Filing summary
Entity and period: The supplied filing is Stratus Media Group, Inc.’s Form 10-Q for the quarter ended June 30, 2013, not a filing identified as Cervomed Inc. The summary below reflects the filing’s stated registrant. Financial statements are unaudited; 2012 comparative results were restated.
Business context and financial results
Stratus reported that it had no events scheduled, had suspended its prior businesses—including ProElite, its mixed martial arts business—and was investigating potential acquisitions. It reported no revenue for the second quarter and only residual licensing revenue for the first half.
| Metric | Three months ended June 30, 2013 | Six months ended June 30, 2013 | Comparable 2012 period |
|---|---|---|---|
| Revenue | $0 | $71,667 | $71,666 and $231,208, respectively |
| Gross profit (loss) | $0 | $71,667 | $65,215 and $(3,745), respectively |
| Operating expenses | $8,225,960 | $10,490,464 | $2,507,888 and $4,791,096, respectively |
| Net income (loss) | $2,339,738 | $(143,721) | $(21,168,484) and $(21,475,653), respectively |
| Net income (loss) attributable to common shareholders | $2,300,240 | $(300,915) | $(21,273,793) and $(21,696,596), respectively |
| Cash from operating activities | Not provided for quarter | $(850,994) | $(2,253,514) for six months |
The second-quarter profit chiefly reflected noncash gains totaling $10.6 million from remeasurement and extinguishment of Series E-related derivative liabilities; it did not reflect operating profitability. The first-half loss also included a $1.94 million goodwill impairment and $3.61 million in warrant, option and stock expense, among other items. Revenue fell year over year, and the company said Strikeforce licensing payments would not recur because no further events were planned.
Liquidity, debt and capital structure
- At June 30, cash was $78,599, total assets were $197,482, current liabilities were $8,767,072 and shareholders’ deficit was $8,569,590. Negative working capital was $8,601,530; accumulated deficit was $56,438,535.
- Notes payable totaled $2,075,002, including notes disclosed as in default. Unpaid deferred salaries were $1,395,480; rent liabilities for vacated facilities were $1,260,645. The filing listed fixed contractual obligations of $6,135,874.
- First-half financing provided $200,000 from a note and $417,500 from common-stock sales. Cash declined by $233,494 during the six months, from $312,093 to $78,599.
- Common shares outstanding increased to 400,232,917 at June 30 from 89,083,677 at December 31, 2012. The company issued substantial shares in exchanges of preferred stock, warrants and debt, as well as in stock sales. It reported 421,332,919 shares outstanding at August 13, 2013.
Material changes, outlook and risks
- The company fully impaired the $1,935,621 ProElite goodwill after deciding to suspend that business. Series E preferred stock and related warrants were exchanged for common shares and extinguished in May 2013, eliminating their full-ratchet provisions but contributing significant dilution and accounting gains or charges.
- Management said it was seeking to raise $10 million or more for operations, settling liabilities and potential acquisitions, but gave no assurance financing would be available on acceptable terms or at all. The filing warns that without additional capital the company may be unable to continue as a going concern; the financial statements include no adjustments for a possible failure to continue.
- A financing firm pursued a judgment for approximately $1.9 million of acquired creditor claims, expected to be settled with shares priced at a discount to market. Additional shares may be required if the share price falls; sales could pressure the stock price and create derivative-accounting volatility.
- A water-damage complaint sought $393,592. The company accrued that amount but disputed insurance coverage and intended to contest responsibility. Other exposures included disputed rent obligations and a negotiated $400,000 settlement estimate with a European vendor.
- Disclosure controls and procedures were deemed ineffective due to material weaknesses involving segregation of duties, written controls over contracts and commitments, and accounting-software change controls. The filing’s “Risk Factors” item says “Not applicable,” despite substantial risks described elsewhere.
- After quarter-end, the company disclosed that Maxim Group received 21,025,000 shares for a three-year advisory agreement; shareholders approved an increase in authorized shares from 500 million to 1 billion in August 2013.
Investor verification priorities
- Confirm the registrant identity: the supplied filing names Stratus Media Group, Inc., not Cervomed Inc.
- Verify current liquidity, going-concern status, financing raised since the filing, and the status and terms of the approximately $1.9 million creditor-share settlement.
- Reconcile the large share issuances, subsequent share count, authorized-share increase and potential additional dilution from options, warrants and convertible notes.
- Assess the legal and insurance outcomes for the $393,592 water-damage claim, rent liabilities and other creditor settlements.
- Review the restated 2012 results and the noncash derivative gains behind second-quarter reported income; evaluate remediation of the disclosed control weaknesses.