Filing identity and period
Important mismatch: The request identifies NeuroOne Medical Technologies Corp., but the supplied Form 10-K is for Original Source Entertainment, Inc. This summary reflects the supplied filing, not NeuroOne. It covers the fiscal year ended December 31, 2011; it is an annual report, not a standalone Q4 report.
Business context
Original Source is a development-stage music licensing business, licensing songs for television and film. It reported a catalog of more than 1,100 songs and contracts with approximately 217 artists/composers. The company had no employees apart from its executive officers, who also served as directors.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $5,398 | $1,167 |
| Cost of sales | $2,138 | $0 |
| Gross profit | $3,260 | $1,167 |
| Gross margin | About 60% | 100% |
| General and administrative expense | $30,688 | $7,211 |
| Net loss (audited statements) | $(27,604) | $(6,044) |
| Cash at year end | $13,851 | $9,129 |
| Net cash used in operating activities | $(27,428) | $(5,092) |
Revenue increased by $4,231, while G&A expense rose by $23,477 and the audited net loss widened by $21,560. The filing attributes much of G&A to legal, accounting, and audit costs associated with reporting-company requirements. It reports $2,700 of advertising expense in 2011, compared with none in 2010.
At December 31, 2011, total liabilities were $17,128, including $16,000 of notes payable and $176 of accrued interest; stockholders’ equity was negative $3,277. The balance sheet lists current assets of $13,851 and current liabilities of $4,628, which would imply positive working capital of $9,223. This conflicts with the filing’s statements that working capital was deficient and raises substantial doubt about the company’s ability to continue as a going concern. The filing provides no clear reconciliation.
2011 financing provided $32,150: $28,650 from common-stock sales and $3,500 from note borrowings. Investing cash flow was zero. The company reported no dividends, no trading market for its shares, and no off-balance-sheet arrangements.
Material changes, outlook, and risks
- The business remained at an early stage, with limited revenue and losses; management expected losses and negative operating cash flow to continue for the foreseeable future.
- Management planned to seek additional debt or equity financing and expand marketing, but could not assure financing would be available on acceptable terms. Management said the company might rely on interest-free loans from CEO/director Lecia Walker, subject to her personal budget.
- Warner Bros. accounted for approximately 90% of revenue, with NBC and CBS each accounting for approximately 5%. A production company’s efforts reportedly generated about 80% of revenue from those networks.
- An independent filmmaker owed $2,000, which the filing described as accounts payable due to the company.
- A $2,000 unsecured convertible note was reported as presently due; it can convert at the holder’s option under terms that could cause significant dilution. The filing also reports $1,500 due in 2012 and $12,500 in 2013.
- The auditor gave an unmodified opinion on the financial statements but highlighted substantial doubt about going concern. The company’s ability to continue depends on achieving profitable operations, generating cash, and obtaining financing.
- Management reported disclosure controls effective as of September 30, 2011. The filing also states that directors did not timely file required Section 16(a) reports and that the company had no code of ethics, audit committee, or audit committee financial expert.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for Original Source Entertainment, not NeuroOne Medical Technologies Corp.
- Reconcile the working-capital statements with the balance sheet, which appears to show positive working capital.
- Reconcile the MD&A’s description of the 2011 loss: it cites $27,428 in one passage, while the audited income statement reports a net loss of $27,604.
- Verify the status, maturity, and conversion terms of the $2,000 note, other debt, and any subsequent financing.
- Assess collection of the reported $2,000 receivable and the company’s dependence on Warner Bros. and a single production company for most revenue.
- Review the company’s financing needs, cash runway, and progress toward revenue growth and positive operating cash flow.