SEC Form 10-Q Summary
Filing identity: The supplied filing is for Carolco Pictures, Inc., not Fubotv Inc. It covers the quarter and nine months ended September 30, 2015, with comparative periods ended September 30, 2014. The interim financial statements are unaudited.
Business Context and Reporting Period
Carolco describes itself as a feature-film and television production company. Through High Five Entertainment, it produces television programming, including award shows, specials, pilots and live events. The company changed its name from Brick Top Productions, Inc. to Carolco Pictures, Inc. in January 2015. York Productions and York Productions II were inactive; S&G Holdings/High Five Entertainment was majority-owned and consolidated.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $366,169 | $374,235 | $768,529 | $644,887 |
| Gross margin | $80,022 | $161,810 | $145,148 | $259,672 |
| Gross margin percentage | 21.9% | 43.2% | 18.9% | 40.3% |
| Operating expenses | $147,907 | $671,672 | $1,054,099 | $2,746,520 |
| Net loss attributable to shareholders | $(989,376) | $(517,157) | $(1,928,535) | $(2,393,113) |
| Basic and diluted loss per share | $(0.02) | $(0.02) | $(0.03) | $(0.08) |
Revenue was approximately flat in the quarter but increased 19% for the nine-month period, primarily from production services and award programming. Cost of goods sold increased faster than revenue, reducing gross margins substantially. Nine-month compensation expense declined to $427,519 from $2,107,540, largely because the prior-year period included significant share-based compensation.
Q3 results included $1.083 million of related-party interest expense associated with convertible notes issued to the former CEO. This more than offset the benefit from lower operating expenses. The company also recognized a $216,354 quarterly gain and a $228,689 nine-month gain from changes in the fair value of derivative liabilities.
- Cash: $162,699 at September 30, 2015, compared with $160,377 at December 31, 2014.
- Total assets: $878,026, including $319,237 of goodwill and a $250,000 project deposit.
- Total liabilities: $2,238,708, compared with $519,806 at December 31, 2014.
- Working capital: Negative $1,684,086.
- Equity: Total equity deficit of $1,360,682, including a $1,257,012 deficit attributable to Carolco shareholders.
- Debt and related obligations: Current liabilities included $47,258 of notes payable, $48,724 of convertible notes payable, $530,919 of related-party convertible notes, and $1,286,966 of derivative liabilities.
- Operating cash flow: $(738,690) for the nine months, compared with $(107,774) in the prior-year period.
- Investing cash flow: $(252,649), primarily reflecting the $250,000 project investment.
- Financing cash flow: $993,661, from related-party and other borrowings, convertible notes and equity offerings.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased by $123,642, or approximately 19%.
- Q3 revenue declined slightly, while Q3 cost of goods sold increased by approximately $74,000, cutting gross margin by roughly half.
- Nine-month operating expenses fell by approximately $1.692 million, primarily due to reduced stock-based compensation and executive compensation.
- Nine-month net loss attributable to shareholders improved by approximately $465,000, but the Q3 net loss increased by approximately $472,000 because of related-party interest expense.
- Liabilities increased substantially, driven by convertible notes, related-party notes and derivative liabilities.
- Shares outstanding increased to 59,851,625 from 54,239,500 at December 31, 2014. The filing also reported 2,452,600 outstanding warrants and approximately 4.47 million potentially issuable shares related to convertible notes.
- Management reported disclosure controls and procedures were ineffective as of September 30, 2015 because of limited resources and personnel.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantified financial guidance. Its strategy focused on expanding production services, marketing the The Doorman pilot, acquiring film rights and developing projects including Audition. Management stated that future operations depend on generating sufficient revenue and raising additional capital.
The financial statements disclose substantial doubt about the company’s ability to continue as a going concern. The company had recurring losses, an accumulated deficit of $5,945,254, negative working capital and insufficient cash to support daily operations. Management stated that no additional third-party financing was currently available and that there were no commitments from officers or shareholders to provide further financing.
Convertible notes contained variable or discounted conversion features and other provisions treated as derivative liabilities. These instruments generated substantial non-cash interest expense and fair-value volatility. Related-party notes totaling $543,115 in face amount were due October 1, 2015 and were reported as in default effective that date.
In April 2015, the company committed $250,000 to the Audition project and issued 100,000 shares to Chairman Mario Kassar. The company also entered into arrangements providing potential producing fees, acquisition-related payments and other compensation tied to projects introduced by Mr. Kassar.
Subsequent to quarter-end, the controlling shareholder sold 35 million shares. The CEO and president resigned in October 2015, and Sam Lupowitz became president, CEO and CFO; the board was reconstituted. The filing states that the company was not party to material litigation. It also reports no material off-balance-sheet arrangements.
Most Important Facts to Verify
- Confirm that the filing belongs to Carolco Pictures, Inc. and not Fubotv Inc.; the supplied metadata and filing issuer do not match.
- Verify the company’s ability to meet obligations after the October 1, 2015 default of related-party convertible notes and other near-term maturities.
- Review the terms, dilution potential and settlement provisions of the convertible notes, derivative liabilities and 2.45 million warrants.
- Assess whether the $162,699 cash balance and anticipated financing are sufficient to fund operations given nine-month operating cash burn of $738,690.
- Evaluate the recoverability of the $319,237 goodwill balance and the $250,000 project deposit.
- Reconcile the going-concern disclosure, which cites net cash used in operations of $721,480, with the cash-flow statement reporting $738,690.
- Review the effectiveness remediation plan for ineffective disclosure controls and the implications of the October 2015 control and management changes.