Filing Scope and Business Context
This Form 10-Q covers the quarter and nine months ended September 30, 2018. The filing is for Recall Studios, Inc., not FuboTV Inc.; the source text does not provide a FuboTV filing. Recall Studios describes its business as developing hyper-realistic digital humans for entertainment, virtual reality, augmented reality, holographic, mobile, interactive and artificial-intelligence applications.
On August 8, 2018, Recall acquired approximately 99.7% of Evolution AI Corporation and consolidated its approximately 58%-owned subsidiary, Pulse Evolution Corporation. Consideration was $211.5 million, paid through the issuance of 1.0 million Series X preferred shares, convertible into 450 million common shares subject to a reverse split or authorized-share increase.
Financial Results and Position
| Metric | Three Months Ended September 30, 2018 | Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2018 | Nine Months Ended September 30, 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $41,000 |
| Operating expenses | $5.492 million | $226,000 | $7.372 million | $755,000 |
| Loss from continuing operations | $4.866 million | $808,000 | $7.748 million | Income of $10.858 million |
| Net income (loss) attributable to Recall Studios | $(4.260) million | $(808,000) | $(7.142) million | Income of $10.847 million |
| Basic loss per share | $(0.03) | $(0.01) | $(0.07) | Income of $0.34 |
- Gross profit and gross margin were not meaningful because the company reported no revenue in the quarter or nine-month 2018 period.
- Third-quarter operating expenses included $2.152 million of stock-based compensation and $2.563 million of amortization of acquired and licensed technology.
- Nine-month other expense included $502,000 of interest expense, $1.228 million of debt-discount amortization and $2.533 million of financing costs, partly offset by a $3.270 million gain on derivative liabilities and a $618,000 gain on the warrant liability.
- At September 30, 2018, cash was $36,551, total assets were $291.469 million, current liabilities were $18.489 million and accumulated deficit was $18.296 million. The company reported negative working capital of approximately $17.641 million.
- Assets included $81.267 million of goodwill and $209.277 million of net acquired and licensed technology. The technology was assigned a 12-year useful life.
- Cash used in operating activities was $2.462 million for the nine months, compared with $358,000 in the prior-year period. Financing activities provided $2.422 million, resulting in a $40,449 decrease in cash.
- At September 30, outstanding principal of notes payable was $534,125. Current liabilities also included a $2.700 million note payable, a $65,000 related-party note, $621,496 of convertible notes payable, a $3.715 million warrant liability and a $2.394 million derivative liability.
Material Changes Versus Prior Comparable Period
- Revenue declined from $41,000 to zero for the nine months, following the prior-year commercialization and sale of an iOS application.
- Operating expenses increased by $6.617 million for the nine months, primarily because of the Evolution AI and Pulse acquisition, technology amortization, stock-based compensation and professional services.
- The prior-year nine-month profit was substantially affected by an $11.905 million derivative-liability fair-value gain; the corresponding 2018 gain was $3.270 million, contributing to the shift to a net loss.
- Common shares outstanding increased from 79.8 million at December 31, 2017 to 214.6 million at September 30, 2018. The Series X preferred shares represent potential conversion into 450 million additional common shares, although conversion was not then available because sufficient authorized common shares did not exist.
- Management changed following the acquisition: John Textor became CEO and Alexander Bafer became Executive Chairman. Textor and Bafer received annual base salaries of $500,000 under their respective agreements, with additional bonus and termination provisions.
Guidance, Outlook, Risks and Unusual Items
- The company provided no quantified revenue, earnings or cash-flow guidance. Management stated that it intended to monetize intellectual property, develop digital-human applications and raise additional equity capital.
- The financial statements contain a going-concern warning. Management stated that current funds and expected equity financing were expected to support operations through 2018, but substantial doubt existed about the company’s ability to continue as a going concern within one year.
- Management reported no committed third-party financing and stated that additional financing may be unavailable or may cause significant dilution or impose restrictive debt terms.
- A $2.700 million note related to the After August acquisition was in default at September 30, 2018, with approximately $743,876 of accrued interest. A $65,000 related-party note was also in default, and related-party convertible notes were past due.
- The company’s disclosure controls and procedures were deemed ineffective as of September 30, 2018 because of limited resources and personnel. Management relied substantially on direct oversight and outsourced legal and accounting professionals.
- The company disclosed potential employment-contract termination liabilities of approximately $1.0 million for Textor and Bafer and approximately $400,000 for Gupta.
- After quarter-end, the company appointed Anand Gupta as CFO and, on November 16, 2018, paid a $275,625 convertible note, $7,580 of accrued interest and a $96,469 prepayment penalty.
Facts Investors Should Verify
- Confirm the issuer identity: the supplied filing is Recall Studios, Inc., not FuboTV Inc.
- Review the legal terms, valuation and ownership effects of the Evolution AI and Pulse acquisition, including the $211.5 million noncash consideration and $81.267 million goodwill.
- Assess the feasibility and timing of the proposed reverse stock split or authorized-share increase needed to permit conversion of the Series X preferred shares.
- Reconcile all past-due and defaulted debt, accrued interest, derivative liabilities and potential settlement amounts.
- Evaluate liquidity, the going-concern qualification and the company’s ability to obtain additional financing despite having only $36,551 of cash at quarter-end.
- Assess dilution from common-stock issuances, convertible notes, warrants and the potential 450 million-share Series X conversion.
- Review the ineffective disclosure controls and the absence of meaningful operating revenue.