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 March 31, 2020
|
|
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.)
|
150 Alhambra Circle, Suite
1200, 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 31,689,548 as of July 1, 2020.
EXPLANATORY NOTE
As previously reported in a Form 8-K filed on
May 15, 2020, the registrant relied on the Securities and Exchange
Commission’s Order under Section 36 of the Securities Exchange Act
of 1934 Modifying Exemptions from the Reporting and Proxy Delivery
Requirements for Public Companies dated March 25, 2020 (Release No.
34-88465) to delay filing its Quarterly Report on Form 10-Q
for the three months ended March 31, 2020 (“2020 Q1 10Q”).
Disruptions and changes to the business
of the registrant caused by COVID-19 required that the
registrant perform additional analyses relating to COVID-19’s
potential impact on its consolidated financial statements;
moreover, the registrant’s operations and business experienced
disruptions due to the unprecedented conditions surrounding
COVID-19. These disruptions include, but are not limited to, office
closures due to mandated social quarantining and work from home
orders. The disruptions in staffing, communications and access to
personnel resulted in delays in getting information from some of
the registrant’s operating subsidiaries necessary for the
preparation and review of its consolidated financial
statements.
TABLE
OF CONTENTS
PART I — FINANCIAL
INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DOLPHIN ENTERTAINMENT, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED
BALANCE SHEETS
(unaudited)
|
|
|
|
|
|
|
| |
|
|
|
As of
March 31,
2020
|
|
As of
December 31,
2019
|
|
|
ASSETS
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
1,880,744
|
|
$
|
2,196,249
|
|
|
Restricted cash
|
|
|
714,089
|
|
|
714,089
|
|
|
Accounts
receivable, net
|
|
|
3,464,936
|
|
|
3,581,155
|
|
|
Other
current assets
|
|
|
540,387
|
|
|
372,872
|
|
|
Total
current assets
|
|
|
6,600,156
|
|
|
6,864,365
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized production costs, net
|
|
|
239,277
|
|
|
203,036
|
|
|
Right-of-use asset
|
|
|
7,026,745
|
|
|
7,435,903
|
|
|
Intangible assets, net of accumulated amortization of $4,730,706
and $4,299,794, respectively.
|
|
|
7,930,627
|
|
|
8,361,539
|
|
|
Goodwill
|
|
|
18,072,825
|
|
|
17,947,989
|
|
|
Property,
equipment and leasehold improvements, net
|
|
|
957,290
|
|
|
1,036,849
|
|
|
Investments
|
|
|
220,000
|
|
|
220,000
|
|
|
Deposits
and other assets
|
|
|
144,632
|
|
|
502,045
|
|
|
Total Assets
|
|
$
|
41,191,552
|
|
$
|
42,571,726
|
|
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
March 31,
2020
|
|
|
As of
December 31,
2019
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
809,620
|
|
|
$
|
832,089
|
|
|
Other
current liabilities
|
|
|
5,346,321
|
|
|
|
5,373,809
|
|
|
Line of
credit
|
|
|
—
|
|
|
|
1,700,390
|
|
|
Term
loan
|
|
|
372,863
|
|
|
|
—
|
|
|
Put
rights
|
|
|
2,795,007
|
|
|
|
2,879,403
|
|
|
Accrued
compensation
|
|
|
2,625,000
|
|
|
|
2,625,000
|
|
|
Debt
|
|
|
—
|
|
|
|
3,311,198
|
|
|
Loan
from related party
|
|
|
1,107,873
|
|
|
|
1,107,873
|
|
|
Lease
liability
|
|
|
1,604,264
|
|
|
|
1,610,022
|
|
|
Contract
liabilities
|
|
|
525,712
|
|
|
|
309,880
|
|
|
Convertible notes payable
|
|
|
1,252,500
|
|
|
|
2,383,610
|
|
|
Convertible notes payable at fair value
|
|
|
548,100
|
|
|
|
—
|
|
|
Notes
payable
|
|
|
290,462
|
|
|
|
288,237
|
|
|
Total current liabilities
|
|
|
17,277,722
|
|
|
|
22,421,511
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
|
Put
rights
|
|
|
—
|
|
|
|
124,144
|
|
|
Convertible notes payable
|
|
|
945,000
|
|
|
|
1,100,000
|
|
|
Convertible notes payable at fair value
|
|
|
1,214,786
|
|
|
|
629,618
|
|
|
Warrants
liability
|
|
|
471,516
|
|
|
|
189,590
|
|
|
Derivative liability
|
|
|
15,456
|
|
|
|
170,000
|
|
|
Notes
payable
|
|
|
1,049,270
|
|
|
|
1,074,122
|
|
|
Term
loan
|
|
|
827,527
|
|
|
|
—
|
|
|
Contingent consideration
|
|
|
227,000
|
|
|
|
330,000
|
|
|
Lease
liability
|
|
|
5,976,977
|
|
|
|
6,386,209
|
|
|
Other
noncurrent liabilities
|
|
|
570,000
|
|
|
|
570,000
|
|
|
Total
noncurrent liabilities
|
|
|
11,297,532
|
|
|
|
10,573,683
|
|
|
Total
Liabilities
|
|
|
28,575,254
|
|
|
|
32,995,194
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 20)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Common
stock, $0.015 par value, 200,000,000 shares authorized, 20,036,906
and 17,892,900, respectively, issued and outstanding at March 31,
2020 and December 31, 2019
|
|
|
300,562
|
|
|
|
268,402
|
|
|
Preferred
Stock, Series C, $0.001 par value, 50,000 shares authorized, issued
and outstanding at March 31, 2020 and December 31, 2019
|
|
|
1,000
|
|
|
|
1,000
|
|
|
Additional paid in capital
|
|
|
106,273,738
|
|
|
|
106,465,896
|
|
|
Accumulated deficit
|
|
|
(93,959,002
|
)
|
|
|
(97,158,766
|
)
|
|
Total
Stockholders' Equity
|
|
|
12,616,298
|
|
|
|
9, 576,532
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
$
|
41,191,552
|
|
|
$
|
42,571,726
|
|
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
|
|
|
|
|
March
31
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Entertainment publicity and marketing
|
|
$
|
6,633,800
|
|
|
$
|
6,238,099
|
|
|
Content
Production
|
|
|
—
|
|
|
|
78,990
|
|
|
Total revenues
|
|
|
6,633,800
|
|
|
|
6,317,089
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
Direct
costs
|
|
|
688,977
|
|
|
|
1,187,419
|
|
|
Selling,
general and administrative
|
|
|
1,120,616
|
|
|
|
795,867
|
|
|
Depreciation and amortization
|
|
|
521,003
|
|
|
|
481,642
|
|
|
Legal
and professional
|
|
|
284,440
|
|
|
|
375,909
|
|
|
Payroll
|
|
|
4,889,623
|
|
|
|
4,301,413
|
|
|
Total expenses
|
|
|
7,504,659
|
|
|
|
7,142,250
|
|
|
Loss before other income (expenses)
|
|
|
(870,859
|
)
|
|
|
(825,161
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
Gain
(loss) on extinguishment of debt
|
|
|
3,259,865
|
|
|
|
(21,287
|
)
|
|
Loss on
deconsolidation of Max Steel VIE
|
|
|
(1,484,591
|
)
|
|
|
—
|
|
|
Change
in fair value of put rights
|
|
|
1,470,740
|
|
|
|
1,527,026
|
|
|
Change
in f air value of contingent consideration
|
|
|
103,000
|
|
|
|
(270,000
|
)
|
|
Change
in fair value of convertible notes and derivative liabilities
|
|
|
147,459
|
|
|
|
—
|
|
|
Change
in fair value of warrants
|
|
|
72,515
|
|
|
|
—
|
|
|
Interest
expense and debt amortization
|
|
|
(624,282
|
)
|
|
|
(287,970
|
)
|
|
Total other income, net
|
|
|
2,944,706
|
|
|
|
947,769
|
|
|
Income before income taxes
|
|
$
|
2,073,847
|
|
|
$
|
122,608
|
|
|
Income taxes
|
|
|
—
|
|
|
|
—
|
|
|
Net income
|
|
$
|
2,073,847
|
|
|
$
|
122,608
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) per Share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.08
|
|
|
$
|
0.01
|
|
|
Diluted
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
|
Weighted
average number of shares used in per share calculation
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
20,498,564
|
|
|
|
15,944,443
|
|
|
Diluted
|
|
|
28,384,982
|
|
|
|
18,690,377
|
|
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
three months ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,073,847
|
|
|
$
|
122,608
|
|
|
Adjustments to reconcile net income to net cash (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
521,003
|
|
|
|
481,642
|
|
|
Loss on deconsolidation of Max Steel VIE
|
|
|
1,484,591
|
|
|
|
—
|
|
|
Amortization of debt discount
|
|
|
425,821
|
|
|
|
30,769
|
|
|
(Gain) loss on extinguishment of debt, net
|
|
|
(3,259,865
|
)
|
|
|
21,287
|
|
|
Bad debt and recovery of account receivable written off, net
|
|
|
87,539
|
|
|
|
41,041
|
|
|
Change in fair value of put rights
|
|
|
(1,470,740
|
)
|
|
|
(1,527,026
|
)
|
|
Change in fair value of contingent consideration
|
|
|
(103,000
|
)
|
|
|
270,000
|
|
|
Change in fair value of warrants
|
|
|
(72,515
|
)
|
|
|
—
|
|
|
Change in fair value of notes payable and derivative
instruments
|
|
|
(147,459
|
)
|
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
28,680
|
|
|
|
428,334
|
|
|
Other current assets
|
|
|
(167,515
|
)
|
|
|
(208,691
|
)
|
|
Capitalized production costs
|
|
|
(36,241
|
)
|
|
|
(11,000
|
)
|
|
Deposits and other assets
|
|
|
(1,021
|
)
|
|
|
(19,908
|
)
|
|
Contract liability
|
|
|
215,832
|
|
|
|
96,839
|
|
|
Accounts payable
|
|
|
(22,469
|
)
|
|
|
(242,407
|
)
|
|
Lease liability, net
|
|
|
(5,832
|
)
|
|
|
53,050
|
|
|
Other current liabilities
|
|
|
97,678
|
|
|
|
42,912
|
|
|
Other noncurrent liabilities
|
|
|
—
|
|
|
|
32,287
|
|
|
Net Cash (Used in) Operating Activities
|
|
|
(351,666
|
)
|
|
|
(388,263
|
)
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(10,532
|
)
|
|
|
(19,621
|
)
|
|
Acquisition of Shore Fire
|
|
|
(250,000
|
)
|
|
|
—
|
|
|
Net Cash (Used in) Investing Activities
|
|
|
(260,532
|
)
|
|
|
(19,621
|
)
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Repayment of the line of credit
|
|
|
(500,000
|
)
|
|
|
—
|
|
|
Proceeds from convertible notes payable
|
|
|
2,395,000
|
|
|
|
—
|
|
|
Repayment of convertible notes payable
|
|
|
(1,202,064
|
)
|
|
|
—
|
|
|
Proceeds from note payable
|
|
|
—
|
|
|
|
200,000
|
|
|
Repayment of notes payable
|
|
|
(21,243
|
)
|
|
|
(19,229
|
)
|
|
Repayment of debt, net of interest
|
|
|
—
|
|
|
|
(89,366
|
)
|
|
Exercise of put rights
|
|
|
(375,000
|
)
|
|
|
(475,000
|
)
|
|
Acquisition of The Door
|
|
|
—
|
|
|
|
(771,500
|
)
|
|
42West settlement of change of control provisions
|
|
|
—
|
|
|
|
(361,760
|
)
|
|
Net Cash Provided by (used in) Financing Activities
|
|
|
296,693
|
|
|
|
(1,516,855
|
)
|
|
NET DECREASE IN CASH AND
CASH EQUIVALENTS
|
|
|
(315,505
|
)
|
|
|
(1,924,739
|
)
|
|
CASH, CASH EQUIVALENTS AND
RESTRICTED CASH, BEGINNING OF PERIOD
|
|
|
2,910,338
|
|
|
|
6,274,640
|
|
|
CASH, CASH EQUIVALENTS AND
RESTRICTED CASH END OF PERIOD
|
|
$
|
2,594,833
|
|
|
$
|
4,349,901
|
|
|
|
|
|
|
|
|
|
|
|
(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
three months ended
March
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
115,161
|
|
|
$
|
71,938
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NON CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
|
|
|
Conversion of note payable into shares of common stock
|
|
$
|
1,350,000
|
|
|
$
|
96,287
|
|
|
Issuance
of shares of Common Stock related to the acquisitions
|
|
$
|
—
|
|
|
$
|
1,000,000
|
|
|
Liability for contingent consideration for the acquisitions
|
|
$
|
227,000
|
|
|
$
|
820,000
|
|
|
Liability for put rights to the Sellers of 42West
|
|
$
|
2,795,007
|
|
|
$
|
5,159,541
|
|
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
three months ended
March
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
1,880,744
|
|
|
$
|
3,616,981
|
|
|
Restricted cash
|
|
|
714,089
|
|
|
|
732,920
|
|
|
Total
cash, cash equivalents and restricted cash shown in the condensed
consolidated statement of cash flows
|
|
$
|
2,594,833
|
|
|
$
|
4,349,901
|
|
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 three months ended
March 31, 2020 and 2019
For the three months ended March 31,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
Balance December 31, 2019
|
|
|
50,000
|
|
|
$
|
1,000
|
|
|
|
17,892,900
|
|
|
$
|
268,402
|
|
|
$
|
106,465,896
|
|
|
$
|
(97,158,766
|
)
|
|
$
|
9,576,532
|
|
|
Net
income for the three months ended March 31, 2020
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,073,847
|
|
|
|
2,073,847
|
|
|
Deconsolidation of Max Steel VIE
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,125,917
|
|
|
|
1,125,917
|
|
|
Issuance
of shares related to acquisition of Viewpoint
|
|
|
—
|
|
|
|
—
|
|
|
|
248,733
|
|
|
|
3,731
|
|
|
|
(3,731
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Issuance
of shares related to financing agreement
|
|
|
—
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
750
|
|
|
|
(750
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Beneficial conversion of convertible promissory note
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
301,781
|
|
|
|
—
|
|
|
|
301,781
|
|
|
Issuance
of shares related to conversion of notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
1,877,811
|
|
|
|
28,167
|
|
|
|
1,147,254
|
|
|
|
—
|
|
|
|
1,175,421
|
|
|
Shares
retired from exercise of puts
|
|
|
—
|
|
|
|
—
|
|
|
|
(32,538
|
)
|
|
|
(488
|
)
|
|
|
(1,636,712
|
)
|
|
|
—
|
|
|
|
(1,637,200
|
)
|
|
Balance March 31, 2020
|
|
|
50,000
|
|
|
$
|
1,000
|
|
|
|
20,036,906
|
|
|
$
|
300,562
|
|
|
$
|
106,273,738
|
|
|
$
|
(93,959,002
|
)
|
|
$
|
12,616,298
|
|
For the three months ended March 31,
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
|
|
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
MARCH 31, 2020
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”), Shore Fire Media, Ltd (“Shore
Fire”) 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, Shore Fire 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 long
established, leading independent producer, committed to
distributing premium, best-in-class film and digital entertainment.
Dolphin produces original feature films and digital programming
primarily aimed at family and young adult markets.
Impact of
COVID-19
On March 11, 2020, the
World Health Organization categorized a novel coronavirus
(COVID-19) as a pandemic, and it continues to spread throughout the
United States. The outbreak of COVID-19 and public and private
sector measures to reduce its transmission, such as the imposition
of social distancing and orders to work-from-home, stay-at-home and
shelter-in-place have adversely affected the demand for certain of
the services the Company offers resulting in decreased revenues and
cash flows. Hotels, restaurants and content productions have
reduced or suspended operating activities which has negatively
impacted the Company’s clients, and as a result, negatively
impacted the Company’s revenues from the services offered to
clients operating in these industries. The Company expects that the
effects of COVID-19 pandemic will continue to negatively impact its
results of operations, cash flows and financial position; however,
the extent of the impact will vary depending on the duration and
severity of the economic and operational impacts of COVID-19. The
Company has taken steps such as freezes on hiring, staff
reductions, salary reductions and cuts in non-essential spending to
mitigate the effects of COVID-19 on the Company’s financial
results. Between April 19, 2020 and April 23, 2020, the Company and
its subsidiaries received five separate unsecured loans for an
aggregate amount of $2.8 million (the “PPP Loans”) under the
Paycheck Protection Program (the “PPP”) which was
established under the Coronavirus Aid, Relief and Economic Security
Act (the “CARES Act”). Under the CARES Act, loan
forgiveness is available for the sum of documented payroll costs,
covered rent payments and covered utilities during the measurement
period beginning on the date of first disbursement of the PPP
Loans. For purposes of the CARES Act, payroll costs exclude
compensation of an individual employee in excess of $100,000,
prorated annually. Not more than 40% of the forgiven amount
can be attributable to non-payroll costs. The receipt of
these funds, and the forgiveness of the loan attendant to these
funds, is dependent on the Company having initially qualified for
the PPP Loans and qualifying for the forgiveness of the PPP Loans
based on its future adherence to the forgiveness criteria.
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”), Dolphin SB Productions LLC,
Dolphin Max Steel Holdings, LLC (“Max Steel Holdings”), Dolphin JB
Believe Financing, LLC, Dolphin JOAT Productions, LLC, 42West, The
Door, Viewpoint and Shore Fire.
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 JB Believe, LLC as a VIE. During the three months
ended March 31, 2020, the Company analyzed its status as the
primary beneficiary of Max Steel Productions LLC (“Max Steel VIE”)
that has previously been consolidated in the financial statements
of the Company and determined that it was no longer the primary
beneficiary. As a result, the Company deconsolidated the financial
statements of Max Steel VIE on a prospective basis from the
Company’s condensed consolidated financial statements as of March
31, 2020. See Note 13 for further discussion.
7
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
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 months ended March 31, 2020 are not
necessarily indicative of the results that may be expected for the
fiscal year ending December 31, 2020. The condensed consolidated
balance sheet at December 31, 2019 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, 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.
Additionally, the full
impact of the COVID-19 outbreak is unknown and cannot be reasonably
estimated. However, management has made appropriate accounting
estimates on certain accounting matters, which include the
allowance for doubtful accounts, carrying value of the goodwill and
other intangible assets, carrying amount of certain convertible
notes payable and embedded derivatives and warrant liabilities,
based on the facts and circumstances available as of the reporting
date. The Company’s future assessment of the magnitude and duration
of the COVID-19 outbreak, as well as other factors, could result in
material impacts to the Company’s financial statements in future
reporting periods.
Revision of Prior Period Financial Statements
During
the preparation of condensed consolidated financial statement for
the three months ended March 31, 2020, the Company identified
certain immaterial errors related to its accounting of the 2019
Lincoln Park Note, 2019 Lincoln Park Warrants and the Pinnacle
Note. The Company concluded that the conversion feature of
the 2019 Lincoln Park Note and the 2019 Lincoln Park Warrants met
the definition of a derivative and should have been recorded at
fair value at inception and remeasured at each reporting period
with changes in the fair value recognized in earnings. The
accretion to par value of the 2019 Lincoln Park Note is recorded as
interest expense. The Company had originally accounted for
the 2019 Lincoln Park Warrants as equity-linked instruments and had
not bifurcated the conversion feature in the 2019 Lincoln Park
Note.
The
Company also reviewed the Pinnacle Note that had a down round
provision allowing for the repricing of the conversion price upon
the Company’s issuance of equity securities at a price lower than
the Pinnacle Note conversion price. On October 21, 2019, the
Company sold shares of Common Stock in a registered public
offering, at a price of $0.7828 when the Pinnacle Note conversion
price was $3.00. As a result, the conversion price of the
Pinnacle Note was repriced to $0.7828. Due to the repricing,
the Company should have recorded a beneficial conversion feature on
the date of the repricing and amortized the beneficial conversion
feature as interest expense over the remaining life of the Pinnacle
Note that matured on January 5, 2020.
In
accordance with SAB No. 99, “Materiality,”
and SAB No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements,” the Company
evaluated the errors and determined that the related impact was not
material to the Company’s financial
statements for any prior annual or interim period, but that
correcting the cumulative
impact of the error would be significant to the Company’s results of
operations for the three months
ended March 31,
2020. Accordingly, the Company revised the consolidated
balance sheets and quarterly and year to date
2019 consolidated statements of operations as of and for
the quarterly and year to date periods ended June
30, 2019, September 30, 2019 and December 31, 2019,
including the related notes presented herein, as
applicable. The errors did not impact revenue or loss from
operations in the consolidated statements of operations, or net
cash used in operations reported in the consolidated statements of
cash flows for any of those periods, which the Company understands
to be the key metrics investors focus on.
8
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
A summary of the revisions
to previously reported financial information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
|
|
|
As
Adjusted
|
|
|
Revised Consolidated Balance Sheet as
of June 30, 2019
|
|
|
Convertible note payable
(noncurrent)
|
|
$
|
1,044,232
|
|
|
$
|
(380,636
|
)
|
|
[2]
|
|
$
|
663,596
|
|
|
Warrant liability (noncurrent)
|
|
$
|
—
|
|
|
$
|
302,306
|
|
|
[3]
|
|
$
|
302,306
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
150,000
|
|
|
[4]
|
|
$
|
150,000
|
|
|
Total noncurrent liabilities
|
|
$
|
8,559,526
|
|
|
$
|
71,670
|
|
|
|
|
$
|
8,631,196
|
|
|
Total liabilities
|
|
$
|
31,088,896
|
|
|
$
|
71,670
|
|
|
|
|
$
|
31,160,566
|
|
|
Additional paid in capital
|
|
$
|
103,571,126
|
|
|
$
|
(166,887
|
)
|
|
[5]
|
|
$
|
103,404,239
|
|
|
Accumulated deficit
|
|
$
|
(95,298,433
|
)
|
|
$
|
95,217
|
|
|
|
|
$
|
(95,203,216
|
)
|
|
Total stockholders' equity
|
|
$
|
8,489,611
|
|
|
$
|
(71,670
|
)
|
|
|
|
$
|
8,417,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed Consolidated
Statement of Operations for the three months ended June 30,
2019
|
|
Change in fair value of derivative
liability
|
|
$
|
—
|
|
|
$
|
30,000
|
|
|
[6]
|
|
$
|
30,000
|
|
|
Change in fair value of warrant liability
|
|
$
|
—
|
|
|
$
|
81,766
|
|
|
[7]
|
|
$
|
81,766
|
|
|
Interest expense
|
|
$
|
(301,138
|
)
|
|
$
|
(16,549
|
)
|
|
[8]
|
|
$
|
(317,687
|
)
|
|
Total other income
|
|
$
|
310,211
|
|
|
$
|
95,217
|
|
|
|
|
$
|
405,429
|
|
|
Loss before income taxes/Net loss
|
|
$
|
(891,867
|
)
|
|
$
|
95,217
|
|
|
|
|
$
|
(796,650
|
)
|
|
Basic net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.05
|
)
|
|
Diluted net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed Consolidated
Statement of Operations for the six months ended June 30,
2019
|
|
Change in fair value of derivative
liability
|
|
$
|
—
|
|
|
$
|
30,000
|
|
|
[6]
|
|
$
|
30,000
|
|
|
Change in fair value of warrant liability
|
|
$
|
—
|
|
|
$
|
81,766
|
|
|
[7]
|
|
$
|
81,766
|
|
|
Interest expense
|
|
$
|
(589,108
|
)
|
|
$
|
(16,549
|
)
|
|
[8]
|
|
$
|
(605,657
|
)
|
|
Total other income
|
|
$
|
1,257,981
|
|
|
$
|
95,217
|
|
|
|
|
$
|
1,353,198
|
|
|
Loss before income taxes/Net loss
|
|
$
|
(769,259
|
)
|
|
$
|
95,217
|
|
|
|
|
$
|
(674,042
|
)
|
|
Basic net loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.04
|
)
|
|
Diluted net loss per share
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Consolidated Balance Sheet as
of September 30, 2019
|
|
Convertible note payable (noncurrent)
|
|
$
|
1,477,597
|
|
|
$
|
(330,989
|
)
|
|
[2]
|
|
$
|
1,146,608
|
|
|
Warrant liability (noncurrent)
|
|
$
|
—
|
|
|
$
|
228,269
|
|
|
[3]
|
|
$
|
228,269
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
150,000
|
|
|
[4]
|
|
$
|
150,000
|
|
|
Total noncurrent liabilities
|
|
$
|
8,299,494
|
|
|
$
|
47,280
|
|
|
|
|
$
|
8,346,774
|
|
|
Total liabilities
|
|
$
|
29,890,000
|
|
|
$
|
47,280
|
|
|
|
|
$
|
29,937,280
|
|
|
Additional paid in capital
|
|
$
|
103,146,270
|
|
|
$
|
(166,887
|
)
|
|
[5]
|
|
$
|
102,979,383
|
|
|
Accumulated deficit
|
|
$
|
(95,649,264
|
)
|
|
$
|
119,607
|
|
|
|
|
$
|
(95,529,657
|
)
|
|
Total stockholders' equity
|
|
$
|
7,717,630
|
|
|
$
|
(47,280
|
)
|
|
|
|
$
|
7,670,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed Consolidated
Statement of Operations for the three months ended September 30,
2019
|
|
Change in fair value of derivative
liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
Change in fair value of warrant liability
|
|
$
|
—
|
|
|
$
|
74,037
|
|
|
[7]
|
|
$
|
74,037
|
|
|
Interest expense
|
|
$
|
(295,556
|
)
|
|
$
|
(49,647
|
)
|
|
[8]
|
|
$
|
(345,203
|
)
|
|
Total other income
|
|
$
|
1,061,340
|
|
|
$
|
24,390
|
|
|
|
|
$
|
1,085,730
|
|
|
Loss before income taxes/Net loss
|
|
$
|
(350,831
|
)
|
|
$
|
24,390
|
|
|
|
|
$
|
(326,441
|
)
|
|
Basic net loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
—
|
|
|
|
|
$
|
(0.02
|
)
|
|
Diluted net loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
—
|
|
|
|
|
$
|
(0.05
|
)
|
9
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
|
|
|
As
Adjusted
|
|
|
Revised Condensed
Consolidated Statement of Operations for the nine months ended
September 30, 2019
|
|
Change in fair value of
derivative liability
|
|
$
|
—
|
|
|
$
|
30,000
|
|
|
[6]
|
|
$
|
30,000
|
|
|
Change in fair value of
warrant liability
|
|
$
|
—
|
|
|
$
|
155,803
|
|
|
[7]
|
|
$
|
155,803
|
|
|
Interest expense
|
|
$
|
(884,665
|
)
|
|
$
|
(66,196
|
)
|
|
[8]
|
|
$
|
(950,861
|
)
|
|
Total other income
|
|
$
|
2,319,321
|
|
|
$
|
119,607
|
|
|
|
|
|
|
$
|
2,438,928
|
|
|
Loss before income
taxes/Net loss
|
|
$
|
(1,120,090
|
)
|
|
$
|
119,607
|
|
|
|
|
$
|
(1,000,483
|
)
|
|
Basic net loss per
share
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.06
|
)
|
|
Diluted net loss per
share
|
|
$
|
(0.17
|
)
|
|
$
|
—
|
|
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Consolidated
Balance Sheet as of December 31, 2019
|
|
Convertible note payable
(noncurrent)
|
|
$
|
1,907,575
|
|
|
$
|
(177,957
|
)
|
|
[2]
|
|
$
|
1,729,618
|
|
|
Convertible note payable
(current)
|
|
$
|
2,452,960
|
|
|
$
|
(69,350
|
)
|
|
[9]
|
|
$
|
2,383,610
|
|
|
Warrant liability
(noncurrent)
|
|
$
|
—
|
|
|
$
|
189,590
|
|
|
[3]
|
|
$
|
189,590
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
170,000
|
|
|
[4]
|
|
$
|
170,000
|
|
|
Total current
liabilities
|
|
$
|
22,490,861
|
|
|
$
|
(69,350
|
)
|
|
|
|
$
|
22,421,511
|
|
|
Total noncurrent
liabilities
|
|
$
|
10,392,050
|
|
|
$
|
181,633
|
|
|
|
|
$
|
10,573,683
|
|
|
Total liabilities
|
|
$
|
32,882,911
|
|
|
$
|
112,283
|
|
|
|
|
$
|
32,995,194
|
|
|
Additional paid in
capital
|
|
$
|
105,443,656
|
|
|
$
|
1,022,240
|
|
|
[10]
|
|
$
|
106,465,896
|
|
|
Accumulated deficit
|
|
$
|
(96,024,243
|
)
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
(97,158,766
|
)
|
|
Total stockholders'
equity
|
|
$
|
9,688,815
|
|
|
$
|
(112,283
|
)
|
|
|
|
$
|
9,576,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed
Consolidated Statement of Operations for the three months ended
December 31, 2019[1]
|
|
Change in fair value of
derivative liability
|
|
$
|
—
|
|
|
$
|
(20,000
|
)
|
|
[6]
|
|
$
|
(20,000
|
)
|
|
Change in fair value of
warrant liability
|
|
$
|
—
|
|
|
$
|
38,679
|
|
|
[7]
|
|
$
|
38,679
|
|
|
Interest expense
|
|
$
|
(321,536
|
)
|
|
$
|
(1,272,809
|
)
|
|
[11]
|
|
$
|
(1,594,345
|
)
|
|
Total other income
|
|
$
|
154,258
|
|
|
$
|
(1,254,130
|
)
|
|
|
|
$
|
(1,099,872
|
)
|
|
Loss before income
taxes
|
|
$
|
(491,486
|
)
|
|
$
|
(1,254,130
|
)
|
|
|
|
$
|
(1,745,616
|
)
|
|
Net loss
|
|
$
|
(73,287
|
)
|
|
$
|
(1,254,130
|
)
|
|
|
|
$
|
(1,327,417
|
)
|
|
Basic net loss per
share
|
|
$
|
—
|
|
|
$
|
(0.07
|
)
|
|
|
|
$
|
(0.07
|
)
|
|
Diluted net loss per
share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed
Consolidated Statement of Operations for the year ended December
31, 2019
|
|
Change in fair value of
derivative liability
|
|
$
|
—
|
|
|
$
|
10,000
|
|
|
[6]
|
|
$
|
10,000
|
|
|
Change in fair value of
warrant liability
|
|
$
|
—
|
|
|
$
|
194,482
|
|
|
[7]
|
|
$
|
194,482
|
|
|
Interest expense
|
|
$
|
(1,206,201
|
)
|
|
$
|
(1,339,006
|
)
|
|
[11]
|
|
$
|
(2,545,207
|
)
|
|
Total other income
|
|
$
|
2,473,579
|
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
1,339,056
|
|
|
Loss before income
taxes
|
|
$
|
(1,611,576
|
)
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
(2,746,099
|
)
|
|
Net loss
|
|
$
|
(1,193,377
|
)
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
(2,327,900
|
)
|
|
Basic net loss per
share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
$
|
(0.14
|
)
|
|
Diluted net loss per
share
|
|
$
|
(0.20
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
$
|
(0.24
|
)
|
|
| |
|
[1]
|
The Company is not required to
and has not previously reported information on the statement of
operations for the three months ended December 31, 2019
|
|
[2]
|
Fair value and accretion to
par value of the 2019 Lincoln Park Note.
|
|
[3]
|
Fair value of the 2019 Lincoln
Park Warrants.
|
|
[4]
|
Fair value of the conversion
feature of the 2019 Lincoln Park Note.
|
|
[5]
|
Reversal of beneficial
conversion feature recorded for the 2019 Lincoln Park Note
|
|
[6]
|
Change in fair value of
bifurcated conversion feature of 2019 Lincoln Park Note.
|
|
[7]
|
Change in fair value of 2019
Lincoln Park Warrant liability.
|
|
[8]
|
Reversal of the amortization
of the beneficial conversion feature of the 2019 Lincoln Park Note
offset by accretion of the 2019 Lincoln Park Note.
|
|
[9]
|
Unamortized discount on the
beneficial conversion feature of the Pinnacle Note.
|
|
[10]
|
Contingent beneficial
conversion feature on repricing of Pinnacle Note conversion, offset
by reversal of beneficial conversion feature of the 2019 Lincoln
Park Note.
|
|
[11]
|
Accretion of the 2019 Lincoln
Park Note and $1.2 million of amortization of the beneficial
conversion feature of the Pinnacle Note.
|
10
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
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, 2019. Significant changes to our accounting
policies as a result of electing the fair value option for certain
convertible notes and warrants issued during the three months ended
March 31, 2020 is discussed below:
Fair Value Option (“FVO”) Election
2020
Convertible Notes
The
Company accounts for certain convertible notes issued during the
three months ended March 31, 2020 under the fair value option
election of ASC 825, Financial Instruments (“ASC-825”) as
discussed below.
The
convertible notes accounted for under the FVO election are each a
debt host financial instrument containing embedded features which
would otherwise be required to be bifurcated from the debt-host and
recognized as separate derivative liabilities subject to initial
and subsequent periodic estimated fair value measurements under ASC
815, Derivatives and Hedging (“ASC-815”).
Notwithstanding, ASC 825-10-15-4 provides for the “fair value
option” (“FVO”) election, to the extent not otherwise prohibited by
ASC 825-10-15-5, to be afforded to financial instruments, wherein
bifurcation of an embedded derivative is not necessary, and the
financial instrument is initially measured at its issue-date
estimated fair value and then subsequently remeasured at estimated
fair value on a recurring basis at each reporting period date.
The
estimated fair value adjustment, as required by ASC 825-10-45-5, is
recognized as a component of other comprehensive income (“OCI”)
with respect to the portion of the fair value adjustment attributed
to a change in the instrument-specific credit risk, with the
remaining amount of the fair value adjustment recognized as other
income (expense) in the accompanying condensed consolidated
statement of operations. With respect to the above notes, as
provided for by ASC 825-10-50-30(b), the estimated fair value
adjustment is presented in a respective single line item within
other income (expense) in the accompanying consolidated statement
of operations, since the change in fair value of the convertible
notes payable was not attributable to instrument specific credit
risk.
Recent Accounting Pronouncements
Accounting Guidance
Adopted
In March
2019, the Financial Accounting Standards Board (the “FASB”) issued
new guidance on film production costs Accounting Standards Update
(“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 adopted this new
guidance without a material impact 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 adopted this new
guidance without a material impact on its consolidated financial
statements.
11
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
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 adopted this new guidance without a material
impact on its consolidated financial statements.
Accounting Guidance Not yet
Adopted
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, 2022 with a cumulative-effect
adjustment to retained earnings as of the beginning of the year of
adoption. Early adoption is permitted. The
Company is in the process of evaluating the impact of the adoption
of ASU 2016-13 on the Company's consolidated financial statements
and disclosures.
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 income of
$2,073,847 for the three months ended March 31, 2020, and had an
accumulated deficit of $93,959,002 as of March 31, 2020. The net
income for the three months ended March 31, 2020, is primarily
attributable to gains on extinguishment of debt and changes in the
fair value of certain derivative liabilities. As of March 31, 2020,
the Company had a working capital deficit of $10,677,566 and
therefore does not have adequate capital to fund its obligations as
they come due or to maintain or grow its operations. In addition,
one of the Company’s subsidiaries operates in the food and
hospitality industries that have been adversely affected by the
government mandated work-from-home, stay-at-home and
shelter-in-place orders as a result of the novel coronavirus
COVID-19. As a
result, the Company’s revenues have been negatively impacted by a
reduction in the services we provide to clients operating in these
industries. 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. The continued spread of COVID-19 and uncertain market
conditions may limit the Company’s ability to access capital.
If the Company is unable to obtain funding from these sources
within the next 12 months, it could be forced to curtail its
business operations or liquidate.
12
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
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. On June 5,
2020, the Company entered into a share purchase agreement with
certain institutional investors and sold to such investors an
aggregate of 7,900,000 shares of Common Stock in a registered
direct offering for net proceeds of approximately $7.6 million.
The Company’s management currently plans to raise any
necessary additional funds through additional issuances of its
Common Stock, securities convertible into its Common Stock and/or
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, Viewpoint and
Shore Fire 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. Between April 19, 2020 and April 23, 2020, the
Company and its subsidiaries received five separate PPP Loans for
an aggregate amount of $2.8 million under PPP which was established
under the Cares Act. The application for the PPP Loans
requires the Company to, in good faith, certify that the current
economic uncertainty made the loan request necessary to support the
ongoing operation of the Company. This certification further
requires the Company to take into account our current business
activity and our ability to access other sources of liquidity
sufficient to support the ongoing operations in a manner that is
not significantly detrimental to the business. The receipt of the
funds from the PPP Loans and the forgiveness of the PPP Loans is
dependent on the Company having initially qualified for the PPP
Loans and qualifying for the forgiveness of such PPP Loans based on
funds being used for certain expenditures such as payroll costs and
rent, as required by the terms of the PPP Loans. There is no
assurance that the Company’s obligation under the PPP Loans will be
forgiven. If the PPP Loans are not forgiven, the Company will need
to repay the PPP Loans over a two-year period, commencing six
months after the funding of the PPP Loans, at an interest rate of
1% per annum.
NOTE 3 — GOODWILL
As of
March 31, 2020, in connection with its acquisitions of 42West, The
Door, Viewpoint and Shore Fire, the Company has a balance of
$18,072,825 of goodwill on its condensed consolidated balance sheet
which management has assigned to the entertainment publicity and
marketing segment. This amount includes a working capital
adjustment made during the three months ended March 31, 2020, in
the amount of $124,836 pursuant to the terms of the Shore Fire
purchase agreement. The Company accounts for goodwill in
accordance with FASB ASC No. 350, Intangibles—Goodwill and Other
(“ASC 350”). ASC 350 requires goodwill to be reviewed for
impairment annually, or more frequently if circumstances indicate a
possible impairment. The Company evaluates goodwill in the fourth
quarter or more frequently if management believes indicators of
impairment exist. Such indicators could include but are not limited
to (1) a significant adverse change in legal factors or in business
climate, (2) unanticipated competition, or (3) an adverse action or
assessment by a regulator.
The Company first assesses qualitative factors to determine whether
it is more likely than not that the fair value of the reporting
unit is less than its’ carrying amount, including goodwill. If
management concludes that it is more likely than not that the fair
value of the reporting unit is less than its’ carrying amount,
management conducts a quantitative goodwill impairment test. This
impairment test involves comparing the fair value of the reporting
unit with its’ carrying value (including goodwill). The Company
estimates the fair values of its reporting units using a
combination of the income, or discounted cash flows approach and
the market approach, which utilizes comparable companies’ data. If
the estimated fair value of the reporting unit is less than its
carrying value, a goodwill impairment exists for the reporting unit
and an impairment loss is recorded.
The
Company determined that the adverse effects of COVID-19 on certain
of the industries in which it operates could be an indicator of a
possible impairment of goodwill. As such, the Company updated
its estimates and assumptions, with the information available as of
the date of this report, performed an impairment test on the
carrying value of its goodwill and determined that an impairment
adjustment was not necessary. As previously discussed, the
full impact of the COVID-19 outbreak is unknown and cannot be
reasonably estimated. The Company’s future assessment of the
magnitude of the effects of the COVID-19 outbreak on its business
could result in impairment of goodwill in future reporting
periods.
13
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
NOTE
4 — MERGERS AND ACQUISITIONS
Shore Fire
Media, Ltd
On
December 3, 2019, (the “Shore Fire Closing Date”), the Company
acquired all of the issued and outstanding capital stock of Shore
Fire, a New York corporation (the “Shore Fire Purchase”), pursuant
to a share purchase agreement (the “Shore Fire Share Purchase
Agreement”) dated on the Shore Fire Closing Date, between the
Company and Shore Fire seller. Shore Fire is an entertainment
public relations agency, offering talent publicity in the music,
events, books, podcasts, and comedy sectors.
The total consideration
paid to the Shore Fire seller in respect of the Shore Fire Purchase
is $3.1 million as follows: (i) $1,140,000 in cash on the Shore
Fire Closing date (adjusted for Shore Fire’s indebtedness, working
capital and cash targets); (ii) $200,000 in shares of Common Stock
at a price of $0.64 per share (314,812 shares) issued to the seller
on the Shore Fire Closing Date, (iii) an additional $400,000 in
shares of common stock paid in two equal installments of $200,000
each on the first and second anniversary of the Shore Fire Closing
Date, (iv) an additional $1,000,000 in cash paid in four equal
payments of $250,000 each to the seller on the three, six, twelve,
and twenty-four month anniversaries of the Shore Fire Closing Date,
and (v) $140,000 and $120,000 in cash paid to key employees on the
first and second anniversary of the Shore Fire Closing Date. In
addition, on March 31, 2020, the Company and the seller agreed on
$124,836 as the amount of the working capital adjustment, pursuant
to the terms of the Shore Fire Purchase Agreement. The Shore
Fire 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 Shore Fire Purchase, the seller entered into an
employment agreement with the Company to continue as an employee
after the closing of the Shore Fire Purchase. The seller’s
employment agreement is through December 3, 2022 and the contract
defines base compensation and a bonus structure based on Shore Fire
achieving certain financial targets. The employment agreement
contains 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.
The
provisional acquisition-date fair value of the consideration
transferred totaled $3,124,836, which consisted of the
following:
|
|
|
|
| |
|
Common
Stock issued at closing (314,812 shares)
|
|
$
|
200,000
|
|
|
Cash
Consideration paid at closing
|
|
|
1,140,000
|
|
|
Cash
Installment to be paid on March 3, 2020
|
|
|
250,000
|
|
|
Cash
Installment to be paid on June 3, 2020
|
|
|
250,000
|
|
|
Cash
Installment to be paid on December 3, 2020
|
|
|
390,000
|
|
|
Common
Stock to be issued on December 3, 2020
|
|
|
200,000
|
|
|
Cash
Installment to be paid on December 3, 2021
|
|
|
370,000
|
|
|
Common
Stock to be issued on December 3, 2021
|
|
|
200,000
|
|
|
Working
capital adjustment paid on April 1, 2020
|
|
|
124,836
|
|
|
|
|
$
|
3,124,836
|
|
The final amount of
consideration may potentially change due to other closing
adjustments, which have not yet been determined.
The fair value of the
314,812 shares of Common Stock issued on the Shore Fire Closing
Date was determined based on the closing market price of the
Company’s Common Stock on the Shore Fire Closing Date of $0.64 per
share.
14
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The following table
summarizes the provisional fair values of the assets acquired and
liabilities assumed at the Shore Fire Closing Date. Amounts in the
table are provisional estimates that may change, as described
below.
|
|
|
|
| |
|
Cash
|
|
$
|
384,530
|
|
|
Accounts
receivable
|
|
|
294,033
|
|
|
Other
current assets
|
|
|
33,402
|
|
|
Property,
plant & equipment
|
|
|
112,787
|
|
|
Intangibles
|
|
|
1,080,000
|
|
|
Total
identifiable assets acquired
|
|
|
1,904,752
|
|
|
|
|
|
|
|
|
Accrued
expenses
|
|
|
(298,870
|
)
|
|
Accounts
payable
|
|
|
(38,750
|
)
|
|
Deferred
tax liability
|
|
|
(358,153
|
)
|
|
Contract
liability
|
|
|
(143,339
|
)
|
|
Other
current liability
|
|
|
(16,651
|
)
|
|
Total
liabilities assumed
|
|
|
(855,763
|
)
|
|
Net
identifiable assets acquired
|
|
|
1,048,989
|
|
|
Goodwill
|
|
|
2,075,847
|
|
|
Net
assets acquired
|
|
$
|
3,124,836
|
|
Of the
provisional fair value of the $1,080,000 of acquired identifiable
intangible assets, $510,000 was assigned to customer relationships
(5 years useful life) and $570,000 was assigned to the trade name
(10-year useful life), that were recognized at a provisional 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.
The
provisional fair value of accounts receivable acquired is
$294,033.
The
provisional fair values of property and equipment and leasehold
improvements of $112,787, and other assets of $33,402, are based on
Shore Fire’s carrying values prior to the acquisition, which
approximate their provisional fair values.
The provisional amount of
$2,075,847 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 Shore Fire.
The following is a
reconciliation of the initially reported fair value to the adjusted
fair value of goodwill:
|
|
|
|
| |
|
Goodwill originally reported at December 3, 2020
|
|
$
|
1,951,011
|
|
|
Changes to estimated fair values:
|
|
|
|
|
|
Working capital adjustment
|
|
|
124,836
|
|
|
Adjusted goodwill
|
|
$
|
2,075,847
|
|
The
above estimated fair values of assets acquired and liabilities
assumed are based on the information that was available as of the
acquisition date to estimate the fair value of assets acquired and
liabilities assumed. As of March 31, 2020, the Company recorded the
identifiable net assets acquired of $1,048,989 as shown in the
table above in its condensed consolidated balance sheet. The
Company did not recognize any adjustments to the identifiable net
assets during the three months ended March 31, 2020.
15
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
Unaudited Pro Forma
Consolidated Statements of Operations
The
following represents the Company’s unaudited pro forma consolidated
operations for the three months ended March 31, 2019 as if Shore
Fire had been acquired on January 1, 2019 and its results had been
included in the consolidated results of the Company for such
period:
|
|
|
|
| |
|
|
|
March
31,
2019
|
|
|
Revenue
|
|
$
|
7,461,227
|
|
|
Net
income
|
|
$
|
162,035
|
|
These amounts have been
calculated after applying the Company’s accounting policies and
adjusting the results of the acquisitions to reflect the
amortization that would have been charged, assuming the intangible
assets had been recorded on January 1, 2019.
The impact of the
acquisition of Shore Fire 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
acquisitions been completed on January 1, 2019, 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.
42West
In connection with the
42West acquisition, on March 30, 2017, the Company entered into put
agreements (the “Put Agreements”) with each of the 42West sellers.
Pursuant to the terms and subject to the conditions set forth in
the Put Agreements, the Company has granted the 42West 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 months ended
March 31, 2020, the 42West sellers exercised Put Rights with
respect to an aggregate of 177,518 shares of Common Stock.
During the three months ended March 31, 2020, the Company
made payments of $375,000 related to exercise of Put Rights, of
which $275,000 pertained to Put Rights that were exercised in
December 2019. As of March 31, 2020, the Company had a
balance of $1,537,200 of Put Rights that were exercised but not yet
paid. The Company also entered into Put Agreements with three
separate 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 5 — CAPITALIZED PRODUCTION COSTS,
ACCOUNTS RECEIVABLES AND OTHER CURRENT ASSETS
Capitalized
Production Costs
Capitalized production
costs include the unamortized costs of completed motion pictures
and digital projects that have been produced by the Company, costs
of scripts for projects that have not been developed or produced
and costs for projects that are in production. 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 or web series.
16
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The Company did not have
any revenues from motion pictures for the three months ended March
31, 2020. Revenues earned from motion pictures was $78,990 for the
three months ended March 31, 2019. These revenues were primarily
attributable to Max Steel, the motion picture released on
October 14, 2016. The Company amortizes capitalized production
costs (included as direct costs) in the condensed consolidated
statements of operations using the individual film forecast
computation method, and did not record any amortization for the
three months ending March 31, 2020 and 2019, related to Max
Steel. As of each of March 31, 2020 and December 31, 2019,
the Company did not have any capitalized productions costs related
to Max Steel on its balance sheet.
The Company purchased
scripts for other motion picture or digital productions and
recorded $239,277 and $203,036 in capitalized production costs
associated with these scripts as of March 31, 2020 and December 31,
2019, respectively. The Company intends to produce these projects,
but they were not yet in production as of March 31, 2020 and there
can be no assurance that these projects will be produced on the
timelines anticipated or at all.
As of
March 31, 2020, and December 31, 2019, the Company had total
capitalized production costs of $239,277 and 203,036, respectively,
recorded on its condensed consolidated balance sheets related to
motion pictures.
The Company has assessed
events and changes in circumstances that would indicate whether the
Company should assess if the fair value of the productions is less
than the unamortized costs capitalized and did not identify
indicators of impairment.
Accounts
Receivables
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 March 31, 2020 and December
31, 2019, the Company had accounts receivable balances of
$3,464,936 and $3,581,155, respectively, net of allowance for
doubtful accounts of $391,082 and $307,887, respectively, related to
its entertainment publicity and marketing segment. The Company did
not have any accounts receivable related to its content production
segment.
Other Current
Assets
The Company had a balance
of $540,387 and $372,872 in other current assets on its condensed
consolidated balance sheets as of March 31, 2020 and December 31,
2019, respectively. As of March 31, 2020 and December 31, 2019,
these amounts were primarily composed of the following:
Indemnification
asset – As of March 31, 2020 and December 31, 2019, the Company
included 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 March 31, 2020
and December 31, 2019, the Company had a balance of $5,228 from
these tax incentives.
Income tax
receivable – The Company is owed an overpayment from certain
taxes paid for 2018. As of March 31, 2020 and December 31,
2019, the Company had a balance of $19,610 from income tax
receivable.
Capitalized costs –
The Company capitalizes certain third-party costs used in the
production of its marketing video content. As of March 31, 2020 and
December 31, 2019, the Company had a balance of $28,981 and $0,
respectively related to these third-party costs.
17
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
NOTE 6 — PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS
Property, equipment and
leasehold improvement consists of:
|
|
|
|
|
|
|
|
| |
|
|
|
March
31,
2020
|
|
|
December
31,
2019
|
|
|
Furniture
and fixtures
|
|
$
|
797,289
|
|
|
$
|
792,611
|
|
|
Computers
and equipment
|
|
|
1,734,753
|
|
|
|
1,728,916
|
|
|
Leasehold
improvements
|
|
|
770,629
|
|
|
|
770,628
|
|
|
|
|
|
3,302,671
|
|
|
|
3,292,155
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
(2,345,381
|
)
|
|
|
(2,255,306
|
)
|
|
Property,
equipment and leasehold improvements, net
|
|
$
|
957,290
|
|
|
$
|
1,036,849
|
|
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 $90,091 for the three
months ended March 31, 2020.
NOTE 7 — INVESTMENT
At March
31, 2020, 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
March 31, 2020 and December 31, 2019, related to this
investment.
NOTE 8 — DEBT
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. 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.
On
February 20, 2020, the Company received notification from the
lender of the Production Service Agreement that Max Steel VIE did
not owe any debt to the lender. As a result, the Company
recorded a gain on extinguishment of debt in the amount of
$3,311,198 during the three months ended March 31, 2020.
As of March 31, 2020, and
December 31, 2019, the Company had outstanding balances of $0 and
$3,311,198 including accrued interest in the amount of $0 and
1,698,280, respectively, in the caption debt related to this
Production Service Agreement on its condensed consolidated balance
sheets.
18
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
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
matured on March 15, 2020 and bore interest on the outstanding
balance at the bank’s prime rate plus 0.25% per annum throughout
its term. The maximum amount that could have been drawn on the
revolving line of credit was $2,250,000 with a sublimit of $750,000
for standby letters of credit. Amounts outstanding under the Loan
Agreement were 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. On February 20, 2020, the Company paid down
$500,000 of the line of credit as part of an agreement to convert
the line of credit into a three-year term loan described below.
As of March 31, 2020, there was no balance on the line of
credit due to its conversion to a term loan, and as of December 31,
2019, the outstanding balance on the line of credit was
$1,700,390.
Term Loan
On March 31, 2020, 42West and The
Door, as co-borrowers, entered into a business loan agreement with
Bank United, N.A. to convert the balance of the 42West line of
credit of $1,200,390 into a three-year term loan (the “Term Loan”).
The Term Loan bears interest at a rate of 0.75% points over
the Lender’s Prime Rate and matures on March 15, 2023. As of March
31, 2020, the Company had balances of $372,863 in current
liabilities and $827,527 in other noncurrent liabilities under the
caption Term Loan on its condensed consolidated balance sheet.
The Term Loan 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 fixed charge coverage of 1.06x based on
fiscal year-end audit to be calculated as provided in the Term
Loan. Further, the Term Loan contains customary negative covenants,
including those that, subject to certain exceptions, restrict the
ability of 42West and The Door 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 and
The Door’s insolvency, such outstanding amounts will automatically
become due and payable. 42West and The Door may prepay any amounts
outstanding under the Term Loan without penalty. As of March 31,
2020, the Company was in compliance with all covenants under the
Term Loan.
NOTE 9 — NOTES PAYABLE
Convertible Notes
Fair Value Convertible
Notes
On
January 3, 2020, the Company entered into a securities purchase
agreement with Lincoln Park Capital Fund LLC, an Illinois limited
liability company (“Lincoln Park”) and issued a convertible
promissory note with a principal amount of $1.3 million (the “2020
Lincoln Park Note”) at a purchase price of $1.2 million together
with warrants to purchase up to 207,588 shares of our common stock
at an exercise price of $0.78 per share. The securities purchase
agreement provides for issuance of warrants to purchase up to
207,588 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 “2020
Lincoln Park Warrants”). As such, on March 4, 2020 the Company
issued warrants to purchase up to 207,588 shares of its common
stock. The 2020 Lincoln Park Note may be converted at any
time into shares of our common stock (the “2020 Conversion Shares”)
at an initial conversion price equal to the lower of (A)
$2.00 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 but under
no circumstances lower than $0.78 per share. If an event of default
under the 2020 Lincoln Park Note occurs prior to maturity, the 2020
Lincoln Park Note will be convertible into shares of Common Stock
at a 15% discount to the applicable conversion price. Outstanding
principal under the 2020 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 2020 Lincoln Park Note matures on
January 3, 2022. The proceeds of the 2020 Lincoln Park Note were
used to repay the 2018 Convertible Debt described below.
19
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The Company elected the
fair value option to account for the 2020 Lincoln Park Note and
determined that the 2020 Lincoln Park Warrants met the criteria to
be accounted for as a derivative. The fair value of the 2020
Lincoln Park Note and the 2020 Lincoln Park Warrants on issuance
was recorded as $885,559 and $314,441, respectively. The fair
value of the note and warrants decreased by $105,550 and $54,441,
respectively, and the change was recognized as current period other
income in the condensed consolidated statement of operations for
the three months ended March 31, 2020 (as no portion of such fair
value adjustment resulted from instrument-specific credit risk).
As of March 31, 2020 the balance of the 2020 Lincoln Park
Note and the 2020 Lincoln Park Warrants recorded on the Company’s
condensed consolidated balance sheet was $780,000 and $260,000,
respectively.
In connection with the
transactions contemplated by the securities purchase agreement, on
January 3, 2020, the Company entered into a registration rights
agreement with Lincoln Park, pursuant to which the Company agreed
to register the 2020 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 files
a resale registration statement with the Securities and Exchange
Commission for any other shareholder of the Company.
On March 4, 2020, the
Company issued a convertible promissory note to a third-party
investor and in exchange received $500,000. The Company also agreed
to issue a warrant (“Series “I” Warrant”) to purchase up to 100,000
shares of our common stock at purchase price of $0.78 per share.
The convertible promissory note bears interest at a rate of
8% per annum and matures on March 4, 2030. The Company elected the
fair value option to account for the convertible promissory note
and determined that the Series “I” Warrant met the criteria to be
accounted for as a derivative. As such, the Company recorded the
fair value on issuance of the convertible promissory note and
Series “I” Warrant as $460,000 and $40,000, respectively. For the
three months ended March 31, 2020, the fair value of the
convertible promissory note and Series “I” Warrant decreased by
$90,000 and $10,000, respectively, and was recognized as current
period other income (as no portion of such fair value adjustment
resulted from instrument-specific credit risk) in the Company’s
condensed consolidated statement of operations. As of March 31,
2020, the balance of the convertible promissory note and Series “I”
Warrant on the Company’s condensed consolidated balance sheet was
$370,000 and $30,000, respectively. The balance of the convertible
promissory note and any accrued interest may be converted at the
noteholder’s option at any time at a purchase price $0.78 per share
of our common stock.
On March 25, 2020, the
Company issued a convertible promissory note to a third-party
investor for a principal amount of $560,000 and received $500,000,
net of transaction costs of $10,000 paid to the investor and
original issue discount. The Company also issued 50,000 shares of
our common stock related to this convertible note payable.
The maturity date of the convertible promissory note is March
25, 2021 and the balance of the convertible promissory note and any
accrued interest may be converted at the noteholder’s option at any
time at a purchase price $0.78 per share of our common stock. The
Company elected the fair value option to account for the
convertible promissory note. The convertible promissory note’s fair
value on issuance was recorded at $500,000. The fair value of
the note increased by $48,100 and was recognized as current period
other expense in the Company’s condensed consolidated statement of
operations for the three months ended March 31, 2020 (as no portion
of such fair value adjustment resulted from instrument-specific
credit risk). As of March 31, 2020 the balance of the
convertible promissory note on the Company’s condensed consolidated
balance sheet was $548,100.
20
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
On May 20, 2019, the
Company entered into a securities purchase agreement with 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 “2019 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 at an exercise
price of $2.00 per share and 137,500 additional warrants 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 “2019 Lincoln Park Warrants”). As such, on each of
July 23, 2019, September 20, 2019, and November 20, 2019, the
Company issued warrants to purchase up to 137,500 shares of Common
Stock. During the three months ended March 31, 2020, the
exercise price of the 2019 Lincoln Park Warrants was reduced to
$0.78 per share. The 2019 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. Pursuant to a re-pricing clause in the 2019 Lincoln Park
Note, the $5.00 fixed conversion price was reduced to $0.78, the
purchase price used in the Company’s public offering that closed on
October 21, 2019. Outstanding principal under the 2019 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 2019 Lincoln Park
Note matures on May 21, 2021 and can be paid prior to the maturity
date without any penalty.
The Company accounts for
the embedded conversion feature of the 2019 Lincoln Park Note at
fair value under ASC-815. Under ASC-815, an embedded feature in a
debt instrument that meets the definition of a derivative is fair
valued at issuance and remeasured at each reporting period with
changes in fair value recognized in earnings. The Company also
determined that the 2019 Lincoln Park Warrants met the definition
of a derivative and should be classified as a liability recorded at
fair value upon issuance and remeasured at each reporting period
with changes recorded in earnings. On each of February 3, February
12, February 27, and March 4, 2020, (the “Conversion Dates”)
Lincoln Park converted $250,000 of principal ($1,000,000 total)
into shares of Common Stock at a conversion price of $0.78. As of
March 31, 2020, the carrying value of the 2019 Lincoln Park Note,
after interest accretion and conversions, was $64,786 and the fair
value of the embedded conversion feature was $15,456. The Company
also recorded $54,711 of interest expense to accrete the note to
par value for the three months ending March 31, 2020.
As of March 31, 2020, the
aggregate fair value of the convertible promissory notes described
above in “Fair Value Convertible Debt” was recorded under the
caption convertible notes payable at fair value at $548,100 and
$1,214,786 in current and noncurrent liabilities, respectively, in
the Company’s condensed consolidated balance sheet.
2020 Convertible
Debt
On March 18, 2020, the
Company issued two convertible promissory notes to two third-party
investors for principal amounts of $120,000 and $75,000. The notes
earn interest at 10% per annum and mature on March 18, 2022.
The balance of each of the convertible promissory notes and
any accrued interest may be converted at the noteholder’s option at
any time at a purchase price $0.78 per share of our common
stock.
2019 Convertible
Debt
On each of March 25, 2019,
July 9, 2019, September 25, 2019, and October 11, 2019 the Company
issued convertible promissory note agreements to third-party
investors and received $200,000, $150,000, $250,000, and $500,000,
respectively, to be used for working capital. The convertible
promissory notes bear interest at a rate of 10% per annum and
mature on March 25, 2021, July 9, 2021, September 25, 2021, and
October 11, 2021, respectively. The balance of the convertible
promissory notes and any accrued interest may be converted into
shares of Common Stock at the noteholder’s option at any time at a
purchase price based on the 30-day trailing average closing price
of the Common Stock. On January 1, 2020, $200,000 was converted
into 346,021 shares of common stock. On January 12, 2020,
$150,000 was converted into 254,326 shares of common stock. On
January 1 and 12, 2020, the price of the Common Stock was $0.68 and
$0.65, respectively, resulting in a loss of $51,333 related to the
conversion of these convertible notes payable.
21
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
On August 12, 2019, the
Company entered into the Exchange Agreement whereby one of the
42West Members agreed to take a convertible note instead of cash in
exchange for 76,194 Put Rights that had been exercised by one of
the 42West Members and not paid. The principal amount of the
convertible note is $702,500, bears interest at a rate of 10% per
annum and matures on August 12, 2020. The balance of the
convertible note and any accrued interest may be converted into
shares of Common Stock at the noteholder’s option at any time
during the term of the convertible note payable, at a purchase
price based on the 30-day trailing average closing price of the
Common Stock.
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
Pinnacle Note to finance the Company’s acquisition of The Door. The
Company’s obligations under the Pinnacle Note were secured
primarily by a lien on the assets of The Door and Viewpoint.
The
principal amount of the Pinnacle Note bore interest at the rate of
8% per annum. The Pinnacle Note matured on January 5, 2020. The
Company had the ability to prepay the Pinnacle Note in whole, but
not in part, at any time prior to maturity; however, if the Company
voluntarily prepaid the Pinnacle Note, it must have (i) paid
Pinnacle a prepayment penalty equal to 10% of the prepaid amount
and (ii) issued 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 contained certain customary events of default.
Pinnacle had the option to convert the outstanding principal amount
of the convertible promissory 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. The conversion price was adjusted to
$0.78, the purchase price used in the Company’s public offering
that closed on October 21, 2019. At the Company’s election, upon a
conversion of the Pinnacle note, the Company had the option to
issue Common Stock in respect of accrued and unpaid interest with
respect to the principal amount of the Pinnacle note converted.
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 was
amortized and recorded as interest expense over the life of the
Pinnacle Note. Upon the re-pricing of the conversion feature of the
Pinnacle Note on October 21, 2019, the Company recognized an
additional beneficial conversion feature of $1,315,386, of which
$69,350 was amortized as interest expense for the three months
ended March 31, 2020
On
December 4, 2019, Pinnacle converted $297,936 of the principal on
the note to 380,603 shares of the Company at a price of $0.78 per
share.
The
Pinnacle note was paid in full on January 5, 2020. For the three
months ended March 31, 2020, the Company recorded interest expense
of $70,686 (including the $69,350 amortization of beneficial
conversion feature discussed above) and paid interest in the amount
of $29,614. As of March 31, 2020, the Company did not have a
balance related to the Pinnacle Note. As of December 31, 2019 the
Company had a balance of $1,202,064 recorded in current liabilities
on its condensed consolidated balance sheet related to the Pinnacle
Note and $28,279 of accrued interest recorded in other current
liabilities.
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
$875,000, with a balance of $550,000 outstanding as of March 31,
2020. Each of the convertible promissory notes had an initial
maturity date of one year from the date of issuance, with the
exception of one note in the amount of $75,000, which had an
initial maturity date of two years from the date of issuance, and
bears interest at a rate of 10% per annum. During 2018, the
respective maturity dates of the promissory notes were extended for
a period of one year from the original maturity dates and in 2019
were extended for another one-year period. 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.
22
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
In regard to the 2020,
2019, 2018, and 2017 Convertible Debt discussed above, for the
three months ended March 31, 2020 and 2019, the Company paid
interest in the aggregate amount of $65,515 and $45,625,
respectively, and recorded interest expense in the amount of
$354,346 and $45,715, respectively in the Company’s condensed
consolidated statement of operations. The interest expense for the
three months ended March 31, 2020 included the amortization of a
beneficial conversion feature in the amount of $301,781 related to
two of the 2017 Convertible Debt notes that were converted during
the three months ended March 31, 2020. As of March 31, 2020
and December 31, 2019, the Company recorded accrued interest of
$56,132 and $40,803, respectively, relating to the 2020, 2019, 2018
and 2017 Convertible Debt. As of March 31, 2020 and December 31,
2019, the Company had a balance of $1,252,500 and $2,385,214,
respectively, in current liabilities and a balance of $945,000 and
$1,100,000, respectively, in noncurrent liabilities, related to the
2020, 2019, 2018, and 2017 Convertible Debt in its condensed
consolidated balance sheet.
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”). 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. For the three months ended March 31, 2020, the Company
repaid $21,243 of the principal amount of the promissory note.
On November 30, 2017, the
Company entered into an
unsecured promissory note in the amount of $200,000 that matures on
January 15, 2021. 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 a maturity date of June 14, 2021. The
promissory note bears interest of 10% per annum and can be prepaid
without a penalty after the initial six months.
On
November 5, 2019, the Company entered into an unsecured promissory
note in the amount of $350,000, maturing on November 4, 2021. The
promissory note bears interest of 10% per annum and can be prepaid
without a penalty after the initial six months.
During the three months
ended March 31, 2020 and 2019, the Company paid interest on its
nonconvertible promissory notes in the aggregate amount of $33,883
and $27,146, respectively. The Company had balances of $8,664 and
$8,788 as of March 31, 2020 and December 31, 2019, 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 months
ended March 31, 2020 and 2019 of $33,759 and $27,034, respectively,
relating to these nonconvertible promissory notes. As of March 31,
2020, the Company had a balance of $290,462 in current liabilities
and $1,049,270 in noncurrent liabilities related to these
nonconvertible promissory notes. As of December 31, 2019, the
Company had balances of $286,633 in current liabilities and
$1,074,122 in noncurrent liabilities on its condensed consolidated
balance sheets relating to these nonconvertible promissory
notes.
NOTE 10 — 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.
23
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
For the three months ended
March 31, 2020, the Company did not repay any principal balance of
the DE LLC Note. For the three months ended March 31, 2020
and 2019, the Company recorded interest expense of $27,621 and
$27,317, respectively. As of March 31, 2020 and December 31, 2019,
the Company had a principal balance of $1,107,873 and accrued
interest of $443,213 and $415,592, respectively, relating to the DE
LLC Note on its condensed consolidated balance sheets.
NOTE 11 — FAIR VALUE MEASUREMENTS
Put Rights
In connection with the
42West acquisition on March 30, 2017, the Company entered into the
put agreements, pursuant to which it granted Put Rights to the
sellers. During the three months ended March 31, 2020, the
sellers exercised their Put Rights, for an aggregate amount of
177,518 shares of Common Stock. During the three months ended
March 31, 2020, the Company paid $375,000 related to Put Rights
that were exercised of which $275,000 were exercised in December
2019. As of March 31, 2020, an additional $1,537,200 was due
from the exercise of these Put Rights.
In addition, the Company
entered into 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 March 31, 2020 and December 31, 2019
was $2,795,007 and $3,003,547, 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 months ending March 31, 2020
and 2019, the Company recorded a gain of $1,470,740 and $1,083,596,
respectively, in the 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 March 31,
2020 and December 31, 2019.
The Company determined the
fair value by using the following key inputs to the Black-Scholes
Option Pricing Model:
|
|
|
|
|
|
|
|
| |
|
Inputs
|
|
As of
March 31,
2020
|
|
|
As of
December 31,
2019
|
|
|
Equity
volatility estimate
|
|
|
97.3% – 133
|
%
|
|
|
64.0% – 70.0
|
%
|
|
Discount
rate based on US Treasury obligations
|
|
|
0.14% – 0.73
|
%
|
|
|
1.54% – 1.59
|
%
|
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, 2019 to March 31, 2020:
|
|
|
|
| |
|
Ending fair value balance reported in the
consolidated balance sheet at December 31, 2019
|
|
$
|
3,003,547
|
|
|
Put rights exercised in December 2019 paid in
January 2020
|
|
|
(275,000
|
)
|
|
Change in fair value (gain) reported in the
statements of operations
|
|
|
(1,470,740
|
)
|
|
Put rights exercised March 2020 and not yet
paid
|
|
|
1,537,200
|
|
|
Ending fair value of put rights reported in
the condensed consolidated balance sheet at March 31, 2020
|
|
$
|
2,795,007
|
|
24
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
Contingent Consideration
In connection with the
Company’s acquisition of The Door, the Door 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 March 31, 2020 and
December 31, 2019 is $227,000 and $330,000, 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 months ended March 31, 2020, the Company recorded
a gain on the Contingent Consideration of $103,000 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
March 31,
2020
|
|
|
As of
December 31,
2019
|
|
|
Risk Free
Discount Rate (based on US government treasury obligation with a
term similar to that of the Contingent Consideration)
|
|
|
0.16% - 0.22
|
%
|
|
|
1.58% - 1.59
|
%
|
|
Annual
Asset Volatility Estimate
|
|
|
44.0
|
%
|
|
|
40.0
|
%
|
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, 2019 to March
31, 2020:
|
|
|
|
| |
|
Beginning fair value balance reported on the
consolidated balance sheet at December 31, 2019
|
|
$
|
330,000
|
|
|
Change in fair value (gain) reported in the
statements of operations
|
|
|
(103,000
|
)
|
|
Ending fair value balance reported in the
condensed consolidated balance sheet at March 31, 2020
|
|
$
|
227,000
|
|
Fair Value Option Election –
Convertible notes payable and freestanding warrants
2020 convertible notes payable
The Company issued the 2020
Lincoln Park Note with a principal amount of $1.3 million at a
purchase price of $1.2 million on January 3, 2020. This
note is accounted for under the ASC 825-10-15-4 FVO election.
Under the FVO election the financial instrument is initially
measured at its issue-date estimated fair value and subsequently
remeasured at estimated fair value on a recurring basis at each
reporting period date. As provided for by ASC 825-10-50-30(b), the
estimated fair value adjustment is presented as a single line item
within other income (expense) in the accompanying consolidated
statement of operations under the caption “change in fair value of
convertible notes and derivative liabilities”.
25
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
For the 2020 Lincoln Park
Note, which measured at fair value categorized within Level 3 of
the fair value hierarchy, the following is a reconciliation of the
fair values from January 3, 2020 (date of issuance) to March 31,
2020:
|
|
|
|
| |
|
Beginning fair value balance on issue date -
January 3, 2020
|
|
$
|
885,559
|
|
|
Change in fair value (gain) reported in the
statements of operations
|
|
|
(105,559
|
)
|
|
Ending fair value balance - March 31,
2020
|
|
$
|
780,000
|
|
The estimated fair value of
the 2020 Lincoln Park Note as of its January 3, 2020 issue date and
as of March 31, 2020, was computed using a Monte Carlo simulation,
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 2020 Lincoln Park Note reflects management’s own
assumptions about the assumptions that market participants would
use in valuing the 2020 Lincoln Park Note as of the acquisition
date and subsequent reporting periods.
The Company determined the
fair value by using the following key inputs to the Monte Carlo
Simulation Model
|
|
|
|
|
|
|
|
| |
|
Fair Value Assumption - 2020 Lincoln Park Note
|
|
January
3,
2020
|
|
|
March
31,
2020
|
|
|
Face
value principal payable
|
|
$
|
1,300,000
|
|
|
$
|
1,300,000
|
|
|
Original conversion price
|
|
|
Variable
|
|
|
|
Variable
|
|
|
Value of Common Stock
|
|
$
|
0.64
|
|
|
$
|
0.54
|
|
|
Expected term (years)
|
|
|
2.00
|
|
|
|
1.76
|
|
|
Volatility
|
|
|
87.5%
|
|
|
|
90%
|
|
|
Straight debt yield
|
|
|
9.5%
|
|
|
|
18.0%
|
|
|
Risk free rate
|
|
|
1.53%
|
|
|
|
0.22%
|
|
The variable conversion
price is the lower of (A) $2.00 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 but under no circumstances lower than
$0.78 per share.
In addition to the 2020
Lincoln Park Note, the Company issued two other convertible notes
during the three months ending March 31, 2020 for which it elected
FVO. The first was issued for a face value of $500,000 on
March 4, 2020, and the second was issued for a face value of
$560,000 on March 25, 2020. Under the FVO election the
financial instrument is initially measured at its issue-date
estimated fair value and subsequently remeasured at estimated fair
value on a recurring basis at each reporting period date. As
provided for by ASC 825-10-50-30(b), the estimated fair value
adjustment is presented as a single line item within other income
(expense) in the accompanying consolidated statement of operations
under the caption “change in fair value of convertible notes and
derivative liabilities”.
For the March 4, 2020 note,
which measured at fair value categorized within Level 3 of the fair
value hierarchy, the following is a reconciliation of the fair
values from March 4, 2020 (date of issuance) to March 31, 2020:
|
|
|
|
| |
|
Beginning fair value balance on issue date -
March 4, 2020
|
|
$
|
460,000
|
|
|
Change in fair value (gain) reported in the
statements of operations
|
|
|
(90,000
|
)
|
|
Ending fair value balance - March 31,
2020
|
|
$
|
370,000
|
|
26
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The estimated fair value of
the note as of its March 4, 2020 issue date and as of March 31,
2020, was computed using a Black-Scholes simulation of the present
value of its cash flows using a synthetic credit rating analysis
and a required rate of return, using the following assumptions:
|
|
|
|
|
|
|
|
| |
|
Fair Value Assumption - 2020 Convertible Note (March 4
note)
|
|
March 4,
2020
|
|
|
March
31,
2020
|
|
|
Face
value principal payable
|
|
$
|
500,000
|
|
|
$
|
500,000
|
|
|
Original conversion price
|
|
$
|
0.78
|
|
|
$
|
0.78
|
|
|
Value of Common Stock
|
|
$
|
0.67
|
|
|
$
|
0.54
|
|
|
Expected term (years)
|
|
|
10.00
|
|
|
|
9.92
|
|
|
Volatility
|
|
|
90%
|
|
|
|
90%
|
|
|
Risk free rate
|
|
|
1.02%
|
|
|
|
0.70%
|
|
|
|
|
|
|
|
|
|
|
|
For the March 25, 2020
note, which measured at fair value categorized within Level 3 of
the fair value hierarchy, the following is a reconciliation of the
fair values from March 25, 2020 (date of issuance) to March 31,
2020:
|
|
|
|
| |
|
Beginning fair value balance on issue date -
March 25, 2020
|
|
$
|
500,000
|
|
|
Change in fair value (loss) reported in the
statements of operations
|
|
|
48,100
|
|
|
Ending fair value balance - March 31,
2020
|
|
$
|
548,100
|
|
The estimated fair value of
the note as of its March 25, 2020 issue date and as of March 31,
2020, was computed using a Monte-Carlo simulation of the present
value of its cash flows using a synthetic credit rating analysis
and a required rate of return, using the following assumptions:
|
|
|
|
|
|
|
|
| |
|
Fair Value Assumption - 2020 Convertible Note (March 25
note)
|
|
March
25,
2020
|
|
|
March
31,
2020
|
|
|
Face
value principal payable
|
|
$
|
560,000
|
|
|
$
|
560,000
|
|
|
Original conversion price
|
|
$
|
0.40
|
|
|
$
|
0.78
|
|
|
Value of Common Stock
|
|
$
|
0.67
|
|
|
$
|
0.54
|
|
|
Expected term (years)
|
|
|
1.00
|
|
|
|
0.98
|
|
|
Volatility
|
|
|
90%
|
|
|
|
90%
|
|
|
Straight debt yield
|
|
|
23.5%
|
|
|
|
19.5%
|
|
|
Risk free rate
|
|
|
0.25%
|
|
|
|
0.17%
|
|
Warrants
In connection with the 2020
Lincoln Park Note, the Company issued warrants to purchase up to
207,588 shares of its common stock on January 3, 2020, as well as
on each of the second, fourth, and six month anniversaries of the
2020 Lincoln Park Note issuance.
For the 2020 Lincoln Park
Warrants, which measured at fair value categorized within Level 3
of the fair value hierarchy, the following is a reconciliation of
the fair values from January 3, 2020 (date of issuance) to March
31, 2020:
|
|
|
|
| |
|
2020 Lincoln Park Warrants:
|
|
Fair
Value
|
|
|
2020
Lincoln Park Warrants derivative liability - January 3, 2020
|
|
$
|
314,441
|
|
|
Change
in fair value (gain) reported in the statements of operations
|
|
|
(54,441
|
)
|
|
2020 Lincoln Park Warrants derivative
liability - March 31, 2020
|
|
$
|
260,000
|
|
27
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The estimated fair value of
the 2020 Lincoln Park Warrants was computed using a Black-Scholes
valuation model, using the following assumptions:
|
|
|
|
|
|
|
|
| |
|
Fair Value Assumption - 2020 Lincoln Park Warrants
|
|
January
3,
2020
|
|
|
March
31,
2020
|
|
|
Aggregate
Fair Value
|
|
$
|
314,441
|
|
|
$
|
260,000
|
|
|
Exercise Price per share
|
|
$
|
0.7828
|
|
|
$
|
0.7828
|
|
|
Value of Common Stock
|
|
$
|
0.64
|
|
|
$
|
0.54
|
|
|
Expected term (years)
|
|
|
5.50
|
|
|
|
5.26
|
|
|
Volatility
|
|
|
87.5%
|
|
|
|
90%
|
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
Risk free rate
|
|
|
1.62%
|
|
|
|
0.42%
|
|
In connection with the
March 4, 2020, convertible promissory note (see Note 9) issued, the
Company issued Series “I” Warrant to purchase up to 100,000 shares
of Common Stock at a purchase price of $0.78 per share.
For the Series “I” Warrant,
which measured at fair value categorized within Level 3 of the fair
value hierarchy, the following is a reconciliation of the fair
values from March 4, 2020 (date of issuance) to March 31, 2020:
|
|
|
|
| |
|
Series “I” Warrant:
|
|
Fair
Value
|
|
|
2020
Series “I” Warrants derivative liability - March 4, 2020
|
|
$
|
40,000
|
|
|
Change
in fair value (gain) reported in the statements of operations
|
|
|
(10,000
|
)
|
|
2020 Series “I” Warrants derivative liability
- March 31, 2020
|
|
$
|
30,000
|
|
The estimated fair value of
the Series “I” Warrants was computed using a Black-Scholes
valuation model, using the following assumptions:
|
|
|
|
|
|
|
|
| |
|
Fair Value Assumption - Series “I” Warrants
|
|
March 4,
2020
|
|
|
March
31,
2020
|
|
|
Aggregate
Fair Value
|
|
$
|
40,000
|
|
|
$
|
30,000
|
|
|
Exercise Price per share
|
|
$
|
0.7828
|
|
|
$
|
0.7828
|
|
|
Value of Common Stock
|
|
$
|
0.67
|
|
|
$
|
0.54
|
|
|
Expected term (years)
|
|
|
5.50
|
|
|
|
5.43
|
|
|
Volatility
|
|
|
90%
|
|
|
|
90%
|
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
Risk free rate
|
|
|
0.80%
|
|
|
|
0.42%
|
|
In connection with the
$1,200,000 2019 Lincoln Park Note issued on May 20, 2019, the
Company issued warrants to purchase up to 550,000 shares of common
stock.
For the 2019 Lincoln Park
Warrants, 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, 2019 to March 31, 2020:
|
|
|
|
| |
|
2019 Lincoln Park Warrants:
|
|
Fair
Value
|
|
|
2019
Lincoln Park Warrants liability - December 31, 2019
|
|
$
|
189,590
|
|
|
Change
in fair value (gain) reported in the statements of operations
|
|
|
(8,074
|
)
|
|
2019 Lincoln Park Warrants liability - March
31, 2020
|
|
$
|
181,516
|
|
28
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
The estimated fair value of
the 2019 Lincoln Park Warrants was computed using a Black-Scholes
valuation model, using the following assumptions:
|
|
|
|
|
|
|
|
| |
|
Fair Value Assumption - 2019 Lincoln Park Warrants
|
|
December 31,
2019
|
|
|
March
31,
2020
|
|
|
Aggregate
Fair Value
|
|
$
|
189,590
|
|
|
$
|
181,516
|
|
|
Exercise Price per share
|
|
$
|
2.00
|
|
|
$
|
0.78
|
|
|
Value of Common Stock
|
|
$
|
0.70
|
|
|
$
|
0.54
|
|
|
Expected term (years)
|
|
|
5.39
|
|
|
|
4.80
|
|
|
Volatility
|
|
|
90%
|
|
|
|
90%
|
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
Risk free rate
|
|
|
1.69%
|
|
|
|
0.38%
|
|
Derivative Liability (2019 Lincoln Park
Note Embedded Conversion Feature)
The Company accounted for
the embedded conversion feature of the 2019 Lincoln Park Note as a
derivative liability. For the embedded conversion feature of the
2019 Lincoln Park Note, 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, 2019 to March
31, 2020:
|
|
|
|
| |
|
Beginning
fair value balance - December 31, 2019
|
|
$
|
170,000
|
|
|
Change in
fair value (gain) reported in the statements of operations
|
|
|
—
|
|
|
Reduction
in value due to note principal conversion
|
|
|
(154,544
|
)
|
|
Ending
fair value balance - March 31, 2020
|
|
$
|
15,456
|
|
The estimated fair value of
the 2019 Lincoln Park Note conversion option as of December 31,
2019 and March 31, 2020, was computed using a Black-Scholes
valuation model, using the following assumptions:
|
|
|
|
|
|
|
|
| |
|
Fair Value Assumption - 2019 Lincoln Park Note Conversion
Option
|
|
December 31,
2019
|
|
|
March
31,
2020
|
|
|
Face
value principal payable
|
|
$
|
1,100,000
|
|
|
$
|
100,000
|
|
|
Original conversion price
|
|
|
0.78
|
|
|
$
|
0.78
|
|
|
Value of Common Stock
|
|
$
|
0.70
|
|
|
$
|
0.54
|
|
|
Expected term (years)
|
|
|
1.38
|
|
|
|
1.09
|
|
|
Volatility
|
|
|
90.0%
|
|
|
|
90%
|
|
|
Straight debt yield
|
|
|
9.5%
|
|
|
|
18.0%
|
|
|
Risk free rate
|
|
|
1.59%
|
|
|
|
0.18%
|
|
NOTE 12 — 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 $525,712 and $309,880 as of March 31, 2020 and December
31, 2019, respectively, in contract liabilities.
29
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
NOTE 13 —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 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 JB Believe, LLC are consolidated in the
condensed consolidated balance sheets as of March 31, 2020 and
December 31, 2019, and in the condensed consolidated statements of
operations and statements of cash flows presented herein for the
three months ended March 31, 2020 and 2019. The financial
statements of Max Steel Productions LLC are consolidated in the
condensed consolidated balance sheet as of December 31, 2019 and in
condensed consolidated statement of operations and statement of
cash flows presented herein for the period between January 1, and
February 20, 2020 and the three months ended March 31, 2019.
These entities were previously under common control and have
been accounted for at historical costs for all periods
presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Max Steel
Productions, LLC
|
|
|
JB Believe
LLC
|
|
|
(in USD)
|
|
As of and
for the three ended March 31,
2020
|
|
|
As of
December 31, 2019
|
|
|
As of and
for the three ended March 31,
2019
|
|
|
As of and
for the three ended March 31,
2020
|
|
|
As of
December 31, 2019
|
|
|
As of and
for the three ended March 31,
2019
|
|
|
Assets
|
|
|
—
|
|
|
|
7,379,851
|
|
|
|
8,021,288
|
|
|
|
190,347
|
|
|
|
190,347
|
|
|
|
184,484
|
|
|
Liabilities
|
|
|
—
|
|
|
|
(11,816,966
|
)
|
|
|
(11,810,997
|
)
|
|
|
(6,749,914
|
)
|
|
|
(6,749,914
|
)
|
|
|
(6,741,834
|
)
|
|
Revenues
|
|
|
3,311,198
|
|
|
|
78,990
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,616
|
|
|
|
—
|
|
|
Expenses
|
|
|
—
|
|
|
|
(607,081
|
)
|
|
|
(76,914
|
)
|
|
|
—
|
|
|
|
(31,075
|
)
|
|
|
(21,241
|
)
|
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.
30
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
Max Steel
VIE 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 8 (Debt), 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 VIE with the
Company controlling the production of the motion picture and having
the rights to sell the motion picture. On February 20, 2020, the
lender of the Production Service Agreement confirmed that Max Steel
VIE did not owe any debt under the Production Service Agreement.
The Company recorded a gain on extinguishment of debt in the
amount of $3,311,198. In addition, the Company assessed its
status as primary beneficiary of the VIE and determined that it was
no longer the primary beneficiary. As such, the Company
deconsolidated Max Steel VIE and recorded a loss on deconsolidation
in the amount of $1,484,591 on its condensed consolidated statement
of operations for the three months ended March 31, 2020.
During
the three months ended March 31, 2019, the Company recorded
interest expense of $39,153 and recorded $116,067 of receivables
that had previously been written off against bad debt.
As of
March 31, 2020 and December 31, 2019, there were outstanding
balances of $0 and $3,311,198, including accrued interest of $0 and
$1,698,280, respectively, related to this debt which are included
in the caption debt in the condensed consolidated balance sheets.
The accrued interest was reclassified from other current
liabilities to debt as of December 31, 2019.
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 14 — 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.
31
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
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 13, 2020, a
holder of a convertible promissory note converted a note with a
principal amount of $200,000 into 346,021 shares of Common
Stock.
On January 13, 2020, one of
the sellers of 42West that had exercised Put Rights in December was
paid $100,000 for 10,846 shares of Common Stock.
On January 23, 2020, the
Company issued 248,733 shares of Common Stock to one of the sellers
of Viewpoint as payment for the third installment of the
consideration for the acquisition of Viewpoint.
On February 3, 2020, a
holder of a convertible promissory note converted a note with a
principal amount of $150,000 into 254,326 shares of Common
Stock.
On February 6, 2020, a
holder of a convertible promissory note converted $250,000 of the
principal amount of the note 319,366 shares of Common Stock.
On February 7, 2020, one of
the sellers of 42West that had exercised Put Rights in December was
paid $100,000 for 10,846 shares of Common Stock.
On February 13, 2020, a
holder of a convertible promissory note converted $250,000 of the
principal amount of the note 319,366 shares of Common Stock.
32
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
On February 27, 2020, a
holder of a convertible promissory note converted $250,000 of the
principal amount of the note 319,366 shares of Common Stock.
On February 28, 2020, one
of the sellers of 42West exercised Put for 10,846 shares of Common
Stock and was paid $100,000.
On March 24, 2020, the
Company issued 50,000 shares of Common Stock as partial
consideration for a $560,000 convertible note payable and received
net proceeds of $500,000.
On March 26, 2020, a holder
of a convertible promissory note converted $250,000 of the
principal amount of the note 319,366 shares of Common Stock.
As of March 31, 2020 and
December 31, 2019, the Company had 20,036,906 and 17,892,900 shares
of Common Stock issued and outstanding, respectively.
NOTE 15 — EARNINGS (LOSS) PER
SHARE
The following table sets
forth the computation of basic and diluted income (loss) per
share:
|
|
|
|
|
|
|
|
| |
|
|
|
Three months
ended
March
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Numerator
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,073,847
|
|
|
$
|
122,608
|
|
|
Deemed
dividend attributable to participating securities
|
|
|
369,557
|
|
|
|
—
|
|
|
Net
income attributable to Dolphin Entertainment common stock
shareholders and numerator for basic earnings per share
|
|
$
|
1,704,290
|
|
|
$
|
122,608
|
|
|
Change in
fair value of put rights
|
|
|
(1,470,740
|
)
|
|
|
(1,527,026
|
)
|
|
Interest
expense
|
|
|
52,566
|
|
|
|
—
|
|
|
Numerator
for diluted earnings (loss) per share
|
|
$
|
286,116
|
|
|
$
|
(1,404,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
Denominator for basic EPS - weighted-average shares
|
|
|
20,498,564
|
|
|
|
15,944,443
|
|
|
Effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
|
Put rights
|
|
|
4,398,323
|
|
|
|
2,745,934
|
|
|
Convertible notes payable
|
|
|
3,488,095
|
|
|
|
—
|
|
|
Denominator for diluted EPS - adjusted weighted-average shares
|
|
|
28,384,982
|
|
|
|
18,690,377
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.08
|
|
|
$
|
0.01
|
|
|
Diluted
earnings (loss) per share
|
|
$
|
0.01
|
|
|
$
|
(0.08
|
)
|
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.
Certain
of the Company’s convertible notes payable and the Series C
Preferred Stock have clauses that entitle the holder to participate
if dividends are declared to the common stockholders as if the
instruments had been converted into shares of common stock.
As such, the Company uses the two-class method to compute
earnings per share and attribute a portion of the Company’s net
income to these participating securities.
33
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
In
periods when the Put Rights are assumed to have been settled at the
beginning of the period in calculating the denominator for diluted
earnings (loss) 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
earnings (loss) per share for the three ended March 31, 2020 and
2019 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
months ended March 31, 2020 and 2019 is subtracted from net
income.
For the three months ended
March 31, 2020, convertible promissory notes that were not
considered participating securities, were included in the
calculation of fully diluted loss per share using the if-converted
method that assumes the convertibles promissory notes are converted
at the beginning of the reporting period using the average market
price for the three months ended March 31, 2020 of the Common
Stock. For the three months ended March 31, 2019, the
convertible promissory notes were not included in diluted loss per
share because inclusion was considered to be anti-dilutive.
NOTE 16 — WARRANTS
A summary
of warrants outstanding at December 31, 2019 and issued, exercised
and expired during the three months ended March 31, 2020 is as
follows:
|
|
|
|
|
|
|
|
| |
|
Warrants:
|
|
Shares
|
|
|
Weighted
Avg.
Exercise Price
|
|
|
Balance
at December 31, 2019
|
|
|
2,277,253
|
|
|
$
|
3.47
|
|
|
Issued
|
|
|
515,176
|
|
|
|
0.78
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
(250,000
|
)
|
|
|
0.78
|
|
|
Balance
at March 31, 2020
|
|
|
2,542,429
|
|
|
$
|
3.37
|
|
On
November 4, 2016, the Company issued warrants to T Squared to
purchase up to 250,000 shares of Common Stock at an initial
exercise price of $14.00 per share. The warrants contain a
down round provision and on October 21, 2019, as a result of the
Company’s sale of Common Stock through an underwritten public
offering, the exercise price of the warrants was reduced to $0.78
per share. The warrants were not exercised and expired on
January 31, 2020.
In the
2017 public offering, 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 public 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.
On each
of May 21, July 23, September 20, and November 20, 2019 the Company
issued 2019 Lincoln Park Warrants to purchase up to 137,500 shares
of Common Stock (550,000 total) at a purchase price of $2.00 per
share to Lincoln Park related to the 2019 Lincoln Park Note.
The 2019 Lincoln Park Warrants became exercisable on the
six-month anniversary of issuance and for a period of five years
thereafter. If a resale registration statement covering the
shares of Common Stock underlying the 2019 Lincoln Park Warrants is
not effective and available at the time of exercise, the 2019
Lincoln Park Warrants may be exercised by means of a “cashless”
exercise formula. The
Company determined that the 2019 Lincoln Park Warrants should be
classified as freestanding financial instruments and meet the
criteria to be accounted for as derivative liabilities at fair
value. The Company recorded the change in fair value of these
warrants as $8,074 of current period income in the condensed
consolidated statement of operations. The fair value of these
warrants was $181,516 on March 31, 2020.
34
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
On
January 3, 2020 and March 4, 2020, in relation to the 2020 Lincoln
Park Note, the Company issued the 2020 Lincoln Park Warrants to
purchase up to 207,588 shares of Common Stock (415,176 total) at a
purchase price of $0.78 per share to Lincoln Park and intends to
issue additional warrants to purchase up to 207,588 shares of
Common Stock on each of the fourth and sixth anniversary of the
2020 Lincoln Park Note. The 2020 Lincoln Park Warrants become
exercisable on the six-month anniversary of issuance and for a
period of five years thereafter. If a resale registration
statement covering the shares of Common Stock underlying the 2020
Lincoln Park Warrants is not effective and available at the time of
exercise, the 2020 Lincoln Park Warrants may be exercised by means
of a “cashless” exercise formula. The Company determined that
the 2020 Lincoln Park Warrants should be classified as freestanding
financial instruments that meet the criteria to be accounted for as
derivative liabilities and recorded a fair value at issuance of
$314,441. The Company recorded $54,441 of income due to change in
fair value during the three months ended March 31, 2020, and had a
balance of $260,000 as of March 31, 2020 recorded in its condensed
consolidated balance sheet.
On March
4, 2020, in connection with the $500,000 convertible note payable
(see Note 9) the Company issued Series “I” Warrant to purchase up
to 100,000 shares of Common Stock at a purchase price of $0.78 per
share. The 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 warrants is not effective and available at the time
of exercise, the warrants may be exercised by means of a “cashless”
exercise formula. The Company determined that the Series “I”
Warrant should be classified as a freestanding financial instrument
that meets the criteria to be accounted for as a derivative
liability and recorded a fair value at issuance of $40,000. The
Company recorded $10,000 of income due to change in fair value
during the three months ended March 31, 2020, and had a balance of
$30,000 as of March 31, 2020 recorded in its condensed consolidated
balance sheet.
NOTE 17 — 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 March 31, 2020 and December
31, 2019, the Company accrued $2,625,000 of compensation as accrued
compensation and has balances of $1,558,664 and $1,493,219
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 $64,726 for each three-month
period ended March 31, 2020 and 2019 on the condensed consolidated
statements of operations.
NOTE 18 — 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) which is
the same as Loss before other income (expenses) on the Company’s
consolidated statement of operations for the three months ended
March 31, 2020. 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.
35
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
In connection with the
acquisitions of 42West, The Door, Viewpoint, and Shore Fire, the
Company assigned $7,930,627 of intangible assets, net of
accumulated amortization of $4,730,706 and goodwill of $18,072,825
as of March 31, 2020 to the Entertainment Publicity and Marketing
segment. The balances reflected as of March 31, 2019 for
Entertainment Publicity and Marketing segment comprise 42West, The
Door, and Viewpoint.
|
|
|
|
|
|
|
|
| |
|
|
|
Three months
ended
March 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Revenues:
|
|
|
|
|
|
|
|
EPD
|
|
$
|
6,633,800
|
|
|
$
|
6,238,099
|
|
|
CPD
|
|
|
—
|
|
|
|
78,990
|
|
|
Total
|
|
$
|
6,633,800
|
|
|
$
|
6,317,089
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating (Loss)
Income:
|
|
|
|
|
|
|
|
|
|
EPD
|
|
$
|
(258,966
|
)
|
|
$
|
(414,628
|
)
|
|
CPD
|
|
|
(611,893
|
)
|
|
|
(410,533
|
)
|
|
Total operating loss
|
|
|
(870,859
|
)
|
|
|
(825,161
|
)
|
|
Interest expense
|
|
|
(624,282
|
)
|
|
|
(287,970
|
)
|
|
Other income, net
|
|
|
3,568,988
|
|
|
|
1,235,739
|
|
|
Income before income
taxes
|
|
$
|
2,073,847
|
|
|
$
|
122,608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
As of
March 31,
2020
|
|
|
As of
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPD
|
|
|
|
|
|
|
|
|
|
$
|
38,534,464
|
|
|
$
|
40,083,491
|
|
|
CPD
|
|
|
|
|
|
|
|
|
|
|
2,657,088
|
|
|
|
2,488,235
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
$
|
41,191,552
|
|
|
$
|
42,571,726
|
|
NOTE 19 — 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 and included in
restricted cash in the amounts of $36,735 as of March 31, 2020. 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
Door Members is obligated under an operating lease agreement for
the office space expiring in August 2020. The Company made payments
of $50,737 to the affiliate during the three months ended March 31,
2020 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 March 31, 2020. 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.
36
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
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, which was October 1, 2019. The lease is
secured by a cash deposit of $19,908.
Shore
Fire Media is obligated under an operating lease agreement for
office space in Brooklyn, New York, expiring in February 2026.
The lease is secured by a cash deposit of $34,490.
Shore
Fire Media is obligated under an operating lease agreement for
office space in Nashville, Tennessee, expiring July 2020. The
lease is secured by a cash deposit of $1,575.
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.
|
|
|
|
|
|
|
|
| |
|
|
|
March 31,
2020
|
|
|
December
31,
2019
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Right-of-use asset
|
|
$
|
7,026,745
|
|
|
$
|
7,435,903
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Lease
liability
|
|
$
|
1,604,264
|
|
|
$
|
1,610,022
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
|
Lease
liability
|
|
$
|
5,976,977
|
|
|
$
|
6,386,209
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease liability
|
|
$
|
7,581,241
|
|
|
$
|
7,996,231
|
|
The table
below shows the lease income and expenses recorded in the
consolidated statement of operations incurred during the three
months ended March 31, 2020.
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Three months
ended
March
31,
|
|
|
Lease costs
|
|
Classification
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease costs
|
|
Selling, general and administrative
expenses
|
|
$
|
547,037
|
|
$
|
517,178
|
|
|
Operating lease costs
|
|
Direct costs
|
|
|
60,861
|
|
|
60,861
|
|
|
Sublease income
|
|
Selling, general and administrative
expenses
|
|
|
(2,400
|
)
|
|
(47,099
|
)
|
|
Net lease costs
|
|
|
|
$
|
605,498
|
|
$
|
530,940
|
|
Maturities of lease liabilities were as follows:
|
|
|
|
| |
|
2020 (excluding three
months ended March 31, 2020)
|
$
|
1,675,724
|
|
|
2021
|
|
|
1,919,733
|
|
|
2022
|
|
|
1,294,106
|
|
|
2023
|
|
|
1,305,358
|
|
|
2024
|
|
|
1,357,335
|
|
|
Thereafter
|
|
|
2,173,036
|
|
|
Total lease payments
|
|
$
|
9,725,292
|
|
|
Less: Imputed interest
|
|
|
(2,144,052
|
)
|
|
Present value of lease
liabilities
|
|
$
|
7,581,240
|
|
37
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
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 March 31,
2020.
NOTE 20 — COMMITMENTS AND
CONTINGENCIES
Litigation
The Company may be subject
to legal proceedings, claims, and liabilities that arise in the
ordinary course of business. In the opinion of management and based
upon the advice of its outside counsels, the liability, if any,
from any pending litigation is not expected to have a material
effect in the Company’s financial position, results of operations
and cash flows.
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 three months ended March 31, 2020, 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 $105,788 during the three months
ended March 31, 2020.
Employment
Contracts
As a
condition to the Shore Fire Purchase, the Marilyn Laverty, the
Shore Fire seller, entered into an employment agreement with the
Company to continue as employees after the closing of the Shore
Fire Purchase. Ms. Laverty’s employment agreement is through
December 31, 2022 and may be renewed by Ms. Laverty for two
successive one-year terms. The employment agreement defines base
compensation and a salary increase and bonus structure based on
Shore Fire achieving certain financial targets. Ms. Laverty
will serve as Shore Fire’s President. 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.
38
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
As a
condition to the acquisition of Viewpoint, David Shilale entered
into an employment agreement with the Company to continue as an
employee after the closing of the Viewpoint purchase. Mr. Shilale’s
employment agreement is for a period of three years from the
closing date of the Viewpoint purchase 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. The agreement does not provide for
guaranteed increases to the base salary. The employment agreement
contains 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.
In connection with the
acquisition of The Door, each of the former members of The Door
(the “Door Members”) has entered into a four-year employment
agreement with The Door, pursuant to which each Door 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.
As a condition to the
closing of the acquisition of 42West each of the three principal
sellers entered into 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 agreements, 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. The Company is negotiating the renewal of
two of the employment agreements with 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 March 31, 2020.
NOTE 21 – SUBSEQUENT EVENTS
On March 27, 2020, President Trump
signed into law the CARES Act. The CARES Act, among other
things, includes provisions relating to refundable payroll tax
credits, deferment of employer side social security payments, net
operating loss carryback periods, alternative minimum tax credit
refunds, modifications to the net interest deduction limitations,
increased limitations on qualified charitable contributions, and
technical corrections to tax depreciation methods for qualified
improvement property. It also appropriated funds for the SBA
Paycheck Protection Program loans that are forgivable in certain
situations to promote continued employment, as well as Economic
Injury Disaster Loans to provide liquidity to small businesses
harmed by COVID-19.
39
DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2020
Between April 19, 2020 and April 23,
2020, the Company and four of its subsidiaries executed notes and
received an aggregate amount of approximately $2.8 million from
five PPP Loans from BankUnited, N.A., under the Paycheck Protection
Program which was established under the CARES Act and is
administered by the U.S. Small Business Administration. The
proceeds from each PPP Loan will be used in accordance with the
terms of the CARES Act program, as described further below. The
application for the PPP Loans requires the Company to, in good
faith, certify that the current economic uncertainty made the loan
request necessary to support the ongoing operation of the Company.
This certification further requires the Company to take into
account our current business activity and our ability to access
other sources of liquidity sufficient to support the ongoing
operations in a manner that is not significantly detrimental to the
business. The receipt of the funds from the PPP Loan and the
forgiveness of the PPP Loans is dependent on the Company having
initially qualified for the PPP Loans and qualifying for the
forgiveness of such PPP Loans based on funds being used for certain
expenditures such as payroll costs and rent, as required by the
terms of the PPP Loans.
The PPP Loans mature between April 19,
2022 and April 23, 2022 and bear interest at a rate of 1.0% per
annum. Commencing November 19, 2020 through November 23, 2020 (the
“First Payment Dates”), the Company and its subsidiaries are
required to pay the Lender all accrued interest that has not been
forgiven. Additionally, beginning on the First Payment Dates and
each month thereafter, the Company and its subsidiaries shall make
equal monthly payments of principal and accrued interest as
necessary to fully amortize the principal amount outstanding by the
maturity date. The PPP Loans may be prepaid by the Company at any
time prior to maturity with no prepayment penalties. The PPP Loans
are unsecured, and all or a portion of the PPP Loans may be
forgiven upon application to the Lender for certain expenditure
amounts made, including payroll costs and rent, during the 8-week
period beginning on the date of first disbursement, in accordance
with the requirements under the PPP.
On May 1 and May 8, 2020,
the Company made payments in the aggregate amount of $250,000 as
the final installment for the consideration of the acquisition of
Viewpoint.
Pursuant
to the Shore Fire purchase agreement, on April 1, 2020, the Company
paid $124,836 to the seller of Shore Fire as a working capital
adjustment and on June 4, 2020, the Company paid the Shore Fire
seller $250,000 for the third installment of the purchase price.
(see Note 4 for additional details on the Shore Fire
purchase)
On June
2, 2020, Lincoln Park converted the remaining balance of $100,000
of the 2019 Lincoln Park Note into 127,746 shares of Common
Stock.
On June
4, 2020, the Company issued 932,866 shares of Common Stock to the
sellers of 42West related to the earnout consideration that was
earned during the year ended December 31, 2017.
On June
5, 2020, the Company issued and sold to certain institutional
investors through a registered direct offering an aggregate of
7,900,000 shares of the Common Stock at a price of $1.05 per share.
The offering of the shares was made pursuant to the Company’s
effective shelf registration statement on Form S-3 previously filed
with the Securities and Exchange Commission. The Company received
proceeds of approximately $7.6 million from the issuance and sale
of the Common Stock after deducting related offering expenses.
On June
5, 2020, Lincoln Park, through a cashless exercise formula,
exercised 2019 Lincoln Park Warrants and issued 377,016 shares of
Common Stock.
On June
4, 5, 15, and 17, 2020 and on July 1, 2020, eight holders of
convertible promissory notes converted an aggregate amount of
approximately $1.3 million of principal and accrued interest into
2,322,399 shares of Common Stock.
40
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, The Door and Shore Fire, we provide expert strategic
marketing and publicity services to many of the top brands, both
individual and corporate, in the entertainment and hospitality
industries. 42West, The Door and Shore Fire are both recognized
global leaders in the PR services for the industries they serve.
Viewpoint adds 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 have established an
acquisition strategy based on identifying and acquiring companies
that complement our existing entertainment publicity and marketing
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. We have identified potential acquisition targets and
are in various stages of discussion with such targets. We intend to
complete at least one acquisition during 2020, but there is no
assurance that we will be successful in doing so, whether in 2020
or at all. We currently intend to fund any acquisitions through
loans or additional issuances of our common stock, securities
convertible into our common stock, debt securities or a combination
of such financing alternatives; however, there can be no assurance
that we will be successful in raising the capital necessary to
consummate any acquisitions, whether on favorable terms or at
all.
We operate in two reportable segments: our entertainment
publicity and marketing segment and our content production segment.
The entertainment publicity and marketing segment comprises 42West,
The Door, Shore Fire and Viewpoint and provides clients with
diversified services, including public relations, entertainment
content marketing, strategic marketing consulting, creative
branding and in-house production of content for marketing. The
content production segment comprises Dolphin Films and Dolphin
Digital Studios and specializes in the production and distribution
of digital content and feature films.
On March 11, 2020. The
World Health Organization categorized a novel coronavirus
(COVID-19) as a pandemic, and it continues to spread throughout the
United States. The outbreak of COVID-19 and public and private
sector measures to reduce its transmission, such as the imposition
of social distancing and orders to work-from-home, stay-at-home and
shelter-in-place have adversely affected our business and demand
for certain of our services. Hotels, restaurants and content
productions have reduced or suspended operating activities which
has negatively impacted the clients we serve. As a result, our
revenues have been negatively impacted from the suspension or
reduction of services we provide to clients that operate in these
industries. We have taken steps to align our expenses with
our changes in revenue. The steps being taken across the
Company include freezes on hiring, staff reductions, salary
reductions and cuts in non-essential spending. We continue to
believe that our strategic strengths discussed above will continue
to assist us as we navigate a rapidly changing marketplace. The
effects of COVID-19 pandemic are negatively impacting our results
of operations, cash flows and financial position; however, the
extent of the impact will vary depending on the duration and
severity of the economic and operational impacts of COVID-19.
2020 Direct Registered
Offering
On June
5, 2020, we issued and sold to certain institutional investors in a
registered direct offering an aggregate of 7.9 million shares of
our common stock at a price of $1.05 per share. The offering of the
shares was made pursuant to our effective shelf registration
statement on Form S-3 previously filed with the Securities and
Exchange Commission. We received proceeds of approximately $7.6
million from the issuance and sale of our common stock after
deducting related offering expenses.
41
Revision of Prior Period Financial
Statements
During the preparation of
condensed consolidated financial statement for the three months
ended March 31, 2020, we identified certain immaterial errors
related to its accounting of the 2019 Lincoln Park Note, 2019
Lincoln Park Warrants and the Pinnacle Note. We concluded
that the conversion feature of the 2019 Lincoln Park Note and the
2019 Lincoln Park Warrants met the definition of a derivative and
should have been recorded at fair value at inception and remeasured
at each reporting period with changes in the fair value recognized
in earnings. The accretion to par value of the 2019 Lincoln Park
Note is recorded as interest expense. We had originally
accounted for the 2019 Lincoln Park Warrants as equity-linked
instruments and had not bifurcated the conversion feature in the
2019 Lincoln Park Note.
We also reviewed the
Pinnacle Note that had a down round provision allowing for the
repricing of the conversion price upon the Company’s issuance of
equity securities at a price lower than the Pinnacle Note
conversion price. On October 21, 2019, we sold shares of
Common Stock in a registered public offering, at a price of $0.78
when the Pinnacle Note conversion price was $3.00. As a
result, the conversion price of the Pinnacle Note was repriced to
$0.78. Due to the repricing, we should have recorded a
beneficial conversion feature on the date of the repricing and
amortized the beneficial conversion feature as interest expense
over the remaining life of the Pinnacle Note that matured on
January 5, 2020.
In accordance with SAB No.
99, “Materiality,”
and SAB No. 108, “Considering
the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements,” we
evaluated the errors and determined that the related impact was not
material to our financial statements for any prior annual or
interim period, but that correcting the cumulative
impact of the error would be significant to the our results of
operations for the three months
ended March 31,
2020. Accordingly, the Company revised the consolidated
balance sheets and quarterly and year to date
2019 consolidated statements of operations as of and for
the quarterly and year to date periods ended June
30, 2019, September 30, 2019 and December 31, 2019,
including the related notes presented herein, as
applicable. The errors did not impact net cash used in
operations reported in the consolidated statement of cash flows
for any of those periods.
A summary of the revisions
to previously reported financial information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
|
|
|
As
Adjusted
|
|
|
Revised Consolidated Balance Sheet as
of June 30, 2019
|
|
|
Convertible note payable
(noncurrent)
|
|
$
|
1,044,232
|
|
|
$
|
(380,636
|
)
|
|
[2]
|
|
$
|
663,596
|
|
|
Warrant liability (noncurrent)
|
|
$
|
—
|
|
|
$
|
302,306
|
|
|
[3]
|
|
$
|
302,306
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
150,000
|
|
|
[4]
|
|
$
|
150,000
|
|
|
Total noncurrent liabilities
|
|
$
|
8,559,526
|
|
|
$
|
71,670
|
|
|
|
|
$
|
8,631,196
|
|
|
Total liabilities
|
|
$
|
31,088,896
|
|
|
$
|
71,670
|
|
|
|
|
$
|
31,160,566
|
|
|
Additional paid in capital
|
|
$
|
103,571,126
|
|
|
$
|
(166,887
|
)
|
|
[5]
|
|
$
|
103,404,239
|
|
|
Accumulated deficit
|
|
$
|
(95,298,433
|
)
|
|
$
|
95,217
|
|
|
|
|
$
|
(95,203,216
|
)
|
|
Total stockholders' equity
|
|
$
|
8,489,611
|
|
|
$
|
(71,670
|
)
|
|
|
|
$
|
8,417,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed Consolidated
Statement of Operations for the three months ended June 30,
2019
|
|
Change in fair value of derivative
liability
|
|
$
|
—
|
|
|
$
|
30,000
|
|
|
[6]
|
|
$
|
30,000
|
|
|
Change in fair value of warrant liability
|
|
$
|
—
|
|
|
$
|
81,766
|
|
|
[7]
|
|
$
|
81,766
|
|
|
Interest expense
|
|
$
|
(301,138
|
)
|
|
$
|
(16,549
|
)
|
|
[8]
|
|
$
|
(317,687
|
)
|
|
Total other income
|
|
$
|
310,211
|
|
|
$
|
95,217
|
|
|
|
|
$
|
405,429
|
|
|
Loss before income taxes/Net loss
|
|
$
|
(891,867
|
)
|
|
$
|
95,217
|
|
|
|
|
$
|
(796,650
|
)
|
|
Basic net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.05
|
)
|
|
Diluted net loss per share
|
|
$
|
(0.06
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed Consolidated
Statement of Operations for the six months ended June 30,
2019
|
|
Change in fair value of derivative
liability
|
|
$
|
—
|
|
|
$
|
30,000
|
|
|
[6]
|
|
$
|
30,000
|
|
|
Change in fair value of warrant liability
|
|
$
|
—
|
|
|
$
|
81,766
|
|
|
[7]
|
|
$
|
81,766
|
|
|
Interest expense
|
|
$
|
(589,108
|
)
|
|
$
|
(16,549
|
)
|
|
[8]
|
|
$
|
(605,657
|
)
|
|
Total other income
|
|
$
|
1,257,981
|
|
|
$
|
95,217
|
|
|
|
|
$
|
1,353,198
|
|
|
Loss before income taxes/Net loss
|
|
$
|
(769,259
|
)
|
|
$
|
95,217
|
|
|
|
|
$
|
(674,042
|
)
|
|
Basic net loss per share
|
|
$
|
(0.05
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.04
|
)
|
|
Diluted net loss per share
|
|
$
|
(0.13
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.12
|
)
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
As
Reported
|
|
|
Adjustment
|
|
|
|
|
|
As
Adjusted
|
|
|
Revised Consolidated
Balance Sheet as of September 30, 2019
|
|
Convertible note payable
(noncurrent)
|
|
$
|
1,477,597
|
|
|
$
|
(330,989
|
)
|
|
[2]
|
|
$
|
1,146,608
|
|
|
Warrant liability
(noncurrent)
|
|
$
|
—
|
|
|
$
|
228,269
|
|
|
[3]
|
|
$
|
228,269
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
150,000
|
|
|
[4]
|
|
$
|
150,000
|
|
|
Total noncurrent
liabilities
|
|
$
|
8,299,494
|
|
|
$
|
47,280
|
|
|
|
|
$
|
8,346,774
|
|
|
Total liabilities
|
|
$
|
29,890,000
|
|
|
$
|
47,280
|
|
|
|
|
$
|
29,937,280
|
|
|
Additional paid in
capital
|
|
$
|
103,146,270
|
|
|
$
|
(166,887
|
)
|
|
[5]
|
|
$
|
102,979,383
|
|
|
Accumulated deficit
|
|
$
|
(95,649,264
|
)
|
|
$
|
119,607
|
|
|
|
|
$
|
(95,529,657
|
)
|
|
Total stockholders'
equity
|
|
$
|
7,717,630
|
|
|
$
|
(47,280
|
)
|
|
|
|
$
|
7,670,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed
Consolidated Statement of Operations for the three months ended
September 30, 2019
|
|
Change in fair value of
derivative liability
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
Change in fair value of
warrant liability
|
|
$
|
—
|
|
|
$
|
74,037
|
|
|
[7]
|
|
$
|
74,037
|
|
|
Interest expense
|
|
$
|
(295,556
|
)
|
|
$
|
(49,647
|
)
|
|
[8]
|
|
$
|
(345,203
|
)
|
|
Total other income
|
|
$
|
1,061,340
|
|
|
$
|
24,390
|
|
|
|
|
$
|
1,085,730
|
|
|
Loss before income
taxes/Net loss
|
|
$
|
(350,831
|
)
|
|
$
|
24,390
|
|
|
|
|
$
|
(326,441
|
)
|
|
Basic net loss per
share
|
|
$
|
(0.02
|
)
|
|
$
|
—
|
|
|
|
|
$
|
(0.02
|
)
|
|
Diluted net loss per
share
|
|
$
|
(0.05
|
)
|
|
$
|
—
|
|
|
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed
Consolidated Statement of Operations for the nine months ended
September 30, 2019
|
|
Change in fair value of
derivative liability
|
|
$
|
—
|
|
|
$
|
30,000
|
|
|
[6]
|
|
$
|
30,000
|
|
|
Change in fair value of
warrant liability
|
|
$
|
—
|
|
|
$
|
155,803
|
|
|
[7]
|
|
$
|
155,803
|
|
|
Interest expense
|
|
$
|
(884,665
|
)
|
|
$
|
(66,196
|
)
|
|
[8]
|
|
$
|
(950,861
|
)
|
|
Total other income
|
|
$
|
2,319,321
|
|
|
$
|
119,607
|
|
|
|
|
|
|
$
|
2,438,928
|
|
|
Loss before income
taxes/Net loss
|
|
$
|
(1,120,090
|
)
|
|
$
|
119,607
|
|
|
|
|
$
|
(1,000,483
|
)
|
|
Basic net loss per
share
|
|
$
|
(0.07
|
)
|
|
$
|
0.01
|
|
|
|
|
$
|
(0.06
|
)
|
|
Diluted net loss per
share
|
|
$
|
(0.17
|
)
|
|
$
|
—
|
|
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Consolidated
Balance Sheet as of December 31, 2019
|
|
Convertible note payable
(noncurrent)
|
|
$
|
1,907,575
|
|
|
$
|
(177,957
|
)
|
|
[2]
|
|
$
|
1,729,618
|
|
|
Convertible note payable
(current)
|
|
$
|
2,452,960
|
|
|
$
|
(69,350
|
)
|
|
[9]
|
|
$
|
2,383,610
|
|
|
Warrant liability
(noncurrent)
|
|
$
|
—
|
|
|
$
|
189,590
|
|
|
[3]
|
|
$
|
189,590
|
|
|
Derivative liability
|
|
$
|
—
|
|
|
$
|
170,000
|
|
|
[4]
|
|
$
|
170,000
|
|
|
Total current
liabilities
|
|
$
|
22,490,861
|
|
|
$
|
(69,350
|
)
|
|
|
|
$
|
22,421,511
|
|
|
Total noncurrent
liabilities
|
|
$
|
10,392,050
|
|
|
$
|
181,633
|
|
|
|
|
$
|
10,573,683
|
|
|
Total liabilities
|
|
$
|
32,882,911
|
|
|
$
|
112,283
|
|
|
|
|
$
|
32,995,194
|
|
|
Additional paid in
capital
|
|
$
|
105,443,656
|
|
|
$
|
1,022,240
|
|
|
[10]
|
|
$
|
106,465,896
|
|
|
Accumulated deficit
|
|
$
|
(96,024,243
|
)
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
(97,158,766
|
)
|
|
Total stockholders'
equity
|
|
$
|
9,688,815
|
|
|
$
|
(112,283
|
)
|
|
|
|
$
|
9,576,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed
Consolidated Statement of Operations for the three months ended
December 31, 2019[1]
|
|
Change in fair value of
derivative liability
|
|
$
|
—
|
|
|
$
|
(20,000
|
)
|
|
[6]
|
|
$
|
(20,000
|
)
|
|
Change in fair value of
warrant liability
|
|
$
|
—
|
|
|
$
|
38,679
|
|
|
[7]
|
|
$
|
38,679
|
|
|
Interest expense
|
|
$
|
(321,536
|
)
|
|
$
|
(1,272,810
|
)
|
|
[11]
|
|
$
|
(1,594,345
|
)
|
|
Total other income
|
|
$
|
154,258
|
|
|
$
|
(1,254,130
|
)
|
|
|
|
$
|
(1,099,872
|
)
|
|
Loss before income
taxes
|
|
$
|
(491,486
|
)
|
|
$
|
(1,254,130
|
)
|
|
|
|
$
|
(1,745,616
|
)
|
|
Net loss
|
|
$
|
(73,287
|
)
|
|
$
|
(1,254,130
|
)
|
|
|
|
$
|
(1,327,417
|
)
|
|
Basic net loss per
share
|
|
$
|
—
|
|
|
$
|
(0.07
|
)
|
|
|
|
$
|
(0.07
|
)
|
|
Diluted net loss per
share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised Condensed
Consolidated Statement of Operations for the year ended December
31, 2019
|
|
Change in fair value of
derivative liability
|
|
$
|
—
|
|
|
$
|
10,000
|
|
|
[6]
|
|
$
|
10,000
|
|
|
Change in fair value of
warrant liability
|
|
$
|
—
|
|
|
$
|
194,482
|
|
|
[7]
|
|
$
|
194,482
|
|
|
Interest expense
|
|
$
|
(1,206,201
|
)
|
|
$
|
(1,339,006
|
)
|
|
[11]
|
|
$
|
(2,545,207
|
)
|
|
Total other income
|
|
$
|
2,473,579
|
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
1,339,056
|
|
|
Loss before income
taxes
|
|
$
|
(1,611,576
|
)
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
(2,746,099
|
)
|
|
Net loss
|
|
$
|
(1,193,377
|
)
|
|
$
|
(1,134,523
|
)
|
|
|
|
$
|
(2,327,900
|
)
|
|
Basic net loss per
share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
$
|
(0.14
|
)
|
|
Diluted net loss per
share
|
|
$
|
(0.20
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
$
|
(0.24
|
)
|
43
|
| |
|
[1]
|
The Company is not required to
and has not previously reported information on the statement of
operations for the three months ended December 31, 2019
|
|
[2]
|
Fair value and accretion to
par value of the 2019 Lincoln Park Note.
|
|
[3]
|
Fair value of the 2019 Lincoln
Park Warrants.
|
|
[4]
|
Fair value of the conversion
feature of the 2019 Lincoln Park Note.
|
|
[5]
|
Reversal of beneficial
conversion feature recorded for the 2019 Lincoln Park Note
|
|
[6]
|
Change in fair value of
bifurcated conversion feature of 2019 Lincoln Park Note.
|
|
[7]
|
Change in fair value of 2019
Lincoln Park Warrant liability.
|
|
[8]
|
Reversal of the amortization
of the beneficial conversion feature of the 2019 Lincoln Park Note
offset by accretion of the 2019 Lincoln Park Note.
|
|
[9]
|
Unamortized discount on the
beneficial conversion feature of the Pinnacle Note.
|
|
[10]
|
Contingent beneficial
conversion feature on repricing of Pinnacle Note conversion, offset
by reversal of beneficial conversion feature of the 2019 Lincoln
Park Note.
|
|
[11]
|
Accretion of the 2019 Lincoln
Park Note and $1.2 million of amortization of the beneficial
conversion feature of the Pinnacle Note.
|
Going Concern
In the audit opinion for
our financial statements as of and for the year ended
December 31, 2019, 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, 2019 and our working capital
deficit. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties. In
addition, we operate in industries that have been adversely
affected by COVID-19 (e.g. food, hospitality and talent PR). As
noted above, on June 5, 2020, we sold 7.9 million shares and
received proceeds in the amount of approximately $7.6 million.
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. Any 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. In April of 2020, we received five separate loans
for an aggregate amount of $2.8 million under the Paycheck
Protection Plan which was established under the Coronavirus Aid,
Relief and Economic Security Act (CARES Act). The loans are
unsecured and all or a portion of the loans may be forgiven upon
application to the lender for certain expenditure amounts made,
including payroll costs, in accordance with the requirements under
the Payroll Protection Plan. There is no assurance that our
loans will be forgiven.
Revenues
For the three months ended
March 31, 2020 and 2019, 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
and musicians, 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. The table below sets forth
the percentage of total revenue derived from our two segments for
the years ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
| |
|
|
|
For the
three months ended
March
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Entertainment publicity and marketing
|
|
|
100.0
|
%
|
|
|
98.7
|
%
|
|
Content
production
|
|
|
0.0
|
%
|
|
|
1.3
|
%
|
|
Total revenue
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
44
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 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, Tony
and Emmy winning film, theater and television stars, directors,
producers, celebrity chefs and Grammy winning 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.
·
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
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.
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
45
·
Sisters Before Misters, a comedy about two estranged sisters
finding their way back to each other after a misunderstanding
causes one of them to have to plan the other’s wedding.
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) legal and professional fees and (5) payroll expenses.
Direct costs include certain cost of services, as well as certain
production costs, related to our entertainment publicity and
marketing business. 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 and equipment and amortization of intangible assets and
leasehold improvements.
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
March 31, 2020 and 2019 other income and expenses consisted of: (1)
gain (loss) on extinguishment of debt; (2) changes in fair value of
put rights; (3) change in fair value of contingent consideration
and (4) interest and debt amortization. For the three months ended
March 31, 2020, other income and expenses also included a loss on
the deconsolidation of the Max Steel variable interest entity,
income from change in the fair value of convertible notes and
derivative liability, and income from change in the fair value of
warrants liability.
RESULTS OF
OPERATIONS
Three months ended March 31, 2020 as
compared to three months ended March 31, 2019
Revenues
Fo