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POW! ENTERTAINMENT, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

May 14, 2014

FORWARD-LOOKING STATEMENTS

Some of the statements in the Form 10-Q are forward-looking statements about what may happen in the future. Forward-looking statements include statements regarding our current beliefs, goals, and expectations about matters such as our expected financial position and operating results, our business strategy, and our financing plans. The forward-looking statements in the Form 10-Q are not based on historical facts, but rather reflect the current expectations of our management concerning future results and events. The forward-looking statements generally can be identified by the use of terms such as "believe," "expect," "anticipate," "intend," "plan," "foresee," "likely" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals are or may be forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be different from any future results, performance and achievements expressed or implied by these statements. We cannot guarantee that our forward-looking statements will turn out to be correct or that our beliefs and goals will not change. Our actual results could be very different from and worse than our expectations for various reasons. You should review carefully all information, including the discussion of risk factors under "Item 1A: Risk Factors" and "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Form 10-K for the year ended December 31, 2013. Any forward-looking statements in the Form 10-Q are made only as of the date hereof and, except as may be required by law, we do not have any obligation to publicly update any forward-looking statements contained in this Form 10-Q to reflect subsequent events or circumstances.

11 Overview



The Company is a multimedia development and licensing company that creates and licenses animated and live-action fantasy and superhero entertainment content and merchandise, leveraging the creative output and branded image of Stan Lee. The Company develops originally created franchises for new media such as mobile, on-line, and videogames, where content is currently in high demand, and for traditional entertainment media such as feature length films in both live action and animation, DVD, television programming, merchandising and related ancillary markets. All of the Company's intellectual property, which may include characters and stories, is vertically integrated in that each property is developed into as many products as possible, to create a branded franchise to accelerate global identity from the synergy created across various media.

Currently, the Company plans to focus on:

· creating project concepts, primarily in the form of story treatments,

· identifying select partners willing to participate in, and/or finance, the

development of the Company's projects,

· identifying talented and suitable writers to write scripts for the Company's

projects, and

· negotiating agreements for the production of the projects ( i.e., the filming

of a movie or television series, the creation of the video game, etc.). Projects in Development



The Company begins with story ideas from Stan Lee and presents the ideas to Disney pursuant to the "first look" contract (See Transactions with Affiliates of The Walt Disney Company), then third parties (such as writers, directors, producers or studios) to develop the project at the third party's expense. The Company considers a project to be "in development" once we have packaged the project and handed the project off to a third party. At that point, the project has left the control of the Company and is in the purview of the third party. Since the Company does not control the process once it is in the hands of others it is unable to indicate with much, if any, certainty when that project will be produced or the cost that such other party may incur to produce it. We currently have over 20 projects "in development." A majority of projects "in development" are never produced, or are produced only after lengthy delays.

We believe that the odds are against the typical project "in development" being produced because there are a very large number of people who come up with ideas for movies, television shows, and other forms of entertainment, but only a limited number of entities with the financial and personnel resources required to produce and distribute these projects. However, we believe that several factors improve the odds of the Company's projects being produced and, if produced being successful.

· First, Stan Lee's has co-created a large number of very successful characters

and projects.

· Second, through Stan Lee, we have established relationships with a variety of

well-known writers, directors and producers.

· Third, Stan Lee's natural inclination and focus are on superheroes, action

characters and other characters that have potential to become "franchises" (i.e. that lend themselves to sequels, to licensing to other media, to merchandising and to other ancillary opportunities). ,



Transactions with Affiliates of The Walt Disney Company

Silver Creek Pictures, Inc. ("Silver Creek"), an affiliate of The Walt Disney Company ("Disney"), entered into an agreement with the Company in 2006 and subsequently amended (the "Silver Creek Agreement") pursuant to which, among other things, the Company provides Silver Creek with a "first look" at all of the Company's creative intellectual property and the right to acquire any such properties, in Silver Creek's discretion under prescribed terms, and Silver Creek compensates the Company for all properties that are developed by Silver Creek into revenue producing works pursuant to complex terms, typical in the film and media industry.

The Silver Creek Agreement provides for Silver Creek to pay the Company overhead allowance amounts equal to $700,000 per annum from 2010 through 2014, and an additional $550,000 per annum advance against certain future payments due from Silver Creek. Silver Creek is entitled to recoup the $550,000 annual payments from proceeds of Company projects.

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In addition to the foregoing $1,250,000 in annual payments, Silver Creek has agreed to pay us $1,250,000 in annual consideration for our lending Stan Lee's services to consult on the exploitation of the assets of Marvel Entertainment, which was acquired by Disney in late 2009. The payments of $1,250,000 per year relating to Stan Lee's consulting services cease in the event of, and from the time of, Stan Lee's inability to perform such services due to disability or other incapacitation.

Furthermore, any properties that Silver Creek rejects or accepts and subsequently abandons may be offered by the Company elsewhere subject to participation by Silver Creek. Depending on the nature of the project so offered to a third party and the time when such project was originally offered to Silver Creek, Silver Creek is entitled to either up to $100,000 per project, or the assignment of 50% or 25% of the Company's compensation from the third-party producer.

At present, in a typical deal for feature films, we believe we would receive an executive producer fee ranging between $450,000 and $750,000 per feature film project produced, plus a share of potential "back-end" revenues or profits, as well as a share of licensing and merchandising revenues. Although an amount in this range is payable to the Company by Silver Creek for any feature films produced, such amount would be subject to offsets to permit Silver Creek to recoup a portion of the advances and guaranteed payments that it is and has been paying the Company on a monthly basis.

The Silver Creek Agreement, including all amendments, are exhibits to the Form 10 filed with the Securities and Exchange Commission on December 10, 2010 and the foregoing summary is subject to the actual terms provided therein.

Additionally, Catalyst Investments, LLC ("Catalyst Investments"), another Disney affiliate, purchased on December 31, 2009 ten percent of the then-outstanding shares of common stock of the Company for $2,500,000 (the "Catalyst Investment").

Going Concern



The Silver Creek Agreement as described above in Transactions with Affiliates of the Walt Disney Company expires in December 2014. There is no assurance that the agreement will be extended or if extended what the terms of such extension would provide. The Company has sustained recurring losses in prior years. The current combined cash and marketable securities will sustain operations for only a short period of time. With the absence of revenue streams from the Silver Creek Agreement, these conditions raise substantial doubt about the Company's ability to continue as a going concern.

The Company is currently exploring various other sources of revenues, but there can be no assurances that we will be successful in finding other revenue streams sufficient to support our operational requirements and we may need to scale back operations, defer executive salaries and reduce staff members.

Critical Accounting Policies and Estimates

Our Management's Discussion and Analysis of Financial Condition and Results of Operations section discusses our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, accrued expenses, financing operations, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the appropriate carrying value of certain assets and liabilities which are not readily apparent from other sources.

We have identified the first tier of estimates and assumptions as significant areas of estimation and assumptions to be the valuation of derivatives liabilities from the utilization of the Black-Scholes Pricing Model, which has inherent volatility that may greatly differ from the actual results. The second tier of estimation consists of stock-based compensation, the allowance for doubtful accounts and the net deferred income tax asset valuation allowance. While we deem the latter estimates to be significant, their infrequent occurrence in our operations are considered secondary compared to the first tier.

13 Results of Operations



We believe that, due to the complex nature and long term cycle of our business operations, period-to-period comparisons of our operating results are not necessarily meaningful and should not be relied on as an indication of future performance. However, it is still important that you review the audited financial statements filed on the Form 10-K for the year ended December 31, 2013 and the related notes in addition to thoroughly reading our current plan of operations.

For Three Months Ended March 31, 2014 and 2013



The Company's revenues for the three months ended March 31, 2014 increased by $68,741 or 14.1% compared to the three months ended March 31, 2013.

For the three months ended March 31, 2014, loss from operations was $79,835 compared to loss from operations of $215,515 for the three months ended March 31, 2013.

Net loss for the three months ended March 31, 2014 includes the write-off of $95,268 for expenses incurred on behalf of SLPC after a settlement with the other equity owner on March 31, 2014.

Total operating costs and expenses for the three months ended March 31, 2014 decreased by $66,939 compared to the three months ended March 31, 2013. The decrease in total general and administrative expenses was primarily attributable to and was also offset by the following:

· Professional expenses decreased by $37,983 in legal expenses for review of

various matters during the three months ended March 31, 2013;



· Decrease in other general and administrative by $15,140 with reduced travel

expenses in the current year; and



· Promotional and marketing decreased by $8,534 mainly from prior year public

relations spending.



Liquidity and Capital Resources

Our current liquidity and capital resources are provided principally through our current agreement with Silver Creek Pictures. We have a deficiency in working capital of $3,570,795 and $3,337,605 as of March 31, 2014 and December 31, 2013, respectively. A reduction in working capital at March 31, 2014 from December 31, 2013 is partly due to decrease in payments of deferred compensation offset by increases in advances payable from Silver Creek. As of March 31, 2014 and December 31, 2013 cumulative advances received from Silver Creek were $3,784,167 and $3,646,667, respectively. These amounts are recoupable by Silver Creek solely from any fixed and contingent compensation related to future developments, including box office bonuses and merchandising royalties.

If Silver Creek stops paying installments of the $1,250,000 per annum that it pays for Stan Lee's consulting services paid to the Company as part of the $2,500,000 obligation per annum as a result of any future death or disability of Stan Lee, the Company believes that revenues from various projects that it has "in development" with other parties or that may shortly go into development with other parties will make up all or a portion of the lost revenue. To the extent that it does not, and to the extent that the Company is unable to raise funds from investments to cover any shortfall, the Company will have to reduce its expenses, as it has done in the past, by such approaches as deferring portions of its executive officer's salaries and reducing staff.

The Silver Creek agreement expires at the end of 2014 and no assurances can be given that the agreement will be extended or if extended what the terms of such extension would provide. The Company is currently exploring various other sources of revenues, but there can be no assurances that we will be successful in finding other revenue streams sufficient to support our current operational requirements.

Deferred compensations to executives totaled $1,577,917 and $1,627,917 as of March 31, 2014 and December 31, 2013, respectively. For the three months ended March 31, 2014, the Company paid down deferred compensation totaling $50,000.

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Off Balance Sheet Arrangements

We are not party to any material off-balance sheet financing arrangements.


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Source: Edgar Glimpses


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