UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

———————

FORM 10-Q


þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended June 30, 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)

———————

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


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


The number of shares of common stock outstanding was 32,179,872 as of August 11, 2020.

 

 




 


TABLE OF CONTENTS



 

Page

PART I — FINANCIAL INFORMATION

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

1

 

 

Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (unaudited)

1

Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2020 and 2019 (unaudited)

3

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (unaudited)

4

Consolidated Statement of Changes in Stockholders' Equity for the six months ended June 30, 2020 and 2019 (unaudited)

6

Notes to Unaudited Condensed Consolidated Financial Statements

8

 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

42

 

 

ITEM 4.

CONTROLS AND PROCEDURES

57

 

 

PART II — OTHER INFORMATION

 

 

 

ITEM 1A.

RISK FACTORS

57

 

 

ITEM 5.

OTHER INFORMATION

59

 

 

ITEM 6.

EXHIBITS

60

 

 

SIGNATURES

61










 


PART I — FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


 

 

As of
June 30,
2020

 

As of
December 31,
2019

 

ASSETS

  

                      

    

                      

  

Current

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12,560,206

 

$

2,196,249

 

Restricted cash

 

 

714,089

 

 

714,089

 

Accounts receivable, net

 

 

2,521,885

 

 

3,581,155

 

Other current assets

 

 

187,504

 

 

372,872

 

Total current assets

 

 

15,983,684

 

 

6,864,365

 

 

 

 

 

 

 

 

 

Capitalized production costs, net

 

 

274,575

 

 

203,036

 

Right-of-use asset

 

 

6,567,094

 

 

7,435,903

 

Intangible assets, net of accumulated amortization of $5,130,784 and $4,299,794, respectively.

 

 

7,530,549

 

 

8,361,539

 

Goodwill

 

 

18,072,825

 

 

17,947,989

 

Property, equipment and leasehold improvements, net

 

 

858,098

 

 

1,036,849

 

Investments

 

 

220,000

 

 

220,000

 

Deposits and other assets

 

 

239,746

 

 

502,045

 

Total Assets

 

$

49,746,571

 

$

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
June 30,
2020

 

 

As of
December 31,
2019

 

LIABILITIES

  

                      

  

  

                      

  

Current

 

 

 

 

 

 

 

 

Accounts payable

 

$

966,096

 

 

$

832,089

 

Other current liabilities

 

 

2,667,019

 

 

 

3,387,130

 

Line of credit

 

 

 

 

 

1,700,390

 

Term loan

 

 

1,100,357

 

 

 

 

Put rights

 

 

2,663,237

 

 

 

2,879,403

 

Accrued compensation

 

 

2,625,000

 

 

 

2,625,000

 

Accrued interest

 

 

2,071,073

 

 

 

1,986,679

 

Debt

 

 

 

 

 

3,311,198

 

Paycheck Protection Program loan

 

 

1,041,997

 

 

 

 

Loan from related party

 

 

1,107,873

 

 

 

1,107,873

 

Lease liability

 

 

1,515,458

 

 

 

1,610,022

 

Contract liabilities

 

 

370,466

 

 

 

309,880

 

Convertible notes payable

 

 

802,500

 

 

 

2,383,610

 

Convertible notes payable at fair value

 

 

740,000

 

 

 

 

Notes payable

 

 

692,743

 

 

 

288,237

 

Total current liabilities

 

 

18,363,819

 

 

 

22,421,511

 

Noncurrent

 

 

 

 

 

 

 

 

Put rights

 

 

 

 

 

124,144

 

Convertible notes payable

 

 

195,000

 

 

 

1,100,000

 

Convertible notes payable at fair value

 

 

1,654,522

 

 

 

629,618

 

Warrants liability

 

 

585,559

 

 

 

189,590

 

Derivative liability

 

 

 

 

 

170,000

 

Notes payable

 

 

625,429

 

 

 

1,074,122

 

Paycheck Protection Program loan

 

 

1,753,703

 

 

 

 

Contingent consideration

 

 

800,000

 

 

 

330,000

 

Lease liability

 

 

5,659,094

 

 

 

6,386,209

 

Other noncurrent liabilities

 

 

570,000

 

 

 

570,000

 

Total noncurrent liabilities

 

 

11,843,307

 

 

 

10,573,683

 

Total Liabilities

 

 

30,207,126

 

 

 

32,995,194

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Common stock, $0.015 par value, 200,000,000 shares authorized, 31,608,903 and 17,892,900, respectively, issued and outstanding at June 30, 2020 and December 31, 2019

 

 

474,142

 

 

 

268,402

 

Preferred Stock, Series C, $0.001 par value, 50,000 shares authorized, issued and outstanding at June 30, 2020 and December 31, 2019

 

 

1,000

 

 

 

1,000

 

Additional paid in capital

 

 

115,966,906

 

 

 

106,465,896

 

Accumulated deficit

 

 

(96,902,603

)

 

 

(97,158,766

)

Total Stockholders' Equity

 

 

19,539,445

 

 

 

9, 576,532

 

Total Liabilities and Stockholders' Equity

 

$

49,746,571

 

 

$

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

 

 

For the six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

  

                      

  

  

                      

  

  

                      

  

  

                      

  

Entertainment publicity and marketing

 

$

5,194,725

 

 

$

6,273,983

 

 

$

11,828,525

 

 

$

12,523,890

 

Content production

 

 

 

 

 

 

 

 

 

 

 

78,990

 

Total revenues

 

 

5,194,725

 

 

 

6,273,983

 

 

 

11,828,525

 

 

 

12,602,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct costs

 

 

656,849

 

 

 

1,279,657

 

 

 

1,285,361

 

 

 

2,467,076

 

Selling, general and administrative

 

 

978,527

 

 

 

1,071,460

 

 

 

2,223,345

 

 

 

1,859,623

 

Depreciation and amortization

 

 

496,461

 

 

 

478,560

 

 

 

1,017,464

 

 

 

960,203

 

Legal and professional

 

 

362,853

 

 

 

449,061

 

 

 

572,314

 

 

 

832,732

 

Payroll

 

 

2,879,073

 

 

 

4,197,324

 

 

 

7,779,939

 

 

 

8,510,486

 

Total expenses

 

 

5,373,763

 

 

 

7,476,062

 

 

 

12,878,423

 

 

 

14,630,120

 

Loss before other income (expenses)

 

 

(179,038

)

 

 

(1,202,079

)

 

 

(1,049,898

)

 

 

(2,027,240

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expenses):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on extinguishment of debt

 

 

 

 

 

 

 

 

3,259,866

 

 

 

(21,287

)

Change in fair value of convertible notes and derivative liabilities

 

 

(696,420

)

 

 

30,000

 

 

 

(548,961

)

 

 

30,000

 

Loss on deconsolidation of Max Steel VIE

 

 

 

 

 

 

 

 

(1,484,591

 

 

 

Change in fair value of warrants

 

 

(483,519

)

 

 

81,766

 

 

 

(411,004

 

 

81,766

 

Change in fair value of put rights

 

 

47,070

 

 

 

251,350

 

 

 

1,517,810

 

 

 

1,778,376

 

Change in fair value of contingent consideration

 

 

(573,000

)

 

 

360,000

 

 

 

(470,000

)

 

 

90,000

 

Interest expense and debt amortization

 

 

(1,058,694

)

 

 

(317,687

)

 

 

(1,682,976

)

 

 

(605,657

)

Total other income (expenses)

 

 

(2,764,563

)

 

 

405,429

 

 

 

180,144

 

 

 

1,353,198

 

Net loss

 

$

(2,943,601

)

 

$

(796,650

)

 

$

(869,754

)

 

$

(674,042

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.12

)

 

$

(0.05

)

 

$

(0.04

)

 

$

(0.04

)

Diluted

 

$

(0.12

)

 

$

(0.05

)

 

$

(0.09

)

 

$

(0.12

)

Weighted average number of shares used in per share calculation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

23,596,206

 

 

 

15,969,926

 

 

 

21,818,711

 

 

 

15,957,085

 

Diluted

 

 

25,299,336

 

 

 

19,172,087

 

 

 

26,071,775

 

 

 

19,671,124

 





The accompanying notes are an integral part of these condensed consolidated financial statements.


3



 


DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)


 

 

For the six months ended
June 30,

 

 

 

2020

 

 

2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

  

                      

  

  

                      

  

Net loss

 

$

(869,754

)

 

$

(674,042

)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,017,464

 

 

 

960,203

 

Loss on deconsolidation of Max Steel VIE

 

 

1,484,591

 

 

 

 

Beneficial conversion feature of convertible notes payable

 

 

1,227,993

 

 

 

 

Interest owed on convertible debt settled with shares of common stock upon conversion

 

 

10,812

 

 

 

 

Amortization of debt discount

 

 

59,726

 

 

 

89,206

 

(Gain) loss on extinguishment of debt, net

 

 

(3,259,866

)

 

 

21,287

 

Bad debt and recovery of account receivable written off, net

 

 

192,471

 

 

 

(115,784

)

Change in fair value of put rights

 

 

(1,517,810

)

 

 

(1,778,376

)

Change in fair value of contingent consideration

 

 

470,000

 

 

 

(90,000

)

Change in fair value of warrants

 

 

411,004

 

 

 

(81,766

)

Change in fair value of notes payable and derivative instruments

 

 

548,961

 

 

 

(30,000

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

866,799

 

 

 

809,592

 

Other current assets

 

 

(114,632

)

 

 

6,669

 

Capitalized production costs

 

 

(71,539

)

 

 

(60,454

)

Deposits and other assets

 

 

(96,137

)

 

 

(58,780

)

Contract liability

 

 

60,586

 

 

 

(330,149

)

Accounts payable

 

 

134,009

 

 

 

(174,258

)

Lease liability, net

 

 

47,130

 

 

 

100,574

 

Other current liabilities

 

 

114,258

 

 

 

346,511

 

Other noncurrent liabilities

 

 

 

 

 

(217,712

)

Net Cash Provided by (Used in) Operating Activities

 

 

716,066

 

 

 

(1,277,279

)

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Purchase of fixed assets

 

 

(7,723

)

 

 

(37,929

)

Net Cash (Used in) Investing Activities

 

 

(7,723

)

 

 

(37,929

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

     Repayment of the line of credit

 

 

(600,033

)

 

 

 

Proceeds from convertible notes payable

 

 

2,395,000

 

 

 

1,110,457

 

Repayment of convertible notes payable

 

 

(1,202,064

)

 

 

 

Proceeds from the issuance of detachable warrants

 

 

 

 

 

89,543

 

Proceeds from note payable

 

 

 

 

 

 

Repayment of notes payable

 

 

(42,803

)

 

 

(38,942

)

Repayment of debt, net of interest

 

 

 

 

 

(99,367

)

Proceeds from PPP Loans

 

 

2,795,700

 

 

 

 

Exercise of put rights

 

 

(459,700

)

 

 

(1,365,500

)

Proceeds from sale of common stock through registered direct offering

 

 

7,644,350

 

 

 

 

Acquisition of The Door

 

 

 

 

 

(771,500

)

Acquisition of Shore Fire

 

 

(624,836

)

 

 

 

Acquisition of Viewpoint

 

 

(250,000

)

 

 

(230,076

)

42West settlement of change of control provisions

 

 

 

 

 

(361,760

)

Net Cash Provided by (Used in) Financing Activities

 

 

9,655,614

 

 

 

(1,667,145

)

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

10,363,957

 

 

 

(2,982,353

)

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD

 

 

2,910,338

 

 

 

6,274,640

 

CASH, CASH EQUIVALENTS AND RESTRICTED CASH END OF PERIOD

 

$

13,274,295

 

 

$

3,292,287

 

 

 

 

 

 

 

 

 

 

 

(Continued)



The accompanying notes are an integral part of these condensed consolidated financial statements.


4



 


DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited)


 

 

For the six months ended

June 30,

 

 

 

2020

 

 

2019

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:

 

 

 

 

 

 

 

 

Interest paid

 

$

208,742

 

 

$

151,100

 

 

  

 

                    

  

  

 

                    

  

SUPPLEMENTAL DISCLOSURES OF NON CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Conversion of note payable into shares of common stock

 

$

2,650,000

 

 

$

75,000

 

Issuance of shares of Common Stock related to the acquisitions

 

$

 

 

$

1,000,000

 

Liability for contingent consideration for the acquisitions

 

$

800,000

 

 

$

460,000

 

Liability for put rights to the Sellers of 42West

 

$

2,663,237

 

 

$

4,708,191

 

 

Reconciliation of cash, cash equivalents and restricted cash. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the statement of cash flows that sum to the total of the same such amounts shown in the statement of cash flows:


 

 

For the six months ended

June 30,

 

 

 

2020

 

 

2019

 

 

  

 

                    

  

  

 

                    

  

Cash and cash equivalents

 

$

12,560,206

 

 

$

2,559,367

 

Restricted cash

 

 

714,089

 

 

 

732,920

 

Total cash, cash equivalents and restricted cash shown in the condensed consolidated statement of cash flows

 

$

13,274,295

 

 

$

3,292,287

 










The accompanying notes are an integral part of these condensed consolidated financial statements.


5



 


DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity

For the six months ended June 30, 2020 and 2019


For the six months ended June 30, 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

 

Net loss for the three months ended June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,943,601

)

 

 

(2,943,601

)

Issuance of shares related to acquisition of Viewpoint

 

 

 

 

 

 

 

 

3,425

 

 

 

51

 

 

 

(51

)

 

 

 

 

 

 

Issuance of shares related to conversion of convertible promissory notes

 

 

 

 

 

 

 

 

2,369,500

 

 

 

35,543

 

 

 

1,260,517

 

 

 

 

 

 

1,296,060

 

Beneficial conversion of convertible promissory note

 

 

 

 

 

 

 

 

 

 

 

 

 

 

856,863

 

 

 

 

 

 

856,863

 

Issuance of shares related to cashless exercise of warrants

 

 

 

 

 

 

 

 

377,016

 

 

 

5,655

 

 

 

363,820

 

 

 

 

 

 

369,475

 

Issuance of earnout share to sellers of 42West

 

 

 

 

 

 

 

 

932,866

 

 

 

13,993

 

 

 

(313,993

)

 

 

 

 

 

(300,000

)

Issuance of shares related to direct registered sale of common stock

 

 

 

 

 

 

 

 

7,900,000

 

 

 

118,500

 

 

 

7,525,850

 

 

 

 

 

 

7,644,350

 

Shares retired from exercise of puts

 

 

 

 

 

 

 

 

(10,810

)

 

 

(162

)

 

 

162

 

 

 

 

 

 

 

Balance June 30, 2020

 

 

50,000

 

 

$

1,000

 

 

 

31,608,903

 

 

$

474,142

 

 

$

115,966,906

 

 

$

(96,902,603

)

 

$

19,539,445

 

(Continued)



The accompanying notes are an integral part of these condensed consolidated financial statements.


6



 


DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders' Equity (Continued)

For the six months ended June 30, 2020 and 2019


For the six months ended June 30, 2019


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Total

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance December 31, 2018

  

  

50,000

  

  

$

1,000

  

  

  

14,123,157

  

  

$

211,849

  

  

$

105,092,852

  

  

$

(94,529,174

)

 

$

10,776,527

 

Net income for the three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

122,608

  

  

 

122,608

 

Issuance of shares related to acquisition of The Door

 

 

 

 

 

 

 

 

307,692

 

 

 

4,615

 

 

 

82,554

 

 

 

 

 

 

87,169

 

Issuance of shares related to conversion of note payable

 

 

 

 

 

 

 

 

53,191

 

 

 

798

 

 

 

95,489

 

 

 

 

 

 

96,287

 

Shares retired from exercise of puts

 

 

 

 

 

 

 

 

(56,940

)

 

 

(854

)

 

 

(1,176,646

)

 

 

 

 

 

(1,177,500

)

Balance March 31, 2019

 

 

50,000

 

 

$

1,000

 

 

 

14,427,100

 

 

$

216,408

 

 

$

104,094,249

 

 

$

(94,406,566

)

 

$

9,905,091

 

Net loss for the six months ended June 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(796,650

)

 

 

(796,650

)

Shares retired from exercise of puts

 

 

 

 

 

 

 

 

(32,538

)

 

 

(490

)

 

 

(690,010

)

 

 

 

 

 

(690,500

)

Balance June 30, 2019

 

 

50,000

 

 

$

1,000

 

 

 

14,394,562

 

 

$

215,918

 

 

$

103,404,239

 

 

$

(95,203,216

)

 

$

8,417,941

 







The accompanying notes are an integral part of these condensed consolidated financial statements.


7



 


DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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. One of our subsidiaries operates in the food and hospitality sector that has been negatively impacted by the orders to either suspend or reduce operations of restaurants and hotels.  Another subsidiary represents talent, such as actors, directors and producers.  The revenues from these clients has been negatively impacted by the suspension of content production.  Conversely, the television and streaming consumption around the globe has increased as well as the demand for consumer products.  Revenues from the marketing of these shows and products has somewhat offset the decrease in revenue from the sectors discussed above. 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.


2020 Registered Direct Offering


On June 5, 2020, the Company issued and sold to certain institutional investors in a registered direct offering an aggregate of 7,900,000 shares of its common stock, par value $0.015 (“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 its Common Stock after deducting related offering fees and expenses.


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.




8



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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 six months ended June 30, 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 June 30, 2020.  See Note 13 for further discussion.


The unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and the instructions to Form 10-Q under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements. Operating results for the three and six months ended June 30, 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.


Reclassifications


Reclassifications have been made to our condensed consolidated financial statements for the prior period to conform to classifications used in 2020.


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.




9



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


Revision of Prior Period Financial Statements


During the preparation of the condensed consolidated financial statements 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 (each as defined in Note 9 – Notes Payable-Convertible Notes below), which were corrected and reflected in the Company’s first quarter, 2020 Form 10-Q. 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 Companys financial statements for any prior annual or interim period, but that correcting thecumulative impact of the error would be significant to the Companys results of operations for thethree months endedMarch 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.


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

)




10



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 



 

 

As Reported

 

 

Adjustment

 

 

 

 

 

As Adjusted

 

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

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 




11



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 



 

 

As Reported

 

 

Adjustment

 

 

 

 

 

As Adjusted

 

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.


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 and six months ended June 30, 2020 is discussed below:


Fair Value Option (“FVO”) Election


2020 Convertible Notes

 

The Company accounts for certain convertible notes issued during the six months ended June 30, 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 instruments 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.




12



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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.


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 August 2020, the FASB issued ASU 2020-06—Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40)—Accounting For Convertible Instruments and Contracts in an Entity's Own Equity. The guidance simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU also simplifies the diluted net income per share calculation in certain areas. The new guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact that this new guidance will have on its consolidated financial statements.




13



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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 loss of $2,943,601 and $869,754, respectively, for the three and six months ended June 30, 2020, and had an accumulated deficit of $96,902,603 as of June 30, 2020.  As of June 30, 2020, the Company had a working capital deficit of $2,380,135 and therefore does not have adequate capital to fund its obligations as they come due or to maintain or grow its operations. In addition, several of our subsidiaries operate in 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 has taken measure such as a freeze on hiring, salary reductions, staff reductions and cuts in non-essential spending to mitigate the reduction in revenues.  The Company is dependent upon funds from the issuance of debt securities, securities convertible into shares of 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.


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.




14



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


NOTE 3 — GOODWILL


As of June 30, 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. 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 at the time of the assessment, 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.


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 consideration on the Shore Fire Closing Date 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.



15



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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.


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.




16



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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 June 30, 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 six months ended June 30, 2020.


Unaudited Pro Forma Consolidated Statements of Operations


The following represents the Company’s unaudited pro forma consolidated operations for the three and six months ended June 30, 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:


 

 

For the three months ended June 30,
2019

 

 

For the six months ended June 30,
2019

 

Revenue

 

$

7,466,465

 

 

$

14,939,501

 

Net income

 

$

(839,195

)

 

$

(677,160


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 six months ended June 30, 2020, the 42West sellers exercised Put Rights with respect to an aggregate of 177,518 shares of Common Stock.  No put rights were exercised during the three months ended June 30, 2020.  During the three and six months ended June 30, 2020, the Company made payments of $84,700 and $459,700, respectively, related to exercise of Put Rights, of which $275,000, pertained to Put Rights that were exercised in December 2019.  As of June 30, 2020, the Company had a balance of $1,452,500 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.




17



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


NOTE 5 — CAPITALIZED PRODUCTION COSTS, ACCOUNTS RECEIVABLES AND OTHER CURRENT ASSETS


Capitalized Production Costs


Capitalized production costs include costs of scripts, fees for casting agents and other development costs for projects that are in development but have not been produced.  Capitalized production costs are stated on the Company’s condensed consolidated balance sheets at the lower of unamortized costs or net realizable value.  The Company recorded $274,575 and $203,036 in capitalized production costs associated with these scripts and development costs as of June 30, 2020 and December 31, 2019, respectively. The Company intends to produce these projects, but they were not yet in production as of June 30, 2020 and there can be no assurance that these projects will be produced on the timelines anticipated or at all. 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.


The Company did not have any revenues from motion pictures or digital productions for the three months ended June 30, 2020 and 2019, respectively and had $0 and $78,990 for the six months ended June 30, 2020 and 2019, respectively. These revenues were attributable to Max Steel, the motion picture released on October 14, 2016.


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 June 30, 2020 and December 31, 2019, the Company had accounts receivable balances of $2,521,885 and $3,581,155, respectively, net of allowance for doubtful accounts of $368,014 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 $187,504 and $372,872 in other current assets on its condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, respectively. As of June 30, 2020 and December 31, 2019, these amounts were primarily composed of the following:


Indemnification asset – As of June 30, 2020 and December 31, 2019, the Company included in other current assets on its condensed consolidated balance sheet, $0 and $300,000, respectively, related to certain indemnifications associated with the 42West acquisition. On June 4, 2020, the Company issued a net aggregate amount of 932,866 shares of Common Stock after deducting the $300,000 indemnification asset from the value of the shares issued to the 42West sellers.


Prepaid expenses – The Company records in other assets on its condensed consolidated balance sheets amounts prepaid for insurance premiums. The amounts are amortized on a monthly basis over the life of the policies.


Tax Incentives – The Company has access to government programs that are designed to promote video production in the jurisdiction. As of June 30, 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 June 30, 2020 and December 31, 2019, the Company had a balance of $19,610 from income tax receivable.




18



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


NOTE 6 — PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS


Property, equipment and leasehold improvement consists of:


 

 

June 30,
2020

 

 

December 31,
2019

 

Furniture and fixtures

 

$

790,591

 

 

$

792,611

 

Computers and equipment

 

 

1,734,753

 

 

 

1,728,916

 

Leasehold improvements

 

 

770,629

 

 

 

770,628

 

 

 

 

3,295,973

 

 

 

3,292,155

 

Less: accumulated depreciation and amortization

 

 

(2,437,875

)

 

 

(2,255,306

)

Property, equipment and leasehold improvements, net

 

$

858,098

 

 

$

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 $96,383 and $186,474 for the three and six months ended June 30, 2020, respectively and $89,306 and $180,428 for the three and six months ended June 30, 2019, respectively.


NOTE 7 — INVESTMENT


At June 30, 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 June 30, 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 $0 and $3,311,198 during the three and six months ended June 30, 2020.


As of June 30, 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.




19



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 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 June 30, 2020, the outstanding balance on the Term Loan was $1,100,357.


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. The bank tests for compliance with debt covenants on an annual basis based on the financial statements of 42West and The Door as of and for the year ended December 31.  Based on current economic factors and uncertainties due to COVID-19, the Company believes it may be out of compliance with certain debt covenants as of and for the year ended December 31, 2020.  As such, the Company classified the entire balance of $1,100,357 of the Term Loan in current liabilities on its condensed consolidated balance sheet.


Payroll Protection Program Loan


Between April 19, 2020 and April 23, 2020, the Company and four of its subsidiaries executed notes and received an aggregate amount of $2,795,700 from five PPP Loans from BankUnited, N.A., under the PPP which was established under the CARES Act and is administered by the U.S. Small Business Administration.  Loans obtained through the PPP are eligible to be forgiven as long as the proceeds are used for qualifying purposes and certain other conditions are met. The receipt of these funds, and the forgiveness of the loan is dependent on the Company having initially qualified for the loan and qualifying for the forgiveness of such loan based on its adherence to the forgiveness criteria. In June 2020, Congress passed the Payroll Protection Program Flexibility Act that made several significant changes to PPP loan provisions, including providing greater flexibility for loan forgiveness. The Company is using the proceeds from the PPP Loans to fund payroll costs in accordance with the relevant terms and conditions of the CARES Act. The Company is following the government guidelines and tracking costs to insure 100% forgiveness of the loan. To the extent it is not forgiven, the Company would be required to repay that portion at an interest rate of 1% over a period of two years.

 

As of June 30, 2020, the current and long-terms portion of the loan were $1,041,997 and $1,753,703, respectively.




20



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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 each of March 4, 2020, and May 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) $1.05 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.


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 on issuance was recorded as $885,559. For the three and six months ended June 30, 2020, the fair value of the note increased by $309,020 and $203,461, respectively, and was recognized as current period other expense in the Company’s condensed consolidated statement of operations (as no portion of such fair value adjustment resulted from instrument-specific credit risk).  As of June 30, 2020, the balance of the convertible promissory note on the Company’s condensed consolidated balance sheet was $1,089,020.


The fair value of the 2020 Lincoln Park Warrants was recorded on issuance as a debt discount of $314,441. For the three and six months ended June 30, 2020, the fair value of the warrants increased by $270,000 and $215,559, respectively, and was recognized as current period other expense in the Company’s condensed consolidated statement of operations. As of June 30, 2020, the fair value of the warrants on the Company’s condensed consolidated balance sheet was $525,559.


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 a 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 and six months ended June 30, 2020, the fair value of the convertible promissory note increased by $195,500 and $105,500, respectively, and was recognized as current period other expense in the Company’s condensed consolidated statement of operations (as no portion of such fair value adjustment resulted from instrument-specific credit risk). For the three and six months ended June 30, 2020, the fair value of the Series “I” Warrant increased by $30,000 and $20,000, respectively, and was recognized as current period other expense in the Company’s condensed consolidated statement of operations. As of June 30, 2020, the balance of the convertible promissory note and Series “I” Warrant on the Company’s condensed consolidated balance sheet was $565,500 and $60,000, 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.



21



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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 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. For the three and six months ending June 30, 2020, the fair value of the note increased by $240,000 and $191,900, respectively, and was recognized as current period other expense in the Company’s condensed consolidated statement of operations (as no portion of such fair value adjustment resulted from instrument-specific credit risk).  As of June 30, 2020, the balance of the convertible promissory note on the Company’s condensed consolidated balance sheet was $740,000.


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 with 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.  On January 3, 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.  On June 2, 2020, Lincoln Park converted the remaining $100,000 into shares of Common Stock at a conversion price of $0.78. The Company recorded $5,031 and $59,742 of interest expense to accrete the note to par value for the three and six months ending June 30, 2020. On June 5, 2020, Lincoln Park exercised the 2019 Lincoln Park Warrants through a cashless exercise formula pursuant to the warrant agreement and was issued 377,016 shares of the Common Stock.


As of June 30, 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 $740,000 and $1,654,522 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. The principal balance of the convertible promissory notes was recorded in noncurrent liabilities under the caption convertible notes payable. The convertible promissory notes did not contain a beneficial conversion feature on issuance as they contain a variable conversion price.



22



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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 June 4, 2020, $500,000 was converted into 989,368 shares of Common Stock and on June 5, 2020, $250,000 was converted into 494,684 shares of Common Stock. The Company recorded as interest expense a beneficial conversion feature related to the conversion of the 2019 Convertible Debt in the aggregate amount of $406,863 and $708,643 for the three and six months ended June 30, 2020.


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. 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.  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.


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 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 $0 and $69,350 was amortized as interest expense for the three and six months ended June 30, 2020, respectively.


The Pinnacle note was paid in full on January 5, 2020. For the three and six months ended June 30, 2020, the Company recorded interest expense of $0 and $70,686 (including the $69,350 amortization of beneficial conversion feature discussed above) and paid interest in the amount of $0 and $29,614, respectively. As of June 30, 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 under the caption convertible notes payable.




23



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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. 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.  On June 15, 2020, $250,000 of the 2017 Convertible Debt and $2,905 of accrued interest was converted into 421,509 shares of Common Stock, on June 17, 2020, $75,000 of the 2017 Convertible Debt and $333 of accrued interest was converted into 124,008 shares of Common Stock and on June 30, 2020, $50,000 of the 2017 Convertible Debt was converted into 79,365 shares of Common Stock using a 90-day average trading price.  The Company recorded as interest expense a beneficial conversion feature related to the conversion of the 2017 Convertible Debt in the aggregate amount of $375,000 for each of the three and six months ended June 30, 2020.

In regard to the 2020, 2019, 2018, and 2017 Convertible Debt discussed above, for the three and six months ended June 30, 2020, the Company paid interest in the aggregate amount of $11,042 and $57,806, respectively, and recorded interest expense in the amount of $913,464 and $1,340,228, respectively in the Company’s condensed consolidated statement of operations. The interest expense for the three and six months ended June 30, 2020 included the amortization of beneficial conversion features in the amounts of $856,863 and $1,227,993, respectively related to the 2017, 2018 and 2019 Convertible Debt that were converted during the three and six months ended June 30, 2020.  As of June 30, 2020 and December 31, 2019, the Company recorded accrued interest of $67,594 and $40,803, respectively, relating to the 2020, 2019, 2018 and 2017 Convertible Debt. As of June 30, 2020 and December 31, 2019, the Company had a balance of $802,500 and $2,454,564, respectively, in current liabilities under the caption convertible notes payable and a balance of $195,000 and $1,100,000, respectively, in noncurrent liabilities under the caption convertible notes payable in its condensed consolidated balance sheet, related to the 2020, 2019, 2018, and 2017 Convertible Debt.


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 and six months ended June 30, 2020, the Company repaid $21,778 and $43,021 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.




24



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


During the three and six months ended June 30, 2020, the Company paid interest on its nonconvertible promissory notes in the aggregate amount of $33,347 and $67,230, respectively. During the three and six months ended June 30, 2019, the Company paid interest on its nonconvertible promissory notes in the aggregate amount of $26,662 and $53,808, respectively. The Company had balances of $8,537 and $8,788 as of June 30, 2020 and December 31, 2019, respectively, for accrued interest recorded in its condensed consolidated balance sheets, relating to these nonconvertible promissory notes. The Company recorded interest expense for the three and six months ended June 30, 2020 of $33,220 and $66,979, respectively, and $26,497 and $53,532 for the three and six months ending June 30, 2019, respectively, relating to these nonconvertible promissory notes. As of June 30, 2020, the Company had a balance of $692,743 in current liabilities and $626,597 in noncurrent liabilities under the caption notes payable related to these nonconvertible promissory notes.  As of December 31, 2019, the Company had balances of $288,237 in current liabilities and $1,074,122 in noncurrent liabilities on its condensed consolidated balance sheets under the caption notes payable 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.


For the three and six months ended June 30, 2020, the Company paid $100,000 of interest on the DE LLC Note and recorded interest expense of $27,621 and $55,242, respectively and did not repay any principal balance of the DE LLC Note. For the three and six months ended June 30, 2019, the Company did not repay any principal balance or interest of the DE LLC Note and recorded interest expense of $27,621 and $54,938, respectively. As of June 30, 2020 and December 31, 2019, the Company had a principal balance of $1,107,873 and accrued interest of $370,834 and $415,592, respectively, relating to the DE LLC Note on its condensed consolidated balance sheets.


On August 12, 2019, the Company entered into the Exchange Agreement whereby Leslee Dart, a Director of the Company agreed to take a convertible note instead of cash in exchange for 76,194 Put Rights that she had exercised but had not been 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.  For the three and six months ended June 30, 2020, the Company recorded interest expense in the amount of $17,563 and $35,126, respectively and did not repay any principal balance or interest on the note.  As of June 30, 2020, $62,264 was recorded as accrued interest and $702,500 was recorded in convertible notes payable as current liabilities, on the condensed consolidated balance sheet.


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 six months ended June 30, 2020, the sellers exercised their Put Rights, for an aggregate amount of 177,518 shares of Common Stock.  During the three and six months ended June 30, 2020, the Company paid $84,700 and $459,700, respectively, related to Put Rights that were exercised of which $275,000 were exercised in December 2019.  As of June 30, 2020, $1,452,500 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.




25



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


The Company records the fair value of the liability in the condensed consolidated balance sheets under the caption “Put Rights” and records changes to the liability against earnings or loss under the caption “Changes in fair value of put rights” in the consolidated statements of operations. The carrying amount at fair value of the aggregate liability for the Put Rights recorded on the condensed consolidated balance sheets at June 30, 2020 and December 31, 2019 was $2,663,237 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 and six months ending June 30, 2020, the Company recorded a gain of $47,070 and $1,517,810, respectively, and $251,350 and $1,778,376, respectively, for the three and six months ended June 30, 2019, in the condensed consolidated statement of operations.

The Company utilized the Black-Scholes Option Pricing Model, which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement as defined in ASC 820. The unobservable inputs utilized for measuring the fair value of the Put Rights reflect management’s own assumptions about the assumptions that market participants would use in valuing the Put Rights as of June 30, 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
June 30,
2020

 

 

As of
December 31,
2019

 

Equity volatility estimate

 

 

135

.0%

 

 

64.0% – 70.0

%

Discount rate based on US Treasury obligations

 

 

0.13% – 0.18

%

 

 

1.54% – 1.59

%


For the Put Rights, which are 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 June 30, 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

 

 

(1,517,810

)

Put rights exercised June 2020 and not yet paid

 

 

1,452,500

 

Ending fair value of put rights reported in the condensed consolidated balance sheet at June 30, 2020

 

$

2,663,237

 


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 June 30, 2020 and December 31, 2019 is $800,000 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 and six months ended June 30, 2020, the Company recorded a loss on the contingent consideration of $573,000 and $470,000 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.




26



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


The Company determined the fair value by using the following key inputs to the Monte Carlo Simulation Model:


Inputs

 

As of
June 30,
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% - 0.18

%

 

 

1.58% - 1.59

%

Annual Asset Volatility Estimate

 

 

75.0

%

 

 

40.0

%


For the contingent consideration, which are 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 June 30, 2020:


Beginning fair value balance reported on the consolidated balance sheet at December 31, 2019

 

$

330,000

 

Change in fair value (loss) reported in the statements of operations

 

 

470,000

 

Ending fair value balance reported in the condensed consolidated balance sheet at June 30, 2020

 

$

800,000

 


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”.  


For the 2020 Lincoln Park Note, which are 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 June 30, 2020:


Beginning fair value balance on issue date - January 3, 2020

 

$

885,559

 

Change in fair value (loss) reported in the statements of operations

 

 

203,461

 

Ending fair value balance - June 30, 2020

 

$

1,089,020

 


The estimated fair value of the 2020 Lincoln Park Note as of its January 3, 2020 issue date and as of June 30, 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

 

 

June 30,
2020

 

Face value principal payable

  

$

1,300,000

  

  

$

1,300,000

  

Original conversion price

 

 

Variable

 

 

 

Variable

 

Value of Common Stock

 

$

0.64

 

 

$

0.87

 

Expected term (years)

 

 

2.00

 

 

 

1.51

 

Volatility

 

 

87.5%

 

 

 

120%

 

Straight debt yield

 

 

9.5%

 

 

 

14.0%

 

Risk free rate

 

 

1.53%

 

 

 

0.16%

 




27



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


The variable conversion price is the lower of (A) $1.05 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 six months ending June 30, 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 are 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 June 30, 2020:


Beginning fair value balance on issue date - March 4, 2020

 

$

460,000

 

Change in fair value (loss) reported in the statements of operations

 

 

105,500

 

Ending fair value balance - June 30, 2020

 

$

565,500

 


The estimated fair value of the note as of its March 4, 2020 issue date and as of June 30, 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

 

 

June 30,
2020

 

Face value principal payable

 

$

500,000

 

 

$

500,000

  

Original conversion price

 

$

0.78

 

 

$

0.78

 

Value of Common Stock

 

$

0.67

 

 

$

0.87

 

Expected term (years)

 

 

10.00

 

 

 

9.68

 

Volatility

 

 

90%

 

 

 

120%

 

Risk free rate

 

 

1.02%

 

 

 

0.66%

 

 

 

 

 

 

 

 

 

 


For the March 25, 2020 note, which are 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 June 30, 2020:


Beginning fair value balance on issue date - March 25, 2020

 

$

500,000

 

Change in fair value (loss) reported in the statements of operations

 

 

240,000

 

Ending fair value balance - June 30, 2020

 

$

740,000

 


The estimated fair value of the note as of its March 25, 2020 issue date and as of June 30, 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

 

 

June 30,
2020

 

Face value principal payable

  

$

560,000

  

  

$

560,000

  

Original conversion price

 

$

0.40

 

 

$

0.78

 

Value of Common Stock

 

$

0.67

 

 

$

0.87

 

Expected term (years)

 

 

1.00

 

 

 

0.73

 

Volatility

 

 

90%

 

 

 

120%

 

Straight debt yield

 

 

23.5%

 

 

 

14.0%

 

Risk free rate

 

 

0.25%

 

 

 

0.16%

 




28



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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 are 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 June 30, 2020:


2020 Lincoln Park Warrants:

 

Fair Value

 

2020 Lincoln Park Warrants derivative liability - January 3, 2020

 

$

314,441

 

Change in fair value (loss) reported in the statements of operations

 

 

211,118

 

2020 Lincoln Park Warrants derivative liability - June 30, 2020

 

$

525,559

 


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

 

 

June 30,
2020

 

Aggregate Fair Value

  

$

314,441

  

  

$

530,000

  

Exercise Price per share

 

$

0.7828

 

 

$

0.7828

 

Value of Common Stock

 

$

0.64

 

 

$

0.87

 

Expected term (years)

 

 

5.50

 

 

 

5.01

 

Volatility

 

 

87.5%

 

 

 

120%

 

Dividend yield

 

 

0%

 

 

 

0%

 

Risk free rate

 

 

1.62%

 

 

 

0.29%

 


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 is 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 June 30, 2020:


Series “I” Warrant:

 

Fair Value

 

2020 Series “I” Warrants derivative liability - March 4, 2020

  

$

40,000

 

Change in fair value (loss) reported in the statements of operations

 

 

20,000

 

2020 Series “I” Warrants derivative liability - June 30, 2020

 

$

60,000

 


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

 

 

June 30,
2020

 

Aggregate Fair Value

  

$

40,000

  

  

$

60,000

  

Exercise Price per share

 

$

0.7828

 

 

$

0.7828

 

Value of Common Stock

 

$

0.67

 

 

$

0.87

 

Expected term (years)

 

 

5.50

 

 

 

5.18

 

Volatility

 

 

90%

 

 

 

120%

 

Dividend yield

 

 

0%

 

 

 

0%

 

Risk free rate

 

 

0.80%

 

 

 

0.30%

 




29



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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. On June 5, 2020, Lincoln Park exercised the warrants through a cashless exercise formula pursuant to the warrant agreement.  The Company issued 377,016 shares of Common Stock related to this cashless exercise.  On June 5, 2020, the market value of the Common Stock was $0.98 per share.


For the 2019 Lincoln Park Warrants, which are 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 June 30, 2020:


2019 Lincoln Park Warrants:

 

Fair Value

 

2019 Lincoln Park Warrants liability - December 31, 2019

 

$

189,590

 

Change in fair value (loss) reported in the statements of operations

 

 

179,886

 

Market value of shares issued upon cashless exercise of 2019 Lincoln Park Warrants

 

 

(369,476

)

2019 Lincoln Park Warrants liability - June 30, 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

 

Aggregate Fair Value

  

$

189,590

  

Exercise Price per share

 

$

2.00

 

Value of Common Stock

 

$

0.70

 

Expected term (years)

 

 

5.39

 

Volatility

 

 

90%

 

Dividend yield

 

 

0%

 

Risk free rate

 

 

1.69%

 


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 is 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 June 30, 2020:

 

Beginning fair value balance - December 31, 2019

 

$

170,000

 

Change in fair value reported in the statements of operations

 

 

 

Reduction in value due to note principal conversion

 

 

(170,000

)

Ending fair value balance - June 30, 2020

 

$

 


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 $370,466 and $309,880 as of June 30, 2020 and December 31, 2019, respectively, in contract liabilities.




30



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 2020 and December 31, 2019, and in the condensed consolidated statements of operations and statements of cash flows presented herein for the three and six months ended June 30, 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 and six months ended June 30, 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

 

 

 

As of and
for the
six months
ended
June 30,

 

 

For the
three months
ended
June 30,

 

 

As of
December 31,

 

 

For the
six months
ended
June 30,

 

 

For the three months  
ended
June 30,

 

 

As of and
for the
six months
ended
June 30,

 

 

For the
three months
ended
June 30,

 

 

As of
December 31,

 

 

For the
six months
ended
June 30,

 

 

For the
three months
ended
June 30,

 

(in USD)

 

2020

 

 

2020

 

 

2019

 

 

2019

 

 

2019

 

 

2020

 

 

2020

 

 

2019

 

 

2019

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

7,379,851

 

 

 

 

 

 

 

 

 

190,520

 

 

 

 

 

 

190,347

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

(11,816,966

)

 

 

 

 

 

 

 

 

(6,750,088

)

 

 

 

 

 

(6,749,914

)

 

 

 

 

 

 

Revenues

 

 

3,311,198

 

 

 

 

 

 

 

 

 

78,990

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

26,290

 

 

 

(14,035

)

 

 

 

 

 

 

 

 

 

 

 

(29,464

)

 

 

(8,223

)


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.




31



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 $0 and $1,484,591 on its condensed consolidated statement of operations for the three and six months ended June 30, 2020.  


As of June 30, 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 accrued interest 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.




32



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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, two of the sellers of 42West that had exercised Put Rights in December were paid $175,000 for 18,980 shares of Common Stock.


On January 23, 2020, the Company issued 252,158 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, Lincoln Park converted $250,000 of the principal amount of the 2019 Lincoln Park Note into 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, Lincoln Park converted $250,000 of the principal amount of the 2019 Lincoln Park Note into 319,366 shares of Common Stock.




33



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


On February 27, 2020, Lincoln Park converted $250,000 of the principal amount of the 2019 Lincoln Park Note  into 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, Lincoln Park converted $250,000 of the principal amount of the 2019 Lincoln Park Note into  319,366 shares of Common Stock.


On May 15, 2020, one of the sellers of 42West that had exercised Put Rights in December was paid $24,700 for 2,676 shares of Common Stock.


On June 2, 2020, Lincoln Park converted the remaining $100,000 of the principal amount of the 2019 Lincoln Park Note into 127,746 shares of Common Stock.


On June 4, 2020, the sellers of 42West received an aggregate of 932,866 shares of Common Stock related to the earnout consideration for the 42West acquisition.


On June 4, 2020, a holder of a convertible promissory note converted $500,000 of principal and $4,578 of accrued interest into 989,368 shares of Common Stock.


On June 5, 2020, Lincoln Park exercised the 2019 Lincoln Park Warrants through a cashless exercise mechanism and was issued 377,016 shares of Common Stock.


On June 5, 2020, a holder of a convertible promissory note converted $75,000 of principal and $707 of accrued interest into 132,820 shares of Common Stock.


On June 5, 2020, a holder of a convertible promissory note converted $250,000 of principal and $2,289 of accrued interest into 494,684 shares of Common Stock.


On June 15, 2020, a holder of a convertible promissory note converted $250,000 of principal and $2,905 of accrued interest into 421,509 shares of Common Stock.


On June 17, 2020, two holders of a convertible promissory notes converted $75,000 of principal and $333 of accrued interest into 124,008 shares of Common Stock.


On June 9, 2020, the Company sold and issued 7,900,000 shares of Common Stock through a registered direct offering.


As of June 30, 2020 and December 31, 2019, the Company had 31,529,538 and 17,892,900 shares of Common Stock issued and outstanding, respectively.




34



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


NOTE 15 — LOSS PER SHARE


The following table sets forth the computation of basic and diluted loss per share:


 

 

Three months ended

June 30,

 

 

Six months ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Numerator

  

 

 

 

 

 

 

 

 

 

 

  

Net loss attributable to Dolphin Entertainment shareholders and numerator for basic earnings per share

 

$

(2,943,601

)

 

$

(796,650

)

 

$

(869,754

)

 

$

(674,042

)

Change in fair value of put rights

 

 

(47,070

)

 

 

(251,350

)

 

 

(1,517,810

)

 

 

(1,778,376

)

Numerator for diluted loss per share

 

$

(2,990,671

)

 

$

(1,048,000

)

 

$

(2,387,564

)

 

$

(2,452,418

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic EPS - weighted-average shares

 

 

23,596,206

 

 

 

15,969,926

 

 

 

21,818,711

 

 

 

15,957,085

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Put rights

 

 

1,703,130

 

 

 

3,202,161

 

 

 

4,253,064

 

 

 

3,714,039

 

Denominator for diluted EPS - adjusted weighted-average shares

 

 

25,299,336

 

 

 

19,172,087

 

 

 

26,071,775

 

 

 

19,671,124

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic loss per share

 

$

(0.12

)

 

$

(0.05

)

 

$

(0.04

)

 

$

(0.04

)

Diluted loss per share

 

$

(0.12

)

 

$

(0.05

)

 

$

(0.09

)

 

$

(0.12

)


Basic loss per share is computed by dividing loss 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 loss per share assumes 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.  For the three and six months ended June 30, 2020 and 2019, the Company had a net loss and as such the two-class method is not presented.


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 loss per share for the three and six months ended June 30, 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 and six months ended June 30, 2020 and 2019 is subtracted from net loss.


For the three and six months ended June 30, 2020 and 2019, 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 six months ended June 30, 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

 

 

(550,000

 

 

0.00

 

Expired

 

 

(250,000

)

 

 

0.78

 

Balance at June 30, 2020 

 

 

1,992,429

 

 

$

3.72

 



35



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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. On January 3, 2020, in relation to the 2020 Lincoln Park Note, the exercise price of the 2019 Lincoln Park Warrants was reduced to $0.78 per share.  The 2019 Lincoln Park Warrants became exercisable on the six-month anniversary of issuance and for a period of five years thereafter.  Pursuant to the warrant agreements, 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.  On June 5, 2020, Lincoln Park exercised the 2019 Lincoln Park Warrants by means of a cashless exercise formula and were issued 377,016 shares of Common Stock. 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. For the three and six months ended June 30, 2020, the Company recorded $187,960 and $179,886 of change in fair value on its condensed consolidated statement of operations.  


On each of January 3, March 4, and May 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 (622,764 total) at a purchase price of $0.78 per share to Lincoln Park and issued  additional warrants to purchase up to 207,588 shares of Common Stock on July 3, 2020.  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 $215,559 and $270,000 of expense due to change in fair value during the three and six months ended June 30, 2020, and had a balance of $525,559 as of June 30, 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 $30,000 and $10,000, respectively, of expense due to change in fair value during the three and six months ended June 30, 2020 and had a balance of $60,000 as of June 30, 2020 recorded in its condensed consolidated balance sheet.




36



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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 June 30, 2020 and December 31, 2019, the Company accrued $2,625,000 of compensation as accrued compensation and has balances of $1,624,109 and $1,493,219 respectively, in accrued interest in 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 $65,445, respectively, for the three months ended June 30, 2020 and 2019, and $130,890 and $130,171 for the six months ended June 30, 2020, and 2019, respectively, 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 and six months ended June 30, 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.


In connection with the acquisitions of 42West, The Door, Viewpoint, and Shore Fire, the Company assigned $7,530,549 of intangible assets, net of accumulated amortization of $5,130,784 and goodwill of $18,072,825 as of June 30, 2020 to the Entertainment Publicity and Marketing segment. The balances reflected as of June 30, 2019 for Entertainment Publicity and Marketing segment comprise 42West, The Door, and Viewpoint.


 

 

Three months ended

 

 

Six months ended

 

 

Three months ended

 

 

Six months ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

EPD

 

$

5,194,725

 

 

$

11,828,525

 

 

$

6,273,983

 

 

$

12,523,890

 

CPD

 

 

 

 

 

 

 

 

 

 

 

78,990

 

Total

 

$

5,194,725

 

 

$

11,828,525

 

 

$

6,273,983

 

 

$

12,602,880

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment Operating Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EPD

 

$

875,831

 

 

$

216,757

 

 

$

(450,165

)

 

$

(810,759

)

CPD

 

 

(1,054,869

)

 

 

(1,266,654

)

 

 

(751,914

)

 

 

(1,216,481

)

Total

 

 

(179,038

)

 

 

(1,049,897

)

 

 

(1,202,079

)

 

 

(2,027,240

)

Interest expense

 

 

(1,058,694

)

 

 

(1,682,976

)

 

 

(317,687

)

 

 

(605,657

)

Other income (expense)

 

 

(1,705,869

)

 

 

1,863,120

 

 

 

723,116

 

 

 

1,958,855

 

Loss before income taxes

 

$

(2,943,601

)

 

$

(869,754

)

 

$

(796,650

)

 

$

(674,042

)




37



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


 

 

 

 

 

 

As of
June 30,
2020

 

 

As of
December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EPD

 

 

 

 

 

 

 

 

 

$

40,556,344

 

 

$

40,083,491

 

CPD

 

 

 

 

 

 

 

 

 

 

9,190,227

 

 

 

2,488,235

 

Total

 

 

 

 

 

 

 

 

 

$

49,746,571

 

 

$

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 June 30, 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 at a rate of $15,300 each month. The lease is secured by a cash security deposit of approximately $29,000. The Company signed a three year renewal of the lease that will commence on August 23, 2020 with substantially the same terms.


The Door is obligated under an operating lease agreement for office space in Chicago, Illinois, at a fixed rate of $2,200 per month, which expired in May 2020 and was not renewed.


42West is obligated under an operating lease agreement for office space in New York, expiring in December 2026. The lease is secured by a standby letter of credit in the amount of $677,354 and provides for increases in rent for real estate taxes and building operating costs. The lease also contains a renewal option for an additional five years.


42West is obligated under an operating lease agreement for office space in California, expiring in December 2021. The lease is secured by a cash security deposit of $44,788 and a standby letter of credit in the amount of $50,000 at June 30, 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.


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 and was not renewed upon its expiration.



38



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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.


 

 

June 30,  
2020

 

 

December 31,
2019

 

Assets

 

 

 

 

 

 

 

 

Right-of-use asset

 

$

6,567,094

 

 

$

7,435,903

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

Lease liability

 

$

1,515,458

 

 

$

1,610,022

 

 

 

 

 

 

 

 

 

 

Noncurrent

 

 

 

 

 

 

 

 

Lease liability

 

$

5,659,094

 

 

$

6,386,209

 

 

 

 

 

 

 

 

 

 

Total lease liability

 

$

7,174,552

 

 

$

7,996,231

 


The table below shows the lease income and expenses recorded in the consolidated statement of operations incurred during the three and six months ended June 30, 2020.


Lease costs

 

Classification

 

Three months
ended
June 30,
2020

 

 

Six months
ended
June 30,
2020

 

Operating lease costs

    

Selling, general and administrative expenses

    

$

554,506

  

  

$

1,063,113

 

Operating lease costs

 

Direct costs

 

 

60,861

 

 

 

121,722

 

Sublease income

 

Selling, general and administrative expenses

 

 

(2,397

)

 

 

(4,794

)

Net lease costs

 

 

 

$

612,970

 

 

$

1,180,041

 


 

Maturities of lease liabilities were as follows:


2020 (excluding six months ended June 30, 2020)

$

1,104,564

 

2021

 

 

1,919,733

 

2022

 

 

1,294,106

 

2023

 

 

1,305,358

 

2024

 

 

1,357,335

 

Thereafter

 

 

2,173,036

 

Total lease payments

 

$

9,154,132

 

Less: Imputed interest

 

 

(1,979,580

)

Present value of lease liabilities

 

$

7,174,552

 


The Company used its incremental borrowing rate on January 1, 2019, deemed to be 8%, to calculate the present value of the lease liabilities and right-of-use asset. The weighted average remaining lease term for our operating leases was six years at June 30, 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. The Company is not aware of any pending litigation as of the date of this report.



39



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


Incentive Compensation Plan


On June 29, 2017, the shareholders of the Company approved the Dolphin Digital Media, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan was adopted as a flexible incentive compensation plan that would allow us to use different forms of compensation awards to attract new employees, executives and directors, to further the goal of retaining and motivating existing personnel and directors and to further align such individuals’ interests with those of the Company’s shareholders. Under the 2017 Plan, the total number of shares of Common Stock reserved and available for delivery under the 2017 Plan (the “Awards”), at any time during the term of the 2017 Plan, will be 1,000,000 shares of Common Stock. The 2017 Plan imposes individual limitations on the amount of certain Awards, in part with the intention to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). Under these limitations, in any fiscal year of the Company during any part of which the 2017 Plan is in effect, no participant may be granted (i) stock options or stock appreciation rights with respect to more than 300,000 shares, or (ii) performance shares (including shares of restricted stock, restricted stock units, and other stock based-awards that are subject to satisfaction of performance goals) that the Compensation Committee intends to be exempt from the deduction limitations under Section 162(m) of the Code, with respect to more than 300,000 shares, in each case, subject to adjustment in certain circumstances. The maximum amount that may be paid out to any one participant as performance units that the Compensation Committee intends to be exempt from the deduction limitations under Section 162(m) of the Code, with respect to any 12-month performance period is $1,000,000 (pro-rated for any performance period that is less than 12 months), and with respect to any performance period that is more than 12 months, $2,000,000. During the six months ended June 30, 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 $61,259 and $167,047 during the three and six months ended June 30, 2020.


Employment Contracts


As a condition to the Shore Fire Purchase, Marilyn Laverty, the Shore Fire seller, entered into an employment agreement with the Company to continue as an employee 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.


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.  




40



DOLPHIN ENTERTAINMENT, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020

 


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. Effective April 1, 2020, the Company renewed Leslee Dart’s employment agreement for a period of three years and may automatically be renewed for successive one-year terms by mutual agreement of Ms. Dart and the Company.   The employment agreement provides for a base salary and contains provisions for termination and as a result of death or disability. During the term of the employment agreement, Ms. Dart is entitled to participate in all employee benefit plans, practices and programs maintained by the Company as well as is entitled to paid vacation in accordance with the Company’s policy. The Company has not renewed the employment agreement of the other two principal sellers, although one remains employed by the Company, while the other one has retired.


Letter of Credit


Pursuant to the lease agreements of the 42West New York and Los Angeles office locations, the Company is required to issue letters of credit to secure the leases. On July 24, 2018, the Company renewed the letter of credit issued by City National Bank for the 42West office space in New York. The letter of credit is for $677,354 and originally expired on August 1, 2018. This letter of credit renews automatically annually unless City National Bank notifies the landlord 60-days prior to the expiration of the bank’s election not to renew the letter of credit. The Company granted City National Bank a security interest in bank account funds totaling $677,354 pledged as collateral for the letter of credit. On June 29, 2018, the Company issued a letter of credit through Bank United, in the amount of $50,000, reducing the borrowing capacity under the Loan Agreement by that amount. The letters of credit commit the issuer to pay specified amounts to the holder of the letter of credit under certain conditions. If this were to occur, the Company would be required to reimburse the issuer of the letter of credit. The Company was not aware of any material claims relating to its outstanding letters of credit as of June 30, 2020.


NOTE 21 – SUBSEQUENT EVENTS


On July 8, 2020, the Company paid interest in the amount of $150,000 to the Company’s CEO.  The interest was accrued as of June 30, 2020 and was related to the loan from related party.  


On July 10, 2020, one of the sellers of 42West exercised Put Rights in the amount of 13,592 and was paid $125,300 on July 16, 2020.


On July 14, 2020 and July 16, 2020, three of the sellers of 42West were paid an aggregate of $460,000 for Put Rights that had been previously exercised.


On July 15, 2020, Lincoln Park converted $360,000 of the principal balance of the 2020 Lincoln Park Note at a purchase price of $.88 per share and was issued 410,959 shares of Common Stock.


On August 17, 2020 (the “Closing Date”), the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Alison Grant (the “Seller”). Pursuant to the Purchase Agreement, on August 17, 2020, the Company acquired from the Seller 100% of the membership interest of Be Social Public Relations, LLC, a California limited liability company (“Be Social”) and Be Social became a wholly-owned subsidiary of the Company. Be Social is a marketing and public relations firm and also offers management and representation services to talent commonly known as “influencers.”


The consideration paid by the Company in connection with the acquisition of Be Social is $2,200,000 plus the potential to earn up to an additional $800,000.  As a result, the Company (i) paid $1,500,000 cash on the Closing Date; (ii) issued 349,534 of shares of its Common Stock on the Closing Date and (iii) will issue a number of shares of Common Stock with an aggregate value of $350,000 on January 4, 2021.  The Company may also pay up to an additional $800,000, 62.5% of which will be paid in cash and 37.5% in shares of Common Stock based on the achievement of specified financial performance targets during the years ended December 31, 2022 and 2023.  The Seller has entered into an employment agreement with the Company with a term through December 31, 2023.  







41



 


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. One of our subsidiaries operates in the food and hospitality sector that has been negatively impacted by the orders to either suspend or reduce operations of restaurants and hotels.  Another subsidiary represents talent, such as actors, directors and producers.  The revenues from these clients has been negatively impacted by the suspension of content production.  Conversely, the television and streaming consumption around the globe has increased as well as the demand for consumer products.  Revenues from the marketing of these shows and products has somewhat offset the decrease in revenue from the sectors discussed above. 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 Registered Direct 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 purchase 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 fees and expenses.




42



 


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 our common stock or securities convertible into our 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 Program 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 Program.  There is no assurance that our loans will be forgiven.  


Revenues


For the three and six months ended June 30, 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 three and six months ended June 30, 2020 and 2019:


 

 

For the three months ended

June 30,

 

 

For the six months ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Entertainment publicity and marketing

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

99.4

%

Content production

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.6

%

Total revenue

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%


Entertainment Publicity and Marketing


Our revenue is directly impacted by the retention and spending levels of existing clients and by our ability to win new clients. We believe that we 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.




43



 


·

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 consumer products 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

·

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.



44



 


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 June 30, 2020, other income and expenses consisted of: (1) change in fair value of convertible notes and derivative liabilities; (2) change in fair value of warrants; (3) changes in fair value of put rights; (4) change in fair value of contingent consideration and (5) interest and debt amortization.  For the six months ended June 30, 2020, other income and expenses included all of the items detailed above as well as a loss on deconsolidation of VIE, and gain on extinguishment of debt.


For the three months ended June 30, 2019, other income and expenses consisted of: (1) change in fair value of derivative liabilities; (2) change in fair value of warrants; (3) changes in fair value of put rights; (4) change in fair value of contingent consideration and (5) interest and debt amortization.   For the six months ended June 30, 2019, other income and expenses included all of the items detailed above and a loss on extinguishment of debt.


RESULTS OF OPERATIONS


Three and six months ended June 30, 2020 as compared to three and six months ended June 30, 2019


Revenues


For the three and six months ended June 30, 2020 and 2019 our revenues were as follows:


 

 

For the three months ended

June 30,

 

 

For the six months ended

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Entertainment publicity and marketing

 

$

5,194,725

 

 

$

6,273,983

 

 

$

11,828,525

 

 

$

12,523,890

 

Content production

 

 

 

 

 

 

 

 

 

 

 

78,990

 

Total revenue

 

$

5,194,725

 

 

$

6,273,983

 

 

$

11,828,525

 

 

$

12,602,880

 


Revenues from entertainment publicity and marketing decreased by approximately $1.1 million and $0.7 million, respectively, for the three and six months ended June 30, 2020, as compared to the same period in the prior year. The decrease was due primarily to the effect of COVID-19 on our clients that operate in the food and hospitality sector and the talent division. Government imposed orders to either reduce or completely shut down the in-restaurant service has caused our clients to either reduce or suspend the services we offer.  As the production of content was halted between mid-March 2020 and July 2020, several of our talent clients requested to suspend their services until the recommencement of production.  The decrease was partially offset by the revenue of Shore Fire, which we acquired on December 3, 2019.


Revenues from content production decreased by approximately $0.1 million for the six months ended June 30, 2020, as compared to the same period in prior year. The decrease was primarily due to the normal revenue life cycle of our motion picture Max Steel. The majority of the revenues of a motion picture are recognized in the first twelve months following the release of the film. Max Steel was released on October 14, 2016, and we have already recognized the revenues from the theatrical release, a majority of home entertainment (i.e. DVD) and from international licensing arrangements. We do not expect to generate additional revenues from Max Steel.




45



 


Expenses


For the three and six months ended June 30, 2020 and 2019, our expenses were as follows:


 

For the three months ended

 

 

For the six months ended

 

 

June 30,

 

 

June 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Expenses:

                      

  

  

                      

  

  

                      

  

  

                      

  

Direct costs

$

656,849

 

 

$

1,279,657

 

 

$

1,182,893

 

 

$

2,467,076

 

Selling, general and administrative

 

978,527

 

 

 

1,071,460

 

 

 

2,325,813

 

 

 

1,859,623

 

Depreciation and amortization

 

496,461

 

 

 

478,560

 

 

 

1,017,464

 

 

 

960,203

 

Legal and professional

 

362,853

 

 

 

449,060

 

 

 

572,314

 

 

 

832,732

 

Payroll

 

2,879,073

 

 

 

4,197,324

 

 

 

7,779,939

 

 

 

8,510,486

 

Total expenses

$

5,373,763

 

 

$

7,476,061

 

 

$

12,878,423

 

 

$

14,630,120

 


Direct costs decreased by approximately $0.6 million and $1.3 million, respectively, for the three and six months ended June 30, 2020, as compared to the three and six months ended June 30, 2019.  Direct costs for Viewpoint are primarily costs attributable to the production costs of each of their projects.  The decrease in direct costs is primarily related to the decrease in Viewpoint’s revenue due to COVID-19, as well as reduced costs at 42West and The Door from a slowdown in business from COVID-19.


Selling, general and administrative expenses decreased by approximately $0.1 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019.  The decrease was primarily due to a slowdown of business activity overall due to COVID-19, partially offset by the inclusion of Shore Fire direct costs.  Selling, general and administrative expenses increased by approximately $0.5 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The increase is primarily due to selling, general and administrative expenses of Shore Fire that was acquired on December 3, 2019 being included for the six months ended June 30, 2020, and an increase of bad debt expense by $0.3 million from the six months ended June 30, 2019 to the six months ended June 30, 2020.


Legal and professional fees decreased by approximately $0.1 million and $0.3 million, respectively, for the three and six months ended June 30, 2020, as compared to the three and six months ended June 30, 2019. The decrease is primarily due to a decrease in audit and legal fees.


Payroll expenses decreased by approximately $1.3 million and $0.6 million for the three and six months ended June 30, 2020, as compared to the three and six months ended June 30, 2019.  In response to the business slowdown due to COVID-19, the Company reduced salaries and staff during the three and six months ending June 30, 2020.  This was partially offset by  the inclusion of Shore Fire salary expense.


Other Income and Expenses


 

 

For the three months ended

 

 

For the six months ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Other Income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Gain (loss) on extinguishment of debt

 

 

 

 

 

 

 

 

3,259,866

 

 

 

(21,287

)

Change in fair value of convertible notes and derivative liabilities

 

 

(696,420

)

 

 

30,000

 

 

 

(548,961

)

 

 

30,000

 

Loss on deconsolidation of Max Steel VIE

 

 

 

 

 

 

 

 

(1,484,591

 

 

 

Change in fair value of warrants

 

 

(483,519

)

 

 

81,766

 

 

 

(411,004