UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2016

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________ to _____________

 

Commission File Number: 000-55353

 

CAROLCO PICTURES, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

Florida   26-4330545

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

1395 Brickell Avenue Suite 800, Miami, Florida   33131
(Address of Principal Executive Offices)   (Zip Code)

 

(877) 535-1400

(Registrant’s Telephone Number, Including Area Code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] Smaller reporting company [X]
(Do not check if a smaller reporting company)      

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of December 6, 2016, there were 337,397,856 shares of the registrant’s common stock, par value $.0001 per share, outstanding.

 

 

 
 

 

CAROLCO PICTURES, INC.

INDEX

  

    Page
  PART I – FINANCIAL INFORMATION  
   
Item 1. Financial Statements 2
   
  Condensed Consolidated Balance Sheets as of September 30, 2016 (unaudited) and December 31, 2015 2
     
  Condensed Consolidated Statements of Operations for the Three Months Ended and Nine Months Ended September 30, 2016 and 2015 (unaudited) 3
     
  Condensed Consolidated Statement of Stockholders’ Deficit for the Nine Months Ended September 30, 2016 (unaudited) 4
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015 (unaudited) 5
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
     
Item 4. Controls and Procedures 24
     
  PART II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 25
     
Item 1A. Risk Factors 25
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
   
Item 3. Defaults Upon Senior Securities 25
   
Item 4. Mine Safety Disclosures 25
     
Item 5. Other Information 25
     
Item 6. Exhibits 25
     
Signatures 29

 

     
     

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this quarterly report on Form 10-Q. Additionally, statements concerning future matters are forward-looking statements.

 

Although forward-looking statements in this quarterly report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the fiscal year ended December 31, 2015, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this quarterly report on Form 10-Q and in other reports that we file with the Securities and Exchange Commission (the “SEC”). You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report on Form 10-Q.

 

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with, or furnish to, the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this quarterly report on Form 10-Q, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

 

1 
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Carolco Pictures, Inc.

Condensed Consolidated Balance Sheets

 

    September 30, 2016     December 31, 2015  
    (Unaudited)        
             
ASSETS                
Current Assets                
Cash   $ 200,000     $ 48,000  
Accounts receivable     46,000       -  
Prepaid expenses and other current assets     5,000       13,000  
Total current assets     251,000       61,000  
                 
Property and equipment, net of accumulated depreciation of $11,000 and $10,000, respectively     1,000       2,000  
Capitalized production costs     54,000       -  
Deposits on project paid to related party     250,000       250,000  
Intangible assets, net of accumulated amortization of $276,000     828,000       -  
Total assets   $ 1,384,000     $ 313,000  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
Current Liabilities                
Accounts payable and accrued expenses   $ 160,000     $ 22,000  
Accrued interest (including interest to related party of $108,000 and $42,000, respectively)     108,000       65,000  
Accrued payroll     327,000       125,000  
Advances from related parties     41,000       31,000  
Deposit on future sale of equity     225,000       -  
Notes payable     75,000       44,000  
Convertible notes payable     -       182,000  
Convertible notes payable-related party     434,000       543,000  
Derivative liability     8,110,000       4,673,000  
Total current liabilities     9,480,000       5,685,000  
                 
Commitments and Contingencies                
                 
Stockholders’ Deficit                
Series A Preferred stock: $0.0001 par value, 5,000,000 shares authorized; 5,000,000 issued and outstanding     500       -  
Series B Preferred stock: $0.0001 par value, 1,000,000 shares authorized; 1,000,000 issued and outstanding     100       -  
Series C Preferred stock: $0.0001 par value, 40,000,000 shares authorized; 40,000,000 issued and outstanding     4,000       -  
Common stock par value $0.0001: 5,000,000,000 shares authorized; 337,397,856 and 93,856,857 shares issued and outstanding, respectively     34,000       9,000  
Additional paid-in capital     8,718,400       6,369,000  
Accumulated deficit     (16,663,000 )     (11,594,000 )
Non-Controlling Interest in Subsidiaries     (190,000 )     (156,000 )
Total Stockholders’ Deficit allocated to Carolco Pictures, Inc.     (8,096,000 )     (5,372,000 )
                 
Total Liabilities and Stockholders’ Deficit   $ 1,384,000     $ 313,000  

 

See accompanying notes to condensed consolidated financial statements

 

2 
 

 

Carolco Pictures, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2016     2015     2016     2015  
                         
Revenues   $ 146,000     $ 366,000     $ 176,000     $ 769,000  
                                 
Cost of goods sold     76,000       286,000       80,000       623,000  
                                 
Gross profit     70,000       80,000       96,000       146,000  
                                 
Operating expenses                                
Compensation     792,000       40,000       956,000       428,000  
Professional fees     219,000       71,000       270,000       361,000  
General and administrative     290,000       37,000       347,000       265,000  
Total operating expenses     1,301,000       148,000       1,573,000       1,054,000  
                                 
Loss from operations     (1,231,000 )     (68,000 )     (1,477,000 )     (908,000 )
                                 
Other income (expense)                                
Interest expense (including interest to related party for the nine months of $66,000 and $11,000, respectively)     (14,000 )     (1,133,000 )     (215,000 )     (1,266,000 )
Change in fair value of derivative liability     379,000       216,000       (3,826,000 )     229,000  
Gain on extinguishment of derivative liability     132,000       -       389,000       -  
Gain on settlement of convertible note     28,000       -       28,000       -  
Other income (expense)     (1,000 )     1,000       (2,000 )     (1,000 )
Other income (expense), net     524,000       (916,000 )     (3,626,000 )     (1,038,000 )
                                 
Loss before non-controlling interest     (707,000 )     (984,000 )     (5,103,000 )     (1,946,000 )
Net (loss) income attributable to non-controlling interest     (2,000 )     5,000       (34,000 )     (17,000 )
Net loss attributable to Carolco Pictures, Inc. stockholders   $ (705,000 )   $ (989,000 )   $ (5,069,000 )   $ (1,929,000 )
                                 
Net loss per common share - basic and diluted   $ (0.01 )   $ (0.02 )   $ (0.02 )   $ (0.04 )
                                 
Weighted-average common shares outstanding -basic and diluted     373,961,099       58,837,772       257,264,681       58,164,613  

 

See accompanying notes to condensed consolidated financial statements

 

3 
 

 

Carolco Pictures, Inc.

Condensed Consolidated Statement of Stockholders’ Deficit

For the Nine Months Ended September 30, 2016

(Unaudited)

  

    Common Shares,
$.0001 Par Value Per Share
    Series A Preferred,
$.0001 Par Value Per Share
    Series B Preferred,
$.0001 Par Value Per Share
   

Series C Preferred,

$.0001 Par Value Per Share

    Additional           Non     Total  
    Shares
Issued
    Amount     Shares
Issued
    Amount     Shares
Issued
    Amount     Shares
Issued
    Amount     Paid-In
Capital
    Accumulated
Deficit
    Controlling
Interest
    Stockholder’s
Defidt
 
                                                                         
Balance December 31, 2015     93,856,857     $ 9,000             $ -             $ -             $ -     $ 6,369,000     $ (11,594,000 )   $ (156,000 )   $ (5,372,000 )
                                                                                                 
Common stock issued in conversion of notes payable     208,540,999       21,000                                                       70,000                       91,000  
                                                                                                 
Common stock issued in conversion of notes payable - related party     35,000,000       4,000                                                       5,000                       9,000  
                                                                                                 
Issuance of Series A and B to settle advances - related party                     5,000,000       500       1,000,000       100                       438,400                       439,000  
                                                                                                 
Issuance of Series A shares for issuance of Series C shares                     (2,500,000 )     (250 )                     12,750,000       1,275       510,975                       512,000  
                                                                                                 
Issuance of Series A and C shares upon acquisition of Recall Studios, Inc.                     1,990,000       200                       25,256,250       2,525       1,218,275                       1,221,000  
                                                                                                 
Issuance of Series A shares to related party                     510,000       50                                       14,950                       15,000  
Issuane of Series C shares for services                                                     1,993,750       200       91,800                       92,000  
                                                                                                 
Net loss                                                                             (5,069,000 )     (34,000 )     (5,103,000 )
                                                                                                 
Balance September 30, 2016     337,397,856     $ 34,000     $ 5,000,000     $ 500     $ 1,000,000     $ 100     $ 40,000,000     $ 4,000     $ 8,718,400     $ (16,663,000 )   $ (190,000 )   $ (8,096,000 )

 

See accompanying notes to condensed consolidated financial statements

 

4 
 

 

Carolco Pictures, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

    Nine Months Ended September 30,  
    2016     2015  
Cash flows from operating activities:                
Net loss before noncontrolling interest   $ (5,103,000 )   $ (1,946,000 )
                 
Adjustments to reconcile net loss to net cash used in operating activities:                
Change in fair value of derivative liability     3,826,000       (229,000 )
Amortization of debt discount and debt issuance cost     79,000       1,229,000  
Depreciation expense     1,000       1,000  
Gain on extinguishment of derivative liability     (389,000 )     -  
Share-based compensation     619,000       204,000  
Gain on settlement of convertible note     (28,000 )     -  
Amortization of intangible assets     276,000       -  
Write-off of subscription receivable     -       8,000  
                 
Changes in operating assets and liabilities:                
Accounts receivable     (46,000 )     11,000  
Prepaid expenses and other current assets     8,000       (69,000 )
Capitalized production costs     (24,000 )     (17,000 )
Accounts payable and accrued expenses     138,000       26,000  
Accrued interest     49,000       23,000  
Accrued payroll     292,000       (25,000 )
Deferred revenue     -       45,000  
                 
Net cash used in operating activities     (302,000 )     (739,000 )
                 
Cash flows from investing activities:                
Purchase of computer software     -       (3,000 )
Deposit on project paid to related party     -       (250,000 )
Cash acquired from acquisition     107,000          
                 
Net cash provided by (used in) investing activities     107,000       (253,000 )
                 
Cash flows from financing activities:                
Advances from (repayments to) related parties     359,000       (80,000 )
(Payments) proceeds from note payable - related party     (100,000 )     380,000  
Proceeds from issuance of notes payable     31,000       27,000  
(Payments) proceeds from issuance of convertible notes payable     (148,000 )     323,000  
Proceeds from private placements of common stock     -       195,000  
Proceeds from sale of units of common stock and warrants     -       150,000  
Deposit on future sale of equity     205,000       -  
                 
Net cash provided by financing activities     347,000       995,000  
                 
Net increase in cash and cash equivalents     152,000       3,000  
Cash and cash equivalents - beginning of period     48,000       160,000  
Cash and cash equivalents - end of period   $ 200,000     $ 163,000  
                 
Supplemental disclosures of cash flow information:                
Interest paid in cash   $ 76,000     $ 5,000  
Taxes paid in cash   $ -     $ -  
                 
Non-Cash Investing and Financing Activities                
Common stock issued upon conversion notes payable and accrued interest   $ 100,000     $ -  
Issuance of Series A and B Preferred Stock upon settlement of related party advances and accrued payroll   $ 439,000     $ -  
Issuance of Series A and C Preferred Stock issued upon acquisition of Recall Studios, Inc.   $ 1,221,000       -  
Debt discount due to convertible feature   $ -     $ 287,000  
Net loss attributable to non-controlling interest   $ 34,000     $ 17,000  

 

See accompanying notes to condensed consolidated financial statements

 

5 
 

 

Carolco Pictures, Inc.

Notes to the Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2016 and 2015

(Unaudited)

 

Note 1 - Organization and Basis of Operations

 

Carolco Pictures, Inc. (the “Company”) was incorporated under the laws of the State of Florida in February 2009 under the name “York Entertainment, Inc.” The Company changed its name to Brick Top Productions, Inc. in October 2010. In January 2015, the Company changed its name from Brick Top Productions, Inc. to Carolco Pictures, Inc. and changed its stock symbol from “BTOP” to “CRCO.”

 

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles as promulgated in the United States of America (“GAAP”) and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended (the “Exchange Act”) and Article 8-03 of Regulation S-X under the Exchange Act. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the three and nine months ended September 30, 2016 are not indicative of the results that may be expected for the fiscal year ending December 31, 2016. You should read these unaudited condensed consolidated financial statements in conjunction with the audited financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2015 filed on November 22, 2016. The condensed consolidated balance sheet as of December 31, 2015 has been derived from the audited financial statements included in the Form 10-K for that year.

 

Going Concern

 

The Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the consolidated financial statements, the Company had a stockholders’ deficit of $8,096,000 at September 30, 2016, and incurred a net loss of $5,103,000 and utilized net cash used in operating activities of $302,000 for the nine months then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2015 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

The ability of the Company to continue as a going concern is dependent on the Company’s ability to execute its strategy and in its ability to raise additional funds. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate its business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case of equity financing. Management estimates that the current funds on hand as of the date of this report will be sufficient to continue operations through December 31, 2016.

 

Note 2 - Summary of Significant Accounting Policies

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include depreciable lives of property and equipment, analysis of impairments of recorded goodwill, accruals for potential liabilities, assumptions made in valuing derivative liabilities and assumptions made in valuing stock instruments issued for services.

 

6 
 

 

Principles of Consolidation

 

The Company’s consolidated subsidiaries and/or entities are as follows:

 

Name of consolidated

subsidiary or entity

 

State or other jurisdiction of

incorporation or organization

 

Date of incorporation or formation

(date of acquisition, if applicable)

 

Attributable

interest

             
York Productions, LLC   The State of Florida  

October 22, 2008

(June 1, 2010)

  60%
             
York Productions II, LLC   The State of Florida   June 13, 2013   60%
             
S&G Holdings, Inc.   The State of Tennessee  

January 4, 2005

(December 24, 2013)

  75%
             
Recall Studios, Inc.   The State of Nevada  

March 30, 2016

(July 27, 2016)

  100%

 

The accompanying financial statements are consolidated and include the accounts of the Company and its majority owned subsidiaries. The consolidated accounts include 100% of the assets and liabilities of our majority owned subsidiaries, and the ownership interests of minority investors are recorded as a minority interest. All inter-company balances and transactions have been eliminated.

 

Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB ASC (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described: 

 

Level 1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
   
Level 2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
   
Level 3 Pricing inputs that are generally observable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

7 
 

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, other assets, accounts payable and accrued payroll, approximate their fair values because of the short maturity of these instruments. The carrying values of notes payable and convertible notes approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing market interest rates.

 

The carrying amount of the Company’s derivative liability of $8,110,000 and $4,673,000 as of September 30, 2016 and December 31, 2015, respectively, was based on Level 2 measurements.

 

Concentrations

 

During the three and nine months ended September 30, 2016 and 2015, the Company had one customer that accounted for 100% and 85%, 79% and 57% of sales, respectively.

 

Revenue Recognition

 

The Company specializes in the development and presentation of television programming including series, specials, pilots, live events and award shows. The Company recognizes revenue from its live events and award show productions when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the show or live event has been completed and occurred and there are no future production obligations, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured.

 

Revenues from the sale of programming for television and other media will be recognized when the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the show/episode is complete, and in accordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery; (iii) the price to the customer is fixed and determinable; and (iv) collectability is reasonably assured.

 

Stock-Based Compensation

 

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by FASB where the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB where the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options and warrants granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options and warrants vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option and warrant grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

 

The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

 

Deposit for Film Project to Related Party

 

Deposit for film project includes capitalizable production costs, production overhead, interest, development costs and acquired production costs and are stated at the lower of cost, less accumulated amortization, or fair value. The amount by which the unamortized costs of film and television productions exceed their estimated fair values is written off. Film development costs for projects that have been abandoned or have not been set for production within three years are generally written off.

 

8 
 

 

Capitalized Production Costs

 

Capitalized production costs consist of capitalized costs pursuant to contractual amount due or paid by the Company for development of virtual reality content, films produced or film rights acquired in preparation of development. Capitalized costs include all direct production and production overhead.

 

In accordance with current accounting guidelines, the Company will amortize capitalized production costs using the individual film forecast computation method, whereby these costs are amortized and participations and residuals costs are accrued in the proportion that current year’s revenue bears to management’s estimate of ultimate revenue at the beginning of the current year expected to be recognized from the exploitation, exhibition or sale of the virtual reality content, films or television programs.

 

Capitalized production costs are stated at lower of amortized cost or estimated fair value. The valuation of capitalized production costs is reviewed on a title-by-title basis, when an event or change in circumstances indicates that the fair value of a film or television program is less than its unamortized cost. In determining the fair value of our programs, the Company projects revenue in future periods to create an ultimate revenue.

 

Ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release or from the date of delivery of the first episode for episodic television series. Ultimate revenue is reviewed and revised at least once per year.

 

During the period ended September 30, 2016, the Company capitalized production costs amounting to $54,000 for projects that are still in development.

 

Intangible Assets

 

Intangible assets consist of employment agreements acquired as a result of the acquisition of Recall Studios, Inc. (“Recall”) in July 2016 and are accounted in accordance with current accounting guidelines and amortized over their expected life. Intangibles are valued at their fair market value and are amortized taking into account the character of the acquired intangible asset and the expected period of benefit. The Company evaluates intangible assets for impairment, at a minimum, on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated undiscounted future cash flows. Recoverability of intangible assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.

 

At September 30, 2016, the Company had remaining intangible assets of $828,000. There were no indications of impairment based on management’s assessment of these assets at September 30, 2016. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy for our overall business, and significant negative industry or economic trends. If current economic conditions worsen causing decreased revenues and increased costs, we may have to record impairment to our intangible assets.

 

Loss Per Share

 

Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the loss of the Company. In computing diluted loss per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants.

 

9 
 

 

At September 30, 2016 and December 31, 2015 there were 2,952,600 warrants outstanding, which were excluded from the loss per share calculation as they were anti-dilutive.

 

Derivative Financial Instruments

 

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. The Company uses a probability weighted average Black-Scholes-Merton model to value the derivative instruments at inception and on subsequent valuation dates through the September 30, 2016 reporting date.

 

The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

 

In March 2016, the FASB issued the ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The amendments in this ASU require, among other things, that all income tax effects of awards be recognized in the income statement when the awards vest or are settled. The ASU also allows for an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and allows for a policy election to account for forfeitures as they occur. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted for any entity in any interim or annual period. The Company is currently evaluating the expected impact that the standard could have on its financial statements and related disclosures.

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the SEC did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statement presentation or disclosures.

 

10 
 

 

NOTE 3 – Acquisition of Recall Studios, Inc.

 

On July 25, 2016, the Company entered into an agreement whereby, the Company issued 25,256,250 shares of Series C Stock and 1,990,000 shares of Series A stock with an estimated fair value of $1.2 million in exchange for all of the issued and outstanding shares of Recall. Recall is a Nevada corporation in the business of developing and producing Virtual Reality (VR) and Augmented Reality (AR) content and devices.

 

The acquisition of Recall has been accounted for as a purchase and the operations of Recall have been consolidated since July 25, 2016, the effective date of the acquisition. The $1.2 million purchase price was allocated based upon the fair value of the acquired assets, as determined by management with the assistance of an independent valuation firm. The purchase price and allocation of the purchase price was as follows:

 

Purchase price:        

 

Fair value of 25,256,250 shares of Series C stock   $ 1,161,000  
Fair value of 1,990,000 shares of Series A stock     60,000  
Purchase price   $ 1,221,000  

 

Purchase price allocation:        

 

Intangible asset, related to employment with covenants not to compete agreements   $ 1,104,000  
Cash balance at acquisition date     107,000  
Capitalized production cost     30,000  
Deposit on future sale of equity     (20,000 )
Purchase price   $ 1,221,000  

  

Management used valuation of $0.046 per share or $1,161,000 to value the 25,256,250 shares of Series C Stock, based on various inputs, including a valuation report prepared by the third-party valuation firm. There are numerous acceptable ways to estimate company value, including using net tangible assets, a market-based approach, or discounted cash flows. The Company considered alternative methods and concluded that due to the lack of suitably comparable market data, the discounted cash flows method was the most appropriate. A discounted cash flows (i.e. free cash flows to equity) methodology was applied by the third-party valuation firm using multiple years of balance sheet and income statement projections. Management used a valuation of $0.030 per share or $60,000 to value the 1,990,000 shares of Series A Stock issued based upon the most recent sale of the Series A for cash.

 

The Company estimates that the intangible assets will have a life of one year which is equal to the terms of the employment and covenants not to compete agreements.

 

During the period ended September 30, 2015, the Company recorded amortization expense of $276,000. As of September 30, 2016, the unamortized balance of these intangible assets amounted to $848,000.

 

The Company did not disclose pro forma financial statements pursuant to FASB Topic 805 “Disclosure of Supplementary Pro Forma Information for Business Combinations” as Recall was established and started operations during April 2016, and its operations were insignificant.

 

Note 4 – Deposit for Film Project Paid to Related Party

 

In April 2015, the Company entered into an agreement with Mr. Mario Kassar, who at the time was the Chairman of the Company. Pursuant to the agreement (the “Kassar Agreement”), the Company provided $250,000 in funding to a company managed by Mr. Kassar for the production of a film initially titled “Audition.”

 

Pursuant to the terms of the Kassar Agreement, the Company engaged Mr. Kassar to render producing and sales services for each film in the “Rambo” franchise, “SMITE” franchise or other feature length motion picture property introduced to the Company by Mr. Kassar (each, a “Picture”) on the same terms as apply to “Audition,” except that the producing fee shall not be less than 10% of the budget of each Picture. The Company also agreed to pay Mr. Kassar 5% of the purchase price of any Carolco-produced feature length films in the “Rambo” franchise and all completed films or film libraries acquired by the Company with Mr. Kassar’s assistance and based on Mr. Kassar’s introduction to the Company of such completed films or film libraries. The terms of the Kassar Agreement also provide that the Company will pay Mr. Kassar a discretionary bonus in relation to his efforts in bringing projects and opportunities to the Company.

 

11 
 

 

As of September 30, 2016, the Audition project was still in pre-production stage. The Company determined there was no impairment of the deposit at September 30, 2016 and December 31, 2015 due to the early stages of the film production.

  

Note 5 –Note Payable

 

The Company has a note payable to a financial institution pursuant to which the Company can make advances up to $75,000. The note payable is secured by certain of the Company’s assets, bears an average interest rate of 5% per annum and will mature in April 2017. As of December 31, 2015, total outstanding note payable amounted to $44,000.

 

During the period ended September 30, 2016, the Company received advances of $31,000 and accrued and paid interest of $2,000. As of September 30, 2016, outstanding balance of the note amounted to $75,000.

 

Note 6- Convertible Notes Payable

 

Convertible notes payable consist of the following as of September 30, 2016 and December 31, 2015:

 

    September 30, 2016   December 31, 2015
         
(a) St. George   $ -     $ 56,000  
(b) Vis Vires     -       78,000  
(c) Auctus Fund     -       86,000  
(d) Vis Vires     -       41,000  
                 
Total Notes     -       261,000  
Less Valuation Discount     -       (79,000 )
                 
Net Balance   $ -     $ 182,000  

 

(a) On May 6, 2015, the Company issued an unsecured convertible promissory note in the principal amount of $91,000 to St. George Investments, LLC (the “Lender”). The note bore interest at 22% per annum, as amended and matured in April 2016. Under the terms of the note, there was an original issue discount (“OID”) of $8,000 withheld at funding and the Company agreed to pay $3,000 to the Lender to cover the Lender’s legal fees and other transaction related costs. The Company recognized the OID as a note discount and the $3,000 fee as debt issuance costs. Both the note discount and issuance costs recognized in the transaction were accreted to interest expense over the life of the note. In addition, the Company paid an $8,000 finders’ fee in the transaction which has been recorded in debt issuance costs and is being accreted to interest expense of the life of the note. The note was convertible by the Lender into common stock of the Company at the lesser of $0.45 per share or, in the event the Company’s market capitalization falls below $15.0 million, at a defined Lender conversion price. As of December 31, 2015, outstanding balance of the note amounted to $56,000 and accrued interest of $3,000.
   
During the nine months ended September 30, 2016, the Company accrued interest of $3,000 and paid off the entire principal note balance of $56,000 and accrued interest of $6,000.

 

12 
 

 

(b) On May 12, 2015, the Company issued a convertible promissory note in the principal amount of $104,000 to the Vis Vires Group, Inc. (“VVG”). The note bore interest at 22% per annum, as amended, and matured in February 2016. VVG deducted $2,000 from the proceeds to cover their legal and other transaction related costs which was recorded as debt issuance costs and is being accreted to interest expense over the life of the note. The note carried a variable conversion price defined as 61% of the market price (representing a 39% discount), with market price being defined as the average of the lowest three trading days for the Company’s common stock during the 10-day period prior to the conversion date. As of December 31, 2015, outstanding balance of the note amounted to $78,000 and accrued interest of $9,000.
   
  During the nine months ended September 30, 2016, the Company accrued interest of $3,000, paid off the note and accrued interest in the aggregate of $79,000 and converted the remaining principal balance of $11,000 to 5,978,947 shares of common stock.
   
(c) On June 22, 2015, the Company issued a convertible promissory note in the amount of $88,000 to the Auctus Fund, LLC (“Auctus”). The note bears interest at 24% per annum, as amended, and matured in March 2016. Auctus deducted $8,000 from the proceeds to cover their legal and other transaction related costs which were recorded as debt issuance costs and is being accreted to interest expense over the life of the note. In addition, the Company paid an $8,000 finders’ fee in this transaction which has been recorded in debt issuance costs and was accreted to interest expense over the life of the note. The note carried a variable conversion price defined as 50% of the market price (representing a 50% discount), with market price being defined as the lowest trading price of our common stock during the 25-trading day period prior to the conversion date. As of December 31, 2015, outstanding balance of the note amounted to $86,000 and accrued interest of $7,000.
   
  During the nine months ended September 30, 2016, the Company converted principal and accrued interest in the aggregate of $38,000 to 160,752,578 shares of common stock. In addition, the Company settled with the note holder the remaining principal balance of $53,000 in exchange for cash payment of $25,000 which resulted in gain of $28,000. As of September 30, 2016, there were no outstanding note balance and accrued interest.
   
(d) On July 10, 2015, the Company issued a convertible promissory note in the principal amount of $52,500 to VVG. The note bore interest at 22% per annum, as amended and matured in April 2016. VVG deducted $1,000 from the proceeds to cover their legal related costs which were charged to interest expense. The note carried a variable conversion price defined as 61% of the market price (representing a 39% discount), with market price being defined as the average of the lowest three trading days for the Company’s common stock during the 10-day period prior to the conversion date. As of December 31, 2015, outstanding balance of the note amounted to $41,000 and accrued interest of $3,000.
   
  During the nine months ended September 30, 2016, the Company converted the entire principal and accrued interest amounting to $42,000 to 41,809,474 shares of common stock.

 

The Company considered the current FASB guidance of “Contracts in Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability of whether or not within the issuers control means the instrument is not indexed to the issuer’s own stock. Accordingly, the Company determined that the conversion prices of these notes were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. In addition, since the number of shares to be issued is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares were available to share settle the conversion option. As a result, the Company determined that the conversion features of the notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities upon issuance. The Company determined that upon issuance of the notes in 2015, the initial fair value of the embedded conversion feature was $532,000. As such, the Company recorded a $532,000 derivative liability, of which $305,000 was recorded as debt discount offsetting the fair value of the notes and the remainder of $226,000 was recorded as a financing cost in 2015. The discount is being amortized using the effective interest rate method over the life of the debt instruments. The unamortized balance of the debt discount was $79,000 as of December 31, 2015.

 

During the nine months ended September 30, 2016, the Company amortized to interest expense, $79,000 of the remaining debt discount. In addition, the Company also recorded and paid additional interest of $55,000 due to the default of certain of these notes.

 

13 
 

 

Note 7 – Convertible Notes Payable to Related Party

 

In July 2015, the Company issued its convertible promissory notes to Alex Bafer, Chairman and former CEO in exchange for the cancellation of previously issued promissory notes in the aggregate of $555,000 and accrued interest of $13,000 for a total of $543,000. The notes are unsecured, bear interest of 5% per annum, matured on October 1, 2015 and are convertible to shares of common stock at a conversion price equal to the lowest 20-day stock price prior to conversion with a 50% discount.

 

The Company considered the current FASB guidance of “Contracts in Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability of whether or not within the issuer’s control means the instrument is not indexed to the issuer’s own stock. Accordingly, the Company determined that the conversion prices of the notes were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. In addition, since the number of shares to be issued is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to share settle the conversion option. As a result, the Company determined that the conversion features of the notes were not considered indexed to the Company’s own stock and characterized the fair value of the conversion features as derivative liabilities upon issuance. The Company determined that upon issuance of the convertible notes in 2015, the initial fair value of the embedded conversion feature was $1.5 million. The Company determined that the cancellation of the previously issued promissory notes in exchange for the convertible notes issued in 2015 was an extinguishment of debt, and the fair value of the derivative liability of $1.5 million was created upon the exchange of debt instruments and was accounted as a debt extinguishment cost during the year ended December 31, 2015.

 

In October 2015, the notes matured and became past due. As a result, the stated interest of 5% increased to 22% pursuant to the term of the notes. As of December 31, 2015, total outstanding note balance amounted to $543,000 and accrued interest of $42,000.

 

In July 2016, the Company and Mr. Bafer agreed to extend the maturity date of these notes to August 1, 2017 and cure the default. There were no other terms changed and no additional compensation paid.

 

During the period ended September 30, 2016, Mr. Bafer converted principal balance of $9,000 to 35 million shares of common stock. In addition, the Company paid Mr. Bafer $100,000 and accrued interest of $66,000. As of September 30, 2016, total outstanding note balance amounted to $434,000 and accrued interest of $108,000.

 

Note 8 - Derivative Liability

 

The FASB has issued authoritative guidance whereby instruments which do not have fixed settlement provisions are deemed to be derivative instruments. Certain warrants issued to investors and conversion features of notes payable do not have fixed settlement provisions because their exercise prices will be lowered if the Company issues securities at lower prices in the future. In addition, since the number of shares to be issued is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to share settle the conversion option. In accordance with the FASB authoritative guidance, the conversion feature of the notes was separated from the host contract (i.e., the notes) and the fair value of the warrants have been recognized as a derivative and will be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

 

The Company had four convertible notes payable, five convertible notes payable to a related party and warrants to purchase a total of 561,250 shares of common stock as of September 30, 2016 that were accounted for as derivative liability. The derivative liability was valued at the following dates using a probability based weighted-average Black-Scholes-Merton model with the following average assumptions:

 

    December 31, 2015   September 30, 2016
Stock Price   $ 0.001     $ 0.0003  
Risk free interest rate     0.003 %     0.50 %
Expected Volatility     404 %     472 %
Expected life in years     0.614       0.625  
Expected dividend yield     0 %     0 %
                 
Fair Value – Warrants   $ 3,658,000     $ 5,521,000  
Fair Value – Note Conversion Feature   $ 1,015,000     $ 2,589,000  

 

14 
 

 

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the derivative securities was determined by the remaining contractual life of the derivative instrument. For derivative instruments that already matured, the Company used the estimated life. The expected dividend yield was based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.

 

During the nine months ended September 30, 2016, the Company recorded a gain of $389,000 upon the extinguishment of derivative liabilities related to the payment and conversion of certain convertible notes, and a gain of $3,826,000 relating to the change in the fair value of the derivatives during the period. As of September 30, 2016, the aggregate fair value of the derivative liabilities was $8,110,000.

 

Note 9 - Stockholders’ Deficit

 

Issuance of Preferred Stock

 

During the period from January 1, 2016 to June 30, 2016, Mr. Tarek Kirschen, the Company’s Chief Executive Officer at that time, made non-interest bearing advances of $354,000 to the Company. In addition, the Company also accrued payroll of $85,000 pursuant to Mr. Kirschen’s employment agreement. In June 2016, the Company issued 5,000,000 of Preferred A shares and 1,000,000 of Preferred B shares to Mr. Kirschen as settlement for advances made by him and his accrued payroll in the aggregate amount of $439,000. The holder of Preferred A shares is entitled to 100 votes per Preferred A share with no dividend rights and the Preferred A shares are not convertible to common shares. The Preferred B shares are convertible into 2 common shares per each Preferred B share, and the holder of Preferred B shares is entitled to 1 vote per Preferred B share, with no dividend rights. Concurrent with the settlement, Mr. Kirschen sold the 5,000,000 Preferred A shares issued to him to South Centre, Inc. (“South Centre”), a firm owned by an unrelated individual, Mr. David Cohen, for $150,000. As a result of this sale, Mr. Cohen gained control of the Company and became its Chief Executive Officer.

 

In July 2016, the Company entered into a Redemption and Issuance Agreement by and between the Company and South Centre. Pursuant to the agreement, the Company redeemed 2,500,000 shares of the Company’s Series A Preferred Stock from South Centre in exchange for 12,750,000 shares of Series C Preferred Stock. The Preferred C shares are convertible to 2 common shares per Preferred C share and each Preferred C share is entitled to 1 vote, with no dividend rights. The Company determined the fair value of the 2,500,000 Series A shares redeemed to be $75,000, or $0.03 per share, which was the price paid by Mr. Cohen when he bought the Series A shares in June 2016. The Company determined that fair value the 12,750,000 Series C shares issued to be $586,000, or $0.046 per share, pursuant to a valuation performed for the Recall acquisition (see Note 3). As a result of this exchange agreement, the Company recorded compensation expense of $512,000 to account for the difference between the fair value of the 2,500,000 Series A shares redeemed and the 12,750,000 Series C shares issued to South Centre.

 

In July 2016, the Company granted 1,993,750 per statement of stockholder’s deficit shares of Preferred C Stock with a fair value of $92,000 for consulting and legal services rendered, which was recorded as part of Operating Expenses in the accompanying Statements of Operations.

 

In July 2016, the Company issued 510,000 shares of Preferred A Stock with a fair value of $15,000 to Mr. Alex Bafer pursuant to his appointment as Chairman of the Board of Directors.

 

15 
 

 

Deposit on Future Sale of Equity

 

During the period ended September 30, 2016, the Company’s wholly-owned subsidiary, Recall sold 562,500 shares of Recall’s common stock for total proceeds of $225,000. These common shares were not included in the purchase agreement when the Company acquired Recall in July 2016.

 

The Company is in the process of converting these 562,500 shares of Recall common stock to the Company’s Series C stock pursuant to the original terms of its acquisition of Recall.

 

Summary of the Company’s Stock Warrant Activities

 

The following table summarizes information concerning outstanding and exercisable warrants as of September 30, 2016:

 

  Warrants   Weighted
 Average Price
January 1, 2016     2,952,600     $ 0.08  
Granted     -       -  
Exercised     -       -  
Forfeited     -       -  
September 30, 2016     2,952,600     $ 0.08  

 

Note 10 - Related Party Transactions

 

Advances from Related Party

 

From time to time, the former CEO of the Company and a shareholder advanced funds to the Company for working capital purposes. Those advances are unsecured, non-interest bearing and due on demand. As of December 31, 2015, outstanding advances from related party amounted to $31,000.

 

During the nine-month period ended September 30, 2016, a shareholder and employee made non-interest bearing advances of $10,000 to the Company.

 

As of September 30, 2016, total outstanding advances from related party amounted to $41,000.

 

Accrued Payroll

 

Pursuant to a September 2010 employment agreement with our former Chief Executive Officer, the Company had accrued payroll of $125,000 as of December 31, 2015.

 

During the nine months ended September 30, 2016, the Company accrued payroll in the aggregate of $287,000 for officers and employees salaries. In June 2016, as part of the settlement with Mr. Kirschen, the Company’s CEO at that time, the Company issued 5,000,000 of Preferred A shares and 1,000,000 of Preferred B shares as settlement of his accrued payroll of $85,000.

 

As of September 30, 2016, accrued payroll amounted to $327,000, of which $125,000 pertains to the accrued salary of two officers, Mr. Cohen, CEO and Mr. Bafer, Chief Development Officer.

 

16 
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Unless otherwise indicated, references in this Quarterly Report on Form 10-Q to “we,” “us,” and “our” are to the Company, unless the context requires otherwise. The following discussion and analysis by our management of our financial condition and results of operations should be read in conjunction with our unaudited condensed interim financial statements and the accompanying related notes included in this Quarterly Report and our audited financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission.

 

Overview

 

We were incorporated on February 20, 2009, in the State of Florida, under the name York Entertainment, Inc. On October 5, 2010, we amended our articles of incorporation to change our name to Brick Top Productions, Inc. Effective December 31, 2014, we amended our articles of incorporation to change our name to Carolco Pictures, Inc.

 

We are an award-winning feature film and television specials production company. We seek to finance, produce and distribute one or more television series and feature films to be licensed for exploitation in domestic and international theatrical, television, cable, home video and pay per view markets.

 

Through our subsidiary, High Five Entertainment, we specialize in the development and presentation of quality television programming including live events and award shows.

 

Through Recall, our subsidiary that we acquired in July 2016, we focus on Virtual Reality content, filling the demand attendant to the increased production of virtual reality viewing devices absent a corresponding increase in content production. Founded by business, media and entertainment industry leaders to meet growing demand for virtual reality and augmented reality content, Recall operates within the convergence of immersive content and software. Recall will allow consumers to create and share interactive experiences across all platforms. Combining modern business strategy with industry experience by bringing together highly trained relative newcomers and entertainment industry stalwarts to create low risk, high profit and artistically acclaimed feature film virtual reality and television projects, the Company and its subsidiaries are analyzing profitability across myriad entertainment sectors.

 

Management’s Plan

 

The business side of our management team is disciplined in financial risk mitigation techniques. Aside from the commercialization of our management team’s past successes, which cannot in themselves necessarily predict future success, we are experienced at balancing projects, budgets and growth to effectively manage risk in light of our business objectives.

 

We believe that we have unique access to Hollywood talent, scripts and third parties ripe for acquisition. We believe that the reputation of our management team in producing some of the most-well known, talked about and socially ingrained entertainment opens doors for us that are closed to others.

 

We believe we represent a new model in entertainment industry profitability. We intend to focus on growth and efficiency. Our development plan combines modern business strategy with old-fashioned industry experience. Our early acquisition, High Five Entertainment, has given us highly regarded, industry leading talent. We have matched that talent with new and existing property development. By targeting additional revenue positive entertainment projects and companies, we expect to achieve increased profitability and efficiency through scale.

 

We believe that our management team’s reputation, contacts and experience give us a competitive edge. However, the market for productions currently is, and is expected to continue to be, extremely competitive. Our competitors include many companies that have substantially greater financial, management, marketing resources and experience than us. There can be no assurance that our productions will be competitive with other motion pictures or television shows, or that we will be able to achieve or maintain profitability.

 

17 
 

 

Recent Developments

 

On June 22, 2016, the Company entered into a Stock Purchase Agreement (the “SPA”) by and between the Company, Tarek Kirschen, the then-Chief Executive Officer and a director of the Company and South Centre, a firm owned solely by David Cohen, a then-unrelated individual. The SPA provided that the Company would issue to Mr. Kirschen 5,000,000 shares of newly designated Series A Preferred Stock of the Company, par value $0.0001 per share (the “Series A Stock”), in exchange for the payment to the Company of $500, which would thereafter be sold by Mr. Kirschen to South Centre for $150,000. Mr. Cohen thereby became the controlling shareholder of the Company.

 

The SPA, as amended pursuant to Amendment No. 1 to the SPA, executed on June 24, 2016, provided that the closing of the transactions thereunder (the “Closing”) would occur upon satisfaction of all conditions precedent, including the issuance of the shares of Series A Stock and the issuance of shares of Series B Preferred Stock of the Company, the delivery of certain documents to evidence the valid issuance of the Series A Stock to Mr. Kirschen, the execution and delivery of certain additional documents, including the Release and Issuance Agreement as discussed below, and certain other customary closing conditions. All such conditions were satisfied and the transactions under the SPA closed on June 27, 2016.

 

On June 22, 2016, in connection with and as required by the SPA, the Company entered into a Release and Issuance Agreement by and between Mr. Kirschen, the Company, Alexander Bafer, a former officer and shareholder of the Company, and South Centre (the “Release Agreement”). Pursuant to the Release Agreement, effective as of the Closing, (i) Mr. Kirschen released all claims that he may have against the Company, Mr. Bafer and their respective related parties; and (ii) Mr. Bafer released all claims that he may have against Mr. Kirschen and his related parties.

 

In the Release Agreement, the Company also agreed to issue to Mr. Kirschen 5,000,000 shares of Series A Stock, and 1,000,000 shares of newly designated Series B Preferred Stock of the Company, par value $0.0001 per share (the “Series B Stock”), and Mr. Kirschen agreed to forgive $438,767.35 that was owed by the Company to Mr. Kirschen (the “Debt”). The transactions under the Release Agreement closed concurrently with the Closing under the SPA, on June 27, 2016. Upon the Closing, Mr. Cohen was named a director and the Chief Executive Officer of the Company.

 

On July 20, 2016, the Company entered into an Amendment to Promissory Notes (“Notes Amendment”) with Alexander Bafer pursuant to which the maturity date of each of our five loans from Mr. Bafer was amended to be August 1, 2017 instead of October 1, 2015. The five loans are represented by Replacement Convertible Promissory Notes (“Notes”). Pursuant to the terms of the Notes Amendment, Mr. Bafer waived any default under each of the Notes through the date of the Notes Amendment as a result of any amounts payable under the Notes not being paid as of October 1, 2015 and waived the payment of any Default Interest (as defined in the Notes) through the date of the Notes Amendment as a result of such failure of payment. No other terms of the loans changed, and we did not pay any consideration for the extension. Our outstanding balance on the loans under the Notes as of July 20, 2016 was approximately $468,662.

 

On July 21, 2016, the Company entered into a Redemption and Issuance Agreement (the “Redemption Agreement”) by and between the Company and South Centre, Inc., an entity owned and controlled by David Cohen, the Company’s sole director (at the time) and Chief Executive Officer. Pursuant to the Redemption Agreement, on the same date, the Company redeemed 2,500,000 shares of the Company’s Series A Preferred Stock (the “Series A Stock”) in exchange for the payment to South Centre of $0.0001 per share, for a total consideration of $250. The Company undertook the redemption for the purposes of obtaining the shares of Series A Stock so that such shares could be paid to certain third parties in connection with the Contribution Agreement as disclosed below.

 

Also pursuant to the Redemption Agreement, on the same date, the Company issued to South Centre 12,750,000 shares of newly designated Series C Preferred Stock of the Company (the “Series C Stock”) in exchange for payment to the Company of $1,275.

 

On July 25, 2016, the Company entered into a Contribution Agreement (the “Contribution Agreement”) by and between the Company, Recall, South Centre and various other shareholders of Recall (the “Recall Shareholders”).

 

18 
 

 

In July 2016, the Company raised approximately $416,000 through the issuance of 487,000 shares of Recall’s common stock. The Company and the purchasers of these common stock are currently in negotiations to convert the 487,000 shares of Recall common stock to the Company’s Series C Preferred Stock.

 

The Contribution Agreement provided that the Recall Shareholders would contribute to the Company all of the shares of Recall held by the Recall Shareholders, which would result in Recall becoming a wholly owned subsidiary of the Company. In return for the contributions by the Recall Shareholders, the Company issued to the Recall Shareholders 25,256,250 shares of Series C Stock and 2,500,000 shares of the Series A Stock, that were redeemed by the Company from South Centre, as described above. The transactions under the Contribution Agreement closed on July 25, 2016.

 

Recall focuses on Virtual Reality content. Founded by business, media and entertainment industry leaders to meet growing demand for Virtual Reality (VR), and Augmented Reality (AR) content, that Recall is the future of new media entertainment and technology. Operating within the convergence of immersive content and software, Recall is allowing consumers to create and share interactive experiences across all platforms through its production of content and software permitting consumer based editing of non-linear content.

 

The Contribution Agreement provided that upon the closing of the transactions in the Contribution Agreement, the Company would enter into employment agreements with (i) Bradley Albert as President and Chief Creative Officer of the Company, (ii) Justin Morris as Chief Operating Officer of the Company and (iii) Alexander Bafer as Chief Development Officer of the Company.

 

Upon the closing of the transactions, the Company entered into employment agreements with each of Mr. Albert, Mr. Morris and Mr. Bafer which commenced simultaneously with the closing of the transactions under the Contribution Agreement, on July 25, 2016.

 

The Company entered into a Chairman Agreement with Alexander Bafer (the “Chairman Agreement”) on July 25, 2016, pursuant to which Mr. Bafer was named to the Board and also named Chairman of the Board. Pursuant to the Chairman Agreement, on the effective date thereof the Company issued to Mr. Bafer 510,000 shares of Series A Stock of the Company, which shares were immediately vested.

 

On July 25, 2016, pursuant to the Contribution Agreement, the Company issued 1,990,000 shares of Series A Stock and 25,256,250 shares of Series C Stock to the Recall Shareholders in exchange for the contribution to the Company by the Recall Shareholders (collectively) of 25,256,250 shares of common stock of Recall, and 748,334 shares of Class A Preferred Stock of Recall, collectively constituting 100% of the issued and outstanding capital stock of Recall.

 

At the option of the holder thereof, each share of Series C Stock is convertible into two shares of common stock of the Company (the “Common Stock”) provided that this option is not exercisable until there are sufficient shares of Common Stock authorized for the conversion of all of the Series C Stock. There is no adjustment to the conversion ratio in the event of a reverse stock split of the common stock or for any other reason.

 

In addition to the above, on the closing of the transaction with Recall, the Company issued 1,000,000 shares of Series C Stock to Harrison Smith (a former shareholder of Recall) and 993,750 shares of Series C Stock to Frank Esposito (an advisor to the Company) in consideration of services rendered to the Company in connection with the Contribution Agreement and the transactions therein.

 

19 
 

 

The issuances of the Series A Stock and the Series C Stock to the Recall Shareholders were completed pursuant to exemptions from registrations provided in Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 of Regulation D under the Securities Act.

 

In addition, as discussed above, pursuant to the Employment Agreement with Mr. Bafer, on the commencement of his employment term, the Company issued to Mr. Bafer 510,000 shares of Series A Stock of the Company, which shares were immediately vested.

 

On July 21, 2016, the Company amended its Articles of Incorporation to designate a new series of preferred stock, the Series C Preferred Stock (the “Series C Stock”) to be utilized in the transactions described above. 40,000,000 shares were designated as Series C Stock.

 

The Company hired a valuation specialist to assist the Company in the determination of the value of the acquisition. As of the date of this report, the Company is still in the process of finalizing the valuation and the allocation of the purchase price.

 

From April 2016 through September 2016, the Company issued 243,540,999 share of common stock upon conversion of convertible notes and accrued interest in the aggregate of $144,000.

 

On June 29, 2016, Carolco Pictures, Inc. (the “Company”), entered into a letter agreement with Esposito Partners, PLLC (“Esposito Partners”), pursuant to which the Company engaged Esposito Partners to provide legal services to the Company (the “Agreement”). The Agreement provides for a one-time fee payable to Esposito Partners in the amount of $60,000, which the Company may elect to pay by the delivery of stock of the Company. The Agreement also provides that Frank Esposito, the Managing Member of Esposito Partners, shall be named as a Director of the Company and shall also serve as the Company’s Chief Legal Officer and Secretary.

 

Private Unit Offering

 

In March 2015, we commenced an offering to sell to certain accredited investors up to 31,250,000 units (each, a “Unit”) at a price per Unit of $0.50, with each Unit consisting of one share of our common stock, one Class A Common Stock Purchase Warrant (the “Class A Warrant”) and one Class B Common Stock Purchase Warrant (the “Class B Warrant”). Each Class A Warrant entitles the holder to purchase one share of our common stock at an exercise price of $3.00 per share for a period of two years after its issuance and each Class B Warrant entitles the holder to purchase one share of our common stock at an exercise price of $6.00 per share for a period of two years after its issuance. The minimum investment amount per investor is $100,000 for 125,000 Units subject to our right to accept subscriptions in a lesser amount. We plan to invest up to $4,000,000 of the proceeds from this offering to partially finance the production of a motion picture based on the screenplay titled “Audition” written by film director, Richard Gray. In addition, we plan to continue use the balance of the offering proceeds in our feature film and television production business.

 

Results of Operations for the Three Months Ended September 30, 2016 and 2015

 

    Three Months Ended
September 30,
    2016   2015
Revenue   $ 146,000     $ 366,000  
Cost of goods sold   $ 76,000     $ 286,000  
Operating expenses   $ 1,301,000     $ 148,000  
Loss before non-controlling interest   $ (707,000 )   $ (984,000 )
Net (loss) income attributable to non-controlling interest   $ (2,000 )   $ 5,000  
Net loss attributable to Carolco Pictures’ stockholders   $ (705,000 )   $ (989,000 )

 

Revenues for the three months ended September 30, 2016 and 2015 were 146,000 and $366,000, respectively. The decrease of $220,000 is due to the slowdown in production activities during the change in the Company’s ownership in June 2016.

 

Cost of goods sold for the three months ended September 30, 2016 and 2015 were $76,000 and $286,000, respectively. The decrease of $210,000 is directly related to the decrease of approximately 60% in revenues, which was due to the change in the Company’s ownership in June 2016.

 

20 
 

 

Operating expenses for the three months ended September 30, 2016 totaled $1,301,000, compared to $148,000 for the three months ended September 30, 2015. The increase of approximately $1,153,000 was primarily attributable to $276,000 in amortization expense related to intangible assets, an increase of $752,000 in compensation expenses due to new employment contracts under the new Company’s ownership, and an increase of $149,000 in professional fees.

 

The Company realized a loss before non-controlling interest of $707,000 for the three months ended September 30, 2016, compared to a loss before non-controlling interest of $984,000 for the three months ended September 30, 2015. This improvement was primarily due to a gain of $379,000 related to the change in value of derivative liabilities on warrants and convertible notes issued by the Company.

 

Results of Operations for the Nine Months Ended September 30, 2016 Compared to the Nine Months Ended September 30, 2015

 

      Nine months Ended
September 30,
      2016       2015
Revenue   $ 176,000     $ 769,000  
Cost of goods sold   $ 80,000     $ 623,000  
Operating expenses   $ 1,573,000     $ 1,054,000  
Loss before non-controlling interest   $ (5,103,000 )   $ (1,946,000 )
Net loss attributable to non-controlling interest   $ (34,000 )   $ (17,000 )
Net loss attributable to Carolco Pictures’ stockholders   $ (5,069,000 )   $ (1,929,000 )

 

Revenues for the nine months ended September 30, 2016 were $176,000, as compared to $769,000 for the nine months ended September 30, 2015. The decrease in revenue of $593,000 was due to the slowdown in production activities during 2016 due to the change in Company’s ownership.

 

Cost of goods sold for the nine months ended September 30, 2016 were $80,000, as compared to $623,000 for the nine months ended September 30, 2015. Cost of goods sold was significantly lower than prior year due to lower revenues between the periods of approximately 73% due to the pause in operations because of the change in ownership during 2016.

 

Operating expenses for the nine months ended September 30, 2016 totaled $1,573,000, compared to $1,054,000 for the nine months ended September 30, 2015. The increase of approximately $519,000 was primarily attributable to $276,000 in amortization expense related to intangible assets, and an increase of $527,000 in compensation expenses due to new employment contracts under the Company’s new ownership.

 

The Company has realized a loss before non-controlling interest of $5,103,000 for the nine months ended September 30, 2016, compared to a loss before non-controlling interest of $1,946,000 for the nine months ended September 30, 2015. This loss increase of $3,157,000 was primarily due to $3,826,000 related to the charge for the change in value of derivative liabilities on warrants and convertible notes issued by the Company.

 

Liquidity and Capital Resources

 

    Nine Months
Ended
September 30, 2016
  Nine Months
Ended
September 30, 2015
Net Cash Used In Operating Activities   $ (302,000 )   $ (739,000 )
Net Cash Provided by Investing Activities   $ 107,000     $ 253,000  
Net Cash Provided by Financing Activities   $ 347,000     $ 994,000  
Net Change in Cash   $ (152,000 )   $ 2,000  

 

As of September 30, 2016, our assets totaled $1,384,000, our liabilities totaled $9,480,000 and we had negative working capital of $9,229,000.

 

21 
 

 

Pursuant to the terms of our employment agreement with Mr. Bafer, we were obligated to pay Mr. Bafer $150,000 per year. On October 1, 2011, Mr. Bafer agreed to waive future base salary under his employment agreement, until further notice, in an effort to reduce our operating expenses. Prior to that time, we did not have sufficient cash flows to make the required payments under the employment agreement and therefore, accrued all unpaid salary until such time we generate revenues from operations or raise additional capital through one or more financing transactions. Accrued salaries due Mr. Bafer totaled $125,000 at September 30, 2016 and December 31, 2015.

 

As part of the Company’s acquisition of S&G Holdings, Inc. (doing business as High Five Entertainment) (“S&G”) in December 2013, the Company entered into an executive employment agreement with Mr. Martin Fischer, pursuant to which Mr. Fischer will serve as S&G’s president for an initial term of five years with an initial base salary of $144,000. He will also be entitled to an annual bonus of up to $100,000 based on performance and a monthly car allowance of $500. In addition, the Company awarded Mr. Fischer an option to purchase 1,491,351 shares of common stock, exercisable at $0.01 per share, which vested throughout 2014.

 

We have suffered recurring losses from operations. The continuation of our Company is dependent upon our attaining and maintaining profitable operations and raising additional capital as needed. In this regard, we have raised additional capital through equity offerings and loan transactions. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash to operate its business. We do not currently have any additional third party financing available in the form of loans, advances, or commitments. Our officers and shareholders have not made any written or oral agreement to provide us additional financing. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case of equity financing.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2016, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations liquidity, capital expenditures or capital resources.

 

Going Concern

 

The Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, and which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the consolidated financial statements, the Company had a stockholders’ deficit of $8,096,000 at September 30, 2016, and incurred a net loss of $5,103,000, and utilized net cash used in operating activities $302,000 for the nine months ended September 30, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2015 consolidated financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

 

The ability of the Company to continue as a going concern is dependent on the Company’s ability to execute its strategy and in its ability to raise additional funds. Management is currently seeking additional funds, primarily through the issuance of equity securities for cash to operate its business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing. Management estimates that the current funds on hand will be sufficient to continue operations through December 31, 2016.

 

22 
 

 

Critical Accounting Policies

 

We have identified the following policies below as critical to our business and results of operations. Our reported results are impacted by the application of the following accounting policies, certain of which require management to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations. For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Specific risks associated with these critical accounting policies are described in the following paragraphs.

 

Non-Controlling Interest. The Company reports the non-controlling interest in its majority owned subsidiaries in the consolidated balance sheets within the equity section, separately from the Company’s stockholders’ equity. Non-controlling interest represents the non-controlling interest holders’ proportionate share of the equity of the Company’s majority-owned subsidiaries. Non-controlling interest is adjusted for the non-controlling interest holders’ proportionate share of the earnings or losses and other comprehensive income (loss) and the non-controlling interest continues to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance.

 

Derivative Financial Instruments. The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a probability weighted average Black-Scholes-Merton models to value the derivative instruments at inception and on subsequent valuation dates through the December 31, 2015, reporting date. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period.

 

Stock-Based Compensation. The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by FASB where the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB where the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options and warrants granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options and warrants vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option and warrant grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date. The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.

 

Recently Issued Accounting Pronouncements

 

See Note 2 in the accompanying financial statements for a discussion of recent accounting policies.

 

Jumpstart Our Business Startups Act of 2012

 

The JOBS Act permits an “emerging growth company” such as us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. Pursuant to Section 107(b) of the JOBS Act, we have elected to use the extended transition period for complying with new or revised accounting standards for an “emerging growth company.” This election will permit us to delay the adoption of new or revised accounting standards that will have different effective dates for public and private companies until such time as those standards apply to private companies. Consequently, our financial statements may not be comparable to companies that comply with public company effective dates.

 

23 
 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not required for smaller reporting companies.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

Under the supervision and with the participation of our management, including our CEO and principal financial officer, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our management, including our CEO and principal financial officer, concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report due to the Company’s limited resources and limited number of employees. To mitigate the current limited resources and limited employees, we rely heavily on direct management oversight of transactions, along with the use of legal and outsourced accounting professionals. As we grow, we expect to increase our number of employees, which, we believe, will enable us to implement adequate segregation of duties within the internal control framework.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

24 
 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company may be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.

 

The Company is not currently engaged in any legal proceedings, however, the Company received a letter dated April 26, 2016 from Studiocanal S.A. (“Studiocanal”) and another letter dated December 1, 2016 from counsel representing Studiocanal claiming that Studiocanal owns common law rights to certain marks currently being used by the Company. Such marks were previously registered by a company that has been defunct since 1996. In addition, Studiocanal and its counsel claim that Studiocanal owns all right, title and interest in and to the catalogue of television programs and films that were produced and distributed by that defunct company, including the Rambo franchise, Terminator 2: Judgment Day, Basic Instinct and Total Recall. The December 2016 letter states that the use of trademarks and copyrighted images by the Company constitutes infringement of intellectual property rights, a violation of the Digital Millennium Copyright Act, false advertising, unfair competition, misappropriation of trademarks and trademark dilution.

 

Studiocanal’s counsel requested that the Company cease and desist from use of such marks and material and relinquish trademark registrations legally obtained by the Company. Following receipt of the April 2016 letter, the Company responded and discussions were held between representatives of the Company and Studiocanal. The Company has not yet responded to the December 2016 letter. As of the date hereof, the Company is not aware of any legal proceeding having been brought by Studiocanal.

 

Item 1A. Risk Factors

 

Not applicable for smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None

 

25 
 

 

Item 6. Exhibits

 

Exhibit

Number 

 

Description 

     
3.1(a)   Articles of Incorporation (Incorporated by reference to Exhibit 3.1(i) to the Company’s Registration Statement on Form S-1 (Commission File No. 333-176093) filed with the SEC on August 5, 2011).
     
3.1(b)   Amendment to Articles of Incorporation (Incorporated by reference to Exhibit 3.1(ii) to the Company’s Registration Statement on Form S-1 (Commission File No. 333-176093) filed with the SEC on August 5, 2011).
     
3.1(c)   Amendment to Articles of Incorporation filed with the Secretary of State of Florida on December 31, 2014 (Incorporated by reference to Exhibit 3.1(III) to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and filed with the SEC on March 31, 2015).
     
3.1(d)   Certificate of Designation of Series A Preferred Stock (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 27, 2015).
     
3.1(e)   Amended Articles of Incorporation of Carolco Pictures, Inc. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on January 29, 2016).
     
3.1(f)   Certificate of Designation of Series A Preferred Stock (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 28, 2016).
     
3.1(g)   Certificate of Designation of Series B Preferred Stock (Incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 28, 2016).
     
3.1(h)   Certificate of Designation of Series C Preferred Stock of the Company, effective as of July 21, 2016 (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2016).
     
3.2(a)   By-Laws (Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (Commission File No. 333-176093) filed with the SEC on August 5, 2011).
     
3.2(b)   Bylaws, as amended on June 22, 2016 (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 28, 2016).
     
3.2(c)   Bylaws of the Company, as amended on July 20, 2016 (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2016).
     
10.1+   2014 Incentive Stock Plan (Incorporated by reference to the Company’s Annual Report on Form 10-K filed with the SEC on April 15, 2015).
     
10.2+   Employment Agreement with Alexander Bafer (Incorporated by reference to Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (Commission File No. 333-176093) filed with the SEC on August 5, 2011).
     
10.3   Production Services Agreement (Incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1/A (Commission File No. 333-176093) filed with the SEC on December 29, 2011).
     
10.4   Operating Agreement to York Productions, LLC (Incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-1/A (Commission File No. 333-176093) filed with the SEC on December 29, 2011).
     
10.5   Stock Purchase Agreement between Brick Top Productions, Inc. and Martin Fischer dated December 24, 2013 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 27, 2013).
     
10.6+   Executive Employment Agreement between S&G Holdings, Inc. and Martin Fischer (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on December 27, 2013).
     
10.7+   Brick Top Chief Development Executive Services Agreement between Brick Top Productions, Inc. and Mario Kassar dated November 20, 2014 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 24, 2014).

 

26 
 

 

10.8+   Brick Top Productions Executive Services Agreement between Brick Top Productions, Inc. and Harrison Smith and Felissa Rose dated December 15, 2014 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 17, 2014).
     
10.9   Debt Conversion Agreement dated as of December 29, 2014 between Brick Top Productions, Inc. and Alexander Bafer (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on December 31, 2014).
     
10.10+   Agreement for Chairman of Board of Directors among Carolco Pictures, Inc., certain shareholders of the Company and Mario Kassar dated as of February 13, 2015 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 17, 2015).
     
10.11+   Agreement dated April 29, 2015, by and between Carolco Pictures, Inc. and Mario Kassar (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on May 4, 2015).
     
10.12   Form of Securities Purchase Agreement (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 9, 2015).
     
10.13   Convertible promissory note in favor of Alexander Bafer for $45,527, dated July 9, 2015 (Incorporated by reference to Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 filed with the SEC on November 16, 2015).
     
10.14   Convertible promissory note in favor of Alexander Bafer for $51,076 dated July 9, 2015 (Incorporated by reference to Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 filed with the SEC on November 16, 2015).
     
10.15   Convertible promissory note in favor of Alexander Bafer for $102,042 dated July 9, 2015 (Incorporated by reference to Exhibit 10.16 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 filed with the SEC on November 16, 2015).
     
10.16   Convertible promissory note in favor of Alexander Bafer for $155,875 dated July 9, 2015 (Incorporated by reference to Exhibit 10.17 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 filed with the SEC on November 16, 2015).
     
10.17   Convertible promissory note in favor of Alexander Bafer for $188,597 dated July 9, 2015 (Incorporated by reference to Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 filed with the SEC on November 16, 2015).
     
10.18   Convertible promissory note in favor of Vis Vires Group, Inc. $52,500 dated July 10, 2015 (Incorporated by reference to Exhibit 10.19 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015 filed with the SEC on November 16, 2015).
     
10.19   Stock Purchase Agreement, dated as of June 22, 2016 by and between Tarek Kirschen, South Centre, Inc. and Carolco Pictures, Inc. (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 28, 2016).
     
10.20   Amendment No. 1 to Stock Purchase Agreement, dated as of June 24, 2016, by and between Tarek Kirschen, South Centre, Inc. and Carolco Pictures, Inc. (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on June 28, 2016).
     
10.21   Release and Issuance Agreement, dated as of June 22, 2016, by and between Tarek Kirschen, South Centre, Inc., Alexander Bafer and Carolco Pictures, Inc. (Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on June 28, 2016).
     
10.22   Letter Agreement between Carolco Pictures, Inc. and Esposito Partners, PLLC (Incorporated by reference to Exhibit 1.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2016).
     
10.23   Redemption Agreement, dated as of July 21, 2016, by and between South Centre, Inc. and the Company (Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2016).

 

27 
 

 

10.24   Contribution Agreement, dated as of July 25, 2016, by and between the Company and the other parties thereto (Incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2016).
     
10.25+   Employment Agreement, dated as of July 25, 2016, by and between the Company and Bradley Albert (Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2016).
     
10.26+   Employment Agreement, dated as of July 25, 2016, by and between the Company and Justin Morris (Incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2016).
     
10.27+   Employment Agreement, dated as of July 25, 2016, by and between the Company and Alexander Bafer (Incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2016).
     
10.28+   Chairman Agreement, dated as of July 25, 2016, by and between the Company and Alexander Bafer (Incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K filed with the SEC on July 26, 2016).
     
21.1   Subsidiaries of the Registrant (Previously filed as an exhibit to the Company’s S-1 Registration Statement filed with the SEC on August 5, 2011).
     
31.1*   Section 302 Certificate of Chief Executive Officer and principal financial officer
     
32.1*   Section 1350 Certification of Chief Executive Officer and principal financial officer

 

 

101.INS   XBRL INSTANCE DOCUMENT*
     
101.SCH   XBRL TAXONOMY EXTENSION SCHEMA*
     
101.CAL   XBRL TAXONOMY EXTENSION CALCULATION LINKBASE*
     
101.DEF   XBRL TAXONOMY EXTENSION DEFINITION LINKBASE*
     
101.LAB   XBRL TAXONOMY EXTENSION LABEL LINKBASE*
     
101.PRE   XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE*

 

* Filed herewith.

+ Management contract or compensatory plan or arrangement.

  

28 
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  CAROLCO PICTURES, INC.
     
Date: December 7, 2016 By: /s/ David Cohen
    David Cohen
    Chief Executive Officer (principal executive officer and principal financial and accounting officer)

 

29 
 

 

 

EXHIBIT 31.1

 

Certifications

 

I, David Cohen, certify that:

 

  1. I have reviewed this quarterly report on Form 10-Q for the quarterly period ended September 30, 2016 of Carolco Pictures, Inc.;
     
  2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
     
  3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
     
  4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
       
    (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
       
    (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
       
    (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
       
    (d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
       
  5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
       
    (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
       
    (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: December 7, 2016 By: /s/ David Cohen
    David Cohen
    Chief Executive Officer
(principal executive officer and principal financial officer)

 

 
 

 

 

Exhibit 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, David Cohen, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge, Carolco Pictures, Inc.’s Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2016 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that:

 

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
   
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: December 7, 2016 By: /s/ David Cohen
    David Cohen
    Chief Executive Officer
(principal executive officer and principal financial officer)