K filed with the SEC on January 3,
2013.
3.3 Amended and Restated Bylaws of the Registrant, which are
incorporated herein by reference to Exhibit 3.2 to our Annual
Report on Form 10-K filed with the SEC on November 29, 2010.
4.1 Securities Purchase Agreement dated April 15, 2013 between the
Registrant and Iconic Holdings, LLC, which is incorporated herein
by reference to Exhibit 10.1 to our Current Report on Form 8-K
filed with the SEC on September 20, 2013.
4.2 Registration Rights Agreement dated April 15, 2013 between the
Registrant and Iconic Holdings, LLC, which is incorporated herein
by reference to Exhibit 10.2 to our Current Report on Form 8-K
filed with the SEC on September 20, 2013.
4.3 9.9% Secured Convertible Promissory Note dated April 15, 2013
between the Registrant and Iconic Holdings, LLC, which is
incorporated herein by reference to Exhibit 10.3 to our Current
Report on Form 8-K filed with the SEC on September 20, 2013.
4.4(1) Purchase Agreement dated August 1, 2013 between the Registrant and
WHC Capital, LLC.
4.5(1) Pledge and Security Agreement dated August 1, 2013 between the
Registrant and WHC Capital, LLC.
4.6(1) 12% Secured Convertible Debenture dated August 1, 2013 between the
Registrant and WHC Capital, LLC.
4.7(1) Convertible Note dated August 5, 2013 between the Registrant and
JSJ Investments, Inc.
4.8(1) 9% Convertible Redeemable Note dated October 2, 2013 between the
Registrant and LG Capital Funding, LLC
4.9(1) Convertible Promissory Note dated November 11, 2013 between the
Registrant and Asher Enterprises, Inc.
4.10(1) Securities Purchase Agreement dated November 11, 2013 between the
Registrant and Asher Enterprises, Inc.
10.1 Exclusive Web Publishing Contract between Benny Powell and
Keenspot Entertainment dated June 30, 2010, which is incorporated
herein by reference to Exhibit 10.4 to our Current Report on Form
8-K filed with the SEC on October 13, 2013.
10.2(1)(2) Printing Agreement between the Registrant and Active Media
Publishing, LLC dated March 13, 2013.
10.3(1)(3) Independent Contractor Agreement between the Registrant and Isen
Robbins.
10.4(1)(3) Independent Contractor Agreement between the Registrant and Chris
Crosby.
10.5(1)(3) Independent Contractor Agreement between the Registrant and David
Campiti.
10.6(1)(3) Independent Contractor Agreement between the Registrant and Aimee
Schoof.
14 Code of Ethics for Senior Financial Officers, which is
incorporated herein by reference to Exhibit 14.1 to our Annual
Report on Form 10-K filed with the SEC on November 29, 2010.
21(1) List of Subsidiaries.
31.1(1) Chief Executive Officer Section 302 Certification.
31.2(1) Chief Financial Officer Section 302 Certification.
32(4) Chief Executive Officer and Chief Financial Officer Section 906
Certification.
101 The following materials from our Annual Report on Form 10-K for
the fiscal year ended August 31, 2013 formatted in Extensible
Business Reporting Language (XBRL): (i) the Condensed Consolidated
Balance Sheets, (ii) the Condensed Consolidated Statements of
Operations, (iii) the Condensed Consolidated Statements of Cash
Flows, and (iv) related notes.
----------
1. Filed herewith.
2. Confidential Treatment has been requested with respect to certain
provisions of this agreement. Omitted portions have been filed separately
with the SEC.
3. Management contract or compensatory plan or arrangement.
4. Furnished herewith
