Filing Overview
Issuer: FaceBank Group, Inc. (formerly Pulse Evolution Group, Inc.), not FuboTV Inc. The filing covers the unaudited quarter and nine months ended September 30, 2019, and was filed November 19, 2019. Effective September 30, 2019, the company changed its name to FaceBank Group, Inc. and ticker to FBNK.
The company describes itself as a digital human technology business focused on digital likenesses for artificial intelligence, entertainment, productivity and social networking. During the period it acquired Facebank AG and a majority interest in Nexway AG, a software and e-commerce solutions company.
Financial Performance and Position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $5.8 million in 2019; $0 in 2018 | $5.8 million in 2019; $0 in 2018 |
| Gross profit | $0.6 million; approximately 10.5% margin | $0.6 million; approximately 10.5% margin |
| Operating loss | $6.9 million; approximately negative 118.7% margin | $19.1 million; approximately negative 327.1% margin |
| Net loss | $6.9 million | $13.1 million |
| Net loss attributable to common stockholders | $7.2 million, or $0.29 per share | $16.2 million, or $0.80 per share |
| Operating cash flow | Not separately provided for the quarter | $1.3 million provided |
| Cash balance | $5.9 million at September 30, 2019 |
Revenue consisted primarily of software license sales by Nexway: $4.7 million from Nexway eCommerce Solutions and $1.2 million from Nexway Academics. Geographic revenue was $3.6 million from Europe, $1.2 million from the United States, $0.6 million from Asia and $0.5 million from other countries.
At September 30, 2019, total assets were $373.2 million, including $130.5 million of net intangible assets and $210.8 million of goodwill. Current assets were $20.2 million versus current liabilities of $69.4 million, producing a reported working-capital deficiency of $49.2 million. Total liabilities were $138.6 million, including $38.3 million of current and long-term borrowings, $33.4 million of deferred tax liabilities, and $55.7 million of accounts payable and accrued expenses.
Cash increased by $5.9 million during the nine months. Operating activities provided $1.3 million, investing activities provided $1.6 million, and financing activities provided $3.0 million. Financing inflows included $2.9 million from common stock, $0.5 million from preferred stock, $0.4 million from related parties and $0.3 million from convertible notes.
Material Changes Versus Prior Comparable Period
- Revenue increased from zero to $5.8 million in both the quarter and year-to-date period, primarily because of the Facebank AG and Nexway acquisitions.
- Gross profit was $0.6 million, but substantial amortization and other expenses resulted in operating and net losses.
- Quarterly net loss increased to $6.9 million from $4.9 million; nine-month net loss increased to $13.1 million from $7.7 million.
- Amortization expense increased to $5.3 million for the quarter and $15.6 million year to date, compared with $2.6 million for the comparable 2018 periods.
- General and administrative expense declined to $2.3 million for the quarter and $4.1 million year to date, primarily because 2018 included substantial stock-based compensation, partly offset by higher compensation and professional fees.
- Operating cash flow improved from $2.5 million used in the first nine months of 2018 to $1.3 million provided in 2019, largely reflecting non-cash amortization and increases in payables.
- The company adopted a one-for-30 reverse stock split and increased authorized common shares to 400 million. Series X preferred stock converted into 15 million common shares, and common shares outstanding increased to 26.9 million at September 30, 2019.
Acquisitions, Outlook, Risks and Unusual Items
- Facebank AG was acquired on August 15, 2019 for 2.5 million common shares valued at approximately $8.3 million. The acquisition added investments, intangible assets, goodwill and approximately $22.9 million of long-term borrowings at acquisition.
- On September 19, 2019, Facebank AG acquired approximately 51% of Nexway and 70% of Highlight Finance Corp. Nexway had a subscription-based software monetization platform operating in approximately 180 countries. The acquired businesses added significant assets and liabilities, including approximately $24.6 million of long-term borrowings at acquisition.
- SAH, an acquired subsidiary, had a bond with principal outstanding of EUR 16.0 million at September 30, 2019. The company agreed to prepay at least EUR 9.5 million by March 31, 2020. Nexway and HFC also had euro-denominated secured or term debt.
- Management expects continued losses and states that additional capital is required to fund operations, satisfy obligations and execute its business plan. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern within one year.
- The company was seeking additional equity financing, but cautioned that financing may be unavailable, may impose debt restrictions or may substantially dilute existing shareholders.
- The company committed to invest at least $2.0 million in the Kung Fu Panda Spectacular Live production. As of September 30, 2019, $1.0 million had been paid and $1.0 million remained unfunded; in October 2019, the remaining obligation was satisfied through issuance of 175,000 common shares.
- The company entered into a Digital Likeness Development Agreement relating to a virtual likeness of Floyd Mayweather. It paid $250,000, recorded a $1.25 million intangible asset and recorded a $1.0 million shares-settled liability for intended share-based awards.
- Results included significant non-cash and potentially volatile items, including $4.4 million of income from the reduction in fair value of a subsidiary warrant liability, $1.0 million of income tax benefit, $1.2 million of other expense related primarily to financial asset fair-value changes, and preferred-stock deemed dividends of approximately $0.4 million.
- Certain obligations were in default, including a $2.7 million note payable with approximately $1.2 million of accrued interest, past-due convertible and related-party notes, and other acquisition-related liabilities. Creditors had agreed to forbear in at least one material default while negotiations continued.
- Management concluded that disclosure controls and procedures were not effective because of material weaknesses in internal control over financial reporting previously reported in the 2018 Form 10-K.
- The filing reports a $524,000 accrued litigation liability. A subsidiary-related lawsuit remained pending, although management believed the claims were without merit and intended to seek dismissal and sanctions.
Investor Verification Checklist
- Confirm the issuer identity and ticker: the supplied filing is for FaceBank Group, Inc., not FuboTV Inc.
- Verify the going-concern disclosure, $49.2 million working-capital deficiency, cash balance and the company’s ability to obtain additional financing.
- Review maturity dates, default status, interest accruals and repayment requirements for acquired euro-denominated debt and other notes.
- Assess the valuation and impairment risk of $210.8 million of goodwill and $130.5 million of intangible assets, including the related future amortization burden.
- Evaluate the economic contribution and sustainability of Nexway revenue, since the reported period includes only a limited period after the September 19 acquisition.
- Review dilution risk from preferred stock, convertible notes, warrants, stock-settled obligations, acquisitions and future equity financing.
- Monitor remediation of the material weaknesses in internal controls and the outcome of pending litigation and creditor negotiations.