Filing Overview
Registrant: Carolco Pictures, Inc., not Fubotv Inc. The source filing is a Form 10-Q for the quarter and nine months ended September 30, 2017, filed November 21, 2017. The company operated primarily through Recall Studios, focused on virtual-reality and augmented-reality content. It was a smaller reporting company and emerging growth company.
Financial Highlights
| Metric | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 |
|---|---|---|
| Revenue | $0 | $41,000 |
| Gross profit | $0 | $33,000 |
| Operating expenses | $226,000 | $755,000 |
| Income from continuing operations | $(808,000) | $10,858,000 |
| Net income (loss) | $(808,000) | $10,847,000 |
| Basic net income (loss) per share | $(0.01) | $0.34 |
| Cash flow from operating activities | Not provided for the quarter | $(358,000) |
- The nine-month net income was primarily non-cash: the company recorded an $11.905 million gain from changes in the fair value of derivative liabilities.
- Cash was $101,000 at September 30, 2017, compared with $77,000 at December 31, 2016.
- Total assets were $172,000, total current liabilities were $2.774 million, and stockholders’ deficit was $2.602 million.
- Significant liabilities included $484,000 of related-party convertible notes, $388,000 of accrued officer payroll, $136,000 of accrued related-party interest, and a $1.574 million derivative liability.
- Nine-month financing cash inflows were $382,000, including $152,000 from common-stock sales and $270,000 from note proceeds, partly offset by $40,000 of convertible-note repayments.
Changes Versus Prior Comparable Period
- Third-quarter revenue remained $0, while net loss increased to $808,000 from $707,000 in the prior-year quarter.
- Third-quarter operating expenses declined to $226,000 from $1.217 million, primarily because of the sale of the S&G subsidiary and the absence of $276,000 of prior-year intangible-asset amortization.
- Nine-month revenue increased from $0 to $41,000, attributable to commercialization of an iOS application. Related cost of goods sold was $8,000.
- Nine-month net results improved from a $5.103 million loss to $10.847 million of income, almost entirely because the prior-year $3.826 million derivative loss became an $11.905 million derivative gain.
- The company issued 78.175 million common shares upon conversion of 39.0875 million Series C preferred shares. Common shares outstanding increased to 79.629 million from 33,940 at December 31, 2016.
- The company sold its 75% interest in S&G Holdings, doing business as High Five Entertainment, and reported the business as discontinued operations. It recognized a $57,000 gain, while future consideration depends on the buyer’s exploitation of the assets.
Outlook, Risks and Unusual Items
- Management stated that substantial doubt exists about the company’s ability to continue as a going concern within one year. Management expected available funds and anticipated common-stock subscription proceeds to support operations through 2017, but no assurance was provided.
- The company depends on additional financing, primarily equity issuance. Financing may be unavailable, impose debt-related restrictions, or substantially dilute existing shareholders.
- Several convertible notes issued in August and September 2017 contained discounted, variable-price conversion features. At September 30, outstanding note principal was $231,000, accrued interest was $18,000, and unamortized note discount was $218,000.
- Related-party notes were past due, including $434,000 owed to the chairman and CEO plus $136,000 of accrued interest, and a $50,000 shareholder note.
- The company disclosed that its disclosure controls and procedures were ineffective because of limited resources and employees.
- The S&G sale provides for an initial $10,000 payment and future payments equal to 5% of quarterly gross revenues from asset exploitation, up to a $590,000 lifetime maximum. If at least $265,000 has not been received by July 1, 2022, the company may repurchase the business and assets for $10,000.
- After the reporting period, the company entered into a $110,000 convertible note financing bearing 12% interest and issued 107,843 commitment-fee shares and warrants for 50,000 shares.
- Management identified substantial competition, execution risk in virtual-reality content, dependence on key personnel and contacts, customer concentration, and uncertainty around derivative-liability valuations.
Investor Verification Points
- Verify the issuer identity: the supplied metadata names Fubotv Inc., but the filing identifies Carolco Pictures, Inc.
- Assess liquidity and going-concern risk against only $101,000 of cash, $2.774 million of current liabilities, recurring operating losses, and reliance on new financing.
- Separate recurring operating performance from the $11.905 million non-cash derivative valuation gain that drove the nine-month profit.
- Review dilution exposure from variable-price convertible notes, preferred-stock conversions, warrants, and subsequent financing.
- Confirm the economics, collectability, and contingent repurchase terms of the S&G divestiture.
- Evaluate the implications of ineffective disclosure controls and the company’s limited staffing and reliance on outsourced accounting professionals.