Attached files
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EX-32 - KINGS ROAD ENTERTAINMENT INC | v177722_ex32.htm |
EX-31.1 - KINGS ROAD ENTERTAINMENT INC | v177722_ex31-1.htm |
EX-31.2 - KINGS ROAD ENTERTAINMENT INC | v177722_ex31-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF
1934
|
For the quarter ended January 31, 2010
-OR-
o
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF
1934
|
For the transition period
from: to
KINGS ROAD ENTERTAINMENT, INC.
(Exact Name of Registrant as Specified
in Its
Charter)
DELAWARE
|
95-3587522
|
|
(State or other jurisdiction
of
|
(I.R.S. Employer
Identification No.)
|
|
incorporation or
organization)
|
468 N. Camden
Drive
Beverly Hills, California
|
90210
|
|
(Address of principal
executive
offices)
|
(Zip
Code)
|
310-278-9975
(Registrant’s telephone number, including area
code)
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 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 o
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes o No x
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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer o
|
Accelerated filer o
|
Non-accelerated
filer o
(Do not check if a smaller reporting
company)
|
Smaller reporting
company x
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes x No
As of March 17, 2010, the registrant had 31,321,493 shares of common stock outstanding.
KINGS ROAD ENTERTAINMENT,
INC.
FORM 10-Q
QUARTER ENDED JANUARY 31,
2010
TABLE OF CONTENTS
PAGE
|
||
Item 1.
|
Financial
Statements
|
1
|
Consolidated Balance Sheets
as of January 31, 2010 and April 30, 2009
|
1
|
|
Consolidated Statements of
Operations for the Three Months Ended January 31, 2010 and 2009
|
2
|
|
Consolidated Statements of
Operations for the Nine Months Ended January 31, 2010 and
2009
|
3
|
|
Consolidated Statements of Cash
Flows for the Nine Months Ended January 31, 2010 and
2009
|
4
|
|
Notes to Consolidated Financial
Statements as of January 31, 2010
|
5
|
|
Item 2.
|
Management’s Discussion and Analysis of
Financial Condition and Results of
Operations
|
10
|
Item 3.
|
Quantitative and Qualitative
Disclosures About Market Risk
|
12
|
Item 4T.
|
Controls and
Procedures
|
12
|
PART II - OTHER
INFORMATION
|
||
Item 1.
|
Legal
Proceedings
|
13
|
Item 1A.
|
Risk Factors
|
13
|
Item 2.
|
Unregistered Sales of Equity
Securities and Use of Proceeds
|
13
|
Item 3.
|
Defaults Upon Senior
Securities
|
13
|
Item 4.
|
Submission of Matters to a Vote of
Security Holders
|
13
|
Item 5.
|
Other
Information
|
13
|
Item 6.
|
Exhibits
|
13
|
SIGNATURES
|
14
|
PART I - FINANCIAL
INFORMATION
CONSOLIDATED
BALANCE SHEETS
AS
OF JANUARY 31, 2010 AND APRIL 30, 2009
January
31, 2010
|
April
30, 2009
|
|||||||
(Unaudited)
|
(Audited)
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 5,512 | $ | 11,416 | ||||
Accounts
receivable, trade
|
14,370 | - | ||||||
Prepayments
and other current assets
|
5,190 | 5,190 | ||||||
Total
current assets
|
25,072 | 16,606 | ||||||
Other
assets:
|
||||||||
Film
development costs, net (Note 4)
|
442,823 | 584,506 | ||||||
Total
other assets
|
442,823 | 584,506 | ||||||
TOTAL
ASSETS
|
$ | 467,895 | $ | 601,112 | ||||
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 146,931 | $ | 99,554 | ||||
Accrued
expenses
|
300,195 | 281,528 | ||||||
Stockholder
loans
|
117,545 | 109,332 | ||||||
Deferred
revenue (Note 5)
|
109,091 | 109,091 | ||||||
Total
current liabilities
|
673,762 | 599,505 | ||||||
Non-current
liabilities
|
||||||||
Deferred
revenue (Note 5)
|
490,909 | 589,411 | ||||||
Total
non-current liabilities
|
490,909 | 589,411 | ||||||
Total
liabilities
|
1,164,671 | 1,188,916 | ||||||
Stockholders’
deficit:
|
||||||||
Common
stock; 50,000,000 shares authorized at $0.01 par value; 31,321,493 shares
issued and outstanding at January 31, 2010 and 19,321,493 at April 30,
2009.
|
313,214 | 193,214 | ||||||
Preferred
stock: 2,000,000 authorized at $0.01 par value; no shares issued and
outstanding at January 31, 2010 and April 30, 2009.
|
- | - | ||||||
Additional
paid-in capital
|
25,970,141 | 25,876,641 | ||||||
Accumulated
deficit
|
(26,979,777 | ) | (26,657,734 | ) | ||||
Accumulated
other comprehensive income (loss)
|
(354 | ) | 75 | |||||
Total
stockholders’ deficit
|
(696,776 | ) | (587,804 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$ | 467,895 | $ | 601,112 |
See
accompanying notes to consolidated financial statements.
1
KINGS
ROAD ENTERTAINMENT, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE MONTHS ENDED JANUARY 31, 2010 AND 2009
(Unaudited)
Three
Months Ended January 31,
|
||||||||
2010
|
2009
|
|||||||
REVENUE:
|
||||||||
Feature
films
|
$ | 60,458 | $ | 84,617 | ||||
Service
productions
|
- | 48,000 | ||||||
TOTAL
REVENUE
|
60,458 | 132,617 | ||||||
OPERATING
EXPENSES:
|
||||||||
General
and administrative
|
102,565 | 150,616 | ||||||
Project
expenses
|
- | 18,800 | ||||||
Total
operating expenses
|
102,565 | 169,416 | ||||||
LOSS
FROM OPERATIONS
|
(42,107 | ) | (36,799 | ) | ||||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income
|
102 | - | ||||||
Interest
expense
|
(9,314 | ) | (1,540 | ) | ||||
Total
other income (expense)
|
(9,212 | ) | (1,540 | ) | ||||
LOSS
BEFORE INCOME TAXES
|
(51,319 | ) | (38,339 | ) | ||||
PROVISION
FOR INCOME TAXES
|
- | - | ||||||
NET
LOSS
|
$ | (51,319 | ) | $ | (38,339 | ) | ||
Net
loss per share – Basic & Diluted
|
$ | (0.00 | ) | $ | (0.00 | ) | ||
Basic
and diluted weighted average number of shares outstanding during the
period
|
26,139,971 | 9,956,493 |
See
accompanying notes to consolidated financial statements.
2
KINGS
ROAD ENTERTAINMENT, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE NINE MONTHS ENDED JANUARY 31, 2010 AND 2009
(Unaudited)
Nine
Months Ended January 31,
|
||||||||
2010
|
2009
|
|||||||
REVENUE:
|
||||||||
Feature
films
|
$ | 216,595 | $ | 247,115 | ||||
Service
productions
|
- | 85,000 | ||||||
TOTAL
REVENUE
|
216,595 | 332,115 | ||||||
OPERATING
EXPENSES:
|
||||||||
General
and administrative
|
373,357 | 423,835 | ||||||
Impairment
of capitalized film costs
|
152,597 | - | ||||||
Project
expenses
|
- | 35,000 | ||||||
Total
operating expenses
|
525,954 | 458,835 | ||||||
LOSS
FROM OPERATIONS
|
(309,359 | ) | (126,720 | ) | ||||
OTHER
INCOME (EXPENSE):
|
||||||||
Interest
income
|
123 | - | ||||||
Interest
expense
|
(12,807 | ) | (3,729 | ) | ||||
Total
other income (expense)
|
(12,684 | ) | (3,729 | ) | ||||
LOSS
BEFORE INCOME TAXES
|
(322,043 | ) | (130,449 | ) | ||||
PROVISION
FOR INCOME TAXES
|
- | - | ||||||
NET
LOSS
|
$ | (322,043 | ) | $ | (130,449 | ) | ||
Net
loss per share – Basic & Diluted
|
$ | (0.01 | ) | $ | (0.01 | ) | ||
Basic
and diluted weighted average number of shares outstanding during the
period
|
21,815,696 | 10,176,783 |
See
accompanying notes to consolidated financial statements.
3
KINGS
ROAD ENTERTAINMENT, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED JANUARY 31, 2010 AND 2009
(Unaudited)
Nine
Months Ended January 31,
|
||||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
2010
|
2009
|
||||||
Net
loss
|
$ | (322,043 | ) | $ | (130,449 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Common
stock issued for services
|
113,500 | - | ||||||
Impaired
film development costs
|
152,597 | - | ||||||
Accrued
shareholder interest payable
|
5,313 | |||||||
Change
in operating assets and liabilities:
|
||||||||
Accounts
receivable, trade
|
(14,370 | ) | 17,000 | |||||
Film
development costs
|
(10,914 | ) | (49,400 | ) | ||||
Prepayments
and other current assets
|
- | 8,804 | ||||||
Accounts
payable
|
47,377 | 124,228 | ||||||
Accrued
expenses
|
18,667 | (50,979 | ) | |||||
Deferred
revenue
|
(98,502 | (81,818 | ) | |||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(108,375 | ) | (162,614 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
Common
stock issued for cash
|
100,000 | - | ||||||
Common
stock repurchased for cash
|
(84,000 | ) | ||||||
Proceeds
from stockholder loans
|
2,900 | 107,682 | ||||||
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
102,900 | 23,682 | ||||||
Foreign
currency translation
|
(429 | ) | 132 | |||||
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
(5,904 | ) | (138,800 | ) | ||||
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
11,416 | 149,765 | ||||||
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$ | 5,512 | 10,965 |
See
accompanying notes to consolidated financial statements.
4
KINGS ROAD ENTERTAINMENT, INC.
As of January 31, 2010
NOTE
1 – NATURE OF OPERATIONS
Kings
Road Entertainment, Inc. and its wholly-owned subsidiaries (collectively, the
"Company") have been engaged primarily in the development, financing and
production of motion pictures for subsequent distribution in movie theaters, to
pay-TV, network and syndicated television, on home video and in other ancillary
media in the United States and all other foreign countries and territories.
Incorporated in Delaware in 1980, the Company began active operations in January
1983 and released its first motion picture in 1984. The Company has theatrically
released 17 additional pictures in the domestic market and released seven
pictures directly to the domestic home video or pay television
market.
NOTE
2 - SIGNIFICANT ACCOUNTING POLICIES
a. Basis
of Presentation
The
accompanying audited consolidated financial statements were prepared in
accordance with generally accepted accounting principles in the United States of
America and reflect all adjustments, consisting of normal recurring accruals and
adjustments which are necessary for a fair statement of the financial position,
results of operations and cash flows for the periods presented. Such financial
statements do not include all the information or notes necessary for a complete
presentation and therefore should be read in conjunction with the consolidated
financial statements, including the notes thereto, contained in our Annual
Report on Form 10-K for the year-ended April 30, 2009. Results for the interim
period are not necessarily indicative of results that may be achieved for the
entire year or for any other period.
b.
Accounting Method
The
Company's consolidated financial statements are prepared using the accrual
method of accounting. The Company has elected an April 30 fiscal
year-end.
c.
Amortization
Film
development costs are expensed or capitalized in accordance with generally
accepted accounting principles.
The amortization of film and participation costs is calculated according
to the individual-film-forecast-computation method, which amortizes or accrues
(expenses) such costs in the same ratio that current period actual revenue
(numerator) bears to estimated remaining unrecognized ultimate revenue as of the
beginning of the current fiscal year (denominator).
The
Company periodically reviews its capitalized film costs and where it determines
that a property will not be used (i.e. will be disposed of) or where a date for
production has not been set within 3 years from the time of the first
capitalized transaction, a loss by a charge to the income statement is made
where the carrying amount of the project exceeds its fair value.
d.
Principals of Consolidation
The
consolidated financial statements include the accounts of the Company and of its
wholly-owned subsidiaries. As of January 31, 2010, the Company had three
wholly-owned subsidiaries: Ticker, Inc., (a California corporation), which was
inactive during the nine month period ended January 31, 2010, The Big Easy II
Film, LLC (a California limited liability corporation), which was also inactive
during the nine month period ended January 31, 2010 and Kings Road Entertainment
Europe GmbH (a limited liability company incorporated under the laws of
Germany), which facilitates international co-productions.
e. Use of
Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure 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.
5
f. Newly
Issued Accounting Pronouncements
In May
2009, the Financial Accounting Standards Board (“FASB”) issued new standards for
subsequent events, which establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The new standards
are effective for interim and annual reporting periods ending after June 15,
2009. The Company adopted the new standards for financial reporting purposes in
its Form 10-Q filing for the quarter ended July 31, 2009. As the pronouncement
only requires additional disclosures, the adoption did not have an impact on the
Company’s consolidated financial statements.
In June
2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification
and the Hierarchy of Generally Accepted Accounting Principles (a replacement of
FASB Statement No. 162)” (SFAS No. 168). This statement modifies the GAAP
hierarchy by establishing only two levels of GAAP, authoritative and
non-authoritative accounting literature. Effective July 2009, the FASB
Accounting Standards Codification (“ASC”), also known collectively as the
“Codification,” is considered the single source of authoritative U.S. accounting
and reporting standards, except for additional authoritative rules and
interpretive releases issued by the SEC. The Codification was developed to
organize GAAP pronouncements by topic so that users can more easily access
authoritative accounting guidance. It is organized by topic, subtopic, section,
and paragraph, each of which is identified by a numerical designation. The
Company has adopted SFAS No. 168 prospectively beginning in the second
quarter of fiscal 2010, resulting in no impact on the Company’s consolidated
financial statements.
g. Net
Loss Per Share
In
accordance with generally accepted accounting principles, the Company calculates
basic net loss per share using the weighted average number of common shares
outstanding during the periods presented. The Company does not have any
potentially dilutive common stock equivalents, such as options or warrants.
Additionally, no shares of preferred stock have been issued.
h.
Foreign Currency Translation
Monetary
assets and liabilities denominated in currencies other than the functional
currency of U.S. Dollars are translated at exchange rates in effect at the
balance sheet date. Foreign company assets and liabilities in foreign currencies
are translated into U.S. Dollars at the exchange rate in effect at the
balance sheet date. Foreign company revenue and expense items are translated at
the average exchange rate for the period. Unrealized gains or losses arising on
the translation of the accounts of foreign companies are included in accumulated
other comprehensive income (loss), a separate component of stockholders’
equity.
NOTE
3 – CURRENT ASSETS
a. Cash
and Cash Equivalents
Cash
equivalents consist of cash on hand and cash on deposit at financial
institutions. For purposes of the statements of cash flows, the Company
considers all highly-liquid debt instruments with original maturities of three
months or less to be cash equivalents. The Company maintains its cash balances
at financial institutions that are federally insured. However, at times, these
balances could exceed federally insured limits. The Company had no cash
equivalents as of January 31, 2010 or April 30, 2009.
b.
Accounts Receivable
The
Company licenses various rights in its films to distributors throughout the
world. Generally, payment is received in full or in part prior to the Company’s
delivery of the film to the applicable distributor. Once calculated royalties
from actual sales have exceeded such an advance, the Company receives royalty
income at the end of a specific reporting period (usually three, six or twelve
months) based on actual sales from the preceding reporting period. As of January
31, 2010, the Company had a total of $14,370 in accounts receivable, of which
$14,110 had been collected by the date of this report.
6
NOTE
4 - FILM DEVELOPMENT COSTS
Film development costs are costs
incurred for movie projects not yet in production. Film development
costs, including any
related interest and overhead, are capitalized as incurred in accordance with U.S. GAAP. Profit participations and residuals,
if any, are accrued in the proportion that revenue for a period bears to the
estimated future revenues. Costs are amortized using the individual film
forecast method which bases the costs amortized on the ratio of revenue earned
in the current period to the Company's estimate of total revenues to be
realized. Management periodically reviews its estimates on a film-by-film basis and, when unamortized costs
exceed net realizable value for a film, that film's unamortized costs are
written down to net realizable value. Management’s periodical review of unamortized film
costs resulted in an impairment of $152,597 during the nine month period ended January 31, 2010 resulting in film development
costs of $
442,823. The impaired amount comprised primarily of one project in development where the
Company decided not to renew the screenplay option.
Subject to the closing of
financing for the
production budgets of three films, the Company expects to amortize approximately
$240,000 of its film development costs during the next twelve months. This
represents production of two complete movies and partial production of one
further movie. The components of the
Company’s film costs at January 31, 2010 relate entirely to movies in
development for theatrical release.
Regarding the Company’s released films, there are no
unamortized film costs capitalized on the balance sheets.
The Company does not have any accrued
participation liabilities for its projects in development. The Company accrues
costs for participation liabilities primarily for existing movies in
distribution in the period and amount in which they occur. The
Company’s cash flows for film costs, participation
costs, exploitation costs and manufacturing costs are classified as operating
activities in the Statement of Cash Flows.
NOTE
5 – DEFERRED REVENUE
Deferred
revenue represents the unamortized portion of royalty advances from
distributors. The Company amortizes a royalty advance across the applicable
period of each distribution agreement. The amount expected to be
amortized during the subsequent 12 month period is disclosed under current
liabilities and the balance is disclosed as a non-current liability. As of
January 31, 2010 and April 30, 2009, the Company had deferred revenue totaling
$600,000 and $698,502, respectively. The decrease is primarily due to the
regular amortization of royalty advances.
NOTE
6 - COMMITMENTS AND CONTINGENCIES
a.
Rent
The
Company rents its registered office space at 468 N. Camden Drive in Beverly
Hills, California and additional office space in Santa Monica, California. The
Company also rents flexible storage space for its archives. Rent expense for the
Company's offices and archive storage space was $13,454 and $13,983 during the
three months ended January 31, 2010 and 2009, respectively and $39,938 and
$37,236 during the nine months ended January 31, 2010 and 2009, respectively.
All rental agreements may be terminated upon one month’s notice.
b. Writing Agreement
As a result of a writing agreement
signed on February 19, 2008, in connection with a currently untitled
feature length motion picture remake/sequel of one of the films in the Company’s library, the Company is obligated to
pay the writer a further $66,667 in installments upon completion of certain
writing milestones which may occur during the course of the agreement. As these
milestones occur, the amounts due will be paid or accrued.
c. Other Matters
The Company is currently investigating
allegations concerning one or more usurpations of corporate opportunities by a
board member. As of the date of this report, management cannot estimate the
potential impact of the outcome of this investigation and accordingly, no
related amounts have been provided for in the accompanying financial
statements.
7
d. Stockholder Loans
As of January 31, 2010, the Company had borrowed the principal sum of $106,877 ($117,545 including accrued interest) from its two largest
stockholders, the
Company’s Head of Production, Mr. Sven Ebeling
and the Company’s President and CEO, Mr. Philip
Holmes under the terms of
an arrangement dated October 15, 2008, which authorized the borrowing
of up to $500,000 from stockholders of the Company to fund working capital and
other needs (the “Loan” or “Loans”). The Loans bear interest at an adjustable rate equal to 3% above the WSJ Prime Rate which interest rate is res
et quarterly. The term of each Loan will be for a maximum of one year
from the end of the month in which the Loan is made. At the end of this term,
the Company will either repay the Loan with interest or
renegotiate the
Loan with the lending party. Upon default or failure to negotiate a
mutual extension,
the lenders may require the Company issue shares at the value of
the 90-day rolling average share price of the Company’s common stock as quoted on the Pink
Sheets at the lower of the
trading price at the
day of lending or date of
renewal. The value shall
include the principal and accumulated interest. The accrued interest charge is
recognized on the balance sheet together with the principal amount of the
loans and the annual interest charge is expensed on the Statement of Operations. As of January 31, 2010 the accumulated interest for the loans
totaled $10,668. The Company disclosed this
transaction in a Form 8-K filed on July 21, 2008. On
July 22, 2009, the board of
directors unanimously
resolved to extend and clarify the terms under which Loans may be made to the
Company to include amounts
due to stockholders for services and to provide for the conversion of
those loans to equity at
any time during the term of the Loan at the 90 day rolling average stock
price as quoted on the Pink
Sheets. As the
Loans and accrued interest are
convertible at the option of the lenders, the Company has classified the
Loans as a current liability. Of the principal sum of $106,877 outstanding as of January 31, 2010, an amount of $90,000 plus accrued
interest was re-negotiated according to the original terms
on July 31, 2009 between
the stockholders and the Company resulting in a 12 month extension of the Loan term through to July 31, 2010.
e. Contingent Losses &
Litigation
Legal fees associated with litigation
are recorded or accrued in the period in which they occur. In the
ordinary course of business, the Company may become involved in matters of dispute which in the
aggregate are not believed by management to be material to its financial
position or results of operations. As of January 31, 2010, the Company was not involved in any
litigation the result of
which would have a material
impact on its operations or financial statements.
NOTE
7 - COMMON STOCK
At January 31, 2010, the Company had 50,000,000 authorized
shares of common stock, $0.01 par value, of which
31,321,493 were issued and
outstanding and 2,000,000 authorized shares of “blank check” preferred stock, $0.01 par value, of
which no preferred shares were issued or outstanding. At April 30,
2009, the Company had 50,000,000 authorized shares of which
19,321,493 were issued and outstanding. The
following common stock
transactions transpired in the nine months ended January 31, 2010:
On July
26, 2009, the Company entered into a Securities Purchase Agreement (“Agreement”)
with DEUMAK, a German company controlled by Mr. Bekim Zemoski, for the purchase
of a total of 650,000 shares of the Company’s common stock for the purchase
price of $100,000. The transaction closed on July 29, 2009. The investment was
based on a price per share of approximately $0.154. This transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933. Mr.
Bekim Zemoski was appointed to the board of directors of the Company on December
12, 2009 and is therefore an affiliate.
On
December 12, 2009 the board of directors agreed to issue 8,650,000 shares of
common stock in settlement of a liability for services amounting to $86,500 owed
to DE-INVEST, a Macedonian company. The exchange was based on the closing price
of the common stock on December 11, 2009 of $0.01 per share on the Pink Sheets.
DE-INVEST is controlled by Mr. Bekim Zemoski who was appointed to the board of
directors on December 12, 2009 and is therefore an affiliate.
On
December 12, 2009 the board of directors agreed to award a bonus to Ms.
Rose-Marie Couture of 2,300,000 shares of common stock in recognition of her
work in the Company’s German subsidiary in film development and management
consulting services. Ms. Couture is the spouse of the President and CEO of the
Company and is therefore an affiliate. The value of the transaction of $23,000
was based on the closing price for the common stock of $0.01 as quoted on the
Pink Sheets on the day of the transaction and the total value of $23,000 is
included in operating expenses on the statement of operations for that period.
On the day of the transaction, the 90 day rolling average price for the stock as
quoted on the Pink Sheets was below the par value of the stock and therefore not
used to evaluate the transaction.
On
December 12, 2009 the board of directors agreed to compensate the departing
members of the board of directors, Ms. Monika Nosic and Mr. Branko Lustig, for
their services each with an award of 200,000 shares of common stock in the
Company.
Both parties are affiliated with West Coast Pictures, a company controlled and
managed by Mr. Sven Ebeling, the Company’s Head of Production. The total value
of the transaction of $4,000 was based on the closing price for the common
shares as quoted on the Pink Sheets on the day of the transaction and the total
value of $4,000 is included in operating expenses on the Statement of Operations
for that period. On the day of the transaction, the 90 day rolling average price
for the stock as quoted on the Pink Sheets was below the par value of the stock
and therefore not used to evaluate the transaction.
8
NOTE
8 – RECOGNITION OF REVENUES
Revenue from the sale or licensing of
films is recognized in accordance with U.S. GAAP. The Company’s revenues are derived primarily from
distribution agreements in the U.S. domestic market place and are amortized
during the reporting period
for which the revenue is applicable. Revenues derived from purchase option
agreements are amortized over the term of the option. Revenues from theatrical
exhibition are recognized on the dates of exhibition. Revenues from
international, home video, video-on-demand, television and
pay-television license agreements are recognized when the license period begins
and the film is available for exhibition or exploitation pursuant to the terms
of the applicable license agreement. Once complete, a typical film will generally be made available for
licensing as follows:
Months
After
|
Approximate
|
|
Marketplace
|
Initial
Release
|
Release
Period
|
Domestic
theatrical
|
0-3
months
|
|
All international
markets
|
1-12
years
|
|
Domestic home
video/DVD/
|
||
Video on Demand
|
3-6 months
|
3-12
months
|
Domestic cable/pay
television
|
12-18
months
|
18
months
|
Domestic syndicated/free
television
|
24-48
months
|
1-n
years
|
These periods are dynamic and as new
media, distribution platforms and consumer demands dictate, they will continue to
change.
The Company also derives revenues from
service production contracts. Third parties engage the Company to develop or
produce film projects on a consulting basis. These revenues will generally
be recognized in the period in which the work is performed. In a given period, where a timing
difference results in the cash received exceeding the actual work performed,
the difference between the
cash flows and the recognition of revenue is recorded as deferred
revenue. Conversely,
where work performed exceeds the payments
received, then the difference is recorded as
accounts
receivable.
NOTE
9 - GOING CONCERN
The
Company’s consolidated financial statements are prepared using generally
accepted accounting principles applicable to a going concern which contemplates
the realization of assets and payment of liabilities in the normal course of
business. However at January 31, 2010, the Company has limited revenues and a
deficit in working capital of $648,690 and has an accumulated deficit of
approximately $26,979,777. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The Company has discontinued
certain operations that historically produced negative cash flow and is
attempting to raise capital through equity-based investment instruments in order
to provide funding for the development of future projects and operating
expenses.
9
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion concerns the periods ended January 31, 2010 and January 31,
2009, which should be read in conjunction with the financial statements and
notes thereto appearing elsewhere in this document as well as the Form 10-K for
the fiscal year ended April 30, 2009.
Three Months Ended January 31, 2010 vs. the Three Months Ended January 31, 2009
For the quarter ended January 31, 2010, operating revenues were $60,458 as compared to $132,617 for the quarter ended January 31, 2009. The decrease of $72,159 results primarily from the lack of service production contracts in progress during the three month period
ended on January 31, 2010. A major part of the Company’s revenue is derived from royalties
earned from the distribution of the Company’s existing library. Revenues from distribution agreements
are unpredictable and depend largely on the
distributors’ activities and consumer demand, both of
which are beyond the Company’s influence.
Operating expenses amounted to $102,565 for the quarter ended January 31, 2010 as compared to $169,416 during the quarter ended January 31, 2009. This decrease of approximately $66,851 is primarily due to a reduction in project expenses of
$18,800 and a reduction in salaries, bonuses and
other personnel related expenses of approximately $70,000 which
was partially offset by an increase in professional fees of approximately
$23,000.
Interest expenses increased to $9,314 for the quarter ended January 31, 2010 as compared to $1,540 during the quarter ended January 31, 2009. The increase of $7,774 is primarily attributable to the inclusion of interest
considerations in settlement negotiations of long term
debt amounting to
$7,481 of which $6,878 was a non-recurring expense during the three month period ended
January 31,
2010.
The Company had a net loss of $51,319 for the quarter ended January 31, 2010 as compared to $38,339 for the quarter ended January 31, 2009. The increase in operating loss of $12,980 results primarily from a decrease in revenues and increase in
interest charges, partially
offset by a decrease in operating expenses.
Nine Months Ended January 31, 2010 vs. the Nine Months Ended January 31, 2009
For the nine months ended January 31, 2010, operating revenues were $216,595 as compared to $332,115 for the nine months ended January 31, 2009. The decrease of $115,520 results primarily from decreased
revenue from service
productions amounting to $85,000 during the period. Of the $216,595 revenue for the period, $38,310 was from non-recurring revenue representing a revenue adjustment by a distributor
relating to prior periods. A major part of the Company’s revenue is derived from royalties
earned from the distribution of the Company’s existing library. Revenues from distribution agreements
are unpredictable and depend largely on the
distributors’ activities and consumer demand, both of
which are beyond the Company’s influence.
Operating expenses amounted to $525,954 for the nine months ended January 31, 2010 as compared to $458,835 during the nine months ended January 31, 2009. This increase of approximately $67,119 is primarily due to an increase in the
impairment of film development costs of approximately $153,000 and an increase in professional fees of approximately $60,000
which was partially
offset by a decrease in project expenses of $35,000, a decrease in sales expenses of
approximately $20,000, a
decrease in salaries, bonus
and other personnel related expense of approximately $70,000 and a decrease in travel and other expenses of approximately $24,000.
The Company had a net loss of $322,043 for the nine months ended January 31, 2010 as compared to a net loss of $130,449 for the nine months ended January 31, 2009. This increase in net loss of
$191,594 resulted primarily from the decrease in
revenues, the impairment of certain capitalized film development expenses, an increase in consulting
fees partially offset by decreases in travel, professional
fees, personnel related
expense as well as project
and sales expenses.
10
Liquidity and Capital
Resources
The
production of motion pictures requires substantial working capital. The Company
must expend substantial sums for development as well as for the production and
distribution of a picture, before that picture generates any revenues. The
Company's principal source of working capital during the three month and nine
month periods ended January 31, 2010, was motion picture distribution and
licensing income. Additionally, on July 29, 2009, the Company received $100,000
from an investor for the sale of 650,000 shares of common stock. In general, cash flows resulting from
the distribution of the Company’s existing film library have declined
and are expected to continue to decline over the long term as the library gets older. The Company is taking measures to
renew expiring licenses and
ensure its library is continuously distributed in all major world markets to
slow down this trend. It is unlikely that the Company's
existing distribution and licensing income will be sufficient to fund its
ongoing operations. For this reason, the Company is
developing new screenplays and seeking equity funding for
the production of
new movies in order to
fully implement its business planning as a movie production and distribution
company. The Company anticipates that its films will primarily be
financed by external sources including tax and location incentives, sales made
in advance to distributors and TV companies as well as the receipt of minimum
guarantee payments from sales companies. If external financing is obtained, it
will likely reduce the equity required to fund the balance of the production
budget as well as the inherent risk in movie financing. In order to fully
implement the Company’s business planning, the Company’s liquidity requirements
include amounts for screenplay acquisition and development as well as the hiring
of creative personnel. The Company currently estimates that it requires a total
of approximately $1 million to fully implement its business plan assuming that
the budgets for initial projects are financed principally from external
sources.
At January 31, 2010, the Company had cash of $5,512 as compared to $11,416 at April 30, 2009. The decrease in the Company’s cash is primarily attributable to operating expenses exceeding cash
revenues over the period. In an attempt to mitigate this, the Company
has issued common shares of the Company’s stock in exchange for debt
(refer NOTE 7) and restructured certain liabilities resulting in an increase in interest charges as
described above in the Results of Operations.
Contractual
Obligations
As a result of a writing agreement
signed on February 19, 2008, in connection with a currently untitled
feature length motion picture remake/sequel of one of the films in the
Company’s library, the Company is obligated to
pay the writer a further
$66,667 in installments upon completion of certain writing milestones which may
occur during the course of the agreement. As these milestones occur, the amounts
due will be either paid or accrued.
This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These forward-looking statements involve risks and uncertainties,
including statements regarding our capital needs, business strategy and
expectations. Any statements contained herein that are not statements of
historical facts may be deemed to be forward-looking statements. In
some cases, you can identify
forward-looking statements by terminology such as "may", "will",
"should", "expect", "plan", "intend", "anticipate",
"believe", “estimate", "predict", "potential" or
"continue", the negative of such terms or other comparable terminology. Actual events or results may
differ materially.
Forward-looking statements are subject
to risks and uncertainties. Such risks and uncertainties include, but are not
limited to, the following:
- the volatile and competitive nature of
the film
industry,
- the uncertainties surrounding the
rapidly evolving markets in which the Company competes,
- the uncertainties surrounding
technological change of the industry,
- the Company's dependence on its
intellectual property rights,
- the success of marketing efforts by third
parties,
- the changing demands of customers
and
- the arrangements with present and
future customers and third parties.
Should one or more of these risks or
uncertainties materialize or should any of the underlying assumptions prove incorrect, actual results of
current and future operations may vary materially from those
anticipated. We disclaim any obligation to publicly update these
statements, or disclose any difference between its actual results and those
reflected in these statements.
11
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a “smaller reporting company” as defined by Regulation S-K and as
such, are not required to provide the information contained in this item pursuant to
Regulation S-K.
a. Evaluation of Disclosure Controls and
Procedures
Our Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report as required by
Rule 13a-15 and Rule 15d-15.
The term “disclosure controls and
procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934 as amended (the “Exchange Act”). These rules refer to the
controls and other procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within required time periods specified in the SEC’s rules and forms,
and that such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
Based on the foregoing evaluation, our
Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures are not effective as of January 31,
2010. We continue to have
material weaknesses in our internal control over financial reporting as
described in Item 9A in our Annual Report on Form 10-K for our fiscal year ended
April 30, 2009 and those deficiencies have not yet been remediated by
us. This is due to deficiencies in working capital that have
prevented the hiring of additional staff which
would enable a segregation of duties and introduction of effective internal
controls and other
improvements.
b. Changes in Internal Control over Financial
Reporting
There have been no material changes in our internal control over financial reporting during the fiscal quarter ended
January 31,
2010, that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
12
PART II - OTHER
INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
As of March 17, 2010, the Company was not aware of any
pending claims or assessments, which may have a material adverse impact on the
Company's financial position or results of operations.
ITEM 1A.
|
RISK
FACTORS
|
There have been no material changes from the risk factors
disclosed in Part 1, Item 1A - Risk Factors in our Annual Report on Form 10-K for the year ended
April 30, 2009.
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
On
December 12, 2009 the board of directors agreed to issue 8,650,000 shares of
common stock in settlement of a liability for services amounting to $86,500 owed
to DE-INVEST, a Macedonian company. The exchange was based on the closing price
of the common stock on December 11, 2009 of $0.01 per share on the Pink Sheets.
DE-INVEST is controlled by Mr. Bekim Zemoski who was appointed to the board of
directors on December 12, 2009 and is therefore an affiliate.
On
December 12, 2009 the board of directors agreed to award a bonus to Ms.
Rose-Marie Couture of 2,300,000 shares of common stock in recognition of her
work in the Company’s German subsidiary in film development and management
consulting services. Ms. Couture is the spouse of the President and CEO of the
Company and is therefore an affiliate. The value of the transaction of $23,000
was based on the closing price for the common stock of $0.01as quoted on the
Pink Sheets on the day of the transaction and the total value of $23,000 is
included in operating expenses on the statement of operations for that period.
On the day of the transaction, the 90 day rolling average price for the stock as
quoted on the Pink Sheets was below the par value of the stock and therefore not
used to evaluate the transaction.
On
December 12, 2009 the board of directors agreed to compensate the departing
members of the board of directors, Ms. Monika Nosic and Mr. Branko Lustig, for
their services each with an award of 200,000 shares of common stock in the
Company. Both parties are affiliated with West Coast Pictures, a company
controlled and managed by Mr. Sven Ebeling, the Company’s Head of Production.
The total value of the transaction of $4,000 was based on the closing price for
the common shares as quoted on the Pink Sheets on the day of the transaction and
the total value of $4,000 is included in operating expenses on the Statement of
Operations for that period. On the day of the transaction, the 90 day rolling
average price for the stock as quoted on the Pink Sheets was below the par value
of the stock and therefore not used to evaluate the transaction.
DEFAULTS UPON
SENIOR SECURITIES
|
None.
SUBMISSION OF
MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None.
OTHER
INFORMATION
|
The
Company is currently investigating allegations concerning one or more
usurpations of corporate opportunities by a board
member.
EXHIBITS
|
31.1
|
Certification
of
Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act
of 2002
|
31.2
|
Certification of
Chief Financial Officer pursuant to
Section 302 of the Sarbanes Oxley Act of
2002
|
32
|
Certifications of
Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
13
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.
KINGS ROAD ENTERTAINMENT,
INC.
|
|||
Date: March 22, 2010
|
By:
|
/s/ Philip
Holmes
|
|
Philip Holmes, Chief Executive
Officer
|
14