PART
I
ITEM
1. BUSINESS
Company
Pulse
Evolution Corporation (“we”, “us”, “our” or the “Company”) was incorporated on
May 31, 2013 under the laws of the State of Nevada under the name QurApps, Inc. On May 8, 2014, we changed our name to Pulse Evolution
Corporation to better reflect our plans to produce high impact applications of hyper-realistic computer-generated human likeness.
We
are a market leader in the emerging virtual human likeness space, and the foremost developer of hyper-realistic digital humans
– computer generated assets that appear to be human and can perform in live shows, virtual reality, augmented reality, holographic,
3D stereoscopic, web, mobile, interactive and artificial intelligence applications.
We
believe that digital humans will be ubiquitous in society, culture and industry. In the last decade, hyper-realistic digital humans
have performed in movies such as
The Curious Case of Benjamin Button
or on stage such as the virtual performance of a digital
Tupac Shakur at the Coachella Valley Music Festival. We expect that, in years to come, digital humans will not only perform for
audiences on stage and in film, but they will also represent individual consumers as digital likeness avatars, in realistic and
fantasy form, appearing and interacting on the consumer’s behalf in electronic and mobile communication, social media, video
game, virtual reality, and augmented reality. We believe digital humans will ultimately act as a relatable interface for artificial
intelligence applications, allow thinking computers and ‘bots’ to appear as humans, providing useful information and
services to people in diverse industries, such as education, health care, telecommunications, defense, transportation and entertainment.
Our
leadership team is currently focused on applications of digital humans in entertainment. We believe the entertainment industry
provides us with attractive near-term opportunities to put digital humans to work in proven performance-oriented business models,
while also allowing us to use the visibility of our globally recognized celebrities to showcase our digital human technologies
and their applications across other industries. Accordingly, our current business plan is to generate revenues from our digital
human representations of three of the world’s best-known late celebrities – Michael Jackson, Elvis Presley and Marilyn
Monroe – in full length entertainment experiences, brand marketing events and digital products.
Although
we are initially focused on the near-term revenue opportunities of ‘virtual performance’ as a new form of entertainment,
our principal business is to promote the use of digital humans globally, through our technology and through our applications,
across diverse digital age industries. As we believe that market demand for digital humans in entertainment, or virtual performers,
is considerably greater than our current capacity to meet such demand, we will remain focused on the production of technology
and content to support performances and concert tours related to our leading celebrity properties. During this period of development
and launch of our live entertainment business, our plans to develop digital humans for other applications, such as artificial
intelligence and virtual reality, will be developed through the establishment of joint ventures with third parties, some of which
may be affiliated with related parties, that can be separately funded and staffed appropriately to support such opportunities.
In 2015, we created one such joint venture, Pulse Biologic, to focus on digital human animation in the surgical simulation and
life sciences industries. In 2016, we plan to create a joint venture with a related party to explore the use of digital humans
in artificial intelligence.
Media
and Entertainment Business
Pulse
Entertainment produced a computer-generated and animated human likeness of the late popular entertainer Michael Jackson that appeared
in a live performance at the Billboard Music Awards on May 18, 2014. The virtual performance of Michael Jackson contributed to
the award show’s highest television viewership in 13 years and an 11-year high in advertising in the demographic of viewers
aged 18 to 49. This production reached approximately 11 million television viewers during the initial network broadcast, followed
by more than 51 million online views through YouTube and Vevo, more than 2,400 news articles, an estimated 98 billion internet
impressions for the Michael Jackson hologram, and more than 300 million internet impressions estimated for Pulse Entertainment
and members of its management.
Our
media and entertainment business model is focused on participation in intellectual property through the development, production
and co-ownership of entertainment properties featuring globally recognized animated virtual performers and through multiyear revenue
share relationships with living celebrities and late celebrity estates.
While
we intend to fund a portion of our production costs from internal sources, we anticipate that a large portion of these costs will
be funded by third parties, including affiliated production companies, associated celebrity estates, corporate sponsors and other
entertainment finance vehicles. We believe there is significant interest from third-parties to finance theatrical productions
related to our leading celebrity properties. It is our goal to utilize such third-party capital to reduce the risks associated
with our entertainment business model and position our company to be paid, as much as possible, as a celebrity or as a producer.
Elvis
Presley
In
August 2014, we entered into a multiyear agreement with an affiliate of Authentic Brands Group, ABG EPE IP, LLC (“ABG”),
the principal owner of rights related to the estate of the late celebrity Elvis Presley to produce a photorealistic digital likeness
of the late celebrity and to participate in a share of revenues that could be realized through performances of the “Virtual
Elvis Presley” in diverse entertainment and media applications. In January 2016 the Agreement was amended, and supplemented
with additional agreements, granting to Pulse certain production rights related to a specific concert production and extending
the rights of exclusivity through the full term of the Agreement to December 31, 2021.
In
January 2016, we officially began production of our first live concert, featuring a digital Elvis Presley, which will be produced
by Simon Fuller and his company XIX Entertainment. Mr. Fuller, noted by
Billboard
magazine as the most successful British
music manager of all time, created the British TV hit
Pop Idol,
American Idol
and the global
Idol
franchise,
which has since garnered 6.5 billion viewers to become the world’s most widely watched television franchise
.
He also
manages, or has managed, such iconic acts as the Spice Girls, the late Amy Winehouse, Annie Lennox, Carrie Underwood, Steven Tyler,
Kelly Clarkson, Lisa Marie Presley, Victoria Beckham and David Beckham.
Michael
Jackson
In
late 2013, Pulse Entertainment Corporation (“Pulse Entertainment”), now a wholly-owned subsidiary of the Company,
entered into an exclusive multiyear agreement with the estate of Michael Jackson to produce a photorealistic digital likeness
of the late celebrity and to participate in a share of revenues that could be realized through performances of the “Virtual
Michael Jackson” in diverse entertainment and media applications.
Marilyn
Monroe
In
October 2014, we entered into a multiyear agreement with the estate of the late celebrity Marilyn Monroe to produce a photorealistic
digital likeness of the late celebrity and to participate in a share of revenues that could be realized through performances of
the “Virtual Marilyn Monroe” in diverse entertainment and media applications.
In
January 2016, the Agreement was amended, extending the rights of exclusivity through the full term of the Agreement to December
31, 2021 and, at the election of Pulse, a renewal option to December 31, 2024.
Interactive,
Virtual Reality, Augmented Reality and Mobile Experiences
On
February 26 2016, we entered into an agreement to purchase 100% of the share capital of Float Hybrid Entertainment, Inc., a developer
of interactive experiences for brands such as
Pepsi, Microsoft, GE, AKQA, Ericsson, XBOX
and
Anheuser-Busch.
Float
was also a founding developer on the Kinect depth sensor platform and an experienced developer responsible for a number of yet-to-be-released
Virtual and Augmented Reality Platforms.
We
believe that Float’s practical experience with creating real-time interactive experiences on a wide range of emerging platforms
combined with Pulse’s market leading digital human technology has positioned us to be a leading pioneer in the delivery
of digital human experiences to a wide range of brands and customers, especially in the virtual and augmented reality arena.
Artificial
Intelligence
We
are actively seeking strategic partners and technology licensing relationships with leading developers of artificial intelligence
technologies. It is our goal to be the “face” of artificial intelligence, to provide a human form to interactive artificially
intelligent computer beings that will be common in society, providing useful information and services to people in diverse industries,
such as education, health care, telecommunications, defense, transportation and entertainment. We believe the experience and vision
of our leadership team, combined with existing and growing business relationships, have positioned the Company to be a pioneer
in the development of consumer facing artificial intelligence applications.
Work
and Accolades of our Management and Team
Our
management team includes pioneers in the creation and presentation of advanced computer generated imagery, photo-realistic human
animation, and holographic virtual performances. They are also accomplished filmmakers and storytellers, who have produced and
exploited entertainment media consumed by audiences around the world for more than 20 years. Their works have been recognized
with numerous film industry awards and nominations, including Academy Awards® for Best Visual Effects issued by the Academy
of Motion Picture Arts and Sciences and similar awards issued by the Visual Effects Society. Our executives, visual effects supervisors
and digital artists have contributed materially to the visual imagery of more than 50 major motion pictures and film properties,
including such notable films as
Lord of the Rings, Transformers, Pirates of the Caribbean, Tron: Legacy, and The Curious Case
of Benjamin Button.
Our
core development team represents a combination of artists and executives who have come together to form a unique company that
specializes in character creation and human animation. Many of our employees have worked, often in leadership roles, with talented
artists, at accomplished companies, delivering visually stunning characters and visual effects sequences.
Our
creative leadership team is anchored by individuals who are recognized within the entertainment industry for their leadership
of largescale feature films and for the development of memorable, award-winning animated characters, resulting in numerous industry
awards for creative and technical excellence, including:
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One
Academy Award® nomination for
Best Visual Effects
in a feature film,
The Chronicles of Narnia: The Lion, the
Witch and the Wardrobe
(2005);
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Our
Executive Chairman, John Textor, has significant experience in the delivery of high-end visual effects and character animation,
having served as both Chairman and Chief Executive Officer of a leading visual effects company which, during his tenure, produced
visual effects and character animation for 25 major feature films and numerous creative projects, resulting in the multiple industry
awards, recognizing the company and, principally, its artists, including:
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Academy
Award® for
Best Visual Effects
in a feature film,
The Curious Case of Benjamin Button
(2009);
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BAFTA
Award (British Academy Awards) for
Best Visual Effects
in a feature film,
The Curious Case of Benjamin Button
(2009);
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Titanium
Lion Award from the Cannes Lions International Festival of Creativity for “Virtual 2Pac” (2012), the virtual performance
of a virtual Tupac Shakur at the Coachella Valley Music Festival;
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Two
Academy Award® nominations for
Best Visual Effects
in a feature film,
Real Steel
(2012) and
Transformers:
Dark of the Moon
(2012)
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Collectively,
our executives, visual effects supervisors and digital artists have contributed materially to numerous largescale feature films,
including
2012, 47 Ronin, The A-Team, Back to the Future Part II, Batman Forever, Blades of Glory, The Chronicles of Narnia:
The Lion, the Witch and the Wardrobe, The Curious Case of Benjamin Button, Ender’s Game, Final Fantasy: The Spirits Within,
Flags of Our Fathers, Forrest Gump, G.I. Joe: The Rise of the Cobra, Girl with the Dragon Tattoo, The Golden Compass, Green Lantern,
Harry Potter and the Sorcerer’s Stone, The Hitcher, Hulk, I am Legend, I Robot, Jack the Giant Killer, Jurassic Park, Letters
from Iwo Jima, The Lord of the Rings: Two Towers, The Matrix Reloaded, Meet the Robinsons, Men in Black II, The Mummy: Tomb of
the Dragon, My Super Ex-Girlfriend, The Nativity Story, Pearl Harbor, Percy Jackson & the Olympians: The Lightning Thief,
Pirates of the Caribbean: At World’s End, Pirates of the Caribbean: Dean Man’s Chest, The Polar Express, Rango, Real
Steel, Rock of Ages, The Seeker: The Dark is Rising, The Smurfs, Speed Racer, Star Trek, Star Wars: Episode III Revenge of the
Sith, Terminator 2: Judgment Day, The Texas Chainsaw Massacre: The Beginning, Thor, Transformers, Transformers: Dark of the Moon,
Transformers: Revenge of the Fallen, TRON: Legacy, War of the Worlds, The Watch, We Own the Night, XMen 2, XMen: First Class,
and
Zodiac.
Live
Virtual Performances of Animated Human Characters
A
selection of significant live virtual performances members of our team have taken part in include:
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Virtual
2Pac
- a digital resurrection and holograph-like performance of the late rapper Tupac Shakur in front of a live audience
at the Coachella Valley Music Festival in 2012. The event was seen by more than 100 million viewers over YouTube in the weeks
to follow, inspiring a dramatic rise in Tupac music downloads, the reappearance of Tupac in Billboard’s Top Album charts
and demand across the worldwide press for the digital return of many other late celebrities;
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The
Michael Jackson Experience at the Billboard Music Awards -
a digital resurrection of Michael Jackson, performing a new
posthumously released song, ‘Slave to the Rhythm’, along with roughly two dozen virtual projection dancers, live
dancers and live band members, in a largescale holographic-like performance in front of a live audience at the globally broadcast
2014 Billboard Music Awards show. The event was seen by more than 11 million television viewers, 40 million viewers over YouTube
and Vevo, resulting in 2,400 news articles and roughly 98 billion internet impressions.
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Intellectual
Property
We
rely on a combination of copyright and trade secret laws in the United States and other jurisdictions, as well as confidentiality
and other contractual provisions to protect our trade secrets, proprietary methodologies and our brand. We enter into confidentiality
and invention assignment agreements with our employees and consultants, and we rigorously control access to our work and methods.
Despite
our efforts, the steps we have taken to protect our proprietary rights may not be adequate to preclude misappropriation of our
proprietary information or infringement of our intellectual property rights, and our ability to police such misappropriation or
infringement is uncertain, particularly in countries outside of the United States.
Marketing
Strategy to Support Productions and Secure New Digital Rights
We
intend to achieve sales growth with lower marketing expense by way of two distinct advantages, the uniqueness of our offerings
as pioneers of a significant emerging industry and the close relationships, forged over many years, with the small number of large
studios, important venues and globally recognized late celebrities that have dominated the entertainment industry.
Marketing
for our productions will include:
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Align
with the most important producers, venue owners and operators in the leading performance markets around the globe, to assure
potential production partners and celebrities that we offer unmatched access to the largest audiences
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Actively
promote Pulse Entertainment’s ability to attract the leading talent in facial animation, head replacement and overall
human effects, as necessary to convince celebrities and celebrity estates of superior quality in digital likeness
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Communicate
all of the above through consistent, high-volume public relations efforts to fully establish and maintain Pulse Entertainment’s
reputation as pioneer and market leader in the global press
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Immediate,
and ongoing, outreach to the agents and managers of leading celebrity estates, asserting the above, to assert that the company
is the obvious (if not the only) choice as a partner in the exploitation of the new industry of virtual performance and digital
resurrection
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Leverage
the success from early celebrity appearances to catalyze tremendous demand from venues seeking this new form of entertainment.
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We
also plan to promote our company as the ideal partner for celebrity estates and owners of likeness rights by focusing on the following
strategies to achieve ownership of intellectual property or long-term license rights related to music and digital likeness:
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Advancement
of Legal Standards: We plan to continue working with entertainment counsel to establish the standards, legal definitions and
preferred language relating to ‘Digital Likeness Rights’, a concept that our principals have introduced into an
industry wide discussion as a result of their pioneering leadership in virtual performances. The advancement of this topic
not only positions the company as a market leader in a new form of entertainment, but the creation of new ‘rights real
estate’ which we believe will enable the company to secure multiple long-term digital likeness licenses (with leading
celebrity estates) well before future competitors have even focused on the existence of such rights.
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Actionable
Production Proposals: Communication with managers and agents regarding specific virtual performance ideas (concerts, shows,
etc.) as a way to accelerate the discussion of rights and the successful licensing of such rights to the company. In short,
celebrity estates want royalty revenues from these breakthrough new performances and the company is one of the only options
they have to move forward. We believe that this position can be leveraged to secure long-term digital likeness rights of the
major celebrity properties before competitors enter the field.
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Offer
to Invest: As it is clear that most celebrity estates are interested in royalty inflows, we will offer to invest in the construction
of 3D models and the assets supportive of digital likeness as a means to achieve long-term license rights. We believe there
are multiple sources of capital, possibly a company affiliated side fund that will help to develop these assets.
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Our
intellectual property strategies will be to obtain digital likeness rights for the leading celebrity estates prior to its competitors
who are not prepared to enter the market. Most managers, agents and attorneys for celebrity estates have not thought deeply and
specifically about this new category of rights exploitation. We are generating the interest celebrity managers, agents and attorneys
who are not aware of this new category of rights exploitation that have the potential for new revenue streams. We believe that
securing these intellectual property rights early on will give it a competitive advantage in the market.
Competition
We
have positioned ourselves as a producer of high impact applications of computer-generated human likeness, or functional hyper-realistic
digital humans. Our competition in the general visual effects services market includes Industrial Light and Magic (purchased by
Disney), Sony Pictures Imageworks Inc., Weta Digital Ltd., Rhythm & Hues Inc. and Framestore CFC, as well as many smaller
firms that specialize in visual effects for film and TV productions. Many of these producers are larger than we are and have greater
financial resources than we do, although they generally operate on a work-for-hire basis and are not directly involved in the
production and financing of their projects.
We
believe we can compete effectively with generalist visual effects industry competitors through specialization, developing the
highest quality and consistency of digital human likeness, and by being a proven executive producer of large scale live shows
and events. We also believe that our long-term exclusive relationships with unique, globally recognized celebrity properties help
to further mitigate the risk of competition from other technology companies that may seek to enter the emerging industries of
human likeness and virtual performance.
Employees
As
of March 31, 2016, we employed 35 full-time employees. We believe that our employee and labor relations are good. We are currently
not a party to any collective bargaining agreement.
Government
Regulation
We
are not currently subject to direct federal, state or local regulations, other than regulations applicable to businesses generally.
Our
Corporate History
Pulse
Evolution Corporation was incorporated on May 31, 2013 under the laws of the State of Nevada under the name QurApps, Inc. We changed
our name to Pulse Evolution Corporation effective May 8, 2014 to better reflect our plans to produce specialized, high impact
applications of computer-generated human likeness, or functional hyper-realistic digital humans.
On
May 31, 2013 (inception) the Company issued 6,000,000 shares of common stock to Alon Nigri our former Chief Executive Officer
and former sole director for cash of $18,000.
During
the month of February 2014, we sold 1,380,004 shares of our common stock at $0.03 per share to various investors for cash of $42,600
pursuant to our Registration Statement on Form S-1 declared effective by the SEC on October 7, 2013.
On
May 15, 2014, our controlling stockholder at the time, former Chief Executive Officer and former sole director (the “Seller”),
entered into and closed on a Share Purchase Agreement (the “Agreement”) with, Tradition Studios IP Acquisition LLC,
(Alternative)2 Holding AG, and Scenic Loop Holding, LLC (each a “Purchaser” and collectively, the “Purchasers”)
whereby the Purchasers purchased from the Seller a total of 53,612,600 shares of our common stock for an aggregate of $107,225,
representing approximately 80.68% of our issued and outstanding shares of common stock. The Purchasers own or control as a group,
Pulse Entertainment.
On
May 16, 2014, we signed a letter of intent to exchange at least a majority of our unissued shares of common stock for 100% of
the outstanding common stock of Pulse Entertainment, a related party.
Effective
on June 23, 2014, the Pulse Entertainment amended and restated its articles of incorporation filed with the Secretary of State
of the State of Nevada in order to effectuate an increase in the number of authorized shares of common stock, par value $0.001
per share, from 75,000,000 to 300,000,000, increase the authorized blank check preferred stock to 100,000,000 shares and effectuate
a 1 for 10 forward stock split of our issued and outstanding common stock (the “Forward Stock Split”). As a result
of the Forward Stock Split, every 1 share of our pre-Forward Split common stock was increased and reclassified into 10 shares
of our common stock. All references to shares of our common stock in this report on Form 10-K refers to the number of shares of
common stock after giving effect to the Forward Stock Split (unless otherwise indicated).
Beginning
on July 15, 2014, and continuing through September 23, 2014, we entered into a securities purchase agreements (the “Securities
Purchase Agreements”) with six investors who are unrelated parties to us whereby they agreed to purchase an aggregate of
4,855,000 shares of our Common Stock at prices ranging from $0.40 per share to $1.00 per share, for a total purchase price of
$2,225,000. The Securities Purchase Agreements provide piggyback registration rights for the Common Stock acquired by the investors
in the event that we register any of our Common Stock under the Securities Act of 1933, as amended (the “Securities Act”)
for sale to the public for cash in an underwritten offering, if the applicable registration form being used by us will permit
such registration. We are not required to register the Common Stock if registration is effected by us on behalf of another shareholder
that is exercising registration rights that prohibit registration of other securities or the Common Stock has already been registered.
On
September 26, 2014, we entered into a share exchange agreement (the “Share Exchange Agreement”) with Pulse Entertainment
shareholders, some of whom are officers and directors of our company, pursuant to which we agreed to issue up to 58,716,870 shares
of our unregistered common stock, net of certain share cancellations, to the shareholders of Pulse Entertainment holding 21,535,252
shares of its issued and outstanding common stock, such shares representing 100% of the issued and outstanding common stock of
Pulse Entertainment.
On
September 30, 2014, Pulse Evolution completed the initial closing under the Share Exchange Agreement pursuant to which we agreed
to issue shares of our unregistered common stock to the shareholders of Pulse Entertainment in exchange for shares of its common
stock. As part of the Share Exchange, certain of our shareholders who are also shareholders of Pulse Entertainment agreed to cancel
60,910,113 shares of our common stock issuable to them in connection with the Share Exchange. As of July 31 2015, all shares of
Pulse Entertainment have been exchanged and Pulse Entertainment is now a wholly owned subsidiary of Pulse Evolution.
ITEM
1A. RISK FACTORS
Not
required for smaller reporting companies.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
Until
March 31, 2015, the Company leased office space for its company headquarters in Port Saint Lucie, Florida pursuant to a lease
for approximately $12,000 per month. The lease expired on March 31, 2015. Beginning on April 1, 2015, the Company leases the office
space on a month-to-month basis for $6,000 per month.
The
Company also leases office space for its production operations in San Rafael, California. The monthly lease expense during the
year ended June 30, 2015 was approximately $7,000 per month. Following the year end, the company entered into a one year lease
at a monthly cost of approximately $15,000.
We
believe our current facilities are adequate to meet current and near-term operating requirements.
ITEM
3. LEGAL PROCEEDINGS
On
May 29, 2014, Hologram USA, Inc., Musion Das Hologram Limited and Uwe Maass (the “Plaintiffs”) filed an amended complaint
in the U.S. District Court for the District of Nevada (Case No. 2:14cv00772GMNNJK). The complaint alleged that Plaintiffs own,
or control, certain patents related to the projection illusion technique, historically known as “Pepper’s Ghost.”
The Plaintiffs further alleged that Pulse Evolution Corporation, Pulse Entertainment Corporation, John Textor, Dick Clark Productions,
Inc., John Branca and John McClain, as executors of the Estate of Michael Jackson, MJJ Productions, Inc. Musion Events, Ltd. Musion
3D, Ltd., William James Rock and Ian Christopher O’Connell (collectively, the “Defendants”) infringed on the
Plaintiffs’ patent rights by using the Plaintiffs’ projection illusion system to project the visual imagery developed
and conceived by our company in connection with the a musical performance at the 2014 Billboard Music Awards in Las Vegas Nevada
featuring an image of the late Michael Jackson. The Plaintiffs did not allege that the Company’s core business, the production
of visual effects or human animation imagery infringes their intellectual property rights. In March 2016, the parties reached
an amicable settlement agreement of all claims and counterclaims. As part of the settlement, our Executive Chairman also agreed
to dismiss and release all claims against the principal shareholder of Hologram USA that remained pending through separate actions
brought in the state of Florida. All costs associated with the settlement and litigation have been accrued in the period to June
30, 2015.
The
Company is involved from time to time in routine litigation arising in the ordinary course of conducting its business. Except
as set forth above, in the opinion of the Company’s management, no pending routine litigation will have a material adverse
effect on the Company’s financial condition, results of operations or cash flows.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
Notes
to the Consolidated Financial Statements
NOTE
1. BASIS OF PRESENTATION AND BUSINESS DESCRIPTION
Nature
of Business
Pulse
Evolution Corporation was incorporated on May 31, 2013, under the laws of the State of Nevada under the name QurApps, Inc., initially
announcing plans to develop software applications for mobile devices. In anticipation of a change of control transaction, which
closed on May 15, 2014, the Company changed its name to Pulse Evolution Corporation effective May 8, 2014.
We
are a market leader in the emerging virtual human likeness space, and the foremost developer of hyper-realistic digital humans
– computer generated assets that appear to be human and can perform in live shows, virtual reality, augmented reality, holographic,
3D stereoscopic, web, mobile, interactive and artificial intelligence applications.
We
believe that digital humans will be ubiquitous in society, culture and industry. In the last decade, hyper-realistic digital humans
have performed in movies such as The Curious Case of Benjamin Button or on stage such as the virtual performance of a digital
Tupac Shakur at the Coachella Valley Music Festival. We expect that, in years to come, digital humans will not only perform for
audiences on stage and in film, but they will also represent individual consumers as digital likeness avatars, in realistic and
fantasy form, appearing and interacting on the consumer’s behalf in electronic and mobile communication, social media, video
game, virtual reality, and augmented reality. The Company’s long-term goal is to be the ‘face’ of artificial
intelligence, to provide a human form to interactive artificially intelligent computer beings that will be common in society,
providing useful information and services to people in diverse industries, such as education, health care, telecommunications,
defense, transportation and entertainment.
Our
leadership team is currently focused on applications of digital humans in entertainment. We believe the entertainment industry
provides us with attractive near-term opportunities to put digital humans to work in proven performance-oriented business models,
while also allowing us to use the visibility of our globally recognized celebrities to showcase our digital human technologies
and their applications across other industries. Accordingly, our current business plan is to generate revenues from our digital
human representations of three of the world’s best-known late celebrities – Michael Jackson, Elvis Presley and Marilyn
Monroe – in full length entertainment experiences, brand marketing events and digital products.
Acquisition
of Pulse Entertainment
In
May 2014, the Company signed a letter of intent to exchange at least a majority of its unissued shares of common stock for 100%
of the outstanding common stock of Pulse Entertainment Corporation, a related party. The Company entered into a share exchange
agreement on September 26, 2014 (the “Share Exchange Agreement”) with Pulse Entertainment in which the Company agreed
to issue up to 58,362,708 shares of its unregistered common stock, $0.001 par value (the “Common Stock”) to the shareholders
of Pulse Entertainment holding 21,535,252 shares of its issued and outstanding common stock (the “Share Exchange”),
such shares representing 100% of the issued and outstanding common stock of Pulse Entertainment. On September 30, 2014, the Company
completed the initial closing under the Share Exchange Agreement pursuant to which it agreed to issue 35,827,309 shares of its
unregistered Common Stock, net of cancellations, to the shareholders of Pulse Entertainment in exchange for 17,466,383 shares
of its common stock. During the quarter ended December 31, 2014, the Company exchanged additional shares under the Share Exchange
Agreement pursuant to which it agreed to issue 15,135,973 shares of its unregistered Common Stock, net of cancellations, to the
shareholders of Pulse Entertainment in exchange for 2,732,869 shares of its common stock. As part of the Share Exchange, certain
of the Company’s shareholders who are also shareholders of Pulse Entertainment canceled 60,910,113 shares of the Company’s
common stock previously issued to them in connection with the Share Exchange. The remaining 1,336,000 shares of Pulse Entertainment
common stock were exchanged in June 2015 and July 2015 by the Pulse Entertainment Shareholders pursuant to the Share Exchange
Agreement for 7,399,426 shares of the Company’s unregistered common stock. In July 2015, Pulse Entertainment became a wholly
owned subsidiary of the Company.
Recapitalization
The
Company’s acquisition of Pulse Entertainment was accounted for as a recapitalization of Pulse Entertainment since the shareholders
of Pulse Entertainment obtained voting and managing control of the Company. Pulse Entertainment was the acquirer for financial
reporting purposes and Pulse Evolution was the acquired company. Consequently, the consolidated financial statements after completion
of the acquisition include the assets and liabilities of both Pulse Evolution and Pulse Entertainment, the historical operations
of Pulse Entertainment and their consolidated operations from the September 30, 2014 closing date of the acquisition. Pulse Entertainment
retroactively applied its recapitalization pursuant to the terms of the Share Exchange Agreement for all periods presented in
the accompanying consolidated financial statements for the year ended June 30, 2015 and for the period from October 10, 2013 (inception)
through June 30, 2014.
Because
Pulse Entertainment is the acquirer for financial reporting purposes, comparative prior year data is presented for the period
from October 10, 2013 through June 30, 2014 due to Pulse Entertainment’s incorporation occurring on October 10, 2013 in
the state of Delaware.
Liquidity
During
the year and subsequent to the year end, the company raised significant core capital in order to support the ongoing development
of the core digital human technology and also to create the digital likeness of Michael Jackson, Elvis Presley and Marilyn Monroe
in anticipation of starting full production of theatrical shows, music concerts and other events.
The
Company broadly consists of a Core operations, management and administration team and In-House Production Talent. Upon commencement
of production of a specific concert or theatrical show, the In-House Production Talent team would be required to provide animation
services related to the performance of the primary celebrity character, such services to be funded by a show-specific production
entity that would likely be managed by the Company and funded materially by third-party entertainment production investors. While
we intend to fund an initial portion of production costs of a show from internal sources, we expect a large portion of these costs
to be funded by such third parties, including affiliated production companies, associated celebrity estates, corporate sponsors
and other entertainment finance vehicles. We do not, however, currently have any such funding or financing arrangements currently
in place. Our ability to fund our In-House Production Talent and meet our obligations on a timely basis relies on our ability
to raise funds for the productions. If we are unable to successfully raise sufficient production capital through future debt and
equity financings or strategic and collaborative ventures with potential partners, we would likely have to reduce our dependence
on In-house Production Talent and limit many, if not all, of our activities as a producer.
We
have raised approximately $16.9 million of core development capital from inception through June 30, 2015. Our plan to develop,
produce and operate full scale productions will require significant direct funding, similar to that of a mid-sized theatrical
show. Until we secure production capital and generate revenues, the company will continue to rely on raising capital to support
the development of technology and digital likenesses of its portfolio of celebrities. We believe that full scale shows will require
in excess of $25m of development and operating financing and we plan to fund each of our productions within a production entity,
similar to the structure used by movie studios.
Subsequent
to the year end, the Company sourced several short term bridge loans and equity investments, as detailed in note 12 (Subsequent
Events). Notably, in January 2016, we secured a $10m equity investment from Original Force and U9. We have analyzed its liquidity
requirements and have determined that we have sufficient liquidity to execute our business plan Model for the 12 months from the
balance sheet date, and beyond that the Company will need to raise production funds to support the launch
of our shows and for corporate operations.
Basis
of Presentation and Consolidation
The
accompanying consolidated financial statements include the accounts of Pulse Evolution Corporation, its majority owned subsidiary
Pulse Entertainment Corporation. The company has created various wholly owned subsidiaries, including The Kopp Initiative, LLC,
Pulse Digital Human Labs, Pulse Japan and Pulse Biologic, all of which had no activity during the year. All significant intercompany
accounts and transactions have been eliminated in consolidation.
The
Company retroactively applied its recapitalization per the Share Exchange Agreement for all periods presented in the accompanying
consolidated financial statements.
NOTE
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
The
accompanying consolidated financial statements include certain reclassifications of amounts in the June 30, 2014 financial statements
in order to conform to the June 30, 2015 presentation. There were no changes to total assets, total liabilities or total stockholders’
equity.
Use
of Estimates
The
Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
On an ongoing basis, the Company evaluates its estimates based on experience and on various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be
cash equivalents. At June 30, 2015 and 2014, the Company’s cash balances may exceed the current insured amounts under the
Federal Deposit Insurance Corporation.
Allowance
for Doubtful Accounts
The
Company maintains a policy to record allowances for doubtful accounts for estimated losses resulting from the inability of its
customers, lenders or investors to make required payments. If the financial conditions of these customers were to deteriorate
and impair their ability to make payments, additional allowances may be required. No allowance for doubtful accounts was necessary
at June 30, 2015 and 2014.
Prepaid
and Other Assets
The
Company had paid a launch fee of $1,000,000 for the multiyear agreement with ABG, as described in Note 4 Intangible and Other
Assets. In April 2015 this agreement was amended to reduce the launch fee to $500,000 and use the remaining payment made by the
Company to fund the $500,000 service contract when expenses are incurred. The entire balance was expensed as of June 30, 2015.
Intangible
Assets
Definite-lived
intangibles, which are made up of license agreements as described in Note 4 Intangible and Other Assets, are amortized on a straight-line
basis over their useful lives. The Company reviews the intangible assets for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. As of June 30, 2015, the Company has determined that there
is no impairment of the intangible assets.
Revenue
Recognition
For
Production Services, revenue is recognized over each contract period based on percentage of work completed. As the production
services are rendered, revenue is recognized.
Production
Costs
Production
costs consist primarily of amounts due to third-party providers that the Company uses to help create and deliver the Company’s
digital and live performance productions.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. Depreciation is provided on a straightline basis over the estimated
useful life of the related asset. Computers are depreciated over five years. Furniture and fixtures are depreciated over seven
years.
Segment
Reporting
The
Company currently operates in only one segment.
Fair
Value of Financial Instruments
ASC
Topic 820, Fair Value Measurements and Disclosures, establishes a three level fair value hierarchy that requires entities to maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels of inputs
used to measure fair value are as follows:
Level
1: Observable inputs such as quoted prices in active markets;
Level
2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level
3: Unobservable inputs in which there is little or no market data and require the reporting entity to develop its own assumptions.
The
carrying amount of prepaid expenses, subscriptions receivable, accounts payable, and accrued expenses approximates fair value
due to the short-term nature of these instruments.
Income
Taxes
The
Company utilizes the asset and liability method of accounting for deferred income taxes. Under this method, deferred tax liabilities
and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the
tax basis of assets and liabilities. A valuation allowance is established against deferred tax assets because, based on the weight
of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company’s
policy is to record interest and penalties on uncertain tax positions as income tax expense. As of June 30, 2015 and 2014, the
Company does not believe any material uncertain tax positions are present. Accordingly, interest and penalties have not been accrued
due to an uncertain tax position and the fact the Company has reported tax losses since inception.
Stock
based Compensation
Accounting
Standard Codification (“ASC”) 718, “Compensation: Stock Compensation” requires recognition in the financial
statements of the cost of employee services received in exchange for an award of equity instruments over the period the employee
is required to perform the services in exchange for the award (presumptively the vesting period). The Company measures the cost
of employee services received in exchange for an award based on the grant date fair value of the award. The Company accounts for
nonemployee share based awards based upon ASC 505-50, “Equity Based Payments to Non Employees.” ASC 505-50 requires
the costs of goods and services received in exchange for an award of equity instruments to be recognized using the fair value
of the goods and services or the fair value of the equity award, whichever is more reliably measurable. The fair value of the
equity award is determined on the measurement date, which is the earlier of the date that a performance commitment is reached
or the date that performance is complete. Generally, the Company’s awards do not entail performance commitments. When an
award vests over time such that performance occurs over multiple reporting periods, the Company estimates the fair value of the
award as of the end of each reporting period and recognize an appropriate portion of the cost based on the fair value on that
date. When the award vests, the Company adjusts the cost previously recognized so that the cost ultimately recognized is equivalent
to the fair value on the vesting date, which is presumed to be the date performance is complete.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). The objective of ASU
2014-09 is to establish a single comprehensive model for entities to use in accounting for revenue arising from contracts with
customers and supersedes most of the existing revenue recognition guidance, including industry-specific guidance. The core principle
of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount
that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying
the new guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the
contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations;
and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09 applies to all contracts with
customers except those that are within the scope of other topics in the FASB Accounting Standards Codification. Entities have
the option of using either a full retrospective or modified approach to adopt ASU 2014-09.
In
July 2015, the FASB issued ASU 2015-14, which delayed the effective date of ASU 2014-09. As a result, this guidance will be effective
for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Earlier
application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods
within that reporting period. The Company is currently evaluating the new guidance, and has not determined the impact this standard
may have on the financial statements, nor decided upon the method of adoption.
In
August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going
Concern (“ASU 2014-15”). ASU 2014-15 will explicitly require management to assess an entity’s ability to continue
as a going concern, and to provide related footnote disclosure in certain circumstances. The new standard will be effective for
all entities in the first annual period ending after December 15, 2016. Earlier adoption is permitted. The Company is currently
evaluating the impact of the adoption of ASU 2014-15.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 840) (“ASU 2016-02”). The new standard establishes a right-of-use
(ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms
longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of
expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, and
annual and interim periods thereafter, with early adoption permitted. A modified retrospective transition approach is required
for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period
presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact
this standard will have on its financial statements.
NOTE
3. PROPERTY & EQUIPMENT
Property
and equipment as of June 30, 2015 and June 30, 2014 consist of the following:
|
|
|
June
30, 2015
|
|
|
June
30, 2014
|
|
|
Useful
Life
|
|
Computers and other equipment
|
|
$
|
3,900
|
|
|
$
|
5,207
|
|
|
5 years
|
|
Furniture and fixtures
|
|
|
47,355
|
|
|
|
18,659
|
|
|
7 years
|
|
Total property and equipment, cost
|
|
|
51,255
|
|
|
|
23,866
|
|
|
|
|
Less accumulated depreciation
|
|
|
(8,086
|
)
|
|
|
(980
|
)
|
|
|
|
Total property
and equipment, net
|
|
$
|
43,169
|
|
|
$
|
22,886
|
|
|
|
The
range of estimated useful lives for property and equipment at June 30, 2015, and June 30, 2014 was five to seven years.
Depreciation
expense on property and equipment totaled $7,106 and $980 for the year ended June 30, 2015 and the period from October 10, 2013
(inception) through June 30, 2014, respectively.
NOTE
4. INTANGIBLE AND OTHER ASSETS
In
August 2014, the Company entered into a multiyear agreement with ABG to develop for ABG, entertainment projects to utilize a realistic
computer generated image of Elvis Presley. The likeness will be used to create entertainment and branding revenue opportunities
for the Company, generated from holographic performances in live shows and commercials. There was a launch fee valued at $500,000
paid for in cash and an additional warrant issued. The warrant was valued based on the fair value at the time of issuance using
the Black Scholes option pricing model.
The
Company determines the fair value of its financial instruments using the Black Scholes option pricing model and utilized the following
assumptions for determination of the fair value of its financial instrument as of the following:
|
|
|
August
2014
|
|
|
Number of shares
|
|
|
2,800,000
|
|
|
Fair value of warrant
|
|
$
|
476,000
|
|
|
Term in years
|
|
|
1.61
|
|
|
Risk free interest rate
|
|
|
3.4
|
%
|
|
Volatility
|
|
|
76.63
|
%
|
|
Dividend rate
|
|
|
0.00
|
%
|
The
initial value has been capitalized and is being amortized over the length of the agreement. At June 30, 2015, forty-nine months
remain unamortized on the agreement. The net value of the intangible asset is $797,067 at June 30, 2015.
In
October 2014, the Company entered into a multiyear agreement with the Estate of Marilyn Monroe, LLC (“the Monroe Estate”)
to develop for the Monroe Estate entertainment projects to utilize a realistic computer generated image of Marilyn Monroe. The
likeness will be used to create entertainment and branding revenue opportunities for the Company, generated from holographic performances
in live shows and commercials. The Monroe Estate holds the likeness, appearance, and publicity rights of Marilyn Monroe. Under
the terms of the agreement, the Company issued 2,800,000 shares of common stock to the Monroe Estate. On March 31, 2015, the Company
issued an additional 1,000,000 shares to the Monroe Estate for a total of 3,800,000 shares issued. The initial value has been
capitalized and is being amortized over the length of the agreement. At June 30, 2015, fifty-one months remain unamortized on
the agreement. The net value of the intangible asset is $1,147,500 at June 30, 2015.
Additionally,
the Company’s amended agreement, effective March 31, 2015, with the Monroe Estate included a provision where the Company
was to cause the 3,800,000 shares issued to be registered by a specified date. If this did not occur, the Company would be liable
to the Monroe Estate for $1,350,000 in order to pay them back for the shares issued. The balance sheet reflects the redemption
value that the Company may be required to pay should the Monroe Estate choose to exercise its redemption rights.
Since
these shares are redeemable at the option of the holder, they have been classified outside of permanent equity.
NOTE
5. ACCRUED LIABILITIES
Accrued
liabilities as of June 30, 2015 and June 30, 2014 consist of the following:
|
|
|
June
30, 2015
|
|
|
June
30, 2014
|
|
|
Payroll and payroll related
liabilities
|
|
$
|
678,791
|
|
|
$
|
132,732
|
|
|
Due to advisor
|
|
|
75,000
|
|
|
|
456,653
|
|
|
Shares to be issued for services
|
|
|
456,101
|
|
|
|
-
|
|
|
Legal settlement accrual
|
|
|
450,000
|
|
|
|
-
|
|
|
Other accrued expenses
|
|
|
3,218
|
|
|
|
87,135
|
|
|
Total accrued
expenses
|
|
$
|
1,663,110
|
|
|
$
|
676,520
|
|
NOTE
6. NON-CONTROLLING INTERESTS
Changes
in the non-controlling interest amounts of our subsidiaries for the year ended June 30, 2015 were as follows:
|
Balance at June 30, 2014
|
|
$
|
141,654
|
|
|
Adjust for Share Exchange
|
|
|
640,392
|
|
|
Net loss attributable to non-controlling
interests
|
|
|
(795,762
|
)
|
|
Balance at
June 30, 2015
|
|
$
|
(13,716
|
)
|
During
the year ended June 30, 2015, the Company’s subsidiary Pulse Entertainment realized a net loss of $8,957,976. Pursuant to
the requirements under FASB ASC Topic 810, Consolidation, the Company allocates Pulse Entertainment’s earnings to non-controlling
interests based on the percentage of common stock of Pulse Entertainment not owned by the Company. Intercompany transactions are
eliminated in consolidation but impact the net earnings of each of the respective entities and as such affect amounts allocated
to non-controlling interests. During the year ended June 30, 2015, the Company completed additional closings under the Share Exchange
Agreement pursuant to which it agreed to issue 58,163,322 shares of its unregistered Common Stock, net of cancellations, to the
shareholders of Pulse Entertainment in exchange for 21,499,252 shares of its common stock. The Pulse Entertainment’s net
loss allocated to non- controlling interests were $795,762 for the year ended June 30, 2015. Subsequent to June 30, 2015, the
remaining non-controlling shares in Pulse Entertainment were exchanged for Pulse Evolution shares and Pulse Entertainment became
a wholly owned subsidiary of Pulse Evolution.
NOTE
7. COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company leases office space in Florida under a non-cancellable operating lease with an expiration date of March 31, 2015. The
Company negotiated a month to month lease commencing on March 1, 2015. The monthly lease expense through March 1, 2015 was approximately
$12,000. Beginning on March 1, 2015, the negotiated rate is $6,000 each month.
The
Company also leases office space on a month to month basis for its production operations. Monthly lease expense is approximately
$7,300. On January 1, 2015, the Company signed an operating sub-lease with an expiration date of December 31, 2015. The monthly
lease expense beginning on January 1, 2015 is approximately $14,000 and increased to $15,252 on January 1, 2016.
Total
rent expense for the year ended June 30, 2015 was approximately $208,254 and was $76,802 for the period ending June 30, 2014.
Advisory
Agreements
The
Company’s majority owned subsidiary, Pulse Entertainment Corporation, entered into an Investor Introduction Agreement (“the
Agreement”) with an international advisory services group (“the Advisor”) in March 2014. The Advisor is to support
the Company in its fund raising process through introductions of potential investors and to assist the Company in developing its
investor relations strategy. The Agreement calls for the Advisor to be paid a success fee in cash equal to six percent of all
investments introduced by the Advisor. In addition the Advisor shall be entitled to shares equal to three percent of the underlying
shares issued in any such transactions.
Pulse
Entertainment entered into a business development advisory agreement (the “Business Development Agreement”) with a
consulting firm (the “Consultant”) in May 2014, wherein the Consultant agreed to provide certain production and promotion
services to Pulse Entertainment in exchange for consideration including cash, equity, an operating budget and production credits
as specified in the Business Development Agreement. The Business Development Agreement provides for certain performance milestones
and for termination by either party with 30 days’ notice. The maximum potential equity consideration is comprised of up
to 200,000 stock options with an exercise price of $1.73 per share as follows:
|
|
●
|
100,000
options immediately upon execution of the Agreement
|
|
|
|
|
|
|
●
|
Up
to 50,000 options each quarter for the following two quarters, beginning three months from the date of the Agreement, if certain
performance targets are achieved.
|
The
Business Development Agreement was terminated in September 2014. As of June 2015, 125,000 stock options to the Consultant in Pulse
Entertainment were vested but not yet issued.
In
October 2014, the Company entered into a consulting agreement with a third party to provide executive leadership in the formation
of a new division of the Company. Under the terms of the agreement, the consultant will provide services in the development of
a business plan, technology planning, and fundraising. Under the term of the agreement, the consultant is to provide services
for six months and is to be paid a monthly base payment of $10,000, with additional amounts to be paid under certain performance
conditions. If certain performance targets, as defined in the agreement, are met, the Company would create a newly formed subsidiary
and the consultant would become the Chief Executive Officer of the newly developed subsidiary. Additionally, beginning upon the
execution of this agreement, the consultant became a member of the Company’s advisory board and was granted 1,152,000 shares
of the Company’s restricted common stock which vest quarterly in equal installments over a two year period. As of June 30,
2015 there were 144,000 shares issued related to this contract. There was $89,245 expensed during the year ended June 30, 2015.
Contractual
Commitments
The
Company has entered into a production related contract with ABG. Under the terms of the contract, the Company is required to make
an initial payment to the third party as well as commitments to profit sharing requiring minimum future payments to the third
party ratably over the next five years beginning at the end of calendar 2015. At June 30, 2015, the future minimum payments due
for future profit sharing under the contract are $4,000,000.
The
Company has entered into a production related contract with the Estate of Marilyn Monroe. Under the terms of the contract, the
Company is required to make an initial payment to the third party as well as commitments to profit sharing requiring minimum future
payments to the third party ratably over the next five years beginning at the end of calendar 2015. At June 30, 2015, the future
minimum payments due for future profit sharing under the contract are $2,100,000.
The
Company had entered into a one year contract with the former Chief Financial Officer through April 30, 2015. His employment was
terminated on January 30, 2015. Although the Company believes that no amounts are owed in connection with this contract, the Company
accrued approximately $87,500 at the time of his termination, representing its estimate of the Company’s maximum total cash
exposure, should the former employee elect to exercise his contractual right to dispute such amount through arbitration. As of
the date of this filing, the Company has received no notice of a filing for arbitration.
In
March 2015, the Company entered into a three month contract with an advisor to support the Company with strategic relationships,
business development, revenue opportunities, and sponsorship and investor introduction with a strong initial focus on the Elvis
show. During the term, the Company shall pay to the advisor a retainer in the amount of $10,000 per month, payable monthly in
advance. In addition, the advisor shall be entitled to receive a share grant equal to $50,000 per month at a valuation equal to
$0.62/share (241,935 shares for the term). As of June 30, 2015, there have not been shares issued to the advisor. There was $150,000
expensed during the year ended June 30, 2015 included in accrued expenses as of June 30, 2015.
Effective
April 1, 2015, the Company entered into an employment agreement with the Managing Director of the Company where the employee will
be paid $12,000 a month. The employee was previously an advisor of the Company who had a stock grant of 1,152,000 of shares, and
the Company granted another stock grant for an additional 1,152,000 shares for a total of 2,304,000 shares, both grants to vest
over a period of 24 months. Subsequent to the year end, the employee and the Company agreed to terminate the employment agreement
while retaining his vesting shares. As of June 30, 2015, 144,000 shares had been issued and his balance of unissued and unvested
shares was 2,160,000.
In
June 2015, the Company entered into an agreement with an Executive Production Company to explore the creation and financing of
a theatrical stage production for one of its celebrity estates. The agreement provides for a fee of 1.5% of amounts raised, with
a minimum advance of $150,000 payable by April 1, 2016. In addition, the Executive Production Company is entitled to a fixed share
of net profits of the production.
Litigation
On
May 29, 2014, Hologram USA, Inc., Musion Das Hologram Limited and Uwe Maass (the “Plaintiffs”) filed an amended complaint
in the U.S. District Court for the District of Nevada (Case No. 2:14cv00772GMNNJK). The complaint alleged that Plaintiffs own,
or control, certain patents related to the projection illusion technique, historically known as “Pepper’s Ghost.”
The Plaintiffs further alleged that Pulse Evolution Corporation, Pulse Entertainment Corporation, John Textor, Dick Clark Productions,
Inc., John Branca and John McClain, as executors of the Estate of Michael Jackson, MJJ Productions, Inc. Musion Events, Ltd. Musion
3D, Ltd., William James Rock and Ian Christopher O’Connell (collectively, the “Defendants”) infringed on the
Plaintiffs’ patent rights by using the Plaintiffs’ projection illusion system to project the visual imagery developed
and conceived by our company in connection with the a musical performance at the 2014 Billboard Music Awards in Las Vegas Nevada
featuring an image of the late Michael Jackson. The Plaintiffs did not allege that the Company’s core business, the production
of visual effects or human animation imagery infringes their intellectual property rights. In March 2016, the parties reached
an amicable settlement agreement of all claims and counterclaims. As part of the settlement, our Executive Chairman also agreed
to dismiss and release all claims against the principal shareholder of Hologram USA that remained pending through separate actions
brought in the state of Florida. All costs associated with the settlement and litigation have been accrued in the period to June
30, 2015.
On
May 27, 2015, William Krueger (“Mr. Krueger”) filed a petition against Pulse Evolution Corporation (“Pulse”)
in the 14th Judicial District Court of Dallas County, Texas, for violation of Texas’s Deceptive Trade Practices Act and
a temporary injunction. Mr. Krueger’s claims relate to Pulse’s failure to remove references to Mr. Krueger as Pulse’s
Chief Financial Officer on the company’s Web site, in a timely fashion, subsequent to the termination of his employment.
Mr. Krueger has stipulated that he is seeking less than $74,500 in damages. The Company believes that Mr. Krueger is inappropriately
pursuing this lawsuit as an alternative to filing claims for severance benefits, which claims, if any, would be required by his
employment contract to be made through arbitration in Florida. The Company believes Mr. Krueger’s claims relate to an unintentional
act, that the damages potentially caused by such act are negligible, and that the lawsuit represents no material risk to the Company.
The
Company is involved from time to time in routine litigation arising in the ordinary course of conducting its business. In the
opinion of the Company’s management, no pending routine litigation will have a material adverse effect on the Company’s
financial condition, results of operations or cash flows.
NOTE
8. CAPITALIZATION
Convertible
Securities
On
December 9, 2013, the Company entered into a Convertible Securities Purchase Agreement (the “Convertible Securities Agreement”)
with a single investor wherein the Company sold 1,734,104 shares of the convertible securities at a price of $1.73 per share for
total net proceeds of approximately $2.8 million (the “Investment Amount”). If a Qualified Equity Financing as defined
in the Convertible Securities Agreement occurred prior to February 15, 2014, then the Investment Amount shall have automatically
converted into fully paid and nonassessable shares of the Company’s Preferred Stock issued in such Qualified Equity Financing
at a price per share equal to sixty percent (60%) of the price per share paid by the other purchasers of Preferred Stock. The
Company did not complete a Qualified Equity Financing before February 15, 2014 and in May 2014, the holders of the Convertible
Securities agreed to convert all outstanding convertible securities outstanding into 1,734,104 shares of common stock at a price
per share of $1.73.
Common
Stock Issued in Private Placements
For
the year ended June 30, 2015, the Company sold 9,691,185 shares of its common stock at an average price of $0.53 per share for
proceeds of $5,059,308 which are net of fees of $116,060. For the period ended June 30, 2014, the Company sold 4,127,696
shares of its common stock at an average price of $1.19 per share for proceeds of $4,916,590.
The
Company entered into a stock purchase agreement with Mr. Taku Toguichi, Chairman and CEO of SpaceBoy, a Japan-based artificial
intelligence company with which the Company intends to be engaged in the development of digital humans for artificial intelligence.
Pursuant to the terms of this agreement, Mr. Toguichi funded $806,000 in exchange for 1,300,000 shares of unregistered common
stock. These shares are included in the total 9,691,185 shares of common stock issued in private placements during the year ended
June 30, 2015.
Common
Stock Issued in Share Exchange
On
September 30, 2014, the Company completed the initial closing under the Share Exchange Agreement pursuant to which it agreed to
issue 35,827,309 shares of its unregistered Common Stock, net of cancellations, to the shareholders of Pulse Entertainment in
exchange for 17,466,383 shares of its common stock. As part of the Share Exchange, certain of the Company’s shareholders
who are also shareholders of Pulse Entertainment agreed to cancel 60,910,113 shares of the Company’s common stock issuable
to them in connection with the Share Exchange. Upon completion of the initial closing, Pulse Entertainment became a subsidiary
of the Company in which the Company owned a 93.8% interest at June 30, 2015. The remaining 1,366,000 shares of Pulse Entertainment
common stock was exchanged by the Pulse Entertainment shareholders pursuant to the Share Exchange Agreement for 7,399,426 shares
of the Company’s unregistered common stock. As of June 30, 2015, the Company owns 99.8% of Pulse Entertainment.
In
July 2015, under the terms of the Share Exchange Agreement as more fully disclosed in Note 6 – Non-controlling Interests,
the Company issued 199,386 shares of its unregistered common stock to shareholders of Pulse Entertainment in exchange for 36,000
shares of its common stock raising its ownership percentage in Pulse Entertainment to 100%, or wholly owned.
Common
Stock Issued in Payment of Subsidiary Payable
Pulse
Entertainment entered into an Investor Introduction Agreement (the “Introduction Agreement”) with an international
advisory services group (the “Advisor”) in March 2014. Pursuant to the terms of the Introduction Agreement, the Advisor
agreed to support the Company in its fund raising process through introductions of potential investors and to assist the Company
in developing its investor relations strategy. Pulse Entertainment agreed to pay the Advisor a success fee in cash equal to 6%
of all investments resulting from introductions by the Advisor. In addition, the Advisor is entitled to Pulse Entertainment shares
equal to 3% of the underlying shares issued in any such transactions.
As
of June 30, 2014, the Advisor had earned 488,830 shares of Pulse Entertainment common stock, of which 224,869 shares of common
stock were issued. A liability had been recognized by Pulse Entertainment for the portion of shares not issued as of June 30,
2014 totaling $456,653. In September 2014, the Company issued 1,461,946 shares of its common stock in payment of the liability
as if Pulse Entertainment had paid the Advisor in its shares, and the Advisor immediately exchanged the shares in the company’s
stock under the Share Exchange Agreement described above. As of June 30, 2015, the Company recorded the par value of the stock
at $1,492 and additional paid in capital of $455,191.
Common
Stock Issued to Service Providers
In
determining the fair value of the services rendered by third parties, the Company uses the value of the services or the fair value
of the common stock at the time the common stock was issued whichever is more readily determinable at the time the services are
rendered.
In
September 2014, the Company entered into an exclusive financial services and advisory agreement with a consultant to assist the
Company in its capital market strategies. The fee is payable equally in cash and stock. The Company recorded stock compensation
expense of $368,305 upon issuance of 594,039 shares of its common stock. This agreement has been terminated as of December 31,
2014.
During
the year ended June 30, 2015, the Company issued 1,598,906 shares of its common stock to the Advisor in payment of the services
provided under the Agreement, which includes 1,461,946 shares in payment of the liability of Pulse Entertainment as described
above. As of June 30, 2015, the Company recorded the par value of the stock at $1,599 and additional paid in capital of $521,369.
In
November 2014, the Company issued 124,268 shares of its common stock to a consultant in payment of the services to the Company’s
fundraising efforts. As of June 30, 2015, the Company recorded the par value of the stock at $124 and additional paid in capital
of $76,922.
On
June 30, 2015, the Company issued warrants to a shareholder for their services provided during the capital raise of the preferred
stock purchased during the period of January through June 2015. The shareholder was issued a warrant to purchase 324,000 shares
of common stock at a price per share equal to $0.01. The warrants have a term of 5 years.
During
the year ended June 30, 2015, the Company issued 635,107 shares of its common stock to various other vendors in payment of the
services provided under their individual agreements, where the Company recorded the par value of the stock at $635 and additional
paid in capital of $393,324.
Preferred
Stock Issued
In
February, 2015 the Company authorized 18,848,184 shares of the preferred stock, par value $0.001 per share, of the Corporation
as Series A Preferred Stock, The Series A Preferred Stock shall be subdivided into two classes: (i) class “A-1” of
Series A Preferred Stock and (ii) class “A-2” of Series A Preferred Stock. The Series A-1 Preferred Stock and the
Series A-2 Preferred Stock shall be treated identically for all intents and purposes hereof, but for the different original issuance
price of each class. The Series A-1 Preferred Stock and Series A-2 have issuance prices of $0.31 and $0.62 per share, respectively.
Each holder of outstanding shares of Series A Preferred Stock shall be entitled to cast the number of votes equal to the number
of whole shares of Common Stock into which the shares of Series A Preferred Stock held by such holder are convertible as of the
record date for determining stockholders entitled to vote on such matter. The holders of record of the shares of Series A Preferred
Stock, exclusively and as a separate class, shall be entitled to elect one (1) director of the Corporation. Upon any liquidation
(voluntary or otherwise), dissolution, or winding up of the Corporation or a Deemed Liquidation Event, no distribution shall be
made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up)
to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received per
share, an amount equal to one (1) times the original stated value, plus an amount equal to accrued and unpaid dividends and distributions
thereon, whether or not declared, to the date of such payment. Each share of Series A Preferred Stock shall be convertible, at
the option of the holder, at any time and from time to time, and without the payment of additional consideration by the holder.
Holders of preferred shares, who are also entitled to convert the preferred shares into an equal amount of common shares, are
entitled to vote with the common class of shareholders, on any company matters requiring a vote of the shareholders, on an “as
if converted” basis. The conversion rights shall terminate at the close of business on the last full day preceding the date
fixed for the payment of any such amounts distributable on such event to the holders of Series A Preferred Stock.
All
outstanding shares of Series A Preferred Stock are subject to a mandatory conversion requirement and shall automatically be converted
into shares of Common Stock, upon either (a) the closing of the sale of shares of Common Stock to the public at a price of at
least $5.00 per share (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other
similar recapitalization with respect to the Common Stock), or (b) the completion of an underwritten public offering pursuant
to an effective registration statement under the Securities Act, resulting in at least $25,000,000 of proceeds, net of the underwriting
discount and commissions, to the Company or (c) the vote or written consent of the preferred. Regardless of the manner of conversion,
any conversion of the preferred shares shall occur on a one-to-one basis into an equal amount of common shares.
In
March 2015, the Company entered into a revenue participation rights and stock purchase agreement with a third party, Holotrack
AG of Switzerland, a special purpose company organized principally by a film and entertainment distribution company in Europe.
Among the principal terms of the agreement is the right of Holotrack AG to participate in the revenue generated from the Company’s
planned live theatrical show featuring the digital likeness of Elvis Presley, effectively as a distributor, in an amount equal
to 10% of the Company’s participation as a producer of the Elvis show. The agreement also required Holotrack AG to fund
development and operating expenses of the Company of $3,720,000, in six equal monthly installments of $620,000, from January to
June of 2015, in exchange for 6,000,000 newly issued preferred shares and the right to exchange 12,848,184 of its affiliates’
common shares for preferred shares. As of June 2015, all such installments have been received and Holotrack and its affiliates
now hold a total of 18,848,184 preferred shares, the principal rights and benefits of which include a priority return of capital
in the event of a liquidation or sale event, weighted average anti-dilution rights and the right to appoint one individual to
the Company’s board of directors.
During
the year ended June 30, 2015, five holders of Common Stock exercised their conversion rights to exchange their Common Shares in
the Company for Preferred Shares in the Company. The total Preferred Shares issued were 12,848,184 in exchange for 12,848,184
of Common Shares.
NOTE
9. STOCK BASED COMPENSATION
During
the year ended June 30, 2015, the Company awarded options to purchase 1,152,006 of the Company’s common stock, of which
would vest over two years beginning three months after the effective date. The fair value of the grant was estimated on the date
of grant using the following assumptions:
|
Risk-free interest rate
|
|
|
1.42
|
%
|
|
Dividend yield
|
|
|
0
|
%
|
|
Expected stock price volatility
|
|
|
53.25
|
%
|
|
Expected term (in years)
|
|
|
5
|
|
|
Expected forfeiture rate
|
|
|
0
|
%
|
The
risk-free interest rate is based on the zero coupon U.S. Treasury rates at the date of grant with maturity dates approximately
equal to the expected term at the grant date. The dividend yield is based on the Company’s historical and expected dividend
yield. The expected term is based on the expected time to exercise. The Company uses historical volatility of similar public companies
to estimate expected volatility.
The
weighted average exercise price is $0.25 per share and 144,001 shares have vested as of June 30, 2015. The grant date fair value
of the stock options was $0.43. The Company recognized stock-based compensation expense of $62,522 for the year ended June 30,
2015. Unrecognized stock compensation expense was $437,651 at June 30, 2015, which the Company expects to recognize over a period
of 1.75 years.
Warrants
|
|
|
Number
of warrants
|
|
|
Weighted
average exercise price
|
|
|
Outstanding warrants as of June 30,
2014
|
|
|
-
|
|
|
|
-
|
|
|
Warrants granted
|
|
|
3,124,000
|
|
|
$
|
0.31
|
|
|
Warrants terminated
|
|
|
-
|
|
|
|
-
|
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding
warrants as of June 30, 2015
|
|
|
3,124,000
|
|
|
$
|
0.31
|
|
In
August 2014, the Company entered into a multiyear agreement with ABG to develop for ABG, entertainment projects to utilize a realistic
computer generated image of Elvis Presley. There was a cash fee and 2,800,000 warrants issued with an exercise price of $0.35
per share. The warrants will expire 10 days after the delivery of an audited financial statement of activities by the Company
for the period ended December 31, 2015.
On
June 30, 2015, the Company issued warrants to a shareholder for their services provided during the capital raise of the preferred
stock purchased during the period of January through June 2015. The shareholder was issued a warrant to purchase 324,000 shares
of common stock at a price per share equal to $0.01. The warrants have a term of 5 years.
NOTE
10. INCOME TAXES
The
Company utilizes the liability method of accounting for deferred income taxes. Under this method, deferred tax liabilities and
assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax
basis of assets and liabilities. A valuation allowance is established against deferred tax assets because, based on the weight
of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company’s
policy is to record interest and penalties on uncertain tax positions as income tax expense. As of June 30, 2015, the Company
does not believe any material uncertain tax positions are present. Accordingly, interest and penalties have not been accrued due
to an uncertain tax position and the fact the Company has reported tax losses since inception.
Deferred
income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
A
reconciliation of the statutory U.S. federal rate to the Company’s effective tax rate is as follows:
|
|
|
|
|
|
Period from
October 10, 2013
|
|
|
|
|
Year Ended
|
|
|
(inception) through
|
|
|
|
|
June
30, 2015
|
|
|
June
30, 2014
|
|
|
U.S. federal statutory
income tax rate
|
|
|
34.0
|
%
|
|
|
34.0
|
|
|
State taxes, net of federal benefit
|
|
|
3.0
|
|
|
|
3.6
|
|
|
Permanent items
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
Change in
valuation allowance
|
|
|
(36.9
|
)
|
|
|
(37.5
|
)
|
|
Effective
tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
|
The
components of the net deferred tax asset/ (liability) as of June 30, 2015 and June 30, 2014 is as follows:
|
|
|
June
30, 2015
|
|
|
June
30, 2014
|
|
|
Net federal operating
loss carry forward
|
|
$
|
6,945,606
|
|
|
$
|
2,825,765
|
|
|
Net state operating loss carry forward
|
|
|
660,004
|
|
|
|
301,692
|
|
|
Accrued Expenses
|
|
|
169,335
|
|
|
|
|
|
|
Stock Options
|
|
|
23,527
|
|
|
|
-
|
|
|
Depreciation
& Intangibles
|
|
|
127,672
|
|
|
|
(392
|
)
|
|
Net deferred tax assets before valuation
allowance
|
|
|
7,926,143
|
|
|
|
3,127,065
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(7,926,143
|
)
|
|
|
(3,127,065
|
)
|
|
Net deferred
tax assets after valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company has determined, based upon the weight of available evidence, that it is more likely than not that the net deferred tax
asset will not be realized and, accordingly, has provided a full valuation allowance against it.
As
of June 30, 2015 and 2014, the Company has federal net operating loss carry forward of approximately $20,428,253 and $8,311,072,
respectively, and has state net operating loss carry forward of $19,262,096 and $8,311,072, respectively. The federal and state
net operating loss carry forwards will expire, if not utilized, by 2034. Utilization of the net operating loss carry forward may
be subject to an annual limitation due to the ownership change limitations provided by Section 382 of the Internal Revenue Code
of 1986, as amended, and similar state provisions.
The
Company is not currently under examination at the Federal and state levels. Currently the period from October 10, 2013 (inception)
to June 30, 2014 and year ended June 30, 2015 are subject to examination. At the date of the financial statements there were no
known assessments.
NOTE
11. EARNINGS (LOSS) PER SHARE
Basic
earnings per share are computed based upon the weighted average number of shares outstanding, including nominal issuances of common
share equivalents, for each period presented. Fully diluted, earnings per share is computed based upon the weighted average number
of shares and dilutive share equivalents outstanding for each period presented. Due to the Company’s net losses for the
year ended June 30, 2015 and for the period from October 10, 2013 (inception) through June 30, 2014 the inclusion of dilutive
common share equivalents in the calculation of diluted earnings per share would be antidilutive. Thus, the common share equivalents
have been excluded from the computation of diluted earnings per share for the year ended June 30, 2015 and for the period from
October 10, 2013 (inception) through June 30, 2014. These common stock equivalents include warrants for shares of the Company’s
common stock and rights to exchange shares of Pulse Entertainment Corporation common stock for shares of the Company’s common
stock.
The
potential dilutive securities outstanding that were excluded from the computation of diluted net loss per share for the year ended
June 30, 2015 and for the period from October 10, 2013 (inception) through June 30, 2014, because their inclusion would have had
an antidilutive effect, are summarized as follows:
|
|
|
As
of June 30, 2015
|
|
|
As
of June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
Share exchange right
of subsidiary shareholders
|
|
|
199,380
|
|
|
|
22,535,399
|
|
|
Unvested restricted stock
|
|
|
2,160,000
|
|
|
|
-
|
|
|
Unvested stock options
|
|
|
1,152,006
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
18,848,184
|
|
|
|
|
|
|
Warrants
|
|
|
3,124,000
|
|
|
|
-
|
|
|
Total
|
|
|
25,483,570
|
|
|
|
22,535,399
|
|
The
net loss and weighted average common stock outstanding for purposes of calculating net loss per common share were computed as
follows for the years ended:
|
|
|
As
of June 30, 2015
|
|
|
As
of June 30, 2014
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable
to common shareholders
|
|
$
|
(12,231,498
|
)
|
|
$
|
(8,323,412
|
)
|
|
Weighted average
number of common shares outstanding in computing basic and diluted earnings per share
|
|
|
127,879,760
|
|
|
|
100,135,655
|
|
|
Total
|
|
$
|
(0.10
|
)
|
|
$
|
(0.08
|
)
|
NOTE
12. RELATED PARTY TRANSACTIONS
Pulse
Entertainment Corporation entered into an Asset Transfer and Assignment Agreement (the “Transfer Agreement”) with
Tradition Studios I.P. Acquisition Inc., (“Tradition”) in April 2014. The agreement is effective as of the inception
date of Pulse Entertainment and included the transfer of property and equipment with a historical cost of approximately $14,000
and general liabilities with a historical cost of approximately $81,100, resulting in a transfer of net liabilities of approximately
$67,000. As of the effective date of the Transfer Agreement, the Executive Chairman of Pulse Entertainment had a majority control
of Pulse Entertainment and also had majority control of Tradition. The transfer of assets and liabilities was considered a common
control transaction in accordance with the accounting guidance in ASC Topic 60535,
Business Combinations
. As such, Pulse
Entertainment recorded the assets and liabilities at historical cost at the time of the transfer with a charge against equity
in additional paid in capital for the net liabilities at the time of transfer. The liability of $81,100 was paid in July 2014
to another entity controlled by the Executive Chairman.
Pulse
Entertainment Corporation, entered into an Investor Introduction Agreement (“the Agreement”) with an international
advisory services group (“the Advisor”) in March 2014. The Advisor is to support the Company in its fund raising process
through introductions of potential investors and to assist the Company in developing its investor relations strategy. The Agreement
calls for the Advisor to be paid a success fee in cash equal to six percent of all investments introduced by the Advisor. In addition
the Advisor shall be entitled to shares equal to three percent of the underlying shares issued in any such transaction.
In
August 2014, the Company’s board of directors approved payments of director fees for fiscal year 2015. All director fees
for the fiscal year 2015 totaling $100,000 were paid as of June 30, 2015.
On
December 10, 2014, the Company entered into a secured promissory note with a related party. The Company received cash of $250,000
which bears interest at a rate of 8% a year. The note is collateralized by certain property owned by the Company. As of June 30,
2015, the Company had unpaid principal and interest of $230,000 and $3,218. The note was fully repaid subsequent to the year end.
All remaining unpaid principal and accrued interest is due on January 31, 2015. The Company must also pay an additional $25,000
if paid before December 31, 2014 or an additional $50,000 if paid after December 31, 2014. The Company did not pay the note at
December 31, 2014 and therefore an additional $50,000 was payable at that time.
NOTE
13. SUBSEQUENT EVENTS
Subsequent
to June 30, 2015 through July 31, 2015, the Company has issued 199,386 shares issued from the Share Exchange.
In
July 2015, the Company granted 200,000 vesting stock options to a 3
rd
party services provider for consulting services
relating to one of our celebrity estates. The stock options have an exercise price of $0.62 per share and vesting over a two year
term.
In
July 2015, the Company entered into an agreement with a service provider to assist the Company and provide expertise as it relates
to producing a live stage musical featuring digital performances. The service provider shall receive 3% of all money received
by the Company for producing and presenting the performances. Additionally, the service provider shall receive 3,000,000 shares
of the Company’s common stock on a pro-rata basis as funds are received by the Company for the performances.
In
August 2015, one holder of Common Stock cancelled their Common Shares in the Company and instead was issued Preferred Shares in
the Company. The total of 280,726 of Common Shares were cancelled and 280,726 of Preferred Shares were issued.
In
August 2015, the Company entered into an agreement for a $620,000 bridge loan which bears interest at 7% each year. Interest will
be payable at the end of each calendar year and calculated on a pro rata basis. All unpaid principal plus accrued interest is
due at the earliest of the Company’s receipt of a certain type of proceeds or on the first anniversary of the note.
In
September 2015, the Company entered into an agreement for a $620,000 bridge loan with a party which bears interest at 15% each
year along with equity coverage of 248,000 shares of Common Stock. Subsequent to signing, only $356,000 of the note was financed.
In January 2016, due to non-completion of the loan, the agreement was terminated and the loan plus interest was returned to the
lender. Because the loan was not completely funded and subsequently terminated, no equity was issued.
In
October 2015, the Company entered into an agreement for a $1,000,000 bridge loan with Holotrack AG, which bears interest at 7%
each year. Interest will be payable at the end of each calendar year and calculated on a pro rata basis. All unpaid principal
plus accrued interest is due at the earliest of the Company’s receipt of a certain type of proceeds or on the first anniversary
of the note.
In
November 2015, the Company entered into an Associate Producer agreement with Holotrack AG to provide financing and production
support for “The King”. In conjunction with this agreement, the company will issue 12,000,000 shares of Series A Preferred
Stock. The Board has approved a change to the Company’s charter to accordingly increase the authorized capital Series A
Preferred Stock.
As
of August 13, 2015, the Company had 100,000,000 shares of capital stock authorized, of which 18,848,184 were designated as Series
A convertible preferred stock. As of August 13, 2015, 18,848,184 shares of Series A convertible preferred stock issued and outstanding,
representing 100% of the authorized Series A convertible preferred stock. On August 13, 2015 and November 1, 2015, the Company
agreed to issue 280,726 and 12,000,000, respectively, shares of Series A convertible preferred stock. Such amounts represented
an over issue of an aggregate of 12,280,726 shares of Series A convertible preferred stock. In order to correct the error, the Company is in the process of filing an amended certificate of designation with the Nevada
Secretary of State, which will have the effect of increasing the number of authorized Series A preferred shares from 18,848,184
shares to 31,128,910 shares. Following the effectiveness of the amendment, we will cancel the previously over issued shares
and issue new shares in the same number to the same share recipients.
In
December 2015, the Company entered into an agreement for a $1,000,000 bridge loan with Mr Bernhard Burgener which bears interest
at 7% each year. Interest will be payable at the end of each calendar year and calculated on a pro rata basis. All unpaid principal
plus accrued interest is due at the earliest of the completion of the Elvis Presley theatrical concert production (“The
King”) or 18 months.
In
December 2015, the Company entered into an agreement for a $500,000 bridge loan with a Third Party which bears interest at 10%
each year along with equity coverage of 1,000,000 shares of the Company’s Common Stock. The loan plus accrued interest was
repaid in February 2016.
In
December 2015, the Company entered into an Executive Producer agreement with Mr Bernhard Burgener for “The King” and
committed to issue Mr Burgener 12,000,000 common shares.
In
November 2015, the Board of Directors approved a limited share repurchase program for the Company to repurchase up to $5,000,000
of Common Stock of the Company from the public float. During the second and third fiscal quarter of 2016, the Company has purchased
257,072 of it shares at a total cost of $309,622, which the company will return to treasury stock.
In
January 2016, the Company entered into amendments with Authentic Brands Group to extend the rights of exclusivity for Marilyn
Monroe and Elvis Presley through the end of the agreements (December 2021).
In
January 2016, the Company entered into a Stock Purchase Agreement with Original Force and U9. The parties purchased a total of
14,760,000 Common Shares for $10,000,000 and received an initial 50% share in the production vehicle for Elvis Presley theatrical
concert. In addition, the parties entered into a 3 year technology license agreement for certain rights to use the Company’s
Digital Human Animation technology.
On
January 28, 2016, the Company entered into an agreement with XIX Entertainment and Simon Fuller to be the Executive Producer of
The King. The agreement includes a cash payment over the course of the production and a share of the “off the top”
profits of the show. In addition, XIX Entertainment was issued a warrant to purchase approximately 36,678,000 shares of Common
Stock in the Company at $1 a share, with cashless exercise rights and certain anti-dilution protections.
On
February 26, 2016, the Company entered into an agreement to purchase 100% of the share capital of Float Hybrid Entertainment,
Inc. (“Float”), a developer of interactive experiences for brands such as Pepsi, Microsoft, GE, AKQA, Ericsson, XBOX
and Anheuser-Busch. Float was also a founding developer of the Kinect depth sensor platform and has deep experience of development
for a number of yet-to-be-released Virtual and Augmented Reality Platforms. The Company will issue to the shareholders of Float,
7,250,000 common shares and will pay up to $1,000,000 in a cash-based earn out over a period of 36 months. The Company anticipates
the closing to occur in the fourth quarter of the year ended June 30, 2016.
On
February 27, 2016, the Company entered into merger agreement with After August, Inc., a California based animation technology
company, primarily to acquire ownership of certain technologies and software tools that we believe will support the Company’s
continuing strategy to be the world’s leading developer of hyper-realistic digital humans. As consideration, the Company
paid $300,000 in cash at closing, issued a 3-year, $2,700,000 promissory note, secured specifically by the acquired technology
assets, and is committed to issue 4.8 million shares of the Company’s common stock. The transaction was closed on April
20, 2016.
In
March 2016, the Company entered into an amicable settlement agreement with Hologram USA, Inc., MDH Hologram Ltd., and Pulse Evolution
Corporation reached an amicable resolution of the litigation related to the 2014 Billboard Music Awards. Costs associated with
the litigation have been accrued during the period ended June 30, 2015. The Company also committed to issue 1,000,000 shares of
Common Stock to a professional services firm in connection with this settlement.