Carolco Pictures, Inc. Form 10-Q Summary
Filing identity: The submitted filing is for Carolco Pictures, Inc., not Fubotv Inc. The report covers the quarter and six months ended June 30, 2015, and was filed August 14, 2015. The financial statements are unaudited.
Business Context and Reporting Period
Carolco describes itself as a feature-film and television-specials production company. Through High Five Entertainment, it provides television programming, production services, pilots, live events and award programming. The company changed its name from Brick Top Productions, Inc. to Carolco Pictures, Inc. in January 2015.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 |
|---|---|---|
| Revenue | $400,460 | $249,303 |
| Cost of goods sold | $304,735 | $140,291 |
| Gross profit | $95,725 | $109,012 |
| Gross margin | 23.9% | 43.7% |
| Operating expenses | $210,539 | $1,926,543 |
| Net loss attributable to shareholders | $236,359 | $1,743,684 |
The filing presents the 2015 and 2014 quarterly shareholder losses as negative amounts in the financial statements; the MD&A table omits the negative sign for the loss figures.
| Metric | Six Months Ended June 30, 2015 | Six Months Ended June 30, 2014 |
|---|---|---|
| Revenue | $402,360 | $270,652 |
| Gross profit | $65,126 | $97,862 |
| Gross margin | 16.2% | 36.2% |
| Operating loss | $841,066 | $1,976,986 |
| Net loss before noncontrolling interest | $961,585 | $1,906,188 |
| Net loss attributable to shareholders | $939,160 | $1,875,956 |
| Basic and diluted loss per share | $0.02 | $0.06 |
- Cash at June 30, 2015 was $242,344, compared with $160,377 at December 31, 2014.
- Total assets were $909,182 and total liabilities were $1,300,880, resulting in total equity deficiency of $391,698.
- Current liabilities exceeded current assets by approximately $715,725.
- Six-month operating cash flow was negative $581,156; investing cash flow was negative $252,649; and financing cash flow was positive $915,772.
- Financing inflows included related-party borrowings, notes payable, convertible notes, private stock placements and unit offerings.
- Debt and debt-related obligations included $74,258 of notes payable, $505,000 of related-party notes payable, $14,445 of convertible notes payable net of deposit, and $362,550 of derivative liabilities.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased approximately 49% to $402,360, driven primarily by increased production-services demand and award-programming activity.
- Quarterly revenue increased approximately 61% to $400,460, but gross profit declined because production costs increased faster than revenue.
- Six-month gross margin declined to 16.2% from 36.2%, primarily because of higher production labor and equipment costs.
- Operating expenses declined substantially, primarily because the prior-year period included significant compensation paid in common shares and warrants.
- Interest expense increased materially because of newly issued debt, including amortization of debt discounts and issuance costs.
- Shares outstanding increased to 60,551,125 at June 30, 2015 from 54,239,500 at December 31, 2014. The company also had 2,452,600 outstanding warrants and potentially dilutive convertible-note shares.
- A $250,000 deposit was made for the “Audition” project, and the company entered into arrangements with Chairman Mario Kassar involving project funding, stock compensation and potential production and sales fees.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide quantitative revenue or earnings guidance. Future revenue depends on marketing the “The Doorman” pilot and acquiring or monetizing film rights.
- Management stated that recurring losses, accumulated deficit and negative operating cash flow raise substantial doubt about the company’s ability to continue as a going concern. Continued operations depend on generating sufficient revenue and raising additional capital.
- Management stated that no additional third-party financing was currently available through loans, advances or commitments, and there was no assurance that additional capital could be raised on acceptable terms.
- The company issued convertible notes with variable conversion prices, including conversion features based on discounts to market prices. These instruments generated a $362,550 derivative liability at June 30, 2015 and could create substantial future equity dilution.
- Related-party notes payable increased to $505,000. The CEO had also waived future base salary, while $150,000 remained accrued under the employment agreement.
- Disclosure controls and procedures were reported as ineffective because the company has only two employees, lacks segregation of duties and has limited accounting resources.
- During the quarter, an officer and director received an approximately $27,000 personal loan from a subsidiary, which management identified as an inadvertent violation of Section 402 of the Sarbanes-Oxley Act. The funds were repaid in July 2015.
- Subsequent events included replacement convertible notes issued to the CEO and the July 2015 sale of 100,500 shares for $25,125.
- The company reported no material litigation and no material off-balance-sheet arrangements. The filing states that smaller reporting companies were not required to provide separate risk factors.
Important Facts for Investors to Verify
- Confirm the issuer identity: the provided filing is Carolco Pictures, Inc., not Fubotv Inc.
- Review the going-concern disclosure and the company’s ability to fund operations given $242,344 of cash, negative working capital and negative operating cash flow.
- Analyze the terms, maturity dates, default rates and variable conversion mechanisms of the convertible notes and related derivative liabilities.
- Assess dilution from the increased share count, outstanding warrants and convertible-note conversion rights.
- Review related-party financing, accrued compensation and the terms of the Chairman’s project and compensation arrangements.
- Investigate the ineffective disclosure controls and the reported related-party loan that violated Section 402 of the Sarbanes-Oxley Act.
- Verify the economics, status and recoverability of the $250,000 “Audition” project deposit and the $319,237 goodwill balance.