Business Context and Reporting Period
Company: Wizard World, Inc. (Note: Metadata listed "Prairie Operating Co." but the filing text identifies the registrant as Wizard World, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2012
Business Overview: The Company produces pop culture and live multimedia conventions ("Comic Cons") across North America. Its business model includes ticket sales, exhibitor booth space, sponsorships, and a developing digital entertainment network.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2012 | Nine Months Ended Sep 30, 2012 | Dec 31, 2011 (Balance Sheet) |
|---|---|---|---|
| Convention Revenue | $2,792,907 | $5,173,315 | - |
| Gross Profit | $1,380,630 (49.4% margin) | $1,955,914 (37.8% margin) | - |
| Net Income (Loss) | $1,704,287 | $(1,287,008) | - |
| Net Income (Loss) Attributable to Common | $1,233,141 | $(2,756,719) | - |
| Cash and Equivalents | - | - | $2,049,848 |
| Total Current Assets | - | - | $2,565,834 |
| Total Current Liabilities | - | - | $6,782,147 |
| Working Capital Deficit | - | - | $(4,216,313) |
| Derivative Liability | - | - | $4,864,334 |
Note: The Q3 2012 net income was significantly driven by a $1.07M gain from the change in fair value of derivative liabilities. Operating income for the quarter was $646,543.
Material Changes vs. Prior Period
- Revenue Growth: Convention revenue increased 95% in Q3 2012 ($2.79M vs. $1.43M) and 68% for the nine-month period ($5.17M vs. $3.08M). This is attributed to hosting two conventions in Q3 2012 compared to one in the prior year, and a strategic shift to fewer but higher-revenue events.
- Operating Expenses: Total operating expenses decreased 20% in Q3 2012 ($734k vs. $916k) and 43% for the nine-month period ($1.90M vs. $3.36M). The reduction is primarily due to a significant decrease in web development fees and consulting fees.
- Derivative Liabilities: The derivative liability balance increased from $1.95M at year-end 2011 to $4.86M at September 30, 2012. This increase drove a $1.09M loss in the nine-month period but a $1.07M gain in the third quarter alone.
- Liquidity: Cash increased from $422k to $2.05M, primarily due to $1.55M in proceeds from the issuance of Series A Convertible Preferred Stock.
Guidance, Outlook, and Risks
- Going Concern: The filing explicitly states that the Company's accumulated deficit, net loss for the nine-month period, and working capital deficit raise substantial doubt about its ability to continue as a going concern. Continued operations depend on raising additional capital and generating revenue.
- Outlook: Management plans to produce seven live events in 2012. The digital media business is currently funded by outside investors and has not yet generated sufficient revenue to cover its own operating costs.
- Management Changes: Subsequent to the period end, Executive Chairman Michael Mathews resigned (Oct 10, 2012), and a termination agreement was reached with consultant Brad Powers (Oct 17, 2012).
- Controls: Management concluded that disclosure controls and procedures were not effective as of September 30, 2012.
- Debt: Several convertible promissory notes issued in 2011 are in default. One note was reclassified as a demand note.
Investor Verification Checklist
- Derivative Liability Volatility: Verify the valuation methodology for the $4.86M derivative liability, as fluctuations in this account caused a swing from a nine-month net loss to a quarterly net profit.
- Cash Burn vs. Revenue: Assess whether the $2.05M cash balance is sufficient to fund operations until the digital platform becomes self-sustaining, given the "Going Concern" warning.
- Debt Default Status: Confirm the status of the defaulted convertible notes and the potential for forced conversion or legal action.
- Stock Dilution: Review the impact of the Series A Preferred Stock and outstanding warrants (7.78M warrants) on future common share dilution.
- Internal Controls: Investigate the specific deficiencies that led to the conclusion that disclosure controls were ineffective.