FBYD 10-Q
Falcon's Beyond Global, Inc. (FBYD)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly
period ended
OR
For the transition period from __________ to __________
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whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
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As of May 16, 2024,
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FALCON’S BEYOND GLOBAL, INC.
TABLE OF CONTENTS
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Quarterly Report”) contains statements that the Company believes are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements relating to expectations for future financial performance, business strategies or expectations for our business. These statements are based on the beliefs and assumptions of the management of the Company. Although the Company believes that its plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, it cannot provide assurance that it will achieve or realize these plans, intentions or expectations. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this in this Quarterly Report, words such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “forecast,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “should,” “target,” “will,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
You should not place undue reliance on these forward-looking statements. Should one or more of a number of known and unknown risks and uncertainties materialize, or should any of our assumptions prove incorrect, the Company’s actual results or performance may be materially different from those expressed or implied by these forward-looking statements. The following important factors, risks, and uncertainties could cause actual results to differ materially from those indicated by the forward-looking statements in this Quarterly Report:
| ● | We may not be able to sustain our growth, effectively manage our anticipated future growth, implement our business strategies or achieve the results we anticipate. |
| ● | The impairments of our intangible assets and equity method investment in our joint ventures, have materially and adversely impacted our business and results of operations and may do so again in the future. |
| ● | Our current liquidity resources raise substantial doubt about our ability to continue as a going concern and holders of our securities could suffer a total loss of their investment. |
| ● | We will require additional capital, which additional financing may result in restrictions on our operations or substantial dilution to our stockholders, to support the growth of our business, and this capital might not be available on acceptable terms, if at all. |
| ● | Following the closure of Katmandu Park DR, our FBD business is in transition, and the repositioning and rebranding of FBD projects will be subject to timing, budgeting and other risks which could have a material adverse effect on us. In addition, the ongoing need for capital expenditures to develop our FBD business could have a material adverse effect on us, including our financial condition, liquidity and results of operations. |
| ● | Our growth plans in FCG may take longer than anticipated or may not be successful. |
| ● | Our ability to execute on our strategy and business model is dependent on the quality of our services, and our failure to offer high quality services could have a material adverse effect on its sales and results of operations. |
| ● | Anticipated synergies across our three business lines may not create the diversified revenue streams that we believe they will. |
| ● | A significant portion of FCG’s revenue is derived from one large client and any loss of, or decrease in services to, that client could harm FCG’s results of operations. |
| ● | Following the completion of the Strategic Investment, the Company, Falcon’s Opco and FCG LLC are subject to contractual restrictions that may affect our ability to access the public markets and expand our business. |
ii
| ● | The significance of our operations and partnerships outside of the United States makes us susceptible to the risks of doing business internationally, which could lower our revenues, increase our costs, reduce our profits, disrupt our business, or damage our reputation. |
| ● | We are exposed to risks related to operating in the Kingdom of Saudi Arabia. |
| ● | Our indebtedness and liabilities could limit the cash flow available for our operations, which may adversely affect our financial condition and future financial results. The principal, premium, if any, and interest payment obligations of such debt may restrict our future operations and impair our ability to invest in our businesses. |
| ● | We may expand into new lines of business in our FBB division and may face risks associated with such expansion. |
| ● | We have entered and expect to continue to enter into joint venture, strategic collaborations, teaming and other business arrangements, and these activities involve risks and uncertainties. A failure of any such relationship could have a material adverse effect on our business and results of operations. |
| ● | In certain jurisdictions into which we are currently contemplating expanding, we will rely on strategic relationships with local partners in order to be able to offer and market our products and services. If we cannot establish and maintain these relationships, our business, financial condition and results of operations could be adversely affected. |
| ● | We are dependent on the continued contributions of our senior management and other key employees, and the loss of any of whom could adversely affect our business, operating results, and financial condition. |
| ● | If we are unable to hire, retain, train and motivate qualified personnel and senior management for our businesses and deploy our personnel and resources to meet customer demand around the world, our business could suffer. |
| ● | Failures in, material damage to, or interruptions in our information technology systems, software or websites, and difficulties in updating our systems or software or implementing new systems or software could adversely affect our businesses or operations. |
| ● | Protection of electronically stored data and other cybersecurity is costly, and if our data or systems are materially compromised in spite of this protection, we may incur additional costs, lost opportunities, damage to our reputation, disruption of services or theft of our assets. |
| ● | Our insurance may not be adequate to cover the potential losses, liabilities and damages of our FBD division, the cost of insurance may continue to increase materially, including as a result of natural disasters, some of which may be related to climate change, and we may not be able to secure insurance to cover all of our risks, all of which could have a material adverse effect on us. |
| ● | Theft of our intellectual property, including unauthorized exhibition of our content, may decrease our licensing, franchising and programming revenue which may adversely affect our business and profitability. |
| ● | We are a holding company and our only material asset is our interest in Falcon’s Opco, and accordingly we will generally be dependent upon distributions from Falcon’s Opco to pay taxes, make payments under the Tax Receivable Agreement and pay dividends. |
| ● | Under the Tax Receivable Agreement, the Company is required to make payments to the Company’s unitholders for certain tax benefits to which the Company may become entitled, and those payments may be substantial. |
iii
| ● | In certain cases, payments under the Tax Receivable Agreement may be accelerated and/or significantly exceed the actual benefits the Company realizes in respect of the tax attributes subject to the Tax Receivable Agreement. |
| ● | If Falcon’s Opco were to become a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes, the Company and Falcon’s Opco might be subject to potentially significant tax inefficiencies, and the Company would not be able to recover payments previously made by it under the Tax Receivable Agreement even if the corresponding tax benefits were subsequently determined to have been unavailable due to such status. |
| ● | As a public reporting company, we are subject to rules and regulations established from time to time by the SEC and Public Company Accounting Oversight Board regarding our internal control over financial reporting. If we fail to establish and maintain effective internal control over financial reporting and disclosure controls and procedures, we may not be able to accurately report our financial results or report them in a timely manner. |
| ● | We have identified material weaknesses in our internal controls over financial reporting. If we are unable to remediate these material weaknesses, if management identifies additional material weaknesses in the future or if we otherwise fail to maintain effective internal controls over financial reporting, we may not be able to accurately or timely report our financial position or results of operations, which may adversely affect our business and stock price or cause our access to the capital markets to be impaired. |
| ● | The Demerau Family is expected to have significant influence over stockholder decisions because of its share ownership. |
| ● | Cecil D. Magpuri, our Chief Executive Officer, controls over twenty percent of our voting power and is able to exert significant influence over the direction of our business. |
| ● | There can be no assurance that we will be able to comply with the continued listing standards of Nasdaq. |
In addition, this Quarterly Report includes important information as to risks, uncertainties, and other factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. See “Note 10: Commitments and Contingencies” within Item 1 of this Quarterly Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within Item 2 of this Quarterly Report. Additional important information as to these factors is included in our Annual Report on Form 10-K for the year ended December 31, 2023 (“Annual Report”) in the sections titled Item 1, “Business”, Item 1A, “Risk Factors,” Item 3, “Legal Proceedings,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The forward-looking statements speak only as of the date of this Quarterly Report or, in the case of any document incorporated by reference, the date of that document. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Additional information as to factors that may cause actual results to differ materially from those expressed or implied in the forward-looking statements is disclosed from time to time in our other filings with the Securities and Exchange Commission (“SEC”).
iv
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FALCON’S BEYOND GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
| (Unaudited) As of March 31, 2024 | As of December 31, 2023 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net ($ | ||||||||
| Other current assets ($ | ||||||||
| Total current assets | ||||||||
| Investments and advances to equity method investments | ||||||||
| Property and equipment, net | ||||||||
| Other non-current assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity (deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable ($ | $ | $ | ||||||
| Accrued expenses and other current liabilities ($ | ||||||||
| Short-term debt ($ | ||||||||
| Current portion of long-term debt ($ | ||||||||
| Earnout liabilities – current portion | ||||||||
| Total current liabilities | ||||||||
| Other long-term payables | ||||||||
| Long-term debt, net of current portion ($ | ||||||||
| Earnout liabilities, net of current portion | ||||||||
| Warrant liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies – Note 10 | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Class A common stock ($ | ||||||||
| Class B common stock ($ | ||||||||
| Additional paid-in capital | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Total equity attributable to common stockholders | ( | ) | ( | ) | ||||
| Non-controlling interests | ( | ) | ( | ) | ||||
| Total equity | ( | ) | ( | ) | ||||
| Total liabilities and equity | $ | $ | ||||||
See accompanying notes to unaudited condensed consolidated financial statements.
1
FALCON’S BEYOND GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands of U.S. dollars, except share and per share data)
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | |||||||
| Revenue ($ | $ | $ | ||||||
| Operating expenses: | ||||||||
| Project design and build expense | ||||||||
| Selling, general and administrative expense | ||||||||
| Transaction expenses | ||||||||
| Credit loss expense ($ | ||||||||
| Depreciation and amortization expense | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Share of gain (loss) from equity method investments | ( | ) | ||||||
| Interest expense ($( | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Change in fair value of warrant liabilities | ||||||||
| Change in fair value of earnout liabilities | ||||||||
| Foreign exchange transaction gain (loss) | ( | ) | ||||||
| Net income (loss) before taxes | $ | $ | ( | ) | ||||
| Income tax benefit | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Net income attributable to noncontrolling interest | ||||||||
| Net income attributable to common stockholders | ||||||||
| Net income (loss) per share, basic | ||||||||
| Net income (loss) per share, diluted | ||||||||
| Weighted average shares outstanding, basic | ||||||||
| Weighted average shares outstanding, diluted | ||||||||
| Comprehensive income (loss): | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Foreign currency translation gain | ||||||||
| Total comprehensive income (loss) | $ | $ | ( | ) | ||||
| Comprehensive income attributable to noncontrolling interest | ||||||||
| Comprehensive income attributable to common stockholders | $ | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
FALCON’S BEYOND GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands of U.S. dollars)
| Three months | Three months | |||||||
| ended March 31, | ended March 31, | |||||||
| 2024 | 2023 | |||||||
| Cash flows from operating activities | ||||||||
| Net income (loss) | ( | ) | ||||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Deferred loss on sales to equity method investments | ||||||||
| Foreign exchange transaction loss (gain) | ( | ) | ||||||
| Share of (gain) loss from equity method investments | ( | ) | ||||||
| Loss on sale of equipment | ||||||||
| Change in deferred tax asset | ( | ) | ||||||
| Credit loss expense ($ | ||||||||
| Change in fair value of earnouts | ( | ) | ||||||
| Change in fair value of warrants | ( | ) | ||||||
| Share based compensation expense | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable, net ($( | ( | ) | ( | ) | ||||
| Other current assets | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Contract assets ($ | ( | ) | ||||||
| Capitalization of ride media content | ( | ) | ||||||
| Deferred transaction costs | ( | ) | ||||||
| Long term receivable – related party | ( | ) | ||||||
| Other non-current assets | ( | ) | ||||||
| Accounts payable ($ | ||||||||
| Accrued expenses and other current liabilities ($ | ( | ) | ||||||
| Contract liabilities ($ | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | — | |||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Short-term advances to affiliates | ( | ) | ||||||
| Proceeds from sale of equipment | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Principal payment on finance lease obligation | ( | ) | ||||||
| Proceeds from debt – related party | ||||||||
| Proceeds from debt – third party | ||||||||
| Repayment of debt – related party | ( | ) | ( | ) | ||||
| Repayment of debt – third party | ( | ) | ( | ) | ||||
| Proceeds from related party credit facilities | ||||||||
| Repayment of related party credit facilities | ( | ) | ( | ) | ||||
| Proceeds from exercised warrants | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ||||||
| Foreign exchange impact on cash | ( | ) | ||||||
| Cash and cash equivalents – beginning of period | ||||||||
| Cash and cash equivalents at end of year | ||||||||
| Supplemental disclosures: | ||||||||
| Cash paid for interest | ||||||||
| Non-cash activities: | ||||||||
| Operating lease right-of-use assets obtained in exchange for new operating lease liabilities (all operating lease assets and liabilities have been deconsolidated as of July 27, 2023) | ||||||||
| Conversion of warrants to common shares, Class A | ||||||||
| Conversion of Class B Common Stock to Class A Common Stock | ||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
FALCON’S
BEYOND GLOBAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)/MEMBERS’ EQUITY (UNAUDITED)
(in thousands of U.S. dollars, except unit and share data)
| Units | Members’ capital | Accumulated deficit | Accumulated other comprehensive loss | Members’ equity | ||||||||||||||||
| December 31, 2022 | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| Foreign currency translation gain | ||||||||||||||||||||
| March 31, 2023 | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||
| Common
Stock, Class A | Common
Stock, Class B | Additional
paid-in | Accumulated other comprehensive | Accumulated | Total equity attributable to common | Non- Controlling | Total | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | capital | loss | deficit | stockholders | Interest | equity | |||||||||||||||||||||||||||||||
| December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||
| Conversion of Warrants to Common Shares | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Conversion of Class B Common Stock to Class A Common Stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock compensation expense | ||||||||||||||||||||||||||||||||||||||||
| Net income | ||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation gain | ||||||||||||||||||||||||||||||||||||||||
| March 31, 2024 | $ | $ | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
FALCON’S BEYOND GLOBAL, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2024 AND 2023
(in thousands of U.S. dollars, unless otherwise stated)
| 1. | Description of business and basis of presentation |
Merger with FAST II
Falcon’s Beyond Global, Inc., a Delaware corporation (“Pubco”, “FBG”, or the “Company”), entered into a Plan of Merger, dated as of January 31, 2023 (the “Merger Agreement”), by and among Pubco, FAST Acquisition Corp. II, a Delaware corporation (“FAST II”), Falcon’s Beyond Global, LLC, a Florida limited liability company that has since redomesticated as a Delaware limited liability company (“Falcon’s Opco”), and Palm Merger Sub, LLC, a Delaware limited liability company and a wholly-owned subsidiary of Pubco (“Merger Sub”).
On October 5, 2023 FAST II merged with and into Pubco (the “SPAC Merger”), with Pubco surviving as the sole owner of Merger Sub, followed by a contribution by Pubco of all of its cash (except for cash required to pay certain transaction expenses) to Merger Sub to effectuate the “UP-C” structure; and on October 6, 2023 Merger Sub merged with and into Falcon’s Opco (the “Acquisition Merger,” and collectively with the SPAC Merger, the “Business Combination”), with Falcon’s Opco as the surviving entity of such merger. Following the consummation of the transactions contemplated by the Merger Agreement (the “Closing”), the direct interests in Falcon’s Opco were held by Pubco and certain holders of the limited liability company units of Falcon’s Opco outstanding as of immediately prior to the Business Combination.
FAST II and Falcon’s Opco’s
transaction costs related to the Business Combination of $
Nature of Operations
The Company operates at the intersection of content, technology, and experiences. We aim to engage, inspire and entertain people through our creativity and innovation, and to connect people with brands, with each other, and with themselves through the combination of digital and physical experiences. At the core of our business is brand creation and optimization, facilitated by our multi-disciplinary creative teams. We believe the complementary strengths of our business divisions facilitates invaluable insights and streamlined growth. The Company has three business divisions, which are conducted through five operating segments. Our three business lines feed into each other to accelerate our growth strategy: (i) Falcon’s Creative Group, LLC (“FCG”) creates master plans, designs attractions and experiential entertainment, and produces content, interactives and software; (ii) Falcon’s Beyond Destinations develops a diverse range of entertainment experiences using both owned and third party licensed intellectual property, consisting of Producciones de Parques, S.L. (“PDP”), Sierra Parima (Sierra Parima’s Katmandu Park in Punta Cana, Dominican Republic (“Katmandu Park DR”) was closed to visitors on March 7, 2024, see Note 4 – Investments and advances to equity method investments, section “Full Impairment of Investment in Sierra Parima”), and Destination Operations, develops a diverse range of entertainment experiences using both Company owned and third party licensed intellectual property, spanning location-based entertainment, dining, and retail; and (iii) Falcon’s Beyond Brands brings brands and intellectual property to life through animation, movies, licensing and merchandising, gaming, as well as ride and technology sales.
5
Basis of presentation
The Business Combination was accounted for similar to a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with U.S. GAAP. Following the closing of the Business Combination, Falcon’s Opco’s Executive Chairman, Mr. Scott Demerau, together with other members of the Demerau family, continue to collectively have a controlling interest of Pubco. As the Business Combination represents a common control transaction from an accounting perspective, the Business Combination was treated similar to a reverse recapitalization. As there was no change in control, Falcon’s Opco has been determined to be the accounting acquirer and Pubco was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Falcon’s Opco issuing stock for the net assets of Pubco, accompanied by a recapitalization. The net assets of Pubco were stated at historical cost, with no goodwill or other intangible assets recorded. Subsequently, results of operations presented for the period prior to the Business Combination are those of Falcon’s Opco.
Falcon’s Opco was formed on April 22,
2021, in the state of Florida, for the purpose of acquiring the outstanding membership units of Katmandu Group, LLC and its subsidiaries
(“Katmandu”), Falcon’s Treehouse, LLC and its subsidiaries (“Treehouse”) and Falcon’s Treehouse National,
LLC (“National”). On April 30, 2021, The Magpuri Revocable Trust, owners of Treehouse and National, and Katmandu Collections,
LLLP, (“Collections”) owners of Katmandu, entered into a Consolidation Agreement, whereby The Magpuri Revocable Trust contributed
The accompanying condensed consolidated financial statements of the Company are unaudited. In the opinion of management, all adjustments necessary for a fair statement of results of operations, cash flows, and financial position have been made. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results for a full year. The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by generally accepted accounting principles.
The unaudited condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) and do not contain certain information included in the Company’s Annual Report. Therefore, these interim statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report.
The unaudited condensed consolidated
financial statements include the accounts of the Company and its majority-owned subsidiaries for which it exercises control. Long-term
investments in affiliated companies in which the Company exercises significant influence, but which it does not control, are accounted
for using the equity method. Investments in which the Company does not exercise significant influence (generally, when the Company has
an investment of less than
The financial statements of the Company’s operating foreign subsidiaries are measured using the local currency as the functional currency. Assets and liabilities are translated at exchange rates as of the balance sheet date. Revenues and expenses are translated at average monthly exchange rates prevailing during the period. Resulting translation adjustments are included in Accumulated other comprehensive loss.
A reclassification of the credit loss
expense of $
6
Principles of Consolidation
The non-controlling interest represents the membership interest in Falcon’s Opco held by holders other than the Company.
The results of operations attributable to the non-controlling interests are included in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss), and the non-controlling interests are reported as a separate component of equity.
The Company consolidates the assets, liabilities and operating results of Falcon’s Opco and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation. The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).
Liquidity
The Company has been engaged in expanding
its physical operations through its equity method investments, developing new product offerings, raising capital and recruiting personnel.
As a result, the Company has incurred a loss from operations of $
The
Company has committed to fund its share of additional investment in its equity investment, Karnival TP-AQ Holdings Limited (“Karnival”),
for the purpose of constructing the Vquarium Entertainment Centers in the People’s Republic of China. See Note 10 –
Commitments and contingencies. On July 27, 2023, Falcon’s Creative Group, LLC, a wholly owned subsidiary of the Company, received
a net closing payment from Qiddiya Investment Company (“QIC”), on behalf QIC Delaware, Inc., of $
The Company’s development plans,
and investments have been funded by a combination of debt and committed equity contributions from its stockholders and third parties,
and the Company is reliant upon its stockholders and third parties for obtaining additional financing through debt or equity raises to
fund its working capital needs, contractual commitments, and expansion plans. As of March 31, 2024, the Company has incurred material
amounts of expenses in relation to its external advisors, accountants and legal costs in relation to its Form S-4 and other filings.
The Company has a working capital deficiency of ($
7
Deconsolidation of Falcon’s Creative Group, LLC
On July 27, 2023, pursuant to the Subscription
Agreement by and between FCG and QIC Delaware, Inc., (the “Subscription Agreement”), QIC Delaware, Inc., a Delaware corporation
and an affiliate of QIC, invested $
QIC is entitled to redeem its preferred
units on the earlier of (a) the five-year anniversary of the Strategic Investment or (b) any date on which a majority of key persons
cease to be employed by FCG. The LLCA contains contractual provisions regarding the distribution of FCG’s income or loss. Pursuant
to these provisions, QIC is entitled to a redemption amount of the initial $
QIC, as the holder of the preferred
units of FCG, has priority with respect to any distributions by FCG, to the extent there is cash available. Under the LLCA, such distributions
are payable (i) first, to QIC until the holders’ preferred return is reduced to zero, (ii) second, to QIC until the investment
amount is reduced to zero, (iii) third, to the Company until it has received an amount equal to the amount paid to QIC, and (iv) fourth,
to QIC and the Company on a pro-rata basis of
The LLCA grants QIC the right to block or participate in certain significant operating and capital decisions of FCG, including the approval of FCG’s budget and business plan, strategic investments, and incurring additional debt, among others. These rights allow QIC to effectively participate in significant financial and operating decisions of FCG that are made in FCG’s ordinary course of business. As such, as of July 27, 2023 the Company does not have a controlling financial interest since QIC has the substantive right to participate in FCG’s business decisions. Therefore, FCG was deconsolidated and accounted for as an equity method investment in the Company’s unaudited condensed consolidated financial statements.
After July 27, 2023, the assets and liabilities of FCG are no longer included within the Company’s consolidated balance sheet as of December 31, 2023.
See Note 4– Investments and advances to equity method investments for the Company’s recognition of its retained investment in FCG. The Company’s retained interest in FCG will continue to be presented separately as a reportable segment in Note 11– Segment Information.
| 2. | Summary of significant accounting policies |
Concentration of credit risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of Cash and cash equivalents and Accounts receivable. The Company places its Cash and cash equivalents with financial institutions of high credit quality. At times, such amounts exceed federally insured limits. Management believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of the respective financial institutions.
8
The Company provides credit to its customers located both inside and outside the United States in its normal course of business. Receivables are presented net of an allowance for credit losses based on the Company’s assessment of the collectability of customer accounts. The Company maintains an allowance that provides for an adequate reserve to cover estimated losses on receivables as well as contract assets. The Company determines the adequacy of the allowance by estimating the probability of loss based on the Company’s historical credit loss experience and taking into consideration current market conditions and supportable forecasts that affect the collectability of the reported amount. The Company regularly evaluates receivable and contract asset balances considering factors such as the customer’s creditworthiness, historical payment experience and the age of the outstanding balance. Changes to expected credit losses during the period are included in Credit loss expense in the Company’s unaudited condensed consolidated statements of operations and comprehensive income (loss). After concluding that a reserved accounts receivable is no longer collectible, the Company reduces both the gross receivable and the allowance for credit losses.
The Falcon’s Creative Group segment
has significant revenue concentration associated with a few customers. As of July 27, 2023 FCG was deconsolidated and accounted for as
an equity method investment in the Company’s unaudited condensed consolidated financial statements. The Falcon’s Creative
Group segment is now comprised of the Company’s retained equity method investment in FCG. See Deconsolidation of Falcon’s
Creative Group, LLC under Note 1 – Description of business and basis of presentation and Note 4– Investments and advances
to equity method investments. FCG revenue continues to depend on one customer, QIC. FCG had
The Company had
Recently issued accounting standards
New accounting standards adopted during the quarter ended March 31, 2024
None.
Recently issued accounting standards not yet adopted as of March 31, 2024
In March 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2024-01, “Scope Application of Profits Interest and Similar Awards”. This ASU demonstrates how an entity should apply the scope guidance in paragraph 718-10-15-3 to determine whether profits interest and similar awards should be accounted for in accordance with Topic 718, Compensation-Stock Compensation. The amendments in this update related to the scope application issue apply to all reporting entities that account for profits interest awards as compensation to employees or non-employees in return for goods or services. For public business entities, this ASU is effective for annual periods beginning after December 15, 2024, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2025, and interim periods within those annual periods. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is evaluating the effect of this update on the Company’s financial statements.
In March 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2024-02, “Codification Improvements-Amendments to Remove References to the Concepts Statements”. The amendments in this Update affect a variety of Topics in the Codification. The amendments apply to all reporting entities within the scope of the affected accounting guidance. This update contains amendments to the Codification that remove references to various Concepts Statements. In most instances, the references are extraneous and not required to understand or apply the guidance. In other instances, the references were used in prior statements to provide guidance in certain topical areas. This ASU is effective for public business entities for fiscal years beginning after December 15, 2024. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2025. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. The Company is evaluating the effect of this update on the Company’s financial statements.
9
| 3. | Revenue |
As of July 27, 2023, FCG was deconsolidated and accounted for as an equity method investment in the Company’s unaudited condensed consolidated financial statements. The unaudited condensed consolidated statements of operations and comprehensive income (loss) therefore does not include activity related to FCG after deconsolidation during the three months ended March 31, 2024, and include three months of activity related to FCG prior to deconsolidation during the three months ended March 31, 2023. After July 27, 2023, the assets and liabilities of FCG are no longer included within the Company’s unaudited condensed consolidated balance sheet. Prior to deconsolidation, FCG’s operations generated a majority of the Company’s consolidated revenue and contract asset and liability balances. See Deconsolidation of Falcon’s Creative Group, LLC under Note 1 – Description of business and basis of presentation. See total revenues of Falcon’s Creative Group, LLC under Note 4 – Investments and advances to equity method investments.
| Three months
ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Services transferred over time: | ||||||||
| Design and project management services | $ | $ | ||||||
| Media production services | ||||||||
| Attraction hardware and turnkey sales | ||||||||
| Other | ||||||||
| Total revenue from services transferred over time | $ | $ | ||||||
| Services transferred at a point in time: | ||||||||
| Digital media licenses | ||||||||
| Total revenue from services transferred at a point in time | $ | $ | ||||||
| Total revenue | $ | $ | ||||||
In March 2023, the Company licensed
the right to use Ride Media Content to Sierra Parima. See Note 7– Related party transactions for further discussion. After the
deconsolidation of FCG, the Company recognizes related party revenue for corporate shared service support provided to FCG. Total related
party revenues from services provided to our equity method investments were $
10
| As of | ||||||||
| March 31, 2024 | December 31, 2023 | |||||||
| Related party | $ | $ | ||||||
| Other | ||||||||
| Total | $ | $ | ||||||
There was no revenue recognized for
the three months ended March 31, 2024 that was included in the contract liability balance as of December 31, 2023. Revenue
recognized for the three months ended March 31, 2023 that was included in the contract liability balance as of December 31,
2022 was $
Geographic information
| Three months
ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Saudi Arabia | $ | $ | ||||||
| Caribbean | ||||||||
| USA | ||||||||
| Hong Kong | ||||||||
| Other | ||||||||
| Total revenue | $ | $ | ||||||
Destinations Operations
The Company had no Destinations Operations revenue during the three months ended March 31, 2024 and 2023.
| 4. | Investments and advances to equity method investments |
The Company accounts for its investments in unconsolidated joint ventures using the equity method of accounting. The Company’s joint ventures are as follows:
| i) | Falcon’s Creative Group |
As of July 27, 2023, FCG was deconsolidated
and accounted for as an equity method investment in the Company’s unaudited condensed consolidated financial statements. See Deconsolidation
of Falcon’s Creative Group, LLC under Note 1 – Description of business and basis of presentation for a discussion of the
terms of the Strategic Investment which required the deconsolidation of FCG. As of July 27, 2023, the Company recorded the investment
in FCG at fair value, which was determined to be $
11
As described in Note 1, the LLCA contains
contractual provisions regarding the distribution of FCG’s income or loss. Pursuant to these provisions, QIC is entitled to a redemption
amount of the initial $
| ii) | PDP |
PDP is an unconsolidated joint venture
with Meliá Hotels International, S.A. (“Meliá Group”) for the development and operation of hotel resorts and
theme parks. The Company has
| iii) | Sierra Parima |
Sierra Parima is an equity method investment
with Meliá Group for the development and operation of hotel resorts and theme parks. The Company has
Full Impairment of Investment in Sierra Parima
Katmandu Park DR completed construction and opened to visitors in early 2023. Although various operational challenges encountered upon opening were resolved, Katmandu Park DR visitor levels were below management’s expectations. Melia and the Company jointly decided to wind down operations and are evaluating avenues for potential liquidation or sale of the property. On March 7, 2024, Katmandu Park DR was closed to visitors.
As of December 31, 2023, equity investment in Sierra Parima was deemed to be other-than-temporarily impaired. The Company estimated the fair value of its investment in Sierra Parima using probability weighted scenarios assigned to discounted future cash flows. The impairment is the result of management’s estimates and assumptions regarding the likelihood of certain outcomes related to various liquidation and sale scenarios and pending legal matters, the timing of which remains uncertain. These estimates were determined primarily using significant unobservable inputs (Level 3). The estimates that the Company makes with respect to its equity method investment are based upon assumptions that management believes are reasonable, and the impact of variations in these estimates or the underlying assumptions could be material.
Based on the estimated sale or liquidation proceeds from Sierra Parima, and Sierra Parima’s outstanding debts remaining to be settled, the fair value of the Company’s investment in Sierra Parima was determined to be .
There are no other liquidity arrangements, guarantees or other financial commitments between the Company and Sierra Parima. The Company is not committed to provide any additional funding as of March 31, 2024. Any future capital fundings will be discretionary.
12
| iv) | Karnival |
On November 2, 2021, the Company entered
into a joint venture agreement to acquire a
| As of | ||||||||
| March 31,
2024 | December 31, 2023 | |||||||
| FCG | $ | $ | ||||||
| PDP | ||||||||
| Karnival | ||||||||
| $ | $ | |||||||
| Three months ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| FCG(1) | $ | $ | ||||||
| PDP | ||||||||
| Sierra Parima | ( | ) | ||||||
| Karnival | ||||||||
| $ | $ | ( | ) | |||||
| (1) |
13
| As of March 31, 2024 | ||||||||||||
| FCG | PDP | Karnival | ||||||||||
| Current assets | $ | $ | $ | |||||||||
| Non-current assets | ||||||||||||
| Current liabilities | ||||||||||||
| Non-current liabilities | ||||||||||||
| As of December 31, 2023 | ||||||||||||||||
| FCG | PDP | Sierra Parima | Karnival | |||||||||||||
| Current assets | $ | $ | $ | $ | ||||||||||||
| Non-current assets | ||||||||||||||||
| Current liabilities | ( | ) | ||||||||||||||
| Non-current liabilities | ||||||||||||||||
| As of March 31, 2024 | ||||||||
| FCG | PDP | |||||||
| Assets | $ | $ | ||||||
| Liabilities | ||||||||
| As of December 31, 2023 | ||||||||||||
| PDP | FCG | Sierra Parima | ||||||||||
| Assets | $ | $ | $ | |||||||||
| Liabilities | ||||||||||||
14
| Three months ended March 31, 2024 | ||||||||
| FCG(1) | PDP | |||||||
| Total revenues | $ | $ | ||||||
| Income from operations | ||||||||
| Net income | ||||||||
| (1) |
| Three months ended March 31, 2023 | ||||||||
| PDP | Sierra Parima | |||||||
| Total revenues | $ | $ | ||||||
| Income (loss) from operations | ( | ) | ||||||
| Net income (loss) | ( | ) | ||||||
The results of operations for Karnival for the three months ended March 31, 2024 and 2023 were not material for the periods presented and, as such, not included in the tables above. As of December 31, 2023, the equity investment in Sierra Parima was deemed to be other-than-temporarily impaired, and therefore, not included in the table above. See “Full Impairment of Investment in Sierra Parima” above.
| Three months ended March 31, 2024 | ||||||||
| FCG(1) | PDP | |||||||
| Total revenues | $ | $ | ||||||
| Total expenses | ||||||||
| (1) |
15
The following table provides Sierra Parima and PDP’s summarized related party activity for the three months ended March 31, 2023:
| Three months ended March 31, 2023 | ||||||||
| PDP | Sierra Parima | |||||||
| Total revenues | $ | $ | ||||||
| Total expenses | ||||||||
| 5. | Accrued expenses and other current liabilities |
| As of | ||||||||
| March 31, 2024 | December 31, 2023 | |||||||
| Audit and professional fees | $ | $ | ||||||
| Excise tax payable on FAST II stock redemptions | ||||||||
| Accrued payroll and related expenses | ||||||||
| Accrued interest | ||||||||
| Project-related accruals | ||||||||
| Other | ||||||||
| $ | $ | |||||||
Accrued expenses and other current liabilities
with related parties were $
| 6. | Long-term debt and borrowing arrangements |
| As of March 31, 2024 | As of December 31, 2023 | |||||||||||||||
| Amount | Interest Rate | Amount | Interest Rate | |||||||||||||
| $10 million revolving credit arrangement – related party (due December 2026) | $ | % | $ | % | ||||||||||||
| €1.5 million term loan (due April 2026) | % | % | ||||||||||||||
| $12.785 million term loan – related party (due December 2026) | % | % | ||||||||||||||
| €7 million term loan (due April 2027) | % | % | ||||||||||||||
| $7.25 million term loan – related party (due December 2027) | % | % | ||||||||||||||
| $1.25 million term loan – (due March 31, 2025) | % | |||||||||||||||
| $7.22 million term loan – related party (due March 31, 2025) | % | |||||||||||||||
| Less: Current portion of long-term debt and short-term debt | ||||||||||||||||
| $ | $ | |||||||||||||||
16
| Available Capacity | ||||
| $ | $ | |||
| $ | ||||
$10 million revolving credit arrangement
In
December 2021, the Company entered into a $
€1.5 million term loan
In April 2020, the Company entered
into a six-year €
$12.785 million term loan
In December 2021, the Company entered
into a five-year $
€7 million term loan
In March 2019, the Company entered
into a seven-year €
$7.25 million Term Loan
In December 2022, the Company entered
into a five-year $
$1.25 million Term Loan
In March 2024, Falcon’s Opco entered
into a one-year $
$7.221 million Term Loan
In March 2024, Falcon’s Opco entered
into a one-year $
17
| 7. | Related party transactions |
Other current assets
As of March 31, 2024, the Company made
short-term advances of $
Related party notes
In January 2023, the Company loaned $
Accrued expenses and other current liabilities
The
Company has a short-term advance from PDP to Fun Stuff, S.L., a wholly-owned subsidiary of Falcon’s Opco (“Fun
Stuff”) for $
Long-term debt
The Company has various long-term debt
instruments with Infinite Acquisitions with accrued interest of $
Services provided to equity method investments
FCG has been contracted for various design, master planning, attraction design, hardware sales and commercial services for themed entertainment offerings by the Company’s equity method investments. As of July 27, 2023 FCG has been deconsolidated and is also now accounted for as an equity method investment. See Deconsolidation of Falcon’s Creative Group, LLC under Note 1 – Description of business and basis of presentation. Destinations Operations recognizes management and incentive fees from the Company’s equity method investments. No revenue was recognized during the three months ended March 31, 2024 and 2023 due to the seasonality of the business.
Intercompany Services Agreement between FCG and the Company
In conjunction with the closing of the
Subscription Agreement described in Note 1 – Description of business and basis of presentation, the Intercompany Services Agreement
was established between FCG and the Company. Accounts receivable balances due from FCG to the Company of $
FCG also provides marketing, R&D,
and other services to FBG. The Company currently owes less than $
Digital media license revenue and related receivable with equity method investment
During March 2023, the Company licensed
the right to use digital ride media content to Sierra Parima. The Company recognized digital media license revenue of $
On March 7, 2024, Sierra Parima’s Katmandu Park DR was closed to visitors. Development plans for future parks, where this digital media license would have been deployed, have been deferred indefinitely, and the Company does not expect any future revenue from this digital media license in the near term.
Advance to Meliá Group
In January 2022, the Company advanced
$
18
Subscription agreement with Infinite Acquisitions
On October 4, 2023, in connection with
the Business Combination, Infinite Acquisitions irrevocably committed to fund an additional approximately $
$
In March 2024, Falcon’s Opco
entered into a one-year $
| 8. | Income taxes |
The tax provisions for the three months ended March 31, 2024
and 2023 were computed using the estimated effective tax rates applicable to the taxable jurisdictions for the full year. The Company’s
tax rate is subject to management’s quarterly review and revision, as necessary. The Company’s effective tax rate was
The Company records a provision or benefit for income taxes
on pre-tax income or loss based on its estimated effective tax rate for the year. Given the Company’s uncertainty regarding future
taxable income, the Company maintains a full valuation allowance on its deferred tax assets. The Company recorded an income tax benefit
of less than $
| 9. | Tax Receivable Agreement |
On October 6, 2023, the partners
of Falcon’s Opco at the time of the Acquisition Merger (“Exchange TRA Holders”), along with the Company (collectively
the “TRA Holders”), entered into a Tax Receivable Agreement with Falcon’s Opco that provides for the payment by Falcon’s
Opco to the TRA Holders of 85% of the amount of tax benefits, if any, that it realizes, or in some circumstances, is deemed to realize,
as a result of (i) future redemptions funded by Falcon’s Opco or exchanges, or deemed exchanges in certain circumstances, of common
units of Falcon’s Opco for the Company’s Class A common stock, par value $
During the three months ended March
31, 2024,
| 10. | Commitments and contingencies |
Litigation — The
Company is named from time to time as a party to lawsuits and other types of legal proceedings and claims in the normal course of business.
As previously disclosed in the Company’s Annual Report and its Current Report on Form 8-K filed with the SEC on May 6, 2024, the
Company was served with a complaint (the “Guggenheim Complaint”) on March 27, 2024 in which Guggenheim Securities, LLC (“Guggenheim”)
alleges breach of a contract with Guggenheim. Guggenheim alleges that the Company owes certain fees and expenses of $
Indemnification — In the ordinary course of business, the Company enters into certain agreements that provide for indemnification by the Company of varying scope and terms to customers, vendors, directors, officers, employees, and other parties with respect to certain matters. Indemnification includes losses from breach of such agreements, services provided by the Company, or third-party intellectual property infringement claims. These indemnities may survive termination of the underlying agreement and the maximum potential amount of future indemnification payments, in some circumstances, are not subject to a cap. As of March 31, 2024 and December 31, 2023, there were no known events or circumstances that have resulted in a material indemnification liability.
Commitments — As
of January 1, 2024 the Company has entered into a commitment with The Hershey Licensing Company (“Hershey”) to develop venues
themed with Hershey’s licensed trademarks and intellectual property in at least four locations by 2028. For each location, the Company
is required to pay a one-time $
As of March 31, 2024 the Company has
unfunded commitments to its unconsolidated joint venture Karnival of $
19
| 11. | Segment information |
The Company has
Falcon’s Creative Group provides master planning, media, interactive and audio production, project management, experiential technology and attraction hardware development services and attraction hardware sales on a work-for-hire model. Pursuant to the Subscription Agreement, Falcon’s Creative Group is now deconsolidated effective July 27, 2023, and accounted for as an equity method investment in the Company’s unaudited condensed consolidated financial statements. The operating segment still remains a reportable segment for the Company. See Deconsolidation of Falcon’s Creative Group, LLC under Note 1 – Description of business and basis of presentation and Note 4 – Investments and advances to equity method investments.
The Company’s equity method investments, PDP and Sierra Parima (before Katmandu Park DR was closed to visitors on March 7, 2024), develop, own and operate hotels, theme parks and retail, dining and entertainment venues. See Note 4 – Investment and advances to equity method investments. Destinations Operations provides development and management services for themed entertainment to PDP, Sierra Parima and new development opportunities. The Company collectively refers to the Destination Operations, PDP and Sierra Parima as Falcon’s Beyond Destinations.
20
| Three months ended March 31, 2024 | ||||||||||||||||||||||||||||||||
| Falcon’s | Falcon’s Beyond Destinations | Falcons | Unallocated | |||||||||||||||||||||||||||||
| Creative Group | Destination Operations | PDP | Sierra Parima | Beyond Brands | Intersegment eliminations | corporate overhead | Total | |||||||||||||||||||||||||
| Revenue | $ | $ | ( | ) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Share of gain or (loss) from equity method investments, excluding impairments | ||||||||||||||||||||||||||||||||
| Segment income (loss) from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||
| Depreciation and amortization expense | ( | ) | ||||||||||||||||||||||||||||||
| Gain (loss) of sale of assets | ( | ) | ||||||||||||||||||||||||||||||
| Share of equity method investee’s impairment of fixed assets | ||||||||||||||||||||||||||||||||
| Interest expense | ( | ) | ||||||||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||||||||
| Change in fair value of warrant liabilities | ||||||||||||||||||||||||||||||||
| Change in fair value of earnout liabilities | ||||||||||||||||||||||||||||||||
| Foreign exchange transaction gains (losses) | ( | ) | ||||||||||||||||||||||||||||||
| Income tax benefit | ||||||||||||||||||||||||||||||||
| Net loss | $ | |||||||||||||||||||||||||||||||
| Three months ended March 31, 2023 | ||||||||||||||||||||||||||||||||
| Falcon’s | Falcon’s Beyond Destinations | Falcons | Unallocated | |||||||||||||||||||||||||||||
| Creative Group | Destination Operations | PDP | Sierra Parima | Beyond Brands | Intersegment eliminations | corporate overhead | Total | |||||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||
| Share of gain or (loss) from equity method investments | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Segment income (loss) from operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Depreciation and amortization expense | ( | ) | ||||||||||||||||||||||||||||||
| Interest expense | ( | ) | ||||||||||||||||||||||||||||||
| Foreign exchange transaction gain (loss) | ||||||||||||||||||||||||||||||||
| Income tax benefit | ||||||||||||||||||||||||||||||||
| Net loss | $ | ( | ) | |||||||||||||||||||||||||||||
21
| 12. | Fair value measurement |
| March 31, 2024 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant liabilities | $ | $ | $ | $ | ||||||||||||
| Earnout liabilities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| December 31, 2023 | ||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Liabilities: | ||||||||||||||||
| Warrant liabilities | $ | $ | $ | $ | ||||||||||||
| Earnout liabilities | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
The warrant liability fair value is based on quoted market prices in active markets, and therefore is classified within Level 1 of the fair value hierarchy. The earnouts based on revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) as well as the earnouts based on the Company’s stock price have been classified within Level 3 of the hierarchy as the fair value is derived using a Monte Carlo simulation analysis in a risk neutral framework, which uses a combination of observable (Level 2) and unobservable (Level 3) inputs. Key estimates and assumptions impacting the fair value measurement include the Company’s revenue and EBITDA forecasts as well as the assumptions listed in the tables below. The fair value measurement associated with the earnout liability is highly sensitive to changes in stock price and forecasted amounts for revenue through 2024. Any changes to stock price and forecasted revenues in 2024 will result in remeasurement of the earnout liability and could result in material gains or losses being recognized in the statement of operations and comprehensive income (loss).
The Company estimated the fair value
per share of the underlying common stock based, in part, on the results of third-party valuations and additional factors deemed relevant.
The risk-free interest rate was determined by reference to the U.S. Treasury yield curve for time periods approximately equal to the remaining
contractual term of the earnouts. The Company estimated a
22
| Amount | ||||
| Current stock price | ||||
| Earnout period – beginning | ||||
| Earnout period – end | ||||
| Equity volatility, EBITDA volatility | % | |||
| Operational leverage ratio | % | |||
| Revenue volatility | % | |||
| Revenue/stock price correlation | % | |||
| EBITDA/stock price correlation | % | |||
| Revenue discount rate | % | |||
| Dividend yield | % | |||
| Amount | ||||
| Term (years) | ||||
| Volatility | % | |||
| Risk-free rate | % | |||
| Dividend yield | % | |||
| Current stock price | ||||
| Earnout Liabilities | ||||
| Balance as of December 31, 2023 | $ | |||
| Issuances | ||||
| Change in fair value | ( | ) | ||
| Balance as of March 31, 2024 | $ | |||
There were no transfers between Level 1 and Level 2, nor into and out of Level 3, during the periods presented.
23
| 13. | Equity and net loss per share |
Authorized Capitalization
The total amount of the Company’s
authorized capital stock consists of (a)
Common Stock
The rights of the holders of Class A Common Stock and Class B Common Stock have various terms, as follows:
Each holder of common stock is entitled to one vote for each share of common stock held of record by such holder on all matters on which stockholders generally are entitled to vote. Shares of Class B Common Stock carry the same voting rights as shares of Class A Common Stock but have no economic terms. Class B Common Stock is exchangeable, along with common units of Falcon’s Opco, into Class A Common Stock.
Preferred Stock
There are no outstanding shares of preferred stock as of March 31, 2024 or December 31, 2023.
| (amounts in thousands, except number of shares and amount per share) | For the period from December 31, 2023 to March 31, 2024 | |||
| Numerator: | ||||
| Net income | $ | |||
| Net income attributable to noncontrolling interests | $ | |||
| Net income available to Class A common stockholders | $ | |||
| Adjustment for dilutive earn out units at Falcon’s Beyond Global, LLC | $ | ( | ) | |
| Dilutive net income attributable to Class A common stockholders | $ | |||
| Denominator: | ||||
| Weighted average Class A common stock outstanding – basic | ||||
| Adjustment for dilutive Class A earnout shares | ||||
| Weighted average Class A common stock outstanding – diluted | ||||
| Net income per Class A common share – basic: | ||||
| Net income per Class A common share – diluted: | ||||
24
The Company applies the treasury stock
method to the Warrants and restricted stock units (“RSUs”), the contingently issuable shares method to the Earnout shares,
and the if-converted method for the Exchangeable noncontrolling interests, if dilutive.
| For the period from December 31, 2023 to March 31, 2024 | ||||
| Class A earnout shares | ||||
| Class B earnout shares | ||||
| Warrants to purchase common stock | ||||
| RSUs | ||||
| 14. | Stock warrants |
As of March 31, 2024, there are
The Company remeasures the fair value
of the warrants based on their quoted market price. For the three months ended March 31, 2024, the Company recognized $
| Year of Issue | Number of Shares Issuable | Exercise Price | Expiration Date | Classification | ||||||||
| 2023 | $ | |||||||||||
| 15. | Earnouts |
At the closing of the Business Combination,
the Company issued
Earnout Shares were deposited into escrow at the Closing and will be earned, released and delivered upon satisfaction of certain milestones related to the EBITDA of the Company and the gross revenue of the Company during periods between July 1, 2023 and December 31, 2024 and the volume weighted average closing sale price of the Company’s shares of Class A Common Stock during the five-year period beginning on the one-year anniversary of the Acquisition Merger and ending on the six-year anniversary of the Acquisition Merger.
The Earnout Shares are classified as a liability and measured at fair value, with changes in fair value included in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
The fair value of the earnout liability
was $
25
| 16. | Share-Based Compensation |
The Company adopted a share-based compensation
plan (the “Plan”) under which
The RSUs do not provide the grantee
with an option to choose settlement in cash or stock. The holder of the RSU shall not be, nor have any of the rights or privileges of,
a shareholder of the Company, including, without limitation, voting rights and rights to dividends, in respect to the RSUs and any shares
underlying the RSUs and deliverable under the Plan unless and until such shares shall have been issued by the Company and held of record
by such holder.
| Restricted Stock Units | ||||
| Nonvested at January 1, 2024 | ||||
| Granted | - | |||
| Forfeited | ||||
| Vested | ||||
| Nonvested at March 31, 2024 | ||||
| Vested at March 31, 2024 | ||||
The RSUs under the Plan will vest over
a five-year period following the one-year anniversary of the date of grant. The grant date of all RSUs associated with the Plan is December
21, 2023.
| Vesting Date | RSU Vested (% of total) | |||
| December 21, 2024 | % | |||
| December 21, 2025 | % | |||
| December 21, 2026 | % | |||
| December 21, 2027 | % | |||
| December 21, 2028 | % | |||
The Company elected the straight-line attribution method to account for the compensation cost over the five-year requisite service period for the entire award, as long as the participant continues to provide service to the Company. Forfeitures are accounted for at the time the forfeiture occurs.
The Company recognized stock-based
compensation expense of $
| 17. | Subsequent events |
On April 16, 2024, QIC released the remaining
$
Subsequent to March 31, 2024, Infinite Acquisitions
has loaned an additional $
On May 10, 2024, shareholders owning Earnout Shares
were notified of the Earnout Shares earned and forfeited for the 2023 performance awards, based on the issued Annual Report in the Form
10-K.
26
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of financial condition and results of operations of the Company is provided to supplement the unaudited condensed consolidated financial statements and the accompanying notes of the Company as of and for the three months ended March 31, 2024, and 2023, included elsewhere in this Quarterly Report. We intend for this discussion to provide the reader with information to assist in understanding the Company’s unaudited condensed consolidated financial statements and the accompanying notes, the changes in those financial statements and the accompanying notes from period to period along with the primary factors that accounted for those changes. Certain information contained in this management’s discussion and analysis includes forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors. Please see “Cautionary Note Regarding Forward-Looking Statements,” in this Quarterly Report.
Overview of Business
The Company operates at the intersection of three potential high-growth business opportunities: content, technology, and experiences. We aim to engage, inspire and entertain people through our creativity and innovation, and to connect people with brands, with each other, and with themselves through the combination of digital and physical experiences. At the core of our business is brand creation and optimization, facilitated by our multi-disciplinary creative teams. The Company has three business divisions, which are conducted through five operating segments.
Our business divisions complement each other as we pursue our growth strategy: (i) the Company’s Falcon’s Creative Group division (“FCG”) creates master plans, designs attractions and experiential entertainment, and produces content, interactives and software; (ii) the Company’s Falcon’s Beyond Destinations division (“FBD”), consisting of Producciones de Parques, S.L., a joint venture between Falcon’s and Meliá Hotels International, S.A. (“Meliá”) (“PDP”), Sierra Parima S.A.S., a joint venture between Falcon’s and Meliá (“Sierra Parima”) (Sierra Parima’s Katmandu Park DR was closed to visitors on March 7, 2024), and Destinations Operations, develops a diverse range of entertainment experiences using both Falcon’s owned and third party licensed intellectual property, spanning location-based entertainment, dining, and retail; and (iii) the Company’s Falcon’s Beyond Brands division (“FBB”) endeavors to bring brands and intellectual property to life through animation, movies, licensing and merchandising, gaming, as well as ride and technology sales.
We recently went public and listed our shares on Nasdaq on October 6, 2023 in connection with a Business Combination with FAST Acquisition Corp. II.
Our unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”). All amounts are shown in thousands of U.S. dollars unless otherwise stated.
The following reflects our results of operations for the three months ended March 31, 2024 and March 31, 2023.
Overview of FCG
Since July 27, 2023, FCG has been deconsolidated and accounted for as an equity method investment in the Company’s unaudited condensed consolidated financial statements. FCG generates a majority of the Company’s consolidated revenue and contract asset and liability balances. Any discussions related to results, operations, and accounting policies associated with FCG are referring to the periods prior to deconsolidation. After deconsolidation, as of July 27, 2023, FCG’s results of operations are included in the Company’s consolidated statement of operations and comprehensive income (loss) as a component of Share of gain (loss) from equity method investments.
On July 27, 2023, pursuant to the Subscription Agreement (the “Subscription Agreement”) by and between FCG and QIC Delaware, Inc., a Delaware corporation and an affiliate of Qiddiya Investment Company (“QIC”), QIC agreed to invest $30.0 million in FCG (the “Strategic Investment”). On July 27, 2023, in connection with the Strategic Investment, FCG received a net closing payment from QIC of $17.5 million (net of $0.5 million in reimbursements). In addition, in March 2024, the Company established the Falcon’s Beyond Global, LLC Long-Term Incentive Plan, effective as of January 1, 2024 (the “Opco Incentive Plan”) to allow Falcon’s Opco to reward certain eligible employees of Falcon’s Opco and its subsidiaries, including FCG. As a result of establishing the Opco Incentive Plan, in April 2024, QIC released the remaining $12.0 million investment into FCG pursuant to the terms of the Subscription Agreement. These funds are to be used exclusively by FCG to fund its operations and growth and cannot be used to satisfy the commitments of other segments.
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Liquidity and Going Concern
The Company has been engaged in expanding its operations through its equity method investments, developing new product offerings, raising capital and recruiting personnel. As a result, the Company has incurred a loss from operations, an accumulated deficit, and negative cash flows from operating activities for the three months ended March 31, 2024. Accordingly, as of May 16, 2024, the Company performed an evaluation of its ability to continue as a going concern through at least twelve months from the date of the issuance of the interim unaudited condensed consolidated financial statements.
The Company’s development plans, and investments have been funded by a combination of debt and committed equity contributions from its stockholders, and the Company is reliant upon its stockholders and third parties for obtaining additional financing through debt or equity raises to fund its working capital needs, contractual commitments, and expansion plans. As of March 31, 2024, the Company has incurred material amounts of expenses in relation to its external advisors, accountants and legal costs in relation to the Business Combination. The Company has a working capital deficiency of ($36.2) million which excludes non-cash earnout liability balance as of March 31, 2024. Additionally, the Company has $15.1 million in debt that is maturing in the next 12 months. The Company does not currently have sufficient cash or liquidity to pay liabilities that are owed or are maturing at this time. There can be no assurance that additional capital or financing raises, if completed, will provide the necessary funding for the next twelve months from the date of this Quarterly Report. This Quarterly Report does not reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
In April 2024, Falcon’s Opco entered into a term loan agreement with Katmandu Ventures, LLC (“Katmandu Ventures”), a greater than 10% shareholder of the Company, pursuant to which Katmandu Ventures made a loan to Falcon’s Opco in the principal amount of approximately $7.2 million, and a term loan agreement with Universal Kat Holdings, LLC (“Universal Kat”) pursuant to which Universal Kat has made a loan to Falcon’s Opco in the principal amount of approximately $1.3 million. Such term loans bear interest at a rate of 8.88% per annum, payable quarterly in arrears, and will mature on March 31, 2025. Approximately $5.4 million of the proceeds of the term loans was used to repay a portion of the outstanding loans under the Infinite Acquisitions revolving credit arrangement.
Results of Operations
The following comparisons are historical results and are not indicative of future results, which could differ materially from the historical financial information presented.
The results of operations for the three months ended March 31, 2023 include activity related to FCG prior to deconsolidation on July 27, 2023. Any discussions related to results, operations, and accounting policies associated with FCG are referring to the periods prior to deconsolidation. See Deconsolidation of Falcon’s Creative Group LLC under Note 1 – Description of business and basis of presentation and Note 4 – Investments and advances to equity method investments in the Company’s unaudited condensed consolidated financial statements.
The following table summarizes our results of operations for the following periods:
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | |||||||
| Revenue | $ | 1,516 | $ | 9,194 | ||||
| Expenses: | ||||||||
| Project design and build expense | - | 6,288 | ||||||
| Selling, general and administrative expense | 6,793 | 9,749 | ||||||
| Transaction expenses | 7 | - | ||||||
| Credit loss expense | 12 | 254 | ||||||
| Research and development | 16 | 463 | ||||||
| Depreciation and amortization expense | 1 | 1,342 | ||||||
| Loss from operations | (5,313 | ) | (8,902 | ) | ||||
| Share of gain or (loss) from equity method investments | 1,154 | (1,279 | ) | |||||
| Interest expense | (269 | ) | (271 | ) | ||||
| Interest income | 3 | - | ||||||
| Change in fair value of warrant liabilities | 208 | - | ||||||
| Change in fair value of earnout liabilities | 118,615 | - | ||||||
| Foreign exchange transaction gain (loss) | (375 | ) | 599 | |||||
| Net loss | $ | 114,023 | $ | (9,853 | ) | |||
| Income tax benefit | 1 | 3 | ||||||
| Net loss | $ | 114,024 | $ | (9,850 | ) | |||
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Revenue
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | |||||||
| Services transferred over time: | ||||||||
| Design and project management services | $ | - | $ | 5,916 | ||||
| Media production services | - | 75 | ||||||
| Attraction hardware and turnkey sales | - | 1,874 | ||||||
| Other | 1,516 | - | ||||||
| Total revenue from services transferred over time | 1,516 | 7,865 | ||||||
| Services transferred at a point in time: | ||||||||
| Digital media licenses | - | 1,329 | ||||||
| Total revenue from services transferred at a point in time | - | 1,329 | ||||||
| Total revenue | $ | 1,516 | $ | 9,194 | ||||
Revenue decreased by $7.7 million to $1.5 million for the three months ended March 31, 2024, compared to $9.2 million for the three months ended March 31, 2023. The decrease was primarily attributable to a $7.9 million decrease in revenue relating to services provided by FCG during the three-month period ending March 31, 2023 which have since been deconsolidated by FBG. As a result of the deconsolidation, there was a $1.5 million increase in revenue associated with shares services provided by FBG to FCG during the three-month period ending March 31, 2024.
The Company’s investment in FCG is accounted for under the equity method and, as such, FCG project management and design revenue and related expenses are no longer included in the results of operations subsequent to the deconsolidation of FCG on July 27, 2023.
Selling, general and administrative expense
Selling, general and administrative expense decreased by $2.9 million to $6.8 million for the three months ended March 31, 2024, compared to $9.7 million for the three months ended March 31, 2023. The decrease was primarily related to a $4.7 million decrease in audit fees and professional services fees, and the deconsolidation of FCG, partially offset by incremental shared-services headcount to support the expansion of the business and for public company related costs.
Credit loss expense
Credit loss expenses decreased by $ 0.3 million to less than $0.1 million for the three months ended March 31, 2024, compared to $0.3 million for the three months ended March 31, 2023, which was related to digital media sales to Sierra Parima joint venture. Katmandu Park DR was closed to visitors on March 7, 2024 and all remaining Sierra Parima receivables were written off as credit loss expense during the year ended December 31, 2023. The Katmandu Park DR related receivables accounted for most of the delinquent receivables, therefore the amount of credit loss expense is lower during the three months ended March 31, 2024.
29
Research and Development
Research and development expense decreased by $0.5 million to less than $0.1 million for the three months ended March 31, 2024, compared to $0.5 million for the three months ended March 31, 2023 due to completion of FBB division projects in 2023. There were no FBB research and development projects in the three-month period ended March 31, 2024.
Depreciation and amortization expense
Depreciation and amortization expense decreased by $1.3 million to less than $0.1 million for the three months ended March 31, 2024, compared to $1.3 million for three months ended March 31, 2023, relating primarily to the amortization of the digital ride media asset of $1.1 million recognized in the three months ended March 31, 2023 when the asset was licensed for use by Sierra Parima. The majority of fixed assets and intangible assets were deconsolidated as part of FCG on July 27, 2023, and the digital ride media asset fully impaired during the year ended December 31, 2023, and therefore depreciation and amortization related to those fixed assets and intangible assets was not included in the three months ended March 31, 2024.
Share of gain or (loss) from equity method investments
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | Change | ||||||||||
| PDP | $ | 534 | $ | 91 | $ | 443 | ||||||
| Sierra Parima | - | (1,372 | ) | 1,372 | ||||||||
| Karnival | 87 | 2 | 85 | |||||||||
| FCG | 533 | - | 533 | |||||||||
| Total share of gain or (loss) from equity method investments | $ | 1,154 | $ | (1,279 | ) | $ | 2,433 | |||||
Share of gain from equity method investments increased by $2.4 million to 1.1 million for the three months ended March 31, 2024, compared to a ($1.3) million loss for the three months ended March 31, 2023. The change in gain or loss from equity method investments was driven by:
| ● | FCG: Share of net income from FCG was $0.5 million for the three months ended March 31, 2024 which was consolidated by the Company during the three months ended March 31, 2023. |
FCG recorded revenues of $14.9 million in the three-month period ended March 31, 2024 representing an increase of $6.9 million or 87% over the corresponding period of 2023 when FCG was fully consolidated by the Company. Operating income of $1.6 million, and net income of $1.8 million were earned during the three months ended March 31, 2024, compared with an operating loss of $1.2 million and net loss of $1.2 million for the corresponding period of 2023.
| ● | The Company recognizes 100% of net income, 9% preferred return to QIC and amortization of the basis difference of deconsolidation of FCG. There were adjustments of $(1.3) million comprised of $(0.5) million in accretion of preference dividend and fees, and $(0.8) million in amortization of basis difference, which further reduced the share of FCG income recorded to $0.5 million. See Note 4– Investments and advances to equity method investments in the Company’s unaudited condensed consolidated financial statements. Additionally, as previously announced on January 18, 2024, FCG entered into a consultancy agreement with QIC to provide a Dragon Ball theme park over the course of approximately two years. The Company recognized $9.8 million in revenue relating to this Dragon Ball consultancy agreement during the three months ended March 31, 2024 |
30
| ● | Sierra Parima: As of December 31, 2023, equity investment in Sierra Parima was deemed to be other-than-temporarily impaired and the fair value of the Company’s investment in Sierra Parima was determined to be zero. Therefore, there was no gain or loss recorded during the three months ended March 31, 2024, compared with a $1.4 million share of net loss during the three months ended March 31, 2023. See Note 4– Investments and advances to equity method investments in the Company’s unaudited condensed consolidated financial statements. |
| ● | PDP: Share of net income from PDP increased by $0.4 million for the three months ended March 31, 2024, primarily driven by a $1.1 million increase in revenue and a $0.4 million favorable change in derivatives which changed from loss to income, driven by interest rate swaps within the hotel group. These favorable changes were offset by a $0.3 million increase in hotel expenses and a $0.5 million unfavorable change in income taxes, which changed from a benefit to a loss. |
| ● | Karnival: A $0.1 million increase in share of net income from Karnival for three months ended March 31, 2024, primarily driven by interest income. |
Change in fair value of warrant liability
Gain due to change in fair value of warrant liabilities was $0.2 million for the three months ended March 31, 2024. The warrant liability relates to the Business Combination which occurred after March 31, 2023, therefore there was no such loss during the three months ended March 31, 2023. Changes in the fair value of warrant liabilities are related primarily to changes in share market price.
Change in fair value of earnout liability
Gain due to change in fair value of earnout liability was $118.6 million for the three months ended March 31, 2024, driven by a decrease in the market price of the Company’s stock between December 31, 2023 and March 31, 2024. The earnout liability relates to the Business Combination which occurred after March 31, 2023, therefore, there was no such loss during the three months ended March 31, 2023. The valuation of performance-based awards, such as earnouts, are sensitive to revenue, EBITDA, and changes in share market price.
Foreign exchange transaction loss
Foreign exchange transaction loss decreased by $1.0 million to ($0.4) million for the three months ended March 31, 2024, compared to $0.6 million for the three months ended March 31, 2023. The decrease was primarily attributable to the unrealized foreign exchange gain (loss) on U.S. denominated related party debt with a Spanish subsidiary as the U.S. dollar strengthened against the Euro during the quarter ended March 31, 2024 and weakened against the Euro during the quarter ended March 31, 2023.
Income tax
Income tax benefit was less than $0.1 million for both the three months ended March 31, 2024 and March 31, 2023.
31
Segment Reporting
The following table presents selected information about our segment’s results for the three months ended March 31, 2024, and 2023. Subsequent to FCG’s deconsolidation on July 27, 2023, FCG segment income or loss is comprised of only of the Company’s equity method share of FCG’s income or loss:
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | |||||||
| Revenues: | ||||||||
| Falcon’s Creative Group | $ | - | $ | 8,002 | ||||
| Destinations Operations | (2 | ) | - | |||||
| Falcon’s Beyond Brands | - | 1,477 | ||||||
| Intersegment eliminations | - | (285 | ) | |||||
| Unallocated corporate revenue | 1,518 | - | ||||||
| Total revenue | 1,516 | 9,194 | ||||||
| Segment income (loss) from operations: | ||||||||
| Falcon’s Creative Group | 533 | (413 | ) | |||||
| Destinations Operations | (414 | ) | (547 | ) | ||||
| PDP | 534 | 91 | ||||||
| Sierra Parima | - | (1,372 | ) | |||||
| Falcon’s Beyond Brands | (663 | ) | 129 | |||||
| Intersegment eliminations | - | (226 | ) | |||||
| Total segment loss from operations | (10 | ) | (2,338 | ) | ||||
| Unallocated corporate overhead | (4,148 | ) | (6,501 | ) | ||||
| Depreciation and amortization expense | (1 | ) | (1,342 | ) | ||||
| Interest expense | (269 | ) | (271 | ) | ||||
| Interest income | 3 | - | ||||||
| Change in fair value of warrant liabilities | 208 | - | ||||||
| Change in fair value of earnout liabilities | 118,615 | - | ||||||
| Foreign exchange transaction (loss) gain | (375 | ) | 599 | |||||
| Net loss before income taxes | $ | 114,023 | $ | (9,853 | ) | |||
| Income tax benefit | 1 | 3 | ||||||
| Net loss | $ | 114,024 | $ | (9,850 | ) | |||
Total revenue for the three months ended March 31, 2024, decreased by $7.7 million to $1.5 million compared to $9.2 million for the three months ended March 31, 2023, primarily driven by the deconsolidation of FCG on July 27, 2023 since FCG accounted for the majority of the revenue at FBG. This decrease in revenue related to the deconsolidation of FCG is partially offset by an increase in revenue relating to shared services agreement between FBG and FCG. See Deconsolidation of Falcon’s Creative Group LLC under Note 1 – Description of business and basis of presentation.
Total segment loss from operations for the three months ended March 31, 2024, decreased by $2.2 million to less than ($0.1) million compared to ($2.3) million for the three months ended March 31, 2023, due to the following:
| ● | FCG segment income from operations for the three months ended March 31, 2024, increased by $0.9 million to $0.5 million as compared to loss of $0.4 million in the three months ended March 31, 2023, primarily as a result of an increase in revenues and improved margins on new long-term contracts. These positive results were partially offset by adjustments of $(1.3) million comprised of $(0.5) million in accretion of preference dividend and fees, and $(0.8) million in amortization of basis difference, which further reduced the share of FCG income recorded to $0.5 million. |
| ● | Destinations Operations segment loss from operations for the three months ended March 31, 2024, decreased $0.1 million to $0.4 million loss compared to loss of $0.5 million for the three months ended March 31, 2023. The small decrease in loss is related to a $0.1 million increase in share of equity method income allocated to Destinations Operations, related to interest income, for the quarter ended March 31, 2024 compared to March 31, 2023. |
32
| ● | PDP segment income for the three months ended March 31, 2024, increased to $0.5 million from $0.1 million for the three months ended March 31, 2023. PDP’s underlying revenues increased $1.3 million to $7.5 million for the three-months ended March 31, 2024 driven by increases in rate at the Mallorca and Tenerife hotel properties. Net income increased to $1.0 million from $0.2 million for the three -months ended March 31, 2024 driven by a $0.8 million flow through of increased revenues to operating profit and a $0.5 million increase in derivative and other net income, partially offset by a $0.5 million increase in income tax expenses. The Company recognized its 50% share of earnings within the PDP segment. |
| ● | Sierra Parima segment loss for the three months ended March 31, 2024, was zero compared to ($1.4) million for the three months ended March 31, 2023. The park closed in March of 2024 following financial, operational, and infrastructure challenges, closing the segment going forward. There were no segment operations to report for Sierra Parima segment for the quarter ending March 31, 2024 since the investment has been fully impaired as of December 31, 2023 and the Company has no further obligation to participate in losses of Sierra Parima. |
| ● | FBB segment income (loss) from operations for the three months ended March 31, 2024 decreased $0.8 million to ($0.7) million compared to income of $0.1 million for the three months ended March 31, 2023. For the quarter ended March 31, 2023, FBB recognized $1.5 million of revenue related to a digital media licensing contract with Sierra Parima. This revenue was offset by $1.0 million selling, general and administrative expenses and $0.4 million research and development expense, resulting in income of $0.1 million for FBB for the quarter ended March 31, 2023. For the quarter ended March 31, 2024, income decreased by $1.5 million to $0 since FBB did not have any income, and additionally, selling, general, and administrative expenses as well as research and development expense both decreased by $0.3 and 0.4 million, respectively, resulting in segment loss of $(0.7) million. |
| ● | Intersegment eliminations decreased by $0.2 million for the three months ended March 31, 2024 due to the deconsolidation of FCG on July 27, 2023. There are no other intersegment eliminations. |
Reportable segment measures of profit and loss are earnings before interest, foreign exchange gains and losses, unallocated corporate expenses, impairments and depreciation and amortization expense. Results of operating segments include costs directly attributable to the segment including project costs, payroll and payroll-related expenses and overhead directly related to the business segment operations. Unallocated corporate overhead costs include costs related to accounting, audit, and corporate legal expenses. Unallocated corporate overhead costs are presented as a reconciling item between total income (losses) from reportable segments and the Company’s consolidated financial results. For more information about our Segment Reporting, see Note 16 – Segment information in the Company’s unaudited condensed consolidated financial statements.
Non-GAAP Financial Measures
We prepare our unaudited condensed consolidated financial statements in accordance with US GAAP. In addition to disclosing financial results prepared in accordance with US GAAP, we disclose information regarding Adjusted EBITDA which is a non-GAAP measure. We define Adjusted EBITDA as net income (loss), determined in accordance with US GAAP, for the period presented, before interest expense, net, income tax expense, depreciation and amortization, transaction expenses related to the business combination, credit loss expense, change in fair value of warrant liabilities, and change in fair value of earnout liabilities.
We believe that Adjusted EBITDA is useful to investors as it eliminates the non-cash depreciation and amortization expense that results from our capital investments and intangible assets recognized in any business combination and improves comparability by eliminating the interest expense associated with our debt facilities, which may not be comparable with other companies based on our structure.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation, or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations are (i) it does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments, (ii) it does not reflect changes in, or cash requirements for, our working capital needs, (iii) it does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our debt, (iv) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements, (v) it does not adjust for all non-cash income or expense items that are reflected in our statements of cash flows, and (vi) other companies in our industry may calculate these measures differently than we do, limiting their usefulness as comparative measures.
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The following table sets forth reconciliations of net loss under US GAAP to Adjusted EBITDA for the following periods:
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | |||||||
| Net income (loss) | $ | 114,024 | $ | (9,850 | ) | |||
| Interest expense | 269 | 271 | ||||||
| Interest income | (3 | ) | — | |||||
| Income tax benefit | (1 | ) | (3 | ) | ||||
| Depreciation and amortization expense | 1 | 1,342 | ||||||
| EBITDA | 114,290 | (8,240 | ) | |||||
| Transaction expenses | 7 | — | ||||||
| Credit loss expense | 12 | 254 | ||||||
| Change in fair value of warrant liabilities | (208 | ) | — | |||||
| Change in fair value of earnout liabilities | (118,615 | ) | — | |||||
| Adjusted EBITDA | $ | (4,514 | ) | $ | (7,986 | ) | ||
Net income increased by $123.9 million to $114.0 million for the three months ended March 31, 2024, compared to ($9.9) million loss for the three months ended March 31, 2023, primarily driven by a $118.6 million gain from change in fair value of earnout liabilities. Adjusted EBITDA increased from $(8.0) to ($4.5) million for three months ended March 31, 2024, primarily driven by lower selling, general and administrative expenses and depreciation due to deconsolidation of FCG on July 27, 2023, and due to reduction in third party accounting, audit, and legal fees relating to public company readiness.
Liquidity and Capital Resources
Sources and Uses of Liquidity
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations. Our primary short-term cash requirements are to fund working capital, short-term debt, acquisitions, contractual obligations and other commitments. Our medium-term to long-term cash requirements are to service and repay debt and to invest in facilities, equipment, technologies, and research and development for growth initiatives. Our principal sources of liquidity are funds from borrowings, equity contributions from our existing investors and cash on hand.
As of March 31, 2024, our total indebtedness was approximately $35.6 million. We had approximately $1.1 million of unrestricted cash and $3.9 million available for borrowing under our lines of credit.
During the three months ended March 31, 2024, Infinite Acquisitions loaned an additional $4.7 million to the Company pursuant to the revolving credit arrangement. The revolving credit arrangement is subject to an annual fixed interest rate of 2.75% and matures in December 2026. Further, in April 2024, Falcon’s Opco entered into a one-year term loan agreement with Katmandu Ventures for $7.221 million and a one-year term loan agreement with Universal Kat for $1.279 million. The term loan with Katmandu Ventures and the term loan with Universal Kat both bear interest at a rate of 8.88% per annum, payable quarterly in arrears, and will mature on March 31, 2025. Approximately $5.4 million of the combined proceeds of the term loans from Katmandu Ventures and Universal Kat were used to repay a portion of the Infinite Acquisitions revolving credit arrangement. See Note 6 – Long-term debt and borrowing arrangements and Note 17 – Subsequent events in the Company’s unaudited condensed consolidated financial statements.
We anticipate managing our operations to ensure that our existing cash on hand and unused capacity on our existing lines of credit, along with additional debt and equity capital raises, and reviewing our portfolio of assets to provide additional liquidity over the next twelve months to meet our short-term needs. Currently, we do not have sufficient cash from operations and unused capacity to meet the next twelve months of our operations.
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For the three months ended March 31, 2024, we have operational losses and negative cash flows from operating activities that raise substantial doubt about our ability to continue as a going concern. As of March 31, 2024, we have $20.7 million of accrued expenses and other current liabilities, which include $17.3 million of transaction expenses relating to the Business Combination, $2.2 million of excise tax payable on FAST II stock redemptions which is not payable until forthcoming treasury regulations are finalized, $0.7 million of accrued payroll and related expenses, and approximately $0.5 million of other accrued expenses and current liabilities. The transaction expenses are actively being negotiated, and actual settlement may vary from the amounts recorded. Additionally, as of March 31, 2024, we have unfunded commitments to Karnival of $2.4 million (HKD 18.7 million), to be used for the purpose of constructing the Vquarium Entertainment Centers in Hong Kong which need to be paid in 2024. On July 27, 2023, FCG received a closing payment from QIC of $17.5 million (net of $0.5 million in reimbursements). On April 16, 2024, QIC released the remaining $12.0 million of the $30.0 million investment to Falcon’s Creative Group, LLC, a deconsolidated subsidiary which is 75% owned by Falcon’s Opco and 25% owned by QIC (“FCG LLC”) upon the establishment of the employee retention and attraction incentive program. These funds are to be used exclusively by the FCG segment to fund its operations and growth and cannot be used to satisfy the commitments of other segments. Until we can generate sufficient revenue from our five reportable segments to cover operating expenses, working capital and capital expenditures, we expect funds raised from additional debt and/or capital to fund our cash needs.
Our capital requirements will depend on many factors, including the timing and extent of spending to support our research and development efforts, investments in technology, the expansion of sales and marketing activities, and market adoption of new and enhanced products and features. In addition, we expect to incur additional costs as a result of operating as a public company. We expect our capital expenditures and working capital requirements to increase materially in the near future. Our ability to generate cash in the future depends on our financial results which are subject to general economic, financial, competitive, legislative and regulatory factors that may be outside of our control. Our future access to, and the availability of credit on acceptable terms and conditions, is impacted by many factors, including capital market liquidity and overall economic conditions. In the event that additional financing is required from outside sources, we cannot be sure that any additional financing will be available to us on acceptable terms if at all. If we are unable to raise additional capital when desired, our business, operating results, and financial condition could be adversely affected. See the section of our Annual Report titled “Risk Factors – We will require additional capital, which additional financing may result in restrictions on our operations or substantial dilution to our stockholders, to support the growth of our business, and this capital might not be available on acceptable terms, if at all.”
Contractual and Other Obligations
Tax Receivable Agreement
In connection with the Closing of the Business Combination, the Company entered into the Tax Receivable Agreement with Falcon’s Opco, the TRA holder representative, certain members of Falcon’s Opco (the “TRA Holders”) and other persons from time-to-time party thereto. Pursuant to the Tax Receivable Agreement, among other things, the Company is required to pay to each TRA Holder 85% of certain tax benefits, if any, that it realizes (or in certain cases is deemed to realize) as a result of the increases in tax basis resulting from any exchange of new Falcon’s Opco units for Class A Common Stock or cash in the future and certain other tax benefits arising from payments under the Tax Receivable Agreement. In certain cases, the Company’s obligations under the Tax Receivable Agreement may accelerate and become due and payable, based on certain assumptions, upon a change in control and certain other termination events, as defined in the Tax Receivable Agreement.
Commitments
Partnership with Raging Power Limited
Pursuant to the terms of our joint venture agreement with Raging Power, Falcon’s and Raging Power are each required to provide funding to Karnival in the form of non-interest-bearing advances, which will be repaid based on a percentage of gross revenues from the operation of the themed virtual ocean adventure attraction we are developing at the new 11 SKIES complex adjacent to the Hong Kong Airport. Accordingly, the joint venture agreement provides that we receive 16.6% to 20.6% of gross revenue of such location. As of March 31, 2024, we have unfunded commitments to Karnival of $2.4 million (HKD 18.7 million).
Transaction costs
Pursuant to the Business Combination during the year ended December 31, 2023, the Company received net cash proceeds from the Business Combination totaling $0.9 million, net of $1.3 million of FAST II transaction costs and $1.6 million of Falcon’s Opco transaction costs paid at Closing. FAST II and Falcon’s Opco transaction costs related to the Business Combination of $6.4 million and $15.7 million, respectively, are not yet settled as of March 31, 2024 and the Company is actively negotiating to settle them over the next 24 months. These transaction costs are recorded in accrued expenses and long-term payables. Negotiations regarding the terms of the costs yet to be settled are still ongoing and may change materially from these amounts accrued.
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As previously disclosed in the Company’s Annual Report and its Current Report on Form 8-K filed with the SEC on May 6, 2024, the Company was served with a complaint (the “Guggenheim Complaint”) on March 27, 2024 in which Guggenheim Securities, LLC (“Guggenheim”) alleges breach of a contract with Guggenheim. Guggenheim alleges that the Company owes certain fees and expenses of $11.1 million for services allegedly performed by Guggenheim in connection with the Business Combination which was consummated on October 6, 2023. As part of the Company’s accounting approach to transaction expenses related to the Business Combination, prior to the Company’s receipt of the Guggenheim Complaint, the Company accrued $11.1 million as of December 31, 2023 with respect to a contract with Guggenheim. The Company intends to vigorously defend itself against the claims alleged in the Guggenheim Complaint and contest the amounts Guggenheim asserts are owed.
Related Party Loans
The Company has entered into various financing agreements with Infinite Acquisitions. As of March 31, 2024, we have aggregate outstanding balances of $21.9 million under these financing agreements. Additionally, in March 2024, the Company entered into a one-year $7.221 million term loan with Katmandu Ventures LLC, a greater than 10% shareholder of the Company. The loan bears interest at 8.875% per annum, which is payable quarterly in arrears.
For more information regarding our related party transactions, see Note 6 — Long-term debt and borrowing arrangements and Note 7 — Related party transactions included in the notes to the Company’s unaudited condensed consolidated financial statements.
Cash Flows
The following table summarizes our cash flows for the period presented:
| Three months ended March 31, 2024 | Three months ended March 31, 2023 | |||||||
| Cash used in operating activities | $ | (3,768 | ) | $ | (6,498 | ) | ||
| Cash used in investing activities | (2,096 | ) | (133 | ) | ||||
| Cash provided by (used in) financing activities | 6,231 | (178 | ) | |||||
Cash Flows from Operating Activities
Our cash flows from operating activities are primarily driven by the activities associated with our FBB segment and corporate overhead activities.
Cash used in operating activities for the three months ended March 31, 2024 was ($3.8) million compared to ($6.5) million for the three months ended March 31, 2023, representing $2.7 million less cash used in operating activities due to a reduction in legal and professional fees, the deconsolidation of FCG and changes in working capital driven by the expansion of the business.
Cash Flows from Investing Activities
Our primary investing activities consisted of the purchase of property, plant and equipment and proceeds from the sale of equipment. Net cash used in investing activities was ($2.1) million during the three months ended March 31, 2024, compared to ($0.1) million net cash used by investing activities during the three months ended March 31, 2023, primarily related to purchases of computer equipment and $2.1 million short-term advance made to FCG.
Cash Flows from Financing Activities
Net cash provided by financing activities increased to $6.2 million in the three months ended March 31, 2024, compared to $(0.1) million in the three months ended March 31, 2023. The cash provided by financing activities in the three months ended March 31, 2024 consisted primarily of (i) $4.7 million in proceeds from and $5.4 million in repayment of the $10.0 million related party revolving credit arrangement with Infinite Acquisitions, (ii) $1.2 million repayment of related party term loans, (iii) $7.2 million of proceeds from related part term loans (iv) $0.4 million repayment of third party term loans, (v) $1.3 million proceeds from third party term loans, and (vi) $0.1 million in proceeds from exercised warrants. See Note 6 — Long-term debt and borrowing arrangements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
This item is not applicable as we are a smaller reporting company.
Item 4. Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this Quarterly Report. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2024, our disclosure controls and procedures were not effective to the identification of material weaknesses in our internal control over financial reporting.
Material Weaknesses
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
In connection with the preparation and audit of the 2023 consolidated financial statements, we identified the following material weaknesses in the Company’s internal control over financial reporting:
Risk Assessment – We did not design and implement an effective risk assessment based on the criteria established in the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) identifying, assessing, and communicating appropriate objectives, (ii) identifying and analyzing risks to achieve these objectives, (iii) contemplating fraud risks, and (iv) identifying and assessing changes in the business that could impact our system of internal controls.
Control Activities – We did not design and implement effective control activities based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the control activities component of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) selecting and developing control activities and information technology that contribute to the mitigation of risks and support achievement of objectives; and (ii) deploying control activities through policies that establish what is expected and procedures that put policies into action.
The following deficiencies, individually and in the aggregate, contributed to material weaknesses in control activities, including:
| ● | We did not have an adequate segregation of duties or appropriate level of review that is needed to comply with financial reporting requirements. |
| ● | We did not design or maintain controls over period end close procedures. |
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| ● | We did not design or maintain effective controls over the period end financial reporting process and preparation of financial statements. Specifically, we did not design and implement a sufficient level of formal accounting policies and procedures that define how transactions across the business cycles should be initiated, recorded, processed and reported and appropriately authorized and approved. |
| ● | We did not design or maintain controls or document segregation of duties over information technology systems used to create or maintain financial reporting records. |
Monitoring – We did not design and implement effective monitoring activities based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the monitoring component of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) selecting, developing, and performing ongoing evaluation to ascertain whether the components of internal controls are present and functioning; and (ii) evaluating and communicating internal control deficiencies in a timely manner to those parties responsible for taking corrective action.
Control Environment – We did not maintain an effective control environment based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the control environment of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) appropriate organizational structure, reporting lines, and authority and responsibilities in pursuit of objectives; (ii) our commitment to attract, develop, train, and retain an appropriate complement of accounting employees; and (iii) establishing a control environment and holding individuals accountable for their internal control related responsibilities.
We did not design or maintain an effective control environment to enable the identification and mitigation of risks of accounting errors based on the contributing factors to material weaknesses in the control environment, including:
| ● | The Company did not create the proper environment for effective internal control over financial reporting and to ensure that: (i) there were adequate processes for oversight; (ii) there was accountability for the performance of internal control over financial reporting responsibilities; (iii) personnel with key positions had the appropriate training and capacity to carry out their responsibilities. |
| ● | The Company did not maintain a sufficient complement of management, accounting, financial reporting personnel who had appropriate levels of knowledge, experience, and training in accounting and internal control matters commensurate with the nature, growth and complexity of our business. The lack of sufficient appropriately skilled and trained personnel contributed to our failure to: (i) adequately identify potential risks; (ii) include in the scope of our internal controls framework certain systems relevant to financial reporting and the preparation of our consolidated financial statements; and (iii) design and implement certain risk-mitigating internal controls. |
Information and Communication – We did not generate or provide adequate quality supporting information and communication based on the criteria established in the COSO framework. We have identified deficiencies in the principles associated with the information and communication component of the COSO framework. Specifically, these control deficiencies constitute material weaknesses, either individually or in the aggregate, relating to: (i) obtaining, generating, and using relevant quality information to support the function of internal control; and (ii) communicating accurate information internally and externally, including providing information pursuant to objectives, responsibilities, and functions of internal control.
Remediation Efforts
We are in the process of designing and implementing a plan to remediate the material weaknesses discussed above. Our remediation plans include strengthening our control environment with an immediate focus on hiring experienced personnel, designing and implementing risk assessment processes, implementing and enhancing our business processes and control activities, consistently generating and providing quality information and communication and re-designing and implementing monitoring controls.
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Our detailed remediation plans include actions such as implementing systems and controls to enhance our review of significant accounting transactions and other new technical accounting and financial reporting issues and preparing and reviewing accounting memoranda addressing these issues, hiring experienced personnel, implementing controls to enable an effective and timely review period end close procedures, and implementing controls to enable an accurate and timely review of accounting records that support our accounting processes and maintain documents for internal accounting reviews.
We have also engaged a third-party consulting firm to assist us with our formal internal control plan and to provide accounting services related to complex accounting transactions. In addition, as we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify our remediation plan.
In light of the material weaknesses discussed above, we performed additional procedures to ensure that our consolidated financial statements included in this Quarterly Report were prepared in accordance with U.S. GAAP. Following such additional procedures, our management, including our Chief Executive Officer and Chief Financial Officer, has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in this Quarterly Report, in conformity with U.S. GAAP.
Changes in Internal Control over Financial Reporting
Except as otherwise described herein, there was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended March 31, 2024 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is named from time to time as a party to lawsuits and other types of legal proceedings and claims in the normal course of business. As previously disclosed in the Company’s Annual Report and its Current Report on Form 8-K filed with the SEC on May 6, 2024, the Company was served with a complaint (the “Guggenheim Complaint”) on March 27, 2024 in which Guggenheim Securities, LLC (“Guggenheim”) alleges breach of a contract with Guggenheim. Guggenheim alleges that the Company owes certain fees and expenses of $11.1 million for services allegedly performed by Guggenheim in connection with the Business Combination which was consummated on October 6, 2023. As part of the Company’s accounting approach to transaction expenses related to the Business Combination, prior to the Company’s receipt of the Guggenheim Complaint, the Company accrued $11.1 million as of December 31, 2023 with respect to a contract with Guggenheim. The Company intends to vigorously defend itself against the claims alleged in the Guggenheim Complaint and contest the amounts Guggenheim asserts are owed.
Item 1A. Risk Factors.
Factors that could cause our actual results to differ materially from those in this Quarterly Report are any of the risks described in our Annual Report. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors not presently known to us or that we currently deem immaterial may also impair our business or results of operations. As of the date of this Quarterly Report, there have been no material changes to the risk factors disclosed in the Annual Report. We may disclose changes to such risk factors or disclose additional risk factors from time to time in our future filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
Item 6. Exhibits
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report:
| * | Filed herewith |
| ** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: May 16, 2024 | FALCON’S BEYOND GLOBAL, INC. | |
| (Registrant) | ||
| By | /s/ Joanne Merrill | |
| Joanne Merrill | ||
| Principal Financial Officer, Principal Accounting Officer and Authorized Signatory | ||
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