PLFX Pulse Evolution Corporation (CE)

Notes to the Condensed 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

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 three months ended September 30, 2015 and 2014 and as of June 30, 2015.

Liquidity

During the quarter and subsequent to the quarter end, the Company raised significant 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 $18.0 million of core development capital from inception through September 30, 2015, consisting of $16.6m of equity and $1.4m of debt. 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 $25,000,000 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 quarter 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 $10,000,000 equity investment from Original Force and U9 and in June 2016 we signed a term sheet for an equity investment of $50,000,000, of which $2,500,000 has been received and the remainder is to be paid in two installments through December 31, 2016. The term sheet is non-binding except for certain clauses, including a restriction on our ability to raise capital from 3rd parties.

We have analyzed our liquidity requirements and have determined that we have sufficient liquidity or access to other sources of capital to support our core operations for the 12 months from the balance sheet date. Beyond that, the Company will need to close the remainder of the $50m investment or raise production funds, lines of credit or core capital to support the launch of our shows and for corporate operations.

Basis of Presentation and Consolidation

The accompanying condensed 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 quarters ended September 30, 2015 and 2014. 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 condensed consolidated financial statements, which includes Pulse Entertainment and all other subsidiaries.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The Company’s condensed 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 September 30, 2015, the Company’s cash balances held within one financial institution were within 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 September 30, 2015 and 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 September 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. For the three months ended September 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 April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount. The standard also aligns the GAAP presentation with International Financial Reporting Standards and will remedy the long-standing conflict with the guidance in FASB Concepts Statement No. 6, Elements of Financial Statements, which indicates that debt issuance costs do not meet the definition of an asset, because they provide no future economic benefit. For public entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2014, and interim periods within fiscal years beginning after December 15, 2015. Early adoption is permitted for financial statements that have not been previously issued. The Company has implemented ASU 2015-03 at September 30, 2015.

In May 2014, the FASB issued guidance that requires companies to recognize revenue to depict the transfer of goods and services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods and services. It also requires enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively, and improves guidance for multiple-element arrangements. The guidance applies to any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. In July 2015, the FASB delayed the effective date of this guidance by one year. The guidance is now effective for public companies for annual periods beginning after December 15, 2017, as well as interim periods within those annual periods using either the full retrospective approach or modified retrospective approach. The Company is currently evaluating the impacts of the new guidance on its financial statements.

In September 2015, the FASB issued ASU 2015-16 – Business Combinations , which requires adjustments to provisional amounts recorded in business combinations to be recognized in the reporting period in which they are identified, either separately on the face of the income statement or in the notes to the financial statements. ASU 2015-16 is effective for annual reporting periods beginning after December 15, 2015 and any interim periods within that period, and early adoption is permitted. We are currently evaluating ASU 2105-16 to determine if this guidance will have a material impact on our financial position, results of operations or cash flows.

There have been no developments to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company’s condensed consolidated financial statements, from those disclosed in the Company’s 2015 Annual Report on Form 10-K.

The range of estimated useful lives for property and equipment at September 30, 2015, and June 30, 2015 was five to seven years.

Depreciation expense on property and equipment totaled $2,324 and $7,160 for the three months ended September 30, 2015 and 2014, respectively.

NOTE 4. INTANGIBLE AND OTHER ASSETS

In August 2014, the Company entered into a multiyear agreement with Authentic Brands Group (“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. The initial value has been capitalized and is being amortized over the length of the agreement. At September 30, 2015, forty-six months remain unamortized on the agreement.

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. The initial value has been capitalized and is being amortized over the length of the agreement. At September 30, 2015, forty-eight months remain unamortized on the agreement.

Intangible assets as September 30, 2015 :

Intangible assets as June 30, 2015 :

As of September 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 leased 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 at the same location. 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 three months ended September 30, 2015 and September 30, 2014 was approximately $57,473 and $53,152, respectively.

Advisory Agreements

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 September 30, 2015 there were 144,000 shares issued related to this contract. There was $89,245 expensed during the three months ended September 30, 2015 included in accrued expenses as of September 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 September 30, 2015, the future minimum payments due for future profit sharing under the contract are $4,000,000. The contract was amended subsequent to the quarter end (see Note 13 – Subsequent events).

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 September 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 September 30, 2015, there have not been shares issued to the advisor. There was $150,000 expensed in a prior period and included in accrued expenses as of September 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 September 30, 2015, 864,000 shares had been vested and his balance of unvested shares was 1,440,000. As of June 30, 2015 and September 30, 2015, $268,000 and $446,000 was accrued respectively.

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.

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 from the service providers sources 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. As of September 30, 2015, these shares have not yet been earned or issued and the agreement is no longer active.

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 as of September 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. Since the quarter end, the case has been dismissed.

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

Common Stock Issued in Private Placements

For the three months ended September 30, 2015, the Company did not sell any shares of its common stock. For the three months ended September 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 $2,308,743.

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, which was in transit at June 30, 2015 and received in the quarter ended September 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. Following the initial closing, the remaining shares of Pulse Entertainment common stock were exchanged by the Pulse Entertainment shareholders for stock in the Company. The Company owned 99.8% and 100%of Pulse Entertainment at June 30, 2015 and September 30, 2015 respectively.

Preferred Stock Issued

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.

NOTE 9. STOCK BASED COMPENSATION

On March 27, 2015 (the “Effective Date”), the Company awarded an advisor directly related to ABG options to purchase 1,152,006 of the Company’s common stock, of which would vest in equal quarterly installments over two years, beginning three months after the Effective Date. On January 1, 2016, the Company consented to the entire agreement be assigned from the advisor to ABG, on whose behalf this advisor will continue to render services to the Company.

The weighted average exercise price is $0.25 per share and 288,002 shares have vested as of September 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 three months ended September 30, 2015. Unrecognized stock compensation expense was $375,129 at September 30, 2015, which the Company expects to recognize over a period of 1.5 years.

Warrants

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. Due to the fact that no revenue has been generated to date, no audited financial statements have been prepared.

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 but has been accounted for as fully exercised in the quarter ended September 30, 2015.

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 vests over a two-year term.

NOTE 10. 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 three months ended September 30, 2015 and 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 three months ended September 30, 2015 and 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 three months ended September 30, 2015 and 2014, because their inclusion would have had an antidilutive effect, are summarized as follows:

The net loss and weighted average common stock outstanding for purposes of calculating net loss per common share were computed as follows for the three months ended:

NOTE 11. RELATED PARTY TRANSACTIONS

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 non-U.S. investors under Regulation S 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.

NOTE 11. RELATED PARTY TRANSACTIONS (Continued)

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 and September 30, 2015, the Company had unpaid principal of $230,000 and $220,000. As of June 30, 2015 and September 30, 2015, the Company had unpaid interest of $6,849 and $3,218. The note was fully repaid subsequent to the quarter end.

Please refer to Note 13 – Subsequent Events for additional related party transactions that occurred after September 30, 2015.

NOTE 12. NOTES PAYABLE

In June 2015, 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. The Share Purchase Agreement, dated June 25, 2015, allowed for the right but not an obligation of the buyer to invest an additional $3.2 million by August 3, 2015 (the “Second Installment”). During the quarter ended September 30, 2015, Mr Toguichi provided further funding of $161,000 but did not complete the second installment. The Company treated the amount as an unsecured loan and repaid the loan plus interest in January 2016. As of September 30, 2015, there has been $1,008 of interest expense accrued.

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. As of September 30, 2015, there has been $4,963 of interest expense accrued. The Company incurred financing costs of 1,240,000 shares to be issued with a value of $768,800 during the three months ended September 30, 2015. Of this, $148,800 was expensed immediately to interest expense and $620,000 capitalized as deferred financing costs. At September 30, 2015, the Company had $542,500 of unamortized deferred financing costs. Future amortization of the deferred financing costs will be $155,000 each quarter through the maturity date of the loan. During the three months ended September 30, 2015, the Company amortized $77,500, which is included in interest expense in the consolidated statements of operations.

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. As of September 30, 2015, there has been $878 of interest expense accrued.