UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q

x   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period May 31, 2014
 
Or
 
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to _____________
 
Commission File Number: 000-53310
 

RED GIANT ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
98-0471928
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
614 E. Hwy 50, Suite 235, Clermont, FL 34711
(Address, including zip code, of principal executive offices)
 
Registrants’ telephone number, including area code:  (866) 926-6427
 
N/A
(Former name, former address and former fiscal year, if changed since last year)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes x    No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller Reporting Company
x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x
 
As of July 18, 2014, there were 2,171,534,973 shares of the Company's common stock, $0.001 par value per share, issued and outstanding.
 
 
 

 

Red Giant Entertainment, Inc.
 
TABLE OF CONTENTS
 
       
Page
 
PART I
FINANCIAL INFORMATION
       
           
Item 1.
Financial Statements
   
3
 
 
Consolidated Balance Sheets as of May 31, 2014 (Unaudited) and August 31, 2013
   
3
 
 
Consolidated Statements of Operations for the Three and Nine Months Ended May 31, 2014 and May 31, 2013 (Unaudited)
   
4
 
 
Consolidated Statements of Cash Flows for the Nine months Ended May 31, 2014 and May 31, 2013 (Unaudited)
   
5
 
 
Notes to Consolidated Financial Statements (Unaudited)
   
6
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
   
14
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
   
15
 
Item 4.
Controls and Procedures
   
16
 
           
PART II
OTHER INFORMATION
       
           
Item 1.
Legal Proceedings
   
18
 
Item 1A.
Risk Factors
   
18
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
   
18
 
Item 3.
Defaults Upon Senior Securities
   
19
 
Item 4.
Mine Safety Disclosures
   
19
 
Item 5.
Other Information.
   
19
 
Item 6.
Exhibits
   
20
 
           
SIGNATURES
   
21
 
 

 
2

 

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.
 
Red Giant Entertainment, Inc.
Consolidated Balance Sheets
 

   
May 31,
   
August 31,
 
   
2014
   
2013
 
   
(unaudited)
       
ASSETS
           
             
Current Assets
           
Cash and cash equivalents
  $ 44,865     $ 14,937  
Inventory
    76,845       52,107  
Prepaid and other current assets
    11,000       82,000  
Total Current Assets
    132,710       149,044  
 
               
Property and equipment, net of accumulated  depreciation of $3,132 and $996, respectively
    22,423       10,548  
 
               
Intangible assets, net of accumulated  amortization of $34,989 and $23,100, respectively
    39,261       51,150  
                 
     TOTAL ASSETS
  $ 194,394     $ 210,742  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
                 
Current Liabilities
               
Accounts payable
  $ 13,000     $ -  
Accrued expenses
    63,900       88,000  
Due to related parties
    41,251       39,187  
Convertible notes payable
    153,496       81,397  
Derivative liability, notes
    1,910,561       1,339,599  
Derivative liability, warrants
    403,800       355,800  
Total Current Liabilities
    2,586,008       1,903,983  
                 
Note payable
    -       24,314  
                 
     TOTAL LIABILITIES
    2,586,008       1,928,297  
                 
Stockholders' Deficit
               
Preferred stock: 100,000,000 authorized; $0.0001 par value
               
0 shares issued and outstanding
    -       -  
Common stock: 3,000,000,000 authorized; $0.0001 par value
               
1,900,895,577 and 434,922,000 shares issued and outstanding
    190,089       43,492  
Additional paid in capital
    5,755,968       43,053  
Treasury stock, at cost; 1,785,900 shares
    (55,000 )     (55,000 )
Accumulated deficit
    (8,282,671 )     (1,749,100 )
Total Stockholders' Deficit
    (2,391,614 )     (1,717,555 )
                 
     TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
  $ 194,394     $ 210,742  
 
 
 
 
See accompanying notes to unaudited consolidated financial statements

 
3

 

Red Giant Entertainment, Inc.
Consolidated Statements of Operations
(unaudited)
 

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
May 31,
   
May 31,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Revenues
  $ 6,457     $ 130,125     $ 17,081     $ 295,653  
Cost of sales
    932       25,865       10,019       106,773  
Gross profit
    5,525       104,260       7,062       188,880  
                                 
Operating Expenses
                               
Selling and marketing
    140,385       3,315       212,234       7,106  
Compensation
    209,820       30,354       241,782       48,929  
Professional
    48,560       19,490       104,324       44,190  
General and administration
    87,851       15,639       197,183       19,037  
Depreciation and amortization
    2,403       1,630       14,025       4,888  
     Total operating expenses
    489,019       70,428       769,548       124,150  
                                 
Net income (loss) from operations
    (483,494 )     33,832       (762,486 )     64,730  
                                 
Other income (expense)
                               
Interest expense
    (693,061 )     -       (867,114 )     -  
Gain (loss) on Change in derivative
    82,496       -       (314,462 )     -  
Gain (loss) on settlement of liabilities and derivative valuation
    (3,996,268 )     -       (4,589,509 )     -  
                                 
Net income (loss)
  $ (5,090,327 )   $ 33,382     $ (6,533,571 )   $ 64,730  
                                 
Basic and dilutive loss per share
  $ (0.00 )   $ 0.00     $ (0.01 )   $ 0.00  
                                 
Weighted average number of  shares outstanding
    1,356,535,516       434,922,000       775,563,224       434,922,000  
 
 
 
 
See accompanying notes to unaudited consolidated financial statements
 
 
4

 
 
Red Giant Entertainment, Inc.
Consolidated Statements of Cash Flows
(unaudited)
 
 
   
Nine Months Ended
 
   
May 31,
 
   
2014
   
2013
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
 Net income (loss)
  $ (6,533,571 )   $ 64,730  
Adjustment to reconcile Net Income to net
               
cash provided by operations:
               
Depreciation and amortization
    14,025       4,888  
Stock-based compensation
    196,303       -  
Amortization of deferred financing costs
    867,114       -  
Change in derivatives
    314,462       -  
    Settlement of liabilities and derivatives valuation     4,589,509       -  
Changes in operating assets and liabilities:
               
(Increase) decrease in operating assets:
               
Inventory
    (24,738 )     (39,092 )
Prepaid expenses and other assets
    71,000       (30,069 )
Increase (decrease) in operating liabilities:
               
Accounts payable
    13,000       -  
Accrued expenses
    (9,729 )     633  
Total adjustments
    6,030,946       (63,640 )
     Net Cash (Used in) Provided By Operating Activities
    (502,625 )     1,090  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Acquisition of property and equipment
    (14,011 )     -  
     Net Cash (Used in) Investing Activities
    (14,011 )     -  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Shareholder loans, net
    2,064       -  
Proceeds from Loan(s), net of expenses
    544,500       -  
     Net Cash (Used in) Provided by Financing Activities
    546,564       -  
                 
Net increase (decrease) in cash and cash equivalents
    29,928       1,090  
Cash and cash equivalents, beginning of period
    14,937       269  
Cash and cash equivalents, end of period
  $ 44,865     $ 1,359  
                 
                 
Supplemental cash flow information
               
Cash paid for interest
  $ -     $ -  
Cash paid for taxes
  $ -     $ -  
                 
Non-cash financing and investing transactions:
               
Debt converted to equity
  $ 1,071,180     $ -  
Accrued interest converted to equity
  $ 2,520     $ -  
 
 
 
 
See accompanying notes to unaudited consolidated financial statements

 
5

 

Red Giant Entertainment, Inc.
Notes to the Consolidated Financial Statements
(Unaudited)
As of May 31, 2014 and August 31, 2013 and
for the three and nine months ended May 31, 2014 and 2013
 
 
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
 
Red Giant Entertainment LLC (the “LLC”) was formed in the State of Florida, U.S.A., on January 1, 2011.  On May 9, 2012, the LLC incorporated and changed its name to Red Giant Entertainment, Inc. (“RGE”).   The LLC was originally a publishing company, but has expanded its operations to include mass media and graphic novel artwork development.
 
On June 11, 2012, Castmor Resources Ltd., a Nevada corporation  entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with RGE, and Benny Powell, who had owned 100% of the issued and outstanding shares in RGE.  Pursuant to the terms and conditions of the Share Exchange Agreement, RGE exchanged 100% of the outstanding shares in RGE for forty million (40,000,000; 240,000,000 post-split) newly-issued restricted shares of the Company’s (Castmor Resources Ltd.) common stock.  Due to the recapitalization and reverse merger with Castmor Resources Ltd., 32,487,000 shares (194,922,000 post split) were issued by Castmor Resources Ltd., which changed its name to Red Giant Entertainment, Inc.  (the “Company”).  The Company subsequently approved a 6 to 1 forward stock split of all shares of record in June, 2012.  The Company’s fiscal year end is August 31.
 
The exchange resulted in RGE becoming a wholly-owned subsidiary of the Company.  As a result of the Share Exchange Agreement, the Company’s principal business became the business of RGE.  All share information has been restated for both the reverse merger and the forward stock split for all periods presented.
 
On March 4, 2013, the Company acquired ComicGenesis, LLC (“ComicGenesis”), a Nevada limited liability company that operates a user-generated comic site that hosts over 10,000 independent webcomics.
 
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Unaudited Interim Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, the consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
 
In the opinion of management, all adjustments considered necessary for a fair presentation have been made in order to make the financial statements presented not misleading.  The results of operations for such interim periods are not necessarily indicative of operations for a full year.
 
These consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ending August 31, 2013 and the notes thereto and other information in our annual report on Form 10-K/A, filed with the Securities and Exchange Commission on February 20, 2014.
 
Basis of Presentation
The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 
6

 

Principles of Consolidation
The Company operates under the name of Red Giant Entertainment, Inc. and its wholly owned subsidiaries RGE and ComicGenesis.  The companies were incorporated for the intentions of developing brand names.  Any activities of these subsidiaries or holdings have been included in the consolidated financial statements, with elimination of any intercompany accounts and transactions.
 
 
Fair Value Measurements
Topic 820 in the Accounting Standards Codification (ASC 820) defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.  ASC 820 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances.  In this standard, the FASB clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability.  In support of this principle, ASC 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions.  The fair value hierarchy is as follows:
 
·  
Level 1 inputs — Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.
·  
Level 2 inputs — Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
·  
Level 3 inputs — Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments and short-term debt instruments with original maturities of three months or less to be cash equivalents.
 
Inventory
As of May 31, 2014, inventory consisted of physical copies of published books, as well as artwork that is used for digitally distributed works for advertising revenue and future publications.  The inventory is valued at the cost to produce, on a first-in-first-out (FIFO) basis.
 
Long-lived Assets
 
Property, Plant and Equipment
Property, plant and equipment are recorded at historical cost and capitalized.  Depreciation is calculated on a straight-line basis over the estimated useful life of the asset.  The Company currently has equipment being depreciated for estimated lives of three to five years.  Depreciation for the three and nine months ended May 31, 2014 and 2013 was $940, $166, $2,136 and $498, respectively.
 
Intangible Property
Intellectual property, including patents and other intangible assets have been capitalized and recorded at their fair value historical cost.  The Company’s intellectual property consists of graphic novel artwork and was contributed in January 2011 by a stockholder to the Company and valued at $29,250, which was determined based on the shareholder’s historical costs for art and printing. The intangible is being amortized over its life of five years.  The Company acquired website and other intangible assets in the acquisition of a subsidiary in March 2013, valued at the fair market value of stock exchanged by a shareholder, valued in the amount of $45,000.  Amortization is calculated on a straight line basis over the estimated useful life of three years.  Amortization for the three and nine months ended May 31, 2014 and 2013was $1,463, $1,464, $11,889 and $4,390, respectively
 
Long-lived Assets Impairment
Long-lived assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable, pursuant to guidance established in ASC 360, Property, Plant and Equipment.  Management considers assets to be impaired if the carrying value exceeds the future projected cash flows from related operations (undiscounted and without interest charges).  If impairment is deemed to exist, the assets will be written down to fair value.  Fair value is generally determined using a discounted cash flow analysis.  Based upon its most recent analysis, the Company believes that no impairment of property existed at May 31, 2014 and August 31, 2013.
 
 
7

 
 
Recent Accounting Pronouncements
We have reviewed the FASB issued Accounting Standards Update (“ASU”) accounting pronouncements and interpretations thereof that have effectiveness dates during the periods reported and in future periods.  The Company has carefully considered the new pronouncements that alter previous generally accepted accounting principles and does not believe that any new or modified principles will have a material impact on the corporation’s reported financial position or operations in the near term.  The applicability of any standard is subject to the formal review of our financial management and certain standards are under consideration.
Revenue Recognition
Revenue for the Company is recognized from three primary sources: Advertising Revenue, Publishing Sales and Creative Services.  Revenue was processed through our Paypal Account and Project Wonderful accounts where applicable.
 
Advertising Revenue comes from the following sources and is stated at net after commissions:
 
o  
Keenspot:  Revenue is earned on a net 90 basis and is based upon traffic to Red Giant property Web sites.  It is calculated on a Cost Per Thousand (CPM) of verified impressions and varies based upon bids by advertisers and other customary factors.  In exchange for advertising, hosting, IT, and sales management, Keenspot takes 50% commission of ad revenue for their services.
o  
Project Wonderful: Revenue is paid immediately and based upon bids by advertisers for a set amount of time at the prevailing highest winning rate.  Project Wonderful takes a 25% commission of ad revenue for their services.
 
Publishing Revenue comes from the following sources:
 
o  
Kickstarter Campaigns:  These are presales for books and revenue is recognized only once the books arrive and are shipped to the buyers.
o  
Direct Sales:  Through our online store, we sell directly to clients and the transactions process through our Paypal account.  All orders are shipped immediately and revenue is recognized upon shipment.
 
Creative Services are artwork, writing, advertising, and other creative endeavors we handle for outside clients.  Revenue is recognized upon completion of the services and collectability is reasonably assured.
 
Shipping and Handling for purchases are paid directly by the consumer through PayPal.  The Company has not established an allowance for doubtful accounts, as all transactions are handled through PayPal directly by the consumer.
 
Cost of Goods Sold
Cost of goods sold includes the cost of the creating services for artwork, advertising and books.
 
Advertising
Advertising costs are expensed as incurred.  The Company expensed advertising costs of $86,105, $65,230, $135,171 and $66,001 for the three and nine month periods ending May 31, 2014 and 2013, respectively.
 
Stock Based Compensation
The Company issues restricted stock to consultants for various services.  Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.  The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete.  The Company recognized consulting expenses and a corresponding increase to additional paid-in-capital related to stock issued for services.  Stock compensation for the periods presented were issued for past services provided, accordingly, all shares issued are fully vested, and there is no unrecognized compensation associated with these transactions.  For agreements requiring future services, the consulting expense is to be recognized ratably over the requisite service period.  The Company has issued shares and warrants to individuals for the purpose of compensation during the three and nine month periods ending May 31, 2014 and 2013, in the amounts of $196,303, $0, $196,303 and $0, respectively.
 
 
8

 
 
Income Taxes
 
The Company has adopted ASC 740, Income Taxes , which requires the Company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns using the liability method.  Under this method, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.
 
The Company may be assessed penalties and interest related to the underpayment of income taxes.  Such assessments would be treated as a provision of income tax expense on the financial statements.  At May 31, 2014, the tax return for 2011 through 2013 have not been filed.  No income tax expense has been realized as a result of operations and no income tax penalties and interest have been accrued related to uncertain tax positions.  The Company has not filed a tax return for the new entity.  These filings will be subject to a three year statute of limitations.  No adjustments have been made to reduce the estimated income tax benefit at fiscal year-end.  Any valuations relating to these income tax provisions will comply with U.S. generally accepted accounting principles.
 
Earnings (Loss) Per Share
The Company follows financial accounting standards, which provides for calculation of “basic” and “diluted” earnings per share.  Basic earnings per share includes no dilution and is computed by dividing net income available to common stockholders by the weighted average common shares outstanding for the period.  Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity similar to fully diluted earnings per share.  There were approximately 1,545,000,000 common stock equivalents outstanding at May 31, 2014, related to the convertible debt arrangements, which have been excluded from diluted earnings per share since their effect would have been anti-dilutive.
 
NOTE 3 - GOING CONCERN
 
The Company is currently generating revenues from operations insufficient to meet its operating expenses.  The Company has incurred losses, resulting in an accumulated deficit. Additionally, the Company has negative cash flows from operations and negative working capital.  Management is currently pursuing various funding options, including seeking debt or equity financing, licensing opportunities, as well as a strategic or other transaction, to obtain additional funding to continue the development of, and successfully commercialize, its products.  There can be no assurance that the Company will be successful in its efforts and this raises substantial doubt about the Company’s ability to continue as a going cocern.  Should the Company be unable to obtain adequate financing or generate sufficient revenue in the future, the Company’s business, results of operations, liquidity and financial condition will be materially and adversely harmed, and the Company will be unable to continue as a going concern.
 
The Company believes that its ability to execute its business plan, and therefore continue as a going concern, is dependent upon its ability to do the following:
 
·  
obtain adequate sources of funding to fund long-term business operations;
·  
enter into a licensing or other relationship that allows the Company to commercialize its products;
·  
manage or control working capital requirements; and
·  
develop new and enhance existing relationships with product distributors and other points of distribution for the Company’s products.
 
There can be no assurance that the Company will be successful in achieving its short- or long-term plans as set forth above, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue in the long-term as a going concern.

The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
 
9

 
 
NOTE 4 - CONVERTIBLE NOTES PAYABLE
 
The Company entered into lending arrangements with several lending institutions, each with convertible features.  The Company evaluated the terms of the convertible notes, with remaining outstanding face values totaling $421,450, in accordance with ASC Topic No. 815 - 40, Derivatives and Hedging – Contracts in Entity’s Own Stock .  The Company determined that the conversion features meet the definition of a liability and therefore bi-furcated the conversion feature and accounted for it as a separate derivative liability.  The Company recognized a debt discount on the notes on the origination date.  The debt discount was recorded as reduction (contra-liability) to the Convertible Notes Payable.  The debt discount is being amortized over the term of the notes.  Additionally, the notes called for an immediate withholding of service charges, which have been treated as an original issue discount or deferred financing costs, a contra-liability charge, which is to be amortized as finance cost over the life of the loan.  Interest expense, in the amount of $693,061 and $867,114, was recognized for the three and nine month period ended May 31, 2014.
 
A derivative liability, in the amount of $1,910,561 has been recorded, as of May 31, 2014, related to the convertible notes.  The Company recognized a change in the derivative liability, resulting in a loss in the amount of $82,496 and $314,462 for the three and nine month periods ending May 31, 2014.  The derivative value was calculated using the Black-Scholes method.  Assumptions used in the derivative valuation were as follows:
 
Weighted Average:
     
Dividend rate
    0.0 %
Risk-free interest rate
    0.06 %
Expected lives (years)
    0.265  
Expected price volatility
    441.7 %
Forfeiture Rate
    0.0 %
 
Summary of Convertible Notes Payable:
 
Original value
  $ 421,450  
Deferred finance cost
    (55,028 )
Unexpired debt discount
    (212,926 )
    $ 153,496  
Less current portion of debt
    153,496  
Non-current
  $ --  
 
NOTE 5 – CAPITAL STOCK
 
The Company has 100,000,000 shares of preferred stock authorized and none have been issued.
 
The Company has 3,000,000,000 shares of common stock authorized, as amended January 29, 2014.  All shares of common stock are non-assessable and non-cumulative, with no preemptive rights.
 
During the year ending August 31, 2013 the Company entered into a stock buy-back plan, whereby 1,785,900 shares were repurchased for $55,000 cost. The shares remain in the name of the Corporation until such time as they are cancelled.
 
The Company issued warrants to purchase approximately 37,166,700 shares of common stock, at a strike price of $.015 per share, in association with a financing arrangement.  Warrants may be exercised on a cashless basis.  The company valued these warrants using the Black-Scholes method, resulting in an interest expense of $355,800 and a corresponding derivative liability.

 
10

 

In March 2013, the Company’s majority shareholder issued 500,000 common shares held personally for the acquisition of its subsidiary, CosmicGenesis, valued at a fair market value of $45,000, considered to be the fair value of the website created and acquired.  The fair value of the common shares were recognized as a contribution to capital.
 
During the three and nine month periods ending May 31, 2014, the Company issued 1,202,602,616 and 1,451,432,007 shares of its common stock in upon conversion of $666,180 and $1,071,180 of convertible notes payable, respectively.  The Company recognized a loss in the amount of $3,996,268 and $4,589,509, respectively, resulting from the excess in the fair market value of the stock above that of the retired debt.
 
During the three month period ending May 31, 2014, the Company issued 14,541,570 common shares to a vendor in exchange for services.  The services were valued at the fair market value of the shares at the date of the exchange, resulting in a charge to operations in the amount of $148,324.
 
On March 27, 2014, the Company issued non-statutory stock options to officers and directors to purchase 5 million shares each of common stock each at an exercise price of $.0048, the trading price at the date of the issuance.  Theseoptions were valued at $23,990 using the Black-Scholes Model.  On the same day an additional 5 million Incentive Stock Options (as defined in Section 422A of the Internal Revenue Code of 1986) (“ISOs”) were issued to the Chief Executive Officer at an exercise price of $.0053.  The ISOs were valued at $23,989.   Assumptions in the model used in both issuances: historical volatility of 313.78%; life of 5 years; and a risk free rate of 1.7%.
 
NOTE 6 – RELATED PARTIES
 
Benny Powell was an officer and director of both parties to the merger.  See Note 1.  Mr. Powell continues as the Company’s Chief Executive Officer and a director post-merger.
 
The Company purchases print materials through Active Media Publishing, Inc. (“AMPI”), an entity wholly owned by Mr. Powell.  AMPI has certain arrangements with overseas printing companies, whereby the printing is facilitated to the Company.  The Company’s agreement with AMPI states processing is at near cost prices on a non-exclusive basis.  During the nine month periods ending May 31, 2014, the Company purchased print media in the amount of $109,614.
 
Keenspot, a general partnership co-founded by Chris Crosby, our Chief Technology Officer and a member of our Board of Directors, has been paid or accrued commissions in the amount of approximately $1,409 during the nine month period ending May 31, 2014.
 
The Company also from time to time have retained Glass House Graphics, a sole proprietorship owned by David Campiti, our Chief Operating Officer and a member of the Board, to provide creative services for us.  The Company paid an aggregate of $14,435 to Glass House Graphics during the nine month period ended May 31, 2014.
 
As of December 2013, the Company has retained Chris Crosby, one of the Company’s officers and directors, to also serve as web editor for the Company’s webcomics.  Mr. Crosby will be compensated for his web editing services, approximately $1,500 per month, which the Company believes to be substantially less than the compensation the Company would pay for an independent third party to provide such services. The Company has paid an aggregate of $11,900 to Mr. Crosby during the nine month period ended May 31, 2014.
 
The Company does not own or lease property or lease office space.  The officers of the Company provide office and storage space to the Company at no charge through their other ventures. The fair value of the office and storage is considered immaterial.
 
The Company does not have employment contracts with its key employees, including the controlling stockholder who is an officer of the Company, although it has independent contractor agreements with its other officers.
 
The amounts and terms of the above transactions may not necessarily be indicative of the amounts and terms that would have been incurred had comparable transactions been entered into with independent third parties.

 
11

 
 
NOTE 7 – BUSINESS SEGMENTS
 
The Company generates revenues from three service offerings: Advertising, Book publishing and Creative. The Company’s management measures its performance by revenue lines and does not allocate its selling, general and administrative expenses to each revenue offering. A summary of the lines of revenue are as follows, for the nine months ending May 31, 2014:
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
May 31,
   
May 31,
 
   
2014
   
2013
   
2014
   
2013
 
Revenues
                       
Advertising
    932       2,216       3,254       4,838  
Book Publishing
    5,525       70,761       13,827       209,416  
Creative
    -       57,148       -       81,399  
     TOTAL
    6,457       130,125       17,081       295,653  
                                 
Cost of sales
                               
Advertising
    932       3,861       3,312       7,283  
Book Publishing
    5,525       18,424       6,707       91,110  
Creative
    -       3,580       -       8,380  
     TOTAL
    6,457       25,865       10,019       106,773  
                                 
Gross Margin
                               
Advertising
    -       (1,645 )     (58 )     (2,445 )
Book Publishing
    -       52,337       7,120       118,306  
Creative
    -       53,568       -       73,019  
     TOTAL
    -       104,260       7,062       188,880  
 
NOTE 8 – COMMITMENTS AND CONTINGENCIES
 
Some of the officers and directors of the Company are involved in other business activities and may, in the future, become involved in other business opportunities that become available.  They may face a conflict in selecting between the Company and other business interests.  The Company has not formulated a policy for the resolution of such conflicts.  Additionally, regarding this concern, the Company does not have employment agreements with its key officers and directors.
 
On May 13, 2013, George Sharp (“Plaintiff”) filed a Complaint in San Diego Superior Court, Central District, Case No. 37-2013-00048310-CU-MC-CTL, against 14 companies, including us (collectively, “Defendants”).  We were served with the Complaint on May 23, 2013.  The Complaint alleges that the Plaintiff received unsolicited promotional emails being sent by Defendant, Victory Mark Corp. Ltd., discussing the other 13 corporate Defendants, including us.  The Plaintiff is seeking liquidated damages in the amount of $1,000 for each email he received for a total of $1,204,000 collectively for all Defendants.  We have responded to discovery propounded by the Plaintiff and are awaiting Plaintiff’s response to our discovery request.
 
We are not currently a party to, nor are any of our property currently the subject of, any other material legal proceeding.  None of our directors, officers, or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
 
In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions.  The litigation process is inherently uncertain and it is possible that the resolution of such matters could have a material adverse effect upon our financial condition and/or results of operations.
 
 
12

 
 
NOTE 9 – SUBSEQUENT EVENTS
 
Subsequent to May 31, 2014, we have issued shares of common stock as follows:
 
·  
On June 4, 2014, we issued 54,685,981 shares of common stock to LG Capital Funding, LLC to convert $32,811.59 in principal and interest due under the 9% Convertible Redeemable Note dated October 2, 2013 (the "2013 LG Note") filed as Exhibit 4.8 to our Annual Report on Form 10-K filed with the SEC on December 5, 2013. The issuance was made pursuant to a May 27, 2014 notice of conversion and fully paid off the 2013 LG Note.
 
·  
On June 6, 2014, we issued 38,197,717 shares of common stock to Iconic Holdings, LLC to convert $22,918.63 of principal and interest due under the 9.9% Secured Convertible Promissory Note dated April 15, 2013 filed as Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on September 20, 2013. The issuance was made pursuant to a June 3, 2014 notice of conversion.
 
·  
On June 13, 2014, we issued 30,000,000 to JMJ Financial to convert $15,000 of partial principal and interest due under the Promissory Note filed as Exhibit 4.13 to our Amended Annual Report on Form 10-K/A filed with the SEC on February 20, 2014.The issuance was made pursuant to a June 10, 2014 notice of conversion.
 
·  
On July 10, 2014, we issued 50,000,000 to JMJ Financial to convert $22,500 of partial principal and interest due under the Promissory Note filed as Exhibit 4.13 to our Amended Annual Report on Form 10-K/A filed with the SEC on February 20, 2014. The issuance was made pursuant to a July 8, 2014 notice of conversion.
 
·  
On July 10, 2014, we issued 86,644,000 shares of common stock to WHC Capital LLC to convert $42,888.78 in principal and interest due under the 12% Secured Convertible Debenture filed as Exhibit 4.6 to our Annual Report on Form 10-K filed with the SEC on December 5, 2013. The issuance was made pursuant to a June 18, 2014 notice of conversion.
 
·  
On July 11, 2014, we issued 11,111,698 shares of common stock to GEL Properties, LLC to convert $12,445.12 in principal and interest due under 6% Convertible Redeemable Secured Notes in the form filed as Exhibit 4.12 to our Annual Report on Form 10-K filed with the SEC on February 20, 2014. The issuance was made pursuant to a July 7, 2014 notice of conversion.
 
Subsequent to May 31, 2014, we have entered into the following convertible debt arrangements:
 
On June 10, 2014, we issued a $50,000 12% Convertible Note (the "JSJ Note") to JSJ. The JSJ Note is due and payable on December 30, 2014 at a premium of 150% of the principal amount upon approval and acceptance by JSJ Investments; provided, however, that the principal balance of the note is payable on demand. If we fail to repay the JSJ Note on demand, a default interest rate of 12% shall also apply from such date. We may not prepay this Note.  The JSJ Note is convertible into shares of our common stock at a conversion price equal to the lower of 55% of the average of the three lowest trading prices in (i) the 20 trading days prior to the date of conversion; or (ii) the ten trading days prior to the execution of the JSJ Note. If we do not issue shares to JSJ within three business days after receipt of a conversion notice, we will be required to issue an additional 25% shares of the shares in the conversion notice per day beginning on the fourth day following our receipt of a conversion notice. This conversion price is subject to adjustment if we issue any securities convertible into or exercisable for common stock where the aggregate price of purchase and exercise per share is lower than the then-existing conversion price.
 
On July 11, 2014, we issued another $50,000 12% Convertible Note to JSJ (together with the June 10, 2014 12% Convertible Note, the “JSJ Notes”) with a maturity date of January 11, 2015.  The JSJ Notes are identical in all respects other than the stated maturity date.  
 
 
13

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
 
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes “forward-looking statements.”  All statements, other than statements of historical facts, included in this Quarterly Report which address activities, events or developments which we expect, believe or anticipate will or may occur in the future are forward-looking statements.  The word “believes,” “intends,” “expects,” “anticipates,” “projects,” “estimates,” “predicts” and similar expressions are also intended to identify forward-looking statements.  Consequently, all of the forward-looking statements made in this Quarterly Report are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences or effects on our business operations.  We assume no obligation to update publicly, except as required by law, any such forward-looking statements, whether as a result of new information, future events or otherwise.
 
CRITICAL ACCOUNTING POLICIES
 
There have been no material changes in our critical accounting policies from those reported in our Amended Annual Report on Form 10-K/A for our fiscal year ended August 31, 2013, filed with the SEC on February 20, 2014 (our “Fiscal 2013 10-K”).  For more information on our critical accounting policies, see Part II, Item 7 of our Fiscal 2013 10-K.
 
RESULTS OF OPERATIONS
 
The Three and Nine Months Ended May 31, 2014 Compared to the Three and Nine Months Ended May 31, 2013
 
Revenues.   During the three and nine months ended May 31, 2014, revenues were $6,457 and $17,081, an decrease of $123,668 and $278,572 from $130,125 and $295,653 for the three and nine months ended May 31, 2013.  The decrease in revenues was a result of large order in 2013.  During the current year our focus has been on negotiations with large distribution and retail channels in order to expand the overall market for our products, the continuing development of our products and penetration into our market.
 
Cost of Sales .  During the three and nine months ended May 31, 2014, we incurred cost of sales of $932 and $10,019 compared to $25,865 and $106,773 incurred during the three and nine months ended May 31, 2013, a decrease of $24,933 and $96,754.  Cost of sales decreased due to decreased revenue.
 
Gross Profits .  Gross profit decreased from $104,260 and $188,880 during the three and nine months ended May 31, 2013 to $5,525 and $7,062 during the three and nine months ended May 31, 2014.  The decrease of $98,735 and $181,818 was largely due to decreased revenues and the continued development of the market for our products.

 
14

 

Operating Expenses .  During the three and nine months ended May 31, 2014, we incurred selling, general and administrative expenses of $489,019 and $769,548 compared to $69,929 and $124,150 incurred during the three and nine months ended May 31, 2013 (an increase of $419,090 and $645,398 or 520%).  Selling, general and administrative expenses include corporate overhead, financial, and administrative services, marketing and professional costs.  Increased expenses for the three and nine month periods ending May 31, 2014 were for marketing, professional fees and payroll.  Additionally, the Company incurred costs, in the amount of $196,303, for stock based compensation.
 
Income.   Our net income for the three and nine months ended May 31, 2014 was a net losses of $5,090,327 and $6,533,571 compared to a net profits of $34,331 and $64,730 during the three and nine months ended May 31, 2013, an increase loss of $5,124,658 and $6,598,301.  The decrease in net income is primarily attributable to the method of financing, which create charges to other expense items, such as finance costs (interest), derivative charges and losses for the fair market value of our stock, which is in excess of the settled debts.
 
Liquidity and Capital Resources.
 
As of May 31, 2014, we had cash or cash equivalents of $44,865, which is the only amount available to us for current expenses until such time as we are able to secure additional investment capital.  The bulk of our assets consist of inventory in the amount of $76,845, prepaid expenses of $11,000, computer equipment (net of depreciation) of $22,423, and intellectual property (net of amortization) of $39,261.
 
Cash Flows from Operating Activities.   For the nine months ended May 31, 2014, we had net cash used by operating activities of $502,625 as compared to net cash provided by operating activities of $1,090 in the nine months ended May 31, 2013.  The change was due primarily from debt service and the recognition of deferred financing costs (interest).
 
Cash Flows from Investing Activities.   There was $14,011 cash used by investing activities for the nine months ended May 31, 2014 and no cash was used for the nine months ended May 31, 2013.
 
Cash Flows from Financing Activities.   For the nine months ended May 31, 2014, we had $546,564 net cash provided by financing activities, primarily from $544,500 received from lending arrangements.  There was no cash provided or used for the nine months ended May 31, 2013.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
 
We are a “smaller reporting company” as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.
 
 
15

 

Item 4. Controls and Procedures.
 
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
 
In connection with the preparation of this quarterly report on Form 10-Q, an evaluation was carried out by our Chief Executive Officer/Chief Financial Officer of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”)) as of May 31, 2014.  Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer/Chief Financial Officer, to allow timely decisions regarding required disclosures.
 
Based on the evaluation, our Chief Executive Officer/Chief Financial Officer concluded disclosure controls and procedures were not effective as of May 31, 2014.
 
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) and Rule 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive and principal financial officers, or persons performing similar functions, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
 
·  
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets;
·  
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
·  
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
 
Our management assessed the effectiveness of our internal control over financial reporting as of May 31, 2014.  In making this assessment, it used the criteria set forth in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  While this assessment is not formally documented, management concluded that, as of May 31, 2014, our internal control over financial reporting is not effective based on those criteria.

 
16

 

Because of its inherent limitations, however, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.  The material weaknesses identified are disclosed below.
 
·  
We do not have an audit committee or any other governing body to oversee management.
·  
Documentation of proper accounting procedures is not present and fundamental elements of an effective control environment were not present as of May 31, 2014, including formalized monitoring procedures.
·  
While we have five officers, there is still no segregation of duties with respect to internal controls, no management oversight, and no additional persons reviewing control documentation, and no control documentation is being produced at this time.
 
NO CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
 
As of the end of the period covered by this Quarterly Report, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

 
17

 

PART II
OTHER INFORMATION

Item 1. Legal Proceedings.
 
On May 13, 2013, George Sharp (“Plaintiff”) filed a Complaint in San Diego Superior Court, Central District, Case No. 37-2013-00048310-CU-MC-CTL, against 14 companies, including us (collectively, “Defendants”).  We were served with the Complaint on May 23, 2013.  The Complaint alleges that the Plaintiff received unsolicited promotional emails being sent by Defendant, Victory Mark Corp. Ltd., discussing the other 13 corporate Defendants, including us.  The Plaintiff is seeking liquidated damages in the amount of $1,000 for each email he received for a total of $1,204,000 collectively for all Defendants.   We have responded to discovery propounded by the Plaintiff and are awaiting Plaintiff’s response to our discovery request.
 
We are not currently a party to, nor are any of our property currently the subject of, any other material legal proceeding.  None of our directors, officers, or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
 
In the ordinary course of business, we may be from time to time involved in various pending or threatened legal actions.  The litigation process is inherently uncertain and it is possible that the resolution of such matters could have a material adverse effect upon our financial condition and/or results of operations.
 
Item 1A. Risk Factors.
 
We are a “smaller reporting company” as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information required under this item.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
 
Other than issuances of securities as previously disclosed in our Current Reports on Form 8-K filed on May 9, 2014, May 27, 2014 and July 11, 2014, we have issued no unregistered equity securities except as follows:
 
In May 2014, GEL converted $5,000 of the principal and interest owed to it under 6% Convertible Redeemable Secured Notes in the form filed as Exhibit 4.12 to our Annual Report on Form 10-K filed with the SEC on February 20, 2014 into an aggregate of 50,000,000 shares of our common stock.
 
In May 2014, LG Capital Funding LLC converted $14,818 of the principal and interest owed to it under a 9% Convertible Redeemable note dated October 2, 2013 in substantially the form  filed as Exhibit 4.8 to our Annual  Report on Form 10-K filed with the SEC on December 5, 2013 into 24,696,894 shares of our common stock.

All conversions were performed pursuant to the terms of the underlying convertible debt.
 
 
18

 
 
Stock Repurchase Plan
 
On June 25, 2013, we announced that we had authorized a stock repurchase program permitting us to repurchase shares of our common stock over the next six to 12 months.  This stock repurchase program has been terminated in the quarterly period ended November 30, 2013.
 
The 1,785,900 shares repurchased under the stock repurchase program prior to the quarterly period ended May 31, 2014 are in process of being returned to authorized but unissued status.
 
Item 3. Defaults upon Senior Securities.
 
None.
 
Item 4. Mine Safety Disclosures.
 
Not applicable.
 
Item 5. Other Information.
 
UNSECURED CONVERTIBLE NOTES TO JSJ INVESTMENTS, INC. ("JSJ")
 
As previously disclosed on our Current Report on Form 8-K filed with the SEC on July 11, 2014 (the “Prior 8-K”), we issued a $50,000 12% Convertible Note to JSJ on June 10, 2014.  This note is due and payable on December 30, 2014 at a premium of 150% of the principal amount upon approval and acceptance by JSJ, with the principal balance of the note payable on demand, and has a default interest rate of 12% rather than the 10% previously disclosed; provided, however, that the principal balance of the note is payable on demand.  On July 11, 2014, we issued another $50,000 12% Convertible Note to JSJ (together with the June 10, 2014 12% Convertible Note, the “JSJ Notes”) with a maturity date of January 11, 2015.  The JSJ Notes are identical in all respects other than the stated maturity date.  The description below of the JSJ Notes (i) amends the disclosure in the Prior 8-K; (ii) does not purport to be complete; and (iii) is qualified in its entirety by reference to the full text of the copy of the JSJ Note filed as 4.5 hereto, respectively other than with respect to maturity date.
 
The JSJ Notes are due and payable on their stated maturity dates at a premium of 150% of the principal amount upon approval and acceptance by JSJ ,with the principal balance of the note payable on demand. If we fail to repay the JSJ Notes upon demand, a default interest rate of 12% shall also apply from such date. We may not prepay the JSJ Notes.
 
The JSJ Notes are convertible into shares of our common stock at a conversion price equal to the lower of 55% of the average of the three lowest trading prices in (i) the 20 trading days prior to the date of conversion; or (ii) the ten trading days prior to the execution of the respective JSJ Note. If we do not issue shares to JSJ within three business days after receipt of a conversion notice, we will be required to issue an additional 25% shares of the shares in the conversion notice per day beginning on the fourth day following our receipt of a conversion notice. This conversion price is subject to adjustment if we issue any securities convertible into or exercisable for common stock where the aggregate price of purchase and exercise per share is lower than the then-existing conversion price.
 
 
19

 
 
In addition, if the aggregate price per share of any securities we issue that are convertible into or exchangeable for, directly or indirectly, or exercisable for common stock
 
The JSJ Notes were issued to JSJ pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act of 1933 and regulations promulgated thereunder. We believe that JSJ is an accredited investor and had adequate information about us as well as the opportunity to ask questions and receive responses from our management.
 
CONVERSION OF DEBT
 
The conversions disclosed in “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds” are incorporated herein by this reference.
 
Item 6. Exhibits.
 
Exhibit No.
 
Description
     
4.1
 
8% Convertible Redeemable Note dated April 28, 2014 between the Registrant and GEL Properties, LLC, which is incorporated herein by reference to Exhibit 4.1 to our Current Report on Form 8-K filed with the SEC on July 11, 2014
     
4.2
 
Securities Purchase Agreement dated May 30, 2014 between the Registrant and LG Capital Funding, LLC, which is incorporated herein by reference to Exhibit 4.2 to our Current Report on Form 8-K filed with the SEC on July 11, 2014
     
4.3
 
9% Convertible Note dated May 30, 2014 between the Registrant and LG Capital Funding, LLC (first LG Note), which is incorporated herein by reference to Exhibit 4.3 to our Current Report on Form 8-K filed with the SEC on July 11, 2014
     
4.4
 
9% Convertible Note dated May 30, 2014 between the Registrant and LG Capital Funding, LLC (second LG Note), which is incorporated herein by reference to Exhibit 4.4 to our Current Report on Form 8-K filed with the SEC on July 11, 2014
     
4.5
 
12% Convertible Note dated June 10, 2014 between the Registrant and JSJ Investments, Inc., which is incorporated herein by reference to Exhibit 4.5 to our Current Report on Form 8-K filed with the SEC on July 11, 2014
     
10.1
 
Promotion Agreement between the Registrant and Toys "R" Us - Delaware, Inc. dated as of June 16, 2014, which is incorporated herein by reference to Exhibit 99.1 to our Current Report on Form 8-K filed with the SEC on July 11, 2014
     
10.2
 
Form of Collateralized Secured Promissory Note between GEL Properties, LLC and the Registrant dated April 28, 2014, which is incorporated herein by reference to Exhibit 99.1 to our Current Report on Form 8-K filed with the SEC on July 11, 2014
     
10.3
 
Collateralized Secured Promissory Note between LG Capital Funding, LLC and the Registrant May 30, 2014, which is incorporated herein by reference to Exhibit 99.2 to our Current Report on Form 8-K filed with the SEC on July 11, 2014
     
31.1
 
Certification by Principal Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification by Principal Financial and Accounting Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32
 
Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
     
101
 
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2014 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes.
 

 
20

 

SIGNATURES
 
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
    RED GIANT ENTERTAINMENT, INC.    
   
   
Date: July 21, 2014
By:
/s/ Benny R. Powell
 
   
Benny R. Powell
 
   
Chief Executive Officer & Principal Executive Officer, Chief Financial Officer
& Principal Financial Officer
 


 
21

 
 
Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934,
RULES 13a-14(a) AND 15d-14(a)
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Benny R. Powell, certify that:

1.  
I have reviewed this Quarterly Report on Form 10-Q for the period ended May 31, 2014 of Red Giant Entertainment, Inc. (the “registrant”).

2.  
Based upon my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3.  
Based upon my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4.  
As the registrant’s sole certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.  
Designed such disclosure control and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.  
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions):

a.  
All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  July 21, 2014
 
 
/s/ Benny R. Powell                                           
Benny R. Powell,
CEO
(Principal Executive Officer)

 
 
 

 
Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO THE SECURITIES EXCHANGE ACT OF 1934,
RULES 13a-14(a) AND 15d-14(a)
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Benny R. Powell, certify that:

1.  
I have reviewed this Quarterly Report on Form 10-Q for the period ended May 31, 2014 of Red Giant Entertainment, Inc. (the “registrant”)

2.  
Based upon my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3.  
Based upon my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4.  
As the registrant’s sole certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.  
Designed such disclosure control and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.  
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.  
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.  
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

5.  
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrants’ board of directors (or persons performing the equivalent functions):

a.  
All significant deficiencies and material weakness in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.  
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: Date: July 21, 2014
 
 
/s/ Benny R. Powell                                           
Benny R. Powell,
CFO
(Principal Financial Officer)

 
 
 

 
Exhibit 32


CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Red Giant Entertainment, Inc. (the “Company”) on Form 10-Q for the period ending May 31, 2014 as filed with the Securities and Exchange Commission on the date hereof, the undersigned, Benny R. Powell, CEO, President, and Chief Financial Officer, of the Company, certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

 
1.
The report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 
2.
The information contained in the report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: July 21, 2014
 
 
/s/ Benny R. Powell                                                      
Benny R. Powell,
CEO, President, Chief Financial Officer
(Principal Executive and Financial Officer)

This certification accompanies the Report pursuant to Rule 13a-14(b) or Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that section. This certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.