UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, DC
20549
———————
FORM
10-Q
|
| |
|
þ
|
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the
quarterly period ended June 30, 2019
|
|
OR
|
|
¨
|
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
|
For the
transition period from __________ to __________
|
Commission file number:
001-38331
DOLPHIN
ENTERTAINMENT, INC.
(Exact name
of registrant as specified in its charter)
———————
|
| |
|
Florida
|
86-0787790
|
|
(State or
other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation or organization)
|
Identification No.)
|
2151 Le Jeune Road, Suite
150 – Mezzanine, Coral Gables, Florida 33134
(Address of
principal executive offices, including zip code)
(305) 774-0407
(Registrant's telephone number)
_____________________________________________________________
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
———————
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes þ No ¨
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required
to be submitted pursuant to Rule 405 of Regulation S-T
(Section 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required
to submit such files). Yes þ No ¨
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a
non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
|
| |
|
Large accelerated filer
¨
|
Accelerated filer
¨
|
|
Non-accelerated filer
þ
|
Smaller reporting company
þ
|
|
|
Emerging growth company
¨
|
If an emerging growth company, indicate by
checkmark if the registrant has elected not to use the extended
transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the
Exchange Act. ¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨
No þ
Securities registered pursuant to Section
12(b) of the Act:
|
|
| |
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
Common Stock, $0.015 par value per share
|
DLPN
|
The
Nasdaq Capital Market
|
|
Warrants to purchase Common Stock,
$0.015 par value per share
|
DLPNW
|
The
Nasdaq Capital Market
|
The number of shares of common stock
outstanding was 14,311,538 as of August 6, 2019
TABLE OF CONTENTS
PART I — FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLPHIN ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
(unaudited)
|
|
|
|
|
|
|
|
| |
|
|
|
As of
June 30,
2019
|
|
|
As of
December 31,
2018
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
2,559,367
|
|
|
$
|
5,542,272
|
|
|
Restricted cash
|
|
|
732,920
|
|
|
|
732,368
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $274,861 and
$283,022, respectively.
|
|
|
2,479,299
|
|
|
|
3,173,107
|
|
|
Other
current assets
|
|
|
614,301
|
|
|
|
620,970
|
|
|
Total
current assets
|
|
|
6,385,887
|
|
|
|
10,068,717
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized production costs, net
|
|
|
785,039
|
|
|
|
724,585
|
|
|
Intangible assets, net of accumulated amortization of $3,494,560
and $2,714,785, respectively.
|
|
|
8,086,773
|
|
|
|
9,395,215
|
|
|
Goodwill
|
|
|
15,996,977
|
|
|
|
15,922,601
|
|
|
Right-of-use asset
|
|
|
6,529,077
|
|
|
|
—
|
|
|
Property,
equipment and leasehold improvements, net
|
|
|
1,040,021
|
|
|
|
1,182,520
|
|
|
Investments
|
|
|
220,000
|
|
|
|
220,000
|
|
|
Deposits
and other assets
|
|
|
534,735
|
|
|
|
475,956
|
|
|
Total Assets
|
|
$
|
39,578,509
|
|
|
$
|
37,989,594
|
|
(Continued)
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
1
DOLPHIN ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS (CONTINUED)
(unaudited)
|
|
|
|
|
|
|
|
| |
|
|
|
As of
June 30,
2019
|
|
|
As of
December 31,
2018
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
769,974
|
|
|
$
|
944,232
|
|
|
Other
current liabilities
|
|
|
6,110,389
|
|
|
|
7,238,507
|
|
|
Line of
credit
|
|
|
1,700,390
|
|
|
|
1,700,390
|
|
|
Put
rights
|
|
|
4,030,280
|
|
|
|
4,281,595
|
|
|
Accrued
compensation
|
|
|
2,625,000
|
|
|
|
2,625,000
|
|
|
Debt
|
|
|
2,312,461
|
|
|
|
2,411,828
|
|
|
Loan
from related party
|
|
|
1,107,873
|
|
|
|
1,107,873
|
|
|
Contract
liabilities
|
|
|
192,471
|
|
|
|
522,620
|
|
|
Lease
liability
|
|
|
1,408,120
|
|
|
|
—
|
|
|
Convertible notes payable, net of debt discount
|
|
|
1,988,462
|
|
|
|
625,000
|
|
|
Notes
payable
|
|
|
283,952
|
|
|
|
479,874
|
|
|
Total current liabilities
|
|
|
22,529,372
|
|
|
|
21,936,919
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
|
Put
rights
|
|
|
677,911
|
|
|
|
1,702,472
|
|
|
Convertible notes payable
|
|
|
1,044,232
|
|
|
|
1,376,924
|
|
|
Notes
payable
|
|
|
769,338
|
|
|
|
612,359
|
|
|
Contingent consideration
|
|
|
460,000
|
|
|
|
550,000
|
|
|
Lease
liability
|
|
|
5,608,045
|
|
|
|
—
|
|
|
Other
noncurrent liabilities
|
|
|
—
|
|
|
|
1,034,393
|
|
|
Total
noncurrent liabilities
|
|
|
8,559,526
|
|
|
|
5,276,148
|
|
|
Total
Liabilities
|
|
|
31,088,898
|
|
|
|
27,213,067
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 19)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.015 par value, 200,000,000 shares authorized, 14,394,562
and 14,123,157, respectively, issued and outstanding at June 30,
2019 and December 31, 2018
|
|
|
215,918
|
|
|
|
211,849
|
|
|
Preferred
Stock, Series C, $0.001 par value, 50,000 shares authorized, issued
and outstanding at June 30, 2019 and December 31, 2018
|
|
|
1,000
|
|
|
|
1,000
|
|
|
Additional paid in capital
|
|
|
103,571,126
|
|
|
|
105,092,852
|
|
|
Accumulated deficit
|
|
|
(95,298,433
|
)
|
|
|
(94,529,174
|
)
|
|
Total
Stockholders' Equity
|
|
|
8,489,611
|
|
|
|
10,776,527
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
39,578,509
|
|
|
$
|
37,989,594
|
|
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
2
DOLPHIN ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
For the
three months ended
|
|
|
For the six
months ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment publicity and marketing
|
|
$
|
6,273,983
|
|
|
$
|
5,121,487
|
|
|
$
|
12,523,890
|
|
|
$
|
10,577,220
|
|
|
Content
production
|
|
|
—
|
|
|
|
97,961
|
|
|
|
78,990
|
|
|
|
427,153
|
|
|
Total revenues
|
|
|
6,273,983
|
|
|
|
5,219,448
|
|
|
|
12,602,880
|
|
|
|
11,004,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
1,279,657
|
|
|
|
295,765
|
|
|
|
2,467,076
|
|
|
|
865,199
|
|
|
Selling,
general and administrative
|
|
|
1,071,460
|
|
|
|
585,214
|
|
|
|
1,859,623
|
|
|
|
1,381,958
|
|
|
Depreciation and amortization
|
|
|
478,560
|
|
|
|
375,163
|
|
|
|
960,203
|
|
|
|
746,343
|
|
|
Legal
and professional
|
|
|
449,060
|
|
|
|
356,002
|
|
|
|
832,732
|
|
|
|
844,488
|
|
|
Payroll
|
|
|
4,197,324
|
|
|
|
3,538,037
|
|
|
|
8,510,486
|
|
|
|
7,196,042
|
|
|
Total expenses
|
|
|
7,476,061
|
|
|
|
5,150,181
|
|
|
|
14,630,120
|
|
|
|
11,034,030
|
|
|
Income (loss) before other income
(expenses)
|
|
|
(1,202,078
|
)
|
|
|
69,267
|
|
|
|
(2,027,240
|
)
|
|
|
(29,657
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on
extinguishment of debt
|
|
|
—
|
|
|
|
(53,271
|
)
|
|
|
(21,287
|
)
|
|
|
(53,271
|
)
|
|
Acquisition costs
|
|
|
—
|
|
|
|
(34,672
|
)
|
|
|
—
|
|
|
|
(34,672
|
)
|
|
Change
in fair value of warrant liability
|
|
|
—
|
|
|
|
350,115
|
|
|
|
—
|
|
|
|
518,432
|
|
|
Change
in fair value of put rights
|
|
|
251,350
|
|
|
|
333,043
|
|
|
|
1,778,376
|
|
|
|
1,416,639
|
|
|
Change
in fair value of contingent consideration
|
|
|
360,000
|
|
|
|
—
|
|
|
|
90,000
|
|
|
|
—
|
|
|
Interest
expense and debt amortization expense
|
|
|
(301,139
|
)
|
|
|
(265,992
|
)
|
|
|
(589,108
|
)
|
|
|
(533,419
|
)
|
|
Total other income (expenses)
|
|
|
310,211
|
|
|
|
329,223
|
|
|
|
1,257,981
|
|
|
|
1,313,709
|
|
|
(Loss) income before income taxes
|
|
$
|
(891,867
|
)
|
|
$
|
398,490
|
|
|
$
|
(769,259
|
)
|
|
$
|
1,284,052
|
|
|
Income taxes
|
|
|
—
|
|
|
|
(228,016
|
)
|
|
|
—
|
|
|
|
(280,620
|
)
|
|
Net (loss) income
|
|
$
|
(891,867
|
)
|
|
$
|
170,474
|
|
|
$
|
(769,259
|
)
|
|
$
|
1,003,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.08
|
|
|
Diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
|
Weighted
average number of shares used in per share calculation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,969,926
|
|
|
|
12,349,014
|
|
|
|
15,957,085
|
|
|
|
12,432,872
|
|
|
Diluted
|
|
|
19,172,087
|
|
|
|
14,032,001
|
|
|
|
19,671,124
|
|
|
|
14,533,224
|
|
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
3
DOLPHIN ENTERTAINMENT, INC.
AND SUBSIDIARIES
Condensed Consolidated
Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
| |
|
|
|
For the six
months ended
June
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(769,259
|
)
|
|
$
|
1,003,432
|
|
|
Adjustments to reconcile net (loss) income to net cash (used in)
operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
960,203
|
|
|
|
746,343
|
|
|
Amortization of capitalized production costs
|
|
|
—
|
|
|
|
203,560
|
|
|
Amortization of beneficial conversion on debt
|
|
|
72,657
|
|
|
|
—
|
|
|
Loss on extinguishment of debt
|
|
|
21,287
|
|
|
|
53,271
|
|
|
Bad debt and recovery of account receivable written off, net
|
|
|
(115,784
|
)
|
|
|
(7,421
|
)
|
|
Change in fair value of warrant liability
|
|
|
—
|
|
|
|
(518,432
|
)
|
|
Change in fair value of put rights
|
|
|
(1,778,376
|
)
|
|
|
(1,416,639
|
)
|
|
Change in fair value of contingent consideration
|
|
|
(90,000
|
)
|
|
|
—
|
|
|
Change in deferred tax
|
|
|
—
|
|
|
|
249,276
|
|
|
Change in deferred rent
|
|
|
—
|
|
|
|
40,172
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
809,592
|
|
|
|
866,534
|
|
|
Other current assets
|
|
|
6,669
|
|
|
|
(90,211
|
)
|
|
Capitalized production costs
|
|
|
(60,454
|
)
|
|
|
(12,500
|
)
|
|
Deposits and other assets
|
|
|
(58,779
|
)
|
|
|
40,219
|
|
|
Contract liability
|
|
|
(330,149
|
)
|
|
|
—
|
|
|
Accrued compensation
|
|
|
—
|
|
|
|
125,000
|
|
|
Accounts payable
|
|
|
(174,258
|
)
|
|
|
(363,066
|
)
|
|
Lease liability, net
|
|
|
100,574
|
|
|
|
—
|
|
|
Other current liabilities
|
|
|
346,511
|
|
|
|
(441,992
|
)
|
|
Other noncurrent liabilities
|
|
|
(217,713
|
)
|
|
|
(491,352
|
)
|
|
Net Cash (Used in) Operating Activities
|
|
|
(1,277,279
|
)
|
|
|
(13,806
|
)
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(37,929
|
)
|
|
|
(49,813
|
)
|
|
Net Cash (Used in) Investing Activities
|
|
|
(37,929
|
)
|
|
|
(49,813
|
)
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds from line of credit
|
|
|
—
|
|
|
|
1,700,390
|
|
|
Repayment of the line of credit
|
|
|
—
|
|
|
|
(750,000
|
)
|
|
Proceeds from note payable
|
|
|
1,110,457
|
|
|
|
—
|
|
|
Proceeds from issuance of detachable warrants
|
|
|
89,543
|
|
|
|
—
|
|
|
Repayment of notes payable
|
|
|
(38,942
|
)
|
|
|
—
|
|
|
Repayment of debt
|
|
|
(99,367
|
)
|
|
|
(1,038,728
|
)
|
|
Sale of common stock and warrants (unit) in Offering
|
|
|
—
|
|
|
|
81,044
|
|
|
Employee shares withheld for taxes
|
|
|
—
|
|
|
|
(56,091
|
)
|
|
Exercise of put rights
|
|
|
(1,365,500
|
)
|
|
|
—
|
|
|
Repayment to related party
|
|
|
—
|
|
|
|
(601,001
|
)
|
|
Advances from related party
|
|
|
—
|
|
|
|
(2,515,000
|
)
|
|
Acquisition of Viewpoint
|
|
|
(230,076
|
)
|
|
|
—
|
|
|
Acquisition of The Door
|
|
|
(771,500
|
)
|
|
|
—
|
|
|
42West settlement of change of control provision
|
|
|
(361,760
|
)
|
|
|
(20,000
|
)
|
|
Net Cash (Used in) Financing Activities
|
|
|
(1,667,145
|
)
|
|
|
(3,199,386
|
)
|
|
NET DECREASE IN CASH AND
CASH EQUIVALENTS
|
|
|
(2,982,353
|
)
|
|
|
(3,263,005
|
)
|
|
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD
|
|
|
6,274,640
|
|
|
|
5,296,873
|
|
|
CASH, CASH EQUIVALENTS AND
RESTRICTED CASH END OF PERIOD
|
|
$
|
3,292,287
|
|
|
$
|
2,033,868
|
|
(Continued)
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
4
DOLPHIN ENTERTAINMENT, INC.
AND SUBSIDIARIES
Condensed Consolidated
Statements of Cash Flows (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
| |
|
|
|
For the six
months ended
June
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
151,100
|
|
|
$
|
88,047
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
|
|
|
Conversion of note payable into shares of common stock
|
|
$
|
75,000
|
|
|
$
|
276,425
|
|
|
Issuance
of shares of Common Stock related to the acquisitions
|
|
$
|
1,000,000
|
|
|
$
|
—
|
|
|
Liability for contingent consideration for the acquisitions
|
|
$
|
460,000
|
|
|
$
|
—
|
|
|
Liability for put rights to the Sellers of 42West
|
|
$
|
4,708,191
|
|
|
$
|
4,809,371
|
|
Reconciliation of cash, cash equivalents and
restricted cash. The following table provides a reconciliation of
cash, cash equivalents and restricted cash reported within the
statement of cash flows that sum to the total of the same such
amounts shown in the statement of cash flows:
|
|
|
|
|
|
|
|
| |
|
|
|
For the six
months ended
June
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
2,559,367
|
|
|
$
|
2,033,868
|
|
|
Restricted cash
|
|
|
732,920
|
|
|
|
—
|
|
|
Total
cash, cash equivalents and restricted cash shown in the condensed
consolidated statement of cash flows
|
|
$
|
3,292,287
|
|
|
$
|
2,033,868
|
|
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
5
DOLPHIN ENTERTAINMENT, INC.
AND SUBSIDIARIES
Consolidated Statements of
Changes in Stockholders' Equity
For the six months ended
June 30, 2019 and 2018
For the six months ended June 30,
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance December 31, 2018
|
|
|
50,000
|
|
|
$
|
1,000
|
|
|
|
14,123,157
|
|
|
$
|
211,849
|
|
|
$
|
105,092,852
|
|
|
$
|
(94,529,174
|
)
|
|
$
|
10,776,527
|
|
|
Net
income for the three months ended March 31, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
122,608
|
|
|
|
122,608
|
|
|
Issuance
of shares related to acquisition of The Door
|
|
|
—
|
|
|
|
—
|
|
|
|
307,692
|
|
|
|
4,615
|
|
|
|
82,554
|
|
|
|
—
|
|
|
|
87,169
|
|
|
Issuance
of shares related to conversion of note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
53,191
|
|
|
|
798
|
|
|
|
95,489
|
|
|
|
—
|
|
|
|
96,287
|
|
|
Shares
retired from exercise of puts
|
|
|
—
|
|
|
|
—
|
|
|
|
(56,940
|
)
|
|
|
(854
|
)
|
|
|
(1,176,646
|
)
|
|
|
—
|
|
|
|
(1,177,500
|
)
|
|
Balance March 31, 2019
|
|
|
50,000
|
|
|
$
|
1,000
|
|
|
|
14,427,100
|
|
|
$
|
216,408
|
|
|
$
|
104,094,249
|
|
|
$
|
(94,406,566
|
)
|
|
$
|
9,905,091
|
|
|
Net loss
for the three months ended June 30, 2019
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(891,867
|
)
|
|
|
(891,867
|
)
|
|
Value of
warrants and beneficial conversion of convertible promissory
note
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
166,887
|
|
|
|
—
|
|
|
|
166,887
|
|
|
Shares
retired from exercise of puts
|
|
|
—
|
|
|
|
—
|
|
|
|
(32,538
|
)
|
|
|
(490
|
)
|
|
|
(690,010
|
)
|
|
|
—
|
|
|
|
(690,500
|
)
|
|
Balance June 30, 2019
|
|
|
50,000
|
|
|
$
|
1,000
|
|
|
|
14,394,562
|
|
|
$
|
215,918
|
|
|
$
|
103,571,126
|
|
|
$
|
(95,298,433
|
)
|
|
$
|
8,489,611
|
|
For the six months ended June 30,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance December 31, 2017
|
|
|
50,000
|
|
|
$
|
1,000
|
|
|
|
10,565,789
|
|
|
$
|
158,487
|
|
|
$
|
98,816,550
|
|
|
$
|
(92,899,680
|
)
|
|
$
|
6,076,357
|
|
|
Net
income for the three months ended March 31, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
832,958
|
|
|
|
832,958
|
|
|
Sale of
common stock and warrants through an offering pursuant to a
Registration Statement on Form S-1
|
|
|
—
|
|
|
|
—
|
|
|
|
20,750
|
|
|
|
312
|
|
|
|
80,732
|
|
|
|
—
|
|
|
|
81,044
|
|
|
Issuance
of shares related to acquisition of 42West
|
|
|
—
|
|
|
|
—
|
|
|
|
760,694
|
|
|
|
11,410
|
|
|
|
(31,410
|
)
|
|
|
—
|
|
|
|
(20,000
|
)
|
|
Shares
retired for payroll taxes per equity compensation plan
|
|
|
—
|
|
|
|
—
|
|
|
|
(17,585
|
)
|
|
|
(264
|
)
|
|
|
(35,410
|
)
|
|
|
—
|
|
|
|
(35,674
|
)
|
|
Shares
retired from exercise of puts
|
|
|
—
|
|
|
|
—
|
|
|
|
(100,504
|
)
|
|
|
(1,508
|
)
|
|
|
(1,688,492
|
)
|
|
|
—
|
|
|
|
(1,690,000
|
)
|
|
Balance March 31, 2018
|
|
|
50,000
|
|
|
$
|
1,000
|
|
|
|
11,229,144
|
|
|
$
|
168,437
|
|
|
$
|
97,141,970
|
|
|
$
|
(92,066,722
|
)
|
|
$
|
5,244,685
|
|
|
Net
income for the three months ended June 30, 2018
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
170,474
|
|
|
|
170,474
|
|
|
Issuance
of shares related to conversion of note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
85,299
|
|
|
|
1,279
|
|
|
|
325,416
|
|
|
|
—
|
|
|
|
326,695
|
|
|
Shares
retired from exercise of puts
|
|
|
—
|
|
|
|
—
|
|
|
|
(223,755
|
)
|
|
|
(3,356
|
)
|
|
|
(446,644
|
)
|
|
|
—
|
|
|
|
(450,000
|
)
|
|
Balance June 30, 2018
|
|
|
50,000
|
|
|
$
|
1,000
|
|
|
|
11,090,688
|
|
|
$
|
166,360
|
|
|
$
|
97,020,742
|
|
|
$
|
(91,896,248
|
)
|
|
$
|
5,291,854
|
|
The accompanying notes are an
integral part of these condensed consolidated financial
statements.
6
DOLPHIN ENTERTAINMENT, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 1 – GENERAL
Dolphin
Entertainment, Inc., a Florida corporation (the “Company,”
“Dolphin,” “we,” “us” or “our”), is a leading independent
entertainment marketing and premium content development company.
Through its acquisitions of 42West LLC (“42West”), The Door
Marketing Group LLC (“The Door”) and Viewpoint Computer Animation
Incorporated (“Viewpoint”), the Company provides expert strategic
marketing and publicity services to all of the major film studios,
and many of the leading independent and digital content providers,
A-list celebrity talent, including actors, directors, producers,
celebrity chefs and recording artists. The Company also provides
strategic marketing publicity services and creative brand
strategies for prime hotel and restaurant groups. The strategic
acquisitions of 42West, The Door and Viewpoint bring together
premium marketing services with premium content production,
creating significant opportunities to serve respective constituents
more strategically and to grow and diversify the Company’s
business. Dolphin’s content production business is a
well-established, leading entertainment producer, committed to
distributing premium, best-in-class film and digital entertainment.
Dolphin produces original feature film and digital programming
primarily aimed at family and young adult markets.
Basis of
Presentation
The accompanying unaudited
condensed consolidated financial statements include the accounts of
Dolphin, and all of its wholly owned subsidiaries, comprising
Dolphin Films, Inc. (“Dolphin Films”), Cybergeddon Productions,
LLC, Dolphin SB Productions LLC, Dolphin Max Steel Holdings, LLC
(“Max Steel Holdings”), Dolphin JB Believe Financing, LLC, Dolphin
JOAT Productions, LLC, 42West, The Door and Viewpoint.
The Company enters into
relationships or investments with other entities, and, in certain
instances, the entity in which the Company has a relationship or
investment may qualify as a variable interest entity (“VIE”). The
Company consolidates a VIE in its financial statements if the
Company is deemed to be the primary beneficiary of the VIE. The
primary beneficiary is the party that has the power to direct
activities that most significantly impact the operations of the VIE
and has the obligation to absorb losses or the right to benefits
from the VIE that could potentially be significant to the VIE. The
Company has included in its condensed consolidated financial
statements the following VIEs: Max Steel Productions, LLC, and JB
Believe, LLC.
The unaudited condensed
consolidated financial statements have been prepared in accordance
with United States generally accepted accounting principles (“U.S.
GAAP”) for interim financial information and the instructions to
Form 10-Q under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required
by U.S. GAAP for complete financial statements. In the opinion of
the Company’s management, all adjustments (consisting only of
normal recurring adjustments) considered necessary for a fair
presentation have been reflected in these unaudited condensed
consolidated financial statements. Operating results for the three
and six months ended June 30, 2019 are not necessarily indicative
of the results that may be expected for the fiscal year ending
December 31, 2019. The condensed consolidated balance sheet at
December 31, 2018 has been derived from the audited financial
statements at that date but does not include all the information
and footnotes required by U.S. GAAP for complete financial
statements. The accompanying unaudited condensed consolidated
financial statements should be read together with the audited
consolidated financial statements and related notes included in the
Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2018.
Reclassifications
Reclassifications have been
made to our condensed consolidated financial statements for the
prior year period to conform to classifications used in 2019.
7
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Use of Estimates
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during
the reporting period. The most significant estimates made by
management in the preparation of the financial statements relate to
the expected revenue and costs for investments in digital and
feature film projects; estimates of sales returns and other
allowances, provisions for doubtful accounts and impairment
assessments for investment in feature film projects, goodwill and
intangible assets. Actual results could differ materially from such
estimates.
Update to Significant Accounting Policies
Our
significant accounting policies are detailed in "Note 3: Summary of
Significant Accounting Policies" within Item 8 of our Annual Report
on Form 10-K for the year ended December 31, 2018. Significant
changes to our accounting policies as a result of adopting ASU No.
2016-02, Leases (Topic 842) on January 1, 2019 are discussed
below:
Leases
In
February 2016, the FASB issued ASU 2016-02, Leases ,
which requires all assets and liabilities arising from leases to be
recognized in our consolidated balance sheets. The Company adopted
this new accounting guidance effective January 1, 2019. In July
2018, the FASB added an optional transition method which the
Company elected upon adoption of the new standard. This allowed us
to recognize and measure leases existing at January 1, 2019 without
restating comparative information. In addition, the Company elected
to apply the package of practical expedients permitted under the
transition guidance within the new standard, which among other
things, allows us to carry forward the historical lease
classification.
The
Company determines if an arrangement is a lease at the lease
commencement date. In addition to the Company’s lease agreements,
we review all material new vendor arrangements for potential
embedded lease obligations. The asset balance related to operating
leases is presented within “right-of-use (ROU) asset” on the
Company’s consolidated balance sheet. The current and noncurrent
balances related to operating leases are presented as “Lease
liability”, in their respective classifications, on the Company’s
consolidated balance sheet.
The lease
liability is recognized based on the present value of the remaining
fixed lease payments discounted using the Company’s incremental
borrowing rate as of January 1, 2019. The ROU asset is calculated
based on the lease liability adjusted for any lease payments paid
to the lessor at or before the commencement date (i.e. prepaid
rent) and initial direct costs incurred by Dolphin and excluding
any lease incentives received from the Lessor.
The lease
term for purposes of lease accounting may include options to extend
or terminate the lease when it is reasonably certain that the
Company will exercise that option as of the commencement date of
the lease. For operating leases, the lease expense is recognized on
a straight-line basis over the lease term. The Company accounts for
its lease and non-lease components as a single component, and
therefore both are included in the calculation of lease liability
recognized on the consolidated balance sheets. See Note 18 for
further discussion.
The
Company did not adopt any other accounting pronouncement during the
three and six months ended June 30, 2019.
8
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Recent Accounting Pronouncements
Accounting Guidance not
yet adopted
In March
2019, the FASB issued new guidance on film production costs ASU
2019-02, (Entertainment Films- Other Assets – Film Costs (Subtopic
926-20)). The new guidance is effective for fiscal years beginning
after December 15, 2019 and interim periods within
those fiscal years and may be adopted early. The new guidance
aligns the accounting for the production costs of an episodic
series with those of a film by removing the content distinction for
capitalization. It also addresses presentation, requires new
disclosures for produced and licensed content and addresses cash
flow classification for license agreements to better reflect the
economics of an episodic series. The Company is currently
evaluating the impact of the new guidance on its consolidated
financial statements.
In
October 2018, the FASB issued new guidance on consolidation
ASU 2018-17, Consolidation (Topic 810): Targeted Improvements
to Related Party Guidance for Variable Interest Entities. The new
guidance is effective for fiscal years beginning after December 15,
2019 and interim periods within those fiscal years and should be
applied retrospectively with a cumulative effect adjustment to
retained earnings at the beginning of the earliest period
presented. Early adoption is permitted. The new guidance provides
that indirect interests held through related parties in common
control arrangements should be considered on a proportional basis
for determining whether fees paid to decision makers and service
providers are variable interests. The Company is currently
evaluating the impact of the new guidance on its consolidated
financial statements.
In
August 2018, the FASB issued new guidance on fair value
measurement (ASU 2018-13, Fair Value Measurement (Topic
820): Disclosure Framework—Changes to the Disclosure Requirements
for Fair Value Measurement) . The new guidance is effective
for fiscal years beginning after December 15, 2019 and interim
periods within those fiscal years. Early adoption is permitted. The
guidance modifies the disclosure requirements on fair value by
removing some requirements, modifying others, adding changes in
unrealized gains and losses included in other comprehensive income
(loss) for recurring Level 3 fair value measurements, and providing
the option to disclose certain other quantitative information with
respect to significant unobservable inputs in lieu of a weighted
average. The Company is currently evaluating the impact of the new
guidance on its consolidated financial statements.
In June
2016, the FASB issued new guidance on measurement of credit losses
(ASU 2016-13, Measurement of Credit Losses on Financial
Instruments) with subsequent amendments issued in November 2018
(ASU 2018-19) and April 2019 (ASU 2019-04). This update changes the
accounting for credit losses on loans and held-to-maturity debt
securities and requires a current expected credit loss (CECL)
approach to determine the allowance for credit losses. It is
applicable to trade accounts receivable. The guidance is effective
for fiscal years beginning after December 15, 2019 with a
cumulative-effect adjustment to retained earnings as of the
beginning of the year of adoption. Early adoption is permitted. The
Company is currently evaluating the impact of the new guidance on
its consolidated financial statements.
NOTE 2 — GOING
CONCERN
The
accompanying unaudited condensed consolidated financial statements
have been prepared in conformity with U.S. GAAP and contemplate the
continuation of the Company as a going concern. The Company had net
loss of $891,867 and $769,259, respectively for the three and six
months ended June 30, 2019, and had an accumulated deficit of
$95,298,433 as of June 30, 2019. As of June 30, 2019, the Company
had a working capital deficit of $16,143,485 and therefore does not
have adequate capital to fund its obligations as they come due or
to maintain or grow its operations. The Company is dependent upon
funds from the issuance of debt securities, securities convertible
into shares of its common stock, par value $0.015 per share
(“Common Stock”), sales of shares of Common Stock and financial
support of certain shareholders. If the Company is unable to obtain
funding from these sources within the next 12 months, it could be
forced to liquidate.
9
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
These
factors raise substantial doubt about the ability of the Company to
continue as a going concern. The condensed consolidated financial
statements, of which these notes form a part, do not include any
adjustments that might result from the outcome of these
uncertainties. In this regard, management currently plans to raise
any necessary additional funds through additional issuance of its
Common Stock, securities convertible into its Common Stock, debt
securities, as well as available bank and non-bank financing, or a
combination of such financing alternatives. There is no assurance
that the Company will be successful in raising additional capital.
Any issuance of shares of Common Stock or securities convertible
into Common Stock would dilute the equity interests of our existing
shareholders, perhaps substantially. The Company currently has the
rights to several scripts, including one currently in development
for which it intends to obtain financing to produce and release
following which it expects to earn a producer and overhead fee.
There can be no assurances that such production, together with any
other productions, will be commenced or released or that fees will
be realized in future periods or at all. The Company is currently
exploring opportunities to expand the services currently being
offered by 42West, The Door and Viewpoint while reducing expenses
of their respective operations through synergies with the Company.
There can be no assurance that the Company will be successful in
expanding such services or reducing expenses. Under the Company’s
currently effective shelf registration statement on Form S-3, the
Company may sell up to $30,000,000 of equity securities. However,
pursuant to applicable SEC rules, the Company’s ability to sell
securities registered under this shelf registration statement,
during any 12-month period, is limited to an amount less than or
equal to one-third of the aggregate market value of the its common
stock held by non-affiliates; therefore, there is no assurance that
the Company will be able to raise capital through the issuance and
sale of equity securities under this registration statement,
irrespective of whether there is market demand for such
securities.
NOTE 3 — MERGERS AND ACQUISITIONS
Viewpoint
On
October 31, 2018, (the “Viewpoint Closing Date”) the Company
acquired all of the issued and outstanding capital stock of
Viewpoint, a Massachusetts corporation (the “Viewpoint Purchase”),
pursuant to a share purchase agreement (the “Viewpoint Purchase
Agreement”), among the Company and the former holders of
Viewpoint’s outstanding capital stock (the “Viewpoint
Shareholders”). Viewpoint is a full-service creative branding and
production house that has earned a reputation as one of the top
producers of promotional and brand-support videos for a wide
variety of leading cable networks, media companies and
consumer-product brands.
The total consideration
payable to the Viewpoint Shareholders in respect of the Viewpoint
Purchase comprises the following: (i) $500,000 in shares of Common
Stock, based on a price per share of Common Stock of $2.29, (ii)
$1.5 million in cash (as adjusted for certain working capital and
closing adjustments and transaction expenses). On the Viewpoint
Closing Date, the Company issued to the Viewpoint Shareholders
218,088 shares of Common Stock and paid the Viewpoint Shareholders
an aggregate of $750,000 in cash (the “Initial Consideration”),
adjusted for working capital, indebtedness and certain transaction
expenses. Pursuant to the Viewpoint Purchase Agreement, the Company
paid to the Viewpoint Shareholders an additional $230,076 cash
($250,000 less a working capital adjustment) on April 30, 2019 and
has agreed to pay $250,000 on each of October 31, 2019 and April
30, 2020 for a total of $750,000, less any adjustments for working
capital (the “Post Closing Consideration” and, together with the
Initial Consideration, the “Viewpoint Purchase Consideration”). The
Viewpoint Purchase Agreement contains customary representations,
warranties and covenants of the parties thereto. The Common Stock
issued as part of the Initial Consideration has not been registered
under the Securities Act of 1933, as amended (the “Securities
Act”).
As a condition to the
Viewpoint Purchase, two of the Viewpoint Shareholders, Carlo
DiPersio and David Shilale have entered into employment agreements
with the Company to continue as employees after the closing of the
Viewpoint Purchase. Mr. DiPersio’s employment agreement is through
December 31, 2020 and the contract defines base compensation and a
bonus structure based on Viewpoint achieving certain financial
targets. Mr. Shilale’s employment agreement is for a period of
three years from the Viewpoint Closing Date and the contract
defines the base compensation and a commission structure based on
Viewpoint achieving certain financial targets. The bonus for Mr.
Shilale is determined at the sole discretion of the Company’s board
of directors and management. Neither agreement provides for
guaranteed increases to the base salary. The employment agreements
contain provisions for termination and as a result of death or
disability and entitles the employee to vacations and to
participate in all employee benefit plans offered by the
Company.
10
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The provisional
acquisition-date fair value of the consideration transferred
totaled $1,960,165, which consisted of the following:
|
|
|
|
| |
|
Common Stock issued at
closing (218,088 shares)
|
|
$
|
427,452
|
|
|
Cash Consideration paid at
closing
|
|
|
750,000
|
|
|
Working capital adjustment,
net
|
|
|
32,713
|
|
|
Cash Installment paid on
April 30, 2019
|
|
|
250,000
|
|
|
Cash Installment to be paid
on October 31, 2019 (included in other current liabilities)
|
|
|
250,000
|
|
|
Cash Installment to be paid
on April 30, 2020 (included in other current liabilities)
|
|
|
250,000
|
|
|
|
|
$
|
1,960,165
|
|
The Company
has engaged an independent third-party valuation expert to
determine the fair values of the various forms of consideration
transferred, which is not yet complete. The final amount of
consideration may potentially change due to any working capital or
other closing adjustments, which have not yet been determined.
The fair
value of the 218,088 shares of Common Stock issued on the Viewpoint
Closing Date was determined based on the closing market price of
the Company’s Common Stock on the Viewpoint Closing Date of $1.96
per share.
The
following table summarizes the provisional fair values of the
assets acquired and liabilities assumed at the Viewpoint Closing
Date (as adjusted). Amounts in the table are provisional estimates
that may change, as described below.
|
|
|
|
| |
|
Cash
|
|
$
|
206,950
|
|
|
Accounts receivable
|
|
|
503,906
|
|
|
Other current assets
|
|
|
102,411
|
|
|
Property, equipment and
leasehold improvements
|
|
|
183,877
|
|
|
Prepaid expenses
|
|
|
32,067
|
|
|
Intangible assets
|
|
|
450,000
|
|
|
Total identifiable assets
acquired
|
|
|
1,479,211
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
(165,284
|
)
|
|
Accounts payable
|
|
|
(77,394
|
)
|
|
Deferred tax liability
|
|
|
(182,416
|
)
|
|
Contract liability
|
|
|
(190,854
|
)
|
|
Total liabilities assumed
|
|
|
(615,948
|
)
|
|
Net identifiable assets
acquired
|
|
|
863,263
|
|
|
Goodwill
|
|
|
1,096,902
|
|
|
Net assets acquired
|
|
$
|
1,960,165
|
|
Of the provisional fair
value of the $450,000 of acquired identifiable intangible assets,
$220,000 was assigned to customer relationships (5 years useful
life) and $100,000 was assigned to the trade name (5-year useful
life), that were recognized at fair value on the acquisition date.
The customer relationships will be amortized using an accelerated
method, and the trade name will be amortized using the
straight-line method. In addition, the Company recognized a
favorable lease intangible asset from the Company’s Massachusetts
office lease in the amount of $130,000. The favorable lease
intangible asset was amortized using the straight-line method over
the remaining lease term of 26 months. On January 1, 2019, the
Company adopted ASC 842 and reclassified the favorable lease asset
recognized at the date of acquisition to right-of-use asset. The
unamortized balance of the favorable lease asset on January 1, 2019
was $120,000.
The provisional fair value
of accounts receivable acquired is $503,906, with the gross
contractual amount being $509,406. The Company expects $5,500 to be
uncollectible.
The
provisional fair values of property and equipment and leasehold
improvements of $183,877, and other assets of $102,411, are based
on Viewpoint’s carrying values prior to the acquisition, which
approximate their provisional fair values.
11
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The provisional amount of $1,096,902 of goodwill was
assigned to the entertainment publicity and marketing segment. The
goodwill recognized is attributable primarily to expectations of
continued successful efforts to obtain new customers, buyer
specific synergies and the assembled workforce of Viewpoint.
Unaudited Pro Forma Consolidated Statements of
Operations
The following represents the Company’s unaudited pro
forma consolidated operations for the three and six months ended
June 30, 2018 as if Viewpoint had been acquired on January 1, 2018
and its results had been included in the consolidated results of
the Company for such period:
|
|
|
|
|
|
|
|
| |
|
|
|
For the
three months ended June 30,
2018
|
|
|
For the six
months ended June 30,
2018
|
|
|
Revenue
|
|
$
|
6,262,785
|
|
|
$
|
14,335,476
|
|
|
Net
(loss) income
|
|
$
|
(107,321
|
)
|
|
$
|
1,210,392
|
|
The pro forma amounts have been calculated after applying
the Company’s accounting policies to the financial statements of
Viewpoint and adjusting the combined results of the Company and
Viewpoint to reflect the amortization that would have been charged
assuming the intangible assets had been recorded on January 1, 2018
and applying the Company’s effective tax rate to the net income of
Viewpoint.
The impact of the Viewpoint Acquisition on the Company’s
actual results for periods following the acquisition may differ
significantly from that reflected in this unaudited pro forma
information for a number of reasons. As a result, this unaudited
pro forma information is not necessarily indicative of what the
combined company’s financial condition or results of operations
would have been had the acquisition been completed on January 1,
2018, as provided in this pro forma financial information. In
addition, the pro forma financial information does not purport to
project the future financial condition and results of operations of
the combined company.
The following table summarizes the original and revised
estimated fair values of the assets acquired and liabilities
assumed at the acquisition date of October 31, 2018 and the related
measurement period adjustments to the fair values recorded during
the six months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
October 31,
2018
(As initially reported)
|
|
|
Measurement
Period Adjustments
|
|
|
June 30,
2019
(As adjusted)
|
|
|
Cash
|
|
$
|
206,950
|
|
|
$
|
—
|
|
|
$
|
206,950
|
|
|
Accounts
receivable
|
|
|
503,906
|
|
|
|
—
|
|
|
|
503,906
|
|
|
Other
current assets
|
|
|
102,411
|
|
|
|
—
|
|
|
|
102,411
|
|
|
Property,
equipment and leasehold improvements
|
|
|
183,877
|
|
|
|
—
|
|
|
|
183,877
|
|
|
Prepaid
expenses
|
|
|
32,067
|
|
|
|
—
|
|
|
|
32,067
|
|
|
Intangible assets
|
|
|
450,000
|
|
|
|
—
|
|
|
|
450,000
|
|
|
Total
identifiable assets acquired
|
|
|
1,479,211
|
|
|
|
—
|
|
|
|
1,479,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
(165,284
|
)
|
|
|
—
|
|
|
|
(165,284
|
)
|
|
Accounts payable
|
|
|
(77,394
|
)
|
|
|
—
|
|
|
|
(77,394
|
)
|
|
Deferred
tax liability
|
|
|
(190,854
|
)
|
|
|
—
|
|
|
|
(190,854
|
)
|
|
Contract
liability
|
|
|
(206,636
|
)
|
|
|
24,220
|
|
|
|
(182,416
|
)
|
|
Total
liabilities assumed
|
|
|
(640,168
|
)
|
|
|
24,220
|
|
|
|
(615,948
|
)
|
|
Net
identifiable assets acquired
|
|
|
839,043
|
|
|
|
24,220
|
|
|
|
863,263
|
|
|
Goodwill
|
|
|
1,141,046
|
|
|
|
(44,144
|
)
|
|
|
1,096,902
|
|
|
Net
assets acquired
|
|
$
|
1,980,089
|
|
|
$
|
(19,924
|
)
|
|
$
|
1,960,165
|
|
12
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The above fair values of
assets acquired and liabilities assumed are based on the
information that was available as of the Viewpoint Closing Date to
estimate the fair value of assets acquired and liabilities assumed.
As of October 31, 2018, the Company recorded the identifiable net
assets acquired of $839,043 as shown in the table above in its
consolidated balance sheet. During the six months ended June 30,
2019, the Company’s measurement period adjustments of $24,220 were
made and, accordingly, the Company recognized these adjustments in
its June 30, 2019 condensed consolidated balance sheet to reflect
the adjusted identifiable net assets acquired of $863,263 as shown
in the table above. The Company also made a provisional working
capital adjustment of $19,924 that was deducted from the second
installment paid to the Viewpoint Shareholders on April 30,
2019.
The following is a
reconciliation of the initially reported fair value to the adjusted
fair value of goodwill:
|
|
|
|
| |
|
Goodwill originally reported
at October 31, 2018
|
|
$
|
1,141,046
|
|
|
Changes to estimated fair
values
|
|
|
|
|
|
Deferred
tax liability
|
|
|
(24,220
|
)
|
|
Working
capital adjustment
|
|
|
(19,924
|
)
|
|
Adjusted goodwill reported at
June 30, 2019
|
|
$
|
1,096,902
|
|
The estimated fair value of
the deferred tax liability decreased by $24,220 primarily due to
the estimated expected future tax rate applied.
The Door
On July 5, 2018 (the
“Closing Date”), the Company, entered into an Agreement and Plan of
Merger (the “Merger Agreement”), in respect of its acquisition of
The Door. On the Closing Date, The Door merged with and into Merger
Sub, with Merger Sub surviving the merger and continuing as a
wholly owned subsidiary of the Company. Upon consummation of the
Merger, Merger Sub changed its name to The Door Marketing Group,
LLC. The Door is an entertainment public relations agency, offering
talent publicity, strategic communications and entertainment
content marketing primarily in the hospitality sector.
The total consideration
payable to the former members of The Door (the “Members”) in
respect of the Merger comprises the following: (i) $2.0 million in
shares of the Common Stock, based on a price per share of Common
Stock of $3.25, (ii) $2.0 million in cash (as adjusted for certain
working capital and closing adjustments and transaction expenses)
and (iii) up to an additional $7.0 million of contingent
consideration in a combination of cash and shares of Common Stock
upon the achievement of specified financial performance targets
over a four-year period as set forth in the Merger Agreement (the
“Contingent Consideration”). On the Closing Date, the Company
issued to the Members 307,692 shares of Common Stock and paid the
Members an aggregate of $1.0 million in cash (the “Initial
Consideration”). In October of 2018, the Company agreed to advance
$274,500 of the second installment due January 3, 2019 to the
Members so they could meet their tax obligations. Pursuant to the
Merger Agreement, on January 3, 2019, the Company paid an aggregate
of $725,500 and issued 307,692 shares of Common Stock to the
Members (the “Post-Closing Consideration” and, together with the
Initial Consideration and the Contingent Consideration, the “Merger
Consideration”). The Merger Agreement contains customary
representations, warranties and covenants of the parties thereto.
The Common Stock issued as Stock Consideration has not been
registered under the Securities Act.
Each of the Members has
entered into a four-year employment agreement with The Door,
pursuant to which each Member has agreed not to transfer any shares
of Common Stock received as consideration for the Merger
(the “Share Consideration”) in the first year following the
closing date of the merger, no more than 1/3 of such Share
Consideration in the second year and no more than an additional 1/3
of such Share Consideration in the third year.
13
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
On the Closing Date, the
Company entered into a registration rights agreement with the
Members (the “Registration Rights Agreement”), pursuant to
which the Members are entitled to rights with respect to the
registration of the Share Consideration under the Securities Act.
All fees, costs and expenses of underwritten registrations under
the Registration Rights Agreement will be borne by the Company,
other than underwriting discounts and commissions. At any time
after July 5, 2019, the Company will be required, upon the request
of such Members holding at least a majority of the Share
Consideration received by the Members, to file up to two
registration statements on Form S-3 covering up to 25% of the Share
Consideration.
The
acquisition-date fair value of the consideration transferred
totaled $5,999,323, which consisted of the following:
|
|
|
|
| |
|
Common Stock issued at closing (307,692 shares)
|
|
$
|
1,123,077
|
|
|
Common Stock issued on January 3, 2019 (307,692 shares)
|
|
|
1,123,077
|
|
|
Cash paid to Members’ on Closing Date
|
|
|
882,695
|
|
|
Members’ transaction costs paid on Closing Date
|
|
|
117,305
|
|
|
Cash paid October 2018
|
|
|
274,500
|
|
|
Cash paid on January 3, 2019
|
|
|
725,500
|
|
|
Contingent Consideration
|
|
|
1,620,000
|
|
|
Working capital adjustment ($46,000 paid in cash on March 12, 2019.
$87,169 will be issued in shares of stock at a later date)
|
|
|
133,169
|
|
|
|
|
$
|
5,999,323
|
|
The
Company has engaged an independent third-party valuation expert to
determine the fair values of the various forms of consideration
transferred. The fair values of the 307,692 shares of Common Stock
issued on the Closing Date and the 307,692 shares of Common Stock
issued on January 3, 2019 were determined based on the closing
market price of the Company’s Common Stock on the Closing Date of
$3.65 per share.
The
Contingent Consideration arrangement requires that the Company
issue up to 1,538,462 shares of Common Stock and
up to $2 million in cash to the Members on achievement of adjusted
net income targets, (as set forth in the Merger Agreement), based
on the operations of The Door over the four-year period beginning
January 1, 2018. The fair value of the Contingent
Consideration at the Closing Date was $1,620,000. The fair value of
the Contingent Consideration was estimated using a Monte Carlo
Simulation model, which incorporates significant inputs that are
not observable in the market, and thus represents a Level 3
measurement as defined in ASC 820. The unobservable inputs utilized
for measuring the fair value of the Contingent Consideration
reflect management’s own assumptions about the assumptions that
market participants would use in valuing the Contingent
Consideration as of the Closing Date. The key assumptions in
applying the Monte Carlo Simulation model are as follows: a
risk-free discount rate of between 2.11% and 2.67% based on the U.S
government treasury obligation with a term similar to that of the
contingent consideration, a discount rate of between 20.0% and
20.5%, and an annual asset volatility estimate of 62.5%. Changes in
the fair value on the Contingent Consideration are recorded at each
balance sheet date with changes reflected as gains or losses on the
condensed consolidated statement of operations. See Note 10
for further discussion on the fair value as of June 30, 2019.
14
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The
following table summarizes the fair values of the assets acquired
and liabilities assumed at the Door Closing Date.
|
|
|
|
| |
|
Cash
|
|
$
|
89,287
|
|
|
Accounts receivable
|
|
|
469,344
|
|
|
Property, equipment and leasehold improvements
|
|
|
105,488
|
|
|
Prepaid expense
|
|
|
31,858
|
|
|
Other assets
|
|
|
30,667
|
|
|
Intangible assets
|
|
|
2,110,000
|
|
|
Total identifiable assets acquired
|
|
|
2,836,644
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
|
(203,110
|
)
|
|
Accounts payable
|
|
|
(1,064
|
)
|
|
Unearned income
|
|
|
(15,500
|
)
|
|
Other liabilities
|
|
|
(1,913
|
)
|
|
Deferred tax liabilities
|
|
|
(593,949
|
)
|
|
Total liabilities assumed
|
|
|
(815,536
|
)
|
|
Net identifiable assets acquired
|
|
|
2,021,108
|
|
|
Goodwill
|
|
|
3,978,215
|
|
|
Net assets acquired
|
|
$
|
5,999,323
|
|
Of the calculation of
$2,110,000 of acquired intangible assets, $1,010,000 was assigned
to customer relationships (10-year useful life), $670,000 was
assigned to the trade name (10-year useful life), $260,000 was
assigned to non-competition agreements (2-year useful life) and
$170,000 was assigned to a favorable lease from the New York City
location (26 months useful life), that were recognized at fair
value on the Closing Date. On January 1, 2019, the Company adopted
ASC 842 and reclassified the favorable lease asset recognized at
the date of acquisition to right-of-use asset. The unamortized
balance of the favorable lease asset on January 1, 2019 was
$130,769.
The fair value of accounts
receivable acquired is $469,344.
The
fair values of property and equipment and leasehold improvements of
$105,488, and other assets of $62,525, are based on The Door’s
carrying values prior to the Merger, which approximate their fair
values.
The amount of $3,978,215 of
goodwill was assigned to the Entertainment publicity and marketing
segment. The goodwill recognized is attributable primarily to
expectations of continued successful efforts to obtain new
customers, buyer specific synergies and the assembled workforce of
The Door.
Unaudited Pro Forma
Consolidated Statements of Operations
The following presents the
Company’s pro forma consolidated operations for the three and six
months ended June 30, 2018 as if The Door had been acquired on
January 1, 2018 and its results had been included in the
consolidated results of the Company for such period:
|
|
|
|
|
|
|
|
| |
|
|
|
For the
three months ended June 30,
2018
|
|
|
For the six
months ended June 30,
2018
|
|
|
Revenue
|
|
$
|
6,848,310
|
|
|
$
|
14,247,354
|
|
|
Net
income
|
|
$
|
519,443
|
|
|
$
|
1,509,350
|
|
These amounts have been
calculated after applying the Company’s accounting policies and
adjusting the results of The Door to reflect (a) the amortization
that would have been charged, assuming the intangible assets had
been recorded on January 1, 2018 and (b) interest expense from the
convertible note payable used to partially pay the consideration
for The Door, calculated as if the convertible note payable was
outstanding as of January 1, 2018.
15
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The impact of the
acquisition of The Door on the Company’s actual results for periods
following the acquisition may differ significantly from that
reflected in this unaudited pro forma information for a number of
reasons. As a result, this unaudited pro forma information is not
necessarily indicative of what the combined company’s financial
condition or results of operations would have been had the
acquisition been completed on January 1, 2018, as provided in this
pro forma financial information. In addition, the pro forma
financial information does not purport to project the future
financial condition and results of operations of the combined
company.
The following table
summarizes the original and revised estimated fair values of the
assets acquired and liabilities assumed at the Closing Date and the
related measurement period adjustments to the fair values recorded
during the six months ended June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
July 5,
2018
(As initially reported)
|
|
|
Measurement
Period Adjustments
|
|
|
June 30,
2019 (As adjusted)
|
|
|
Cash
|
|
$
|
89,287
|
|
|
$
|
—
|
|
|
$
|
89,287
|
|
|
Accounts
receivable
|
|
|
469,344
|
|
|
|
—
|
|
|
|
469,344
|
|
|
Property,
equipment and leasehold improvements
|
|
|
105,488
|
|
|
|
—
|
|
|
|
105,488
|
|
|
Prepaid
expenses
|
|
|
31,858
|
|
|
|
—
|
|
|
|
31,858
|
|
|
Other
assets
|
|
|
30,667
|
|
|
|
—
|
|
|
|
30,667
|
|
|
Intangible assets
|
|
|
2,110,000
|
|
|
|
—
|
|
|
|
2,110,000
|
|
|
Total
identifiable assets acquired
|
|
|
2,836,644
|
|
|
|
—
|
|
|
|
2,836,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
(203,110
|
)
|
|
|
—
|
|
|
|
(203,110
|
)
|
|
Accounts payable
|
|
|
(1,064
|
)
|
|
|
—
|
|
|
|
(1,064
|
)
|
|
Unearned
income
|
|
|
(15,500
|
)
|
|
|
—
|
|
|
|
(15,500
|
)
|
|
Other
liabilities
|
|
|
(1,913
|
)
|
|
|
—
|
|
|
|
(1,913
|
)
|
|
Deferred
tax liability
|
|
|
(584,378
|
)
|
|
|
(9,571
|
)
|
|
|
(593,949
|
)
|
|
Total
liabilities assumed
|
|
|
(805,965
|
)
|
|
|
(9,571
|
)
|
|
|
(815,536
|
)
|
|
Net
identifiable assets acquired
|
|
|
2,030,679
|
|
|
|
(9,571
|
)
|
|
|
2,021,108
|
|
|
Goodwill
|
|
|
3,835,475
|
|
|
|
142,740
|
|
|
|
3,978,215
|
|
|
Net
assets acquired
|
|
$
|
5,866,154
|
|
|
$
|
133,169
|
|
|
$
|
5,999,323
|
|
The above fair values of
assets acquired and liabilities assumed are based on the
information that was available as of the Closing Date to estimate
the fair value of assets acquired and liabilities assumed. As of
the Closing Date, the Company recorded the identifiable net assets
acquired of $2,030,679 as shown in the table above in its condensed
consolidated balance sheet. The Company has reflected adjustments
of $142,740 made during the Company’s measurement period on its
June 30, 2019 condensed consolidated balance sheet to reflect the
adjusted identifiable net assets acquired of $2,021,108 as shown in
the table above.
The following is a
reconciliation of the initially reported fair value to the adjusted
fair value of goodwill:
|
|
|
|
| |
|
Goodwill originally reported
at July 5, 2018
|
|
$
|
3,835,475
|
|
|
Changes to estimated fair
values
|
|
|
|
|
|
Working
capital adjustment
|
|
|
133,169
|
|
|
Deferred
tax liability
|
|
|
9,571
|
|
|
Adjusted goodwill at June 30,
2019
|
|
$
|
3,978,215
|
|
The estimated fair value of
the deferred tax liability increased by $9,571 primarily due to the
estimated expected future tax rate applied.
16
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
42West
On March 30, 2017, the
Company entered into a purchase agreement (the “42West Purchase
Agreement”) pursuant to which the Company acquired 100% of the
membership interests of 42West and 42West became a wholly owned
subsidiary of the Company. 42West is an entertainment public
relations agency offering talent, entertainment and targeted
marketing, and strategic communication services. On January 1,
2019, the Company adopted ASC 842 and reclassified the favorable
lease asset recognized at the date of acquisition to right-of-use
asset. The unamortized balance of the favorable lease asset on
January 1, 2019 was $277,878.
The Company agreed to
settle change of control provisions with certain 42West employees
and former employees by offering cash payments in lieu of shares of
Common Stock. As a result, the Company made payments in the
aggregate amount of (i) $20,000 on February 23, 2018; (ii) $292,112
on March 30, 2018 and (iii) $361,760 of March 29, 2019 related to
the change of control provisions.
Also, in connection with
the 42West acquisition, on March 30, 2017, the Company entered into
put agreements (the “Put Agreements”) with each of the sellers.
Pursuant to the terms and subject to the conditions set forth in
the Put Agreements, the Company has granted the sellers the right,
but not the obligation, to cause the Company to purchase up to an
aggregate of 1,187,087 of their respective shares of Common Stock
received as consideration for the Company’s acquisition of 42West
for a purchase price equal to $9.22 per share during certain
specified exercise periods set forth in the Put Agreements up until
December 2020 (the “Put Rights”). During the three and six months
ended June 30, 2019, respectively, the sellers exercised Put
Rights with respect to an aggregate of 74,891 and 202,602 shares of
Common Stock. The Company paid $65,000 on February 2, 2019, $35,000
on March 13, 2019, $300,000 on April 1, 2019, $75,000 on April 10,
2019, $50,000 on May 6, 2019, $350,000 on June 3, 2019 and $115,500
on June 28, 2019 related to these Put Rights. An additional
$877,500 is due from the exercise of these Put Rights. As of June
30, 2019, the Company had purchased an aggregate of 731,607 shares
of Common Stock from the sellers for an aggregate purchase price of
$6,745,500, of which $175,000 was paid in July of 2019, and
$702,500 is still outstanding.
The Company entered into
Put Agreements with three 42West employees with change of control
provisions in their employment agreements. The Company agreed to
purchase up to 50% of the shares of Common Stock to be received by
the employees in satisfaction of the change of control provision in
their employment agreements. The employees have the right, but not
the obligation, to cause the Company to purchase up to an
additional 20,246 shares of Common Stock in respect of the Earn Out
Consideration.
NOTE 4 — CAPITALIZED PRODUCTION COSTS,
ACCOUNTS RECEIVABLES AND OTHER CURRENT ASSETS
Capitalized
Production Costs
Capitalized production
costs include the unamortized costs of Max Steel and costs
of scripts for projects that have not been developed or produced.
These costs include direct production costs and production overhead
and are amortized using the individual-film-forecast method,
whereby these costs are amortized and participations and residuals
costs are accrued in the proportion that current year’s revenue
bears to management’s estimate of ultimate revenue at the beginning
of the current year expected to be recognized from the
exploitation, exhibition or sale of the motion picture.
Revenues
earned from motion pictures were $0 and $97,961, for the three
ended June 30, 2019 and 2018, respectively, and $78,990 and
$427,153 for the six months ended June 30, 2019 and 2018,
respectively. These revenues were attributable to Max Steel
, the motion picture released on October 14, 2016. The Company
amortized capitalized production costs (included as direct costs)
in the condensed consolidated statements of operations using the
individual film forecast computation method in the amounts of
$53,862 and $203,560 for the three and six months ended June 30,
2018, related to Max Steel. As of each of June 30, 2019, and
December 31, 2018, the Company had a balance of $629,585, recorded
as capitalized production costs related to Max Steel .
The
Company purchased scripts, including one from a related party, for
other motion picture or digital productions and recorded $155,454
and $95,000 in capitalized production costs associated with these
scripts as of June 30, 2019 and December 31, 2018, respectively.
The Company intends to produce these projects, but they were not
yet in production as of June 30, 2019.
17
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
As of
June 30, 2019, and December 31, 2018, the Company had total
capitalized production costs of $785,039 and $724,585,
respectively, net of accumulated amortization, tax incentives and
impairment charges, recorded on its condensed consolidated balance
sheets.
The Company has assessed events and changes
in circumstances that would indicate that the Company should assess
whether the fair value of the productions is less than the
unamortized costs capitalized and did not identify indicators of
impairment.
Accounts
Receivables
The Company entered into
various agreements with foreign distributors for the licensing
rights of our motion picture, Max Steel , in certain
international territories. The Company delivered the motion picture
to the distributors and satisfied the other requirements of these
agreements. For six months ended June 30, 2019, the Company
received $116,067 from a foreign distributor that had been deemed
uncollectible for the year ended December 31, 2018 and recorded it
against bad debt expense in its condensed consolidated statement of
operations. In addition, the domestic distributor of Max
Steel reports to the Company on a quarterly basis the sales of
the motion picture in the United States. As of June 30, 2019, the
Company had $43,275 in accounts receivable related to the domestic
revenues of Max Steel . There were no accounts receivable
related to the revenues of Max Steel at December 31,
2018.
The Company’s trade
accounts receivables related to its entertainment publicity and
marketing segment are recorded at amounts billed to customers, and
presented on the balance sheet, net of the allowance for doubtful
accounts. The allowance is determined by various factors, including
the age of the receivables, current economic conditions, historical
losses and other information management obtains regarding the
financial condition of customers. As of June 30, 2019 and December
31, 2018, the Company had accounts receivable balances of
$2,436,024 and $3,173,107, respectively, net of allowance for
doubtful accounts of $274,861 and $283,022, respectively, related
to its entertainment publicity and marketing segment.
Other Current
Assets
The Company had a balance
of $614,301 and $620,970 in other current assets on its condensed
consolidated balance sheets as of June 30, 2019 and December 31,
2018, respectively. As of June 30, 2019 and December 31, 2018,
these amounts were primarily composed of the following:
Indemnification
asset – The Company recorded in other current assets on its
condensed consolidated balance sheet, $300,000 related to certain
indemnifications associated with the 42West Acquisition.
Prepaid expenses –
The Company records in other assets on its condensed consolidated
balance sheets amounts prepaid for insurance premiums. The amounts
are amortized on a monthly basis over the life of the policies.
Tax Incentives – The
Company has access to government programs that are designed to
promote video production in the jurisdiction. As of June 30, 2019
and December 31, 2018, the Company had a balance of $60,000 from
these tax incentives.
Income tax
receivable – The Company is owed an overpayment from taxes paid
to State of New York. As of each of June 30, 2019 and
December 31, 2018, the Company had a balance of $62,776 from income
tax receivable.
Capitalized costs –
The Company capitalizes certain third-party costs used in the
production of its marketing video content. As of June 30, 2019 and
December 31, 2018, the Company had a balance of $3,576 and $76,313,
respectively related to these third-party costs.
18
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 5 — PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS
Property, equipment and
leasehold improvement consists of:
|
|
|
|
|
|
|
|
| |
|
|
|
June 30,
2019
|
|
|
December
31,
2018
|
|
|
Furniture
and fixtures
|
|
$
|
720,777
|
|
|
$
|
713,075
|
|
|
Computers
and equipment
|
|
|
1,666,104
|
|
|
|
1,636,391
|
|
|
Leasehold
improvements
|
|
|
732,869
|
|
|
|
732,870
|
|
|
|
|
|
3,119,750
|
|
|
|
3,082,336
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
(2,079,729
|
)
|
|
|
(1,899,816
|
)
|
|
Property,
equipment and leasehold improvements, net
|
|
$
|
1,040,021
|
|
|
$
|
1,182,520
|
|
The Company depreciates
furniture and fixtures over a useful life of between five and seven
years, computer and equipment over a useful life of between three
and five years and leasehold improvements are amortized over the
remaining term of the related leases. The Company recorded
depreciation and amortization expense of $89,306 and $180,428 for
the three and six months ended June 30, 2019, respectively.
NOTE 6 — INVESTMENT
At June
30, 2019, investments, at cost, consisted of 344,980 shares of
common stock of The Virtual Reality Company (“VRC”), a privately
held company. In exchange for services rendered by 42West to VRC
during 2015, 42West received both cash consideration and a
promissory note that was convertible into shares of common stock of
VRC. On April 7, 2016, VRC closed an equity financing round
resulting in common stock being issued to a third-party investor.
This transaction triggered the conversion of all outstanding
promissory notes held by 42West into shares of common stock of VRC.
The Company’s investment in VRC represents less than a 1%
noncontrolling ownership interest in VRC. The Company had a balance
of $220,000 on its condensed consolidated balance sheets as of both
June 30, 2019 and December 31, 2018, related to this
investment.
NOTE 7 — DEBT
Loan and Security
Agreement
During
2016, Max Steel Holdings, a wholly owned subsidiary of Dolphin
Films, entered into a loan and security agreement (the “P&A
Loan”) providing for a non-revolving credit facility in an
aggregate principal amount of up to $14,500,000 that matured on
August 25, 2017. Proceeds of the credit facility in the aggregate
amount of $12,500,000 were used to pay a portion of the print and
advertising expenses (“P&A”) of the domestic distribution of
Max Steel. Repayment of the loan was intended to be made from
revenues generated by Max Steel in the United States. The loan was
partially secured by a $4,500,000 corporate guaranty from an
unaffiliated third-party associated with the film, of which Dolphin
provided a backstop guaranty of $620,000. The Company also granted
the lender a security interest in bank account funds totaling
$1,250,000. Once it was determined that the Max Steel would
not generate sufficient funds to repay the lender, the unaffiliated
party paid the lender the $4,500,000 to reduce the loan balance and
the lender applied the $1,250,000 of the funds in the Company’s
bank account to the reduce the loan balance. The loan is also
secured by substantially all of the assets of Max Steel Holdings.
As a result, if the lender forecloses on the collateral securing
the loan, Max Steel Holding will lose the copyright for Max Steel
and, consequently, will no longer receive any revenues from the
domestic distribution of Max Steel. In addition, the Company would
impair the entire capitalized production costs of Max Steel
included as an asset on its balance sheet, which as of June 30,
2019 was $629,585. Amounts borrowed under the credit facility
accrue interest at either (i) a fluctuating per annum rate equal to
the 5.5% plus a base rate or (ii) a per annum rate equal to 6.5%
plus the LIBOR determined for the applicable interest period, as
determined by the borrower.
As of
June 30, 2019 and December 31, 2018, the Company had outstanding
balances of $699,542 and $682,842, respectively, related to this
agreement recorded on its condensed consolidated balance sheets in
the caption debt. On its condensed consolidated statement of
operations for the three and six months ended June 30, 2019, the
Company recorded interest expense of $20,549 and $47,249,
respectively, and $51,884 and $112,491 for the three and six months
ended June 30, 2018, respectively, related to the P&A Loan. For
the six months ended June 30, 2018, the Company also recorded
$500,000 in direct costs from loan proceeds that were not used by
the distributor for the marketing of the film and returned to the
lender.
19
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Production Service
Agreement
During
2014, Dolphin Films entered into a financing agreement to produce
Max Steel (the “Production Service Agreement”). The
Production Service Agreement was for a total amount of $10,419,009
with the lender taking a $892,619 producer fee. The Production
Service Agreement contained repayment milestones to be made during
2015, which, if not met, accrued interest at a default rate of 8.5%
per annum above the published base rate of HSBC Private Bank (UK)
Limited until maturity on January 31, 2016 or the release of the
movie. Due to a delay in the release of Max Steel , the
Company did not make the repayments as prescribed in the Production
Service Agreement. As a result, the Company has balances in accrued
interest of $1,698,280 and $1,624,754, respectively, as of June 30,
2019 and December 31, 2018 in other current liabilities on the
Company’s condensed consolidated balance sheets. The loan was
partially secured by international distribution agreements entered
into by the Company prior to the commencement of principal
photography and the receipt of tax incentives. As a condition to
the Production Service Agreement, the Company acquired a completion
guarantee from a bond company for the production of the motion
picture. The funds for the loan were held by the bond company and
disbursed as needed to complete the production in accordance with
the approved production budget. The Company recorded debt as funds
were transferred from the bond company for the production.
As of June 30, 2019, and
December 31, 2018, the Company had outstanding balances of
$1,612,919 and $1,728,986, respectively, in the caption debt
related to this Production Service Agreement on its condensed
consolidated balance sheets, not including the accrued interest
discussed above and included in other current liabilities.
Line of Credit
On March 15, 2018, 42West
entered into a business loan agreement with BankUnited, N.A. for a
revolving line of credit (the “Loan Agreement”). The Loan Agreement
matures on March 15, 2020 and bears interest on the outstanding
balance at the bank’s prime rate plus 0.25% per annum. The maximum
amount that can be drawn on the revolving line of credit is
$2,250,000 with a sublimit of $750,000 for standby letters of
credit. Amounts outstanding under the Loan Agreement are secured by
42West’s current and future inventory, chattel paper, accounts,
equipment and general intangibles. On March 28, 2018, the Company
drew $1,690,000 under the Loan Agreement to purchase 183,296 shares
of Common Stock, pursuant to the Put Agreements. As of June 30,
2019 and December 31, 2018, the outstanding balance on the line of
credit was $1,700,390.
The Loan Agreement contains
customary affirmative covenants, including covenants regarding
maintenance of a maximum debt to total net worth ratio of at least
4.0:1.0 and a minimum debt service coverage of 1.40x based on
fiscal year-end audit to be calculated as provided in the Loan
Agreement. Further, the Loan Agreement contains customary negative
covenants, including those that, subject to certain exceptions,
restrict the ability of 42West to incur additional indebtedness,
grant liens, make loans, investments or certain acquisitions, or
enter into certain types of agreements . Upon the occurrence of an event of
default, the bank may accelerate the maturity of the loan and
declare the unpaid principal balance and accrued but unpaid
interest immediately due and payable. In the event of 42West’s
insolvency, such outstanding amounts will automatically become due
and payable. 42West may prepay any amounts outstanding under the
Loan Agreement without penalty. As of June 30, 2019, the Company
was in compliance with all covenants under the Loan Agreement.
20
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 8 — NOTES PAYABLE
Convertible Notes
2019 Lincoln Park
Note
On May 20, 2019, the
Company entered into a securities purchase agreement with Lincoln
Park Capital Fund LLC, an Illinois limited liability company
(“Lincoln Park”), pursuant to which the Company agreed to issue and
sell to Lincoln Park a senior convertible promissory note in an
initial principal amount of $1,100,000 (the “Lincoln Park Note”) at
a purchase price of $1,000,000 (representing an original issue
discount of approximately 9.09%), together with warrants to
purchase up to 137,500 shares of Common Stock (the “Lincoln Park
Warrants”) at an exercise price of $2.00 per share. The
securities purchase agreement provides for issuance of warrants to
purchase 137,500 shares of Common Stock on each of the second,
fourth and sixth month anniversaries of the securities purchase
agreement if any of the balance remains outstanding on such dates.
The Lincoln Park Note is convertible at any time into shares of
Common Stock (the “Conversion Shares”) at an initial conversion
price equal to the lower of (a) $5.00 per share and (B) the lower
of (i) the lowest intraday sale price of the Common Stock on the
applicable conversion date and (ii) the average of the three lowest
closing sales prices of the Common Stock during the twelve
consecutive trading days ending on and including the trading day
immediately preceding the conversion date, subject in the case of
this clause (B), to a floor of $1.00 per share. If an event
of default under the Lincoln Park Note occurs prior to maturity,
the Lincoln Park Note will be convertible into share of Common
Stock at a 15% discount to the applicable conversion price.
Outstanding principal under the Lincoln Park Note will not accrue
interest, except upon an event of default, in which case interest
at a default rate of 18% per annum would accrue until such event of
default is cured. The Lincoln Park Note matures on May 21,
2021 and can be paid at prior to the maturity date without any
penalty.
On May 21, 2019, the date
of the issuance of the Lincoln Park Note, the Company’s Common
Stock had a market value of $1.37 per share. The Company determined
that the Lincoln Park Note contained a beneficial conversion
feature by calculating the amount of shares using the conversion
rate of the Lincoln Park Note of $1.18 per share, (after allocating
a portion of the convertible debt to the warrants based on the fair
value of the warrants) and then calculating the market value of the
shares that would be issued at conversion using the market value of
the Company’s Common Stock on the date of the Lincoln Park Note.
The Company recorded a beneficial conversion feature on the Note of
$166,887 that is amortized and recorded as interest expense over
the life of the Lincoln Park Note. The original issue
discount of $100,000 is amortized and recorded as interest expense
over the life of the Lincoln Park Note. For the three months ended
June 30, 2019, the Company recorded $11,120 of interest expense
from the amortization of the original issue discount and beneficial
conversion feature. As of June 30, 2019, the Company had a
balance of $844,234, net of $95,833 of original debt discount and
$159,933 of beneficial conversion feature, related to the Lincoln
Park Note in noncurrent liabilities on its condensed consolidated
balance sheet.
In connection with the
transactions contemplated by the securities purchase agreement, on
May 20, 2019, the Company entered into a registration rights
agreement with Lincoln Park, pursuant to which the Company agreed
to register the Conversion Shares for resale by Lincoln Park under
the Securities Act, if during the six-month period commencing on
the date of the Registration Rights Agreement, the Company
determines to file a resale registration statement with the
Securities and Exchange Commission.
2019 Convertible
Debt
On March 25, 2019, the
Company issued a convertible promissory note agreement to a
third-party investor and received $200,000 to be used for working
capital. The convertible promissory note bears interest at a rate
of 10% per annum and matures on March 25, 2021. The balance of the
convertible promissory note and any accrued interest may be
converted into shares of Common Stock at the note holder’s option
at any time at a purchase price based on the 30-day trailing
average closing price of the Common Stock. As of June 30, 2019, the
Company had a balance of $200,000 in noncurrent liabilities related
to this convertible promissory note.
21
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
2018 Convertible
Debt
On July 5, 2018, the
Company issued an 8% secured convertible promissory note in the
principal amount of $1.5 million (the “Pinnacle Note”) to Pinnacle
Family Office Investments, L.P. (“Pinnacle”) pursuant to a
Securities Purchase Agreement, dated the same date, between the
Company and Pinnacle. The Company used the proceeds of the
convertible promissory note to finance the Company’s acquisition of
The Door. The Company’s obligations under the Pinnacle Note are
secured primarily by a lien on the assets of The Door and
Viewpoint.
The Company must pay
interest on the principal amount of the Pinnacle Note, at the rate
of 8% per annum, in cash on a quarterly basis. The Pinnacle Note
matures on January 5, 2020. The Company may prepay the Pinnacle
Note in whole, but not in part, at any time prior to maturity;
however, if the Company voluntarily prepays the Pinnacle Note, it
must (i) pay Pinnacle a prepayment penalty equal to 10% of the
prepaid amount and (ii) issue to Pinnacle warrants to purchase
100,000 shares of Common Stock with an exercise price equal to
$3.25 per share. The Pinnacle Note also contains certain customary
events of default. The holder may convert the outstanding principal
amount of the Pinnacle Note into shares of Common Stock at any time
at a price per share equal to $3.25, subject to adjustment for
stock dividends, stock splits, dilutive issuances and subsequent
rights offerings. At the Company’s election, upon a conversion of
the Pinnacle Note, the Company may issue Common Stock in respect of
accrued and unpaid interest with respect to the principal amount of
the Pinnacle Note not converted by Pinnacle.
On the date of the Pinnacle
Note, the Company’s Common Stock had a market value of $3.65. The
Company determined that the Note contained a beneficial conversion
feature or debt discount by calculating the amount of shares using
the conversion rate of the Pinnacle Note of $3.25 per share, and
then calculating the market value of the shares that would be
issued at conversion using the market value of the Company’s Common
Stock on the date of the Pinnacle Note. The Company recorded a debt
discount on the Note of $184,614 that is amortized and recorded as
interest expense over the life of the Pinnacle Note.
For the three and six
months ended June 30, 2019, the Company paid interest and recorded
interest expense of $30,000 and $60,000, respectively related to
the Pinnacle Note. For the three and six months ended June 30,
2019, the Company recorded $30,769 and $61,538 as interest expense
related to the amortization of the debt discount. As of June
30, 2019, the Company had a balance of $1,438,462, net of $61,538
of debt discount, recorded in current liabilities on its condensed
consolidated balance sheet, related to the Pinnacle Note. As of
December 31, 2018, the Company had a balance of $1,376,924, net of
$123,076 of debt discount, recorded in noncurrent liabilities on
its consolidated balance sheet, related to the Pinnacle Note.
2017 Convertible
Debt
In 2017, the Company
entered into subscription agreements pursuant to which it issued
unsecured convertible promissory notes, each with substantially
similar terms, for an aggregate principal amount of $625,000. Each
of the convertible promissory notes matures one year from the date
of issuance, with the exception of one note in the amount of
$75,000 which matures two years from the date of issuance, and
bears interest at a rate of 10% per annum. During 2018, the Company
and the note holders agreed to extend the maturity date for another
year from the original maturity date, with the exception of the
$75,000 note with a two-year maturity date. The principal and any
accrued and unpaid interest of the convertible promissory notes are
convertible by the respective holders into shares of Common Stock
at a price equal to either (i) the 90-trading day average price per
share of Common Stock as of the date the holder submits a notice of
conversion or (ii) if an Eligible Offering (as defined in the
convertible promissory notes) of Common Stock is made, 95% of the
public offering price per share of Common Stock.
On March 21, 2019, the
holder of a $75,000 convertible promissory note elected to convert
the note into 53,191 shares of Common Stock on the 90-day trailing
trading average price of $1.41 per share. On March 21, 2019, the
closing market price of the Company’s common stock was $1.81. As a
result, the Company recorded a loss on extinguishment of debt on
its condensed consolidated statement of operations of $21,276 for
the difference between the closing market price and the conversion
price of the Common Stock.
22
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
For the three and six
months ended June 30, 2019, the Company paid interest on these
notes in the aggregate amount of $17,521 and $33,146, respectively
and recorded interest expense in the amount of $18,750 and $34,465,
respectively relating to these notes. For the three and six months
ended June 30, 2018, the Company paid interest on these notes in
the aggregate amount of $15,625 and $34,890, respectively and
recorded interest expense in the amount of $21,480 and $43,355,
respectively relating to these notes. As of June 30, 2019 and
December 31, 2018, the Company recorded accrued interest of $6,181
and $4,861, respectively, relating to the convertible notes
payable. As of June 30, 2019 and December 31, 2018, the Company had
a balance of $550,000 and $625,000, respectively, in current
liabilities and a balance of $200,000 in noncurrent liabilities as
of June 30, 2019 on its condensed consolidated balance sheets
relating to these convertible notes payable.
Nonconvertible Notes
Payable
On July 5, 2012 the Company
entered into an unsecured promissory note in the amount of $300,000
bearing 10% interest per annum and payable on demand with KCF
Investments LLC (‘KCF”), an entity controlled by Mr. Stephen L
Perrone, an affiliate of the Company. On December 10, 2018, the
Company agreed to exchange this note, including accrued interest of
$192,233 for a new unsecured promissory note in the amount of
$492,233 that matures on December 10, 2023. This promissory note
bears interest of 10% per annum and can be prepaid without a
penalty at any time prior to its maturity. The note requires
monthly repayments of principal and interest in the amount of
$10,459 throughout the life of the note.
On November 30, 2017, the
Company entered into an
unsecured promissory note in the amount of $200,000 that matures on
January 15, 2020. The promissory note bears interest of 10% per
annum and can be prepaid without a penalty at any time prior to its
maturity.
On June 14, 2017, the
Company entered into an unsecured promissory note in the amount of
$400,000, with an initial maturity date of June 14, 2019. On May 1,
2019, the holder of the promissory note agreed to extend the
maturity date until June 14, 2021 on the same terms as the original
promissory note. The promissory note bears interest of 10%
per annum and can be prepaid without a penalty after the initial
six months.
During the three and six
months ended June 30, 2019, the Company paid interest on its
nonconvertible promissory notes in the aggregate amount of $26,662
and $53,808, respectively. During the three and six months ended
June 30, 2018, the Company paid interest on its nonconvertible
promissory notes in the aggregate amount of $15,000 and $30,834,
respectively. The Company had balances of $6,038 and $6,315
as of June 30, 2019 and December 31, 2018, respectively, for
accrued interest recorded in other current liabilities in its
condensed consolidated balance sheets, relating to these promissory
notes. The Company recorded interest expense for the three and six
months ended June 30, 2019 of $26,497 and $53,532, respectively,
and $22,479 and $44,877, for the three and six months ending June
30, 2018, respectively, relating to these promissory notes. As of
June 30, 2019, the Company had a balance of $283,952 in current
liabilities and $769,339 in noncurrent liabilities related to these
nonconvertible promissory notes. As of December 31, 2018, the
Company had balances of $79,874 in current liabilities and
$1,012,359 in noncurrent liabilities on its condensed consolidated
balance sheets relating to these nonconvertible promissory
notes.
NOTE 9 — LOANS FROM RELATED PARTY
Dolphin Entertainment, LLC
(“DE LLC”), an entity wholly owned by the Company’s CEO, William
O’Dowd, previously advanced funds for working capital to Dolphin
Films. During 2016, Dolphin Films entered into a promissory note
with DE LLC (the “DE LLC Note”) in the principal amount of
$1,009,624. Under the terms of the DE LLC Note, the CEO may make
additional advancements to the Company, as needed, and may be
repaid a portion of the loan, which is payable on demand and bears
interest at 10% per annum. Included in the balance of the DE LLC
Note are certain script costs and other payables totaling $594,315
that were owed to DE LLC.
For the three and six
months ended June 30, 2019, the Company did not repay any principal
balance of the DE LLC Note and recorded interest expense of $27,621
and $54,938, respectively. For the three and six months
ended June 30, 2018, the Company repaid $470,000 and $601,001,
respectively of principal balance and recorded interest expense of
$33,605 and $73,535, respectively, relating to the DE LLC Note. As
of June 30, 2019 and December 31, 2018, the Company had a principal
balance of $1,107,873 and accrued interest of $359,826 and
$304,888, respectively, relating to the DE LLC Note on its
condensed consolidated balance sheet.
23
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 10 — FAIR VALUE MEASUREMENTS
Put Rights
In connection with the
42West Acquisition (see Note 3) on March 30, 2017, the Company
entered into the Put Agreements, pursuant to which it granted the
Put Rights to the sellers. During the six months ended June
30, 2019, the sellers exercised their Put Rights, in accordance
with the Put Agreements, for an aggregate amount of 202,602 shares
of Common Stock. As a result, the sellers were paid $65,000 on
February 7, 2019, $35,000 on March 13, 2019, $300,000 on April 1,
2019, $75,000 on April 10, 2019, $50,000 on May 6, 2019, $350,000
on June 3, 2019 and $115,500 on June 28, 2019 related to these Put
Rights. An additional $877,500 is due from the exercise of these
Put Rights of which $175,000 was paid in July 2019.
In addition, the Company
entered in put agreements with three 42West employees with change
of control provision in their employment agreements. The Company
agreed to purchase up to 50% of the shares of Common Stock to be
received by the employees in satisfaction of the change of control
provision in their employment agreements. The employees have the
right, but not the obligation, to cause the Company to purchase an
additional 20,246 shares of Common Stock.
The
Company records the fair value of the liability in the condensed
consolidated balance sheets under the caption “Put Rights” and
records changes to the liability against earnings or loss under the
caption “Changes in fair value of put rights” in the consolidated
statements of operations. The carrying amount at fair value of the
aggregate liability for the Put Rights recorded on the condensed
consolidated balance sheets at June 30, 2019 and December 31, 2018
was $4,708,191 and $5,984,067, respectively. Due to the change in
the fair value of the Put Rights for the period in which the Put
Rights were outstanding for the three and six months June 30, 2019,
the Company recorded a gain of $251,350 and $1,778,376,
respectively, and $333,043 and $1,416,639, respectively for the
three and six months ended June 30, 2018, on the change in the fair
value of the Put Rights in the condensed consolidated statement of
operations.
The Company utilized the
Black-Scholes Option Pricing Model, which incorporates significant
inputs that are not observable in the market, and thus represents a
Level 3 measurement as defined in ASC 820. The unobservable inputs
utilized for measuring the fair value of the Put Rights reflect
management’s own assumptions about the assumptions that market
participants would use in valuing the Put Rights as of the June 30,
2019 and December 31, 2018.
The Company determined the
fair value by using the following key inputs to the Black-Scholes
Option Pricing Model:
|
|
|
|
|
|
|
|
| |
|
Inputs
|
|
As of
June 30,
2019
|
|
|
As of
December 31,
2018
|
|
|
Equity
volatility estimate
|
|
|
42.0% – 44.0
|
%
|
|
|
35.0% – 59.4
|
%
|
|
Discount
rate based on US Treasury obligations
|
|
|
1.78% – 2.13
|
%
|
|
|
2.45% – 2. 63
|
%
|
For the Put Rights, which
measured at fair value categorized within Level 3 of the fair value
hierarchy, the following is a reconciliation of the fair values
from December 31, 2018 to June 30, 2019:
|
|
|
|
| |
|
Ending fair value balance reported in the
consolidated balance sheet at December 31, 2018
|
|
$
|
5,984,067
|
|
|
Put rights exercised in December 2018 paid in
January 2019
|
|
|
(375,000
|
)
|
|
Change in fair value (gain) reported in the
statements of operations
|
|
|
(1,778,376
|
)
|
|
Put rights exercised June 2019 and paid in
July 2019
|
|
|
175,000
|
|
|
Put rights exercised March 2019 and not yet
paid
|
|
|
702,500
|
|
|
Ending fair value of put rights reported in
the condensed consolidated balance sheet at June 30, 2019
|
|
$
|
4,708,191
|
|
24
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Contingent Consideration
In connection with the
Company’s acquisition of The Door (See Note 3), the Members have
the potential to earn the Contingent Consideration, comprising up
to 1,538,462 shares of Common Stock, based on a purchase price of
$3.25, and up $2,000,000 in cash on achievement of adjusted net
income targets based on the operations of The Door over the
four-year period beginning January 1, 2018.
The Company records the
fair value of the liability in the condensed consolidated balance
sheets under the caption “Contingent Consideration” and records
changes to the liability against earnings or loss under the caption
“Changes in fair value of contingent consideration” in the
condensed consolidated statements of operations. The fair value of
the Contingent Consideration on the date of the acquisition of The
Door was $1,620,000. The carrying amount at fair value of the
aggregate liability for the Contingent Consideration recorded on
the condensed consolidated balance sheet at June 30, 2019 and
December 31, 2018 is $460,000 and $550,000, respectively. Due to
the change in the fair value of the Contingent Consideration for
the period in which the Contingent Consideration was outstanding
during the three and six months ended June 30, 2019, the Company
recorded a gain on the Contingent Consideration of $360,000 and
$90,000, respectively, in the condensed consolidated statement of
operations.
The Company utilized a
Monte Carlo Simulation model, which incorporates significant inputs
that are not observable in the market, and thus represents a Level
3 measurement as defined in ASC 820. The unobservable inputs
utilized for measuring the fair value of the Contingent
Consideration reflect management’s own assumptions about the
assumptions that market participants would use in valuing the
Contingent Consideration as of the acquisition date.
The Company determined the
fair value by using the following key inputs to the Monte Carlo
Simulation Model:
|
|
|
|
|
|
|
|
| |
|
Inputs
|
|
As of June
30, 2019
|
|
|
As of
December 31,
2018
|
|
|
Risk Free
Discount Rate (based on US government treasury obligation with a
term similar to that of the Contingent Consideration)
|
|
|
1.73% - 2.09
|
%
|
|
|
2.47% - 2.59
|
%
|
|
Annual
Asset Volatility Estimate
|
|
|
40.0
|
%
|
|
|
65.0
|
%
|
For the Contingent
Consideration, which measured at fair value categorized within
Level 3 of the fair value hierarchy, the following is a
reconciliation of the fair values from December 31, 2018 to June
30, 2019:
|
|
|
|
| |
|
Beginning fair value balance reported on the
consolidated balance sheet at December 31, 2018
|
|
$
|
550,000
|
|
|
Change in fair value (gain) reported in the
statements of operations
|
|
|
(90,000
|
)
|
|
Ending fair value balance reported in the
condensed consolidated balance sheet at June 30, 2019
|
|
$
|
460,000
|
|
NOTE 11 — CONTRACT
LIABILITIES
The
Company receives advance payments from customers for public
relations projects or as deposits for promotional or brand-support
video projects, that it records as contract liabilities. Once the
work is performed or the projects are delivered to the customer,
the contract liability is recorded as revenue. The Company had
balances of $192,471 and $522,620 as of June 30, 2019 and December
31, 2018, respectively, in contract liabilities.
25
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
NOTE 12 —VARIABLE
INTEREST ENTITIES
VIEs are
entities that, by design, either (1) lack sufficient equity to
permit the entity to finance its activities without additional
subordinated financial support from other parties, or (2) have
equity investors that do not have the ability to make significant
decisions relating to the entity’s operations through voting
rights, or do not have the obligation to absorb the expected losses
or the right to receive the residual returns of the entity. The
most common type of VIE is a special-purpose entity (“SPE”). SPEs
are commonly used in securitization transactions in order to
isolate certain assets, and distribute the cash flows from those
assets to investors. The legal documents that govern the
transaction specify how the cash earned on the assets must be
allocated to the SPE’s investors and other parties that have rights
to those cash flows. SPEs are generally structured to insulate
investors from claims on the SPE’s assets by creditors of other
entities, including the creditors of the seller of the assets.
The
primary beneficiary of a VIE is required to consolidate the assets
and liabilities of the VIE. The primary beneficiary is the party
that has both (1) the power to direct the activities of an entity
that most significantly impact the VIE’s economic performance; and
(2) through its interests in the VIE, the obligation to absorb
losses or the right to receive benefits from the VIE that could
potentially be significant to the VIE. To assess whether the
Company has the power to direct the activities of a VIE that most
significantly impact the VIE’s economic performance, the Company
considers all the facts and circumstances, including its role in
establishing the VIE and its ongoing rights and
responsibilities.
To assess
whether the Company has the obligation to absorb losses or the
right to receive benefits from the VIE that could potentially be
significant to the VIE, the Company considers all of its economic
interests, including debt and equity investments, servicing fees,
and derivative or other arrangements deemed to be variable
interests in the VIE. This assessment requires that the Company
apply judgment in determining whether these interests, in the
aggregate, are considered potentially significant to the VIE.
The Company performs
ongoing reassessments of (1) whether entities previously evaluated
under the majority voting-interest framework have become VIEs,
based on certain triggering events, and therefore would be subject
to the VIE consolidation framework, and (2) whether changes in the
facts and circumstances regarding the Company’s involvement with a
VIE cause the Company’s consolidation conclusion to change. The
consolidation status of the VIEs with which the Company is involved
may change as a result of such reassessments. Changes in
consolidation status are applied prospectively with assets and
liabilities of a newly consolidated VIE initially recorded at fair
value unless the VIE is an entity which was previously under common
control, which in that case is consolidated based on historical
cost. A gain or loss may be recognized upon deconsolidation of a
VIE depending on the amounts of deconsolidated assets and
liabilities compared to the fair value of retained interests and
ongoing contractual arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Max Steel Productions
LLC
|
|
|
JB Believe LLC
|
|
|
|
|
As of
and
for the
six months
ended
June 30,
|
|
|
For the
three months
ended
June 30,
|
|
|
As of
December 31,
|
|
|
As of
and
for the
six months
ended
June 30,
|
|
|
As of
and
for the
three months
ended
June 30,
|
|
|
As of
and
for the
six months
ended
June 30,
|
|
|
For the
three months
ended
June 30,
|
|
|
As of
December 31,
|
|
|
As of
and
for the
six months
ended
June 30,
|
|
|
As of
and
for the
three months
ended
June 30,
|
|
|
(in USD)
|
|
2019
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
|
2018
|
|
|
Assets
|
|
|
8,052,711
|
|
|
|
—
|
|
|
|
7,978,887
|
|
|
|
8,820,966
|
|
|
|
—
|
|
|
|
185,000
|
|
|
|
—
|
|
|
|
205,725
|
|
|
|
—
|
|
|
|
—
|
|
|
Liabilities
|
|
|
(11,856,455
|
)
|
|
|
—
|
|
|
|
(11,887,911
|
)
|
|
|
(12,153,196
|
)
|
|
|
—
|
|
|
|
(6,743,568
|
)
|
|
|
(6,750,573
|
)
|
|
|
(6,741,834
|
)
|
|
|
(6,743,568
|
)
|
|
|
—
|
|
|
Revenues
|
|
|
78,990
|
|
|
|
—
|
|
|
|
—
|
|
|
|
427,153
|
|
|
|
97,961
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expenses
|
|
|
26,290
|
|
|
|
(14,035
|
)
|
|
|
—
|
|
|
|
(464,418
|
)
|
|
|
(128,691
|
)
|
|
|
(29,464
|
)
|
|
|
(8,223
|
)
|
|
|
—
|
|
|
|
(290
|
)
|
|
|
—
|
|
The Company evaluated the
entities in which it did not have a majority voting interest and
determined that it had (1) the power to direct the activities of
the entities that most significantly impact their economic
performance and (2) had the obligation to absorb losses or the
right to receive benefits from these entities. As such the
financial statements of Max Steel Productions, LLC and JB Believe,
LLC are consolidated in the condensed consolidated balance sheets
as of June 30, 2019 and December 31, 2018, and in the condensed
consolidated statements of operations and statements of cash flows
presented herein for the three and six months ended June 30, 2019
and 2018. These entities were previously under common control and
have been accounted for at historical costs for all periods
presented.
26
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Max Steel Productions, LLC
was initially formed for the purpose of recording the production
costs of the motion picture Max Steel. Prior to the
commencement of the production, the Company entered into a
Production Service Agreement to finance the production of the film.
As described in Note 7, the Production Service Agreement was for a
total amount of $10,419,009 with the lender taking a producer fee
of $892,619. Pursuant to the financing agreements, the lender
acquired 100% of the membership interests of Max Steel Productions,
LLC with the Company controlling the production of the motion
picture and having the rights to sell the motion picture.
As of each of June 30, 2019
and December 31, 2018, the Company had a balance in capitalized
production costs of $629,585. For the year ended December 31, 2018,
the Company wrote off accounts receivable of $618,165, of which it
had an allowance for doubtful account of $227,280 and did not have
a balance in accounts receivable related to Max Steel as of
December 31, 2018. For the six months ended June 30, 2019, the
Company collected $116,067 of receivables that had previously been
written off and recorded the receipt against bad debt expense. All
proceeds from the sale of international licensing rights to the
motion picture Max Steel and certain tax credits are used to
repay the amounts due under the Production Service Agreement. As
such, the Company will not receive any cash proceeds from the sale
of the international licensing rights until the proceeds received
from the Production Service Agreement are repaid. For the six
months ended June 30, 2019 and 2018, the proceeds from the
international sales agreements and certain tax credits that were
used to repay amounts due under the Production Service Agreement
amounted to $116,067 and $4,582, respectively. If the amounts due
under the Production Service Agreement are not repaid from the
proceeds of the international sales, the Company may lose the
international distribution rights, in which case it would no longer
receive the revenues from these territories and would impair the
capitalized production costs and related accounts receivable. The
Company believes that the lender’s only recourse under the
Production Service Agreement is to foreclose on the collateral
securing the loans, which consists of the foreign distribution
rights for Max Steel . However, if the lender were to
successfully assert that the Company is liable to the lender for
the payment of this debt despite the lack of any contractual
obligation on behalf of the Company, payment of the loan would have
a material adverse effect on its liquidity, results of operations
and financial condition.
As of June 30, 2019 and
December 31, 2018, there were outstanding balances of $1,612,919
and $1,728,986, respectively, related to this debt which are
included in the caption debt in the condensed consolidated balance
sheets.
JB Believe LLC, an entity
owned by Believe Film Partners LLC, of which the Company owns a 25%
membership interest, was formed for the purpose of recording the
production costs of the motion picture “ Believe ”. The
Company was given unanimous consent by the members of this entity
to enter into domestic and international distribution agreements
for the licensing rights of the motion picture, Believe ,
until such time as the Company had been repaid $3,200,000 for the
investment in the production of the film and $5,000,000 for the
P&A to market and release the film in the United States. The
Company has not been repaid these amounts and as such is still in
control of the distribution of the film. The capitalized production
costs were either amortized or impaired in previous years. JB
Believe LLC’s primary liability is to the Company, which it owes
$6,491,834.
NOTE 13 — STOCKHOLDERS’ EQUITY
A.
Preferred Stock
The Company’s Amended and
Restated Articles of Incorporation authorize the issuance of
10,000,000 shares of preferred stock. The Board of Directors has
the power to designate the rights and preferences of the preferred
stock and issue the preferred stock in one or more series.
On February 23, 2016, the
Company amended its Articles of Incorporation to designate
1,000,000 preferred shares as “Series C Convertible Preferred
Stock” with a $0.001 par value which may be issued only to an
“Eligible Series C Preferred Stock Holder”. On May 9, 2017, the
Board of Directors of the Company approved an amendment to the
Company’s articles of incorporation to reduce the designation of
Series C Convertible Preferred Stock to 50,000 shares with a $0.001
par value. The amendment was approved by the Company’s shareholders
on June 29, 2017, and the Company filed Amended and Restated
Articles of Incorporation with the State of Florida (the “Second
Amended and Restated Articles of Incorporation”) on July 6, 2017.
Additionally, on July 6, 2017, the Second Amended and Restated
Articles of Incorporation eliminated previous designations of
Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock, no shares of which are outstanding.
27
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Pursuant to the Second
Amended and Restated Articles of Incorporation, each share of
Series C Convertible Preferred Stock will be convertible into one
share of Common Stock (one half of a share post-split on September
14, 2017) subject to adjustment for each issuance of Common Stock
(but not upon issuance of common stock equivalents) that occurred,
or occurs, from the date of issuance of the Series C Convertible
Preferred Stock (the “issue date”) until the fifth (5th)
anniversary of the issue date (i) upon the conversion or exercise
of any instrument issued on the issued date or thereafter issued
(but not upon the conversion of the Series C Convertible Preferred
Stock), (ii) upon the exchange of debt for shares of Common Stock,
or (iii) in a private placement, such that the total number of
shares of Common Stock held by an “Eligible Class C Preferred Stock
Holder” (based on the number of shares of Common Stock held as of
the date of issuance) will be preserved at the same percentage of
shares of Common Stock outstanding held by such Eligible Class C
Preferred Stock Holder on the issue. An Eligible Class C Preferred
Stock Holder means any of (i) DE LLC for so long as Mr. O’Dowd
continues to beneficially own at least 90% of DE LLC and serves on
its board of directors or other governing entity, (ii) any other
entity in which Mr. O’Dowd beneficially owns more than 90%, or a
trust for the benefit of others, for which Mr. O’Dowd serves as
trustee and (iii) Mr. O’Dowd individually. Series C Convertible
Preferred Stock will be convertible by the Eligible Class C
Preferred Stock Holder only upon the Company satisfying one of the
“optional conversion thresholds”. Specifically, a majority of the
independent directors of the Board, in its sole discretion, must
have determined that the Company accomplished any of the following
(i) EBITDA of more than $3.0 million in any calendar year, (ii)
production of two feature films, (iii) production and distribution
of at least three web series, (iv) theatrical distribution in the
United States of one feature film, or (v) any combination thereof
that is subsequently approved by a majority of the independent
directors of the Board based on the strategic plan approved by the
Board. While certain events may have occurred that could be deemed
to have satisfied this criteria, the independent directors of the
Board have not yet determined that an optional conversion threshold
has occurred. Except as required by law, holders of Series C
Convertible Preferred Stock will have voting rights only if the
independent directors of the Board determine that an optional
conversion threshold has occurred. Only upon such determination
will the Series C Convertible Preferred Stock be entitled or
permitted to vote on all matters required or permitted to be voted
on by the holders of Common Stock and will be entitled to that
number of votes equal to three votes for the number of shares of
Common Stock into which the Series C Convertible Preferred Stock
may then be converted.
The Certificate of
Designation also provides for a liquidation value of $0.001 per
share and dividend rights of the Series C Convertible Preferred
Stock on parity with the Company’s Common Stock.
B.
Common
Stock
On January 3, 2019, the
Company issued 307,692 shares of its Common Stock to the sellers of
The Door pursuant to the Merger Agreement. (See Note 3)
On February 7, 2019, one of
the sellers of 42West exercised Put Rights for 7,049 shares of
Common Stock and was paid an aggregate amount of $65,000 on
February 7, 2019.
On March 11, 2019, one of
the sellers of 42West exercised Put Rights for 3,796 shares of
Common Stock and was paid an aggregate amount of $35,000 on March
13, 2019.
On March 12, 2019, one of
the sellers of 42West exercised Put Rights for 21,692 shares of
Common Stock and was paid an aggregate amount of $200,000 on April
1, 2019.
On March 20, 2019, one of
the sellers of 42West exercised Put Rights for 87,040 shares of
Common Stock and was paid an aggregate amount of $100,000 on April
1, 2019. The remaining $702,500 is still outstanding.
On March 21, 2019, one of
the sellers of 42West exercised Put Rights for 8,134 shares of
Common Stock and was paid an aggregate amount of $75,000 on April
10, 2019.
On March 21, 2019, one of
the convertible promissory note holders elected to convert a
$75,000 convertible promissory note into 53,191 shares of common
stock at a 90-day trailing trading average stock price of $1.41 per
share of Common Stock.
28
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
On May 6, 2019, one of the
sellers of 42West exercised Put Rights for 5,422 shares of Common
Stock and was paid $50,000 on May 6, 2019.
On May 13, May 16 and May
22, 2019, three of the sellers of 42West exercised Put Rights for
an aggregate amount of 37,961 shares of Common Stock and were paid
$350,000 on June 3, 2019.
On June 25, 2019, one of
the sellers of 42West exercised Put Rights for 12,527 shares of
Common Stock and was paid $115,500 on June 28, 2019.
On June 24, 2019, one of
the sellers of 42West exercised Put Rights for 8,134 shares of
Common Stock and was paid $75,000 on July 10, 2019.
On June 30, 2019 one of the
sellers of 42West exercised Put Rights for 10,846 shares of Common
Stock and was paid $100,000 on July 17, 2019.
As of June 30, 2019 and
December 31, 2018, the Company had 14,394,562 and 14,123,157 shares
of Common Stock issued and outstanding, respectively.
NOTE 14 — EARNINGS (LOSS) PER
SHARE
The following table sets
forth the computation of basic and diluted income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three months
ended
June
30,
|
|
|
Six months
ended
June
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net(loss)
income attributable to Dolphin Entertainment shareholders and
numerator for basic earnings per share
|
|
$
|
(891,867
|
)
|
|
$
|
170,474
|
|
|
$
|
(769,259
|
)
|
|
$
|
1,003,432
|
|
|
Change in
fair value of put rights
|
|
|
(251,350
|
)
|
|
|
(333,043
|
)
|
|
|
(1,778,376
|
)
|
|
|
(1,416,639
|
)
|
|
Numerator
for diluted earnings per share
|
|
$
|
(1,143,217
|
)
|
|
$
|
(162,569
|
)
|
|
$
|
(2,547,635
|
)
|
|
$
|
(413,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS - weighted-average shares
|
|
|
15,969,926
|
|
|
|
12,349,014
|
|
|
|
15,957,085
|
|
|
|
12,432,872
|
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Put
rights
|
|
|
3,202,161
|
|
|
|
1,682,987
|
|
|
|
3,714,039
|
|
|
|
2,100,352
|
|
|
Denominator for diluted EPS - adjusted weighted-average shares
|
|
|
19,172,087
|
|
|
|
14,032,001
|
|
|
|
19,671,124
|
|
|
|
14,533,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) income per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.08
|
|
|
Diluted
(loss) per share
|
|
$
|
(0.06
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.03
|
)
|
Basic
earnings per share is computed by dividing income attributable to
the shareholders of Common Stock (the numerator) by the
weighted-average number of shares of Common Stock outstanding (the
denominator) for the period. Diluted earnings per share assume that
any dilutive equity instruments, such as put rights and convertible
notes payable were exercised and outstanding Common Stock adjusted
accordingly.
In
periods when the Put Rights are assumed to have been settled at the
beginning of the period in calculating the denominator for diluted
(loss) income per share, the related change in the fair value of
Put Right liability recognized in the consolidated statements of
operations for the period, is added back or subtracted from net
income during the period. The denominator for calculating diluted
income per share for the three and six months ended June 30, 2019
and 2018 assumes the Put Rights had been settled at the beginning
of the period, and therefore, the related income due to the
decrease in the fair value of the Put Right liability during the
three and six months ended June 30, 2019 and 2018 is subtracted
from net income.
29
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Other
potentially dilutive equity instruments such as convertible notes
payable, were not included in the calculation diluted (loss) income
per share for the three and six months ended June 30, 2019 and 2018
because they were determined to be anti-dilutive.
NOTE 15 —
WARRANTS
A summary
of warrants outstanding at December 31, 2018 and issued, exercised
and expired during the six months ended June 30, 2019 is as
follows:
|
|
|
|
|
|
|
|
| |
|
Warrants:
|
|
Shares
|
|
|
Weighted
Avg.
Exercise Price
|
|
|
Balance
at December 31, 2018
|
|
|
2,727,253
|
|
|
$
|
3.62
|
|
|
Issued
|
|
|
137,500
|
|
|
|
2.00
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
(1,000,000
|
)
|
|
|
2.29
|
|
|
Balance
at June 30, 2019
|
|
|
1,864,753
|
|
|
$
|
4.06
|
|
On
November 4, 2016, the Company issued a Warrant “G”, a Warrant “H”
and a Warrant “I” to T Squared (“Warrants “G”, “H” and “I”). A
summary of Warrants “G”, “H” and “I” issued to T Squared is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Warrants :
|
|
Number of
Shares
|
|
|
Exercise
price at
June 30,
2019
|
|
|
Original
Exercise
Price
|
|
|
Exercise
price at
December 31,
2018
|
|
|
Expiration
Date
|
|
Warrant “G”
|
|
|
750,000
|
|
|
$
|
Expired
|
|
|
$
|
10.00
|
|
|
$
|
2.29
|
|
|
|
January 31, 2019
|
|
Warrant “H”
|
|
|
250,000
|
|
|
$
|
Expired
|
|
|
$
|
12.00
|
|
|
$
|
2.29
|
|
|
|
January 31, 2019
|
|
Warrant “I”
|
|
|
250,000
|
|
|
$
|
2.00
|
|
|
$
|
14.00
|
|
|
$
|
2.29
|
|
|
|
January 31, 2020
|
|
|
|
|
1,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Warrants “G”, “H” and
“I” contain a round down provision providing that, in the event the
Company sells grants or issues any Common Stock or options,
warrants, or any instrument convertible into shares of Common Stock
or equity in any other form at a deemed per share price below the
then current exercise price per share of the Warrants “G”, “H” and
“I”, then the then current exercise price per share for the
warrants that are outstanding will be reduced to such lower price
per share. Under the terms of the Warrants “G”, “H” and “I”, T
Squared has the option to continually pay the Company an amount of
money to reduce the exercise price of any of Warrants “G”, “H” and
“I” until such time as the exercise price of Warrant “G”, “H”
and/or “I” is effectively $0.02 per share. At such time when the T
Squared has paid down the warrants to an exercise price of $0.02
per share or less T Squared will have the right to exercise the
Warrants “G”, “H” and “I” via a cashless provision. Due to the
existence of the round down provision, the Warrants “G”, “H” and
“I” were carried in the consolidated financial statements as
derivative liabilities at fair value. However, on July 1, 2018, the
Company adopted ASU 2017-11 that states down round provisions no
longer preclude equity classification when assessing whether the
instrument is indexed to an entity’s own stock. As a result, the
Company used the modified retrospective approach and recorded a
cumulative effect adjustment to retained earnings to classify the
instruments as equity. Warrants “G” and “H” were not exercised and
expired on January 31, 2019.
In the
Company’s 2017 offering of its Common Stock, the Company issued
1,215,000 units, each comprising one share of Common Stock, and one
warrant exercisable for one share of Common Stock for $4.74 per
share. In addition to the units issued and sold in this 2017
offering, the Company also issued warrants to the underwriters to
purchase up to an aggregate of 85,050 shares of Common Stock at a
purchase price of $4.74 per share. On January 22, 2018, the
underwriters exercised their over-allotment option with respect to
175,750 warrants to purchase Common Stock at a purchase price of
$4.74 per share. In connection with the exercise of the
over-allotment option, the Company issued to the underwriters
warrants to purchase an aggregate of 1,453 shares of Common Stock
at a purchase price of $4.74 per share. The Company determined that
each of these warrants should be classified as equity and recorded
the fair value of the warrants in additional paid in capital.
30
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
On May
21, 2019, the Company issued warrants to purchase up to 137,500
shares of Common Stock at a purchase price of $2.00 per share to
Lincoln Park related to the Lincoln Park Note (the “Lincoln Park
Warrants”). The Lincoln Park Warrants become exercisable on
the six-month anniversary and for a period of five years
thereafter. If a resale registration statement covering the
shares of Common Stock underlying the Lincoln Park Warrants is not
effective and available at the time of exercise, the Lincoln Park
Warrants may be exercised by means of a “cashless” exercise
formula. The Lincoln Park Warrants had a fair value at
issuance of $89,543. The Company determined that the Lincoln Park
Warrants should be classified as equity and recorded the fair value
of the warrants in additional paid in capital.
NOTE 16 — RELATED PARTY
TRANSACTIONS
On
December 31, 2014, the Company and its CEO renewed his employment
agreement for a period of two years commencing January 1, 2015. The
agreement stated that the CEO was to receive annual compensation of
$250,000. In addition, the CEO was entitled to an annual
discretionary bonus as determined by the Company’s Board of
Directors. As part of his agreement, he received a $1,000,000
signing bonus in 2012 that is recorded in accrued compensation on
the condensed consolidated balance sheets. Any unpaid and accrued
compensation due to the CEO under this agreement will accrue
interest on the principal amount at a rate of 10% per annum from
the date of this agreement until it is paid. Even though the
employment agreement expired and has not been renewed, the Company
has an obligation under the agreement to continue to accrue
interest on the unpaid balance. As of June 30, 2019 and December
31, 2018, the Company accrued $2,625,000 of compensation as accrued
compensation and has balances of $1,360,890 and $1,230,719
respectively, in accrued interest in other current liabilities on
its condensed consolidated balance sheets, related to Mr. O’Dowd’s
employment. The Company recorded interest expense related to the
accrued compensation of $65,445 and $64,418, respectively, for the
three months ended June 30, 2019 and 2018, and $130,171 and
$126,581 for the six months ended June 30, 2019 and 2018,
respectively, on the condensed consolidated statements of
operations.
On March
30, 2017, in connection with the acquisition of 42West, the Company
and Mr. O’Dowd, as personal guarantor, entered into the Put
Agreements with each of the sellers of 42West, pursuant to which
the Company granted the Put Rights. Pursuant to the terms of one
such Put Agreement, Mr. Allan Mayer, a member of the board of
directors of the Company, exercised Put Rights and caused the
Company to purchase 37,961 shares of Common Stock at a purchase
price of $9.22 per share for an aggregate purchase price of
$350,000, during the six months ended June 30, 2019.
NOTE 17 — SEGMENT
INFORMATION
The
Company operates in two reportable segments, Entertainment
Publicity and Marketing Segment and Content Production Segment. The
Entertainment Publicity and Marketing segment is composed of
42West, The Door and Viewpoint and provides clients with
diversified services, including public relations, entertainment and
hospitality content marketing and strategic marketing consulting.
The Content Production segment is composed of Dolphin Entertainment
and Dolphin Films and engages in the production and distribution of
digital content and feature films.
The
profitability measure employed by our chief operating decision
maker for allocating resources to operating segments and assessing
operating segment performance is operating income (loss). Salaries
and related expenses include salaries, bonuses, commissions and
other incentive related expenses. Legal and professional expenses
primarily include professional fees related to financial statement
audits, legal, investor relations and other consulting services,
which are engaged and managed by each of the segments. In addition,
general and administrative expenses include rental expense and
depreciation of property, equipment and leasehold improvements for
properties occupied by corporate office employees.
31
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
In connection with the
acquisitions of 42West, The Door, and Viewpoint, the Company
assigned $8,086,773 of intangible assets, net of accumulated
amortization of $3,494,560 and goodwill of $15,996,977 (after
goodwill impairment of $1,857,000) as of June 30, 2019 to the
Entertainment Publicity and Marketing segment. The balances
reflected as of June 30, 2018 for Entertainment Publicity and
Marketing segment comprise only 42West.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Three months
ended
|
|
|
Six months
ended
|
|
|
Three months
ended
|
|
|
Six months
ended
|
|
|
|
|
June 30,
2019
|
|
|
June 30,
2018
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPD
|
|
$
|
6,273,983
|
|
|
$
|
12,523,890
|
|
|
$
|
5,121,487
|
|
|
$
|
10,577,220
|
|
|
CPD
|
|
|
—
|
|
|
|
78,990
|
|
|
|
97,961
|
|
|
|
427,153
|
|
|
Total
|
|
$
|
6,273,983
|
|
|
$
|
12,602,880
|
|
|
$
|
5,219,448
|
|
|
$
|
11,004,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Income
(Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPD
|
|
$
|
(450,165
|
)
|
|
$
|
(810,759
|
)
|
|
$
|
497,886
|
|
|
$
|
965,702
|
|
|
CPD
|
|
|
(751,913
|
)
|
|
|
(1,216,481
|
)
|
|
|
(428,619
|
)
|
|
|
(995,359
|
)
|
|
Total
|
|
|
(1,202,078
|
)
|
|
|
(2,027,240
|
)
|
|
|
69,267
|
|
|
|
(29,657
|
)
|
|
Interest expense
|
|
|
(301,139
|
)
|
|
|
(589,108
|
)
|
|
|
(265,992
|
)
|
|
|
(533,419
|
)
|
|
Other income (expense)
|
|
|
611,350
|
|
|
|
1,847,089
|
|
|
|
595,215
|
|
|
|
1,847,128
|
|
|
Income (loss) before
income taxes
|
|
$
|
(891,867
|
)
|
|
$
|
(769,259
|
)
|
|
$
|
398,490
|
|
|
$
|
1,284,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
As of June
30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPD
|
|
|
|
|
|
|
|
|
|
$
|
36,811,890
|
|
|
$
|
25,410,350
|
|
|
CPD
|
|
|
|
|
|
|
|
|
|
|
2,766,619
|
|
|
|
3,227,077
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
39,578,509
|
|
|
$
|
28,637,427
|
|
NOTE 18 — LEASES
Viewpoint
is obligated under an operating lease agreement for office space in
Newton, Massachusetts, expiring in March 2021. The lease is secured
by a certificate of deposit held by the Company in the amount of
$55,014 and included in restricted cash as of June 30, 2019 and
December 31, 2018. The lease provides for increases in rent for
real estate taxes and operating expenses, and contains a renewal
option for an additional five years.
The Door
occupies space in New York. An entity wholly owned by the former
Members of The Door is obligated under an operating lease agreement
for the office space expiring in August 2020. The Company made
payments of $108,785 to the affiliate during the six months ended
June 30, 2019 related to this lease. The lease is secured by a cash
security deposit of approximately $29,000.
The Door
is obligated under an operating lease agreement for office space in
Chicago, Illinois, at a fixed rate of $2,200 per month, expiring in
May 2020. The lease is secured by a cash deposit of approximately
$1,500.
42West is
obligated under an operating lease agreement for office space in
New York, expiring in December 2026. The lease is secured by a
standby letter of credit in the amount of $677,354 and provides for
increases in rent for real estate taxes and building operating
costs. The lease also contains a renewal option for an additional
five years.
42West is
obligated under an operating lease agreement for office space in
California, expiring in December 2021. The lease is secured by a
cash security deposit of $44,788 and a standby letter of credit in
the amount of $50,000 at June 30, 2019. The lease also provides for
increases in rent for real estate taxes and operating expenses, and
contains a renewal option for an additional five years, as well as
an early termination option effective as of February 1, 2019.
Should the early termination option be executed, the Company will
be subject to a termination fee in the amount of approximately
$637,000. The Company has not and does not expect to execute such
option.
The
Company is obligated under an operating lease agreement for office
space in Miami, Florida. The lease is secured by a cash security
deposit of $8,433. The original term of the lease expired October
31, 2016 and the Company extended the lease until September 30,
2019 with substantially the same terms as the original lease.
32
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
The Company is obligated
under an operating lease for office space in Los Angeles,
California until July 31, 2019. The monthly rent is $13,746 with
annual increases of 3% for years 1 – 3 and 3.5% for the remainder
of the lease. The lease is secured by a cash security deposit in
the amount of $32,337. On June 1, 2017, the Company entered into an
agreement to sublease the office space in Los Angeles, California.
The sublease is effective June 1, 2017 through July 31, 2019 with
lease payment as follows: (i) $14,892 per month for the first
twelve months, with the first two months of rent abated and (ii)
$15,338 per month for the remainder of the sublease. The subtenant
vacated the premises on July 31, 2019 and the Company’s obligations
under the sublease and master lease agreements have been
satisfied.
The
amortizable life of the right of use asset is limited by the
expected lease term. Although certain leases include options to
extend the Company did not include these in the right of use asset
or lease liability calculations because it is not reasonably
certain that the options will be executed.
|
|
|
|
|
|
|
|
| |
|
|
|
January
1,
2019
|
|
|
June 30,
2019
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Right of
use asset
|
|
$
|
7,547,769
|
|
|
$
|
6,529,077
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Lease
liability
|
|
$
|
1,394,479
|
|
|
$
|
1,408,122
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
|
Lease
liability
|
|
$
|
6,298,437
|
|
|
$
|
5,608,043
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease liability
|
|
$
|
7,692,916
|
|
|
$
|
7,016,165
|
|
The table
below shows the lease income and expenses recorded in the
consolidated statement of operations incurred during the three and
six months ended June 30, 2019.
|
|
|
|
|
|
|
|
|
|
| |
|
Lease costs
|
|
Classification
|
|
Three
months
ended
June 30,
2019
|
|
|
Six
months
ended
June 30,
2019
|
|
|
Operating lease costs
|
|
Selling, general and administrative
expenses
|
|
$
|
542,325
|
|
|
$
|
1,121,729
|
|
|
Operating lease costs
|
|
Direct costs
|
|
|
60,861
|
|
|
|
121,722
|
|
|
Sublease income
|
|
Selling, general and administrative
expenses
|
|
|
(47,522
|
)
|
|
|
(94,738
|
)
|
|
Net lease costs
|
|
|
|
$
|
555,664
|
|
|
$
|
1,148,713
|
|
Maturities of lease liabilities were as follows:
|
|
|
|
| |
|
2019 (excluding six months
ended June 30, 2019)
|
$
|
961,081
|
|
|
2020
|
|
|
1,892,725
|
|
|
2021
|
|
|
1,550,344
|
|
|
2022
|
|
|
926,500
|
|
|
2023
|
|
|
927,564
|
|
|
Thereafter
|
|
|
2,860,001
|
|
|
Total lease payments
|
|
$
|
9,118,215
|
|
|
Less: Imputed interest
|
|
|
(2,102,050
|
)
|
|
Present value of lease
liabilities
|
|
$
|
7,016,165
|
|
The
Company used its incremental borrowing rate on January 1, 2019,
deemed to be 8%, to calculate the present value of the lease
liabilities and right of use asset. The weighted average remaining
lease term for our operating leases was six years at June 30,
2019.
33
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
On February 19, 2019, the
Company entered into an agreement to lease 3,024 square feet of
office space in Coral Gables, Florida. The lease is for a period of
62 months from the commencement date, at a monthly lease rate of
$9,954 with annual increases of 3%. The rent payments are abated
for the first four months of the lease after the commencement date.
Per the lease agreement, the commencement date is defined as the
earlier of (i) date on which landlord delivers to the tenant
possession of the premises with the work (as defined in the lease)
substantially completed and (ii) the date of which the tenant
begins occupying the premises for the conduct of business. The
lease allows for a tenant improvement allowance to build out the
space and any cost of the improvements over the tenant allowance
are the Company’s responsibility. The landlord is responsible for
the construction of the improvements. The Company evaluated the
provisions of the lease and determined that (i) it does not have
the right to obtain the partially constructed underlying asset
during the construction, (ii) the lessor does not have an
enforceable right to payment for its performance to date (iii) the
asset has an alternative use to the lessor and (iv) the Company
does not own the land or the property improvements being
constructed. As such this lease was not included in the right of
use asset or lease liabilities on the Company’s consolidated
balance sheet as of June 30, 2019.
The Company adopted ASU
2016-02 with respect to leases effective January 1, 2019. In July
2018, the FASB added an optional transition method which the
Company elected upon adoption of the new standard. This allowed us
to recognize and measure leases existing at January 1, 2019 without
restating comparative information.
NOTE 19 — COMMITMENTS AND
CONTINGENCIES
Litigation
On or about January 25,
2010, an action was filed by Tom David against Winterman Group
Limited, Dolphin Digital Media (Canada) Ltd., Malcolm Stockdale and
Sara Stockdale in the Superior Court of Justice in Ontario (Canada)
alleging breach of a commercial lease and breach of a personal
guaranty. On or about March 18, 2010, Winterman Group Limited,
Malcolm Stockdale and Sara Stockdale filed a Statement of Defense
and Crossclaim. In the Statement of Defense, Winterman Group
Limited, Malcolm Stockdale and Sara Stockdale denied any liability
under the lease and guaranty. In the Crossclaim filed against
Dolphin Digital Media (Canada) Ltd., Winterman Group Limited,
Malcolm Stockdale and Sara Stockdale seek contribution or indemnity
against Dolphin Digital Media (Canada) Ltd. alleging that Dolphin
Digital Media (Canada) agreed to relieve Winterman Group Limited,
Malcolm Stockdale and Sara Stockdale from any and all liability
with respect to the lease or the guaranty. On or about March 19,
2010, Winterman Group Limited, Malcolm Stockdale and Sara Stockdale
filed a Third-Party Claim against the Company seeking contribution
or indemnity against the Company, formerly known as Logica
Holdings, Inc., alleging that the Company agreed to relieve
Winterman Group Limited, Malcolm Stockdale and Sara Stockdale from
any and all liability with respect to the lease or the guaranty.
The Third-Party Claim was served on the Company on April 6, 2010.
On or about April 1, 2010, Dolphin Digital Media (Canada) filed a
Statement of Defense and Crossclaim. In the Statement of Defense,
Dolphin Digital Media (Canada) denied any liability under the lease
and in the Crossclaim against Winterman Group Limited, Malcolm
Stockdale and Sara Stockdale, Dolphin Digital Media (Canada) seeks
contribution or indemnity against Winterman Group Limited, Malcolm
Stockdale and Sara Stockdale alleging that the leased premises were
used by Winterman Group Limited, Malcolm Stockdale and Sara
Stockdale for their own use. On or about April 1, 2010, Dolphin
Digital Media (Canada) also filed a Statement of Defense to the
Crossclaim denying any liability to indemnify Winterman Group
Limited, Malcolm Stockdale and Sara Stockdale. The ultimate results
of these proceedings against the Company cannot be predicted with
certainty. On or about March 12, 2012, the Court served a Status
Notice on all the parties indicating that since more than (2) years
had passed since a defense in the action had been filed, the case
had not been set for trial and the case had not been terminated,
the case would be dismissed for delay unless action was taken
within ninety (90) days of the date of service of the notice. The
Company has not filed for a motion to dismiss and no further action
has been taken in the case. The ultimate results of these
proceedings against the Company could result in a loss ranging from
0 to $325,000. On March 23, 2012, Dolphin Digital Media (Canada)
Ltd filed for bankruptcy in Canada. The bankruptcy will not protect
the Company from the third-party claim filed against it. However,
the Company has not accrued for this loss because it believes that
the claims against it are without substance and it is not probable
that they will result in loss. As of June 30, 2019, the Company had
not received any other notifications related to this action.
34
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
Incentive
Compensation Plan
On June
29, 2017, the shareholders of the Company approved the Dolphin
Digital Media, Inc. 2017 Equity Incentive Plan (the “2017
Plan”). The 2017 Plan was adopted as a flexible incentive
compensation plan that would allow us to use different forms of
compensation awards to attract new employees, executives and
directors, to further the goal of retaining and motivating existing
personnel and directors and to further align such individuals’
interests with those of the Company’s shareholders. Under the 2017
Plan, the total number of shares of Common Stock reserved and
available for delivery under the 2017 Plan (the “Awards”), at any
time during the term of the 2017 Plan, will be 1,000,000 shares of
Common Stock. The 2017 Plan imposes individual limitations on the
amount of certain Awards, in part with the intention to comply with
Section 162(m) of the Internal Revenue Code of 1986, as amended
(the “Code”). Under these limitations, in any fiscal year of the
Company during any part of which the 2017 Plan is in effect, no
participant may be granted (i) stock options or stock appreciation
rights with respect to more than 300,000 shares, or (ii)
performance shares (including shares of restricted stock,
restricted stock units, and other stock based-awards that are
subject to satisfaction of performance goals) that the Compensation
Committee intends to be exempt from the deduction limitations under
Section 162(m) of the Code, with respect to more than 300,000
shares, in each case, subject to adjustment in certain
circumstances. The maximum amount that may be paid out to any one
participant as performance units that the Compensation Committee
intends to be exempt from the deduction limitations under Section
162(m) of the Code, with respect to any 12-month performance period
is $1,000,000 (pro-rated for any performance period that is less
than 12 months), and with respect to any performance period that is
more than 12 months, $2,000,000. During the six months ended June
30, 2019, the Company did not issue any Awards under the 2017
Plan.
Employee Benefit
Plan
The
Company has a 401(K) profit sharing plan that covers substantially
all of its employees. The Company matches 100% of the first 3%
contributed by the employee and then 50% up to a maximum of 4%
contributed by the employee. The contribution is also limited by
annual maximum amount determined by the Internal Revenue Service.
The Company’s contributions were $51,777 and $149,220 during the
three and six months ended June 30, 2019. Contributions to the
42West 401(K) plan that was in existence during the six months
ended June 30, 2019, are at the discretion of management. The
Company’s contributions were $44,030, for the six months ended June
30, 2019. 42West adopted the Company’s plan during the quarter
ended June 30, 2019.
Employment
Contracts
As a
condition to the Viewpoint Purchase, two of the Viewpoint
Shareholders, Carlo DiPersio and David Shilale entered into
employment agreements with the Company to continue as employees
after the closing of the Viewpoint Purchase. Mr. DiPersio’s
employment agreement is through December 31, 2020 and the contract
defines base compensation and a bonus structure based on Viewpoint
achieving certain financial targets. Mr. Shilale’s employment
agreement is for a period of three years from the Viewpoint Closing
Date and the contract defines the base compensation and a
commission structure based on Viewpoint achieving certain financial
targets. The bonus for Mr. Shilale is determined at the sole
discretion of the Company’s board of directors and management.
Neither agreement provides for guaranteed increases to the base
salary. The employment agreements contain provisions for
termination and as a result of death or disability and entitles the
employee to vacations and to participate in all employee benefit
plans offered by the Company.
Each of the Members has
entered into a four-year employment agreement with The Door,
pursuant to which each Member has agreed not to transfer any shares
of Common Stock received as consideration for the Merger (the
“Share Consideration”) in the first year following the closing date
of the merger, no more than 1/3 of such Share Consideration in the
second year and no more than an additional 1/3 of such Share
Consideration in the third year.
During the year ended
December 31, 2017, 42West renewed two senior level management
employment agreements each with a three-year term. The contracts
define each individual’s base compensation along with salary
increases. The employment agreements contain provisions for
termination and as a result of death or disability and entitles
each of the employees to bonuses, commissions, vacations and to
participate in all employee benefit plans offered by the Company.
A third senior management level employee with an employment
contract with similar terms as described above, left 42West during
the six months ended June 30, 2019.
35
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
As a condition to the
closing of the acquisition of 42West each of the three principal
sellers entered into employment agreements (the “Employment
Agreements”) with the Company and have agreed to continue as
employees of the Company for a three-year term. Each of the
Employment Agreements provides for a base salary with annual
increases and contain provisions for termination and as a result of
death or disability. During the term of the Employment Agreement,
these persons are entitled to participate in all employee benefit
plans, practices and programs maintained by the Company as well as
are entitled to paid vacation in accordance with the Company’s
policy. Each of the Employment Agreements contains lock-up
provisions pursuant to which each such person has agreed to certain
transfer restrictions with respect to the shares of Common Stock
received in connection with the acquisition of 42West.
On April 5, 2018, the principal sellers
of 42West signed amendments to their respective employment
agreements that modified the annual bonus provisions. These
amendments eliminated the rights of each of them (i) to be eligible
to receive in accordance with the provisions of the Company’s
incentive compensation plan, a cash bonus for the calendar year
2017 if certain performance goals were achieved and (ii) to
receive an annual bonus, for each year during the term of each
such employment agreement, of $200,000 in shares of Common Stock
based on the 30-day trading average closing price of such
common stock. The amendment provides for each of the Principal
Sellers to be eligible under the Company’s incentive compensation
plan to receive annual cash bonuses beginning with the calendar
year 2018 based on the achievement of certain performance goals. No
cash bonuses were paid during the six months ended June 30, 2019 to
the principal sellers of 42West.
Letter of Credit
Pursuant to the lease
agreements of the 42West New York and Los Angeles office locations,
the Company is required to issue letters of credit to secure the
leases. On July 24, 2018, the Company renewed the letter of credit
issued by City National Bank for the 42West office space in New
York. The letter of credit is for $677,354 and originally expired
on August 1, 2018. This letter of credit renews automatically
annually unless City National Bank notifies the landlord 60-days
prior to the expiration of the bank’s election not to renew the
letter of credit. The Company granted City National Bank a security
interest in bank account funds totaling $677,354 pledged as
collateral for the letter of credit. On June 29, 2018, the Company
issued a letter of credit through Bank United, in the amount of
$50,000, reducing the borrowing capacity under the Loan Agreement
by that amount. The letters of credit commit the issuer to pay
specified amounts to the holder of the letter of credit under
certain conditions. If this were to occur, the Company would be
required to reimburse the issuer of the letter of credit. The
Company was not aware of any material claims relating to its
outstanding letters of credit as of June 30, 2019.
Motion Picture
Industry Pension Accrual
Until
April 2, 2019, 42West was a contributing employer to the Motion
Picture Industry Pension Individual Account and Health Plans
(collectively the “Plans”), two multiemployer pension funds and one
multiemployer welfare fund, respectively, that are governed by the
Employee Retirement Income Security Act of 1974, as amended. The
Plans conducted an audit of 42West’s books and records for the
period June 7, 2011 through August 20, 2016 in connection with the
contribution obligations to the Plans. During 2018, 42West came to
an agreement with the Plans to pay $314,256 over a twelve-month
period. During the three and six months ended June 30, 2019, it
paid an aggregate amount of $83,764 and $167,527, respectively, to
the Plans related to this agreement. The remaining balance of
$27,921 is recorded in other current liabilities on the condensed
consolidated balance sheet as of June 30, 2019. As of December 31,
2018, the Company had accrued $174,651 in its consolidated balance
sheet related to the audit.
NOTE 20 – SUBSEQUENT EVENTS
On July 10, 2019, the
Company paid $75,000 to one of the sellers of 42West for a Put
Right that was exercised on June 24, 2019.
On July 9, 2019, the
Company issued a convertible promissory note agreement to a
third-party investor and received $150,000. The convertible
promissory note bears interest at a rate of 10% per annum and
matures on July 9, 2021. The balance of the convertible promissory
note and any accrued interest may be converted at the note holder’s
option at any time at a purchase price based on the 30-day average
closing market price per share of the Common Stock
On July 17, 2019, the
Company paid $100,000 to one of the sellers of 42West for a Put
Right that was exercised on June 28, 2019.
36
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2019
On July 23, 2019, pursuant
to the terms of the securities purchase agreement with Lincoln
Park, the Company issued Series B Warrants that entitle the holder
to purchase up to 137,500 shares of Common Stock at $2.00 per
share. The initial exercise date of the Series B Warrants is
January 23, 2020 and can be exercised thereafter for a period of
five years.
On August 12, 2019, the
Compensation Committee of the Company’s Board of Directors
unanimously approved a salary increase of $50,000 each to the
Company’s Chief Executive Officer and Chief Financial Officer
effective January 1, 2019.
In connection with the Put Agreement
with 42West co-CEO Leslee Dart, on August 12, 2019, the Company
entered into an amendment, waiver and exchange agreement (the “Dart
Exchange Agreement”) pursuant to which Ms. Dart waived her Put
Right with respect to 76,194 shares of Common Stock in
exchange for a convertible note (the “Dart Convertible Note”) in
the aggregate principal amount of $702,500, issued on the date of
the Dart Exchange Agreement.
The Dart Convertible Note is convertible
at any time into shares of Common Stock (the “Conversion Shares”)
at a conversion price (the “Conversion Price”) equal to the
quotient obtained by dividing (i) the principal and interest being
converted by (ii) the average closing price per share of Common
Stock, as reported by the Nasdaq Stock Market (or such other
exchange or quotation system on which the Common Stock is then
traded) for the 30-trading days immediately prior to, but not
including the date on which the holder delivers the notice of
conversion. The Conversion Price subject to adjustments for stock
splits, reclassifications and certain other transactions involving
the Company or its securities. The Dart Convertible Note bears an
interest rate of ten percent per annum. The Dart Convertible Note
matures on August 12, 2020 unless earlier converted or redeemed.
The Company may, at its option, prepay all or any portion of the
outstanding balance under the Dart Convertible Note without penalty
or premium.
The Dart Convertible Note provides for
customary events of default, which include (subject in certain
cases to customary grace and cure periods), among others, the
following: nonpayment of principal or interest; failure to
maintain corporate existence; and certain events of bankruptcy or
insolvency. Generally, if an event of default occurs and is
continuing under the Dart Convertible Note, the holder may declare
the principal of, and accrued interest on, the Dart Convertible
Note due and payable. In the case of certain events of
bankruptcy or insolvency, all amounts outstanding under the Dart
Convertible Note, together with accrued and unpaid interest
thereon, would automatically become due and payable. The Dart
Convertible Note was issued to the holder in reliance upon the
exemption from registration provided by Section 4(a)(2) of the
Securities Act, based upon the representation made by the holder
that she is an “accredited investor” and that she is acquiring the
Dart Convertible Note solely for the purposes of investment and not
with a present view to, or for sale in connection with, any
distribution or resale thereof. In addition, there was no general
advertisement conducted by the Company in connection with the
issuance of the Dart Convertible Note.
In connection with the Put Agreement
with Allan Mayer, a member of the Company’s board of directors and
42West co-CEO, on August 12, 2019, the Company entered into an
amendment, waiver and exchange agreement (the “Mayer Exchange
Agreement”) pursuant to which Mr. Mayer waived his Put Right with
respect to 44,740 shares of Common Stock in exchange for 385,514
shares of the Company’s Common Stock (the “Mayer Common Stock”)
issued on the date of the Mayer Exchange Agreement The Mayer Common
Stock was issued to the holder in reliance upon the exemption from
registration provided by Section 4(a)(2) of the Securities Act,
based upon the representation made by the holder that he is an
“accredited investor” and that he is acquiring the Mayer Common
Stock solely for the purposes of investment and not with a present
view to, or for sale in connection with, any distribution or resale
thereof. In addition, there was no general advertisement conducted
by the Company in connection with the issuance of the Mayer Common
Stock.
37
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are a leading
independent entertainment marketing and premium content production
company. We were first incorporated in the State of Nevada on
March 7, 1995 and domesticated in the State of Florida on
December 4, 2014. Our Common Stock trades on The Nasdaq
Capital Market under the symbol “DLPN”.
Through our subsidiaries,
42West and The Door, we provide expert strategic marketing and
publicity services to many of the top brands, both individual and
corporate, in the entertainment and hospitality industries. The
Door and 42West are both recognized global leaders in the PR
services for the industries they serve. Our recent acquisition of
Viewpoint has added full-service creative branding and production
capabilities to our marketing group. Dolphin’s legacy content
production business, founded by Emmy-nominated Chief Executive
Officer, Bill O’Dowd, has produced multiple feature films and
award-winning digital series, primarily aimed at family and young
adult markets.
We currently operate in two
reportable segments: our entertainment publicity and marketing
segment and our content production segment. The entertainment
publicity and marketing segment is composed of 42West, The Door and
Viewpoint and provides clients with diversified services, including
public relations, entertainment content marketing, strategic
communications, social media marketing, creative branding and the
production of marketing video content. The content production
segment is composed of Dolphin Films and Dolphin Digital Studios,
which produce and distribute feature films and digital content.
We have established an
acquisition strategy based on identifying and acquiring companies
that complement our existing entertainment publicity services and
content production businesses. We believe that complementary
businesses, such as data analytics and digital marketing, can
create synergistic opportunities and bolster profits and cash flow.
By way of example, both 42West and The Door have identified the
ability to create content for clients as a “must have” for public
relations campaigns in today’s environment, which relies so heavily
on video clips to drive social media awareness and engagement.
Thus, we believe that our acquisition of Viewpoint provides a
critical competitive advantage in the acquisition of new clients in
the entertainment and lifestyle marketing space, and has the
potential to fuel topline revenue growth by driving increases in
average revenue per client with the cross-selling of video content
creation services. We have identified potential acquisition targets
and are in various stages of discussion with such targets. We
believe that our existing portfolio of public relations and
marketing companies will continue to attract future acquisitions.
We believe that our “marketing super group” is unique in the
industry, as a collection of best-in-class service providers across
a variety of entertainment and lifestyle verticals. We further
believe that new acquisitions in this space would improve our
portfolio’s breadth and depth of services and, therefore, we would
be able to offer an even more compelling opportunity for other
industry leaders to join, and enjoy the benefits of cross-selling
to a wide variety of existing and potential clients. Thus, we
believe we can continue to grow both revenues and profits through
future acquisitions into our entertainment publicity and marketing
segment. We intend to complete additional acquisitions during 2019,
but there is no assurance that we will be successful in doing so,
whether in 2019 or at all.
Going Concern
In the audit opinion for
our financial statements as of and for the year ended
December 31, 2018, our independent auditors included an
explanatory paragraph expressing substantial doubt about our
ability to continue as a going concern based upon our accumulated
deficit as of December 31, 2018 and our working capital
deficit. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
Management is planning to raise any necessary additional funds
through additional sales of our Common Stock, securities
convertible into our Common Stock, debt securities, as well as
available bank and non-bank financing, or a combination of such
financing alternatives; however, there can be no assurance that we
will be successful in raising any necessary additional capital or
securing loans. Such issuances of additional shares of Common Stock
or securities convertible into Common Stock would dilute the equity
interests of our existing shareholders, perhaps substantially.
38
Revenues
For the three and six
months ended June 30, 2019 and 2018, we derived the majority of our
revenues from our entertainment publicity and marketing segment.
The entertainment publicity and marketing segment generates its
revenues from providing public relations services for celebrities,
entertainment and targeted content marketing for film and
television series, strategic communications services for
corporations and public relations, marketing services and brand
strategies for hotels and restaurants. For the six months ended
June 30, 2019, revenue form content production segment was derived
primarily from the domestic distribution of Max Steel . For
the three and six months ended June 30, 2018, the content
production segment revenues were derived from the domestic and
international distribution of Max Steel . Revenue by
percentage of aggregate revenue for our two segments for the three
and six months ended June 30, 2019 and 2018 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
For the
three months ended
June
30,
|
|
|
For the six
months ended
June
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Revenues :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment publicity and marketing
|
|
|
100.0
|
%
|
|
|
98.1
|
%
|
|
|
99.4
|
%
|
|
|
96.1
|
%
|
|
Content
production
|
|
|
0.0
|
%
|
|
|
1.9
|
%
|
|
|
0.6
|
%
|
|
|
3.9
|
%
|
|
Total revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Entertainment
Publicity and Marketing
Our
revenue is directly impacted by the retention and spending levels
of existing clients and by our ability to win new clients. We
believe that we currently have a stable client base, and we have
continued to grow organically through referrals and actively
soliciting new business as well as through acquisition of new
businesses within the same industry. We earn revenues primarily
from the following sources: (i) celebrity talent services; (ii)
content marketing services under multiyear master service
agreements in exchange for fixed project-based fees; (iii)
individual engagements for entertainment content marketing
services for durations of generally between three and six months;
(iv) strategic communications services; (v) engagements for
marketing of special events such as food and wine festivals and
(vi) content productions of marketing materials on a project
contract basis. For these revenue streams, we collect fees through
either fixed fee monthly retainer agreements or project-based
fees.
We earn
entertainment publicity and marketing revenues primarily through
the following:
·
Talent – We earn
fees from creating and implementing strategic communication
campaigns for performers and entertainers, including Oscar and Emmy
winning film and television stars, directors, producers, celebrity
chefs and Grammy nominated recording artists. Our services in this
area include ongoing strategic counsel, media relations, studio
and/or network liaison work, and event and tour support.
·
Entertainment Marketing and Brand Strategy – We earn
fees from providing marketing direction, public relations counsel
and media strategy for entertainment content (including theatrical
films, television programs, DVD and VOD releases, and online
series) from all the major studios, as well as content producers
ranging from individual filmmakers and creative artists to
production companies, film financiers, DVD distributors, and other
entities. In addition, we provide entertainment marketing services
in connection with film festivals, food and wine festivals, awards
campaigns, event publicity and red-carpet management. As part of
our services we offer marketing and publicity services tailored to
reach diverse audiences. We also provide marketing direction
targeted to the ideal consumer through a creative public relations
and creative brand strategy for hotel and restaurant groups. Our
clients for this type of service include major studios, independent
producers for whom we create targeted multicultural marketing
campaigns and leading hotel and restaurant groups.
We
expect that increased digital streaming marketing budgets at
several large key clients will drive growth of revenue and profit
in 42West ’ s
Entertainment Marketing division over the next several years.
·
Strategic Communications – We earn
fees by advising companies looking to create, raise or reposition
their public profiles, primarily in the entertainment industry. We
believe that growth in Strategic Communications division will be
driven by increasing demand for these services by traditional and
non-traditional media clients who are expanding their activities in
the content production, branding, and consumer products PR sectors.
We expect that this growth trend will continue for the next three
to five years. We also help studios and filmmakers deal with
controversial movies, as well as high-profile individuals address
sensitive situations.
39
·
Creative Branding and Production – We offer
clients creative branding and production services from concept
creation to final delivery. Our services include brand strategy,
concept and creative development, design and art direction, script
and copyrighting, live action production and photography, digital
development, video editing and composite, animation, audio mixing
and engineering, project management and technical support. We
expect that our ability to offer these services to our existing
clients in the entertainment and hospitality industries will be
accretive to our revenue.
Content
Production
Dolphin Films
For the
six months ended June 30, 2019, we derived revenues from Dolphin
Films primarily through the domestic distribution of our motion
picture, Max Steel . For the three and six months ended June
30, 2018, we derived revenues from the domestic and international
distribution of Max Steel .
The
production of the motion picture, Max Steel , was completed
during 2015 and released in the United States on October 14,
2016. The motion picture did not perform as well as expected
domestically, but we secured approximately $8.2 million in
international distribution agreements prior to its release. As part
of our domestic distribution arrangement, we still have the ability
to derive revenues from the ancillary markets described below,
although the amount of revenue derived from such channels is
typically commensurate with the performance of the film in the
domestic box office.
We earn motion picture
revenues through the following:
·
Theatrical – We earn
theatrical revenues from the domestic theatrical release of motion
pictures licensed to a U.S. theatrical distributor that has
agreements with theatrical exhibitors. The financial terms
negotiated with the Max Steel U.S. theatrical distributor
provides that we receive a percentage of the box office results,
after related distribution fees.
·
International – We earn
international revenues through license agreements with
international distributors to distribute our motion pictures in an
agreed upon territory for an agreed upon time. Several of the
international distribution agreements related to Max Steel
were contingent on a domestic wide release that occurred on
October 14, 2016.
·
Other – We earn
additional revenues through Dolphin Films’ U.S. theatrical
distributor which has existing output arrangements for the
distribution of productions to home entertainment, video-on-demand,
or VOD, pay-per-view, or PPV, electronic-sell-through, or EST, SVOD
and free and pay television markets. The revenues expected to be
derived from these channels are based on the performance of the
motion picture in the domestic box office. For the six months ended
June 30, 2019 and 2018, the majority of revenues from Max
Steel were derived from these channels.
Our ability to receive
additional revenues from Max Steel depends on our ability to
repay our loans under our production service agreement and prints
and advertising loan agreement from the profits of Max Steel.
Max Steel did not generate sufficient funds to repay
either of these loans prior to the applicable maturity dates. As a
result, if the lenders foreclose on the collateral securing the
loans, our subsidiary and the Max Steel VIE will lose the copyright
for Max Steel and, consequently, will no longer receive
any revenues from Max Steel . In addition, we would impair
the entire capitalized production costs of Max Steel
included as an asset on our balance sheet, which as of June 30,
2019, was $0.6 million. We are not parties to either of these loan
agreements and have not guaranteed to the lenders any of the
amounts outstanding under these loans, but we have provided a
$620,000 backstop to the guarantor of the prints and advertising
loan. For a discussion of the terms of such agreements and the
$620,000 backstop, see “Liquidity and Capital Resources” below.
Project Development
and Related Services
We have a team that
dedicates a portion of its time to sourcing scripts for future
development. The scripts can be for either digital or motion
picture productions. We have acquired the rights to certain scripts
that we intend to produce and release in the future, subject to
obtaining financing. We have not yet determined if these projects
would be produced for digital or theatrical distribution.
40
Our
pipeline of feature films includes:
·
Youngblood , an updated version of the 1986 hockey
classic;
·
Out of Their League , a romantic comedy pitting husband
versus wife in the cut-throat world of fantasy football; and
·
Ask Me , a teen comedy in which a high-school student starts
a business to help her classmates create elaborate
“promposals”.
We have completed development of each of these feature films, which
means that we have completed the script and can begin
pre-production once financing is obtained. We are planning to fund
these projects through loans, sales of our Common Stock, securities
convertible into our Common Stock, debt securities or a combination
of such financing alternatives; however, there is no assurance that
we will be able to obtain the financing necessary to produce any of
these feature films.
Expenses
Our expenses consist
primarily of: (1) direct costs; (2) selling, general and
administrative expenses; (3) depreciation and amortization expense;
(4) payroll expenses; and (5) legal and professional fees.
Direct costs include certain cost of services, as well as certain
production costs, related to our entertainment publicity and
marketing business. Direct costs also include amortization of
deferred production costs, impairment of deferred production costs,
residuals and other costs associated with our content production
business. Residuals represent amounts payable to various unions or
“guilds” such as the Screen Actors Guild, Directors Guild of
America, and Writers Guild of America, based on the performance of
the motion picture and digital productions in certain ancillary
markets. Included within direct costs are immaterial impairments
for any of our projects. Capitalized production costs are recorded
at the lower of their cost, less accumulated amortization and tax
incentives, or fair value. If estimated remaining revenue is not
sufficient to recover the unamortized capitalized production costs
for that title, the unamortized capitalized production costs will
be written down to fair value.
Selling, general and administrative expenses include all overhead
costs except for payroll, depreciation and amortization and legal
and professional fees that are reported as a separate expense
item.
Depreciation and amortization include the depreciation of our
property, equipment and leasehold improvements and amortization of
intangible assets.
Legal and professional fees include fees paid to our attorneys,
fees for investor relations consultants, audit and accounting fees
and fees for general business consultants.
Payroll expenses include wages, payroll taxes and employee
benefits.
Other Income and Expenses
For the three months ended
June 30, 2019 other income and expenses consisted of: (1) changes
in fair value of put rights; (2) changes in fair value of
contingent consideration and (3) interest expense and debt
amortization expense. For the six months ended June 30, 2019, other
income and expenses included all of the same line items detailed
above and a loss on extinguishment of debt. For the three and six
months ended June 30, 2018 other income and expenses consisted of
(1) changes in the fair value of warrant liabilities; (2) changes
in the fair value of the put rights; (3) acquisition costs; (4)
loss on extinguishment of debt and (5) interest expense and debt
amortization expense.
41
RESULTS OF
OPERATIONS
Three and six months ended June 30,
2019 as compared to three and six months ended June 30,
2018
Revenues
For the three and six
months ended June 30, 2019 and 2018 our revenues were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
For the
three months ended
June
30,
|
|
|
For the six
months ended
June
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Revenues :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entertainment publicity and marketing segment
|
|
$
|
6,273,983
|
|
|
$
|
5,121,487
|
|
|
$
|
12,523,890
|
|
|
$
|
10,577,220
|
|
|
Content
production segment
|
|
|
—
|
|
|
|
97,961
|
|
|
|
78,990
|
|
|
|
427,153
|
|
|
Total revenue
|
|
$
|
6,273,983
|
|
|
$
|
5,219,448
|
|
|
$
|
12,602,880
|
|
|
$
|
11,004,373
|
|
Revenues from entertainment
publicity and marketing increased by approximately $1.2 million and
$2.0 million, respectively, for the three and six months ended June
30, 2019, as compared to the same period in the prior year. The
increase was due primarily to the addition of revenues of The Door
and Viewpoint which we acquired on July 5, 2018 and October 31,
2018, respectively, partially offset by the decrease in revenues of
42West caused by the departure of several publicists in June of
2018.
Revenues from content
production decreased by approximately $0.1 million and $0.3 million
for the three and six months ended June 30, 2019, as compared to
the same period in prior year. The decrease was primarily due to
the normal revenue life cycle of our motion picture Max
Steel . The majority of the revenues of a motion picture are
recognized in the first twelve months following the release of the
film. Max Steel was released on October 14, 2016, and we
have already recognized the revenues from the theatrical release, a
majority of home entertainment (i.e. DVD) and from international
licensing arrangements. We continue to record revenues, to a
significantly lesser extent, from home entertainment, and from pay
and free TV in the domestic market.
On September 4, 2018, our
domestic distributor, Open Road, filed for Chapter 11 bankruptcy
protection. The assets of Open Road were sold on December 21, 2018
to Raven Capital, with the final transaction closing in February
2019. We expect that our domestic distribution agreements for
Max Steel and Believe, which were purchased in the
sale of the assets of Open Road, will continue on the same terms as
agreed upon with Open Road.
Expenses
For the three and six
months ended June 30, 2019 and 2018, our expenses were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
For the
three months ended
|
|
|
For the six
months ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
$
|
1,279,657
|
|
|
$
|
295,765
|
|
|
$
|
2,467,076
|
|
|
$
|
865,199
|
|
|
Selling,
general and administrative
|
|
1,071,460
|
|
|
|
585,214
|
|
|
|
1,859,623
|
|
|
|
1,381,958
|
|
|
Depreciation and amortization
|
|
478,560
|
|
|
|
375,163
|
|
|
|
960,203
|
|
|
|
746,343
|
|
|
Legal
and professional
|
|
449,060
|
|
|
|
356,002
|
|
|
|
832,732
|
|
|
|
844,488
|
|
|
Payroll
|
|
4,197,324
|
|
|
|
3,538,037
|
|
|
|
8,510,486
|
|
|
|
7,196,042
|
|
|
Total
expenses
|
$
|
7,476,061
|
|
|
$
|
5,150,181
|
|
|
$
|
14,630,120
|
|
|
$
|
11,034,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
Direct costs increased by
approximately $1.0 million and $1.6 million, respectively, for the
three and six months ended June 30, 2019, as compared to the three
and six months ended June 30, 2018. Direct costs related to the
entertainment publicity and marketing segment were approximately
$1.3 million and $2.4 million, respectively, for the three and six
months ended June 30, 2019 as compared to $0.2 million and $0.5
million, respectively, for the three and six months ended June 30,
2018. The increase was primarily due to the direct costs associated
with the addition of operations of The Door and Viewpoint.
Entertainment publicity and marketing direct costs for the three
and six months ended June 30, 2018 was composed of only the direct
costs for 42West.
Direct costs related to the
content production segment were immaterial for the three and six
months ended June 30, 2019 and approximately $0.1 million and $0.3
million, respectively, for the three and six months ended June 30,
2018. Direct costs for the content production segment consist
primarily of (i) amortization of capitalized production costs; (ii)
residual payments made to the guilds and (iii) distributor costs to
produce DVD’s. Capitalized production costs are amortized based on
revenues recorded during the period over the estimated ultimate
revenues of the film. As a result, because revenues from content
production decreased for the three and six months ended June 30,
2019, as compared to the same periods in prior year, direct costs
also decreased.
Selling,
general and administrative expenses increased by approximately $0.5
million for each of the three and six months ended June 30, 2019,
as compared to the three and six months ended June 30, 2018. The
increase was primarily due to the selling, general and
administrative costs associated with the addition of operations of
The Door and Viewpoint included in the balances for the three and
six months ended June 30, 2019. Since the acquisitions of The Door
and Viewpoint took place after June 30, 2018, selling, general and
administrative expenses for the three and six months ended June 30,
2018 did not include any balances for these entities. We
reclassified approximately $0.1 million and $0.2 million of
computer consulting related expenses from selling, general and
administrative expenses to legal and professional fees for the
three and six months ended June 30, 2018, respectively, to conform
with the presentation of these costs for the three and six months
ended June 30, 2019.
Depreciation and amortization increased by approximately $0.1
million and $0.2 million for the three months and six months ended
June 30, 2019, as compared to the three and six months ended June
30, 2018. For the three and six months ended June 30, 2019, the
amortization expense included the amortization of intangible assets
obtained through the acquisitions of 42West, The Door and
Viewpoint. By contrast, the amortization expense for the
three and six months ended June 30, 2018 comprised only the
amortization of the intangible assets obtained with the acquisition
of 42West.
Legal and
professional fees increased by approximately $0.1 million for the
three months ended June 30, 2019, as compared to the three months
ended June 30, 2018. The increase is primarily due to the legal and
professional fees of The Door and Viewpoint and legal fees related
to the Lincoln Park Note. Legal and professional fees remained
substantially the same for the six months ended June 30, 2019, as
compared to the same period in prior years, in spite of including
the legal and professional fees for The Door and Viewpoint. This is
primarily attributable to an overall decrease in the use of
consultants in both the entertainment publicity and marketing
segment and the content production segment.
Payroll
expenses increased by approximately $0.7 million and $1.3 million
for the three and six months ended June 30, 2019, as compared to
the three and six months ended June 30, 2018. The increase is
primarily due to the addition of payroll for The Door and Viewpoint
in the entertainment and publicity segment offset by a decrease in
the payroll expense of 42West related to the departures of certain
senior publicists in mid-2018.
Other Income and
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
For the
three months ended
|
|
|
For the six
months ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Other Income and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of debt
|
|
$
|
—
|
|
|
$
|
(53,271
|
)
|
|
$
|
(21,287
|
)
|
|
$
|
(53,271
|
)
|
|
Acquisition costs
|
|
|
—
|
|
|
|
(34,672
|
)
|
|
|
—
|
|
|
|
(34,672
|
)
|
|
Change
in fair value of warrant liability
|
|
|
—
|
|
|
|
350,115
|
|
|
|
—
|
|
|
|
518,432
|
|
|
Change
in fair value of put rights
|
|
|
251,350
|
|
|
|
333,043
|
|
|
|
1,778,376
|
|
|
|
1,416,639
|
|
|
Change
in fair value of contingent consideration
|
|
|
360,000
|
|
|
|
—
|
|
|
|
90,000
|
|
|
|
—
|
|
|
Interest
expense and debt amortization expense
|
|
|
(301,139
|
)
|
|
|
(265,992
|
)
|
|
|
(589,108
|
)
|
|
|
(533,419
|
)
|
|
Total
|
|
$
|
310,211
|
|
|
$
|
329,223
|
|
|
$
|
1,257,981
|
|
|
$
|
1,313,709
|
|
43
During
the six months ended June 30, 2019, a holder of a convertible
promissory note elected to convert the principal on the promissory
note thereunder into 53,191 shares of our Common Stock pursuant to
the terms of the promissory note, at a conversion price of $1.41
per share. On the date of the conversion, the market price of our
Common Stock was $1.81 per share, resulting in a loss on
extinguishment of debt of $0.02 million.
The fair
value of Put Rights related to the 42West acquisition were recorded
on our balance sheet on the date of the acquisition. The fair value
of the Put Rights is measured at every balance sheet date and any
changes are recorded on our consolidated statements of operations.
The fair value of the Put Rights decreased by approximately $0.3
million and $1.8 million for the three and six months ended June
30, 2019, respectively, and by $0.3 million and $1.4 million for
the three and six months ended June 30, 2018, respectively.
The fair
value of contingent consideration related to our acquisition of The
Door was recorded at fair value on our balance sheet on the
acquisition date. The fair value of the related contingent
consideration is measured at every balance sheet date and any
changes recorded on our consolidated statements of operations. For
the three and six months ended June 30, 2019, the fair value of the
contingent consideration decreased by approximately $0.4 million
and $0.1 million, respectively.
Interest
expense and debt amortization expense increased by approximately
$0.03 million and $0.05 million for the three and six months ended
June 30, 2019, as compared to the same periods in the prior year,
primarily due to 2018 convertible note payable.
Net Income
Net loss
was approximately $(0.9) million or $(0.06) per share based on
15,969,926 weighted average shares outstanding for basic earnings
per share and $(0.06) per share based on 19,172,087 weighted
average shares on a fully diluted basis for the three months ended
June 30, 2019 and net loss was approximately $(0.8) million or $
(0.05) per share based on 15,957,085 weighted average shares
outstanding and $(0.13) per share based on 19,671,124 weighted
average shares outstanding on a fully diluted basis for the six
months ended June 30, 2019. Net income was approximately $0.2
million or $0.01 per share based on 12,349,014 weighted average
shares outstanding and $(0.01) per share based on 14,032,001
weighted average shares outstanding on a fully diluted basis for
the three months ended June 30, 2018 and net income was
approximately $1.0 million or $0.08 per share based on 12,432,872
weighted average shares outstanding and $(0.03) per share based on
14,533,224 weighted average shares outstanding on a fully diluted
basis for the six months ended June 30, 2018. The reduction in net
income for the three and six months ended June 30, 2019 as compared
to the three and six months ended June 30, 2018, is related to the
factors discussed above.
LIQUIDITY
AND CAPITAL RESOURCES
Cash Flows
Six months ended
June 30, 2019 as compared to six months ended June 30,
2018
Cash
flows used in operating activities for the six months ended June
30, 2019 were approximately $1.3 million compared to immaterial
cash flows used in operating activities for the six months ended
June 30, 2018. The increase in cash used in operating activities
for the six months ended June 30, 2019 as compared to the six
months ended June 30, 2018 is primarily due to lower cash flows
from operations before changes in operating assets and liabilities
of approximately $2.1 million. This decrease in cash flows used for
operations before changes in operating assets and liabilities was
partially offset by an increase in cash flows from other current
liabilities, other current assets and accounts payable.
Cash
flows used in investing activities were for purchases of fixed
assets and were substantially the same as compared to the same
period in prior year.
Cash
flows used in financing activities for six months ended June 30,
2019 were approximately $1.7 million as compared to $3.2 million of
cash flows used in financing activities during the six months ended
June 30, 2018. Cash flows used in financing activities for the six
months ended June 30, 2019 consisted primarily of (i) $0.1 million
of net repayment of debt related to Max Steel; (ii) $1.4 million
used to purchase our Common Stock pursuant to Put Rights that were
exercised; (iii) second installment of the consideration paid for
Viewpoint; (iv) second installment of the consideration for The
Door and (v) final installment in the consideration paid to
employees of 42West to settle change of control provisions in their
employment contracts. The cash used in financing activities as
described above was offset by $1.2 million received from the
issuance of convertible promissory notes. By contrast cash flows
used in financing activities during the six months ended June 30,
2018 consisted primarily of $1.7 million in proceeds from our
line of credit with Bank United offset by (i) $0.8 million used to
repay our line of credit with City National; (ii) $1.0 million used
to repay the debt related to Max Steel; (iii) $2.5 million used to
purchase our Common Stock pursuant to Put Rights that were
exercised and (iv) $0.6 million used to repay advances from our
CEO.
44
As of
June 30, 2019 and 2018, we had cash available for working capital
of approximately $2.6 million, not including $0.7 million pledged
as collateral for the standby letter of credit for the New York
office and security deposit in the Newton MA office, and
$2.0 million, respectively, and a working capital deficit of
approximately $16.1 million and $13.6 million,
respectively.
These
factors, along with an accumulated deficit of $95.3 million as of
June 30, 2019, raise substantial doubt about our ability to
continue as a going concern. The condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q do not
include any adjustments that might result from the outcome of these
uncertainties. In this regard, management is planning to raise any
necessary additional funds through additional issuances of our
Common Stock, securities convertible into our Common Stock, debt
securities, as well as available bank and non-bank financing, or a
combination of such financing alternatives. There is no assurance
that we will be successful in raising additional capital. Such
issuances of additional shares of Common Stock or securities
convertible into Common Stock would further dilute the equity
interests of our existing shareholders, perhaps substantially. We
currently have the rights to several scripts which we currently
intend to obtain financing to produce and release. We will
potentially earn a producer and overhead fee for this production.
There can be no assurances that such production will be released or
fees will be realized in future periods.
In
addition, we have a substantial amount of debt. We do not currently
have sufficient assets to repay such debt in full when due, and our
available cash flow may not be adequate to maintain our current
operations if we are unable to repay, extend or refinance such
indebtedness. As of June 30, 2019, our total debt was approximately
$13.9 million and our total stockholders’ equity was approximately
$8.5 million. Approximately $4.7 million of the total debt as of
June 30, 2019 represents the fair value of Put Rights in connection
with the 42West acquisition, which may or may not be exercised by
the sellers. Approximately $2.3 million of our indebtedness as of
June 30, 2019 ($0.7 million outstanding under the prints and
advertising loan agreement plus $1.6 million outstanding under the
production service agreement) was incurred by our Max Steel
subsidiary and the variable interest entity consolidated in our
financial statements, Max Steel Productions LLC (“Max Steel VIE”).
Repayment of these loans was intended to be made from revenues
generated by Max Steel both within and outside of the United
States. Max Steel did not generate sufficient funds to repay
either of these loans prior to the maturity date. As a result, if
the lenders foreclose on the collateral securing the loans, our
subsidiary will lose the copyright for Max Steel and,
consequently, will no longer receive any revenues from Max
Steel . In addition, we would impair the capitalized production
costs and accounts receivable related to the sales of Max
Steel included as assets on our balance sheet, which as of June
30, 2019 were approximately $0.6 million and $0.04 million,
respectively.
If we are not able to
generate sufficient cash to service our current or future
indebtedness, we will be forced to take actions such as reducing or
delaying digital or film productions, selling assets, restructuring
or refinancing our indebtedness or seeking additional debt or
equity capital or bankruptcy protection. We may not be able to
affect any of these remedies on satisfactory terms or at all and
our indebtedness may affect our ability to continue to operate as a
going concern.
Put Rights
In connection with the
42West acquisition, pursuant to Put Agreements, we granted the
sellers Put Rights to require us to purchase up to an aggregate of
1,187,087 shares of Common Stock that they received as
consideration (including shares from the earn out consideration
which was achieved for the year ended December 31, 2017) for a
purchase price of $9.22 per share during certain specified exercise
periods up until December 2020. During the six months ended
June 30, 2019, we purchased 202,602 shares of our Common Stock from
certain of the sellers in accordance with the Put Agreements. An
aggregate purchase price of $990,500 was paid during the six months
ended June 30, 2019, $175,000 was paid in July 2019 and another
$702,500 remains unpaid.
In March of 2018, we
entered into Put Agreements with three 42West employees with change
of control provisions in their employment agreements. We agreed to
purchase up to 50% of the shares of Common Stock to be received by
the employees in satisfaction of the change of control provision in
their employment agreements. The employees have put rights to
require us to purchase an additional 20,246 shares of Common Stock,
including in respect of the earn out consideration. None of these
put rights were exercised during the six months ended June 30,
2019. See Note 3—Mergers and Acquisitions for further discussion of
the 42West acquisition and the put agreements we entered into with
the sellers and 42West employees.
45
Financing Arrangements
Prints and
Advertising Loan
On August 12, 2016,
Dolphin Max Steel Holdings, LLC, a wholly owned subsidiary of
Dolphin Films, or Max Steel Holdings, entered into a loan and
security agreement, or the P&A Loan, providing for a
non-revolving credit facility in an aggregate principal amount of
up to $14,500,000 that matured on August 25, 2017. The loan is
not guaranteed by any other Dolphin entity and the only asset held
by Max Steel Holdings is the copyright for the motion picture,
which secures the loan. The proceeds of the credit facility were
used to pay a portion of the P&A expenses of the domestic
distribution of our feature film, Max Steel . Amounts
borrowed under the credit facility accrue interest at either (i) a
fluctuating per annum rate equal to the 5.5% plus a base rate or
(ii) a per annum rate equal to 6.5% plus the LIBOR determined for
the applicable interest period, determined by the borrower. As of
June 30, 2019, we recorded a balance of $0.7 million, including
accrued interest of $.06 million, related to this agreement on our
condensed consolidated balance sheets.
Production Service
Agreement
During
2014, the Max Steel VIE, created in connection with the financing
and production of Max Steel, entered into a loan agreement in the
amount of $10.4 million to produce Max Steel . The loan is
partially secured by international distribution agreements made
prior to the commencement of principal photography and tax
incentives. The agreement contains repayment milestones to be made
during the year ended December 31, 2015, that if not met,
accrue interest at a default rate of 8.5% per annum above the
published base rate of HSBC Private Bank (UK) Limited until the
maturity on January 31, 2016 or the release of the movie.
Repayment of the loan was intended to be made from revenues
generated by Max Steel outside of the United States. Max
Steel did not generate sufficient funds to repay the loan prior
to the maturity date. As a result, if the lender forecloses on the
collateral securing the loan, Max Steel VIE will lose the copyright
for Max Steel and, consequently, our consolidated financial
statements will no longer reflect any revenues from the
distribution of Max Steel in foreign territories. During the
six months ended June 30, 2019, Max Steel Holdings collected
approximately $0.1 million from an accounts receivable that had
previously been written off and recorded this amount on our
consolidated statement of operations. We had a balance of
$1.6 million related to this agreement in the caption debt and $1.7
million of accrued interest in other current liabilities on our
condensed consolidated balance sheet as of June 30, 2019.
42West Line of Credit
On March
15, 2018, 42West entered into a business loan agreement with
BankUnited, N.A. (the “Loan Agreement”) for a revolving line of
credit. The Loan Agreement matures on March 15, 2020 and bears
interest on the outstanding balance at the bank’s prime rate plus
0.25% per annum. The maximum amount that can be drawn under the
Loan Agreement is $2,250,000 with a sublimit of $750,000 for
standby letters of credit. Amounts outstanding under the Loan
Agreement are secured by 42West’s current and future inventory,
chattel paper, accounts, equipment and general intangibles. As of
June 30, 2019, we recorded a balance of $1.7 million related to
this Loan Agreement.
The Loan
Agreement contains customary affirmative covenants, including
covenants regarding maintenance of a maximum debt to total net
worth ratio of at least 4.0:1.0 and a minimum debt service coverage
of 1.40x based on fiscal year-end audit to be calculated as
provided in the Loan Agreement. Further, the Loan Agreement
contains customary negative covenants, including those that,
subject to certain exceptions, restrict the ability of 42West to
incur additional indebtedness, grant liens, make loans, investments
or certain acquisitions, or enter into certain types of agreements.
Upon the occurrence of an event of default, the bank may accelerate
the maturity of the loan and declare the unpaid principal balance
and accrued but unpaid interest immediately due and payable. In the
event of 42West’s insolvency, such outstanding amounts will
automatically become due and payable. 42West may prepay any amounts
outstanding under the Loan Agreement without penalty. As of June
30, 2019, we were in compliance with all covenants under the Loan
Agreement.
Promissory
Notes
Nonconvertible Notes
On July 5, 2012, we issued an unsecured promissory note in the
amount of $300,000 bearing interest at a rate of 10% per annum and
payable on demand to KCF Investments LLC, an entity controlled by
Mr. Stephen L Perrone, an affiliate of Dolphin. The proceeds from
this note were used for working capital. On December 10, 2018, we
agreed to exchange this promissory note, including accrued interest
of $192,233, for a new unsecured promissory note in the amount of
$492,233 that matures on December 10, 2023. The promissory note
bears interest at a rate of 10% per annum and provides for monthly
repayments of principal and interest in the amount of $10,459
beginning January 15, 2019. The promissory note may be repaid at
any time prior to maturity without a penalty. During the six months
ended June 30, 2019, we repaid $0.04 million of the principal of
this note.
46
On November 30, 2017, we
entered into an unsecured promissory note that matures on January
15, 2020 and received $200,000. We may prepay this promissory note
with no penalty at any time. The promissory note bears interest at
a rate of 10% per annum.
On June 14, 2017, we
entered into an unsecured promissory note that matures two years
after issuance and received $400,000. On May 1, 2019, the holder of
the note agreed to extend the maturity date of the unsecured
promissory note until June 14, 2021. The promissory note
bears interest at a rate of 10% per annum.
We have a balance of
$283,952 in current liabilities and $769,339 in noncurrent
liabilities related to the foregoing nonconvertible notes in our
balance sheet as of June 30, 2019.
Convertible
Notes
2019
Lincoln Park Note
On May
20, 2019, we entered into a securities purchase agreement with
Lincoln Park Capital Fund LLC and issued a convertible promissory
note with a principal amount of $1.1 million at a purchase price of
$1.0 million together with warrants to purchase up to 137,500
shares of our common stock at an exercise price of $2.00 per share.
The securities purchase agreement provides for issuance of warrants
to purchase up to 137,500 shares of our common stock on each of the
second, fourth and sixth month anniversaries of the securities
purchase agreement if the principal balance has not been paid on
such dates. The convertible promissory note has an original issue
discount of $100,000 and does not bear interest unless there is an
event of default. The convertible promissory note may be converted
at any time into shares of our common stock at an initial
conversion price equal to the lower of (A) $5.00 per share and (B)
the lower of (i) the lowest intraday sales price of our common
stock on the applicable conversion date and (ii) the average of the
three lowest closing sales prices of our common stock during the
twelve consecutive trading days including the trading day
immediately preceding the conversion date. The convertible
promissory note matures on May 21, 2021. As of June 30, 2019, we
had a balance of $0.8 million, net of $0.1 million original issue
discount and $0.2 million of a beneficial conversion feature, on
our condensed consolidated balance sheet.
On May
20, 2019, in connection with the securities purchase agreement with
Lincoln Park discussed above, we entered into a Registration Rights
Agreement with Lincoln Park pursuant to which we agreed to register
any shares converted into our Common Stock pursuant to the terms of
the convertible promissory note with Lincoln Park, if during the
six-month period commencing on the date of the Registration Rights
Agreement, we determine to file a resale registration statement
with the Securities and Exchange Commission.
2019
Convertible Debt
On July 9, 2019, we issued
a convertible promissory note agreement to a third-party investor
and received $150,000. The convertible promissory note bears
interest at a rate of 10% per annum and matures on July 9, 2021.
The balance of the convertible promissory note and any accrued
interest may be converted at the note holder’s option at any time
at a purchase price based on the 30-day average closing market
price per share of the Common Stock.
On March 25, 2019, we
issued a convertible promissory note agreement to a third-party
investor and received $200,000. The convertible promissory note
bears interest at a rate of 10% per annum and matures on March 25,
2021. The balance of the convertible promissory note and any
accrued interest may be converted at the note holder’s option at
any time at a purchase price based on the 30-day average closing
market price per share of the Common Stock.
2018 Convertible
Debt
On July
5, 2018, we issued an 8% secured convertible promissory note in the
principal amount of $1.5 million pursuant to a securities purchase
agreement with Pinnacle Family Office L.P., dated the same date.
Interest on the convertible promissory note is payable on a
quarterly basis and the convertible promissory note matures on
January 5, 2020. We may prepay the convertible promissory note in
whole, but not in part, at any time prior to maturity; however, if
we voluntarily prepay the convertible promissory note we must (i)
pay the holder of the convertible promissory note a prepayment
penalty equal to 10% of the prepaid amount and (ii) issue to the
holder of the convertible promissory note warrants to purchase
100,000 shares of our common stock with an exercise price equal to
$2.29 per share. The convertible promissory note also contains
certain customary events of default. The holder may convert the
outstanding principal amount of the convertible promissory note
into shares of our common stock at any time at a price per share
equal to $2.29, subject to adjustment for stock dividends, stock
splits, dilutive issuances and subsequent rights offerings. As of
June 30, 2019, we have a balance of $1.4 million, net of a debt
discount of $0.1 million, on our condensed consolidated balance
sheet and recorded $0.06 million of interest expense on our
condensed consolidated statement of operations for the six months
ended June 30, 2019.
47
2017 Convertible
Debt
In 2017, we entered into
subscription agreements pursuant to which we issued unsecured
convertible promissory notes, each with substantially similar
terms, for an aggregate principal amount of $550,000. The
convertible promissory notes mature during the third quarter of
2019 and each bears interest at a rate of 10% per annum. The
principal and any accrued and unpaid interest of the convertible
promissory notes are convertible by the respective holders into
shares of Common Stock at a price of either (i) the 90 day average
closing market price per share of Common Stock as of the date the
holder submits a notice of conversion or (ii) if an Eligible
Offering (as defined in the convertible promissory notes) of Common
Stock is made, 95% of the public offering price per share of Common
Stock. As of June 30, 2019, we had a balance of $550,000 in current
liabilities related to these convertible promissory notes.
Critical Accounting Policies, Judgments
and Estimates
Our discussion and analysis
of our financial condition and results of operations is based upon
our consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these consolidated
financial statements requires us to make estimates, judgments and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. We base our estimates on
historical experience and on various other assumptions that we
believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates.
An accounting policy is
considered to be critical if it requires an accounting estimate to
be made based on assumptions about matters that are highly
uncertain at the time the estimate is made, and if different
estimates that reasonably could have been used, or changes in the
accounting estimate that are reasonably likely to occur, could
materially impact the consolidated financial statements. We believe
that the following critical accounting policies reflect the more
significant estimates and assumptions used in the preparation of
the consolidated financial statements.
Leases
On
January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842),
which requires all assets and liabilities arising from leases to be
recognized in our consolidated balance sheets. The Company adopted
this new accounting guidance effective January 1, 2019. In July
2018, the FASB added an optional transition method which we elected
upon adoption of the new standard. This allowed us to recognize and
measure leases existing at January 1, 2019 without restating
comparative information. In addition, we elected to apply the
package of practical expedients permitted under the transition
guidance within the new standard, which among other things, allows
us to carry forward the historical lease classification.
We determine if an
arrangement is a lease at the lease commencement date. In addition
to our lease agreements, we review all material new vendor
arrangements for potential embedded lease obligations. The asset
balance related to operating leases is presented within
“right-of-use (ROU) asset” on our consolidated balance sheet. The
current and noncurrent balances related to operating leases are
presented as “Lease liability”, in their respective
classifications, on our consolidated balance sheet.
The lease
liability is recognized based on the present value of the remaining
fixed lease payments discounted using our incremental borrowing
rate as of January 1, 2019. The ROU asset is calculated based on
the lease liability adjusted for any lease payments paid to the
lessor at or before the commencement date (i.e. prepaid rent) and
initial direct costs incurred by us and excluding any lease
incentives received from the Lessor. For operating leases, the
lease expense is recognized on a straight-line basis over the lease
term. The Company accounts for its lease and non-lease components
as a single component, and therefore both are included in the
calculation of lease liability recognized on the consolidated
balance sheets.
Revenue
Recognition
On January 1, 2018, we
adopted ASU No. 2014-09 – Revenue from Contracts with Customers
(Topic 606). Applying this newly adopted guidance, we recognize
revenue when promised goods or services are transferred to our
clients in an amount that reflects the consideration to which we
expect to be entitled to in exchange for those goods or services.
Revenue from public relations consists of fees from the performance
of professional services and billings for direct costs reimbursed
by clients. Fees are generally recognized on a straight-line or
monthly basis, as the services are consumed by our clients, which
approximates the proportional performance on such contracts. Direct
costs reimbursed by clients are billed as pass-through revenue with
no mark-up.
48
We have entered into
agreements with foreign and a domestic distributor for our motion
picture Max Steel . These international distribution
agreements contain minimum guaranteed payments once the motion
picture is delivered and other specifications are met per the
agreements. We entered into a domestic distribution agreement with
Open Road to distribute the film in the United States using their
existing relationships and output agreements with the movie
theaters, as well, as DVD, SVOD, pay TV, and free TV distributors.
These distribution agreements are for the licensing of function
intellectual property and, as such, we recognize revenue once the
motion picture has been delivered and the license period has
begun.
ASC 606 provides guidance
on determining whether revenues should be recognized on a gross or
net basis (Principal vs Agent). Based on the new guidance of ASC
606, we determined that for the domestic distribution of Max
Steel we should report revenues on a gross basis because we are
primarily responsible for the fulfillment of the completed motion
picture and carry the “inventory risk” if the motion picture does
not meet the customers specifications. At other times, we may enter
into contracts with distributors, on significantly different terms,
and will need to evaluate these contracts at that time.
Fair Value Measurements
Fair value is defined as
the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market
participants at the measurement date. Assets and liabilities
measured at fair value are categorized based on whether the inputs
are observable in the market and the degree that the inputs are
observable. Inputs refer broadly to the assumptions that market
participants would use in pricing the asset or liability, including
assumptions about risk. Observable inputs are based on market data
obtained from sources independent of our company. Unobservable
inputs reflect our own assumptions based on the best information
available in the circumstances. The fair value hierarchy
prioritizes the inputs used to measure fair value into three broad
levels, defined as follows:
|
|
|
| |
|
|
Level 1
|
—
|
Inputs are quoted prices in active markets
for identical assets or liabilities as of the reporting date.
|
|
|
Level 2
|
—
|
Inputs other than
quoted prices included within Level 1, such as quoted prices for
similar assets and liabilities in active markets; quoted prices for
identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated
with observable market data.
|
|
|
Level 3
|
—
|
Unobservable
inputs that are supported by little or no market activity and that
are significant to the fair value of the assets and liabilities.
This includes certain pricing models, discounted cash flow
methodologies, and similar techniques that use significant
unobservable inputs. Unobservable inputs for the asset or liability
that reflect management’s own assumptions about the assumptions
that market participants would use in pricing the asset or
liability as of the reporting date.
|
We carry certain derivative
financial instruments using inputs classified as “Level 3” in the
fair value hierarchy on our balance sheets.
Put Rights
In
connection with the 42West acquisition, we entered into Put
Agreements with each of the sellers of 42West granting them the
right, but not the obligation, to cause us to purchase up to an
aggregate of 1,187,087 of their shares received as consideration
for their membership interests in 42West, including the Put Rights
on the shares earned from the earn out consideration. Based upon
the results of operations of 42West, the sellers earned this
additional consideration. In March of 2018, we also entered into
put agreements with certain 42West employees granting them the
right, but not the obligation, to cause us to purchase up to an
aggregate of 140,697 of their shares of Common Stock received in
April 2017 and July 2018 and those to be received from the earn out
consideration. We have agreed to purchase the shares at $9.22 per
share during certain specified exercise periods as set forth in the
Put Agreements, through specified dates in December 2020. During
the six months ended June 30, 2019, we purchased 202,602 shares of
Common Stock and paid an aggregate amount of $990,500 to the
sellers of 42West, with $877,500 still payable and included in the
current portion of put rights on our condensed consolidated balance
sheet. $175,000 was paid in July 2019. As of June 30, 2019, there
were 475,726 Put Rights outstanding to be exercised.
We use a
Black-Scholes Option Pricing model, which incorporates significant
inputs that are not observable in the market, and thus represents a
Level 3 measurement as defined in ASC820. The unobservable inputs
utilized for measuring the fair value of the Put Rights reflects
management’s own assumptions that market participants would use in
valuing the Put Rights. The Put Rights were initially measured on
the date of the put agreements and are subsequently measured at
each balance sheet date with changes in the fair value between
balance sheet dates, being recorded as a gain or loss in the
statement of operations.
49
Contingent Consideration
On July
5, 2018, as part of the merger agreement with the Members of The
Door, we agreed to pay up to 1,538,462 shares of Common Stock at a
purchase price of $3.25 and up to $2.0 million in cash if certain
adjusted net income targets were met over a four-year period. If
the adjusted net income targets are achieved, the contingent
consideration is first paid in shares of Common Stock and the last
$2 million of contingent consideration earned is paid in cash.
To value the contingent
consideration, we used a Monte Carlo Simulation Model, which
incorporates significant inputs that are not observable in the
market, and thus represents Level 3 measurement as defined in
ASC820. The unobservable inputs utilized for measuring the fair
value of the contingent consideration reflect management’s own
assumptions about the assumptions that market participants would
use in valuing the contingent consideration. The contingent
consideration was initially measured as of the date of the merger
(July 5, 2018) and is subsequently measured at each balance sheet
date with changes in the fair value between balance sheet dates,
being recorded as a gain or loss in the statement of
operations.
The Company utilized a
Monte Carlo Simulation model, which incorporates significant inputs
that are not observable in the market, and thus represents a Level
3 measurement as defined in ASC 820. The unobservable inputs
utilized for measuring the fair value of the Contingent
Consideration reflect management’s own assumptions about the
assumptions that market participants would use in valuing the
Contingent Consideration as of the acquisition date.
We determined the fair
value by using the following key inputs to the Monte Carlo
Simulation Model:
|
|
|
|
|
|
|
|
| |
|
Inputs
|
|
As of June
30, 2019
|
|
|
As of
December 31,
2018
|
|
|
Risk Free
Discount Rate (based on US government treasury obligation with a
term similar to that of the Contingent Consideration)
|
|
|
1.73% - 2.09
|
%
|
|
|
2.47% - 2.59
|
%
|
|
Annual
Asset Volatility Estimate
|
|
|
40.0
|
%
|
|
|
65
|
%
|
For the
Contingent Consideration, which measured at fair value categorized
within Level 3 of the fair value hierarchy, the following is a
reconciliation of the fair values from December 31, 2018 to June
30, 2019:
|
|
|
|
| |
|
Beginning fair value balance on December 31,
2018
|
|
$
|
550,000
|
|
|
Change in fair value (gain) reported in the
statements of operations
|
|
|
(90,000
|
)
|
|
Ending fair value balance on June 30,
2019
|
|
$
|
460,000
|
|
Recent Accounting Pronouncements
For a discussion of recent
accounting pronouncements, see Note 1 to the unaudited condensed
consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
As of June 30, 2019 and
2018, we did not have any material off-balance sheet
arrangements.
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This Quarterly Report on
Form 10-Q contains “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements may include, but are not limited to,
statements relating to our objectives, plans and strategies, as
well as statements, other than historical facts, that address
activities, events or developments that we intend, expect, project,
believe or anticipate will or may occur in the future. These
statements are often characterized by terminology such as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “could,”
‘intends,” “target,” “projects,” “contemplates,” “believes,”
“estimates,” “predicts,” “potential,” “goal” or “continue” or the
negative of these terms or other similar expressions.
50
Forward-looking statements
are based on assumptions and assessments made in light of our
experience and perception of historical trends, current conditions,
expected and future developments and other factors believed to be
appropriate. Forward-looking statements are not guarantees of
future performance and are subject to risks and uncertainties, many
of which are outside of our control. You should not place undue
reliance on these forward-looking statements, which reflect our
views only as of the date of this Quarterly Report on Form 10-Q,
and we undertake no obligation to update these forward-looking
statements in the future, except as required by applicable law.
Risks that could cause
actual results to differ materially from those indicated by the
forward-looking statements include those described as “Risk
Factors” in our Annual Report on Form 10-K for the fiscal year
ended December 31, 2018, as updated by our subsequently filed
Quarterly Reports on Forms 10-Q and Current Reports on Forms
8-K.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Report on the Effectiveness
of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other
procedures that are designed to improve that information required
to be disclosed in our reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange
Act is accumulated and communicated to management, including our
Chief Executive Officer, to allow timely decisions regarding
required disclosure.
We
carried out an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2019.
Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and
procedures were not effective due to material weaknesses disclosed
in our Annual Report on Form 10-K for the year ended December 31,
2018, filed with the SEC on April 15, 2019, which have not been
remediated as of the date of the filing of this report.
Remediation of Material Weaknesses in
Internal Control over Financial Reporting
In order to remediate the
material weaknesses in internal control over financial reporting,
we intend to implement improvements during fiscal year 2019, under
the direction of our board of directors, as follows:
·
Our
board of directors intends to review the COSO “Internal Control
over Financial Reporting - Guidance for Smaller Public Companies”
that was published in 2006 including the control environment, risk
assessment, control activities, information and communication and
monitoring. Based on this framework, the board of directors plans
to implement controls as needed assuming a cost benefit
relationship. In addition, our board of directors plans to evaluate
the key concepts of the updated 2013 COSO “Internal Control
–
Integrated Framework ” as it
provides a means to apply internal control to any type of
entity.
·
Perform
a comprehensive review of current procedures to ensure compliance
with our newly documented accounting policies and procedures;
·
We are
in the process of enhancing our controls over segregation of
duties.
Changes in Internal
Control over Financial Reporting
During our last fiscal quarter, there has otherwise been no change
in our internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
51
PART II — OTHER
INFORMATION
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed
in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for
the fiscal year ended December 31, 2018
filed with the SEC on April 15, 2019.
ITEM 2. UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Company Purchases of
Equity Securities
The
following table presents information related to our repurchases of
our shares of Common Stock during the quarter ended June 30,
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Period
|
|
Total Number
of Shares Purchased (1)
|
|
Average
Price Paid Per Share
|
|
|
Total Number
of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
|
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
|
|
|
4/1/2019 – 4/30/2019
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
5/1/2019 – 5/31/2019
|
|
|
43,383
|
|
|
|
9.22
|
|
|
|
—
|
|
|
|
—
|
|
|
6/1/2019 – 6/30/2019
|
|
|
31,507
|
|
|
|
9.22
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
|
74,890
|
|
|
$
|
9.22
|
|
|
|
—
|
|
|
|
—
|
|
———————
(1)
Pursuant to the terms and subject to the conditions set forth in
the Put Agreements, the sellers exercised their Put Rights for an
aggregate of 74,890 shares of Common Stock and were paid an
aggregate amount of $690,500. See Note 3—Mergers and Acquisitions
to our unaudited condensed consolidated financial statements
contained elsewhere in this Quarterly Report on Form 10-Q for
further discussion of the Put Agreements.
On July 9, 2019, we issued
a convertible promissory note agreement to a third-party investor
and received $150,000. The convertible promissory note bears
interest at a rate of 10% per annum and matures on July 9, 2021.
The balance of the convertible promissory note and any accrued
interest may be converted at the note holder’s option at any time
at a purchase price based on the 30-day average closing market
price per share of the Common Stock.
On March 25, 2019, we
issued a convertible promissory note agreement to a third-party
investor and received $200,000. The convertible promissory note
bears interest at a rate of 10% per annum and matures on March 25,
2021. The balance of the convertible promissory note and any
accrued interest may be converted at the note holder’s option at
any time at a purchase price based on the 30-day average closing
market price per share of the Common Stock.
On July 23, 2019, pursuant
to the terms of the securities purchase agreement with Lincoln
Park, we issued Series B Warrants that entitle the holder to
purchase up to 137,500 shares of Common Stock at $2.00 per share.
The initial exercise date of the Series B Warrants is January
23, 2020 and can be exercised thereafter for a period of five
years.
The securities referred to
above were issued by the Company in reliance upon the exemption
from registration provided by Section 4(a)2 of the Securities
Act.
52
ITEM 5.
OTHER INFORMATION
Item 5.02 - Compensatory
Arrangements of Certain Officers
On August 12, 2019, the Compensation Committee of the
Board of Directors of the Company approved an increase of $50,000
annually for each of the Chief Executive Officer and Chief
Financial Officer. The increase is effective January 1, 2019.
Item
1.01 - Entry into a Material Definitive Agreement
Item
2.03 - Creation of a Direct Financial Obligation under an
Off-Balance Sheet Arrangement of a Registrant
Item
3.02 - Unregistered Sales of Equity Securities
In connection with the Put
Agreement with 42West co-CEO Leslee Dart, on August 12, 2019, the
Company entered into an amendment, waiver and exchange agreement
(the “Dart Exchange Agreement”) pursuant to which Ms. Dart waived
her Put Right with respect to 76,194 shares of Common Stock
in exchange for a convertible note (the “Dart Convertible Note”) in
the aggregate principal amount of $702,500, issued on the date of
the Dart Exchange Agreement.
The Dart Convertible Note is
convertible at any time into shares of Common Stock (the
“Conversion Shares”) at a conversion price (the “Conversion Price”)
equal to the quotient obtained by dividing (i) the principal and
interest being converted by (ii) the average closing price per
share of Common Stock, as reported by the Nasdaq Stock Market (or
such other exchange or quotation system on which the Common Stock
is then traded) for the 30-trading days immediately prior to, but
not including the date on which the holder delivers the notice of
conversion. The Conversion Price subject to adjustments for stock
splits, reclassifications and certain other transactions involving
the Company or its securities. The Dart Convertible Note bears an
interest rate of ten percent per annum. The Dart Convertible Note
matures on August 12, 2020 unless earlier converted or redeemed.
The Company may, at its option, prepay all or any portion of the
outstanding balance under the Dart Convertible Note without penalty
or premium.
The Dart Convertible Note
provides for customary events of default, which include (subject in
certain cases to customary grace and cure periods), among others,
the following: nonpayment of principal or interest; failure
to maintain corporate existence; and certain events of bankruptcy
or insolvency. Generally, if an event of default occurs and is
continuing under the Dart Convertible Note, the holder may declare
the principal of, and accrued interest on, the Dart Convertible
Note due and payable. In the case of certain events of
bankruptcy or insolvency, all amounts outstanding under the Dart
Convertible Note, together with accrued and unpaid interest
thereon, would automatically become due and payable. The Dart
Convertible Note was issued to the holder in reliance upon the
exemption from registration provided by Section 4(a)(2) of the
Securities Act, based upon the representation made by the holder
that she is an “accredited investor” and that she is acquiring the
Dart Convertible Note solely for the purposes of investment and not
with a present view to, or for sale in connection with, any
distribution or resale thereof. In addition, there was no general
advertisement conducted by the Company in connection with the
issuance of the Dart Convertible Note.
In connection with the Put Agreement
with Allan Mayer, a member of the Company’s board of directors and
42West co-CEO, on August 12, 2019, the Company entered into an
amendment, waiver and exchange agreement (the “Mayer Exchange
Agreement”) pursuant to which Mr. Mayer waived his Put Right with
respect to 44,740 shares of Common Stock in exchange for 385,514
shares of the Company’s Common Stock (the “Mayer Common Stock”)
issued on the date of the Mayer Exchange Agreement. The Mayer
Common Stock was issued to the holder in reliance upon the
exemption from registration provided by Section 4(a)(2) of the
Securities Act, based upon the representation made by the holder
that he is an “accredited investor” and that he is acquiring the
Mayer Common Stock solely for the purposes of investment and not
with a present view to, or for sale in connection with, any
distribution or resale thereof. In addition, there was no general
advertisement conducted by the Company in connection with the
issuance of the Mayer Common Stock.
The foregoing description
of the Dart Convertible Note, the Dart Exchange Agreement and the
Mayer Exchange Agreement is only a summary and is qualified in its
entirety by reference to the full text of the Dart Convertible
Note, the Dart Exchange Agreement and the Mayer Exchange Agreement,
which are filed as Exhibit 4.3, Exhibit 10.3 and 10.4,
respectively, to this Quarterly Report on Form 10-Q and
incorporated herein by reference.
53
ITEM 6. EXHIBITS
|
|
| |
|
Exhibit No.
|
|
Description
|
|
4.1
|
|
Dolphin Entertainment, Inc. Senior Convertible Note, filed as
Exhibit 4.1 to the Company’s Current Report of Form 8-K filed with
the SEC on May 22, 2019 and incorporated by reference
herein.
|
|
4.2
|
|
Form of Warrant issued to Lincoln Park Capital Fund, LLC, filed
as Exhibit 4.2 to the Company’s Current Report of Form 8-K
filed with the SEC on May 22, 2019 and incorporated by reference
herein.
|
|
4.3
|
|
Convertible Note, dated as of August 12, 2019
(Leslee Dart)
|
|
10.1
|
|
Securities Purchase Agreement, dated as of May 20, 2019, by and
between the Company and Lincoln Park Capital Fund, LLC, filed as
Exhibit 10.1 to the Company’s Current Report of Form 8-K filed with
the SEC on May 22, 2019 and incorporated by reference
herein.
|
|
10.2
|
|
Registration Rights Agreement, dated as of May 20, 2019, by and
between the Company and Lincoln Park Capital Fund, LLC, filed as
Exhibit 10.2 to the Company’s Current Report of Form 8-K filed with
the SEC on May 22, 2019 and incorporated by reference
herein.
|
|
10.3
|
|
Amendment, Waiver and Exchange Agreement,
dated as of August 12, 2019 by and between the Company, William
O’Dowd, IV, 42West LLC and Leslee Dart
|
|
10.4
|
|
Amendment, Waiver and Exchange Agreement,
dated as of August 12, 2019 by and between the Company, William
O’Dowd, IV, 42West LLC and Allan Mayer
|
|
31.1
|
|
Certification of Chief Executive Officer of
the Company pursuant to Section 302 of the Sarbanes Oxley Act of
2002
|
|
31.2
|
|
Certification of Chief Financial Officer of
the Company pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
32.1
|
|
Certification of Chief Executive Officer of
the Company pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
32.2
|
|
Certification of Chief Financial Officer of
the Company pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
101.INS
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation
Linkbase
|
|
101.DEF
|
|
XBRL Taxonomy Extension
Definition
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label
Linkbase
|
|
101.PRE
|
|
XBRL Taxonomy Extension
Presentation Linkbase
|
54
SIGNATURES
In accordance with the
requirements of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized August 13, 2019.
|
|
| |
|
|
Dolphin Entertainment, Inc.
|
|
|
|
|
|
|
By:
|
/s/ William O’Dowd IV
|
|
|
|
Name: William O’Dowd IV
|
|
|
|
Chief Executive Officer
|
|
|
| |
|
|
By:
|
/s/ Mirta A Negrini
|
|
|
|
Name: Mirta A Negrini
|
|
|
|
Chief Financial Officer
|
55
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