UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q10-Q/A
(Amendment No. 1)
(Mark One)
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2019March 31, 2020
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____________ to _____________
Commission File Number:000-55353
Pulse EvolutionFaceBank Group, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Florida | 26-4330545 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) | (Zip Code) |
(212) 537-5775672-0055
(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:
Title of each class | Trading Symbol(s) | Name of exchange on which registered | ||
N/A | N/A | N/A |
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.
Large accelerated filer | [ ] | Accelerated filer | [ ] |
Non-accelerated filer | [X] | Smaller reporting company | [X] |
Emerging growth company | [ ] |
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 13, 2019,7, 2020, there were 23,444,31842,064,459 shares of the registrant’s common stock, par value $0.0001 per share, outstanding.
PULSE EVOLUTION GROUP, INC.FaceBank Group, Inc.
INDEX
FaceBank Group, Inc. (the “Company” or “FaceBank”) is filing this quarterly report on Form 10-Q after the May 15, 2020 deadline (the “Original Due Date”) applicable for the filing of a Form 10-Q for the quarter ended March 31, 2020 (the “Quarterly Report”) in reliance on the 45-day extension provided by an order issued by the U.S. Securities and Exchange Commission (the “Commission” or the “SEC”) under Section 36 of the Securities Exchange Act of 1934 Granting Exemptions From Specified Provisions of the Exchange Act of 1934 and Certain Rules Thereunder dated March 4, 2020 (Release No. 34-88318), as modified and superseded by a new Commission order issued on March 25, 2020 (Release No. 34-88465) (collectively, the “Order”).
As disclosed in the Company’s Current Report on Form 8-K filed with the Commission on May 15, 2020, the Company was unable to file this Quarterly Report within the prescribed time period due to the global COVID-19 pandemic. As a result of the pandemic, management’s full efforts have been focused on operating its business and evaluating available funding. The Company has been following the recommendations of local health authorities in the U.S. and Europe, where one of its operating subsidiaries is located, to minimize exposure risk for its employees, including temporarily closing its offices and requiring its employees to work remotely to the extent possible. As a result, the Company’s books and records were not easily accessible, resulting in delays in preparation and completion of its financial statements. Further, the various governmental mandatory closures of businesses have precluded the Company’s personnel, particularly its senior accounting staff, from obtaining access to its European subsidiaries’ books and records necessary to prepare the Company’s financial statements that, once audited, comprise the essence of the Quarterly Report.
These unforeseen circumstances resulted in the Company being unable to file its Quarterly Report during the prescribed period without undue hardship and expense to the Company. As such, the Company is filing this Quarterly Report within 45 days of the Original Due Date in reliance on the Order.
In connection with the preparation of the Company’s unaudited condensed consolidated interim financial statements as of and for the quarter ended June 30, 2020, the Company identified an inadvertent error in the accounting for goodwill relating to the Company’s acquisitions of Nexway and Facebank AG. Goodwill was inadvertently impaired at December 31, 2019. Accordingly, the Company is restating herein its previously issued unaudited condensed consolidated financial statements and the related disclosures for the three months ended March 31, 2020.
3 |
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that involve a number of risks and uncertainties. Words such as “anticipates,” “expects,” “intends,” “goals,” “plans,” “believes,” “seeks,” “estimates,” “continues,” “may,” “will,” “would,” “should,” “could,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, uncertain events or assumptions, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on management’s expectations as of the date of this filing and involve many risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include those described throughout this report and our Annual Report on Form 10-K for the year ended December 31, 2018, particularly the “Risk Factors” sections of such reports. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made in this Form 10-Q and in other documents we file from time to time with the Securities and Exchange Commission that disclose risks and uncertainties that may affect our business. The forward-looking statements in this Form 10-Q do not reflect the potential impact of any divestitures, mergers, acquisitions, or other business combinations that had not been completed as of August 14, 2019. In addition, the forward-looking statements in this Form 10-Q are made as of the date of this filing, and we do not undertake, and expressly disclaims any duty, to update such statements, whether as a result of new information, new developments or otherwise, except to the extent that disclosure may be required by law.
PART I - FINANCIAL INFORMATION
Pulse EvolutionFaceBank Group, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except for share and per share information)
June 30, 2019 | December 31, 2018 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 151 | $ | 31 | ||||
Prepaid expenses | 15 | - | ||||||
Total current assets | 166 | 31 | ||||||
Property and equipment, net | 13 | 14 | ||||||
Deposits | 23 | 3 | ||||||
Investment in Panda Productions (HK) Limited (Kung Fu Panda) | 1,000 | - | ||||||
Intangible assets | 125,772 | 136,078 | ||||||
Goodwill | 148,055 | 149,975 | ||||||
Right-of-use assets | 99 | - | ||||||
Total assets | $ | 275,128 | $ | 286,101 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 2,624 | $ | 2,475 | ||||
Accrued expenses | 4,128 | 5,860 | ||||||
Due to related parties | 699 | 398 | ||||||
Note payable | 3,873 | 3,667 | ||||||
Notes payable - related parties | 516 | 172 | ||||||
Convertible notes, net of $0 and $456 discount as of June 30, 2019 and December 31, 2018, respectively | 50 | 587 | ||||||
Convertible notes - related parties | 50 | 864 | ||||||
Profits interest sold | 655 | - | ||||||
Warrant liability - subsidiary | 927 | 4,528 | ||||||
Current portion of lease liability | 84 | - | ||||||
Total current liabilities | 13,606 | 18,551 | ||||||
Deferred income taxes | 32,794 | 35,000 | ||||||
Lease liability | 15 | - | ||||||
Total liabilities | 46,415 | 53,551 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 14) | ||||||||
Stockholders’ equity: | ||||||||
Series A Preferred stock, par value $0.0001, 5,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2019 and December 31, 2018 | - | - | ||||||
Series B Convertible Preferred stock, par value $0.0001, 1,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2019 and December 31, 2018 | - | - | ||||||
Series C Convertible Preferred stock, par value $0.0001, 41,000,000 shares authorized, 0 shares issued and outstanding as of June 30, 2019 and December 31, 2018 | - | - | ||||||
Series X Convertible Preferred stock, par value $0.0001, 1,000,000 shares authorized, 0 and 1,000,000 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | - | - | ||||||
Common stock par value $0.01: 400,000,000 shares authorized; 23,317,975 shares issued and 7,532,776 shares outstanding at June 30, 2019 and December 31, 2018, respectively | 2 | 1 | ||||||
Additional paid-in capital | 229,964 | 227,570 | ||||||
Accumulated deficit | (30,776 | ) | (21,763 | ) | ||||
Non-controlling interest | 29,523 | 26,742 | ||||||
Total stockholders’ equity | 228,713 | 232,550 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 275,128 | $ | 286,101 |
March 31 2020 | December 31, 2019 | |||||||
(Unaudited) | * | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 81 | $ | 7,624 | ||||
Accounts receivable, net | - | 8,904 | ||||||
Notes Receivable - fuboTV | 10,000 | - | ||||||
Inventory | - | 49 | ||||||
Prepaid expenses | 130 | 1,396 | ||||||
Total current assets | 10,211 | 17,973 | ||||||
Property and equipment, net | - | 335 | ||||||
Deposits | 24 | 24 | ||||||
Investment in Nexway at fair value | 2,374 | - | ||||||
Financial assets at fair value | 1,965 | 1,965 | ||||||
Intangible assets | 111,459 | 116,646 | ||||||
Goodwill | 176,595 | 227,763 | ||||||
Right-of-use assets | 37 | 3,519 | ||||||
Total assets | $ | 302,665 | $ | 368,225 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | 3,406 | $ | 36,373 | |||||
Accrued expenses | 4,337 | 20,402 | ||||||
Due to related parties | 305 | 665 | ||||||
Notes payable, net of discount | 5,207 | 4,090 | ||||||
Notes payable - related parties | 446 | 368 | ||||||
Convertible notes, net of $945 and $456 discount as of March 31, 2020 and December 31, 2019, respectively | 1,962 | 1,358 | ||||||
Shares settled liability for intangible asset | - | 1,000 | ||||||
Shares settled liability for note payable | 7,515 | - | ||||||
Profit share liability | 1,971 | 1,971 | ||||||
Warrant liability - subsidiary | 39 | 24 | ||||||
Warrant liability | 15,987 | - | ||||||
Derivative liability | 389 | 376 | ||||||
Current portion of lease liability | 37 | 815 | ||||||
Total current liabilities | 41,601 | 67,442 | ||||||
Deferred income taxes | 28,679 | 30,879 | ||||||
Other long-term liabilities | 1 | 41 | ||||||
Lease liability | - | 2,705 | ||||||
Long term borrowings | 55,130 | 43,982 | ||||||
Total liabilities | 125,411 | 145,049 | ||||||
COMMITMENTS AND CONTINGENCIES (Note 15) | ||||||||
Series D Convertible Preferred stock, par value $0.0001, 2,000,000 shares authorized, 456,000 and 456,000 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively; aggregate liquidation preference of $463 and $462 as of March 31, 2020 and December 31, 2019, respectively | 463 | 462 | ||||||
Stockholders’ equity: | ||||||||
Series AA Preferred stock, par value $0.00001, 35,800,000 shares authorized, 0 shares issued and outstanding as of December 31, 2019 | - | - | ||||||
Series A Preferred stock, par value $0.0001, 5,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2019 | - | - | ||||||
Series B Convertible Preferred stock, par value $0.0001, 1,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2019 | - | - | ||||||
Series C Convertible Preferred stock, par value $0.0001, 41,000,000 shares authorized, 0 shares issued and outstanding as of December 31, 2019 | - | - | ||||||
Series X Convertible Preferred stock, par value $0.0001, 1,000,000 shares authorized, 0 and 1,000,000 shares issued and outstanding as of December 31, 2019 | - | - | ||||||
Common stock par value $0.0001: 400,000,000 shares authorized; 32,307,663 and 28,912,500 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 3 | 3 | ||||||
Additional paid-in capital | 270,397 | 257,002 | ||||||
Accumulated deficit | (111,593 | ) | (56,123 | ) | ||||
Non-controlling interest | 17,984 | 22,602 | ||||||
Accumulated other comprehensive loss | - | (770 | ) | |||||
Total stockholders’ equity | 176,791 | 222,714 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY | $ | 302,665 | $ | 368,225 |
* Derived from audited information.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4 |
Pulse EvolutionFaceBank Group, Inc.
Condensed Consolidated Statements of Operations
(unaudited; in thousands except for share and per share information)
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Operating expenses | ||||||||||||||||
General and administrative | $ | 804 | $ | 1,040 | $ | 1,841 | $ | 1,880 | ||||||||
Depreciation and Amortization | 5,158 | - | 10,316 | - | ||||||||||||
Total operating expenses | 5,962 | 1,040 | 12,157 | 1,880 | ||||||||||||
Other income (expense) | ||||||||||||||||
Interest expense | (454 | ) | (613 | ) | (900 | ) | (1,099 | ) | ||||||||
Financing costs | - | (205 | ) | - | (2,342 | ) | ||||||||||
Change in fair value of subsidiary warrant liability | 1,124 | - | 3,601 | - | ||||||||||||
Change in fair value of derivative liability | 890 | (329 | ) | 1,018 | 2,439 | |||||||||||
Total other income (expense) | 1,560 | (1,147 | ) | 3,719 | (1,002 | ) | ||||||||||
Loss before income taxes | (4,402 | ) | (2,187 | ) | (8,438 | ) | (2,882 | ) | ||||||||
Income tax benefit | 1,037 | - | 2,206 | - | ||||||||||||
Net loss | (3,365 | ) | (2,187 | ) | (6,232 | ) | (2,882 | ) | ||||||||
Less: net loss attributable to non-controlling interest | 2,182 | - | 2,781 | - | ||||||||||||
Net loss attributable to common stockholders | $ | (5,547 | ) | $ | (2,187 | ) | $ | (9,013 | ) | $ | (2,882 | ) | ||||
Net loss per share attributable to common stockholders | ||||||||||||||||
Basic and diluted | $ | (0.24 | ) | $ | (0.77 | ) | $ | (0.50 | ) | $ | (1.04 | ) | ||||
Weighted average shares outstanding: | ||||||||||||||||
Basic and diluted | 22,964,199 | 2,842,845 | 17,952,188 | 2,771,522 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited; in thousands, except for share and per share information)
For the three and six months ended June 30, 2019
Preferred stock | Common Stock | Additional Paid-In | Accumulated | Noncontrolling | Total Stockholders’ Equity | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Interest | (Deficit) | |||||||||||||||||||||||||
Balance at December 31, 2018 | 1,000,000 | $ | - | 7,532,776 | $ | 1 | $ | 227,570 | $ | (21,763 | ) | $ | 26,742 | $ | 232,550 | |||||||||||||||||
Issuance of common stock for cash | - | - | 378,098 | - | 1,778 | - | - | 1,778 | ||||||||||||||||||||||||
Preferred stock converted to common stock | (1,000,000 | ) | - | 15,000,000 | 1 | (1 | ) | - | - | - | ||||||||||||||||||||||
Common stock issued for lease settlement | - | - | 18,935 | - | 130 | - | - | 130 | ||||||||||||||||||||||||
Issuance of subsidiary common stock for cash | - | - | - | - | 65 | - | - | 65 | ||||||||||||||||||||||||
Additional shares issued for reverse stock split | - | - | 1,374 | - | - | - | - | - | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | (3,466 | ) | 599 | (2,867 | ) | ||||||||||||||||||||||
Balance at March 31, 2019 | - | $ | - | 22,931,183 | $ | 2 | $ | 229,542 | $ | (25,229 | ) | $ | 27,341 | $ | 231,656 | |||||||||||||||||
Issuance of common stock for cash | - | - | 386,792 | - | 422 | - | - | 422 | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | (5,547 | ) | 2,182 | (3,365 | ) | ||||||||||||||||||||||
Balance at June 30, 2019 | - | $ | - | 23,317,975 | $ | 2 | $ | 229,964 | $ | (30,776 | ) | $ | 29,523 | $ | 228,713 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Pulse Evolution Group, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited; in thousands, except for share and per share information)
For the three and six months ended June 30, 2018
Preferred stock | Common Stock | Shares to be | Additional Paid-In | Accumulated | Total Stockholders’ Equity | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Issued | Capital | Deficit | (Deficit) | |||||||||||||||||||||||||
Balance at December 31, 2017 | 7,424,491 | $ | 1 | 2,659,918 | $ | - | $ | - | $ | 8,053 | $ | (11,153 | ) | $ | (3,099 | ) | ||||||||||||||||
Issuance of common stock for cash | - | - | 91,200 | - | 80 | 469 | - | 549 | ||||||||||||||||||||||||
Issuance of common stock for services | - | - | 15,833 | - | - | 410 | - | 410 | ||||||||||||||||||||||||
Issuance of common stock for commitment fee | - | - | 6,667 | - | - | 118 | - | 118 | ||||||||||||||||||||||||
Conversion of notes payable into common shares | - | - | 4,333 | - | - | 18 | - | 18 | ||||||||||||||||||||||||
Conversion of warrants into common stock | - | - | 1,474 | - | - | - | - | - | ||||||||||||||||||||||||
Cancellation of common stock for commitment fee refund | - | - | (3,594 | ) | - | - | (55 | ) | - | (55 | ) | |||||||||||||||||||||
Net loss | - | - | - | - | - | - | (695 | ) | (695 | ) | ||||||||||||||||||||||
Balance at March 31, 2018 | 7,424,491 | $ | 1 | 2,775,831 | $ | - | $ | 80 | $ | 9,013 | $ | (11,848 | ) | $ | (2,754 | ) | ||||||||||||||||
Issuance of common stock for cash | - | - | 140,533 | - | (80 | ) | 1,026 | - | 946 | |||||||||||||||||||||||
Issuance of common stock for services | - | - | 22,500 | - | - | 273 | - | 273 | ||||||||||||||||||||||||
Conversion of preferred stock into common stock | (1,162,000 | ) | - | 77,467 | - | - | - | - | - | |||||||||||||||||||||||
Conversion of warrants into common stock | - | - | 3,640 | - | - | - | - | - | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | (2,187 | ) | (2,187 | ) | ||||||||||||||||||||||
Balance at June 30, 2018 | 6,262,491 | $ | 1 | 3,019,971 | $ | - | $ | - | $ | 10,312 | $ | (14,035 | ) | $ | (3,722 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
(unaudited; in thousands except for share and per share information)
For the Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities | ||||||||
Net loss | (6,232 | ) | $ | (2,882 | ) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 10,316 | - | ||||||
Stock-based compensation | - | 683 | ||||||
Amortization of debt discount | 454 | 823 | ||||||
Deferred income tax benefit | (2,206 | ) | - | |||||
Financing cost | - | 2,342 | ||||||
Change in fair value of derivative liability | (1,018 | ) | (2,439 | ) | ||||
Change in fair value of subsidiary warrant liability | (3,601 | ) | - | |||||
Amortization of right-of-use assets | 26 | - | ||||||
Accrued interest on note payable | 295 | - | ||||||
Changes in operating assets and liabilities of business, net of acquisitions: | ||||||||
Prepaid expenses | (15 | ) | - | |||||
Accounts payable | 149 | (52 | ) | |||||
Accrued expenses | 310 | (80 | ) | |||||
Lease liability | (26 | ) | - | |||||
Net cash used in operating activities | (1,548 | ) | (1,605 | ) | ||||
Cash flows from investing activities | ||||||||
Investment in Panda Productions (HK) Limited | (1,000 | ) | - | |||||
Sale of profits interest in investment in Panda Productions (HK) Limited | 655 | - | ||||||
Payments for leasehold improvements | (9 | ) | - | |||||
Lease security deposit | (20 | ) | - | |||||
Net cash used in investing activities | (374 | ) | - | |||||
Cash flows from financing activities | ||||||||
Proceeds from issuance of convertible notes | - | 1,157 | ||||||
Repayments of convertible notes | (523 | ) | (731 | ) | ||||
Proceeds from sale of common stock | 2,199 | 1,471 | ||||||
Proceeds from sale of subsidiary’s common stock | 65 | - | ||||||
Proceeds from related parties | 410 | - | ||||||
Repayments to related parties | (109 | ) | - | |||||
Net cash provided by financing activities | 2,042 | 1,897 | ||||||
Net increase in cash | 120 | 292 | ||||||
Cash and at beginning of period | 31 | 77 | ||||||
Cash at end of period | $ | 151 | $ | 369 | ||||
Supplemental disclosure of cashflows information: | ||||||||
Interest paid | - | - | ||||||
$ | - | $ | - | |||||
Non-cash financing and investing activities: | ||||||||
Issuance of common stock for note conversion | $ | - | $ | 18 | ||||
Common stock issued for lease settlement | $ | 130 | $ | - | ||||
Measurement period adjustment on the Evolution AI Corporation acquisition | $ | 1,920 | $ | - |
For the Three Months Ended March 31, | ||||||||
2020 (As Restated) | 2019 | |||||||
Revenues | ||||||||
Revenues, net | $ | 7,295 | $ | - | ||||
Total revenues | 7,295 | - | ||||||
Operating expenses | ||||||||
General and administrative | 20,203 | 1,037 | ||||||
Amortization of intangible assets | 5,217 | 5,153 | ||||||
Depreciation | 3 | 5 | ||||||
Total operating expenses | 25,423 | 6,195 | ||||||
Operating loss | (18,128 | ) | (6,195 | ) | ||||
Other income (expense) | ||||||||
Interest expense and financing costs | (2,581 | ) | (446 | ) | ||||
Loss on deconsolidation of Nexway | (11,919 | ) | - | |||||
Loss on issuance of notes, bonds and warrants | (24,053 | ) | - | |||||
Other expense | (436 | ) | - | |||||
Change in fair value of warrant liability | (366 | ) | - | |||||
Change in fair value of subsidiary warrant liability | (15 | ) | 2,477 | |||||
Change in fair value of shares settled liability | (180 | ) | - | |||||
Change in fair value of derivative liability | 297 | 128 | ||||||
Total other income (loss) | (39,253 | ) | 2,159 | |||||
Loss before income taxes | (57,381 | ) | (4,036 | ) | ||||
Income tax benefit | (1,038 | ) | (1,169 | ) | ||||
Net loss | (56,343 | ) | (2,867 | ) | ||||
Less: net loss attributable to non-controlling interest | 873 | 599 | ||||||
Net loss attributable to controlling interest | $ | (55,470 | ) | $ | (3,466 | ) | ||
Less: Deemed dividend - beneficial conversion feature on preferred stock | (171 | ) | - | |||||
Net loss attributable to common stockholders | $ | (55,641 | ) | $ | (3,466 | ) | ||
Net loss per share attributable to common stockholders | ||||||||
Basic | $ | (1.83 | ) | $ | (0.27 | ) | ||
Diluted | $ | (1.83 | ) | $ | (0.27 | ) | ||
Weighted average shares outstanding: | ||||||||
Basic | 30,338,073 | 12,883,381 | ||||||
Diluted | 30,338,073 | 12,883,381 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5 |
FaceBank Group, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(unaudited; in thousands, except for share and per share information)
Three Months Ended March 31, 2020
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | Noncontrolling | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Deficit | Loss | Interest | Equity | ||||||||||||||||||||||
Balance at December 31, 2019 | 28,912,500 | $ | 3 | $ | 257,002 | $ | (56,123 | ) | $ | (770 | ) | $ | 22,602 | $ | 222,714 | |||||||||||||
Issuance of common stock for cash | 795,593 | - | 2,297 | - | - | - | 2,297 | |||||||||||||||||||||
Issuance of common stock - subsidiary share exchange | 1,552,070 | - | 1,150 | - | - | (1,150 | ) | - | ||||||||||||||||||||
Common stock issued in connection with note payable | 7,500 | - | 67 | - | - | - | 67 | |||||||||||||||||||||
Stock based compensation | 1,040,000 | - | 10,061 | - | - | - | 10,061 | |||||||||||||||||||||
Deemed dividend related to immediate accretion of redemption feature of convertible preferred stock | - | - | (171 | ) | - | - | - | (171 | ) | |||||||||||||||||||
Accrued Series D Preferred Stock dividends | - | - | (9 | ) | - | - | - | (9 | ) | |||||||||||||||||||
Deconsolidation of Nexway | - | - | - | - | 770 | (2,595 | ) | (1,825 | ) | |||||||||||||||||||
Net loss – As Restated | - | - | - | (55,470 | ) | - | (873 | ) | (56,343 | ) | ||||||||||||||||||
Balance at March 31, 2020 (As Restated) | 32,307,663 | $ | 3 | $ | 270,397 | $ | (111,593 | ) | $ | - | $ | 17,984 | $ | 176,791 |
Three Months Ended March 31, 2019
Series X Convertible | Additional | Total | ||||||||||||||||||||||||||||||
Preferred stock | Common Stock | Paid-In | Accumulated | Noncontrolling | Stockholders’ | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Interest | Equity | |||||||||||||||||||||||||
Balance at January 1, 2019 | 1,000,000 | $ | - | 7,532,776 | $ | 1 | $ | 227,570 | $ | (21,763 | ) | $ | 26,742 | $ | 232,550 | |||||||||||||||||
Issuance of common stock for cash | - | - | 378,098 | - | 1,778 | - | - | 1,778 | ||||||||||||||||||||||||
Preferred stock converted to common stock | (1,000,000 | ) | - | 15,000,000 | 1 | (1 | ) | - | - | - | ||||||||||||||||||||||
Common stock issued for lease settlement | - | - | 18,935 | - | 130 | - | - | 130 | ||||||||||||||||||||||||
Issuance of subsidiary common stock for cash | - | - | - | - | 65 | - | - | 65 | ||||||||||||||||||||||||
Additional shares issued for reverse stock split | - | - | 1,374 | - | - | - | - | - | ||||||||||||||||||||||||
Net loss | - | - | - | - | - | (3,466 | ) | 599 | (2,867 | ) | ||||||||||||||||||||||
Balance at March 31, 2019 | - | $ | - | 22,931,183 | $ | 2 | $ | 229,542 | $ | (25,229 | ) | $ | 27,341 | $ | 231,656 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6 |
FaceBank Group, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited; in thousands, except for share and per share information)
For the Three Months Ended March 31, | ||||||||
2020 (As Restated) | 2019 | |||||||
Cash flows from operating activities | ||||||||
Net loss | $ | (56,343 | ) | $ | (2,867 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Amortization of intangible assets | 5,217 | 5,153 | ||||||
Depreciation | 3 | 5 | ||||||
Stock-based compensation | 9,061 | - | ||||||
Loss on deconsolidation of Nexway, net of cash retained by Nexway | 8,564 | - | ||||||
Common stock issued in connection with note payable | 67 | - | ||||||
Loss on issuance of notes, bonds and warrants | 24,053 | - | ||||||
Amortization of debt discount | 1,664 | 234 | ||||||
Deferred income tax benefit | (1,038 | ) | (1,169 | ) | ||||
Change in fair value of derivative liability | (297 | ) | (128 | ) | ||||
Change in fair value of warrant liability | 366 | - | ||||||
Change in fair value of subsidiary warrant liability | 15 | (2,477 | ) | |||||
Change in fair value of shares settled liability | 180 | - | ||||||
Amortization of right-of-use assets | 13 | 6 | ||||||
Accrued interest on note payable | 112 | 144 | ||||||
Other adjustments | (55 | ) | - | |||||
Changes in operating assets and liabilities of business, net of acquisitions: | ||||||||
Accounts receivable | (927 | ) | - | |||||
Notes Receivable | (179 | ) | - | |||||
Prepaid expenses | 1,102 | (23 | ) | |||||
Accounts payable | 1,295 | 172 | ||||||
Accrued expenses | (277 | ) | 374 | |||||
Due from related parties | (60 | ) | - | |||||
Lease liability | (14 | ) | (6 | ) | ||||
Net cash used in operating activities | (7,478 | ) | (582 | ) | ||||
Cash flows from investing activities | ||||||||
Investment in Panda Productions (HK) Limited | - | (1,000 | ) | |||||
Sale of profits interest in investment in Panda Productions (HK) Limited | - | 212 | ||||||
Advance to fuboTV | $ | (2,421 | ) | |||||
Lease security deposit | - | (13 | ) | |||||
Net cash used in investing activities | (2,421 | ) | (801 | ) | ||||
Cash flows from financing activities | ||||||||
Proceeds from issuance of convertible notes | 900 | - | ||||||
Repayments of convertible notes | (550 | ) | (203 | ) | ||||
Proceeds from the issuance of Series D Preferred Stock | 203 | - | ||||||
Proceeds from sale of common stock and warrants | 2,297 | 1,778 | ||||||
Proceeds from sale of subsidiary’s common stock | - | 65 | ||||||
Redemption of Series D Preferred Stock | (272 | ) | - | |||||
Proceeds from related parties notes | 78 | - | ||||||
(Repayments) proceeds from (to) related parities | (300 | ) | 18 | |||||
Net cash provided by financing activities | 2,356 | 1,658 | ||||||
Net (decrease) increase in cash | (7,543 | ) | 275 | |||||
Cash at beginning of period | 7,624 | 31 | ||||||
Cash at end of period | 81 | $ | 306 | |||||
Supplemental disclosure of cash flows information: | ||||||||
Interest paid | $ | 170 | $ | 68 | ||||
Income tax paid | $ | - | $ | - | ||||
Non cash financing and investing activities: | ||||||||
Reclass of shares settled liability for intangible asset to stock-based compensation | $ | 1,000 | $ | - | ||||
Issuance of common stock - subsidiary share exchange | $ | 1,150 | $ | - | ||||
Lender advanced loan proceeds direct to fuboTV | $ | 7,579 | $ | - | ||||
Accrued Series D Preferred Stock dividends | $ | 9 | $ | - | ||||
Deemed dividend related to immediate accretion of redemption feature of convertible preferred stock | $ | 171 | $ | - | ||||
Common stock issued for lease settlement | $ | - | $ | 130 | ||||
Measurement period adjustment on the Evolution AI Corporation acquisition | $ | - | $ | 1,920 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7 |
Pulse EvolutionFaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 1 – Organization and Nature of Business
OverviewIncorporation
Pulse EvolutionFaceBank Group, Inc. (the “Company” or “FaceBank”) 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. Effective November 29, 2017,On September 30, 2019, the Company’s corporate name was changed to Recall Studios, Inc. On February 28, 2019, the Company’s corporate name was changed to Pulse EvolutionFaceBank Group, Inc.
We are a technology company that focuses on human animation and hyper-realistic digital human technologies; computer generated assets that can be distributed across a spectrum of traditional media and emerging display technologies, including live entertainment, virtual reality, augmented reality, mobile, interactive and artificial intelligence applications.
Reverse Stock-Split and Increase in Authorized Share CapitalMerger with fuboTV Inc.
On January 9, 2019,April 1, 2020, fuboTV Acquisition Corp., a Delaware corporation and our wholly-owned subsidiary (“Merger Sub”) merged with and into fuboTV Inc., a Delaware corporation (“fuboTV”), whereby fuboTV continued as the Company amended its certificatesurviving corporation and became our wholly-owned subsidiary pursuant to the terms of incorporationthe Agreement and Plan of Merger and Reorganization dated as of March 19, 2020, by and among us, Merger Sub and fuboTV (the “Merger Agreement” and such transaction, the “Merger”) (See Note 16).
In accordance with the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), all of the capital stock of fuboTV was converted into the right to increase the authorized number ofreceive shares of itsour newly-created class of Series AA Convertible Preferred Stock, par value $0.0001 per share (the “Series AA Preferred Stock”) (See Note 13). Each share of Series AA Preferred Stock is entitled to 0.8 votes per share and is convertible into two (2) shares of our common stock, par value,only in connection with a bona fide transfer to 400 million shares.a third party pursuant to Rule 144. Until the time we are able to uplist to a national securities exchange, the Series AA Preferred Stock benefits from certain protective provisions that, for example, require us to obtain the approval of a majority of the shares of outstanding Series AA Preferred Stock, voting as a separate class, before undertaking certain matters.
As a result of the Merger, fuboTV, a leading live TV streaming platform for sports, news, and entertainment, became a wholly-owned subsidiary of the Company. Before the Merger, Facebank Group was and continues to be a character-based virtual entertainment company, and a leading developer of digital human likeness for celebrities and consumers, focused on applications in traditional entertainment, sports entertainment, live events, social networking, mixed reality (AR/VR) and artificial intelligence. Following the Merger, we operate our business under the name “fuboTV” and we are in the process of changing the name of FaceBank Group, Inc. to fuboTV, Inc. On May 1, 2020, the Company’s trading symbol was changed to “FUBO”. Unless the context otherwise requires, “we,” “us,” “our,” and the “Company” refers to FaceBank and its subsidiaries on a consolidated basis, and fuboTV Pre-Merger refers to fuboTV Inc. prior to the Merger.
In connection with the Merger, on March 11, 2020, FaceBank and HLEE Finance S.a r.l. (“HLEE”) entered into a Credit Agreement, dated as of March 11, 2020, pursuant to which HLEE provided FaceBank with a $100,000,000 revolving line of credit (the “Credit Facility”). The Credit Facility is secured by substantially all the assets of FaceBank. As of August 10, 2020, there are no amounts outstanding under the Credit Facility, and the Company does not intend to draw down on this Credit Facility. See Note 9 of the Notes to the Unaudited Condensed Consolidated Financial Statements for more information about the Credit Facility.
On March 19, 2020, FaceBank, Merger Sub, Evolution AI Corporation (“EAI”) and Pulse Evolution Corporation (“PEC” and collectively with EAI, Merger Sub and FaceBank, the “Initial Borrower”) and FB Loan Series I, LLC (“FB Loan”) entered into a Note Purchase Agreement (the “Note Purchase Agreement”), pursuant to which the Initial Borrower sold to FB Loan senior secured promissory notes in an aggregate principal amount of $10,050,000 (the “Senior Notes”). The Company also effectuatedreceived proceeds of $7.4 million, net of an original issue discount of $2.65 million. In connection with the FB Loan, FaceBank, fuboTV and certain of their respective subsidiaries granted a 1-for-30 reverse stock splitlien on substantially of their assets to secure the obligations under the Senior Notes. See Note 9 of the Notes to the Unaudited Condensed Consolidated Financial Statements for more information about the Note Purchase Agreement.
Prior to the Merger, fuboTV Pre-Merger and its subsidiaries were party to a Credit and Guaranty Agreement, dated as of April 6, 2018 (the “AMC Agreement”), with AMC Networks Ventures LLC as lender, administrative agent and collateral agent (“AMC Networks Ventures”). fuboTV Pre-Merger previously granted AMC Networks Ventures a lien on substantially all of its common stock on February 28, 2019. All shareassets to secure its obligations thereunder. The AMC Agreement survived the Merger and, per share amounts for all periods presented are retroactively restated for the effectas of the reverse stock split. AllEffective Time, there was $24.9 million outstanding under the AMC Agreement, net of debt issuance costs. In connection with the outstanding sharesMerger, FaceBank guaranteed the obligations of Series X Preferred Stock also automatically converted intofuboTV under the AMC Agreement on an aggregateunsecured basis. The liens of 15,000,000 sharesAMC Networks Ventures on the assets of common stock on February 28, 2019.fuboTV are senior to the liens in favor of FB Loan and FaceBank securing the Senior Notes.
Nature of Business
The Company is a leading digital entertainment company, combining fuboTV Pre-Merger’s direct-to-consumer live TV streaming, or vMVPD, platform with FaceBank Pre-Merger’s technology-driven IP in sports, movies and live performances. We expect that this business combination will create a content delivery platform for traditional and future-form IP. We plan to leverage FaceBank’ IP sharing relationships with leading celebrities and other digital technologies to enhance its already robust sports and entertainment offerings.
Since the Merger, while we continue our previous business operations, we are principally focused on offering consumers a leading live TV streaming platform for sports, news and entertainment through fuboTV. fuboTV revenues are almost entirely derived from the sale of subscription services and advertising in the United States, though fuboTV has started to assess expansion opportunities into international markets, with operations in Canada and the launch in late 2018 of its first ex-North America offering of streaming entertainment, to consumers in Spain.
Our subscription-based services are offered to consumers who can sign-up for accounts at https://fubo.tv, through which we provide basic plans with the flexibility for consumers to purchase the add-ons and features best suited for them. Besides the website, consumers can also sign-up via some TV-connected devices. The fuboTV platform provides, what we believe to be, a superior viewer experience, with a broad suite of unique features and personalization tools such as multi-channel viewing capabilities, favorites lists and a dynamic recommendation engine as well as 4K streaming and Cloud DVR offerings.
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 2 – Restatement for Correction of an Error
In connection with the preparation of the Company’s condensed consolidated interim financial statements as of and for the quarter ended June 30, 2020, the Company identified an inadvertent error in the accounting for goodwill relating to the Company’s acquisition of Nexway and Facebank AG. Goodwill was inadvertently impaired at December 31, 2019. Upon further evaluation, the Company determined that goodwill amounting to $79.7 million should not have been impaired. Accordingly, the Company should have allocated $51.2 million towards the loss on deconsolidation of Nexway during the three months ended March 31, 2020, which would have resulted in a loss on deconsolidation of Nexway of $11.9 million. The Company is restating herein its previously issued condensed consolidated financial statements and the related disclosures for the three months ended March 31, 2020.
In addition to the restatement of the financial statements, certain information within the following notes to the financial statements have been restated to reflect the correction of a misstatement discussed above as well as to add disclosure language as appropriate:
Note 5 – Investments
Note 7 – Intangible Assets and Goodwill
The financial statement misstatements reflected herein in did not impact cash flows from operations, investing, or financing activities in the Company’s consolidated statements of cash flows for any period previously presented.
Comparison of restated financial statements to financial statements as previously reported
The following tables compare the Company’s previously issued Consolidated Balance Sheets and Consolidated Statement of Operations as of and for the three months ended March 31, 2020 to the corresponding restated consolidated financial statements for those respective years.
Restated consolidated balance sheets and consolidated statements of operations as of and for the three months ended March 31, 2020 are as follows:
March 31, 2020 (unaudited) as Previously Reported | Effect of Restatement (unaudited) | March 31, 2020 (unaudited) as Restated | ||||||||||
ASSETS | ||||||||||||
Total current assets | 10,211 | - | 10,211 | |||||||||
- | ||||||||||||
Deposits | 24 | - | 24 | |||||||||
Investment in Nexway at fair value | 2,374 | - | 2,374 | |||||||||
Financial assets at fair value | 1,965 | - | 1,965 | |||||||||
Intangible assets | 111,459 | - | 111,459 | |||||||||
Goodwill | 148,054 | 28,541 | 176,595 | |||||||||
Right-of-use assets | 37 | - | 37 | |||||||||
Total assets | $ | 274,124 | $ | 28,541 | $ | 302,665 | ||||||
- | ||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | - | |||||||||||
Total current liabilities | 41,601 | - | 41,601 | |||||||||
Total liabilities | 125,411 | - | 125,411 | |||||||||
- | ||||||||||||
COMMITMENTS AND CONTINGENCIES (Note 15) | - | |||||||||||
- | ||||||||||||
Series D Convertible Preferred stock, par value $0.0001, 2,000,000 shares authorized, 461,839 shares issued and outstanding as of December 31, 2019; aggregate liquidation preference of $462 as of December 31, 2019 | 463 | - | 463 | |||||||||
- | ||||||||||||
Stockholders’ equity: | - | |||||||||||
Common stock par value $0.0001: 400,000,000 shares authorized; 32,307,663 and 28,912,500 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively | 3 | - | 3 | |||||||||
Additional paid-in capital | 270,397 | - | 270,397 | |||||||||
Accumulated deficit | (140,134 | ) | 28,541 | (111,593 | ) | |||||||
Non-controlling interest | 17,984 | - | 17,984 | |||||||||
Total stockholders’ equity | 148,250 | 28,541 | 176,791 | |||||||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY AND TEMPORARY EQUITY | $ | 274,124 | $ | 28,541 | $ | 302,665 |
For the Three Months Ended March 31, 2020 as Previously Reported (unaudited) | Effect of Restatement (unaudited) | For the Three Months Ended March 31, 2020 as Restated (unaudited) | ||||||||||
Operating loss | (18,128 | ) | - | (18,128 | ) | |||||||
- | ||||||||||||
Other income (expense) | - | |||||||||||
Interest expense and financing costs | (2,581 | ) | - | (2,581 | ) | |||||||
Gain (loss) on deconsolidation of Neway | 39,249 | (51,168 | ) | (11,919 | ) | |||||||
Loss of issuance of notes, bonds & warrants | (24,053 | ) | - | (24,053 | ) | |||||||
Other expense | (436 | ) | - | (436 | ) | |||||||
Change in fair value of warrant liability | (366 | ) | - | (366 | ) | |||||||
Change in fair value of subsidiary warrant liability | (15 | ) | - | (15 | ) | |||||||
Change in fair value of shares settled liability | (180 | ) | - | (180 | ) | |||||||
Change in fair value of derivative liability | 297 | - | 297 | |||||||||
Total other income (expense) | 11,915 | (51,168 | ) | (39,253 | ) | |||||||
Loss before income taxes | (6,213 | ) | (51,168 | ) | (57,381 | ) | ||||||
Income tax benefit | (1,038 | ) | - | (1,038 | ) | |||||||
Net loss | (5,175 | ) | (51,168 | ) | (56,343 | ) | ||||||
Less: net loss attributable to non-controlling interest | 873 | - | 873 | |||||||||
Net loss attributable to controlling interest | $ | (4,302 | ) | $ | (51,168 | ) | $ | (55,470 | ) | |||
Less: Deemed dividend - beneficial conversion feature on preferred stock | (171 | ) | - | (171 | ) | |||||||
Net loss attributable to common stockholders | $ | (4,473 | ) | $ | (51,168 | ) | $ | (55,641 | ) | |||
Net loss per share attributable to common stockholders | ||||||||||||
Basic and diluted | $ | (0.15 | ) | $ | (1.83 | ) | ||||||
Weighted average shares outstanding: | ||||||||||||
Basic and diluted | 30,338,073 | - | 30,338,073 |
Note 3 – Liquidity, Going Concern and Management Plans
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
The Company hashad cash of $0.2$0.1 million, a working capital deficiency of $13.4$31.4 million and an accumulated deficit of $30.8$111.6 million at June 30, 2019. The Company incurred a $9.0 millionMarch 31, 2020 and fuboTV had net loss of $173.7 million for the six monthsyear ended June 30,December 31, 2019. The Company expects to continue incurring losses in the foreseeable future and will need to raise additional capital to fund its operations, meet its obligations in the ordinary course of business and execute its longer-term business plan. These obligations include liabilities assumed in an acquisition that are in arrears and payable on demand. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date that these financial statements are issued. The unaudited 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.
The Company’s future capital requirements and the adequacy of its available funds will depend on many factors, including its ability to successfully commercialize its productsattract and services, competing technological andretain subscribers, develop new technologies that can compete in a rapidly changing market developments,with many competitors and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement its product and service offerings.
Management believes that the Company has access to capital resources through potential issuances of debt and equity securities. The ability of the Company to continue as a going concern is dependent on the Company’s ability to execute its strategy and raise additional funds. Management is currently seeking additional funds, primarily through the issuance of equity securities for cash, to operate its business. No assurance can be given that any future financing will be available 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 stockholders, in the case orof an equity financing. In addition to the foregoing, based on the Company’s current assessment, the Company does not expect any material impact on its long-term development timeline and its liquidity due to the worldwide spread of a novel strain of coronavirus (“COVID 19”). However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus throughout the world.
Note 34 – Basis of Presentation and Summary of Significant Accounting Policies
BasisPrinciples of presentationConsolidation
The accompanying unaudited condensed consolidated financial statements include the accounts, as of March 31, 2020, of the Company and principles of consolidationits 99.7%-owned operating subsidiary EAI, which, until the Merger, was the Company’s principal operating subsidiary; inactive subsidiaries York Production LLC and York Production II LLC; wholly-owned subsidiaries Facebank AG, StockAccess Holdings SAS (“SAH”) and FBNK Finance Sarl (“FBNK Finance”); its 70.0% ownership in Highlight Finance Corp. (“HFC”); and its 76% ownership in Pulse Evolution Corporation (“PEC”). All significant inter-company balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”(the “Commission”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments (except for the Nexway deconsolidation), considered necessary for a fair presentation of such interim results.
Pulse Evolution Group, Inc.
Notes to the Condensed Consolidated Financial Statements
The results for the unaudited condensed consolidated statement of operations are not necessarily indicative of results to be expected for the year ending December 31, 20192020 or for any future interim period. The unaudited condensed consolidated balance sheet at June 30,December 31, 2019 has been derived from the audited financial statements; however, it does not include all of the information and notes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 20182019 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on June 10, 2019.
May 29, 2020.
Principles of Consolidation
12 |
FaceBank Group, Inc.
The accompanying consolidated financial statements includeNotes to the accounts of the Company and its 99.7% owned principal operating subsidiary Evolution AI Corporation (“EAI”), inactive subsidiaries York Production LLC and York Production II LLC and its 54% majority owned subsidiary PEC. All inter-company balances and transactions have been eliminated in consolidation.Unaudited Condensed Consolidated Financial Statements
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. ThoseThe significant estimates and assumptions include allocating the fair value of purchase consideration issued in business acquisitions, depreciableuseful lives of property and equipment,intangible assets, analysis of impairments of recorded goodwill,intangible assets, accruals for potential liabilities, assumptions made in valuing derivative liabilities and assumptions made when estimating the fair value of equity instruments issued in share-based payment arrangements and deferred income taxes and related valuation allowance.
fair value of equity method investees.
Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, see the Company’s Annual Report on Form 10-K filed with the SEC on June 10, 2019.May 29, 2020.
Long-term investments
As described in Note 5 to these condensed consolidated financial statements, effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-01 and related ASU 2018-03 concerning recognition and measurement of financial assets and financial liabilities. In adopting this new guidance, the Company has made an accounting policy election to adopt an adjusted cost method measurement alternative for investments in equity securities without readily determinable fair values.
For equity investments that are accounted for using the measurement alternative, the Company initially records equity investments that qualify for the measurement alternative at cost, but is required to adjust the carrying value of such equity investments through earnings when there is an observable transaction involving the same or a similar investment with the same issuer or upon an impairment.
As of June 30, 2019, the Company’s long-term investments consist of its investment in Panda Productions (HK) Limited (“Panda”), (Note 5).
LeasesLoss Per Share
Effective January 1, 2019,Basic loss per share is computed by dividing net loss available to common stockholders by the Company accounts for its leases under ASC 842,Leases. Under this guidance, arrangements meetingweighted average number of common shares outstanding during the definitionperiod. Diluted net loss per common share excludes the potential impact of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interestconvertible notes, convertible preferred stock, common stock options and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. The adoption of ASC 842 did not have anwarrants because their effect on the Company’s condensed consolidated results of operations or cash flows, due to the leases having a term of less than one year.would be anti-dilutive.
In calculating the right of use asset and lease liability, the Company elects to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less, if any, from the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease term.
The Company continues to account for leases infollowing common share equivalents are excluded from the prior period financial statements under ASC Topic 840.calculation of weighted average common shares outstanding because their inclusion would have been anti-dilutive:
Pulse Evolution Group, Inc.
Notes to the Condensed Consolidated Financial Statements
March 31, | March 31, | |||||||
2020 | 2019 | |||||||
Common stock purchase warrants | 200,007 | 200,007 | ||||||
Series D Preferred Stock shares | 456,000 | - | ||||||
Stock options | 16,667 | 16,667 | ||||||
Convertible notes variable settlement feature | 311,111 | 577,503 | ||||||
Total | 983,785 | 794,177 |
Deferred tax liabilityTax Liability
The Company recognized $36.9 million of deferred tax liabilities related to the EAI acquisition during the year ended December 31, 2018. The following is a rollforward of the Company’s deferred tax liability from January 1, 20192020 to June 30, 2019:March 31, 2020 (in thousands):
June 30, 2019 | ||||
Balance – January 1, 2019 | $ | 35,000 | ||
Income tax benefit (associated with the amortization of intangible assets) | (2,206 | ) | ||
Balance - June 30, 2019 | $ | 32,794 |
March 31, 2020 | ||||
Beginning balance | $ | 30,879 | ||
Income tax benefit (associated with the amortization of intangible assets) | (1,038 | ) | ||
Deconsolidation of Nexway | (1,162 | ) | ||
Ending balance | $ | 28,679 |
13 |
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Loss Per ShareRecently Issued Accounting Standards
Net loss per share is computed by dividing the net loss available to common stockholders by the weighted average number of common shares outstanding. The calculation of the basic and diluted earnings per share is the same for all periods presented, as the effect of the potential common stock equivalents is anti-dilutive due to the Company’s net loss position for all periods presented. Anti-dilutive securities, which are convertible into the Company’s common stock, consist of the following at June 30, 2019 and 2018:
As of June 30, | ||||||||
2019 | 2018 | |||||||
Common stock purchase warrants | 200,007 | 8 | ||||||
Convertible preferred shares | - | 84,166 | ||||||
Stock options | 16,667 | - | ||||||
Convertible notes variable settlement feature | 524,945 | 252,788 | ||||||
Total | 741,619 | 336,962 |
Recently issued and adopted accounting pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and assures that there are proper controls in place to ascertain that the Company’s condensed consolidated financial statements properly reflect the change.
In July 2017, the FASB has issued a two-part ASU No. 2017-11, (i)Accounting for Certain Financial Instruments with Down Round Features and (ii)Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception which simplifies the accounting for certain financial instruments with down round features, a provision in an equity-linked financial instrument (or embedded feature) that provides a downward adjustment of the current exercise price based on the price of future equity offerings. It is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company adopted this standard on its consolidated financial statements and disclosures as of January 1, 2019. The adoption of ASU 2017-11 did not have a material impact on its condensed consolidated financial statements.
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment. ASU 2017-04 removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This standard will be effective for the Company beginning in the first quarter of fiscal year 2020 and is required to be applied prospectively. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in ASU 2018-13 modify the disclosure requirements on fair value measurements based on the concepts in the Concepts Statement, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating ASU 2018-13 and its impact on its condensed consolidated financial statements.
Pulse Evolution Group, Inc.
NotesIn December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the Condensed Consolidated Financial Statements
Note 4 – Acquisition
The EAI acquisition which occurred on August 8, 2018, was accountedgeneral principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for using acquisition method of accounting. The aggregate of the purchase price, plus net liabilities assumed was allocated to separately identifiable assetsfiscal years, and the excess was recorded as goodwill. The preliminary allocation of the purchase price was based upon a valuation for which the estimates and assumptions are subject to change during the one year measurement period, which ends August 7, 2019. During the six months ended June 30, 2019, the Company recorded a measurement period adjustment to reduce acquisition date accrued expenses by $1.9 million, which resulted in a corresponding decrease to goodwill. In addition during the six months ended June 30, 2019, the Company recorded a lease settlement liability measurement period adjustment of $0.1 million which should have been accrued at the time of the acquisition. This lease settlement liability was settled during the 1st quarter of 2019interim periods within those fiscal years, beginning after December 15, 2020, with the issuance of 18,935 shares (see Note 14).
early adoption permitted. The Company allocatedis currently evaluating the purchase consideration to the fair valueimpact of the assets acquiredthis standard on its condensed consolidated financial statements and liabilities assumed as summarized in the table below (in thousands except for share and per share amounts):related disclosures.
Fair Value | ||||
Consideration Paid: | ||||
Series X Convertible Preferred Stock (1,000,000 shares at a fair value of $211.50 per share) | $ | 211,500 | ||
Purchase Price Allocation: | ||||
Property and equipment | 22 | |||
Accounts payable | (2,291 | ) | ||
Accrued expenses | (3,205 | ) | ||
Notes payable (in default) | (3,634 | ) | ||
Warrant liability | (4,437 | ) | ||
Due to related parties and affiliates | (295 | ) | ||
Net liabilities assumed | (13,840 | ) | ||
Excess allocated to | ||||
Human animation technologies | 123,436 | |||
Trademark and trade names | 7,746 | |||
Animation and visual effects technologies | 6,016 | |||
Digital asset library | 6,255 | |||
Intangible assets | 143,453 | |||
Deferred tax liability | (36,944 | ) | ||
Non- controlling interest | (29,224 | ) | ||
Goodwill | 148,055 | |||
Total Purchase Price | $ | 211,500 |
Pulse Evolution Group, Inc.
Notes to the Condensed Consolidated Financial Statements
Proforma
The following unaudited pro forma financial information for the three and six months ended June 30, 2018 presents combined results of operations as if the acquisition of Evolution AI Corporation and Pulse Evolution Corporation had occurred on January 1, 2017 (in thousands):
Three Months Ended | Six Months Ended | |||||||
June 30, 2018 | June 30, 2018 | |||||||
Operating Revenues | $ | 147 | $ | 294 | ||||
Net Loss | $ | (6,261 | ) | $ | (11,394 | ) |
Note 5 – Investments
Nexway
The Company had an equity investment of 62.3% in Nexway AG (“Nexway”), which it acquired on September 16, 2019. The equity investment in Nexway was a controlling financial interest and the Company consolidated its investment in Nexway under ASC 810, Consolidation.
On March 31, 2020, the Company relinquished 20% of the total Nexway shareholder votes associated with its investment, which reduced the Company’s voting interest in Nexway to 37.6%. As a result of the Company’s loss of control in Nexway, the Company deconsolidated Nexway as of March 31, 2020 as it no longer has a controlling financial interest.
As of March 31, 2020, the fair value of the Nexway shares owned by the Company is approximately $2.4 million, calculated as follows (dollars in thousands, except per share value):
Price per share Euros | € | 5.28 | ||
Exchange rate | 1.1032 | |||
Price per share USD | $ | 5.82 | ||
Nexway shares held by the Company | 407,550 | |||
Fair value - investment in Nexway | $ | 2,374 |
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
The deconsolidation of Nexway resulted in a loss of approximately $11.9 million calculated as follows:
Cash | $ | 5,776 | ||
Accounts receivable | 9,831 | |||
Inventory | 50 | |||
Prepaid expenses | 164 | |||
Goodwill | 51,168 | |||
Property and equipment, net | 380 | |||
Right-of-use assets | 3,594 | |||
Total assets | $ | 70,963 | ||
Less: | ||||
Accounts payable | 34,262 | |||
Accrued expenses | 15,788 | |||
Lease liability | 3,594 | |||
Deferred income taxes | 1,161 | |||
Other liabilities | 40 | |||
Total liabilities | $ | 54,845 | ||
Non-controlling interest | 2,595 | |||
Foreign currency translation adjustment | (770 | ) | ||
Loss before fair value - investment in Nexway | 14,293 | |||
Less: fair value of shares owned by Facebank | 2,374 | |||
Loss on deconsolidation of Nexway | $ | 11,919 |
Panda Interests
In March 2019, the Company entered into an agreement to finance and co-produce Broadway Asia’s theatrical production of DreamWorks’ Kung Fu Panda Spectacular Live at the Venetian Theatre in Macau, Hong Kong currently scheduled to open in January 2020 (“Macau Show”). The agreement requires the Company to invest at least $2 million in Panda Productions (HK) Limited (“Panda), in exchange for which the Company has received an equity interest in the production, billing credit as associate producer, and certain rights to participate in possible future productions of DreamWorks’ Kung Fu Panda property in similar theatrical productions.
During the six months ended June 30, 2019, the Company acquired an approximate 2% interest in Panda for $2.0 million. The Company has evaluated the guidance in ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, and elected to account for the investment using the measurement alternative as the equity securities are without a readily determinable fair value and do not give the Company significant influence over Panda. The measurement alternative at cost, less any impairment, plus or minus changes resulting from observable price changes. As of June 30, 2019, the Company considered the cost of the investment to not exceed the fair value of the investment and did not observe price changes.
As of June 30, 2019, the Company paid $1.0 million to Panda. As of June 30, 2019 and the date of this report, $1.0 million remains unfunded.
During the six months ended June 30, 2019, the Company sold profits interests to accredited investors and received cash of $0.7 million. As part of this transaction the Company also issued 209,050 common shares in connection with this transaction. As a result of this sale of the profits interest, the Company will potentially distribute approximately 10% of its proceeds received in the Macau Show. The Company allocated 100% the amount of proceeds received from investors todetermined the fair value of the profits interests based upon expected cash outflows on the Macau Shaw. The issuance of a profits interest meets the definition of a derivative in accordance with ASC 815, therefore, the Company will update the fair value of this profits interests on a quarterly basis and record any change in fair value as a component of other income (expense). The Company determined that the fair value of this profits interest to be approximately $0.7$1.7 million as of the date of this transaction and $2.0 million as of June 30,March 31, 2020 and December 31, 2019.
The table below summarizes the Company’s profits interest at March 31, 2020 and December 31, 2019 (in thousands except for unit and per unit information):
Panda units granted | 26.2 | |||
Fair value per unit on grant date | $ | 67,690 | ||
Grant date fair value | $ | 1,773 | ||
Change in fair value of Panda interests | $ | 198 | ||
Fair value at December 31, 2019 | $ | 1,971 | ||
Change in fair value of Panda interests | - | |||
Fair value at March 31, 2020 | $ | 1,971 |
15 |
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 6 – Intangible Assets
The table below summarizes the Company’s intangible assets at March 31, 2020 (in thousands):
Useful | Weighted Average | March 31, 2020 | ||||||||||||||||||
Lives (Years) | Remaining Life (Years) | Intangible Assets | Accumulated Amortization | Net Balance | ||||||||||||||||
Human animation technologies | 7 | 6 | $ | 123,436 | (29,054 | ) | $ | 94,382 | ||||||||||||
Trademark and trade names | 7 | 6 | 7,746 | (1,826 | ) | 5,920 | ||||||||||||||
Animation and visual effects technologies | 7 | 6 | 6,016 | (1,418 | ) | 4,598 | ||||||||||||||
Digital asset library | 5-7 | 5.5 | 7,536 | (1,610 | ) | 5,926 | ||||||||||||||
Intellectual Property | 7 | 6 | 828 | (195 | ) | 633 | ||||||||||||||
Total | $ | 145,562 | $ | (34,103 | ) | $ | 111,459 |
Amortization expense totaled $5.2 million and $10.3 million for the three and six months ended June 30, 2019. The Company’s intangible assets are being amortized over a weighted average remaining life of 6.1 years.March 31, 2020 and 2019 was $5.2 million in each period, respectively.
FutureThe estimated future amortization expense associated with intangible assets is as follows (in thousands):
Future Amortization | ||||
2019 (six months remaining) | $ | 10,306 | ||
2020 | 20,612 | |||
2021 | 20,612 | |||
2022 | 20,612 | |||
2023 | 20,612 | |||
Thereafter | 33,018 | |||
Total | $ | 125,772 |
Pulse Evolution Group, Inc.
Notes to the Condensed Consolidated Financial Statements
Future Amortization | ||||
2020 | $ | 15,652 | ||
2021 | 20,868 | |||
2022 | 20,868 | |||
2023 | 20,868 | |||
2024 | 20,795 | |||
Thereafter | 12,408 | |||
Total | $ | 111,459 |
Note 7 -– Accounts Payable and Accrued Expenses
AccruedAccounts payable and accrued expenses as of June 30, 2019March 31, 2020 and December 31, 20182019 consist of the following (in thousands):
June 30, 2019 | December 31, 2018 | March 31, | December 31, | |||||||||||||
2020 | 2019 | |||||||||||||||
Suppliers | $ | - | $ | 37,508 | ||||||||||||
Payroll taxes (in arrears) | $ | 1,308 | $ | 1,308 | 1,308 | 1,308 | ||||||||||
Accrued compensation | 1,774 | 2,453 | 2,124 | 3,649 | ||||||||||||
Legal and professional fees | 316 | 765 | 1,797 | 3,936 | ||||||||||||
Accrued litigation loss | 524 | 524 | 524 | 524 | ||||||||||||
Taxes | - | 5,953 | ||||||||||||||
Other | 206 | 810 | 1,990 | 3,897 | ||||||||||||
Total | $ | 4,128 | $ | 5,860 | $ | 7,743 | $ | 56,775 |
16 |
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 8 -– Related Parties
Amounts owed to and due from related parties as of June 30, 2019March 31, 2020 and December 31, 20182019 consist of the following (in thousands):
June 30, 2019 | December 31, 2018 | March 31, | December 31, | |||||||||||||
Alexander Bafer, Executive Chairman | $ | 20 | $ | 25 | ||||||||||||
John Textor, Chief Executive Officer | 310 | 304 | ||||||||||||||
2020 | 2019 | |||||||||||||||
Alexander Bafer, former Executive Chairman | $ | 20 | $ | 20 | ||||||||||||
John Textor, former Chief Executive Officer and affiliated companies | 292 | 592 | ||||||||||||||
Other | 369 | 69 | (7 | ) | 53 | |||||||||||
Total | $ | 699 | $ | 398 | $ | 305 | $ | 665 |
Our former Chairman and current Director, Mr. Bafer, advanced an unsecured, non-interest-bearing loan to the Company which is payable on demand. The amounts due to John Textor, former Chief Executive Officer and Executive Chairman and our current Head of Studio and a Director, represents an unpaid compensation liability assumed in the acquisition of EAI. The amounts due to other related parties also represent financing obligations assumed in the acquisition of EAI.
During the six months ended June 30, 2019, the Company received approximately $409,000 from related parties, including a $300,000 advance from FaceBank, Inc., a development stage company controlled by Mr. Textor, $56,000 from Mr. Bafer, $23,000 from Mr. Textor and $30,000 from other related parties. During the six months ended June 30, 2019, the Company paid approximately $109,000 to related parties, including $51,000 to Mr. Bafer, $23,000 to Mr. Textor and $35,000 to other related parties.
Notes Payable -– Related Parties
On August 8, 2018, the Company assumed a $172,000 note payable due to a relative of the CEO.then-Chief Executive Officer, John Textor. The note has three-month roll-over provision and different maturity and repayment amounts if not fully paid by its due date and bears interest at 18% per annum. The Company has accrued default interest for additional liability in excess of the principal amount. The note is currently in default. Accrued interest as of June 30, 2019March 31, 2020 and December 31, 20182019 related to this note was $79,000$102,000 and $45,000,$85,000, respectively.
On May 22, 2019, the Company issued a non-convertible promissory note to replace its convertible promissory note, dated October 12, 2015, with its Chairman, Mr. Bafer. The note has a principal balance of $264,365, accrues interest at a rate of 8% per annum and has a maturity date of August 31, 2019. Accrued interest is approximately $167,000 as of June 30, 2019.
Note 9 - NoteNotes Payable
Evolution AI Corporation
The Company has recorded, through the accounting consolidation of EAI, a $2.7 million note payable bearing interest at the rate of 10% per annum that was due on October 1, 2018. The cumulative accrued interest on the note amounts to $1.2$1.5 million. The note is currently in a default condition due to non-payment of principal and interest. The note relates to the acquisition of technology from parties who, as a result of the acquisition of EAI, own 15,000,000 shares of the Company’s common stock (after the conversion of 1,000,0000 shares of Series X Convertible Preferred Stock during the six monthsyear ended June 30,December 31, 2019). Such holders have agreed not to declare the note in default and to forbear from exercising remedies which would otherwise be available in the event of a default, while the note continues to accrue interest. The Company is currently in negotiation with such holders to resolve the matter.
Note 10 -Fair value measurementsFBNK Finance SarL
On February 17, 2020, FBNK Finance issued EUR 50,000,000 of bonds (or $55.1 million as of March 31, 2020). There were 5,000 notes with a nominal value EUR 10,000 per note. The bonds were issued at par with 100% redemption price. The maturity date of the bonds is February 15, 2023 and the bonds have a 4.5% annual fixed rate of interest. Interest is payable semi-annually on August 15 and February 15th. The majority of the proceeds was used for the redemption of the bonds issued by SAH, HFC and Nexway SAS. The bonds are unconditional and unsubordinated obligations of the FBNK Finance. As part of this transaction, the Company recorded a $11.1 million loss on extinguishment during the three months ended March 31, 2020.
Credit and Security Agreement
As described in Note 1, on March 11, 2020, the Company and HLEEF entered into the Credit Agreement, pursuant to which HLEEF extended the Credit Facility to FaceBank. The Credit Facility is secured by substantially all the assets of FaceBank. As of August 10, 2020, there are no amounts outstanding under the Credit Facility, and the Company does not intend to draw down on this Credit Facility.
As described in Note 1, in connection with the Credit Agreement, FaceBank and HLEEF entered into the HLEEF Security Agreement, pursuant to which FaceBank granted to HLEEF a security interest in all substantially all assets of FaceBank as security for the prompt and complete payment and performance of all of the obligations under the Credit Agreement and the related promissory note.
The Credit Facility contains customary affirmative and negative covenants, including restrictions on the ability of FaceBank to incur indebtedness in excess of $50,000,000, subject to certain exceptions, to make loans in excess of $250,000 to directors or officers of FaceBank or to any subsidiary other than fuboTV, and to declare and pay any distributions, subject to certain exceptions. The Credit Facility also contains customary events of default that include, among other things, certain payment defaults, cross defaults to other material indebtedness, covenant defaults, change of control defaults, judgment defaults, and bankruptcy and insolvency defaults. If an event of default exists, the lenders may require the immediate payment of all obligations under the Credit Facility, and may exercise certain other rights and remedies provided for under the Credit Facility, the HLEEF Security Agreement, the other loan documents and applicable law.
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Note Purchase Agreement
On March 19, 2020, the Initial Borrower and FB Loan entered into the Note Purchase Agreement, pursuant to which the Initial Borrower sold to FB Loan the Senior Notes. On April 2, 2020, fuboTV and Sports Rights Management, LLC, a Delaware limited liability company (“SRM”), also joined the Note Purchase Agreement as borrowers (fuboTV, SRM and the Initial Borrower, collectively, the “Borrower”). In connection with the Company’s acquisition of fuboTV, the proceeds of $7.4 million, net of an original issue discount of $2.65 million, were sent directly to fuboTV (see Note 16).
Each Borrower’s obligations under the Senior Notes are secured by substantially all of the assets of each such Borrower pursuant to a Security Agreement, dated as of March 19, 2020, by and among Borrower and FB Loan (the “Security Agreement”).
The Note Purchase Agreement contains customary affirmative and negative covenants, including covenants limiting the ability of the Borrower and its subsidiaries to, among other things, incur debt, grant liens, make certain restricted payments, make certain loans and other investments, undertake certain fundamental changes, enter into restrictive agreements, dispose of assets, and enter into transactions with affiliates, in each case, subject to limitations and exceptions set forth in the Note Purchase Agreement. The Note Purchase Agreement also contains customary events of default that include, among other things, certain payment defaults, cross defaults to other material obligations, covenant defaults, change of control defaults, judgment defaults, and bankruptcy and insolvency defaults. If an event of default exists, the lenders may require the immediate payment of all obligations under the Note Purchase Agreement, and may exercise certain other rights and remedies provided for under the Note Purchase Agreement, the Security Agreement, the other loan documents and applicable law.
Interest on the Senior Notes shall accrue until full and final repayment of the principal amount of the Senior Note at a rate of 17.39% per annum. On the first business day of each calendar month in which the Senior Note is outstanding, beginning on April 1, 2020, Borrower shall pay in arrears in cash to FB Loan accrued interest on the outstanding principal amount of the Senior Note. The maturity date of the Senior Notes is the earlier to occur of (i) July 8, 2020 and (ii) the date the Borrower receives the proceeds of any financing. The Borrower may prepay or redeem the Senior Note in whole or in part without penalty or premium.
In connection with the Note Purchase Agreement, the Company issued FB Loan a warrant to purchase 3,269,231 shares of its common stock at an exercise price of $5.00 per share (the “FB Loan Warrant”) and 900,000 shares of its common stock. The fair value of the warrant on the Senior Notes issuance date was approximately $15.6 million and is recorded as a warrant liability in the accompanying condensed consolidated balance sheet with subsequent changes in fair value recognized in earnings each reporting period (see Note 10). The fair value of the 900,000 common stock issued was based upon the closing price of the Company’s common stock as of March 19, 2020 (or $8.15 per share or $7.3 million). Since the fair value of the warrants and common stock exceeded the principal balance of the Senior Notes, the Company recorded a loss on issuance of the Senior Notes totaling $12.9 million and is reflected in the accompanying condensed consolidated statement of operations.
The 900,000 shares were valued at $8.15 per share at March 19, 2020 and $7.5 million set forth on the balance sheet for shares settled payable for note payable reflects the fair value of 900,000 shares to be issued at $8.35 per share as of March 31, 2020. The Company recorded change in fair value of shares settled payable of $0.2 million during the three months ended March 31, 2020.
The carrying value of the Senior Notes as of March 31, 2020 is comprised of the following:
March 31, 2020 | ||||
Principal value of Senior Note | $ | 10,050 | ||
Original issue discount | (2,650 | ) | ||
Discount resulting from allocation of proceeds to warrant liability | (7,400 | ) | ||
Amortization of discount | 1,005 | |||
Net carrying value of Senior Note | $ | 1,005 |
Pursuant to the Note Purchase Agreement, the Borrower agreed, among other things that (i) FaceBank shall file a registration statement with the Commission regarding the purchase and sale of 900,000 shares of FaceBank’s common stock issued to FB Loan in connection with the Note Purchase Agreement (the “Shares”) and any shares of capital stock issuable upon exercise of the FB Loan Warrant (the “Warrant Shares)”); and (ii) FaceBank shall have filed an application to list FaceBank’s Common Stock for trading on the NASDAQ exchange, on or before the date that is thirty (30) days following the closing date of the Note Purchase Agreement.
As of July 3, 2020, the Company had repaid the Senior Notes in full ($10.05 million) plus accrued interest.
Amendments to the Note Purchase Agreement
On April 21, 2020, the Company entered into an Amendment to the Note Purchase Agreement to (i) extend the deadline for registration of the resale of the Shares and the Warrant Shares to May 25, 2020 and (ii) provide that in lieu of the obligation under the Note Purchase Agreement to apply to list on NASDAQ within thirty (30) days of March 19, 2020, FaceBank shall have initiated the process to list its capital stock on a national exchange on or before the date that is thirty (30) days following March 19, 2020.
Subsequently, on May 28, 2020, the Company and FB Loan entered into a Consent and Second Amendment to the Note Purchase Agreement (the “Second Amendment”), pursuant to which, among other things, FB Loan agreed to extend the deadline for registration for of the Shares and the Warrant Shares for resale to July 1, 2020. In addition:
(i) | FB Loan consented to the May 11, 2020 sale by the Company of capital stock for aggregate consideration in the amount of $7,409,045; and | |
(ii) | the provision requiring that following receipt by any loan party or any subsidiary of proceeds of any financing, the Borrower must prepay the Senior Note in an amount equal to 100% of the cash proceeds of such financing, was removed. |
Finally, on July 1, 2020, the Company and FB Loan entered into a Third Amendment to Note Purchase Agreement (the “Third Amendment”), pursuant to which (i) the deadline for registration of the Shares and the Warrant Shares for resale was extended to July 8, 2020 and (ii) the deadline for the redemption of the Senior Notes by the Borrower was amended to be the earlier to occur of (y) July 8, 2020 and (z) the date the Borrower receives the proceeds of any financing.
Joinder Agreement and Guaranty Agreement
On April 30, 2020, fuboTV and SRM entered into a joinder agreement (the “Joinder Agreement”) in favor of FB Loan in connection with the Note Purchase Agreement. The Joinder Agreement is effective as of April 2, 2020.
Pursuant to the Joinder Agreement, (a) fuboTV joined the Note Purchase Agreement, became an issuer of notes and a borrower thereunder, assumed all obligations of the Borrower in connection therewith, and granted a lien on substantially all of its assets to secure its obligations under the Note Purchase Agreement and any notes issued pursuant thereto and (b) SRM guaranteed the obligations of the Borrower and fuboTV under the Note Purchase Agreement and any notes issued pursuant thereto and granted a security interest in substantially all of its assets to secure its guaranty obligations.
On April 30, 2020, in connection with the Joinder Agreement, SRM entered into a guaranty agreement (the “Guaranty Agreement”) in favor of FB Loan, pursuant to which SRM guaranteed the obligations of Borrower under fuboTV under the Note Purchase Agreement. The Guaranty Agreement is effective as of April 2, 2020.
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 10 – Fair Value Measurements
The Company holds investments in equity securities and limited partnership interests, which are accounted for at fair value and classified within financial assets at fair value on the condensed consolidated balance sheet, with changes in fair value recognized as investment gain/ loss in the condensed consolidated statements of operations. The Company also has an investment in Nexway common stock that is publicly traded on the Frankfurt Exchange. Additionally, the Company’s convertible notes, derivatives and warrants were classified as liabilities and measured at fair value on the issuance date, with changes in fair value recognized as other income/expense in the condensed consolidated statements of operations.
Fair valued measured at March 31, 2020 | ||||||||||||
Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||
Financial Assets at Fair Value: | ||||||||||||
Investment in Equity/Debt Funds | $ | - | $ | 1,965 | $ | - | ||||||
Investment in Nexway at fair value | 2,374 | - | - | |||||||||
Total Financial Assets at Fair Value | $ | 2,374 | $ | 1,965 | $ | - | ||||||
Financial Liabilities at Fair Value: | ||||||||||||
Derivative liability - convertible notes | $ | - | $ | - | $ | 1,692 | ||||||
Profits interest sold | - | - | 1,971 | |||||||||
Embedded put option | - | - | 389 | |||||||||
Warrant liability - Subsidiary | - | - | 39 | |||||||||
Warrant liability | - | - | 15,987 | |||||||||
Total Financial Liabilities at Fair Value | $ | - | $ | - | $ | 20,078 |
Pulse Evolution Group, Inc.
Notes to the Condensed Consolidated Financial Statements
The following table classifies the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of June 30, 2019 and December 31,2018 (in thousands):
Fair Value measured at June 30, 2019 | ||||||||||||
Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||
Derivative liability - convertible notes | $ | - | $ | - | $ | - | ||||||
Derivative liability - related party convertible notes | - | - | - | |||||||||
Total Derivative Liability | $ | - | $ | - | $ | - | ||||||
Profits interest sold | - | - | 655 | |||||||||
Warrant Liability | - | - | 927 | |||||||||
Total Fair Value | $ | - | $ | - | $ | 1,582 |
Fair Value measured at December 31, 2018 | ||||||||||||
Quoted prices in (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs(Level 3) | ||||||||||
Derivative liability - convertible notes | $ | - | $ | - | $ | 469 | ||||||
Derivative liability - related party convertible notes | - | - | 549 | |||||||||
Total Derivative Liability | $ | - | $ | - | $ | 1,018 | ||||||
Warrant Liability | - | - | 4,528 | |||||||||
Total Fair Value | $ | - | $ | - | $ | 5,546 |
Fair Value measured at December 31, 2019 | ||||||||||||
Quoted prices in active markets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||
Derivative liability – convertible notes | $ | - | $ | - | $ | 1,203 | ||||||
Profits interest | - | - | 1,971 | |||||||||
Embedded put option | - | - | 376 | |||||||||
Warrant Liability - Subsidiary | - | - | 24 | |||||||||
Total Financial Liabilities at Fair Value | $ | - | $ | - | $ | 3,574 |
Derivative Financial Instruments
The following table presents changes in Level 3 liabilities measured at fair value (in thousands) for the six monthsyear ended June 30,December 31, 2019. Unobservable inputs were used to determine the fair value of positions that the Company has classified within the Level 3 category.
FaceBank Group, Inc.
Derivative | Warrants (assumed from subsidiary) | Profits interest sold | ||||||||||
Fair value at December 31, 2018 | $ | 1,018 | $ | 4,528 | $ | - | ||||||
Change in fair value | (1,018 | ) | (3,601 | ) | - | |||||||
Additions | - | - | 655 | |||||||||
Fair value at June 30, 2019 | $ | - | $ | 927 | $ | 655 |
Notes to the Unaudited Condensed Consolidated Financial Statements
Derivative - Convertible Notes | Warrants (assumed from subsidiary) | Profits Interests Sold | Warrant Liability | Embedded Put Option | ||||||||||||||||
Fair value at December 31, 2019 | $ | 1,203 | $ | 24 | $ | 1,971 | $ | - | $ | 376 | ||||||||||
Change in fair value | (200 | ) | 15 | - | 366 | (97 | ) | |||||||||||||
Additions | 689 | - | - | 15,621 | 172 | |||||||||||||||
Redemption | - | - | - | - | (62 | ) | ||||||||||||||
Fair value at March 31, 2020 | $ | 1,692 | $ | 39 | $ | 1,971 | $ | 15,987 | $ | 389 |
The Company assumed liability for a warrant issued by PEC that expires on January 28, 2023. The fair value of the warrant liability, amounted to $0.9 milliontotaled $39,000 on June 30, 2019March 31, 2020 and $4.5 million$24,000 on December 31, 2018,2019, resulting in a change in fair value of $3.6 million$15,000 that is reported as a component of other income/(expense) in the condensed consolidated statement of operations for the sixthree months ended June 30, 2019.March 31, 2020.
Pulse Evolution Group, Inc.
Notes to the Condensed Consolidated Financial Statements
Subsidiary Warrant Liability – The Company used a Monte Carlo simulation model to estimate the fair value of the warrant liability with the following assumptions at June 30, 2019March 31, 2020 and December 31, 2018:2019:
June 30, 2019 | December 31, 2018 | March 31, 2020 | December 31, 2019 | |||||||||||||
Exercise price | $ | 0.75 | $ | 0.75 | $ | 0.75 | $ | 0.75 | ||||||||
Stock price - subsidiary | $ | 0.10 | $ | 0.22 | ||||||||||||
Stock price – subsidiary | $ | 0.03 | $ | 0.02 | ||||||||||||
Discount applied | 50 | % | 50 | % | 0 | % | 0 | % | ||||||||
Fair value of stock price | $ | 0.02 | $ | 0.09 | $ | 0.00 | $ | 0.00 | ||||||||
Risk free rate | 1.72 | % | 2.49 | % | 0.28 | % | 1.62 | % | ||||||||
Contractual term (years) | 3.58 | 4.08 | 2.83 | 3.08 | ||||||||||||
Expected dividend yield | 0 | % | 0 | % | 0 | % | 0 | % | ||||||||
Expected volatility | 83.2 | % | 86.5 | % | 83.7 | % | 83.7 | % | ||||||||
Number of subsidiary warrants outstanding | 48,904,037 | 48,904,037 | 48,904,037 | 48,904,037 |
In arriving at the fair value of stock price a 50%as of December 31, 2019 and March 31, 2020, no discount was applied to the trading price of the PEC stock, as a result of illiquidity in the volumes being traded on the OTC markets. Risk-free interest rate was based on rates established by the Federal Reserve Bank. The volatility rate was based on stock prices of comparable companies.
Profits Interest – The fair value of the profits interest sold was determined using an expected cash flow analysis.
Warrant Liability – In connection with its Note Purchase Agreement (see Note 9), the Company issued the FB Loan Warrant and utilized the Black-Scholes pricing model. Absent the Company’s sequencing policy as disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on May 29, 2020, the Company would have recorded these warrants as equity classified. The warrant liability was recorded at the date of grant at fair value with subsequent changes in fair value recognized in earnings each reporting period. The fair value of the warrant liability at grant date totaled $15.6 million, and on March 31, 2020 the fair value of the warrant liability totaled $16.0 million, resulting in a change in fair value of $0.4 million that is reported as a component of other income/(expense) in the condensed consolidated statement of operations for the three months ended March 31, 2020.
The significant assumptions used in the valuation are as follows:
March 31, 2020 | ||||
Fair value of underlying common shares | $ 4.78 - 4.97 | |||
Exercise price | $ | 5.00 | ||
Dividend yield | - | % | ||
Historical volatility | 52.6% - 52.8 | % | ||
Risk free interest rate | 0.14% – 0.66 | % |
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Embedded Put Option – The Series D Convertible Preferred Stock (the “Series D Preferred Stock”) contains a contingent put option and, accordingly, the Company considered it to be a liability and accounted for it at fair value using Level 3 inputs. The Company determined the fair value of this liability using the Monte Carlo simulation model with the following inputs:
March 31, 2020 | December 31, 2019 | |||||||
Stock price | $ | 8.35 – $9.20 | $ | 8.91 – $9.03 | ||||
Fixed conversion price | $ | 0.25 | $ | 0.25 | ||||
Risk free rate | 0.2 – 0.4 | % | 1.6 | % | ||||
Contractual term (years) | 1.2 – 1.5 | 1.2 – 1.5 | ||||||
Expected dividend yield | 8.0 | % | 8.0 | % | ||||
Expected volatility | 87.2% - 94.8 | % | 89.2% - 90.4 | % |
Note 11 -– Convertible Notes Payable and Convertible Notes Payable to Related Parties
At June 30, 2019March 31, 2020 and December 31, 2018,2019, the carrying amounts of the convertible notes including the remaining principal balance plus the fair value of the derivative liabilities associated with the variable share settlement feature and unamortized discounts is as follows (in thousands):
Issuance Date | Stated Interest Rate | Maturity Date | Principal | Unamortized Discount | Variable Share Settlement Feature at Fair Value | Carrying Amount | ||||||||||||||||||
Convertible notes | ||||||||||||||||||||||||
Birchwood Capital (2) | 11/6/18 | 10 | % | 5/6/19 | $ | 50 | $ | - | $ | - | $ | 50 | ||||||||||||
Total | $ | 50 | - | - | $ | 50 | ||||||||||||||||||
Convertible notes- Related Parties | ||||||||||||||||||||||||
Chairman (5) in default | 10/12/15 | 22 | % | 8/1/17 | $ | - | $ | - | $ | - | $ | - | ||||||||||||
Shareholder (6) in default | 12/28/16 | 3 | % | 3/24/17 | 50 | - | - | 50 | ||||||||||||||||
Total | $ | 50 | $ | - | $ | - | $ | 50 | ||||||||||||||||
Balance at June 30, 2019 | $ | 100 | $ | - | $ | - | $ | 100 |
Issuance Date | Stated Interest Rate | Maturity Date | Principal | Unamortized Discount | Variable Share Settlement Feature at Fair Value | Carrying amount | ||||||||||||||||||
Convertible notes | ||||||||||||||||||||||||
JSJ Investments (2) | 12/6/2019 | 10 | % | 12/6/2020 | $ | 255 | $ | (174 | ) | $ | 443 | $ | 524 | |||||||||||
Eagle Equities (3) | 12/12/2019 | 12 | % | 12/12/2020 | 210 | (147 | ) | 297 | 360 | |||||||||||||||
BHP Capital (4) | 12/20/2019 | 10 | % | 12/20/2020 | 125 | (85 | ) | 120 | 160 | |||||||||||||||
GS Capital Partners (5) | 1/17/2020 | 10 | % | 1/17/2021 | 150 | (120 | ) | 210 | 240 | |||||||||||||||
EMA Financial, LLC (6) | 2/6/2020 | 10 | % | 11/6/2020 | 125 | (100 | ) | 204 | 229 | |||||||||||||||
Adar Alef, LLC (7) | 2/10/2020 | 12 | % | 2/10/2021 | 150 | (129 | ) | 220 | 241 | |||||||||||||||
BHP Capital (8) | 3/24/2020 | 10 | % | 3/24/2020 | 100 | (95 | ) | 99 | 104 | |||||||||||||||
Jefferson Street Capital, LLC (9) | 3/24/2020 | 10 | % | 3/24/2020 | 100 | (95 | ) | 99 | 104 | |||||||||||||||
Balance at March 31, 2020 | $ | 1,215 | $ | (945 | ) | $ | 1,692 | $ | 1,962 |
Issuance Date | Stated Interest Rate | Maturity Date | Principal | Unamortized Discount | Variable Share Settlement Feature at Fair Value | Carrying amount | ||||||||||||||||||
Convertible notes | ||||||||||||||||||||||||
Adar Bays – Alef (1) | 7/30/2019 | 10 | % | 7/30/2020 | 275 | (159 | ) | 379 | 495 | |||||||||||||||
JSJ Investments (2) | 12/06/2019 | 10 | % | 12/6/2020 | 255 | (238 | ) | 422 | 439 | |||||||||||||||
Eagle Equities (3) | 12/12/2019 | 12 | % | 12/12/2020 | 210 | (199 | ) | 285 | 296 | |||||||||||||||
BHP Capital (4) | 12/20/2019 | 10 | % | 12/20/2020 | 125 | (114 | ) | 117 | 128 | |||||||||||||||
Balance at December 31, 2019 | $ | 865 | $ | (710 | ) | $ | 1,203 | $ | 1,358 |
Pulse EvolutionFaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Issuance Date | Stated Interest Rate | Maturity Date | Principal | Unamortized Discount | Variable Share Settlement Feature at Fair Value | Carrying Amount | ||||||||||||||||||
Convertible notes | ||||||||||||||||||||||||
Power Up (1*) | 8/24/18 | 8 | % | 8/24/19 | $ | 203 | $ | (131 | ) | $ | 152 | $ | 224 | |||||||||||
Birchwood Capital (2) | 11/6/18 | 10 | % | 5/6/19 | 50 | (35 | ) | - | 15 | |||||||||||||||
Power Up (3) | 11/26/18 | 8 | % | 11/26/19 | 128 | (115 | ) | 96 | 109 | |||||||||||||||
Adar Bays - Alef (4) | 11/28/18 | 10 | % | 11/28/19 | 193 | (175 | ) | 221 | 239 | |||||||||||||||
Total | $ | 574 | $ | (456 | ) | $ | 469 | $ | 587 | |||||||||||||||
Convertible notes- Related Parties | ||||||||||||||||||||||||
Chairman (5) in default | 10/12/15 | 22 | % | 8/1/17 | $ | 265 | - | $ | 549 | 814 | ||||||||||||||
Shareholder (6) in default | 12/28/16 | 3 | % | 3/24/17 | 50 | - | - | 50 | ||||||||||||||||
Total | $ | 315 | - | $ | 549 | $ | 864 | |||||||||||||||||
Balance at December 31, 2018 | $ | 889 | $ | (456 | ) | $ | 1,018 | $ | 1,451 |
* The (#) references the notes described below
The derivative liability results from the variable share settlement provision featured within the convertible notes issued by the Company. The fair value of the derivative liabilities was estimated using a Binomial Lattice model on the dates that the notes were issued and were subsequently revalued at June 30, 2019March 31, 2020 and December 31, 2018,2019, using the Monte Carlo simulation model with the following weighted average assumptions:
April 25, 2019 – May 22, 2019 | December 31, 2018 | |||||||
Stock Price | $ 5.05 - 7.25 | $ | 6.75 | |||||
Risk Free Interest Rate | 2.37 – 2.45 | % | 2.61 | % | ||||
Expected life (years) | 0.19 – 0.59 | 0.73 | ||||||
Expected dividend yield | 0 | % | 0 | % | ||||
Expected volatility | 65.9 – 94.3 | % | 92.8 | % | ||||
Fair Value - Note Variable Share Settlement Feature | $ | 561 | * | $ | 1,018 |
*Fair value at May 22, 2019
March 31, 2020 | December 31, 2019 | |||||||
Stock Price | $ | 7.74 – 9.45 | $ | 8.91 – 10.15 | ||||
Risk Free Interest Rate | 0.12 – 1.56 | % | 1.52 - 1.60 | % | ||||
Expected life (years) | 0.33 – 1.00 | 0.58 – 1.00 | ||||||
Expected dividend yield | 0 | % | 0 | % | ||||
Expected volatility | 91.3 – 134.0 | % | 90.0 – 95.3 | % | ||||
Fair Value – Note Variable Share Settlement Feature (in thousands) | $ | 1,692 | $ | 1,203 |
(1) | On |
Pulse Evolution Group, Inc.
Notes to the Condensed Consolidated Financial Statements
On January 20, 2020, the Company repaid the principal balance of $275,000 and accrued interest of approximately $16,000. | |
(2) | On December 6, 2019, the Company issued a convertible promissory note to JSJ Investments with a principal balance of $255,000. The Company received net proceeds of $250,000. The note matures on December 6, 2020 and bears interest at 10% per annum. The Company may prepay this note and unpaid interest on or prior to July 3, 2020. The loan and any accrued interest may be converted into shares of the Company’s common stock at a rate of 47% multiplied by the lowest trading price during the previous twenty (20) day trading period ending on the latest complete trading day prior to the conversion date. |
(3) | On December 12, 2019, the Company issued a convertible promissory note to Eagle Equities, LLC with a principal balance of $210,000. The Company received net proceeds of $200,000. The note matures on December 12, 2020 and bears interest at 12% per annum. The loan and any accrued interest may be converted into shares of the Company’s common stock, at any time after the six month anniversary of the note, at a rate of 53% multiplied by the lowest trading price during the previous twenty (20) day trading period ending on the latest complete trading day prior to the conversion date. |
(4) | On December 20, 2019, the Company issued a convertible promissory note to BHP Capital NY Inc. with a principal balance of $125,000. The Company received net proceeds of $122,500. The note matures on December 20, 2020 and bears interest at 10% per annum. The loan and any accrued interest may be converted into shares of the Company’s common stock at a rate of |
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
(5) | On |
Related Party Convertible Notes
(6) |
On |
On | |
(8) | On March 24, 2020, the Company issued a convertible promissory note to BHP Capital NY Inc. with a principal balance of |
(9) | On March 24, 2020, the Company issued a convertible promissory note to Jefferson Street Capital, LLC. with a principal balance of $100,000. The note matures on demand and bears interest at 10% per annum. The loan and any accrued interest may be converted into shares of the Company’s common stock at a rate of 61% multiplied by the lowest trading price during the previous fifteen (15) day trading period ending on the latest complete trading day prior to the conversion date. On January 29, 2020, the Company issued a convertible promissory note to Auctus Fund, LLC. with a principal balance of $275,000. The note matures on November 29, 2020 and bears interest at 10% per annum. The loan and any accrued interest may be converted into shares of the Company’s common stock at a rate of 50% multiplied by the lowest trading price during the previous twenty five (25) day trading period ending on the latest complete trading day prior to the conversion date. On March 19, 2020, the Company repaid the principal balance and interest of approximately |
Note 12- Stockholders’ Equity / (Deficit)
Authorized Share Capital
The Company amended its articles of incorporation on January 9, 2019 to increase the authorized share capital to 400 million shares of common stock.
Series X Convertible Preferred Shares
The Company had 0 and 1,000,000 shares, par value $0.0001, of series X Convertible Preferred Shares, issued and outstanding at June 30, 2019 and December 31, 2018, respectively. Series X Convertible Preferred shares have the rights to receive dividends or any distributions on a “as-converted basis’ and also each series X Convertible Preferred stockholder held the right to 1 vote relative to each stockholder of common stock, on a “as-converted basis”. Each series X Convertible Preferred share is convertible into 15 shares of common stock. On February 28, 2019, the 1,000,000 series X Preferred Shares automatically converted into 15,000,000 shares of Common Stock.
23 |
Pulse EvolutionFaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 12 – Temporary Equity
CommonSeries D Convertible Preferred Stock
InOn March 2019,6, 2020, the Company raised $1.1 million in(i) entered into a private placement transaction by issuing 93,910stock purchase agreement to issue 203,000 shares of its common stockSeries D Preferred Stock, for $11.28proceeds of $203,000 and (ii) redeemed the 203,000 shares of Series D Preferred Stock previously issued on September 6, 2019. As a result, the total number of shares of Series D Preferred Stock outstanding as of March 31, 2020 was 456,000 (see Note 17).
The following table summarizes the Company’s Series D Preferred Stock activities for the three months ended March 31, 2020 (dollars in thousands):
Series D Preferred Stock | ||||||||
Shares | Amount | |||||||
Total temporary equity as of December 31, 2019 | 461,839 | $ | 462 | |||||
Issuance of Series D convertible preferred stock for cash | 203,000 | 203 | ||||||
Offering cost related to issuance of Series D convertible preferred stock | - | (3 | ) | |||||
Deemed dividends related to immediate accretion of offering cost | - | 3 | ||||||
Accrued Series D preferred stock dividends | 8,868 | 9 | ||||||
Bifurcated redemption feature of Series D convertible preferred stock | - | (171 | ) | |||||
Deemed dividends related to immediate accretion of bifurcated redemption feature of Series D convertible preferred stock | - | 171 | ||||||
Redemption of Series D preferred stock (including accrued dividends) | (210,831 | ) | (211 | ) | ||||
Total temporary equity as of March 31, 2020 | 462,876 | $ | 463 |
The redemption of the 203,000 shares of Series D Preferred Stock (previously issued on September 6, 2020) on March 6, 2020 occurred as follows (amounts in thousands except share and per share values):
Series D preferred stock issued | 203,000 | |||
Per share value | $ | 1.00 | ||
$ | 203 | |||
Accrued dividends | $ | 8 | ||
$ | 211 | |||
Redemption percentage | $ | 1.29 | ||
Total | $ | 272 |
Holders of shares of the Series D Preferred Stock are entitled to a Hong Kong-based family office group.receive, cumulative cash dividends at the rate of 8% on $1.00 per share of the Series D Preferred Stock per annum (equivalent to $0.08 per annum per share), subject to adjustment. The dividends are payable solely upon redemption, liquidation or conversion. The Company contemporaneously issued warrants to purchase an additional 200,000recorded approximately $9,000 accrued dividend as of March 31, 2020.
The Series D Preferred Stock is being classified as temporary equity because it has redemption features that are outside of the Company’s control upon certain triggering events, such as a Market Event. A “Market Event” is defined as any trading day during the period which shares of common stockthe Series D Preferred Stock are issued and outstanding, where the trading price for such date is less than $0.35. In the event of a Market Event, the Series D Preferred Stock shall be subject to mandatory redemption and the stated value shall immediately be increased to $1.29 per share of Series D Preferred Stock. The Market Event is considered to be outside the control of the Company, resulting in classification of the Series D Preferred Stock as temporary equity.
The initial discounted carrying value resulted in recognition of a bifurcated redemption feature of $171,000, further reducing the initial carrying value of the shares of Series D Preferred Stock. The discount to the investoraggregate stated value of the shares of Series A Convertible Preferred Stock, resulting from recognition of the bifurcated redemption feature was immediately accreted as a reduction of additional paid-in capital and an increase in this transaction.the carrying value of the Series D Shares. The warrants feature an exercise priceaccretion is presented in the condensed consolidated statement of $11.31operations as a deemed dividend, increasing net loss to arrive at net loss attributable to common stockholders.
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Note 13 – Stockholders’ Equity / (Deficit)
Preferred Stock Designations
On March 20, 2020, FaceBank amended its Articles of Incorporation to withdraw, cancel and terminate the previously-filed (i) Certificate of Designation of with respect to 5,000,000 shares of its Series A Preferred Stock, par value $0.0001 per share, (ii) Certificate of Designation with respect to 1,000,000 shares of its Series B Preferred Stock, par value $0.0001 per share, (iii) Certificate of Designation with respect to 41,000,000 shares of its Series C Preferred Stock, par value $0.0001 per share and may(iv) Certificate of Designation with respect to 1,000,000 shares of its Series X Preferred Stock, par value $0.0001 per share. Upon the withdrawal, cancelation and termination of such designations, all shares previously designated as Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series X Preferred Stock were returned to the status of authorized but undesignated shares of FaceBank’s Preferred Stock, par value $0.0001 per share.
On March 20, 2020, in connection with the Merger, FaceBank filed an amendment to its Articles of Incorporation to designate 35,800,000 of its authorized preferred stock as “Series AA Convertible Preferred Stock” pursuant to a Certificate of Designation of Series AA Convertible Preferred Stock (the “Series AA Preferred Stock Certificate of Designation”). The Series AA Convertible Preferred Stock (the “Series AA Preferred Stock”) has no liquidation preference. The Series AA Preferred Stock is entitled to receive dividends and other distributions as and when paid on the Common Stock on an as converted basis. Each share of Series AA Preferred Stock is initially convertible into two shares of Common Stock, subject to adjustment as provided in the Series AA Preferred Stock Certificate of Designation and shall only be exercised atconvertible immediately following the sale of such shares on an arms’-length basis either pursuant to an exemption from registration under Rule 144 promulgated under the Securities Act or pursuant to an effective registration statement under the Securities Act. Each share of Series AA Preferred Stock shall have 0.8 votes per share (the “Voting Rate”) on any time priormatter submitted to March 31, 2020.the holders of the Common Stock for a vote and shall vote together with the Common Stock on such matters for as long as the Series AA Preferred Stock is outstanding. The warrants were determinedVoting Rate shall be subject to be equity instrumentsadjustment in the event of stock splits, stock combinations, recapitalizations reclassifications, extraordinary distributions and are therefore classified within stockholders’ equity in accordance with ASC 815.similar events.
Common Stock Activity
Issuance of Common Stock for Cash
The Company raised an additional $1.1approximately $2.3 million through issuances of an aggregate of 670,980795,593 shares of its common stock in private placement transactions during the sixthree months ended June 30, 2019March 31, 2020 to several other investors.
Issuance of Common Stock Related to PEC Acquisition
During the six monthsthree-months ended June 30, 2019,March 31, 2020, the Company issued 18,9351,552,070 shares of its common stock in exchange for 3,727,080 shares of its subsidiary PEC. The interests exchange in PEC were previously recorded within noncontrolling interests and the transaction was accounted for as a reduction of $1.1 million of noncontrolling interests for the carrying value of those noncontrolling interests at the date of exchange with an offsetting increase in Additional paid-in capital.
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
Issuance of Common Stock for Services Rendered
On January 1, 2020, the Company entered into the first amendment to a joint business development agreement and issued 200,000 shares of its restricted common stock with a fair value of $1.8 million in exchange for business development services.
During the three months ended March 31, 2020, the Company issued 275,000 shares of its common stock with a fair value of $2.3 million in exchange for consulting services.
During the three months ended March 31, 2020, the Company issued 62,500 shares of its common stock with a fair value of approximately $0.6 million in exchange for services rendered in connection with the Company’s amended Digital Likeness Development Agreement by and among Floyd Mayweather, the Company and FaceBank, Inc., effective as of July 31, 2019, as amended (the “Mayweather Agreement”).
During the three months ended March 31, 2020, the Company issued 2,500 shares of its common stock with a fair value of $26,000 in exchange for consulting services.
Issuance of Common Stock for Employee Compensation
On February 20, 2020, the Company issued 300,000 shares of its common stock to an officer of the Company at a fair value of $2.7 million, or $9.00 per share.
During the three months ended March 31, 2020, the Company issued 200,000 shares of its common stock with a fair value of $1.6 million as compensation to service providers for services rendered.
Issuance of Common Stock in Connection with Convertible Notes
During the three months ended March 31, 2020, the Company issued 7,500 shares of its common stock with a fair value of approximately $0.1 million or $6.90 per share, to settle a lease dispute.in connection with the issuance of convertible notes.
Stock Options
Equity Compensation Plan Information
The Company has adopted theCompany’s 2014 Equity Incentive Stock Plan (the “Plan”“2014 Plan”). The Plan provides for the issuance of up to 166,667 incentive stock options and nonqualified stock options to the Company’s employees, officers, directors, and certain consultants. The 2014 Plan is administered by the Company’s Board and has a term of 10 years.
Contemporaneous with the closing of the Merger, the Company assumed 8,051,098 stock options issued and outstanding under the fuboTV Inc. 2015 Equity Incentive Plan (the “2015 Plan”) with a weighted-average exercise price of $1.32 per share. From an after the Effective Time, such options may be exercised for shares of our common stock under the terms of the 2015 Plan.
On April 1, 2020, the Company approved the establishment of the FaceBank 2020 Equity Incentive Plan. The Company has valuedcreated an incentive option pool of 12,116,646 shares of FaceBank Common Stock under the Plan.
On May 21, 2020, we established our Outside Director Compensation Policy to set forth guidelines for the compensation of our non-employee directors for their service on our Board of Directors.
Options
The fair value of the Company’s common stock was based upon the publicly quoted price on the date that the final approval of the awards was obtained. The Company does not expect to pay dividends in the foreseeable future so therefore the expected dividend yield is 0%. The expected term for stock options at their date of grant utilizinggranted with service conditions represents the Black-Scholes option pricing model. This modelaverage period the stock options are expected to remain outstanding and is dependent upon several variables such asbased on 10 years. The Company obtained the options’ term, exercise price, current stock price, risk-free interest rate estimated overfrom publicly available data published by the expected term and estimatedFederal Reserve. The Company uses a methodology in estimating its volatility percentage from a computation that was based on a comparison of our stock over the expected termaverage volatility rates of the options. The risk-free interest rate used in the calculations issimilar companies to a computation based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected lifestandard deviation of the Company’s own underlying stock price’s daily logarithmic returns. During the three months ended March 31, 2020, 280,000 options as calculated usingwere granted outside of the simplified method. The estimated volatility was determined based onPlan, and there were no options granted during the historical volatility of our common stock.three months ended March 31, 2019.
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
The Company did not grant stock options duringfollowing reflects the six months ended June 30, 2019.
A summary of option activity under the Company’s employee stock option plan for the six months ended June 30, 2019 is presented below:
Number of Shares | Weighted Average Exercise Price | Total Intrinsic Value | Weighted Average Remaining Contractual Life (in years) | |||||||||||||
Outstanding as of December 31, 2018 | 16,667 | $ | 28.20 | $ | - | 9.1 | ||||||||||
Outstanding as of June 30, 2019 | 16,667 | $ | 28.20 | $ | - | 8.6 | ||||||||||
Options exercisable as of June 30, 2019 | 16,667 | $ | 28.20 | $ | - | 8.6 |
There was no stock-based compensation expense recognized during the six months ended June 30, 2019. Stock-based compensation expense of $0.3 million and $0.7 million was recognizedactivity for the three and six months ended June 30, 2018, respectively, associatedMarch 31, 2020:
Number of Shares | Weighted Average Exercise Price | Total Intrinsic Value | Weighted Average Remaining Contractual Life (in years) | |||||||||||||
Outstanding as of December 31, 2019 | 16,667 | $ | 28.20 | $ | - | 8.1 | ||||||||||
Granted | 280,000 | $ | 7.20 | $ | 322,000 | 4.7 | ||||||||||
Outstanding as of March 31, 2020 | 296,667 | $ | 8.38 | $ | 322,000 | 4.9 | ||||||||||
Options vested and exercisable as of March 31, 2020 | 296,667 | $ | 8.38 | $ | 322,000 | 4.9 |
During the three months ended March 31, 2020, in connection with stock-based payment awards issuedthe Mayweather Agreement, the Company granted options to non-employee service providers.purchase 280,000 shares of the Company’s common stock at an exercise price of $7.20 per share. This option has a fair value of $1,031,000, a five-year term and expires on December 21, 2024.
As of June 30, 2019,March 31, 2020, there was no unrecognized stock-based compensation expense.
Warrants
A summary of the Company’s outstanding warrants as of June 30, 2019March 31, 2020 are presented below:
Number of Warrants | Weighted Average Exercise Price | Total Intrinsic Value | Weighted Average Remaining Contractual Life (in years) | |||||||||||||
Outstanding as of December 31, 2018 | 7 | $ | 24,000 | $ | - | 2.9 | ||||||||||
Issued | 200,000 | 11.31 | - | 1.0 | ||||||||||||
Outstanding as of June 30, 2019 | 200,007 | $ | 12.15 | $ | - | 0.7 | ||||||||||
Warrants exercisable as of June 30, 2019 | 200,007 | $ | 12.15 | $ | - | 0.7 |
Number of Warrants | Weighted Average Exercise Price | Total Intrinsic Value | ||||||||||
Outstanding as of December 31, 2019 | 200,007 | $ | 12.15 | $ | - | |||||||
Issued | 3,411,349 | $ | 5.11 | $ | 11,038,616 | |||||||
Expired | (200,000 | ) | $ | - | $ | - | ||||||
Outstanding as of March 31, 2020 | 3,411,356 | $ | 5.16 | $ | 11,038,616 | |||||||
Warrants exercisable as of March 31, 2020 | 3,411,356 | $ | 5.16 | $ | 11,038,616 |
On March 19, 2020, in connection with its Note Purchase Agreement (see Note 9), the Company issued the FB Loan Warrant, a warrant to purchase 3,269,231 shares of its common stock with a fair value of $15.6 million.
Pulse Evolution Group, Inc.
Notes toOn March 30, 2020, the Condensed Consolidated Financial StatementsCompany issued 142,118 warrants in connection with a $1.1 million convertible note. The exercise price is $7.74 with a 5-year term. The Company received the proceeds from the convertible note on April 1, 2020 and will therefore record the balance sheet impact of this warrant and convertible note on April 1, 2020.
Note 13 -14 – Leases
On February 14, 2019, the Company entered into a lease for new offices in Jupiter, Florida. The lease has an initial term of 18 months commencing March 1, 2019 until August 31, 2020 with a base annual rent of $89,437. The Company has an option to extend the lease for another year until August 31, 2021 for an annual rent of $94,884 and a second option for a further annual extension until August 31, 2022 for an annual rent of $97,730. The Company recorded the lease obligations in accordance with ASC 842.
At June 30,As part of the acquisition of Nexway on September 19, 2019, the Company had operatingrecognized right of use assets of $3.6 million and lease liabilities of $0.1$3.6 million associated with operating lease obtained in the acquisition. At March 31, 2020, the Company deconsolidated its investment in Nexway and accordingly, reduced its operating lease liabilities and right of use assets of $0.1 million, respectively, recorded into zero.
FaceBank Group, Inc.
Notes to the accompanying condensed consolidated balance sheet.Unaudited Condensed Consolidated Financial Statements
The following summarizes quantitative information about the Company’s Florida operating leaseslease (amounts in thousands, except lease term and discount rate):
For the Three Months Ended June 30, 2019 | For the Six Months Ended June 30, 2019 | For the Three Months Ended March 31, 2020 | ||||||||||
Operating leases | ||||||||||||
Operating lease cost | $ | 23 | $ | 30 | $ | 98 | ||||||
Variable lease cost | 15 | 20 | 73 | |||||||||
Operating lease expense | 38 | 50 | 171 | |||||||||
Short-term lease rent expense | - | - | - | |||||||||
Total rent expense | $ | 38 | $ | 50 | $ | 171 |
For the Three Months Ended June 30, 2019 | For the Six Months Ended June 30, 2019 | |||||||
Operating cash flows from operating leases | $ | 22 | $ | 30 | ||||
Weighted-average remaining lease term – operating leases (in years) | 1.2 | 1.2 | ||||||
Weighted-average discount rate – operating leases | 10.0 | % | 10.0 | % |
Operating cash flows from operating leases | $ | 75 | ||
Right-of-use assets exchanged for operating lease liabilities | $ | 125 | ||
Weighted-average remaining lease term – operating leases | 0.4 | |||
Weighted-average monthly discount rate – operating leases | 0.8 | % |
Maturities of theThe Company’s operating leases, are as follows (amounts in thousands):lease expires on August 31, 2020 and the remaining liability totals $37,000. The Company has decided not to extend the lease.
Six months ended December 31, 2019 | $ | 45 | ||
Year Ended December 31, 2020 | 61 | |||
Total | 106 | |||
Less present value discount | (7 | ) | ||
Operating lease liabilities | $ | 99 |
Note 14 -15 – Commitments and Contingencies
Litigation
The Company may be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Legal expenses associated with any contingency are expensed as incurred.
In connection with closed litigation on two separate matters that resulted in judgments against PEC, a majority interest of which was subsequently purchased by the Company, we have accrued $524,000 which remains on the balance sheet as a liability at June 30, 2019March 31, 2020 and December 31, 2018.2019. The Company, on behalf of its subsidiary, is in settlement discussions with the parties.
On August 27, 2018 plaintiff, Scott Meide, filed a pro se (unrepresented by counsel) complaint in the United States District Court for the Middle District of Florida, Jacksonville Division, against Pulse Evolution Corporation,PEC, now a subsidiary of the Company, naming its former officers among others as defendants. The Company’s position is that the pro se Complaint is defamatory, without merit in fact or law and represents an extortive attempt to coerce payment under threat of reputational harmharm. The Company’s subsidiaries and affiliates filed a motion to dismiss on September 25, 2018. On July 24, 2019, all counts of the complaint were dismissed in favor of the Company.Company’s subsidiaries and affiliates. Mr. Meide haswas afforded the rightopportunity to file an amended complaint for a portion of his claims, and such amendment was filed on September 24, 2019. On October 6, 2019, Judge Marcia Morales Howard ordered Mr. Meide’s amended complaint stricken, describing the filing as insufficient and having failed to identify facts necessary to support its allegations, and offering Mr. Meide “one final opportunity to properly state his claims” with an amended complaint. Mr. Meide’s third attempt to submit a sufficient complaint was filed on November 1, 2019. The Company’s subsidiaries and affiliates plan to reaffirm their motions to dismiss and the Company believes Mr. Meide’s final amended complaint will also be dismissed. The Company plans to the ask the court for an award of sanctions and attorney fees in connection with Mr. Meide’s filing of a frivolous lawsuit. We believe the lawsuit has no later than August 26, 2019.merit, and we intend to vigorously defend our position.
Note 16 – Acquisition of fuboTV
As described in Note 1, on April 1, 2020, we consummated the acquisition of Pre-Merger fuboTV by the merger of Merger Sub into fuboTV, whereby fuboTV continued as the surviving corporation and became a wholly-owned subsidiary of FaceBank pursuant to the terms of the Merger Agreement.
In accordance with the terms of the Merger Agreement, all of the capital stock of fuboTV was converted into the right to receive 34,324,362 shares Series AA Preferred Stock, a newly-created class of stock. Pursuant to the Series AA Certificate of Designation, each share of Series AA Preferred Stock is convertible into two (2) shares of FaceBank’s common stock. In addition, each outstanding option to purchase shares of common stock of fuboTV was assumed by FaceBank and converted into an option to acquire FaceBank’s common stock. In addition, in accordance with the terms of the Merger Agreement, at the Effective Time the Company assumed 8,051,098 stock options issued and outstanding under the fuboTV Inc. 2015 Equity Incentive Plan (the “2015 Plan”) with a weighted-average exercise price of $1.32 per share. From and after the Effective Time, such options may be exercised for shares of FaceBank’s common stock under the terms of the 2015 Plan.
FaceBank Group, Inc.
Notes to the Unaudited Condensed Consolidated Financial Statements
The preliminary purchase price amounted to $596.1 million which represents the $529.7 market value ($8.20 per share as of April 1, 2020) of 64.6 million common shares plus the $66.4 million value of 8.1 million stock options on an as-converted basis. This preliminary purchase price excludes transaction costs.
The Company will account for the Merger as a business combination under the acquisition method of accounting. As such, the purchase price will be allocated to the net assets acquired, inclusive of intangible assets, with any excess fair value recorded to goodwill. Since the closing date of the acquisition occurred subsequent to the end of the reporting period, the allocation of purchase price to the underlying net assets has not yet been completed. The Company will reflect the preliminary purchase price allocation in its consolidated financial statements for the year ending December 31, 2020.
Note 17 – Subsequent Events
Refer to Note 9 to the Unaudited Condensed Consolidated Financial Statements for a description of the amendments to the Note Purchase Agreement since March 31, 2020.
Redemption of Series D Preferred Stock
On June 25, 2018, an office space vendor filed a complaint (Case#: CIV1802192)16, 2020, the Company redeemed 253,000 shares of its Series D Preferred Stock in exchange for $339,174. As of July 2, 2020, the Superior Courttotal number of shares of Series D Preferred Stock outstanding was 203,000.
Issuance of Securities in Private Placements
Certain of the Statecommon stock issuances noted below remain issuable as of California, Marin County asserting breachthe date of contract, breachthe filing of implied covenantthis Quarterly Report.
Issuance of good faithCommon Stock and fair dealing, intentional misrepresentation,Warrants for Cash
Between May 11, 2020 and negligent misrepresentation. TheJune 8, 2020, the Company respondedentered into Purchase Agreements with affirmative defenses on September 27, 2018. Thecertain investors (the “Investors”), pursuant to which the Company reachedsold an outaggregate of court settlement on December 19, 20183,735,922 shares (the “Purchased Shares”) of the Company’s common stock at a purchase price of $7.00 per share and issued warrants to the Investors covering a total of 3,735,922 shares of the Company’s common stock (the “Warrants”) for an aggregate purchase price of $26,151,454.
On July 2, 2020, the Company entered into a Purchase Agreement with Credit Suisse Capital LLC, pursuant to which the Company sold 2,162,163 shares (the “CS Shares” and together with the vendorPurchased Shares, the “Total Shares”) of the Company’s common stock at a purchase price of $9.25 per share for an aggregate purchase price of $20,000,007.75.
Since March 31, 2020, the Company raised an additional $403,895.00 through issuances of an aggregate of 111,459 shares of its common stock in private placement transactions to several other investors.
Issuance of Common Stock Related to PEC Acquisition
Since March 31, 2020, the Company has issued 1,201,749 shares of its common stock in exchange for 14,222,975 shares of its subsidiary PEC.
Issuance of Convertible Notes and the case was dismissed on January 24, 2019. During the six months ended June 30, 2019,Related Warrants for Cash
Since March 31, 2020, the Company issued 18,935convertible notes with a principal balance of approximately $2.1 million. In connection with such notes, the Company issued (i) 55,000 shares of its common stock and (ii) warrants to purchase an aggregate of 55,172 shares of its common stock at a fair valuean initial exercise price of approximately $0.1 million or $6.90$9.00 per share, in connection with this lease settlement.
Note 15 – Subsequent Events
Series D Preferred Stock
Subsequent to June 30, 2019, the Company authorized 2,000,000 shares of series D preferred stock with a par value of $1.00 per share. The series D preferred stock is senior to the Company’s common stock and junior to all existing and future debt, and the Series A, Series B, Series C and Series X preferred stock, with respect to dividends and right of liquidation. Each share of series D preferred stock will carry an annual dividend, at a dividend rate of 8% of the stated value.
On July 15, 2019, the Company entered into a stock purchase agreement to issue 253,000 shares of its series D preferred stock, for proceeds of $253,000.
Definitive AgreementIssuance of Warrant for Services Rendered
On July 31, 2019,May 25, 2020, the Company entered intoissued to ARETE Wealth Management a joint venture and revenue share agreement, called the Digital Likeness Development Agreement, among the Company, FaceBank, Inc., and professional boxing promoter and retired professional boxer, Floyd Mayweather, concerning the development of the hyper-realistic, computer generated ‘digital likeness’ of the face and body of Mr. Mayweather (“Virtual Mayweather”), for global exploitation in commercial applications. The Company is responsible for the advance funding of all technology and related costs. The Company paid an upfront cash fee of $250,000, and issued 138,966warrant to purchase 275,000 shares of the Company’s common stock with a fair valuean initial exercise price of $1,000,000, or $7.196$5.00 per share.
Stock Option Grants to Executive Officers
On June 8, 2020, the Company granted an options to purchase 850,000 shares of its common stock at an exercise price of $10.435 per share in connection with an employment agreement for the Company’s Chief Financial Officer.
On June 28, 2020, the Company granted an option to Mr. Mayweather. The revenue earned from the agreement will initially be shared 50% topurchase 1,203,297 shares of common stock at an exercise price of $11.15 per share in connection with a Letter Agreement by and between the Company and 50% to Mr. Mayweather, until the Company has recovered the advanced funding. Revenues earned subsequent the Company’s cost recovery will be shared 75% to Mr. Mayweather and 25% to the Company. The term of the agreement is from July 31, 2019 through July 31, 2024, unless extended by the parties. The Company also has an option to extend the Agreement, for an additional five year term, based on performance.
its Executive Chairman.
Convertible Note
On July 30, 2019, the Company entered into a $275,000 convertible promissory note with an unrelated party. The note accrues interest at a rate of 12% per annum and matures on July 30, 2020. The note is not convertible until the six month anniversary of the note, at which time if the note has not already been repaid by the Company, the note holder shall be entitled to convert all or part of the note into shares of the Company’s common stock, at a price per share equal to 53% of the lowest trading price of the common stock for the twenty prior trading days upon which the conversion notice is received by the Company.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unless otherwise indicated, references in this Quarterly Report on Form 10-Q to “we,” “us,” “our” and the “Company” are to Pulse Evolution Group, Inc. and its subsidiaries, unless the context requires otherwise. The following discussion and analysis by our management of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying related notes included in this Quarterly Report on Form 10-Q and our audited financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, as filed with the Securities and Exchange Commission.Commission (the “SEC”).
The results of our operations for the three months ended March 31, 2020 are not readily comparable against the results of our operations in the comparable prior year three month period ended March 31, 2019 as a result of our acquisition of Facebank AG and our acquisition of and then deconsolidation of Nexway AG and its subsidiaries.
In addition, because of the acquisition of fuboTV on April 1, 2020, the results of our operations going forward will be markedly different. We encourage our investors to review the Pro Forma Unaudited Condensed Combined financial statement presentation as of and for the year ended December 31, 2019 that was included as Exhibit 99.2 to the Company’s Current Report on Form 8-K/A that was filed with the Commission on June 17, 2020, as well as the Company’s forthcoming Current Report on Form 8-K/A that will include additional Pro Forma Unaudited Condensed Combined financial statements as of and for the period ended March 31, 2020.
OverviewIncorporation
Pulse EvolutionFaceBank Group, Inc. (formerly known as Recall Studios, Inc.(the “Company” or “FaceBank”) was incorporated under the laws of the State of Florida in February 2009 under the name York Entertainment, Inc. On February 28,September 30, 2019, the Company’s corporate name was changed to Pulse EvolutionFaceBank Group, Inc., in recognition of the global market reputation of its major operating subsidiary, Pulse Evolution Corporation, and its stock symbol was changed to “DGLF” in recognition of the Company’s focus on ‘Digital Life’.
Nature of BusinessMerger with fuboTV Inc.
Pulse Evolution Group, Inc. is a developer of hyper-realistic digital humans – computer generated assets that can be distributed across the full spectrum of traditional media and emerging display technologies, including live entertainment, virtual reality, augmented reality, mobile, interactive and artificial intelligence applications. The Company’s business plan is to generate revenues through the development and deployment of digital human characters, and related software, but also through roll-up acquisitions within the digital human industry. The Company believes it has the opportunity to make strategic acquisitions of technology and revenue-generating companies, to become a dominant global leader in a sizable and lucrative digital human industry that is, thus far, largely unrecognized as an industry.
On August 8, 2018, the Company entered into a share exchange agreement to acquire up to 100% of Evolution AI Corporation (“EAI”)April 1, 2020, fuboTV Acquisition Corp., a development stage artificial intelligence company, which included EAI’s 58% interest in Pulse Evolution CorporationDelaware corporation and our wholly-owned subsidiary (“PEC”Merger Sub”). PEC is merged with and into fuboTV Inc., a globally recognized pioneer inDelaware corporation (“fuboTV”), whereby fuboTV continued as the development of hyper-realistic digital humans for live shows, virtual reality, augmented reality, holographic, 3D stereoscopic, web, mobile, interactivesurviving corporation and artificial intelligence applications. PEC’s principals are most popularly known for producing some of the most visually stunning digital humans in the history of entertainment, including the Academy Award lead character inThe Curious Case of Benjamin Button (2008), the digital alter-ego of Jeff Bridges inTron: Legacy (2010), the holographic performance of ‘Virtual Tupac Shakur’ at the Coachella Valley Music Festival (2012), and ‘Virtual Michael Jackson’ at the Billboard Music Awards (2014). Currently, we indirectly own a majority of the issued and outstanding common stock of PEC through EAI. Pursuantbecame our wholly-owned subsidiary pursuant to the terms of the closing agreement,Agreement and Plan of Merger and Reorganization dated as of March 19, 2020, by and among us, Merger Sub and fuboTV (the “Merger Agreement” and such transaction, the “Merger”) (See Note 16).
In accordance with the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), all of the capital stock of fuboTV was converted into the right to receive shares of our newly-created class of Series AA Convertible Preferred Stock, par value $0.0001 per share (the “Series AA Preferred Stock”) (See Note 13). Each share of Series AA Preferred Stock is entitled to 0.8 votes per share and is convertible into two (2) shares of our common stock, only in connection with a bona fide transfer to a third party pursuant to Rule 144. Until the time we are able to uplist to a national securities exchange, the Series AA Preferred Stock benefits from certain protective provisions that, for example, require us to obtain the approval of a majority of the shares of outstanding Series AA Preferred Stock, voting as a separate class, before undertaking certain matters.
As a result of the Merger, fuboTV, a leading live TV streaming platform for sports, news, and entertainment, became a wholly-owned subsidiary of the Company. Before the Merger, Facebank Group was and continues to be a character-based virtual entertainment company, and a leading developer of digital human likeness for celebrities and consumers, focused on applications in traditional entertainment, sports entertainment, live events, social networking, mixed reality (AR/VR) and artificial intelligence. Following the Merger, we operate our business under the name “fuboTV” and we are in the process of changing the name of FaceBank Group, Inc. to fuboTV, Inc. On May 1, 2020, the Company’s trading symbol was changed to “FUBO”. Unless the context otherwise requires, “we,” “us,” “our,” and the “Company” refers to FaceBank and its subsidiaries on a consolidated basis, and fuboTV Pre-Merger refers to fuboTV Inc. prior to the Merger.
In connection with the Merger, on March 11, 2020, FaceBank and HLEE Finance S.a r.l. (“HLEE”) entered into a Credit Agreement, dated as of March 11, 2020, pursuant to which HLEE provided FaceBank with a $100,000,000 revolving line of credit (the “Credit Facility”). The Credit Facility is secured by substantially all the assets of FaceBank. As of August 10, 2020, there are no amounts outstanding under the Credit Facility, and the Company becamedoes not intend to draw down on this Credit Facility. See Note 9 of the Notes to the Unaudited Condensed Consolidated Financial Statements for more information about the Credit Facility.
On March 19, 2020, FaceBank, Merger Sub, Evolution AI Corporation (“EAI”) and Pulse Evolution Corporation (“PEC” and collectively with EAI, Merger Sub and FaceBank, the “Initial Borrower”) and FB Loan Series I, LLC (“FB Loan”) entered into a 99.7% ownerNote Purchase Agreement (the “Note Purchase Agreement”), pursuant to which the Initial Borrower sold to FB Loan senior secured promissory notes in an aggregate principal amount of EAI.$10,050,000 (the “Senior Notes”). The Company accountedreceived proceeds of $7.4 million, net of an original issue discount of $2.65 million. In connection with the FB Loan, FaceBank, fuboTV and certain of their respective subsidiaries granted a lien on substantially of their assets to secure the obligations under the Senior Notes. See Note 8 of the Notes to the Unaudited Condensed Consolidated Financial Statements for more information about the transactionNote Purchase Agreement.
Prior to the Merger, fuboTV Pre-Merger and its subsidiaries were party to a Credit and Guaranty Agreement, dated as of April 6, 2018 (the “AMC Agreement”), with AMC Networks Ventures LLC as lender, administrative agent and collateral agent (“AMC Networks Ventures”). fuboTV Pre-Merger previously granted AMC Networks Ventures a business combination usinglien on substantially all of its assets to secure its obligations thereunder. The AMC Agreement survived the acquisition method of accounting based on ASC 805 — Business Combinations, which requires recognitionMerger and, measurement of all identifiable assets acquired and liabilities assumed at their fair value as of the date control is obtained.Effective Time, there was $24.9 million outstanding under the AMC Agreement, net of debt issuance costs. In connection with the Merger, FaceBank guaranteed the obligations of fuboTV under the AMC Agreement on an unsecured basis. The Company determined that it was the accounting acquirer under ASC 805. This determination was primarily based on existing managementliens of the Company retaining 4 of the 5 seatsAMC Networks Ventures on the Board,assets of fuboTV are senior to the provisionsliens in favor of FB Loan and FaceBank securing the voting rights agreement entered between the Company and the principal founder of EAI, and the operating management continuing in key roles following the business combination.Senior Notes.
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 CaseNature 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 some of the world’s best-known living and late celebrities through their appearance across a diverse array of display mediums, such as live entertainment, film and television, video games and mobile applications.Business
The Company is a leading digital entertainment company, combining fuboTV Pre-Merger’s direct-to-consumer live TV streaming, or vMVPD, platform with FaceBank Pre-Merger’s technology-driven IP in sports, movies and live performances. We expect that this business combination will create a content delivery platform for traditional and future-form IP. We plan to leverage FaceBank’ IP sharing relationships with leading celebrities and other digital technologies to enhance its already robust sports and entertainment offerings.
Since the Merger, while we continue our previous business operations, we are principally focused on offering consumers a leading live TV streaming platform for sports, news and entertainment through fuboTV. fuboTV revenues are almost entirely derived from the sale of subscription services and advertising in the United States, though fuboTV has a long-term agreementstarted to assess expansion opportunities into international markets, with operations in Canada and the launch in late 2018 of its first ex-North America offering of streaming entertainment, to consumers in Spain.
Our subscription-based services are offered to consumers who can sign-up for accounts at https://fubo.tv, through which we provide basic plans with the Estateflexibility for consumers to purchase the add-ons and features best suited for them. Besides the website, consumers can also sign-up via some TV-connected devices. The fuboTV platform provides, what we believe to be, a superior viewer experience, with a broad suite of Michael Jackson,unique features and personalization tools such as multi-channel viewing capabilities, favorites lists and a shareholderdynamic recommendation engine as well as 4K streaming and Cloud DVR offerings.
Corporate Information
Our headquarters are located at 1330 Avenue of the Company, 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 held by Company shareholders, the Estate of Marilyn Monroe and Authentic Brands Group / Elvis Presley Enterprises. In March 2019, the Company entered into an agreement to finance and co-produce Broadway Asia’s theatrical production of DreamWorks’ Kung Fu Panda Spectacular Live at the Venetian Theatre in Macau, Hong Kong, currently scheduled to open in early 2020.
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,Americas, New York, NY 10019, and our collaboration with the larger communitytelephone number is (212) 672-0055. You can access our websites, including historical financial information pertaining to fuboTV Pre-Merger, at https://fubo.tv, https://ir.fubo.tv, https://facebankgroup.com and https://ir.facebankgroup.com. Information contained on our websites is not part of artificial intelligence pioneers, we expect that we will do more than just put a facethis Quarterly Report on AI. We intend to build your most knowledgeable teacher, your most trusted advisor,Form 10-Q and is not incorporated by reference in a digital world that reveals more possibilities each day, maybe even your best friend.
this Quarterly Report on Form 10-Q.
Results of Operations for the three months ended June 30,March 31, 2020 and 2019 and 2018 (Income)(in thousands):
Three Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Executive compensation | $ | 200 | $ | 63 | ||||
Compensation | 134 | 12 | ||||||
Marketing and advertising | 112 | 452 | ||||||
Legal and professional fees | 189 | 369 | ||||||
Depreciation and amortization | 5158 | - | ||||||
General and administrative expenses | 169 | 144 | ||||||
Operating Expenses | 5,962 | 1,040 | ||||||
Change in fair value of subsidiary warrant liability | 1,124 | - | ||||||
Change in fair value of derivative liability | 890 | (329 | ) | |||||
Financing Costs | - | (205 | ) | |||||
Interest expense | (454 | ) | (613 | ) | ||||
Other Income (Expense) | 1,560 | (1,147 | ) | |||||
Loss before income taxes | (4,402 | ) | (2,187 | ) | ||||
Income tax benefit | 1,037 | - | ||||||
Net Loss | $ | (3,365 | ) | $ | (2,187 | ) |
Three Months Ended March 31, | ||||||||
2020 (as restated) | 2019 | |||||||
Revenues | ||||||||
Revenues | $ | 7,295 | $ | - | ||||
Total Revenues | ||||||||
Operating Expenses | ||||||||
General and administrative | 20,203 | 1,037 | ||||||
Amortization of intangible assets | 5,217 | 5,153 | ||||||
Depreciation | 3 | 5 | ||||||
Total Operating Expenses | 25,423 | 6,195 | ||||||
Change in fair value of subsidiary warrant liability | (15 | ) | 2,477 | |||||
Change in fair value of warrant liability | (366 | ) | - | |||||
Change in fair value of shares settled liability | (180 | ) | - | |||||
Change in fair value of derivative liability | 297 | 128 | ||||||
Interest expense | (2,581 | ) | (446 | ) | ||||
Loss on deconsolidation of Nexway | (11,919 | ) | - | |||||
Loss on issuance of convertible notes, bonds and warrants | (24,053 | ) | - | |||||
Other expense | (436 | ) | - | |||||
Total Other Income (expense) | (39,253 | ) | 2,159 | |||||
Loss before income taxes | (57,381 | ) | (4,036 | ) | ||||
Income tax benefit | (1,038 | ) | (1,169 | ) | ||||
Net loss | $ | (56,343 | ) | $ | (2,867 | ) |
Operating ExpensesRevenue
During the three months ended June 30, 2019, operatingMarch 31, 2020, we recognized revenues of $7.3 million. The revenues recognized are related to the sale of our software licenses. There were no revenues recognized during the three months ended March 31, 2019.
General and Administrative
During the three months ended March 31, 2020, general and administrative expenses totaled $6.0$20.2 million, compared to $1.0 million for the three months ended June 30, 2018.March 31, 2019. The increase of $5.0$19.2 million wasis primarily due to $5.2 million of amortization expense recognized from our intangible assets associated with the acquisition of Evolution AI Corporation (“EAI”), a decrease in executive compensation of $0.1 million related to increases in annual salaries and bonuses for our Chief Executive Officer and Executive Chairman, which were effective August 8, 2018, $0.1$9.2 million of other compensation expense for payroll and related benefits for new employees, offset by a decrease in legal and professional fees of $0.3expenses, $3.6 million primarily due to $0.3 million of stock-based compensation expense recognized during the three months ended June 30, 2018 for services rendered and decreases in marketing and advertising and $6.2 million other general and administrative expenses resulting from our 2019 acquisitions of $0.3 million.
Other IncomeFacebank AG and Nexway.
Depreciation and Amortization
During the three months ended June 30, 2019, we recognized $1.6March 31, 2020, amortization expenses totaled $5.2 million of other income, compared to $1.1$5.2 million of other expenses during the three months ended June 30, 2018.March 31, 2019.
Other Income (Expense)
During the three months ended March 31, 2020, we recognized $39.3 million of other expense, compared to $2.2 million of other income during the three months ended March 31, 2019. The $2.7$37.1 million increase to other incomeexpense is primarily related to the gain of $1.1 million recognized for the change in fair value of our subsidiary warrant liability primarily driven by a decrease in the underlying stock price of $0.05 per share from March 31, 2019 to June 30, 2019, the gain of $0.9$0.3 million for the change in fair value of our derivative liability related to our convertible notes and interest expensepreferred stock, offset by debt discount of $0.5$2.6 million related to our convertible notes.notes, $0.4 million for the loss in fair value of warrant liability, a $11.9 million of loss on deconsolidation of Nexway, $0.2 million for the loss in fair value of shares settled liability and $24.1 million of loss on issuance of convertible notes, bonds and warrants.
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Income Taxes
During the three months ended June 30, 2019,March 31, 2020, we recognized an income tax benefit of $1.0 million. The Company’s deferred tax liability and income tax benefit relates to our amortizable intangible assets. The amortization of intangible assets of $5.2$1.0 million caused the deferred tax liability to decrease by $1.0 million, which resulted in the recognition of an income tax benefit.
Net Loss
During the three months ended June 30, 2019,March 31, 2020, we recorded a net loss of $3.4 million, compared to a net loss of $2.2 million for the three months ended June 30, 2018. The increase in net loss of $1.2 million is primarily due to $5.2 million of amortization of our intangible assets, offset by a $2.0 million gain recorded for the change in fair value of our subsidiary warrant liability and derivative liability, the recognition of a $1.0 million income tax benefit, decreased interest expense of $0.5 million and a decrease in marketing and professional fees of $0.5 million.
Results of Operations for the six months ended June 30, 2019 and 2018 (Income):
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Executive compensation | $ | 500 | 110 | |||||
Compensation | 338 | 68 | ||||||
Marketing and advertising | 324 | 577 | ||||||
Legal and professional fees | 397 | 855 | ||||||
Depreciation and amortization | 10,316 | - | ||||||
General and administrative expenses | 282 | 270 | ||||||
Operating Expenses | 12,157 | 1,880 | ||||||
Change in fair value of subsidiary warrant liability | 3,601 | - | ||||||
Change in fair value of derivative liability | 1,018 | 2,439 | ||||||
Financing Costs | - | (2,342 | ) | |||||
Interest expense | (900 | ) | (1,099 | ) | ||||
Other Income (Expense) | 3,719 | (1,002 | ) | |||||
Loss before income taxes | (8,438 | ) | (2,882 | |||||
Income tax benefit | 2,206 | - | ||||||
Net Loss | $ | (6,232 | ) | (2,882 | ) |
Operating Expenses
During the six months ended June 30, 2019, operating expenses totaled $12.2 million, compared to $1.9 million for the six months ended June 30, 2018. The increase of $10.3 million was primarily due to $10.3 million of amortization expense recognized from our intangible assets associated with the acquisition of Evolution AI Corporation (“EAI”), increases in executive compensation of $0.4 related to increases in annual salaries and bonuses for our Chief Executive Officer and Executive Chairman, which were effective August 8, 2018, $0.3 million of other compensation expense for payroll and related benefits for new employees, offset by a decrease of $0.4 million for legal and professional fees, primarily due to $0.7 million of stock-based compensation expense recognized during the six months ended June 30, 2018 for services rendered and decreases in advertising and marketing totaling $0.3 million.
Other Income
During the six months ended June 30, 2019, we recognized $3.7 million of other income, compared to $1.0 million of other expense during the six months ended June 30, 2018. The $4.7 million increase to other income is primarily related to the gain of $3.6 million recognized for the change in fair value of our subsidiary warrant liability primarily driven by a decrease in the underlying stock price of $0.12 per share from December 31, 2018 to June 30, 2019, a decrease in financing costs of $2.3 million, a decrease in interest expense of $0.2 million related to our convertible notes, offset by a $1.4 million decrease in the change in fair value of our derivative liability related to our convertible notes,.
Income Taxes
During the six months ended June 30, 2019, we recognized an income tax benefit of $2.2 million. The Company’s deferred tax liability and income tax benefit relates to our amortizable intangible assets. The amortization of intangible assets of $10.3 million caused the deferred tax liability to decrease by $2.2 million, which resulted in the recognition of an income tax benefit.
Net Loss
During the six months ended June 30, 2019, we recorded a net loss of $6.2$56.3 million, compared to a net loss of $2.9 million for the sixthree months ended June 30, 2018.March 31, 2019. The increase in net loss of $3.3$53.4 million is primarily due to $10.3higher stock-based compensation expense of $9.1 million and a loss of amortization$11.9 million on deconsolidation of Nexway, $24.1 million loss on issuance of convertible notes, bonds and warrants, debt discount of $2.6 million related to our convertible notes and net revenue of $7.3 million recognized from the sale of our intangible assets and an increase of $0.6 million in compensation expenses, offset by $4.6 million of gains recorded for the change in fair value of our subsidiary warrant liability and derivative liability, the recognition of a $2.2 million income tax benefit and a decrease in marketing and professional fees of $0.8 million.software licenses.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
The Company hashad cash of $0.2$0.1 million, a working capital deficiency of $13.4$31.4 million and an accumulated deficit of $30.8$111.6 million at June 30, 2019.March 31, 2020. The Company incurred a $9.0$56.3 million net loss for the sixthree months ended June 30, 2019.March 31, 2020. The Company expects to continue incurring losses in the foreseeable future and will need to raise additional capital to fund its operations, meet its obligations in the ordinary course of business and execute its longer-term business plan. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the issuance date of our interimthat those financial statements included in this quarterly report.are issued. 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.
The Company’s future capital requirements and the adequacy of its available funds will depend on many factors, including its ability to successfully commercialize its productsattract and services, competing technological andretain subscribers, develop new technologies that can compete in a rapidly changing market developments,with many competitors and the need to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement its product and service offerings.
The Company entered into an agreement to finance and co-produce Broadway Asia’s theatrical production of DreamWorks’ Kung Fu Panda Spectacular Live at the Venetian Theatre in Macau, Hong Kong, currently scheduled to open in January 2020. The agreement requires the Company to invest at least $2.0 million in a related production company, in exchange for which the Company has received a profit-sharing interest in the production, billing credit as associate producer, and certain rights to participate in possible future productions of DreamWorks’ Kung Fu Panda property in similar theatrical productions.
In March 2019, the Company raised $1.1 million by issuing 93,910 shares of its common shares for an average price of $11.28 per share to a Hong Kong-based family office group. In connection therewith, the Company has also issued warrants to acquire an additional 200,000 common shares, subject to exercise prices of between $11.00 and $13.50 per share, or $11.31 on a weighted average basis, payable in cash at any time prior to March 31, 2020. In addition, the Company has raised $1.1 million through the issuance of common stock between January and June 2019 at various prices ranging between $5.00 to $9.00 per share to a number of smaller investors.
Management believes that the Company has access to capital resources through potential issuances of debt and equity securities.
The ability of the Company to continue as a going concern is dependent on the Company’s ability to execute its strategy and to raise additional funds. Management is currently seeking additional funds, primarily through the issuance of equity securities for cash, to operate its business. No assurance can be given that any future financing will be available 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 stockholders, in the case orof an equity financing. In addition to the foregoing, based on the Company’s current assessment, the Company does not expect any material impact on its long-term development timeline and its liquidity due to the worldwide spread of a novel strain of coronavirus (“COVID 19”). However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus throughout the world.
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Cash Flows (in thousands)
Six Months Ended June 30, | ||||||||
2019 | 2018 | |||||||
Net Cash Used in Operating Activities | $ | (1,549 | ) | $ | (1,605 | ) | ||
Net Cash Used in Investing Activities | (373 | ) | - | |||||
Net Cash Provided by Financing Activities | 2,042 | 1,897 | ||||||
Net Change in Cash | $ | 120 | $ | 292 |
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Net Cash Used in Operating Activities | $ | (7,478 | ) | $ | (582 | ) | ||
Net Cash Used in Investing Activities | (2,421 | ) | (801 | ) | ||||
Net Cash Provided by Financing Activities | 2,356 | 1,658 | ||||||
Net Change in Cash | $ | (7,543 | ) | $ | 275 |
Operating Activities
For the sixthree months ended June 30, 2019,March 31, 2020, net cash used in operating activities was $1.5$7.5 million, which consisted of our net loss of $6.2$56.3 million, adjusted for non-cash expenses of $4.3$58 million, including $10.3$5.2 million of depreciation and amortization expenses $0.5related to our intangible assets, loss on issuance of convertible notes, bonds and warrants of $24.1 million, $9.1 stock-based compensation, $1.7 million of amortization of the debt discount, $0.4 million of change in fair value of warrant liability, $0.2 million of change in fair value of shares settled liability and $0.3$0.1 million of interest expense related to our convertible notes payable, offset by $4.6$0.3 million related to the change in fair value of our subsidiary warrant liability and our derivative liability, $2.2$8.6 million on deconsolidation of Nexway and $1.0 million of income tax benefit. Changes in operating assets and liabilities primarily consisted of increases in accounts payable and accrued expenses of $1.0 million, offset by a decrease in accounts receivable of $0.9 million.
For the three months ended March 31, 2019, net cash used in operating activities was $0.6 million, which consisted of our net loss of $2.9 million, adjusted for non-cash expenses of $1.8 million including, $5.2 million of depreciation and amortization expenses, $0.2 million of amortization of the debt discount and $0.1 million of interest expense related to our notes payable, offset by $2.5 million related to the change in fair value of our warrant liability, $1.2 million of income tax benefit, and the increase in accounts payable and accrued expenses of $0.5 million.
For the six months ended June 30, 2018, net cash used in operating activities was $1.6 million, which primarily consisted of our net loss of $2.9 million, adjusted for non-cash expenses of $2.3 million related to financing costs, $0.7 million of stock-based compensation expense for services provided and $0.8 million of amortization of our debt discount related to our convertible notes, offset by a $2.4 million gain recognized for the change in fair value of our derivative liability.
Investing Activities
In March 2020, we advanced $2.4 million to fuboTV in accordance with the Merger Agreement.
For the sixthree months ended June 30,March 31, 2019, net cash used in investing activities was $0.4$0.8 million, which primarily consisted of our $1.0 million payment for our investment in Panda Productions (HK) Limited (“Panda”), offset by $0.6$0.2 million received from accredited investors for an interest in Panda.
There were no investing activities for the six months ended June 30, 2018.
Financing Activities
For the sixthree months ended June 30, 2019,March 31, 2020, net cash provided by financing activities was $2.0$2.4 million. The net cash provided is primarily related to $2.2$2.3 million of proceeds received from the sale of our common stock, $0.3$0.2 million of proceeds received from the issuance of our Series D Preferred Stock, $78,000 received as an advance from a related party, $0.9 million of proceeds received from the issuance of a convertible note, offset by repayments of $0.6 million in connection with our convertible notes, repayments of $0.3 million to related parties and redemption of $0.3 million of Series D Preferred Stock.
For the three months ended March 31, 2019, net cash provided by financing activities was $1.7 million. The net cash provided is primarily related to $1.8 million of proceeds received from the sale of our common stock, $65,000 of proceeds received from the issuance of our subsidiary’s common stock, offset by repayments of $0.5 million in connection with our convertible notes.
For the six months ended June 30, 2018, net cash provided by financing activities was $1.9 million. The net cash provided is primarily related to $1.2 million of proceeds received from the issuance of our convertible notes and $1.5 million of proceeds received from the sale of our common stock, offset by repayments of $0.7$0.2 million of our convertible notes.
Off-Balance Sheet Arrangements
As of June 30, 2019,March 31, 2020, there were no off-balance sheet arrangements.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements and related disclosures requires us to make estimates and judgmentsassumptions that affect the reported amounts of assets and liabilities expenses, and related disclosuredisclosures of contingent assets and liabilities. We evaluate, on an ongoing basis, ourliabilities 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 judgments, including thoseassumptions include allocating the fair value of purchase consideration issued in business acquisitions, investments, depreciable lives of property and equipment, analysis of impairments of recorded goodwill and other long-term assets, accruals for potential liabilities, assumptions made in valuing derivative liabilities, assumptions made when estimating the fair value of equity instruments issued in share-based payment arrangements and deferred income taxes and related to the useful life of the assets. We base our estimates on historical experience and assumptions that we believe 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.valuation allowance.
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Recently Issued Accounting Pronouncements
See Note 34 in the accompanying condensed consolidated financial statements for a discussion of recentrecently issued accounting policies.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not required for smaller reporting companies.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Under the supervision of and with the participation of our management, including the Company’s Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2019. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, because of the material weaknesses in our internal controls over financial reporting described in our December 31, 2018 Annual Report, our disclosure controls and procedures were not effective.
Report of Management on Internal Controls over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. As of June 30, 2019, management has not completed an effective assessment of the Company’s internal control over financial reporting based on the 2013 Committee of Sponsoring Organizations (COSO) framework. Management has concluded that as of June 30, 2019, our internal control over financial reporting was not effective to detect the inappropriate application of U.S. GAAP. Management identified the following material weaknesses set forth below in our internal control over financial reporting.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Management necessarily applied its judgment in assessing the benefits of controls relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
The Company may be involved in certain legal proceedings that arise from time to time in the ordinary course of its business. Except for income tax contingencies (commencing April 1, 2009), the Company records accruals for contingencies to the extent that management concludes that the occurrence is probable and that the related amounts of loss can be reasonably estimated. Legal expenses associated with the contingency are expensed as incurred.
Not applicable for smaller reporting companies.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the six months ended June 30, 2019, the Company issued 764,890 shares of common stock for proceeds of $2.2 million.
The securities referenced above were issued solely to “accredited investors” in reliance on the exemption from registration afforded by Section 4(a)(2) of the Securities Act, as amended.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors since the filing of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019.
| ||
31.1* | Certification of Principal Executive Officer pursuant to Section 302 | |
31.2* | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* | ||
* Filed herewith.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: August | By: | /s/ |
Chief Executive Officer (Principal Executive |
Date: August 10, 2020 | By: | /s/ Simone Nardi |
Simone Nardi | ||
Chief Financial Officer (Principal Financial Officer)) |
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