Filing Summary
Filing identity: The supplied filing is a Form 10-K for Recall Studios, Inc., not Fubotv Inc. It covers the fiscal year ended December 31, 2017, with comparative figures for 2016. The filing was signed April 17, 2018. The requested “2017 Q4” period is therefore presented as a full fiscal year, not a standalone quarter.
Business Context and Reporting Period
The company transitioned from film and television production toward augmented reality, virtual reality, immersive content, and related software. Its principal operating subsidiary, Recall Studios, develops VR/AR content and consumer-focused editing and interactive-media applications, with two patents pending. The company had four full-time employees as of April 16, 2018.
High Five Entertainment, formerly a majority-owned subsidiary, was sold to Metropolitan Sound + Vision LLC in 2017 and is reported as discontinued operations. The company changed its name from Carolco Pictures, Inc. to Recall Studios, Inc. in 2017.
Financial Performance and Liquidity
| Metric | 2017 | 2016 | Change or comment |
|---|---|---|---|
| Revenue | $41,000 | $24,000 | Up $17,000, or approximately 71% |
| Cost of goods sold | $8,000 | $6,000 | Gross profit was $33,000 versus $18,000 |
| Gross margin | Approximately 80.5% | 75.0% | Improved, but on minimal revenue |
| Operating expenses | $1.177 million | $1.189 million | Down $12,000 |
| Loss from operations | $(1.144) million | $(1.171) million | Operating deficit persisted |
| Net income (loss) | $10.474 million | $(10.066) million | 2017 benefit was primarily non-cash |
| Cash used in operating activities | $(612,000) | $(603,000) | Continuing operations used $413,000 in 2017 |
| Cash from financing activities | $618,000 | $452,000 | Primarily convertible-note and equity financing |
| Cash balance | $77,000 | $77,000 | No net change in cash during 2017 |
| Total assets | $86,000 | $115,000 | Declined $29,000 |
| Total current liabilities | $3.185 million | $14.554 million | Decline largely reflected lower derivative liabilities and discontinued operations |
| Stockholders’ deficit | $(3.099) million | $(14.439) million | Improved primarily from derivative revaluation and equity activity |
The reported net income was not indicative of operating profitability. The company recorded a $12.367 million gain from the change in fair value of derivative liabilities, compared with a $9.054 million loss in 2016. Operating expenses also included $679,000 of financing costs and $188,000 of debt-discount amortization. The filing does not provide a meaningful revenue-based net margin because the reported profit was dominated by derivative accounting gains.
At December 31, 2017, convertible notes payable, net of discount, were $152,000, convertible notes payable to related parties were $484,000, accrued interest related to parties was $141,000, and derivative liabilities were $1.867 million. Certain related-party notes were past due. The company also reported $343,000 of accrued officer payroll, including $310,000 owed to the CEO.
Material Changes Versus 2016
- Revenue increased from $24,000 to $41,000, but the company remained substantially unprofitable at the operating level.
- Net results shifted from a $10.066 million loss to $10.474 million of income, principally because the derivative-liability fair-value adjustment changed from a $9.054 million loss to a $12.367 million gain.
- Operating cash use remained high at $612,000, while year-end cash remained only $77,000.
- The company sold its 75% interest in High Five Entertainment. Discontinued operations produced a $68,000 loss and a $57,000 gain on sale, for a net discontinued-operations loss of $11,000 in 2017.
- The company issued 978,750 common shares for $175,000 and 501,000 common shares valued at $410,000 for services. It also converted 39.0875 million Series C preferred shares into 78.175 million common shares.
- The company completed a 1-for-10,000 reverse stock split in January 2017, with prior share and per-share amounts retrospectively restated.
- Research and development expense fell from $161,000 to zero, and the $250,000 film-project impairment recognized in 2016 was not repeated.
Outlook, Risks, Contingencies, and Unusual Items
Management plans to commercialize VR/AR software and content, secure intellectual property, generate revenue, and raise additional capital. No quantified revenue, earnings, or cash-flow guidance was provided.
- Going concern: Management and the independent auditor stated that recurring operating losses, negative operating cash flow, accumulated deficit, and limited cash raise substantial doubt about the company’s ability to continue as a going concern within one year.
- Financing dependence: Management expected to seek additional equity and debt financing. No third-party financing commitments were available, and additional financing could be unavailable or materially dilutive.
- Convertible debt risk: Several notes contain variable-price conversion features and substantial discounts to market prices, which may create significant dilution and derivative-liability volatility.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were not effective, citing the company’s small staff and lack of segregation of duties.
- Customer concentration: One customer accounted for 90% of 2017 sales.
- High Five transaction: Consideration includes $10,000 at closing and 5% of Metro’s quarterly gross revenue from exploiting High Five assets, capped at $590,000. If at least $265,000 has not been received by July 1, 2022, the company may repurchase the assets for $10,000.
- Trademark settlement: The company assigned the CAROLCO trademark to STUDIOCANAL for a one-time $9,000 payment and agreed to discontinue use of the CAROLCO name and related film-library materials.
- Subsequent events: The CEO resigned in January 2018, an interim CEO was appointed and resigned in February 2018, and the former CEO was reappointed CEO and chairman. Additional convertible notes were issued in January and February 2018.
- Tax assets: Approximately $2.3 million of deferred tax assets were fully offset by a valuation allowance. Net operating loss carryforwards of approximately $2.4 million were available, subject to limitations and expiration.
Investor Verification Priorities
- Verify the issuer’s identity and ticker because the supplied metadata names Fubotv Inc., while the filing identifies Recall Studios, Inc. and ticker BTOP.
- Reconcile the reported $10.474 million net income with the $1.144 million operating loss and the $12.367 million derivative-liability gain.
- Review the complete maturity, conversion, discount, and dilution terms of the convertible notes, including related-party notes that were past due at year-end.
- Assess whether the company obtained sufficient financing after year-end to address the auditor’s going-concern uncertainty.
- Review the effectiveness deficiencies in disclosure controls and internal control over financial reporting.
- Confirm the status and collectability of the contingent High Five purchase-price payments and the company’s potential $10,000 repurchase right.
- Evaluate the impact of the 2017 reverse split, preferred-stock conversions, subsequent note issuances, and potential future conversions on the fully diluted share count.