GNB Corporation



 

 

 

 

 

 

 

 

 

ArtCraft
Entertainment, Inc.

A Delaware Corporation

 

Financial
Statements (Unaudited)

December
31, 2016 and 2015



 

 

 

 

ARTCRAFT ENTERTAINMENT, INC.

TABLE OF CONTENTS

Page

FINANCIAL
STATEMENTS
(UNAUDITED) AS OF DECEMBER 31, 2016 and
2015

  AND FOR THE YEARS THEN ENDED:

 

   Balance Sheets                                                                                                                                1-2

   Statements of Operations                                                                                                                 3

   Statements of Changes
in Stockholders’
Equity (Deficiency)                                                          4

   Statements of Cash
Flows                                                                                                               
5

   Notes to Financial
Statements                                                                                                     
614



 



























 

 





 





 







NOTE 1: NATURE
OF OPERATIONS

 

ArtCraft
Entertainment, Inc. (the “Company”), is a corporation organized May 20, 2013
under the laws of Delaware.  The Company is
a developer and publisher of massive multiplayer online role playing games.

 

As of December 31,
2016, the Company has not yet commenced planned principal operations nor
generated significant revenue.  The
Company’s activities since inception have consisted of formation activities, product
development, and efforts to raise additional capital.  The Company is dependent upon additional
capital resources for the commencement of its planned principal operations and
is subject to significant risks and uncertainties; including failing to secure
additional funding to operationalize the Company’s planned operations.

 

NOTE
2:  GOING CONCERN

 

The accompanying financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business.  The
Company is a business that has not commenced
planned principal operations, has not generated sales revenues or profits since
inception, and has sustained net losses of $3,519,806 and $3,488,790 for the years
ended December 31, 2016 and 2015, respectively. 
The Company’s ability to continue as a going
concern for the next twelve months is dependent
upon its ability to generate sufficient cash flows from operations to meet its
obligations, which it has not been able to accomplish to date, and/or to obtain
additional capital financing. 
No assurance can be given that the Company
will be successful in these efforts. 
These factors, among others, raise substantial doubt about the ability
of the Company to continue as a going concern for a reasonable period of time.  
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.

 

NOTE 3: SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

The
accounting and reporting policies of the Company conform to accounting
principles generally accepted in the United States of America (GAAP).

 

The Company adopted the calendar year as
its basis of reporting.

 

Use of Estimates

The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those
estimates.

 



Cash Equivalents and
Concentration of Cash Balance

The Company considers all highly liquid securities
with an original maturity of less than three months to be cash
equivalents.  The Company’s cash and cash
equivalents in bank deposit accounts, at times, may exceed federally insured
limits.

 

Accounts Receivable and
Allowance for Doubtful Accounts

Accounts receivable are carried at their estimated collectible
amounts and are periodically evaluated for collectability based on past credit
history with clients and other factors. Provisions for losses on accounts
receivable are determined on the basis of loss experience, known and inherent
risk in the account balance and current economic conditions.  There
are no accounts receivable or associated allowances for doubtful accounts
established as of December 31, 2016 or 2015.

 

Capital Assets

Property and equipment are recorded at
cost.  Depreciation is recorded for property
and equipment using the straight-line method over the estimated useful lives of
assets.  The Company reviews the
recoverability of all long-lived assets, including the related useful lives,
whenever events or changes in circumstances indicate that the carrying amount
of a long-lived asset might not be recoverable. 
Capital assets as of December 31, 2016 and 2015 are as follows:

 



 

Software Development Costs

The Company accounts for software development costs in accordance
with FASB 985-20, Costs of Computer Software to be Sold, Leased, or Marketed.  Costs incurred during the period of planning
and development, and prior to determining technological feasibility, are expensed
to operations as research and development in the period incurred.  Technological feasibility is generally
determined once substantially all product development and testing has been
completed, including development of a working model.  The Company capitalizes certain costs in the
development of its proprietary games for the period after technological
feasibility was determined and prior to marketing and initial sales. Costs
incurred after determination of readiness for market are expensed to operations
in the period incurred.  

 

The Company
expensed $3,245,305 and $3,047,073 of costs related to the development of its
game software during the years ended December 31, 2016 and 2015, respectively,
to research and development, as the technological feasibility of the game was
not achieved as of December 31, 2016 or 2015.



Fair Value of Financial
Instruments

Financial Accounting Standards
Board (“FASB”) guidance specifies a hierarchy of valuation techniques based on
whether the inputs to those valuation techniques are observable or unobservable.
Observable inputs reflect market data obtained from independent sources, while
unobservable inputs reflect market assumptions. The hierarchy gives the highest
priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1 measurement) and the lowest priority to unobservable
inputs (Level 3 measurement).  The three
levels of the fair value hierarchy are as follows:

 

Level 1 -
Unadjusted quoted prices in active markets for identical assets or liabilities
that the reporting entity has the ability to access at the measurement date.
Level 1 primarily consists of financial instruments whose value is based on
quoted market prices such as exchange-traded instruments and listed equities.

 

Level 2 - Inputs
other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly (e.g., quoted prices of
similar assets or liabilities in active markets, or quoted prices for identical
or similar assets or liabilities in markets that are not active).

 

Level 3 -
Unobservable inputs for the asset or liability. Financial instruments are
considered Level 3 when their fair values are determined using pricing models,
discounted cash flows or similar techniques and at least one significant model
assumption or input is unobservable.

 

 

The carrying amounts reported
in the balance sheets approximate their fair value.

 

Revenue Recognition

The Company recognizes revenue
when: (1) persuasive evidence exists of an arrangement with the customer
reflecting the terms and conditions under which products or services will be
provided; (2) delivery has occurred or services have been provided;
(3) the fee is fixed or determinable; and (4) collection is
reasonably assured. No revenues have been earned or recognized as of December
31, 2016 or 2015. 

 

The Company conducted a
Kickstarter campaign to pre-sell the product it is developing, and continued to
pre-sell the product on its own website after completion of the Kickstarter
campaign.  No pre-sale orders have been fulfilled
as of December 31, 2016, so all proceeds have been recorded to deferred revenues
as of December 31, 2016, in the amount of $4,031,328.  These deferred revenues will be recognized
upon completion of the revenue recognition process, which includes delivery of
the product.

 

Income Taxes

The Company uses the liability
method of accounting for income taxes as set forth in FASB ASC 740, Income Taxes.  Under the
liability method, deferred taxes are determined based on the temporary
differences between the financial statement and tax basis of assets and
liabilities using tax rates expected to be in effect during the years in which
the basis differences reverse.  A valuation allowance is recorded
when it is unlikely that the deferred tax assets will be
realized.  The Company



assesses its income tax positions and
records tax benefits for all years subject to examination based upon its
evaluation of the facts, circumstances and information available at the
reporting date.  In accordance with ASC 740-10, for those tax
positions where there is a greater than 50% likelihood that a tax benefit will
be sustained, the Company’s policy is to record the largest amount of tax
benefit that is more likely than not to be realized upon ultimate settlement
with a taxing authority that has full knowledge of all relevant
information.  For those income tax positions where there is less than
50% likelihood that a tax benefit will be sustained, no tax benefit will be
recognized in the financial statements. 
The Company has determined that there are no material uncertain tax
positions.

 

The Company converted from a subchapter
S-Corporation to a C-Corporation for tax purposes effective on May 31,
2014.  Accordingly, all earnings and
losses prior to the conversion passed through to the ownership and were not
taxable to the Company.  Therefore, the
Company does not receive the net operating loss carryforward credits for losses
prior to the conversion date.

 

Measurement
of deferred income items is based on enacted tax laws including tax rates, with
the measurement of deferred income tax assets being reduced by available tax
benefits not expected to be realized in the immediate future. As of December
31, 2016 and 2015, the Company had net operating loss carryforwards of $3,184,204
and $1,564,844, respectively. The Company incurs Federal and Texas income taxes
at rates of approximately 34% and 1% of gross margin, respectively, and has used
an effective blended rate of 34.7% to derive a net deferred tax asset of $2,500,903
and $1,313,425 as of December 31, 2016 and 2015, respectively, related to tax-effected
net operating loss carryforwards, non-qualified stock option expense,
book-to-tax accrual differences, deferred revenue recognized as taxable income
in 2016 and 2015, and other items.  Due
to the uncertainty as to the Company’s ability to generate sufficient taxable
income in the future and utilize the net operating loss carryforwards before
they begin to expire in 2034, the Company has recorded a full valuation
allowance to reduce the net deferred tax asset to zero.  Under Section 382 and 383 of the Internal
Revenue Code of 1986, as amended, or the Code, if a corporation undergoes an
"ownership change," the corporation's ability to use its pre-change
net operating loss carryforwards and other pre-change attributes to offset its
post-change income may be limited. In general, an "ownership change"
will occur if there is a cumulative change in our ownership by "5-percent
shareholders" that exceeds 50 percentage points over a rolling three-year
period. Utilization of the Company’s net operating loss carryforwards may be
subject to annual limitations due to ownership changes. Such annual limitations
could result in the expiration of our net operating loss carryforwards before they
are utilized. 

 

The
Company reviews tax positions taken to determine if it is more likely than not
that the position would be sustained upon examination resulting in an uncertain
tax position.  The Company recognizes
interest accrued and penalties related to unrecognized tax benefits in tax
expense. During the years ended December 31, 2016 and 2015, the Company
recognized no interest and penalties.

 

The
Company files U.S. federal and Texas state income tax returns.  All tax periods since inception remain open
to examination by the taxing jurisdictions to which the Company is subject.

 

 

 

 



NOTE 4:  STOCKHOLDERS’
EQUITY (DEFICIENCY)

 

The
Company amended and restated its articles of incorporation in November 2016,
authorizing 20,000,000 shares of $0.0001 par value common stock and 8,504,354
shares of $0.0001 par value preferred stock, designated as 4,304,354 shares of
Series Seed Preferred Stock, 2,000,000 shares of Series Seed-1 Preferred Stock,
586,273 shares designated as Series Seed-2 Preferred Stock, and 1,613,727
shares designated as Series Seed-3 Preferred Stock.

 

Preferred
stockholders have liquidation preferences of a multiple of 1.5 of the purchase
price (as defined in the articles of incorporation) and various other rights
and preferences over common stockholders.

 

Common Stock Issuances

In
May of 2013, the Company issued its founder 7,000,000 shares of common stock at
par value of $0.0001 per share, for total proceeds of $700.  An additional $1,300 was contributed to the
Company by the founder.

 

In
March 2014, the Company issued a total of 3,100,000 shares of common stock to eight
employees in exchange for services to the Company at a price of $0.0001 per
share, providing total proceeds of $310. 
These issuances were under restricted stock purchase agreements which
stipulated repurchase options subject to vesting schedules. One such agreement
stipulated vesting of 800,000 shares upon issuance, and an additional 2,000,000
shares which vest monthly at a rate of 80,000 shares per month, commencing in
March of 2014.  2,560,000 and 1,600,000
shares have vested under this arrangement as of December 31, 2016 and 2015,
respectively.  The remaining seven
restricted stock purchase agreements stipulated vesting of all issued shares (a
total 300,000) upon an initial public offering. 
Unvested shares under these agreements are subject to a repurchase
option upon termination of service with the Company, as defined in the
agreement.  The repurchase price on the
2,800,000 share agreement stipulated repurchase at par value of $0.0001, while
the remaining seven agreements stipulate a repurchase price of the fair value
of the Company at the termination date, as determined by the Board of
Directors.  All shares issued under these
arrangements become fully vested immediately prior to a change in control event,
as defined in the agreements.

 

In
April 2014, two employees exercised restricted stock
purchase right grants into 240,000 shares of common stock at an exercise price
of $0.0001 per share, providing proceeds of $24.

 

In May through June of 2015, two employees exercised stock options
into 83,777 shares of common stock at exercise prices of $0.06-$0.09 per share,
resulting in proceeds of $6,826.  A stock
option was exercised in 2016 for 6,000 shares of common stock, providing
proceeds of $360.

 

As
of December 31, 2016 and 2015, 10,429,777 and 10,423,777 shares of common stock
were issued and outstanding, respectively. 
As of December 31, 2016 and 2015, 10,429,777 and 9,883,777 shares of
common stock were vested and no longer subject to repurchase options, respectively.

 

 

 



Series Seed Preferred Stock Issuances

In
2014, the Company issued 2,445,657 shares of Series Seed Preferred Stock at a
price per share of $0.6133, resulting in proceeds of $1,499,922.  This issuance triggered the conversion of all
outstanding convertible notes payable at the issuance date, resulting in the
issuance of an additional 1,858,697 shares of Series Seed Preferred Stock after
relieving $855,000 of convertible note payable principal.

 

Series Seed-1 Preferred Stock Issuances

In
2015, the Company issued 1,266,088 shares of Series Seed-1 Preferred Stock at a
price per share of $1.0427, resulting in proceeds of $1,320,150.

 

In
2016, the Company issued an additional 733,912 shares of Series Seed-1
Preferred Stock at a price per share of $1.0427, resulting in proceeds of
$765,250.

 

Series Seed-2 Preferred Stock Issuances

In
2016, the Company issued 586,273 shares of Series Seed-2 Preferred Stock at a
price per share of $1.0427, resulting in proceeds of $611,307.

 

Series Seed-3 Preferred Stock Issuances

Subsequently,
in 2017, the Company issued 549,626 shares of Series Seed-3 Preferred Stock for
gross proceeds of $613,342.

 

Stock Plan

In
April 2014, the Company approved its 2014 Stock Incentive Plan (the “Plan”) to
provide employees, officers, non-employee directors, contractors, and
consultants to the Company with stock based awards.  The Company has reserved 2,700,000 shares of
common stock for issuance under the Plan. 

 

NOTE 5: 
SHARE BASED PAYMENTS

 

The Company has adopted the
2014 Stock Incentive Plan, as amended and restated (the “Plan”), which provides
for the grant of shares of stock options, stock appreciation rights, and stock
awards (performance shares) to employees, non-employee directors, and
non-employee consultants.  Under the
Plan, the number of shares available to be granted was 2,700,000 and 1,900,000
shares as of December 31, 2016 and 2015, respectively.  The options generally have a term of ten
years.  The amounts granted each calendar
year to an employee or non-employee is limited depending on the type of award.  Shares available for grant under the Plan
amounted to 1,195,023 and 728,000 as of December 31, 2016 and 2015,
respectively.  Vesting generally occurs
over a period of immediately to four years. 

 

During 2014, the Company
issued 240,000 restricted stock purchase right grants under the Plan, which
vested upon issuance and were exercised immediately at the $0.0001 per share
exercise price, resulting in the issuance of 240,000 shares of common
stock.  These issuances are not
considered in the following tables, which only contemplate stock option grants.

 



A summary of information
related to stock options for the years ended December 31, 2016 and 2015 is as
follows:



 

The Company measures employee
stock-based awards at grant-date fair value and recognizes employee
compensation expense on a straight-line basis over the vesting period of the
award.    Determining the appropriate fair value of
stock-based awards requires the input of subjective assumptions, including the
fair value of the Company’s common stock, and for stock options, the expected
life of the option, and expected stock price volatility. The Company used the
Black-Scholes option pricing model to value its stock option awards. The
assumptions used in calculating the fair value of stock-based awards represent
management’s best estimates and involve inherent uncertainties and the
application of management’s judgment. As a result, if factors change and
management uses different assumptions, stock-based compensation expense could
be materially different for future awards.

 

The expected life of stock
options was estimated using the “simplified method,” which is the midpoint
between the vesting start date and the end of the contractual term, as the
Company has limited historical information to develop reasonable expectations
about future exercise patterns and employment duration for its stock options
grants.  For stock price volatility, the
Company uses comparable public companies as a basis for its expected volatility
to calculate the fair value of options grants. The risk-free interest rate is
based on U.S. Treasury notes with a term approximating the expected life of the
option.  The estimation of the number of
stock awards that will ultimately vest requires judgment, and to the extent
actual results or updated estimates differ from the Company’s current estimates,
such amounts are recognized as an adjustment in the period in which estimates
are revised.  The assumptions utilized
for option grants during the years ended December 31, 2016 and 2015 are as
follows:

 





 

Stock-based compensation
expense of $32,322 and $11,188 was recognized under FASB ASC 718 for the years
ended December 31, 2016 and 2015, respectively. 
Total unrecognized compensation cost related to non-vested stock option
awards amounted to $40,816 and $39,283 as of December 31, 2016 and 2015,
respectively.

 

NOTE
6:  RELATED PARTIES

 

Officers
of the Company have advanced funds to the Company.  The amounts due to these related parties as
of December 31, 2016 and 2015 amounted to $2,285 and $1,547, respectively.

 

NOTE
7:  LICENSING AGREEMENT

 

In
May 2016, the Company entered into a licensing agreement with a European
publisher (the “Licensee”), providing the Licensee exclusive rights to market,
operate, and commercially exploit the Company’s product in certain languages in
certain countries for an initial term of ten years from the commercial launch
of the product.  Under the agreement
terms, the Company is to receive a non-refundable, non-recoupable license fee
totaling $2,000,000, along with royalties on the Licensee’s net revenues from
the licensed rights.  As of December 31,
2016, $1,150,000 of the license fee was been received.  As the up-front licensing fee is congruent to
the intellectual property rights conveyed in the agreement, following ASC 606-10-55-56,
the Company has determined it appropriate to account for the upfront fee
portion of the licensing fee as a payment on a single performance obligation
over the life of the contract, and therefore has deferred these revenues until
performance of the contractual obligations under the terms of the agreement.

 

NOTE
8:  LEASE COMMITMENTS

 

In October 2015, the Company entered into
a sublease agreement for office space commencing in October 2015 and expiring
May 2016.  Rent obligations under this
sublease agreement were $10,302 per month as long as the sublessor continues to
vacate a portion of the leased space, then $13,226 per month thereafter.  A $13,226 deposit was paid on this lease
agreement. The Company and the lessor terminated the lease in February 2016 and
the deposit was returned.

 

In December of 2015, the Company entered
into a lease agreement for office space to commence March 1, 2016 and continue
for a 39 month term ending May 31, 2019. 
Rent payments escalate annually, ranging from $6,828 to $7,397 per month.  A deposit of $11,532 was paid on this lease
agreement.  Future payment obligations
under this lease agreement are as follows:

 





NOTE 9:  RECENT ACCOUNTING PRONOUNCEMENTS

 

Management
does not believe that any recently issued, but not yet effective, accounting
standards could have a material effect on the accompanying financial
statements. As new accounting pronouncements are issued, we will adopt those
that are applicable under the circumstances.

 

NOTE 10:  SUBSEQUENT EVENTS

 

In
2017, the Company sold 549,626 shares of its Series Seed-3 Preferred Stock for
total proceeds of $613,342.

 

During 2017, the Company issued three
convertible notes payable for a total of $1,100,000 of principal.  The notes bear interest at 2% per annum and
mature on December 31, 2017.  Maturity is
subject to an acceleration clause in the case of a change in control.  The convertible notes become convertible into
preferred stock upon the next qualified equity offering, as defined in the
agreements, of $500,000 or greater, inclusive of the notes.  Therefore, any preferred stock issuance after
the issuance the convertible notes payable will trigger conversion.  The conversion price is the lesser of the
pricing in the triggering equity financing or $0.965175 per share.  The convertible notes payable are also
automatically convertible into the Company’s Series Seed-3 Preferred Stock upon
reaching maturity, if not otherwise converted beforehand, at a price per share
of $0.965175.

 

The Company has evaluated subsequent
events through April 28, 2017, the date the financial statements were available
to be issued.  Based on the evaluation,
no additional material events were identified which require adjustment or
disclosure.

 

 

© 2017 ArtCraft Entertainment, Inc.