8-K 1 stratus_8k-041613.htm FORM 8-K

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 8-K

 

 

Current Report Pursuant to Section 13 or 15(d) of

the Securities Exchange Act of 1934

 

 

Date of Report (Date of Earliest Event Reported): April 16, 2013

 

 

 

STRATUS MEDIA GROUP, INC.

 

(Exact Name of Registrant as Specified in its Charter)

 

 

Nevada

 

(State or Other Jurisdiction of Incorporation)

 

 

000-24477   86-0776876
(Commission File Number)   (I.R.S. Employer Identification No.)

 

 

1800 Century Park East, 6th Floor, Los Angeles, CA   90067
(Address of Principal Executive Offices)   (Zip Code)

 

 

(310) 526-8700

 

(Registrant’s Telephone Number, Including Area Code)

 

 

 

 
 

Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review

On April 16, 2013, the Company’s Chief Financial Officer concluded that the following financial statements of the Company cannot be relied on for the reasons set forth below: for the year ended December 31, 2011 included in the Company’s Form 10-K that was filed on May 21, 2012; for the period ended March 31, 2012 included in the Company’s Form 10-Q that was filed on May 21, 2012; for the period ended June 30, 2012 included in the Company’s Form 10-Q and Form 10-Q/A that were filed on August 17, 2012 and September 7, 2012, respectively; and for the period ended September 30, 2012 included in the Company’s Form 10-Q that was filed on November 19, 2012. The Company discussed the matter which is the subject of this filing with its independent accountant.

On May 24, 2011, the Company entered into a Securities Purchase Agreement with eight investors (collectively, the “Investors”) pursuant to which the Company sold 8,700 shares of a new series of convertible preferred stock designated as Series E Convertible Preferred Stock (“Original Series E”), the terms of which are set forth in the Certificate of Designations of Series E Preferred Stock (the “Certificate”), for $1,000 per share, or $8,700,000 in the aggregate. In October 2012, the Company sold 1,000 shares of Series E for $1,000,000 (“New Series E”). The Original Series E and New Series E together are referred to herein as “Series E.” As part of the financings related to the Series E, the Company issued warrants (the “Warrants”) to purchase shares of the Company’s Common Stock.

These Series E and the Warrants contain “full ratchet-down” liquidity protection that provides that if the Company issues securities for less than the existing conversion price for the Series E or the exercise price of the Warrants, then the conversion price for Series E Preferred Stock will be lowered to that lower price. Also, the exercise price for the Warrants will be decreased to that lower price and the number of shares issuable pursuant to the exercise of the Warrants will be increased such that the product of the original exercise price times the original quantity equals the lower exercise price times the higher quantity.

In preparing the financial statements for 2012, the Company has determined that the Warrants included certain embedded derivative features as set forth in ASC 815, “Derivatives and Hedging,” (“ASC 815”) and that the conversion feature of the Series E was not an embedded derivative because this feature was clearly and closely related to the host (Series E) as defined in ASC 815. These derivative liabilities were initially recorded at their estimated fair value on the date of issuance and are subsequently adjusted each quarter to reflect the estimated fair value at the end of each period, with any decrease or increase in the estimated fair value of the derivative liability for each period being recorded as other income or expense. Since the value of the embedded derivative feature for the Warrants was higher than the value of both Series E transactions, there was no beneficial conversion feature recorded for either transaction, and the excess of the value of the embedded derivative feature over the value of the transaction was recorded in each year on the Statement of Operations as a separate line item for each year presented.

As the result of this determination, the Company had incorrectly accounted for the derivative liabilities embedded in the Series E and the Warrants issued in the year 2011. The consolidated balance sheet as of December 31, 2011 and the related consolidated statements of operations for the year then ended were restated to reflect the correct treatment. The following table presents the effect of the restatement adjustment on the accompanying consolidated balance sheet as of December 31, 2011:

2
 

 

   As of December 31, 2011 
   As Previously       Net 
Consolidated Balance Sheet as of December 31, 2011   Reported    Restated    Adjustment 
Derivative liability  $   $15,888,855   $15,888,855 
Other current liabilities   3,786,217    3,786,217     
Total current liabilities  $3,786,217   $19,675,072   $15,888,855 
                
Shareholders' deficit               
Series D 10% Preferred Stock, $0.001 par value: 500,000 shares authorized,18,999 shares outstanding  $19   $19     
Series E 5% Preferred Stock, $0.001 par value: 10,000 shares authorized; 9,450 and 8,500 shares issued and outstanding   9    9     
Common stock, $0.001 par value:  200,000,000 shares authorized 89,083,677 and 88,157,055 shares issued and outstanding   88,157    88,157     
Additional paid-in capital   41,964,908    33,264,917    (8,699,991)
Accumulated deficit   (42,196,523)   (49,385,387)   (7,188,864)
Total Stratus shareholders' deficit  $(143,430)  $(16,032,285)  $(15,888,855)

 

The flowing table presents the effect of the restatement adjustment on the accompanying consolidated statement of operations for the year ended December 31, 2011:

 

   Year Ended December 31, 2011 
  As Previously       Net 
Consolidated Statement of Operations for 2011  Reported    Restated    Adjustment 
Loss from operations  $(16,429,344)  $(16,429,344)  $ 
                
Other (income)/expenses               
Fair value of derivative liabilities in excess of proceeds       19,642,867    19,642,867 
Adjustments to fair value of derivative securities       (12,454,003)   (12,454,003)
Other (income)/expenses   (1,012,909)   (1,012,909)    
Interest expense   420,733    30,535    (390,198)
Total other (income)/expenses   (592,176)   6,206,490    6,798,666 
                
Net loss  $(15,837,168)  $(22,635,834)  $(6,798,666)
                
Preferred dividends       390,198    390,198 
Net loss atttributable to common shareholders  $(15,837,168)  $(23,026,032)  $(7,188,864)
                
Basic and diluted loss attributable to common shareholders per share  $(0.18)  $(0.26)  $(0.08)
Basic weighted average shares outstanding   88,157,055    88,157,055     

Diluted weighted average shares outstanding

   88,157,055    101,023,493    12,866,438 

 

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The following tables present the effect of the restatement on the 2011 and 2012 quarterly periods:

  As of March 31, 2012
(Unaudited)
 
  As Previously       Net 
Consolidated Balance Sheet as of March 31, 2012  Reported   Restated   Adjustment 
Derivative liability  $   $13,841,450   $13,841,450 
Other current liabilities   5,768,527    5,768,527     
Total current liabilities  $5,768,527   $19,609,977   $13,841,450 
Shareholder's deficit               
Series D 10% Preferred Stock  $19   $19   $ 
Series E 5% Preferred Stock   9    9     
Common stock   88,157    88,157     
Additional paid-in capital   42,315,939    33,615,948    (8,699,991)
Accumulated deficit   (44,541,282)   (49,682,741)   (5,141,459)
Total Shareholder's deficit  $(2,137,158)  $(15,978,608)  $(13,841,450)

 

Three Months Ended March 31, 2012

(Unaudited)

   Three Months Ended March 31, 2011
(Unaudited)

 

 

Consolidated Statement of Operations for Three Months Ended  As Previously      Net   As Previously       Net 
March 31, 2012 and 2011  Reported   Restated   Adjustment   Reported   Restated   Adjustment 
Loss from operations  $2,352,168   $2,352,168   $   $1,674,375   $1,674,375   $ 
                               
Other (income)/expenses                              
Adjustments to fair value of derivative securities       (2,047,405)   (2,047,405)            
Other (income)/expenses               3,190    3,190     
Interest expense   126,573    2,405    (124,168)   36,813    17,511    (19,302)
Total other (income)/expenses   126,573    (2,045,000)   (2,171,573)   40,003    20,701    (19,302)
Net loss   (2,478,742)   (307,168)   2,171,573   (1,714,378)   (1,695,076)   19,302
Preferred dividends       124,168    124,168        19,302    19,302 
Net income/(loss) attributable to common shareholders  $(2,478,742)  $(431,336)  $2,047,405  $(1,714,378)  $(1,714,378)  $ 
                               
Basic and diluted net income (loss) attributable to common shareholders per share   $ (0.03 )   $   (0.00 )   $ 0.03     $ (0.03 )   $ (0.03 )   $  
Basic weighted average shares outstanding   88,157,055    88,157,055        64,220,069    64,220,069     
Diluted weighted average shares outstanding   88,157,055    109,407,055    21,250,000    64,220,069    64,220,069     

 

As of June 30, 2012

(Unaudited)

   As of June 30, 2011
(Unaudited)
 
Consolidated Balance Sheet   As Previously      Net   As Previously       Net 
as of June 30, 2012 and 2011  Reported   Restated   Adjustment   Reported   Restated   Adjustment 
Derivative liability  $   $31,756,853   $31,756,853   $   $22,871,800   $22,871,800 
Other current liabilities   8,776,795    8,776,795        3,188,293    3,188,293     
Total current liabilities  $8,776,795   $40,533,648   $31,756,853   $3,188,293   $26,060,093   $22,871,800 
Shareholder's surplus/(deficit)                              
Series C 10% Preferred Stock  $   $   $   $9   $9   $ 
Series D 10% Preferred Stock   19    19        51    51     
Series E 5% Preferred Stock   8    8        9    9     
Common stock   89,231    89,231        75,555    75,555     
Additional paid-in capital   42,886,643    34,186,652    (8,699,991)   39,011,539    30,311,548    (8,699,991)
Accumulated deficit   (48,049,851)   (71,106,713)   (23,056,862)   (30,341,462)   (44,513,271)   (14,171,809)
Total Shareholder's surplus/(deficit)  $(5,073,950)  $(36,830,803)  $(31,756,853)  $8,745,692   $(14,126,108)  $(22,871,800)

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  Three Months Ended June 30, 2012
(Unaudited)
   Three Months Ended June 30, 2011
(Unaudited)
 
Consolidated Statement of Operations for Three Months Ended   As Previously      Net   As Previously       Net 
June 30, 2012 and 2011  Reported   Restated   Adjustment   Reported   Restated   Adjustment 
Loss from operations  $(2,442,673)  $(2,442,673)  $   $(2,056,726)  $(2,056,726)  $ 
Other (income)/expenses                              
Fair value of derivative liabilities in excess of proceeds                   19,642,867    19,642,867 
Adjustments to fair value of derivative securities       17,915,403    17,915,403        (5,471,058)   (5,471,058)
Other (income)/expenses   760,696    760,696                 
Interest expense   171,217    49,712    (121,505)   88,836    43,767    (45,069)
Total other (income)/expenses   931,913    18,725,811    17,793,898    88,836    14,215,576    14,126,700 
Net loss   (3,374,586)   (21,168,484)   (17,793,898)   (2,145,562)   (16,272,302)   (14,126,700)
Preferred dividends       121,505    121,505        45,069    45,069 
Net loss attributable to common shareholders  $(3,374,586)  $(21,289,989)  $(17,915,403)  $(2,145,562)  $(16,317,371)  $(14,171,809)
Basic and diluted loss attributable to common shareholders per share   $ (0.04 )   $ (0.24 )   $ (0.20 )   $ (0.03 )   $ (0.23 )   $ (0.20 )
Basic weighted average shares outstanding   88,182,285    88,182,285        71,161,702    71,161,702     
Diluted weighted average shares outstanding   88,182,285    116,348,952    28,166,667    71,161,702    80,005,109    8,843,407 

Consolidated Statement of Operations  Six Months Ended June 30, 2012
(Unaudited)
   Six Months Ended June 30, 2011
(Unaudited)
 
for Six Months Ended   As Previously      Net   As Previously       Net 
June 30, 2012 and 2011  Reported   Restated   Adjustment   Reported   Restated   Adjustment 
Loss from operations  $(4,794,841)  $(4,794,841)  $   $(3,731,101)  $(3,731,101)  $ 
Other (income)/expenses                              

Fair value of derivative liabilities in excess of proceeds

                   

19,642,867

    

19,642,867

 
Adjustments to fair value of derivative securities       15,867,998    15,867,998        (5,471,058)   (2,047,405)
Other (income)/expenses   760,696    

760,696

                 
Interest expense   297,791    52,118    (245,673)   128,839    64,468    (64,371)
Total other (income)/expenses   1,058,487    16,680,812    15,622,325    128,839    14,236,277   (14,107,438)
Net loss   (5,853,328)   (21,475,653)   (15,622,325)   (3,859,940)   (17,967,378)   2,111,776
Preferred dividends       245,673    245,673        64,371    64,371 
Net loss attributable to common shareholders  $(5,853,328)  $(21,721,326)  $(15,867,998)  $(3,859,940)  $(18,031,749)  $(14,171,809)
Basic and diluted loss attributable to common shareholders per share   $ (0.07 )   $ (0.24 )   $ (0.17 )   $ (0.06   )   $ (0.26 )   $ (0.20 )
Basic weighted average shares outstanding   88,953,297    88,953,297        68,704,527    68,704,527     
Diluted weighted average shares outstanding   88,953,297    117,119,964    28,166,667    68,704,527    73,150,660    4,446,133 

  As of September 30, 2012
(Unaudited)
   As of September 30, 2011
(Unaudited)
 
Consolidated Balance Sheet as of   As Previously      Net   As Previously       Net 
September 30, 2012 and 2011  Reported   Restated   Adjustment   Reported   Restated   Adjustment 
Derivative liability  $   $29,734,063   $29,734,063   $   $21,033,880   $21,033,880 
Other current liabilities   9,981,068    9,981,068        3,337,562    3,337,562     
Total current liabilities  $9,981,068   $39,715,131   $29,734,063   $3,337,562   $24,371,442   $21,033,880 
Shareholder's surplus/deficit                              
Series C 10% Preferred Stock  $   $   $   $3   $3   $ 
Series D 10% Preferred Stock   19    19        45    45     
Series E 5% Preferred Stock   8    8        9    9     
Common stock   90,314    90,314        77,865    77,865     
Additional paid-in capital   45,445,094    36,745,103    (8,699,991)   39,636,545    30,936,554    (8,699,991)
Accumulated deficit   (51,566,427)   (72,600,499)   (21,034,072)   (34,662,520)   (46,996,409)   (12,333,889)
Total Shareholder's surplus/deficit  $(6,030,992)  $(35,765,055)  $(29,734,063)  $5,051,944   $(15,981,936)  $(21,033,880)

 

5
 

 

Three Months Ended September 30, 2012

(Unaudited)

   Three Months Ended September 30, 2011
(Unaudited)
 
Consolidated Statement of Operations for Three Months Ended   As Previously      Net   As Previously       Net 
September 30, 2012 and 2011  Reported   Restated   Adjustment   Reported   Restated   Adjustment 
Loss from operations  $(3,426,250)  $(3,426,250)  $   $(4,140,283)  $(4,140,283)  $ 
Other (income)/expenses                              
Adjustments to fair value of derivative securities       (2,022,790)   (2,022,790)       (1,837,920)   (1,837,920)
Other (income)/expenses   (133,770)   (133,770)                
Interest expense   172,057    52,313    (119,744)   195,705    3,535    (192,170)
Total other (income)/expenses   38,287    (2,104,247)   (2,142,534)   195,705    (1,834,385)   (2,030,090)
Net loss   (3,464,537)   (1,322,003)   2,142,534   (4,335,988)   

(2,305,898

)   2,030,090
Preferred dividends       119,744    119,744        192,170    192,170 
Net loss attributable to common shareholders  $(3,464,537)  $(1,441,747)  $2,022,790  $(4,335,988)  $

(2,498,068

)  $1,837,920
Basic and diluted loss attributable to common shareholders per share   $ (0.04 )   $ (0.02 )   $ 0.02   $ (0.06 )   $ (0.03 )   $ 0.03  
Basic weighted average shares outstanding   89,748,496    89,748,496        77,535,263    77,535,263     
Diluted weighted average shares outstanding   89,748,496    117,915,163    28,166,667    77,535,263    99,285,263    21,750,000 

 

Nine Months Ended September 30, 2012

(Unaudited)

   Nine Months Ended September 30, 2011
(Unaudited)
 
Consolidated Statement of Operations for Nine Months Ended   As Previously      Net   As Previously       Net 
September 30, 2012 and 2011  Reported   Restated   Adjustment   Reported   Restated   Adjustment 
Loss from operations  $(8,221,091)  $(8,221,091)  $   $(7,871,384)  $(7,871,384)  $ 
Other (income)/expenses                              
Fair value of derivative liabilities in excess of proceeds                   

19,642,867

    

19,642,867

 
Adjustments to fair value of derivative securities       13,845,208    13,845,208        (7,308,979)   (7,308,979)
Other (income)/expenses   626,926    

626,926

                 
Interest expense   469,848    104,431    (365,417)   324,544    68,003    (256,541)
Total other (income)/expenses   1,096,774    14,576,565    13,479,791    324,544    12,401,891    12,077,347 
Net loss   (9,317,865)   (22,797,656)   (13,479,791)   (8,195,928)   (20,273,275)   (12,077,347)
Preferred dividends       365,417    365,417        256,541    256,541 
Net loss attributable to common shareholders  $(9,317,865)  $(23,163,073)  $(13,845,208)   $(8,195,928)  $(20,529,816)  $(12,333,888)
Basic and diluted loss attributable to common shareholders per share   $ (0.10 )   $ (0.26 )   $ (0.16 )   $ (0.11 )   $ (0.29 )   $ (0.18 )
Basic weighted average shares outstanding   89,220,298    89,220,298        71,652,187    71,652,187     
Diluted weighted average shares outstanding   89,220,298    117,386,965    28,166,667    71,652,187    81,929,660    10,277,473 

The fair value of these derivative liabilities is calculated using the commonly-accepted Black Scholes pricing model that is based on the following as of the date of calculation: the closing price of the common stock, the strike price of the underlying instrument, the risk-free interest rate for the applicable remaining life of the underlying instrument (i.e., the U.S. treasury rate for that period) and the historical volatility of the Company’s common stock. These fair value results are extremely sensitive to all these input variables, particularly the closing price of the company’s common stock and the volatility of the Company’s common stock. Accordingly, the fair values of these derivative liabilities are subject to significant changes.

As noted, the restated financials have no change to the item “Loss from Operations.” Additionally, there is no change to the Company’s current assets, including cash, and current liabilities other than the derivative liability.

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SIGNATURES

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

 

 

 

 

 

STRATUS MEDIA GROUP, INC.
Date: April 24, 2013 By:  /s/ John Moynahan             
   Chief Financial Officer

 

 

 

 

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