Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
Amendment No. 1
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period November 30, 2013
Or
[ ] 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: 001-34039
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, FL 34711
(Address, including zip code, of principal executive offices)
Registrants' telephone number, including area code: (866) 926-6427
N/A
(Former name, former address and former fiscal year,
if changed since last year)
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 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]
As of January 13, 2014, there were 537,994,184 shares of our common stock,
$0.0001 par value per share, issued and outstanding.
EXPLANATORY PARAGRAPH
This Amendment No. 1 (this "Amendment") to our Report on Form 10-Q originally
filed on January 14, 2014 is made to adjust financial statements presented in
prior amended annual and their effect on the quarterly financial statements
previously presented. Please refer to Note 1 to our financial statements
regarding restatement of the originally reported financial statements for both
annual and quarterly information. The financial statements and disclosures
herein do not reflect events that may have occurred subsequent to January 14,
2014, the original date of filing, and do not modify or update any filings made
with the Securities and Exchange Commission after January 14, 2014.
RED GIANT ENTERTAINMENT, INC.
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements 3
Balance Sheet as of November 30, 2013 (Unaudited) 3
Statement of Operations for the Three Months Ended
November 30, 2013 and November 30, 2012 (Unaudited) 4
Statements of Cash Flows for the Three Months Ended
November 30, 2013 and November 30, 2012 (Unaudited) 5
Notes to Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 1A. Risk Factors 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 19
Item 4. Mine Safety Disclosures 19
Item 5. Other Information 19
Item 6. Exhibits 19
SIGNATURES 20
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Red Giant Entertainment, Inc.
Consolidated Balance Sheets
November 30, August 31,
2013 2013
------------ ------------
(RESTATED) (RESTATED)
(unaudited) (audited)
ASSETS
Current Assets
Cash and cash equivalents $ 39 $ 14,937
Accounts receivable, net of allowance for doubtful
accounts of $0 and $0, respectively 2,095 --
Inventory 50,992 52,107
Prepaid and other current assets 89,092 82,000
------------ ------------
Total Current Assets 142,218 149,044
Property and equipment, net of accumulated
depreciation of $1,573 and $996, respectively 9,971 10,548
Intangible assets, net of accumulated
amortization of $28,313 and $23,100, respectively 45,937 51,150
------------ ------------
TOTAL ASSETS $ 198,126 $ 210,742
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 78,881 $ 88,000
Due to related parties 42,301 39,187
Convertible notes payable 171,010 81,397
Derivative liability, notes 1,516,498 1,339,599
Derivative liability, warrants 355,800 355,800
------------ ------------
Total Current Liabilities 2,164,490 1,903,983
Convertible note payable, long-term 53,012 24,314
TOTAL LIABILITIES 2,217,502 1,928,297
------------ ------------
COMMITMENTS AND CONTINGENCIES
Stockholders' Deficit
Preferred stock: 100,000,000 authorized; $0.0001 par value
0 shares issued and outstanding -- --
Common stock: 900,000,000 authorized; $0.0001 par value
457,558,273 and 434,922,000 shares issued and outstanding 45,756 43,492
Additional paid in capital 168,989 43,053
Treasury stock, at cost; 1,785,900 shares (55,000) (55,000)
Accumulated deficit (2,179,121) (1,749,100)
------------ ------------
Total Stockholders' Deficit (2,019,376) (1,717,555)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 198,126 $ 210,742
============ ============
See notes to unaudited financial statements
3
Red Giant Entertainment, Inc.
Consolidated Statements of Operations
(unaudited)
For the Three Months Ended
November 30,
2013 2012
------------ ------------
(RESTATED)
Revenues $ 3,379 $ 105,937
Cost of sales 2,378 47,474
------------ ------------
1,001 58,463
Operating Expenses
Selling and marketing 52,841 3,020
Compensation 14,242 12,040
Professional 18,970 1,200
General and administration 45,769 2,431
Depreciation and amortization 5,790 1,629
------------ ------------
Total operating expenses 137,612 20,320
------------ ------------
Net loss from operations (136,611) 38,143
------------ ------------
Other income (expense)
Interest expense (193,811) --
Change in derivative (31,399) --
Gain (loss) on settlement of debt (68,200) --
Income taxes -- (5,700)
------------ ------------
Net loss $ (430,021) $ 32,443
============ ============
Basic and dilutive loss per share $ (0.00) $ 0.00
============ ============
Weighted average number of shares outstanding 438,927,644 434,922,000
============ ============
See notes to unaudited financial statements
4
Red Giant Entertainment, Inc.
Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended
November 30,
2013 2012
---------- ----------
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (430,021) $ 32,443
Adjustment to reconcile Net Income to net
cash provided by operations:
Depreciation and amortization 5,790 1,629
Amortization of deferred financing costs 193,811 --
Change in derivatives 31,399 --
(Gain) Loss on settlement of debt 68,200 --
Changes in operating assets and liabilities:
(Increase) decrease in operating assets:
Accounts receivable (2,095) --
Inventory 1,115 (16,366)
Prepaid expenses and other assets (7,092) (25,040)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (9,119) 9,506
Total adjustments 282,009 (30,271)
---------- ----------
Net Cash (Used in) Provided By Operating Activities (148,012) 2,172
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder loans, net 3,114 --
Proceeds from Loan(s) 130,000 --
---------- ----------
Net Cash (Used in) Provided by Financing Activities 133,114 --
---------- ----------
Net increase (decrease) in cash and cash equivalents (14,898) 2,172
Cash and cash equivalents, beginning of period 14,937 269
---------- ----------
Cash and cash equivalents, end of period $ 39 $ 2,441
========== ==========
Supplemental cash flow information
Cash paid for interest $ -- $ --
========== ==========
Cash paid for taxes $ -- $ --
========== ==========
Non-cash transactions:
Expenses paid from proceeds of debt $ 15,500 $ --
========== ==========
Debt converted to equity $ 60,000 $ --
========== ==========
See notes to unaudited financial statements
5
Red Giant Entertainment, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Red Giant Entertainment LLC (the "LLC") was formed in the State of Florida,
U.S.A., on January 1, 2011. On May 9, 2012, the LLC 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 LLC 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 RGE, and Benny
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 Castmore Resources Ltd., which
changed its name to Red Giant Entertainment, Inc. (the "Company"). The Company
subsequently approved a 6 to 1 forward stock split of all shares of record in
June, 2012. The Company's fiscal year end is August 31.
The exchange resulted in RGE becoming a wholly-owned subsidiary of the Company.
As a result of the Share Exchange Agreement, the Company's principal business
became the business of RGE. All share information has been restated for both the
reverse merger and the forward stock split for all periods presented.
On March 4, 2013, the Company acquired ComicGenesis, LLC ("ComicGenesis"), a
Nevada limited liability company that operates a user-generated comic site that
hosts over 10,000 independent webcomics.
RESTATEMENT
In the course of monitoring the business, management identified errors with
respect to the completeness and disclosure of our debt accounting and the
completeness of all related party transactions for the year ending August 31,
2013. Specifically, certain convertible debt agreements with related parties
were not appropriately captured in the August 31, 2013 financial statements.
Such notes were reimbursements to related parties for expense payments they made
on behalf of the company. It is further noted, that the embedded conversion
options of these notes qualified for derivative accounting and thus were
bifurcated and recorded as a derivative liability. In addition, we noted a share
transaction of a major shareholder executed for the benefit of the company
(issuing his own shares to acquire a website for the company) had not accounted
for the intangible property received in the exchange.
The following summary is presented in comparison to the originally reported
financial statements, as of August 31, 2013:
Originally
Reported Adjustment Restated
-------- ---------- --------
Cash $ 14,937 $ 14,937
Inventory 52,107 52,107
Prepaid and other 82,000 82,000
Property & equipment 10,548 10,548
Intangible assets 13,650 (1) 45,000 51,150
(1) (7,500)
Total Assets $ 173,242 $ 210,742
Accounts payable and accrued $ 81,332 (4) 6,668 $ 88,000
Due to related parties 39,187 39,187
6
Convertible notes payable 100,710 (2) 338,000 105,711
(3) (338,000)
(5) 5,001
Derivative liability, notes 271,321 338,000 1,339,599
(3) 730,278
(6)
Derivative liability, warrants -- (7) 355,800 355,800
Total Liabilities 492,550 1,928,297
Common stock 43,492 43,492
Additional paid in capital (1,947) (1) 45,000 43,053
Treasury stock (55,000) (55,000)
Accumulated deficit (305,853) (1,443,247) (1,749,100)
Total Stockholders' Equity (319,308) (1,717,555)
Liabilities and Equity $ 173,242 $ 210,742
Revenues $ 497,486 $ 497,486
Cost of sales 148,215 (2) 127,475 275,690
349,271 221,796
Selling, general and administrative 421,865 (1) 7,500 639,890
(2) 210,525
Interest expense 112,090 (4) 6,668 479,559
(5) 5,001
(7) 355,800
Change in derivatives 113,821 (6) 730,278 844,099
Income taxes -- --
Net loss $(298,505) $(1,741,752)
----------
(1) Acquisition of a website for the transfer of common stock by shareholder,
at the fair value of $45,000; related amortization of website acquired, in
the amount of $7,500.
(2) Proceeds in exchange of convertible notes issued to reimburse related
parties for operating expenses paid on the Company's behalf.
(3) Record debt discounts and deferred financing costs, related to the
convertible notes payable.
(4) Accrue interest payable and interest expense, related to convertible notes
(5) Amortization of debt discount on convertible notes
(6) Derivative liability related to the embedded conversion option of new
convertible notes marked to fair value
(7) Issuance of warrants as financing cost
For the three months ending November 30, 2013, the Company has restated the
financial statements to incorporate the above entries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP"), which
require 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 reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
PRINCIPLES OF CONSOLIDATION
The Company operates under the name of Red Giant Entertainment, Inc. and its
wholly owned subsidiaries RGE and ComicGenesis. The companies were incorporated
for the intentions of developing brand names. Any activities of these
subsidiaries or holdings have been included in the consolidated financial
statements, with elimination of any intercompany accounts and transactions.
7
UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, the financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In the opinion of management, all adjustments consisting of normal recurring
entries necessary for a fair statement of the periods presented for: (a) the
financial position; (b) the result of operations; and (c) cash flows, have been
made in order to make the financial statements presented not misleading. The
results of operations for such interim periods are not necessarily indicative of
operations for a full year.
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.
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.
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.
LONG-LIVED ASSETS
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. Depreciation for the three months ended
November 30, 2013 and 2012 was $577 and $166, respectively.
Intelectual property, including patents and other intangible assets have been
capitalized and recorded at their fair value historical cost. The Company's
intellectual property consists of graphic novel artwork and was contributed by a
stockholder 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 life of five years. The Company acquired website and other intangible
assets in the acquisition of a subsidiary, valued at the fair market value of
stock exchanged by a shareholder. Amortization is calculated on a straight line
basis over the estimated useful life of three years. Amortization for the three
months ending November 30, 2013 and 2012 was $5,213 and $1,463, respectively
8
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
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. Based upon its most recent analysis, the Company
believes that no impairment of property existed at November 30, 2013 and August
31, 2012.
RECENT ACCOUNTING PRONOUNCEMENTS
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 financial position or 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.
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 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.
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 $25,014 and $771 for the periods ending November 30, 2013 and 2012,
respectively.
STOCK BASED COMPENSATION
The Company issues restricted stock to consultants for various services. Cost
for these transactions are measured at the fair value of the consideration
received or the fair value of the equity instruments issued, whichever is more
9
reliably measurable. The value of the common stock is measured at the earlier of
(i) the date at which a firm commitment for performance by the counterparty to
earn the equity instruments is reached or (ii) the date at which the
counterparty's performance is complete. The Company recognized consulting
expenses and a corresponding increase to additional paid-in-capital related to
stock issued for services. Stock compensation for the periods presented were
issued for past services provided, accordingly, all shares issued are fully
vested, and there is no unrecognized compensation associated with these
transactions. For agreements requiring future services, the consulting expense
is to be recognized ratably over the requisite service period.
INCOME TAXES
The Company was a limited liability company until May 9, 2012. As an LLC, no
income tax provision was made at the Company level and all taxable income and
deductions were passed directly to the equity owner. The Company will be
evaluating the tax ramifications of the change in entity status and the
organizational changes to determine future tax issues.
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 stockholders 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 61,000,000 common stock equivalents
outstanding at November 30, 2013.
NOTE 3 - MANAGEMENT STATEMENT REGARDING GOING CONCERN
The Company is currently generating revenues from operations sufficient to meet
its 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 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:
* 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.
10
NOTE 4 - INVENTORY
As of November 30, 2013, inventory consisted of physical copies of published
books, as well as artwork that is used for digitally distributed works for
advertising revenue and future publications. The inventory is valued at the cost
to produce.
NOTE 5 - CONVERTIBLE NOTES PAYABLE
The Company entered into lending arrangements with several lending institutions,
each with convertible features. The Company evaluated the terms of the
convertible notes, with outstanding face values totaling $766,500 ($145,500 for
the three month period ending November 30, 2013), 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 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 $620,500
($130,000 for the three month period ending November 30, 2013), 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
term of the notes. Additionally, the notes called for an immediate withholding
of $146,000 ($15,500 for the three month period ending November 30, 2013), 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. Interest expense, in the amount of
$193,811, was recognized for the three month period ended November 30, 2013 for
the amortization of debt discounts and deferred finance costs.
A derivative liability, in the amount of $1,516,498 has been recorded, as of
November 30, 2013, related to the above notes. The Company recognized a change
in the derivative liability, resulting in a loss in the amount of $31,399. 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 0.08%
Expected lives (years) 0.298
Expected price volatility 315.0%
Forfeiture Rate 0.0%
Summary of Convertible Notes Payable:
Original value $ 706,500
Deferred finance cost (98,598)
Unexpired debt discount (383,880)
---------
$ 224,022
Current portion of convertible notes payable 171,010
---------
Long-term portion of convertible notes payable $ 53,012
=========
NOTE 6 - 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 November 30, 2013, the Company expected no net deferred tax assets calculated
at an expected rate of 37.6%. The Company has applied a 100% valuation allowance
on the deferred tax assets attributable to the Net Operating Losses incurred.
11
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 November 30, 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
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 7 - 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 eight months ended, August 31, 2012, $10,869 of contributed capital
was added to additional paid in capital. For the 3 months ended February 28,
2013, no additional capital was contributed.
In June, 2012, Castmor Resources Ltd., entered into Share Exchange Agreement
(the "Share Exchange Agreement") with Red Giant Entertainment Inc., ("RGE"), and
Benny 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.
The Company issued warrants to purchase approximately 37,166,700 shares of
common stock, at a strike price of $.015 per share, in association with a
financing arrangement. Warrants may be exercised in a cashless option. The
company valued these warrants using the Black-Scholes method, resulting in a
interest expense of $355,800 and a corresponding derivative liability.
During the three month period ending November 30, 2013, the Company issued
22,636,273 shares of its common stock in satisfaction of obligation to $60,000
of convertible notes payable. The Company recognized a loss in the amount of
$68,200 resulting from the excess in the fair market value of the stock above
that of the retired debt.
NOTE 8 - RELATED PARTIES
Benny Powell was an officer and director of both parties to the merger. See Note
1. Mr. Powell continues as the Company's sole officer and director post merger.
The Company purchases print materials through Active Media Publishing, Inc.
("AMPI"), an entity wholly owned by 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 quarterly period ended November 30, 2013, the
Company purchased print media in the amount of $3,750.
12
Keenspot has been paid or accrued commissions in the amount of approximately
$917 during the quarterly period ended November 30, 2013.
The Company 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. The Company paid an aggregate
of $12,575 to Glass House Graphics during the quarterly period ended November
30, 2013.
The Company does not own or lease property or lease office space. The officers
of the Company provide office and storage space to the Company at no charge
through their other ventures.
The Company does not have employment contracts with its key employees, including
the controlling stockholder who is an officer of the Company, although it has
independent contractor agreements with its other officers.
As of December 2013, the Company has retained Chris Crosby, one of the Company's
officers and directors, to also serve as web editor for the Company's webcomics.
Mr. Crosby will be compensated $1,500 per month for his web editing services,
which the Company believe to be substantially less than the compensation the
Company would pay for an independent third party to provide such services.
Keenspot, a company owned by Mr. Crosby, has been paid or accrued commissions in
the amount of approximately $0 for the three months ending November 30, 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 or accrued an
aggregate of $12,575 to Glass House Graphics for the three months ending
November 30, 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 9 - 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:
For the Three Months Ended
November 30,
-------------------------------
2013 2012
-------- --------
Revenues
Advertising $ 1,284 $ 1,139
Book publishing 2,095 96,548
Creative 0 8,250
-------- --------
TOTAL: 3,379 105,937
-------- --------
Cost of Sales
Advertising 1,342 2,139
Book publishing 1,036 42,135
Creative 0 3,200
-------- --------
TOTAL: 2,378 47,474
-------- --------
Gross Margin
Advertising (58) (1,000)
Book publishing 1,059 54,413
Creative 0 5,050
-------- --------
TOTAL: 1,001 58,463
-------- --------
13
NOTE 10 - COMMITMENTS AND CONTINGENCIES
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. Additionally, regarding this
concern, the Company does not have employment agreements with its key officers
and directors.
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
unaware of any pending or threatened assertions and there are no current matters
that would have a material effect on the Company's financial position or results
of operations.
NOTE 11 - SUBSEQUENT EVENTS
In December 2013 and January 2014, four convertible debt holders converted an
aggregate of $131,095 in principal and interest for an aggregate of 63,019,244
shares of the Company's common stock. In December 2013, two debt holders also
converted debt owed to them for an aggregate of 17,416,667 shares of the
Company's common stock.
On January 6, 2014, the Company filed a Definitive Information Statement on
Schedule 14C (the "Information Statement") and is in process of mailing the
Information Statement to stockholders. Under the Information Statement, the
following actions were taken by written consent of stockholders holding a
majority of the Company's common stock have authorized the following actions,
effective 20 calendar days after the date of mailing to the stockholders:
(1) the re-election of the Company's Board of Directors;
(2) the approval of Messineo & Co., CPAs, LLC as the Company's independent
auditors for the fiscal year ending August 31, 2014;
(3) the filing of a Certificate of Amendment to Company's the Articles of
Incorporation to increase the number of authorized shares of common
stock, par value $0.0001 per share from 900,000,000 to 3,000,000,000;
(4) the approval of the Company's 2013 Stock Option Plan adopted by the
Board of Directors on December 24, 2013;
(5) the casting of an advisory vote approving the compensation of our
named executive officers; and
(6) the casting of an advisory vote on the frequency of future advisory
votes to approve the compensation of our named executive officers to
be every three years.
Management has evaluated subsequent events through the date these financial
statements were available to issue, the date of filing with the Securities and
Exchange Commission. 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
This Quarterly Report on Form 10-Q (this "Quarterly Report") includes
"forward-looking statements." All statements, other than statements of
historical facts, included in this Quarterly Report which address activities,
events or developments which we expect, believe or anticipate will or may occur
in the future are forward-looking statements. The word "believes," "intends,"
"expects," "anticipates," "projects," "estimates," "predicts" and similar
expressions are also intended to identify forward-looking statements.
Consequently, all of the forward-looking statements made in this Quarterly
Report are qualified by these cautionary statements and there can be no
assurance that the actual results or developments anticipated by us will be
realized or, even if substantially realized, that they will have the expected
consequences or effects on our business operations. We assume no obligation to
update publicly, except as required by law, any such forward-looking statements,
whether as a result of new information, future events or otherwise.
CRITICAL ACCOUNTING POLICIES
There have been no material changes in our critical accounting policies from
those reported in our Annual Report on Form 10-K for our fiscal year ended
August 31, 2013, filed with the SEC on December 4, 2013. For more information on
our critical accounting policies, see Part II, Item 7 of our fiscal 2012 Annual
Report on Form 10-K.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NOVEMBER 30, 2013 COMPARED TO THE THREE MONTHS ENDED NOVEMBER
30, 2012
The three months ended November 30, 2013 were largely spent (i) negotiating the
Supply Agreement with Diamond Comic Distributors, Inc. ("DCD") dated November
25, 2013 and effective January 1, 2014; (ii) transitioning our Collected Book
line to be distributed through DCD for book store sales and specialty book
sales; and (iii) focusing efforts on transitioning from paid-book sales to
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
(collectively, the "Changes").
Due to Changes effect on our operations, we incurred significantly greater
operating expenses and significantly lower revenues and profits for the three
months ended November 30, 2013 as compared to the three months ended November
30, 2012. Nevertheless, our management believes that the Changes will eventually
lead to greater profitably and more stability for our business and our prospects
in the future, particularly if we are able to successfully launch or Giant-Size
line of titles.
REVENUES. During the three months ended November 30, 2013, revenues were $3,379,
a decrease of $102,558 from $105,937 for the three months ended November 30,
2012.
COST OF SALES. During the three months ended November 30, 2013, we incurred cost
of sales of $2,378 compared to $47,474 incurred during the three months ended
November 30, 2012 (a decrease of $45,096).
GROSS PROFITS. Gross profit decreased from $58,463 during the three months ended
November 30, 2012 to $1,001 during the three months ended November 30, 2013.
15
OPERATING EXPENSES. During the three months ended November 30, 2013, we incurred
operating expenses of $137,612 compared to $20,320 incurred during the three
months ended November 30, 2012, an increase of $117,292. This increase occurred
primarily due to greater selling and marketing costs and greater general and
administrative costs, which were $52,731 and $45,879 the three months ended
November 30, 2013, as compared to $1,497 and $3,954 during the three months
ended November 30, 2012.
NET LOSS. Our net loss for the three months ended November 30, 2013 was $430,021
compared to a net profit of $32,443 during the three months ended November 30,
2012, a decrease of $397,578.
ITEM 3. 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 information under this
item.
ITEM 4. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
In connection with the preparation of this quarterly report on Form 10-Q, an
evaluation was carried out by our Chief Executive Officer and the Chief
Financial Officer of the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934 ("Exchange Act")) as of November 30, 2013. Disclosure controls and
procedures are designed to ensure that information required to be disclosed in
reports filed or submitted under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC rules and
forms and that such information is accumulated and communicated to management,
including the Chief Executive Officer and the Chief Financial Officer, to allow
timely decisions regarding required disclosures.
Based on the evaluation, our Chief Executive Officer/Chief Financial Officer
concluded disclosure controls and procedures were not effective as of November
30, 2013.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is
defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act
as a process designed by, or under the supervision of, our principal executive
and principal financial officers, or persons performing similar functions, and
effected by our Board of Directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. Our internal control over financial
reporting includes those policies and procedures that:
* pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect our transactions and dispositions of our
assets;
16
* provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations
of our management and directors; and
* provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of our assets that
could have a material effect on the financial statements.
Our management assessed the effectiveness of our internal control over financial
reporting as of November 30, 2013. In making this assessment, it used the
criteria set forth in the Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). While
this assessment is not formally documented, management concluded that, as of
November 30, 2013, our internal control over financial reporting is not
effective based on those criteria.
Because of its inherent limitations, however, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
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 November 30, 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.
NO CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
As of the end of the period covered by this Quarterly Report, there were no
changes in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that have materially affected, or were
reasonably likely to materially affect, our internal control over financial
reporting.
17
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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.
We are not currently a party to, nor are any of our property currently the
subject of, any other material legal proceeding. 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.
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 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 required
under this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
SECOND NOTE TO ICONIC HOLDINGS, LLC ("ICONIC")
On December 20, 2013, we issued Iconic a 10% Secured Convertible Promissory Note
in the amount of $25,000 for which we received $17,500 (the "Second Iconic
Note") with an original issue discount of $7,500. The Second Iconic Note matures
on December 20, 2014 and is convertible into our common stock at the lower of
(i) $0.0033 per share; or (ii) 60% of the lowest trading price of any day during
the 20 consecutive trading days prior to the date of conversion. The shares of
common stock into which the Second Iconic Note is convertible are not being
registered in the Registration Statement.
The Second Iconic Note was issued 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.
CONVERSIONS OF DEBT
During the three months ended November 2013, we issued to Iconic an aggregate of
22,636,273 shares of our common stock in exchange for debt totaling $60,000.
18
In December 2013 and January 2014, four convertible debt holders converted an
aggregate of $131,095.34 in principal and interest for an aggregate of
63,019,244 shares of our common stock. In December 2013, two debt holders also
converted debt owed to them for an aggregate of 17,416,667 shares of our common
stock. All conversions were performed pursuant to the underlying terms of their
convertible debt.
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. This stock repurchase program has been terminated in the quarterly
period ended November 30, 2013. No repurchases were made in the quarterly period
ended November 30, 2013.
1,785,900 shares repurchased under the stock repurchase program prior to the
quarterly period ended November 30, 2013 have not yet been returned to
authorized but unissued status, but upon doing so, will result in us having
outstanding 518,077,170 shares of common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
Exhibit No. Description
----------- -----------
10.1 Share Exchange Agreement between the Registrant and Diamond Comic
Distributors dated as of November 25, 2013, which is incorporated
herein by reference to Exhibit 10.1 to our Quarterly Report on
Form 10-Q filed on January 14, 2014
31.1 Certification by Principal Executive Officer pursuant to Rule
13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification by Principal Financial and Accounting Officer
pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 (1) Certification of Principal Executive Officer and Principal
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
101 The following materials from the Company's Quarterly Report on
Form 10-Q for the quarter ended November 30, 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) Furnished herewith.
19
SIGNATURES
In accordance with 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.
Date: April 14, 2014 By: /s/ Benny Powell
-------------------------------------
Benny Powell
Chief Executive Officer & Principal
Executive Officer, Chief Financial
Officer & Principal Financial Officer
2
