Business context and reporting period
Wizard World, Inc. (not Prairie Operating Co., as identified in the request metadata) filed this unaudited Form 10-Q for the quarter ended June 30, 2013. It produces pop-culture conventions and also pursues sponsorship, advertising, and digital-media revenue. The company planned eight live events in 2013.
Financial performance and liquidity
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 |
|---|---|---|
| Convention revenue | $2.90 million | $4.69 million |
| Gross profit / margin | $566,000 / 19.5% | $1.38 million / 29.4% |
| Operating loss | $294,000 | $168,000 |
| Net loss | $3.10 million | $1.92 million |
| Net loss attributable to common stockholders | $3.18 million; $0.09 per share | $2.08 million; $0.06 per share |
- Cash was reported as $2.17 million on the June 30 balance sheet. Current assets were $2.85 million and current liabilities $2.04 million; the balance-sheet figures imply working capital of about $812,000.
- Total liabilities were $8.41 million, including a $6.37 million non-current derivative liability and $543,000 of accrued dividends. Stockholders’ deficit was $5.48 million.
- The cash-flow statement reports $312,000 provided by operating activities in the first half, no financing cash flow, and $37,000 used for investing. Its reported ending cash is $2.23 million.
Material changes and management commentary
- Second-quarter revenue rose 56% year over year, with two events in each period. Management cited stronger marketing, higher ticket prices, and larger events; revenue per event increased to about $1.45 million from $930,000.
- Second-quarter gross margin declined to about 20% from 22%, which management attributed primarily to an unprofitable New York City event.
- First-half revenue nearly doubled year over year, with four events versus three. Gross margin rose to about 29% from 24%, and operating loss narrowed from $594,000 to $168,000.
- Operating expenses increased in both periods, principally due to higher salaries, headcount, and share-based compensation. Derivative fair-value losses were a major expense: $2.80 million for the quarter and $1.75 million for the first half.
- Management estimated next-12-month working-capital needs of $2.3 million and a monthly burn rate of $190,000, but stated that available cash and operating cash flows should cover requirements for at least 12 months. The digital platform had not yet generated a profit; management planned to pursue advertising monetization.
Risks, contingencies, and unusual items
- Disclosure controls and procedures were concluded to be ineffective. The company reported no material quarterly changes in internal control over financial reporting.
- The $6.37 million derivative liability is a Level 3 fair-value estimate using unobservable inputs and contributes substantial non-cash earnings volatility.
- The company entered a seven-year office lease with entities controlled by a director and the CEO/significant stockholder. Base rent is $6,900 per month; disclosed future minimum payments total $558,900.
- The company reported no material litigation, no defaults on indebtedness, no off-balance-sheet arrangements, and no reportable subsequent events. It disclosed no material changes to previously reported risk factors.
- No quantified earnings or revenue guidance was provided. Management’s event and liquidity statements are forward-looking and subject to risks.
Important facts to verify
- Reconcile cash: the balance sheet reports $2,170,685, while the cash-flow statement reports ending cash of $2,232,370.
- Reconcile first-half operating cash flow: the cash-flow statement reports $312,365, while MD&A cites $250,680.
- Reconcile current assets and working capital: the balance sheet reports current assets of $2,848,124, while MD&A reports $2,786,439 and working capital of $750,525.
- Assess the assumptions and potential dilution associated with the $6.37 million derivative liability, preferred stock, warrants, and accrued preferred dividends.
- Evaluate the credibility of the 12-month liquidity assertion against stated cash needs, event profitability, and the digital business’s lack of profitability.