UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: February 28, 2010
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number: 333-108690
RED ROCK PICTURES HOLDINGS INC. (Exact name of registrant as specified in its charter)
| Nevada | | 98-0441032 |
| (State or other jurisdiction of | | (I.R.S. Employer Identification No.) |
| incorporation or organization) | | |
6019 Olivas Park Drive, Suite B Ventura, California | | 93003 |
| (Address of principal executive offices) | | (Zip Code) |
(323) 790-1813
(Registrant’s telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company x |
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes o No x
State the number of shares outstanding of each of the issuer’s classes of common equity, as of April 13, 2010: 106,816,335 shares of common stock.
RED ROCK PICTURES HOLDINGS, INC. AND SUBSIDIARIES
FORM 10-Q
THREE AND SIX MONTHS ENDED FEBRUARY 28, 2010 AND 2009
__________________
TABLE OF CONTENTS
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| | | Page |
| | | |
| PART I - FINANCIAL INFORMATION |
| | | |
| Item 1. | Consolidated Financial Statements | |
| | Consolidated Balance Sheets | 4 |
| | Consolidated Statements of Loss and Comprehensive Loss | 5 |
| | Consolidated Statements of Cash Flows | 6 |
| | Notes to Consolidated Financial Statements | 7 |
| Item 2. | Management’s Discussion & Analysis or Plan of Operation | 11 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 13 |
| Item 4. | Controls and Procedures | 13 |
| | | |
| PART II -- OTHER INFORMATION |
| | | |
| Item 1. | Legal Proceedings | 15 |
| Item 1A. | Rick Factors | 15 |
| Item 2. | Unregistered Sales of Equity securities and Use of Proceeds | 15 |
| Item 3. | Defaults Upon Senior Securities | 15 |
| Item 4. | Submission of Matters to a Vote of Security Holders | 15 |
| Item 5 | Other Information | 15 |
| Item 6. | Exhibits | 15 |
| | | |
| Signatures | | 16 |
CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes certain forward-looking statements as defined within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to revenue, revenue composition, earnings, projected plans, performance, demand trends, future expense levels, trends in average headcount and gross margins, and the level of expected capital expenditures. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to Red Rock Pictures Holdings Inc. management and are subject to certain risks, uncertainties and assumptions. Any statements contained herein (including without limitation statements to the effect that the Company or management "estimates," "expects," "an ticipates," "plans," "believes," "projects," "continues," "may," "will," "could," or "would" or statements concerning "potential" or "opportunity" or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact should be construed as forward-looking statements. The actual results of Red Rock Pictures Holdings Inc. may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors including those discussed in "Risk Factors" under Item 1A, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," within. Because of these and other factors that may affect Red Rock Pictures Holdings Inc.’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future pe riods. The Company undertakes no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that Red Rock Pictures Holdings, Inc. files from time to time with the Securities and Exchange Commission ("SEC"), including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.
HOW TO OBTAIN SEC FILINGS
All reports filed by Red Rock Pictures Holdings, Inc. filed with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at the SEC's public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. Red Rock Pictures Holdings also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge to investors upon request.
RED ROCK PICTURES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF FEBRUARY 28, 2010 AND AUGUST 31, 2009
| | | February 28, 2010 | | | August 31, 2009 | |
| | | (Unaudited) | | | | |
| ASSETS | | | | | | |
| Current Assets | | | | | | |
| Cash | | $ | 32,960 | | | $ | - | |
| Capitalized production costs | | | 135,372 | | | | - | |
| Total Current Assets | | | 168,332 | | | | - | |
| | | | | | | | | |
| Long Term Assets | | | | | | | | |
| Equipment, net | | | 13,377 | | | | 16,916 | |
| Total Long Term Assets | | | 13,377 | | | | 16,916 | |
| | | | | | | | | |
| Total Assets | | $ | 181,709 | | | $ | 16,916 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | | |
| Current Liabilities | | | | | | | | |
| Accounts payable | | $ | 252,983 | | | $ | 240,755 | |
| Advances from stockholders | | | 63,636 | | | | 63,636 | |
| Deferred revenue | | | 100,000 | | | | - | |
| Senior secured convertible note, including accrued interest of $11,700 and $6,700 at February 28, 2010 and 2009, respectively | | | 211,700 | | | | 106,700 | |
| Notes payable to related parties, including accrued interest of $367,928 and $299,928 at February 28, 2010 and 2009, respectively | | | 1,907,928 | | | | 1,799,928 | |
| Total Current Liabilities | | | 2,536,247 | | | | 2,211,019 | |
| | | | | | | | | |
Going Concern, Commitments and Contingency (Note 2, 8) | | | | | | | | |
| | | | | | | | | |
| Stockholders' Deficit | | | | | | | | |
| Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued or outstanding | | | -- | | | | -- | |
Common stock, $0.001 par value; 120,000,000 shares authorized, 106,816,335 shares issued and outstanding at both February 28, 2010 and August 31, 2009, respectively | | | 106,816 | | | | 106,816 | |
| Additional paid-in-capital | | | 10,659,134 | | | | 10,269,134 | |
| Deficit | | | (13,120,488 | ) | | | (12,570,053 | ) |
| Total Stockholders' Deficit | | | (2,354,538 | ) | | | (2,194,103 | ) |
| | | | | | | | | |
| Total Liabilities and Stockholders' Deficit | | $ | 181,709 | | | $ | 16,916 | |
The accompanying notes are an integral part of these financial statements.
RED ROCK PICTURES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS AND COMPREHENSIVE LOSS
| | | Three Months Ended February 28, 2010 (Unaudited) | | | Three Months Ended February 28, 2009 (Unaudited) | | | Six Months Ended February 28, 2010 (Unaudited) | | | Six Months Ended February 28, 2009 (Unaudited) | |
| REVENUE | | | | | | | | | | | | |
| Production revenue | | $ | 2,688 | | | $ | -- | | | $ | 2,688 | | | $ | 183,650 | |
| Print and advertising premium fees | | | - | | | | - | | | | - | | | | 69,844 | |
| Interest on production advances | | | -- | | | | 91,000 | | | | - | | | | 182,000 | |
| TOTAL REVENUE | | | 2,688 | | | | 91,000 | | | | 2,688 | | | | 435,494 | |
| COSTS AND EXPENSES | | | | | | | | | | | | | | | | |
| Amortization of capitalized production costs | | | - | | | | -- | | | | - | | | | 34,081 | |
| Stock based compensation | | | 220,000 | | | | 294,267 | | | | 430,000 | | | | 708,534 | |
| Professional fees | | | 19,254 | | | | (1,597 | ) | | | 19,254 | | | | 86,484 | |
| Salaries and wages | | | 18,284 | | | | 60,221 | | | | 18,284 | | | | 78,796 | |
| Office and general | | | 10,816 | | | | 26,593 | | | | 12,586 | | | | 41,495 | |
| Bad debt expense | | | -- | | | | 300,000 | | | | -- | | | | 330,000 | |
| Rent | | | -- | | | | 5,181 | | | | -- | | | | 12,021 | |
| Amortization of intangible assets | | | -- | | | | 22,330 | | | | -- | | | | 44,660 | |
| TOTAL COSTS AND EXPENSES | | | 268,354 | | | | 706,995 | | | | 480,124 | | | | 1,336,071 | |
| | | | | | | | | | | | | | | | | |
| LOSS FROM OPERATIONS | | | (265,666 | ) | | | (615,995 | ) | | | (477,436 | ) | | | ( 900,577 | ) |
| | | | | | | | | | | | | | | | | |
| Interest expense | | | 36,500 | | | | 34,000 | | | | 73,000 | | | | 68,000 | |
| | | | | | | | | | | | | | | | | |
| NET LOSS AND COMPREHENSIVE LOSS | | $ | (302,166 | ) | | $ | (649,995 | ) | | $ | (550,436 | ) | | $ | (968,577 | ) |
| | | | | | | | | | | | | | | | | |
| LOSS PER WEIGHTED NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED | | $ | (0.00 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) | | $ | (0.01 | ) |
| | | | | | | | | | | | | | | | | |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC AND DILUTED | | | 106,816,335 | | | | 103,276,068 | | | | 106,816,335 | | | | 99,746,735 | |
The accompanying notes are an integral part of these financial statements.
RED ROCK PICTURES HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 2010 AND 2009
| | | Six Months Ended February 28, 2010 (Unaudited) | | | Six Months Ended February 28, 2009 (Unaudited) | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
| Net loss | | $ | (550,434 | ) | | $ | (968,577 | ) |
| Adjustments to reconcile net loss to net cash (used in) provided by operating activities: | | | | | | | | |
| Stock-based compensation expense | | | 430,000 | | | | 708,534 | |
| Increase in allowance for doubtful accounts | | | -- | | | | 330,000 | |
| Depreciation and amortization | | | 3,539 | | | | 49,471 | |
| Accrued interest on convertible note | | | 73,000 | | | | -- | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | - | | | | (57,650) | |
| Capitalized production costs | | | (135,372) | | | | 22,075 | |
| Prepaid expenses and deposits | | | - | | | | (2,473) | |
| Accounts payable and accrued liabilities | | | 12,227 | | | | 54,075 | |
| Deferred revenue | | | 100,000 | | | | (126,000) | |
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | | | (67,040 | ) | | | 9,455 | |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Production loans and accrued interest | | | -- | | | | 140,605 | |
| Print and advertising funding and accrued interest | | | -- | | | | (488,911) | |
| NET CASH USED IN INVESTING ACTIVITIES | | | -- | | | | (348,306) | |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Advances from stockholders | | | -- | | | | (73) | |
| Advances from related parties | | | -- | | | | 235,428 | |
| Proceeds from convertible debenture | | | 100,000 | | | | 100,000 | |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 100,000 | | | | 335,355 | |
| | | | | | | | | |
| NET INCREASE (DECREASE) IN CASH | | | 32,960 | | | | (3,496) | |
| | | | | | | | | |
| CASH, BEGINNING OF PERIOD | | | -- | | | | 5,932 | |
| | | | | | | | | |
| CASH, END OF PERIOD | | $ | 32,960 | | | $ | 2,436 | |
| | | | | | | | | |
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, 2010 AND 2009 (UNAUDITED)
| 1. | NATURE OF BUSINESS AND BASIS OF PRESENTATION |
Nature of Business
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. On June 6, 2008, the Company purchased Studio Store Direct, Inc., who specialized in the development and distribution of direct response infomercials. While the Company was traditionally engaged in the business of developing and financing feature length motion pictures, the Company changed its strategy this fiscal year by focusing on the development and distribution of direct response infomercials.
Basis of Presentation
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 n otes thereto included in our Annual Report on Form 10-K for the year ended August 31, 2009. Operating results for the three and six months ended February 28, 2010 are not necessarily indicative of the results that may be expected for future quarters or the year ending August 31, 2010.
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, does not have significant sources of revenue and has working capital deficiencies 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.
| 3. | NEW ACCOUNTING PRONOUNCEMENTS |
In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2010-06, or ASU No. 10-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements. ASU No. 10-06 requires an entity to disclose separately the amounts of significant transfers in and out of Level 1 and 2 fair value measurements, and describe the reasons for the transfers. Also, it requires additional disclosure regarding purchases, sales, issuances and settlements of Level 3 measurements. ASU No. 10-06 is effective for interim and annual periods beginning after December 15, 2009, except for the additional disclosure of Level 3 measurements, which is effective for fiscal years beginning after December 15, 2010. The Company does not expect the adoption of this sta tement to have a material impact on its consolidated financial statements.
In June 2009, the FASB issued Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. This guidance establishes the FASB Accounting Standards Codification as the single source of authoritative US generally accepted accounting principles recognized by the FASB to be applied to nongovernmental entities. This guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of this guidance will not have an impact on the Company’s financial position, results of operations or cash flow. During the current quarter, the Company has implemented the Codification in the consolidated financial statements by providing references to the Accounting Sta ndards Codification (“ASC”) topics.
In May 2009, the FASB issued guidance for Subsequent Events which is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. The Company has evaluated subsequent events after the balance sheet date of February 28, 2010 through the filing date of this quarterly Report.
Management does not believe that any new accounting pronouncements not yet effective will have a material impact on the Company’s financial statements.
| 4. | CUSTOMER CONCENTRATION AND RELATED PARTY |
In fiscal year 2009 the Company recorded revenue from our largest customer and related party, National Lampoon, Inc. For the three and six months ended February 28, 2009, revenue from National Lampoon, Inc. was $91,000 and $435,949 or approximately 100% and 42% of total revenue, respectively.
| 5. | 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, 2010:
| | | Fiscal Year 2010 | |
| | | | |
| Opening balance, August 31, 2009 | | $ | - | |
| Production costs incurred and capitalized | | | 135.372 | |
| Expense related to delivered projects and reclassified to cost of sales | | | - | |
| Closing unamortized balance, February 28, 2010 | | $ | 135,372 | |
| | | | | |
| 6. | 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.
The Company is currently in default as the Company was unable, due to its financial wherewithal, to repay the balance owed at the maturity date. As an event of default, the interest rate is increased to twenty percent (20.0%) until the date of such cure. The Company is currently in negotiation with the Note Holder.
During the six months ended February 28, 2010, the Note Holder advanced the Company an additional $100,000 in the form of a short term loan. The terms of the loan are in discussion and dependent on our current efforts to successfully obtain additional financing. Proceeds from this loan was used to complete the fiscal year 2009 Annual Report on Form 10-K, which included auditor, legal, printing, and other professional fees and to fund operating capital. The remaining funds are being used to fund our operations.
| 7. | NOTES PAYABLE TO 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. The total balance outstanding, including accrued interest, was $1.9 million and $1.8 million at February 28, 2010 and August 31, 2009, respectively.&# 160;
The Company is currently in default on the Williams-Laikin loans. In an event of default occurs and is continuing, and in every such case, unless the principal of the note shall have already become due and payable, the holder by a notice in writing to the Company may declare all of the principal of this note, together with accrued interest thereon, to be due and payable immediately. No such notice as been received as of the date of this filing.
In the event the Company or any of its subsidiaries make an assignment for the benefit of creditors, or put in writing its inability to pay its debts generally as they become due, or a notice of lien, levy or assessment is filed of record or given to Company or any of its subsidiaries with respect to all or any of their respective assets by any federal, state, local department or agency, and such lien, levy or assessment is not released or paid within a reasonable period of time but in no event longer than twenty (20) days from the date such lien, levy, or assessment is filed, or such longer period of time as is appropriate in the case of any such lien, levy or assessment that is being contested in good faith and by appropriate proceedings; then all principal and accrued interest shall become and be immediately due and payable wi thout any declaration or other act on the part of the note holder.
| 8. | COMMITMENTS AND CONTINGENCY |
There are currently no pending litigation proceedings to which we are a party or to which any of our property is subject.
Mr. Rolle’s employment agreement stipulates that Mr. Rollé can receive common shares in lieu of cash compensation. The Company recorded $60,000 and $120,000 during the three and six months ended February 28, 2010. The balance is included in common shares issuable which are a component of additional paid-in-capital in our Consolidated Balance Sheet and expensed in Stock based compensation on our Consolidated Statement of Loss.
On December 31, 2009 and per Mr. Wiseman’s employment agreement, 2,000,000 shares of common stock are to be issued to Mr. Wiseman. The shares were valued at the close of market on December 31, 2009. The value of $10,000 is included in common shares issuable which are a component of additional paid-in-capital in our Consolidated Balance Sheet and expensed in Stock based compensation on our Consolidated Statement of Loss.
| 10. | STOCK OPTION AND EQUITY INCENTIVE PLAN |
On February 14, 2007 the Company filed a Form S-8 Registration Statement for Securities to be offered to Employees in Employee Benefit Plans’. Under the terms of this filing the Company registered 9,000,000 shares of common stock with a par value of $.001 per share. The purpose of the plan is to provide incentives to attract, retain and motivate eligible persons whose present and potential contributions are important to the success of the Company by offering them an opportunity to participate in the Company ’ s future performance through awards of options and restricted stock.
Under the Plan, incentive stock options may be granted to employees, directors, and officers of the Company and non-qualified stock options may be granted to consultants, employees, directors, and officers of the Company. Options granted under the option plan are for periods not to exceed ten years, and must be issued at prices not less than 100% of the fair market value of the stock on the date of grant. Options granted to shareholders who own greater than 10% of the outstanding stock are for periods not to exceed five years and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant.
Summary of stock option activity is as follows:
| | | Number of shares | | | Weighted average exercise price | | | Weighted average remaining contractual term (in years) | |
| Outstanding at August 31, 2009 | | | 3,133,333 | | | $ | 0.07 | | | | |
| Granted | | | - | | | | - | | | | |
| Expired | | | (1,133,333 | ) | | | 0.07 | | | | |
| Outstanding at February 28, 2010 | | | 2,000,000 | | | $ | 0.07 | | | | 2.6 | |
| Vested and expected to vest at February 28, 2010 | | | 2,000,000 | | | $ | 0.07 | | | | 2.6 | |
| Exercisable at February 28, 2010 | | | 2,000,000 | | | $ | 0.07 | | | | 2.6 | |
During the three and six months ended February 28, 2010 and 2009, the Company recognized total compensation expense related to stock options of $150,000, $176,267, $300,000 and $339,663 respectively and is included as a component of stock based compensation expense disclosed separately in the accompanying consolidated statements of loss and comprehensive loss.
As at February 28, 2010 and August 31, 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 carryforward 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.
ITEM 2. MANAGEMENT’S DISCUSSION OR PLAN OF OPERATION
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
Fiscal year 2009 was a disappointing year for the Company. During fiscal years 2007 to 2009, we funded two full featured films and various print and advertising campaigns for our largest customer and related party, National Lampoon, Inc. In 2009 we reviewed and determined that the featured films and the print and advertising campaigns significantly underperformed. With this underperformance, and the deteriorating financial condition of National Lampoon, Inc., we recorded a total charge of approximately $4.4 million during the second half of fiscal year 2009.
Starting in fiscal year 2010 we modified our strategic plan to focus on the development and distribution of direct response infomercials. Our ability to implement our revised strategy is highly dependent on our ability to successfully raise additional capital.
Results of Operations
Comparison of the Three Months Ended February 28, 2010 and 2009
Revenue
Revenue was $2,688 and $91,000 for the three months ended February 28, 2010 and 2009, respectively. The decline in revenue was due to the loss of our largest customer as explained above.
Costs and Expenses
Cost and expenses was $268,354 and $706,995 for the three months ended February 28, 2010 and 2009, respectively. The decrease of $438,641 was due to $300,000 of bad debt and $22,330 of intangible asset amortization expense recorded in the 2009 that did not exist in 2010. Stock based compensation expense decreased $74,267 related to less outstanding stock options and the remaining decrease in expenses of $42,044 was related to expense reduction efforts related to our reduction in revenues.
Interest Expense
Interest expense was $36,500 compared to $34,000 for the three months ended February 28, 2010 and 2009, respectively. Interest expense related to our debt as discussed in both Note 6 and Note 7.
Comparison of the Six Months Ended February 28, 2010 and 2009
Revenue
Revenue was $2,688 and $435,494 for the six months ended February 28, 2009 and 2008, respectively. The decrease in revenue was due to the loss of our largest customer as explained above. In 2009, we completed and delivered one infomercial project that generated revenue of $183,650. No infomercials were delivered during the six months ended February 28, 2010.
Costs and Expenses
Cost and expenses was $480,123 and $1,336,071 for the six months ended February 28, 2010 and 2009, respectively. This decrease of $855,948 was due $330,000 of bad debt and $44,660 of intangible asset amortization expense recorded in the 2009 that did not exist in 2010. Stock based compensation expense decreased $278,534 related to less outstanding stock options and less issuances than the prior year. The remaining decrease in expenses of $202,754 was related to expense reduction efforts related to our reduction in revenues.
Interest Expense
Interest expense was $73,000 compared to $68,000 for the six month ended February 28, 2010 and 2009, respectively. Interest expense related to our debt as discussed in both Note 6 and Note 7.
Liquidity and Capital Resources
As of February 28, 2010 we had $32,960 in cash and a working capital deficiency of $2.4 million. 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. We have been in discussion with, and we continue to seek, private investors in hopes of raising enough capital to efficiently operate our business.
Cash used from operating activities were $67,040 for the six months ended February 28, 2010. We expended $135,372 on the development of an infomercial which is expected to be released to our customer during the third quarter ended May 31, 2010. The cash used to develop the infomercial was offset by the advance of $100,000 from a book publisher which is related to this same infomercial. The remaining use of cash from operating activities was due to changes in the balance of our accounts payable and accrued expenses and the funding of our net losses from operations.
Cash received from financing activities of $100,000 was from an investor as discussed in Note 6 of the attached consolidated financial statements.
The Company is currently in default on its Senior Secured Convertible Debenture discussed in Note 6 of the attached consolidated financial statements at February 28, 2010. As an event of default, the interest rate is increased to twenty percent (20.0%) until the date of such cure. The Company is currently in negotiation with the Note Holder. The Note Holder has advanced an additional $100,000 during the six month ended February 28, 2010 to fund the completion of our annual report and to fund operating capital.
The Company is currently in default on the Williams-Laikin loans discussed in Note 7 of the attached consolidated financial statements at February 28, 2010. In an event of default occurs and is continuing, and in every such case, unless the principal of the note shall have already become due and payable, the holder by a notice in writing to the Company may declare all of the principal of this note, together with accrued interest thereon, to be due and payable immediately. No such notice has been received as of the date of this filing.
In the event the Company or any of its subsidiaries make an assignment for the benefit of creditors, or put in writing its inability to pay its debts generally as they become due, or a notice of lien, levy or assessment is filed of record or given to Company or any of its subsidiaries with respect to all or any of their respective assets by any federal, state, local department or agency, and such lien, levy or assessment is not released or paid within a reasonable period of time but in no event longer than twenty (20) days from the date such lien, levy, or assessment is filed, or such longer period of time as is appropriate in the case of any such lien, levy or assessment that is being contested in good faith and by appropriate proceedings; then all principal and accrued interest shall become and be immediately due and payable wi thout any declaration or other act on the part of the note holder.
Based upon the above we have not been able to raise the capital expected to pursue our business plan. We are seeking advice from investment professionals on how to obtain additional capital. We will need to raise additional capital to continue our operations 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 14, 2009. 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 peri ods 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.
ITEM 4. CONTROLS AND PROCEDURES
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
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. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement to the Company's annual or interim financial statements will not be prevented or detected.
In the course of management's assessment, we have identified the following material weaknesses in internal control over financial reporting:
| - | Segregation of Duties – As a result of limited resources, we did not maintain proper segregation of incompatible duties. Namely the lack of an audit committee, an understaffed financial and accounting function, and the need for additional personnel to prepare and analyze financial information in a timely manner and to allow review and on-going monitoring and enhancement of our controls. The effect of the lack of segregation of duties potentially affects multiple processes and procedures. |
| - | Maintenance of Current Accounting Records – This weakness specifically affects the payments and purchase cycle and therefore we failed to maintain effective internal controls over the completeness and cut off of accounts payable, expenses and other capital transactions. |
| - | Application of GAAP – We did not maintain effective internal controls relating to the application of generally accepted accounting principles in accounting for transactions for common shares issued for interest expense. |
We are in the continuous process of improving our internal control over financial reporting in an effort to eliminate these material weaknesses through improved supervision and training of our staff, but additional effort is needed to fully remedy these deficiencies. Management has engaged a Certified Public Accountant as a consultant to assist with the financial reporting process in an effort to mitigate some of the identified weaknesses. The Company intends on hiring the necessary staff to address the weaknesses once additional capital is obtained which will allow full operations to commence.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in routine litigation incidental to the conduct of our business. There are currently no material pending litigation proceedings to which we are a party or to which any of our property is subject.
ITEM 1A. RISK FACTORS.
There are no material changes to the risk factors disclosed in our annual report filed on Form 10-K dated December 14, 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company is currently in default on its Senior Secured Convertible Debenture discussed in Note 6 of the attached consolidated financial statements at February 28, 2010. As an event of default, the interest rate is increased to twenty percent (20.0%) until the date of such cure. The Company is currently in negotiation with the Note Holder.
The Company is currently in default on the Williams-Laikin loans discussed in Note 7 of the attached consolidated financial statements at February 28, 2010. In an event of default occurs and is continuing, and in every such case, unless the principal of the note shall have already become due and payable, the holder by a notice in writing to the Company may declare all of the principal of this note, together with accrued interest thereon, to be due and payable immediately. No such notice has been received as of the date of this filing.
In the event the Company or any of its subsidiaries make an assignment for the benefit of creditors, or put in writing its inability to pay its debts generally as they become due, or a notice of lien, levy or assessment is filed of record or given to Company or any of its subsidiaries with respect to all or any of their respective assets by any federal, state, local department or agency, and such lien, levy or assessment is not released or paid within a reasonable period of time but in no event longer than twenty (20) days from the date such lien, levy, or assessment is filed, or such longer period of time as is appropriate in the case of any such lien, levy or assessment that is being contested in good faith and by appropriate proceedings; then all principal and accrued interest shall become and be immediately due and payable wi thout any declaration or other act on the part of the note holder.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
(a) Exhibits
| Exhibit Number | | Description of Exhibit |
| | | |
| 31.1 | | Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended |
| | | |
| 32.1 | | Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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 19, 2010 | By: /s/ Reno Rollé |
| | Reno Rollé |
| | President, Chief Executive Officer, and Director |
| | |
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