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, 2017

 

[  ]	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.)

 

1115 Broadway, 12th Floor, New York, NY		10010
(Address of Principal Executive Offices)		(Zip Code)

 

(212) 537-5775

(Registrant’s Telephone Number, Including Area Code)

 

5550 Glades Road, Ste. 500, Boca Raton, Florida 33431

(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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

As of November 20, 2017, there were 79,628,783 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

 

CAROLCO PICTURES, INC.

INDEX

 

		Page
	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016	4
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2017 and 2016 (unaudited)	5
	Condensed Consolidated Statement of Stockholders’ Deficit for the Nine Months Ended September 30, 2017 (unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (unaudited)	7
	Notes to Condensed Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 3.	Defaults Upon Senior Securities	22
Item 4.	Mine Safety Disclosures	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
Signatures		23

 

 

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, 2016, 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.

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Carolco Pictures, Inc.

Condensed Consolidated Balance Sheets

 

		September 30, 2017				December 31, 2016
		(unaudited)
ASSETS
Current assets
Cash		$	101,000			$	77,000
Accounts receivable			10,000				10,000
Prepaid expenses and other current assets			58,000				-
Current assets from discontinued operations			-				28,000
Total current assets			169,000				115,000
Deposits			3,000				-
Total Assets		$	172,000			$	115,000
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses		$	93,000			$	49,000
Accrued interest related parties			136,000				118,000
Accrued payroll - officers			388,000				422,000
Advances from related parties			31,000				31,000
Deposit on future sale of equity			55,000				55,000
Convertible notes payable, net of discount			13,000				-
Convertible notes payable - related party			484,000				484,000
Derivative liability			1,574,000				12,985,000
Current liabilities from discontinued operations			-				226,000
Total current liabilities			2,774,000				14,370,000
Commitments and Contingencies			-				-
Stockholders' Deficit:
Series A Preferred stock,  par value $0.0001, 5,000,000 shares authorized 5,000,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016			1,000				1,000
Series B Preferred stock,  par value $0.0001, 1,000,000 shares authorized 1,000,000 shares issued and outstanding as of September 30, 2017 and December 31, 2016			-				-
Series C Preferred stock,  par value $0.0001, 41,000,000 shares authorized 1,424,491 shares and 41,511,991 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively			-				4,000
Common stock,  par value $0.0001, 300,000,000 shares authorized 79,628,783 shares and 33,940 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively			8,000				-
Additional paid in capital			8,239,000				7,626,000
Non - controlling interest			-				(189,000	)
Accumulated deficit			(10,850,000	)			(21,697,000	)
Total Stockholders' Deficit			(2,602,000	)			(14,255,000	)
Total Liabilities and Stockholders' Deficit		$	172,000			$	115,000

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Carolco Pictures Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
Revenue		$	-			$	-			$	41,000			$	-
Cost of goods sold			-				-				8,000				-
Gross Profit			-				-				33,000				-
Operating Expenses:
Compensation			64,000				715,000				430,000				804,000
General and administrative			162,000				502,000				325,000				567,000
Total operating expenses			226,000				1,217,000				755,000				1,371,000
Loss from operations			(226,000	)			(1,217,000	)			(722,000	)			(1,371,000	)
Other Income (Expense)
Interest expense			(32,000	)			(14,000	)			(44,000	)			(211,000	)
Amortization of debt discount			(51,000	)			-				(51,000	)			-
Financing costs			(231,000	)			-				(231,000	)			-
Other income (expense)			-				-				1,000				(2,000	)
Gain on settlement of convertible note			-				28,000				-				28,000
Gain on extinguishment of derivative liability			-				132,000				-				389,000
Change in fair value of derivative liability			(268,000	)			379,000				11,905,000				(3,826,000	)
Total Other (Income) Expense			(582,000	)			525,000				11,580,000				(3,622,000	)
Income (Loss) From Continuing Operations			(808,000	)			(692,000	)			10,858,000				(4,993,000	)
Income (Loss) From Discontinued Operations:
Loss from operations of discontinued business component			-				(15,000	)			(68,000	)		$	(110,000	)
Gain from sale of discontinued business component			-				-				57,000				-
Total Income (Loss) From Discontinued Operations			-				(15,000	)			(11,000	)			(110,000	)
Net Income (Loss)		$	(808,000	)		$	(707,000	)		$	10,847,000			$	(5,103,000	)
Net income (loss) from continuing operations per common share
-Basic		$	(0.01	)		$	(1.85	)		$	0.34			$	(19.41	)
-Diluted		$	(0.01	)		$	(1.85	)		$	0.27			$	(19.41	)
Net income (loss) from discontinued operations per common share
-Basic		$	-			$	(0.04	)		$	(0.00	)		$	(0.43	)
-Diluted		$	-			$	(0.04	)		$	(0.00	)		$	(0.43	)
Net income (loss)
-Basic		$	(0.01	)		$	(1.89	)		$	0.34			$	(19.84	)
-Diluted		$	(0.01	)		$	(1.89	)		$	0.27			$	(19.84	)
Weighted average common shares outstanding
-Basic			79,393,777				373,961				32,156,987				257,265
-Diluted			86,784,507				373,961				39,547,717				257,265

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Carolco Pictures Inc.

Condensed Consolidated Statements of Stockholders' Deficit

(Unaudited)

 

		Common Shares,
		$0.0001 Par Value								Series A Preferred								Series B Preferred								Series C Preferred
		Per Share								$0.0001 Par Value								$0.0001 Par Value								$0.0001 Par Value								Additional								Non-
		Shares								Shares								Shares								Issued								Paid -In				Accumulated				Controlling				Equity
		Issued				Amount				Issued				Amount				Issued				Amount				Shares				Amount				Capital				Deficit				Interest				(Deficit)
Balance December 31, 2016			33,940			$	-				5,000,000			$	1,000				1,000,000			$	-				40,511,991			$	4,000			$	7,626,000			$	(21,697,000	)		$	(189,000	)		$	(14,255,000	)
Issuance of common stock for cash			810,000				-																												152,000												152,000
Issuance of common stock for services			501,000				-																												410,000												410,000
Issaunce of shares to former officer			1,000				-																												-												-
Conversion of Preferred "C" shares into common			78,175,000				8,000																				(39,087,500	)			(4,000	)			(4,000	)
Elimination of non-controlling interest upon sale of S&G			-				-																																				189,000				189,000
Issuance of common stock for commitment fee			107,843				-																												55,000												55,000
Net income																																							10,847,000								10,847,000
Balance September 30, 2017			79,628,783			$	8,000				5,000,000			$	1,000				1,000,000			$	-				1,424,491			$	-			$	8,239,000			$	(10,850,000	)			0			$	(2,602,000	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Carolco Pictures, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Nine Months Ended
		September 30, 2017				September 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	10,847,000			$	(5,103,000	)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Financing cost			231,000
Common stock issued for commitment fee			55,000
Common stock issued for services			410,000				619,000
Change in fair value of derivative liability			(11,905,000	)			3,826,000
Elimination of non-controlling interest of discontinued operations			189,000
Depreciation expense			-				1,000
Amortization of debt discount and debt issuance cost			51,000				79,000
Amortization of intangible assets			-				276,000
Gain on settlement of convertible note			-				(28,000	)
Gain on extinguishment of derivative liability			-				(389,000	)
Changes in operating liabilities
Accounts receivable			-				(46,000	)
Prepaid expenses and other current assets			(58,000	)			8,000
Deposits			(3,000	)			-
Capitalized production costs			-				(24,000	)
Accounts payable			39,000				138,000
Accrued interest			18,000				49,000
Accrued payroll			(34,000	)			292,000
Net Cash Used By Operating Activities of Continuing Operations			(160,000	)			(302,000	)
Net Cash Used in Operating Activities of Discontinued Operations			(198,000	)
Net Cash Used in Operating Activities of Discontinued Operations			(358,000	)			(302,000	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired from acquisition			-				107,000
Net Cash Provided by Financing Activities			-				107,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from related parties			-				359,000
Repayments of note payable - related party			-				(100,000	)
Proceeds from issuance of note payable			270,000				31,000
Repayments of convertible notes payable			(40,000	)			(148,000	)
Proceeds from future sale of equity							205,000
Proceeds from sale of common stock			152,000				-
Net Cash Provided by Financing Activities			382,000				347,000
Net Increase in Cash			24,000				152,000
Cash at Beginning of Period			77,000				48,000
Cash at End of Period		$	101,000			$	200,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest		$	-			$	19,000
Income taxes paid		$	-			$	-
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock upon conversion of 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 B Preferred Stock upon acquisition of Recall Studios, Inc.		$	-			$	1,221,000
Conversion of 39,087,500 shares of Series C Preferred stock into 79,175,000 shares of common stock		$	8,000			$	-

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Carolco Pictures, Inc.

Notes to the Condensed Consolidated Financial Statements

For the Nine Months Ended September 30, 2017 and 2016

(Unaudited)

 

Note 1 - Organization and Basis of Operations

 

Carolco Pictures, Inc. (formerly “Brick Top Productions, Inc.” or 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. In addition, in January 2015, the Company changed its stock symbol from “BTOP” to “CRCO.”

 

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United States of America (“U.S.”) 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 nine months ended September 30, 2017 are not indicative of the results that may be expected for the fiscal year ending December 31, 2017. 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, 2016 filed on April 10, 2017. The condensed consolidated balance sheet as of December 31, 2016 has been derived from the audited financial statements included in the annual report on Form 10-K for that year.

 

Going Concern

 

The Company’s condensed 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 condensed consolidated financial statements, the Company had a stockholders’ deficit of $2,602,000 at September 30, 2017 and incurred a loss from operations for the three months ended September 30, 2017 of $808,000. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued. In addition, the Company’s independent public accounting firm in its audit report to the financial statements included in the 2016 Annual Report expressed substantial doubt about the Company’s ability to continue as a going concern. The condensed 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.

 

Management estimates that the current funds on hand and raising capital through proceeds from the sale of common stock subscriptions will be sufficient to continue operations through 2017. 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.

 

 

Note 2 - Summary of Significant Accounting Policies

 

Reverse Stock Split

 

In January 2017, the Company effected a 1-for-10,000 reverse stock split of the Company’s common stock. All shares and per-share amounts have been retroactively restated as of the earliest periods presented to reflect the stock split.

 

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.

 

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	%
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. York Productions, LLC and York Productions II, LLC are currently inactive. On June 15, 2017, Carolco Pictures, Inc. entered into a Purchase and Sale Agreement with Metropolitan Sound + Vision LLC, a South Carolina limited liability company. Pursuant to the Agreement, the Company agreed to sell to Metro all of the shares of common stock of S&G Holdings, Inc., a Tennessee corporation doing business as High Five Entertainment owned by the Company, which constitute 75% of the issued and outstanding shares of S&G.

 

Concentrations

 

During the nine months ended September 30, 2017, the Company had one customer that accounted for 90% of sales. During the nine months ended September 30, 2016, the Company had no sales.

 

Income (Loss) Per Share

 

Basic income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income (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 income (loss) of the Company. In computing diluted income (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.

 

 

For the nine months ended September 30, 2017, the dilutive impact of a note payable that can convert into 13 shares of common stock and warrants exercisable into 239 shares of common stock have been excluded because their impact on the income per share is anti-dilutive. For the nine months ended September 30 2017, the calculation of diluted earnings per share included convertible Series B Preferred stock that can convert into 2,000,000 shares of common stock, convertible Series C Preferred stock that can convert into 2,848,982 shares of common stock, and notes that can convert into 2,541,748 shares of common stock. For the nine months ended September 30, 2016, the dilutive impact of 295 warrants, Series B Preferred stock that can convert into 2,000,000 shares of common stock and notes that can convert into 399,333,333 shares of common stock have been excluded because their impact on the loss per share is anti-dilutive.

 

The following table sets forth the computation of basic and diluted earnings per share:

 

		Nine months ended September 30,								Three months ended September 30,
		2017				2016				2017				2016
Earnings per share – Basic
Income (Loss) for the period		$	10,847,000			$	(5,103,000	)		$	(808,000	)		$	(707,000	)
Basic average common stock outstanding			32,156,987				257,265				79,393,777				373,961
Net earnings per share		$	0.34			$	(19.84	)		$	(.01	)		$	(1.89	)

 

		Nine months ended September 30,								Three months ended September 30,
		2017				2016				2017				2016
Earnings per share - Diluted
Income (Loss) for the period		$	10,847,000			$	(5,103,000	)		$	(808,000	)		$	(1,823,000	)
Basic average common stock outstanding			32,156,987				257,265				79,393,777				373,961
Diluted effect from preferred stock and convertible notes			7,390,730				-				7,390,730				-
Diluted average common stock outstanding			39,547,717				257,265				86,784,507				373,961
Net earnings per share		$	0.27			$	(19.84	)		$	(0.01	)		$	1.89	)

 

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 September 30, 2017, 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 Financial Accounting Standards Board (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 U.S. 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.

 

July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The Company has early adopted ASU 2017-11 in the third quarter of 2017 . The adoption of ASU 2017-11 is not expected to have a material impact on the Company’s 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 Securities and Exchange Commission 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.

 

Note 3 – Convertible Notes Payable

 

On August 28, 2017, the Company issued a convertible promissory note to Power Up Lending Group in the amount of $40,000. The note is due on June 10, 2018 and bears interest at 8% per annum. The loan becomes convertible 180 days after the date of the note. The loan and any accrued interest can then be converted into shares of the Company’s common stock at a rate of 63% multiplied by the average of the three lowest trading price during the previous ten (10) day trading period ending on the latest complete trading day prior to the conversion date. Pursuant to current accounting guidelines, the Company recorded a note discount of $40,000 to account for the note’s derivative liability. On September 29, 2017 the note and all accrued interest was paid off and the remaining portion of the note discount was amortized.

 

On August 29, 2017, the Company issued a convertible promissory note to Crown Bridge Partners in the amount of $35,000. The note is due on August 29, 2018 and bears interest at 10% per annum. The loan and any accrued interest can then be converted into shares of the Company’s common stock at a rate of 55% multiplied by the lowest trading price during the previous twenty (20) day trading period ending on the latest complete trading day prior to the conversion date. Pursuant to current accounting guidelines, the Company recorded a note discount of $35,000 to account for the note’s derivative liability.

 

 

On September 5, 2017, the Company issued a convertible promissory note to LG Capital Funding in the amount of $52,500. The note is due on September 5, 2018 and bears interest at 6% per annum. The loan and any accrued interest can then be converted into shares of the Company’s common stock at a rate of 58% multiplied by the lowest trading price during the previous twenty (20) day trading period ending on the latest complete trading day prior to the conversion date. Pursuant to current accounting guidelines, the Company recorded a note discount of $52,500 to account for the note’s derivative liability.

 

On September 12, 2017, the Company issued a convertible promissory note to EMA Financal in the amount of $100,000. The note is due on September 5, 2018 and bears interest at 10% per annum. The loan and any accrued interest can then be converted into shares of the Company’s common stock at a rate of 50% multiplied by the lowest trading price during the previous twenty-five (25) day trading period ending on the latest complete trading day prior to the conversion date. Pursuant to current accounting guidelines, the Company recorded a note discount of $100,000 to account for the note’s derivative liability.

 

On September 22, 2017, the Company issued a convertible promissory note to Essex Global Investment in the amount of $43,000. The note is due on September 22, 2018 and bears interest at 10% per annum. The loan and any accrued interest can then be converted into shares of the Company’s common stock at a rate of 58% multiplied by the lowest trading price during the previous twenty-five (25) day trading period ending on the latest complete trading day prior to the conversion date. Pursuant to current accounting guidelines, the Company recorded a note discount of $43,000 to account for the note’s derivative liability.

 

As of September 30, 2017, outstanding balance of the notes payable amounted to $231,000, accrued interest of $18,000 and unamortized note discount of $218,000.

 

Note 4– Convertible Notes Payable to Related Parties

 

Chairman and CEO

 

In July 2015, the Company issued convertible promissory notes to Alex Bafer, Chairman and CEO, in exchange for the cancellation of previously issued promissory notes in the aggregate of $530,000 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 closing stock price during the 20 trading days prior to conversion with a 50% discount.

 

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. 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. As of September 30, 2017 and December 31, 2016, the total outstanding note balance amounted to $434,000 and $434,000, and accrued interest of $136,000 and $118,000, respectively. The notes are currently past due.

 

Shareholder

 

On December 28, 2016, the Company issued an unsecured convertible promissory note in the principal amount of $50,000 to a shareholder. The note bears interest at 5% per annum, is due on March 24, 2017, and is convertible into shares of common stock at a conversion price of $4,000 per share. The note is currently past due.

 

 

Note 5- 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 did not have fixed settlement provisions because either their exercise prices will be lowered if the Company issues securities at lower prices in the future or the conversion price is variable. 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 derivative liabilities were valued at the following dates using a probability based weighted-average Black-Scholes-Merton model with the following average assumptions:

 

		September 30, 2017				December 31, 2016
Stock Price		$	0.51			$	4.0
Risk free interest rate			0.84	%			0.51% - 0.62	%
Expected Volatility			525	%			383	%
Expected life in years			.92-1.00				0.21-0.57
Expected dividend yield			0	%			0	%
Fair Value – Warrants		$	0			$	11,930,000
Fair Value – Note Conversion Feature			1,574,000				1,055,000
Total		$	1,574,000			$	12,985,000

 

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, 2017, the Company recorded $495,000 in derivative liability as a result of conversion features from the issuance of new convertible notes payables (see Note 3). In addition the Company recorded a gain of $9,331,000   to account for the change in fair value of the derivative liabilities related to the conversion features and warrants from December 31, 2016 to September 30, 2017. Also the Company recorded a gain from various warrants accounted for as derivative liabilities expired and as such their corresponding fair value at the expiration date of $2,575,000 was extinguished from the derivative liabilities balance. As of September 30, 2017, the derivative liability amounted to $1,574,000.

 

 

Note 6- Stockholders’ Deficit

 

Issuance of Common Stock for Cash

 

During the nine months ended September 30, 2017, the Company issued 810,000 shares of common stock for proceeds of $152,000.

 

Issuance of Common Stock for services

 

During the nine months ended September 30, 2017, the Company issued an aggregate of 501,000 shares of common stock valued at $410,000 to five shareholders for services.

 

Issuance of Common Stock Upon Conversion of Series C Preferred Stock

 

During the nine months ended September 30, 2017, the Company issued 78,175,000 shares of common stock upon the conversion of 39,087,500 shares of Series C Preferred Stock pursuant to the terms of the certificate of designation of the Series C Preferred Stock.

 

Summary of the Company’s Stock Warrant Activities

 

The following table summarizes information concerning outstanding and exercisable warrants as of September 30, 2017 and December 31, 2016:

 

		Warrants				Weighted Average Price				Weighted Average Remaining Contractual Life
December 31, 2016			295			$	800				3.63
Granted			-				-				-
Exercised			-				-				-
Forfeited/expired			(56	)			10				.0 5
September 30, 2017			239			$	1,740				3.68

 

At September 30, 2017, the Company’s outstanding and exercisable warrants had no intrinsic value as the exercise price of these warrants was greater than the market price at September 30, 2017

 

Note 7- Related Party Transactions

 

Advances from Related Party

 

From time to time, the CEO of the Company and a shareholder/employee advanced funds to the Company for working capital purposes. Those advances are unsecured, non-interest bearing and due on demand. As of September 30, 2017 and December 31, 2016 outstanding advances from related party aggregated to $31,000 and $31,000, respectively.

 

Accrued Payroll

 

During the nine months ended September 30, 2017, the Company accrued payroll in the aggregate of $191,250 for officers and employees’ salaries. On April 3, 2017, the Company entered into a separation agreement and general release by and between the Company and David Cohen pursuant to which Mr. Cohen agreed to resign from his officer and director positions with the Company. In consideration thereof, Mr. Cohen received 1,000 shares of Company common stock valued at $1,000. In addition he released the Company from its obligation for accrued payroll of $125,000.  

 

As of September 30, 2017, accrued payroll amounted to $388,000, of which $343,750 pertains to the accrued salary of one officer Mr. Bafer, Chief Executive Officer.

 

Note 8 - Contingencies and Litigation

 

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.

 

 

Note 9 – Discontinued Operations

 

On June 15, 2017, the Company entered into a Purchase and Sale Agreement with Metropolitan Sound + Vision LLC, a South Carolina limited liability company. Pursuant to the Agreement, the Company agreed to sell to Metro all of the shares of common stock of S&G Holdings, Inc., a Tennessee corporation doing business as High Five Entertainment owned by the Company, which constitute 75% of the issued and outstanding shares of S&G. Pursuant to current accounting guidelines, the business component is reported as a discontinued operations.

 

Pursuant to the Agreement, at the closing of the Transaction, the Company was to deliver to Metro 100% of the issued and outstanding shares of common stock of S&G owned by the Company, and Metro was required to pay for such stock as follows: An initial payment of $10,000 was required to be made at the closing, and thereafter, at the end of each fiscal quarter, beginning at the end the third fiscal quarter of 2017, Metro shall pay the Company 5% of gross revenues collected during the quarter by Metro via the exploitation of S&G’s assets, up to a lifetime maximum of $590,000.

 

The Agreement requires Metro to use its best professional efforts to generate revenue from the exploitation of S&G’s assets, and if the Company has not received a total of at least $265,000 of the $590,000 lifetime maximum purchase price from Metro before July 1, 2022, the Company has the right to repurchase the stock and assets of the S&G from Metro for $10,000.

 

The Company recognized a gain on the sale of S&G of $57,000 consisting of the assumption by the buyer of the net liabilities of S&G of $236,000 offsets by the elimination of the non-controlling interest of S&G of $189,000 and the purchase price consideration of $10,000. The remainder of the purchase price will be recognized when collectability can be determined.

 

The following table summarizes the assets and liabilities of our former subsidiary’s discontinued operations as of December 31, 2016:

 

		December 31, 2016
ASSETS:
Current assets
Cash		$	24,000
Accounts receivable			1,000
Prepaid expenses and other current assets			3,000
Total assets		$	28,000
LIABILITIES :
Current liabilities
Accounts payable and accrued expenses		$	81,000
Accrued payroll – officers			36,000
Advances from related parties			10,000
Deferred revenue			24,000
Note payable			75,000
Total liabilities		$	226,000

 

 

The following table summarizes the results of operations of our former subsidiary for the three and nine months ended September 30, 2017 and 2016 and is included in the condensed consolidated statements of operations as discontinued operations:

 

		For the Three Months Ended								For the Nine Months Ended
		September 30,								September 30,
		2017				2016				2017				2016
Revenue		$	-			$	146,000			$	49,000			$	176,000
Cost of goods sold			-				76,000				31,000				80,000
Gross Profit			-				70,000				18,000				96,000
Operating Expenses:
Compensation			-				77,000				76,000				152,000
General and administrative			-				7,000				7,000				51,000
Total operating expenses			-				84,000				83,000				203,000
Loss from operations			-				(14,000	)			(65,000	)			(107,000	)
Other Income (Expense)
Interest expense			-				(1,000	)			(1,000	)			(3,000	)
Other income (expense)			-				-				(2,000	)			-
Total Other Income (Expense)			-				(1,000	)			(3,000	)			(3,000	)
Loss From Operations of Discontinued Business Component		$	-			$	(15,000	)		$	(68,000	)		$	(110,000	)

 

Note 10 - Subsequent Events

 

On August 31, 2017, stockholders holding a majority of the voting power of our issued and outstanding shares of capital stock executed a written consent approving an amendment to our articles of incorporation, as amended, pursuant to which our corporate name will change from Carolco Pictures, Inc. to Recall Studios, Inc. The corporate name change will become effective after the action is approved by FINRA.

 

In November 2017 the Company entered into a securities purchase agreement in connection with the issuance of a $110,000 convertible note. The note carries interest of 12% per year and is due and payable on March 29, 2018. The outstanding amounts under the note are convertible, at the option of the holder, into shares of common stock of the Company, at a conversion price calculated at 58% of the lowest sale price for the common stock during the 20 consecutive trading days immediately preceding the conversion date. In addition the Company issued 107,843 shares of the Company’s common stock as a commitment fee and issued warrants to purchase 50,000 shares of the Company’s common stock at an exercise price of $0.50.

 

 

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, 2016 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.

 

Through our subsidiary, Recall Studios 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 Studios operates within the convergence of immersive content and software. Recall Studios 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 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.

 

Recent Developments

 

On April 3, 2017, the Company entered into a separation agreement and general release by and between the Company and David Cohen pursuant to which Mr. Cohen agreed to resign from his officer and director positions with the Company. In consideration thereof, Mr. Cohen received 1,000 shares of Company common stock. Mr. Cohen resigned on April 11, 2017.

 

On June 15, 2017, Carolco Pictures, Inc. entered into a Purchase and Sale Agreement with Metropolitan Sound + Vision LLC, a South Carolina limited liability company. Pursuant to the Agreement, the Company agreed to sell to Metro all of the shares of common stock of S&G Holdings, Inc., a Tennessee corporation doing business as High Five Entertainment owned by the Company, which constitute 75% of the issued and outstanding shares of S&G, for a total purchase price of $600,000. The Company had acquired the shares of S&G from Martin Fischer in 2013, and Mr. Fisher subsequently served as the President of S&G, and is a stockholder of the Company.

 

S&G’s minority shareholders have agreed to the sale and the delivery of their shares to Metro.

 

Pursuant to the Agreement, at the closing of the Transaction, the Company was to deliver to Metro 100% of the issued and outstanding shares of common stock of S&G owned by the Company, and Metro was required to pay for such stock as follows: An initial payment of $10,000 was required to be made at the closing, and thereafter, at the end of each fiscal quarter, beginning at the end the third fiscal quarter of 2017, Metro shall pay the Company 5% of gross revenues collected during the quarter by Metro via the exploitation of S&G’s assets, up to a lifetime maximum of $590,000.

 

Metro is also required to provide documentation and accounting of all exploitation of such assets to the Company along with its quarterly payments. Metro is not required to make any payments in any quarter in which no revenues are collected from the exploitation of S&G’s assets.

 

Pursuant to the Agreement, the Company agreed that the Company would (i) repay or settle the sum of $33,334 which was due from S&G to S&G’s former landlord, Colliers International by July 31, 2017; and (ii) repay or settle the sum of $6,591 which was due from S&G to the State of Tennessee by July 1, 2017. In addition, the Company also forgave $5,000 which remained owed by S&G to the Company pursuant to a promissory note, originally in the amount of $25,000, of which S&G had previously repaid $20,000. The Agreement provided that S&G would retain the obligation for a $75,000 line of credit with SunTrust Bank. In addition, the sum of $39,656, which was due and payable to Martin Fischer by S&G has been fully and irrevocably settled and resolved by the Settlement and Mutual Release described below. In addition, Metro was entitled to deduct from the purchase price all taxes that the Company or S&G owe to any federal or state entity as they relate to the assets of S&G.

 

 

The Agreement requires Metro to use its best professional efforts to generate revenue from the exploitation of S&G’s assets, and if the Company has not received a total of at least $265,000 of the $590,000 lifetime maximum purchase price from Metro before July 1, 2022, the Company has the right to repurchase the stock and assets of the S&G from Metro for $10,000.

 

The Company did not utilize a broker in connection with the Agreement or the Transaction.

 

On July 12, 2017, Carolco Pictures, Inc. entered into a letter agreement with Big Ben Venture Partners Ltd. Pursuant to the terms of the Agreement, Big Ben agreed to assist with the listing of a yet-to-be formed Swedish publicly traded subsidiary on the Nordic Growth Market NGM AB, MIC Code XNGM, a regulated Swedish stock exchange. Big Ben will provide bridge funding for the formation of the Subsidiary and assist with a reverse merger. In exchange for its services, the Company agreed to pay SEK 475,000 (approximately $57,000), of which SEK 275,000 (approximately $33,000) will be paid as a retainer upon execution of the Agreement.

 

Big Ben agrees to prepare a common stock public accession memorandum, as required by the Swedish stock exchange. Once the memorandum is compliant and approved, the Subsidiary may raise capital up to 2,500,000 Euros (approximately $2,875,000) and list the Subsidiary. Big Ben also agrees to provide public image consulting, including in regard to the website, investor relations page and press releases, legal advice, post-introductory public offering advice and support and compliance advice. In addition, Big Ben will assist with raising capital via a limited private offering prior to approval of an offering memorandum, with a goal of raising capital prior to the public offering, and will introduce the Company to institutional investment contacts in order to assist with capital raising. As compensation for closing an equity transaction with an introduced party, Big Ben will be entitled to a success fee, payable in cash as funds are raised, directly or indirectly, by Big Ben, or otherwise agreed upon. The success fee will be as set forth below:

 

	●	10.0% of the first SEK 3,000,000 (approximately $360,000)
	●	8.0% of the following SEK 7,000,000 (approximately $840,000)
	●	7.5% of the following SEK 30,000,000 (approximately $3,600,000)
	●	6.0% of the following amount raised.

 

Big Ben also offers the Subsidiary a dual listing opportunity with OTC Pink or OTCQX International

 

Results of Operations for the Three Months Ended September, 2017 and 2016

 

		Three Months Ended September 30,
		2017				2016
Revenue		$	0			$	0
Cost of goods sold		$	0			$	0
Operating expenses		$	226,000			$	1,217,000
Income (loss) from continuing operations		$	(808,000	)		$	(692,000	)
Net income (loss) from discontinued operations		$	0			$	(15,000	)
Net income (loss)		$	(808,000	)		$	(707,000	)

 

Revenues for the three months ended September 30, 2017 and 2016 were $0 and $0, respectively.

 

Cost of goods sold for the three months ended September 30, 2017 and 2016 were $0 and $0, respectively.

 

Operating expenses for the three months ended September 30, 2017 totaled $226,000, compared to $1,217,000 for the three months ended September 30, 2016. The decrease of $991,000 is directly related to a reduction in operating expenses due to the sale of our S&G subsidiary as well as $276,000 in amortization expense related to intangible assets recorded during the three months ended September 30, 2016.

 

 

The Company realized loss from continuing operations of $808,000 for the three months ended September 30, 2017, compared to a loss from continuing operations of $692,000 for the three months ended September 30, 2016. The increase is primarily due to a charge to financing costs of $231,000 as well as amortization of debt discount of $51,000 in the three months ended September 30, 2017 offset by the change in fair value of derivatives associated with warrants and convertible notes outstanding, which amounted to a loss of $268,000 for the three months ended September 30, 2017 as compared to a gain of $379,000 for the three months ended September 30, 2016. In addition, the gain on extinguishment of derivative liability was $0 during the three months ended September 30, 2017 as compared to $132,000 for the three months ended September 30, 2016.

 

Results of Operations for the Nine Months Ended September 30, 2017 and 2016

 

		Nine Months Ended September 30,
		2017				2016
Revenue		$	41,000			$	0
Cost of goods sold		$	8,000			$	0
Operating expenses		$	755,000			$	1,371,000
Income (loss) from continuing operations		$	10,858,000			$	(4,993,000	)
Net loss from discontinued operations		$	(11,000	)		$	(110,000	)
Net income (loss)		$	10,847,000			$	(5,103,000	)

 

Revenues for the nine months ended September 30, 2017 and 2016 were 41,000 and $0, respectively. The increase of $41,000 is directly related the commercialization and sale of an iOS app.

 

Cost of goods sold for the nine months ended September 30, 2017 compared to the same period in 2016 increased by $8,000. The increase is due to the sale of the iOS app.

 

Operating expenses for the nine months ended September 30, 2017 totaled $755,000, compared to $1,371,000 for the nine months ended September 30, 2016. The decrease of $616,000 is directly related to a reduction in operating expenses due to the sale of our S&G subsidiary.

 

The Company realized income from continuing operations of $10,858,000 for the nine months ended September 30, 2017, compared to a loss from continuing operations of $4,993,000 for the nine months ended September 30, 2016. The increase is primarily due to the change in fair value of derivatives associated with warrants and convertible notes outstanding, which amounted to a gain of $11,905,000 for the nine months ended September 30, 2017 as compared to a loss of $3,826,000 for the nine months ended September 30, 2016. This gain is offset by a charge to financing costs of $231,000 as well as amortization of debt discount of $51,000 in the three months ended September 30, 2017 In addition, the gain on extinguishment of derivative liability was $0 during the nine months ended September 30, 2017 as compared to $389,000 for the nine months ended September 30, 2016.

 

Liquidity and Capital Resources

 

		Nine months Ended September 30, 2017				Nine months Ended September 30, 2016
Net Cash Used in Operating Activities		$	(358,000	)		$	(302,000	)
Net Cash Provided by Investing Activities		$	-			$	107,000
Net Cash Provided by Financing Activities		$	382,000			$	347,000
Net Change in Cash		$	24,000			$	152,000

 

 

As of September 30, 2017, our total assets were $172,000 and our total liabilities were $2,774,000 and we had negative working capital of ($2,602,000). Our financial statements report net income of $10,847,000 including non-cash gain of $11,905,000 the change in fair value of derivative liability for the nine months ended September 30, 2017 as compared to a net loss of $5,103,000 for the nine months ended September 30, 2016.

 

We have suffered recurring losses from operations. The continuation of our company is dependent upon our company 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, and, in the short term, will seek to raise additional capital in such manners to fund our operations. We do not currently have any 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. There can be no assurance that we will be able to continue to raise capital on terms and conditions that are deemed acceptable to us.

 

Off-Balance Sheet Arrangements

 

As of September 30 2017, 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 condensed 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 condensed consolidated financial statements, the Company had a stockholders’ deficit of $2,602,000 at September 30, 2017 and incurred a loss from operations for the three months ended September 30, 2017 of $808,000. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued. In addition, the Company’s independent public accounting firm in its audit report to the financial statements included in the 2016 Annual Report expressed substantial doubt about the Company’s ability to continue as a going concern. The condensed 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.

 

Management estimates that the current funds on hand and raising capital through proceeds from the sale of common stock subscriptions will be sufficient to continue operations through 2017. 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.

 

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.

 

 

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 September 30, 2017, 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

 

See Note 2 in the accompanying condensed consolidated 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.

 

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 Chief Accounting 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 and Accounting 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 and Accounting 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 fiscal quarter ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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.

 

Item 1A. Risk Factors

 

Not applicable for smaller reporting companies.

 

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

 

On various dates during the three months ended September 30, 2017, the Company issued 200,000 shares of the Company’s Common Stock for net proceeds of $30,000.

 

The securities referenced above were issued solely to “accredited investors” in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act, as amended.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since the filing of our quarterly report on Form 10-Q for the quarter ended June 30, 2017.

 

Item 6. Exhibits

 

Exhibit Number		Description
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.

 

 

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: November 21, 2017	By:	/s/ Alex Bafer
		Alex Bafer
		Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)