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EX-32.2 - Wizard World, Inc.ex32-2.htm
EX-32.1 - Wizard World, Inc.ex32-1.htm
EX-31.2 - Wizard World, Inc.ex31-2.htm
EX-31.1 - Wizard World, Inc.ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: September 30, 2017

 

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 No. 000-33383

 

WIZARD WORLD, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   98-0357690
(State or other jurisdiction
of incorporation)
  (IRS Employer
Identification No.)

 

662 N. Sepulveda Blvd., Suite 300

Los Angeles, CA 90049

(Address of principal executive offices)

 

(310) 648-8410

(Registrant’s telephone number, including area code)

 

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 past 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 (Sec. 232.405 of this chapter) during the preceding 12 months (or for 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, smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer (Do not check if a smaller reporting company) [  ] Smaller reporting company [X]
Emerging Growth Company [  ]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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 November 13, 2017, there were 68,535,036 shares outstanding of the registrant’s common stock.

 

 
 

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION
       
Item 1. Financial Statements   F-1
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   3
       
Item 3. Quantitative and Qualitative Disclosures About Market Risk   11
       
Item 4. Controls and Procedures   12
       
PART II – OTHER INFORMATION
       
Item 1. Legal Proceedings   12
       
Item 1A. Risk Factors   12
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds  

12

       
Item 3. Defaults Upon Senior Securities   13
       
Item 4. Mine Safety Disclosures   13
       
Item 5. Other Information   13
       
Item 6. Exhibits   13
       
Signatures   14

 

2
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Wizard World, Inc.

 

September 30, 2017

 

Index to the Condensed Consolidated Financial Statements

 

Contents   Page(s)
     
Condensed Consolidated Balance Sheets at September 30, 2017 (unaudited) and December 31, 2016   F-2
     
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)   F-3
     
Condensed Consolidated Statements of Stockholders’ Deficit for the Nine Months Ended September 30, 2017 (unaudited)   F-4
     
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)   F-5
     
Notes to the Condensed Consolidated Financial Statements (unaudited)   F-6

 

F-1
 

 

Wizard World, Inc.

Condensed Consolidated Balance Sheets

 

   September 30, 2017   December 31, 2016 
   (Unaudited)     
Assets          
           
Current Assets          
Cash and cash equivalents  $1,176,034   $4,401,217 
Accounts receivable, net   474,186    187,819 
Inventory   12,368    - 
Prepaid convention expenses   313,979    704,711 
Prepaid insurance   101,566    96,076 
Prepaid rent - related party   101,091    181,796 
Prepaid taxes   14,605    13,984 
Other prepaid expenses   20,708    13,666 
Total Current Assets   2,214,537    5,599,269 
           
Property and equipment, net   192,832    215,948 
           
Security deposits   9,408    19,912 
           
Total Assets  $2,416,777   $5,835,129 
           
Liabilities and Stockholders' Deficit          
           
Current Liabilities          
Accounts payable and accrued expenses  $2,765,689   $937,773 
Unearned revenue   738,789    1,574,938 
Derivative liabilities - related party   7,159,835    6,498,737 
Due to CONtv joint venture - net   224,241    224,241 
           
Total Current Liabilities   10,888,554    9,235,689 
           
Non-current Liabilities:          
Convertible promissory note - related party, net   61,222    1,456 
           
Total Non-current Liabilities   61,222    1,456 
           
Total Liabilities   10,949,776    9,237,145 
           
Commitments and contingencies          
           
Stockholders' Deficit          
Preferred stock par value $0.0001: 20,000,000 shares authorized; 50,000 shares designated, respectively   -    - 
Series A convertible preferred stock par value $0.0001: 50,000 shares designated; 39,101 shares issued and converted, respectively   -    - 
Common stock par value $0.0001: 80,000,000 shares authorized; 68,535,036 and 68,535,036 shares issued and outstanding, respectively   6,855    6,855 
Additional paid-in capital   21,406,885    21,132,386 
Accumulated deficit   (29,934,279)   (24,529,440)
Non-controlling interest   (12,460)   (11,817)
Total Stockholders' Deficit   (8,532,999)   (3,402,016)
           
Total Liabilities and Stockholders' Deficit  $2,416,777   $5,835,129 

 

See accompanying notes to the condensed consolidated financial statements

 

F-2
 

 

Wizard World, Inc.

Condensed Consolidated Statements of Operations

 

    For the Three Months Ended     For the Nine Months Ended  
    September 30, 2017     September 30, 2016     September 30, 2017     September 30, 2016  
    (Unaudited)     (Unaudited)     (Unaudited)     (Unaudited)  
                         
Revenue                                
Convention revenue   $ 5,233,283     $ 6,267,631     $ 13,617,324     $ 20,768,937  
                                 
ConBox revenue     -       137,020       84,580       608,025  
                                 
Total revenue     5,233,283       6,404,651       13,701,904       21,376,962  
                                 
Cost of revenue     5,238,258       3,964,711       13,670,274       14,323,415  
                                 
Gross profit (loss)     (4,975 )     2,439,940       31,630       7,053,547  
                                 
Operating expenses                                
Compensation     690,640       1,203,820       2,628,161       3,632,232  
Consulting fees     209,859       161,637       537,095       438,888  
General and administrative     371,427       598,019       1,321,231       1,901,456  
                                 
Total operating expenses     1,271,926       1,963,476       4,486,487       5,972,576  
                                 
(Loss) income from operations     (1,276,901 )     476,464       (4,454,857 )     1,080,971  
                                 
Other income (expenses)                                
Interest expense     (112,068 )     (92)       (288,742 )     (977)  
Loss on disposal of equipment     -       (36,876)       (785 )     (36,876)  
Change in fair value of derivative liabilities     (2,306,470 )     -       (661,098 )        
Loss on CONtv joint venture     -       (75,000)       -       (225,000)  
                                 
Other income (expenses)     (2,418,538 )     (111,968)       (950,625 )     (262,853)  
                                 
(Loss) income before income tax provision     (3,695,439 )     364,496       (5,405,482 )     818,118  
                                 
Income tax provision     -       -       -       -  
                                 
Net (loss) income     (3,695,439 )     364,496       (5,404,839 )     818,118  
                                 
Net (loss) income attributable to non-controlling interests     -       (720)       (643 )     68,233  
                                 
Net (loss) income attributable to common stockholders   $ (3,695,439 )   $ 365,216     $ (5,404,839 )   $ 749,885  
                                 
(Loss) income per share                                
Basic   $ (0.05 )   $ 0.01     $ (0.08 )   $ 0.01  
Diluted   $ (0.05 )   $ 0.01     $ (0.08 )   $ 0.01  
                                 
Weighted average common shares outstanding - basic     68,535,036       51,368,386       68,535,036       51,368,386  
Weighted average common shares outstanding - diluted     68,535,036       51,368,386       68,535,036       51,368,386  

 

See accompanying notes to the condensed consolidated financial statements

 

F-3
 

 

WIZARD WORLD, INC.

Condensed Consolidated Statement of Stockholders’ (Deficit) Equity

For the Nine Months Ended September 30, 2017

(Unaudited)

 

    Preferred Stock
Par Value $0.0001
    Common Stock Par Value $0.0001     Additional
Paid-in
    Accumulated     Non-controlling     Total Stockholders'(Deficit)  
    Shares     Amount     Shares     Amount     Capital     Deficit     Interest     Equity  
                                                 
Balance - December 31, 2016     -     $ -       68,535,036     $ 6,855     $ 21,132,386     $ (24,529,440 )   $ (11,817 )   $ (3,402,016 )
                                                                 
Share-based compensation     -       -       -       -       274,499       -       -       274,499  
                                                                 
Net loss     -       -       -       -       -       (5,404,839 )     (643 )     (5,405,482 )
                                                                 
Balance – September 30, 2017     -     $ -       68,535,036     $ 6,855     $ 21,406,885     $ (29,934,279 )   $ (12,460 )   $ (8,532,999 )

 

See accompanying notes to the condensed consolidated financial statements

 

F-4
 

 

Wizard World, Inc.

Condensed Consolidated Statements of Cash Flows

 

   For the Nine Months Ended 
   September 30, 2017   September 30, 2016 
   (Unaudited)   (Unaudited) 
         
Cash Flows From Operating Activities:          
Net (loss) income  $(5,405,482)  $818,118 
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:          
Depreciation   119,511    117,589 
Loss on disposal of equipment   785    36,876 
Change in fair value of derivative liabilities   661,098    - 
Accretion of debt discount   59,766    - 
Loss on CONtv joint venture   -    225,000 
Share-based compensation   274,499    642,708 
Changes in operating assets and liabilities:          
Accounts receivable   (286,367)   141,122 
Inventory   (12,368)   (132,039)
Prepaid convention expenses   390,732    522,210 
Prepaid rent   80,705    (191,120)
Prepaid insurance   (5,490)   - 
Prepaid taxes   (621)   - 
Other prepaid expenses   (7,042)   - 
Security deposits   10,504    (10,312)
Accounts payable and accrued expenses   1,827,916    (194,286)
Unearned revenue   (836,149)   (3,221,138)
           
Net Cash Used In by Operating Activities   (3,128,003)   (1,245,272)
           
Cash Flows from Investing Activities:          
Purchase of property and equipment   (97,180)   (144,871)
Proceeds received on disposal of equipment   -    4,850 
Investment in CONtv joint venture - net   -    (150,000)
           
Net Cash Used In Investing Activities   (97,180)   (290,021)
           
Net change in cash and cash equivalents   (3,225,183)   (1,535,293)
           
Cash and cash equivalents at beginning of reporting period   4,401,217    4,723,699 
           
Cash and cash equivalents at end of reporting period  $1,176,034   $3,188,406 
           
Supplemental disclosures of cash flow information:          
Interest paid  $-   $1,028 
Income tax paid  $-   $- 
           
Supplemental disclosure of non-cash investing and financing activities:          
Acquisition of controlling interest of ConBox  $-   $96,781 

 

See accompanying notes to the condensed consolidated financial statements

 

F-5
 

 

Wizard World, Inc.

September 30, 2017

Notes to the Condensed Consolidated Unaudited Financial Statements

 

Note 1 – Organization and Operations

 

Wizard World, Inc.

 

Wizard World, Inc., formerly GoEnergy, Inc. (“Wizard World” or the “Company”) was incorporated on May 2, 2001, under the laws of the State of Delaware. The Company, through its operating subsidiary, is a producer of pop culture and live multimedia conventions across North America.

 

Note 2 – Going Concern Analysis

 

Going Concern Analysis

 

The Company had a loss from operations of $4,454,857 and $1,182,246 for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. As of September 30, 2017, we had cash and working capital deficit (excluding the derivative liability) of $1,176,034 and $1,514,182, respectively. We have evaluated the significance of these conditions in relation to our ability to meet our obligations and have concluded that, due to these conditions, there is substantial doubt about the Company’s ability to continue as a going concern through November 2018.

 

If necessary, management believes that both related parties (management and members of the Board of Directors of the Company) and potential external sources of debt and/or equity financing may be obtained based on management’s history of being able to raise capital from both internal and external sources coupled with current favorable market conditions. Therefore, the accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

 

The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein. While the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. The Company’s ability to continue as a going concern is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control operating expenses.

 

F-6
 

 

Note 3 – Significant and Critical Accounting Policies and Practices

 

The management of the Company is responsible for the selection and use of appropriate accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.

 

Basis of Presentation - Unaudited Interim Financial Information

 

The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements of the Company for the year ended December 31, 2016 and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the SEC on April 17, 2017.

 

Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Principles of Consolidation

 

The condensed consolidated financial statements include all accounts of the entities as of the reporting period ending date(s) and for the reporting period(s) as follows:

 

Name of consolidated
subsidiary or entity
  State or other jurisdiction of
incorporation or organization
  Date of incorporation
or formation (date of
acquisition, if
applicable)
  Attributable interest 
           
KTC Corp.  The State of Nevada, U.S.A.  September 20, 2010   100%
            
Kicking the Can L.L.C.  The State of Delaware, U.S.A.  April 17, 2009   100%
            
Wizard World Digital, Inc.  The State of Nevada, U.S.A.  March 18, 2011   100%
            
Wiz Wizard, LLC  The State of Delaware, U.S.A.  December 29, 2014   100%
            
ButtaFyngas, LLC  The State of Delaware, U.S.A.  April 10, 2015   50%

 

F-7
 

 

All inter-company balances and transactions have been eliminated. Non–controlling interest represents the minority equity investment in the Company’s subsidiaries, plus the minority investors’ share of the net operating results and other components of equity relating to the non–controlling interest.

 

As of September 30, 2017, the aggregate non-controlling interest in ButtaFyngas was ($12,460). As of December 31, 2016, the aggregate non-controlling interest in Wiz Wizard and ButtaFyngas was ($11,817). The non-controlling interest is separately disclosed on the Condensed Consolidated Balance Sheet.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable net of the allowance for doubtful accounts. As of September 30, 2017 and December 31, 2016, the allowance for doubtful accounts was $0.

 

Inventories

 

Inventories are stated at average cost using the first-in, first-out (FIFO) valuation method. Inventory was comprised of the following:

 

   September 30, 2017   December 31, 2016 
Finished goods  $12,368   $- 
           

 

Fair Value of Financial Instruments

 

The Company follows ASC 820-10 of the FASB Accounting Standards Codification to measure the fair value of its financial instruments and disclosures about fair value of its financial instruments. ASC 820-10 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820-10 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by ASC 820-10 are described below:

 

F-8
 

 

Level 1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
   
Level 2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
   
Level 3 Pricing inputs that are generally unobservable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, inventory, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments.

 

In connection with the issuance of a convertible promissory note as discussed below in Note 6, the Company evaluated the note agreement to determine if the agreement contained any embedded components that would qualify the agreement as a derivative. The Company identified certain put features embedded in the convertible note agreement that potentially could result in a net cash settlement in the event of a fundamental transaction, requiring the Company to classify the conversion feature as a derivative liability.

 

The Company determined that it is not practical to estimate the fair value of the convertible promissory note payable because of its unique nature and the costs that would be incurred to obtain an independent valuation. The Company does not have comparable outstanding debt on which to base an estimated current borrowing rate or other discount rate for purposes of estimating the fair value of the convertible note payable and the Company has not been able to develop a valuation model that can be applied consistently in a cost-efficient manner. These factors all contribute to the impracticability of estimating the fair value of the notes payable. At September 30, 2017 and December 31, 2016, the carrying value of the convertible promissory note payable net of debt discount was $61,222 and $1,456. At September 30, 2017 and December 31, 2016, the Company recorded accrued interest of $253,000 and $25,000, which is included on the Condensed Consolidated Balance Sheets in the accounts payable and accrued expenses line item.

 

Transactions involving related parties typically cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free-market dealings may not exist. However, in the case of the convertible promissory note discussed in Note 6, the Company obtained a fairness opinion from an independent third party which supports that the transaction was carried out at an arm’s length basis.

 

The Company’s Level 3 financial liabilities consist of the derivative conversion features issued in 2016. The Company valued the conversion features using a Monte Carlo model. These models incorporate transaction details such as the Company’s stock price, contractual terms, maturity, risk free rates, and volatility as of the date of issuance and each balance sheet date.

 

F-9
 

 

The Company utilized the following range of management assumptions in valuing the derivative conversion features during the nine months ended September 30, 2017:

 

Exercise price   $ 0.12 – 0.14  
Risk free interest rate     1.38% - 1.77 %
Dividend yield     0.00 %
Expected volatility     102.27% - 112.10 %
Remaining term     1.25 – 4.17 years  

 

Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

 

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative liability at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the change in the fair value of the derivative liability.

 

Financial assets and liabilities measured at fair value on a recurring basis are summarized below and disclosed on the balance sheets as follows:

 

   Carrying   Fair Value Measurement Using 
   Value   Level 1   Level 2   Level 3   Total 
                     
Embedded conversion feature  $3,599,906   $-   $-   $3,599,906   $3,599,906 
Warrant liability   3,559,929    -    -    3,559,929    3,559,929 
September 30, 2017  $7,159,835   $-   $-   $7,159,835   $7,159,835 

 

The unobservable level 3 inputs used by the Company was the expected volatility assumption used in the Monte Carlo pricing model. Expected volatility is based on the historical stock price of the Company’s common stock.

 

The following table provides a summary of the changes in fair value, including net transfers in and/or out, of all financial assets measured at fair value on a recurring basis using significant unobservable inputs during the nine months ended September 30, 2017.

 

   Warrants   Convertible Note   Total 
Balance – December 31, 2016  $3,200,137   $3,298,600   $6,498,737 
Change in fair value of derivative liability   359,792    301,306    661,098 
Balance – September 30, 2017  $3,559,929   $3,599,906   $7,159,835 

 

Changes in the unobservable input values could potentially cause material changes in the fair value of the Company’s Level 3 financial instruments. The significant unobservable inputs used in the fair value measurements is the expected volatility assumption. A significant increase (decrease) in the expected volatility assumption could potentially result in a higher (lower) fair value measurement.

 

Derivative Instruments

 

The Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with ASC 815-15. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

 

F-10
 

 

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date.

 

Revenue Recognition and Cost of Revenues

 

The Company follows Paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company will recognize revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

 

Convention revenue is generally earned upon completion of the convention. Unearned convention revenue are deposits received for conventions that have not yet taken place, which are fully or partially refundable depending upon the terms and conditions of the agreements.

 

Unearned ConBox revenue is non-refundable up-front payments for products. These payments are initially deferred and subsequently recognized over the subscription period, typically three months, and upon shipment of the product.

 

The Company recognizes cost of revenues in the period in which the revenues was earned. In the event the Company incurs cost of revenues for conventions that are yet to occur, the Company records such amounts as prepaid expenses and such prepaid expenses are expensed during the period the convention takes place.

 

Shipping and Handling Costs

 

The Company accounts for shipping and handling fees in accordance with paragraph 605-45-45-19 of the FASB Accounting Standards Codification. While amounts charged to customers for shipping products are included in revenues, the related costs are classified in cost of revenue as incurred.

 

Shipping and handling costs were $0 and $2,266 for the three months ended September 30, 2017 and 2016, respectively. Shipping and handling costs were $21,479 and $241,627 for the nine months ended September 30, 2017 and 2016, respectively.

 

Equity–based compensation

 

The Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “Compensation – Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.

 

Restricted stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a four-year period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share of Company stock on the grant date.

 

The fair value of option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s Common stock over the expected option life and other appropriate factors. The expected option term is computed using the “simplified” method as permitted under the provisions of ASC 718-10-S99. The Company uses the simplified method to calculate expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on the Common stock of the Company and does not intend to pay dividends on the Common stock in the foreseeable future. The expected forfeiture rate is estimated based on historical experience.

 

F-11
 

 

Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, the equity–based compensation could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If the actual forfeiture rate is materially different from the Company’s estimate, the equity–based compensation could be significantly different from what the Company has recorded in the current period.

 

The Company accounts for share–based payments granted to non–employees in accordance with ASC 505-40, “Equity Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments is re-measured each reporting period over the requisite service period.

 

Earnings per Share

 

Earnings per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.

 

F-12
 

 

The following table provides a reconciliation of the numerator and denominator used in computing basic and diluted net income (loss) attributable to common stockholders per common share.

 

   For the Three Months Ended 
   September 30, 2017   September 30, 2016 
Numerator:          
Net (loss) income attributable to common stockholders  $(3,695,439)   365,216 
Effect of dilutive securities:          
Convertible note - Interest expense and debt discount (net)   -    - 
Net change in derivative liabilities - warrants and convertible note   -    - 
           
Diluted net (loss) income  $(3,695,439)   365,216 
           
Denominator:          
Weighted average common shares outstanding - basic   68,535,036    51,368,386 
Dilutive securities (a):          
Convertible note   -    - 
Options   -    - 
Warrants   -    - 
           
Weighted average common shares outstanding and assumed conversion - diluted   68,535,036    51,368,386 
           
Basic net (loss) income per common share  $(0.05)   0.01 
           
Diluted net (loss) income per common share  $(0.05)   0.01 
           
(a) - Anti-dilutive securities (options, warrants and convertible notes) excluded:   37,976,334    4,419,000 

 

   For the Nine Months Ended 
  

September

30, 2017

  

September

30, 2016

 
Numerator:          
Net (loss) income attributable to common stockholders  $(5,404,839)  $749,885 
Effect of dilutive securities:          
Convertible note - Interest expense and debt discount (net)   -    - 
Net change in derivative liabilities - warrants and convertible note   -    - 
           
Diluted net (loss) income  $(5,404,839)  $749,885 
           
Denominator:          
Weighted average common shares outstanding - basic   68,535,036    51,368,386 
Dilutive securities (a):          
Convertible note   -    - 
Options   -    - 
Warrants   -    - 
           
Weighted average common shares outstanding and assumed conversion - diluted   68,535,036    51,368,386 
           
Basic net (loss) income per common share  $(0.08)  $0.01 
           
Diluted net (loss) income per common share  $(0.08)  $0.01 
           
(a) - Anti-dilutive securities (options, warrants and convertible notes) excluded:    37,976,334    4,419,000 

 

 

F-13
 

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to current period presentation.

 

Recently Issued Accounting Pronouncements

 

In July 2015, the FASB issued the ASU No. 2015-11 “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). The amendments in this ASU do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. An entity should measure inventory within the scope of this ASU at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. During the nine months ended September 30, 2017, the Company adopted the methodologies prescribed by ASU 2015-11 and deemed that the adoption of the ASU did not have a material effect on its financial position or results of operations.

 

In April 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation” (topic 718). The FASB issued this update to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The updated guidance is effective for annual periods beginning after December 15, 2016, including interim periods within those fiscal years. During the nine months ended September 30, 2017, the Company adopted the methodologies prescribed by ASU 2016-09 and deemed that the adoption of the ASU did not have a material effect on its financial position or results of operations.

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” Under ASU 2016-02, lessees will be required to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its consolidated financial statements and disclosures.

 

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (Topic 606)”. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net) (Topic 606)”. These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity’s adoption of ASU 2014-09, which the Company intends to adopt for interim and annual reporting periods beginning after December 15, 2017. The Company is in the process of evaluating the standard and does not expect the adoption will have a material effect on its consolidated financial statements and disclosures.

 

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”, which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is currently evaluating the standard and does not expect the adoption will have a material effect on its consolidated financial statements and disclosures.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.

 

F-14
 

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard.

 

In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,” which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This standard is required to be adopted in the first quarter of 2018. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

 

In July 2017, the FASB issued ASU 2017-11, “Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception”. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is evaluating the effect that ASU 2017-11 will have on its financial statements and related disclosures.

 

In September 2017, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). The new standard, among other things, provides additional implementation guidance with respect to Accounting Standards Codification (ASC) Topic 606 and ASC Topic 842. ASU 2017-03 is effective for annual and interim fiscal reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact of the new standard, but does not expect it to have a material impact on its implementation strategies or its consolidated financial statements upon adoption.

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, when adopted, will have a material effect on the accompanying consolidated financial statements.

 

Note 4 – Property and Equipment

 

Property and equipment stated at cost, less accumulated depreciation and amortization, consisted of the following:

 

   September 30, 2017   December 31, 2016 
Computer Equipment  $42,195   $33,858 
Equipment   460,927    390,656 
Furniture and Fixtures   62,321    45,198 
Leasehold Improvements   22,495    22,495 
    587,938    492,207 
Less: Accumulated depreciation   (395,106)   (276,259)
   $192,832   $215,948 

 

Depreciation expense was $119,511 and $117,589 for the nine months ended September 30, 2017 and 2016, respectively.

 

Note 5 – Investment in CONtv Joint Venture

 

On August 27, 2014, the Company entered into a joint venture and executed an Operating Agreement with Cinedigm, ROAR (a related party co-founded by one of the Company’s directors) and Bristol Capital (a related party founded by the Company’s Chairman of the Board). The Company owned a 47.50% interest in the newly formed entity, CONtv. The Company was accounting for the interest in the joint venture utilizing the equity method of accounting.

 

On November 16, 2015, the Company entered that certain A&R Operating Agreement by and among, the Company, Cinedigm, ROAR and Bristol Capital, pursuant to which the Company’s interest in CONtv was reduced to a non-dilutable 10% membership interest. Pursuant to the A&R Operating Agreement, the Company was only obligated to fund on-going costs in the amount of $25,000 in cash on an on-going monthly basis for a period of 12 months following the effective date.

 

For the nine months ended September 30, 2017 and 2016, the Company recognized $0 and $225,000 in losses from this venture, respectively.

 

F-15
 

 

As of September 30, 2017 and December 31, 2016, the investment in CONtv was $0.

 

As of September 30, 2017 and December 31, 2016, the Company has a balance due to CONtv of $224,241.

 

Note 6 – Related Party Transactions

 

Wiz Wizard

 

On December 29, 2014, the Company and a member of the Board formed Wiz Wizard (d/b/a ConBox) in the State of Delaware. The Company and the member of the Board each owned 50% of the membership interest and agreed to allocate the profits and losses accordingly upon repayment of the initial capital contributions on a pro rata basis. On February 4, 2016, the member of the Board assigned his fifty percent (50%) membership interest to the Company.

 

Consulting Agreement

 

On December 29, 2016, the Company entered into a Consulting Services Agreement (the “Consulting Agreement”) with Bristol Capital, LLC, a Delaware limited liability company (“Bristol”) managed by Paul L. Kessler, the Chairman of the Company. Pursuant to the Consulting Agreement, Mr. Kessler will serve as Executive Chairman of the Company. The initial term of the Agreement was from December 29, 2016 through March 28, 2017 (the “Initial Term”). The term of the Consulting Agreement will be automatically extended for additional terms of 90 day periods each (each a “Renewal Term” and together with the Initial Term, the “Term”), unless either the Company or Bristol gives prior written notice of non-renewal to the other party no later than thirty (30) days prior to the expiration of the then current Term.

 

During the Term, the Company will pay Bristol a monthly fee (the “Monthly Fee”) of Eighteen Thousand Seven Hundred Fifty and No/100 Dollars ($18,750).

 

In addition, the Company will grant to Bristol options to purchase up to an aggregate of 600,000 shares of the Company’s common stock.

 

During the nine months ended September 30, 2017, the Company incurred total expenses of $168,750 for services provided by Bristol. At September 30, 2017, the Company accrued $187,500 of monthly fees due to Bristol.

 

Operating Sublease

 

On June 16, 2016, the Company entered into a Standard Multi-Tenant Sublease (“Sublease”) with Bristol Capital Advisors, LLC (“Bristol Capital Advisors”), an entity controlled by the Company’s Chairman of the Board. The term of the Sublease is for 5 years and 3 months beginning on July 1, 2016 with monthly payments of $8,118. Upon execution of the Sublease, the Company paid a security deposit of $9,137 and $199,238 for prepaid rent of which $101,091 remains at September 30, 2017. During the nine months ended September 30, 2017, the Company incurred total rent expense of $108,353 under the Sublease. See Note 7 for future minimum rent payments due. The sub-lease is a pass-through of costs under a master lease between the sublessor and an unrelated third-party lessor. Bristol is not including a premium nor profiting under the sublease agreement.

 

Outsourced Marketing

 

During the nine months ended September 30, 2017, the Company utilized outsourced marketing support from a company affiliated with ROAR, which is partially owned by a member of the Board. The Company had expenses of $36,000 and $36,809 during the nine months ended September 30, 2017 and 2016. As of September 30, 2017 and December 31, 2016, the outstanding liability due to the affiliate of ROAR was $2,250 and $0, respectively. The Company is not currently utilizing such outsourced marketing services.

 

Securities Purchase Agreement

 

Effective December 1, 2016, the Company entered into the Purchase Agreement with Bristol Investment Fund, Ltd. (the “Purchaser”), an entity controlled by the Chairman of the Company’s Board of Directors, pursuant to which the Company sold to the Purchaser, for a cash purchase price of $2,500,000, securities comprising: (i) the Debenture, (ii) Series A Warrants, and (iii) Series B Warrants. Pursuant to the Purchase Agreement, the Company paid $25,000 to the Purchaser and issue to the Purchaser 500,000 shares of Common Stock with a grant date fair value of $85,000 to cover the Purchaser’s legal fees. The Company recorded as a debt discount of $110,000 related to the cash paid and shares issued to Purchaser for legal fees.

 

F-16
 

 

  (i) Debenture

 

The Debenture with an initial principal balance of $2,500,000, due December 30, 2018 (the “Maturity Date”), will accrue interest on the aggregate unconverted and then outstanding principal amount of the Debenture at the rate of 12% per annum. Interest is payable quarterly on (i) January 1, April 1, July 1 and October 1, beginning on January 1, 2017, (ii) on each date the Purchaser converts, in whole or in part, the Debenture into Common Stock (as to that principal amount then being converted), and (iii) on the day that is 20 days following the Company’s notice to redeem some or all of the outstanding principal of the Debenture (only as to that principal amount then being redeemed) and on the Maturity Date. The Debenture is convertible into shares of the Company’s Common Stock at any time at the option of the holder, at an initial conversion price of $0.15 per share, subject to adjustment. In the event of default occurs, the conversion price shall be the lesser of (i) the initial conversion price of $0.15 and (ii) 50% of the average of the 3 lowest trading prices during the 20 trading days immediately prior to the applicable conversion date.

 

  (ii) Series A Warrants

 

The Series A Warrants to acquire up to 16,666,667 shares of Common Stock at the Series A Initial Exercise Price of $0.15 and expiring on December 1, 2021. The Warrants may be exercised immediately upon the issuance date, upon the option of the holder.

 

  (iii) Series B Warrants

 

The Series B Warrants to acquire up to 16,666,650 shares of Common Stock at the Series B Initial Exercise Price of $0.0001 and expiring on December 1, 2021. The Series B Warrants were exercised immediately upon the issuance date. The Company received gross proceeds of $1,667 upon exercise of the warrants.

 

Derivative Analysis

 

Because the conversion feature included in the convertible note payable and warrants have full reset adjustments tied to future issuances of equity securities by the Company, they are subject to derivative liability treatment under Section 815-40-15 of the FASB Accounting Standard Codification (“Section 815-40-15”).

 

Generally accepted accounting principles require that:

 

a. Derivative financial instruments be recorded at their fair value on the date of issuance and then adjusted to fair value at each subsequent balance sheet date with any change in fair value reported in the statement of operations; and
   
b. The classification of derivative financial instruments be reassessed as of each balance sheet date and, if appropriate, be reclassified as a result of events during the reporting period then ended.

 

Upon issuance of the note, a debt discount was recorded and any difference in comparison to the face value of the note, representing the fair value of the conversion feature and the warrants in excess of the debt discount, was immediately charged to derivative expense. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated statements of operations. There was unamortized debt discount of $2,438,778 as of September 30, 2017.

 

The fair value of the embedded conversion feature was estimated using a Monte Carlo pricing model. See Note 3 for the estimates and assumptions used.

 

F-17
 

 

Note 7 – Commitments and Contingencies

 

Operating Sublease

 

On June 16, 2016, the Company entered into a Standard Multi-Tenant Sublease (“Sublease”) with Bristol Capital Advisors, an entity controlled by the Company’s Chairman of the Board, which leases the premises from a third-party and passes actual and direct cost of the Company’s occupancy through to the Company without any fee, profit or markup. The term of the Sublease is for 5 years and 3 months beginning on July 1, 2016 with monthly payments of $8,118. Upon execution of the Sublease, the Company paid a security deposit of $9,137 and $199,238 for prepaid rent of which $101,091 remains at September 30, 2017. During the nine months ended September 30, 2017, the Company incurred total rent expense of $108,353 under the Sublease. See below for future minimum rent payments due.

 

Future minimum lease payments inclusive of related tax required under the non-cancelable operating lease and sublease are as follows:

 

Fiscal year ending December 31:    
2017 (remainder of year)  $24,354 
2018   97,416 
2019   97,416 
2020   97,416 
Thereafter   73,062 
   $389,664 

 

F-18
 

 

Obligation to Fund CONtv

 

On November 16, 2015, pursuant to that certain A&R Operating Agreement for CONtv, the Company’s ownership interest in CONtv was reduced to 10%. In addition, the Company is only obligated to fund on-going costs in the amount of $25,000 in cash on an on-going monthly basis for a period of 12 months following the effective date.

 

For the nine months ended September 30, 2017 and 2016, the Company recognized $0 and $225,000 in losses from this venture, respectively.

 

As of September 30, 2017 and December 31, 2016, the Company has a balance due to CONtv of $224,241 and $224,241, respectively.

 

SDNY Lawsuit

 

On October 28, 2016, the Company filed a Complaint (the “SDNY Complaint”) and commenced a lawsuit in the United States District Court, Southern District of New York, against Stephen Shamus, the former Chief Marketing Officer of the Company whose employment was terminated on October 27, 2016 (the “SDNY Lawsuit”). In the SDNY Lawsuit, the Company alleges, among other things, breach of fiduciary duty, misappropriation of corporation assets, breach of contract, and conversion, against Mr. Shamus relating to the Company’s assertion that he used his position with the Company to improperly obtain memorabilia at the Company’s comic conventions which he would then sell and retain the profits from for his own benefit. On November 16, 2016, Mr. Shamus filed an Answer to the Complaint with counterclaims to the Complaint (the “Counterclaim”). The Counterclaim alleges breach of contract and unjust enrichment against the Company and seeks compensatory damages in the form of cash. The lawsuit was concluded on February 15, 2017 with no financial impact on the Company’s financial statements.

 

DNJ Lawsuit

 

On December 16, 2016, the Company filed a Complaint (the “DNJ Complaint”) and commenced a lawsuit in the United States District Court, District of New Jersey (the “DNJ Lawsuit”), against Gareb Shamus, the founder and former Chief Executive Officer of the Company; Pivot Media LLC and 4 Brothers LLC, entities owned and operated by Gareb Shamus; Stephen Shamus, the former Chief Marketing Officer of the Company whose employment was terminated on October 27, 2016; Kenneth Shamus, a former director of the Company; Eric Weisblum; GEM Funding LLC; It’s All Normal LLC; and various other defendants (collectively, the “DNJ Defendants”). In the DNJ Complaint, the Company alleged that the DNJ Defendants violated Section 13(d) of the Exchange Act and SEC Rules 13d-1 and 13d-5. The Company sought an injunction to compel the DNJ Defendants to make complete disclosure under Section 13(d) of the Exchange Act and to cure their past violations. The DNJ Lawsuit was concluded on February 15, 2017 with no financial impact on the Company’s financial statements.

 

Silverman Lawsuit

 

On January 11, 2017, Arden B. Silverman (“Silverman”), d/b/a Capital Asset Protection, filed a complaint (the “Silverman Complaint”) and commenced a lawsuit against the Company in the Superior Court of California, County of Los Angeles – Central District (the “Silverman Lawsuit”). Silverman brought the claim after being assigned the right title and interest in a claim against the Company by Rogers & Cowan, Inc., a California corporation (Rogers & Cowan). The Silverman Complaint alleges the Company owes $42,600 plus attorney’s fees to Silverman for services provided by Rogers & Cowan to the Company. On April 10, 2017, the Company filed a cross Cross-Complaint in the Silverman Lawsuit against Roger and Cowan, among others (the “Cross-Complaint”). The Cross-Complaint seeks in excess of $90,000 from Rogers & Cowan, among others, and alleges, fraud, negligent misrepresentation, breach of written agreement; breach of covenant of good faith and fair dealings, and violations of Cal. Bus. & Prof. Code §§17200 et seq. The action was concluded by way of settlement agreement with the Company paying a non-material amount to conclude the matter. The action was concluded by the way of a settlement agreement with the Company paying a non-material amount to conclude the matter.

 

Malinoff Dispute

 

Randall Malinoff, the Company’s former Chief Operating Officer, who departed from on the Company as of July 5, 2017, is currently engaged in a dispute with the Company. The dispute pertains to his departure from the Company. Both Mr. Malinoff and the Company have retained counsel to engage on the issues in controversy.

 

F-19
 

 

With the exception of the foregoing disputes, the Company is not involved in any disputes and does not have any litigation matters pending which the Company believes could have a materially adverse effect on the Company’s financial condition or results of operations.

 

Stock Options

 

The following is a summary of the Company’s option activity:

 

    Options     Weighted
Average
Exercise Price
 
             
Outstanding – December 31, 2016     5,319,000     $ 0.57  
Granted     -     $ -  
Exercised     -     $ -  
Forfeited/Cancelled     (676,000 )   $ 0.56  
Outstanding – September 30, 2017     4,643,000     $ 0.58  
Exercisable – September 30, 2017     3,628,000     $ 0.56  

 

Options Outstanding     Options Exercisable  
Exercise Price     Number
Outstanding
    Weighted
Average
Remaining
Contractual Life
(in years)
  Weighted
Average
Exercise Price
    Number
Exercisable
    Weighted
Average
Exercise Price
 
                               
$ 0.40 -0.94       4,643,000     2.58 years   $ 0.58       3,628,000     $ 0.56  

 

At September 30, 2017, the total intrinsic value of options outstanding and exercisable was $0 and $0, respectively.

 

The Company recognized an aggregate of $274,499 and $642,708 in compensation expense during the nine months ended September 30, 2017 and 2016, respectively, related to option awards. At September 30, 2017, unrecognized stock based compensation was $355,967.

 

F-20
 

 

Stock Warrants

 

The following is a summary of the Company’s warrant activity:

 

    Warrants     Weighted
Average
Exercise Price
 
             
Outstanding – December 31, 2016     16,666,667     $ 0.15  
Exercisable – December 31, 2016     16,666,667     $ 0.15  
Granted     -      $ -   
Exercised     -      $ -   
Forfeited/Cancelled     -      $ -   
Outstanding – September 30, 2017     16,666,667     $ 0.15  
Exercisable – September 30, 2017     16,666,667     $ 0.15  

 

Warrants Outstanding   Warrants Exercisable
Exercise Price   Number
Outstanding
  Weighted
Average
Remaining
Contractual Life
(in years)
  Weighted
Average
Exercise Price
  Number
Exercisable
  Weighted
Average
Exercise Price
                                     
$ 0.15       16,666,667     4.42 years   $ 0.15     16,666,667   $ 0.15  

 

At September 30, 2017, the total intrinsic value of warrants outstanding and exercisable was $1,953,333 and $1,953,333, respectively.

 

The expected warrant term is based on the contractual term. The expected option term is computed using the “simplified” method as permitted under the provisions of ASC 718-10-S99. The Company uses the simplified method to calculate expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. The expected volatility is based on historical-volatility of the Company when stock prices were publicly available. The risk-free interest rate is based on the U.S. Treasury yields with terms equivalent to the expected term of the related option at the valuation date. Dividend yield is based on historical trends.

 

F-21
 

 

Note 8 – Segment Information

 

The Company evaluates performance of its operating segments based on revenue and operating profit (loss). Segment information for the nine months ended September 30, 2017 and 2016 and as of September 30, 2017 and December 31, 2016, are as follows:

 

   Conventions   ConBox   Total 
Three Months ended September 30, 2017               
Revenue  $5,233,283    -    5,233,283 
Cost of revenue   (5,238,258)   -    (5,238,258)
Gross loss   (4,975)   -    (4,975)
Operating expenses   (1,271,247)   (679)   (1,271,926)
Operating loss   (1,276,222)   (679)   (1,276,901)
                
Three Months ended September 30, 2016               
Revenue  $6,267,631   $137,020   $6,404,651 
Cost of revenue   (3,888,811)   (75,900)   (3,964,711)
Gross margin (loss)   2,378,820    61,120    2,439,940 
Operating expenses   (1,962,080)   (1,396)   (1,963,476)
Operating profit   416,740    59,724    476,464 
                
Nine Months Ended September 30, 2017               
Revenue  $13,617,324   $84,580   $13,701,904 
Cost of revenue   (13,590,113)   (80,161)   (13,670,274)
Gross margin (loss)   27,211    4,419    31,630 
Operating expenses   (4,456,953)   (29,534)   (4,486,487)
Operating loss   (4,429,742)   (25,115)   (4,454,857)
                
Nine Months Ended September 30, 2016               
Revenue  $20,768,937   $608,025   $21,376,962 
Cost of revenue   (13,672,094)   (651,321)   (14,323,415)
Gross margin (loss)   7,096,843    (43,296)   7,053,547 
Operating expenses   (5,958,148)   (14,428)   (5,972,576)
Operating profit (loss)   1,138,695    (57,724)   1,080,971 

 

September 30, 2017            
Accounts receivable, net  $474,186   $-   $474,186 
Total assets   2,416,777    -    2,416,777 
Unearned revenue   738,789    -    738,789 
                
December 31, 2016               
Accounts receivable, net  $128,561   $59,258   $187,819 
Total assets   5,775,871    59,258    5,835,129 
Unearned revenue   1,479,392    95,546    1,574,938 

 

F-22
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

THE FOLLOWING DISCUSSION OF OUR PLAN OF OPERATION AND RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND RELATED NOTES TO THE FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS REPORT. THIS DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT RELATE TO FUTURE EVENTS OR OUR FUTURE FINANCIAL PERFORMANCE. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. THESE RISKS AND OTHER FACTORS INCLUDE, AMONG OTHERS, THOSE LISTED UNDER “FORWARD-LOOKING STATEMENTS” AND “RISK FACTORS” AND THOSE INCLUDED ELSEWHERE IN THIS REPORT.

 

Overview

 

We intend that this discussion provides information that will assist in understanding our financial statements, the changes in certain key items in those financial statements, and the primary factors that accounted for those changes, as well as how certain accounting principles affect our financial statements. This discussion should be read in conjunction with our financial statements and accompanying notes for the three and nine months ended September 30, 2017 and 2016, included elsewhere in this report.

 

We are currently a producer of Comic Conventions across the United States that celebrate movies, television shows, video games, technology, toys, social networking/gaming platforms, comic books and graphic novels. Our Comic Conventions provide entertainment for fans of the pop culture genre, as well as a platform for the sales, marketing, promotions, public relations, advertising and sponsorship opportunities for entertainment companies, toy companies, gaming companies, publishing companies, marketers, corporate sponsors, and retailers which wish to reach our audience.

 

During the nine months ended September 30, 2017, the Company was able to utilize internal controls and operating procedures employed by the Company’s new management during 2016 in order to stabilize the business. With the recently reformed internal controls in place, management continued to carefully analyze new markets for the Company’s Comic Conventions. The Company’s new internal accounting team and new sales team have continued to implement the policies put in place by management throughout 2016. Additionally, the Company is working to greatly refine and enhance its mass media, digital, and grass-roots marketing techniques, and to implement a plan to commence marketing efforts earlier in each market.

 

Plan of Operation

 

At present, the Company is engaged primarily in the live event business and derives income mainly from: (i) the production of Comic Conventions, which involves the sales of admissions and exhibitor booth space, and (ii) sale of sponsorships and advertising.

 

We plan on continuing to enhance our Comic Conventions by featuring a broader array of attractions and an enhanced mix of celebrity talent. Further, we are carefully researching and identifying new geographic markets for our Comic Conventions. It is the intention of the Company to continue to increase top line revenue by employing more sophisticated techniques to market those conventions. It is also the intention of the Company to continue to employ methods to reduce operating costs.

 

Concurrently with the Company’s stepped-up efforts in the Comic Convention business, the Company issued a Press Release on August 16, 2017 announcing that it is entering the digital media space. The Company, through the creation of WizPop (a daily news service) and the re-introduction of a digital version of Wizard Magazine, the Company intends to greatly expand its creation of compelling video and editorial content, reaching fans via social media outlets such as Facebook, Twitter, and YouTube, as well as the Company’s website, www.wizardworld.com. The creation and distribution of text and video editorial content began during August 2017. The company believes that it occupies a desirable space in the realm of live and digital platforms.

 

The Company is also actively exploring other business opportunities that may, or may not come to fruition: Such initiatives may include international digital distribution opportunities, especially in Asia, as well as opportunities for the international production of live events. Concurrently, the Company is looking at the feasibility of creating a fixed installation that will be used for the creation of content and the sales of merchandise. Finally, the Company is exploring combinations, mergers and acquisitions with third party entities to work together on marketing, e-commerce, merchandising and branding initiatives. The Company has also announced that it has obtained the right to program two channels in China, one being a linear advertising supported channel and the other an SVOD channel. The Company is actively engaging in discussions with content suppliers to program the channels.

 

We currently expect to produce 14 live events during 2017, although that number of conventions may change as we evaluate locations and venues.

 

3
 

 

Results of Operations

 

Summary of Statements of Operations for the Three Months Ended September 30, 2017 and 2016:

 

   Three Months Ended 
  

September

30, 2017

  

September

30, 2016

 
Convention revenue  $5,233,283   $6,267,631 
ConBox revenue  $-   $137,020 
Gross profit (loss)  $(4,975)  $2,439,640 
Operating expenses  $(1,271,926)  $(1,963,476)
(Loss) income from operations  $(1,276,901)  $476,464 
Other income (expenses)  $(2,418,538)  $(111,968)
Net (loss) income attributable to common shareholder  $(3,695,439)  $365,216 
(Loss) income per common share – basic  $(0.05)  $0.01 
Income per common share – diluted  $(0.05)  $0.01 

 

Convention Revenue

 

Convention revenue was $5,233,283 for the three months ended September 30, 2017, as compared to $6,267,631 for the comparable period ended September 30, 2016, a decrease of $1,034,348. The decrease in revenue is primarily attributable to lower attendance at the shows. The Company produced four events during the three months ended September 30, 2017, as compared to four events during the comparable three months ended September 30, 2016. Average revenue generated per event during the three months ended September 30, 2017 was $1,308,321 as compared to $1,566,908 during the comparable period in 2016.

 

ConBox Revenue

 

ConBox revenue was $0 for the three months ended September 30, 2017, as compared to $137,020 for the comparable three months ended September 30, 2016, a decrease of $137,020. The decrease in ConBox revenue is attributable to the new management team’s decision to primarily focus on driving the convention business forward, and to suspend the active production and distribution of ConBox.

 

Gross Profit (Loss)

 

Gross profit percentage for the convention segment decreased from a gross profit of 38% during the three months ended September 30, 2016, to a gross deficit of (0.1%) during the three months ended September 30, 2017. The Company produced four events during the three months ended September 30, 2017, as compared to four events during the comparable three months ended September 30, 2016. The gross profit percentage decrease was attributable to decreased attendance at each show.

 

Gross profit percentage for the ConBox segment decreased from a gross margin of 44.6% during the three months ended September 30, 2016, to a gross deficit of 0% during the three months ended September 30, 2017. The gross profit percentage decrease was attributable to a decrease in revenue.

 

Operating Expenses

 

Operating expenses for the three months ended September 30, 2017, was $1,271,926, as compared to $1,963,476 for the three months ended September 30, 2016. The change is attributable to enhanced operating efficiency, a decrease in employee compensation and general and administrative expenses offset by a slight increase in consulting expenses. The $513,180 decrease in compensation is primarily attributable to a decline in both headcount and officer compensation. General and administrative expenses decreased by $226,592 since the prior three months’ comparative period due in part to tighter controls over spending.

 

(Loss) Income from Operations

 

Loss from operations for the three months ended September 30, 2017, was $1,271,901 as compared to income from operations of $476,464 for the three months ended September 30, 2016. The decrease is primarily attributable to declines in attendance, with increased costs in the area of event production and losses on convention improvements designed to enhance the fan experience.

 

4
 

 

Other Income (Expense)

 

Other income (expenses) for the three months ended September 30, 2017, was expense of $2,418,538, as compared to expense of $111,968 for the three months ended September 30, 2016. The change is primarily attributable to the change in fair value of derivative liabilities giving rise to loss of $2,306,470 during the current quarter, in relation to the derivative liability of the convertible note and related warrants. In addition, the Company recorded $112,068 interest expense during the three months ended September 30, 2017. The Company did not sustain a loss during the three months ended September 30, 2017 on the CONtv joint venture with Cinedigm but recorded a loss of $36,876 during the three months ended September 30, 2016 upon the disposal of equipment.

 

Net Income (Loss) Attributable to Common Stockholder

 

Net income (loss) attributable to common stockholder for the three months ended September 30, 2017, was net loss of $(3,695,439) or loss per basic share of $(0.05), compared to net income of $365,216 or income per basic share of $0.01, for the three months ended September 30, 2016.

 

Inflation did not have a material impact on the Company’s operations for the applicable period. Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company’s results of operations.

 

Summary of Statements of Operations for the Nine Months Ended September 30, 2017 and 2016:

 

 

   Nine Months Ended 
   September 30, 2017   September 30, 2016 
Convention revenue  $13,617,324   $20,768,937 
ConBox revenue  $84,580   $608,025 
Gross profit  $31,630   $7,053,547 
Operating expenses  $(4,486,487)  $(5,972,576)
(Loss) income from operations  $(4,454,857)  $1,080,971 
Other income (expenses)  $(950,625)  $(262,853)
Net (loss) income attributable to common shareholder  $(5,404,839)  $749,885 
(Loss) income per common share – basic  $(0.08)  $0.01 
(Loss) income per common share – diluted  $(0.08)  $0.01 

 

Convention Revenue

 

Convention revenue was $13,617,324 for the nine months ended September 30, 2017, as compared to $20,768,937 for the comparable period ended September 30, 2016, a decrease of $7,151,613. The decrease in revenue is primarily attributable to the decreased number of shows run as well as lower attendance at the shows. The Company produced twelve events during the nine months ended September 30, 2017, as compared to fifteen events during the comparable nine months ended September 30, 2016. Average revenue generated per event during the nine months ended September 30, 2017 was $1,134,777 as compared to $1,384,596 during the comparable period in 2016.

 

ConBox Revenue

 

ConBox revenue was $84,580 for the nine months ended September 30, 2017, as compared to $608,025 for the comparable nine months ended September 30, 2016, a decrease of $523,445. The decrease in ConBox revenue is attributable to the new management team’s decision to primarily focus on driving the convention business forward, and not continuing with the ConBox operation.

 

Gross Profit

 

Gross profit percentage for the convention segment decreased from a gross profit of 34% during the nine months ended September 30, 2016, to a gross profit of 0.2% during the nine months ended September 30, 2017. The Company produced twelve events during the nine months ended September 30, 2017, as compared to fifteen events during the comparable nine months ended September 30, 2016. The gross profit percentage decrease was attributable to decreased attendance at each show based on inefficient marketing and reduced celebrity talent.

 

5
 

 

Gross profit percentage for the ConBox segment increased from a gross deficit of 7% during the nine months ended September 30, 2016, to a gross profit of 5% during the nine months ended September 30, 2017. The gross profit percentage increase was attributable to an overall decrease in fulfillment costs.

 

Operating Expenses

 

Operating expenses for the nine months ended September 30, 2017, was $4,486,487, as compared to $5,972,576 for the nine months ended September 30, 2016. The change is attributable to a decrease in employee compensation and general and administrative expenses offset by a slight increase in consulting expenses. The $1,004,071 decrease in compensation is primarily attributable to a decline in both headcount and officer compensation. General and administrative expenses decreased by $580,225 since the prior nine months’ comparative period due to a decrease in service fees, travel and web development.

 

(Loss) Income from Operations

 

Loss from operations for the nine months ended September 30, 2017, was $4,454,857 as compared to income from operations of $1,080,971 for the nine months ended September 30, 2016. The decrease is primarily attributable to producing three fewer events, combined with increased costs in the area of event production and overall losses for the conventions as discussed above.

 

Other Income (Expense)

 

Other income (expenses) for the nine months ended September 30, 2017, was expense of $950,625, as compared to expense of $262,853 for the nine months ended September 30, 2016. The change is primarily attributable to the change in fair value of derivative liabilities giving rise to a loss of $661,098 during the current quarter, in relation to the derivative liability of the convertible note and related warrants. In addition, the Company recorded $288,742 interest expense during the nine months ended September 30, 2017. The Company did not sustain a loss during the nine months ended September 30, 2017 on the CONtv joint venture with Cinedigm but recorded a loss on the CONtv joint venture of $225,000 and a loss of $36,876 upon the disposal of equipment during the nine months ended September 30, 2016.

 

Net Income (Loss) Attributable to Common Stockholder

 

Net (loss) income attributable to common stockholder for the nine months ended September 30, 2017, was net loss of $(5,404,839) or loss per basic share of $(0.08), compared to a net income of $749,885 or income per basic share of $0.01, for the nine months ended September 30, 2016.

 

Inflation did not have a material impact on the Company’s operations for the applicable period. Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company’s results of operations.

 

Liquidity and Capital Resources

 

The following table summarizes total current assets, liabilities and working capital deficit at September 30, 2017 compared to December 31, 2016:

 

   September 30, 2017   December 31, 2016   Increase/(Decrease) 
Current Assets  $2,214,537   $5,599,269   $(3,384,732)
Current Liabilities  $10,888,554   $9,235,689   $1,652,865 
Working Capital Deficit  $(8,674,017)  $(3,636,420)  $(5,037,597)

 

At September 30, 2017, we had working capital deficit of $8,674,017, as compared to working capital deficit of $3,636,420, at December 31, 2016, a decrease of $5,037,597. The decrease is primarily attributable to a decrease in cash and cash equivalents, prepaid expenses and an increase in accounts payable and accrued expenses and derivative liabilities. These were offset by increases in accounts receivable and decreases in unearned revenue.

 

6
 

 

Net Cash

 

Net cash used in operating activities for the nine months ended September 30, 2017 and 2016, was $3,128,003 and $1,245,272, respectively. The net (loss) income for the nine months ended September 30, 2017 and 2016 was $(5,405,482) and $818,118, respectively.

 

Going Concern Analysis

 

The Company had a loss from operations of $4,454,857 and $1,182,246 for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. As of September 30, 2017, we had cash and working capital deficit (excluding the derivative liability) of $1,176,034 and $1,514,182, respectively. We have evaluated the significance of these conditions in relation to our ability to meet our obligations and have concluded that, due to these conditions, there is substantial doubt about the Company’s ability to continue as a going concern through November 2018.

 

If necessary, management believes that both related parties (management and members of the Board of Directors of the Company) and potential external sources of debt and/or equity financing may be obtained based on management’s history of being able to raise capital from both internal and external sources coupled with current favorable market conditions. Therefore, the accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

 

The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein. While the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. The Company’s ability to continue as a going concern is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control operating expenses.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2017, the Company had no off-balance sheet arrangements.

 

Critical Accounting Policies

 

We believe that the following accounting policies are the most critical to aid you in fully understanding and evaluating this “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s). Actual results could differ from those estimates.

 

7
 

 

Property and Equipment

 

Property and equipment is stated at historical cost less accumulated depreciation and amortization. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of the assets, varying from 3 to 5 years or, when applicable, the life of the lease, whichever is shorter.

 

Derivative Liability

 

The Company evaluates its debt and equity issuances to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with paragraph 815-10-05-4 and Section 815-40-25 of the FASB ASC. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as either an asset or a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the consolidated statement of operations as other income or expense. Upon conversion, exercise or cancellation of a derivative instrument, the instrument is marked to fair value at the date of conversion, exercise or cancellation and then the related fair value is reclassified to equity.

 

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

 

The Company adopted Section 815-40-15 of the FASB ASC (“Section 815-40-15”) to determine whether an instrument (or an embedded feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.

 

The Company utilizes the Monte Carlo pricing model to compute the fair value of the derivative and to mark to market the fair value of the derivative at each balance sheet date. The Company records the change in the fair value of the derivative as other income or expense in the consolidated statements of operations.

 

Income Taxes

 

The Company accounts for income taxes under Section 740-10-30 of the FASB ASC. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

 

The Company adopted section 740-10-25 of the FASB ASC (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent (50%) likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

 

8
 

 

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carryforwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.

 

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

 

Revenue Recognition

 

The Company follows Paragraph 605-10-S99-1 of the FASB ASC for revenue recognition. The Company will recognize revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

 

Unearned convention revenue is deposits received for conventions that have not yet taken place, which are fully or partially refundable depending upon the terms and conditions of the agreements.

 

Unearned ConBox revenue is non-refundable up-front payments for products. These payments are initially deferred and subsequently recognized over the subscription period, typically three months, and upon shipment of the product.

 

The Company recognizes cost of revenues in the period in which the revenues was earned. In the event the Company incurs cost of revenues for conventions that are yet to occur, the Company records such amounts as prepaid expenses and such prepaid expenses are expensed during the period the convention takes place.

 

Equity–based compensation

 

The Company recognizes compensation expense for all equity–based payments in accordance with ASC 718 “Compensation – Stock Compensation”. Under fair value recognition provisions, the Company recognizes equity–based compensation net of an estimated forfeiture rate and recognizes compensation cost only for those shares expected to vest over the requisite service period of the award.

 

Restricted stock awards are granted at the discretion of the Company. These awards are restricted as to the transfer of ownership and generally vest over the requisite service periods, typically over a four-year period (vesting on a straight–line basis). The fair value of a stock award is equal to the fair market value of a share of Company stock on the grant date.

 

The fair value of option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s Common stock over the expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on our Common stock and does not intend to pay dividends on our Common stock in the foreseeable future. The expected forfeiture rate is estimated based on historical experience.

 

9
 

 

Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, our equity–based compensation could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the equity–based compensation could be significantly different from what the Company has recorded in the current period.

 

The Company accounts for share–based payments granted to non–employees in accordance with ASC 505-40, “Equity Based Payments to Non–Employees”. The Company determines the fair value of the stock–based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete. The fair value of the equity instruments is re-measured each reporting period over the requisite service period.

 

Fair Value of Financial Instruments

 

We follow Paragraph 825-10-50-10 of the FASB ASC for disclosures about fair value of our financial instruments and paragraph 820-10-35-37 of the FASB ASC (“Paragraph 820-10-35-37”) to measure the fair value of our financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

  Level 1 – Quoted market prices available in active markets for identical assets or liabilities as of the reporting date;
     
  Level 2 – Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date; and
     
  Level 3 – Pricing inputs that are generally observable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amount of the Company’s assets and liabilities, such as cash, accounts receivable, inventory, prepaid expenses, accounts payable and accrued liabilities, and unearned revenue approximate their fair value because of the short maturity of those instruments.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” Under ASU 2016-02, lessees will be required to recognize, for all leases of 12 months or more, a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. Additionally, the guidance requires improved disclosures to help users of financial statements better understand the nature of an entity’s leasing activities. This ASU is effective for public reporting companies for interim and annual periods beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. The Company is in the process of evaluating the effect of the new guidance on its consolidated financial statements and disclosures.

 

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In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (Topic 606)”. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross verses Net) (Topic 606)”. These amendments provide additional clarification and implementation guidance on the previously issued ASU 2014-09, “Revenue from Contracts with Customers”. The amendments in ASU 2016-10 provide clarifying guidance on materiality of performance obligations; evaluating distinct performance obligations; treatment of shipping and handling costs; and determining whether an entity’s promise to grant a license provides a customer with either a right to use an entity’s intellectual property or a right to access an entity’s intellectual property. The amendments in ASU 2016-08 clarify how an entity should identify the specified good or service for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The adoption of ASU 2016-10 and ASU 2016-08 is to coincide with an entity’s adoption of ASU 2014-09, which the Company intends to adopt for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating the standard and does not expect the adoption will have a material effect on its consolidated financial statements and disclosures.

 

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”, which narrowly amended the revenue recognition guidance regarding collectability, noncash consideration, presentation of sales tax and transition and is effective during the same period as ASU 2014-09. The Company is currently evaluating the standard and does not expect the adoption will have a material effect on its consolidated financial statements and disclosures.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case it would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently in the process of evaluating the impact of ASU 2016-15 on its consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory”, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted. The Company is currently evaluating the impact of the new standard.

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017 with early adoption permitted. The provisions of this guidance are to be applied using a retrospective approach which requires application of the guidance for all periods presented. The Company is currently evaluating the impact of the new standard.

 

Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying condensed consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We do not hold any derivative instruments and do not engage in any hedging activities.

 

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Item 4. Controls and Procedures.

 

(a) Evaluation of Disclosure Controls and Procedures.

 

Pursuant to Rule 13a- 15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s PEO and PFO concluded that the Company’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s PEO and PFO, as appropriate, to allow timely decisions regarding required disclosure.

 

(b) Changes in Internal Control over Financial Reporting.

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

The Company is committed to improving financial organization. As part of this commitment, management and the Board are currently performing an extensive review of the Company’s policies and procedures as it relates to financial reporting in an effort to mitigate future risks of potential misstatements. The Company will continue to focus on developing and documenting internal controls and procedures surrounding the financial reporting process, primarily through the use of account reconciliations, and supervision.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Silverman Lawsuit

 

On January 11, 2017, Arden B. Silverman (“Silverman”), d/b/a Capital Asset Protection, filed a complaint (the “Silverman Complaint”) and commenced a lawsuit against the Company in the Superior Court of California, County of Los Angeles – Central District (the “Silverman Lawsuit”). Silverman brought the claim after being assigned the right title and interest in a claim against the Company by Rogers & Cowan, Inc., a California corporation (Rogers & Cowan). The Silverman Complaint alleges the Company owes $42,600 plus attorney’s fees to Silverman for services provided by Rogers & Cowan to the Company. On April 10, 2017, the Company filed a cross Cross-Complaint in the Silverman Lawsuit against Rogers and Cowan, among others (the “Cross-Complaint”). The Cross-Complaint seeks in excess of $90,000 from Rogers & Cowan, among others, and alleges, fraud, negligent misrepresentation, breach of written agreement; breach of covenant of good faith and fair dealings, and violations of Cal. Bus. & Prof. Code §§17200 et seq. The Silverman lawsuit was settled by payment of a non-material amount by the Company.

 

Malinoff Dispute

 

Randall Malinoff, the Company’s former Chief Operating Officer, who departed from on the Company as of July 5, 2017, is currently engaged in a dispute with the Company. The dispute pertains to his departure from the Company. Both Mr. Malinoff and the Company have retained counsel to engage on the issues in controversy.

 

With the exception of the foregoing disputes, the Company is not involved in any disputes and does not have any litigation matters pending which the Company believes could have a materially adverse effect on the Company’s financial condition or results of operations.

 

Item 1A. Risk Factors.

 

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K, filed with the SEC on April 17, 2017.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

There were no unregistered sales of the Company’s equity securities during the quarter ended September 30, 2017, that were not otherwise disclosed in a Current Report on Form 8-K.

 

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Item 3. Defaults Upon Senior Securities.

 

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

There is no other information required to be disclosed under this item which was not previously disclosed.

 

Item 6. Exhibits.

 

Exhibit No.   Description
     
31.1   Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). *
     
31.2   Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)). *
     
32.1   Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
     
32.2   Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
     
101.INS   XBRL Instance Document *
     
101.SCH   XBRL Taxonomy Extension Schema *
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase *
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase *
     
101.LAB   XBRL Taxonomy Extension Label Linkbase *
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase *

 

* Filed herewith.

 

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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.

 

  WIZARD WORLD, INC.
   
Date: November 14, 2017 By: /s/ John D. Maatta
  Name: John D. Maatta
  Title: Chief Executive Officer and President
    (Principal Executive Officer)
    (Principal Financial Officer)
    (Principal Accounting Officer)

 

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