Filing Overview
Important identification note: The provided filing is for Carolco Pictures, Inc., not Fubotv Inc. It is a Form 10-Q for the six months and three months ended June 30, 2016, signed November 23, 2016. The filing states that the company had not filed all required reports during the preceding 12 months.
Business Context and Reporting Period
Carolco described itself as a film and television production company, including live events and award shows through High Five Entertainment. The filing also discusses a July 2016 acquisition of Recall Studios, a virtual- and augmented-reality content business, which occurred after the reporting date and therefore was not reflected in the June 30, 2016 financial statements.
The company was a smaller reporting company and reported 337,397,856 common shares outstanding as of November 16, 2016. The financial statements were unaudited and prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|---|---|
| Revenue | $7,000 | $400,000 | $29,000 | $402,000 |
| Gross profit | $5,000 | $96,000 | $25,000 | $65,000 |
| Gross margin | 71.4% | 24.0% | 86.2% | 16.2% |
| Operating expenses | $130,000 | $211,000 | $272,000 | $906,000 |
| Loss from operations | $(125,000) | $(115,000) | $(247,000) | $(841,000) |
| Net loss attributable to stockholders | $(1,823,000) | $(236,000) | $(4,349,000) | $(939,000) |
| Basic and diluted loss per share | $(0.01) | $(0.00) | $(0.02) | $(0.02) |
The six-month operating loss margin was approximately $(247,000) / $29,000, or negative 852%, compared with negative 209% in the prior-year period. Results were materially affected by non-cash derivative-liability remeasurement charges.
Balance Sheet and Liquidity
- Cash declined to $7,000 at June 30, 2016 from $48,000 at December 31, 2015.
- Total assets were $279,000, including a $250,000 deposit on a film project paid to a related party.
- Current liabilities were $9.493 million, including an $8.619 million derivative liability.
- Stockholders’ deficit attributable to Carolco was $9.214 million, compared with $5.372 million at December 31, 2015.
- Management reported negative working capital of approximately $9.465 million.
- Net cash used in operating activities was $204,000, compared with $581,000 in the prior-year period.
- Net cash provided by financing activities was $163,000, compared with $916,000 in the prior-year period; the resulting change in cash was $(41,000).
Debt and Other Obligations
- Notes payable totaled $75,000 at June 30, 2016 and were secured by certain assets, bore an average 5% interest rate, and matured in April 2017.
- Convertible notes payable totaled $54,000, and the filing states that these notes were matured and in default.
- Convertible notes payable to a related party totaled $434,000, with accrued related-party interest of $99,000; these notes were also matured and in default at June 30, 2016.
- The company reported an $8.619 million derivative liability, compared with $4.673 million at December 31, 2015.
- During the period, $230.4 million common shares were issued upon conversion of convertible notes, accrued interest, and related-party notes with an aggregate stated value of approximately $100,000.
Material Changes Versus the Prior Comparable Period
- Six-month revenue fell by approximately 93%, from $402,000 to $29,000, which management attributed to reduced production activity during a change in ownership.
- Six-month cost of goods sold declined from $337,000 to $4,000, reflecting the lower production activity and revenue base.
- Operating expenses decreased by approximately 70%, from $906,000 to $272,000, primarily because of lower executive compensation paid in common shares and warrants.
- Six-month net loss attributable to stockholders increased to $4.349 million from $939,000, primarily because of a $4.203 million loss from the change in fair value of derivative liabilities.
- The derivative liability increased by approximately $3.946 million from year-end 2015.
- Common shares outstanding increased from 93.9 million at December 31, 2015 to 324.3 million at June 30, 2016, primarily through debt conversions.
- In June 2016, the company issued 5 million Series A preferred shares and 1 million Series B preferred shares to settle approximately $439,000 of related-party advances and accrued payroll. Series A shares carried 100 votes per share; Series B shares were convertible into two common shares per preferred share.
Guidance, Outlook, Risks, and Unusual Items
- Going concern: Management stated that substantial doubt existed regarding the company’s ability to continue as a going concern because of recurring losses, a $9.214 million stockholders’ deficit, limited cash, operating cash usage, and defaulted convertible notes. Management expected available funds of approximately $120,000 at the report date to support operations through December 31, 2016, but this was dependent on additional financing.
- Financing risk: Management was seeking additional equity financing. No assurance was provided that financing would be available or acceptable, and equity financing could substantially dilute existing shareholders.
- Subsequent financing: In July 2016, the company reported raising approximately $416,000 through the issuance of 487,000 shares of common stock.
- Ownership and strategic changes: David Cohen became controlling shareholder and CEO in June 2016. In July 2016, the company acquired Recall Studios, issued substantial Series A and Series C preferred stock, and entered into new executive employment agreements. The acquisition valuation and purchase-price allocation were not finalized when the filing was prepared.
- Debt restructuring: In July 2016, the maturity dates of the related-party notes owed to Alexander Bafer were extended to August 1, 2017, and certain defaults and default interest were waived through the amendment date.
- Customer concentration: One customer represented 66% of six-month revenue in 2016, compared with 57% in 2015.
- Related-party exposure: The company maintained a $250,000 deposit for a film project paid to an entity managed by former chairman Mario Kassar. The project remained in pre-production as of June 30, 2016.
- Legal matter: Studiocanal S.A. sent a cease-and-desist letter concerning use of certain trademarks. The filing stated that no legal claim had been brought as of the report date.
- Controls: Management concluded that disclosure controls and procedures were ineffective as of June 30, 2016 because of limited resources and personnel. The company relied heavily on management oversight and external legal and accounting professionals.
- No formal guidance: The filing does not provide quantitative revenue, earnings, or cash-flow guidance. Management’s outlook emphasizes raising capital, resuming production, and pursuing entertainment and virtual-reality opportunities.
Investor Verification Checklist
- Verify that the filing belongs to Carolco Pictures, Inc. rather than Fubotv Inc., including the applicable issuer, CIK, ticker, and reporting history.
- Review the company’s ability to obtain financing and reconcile the stated cash runway with cash of only $7,000 at June 30, 2016.
- Assess the enforceability, maturity, default status, and potential dilution from the convertible notes, warrants, and derivative liabilities.
- Examine the valuation, purchase-price allocation, and operating performance of the July 2016 Recall Studios acquisition.
- Review the voting and conversion rights of Series A, Series B, and Series C preferred stock and the resulting control and dilution implications.
- Evaluate the recoverability and related-party terms of the $250,000 film-project deposit.
- Consider the ineffective disclosure controls, late filing indicators, customer concentration, trademark dispute, and substantial doubt regarding going concern.