Filing Overview
Reporting period: Three months ended March 31, 2019; filed June 26, 2019. The supplied filing is for Pulse Evolution Group, Inc. (formerly Recall Studios, Inc.), not Fubotv Inc.; investors should verify the issuer and accession details.
The company develops hyper-realistic digital humans and related technologies for entertainment, virtual reality, augmented reality, mobile, interactive, and artificial-intelligence applications. The company changed its name to Pulse Evolution Group, Inc. on February 28, 2019, completed a 1-for-30 reverse stock split, and converted its Series X preferred stock into 15 million common shares.
Financial Results and Position
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | The filing does not report operating revenue for the quarter. | The filing does not report operating revenue for the quarter. |
| Operating expenses | $6.2 million | $0.8 million |
| Loss before taxes | $4.0 million | $0.7 million |
| Net loss | $2.9 million | $0.7 million |
| Net loss attributable to common stockholders | $3.5 million | $0.7 million |
| Basic and diluted loss per share | $0.27 | $0.26 |
| Cash flow from operations | $(0.6) million | $(0.6) million |
| Cash flow from investing | $(0.8) million | $0 |
| Cash flow from financing | $1.7 million | $1.0 million |
| Cash at period end | $0.3 million | $0.4 million |
- Margins: Not meaningful because the filing reports no operating revenue and the company incurred an operating loss.
- Assets and liabilities: Total assets were $280.5 million, including $130.9 million of net intangible assets and $148.1 million of goodwill. Total liabilities were $48.8 million.
- Liquidity: The company reported a $14.6 million working-capital deficiency, a $25.2 million accumulated deficit, and $0.3 million of cash at March 31, 2019.
- Debt and obligations: Current liabilities included $3.8 million of notes payable, $1.4 million of convertible notes and related-party convertible notes, $2.1 million of subsidiary warrant liability, and $4.2 million of accrued expenses. A $2.7 million note payable plus approximately $1.1 million of accrued interest was in default.
Material Changes Versus the Prior Comparable Period
- Operating expenses increased by $5.4 million, primarily because of $5.2 million of amortization of acquisition-related intangible assets, higher executive compensation, additional employee compensation, and increased marketing costs.
- Net loss increased to $2.9 million from $0.7 million. The increase was partially offset by a $1.2 million deferred tax benefit and a $2.5 million gain from the change in fair value of a subsidiary warrant liability.
- Operating cash use was broadly stable at $0.6 million, while investing cash use increased because of the company’s investment in Panda Productions (HK) Limited.
- Financing proceeds increased to $1.7 million, primarily from common-stock issuances, compared with $1.0 million in the prior-year quarter, which included convertible-note proceeds.
- Common shares outstanding increased from 7.5 million at December 31, 2018 to 22.9 million at March 31, 2019, primarily because of the conversion of Series X preferred shares and other equity issuances.
Guidance, Outlook, Risks, and Unusual Items
- Going concern: Management stated that substantial doubt exists about the company’s ability to continue as a going concern within one year. The company expects continued losses and needs additional capital to fund operations, meet obligations, and execute its business plan.
- Financing risk: Management is seeking additional debt and equity financing. Future financing may be unavailable or costly and could restrict operations or materially dilute existing shareholders.
- Defaults and arrears: Certain acquisition-assumed liabilities are in arrears and payable on demand. The company is negotiating with holders of a defaulted note and has accrued payroll taxes and other obligations.
- Kung Fu Panda investment: The company agreed to finance and co-produce a theatrical production scheduled for early 2020. It paid $1.0 million of a required minimum $2.0 million investment and sold profits interests that may entitle investors to approximately 10% of production proceeds.
- Acquisition accounting: A $1.9 million measurement-period adjustment reduced acquisition-related accrued expenses and goodwill. Intangible-asset amortization is expected to total approximately $15.5 million for the remaining nine months of 2019 and $20.6 million in each of 2020 through 2023.
- Legal matters: The company carried a $0.5 million accrued litigation liability and was in settlement discussions. A separate lawsuit was described as without merit, with no reserve established.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective because of material weaknesses, including inadequate accounting policies, limited segregation of duties, insufficient technical expertise, ineffective information-technology controls, and inadequate tax-compliance tracking.
- Accounting changes: The company adopted guidance on down-round features, equity investments, and leases during 2019; management reported no material impact from the relevant adoptions.
Investor Verification Items
- Verify that this filing belongs to Pulse Evolution Group, Inc. rather than Fubotv Inc.; the issuer named in the supplied text does not match the request metadata.
- Confirm the absence or presentation of operating revenue and assess whether the company had begun commercial operations.
- Reconcile the going-concern disclosure with the $0.3 million cash balance, $14.6 million working-capital deficiency, defaults, and need for additional financing.
- Review the valuation and recoverability of the $130.9 million intangible-asset balance and $148.1 million goodwill balance.
- Assess potential dilution from the 22.9 million shares outstanding, convertible notes, warrants, options, and future equity financing.
- Review the terms, funding requirements, and economics of the Panda Productions investment and profits-interest arrangement.
- Examine the identified material weaknesses in internal control and any remediation disclosed in subsequent filings.