Business Context and Reporting Period
The filing is a Form 10-Q for the quarter and six months ended June 30, 2017, filed by Carolco Pictures, Inc., not Fubotv Inc. The company reported operations primarily through Recall Studios, focused on virtual- and augmented-reality content, while York Productions entities were inactive. The filing identifies the company as a smaller reporting company and emerging growth company.
The financial statements are unaudited and presented under U.S. GAAP. Management disclosed substantial doubt about the company’s ability to continue as a going concern.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2017 |
|---|---|---|
| Revenue | $36,000 | $41,000 |
| Gross profit | $28,000 | $33,000 |
| Gross margin | Approximately 77.8% | Approximately 80.5% |
| Operating expenses | $387,000 | $529,000 |
| Loss from operations | $(359,000) | $(496,000) |
| Income from continuing operations | $5,003,000 | $11,666,000 |
| Net income | $5,017,000 | $11,655,000 |
| Net income per diluted share | $0.22 | $0.80 |
Reported profitability was dominated by non-cash gains from changes in the fair value of derivative liabilities: $5.366 million for the quarter and $12.173 million for the six-month period. Excluding this accounting item, the company remained loss-making from operations.
- Cash at June 30, 2017: $20,000, down from $77,000 at December 31, 2016.
- Total assets: $40,000; total liabilities: $1.919 million.
- Stockholders’ deficit: $1.879 million; negative working capital was approximately $1.882 million.
- Derivative liability: $812,000, compared with $12.985 million at December 31, 2016.
- Related-party convertible notes payable: $484,000, including accrued related-party interest of $130,000.
- Accrued payroll to officers: $339,000, including $312,500 attributed to the CEO.
- Net cash used in operating activities: $179,000; net cash provided by financing activities: $122,000.
Material Changes Versus the Prior Comparable Period
- Continuing-operations revenue increased from zero to $36,000 for the quarter and $41,000 for the six-month period, primarily from commercialization and sale of an iOS application.
- Operating expenses increased to $387,000 for the quarter and $529,000 for the six-month period, in part because $410,000 of common stock was issued for services.
- Net results changed from a $1.823 million quarterly loss and $4.381 million six-month loss in 2016 to net income of $5.017 million and $11.655 million, respectively, largely because derivative fair-value changes shifted from losses to gains.
- The company issued 610,000 common shares for $122,000 in cash and 501,000 shares valued at $410,000 for services.
- In January 2017, the company completed a 1-for-10,000 reverse stock split. During the six months, 39.0875 million Series C preferred shares were converted into 78.175 million common shares.
- On June 15, 2017, the company agreed to sell its 75% interest in S&G Holdings, doing business as High Five Entertainment. The business was classified as discontinued operations and generated a $57,000 gain on sale, while the six-month discontinued-operations result was an $11,000 loss.
- Shares outstanding increased from 33,940 at December 31, 2016 to 79,320,940 at June 30, 2017.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that cash on hand and anticipated proceeds from common-stock subscriptions were expected to fund operations through 2017, but continued operations depend on executing the business strategy and raising additional capital.
- Management reported no available third-party loan, advance, or financing commitment, and stated that officers and shareholders had not agreed to provide additional financing.
- The company’s auditors previously expressed substantial doubt about going concern, and management repeated that substantial doubt existed within one year of issuance of the financial statements.
- Future equity financing could materially dilute existing shareholders; debt financing could impose restrictive terms. No assurance was provided that financing would be available on acceptable terms.
- The S&G sale provides an initial $10,000 payment and potential quarterly payments equal to 5% of gross revenues generated from the assets, up to a lifetime maximum purchase price of $600,000. The company may repurchase the assets for $10,000 if it receives less than $265,000 before July 1, 2022.
- Most related-party notes were past due, including the CEO’s convertible notes and a $50,000 shareholder note.
- Disclosure controls and procedures were deemed ineffective because of limited resources and a limited number of employees. Management relied substantially on direct oversight and outsourced legal and accounting professionals.
- During July 2017, the company agreed to pursue formation and listing of a Swedish subsidiary with Big Ben Venture Partners, involving approximately $57,000 of fees plus potential success fees. The filing text does not establish whether the proposed listing or capital raise was completed.
- In July 2017, the company agreed to assign the “CAROLCO” trademark to STUDIOCANAL for $9,000, cease use of the CAROLCO name in entertainment activities, and change its corporate name.
- One customer accounted for 90% of continuing-operations sales during the six months ended June 30, 2017.
Investor Verification Items
- Verify the issuer identity: the supplied filing is for Carolco Pictures, Inc., whereas the request identifies Fubotv Inc.
- Reconcile the reported net income with the $12.173 million non-cash derivative fair-value gain and assess the sustainability of reported earnings.
- Confirm current cash needs, funding availability, and whether additional equity financing occurred after June 30, 2017.
- Review the terms, maturity status, conversion features, and potential dilution from related-party notes, preferred stock, warrants, and other convertible instruments.
- Assess the company’s ability to satisfy $1.919 million of current liabilities with only $20,000 of cash and limited operating cash generation.
- Verify completion and collectability of the S&G disposition payments and any potential repurchase obligation.
- Review the effectiveness of disclosure controls and any remediation of the disclosed internal-control deficiencies.
- Confirm the subsequent trademark settlement, corporate name change, and the effect on the company’s stated entertainment strategy.