Business Context and Reporting Period
This is Wizard Brands, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The filing identifies the registrant as Wizard Brands, formerly Wizard Entertainment; it does not identify Prairie Operating Co. as the filer.
The company historically produced pop-culture conventions. COVID-19 halted live events after the first quarter, prompting a shift to virtual fan events and online collectibles sales, plus the April 2020 acquisition of Jevo assets for a planned gelatin-shot machine business.
Financial Results and Liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $816,416 | $2,542,632 | $3,418,835 | $6,092,615 |
| Gross margin dollars | $335,378 | $377,833 | $913,515 | $969,977 |
| Gross margin percentage | 41% | 15% | 27% | 16% |
| Operating expenses | $579,622 | $662,250 | $1,185,032 | $1,397,664 |
| Operating loss | $(244,244) | $(284,417) | $(271,517) | $(427,687) |
| Net loss | $(390,443) | $(359,292) | $(574,057) | $(582,389) |
For the first half, convention revenue declined substantially; virtual events generated $757,258 and e-commerce generated $113,583, according to the revenue-disaggregation note. The filing attributes improved gross-margin percentages to lower virtual-event and e-commerce costs, and lower operating expenses primarily to reduced staffing. Higher interest expense—$312,540 for the first half, versus $154,702 a year earlier—offset some operating improvement.
Cash and cash equivalents were $2,567,860 at June 30, down from $2,777,654 at year-end. First-half operating cash use was $398,843; investing cash use was $158,451, including $139,124 for intangibles; financing provided $347,500 from notes payable. Current assets were $2,905,775 and current liabilities $7,931,364, producing a $5,025,589 working-capital deficit. Total liabilities were $10,050,435, compared with $3,260,246 in total assets; stockholders’ deficit was $6,790,189.
Material Changes, Outlook, and Risks
- COVID-19 and operating outlook: No live events were scheduled for the remainder of 2020, and management said 2021 event timing was uncertain. Events in New Orleans and Philadelphia were tentatively scheduled for January 2021, subject to pandemic conditions and government restrictions.
- New activities: The company reported virtual-event and Vault/e-commerce revenue during the period and planned to resume Jevo machine production with a target of first-quarter 2021. Management stated it could not yet reliably assess whether the new lines would succeed. No specific financial guidance was provided.
- Going concern: The filing says the company’s financial conditions had previously raised substantial doubt about its ability to continue as a going concern through August 2021. Management cited cost reductions, new activities, and potential financing, but acknowledged there was no assurance of sufficient revenue, cost control, or additional funding.
- Debt and dilution: The company had two $2.5 million convertible debentures bearing 12% interest. Following repricing of certain options, ratchet provisions reset the conversion prices to $0.25 per share. Holders agreed not to require payment until December 31, 2022; the newer debenture was also extended. These terms may create significant dilution. The Barlock debenture is secured by substantially all company assets, on equal footing with certain other creditors.
- Other borrowing: The company received a $197,600 PPP loan and a $149,900 SBA loan (3.75% interest, maturing in June 2050). Management expected to seek forgiveness of the PPP loan; forgiveness was not reported as completed.
- Subsequent events and controls: In August, the board resolved to convert debt and deferred compensation owed to the CEO and chairman into preferred shares. The company also amended its Series A preferred-stock terms. Management concluded disclosure controls and procedures were not effective; no material change in internal control over financial reporting was reported for the quarter.
- Contingencies: The company reported no litigation believed likely to have a material adverse effect and no off-balance-sheet arrangements. It also reported no defaults on indebtedness.
Important Facts to Verify
- Reconcile the filing’s revenue inconsistencies: the note reports first-half convention revenue of $2,574,994, while MD&A gives $2,547,994; together with virtual and Vault revenue, the note’s components do not sum to the reported $3,418,835 total. Q2 MD&A also describes convention revenue as $80, while the statements present $816,416 as “Convention Revenues.”
- Check loss-per-share disclosures: the statements and MD&A give conflicting prior-period Q2 and six-month comparative values.
- Confirm the status and terms of the proposed preferred-stock conversions, amended preferred rights, and debenture extensions/forbearance, including resulting dilution and creditor priority.
- Assess cash runway and financing availability against the working-capital deficit, going-concern disclosure, and the uncertainty of live events and new business lines.