RED ROCK PICTURES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
| | | For the Three Months Ended February 28, 2009 (Unaudited) | | | For the Three Months Ended February 29, 2008 (Unaudited) | | | For the Six Months Ended February 28, 2009 (Unaudited) | | | For the Six Months Ended February 29, 2008 (Unaudited) | |
| REVENUE | | | | | | | | | | | | |
| Production revenue | | $ | -- | | | $ | -- | | | $ | 183,650 | | | $ | -- | |
| Print and advertising premium fees | | | -- | | | | -- | | | | 69,844 | | | | -- | |
| Interest on production advances | | | 91,000 | | | | 89,332 | | | | 182,000 | | | | 178,665 | |
| TOTAL REVENUE | | | 91,000 | | | | 89,332 | | | | 435,494 | | | | 178,665 | |
| COSTS AND EXPENSES | | | | | | | | | | | | | | | | |
| Amortization of capitalized production costs | | | -- | | | | -- | | | | 34,081 | | | | -- | |
| Stock based compensation | | | 294,267 | | | | 1,147,984 | | | | 708,534 | | | | 1,318,150 | |
| Professional fees | | | (1,597 | ) | | | 18,219 | | | | 86,484 | | | | 28,191 | |
| Salaries and wages | | | 60,221 | | | | 11,058 | | | | 78,796 | | | | 25,430 | |
| Office and general | | | 26,593 | | | | 23,067 | | | | 41,495 | | | | 41,740 | |
| Bad debt expense | | | 300,000 | | | | -- | | | | 330,000 | | | | -- | |
| Rent | | | 5,181 | | | | 6,000 | | | | 12,021 | | | | 12,000 | |
| Amortization of intangible assets | | | 22,330 | | | | -- | | | | 44,660 | | | | -- | |
| TOTAL COSTS AND EXPENSES | | | 706,995 | | | | 1,206,328 | | | | 1,336,071 | | | | 1,425,511 | |
| | | | | | | | | | | | | | | | | |
| LOSS FROM OPERATIONS | | | (615,995 | ) | | | (1,116,996 | ) | | | ( 900,577 | ) | | | (1,246,846 | ) |
Interest expense | | | 34,000 | | | | 56,886 | | | | 68,000 | | | | 109,358 | |
| | | | | | | | | | | | | | | | | |
| NET LOSS AND COMPREHENSIVE LOSS | | $ | (649,995 | ) | | $ | (1,173,882 | ) | | $ | (968,577 | ) | | $ | (1,356,204 | ) |
| | | | | | | | | | | | | | | | | |
| LOSS PER WEIGHTED NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.02 | ) |
| | | | | | | | | | | | | | | | | |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED | | | 103,276,068 | | | | 78,477,512 | | | | 99,746,735 | | | | 72,709,233 | |
| | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
| | | Year Ended February 28, 2009 (Unaudited) | | | Year Ended February 29, 2008 (Unaudited) | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net loss | | $ | (968,577 | ) | | $ | (1,356,204 | ) |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | | | | |
| Stock-based compensation expense | | | 708,534 | | | | 1,318,150 | |
| Increase in allowance for doubtful accounts | | | 330,000 | | | | - | |
| Depreciation and amortization | | | 49,471 | | | | - | |
| Accrued interest on convertible note | | | -- | | | | 39,550 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (57,650) | | | | - | |
| Capitalized production costs | | | 22,075 | | | | - | |
| Prepaid expenses and deposits | | | (2,473) | | | | - | |
| Accounts payable and accrued liabilities | | | 54,075 | | | | 46,792 | |
| Deferred production revenue | | | (126,000) | | | | - | |
| NET CASH PROVIDED BY OPERATING ACTIVITIES | | | 9,455 | | | | 48,288 | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Production loans and accrued interest | | | 140,605 | | | | (182,765 | ) |
| Print and advertising funding and accrued interest | | | (488,911) | | | | - | |
| NET CASH USED IN INVESTING ACTIVITIES | | | (348,306) | | | | (182,765 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Advances from stockholders | | | (73) | | | | (132,770 | ) |
| Advances from related parties | | | 235,428 | | | | 69,808 | |
| Proceeds from convertible debenture | | | 100,000 | | | | 215,000 | |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 335,355 | | | | 152,038 | |
| | | | | | | | | |
| NET (DECREASE) INCREASE IN CASH | | | (3,496) | | | | 17,561 | |
| | | | | | | | | |
| CASH, BEGINNING OF PERIOD | | | 5,932 | | | | 9,936 | |
| | | | | | | | | |
| CASH, END OF PERIOD | | $ | 2,436 | | | $ | 27,497 | |
The accompanying notes are an integral part of these financial statements.
RED ROCK PICTURES HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2009 AND FEBRUARY 29, 2008
(UNAUDITED)
| 1. | NATURE OF BUSINESS AND BASIS OF PRESENTATION |
Nature of Business
As used in this report, "Red Rock Pictures Holdings, Inc.", "the Company", "us”, “we," "our" and similar terms include Red Rock Pictures Holdings, Inc. and its subsidiaries, unless the context indicates otherwise.
Red Rock Pictures, Inc. was incorporated on August 18, 2006 under the laws of the State of Nevada and was acquired by Red Rock Pictures Holdings Inc. on August 31, 2006. The Company engages in the business of developing, financing, producing and licensing feature-length motion pictures and direct response infomercials.
On June 6, 2008, the Company entered into a Stock for Stock Exchange Agreement (the “Exchange Agreement”) with Studio Store Direct, Inc. (“SSD”) and all of the current SSD Shareholders. Pursuant to the Exchange Agreement, the Company acquired 100% of the assets of SSD by issuing 11,000,000 restricted common shares in exchange for all the issued and outstanding shares of SSD. Further, SSD became a wholly owned subsidiary of the Company. With the addition of SSD, the Company also operates as a traditional infomercial production and distribution company. SSD has developed a patent pending process for embedding direct response programs directly onto motion picture DVD’s. Viewers can access virtual stores, offering related merchandise for purchase with the simple click of a mouse or by dialing a toll free number. SSD’s model provides a turnkey new revenue solution for major Hollywood studios and independent distributors.
On January 8, 2009, the Company announced that it has entered into a definitive agreement to acquire New York based ComedyNet.TV, Inc. (“ComedyNet”), a leader in multimedia comedic content distribution. Under the terms of the final asset purchase agreement, the Company will issue 50,000,000 common shares in consideration for the assets of ComedyNet. The transaction closed on April 8, 2009.
Basis of Presentation
Effective September 1, 2008, the Company determined that it has emerged from its development stage as is therefore no longer presenting development stage financial information as such.
The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Securities and Exchange Commission, or SEC, Form 10Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles, or GAAP, for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended August 31, 2008. Operating results for the three and six months ended February 28, 2009 are not necessarily indicative of the results that may be expected for future quarters or the year ending August 31, 2009.
Use of Estimates
The preparation of our financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of net revenue and expenses in the reporting periods. We regularly evaluate estimates and assumptions related to allowances for doubtful accounts, share-based compensation expense, deferred income tax asset valuation allowances, uncertain tax positions, litigation and other contingencies. We base our estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by us may differ materially and adversely from our estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Revenue Recognition
The Company recognizes revenue from television and film productions pursuant to American Institute of Certified Public Accountants Statement of Position 00-2, Accounting by Producers or Distributors of Films (“SOP 00-2”). The following conditions must be met in order to recognize revenue under SOP 00-2: (i) persuasive evidence of a sale or licensing arrangement exists; (ii) the program is complete and has been delivered or is available for immediate and unconditional delivery; (iii) the license period of the arrangement has begun and the customer can begin its exploitation, exhibition or sale; (iv) the arrangement fee is fixed or determinable; and (v) collection of the arrangement fee is reasonably assured. Income from film productions is derived from foreign, home video and television sales of third-party films for which production and/or prints and advertising have been financed by the Company. A significant portion of participation income is paid to the Company based on the timetable associated with participation statements generated by third party processors, and is not typically known by the Company on a timely basis. This revenue is consequently not recognized until the amount is either known or reasonably estimable or until receipt of the statements from the third parties. When the Company is entitled to royalties based on gross receipts, revenue is recognized before deduction of fees, which are included as a component of cost of revenue. Cash received in advance of meeting the revenue recognition criteria described above is recorded as deferred production revenue.
Production Costs for Feature Films
Production costs are accounted for pursuant to SOP No. 00-2. The cost of production for movies, including direct costs, production overhead and interest are capitalized and amortized using the individual-film-forecast method under which such costs are amortized for each program in the ratio that revenue earned in the current period for such program bears to management’s estimate of the ultimate revenues to be realized from all media and markets for such program. Management regularly reviews, and revises when necessary, its ultimate revenue estimates on a title-by-title basis, which may result in a change in the rate of amortization applicable to such title and/or a write-down of the value of such title to estimated fair value. These revisions can result in significant quarter-to-quarter and year-to-year fluctuations in film write-downs and rates of amortization. If a total net loss is projected for a particular title, the associated film and television costs are written down to estimated fair value. All exploitation costs, including advertising and marketing costs are expensed as incurred.
Production Costs for Infomercials
The cost of production for infomercials for our customers, including direct costs, production overhead and interest are capitalized and expensed upon delivery to our customers.
Stock-Based Compensation
The Company accounts for stock-based compensation in accordance with SFAS No. 123 (Revised 2004), Share-Based Payment, (SFAS No. 123R). Under the fair value recognition provision of SFAS No. 123R, stock-based compensation cost is estimated at the grant date based on the fair value of the award. The Company estimates the fair value of stock options granted using the Black-Scholes-Merton option pricing model. The fair value of restricted stock awards is based on the closing market price of the Company’s common stock on the date of grant. The fair value of options and awards, adjusted for estimated forfeitures, is amortized on a straight-line basis over the requisite service period of the award, which is generally the vesting period.
During the three and six months ended February 28, 2009, the Company recognized total compensation expense of $294,267 and $708,534 respectively and is disclosed separately in the accompanying consolidated statements of loss.
The Company's financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has experienced losses from operations since inception that raise substantial doubt as to its ability to continue as a going concern.
The Company's existence is dependent upon management's ability to develop profitable operations and resolve its liquidity problems. Management anticipates the Company will attain profitable status and improve its liquidity through continued business development and additional equity investment in the Company.
The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
Basic net loss per share is computed by dividing loss available to common stockholders by the weighted-average number of common shares outstanding for the period. In computing diluted net loss per share, the weighted average number of shares outstanding is adjusted to reflect the effect of potentially dilutive securities. There were no dilutive securities for the six months ended February 28, 2009.
A majority of our revenue was recorded from one customer and a related party, National Lampoon, Inc., and its subsidiaries. We generated $91,000 and $89,322 in revenue, or 100% of total revenue, for the three months ended February 28, 2009 and February 29, 2008, respectively. For the six month period ending February 28, 2009 and February 29, 2008, we generated $435,494 and $178, 665 in revenue, or 42% and 100% of total revenue, respectively.
| 5. | ADVANCES TO RELATED PARTY |
These advances are unsecured, non interest bearing and due on demand. As of February 28, 2009 and August 31, 2008, advances to related parties were $37,298 and $76,798, respectively. These advances were made to a company controlled by the spouse of a director and shareholder of the Company.
| 6. | CAPITALIZED PRODUCTION COSTS |
All capitalized production costs relate to projects in development. The Company expects 100% of the balance of capitalized production costs will be amortized or expensed within the next year. The table below displays the activity during the six months ended February 28, 2009:
| | | Fiscal Year 2009 | |
| | | | |
| Opening balance, August 31, 2008 | | $ | 134,723 | |
| Production costs incurred and capitalized | | | 12,006 | |
| Expense related to delivered projects and reclassified to cost of sales | | | (34,081) | |
| Closing unamortized balance, February 28, 2009 | | $ | 112,648 | |
| 7. | PRODUCTION LOANS AND ACCRUED INTEREST |
The Company provides production financing to National Lampoon, Inc., a corporate shareholder ("NL") that shares certain directors and officers of Red Rock Pictures Holdings, Inc. The production advances bear interest at a rate of 10% per annum, has a security interest in the film to the extent of the actual amount of the funding as long as there is an unpaid balance on the loan and are repayable from 100% of any and all net revenues from each picture. The financing agreements allows for the Company to advance up to $2,000,000 per picture production.
Outstanding production loans to and accrued interest with NL consists of the following as of February 28, 2009 and August 31, 2008 was:
| | | As of February 28, 2008 | | | As of August 31, 2008 | |
| | | | | | | |
| Bag Boy Productions, Inc., a wholly-owned subsidiary of NL, less allowance for doubtful accounts of $300,000 and $Nil, respectively | | $ | 509,030 | | | $ | 1,077,635 | |
| Ratko Productions, Inc., a wholly-owned subsidiary of NL | | | 2,261,992 | | | | 2,163,992 | |
| Endless Bummer LLC | | | 30,000 | | | | - | |
| Less current portion | | | 2,801,022 (700,000 | ) | | | (1,396,470 | ) |
| Long term portion of production loans and interest | | $ | 2,101,022 | | | $ | 1,845,157 | |
Bag Boy Productions, Inc. - As a result of a modification on October 31, 2006 to this financing agreement with NL, repayment of this loan will now be received no later than March 14, 2011. The payments are to be made from the proceeds from the release of the film over an estimated revenue cycle of three years, as follows: first NL is to receive a 20% distribution fee; thereafter, NL is to receive recoupment of all prints and advertising expenses incurred in connection with the distribution of the picture. The remaining gross receipts are to be split equally between the Company and NL until such time as the Company has recouped its investment entirely. As of February 28, 2009, the Company had a loan balance of $197,307 in principal and $311,723 in interest under this financing agreement for a total of $539,030. During the second quarter of fiscal year 2009, we recorded a reserve of $300,000 related to this film due to its revised downward revenue projections.
Ratko Productions, Inc. - As a result of a modification on October 31, 2006 to this financing agreement with NL, repayment of this loan will now be received no later than January 31, 2012. The payments are to be made from the proceeds from the release of the film over an estimated revenue cycle of three years, as follows: first NL is to receive a 20% distribution fee; thereafter, NL is to receive recoupment of all prints and advertising expenses incurred in connection with the distribution of the picture. The remaining gross receipts are to be split equally between the Company and NL until such time as the Company has recouped its investment entirely. As of February 28, 2008, the Company had a loan balance of $1,922,028 in principal and $339,964 in interest under this financing agreement for a total of $2,261,992.
Endless Bummer Productions LLC - Per a deal memorandum effective March 18, 2009 between Red Rock Pictures Holding, Inc., National Lampoon, Inc., 4Fini, Inc. Chris Kaman and Endless Bummer Productions, LLC, the Company has an obligation to invest in an upcoming feature length motion picture title Endless Bummer. The Company is obligated to invest $50,000 by April 30, 2009 of which $30,000 has been paid as of February 28, 2009.
| 8. | PRINT AND ADVERTISING FUNDING |
During the third quarter of fiscal year 2008, the Company entered into an agreement with NL whereby the Company agreed to advance funding to NL for print and advertising services (P&A) for certain titles released by NL for total advances of up to $2,000,000. The Company will be entitled to recoup its investment plus a premium of twenty percent (20%) of the amount funded. In addition, the Company will be entitled to a five percent (5%) of all net contingent proceeds from the picture.
The agreement expressly states that NL is not a borrower or guarantor under any of the P&A funding and the only recourse available to the Company is against the specific film funded, with no cross collateralization. NL responsibility is to direct payments to the Company directly from any proceeds due from each picture prior to any payment to the picture or any affiliates. At February 28, 2009 and August 31, 2008, the Company had advanced $1,779,235 and $1,078,180, respectively.
| 9. | ADVANCES FROM RELATED PARTIES |
On June 9, 2007, the Company entered into loan agreements with the N. Williams Family Investments, L.P. and Daniel Laikin (collectively, “Williams-Laikin”) for $1,000,000 each for a total of $2,000.000. The loan agreement with Daniel Laikin was subsequently amended from $1,000,000 to $900,000.
The proceeds of these loans are to fund the Company’s obligation to advance production costs to National Lampoon for a motion picture production. The loans are secured by the profit participation rights of the films. The loans bear seven percent (7%) interest and are to be repaid out of the proceeds of equity raised of the Company or sales efforts of the motion picture. In addition to the interest on these advances, Williams-Laikin are entitled to receive five percent (5%) of the twenty five percent (25%) of all net profits from the distribution of the respective pictures specified in their agreement received by Red Rock Pictures Holdings Inc. as described in Note 5.
In addition, on July 7, 2007 the Company issued to Williams-Laikin 521,866 shares of the company’s common stock which represents the number of shares computed by dividing each $1,000,000 loan by $1.92 (the computed lowest volume weighted average price (“VWAP”) for the five days prior to the execution of the Williams-Laikin loans).
In the event that Company’s common stock falls below $1.92 on the six-month anniversary of the Williams-Laikin loans, than the Company shall issue to Williams-Laikin an additional number of shares of the Company’s common stock equal to the difference between the number of Williams-Laikin shares and one million dollars ($1,000,000) divided by the VWAP of the Company’s common stock, as quoted by Bloomberg, LP, on the calculation date. During the year ended August 31, 2008 the Company issued 11,440,662 share s pursuant to this requirement and has been valued at the market value of the common stock on the date of issue.
In addition the Company has received advances from a company controlled by the spouse of a director and shareholder of the Company. These advances are unsecured, non interest bearing and due on demand.
The completed technology relates to the intangible assets that were identified by management in the acquisition of Studio Store Direct, Inc. Management identified completed technology and processes for embedding direct response programs directly onto motion picture digital video discs ("DVD's"). It was determined that the estimated useful life of this technology was five years and accordingly the cost of this technology is being amortized over five years using the straight line method. The Company recorded $22,331 and $44,660 for the three and six months ended February 28, 2009, respectively.
The following table sets forth the intangible assets, excluding goodwill, by major category:
| Category | | Cost | | | Accumulated Amortization | | | Net Book Value at February 28, 2009 | |
| Completed technology | | $ | 446,611 | | | $ | (66,991) | | | $ | 379,620 | |
| 11. | SENIOR SECURED CONVERTIBLE DEBENTURE |
On December 28, 2008, the Company entered into a twelve month $100,000 senior secured convertible debenture agreement with Emerald Asset Advisors, LLC (“Note Holder”). The one year term loan bears interest at 10% per annum and interest accrues and is payable in cash upon maturity provided that the elected conversion to common shares does not occur. At any time or times on or after December 28, 2008, the Note Holder shall be entitled to convert any portion of the outstanding and unpaid amount into fully paid and nonassessable shares of Common Stock at a conversion price of $0.06 per common share. From and after the occurrence of an event of default, the interest rate shall be increased to twenty percent (20.0%) until the date of such cure.
| 12. | COMMITMENTS AND CONTINGENCY |
Per a deal memorandum effective March 18, 2009 between Red Rock Pictures Holding, Inc., National Lampoon, Inc., 4Fini, Inc. Chris Kaman and Endless Bummer Productions, LLC, the Company has an obligation to invest in an upcoming feature length motion picture titled Endless Bummer. The Company is obligated to invest $50,000 by April 30, 2009 of which $30,000 has been paid and classified as capitalized production costs in the accompanying Consolidated Balance Sheet at February 28, 2009.
On October 27, 2008, we and our wholly owned subsidiary Studio Store Direct, Inc. (“SSD”), was served a summons and complaint related to a contract action brought against the Company by Livon Laboratory, Inc. (“LivOn”). The breach of claim by LivOn is related to contract entered into between SSD, and LivOn for the production of an infomercial to be used as a direct response-marketing tool in conjunction with the sale of LivOn’s LypoSpheric Vitamin C. LivOn has requested relief in excess of $60,000 for the alleged material breach of the contract between SSD and LivOn. We have retained counsel and are in the process of filing a counterclaim for damages against LivOn. As of April 10, 2009, the Company maintains that the claim is frivolous and unfounded.
On November 17, 2008, the Board of Directors authorized the Company to issue 5,000,000 shares to Reno Rollé, the Company’s President and Chief Executive Officer, at the closing market price on November 17, 2008. The shares were issued per Mr. Rollé’s employment agreement with the Company. The issuance of shares was recorded as an expense of $200,000 and is included in stock-based compensation expense in the accompanying consolidated statements of loss and comprehensive loss.
On November 17, 2008, the Board of Directors authorized the Company to issue 1,000,000 shares to a Director for services rendered. The shares were issued at the closing market price on November 17, 2008. The issuance of shares was recorded as an expense of $40,000 and is included in stock-based compensation expense in the accompanying consolidated statements of loss and comprehensive loss.
On November 25, 2008, the Company entered into an agreement with one of its vendors to issue shares in lieu of a cash payment for expenses incurred and outstanding. The Company issued 166,000 shares of common stock to satisfy an outstanding balance owed of approximately $22,000.
On December 10, 2008, the Board of Directors authorized the Company to issue 1,000,000 shares to an employee for services rendered. The shares were issued at the closing market price on December 10, 2008. The issuance of shares was recorded as an expense of $30,000 and is included in stock-based compensation expense in the accompanying consolidated statements of loss and comprehensive loss.
On December 10, 2008, the Board of Directors authorized the Company to issue 1,000,000 shares to Reno Rollé, the Company’s President and Chief Executive Officer, at the closing market price on December 10, 2008. The shares were issued per Mr. Rollé’s employment agreement with the Company. The issuance of shares was recorded as an expense of $30,000 and is included in stock-based compensation expense in the accompanying consolidated statements of loss and comprehensive loss.
| 14. | SUPPLEMENTAL CASH FLOW INFORMATION |
During the six months ended February 28, 2009 and February 29, 2008, there was no interest or taxes paid by the Company.
As of February 28, 2009, there were no differences between financial reporting and tax bases of assets and liabilities. The Company will have tax losses available to be applied against future years' income as result of the losses incurred. However, due to the losses incurred in the period and expected future operating results, management determined that it is more likely than not that the deferred tax asset resulting from the tax losses available for carry forward will not be realized through the reduction of future income tax payments. Accordingly a 100% valuation allowance has been recorded for deferred income tax assets.
The Company entered into a definitive agreement to acquire New York based ComedyNet.TV, Inc. (“ComedyNet”), a leader in multimedia comedic content distribution. Pursuant to the terms of the final asset purchase agreement, the Company will issue 50,000,000 common shares in consideration for the assets of ComedyNet. The transaction closed on April 8, 2009. ComedyNet’s assets include a substantial library of filmed comedic content and general fixed assets which will be recorded based on a third party valuation of its fair market value.
Certain statements contained in this quarterly filing, including, without limitation, statements containing the words “believes”, “anticipates”, “expects” and words of similar import, constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.
Such factors include, among others, the following: international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings.
Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. The following discussion and analysis should be read in conjunction with our Financial Statements and notes appearing elsewhere in this report.
Plan of Operation
Overview
We are engaged in the finance, production, distribution and marketing of filmed entertainment products, including theatrical motion pictures, television programs, home video products, and digitally delivered entertainment and media. We were founded in 2006 to leverage the experience and expertise of its management team and exploit emerging opportunities in traditional and digital media and entertainment. Our primary business model centers around the control of entertainment properties that we may develop, acquire, produce and/or finance. We will also be involved in the funding of motion pictures and other entertainment and media properties, both for our own library and development activities as well as in partnership with outside producers.
Proposed Milestones to Implement Business Operations
During the next twelve months, we expect to take the following steps in connection with the development of our business and the implementation of our plan of operations:
The Company will continue to enter into agreements with strategic partners in the film development and production industry. These partners will include film production entities such as National Lampoon, Inc., a current shareholder of the Company. The Company has entered into agreements to fund and co-fund production of a slate of National Lampoon branded moderately budgeted films. These films will be distributed by and through National Lampoon, focused primarily on the college audience, but marketed and distributed to the general population. The Company intends to fund P&A (Prints and Advertising) on these pictures to promote a limited release, less than 50 screens on the initial release. In the event it is decided to release the picture on additional screens, the Company may either increase funding or work with a P&A lender to provide the additional funding required. The terms of these agreements call for a ten percent (10%) annual interest rate and twenty-five (25%) percent net profit participation in the motion pictures after recoupment of all costs and distribution fees for funds advanced for film financings. For funds advanced for P&A, the terms include a twenty percent (20%) return premium and a profit participation of up to ten percent (10%) of net profits in the motion pictures.
The Company intends to enter into agreements to fund and co-produce a slate of National Lampoon mid-budget films. It is our intent to enter into an agreement to release one National Lampoon film per year in this manner. The distribution on these films will be controlled by National Lampoon, but will be for a wide theatrical release (1200+ screens). The Company will share in all revenue generated from these pictures, including theatrical, home video (DVD), foreign sales, PPV/VOD, and television.
The Company will begin building and formalizing relationship with the talent community. The Company intends to use our equity as incentives to build these relationships. The Company intends to work with top talent to fund and produce projects that they bring to the Company. These are typically moderately budgeted projects which fall below the typical studio interest.
Another area that the Company will pursue as part of our plan is the acquisition of existing film properties and film and media related businesses. The Company will work to build a library of films to leverage across all distribution platforms. The Company feels that as distribution platforms continue to expand, there are opportunities to exploit content and generate revenue in a number of ways.
Their compensation is determined as a percentage of the purchase price of the acquisition. The company has evaluated a number of strategic acquisitions and continues to do so.
The Company will also hire and train a limited amount of additional staff, including management, marketing, and administrative personnel. The number of employees hired will be dependent upon a variety of factors including our progress in implementing our business plan and available capital. The Company believes that the hiring of employees will be an ongoing process during the Company’s existence.
Results of Operations
Comparison of the Three Months Ended February 28, 2009 and February 29, 2008
Revenue
Revenue was $91,000 and $89,332 for the three months ended February 28, 2009 and February 29, 2008, respectively. This revenue is related to the interest of production loans which has increased in balance over the same period of the prior year.
Costs and Expenses
Cost and expenses was $706,995 and $1,206,328 for the three months ended February 28, 2009 and February 29, 2008, respectively. This decrease of $499,333 was due to a decrease in stock-based compensation expense of $853,717 offset by an increase in bad debt expense of $300,000. The remaining difference is due to normal fluctuations in operating expenses based on business operations.
Income Taxes
During the three months ended February 28, 2009 and February 29, 2008, respectively, we had no provision for income taxes due to the net operating losses incurred.
Comparison of the Six Months Ended February 28, 2009 and February 29, 2008
Revenue
Revenue was $435,494 and $178,665 for the six months ended February 28, 2009 and February 29, 2008, respectively. The increase of revenue of $256,829 was due to the completion of one infomercial project that generated revenue of $183,650. In addition, during the third quarter of fiscal year 2008, the Company entered into an agreement to provide print and advertising services. This agreement generated $69,844 and no revenue during the comparative period.
Costs and Expenses
Cost and expenses was $1,336,071 and $1,425,511 for the six months ended February 28, 2009 and February 29, 2008, respectively. This decrease of $89,440 was due to a decrease in stock-based compensation expense of $609,616, offset by an increase in bad debt expense of $330,000, amortization expense related to intangible assets of $44,660, and $34,081 in expenses associated with an infomercial project that was delivered during the fiscal year. Professional fees, which include accounting and legal fees, increased $58,293 due to our recent acquisition. The remaining difference is due to normal fluctuations in operating expenses based on business operations.
Income Taxes
During the three months ended February 28, 2009 and February 28, 2008, respectively, we had no provision for income taxes due to the net operating losses incurred.
Liquidity and Capital Resources
As of February 28, 2009 we had $2,436 in cash and a working capital deficiency of $1,851,450. A substantial amount of cash will be required in order to continue operations over the next twelve months. Based upon our current cash and working capital deficiency, we will not be able to meet our current operating expenses and will require additional capital.
Our cash flows provided by operating activities was $9,455 reflecting the increase in our accounts receivable and the recording of revenue and expenses associated with the delivery of an infomercial project during the year.
Our cash flows used in investing activities was $348,306. The balance reflects an increase in both production loans and print and advertising funding and related interest. The Company expects to see some payments on the loans and print and advertising funding during the second half of fiscal year 2009.
Our cash flows from financing activities represent activity with a related party to fund print and advertising and production loans.
On December 28, 2008, we entered into a twelve month $100,000 senior secured convertible debenture agreement with Emerald Asset Advisors, LLC (“Note Holder”). The one year term loan bears interest at 10% per annum and interest shall accrue and be payable in cash upon maturity or provided a conversion to common shares occurs. From and after the occurrence of an event of default, the interest rate shall be increased to twenty percent (20.0%) until the date of such cure.
At any time or times on or after December 28, 2008, the Note Holder shall be entitled to convert any portion of the outstanding and unpaid amount into fully paid and nonassessable shares of Common Stock at a conversion price of $0.06 per common share. The Company has an option to receive up to an additional $200,000 in funds in exchange for up to an additional 12 million common shares.
The Company entered into a definitive agreement to acquire New York based ComedyNet.TV, Inc. (“ComedyNet”), a leader in multimedia comedic content distribution. Pursuant to the terms of the final asset purchase agreement, the Company will issue 50,000,000 common shares in consideration for the assets of ComedyNet. The transaction was closed on April 8, 2009.
Additionally, we intend to seek advice from investment professionals on how to obtain additional capital and believe that by being a public entity we will be more attractive to the sources of capital. In addition, we will need to raise additional capital to continue our operations past twelve months and there is no assurance that we will be successful in raising the needed capital. Currently we have no material commitments for capital expenditures.
Critical Accounting Policies
Red Rock’s financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use if estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
Our significant accounting policies are summarized in Note 3 of our annual financial statements filed on Form 10-K and dated December 15, 2008. While all these significant accounting policies impact its financial condition and results of operations, Red Rock views certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on the Company’s consolidated financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company is not subject to certain market risks, including changes in interest rates and currency exchange rates.
Pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (“Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Accounting Officer (“CAO”) (the Company’s principal financial and accounting officer), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s CEO and CAO concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CAO, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Controls over Financial Reporting
Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of consolidated financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. There has been no change in the Company’s internal control over financial reporting during the quarter ended February 28, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s management, including the Company’s CEO and CAO, does not expect that the Company’s disclosure controls and procedures or the Company’s internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as of February 28, 2009.
On October 27, 2008, we and our wholly owned subsidiary Studio Store Direct, Inc. (“SSD”), was served a summons and complaint related to a contract action brought against the Company by Livon Laboratory, Inc. (“LivOn”).
The breach of claim by LivOn is related to contract entered into between SSD, and LivOn for the production of an infomercial to be used as a direct response-marketing tool in conjunction with the sale of LivOn’s LypoSpheric Vitamin C. LivOn has requested relief in excess of $60,000 for the alleged material breach of the contract between SSD and LivOn. We have retained counsel and are in the process of filing a counterclaim for damages against LivOn. As of April 14, 2009, the Company maintains that the claim is frivolous and unfounded.
ITEM 1A. RISK FACTORS.
Risk Factors
We have a limited operating history in which to evaluate our business.
We were incorporated in Nevada in August 2006 and we have limited revenues to date and we have a limited operating history upon which an evaluation of our future success or failure can be made. No assurances of any nature can be made to investors that the company will be profitable.
We will require additional funds to achieve our current business strategy and our inability to obtain additional financing could cause us to cease our business operations.
We will need to raise additional funds through public or private debt or sale of equity to achieve our current business strategy. Such financing may not be available when needed. Even if such financing is available, it may be on terms that are materially adverse to your interests with respect to dilution of book value, dividend preferences, liquidation preferences, or other terms. Our capital requirements to implement our business strategy will be significant. However, at this time, we can not determine the amount of additional funding necessary to implement such plan. We intend to assess such amount at the time we will implement our business plan. Furthermore, we intend to effect future acquisitions with cash and the issuance of debt and equity securities. The cost of anticipated acquisitions may require us to seek additional financing. We anticipate requiring additional funds in order to fully implement our business plan to significantly expand our operations. We may not be able to obtain financing if and when it is needed on terms we deem acceptable. Our inability to obtain financing would have a material negative effect on our ability to implement our acquisition strategy, and as a result, could require us to diminish or suspend our acquisition strategy.
If we are unable to obtain financing on reasonable terms, we could be forced to delay, scale back or eliminate certain product and service development programs. In addition, such inability to obtain financing on reasonable terms could have a material negative effect on our business, operating results, or financial condition to such extent that we are forced to restructure, file for bankruptcy, sell assets or cease operations, any of which could put your investment dollars at significant risk.
If we are unable to retain the services of our chief executive officer, Reno Rolle, or if we are unable to successfully recruit qualified managerial personnel and employees with experience in business and the entertainment industry, we may not be able to continue our operations.
Our success depends solely upon the continued service of Reno Rolle, our chief executive officer. Loss of Mr. Rolle’s services will have a material adverse effect on our growth, revenues, and prospective business. We do not maintain key-man insurance on the life of our chief executive officer. In addition, in order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully recruiting qualified managerial personnel and employees with experience in business and the entertainment industry. Competition for qualified individuals is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified personnel on acceptable terms.
There may be potential liabilities associated with the Company that we were not aware of at the time of the Merger.
We may have liabilities that we did not discover or may have been unable to discover during our pre-acquisition investigation. Any indemnities or warranties may not fully cover such liabilities due to their limited scope, amount or duration, the financial limitations of the indemnitor or warrantor, or for other reasons. Therefore, in the event we are held responsible for the foregoing liabilities, our operations may be materially and adversely affected.
The Red Rock shareholders currently own a controlling interest in our voting stock and investors may not have any voice in our management.
In connection with the acquisition of Red Rock, the Red Rock Shareholders, will hold an aggregate of 51% of our outstanding shares of common stock, and in the aggregate, has the right to cast 51% of the votes in any vote by our stockholders. Thus, these stockholders, acting together, will have the ability to control substantially all matters submitted to our stockholders for approval, including:
| · | election of our board of directors; |
| · | removal of any of our directors; |
| · | amendment of our certificate of incorporation or bylaws; and |
| · | adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving the Company. |
As a result of their ownership and positions, our directors and executive officers collectively are able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our directors and executive officers, or the prospect of these sales, could adversely affect the market price of our common stock. Management's stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
It is likely that additional shares of our stock will be issued in the normal course of our business development, which will result in a dilutive affect on our existing shareholders.
We will issue additional stock as required to raise additional working capital in order to secure intellectual properties, undertake company acquisitions, recruit and retain an effective management team, compensate our officers and directors, engage industry consultants and for other business development activities.
If we fail to adequately manage our growth, we may not be successful in growing our business and becoming profitable.
We expect our business and number of employees to grow over the next year. We expect that our growth will place significant stress on our operation, management, employee base and ability to meet capital requirements sufficient to support our growth over the next 12 months. Any failure to address the needs of our growing business successfully could have a negative impact on our chance of success.
If we acquire or invest in other businesses, we will face certain risks inherent in such transactions.
We may acquire, make investments in, or enter into strategic alliances or joint ventures with, companies engaged in businesses that are similar or complementary to ours. If we make such acquisitions or investments or enter into strategic alliances, we will face certain risks inherent in such transactions. For example, we could face difficulties in managing and integrating newly acquired operations. Additionally, such transactions would divert management resources and may result in the loss of artists or songwriters from our rosters. We cannot assure you that if we make any future acquisitions, investments, strategic alliances or joint ventures that they will be completed in a timely manner, that they will be structured or financed in a way that will enhance our creditworthiness or that they will meet our strategic objectives or otherwise be successful. Failure to effectively manage any of these transactions could result in material increases in costs or reductions in expected revenues, or both.
“Penny Stock” rules may make buying or selling our common stock difficult.
Trading in our securities is subject to the “penny stock” rules. The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00 per share, subject to certain exceptions. These rules require that any broker-dealer who recommends our securities to persons other than prior customers and accredited investors, must, prior to the sale, make a special written suitability determination for the purchaser and receive the purchaser’s written agreement to execute the transaction. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated with trading in the penny stock market. In addition, broker-dealers must disclose commissions payable to both the broker-dealer and the registered representative and current quotations for the securities they offer. The additional burdens imposed upon broker- dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit the market price and liquidity of our securities. Broker- dealers who sell penny stocks to certain types of investors are required to comply with the Commission’s regulations concerning the transfer of penny stocks. These regulations require broker-dealers to:
| Make a suitability determination prior to selling a penny stock to the purchaser; |
| · | Receive the purchaser’s written consent to the transactions; and |
| · | Provide certain written disclosures to the purchaser. |
Risks Associated with the Entertainment, Media and Communications Industries
Competition from providers of similar products and services could materially adversely affect our revenues and financial condition.
The industry in which we compete is a rapidly evolving, highly competitive and fragmented market, which is based on consumer preferences and requires substantial human and capital resources. We expect competition to intensify in the future. There can be no assurance that we will be able to compete effectively. We believe that the main competitive factors in the entertainment, media and communications industries include effective marketing and sales, brand recognition, product quality, product placement and availability, niche marketing and segmentation and value propositions. They also include benefits of one's company, product and services, features and functionality, and cost. Many of our competitors are established, profitable and have strong attributes in many, most or all of these areas. They may be able to leverage their existing relationships to offer alternative products or services at more attractive pricing or with better customer support. Other companies may also enter our markets with better products or services, greater financial and human resources and/or greater brand recognition. Competitors may continue to improve or expand current products and introduce new products. We may be perceived as relatively too small or untested to be awarded business relative to the competition. To be competitive, we will have to invest significant resources in business development, advertising and marketing. We may also have to rely on strategic partnerships for critical branding and relationship leverage, which partnerships may or may not be available or sufficient. We cannot assure that it will have sufficient resources to make these investments or that we will be able to make the advances necessary to be competitive. Increased competition may result in price reductions, reduced gross margin and loss of market share. Failure to compete successfully against current or future competitors could have a material adverse effect on the Company’s business, operating results and financial condition.
The speculative nature of the entertainment, media and communications industry may result in our inability to produce products or services that receive sufficient market acceptance for us to be successful.
Certain segments of the entertainment, media and communications industry are highly speculative and historically have involved a substantial degree of risk. For example, the success of a particular film, video game, program or recreational attraction depends upon unpredictable and changing factors, including the success of promotional efforts, the availability of alternative forms of entertainment and leisure time activities, general economic conditions, public acceptance and other tangible and intangible factors, many of which are beyond our control. If we complete a business combination with a target business in such a segment, we may be unable to produce products or services that receive sufficient market acceptance for us to be successful.
Changes in technology may reduce the demand for the products or services we may offer following a business combination.
The entertainment, media and communications industries are substantially affected by rapid and significant changes in technology. These changes may reduce the demand for certain existing services and technologies used in these industries or render them obsolete. We cannot assure you that the technologies used by or relied upon or produced by a target business with which we effect a business combination will not be subject to such occurrence. While we may attempt to adapt and apply the services provided by the target business to newer technologies, we cannot assure you that we will have sufficient resources to fund these changes or that these changes will ultimately prove successful.
If our products or services that we market and sell are not accepted by the public, our profits may decline.
Certain segments of the entertainment, media and communications industries are dependent on developing and marketing new products and services that respond to technological and competitive developments and changing customer needs and tastes. We cannot assure you that the products and services of a target business with which we effect a business combination will gain market acceptance. Any significant delay or failure in developing new or enhanced technology, including new product and service offerings, could result in a loss of actual or potential market share and a decrease in revenues.
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| | | |
| Exhibit No. | | Description |
| | | |
| 31.1 | | Certification of Reno Rollé pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. |
| | | |
| 31.2 | | Certification of Steve Handy pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended. |
| | | |
| 32.1 | | Certification of Reno Rollé pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | | |
| 32.2 | | Certification of Steve Handy pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, there unto duly authorized.
| | RED ROCK PICTURES HOLDINGS, INC. |
| | Registrant |
| | |
| Date: April 17, 2009 | By: /s/ Reno Rollé |
| | Reno Rollé |
| | President, Chief Executive Officer, and Director |
| | |
| | RED ROCK PICTURES HOLDINGS, INC. |
| | Registrant |
| | |
| Date: April 17, 2009 | By: /s/ Steve Handy |
| | Steve Handy |
| | Chief Financial Officer |
| | |
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