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: June 30, 2020
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 BRANDS, 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)
(747) 264-1483
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| n/a | n/a | n/a |
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 August 14, 2020, there were 3,506,752 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 | 9 |
| Item 4. | Controls and Procedures | 9 |
| PART II – OTHER INFORMATION | ||
| Item 1. | Legal Proceedings | 9 |
| Item 1A. | Risk Factors | 9 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 10 |
| Item 3. | Defaults Upon Senior Securities | 10 |
| Item 4. | Mine Safety Disclosures | 10 |
| Item 5. | Other Information | 10 |
| Item 6. | Exhibits | 11 |
| Signatures | 12 | |
| 2 |
PART I – FINANCIAL INFORMATION
Wizard Brands, Inc.
June 30, 2020
Index to the Condensed Consolidated Financial Statements
| F-1 |
Wizard Brands, Inc.
Condensed Consolidated Balance Sheets
| June 30, 2020 | December 31, 2019 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 2,567,860 | $ | 2,777,654 | ||||
| Accounts receivable, net | 13,248 | 113 | ||||||
| Inventory | 220,641 | - | ||||||
| Prepaid convention expenses | - | 342,283 | ||||||
| Prepaid expenses | 104,026 | 97,872 | ||||||
| Total Current Assets | 2,905,775 | 3,217,922 | ||||||
| Property and equipment, net | 64,541 | 58,104 | ||||||
| Intangibles, net | 146,393 | - | ||||||
| Operating lease right of use asset, net | 125,336 | 170,696 | ||||||
| Security deposits | 18,201 | 9,408 | ||||||
| Total Assets | $ | 3,260,246 | $ | 3,456,130 | ||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 4,179,062 | $ | 3,317,972 | ||||
| Unearned revenue | 726,978 | 1,568,242 | ||||||
| Notes payable | 200,365 | - | ||||||
| Operating lease liability | 100,718 | 93,324 | ||||||
| Convertible promissory note – related party, net | 2,500,000 | 2,500,000 | ||||||
| Due to CONtv joint venture | 224,241 | 224,241 | ||||||
| Total Current Liabilities | 7,931,364 | 7,703,779 | ||||||
| Operating lease liability, net | 27,954 | 79,816 | ||||||
| Notes payable, net | 147,135 | - | ||||||
| Convertible debenture, net | 1,943,982 | 1,929,264 | ||||||
| Total Liabilities | 10,050,435 | 9,712,859 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock-Series A Cumulative and Convertible par value $1,000: 3,500 shares authorized; no shares outstanding, respectively | - | - | ||||||
| Preferred stock par value $0.0001: 5,000,000 shares authorized; 288,448 and 288,448 shares issued and outstanding, respectively | 29 | 29 | ||||||
| Common stock par value $0.0001: 100,000,000 shares authorized; 3,506,752 and 3,506,752 shares issued and outstanding, respectively | 351 | 351 | ||||||
| Additional paid-in capital | 21,894,731 | 21,854,134 | ||||||
| Accumulated deficit | (28,672,802 | ) | (28,098,745 | ) | ||||
| Non-controlling interest | (12,498 | ) | (12,498 | ) | ||||
| Total Stockholders’ Deficit | (6,790,189 | ) | (6,256,729 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 3,260,246 | $ | 3,456,130 | ||||
See accompanying notes to the condensed consolidated financial statements
| F-2 |
Wizard Brands, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||
| June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||
| (unaudited) | (unaudited) | (unaudited) | (unaudited) | |||||||||||||
| Convention Revenues | $ | 816,416 | $ | 2,542,632 | $ | 3,418,835 | $ | 6,092,615 | ||||||||
| Cost of revenues | 481,038 | 2,164,799 | 2,505,320 | 5,122,638 | ||||||||||||
| Gross margin | 335,378 | 377,833 | 913,515 | 969,977 | ||||||||||||
| Operating expenses | ||||||||||||||||
| Compensation | 250,212 | 329,638 | 506,933 | 785,924 | ||||||||||||
| Consulting fees | 108,353 | 115,393 | 226,160 | 217,844 | ||||||||||||
| General and administrative | 221,057 | 217,219 | 451,939 | 393,896 | ||||||||||||
| Total operating expenses | 579,622 | 662,250 | 1,1,85,032 | 1,397,664 | ||||||||||||
| Loss from operations | (244,244 | ) | (284,417 | ) | (271,517 | ) | (427,687 | |||||||||
| Other income (expenses) | ||||||||||||||||
| Interest expense | (156,199 | ) | (74,875 | ) | (312,540 | ) | (154,702 | ) | ||||||||
| Other income | 10,000 | - | 10,000 | - | ||||||||||||
| Total other expenses | (146,199 | ) | (74,875 | ) | (302,540 | ) | (154,702 | ) | ||||||||
| Loss before income tax provision | (390,443 | ) | (359,292 | ) | (574,057 | ) | (582,389 | ) | ||||||||
| Income tax provision | - | - | - | - | ||||||||||||
| Net loss | (390,443 | ) | (359,292 | ) | (574,057 | ) | (582,389 | ) | ||||||||
| Net loss attributable to non-controlling interests | - | - | - | �� | - | |||||||||||
| Net loss attributable to common stockholders | $ | (390,443 | ) | $ | (359,292 | ) | $ | (574,057 | ) | $ | (582,389 | ) | ||||
| Loss per share - basic | $ | (0.11 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.06 | ) | ||||
| Loss per share - diluted | $ | (0.11 | ) | $ | (0.13 | ) | $ | (0.16 | ) | $ | (0.06 | ) | ||||
| Weighted average common shares outstanding - basic | 3,506,752 | 3,506,752 | 3,506,752 | 3,506,752 | ||||||||||||
| Weighted average common shares outstanding - diluted | 3,506,752 | 3,506,752 | 3,506,752 | 3,506,752 | ||||||||||||
See accompanying notes to the condensed consolidated financial statements
| F-3 |
Wizard Brands, Inc.
Condensed Consolidated Statement of Stockholders’ Deficit
(unaudited)
For the Three Months Ended June 30, 2020
| Preferred Stock Par Value $0.0001 | Common Stock Par Value $0.0001 | Additional Paid-in | Accumulated | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||||||||
Balance - March 31, 2020 | 288,448 | $ | 29 | 3,506,752 | $ | 351 | $ | 21,875,305 | $ | (28,282,359 | ) | $ | (12,498 | ) | $ | (6,419,172 | ) | |||||||||||||||
| Share-based compensation | - | - | - | - | 19,426 | - | - | 19,426 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (390,443 | ) | - | (390,443 | ) | ||||||||||||||||||||||
| Balance -June 30, 2020 | 288,448 | $ | 29 | 3,506,752 | $ | 351 | $ | 21,894,731 | $ | (28,672,802 | ) | $ | (12,498 | ) | $ | (6,790,189 | ) | |||||||||||||||
For the Three Months Ended June 30, 2019
| Preferred Stock Par Value $0.0001 | Common Stock Par Value $0.0001 | Additional Paid-in | Accumulated | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance - March 31, 2019 | 288,448 | $ | 29 | 3,506,752 | $ | 351 | $ | 21,158,927 | $ | (26,159,987 | ) | $ | (12,498 | ) | $ | (5,005,966 | ) | |||||||||||||||
| Share-based compensation | - | - | - | - | 55,765 | - | - | 55,765 | ||||||||||||||||||||||||
| Net income | - | - | - | - | - | (359,292 | ) | - | (359,292 | ) | ||||||||||||||||||||||
| Balance – June 30, 2019 | 288,448 | $ | 29 | 3,506,752 | $ | 351 | $ | 21,221,904 | $ | (26,519,279 | ) | $ | (12,498 | ) | $ | (5,309,493 | ) | |||||||||||||||
See accompanying notes to the condensed consolidated financial statements
| F-4 |
Wizard Brands, Inc.
Condensed Consolidated Statement of Stockholders’ Deficit
(unaudited)
For the Six Months Ended June 30, 2020
| Preferred Stock Par Value $0.0001 | Common Stock Par Value $0.0001 | Additional Paid-in | Accumulated | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance - December 31, 2019 | 288,448 | $ | 29 | 3,506,752 | $ | 351 | $ | 21,854,134 | $ | (28,098,745 | ) | $ | (12,498 | ) | $ | (6,256,729 | ) | |||||||||||||||
| Share-based compensation | - | - | - | - | 40,597 | - | - | 40,597 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (574,057 | ) | - | (574,057 | ) | ||||||||||||||||||||||
| Balance - June 30, 2020 | 288,448 | $ | 29 | 3,506,752 | $ | 351 | $ | 21,894,731 | $ | (28,672,802 | ) | $ | (12,498 | ) | $ | (6,790,189 | ) | |||||||||||||||
For the Six Months Ended June 30, 2019
| Preferred Stock Par Value $0.0001 | Common Stock Par Value $0.0001 | Additional Paid-in | Accumulated | Non- controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Deficit | |||||||||||||||||||||||||
| Balance – December 31, 2018 | 288,448 | $ | 29 | 3,506,752 | $ | 351 | $ | 21,034,211 | $ | (25,936,890 | ) | $ | (12,498 | ) | $ | (4,914,797 | ) | |||||||||||||||
| Share-based compensation | - | - | - | - | 187,693 | - | - | 187,693 | ||||||||||||||||||||||||
| Net income | - | - | - | - | - | (582,389 | ) | - | (582,389 | ) | ||||||||||||||||||||||
| Balance – June 30, 2019 | 288,448 | $ | 29 | 3,506,752 | $ | 351 | $ | 21,221,904 | $ | (26,519,279 | ) | $ | (12,498 | ) | $ | (5,309,493 | ) | |||||||||||||||
See accompanying notes to the condensed consolidated financial statements
| F-5 |
Wizard Brands, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
| For the Six Months Ended | ||||||||
| June 30, 2020 | June 30, 2019 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | (574,057 | ) | $ | (582,389 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 12,890 | 24,350 | ||||||
| Accretion of debt discount | 14,718 | 4,999 | ||||||
| Right-of-use asset amortization | 892 | 2,146 | ||||||
| Share-based compensation | 40,597 | 187,693 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (13,135 | ) | (64,563 | ) | ||||
| Inventory | (220,641 | ) | - | |||||
| Prepaid convention expenses | 342,283 | 546,506 | ||||||
| Prepaid expenses | (6,154 | ) | (44,279 | ) | ||||
| Security deposits | (8,793 | ) | ||||||
| Accounts payable and accrued expenses | 853,821 | 134,922 | ||||||
| Unearned revenue | (841,264 | ) | (724,194 | ) | ||||
| Net Cash Used In Operating Activities | (398,843 | ) | (514,809 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of property and equipment | (19,327 | ) | (7,888 | ) | ||||
| Purchase of intangible assets | (139,124 | ) | - | |||||
| Net Cash Used In Investing Activities | (158,451 | ) | (7,888 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Proceeds from notes payable | 347,500 | - | ||||||
| Net Cash Provided by Financing Activities | 347,500 | - | ||||||
| Net change in cash and cash equivalents | (209,794 | ) | (522,697 | ) | ||||
| Cash and cash equivalents at beginning of reporting period | 2,777,654 | 1,014,671 | ||||||
| Cash and cash equivalents at end of reporting period | $ | 2,567,860 | 491,974 | |||||
| Supplemental disclosures of cash flow information: | ||||||||
| Interest paid | $ | - | $ | - | ||||
| Income tax paid | $ | - | $ | - | ||||
| Supplemental disclosure of noncash investing and financing activities: | ||||||||
| Right-of-use assets obtained in exchange for lease obligations | $ | - | $ | 252,980 | ||||
See accompanying notes to the condensed consolidated financial statements
| F-6 |
Wizard Brands, Inc.
June 30, 2020
Notes to the Condensed Consolidated Financial Statements
(unaudited)
Note 1 – Organization and Operations
Wizard Brands, Inc.
Wizard Brands, Inc., formerly GoEnergy, Inc., Wizard World, Inc., and Wizard Entertainment, Inc. (“Wizard Brands” 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. Effective October 5, 2018, the Company changed its name to Wizard Entertainment, Inc. On July 29, 2020, the Company changed its name to Wizard Brands, Inc.
Recent Developments
On April 28, 2020 the Company, through one of its wholly-owned operating subsidiaries, acquired the assets of the creator of the Jevo machine, which is a patent protected first-mover application for the creation of gelatin shots. With Jevo, the Company will diversify its revenue generation capabilities by manufacturing, marketing and selling Jevo units and related consumables, both nationally and internationally to: bars, restaurants, clubs, casinos, hotels, cruise lines, resorts and other establishments that serve beverages (both alcoholic and non-alcoholic) to the public. In addition to food and beverage applications the Company has identified other market segments where the Jevo units can be marketed including but not limited to the healthcare industry. The acquisition of Jevo is the Company’s initial entry into M&A activity intended to broaden the Company’s revenue base. Following the closing of the merger transaction, ECS’s financial statements as of the closing were consolidated with the consolidated financial statements of the Company. As of the date of this report, the purchase price allocation has yet to be valued.
Note 2 – Going Concern Analysis
Going Concern Analysis
The Company had a loss from operations of $271,517 and $427,687 for the six months ended June 30, 2020 and 2019, respectively. On June 30, 2020, we had cash and cash equivalents of approximately $2.6 million and a working capital deficit of approximately $5.0 million. We have evaluated the significance of these conditions in relation to our ability to meet our obligations, which had previously raised doubts about the Company’s ability to continue as a going concern through August 2021. However, the Company believes that the effects of its cost savings efforts with regard to corporate overhead and show production expenses commenced in 2017, together with the initiation of virtual activities and e-commerce, will guide the Company in a positive direction as we continue to strive to attain profitability.
However, because of the current situation with the Covid-19 virus, the Company was unable to produce any live events after the First Quarter of 2020. At present it is unclear how many live events will actually be produced by the Company in 2021. It is presently unknowable how long the current situation with Covid-19 will continue and what impact the Covid-19 situation will ultimately have upon the Company in 2020 and 2021. At this point, the Company has postponed all of the live shows that it has scheduled for 2020. In the face of the impact of Covid-19 on live events generally, the Company has focused on producing virtual events. The first such virtual event was an interactive fan experience which took place on March 31, 2020 and since that time the Company has produced approximately 60 virtual events during the current quarter. In addition, the Company has moved into e-commerce with online sales of collectables and the creation of the “Wizard World Vault” as a site for consumers to purchase pop-culture memorabilia and collectables.
| F-7 |
As disclosed in “Securities Purchase Agreement II”, On December 19, 2019, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Barlock 2019 Fund, LP (the “Purchaser”), for the sale of the Company’s securities, comprised of (i) a $2,500,000 convertible debenture, convertible at a price of $2.50 per share, and (ii) warrants to acquire 300,000 shares of the Company’s common stock at an exercise price of $2.50 per share. As a condition to Purchaser entering into the Purchase Agreement, the Company entered into a security agreement in favor of the Purchaser, granting a security interest in substantially all of the property of the Company, whether presently owned or existing or hereafter acquired or coming into existence, including but not limited to, its ownership interests in its subsidiaries, to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the debenture. The security interest is on equal footing with certain other creditors of the Company. The Company received $2,500,000 in cash from the offering of the securities but was required to pay out of the closing proceeds, Purchaser’s attorney’s fees in the amount of $25,000. The Company has agreed with the Purchaser that the funds received will be restricted and utilized only for M&A opportunities, new business ventures, brand extensions and the creation of new vertical opportunities by the Company. The subject note contains a “ratchet” provisions that adjusts the conversion rates of the note to the lowest rate the Company has agreed to issue stock. The effect of repricing board and employee options, (as discussed in Item 5 “Other Information”) to $0.25 reset the conversion rate of the debenture to $0.25. In light of the financial stress Covid-19 has placed on the Company the holder of the debenture has agreed to not require payment due under the outstanding notes until December 31, 2022.
In addition to its cost containment strategies, the Company identified opportunities to rapidly move into the areas of (i) retailing collectables, (ii) providing virtual opportunities to fans to interact with celebrities, (iii) creating live and virtual events and conferences focused on new subject matter and affinities, and (iv) engaging in M&A opportunities. The company initiated these activities in 2020.
Additionally, if necessary, management believes that both related parties (management and members of the Board of Directors of the Company) and potential external sources of debt and/or equity financing may be obtained based on management’s history of being able to raise capital from both internal and external sources coupled with current favorable market conditions, It is understood however, that although there is a recent history of related-parties providing a source of financing, there is no absolute certainty that any such related-party financing can be obtained on a going-forward basis. Therefore, the accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein. While the Company believes in the viability of management’s strategy to generate sufficient revenue, control costs and the ability to raise additional funds if necessary, there can be no assurances to that effect. The Company’s ability to continue as a going concern is dependent upon the ability to further implement the business plan, generate sufficient revenues and to control operating expenses.
Note 3 – Significant and Critical Accounting Policies and Practices
The management of the Company is responsible for the selection and use of appropriate accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.
Basis of Presentation - Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited condensed consolidated financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2019 and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on March 30, 2020.
| F-8 |
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).
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 June 30, 2020 and December 31, 2019, the aggregate non-controlling interest in ButtaFyngas was ($12,498). The non-controlling interest is separately disclosed on the Condensed Consolidated Balance Sheet.
Cash and Cash Equivalents
The Company considers investments with original maturities of three months or less to be cash equivalents.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.
Fair Value of Financial Instruments
For purpose of this disclosure, the fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. The carrying amount of the Company’s short-term financial instruments approximates fair value due to the relatively short period to maturity for these instruments.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company generally does not require collateral to support customer receivables. The Company provides an allowance for doubtful accounts based upon a review of the outstanding accounts receivable, historical collection information and existing economic conditions. The Company determines if receivables are past due based on days outstanding, and amounts are written off when determined to be uncollectible by management. The maximum accounting loss from the credit risk associated with accounts receivable is the amount of the receivable recorded, which is the face amount of the receivable net of the allowance for doubtful accounts. As of June 30, 2020 and December 31, 2019, the allowance for doubtful accounts was $0 and $0, respectively.
Inventories
Inventories are stated at average cost using the first-in, first-out (FIFO) valuation method. Inventory was comprised of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Finished goods | $ | 220,641 | $ | - | ||||
| F-9 |
Property and Equipment
Property and equipment are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is computed by the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the respective assets as follows:
| Estimated Useful Life (Years) | |||
| Computer equipment | 3 | ||
| Equipment | 2-5 | ||
| Furniture and fixture | 7 | ||
| Leasehold improvements | * |
(*) Amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever period is shorter.
Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the condensed consolidated statements of operations.
Intangible assets
Intangible assets represent intangible assets acquired in connection with the Company’s purchase of Jevo patents and technology. The transaction was not a business combination or acquisition of a business.
The intangible assets are expected to be amortized using a straight-line method consistent with the expected future cash flows related to the intangible asset. Amortized intangible assets are reviewed for impairment whenever events or changes in circumstances exist that indicate the carrying amount of an asset may not be recoverable. When indicators of impairment exist, an estimate of undiscounted net cash flows is used in measuring whether the carrying amount of the asset or related asset group is recoverable.
Measurement of the amount of impairment, if any, is based upon the difference between the asset or asset group's carrying value and fair value. Fair value is determined through various valuation techniques, including market and income approaches as considered necessary.
Investments - Cost Method, Equity Method and Joint Venture
In accordance with sub-topic 323-10 of the FASB ASC (“Sub-topic 323-10”), the Company accounts for investments in common stock of an investee for which the Company has significant influence in the operating or financial policies even though the Company holds 50% or less of the common stock or in-substance common stock.
Method of Accounting
Investments held in stock of entities other than subsidiaries, namely corporate joint ventures and other non-controlled entities usually are accounted for by one of three methods: (i) the fair value method (addressed in Topic 320), (ii) the equity method (addressed in Topic 323), or (iii) the cost method (addressed in Subtopic 325-20). Pursuant to Paragraph 323-10-05-5, the equity method tends to be most appropriate if an investment enables the investor to influence the operating or financial policies of the investee.
Investment in CONtv
The Company currently holds a limited and passive interest of 10% in CONtv, a joint venture with third parties and Bristol Capital, LLC (a related party controlled by a member of the Board). CONtv is a digital network devoted to fans of pop culture entertainment and is inactive
For the three and six months ended June 30, 2020 and 2019, the Company recognized $0 losses from this venture, respectively.
As of June 30, 2020 and December 31, 2019, the investment in CONtv was $0.
As of June 30, 2020 and December 31, 2019, the amount due to CONtv was $224,241.
Fair Value of Measurements
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-10 |
| 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.
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 5, the Company obtained a fairness opinion from an independent third party which supports that the transaction was carried out at an arm’s length basis.
Revenue Recognition and Cost of Revenues
The Company follows the FASB Accounting Standards Codification ASC 606 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:
| 1) | Identify the contract with a customer |
A contract with a customer exists when (i) the Company enters into an enforceable contract with a customer that defines each party’s rights regarding the services to be transferred and identifies the payment terms related to these services, (ii) the contract has commercial substance and, (iii) the Company determines that collection of substantially all consideration for services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. The Company applies judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.
| 2) | Identify the performance obligations in the contract |
Performance obligations promised in a contract are identified based on the services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from the Company, and are distinct in the context of the contract, whereby the transfer of the services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised services, the Company must apply judgment to determine whether promised services are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services are accounted for as a combined performance obligation.
| 3) | Determine the transaction price |
The transaction price is determined based on the consideration to which the Company will be entitled in exchange for transferring services to the customer. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of the Company’s contracts as of June 30, 2020 contained a significant financing component.
| F-11 |
| 4) | Allocate the transaction price to performance obligations in the contract |
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. However, if a series of distinct services that are substantially the same qualifies as a single performance obligation in a contract with variable consideration, the Company must determine if the variable consideration is attributable to the entire contract or to a specific part of the contract. For example, a bonus or penalty may be associated with one or more, but not all, distinct services promised in a series of distinct services that forms part of a single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price basis unless the transaction price is variable and meets the criteria to be allocated entirely to a performance obligation or to a distinct service that forms part of a single performance obligation. The Company determines standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
| 5) | Recognize revenue when or as the Company satisfies a performance obligation |
The Company satisfies performance obligations either over time or at a point in time. Revenue is recognized at the time the related performance obligation is satisfied by transferring a promised service to a customer.
Convention revenue is generally earned upon completion of the convention. Unearned convention revenue is deposits received for conventions that have not yet taken place, which are fully or partially refundable depending upon the terms and conditions of the agreements.
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.
Disaggregation of Revenue from Contracts with Customers. The following table disaggregates gross revenue by significant revenue stream for the six months ended June 30, 2020 and 2019:
| For the Six Months Ended | ||||||||
| June 30, 2020 | June 30, 2019 | |||||||
| Conventions | $ | 2,574,994 | $ | 6,092,615 | ||||
| Virtual | 757,258 | - | ||||||
| Vault | 113,583 | - | ||||||
| Total revenue | $ | 3,418,835 | $ | 6,092,615 | ||||
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 $0 for the three months ended June 30, 2020 and 2019, 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.
| F-12 |
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 an option award is estimated on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected stock volatility, the risk–free interest rate, the expected life of the option, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of the Company’s Common stock over the expected option life and other appropriate factors. The expected option term is computed using the “simplified” method as permitted under the provisions of ASC 718-10-S99. The Company uses the simplified method to calculate expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as the Company has never paid or declared any cash dividends on the Common stock of the Company and does not intend to pay dividends on the Common stock in the foreseeable future. The expected forfeiture rate is estimated based on historical experience.
Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and the Company uses different assumptions, the equity–based compensation could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If the actual forfeiture rate is materially different from the Company’s estimate, the equity–based compensation could be significantly different from what the Company has recorded in the current period.
Income Taxes
The Company follows the asset and liability method of accounting for income taxes under FASB ASC 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
FASB ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. There were no unrecognized tax benefits as of June 30, 2020 and December 31, 2019. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. No amounts were accrued for the payment of interest and penalties as of June 30, 2020 and December 31, 2019. The Company is currently not aware of any issues under review that could result in significant payments, accruals or material deviation from its position. The Company is subject to income tax examinations by major taxing authorities since inception.
The Company may be subject to potential examination by federal, state, and city taxing authorities in the areas of income taxes. These potential examinations may include questioning the timing and amount of deductions, the nexus of income among various tax jurisdictions, and compliance with federal, state, and city tax laws. The Company’s management does not expect that the total amount of unrecognized tax benefits will materially change over the next twelve months.
| F-13 |
The Company is no longer subject to tax examinations by tax authorities for years prior to 2017.
Earnings per Share
Earnings per share (“EPS”) is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to Section 260-10-45 of the FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16, basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.
The following table shows the outstanding dilutive common shares excluded from the diluted net income (loss) per share calculation as they were anti-dilutive:
| Contingent shares issuance arrangement, stock options or warrants | ||||||||
| For the Six Months Ended June 30, 2020 | For the Six Months Ended June 30, 2019 | |||||||
| Convertible note | 833,333 | 833,333 | ||||||
| Common stock options | 226,000 | 246,375 | ||||||
| Common stock warrants | 1,133,333 | 833,333 | ||||||
| Total contingent shares issuance arrangement, stock options or warrants | 2,192,666 | 1,913,041 | ||||||
Reclassification
Certain prior period amounts have been reclassified to conform to current period presentation.
Recently Adopted Accounting Guidance
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 adoption of ASU 2018-16 did not have a material impact on the Company’s financial statement presentation or disclosures.
In August 2018, the FASB issued Accounting Standards Update (ASU) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement”, which changes the fair value measurement disclosure requirements of ASC 820. This update is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years. The adoption of ASU 2018-13 did not have a material impact on the Company’s financial statement presentation or disclosures.
| F-14 |
Recently Issued Accounting Pronouncements
In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” ASU 2020-04 provides optional expedients and exceptions to account for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate if certain criteria are met. The amendments of ASU No. 2020-04 are effective immediately, as of March 12, 2020, and may be applied prospectively to contract modifications made and hedging relationships entered into on or before December 31, 2022. The Company is evaluating the impact that the amendments of this standard would have on the Company’s consolidated financial statements
In December 2019, the FASB issued ASU 2019-12, Income Taxes(Topic 740): “Simplifying the Accounting for Income Taxes”, which is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and by clarifying and amending existing guidance to improve consistent application. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. Certain amendments within this ASU are required to be applied on a retrospective basis, certain other amendments are required to be applied on a modified retrospective basis and all other amendments on a prospective basis. The Company is currently evaluating the impact the adoption of this standard will have on the consolidated financial statements.
Management has evaluated all recent accounting pronouncements as issued by the FASB in the form of Accounting Standards Updates (“ASU”) through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not yet effective accounting pronouncements, when adopted, will have a material impact on the financial statements of the Company.
Note 4 – Property and Equipment
Property and equipment stated at cost, less accumulated depreciation and amortization, consisted of the following:
| June 30, 2020 | December 31, 2019 | |||||||
| Computer Equipment | $ | 30,326 | $ | 48,128 | ||||
| Equipment | 474,068 | 474,068 | ||||||
| Furniture and Fixtures | 63,925 | 62,321 | ||||||
| Vehicles | 57,500 | - | ||||||
| Leasehold Improvements | 22,495 | 22,495 | ||||||
| 590,814 | 607,012 | |||||||
| Less: Accumulated depreciation | (539,985 | ) | (548,908 | ) | ||||
| $ | 50,829 | $ | 58,104 | |||||
Depreciation expense was $12,890 and $12,003 for the six months ended June 30, 2020 and 2019, respectively.
Note 5 – Related Party Transactions
Wiz Wizard LLC
On December 29, 2014, the Company and a member of the Board formed Wiz Wizard (d/b/a ConBox) in the State of Delaware. The Company and the member of the Board each owned 50% of the membership interest and agreed to allocate the profits and losses accordingly upon repayment of the initial capital contributions on a pro rata basis. On February 4, 2016, the member of the Board assigned his fifty percent (50%) membership interest to the Company. The Company ceased ConBox operations in 2017. Wiz World, LLC was dissolved in March 2019.
Consulting Agreement
On December 29, 2016, the Company entered into a Consulting Services Agreement (the “Consulting Agreement”) with Bristol Capital, LLC, a Delaware limited liability company (“Bristol”) managed by Paul L. Kessler, the Chairman of the Company. Pursuant to the Consulting Agreement, Mr. Kessler will serve as Executive Chairman of the Company. The initial term of the Agreement is from December 29, 2016 through March 28, 2017 (the “Initial Term”). The term of the Consulting Agreement will be automatically extended for additional terms of 90-day periods each (each a “Renewal Term” and together with the Initial Term, the “Term”), unless either the Company or Bristol gives prior written notice of non-renewal to the other party no later than thirty (30) days prior to the expiration of the then current Term.
| F-15 |
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). This agreement has been amended so that the monthly fee owed to Bristol may now, at the option of the Company, be paid in preferred stock.
In addition, the Company granted to Bristol options to purchase up to an aggregate of 30,000 shares of the Company’s common stock.
During the six months ended June 30, 2020 and 2019, the Company incurred expenses of approximately $112,500, for each period for services provided by Bristol. On November 22, 2018, the Board of Directors of the Company decided to issue 210,982 shares of Preferred stock for settlement of the outstanding fees due to Bristol totaling $496,875. At June 30, 2020 and December 31, 2019, the Company accrued $166,962 and $125,154, respectively, of net monthly fees due to Bristol. On August 3, 2020 the Board of Directors resolved to convert the total amount of debt owed to Bristol, as of July 31, 2020, into shares of Preferred stock.
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 leased premises are owned by an unrelated third party and Bristol Capital Advisors passes the lease costs down to the Company. The term of the Sublease is for 5 years and 3 months beginning on July 1, 2016 commencing with monthly payments of $8,118. During the six months ended June 30, 2020 and 2019, the Company paid lease obligations $23,812 and $25,837, respectively, under the Sublease. See Note 8.
Loan from officer
During the year ended December 31, 2019, the CEO made a non-interest bearing loan to the Company of $100,000. During the six months ended June 30, 2020, an additional $125,000.00 was loaned to the Company, which together without amounts paid on behalf of the Company, brought the total amount loaned to $351,000. The outstanding balance under the loan payable as of June 30, 2020, and December 31, 3019 was $200,000 and $100,000, respectively, and was included in accounts payable and accrued liabilities on the condensed consolidated balance sheet. On August 3, 2020 the Board of Directors resolved to convert the total amount of debt (including loans made to the Company and deferred compensation) owed to John D. Maatta, as of July 31, 2020, into shares of Preferred Stock.
Securities Purchase Agreement
Effective December 1, 2016, the Company entered into the Purchase Agreement with Bristol Investment Fund, Ltd. (the “Purchaser”), an entity controlled by the Chairman of the Company’s Board of Directors, pursuant to which the Company sold to the Purchaser, for a cash purchase price of $2,500,000, securities comprising: (i) the Debenture, (ii) Series A Warrants, and (iii) Series B Warrants. Pursuant to the Purchase Agreement, the Company paid $25,000 to the Purchaser and issued to the Purchaser 25,000 shares of Common Stock with a grant date fair value of $85,000 to cover the Purchaser’s legal fees. The Company recorded as a debt discount of $25,791 related to the cash paid and the relative fair value of the shares issued to Purchaser for legal fees.
(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 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 $3.00 (as converted) 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 $3.00 and (ii) 50% of the average of the 3 lowest trading prices during the 20 trading days immediately prior to the applicable conversion date. The debenture contains a “ratchet” provisions that adjusts the conversion rate of the debenture to the lowest rate the Company has agreed to issue stock. The effect of repricing board and employee options to $0.25 reset the conversion rates of the debenture to $0.25. In light of the financial stress Covid-19 has placed on the Company the holder of the debenture has agreed to not require payment due under each of the outstanding debenture until December 31, 2022.
| F-16 |
(ii) Series A Warrants
The Series A Warrants to acquire up to 833,333 shares of Common Stock at the Series A Initial Exercise Price of $3.00 and expiring on December 1, 2021. The Warrants may be exercised immediately upon the issuance date, upon the option of the holder. The exercise price has now been adjusted to $0.25 and the exercise date has been extended.
(iii) Series B Warrants
The Series B Warrants to acquire up to 833,333 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.
Upon issuance of the note, the Company valued the warrants using the Black-Scholes Option Pricing model and accounted for it using the relative fair value of $1,448,293 as debt discount on the condensed consolidated balance sheet. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method which approximates the interest method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated statements of operations. There was unamortized debt discount of $0 as of June 30, 2020 and December 31, 2019, which includes the debt discount recorded upon execution of the Securities Purchase Agreement discussed above.
Investment in CONtv
The Company currently holds a limited and passive interest of 10% in CONtv, a joint venture with third parties and Bristol Capital, LLC (a related party controlled by a member of the Board). CONtv is a digital network devoted to fans of pop culture entertainment and is inactive
For the six months ended June 30, 2020 and 2019, the Company recognized $0 losses from this venture, respectively.
As of June 30, 2020 and December 31, 2019, the investment in CONtv was $0.
As of June 30, 2020 and December 31, 2019, the amount due to CONtv was $224,241.
Note 6 – Notes Payable
Paycheck Protection Program
On March 27, 2020 the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted and included a provision for the Small Business Administration (“SBA”) to implement its Paycheck Protection Program (“PPP”). The PPP provides small businesses with funds to pay payroll costs, including some benefits over a covered period of up to 24 weeks. Funds received under the PPP may also be used to pay interest on mortgages, rent, and utilities. Subject to certain criteria being met, all or a portion of the loan may be forgiven. The loans bear interest at an annual rate of one percent (1%), are due two (2) years from the date of issuance, and all payments are deferred for the first six (6) months of the loan. Any unforgiven balance of loan principal and accrued interest at the end of the six (6) month loan deferral period is amortized in equal monthly installments over the remaining 18-months of the loan term. On April 30, 2020, the Company closed a $197,600 SBA guaranteed PPP loan. The Company expects to use the loan proceeds as permitted and apply for and receive forgiveness for the entire loan amount.
Small Business Administration Loan
On June 9, 2020, the Company executed a loan agreement with the SBA. The Company received aggregate proceeds of $149,900 under the loan which shall accrue interest at a rate of 3.75% and will mature in June 2050. As of June 30, 2020, the outstanding balance under the loan was $149,900.
| F-17 |
Note 7 – Convertible Debenture
Securities Purchase Agreement
Effective December 19, 2019, the Company entered into the Purchase Agreement with a Purchaser, pursuant to which the Company sold to the Purchaser, for a cash purchase price of $2,500,000, securities comprising: (i) the Debenture and (ii) Series A Warrants. Pursuant to the Purchase Agreement, the Company paid $25,400 to the Purchaser to cover the Purchaser’s legal fees. The Company recorded as a debt discount of $25,400 related to the cash paid and the relative fair value of the shares issued to Purchaser for legal fees.
(i) Debenture
The Debenture with an initial principal balance of $2,500,000, due December 30, 2021 (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, 2020, (ii) on each date the Purchaser converts, in whole or in part, the Debenture into Common Stock (as to that principal amount then being converted), and (iii) on the day that is 20 days following the Company’s notice to redeem some or all of the of the outstanding principal of the Debenture (only as to that principal amount then being redeemed) and on the Maturity Date. The Debenture is convertible into shares of the Company’s Common Stock at any time at the option of the holder, at an initial conversion price of $2.50 (as converted) 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 $2.50 and (ii) 50% of the average of the 3 lowest trading prices during the 20 trading days immediately prior to the applicable conversion date. Subsequent to June 30, 2020, the Purchaser agreed to extend the debenture a year as well as forbear any collection on the debenture up to December 30, 2022. The subject debenture contains a “ratchet” provisions that adjusts the conversion rates of the notes to the lowest rate the Company has agreed to issue stock. The effect of repricing board and employee options to $0.25 reset the conversion rates the note to $0.25. In light of the financial stress Covid-19 has placed on the Company the holder of the debenture has agreed to not require payment due under the outstanding debenture until December 31, 2022.
(ii) Warrants
The Series A Warrants to acquire up to 300,000 shares of Common Stock at the Series A Initial Exercise Price of $2.50 and expiring on December 1, 2024. The Warrants may be exercised immediately upon the issuance date, upon the option of the holder. The exercise price has now been adjusted to $0.25.
Upon issuance of the note, the Company valued the warrants using the Black-Scholes Option Pricing model and accounted for it using the relative fair value of $545,336 as debt discount on the condensed consolidated balance sheet. The debt discount is amortized over the earlier of (i) the term of the debt or (ii) conversion of the debt, using the effective interest method which approximates the interest method. The amortization of debt discount is included as a component of interest expense in the condensed consolidated statements of operations. There was unamortized debt discount of $533,780 and $0 as of June 30, 2020 and December 31, 2019, respectively, which includes the debt discount recorded upon execution of the Securities Purchase Agreement discussed above.
Note 8 – Commitments and Contingencies
Appointment of President and Chief Executive Officer
On April 22, 2016, the Board approved the appointment of Mr. John D. Maatta as the Company’s President and Chief Executive Officer, effective as of May 3, 2016. Mr. Maatta will continue to serve as a member of the Board. In addition, the Board granted Mr. Maatta options to purchase up to an aggregate of 55,000 shares of the Company’s common stock, subject to the terms and conditions of the Third Amended and Restated 2011 Stock Incentive and Award Plan, which were fully vested as of December 31, 2018. Mr. Maatta formally entered into his Employment Agreement with the Company on July 17, 2016. Effective January 1, 2018, Mr. Maatta has elected to receive 50% of the compensation provided for his employment contract and is currently receiving $125,000 per year with the remainder of the balance deferred which amount is included in accounts payable and accrued expenses on the accompanying condensed consolidated balance sheets. On November 22, 2018, the Board of Directors of the Company decided to issue 86,466 shares of Preferred stock for settlement of the deferred compensation due to Mr. Maatta totaling $212,707. Deferred compensation for Mr. Maatta accrued as of June 30, 2020 and December 31, 2019 and 2018 was $239,640 and $186,885, respectively. From time to time Mr. Maatta has made non-interest bearing loans to the Company. As of June 30, 2020 and December 31, 2019 the outstanding loans due to Mr. Maatta were $200,000 and $100,000, respectively, which was included in accounts payable and accrued liabilities on the condensed consolidated balance sheet.
| F-18 |
On January 23, 2019, the Company granted options to purchase an additional 20,000 shares of the Company’s common stock. The options were with an exercise price of $2.60 (as converted) per share, a term of 5 years, and immediate vesting. The options have an aggregated fair value of approximately $46,431 that was calculated using the Black-Scholes option-pricing model.
Consulting Agreement
As discussed in Note 6, on December 29, 2016, the Company entered into a Consulting Services Agreement (the “Consulting Agreement”) with Bristol managed by Paul L. Kessler, the Chairman of the Company. Pursuant to the Consulting Agreement, Mr. Kessler will serve as Executive Chairman of the Company. The initial term of the Agreement is from December 29, 2016 through March 28, 2017 (the “Initial Term”). The term of the Consulting Agreement will be automatically extended for additional terms of 90-day periods each (each a “Renewal Term” and together with the Initial Term, the “Term”), unless either the Company or Bristol gives prior written notice of non-renewal to the other party no later than thirty (30) days prior to the expiration of the then current Term.
During the Term, the Company will pay Bristol a monthly fee (the “Monthly Fee”) of $18,750. For services rendered by Bristol prior to entering into the Consulting Agreement, the Company will pay Bristol the Monthly Fee, pro-rated, for the time between September 1, 2016 and December 29, 2016. Bristol may also receive an annual bonus as determined by the Compensation Committee of the Company’s Board of Directors (the “Board”) and approved by the Board. Bristol has deferred payment of the monthly fees due from the Company as defined under the Consulting Agreement. On November 22, 2018, the Board of Directors of the Company decided to issue 201,982 shares of Preferred stock for settlement of the outstanding fees due to Bristol totaling $496,875. As of June 30, 2020 and December 31, 2019, the Company accrued $206,608 and $125,154, respectively, of net monthly fees due to Bristol. The Company’s consulting agreement with Bristol Capital, LLC has been amended so that the monthly fee may now, at the option of the Company, be paid in preferred stock.
In addition, the Company granted to Bristol options to purchase up to an aggregate of 30,000 shares of the Company’s common stock. On January 23, 2019, the Company granted options to purchase an additional 300,000 shares of the Company’s common stock. The options were with an exercise price of $2.60 (as converted) per share, a term of 5 years, and immediate vesting. The options have an aggregated fair value of approximately $34,823 that was calculated using the Black-Scholes option-pricing model.
Legal proceedings
The Company is from time to time involved in legal proceedings in the ordinary course of business. It is not involved in any disputes and does not have any litigation matters pending which the Company believes could have a materially adverse effect on the Company’s financial condition or results of operations.
Note 9 – Operating Leases
On June 16, 2016, the Company entered into a Standard Multi-Tenant Sublease (“Sublease”) with Bristol Capital Advisors, an entity controlled by the Company’s Chairman of the Board. The leased premises are owned by an unrelated third party and Bristol Capital Advisors passes the lease costs down to the Company. The term of the Sublease is for 5 years and 3 months beginning on July 1, 2016 commencing with monthly payments of $8,118. During the six months ended June 30, 2020 and 2019, the Company paid lease obligations $45,317 and $51,674, respectively, under the Sublease.
We determine if an arrangement contains a lease at inception. Right of use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
| F-19 |
Our leases consist of leaseholds on office space. We utilized a portfolio approach in determining our discount rate. The portfolio approach takes into consideration the range of the term, the range of the lease payments, the category of the underlying asset and our estimated incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. We also give consideration to our recent debt issuances as well as publicly available data for instruments with similar characteristics when calculating our incremental borrowing rates.
Our lease term includes options to extend the lease when it is reasonably certain that we will exercise that option. Leases with a term of 12 months or less are not recorded on the balance sheet, per the election of the practical expedient noted above.
We recognize lease expense for these leases on a straight-line basis over the lease term. We recognize variable lease payments in the period in which the obligation for those payments is incurred. Variable lease payments that depend on an index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are recognized in the period incurred.
The components of lease expense were as follows:
| For the Six Months Ended | For the Six Months Ended | |||||||
| June 30, 2020 | June 30, 2019 | |||||||
| Operating lease | $ | 45,317 | $ | 53,819 | ||||
| Sublease income | (9,000 | ) | (19,807 | ) | ||||
| Total net lease cost | $ | 36,317 | $ | 34,012 | ||||
Supplemental cash flow and other information related to leases was as follows:
| For the Six Months Ended | For the Six Months Ended | |||||||
| June 30, 2020 | June 30, 2019 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows from operating leases | $ | (44,468 | ) | $ | (51,674 | ) | ||
| ROU assets obtained in exchange for lease liabilities: | ||||||||
| Operating leases | $ | - | $ | 252,980 | ||||
| Weighted average remaining lease term (in years): | ||||||||
| Operating leases | 1.17 | 2.25 | ||||||
| Weighted average discount rate: | ||||||||
| Operating leases | 12 | % | 12 | % | ||||
The following table presents the maturity of the Company’s lease liabilities as of June 30, 2020:
| For the twelve months ending June 30: | ||||
| 2021 | $ | 109,643 | ||
| 2022 | 28,232 | |||
| 2023 | - | |||
| 137,876 | ||||
| Less: Imputed interest | (9,203 | ) | ||
| Present value | $ | 128,672 | ||
| F-20 |
Note 10 – Stockholders’ Equity (Deficit)
Reverse Stock Split
Following the board of directors approval, the Company filed a Certificate of Change to its Articles of Incorporation (the “Amendment”), with the Secretary of State of the State of Delaware to effectuate a one-for-twenty (1:20) reverse stock split (the “Reverse Stock Split”) for all classes of its stock, par value $0.0001 per share, without any change to its par value. The Amendment became effective on January 23, 2020. No fractional shares were issued in connection with the Reverse Stock Split as all fractional shares were “rounded up” to the next whole share.
All share and per share amounts for the common stock have been retroactively restated to give effect to the reverse splits.
The Company’s authorized capital stock consists of 105,000,000 shares, of which 100,000,000 are for shares of common stock, par value $0.0001 per share, and 5,000,000 are for shares of preferred stock, par value $0.0001 per share, of which 3,500 have been designated as Series A Cumulative Convertible Preferred Stock (“Series A”).
As of June 30, 2020 and December 31, 2019, there were 288,448 shares of preferred stock issued and outstanding and 0 shares of Series A, respectively.
As of June 30, 2020 and December 31, 2019, there were 3,506,752 and 3,506,752 shares of common stock issued and outstanding, respectively. Each share of the common stock entitles its holder to one vote on each matter submitted to the shareholders.
The following is a summary of the Company’s option activity:
| Options | Weighted Average Exercise Price | |||||||
| (as converted) | ||||||||
| Outstanding – December 31, 2019 | 226,000 | $ | 3.00 | |||||
| Exercisable – December 31, 2019 | 171,083 | $ | 2.62 | |||||
| Granted | - | $ | - | |||||
| Exercised | - | $ | - | |||||
| Forfeited/Cancelled | - | $ | - | |||||
| Outstanding – June 30, 2020 | 226,000 | $ | 5.43 | |||||
| Exercisable – June 30, 2020 | 192,073 | $ | 5.82 | |||||
| Options Outstanding | Options Exercisable | ||||||||||||||||
| Exercise Price | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price | ||||||||||||
| $ | 2.60 – 18.80 | 226,000 | 2.95 years | $ | 5.43 | 183,058 | $ | 5.97 | |||||||||
At June 30, 2020, the total intrinsic value of options outstanding and exercisable was $0.
During the six months ended June 30, 2020 and 2019, the Company recorded total stock-based compensation expense related to options of approximately $40,597 and $187,700, respectively. The unrecognized compensation expense at June 30, 2020 was approximately $44,213.
| F-21 |
Stock Warrants
The following is a summary of the Company’s warrant activity:
| Warrants | Weighted Average Exercise Price | |||||||
| (as converted) | ||||||||
| Outstanding – December 31, 2019 | 1,133,333 | $ | 2.80 | |||||
| Exercisable – December 31, 2019 | 1,133,333 | $ | 2.80 | |||||
| Granted | - | $ | - | |||||
| Exercised | - | $ | - | |||||
| Forfeited/Cancelled | - | $ | - | |||||
| Outstanding – June 30, 2020 | 1,133,333 | $ | 3.00 | |||||
| Exercisable – June 30, 2020 | 1,133,333 | $ | 3.00 | |||||
| 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 | ||||||||||||
| $ | 2.60 – 3.00 | 1,133,333 | 2.22 years | $ | 3.00 | 1,133,333 | $ | 3.00 | |||||||||
At June 30, 2020 the total intrinsic value of warrants outstanding and exercisable was $0.
Note 11 – Credit Risk
Financial instruments that potentially subject the Company to significant concentration of credit risk consist primarily of cash and cash equivalents. As of June 30, 2020 and December 31, 2019, substantially all of the Company’s cash and cash equivalents were held by major financial institutions and the balance in certain accounts exceeded the maximum amount insured by the Federal Deposits Insurance Corporation (“FDIC”). However, the Company has not experienced losses on these accounts and management believes that the Company is not exposed to significant risks on such accounts.
Note 12 – Subsequent Events
On July 29, 2020, the Company amended its Amended and Restated Certificate of Incorporation by filing with the Office of the Secretary of State of the State of Delaware a Certificate of Amendment to the Amended and Restated Certificate of Incorporation for the purpose of changing the name of the Company from Wizard Entertainment, Inc. to Wizard Brands, Inc.
On August 3, 2020 the Board of Directors resolved to convert the total amount of debt (including loans made to the Company and deferred compensation) owed to John D. Maatta and Paul Kessler, as of July 31, 2020, into shares of Preferred Stock.
On August 11, 2020, the Company filed with the Office of the Secretary of State of the State of Delaware a Certificate of Designation and Restatement of Rights, Preferences and Restrictions of Series A Preferred Stock for the purpose of amending the rights and preferences of its Series A Preferred Stock.
The Company’s board of directors repriced options that had been previously authorized (including, but not necessarily limited to those grants of 5/3/16, 12/29/16, 1/23/19 and 4/4/20) to $0.25 per share. Options previously granted to board members (including those grants of 9/5/18, 9/12/19 and 4/4/20, as well as the preferred conversion price for the conversion of all of the existing debt as of July 31, 2020 held by Mr. Kessler and Mr. Maatta into Preferred stock, for which preferred shares have or will be issued) were likewise priced at $0.25 per share.
The effect of repricing board and employee options to $0.25 reset the conversion rates of both debentures to $0.25. In light of the financial stress Covid-19 has placed on the Company the holders of both the Bristol Investment Fund, Ltd debenture and the Barlock 2019 Fund LP debenture has agreed to not require payment due under each of the outstanding debentures until December 31, 2022.
| 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
This discussion is intended to provide information to assist the 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 six months ended June 30, 2020 and 2019, included elsewhere in this report.
Prior to the onset of the age of Covid-19 the Company produced live pop culture conventions (“Comic Conventions”) across the United States providing a social networking and entertainment venue for enthusiasts of movies, TV shows, video games, technology, toys, social networking, gaming, comic books, and graphic novels. Our Comic Conventions have provided an opportunity for companies in the entertainment, toy, gaming, publishing and retail business to carry out sales, marketing, product promotion, public relations, advertising, and sponsorship efforts. However, at present, because of the substantial uncertainties concerning the course and scope of the current situation with the Covid-19 virus, it is currently clear that no live events will be produced by the Company during Q3 and Q4 of 2020. It is presently unknowable how long the current situation with Covid-19 will continue and what impact the Covid-19 situation will ultimately have upon the Company. Because of the Covid-19 situation, the Company has not been able to produce a live event since March 6 and March 8, 2020 in Cleveland, Ohio. Events that had been planned for 2020 have been postponed into 2021. Currently no live events are scheduled for the remainder of 2020. Live events are scheduled for New Orleans and Philadelphia in January 2021. However, at this point it is unknowable if such scheduled events can take place or not, with the determination being solely dependent on the progression of the Covid-19 virus, and the imposition of governmental authority either allowing or disallowing the mounting of live events.
During 2019 and 2020, the Company has utilized internal controls, operating procedures and techniques to control costs.
Plan of Operation
The Company has heretofore primarily engaged in the live event business and derived income mainly from: (i) the production of Comic Conventions, which involve the sales of admissions and exhibitor booth space; and, (ii) sale of sponsorships and advertising. The Company, while taking steps to enhance its live event operations, was steadily moving into the space of being a hyphenate live-event/media company. However, at present, because of the substantial uncertainties concerning the course and scope of the current situation with the Covid-19 virus, it is currently unclear how many live events will actually be produced by the Company in 2021. It is presently unknowable how long the current situation with Covid-19 will continue and what impact the Covid-19 situation will ultimately have upon the Company beyond 2020.
In recognition of the fact that the Covid-19 situation would cause a cessation of the Company’s ability to produce live events in the near, intermediate or potentially the long term; the Company aggressively took steps to alter its operations in the face of the Pandemic. In particular the Company: (i) Entered the virtual event space as of March 31, 2020, (ii) Entered the e-commerce space, and (iii) engaged in M&A activity and acquiring the assets of a company that manufactured and distributed the Jevo apparatus.
| 3 |
It is presently unknowable how long the current situation with Covid-19 will continue and what impact the Covid-19 situation will ultimately have upon the Company in 2020 and in 2021. At this point, the Company has cancelled all of its of its previously-planned shows which were to take place in 2020. The company evaluates the progression of Covid-19 and the governmental response to the virus continually. In the face of the impact of Covid-19 on live events generally, the Company has focused on producing virtual events. The first such virtual event was an interactive fan experience which took place on March 31, 2020. Such shows are continuing with numerous shows per week. In addition, the Company has moved into e-commerce with online sales of collectables with the creation of the “Wizard Vault” as a site for consumers to purchase pop-culture collectables.
Virtual Experiences
The Company is producing on-line events which allow for interactive communication between celebrities and their fans. The virtual events that are produced by the Company feature a no-charge 30 to 45 minute moderated discussion, Following the moderated discussion there is an opportunity for fans to speak directly with celebrities while paying by the minute for the experience. Additionally, autographs and videos are being sold. To date the Company has produced close to 100 virtual events since inception on March 31, 2020.
The Wizard World Vault
In addition to the production of the virtual events the Company has created the Wizard World Vault. The Vault is a collection of autographed photographs, memorabilia and one-of-a-kind collectibles that are offered for sale via e-commerce. The Vault which launched at or about the same time as the Virtual Experiences has already proven to be a popular source of celebrity memorabilia among fans of motion pictures and television programming.
As of January 1, 2020, the Company had expected to produce between 9-12 live events during 2020, subject to the evaluation of suitable locations and venues. Among the shows that were contemplated to be produced in 2020 were shows in new markets, which have yet to be announced. However, because of governmental mandates necessitated by the current situation with the Covid-19 virus, no live events have been produced by the Company following the First Quarter of 2020.
Jevo
On April 28, 2020 the Company, through one of its wholly-owned operating subsidiaries, acquired the assets of the creator of the Jevo machine, which is a patent-protected first-mover application for the creation of gelatin shots. With Jevo, the Company will diversify its revenue generation capabilities by manufacturing, marketing and selling Jevo units and related consumables, (both nationally and internationally) to: bars, restaurants, clubs, casinos, hotels, cruise lines, resorts and other establishments that serve beverages (both alcoholic and non-alcoholic) to the public. In addition to food and beverage applications the Company has identified other market segments where the Jevo units can be marketed including but not limited to the healthcare and cannabis industries. The Company intends to resume the manufacturing of the Jevo units with a target of producing new Jevo machines in the first quarter of 2021.
The acquisition of Jevo is the Company’s initial entry into M&A activity intended to broaden the Company’s revenue base.
The Company has now identified and has actualized opportunities to rapidly expand its revenue base by entry into the areas of: (i) retailing collectables; (ii) providing virtual opportunities to fans to interact with celebrities; (iii) creating live (when and as allowed by governmental authorities) and virtual events and conferences focused on new subject matter and affinities; and (iv) exploiting the opportunities in manufacturing and distribution brought about by the Jevo acquisition and (v) engaging in M&A opportunities. The company intends to continue forward with these activities in 2020.
| 4 |
Results of Operations
Summary of Statements of Operations for the Three Months Ended June 30, 2020 and 2019:
| Three Months Ended | ||||||||
| June 30, 2020 | June 30, 2019 | |||||||
| Convention revenue | $ | 816,416 | $ | 2,542,632 | ||||
| Gross margin | $ | 335,378 | $ | 377,833 | ||||
| Operating expenses | $ | 579,622 | $ | 662,250 | ||||
| Loss from operations | $ | (244,244 | ) | $ | (284,417 | ) | ||
| Other income (expenses) | $ | (146,199 | ) | $ | (74,875 | ) | ||
| Loss income attributable to common shareholder | $ | (390,443 | ) | $ | (359,292 | ) | ||
| Loss per common share – basic | $ | (0.11 | ) | $ | (0.10 | ) | ||
| Loss per common share – diluted | $ | (0.11 | ) | $ | (0.10 | ) | ||
Revenue
Because of the Covid-19 situation the Company produced no live events during the Second Quarter of 2020 and will produce no further events during 2020. Rather, the Company, commencing on March 31, 2020 commenced the production of virtual events. For the three months ended June 30, 2020 revenue from the virtual events was $737,446.
In addition to the virtual events that were produced the Company also engaged in e-commerce through the Wizard World Vault and on the eBay platform. During the period ending June 30, 2020, the revenue contributed by e-commerce was $78,890.
Convention revenue was $80 for the three months ended June 30, 2020, as compared to $2,542,632 for the comparable period ended June 30, 2019, a decrease of $2,542,552. As noted above, the Company produced no live shows during the three months ended June 30, 2020 compared to 4 Comic Contentions in addition to the “Ghostbusters Fanfest” during the three months ended June 30, 2019.
Gross Profit
The gross profit percentage increased from a gross profit percentage of 15% during the three months ended June 30, 2019, to a gross profit percentage of 41% during the three months ended June 30, 2020. The gross profit percentage increase was attributable in part to the lower operating costs of operating virtual events and e-commerce versus live events.
Operating Expenses
Operating expenses for the three months ended June 30, 2020, were $579,622, as compared to $662,250 for the three months ended June 30, 2019. The decrease is primarily attributable to a decrease in staffing and a correlating decrease in employee compensation. General and administrative expenses increased from $217,219 from the prior year comparative period to $221,057 for the current year three-month period.
Loss from Operations
The loss from operations for the three months ended June 30, 2020, was $244,244 as compared to a loss from operations of $284,417 for the three months ended June 30, 2019. The variance was primarily attributable to a decrease in compensation.
Other Expenses
Other expenses for the three months ended June 30, 2020, was $146,199 as compared to $74,875 for the three months ended June 30, 2019. In each case, the balance was primarily attributable to interest expense on the outstanding debt.
| 5 |
Net Loss Attributable to Common Stockholder
Net loss attributable to common stockholders for the three months ended June 30, 2020, was $390,443 or loss per basic share of $0.11, compared to a net loss of $359,292 or loss per basic share of $0.10 for the three months ended June 30, 2019.
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 Six Months Ended June 30, 2020 and 2019:
| Six Months Ended | ||||||||
| June 30, 2020 | June 30, 2019 | |||||||
| Convention revenue | $ | 3,418,835 | $ | 6,092,615 | ||||
| Gross margin | $ | 913,515 | $ | 969,977 | ||||
| Operating expenses | $ | 1,185,032 | $ | 1,397,664 | ||||
| Loss from operations | $ | (271,517 | ) | $ | (427,687 | ) | ||
| Other income (expenses) | $ | (302,540 | ) | $ | (154,702 | ) | ||
| Loss income attributable to common shareholder | $ | (574,057 | ) | $ | (582,389 | ) | ||
| Loss per common share – basic | $ | (0.16 | ) | $ | (0.17 | ) | ||
| Loss per common share – diluted | $ | (0.16 | ) | $ | (0.17 | ) | ||
Revenue
Because of the Covid-19 situation The Company produced 3 live events during the six months ended June 30, 2020 and will produce no further live events during 2020. Convention revenue was $2,547,994 for the six months ended June 30, 2020, as compared to $6,092,615 for the comparable period ended June 30, 2019, a decrease of $3,544,621. As noted above, the Company produced 3 live shows during the six months ended June 30, 2020 compared to 5 Comic Contentions in addition to the “Ghostbusters Fanfest” during the three months ended June 30, 2019. Average revenue generated per event in the six-month period of 2020 was $849,331 as compared to $1,015,436 during the comparable six-month period of 2019. As noted elsewhere in this current report, there are no future conventions scheduled at this time and all foreseeable revenue will come from virtual events and Jevo operations.
Commencing in 2020, the Company began the production of virtual events. For the six months ended June 30, 2020 revenue from the virtual events was $757,258.
In addition to the virtual events that were produced, the Company also engaged in e-commerce through the Wizard World Vault and on the eBay platform. During the period ending June 30, 2020, the revenue contributed by e-commerce was $113,583.
Gross Profit
The gross profit percentage increased from a gross profit percentage of 16% during the six months ended June 30, 2019, to a gross profit percentage of 27% during the six months ended June 30, 2020. The gross profit percentage increase was attributable in part to the lower operating costs of operating virtual events and e-commerce versus live events.
Operating Expenses
Operating expenses for the six months ended June 30, 2020, were $1,185,032, as compared to $1,397,664 for the six months ended June 30, 2019. The decrease is primarily attributable to a decrease in staffing and a correlating decrease in employee compensation. General and administrative expenses increased by $58,043 from the prior year comparative period.
| 6 |
Loss from Operations
Loss from operations for the six months ended June 30, 2020, was $271,517 as compared to loss from operations of $427,687 for the six months ended June 30, 2019. The variance was primarily attributable to the conversion from producing live events to producing virtual events and establishing the e-commerce operations, as well as costs associated with the acquisition of a new operating and the assimilation of that unit into the Company.
Other Expenses
Other expenses for the six months ended June 30, 2020, was $302,540 as compared to $154,702 for the six months ended June 30, 2019. In each case, the balance was primarily attributable to interest expense on the outstanding debt.
Net Loss Attributable to Common Stockholder
Net loss attributable to common stockholders for the six months ended June 30, 2020, was $574,057 or loss per basic share of $0.16 compared to a net loss of $582,389 or loss per basic share of $0.17 for the six months ended June 30, 2019.
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 at June 30, 2020, compared to December 31, 2019:
| June 30, 2020 | December 31, 2019 | Increase/(Decrease) | ||||||||||
| Current Assets | $ | 2,905,775 | $ | 3,217,922 | $ | (312,147 | ) | |||||
| Current Liabilities | $ | 7,931,364 | $ | 7,703,779 | $ | 227,585 | ||||||
| Working Capital (Deficit) | $ | (5,025,589 | ) | $ | (4,485,857 | ) | $ | (539,732 | ) | |||
At June 30, 2020, we had a working capital deficit of $5,025,589 as compared to working capital deficit of $4,485,857, at December 31, 2019, an increase of $539,732. The change in working capital is primarily attributable to a decrease in cash and cash equivalents and prepaid convention expenses and an increase in inventory, accounts payable and accrued expenses offset by a decrease in unearned revenue.
Net Cash
Net cash used in operating activities for the six months ended June 30, 2020 and 2019 was $398,843 and $514,809 respectively. The net loss for the six months ended June 30, 2020 and 2019, was $586,131 and $582,389 respectively.
Going Concern Analysis
The Company had a loss from operations of $271,517 and $427,687 for the six months ended June 30, 2020 and 2019, respectively. On June 30, 2020, we had cash and cash equivalents of approximately $2.6 million and a working capital deficit of approximately $5.0 million. We have evaluated the significance of these conditions in relation to our ability to meet our obligations, which had previously raised doubts about the Company’s ability to continue as a going concern through August 2021. However, the Company believes that the effects of its cost savings efforts with regard to corporate overhead and show production expenses together with the initiation of virtual activities and e-commerce, will guide the Company in a positive direction as we continue to strive to attain profitability.
However, because of the current situation with the Covid-19 virus, the Company was unable to produce any live events after the First Quarter of 2020. At present it is unclear how many live events will actually be produced by the Company in 2021. It is presently unknowable how long the current situation with Covid-19 will continue and what impact the Covid-19 situation will ultimately have upon the Company in 2020 and 2021. At this point, the Company has postponed all of the live shows that it has scheduled for 2020. In the face of the impact of Covid-19 on live events generally, the Company has focused on producing virtual events. The first such virtual event was an interactive fan experience which took place on March 31, 2020 and since that time the Company has produced approximately 60 virtual events. In addition, the Company has moved into e-commerce with online sales of collectables and the creation of the “Wizard World Vault” as a site for consumers to purchase pop-culture memorabilia and collectables.
| 7 |
In addition to its cost containment strategies, the Company identified opportunities to rapidly move into the areas of (i) retailing collectables, (ii) providing virtual opportunities to fans to interact with celebrities, (iii) creating live and virtual events and conferences focused on new subject matter and affinities, and (iv) engaging in M&A opportunities. The Company intends to initiate these activities in 2020.
On December 19, 2019, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Barlock 2019 Fund, LP (the “Purchaser”), for the sale of the Company’s securities, comprised of (i) a $2,500,000 convertible debenture, convertible at a price of $2.50 per share, and (ii) warrants to acquire 300,000 shares of the Company’s common stock at an exercise price of $2.50 per share. The warrants are now exercisable at $0.25 per share due to anti-dilution protections contained in the securities. As a condition to Purchaser entering into the Purchase Agreement, the Company entered into a security agreement in favor of the Purchaser, granting a security interest in substantially all of the property of the Company, whether presently owned or existing or hereafter acquired or coming into existence, including but not limited to, its ownership interests in its subsidiaries, to secure the prompt payment, performance and discharge in full of all of the Company’s obligations under the debenture. The security interest is on equal footing with certain other creditors of the Company. The Company received $2,500,000 in cash from the offering of the securities but was required to pay out of the closing proceeds, Purchaser’s attorney’s fees in the amount of $25,000. The Company has agreed with the Purchaser that the funds received will be restricted and utilized only for M&A opportunities, new business ventures, brand extensions and the creation of new vertical opportunities by the Company. The subject debenture contains a “ratchet” provision that adjusts the conversion rates of the notes to the lowest rate the Company has agreed to issue stock. The effect of repricing board and employee options to $0.25 reset the conversion rates the note to $0.25. In light of the financial stress Covid-19 has placed on the Company the holder of the note has agreed to not require payment due under the outstanding notes until December 31, 2022.
Additionally, if necessary, management believes that both related parties (management and members of the Board of Directors of the Company) and potential external sources of debt and/or equity financing may be obtained based on management’s history of being able to raise capital from both internal and external sources coupled with current favorable market conditions, It is understood however, that although there is a recent history of related-parties providing a source of financing, there is no absolute certainty that any such related-party financing can be obtained on a going-forward basis. Therefore, the accompanying 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 June 30, 2020, the Company had no off-balance sheet arrangements.
Critical Accounting Policies
There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in our 2019 Annual Report.
Recent Accounting Pronouncements
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.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We do not hold any derivative instruments and do not engage in any hedging activities.
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 perform reviews of the Company’s policies and procedures as they relate 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.
The Company d 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. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our Company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.
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 March 30, 2020. However, at present, because of the substantial uncertainties concerning the course and scope of the current situation with the Covid-19 virus, it is currently unclear how many live events will actually be produced by the Company in 2021. It is presently unknowable how long the current situation with Covid-19 will continue and what impact the Covid-19 situation will ultimately have upon the Company in 2020 and 2021. Already because of Covid-19 the Company has had to cease producing live events, which had been its primary source of revenue. In place and stead of the live events the Company has entered into three new lines of business: (i) The production of virtual events, (ii) engaging in e-commerce; and, (iii) entry into manufacturing and distribution with the Jevo apparatus. In that each of these endeavors is a new line of business without a track of even 90 days it is not possible to accurately project which, if any, of these enterprises will be successful. It may be that virtual events, e-commerce and the manufacturing and sale of Jevo units will generate top line revenue and net profits or it may be that some of the activities will succeed and some will fail. It remains too early to make proper projections or to be able to fully assess the scope of the risk factors that are involved.
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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 June 30, 2020, that were not otherwise disclosed in a Current Report on Form 8-K.
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.
Up until the age of Covid-19, the Company had a single revenue stream rooted in the sale of exhibitor booths, sponsorships, and tickets for public mass events. The virus has interrupted that revenue stream and it is uncertain when the situation will get back to normal. The Company’s work force has been reduced to a handful of employees who have continued to provide services while, at times, receiving only a portion of their salaries. In recognition of this fact, the Company’s board of directors repriced options that had been previously authorized (including, but not necessarily limited to those grants of 5/3/16, 12/29/16, 1/23/19 and 4/4/20) to $0.25 per share. Options previously granted to board members (including those grants of 9/5/18, 9/12/19 and 4/4/20, as well as the preferred conversion price for the conversion of all of the existing debt as of July 31, 2020 held by Mr. Kessler and Mr. Maatta into Preferred stock, for which preferred shares have or will be issued) were likewise priced at $0.25 per share.
On December 2, 2016, the Company issued a convertible debenture to Bristol Investment Fund, Ltd in the face amount $2,500,000 which accrues interest at the rate of 12% per annum. This debenture was originally due and payable on December 30, 2018. On December 19, 2019, the Company issued a second 12% convertible debenture to Barlock 2019 Fund, LP , also in the face amount of $2,500,000, which comes due and payable on December 30, 2021. Each such debenture contains a ratchet provision that adjusts the conversion rates of the debentures to the lowest rate at which the Company has agreed to issue stock. The effect of repricing board and employee options to $0.25 reset the conversion rates of both debentures to $0.25. In light of the financial stress Covid-19 has placed on the Company, the holders of both the Bristol Investment Fund, Ltd debenture and the Barlock 2019 Fund LP debenture have agreed to not require payment due under each of the outstanding debentures until December 31, 2022.
On July 29, 2020, the Company amended its Amended and Restated Certificate of Incorporation by filing with the Office of the Secretary of State of the State of Delaware a Certificate of Amendment to the Amended and Restated Certificate of Incorporation for the purpose of changing the name of the Company from Wizard Entertainment, Inc. to Wizard Brands, Inc. A copy of the Certificate of Amendment to the Amended and Restated Certificate of Incorporation is attached to this current report as Exhibit 3.2.
On August 11, 2020, the Company filed with the Office of the Secretary of State of the State of Delaware a Certificate of Designation and Restatement of Rights, Preferences and Restrictions of Series A Preferred Stock for the purpose of amending the rights and preferences of its Series A Preferred Stock. A copy of the filing is attached to this current report as Exhibit 3.3.
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* Filed herewith.
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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 BRANDS, INC. | ||
| Date: August 14, 2020 | 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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