SEC Form 10-Q Summary
Filing entity and period: The supplied filing is for Carolco Pictures, Inc., not Fubotv Inc. It covers the quarter and nine months ended September 30, 2016, with unaudited financial statements. The filing was signed December 7, 2016.
Business Context and Reporting Period
Carolco described its business as producing and distributing feature films, television programming, live events and award shows. In July 2016, it acquired Recall Studios, Inc., which develops virtual reality and augmented reality content and devices. The company also reported a change in control in June 2016, when David Cohen became controlling shareholder and chief executive officer.
Financial Performance and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $146,000 vs. $366,000 | $176,000 vs. $769,000 |
| Gross profit | $70,000 vs. $80,000 | $96,000 vs. $146,000 |
| Operating expenses | $1,301,000 vs. $148,000 | $1,573,000 vs. $1,054,000 |
| Loss before non-controlling interest | $(707,000) vs. $(984,000) | $(5,103,000) vs. $(1,946,000) |
| Net loss attributable to shareholders | $(705,000) vs. $(989,000) | $(5,069,000) vs. $(1,929,000) |
| Basic and diluted loss per share | $(0.01) vs. $(0.02) | $(0.02) vs. $(0.04) |
Margins: Nine-month gross margin was approximately 55%, compared with approximately 19% in the prior-year period. Despite this improvement, operating expenses substantially exceeded gross profit. The filing does not present a non-GAAP adjusted margin or EBITDA measure.
- Cash flow: Net cash used in operating activities was $302,000, compared with $739,000 used in the prior-year period. Investing activities provided $107,000, primarily reflecting $107,000 of cash acquired in the Recall acquisition. Financing activities provided $347,000, including related-party advances and a $205,000 deposit on a future equity sale.
- Liquidity: Cash was $200,000 at September 30, 2016, versus $48,000 at December 31, 2015. The company reported negative working capital of $9,229,000.
- Balance sheet: Total assets were $1,384,000 and total current liabilities were $9,480,000. Stockholders’ deficit attributable to Carolco was $8,096,000.
- Debt and liabilities: Outstanding notes payable were $75,000, related-party convertible notes were $434,000, accrued interest was $108,000, accrued payroll was $327,000, and the derivative liability was $8,110,000.
- Share count: Common shares outstanding increased from 93,856,857 at December 31, 2015 to 337,397,856 at September 30, 2016. The company also had Series A, Series B and Series C preferred stock outstanding.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue declined by $593,000, or approximately 77%, principally because production activity slowed during the change in ownership.
- Nine-month operating expenses increased by $519,000, driven primarily by $276,000 of intangible-asset amortization and higher compensation under new employment agreements.
- The nine-month loss before non-controlling interest increased by $3,157,000. The principal driver was a $3,826,000 loss from the change in fair value of derivative liabilities, compared with a $229,000 gain in the prior-year period.
- Third-quarter net loss improved year over year because the company recognized a $379,000 derivative-liability fair-value gain, while revenue and gross profit declined.
- The company acquired Recall for an estimated $1,221,000, paid through the issuance of Series A and Series C preferred shares. The acquisition added approximately $1,104,000 of employment-related intangible assets and $107,000 of cash.
- Convertible notes were substantially repaid or converted into common stock. During the nine months, 243,540,999 common shares were issued upon conversion of convertible notes and accrued interest totaling approximately $144,000.
Guidance, Outlook, Risks and Unusual Items
- Going concern: Management stated that recurring losses, a $8,096,000 stockholders’ deficit and operating cash usage raised substantial doubt about the company’s ability to continue as a going concern. Management expected available funds to support operations through December 31, 2016, but stated that additional financing was required and not assured.
- Financing risk: Management was seeking debt and equity financing. Debt could impose operating restrictions, while equity financing could materially dilute shareholders. The company stated that no additional third-party financing commitments were available.
- Derivative liability volatility: Warrants and conversion features were valued using probability-weighted Black-Scholes-Merton models. Changes in fair value can materially affect reported earnings without corresponding cash flows.
- Related-party exposure: The company maintained a $250,000 deposit for a film project with an entity managed by former chairman Mario Kassar. The project remained in pre-production, and no impairment was recorded.
- Concentration: One customer accounted for 100% of third-quarter revenue and 79% of nine-month revenue in 2016, creating significant customer concentration risk.
- Legal and intellectual-property matter: Studiocanal claimed rights to certain marks and to a film and television catalogue, including titles associated with the Carolco name. The filing stated that no legal proceeding had been brought as of the filing date.
- Controls: Management concluded that disclosure controls and procedures were ineffective because of limited resources and personnel. The company relied heavily on direct management oversight and outsourced professionals.
- Accounting estimates: The valuation of derivative liabilities, stock-based compensation, film and production costs, and acquired intangible assets involved significant assumptions and could produce materially different future results.
Facts an Investor Should Verify
- Confirm the issuer identity: the supplied document is Carolco Pictures, Inc., despite the request identifying Fubotv Inc.
- Review the going-concern disclosure and the company’s ability to obtain financing after September 30, 2016.
- Verify the terms, maturity and settlement status of the $434,000 related-party convertible notes and the $8,110,000 derivative liability.
- Assess the dilution and voting effects of the 337.4 million common shares and the Series A, B and C preferred stock.
- Evaluate the valuation and operating prospects of the Recall VR/AR acquisition, including the short-lived acquired intangible assets.
- Investigate the Studiocanal intellectual-property claims and any subsequent litigation or settlement.
- Reconcile the filing’s cash-flow presentation with the balance sheet and subsequent financing activity, as the MD&A narrative contains an apparent sign inconsistency regarding the reported net change in cash.