Filing identity and reporting period
The supplied filing is Stratus Media Group, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2012, filed November 19, 2012. Although the request metadata names Cervomed Inc., the filing identifies Stratus Media Group, Inc. as the registrant.
Stratus’s businesses include live sports and entertainment events, ProElite mixed-martial-arts events, and the Stratus White credit-card rewards program. The company reported that its operations were on hold because of insufficient working capital; it had no events scheduled and had furloughed employees.
Financial performance and condition
| Metric | Q3 2012 / Sep. 30, 2012 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $143,334 for Q3; $374,542 for nine months | Q3 2011: $250,201; nine months 2011: $250,201 |
| Gross profit (loss) | $142,484 for Q3; $138,739 for nine months | Q3 and nine months 2011: $(3,609) |
| Operating expenses | $3,568,734 for Q3; $8,359,830 for nine months | Q3 2011: $4,136,674; nine months 2011: $7,867,775 |
| Net loss | $(3,464,537) for Q3; $(9,317,865) for nine months | Q3 2011: $(4,335,988); nine months 2011: $(8,195,928) |
| Loss per share | $(0.04) for Q3; $(0.10) for nine months | Q3 2011: $(0.06); nine months 2011: $(0.11) |
| Cash and equivalents | $156,912 | $98,449 at Dec. 31, 2011 |
| Current assets / current liabilities | $733,636 / $9,981,068 | $185,951 / $3,786,217 at Dec. 31, 2011 |
| Notes payable | $3,426,316 | $555,000 at Dec. 31, 2011 |
| Total assets / shareholders’ deficit | $3,944,125 / $(6,036,943) | $3,673,552 / $(112,665) at Dec. 31, 2011 |
For the nine months, operating cash use was $2,812,853, investing cash flow was zero, and financing provided $2,871,316, primarily from notes payable. Cash increased $58,463. The company paid no cash interest during the period, despite recording interest expense.
Changes and notable items
- Nine-month revenue rose 50% year over year, entirely from ProElite. Q3 revenue was lower than the prior-year quarter, which included ProElite live-event and merchandise sales; Q3 2012 revenue was ProElite royalties.
- Nine-month net loss increased by about $1.12 million. Operating expenses rose 6%, with lower general and administrative costs more than offset by higher stock-, option- and warrant-related expense and a $197,500 impairment charge.
- Cash remained very limited while current liabilities increased substantially. Deferred salary reached $1.23 million, accrued interest was $1.12 million, and accrued expenses and other liabilities were $2.58 million.
- The company recorded a $538,515 net receivable from former CEO Paul Feller, including amounts related to company stock-sale proceeds and expenses. Collectability is not established in the supplied text.
- Stratus impaired $197,500 of event assets after deciding not to pursue Beverly Hills Concours, Maui Music Festival and Freedom Bowl. It reported $3.16 million of goodwill and intangible assets remained; management warned that further impairment could eliminate their carrying value.
- Potential dilution is significant: 130.9 million warrants and 7.9 million options were outstanding at September 30, compared with 90.3 million common shares then outstanding. The filing also describes preferred-stock conversion and anti-dilution provisions.
Outlook, risks and contingencies
Management stated that Stratus was pursuing at least $10 million in equity financing to fund operations, settle liabilities, pursue acquisitions and cover selling expenses. There is no assurance financing would be available. The company warned that without additional capital it could not resume events or credit-card operations, meet creditor obligations, or continue as a going concern. It reported negative working capital of $9,247,432 and an accumulated deficit of $51,566,427.
Several notes were in default, including ProElite notes and company notes; the filing describes secured and unsecured borrowings, conversion rights and warrant-related consequences. After quarter-end, the company agreed to a $1 million Series E preferred-stock sale with warrants, and ProElite received a $500,000 secured convertible note. These subsequent transactions do not remove the disclosed liquidity uncertainty.
Three lawsuits described in the filing were reported as resolved by agreement in October 2012, with dismissal anticipated. The company also accrued $300,000 for potential property damage that might not be covered by insurance and $452,041 for rent obligations on vacated facilities.
Management concluded that disclosure controls were ineffective, citing material weaknesses including inadequate segregation of duties, lack of written controls for contracts and commitments, weak accounting-software change controls, and the former CEO’s ability to initiate and approve transfers to a personal account until April 2012. The filing lists risk factors as “not applicable,” notwithstanding its going-concern, liquidity, debt-default and control disclosures.
Key facts for investors to verify
- Confirm the registrant’s identity: this filing is for Stratus Media Group, Inc., not Cervomed Inc.
- Verify whether the company obtained sufficient financing after quarter-end and whether operations resumed.
- Check the status, amounts and security or conversion terms of defaulted notes and other near-term obligations.
- Assess the collectability and resolution of the $538,515 receivable from the former CEO.
- Review the dilution implications of outstanding warrants, options, preferred shares and anti-dilution provisions.
- Confirm final dismissal and financial consequences of the reported lawsuit settlements, and the outcome of the property-damage claim.
- Review subsequent impairment testing and remediation of the disclosed material weaknesses in financial controls.