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Pulse Evolution Corp – ‘10-Q/A’ for 9/30/18

On:  Wednesday, 8/14/19, at 4:39pm ET   ·   As of:  8/13/19   ·   For:  9/30/18   ·   Accession #:  1493152-19-12232   ·   File #:  333-190431   ·   Deletion:  This Filing was Deleted by the SEC on 9/11/19.

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 8/13/19  Pulse Evolution Corp              10-Q/A      9/30/18    3:942K                                   M2 Compliance/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q/A      Amendment to Quarterly Report                       HTML    484K 
 2: EX-31.1     Certification -- §302 - SOA'02                      HTML     13K 
 3: EX-32.1     Certification -- §906 - SOA'02                      HTML      8K 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q/A

(Amendment No. 1)

(Mark One)

For the quarterly period ended September 30, 2018

For the transition period from _____________ to _____________

Commission File Number: 000-55353

Pulse Evolution Group, Inc.

(Exact Name of Registrant as Specified in Its Charter)

(212) 537-5775

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X] 

As of August 12, 2019, there were 23,444,318 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.

Pulse Evolution Group, Inc. (formerly known as Recall Studios, Inc.)

INDEX

EXPLANATORY NOTE

This Amendment No. 1 (this “Amendment”) to Form 10-Q for the fiscal quarter ended September 30, 2018, amends Pulse Evolution Group, Inc.’s (formerly Recall Studios, Inc.) (the “Company”) Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2018, which was originally filed with the Securities and Exchange Commission on November 10, 2018 (the “Original Filing”).

In connection with the preparation of the Company’s condensed consolidated financial statements as of and for the year ended December 31, 2018, the Company identified inadvertent errors in the accounting for deferred tax liabilities relating to the Company’s acquisition of Evolution AI Corporation (“Evolution AI”) in August 2018.

This Amendment is being filed solely to restate the financial statements (i) for the accounting error described above and as further described in Notes 1 and 3 to the financial statements and (ii) for measurement period adjustments also related to the Company’s acquisition of Evolution AI and as further described in Notes 1, 3 and 5. These adjustments had no effect on earnings or cash flows for any of the periods presented. No changes were made to Item 4. Controls and Procedures as our disclosure controls and procedures were already not considered effective.

Generally, no changes have been made to the Original Filing other than (i) to add the information as described above, (ii) to update the cover page to this Amendment, and (iii) to provide updated certifications. This Amendment should be read in conjunction with the Original Filing. This Amendment speaks as of the date of the Original Filing and does not modify or update in any way the disclosures made in the Original Filing, except as required to reflect the revisions discussed above.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates” and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this quarterly report on Form 10-Q. Additionally, statements concerning future matters are forward-looking statements.

Although forward-looking statements in this quarterly report on Form 10-Q reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K, for the fiscal year ended December 31, 2017, in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this quarterly report on Form 10-Q and in other reports that we file with the Securities and Exchange Commission (the “SEC”). You are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this quarterly report on Form 10-Q.

We file reports with the SEC. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. You can also read and copy any materials we file with, or furnish to, the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this quarterly report on Form 10-Q, except as required by law. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which are designed to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Recall Studios, Inc.

Condensed Consolidated Balance Sheets

(unaudited, in $ for 2018 and rounded to nearest thousand for 2017, except per share information)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Recall Studios, Inc.

Condensed Consolidated Statements of Operations

(unaudited, in $ for 2018 and rounded to nearest thousand for 2017, except per share information)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Recall Studios, Inc.

Condensed Consolidated Statements of Cash Flows

(unaudited, in $ for 2018 and rounded to nearest thousand for 2017, except per share information)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Recall Studios, Inc.

Notes to the Condensed Consolidated Financial Statements For the
Nine Months Ended September 30, 2018 and 2017

(Unaudited)

Note 1 - Organization and Basis of Operations

Nature of Business

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. The Company has a long-term agreement with Company shareholder, the Estate of Michael Jackson, to share in the revenues of any commercial use of the digital likeness of Michael Jackson. The Company is also in negotiations regarding the amendment and re-instatement of rights agreements relating to the intellectual property of two other Company shareholders, the Estate of Marilyn Monroe and Authentic Brands Group / Elvis Presley Enterprises.

We believe our specific business opportunity will be driven by the rapid evolution of the methods by which people access information and content through various forms of interactive electronic media. We believe that we are moving toward a world in which we will simply ask a computer a question and we will be given an answer, by a hyper-realistic digital human who possesses a universe of accurate and relevant information. Through our continued development of the world’s most advanced human animation technology, and our collaboration with the larger community of artificial intelligence pioneers, we expect that we will do more than just put a face on ‘AI.’ We intend to build your most knowledgeable teacher, your most trusted advisor, and in a digital world that reveals more possibilities each day, maybe even your best friend.

Company History

Recall Studios, Inc. was incorporated under the laws of the State of Florida in February 2009 under the name York Entertainment, Inc. The Company changed its name to Brick Top Productions, Inc. in October 2010, and to Carolco Pictures, Inc. in January 2015, both names relating to the Company’s then principal business of feature film entertainment. Effective November 29, 2017, the Company’s corporate name was changed to Recall Studios, Inc., and its stock symbol was changed to “BTOP.”

On August 8, 2018, the Company entered into an agreement to acquire 99.7% of Evolution AI Corporation (EAI), a private corporation incorporated in the State of Florida in November 2017. EAI owned approximately 58% of Pulse Evolution Corporation (“Pulse”) (OTC Pink: PLFX), a corporation incorporated in the State of Nevada. The Company acquired its ownership interest in EAI by issuing Preferred X stock for a total consideration valued at $211,500,000.

The financial statements as of September 30, 2018 reflect the assets and liabilities acquired from EAI and Pulse, including Goodwill and the Non-Controlling interest arising from the business combination.

Recall Studios, Inc.

Notes to the Condensed Consolidated Financial Statements For the

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

Going Concern

The Company’s condensed consolidated financial statements have been prepared assuming that it will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. As reflected in the condensed consolidated financial statements, the Company had an accumulated deficit of $18,295,687 at September 30, 2018 and incurred a net loss for the nine months ended September 30, 2018 of $7,142,257 and utilized net cash used in operating activities of $2,461,968. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued. In addition, the Company’s independent public accounting firm in its audit report to the financial statements included in the 2017 Annual Report expressed substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Management estimates that the current funds on hand and raising capital through proceeds from the sale of common stock subscriptions will be sufficient to continue operations through 2018. The ability of the Company to continue as a going concern is dependent on the Company’s ability to execute its strategy and in its ability to raise additional funds. Management is currently seeking additional funds, primarily through the issuance of equity securities for cash to operate its business. Management is also monetizing the Company’s intellectual property and seeks to increase operational revenues through its myriad applications which are available on various platforms. No assurance can be given that any future financing will be available, or operational revenues, or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing.

Restatement

In connection with the preparation of the Company’s condensed consolidated financial statements as of and for the fiscal year ended December 31, 2018, the Company identified an error whereby, the deferred tax liability on a temporary tax difference between tax and accounting basis on intangible assets had not been recognized. This error resulted in an understatement of the deferred tax liability and goodwill by $37.0 million.

This Amendment is being filed solely to restate the condensed consolidated financial statements (i) for the accounting error described above and (ii) for measurement period adjustments also related to the Company’s acquisition of Evolution AI.

A reconciliation of the previously reported condensed consolidated balance sheet as of September 30, 2018 and the restated September 30, 2018 condensed consolidated balance sheet is as follows:

Recall Studios, Inc.

Notes to the Condensed Consolidated Financial Statements For the

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

Note 2 - Summary of Significant Accounting Policies

Reclassifications

The accompanying consolidated financial statements include certain reclassifications of amounts in the December 31, 2017 financial statements in order to conform to the September 30, 2018 presentation. There were no changes to total assets, total liabilities or total stockholders’ equity.

Reverse Stock Split

In January 2017, the Company effected a 1-for-10,000 reverse stock split of the Company’s common stock. All shares and per-share amounts have been retroactively restated as of the earliest periods presented to reflect the stock split.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include depreciable lives of property and equipment, analysis of impairments of recorded goodwill, accruals for potential liabilities, assumptions made in valuing derivative liabilities and assumptions made in valuing stock instruments issued for services.

Principles of Consolidation

The Company’s consolidated subsidiaries and/or entities are as follows:

The accompanying financial statements are consolidated and include the accounts of the Company and its majority owned subsidiaries. The consolidated accounts include 100% of the assets and liabilities of our majority owned subsidiaries, and the ownership interests of minority investors are recorded as a minority interest. All inter-company balances and transactions have been eliminated. York Productions, LLC and York Productions II, LLC are currently inactive. On June 15, 2017, Recall Studios, Inc. entered into a Purchase and Sale Agreement with Metropolitan Sound + Vision LLC, a South Carolina limited liability company. Pursuant to the Agreement, the Company agreed to sell to Metro all of the shares of common stock of S&G Holdings, Inc., a Tennessee corporation doing business as High Five Entertainment owned by the Company, which constitute 75% of the issued and outstanding shares of S&G. The assets, liabilities and results of operations of S&G have been reclassified to discontinued operations for financial statement presentation in 2017.

The assets, liabilities and results of operations of Evolution AI Corporation have been consolidated from the date of acquisition and included in financial statement presentation as of September 30, 2018. The accompanying consolidated financial statements also include the accounts of Pulse Evolution Corporation (Pulse), from the date of acquisition until September 30, 2018. Pulse accounts includes its wholly owned subsidiaries including Pulse Entertainment Corporation, The Kopp Initiative, LLC, Pulse Digital Human Labs, Pulse Japan and Pulse Biologic, After-August Inc, EPLS, all of which had no activity during the period ended. All significant intercompany accounts and transactions have been eliminated in consolidation.

Fair Value of Financial Instruments

The Company follows the Financial Accounting Standards Board (FASB) Accounting Standards Codification for disclosures about fair value of its financial instruments and to measure the fair value of its financial instruments. The FASB Accounting Standards Codification establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The three levels of the fair value hierarchy are described below:

Recall Studios, Inc.

Notes to the Condensed Consolidated Financial Statements For the

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

The carrying amounts of the Company’s financial assets and liabilities, such as cash, other assets, accounts payable and accrued payroll, approximate their fair values because of the short maturity of these instruments. The carrying values of notes payable and convertible notes approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing market interest rates.

The carrying amount of the Company’s derivative liability of $2,393,891 as of September 30, 2018 and $1,867,000 as of December 31, 2017 was based on Level 3 measurements. The carrying amount of the Company’s warrant liability of $3,714,541 as of September 30, 2018 and $0 as of December 31, 2017 was also based on Level 3 measurements.

Non-Controlling Interest

Non-controlling interest represents the non-controlling interest holders’ proportionate share of the equity of the Company’s majority-owned subsidiaries. Non-controlling interest is adjusted for the non-controlling interest holders’ proportionate share of the earnings or losses and other comprehensive income (loss) and the non-controlling interest continues to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance. All Non-controlling interest was eliminated as part of the sale of S&G Holdings, Inc., a Tennessee corporation doing business as High Five Entertainment in 2017. Non-Controlling interest as of September 30, 2018 reflects 42% of the common stock of Pulse Evolution Corporation that the Company did not own. Non-Controlling of Evolution AI Corporation of 0.3% was excluded as its impact was deemed insignificant to the financial statements as a whole.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided on a straight-line basis over the estimated useful life of the related asset. Computers are depreciated over five years. Furniture and fixtures are depreciated over seven years. Impairment is reviewed on an annual basis and no impairment charge was necessary at September 30, 2018 or December 31, 2017.

Acquired & Licensed Technology

The Company acquired technology assets as a result of its acquisition of EAI and Pulse. Amortization is provided on a straight-line basis over the estimated useful life of 12 years of the related assets. Impairment is reviewed on an annual basis and no impairment charge was necessary at September 30, 2018.

Revenue Recognition

The Company’s Recall Studios subsidiary produces software applications for third-parties on a consulting basis. Effective January 1, 2018, the Company retroactively adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 606 - Revenue from Contracts with Customers, which has no material impact on revenue reported on the years presented within these financial statements. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.

The Company adopted ASC 606, Revenue from Contracts with Customers, which requires that upon revenue being generated, the Company will disaggregate revenue into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Recall Studios, Inc.

Notes to the Condensed Consolidated Financial Statements For the

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

Stock-Based Compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by FASB ASC 718 where the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB ASC 718 where the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Options and warrants granted to non-employees are revalued each reporting period to determine the amount to be recorded as an expense in the respective period. As the options and warrants vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the then current value on the date of vesting. In certain circumstances where there are no future performance requirements by the non-employee, option and warrant grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes- Merton Option Pricing model could materially affect compensation expense recorded in future periods.

Income (Loss) Per Share

Basic income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share reflects the potential dilution, using the treasury stock method that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income (loss) of the Company. In computing diluted income (loss) per share, the treasury stock method assumes that outstanding options and warrants are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options and warrants may have a dilutive effect under the treasury stock method only when the average market price of the common stock during the period exceeds the exercise price of the options and warrants.

For the nine months ended September 30, 2018, the dilutive impact of 239 warrants, Series C Preferred stock that can convert into 2,524,982 shares of common stock, Series X Preferred stock that can convert into 450,000,000 shares of common stock and notes that can convert into 5,276,810 shares of common stock have been excluded because their impact on the loss per share is anti-dilutive.

For the nine months ended September 30, 2017, the dilutive impact of a note payable that can convert into 13 shares of common stock and warrants exercisable into 239 shares of common stock have been excluded because their impact on the income per share is anti-dilutive. For the nine months ended September 30 2017, the calculation of diluted earnings per share included convertible Series B Preferred stock that can convert into 2,000,000 shares of common stock, convertible Series C Preferred stock that can convert into 2,848,982 shares of common stock, and notes that can convert into 2,541,748 shares of common stock.

The following table sets forth the computation of basic and diluted earnings per share:

Recall Studios, Inc.

Notes to the Condensed Consolidated Financial Statements For the

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

Derivative Financial Instruments

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a Black- Scholes-Merton models, when the number of shares issuable is fixed, and a Binomial Lattice model, when the number of shares issuable is variable, to value the derivative instruments at inception and on subsequent valuation dates through the September 30, 2018 reporting date.

The classification of derivative instruments, including whether such instruments should be recorded as liabilities on issuance and in subsequent periods, is evaluated at the end of each reporting period.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014- 09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company has adopted ASU 2014-09 in the first quarter of 2018. The adoption of ASU 2014-09 is not expected to have a material impact on the Company’s financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016- 02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is 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 in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

On June 20, 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for share-based payments to nonemployees (for example, service providers, external legal counsel, suppliers, etc.). Under the new standard, companies will no longer be required to value non-employee awards differently from employee awards. Meaning that companies will value all equity classified awards at their grant date under ASC 718 and forgo revaluing the award after this date. The Company has chosen to early adopt this standard.

Effective January 1, 2018, the Company retroactively adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 606 - Revenue from Contracts with Customers, which has no material impact on revenue reported on the years presented within these financial statements. Under ASC 606, the Company recognizes revenue from the commercial sales of products, licensing agreements and contracts to perform pilot studies by applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied. For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 - Revenue Recognition. Under ASC 605, revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer is fixed and determinable; and (4) the collectability of the fee is reasonably assured.

Recall Studios, Inc.

Notes to the Condensed Consolidated Financial Statements For the

Nine Months Ended September 30, 2018 and 2017

(Unaudited)

There was no impact on the Company’s financial statements as a result of adopting ASC 606 for the period ended September 30, 2018 and year ended December 2017.