Wizard World, Inc. — Q1 2017 Form 10-Q
Filing identity: The filing is for Wizard World, Inc., not Prairie Operating Co. The period is the three months ended March 31, 2017; the interim financial statements are unaudited.
Business context and reporting period
Wizard World produces pop-culture conventions across North America and operates the ConBox business. Management reported three conventions in Q1 2017, compared with four in Q1 2016, and expects to produce 16 live events during 2017, subject to change as locations and venues are evaluated.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $3.52 million | $5.34 million; down 34% |
| Gross profit / margin | $381,746 / 10.8% | $2.21 million / 41.3% |
| Operating income (loss) | $(1.28) million | $129,088 |
| Net income attributable to common stockholders | $517,173; basic EPS $0.01 | Net loss of $16,080 |
| Net cash from (used in) operating activities | $(798,947) | $1.41 million |
Convention revenue fell 31% to $3.45 million; ConBox revenue fell 79% to $74,119. Management attributed the convention decline primarily to holding one fewer event and the ConBox decline to focusing on the convention business. Convention gross margin fell to about 9% from 41%, which management attributed to increased programming and venue build-out investment. Lower compensation and general and administrative expenses partly offset the weaker gross profit.
Q1 net income included a $1.88 million gain from the reported change in fair value of derivative liabilities, despite the operating loss. The filing’s derivative-liability rollforward reports a different change amount of $1.83 million; this inconsistency should be checked.
At March 31, cash was $3.52 million, down from $4.40 million at December 31, 2016. Current assets were $4.90 million and current liabilities $7.91 million, producing a reported working-capital deficit of $3.01 million. Management separately reported working capital of $1.60 million excluding derivative liabilities. Total liabilities were $7.92 million, including $4.62 million of current derivative liabilities. The related-party convertible debenture had an initial principal of $2.50 million, bears 12% interest, and matures December 30, 2018; the balance sheet reports the note, net of discount, at $9,027 and accrued interest of $100,000 in accounts payable and accrued expenses.
Changes, outlook, risks and unusual items
- Operating results weakened substantially year over year: revenue declined, gross margin contracted, and operating income turned to a loss. Operating cash flow also shifted from positive to negative.
- Management said the Bristol financing and potential access to additional debt or equity had alleviated the conditions that had raised substantial doubt about the company’s ability to continue as a going concern. It cautioned that future viability depends on implementing its plan, generating sufficient revenue, controlling costs, and obtaining financing if needed; there is no assurance these efforts will succeed.
- The $2.50 million financing was from Bristol Investment Fund, an entity controlled by the board chairman. It included convertible debt and warrants with reset features, creating Level 3 derivative liabilities valued using a Monte Carlo model and significant unobservable volatility assumptions. The filing identifies related-party terms and valuation changes as matters requiring attention.
- Management expects to continue developing conventions and digital content, but provides no financial guidance. The 16-event plan is subject to change.
- Management concluded that disclosure controls and procedures were not effective at quarter-end. It said it was reviewing financial-reporting policies and procedures; no material change in internal control over financial reporting during the quarter was reported.
- The Silverman lawsuit alleged $42,600 plus attorney fees; the company filed a cross-complaint seeking more than $90,000 and said it was negotiating a settlement. Two other lawsuits concluded in February 2017 with no financial-statement impact.
Most important facts for investors to verify
- Confirm the filing entity: the supplied filing is Wizard World, Inc., despite the Prairie Operating Co. request metadata.
- Reconcile the derivative-liability fair-value gain of $1.88 million in the income statement with the $1.83 million change shown in the rollforward, and assess the effect on reported earnings.
- Review cash burn, the working-capital deficit, unearned convention revenue, and the company’s ability to fund operations and its event schedule.
- Examine the related-party debenture, its 12% interest, conversion and reset terms, warrants, accrued interest, and potential dilution.
- Track remediation of ineffective disclosure controls and developments in the Silverman litigation and settlement discussions.