Filing Overview
Filing identity: The provided filing is for Brick Top Productions, Inc., not Fubotv Inc. It is an unaudited Form 10-Q for the quarter and nine months ended September 30, 2014, filed November 14, 2014. The company was a smaller reporting company and reported 30,974,500 common shares outstanding as of November 10, 2014.
Business Context and Reporting Period
Brick Top Productions finances, produces, acquires and distributes television, film and other media projects. Its consolidated subsidiaries include York Productions, York Productions II and S&G Holdings, Inc., doing business as High Five Entertainment, in which Brick Top holds a 75% interest. The S&G acquisition was completed in December 2013 and materially affected 2014 revenue and expenses.
Management’s stated projects include marketing the “Nick The Doorman” pilot, developing “Bless Me Father,” pursuing additional production-company acquisitions, developing a mobile-content platform and leveraging acquired Carolco Pictures intellectual-property rights.
Financial Performance and Position
| Metric | Three Months Ended Sept. 30, 2014 | Three Months Ended Sept. 30, 2013 | Nine Months Ended Sept. 30, 2014 | Nine Months Ended Sept. 30, 2013 |
|---|---|---|---|---|
| Revenue | $374,235 | $0 | $644,887 | $0 |
| Operating expenses | $884,097 | $47,063 | $3,131,735 | $109,676 |
| Loss from operations | $(509,862) | $(47,063) | $(2,486,848) | $(109,676) |
| Net loss attributable to Brick Top | $(517,157) | $(47,088) | $(2,393,113) | $(110,877) |
| Basic and diluted loss per share | $(0.02) | $(0.00) | $(0.08) | $(0.00) |
Reported operating margins were approximately negative 136% for the quarter and negative 386% for the nine-month period. Net loss margins attributable to Brick Top stockholders were approximately negative 138% and negative 371%, respectively. The filing does not present gross profit or gross margin.
- Cash flow: Nine-month operating cash use was $(107,774), investing cash use was $(51,203), and financing cash inflow was $364,452. Cash increased from $135,612 at December 31, 2013 to $341,087 at September 30, 2014.
- Balance sheet: Total assets were $732,761, including $341,087 of cash, $51,386 of accounts receivable and $319,237 of goodwill. Total liabilities were $708,557 and total equity was $24,204.
- Debt and obligations: Current liabilities included $103,152 of notes payable, $110,847 of advances from related parties, $150,000 of accrued payroll and $190,508 of accounts payable. Long-term notes payable to officers were $150,000. The company also had a $54,152 bank line of credit payable on demand and a $49,000 promissory note due June 1, 2015.
- Equity and dilution: Additional paid-in capital increased to $3,858,753. The accumulated deficit was $(3,789,636). A warrant for 1,491,350 shares, exercisable at $0.01 per share, was fully vested and exercisable at September 30, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue increased from zero to $374,235 in the quarter and from zero to $644,887 for the nine months, primarily because of the S&G acquisition.
- Operating expenses increased to $884,097 for the quarter and $3,131,735 for the nine months, largely because of the acquired operations and substantial stock-based compensation.
- Stock-based compensation was $2,251,735 for the nine months, including the $1,476,735 fair value of a warrant issued for employee services. This noncash charge was a principal driver of the reported loss.
- Accounts receivable increased from zero at December 31, 2013 to $51,386, while accounts payable increased from $92,796 to $190,508.
- Cash improved because financing activities provided $364,452, including $200,000 of note proceeds, $50,000 of related-party advances, $40,000 from stock issuance and a $76,000 capital contribution.
- Common shares outstanding increased from 30,114,500 at December 31, 2013 to 30,974,500 at September 30, 2014. Shares were issued for cash, employee services and nonemployee services.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal quantitative revenue or earnings guidance. It expects future revenue to depend on additional programming by High Five Entertainment, monetization of the “Nick The Doorman” pilot, new film and television rights acquisitions and potential additional acquisitions. Management stated that additional capital is required to execute its business plan.
- Going concern: Management disclosed substantial doubt about the company’s ability to continue as a going concern because of recurring losses, accumulated deficit and operating cash use. Continued operations depend on generating sufficient revenue and raising additional funds.
- Funding risk: Management stated that officers and shareholders had not committed to provide additional financing and that there is no assurance the company can raise capital on acceptable terms.
- Acquisition contingency: Under the S&G acquisition agreement, failure to make required capital contributions could require the company to return certain acquired shares. The filing states that the required obligations had been met.
- Related-party financing: The CEO provided advances and loans and made a $76,000 capital contribution. A further $150,000 CEO loan was disclosed as a subsequent event on October 1, 2014.
- Operating and project risks: Projects may require additional funding, may not be sold or distributed, and may take months or years to monetize. The company competes with substantially larger networks and studios with greater financial resources.
- Control weakness: Management determined that internal control over financial reporting was not effective, primarily because the company had only two employees and lacked segregation of duties.
- Unusual accounting items: Goodwill of $319,237 remained on the balance sheet without recorded impairment. Capitalized pilot costs of $292,931 had been fully impaired at December 31, 2013. No income tax provision was recorded, and deferred tax benefits were subject to a full valuation allowance.
Important Facts to Verify
- Verify the company identity: the source filing is for Brick Top Productions, Inc., whereas the request identifies Fubotv Inc.
- Reconcile the MD&A statement of total liabilities of $704,807 and negative working capital of $(146,504) with the balance sheet figures of $708,557 and calculated working capital of approximately $(150,254).
- Assess the sustainability and collectability of the newly reported license-fee revenue and the operating performance of the acquired S&G business.
- Review the substantial going-concern uncertainty, recurring operating losses and dependence on future equity, debt or related-party financing.
- Evaluate dilution from the 1,491,350 fully vested warrants and other shares issued for services.
- Review the valuation and impairment risk associated with $319,237 of goodwill and the company’s entertainment-related intellectual property.
- Confirm the terms and repayment capacity for the demand line of credit, promissory note, officer debt, accrued payroll and related-party advances.
- Investigate the disclosed ineffective internal controls and the absence of segregation of duties.