Filing Overview
The supplied filing is a Form 10-Q for the quarter ended June 30, 2018, filed August 15, 2018. The filing identifies the registrant as Recall Studios, Inc., not Fubotv Inc.; investors should verify that the source filing corresponds to the intended company. The company described its business as film and television production reoriented toward augmented-reality and virtual-reality technology and content.
Financial Performance and Position
Amounts below are rounded to the nearest thousand unless otherwise noted.
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Revenue | $0 | $36,000 | $0 | $41,000 |
| Operating expenses | $1,040,000 | $387,000 | $1,880,000 | $529,000 |
| Loss from continuing operations | $(2,187,000) | $5,003,000 | $(2,882,000) | $11,666,000 |
| Net income (loss) | $(2,187,000) | $5,017,000 | $(2,882,000) | $11,655,000 |
| Basic loss per share | $(0.03) | $0.29 | $(0.03) | $1.35 |
| Diluted loss per share | $(0.03) | $0.22 | $(0.03) | $0.80 |
- Cash: $369,000 at June 30, 2018, compared with $77,000 at December 31, 2017.
- Operating cash flow: $1,605,000 used in the first six months of 2018, compared with $179,000 used in the prior-year period.
- Financing cash flow: $1,897,000 provided, including $1,157,000 of convertible-note proceeds, $1,471,000 of common-stock proceeds and $731,000 of note repayments.
- Assets and liabilities: Total assets were $378,000 and current liabilities were $4,100,000. Management reported negative working capital of $3,731,000 and a stockholders’ deficit of $3,722,000.
- Debt and derivative obligations: Convertible notes payable totaled $860,875 before stated discounts, accrued interest was $19,615, and the derivative liability was $2,831,000, measured using Level 3 inputs.
- Margins: No meaningful operating margin was generated because revenue was zero. The filing does not provide a clear adjusted EBITDA measure.
Material Changes Versus the Prior Comparable Period
- Revenue fell to zero from $36,000 in the quarter and from $41,000 for the six-month period, primarily because the S&G/High Five Entertainment business was sold in 2017 and reported as discontinued operations.
- Six-month operating expenses increased by $1,351,000, driven primarily by higher consulting fees and advertising and marketing costs. Quarterly expenses increased by $653,000.
- The company moved from significant prior-year profits to losses. The 2017 results benefited from a $12,173,000 gain from the change in fair value of derivative liabilities; the comparable 2018 gain was $2,439,000.
- 2018 results included $2,342,000 of financing costs and $804,000 of debt-discount amortization for the six months, compared with no comparable amounts in 2017.
- Common shares outstanding increased to 90,599,120 at June 30, 2018 from 79,797,533 at December 31, 2017. The company issued 6,952,000 shares for $1,471,000 of cash and 1,150,000 shares valued at $683,000 for services during the first six months.
Guidance, Outlook, Risks and Unusual Items
- Going concern: Management and the company’s independent accountant identified substantial doubt about the company’s ability to continue as a going concern within one year. Management expected available funds and anticipated equity financing to support operations through 2018, but provided no assurance that financing or sufficient operating revenue would be obtained.
- Financing dependence: The company stated that it had no third-party financing commitments and expected to seek additional equity and debt financing. Additional equity could materially dilute existing holders, while debt financing could impose operating restrictions.
- Convertible financing risk: Many notes contained variable-price conversion features. These features generated a $2,831,000 derivative liability and could result in significant future share issuance and dilution.
- Subsequent strategic transaction: After quarter-end, the company closed an exchange involving Evolution AI Corporation. It issued 1,000,000 shares of Series X preferred stock, potentially convertible into approximately 450,000,000 common shares before contemplated adjustments, and acquired approximately 99.7% of EAI.
- Corporate changes: After the exchange, John Textor became CEO and Alexander Bafer became executive chairman. Each was provided an annual base salary of $500,000, with additional bonus and equity eligibility.
- Potential reverse split and authorization increase: Management contemplated a 1-for-25 reverse stock split and an increase in authorized common shares to support conversion of Series X preferred stock.
- Internal controls: Management concluded that disclosure controls and procedures were not effective at June 30, 2018 because of limited resources and personnel.
- Accounting adoption: The company adopted ASC 606 in the first quarter of 2018 and stated that adoption was not expected to materially affect the financial statements.
Investor Verification Checklist
- Confirm the company identity: the supplied filing is for Recall Studios, Inc., not Fubotv Inc.
- Verify the going-concern disclosure, available cash, negative working capital and near-term funding requirements.
- Reconcile the convertible-note balances, maturities, discounts, derivative liability and potential conversion dilution.
- Review the Evolution AI exchange, Series X conversion terms, contemplated reverse split and proposed increase in authorized shares.
- Assess the sustainability of the business given zero reported revenue and materially higher operating expenses.
- Review subsequent executive compensation, related-party obligations and the company’s past-due related-party notes.
- Confirm the scope and remediation status of the ineffective disclosure controls.