Note
2 – 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 had cash of $5.9 million, a working capital deficiency of $49.2 million and an accumulated deficit of $37.6
million at September 30, 2019. The Company incurred a $13.1 million net loss for the nine months ended September 30, 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 products and services, competing technological and market developments, 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
or equity financing.
Note
3 – Basis of Presentation and Summary of Significant Accounting Policies
Basis
of Presentation and Principles of 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”). In
the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting
of normal recurring adjustments, considered necessary for a fair presentation of such interim results.
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited 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, 2019 or for any future interim period. The unaudited condensed consolidated balance sheet at
September 30, 2019 has been derived from 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, 2018 and notes
thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on June 10, 2019.
Principles
of Consolidation
The
Company’s policy is to consolidate all entities that it controls by ownership of a majority of the outstanding voting stock.
In addition, the Company consolidates entities that meet the definition of a variable interest entity (“VIE”) for
which it is the primary beneficiary. The primary beneficiary is the party who has the power to direct the activities of a VIE
that most significantly impact the entity’s economic performance and who has an obligation to absorb losses of the entity
or a right to receive benefits from the entity that could potentially be significant to the entity. For consolidated entities
that are less than wholly owned, the third party’s holding of equity interest is presented as Noncontrolling interests in
the Company’s Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Stockholders’ Equity.
The portion of net earnings attributable to the noncontrolling interests is presented as Net earnings (loss) attributable to noncontrolling
interests in the Company’s Condensed Consolidated Statements of Operations.
The accompanying unaudited consolidated financial
statements include the accounts of the Company, and its 99.7% owned principal operating subsidiary Evolution AI Corporation (“EAI”),
62.3% majority-owned operating subsidiary Nexway AG (“Nexway”), wholly-owned subsidiaries Facebank AG and StockAccess
Holdings SAS (“SAH”), 70.0% majority-owned operating subsidiary Highlight Finance Corp. (“HFC”), inactive
subsidiaries York Production LLC and York Production II LLC and its 54% majority owned subsidiary, Pulse Evolution Corporation
(“PEC”). All inter-company balances and transactions have been eliminated in consolidation. All subsidiaries acquired
are consolidated from the date of acquisition.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. Those estimates and assumptions include 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
valuation allowance.
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.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with original maturities of 90 days or less at acquisition to be cash
equivalents. There were no cash equivalents as of September 30, 2019 and December 31, 2018.
Fair
value of financial instruments
The
Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) 820, Fair Value Measurements. This statement defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. To
increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value into three levels as follows:
Level
1 — quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level
2 — observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices
for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable
or whose significant value drivers are observable; and
Level
3 — assets and liabilities whose significant value drivers are unobservable.
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
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.
For
equity investments that result in the Company having significant influence, but not control, of an entity, the Company applies
the equity method of accounting.
Loans
for which the Company has the intent and ability to hold for the foreseeable future or until maturity are classified as held for
investment and accounted for at cost, adjusted for unamortized premiums and discounts, net of allowance for loan losses.
As of September 30, 2019, the Company’s
long-term investments consist of its investment in Panda Productions (HK) Limited (“Panda”) and an equity investment
in shares and a term loan to P8H, Inc. (“Paddle8”). Refer to Note 5 for further information on the Company’s
long-term investments.
Accounts
receivable and allowance for doubtful accounts
Accounts
receivable are reported at realizable value, net of allowances for contractual credits and doubtful accounts. The Company records
allowances for doubtful accounts receivable based upon expected collectability. The reserve is generally established based upon
an analysis of its aged receivables. Additionally, if necessary, a specific reserve for individual accounts is recorded when the
Company becomes aware of a customer’s inability to meet its financial obligations, such as in the case of a bankruptcy filing
or deterioration in the customer’s operating results or financial position. The Company also regularly reviews the allowance
by considering factors such as historical collections experience, credit quality, age of the accounts receivable balance and current
economic conditions that may affect a customer’s ability to pay. If actual bad debts differ from the reserves calculated,
the Company records an adjustment to bad debt expense in the period in which the difference occurs.
Concentrations
For
the nine months ended September 30, 2019, no customer accounted for more than 10% of sales and accounts receivable.
Sequencing
On
July 30, 2019, the Company adopted a sequencing policy under ASC 815-40-35 whereby
in the event that reclassification of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the
Company’s inability to demonstrate it has sufficient authorized shares as a result of certain securities with a potentially
indeterminable number of shares, shares will be allocated on the basis of the earliest issuance date of potentially dilutive instruments,
with the earliest grants receiving the first allocation of shares. Pursuant to ASC 815, issuance of securities to the Company’s
employees or directors are not subject to the sequencing policy.
Leases
Effective
January 1, 2019, the Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the
definition 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 interest 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 an 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.
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.
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
The
Company continues to account for leases in the prior period financial statements under ASC Topic 840.
Revenue
from Contracts with Customers
The
Company recognizes revenue from contracts with customers under ASC 606, Revenue from Contracts with Customers (the “revenue
standard”). The core principle of the revenue standard is that a company should recognize revenue to depict the transfer
of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled
in exchange for those goods or services. A good or service is transferred to a customer when, or as, the customer obtains control
of that good or service. The following five steps are applied to achieve that core principle:
|
●
|
Step
1: Identify the contract with the customer
|
|
●
|
Step 2: Identify
the performance obligations in the contract
|
|
●
|
Step 3: Determine
the transaction price
|
|
●
|
Step 4: Allocate
the transaction price to the performance obligations in the contract
|
|
●
|
Step 5: Recognize
revenue when the company satisfies a performance obligation
|
The
Company recognized revenue from contracts with customers of approximately $5.8 million during the three- and nine-months ended
September 30, 2019, primarily from the sale of software licenses. Revenue from the sale of software licenses are recognized as
a single performance obligation at the point in time that the software license is delivered to the customer.
The
following presents our revenues from contracts with customers disaggregated by major business activity (in thousands):
|
|
Three and Nine Months Ended
September 30, 2019
|
|
Nexway eCommerce Solutions
|
|
$
|
4,667
|
|
Nexway Academics
|
|
|
1,167
|
|
Total
|
|
$
|
5,834
|
|
Foreign
Currency Translation and Transactions
Assets
and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are translated at exchange rates at the end
of a period. Revenues and expenses are translated at average exchange rates during the period. The gains or losses resulting from
translating foreign currency financial statements into U.S. dollars, net of taxes, if any, are reported as a separate component
of Accumulated Other comprehensive income (loss) within stockholders’ equity. Gains or losses resulting from foreign currency
transactions are included in Other income (expense) in the Company’s Condensed Consolidated Statements of Operations. As
the acquisition of Nexway occurred on September 19, 2019, foreign currency translation and transactions costs were deemed immaterial.
Deferred
tax liability
The Company recognized $1.2 million of deferred
tax liabilities related to the Facebank AG acquisition, and $0.5 million related to the Nexway acquisition during the three
months ended September 30, 2019, and $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, 2019
to September 30, 2019 (in thousands):
|
|
September
30, 2019
|
|
Balance - January 1, 2019
|
|
$
|
35,000
|
|
Facebank AG
acquisition
|
|
|
1,151
|
|
Nexway acquisition
|
|
|
450
|
|
Income tax
benefit (associated with the amortization of intangible assets)
|
|
|
(3,234
|
)
|
Balance - September 30, 2019
|
|
$
|
33,367
|
|
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
Net
Loss Per Share
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
September 30, 2019 and 2018:
|
|
As of September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Common stock purchase warrants
|
|
|
200,007
|
|
|
|
8
|
|
Convertible preferred shares
|
|
|
455,233
|
|
|
|
502,806
|
|
Stock options
|
|
|
16,667
|
|
|
|
-
|
|
Convertible notes variable settlement feature
|
|
|
609,491
|
|
|
|
175,894
|
|
Total
|
|
|
1,281,398
|
|
|
|
678,708
|
|
Convertible
Preferred Stock
Preferred
shares subject to mandatory redemption are classified as liability instruments and are measured at fair value. The Company classifies
conditionally redeemable preferred shares, which includes preferred shares that feature redemption rights that are either within
the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s
control, as temporary equity (“mezzanine”) until such time as the conditions are removed or lapse.
Segment
reporting
The
Company has only one operating segment and reporting unit. The Company defines its segments as those business units whose operating
results are regularly reviewed by the chief operating decision maker (“CODM”) to analyze performance and allocate
resources. The Company’s CODM is its Chief Executive Officer. As of September 30, 2019 and for the nine months
ended September 30, 2019, the CODM only reviews consolidated results to analyze performance and allocate resources.
Revenues, classified by the major geographic
areas in which our customers were located, were as follows (in thousands):
|
|
Revenues
|
|
Europe
|
|
$
|
3,559
|
|
United States
|
|
|
1,225
|
|
Asia
|
|
|
583
|
|
Other Countries
|
|
|
467
|
|
Total
|
|
$
|
5,834
|
|
As the Company continues to
integrate the operations acquired in the Nexway and Facebank AG acquisitions, such integration may result in multiple
reportable segments and reporting units in future periods.
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
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) which supersedes FASB Topic 840, Leases
(Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both
lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating
leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification
will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the
term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases
with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted
for similar to existing guidance for operating leases. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842)
Land Easement Practical Expedient for Transition to Topic 842, which amends ASU 2016-02 to provide entities an optional transition
practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted for
as leases under the current leases guidance in Topic 842. An entity that elects this practical expedient should evaluate new or
modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842. The standard will be effective
for annual and interim periods beginning after December 15, 2019, with early adoption permitted upon issuance. The Company adopted
this standard on January 1, 2019. The impact of this adoption was immaterial. See Note 13 for more information.
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 FASB issued 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.
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited 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.
In
May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers
(“Topic 606”), amending revenue recognition guidance and requiring more detailed disclosures to enable users of
financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers. The core principle of Topic 606 is that revenue should be recognized to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. Additional ASUs have been issued that are part of the overall new revenue guidance including: (i) ASU
2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” (ii) ASU 2016-10, “Identifying
Performance Obligations and Licensing,” (iii) ASU 2016-20, “Technical Corrections and Improvements to Topic
606, Revenue from Contracts with Customers” and (iv) ASU 2016-12, “Narrow Scope Improvements and Practical
Expedients,” which clarified guidance on certain items such as reporting revenue as a principal or agent, identifying
performance obligations. Concurrent with the acquisition of Nexway, the Company adopted ASU No. 2014-09, Revenue from Contracts
with Customers, as amended (Accounting Standards Codification Topic 606) (ASC 606) using the modified retrospective method
applied to those contracts which were not completed the acquisition date. The Company also elected to use the practical expedient
that allows an entity to expense the incremental cost of obtaining a contract as an expense when incurred if the amortization
period of the asset that an entity otherwise would have recognized is less than one year.
Note
4 – Acquisitions
EAI
acquisition
The
EAI acquisition which occurred on August 8, 2018, was accounted for using acquisition method of accounting. The aggregate of the
purchase price, plus net liabilities assumed was allocated to separately identifiable assets 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 ended August 7, 2019. During the nine months ended September 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 nine months ended September 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 first quarter of 2019 with the issuance of 18,935 shares (see Note
14).
The
Company allocated the purchase consideration to the fair value of the assets acquired and liabilities assumed as summarized in
the table below (in thousands except for share and per share amounts):
|
|
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
|
|
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
Proforma
EAI
The following unaudited pro forma financial
information for the three and nine months ended September 30, 2018 presents combined results of operations as if the acquisition
of EAI and PEC had occurred on January 1, 2018 (in thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2018
|
|
|
September 30, 2018
|
|
|
|
|
|
|
|
|
Operating Revenues
|
|
$
|
5,981
|
|
|
$
|
6,275
|
|
Net Loss
|
|
$
|
(9,829
|
)
|
|
$
|
(20,593
|
)
|
Facebank
AG acquisition
On August 15, 2019, the Company acquired 100%
of the issued and outstanding capital stock of Facebank AG in exchange for 2,500,000 shares of common stock, par value $0.0001
per share, of the Company. The acquisition was accounted for using the acquisition method accounting. The fair value of the Company’s
common stock transferred as consideration in the acquisition was $8.25 million, which was determined using comparable observable
transactions around the closing. Facebank AG is a privately-owned Swiss holding company which, at the time of acquisition, owned
a minority interest in Nexway AG, and had entered into a binding agreement to acquire an aggregate 62.3% majority interest in
Nexway AG. On September 19, 2019, Facebank AG completed its acquisition of a majority interest in Nexway AG, which is further
discussed below. Facebank AG also owns 100% of SAH, a French joint stock company and investor in the global luxury, entertainment
and celebrity focused industries that directly or indirectly holds investments in multiple other subsidiaries.
The
acquisition of Facebank AG was considered immaterial as defined by ASC 805, Business combinations.
Purchase
Price Allocation
The
following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed
for the Facebank AG acquisition (in thousands):
Cash
|
|
$
|
329
|
|
Accounts receivable
|
|
|
3,709
|
|
Property and equipment
|
|
|
16
|
|
Investments
|
|
|
5,671
|
|
Financial assets as fair value
|
|
|
2,275
|
|
Intangible assets – customer relationships
|
|
|
2,241
|
|
Intangible assets – intellectual property
|
|
|
1,215
|
|
Intangible assets – trade names and trademarks
|
|
|
843
|
|
Goodwill
|
|
|
16,841
|
|
Accounts payable
|
|
|
(64
|
)
|
Accrued expenses
|
|
|
(802
|
)
|
Deferred taxes
|
|
|
(1,161
|
)
|
Long-term borrowings
|
|
|
(22,863
|
)
|
Stock purchase price
|
|
$
|
8,250
|
|
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
The liabilities assumed in the acquisition
include long-term borrowings with an acquisition-date fair value of $22.9 million. SAH is the borrower under a EUR 20.0 million
bond due March 31, 2014 and an interest rate of 7%. The principal amount outstanding under the borrowing was EUR 14.5 million
and EUR 16.0 million at August 15, 2019 (acquisition date) and September 30, 2019, respectively. As part of the acquisition, the
Company agreed to pre-pay at least EUR 9.5 million of the outstanding principal of the SAH Bond by March 31, 2020.
At August 15, 2019, SAH was also the borrower
under a EUR 5.0 million term loan with Highlight Finance Corp. as the lender and an interest rate of 4.0%. The term loan was effectively
settled as part of Facebank AG’s acquisition of Nexway AG and Highlight Finance Corp. on September 19, 2019 and is not outstanding
at September 30, 2019. Refer to the following section for further discussion on the acquisition of Nexway AG and Highlight Finance
Corp.
Nexway
AG Acquisition
On September 19, 2019, Facebank AG, a wholly
owned subsidiary of the Company, acquired 333,420 shares, or approximately 51%, of Nexway and 35,000 shares, or approximately 70%,
of Highlight Finance Corp. (“HFC”) (the “Nexway AG Acquisition”). Prior to the acquisition, Facebank AG
owned 74,130 shares of Nexway, representing approximately 11.3% of the outstanding common shares of Nexway. Nexway is a Karlsruhe-based
and Germany-listed software and solutions company, which provides a subscription-based platform for the monetization of intellectual
property, principally for entertainment, games and security software companies, through its proprietary merchant presence in 180
different countries. HFC is a British Virgin Islands company with a EUR 15.0 million term bond facility issued and outstanding.
The acquisition was accounted for using the
acquisition method accounting. The aggregate consideration of approximately ($5.3 million) equaled the sum of cash paid ($2.2
million), the fair value of bonds issued ($1.8 million), and the fair value of the Nexway shares previously owned by Facebank
AG ($1.1 million), less the fair value of Facebank AG debt effectively settled as a result of the acquisition ($10.4 million).
Goodwill related to the Nexway AG Acquisition is not deductible for tax purposes.
Purchase
Price Allocation
The
following table summarizes the preliminary allocation of the purchase price to the assets acquired, liabilities assumed
and noncontrolling interest for the Nexway AG Acquisition (in thousands):
Cash
|
|
$
|
4,152
|
|
Accounts receivable
|
|
|
12,900
|
|
Prepaid expenses
|
|
|
1,169
|
|
Inventory
|
|
|
61
|
|
Property and equipment
|
|
|
213
|
|
Intangible assets – customer relationships
|
|
|
2,241
|
|
Intangible assets – intellectual property
|
|
|
1,215
|
|
Intangible assets – trade names and trademarks
|
|
|
843
|
|
Goodwill
|
|
|
45,900
|
|
Right-of-use assets
|
|
|
3,594
|
|
Accounts payable
|
|
|
(28,381
|
)
|
Accrued expenses
|
|
|
(16,747
|
)
|
Current portion of lease liability
|
|
|
(756
|
)
|
Deferred income taxes
|
|
|
(450
|
)
|
Other long-term liabilities
|
|
|
(193
|
)
|
Lease liability
|
|
|
(2,838
|
)
|
Long-term borrowings
|
|
|
(24,609
|
)
|
Noncontrolling interests
|
|
|
(3,582
|
)
|
Consideration transferred
|
|
$
|
(5,268
|
)
|
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
The
liabilities assumed in the acquisition include long-term borrowings with an acquisition-date fair value of $24.6 million. Nexway
AG is the borrower of EUR 12.0 million secured notes, of which EUR 7.5 million was outstanding upon the acquisition on September
19, 2019. The Nexway borrowing has a maturity date of September 8, 2023 and interest rate of 6.5%. HFC is the borrower under a
EUR 15.0 million bond due April 30, 2024 and an interest rate of 4%. All of the HFC bond was outstanding as of September 19, 2019
and September 30, 2019.
Proforma
– Nexway AG
The following unaudited pro forma financial
information for the three and nine months ended September 30, 2019 and September 30, 2018 presents combined results of operations
as if the Nexway AG Acquisition had occurred on January 1, 2018 (in thousands):
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended September
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Operating revenues
|
|
$
|
51,900
|
|
|
$
|
23,545
|
|
|
$
|
139,322
|
|
|
$
|
70,634
|
|
Net loss
|
|
$
|
(9,389
|
)
|
|
$
|
(5,367
|
)
|
|
$
|
(18,933
|
)
|
|
$
|
(9,252
|
)
|
Note
5 – Investments
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, 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 nine months ended September 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 September 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 September 30, 2019, the Company paid
$1.0 million to Panda. As of September 30, 2019, $1.0 million remained unfunded.
During the nine months ended September 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%
of the amount of proceeds received from investors to 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
million as of the date of this transaction and as of September 30, 2019.
Additionally, as part of its acquisition of
Facebank AG on August 15, 2019, the Company acquired investments in Paddle8 consisting of common shares and a term loan. Paddle8
is an online auction house that connects buyers and sellers of fine art and collectibles across the internet. The common shares
hold a 49% voting interest and 33% economic interest in Paddle8 and were assessed to have an acquisition date fair value of $-0-,
which is the carrying value as of September 30, 2019. The Company will account for its investment in the common shares under the
equity method of accounting. The Company intends to hold the term loan until maturity and will accounted for the term loan at amortized
cost, net of any allowance for loan loss. The carrying value of the term loan at September 30, 2019 was $4.6 million.
Note
6 – Intangible Assets and Goodwill
On
July 31, 2019, the Company entered into 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 intends to issue share-based
awards with an approximate fair value of $1,000,000 to Mr. Mayweather. The revenue earned from the agreement will initially be
shared 50% to 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. As of September 30, 2019, the Company has not
issued the share-based awards and has recorded a shares settled liability of $1,000,000 on the accompanying condensed consolidated
balance sheet. The Company recorded an intangible asset of $1,250,000 in connection with Virtual Mayweather. The Company will
amortize this intangible asset over a 5-year period.
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
The Company recognized intangible assets during
the period ended September 30, 2019 in connection with the Facebank AG Acquisition and the Nexway acquisition. Refer
to Note 4 – Acquisition for further information on the Facebank AG Acquisition and the Nexway acquisition.
The
table below summarizes the Company’s intangible assets at September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
|
Useful Lives (Years)
|
|
|
Weighted Average Remaining Life (Years)
|
|
|
Intangible Assets
|
|
|
Accumulated Amortization
|
|
|
Net Balance
|
|
Human animation technologies
|
|
|
7
|
|
|
|
6
|
|
|
$
|
123,436
|
|
|
$
|
(20,237
|
)
|
|
$
|
103,199
|
|
Trademark and trade names
|
|
|
7
|
|
|
|
6
|
|
|
|
9,432
|
|
|
|
(1,273
|
)
|
|
|
8,159
|
|
Animation and visual effects technologies
|
|
|
7
|
|
|
|
6
|
|
|
|
6,016
|
|
|
|
(988
|
)
|
|
|
5,028
|
|
Digital asset library
|
|
|
5-7
|
|
|
|
5.5
|
|
|
|
7,505
|
|
|
|
(1,036
|
)
|
|
|
6,469
|
|
Intellectual Property
|
|
|
7
|
|
|
|
6
|
|
|
|
3,258
|
|
|
|
(136
|
)
|
|
|
3,122
|
|
Customer relationships
|
|
|
11
|
|
|
|
11
|
|
|
|
4,482
|
|
|
|
-
|
|
|
|
4,482
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
154,129
|
|
|
$
|
(23,670
|
)
|
|
$
|
130,459
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
Useful Lives (Years)
|
|
|
Weighted Average Remaining Life (Years)
|
|
|
Intangible Assets
|
|
|
Accumulated Amortization
|
|
|
Net Balance
|
|
Human animation technologies
|
|
|
7
|
|
|
|
6.8
|
|
|
$
|
123,436
|
|
|
$
|
(7,012
|
)
|
|
$
|
116,424
|
|
Trademark and trade names
|
|
|
7
|
|
|
|
6.8
|
|
|
|
7,746
|
|
|
|
(443
|
)
|
|
|
7,303
|
|
Animation and visual effects technologies
|
|
|
7
|
|
|
|
6.8
|
|
|
|
6,016
|
|
|
|
(344
|
)
|
|
|
5,672
|
|
Digital likeness development
|
|
|
7
|
|
|
|
6.8
|
|
|
|
6,255
|
|
|
|
(357
|
)
|
|
|
5,898
|
|
Intellectual Property
|
|
|
7
|
|
|
|
6.8
|
|
|
|
828
|
|
|
|
(47
|
)
|
|
|
781
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
144,281
|
|
|
$
|
(8,203
|
)
|
|
$
|
136,078
|
|
The
intangible assets are being amortized over their respective original useful lives, which range from 5 to 11 years. The
Company recorded amortization expense related to the above intangible assets of approximately $5.2 million and $3.0 million
for the three months ended September 30, 2019 and 2018, respectively, and $15.5 million and $3.0 million for the nine months
ended September 30, 2019 and 2018, respectively. There were no impairment charges recorded during the three- and nine-month
periods ended September 30, 2019 and 2018.
The
estimated future amortization expense associated with intangible assets is as follows (in thousands):
|
|
Future Amortization
|
|
2019 (three months remaining)
|
|
$
|
5,523
|
|
2020
|
|
|
22,092
|
|
2021
|
|
|
22,092
|
|
2022
|
|
|
22,092
|
|
2023
|
|
|
22,092
|
|
Thereafter
|
|
|
36,566
|
|
Total
|
|
$
|
130,459
|
|
Goodwill
The
following table is a summary of the changes to goodwill for the nine months ended September 30, 2019 (in thousands):
Balance - January 1, 2019
|
|
$
|
149,975
|
|
Nexway Acquisition
|
|
|
45,900
|
|
Facebank AG Acquisition
|
|
|
16,841
|
|
Measurement period adjustment for EAI acquisition
|
|
|
(1,921
|
)
|
Balance - September 30, 2019
|
|
$
|
210,795
|
|
Refer to Note 4 – Acquisition for further
information on the Facebank AG Acquisition and the Nexway acquisition.
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
7 – Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses as of September 30, 2019 and December 31, 2018 consist of the following (in thousands):
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Suppliers
|
|
$
|
37,508
|
|
|
$
|
-
|
|
Payroll taxes (in arrears)
|
|
|
1,308
|
|
|
|
1,308
|
|
Accrued compensation
|
|
|
3,654
|
|
|
|
2,453
|
|
Legal and professional fees
|
|
|
3,936
|
|
|
|
1,952
|
|
Accrued litigation loss
|
|
|
524
|
|
|
|
524
|
|
Taxes
|
|
|
5,953
|
|
|
|
-
|
|
Other
|
|
|
2,840
|
|
|
|
2,098
|
|
Total
|
|
$
|
55,723
|
|
|
$
|
8,335
|
|
Note
8 - Related Parties
Amounts
owed to related parties as of September 30, 2019 and December 31, 2018 consist of the following (in thousands):
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Alexander Bafer, Executive Chairman
|
|
$
|
20
|
|
|
$
|
25
|
|
John Textor, Chief Executive Officer and affiliated companies
|
|
|
384
|
|
|
|
304
|
|
Other
|
|
|
53
|
|
|
|
69
|
|
Total
|
|
$
|
457
|
|
|
$
|
398
|
|
Our
Chairman, Mr. Bafer, advanced an unsecured, non-interest-bearing loan to the Company which is payable on demand. The amounts due
to John Textor, Chief Executive Officer, 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 nine months ended September 30, 2019, the Company received approximately $415,000 from related parties, including a $300,000
advance from FaceBank, Inc., a development stage company controlled by Mr. Textor, $56,000 from Mr. Bafer, $29,000 from Mr. Textor
and $30,000 from other related parties. During the nine months ended September 30, 2019, the Company paid approximately $356,000
to related parties, including $51,000 to Mr. Bafer, $254,000 to Mr. Textor and $51,000 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. 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 September 30, 2019 and December 31, 2018 related to this note was $70,000 and $45,000, 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
matured on August 31, 2019. During the nine months ended September 30, 2019, Mr. Bafer repaid $258,850 of the principal balance
and approximately $8,500 of interest. As of September 30, 2019, the note is in default and the total outstanding principal balance
is approximately $5,500.
Note
9 - Note Payable
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 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 of Series X Convertible Preferred Stock during the nine months ended September 30, 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.
FaceBank
Group, Inc.
(Formerly
Pulse Evolution 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. 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.
The
following table classifies the Company’s assets and liabilities measured at fair value on a recurring basis into the fair
value hierarchy as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
Fair valued measured at September 30, 2019
|
|
|
|
Quoted prices in active markets (Level 1)
|
|
|
Significant other observable inputs (Level 2)
|
|
|
Significant unobservable inputs (Level 3)
|
|
Equity securities
|
|
$
|
-
|
|
|
$
|
592
|
|
|
$
|
-
|
|
Limited partnership interests
|
|
|
-
|
|
|
|
1,528
|
|
|
|
-
|
|
Total Financial Assets at Fair Value
|
|
$
|
-
|
|
|
$
|
2,120
|
|
|
$
|
-
|
|
|
|
Fair Value measured at September 30, 2019
|
|
|
|
Quoted prices in active markets
(Level 1)
|
|
|
Significant other observable inputs
(Level 2)
|
|
|
Significant unobservable inputs (Level 3)
|
|
Derivative liability - convertible notes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
377
|
|
Profits interest sold
|
|
|
-
|
|
|
|
-
|
|
|
|
655
|
|
Embedded put option
|
|
|
-
|
|
|
|
-
|
|
|
|
380
|
|
Warrant Liability
|
|
|
-
|
|
|
|
-
|
|
|
|
96
|
|
Total Financial Liabilities at Fair Value
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,508
|
|
|
|
Fair Value measured at December 31, 2018
|
|
|
|
Quoted prices in
active markets
(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
|
|
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
Derivative
Financial Instruments
The
following table presents changes in Level 3 liabilities measured at fair value (in thousands) for the nine months ended
September 30, 2019. Unobservable inputs were used to determine the fair value of positions that the Company has classified within
the Level 3 category.
|
|
Derivative
- Convertible Notes
|
|
|
Warrants
(assumed from subsidiary)
|
|
|
Profits
Interests Sold
|
|
|
Embedded
Put Option
|
|
Fair value at December 31, 2018
|
|
$
|
1,018
|
|
|
$
|
4,528
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Change in fair value
|
|
|
(1,018
|
)
|
|
|
(4,432
|
)
|
|
|
-
|
|
|
|
1
|
|
Additions
|
|
|
377
|
|
|
|
-
|
|
|
|
655
|
|
|
|
379
|
|
Fair value at September 30,
2019
|
|
$
|
377
|
|
|
$
|
96
|
|
|
$
|
655
|
|
|
$
|
380
|
|
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 $0.1 million on September 30, 2019 and $4.5 million on December 31, 2018, resulting in a change in fair value of $4.4
million that is reported as a component of other income/(expense) in the condensed consolidated statement of operations for the
nine months ended September 30, 2019.
Warrant
Liability - The Company used a Monte Carlo simulation model to estimate the fair value of the warrant liability with the following
assumptions at September 30, 2019 and December 31, 2018:
|
|
September 30, 2019
|
|
|
December 31, 2018
|
|
Exercise price
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
Stock price - subsidiary
|
|
$
|
0.04
|
|
|
$
|
0.22
|
|
Discount applied
|
|
|
50
|
%
|
|
|
50
|
%
|
Fair value of stock price
|
|
$
|
0.00
|
|
|
$
|
0.09
|
|
Risk free rate
|
|
|
1.56
|
%
|
|
|
2.49
|
%
|
Contractual term (years)
|
|
|
3.33
|
|
|
|
4.08
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
81.0
|
%
|
|
|
86.5
|
%
|
Number of subsidiary warrants outstanding
|
|
|
48,904,037
|
|
|
|
48,904,037
|
|
In
arriving at the fair value of stock price, a 50% 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 Sold - The fair value of the profits interest sold was determined using an expected cash flow analysis.
Embedded
Put Option - The Series D Convertible 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 to approximate the maximum redemption price.
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
11 - Convertible Notes Payable and Convertible Notes Payable to Related Parties
At
September 30, 2019 and December 31, 2018, 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
|
|
Adar Alef, LLC (4)
|
|
7/30/19
|
|
|
12
|
%
|
|
7/30/20
|
|
|
275
|
|
|
|
(228
|
)
|
|
|
377
|
|
|
|
424
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
325
|
|
|
|
-
|
|
|
|
377
|
|
|
$
|
474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes- Related P{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 September 30, 2019
|
|
|
|
|
|
|
|
|
|
$
|
375
|
|
|
$
|
(228
|
)
|
|
$
|
377
|
|
|
$
|
524
|
|
|
|
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 September 30, 2019 and December 31, 2018, using the Monte Carlo simulation model
with the following weighted average assumptions:
|
|
April 25, 2019 –
September 30, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Stock Price
|
|
$
|
5.05 - 12.75
|
|
|
$
|
6.75
|
|
Risk Free Interest Rate
|
|
|
1.78 – 2.45
|
%
|
|
|
2.61
|
%
|
Expected life (years)
|
|
|
0.19 – 1.00
|
|
|
|
0.73
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
65.9
– 97.3
|
%
|
|
|
92.8
|
%
|
|
|
|
|
|
|
|
|
|
Fair Value - Note Variable Share Settlement Feature (in thousands)
|
|
$
|
524
|
|
|
$
|
1,018
|
|
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
*
Fair value at September 30, 2019
(1)
|
On
February 20, 2019, the Company settled the August 24, 2018, convertible promissory note issued to Power Up, repaying the principal
balance of $202,500 and $66,369 for interest and penalties.
|
|
|
(2)
|
On
November 6, 2018, the Company issued a convertible promissory note to Birchwood Capital, LLC in the amount of $50,000. The
note was due on May 6, 2019 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 $3.00 per share. The Company recorded a beneficial conversion feature discount
of $50,000 on this note as of December 31, 2018. The note is currently past due. Accrued interest was approximately $4,500
and $1,000 as of September 30, 2019 and December 31, 2018, respectively.
|
|
|
(3)
|
On
November 26, 2018, the Company issued a convertible promissory note to Power Up Lending Group, LLC in the amount of $128,000.
The note is due on November 26, 2019 and bears interest at 8% 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 average for the three lowest traded prices
during the previous ten (10) day trading period ending on the latest complete trading day prior to the conversion date. On
April 25, 2019, the Company settled the note, repaying the principal balance of $128,000 and $39,000 for interest and penalties.
|
(4)
|
On
July 30, 2019, the Company issued a convertible promissory note to Adar Alef, LLC in the amount of $275,000. 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.
On
November 28, 2018, the Company issued a convertible promissory note to Adar Bays - Alef, LLC in the amount of $192,500.
The note is due on November 28, 2019 and bears interest at 6% per annum. The loan and any accrued interest may be converted
into shares of the Company’s common stock 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. On May 20, 2019,
the Company settled the note, repaying the principal balance of $192,500 and $47,500 for interest and penalties.
|
Related
Party Convertible Notes
(5)
|
In
July 2015, the Company issued convertible promissory notes to Mr. Bafer, Chairman, in exchange for the cancellation of previously
issued promissory notes in the aggregate of $530,000 and accrued interest of $13,000 for a total of $543,000. The notes are
unsecured, bear interest of 5% per annum, matured on October 1, 2015 and are convertible into shares of common stock at a
conversion price equal to the lowest closing stock price during the 20 trading days prior to conversion with a 50% discount.
|
|
|
|
In
October 2015, the notes matured and became past due. As a result, the stated interest of 5% increased to 22% pursuant
to the term of the notes. In July 2016, the Company and Mr. Bafer agreed to extend the maturity date of these notes to
August 1, 2017 to cure the default. There were no other terms changed and no additional consideration was paid.
On
May 22, 2019, the Company issued a non-convertible promissory note to replace the convertible promissory notes (See Note
8).
|
|
|
(6)
|
On
December 28, 2016, the Company issued an unsecured convertible promissory note in the principal amount of $50,000 to a shareholder.
The note bears interest at 3% per annum, was due on March 24, 2017, and is convertible into shares of common stock at a conversion
price of $4,000 per share. The note is currently past due. Accrued interest was approximately $4,000 and $3,000 as of September
30, 2019 and December 31, 2018, respectively.
|
|
|
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
Note
12 – Temporary Equity
Series
D Convertible Preferred Stock
The
following table summarizes the Company’s Series D Convertible Preferred Stock activities for the nine months ended September
30, 2019 (dollars in thousands):
|
|
Series D Preferred Stock
|
|
|
|
Shares
|
|
|
Amount
|
|
Total temporary equity as of December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
Issuance of Series D convertible preferred stock for cash
|
|
|
456,000
|
|
|
|
456
|
|
Offering cost related to issuance of Series D convertible preferred stock
|
|
|
-
|
|
|
|
(6
|
)
|
Deemed dividends related to immediate accretion of offering cost
|
|
|
-
|
|
|
|
6
|
|
Accrued Series D Preferred Stock dividends
|
|
|
5,299
|
|
|
|
5
|
|
Bifurcated redemption feature of Series D convertible preferred stock
|
|
|
-
|
|
|
|
(379
|
)
|
Deemed dividends related to immediate accretion of bifurcated redemption feature of Series D convertible preferred stock
|
|
|
-
|
|
|
|
379
|
|
Total temporary equity as of September 30, 2019
|
|
|
461,299
|
|
|
$
|
461
|
|
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. On September 6, 2019, the Company entered into another stock purchase agreement to issue 203,000 shares
of its Series D Preferred Stock, for proceeds of $203,000.
Holders
of shares of the Series D Preferred Stock are entitled to 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). The dividends are payable solely upon redemption,
liquidation or conversion. The Company recorded approximately $5,000 accrued dividend as of September 30, 2019.
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 the 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 $379,000, further reducing the
initial carrying value of the Series D Shares. The discount to the aggregate stated value of the Series A Shares, resulting from
recognition of the bifurcated redemption feature was immediately accreted as a reduction of additional paid-in capital and an
increase in the carrying value of the Series D Shares. The accretion is presented in the Consolidated Statement of Operations
as a deemed dividend, increasing net loss to arrive at net loss attributable to common stockholders.
Note
13- 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 September 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.
Common
Stock
In
March 2019, the Company raised $1.1 million in a private placement transaction by issuing 93,910 shares of its common stock for
$11.28 per share to a Hong Kong-based family office group. The Company contemporaneously issued warrants to purchase an additional
200,000 shares of common stock to the investor in this transaction. The warrants feature an exercise price of $11.31 per share,
and may be exercised at any time prior to March 31, 2020. The warrants were determined to be equity instruments and are therefore
classified within stockholders’ equity in accordance with ASC 815.
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
The
Company raised an additional $1.8 million through issuances of an aggregate of 888,251 shares of its common stock in private placement
transactions during the nine months ended September 30, 2019 to several other investors.
During
the nine months ended September 30, 2019, the Company issued 18,935 shares of its common stock, at a fair value of approximately
$0.1 million or $6.90 per share, to settle a lease dispute.
During the nine months ended September 30,
2019, the Company issued 2,500,000 shares of its common stock, at a fair value of approximately $8.3 million, or approximately
$3.30 per share, related to its acquisition of Facebank AG and Nexway.
During the nine-months ended September 30,
2019, the Company issued 856,354 shares of its common stock in exchange for 11,700,743 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 $3.0 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.
During
the nine months ended September 30, 2019, the Company issued 15,009 shares of its common stock at a fair value of approximately
$0.1 million or $6.72 per share for services rendered.
During
the nine months ended September 30, 2019, the Company issued 2,000 shares of its common stock at a fair value of approximately
$13,000 or $6.59 per share in connection with the cancellation of a consulting agreement.
Stock
Options
The
Company has adopted the 2014 Equity Incentive Stock Plan (the “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 Plan is administered by the Company’s Board, and has a term of 10 years.
The
Company has valued the options at their date of grant utilizing the Black-Scholes option pricing model. This model is dependent
upon several variables such as the options’ term, exercise price, current stock price, risk-free interest rate estimated
over the expected term and estimated volatility of our stock over the expected term of the options. The risk-free interest rate
used in the calculations is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating
the expected life of the options as calculated using the simplified method. The estimated volatility was determined based on the
historical volatility of our common stock.
The
Company did not grant stock options during the nine months ended September 30, 2019.
A
summary of option activity under the Company’s employee stock option plan for the nine months ended September 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 September 30, 2019
|
|
|
16,667
|
|
|
$
|
28.20
|
|
|
$
|
-
|
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable as of September 30, 2019
|
|
|
16,667
|
|
|
$
|
28.20
|
|
|
$
|
-
|
|
|
|
8.3
|
|
There
was no stock-based compensation expense recognized during the three and nine months ended September 30, 2019. Stock-based compensation
expense of $3.4 million was recognized for each of the three and nine months ended September 30, 2018, respectively, associated
with stock-based payment awards issued to non-employee service providers.
As
of September 30, 2019, there was no unrecognized stock-based compensation expense.
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
Warrants
A
summary of the Company’s outstanding warrants as of September 30, 2019 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
|
|
|
|
-
|
|
|
|
0.5
|
|
Outstanding as of September 30, 2019
|
|
|
200,007
|
|
|
$
|
12.15
|
|
|
$
|
315,000
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants exercisable as of September 30, 2019
|
|
|
200,007
|
|
|
$
|
12.15
|
|
|
$
|
315,000
|
|
|
|
0.5
|
|
Note
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
September 30, 2019, the Company had operating lease liabilities of $79,000 and right of use assets of $79,000, respectively, recorded
in the accompanying condensed consolidated balance sheet.
As part of the Nexway acquisition on September
19, 2019, the Company recognized right of use assets of $3.6 million and lease liabilities of $3.6 million associated with operating
lease obtained in the acquisition.
The
following summarizes quantitative information about the Company’s operating leases (amounts in thousands, except lease term
and discount rate):
|
|
For the Three Months
Ended
September 30, 2019
|
|
|
For the Nine Months
Ended
September 30, 2019
|
|
Operating leases
|
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
22
|
|
|
$
|
53
|
|
Variable lease cost
|
|
|
18
|
|
|
|
37
|
|
Operating lease expense
|
|
|
40
|
|
|
|
90
|
|
Short-term lease rent expense
|
|
|
-
|
|
|
|
-
|
|
Total rent expense
|
|
$
|
40
|
|
|
$
|
90
|
|
Operating cash flows from operating leases
|
|
$
|
22
|
|
|
$
|
52
|
|
Right-of-use assets exchanged for operating lease liabilities
|
|
$
|
3,594
|
|
|
$
|
3,719
|
|
Weighted-average remaining lease term – operating leases
|
|
|
8.3
|
|
|
|
8.3
|
|
Weighted-average discount rate – operating leases
|
|
|
8.0
|
%
|
|
|
8.0
|
%
|
FaceBank
Group, Inc.
(Formerly
Pulse Evolution Group, Inc.)
Notes
to the Unaudited Condensed Consolidated Financial Statements
Maturities
of the Company’s operating leases, are as follows (amounts in thousands):
Three months ended December 31, 2019
|
|
$
|
222
|
|
Year Ended December 31, 2020
|
|
|
816
|
|
Year Ended December 31, 2021
|
|
|
769
|
|
Year Ended December 31, 2022
|
|
|
452
|
|
Year Ended December 31, 2023
|
|
|
452
|
|
Thereafter
|
|
|
2,258
|
|
Total
|
|
|
4,969
|
|
Less present value discount
|
|
|
(1,296
|
)
|
Operating lease liabilities
|
|
$
|
3,673
|
|
Note
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 September 30, 2019 and December 31, 2018. 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 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 harm. 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’s subsidiaries and affiliates. Mr. Meide was afforded the opportunity 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.
On
June 25, 2018, prior to our acquisition of a majority interest in PEC, an office space vendor filed a complaint against
such company (Case#: CIV1802192) in the Superior Court of the State of California, Marin County asserting breach of contract,
breach of implied covenant of good faith and fair dealing, intentional misrepresentation, and negligent misrepresentation. The
Company’s subsidiary then responded with affirmative defenses on September 27, 2018. The Company reached an out of court
settlement on December 19, 2018 with the vendor and the case was dismissed on January 24, 2019. During the nine months ended September
30, 2019, the Company issued 18,935 shares of its common stock, at a fair value of approximately $0.1 million or $6.90 per share,
in connection with this lease settlement.
Note 16 – Subsequent Events
The
Company has evaluated all events that occurred after the balance sheet date of September 30, 2019, through November 19, 2019,
the date when financial statements were available to be issued to determine if they must be reported. The Company’s subsequent
events are as follows:
Investments
On
October 24, 2019, the Company satisfied its obligations under its investment agreement with Panda Productions (HK) Limited by
issuing 175,000 common shares, in lieu of its obligation to fund an additional $1 million in cash.
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 FaceBank 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,
as filed with the Securities and Exchange Commission (the “SEC”).
Overview
FaceBank
Group, Inc. (formerly known as Pulse Evolution Group, Inc. and Recall Studios, Inc.) was incorporated under the laws of the State
of Florida in February 2009 under the name York Entertainment, Inc. On February 28, 2019, the Company’s corporate name was
changed to Pulse Evolution Group, Inc., in recognition of the global market reputation of its major operating subsidiary, Pulse
Evolution Corporation (“PEC”), and its stock symbol was changed to “DGLF” in recognition of the
Company’s focus on ‘Digital Life’. Effective September 30, 2019, the Company’s name was changed to FaceBank
Group, Inc. and its trading symbol was changed to FBNK.
Nature
of Business
FaceBank Group, Inc. is a digital human
technology company, focused on the development, collection, protection and preparation of the personal digital likeness assets,
of celebrities and consumers, for use in artificial intelligence, entertainment, personal productivity and social networking.
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”), a development stage artificial
intelligence company, which included EAI’s 58% interest in PEC. PEC is a globally recognized pioneer in the development
of hyper-realistic digital humans for live shows, virtual reality, augmented reality, holographic, 3D stereoscopic, web, mobile,
interactive 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 in The Curious
Case of Benjamin Button (2008), the digital alter-ego of Jeff Bridges in Tron: 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. Pursuant to the terms of the closing agreement, the Company became a 99.7% owner of EAI. The Company accounted for
the transaction as a business combination using the acquisition method of accounting based on the Financial Accounting Standards
Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 805 — Business Combinations,
which requires recognition and measurement of all identifiable assets acquired and liabilities assumed at their fair value as
of the date control is obtained. The Company determined that it was the accounting acquirer under ASC 805. This determination
was primarily based on existing management of the Company retaining 4 of the 5 seats on the Board, the provisions of 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.
On July 31, 2019, the Company entered into
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 intends to issue share-based awards with an approximate fair value
of $1,000,000 to Mr. Mayweather. The revenue earned from the agreement will initially be shared 50% to 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. As of September 30, 2019, the Company has not issued the share-based awards and has recorded a shares
settled liability of $1,000,000 on the accompanying condensed consolidated balance sheet. The Company recorded an intangible asset
of $1,250,000 in connection with Virtual Mayweather. The Company will amortize this intangible asset over a 5-year period.
On August 15, 2019, the Company acquired 100%
of the issued and outstanding capital stock of Facebank AG in exchange for 2,500,000 share of common stock, par value $0.0001
per share, of the Company. The acquisition was accounted for using the acquisition method accounting. The fair value of the Company’s
common stock transferred as consideration in the acquisition was $8.25 million, which was determined using comparable observable
transactions around the closing. Facebank AG is a privately-owned Swiss holding company which, at the time of acquisition, owned
a minority interest in Nexway AG (“Nexway”), and had entered into a binding agreement to acquire an aggregate
62.3% majority interest in Nexway. On September 19, 2019, Facebank AG completed its acquisition of a majority interest in Nexway,
which is further discussed below. Facebank also owns 100% of StockAccess Holdings SAS (“SAH”), a French joint stock
company and investor in the global luxury, entertainment and celebrity focused industries that directly or indirectly holds investments
in multiple other subsidiaries.
On
September 19, 2019, Facebank AG, a wholly owned subsidiary of the Company, acquired 333,420 shares, or approximately 51%, of Nexway and 35,000 shares, or approximately 70%, of Highlight Finance Corp. (“HFC”) (the “Nexway
AG Acquisition”). Prior to the acquisition, Facebank AG owned 74,130 shares of Nexway, representing approximately 11.3%
of the outstanding common shares of Nexway. Nexway is a Karlsruhe-based and Germany-listed software and solutions company, which
provides a subscription-based platform for the monetization of intellectual property, principally for entertainment, games and
security software companies, through its proprietary merchant presence in 180 different countries. HFC is a British Virgin Islands
company with a EUR 15.0 million term bond facility issued and outstanding.
The acquisition was accounted for using the
acquisition method accounting. The aggregate consideration of approximately ($5.3 million) equaled the sum of cash paid ($2.2
million), the fair value of bonds issued ($1.8 million), and the fair value of the Nexway shares previously owned by Facebank
AG ($1.1 million), less the fair value of Facebank AG debt effectively settled as a result of the acquisition ($10.4 million).
Goodwill related to the Nexway AG acquisition is not deductible for tax purposes.
We
believe that digital humans will be ubiquitous in society, culture and industry. In the last decade, hyper-realistic digital humans
have performed in movies such as The Curious Case of Benjamin Button or on stage such as the virtual performance of a digital
Tupac Shakur at the Coachella Valley Music Festival. We expect that, in years to come, digital humans will not only perform for
audiences on stage and in film, but they will also represent individual consumers as digital likeness avatars, in realistic and
fantasy form, appearing and interacting on the consumer’s behalf in electronic and mobile communication, social media, video
game, virtual reality, and augmented reality. The Company’s long-term goal is to be the ‘face’ of artificial
intelligence, to provide a human form to interactive artificially intelligent computer beings that will be common in society,
providing useful information and services to people in diverse industries, such as education, health care, telecommunications,
defense, transportation and entertainment.
Our
leadership team is currently focused on applications of digital humans in entertainment. We believe the entertainment industry
provides us with attractive near-term opportunities to put digital humans to work in proven performance-oriented business models,
while also allowing us to use the visibility of our globally recognized celebrities to showcase our digital human technologies
and their applications across other industries. Accordingly, our current business plan is to generate revenues from our digital
human representations of 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.
The
Company has a long-term agreement with the Estate of Michael Jackson, a shareholder 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,
and our collaboration with the larger community of artificial intelligence pioneers, we expect that we will do more than just
put a face on AI. We intend to build your most knowledgeable teacher, your most trusted advisor, and in a digital world that reveals
more possibilities each day, maybe even your best friend.
Results
of Operations for the three months ended September 30, 2019 and 2018 (in thousands):
|
|
Three
Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Revenues
|
|
$
|
5,834
|
|
|
$
|
-
|
|
Cost of revenues
|
|
|
(5,222
|
)
|
|
|
-
|
|
General and administrative
|
|
|
(2,264
|
)
|
|
|
(2,927
|
)
|
Amortization of intangible assets
|
|
|
(5,254
|
)
|
|
|
(2,563
|
)
|
Depreciation
|
|
|
(19
|
)
|
|
|
(3
|
)
|
Other income (expense)
|
|
|
(1,012
|
)
|
|
|
626
|
|
Income tax
benefit
|
|
|
1,028
|
|
|
|
-
|
|
Net
loss
|
|
$
|
(6,909
|
)
|
|
$
|
(4,867
|
)
|
Revenue
During the three months ended September 30,
2019, we recognized revenues of $5.8 million which are related to our acquisition of Facebank AG. The revenues recognized are
related to the sale of our software licenses. There were no revenues recognized during the three months ended September 30,
2018.
Cost
of Revenues
During
the three months ended September 30, 2019, we recognized cost of revenues of $5.2 million, which are directly related to the revenues
recognized with our acquisition of Facebank AG. There were no cost of revenues recognized during the three months ended September
30, 2018.
General
and Administrative
During
the three months ended September 30, 2019, general and administrative expenses totaled $2.3 million, compared to $2.9 million
for the three months ended September 30, 2018. The decrease of $0.6 million was primarily due decreased stock-based compensation
expense of $3.0 million recognized during the three months ended September 30, 2018 related to the issuance of 407,943 common
shares to non-employees for legal and consulting services rendered, offset by increases in executive compensation of $0.3 million
related to increases in annual salaries and bonuses for our Chief Executive Officer and Executive Chairman, $0.1 million of other
compensation expense for payroll and related benefits for new employees, and increases in legal and professional fees of $1.9
million.
Amortization
of Intangible Assets
During the three months ended September 30,
2019, amortization expenses totaled $5.3 million, an increase of $2.7 million as compared to $2.6 million during
the three months ended September 30, 2018. The increase is primarily attributable to higher amortization expense related to the
intangible assets acquired with EAI.
Other
Income (Expense)
During the three months ended September 30,
2019, we recognized $1.0 million of other expense, compared to $0.6 million of other income during the three months ended September
30, 2018. The $1.6 million increase to other expense is primarily related to $1.2 million of other expense, net, primarily
related to fair value changes in the financial assets held by Facebank AG, $0.8 million for the change in fair value of our derivative
liability related to our convertible notes, an increase in interest expense of $0.3 million related to our convertible
notes, offset by $0.5 million of interest income and an increase of $0.2 million for the gain in fair value of our
subsidiary warrant liability.
Income
Taxes
During
the three months ended September 30, 2019, 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 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 September 30,
2019, we recorded a net loss of $6.9 million, compared to a net loss of $4.9 million for the three months ended September 30,
2018. The increase in net loss of $2.0 million is primarily due to higher amortization of $2.7 million related to our intangible
assets and an increase of $1.6 million of other expenses, offset by the recognition of a $1.0 million of income tax benefit,
decreased general and administrative expenses of $0.7 million, and a gross profit of $0.6 million recognized
from the sale of our software licenses.
Results
of Operations for the nine months ended September 30, 2019 and 2018 (in thousands):
|
|
Nine
Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(in thousands)
|
|
Revenues
|
|
$
|
5,834
|
|
|
$
|
-
|
|
Cost of revenues
|
|
|
(5,222
|
)
|
|
|
-
|
|
General and administrative
|
|
|
(4,105
|
)
|
|
|
(4,806
|
)
|
Amortization of intangible assets
|
|
|
(15,560
|
)
|
|
|
(2,563
|
)
|
Depreciation
|
|
|
(29
|
)
|
|
|
(3
|
)
|
Other income (expense)
|
|
|
2,707
|
|
|
|
(376
|
)
|
Income tax
benefit
|
|
|
3,234
|
|
|
|
-
|
|
Net
loss
|
|
$
|
(13,141
|
)
|
|
$
|
(7,748
|
)
|
Revenue
During the nine months ended September 30,
2019, we recognized revenues of $5.8 million, which are related to our acquisition of Facebank AG. The revenues recognized
are related to the sale of our software licenses. There were no revenues recognized during the three months ended September
30, 2018.
Cost
of Revenues
During
the nine months ended September 30, 2019, we recognized cost of revenues of $5.2 million, which are directly related to the revenues
recognized with our acquisition of Facebank AG. There were no cost of revenues recognized during the three months ended September
30, 2018.
General
and Administrative
During
the nine months ended September 30, 2019, general and administrative expenses totaled $4.1 million, compared to $4.8 million for
the nine months ended September 30, 2018. The decrease of $0.7 million was primarily due to decreased stock-based compensation
expense of $3.0 million recognized during the three months ended September 30, 2018 related to the issuance of 407,943 common
shares to non-employees for legal and consulting services rendered, offset by increases in executive compensation of $0.7 million
related to increases in annual salaries and bonuses for our Chief Executive Officer and Executive Chairman, $0.3 million of other
compensation expense for payroll and related benefits for new employees, and increases in legal and professional fees of $1.9
million.
Amortization
of Intangible Assets
During the nine months ended September 30,
2019, amortization expenses totaled $15.6 million, an increase of $13.0 million as compared to $2.6 million during the
three months ended September 30, 2018. The increase is primarily attributable to higher amortization expenses related to
the intangible assets acquired with EAI.
Other
Income (Expense)
During the nine months ended September 30,
2019, we recognized $2.7 million of other income, compared to $0.4 million of other expense during the nine months ended
September 30, 2018. The $3.1 million increase to other income is primarily related to an increase of $3.8 million
recorded for the change in fair value of our subsidiary warrant liability, decreases in interest expense of $2.3 million,
primarily related to reduced financing costs recognized during the nine months ended September 30, 2019, and $0.5 million
of interest income related to our acquisition of Facebank AG, offset by an increase of $2.3 million recognized for the
change in fair value of our derivative liability related to our convertible notes and $1.2 million of other expense, net, primarily
related to fair value changes in the financial assets held by Facebank AG.
Income
Taxes
During
the nine months ended September 30, 2019, we recognized an income tax benefit of $3.2 million. The Company’s deferred tax
liability and income tax benefit relates to our amortizable intangible assets. The amortization of intangible assets of $15.5
million caused the deferred tax liability to decrease by $3.2 million, which resulted in the recognition of an income tax benefit.
Net
Loss
During the nine months ended September 30,
2019, we recorded a net loss of $13.1 million, compared to a net loss of $7.7 million for the three months ended
September 30, 2018. The increase in net loss of $5.4 million is primarily due to higher amortization of $13.0 million related
to our intangible assets, offset by the recognition of $3.2 million of income tax benefit, increases in other income of $3.1
million, a decrease in general and administrative expenses of $0.7 million and a gross profit of $0.6 million
recognized for the sale of our software licenses.
Liquidity
and Going Concern
The
accompanying 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 had cash of $5.9 million, a working
capital deficiency of $49.2 million and an accumulated deficit of $37.6 million at September 30, 2019. The Company incurred a
$13.1 million net loss for the nine months ended September 30, 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 factors raise substantial doubt about the Company’s ability to continue
as a going concern within one year from the issuance date of our unaudited interim financial statements included in this quarterly
report. 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 products and services, competing technological and market developments, 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 $1.8 million through the issuance of
common stock between January and September 2019 at various prices ranging between $2.00 to $9.00 per share to a number of smaller
investors.
Management
believes that the Company has access to capital 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 or equity financing.
Cash
Flows (in thousands)
|
|
Nine
Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Net
Cash Provided by (Used in) Operating Activities
|
|
$
|
1,257
|
|
|
$
|
(2,462
|
)
|
Net
Cash Provided by Investing Activities
|
|
|
1,625
|
|
|
|
-
|
|
Net
Cash Provided by Financing Activities
|
|
|
2,983
|
|
|
|
2,422
|
|
Net
Change in Cash
|
|
$
|
5,865
|
|
|
$
|
(40
|
)
|
Operating
Activities
For the nine months ended September 30, 2019,
net cash provided by operating activities was $1.3 million, which consisted of our net loss of $13.1 million,
adjusted for non-cash expenses of $7.5 million including, $15.6 million of amortization expenses related to our
intangible assets, $0.5 million of amortization of the debt discount and $0.6 million of interest expense related to
our convertible notes payable, offset by $5.4 million related to the change in fair value of our subsidiary warrant
liability and our derivative liability, and $3.2 million of income tax benefit. Changes in operating assets and liabilities
primarily consisted of increases in accounts payable and accrued expenses of $3.4 million, offset by a decrease
in accounts receivable of $3.6 million.
For
the nine months ended September 30, 2018, net cash used in operating activities was $2.5 million, which primarily consisted of
our net loss of $7.7 million, adjusted for non-cash expenses of $2.5 million related to financing costs, $3.4 million of stock-based
compensation expense for services provided, $2.6 million amortization of intangibles and $1.2 million of amortization of our debt
discount related to our convertible notes, offset by a $3.3 million gain recognized for the change in fair value of our derivative
liability.
Investing
Activities
For the nine months ended September 30,
2019, net cash provided by investing activities was $1.6 million, which primarily consisted of $2.3 million
of cash received in connection with our acquisition of Facebank AG and Nexway, $1.0 million paid for our
investment in Panda Productions (HK) Limited (“Panda”), offset by $0.7 million received from accredited
investors for an interest in Panda, and $0.3 million paid for intangible assets related to our Virtual Mayweather
agreement.
There
were no investing activities for the nine months ended September 30, 2018.
Financing
Activities
For the nine months ended September 30, 2019,
net cash provided by financing activities was $3.0 million. The net cash provided is primarily related to $2.9 million
of proceeds received from the sale of our common stock, $0.5 million of proceeds received from the issuance of our preferred
stock, $0.4 million received as an advance from a related party, $0.3 million of proceeds received from the issuance of
a convertible note and $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 and repayments of $0.6 million to related parties.
For
the nine months ended September 30, 2018, net cash provided by financing activities was $2.4 million. The net cash provided is
primarily related to $1.3 million of proceeds received from the issuance of our convertible notes and $2.3 million of proceeds
received from the sale of our common stock, offset by repayments of $1.3 million of our convertible notes.
Off-Balance
Sheet Arrangements
As
of September 30, 2019, 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 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 assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include
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 valuation allowance.
Recently
Issued Accounting Pronouncements
See
Note 3 in the accompanying condensed consolidated financial statements for a discussion of recent accounting policies.