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 November 30, 2013 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to _____________ Commission File Number: 001-34039 RED GIANT ENTERTAINMENT, INC. (Exact name of registrant as specified in its charter) Nevada 98-0471928 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 614 E. Hwy 50, Suite 235, Clermont, FL 34711 (Address, including zip code, of principal executive offices) Registrants' telephone number, including area code: (866) 926-6427 N/A (Former name, former address and former fiscal year, if changed since last year) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes [ ] No [X] As of January 13, 2014, there were 519,863,070 shares of our common stock, $0.0001 par value per share, issued and outstanding. RED GIANT ENTERTAINMENT, INC. TABLE OF CONTENTS Page ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements 3 Balance Sheet as of November 30, 2013 (Unaudited) 3 Statement of Operations for the Three Months Ended November 30, 2013 and November 30, 2012 (Unaudited) 4 Statements of Cash Flows for the Three Months Ended November 30, 2013 and November 30, 2012 (Unaudited) 5 Notes to Financial Statements (Unaudited) 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 16 Item 4. Controls and Procedures 16 PART II OTHER INFORMATION Item 1. Legal Proceedings 18 Item 1A. Risk Factors 18 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18 Item 3. Defaults Upon Senior Securities 19 Item 4. Mine Safety Disclosures 19 Item 5. Other Information 19 Item 6. Exhibits 19 SIGNATURES 20 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. Red Giant Entertainment, Inc. Consolidated Balance Sheets November 30, August 31, 2013 2013 ---------- ---------- (unaudited) (audited) ASSETS Current Assets Cash and cash equivalents $ 39 $ 14,937 Accounts receivable, net of allowance for doubtful accounts of $0 and $0, respectively 2,095 -- Inventory 50,992 52,107 Prepaid and other current assets 89,092 82,000 ---------- ---------- Total Current Assets 142,218 149,044 Property and equipment, net of accumulated depreciation of $1,573 and $996, respectively 9,971 10,548 Intangible assets, net of accumulated amortization of $17,063 and $15,600, respectively 12,187 13,650 ---------- ---------- TOTAL ASSETS $ 164,376 $ 173,242 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current Liabilities Accounts payable and accrued expenses $ 72,213 $ 81,332 Due to related parties 42,301 39,187 Note payable 100,710 100,710 Derivative liability 490,206 271,321 ---------- ---------- Total Current Liabilities 705,430 492,550 ---------- ---------- Long-term loans 15,148 -- TOTAL LIABILITIES 720,578 492,550 ---------- ---------- COMMITMENTS AND CONTINGENCIES -- -- ---------- ---------- Stockholders' Deficit Preferred stock: 100,000 authorized; $0.0001 par value 0 shares issued and outstanding -- -- Common stock: 900,000,000 authorized; $0.0001 par value 457,558,273 and 434,922,000 shares issued and outstanding 45,756 43,492 Additional paid in capital 123,989 -- Treasury stock, at cost, 1,785,900 shares (55,000) (55,000) Accumulated deficit (670,947) (305,853) ---------- ---------- Total Stockholders' Equity (Deficit) (556,202) (319,308) ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 164,376 $ 173,242 ========== ========== See notes to the unaudited financial statements 3 Red Giant Entertainment, Inc. Consolidated Statements of Operations (unaudited) For the Three Months Ended November 30, ----------------------------------- 2013 2012 ------------ ------------ Revenues $ 3,379 $ 105,937 Cost of sales 2,378 47,474 ------------ ------------ Gross Profit 1,001 58,463 ------------ ------------ OPERATING EXPENSES Selling and marketing 52,731 1,497 General and administrative 45,879 3,954 Compensation 14,242 12,040 Professional 18,970 1,200 Depreciation and amortization 2,040 1,629 ------------ ------------ Total operating expenses 133,862 20,320 ------------ ------------ NET PROFIT (LOSS) FROM OPERATIONS (132,861) 38,143 ------------ ------------ OTHER INCOME (EXPENSE) Interest expense (90,648) -- Change in derivative (73,385) -- Gain (loss) on settlement of debt (68,200) -- Income taxes -- (5,700) ------------ ------------ NET PROFIT (LOSS) $ (365,094) $ 32,443 ============ ============ BASIC AND DILUTIVE LOSS PER SHARE $ (0.00) $ 0.00 ============ ============ WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 438,927,644 434,922,000 ============ ============ See notes to the unaudited financial statements 4 Red Giant Entertainment, Inc. Consolidated Statements of Cash Flows (unaudited) For the Three Months Ended November 30, ------------------------------- 2013 2012 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (365,094) $ 32,443 Adjustment to reconcile Net Income to net cash provided by operations: Depreciation and amortization 2,040 1,629 Amortization of deferred financing costs 90,648 -- Change in derivative 73,385 -- Loss on settlement of debt 68,200 -- Changes in operating assets and liabilities: (Increase) decrease in operating assets: Accounts receivable (2,095) -- Inventory 1,115 (16,366) Prepaid expenses and other assets (7,092) (25,040) Increase (decrease) in operating liabilities: -- -- Accounts payable and accrued expenses (9,119) 9,506 ---------- ---------- Total adjustments 217,082 (30,271) ---------- ---------- Net Cash (Used in) Provided By Operating Activities (148,012) 2,172 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Stockholder loans, net 3,114 -- Proceeds from Loan(s) 130,000 -- ---------- ---------- Net Cash (Used in) Provided by Financing Activities 133,114 -- ---------- ---------- Net increase (decrease) in cash and cash equivalents (14,898) 2,172 ---------- ---------- Cash and cash equivalents, beginning of period 14,937 269 ---------- ---------- Cash and cash equivalents, end of period $ 39 $ 2,441 ========== ========== Supplemental cash flow information Cash paid for interest $ -- $ -- ========== ========== Cash paid for taxes $ -- $ -- ========== ========== Non-cash transactions: Expenses paid from proceeds of debt $ 15,500 $ -- ========== ========== Debt converted to equity $ 60,000 $ -- ========== ========== See notes to the unaudited financial statements 5 Red Giant Entertainment, Inc. Notes to the Consolidated Financial Statements (Unaudited) NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS Red Giant Entertainment LLC (the "LLC") was formed in the State of Florida, U.S.A., on January 1, 2011. On May 9, 2012, the LLC incorporated and changed its name to Red Giant Entertainment, Inc. ("RGE") All income and expenses in these financial statements have been recharacterized for reporting purposes to be all inclusive for the corporate entity. The LLC was originally a publishing company, but has expanded its operations to include mass media and graphic novel artwork development. On June 11, 2012, Castmor Resources Ltd., a Nevada corporation entered into a Share Exchange Agreement (the "Share Exchange Agreement") with RGE, and Benny Powell, who had owned 100% of the issued and outstanding shares in RGE. Pursuant to the terms and conditions of the Share Exchange Agreement, RGE exchanged 100% of the outstanding shares in RGE for forty million (40,000,000; 240,000,000 post split) newly-issued restricted shares of the Company's common stock. Due to the recapitalization and reverse merger with Castmor Resources Ltd., 32,487,000 shares (194,922,000 post split) were issued in Castmore Resources Ltd., which changed its name to Red Giant Entertainment, Inc. (the "Company"). The Company subsequently approved a 6 to 1 forward stock split of all shares of record in June, 2012. The Company's fiscal year end is August 31. The exchange resulted in RGE becoming a wholly-owned subsidiary of the Company. As a result of the Share Exchange Agreement, the Company's principal business became the business of RGE. All share information has been restated for both the reverse merger and the forward stock split for all periods presented. On March 4, 2013, the Company acquired ComicGenesis, LLC ("ComicGenesis"), a Nevada limited liability company that operates a user-generated comic site that hosts over 10,000 independent webcomics. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The Company operates under the name of Red Giant Entertainment, Inc. and its wholly owned subsidiaries RGE and ComicGenesis. The companies were incorporated for the intentions of developing brand names. Any activities of these subsidiaries or holdings have been included in the consolidated financial statements, with elimination of any intercompany accounts and transactions. UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the financial statements do not include all of the 6 Red Giant Entertainment, Inc. Notes to the Consolidated Financial Statements (Unaudited) information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring entries necessary for a fair statement of the periods presented for: (a) the financial position; (b) the result of operations; and (c) cash flows, have been made in order to make the financial statements presented not misleading. The results of operations for such interim periods are not necessarily indicative of operations for a full year. RECLASSIFICATION Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported losses. FAIR VALUE MEASUREMENTS Topic 820 in the Accounting Standards Codification (ASC 820) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, ASC 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy is as follows: * Level 1 inputs -- Unadjusted quoted process in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date. * Level 2 inputs -- Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. * Level 3 inputs -- Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity's own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, the Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at historical cost and capitalized. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset. The Company currently has equipment being depreciated for estimated lives of three to five years. Depreciation for the three months ended November 30, 2013 and 2012 was $577 and $166, respectively. 7 Red Giant Entertainment, Inc. Notes to the Consolidated Financial Statements (Unaudited) LONG-LIVED ASSETS IMPAIRMENT Long-lived assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable, pursuant to guidance established in ASC 360, Property, Plant and Equipment. Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations (undiscounted and without interest charges). If impairment is deemed to exist, the assets will be written down to fair value. Fair value is generally determined using a discounted cash flow analysis. Based upon its most recent analysis, the Company believes that no impairment of property existed at November 30, 2013 and August 31, 2012. RECENT ACCOUNTING PRONOUNCEMENTS We have reviewed the FASB issued Accounting Standards Update ("ASU") accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods. The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation's reported financial position or operations in the near term. The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration. REVENUE RECOGNITION Revenue for the Company is recognized from three primary sources: Advertising Revenue, Publishing Sales and Creative Services. Revenue was processed through our Paypal Account and Project Wonderful accounts where applicable. Advertising Revenue comes from the following sources and is stated at net after commissions: * Keenspot: Revenue is earned on a net 90 basis and is based upon traffic to Red Giant property Web sites. It is calculated on a Cost Per Thousand (CPM) of verified impressions and varies based upon bids by advertisers and other customary factors. In exchange for advertising, hosting, IT, and sales management, Keenspot takes 50% commission of ad revenue for their services. * Project Wonderful: Revenue is paid immediately and based upon bids by advertisers for a set amount of time at the prevailing highest winning rate. Project Wonderful takes a 25% commission of ad revenue for their services. Publishing Revenue comes from the following sources: * Kickstarter Campaigns: These are presales for books and revenue is recognized only once the books arrive and are shipped to the buyers. * Direct Sales: Through our online store, we sell directly to clients and the transactions process through our Paypal account. All orders are shipped immediately and revenue is recognized immediately. Creative Services are artwork, writing, advertising, and other creative endeavors we handle for outside clients. Revenue is recognized upon completion of the services and payment has been tendered. 8 Red Giant Entertainment, Inc. Notes to the Consolidated Financial Statements (Unaudited) Shipping and Handling for purchases are paid directly by the consumer through Paypal. The Company has not established an allowance for doubtful accounts, as all transactions are handled through Paypal directly by the consumer. COST OF GOODS SOLD Cost of goods sold includes the cost of creating services or artwork, advertising and books. ADVERTISING Advertising costs are expensed as incurred. The Company expensed advertising costs of $25,014 and $771 for the periods ending November 30, 2013 and 2012, respectively. STOCK BASED COMPENSATION The Company issues restricted stock to consultants for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete. The Company recognized consulting expenses and a corresponding increase to additional paid-in-capital related to stock issued for services. Stock compensation for the periods presented were issued for past services provided, accordingly, all shares issued are fully vested, and there is no unrecognized compensation associated with these transactions. For agreements requiring future services, the consulting expense is to be recognized ratably over the requisite service period. INCOME TAXES The Company was a limited liability company until May 9, 2012. As an LLC, no income tax provision was made at the Company level and all taxable income and deductions were passed directly to the equity owner. The Company will be evaluating the tax ramifications of the change in entity status and the organizational changes to determine future tax issues. The Company has adopted ASC 740, INCOME TAXES, which requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company's financial statements or tax returns using the liability method. Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. EARNINGS (LOSS) PER SHARE The Company follows financial accounting standards, which provides for calculation of "basic" and "diluted" earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share. There were approximately 61,000,000 common stock equivalents outstanding at November 30, 2013. 9 Red Giant Entertainment, Inc. Notes to the Consolidated Financial Statements (Unaudited) NOTE 3 - MANAGEMENT STATEMENT REGARDING GOING CONCERN The Company is currently generating revenues from operations sufficient to meet its operating expenses. However, our management believes that given the current economic environment and the continuing need to strengthen our cash position, there is still doubt about the Company's ability to continue as a going concern. Management is currently pursuing various funding options, including seeking debt or equity financing, licensing opportunities, as well as a strategic or other transaction, to obtain additional funding to continue the development of, and successfully commercialize, its products. There can be no assurance that the Company will be successful in its efforts and this raises substantial doubt about the Company's future. Should the Company be unable to obtain adequate financing or generate sufficient revenue in the future, the Company's business, results of operations, liquidity and financial condition would be materially and adversely harmed, and the Company will be unable to continue as a going concern. The Company believes that its ability to execute its business plan, and therefore continue as a going concern, is dependent upon its ability to do the following: * obtain adequate sources of funding to fund long-term business operations; * enter into a licensing or other relationship that allows the Company to commercialize its products; * manage or control working capital requirements; and * develop new and enhance existing relationships with product distributors and other points of distribution for the Company's products. There can be no assurance that the Company will be successful in achieving its short- or long-term plans as set forth above, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue in the long-term as a going concern. NOTE 4 - INVENTORY As of November 30, 2013, inventory consisted of physical copies of published books, as well as artwork that is used for digitally distributed works for advertising revenue and future publications. The inventory is valued at the cost to produce. NOTE 5 - INTELLECTUAL PROPERTY The Company's intellectual property consists of graphic novel artwork and was contributed by a stockholder to the Company and valued at $29,250, which was determined based on the historical costs for artists and printing. The intangible is being amortized over its life of five years. Amortization cost for the three months ended November 30, 2013 and 2012 was $1,463 and $1,463, respectively. NOTE 6 - CONVERTIBLE NOTES PAYABLE The Company entered into lending arrangements with several lending institutions, each with convertible features. The Company evaluated the terms of the convertible notes, with outstanding face values totaling $243,000, in accordance with ASC Topic No. 815 - 40, DERIVATIVES AND HEDGING - CONTRACTS IN ENTITY'S OWN STOCK and that the underlying common stock is indexed to the Company's common 10 Red Giant Entertainment, Inc. Notes to the Consolidated Financial Statements (Unaudited) stock. The Company determined that the conversion features meet the definition of a liability and therefore bi-furcated the conversion feature and accounted for it as a separate derivative liability. The Company evaluated the conversion feature for a beneficial conversion feature. The effective conversion price was compared to the market price on the date of the note and was deemed to be less than the market value of underlying common stock at the inception of the note. Therefore, the Company recognized a debt discount on the notes in the amount of $243,000 on the origination date. The debt discount was recorded as reduction (contra-liability) to the Convertible Notes Payable. The debt discount is being amortized over the term of the notes. Additionally, the notes called for an immediate withholding of $15,500 for service charges, which has been treated as an original issue discount or deferred financing costs, a contra-liability charge, which is to be amortized as finance cost over the life of the loan. Interest expense, in the amount of $90,648, was recognized for the three month period ended November 30, 2013. A derivative liability, in the amount of $490,206 has been recorded, as of November 30, 2013, related to the above notes. The Company recognized a change in the derivative liability, resulting in a loss in the amount of $73,385. The derivative value was calculated using the Black-Scholes method. Assumptions used in the derivative valuation were as follows: Weighted Average: Dividend rate 0.0% Risk-free interest rate 0.08% Expected lives (years) 0.298 Expected price volatility 315.0% Forfeiture Rate 0.0% Summary of Convertible Notes Payable: Original value $ 243,000 Deferred finance cost (11,016) Unexpired debt discount (116,126) --------- $ 115,858 ========= NOTE 7 - PROVISION FOR INCOME TAXES Income taxes are provided based upon the liability method. Under this approach, deferred income taxes are recorded to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end. A valuation allowance is recorded against deferred tax assets if management does not believe the Company has met the "more likely than not" standard imposed by accounting standards to allow recognition of such an asset. At November 30, 2013, the Company expected no net deferred tax assets calculated at an expected rate of 37.6%. The Company has applied a 100% valuation allowance on the deferred tax assets attributable to the Net Operating Losses incurred. Although Management believes that its estimates are reasonable, no assurance can be given that the final tax outcome of these matters will not be different than that which is reflected in our tax provisions. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict. ACCOUNTING FOR INCOME TAX UNCERTAINTIES AND RELATED MATTERS The Company may be assessed penalties and interest related to the underpayment of income taxes. Such assessments would be treated as a provision of income tax expense on the financial statements. At November 30, 2013, the tax return for 2011 and 2012 has not being filed. No income tax expense has been realized as a result of operations and no income tax penalties and interest have been accrued related to uncertain tax positions. The Company has not filed a tax return for 11 Red Giant Entertainment, Inc. Notes to the Consolidated Financial Statements (Unaudited) NOTE 8 - CAPITAL STOCK the new entity. These filings will be subject to a three year statute of limitations. No adjustments have been made to reduce the estimated income tax benefit at fiscal year end. Any valuations relating to these income tax provisions will comply with U.S. generally accepted accounting principles. The Company has 100,000,000 shares of preferred stock authorized and none have been issued. The Company has 900,000,000 shares of common stock authorized, of which 434,922,000 shares are issued and outstanding. All shares of common stock are non-assessable and non-cumulative, with no preemptive rights. During the eight months ended, August 31, 2012, $10,869 of contributed capital was added to additional paid in capital. For the 3 months ended February 28, 2013, no additional capital was contributed. In June, 2012, Castmor Resources Ltd., entered into Share Exchange Agreement (the "Share Exchange Agreement") with Red Giant Entertainment Inc., ("RGE"), and Benny Powell, who had owned 100% of the issued and outstanding shares in RGE. Pursuant to the terms and conditions of the Share Exchange Agreement, RGE exchanged 100% of the outstanding shares in RGE for forty million (240,000,000 post split) newly-issued restricted shares of the Company's common stock. Due to the recapitalization and reverse merger of Castmor Resources Ltd, an additional 32,487,000 (194,922,000 post split) shares were issued. The Company approved a 6 to 1 stock split of all shares issued in June of 2012. All share information has been restated for both the reverse merger and the forward stock split for all periods presented. During the three month period ending November 30, 2013, the Company issued 22,636,273 shares of its common stock in satisfaction of obligation to $60,000 of convertible notes payable. The Company recognized a loss in the amount of $68,200 resulting from the excess in the fair market value of the stock above that of the retired debt. NOTE 9 - RELATED PARTIES Benny Powell was an officer and director of both parties to the merger. See Note 1. Mr. Powell continues as the Company's sole officer and director post merger. The Company purchases print materials through Active Media Publishing, Inc. ("AMPI"), an entity wholly owned by Mr. Powell. AMPI has certain arrangements with overseas printing companies, whereby the printing is facilitated to the Company. Agreement with AMPI states processing is at near cost prices on a non-exclusive basis. During the quarterly period ended November 30, 2013, the Company purchased print media in the amount of $3,750. Keenspot has been paid or accrued commissions in the amount of approximately $917 during the quarterly period ended November 30, 2013. The Company also from time to time have retained Glass House Graphics, a sole proprietorship owned by David Campiti, our Chief Operating Officer and a member of the Board, to provide creative services for us. The Company paid an aggregate of $12,575 to Glass House Graphics during the quarterly period ended November 30, 2013. The Company does not own or lease property or lease office space. The officers of the Company provide office and storage space to the Company at no charge through their other ventures. The Company does not have employment contracts with its key employees, including the controlling stockholder who is an officer of the Company, although it has independent contractor agreements with its other officers. 12 Red Giant Entertainment, Inc. Notes to the Consolidated Financial Statements (Unaudited) As of December 2013, the Company has retained Chris Crosby, one of the Company's officers and directors, to also serve as web editor for the Company's webcomics. Mr. Crosby will be compensated $1,500 per month for his web editing services, which the Company believe to be substantially less than the compensation the Company would pay for an independent third party to provide such services. The amounts and terms of the above transactions may not necessarily be indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent third parties. NOTE 10 - BUSINESS SEGMENTS The Company generates revenues from three service offerings: Advertising, Book publishing and Creative. The Company's management measures its performance by revenue lines and does not allocate its selling, general and administrative expenses to each revenue offering. A summary of the lines of revenue are as follows: For the Three Months Ended November 30, ------------------------------- 2013 2012 -------- -------- Revenues Advertising $ 1,284 $ 1,139 Book publishing 2,095 96,548 Creative 0 8,250 -------- -------- TOTAL: 3,379 105,937 -------- -------- Cost of Sales Advertising 1,342 2,139 Book publishing 1,036 42,135 Creative 0 3,200 -------- -------- TOTAL: 2,378 47,474 -------- -------- Gross Margin Advertising (58) (1,000) Book publishing 1,059 54,413 Creative 0 5,050 -------- -------- TOTAL: 1,001 58,463 -------- -------- NOTE 11 - COMMITMENTS AND CONTINGENCIES Some of the officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available. They may face a conflict in selecting between the Company and other business interests. The Company has not formulated a policy for the resolution of such conflicts. Additionally, regarding this concern, the Company does not have employment agreements with its key officers and directors. In the normal course of business, the Company may become a party to litigation matters involving claims against the Company. The Company's management is unaware of any pending or threatened assertions and there are no current matters that would have a material effect on the Company's financial position or results of operations. NOTE 12 - SUBSEQUENT EVENTS In December 2013 and January 2014, four convertible debt holders converted an aggregate of $131,095.34 in principal and interest for an aggregate of 63,019,244 shares of the Company's common stock. In December 2013, two debt holders also converted debt owed to them for an aggregate of 17,416,667 shares of the Company's common stock. 13 Red Giant Entertainment, Inc. Notes to the Consolidated Financial Statements (Unaudited) On January 6, 2014, the Company filed a Definitive Information Statement on Schedule 14C (the "Information Statement") and is in process of mailing the Information Statement to stockholders. Under the Information Statement, the following actions were taken by written consent of stockholders holding a majority of the Company's common stock have authorized the following actions, effective 20 calendar days after the date of mailing to the stockholders: (1) the re-election of the Company's Board of Directors; (2) the approval of Messineo & Co., CPAs, LLC as the Company's independent auditors for the fiscal year ending August 31, 2014; (3) the filing of a Certificate of Amendment to Company's the Articles of Incorporation to increase the number of authorized shares of common stock, par value $0.0001 per share from 900,000,000 to 3,000,000,000; (4) the approval of the Company's 2013 Stock Option Plan adopted by the Board of Directors on December 24, 2013; (5) the casting of an advisory vote approving the compensation of our named executive officers; and (6) the casting of an advisory vote on the frequency of future advisory votes to approve the compensation of our named executive officers to be every three years. Management has evaluated subsequent events through the date these financial statements were available to issue, the date of filing with the Securities and Exchange Commission. There was no event of which management was aware that occurred after the balance sheet date that would require any adjustment to, or disclosure in, the accompanying consolidated financial statements. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. This Quarterly Report on Form 10-Q (this "Quarterly Report") includes "forward-looking statements." All statements, other than statements of historical facts, included in this Quarterly Report which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements. The word "believes," "intends," "expects," "anticipates," "projects," "estimates," "predicts" and similar expressions are also intended to identify forward-looking statements. Consequently, all of the forward-looking statements made in this Quarterly Report are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences or effects on our business operations. We assume no obligation to update publicly, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise. CRITICAL ACCOUNTING POLICIES There have been no material changes in our critical accounting policies from those reported in our Annual Report on Form 10-K for our fiscal year ended August 31, 2013, filed with the SEC on December 4, 2013. For more information on our critical accounting policies, see Part II, Item 7 of our fiscal 2012 Annual Report on Form 10-K. RESULTS OF OPERATIONS THREE MONTHS ENDED NOVEMBER 30, 2013 COMPARED TO THE THREE MONTHS ENDED NOVEMBER 30, 2012 The three months ended November 30, 2013 were largely spent (i) negotiating the Supply Agreement with Diamond Comic Distributors, Inc. ("DCD") dated November 25, 2013 and effective January 1, 2014; (ii) transitioning our Collected Book line to be distributed through DCD for book store sales and specialty book sales; and (iii) focusing efforts on transitioning from paid-book sales to production of a "Giant-Size" line of titles that will be provided at no charge, with revenue being earned through selling advertising in such Giant-Size titles (collectively, the "Changes"). Due to Changes effect on our operations, we incurred significantly greater operating expenses and significantly lower revenues and profits for the three months ended November 30, 2013 as compared to the three months ended November 30, 2012. Nevertheless, our management believes that the Changes will eventually lead to greater profitably and more stability for our business and our prospects in the future, particularly if we are able to successfully launch or Giant-Size line of titles. REVENUES. During the three months ended November 30, 2013, revenues were $3,379, a decrease of $102,558 from $105,937 for the three months ended November 30, 2012. COST OF SALES. During the three months ended November 30, 2013, we incurred cost of sales of $2,378 compared to $47,474 incurred during the three months ended November 30, 2012 (a decrease of $45,096). GROSS PROFITS. Gross profit decreased from $58,463 during the three months ended November 30, 2012 to $1,001 during the three months ended November 30, 2013. 15 OPERATING EXPENSES. During the three months ended November 30, 2013, we incurred operating expenses of $133,862 compared to $20,320 incurred during the three months ended November 30, 2012, an increase of $93,542. This increase occurred primarily due to greater selling and marketing costs and greater general and administrative costs, which were $52,731 and $45,879 the three months ended November 30, 2013, as compared to $1,497 and $3,954 during the three months ended November 30, 2012. NET LOSS. Our net loss for the three months ended November 30, 2013 was $365,094 compared to a net profit of $38,143 before taxes during the three months ended November 30, 2012, a decrease of $397,537. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are a "smaller reporting company" as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item. ITEM 4. CONTROLS AND PROCEDURES. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES In connection with the preparation of this quarterly report on Form 10-Q, an evaluation was carried out by our Chief Executive Officer and the Chief Financial Officer of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 ("Exchange Act")) as of November 30, 2013. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures. Based on the evaluation, our Chief Executive Officer/Chief Financial Officer concluded disclosure controls and procedures were not effective as of November 30, 2013. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: * pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; 16 * provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and * provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. Our management assessed the effectiveness of our internal control over financial reporting as of November 30, 2013. In making this assessment, it used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). While this assessment is not formally documented, management concluded that, as of November 30, 2013, our internal control over financial reporting is not effective based on those criteria. Because of its inherent limitations, however, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified are disclosed below. * We do not have an audit committee or any other governing body to oversee management. * Documentation of proper accounting procedures is not present and fundamental elements of an effective control environment were not present as of November 30, 2013, including formalized monitoring procedures. * While we now have five officers, there is still no segregation of duties with respect to internal controls, no management oversight, and no additional persons reviewing control documentation, and no control documentation is being produced at this time. NO CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING As of the end of the period covered by this Quarterly Report, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. 17 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On May 13, 2013, George Sharp ("Plaintiff") filed a Complaint in San Diego Superior Court, Central District, Case No. 37-2013-00048310-CU-MC-CTL, against 14 companies, including us (collectively, "Defendants"). We were served with the Complaint on May 23, 2013. The Complaint alleges that the Plaintiff received unsolicited promotional emails being sent by Defendant, Victory Mark Corp. Ltd., discussing the other 13 corporate Defendants, including us. The Plaintiff is seeking liquidated damages in the amount of $1,000 for each email he received for a total of $1,204,000 collectively for all Defendants. After denial of our Demurrer to the Complaint, we filed an Answer to the Complaint. The Plaintiff has filed a Demurrer to our Answer, which will be heard February 14, 2014. We are not currently a party to, nor are any of our property currently the subject of, any other material legal proceeding. None of our directors, officers, or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business. In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters could have a material adverse effect upon our financial condition and/or results of operations. ITEM 1A. RISK FACTORS. We are a "smaller reporting company" as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information required under this item. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. SECOND NOTE TO ICONIC HOLDINGS, LLC ("ICONIC") On December 20, 2013, we issued Iconic a 10% Secured Convertible Promissory Note in the amount of $25,000 for which we received $17,500 (the "Second Iconic Note") with an original issue discount of $7,500. The Second Iconic Note matures on December 20, 2014 and is convertible into our common stock at the lower of (i) $0.0033 per share; or (ii) 60% of the lowest trading price of any day during the 20 consecutive trading days prior to the date of conversion. The shares of common stock into which the Second Iconic Note is convertible are not being registered in the Registration Statement. The Second Iconic Note was issued to Iconic pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act of 1933 and Regulation D promulgated thereunder. Iconic has represented to us that it is an accredited investor and had adequate information about us as well as the opportunity to ask questions and receive responses from our management. CONVERSIONS OF DEBT During the three months ended November 2013, we issued to Iconic an aggregate of 2,636,373 shares of our common stock in exchange for debt totaling $62,000. 18 In December 2013 and January 2014, four convertible debt holders converted an aggregate of $131,095.34 in principal and interest for an aggregate of 63,019,244 shares of our common stock. In December 2013, two debt holders also converted debt owed to them for an aggregate of 17,416,667 shares of our common stock. All conversions were performed pursuant to the underlying terms of their convertible debt. STOCK REPURCHASE PLAN On June 25, 2013, we announced that we had authorized a stock repurchase program permitting us to repurchase shares of our common stock over the next six to 12 months. This stock repurchase program has been terminated in the quarterly period ended November 30, 2013. No repurchases were made in the quarterly period ended November 30, 2013. 1,785,900 shares repurchased under the stock repurchase program prior to the quarterly period ended November 30, 2013 have not yet been returned to authorized but unissued status, but upon doing so, will result in us having outstanding 518,077,170 shares of common stock. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS. Exhibit No. Description ----------- ----------- 10.1 Share Exchange Agreement between the Registrant and Diamond Comic Distributors dated as of November 25, 2013. 31.1 Certification by Principal Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification by Principal Financial and Accounting Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 (1) Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. 101 The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended May 31, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes. ---------- 1. Furnished herewith. 19 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RED GIANT ENTERTAINMENT, INC. Date: January 14, 2014 By: /s/ Benny Powell ------------------------------------- Benny Powell Chief Executive Officer & Principal Executive Officer, Chief Financial Officer & Principal Financial Officer 20