Filing Scope and Business Context
The provided filing is a Form 10-K for the fiscal year ended December 31, 2018, filed June 7, 2019. The filing identifies the registrant as Pulse Evolution Group, Inc., formerly Recall Studios, Inc.; it does not identify FuboTV Inc. or report a 2018 fourth-quarter period.
The company develops hyper-realistic digital humans and related technologies for live entertainment, film, television, virtual reality, augmented reality, mobile, interactive and artificial-intelligence applications. On August 8, 2018, it acquired 99.7% of Evolution AI Corporation, including Evolution AI’s 58% interest in Pulse Evolution Corporation, by issuing 1 million Series X preferred shares valued at $211.5 million.
Financial Results and Key Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $0 | $41,000 |
| Operating expenses | $15.0 million | $1.2 million |
| Loss from continuing operations | $15.2 million | Income of $10.5 million |
| Net loss | $13.1 million | Net income of $10.5 million |
| Net loss attributable to the company | $10.6 million | Net income of $10.5 million |
| Net loss per basic share | $2.37 | Net income per share of $7.12 |
| Cash used in operating activities | $3.2 million | $612,000 |
| Cash provided by financing activities | $3.1 million | $618,000 |
| Cash at year-end | $31,000 | $77,000 |
There was no meaningful operating margin because revenue was zero. The principal 2018 expense drivers were $8.2 million of amortization, $3.7 million of stock-based compensation, $889,000 of marketing and advertising, $833,000 of legal and professional fees, $506,000 of executive compensation and $508,000 of other compensation.
Other expense was $243,000 in 2018, compared with other income of $11.6 million in 2017. The 2018 amount included $2.7 million of interest expense, a $1.9 million gain on extinguishment of convertible notes, a $741,000 gain from the change in fair value of a derivative liability and a $91,000 loss from the change in fair value of a subsidiary warrant liability.
At December 31, 2018, total assets were $286.1 million, including $136.1 million of net intangible assets and $150.0 million of goodwill. Current liabilities were $18.6 million, including $3.7 million of notes payable, $5.9 million of accrued expenses, $4.5 million of subsidiary warrant liability and $1.5 million of convertible notes, including related-party notes.
The company reported a working-capital deficiency of $18.5 million, an accumulated deficit of $21.8 million and total liabilities of $53.6 million. There were no investing cash flows in 2018 and no disclosed off-balance-sheet arrangements.
Material Changes Versus 2017
- Revenue declined from $41,000 to zero.
- The company moved from $10.5 million of net income to $13.1 million of net loss, primarily because 2017 benefited from a $12.4 million derivative-liability fair-value gain that did not recur.
- Operating expenses increased by $13.8 million, largely due to acquisition-related amortization, stock-based compensation and expanded professional and compensation costs.
- The Evolution AI acquisition added substantial intangible assets, goodwill, deferred tax liabilities and non-controlling interest to the balance sheet.
- Cash declined by $46,000 despite $3.1 million of financing cash inflows, as operating activities used $3.2 million.
- Common shares outstanding increased from 2.7 million at December 31, 2017 to 7.5 million at December 31, 2018, before the 2019 conversion of Series X preferred shares into 15.0 million common shares and the 1-for-30 reverse stock split.
Outlook, Risks and Unusual Items
Management stated that the company expects continued losses and must raise additional capital to fund operations, meet obligations and execute its business plan. The financial statements and the auditor’s report state that substantial doubt exists about the company’s ability to continue as a going concern within one year.
Management was seeking primarily equity financing. The filing cautions that financing may be unavailable or may impose restrictive terms or cause substantial shareholder dilution. The company had only $31,000 of cash at year-end and several obligations were past due or in default, including a $2.7 million technology-acquisition note, a $172,000 related-party note and $315,000 of related-party convertible-note principal.
Subsequent to year-end, the company raised approximately $1.0 million in March 2019 and an additional amount through common-stock issuances between January and May 2019. It also agreed to invest at least $2.0 million in a DreamWorks Kung Fu Panda theatrical production scheduled to open in January 2020.
The company disclosed two material weaknesses in internal control over financial reporting and concluded that disclosure controls were not effective as of December 31, 2018. Identified issues included limited segregation of duties, insufficient accounting and SEC-reporting expertise, ineffective information-technology controls and inadequate tax-filing processes.
Accrued expenses included $524,000 for judgments in closed litigation. A separate pro se lawsuit against Pulse Evolution Corporation was pending, and no reserve had been established. The filing also states that federal and state tax filings had been delinquent since December 31, 2014.
Significant accounting estimates relate to the fair value of acquired intangible assets, goodwill, derivative liabilities and warrant liabilities. Goodwill was not tested for impairment at December 31, 2018 because the acquisition occurred only in August 2018.
Most Important Facts to Verify
- Registrant identity: Confirm whether this filing was incorrectly associated with FuboTV Inc.; the source filing is for Pulse Evolution Group, Inc.
- Period: Confirm that the requested period should be fiscal year 2018 rather than fourth quarter 2018.
- Going concern: Review the auditor’s going-concern paragraph, liquidity deficiency, past-due obligations and financing dependence.
- Acquisition valuation: Validate the $211.5 million consideration, $150.0 million goodwill balance and $136.1 million intangible-asset balance.
- Dilution: Account for the subsequent conversion of 1 million Series X preferred shares into 15 million common shares and the 2019 reverse stock split.
- Controls and reporting: Review remediation of the disclosed material weaknesses and the change from Fruci & Associates to Marcum LLP.
- Contingencies: Verify the $524,000 litigation accrual, pending litigation, defaulted debt and delinquent tax filings.
- Commercialization: Verify whether the company generated operating revenue after 2018 and whether the planned theatrical and digital-human initiatives required additional capital.