Business Context and Reporting Period
The provided filing is a Form 10-K for Carolco Pictures, Inc., not fuboTV Inc., for the fiscal year ended December 31, 2016, filed April 10, 2017. The company produced television and film content through High Five Entertainment and entered the virtual reality and augmented reality content and software businesses through the July 2016 acquisition of Recall Studios.
The company operated two reportable segments: television production and virtual reality/application production services. The filing identifies the issuer as a smaller reporting company and shell company disclosures appear inconsistent in the supplied text.
Key Financial Metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $208,000 | $964,000 | Down $756,000, approximately 78% |
| Cost of goods sold | $113,000 | $792,000 | Down $679,000 |
| Gross profit | $95,000 | $172,000 | Down $77,000 |
| Gross margin | Approximately 45.7% | Approximately 17.8% | Improved |
| Operating expenses | $1,720,000 | $3,218,000 | Down approximately 47% |
| Loss from operations | $1,625,000 | $3,046,000 | Improved |
| Net loss before non-controlling interest | $10,136,000 | $7,609,000 | Loss increased $2,527,000 |
| Net loss attributable to stockholders | $10,103,000 | $7,577,000 | Loss increased $2,526,000 |
| Net loss per basic and diluted share | $360.74 loss | $1,237.87 loss | Not directly comparable because share counts changed materially |
| Cash used in operating activities | $579,000 | $915,000 | Use decreased $336,000 |
| Cash provided by investing activities | $180,000 | Cash used of $250,000 | Improved $430,000 |
| Cash provided by financing activities | $452,000 | $1,053,000 | Down $601,000 |
| Cash balance at year-end | $101,000 | $48,000 | Up $53,000 |
| Total assets | $115,000 | $313,000 | Down $198,000 |
| Total liabilities | $14,370,000 | $5,685,000 | Up $8,685,000 |
| Stockholders' deficit | $14,255,000 | $5,372,000 | Deficit increased $8,883,000 |
Material Changes Versus the Prior Comparable Period
- Revenue declined substantially because production activity slowed during the June 2016 ownership transition.
- Gross margin improved because cost of goods sold declined faster than revenue, although gross profit decreased in absolute dollars.
- Operating expenses declined primarily because of lower compensation and professional fees.
- The net loss increased principally because the company recorded an $8,870,000 increase in the fair value of derivative liabilities, partially offset by a $558,000 gain on extinguishment of derivative liabilities.
- Derivative liabilities increased from $4,673,000 to $12,985,000, materially increasing reported liabilities and contributing to the stockholders' deficit.
- Recall Studios was acquired in July 2016 in a related-party common-control transaction. The company issued Series A and Series C preferred stock and recorded the acquired net assets at historical cost, with a total recorded basis of approximately $190,000.
- The company issued preferred stock to settle approximately $439,000 of advances and accrued payroll owed to former CEO Tarek Kirschen. Ownership and control changed during 2016 and subsequently shifted again toward Alexander Bafer.
- The company impaired a $250,000 related-party film-project deposit because completion of the project was uncertain.
- Several convertible notes were repaid or converted. Related-party convertible notes outstanding at year-end totaled $434,000, with accrued related-party interest of $118,000.
Liquidity, Debt and Going Concern
At December 31, 2016, cash was $101,000 against total liabilities of $14,370,000 and negative working capital of approximately $14,255,000. Current liabilities included a $12,985,000 derivative liability, $458,000 of accrued payroll, $484,000 of related-party convertible notes, $118,000 of accrued interest, and a $75,000 secured note payable maturing in April 2017.
Management stated that the company had no committed third-party financing and that officers and shareholders had not agreed to provide additional financing. Management expected available funds and proceeds from equity subscriptions to support operations through 2017, but stated that additional capital was required and might not be available on acceptable terms.
The independent auditor and management reported substantial doubt about the company's ability to continue as a going concern within one year from issuance of the financial statements. The financial statements contain no adjustments that might be required if the company cannot continue as a going concern.
Outlook, Commentary, Risks and Unusual Items
- Management planned to market the The Doorman pilot, pursue new film-rights acquisitions, expand television awards programming, and develop VR/AR content and consumer editing software. No quantified revenue or earnings guidance was provided.
- Revenue recognition is generally deferred until productions or services are completed, delivered or accepted and collectability is reasonably assured.
- Two customers accounted for 72% and 12% of 2016 sales, creating significant customer concentration risk.
- The company had only four full-time employees as of March 31, 2017 and acknowledged ineffective disclosure controls and ineffective internal control over financial reporting due principally to limited personnel and inadequate segregation of duties.
- Studiocanal claimed rights to marks and content associated with the former Carolco catalogue and alleged potential trademark, copyright, Digital Millennium Copyright Act, false advertising, unfair competition and dilution violations. The company reported that no lawsuit had been filed as of the filing date, but had not responded to Studiocanal's December 2016 letter.
- The Recall acquisition was a related-party transaction involving Alexander Bafer, who became chairman and Chief Development Officer. Related-party transactions, control changes and preferred-stock issuances created substantial governance and dilution risks.
- In January 2017, the company declared a 1-for-10,000 reverse stock split of common stock; historical share and per-share amounts were retroactively restated.
- In April 2017, David Cohen agreed to resign as CEO and director, and Alexander Bafer was expected to assume CEO responsibilities. A related transaction transferred preferred shares to an entity controlled by Bafer.
Important Facts for Investors to Verify
- Confirm that the filing belongs to Carolco Pictures, Inc. rather than fuboTV Inc.; the supplied document does not contain fuboTV financial information.
- Reconcile the unusually large derivative liability, its valuation assumptions, and the resulting $8,870,000 fair-value loss.
- Assess near-term liquidity, the April 2017 maturity of the secured note, related-party debt, accrued payroll, and the availability of new financing.
- Review the auditor's going-concern qualification and management's financing assumptions for 2017.
- Evaluate the economic effect and potential dilution from Series A, Series B and Series C preferred stock, convertible notes, warrants and the reverse stock split.
- Review the Recall Studios common-control acquisition and all related-party terms, including consideration issued and control rights.
- Investigate the status and potential financial impact of Studiocanal's intellectual-property claims.
- Consider the material customer concentration and the lack of quantified guidance or demonstrated profitability.
- Verify the company's internal-control deficiencies, governance structure and subsequent management changes.