Exhibit 10.2
AUDITED FINANCIAL STATEMENTS
Red Giant Entertainment, LLC
Financial Statements
December 31, 2011
Table of Contents
Report of Independent Registered Public Accounting Firm F-2
Statement of Assets, Liabilities, and Member Equity F-3
Statement of Income, Expenses and Member Equity F-4
Statement of Cash Flow F-5
Notes to the Financial Statements F-6
F-1
Martinelli Mick PLLC
218 North Bernard
Spokane, WA 99201
To the Member of
Red Giant Entertainment, LLC
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have audited the accompanying balance sheet of Red Giant Entertainment, LLC,
as of December 31, 2011, and the related statements of income, expenses and
member equity and cash flow for the year ended December 31, 2011. Red Giant
Entertainment, LLC's management is responsible for these financial statements.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Red Giant Entertainment, LLC as
of December 31, 2011, and the results of its operations and its cash flows for
the year ended December 31, 2011 in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2, the Company is newly
formed, has not yet established a reliable operating history, and the success of
future operations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Martinelli Mick PLLC
------------------------------------
Martinelli Mick PLLC
Spokane, Washington
June 4, 2012
F-2
Red Giant Entertainment LLC
Statements of Assets, Liabilities, and Member Equity
As of December 31, 2011
2011
--------
ASSETS
Current Assets
Cash in Banks $ 97
Inventory 16,301
--------
TOTAL CURRENT ASSETS 16,398
--------
Fixed Assets
Intellectual Property 29,250
Less Accumulated Amortization (5,850)
--------
TOTAL FIXED ASSETS 23,400
--------
TOTAL ASSETS $ 39,798
========
LIABILITIES & MEMBER EQUITY
Current Liabilities $ --
Member Equity 39,798
--------
TOTAL LIABILITIES & MEMBER EQUITY $ 39,798
========
The accompanying notes are an integral part of these financial statements.
F-3
Red Giant Entertainment LLC
Statements of Income, Expenses and Member Equity
For the year ended December 31, 2011
2011
--------
Sales
Advertising $ 11,416
Publishing 24,008
Creative Services 17,862
--------
Total Sales 53,286
--------
Cost of Sales
Advertising 11,033
Publishing 2,639
Creative Services 13,890
--------
Total Cost of Sales 27,563
--------
Gross Profit 25,723
--------
Expenses
Bank service charges 574
Advertising & marketing 3,902
Amortization expense 5,850
Communication 1,369
Utilities 900
Travel & entertainment 1,580
Other operating expense 2,426
--------
Total Expenses 16,601
--------
Net Income 9,122
--------
Beginning Member Equity --
Member Contributions 30,676
Member Distributions --
--------
Ending Member Equity $ 39,798
========
The accompanying notes are an integral part of these financial statements.
F-4
Red Giant Entertainment LLC
Statement of Cash Flow
For the year ended December 31, 2011
2011
--------
OPERATING ACTIVITIES
Net Income $ 9,122
Depreciation & Amortization --
Adjustments to reconcile Net Income to net cash
provided by operating activities:
Amortization 5,850
Inventory (16,301)
Accounts Payable --
Other Payables --
--------
NET CASH USED BY OPERATING ACTIVITIES (1,329)
--------
INVESTING ACTIVITIES
NET CASH USED BY INVESTING ACTIVITIES --
--------
FINANCING ACTIVITIES
Member Contributions 1,426
Member Distributions --
--------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,426
--------
Net Cash Increase for Period 97
Cash at Beginning of Period --
--------
CASH AT END OF PERIOD $ 97
========
Supplemental cash flow information:
Interest paid $ --
========
Income taxes paid $ --
========
Non-cash
Member contribution of intellectual property $ 29,250
========
The accompanying notes are an integral part of these financial statements.
F-5
Red Giant Entertainment
Notes to the Financial Statements
December 31, 2011
ORGANIZATION AND DESCRIPTION OF BUSINESS
Red Giant Entertainment LLC (hereinafter "the Company"), was incorporated in the
State of Florida, U.S.A., on January 1, 2011. The Company's fiscal year end is
December 31. On May 9, 2012, the Company incorporated and changed its name to
Red Giant Entertainment, Inc. The Company was originally a publishing company,
but has expanded its operations to include mass media and graphic novel artwork
development.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements of the Company have been prepared in accordance with
the generally accepted accounting principles in the United States of America.
Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily
involves the use of estimates that have been made using careful judgment. The
financial statements have, in management's opinion, been properly prepared
within reasonable limits of materiality and within the framework of the
significant accounting policies summarized below:
ACCOUNTING METHOD
The Company's financial statements are prepared using the accrual basis of
accounting in accordance with accounting principles generally accepted in the
United States of America and reported in US Dollars.
ADVERTISING
Advertising costs are expensed as incurred. The Company expensed advertising
costs of $3,902 for the year ending December 31, 2011.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments and short-term debt instruments with original maturities of
three months or less to be cash equivalents. As at December 31, 2011, there were
$97 of cash equivalents.
COST OF GOODS SOLD
Cost of goods sold includes the cost of creating services or artwork,
advertising and books.
FAIR VALUE MEASUREMENTS
Topic 820 in the Accounting Standards Codification (ASC 820) defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. ASC
820 applies whenever other standards require (or permit) assets or liabilities
to be measured at fair value but does not expand the use of fair value in any
new circumstances. In this standard, the FASB clarifies the principle that fair
F-6
value should be based on the assumptions market participants would use when
pricing the asset or liability. In support of this principle, ASC 820
establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. The fair value hierarchy is as follows:
* Level 1 inputs -- Unadjusted quoted process in active markets for
identical assets or liabilities that the entity has the ability to
access at the measurement date.
* Level 2 inputs -- Inputs other than quoted prices included in Level 1
that are observable for the asset or liability, either directly or
indirectly. These might include quoted prices for similar assets and
liabilities in active markets, and inputs other than quoted prices
that are observable for the asset or liability, such as interest rates
and yield curves that are observable at commonly quoted intervals.
* Level 3 inputs -- Unobservable inputs for determining the fair values
of assets or liabilities that reflect an entity's own assumptions
about the assumptions that market participants would use in pricing
the assets or liabilities.
The Company currently does not have any assets that are measured at fair value
on a recurring or non-recurring basis, consequently, the Company did not have
any fair value adjustments for assets and liabilities measured at fair value at
December 31, 2011, nor gains or losses reported in the statement of operations
that are attributable to the change in unrealized gains or losses relating to
those assets and liabilities still held at the reporting date for the year ended
December 31, 2011.
INCOME TAXES
The Company is a limited liability company. As a result, no income tax provision
is made at the Company level and all taxable income and deductions are passed
directly to the equity owner.
RECENT ACCOUNTING PRONOUNCEMENTS
Management does not believe that any recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements.
In June 2011, the FASB issued authoritative guidance requiring entities to
present net income and other comprehensive income (OCI) in one continuous
statement or two separate, but consecutive, statements of net income and
comprehensive income. The option to present items of OCI in the statement of
changes in equity has been eliminated. The new requirements are effective for
annual reporting periods beginning after December 15, 2011 and for interim
reporting periods within those years. We do not expect the adoption to have a
material impact on our financial statements.
In May 2011, the FASB issued further additional authoritative guidance related
to fair value measurements and disclosures. The new guidance results in a
consistent definition of fair value and common requirements for measurement of
F-7
and disclosure about fair value between accounting principles generally accepted
in the United States (U.S. GAAP) and International Financial Reporting Standards
(IFRS). The guidance is effective for fiscal years and interim periods within
those years beginning after December 15, 2011. We are currently assessing the
impact of the guidance.
In April 2011, the FASB issued ASU No. 2011-17, "Revenue Recognition - Milestone
Method (Topic 605)." This ASU provides guidance on defining a milestone and
determining when it may be appropriate to apply the milestone method of revenue
recognition for research and development transactions. This update was effective
in the second quarter of 2011. Adoption of this update is not anticipated to
have a material impact on the Company's results of operation or financial
position.
In January 2011, the FASB issued ASU No. 2011-06, "Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements."
This ASU requires additional disclosures about significant unobservable inputs
and transfers within Level 1 and 2 measurements. Adoption of this update did not
have any impact on the Company's results of operation or financial position.
REVENUE RECOGNITION
Revenue for the Company is recognized from three primary sources: Advertising
Revenue, Publishing Sales and Creative Services. Revenue in 2011 was processed
through our Paypal Account and Project Wonderful accounts where applicable.
Advertising revenue comes from the following sources and is stated at net after
commissions:
* Keenspot: Revenue is recognized from Keenspot's arrangements with
advertisers at an agreed upon cost per thousand verified impressions
(CPM) to our Keenspot sites whereby advertisers pay based on the
number of times the target audience is exposed to the advertisement.
This revenue is recognized on a net basis in the monthly period in
which the impressions occur (i.e., advertisers pay us within 90
calendar days of receiving Keenspot's invoices). The particular CPM
rate varies based upon bids by advertisers and other customary
factors. In exchange for advertising, hosting, IT, and sales
management, Keenspot takes 50% commission of ad revenue for their
services.
* Project Wonderful: Revenue is paid immediately and based upon bids by
advertisers for a set amount of time at the prevailing highest winning
rate. Project Wonderful takes a 25% commission of ad revenue for their
services.
Publishing Revenue comes from the following sources:
* Kickstarter Campaigns: These are presales for books and revenue is
recognized only once the books arrive and are shipped to the buyers.
* Direct Sales: Through our online store, we sell directly to clients
and the transactions process through our Paypal account. All orders
are shipped immediately and revenue is recognized immediately.
F-8
Creative Services are artwork, writing, advertising, and other creative
endeavors we handle for outside clients. Revenue is recognized upon payment for
services. Shipping and Handling for purchases are paid directly by the consumer
through Paypal. The Company has not established an allowance for doubtful
accounts, as all transactions are handled through Paypal directly by the
consumer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses for the reporting period. The
Company reviews its estimates on an ongoing basis. The estimates were based on
historical experience and on various other assumptions that the Company believes
to be reasonable under the circumstances. Actual results could differ from these
estimates. The Company believes the judgments and estimates required in its
accounting policies to be critical in the preparation of the Company's financial
statements.
NOTE 2 - MANAGEMENT STATEMENT REGARDING GOING CONCERN
The Company is currently generating revenues from operations sufficient to meet
its operating expenses. However, as the Company completed the first year of
operation in 2011, management believes that given the current economic
environment and the continuing need to strengthen our cash position, there is
still doubt about the Company's ability to continue as a going concern.
Management is currently pursuing various funding options, including seeking debt
or equity financing, licensing opportunities, as well as a strategic or other
transaction, to obtain additional funding to continue the development of, and
successfully commercialize, its products. There can be no assurance that the
Company will be successful in its efforts. Should the Company be unable to
obtain adequate financing or generate sufficient revenue in the future, the
Company's business, results of operations, liquidity and financial condition
would be materially and adversely harmed, and the Company will be unable to
continue as a going concern.
The Company believes that its ability to execute its business plan, and
therefore continue as a going concern, is dependent upon its ability to do the
following:
* obtain adequate sources of funding to fund long-term business
operations;
* enter into a licensing or other relationship that allows the Company
to commercialize its products;
* manage or control working capital requirements; and
* develop new and enhance existing relationships with product
distributors and other points of distribution for the Company's
products.
F-9
There can be no assurance that the Company will be successful in achieving its
short- or long-term plans as set forth above, or that such plans, if
consummated, will enable the Company to obtain profitable operations or continue
in the long-term as a going concern.
NOTE 3 - RELATED PARTY TRANSACTIONS
Red Giant Enterprises, Inc. uses a related business, Active Media Printing, LLC,
for printing services. During the year ended December 31, 2011, the Company paid
$5,050 to this party. Active Media Printing is owned and operated by the
President of Red Giant Enterprises.
NOTE 4 - MEMBER EQUITY
The Company was wholly owned throughout 2011. At December 31, 2011, the member
equity appeared was as follows:
2011
--------
Capital -
Contributions $ 30,676
Profit Distributions $ --
Current Year Net Income (to be allocated) $ 9,122
--------
Total Member Equity at Year End $ 39,798
========
NOTE 5 - INVENTORY
As of December 31, 2011, inventory consisted of physical copies of published
books, as well as artwork is used for digitally distributed works for
advertising revenue and future publications. The inventory is valued at the cost
to produce.
NOTE 6 - INTELLECTUAL PROPERTY
The Company's intellectual property consists of graphic novel artwork and was
contributed by the Member to the Company and valued at $29,250, which was
determined based on a per page cost for artists and printing. The intangible is
being amortized over its life of five years. Amortization cost for the year
ended December 31, 2011, was $5,850. The Company expects to amortize the
remaining $23,400 over the remaining life of four years at $5,850 per year.
NOTE 7 - SUBSEQUENT EVENTS
Subsequent events have been evaluated through June 4, 2012, the date that the
financial statements were available to be issued and have no effect on the
events of 2011.
F-10