Filing summary
Registrant: The filing is for Wizard Brands, Inc., not Prairie Operating Co. It is a Form 10-Q for the quarter ended September 30, 2020; the financial statements are unaudited.
Business context and reporting period
Wizard Brands produced pop-culture conventions before COVID-19 halted live events after March 8, 2020. It pivoted to virtual celebrity events and e-commerce, and acquired Jevo assets in April 2020 to enter equipment manufacturing and sales. The company reports that it produced three live events in the first nine months of 2020, compared with nine conventions and Ghostbusters Fanfest in the prior-year period.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $601,042 | $2,830,254 | $4,019,877 | $8,922,869 |
| Gross profit | $326,524 | $102,944 | $1,240,039 | $1,072,921 |
| Operating expenses | $926,055 | $694,443 | $2,111,087 | $2,092,107 |
| Operating loss | $(599,531) | $(591,499) | $(871,048) | $(1,019,186) |
| Net loss | $(743,826) | $(666,373) | $(1,317,883) | $(1,248,762) |
Gross margin was 54.3% in Q3 2020 versus 3.6% a year earlier, and 30.8% for the nine-month period versus 12.0%. Management attributed the improvement to lower costs for virtual events and e-commerce than for live shows. Nine-month interest expense increased to $456,835 from $229,576.
Nine-month revenue comprised conventions $2,608,678, virtual events $1,216,686, Wizard World Vault/e-commerce $191,906, and Jevo $2,607. Q3 convention revenue was zero; virtual-event revenue was $459,428 and e-commerce revenue was $78,323.
At September 30, cash and cash equivalents were $2,090,752, current assets $2,418,219, current liabilities $6,725,461, and working capital deficit $4,307,242. Total liabilities were $6,905,510; stockholders’ deficit was $6,267,202. Nine-month operating cash use was $870,687, investing cash use $163,715, and financing cash inflow $347,500; cash declined by $686,902 to $2,090,752. The filing reports no income tax or interest paid.
Changes, debt, and unusual items
- Revenue fell 79% in Q3 and 55% in the first nine months, principally reflecting the suspension of live conventions. Gross profit improved, but operating expenses rose 33% in Q3 and were broadly flat year over year for the nine-month period.
- The company reported a $2.5 million related-party convertible debenture bearing 12% interest. Its conversion price was reset to $0.25 under a ratchet provision after option repricing; the holder agreed to forbear collection through December 31, 2022. The debt is secured by substantially all company assets. The balance sheet classifies the $2.5 million note as current.
- The company disclosed a $197,600 Paycheck Protection Program loan and a $149,900 SBA loan. The balance sheet, however, reports no notes payable. PPP forgiveness was expected by management, not confirmed in the filing.
- In August, the company issued 173,974 Series A preferred shares in connection with settlement of accrued liabilities; preferred dividends of $33,174 were reported. Common shares outstanding were 3,506,752 at September 30 and November 16, 2020. The company also disclosed 792,750 options and 1,133,333 warrants outstanding; conversion and exercise-price adjustments create potential dilution.
- Jevo manufacturing was targeted to resume in Q1 2021, but the acquisition purchase-price allocation had not yet been valued. The company reported no material pending litigation and no off-balance-sheet arrangements.
Outlook, risks, and controls
No live events were planned for the remainder of 2020. New Orleans and Philadelphia events were scheduled for January 2021, but management said their occurrence depended on COVID-19 conditions and government restrictions; the number of live events possible in 2021 was uncertain. Management planned to rely on virtual events, e-commerce, Jevo, cost controls, and potential financing. It cautioned that these new activities had limited operating history and might not succeed.
The company disclosed a working capital deficit and recurring losses, and stated that these conditions raised substantial doubt about its ability to continue as a going concern. Its ability to continue depends on executing its plan, generating sufficient revenue, controlling expenses, and obtaining financing; management gave no assurance that financing would be available. The company concluded its disclosure controls and procedures were ineffective. No material changes to internal control over financial reporting were reported during the quarter.
Important facts for investors to verify
- Reconcile the disclosed PPP and SBA loan balances ($347,500 combined) with the balance sheet’s zero notes-payable line and the reported $347,500 financing cash inflow.
- Review the classification and terms of the $2.5 million convertible note, including its current-liability presentation, forbearance through 2022, collateral, 12% interest, and $0.25 conversion reset.
- Check the filing’s inconsistent loss and EPS figures: the financial statements report Q3 net loss of $743,826, common-stockholder loss of $710,652, and EPS of $(0.20); MD&A reports common-stockholder loss of $743,826 and EPS of $(0.21). For nine months, the statements report common-stockholder loss of $1,284,709 and EPS of $(0.37), while MD&A reports $1,317,883 and $(0.38).
- Reconcile other MD&A inconsistencies: its nine-month summary labels $2,779,838 as gross margin, whereas the statements show that amount as cost of revenues and gross profit of $1,240,039; its operating-cash-use comparison for 2019 also differs from the cash-flow statement.
- Assess cash runway, going-concern dependence, the sustainability and economics of virtual/e-commerce revenue, Jevo’s relaunch prospects, and potential dilution from preferred stock, options, warrants, and convertible debt.